AS Tallinna Vesi (TVE1T) Earnings Call Transcript & Summary

Hello, Ladies and gentlemen. Good morning to everybody. My name is Eliis Randver, and I welcome you today on Tallinna Vesi's Webinar. The webinar will be hosted by Karl Heino Brookes; and Kristi Ojakäär. Kristi -- Karl Heino Brookes and Kristi Ojakäär will introduce Tallinna Vesi's financial and operational results for the first quarter of 2020. And right after the presentation, we will open the floor for questions. [Operator Instructions] But now I will give it over to Karl and Kristi to present the operational and financial results of ASTV.

Okay. Thank you, Eliis, and a very good morning to everyone, and welcome to the April Q1 webinar today. As usual, I'm going to give you an update on the operational status of the company, and then we'll move on to the financial details with Kristi. And -- but perhaps the first thing I want to talk about is the company's response on the impact of coronavirus. So first of all, I would just like to say there's been no effect on our employees as a result of the coronavirus, and our operations continue broadly as normal. And restrictions came into place in Estonia, almost 6 weeks ago now that the company responded very quickly to those restrictions. So what we've done as a company is anybody that can work from home is working from home. And then in terms of the operational teams, we've divided them into much smaller working groups with different start-finishing times in different facilities so that their interaction with each other is very limited. And that seems to be working well. As I say, our operations are unaffected currently. In terms of returning back to normal, at the moment, in Estonia, there is talk of easing restrictions, but nothing clear at this moment in time. We are preparing our plans to return back to work, but we are in no rush. We can take our time. We can make sure that we protect the vulnerable employees that we have. And so it'll be very much a phased return back to work. Now one of the thing that's been affected by the coronavirus is our AGM. We were pursuing 2 options for this. There's a piece of legislation going through the Estonian parliament at the moment, which would allow for a -- an effect to remote AGM. And sadly, I don't think that's going to be passed in time by parliament, it could actually be passed after. We have to send out the invitation to the AGM, which will go out on the 5th, on the stock exchange. So it now looks as though we're going to have a physical AGM, but of course, following all the necessary government restrictions and guidance. So we're looking at doing this at Paljassaare, our wastewater treatment plant, where we can create an isolated part of the building for any potential attendees. What I would ask, though, is on this call is that we don't really want people to attend, it would only be really by exception. We will encourage you to use proxy vote, if you would like to make a vote. Therefore, your attendance wouldn't be required. Anyway, we'll produce further guidance, and that will be included in the stock exchange announcement. And then I think there'll been announcements in the media on the 6th of May. The AGM is set to go ahead on the 28th of May. So moving on to operations. And as I said before, operational performance continues to be very good despite these challenging times. The water quality is 100%. So all the samples that we take across the city, they've been 100% compliant. We've had a slight increase in our leakage performance up to 14.9%, which is slightly worse than last year. And I think this is largely down to the difference in the winter. As you know, we didn't really have a proper winter in Estonia, it was quite a mild, and I think that's had an impact on our leakage performance. But at this moment in time, we're optimistic that we can recapture those percentages throughout the year. Water interruptions, again, we're doing very well there. The average interruption time is 2 hours and 52 minutes, which again is great performance. The wastewater treatment plant is working perfectly and the treated -- the final treated affluent that leaves the plant is 100% compliant with the permit parameters. We have been working on a couple of significant projects as well. We've got an ongoing project to our wastewater treatment plant, which thankfully is still proceeding. We're actually ahead of schedule in terms of the program. So that's quite a major project that will run over 2, 3 years, and it relates to our mechanical treatment process. We've also had a very large project on a major road in Tallinn called Cabaca tee, where we've had to very quickly reline a 1 meter diameter sewer. I'm very pleased to say that our job has now been completed successfully, on time, and perhaps most importantly, without any disruption to traffic and the citizens of Tallinn and that and -- oh, sorry, just one more. We have our customer satisfaction score, which on the scale of 1 to 5 has come out at 4, which is consistent with previous years. So that's my bit for now. Obviously, I'll be here for questions later. I'm now going to hand you over to Kristi, who will take you through the financial results in detail. Thank you.

