AS Tallinna Vesi (TVE1T) Earnings Call Transcript & Summary

Hello, ladies and gentlemen. Thank you for joining. My name is Laura Korjus, and I am the Head of Communication in Tallinna Vesi. I welcome you all to today's Tallinna Vesi's webinar. This webinar will be hosted by the members of the Management Board, Chief Financial Officer, Kristi Ojakaar, and Chief Operations Officer, Aleksandr Timofejev. Firstly, Aleksandr and Kristi will introduce the highlights of the first quarter and give an overview about COVID-19's impact on Tallinna Vesi, then they will speak about Tallinna Vesi's operational and financial results of the first quarter of the year, after that Aleksandr will tell -- will give an overview about investments in wastewater treatment. Right after the presentation, you will have an opportunity to ask questions. It is also possible to type in your question during the presentation, but these will be answered in the end part of the webinar. To submit your questions please use the question box on the right side of the screen. Now I will give it over to Aleksandr and Kristi. Here you go.

Thank you, Laura. Good morning, everyone, from my side as well. As you know there has been a change in the ownership of the company. Starting from March 31, 2021, ASTV's shareholders with a direct holding over 5% are the city of Tallinn and Utilitas. Also, several members of our Supervisory Council have been replaced. The first council meeting with the new members was held yesterday. We are enthusiastic about our future cooperation with the city and Utilitas, and we will keep all our shareholders well informed whenever necessary. A little bit about COVID-19 and its impact on the business. The first quarter of 2021 was affected by the spread of coronavirus. In the first quarter, we maintained the changes in our working arrangements made in autumn. The arrangements were to ensure the continued safety of our staff and uninterrupted high-quality service to our customers. Overall we have had some COVID-19 cases among our employees. Overall changes in the work organization have proved right and kept the way the spread of the virus. We are still being cautious and we'll be keeping the measures at least until the end of May. All the planned investments have been made and deliveries such as chemicals are on schedule. I give over, at the moment, to Kristi.

Thank you, Aleksandr. With the following, I would like to give you the overview of the financial performance of Tallinna Vesi in the first quarter of this year. After the financial highlights of the first quarter, I will give more details about sales and costs. The ongoing coronavirus pandemic has affected Tallinna Vesi's results being reason for lower revenues and profit compared to the first quarter of the last year. It is difficult to predict the objective scale of the emerging outbreaks and the consequent economic impact to the company's revenue and financial results. The latest economic forecast from Bank of Estonia expects the recovery of the Estonian economy to be delayed until the second half of the year, but the recovery shall be faster. So the expected growth of GDP is expected to be 2.7% in this year and 5% in 2022. So aligned with Estonia's macroeconomic forecast, we expect in short-term lower water services consumption also in next month compared to the pre-pandemic time, specifically in commercial customers segment.

