Severn Trent PLC (SVT) Earnings Call Transcript & Summary

Good morning, and welcome to the Severn Trent results Q&A. I'm Liv Garfield, Chief Executive. This is Helen Miles, our CFO, and you've got almost all of the senior team. Bob Stear, our Chief Engineer, is actually presenting some of the innovation work we've been doing at an International Water Conference today. So we'll still be able to answer any of those questions, but it won't be Bob's delta tones. So with that, first question is Sarah Lester. Sarah, can you hear us?

Yes. And thank you very much. Thankfully, my hand up function works today unlike last week. Two questions, please, for me this morning. So the first one, obviously, a topic of the day, the Cunliffe Review, the Independent Water Commission. We're expected to get the initial recommendations imminently, and there's going to be a lot of pages, a lot of noise. So I think what could be really valuable and helpful, please, is from your perspective, what do you think the market should be focusing on? What do you think the market should get excited about if they see it in the document? And I suppose the opposite as well, what should the market maybe be a little bit more concerned about if they spot it in the document. Then the second question, please, on ODIs, had a lot of interest this morning so far on the anticipated evolution of ODIs over the 5 years. So now we've got year 1 guidance as well as the aggregate 5-year guidance. So just any sort of color you can please provide that fills in the gaps there, key metrics, the evolution, the profiling of that would be hugely helpful. Thanks very much.

Very good. Okay. So I'll get Shane to share with you our sense of the journey of Cunliffe when it comes out, but also, I guess, some early insights as to what we think will occur. Overall, though, I wouldn't be -- don't be nervous. So I guess you asked whether there's anything to be concerned about. I think a review of this type is beneficial for a company like Severn Trent that is considered to be a strong performer, and it works constructively with government and regulators. Cunliffe is a highly impressive guy. He's done a huge amount of work. He wants to create a sector that is good for the long term. And I'm really, really clear that that's what he's looking to do. And so there will be some change, but change is good. For good companies, change is always positive. Shane, do you want to share your perspective and then we'll come back and talk about ODIs after.

Yes. So you're definitely right, Sarah. It's a 300-page call for evidence. So it is wide ranging where they might land. I think the one thing we expect will be more focused on the supervisory model. So Cunliffe has given a couple of indications of this in the document. And they're suggesting this will be in areas where the regulatory rules and base cost models, et cetera, struggle to deliver the outcomes that the government and the sector would like. So this is probably going to be in areas like resilience, both financial resilience, asset resilience and asset health. So we expect to be looking into this space quite a lot. So the supervisory model is the one, I think, to be excited or interested about.

Very good. And in terms of ODIs, so we're really pleased with today's performance. We know that our job is to manage strong results regardless of any weather dynamic or any changes that hit during the course of the year. And so the team has done a very strong job to close the AMP out so firmly. And the reason that's important is because, of course, that's the exit rate that you go into the next AMP on and the targets were actually down again. So you want to be ending year 5 in a very strong position to start year 1 with an excellent run rate. I'll get Steph to talk about a couple of our favorite ODIs. But broadly, we've got a couple in each, right? So we've got a couple of waste a couple in water. I mean I know she'll pick up on leakage, but I had to share with you the couple that we feel most excited about going into year 1.

Yes. Thanks, Liv. So yes, just to talk about AMP8 really quickly. So this last year, we've had our best ever year on supply interruptions, our best ever year on leakage and our best ever year on internal sewer flooding. So we're really pleased with that. And as Liv said, that puts us in a great place going into AMP8. We have got some AMP8 measures that we already really love. So leakage is going to be worth a lot. We are really pleased that spills is in the mix. I'm actually really pleased about pollutions as well. We've got lots of plans and lots of investment there. I think we do a really good job. We actually love all of the measures. We're really excited about some of the new ones like greenhouse gases. We're getting our head around that, and we're really motoring on. We know that customers choose the ODI, so we want to win on all of them.

Very good. Hopefully, come back later, if you've got more questions. But with that, we're going to go to Mark Freshney now for his questions.

