AS Tallinna Vesi (TVE1T) Earnings Call Transcript & Summary

Hello, ladies and gentlemen, thank you for joining. I am Triin Veermae, and I welcome you all today's Tallinna Vesi's Webinar. This webinar will be hosted by Aleksandr Timofejev, CEO; and Taavi Groon, CFO. First, Aleksandr and Taavi will introduce the highlights of the first quarter of 2024. The presenters will also speak about Tallinna Vesi's operational and financial results for the first 3 months. Aleksandr will give an overview about some of the investments made in the first quarter of 2024. Right after the presentation, you will have the opportunity to ask questions. It is also possible to type in your questions 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.

Thank you, Triin. Good morning, everybody. Today, on our webinar, we will cover the financial and operational results of Tallinn Water. And if you have any questions, as Triin mentioned, you're just welcome to questions and we'll try to answer on that immediately. So let's move on. And if we speak about the first quarter, then for Tallinn Water the quarter was good. Our operational results were fine. And if we speak about the financial results, then we can see 2% increase in sales. It was connected with the higher consumption of our services, water, wastewater and storm water. And despite that factor, but sales were higher and the net profit still fell down to EUR 3.01 million, and this is related to the increase in the interests. And if we speak about investments that company made, then we'll try to do everything to keep our services on the highest level. During the first quarter, we invested [ EUR 6.65 million. ] And during this year, we plan to invest over EUR 50 million in our assets. Our operational results were great. If we speak about the drinking water, then the quality was on a very high level and all samples we took from the city were according to the standard. Also, wastewater plant was working very well, and we treated all wastewater according to all regulation needs. So 100% of our effluent was according to the standard as well. On our previous webinars we shared information, but at the end of September 2023, we submitted our obligation to the Competition Authority to change their water tariffs. And the application is still in Competition Authority, and we expect the decision soon. Let's move on to the next slide, and I will cover a little bit more investments. So as I mentioned before, over EUR 6 million was invested during the first quarter. A lot of work has been done in the city. So we did construct a lot of pipelines. Some streets are also added to the slide and during this year, we plan to reconstruct some more. So during the first quarter, 80% of the pipes we built in total, it was 5 kilometers and 4 kilometers of that was due to the Nordic method. And by the end of this year, we plan to construct over 40 kilometers of pipelines in the city of Tallinn. Of course, there are some reconstructions of the pumping stations, and we invest a lot in our assets that are situated near Ülemiste Lake and also at Paljassaare wastewater treatment plant. So in Ülemiste water treatment plant, we do a lot of work with clarifiers, we also do some reconstruction in our catchment area in Kaunissaare. We continue also with digester second construction project. As you know, last year, we reconstructed the first digester and the second is at the moment under the reconstruction. So by the end of the year, both methane tanks of the digesters will be fully constructed. And due to that, we expect to increase the volume of biogas, which produced from the wastewater sludge. And of course, this will help us to produce more energy and more heating power. We also almost finished with a project of cogeneration plant. So we'll produce today not only the heating power but also electricity. And this helps ourselves to save costs on the energy and heating. So, as was mentioned in the media, we also signed the contract for the construction of the biological treatment. We start the 3 years project that is related to the biological treatment, final stage reconstruction. We will reconstruct our sedimentation -- secondary sedimentation tanks, and this will help us also to treat in the future wastewater in the better way and we'll increase the contingency of our processes. If we will move on to the next slide, then I will speak a little bit about our wastewater operational results. As I said, the water quality in the city is very high, 100% of samples which is from the city were according to the regulation. In total, we took from the city 774 samples. And also at the end of April, we opened over 16 drinking taps in the city of Tallinn. So our citizens and guests can get portable water from the public taps. The wastewater treatment plant worked very well as well. So our effluent parameters set were lower than the limits. If we speak about the volumes, then we took out from the waste water over 150 tons of screenings, 60 tons of sand, almost 500 tons of nitrogen and over 60 tons of phosphorus. So this shows that our treatment plant works very well, and this is very important for the Baltic Sea and for the environment in total. If we speak about the network operations, then the first quarter showed that the investments did we in the previous years were in the right places. So the leakage rate in the first quarter was 16.55%, if we compare it with the last year, then it is better and we continue to reconstruct our pipelines according to the plan, our engineers put together. The average duration of water interruption per property also dropped down during the first quarter, if we compare with the last year. And I think that our customers can be happy about that. The customer satisfaction in the first quarter was on the same level as last year, and we try to do everything to improve the satisfaction of our customers by implementing different technologies and improving our everyday's business. By today, already 50% of our customers have smart meter. And of course, we all try to get from our customers' feedback to improve our daily processes. And as was that mentioned before, the regulation of the network is according to the plan. And by the end of the year, we plan to build over 40 kilometers so far water and wastewater networks. I will hand over to Taavi, who will cover the finance results, and I will be happy to answer to your questions if you have them at the end of the presentation. Thank you.

