Pennon Group Plc (PNN) Earnings Call Transcript & Summary

Welcome back, and thank you for your patience during the break. I will now hand the floor back to Susan Davy.

Thank you very much, Adam, and welcome, everybody, this morning. Thank you for joining us to discuss Pennon's Half Year Results for 2023, '24. As you will have just seen from the video, we have had a step up in investment across the group by some 8% to 7% compared to half 1 last year, very much investing not just for today, but in the future, making progress on the things that matter most to our customers across the regions that we serve, as well as the complementary investment that's going on with Pennon Power to grow the renewables support for the group. We're focused on customer priorities, protecting water quality and make sure we've got water resources in place to deliver clean, safe drinking water, [indiscernible] strong [ water flows ], eradicating pollutions protecting and making sure that we're supporting affordability for our customers, and you have seen that in the presentation, absolutely underpinned by a robust balance sheet and we've got stable gearing, set-leading, sufficient financing in play, and that all goes to support our dividend policy of CPIH plus 2%. So thank you for joining. We have members of the executive team here today. We've got Paul and we've got Steve Buck, who's joined and will be taking over from Paul at the end of December, and we've got John Halsall, who's our COO as well in the room. So there's many of us. So over to Q&A. Thank you very much.

[Operator Instructions] And our first question comes from Martin Young from Investec.

Good morning to everybody. I just wanted to echo Susan's best wishes to Paul. Thank you for everything that you've done over the years, Paul, and all the very best for the future. And then turning to questions, 2 of those. You have in your business plan, obviously, franchise a significant uptick in the level of investments in AMP8 versus what you have done in AMP7 and indeed, this is what you will do in the last couple of years of AMP7. Maybe you could say something around the preparation that you have done to make sure that the supply chain is lined up and ready to go on all of this. And then the second question relates to Thames Water, in their business plan they have effectively asked for a degree of special treatment, if you like. Water regulation is comparator based with penalties and rewards. If something is done to accommodate the request of Thames, what do you think should be done in order to make sure that the good performance in the space are treated on an equal basis?

Okay. So let's start with questions at Martin. So in terms of your first point around the step-up in investment -- capital investment, yes, we are ramping up in K7 and indeed, the ramp-up we've got for this regulatory period is almost kind of doubling if not a little bit more of CapEx delivery already compared to where we were 3 or 4 years ago. So when we talk about preparation and the ability to ramp up, we've already been doing that for this regulatory period. Yes, there's a little bit of a ramp up again for our business plan that we've put in. But to your point, in terms of preparation, we have already onboarded our new Tier 1 supply chain for delivery. We've had a kickoff mobilization, get together with those, and we are absolutely starting that now, in preparation for the new regulatory period. So the supply chain is in place, but it's not just the supply chain. It's about what we're doing with our teams, within the organization, and we have been ramping up in terms of employees to support the delivery that will be coming, as well as what we're doing now. And we've got our fantastic apprenticeship programs and graduate programs in place where we're getting new talent into the business and making sure that we are really ready for delivery for the K program. But I've got to stress, I think, Martin, we are doing it now. We are -- we've already ramped up -- we've already accelerated that investment. So yes, there's a little bit of election pick up for K, but actually, the big push has been now, and we're on with that. And then in terms of your second point around Thames Water and if the regulator intervenes and does something different with Thames Water, what does that mean for everybody. I mean I think we have a very robust regulator in Ofwat. They know what they're doing. They know that it's incredibly important to incentivize the sector. It is all about competitive positioning and making sure that we've got a regulatory framework in a regime that works. And I'm sure, as they have done in the past, they will do their job and they we'll do it well. So am I concerned about things that happen for one specific company? Not when you've got a good robust regulator who is able to make sure and have done for a number of decades, make sure we have got a robust regulatory regime in place. So it will be interesting to see what happens, but I'm sure the regulator will be able to work out how to make it work for the sector if there is any kind of intervention.

The next question comes from Sarah Lester from Morgan Stanley.

But of course, a huge congratulations first to Paul, this is your last results and a big welcome to Steve. I just have one question for you, Susan, please, but there are kind of 3 small parts to it. As we approach the end of calendar year 2023 and we look forward to 2024, I'm just curious, firstly, what excites you the most about the year ahead? Secondly, what are you most concerned about or say is the biggest challenge? And then thirdly, if there is one single message you'd like investors to take into 2024, what is it?

