Severn Trent PLC (SVT) Earnings Call Transcript & Summary

Good day, everyone, and welcome to the Severn Trent full year results FY '20, hosted by Liv Garfield. My name is Peter, and I'm your moderator today. [Operator Instructions] I would like to advise all partly this conference is being recorded. Now I'd like to hand over to Liv. Please proceed.

Thanks, Peter. And good morning to everyone. So we're going to straight to questions. So that you know who we've got on the call today: We've got myself. We've obviously got James. And we've got about 5 of the senior team as well, so you won't just have to listen to James and I when we get to the Q&A part. So with that, we open straight up to yourselves. Who is going to start us off with questions? You'll have to do a song or a dance if you're not careful.

All right, it's already one question in the line, which comes from...

It's Fraser McLaren from Bank of America. Hope you are all well? Just a couple of questions, if I may, please, just to clarify a couple of things that you mentioned on this morning's presentation. First of all, the revenue impact from lower nonhousehold volumes, can you confirm, please, that, that will flow straight through to EPS this year rather than being adjusted in some way given that it's recoverable? And secondly, you mentioned that you would update us with the latest COVID impacts at the next trading statement. Just to clarify: Does that simply relate to the financial performance guidance, and -- or is there likely to be any reconsideration of the actual dividend?

Very good. So I'll take the second question, then I'll hand the one to James that sounds more complicated than the first. So yes, you're absolutely right. The only guidance we're looking to give at the next trading statement in July is purely around what we've seen on the revenues in particular. We've said that we're confident that on overall operational performance we'll manage it in and around across the ODIs. We've said that costs-wise we're going to be able to manage that within our totex. Some things will cost slightly more. We'll make some 7 days worth. And we're not going to reconsider the dividend policy. We've made that announcement today. So it's purely around the revenue impact for the year as how it's going for nonhousehold. With that, I'll hand to James.

Yes. So yes, you're right. The revenue impact will unfortunately go straight down to EPS, so we won't be exceptionalizing it. Because as we've said very clearly, you've got this regulatory mechanism that will correct it in 2 years time, but you should be accounting for that in your numbers. And none of us are -- none of us can predict how the kind of the path out of the lockdown is going to happen, so what we've done is we've taken -- we've looked to the government's advice. We've kind of followed the latest on that, and that's what has given us that range. And of course, we'll be able to give you more information in July and November, as we can see how that's impacting.

That's great. And can I just ask a quick follow-up, please, on that point? And I mean I appreciate that the regulatory mechanism provides for a recovery after 2 years. Is there any risk, do you think, that the regulator will seek to ask the industry to take that recovery over a longer period of time given its unusual magnitude?

I think the way we think about this is we're quite used to managing that complicated revenue situation based on ODIs. If you think about it, we've made GBP 78 million worth of ODIs in some years and managed that flow, so we're quite adept at managing it. You've actually got a number of things that can help the bill go up and down in a year. So I'll pass to James just to cover more thoughts in, but I think we feel comfortable that we will be able to manage this in an efficient manner over the course of this AMP.

Yes. So Fraser, in any given year, right, you've got an element of risk in that you have to manage. You've also got inflation and the K factor that you have to manage. And then of course, we, perhaps more than others, have had ODI rewards that we've sought to manage that. You have to look at all of those components based on the impacts on the original plan. You have to think very carefully about the impacts on customers and making sure that their bills are smooth, and that's what our customers have told us they'd like to see. And then of course, if you do defer revenue, you do get the inflation benefit and the costs of capital benefit of deferring it. So there's all of those things that we take into account when we think about how we take that revenue in future.

Brilliant. Is there another question to each one of us?

The next question comes from the line of...

Lakis Athanasiou. Good results showing good management, et cetera, et cetera. Pats on heads. My questions: firstly, the interest guidance. Yes, okay, it's going down as capitalized -- or going up as capitalized interest goes down, but true underlying, I would have thought, would be dropping a bit just because inflation is going to be coming off. My second question is payment deferrals, both household and transmitted through billing arrangements in Water Plus non-households. Can you say anything about that at this stage? And do you expect it to last a full year, or is it just one of those unquantifiable things? And thirdly, is it at all possible to quantify where you think household bad debt could eventually end up? Do you think the rate will increase more than you put into the year-end? Or again one of those things you don't know.

So I'll let James answer one and three. On number two, I think we've given you, I think, really good guidance this year and from where we are now, and I don't think we can get into any more detail. We're just going to let the next period of time play out. So we -- the good thing is we'll talk to you again in July and again, I guess, at the half year and again, I guess, for the Q3 trading statement. So we'll keep close to sharing what's happening, but I don't think we've got any more detail on question two. In terms of interest guidance, I'll let James to answer that. And then yes, we can give you some thoughts around how we think about bad debt, which might help with our thought process. Again, James will pick that up.

