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

Welcome to Studsvik Q4 2023 Report Presentation. [Operator Instructions] Now I will hand the conference over to CEO, Camilla Hofland, and CFO, Niklas Karlsson. Please go ahead.

Ladies and gentlemen, good afternoon, good evening, good morning, and welcome to the Studsvik interim report for the fourth quarter 2023. My name is Camilla Hoflund, CEO of Studsvik. And with me on the call today, I have Niklas Karlsson, the CFO. We will walk you through the results and update of the Studsvik Group for the fourth quarter 2023. And as the operator said, at the end, you are welcome to ask questions, either by calling in or through the -- or through writing your questions in the chat. Studsvik in brief, due to several drivers for the nuclear energy, such as climate change, geopolitical tension, increased need for energy. Actually, the nuclear power is high on the agenda today. When reflecting over several decades, it has never been so obvious that the worldwide people need nuclear power in the transition to a sustainable future. This reflects in the actions from our powerful leaders around the world recently in the United Nation Climate Change Conference, Group 28, the leaders from U.S., Canada, Japan, Europe countries, including Sweden, jointly committed to do efforts to triple the nuclear energy capacity. This initiative is part of the efforts to achieve the net 0 emissions by 2015 -- '50. In the 2024 World Economic Forum, in the [ host ], the message also came across that the global electricity production from nuclear power is expected to reach record levels in the next 2 years. There is a need of electricity that is fossil-free, efficient and reliable, with an increased capacity over time. Another event was when the Swedish Prime Minister Ulf Kristersson and the French President Emmanuel Macron recently signed a renewed strategic innovation partnership declaration between Sweden and France, and that declaration included new areas such as nuclear energy, which was very encouraging. Studsvik is a company that provides technology services on the global market within the nuclear industry. We support the whole reactor life cycle from new build to operation, decommissioning and final storage with our specialized expertise offerings. The quarter in brief. This is another quarter and year with stable performance for the group. However, there are variances within the business areas. Within Scandpower Software, we signed 2 significant license agreements in the last quarter. We also signed a license agreement with Dongguk Nuclear Solutions, South Korea for static patented inDRUM technology for treatment of radioactive waste. Studsvik signed a cooperation agreement with Energy Company Fortum to investigate the conditions for new nuclear power on the Studsvik site outside Nykoping. The MOU is part of Fortum's nuclear feasibility study, launched in October 2022. During the 2-year program, Fortum explores commercial, technical and social, including political, legal and regulatory conditions, both for small modular reactors and conventional large reactors, both in Finland and Sweden. The acquisition announced in Q3 2022 of all the shares of Scandpower held by the minority shareholder was finally settled during the quarter. The group summary. In the quarter, the group sales are on the same level as in 2022 with slightly lower operating profit due to lower license revenue within Waste Management Technology and the higher level of sick leave within our staffing operations. The group's sales for the full year have increased slightly compared to previous year, despite the first half year beginning with some delays of material shipments and technical challenges in our facilities. The operating profit reaches the same level as previous years, resulting in a slightly lower operating margin for the current year. Decommissioning and radiation protection services is a business area that provides expertise and experience for Germany, Switzerland, Belgium and the Netherlands. In general, the business is stable and there is a high demand on the German and Swiss markets. The first 9 months included outage work and efficient workforce utilization that contributed to a good level of delivery on decommissioning projects. However, the fourth quarter profit was negatively impacted by a higher level of sick leave. If we look into some focus areas for the business area, we can summarize that there is a tough competition when it comes to recruitment of qualified people on the market in Germany and Switzerland. We continue to invest in employer branding and to contribute to the education program together with the university. There is an interest for combined services within decommissioning and waste management such as stabilizing volume reduction and free release measurements of radioactive waste. Still the decision process at the customers take time and on the other hand, the waste will not disappear and one day, it has to be handled some way or another. One focus area is strategic partners for decommissioning services, and we are doing joint offerings to customers where it makes sense. Even if directors have been closed in Germany, we continue to support reactor operation in Switzerland, Belgium and the Netherlands. The business area of Fuel and Materials Technology is a business with the position of the international laboratory supporting the global industry with world-leading testing and analysis. Due to good delivery in