Well, Sarah, you really got it this morning. Okay. Thank you for those questions. So what am I excited about? Well, I am excited about the fact that we -- you saw it in the presentation, we've launched a number of initiatives across the group and then a crew that you saw in the presentation is something I'm really proud of, that we have delivered alongside the university. It's really exciting projects where we're bringing together the greatest minds to solve some of the biggest issues we've got and it's things like microplastics and its aspects of pollution that we really do need to investigate to the end results. So I'm very excited about the joint venture with the University of Exeter. So that's a definite exciting point given without this week. I think in terms of concern, I think I'm not concerned per se. We are getting on doing what we need to do. We're delivering. We understand what regionally is important for the communities that we serve. We've got our renewables business that can -- we are investing in to make sure that we can offset some of those risks on the wholesale energy market size. So I don't have concerns per se. We've got a good plan in place for the next year. We've got action plans and it was ready to make sure that we deliver. So no concerns from that front. Very much going to be delivering on our strategy. And then for 2024 and beyond, again, we've got a great plan in place and brilliant colleagues across the business to deliver it. So I probably disappointed you, Sarah, but I don't think there's anything that particularly concerns me and it's a question about just being able to get on and deliver what we need to do.

The next question comes from Dominic Nash from Barclays.

Thank you for the questions. I've just got a couple for me. Just following up from Sarah's question about what can excite you in 2024, Susan. And clearly, getting a 4-star EA score must be quite an exciting prospect. Can you just give us some color on how that is going and how confident you -- that we will get a 4-star rating for 2024? And second, I've got a question for you, Paul. Echoing earlier comments, well done. Thank you. Congratulations for your final set results. Now going back to the number of years that you've been CFO and involved in Pennon, is there -- if you go back in time, is there anything that you would have considered doing differently? And secondly, as in, what's been the most rewarding or most interesting thing that you think you done -- highlight of your time here?

Okay. Dominic, thanks for those questions. So EPA, we are really focused on getting the highest star rating, not for ourselves but for our communities and making sure that we're delivering. Just to be really clear as well, Dom, the 2024 assessment we will get in 2025 because obviously, it comes out after the year. And that's the 1 where we will be focused on getting that 4-star. I've always said it's not going to be a linear trajectory to get there. We have been working incredibly hard and John, who has joined us this year has been really making sure we've got sustainable action plans in place to deliver. Now the 2 focus areas for us to get to the EPA star ratings that we need to get to is around reducing our impact on the environment with pollutions and making sure from a resource position post the drought that we've got our resources back to where we need to get to. So perhaps if I talk about both of those on the pollution side, I'm pleased in terms of serious pollution numbers, they're down. If we look back to 2021, '22. They were much higher up around 8% or so. They have come down last year and this year that we've had one to date. Now one is one too many, and we want to get to 0, but I'm pleased with the trajectory on that measure. So the number of other pollutions that we have that are not the serious pollutions but indeed are serious in the sense of what that they do in the environment. We've had the trajectory of bringing those down at year-on-year, and we've taken 50% as of 2020 off the numbers. This year, we're probably going to have an outturn where we have a slight pick up on that, but it hasn't taken us away from the fact that we will get to where we need to get to next year. And we have the action plans to make sure that's back on track. So we are getting there with the pollutions and eradicating those. And then on the water resources side, and you'll see in the presentation, we're investing significantly to create more headroom, to create more resources, and that's one side of the coin. And the second side is making sure that we're supporting customers and we're being more efficient with the water that we use to reducing leaks and helping customers to reduce their leaks, as well as them -- encouraging them to use less water. And last year, we had the Stop the Drop campaign which worked really well for demand management, and we're looking at similar initiatives that can help us drive demand production. But again, we're confident that our resource position is recovering and will be recovered for that assessment for next year. So those are the 2 areas to focus on. And with that, I'll hand over to Paul for his question.

Okay. Thank you, Susan, and thank you for your kind questions, Dominic. And for everyone else has kind wishes so far, it's -- really thankful for that. That's so kind. In terms of things I might consider doing differently, it's a strange question, I'm not sure I've ever dwelled on it too much. But I suppose if I take a step back and look at where the sector is right now, there is a -- with my treasury hat on, there is a sort of side of me that wishes perhaps we have, as a sector done more investment in the past 10 years when rates and yields were lower rather than coming to it at this point in time when rates and yields are obviously in a very different place. But that's just a reflection on where we are as a sector rather than anything more specific. In terms of all the rewarding things that have happened over the time I've been here, obviously, there's been lots of landmark transactions not least building out and then ultimately selling Viridor, as well as the acquisitions of Bournemouth and Bristol and a lot of notable treasury transactions along the way. So there's always been a lot of interesting things that we've done. We've also been at the forefront of many things and working closely with Susan on pushing agendas like our sustainable financing framework, which is the first in the sector as well as achieving the fair tax mark again, the first water company to do so back in 2018. So those things do stand out for me. But obviously, my main highlight would be working with my fabulous colleagues, past and present over the 14 years I've been here. That's been the main thing for me.