Yes. So on the interest. Yes, so I've guided you to an increase in the interest charge. And that's mainly just the fundamentals are there's going to be slightly less capitalized interest this year around just because it's a much smaller CapEx. So to put it in perspective: It's almost half the amount of CapEx activity this year versus last year. So that is going to have an impact on that. And then of course, there is the interest -- the increase in interest on -- based on the fundamentals that we've got a larger level of debt because of the CapEx that -- particularly in the final year of AMP6. In terms of the underlying rate, I'm not going to guide you in terms of the underlying rates. I mean they have come down. That's true. And I mean the only -- the big wild card, right, is inflation. So there are as many forecasts of higher inflation as there are lower inflations over the short to medium term, so I don't -- I can't tell you what that's going to be. We have about 25% of our debt that's index linked. And the remainder is predominantly now fixed because, as you know, I've been kind of derisking that position based on getting to the right start point for AMP7. So inflation might have a massive impact on the go-forward rate of interests.

And bad debt. Do you have -- to say how we think about bad debt?

Yes. So on bad debt, it -- this again is going to be tricky for anyone to forecast just because the -- what we -- bad debt. Our bad debt number across the whole sector is to a certain extent driven by the level of unemployment. And we just don't know what the recession is going to look and feel like and what that shape is going to be. The -- in terms of the underlying kind of level of bad debt that we see, it's not the level that you saw this year. You can see that we made some adjustments to our provision, which I've explained in the RNS, that's probably made this year higher than the underlying run rate. And I know lots of you have kind of looked at, "Okay, help me model what an impact could be." And it will depend on what that recession looks like, but the last time we kind of looked at -- we had a recession, there was around a 90 to 100 basis point increase in bad debts for a short period of time, a few years, that was based on the underlying level. And so that's what a lot of people have been modeling.

Okay, thanks for that.

And the next question comes from the line of...

Alex Wheeler.

Hello, Alex, can you hear us? Missed you now. Alex, are you there?

I think, just dropped. The next question comes from the line of -- [Operator Instructions]

We've lost you. Should we go to another question and come back to Alex, maybe, Peter?

Certainly. Our next question comes from the line of...

Deepa Venkateswaran, Bernstein. I had actually just one follow-up question on bad debts. So I think, James, when you were talking about 100 bps or so. If we take that, we are talking about maybe GBP 10 million, GBP 15 million impact. If this were to become unusual, so way above GBP 12 million, GBP 15 million, to GBP 50 million or GBP 60 million, would there be any mechanism under reopeners or anything with Ofwat that will help you to claw this back in 2 years time or 5 years time? Or is this basically something that shareholders have to absorb?

Brilliant. I mean, Deepa, in the way we view price controls and working with Ofwat if you take a package over 5 years and effectively you sign up for that package. And you'll have some good things that come out of the package, and you might have some less-good things that arrive in the package, but broadly we take a view that in the round these things tend to wash out a little bit. Of course, they then play into the next price review and the conversations there, but Shane, as you're our new Head of Strat and Reg, do you want to make a couple of comments on that?

Yes, Deepa. And so for the retail bad debt, there is no mechanism for that to be shared like the revenues. However, it does feed into the process of PR24. So the way Ofwat sets the retail cost allowance is they look at the historic costs. So if we're seeing higher retail historic costs, I mean, that will flow into the allowance there for PR24 and beyond. So there is an indirect benefit there.

And I think what we're guiding to, Deepa, today is that we've had a good look at the negative things over the next period of time. We've also got some positive things. We've been preparing for quite a while. Remember we've been fast tracked for a while, we've been preparing for a while. We deliberately invested heavily in this last year of AMP6 to get ourselves in good shape on the totex cost base and on the ODIs. So whilst we're bound to talk about some of the things that are coming out of COVID like bad debt and like some of those things, actually we probably have a good chunk of things that are positive that allow us some offset.

And the other thing I would say is, over the last decade since the last recession, we've made a huge amount of changes to our credit collection journeys, which I think will make us a lot more resilient to this kind of an issue. So if you think about the -- for example, we've got much more help in place, so we'll be -- we're already helping 70,000 of our customers with their bills. So we've got many more schemes that we can deploy to help people who struggle with their bills in the short term or the long term. Secondly, our Direct Debit penetration is up in the mid 60%, which is much more helpful in terms of maintaining kind of the underlying level of cash flows. And thirdly, I think we've just gotten much better at providing easy ways for people to pay. So there are many more channels that people can pay. And we can adjust the plans if needed to make sure that they can keep on top of their bills. So I think there are lots of things that mean that we're well placed to manage this going forward.

Could I ask a follow-up, if that's okay?

Of course, you can. Yes, go ahead Deepa.

Yes. So just on the dividend, that you've confirmed this year's dividend and the broad dividend policy. I was just wondering whether there were any discussions with any particular group of stakeholders that may have led you to consider that you should pause the dividend. So was there any such pressure that you came across? Would be just interested in hearing your views on the overall decision as well.

