Ladies and gentlemen, thank you for standing by, and welcome to the Studsvik Q2 2020 conference call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star one on your telephone. I must advise you that this conference is being recorded today, Tuesday, the 21st of July, 2020. I would now like to hand the conference over to your first speaker today, Camilla Hoflund. Thank you. Please go ahead.
Thank you. Ladies and gentlemen, welcome to Studsvik interim report for the second quarter 2020. Let me introduce myself. My name is Camilla Hoflund, and I'm the CEO of Studsvik. With me here today, I have Claes Engvall, our CFO. We will walk you through the Studsvik report for the second quarter 2020 and also share our updated view of especially the COVID-19 situation. Next page, please. Please let me start with a brief introduction of Studsvik as a company. We have a strong characteristic, mainly in the nuclear industry, providing services to customers represented by the utilities, fuel vendors, international research organizations, and regulators. We operate on a global market and have a strong international footprint. Our offerings cover several areas of the fuel and reactor life cycle, from new build, operation, decommissioning to final disposal research.
One of our key initiatives has been to expand beyond the nuclear into a new segment, medical isotope production. Next page, please. Please let me share the CEO view in brief. Studsvik offers services for the global nuclear industry to support safety and efficiency. Adapting to our mission statement, we create customer solutions to complex problems using our proven ability to innovate. Nuclear power is a fossil-free energy source and therefore an important alternative in the energy mix to support a clean energy. Studsvik is part of that industry vision. A little bit more here and now. The first half year started stable, and our company improved our overall financial performance despite the COVID-19 that so far mainly has impacted our German operation. In the quarter, we continue to see improvement from our initiatives last year, such as cost-saving programs, restructuring of organization, and commercial negotiations.
We have profit improvements in almost all business areas compared to the same period last year. We still have the global uncertainties due to COVID-19. As for all companies, it's difficult to foresee the long-term impact on the market and in general, and specifically on our business. We continue to monitor the COVID-19 situation closely to adapt to any new circumstances, to make sure that we have a safe situation for our people and for our operations. During today's report, I will walk you through the group summary with COVID-19 impact, following a more specific update of the business areas. I will hand it over to Claes Engvall, that will walk you through the financial highlights and outlook, as well as identify the risks moving forward. Next page, please. People's health is our highest priority, we apply the national regulations and recommendations.
Our management are tracking the situation closely to be able to adapt the operation whenever it's needed. The impact of quarter two has been limited to the German operations, about SEK 5 million. The Swedish site has been in full operation, and also it's reflected in the financial performance for Fuel and Materials Technology. We still have a large number of employees worldwide working on remote. Due to travel restrictions, we start to see some delays in the market and sales activities for new offerings and new customers, and especially for Waste Management Technology. Our main risk identified going forward are temporary shutdown at the customer site in Germany, shutdown of the facilities in Sweden or continued restrictions regarding transport, continued delay of new orders due to restricted travel policies.
We work to mitigate business delays with remote solutions like digital sales and market approaches, which works to a certain level, but it's more challenging for new customers and new offerings. We hope that things turn out to be more stable and that we soon enter a post-COVID-19 phase. Next page, please. Quarter two in brief. As mentioned, we have a stable quarter and an overall improved financial performance. Our improvement program from 2019 shows expected outcome. As reported, the COVID-19 impact has been limited so far and is related to the German operations. Overall for the group, we are improving sales and operating profit, as well as having a stable cash situation for the quarter. The operating margin has improved from Q1, and in the current quarter, we reached 5.7%, or we are at 8.7% excluding COVID-19 impact.
The business and operations are progressing in the right direction, although we need to be prepared for a potential second wave of COVID-19. Next page, please. More specifically on Fuel and Materials Technology, a strong quarter with growth numbers. The business with customers in Asia and Russia are increasing over time. In the period, we have new business with Chinese customers that has a positive impact on the sales. We managed to keep a high and stable utilization in the operation all the way to the summer break. As reported last time, the medical isotope production will start up in Q1 2021. The irradiated sources for the production will be delivered to Studsvik end of this year, and then we plan for a ramp-up of the production.
The business area has a strong pipeline. The specific example is the offering to the Norwegian government, Norsk Nukleær Dekommisjonering, NND, including transport and treatment of the fuel in our facilities. We have not yet received the order. However, we expect to sign a contract of maximum NOK 150 million over 13 years in Q3 this year. NND has also officially expressed that they aim to do a larger purchase of transport, storage, and treatment for the rest of the fuel to an estimated value of NOK 1,500 million. NND has also mentioned that Studsvik has an interesting and competitive offer. This is very interesting for us, as the offering we can provide is part of the core business of Fuel and Materials Technology.
