Studsvik AB (publ) (SVIK) Earnings Call Transcript & Summary

Good day, and thank you for standing by, and welcome to the Studsvik Year-end Report 2021 Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. And I would like to turn the conference now to your first speaker today, Ms. Camilla Hoflund. Please go ahead, ma'am.

Thank you. Ladies and gentlemen, welcome to the Studsvik year-end report 2021. Let me introduce myself, my name is Camilla Hoflund, the CEO of Studsvik. And with me today on the call, I have Niklas Karlsson, the CFO of Studsvik. We will present the results of specific group performance and financials for the fourth quarter and full year. We are pleased to start today's presentation by informing you that Studsvik Group delivered a very strong result in the quarter and the full year. Next slide, please. Let me start with a brief introduction of Studsvik. Studsvik is listed on the Nasdaq Stockholm Small Cap, with a revenue in 2021 of almost SEK 800 million. Studsvik has 520 employees based in Sweden, Germany, U.S., U.K., Switzerland, Japan and China. Studsvik is an independent organization innovating nuclear sustainability on a global market with a strong established international brand. Studsvik develops safe and efficient solutions to customers within the nuclear field from new reactor builds and operational support for existing reactors, to decommissioning of nuclear power plants, including radioactive waste solutions. Our customers can be found in the whole industry, ranging from fuel vendors producing the fuel for the nuclear plant, the nuclear power plant owners and operators, public agencies, research centers and other nuclear facilities associated with the nuclear power industry. Additionally, we are expanding beyond nuclear power into the medical isotope production. By innovating with new technology and technical experience from the nuclear power industry, we operate an automated production lines in nuclear isotopes in our facilities at the Studsvik site in Sweden. Next slide, please. 2021 was a strong close to the year. In 2021 and especially quarter 4, the organization performed on a very high level by delivering on the high order backlog and having a high utilization throughout the organization. The 2 largest business areas, Fuel and Materials Technology and Decommissioning and Radiation Protection Services, contributed to a net sales growth of 10%. Also the profitability and operating margin improved within the group. In 2021, Studsvik managed to achieve all 3 group financial targets, meaning the growth of 10%, operating margin of 8% and solidity about 40%. Next slide, please. So in summary, the financials for the group shows an improvement both for the quarter and full year, also when excluding the sale of land in quarter 3 of about SEK 10 million. The operating profit and margin have improved for the full year. Strong contributors for the period were Fuel and Materials Technology that's delivered with an increased capacity in the [ hot cell ] facilities, and Waste Management Technology that renegotiated a license agreement with a profit impact of about SEK 20 million. Scandpower power improved in the quarter by closing of license sales. Next slide, please. The business area Decommissioning and Radiation Protection Services delivered a stable performance, with improved operating margins for the full year. In the quarter, the profit decreased compared to last year, mainly due to increased nonrecurring costs and organizational preparations in connecting with the last reactors being shut down in Germany. The market shift in Germany to more decommissioning services and less traditional decontamination services of today will take some years. At present, Studsvik is adapting the organization and will be prepared for the switch the upcoming years. Our strategic pillars have been added to the business area to point out the dismantling area will increase in focus and priority for us. Studsvik is also expanding the services in Switzerland. And for the future, we also plan to expand in Belgium and nearby countries where we already have long-term customer relations. Next slide, please. The business area Fuel and Material Technology delivered an all-time high result in the quarter and for the full year. The business area has delivered on the strong order backlog with increased capacity in the facilities. Also, the transport project performance contributed to higher net sales in the quarter. The successful transport of fuel from South Korea is the first of a kind and have had international publicity within the industry. In the fourth quarter, the business area produced one set of medical isotopes, the second set for 2021. And Studsvik has now received the delivery of irradiated pellets as planned, so the production of medical isotopes will ramp up during 2022. The business area is expected to continue to deliver with increased capacity also in the beginning of 2022. However, the quarter 4 had a very high performance throughout the operation and, on top of that, international transports were performed. Next slide, please. The business area Scandpower improved the quarter by closing license sales. For full year, the business area dropped in the net sales compared to 2020. The business here did not close any major license sales last year, 2021. And there is a delay of the planned expansion of the Chinese markets and new regions, such as Eastern Europe and, for example, Ukraine. A new strategic pillar for the business area is to develop the portfolio, including bringing on new developments and phasing out older software versions. In addition, the current business model will also be reviewed to improve profitability. The business area continues with long-term R&D activities to apply Scandpower products in new technology reactor types, such as small modular reactors, SMRs, and expanding the capabilities into advanced reactor design. Next slide, please. The business area Waste Management Technology renegotiated a license agreement within -- and improved the profit in the quarter by SEK 20 million. The business area has ongoing commercial discussions of license opportunities with potential customers, such as nuclear power utilities and other nuclear facility operators in both North America and Europe. The business area continued to pursue the value of applying Studsvik's technologies, treating problematic radioactive waste, volume reductions and cost savings, as well as meeting social and environmental aspects. Our waste technologies are competitive options for our customers, supporting environmentally safe and cost-efficient solutions for these problematic waste. Next slide, please. For the group. For the group, the financial numbers have improved year-on-year. In the quarter, the investment level has increased and is impacting the free cash flow. Investments are supporting the expansion within Fuel and Materials Technology and necessary infrastructure at the Studsvik sites. Next slide, please. The outlook of the business areas. The business area Decommissioning and Radiation Protection Services is prepared for the new situation for Germany closing the last reactors in 2022. However, we foresee a slower start of this year as the market conditions are changing. We have revisions planned in Switzerland and they will start later this year. For Fuel and Materials Technology, it's expected to continue to deliver with increased capacity. However, we are not expecting to be on Q4 levels as there are no planned transports to be performed in the beginning of the year. Scandpower is focusing on closing license sales and to review the business model, including commercial conditions of the software portfolio. And for Waste Management Technology, the focus is to close our new license sales. Next slide, please. The group financial targets. After some years of continuous improvement of the financial results, in 2021, the group achieved all 3 targets: growth 10%, operating margin 8% and solidity about 40%. The Board of Directors has adopted a new financial target for the group, and that is an average annual organic growth of 6%, an operating margin of 12% and also a solidity of at least 40%. The targets are important. However, even more important is to continue our development of continuous long-term improvement. Next slide, please. Thank you very much for listening to Studsvik's Q4 report and full year report. And now I hand over to the operator to open up for the Q&A session. Thank you.

