AS Tallinna Vesi (TVE1T) Earnings Call Transcript & Summary

Hello, ladies and gentlemen, and thanks for joining us today in this late Friday afternoon. 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 Brookes; and Chief Financial Officer, Kristi Ojakäär. First, as always, Karl and Kristi will introduce Tallinna Vesi's financial and operational results for the second quarter of 2020. And then right after the presentation, we will be answering all of the questions you may have. [Operator Instructions] Now I will give it over to Karl for the operational report and then later to Kristi.

Thank you, Eliis, and a very good afternoon, everybody, and thank you for joining us on the Q2 2020 webinar today. Before we get into the usual operational results, we'll just give an update on the COVID-19 situation. I'm very pleased to say that the company responded very well to the COVID-19 crisis. We have no incidents with any of our employees or any impact on our services. The COVID, the emergency situation actually came to an end on May 18th in Estonia. And after that date, we slowly phased people back into the offices. More or less, we've got everybody back in work now, all office-based staff are back with us. Operational teams have reverted to normal working practices. However, we are still being cautious. Normally, we would welcome visitors to our plants at Ülemiste and Paljassaare. But clearly, we need to be cautious, and those excursions and visits have been canceled for the foreseeable future. We already had some pandemic plans in place for the company, as you would expect for these situations. But clearly, we've also learned a lot. Those plans will be revised with the lessons learned very, very quickly. As I'm sure you're all aware, there is talk about a second wave or potentially some more coronavirus reoccurring. So I'd like to think that we could act very quickly and again, respond very quickly from the lessons of the loan before. I'm now going to move on to operations. And so as usual, well, it's becoming quite [ anomalous ]. We've had a very good set of operational results for the first 2 quarters of 2020. The water samples that we take from across the network are 100% compliant. We've had no sample failures whatsoever. Leakage is a very important target to us. As I've said lots of times before, it's a testament to how quickly we respond and repair our network. And also to where we're investing in the network to replace deteriorated pipes. So our leakage figure is -- remains very low, 12.7%. And in interruptions will inevitably occur. We have, I think, over 2,000 kilometers of water and wastewater network. The average interruption time during Q2 was just 3 hours and 3 minutes, which, again, I think, is a fantastic performance. Our wastewater treatment plant at Paljassaare, care continues to perform very well. And again, we've had no favors from the samples taken from the final effluent before it leaves the plant. We're also making some big investments this year as well, particularly at Paljassaare. We talked about projects in Q1 at Kadaka, a sewer pipe replacement. Very pleased to say that, that project went very well, and that new asset is performing. And also the investment that we're making at Paljassaare is making very good progress. In fact, it's making such good progress that we're going to finish the job ahead of schedule probably 6 months earlier than it actually impacts. So it'll probably finish towards the end of next year if the current schedule is maintained. In terms of customer service, as you know, we do an excellent service with our customers, and that continues to be very good, at 4.1 out of the -- out of the possible 5. I'm now going to hand you over to Kristi. Kristi will take you through the financial results in a lot more detail. But as Eliis mentioned before, we're here to answer any questions you may have at the end of the presentation. Thank you.