customer projects, thanks to the result of project reprioritization and efficient performance, the sales level improved in the last quarter. The margin is lower compared to last year due to different project mix. The business did not manage to recover the revenue losses arising from the production disruptions, as well as the delayed fuel shipment in the early quarters. Focus areas are several initiatives to, of course, to obtain the necessary license for the delayed fuel transports. This is a complex problem that engaged several stakeholders, customers, carriers and authority, and it takes time and efforts. Some years ago, we initiated the Studsvik Material Integrity Life Extension -- SMILE project, a 5-year collaboration venture between Studsvik, OECD and NEA. Experts from all over the world comes together twice a year, creating a forum for knowledge transfer between organizations and generations. It engaged 16 members from 9 different countries, which are financing experimental investigations. So this is a commercial project. The tests are performed on real age materials from light-water reactors that have been decommissioned after more than 40 years of operation. Today, we see an increased interest from the industry in the area of lifetime extension, and it is very capital efficient to run the nuclear reactors as long as it is a safe operation. Genpower is a software business that is a world leading in the fuel optimization from design of fuel core to operation and disposal. Studsvik software is installed in about 50% of the world's light-water reactors that are in operation today. At the year-end, the license sales increased mainly to customers in U.S. and Finland. The business has managed to improve the operating profit and margin compared to last year. The acquisition announced in Q3 2022 of all the shares held by the minority owner, it was finally settled during the quarter, which we are very happy about. Focus areas for this business area, also for our software business, we can -- we see an increased interest for life extension and high performance of fuel. This, in combination with initiatives for new types of reactors such as SMRs and advanced reactors, give new business opportunities. It is key to be where new nuclear is being built, and we just finished a customer trip to the Middle East and the Barakah nuclear power plant in UAE. One key initiative is also to review and develop our software portfolio. We are also assessing how we can broaden our software to cover not only the fuel core, but also other applications in the nuclear reactor. Waste Management Technology is a business area that supports efficient and safe handling of radioactive waste with our technical solutions and advisory support. The lower sales and earnings during the quarter and for the full year is mainly due to lower license sales. In the quarter, for long-term license agreement was signed with Dongguk Nuclear Solutions, which also includes the provision of engineering services for establishing an inDRUM technology in South Korea. The agreement gave Studsvik initial smaller revenue of SEK 3 million to be followed by milestones payments, providing additional revenue of around $30 million over a 3- to 5-year period. The customer has the right to exit the agreement if the milestones cannot be achieved. An in-brand feasibility study by European Spallation Source, ESS and will be carried out in 2024. Focus areas. The investment in a demonstration facility at the Studsvik site for our patented inDRUM technology is ongoing. This is key to provide the technical -- to prove the technical functionality and cost savings that the technology brings through sales and efficient optimization of radioactive waste. During the year, we also established relationships with strategic partners on selected markets, positioning us to well -- to better reach out with our offering and creating the conditions for future growth. These have been successfully way to expand our market and also in the future, our sales capabilities. Possibilities for new nuclear at the Studsvik site. The initiatives ongoing to explore new nuclear power at the Studsvik site includes small modular reactors as well as conventional large reactors. The Studsvik site is a classic Swedish nuclear territory, and the site has the infrastructure adopted for nuclear activities. Studsvik site is well located in building zone 3 that has a growing demand for energy and electricity. A reactor will be established on the Studsvik side. Studsvik's role will be to make land available and contribute with our expertise in various areas, not to build or operate nuclear power plants on our own, and in order we intend to finance the construction of any new reactors. The Studsvik site offers an already established infrastructure suitable for nuclear operations. And in addition, there is a deep sea harbor [indiscernible] facility for material examination and facilities for waste treatment. In summary, we have closed another stable quarter with the broad global interest to expand within the nuclear sector and so many -- both international and national initiatives. This will create opportunities for Studsvik. Studsvik has a given place to be an innovative service provider for vendors, utilities, authorities and other research organizations. The outcome of the initiatives is expected to be mainly mid- to long term. Thank you for listening to Studsvik Q4 report. Now we hand over to the operator to invite for the Q&A session.