Helen, just on your target of doubling earnings over the next 3 years. Just interested in the sensitivities surrounding that because if we look at prior reviews, there is nothing ever goes to plan, right? You've got a big mismatch on inflation, timing at the top line. Tax rates do change even though you take deferred tax out. So I was just interested in what your certainty around that was and the sensitivities and how you can be so sure of committing to that projection when there are so many unknowns.

So just while Helen gets ready to answer the kind of the details. I mean, nothing goes to plan. If we look at the last 5 years, we've delivered GBP 434 million worth of revenue-enhancing ODIs. We originally indicated GBP 25 million in the first year and then growing thereafter. So we've dramatically outperformed on that. If we look at totex, in spite of the Ukraine situation, the cost of living, a whole heap of things and inflation that's been much higher than everyone thought, we've managed to keep totex to 1.1% over spend, which shows that, again, I think that's definitely to plan. And then if we look at financing, at the start of the AMP people were saying, what about deflation? And we've shown actually in the last decade, we can outperform financing in any environment. So I think that's -- I think if you look at the period of time, that might be true for the sector, actually, Severn Trent has proven to be a very, very safe and outperforming place. And that's all added up to RRE. So I guess, base return, we've doubled the base return and some over the last few years, and that's true actually for the 5 years before that. And investors make good returns based on long-term growth in terms of RCV growth. So we've already given guidance that we're going to grow RCV growth by 59% over the next 5 years. So I know what you mean that the world does feel like a less stable place than before. Actually, Severn Trent is probably the best place in that kind of stormy environment. I'll get Helen to share with you why we feel confident specifically on the EPS guidance.

Yes. Thanks for the question, Mark. It's a good question. I think there's a couple of things I'll say. First of all, I wouldn't put something into the market that wasn't really confident that we could deliver. So you can be confident in that, that we're confident we can deliver it. On -- in terms of why have we put that into the market, I think a couple of things. You can see we've got really strong RCV growth of 59% over the AMP, and we're confident that will flow through into earnings. So we want to demonstrate that. And the other thing is that it's a more accessible measure for investors and the markets who are not water experts. So there's that as well. And we benchmarked ourselves against a broad range of utilities, U.K. and non-U.K. And it's typically 3 years guidance that's given around EPS or earnings or something similar. And so we thought that was the right benchmark to look at. So that's why we've given the guidance. We're confident we can deliver it. And all the reasons that I laid out in the presentation really underpin that around our energy hedging, our revenue profile, et cetera.

Very good. Okay. We have Pav next. We might hear from Mark again later. Pav, over to you.

I have a shorter-term question and a longer-term question. I guess my shorter-term question is on weather impacts. And I guess you would have factored that into your guidance is for FY '26. But I'd be more interested in hearing from an operational perspective, what are some of the challenges or benefits to the extent you're seeing them from the weather that we've seen so far this year? And then my longer-term question is on affordability. So how do you engage with the government and customers given we're talking about high levels of build growth, not just in AMP8, but forecast for AMP9 and beyond. I think investors like to hear the story of RAB growth and earnings growth, but that comes at the expense of higher bills for customers. So what's your message to the government and to customers on affordability and value for money, please?

Very good. So every weather type helps one metric and hinders another one. It's just the nature. So I guess, to some extent, of course, if you've had a long, prolonged dry period, then it means that spills typically is going to be much better. So you do end up where you benefit from some of those metrics. And our job is to make sure that it doesn't matter what the weather is doing that we're in strong shape. So I guess the types of things that we're doing is to make sure that we try and deliver even more solutions quicker than possible in spills because the more solutions we're getting now, and we've obviously banked some upside from having less rain in the last few months, then that puts us in strong space for the rest of the year to outperform strong in that metric. Of course, it also means you want to really carefully use your water sources in the right format in the right fashion to make sure that you're keeping yourselves in strong shape for the summer in terms of resilience. We've not had a hosepipe in the Center region for 30 years. So we're quite experienced at how we manage to kind of do that. And a lot of it is about working with our customers to get them to actually use their water, I guess, as much as they need to, but at the same time, not being profitable with it. So we've been driving strong on PCC, working closely with customers in that space. So that hopefully gives you a sense of how every metric wins or loses, depending on the weather type. On affordability, I'll get Jude to jump in. I mean it's an interesting one on affordability because you're absolutely right. Customers, as part of the pricing process, they were very actively involved in what they wanted us to do and they wanted the investment. But of course, the implications of that investment is that bills do go up. And our passionate desire as a management team has been that no customer should ever fear their water bill because we're very conscious that lots of other bills are going up by a much quicker rate than ours, council tax, energy bills, lots of things are rising very fast in the nation, and we want to make sure that nobody feels fear from ours, which is why we've got such a strong package. And I'll get Jude to talk through all the ways that we go out and make sure that customers are aware of what that package looks like. And then, of course, how we're working with government to make them also aware of the offers because we do have the sector-leading package for customers.