[Operator Instructions] The next comes from James Brand from Deutsche Bank.

Also best wishes and thanks from me to Paul. I had a few questions on ODIs. So firstly, kind of highlight it, that you are third ranked in terms of your ODI performance in terms of the kind of -- I think the number of measures which you're outperforming on. But you have had, I think, net penalties from ODIs over this period. So just wondering why that was. Is there a few measures, even they're doing really well on a lot of measures. And there are some measures that has just gone very badly or relatively badly. Second question is, given you are performing, I think, overall, pretty well on ODIs and are getting that penalties over the period. I think that's a pretty clear sign that Ofwat has been extremely tough on its ODI targets for the industry in this regulatory period? And second question is, do you think there's any scope for their approach to get a bit easier going into the next period that you actually might have more companies that are able to outperform if they're doing well. And then thirdly, on ODIs, I don't think you said anything specific about kind of ODI rewards or penalties in the half or the full year. So just kind of wondering that you're on track to outperform on ODIs for this year?

Okay. Thanks very much for your questions, James. The first question, I think, was around ODI. Given our comparative position where are we in terms of that overall assessment and other specific measures that are kind of driving the overall position down. Now I think in terms of the ODIs appreciate in the presentation, there are a number of appendices. But in the appendices, I assure you there are a few tables in there that detail the ODI position. And you're right, there are a couple of ODIs that have been in penalty that are not as much in penalty as they were when we first got this regulatory period, but are still in penalty and I think that you might assume would be. So we've just touched on with the earlier conversation and the questions that we have in from Dominic around the EPA. So we are not where we wanted to be for our EPA assessments. We aren't going to get there, but we're not there yet. So obviously, we've got penalty for that, and we've got penalty at ramp of wastewater solutions performance, which obviously goes some way to explaining why we have the penalty, the net penalty position that we have. But there are things that have gone well. There are things that we are delivering on, whether it's the bathing water quality, which is incredibly important for our region or whether it's the catchment work, which again is incredibly important for water quality, which has been improving the water quality and discoloration position that we have relative to the sector. So there are areas where we have done well, but you're right in terms of a slight net penalty that's where we find ourselves. Now when you look at the -- I think your second question was the common performance metrics and where those are across the sector, obviously, if you look at companies, I think companies have really struggled on the common performance metrics to get into a net reward position. So I'm sure that's something that the regulator will be reflecting on. But having said that, it is important that targets are set to drivers and to make sure that we are delivering and incentivized to deliver for our customers. So I'm sure that is something that Ofwat will reflect some. I think the third point in terms of the overall numbers I think we're in a slight net penalty for the half year '23, '24. But I think as we said in the announcement, we don't anticipate the full year penalty being as high as it was last year. So I think we're about GBP 3 million for the half year. And last year, we were at GBP 10 million of penalty.

Next question comes from Hannah Avory from BNP Paribas.

I have a quick question on your tariff innovation comment. So you mentioned your pilot schemes that are going on and also conscious that you have quite a unique position in terms of the second home ownership being very high in your region. I was just wondering if you could talk a bit more about how the pilot schemes are going, which ones are looking the most promising? And then to what extent these kind of new changes to the tariffs or potential changes to tariffs rely on smart metering and kind of what your smart meter penetration at the moment. And with that in mind, kind of when we could see potential new tariffs being introduced?

Yes. Thanks very much, happy your question this morning. So a bit of first [indiscernible] really. I know other companies have looked at trialing different tariffs, but we're going out with a [indiscernible] suite of tax, tariffs that we're going to be trialing. We put that in the charge scheme for this coming year, so that we can understand what businesses that we can make and how we can support our customers. So there's a range of things we're looking at. And for our region, we are looking at seasonal tariffs. We're looking at rising block tariffs where you are charged a certain amount for a consumption level and then a high amount for a block use. Above that, we're looking at peak charging and we're looking at how we might incentivize our customers who come into the region to use less water as well. So lots of trials going on. And we're targeting -- you're quite right, some of those charges we want to make sure that it works in a really efficient way and smart metering helps us do that. So some of the trials are targeted at specific regions where we do have lots of users to the region. So North Devon, for example, about 1/3 of the customers now have got smart meters in place and that will help us encourage them to take part in our trial, take part in these pilots to understand which tariffs will help in terms of their affordability but also usage and demand. We had our Stop the Drop campaign last year, which is a blanket campaign for Cornwall as we were trying to recharge resources and make sure the reservoir levels we're going to get to a good place. And we encourage customers to use less water and they would get an amount of their bills from doing so if we hit a certain level. And that was incredibly popular, it went well and customers got first [indiscernible] their bill from doing it. So it was understanding the outcome from that pilot as levers to think about charging in a different way. Now this is not usual for the sector. So not many of these tariffs around. So we want to make sure we're piloting them, and we'll do that next year to then see what works, see what does and take it forward. But I have to stress that these aren't compulsory tariff trials that we're doing. These are voluntary. We're getting good take up, and we'll see how those goes. And then obviously, going forward, it will be something that customers can choose in terms of the tariffs that suits them best. So due purpose, helping customers so they are in control and can manage their affordability. And then for us, we think it will help drive water efficiency and also there's a fair point of our region where we have lots of visitors coming into the region during the summer period. We want to make sure that those who are resident and resident only around are basically incentivized their water efficiency, but also does get discounts at the right time to flex that. So lots going on, and I'm sure I will be talking about the outcomes of those pilots at this time next year.

