Severn Trent Plc (OTCQX:SVTRF) Q3 2016 Earnings Conference Call November 24, 2016 4:30 AM ET
Liv Garfield - Chief Executive
James Bowling - CFO
Andy Smith - Managing Director
Guy MacKenzie - Credit Suisse
James Brand - Deutsche Bank
Iain Turner - Exane
Nigel Hawkins - Hardman & Co
Ashley Thomas - Societe Gen
Dominic Nash - Macquarie
Ed Reid - Lazarus
Chris Laybutt - JPMorgan
Good morning, everyone, and welcome to the Severn Trent 2016/2017 interim results. I'm Liv Garfield, Chief Executive; and this James Bowling, who's joining on stage today, our CFO, whilst everyone sits down for a second or two, brilliant.
So thank you very much for joining us in the room today. Thank you also for joining us if you're online, on the phone. Now, our strategy is to be the most trusted water Company by 2020, and we're going to achieve that through delivering an outstanding customer service, best-value service, and also environmental leadership. And since the start of the regulatory period, we've been working really hard to adapt our culture to become more customer-focused, improve our operational performance. We're making our processes simpler and slicker and also, embracing progressive technologies and contributing more to the environment through investing in assets and also our renewables agenda. And we believe, we're moving at pace towards that strategy. And that each and every system is being guided by the needs of our stakeholders, whether they are our customers, our investors, our colleagues, and the community. And we’re very confident that in order to successfully deliver we need to demonstrate strong financial performance, operational excellence, and a migration towards the frontier of sector efficiency. And we believe we've got a pleasing set of result today and with the hard work that’s beginning to pay back and show to and translate in-field results.
James is going to talk through the financials now, and I'll talk of operational performance later. So, with that, I'm going to hand to James.
Thank you, Liv, and good morning, everyone. Our results for this six months period reflect the strong foundations we've built in year-one of the AMP, and our continuing focus on delivering on our leaders of outperformance.
So let's turn to the financial highlights in the first six months. Group turnover is up 3.2%, reflecting the RPI-linked price increases in our regulated business, and good underlying growth and favorable foreign exchange for our business services division.
Our underlying PBIT growth of £8 million or 3.1% is in line with the growth in turnover, reflecting good control of our cost base. On the financing side, the actions we've taken to manage our debt portfolio and increase our exposure to lower floating interest rates has helped reduce our effective finance costs from 4.6% in the first half of last year to 4.2% for this half year.
We've continued to build on the promising start for our customer ODIs, and despite tougher targets this year, we remain on-track for delivering a net reward of £15 million. Our underlying basic earnings per share is up 13.5% year-on-year reflecting both a strong operating performance across the group and the benefits of low financing costs.
In line with our policy, we'll be paying an interim dividend of £0.0326, up 1.1% in line with November 2015 RPI, representing 40% of the full-year dividend planned for this year. I'm also pleased to announce good progress on our triennial pension valuation, With the key terms of the new funding plan now agreed with the trustee ahead of schedule, we have clarity on our cash contributions for the remainder of the AMP, and I'll provide more detail on this later in the presentation.
Turning now to our regulated business, Regulated Water and Waste Water is at the heart of our group, comprising our wholesale water and waste water operations and our regulated household retail business. Our turnover is up by £10.8 million or 1.4% due to the £11.6 million impact of the annual RPI price increase, slightly higher consumption and growth in customer numbers, offset by changes in the charging base and other small variances. PBIT for our Regulated Water and Waste Water business was £268.9 million, a £3.5 million increase on the prior year.
Let's look in-turn of the components of performance. Turnover contributed growth of £10.8 million as mentioned earlier. Our labor and contracted cost combined were down £3.9 million, despite absorbing £2 million of costs to prepare our wholesale business from market opening next year. Within that, net labor costs were down £6 million, reflecting our continued focus on driving operational efficiencies and higher levels of capitalized labor, which more than offset the annual pay increase. And hired and contracted costs increased by £2.1 million as we continue to invest in improving our customer ODI performance.
Power costs were down £1.7 million. Higher power consumption from increased water into production was more than offset by favorable wholesale electricity prices, which we’ve secured through our active hedging program. The bad debt charge for the period was £10.3 million, that's £2.5 million lower than the prior period. From June 1st credit risks for non-household customers transferred to the retailer, initially Water Plus, and our Regulated Water and Waste Water business will retain a credit risk for sales to the retailers and of course household customers.