I mean I think, as you know, dividends are Board decision. It's always something that's discussed in detail every year, and this year, I think we really gave it proper consideration. And where we concluded is that we're not taking government support. We're not furloughing teams, anybody at all in the business. We think we can be a responsible employer. We've contributed millions of pounds to charity. We give 1% of our profits, remember, to charities in our area, so we think we can help communities actively. And we've been able to put more money to help customers. We deploy cash to help customers, whether it's vulnerable customers or whether it's the Severn Trent Trust Fund. And then the clinch became that actually there are literally tens to hundreds of thousands of small retail customers that actually rely on our dividend policy for part of their ongoing ability to make their way through the next couple of years as well. And whether you've got retired policemen, retired care workers, retired Severn Trent engineers, it felt like this was the right answer. So it did have active discussion, but the clincher in the end was the strong retail base. It does rely on our dividend policy to actually manage their lifestyle over the next couple of years, and it's going to be tricky for everyone in the U.K.

And the next question comes from the line of...

Deepa Venkateswaran, Bernstein.

Was that Deepa of -- another one? Or if we maybe got the wrong thing there, Peter. What do you reckon?

Robert Pulleyn.

Rob...

Rob, brilliant.

Yes. So may I ask a high-level question? And forgive the length. So Severn Trent really finds itself at the center of social discussion, particularly given the last question and given the current COVID circumstances. You have to balance supply continuity versus bad debt considerations. There's the longer-term sustainability issues in water. And your dividend, as you rightly pointed out, ultimately goes to many of the more vulnerable people in this current crisis, so how does management chart a course through this situation? And in your opinion, how should this be reflected in ESG considerations?

Thanks, Rob. And the way that we think you'll be judged, I guess, it's first of all that sense of this theme of customers, colleagues and communities. So the way that we're choosing to chart a course is to look through the lens and say, right now today, we're providing the support and help that each of those 3 types would expect. And then almost if you were to roll forward time and reflect 18 months, 5 years from now, would we look back and say actually that makes us a leader in how we treated those 3 groups, or not? And that's how we're looking to do it. It's almost like the decisions of today but then if you have time for it in 2020. When I think about this S of ESG -- and I think the environmental part is very clear. I think the G part is explicitly clear, and especially in our sector that's been made very clear. Then I think actually the S, as you said, is most interesting. And we've been mulling for a good period of time what -- how do you have an index of measures that feel that you can judge whether a company treats its people but its customers and communities fairly. And we've been mulling over. Is it engagement? Is it inclusion? Is it fairness? Is it well-being? Is it investment in skills? But then also, is it affordable service and positive difference to the community? And in the end, we've kind of judged it's a combination of probably 10 to 12 different measures that feel like they work across many companies. So they do work across sectors, but it kind of comes down to ethos, doesn't it, and whether you're using the right guiding principles for people because you can have a policy or a rule book, but to some extent, we ask everyone at the very last moment before they do anything to consider, are they doing the right thing? And that's what we're trying to do ourselves through the course of this particular pandemic is question on every judgment point does that feel right in balance, that we're doing the right thing for the long-term success of Severn Trent but also the short-term financial health and well-being, mental health as much as physical health of all of our colleagues and customers. So I think it's a navigation. And I think it's probably got a slightly circuitous part sometimes. If it doesn't feel like a direct part, you've got to reconsider and think. And that's how we're thinking about it. And I suspect it will be one of the things we all will get judged. So I'm sure, in 18 months time or 5 years time, we will definitely get rejudged and reconsidered as to whether we plotted that path correctly. And it's a really great question to bring up because it's probably what we're spending a good chunk of time mulling over as a management team is that part.

The next question comes from the line of...

Dominic Nash, Barclays. I've got a couple of questions, please. Firstly, can I just go on to this, the JVs, the impairment? What impact on underlying profit, do you think, that impairment will have both on this year's and also next year's numbers as well? And secondly, on ODIs you stated that there's going to be a couple of ODIs that will be materially more difficult to meet in a COVID-19 world. Is there a chance that -- as a representation to Ofwat from the water industry, to have a couple of these ODIs maybe suspended in light of giving impossible tasks or lighten the talk, please?

