AS Tallinna Vesi (A1T.F) Earnings Call Transcript & Summary

[Audio Gap] [Operator Instructions] Now I would hand over to Aleksandr and Taavi. Here you go.

Good morning, everybody, and welcome to the Tallinna Water's webinar. So today, we will cover some operational and financial results for the second quarter. And I'm really happy that the second quarter was very good for Tallinna Water. So our financial results were outperformed if we compare them with the budget. And if we speak about the sales, then during the second quarter, the sales reached EUR 19.4 million and the net profit was EUR 1.4 million. Now we will cover financial numbers in details. And if you have any questions, then we are happy also to answer them a little bit later. So if we will move on to the operational results, then I would like to say that the water quality from the tap was according to all standards. We took during first half of the year over 11,300 samples from the customers' taps and all samples were according to the [indiscernible]. During the second quarter, we took over 500 samples. If we speak about waste water treatment plants, then our effluent quality was better than the law requires. If we speak about phosphorus, then it was 0.3%. And if we speak about the nitrogen, then it was below 10 milligrams per liter. I would like to say that during the second quarter, a lot of rains have been in Estonia. So we treated during the first part of the year 6% more wastewater than we budgeted. Of course, as we mentioned before, we do everything to fulfill obligations and offer the vital services to our customers. During the second quarter, we also produced a lot of electrical energy and heating power that is needed for our treatment facilities. During the second quarter, we produced over 2.8 gigawatt hour electrical energy. And if you speak about the first half of the year, then we outperformed 5 gigawatt hour electrical energy production that we used in our facilities. I would like to say that our aim is to install the smart meters to our customers. And by the end of the second quarter of 2025, over 72% of our customers actually used ultrasonic smart water meters. This gives us a better overview about the consumption in the city and of course, also helps customers to save their time for these customers who have a smart meter who have to send their leadings to us. And during the second quarter, we had one working accident that happened in the water treatment plant. On of our employees fell down into the opening, but he opened himself. The person is at the moment on the sick leave, and we hope to get him back to work soon. So all similar locations were checked by our health and safety department. And of course, we take health and safety very seriously in the company, and we do everything in the future to keep zero tolerance with the health and safety issues. If we move on to the next slide, then I will speak a little bit more about our investments. So during this year, we plan to invest up to EUR 61 million into our assets. Why we do that? The main reason is to keep very high level of services for the water and sewage services and of course, contingency. It is important that our customers get water supply 24/7, and if there's any crisis, then we are ready to handle that so people can use water and wastewater services also during the crisis time. So we reconstruct a lot of pipelines in the city. We do it together with the city of Tallinn, other municipalities and some other utilities. During the first 6 months, we reconstructed over 20 kilometers of pipelines. Approximately 50% of that was done with the trenchless method. And by the end of the year, we plan to complete 45 kilometers of pipeline reconstruction in Tallinn. This is for water, sewage and storm water pipelines. You can see also on the slide some streets where we do work at the moment. We are sorry if there reconstructions somehow impact your every day's life. But without these works, it is not possible to keep the high level of services in the future. A lot of investments also done in the treatment plants. So we completed the filters reconstruction at the water treatment plant and huge reconstructions at the moment ongoing at waste treatment plant at Paljassaare. So we install the primary screens to the main pumping station and we also reconstruct the screens in the treatment plant itself. It will help us better comply with the mechanical treatment during the storm events. And due to that, we can get from the process more screenings and this will positively impact the next stages of the treatment such as biological and chemical treatment. The secondary segmentation tanks are also under reconstruction. In total, we have to reconstruct 12 tanks. And by today, 4 of them are reconstructed and construction works are completed. And this year, we start with 2 extra ones. And the rest will be completed during next year. And of course, as I already mentioned, the contingency, then we continue to install the generators into our pumping stations. So during the serious energy cut, we can cover the main areas with water supply and also the wastewater discharge. So by the end of this year, 40 generators will be installed in our strategical pumping stations. If we move on to the next slide, then you can see our main targets. So as I mentioned before, the tap water quality is on the top level. 60 public water taps opened in Tallinn. So from there 24/7, it's possible to get drinking water. Wastewater treatment plant is working according to all standards, even outperform them and our effluent quality of that is 100%. The leakage rate is similar to last year. So we do a lot of work to investigate and find out the leakages. And of course, the reconstruction of the water pipes help year-on-year as well with that. Our leakage level is on a very good level if we compare us with similar sized cities, and we do everything to maintain the same level of the leakage rate in the future as well. One of our aims is to decrease the length of the water interruption. So we try to plan our works as good as possible. And if we look into the second quarter of 2025, then the average water interruption took 2 hours and 15 minutes. That is much better than last year. As I mentioned before, the rehabilitation of networks is ongoing. During the second quarter, 13.7 kilometers was constructed. And if we speak about the 6 months, then over 20 kilometers of pipes have been completed. And a little bit about the customer satisfaction as well. So satisfaction is important for us. We do a lot of cooperation with customers. We investigate what are the expectations and what we can do better. And during the second quarter, our response was for 4/5. That is quite okay and a little bit better than last year, but our aim is to get the response that is equal to 4.2. So we continue to do the cooperation with our customers. We try to find better ways how faster [indiscernible] on emergencies. And of course, the aim to give the feedback to the customers as quickly as possible. And we try to do everything to cover the topic within one letter, not having long conversations with the customers because the time is important. So overall, everything is good. We are moving towards the third quarter with great results. And I will hand over to Taavi now, who will go into details of the financial results. Thank you.