I will give an update on our operational performance during the first quarter, which is also covered in TSE released on last Wednesday. We are pleased to see consistently high performance in the quality of our services. Overall some results are not as perfect as in 2020 due to very low temperatures of air in the beginning of the year. A little bit about water quality. We monitor our water quality at all times and in the first quarter of 2021, we took almost 900 water samples from the network. All our samples met strict water quality standards and were 100% compliant with all requirements. This has been ensured by the efficient management of water treatment process, proactive network maintenance and low overall water temperature being a contributing factor. If we speak about the wastewater treatment, then in addition to monitoring drinking water, we've also consistently monitored the concentration of pollutants in the incoming wastewater and final treated effluent of Wastewater Treatment Plant, which had a direct impact on the marine environment. During the first 3 months, the effluent continued to be fully compliant with all regulations and standards. Customers are really important for us. Our goal is to deliver high-quality service to our customers and users and in the first quarter our customer satisfaction was much higher, 4.3 than during the same period last year. This shows that customers are more and more satisfied with the customer service we provide to them. In the first quarter, we also saw a decrease in the number of written inquiries and repeated requests, and customers’ complaints. This positive trend shows a stable improvement in the quality of our services. The level of leakages in our network was 15.46% in the first 3 months of the year impacted by cold weather and reduced consumption because of the coronavirus. We always try to disturb our customers as little as possible. Unfortunately, the average water distribution time is slightly higher than in the same period last year. To minimise the effect of water interruptions on customers, we continue the additional valve installation project also in 2021. In terms of enhancing the reliability of water supply service to our customers, we rehabilitated our network in Poska, Roosikrantsi streets and Kadaga Road. During first quarter of 2021, we construct a total of 1,400 meters of water pipes and approximately 700 meters of sewers. Let's move on to the bigger projects. In the first quarter of the year, our main focus was on investments in wastewater treatment. In both of these projects our investment plan concludes the EUR 9.6 million in total, including EUR 1.1 million for the new pump and the main pumping station of Paljassaare, and EUR 8.5 million in total in the reconstruction of the mechanical treatment stage. Company upgraded the city's main pumping station receiving all the wastewater collected from Tallinn. We installed a new pump called Morris, which reduces the operational risk of a plant and provides up to 10% additional capacity for incoming wastewater volumes. Morris will also enhance resilience over wastewater-driven process at times of heavy rainfall, and will further increase the reliability of supply for Tallinners. The largest project over the past decade is the reconstruction of the mechanical treatment process stage in the wastewater treatment plant. Everything progressed according to the plan. In the first quarter, we made preparations for taking the new grit traps into the operation. Completion of the project will further enhance the quality and resilience of the wastewater treatment process in Tallinn. The project will be continued also throughout 2021. I will give over now to Kristi who will continue with the finance results. Thank you.

So thank you, Aleksandr. As you can see compared to the first quarter in 2020, the total sales revenues decreased by 10.6% amounting to EUR 11.8 million. The sales of water services decreased by 9.5% or EUR 1.1 million and the construction services by 25.7% or EUR 0.3 million. The gross profit for the first quarter in 2021 was EUR 5.2 million, which was lower by 14.5% or EUR 0.9 million compared to the same period in last year. The gross profit was fully impacted by lower water services revenues. In the first quarter this year, the operating profit was EUR 4.7 million or EUR 1 million lower than in the same period in 2020 being mainly impacted by lower revenues. Operating profit in first quarter in 2021 was also affected by reduction in the provision for the possible third-party claims. In first quarter in 2021, the amount was EUR 1.2 million. which is comparable to the amount in the first quarter of last year. Compared to the first quarter in 2020, the net profit of the company was EUR 1 million lower being mainly affected by changes in operating profit. We shall move to the next slides for further comments of the changes in revenues and costs in detail. Total sales revenues for the first quarter of 2021 decreased by 10.6%, as said previously. Total revenues from water services were 9.5% or EUR 1.1 million lower than in the first quarter of 2020 amounting to EUR 10.8 million. The decrease in water services revenues was caused by the changes in the consumption and the private customers' revenues in main service area increased compared to the same period in 2020 by 1.7% to EUR 5.1 million, driven mainly by higher consumption in apartment blocks worth EUR 0.07 million. The commercial customers' revenue in main service area decreased compared to the same period in 2020 by 21.5% to EUR 3.3 million related to decrease in the commercial consumption. Outside services area revenues decreased by 1.6% amounting to EUR 1.2 million and the change was driven by lower stormwater disposal from different outside areas, but rest above the higher consumption of water supply services. Stormwater volumes for the main service area were lower by 26.5% amounting to EUR 0.29 million in the first quarter of this year. The revenues from construction services showed a decrease of 25.7% or EUR 0.3 million compared to the first quarter of last year and amounted to EUR 0.8 million. The decrease was mainly related to lower pipe construction services revenues being impacted by snowy winter that made the pipe construction challenging during the first 2 months of this year. We shall now move onto the costs. The total cost of goods sold decreased by 7.3% or EUR 520,000 in the first quarter of 2021 amounting to EUR 6.6 million. Direct main production costs in total decreased by 7% or EUR 142,000 mostly due to the lower electricity costs and pollution tax while chemicals cost has increased. Construction services cost decreased by 28.7% to EUR 0.6 million and were related to lower construction services revenues mentioned previously. Other cost of goods sold decreased by 19.2% to EUR 0.9 million and were related to timing of asset maintenance costs. Administrative and marketing costs increased by 18.5% or EUR 261,000 amounting to EUR 1.7 million and it was related to increased purchase of administrative and consulting services. Other net income and expenses amounted to net income of EUR 1.2 million compared to net income of EUR 1 million in last year, and it was caused by higher revenues from connection fees and lower expense of estimated credit losses. The net income was mostly impacted by EUR 1.2 million decrease in provision for third-party claims in the first quarter of this year, which is equal to decrease of provision in last year same period. The provision takes into account difference in between the tariffs and services agreement in 2010 and the tariffs based on the company's estimation with reservation to the possible fluctuations regarding past 21 month being the approximate remaining unexpired term of potential claims. Still, company does not consider itself liable to customers for any claims related to tariffs, which were applied until the new tariffs were approved by CA. This takes us now to the cash flow. The company's cash balance stood at EUR 47.1 million at 10th of March, and was forming 18.2% of the total assets. Compared to the end of last quarter, the cash balance has increased by EUR 2.6 million. The biggest contribution to the cash flows comes naturally, from the main operations. 2021 first quarter total operating cash flow amounted to EUR 5.2 million. The company's collection of receivables continues to be high being on average 99.2% level. The net cash flows from investing activities during the 3 months of this year resulted the cash outflow of EUR 2.4 million, which is EUR 0.3 million less than in the same period last year. Investments into fixed assets have been EUR 2.9 million and the compensations received for the construction of pipes and connection points for EUR 0.5 million. The company's financing cash outflow during the 3 months of 2021 were EUR 0.2 million. Compared to the last year same period, cash outflows have decreased by EUR 0.1 million mainly related to lower interest and lease payments. As we usually do in April, we also have a positive news for investors this time related to dividend proposal, namely company's council has made a resolution to propose a dividend EUR 0.65 per share. The proposal is subject to the shareholders' meeting resolution in the beginning of the June. Thank you, and I'm giving floor back to Laura.