Thank you very much, Aleksandr. Now let's take a look at the financial highlights. We've also stated in our reporting quoting to Estonia, Eesti Pank, that financial macroeconomic financial situation remains bleak, but there are signs of recovery, not positive growth for this year, but expected for coming years. But we see some positive aspects also in our business, as Aleksandr already mentioned. Sales increased by 2.3%, primarily driven by higher service revenues. It was somewhat set back by lower construction revenues, which needs to be considered as a very seasonal business. Cost of goods sold did not have an impact on net profit for Q1 comparing to Q1 previous year. And this is primarily due to lower variable and direct production costs. We have seen prices stabilizing for direct production costs and in electricity, also decreases. These are mitigating the increases in administrative and marketing costs to some extent, because outsourced services and salary costs still have a high pressure and marketing and administrative costs also increased for Q1, having a negative impact of EUR 0.2 million on the net profit. Most significant impact, as I already mentioned, the net profit of Q1 comes from financial expenses. I mean, interest expenses connected to our lending and the changes in base rate, which for our loans is Euribor. Now taking a look at volumes and revenues, as mentioned, we saw an increase in water services, private customer volumes and revenues increased most significantly. Business customer revenues stayed on the same level. And so that outside area of services related to water and sewage and storm water. Private customer increased volumes and revenues are primarily connected to apartment building consumption. Now taking a look on the next slide. We -- I'm summarizing the impact of -- on total cost of goods sold. The level of total cost of goods sold remained on the same level as last year in the same quarter. And here, we see a little bit more detail some of the aspects that already we have been mentioned. First half direct production costs showed a decrease, we see that variable cost prices and usage has stabilized, primarily, this is a question of pricing. Electricity costs have decreased. This is a combination of different aspects. Price consumption used in production and also the amount of electricity that we are producing in our CHP. On staff costs, we see an increase for the first quarter, which is quite significant, 14.9%. This is due to average increases in salary, but also new hirings as we had a number of vacancies in Q1 '23, which were filled during the year. Some negative impacts also from depreciation costs, but this is directly related to our investments and is part of also of our higher asset base. Construction costs are lower compared to last year, but this is connected directly due to lower construction revenues and thus construction services that are outsourced are lower. And we end up at the same level EUR 8.9 million as in Q1 2023. Now let's take a brief look at our cash flows. In Q1, end of Q1, we -- our cash balance ended at EUR 14.5 million, which is around 5.1% of total assets. This meaning that, the cash balance more or less stayed at the same level as it was at the end of the year. And you can see that our investing cash flows matched our operating cash flows. So our financing cash flow requirements were significantly lower for the first quarter. This is expected to change as the investment base in following quarters will increase. And our net change in tangible assets was EUR 4.5 million, increasing to -- close to EUR 262 million. And to take a look at also our investment volumes, we have stated that '24 target is up to EUR 62 million. In the recent years, we have notably expanded our investment activities. It's very much connected to focusing on future growth in our assets and majority of those investments are directed into water and network reconstruction and development projects. Almost 1/3 of our investments is focused this year on treatment plants, water treatment, and wastewater treatment plant. And thirdly, we have a significant part of storm water, new storm water network development, which is done in close cooperation with Tallinn City. All of the network construction and reconstruction projects are planned together with Tallinn City and whenever possible, together with other utility companies to mitigate the cost impact of all the services, utility services and also to have a minimal impact -- minimal interruptions and disruptions in the city as network will speed constructions, usually involve closing of roads or streets. And to conclude, a quick look at our dividend proposal, which will be submitted to the Annual General Meeting of Shareholders. We have stated that our dividend policy is to distribute up to 80% of net income proposal for the general meeting is to distribute EUR 0.51 per share, and it accounts for 79.4% of 2023 net profit. The Annual General Meeting is held on the 30th of May. This concludes my summary of the financial highlights. And next, I'll give us a word for summarizing to Triin.

So thank you for the presentation. Now we will proceed with the questions. [Operator Instructions] So seems like we do have one question and it's from [ Hilary. ] And the question is, what is the new storm, what is the network in development?

Well, if we speak about the Tallinn City, then in the city of Tallinn today partly the wastewater network is combined and partly it is fully separated. So it means that the storm water goes from the streets straight to the sea. Today, when the city of Tallinn or the Tallinn Water reconstructs the assets under the street. And on this street, there is no storm water system, then we built an additional storm water pipe under the street. So it helps in the future to direct the storm water from the streets in a quicker way. And more environmental friendly manner. So this water does not have to be treated at the waste treatment plant. So less chemicals and energy goes for that. And if we speak about 2023, then already at the moment, for example, we construct such a pipe in Paavli Street and we believe that soon, there will be a start of the reconstruction works on [ Jõe and Pronksi ] streets. And of course, some other streets will during this year.

Okay. Thank you, Aleksandr. We will give you one more extra minute to dive in your questions. It seems like we don't have any more questions. A recording of the presentation will be available in Tallinna Vesi's Youtube channel webinar playlist shortly. And the presentation materials and reports can be found on Tallinna Vesi's webpage. Taavi Groon and Aleksandr Timofejev, thank you for the overview, and thank you for all joining. Have a good day.

Thank you.