Thank you, Aleksandr. And in the next slides, we'll take a look at the volumes, sales volumes and also financial aspects of the second quarter and 6 months of this year. Starting off with service volumes in 2 main customer segments, private and business customer segment for the second quarter and also for the 6 months, we have slight decreases. For the 6 months, the decrease in volumes is less than 1% in both segments. There are no clear outliers. There are factors like rainfall, industrial consumption that are affecting the small variations in consumption. But all in all, it's in the same range that it was in the last year same period. And we don't expect any sudden changes also in near term. There's a more significant change in consumption in the outside service area. And compared to last year, this is mainly due to consumption of pure water in Harju region. For that time in '24, we supplied Harju region with additional clean water, which after a certain time period was replaced with borewell water, and this volume is not being sold in '25, and there will be a slight variation also for the total of the year. Now going forward, looking at the revenues of the services, we see a significant change in private customer sales volumes for the second quarter and also for the 6 months and also a significant change in other customer groups. But what drives the private customer revenues and pricing most is the regulation requirement to equalize prices between customer groups, specifically private and business customer groups. Right now, there is a price difference in clean water and wastewater. And we have done 2 significant price adjustments on 1st of July 2024 and 1st of May 2025. And as a result, the business customer pricing is decreasing as the prices for the business customers are right now higher and the private customer are increasing due to the price equalization. There will be one more adjustment to equalize clean water in 2026. Wastewater prices will remain different, but they will not be based on customer groups, but on pollution load of the wastewater. Outside service area prices have increased primarily due to investments in the area, which also affect the overall changes to all customer groups as well. And the main driver after the price equalization is investments that we do in the sustainability of our services. Now in the next slide, we'll take a look at total cost of goods sold. Total cost of goods sold for the second quarter increased EUR 2.9 million. It's a significant change, but there's one clear driver for that, that's construction services cost accounted for EUR 2.5 million of this impact. And it is in correlation with the construction services sold. There are some more or less relevant changes in the impact of total cost of goods sold. For example, total direct production cost decreased slightly, less than 4%, primarily driven by our own production of electricity, which, as Alex mentioned, has been strong for second quarter. There are some increases in staff costs due to increases in salary costs and depreciation costs related to investments. But the main driver remains the construction services. And these are services that we use to provide construction services to our external partners. In the next slide, we summarize the impact on net profit. You see here that the net profit in total for the second quarter is around EUR 0.8 million lower. But the main driver for this lower outcome compared to last year is corporate income tax. We'll get into that in a moment. But first off, starting with the sales. As already mentioned, construction services is the largest impact on the sales change in Q2. This is very much related to how the construction projects are timed, how they are contracted. We had around EUR 2.7 million of construction revenue impact of this EUR 3.7 million change. And the rest is primarily due to price adjustments in Water Services from 1st of May. Construction Services impact is also seen in the cost of goods sold. Then we have some less important changes in fixed costs and the positive impact from net financial costs. And coming to the income tax, this income tax increase is related to changes in corporate income tax regulation. Income tax is paid on distributed dividends. Distribution of dividends was done in the second quarter. But income tax paid on the dividends increased significantly in 2025. First off, the rate increased to 22% and the lower tax rate applied to consistent dividend payments, 14% was not applied -- it was abolished in 2025. So all dividends are effectively taxed with a tax rate of 22%. Now looking at the next slide, we see our cash position. It has decreased by EUR 6.4 million compared to end of last quarter. But we're not targeting to maintain a high cash position. So this is within our set business operations and targets. We work on the principle that we operate our cash as most effectively as we can and secure our liquidity with sufficient financing and debt contracts. Main use of our cash flow, yes, investing activities. So EUR 12.4 million impact from our investments also on the cash position comes from investment activities. Financing cash flows don't show a significant net impact, but included changes related to dividend payments and at the same time on the other side, changes in long-term debt. And finally, let's take a look at our investment track for this year. We have stated that we are aiming to invest around EUR 61 million this year. We are well on track regarding this target. We have invested in the 6 months of this year, EUR 23 million on the balance sheet. It must be noted that first half of the year is always slower due to construction timing. So we expect to be close to the set target. Majority of those investments, around 85% of those investments are related to regulated assets. This is where we earn our profitability from the capital that we invest, we earn regulated return. This is the core of our profitability and business. But regulated asset base is reviewed during price approval process and the last change was, as mentioned, applied from 1st of May. But then we have 2 other groups that form the 15% stormwater network of customer connections, which is financed respectively by City of Tallinn and by connection fees from customers. So all in all, we have a strong quarter, negative impact from increase in corporate income tax, but we are well on track with our price adjustments to perform the investments necessary and achieve the results that we are targeting for this year. With this, I will conclude my part in today's presentation. Thank you very much. And I will hand back to Kristiina.

Yes. Thank you for the presentation, both of you. So now we will proceed with the questions. [Operator Instructions].

For the time being, we've had no questions in our webinar event, but we received one question by e-mail regarding the choice of language in the webinar and specifically why it is done in English. And I would like to answer that right away here. The main reason for that is to make this information and data more accessible in other regions of investors. We'd be very happy to do the presentation in Estonian, but we also have to keep in mind that we have investors in the Baltic and Nordic regions and our consideration has been that English will provide opportunity with those investors as well to receive the information.

Thank you, Taavi. So it seems that we don't have any questions. So the recording of the presentation will be available in Tallinna Vesi's YouTube channel in our webinar very shortly and the presentation materials and reports can be found on our web page. So thank you, Taavi and Aleksandr for the overview, and thank you all for joining. Have a good day.

Thank you.

Thank you. Have a good day.