Severn Trent PLC (SVT) Earnings Call Transcript & Summary

Hello. I'm Liv Garfield, Chief Executive of Severn Trent, and welcome to the 2024 interim presentation. I'm on about staying commentary. And as part of the presentation this morning, I'm also going to be presenting a smart meter. Now why are smart meters so exciting. They help customers get much better access to data. It also typically helps them reduce consumption, which means, of course, the a little bit of reduction on their bill and they help us with leakage, a long-standing totemic issue across the sector. Now we're going to be fitting 157,000 smart meters over the next couple of years as past the green recovery investments and a whopping extra GBP 1 million over the course of the following app through to 2030. Now before we get going, let's first of all, just talk about the highlights from the last 6 months. It's been a strong 6 months. Firstly, I'm delighted to share that we're on track for our fifth ever consecutive year of 4-star EPA status, the highest accolade that the environment agency hands out and a real testament to the hard work of every colleague. Secondly, we're running at around 80% green on all of our performance metrics. And that means we're delivering things that customers truly care about most. And that of course lead into being strong in our position for at least GBP 50 million worth of ODI return this year, and that would make us GBP 250 million ODI rewards so far this AMP. Now we also want to get going for next AMP, and that's why we're accelerating GBP 400 million into years 4 and 5 of AMP8 future spend. And that will allow us to get ahead and to begin to really feel confident about being an ODI outperformed delivery company in the next AMP as well as this period. And of course, in the same 6 months, we've submitted our boldest, our best price fee to date, and we're excited to begin to discuss that with the regulator and, of course, begin to get on with delivering it. Now I need to go down the road now and find the exact address to where I'm going to fit the first of my smart meters this morning. So I'll hand over to Helen to take you through the financials.

I'm really pleased to share with you a robust set of financial results, managing the challenges of the macroeconomic environment and setting us up perfectly for growth. Our financial performance for the first half of the year is in line with our expectations, and there are strong indicators for the future. Firstly, I'm pleased to share that we continue to expect EPS growth for the full year, even after accounting for the [ 46.5 million ] additional shares issued in October. Secondly, we are on course to invest GBP 1 billion this year as we continue to ramp up our capital investment program. At the half year, we are up over 75% year-on-year, and this is a wonderful demonstration of being a growing company with our highest investment year ever. Next is that even with the step-up in investment, we expect our regulatory gearing to remain one of the lowest in the sector, and I'm pleased with the strength of our balance sheet at the half year with shadow gearing of 60.6%. And finally, our interim dividend for this year is 46.74p in line with our policy. If you take a look at the slide, there are 3 key drivers of our half year PBIT, which are revenue growth, scaling up investment for the future and inflationary impacts. And if I start with revenue, we're seeing inflation flow through as well as the impact of our hard-earned ODIs from previous periods, increasing revenue in total by GBP 95 million. Our bad debt charge remains at around 2% of revenue. I'm really pleased to have agreed a 2-year pay deal for our people, giving us cost certainty both this year and next. We are pushing forward as we continue to invest in future growth. Specifically, there is an increase of GBP 14.5 million of OpEx spend, which consists of an increase in green recovery activity as well as the majority of around GBP 10 million of transition costs for our strategic program to in-source critical waste operational activity. This is a significant business change, which will know -- will give us a good return. Now of course, like others, we have experienced above-average inflation increases in costs such as power, which reflect 2022 prices, power pass-through costs, chemicals, which are also heavily correlated to power and other fixed costs such as business rates and regulatory fees. The big picture here, though, is we are moving forward at pace. And as we continue to grow, we will do so efficiently, keeping our cost base under control, at the same time as making the right totex investments to maintain our sector-leading operational performance. Our business services division is a valuable differentiator for us, providing an important contribution to net zero, cash generation and energy cost mitigation. Green Power is a fast-growing business and the U.K.'s largest producer of renewable energy from food waste. We work with over 65 local authorities and 100 major commercial customers right across the U.K. The acquisition of 2 new food plant sites with an digestion as well as the benefits from investment in the expansion of our existing footprint will increase generation capacity in green power by 30% on an annualized basis. And while this is brilliant for future earnings growth, the acquisition did result in one-off costs of just under GBP 4 million in this half year, which coupled with steady turnover and an increase in some operating costs such as labor, resulted in a reduction in EBITDA year-on-year. Operating Services continues to perform well and is able to drive up income from existing contracts because of the consistent, reliable and value performance they deliver. Our Property Development division has generated GBP 53 million of PBIT since 2017, remaining well on track with our target to deliver GBP 150 million of PBIT by 2032. You can see from the chart on the left, we are extremely well placed in our financing costs versus the rest of the sector with 3% lower cost of finance. And we expect to continue outperforming the sector into the future. You can see our cash cost of interest has increased 3.4% due to the impact of higher interest rates on recent debt issues, although we've beaten the iBoxx by 18 basis points on average of the AMP. Whilst inflation hasn't reduced as we expected, the decrease we have seen has reduced our effective cost of interest to 5.6%. We will, of course, see