[Operator Instructions] And we will now take the first question now, and please go ahead.

Okay. This is Stefan from ABG. I just want to connect to your new financial targets. You say that you -- firstly, on growth, you say that you aim to grow 6% on an annual basis. Can you just break down that a little bit more in terms of business area contribution and so on, and what your thoughts are there?

Yes. Stefan. Yes, I'm pleased to see that we are pointing out, is an organic growth to begin with, 6%. And for sure, I think we can then all agree that the expectations are high for Fuel and Materials Technology and for Decommissioning and Radiation Protection Services. I think there is a little bit more -- we have grown the 2 last years and now I think we're getting to a level where I think it's difficult to continue to grow with the same increase as we have had in the past. And then I think for the other 2 business areas, it's -- of course, we have targets and we need to show proof that we will be able to grow. But the main engine for the growth will be Fuel and Materials Technology.

And then also on the operating margin, it's an increase of 4 percentage points, the target. Where do you see that this improvement will stem from if you talk about business areas again?

I think it follows very much the similar answer as for the growth. I think expectation, of course, is within Fuel and Materials Technology, and we're also seeing on 2021 a nice increase. But for sure, all BA, business areas, have to focus on profitability and to increase profitability. But the main expectations are in Fuel and Materials with the growth coming.

And then also, I would like to have some questions regarding the quarter. If we look at Decommissioning, for example, can you quantify the extra cost that you took in the quarter and also how severe this change in conditions will be in the beginning of 2022 here?

Yes. We don't share the details of exactly the extra cost and to quantify of the extra cost. But for sure, it's connected with people and costs around staffing, et cetera. And then like I told you, I think we are on a very good stable phase within the business area and we have customer contracts. But always when you have bigger changes coming into the market, I think it's fair to say that there are always uncertainties coming up in that perspective.

Perfect. And you also mentioned that you see an expansion to Belgium. Can you maybe speak about, long term, what is the potential maybe in terms of employees in that country that you see that -- the opportunity that you have there?

I think the main expansion area will actually be -- in shorter term, will be Switzerland. And we have people from Germany working in Switzerland during both the outages in the nuclear power plants, but also in the first decommissioning of one of the reactors in Switzerland. So that's an area where we definitely, in shorter term, will expand and continue to expand. And for Belgium, we have also already now doing outage services. But we will also look into more in the decommissioning and start to understand their plans. So I think that will be a little bit more into the future, a few years from now, maybe.

