AS Tallinna Vesi (TVE1T) Earnings Call Transcript & Summary

Hello, ladies and gentlemen. Thank you for joining. I am Kristiina Tamberg, and I welcome you to today's Tallinna Vesi's webinar. This webinar will be hosted by Aleksandr Timofejev, CEO; and Taavi Groon, CFO. Firstly, Aleksandr Timofejev and Taavi Groon will introduce the highlights of the fourth quarter of 2024. The presenters will also speak about Tallinna Vesi's operational and financial results of the year. Aleksandr will give an overview about some of the investments we made in the fourth quarter of 2024. [Operator Instructions] Now I will hand over to Aleksandr Timofejev. There you go.

Good morning, everybody. Thank you for joining us, and I will cover fourth quarter of 2024, and we'll speak a little bit about the full year as well. So if we speak about our results, then they were great. In the fourth quarter, the sales were EUR 17.7 million. And also, if we speak about the net profit, then it was EUR 4.2 million. If we speak about the 12 months, then the net profit was EUR 13.28 million. If we speak about investments, then during last year, we invested into our assets approximately EUR 50 million. And in the fourth quarter, the part of this investment was EUR 16.1 million. Drinking water was on a very high quality. And in the fourth quarter, our result was 99.5%. And if we speak about the full year, then it was 99.6%. So we took more than 3,000 samples from customers' tubs and only 12 samples were not according to the standard. I have to say that in the fourth quarter, we had one working accident in our subsidiary, Watercom, when on the construction side, the employee's hand was injured. Today, he is back to work, and we have made some changes in our procedures to improve health and safety on our sites. One positive aspect is that at the end of 2023, we installed 2 CHP engines that produce electrical energy and also heating power for our plant. And in 2024, we produced more than 8 gigawatts of electrical energy during the year. If we speak about the fourth quarter, then it was 2.5 gigawatt hour of electrical energy. We covered 100% of our heating power at wastewater treatment plant using our biogas and also produced approximately 18% of the electrical power we use in the company by these engines. Wastewater treatment plant performed very well as well. We treated over 50 million cubic meters of water and our affluent was according to all the standards. We actually cleaned or treated the water better than the standards wish. And we also continued with our 5 years project, the installation of smart meters. So today, over 60% of our customers can use smart meters. And in 2 years, we will finish with that project. If we move on to the next slide, -- then I will cover a little bit investments we did. As I mentioned before, we invested approximately EUR 50 million in our assets. A lot of investments have been done in our network. During last year, we built 45 kilometers of pipelines in the city of Tallinn. So we reconstructed water, sewage and also storm water pipelines. You can also read from the slide the streets where we did some work. Our main aim is to do cooperation with the city of Tallinn and other utilities. A lot of sites were built together with Utilitas, the heating company of Tallinn and also a couple of sites have been done together with the gas company. If we speak about the plans, then we finalized the digesters reconstruction. So it gave us an opportunity to deal in the future with gas production. Our aim is to increase the biogas production at the wastewater treatment plant. So it will give us an opportunity to produce more energy; heating energy and also electrical energy. We do some reconstructions at the water treatment plant of Ülemiste, so we reconstruct the clarifiers and filters. And of course, the main project for this and the next year is the reconstruction of the ozonation treatment. So the design is almost ready. It should be concluded in this quarter, and then we will move on with the procurement and the direct construction of ozonation. We also started last year with the reconstruction of secondary sedimentation tanks in the wastewater treatment plant. This was a huge investment. Approximately EUR 9 million will be spent to reconstruct 12 of the secondary clarifiers. By today, 2 of them are completed and 10 are waiting for the reconstruction in 2025 and 2026. Of course, one important project that has been completed at the beginning of this year, but what we did work during last year is the SCADA change in the wastewater treatment plant. So starting from this year, we also use the new SCADA system that is more protected from the cybersecurity and give us an opportunity to visual better our processes. If we move on to the next slide, then in here, I will conclude the operational results from the last year. So as I mentioned before, the water quality was great. The leakage rate, if we speak about the fourth quarter, then it was 12.67%. But if we speak about the full year, then it was 13.67%, that is very good for the size of the city Tallinn is. Our wastewater is treated according to all the standards. And it is very important to say that the customers are also satisfied with the service we provide to them. So our teams do a lot of work to improve our customer service and customer experience. We are happy to get feedback from our customers. And if we speak about last year, then our result in the fourth quarter was 4.2 out of 5. That is very good. During this year, we have also some plans, how to improve the customer satisfaction and we do a lot of work together with our customers to improve that. The average duration of water interruption in the fourth quarter was higher than last year. It is related to some emergencies that took longer to repair them. And if we speak about the full year, then it was on the last year's average. The rehabilitation of the networks is according to our plan. So this year, we reconstructed 45 kilometers of pipes. This is the aim what we achieved during [indiscernible] years. So our idea or our aim target is to reconstruct approximately 40 kilometers a year. This will give an opportunity to keep the network in a good shape and not to move to the older side. Now I will give over to Taavi, who will speak about finance in details. Thank you.