Thank you, Karl, and good morning to everyone. And now I would like to give you the overview of the financial performance of Tallinna Vesi in the first quarter in 2020. After the financial highlights of the first quarter in 2020, I will give a more detailed overview of our sales and costs in the first quarter. But first of all, the economic environment has significantly changed in the world and Estonia, resulting from ongoing coronavirus pandemic. Because of state of emergency announced in Estonia from 12th of March, the quarantine requirements and the introduction of restrictions on gatherings and movement are affecting companies in all sectors. It has had a financial impact also to us, mainly to our revenues. Because of current emergency situation and according to Estonian macroeconomic forecasts, we expect that decrease in our water consumption in short term will continue. The performance of the group continues to be good. Compared to the first quarter of 2019, the total sales revenues decreased by 10.1%, amounting to EUR 13.2 million. Whilst sales of water services decreased by 14.5% or EUR 2 million, the construction services revenues increased by 87.4% or EUR 0.48 million. The gross profit for the first quarter in 2020 was EUR 6.1 million, which is lower by 26.7% or EUR 2.2 million compared to same period in last year. The gross profit was impacted by lower water services revenues accompanied by higher staff costs and other cost of goods sold, and balanced partly by higher stormwater revenues and profit from construction services. In first quarter, in 2020, the operating profit was EUR 5.7 million or EUR 1.22 million lower than in the same period in 2019. Operating profit in the first quarter was positively affected by reduction in provision formed from the possible third-party claims, amounting to EUR 1.2 million, and this was balanced by higher estimated expected losses from the receivables. Compared to the first quarter in 2019, the net profit of the company was EUR 1.30 million lower, being positively affected by EUR 0.09 million lower net financial expenses. Now let's move on to the next slide, and I will comment on the changes in revenues and expenses in more detail. Starting from the sales. Our total sales revenues for the first quarter in 2020 decreased by 10.1%, amounting to EUR 13.2 million. Total revenues from water services were by -- 14.5% or EUR 2 million lower than in the first quarter of 2019, amounting to EUR 12 million. As new tariffs were applicable from December 2019, the decrease in water services revenues were driven mainly by lower tariffs for main service area, accompanied by changes in consumption. The private customers' revenue in Tallinn and Saue area decreased compared to the same period in 2019 by 22.6% to EUR 5 million, driven mainly by an average 27% lower tariffs from end of last year, worth EUR 1.82 million. The decrease from tariffs was partly balanced by 5.5% higher domestic consumption, which came from apartment blocks, mainly. The total impact from change of tariffs was EUR 1.8 million and from consumption, plus EUR 0.3 million. The commercial customer revenues in Tallinn and Saue area decreased compared to same period in 2019 by 17.1% to EUR 4.1 million, driven also mainly by average 15% lower tariffs versus EUR 0.7 million, accompanied by 2.8% decrease from consumption. The total impact from change of tariffs was minus EUR 0.7 million, and from consumption, minus EUR 0.15 million. Outside services area revenues have remained stable, amounting to EUR 1.2 million and the change was driven by higher wastewater revenues balanced fully by lower stormwater disposal revenues from different areas. Our stormwater volumes from the main service area were higher by 38.9%, amounting to EUR 1.19 million in the first quarter of 2020. The revenues from construction services showed an increase of 87.4% or EUR 0.48 million compared to the first quarter of last year and amounted to EUR 1 million. The increase was mainly related to higher pipe construction services revenues, accompanied by higher road construction and supervision revenues. The increase was related to projects won by the company, both in Tallinn and other parts of Estonia in 2019. Moving on to the costs. The total cost of goods sold in the first quarter of 2020 was higher by 11.2% or EUR 0.7 million, amounting to EUR 7.1 million. Direct main production costs in total have decreased by 2.2% or EUR 45,000, mostly due to lower electricity and chemical costs balanced by higher water abstraction charges. Staff costs increased by 9.6% to EUR 1.80 million. The increase was mainly driven by higher number of employees. Construction services cost increased by 49.7% to EUR 0.85 million, and this is related to higher construction services revenues I mentioned earlier. Other cost of goods sold increased by 23.2% to EUR 1.13 million. And this mainly relates to higher asset maintenance and sludge disposal costs. Administrative and marketing costs increased by 2.8% to EUR 1.4 million and are related to higher salary costs. Other net income and expenses amounted to a net income of EUR 1.03 million compared to net income of EUR 0.01 million in previous period. The change was mostly impacted by EUR 1.2 million decrease in provision for third-party claims in the first quarter of 2020, balanced by higher estimated losses from our receivables. The provision takes into account difference in between the tariffs approved by the City of Tallinn in 2010 and the tariffs based on the company's estimations regarding past 3 months being the approximate remaining unexpired term of potential claims. Still, the company does not consider itself liable to customers for any claims related to tariffs applied until the new tariffs approved by CA are truly implemented. Estimate losses from receivables amount to EUR 0.12 million being part of provisional, and this provision takes into account the possible [Audio Gap] EBITDA loss from accounts receivable based on the best available information about past events, current conditions and forecast on macroeconomic conditions. Lower net financial expenses were mostly related to lower interest costs accompanied by the revaluation of swap contracts. It takes us now to the cash flows. The cash position as of end of March 2020 is strong. The company's cash balance stood at EUR 68.7 million, forming 25.6% of the total assets. Compared to the end of 2019, the cash balance has increased by EUR 2.9 million. The biggest contribution to the cash flows comes from the main operations. The company collection of receivables continues to be high, being close to 99.7% on average. In first quarter, in 2020, net cash flows from investing activities resulted in a cash outflow of EUR 2.7 million compared to the cash outflow of EUR 0.9 million in the period of 2019. The investments into fixed assets have been at EUR 1.3 million higher than in 2019. The compensation for pipes received were EUR 0.5 million lower than in 2019 3 months period. The company's financing cash flows were negative of EUR 0.33 million, which is EUR 0.03 million less than in first quarter of 2019. The Interest payments have decreased whilst the lease payments have somewhat increased. And as a final note, every year, the supervisory council evaluates the proposal of the dividends to be paid out to the shareholders and the project to be presented to the voting to the annual general meeting, considering all circumstances. Regarding this year's dividend payment, the supervisory council decide this meeting held on 23rd of April to make a proposal to AGM to pay out EUR 1 per A share and EUR 600 per B share from the accumulated profits.