the benefit of higher inflation in financing outperformance and our CV growth. Our chosen debt mix continues to serve us well. At 27% we hold considerably less index-linked debt than others, which has been beneficial during the recent period of high inflation. And it's worth remembering, too, that our high level of fixed debt, together with the iBoxx true-up mechanism provide protection against the high interest rates we've continued to see. You will all know we have an experienced treasury team, which has consistently delivered financing outperformance in both high and low inflationary environment. Backed by our strong liquidity position and broad access to global markets, we've got the flexibility to go to market at the point that's most advantageous to us. But as well as the advantage that gives us, we want to go further. And a great example of that is the work we've done on the EU taxonomy alignment over the last 6 months. As a reminder, we shared our eligibility assessment for the first time at year-end, and I'm delighted to be able to share with you today our alignment assessment. This is something we believe makes us more attractive to both debt and equity investors and is yet another example of how we are differentiated from others in the sector. I'm really pleased that the majority of our financial flows align to the EU criteria with CapEx being the highest at 62% and being the most important of the 3. From the analysis we've done, we believe we can get even better. And as you would expect, work is already underway to improve further, and we'll update you on our progress at year-end. And as we think about the future, it's also worth reflecting on the growth journey we are on. We are forecasting 43% nominal RCV growth across AMP7, which equates to a compound annual growth rate of over 7%. In AMP8, we anticipate a significant step-up in real RCV growth with forecast nominal growth at over 40% again as we deliver huge benefits to customers and the environment. That all means that in the 10-year period from the start of AMP7 to the end of AMP8, we're projecting that we will have doubled the value of our RCV. But we couldn't do that at this scale without the capital injection we have had. And so I want to take this opportunity to thank all of our investors for their outstanding support of [indiscernible] plan, covering our book nearly 4x over. It really is a game changer. It is meant not only could we submit a financeable bold and ambitious plan. We have also been able to expedite unpaid activity and all the benefits that brings, at the same time as reducing financing costs and maintaining our financial resilience and credit ratings. So thank you. So finally from me, let's review our outlook and guidance, which is unchanged since our last update. Due to lower interest costs in the year, we continue to expect year-on-year adjusted EPS growth at the full year, and that's after the additional shares issued as part of the equity raise. We're reiterating our guidance on ODIs with at least GBP 50 million of reward anticipated this year, plus GBP 40 million to GBP 50 million of end of AMP ODIs on top of any rewards that we earn in year 5. You will see the impact of energy prices in this year's totex but even taking account of that, we expect to continue seeing strong average RoRE performance for AMP7. I'll now hand you back over to Liv to see how she's getting on with the metering team.

So I found it by customer, #47, I've got the BNG box, which is perfect. Now did you know that all of the leakage that happens on the network is actually split between our side of the network, which is this side of the BNG box and customer side of the owned network, which is this side of the BNG box. And actually, 1/3 of all leakage in the U.K. is actually on the customer-owned pipes. And that's where smart meters really come into their own. They can pinpoint leaks much faster, help us identify them much quicker and be able to make real progress. Now leakage is a very stretching target, and we're delighted to have hit the target for the first 3 years of the AMP and are well on track again this year. Now before we [indiscernible] work, let's go and talk to the customer and check that okay for us to begin to do that activity. So good news. The customer is happy for us to do the work on the smart meter. Before we do that though, let me just cover our operation performance for the last 6 months. It's been a strong period of time. As I said, 80% of the metrics are green and [indiscernible] at least GBP 50 million of ODI rewards, taking us above that GBP 250 million AMP to date, which is great. Now in terms of which of the metrics that are shining, leakage, as I said, also some [indiscernible] on blockages, a 30% reduction so far this AMP. And quite nice to see one of last year's red metrics turned green again, which is Mainz first. Now that said, there's always more we can do and more improvement. If we look at 2 metrics where we know we want to keep getting better, supply interruptions, whilst we're not yet at the awful numbers, we are actually pleased about our best 6 months to date. And if we look at another metric, external [indiscernible] letting, still in penalty, but very pleased to see that we are the frontier company in our sector on that metric, which again will stand us in good shape for the future, either it is a penalty metric for today. Now looking forward, we want to be the ODI winner next AMP as well as this AMP. And as we were pleased to see around 72% of our metrics are either in [indiscernible] quarter already or literally touching distance to that or core [indiscernible] mark of the AMP8 measures. And that's given us renewed confidence to begin investing in some of the key metrics that we're confident we can be successful in heading into the next AMP period, namely, investing in the Zero Spills hub to bring down CSOs build for the future and creating our very own ODI Center of Excellence, the first task of which is to focus on PCC. We know that PCC is a consumption metric by really helping by installing smart meters, we know that has a really strong impact. It's part of our armory. So let's crack on, let's install one smart meter together right now. Okay, so now, [indiscernible] is going to take the lead in a second, turn the water off temporarily and fit the smart meter. Before I do, let me just explain why reduced consumption is so important to the environment. But having reduced consumption and having