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

Good morning, everybody, and welcome to our results presentation. I'm Louise Beardmore, Chief Executive of United Utilities. And I'm joined today by our CFO, Phil Aspin. I'm going to start by taking you through our operational performance for the first half of the year before handing over to Phil, who will pick up on our financial results. I'm then going to provide a business update, including recent developments since we submitted our draft determination response in August, our accelerated program for spill reductions and our additional investment plans for Lake Windermere. Of course, we expect that you're going to have some questions, and we really look forward to the opportunity to answering those during a live Q&A at 9 a.m. this morning. It's been a busy first half of the year, and we've been focused on delivering improved services for our customers and, at the same time, ramping up to deliver a significant program of investment in AMP8. We've been faced with record levels of rainfall and storms making it a really busy time for colleagues, but we have responded extremely well. So I'm really pleased this morning to be able to announce a strong set of both operational and financial results. From an environmental perspective, we are pleased to have been awarded 4-star status in the EA's performance assessment for 2023. And we're really encouraged to see that in Ofwat's water company performance report that was published in October, we were the sector-leading company for ODI rewards in FY '24. And despite the storms and that higher-than-average rainfall, we're on track to deliver at least in line with this performance in FY '25. Now more than ever, great customer service really matters. And therefore, it's really encouraging to see our strong position on customer service, improve further. Our underlying EPS has more than doubled to 26.8p, our RCV growth is in line with guidance, and our gearing remained stable at 60%. So if we look at our operational performance for the first half of the year. On water, we've been focused on reducing levels of leakage and are seeing a real benefit from satellite imaging of all of our water mains, accelerating the time to both locate and fix leaks. We also have some exciting projects underway utilizing telecoms' fiber networks to detect leaks and are encouraged to see future opportunities from the partnerships we're putting in place. We're continuing to invest to improve water quality. And so far this AMP, we've seen a fantastic 26% reduction in water quality complaints. I'm really pleased to update you that we're making excellent progress upgrading the Vyrnwy aqueduct that takes water from Wales up to Liverpool and Cheshire, and that's going to enable improvements in water quality for over 1 million customers here in the Northwest. There continues to be a strong focus on wastewater performance, and understandably so. And in July, we were 1 of only 3 companies to achieve 4-star status in the EA's EPA rating, which means we have achieved 15 out of a possible 16 stars since the start of AMP7. On serious pollutions, we've been green on the EA's assessment for 13 years, the only company to achieve this. And despite that heavy rainfall, we've had no serious pollutions in the first half of this financial year. We are clear we need to do more, and we are seeing opportunities to improve our pollutions performance even further. This chart shows how we have consistently outperformed the sector, and we are focused on sustaining this performance driving down our total pollution numbers even further. Our analysis shows that 1/4 of our incidents are due to power supply disruption, often during those storm conditions. So we're making investments to improve power supply resilience at our treatment works so that we can drive those reductions in pollutions that we all want to see. Innovation is playing a really key part in helping us improve our performance. We've been introducing thermal imaging drones to help us detect potential pollution incidents. In this side-by-side comparison that you can see on the slide, you can see that the thermal imaging picture on the left can identify potential pollution issues that are not visible to the naked eye. Here, you can see a plume identified in the white box that originated from a private drainage issue. What was great is we were able to intervene and take corrective action before a pollution ever occurred. But our investment is not just about spotting potential pollution issues. We're also enhancing our state-of-the-art AI system to predict and prevent pollution incidents before they ever happen. One way we're going to be able to minimize pollution incidents is by detecting and preventing operational issues in our network. We continue to develop and implement a wide variety of schemes and initiatives to reduce blockages. And our investment in our sewer sensor capability and proactive monitoring and AI, combined with early alert systems as part of our dynamic network modeling capability, is really paying off in our performance. As a result, we've had our best ever performance so far on sewer blockages, and we're seeing a progressive reduction in sewer collapses over this AMP so far. Although it's clear we need to do more, we're really encouraged by the improvements we've seen in our network and we're now focused on driving down pollutions even further. We continue to perform well across our measures of customers' experience, consolidating our leading listed company position for service. We've had a solid start to the year on customer experience, ranking 4th place WASC overall, continuing the strong performance we've had on these measures in every year of AMP7 so far. And we've been driving really hard to improve services for developers, and I'm really encouraged to see that we've achieved the 1st place ranking in the most recent D-MeX survey. We're also positioned as the 1st place WASC for business retailer experience, a new measure that's going to have a greater importance as we go into the next AMP. Ofwat is rightly increasing the number of customer service measures for the next AMP, and we feel very well placed to respond. Here at UU, affordability support has always been a priority, and those benefiting from our comprehensive set of affordability schemes has once again grown. I'm really pleased that we've been able to support 400,000 families through our affordability