AS Tallinna Vesi (TVE1T) Earnings Call Transcript & Summary

Hello, ladies and gentlemen. Thank you for joining. I am Dreanna, and I welcome you all to today's Tallinna Vesi's webinar. This webinar will be hosted by Aleksandr Timofejev, CFO (sic) [ CEO ]; and Taavi Groon, Chief Financial Officer. First, Aleksandr Timofejev and Taavi Groon will introduce the highlights of the fourth quarter of '23. The presenters will also speak about Tallinna Vesi's operational and financial results of the first 4 months -- of the first -- of the last 12 months. Aleksandr will give an overview about the sum of investments made in the fourth quarter. Right after the presentation, you will have the opportunity to ask questions. [Operator Instructions] Now, I will hand over to Aleksandr and Taavi.

Good morning, everyone. Welcome to our webinar. Our results were very good. And if we speak about the financial and operational results of fourth quarter, then I can confirm that these were excellent. Me and Taavi will cover the details during the presentation. In the fourth quarter, the group's total sales were EUR 15.52 million, showing a decrease of 3.1% or $0.5 million year-on-year. The group's net profit for the fourth quarter was EUR 2.98 million, being EUR 0.62 million higher than for comparative period in 2022. In the 12 months of 2023, the group invested into fixed assets almost EUR 35 million. In the fourth quarter, we took part in the Sustainability Festival Impact Day and opened the doors of our water treatment plant to the public as part of the architectural event Open House Tallinn. In 2023, we continued to maintain water pipes using the air-scouring technique. And at the beginning of the year, we also introduced ice pigging technique for cleaning water pipes. Using this technique, we cleaned 141 kilometers of water mains during 12 months. By the end of the fourth quarter of 2023, we had installed smart meters to 40.6% of our customers. The main advantage of smart meters is the speed and accuracy of data transmission as well as the security and reliability. Let's go to the investments. If we speak about the investments into the network, then by the end of the fourth quarter, we have reconstructed more than 27 kilometers of pipes. The largest reconstruction works in 2023 were carried out in Joe and Pronksi streets, Vana-Kalamaja street, Vilde and Akadeemia roads, Kuklase and Vaablase streets, Parna, Reinvaldi and Kuhlbarsi Street, Tehnika, Magasini and Punane Street, and on Smuuli Road. In the fourth quarter, the reconstruction work on the supply pipeline for the Lasnamae Booster pumping station and the intersection of Punned and Smuuli streets was completed, significantly increasing the security of supply in the area. Works were also completed on the large-scale chain house project with individual supply points being built for the apartment buildings in Lasnamae and Mustamae areas. The rehabilitation of the sims pipeline in Mustamae using trenchless technique was completed. We invested a lot also into water and waste towards treatment plants. The major projects carried out at the treatment plant in 2023 included the reconstruction of digesters and the installation of the cogeneration plant at the Wastewater Treatment Plant. The reconstruction of the filters of the B-house and reconstruction of the clarifiers of the A-house at the Water Treatment Plant was completed. The first phase of the reconstruction of digesters has been successfully completed with the first over 2 digesters being reconstructed and almost all components being replaced. Work will continue in this year as well. The installation of the cogeneration plant was completed towards the end of 2023. And while electricity and heat production have already started, finishing works and tests are still ongoing until the plant become fully operational. The operational results of the fourth quarter were very good. We continue to provide reliable water and wastewater services in the fourth quarter, as reflected by the steadily higher level of the quality indicators. During 12 months and the fourth quarter of this year, the quality of the tap water was excellent, meeting 99.9% of all quality requirements. Clean tap water has been ensured by the efficient water treatment process, regular monitoring and ongoing preventative maintenance work on the water network. In 12 months of 2023, wastewater treated at the Wastewater Treatment Plant at Paljassaare met all the established requirements. Pollutant parameters that are significantly lower than the limits required by the law is the proof of the excellent level of treated effluent. In 2023, we have taken 800 tons of debris, 203 tons of grit, 1,835 tons of nitrogen and almost 250 tons of phosphorus out from the wastewater. The customer satisfaction in the fourth quarter was at 4.0 points out of 5 and at 3.9 points for 2023 in average. In order to increase customer satisfaction, we have made several changes in the work organization. The level of water was -- in the water network has remained low in the fourth quarter of the year being at 11.35%, remaining also lower than in the same period last year. In 2023, the leakage rate was 12.93% compared to 16% last year. Tallinn Water notified almost all customers affected by an interruption at least 1 hour in advance. We can say that our best result for last year is 99.9%. The duration of the water interruption in the fourth quarter was 2 hours and 52 minutes. That is 8 minutes less than during the same period last year. As for the 12 months of the year, the average duration of water interruption was 15 minutes shorter than in the same period last year. To reduce the inconvenience caused by the water interruptions, we continue installing additional isolation wells on the network. By the end of the fourth quarter of 2023, we had reconstructed more than 27 kilometers of networks that will keep our results in a good shape. Now I will hand over to Taavi. Thank you.

