AS Tallinna Vesi (TVE1T) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. This is Tuuli Sokmann speaking, and I welcome you today to 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 Heino Brookes and Kristi Ojakäär will introduce Tallinna Vesi's operational and financial results of the fourth quarter of 2020, and then we are going to summarize some highlights from this very special year and that's briefly fresh news from yesterday when we announced the acquisition of a new subsidiary. And right after the presentation, we will have Q&A session. [Operator Instructions] And now I will give it over to Karl Heino Brookes and Kristi Ojakäär, and here you go.

Okay. Good morning, everyone, and thank you, Tuuli. A very warm welcome to the first webinar of 2021. I am -- so let's, first of all, just look at last year. So clearly, last year, 2020 was an unprecedented year for everybody, everybody in the world. And of course, that affected ASTV also. What we've seen as a result of the pandemic was a drop in revenues linked to the commercial sector and particularly the hospitality sector in Tallinn. So hotels, bars, et cetera. In contrast to that, the domestic consumption or private consumption actually grew during the year. And that's the result of more people having working from home. I also understand that the Bank of Estonia has stated that the economy actually retracted by 2.5% in 2020. In terms of staff and operational performance, I'm very pleased to say that all our staff have remained healthy throughout this pandemic, and we still managed to deliver an outstanding service to our customers. We do have a lot of restrictions still in place in the company as it is happening with all other companies in Estonia. So many of our staff are working from home. And then we've really changed the working patterns of our operational staff to minimize their interaction. There is a hope and a light now, and the vaccine is slowly being rolled out across Estonia and Europe, perhaps not as quickly as we would like, but I am optimistic that later in the year, things will start to revert back to normal. But at this current time, we'll take the precaution of leaving all our restrictions in place until we see some vaccinations amongst our own staff. Okay. So moving on to investments. Last year was a big year despite COVID in terms of investments for the company. We actually delivered one of the biggest capital programs in the company's history, and that was EUR 15.6 million. We do have a normal capital program linked to 5 plus 5 and normal replacement work, but we are currently delivering some very large projects. So the main one of which is at our wastewater treatment plant at Paljassaare. So the work on there is ongoing at the moment. This is a large project. I'm very pleased to say it's ahead of schedule. This is to replace grip traps and also enhance the mechanical treatment stage. And when this is completed, this will enhance the quality of the wastewater treatment, but it also provides resilience as well in terms of heavy rainfall. And together with that large project, we also did some large one-off projects in the city also. So one of them was at Kadaka, a sewer relining project or collector relining project, and then we had a large water main replacement project in Mustamäe on a road called Järvevana Street. So that's the capital investments. The Paljassaare investment will continue throughout this year. I'm very pleased to say it's well ahead of schedule, and we're predicting completions towards the end of the year or Q1 next year. So if I now move on to operational performance. As I touched on briefly in the introduction, we've had a good year in operations, and we've continued to provide a very good service. I don't propose to go through all the individual measures there in detail, but I will bring out the leakage performance, which is something we're very proud of. So our leakage is now at an all-time low of 12.42%. And really, that's a testament to this. Replacing the right parts of the network before it becomes problem, so capital investments in the right places. But it's also a testament to how quick we deal with leakages in terms of the repairs and the ongoing maintenance into the network. I think, as you'll see, all the other parameters are really good as well and have shown some improvement. The other one that's very good is the effluent-leading Paljassaare. So again, we remain 100% compliant with our water permit parameters, and we've had a fully complained year. Okay. I'm going to come back later and do a summary of the year and also talk a bit more about the new company that we've started. But before that, I'm going to pass you over to Kristi now will take you through the financial results in a lot more detail. Thank you.

