Earnings Call: Q2 2021

Jul 21, 2021

Good day, and thank you for standing by. Welcome to the Studsvik Q2 2021 conference call. At this time, all participants are in a listen-only mode. After the speaker's 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. Please be advised that today's conference is being recorded. If you require operator assistance, please press star zero. I would now like to hand over the call to your speaker today, Ms. Camilla Hoflund. Thank you. Please go ahead. Thank you very much, operator. Ladies and gentlemen, warmly welcome to the Studsvik interim report for the second quarter 2021. Let me introduce myself. I am Camilla Hoflund, the CEO of Studsvik, and together with me today is Anette Lundh, the CFO for Studsvik. We will walk you through the Studsvik report for the second quarter and half year 2021 that shows a continuous strengthening of the group results. Next slide, please. Please let me start with a brief introduction of the Studsvik company. Studsvik's main market is nuclear industry. Our roughly 500 employees based in Sweden, Germany, U.S., U.K., Switzerland, Japan, and China support the customers worldwide and across the whole nuclear fuel and reactor cycle. Studsvik is an independent organization that operates on a global market with a strong international brand. Our value chain covers customer needs within the nuclear field from new build reactors in operation, decommissioning, including handling of radioactive waste, to final disposal. The customers are represented by the whole industry, like utilities, fuel vendors, international research organizations, and regulators. A key initiative beyond nuclear has been to expand into a new segment, Medical Isotope Production. Next page, please. Studsvik has improved the financial numbers for the second quarter and half year compared to last year, and the highlights in the quarter are that we reached a sales increase of 24% and the improved operating margin, mainly due to a strong performance within Decommissioning and Radiation Protection Services. The business area continues to deliver on a very high demand during the revision period. Fuel and Materials Technology also delivers a stable performance in the quarter. Strategic agreements have been signed in the quarter, within decommissioning and radiation protection services, SEK 135 million over a 3-year period for dismantling services. The agreements are important in the transition from reactor operation to a situation where all reactors are shut down in 2022. Within fuel and materials technology, a new international program, SEK 110 million over a 5-year period. The agreement is valuable to support the global industry in the life extension programs of light water reactors. In summary, the 2 largest business areas, decommissioning and radiation protection services and fuel and materials technology, have a strong and solid performance in the quarter. Next page, please. Decommissioning and radiation protection services deliver a quarter with strong growth and operating margin. The business area made a great achievement to meet the high demand during the revision period, and the utilization level was high throughout the organization. The improved commercial customer contracts have also contributed to a positive impact of the overall results. The new agreements that are in place are strategic in the transition from reactors in operation to shut down in 2022. The remaining nuclear power plants in operation in Germany will shut down in 2022, meaning next year. There will be a strong demand for the services Studsvik is offering to the market today, even after the shutdown of the reactors. There will be a demand both for services similar as during operation called reactors in service operation and an increased demand for decommissioning dismantling services. In the long run, we will see a shift towards more decommissioning services and less traditional decontamination services. Studsvik is preparing for this shift by educating existing personnel and recruiting new staff in the expanding area of decommissioning. Studsvik is also performing work in Switzerland, where Studsvik has an office, and in Belgium, and in the Netherlands with long-term customer relations. Studsvik is well prepared to meet future market demand within decommissioning and radiation protection services. Next page, please. Fuel and materials technology has a strong backlog that supports the sales increase in the quarter. The breakthrough in Asia last year, customers in both China and South Korea request international transport of material to the Studsvik site, as well as material testing in Studsvik site. The transports both from South Korea and China will be first of a kind for irradiated material. The agreements also require an upgrade of testing capabilities in the facility at the Studsvik site. There are several investment programs in place to improve the overall capacity over a 2-year period, including both equipment, infrastructure, and employees. Following the Studsvik strategic initiative, the business area has signed the international agreement for material testing to support the life extension programs of the light water reactors. The agreement is worth SEK 110 million over a five-year period, with participants from eight countries and 15 organizations. This program is a collaborative network of world-leading specialists that support the industry with high value, resulting to prolong the lifetime of the nuclear reactors. Next page, please. For Scandpower, there were no major software sales in the quarter. There are commercial negotiations ongoing for new sales, and the target is to close some opportunities in the second half of the year. To enter new geographical markets, it is a key to be well-positioned on the global market. Scandpower is pursuing long-term market activities in the Middle East and Eastern Europe. The business area is focusing on developing new partnerships to access new geographical markets. For example, Studsvik is participating in a bidding process for VVER, the Russian reactor type, in Ukraine, where Scandpower software can expand for VVER applications. Another long-term initiative is the cooperation with vendors for new reactor technologies, like small modular reactors, called SMRs, where Scandpower software is being used for the SMR designs, fuel designs. The business area is also focusing on expanding the capabilities into more SMRs and advanced reactors, which are being designed, demonstrated around the world today. However, this is a long-term initiative. Next page, please. The result for the quarter includes a participation fee from UK Nuclear Waste Management, called LLWR, of SEK 3.8 million. There was no license business signed in the quarter. There are license opportunities in Europe and North America, especially for the inDRUM technology. The focus is to sign a license opportunity before year-end. The background is that Waste Management Technology has an efficient waste technology with possibilities to support environmentally