Severn Trent PLC (SVT) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to the Severn Trent results Q&A session. I've got the entire senior team, and obviously Helen, as our -- her first moment as our CFO, with James alongside as well as our outgoing CFO. So with that, I'd like to open up questions.

And I can see that the first question, Martin, over to you.

I hope everybody is doing well. And I got sort of -- one sort of overarching question of bank, the broader industry. If we look at what's been playing out in the media recently in respect of the GBP 10 billion that is going to be invested in wastewater. I just wanted to kind of check how this sort of stacked up? Because I look at the accelerated infrastructure delivery project from Ofwat, the GBP 56 billion that was outlined by the government last August. And surely, that is going into business plans in October. So this GBP 10 billion that's been talked about widely in the press strikes me -- has not been new many over and above what's been talked about previously. And as a consequence of that, it seems a bit cheeky that The Times is claiming that it's a victory for its campaign. So I just wanted to check that my understanding there was correct about the money. But also, I think it leads into a broader issue around how the collective narrative is being managed by the water industry in aggregate. And it doesn't strike me that it's being done in a great way, and collectively the industry needs to put a stop a little and gain some elements of control. So I just wondered what your sort of overarching thoughts were about where the industry stands at the moment in public consciousness and how collectively it can do a better job on the PR side of things?

Very good. So a couple of questions. I'm going to divide into 2 parts, right? So one is the investment in CSOs and two is the reputational situation. So I think the key 3 facts around the investment on Ofwat is, number one, is in the next 5-year period of time, we are going to be tripling the investment in this critical area. So I think that's the point The Times was making, is that in this 5-year period, GBP 3.1 billion has been invested in further improving and reducing activations from CSOs. In the next 5-year period, that's going to be GBP 10 billion. I think for the public that is new news, that is certainly a new step change. And I think it is a really exciting commitment. So that's the first part of that. And then the second thing is that in terms of investment, every company has to self-fund its improvements from an average of [ 29 ] across the sector activations a couple of years ago down to an average of [ 20 ] by 2025. That's been the clear guidance by Ofwat, is that you will have to self fund that improvement. And we've made good progress on that. We've been working hard behind the scenes. And you'll see that for our results today, our average actually is at [ 18.4 ]. So we've already got ourselves below standard. Of course, we'll have to repeat that for the next couple of years and thereafter. But we've already made some significant investments. And the third thing, I think, in terms of the wider context is people sometimes refer to GBP 56 billion like you did. I mean, that's a Stantec report. I think what I would like to believe is that as we invest, I guess, the GBP 10 billion, which the sector is committed to over the next few years, we'll get better, we'll get more efficient, we'll find different ways of delivering it. And certainly, that's our expectation, is that we'll be able to continue to improve those costs to hopefully bring down that future bill impact. So then that solves, I think, hopefully, and you nod, that answers the first part of the question, raised the eyebrows versus a nod, but I'll take it. The second part, I think, is all around the reputation. And I think last week was really important. I think what's clear from the public perception is that the sector did need to make an apology. It did need to accept that we could have gone faster and quicker on this topic. And that's true for the whole sector, and we stand by the fact that, that's exactly the sector did. I think Water UK got new leadership in, in the form of Ruth Kelly and David Henderson, and they seem to me to be doing a very strong job in their first couple of months. And I think as needed, I think the sector needed the reset. And now what we're going to be judged on is around our series of commitments. And of course, there are different performance levels in the sector, but the reality is, the best companies need to continue to perform strongly and get better and better and set the benchmark. And companies that are struggling on performance areas need to continue to improve. I think that's the best way we can say about it. I think the key issues that are the big topics, Severn Trent has done really well. So if you look at our results today, we try to lean into this exact topic. We've got a whole slide. And I talk about the fact that we are under the spotlight. And I think the big 5 measures, we've got a decent track record on: CSOs improvement, leakage reduction and performance, making sure you don't have hosepipe bans and customers can have access if they want to water in the summer. It's been the best about 30 years since we needed one of those in our region, making sure that we actually help on affordability. The biggest topic if you talk to customers is affordability, manage bills and of course, making sure that we are a good, wide, societal employer. So I think if you take a look at that slide, it tries to bring out our track record and our desire to go further and faster. So quite a long answer, but hopefully, it covers a few points. Very good. Our next question is Sarah.