Thank you very much both for the presentation. We've had some feedback, meanwhile that unfortunately, the slides were not changing for the participants. So we truly apologize for that. It seems to have been a connection issue with that. We still hope that you heard us well. And all of the slides together with the recording of the webinar will be published very shortly after the webinar. And you'll also find the stock announcement with links about where to find them. So we truly hope that enables you to have a view on the graphs as well and look into the numbers that have been described now. But we are now moving forward with the questions-and-answer section of our webinar.

[Operator Instructions] Okay. Thank you. As we have quite a few questions already, we will start answering them one by one. Starting with a question from [ Vaeconina Mae ]. There's actually 2 questions. So we will do them one after another. The first question is, your stated dividend policy is to increase dividends every year. Is this policy going to be valid going forward given the company is now subject to price regulation by the ECA? Do you have any view on how the payout ratio going forward? Please, Karl.

Okay. Thank you for the questions. In terms of dividend policy, I don't think we've had a firm dividend policy since before the tariff dispute because of the uncertainty surrounding that. And as a business, clearly now that that's over, we have been looking at a 5-year plan going forward. And we have -- we do have some ideas. But obviously, given the uncertainties that we've just been discussing on the call on the financials, I think it would be very unwise for us to publish a dividend policy at this time. So that's something clearly that we'd want to do after this coronavirus is finished, and we know a bit more about the impact on the business.

Thank you, Karl. And the second question asked by [ Vaeconina Mae ] is you have previously guided that the CapEx for 2020 will come in higher than the average annual CapEx over the last few years. What level of annual CapEx in your terms, can your investors assume up to 2025?

Okay. Yes. Quite right. We have higher CapEx currently for the next couple of years related to our mechanical treatment projects and some major project. And in terms of the 5-year projection, I don't think I'm able to go into that sort of detail with you because that would become a forecast. So all I can tell you is that we'll reveal our CapEx funds as we always do on a year-by-year basis.