Thank you, Karl. First of all, I would like to give you the overview of the financial performance of Tallinna Vesi in the fourth quarter in 2020. After financial highlights of the fourth quarter, I will give more detailed overview about sales and costs. Now first of all, the economic environment has significantly changed in Estonia, resulting from ongoing pandemic. The virus started to spread again more actively in autumn and especially at the end of the year, which makes it necessary to control it with additional restrictions. It is difficult to predict the scale of new outbreak and the consequent economic impact to the company's revenues and financial results, as there are a lot of uncertainties in further development of the pandemic and the resulting impacts. Estonia's macroeconomic forecast. We're expecting a short-term decrease in our water services consumption also in first months of the year, if you compare year-on-year basis. According to Estonian Bank's forecast from the middle of December, the setback from pandemic is much easier than predicted previously, and the economy should start to recover already in in 2021 is the pandemic will be under the control. Compared to the fourth quarter in 2019, the total sales revenues decreased by 18.3%, amounting to EUR 13.2 million. The sale of water services decreased by 17% or EUR 2.4 million and the construction services by 31.1% or EUR 0.6 million. The gross profit for the fourth quarter in 2020 was EUR 5.6 million, which was lower by 29.4% or EUR 2.4 million compared to the same period in 2019. The gross profit was mainly impacted by lower water services revenues. And fourth quarter in 2020, the operating profit was EUR 5.8 million or EUR 5.3 million lower than in the same period in 2019. Operating profit in fourth quarter in 2020 was negatively affected by reduction in the provision for possible third-party claims say in fourth quarter in 2020. It amounted to EUR 1.2 million compared to the reduction of provision in the amount of EUR 4.6 million in the last quarter of 2019. Compared to the fourth quarter in previous year, the net profit of the company was EUR 5.6 million lower, being mainly affected by changes in operating profits. Now moving on to the next slide. I will comment on changes in revenues and expenses in detail. As mentioned previously, revenues decreased in the fourth quarter by 18.3%. And this is related to new tariffs applicable from 1st of December 2019 and to the changes in the consumption related to the pandemic. The private customer revenues in main service area decreased compared to the same period in 2019 by 15.2% to EUR 5.1 million, driven mainly by an average 27% lower new tariffs applied from 1st of December 2019, worth EUR 1.2 million. The decrease from tariff was partly balanced by 5% higher domestic consumption, which came mainly from a partner block, were EUR 0.3 million. The commercial customer revenues in main service area decreased compared to the same period in 2019 by 25.7% to EUR 3.8 million, driven by an average 16.9% decrease in consumption, accompanied by an average 15% lower tariff applied from 1st of December 2019. The total impact on commercial customer revenues from consumption was EUR 0.8 million and from change of tariff EUR 0.5 million. Outside services area revenues decreased by 3.8% compared to previous period, and the change was driven by lower stormwater disposure consumption from different outside areas, accompanied by change of tariff applied from the 1st of December 2019 and were partly balanced by higher consumption of water supply services. Stormwater volumes from the main services area were lower by 11.9%, amounting to EUR 1 million in the fourth quarter of 2020, driven by lower stormwater volumes. The revenues from construction services should decrease of 31.1% or EUR 0.6 million compared to the fourth quarter in 2019 and amounted to EUR 1.3 million. The decrease was mainly related to lower construction services revenues balanced slightly by higher road construction revenues. The change is impacted by pandemic, which was delays in new developments in Tallinn. Moving on to the costs. The total cost of goods sold decreased by 7.4% or EUR 606,000 in the fourth quarter of 2020, amounting to EUR 7.5 million. Direct main production costs in total decreased by 15.6% or EUR 312,000, mostly due to lower electricity costs and pollution tax expenses. Staff costs increased by 13.2% to EUR 1.9 million. The increase was mainly driven by a higher number of employees and the -- as well as change of salaries from the beginning of year by CPI. Construction services cost decreased by 35.5% to EUR 1.1 million and were related to lower construction services revenues mentioned earlier. Administrative and marketing costs decreased by 23% or EUR 316,000, amounting to EUR 1.1 million. Other net income and expenses amounted to net income of EUR 1.2 million compared to net income of EUR 4.5 million in comparative period. The change was mostly impacted by EUR 1.2 million decrease in provision for third-party claims in the fourth quarter of 2020 compared to a decrease of EUR 4.6 million in the fourth quarter of 2019. The provision takes into account difference in between the tariffs set according to services agreements in 2010 and the tariffs based on company's estimation with elevation to the possible fluctuation regarding past 24 months being approximately remaining unexpired term of potential claims. Still it is to be highlighted that 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 duly implemented. This takes us now to the cash flows. The cash position as of end of December 2020 stood at EUR 44.5 million, forming 17.4% of the total assets. Compared to the end of last quarter, the cash balance has decreased by end of fourth quarter by EUR 1.4 million. The decrease in cash position is mainly driven by EUR 1.7 million higher investing activities related to cash flows in fourth quarter. The biggest contribution of cash flows comes from the main operations, 2020 total, the operating cash flow amounted to EUR 22.6 million. The company's collection of receivables continues to be at a very high level, being 99.6% on average. The net cash flows from investing activities during 2020 resulted a cash outflow of EUR 13.6 million, which is EUR 6.3 million more than in the same period last year. Investments in the fixed asset being EUR 15.7 million. The compensations received for the construction of pipes and connection points were EUR 2 million. The largest investment project in 2020 for the company is the before-mentioned reconstruction of mechanical pretreatment were started at the wastewater plant in January 2020. The company's financing cash flows during 2020 were negative of EUR 29.3 million. Compared to last year same period, cash outflows increased by EUR 5.6 million, mainly related to higher dividend and the related tax payments. Now I'm giving floor to back to Karl who will make summary about 2020 for ASTV.