safe and cost-efficient solutions. Nuclear waste storage is charged by volume. Studsvik innovative technology reduces waste as much as 90%. That translates directly to reducing the waste storage cost and the cost saving for the owner. There are also requirements for the waste to be stored in an environmentally safe manner. One of the features of the Studsvik technologies is to focus on stabilizing the waste to support a safe transport and long-term storage. There is a clear need for the waste handling globally. The obstacle is the timing with long lead times and decision processes. Next page, please. Sales, operating profits and operating profit margin has improved insignificantly for the quarter and first half year compared to last year. As mentioned before, the required expansion within Fuel and Materials Technology has increased the investment. Next page, please. The outlook for the business area. As mentioned in the beginning of the call, the Studsvik Group shows a continuous strengthening of the results, mainly due to the 2 largest business areas, Decommissioning and Radiation Protection Services and Fuel and Materials Technologies, that both have a strong, solid performance that is expected to continue for the full year. For Scandpower, it is a timing question for the new software sales. There are also some delays in sales activities on the Chinese market. Still, the business area is expected to improve by closing sales towards the end of the year. For Waste Management Technology, it's more difficult to predict the timing for a breakthrough in inDRUM, although there is a strong market need and customer interest. The business area is focusing on closing a license sale this year to show the proof of concept. Next page, please. Thank you for listening to Studsvik Q2 interim report. Over to operator and Q&A session. Thank you. As a reminder, to ask question, you will need to press star one on your telephone. To withdraw your question, you may need to press the star two. Please stand by while we compile the Q&A roster. Again, if you need to ask a question, that is star and one. Okay, we'll now take our first question. It's from the line of Pål Jarness from A Private Investor. Thank you. Please ask your question Good afternoon, Camilla and team. Pål Jarness here. Hello. Thank you for a good quarter, and very pleasing to see the positive development in Germany. I am, as you may know, quite concerned about the waste management area. I posted a number of questions ahead of the annual general meeting, and Studsvik promised in the invitation and the announcement that the questions and the answers would be published on Studsvik's internet site. That was omitted, disregarded, and this has continued since. I have asked management and even the chairman several times to answer the question that I feel that I'm entitled to get an answer to, but so far, Studsvik declines to answer. I find that very surprising, and I'm actually quite upset about that fact. To the question, DYNATECH. In Q4, Studsvik took a sales revenue for DYNATECH for the license to sell THOR in China. That actually boosted the sales of waste management in Q4. At the same time, Studsvik took a full credit reserve, a bad debt reserve for the same amount. Has Studsvik received payment? If not, will DYNATECH be deliberated of their sole right to THOR in China? Thank you, Pål, for your question. We never give any, as you know very well, confidential information to specific agreements we have with the customers or agents. To answer your question in the way possible, we have no further information to that, and discussions are ongoing with the agent. It means that you maintain what you believe is a leading technology, not the inDRUM, but still related to the inDRUM on the Chinese market with a sole distributor that is not distributing and not paying. I find that quite surprising. I hope that you address that. Moving on. Waste Management Technology has, under the last 10 years, been named many different things, consultancy services among others. Now it's Waste Management Technology. It's been investing heavily in the FBSR technology, the metal treatment. Now the inDRUM technology, the Freeze-Tec technology. It still continues to lose money. At the same time, it defends a goodwill value of SEK 176 million. Very significant goodwill value that is posted to a business area that seems to develop and actually not deliver any profit at all. To me, that means that the inDRUM technology has to be much more promising than the modest statements you make. What justifies the SEK 176 million goodwill in Waste Management Technology? Thank you, Pål, for the question. Anette here. As you probably have seen in the report for Q2 on page 9, the goodwill of the group, amounting to about SEK 180 million in total, has been reallocated. The reason for this is that it's an accounting matter, and after a thorough review, we have seen that the earlier allocation has been inaccurate. The reallocation did not have any effect on previous year's results, which we have made impairment tests for earlier periods to confirm. As seen in the quarterly report, about SEK 120 million is now correctly attributed to decommissioning and radiation protection services instead of Waste Management Technology. Thank you. That was a clever move. It also confirms that the Waste Management Technology is not as promising as it otherwise was looking in the year-end and during Q1. Then Scandpower. Middle East has been mentioned repeatedly in the reports that Studsvik is bidding for different activities in Middle East. It's not mentioned now. Does that mean that the opportunity in the Middle East are gone? No, I think I mentioned verbally, I'm sorry if I wasn't correct on that we are absolutely pursuing the Middle East. As you also are aware, all these activities are quite long-term, activities and opportunities that we are pursuing. That's still an option. I was just surprised that it was not mentioned in the report. Okay, thank you. Now I let someone else ask some questions. Thank you. Again, to ask questions over the phone, that is star and one. Again, for participants who would like to ask questions, that is star and one. Okay, Pål Jarness would like to ask a question again. Please go ahead. Your line is open. Since no one else is asking, what about Elekta? Any sales or shipments to Elekta, or is that contract at a standstill? No, as we have said before, and that we are waiting for the irradiated pellet supply. We have received the irradiated pellet supply. The production has started. We have no more results to share today. That will be for the quarter three reporting. Okay, the production is ongoing now. That's very good news. We started, yes. Thank you. Thank you. Operator, please. Looks like there are no further questions after Pål. You may just continue. Thank you, gentlemen and ladies, and I wish you all a very nice summer. Thank you for calling in today. Bye-bye. That does conclude our conference for today. You may all disconnect. Speakers, please stand by.