AS Tallinna Vesi (TVE1T) Earnings Call Transcript & Summary

Hello, ladies and gentlemen. Thank you for joining. I am Maria Tiidus, the Head of Communications in Tallinna Vesi, and I welcome you all today's Tallinna Vesi's webinar. This webinar will be hosted by Aleksandr Timofejev, Chief Executive Officer; and Taavi Groon, Chief Financial Officer. Firstly, Aleksandr Timofejev and Taavi Groon will introduce the highlights of the fourth quarter and 12 months of 2022. The presenter will also speak about Tallinna Vesi's operational and financial results of the fourth quarter and also of the whole year. Aleksandr will give an overview about some of the investments made in the fourth quarter and in 12 months 2022. Right after the presentation, you will have the opportunity to ask questions. It is also possible to type in your questions during presentation, but this will be answered in the end part of the webinar. [Operator Instructions]. Now I will give over to Aleksandr and Taavi. Here you go. Thank you.

Good morning, everyone. I'm happy to welcome you today here in our webinar. Here are some of the highlights from 2022. The services agreement signed with the city of Tallinn upon the privatization of AS Tallinn Water expired at the end of 2022. The new administrative contract with the city was entered into the period of 1st December 2022 to 30th November 2032. The new administrative contract is aimed at ensuring high-quality water services for city residents and entrepreneurs. The preparation of Tallinn public water supply and sewage development plant for the next 12 years is also currently under way. The aim of that document is to set a direction for the development of the water sector in Tallinn, and it will also be the framework for the preparation of a development and investment plant of Tallinna Vesi. In addition to investments in the well-functioning water and wastewater treatment and water and sewage network, we have taken action to reduce company's environmental impact. Today, all that energy used at our facilities and in treatment process is already from the renewable sources. In 2022, we prepared a climate impact reduction plan for the company and set ourselves several ambitious targets. We aim to grow investments in fixed assets to secure sustainable infrastructure and continuity of service. In 2022, we invested EUR 25 million in our capital assets, increasing, amongst our things, the volume over reconstruct water pipes and sewers to 19 kilometers. In 2022, a number of ongoing projects continued, such as a reconstruction of effluent outlet tower, [indiscernible] reconstruction works in the main pumping station at Paljassaare and reconstruction of air tanks. In addition, a new point of reception for sewage sludge from septic trucks was completed and the new raw sludge thickeners were installed at Paljassaare. Watercom delivered more sales and profit in 2022 than ever before. For the first time, the biggest contribution to external profit came from road construction activity. In 2022, the company successfully launched a new manhole repair service, and at the end of the year, an ice-pigging equipment was delivered, which allow us to clean the water pipes by applying the most innovative technology currently used in Northern Europe. Tallinn Water started with smart meters installation in the third quarter of 2022. There have been difficulties with supply of meters because of the lack of chips. By the end of 2022, approximately 4% of our customers got new smart meter. By the end of 2023, the company plans to install smart meters to 40% of our customers. We continued cooperation with 3 Tallinn universities and trade schools, under which 13 scholarships were awarded to support active students specialized in areas related to the company's core business. In 2022, AS Tallinna Vesi representatives took part at Expo 2020 in Dubai in Water Business Forum and opened to the public history about AS TV's 30-year success. In December 2022, company organized water day event for partners. Event took place at Ülemiste treatment plant. It was possible to watch event also online. Presentations and discussions were related to the climate improvement, challenges of water business and customer expectations. I'll go to the investments now. We constantly put an effort to improve our vital services. In 2022, we carried out investment projects for EUR 25 million. In 2022, a number of ongoing projects continued such as construction of affluent outlet tower, receiver reconstruction works in the main pumping station at Paljassaare and the reconstruction of air tanks. In addition, a new point of reception sewer sludge from septic trucks was completed and the new raw sludge thickeners were installed. We significantly increased investments to water and waste towards networks. In total, we renovated over 19 kilometers of pipes last year. This is more than any of our previous years over the past decade. The pipes were renovated on Järvevana Road, Sõle Street, Linnamae Road, Raba Street, residential [indiscernible], in [indiscernible] and streets. Renovations made will help to secure a reliable water supply for a large number of Tallinners. 2022 saw the reconstruction of [indiscernible] pumping station, the installation of UV equipment in several pumping stations and the reconstruction of pipelines, allowing additional [indiscernible] of water in the water network. Our capital investments into the network ensured uninterrupted water and sewages and reliability of water supply to consumers also in the future. A little bit about operation results. The company operation results in 2022 were very good. The quality of drinking water in Tallinn was excellent, being 99.84% compliant with all requirements. We took a total of 3,086 water samples from our customer taps during 2022. Top level tap water was ensured by an effective water treatment process, continuous preventive maintenance works in the water network and investments made in recent years in the water pumping stations. In the fourth quarter, [indiscernible] equipment was delivered to Tallinn and maintenance of water pipeline started already in December. Wastewater treated at the Paljassaare wastewater treatment plant also maintains a high level of quality being again fully compliant with all the set requirements to us there. The significantly lower indicators of pollutants are a proof of excellent quality of effluent discharge to the sea and the good work of our teams. Our goal is to deliver high-quality service to our customers. And within 12 months, our customer satisfaction was 4.3 points out of 5, which is a very, very good result. The leakage rate in the last quarter of 2022 was 15.3%, which is lower rate to the same period last year. In 2022, the leakage rate in overall was 16%. We've always tried to disturb our customers as little as possible, and we do everything to supply our customers with drinking water. The average water interruption per property last 3 hours and 12 minutes were shorter than in 2021. In terms of enhancing the reliability of water supply service to our customers, within the last 12 months, we have reconstructed over 19 kilometers of pipes. Now I will give over to Taavi, who will go into details about the financial results. Thank you.