Let me take the ODIs one. As you know, that's my Mastermind topic. I'd probably choose to do that if we ever had to do a Mastermind topic. And the way that -- and you're right. There are definitely 3 or 4 that are going to be hard. So for example, it's very tricky to educate as many schoolchildren when you haven't got schools that are open. So that's tricky. Not that we're not trying to do quite a lot of online availability, but it's not the same as having booked in sessions to primary schools. And to be fair, I don't know about you, Dominic, but my children used to wash their hands with a flick of a hand somewhere near a tap. And now they do have a good 20 seconds Happy Birthday song. We can see. Well, that's definitely using more water, so PCC, per capita consumption, is definitely not going to be hit this year, right? That's just a fact, if we can call that now, based on the first few weeks of water usage. So there are few things like that. And the way we view it, though, is we took a 5-year settlement. And this is only 1 year of 5 years, I'd hope. And actually, in the same way as you might lose on those, we have got some great other opportunities for other measures. So we are, for example, finding customers are really reading things that we're sending out. So we're getting amazing readership of the messages we send to customers. It's like 70% of customers are opening and clicking on the e-mail and reading it. We've never had that before. So our ability to influence behavior and other activities is maybe better than ever before in our lives. So we view it as it's our job across the round of the basket of measures to find upsides to alleviate the bad sides. I think overall what's Ofwat said it will do is, at the end of the first year of the AMP, they will look at it. And if they think that companies were penalized unfairly and the targets were clearly unreasonable in a different world, they'll take their own judgment, but we're not going to be making representations. We think Ofwat has been a balanced, fair, tough, but fair regulator, in our experience, over the last 6 years. So we'll leave them to make an industry view at the right point in time, but from our perspective, we're guiding that we'll be positive in year 1 of the AMP on ODIs regardless of those impacts. We're not relying on any change for our guidance. And on the JV, I'm going to hand it to James.

Yes. Thanks, Dominic. So on the presentation, I tried to lay out very clearly what the losses were of the JV that we've kind of recorded because the accounting for them is a little bit esoteric. But the one thing I did want to highlight was that there was an underlying trading loss, but the accounting rules didn't allow us to kind of leave those in the underlying results, so they were exceptionalized as well. So there's about 6p on the EPS that you -- some of you probably would have expected to see as a reduction in EPS in the underlyings to reflect the trading losses of Water Plus that all got exceptionalized. So that 6p is a sort of the thing to bear in mind. The overall -- and then you can see on the reported EPS what the overall impact was of the write-downs as well. And the total amount, I think, that was -- that impacted the reported EPS was about 22p. Now of course, a lot of that is -- those are book losses. They're not cash losses. And going forward, it's a little bit harder to forecast what the Water Plus numbers will be. And again, it will depend very much on the kind of pathway out of lockdown, but there is no investment value on the balance sheet for Water Plus because we've taken those prudent write-downs. And so that will impact the sort of the future EPS related to the JV.

Can I just follow up on that? If Water Plus doesn't pay you your cash -- and I think it's, what, 60% that it's allowed to pay you, but you obviously accrue a WACC on that, a WACC plus 1%, I think it is, on that. Will you be accounting for that as a financial asset and offsetting your net debt? Or will that be sort of kind of candidate working capital?

What a good question. I think I'll have to go in, and I will think about that, but I think you're right. We will be charging them interest because I think that is what is going to be happening across the sector, not least because it's going to encourage Water Plus to manage their affairs appropriately. And so yes, it will be a financial asset and it will be subject to the normal accounting for financial assets, but I haven't looked that too closely ahead of that. But it's a good question.

The next one comes from the line of...

Mark Freshney. Yes, I've got 2 questions. Firstly, coming to Water Plus, my understanding is that you're still effectively carrying a lot of the value through, I think, GBP 140 million or GBP 135 million of shareholder loans, which is effectively your remaining equity in the business. So I was just looking to confirm that. And then somewhere, I read, I think, that there was a GBP 30 million bad debt charge or additional bad debt charge within Water Plus. So can -- you've spoken about accounting from your viewpoint, but what is the total bad debt including the exceptional bad debts within Water Plus? My third question was more on the household bad debt, if you like. There was only a GBP 2 million increase, which relates to the legacy debt, but it seems to me that the bad debt cycle had actually started about a year ago rather than now, and that's something that we're hearing from other companies as well. So what is the underlying bad debt allowance within the price control?

Great. Okay, 3 good, complicated questions there. So let's start off. First of all, James, do you want to talk about the remaining equity in terms of the loans in Water Plus, first?

Yes. There's no remaining equities. You can see on the balance sheet. We have made some loans, both us and EU, and the good news is they've actually paid down those loans in the year. So even though they've had -- like it's been a tricky year, as I explained, we had seen some significant improvement, particularly in the second half, in terms of cash collections, which did enable them to write-down those loans. The loans that are on the balance sheet are on a commercial arm's-length basis. They're effectively revolving credit facilities and they pay those down as they get their money in. So that's what's left in terms of the loans to Water Plus. In terms of the bad debt, yes, they wrote-down on an exceptional basis. They wrote down a GBP 30 million of -- as an additional bad debt provision. So keep in mind a couple of things. First of all, they've got to anticipate their view of their customers and how they're going to fare coming out of lockdown in terms of their ability to pay. And I think they've been quite prudent to kind of look at the impact, particularly on their small and medium-size businesses who are going to struggle coming out of this, but remember they also have a significant portfolio of customers that include some really strong retailers, for example, some public sector businesses as well that won't be impacted. So they've taken that into account as well. I think the overall provision they've taken is prudent. And of course, we reflect a half share of that in our numbers, but then they had to make those decisions on the provision at the end of the year. And they couldn't really take into account the changes that Ofwat indicated after the year-end because it just isn't clear yet how those regulatory changes are going to manifest themselves. So you can't actually take account of them in the year-end, but we see all of the intervention Ofwat have been considering for the market to be positive for both us as a wholesaler and Water Plus as a retailer.