Thank you for the presentation, Kristi and Aleksandr. Now we will proceed with the questions, and we will give you some time to submit your question. You can type it into the question box, and please feel free to type in any questions you might have. You now have some minutes for this. We have received one question from Sander Danil. And it is, "What is the amount of total CapEx plan for 2021?" And Aleksandr, please?

Thank you very much for the question. So I'm glad to say that Tallinn water invests into the assets year-on-year, and the investment plan for 2021 are on the same level as last year. During this year, we plan to rehabilitate a lot of networks in the city of Tallinn, and also we have some good projects at the wastewater treatment plant to improve the effluent quality of the wastewater treatment plant. Thank you.

And we will give you one more minute to type in your question. Thank you for the questions. And Sander Danil asks, "Does the new Council plan to review the dividend policy of the company for coming years?"

Thank you for the question. We have to say that it has not been discussed yet. If there is any change to be made then we will inform all the investors accordingly.

And another question, are you planning to disclose RAB and WACC numbers in the future?

Thank you once again. The answer here is that we currently do not plan to disclose RAB and WACC numbers separately.

And one more question about construction. Construction activities were somewhat complicated by weather conditions in the first quarter, do you see already volumes picking up in the second quarter?

Thank you for the question. Definitely, the construction market is very active at the moment and Tallinn Water and our subsidiary are participating in the tenders, and we tried to get as much work as possible to fulfill all expectations that are raised by our shareholders. Thank you.

And also Sven [indiscernible] asks, what kind of pipe are in the water net?

In water network we use different materials. So if we speak about the plastic pipes, then this is PE or PP pipes and if we speak about the bigger diameter pipes then we use cast iron pipes. Thank you.

And that's it with the questions right now. It seems like we don't have any more of these. So thank you all who have sent in their questions. A 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 web page. Kristi and Aleksandr, thank you for the overview and thank you for joining. Have a good day.