Okay. Perfect. And then also on Scandpower, we saw a very good profitability level here in Q4, and you mentioned that it was driven by a license sale. But have you been able to perform any internal efficiencies in this short period that you have a new CEO in place there? Or was it purely driven by the license sales?

No, I think it's both of them, but the main part is driven by license sales. But the new CEO, for sure, are looking into improving profitability and cost structure as well. However, I think those kind of activities to identify new development areas but also to see how we can do things more efficient will take some longer time.

Okay. Perfect. And then my last question, sorry for many questions here on the call, but it's regarding this renegotiated license agreement in the waste management area. Obviously, you had a positive effect here in Q4, but how will it affect future business? Will you have a higher contribution from future license sales? Or how will it pan out?

I think for this specific renegotiation, we had the impact in Q4 and we have no further impact for the future for this specific customer deal. But of course for looking into the future, well, for the business area, it is, like mentioned, that we have several negotiations ongoing with customers and commercial discussions. And I think this is a good reference to show that this is something valuable for our customer and that our technologies are valuable. So I think that might support in a nice way for the future.

[Operator Instructions] We will now take our next question.

It's Adrian Bignell from Quero. I've got just a couple of questions. Just can you -- just coming back to the medical isotope business, what kind of visibility -- because you obviously talk about now getting ready to ramp it up in 2022, what kind of visibility do you have in the business in terms of your clients telling you how much demand they're going to have this year? Or is it very much a kind of slow ramp-up and see how you go?

I think this is never a quick ramp-up, to be honest to say, because of the character of the things we are dealing with. And then, of course, I cannot give any details of exactly how we are planning with the customer. But I think it would be like a smooth ramp-up, and we want to have also a smooth ramp-up because that's very suitable for our other operations in the facilities.

Okay. And is it just one client in medical isotopes? And do you think that will remain one client? Will you be able to find new clients as the year goes on?

At the moment, it's one client and one contract that we have also press released in the past. But for sure, we already have discussions and are looking into the future of expanding that. But exactly how that's going to be is nothing I can share at the moment.

Okay. And then sorry, just on the Scandpower division, sales fell away in the U.S. Why is that? And in terms of the business going forward, is it going to remain on a license sale and maintenance business? Or will it go to a SaaS business model?

If I start with the last question, I think we have to be adaptable, and we are very flexible because it also depends on how it is possible with the business model for the customers. Because some require -- it might be some difficult with the SaaS model, let's say, for some of the customers. So -- but we are definitely flexible and open for that as well. And we can see that it seems to be a trend to be a little bit more into lease, meaning it's reoccurring, rather than license. But we have both models and will continue with both models. And then in U.S., we had a little bit of COVID impact that made it a little bit more difficult to do what we traditionally do, interactions and meetings face-to-face with our customers. So we still have opportunities for sure in the U.S., but they are a little bit postponed due to -- actually, this business area has a little bit impact of the COVID situation.

Okay. So we could expect 2022 to be a little bit of a recovery in the U.S. as you get back to face-to-face contacts?

I don't -- I cannot share any specific on different regions. So unfortunately, Adrian, I can't really answer your question to that.

Okay. And then maybe just talking on the Waste division. Is it in terms of -- can you give us a little bit of kind of color in terms of are you negotiating with a greater number of people at the moment, getting closer to end discussions? Or is it still very much kind of hard to predict how '22 will pan out?

We have a number of customers and they are, of course, this kind of specific things that we are talking about, waste technologies, is very dedicated customers. And then, of course, it's difficult to assess the speed of the discussions and if we are going to be 100% successful. But we have, over a longer period, discussed with a handful of customers that we have on the list.

Okay. But can you -- I mean, maybe just to give -- can you say that you're more optimistic than you were 6 months ago in terms of closing deals? Or is it you can't say?

For sure we are optimistic of closing a license deal in Waste Management Technology. Otherwise, we wouldn't leave in the business area.

Okay. And then maybe sort of my last question comes to the balance sheet and solidity. So you've already hit your target ratio of 40%, haven't you?

Yes.

And yet you still only have a payout ratio of 30% in -- for dividend. Why do you -- I mean, it seems to me there aren't many M&A opportunities out there, so why can't you raise the dividend further? I know that's really a Board decision, but...

Yes. Exactly, Adrian. It's a Board of Directors decision. And I'm sorry I can't comment on that for you or anyone else, by the way.

Okay. Are you getting much sort of feedback from existing shareholders to raise the dividend? Or is that a common discussion point?

Adrian, I think that is a discussion within the boardroom. Sorry for that.

