AS Tallinna Vesi (TVE1T) Earnings Call Transcript & Summary

Hello, ladies and gentlemen. Thank you for joining. I am Marta Kuningas, the Communications Specialist in Tallinna Vesi. And I welcome you all in today's webinar. This webinar will be hosted by Aleksandr Timofejev, CEO; and Taavi Gröön, CFO. Firstly, Aleksandr Timofejev and Taavi Gröön will introduce the highlights of the second quarter of 2023. The presenters will also speak about Tallinna Vesi's operational and financial results for 6 months. Aleksandr will give an overview about some of the investments made in the second quarter of 2023. Right after the presentation, you will have the 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. [Operator Instructions] Now I will hand over to Aleksandr and Taavi. Here you go.

Good morning, everybody, and welcome to our webinar. The company's financial and operational results of second quarter are very good. Together with Taavi, we will cover them during this meeting. There have been no working incidents in the company during second quarter. Our teams worked a lot to keep safety on our sites. Tallinna Water has entered into the loan agreements totaling EUR 131 million. EUR 40 million of loan agreement was concluded with the Nordic Investment Bank. A syndicated loan agreement in the amount of EUR 91 million was concluded with SEB Pank, Swedbank and OP Corporate Bank. The signed loan agreements will finance Tallinna Water investments in the years 2023, 2024, 2025. The company's investments will amount to EUR 35 million in 2023 and will be based on the company's business plan. We aim to grow investments into fixed assets to secure a sustainable infrastructure and continuity of service. In 2023, we already invested EUR 10.4 million in our capital assets. Company reconstructed over 14 kilometers of water and wastewater pipes. By the end of the year, we plan to renovate over 25 kilometers of our networks. In the 6 months of the year, the quality of tap water was excellent, with all the water samples taken meeting the strict standards for water quality. Wastewater treatment at Paljassaare wastewater treatment plant outperformed all legal requirements as well. Tallinna Water operates today over 40 public water taps in Tallinn. We offer free-of-charge drinking water at all big public events in Tallinn. In June, we provided more than 100,000 liters of drinking water at 13th Youth Song and Dance Celebration in Tallinn. This year, in addition to the usual maintenance work, we started cleaning the water pipes by using a modern ice pigging method that is still very new to the Nordic countries. During 6 months, our teams cleaned over 70 kilometers of water pipes with ice. This is 50% of the annual plan for this year. Ice pigging technology was introduced to other water utilities by Watercom at the Baltic Water Utilities Conference (sic) [ Baltic Water Works Conference ] in May. This year, in May, company was certified with a new ISO standard 27001 for information security management systems. Now we go to the operational update. So as I said before, the second quarter's performance was very good. The quality of drinking water in Tallinn was excellent, being 100% compliant with all the requirements done at Estonia. Company took 1,572 water samples from customers' taps during first 6 months. Top-level tap water was ensured by an effective water treatment process, continuous preventive maintenance works in the water network and investments made in the recent years in the water pumping stations. Wastewater process at Paljassaare wastewater treatment plant guarantees a high level of quality as well. Treated wastewater was fully compliant with all the requirements. And significantly lower indicators of pollutants are a proof of the excellent quality of effluent discharged to the Baltic Sea. During first 6 months of this year, Paljassaare wastewater treatment plant helped to reduce Baltic Sea pollution a lot. 355 tons of screenings, almost 90 tons of sand, 940 tons of nitrogen and 126 tons of phosphorus was taken out from the wastewater during the treatment process. The level of water losses is low as well. In the second quarter, it was 13.62%. We always try to minimize disturbance of our customers and do everything to keep water supply 24/7. The average water interruption per property was 2 hours and 29 minutes, which is shorter than last year. In terms of enhancing the reliability of water supply service to our customers, within the 6 months, we have reconstructed over 14 kilometers of pipes. A lot of sites have been rehabilitated using no-dig method. Our goal is to deliver high-quality services to our customers, and within 6 months, our customer satisfaction was 4.0 out of 5. Average customer service score was affected by the feedback regarding self-service and the network's activities in the second quarter, especially by the emergency at Rõugu Street. If we move on to investments, then I have to mention that Tallinna Water provides water services for 0.5 million of consumers. It is very important for us that we deliver stable and quality water service to all our customers. By the end of second quarter 2023, we carried out investments projects for EUR 10.4 million. This year, works will continue on Vana-Kalamaja, Jõe and Pronksi streets. Rehabilitation of pipelines has already started on Rahvakooli Road, Rebase and Naaritsa streets, Punane and Smuuli streets in Lasnamäe, using no-dig methods in the Mustamäe area to minimize the disturbance for local citizens and traffic. Our capital investments into the network ensure uninterrupted water and wastewater services and reliability of water supply to consumers also in the future. At the water treatment plant, the reconstruction works are currently underway on the filters. Shortly, we'll start with the reconstruction of switchboards. Preparations are ongoing for the reconstruction of the clarifiers and the fish ladder in Vaskjala. Main constructions at Paljassaare wastewater treatment plant of digesters, installation of a cogeneration plant and reconstruction of aeration tanks are ongoing. Major design contracts have been concluded for design of screens at the wastewater pumping station and reconstruction of the screens at the wastewater treatment plant. All these investments will help to improve our main processes and will keep Baltic Sea cleaner. Now I will give over to Taavi, who will go into details about the financial results. Thank you.