Absolutely. We -- obviously, we're working with Defra right now on a single social tariff. But if I swine back a bit, we've always embraced social tariffs -- we have one of the best packages. We help a couple of hundred thousand of our customers with the -- our existing social tariff, and we're increasing our support to GBP 575 million this AMP. And that's going to help around 1 in 6 families in our region. Now the types of help that we do is obviously a tariff. We also are out in the community trying to be clear on the types of support that we can give. We're also able to discuss water meters with people, and we're seeing a really increasing demand for water meters that we're happily able to supply now, which is really exciting. And that allows people to manage their own consumption. So we embrace this support, and we're working closely with government on that social single tariff. We're expecting a consultation out this summer actually.

Very good. Okay. Over to Alex. Thank you very much Pav.

Two for me, please. I guess, firstly, just on the phasing on the EPS guidance. I think you said that it's going to be weighted towards the first year on the build profile. Can you just remind us what the phasing is of the build profile if indeed that's the way that you expect the phasing of the EPS to go over the 3-year guidance? And then my second one is a little bit of a follow-up on Pavan's point. Just on Ofwat talking about GBP 2,000 water bills by 2050. And when we think about the Cunliffe review, do you think that it could unlock materially more opportunity for the sector when, I guess bills and affordability is still so high on the agenda?

So let's do the second one first, and I'll hand to Helen to talk about the guidance and the phasing. So I mean it's a long way to 2050. There'll be a lot of inflation between now and then and base wages in the U.K. will go up a lot between now and then. So I think the way that we look at this is the cleanest way to look at it is to look at what proportion of a household expenditure is going on the water bill. And typically, for the last number of years, it's been 1.2%, 1.3% of your median household alliance -- allowance has been going on the water bill. And if you look at the next 5 years, it's exactly the same percentage. So it's still 1.3%. So when you look at an individual number and say the bill for water is going to be x, it can sound like a very, very large increase. If you look at it as a proportion of the household median income, if that is -- is that staying not very dissimilar, that's staying within that ballpark, it shows that actually it will be manageable. So that's one way I would look at it is to think about it that way. The second way I look at it is that you can spend a lot of investment. And because it doesn't actually play out straight away, it goes up for 25 years. Again, we could do an awful amount of investment in our sector that wouldn't dramatically rise the bill straight away because you do get that 25-year curve. That's how the whole process works, isn't it? So we're spending a few thousand pounds per household this AMP on every household in terms of investment if you divide it that way. But of course, the bill doesn't become that. So I think you've got it -- there will be 2 different ways, Alex, I would look at it. But in terms of the Ofwat engagement, I think what we want as a sector overall, every regulator, government and the water companies is we want to be a sector that delivers strongly, has strong resilience and is in good shape for customers. And we want to do that as efficiently as possible, and that's part of the journey is what's the best way of managing that equation over the next 20 years. Good to Helen, do you want to talk about flow?

Yes. Alex, yes, so the bill increases in real terms every year across the AMP. Obviously, then you've got to add inflation. But if you just look at the real term increases, there's a bigger increase in year 1 relative to the following years, and it drops off quite significantly in year 2 and then the increase reduces in real terms. So it's about a 15% increase in year 1, and then it drops off, but it does increase every year in real terms.

Very good. Hopefully, that helps. Dominic...

