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 webinar will be hosted by Aleksandr Timofejev, Chief Executive Officer; and Taavi Groon, Chief Financial Officer. Aleksandr and Taavi will introduce the highlights of the second quarter. The presenters will also speak about Tallinna Vesi's operational and financial results of the second quarter of the year. Aleksandr will also give an overview about some of the investments made in the second quarter. [Operator Instructions] Now I will hand it over to Aleksandr. Here you go.

Good morning. I'm happy to welcome you today. Now I will introduce the highlights for the second quarter of the year. At the beginning of June, the annual general meeting of the company was held, where the shareholders of Tallinna Water approved to pay a dividend of EUR 0.65 per share from the 2021 profits. The payout is equal to 80% of earnings in 2021 and was made on 29th of June. Just a bit about our important project. In May, we signed a contract with Telia Eesti for a delivery of smart meters for our customers and the transmission of data via Telia's network. We have started with the installation of remotely enabled smart meters already. I'm sure that our customers are very happy about it and expecting to get their meters as quick as possible. We're planning to replace the water meters for all our customers with smart ones by 2026 at the latest so that the customers would no longer need to report water meter readings. Even in the summer, we open up taps where people can drink tap water. For this summer, we have opened 38 of them and for visitors and [indiscernible]. We have provided free fresh water at 24 events such as [indiscernible], Tallinna women's [indiscernible] and also in [indiscernible] festival. The pipeline construction strategy is very important as all our customers get our services from our pipes. We prepare pipeline rehabilitation strategy in cooperation with Tallinn University of Technology. The strategy will help us in the future to do investments in the most efficient and modern way. The public water supply and sewage development plan for the next 12 years is under preparation but again, in cooperation with the city of Tallinn and should be ready in the second part of the year. The development plan provides basis for creating the company's development and business plan for the next 12 years. In addition to that, we are preparing to do with the city of Tallinn the new administrative agreement for next years. Let's move on to the next slide and speak a little bit more in details about investments. As previously, we're constantly putting effort to improve our vital service. In the 6 months of 2022, we geared our investment projects in the amount of EUR 7.44 million. During 6 months, we reconstructed more than 10,000 meters of our network, and work will be continuing also in the second part of the year. Network renewables are ongoing on Järvevana Road, Sõle Street, Kolde, Ehte, Kotka and Sitsi Streets, the Astangu area and Ussimäe Road. Our engineers will continue to deliver the best work to our customers and citizens also during the second part of the year. Of course, we invest also in our assets -- into assets that are situated at water and wastewater treatment plant. We're using filters and the water treatment plants, and that's quite important to be sure that the water we treat at the water treatment plant [indiscernible] is according to all requirements that is settled by the law. Also, we are updating pumping stations on Rummu Street and improving each with a possibility for secondary chlorination in Lasnamäe and Pirita areas. If we speak about wastewater treatment, then it is important to say that we're doing construction work in main feed pumping station shaft and effluent [ shore well ], which are a critical part of the wastewater treatment process, mainly due the fact that all the wastewater from our service area goes through the stages of the process. We are also renovating aero tanks, which are an important part of the biological treatment process in which we remove nitrogen and phosphorus. Our capital investments into the network ensure uninterrupted water and wastewater service and reliability of water supply to consumers also in the future. I would like also to speak a little bit more in the -- about our operational results. If we speak about the second quarter, then the results are really good. The water quality is on the highest level. The quality of drink water in Tallinn was excellent, being 100% compliant with all requirements. We took approximately 1,700 water samples from our customers during the first 6 months of the year, and all samples were according to the compliance. Top-level tap water was ensured by an effective water treatment process, continuous preventive maintenance in the water network and investments made in the recent years in the water pumping stations, which created post-chlorination facilities in different parts of the city. This enables to maintain the sanitary guarantee in the water network by maintaining high-quality drink water even with hot weather. Wastewater treatment plant is working well as well. Wastewater treated at Paljassaare wastewater treatment plant also maintains a high level of quality, being, again, fully compliant with all the set requirements last year. The significantly lower indicators of pollutants are the proof of excellent quality of effluent discharge received. A little bit about our customers and their satisfaction. Our goal is to deliver high-quality service to our customers. And in the first half of the year, our customer satisfaction was 4.3 of 5, which is a very good result. The leakage rate in the second quarter of 2022 was 14.3%, which is similar to the same period last year. In the 6 months of 2022, the leakage rate was 17.67%. A high leakage rate was mainly caused by extraordinary well conditions in the first month of the year. Already by the end of March, leakage rate has shown reduction. We always try to disturb our customers as little as possible and do everything to supply our customers with water. In the second quarter, the average water disruption per property that was impacted by water interruptions lasted 3 hours and 31 minutes, which is slightly higher than in the competitive periods last year. In terms of enhancing reliability of water supply services to our customers in the first half of the year, we have reconstructed about 10 kilometers of pipes as was mentioned before. Now I will go -- give over to Taavi, who will speak about financial results.

