AS Tallinna Vesi (TVE1T) Earnings Call Transcript & Summary

Hello, ladies and gentlemen. Thank you for joining. I am Laura Korjus, the Head of Communication in Tallinna Vesi, and I welcome you all to today's Tallinna Vesi's webinar. This will be hosted by Aleksandr Timofejev, Chief Executive Officer. On today's webinar, Aleksandr will do the presentation alone due to the fact that our new Chief Financial Officer, Taavi Groon, will join the team on 23rd of May. Today, firstly, Aleksandr will introduce the highlights of the first quarter, then he will also speak about Tallinna Vesi's operational and financial results of the first quarter of the year. Also, he will give a brief overview about some of the investments made in the first quarter of the year. [Operator Instructions]. To submit your questions, please use the question box. Now, I will hand it over to Aleksandr. Here you go.

Good morning, everyone. I'm happy to welcome you today here in our webinar. Here are some of the highlights from the first quarter of the year. Management Board made a proposal to a supervisory council to pay a dividend of EUR 0.65 per share from the 2021 profits. The company's Supervisory Council decided in its meeting, held on 28th of April, to make a proposal to Annual General Meeting to approve the payment. The payout is equal to 80% of earnings in 2021. Public water supply and sewerage development plan over the next 12 years to regulate the development of the water sector in Tallinn, will be developed soon. The public water supply and sewerage development plan is under preparation by the city of Tallinn in cooperation with Tallinn Water and other Tallinn city water utilities. The development plan provides the basis of creating a company's development and investment [ plan ]. In the first quarter of the year, sales to commercial customers within the service area increased by 17.9% to EUR 3.84 million, comparing to the last year same period, driven the high consumption of water services. The sales to commercial customers were impacted by a slight reduction of the pandemic-related restrictions as hotels and spas and of course, entertainment facilities were opened. The cost of energy, chemicals, construction materials and construction services has increased by 2.3%. This was driven by higher electricity price, higher price of polymer and methanol used in the waste water treatment process. There has also been an increase in the cost of our work resources. The increase was mainly influenced by higher staff costs related to salary increase of every staff member of Tallinn Water, according to the system that company has. Moving on, I would also like to introduce you Tallinna Vesi's new Chief Financial Officer, Taavi Groon. Taavi will join the company on 23rd of May. Taavi has a long and diverse experience in financial management in various industries. Taavi was involved in a regulated business working in [ Adven Eesti ]. Since 2018, he has acted as a Chief Financial Officer of North Estonia Medical Center. Now, we move on to the operational results, and I will give you an overview about first quarter. If we speak about water quality, then it was really, really high in the first quarter of 2022. The company took 842 water samples from the customer taps, and all the samples were according to the standards. If we speak about the wastewater treatment, then the waste was treated at the Paljassaare Wastewater Treatment Plant, also maintains a high level of quality, being again fully compliant with all the set requirements. Customers are important for us as well, and our goal is to deliver high-quality service to our customers. And in the last 3 months of the year, our customer satisfaction was really high. The result was 4.4 points of 5, which is a very, very good result for us. The leakage rate was a little bit higher during the first quarter of 2022. This was mainly caused by extraordinary weather conditions, snow and ice disrupt our activities. But by the end of March, leakage rate showed reduction. We always try to disturb our customers as little as possible and do everything to supply our customers for water. In the first quarter, the average water disruption per property, which was impacted by water interruption, lasted 3 hours and 25 minutes, which is on a single level as last year. The habilitation of the networks is really important. In terms of enhancing the reliability of water supply services to our customers, in the first 3 months, we have reconstructed about 6 meters of water pipes and more than 2.6 kilometers of sewers and more detail about our investments in our assets on the next slide. We constantly put in effort to improve our vital service. In the first 3 months of 2022, we carried out investment projects in the amount of EUR 2.78 million. Currently, we have made an agreement to renovate 17 kilometers of networks. This year, networks will be renovated on the Järvevana Road, Tulika, Kotka, Sõle and Lõime Streets and also in the area of Astangu Street. In cooperation with Utilitas, pipes will be renovated on Kesk-Luha, Uue-Maailma, Õllepruuli and Tuvi Streets. I would like also to speak about remote water meters. The project is moving according to the plan. The procurement of water meters and software has successfully ended. Soon, we can give more intel on the selected partner and next steps on the project. We also make constant investments into our water and waste towards treatment plants. If we speak about drinking water and our [indiscernible] treatment plant, then at the moment, we are renewing our filters, which are an important part of our water treatment process. Also, we are updating the pumping station on Rummu Street and improving it with a possibility of secondary coordination of [indiscernible] and Pirita areas. Wastewater treatment plant works well. Related to wastewater treatment process, we are doing reconstruction works in main feed pumping station shop and effluent outlet tower, which are critical parts of a wastewater treatment process mainly due to the fact that all the wastewater from our service area goes to [ these stages ] of the process. We are also renovating aeration tanks, which are an important part of a biological treatment process, in which we remove nitrogen and phosphorus. Our capital investments into the network ensure uninterrupted water and sewage services