And then just on the last point then. So I think it's fair, Mark, you're highlighting about household bad debt as to when did the term of that change. I think there's a couple of points there. There is COVID impact and what we've done around that, and then is our own performance and how we were looking to improve that.

Yes, I think that's -- it's a fair question. And I have been flagging, I think, for the last 18 months that we have a slug of debt that's kind of at the beginning of AMP and pre AMP6 that we are recognizing that we just find it a little bit harder to collect. And I think, at the half year, I talked about the fact that we were mobilizing a really sort of good debt recovery plan that involves new ways of effectively interacting with those customers. And we have seen a really significant improvement on that intervention, but I think I'm being realistic that some of the most successful interventions that we've made on early days are going to be impacted by things like social distancing. So for example, the field visits that we were doing really well on will not be quite as effective in the future. And -- but we do have to recognize that it is going to be tough for some of our customers. And that's why we've got some of the comprehensive plans for helping our customers, such as the Big Difference Scheme, that I think will be really effective.

So the way that we're thinking of that number, Mark, as James was saying, is seeing an opportunity for us to still improve a bit further, I think, on the long-term debt over the medium term ourselves with new schemes and new plans, definitely some knowledge that longer-term debt will be harder to collect in a COVID world and then also some immediate hits from COVID in those last few weeks. And that's why you've seen the number move to that side this year, and we'll manage that carefully over the next period of time. Very good.

Okay. And just to be clear about one of the numbers: It was the -- within Water Plus, it was GBP 30 million exceptional bad debt charge, but there will be another underlying bad debt charge as well. What was that, that -- so we can take the two together.

The underlying bad debt charge will be included in the underlying trading loss. So I don't have those numbers at hand, Mark.

Should we follow up with you afterwards just to help out?

Yes. Yes, we'll do.

Great. Thank you very much. Peter another question.

The next line comes from a person who either hasn't recorded a name or was on mute. [Operator Instructions]

Okay. Mystery caller press star one, see what happens. We're waiting to hear some dialer tones.

[Operator Instructions]

Hello?

Hello, we can hear you? Who's that?

Worth a try. Sorry about that. Obviously, I didn't know I was -- had been on mute. It's James Brand of Deutsche. I hope you are all -- you and your families are all well and look forward to seeing up you again when this is all over. I also have 3 questions. So the first one is just on -- not to ask about Water Plus because it's not a critical part of your business, but you've given some quite detailed answers in terms of write-downs and bad debts and things like that. I was actually just interested in how it was performing, which I guess it's hard to separate out from COVID given how significant that could be, but I was interested in how it's performing kind of ex COVID because there's obviously some issues with that business going through the course of last year and some integration issues. I was wondering whether they were behind you. And ex COVID, maybe we could anticipate a better performance going forwards. Second question is actually on pensions. So you obviously highlighted quite a significant reduction in the pension deficit and -- but also highlighted that some of that was driven by temporary factors around credit spreads. I was interested in how much of that we should perhaps think about being sustainable. And then also you mentioned that some of it was driven by lower breakevens, lower RPI inflation expectations. Some of the drop in RPI inflation expectations have been driven by this review of RPI; and the idea of, over at some point in the next 5 or 10 years, we could align RPI inflation with CPIH. And I was wondering whether if that actually happened. I presume that a lot of your pension liabilities are linked to RPI inflation, whether that would be potentially quite a meaningful positive for you or whether you might have to adjust for the change in -- somehow in your -- how much you increase your pensions for your pensioners. And then thirdly, I might not get an answer to this but worth a try. If we look at the upcoming regulatory period and we compare it to the last, do you think that it will be easier or harder to deliver financial outperformance under ODIs and totex in this period versus the last one?

Brilliant, 3 fab questions. I'm going to James, first, on pensions because he's chomping at the bit. He loves the pensions question, so literally, James, you've made his day.

He did though, pensions accounting will be so exciting? Yes, I think, James, some really good questions on this. So I'll just sort of unpack them a little bit. So the first one was there was this big corporate bond spread spike at the end of the year. And that has come back quite a lot over the last month, which meant you're going to see this across all reporters who report on the 31st of March, that they did get an IAS 19 benefit from this. And I hope I've been pretty clear that you should see this as a temporary thing. And I haven't -- I've signaled that you should continue to expect the cash flow -- cash payments that we've agreed with the trustee to continue, but there is -- you're also right to say that, when you unpack it a little bit, there is that corporate bond spike. But there is also a slight shift in expectations around long-term inflation and specifically on long-term RPI. And we have seen the spread between RPI and CPI narrow, particularly, as you'd expect because that's where the consultation is focused, on the 2030-plus end of the curve. And that is really the market kind of expecting there to be convergence. And then May, they are consulting at the moment. And in August, they are, I think, receiving all those consultations. And they are also, they have asked people to consider whether that should be pulled ahead to 2025. Now I'm not going to comment on what the right answer is, but you're right that, that is having a positive impact on our deficit. And so that may sustain, but the credit spreads definitely won't sustain. But I think -- underneath it all when you look at our overall approach, I think the hedging strategy that I put in place 2 or 3 years ago is giving us good protection, and that has been incredibly important over such a volatile period. And as -- we've always had a good relationship with the trustee and effectively agreed our contributions forward that were consistent with what we had in the original plan.

