AS Tallinna Vesi (TVE1T) Earnings Call Transcript & Summary

Hello, ladies and gentlemen. My name is Eliis Randver, and I welcome you today on Tallinna Vesi's webinar. The webinar will be hosted by the Chairman of the Board, Karl Heino Brookes; and Chief Financial Officer, Kristi Ojakäär. Firstly, Karl Brookes and Kristi Ojakäär will introduce Tallinna Vesi's financial and operational results for the fourth quarter of 2019. Right after the presentation, we will open the floor for any questions you might have. [Operator Instructions] Now I will give it over to Karl Brookes and Kristi Ojakäär, please.

Thank you, Eliis, and good morning, everyone. And thank you very much for joining the Q4 2019 webinar today. Before we get started, I'd just like to say a very warm welcome to Kristi Ojakäär, who's our new CFO, on joining us on the webinar for the first time today. As usual, I'm going to give you an update on our operational performance during the fourth quarter and, of course, for the full year. And this has also been covered in the TSE, which was issued last week. In summary, the operational performance of AS Tallinna Vesi has once again been excellent. The quality of drinking water remains very high. And of the samples taken in Q4, 99% were compliant, and 99.04% for the full year. Even though compliance remains very high, the results were slightly lower than in previous years. And this is resulting from the introduction of a new laboratory test, which is much more sensitive at our water treatment plant. Results of these tests have triggered further work on the water distribution network and enhancements to our ongoing maintenance regimes to ensure the constant and consistent supply of high-quality drinking water. Our water is obviously one of our most important natural resources. And I'm very pleased to say that the year-end leakage performance was 12.97%, which is the lowest in the company's history. During the fourth quarter, it was slightly higher at 14.3%, which is perfectly normal, and that's due to change in ambient temperatures outside, which can cause some shocks to the distribution network. In 2019, the average water disruption time per property was 2 hours and 59 minutes, which, again, is a tremendous performance. At the other end of our processes, the final effluent leaving the wastewater treatment plant at Paljassaare was also fully compliant with the water permit parameters, which means we didn't incur any additional pollution tax charges. And then finally, in terms of customer services, customers' rates on a scale of 1 to 5, with 5 being the highest possible, we achieved 4.1, which, again, is a very good score and shows excellent customer service. So moving on to tariffs. As I'm sure everybody listening is already aware, the company lost its ongoing and long-running legal challenge linked to tariffs. And we are now regulated by the standing Competition Authority, not the city of Tallinn as was previous. Newly approved tariffs came into force on the 1st of December 2019, which resulted in a 27% reduction to our domestic customers, private customers, and a 15% reduction to commercial customers. In very broad terms, this results to around EUR 10 million reduction in annual revenues going forward. Clearly, replacing EUR 10 million of lost revenues is a significant challenge, but, as you would expect, the company is currently exploring some ideas as how we can eat into this. And the 3 areas that we're looking at are incremental growth, that's both in our subsidiary Watercom and also the main business. We're also looking at targeted efficiency and also areas where we can invest and make a saving in a few years' time, so spend-to-save initiatives. I also will continue to push our wholly owned subsidiary, Watercom. They've shown another good year's growth last year, and we're pushing them again this year to continue that same trend. We've kicked off a project in the business now called [ Apollo, ] which is, for us, targeted at recouping some of these lost revenues. And a project manager of that project will start with us next Monday. So that's the operational performance and tariff performance. We'll now move on to the finances. In summary, very good. And -- but I'm going to pass you over to Kristi, who's going to take you through the detail. Thank you.