reduced leakage through smart metering, you ended where we take less and more to the environment on strategy less water, of course, is environmentally excellent. And we love being the environmental leaders of the sector. We're delighted to be on track for 5 years on the row of [indiscernible] status with 0 serious solutions year-to-date, which is really, really good. But actually, wider across the environmental metrics, we're delighted to be on track for 10,000 hectares of land commitment as part of biodiversity and that would make up 2% of the whole nation's nature recovery network. If you look at the other actually big environmental ODI, it's around farming for water. We'll work with 5,000 farmers, 98% of which would recommend working with us, all on track to, again, continue to make our river water quality even better. So with that, let's begin take off the [indiscernible], okay? That was easy. Take out the inner plug, also easy and now to get ready to turn the water off just for a couple of seconds whilst we fit that meter. Okay. [indiscernible] So first thing, take off the lid, spray the chlorine, make sure you do it away from your face. Okay, nice and clean. Spray down here to make sure the connector is lovely as well for you to flow. Right. So then in a second, I literally just fit this takes as simple as that, a 2-second job. This is just one example, towards the easier end of the scale capital investments are making during the course of this and going into the next. Now colleague has been working across the business on a whole range of different capital investments, and we thought we'd bring to life just a couple of examples of the bigger capital investors now in the course of the video. The first, let me just fit this. [indiscernible]. [Presentation]

Now I hope you enjoy the video. I have brought to life the scale of investment we're doing right now. It's our largest ever capital year, GBP 1 billion spend this year, which is absolutely brilliant and put in such strong shape for the future. We are so excited to have done the hard yards already on capital investment. We're now exactly the right run rate we need to be for the whole of the next 7 years. And that means that we've done some of the brilliant innovation. We've done digital twins to get ourselves ready for the future. We've made sure that we've locked in our supply chain. And we've created this really innovative plug-and-play facility kind of like 3D printing for some of our everyday assets, and you can get quicker into action on our sites and less invasive on-site work for those teams. Now let me tell the customers that the waters back on, and they're fully sourced. So as I walk at the drive to tell the customer the good news, that their water is back on and they can have a hot cup of tea. Let me tell you all about our AMP8 investment plans. We're talking a colossal GBP 12.9 billion totex program, a 31% real RCV growth, and we stand in perfect shape to be able to deliver it. Where that's the 1.2 million smart meters between now and 2030, the net 0 ambitions over the same time window or actually, some of the other activities such as our really, really bold ODI targeted set of cells because we want customers to have fantastic customer service for ourselves. Now we know we're getting ourselves in the right shape. We need to make sure that the regulator assessed our plan against the 3 key conditions, whether it's deliverability, affordability or financeability. On affordability, we feel we're in strong shape with the GBP 550 million of poor package, which will help around 1 in 6 customers that are struggling to afford their bill. On deliverability, as you can see on the right, run rate already for our capital ambitions and we've got ourselves with a locked in supply chain and would have in-sourced activities such as our wastewater insourcing, which gives us a really strong opportunity for the future. And on financeability, following the recent equity raise that was supported so strongly by investors, we then we've got a fantastic balance sheet and we're in the right position with our ESG credentials to really be a strong investment opportunity for the future. So what I'd like to do now is after turning a customer the water back on, I'll introduce you some of the amazing smart metering team because it's all about team and talent that was to cure our future. An amazing plan needs amazing people to deliver it for it to be a success. Our focus today is on the smart meeting team, who came to trade me today, watch it and get enrolled, and I think I'm a little giggle at my expects. Now I am super excited about the future. I genuinely believe we've got amazing people and they are the best asset we have. And that means you also need to have the right skills to make sure that you can deliver against that plan. And we've got the academy, which allows us to really train up on brilliant skills. We've also got a strong track record in insourcing. And most recently, of course, we did the wastewater at network insourcing that we again think gives us a bit of a boost for the future. Now as well as making sure that we've got those right skills, right people, we also need to make sure that everyone is engaged and headed in the right direction. And that's why for the last few weeks, I've been now doing roadshows across the patch, meeting about 3,500 or so pharma colleagues with the remainder between now and Christmas. And I wasn't surprised having met with colleagues and seeing how enthusiastic they are for the next 18 months and for the long-term future of the organization. On our most recent [indiscernible], they were 8.6 out 10 in the top 3% of utilities globally. And that is such an amazing platform on which we can build and deliver exciting things heading into abate. Let me now give you a quick summary of the first 6 months of this financial year. So to sum up, we're focused every single day and making sure that we deliver strongly for our customers, and we closed out AMP7 strongly. We're really pleased this year to have our greatest investment year yet on capital of the GBP 1 billion run rate. And we start an example with a strong balance sheet, the ability to accelerate money now to make sure that we have a really strong 5 years between 2025 and 2030. So with that, a big thank you for listening. We look forward to having questions with you on Zoom later. And the whole of the executive team will be joining me to discuss any topic on your mind.