Thank you very much, Aleksandr. Welcome, everyone, who has joined us live. And in the next slides, I'll give an overview, as Aleksandr and Kristiina said, about our financial activities. But first off, starting with volumes of water and wastewater. Then the first quarter very much followed the same trends as we see on an annual level. We have seen in the fourth quarter and also for the full year that business customer volumes have slightly decreased. There are some changes in customer behavior, but we see that this decrease is small, and we feel that with the improvement of the economic environment, there will not be any sudden changes in business customer water consumption for the future. At the same time, private customer sales volumes, both in the fourth quarter and also for the full year have slightly increased, so have the outside service area volumes, outside service area being other water companies within Tallinn area or outside. In private customer segment, we see that the increase is coming from the residential buildings. So it's natural consumption volumes from consumers. But it is a slight increase as we see year-by-year in customer consumption, mainly due to the intensity of habitation and how the population changes in Tallinn and neighboring areas change. And for the future, we see that those slight adjustments in consumption will continue. And in overall terms there, we don't expect any sudden changes in the sales volumes of our business. Next, let's take a look at the revenue side. For the year 2024, we had a significant change in pricing from the 1st of July, 2024. So it's primarily affecting third and fourth quarter, and we can see the changes compared to last year fourth quarter in private customer volumes where the sales revenue has increased, but also in the business customer volume where the sales revenue has decreased. And this is a result of the regulation that requires that pricing for private customers and business customers has to be on the same level. And now in last year and in the next price adjustments, this gap between private and business customer pricing will decrease. The same trends can be observed for the full year. Private customer revenues have increased and business customer revenues have slightly increased. And also, there is an increase in outside service area revenues. The price increase in itself, in total, is primarily driven by investments that we have made in our business to ensure reliability and quality of our services and also to protect the environment. Now next, taking a look at our cost side in the fourth quarter. We see that direct production costs for the fourth quarter have decreased by 11%. This is summarizing the chemicals and electricity, while chemicals have slightly increased, and it's a combination of how much chemicals are in use, but also the pricing that is slowly increasing in -- for the chemicals that we use in production process. At the same time, electricity has decreased, and this is very much a result of the electrical energy that we produce ourselves in the CHP, the combined heat and power engine in our wastewater treatment plant. Electricity price, in addition to our own production, is also supported by lower average price compared to last year. So it's both positive trends have an impact on the Q4 direct production cost. We have 8% increase in staff cost. There is 2 components affecting that. One is salary adjustment, but also new positions required to maintain our services. Construction costs have increased in the total cost portfolio, and this is directly tied to the construction revenues. So it's a correlation depending on how much construction services are provided and how much construction cost occurs. Total production cost was EUR 10.3 million. And as mentioned, an increase compared to 2023. Now moving forward, looking at the net profit level, we have a significant increase in net profit compared to 2023. Net profit for the quarter amounted to EUR 4.2 million and it is foremost a result of price change. Price change, as mentioned, was necessary to continue and reflect the investments that we have already made, but of course, also to cover the cost increases. Cost of goods sold is a decrease on net profit level as we can see. And administrative and marketing expenses have increased by 0.2 -- sorry, cost of goods sold has increased, decreasing the effect of prices changes. Price change was driven partly also by cost changes. And marketing expenses increased by around roughly EUR 0.3 million and very much affected by the services that we outsource primarily related to professional services. And on an annual level, our profit level was slightly above 2023, around EUR 0.4 million higher, resulting in a EUR 13.3 million net profit for the 2024. Now taking a quick look on the next slide on the cash flows in fourth quarter. We can see that our investment activities in the fourth quarter were active. That is very much related to the timing of the projects, very much of the infrastructure construction projects reached a finalization stage in the fourth quarter. The construction period will start again more with a quicker pace in second quarter, but the fourth quarter is a time period where many of the projects are finalized, also incurring as a result, the higher investing cash flows outflow. We have increased, slightly, our lending to finance these investing cash flows. Our cash position in the end of the fourth quarter was EUR 3.6 million. It is lower compared to the end of the last quarter. But as we have sufficient long-term facilities to finance our investing cash flows, we are optimizing the level of facilities that we use and are not maintaining a high cash balance. Our long-term facilities provide sufficient credit lines to cover our investing cash flows and operating cash flow. And finally, taking a quick look on the investment portfolio. In '24, it reached up to EUR 50 million. The investments that we made in 2024 are already reflected in the price change that occurred from 1st of July. And as we've also indicated that the estimate for 2025 is EUR 61 million. It's an investment amount in the same range that we estimated in 2024. But there are, of course, certain overflows postponements of projects. So the implementation over the -- throughout the year would show how much impact the investments will have on cash flow during the year. The estimate includes the investments that we do also into our regulated asset base -- regulated asset base, the investments that have an effect on regulated asset base amount roughly to 85% of the total investment volume. And these changes will be applied to regulated asset base and pricing after the price procedure and after approval of competition authority and the process is ongoing. There is -- at this time, there is no clear deadline for the next price application and when it will be approved and applied, but the process is ongoing. With these remarks, I say thank you very much to everyone. And I'll give the word back to Kristiina. Thank you.

Yes. Thank you both for the presentation. And now we are going to proceed with the questions. [Operator Instructions] So it seems that we don't have any questions right now, but recording of the presentation will be available in the Tallinna Vesi's YouTube channel webinar playlist shortly and presentation materials and reports can be found on Tallinna Vesi's web page. Taavi and Aleksandr Timofejev, thank you both for the overview, and thank you all for joining us. Have a good day.