and reliability of water supply to customers in the future. Now, I would like also to give you the overview of our financial performance of AS Tallinna Vesi in the first quarter of 2022. First of all, the latest economic forecast from Estonian Bank expects that the Estonian economy will grow strongly this year by over 9% in euros at current prices. But the counter effect of inflation means real growth in the economy will probably be close to 0 or even slightly negative. Although some sectors have not still recovered from COVID, the economy as a whole has clearly returned to its precrisis level. The recovery of economy has had a positive impact on Tallinna Water's financial results as well, reflecting a slight increase of revenues compared to the first quarter of 2021. Important to say that high energy prices and inflation has [ direct impact ] on profit of the company. We are optimistic that consumption will slightly increase this year and revert to pre-pandemic volumes in the long term. Compared to the first quarter in 2021, the total sales revenues increased by 2.3%, amounting to EUR 12.1 million. The sales of water services increased by 6.2% or EUR 0.7 million and the construction services decreased by 52.2% or EUR 0.4 million. The gross profit for the first quarter in 2022 was EUR 4.4 million, which was lower by 15.4% or EUR 0.8 million, compared to the same period last year. The gross profit was mainly impacted by higher cost of goods and services sold, which was partly balanced by higher water services revenues. In the first quarter of 2022, the operating profit was EUR 3 million or EUR 1.7 million lower than in the same period last year, being mainly impacted by changes in the gross profit, increasing the change of provision from over possible third-party claims in the first quarter in 2022, compared to a reduction in the provision in the amount of EUR 1.2 million in the comparable period last year. Compared to the first quarter in 2021, the net profit of the company was EUR 1.7 million lower, being mainly impacted by changes in the operating profit. On the next slide, I will comment on the changes in the revenues and the expenses in more detail. So total sales revenues for the first quarter 2020 [ increased ] by 2.3% amounting to EUR 12.1 million. Total revenues from water services were by 6.2% or 0.7 -- sorry, EUR 0.67 million higher than in the first quarter of 2021, amounting to EUR 11.5 million. The increase in water services revenues were mainly driven by higher [ stormwater ] treatment and disposal service revenues and commercial customers and were partly balanced by decrease in private customers' consumption. The private customers' revenues in main service area decreased, compared to the same period in 2021, by 4.1% to EUR 4.9 million. The commercial customers' revenues in main service area increased, compared to the same period last year, by 17.9% to EUR 3.8 million, driven fully by increase in consumption. The sales to commercial customers were impacted by reduction of the pandemic-related restrictions as hotels and spas were open. Less people were working at home. In addition, the water consumption in hotels and rental services has increased due to accommodation of Ukraine refugees in March. Outside services area revenues increased by 0.8%, amounting to EUR 1.3 million, which was driven by changes in consumption of all services. Stormwater and fire hydrant services revenues from the main service area were higher by 34.6%, amounting to EUR 1.2 million in the first quarter 2022, driven mainly by [ 31% ] higher stormwater volumes. The revenues from construction services showed a decrease of 52.2% or EUR 0.4 million, compared to the first quarter in 2021, and amount to EUR 0.4 million. The decrease was mainly related to lower volume of work orders and weather conditions in the first quarter of 2022 that made the construction works challenging. This now takes us to the cost. The total cost of goods sold increased by 16.2% or EUR 106,000 in the first quarter of 2022, amounting to EUR 7.7 million. Total direct production costs increased by 51% or EUR 959,000 mostly due to higher electricity costs, combined by an increase in the chemical costs. Electricity costs increased by 91.4% mainly due to an average 82% high electricity price despite [ state ] compensation. Chemicals costs increased by 19.2%, driven mainly by an average 31% high price of methanol used at the wastewater treatment process. Construction services cost decreased by 52.1% and were related to lower construction services revenues mentioned earlier. Salary costs increased by 9.2% to EUR 2 million and were mainly affected by salary increase of every staff member according to a company salary policy. Other cost of goods sold increased by 21.6% to EUR 1.1 million, mainly due to higher prices related to heating and gas costs. Administrative and marketing expenses decreased by 20.5% to EUR 1.3 million, driven by lower outsourced professional services cost, partly by higher salary costs. Other net income and expenses amounted to net outcome of EUR 0.05 million, compared to net income of EUR 1.15 million in comparative period, being mainly driven from freezing the change of provision for possible third-party claims mentioned earlier. Now it takes us to the cash flows. As of 31st March 2022, the company's cash balance stood at EUR 37.6 million, forming 14.6% of the total asset. Compared to the end of last quarter, the cash balance has increased by EUR 1 million, mainly as a result of lower financing activities related to cash outflows accompanied by lower contribution from main operations. The biggest contribution of the cash flows comes from the main operations. During the 3 months of 2022, total operating cash flow amounted to EUR 3.9 million. The company's collection of receivables continue to be very high, being 99.7% on average. The net cash flows from investing activities during the 3 months of 2022 resulted in cash outflow of EUR 2.7 million, which is EUR 0.2 million more than in the same period last year. Investments into fixed assets were EUR 3.3 million, and the compensations received from the pipe construction were EUR 0.6 million. The company's financing cash outflows during the 3 months of 2022 were of EUR 0.2 million being on the same level compared to the last year same period. Thank you.