[Operator Instructions] The next question comes from Stefan Knutson from ABG.

Just a couple of questions from my side. First, with Scandpower and the license agreement, obviously positive. But have you discussed anything internally to try to change the business model in that company to have a more even flow of the results.

Yes. We have that discussion, and it's quite an important topic for us, as well. But we have to also adjust to that some customer has easier to make it as a license sales and some customers, which we try to push for a little bit more is lease model. So we are well aware that we would like to have a more even flow on the net sales, but it's not an easy or quick task to change.

Then I'm a bit confused about the closure of the minority deal there. You had reserved $90 million in the last annual report, but it looks like you ended up paying $73 million. Is that correct?

The total price for the purchase of the shares from the minority ended up to be around $90 million. So it's both what was booked in 2022 and the $73 million in 2023.

And that was for 9% of the Scandpower..

That's for 21% of the shares in the Scandpower Group.

And then lastly, I'm just thinking a bit more long term here, but given everything that is happening in your industry, is it time for you to review your financial targets? Because I think you sort of changed them before you knew all this new information. Isn't that correct?

Thank you for that question, Stefan. Then of course, we always talk about our financial targets. And right now, those are the financial targets we have, but we will, of course, inform the externally as soon as we would make any changes to them. But it looks promising for the future.

The next question comes from Adrian Bignell from Quaero Capital.

Camilla, thanks for the presentation so far. I just had a couple of questions on Scandpower and the Waste Management. Can you just give us a bit more of a sense of what is the potential for Scandpower? Clearly, you signed a couple of agreements you talked about maybe wanting to broaden your coverage. Does that include M&A in the space? And are there opportunities for M&A? And then on the Waste Management, again, can you just explain a little bit what is the potential addressable market? And have the recent contracts that you've won, has that really kind of helped to ease the sales cycle?

Let me start with Scandpower. And as you know, we never give any forecast in that sense. But for sure, it's a positive future that we can see, which also will be, of course, for this business area. And we are always also opening up to invest and look for the right acquisition in some sense, but we have nothing that is on the table right now. And for the second question, when it comes -- when it comes to waste management technology. I think the contracts that we have signed is, like I said, important for our future net sales and performance within the business area. And they are based on milestones and performance, of course. And as we are expecting to be delivering according to them, I think we will see improved future.

Okay. And I mean future contracts would be -- you'd hope to be of a similar size to sort of $30 million spread over a 3-, 5-year period? Is that there?

It very much depends on -- every contract is an individual contract. And of course, it depends on what kind of volumes, which markets and other aspects that varies quite a lot.

Okay. And then can I just sort of just divert onto the fuel and materials part of the business. And sorry, can you just explain why the margin for the dips versus 2022, where it was 16.3% down to 14.3%. What's the expectation for the next 12 months? Is it a lower margin? Or is it -- what are going to be the key points driving that margin?

I think the key points, I think, if you look at the average for the year, if I look at the whole year, I think you noticed that we had a little bit of these technical issues, delayed transports in the beginning of last year, which of course, impacted the average of the margin because then we have to shuffle around with smaller programs and try to compensate for some of the things that didn't come on time as expected. So I think if we are more on track where things are more smooth and we don't have those kind of issues, I think that would improve the margin.

Okay. And again, simply for the outlook for the margin in the decommissioning business? What kind of guidance can you give us on that side?

No guidance. No, sorry, we don't guide in that sense. I think it's -- as you heard, it's a tough market. It's a lot of requests, but also quite a challenging to find the right qualified people. And then, this is a people business. So when we have the flus in Germany around Christmas time, Christmas time and wintertime, it impacts the business.

Okay. And what is the -- in terms of the contracts and decommissioning, how often are they negotiated? So how easy is it to pass on some kind of price increases?

That's also very dependent on which is a customer which are the contract, but of course, that's on the agenda all the time. And usually, you have quite good chances to pass on, if not all, quite significant amount of increases such as salary increases.

Yes. Because who would be your main competitor in this area in Germany, Switzerland?

Many companies, I would say. And you probably need to go into a separate discussion on that. But of course, there are many companies that is into the decommissioning and people business, and they are both their own private companies, but also daughter companies to bigger utilities.

Okay. And maybe, sorry, just last question just on the balance sheet. Where are you now in terms of net cash position?

I mean if you look into the balance sheet, we have $97 million roughly in cash -- so it's slightly lower compared to previous year.

Yes. Any thoughts on dividend? Any changes or...

That will be decided on the 25th.

On the annual meeting that we have. And then I open up the chat, so I can see that we have a question here. Can you see the problems you have during the year with Fuel and Materials happening in 2024 as well? Or was that an issue with 2023? And I think we addressed that a little bit, that it was an issue in 2023. And of course, we hope to not see it in 2024. Is that a guarantee? No, not really, because I can never give guarantees like that, but it's nothing that we planned for. And I will also have a question about which business you see most potential in 2024. And I think that we have all of our -- the 4 business areas that are quite different. So I think it's difficult to say which one is the most potential in. But of course, we -- we know that within Fuel and Materials Technology, we have some of these discussions around Studsvik and the Studsvik site area that we think is quite encouraging and has also made public in our press releases. I think that maybe covers the questions we have for today. So let me, on behalf of Studsvik, thank you all for calling in and being on the webinar, and thank you for the questions. Back to operator.