Thank you, Aleksandr. I will now give a short overview of the financial performance of Tallinna Vesi in the fourth quarter and for the 12 months of 2022. Let's start off with a quick comment on latest economic forecast. Estonian Central Bank forecast finds that consumption will be reduced by higher inflation and the profitability of the companies will decline. The economic -- economy is expected to grow a little during this year but mainly because of increased spending by the public sector. Inflation will continue to fall but remain on the high side, dropping a little below 10% in 2023. These trends have and will continue to affect our operations and financial results. Compared to the fourth quarter in '21, the total sales revenues increased by 7%, amounting to EUR 16 million. In 12 months, the sales increased by 2% to EUR 54.6 million. In both periods, the sales were mainly impacted by higher water service revenues while construction revenues were decreasing. The gross profit for Q4 in '22 was EUR 4.5 million, down by 6% or EUR 3.5 million compared to the same period in '21. In 12 months, the gross profit decreased by 18% or EUR 3.7 million. The gross profit was mainly impacted by a higher cost of goods and services sold, which was close to fully balanced by higher water service revenues. In Q4 in '22, the operating profit was EUR 2.8 million or EUR 0.6 million lower than in the same period in '21, being mainly impacted by changes in gross profit and higher administrative and marketing expenses. In 12 months, the operating profit was EUR 11.3 million or EUR 7.5 million lower, reflecting the same trends as in last quarter and accompanied by freezing the change of provision of the possible third-party claims in Q4 2021. In total, the reduction in the provision in '21 amounted to EUR 3.6 million. Compared to the fourth quarter in '21, the net profit of the company was EUR 2.4 million or EUR 0.8 million lower being mainly impacted by change in maintenance but also by increase in interest expenses due to changes in EURIBOR rates. In 12 months, the net profit was EUR 8.4 million or EUR 7 million lower compared to the same period last year. On the next slide, I will comment on the changes in revenues and expenses in more detail. Total sales revenues for the fourth quarter of '21 increased by 7% amounting to EUR 16 million. In 12 months, the sales increased by 2% to EUR 54.6 million. In the fourth quarter, the total revenues from water services were -- by 13% or EUR 1.6 million higher than in the fourth quarter of '21 and amounting to EUR 13.5 million in total, resulting mainly from tariff increase starting from 1st of October 2022. In 12 months, the sales of water services increased by 9% or EUR 3.8 million driven by changes in tariffs, higher commercial customer consumption and storm water revenues. In the fourth quarter, the private customer revenues in main service area increased compared to the same period in '21 by 20% to EUR 6 million being mainly driven by increase in tariffs. In 12 months, the private customer revenues increased by 3% to EUR 20.8 million. In the fourth quarter, the commercial customer revenues in main service area increased compared to the same period in '21 by 12% to EUR 4.3 million driven by increase in consumption accompanied by tariff increase effective from 1st of October '22. The sales to commercial customers were impacted by higher consumption of hotels and spas, rental services and ports. In 12 months, the commercial customer sales increased by 16% to EUR 6.7 million, being affected by the same factors as mentioned in relation to fourth quarter. Construction Services showed in the fourth quarter a decrease of 15% or EUR 0.4 million and amounted to EUR 2.4 million. Accordingly, we're also down construction -- related construction services costs. On an annual basis, the Construction Services revenues were down by 34% or EUR 2.5 million, totaling EUR 4.8 million for the period. Decrease was mainly related to lower pipe construction revenues won on the market, accompanied by lower volume in the first 9 months in the road construction. The latter