Thank you, Aleksandr. I would like to give you an overview of the financial performance of Tallinna Vesi in the second quarter of 2022. First, according to the latest economic forecast from Eesti Pank, the Estonian economy started in the year -- started the year in a very strong position, but the growth was slow. The outbreak of war in February and the various impacts from it overshadow the outlook for the Estonian economy further. But sanctions on Russia have already led to rapid pricing rises, the broader impact on the economies is expected to become apparent in the second half of the year. Inflation is expected to be lower next year, but the price level will remain high. Inflation in Estonia has been the fastest in the Europe area in recent months, mainly because of the major rise in energy prices. Higher energy cost will gradually be passed through into the prices of many other goods and services. Higher energy prices and the inflation have a direct impact on the profit of the company. Compared to the second quarter in 2021, the total sales revenues were, at the same level, increasing by 0.3%, amounting to EUR 13 million. The sales of water services increased by 8.1% or EUR 0.9 million on the [ go ]. And construction services decreased by 55.9% or EUR 0.9 million. The gross profit for the second quarter in 2022 was EUR 4.4 million, which is -- which was lower by 15.5% or EUR 0.8 million compared to the same period in 2021. The gross profit was mainly impacted by higher cost of goods and services sold, which is partly balanced by high water services revenues. In the second quarter of '22, the operating profit was EUR 3.1 million or EUR 2.1 million lower than in the same period for 2021. Being mainly impacted by changes in gross profit and freezing the change in provisions formed for the possible third-party claims. The net profit of the company for the second quarter of 2022 was EUR 0.96 million, over EUR 2.1 million lower, being mainly impacted by changes in operating profit, eliminating the effects of provisions for possible third-party claims in 2021. The group's net profit for the second quarter of 2021 would have been EUR 1.87 million, '22, showing a decrease of EUR 0.9 million year-on-year. On the next slide, I'll comment on the changes in revenues expense -- and expenses in more detail. The total sales revenues for the second quarter of '21 increased -- of '22 increased by 0.2% amounting to EUR 13 million. Total revenues from water services, I've mentioned, 8.1% increase or EUR 0.9 million, higher than in the second quarter of '21, where they amounted to EUR 12.1 million. The increase in water services revenues were mainly driven by higher storm water treatment, disposal service revenues and commercial customers' consumption and we will -- and were partly balanced by decreasing private customers' consumption. The private customers revenue using main service area decreased compared to the same period in '21 by 1.2% to EUR 5 million. The commercial customer revenues in main service area increased compared to the same period in '21 by 22.7% to EUR 4.2 million, driven fully by increasing consumption. The sales to commercial customers were impacted by higher consumptions of hotels and spas, rental services and shopping centers. The higher water consumption in hotels and rental services can be related to lower restrictions. Storm water and fire hydrant service revenues from the main service area were higher by 13.5%, amounting to EUR 1.1 million in the second quarter of 2022, driven mainly by high cost per cubic meter, which was partly set back by 7% lower storm water volumes. The revenues from construction services amounted to EUR 0.7 million and showed a decrease of 55.9% or EUR 0.9 million, 55.9% or EUR 0.9 million compared to the second quarter in '21. Accordingly, we're also down construction service costs, which decreased by 62.9% or EUR 0.8 million. Despite lower revenues, construction service profit was at the same level amounting to EUR 0.1 million because of the better margins. The decrease was mainly related to postponed procurement from public sector due to uncertainty in the markets and high prices in the road construction. This now takes us to the costs. The total cost of goods sold increased by 10.9% or EUR 0.85 million, amounting to EUR 8.6 million in the second quarter of '22. Total direct production costs increased by 54.1% or EUR 1 million, mostly due to higher electricity costs accompanied by an increase in chemical costs. Electricity costs increased by 99.9% mainly due to an average 96% higher electricity price. Chemicals costs increased by 17.9%, driven mainly on average 32% higher price for methanol. Construction services cost decreased by 62.9% or EUR 0.5 million and were related to lower construction services revenues mentioned earlier. Salary costs increased by 14.2% to EUR 2.1 million and were mainly affected by salary increase of every staff member according to the company salary policy. Other costs of goods sold increased by 29.7% to EUR 1.8 million, mainly related to higher prices of fuel, heating and gas. Administrative and marketing expenses increased by 17.1% to EUR 1.3 million, driven also by higher salary costs. Other net income and expenses amounted to net expenses of EUR 0.05 million compared to the net income of EUR 1.06 million in comparative period. 2021 Q2 net income was impacted by reversal of provisions for the possible third-party claims. It takes us now to cash flows. As of June 30, '22, the company's cash balance stood at EUR 23.5 million, forming 9.5% of total assets. Compared to the end of last quarter, cash balance has increased by EUR 14 million, mainly as a result of dividend payout at the end of June. The biggest contribution to the cash flows comes from main operations during the 6 months of '22. Total operating cash flows amounted to EUR 8.3 million. The company's collection of receivables continues to be high being 99.8% on average. Net cash flows for investing activities during 6 months of 2022 resulted a cash flow outflow of EUR 6.1 million, which is EUR 2.4 million less than in the same period last year. Investments into fixed assets were EUR 7.4 million and compensations received volume by constructions were EUR 1.2 million. The company's financing cash outflows during the 6 months of '22 were EUR 15 million, being on the same level compared to the last year same period. And yes, with that, I conclude my part and thank you.

