Pennon Group Plc (PNN) Earnings Call Transcript & Summary

We'll now begin the Q&A session. [Operator Instructions] Our first question for today comes from Sarah Lester of Morgan Stanley.

Thank you very much. So [indiscernible].

Sarah, I think we're just going to do a bit of an intro if that's okay. We've got a couple of people who just wanted. Is that okay? Thank you, Sarah. Apologies for that. We'll get started in a moment. Welcome, everybody, this morning. I'm joined by my chair, Gill Rider, and my CFO, Steve Buck. As you've seen in the results presentation this morning, we're joining you here from Devon. While today, well, we're going to be talking about the 2023/'24 results and on group. Myself and my colleagues are currently focused on our #1 priority, which is the health and safety of our customers and our operational team, who are working tirelessly around the clock on returning a safe supply of water to people and businesses in and around Brixham in Devon. But for now, let's turn to the 2023/'24 results. Just a few words from me on those, I know you've seen the presentation. But just in terms of the summaries, this has been a year of securing the building blocks for the long-term business that we are, and securing shareholder value for the long term. It has been a transformative year for us as a business. And in fact, it's been a year where we have done what we said we were going to do. We have had record level of investments, 3x the scale at the start of this regulatory period, which sets us in a really good position for going into the next regulation period with the run rate at [indiscernible]. We've broken the drought cycle. We had our drought in 2022, and we've invested significantly. Yes, we have had the benefit of rainfall, but we have invested significantly and 1/3 of the improvement in our resource level is down to the fact that we've invested. And we have put investments in that will keep us in a good place on water resources for 25 years. We've retained the gains we've made on environmental performance and we've been reshaping the business. We delivered synergistic benefit with the solid run rate to get into the next regulatory period. We delivered growth, organic and acquisitive and acquisitions are on track. We're delivering what we said we would do for those acquisitions. We'd like to see the balance sheet for those acquisitions that we've invested in, and we are delivering efficiency, which will help our customer build going forward. Certainly our latest acquisition is fast-tracking through the CMA processes, which is great news. So we know to attract investment, we need investment support. We do have a good, strong liquidity, which Steve, I'm sure, can talk about this morning. But we recognize the importance of dividend payments as a key element of shareholder returns. So we have carefully evaluated the recommended final dividend position of Pennon. We considered the fact that we've had robust performance in the [indiscernible] for the group. But we've also notes upward, recent M guidance on wholesale water business dividends. We have followed the Pennon policy, K7 policy, increasing the dividend by CPIH plus 2%but we have adjusted the final dividend content by GBP 2.4 million, equivalent to the South West Water Court's fine that we got in '23-24, signaling that we're listening and we're clearing the way for long-term shareholder value. So I just wanted to make sure that I point really clear before we enter the Q&A. So with that, I'll come back to you, Sarah, and apology to making your wait.

No, that's all right. I suspected you might want to say something first. So I've got 2 questions, please. The first one is around that extra spend in FY '24. So I'm just wondering if you could please talk us through a little bit more the thought process and importantly, that net benefit to longer-term shareholder value that you do expect due to the investment and initiatives undertaken during the year? And then my second question is around talent and people resources in the sector. I'm curious as to whether you're seeing people exiting the sector or any challenges with recruitment given the media attention on the broader space?

Okay. Thank you very much, Sarah. I mean if I perhaps start with the first one, as Steve can then [indiscernible] for the CapEx as well, but if you look at the CapEx split, we have spent on the water side business -- we have spent more on the water resources side. I just touched on the drought and the expenditures that we have there. So you will see a peak in investments that we have for drought, perhaps sort of come through as a result of that. But Steve, I don't know if you want to want to detail more on the CapEx?

Yes, sure. So as you have seen in the presentation, there are 2 themes to CapEx. So year 4 is our peak year. And I don't think anybody knew that year 4 and 5 were going to be our peak years from the [indiscernible] determination and all the reinvestment. So GBP 80 million of that peak is pulled forward from the year 5 into year 4. So what's the net benefit of that is, Devon and Cornwall become resilient to the effect of drought sooner. And that's the timing. It's just a timing matter between year 4 and year 5. We have incurred another GBP 80 million, and it's a different GBP 80 million and -- there's always a bit of a nuisance when you have two GBP 80 millions, but it's a different GBP 80 million in terms of our base maintenance costs. We have incurred more base maintenance costs in year 4. That's to deal with addressing the priorities of pollutions, water quality as well as dealing with the effects of the unprecedented weather, we've experienced throughout the winter. On that GBP 80 million, that isn't a timing thing. That will flow through and be add to our overspend to our CapEx spend position. Previously, we guided the year 4 and year 5 on page 50, that second GBP 80 million means it will be at GBP 930 million for 2 years cumulative. Of that GBP 80 million, we expect 50% to be recovered through the regulatory mechanism.

