AS Tallinna Vesi (TVE1T) Earnings Call Transcript & Summary

So thank you for joining us. And my name is Tuuli Sokmann, 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. As usually, first, we'll call on Kristi who will introduce Tallinna Vesi's financial and operational results of the third quarter of 2020. And right after the presentation, we will open the floor for questions. We have 1 question sent in advance. And I invite you to use the question box on the right side of the screen to submit your questions. And all questions will be answered after presentations. So -- and now I give it over to Karl and Kristi. So, please?

Okay. Thank you, Tuuli. A very good morning to everyone, and welcome to the Q3 2020 webinar today. Just before we get on to the business as usual as well, the operational and financial results, we'll just give you an update in terms of the company's response to the ever-changing corona pandemic. At this moment in time, and I'm pleased to say the company suffered no ill effects in terms of its staff as a result of the virus. We have taken lots of precautions, and I would say that the company is now operating in what I would call an AMBER Alert status. So we've got people working from home, as is the case of most office-based companies. And then in terms of our operational staff, we've got shift patterns in place to limit the interaction of staff. I mean this is obviously something we're watching very closely. I'm aware in the news today that the situation is deteriorating by the day in Europe and also in Estonia. I believe the infection rate is now up to 258 in Estonia as of this morning. So we've got a meeting later today then, and we'll review again our current practices. And maybe we need to step up some of our precautionary measures. In terms of the impact on the business, the financial results, we have seen an impact on consumption. In terms of domestic consumption or private consumption, we've seen an increase there. And in terms of the commercial sector, we have seen a slight reduction. As I'm sure you'll appreciate the hospitality sector in Tallinn has been hit quite hard by the pandemic. And in turn, we're seeing that flow through to our results, but Kristi will give you a good update on that later. So moving on to our operational results. I'm not going to spend a lot of time here because, once again, they are very, very good. We're very pleased with the performance this year. Particularly pleasing is things like the leakage rate in the third quarter. Very, very low level, are there at 9.6% and for the 9 months, at 12.5%. So that's a really good figure to have. In terms of water quality, we're up from last year. Last year was very good, but we're even better this year. As you'll recall, we had some issues with a new test last year, last summer that brought to some isolated quality issues, and I'm very pleased to say we've not experienced the same problems this year. Wastewater treatment plant is working fine and the discharge from there, the effluent leaving there is 100% compliant. Okay. So that's the operational update. I don't spend plan to spend too much time there. In terms of another update, I'm going to talk a little bit about our capital projects, which is something we've not done before. So we've got a couple of big projects on the go this year. We have a standard, if you like, capital program every year relating to pipe replacements and the general things, but we've got a couple of one-off projects running at the moment. One of them is on Punase Street, which is open last summer. And here, we're replacing 2 very large pipes that supply over 100,000 customers in that area. And once this project is completed, that will provide greater resilience in terms of water supply to these people in this area. And it also completes a strategy that we've had across the city of -- if you like, providing duplicate supplies to large areas of the city. So we did a similar project over in [ Järvevana ] couple of years ago, which provides additional security to the Mustamäe area and Nõmme areas of the city. The other large project that's currently running is over at our wastewater treatment plan. This is one of the largest projects we've done actually in the last 10 years. And this is to replace part of the treatment process, the mechanical treatment process. We're building new grit traps, which basically take away suspended solids from the sewage when it enters the plant. A lot of the concrete work has already been completed. We're also building a new overflow there as well, and this will be particularly useful in times of very, very heavy rainfall and it just gives us some extra capacity when it rains. So there's less chance of a pollution incident occurring. Okay. So that's my part done for now. I'll come back later for the questions. I'll now hand you over to Kristi to take you through the finances in a bit more detail. 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 third quarter in 2020. After financial highlights, I will give a more detailed overview about sales and costs. As we all know, economic environment has significantly changed in the world and in Estonia, resulting from ongoing coronavirus pandemic. The virus started to spread again more actively at the end of the summer, which makes it necessary to control it with to additional restrictions. It is difficult to predict objectively the scale of new outbreak and the consequent economic impact to the company's revenues and financial results. Aligned to Estonia's macroeconomic forecast, we expect in short term, a decrease in our water services consumption compared to the peak COVID consumption also in next month. Compared to the third quarter in 2019, the total sales revenues decreased by 19.5%, amounting to EUR 13.3 million. The sales of water services decreased by 20.2% or EUR 2.9 million and the