Thank you, Taavi and Aleksandr for that presentation. And now we will proceed with the questions, and we will give you some minutes to submit your questions. [Operator Instructions] So thank you for the questions. We have a first question from [ Andres ], and the question is could we expect 2002 (sic) [ 2022 ] dividend payout above 80% and possibly above 100%? Taavi?

Thank you for the question. The dividend policy of the company has not changed. And it's if there aren't any changes, it will be informed to the Nasdaq and also through other channels. But it remains the same and it's too early at the moment to talk about 2022 dividends.

Thank you. And the second and third questions are from Sander Danil. And the first one is please explain the major terms of the new agreement with the city? Aleksandr?

Thank you for the question. So the main thing is about that the Tallinna Water will remain the water undertaker in Tallinn, and we will provide the services to our customers. Of course, the old contract was prepared almost 20 years ago; and today, the regulation is different. So the contract will be relooked in the way that it is according to the modern law. And if we speak about details of the contract at the moment, we are under negotiations and it's not, I think, the right time to share any details as they are not agreed until the end with the city.

Thank you. And another question from Sander Danil, please explain the situation in construction activities. Do you expect them to remain sluggish in the second part of the year?

Thank you for the question. One more time , it's quite a good question and difficult to answer on that. So if we speak about first 6 months that it is visible that the revenues that we've got from the construction were lower. At the moment, the market is active and Watercom is participating in tenders. We also have, at the moment, under negotiation more than EUR 2 million. So we really hope that, in the second part of the year, we can get more tenders, what we can construct. And with that, we could fulfill our expectations. And if we look into the media, then the media suggests the change on the construction market, but we think that the change will be more for the next year. So at the moment, we participate in tenders. We see opportunities, and we definitely will use these opportunities to fulfill the budget.

And we have a question from [ Peter Prisle ]. And the question is, with the previous owner, United Utilities, Tallinna Vesi used to pay different type of management fees to United Utilities. Is this going to be the case with the new private owner as well? Aleksandr?

Thank you for the question. If we speak about United Utilities, then they left at the end of the first quarter 2021. And it's true, but there was a technical fee, what the company paid United Utilities, today, we do not have such an agreement with the new owner. So we do not pay any extra fee today to Utilitas if the question was about a bigger shareholder.

Thank you, and we will give you 2 more minutes to type in your questions. Seems like we don't have any more questions. Recording of the presentation will be available in the Tallinna Vesi's YouTube channel in our playlist shortly. Presentation materials and reports can be found on Tallinna Vesi's web page. Taavi and Aleksandr, thank you for the overview, and thank you all for joining. Have a good day.