Okay. Great. Thank you very much, Steve. Perhaps if I just think on your question around how we are attracting and retaining talent. Well, I'm joined by my new CFO, Steve Buck here today. So we are absolutely investing in the community. We have got colleagues who are joining us with the investment plans that we've got, we've obviously had a kickoff in the number of people who we've got in the organization to turnover levels in terms of employee substitutes in one year. What we are doing is making sure that we are offering an excellent training for people who are joining us, what the intent of our colleagues to our pension, our graduate scheme and as ever, with effector like this, yes, we are in the spotlight, but there are excellent roles for individuals with excellent training opportunities for them, and we are obviously briefing and bringing people into the business. And as ever, and I will say that we are a sector that is in spotlight, but there is nothing more important than delivering safety in drinking water and it's actually for the people who want to make sure that we can deliver for our customers. So yes, we're investing in people, and yes, we have got people joining the business.

Our next question comes from John Campbell of Bank of America.

Three questions, if I can. I've got one on your dividend, one on price review 2024 and one on the incident at the moment with South West Water. But if I start perhaps with a dividend, I saw that you reduced it by GBP 2.4 million related to a fine, which you received in 2023 -- in May 2023. I noticed separately that the Environment Agency issued a press release on the 17th of April, suggesting that you were in court for South West Water for potentially a different case. Is there anything you can say about that case? And could it be the fact that if it perhaps doesn't go your way that you could see impacts on the group dividend this year or potentially in outer years as well going forward? The second one I wanted to ask you about price review. So you've got the people suggesting with the concept of Totex reopeners. It was discussed by Chris Walters in an article on Utility Week. What -- has Pennon basically heard on this topic? And do you have a view on the idea? And the last one related to the South West Water matter at the moment. So do you have an estimated potential cost relating to compensating customers for the disruption and any associated infrastructure expenses as well?

Okay. John, thanks for your questions, perhaps if I start with the dividend one and then over to Steve, for PR24. So the dividend question. Let's be clear, we have a policy, K7, and we're following that policy. However, we are aware that very recent guidance that [indiscernible] gave around dividend considerations for water businesses. And we are listening. Yes, we've made an adjustment to reset the fact that we had a court fine for South West Water last year. But in effect, what we were doing is just making sure that we were speaking, we were listening and clearing the way for long-term shareholder value with the dividend policies that we have now, and I'm sure we'll rest for K8. So what we're doing is saying that we are [indiscernible] of the -- but like we are under. We think it's right that we adjusted the dividend in the round or what we have come through last year and that was on the back of what happened with the court, [indiscernible] but that's not a presence factor, but it's something that we took into account. So that's probably one thing to say on the dividend point. And then perhaps over to you Steve for PR24 and Totex reopeners.

Yes, sure. John, so I mean, what we're talking about here is uncertainty. This is about a mechanism to deal with uncertainty. And from our perspective, first way is that we welcome mechanisms to deal with uncertainty. If you just look at the situation, we are in, right now, PR24, unprecedented levels of investment. There still is a little bit of movement between various different regulators and government about what are the obligations for, PR24. And the [indiscernible] is that the world doesn't operate in 5-year cycles is what a regulatory price review does. So if there are going to be mechanisms that deal with change or clarity outside of those 5-year boundaries, we really welcome. And we actually think this is good for customers as well because, obviously, we want to find ourselves and I can totally understand from a regulatory point of view that we don't want customers paying for things that are unclear. Likewise, we don't want to be in a position where things become clear, and there's no mechanism -- we have to wait years for it to [indiscernible] back up again. So absolutely, welcome it. I think it's a really good proposal to deal with. What is actually, I think, quite a lot of uncertainty around PR24 what's driving those obligations.

And I think, John, you asked about the incident. So let's be clear, we're just focused on, at this point in time, making sure that we're restoring service to the customers in Brixham. We've got 85% of customers back on, in terms of funds being able to lift [indiscernible] notice that we have in place. And we've got the remaining 15% of customers to pay for it and get that sorted. We have given compensations to household customers in the process of all of that and the cost of that will be single-digit million -- millions in terms of -- at the cost of what we've announced. But let's be clear, our focus at the moment is making sure that we're getting supply where it should be for those customers in Brixham and that's then my excellent focus at this point in time.

Our next question comes from Jenny Ping of Citi.

So just following on from John's question around the dividend. So am I understanding this correctly that you will effectively look at any future fines, whether it's from EA or Ofwat or any other parties on a case-by-case basis? Or is this now part of the wider policies? And also, I guess, where do you draw the line? So some of the compensation issues that you just outlined for your water challenges -- water business challenges. Is that also going through the dividend or how do you draw the line effectively? Second one, just with regards to the CapEx increase. Obviously, the additional GBP 80 million this year. I wondered if you could comment about the risk of that going out further. We've obviously seen a number of increases in terms of the Totex, the last 2 years of the AMP. So I just wondered how confident you, [indiscernible] whether you are, effectively have that under control in terms of resolving some of the issues? Or could we see prices and costs escalate further? And then just thirdly, just on the balance sheet, noting your net debt, are you still in the camp of being comfortable going into AMP8 without equity?