construction services by 17.3% or EUR 0.4 million. The gross profit for the third quarter in 2020 was EUR 5.8 million, which was lowered by 35% or EUR 3.1 million compared to the same period in 2019. The gross profit was mainly impacted by lower water services revenues. In the third quarter, in 2020, the operating profit was EUR 5.8 million or EUR 1.8 million lower than in the same period in 2019. Operating profit in the third quarter in 2020 was positively affected by the -- a reduction in the provision from the possible third-party claims amounting to EUR 1.2 million. Compared to third quarter in 2019, the net profit of the company was EUR 1.7 million lower, being mainly affected by changes in operating profit. We are now moving on to the next slide, and I will comment on the changes in revenues and expenses in detail. Total sales revenues for the third quarter decreased by 19.5%, amounting to EUR 13.3 million. Total revenues from water services were 20.2% or EUR 2.9 million lower than in the third quarter of 2019, amounting to EUR 11.4 million. As new tariffs were applicable from the December 1, 2019, the decrease in water services revenues was driven by lower tariff from our 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 23.8% to EUR 4.9 million, driven mainly by an average 27% lower new tariffs worth EUR 1.8 million. The decrease from tariff was partly balanced by 3.8% higher consumption from domestic customers, which came from patent blocks worth EUR 0.3 million. The commercial customers' revenues in the main service area decreased compared to the same period in 2019 and [indiscernible] to EUR 3.7 million, driven by an average 18% decrease in consumption, accompanied by an average 15% lower tariffs. The total impact on commercial customer revenues from consumption was EUR 0.9 million and from change of tariff, EUR 0.7 million. Outside service area revenues increased by 2.3%, amounting to EUR 1.3 million. The change was driven by higher wastewater, strong water disposal consumption from different outside areas, balanced by lower new drives. Storm water volumes from the main service area were higher by 46%. Since the storm water treatment costs were lower, revenues amounted to EUR 1.1 million in the third quarter of 2020, being 29% higher than in the same period last year. Lower pollution charges and discharging revenues decreased by 14.9% to EUR 0.06 million. The revenues from construction services showed a decrease of EUR 17.3 million or EUR 0.4 million compared to the third quarter in 2019 and amounted to EUR 1.7 million. The decrease was mainly related to lower pipe construction services revenues, balanced partly by higher road construction revenues. The decrease in revenues relates to delayed new developments in Tallinn, while some larger projects won by the company in 2019 and 2020 in Tallinn and other parts of Estonia continued also in the third quarter of this year. This now takes us to the cost. The total cost of goods sold in the third quarter of 2020 was at the same level as it was in the last year, amounting to be EUR 7.5 million. Direct main production costs in total have decreased by 3.9% over EUR 67,000, mostly due to the lower electricity and chemicals costs. Staff costs increased by 6.7% to EUR 1.6 million. That increase was mainly driven by higher number of employees and change of salaries from the beginning of the year by CPI. Construction services costs decreased by 21.4% to EUR 1.4 million, and that was mostly related to lower construction services revenues mentioned earlier. Other cost of goods sold increased by 14.3% to EUR 1.4 million and were mainly related to higher asset maintenance costs. Administrative and marketing costs were at the same level, amounting to EUR 1.2 million. Other income and expenses amounted to a net income of EUR 1.2 million compared to the net expense of EUR 0.2 million in the same period last year. The change was mostly impacted by EUR 1.2 million decrease in provision for third-party claims in third 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 the reservation to possible fluctuation regarding past 27 months, which is being the approximate remaining unexpired term of potential claims. 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 were truly implemented. Lower net financial expenses were related to the revaluation of subcontracts and as well, lower interest costs. That takes us now to the cash flows. The cash position as of end of September is still strong. The company's cash balance stood at EUR 45.9 million, forming 18% of the total assets. Compared to the end of last quarter, the cash balance has decreased by the end of third quarter by EUR 2.9 million. The decrease in cash position is mainly driven by EUR 1.7 million higher investing activities related to cash flows. The biggest contribution to the cash flow comes from the main operations, 9 months by 2020 total, the operating cash flows amounted to EUR 18.7 million. The company's collection of receivables continues to be high, being on 99.6% on average. The net cash flows from investing activities during first 9 months of the year resulted in a cash outflow of EUR 8.4 million, which is EUR 4.5 million more than in the same period last year. Investments into fixed assets have been EUR 10.1 million. The compensations received for the construction of pipes and connection points were EUR 1.6 million. The largest investment projects in 2020 for the company is the before mentioned reconstruction of mechanical treatment, which started in January. The company's financing cash flows during 9 months of 2020 were negative of EUR 27.1 million compared to the last year same period. Cash outflows increased by EUR 4.9 million, mainly related to higher dividend and the related tax payment. Now I'm giving the floor back to Karl, who speaks about our brand, new dividend policy.