Thank you, Aleksandr, for the presentation. Now we will proceed with the questions.

We have some questions sent in already, but we will also give you some minutes to submit your questions now. Please feel free to [ send in ] any questions you might have. So thank you for the questions. We will proceed with this in the order they have been received. We have three questions related to tariffs. And these are, firstly, from [indiscernible]. Please update your plans to increase tariffs for residential and separately for commercial customers. And second one from Andreas [indiscernible], do you expect tariff provisions anytime soon to inflation? And also third one from [ Mikel Kama ]. What kind of impact might have increased inflation on Tallinna Vesi's financial results on the next 1 to 2 years? What is the best and worst scenario for you? And Aleksandr, please.

Thank you for the questions. So our current private and commercial tariffs have varied from December 2019 and until new tariffs are approved by Competition Authority. The company has not started with the process of a new tariff application, and it's observing the changes in the price and costs. Even if we would start with the process in the nearest future, and the approval process might take time more than a few months. And today, to give a better forecast regarding the tariff increase is very difficult.

And a question from Sander Danil. Do you expect a further recovery in commercial water consumption in the near term?

So we are really optimistic that the consumption will slightly increase this year and revert to the pre-pandemic volumes in the longer term. If we speak about the first quarter that it is visible, but it is much better than first quarter of 2021 and March was really good as well. But we still have space to go to the pre-pandemic situation.

Thank you. And another question from Sander Danil. When we could expect some results regarding the ongoing court leases concerning the third-party claims?

So if we speak about the third-party claims, then the court proceedings are ongoing and the final decision date cannot be predicted. That's all.

Thank you. And we will give you 1 or 2 minutes more to type in your questions. Thank you. We have another question from Sander Danil. Will relatively low construction volume in the first quarter reflect in higher activities in the coming quarters?

This is a very good question. And if we speak about the construction market, then definitely during the warmer period of spring and summer, the activity should be higher. And we are expecting more work in the road construction. As it was mentioned before, the first quarter of the year was really cold, and it was quite difficult to plan any construction activities of the road. And of course, the war in Ukraine and the COVID pandemic still [ created ] a lot of uncertainty for the customers. So at the moment, we feel that more work is coming to the network -- sorry, to the market, and we try to participate in the tenders to win them. So we believe that during the second and the third quarter, there will be more work regarding road construction, where we can participate.

Thank you. And it seems like we don't have any more questions. A recording of the presentation will be available in the Tallinna Vesi's YouTube channel webinar playlist shortly. Presentation materials and reports can be found on Tallinna Vesi's webpage. Aleksandr, thank you for the overview, and thank you all for joining. Have a good day and a nice weekend.

Thank you. Have a nice day.