Two questions from me, please. Firstly, ODIs. So you met guidance for this year and frankly I don't think that should be taken for granted at all given the challenging conditions. So on that, could you please talk us through the strategic pivot that had to take place if it did, given that some areas you would usually do well or maybe more challenging because of the weather? I'm just wondering if the challenges of the year have actually meant you've improved in other areas because of your determination to hit the guidance for this year? And then secondly, this is a super high-level question and maybe one for you, Liv. If you could devise a Christmas wish list of 3 things you'd ideally want from water regulation here in the U.K. What would those 3 things be? I don't mean specific numbers around return allowances, more a high-level question around the future of regulation and the framework?

Really good. Okay. You're all starting with easy questions this morning, not? So the first one is, I think it was a challenging year, otherwise. I mean, we saw the draught 5.5 months on record. We then managed to see all of the rainfall. Actually in our region, we got about the 90th percentile on rainfall. But it arrived in 3 months, right? So that is much harder to run a waste network on that basis, and that came through in terms of some of the underlying performance on a couple of the waste measures. And then we saw the [indiscernible] that's what's caused [indiscernible]. So it's true, we did see some measures that had been friends previously be less friends this year, and we saw some measures we expected to outperform on by bigger numbers, deliver less. I've always said that the most unique thing about Severn Trent is our culture. And what we saw kick in was exactly that. So as you say, a determination, but also we promise our customers a standard of performance, and we were desperately keen to get around 80% of our measures to be green, but also for our customers to see benefits year-on-year. And we stepped in. So I'm going to ask Jude to comment a little bit on some of the -- some stuff that her team stepped in on in terms of voids and meters and then turn to [indiscernible] because we also did some lovely job on the environmental metrics, and we'll talk about the performance on those. So Jude?

Yes, absolutely. So a couple of things in my area. The voids to take the best. So these are the properties where we haven't been charging for consumption. And we worked really hard to identify all of those, bringing them back into charge with data so that we're really confident that we wouldn't upset anybody. And that was very successful. We over-delivered and we kind of accelerated out the tracks on that. And then metering actually, which was an even bigger uphill moment. We hadn't planned to extend our rollout massively last year. And actually, as we could see other areas not performing in the way that we really hoped, we decided to again accelerate out attractive meters. So we secured plenty of meters, where we galvanized the team and we worked dawn to dusk to try and make sure that we put all the meters in the ground that we could do. And again, we're really over-performed there. So some great challenges in work.

And [ Steff ], some highlights for [indiscernible]?

Yes, absolutely. So I think recognizing it was a tricky year in some regards, but we did do some great things for the environment, particularly around biodiversity where we delivered a bumper year and really set ourselves up for what we want to do over the next couple of years as well. In pollutions as well, we had our best year on [ CRS ] pollutions, and we're absolutely focused on driving all pollutions across all asset classes down over the next couple of years too.

Very good. And in terms of what I'd love for Christmas, and it's actually something I talk about quite a lot internally as things I'd like for Christmas, often to the team all over Christmas over you is X, so it's good language. I'll choose 2 and [indiscernible] because he's like giving me the look, says, well, I've got one. So yes, you have one. So the first 2 I'd have is, I think we're going to receive is we want to step up in investment. So we've said that we're ready. We're in a really strong place, and we look at the work we've done on capital delivery over the last few years and on an underlying cost base, we feel that we can deliver really strong pickup for customers, but we'd like to see the next price if you have a step change in investments. We're stepping up this year to our guidance on our own capital investments to between GBP 850 million and GBP 1 billion, and that's part of our AMP8 preparedness. And so we'd love to see a strong support by the regulator for us to focus on water resources, on zero and also for more support for us to head into continued river quality and environment improvements. So that's the first thing, I guess we'd like. The second thing that we'd love for Christmas, I guess, assuming we've got joyous investment, is we'd love clarity early on the price review. So we've been quite open about the fact that we're confident of putting in a good plan. That plan will go in October. We'd love clarity as early as possible in the process. Now I think last time around, we had a fast track situation. That's not formally built in yet. But we've been open with Ofwat, but that's what we'd love, is early feedback to allow us to deliver for customers early by literally starting as early as possible with our pricing. And Shane, what thing you'd love for Christmas?

So I think we probably would like is one of the enablers, I guess, for what you talked about, which is more engineering expertise within Ofwat. So it's going to be a big investment plan, and I think it will be much easier for Ofwat to assess the case if they have more capability. So one of the reasons why we're quite supportive of the fact they're going to be recruiting more engineers because they can assess more of our proposals.

Very good. I hope that answers, Sarah, your questions.

Absolutely.

Very good. Thank you. Dominic, over to you next.