Thank you, Karl, and good afternoon to everyone. I would like to give you the overview of the financial performance of Tallinna Vesi in the second quarter in 2020. After financial highlights, I will give you more detailed overview about sales and costs. First of all, the economic environment has significantly changed in the world and in Estonia, resulting from ongoing coronavirus pandemic. The introduction of restrictions on gathering and movement, which were introduced in Estonia in the middle of March, affected companies in all sectors, and this has affected Tallinna Vesi as well. Tallinna Vesi revenues were negatively impacted by commercial customers' lower consumption, which was partly balanced by higher consumption from private customers within the service area. When the emergency situation hasn't still ended, in mid-May, the restrictions that were introduced to counter the pandemic were reached and step-by-step water consumption started to recover. Aligned with Estonia's macroeconomic forecast, we expect that in a short term, there will be a decrease in our water services consumption. Compared to the second quarter in 2019, the total sales revenues decreased by 25.1%, amounting to EUR 12.1 million. The sales of water services decreased by 25.9% or EUR 3.8 million and the construction services by 18.6% or EUR 0.3 million. The gross profit for the second quarter in 2020 was EUR 4.7 million, which was lower by 46.2% or EUR 4.1 million compared to the same period in 2019. The gross profit was mainly impacted by lower water services revenues. In the second quarter, in 2020, the operating profit was EUR 4.6 million or EUR 2.0 million lower than in the same period in 2019. Operating profit in second quarter in 2020 was positively affected by a reduction in the provision form for the possible third-party claims amounting to EUR 1.2 million, accompanied by EUR 0.8 million, lower tariff dispute related costs. Compared to the second quarter in 2019, the net profit of the company was EUR 2.6 million lower, being affected by EUR 0.8 million higher dividend payment related tax costs. We are moving on to the next slides, and I will comment on the changes in revenues and expenses in detail. Total sales revenues for the second quarter of 2020 decreased by 25.1%, amounting to EUR 12.1 million. Total revenues from water services whereby 25.9% or EUR 3.8 million lower than in the second quarter of 2019, amounted to EUR 10.8 million. As new tariffs were applicable from 1st of December 2019, the decrease in water services revenues was driven by lower tariffs from main service area accompanied by changes in the consumption. The private customers' revenues in main service area decreased compared to the same period in 2019 by 21.9% to EUR 5.1 million, driven mainly by, on average, 27% lower tariffs worth EUR 1.85 million. The decrease from tariffs was partly balanced by 6.5% higher domestic consumption, which came from apartment blocks worth EUR 0.4 million. The commercial customer revenues in main service area decreased compared to the same period in 2019 by 45.1% to EUR 3.0 million. This was driven by an average 35.4% decrease in consumption, accompanied by on average 15% lower tariffs. The total impact on commercial customers' revenues from consumption decrease was minus EUR 1.9 million and from change of tariffs, minus EUR 0.5 million. Outside service area revenues decreased by 2.5%, amounting to EUR 1.1 million. The change was driven by lower new tariffs balanced by higher water and storm water disposal from different outside areas. Storm water volumes from the main service area were higher by 22%, amounting to EUR 1.2 million in the second quarter of 2020. Lower pollution charges and discharging revenues decreased by 31% to EUR 0.03 million. The revenues from construction services showed a decrease of 18.6% or EUR 0.3 million compared to the second quarter of last year and amounted to EUR 1.2 million. The decrease was mainly related to lower pipe construction services revenues placed by higher road construction revenues. Due to changed macroeconomic situation, new developments in Tallinn were delayed, while some larger projects won by the company in 2019 in Tallinn and in other parts of Estonia continued also in the second quarter of this year. This now takes us to the cost. The total cost of goods sold in second quarter of 2020 was at the same level as in 2019, amounting to EUR 7.4 million. Direct main production costs in total have decreased by 3.6% or EUR 64,000, mostly due to lower electricity and chemicals costs. Staff costs increased by 9.3% to EUR 1.9 million, and the increase was mainly driven by higher number of employees and the change of salaries from the beginning of the year by CPI. Construction services cost decreased by 23.3% to EUR 0.9 million and related to lower construction services revenues mentioned earlier. Other cost of goods sold increased by 9.8% to EUR 1.5 million, and this was mainly related to higher sludge disposal and disposal cost and raw water service costs. Administrative and marketing costs decreased by 37.7% to EUR 1.3 million, which was related to lower tariff dispute related legal costs, which last year resulted from the ICSID award in June 2019, according to which the company was liable to pay for 25% of Estonian legal costs. Other net income and expenses amounted to a net income of EUR 1.2 million compared to net expense of EUR 0.1 million in comparative period. The change was mostly impacted by EUR 1.2 million decrease in provision for third-party claims in the second quarter of 2020. 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 estimation with relation to the possible fluctuations regarding past 30 months. Lower net financial expenses were related to the revaluation of subcontracts and lower interest costs. It takes us now to the cash flows. The cash position as of end of June is strong. The company cash balance stood at EUR 48.8 million, forming the 19.5% of the total assets. Compared to the end of last quarter, the cash balance has decreased by end of second quarter by EUR 19.8 million. The decrease in cash position is mainly driven by EUR 20 million dividend payout in the end of June. The biggest contribution to the cash flows comes from the main operations. 6 months 2020 total, the operating cash flow amounted to EUR 11.1 million. The company collection of receivables continues to be high being on 99.7% on average. Net cash flows from investing activities during first 6 months of the year resulted a cash flow of a EUR 4.6 million, which is EUR 3.2 million more than in the same period last year. Investments into fixed assets have been at EUR 5.5 million. The compensation received from the construction of pipes and connection points were EUR 0.7 million. The largest investment profit -- project in 2020 for the company is the construction of mechanical pretreatment. And as mentioned earlier, work started at the wastewater treatment plant in January. The company's financing cash flows during 6 months of 2020 were a negative of EUR 22.4 million compared to the last year same period and cash flow -- cash outflow increased by EUR 4.7 million, mainly related to higher dividend payment.

Thank you, Karl and Kristi. This concludes our presentation for today.

[Operator Instructions] Okay. So we have our first question from Sander Danil, who asked that the drop in commercial water consumption of 35% year-over-year was rather steep. How was the dynamic month-by-month in Q2 2020. Please describe your outlook for corporate consumption in the second half of the year. So, please?

Kristi, are you okay to comment on that in terms of Q2, and maybe I can comment overall.

Yes. Thank you, Karl. So the drop in commercial water consumption of 35%, yes, it was really rather steep. However, this is well aligned with the overall situation, what was in place in Estonia. So as we know from mid-March, the restrictions on gathering and movement were introduced. So aligned with this change, we saw a drop in the consumption from mid-March. And since most of the business is, well, closed in April, the consumption was, I would say, historically lowest level during the whole April. And then in the mid-May, when restrictions were lifted, we saw gradual increase in the consumption. And we can say that the increase continued in June. So as we were also mentioning in our financial comments in our financial results, that we do expect that the consumption will be somewhat lower as well in a short-term period. However, it is really complicated to estimate the actual consumption result because of the uncertainty in the overall situation, meaning how the pandemic will evolve, what will be the economic impacts overall because as we now see, that the overall macroeconomic situation affects as well consumption of the water. So with regards to estimation of the second half of the year, we are not able to give out any specific number. However, we expect that the consumption will be lower than last year.