Earnings Call: Q2 2020

Jul 21, 2020

Ladies and gentlemen, thank you for standing by, and welcome to the SUSLY q two twenty twenty 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, July 21. I would now like to hand the conference over to your first speaker today, Camilla Hoffman. Thank you. Please go ahead. Thank you. Ladies and gentlemen, welcome to Stutzik Interim Report for the second quarter twenty twenty. Let me introduce myself. My name is Camilla Hoffland, and I'm the CEO of Stutzik. And with me here today, I have Charles Engvall, our CFO. We will walk you through the Stutzik report for the second quarter twenty twenty and also share our update updated updated view of especially the COVID nineteen situation. Next page, please. Please let me start with a brief introduction of Stubtgart as a company. We have a strong characteristics 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 newbuild, 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. Substrate 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 the clean energy. Citrix is part of that industry vision. And then a little bit more here and now, the first half year started stable and our company improved our overall financial performance despite the COVID-nineteen that so far mainly has impacted our German operation. In the quarter, we continue to see improvements from our initiatives last year, such as cost savings program, restructuring of organization and commercial negotiations. We have profit improvement in almost all business areas compared to the same period last year. Going forward, we still have the global uncertainty due to COVID-nineteen. As for all companies, it's difficult to foresee the long term impact on the market and in generally and specifically on our business. We continue to monitor the COVID-nineteen situation closely to adapt to any new circumstances to make sure that we have a safe situation for our people and for our operation. During today's report, I will walk you through the group summary with COVID nineteen impact following a more specific update of the business area. Then I will hand it over to class m one 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 and 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 quarter two has been limited to the German operations about SEK 5,000,000. The Swedish site has been in full operation that also is 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 key 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 offering. We hope that things turn out to be more stable and that we soon enter a post COVID-nineteen 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-nineteen impact has been limited so far and is related to the German operation. 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 quarter one. And in the current quarter, we reached 5.7% or we are at 8.7% excluding COVID-nineteen impact. The business and operations are progressing in the right direction, although we need to be prepared for a potential second wave of COVID-nineteen. 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 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 quarter one twenty twenty one. The irradiated sources for the production will be delivered to Stutzik end of this year, and then we plan for a ramp up of production. The business area has a strong pipeline, and a specific example is the offering to the Norwegian government, Norsk Nuclear Decommissioning, NMD, 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 150,000,000 Norwegian kronas over thirteen years in quarter three this year. A and ND has also officially expressed that they aim to do a larger purchase of transport storage and treatment for the rest of the few weeks to an estimated value of million. Nandini has also mentioned that Stutzik 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. Although 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 twenty 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 activity for the new technology license sales have slowed down due to the COVID nineteen and travel restrictions. We keep up 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 US 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 noticed 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 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, although there is a risk of delays due to the COVID-nineteen and travel restrictions. Next page, please. Finally, the German operation, an improvement in the quarter even with the COVID-nineteen impact of SEK 5,000,000 in the period. The half year results shows the positive impact of the improvements from our initiatives last year, such as cost savings programs, restructuring and commercial negotiations. Note that the numbers also include a COVID-nineteen impact of totally eight million this year. At the moment, the staff are highly utilized due to the revision period. The order books are full for 2020, and we continue to develop the organization, including new management in the areas of decommissioning and engineering. Now I would like to hand it over to Klaus Benglmann for the financial status. So then I would like to start with the financial highlights. And the highlights of the quarter that we have a EBIT of SEK 9,600,000.0, which is a good EBIT for the 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 to equity ratio, which has improved. I will come back to that also. And yes, like Amit said, the impact we've had the first six months from COVID nineteen is SEK 8,000,000, all of it pertained to the German operations. Next page, please. Looking at the Sputzik Group's earning, I would like to give some highlights. We have now in the quarter a operating margin of 5.7%, which is not reaching our target of 8%, but well on the way, reaching the target of 8%. So that's a good improvement compared