Thank you, Karl, and good morning to everyone. I would like to give you the overview of the financial performance of AS Tallinna Vesi in the fourth quarter in 2019. After financial highlights of the fourth quarter and 12 months of 2019, I will give you more detailed overview about the sales and costs in the fourth quarter of last year. The performance of the group continues to be good compared to the fourth quarter in 2018. Total sales revenues decreased by 0.7% amounting to EUR 16.1 million, whilst sales of water services decreased by 2.8% or EUR 0.4 million. The construction services revenues increased by 17.6% or EUR 0.3 million. The gross profit for the fourth quarter in 2019 was EUR 8 million, which is lower by 4.7% or EUR 0.4 million compared to the same period in 2018. The gross profit was impacted by lower water services revenues accompanied by higher electricity, staff and depreciation costs, and they're balanced partly by lower maintenance and chemical costs. In the fourth quarter in 2019, the operating profit was EUR 11.1 million or EUR 5.77 million higher than in the same period 2018. Operating profit in fourth quarter in 2019 was positively affected by reduction in the provision formed for the possible third-party claims amounting to EUR 4.6 million, whilst in 2018 in the same period, provision was increased by EUR 1.5 million. Compared to the fourth quarter in 2018, the net profit of the company was EUR 5.94 million higher, being positively affected by EUR 0.17 million lower net financial expenses. In total, 2019 12-month unaudited results were very good. Unaudited sales of 2019 totaled to EUR 63.4 million, showing an increase by 1% or EUR 0.6 million year-on-year. 89.7% of sales comprised of sales of water services within outside of the service area -- within and outside of the service area, and 9.4% from construction services and 0.9% from other services. Unaudited gross profit in 2019 reached to EUR 34 million, decreasing 0.7% compared to 2018 due to EUR 0.9 million increase in COGS year-on-year, from which EUR 0.7 million is related to increased electricity costs, driven by an average 25.6% higher electricity prices. Unaudited operating profit for the 12 months of 2019 amounted to EUR 32.1 million, being 19.1% or EUR 5.1 million higher than in the corresponding period of 2018, being mainly impacted by change in provision for the possible third-party claims mentioned in the fourth quarter results and additional legal costs resulting from the ICSID award, according to which the company was liable to pay for 25% of Estonian legal costs related to this matter. Unaudited net profit for the 12 months of 2019 was EUR 27.8 million, being 14.9% or EUR 3.6 million higher than for the same period of 2018. We shall move to the next slides, and I will comment on the changes in revenues and expenses of the fourth quarter in detail. Let's start from the sales. Total revenues from water services were, in the fourth quarter, 2.8% or EUR 0.4 million lower than in the fourth quarter of 2018, amounting in total to EUR 14.03 million. As new tariffs were applicable from 1st December 2019, the decrease in water services revenues was driven by lower tariffs from main service area, accompanied by changes in the consumption. The domestic revenues in Tallinn and Saue area decreased compared to the same period in 2018 by 8.2% to EUR 6.1 million, driven mainly by an average 27% lower tariffs from 1st of December 2019 worth EUR 0.61 million. The decrease from tariff was partly balanced by 0.9% higher domestic consumption, which came from apartment blocks. The commercial sector revenues in Tallinn and Saue area decreased compared to the same period in 2018 by 3.2% to EUR 5.1 million, driven mainly by an average 15% lower tariffs worth EUR 0.25 million. Outside services area revenues have shown a good increase by 11.4% to EUR 1.38 million, and the increase was mainly driven by higher wastewater and stormwater disposal volumes from Rae, Saue and Kiili areas and water supply to Maardu area. Stormwater volumes from the main service area were higher by 7%, amounting to EUR 1.15 million in the fourth quarter of 2019. The revenues from construction services showed an increase of 17.6% or EUR 0.28 million compared to the fourth quarter in 2018 and amounted to EUR 1.9 million. The increase was mainly related to higher pipe construction services revenues, accompanied by higher road construction services revenues. The increase came from projects won by the company, both in Tallinn and other parts of Estonia. This now takes us to the costs. The total cost of goods sold in the fourth quarter of 2019 was higher by 3.7% or EUR 0.3 million, amounting to EUR 8.1 million. Direct main production costs in total have increased by 10.6% or EUR 192,000, mostly due to higher electricity costs, driven by, on average, 26.4% higher electricity prices in the last quarter. Staff costs increased by 6.3% to EUR 1.71 million. The increase is mainly driven by higher number of employees but also higher salaries. Depreciation cost increased 7.6% to EUR 1.47 million, and the increase is related to change in accounting for the leases as IFRS 16 became effective from 1st of January 2019, accompanied by higher accelerated depreciation cost. Construction services cost increased by 20.8% to EUR 1.66 million, and this is related to higher construction services revenues mentioned earlier. Other cost of goods sold increased by 23% to EUR 1.32 million and are mainly related to lower asset maintenance costs, balanced by higher sludge disposal costs. Administrative and marketing costs decreased by 3.4% to EUR 1.4 million and were mainly related to lower tariff dispute-related costs in comparison to fourth quarter in 2018. Other net income and expenses amounted to net income of EUR 4.46 million compared to the net expense of EUR 1.66 million in the same period last year. The change was mostly impacted by EUR 4.63 million decrease in provision for third-party claims in the fourth quarter of 2019. The provision takes into account 3 years of possible difference in the prices between the tariffs approved by the City of Tallinn in 2010 and the best understanding of CA methodology. Still, the company does not consider itself liable to customers for any claims related to the tariffs applied until the new tariffs approved by CA are duly implemented. Lower net financial expenses were mostly related to lower interest costs, accompanied by the revaluation of swap contracts. Let's move to the cash flows. The cash position at the end of 2019 is strong. The company's cash balance stood at EUR 64.78 million, forming 24.6% of the total assets. Compared to the end of 2018, the cash balance has increased by EUR 3 million. The biggest contribution to the cash flows comes from the main operations. The company collection of receivables continues to be high, being 99.7% on average. In 2019, net cash flows from investing activities resulted in a cash outflow of EUR 7.37 million compared to the cash outflow of EUR 6.84 million in the same period in 2018. The investments into fixed assets have been at EUR 0.3 million lower than in 2018. The compensation for pipes received were EUR 0.71 million lower than during the 12 months of 2018. Financing cash flows were negative of EUR 23.64 million, which is EUR 12.99 million more than in 2018. In 2019, the company paid out dividends of EUR 0.75 per share, which is more than 2x higher dividend payment than in 2018. During 2019, the company paid back 2 -- first 2 installments of loan in the amount of EUR 3.64 million.