schemes this AMP. And we have over 475,000 households on our priority service register. We were really encouraged to see that last week, we were recognized as exemplary in a number of areas in Ofwat's assessment of water companies' vulnerability strategies, showcasing our commitment to helping customers who need it most. Now recognizing our ESG performance. We are the first and only U.K. water company to have achieved a validated science-based targets for the near term, long-term and net zero by SBTi. Our Environmental Investment Fund is going from strength to strength, having enabled us to support a range of local community environmental programs supporting river cleanups, citizen science projects and youth clubs, all grassroot environmental projects right across the region. And I'm really pleased to say there are over 40,000 beneficiaries of this fund so far. With a massive step-up in activity in AMP8, growing and nurturing talent is a real key priority for us here at United Utilities. And I'm really pleased to see that we've recruited over 500 graduates and apprentices as part of our programs to AMP7, enabling great STEM-based careers and enabling that future growth into AMP8. We're also driving more inclusivity in our recruitment, partnering with Ambitious about Autism and the 10,000 Black Interns program to provide better access to career development opportunities for everybody. And I'm also really pleased that UU has been recognized as 1 of the top 10 companies within the FTSE 100 in the 2024 Corporate Religious Equity, Diversity and Inclusion Index. And finally, we ranked really highly in a range of ESG indices, being rated as low risk by Sustainalytics and having retained our Fair Tax Mark accreditation the sixth year running. With that, I'm now going to hand you over to Phil to take you through the financials.

Thanks, Lou, and good morning. Firstly, here are the financial highlights. Revenue increased by around 11% in line with our guidance, largely as a result of a revenue cap increase. Underlying operating profit increased to GBP 336 million, primarily reflecting higher revenue, with underlying EPS of GBP 26.8, a 103% increase on the prior half year. As expected, the interim dividend per share has increased in line with our policy to 17.28p. And finally, our balance sheet is strong with gearing at 60%. Before getting into the detail of the first half performance, I wanted to remind you of our AMP7 financial framework. It remains unchanged. Our RoRE guidance for the AMP is between 6% to 8% real. We continue to forecast an RCV growth rate of 4% to 5% per annum. Our dividend policy is for growth in line with CPIH inflation. And lastly, we continue to benefit from our strong balance sheet with gearing of 60% in the middle of a 55% to 65% target range. Following the draft determination, Moody's and S&P this week announced they were placing our ratings on negative outlook on the back of the sector move, reflecting their changed assessment of the stability and supportiveness of a regulatory environment for U.K. water companies. We will provide an update on our financial framework following receipt of our final determination in December. Now turning to our underlying operating profit bridge. Underlying operating profit of GBP 336 million is up GBP 65 million on the prior half year, in line with our expectations. Revenue increased by GBP 107 million or around 11%, mainly driven by the inflationary mechanism and the impact of prior period adjustments in respect of consumption. Operating costs have increased by GBP 19 million or around 5% compared to the prior half year. Depreciation has increased by GBP 27 million, reflecting accelerated depreciation of GBP 10 million in relation to decommissioning of assets following completion of a new West Cumbria water treatment works as well as the usual increase to reflect underlying growth in the asset base. All of this results in an underlying operating profit of GBP 336 million, a 24% increase on the prior half year. Underlying net finance expense for the half year was GBP 153 million, GBP 27 million lower than the same period last year, largely reflecting lower inflation applied to our index-linked debt, partially offset by a reduction in capitalized interest and pension interest income together with the increase in cash interest. Cash interest rose GBP 24 million reflecting both the increase in debt and higher interest rates. On underlying tax, we recognized no current tax charge for the half year, in line with our guidance, as we benefit from full expensing. We expect this to continue into the second half resulting in no current tax charge at the full year. This results in underlying profit after tax of GBP 183 million and an EPS of 26.8p. Our balance sheet continues to demonstrate financial strength with gearing at 60%. RCV has grown to GBP 14.9 billion, up from GBP 14.7 billion at the end of March, and net debt is GBP 9.1 billion. We maintain a track record of responsible financing policies and we benefit from a fully funded pension scheme so we're not subject to unfunded costs in the future. Lou has already mentioned how operationally we're setting ourselves up for AMP8. Having fully funded AMP7, we're now funding our AMP* financing requirements and have raised GBP 830 million in the first half of this financial year, providing GBP 2.6 billion of liquidity which extends out into FY '27. So before I sum up, here is a reminder of our technical guidance for FY '25. Reflecting our desire to accelerate activity on CSOs, we've narrowed our CapEx range to the upside and raised the lower end of the range to GBP 950 million with revised guidance now GBP 950 million to GBP 1.1 billion. And on ODIs, we remain on track to deliver rewards at least in line with FY '24, our best ever year. So finally, to summarize. Once again, it's been a solid half for us here at UU with underlying operating profit up 24% and underlying EPS more than doubled compared to the prior half year. Our balance sheet remains one of the strongest in the sector with RCV gearing at 60% and a fully funded pension scheme. Together with liquidity of GBP 2.6 billion, we have a robust financial position which underpins the growth investments we're going to see over the next 5-year period. Our progressive dividend continues to grow in line with inflation and our interim dividend, landing at 17.28 per share, in line with policy. So thank you, and I'll now hand back to Lou.