to previous year. We had a free cash flow in the quarter of 11,000,000 Swedish crowns, and combined this year, 35,000,000 Swedish crowns, and that's really helped us strengthen the financial position. And just like I said before, we're also seeing an improvement in net debt equity ratio. Full year 2019, it was at 27.4%. And this quarter, it's now down to or end of the quarter is down to 16.2%. That's a good improvement. Next page, please. Looking at the improvements quarter over quarter. This year, we had a Q2 of SEK 9,600,000.0. Last year, we made a loss of SEK 8,100,000.0. All in all, an improvement of SEK 17,700,000.0. The bulk of the improvement derives from waste and material technology where we have discontinued with the loss making business. And as you're all aware of, we made some substantial reductions when it comes to cost level and also in business activities and concentrates. So that's an improvement of 13,800,000.0 Swedish crowns. And please also bear in mind that last year, we had on a nonrecurring items of 5,500,000.0 Swedish crowns in q two. We've also, just like Camilla mentioned, seen some good improvements in the German operations. We have improved company contracts, better utilization rates, and also cost saving initiatives. So all all in all, 2,800,000.0 Swedish crowns. And bear also in mind that the quarterly impact from the COVID nineteen situation is 5,000,000 Swedish crowns for Germany. Scanpower, improved base business, fell a much stable business compared to last year, whereas for Fuel and Material Technology, we have lost roughly SEK 2,600,000.0 bottom line, which is then related to the delays of the Elekta production. And also keep in mind that last year, we dissolved a provision of SEK 10,000,000 in Q2. Other areas, we've had an improvement of SEK 1,900,000.0, mainly referable to cost saving initiatives. But also last year, we had a nonrecurring write downs of SEK 800,000.0. 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, and we continue to monitor this and the cash situation on a regular basis. We've seen some good improvements. The investment levels are lower this year. And, also, we had some additional contribution from associated companies in UK and Germany, which we explained also then the the good cash flow from investments. Altogether, for the first six months, a positive free cash flow of SEK 35,100,000.0. Next page, please. Looking at the the future then, the financial outlook, we still foresee, yes, like, everybody else, I guess, that there are still high uncertainties regarding the COVID nineteen and the the situation going forward. We monitor this on a very close basis, you know, regular contact in the management team and also working very, closely together with the local staffs and and just to catch risks and mitigating actions as soon as possible, but it's still an uncertain situation. Fuel material, just like we informed last time, we've seen some delays, in the deliveries of cobalt, which has led to deliveries or delayed deliveries to Elekta until Q1 twenty twenty one. And this will impact our sales by roughly SEK 30,000,000. Last quarterly release, we said that we had a con contract of roughly SEK 400,000,000, and the impact would be 7%. So that's the same number, basically. Besides that delay, we expect stable operations, so we don't foresee any major changes, basically. Scanpower, we foresee a stable business for the full year, so no changes on our outlook for the full year. Waste Management Technology, we are well on track towards the improvement target of the 10,000,000. And in Germany, we are also on track towards the SEK 10,000,000 improvement program. The only issue we have with Germany is, of course, the impact from COVID-nineteen. So next page, please. Looking at the financial outlook, continue then. We have other potential risks. We have spoken previously about the risk of trade conflict and also issues concerning export control. Those risks have not changed, but they're still there, same level as previously. We have also informed that we don't foresee any major restructuring or items affecting comparability this year. Our cash level today, we foresee, will be reduced somewhat towards the end of the year. And, yes, like I said before, that 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. And that concludes the presentation for me in Camilla. So 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. And our first question comes from the line of Stefan Knudson from ABG. Your line is now open. Please ask your question. Thank you. Hello. Congratulations on the final 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. And the other one was also good commercial agreements with customers. But nothing out of the of the ordinary that that you can't take with you in the in the second half of the year then? I think what you could say is that we had also a strong impact from Shining's business, but you also have to bear in mind that we these kind of facilities need to do some maintenance and planning and and refurbishment. So of course, in this quarter two, there was a very high utilization in that sense, but from the ordinary business. Okay. I understand. And 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 higher utilization there as well? No, we didn't have any license sales, but we have increased utilization on The U. S. Market. Okay. And if I understood you correctly, it was you highlighted the waste management segment as the most COVID-nineteen or highest COVID-nineteen risk in the second quarter or in the second half year? Yes. I would say, yes, to the misunderstanding on what Germany was referred to for the full the first six months. Going forward, what we see, of course, on the preconditions that we don't see in the second wave in Germany is delays of business discussions pertaining