A special sort of hello to -- goodbye to James. Last time, we're going to see him, but I haven't got, James, a specific question for you, so apologies. Two questions from me. Following on, I think, the first one from Martin. And in your spot, you said obviously Water U.K., apologized on behalf of the water industry, and it seems to me to be a unilateral apology. Do you think it's fair that the water sector should take the sole blame for the position that we find ourselves in with the sort of lack of trust? Or do you think other institutions should also sort of step up to the market and be comparable? And following on from that, then do you think that the structure of the regulation of the water sector should change in all sort of oversight? Should we have -- particularly in light of a labor and [indiscernible] view of what to do with the environment agency in Ofwat? And the second question is, is that interesting on your 3 Christmas wish list that you just mentioned, I didn't hear anything about returns. You're obviously going to be pushing your business plans on October 2. Could you just give us some sort of color as to whether you are thinking you have to follow the Ofwat review or the Ofwat return numbers, which, frankly, I think of sort of in another era? Or do you actually think that you should have in a wish list, a significantly higher return for [indiscernible] world we're now living?

Very good. So I guess the second question first. So the way the process works, as you know, Dominic, is you're meant to put in your plan using the Ofwat number, but you can also recommend what you think is the right and appropriate number as well, and that is the named process. This time around that is different to previous price reviews where you have to just accept the number that was given. This time around, you can give evidence you can say what you believe. I suspect that will be the answer for the sector because from when the initial view came out from Ofwat, so much is happening. And they would say that an opening noise as well. I think they have been on record saying that we'll take the very latest data and the very latest macroeconomic position when they look at it, and certainly, the world continues to change. So we don't ever get drawn on debating whacking public, as you know. It's a conversation that we'll have with the regulator over the course of the price review process. But that's as much as we say at this stage or at any stage during price reviews. And in terms of the first part, I mean, I think all the evidence says that consumers, they certainly hold us to a large degree accountable. And so whether it is fair that we get serviced negative price, it is obviously an interesting debate. And I think we'd love to see that broaden out. But the view for us as a sector or rather as a senior team, is that customers wanted us to make that reset, they wanted the whole sector to lean into that apology. And so that's what we needed to do and we stand by that, that we should as a senior team, we should as a sector, have understood whether it is an [indiscernible] infrastructure that's listed for a while, it's not acceptable to consumers anymore and we need to make sure that we do our part of addressing that. In terms of shape of regulators, I mean, they're hypotheticals, and I guess, so I think we should leave that to governments and to regulators to work out their best position. What I do know is strong regulators are the best answer of the sector. So sectors that are seen to have strong regulators typically far better. So I think it's important as well with the stuff that I think Ofwat have announced -- they have announced. They've also set out things they intend to do as part of their next wave of their journey, and we support them on all of those ambitions as well. Good. Dominic, anything else or should I move to Mark? Is that right?

Yes, please move to Mark.

Mark, over to you.

My question is more of an observation and then a question. I mean, the returns are -- achieved are actually quite low, right? If I take the financing outperformance, which is mostly inflation related, I mean, the actual -- you're outperforming a slim amount on ODIs and then you've got base, which is really just too low. And I think as Dominic spoke about, what's -- the provisional numbers for the next price control are just too low. So it's all very well the media criticism, but I'm not convinced those returns are enough to secure the investment required if you get a big step-up in [ RAB ] growth at the next price control. And I guess further to that, and this is the question element for James, is that we saw you resort to equity markets 2 years to go to fund Green Recovery plan, which went tremendously well. How do you think about balancing returns and the need to raise capital and the conversations that you and Shane have with Ofwat on that the next price control? Because let's face it, financeability, you can't do the higher CapEx without the financeability?

So I'll take those because, I guess, we're not going to go into detail on our price review, right? So our price review gets submitted in October. And we are confident that we've got a really good plan that will go into regulator. We're confident we'll then have good discussions and we'll end up with a good outcome that investors will be pleased with. And that's as much as we'll say at this stage. We don't give guidance on dividends and returns outside of the 5 years. We already gave full 5-year guidance. And there's a long journey to go still in terms of understanding how Ofwat rewards good performance and how they make sure the sector was financeable. But don't forget, in their code, they have to make sure the sector is financed but against a notional company. We are very close to notional company. We often are and it is different for us versus others. And they do need to make sure that company is financeable. On your first point, I think it's a bit harsh, actually, to be honest, Mark, because if you look at the AMP6 returns and you cross compare it to the AMP7 returns on RoRE, then actually we're already significantly ahead if you take our cumulative average position. So ignore the base return, look at the actual outperformance and look at the total return. Our RoRE performance at the end of year 3 in this AMP versus end of year 3 and last AMP is ahead. So I know that we'd all like -- I'd like the WACC to be higher as well. Of course, that makes every chief exec's life better. But actually, you've got to play the cards you've got, and we've played them really well in this period of time. And your point on financing, I think...