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

Hello, and welcome to the Studsvik Q3 2022 Call. My name is Laura, and I will be a coordinator for today's event. Please note, this call is being recorded. [Operator Instructions] I will now hand you over to your host, Camilla Hoflund, to begin today's conference. Thank you.

Thank you very much, Laura. Ladies and gentlemen, welcome to the Studsvik Interim Report for the Quarter 3 2022. Let me introduce myself. My name is Camilla Hoflund, the CEO of Studsvik. And with me on the call today, I have the CFO, Niklas Karlsson. We will present the results of Studsvik Group for the third quarter. Next page, please. There are important global drivers within our industry, and Studsvik support the customer with our products and services with a worldwide footprint. Example of important key drivers for the nuclear energy that are both on an international and national agenda are: The climate change. The negative trend is continuing, and the world needs to reduce the carbon dioxide emission, CO2. We all hear daily about the extreme weather situation all around the world, and it's not improving, rather the opposite, getting worse. The energy needs and shortage. The debates about the reliable and predictable energy supply is on the agenda for the industries that are dependent on clean energy to meet their climate targets. Also in Sweden, the energy supply, including nuclear power, is very much on the agenda among the politics. Some industries, as well as smaller businesses, need to consider shutting down due to the price of the electricity. The geopolitical situation. Due to the unstable geopolitical situation, many countries are aiming to be more self-sufficient or having multiple or independent supply chains. This is also applicable for the nuclear industry. And several nations have their own concept, for example, for the small modular reactors and advanced reactors. In this context, nuclear power is an energy source that today is more and more [ excessive ] as a key in the mix of the energy portfolio. Also, the European Parliament announced that they support certain nuclear activities within the taxonomy for the European Union. In the light of the global situation, Studsvik is an independent organization with a vision: Innovating nuclear sustainability to support the world with safe and efficient solutions. Our customers are our producers; fuel vendors; authorities; our research and development organizations within the nuclear industry, from new reactor build bill and operational support for existing reactors, to decommissioning of nuclear power plants, including radioactive waste solutions for environmental and safe final disposal. Next page, please. In summary, the same operating profit and margins for the group have increased in the third quarter compared to last year. The operating margin, excluding the sale of land affecting both 2021 and 2022, improved both in the quarter and 9 months. The quarter 3 this year shows a stronger operating profit compared to previous year. Usually, the license sales of software do not occur until quarter 4. This year, we have license sales within the business area of Scandpower in quarter 3 that had a positive impact on the results. Business area Fuel and Materials Technology established a long-term partnership with a new customer. The first orders of SEK 40 million will be delivered this year and 2023. Studsvik has exercised its option to acquire all shares from the minority shareholder in Scandpower. This gives us a better control successful strategic direction and develop the business area in the future. Next page, please. Decommissioning and Radiation Protection Services. As expected, and earlier communicated, 2022 is a decline compared to 2021 due to the reduction of refueling and maintenance activities in both Switzerland and Germany. This year, the refueling and maintenance services in Germany was limited as utilities were planning to phase out the reactors from the grid at year-end. However, it has decided to prolong the operation of 3 reactors in Germany. And consequently, next year, there will be also a need for refueling and maintenance services, although not on the same level as before. At the end of the quarter, the sickness absence increased compared to half year, and that had also a slightly negative impact of the operating profit. We consider 2022 as a transition year. And for the future, more focus on the operations would be in the decommissioning area within both Germany and nearby countries. Next page, please. Fuel and Materials Technology. In the quarter and year-to-date, the sales had increased due to a stronger performance in the facility. Excluding the profit from the sale of land from last year that impacted both 2021 and 2022, the operating profit and margin increased both during the quarter and year-to-date. The new long-term partnership that has been established service with a German customer within the area of spent fuel studies is an example of a strategic pillar: Expansion of services within the decommissioning area. The first order amounts to SEK 40 million and will be carried out in 2022 and 2023, and the project has already started. Next page, please. Scandpower. Recently, we had to release the news that Rob Whittle, that joined the group in 2021 as President of Scandpower business area, suddenly passed away. He contributed with new perspectives to the business area despite this very short time within the business area. Arthur Wharton has been appointed as Acting President of the Scandpower business area. Mr. Wharton has been in the nuclear industry for more than 15 years and has previous positions both within technical, strategic and commercial areas. The business area had an increased license sales in the quarter. Usually, the license sales of the do not incur until quarter 4. Studsvik has exercised its option to acquire all shares from the minority shareholders in Scandpower. The price of the shares will be determined in arbitration proceedings. Next page, please. Waste Management Technology. The sales growth consists mainly of advisory services within Waste Management. And for these services, we are using subcontractors. The business gives lower margin compared to license sales and associated engineering services. However, this is a service that can open up for potential license opportunities. Last year, we had a profit share payout of SEK 6 million from U.K. Nuclear Waste Management, LLWR, an agreement that expired in June 2021. We had no license sales in the quarter. Next page, please. The group. The negative cash flow is mainly due to increased working capital, high -- ongoing customer projects within Fuel and Material Technologies. There are activities ongoing to improve the efficiencies to reach milestones in our larger projects, especially within Fuel and Materials Technology, and we will report the progress in the upcoming quarters. The investment level was high last year due to a capacity increase within Fuel and Materials Technology as well as the need to upgrade supporting infrastructure for the site. This year, we see a slowdown compared to 2021. Next page, please. The outlook. As expected, the refueling and maintenance services was lower in this year compared to last year. However, it will not be phased out at year-end as there is the decision to continue operation on the 3 German nuclear power plants in 2023. There is a continuous focus on increasing the services in Germany and nearby countries, mainly within the decommissioning area. Fuel and Material Technology is expected to continue to deliver on the strong backlog. The order from a new customer in Germany is an important achievement in broadening the customer base for new and existing markets. For Scandpower, the direction moving forward is the same as reported last quarter: Focus on development of the software portfolio with both internal research and development efforts as well as through partnerships to gain time and effort. Focus is also to enter new markets. For Waste Management Technology, the focus is to sign a license agreement in some of the ongoing opportunities in Europe and North America. Next page, please. Thank you so much for listening in to Studsvik's Q3 Report. Now I hand over to the operator to invite for the Q&A session. Thank you.