Very good. Thank you, James. I'm going to hand to Andy now, Andrew Smith, he's has been with me in the board for the last couple of years. So I'm going to ask Andy to share some thoughts on, ignoring COVID, what were some of the improvements we were seeing before it arose.

Okay, I'll do that Liv. And if I may, just on the COVID front briefly. I think we've got a lot of focus on the finance and the impairment and so on. I do want a callout to Andy Hughes and the team there in Stoke, who've done a fantastic job in responding to it, as you've seen across the rest of the Severn Trent, great focus on our people, customers and partners. So well done to all of them. It is difficult, the effects of the pandemic. On to the question: We are seeing an improvement. As James has said previously, we've seen an improvement H2 to H1. We're not expecting the legacy issues in H1 to repeat. We're seeing an improvement in customer service. Abandon rates are down. Complaints rates are down and so on. Debt management, we're seeing improvement there, particularly on our key customers, where Andy and the team have done a great job. Lots of work going on the underlying basics, if you like, of data claims. And it's proven really difficult in the market to get that sorted out, as we've seen previously in energy and other markets. It's certainly proven to be the challenge we weren't expecting. A big focus on the revenue assurance, core processes there, costs to serve. We've brought an external firm in to -- to help Andy and the team to drive that through with pace. So we're focused on sustainable profit out of this business. We think we can achieve that. And COVID aside, we're confident we'll be seeing that coming through this year, hopefully, and if not, in future years. So back to you, Liv.

Thank you very much. And then on to the last of the questions from James. So you'll recall that we don't give you guidance at the start of an AMP that said here is what's going to happen on totex and here is what's going to happen on ODIs. So we didn't at the start of AMP6, and I'm afraid, just to ruin your today, we're not at the start of AMP7 either. A couple of things to contextualize: We did enter AMP6 with quite a sizable hole between our run rate and what we needed, what we've been given as the allowance. We entered this AMP in much better shape, where we've got some natural plans in place to do well in terms of in-house design work that Helen has been leading on or whether it's the fact that we've been working on overhead costs. So you would have seen this from our announcement and from James' script earlier. We've talked about, how we've saved 23% of head office costs over the last couple of years. So we do enter in better shape, and then we can now see how we perform over the next period of time. So where's your upside in ODIs? So last AMP, we sliced, and we thought we'd go for 0 in the first year. That's what we said to you. It was 0. This year, we are saying positive. And I guess we're probably saying no more than that on the basis of we want to see how things play out over the next few months because it is certainly not normal right now. But I will ask James Jesic, not Bowling, to share a couple of thoughts on a couple ODIs just to, I guess, get you excited about some of the things that we're working on. James?

Thank you, Liv. So I guess you will know from AMP6 that we've got a really strong background in ODI delivery. And I think Liv has shared previously, we've all talked about the fact that it is really strong cultural focus within the organization. We understand the linkage from ODI performance to providing the best possible service we can to customers. Now what we've been doing throughout that AMP6 is really understanding the linkages between the end-to-end process across our water cycle and the positivity that, that can have on various ODI impacts, and we're continuing that work going into AMP7. So for instance, if I think about a number of our waste info measures, if we really or we are really understanding the true root causes of what causes a blockage on our network. And more often than not, a blockage can lead to a pollution. It can lead to a flood-in. And we're really understanding the propensity of our network -- caused by a number of factors, the propensity of that network to actually have a blockage upon it. So just in that area, for instance, we're really understanding sort of the customer behavior and the activities that customers undertake within their own home. Whether that's the disposal of fat, oil and grease down into the -- down the drain; or whether it's the disposal of sanitary products and wipes into the toilet system, all those things are potential blockage issues. And we've done a lot of work to understand the most likely demographics and where those sorts of things occur. And we've got extensive education campaign already prepped and already developed building on the 800,000 people already educated this year -- sorry, this AMP, to really continue driving that performance. And that in turn will not only improve our blockage numbers, but we think there will be benefits from a flood-in and pollution perspective as well. And then if you think about the broader environmental challenges that we've been facing into. Our work on biodiversity, I think, is really exciting for us as a business. It's something that we think not only good for the environment but also, again, really improves our overall delivery. So for example, if you think about -- let's take peatland erosion. I'm sure that was the first thing on your mind this morning. Peatland erosion can actually lead to quite a deterioration in raw water quality. It can also lead to flood-in and excess water in rivers and all that sort of thing. By really improving peatlands up in the Derbyshire Dales, for instance, we're not only going to improve water quality from the rivers that we abstract from, which means less energy-intensive and chemical-intensive treatment, but we're also going to improve the overall propensity and reduce the overall propensity of that area to flow. So those are just some of the things that we're looking at.