Thank you, Aleksandr. I will now share some comments on our financial performance in the fourth quarter. But before that, just a quick comment on the latest economic forecast from Eesti Pank. The recession in Estonian economy is expected to last for longer than previously thought, mainly because of the Estonia's export markets are in relatively poor position and competitiveness has been lost. The forecast expects that the Estonian economy to shrink slightly in '24, but growth is expected to recover from 2025. And shrinking economy, we'll see unemployment rise a little next year, so people purchase purchasing power is expected to improve as inflation is backing off. The -- this deceleration in pricing increase directly also affects the company's profitability and has contributed to recovery during last year when comparing the conditions in 2022. The gross profit for last quarter in '23 was EUR 5.9 million, recovered by 31% compared to the same period last year. The operating profit in Q4 was EUR 4.1 million, recovering EUR 1.3 million compared to 2022. And the net profit of the company in Q4 amounted to EUR 3 million, which is EUR 0.6 million above the same period in 2022. Recovery is primarily impacted by a decrease in cost of goods and services sold, where electricity cost has the most notable impact and -- which is partly set back by higher administrative and marketing expenses, but the bottom line was also impacted by increase in interest expenses. Now moving on to changes in revenue expenses in a bit more detail -- the total sales revenues for the fourth quarter of '23 decreased by 3.1%, amounting to EUR 15.5 million. That decline in overall sales is attributed to a reduction in revenue from construction services, whereas revenue from water services witnessed a 4% increase. Water services constitute 90% of total sales. Private customers' revenues in main service area increased compared to the same period in '22 by 2.4% to EUR 6.2 million and were primarily driven by higher consumption. And business customers' revenues in main service area compared to the same period by 7.5%, also impacted by higher consumption as the price increase effected in Q4 2022 had already full impact on revenues, the changes are relatable to higher consumptions. And now moving on to cost. Total cost of goods sold amounted to $9.6 million in fourth quarter of '23, being lower by $1.9 million compared to the equivalent period in '22. The changes were influenced by lower direct production costs, particularly by lower electricity costs. Total direct production costs amounted to $2.95 million, showing a 22% or $0.8 million decrease compared to the equivalent period in '22. Salary costs have increased roughly 17% to $2.6 million due to annual adjustment -- annual salary adjustment, which was performed in Q1 and new hirings also for vacant positions and new positions. Depreciation increased by 14%, and it's related to higher investment volumes in '23. In the fourth quarter of 2023, construction service costs have decreased by almost 54% or $1 million related directly to lower construction revenue. Shifting focus from overall cost of goods sold to the administrative marketing expenses -- expense outlined in report Note 9 indicate a rise of 16.7%, equivalent to $0.23 million in comparison -- comparison of the fourth quarter of '22, rising in total by $1.6 million. This increase is primarily attributed to elevated salary expenses and rising external procured professional services. Next, let's take a look at the cash flows. As of 31st of December 23, the cash balance stood at EUR 14.7 million, forming roughly 5% of total assets. Compared to the end of last year, the cash balance has increased by EUR 2 million. The biggest contribution of the cash flow comes from main operations. During '23, the total operating cash flow amounted to EUR 24.5 million, which is EUR 9.5 million higher than in the comparative period of last year and reflects the recovery aspects mentioned earlier. The net cash flows from investing activities during '23 resulted net cash outflow of EUR 26.2 million, which is EUR 7.1 million more than in the same period last year. The company's net cash flows from financing activities during '23 resulted in a cash inflow of EUR 3.8 million, which is EUR 23.7 million more than in the same period last year, and it's related to additional financing acquired for the investments performed and ongoing investments in '23. And finally, let's take a quick look at the full year of 2023. On a gross profit level, the full year gross profit for the buyer in '23 was EUR 24.1 million, recovering by 42% compared to the same period last -- compared to 2022. The gross profit recovery was primarily driven by increase in revenue, the price adjustment that occurred in October 2022 and had a full year impact in 2023. Operating profit was EUR 17.4 million, EUR 6 million higher than in the same period. The recovery in gross profit was partly set back by higher administrative and marketing expenses. And administrative and marketing expenses increased $1 million compared to '22, amounting to EUR 6 million. The change is mainly due to salary cost adjustments and higher salary costs. Beyond changes in operating profit, the bottom line, of course, was impacted by increase in interest expenses, but also lower income tax costs compared to '22. And the net profit for the year amounted to EUR 12.8 million, which is EUR 4.4 million above the same period in 2022. This concludes my short overview. And 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 questions. Recording of the presentation will be available in the Tallinna Vesi's YouTube channel, webinar shortly. Presentation materials and reports can be found on Tallinna Vesi's web accounts. [indiscernible] Thank you for our review, and thank you all for joining. Have a good day.