Thank you, Kristi, taking us through the financials. Just a summary slide here. As I've mentioned before, I think despite COVID, the company has had a great year in 2020. I just want to summarize that with you. So I think we've done really well in terms of our response to the corona crisis. We safeguarded our staff on the services that we provide. We've got a good year for investments, and we've taken you through that already in some detail. We've seen further improvements in our operational results, in particular, our leakage rate, which is now at 12.42%, which is a really good result, not only for the company, but across Europe, this is a really good result. We've paid out a record year in dividends as well. And that we now have a dividend policy in place, which we've communicated to you before. And perhaps something else I just wanted to mention as well is that our safety performance has also been very good. It's not on this slide. But last year, we had no lost time accidents in the company. Whatsoever, not something that I'm personally very proud of. Right at the beginning of the meeting, we touched on the fact that we'd opened up a new business, a new business stream as it were ASTV Green Energy, which we got the green light for our Supervisory Council meeting yesterday. And it's fairly embryonic at the moment, but I can give you sort of a bit of an indication as to the first project that we're going to be looking at. In the picture that you can see on the slide, if you look towards the top left, you'll see 2 very tall tanks. There are digestors, okay? So this is where all the switch goes into. One of the products of the digestor is methane gas. Now at the moment, we use that gas across the plant to run boilers and things. But there is a surplus of gas, particularly in the summer months. So what we're looking to do is to do more with that gas. There are a couple of options. One is to generate power with it. But the one that we're going to look up first is to clean the gas and then inject it into the wider gas network. So we'd actually receive a return for injecting the gas into the network. United Utilities, our major shareholders, has already got a scheme like this in place, and it's been running for several years in Manchester in the U.K., and we'll be drawing on their expertise and experience as we start into this project. Nothing's really to report at this moment. We're just filled in the conceptual design stage. But at some point later in the year, we'll be moving into the detailed design and construction phases, hopefully, if the business case looks good. So that's the end of the webinar from my perspective. I'll hand you back over to Tuuli now, and we can look at any questions that you may have.

Yes. Thank you both for the presentation. And now we will have a Q&A session shortly. We actually have some questions that have been sent during the presentation already. [Operator Instructions] Hello, welcome back. So since we have some questions here right, and we start answering them. So first question is from [ Yuchnitz Miskinis ] and he asks do you think company will continue to decrease third-party claims at waiting for final approval from local price authority? Kristi, can you comment?

Thank you for the question. First of all, we would like to mention that we are not in the process of any approval of the price from the authorities. And secondly, we need to say that the third-party claims as well, not linked to any of those processes. So if you see as you could elaborate on the questions, we could take a lot into details, you understand the question more precisely.

Thanks, Kristi. The next question comes from Sander Danil. Can you disclose which clients submitted the tariff claim in amount of EUR 1.1 million, and what is the status of the case?