Thank you, Kristi, and thank you, Karl, for the presentations. Now we will proceed to answering any questions you might have. [Operator Instructions] So we have our first question asked by [indiscernible]. Why did you decide to release part of the third-party claim provision? And how was this size decided and calculated? Please, Kristi, could you answer that question?

Thank you for the question. I'm referring to the previous presentation and highlighting that the provision takes into account 3 years of possible difference in the prices between the tariffs approved by the City of Tallinn in 2010 and the best understanding of the CA methodology. Still, the company does not consider itself liable to customers for any claims related to the tariffs applied until the new tariffs approved by the CA are duly implemented.

Thank you, Kristi. [Operator Instructions] So the second question we received from [indiscernible] is also related to the provision. And he's asking what will be the methodology to adjust the provisions for potential claims from customers when you reverse the provisions on a quarterly basis within 3 years? So, Kristi, could you comment on that as well?

Thank you. We will monitor the developments of potential claims very closely. And we will take actions based on those possible developments throughout the year. So it is too early to say if we will adjust in the coming quarter. It really depends.

I think it's very much an ongoing review and discussion, also with our Supervisory Council members.

Thank you, Karl and Kristi. [Operator Instructions] And now the third question from [indiscernible] on a slightly different topic. And he's asking when will Tallinna Vesi introduce smart meters? I guess it should be possible now to add such investments into regulated asset base. Karl, please?

Thank you. Smart meters is something that we've looked at continuously over the years. At the moment, we have to calibrate all our meters every 5 years. And also, as you've heard earlier, our collectibility rate is incredibly high at 99.7%. So as I sit here today, there's not really a business case to move to smart meters. Added to that, you've got the investment, but you've also got the ongoing data charges associated with the smart meters also. But that's not to say it's off the table completely. And we will keep an eye on the situation going forward.

Thank you, Karl. [Operator Instructions] Yes, and we've received 2 questions from Sander Danil. The first one is what preconditions would be needed in order to release all provisions for third-party claims? Kristi, please?

Thank you. So as mentioned earlier, we will monitor all the developments really, really closely. And still, the company does not consider itself liable. But the reason why the provision is in the balance sheet is the conservatism concept. So the fact that we don't have any claims in near future doesn't enable us to release the provision in the full amount. So the answer here would be most probably time.

Thank you, Kristi. And I will also read out the second question. Was the good level of construction revenues in Q4 related to mild weather conditions this year or expanded contract portfolio? So please, Karl, would you comment?

Yes. I'm guessing this is linked to our Watercom, as where the question is aimed at. I think it's a combination of both, to be honest. You're quite right. We have had a very mild autumn and winter, and that's meant that projects can progress longer in the year, particularly those that are going to spill over into the next year as well. So that's helped us. But I think it's also the phasing that projects come to a completion, comes to the end of their life cycle in the autumn, and then the associated revenues with them flow in. So it's perfectly normal. But look, in previous years, you tend to see a [indiscernible] in Q4. There is an increase as jobs come to a completion.

Thank you. [Operator Instructions] It seems that we don't have any more questions that are unanswered. So thank you very much for participating. Thank you for all of the questions asked. And thank you, Riina (sic) [ Kristi ] and Karl, for the presentations. Recording of the presentation will be available on Nasdaq Baltic YouTube channel webinar playlist very shortly. And the presentation materials and reports can be found on Tallinna Vesi's web page. So once again, thank you all for participating, and have a good day.

Thank you.

Thank you. Bye.