We expect this opportunity to be implemented a few years ahead, and a project like this will be performed over many years, maybe up to 20 years. Next page, please. For Waste Management Technology, the net sales are in line with last year, but with improved margin due to utilization of high-margin engineering business. The sales activities for the new technology license sales have slowed down due to the COVID-19 and travel restrictions. We keep us working on remote with market and business development activities. We have adjusted to the situation and focus on closing smaller pre-studies with customers in U.S. and Europe, and this is smaller steps that can open up for larger opportunities of license sales in the future. Next page, please. For Scanpower, we notice that even with less sales, we have reduced the loss in the period due to increased engineering business and cost awareness.
We have not closed any major license sales in the period. Scanpower has a strong brand and well-established network with the customers, especially on the home market in the U.S. and in Asia. The business area has a strong pipeline on a broad geographic market and a good potential for closing a major license sale. There is a risk of delays due to the COVID-19 and travel restrictions. Next page, please. Finally, the German operation. An improvement in the quarter, even with the COVID-19 impact of SEK 5 million in the period. The half year results shows the positive impact of the improvements from our initiatives last year, such as cost-saving programs, restructuring, and commercial negotiations. Note that the numbers also include a COVID-19 impact of totally SEK 8 million this year. At the moment, the staff are highly utilized due to the revision period.
The order books are full for 2020. We continue to build up the organization, including new management in the areas of decommissioning and engineering. I would like to hand it over to Claes Engvall for the financial status.
I would like to start with the financial highlights, and the highlights of the quarter is that we have an EBIT of SEK 9.6 million, which is a good EBIT for a second quarter, even historically. We have seen a solid development of the group's free cash flow, and I will come back to it a little bit more in detail later on. This has helped us to strengthen our financial position and also helped us strengthen the net debt-equity ratio, which has improved. I will come back to that also. Yes, like Camilla said, the impact we've had the first six months from COVID-19 is SEK 8 million, all of it pertained to the German operations. Next page, please. Looking at the Studsvik Group's earning, I would like to give some highlights.
We have now in the quarter an operating margin of 5.7%, which is not reaching our target of 8%, but well on the way reaching the target of 8%. That's a good improvement compared to previous year. We had a free cash flow in the quarter of SEK 11 million. Combined this year, SEK 35 million, and that's really helped to strengthen the financial position. Just like I said before, we're also seeing an improvement in net debt-equity ratio. Full year 2019, it was at 27.4%. In this quarter, it's now down to, or end of the quarter, it's down to 16.2%. That's a good improvement. Next page, please. Looking at the improvements quarter-over-quarter. This year we have a Q2 of SEK 9.6 million. Last year, we made a loss of SEK 8.1. All in all, an improvement of SEK 17.7 million.
The bulk of the improvement derives from Waste Management Technology, where we have discontinued with the loss-making business. As you're all aware of, we made some substantial reductions, when it comes to cost level and also in business activities and concentrated. That's an improvement of SEK 13.8 million. Please also bear in mind that last year we had Non-Recurring Items of SEK 5.5 million in Q2. We've also, just like Camilla mentioned, seen some good improvements in the German operations. We have improved customer contracts, better utilization rates, and also cost-saving initiatives. All in all, SEK 2.8 million. Bear also in mind that the quarterly impact from the COVID-19 situation is SEK 5 million for Germany. Scanpower, improved base business, fairly much a stable business compared to last year.
For Fuel and Materials Technology, we have lost roughly SEK 2.6 million bottom line, which is related to the delays of the Elekta production. Also keep in mind that last year we dissolved a provisional SEK 10 million in Q2. Other areas we've had an improvement of SEK 1.9 million, mainly attributable to cost-saving initiatives, but also last year we had Non-Recurring Items of SEK 0.8 million. Altogether, the deviation is SEK 17.7 in improved profitability. Next page, please. The cash flow. Like we mentioned, we have a good improvement on the EBIT level. We have continued to focus throughout the organization on working capital, we continue to monitor this and the cash situation on a very regular basis. We've seen some good improvements.