then to rate management technologies. Is that correct? Yes. Okay. Perfect. And in Scanpower, you decreased sales, but you improved EBIT by almost SEK 2,000,000. Is this now the a lower level of the cost base that we see and that you will carry forward? Yes. We can comment that they made a good job on reducing the cost level. So we don't see this as a one off, but we could see it as a more steadily reduced cost level. Perfect. And then I also have question on Germany or the guidance on the cost savings in general. You mentioned that it was SEK 5,000,000 negative effect on EBIT. So taking that into account, you seem to be very well ahead of the guidance you gave in the beginning of the year of SEK10 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 nineteen situation. We don't today foresee any issues. But again, please bear in mind that the revision period right now in Germany going into q three and then q four typically is is a slower quarter for Germany. When it comes to waste management technology, I would say it's we are not really sure about how the COVID-nineteen situation will impact the business discussions. So some of our customers have a difficult time carrying out business discussions on remote, so that kind of slows things down. But the impact is a bit too early to say. So it's more of a risk rather than anything else. Okay, perfect. And 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 a 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. So 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. But we're not saying that it was a bit there will be a big shift, but it would be a some 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 Gillenhammer. Your line is now open. Please ask your question. Thank you. Thanks, and good afternoon. Good afternoon. To you. It's really to read the the positive numbers this time. I have one particular question with respect to wage management because you say in if I read it correctly, in last year, you had an operating loss of roughly DKK 20,000,000, DKK 19,600,000.0 adjusted. And you now say that you have a 10,000,000 improvement you're heading for that this year. Should that be where as you said you're actually forecasting a €10,000,000 loss for Waste Management Technology the full year? Because that's the way I read your report. And secondly, how much have you received from The UK, 15% ownership, and that is included, as far as I understand, in this operating result? Okay. Now we got this question during Q1. And what we said basically, yes, it's correct that we if you exclude the MRIs, we made a loss last year of 19,000,000. And then we have an improvement program of 10. So, of course, mathematically, we would be at minus nine. So we got the question, and our answer was that, but, of course, we will not accept to run be running on the minus. And I think also what you can see from the numbers we have presented that we have had a good start for the year. And the risks we are referring to when it comes to Waste Management is really the delays or the potential delays in business discussions. So of course, we don't have any big cost coming up for or any major changes on the underlying business. I mean the number of staff has been significantly reduced. Left loss making contracts. So I think that probably answers your question. No. Basically, then I read you as saying that you don't expect those 10,000,000 kilometers. You you expect a much better result than that Yeah. That's the full year. That's correct. That's correct. That's what they're If I may be a bit critical, then I think that is what you should say. Because the way the way you have written it now, implicitly, you say we expect 10,000,000 of loss. But then you say now that you don't expect €10,000,000 loss. Point taken. And I think that's it's I think to be honest, I think it's very important that you guide the investment community in 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. And 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, etcetera. But you have enormous opportunities in this company. And and I really would like to see you, how should say, put those forward rather than talking about risks, etcetera. And 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 is that Ken Power? Or because you have enormous tax have enormous tax losses. Sorry? Very much in The United States where they have a tax a positive tax position. Yes. Yep. But because you in the group, have enormous tax losses. Are these actual cash tax payments or are they just provisions for potential tax? Does money go down? In statement, the to some extent, it's it's potential tax, whereas in the cash flow, it's actual taxes paid. Excellent. And then my final question was, you mentioned, Alexa, that DKK 30,000,000 of sort of annualized turnover did not happen this year again. How certain do you feel about the ramp up in Q1 twenty twenty one? And secondly, what return on sales do you expect on that? Because it's basically using the same top seven laboratories, isn't it? So suppose the margins are very good. I can start with the first question. And then, of course, we are dependent on getting the sources, the trans yeah. You're ready to transport it to our hotel facility. But at the moment, it's running as planned, and the the reactor is supposed to stop somewhere in in September time frame. And then we definitely know that we are on on good track. But it everything seems to be towards getting the deliveries end of this year as planned. So we have no other signals that it wouldn't be that case. Good. And the the second question, the second question then about the margin effect. No. We we don't concentrate on margins for individual contracts. Okay. Alright. Thank you very much. Thank you. Thank you. Thank you. And 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.