United Utilities Group PLC (UU) Earnings Call Transcript & Summary

Good morning, good afternoon, and welcome to the United Utilities' response to its final determination. [Operator Instructions] I would now like to hand over to today's host, Steve Mogford, Chief Executive, to begin.

Hello there. Thanks, Tyler. Good afternoon, everybody, and thanks very much for dialing in. As Tyler just said, I'm Steve Mogford, Chief Executive of United Utilities. And I've got with me today on the call, Russ Houlden, our Chief Financial Officer; Louise Beardmore, our Customer Services and People Director; and James Bullock, our Strategy and Regulation Director. Earlier today, as you know, we announced that we've accepted the PR19 final determination and confirmed the United Utilities Group PLC dividend policy for AMP7. This call today is to give you opportunity to ask questions following this morning's announcement. However, first, I'll just give you a brief overview. The team here today, along with colleagues throughout the organization, have been instrumental in delivering the operational transformation we've achieved in AMP6. And our recognized approach to innovation has been key to this, and it will be fundamental in helping us meet our targets in AMP7. Having made our detail assess -- detailed assessment of the final determination and recognizing the interest of all stakeholders, the Board has announced its intention to maintain the dividend per share as we exit AMP6 and to grow this in line with CPIH through AMP7. Today's announcement represents the final stage of the PR19 process for us, and we now look forward to delivering against our plans for AMP7, and these provide further service improvements for customers, lower bills, investment to improve the resilience of the region's water infrastructure and the continuation of our responsible approach to financing and pensions. And all of this is underpinned by a robust and sustainable capital structure. We've already made good use of the additional time and clarity that achieving fast-track status is afforded, and we're hitting the ground running even before we start AMP7. So I'd now like to invite questions. If you could say who you are, as you do that, please?

Thank you, Steve. [Operator Instructions] Your first question today comes from James Brand of Deutsche Bank.

Congratulations on maintaining the dividend. I had a couple of questions. I'm not sure you necessarily want to answer them at the moment, but I just thought I'd try just in case you're willing to share some context. The first is on the payout ratio, the IFRS payout ratio. It looks, based on my modeling, very comfortable in the first year and less comfortable in years as you get to the end of the regulatory period. Do you think that the dividend per share is covered by earnings throughout the period? And does it matter if it is? Or is it more about the balance sheet? And the second question is just on the balance sheet. Also, my kind of estimates, you'd de-gear at least in terms of net debt-to-RAV as you go through the period, but remain comfortably within the target leverage range that you set out. And I was just wondering whether you're able to say whether you -- that was also your projections that you'd de-gear over the period. And are you comfortable with that, whether investors should maybe anticipate that if you do de-gear that you might -- you could think about special dividends or additional distributions?

Okay. Thanks, James. I think you're correct in the sense that what we do when we look at dividend is we look at it over the 5-year period because, obviously, the settlement itself is a 5-year one. It is true to say that we've -- we're stronger in cover over the first few years. And essentially, a function of that is the fact that we pulled forward revenue through the use of the CPIH mechanism to get a softer landing into the beginning of AMP7. So yes, you're right. We do get thinner, but we're satisfied with the level of cover across the 5-year period as an average. In terms of balance sheet de-gearing, I think, again, you're correct. But Russ, do you want to pick up on that?

Yes. I think, James, you're right to say that we will probably marginally de-gear, but we're going to be well within the 55% to 65% range. So I wouldn't expect that we'd need to do anything like you were suggesting in terms of special dividends or any other adjustment mechanisms.

The next question comes from Deepa Venkateswaran from Bernstein.

So my question was really about the assumptions that you've made on the outperformance. So I read in the press release that you are trying to use the outperformance in the last 2 AMPs. Is that something that you've discussed with Ofwat and you're okay? And is the amount or the balance in this around GBP 250 million or GBP 300 million? I wanted to check that. And then on top of it, have you assumed any sort of outperformance that you will be already making in the current AMP from financials or ODI or totex? And just an idea if there's any uncertainty or anything we should be wary of in case those performance measures don't come through?

I think, firstly, in terms of the assumptions that we've used in terms of the outperformance dividend that's coming through from AMP6, principally is essentially what we've done there, is looked at the outperformance that we effectively earned through AMP6, and this is yet to be paid up to group from Water. We've looked at that in the context of its co-sharing with customers. So I think you're aware that we've already consumed GBP 250 million plus another GBP 100 million of fast start only from AMP7. So essentially, the payment that we would pay up to group is post customer sharing. But essentially, we're satisfied with the level that we're doing because, I think, when you look at AMP7, we've got a lower capital demand because we've got a smaller capital program than we've had in previous AMPs, and we've got a -- quite a strong balance sheet. So I think as far as we're concerned, we're satisfied with the ability to essentially use the outperformance in AMP7 to sustain dividend. I think in terms of outperformance going forward, I think we've said to you consistently throughout the period, we're not really -- we're not talking about absolute levels of outperformance at the moment in terms of our targets and expectations. I think we'd like to get a little way into the AMP, as we did last time, before we start putting numbers on it. But certainly, as far as outperformance is concerned, we are in a position where we believe that there is opportunity to outperform. If you look at the mix of ODIs we have, some are very tough, some that we -- if we go for it, we think there's an opportunity to outperform. So I think, across the board, again, we do expect to see outperformance as a contribution. And I think in looking at that, we see that there's also an opportunity to build our resilience as we approach AMP5 in the same way as we've done the AMP6 and giving ourselves resilience by the time we get to the next final determination positioning.

Can you just clarify how much of the past outperformance is the balance that you can still distribute?

We haven't declared that, but you'll see it in the UUW accounts when they come out later this year.

Dominic Nash of Barclays will be next your question.