The investment levels are lower this year, and also we have some additional contribution from associated companies in the U.K. and Germany, explain also then the good cash flow from investments. Altogether for the first six months, a positive free cash flow of SEK 35.1 million. Next page, please. Looking at the future, the financial outlook. We still foresee, just like everybody else, I guess, that there are still high uncertainties regarding the COVID-19 and the situation going forward. We monitor this on a very close basis, in regular contact in the management team, and also working very closely together with the local staffs, and just to catch risks and mitigating actions as soon as possible. It's still an uncertain situation.
For fuel material, just like we informed last time, we've seen some delays in the deliveries of cobalt, which has led to delayed deliveries to Elekta until Q1 2021. This will impact our sales by roughly SEK 30 million. Last quarter release, we said that we had a contract of roughly SEK 400 million and the impact would be 7%. That's the same number, basically. Besides that delay, we expect stable operations, we don't foresee any major changes then, basically. Scanpower, we foresee a stable business for the full year. No changes on our outlook for the full year. Waste Management Technology, we are well on track towards the improvement target of the SEK 10 million. In Germany, we are also on track towards the SEK 10 million improvement program.
The only issue we have with Germany is, of course, the impact from COVID-19. Next page, please. Looking at the financial outlook continuing, we have other potential risks. We have spoken previously about the risk of trade conflicts and also issues concerning export control. Those risks have not changed, they're still there on the same level as previously. We have also informed that we don't foresee any major restructuring items affecting comparability this year. Our cash level today we foresee will be reduced somewhat towards the end of the year. Just like I said before, our current investment level is a little bit lower than last year, and we foresee that the full year also will be lower than last year. That concludes the presentation from me and Camilla.
We would very much like to thank you for joining this conference, and we hope you find the quarterly report even containing more information if you want to have additional information. I would like to hand back then to the operator and then also open up for any additional questions. Thank you.
Thank you, speakers. Ladies and gentlemen, we will now begin the question and answer session. If you wish to ask a question, please press star one on your telephone and wait for your name to be announced. If you wish to cancel your request, you may press the hash key. Once again, that is star one to ask a question. Our first question comes from the line of Stefan Knutsson from ABG. Your line is now open. Please ask your question. Thank you.
Hello. Congratulations on a fine report. I will start off by a question on Fuel and Materials. We saw a strong EBIT margin of 20% in the quarter. What was the main drivers of this margin?
There were several drivers, I would say. One was a very high and stable utilization with no planned or unplanned interruptions in the production line. The other one was also good commercial agreements with customers.
Nothing out of the ordinary that you can't take with you in the second half of the year, then?
I think what you could say is that we had also strong impact from China's business. You also have to bear in mind that these kind of facilities need to do some maintenance and planning and refurbishment. Of course, in this quarter two, there was a very high utilization in that sense, but from the ordinary business.
Okay, I understand. Going further into the Waste Management division, you were able to increase sales despite going from 45 to 33 employees. Was there any license sales in those number, or was it just a higher utilization there as well?
No, we didn't have any license sales. We had an increased utilization on the U.S. market.
Okay. If I understood you correctly, you highlighted the Waste Management segment as the most COVID-19 or highest COVID-19 risk in the second quarter or in the second half year.
Yes, I would say as to the no misunderstanding, but Germany was referred to for the first six months. Going forward, if we're to see, of course, on the preconditions that we don't see any second wave in Germany, it delays our business discussions pertaining then to Waste Management Technologies. Is that correct? Yes.
Okay, perfect. In Scanpower, you decreased sales, but you improved EBIT by almost two million SEK. Is this now the low level of the cost base that we see and that you will carry forward?
Yeah, we could comment that they made a good job on reducing the cost level. We don't perceive this as a one-off, but we perceive it as a more steadily reduced cost level.
Perfect. I also have a question on Germany or the guidance on the cost savings in general. You mentioned that it was a SEK 5 million negative effect on EBIT. Taking that into account, you seem to be very well ahead of the guidance you gave in the beginning of the year of SEK 10 million cost savings in Germany and waste management. Is there any reason to suspect a weaker performance in the second half of the year on those metrics?
I think you're quite correct that we are basically off to a very good start on the improvement programs. For Germany, again, it's the COVID-19 situation. We don't today foresee any issues. Again, please bear in mind, they have the revision period right now in Germany, going into Q3 and then Q4 typically is a slower quarter for Germany. When it comes to Waste Management Technology, I would say we are not really sure about how the COVID-19 situation will impact the business discussions. Some of our customers have a difficult time carrying out business discussions on remote, so that kind of slows things down. The impact should be relatively same. It's more of a risk rather than anything else.