Thank you very much, Jenny. I'll start with the first one around the dividend. Look, you are absolutely right what you said. But we've taken this in the round. This is not [indiscernible] it's not on policy, but we're listening and we felt that it's the right [indiscernible] signal with very clearly add shareholders to fear the risk of the issue that we spoke to South West Water as it is environmental finance time. But we will look at it on a case-by-case basis going forward and it's right [indiscernible] that we do that. But we are fitting in [indiscernible]. Steve, can you talk on the CapEx increase?

Yes. So the -- just to make sure we're talking about the same GBP 80 million, this frustration of having 2 lots of GBP 80 million. But the GBP 80 million, I think you're referring to is the base.

Yes, the base one.

And in terms of that -- I mean first of all, I just wanted to make sure because you used the word about getting it under control. It is under control. I wouldn't want to give you the impression that it's not. They have -- what we have done is we've deliberately elevated the investment because of all the things I described about pollutions, leakage, quality program and the weather. What we will see in year 5 is, it will return to levels we've seen before, either in prior year and also levels that we put in our PR24 plan. So it's very much about a return to normal, in terms of getting that back to sort of what we're seeing in terms of the few million.

Yes, thank you Steve for that. And the third one is around net debt and where we see ourselves landing case and then going into K8. I mean, obviously, slightly higher gearing for this year end than we have put into our business plan submission. But as we said before, we work comfortably within the 55% to 65% through the period in K8 in our business plan. Obviously, we've got to receive just termination on [indiscernible] with everybody else. And we will work through that process with Ofwat and get to FD and see where we are, but comfortable that we will land at the end of the K7, certainly work within our policies. And we obviously need to understand from what the 12th of June will bring.

Our next question comes from Dominic Nash of Barclays.

Just a couple of questions from me, please. The first one, coming back to the dividend policy again. Is it possible to give us some color on what was actually in the letter that Ofwat I think you couched around the water industry and what the guidance for dividend policy for the sector actually is? And second question I've got is, could you give us an update on where you think the time frame for the Ofwat investigations into both your leakage numbers and CSOs are, please?

Yes, happy to pick those. So in terms of the color around the specific guidance that recently came out of box. I mean, we did cut some notes in the [indiscernible] presentation that we put out this morning. Probably I'd be surprised anybody in the con call, but Ofwat's wanting companies to make sure they considered the dividend decisions in the ramp looking at performance for the business and taking into account what's been delivered to customers. You can see our position today. We've invested heavily. We've got ODIs running around 70%, one of the best performers in the sector in that regard. We obviously accelerated investments, both in back of the drought for 2022. So we've taken all sorts of consideration, but the information and guidance of Ofwat and obviously, we want to make sure that you're picking up all assets in consideration. And in doing that, we felt it was right to signal that we were listening for this final dividend, we've recommended from today. And in doing that, I think we're clearing the way for long-term shareholder value. I think that's where we are on that one. Second one on the question around the investigation. Yes, we have 2 of investigations that are outstanding, one around leakage and one around for South West Water treatment. We continue to present information to Ofwat. In terms of time scale, and we haven't been given a definitive time for conclusion. But if you're asking me to expectations, I'm hopeful it will be kind of Q2 this financial year. But it really does depend on where we get to with those interactions. I can say we haven't had any feedback or say from them, but we are continuing to share information with them.

Can I just follow up, your first answer on the general question on performance linking to dividend. Does that mean do you think that the performance of ODIs becomes increasingly important going forward that there will be pressure on yourself and other companies if you don't meet the ODI numbers, that the dividend might also need to reflect that as well?

Well, I think, Dom, I mean there is -- if we're looking specifically at ODIs, when I talk about performance, performance in the round for what we've delivered to customers [indiscernible] is compared we've done 70% of ODIs, yes. As a marker of performance, but it's not the only thing to look at. We know that there are mechanisms within the regulatory regime to account for where we do well and see if we fall short already that pick up financial penalties for ODIs. So I'm not suggesting that there's a mechanism flowing through for performance. I think it's to stand back and the fact that we are performing which is one of the better performance in the sector in terms of ODIs just as I said service in and around conversation we've had about that. Now in terms of ODIs, yes, we haven't been in a position where we've been in net rewards for ODI this regulatory period. They were challenging times [indiscernible]. We have put in K8 divisions that we've put forward around those incentives. We'll see where the lands on that. But I've said before and I'll say again, there are a number of ODIs that are coming into the framework the next time, that are not in the common framework this time where we do well. So maybe water being one of them, the catchment work being another, where we've had a net ODI to reward this period of around about GBP 20 million so far. So I'm looking forward to the new regime for incentives. These questions that are being posed and the position we've taken, we think, it is the right one, particularly that we're listening and making sure that investors are also getting the dividends that's policy. [Audio Gap]

[Audio Gap] original filings in South West Water Bristol and South West Bristol and Sutton in East Surrey, how have your expectations changed in terms of potential total spend, because we can't really conceptualize things on one number as we've seen with the GBP 80 million. It's a big moving feast. How have your views on CapEx changed within that last 9 months?