Well done. Two questions, please. First, if could you just remind me how much non-appointed assets and profit do you have? And you're saying that you're going to pay out profits from those into your dividend. Is that meaning that you're going to be retaining any earnings there for future growth? And secondly, just to [ walk down this ] one. On the targets that you've gotten in the final determination, when you went through your plans internally, are there any individual targets that you looked at that you think of particularly something that outstand and you as a management team should focus on more than any others, please?

Okay. Do you want to do the non-appointed asset one, Russ?

The non-appointed is pretty small, isn't it? About GBP 5 million to GBP 10 million, something like that, in terms of profit. So it's not the major contribution. I think the main thing is the regulated business where we would expect to achieve the targets. And as Steve said, our aim would be to outperform them.

Yes. I think, Dominic, we're about as pure play as you can get really in terms of regulated. We've got sort of JVs, and we've got our energy activity, but it's tiny in terms of the size. I think in terms of targets, we saw, coming out in FD, some adjustments to the targets. So for example, I think you remember that we went in with a 20% target, only in case that's been reduced to 15%. So we're reasonably happy with that situation. I think it puts us in line with the rest of the sector. Some of the other targets in other areas came down from an FD perspective. So in things like supply interruptions, which brought the target much closer to our actual performance, I think, again, we can see some upsides in the FD coming through. The one area that, I think, again, we saw an improvement in FD, but is still quite a challenge for us in the nature of our region is sewer flooding. So we've long been an outlier on sewer flooding in the sector, and that's an area where we've got plans for very significant improvement as we go through AMP7. And it's where we spend some of our GBP 100 million of early start money in order to get a lead on that. So I think that's an area for us, but there are other areas of opportunity. So I think, probably fair to say, when you look across the board, there are some tough asks, and there are some easier ones from us. I think it's probably true of everybody when you look across the sector, and none of us is a leader in everything. And there are some areas where it's tough for us to plan into one of them. If you want to keep your eye on that going forward, that's one to keep an eye on. But there are others where we've got opportunities.

Probably worth saying in terms of those opportunities and, in fact, to deeper dive on ideas generally will be a topic for this Capital Markets Day. So look at -- watch the space on that, Dominic.

It's an area, Dominic, where you might think we are applying quite a lot of effort around systems thinking and innovation to address those areas. So -- but our Capital Markets Day will be opportunity to go into that in more detail.

[Operator Instructions] And the next question today, Steve, comes from Martin Young of Investec.

Just a quick one for me. I just wanted to sort of pick up on your last point around the Capital Markets Day. And obviously, you've alluded to talking about ODIs at that event. Previously, in today's call, you kind of gave the impressions that anything about outperformance might be sort of being further down the line. So when we think ahead to March and you're talking about ODIs, is it very much going to be scene setting? Or will we actually get some indication from you as to where you might be in reward territory and where you might be in penalty territory ?

I think what you could expect to see when we get to Capital Markets Day is probably an understanding of where we are in terms of current performance, what the targets are for the ODIs and the sort of things -- some of the things that we're doing effectively in terms of drivers of performance as we go through. So I think when you get to March, will we give you hard numbers for expectation for the AMP? I don't think so. I very much doubt that. I think I'll be surprised if anybody does. But what we can do is give you a better perspective on where the opportunities and challenges lie it's the ODIs for us and where we currently stand. So you can get a sense of what we're doing.

Jenny Ping from Citigroup is your next question today.

Just one question from me. What was the final decision that you've made, one, on the deferred tax inclusion within your EPS numbers just in the context of looking at payout, but also some investments, especially those on the other side of the pond who tend to look at these. And I just wondered where you are on that decision?

Yes. We've said that we're going to wait for the final determination. We said we're going to wait to see the progress of the rate-regulated activities project through the IASB. We've obviously now got the final determination. The rate-regulated activities project through the IASB was due to produce an exposure draft in the first half of this year. But it looks like it's probably slipping into the second half. It's clear to us because of our involvement in that project that this deferred tax issue would effectively be addressed by rate-regulated activities accounting as with a number of other factors. And therefore, it would seem to us to be a sensible stepping-stone towards rate-regulated activities to move to make the same adjustment that Severn Trent and panel have made.

And next up, we have Verity Mitchell from HSBC.

I'm just curious a bit about your approach to leakage. And clearly, you were given a really tough target, the draft determination. So did you start to do work on the premise that you would have an even tougher target that -- than you have now? And therefore, you're slightly relieved and feel much more confident about your leakage targets.

Thanks, Verity. I think, yes, you're right. When we kicked off our early start investment, we were doing that against the 20% leakage target. I think probably we were surprised when it came in at 15% in the FD, but we sort of understand of what's rationale for that. I think that it's still pretty tough. And I think it's a steep profile in terms of the change, particularly as you get to the back end. So I think the early start money for us was money well spent. And yes, tough, but an easier target, if you look at that. I mean the truth of the matter is we do as much as we can, because I don't think this is a topic that's going to go away for the sector. So it's a very emotive issue. And I think that the journey that everybody is going on is just the beginning, quite honestly, over a number of AMPs. If we exceed 15%, then we're into reward territory.

[Operator Instructions] Okay, Steve, it appears Verity was the final question. So I'll hand back for any closing remarks.

Okay. So thanks very much. Thank you very much for coming on the call. I think we are delighted to be where we are, delighted to now be at the end of the process and have a very clear view ahead of us of both the targets and the opportunities. I think Capital Markets Day, for those of you who might not have picked up on it, is the 2nd of March. So I look forward to seeing you there for those of you that can attend. Thanks very much. Good afternoon.

Ladies and gentlemen, that does conclude today's call. Thank you for joining, and enjoy the rest of your day.