Next question comes from John Campbell from Bank of America.

And firstly, good luck to Paul with his new endeavors. The first question I had related to the Ofwat investigation of South West Water among other several water firms as well. Appreciate there's an ongoing investigation, so you can't perhaps provide specifics, but do you have a rough idea of when we could have an answer. For example, would it be by the final determination? And generally, do you feel that Pennon is well positioned with regards to this investigation. And my second question is related to your business plan. Has Ofwat come back with any comments or questions or indeed local politicians related to your PR 2024 business plan?

Paul, could you get...

Yes. Perhaps I'll take that first one on the investigation. So just to remind everyone on the call, there are 2 investigations underway at the moment. The first one relates to wastewater and is an investigation is being looked at by the environment agency and Ofwat, and that was kicked off a number of years ago now and involves all wastewater companies. And then Ofwat have taken further steps with a number of specific companies, 6 in total. We continue to receive questions in relation to those investigations and we openly in terms, currently respond to those questions. At this point in time, we haven't had any substantive engagement that would give rise as to as having any particular insight. Unfortunately, on timelines or potential outcomes in that regard. So in terms of the wastewater ones, still very much going through the process of responding to questions as they are raised. Then there is a second investigation that is underway in relation to leakage, particularly around how leakage has reduced following a spike in leakage that we reported to one of the COVID years that then became a reduction as it became back on track. That is something Ofwat has inquired about and asked us some questions in regards to that one. Again, we've received a number of questions. We've had some more engagements in terms of meetings. So one would be helpful that, that one might be moving towards some sort of resolution sooner rather than later in terms of which one might be done first. But similarly, again, we have no insight into actual timelines or potential outcomes.

Okay. And then you asked about the business plan. Obviously, we submitted business plan. There is a timeline and a timetable for what happens next. We've had, which I'm sure all companies has some technical queries on some of the young submission tables that we spent in -- but obviously, Ofwat will be working through those, and there hasn't been any kind of substantive conversation with them about the plan that's been submitted. But obviously, we will await the next steps in the process.

We have a follow-up from Dominic Nash from Barclays.

Just a quick one. In your results, you said that your CapEx has gone up by GBP 100 million from GBP 750 million to GBP 850 million through AMP7. Can you just give us some sort of color as to whether that was included in the business plan submission and the GBP 5.4 billion shadow RAB that you published for April 2025. And what impact that will have or what return will you get on that extra GBP 100 million? I presume you share 50% of it with consumers. But are there any other additional sort of return advantages from that extra GBP 100 million spend?

Yes. So in terms of the technical way that will come through, Dominic, you're right. It will effectively -- half of that will effectively get trued up on to the shadow RCV. Now at the time, we talked about that GBP 5.4 billion, and we had a specific breakdown of it in our spotlight presentation, if you remember, I'm sure you will do. Now that element wouldn't be included in that. But as it is GBP 50 million, obviously, half of GBP 100 million would go on to that RCV. It will still round to GBP 5.4 billion. So GBP 5.4 billion is still very much the number, but now it does also include the effect of that extra GBP 100 million coming through with that extra GBP 100 million, just to give a flavor relates to further activity. So in terms of our investments in items such as pollution, such as leakage, driving performance, activity levels, et cetera. We are going to be spending a little bit more on that. And that is -- one is coming through there as well as an element of higher cost inflation for particular items. So there's a couple of things, but primarily higher activity coming through.

We have no further questions. So I'll hand the call back to Susan Davy for concluding remarks.

Okay. Thanks very much, Adam. Well, thank you, everybody for joining us this morning. Great to get those questions in. As you see, we've got a robust set of results for the half year very much underpinning our dividend. And as many have said on the call, again, I just want to reiterate my thanks for Paul for his contribution to Pennon and wish him well for the future. And my hello to Steve, who's here this morning and who's joined this -- we can obviously past the planned handover with Paul before taking up the CFO post at the beginning of the new year. So thank you, everybody, and thank you for joining.

Thank you all.

This concludes today's call. Thank you very much.