Thanks, Phil. And so before I wrap up, I just wanted to pick up where we are in the regulatory review and, more importantly, how we're ramping up to deliver that huge plan in AMP8. As a quick recap, Ofwat published the draft determination over the summer. Our plan was recognized as high quality and a significant totex increase has already been confirmed. This means our annual growth guidance of 4% to 5% is already underpinned and will likely increase further as we head towards final determination. Although the next 5 years will see record levels of growth, we know this step-up isn't just about AMP8, but it's about each successive AMP that follows and over the next 25 years. We're really pleased to see that our core operating costs were in line with those set by Ofwat, confirming that our base costs are efficient. We've made significant representation as part of our DD response for a further GBP 2 billion worth of enhancement that we've supported with robust evidence, and we're continuing to engage really well with Ofwat to reach a more balanced outcome. Our DD response included additional investment in Windermere with an overall plan of GBP 200 million, a plan that will see us tackle all 6 storm overflows in the catchment that will reduce spills by 75% and also see us upgrade all of our 9 treatment works that are around the lake. Lake Windermere already has 4 excellent bathing water classifications and has seen levels of phosphorus reduced by around 1/3 since 2020, largely due to improvements at our sewage treatment works. But we recognize the importance of going further and faster, and that's why we put forward this comprehensive package of investment. In terms of what comes next, here's a reminder of that time line that we're all working to. And we're all very, very focused on that key date of the 19th of December. And whilst focused on the regulatory review, we're also looking ahead to next year when we'll update you on our dividend policy. By next summer, we'll also be hearing the findings of the independent water commission, being chaired by Sir Jon Cunliffe, that was announced by government last month. In the meantime, we are on track to deliver all of our AMP7 commitments and we're now focused on ramping up delivery for our AMP8 program. We've onboarded 45 delivery partners who are helping us to deliver around GBP 6 billion worth of value over AMP8. And I'm pleased to report we're also going to be working with a further 30 local regional partners based in areas including Preston, Liverpool, Carlisle and Manchester, driving a platform for growth for small as well as large businesses. We've got a real role to play investing in our local communities and supporting economic growth in our region. Not only does our business plan support 30,000 jobs, but it's also going to bring investment in skills and opportunities here in the Northwest and it's going to contribute GBP 35 billion worth of economic value and support growth right at the heart of our region. Mobilizing our supply chain now is enabling us to get started on the things that matter most to our stakeholders, including moving at pace and scale to reduce storm overflows and improve wastewater services. Last week, we announced plans to accelerate spill reductions even further. Customers and regulators have made it clear that they want us to go as fast as we can. And we've been working in the background sourcing tactical and solutions. And our Better Rivers program has been trialing and testing a range of solutions using standard and modular designs to drive some immediate benefits, and we're now building on that program's success to deploy and learn at scale across the region. We've been accessing some of the very best innovation from across the world to see what more we can do. And that's why we're able to commit to a further acceleration that will see us making capital interventions at an additional 700 sites across the Northwest. Together with our business plan, that will see us making improvements over 1,100 sites by 2030 and spending a total of GBP 500 million on accelerated wastewater service improvements. So to summarize, we continue to perform well both operationally and financially. We are going further and faster with a plan that's going to see us tackle more than 1,100 storm overflows. We have submitted a comprehensive response to the regulator following the draft determination, and that is backed by a strong track record of delivering for all of our stakeholders. As Phil said, financially we're very well positioned and we're already delivering on core improvements. And we have mobilized to secure delivery whilst, at the same time, pushing harder to consolidate our leading customer service position. I want to thank you for taking the time to listen today, and I'm sure that you're bound to have many questions. And Phil and I look forward to answering those later this morning. Thank you so much for your time, and we look forward to seeing you later.