Okay, perfect. I have a final question regarding the cash levels that you mentioned that you foresee that they would be lower in the end of the year. What is the explanation here? Is it the higher working capital or some other thing?
One of the reasons is that typically for Scanpower, we get a lot of the payments for the maintenance in the beginning of the year. We have a very strong one-off effect in the beginning of the year, which we don't have towards the end of the year. We're not saying that there will be a big shift, but it would be somewhat a reduction towards the end of the year.
Okay, perfect. That was all for me.
Okay. Thank you.
Thank you. Once again, a gentle reminder, if you wish to ask a question, please press star one on your telephone and wait for your name to be announced. Our next question comes from the line of Peter. Dylan Hammer, your line is now open. Please ask your question. Thank you.
Thanks, and good afternoon.
Good afternoon.
Back on to you. It was really great to read the positive numbers this time. I have one particular question with respect to waste management, because you say, if I read it correctly, in last year, you had an operating loss of roughly SEK 20 million, SEK 19.6 adjusted, and you now say that you have a SEK 10 million improvement, you're heading for that this year. Should that be read as that you're actually forecasting a SEK 10 million loss for Waste Management Technology the full year? Because that's the way I read your report. Secondly, how much have you received from the U.K., 15% ownership, and that is included as far as I understand in this operating result?
We got this question during Q1, and what we said, basically, yes, it's correct that if you exclude the NRIs, we made a loss last year of SEK 19 million. Then we have an improvement program of SEK 10 million. Of course, mathematically, we would be at minus SEK 9 million. We got the question, and our answer was that, but of course, we will not accept be running on a minus. I think also what you can see from the numbers we have presented, that we have had a good start for the year. The risks we are referring to when it comes to Waste Management is really the potential delay in business discussions. Of course, we don't have any big costs coming up or any major changes on the underlying business. The number of staff has been significantly reduced.
We have left loss-making contracts. I think that probably answers your question.
Just something small.
Yeah.
No. Basically, I read you as saying that you don't expect a loss of SEK 10 million. You expect a much better result than that.
Yeah
for the full year.
That's correct. That's what we are saying.
If I may be a bit critical, then I think that is what you should say. The way you have written it now, implicitly you say, we expect SEK 10 million of loss. You say now that you don't expect SEK 10 million of loss.
Okay. Point taken.
To be honest, I think it's very important that you guide the investment community in a correct way. This is a very cautious approach, but being cautious is not always correct. I think you need to be clear in that respect. Overall, I must say, although I started this by congratulating you, and I really mean that, but I think you talk so much about risks. COVID risks that may or may not be there, but you lift them up as being a potential threat, et cetera. You have enormous opportunities in this company. I really would like to see you, how should I say, put those forward rather than talking about risks, et cetera. Also being a bit, it seems to be too cautious when, for example, you present the waste management outlook. Anyhow, I also wondered why do we pay taxes?
Is that Scanpower or? Because you have enormous-
Profit-
You have enormous tax profits. Sorry.
Very much in the United States, where we have a cost of tax position. Yes.
Yeah, because in the group, you have enormous tax losses. Are these actual cash tax payments or are they just provisions for potential tax? Does money go down?
In the income statement, to some extent, it's potential tax, whereas in the cash flow, it's actual taxes paid.
Right.
For the group.
Excellent. My final question was, you mentioned Elekta, that SEK 30 million of sort of annualized turnover did not happen this year again. How certain do you feel about the ramp-up in Q1 2021? Secondly, what return on sales do you expect on that? Because it's basically using the same hot cell laboratory, isn't it? I suppose the margins are very good.
I can start with the first question. Of course, we are dependent on getting the sources, the irradiated transported to our hot cell facility. At the moment, it's running as planned, and the reactor is supposed to stop somewhere in the September timeframe. We definitely know that we are on good track. Everything seems to be towards getting the deliveries end of this year as planned. We have no other signals that it wouldn't be that case.
Good.
The second question then about the margin, we don't comment on margins for individual contracts.
Okay. All right. Thank you very much.
Thank you.
Thank you.
Thank you. Once again, a gentle reminder, please press star one on your telephone if you would like to ask a question. Thank you. There are no further questions at this time. Please continue. Thank you.
Thank you very much, everyone, and take care, and hope to talk to you again in quarter three. Have a nice summer. Bye-bye.
Thank you. Bye-bye.
Thank you, speakers. That does conclude our conference for today. Thank you for participating, you may all disconnect. Speakers, please stand by.