A couple of questions to me, I think my first question has probably got a couple of parts in it, so apologies. I know how you like that. The special measures bill obviously got Royal Assent, a couple of months ago. And I wanted just to explore that one, first of all, on what impact do you think that is actually going to have on retaining and attracting sort of talent? And then some technical sort of question underneath it is that clearly, you've done your -- you obviously released your results today. How long does it take Ofwat to opine on sort of a remuneration policy in their reports? And how does your Board and your remuneration committee sort of sign that off within the concept of your results actually be out today? Is there like a potential mismatch? Or how has that one worked? And secondly, coming back to the Cunliffe review. I think you say change is always positive. I think one area that they're potentially looking at debating is whether the notional model is correct or whether you need to go to a more sort of company-specific model. And that could mean or could that mean to a better performer like yourself that you might end up with sort of capped upside versus sort of the sector? I don't know what your thoughts would be on that.

Very good. So let's take them in reverse order again. So the way -- some of the conversations that I've had a sense of based on all the paperwork and all the discussions we've had is that the comparative benchmarking doesn't go away. So there is still absolutely a need for comparative benchmarking on costs, which means that you will still have companies outperform those models and still keep the upside, right? That looks to be the way that it's playing through. The difference is, is that there are obviously also factors geographically and locally to companies, and that also needs more factoring in. So that seems to be the situation. So let's wait and see. It's only a few weeks now until we get the actual situation, but we still feel comfortable that this is a regulatory sector that wants outperformance to continue to outperform. But equally, there are some people that are struggling and what Cunliffe is obviously grappling with is how to maybe get people that need redemption back into that situation. So I think that's -- but we genuinely believe that they want companies like us that are leading the way to continue to lead the way and that the sector regulation will continue to encourage that. So that's our perception. On the first part then, so I'll talk about retaining and attracting talent and then Neil can just share with you just very simply the time line, but broadly, no problems as far as the time line works. But I'll get Neil to explain how that works because he's better at that than me. So we are in a growth period. So we're an organization that has chosen to in-source more to give ourselves more control and more opportunities for the future. And we're delighted with the talent that we are recruiting and retaining. We've been out in the marketplace the last -- just this year alone with a couple of senior talents. So in the kind of like there's like my top 8 that work here and then there's the 42 that work for the 8. And we've had brilliant talent. I mean, our Head of IR, Nicola, is an example of excellent talent that has wanted to join us during the course of that period of time. So we're not seeing any pullback from people wanting to join us. I think we are a listed company that has really good growth potential, has a really committed wide situation, whether it's to ESG, whether it's to being proven to really grow talent well and to help people support their careers and whether it's exciting activities to work on. And we're in a wonderful moment where we've got really exciting things for people to work on. So I'm not worried at all about the ability for Severn Trent personally to recruit talent, to retain talent and be seen as a bit of a talent magnet, not at all. I feel really strongly that we're in excellent shape on that basis. But Neil, just remind us of the time lines and logistics program.

Yes. So we've been engaging and discussing with Ofwat throughout the consultation period. So we've been following very closely the guidance there. At the beginning of June, we believe we'll get the final rule in the guidance around it that will come out. We have a pretty strong understanding of what we believe will be in there. And so time-wise, that doesn't cause us any problems in terms of our remuneration assessment and our normal time line process.

Very good. Okay. Jenny, over to you.

Two questions, please. Firstly, just on ODIs, the GBP 25 million that you've targeted for the year ahead. Can you just remind us what you're assuming or what's the basis of assumption in terms of the split between the clean side and the dirty side? Because obviously, as you alluded to earlier, the weather may impact one more than the other at any point in time. So just trying to get a gauge of whether that GBP 25 million is actually quite conservative given the dry weather conditions we've got at the moment. And can you remind us how you're going to take it? I understand the decision haven't been made yet, i.e., whether it's through revenues or through RAB. So just a clarification on that. And then the second one, just with regards to the pipe -- the water pipe burst that you've seen, is there going to be any costs associated with that, that we should bake in? Two very specific questions.

Very good. No, on the water pipe burst, I mean, dramatic photo, but actually operationally brilliantly managed. I think it was less than 1 or 2 seconds of supply interruptions impact. customers all held on supply, so no. On the -- how we take it, too early to tell. So we don't actually complete the year until a year from now, and then we don't get the money anyway from Ofwat until 2 years after that. So it'd be too early to decide what to do, and it's not a large amount of money in the first year around GBP 25 million.

The expectation from Ofwat is revenue, you can always apply for that.