There we go. So no guidance but definite enthusiasm, I think, is the summary. Great. Any more questions coming through then Peter?

Yes there are 3 more questions. The next question comes from the line of...

Martin Young. Just 2 questions from me. And sorry to sort of keep laboring the issue on bad debt, but bad debts on the household side. If I look at that charge of GBP 43 million in FY '20, of which, I guess ballpark, GBP 15 million relates to the aged debt. If I strip that out and then run with this 100 bp increase in bad debt costs as a consequence of a recession, getting back to something in the low 40s seems to be where one might land. Is that a reasonable sort of way to be thinking of things? And then secondly, on ODIs and how they might potentially shift if Ofwat is minded to do so: We've obviously got the CMA process ongoing with 4 companies. If as part of that the CMA comes out with an opinion that Ofwat has been overly penal on ODIs and Ofwat is forced to make changes to the common ODIs, would those then flow through to all actors in the water industry, whereas the other parts of a decision by the CMA presumably would only apply to the companies that have that raised, the complaint, at the CMA?

So very briefly on the second of the point is that, when you sign up to your settlement, you take the whole AMP, right. You take in its entirety ODIs, totex, WACC, the works, financing. And it -- that's what you take. So we think we've got a settlement on ODIs which had minimum intervention. It is stretching, but you've got to remember, these ODIs, these are the measures that customers say they really care about most, so to not deliver on those targets doesn't deliver customers what they really say they wanted. One of the biggest things in the sector is legitimacy. So they are stretching, and we'll have to push ourselves to deliver these service improvements, but I think we're psychologically in on the basis that we need to keep moving forward in the sector into increased and better service levels. So we would have gained, as we understand it, from common ODIs moving in that; and we're committed to working hard over the next few years. And you won't hit green on every ODI on every year. That's just life in the world of ops, but I think we can make considerable progress on service levels over the next 5 years. That's what we're backing ourselves to deliver. I doubt James is going to give you much more on bad debt, but I'll pass over to him in case I'm wrong here.

Happy to sort of talk to you offline, Martin. I think the building blocks I've given you in terms of what we feel our underlying rate is; and the best historical evidence we've got, which I've talked about, that you have to also kind of take into account the improvements that we've made over the last decade in terms of the way we're running the book. I think I've kind of given you those building blocks, but yes, I'm not going to give you a precise number but happy to talk you through, if anything is unclear, after the call.

Thank you, Martin. Peter, second or the last question, that you said?

Sorry, there are 3 more questions. The first one comes from the line -- there was -- no name was recorded. [Operator Instructions]

Oh, we just never knew who we're ever going to see. So who is it? Press star one, if you want to ask a question? It might be you.

Hello, can you hear me?

Yes, we can.

It's Christian here from PIMCO. Sorry for not recording my name earlier. So just a couple of questions on around financing plans and looking into the next year. Funding standards compared to sustainable are green. And then you've shown in the maturity profile that the RCF is a 2021 maturity. Is that drawn or undrawn?

Great. James, hello?

I missed the question.

So was the -- is the RCF drawn or undrawn?

So I think we -- the -- so we've got about GBP 1.1 billion of facilities. And it was I think we had about -- GBP 0.8 billion was undrawn. So that kind of gives you the kind of level of you can work out what the amount that was drawn at the year-end. And since the year-end, by the way, we've been obviously monitoring cash flows weekly, and they've remained very robust.

And on sustainable financing, James, in terms of your thoughts on green and sustainable financing for the future.

Yes. We're really excited about it. I think we've got a great story to tell. And I was really pleased to see the interest on the U.S. private placement that we did in March, which I think indicates has a really strong interest, in ESG investors, in our story and to invest on the fixed income side. And it was really nice to see that we got some new names coming in who are clearly interested in our ESG. So there will be more.

Very good. Those are your questions?

As you think -- yes. Just one follow-up. As you think about the eligible pool of projects, what's the envelope you're looking at currently on your look-back period and your look forward in terms of what could you actually fund in that framework in 2021?

Yes. Well, I think the really good news is that, AMP7, a lot of our investment and CapEx is going to be very much focused around the sustainability and environmental agenda. So there will be lots of projects. And I think you heard some of the things that James Jesic was talking about earlier in terms of catchment management. And the overall kind of environmental improvements we can make that both help the environment but also reduce our treatment costs are exactly the kind of thing that I envisage funding through the green, sustainable bonds.

And the next question comes from the line of...