Okay. If you -- and maybe just a subsidiary question on the M&A. Is there -- do you see anything sort of cropping up in 2022? Or is it unlikely?

I don't give any forecasting on that. Of course, we are always having M&A on the agenda, but I don't share anything at the moment.

We will now take our next question.

This is Marc Saint John Webb, just complementing on Adrian's questions, but specifically on the nuclear business. The -- just trying to get an idea on your decommissioning business. You were talking about Germany closing its last reactor this year, and therefore, we could expect a sort of a slow start to the year. Could you help us understand on the dynamics of the decommissioning business and the rest of the business? What happens in the years after the final closure of a plant, what business can you still do? And over the next few years in the market, which has actually closed, and you're saying that sort of Switzerland is going to continue closing. But just to get an impression whether all your staff in Germany will continue to be busy over the next years. And second question, this morning, we have -- in France, we have Emmanuel Macron that's going to be announcing the launch of 14 EPRs, which is absolutely huge. Admittedly, it's going to be over the next few decades. But there will also be the announcement of quite a number of SMRs, which means that the French market is going to be very dynamic. I noticed that you're doing business in Switzerland, you're talking about increasing Belgium. Can you just remind us, one, if the French market remains completely close to you or you will try and benefit a little bit from the huge boom we're going to see in France? And secondly, and this is looking out a long way out, but in the environment when the world is starting to invest in nuclear a lot more, how will it affect the various divisions of Studsvik looking 5 or 10 years out?

Thank you very much for very comprehensive questions, and I will do my best to answer them. When it comes to Decommissioning and Radiation Protection Services, I want to think that, in principle, all of the things we have been doing when the reactors work in operations need to be done or similar resources and competencies you need to have even in the closing phase. However, when moving from reactor operations to closing, there might be some authority papers that need to be in place and the customer organizations need to be prepared, and that might be a little bit -- take some time to find all these pieces and to make sure that we can continue with the work. But for sure, there have been many, many years of work, and there is a huge demand also in Germany to increase in this dismantling phase, decommissioning phase that is after the reactor operation. When it comes to Switzerland, they have reactors and will continue with life extension program. So they will continue both with the reactor operation, but they also have the first reactor that has started the decommissioning activities. So for our people in the decommissioning area, we foresee a very, very long time and many, many years of work that is upcoming. Into the SMR and the French market, we are very positive to also take the news from the French activities to increase the nuclear power and to keep the nuclear power. And in general, we are always looking into markets that have those approaches, either -- you could say, either building or for decommissioning, of course. Today, we have some activities with the French market and French customers, mainly in our international programs, that are [ joint ] programs, but we have the connection. And for sure, we are very interested and already looking into how can we enter the French market that usually might be a little bit tricky because it's very much close into the French aspects. But we will definitely do our efforts to increase our activities on the French market and also, in the longer term, on the SMR applications. And your third question about people investing, I think that's very good and nuclear, and we know the taxonomy is up in the discussions, too. So for sure, we see that if our customers will increase activities, we are quite sure that, that will be very positive for Studsvik in all business areas. Because already today, when you are building new reactors, you need to take into consideration the waste class technologies for handling the waste. And you might be aware that Studsvik have -- the different business areas are covering very much different cycles of the reactor lifetime. So I think we have a good leverage in many of the business areas looking into the future and investing in more nuclear. Thank you.

And if I could just add an extra question to that. So in France, again, the thought is that all of this is going to be for the 2030s and '40s, so it's still far ahead in terms of actually generating extra power. And in the meantime, there's going to be a big rise in demand of power from electric vehicles, et cetera. So there's just not the nuclear capacity out there, particularly with the programmed closures. So there's talk of stopping the closures, renovating and life extension. So can you help us understand, in the environment of renovation and life extension, how does Studsvik play in that?

Yes. And for the life extension, it is mainly with the support of Fuel and Materials Technology and partly Scandpower software, where we are doing some R&D and an international program assessing the material that you want to prolong the lifetime for. We are not performing people work with really life extension part, if you understand, the decommissioning is a different area. But we, for sure, have R&D activities and also testing capabilities, analysis and software that can support those kind of questions.

[Operator Instructions] Okay, ma'am. No questions at the moment. Please continue.

So thank you, ladies and gentlemen. It's been a pleasure presenting the Studsvik full year report for you, and looking forward to the next presentation in quarter 1. Thank you.

Okay. That does conclude our conference for today. Thank you for participating, you may all disconnect. Speakers, please stand by.