Precisely -- so we've always taken its revenue previously. So we might probably continue with that, but we can decide, right? So it's with us to choose in a couple of years' time. And then in terms of -- when we give the guidance, it's like the Grand National, right? You're running a lot of horses. So there's a lot of horses being run. And I guess you just see what ends up doing well. We've got a long time to go. We're only -- we're 5 months into some metrics and 1 month into others. So of course, we're going to be shooting to be higher to make sure that we definitely land GBP 25 million. Some measures might gain a bit from weather, some -- you said I've got no idea what the summer is going to be like yet or the winter. So too early to give you any sense of the split between water and waste. The only thing we've said to you so far that we feel very confident on in year 1 is leakage and spills will be good numbers, but we are confident about that before any weather situation because our run rate is so strong going into both of those metrics. So the bigger thing is your trend data is more important to you than weather. Weather is us to manage. Trend data shows the progress you've made on your underlying performance. Thank you very much. James, over to you next.

I missed the first 5 minutes. So hopefully, I'm not asking questions that have been asked already. First one was on Cunliffe. Obviously, you kind of touched upon that in one of the earlier questions, but I was wondering whether you could just step back a bit and you could tell us if you had any kind of major expectations from Cunliffe. What areas do you think it's going to swing the needle the most or maybe you don't want to speculate at this point? And then secondly, on drought risk. On one of your earlier questions, you sounded reasonably relaxed about the risk. I'm sure you probably wouldn't want to characterize it yourself that way that you're relaxed. But you didn't seem to be that worried about big impact on your region. Is that because you're in a good position in terms of reservoir levels and things like that? Or you've just been good at dealing with it in the past? Maybe you could give a bit more detail there.

Very good. So we did cover Cunliffe early. I'm afraid you get to be like a bang of [indiscernible] for that. So Jenny covered that first thing, so she's still in that question. So we won't do that again. I mean on drought risk, I suppose all weather types require effort. So it's -- when you've got a freeze-thaw, it requires effort and you can never be complacent about any extreme weather type. So we are working hard to make sure like we do every year, they're in strong shape. But we have got a playbook that we kick in. It is 30 years since we last faced a hosepipe ban, and we're playing to that playbook. But we're happy to talk about what we're doing because that might be of some interest. I guess if you don't work in the water sector, people sometimes don't know all the efforts that you can go to. So I guess, Steph, do you want to bring out all the various things that we are doing?

Yes, absolutely. So we're really lucky in 1/3 of our water comes from groundwater sources. So we're absolutely maximizing those to protect the raw water in the reservoirs at the moment. We've got the grid so we can move water around. So where the demand is, we can supply water in those places, too. Our leakage is at the lowest level that it's ever been, but we're increasing find and fix in the areas that need it most. We're using our people because we know that they are our best advocates. So we're running lots of campaigns internally. And we're asking our lovely customers for help as well. So there's a whole summer of campaigns around usage and reminding people how much liters -- how many liters of water it uses every time you turn your sprinkler on. And it is raining in Coventry today as well. So there's plenty of time for the rain to come.

And definitely as well that we actually have new water sources going on this year as well. So James, do you want to talk about Witches Oak?

Absolutely. So Witches Oak is a new treatment works that we've been building as part of the Green Recovery program. We've actually enabled and built that whole program within a 3-year period, which is just unbelievable in terms of speed. And that source itself will be available later this summer actually. So that will help in the scenario of any high peak demand periods. And obviously, we'll be there not only now but for the future.

Very good. Okay. Good, right. We're getting into some questions we've got actually here on the iPad now. So [ Michel Debs ], he came first actually. So I should have done him right at the start because he was the first question that came in. Shane, it's one for you actually. So can you please clarify how the CMA referral executed by your peers will impact the setting of common ODI benchmarks?

So I think first one, just a reminder, we have been a sector leader for ODIs for the last 10 years, and we have provided a forecast of GBP 300 million for AMP8. And the reason the CMA companies are appealing is because they're likely being a penalty for AMP8 on ODIs. So it's quite a different context. So the OAM is a mechanism is designed at the FD to be rarely used, so Ofwat changed the rules. So to create the plus or minus 50 basis points and define the median as the middle 3 or 4 companies. So given these points, it would only have been used 3x out of the potential 20, so 10 for water, 10 for waste. So I think given this context, it's probably 50-50 whether the CMA will opine on whether the OAM should be adjusted or not. So I think in terms of the context for us, it's largely immaterial. So not largely -- it is immaterial to us. So I would just keep the GBP 300 million in the model.