Thank you, Karl. Okay. So moving on with the next question. [ Arvydas Katilius ] has asked, are you going to disclose RAB in the future? And what are perspectives of increasing it in connection with WACC perspective? So please, Kristi, could you answer that?

Thank you for the question. So at this moment, we believe that disclosing RAB is not -- would not add any value to the information what we are providing currently. And currently, our investment decisions are related to rather business needs than considering only WACC perspective.

Thank you, Kristi. So the next question is asked by [ Yulia Hristova ], and the question is, can you comment more on your policy with regards to employee count? Do you plan any layoffs, salary freeze, et cetera? So Karl, please.

Okay. Again, thank you for the question. As I started at the beginning of the webinar, we're currently doing okay, despite the coronavirus. Everybody is busy. The operational team are still working and the people still working effectively from home. So no, I don't propose to do any layoffs or salary freezes at this time. One area that we're watching very closely, we have a, obviously, a daughter company, Watercom in the construction sector, and I'm very -- keeping a very close eye on developments in that area. But as regards to the main ASTV business, and I don't see a problem at this moment in time.

Thank you, Karl, for that. The next question is asked by Sander Danil. What's your plan to reevaluate the potential claims and provisions on a quarterly basis going forward? And what conditions need to be met in order to reverse the provision in full? So Kristi, would you please answer.

Yes, thank you. So as you can see from our first quarter results, we review now provision on a quarterly basis. And this is being based on the estimation that remaining unexpired term of potential claims is still there. So we definitely will do a more thorough review when the time passes. Since there is currently no claims, then we could really argue at certain point what could be the justified level for the provision, but this is for future discussions. Now we are evaluating based on expiry, potential expiry at our own company.

Thank you, Kristi. So moving on to the next question by [ Peter Prisa ]. Have there been any claims for compensation or tariff difference for past periods? So please, Karl, could you address that?

Okay. I'm not aware of any substantiated claims for the business as of this moment in time.

Thank you, Karl. We have another question from [ Arvydas Katilius ]. What are your plans regarding provision for that possible customer claims, which now is EUR 40 million. Are you going to reduce it again in Q4 2020? If yes, what could be the amount? So I...

Thank you. As explained with regards to previous question from Sander Danil, yes, the plan is to review provision on a quarterly basis.

Okay. Then now we have another question from Sander Danil. Please describe broadly the breakdown of commercial water sales volumes by economic segments. What portion is formed by more vulnerable leisure service industrial sectors? Okay. Kristi, could you please.

Thank you for the question. So this is a type of an information, which we haven't disclosed previously, and we don't have currently any plans to disclose this type of information.

Thank you. And Sander Danil has also asked what dynamics did we see in commercial water volumes in March? Kristi, please.

So as we have said in our report of Q1 that we see a consumption decrease from the second half of March. So for any numbers, we once again refer to our interim report, and you can draw conclusions from there.

Thank you, Kristi. And then currently, our last question from [ Peter Prisa ] is what is now the regulatory of tariff approval by the competition authority? Is it set for some number of years? So Karl, could you comment on the tariffs?

Yes, sure. Yes, as you all know, we got approved tariffs in place in December last year. I think in theory, there's a resubmission there if you would like to increase tariffs or I think if your cost basis has changed by more than 5%. And at this moment in time, we're not planning on going back to the competition authority for the foreseeable future unless there was an impact to the business. So in answer to the question, there's no set time frame for the regulation. I think it's -- well, it's a 12-month period they regulate for, but in terms of resubmitting an application, there are various triggers to do that, as I'd say, one of which will be, if you want to increase the tariffs.

Thank you very much, Karl. Thank you for all of the questions. [Operator Instructions] Okay. It seems like we don't have any other questions. So once again, thank you for all of your questions. Thank you, Karl and Kristi, for the presentations. We once again apologize that the slides weren't showing correctly, but you will find them on our website very shortly after the presentation finishes. So thank you very much for participating. You will find the recording of the presentation available on the Nasdaq Baltic YouTube channel webinar playlist as well. Thank you, and see you next time.

Yes. Thank you all. Goodbye.

Thank you. Bye.

Have a good day. Bye.