Thank you, Aleksandr. Now to a short overview of our financial performance in the second quarter of 2023 but, first, starting off with a quick comment on latest economic forecast. Eesti Pank finds that the Estonian economy is performing adequately overall, though the challenges have hit different sectors quite differently. GDP at current prices has shown -- has grown by around 30% over the past 2 years, but at the real values, the economy has been shrinking steadily for more than a year. Economic growth should start to recover in the second half of the year, and the inflation is expected to continue its downwards trajectory. It was down close to 9% in June, which is mainly a consequence of the leap in the first half of last year. The falling tendency but continued high level of inflation will also have impact on our financial performance. The gross profit for the second quarter in '23 was EUR 5.8 million, recovering by 31% compared to same period last year. The gross profit recovery is primarily impacted by higher sales revenue and underlying price adjustment caused by increase in cost of goods and services sold. The operating profit in Q2 was EUR 4.1 million, EUR 1.1 million higher than in the same period in 2022, being positively impacted by recovery in the gross profit, partly set back by higher administrative and marketing expenses. The net profit of the company in Q2 amounted to EUR 2.3 million, EUR 1.4 million above the same period in '22. Beyond changes in operating profit, the bottom line was impacted by increase in interest expenses and lower dividend-related tax costs. And now let's take a look at changes in revenue and expenses in more detail. The total sales revenue for the second quarter of 2023 increased by 18%, amounting to EUR 15.4 million. In Q2, the total revenue from water services increased 15% or EUR 1.8 million compared to the second quarter of '22. Increased sales were a result of adjusted water prices from 1st of October '22. Price adjustment, as mentioned, was prompted by higher costs. In the second quarter, the private customers revenues in main service areas increased compared to the same period in '22 by 23% to EUR 6.2 million, reflecting the change in water price -- water services prices. Commercial customers revenues in main service area increased compared to the same period by 4% to EUR 4.4 million driven also by price adjustment primarily. Construction services showed in the second quarter an increase of over 2x, amounting to EUR 1.4 million. A quicker pace of projects and increased revenue was -- has mainly been due to projects continued from previous year. Accordingly, construction services costs were also higher. And next, let's continue on to costs. The total cost of goods sold increased by 12% or EUR 1 million in the second quarter, amounting to EUR 9.6 million. Total direct production costs decreased in the second quarter by 4% or EUR 0.1 million, primarily due to lower electricity prices but set back by increased chemical costs. In the second quarter of '23, construction services costs increased in line with revenue by 2x to EUR 1.0 million and, as mentioned, were related to higher services -- construction services revenues. Staff costs increased by 19% to EUR 2.5 million. The primary factor influencing the cost increase was an average 9.5% salary adjustment accompanied by new hires to fill vacant positions. Depreciation increased by 22% to EUR 1.7 million driven by higher investments made in 2022 and '23. Administrative and marketing expenses increased in the second quarter by 19% to EUR 1.5 million driven by salary and professional services costs. Now let's continue on to cash flows. As of 30th of June this year, the company's cash balance stood at EUR 13 million, and forming the 5% of total assets. Compared to the end of last quarter, the cash balance has not significantly changed, increasing by EUR 0.1 million. The biggest contribution to the cash flows comes from the main operations. First half of '23, total operating cash flow amounted to EUR 11.5 million, which is EUR 3.2 million higher than the comparative period in last year. The company's collection of receivables continues to be high, being 99.8% on average. The net cash flows from investing activities during the 6 months of 2023 amounted -- resulted in a cash outflow of EUR 8.7 million, which is EUR 2.6 million more than in the same period last year. During the first half of '23, the company, as Aleksandr -- I'm sorry. The company financing cash flows amounted to EUR 2.4 million, which is EUR 12.8 million lower compared to the same period last year. This decrease was influenced by reduced dividends and increased debt. And as Aleksandr mentioned, during the second quarter, the company entered into loan agreements and established a financing structure to support our investment plans for the upcoming years. And the signed agreements encompassed the refinancing a part of existing debt in the amount of EUR 37.5 million. This concludes my short overview. Thank you very much for your time.

Thank you both for the presentation. Now we will proceed with the questions. [Operator Instructions] It seems like we don't have any questions. 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. Taavi Gröön and Aleksandr Timofejev, thank you for the overview. And thank you all for joining. Have a good day.