[Operator Instructions] We'll take our first question from Stefan of ABG.

And first, I would like to send my condolence for the horrible news about Rob. Obviously not great to read about that. If we start off with Scandpower, I could see that his legacy is shown in the number with a huge license deal here in the quarter. Can you just elaborate a bit about the license deal? And was it that it was taken in Q3 instead of Q4? Or can we expect a further license deal if we look at it?

Thank you, Stefan, for the condolences and also for the question. These Scand sales that we had in Q3 was partly expected to come in Q4. So partly, it was a little bit pre the time line, so to say. But of course, I want to address that we always have opportunities that we are working on and focusing on. And with that said, we never give you any forecast, and it's always difficult to know the time lines. But I hope that answers your question.

Okay. Perfect. And then if we look to the decommissioning business area. I mean, we saw a decrease in number of employees this quarter. Is this what you expect, slow ramp down of -- as Germany has closed down the majority of their power plants? Or how should we view the outlook for decommissioning?

I think we have to review it. Like this year, it's a little bit of a transition year. And I think over time, that we will see, of course, a slowdown in refueling and maintenance work. But we will also see, for -- at least for us, to ramp up for nearby countries, but also in the decommissioning area. But I think you might remember that we said that this year will probably be a transition year for us, which, always when you have big movements on the market, things happen, and you have to adjust for that.

Okay. Perfect. And then if we go into the more positive news about the development in the Fuel and Material business area with the deal in Germany. Can you talk more about the volume in that contract that you closed? And also if we are to look at the potential for the total German market. And is it -- I mean, is this still connected to the shutdowns? And who are you competing with for the rest of the business that will come from Germany?