Thank you for the question. Here, we would like to comment that since there is an ongoing court procedure, then in order to protect the company's interest, we do not consider it appropriate to comment and discuss the dispute in public in detail.

Okay, then next question from Sander Danil. What kind of production volume revenues you expect from the green energy projects in the longer term?

Sander, thank you for your question. Quite a complex answer, really. We've got some -- we know the volumes currently that come out of our digestors. But we're actually going to do some refurbishment work on the digestors, which I think will increase the volume further. So I wouldn't like to give any numbers out just for the moment until we've done that work. And we base the business case at the moment based on the expected volume and also, if you like, an indicative budget for completion of the works. Clearly, we'll only know for sure the strength of the business case is when we go to the market, and we've actually got the costs of building the biomethane plant. So apologies, I can't be more specific for you at this moment in time. But as this project develops, and I'm sure we can share more information with you along the way.

Again, a question from [ Yuchnitz Miskinis ] regarding dividend policy, as it is not yet published on your website, neither 2020 dividend information. Could you please share main guidelines of that dividend policy? And do you see continuing similar level of dividends as for 2019?

Thank you for the question. So we have disclosed our new reform dividend policy in our financial reports. So the dividend policy is linked to the profit levels and the financial position of the company. So it is rather not to be compared to the dividend payouts of previous years. However, we are not able to give out any indication to the rules of the dividends yet.

Again question from Sander Danil. The deferred tax adjustment of EUR 255,000 cover mainly -- cover only potential dividend from water for last year or the whole retained earnings of the subsidiary.

The short answer here is that this deferred tax adjustment covers the whole retained earnings of the subsidiary.

Okay. Thanks. Again, question from Sander Danil. How did you manage to reduce your admin expenses so nicely in quarter 4?

So in the current situation of the pandemic, we reduced the consumption of some of the services and revised the pricing in the fourth quarter of 2020.

Thank you. And one more question from [ Yuchnitz Miskinis ]. To add up some clarity. Currently, there is EUR 9.6 million on balance sheet for third-party claims decreased from approximately EUR 17 million during a couple of years. Do you see continued trend of such third-party decreases in next years '21, '22? So Kristi, can you comment on that?

Thank you for the question. So the answer here is that we will evaluate the situation going forward, depending on the further development. So unfortunately, there is no , clear yes, for now.

I think it's a bit too early to say anything at the moment. We're only in the first month of the year.

Okay. So we will be waiting little bit more, if you might have some extra questions. At the moment, we have answered everything submitted so far. Okay. And no more questions so far.

Yes. One more.

There is one more actually. Yes. So from Sander Danil. Again, do you expect your construction volumes to pick up again in 2021?

Sander, that's a difficult question, isn't it really? I think a lot of this has got to do with the pandemic and the wider impact across Estonia. I would hope so, but I think it's a little bit too early. It isn't at this moment in time to make a prediction for 2021. So I'd like to just remain neutral on that point for the time being. I think people are predicting some growth again, but I think it'd be wrong for me to make an actual prediction this moment in time.

And one more question from [ Yuchnitz Miskinis ]. Generally, how does management see the year 2021 in terms of revenue, usage of water services?

Okay. Well, I think it's a very similar answer to the last one I've just given. Yes, it's really to do with how quickly Estonia returns back to normal, isn't it, particularly in the hospitality sector. I think a lot of this is predicated on how we get the vaccine rolled out across Europe because then, of course, people can start traveling back to Tallinn and the hotels will be full again. So again, let's hope for sort of the middle part of the year, things will start returning back to normal. But again, I'm in the hands at this moment in time. So it's a very difficult question to answer exactly.

Okay. Thank you, Karl. So we have answered all questions received so far. If someone is still typing in, we're waiting some more time. Okay. It seems like we don't have any more questions. And just for information that the recording of the presentation will be available in the NASDAQ Baltic YouTube channel webinar playlist shortly. Presentation materials and reports can be found on Tallinna Vesi's webpage. Karl and Kristi, thank you for the overviews, and thank you to all the participants for joining. Have a good day.

Yes. Thank you, everyone. Goodbye.

Thank you.