It's Fraser McLaren. Sorry for coming back, but just one more quick one, if I may. You highlighted earlier on that you're not taking any external help in respect of COVID. So I'm interested in your view on the cap on bad debts in non-household, which is effectively a protection measure. I'm just wondering how you view that.

So I think I have a different view on it too, Fraser. So I think this is about protecting retailers, right? So there is a market that's been created. And if you think about the source of the retail market: If you were Tescos or Topps Tiles, it's very tricky to manage 3,500 stores in a world when you're getting a little different bills. So there was a logic to creating that retail market. And then some of those retail players have really struggled. And the source of it, I think, is those retailers going to Ofwat intermodal, saying, "We've got a real problem here." And then Ofwat have looked at it and said, "Actually, we think the market needs some help." So that is an Ofwat choice to do it. Actually what the wholesalers have done is actually provide liquidity, right? We've provided credit into that market and really stepped in and helped. And we've been thanked formally by government for our speedy response, to stepping in. So we've received formal thanks from these separate states for being key workers during this crisis and being such rock stars through the last few months but also sort of stepping in so speedily and helping a market that could have landed and was really struggling. So I think it's seen by ourselves, by Ofwat's and by government quite differently to that interpretation. Bril. Okay, Peter, any last questions? I think there was one other?

Yes, Liv. There's only one question left. And there was no name was recorded. [Operator Instructions]

Very good. Who have we got? Well, one of you think, you've asked your question.

It's me, Verity from HSBC. So it's a bit like -- it's like sort of game show, isn't it, if you're chosen...

It is. Who's behind door 1? I wonder. Is it going to be me. "What excited you? Behind the sunshine spell." Okay, we are ready, Verity, what's...

Well, mine -- yes, very prosaic questions, I'm afraid. And one is looking at your costs actually. And I noticed that your labor costs have gone up twice as much as the reduction in hired and contracted. Just wondering, is that a process that's continued, or do we expect to see more rolloff in hired and contracted? Or is that something that happened in the last AMP? And then just finally, on, I suppose, FD CapEx phasing. Is it more or less in line but you've just moved things around in terms of the projects you're doing in this upcoming year?

I think you've self-answered a little bit your questions actually, Verity. So you're right. At the end of an AMP, you do a little bit of making sure that you're in the right space for the long term for the future, so there's a little bit of some of those costs that close out AMP costs, where we've kind of said, okay, we have the ability to invest now in the last year of the AMP to get ourselves in the right run rate for some measures. And maybe in some cases where we have insourced it, it costs you more than you insource because you have that double hit, where you have the hired and contracted costs for the year and you have the -- your own people to bring up to speed. So you've seen a little bit of some of the insource costs, but they are short-term tricky and then they get good. But James wants to jump in. He's giving me the look that says he's got more detail. I've got to hand.

And I think it's also an important one. When you're looking at the group costs overall and not just Regulated Water and Waste Water, when you look at the group costs, they have gone up because we've got a full year of Agrivert trading as well. So not only have we benefited from their profit, but we also see the higher revenue and the higher costs across the cost base too. So keep that in mind.

Does that help, Verity?

Yes, yes, yes. It makes sense.

I mean, on an ongoing basis, we are confident of good cost control. We've got a good track record of cost control. And when we look forward, we think that there are more opportunities for us to continue to be more productive, so we're not facing into a situation where we're worried about our cost base. We feel that we've got a good setup for the future.

And then CapEx. You just mentioned that you -- it's more or less in line with FD, but it might be just internally a few different things being faced at different times.

Yes. So we think about things we've done on this. So we've deliberately looked at and we've learned a lot talking about water performance in particular. And we know that, for example, mains relay are a critical part of your ability to do things differently. We know that, if you spend more money on waste infrastructure, you can get ahead of the curve. And one of the things that we did, you'll remember, at the very start of AMP6 is in the first year of AMP6 we invested heavily in some of the key areas that we thought would yield ODIs in excess over the 5 years. The advantage this time around is we got fast tracked. And by getting fast tracked, you get the advantage of doing the spend that you might want to begin thinking about to get your network in the right shape to get your resilience set up for the future. We've been able to do a bit of that actually now to get ourselves feeling comfortable about 40 measures we've signed up to. It's been a really lovely thing. That's one of the great things about fast track is you have quality understanding of your plan and the chance to begin to make progress and make decisions early on. Thank you. Thank you very much. Well, thank you because I was very worried at the start we'll have no questions. So I think it would have been quite lonely just us literally sat here in Cove, so a big thank you to all of you for all the questions. And a big thank you for knowing our business so well and to have pushed us quite hard on the questions as well. So that has been fantastic. So with that, I think we're going to call it a day, if everyone is okay with that. Very good, over and out. Stay safe. Stay alert, and we'll speak to you all soon. Cheers now. Bye-bye.

Thank you, Liv. Everyone, that concludes your conference call for today. You may now disconnect. Thank you for joining, and have a lovely day. Take care.