impacted by postponement of procurement from public sector due to uncertainty on the markets. Next, let's take a look at the costs. The total cost of goods sold increased by 14% or EUR 1.4 million. In Q4 amounting to EUR 11.5 million. In 12 months, the increase was 15% and amounted to EUR 37.7 million. Total production costs increased in fourth quarter of '22 by 29% or EUR 0.9 million primarily due to higher electricity costs. In 12 months, the total direct production costs increased by 58%, amounting to EUR 13.6 million and were impacted by the same factors, higher electricity and other variable costs. Electricity costs increased close to 2x due to an average 62% higher electricity price. Chemical costs increased by 23% driven primarily by price of methanol. In the fourth quarter of '22, construction service costs decreased by 13% to EUR 1.9 million in 12 months the cost decreased by 37% to EUR 3.8 million. And we were related to lower construction services revenues I mentioned earlier. In the fourth quarter of 2022 salary costs increased by 14% to EUR 2.2 million. The cost increase also in 12 months was 14%, amounting to EUR 8.2 million and were mainly affected by salary increases of every staff member according to the company's salary policies and also filling of vacancies during the time period. Administrative and marketing expenses increased in Q4 of '22 by 17% to EUR 1.4 million and in 12 months by 4% to EUR 5.1 million, driven primarily by higher salary costs in both periods. In Q4 of '22, other net income and expenses amounted to a net loss of EUR 0.3 million compared to EUR 0.2 million in comparative period. In 12 months, the corresponding figure amounted to loss of EUR 0.5 million compared to net income of EUR 3.1 million in last year, and this being mainly driven by freezing of the change of provision in the possible third party claims in fourth quarter '21. Now let's take a look at the cash flows. As of 31st of December '22, the company's cash balance stood at EUR 12.7 million, forming 5% of total assets. Compared to the end of last quarter, the cash balance has decreased by EUR 4 million, mainly as a result of investments related cash flows. The biggest contribution to the cash flows comes from main operations during the 12 months of '22, total operating cash flows amounted to EUR 15 million which is EUR 7.4 million lower than comparative period last year. The company's collection of receivables continues to be high, being 99.85% on average. The net cash flows from investing activities during the 12 months of '22 resulted in cash outflow of EUR 19 million, which is EUR 8.2 million more than in the same period last year. The company's financing cash flows during the 12 months of '22 were EUR 19.9 million being on the same level compared to the last year same period. I will conclude my overview with this. And thank you for your time.

Thank you both for the presentation. And now we will proceed with the questions. And we have some questions in already, but we will also give you some minutes to submit your questions, and please feel free to type in any questions you might have. Thank you for the questions. And we will proceed with this in the order they have been received. The first question is by Sander Danil. And the question is, when and how much you expect to save in electricity costs in connection to the planned new CHP facility in Paljassaare. And Aleks, can you give an answer?

Yes. Thank you very much for the question. So the plan is that CHP engine will be installed by the end of 2023. So we believe that the engine starts to work at the end of fourth quarter. And if we speak about the savings, then our expectation is that during 12 months starting from the point when the CHP engine starts working, the company could save approximately 10,000 megawatt per hour energy.

The second question also by Sander Danil is, please explain 26% Y-o-Y increase in other cost of goods sold to EUR 2 million in Q4. Aleks, can you give an answer?

Yes. Thank you. So the biggest impact on our costs related to the heating and gas purchase for the heating of our assets.