Okay. Thank you. Thank you, Kristi. Yes, this has been a common question at the end of webinars for some time. And in previous years, we've had some uncertainty in the company about the future, particularly when the time to dispute was running. I think we're now in a much more stable position in terms of tariffs, COVID aside, of course. And as a result of that, we've been working hard over the last few months developing our business plan for the next 5 years; so in terms of our investments, our borrowing, our costs and obviously, our revenues. And flowing from that, we've been able to create our dividend policy for the next few years. This was presented to our supervisory council yesterday. I think it was announced, obviously, this morning as part of our financial results, and I'm very pleased to be sharing this with you today. Thank you.

Okay. Thank you, both, for the presentation. Before we move on to questions, just 1 more remark for your audience. In case you'd like to receive our webinar invitations and stock exchange releases and you're not in our mailing list so far, I encourage you to subscribe via contact presented here. So subscription can be done via e-mail, you can contact here. And of course, this contact information is also available on our website.

Right. And now we will proceed with the questions in the order they are received. So please use the question box on the right side of the screen. And we have received 1 question in advance, and let's start with this one. And the question is submitted by [ Mike Matas ]. Why haven't you still published environmental report for 2019 and when it will be published?

Shall I pick that, Tuuli, for you? Okay. So there's not a problem here. Obviously, our auditing has been delayed this year because of COVID. We didn't really want the auditors walking around our plants to do this audit. So it's -- there's nothing to worry about. It's just been postponed until the autumn. So it will be done soon.

Yes. And yes, we expect this report to be published by the end of November, hopefully. So this is the plan right now.

So -- and now we have 1 more question asked by Danil. And he is interested -- do you expect a further decline in corporate consumption in the main area in quarter 4? I mean...

Answering to the question, as we have been writing as well in our financial reports, we do expect a slight decrease year-over-year in commercial consumption in the fourth quarter as well. And moreover, if you look at the macroeconomic forecast for Estonia, we shall expect it to be extended to the next year as well. How long this impact will last, it is very difficult to predict.

Okay. Okay. Thank you, Kristi. It might take some time to type in your questions, so we are giving some time for it. Still -- yes. So if there's anything else you'd like to know, please feel free to use this question box. At the moment, I don't see any questions right now, but maybe you still would like to -- no, anything else? So we're waiting. Oh, yes. Okay. It's very near. So we have 1 question from Sander. Yes. Are there any delays in construction projects at this stage? Danil is asking.

Okay. In terms of the largest project that we have running, we're actually ahead of schedule. We're going to finish this project, I believe 6 months sooner if the wastewater treatment works. And in terms of the other projects at Punase and Mustamäe as well, there are no delays that I'm aware of. So in answer to your question, Sander, no construction delays at the moment.

Okay. Thank you, Karl. So in case you still have anything else, just feel free to submit your questions. Okay. So we have answered all questions we have so far. Yes, this was already answered.

Yes.

So we have...

Okay, I'm not aware of any questions apart from the 2 that we've answered on screen. We are having a little bit of technical difficulties with the screen.

Yes. But we will be waiting for a little bit more, if you might have anything. So I think that no one is typing right now...

So I think that's it. Yes. So...

So it seems that it's fine by now. This is it, yes. So okay. Seems like we don't have any more questions at the moment. So for your information, that recording of the presentation will be available in the NASDAQ Baltic YouTube channel webinar place shortly. And presentation materials and reports can be found on Tallinna Vesi's web page. Karl and Kristi, thank you for the [ good ] news, and thank you all for participating in our webinar today and have a good day.

Okay. Thank you, everyone, for joining us today. We'll catch you at the next webinar. Thank you.