Very good. I'll do the second question here, then we'll come back to Dominic. So the second question is from Julius from Bank of America, who's struggling to get his tech to work this morning. So he asked us a question about Cunliffe, but I think we've commented on that already. It's the same question actually as we had a couple of times. The second one then is, Helen, one for you. So on bad debt expenses, we saw a slight tick up of this as a percentage of household revenue. Where do you see this ratio going over AMP8 given the increase in bills?

Yes, great question. If you look over the last decade, our bad debt has been between probably 1.8% and 2.2% in various economic situations and bill profiles. I think we remain confident that across the AMP, it will be around that similar range. We've got really high direct debit penetration, and that has increased over the last 12 months. And we've also got high pay on bill. So we're very comfortable that even with the bill increase, we'll be able to manage within those ranges.

And we've seen early positive signs. Haven't we Jude. If we look at the last few weeks, obviously, we have obviously issued the bills and we collect, and we've seen good early indicators.

Yes, absolutely. So we're not seeing collections down. And back to Helen's comment about direct debit penetration, we've actually seen that increase since the bill rise. We've also got lots of customers talking to us about meters, and that gives them the opportunity to manage their consumption. So as Helen says, we're expecting to stay well within those bounds.

Very good. Dominic, back to you.

Yes, a couple of things. A question here really is basically on system planning and strategic direction. And one of the things I think has been quite interesting to come up in the conversations I've been having is that, obviously, there doesn't seem to be a regional sort of level development authority. It doesn't seem to be like a NESO equivalent in the water sector. And one of the comments that I got back is that the Welsh government tends to do better than the English government in sort of long-term planning. And clearly, as a company that straddles both sides of the border. I'd be interested in your views as to whether or not we should have some sort of NESO equivalent in the water sector. And is the Welsh model something that should be adopted on its planning in the English one?

So we're definitely not going to get drawn on a Welsh versus English government situation. So that's definitely one we'll avoid. I guess if you think about NESO, I mean, I don't think Cunliffe intends to go down the NESO path. I think because whilst there is definitely more to be done regionally, I think one of the things we will see come out of Cunliffe is more focused on regional. Actually, the big thing is around enhancement spend. So -- and it's about the trade-offs. So the bit that Welsh does very well is it does very good conversations around those trade-offs. So as in -- you don't want to put the bill up by more than x. So if that is kind of like the kind of situation that you say we want bills to go up consistently every year. We want to invest in every year, but what's the kind of like the prioritization of what comes first, then I think that's where more regional voice would work. And people have sometimes talked about catchment model. I think this is a bigger model than that. It's about taking like entire river basin areas and saying, if we think about the Severn or the Trent as an entirety, what else could we do in that entire area that would make logical sense for the long term. So I think we will see ideas of that. We would relish that I mean we're very well connected into the fabric of our communities, and we would love the opportunity to get more of a voice, but also particularly around the prioritization. Currently, we lean into that. We do an awful lot of customer research, and we think we get it right. But I think actually, reputationally, I think it will be more helpful to us to have a wider voice of stakeholders saying, actually, we also support this. This is what we want, and we would love it. So we will be delighted that what comes out of kind of actually is a bigger role for regional guidance, and we think we would work brilliantly in that particular situation. Very good. James, anything you want to throw in is our residential Welsh expert?

Yes. The Welsh angle is really interesting one, actually. The Welsh government have really focused on how do they bring together water companies, regulators and the farming community as well as housebuilders to really try and drive some action. I mean it's still quite early days in terms of the progress, but there has been some good catchment examples that have been put in place and are starting to pay dividends. And obviously, the Cunliffe review does straddle England and Wales. So no doubt they'll take any particular learnings from that and play that into the overall review.

Very good. So that is all the questions. So a massive thank you very much, everybody. Much appreciate your attendance today, and we look forward to seeing all of you in person at some stage very soon. That's it. Thank you very much.