As a percentage of household revenue, our bad debt performance has improved year-on-year to 1.8%, down from 2.2% from prior period, as we make good progress on supporting our vulnerable customers and focus on improving cash collection performance from our other customers. As planned, we’ve significantly stepped up investments in our infrastructure renewals program, an increase of £14 million compared to the first six months of last year, including £5.3 million spent on a new 1.8 kilometer tunnel adjacent to the existing aquadox at Bleddfa in Wales when the three tunnels being built as part of the Birmingham Resilience Programme.
Depreciation was up marginally due to the continued growth in our asset-base, and we held other costs broadly flat, despite last year benefitting from the £4.4 million refunds from the environment agency.
Turning to business services, we're pleased with the division’s performance, showing good top and bottom line growth this half year. And just as a reminder, these numbers and comparatives do not include any non-household retail activity. Total turnover was up £16.9 million of which around £9 million was due to favorable U.S. dollar and Euro FX movements, and the balance was due to good like-for-like growth in operating services and increased generation in our renewable energy business.
Total PBIT was up £4.9 million due to the increased turnover and improving margins in operating services and the increase in renewables activity, and I would go into our renewables program in more detail later on. Taking together, business services delivered 44% growth in PBIT to £16.1 million for this half.
Turning now to cash flow, we've been focused on improving on cash flow this year, and I'm pleased to report our cash from operations was up 7.4% to £532 million due to the growth in PBIT, strong cash collection, and the benefit to the group’s operating cash from the trading terms of Water Plus. We've invested £235 million this half, up from a £190 million last year, as we ran proper capital spends on projects including s Birmingham Resilience Programme and the new Sludge Thermal Hydrolysis plant at Minworth.
Outflows for interests, tax and dividends totaled to £193.3 million, and we’ve invested £15 million in the creation of the Water Plus JV including £10 million of new equity. In addition to this, we and UU have both equally advanced cash to fund the working capital requirements of the new venture of around £45 million. Together with other moments, the value of net debt reduced by £82.1 million over the period.
Turning now to financing, over the last eighteen months, we’ve made good progress with our funding plans, and this half we’ve seen the ongoing benefits of having replaced higher fixed interest bonds with lower floating rate debt last year. These benefits have been partially offset by the impact of higher RPI on our index-linked debt. Overall, our finance costs fell by 8% to £98.1 million, and our effective interest costs fell 40 basis-points year-over-year to 4.2%.
We continue to diversify funding sources, and secured further liquidity in this half through a £100 million bilateral bank loan. Net debt at September 30th was £4.74 billion and on net debt to RCV ratio, excluding the value of our pension liability which we’ll come to shortly, was 59.4% of the half year.
And finally, we’re also pleased to see that Moody’s have recently affirmed our credit ratings and improved their outlook for both Severn Trent PLC and Severn Trent Water Limited to stable; reflecting the benefit of our customer ODR rewards; our expected TotEx outperformance; and more favorable inflation environment and our financing strategy in the current low interest rate environment.
Turning now to pensions, while we’re pleased to achieve funding certainty over the rest of the year for a reasonable increase in cash contributions; the recent volatility in bond yields has provided challenging backdrop for our 2016 triennial valuation discussions. So we’re pleased to have reach agreement with the trustee ahead of schedule on the main components of the funding plan for the scheme.
We’ve agreed an increase as £3 million in the base cash contributions from £12 million to £15 million a year. These revised contributions will run through to 2031 and will be index-linked. We plan to wrap these annual contributions in a new efficient asset by funding structure, which will enable additional cash contributions of £10 million a year for the next three years.
The existing ABF payment of £8 million a year will continue through to 2032, and both ABF structures switch off contributions to the schemes if they return to a surplus position. This plan provides certainty to funding for the Company and leverages our strong covenants as a long-term business with high quality assets. It underlines our commitments to fund the scheme at the right level, at the right pace, and over the right time frame to meet our obligation to members.
Turning to our accounting position, we saw one of the biggest six monthly falls recorded in the iBoxx bond index, leading up to our balance sheet date. And although more recently we’re seeing some of that full reverse following the U.S. presidential election, the snapshot IAS 19 valuation of our schemes liabilities at September 30th, increased by 26% compared to the year-end. And despite the good performance from the schemes’ assets over the same period, our accounting deficit increased to £712 million.
We continue to actively manage our underlying obligations and we recently offered a pension increase exchange scheme, an attractive option to some members as they can exchange future index linkage for higher pensions today, which we’ve estimated will reduce liabilities by £21 million if take-up is as forecast. And as a reminder, our defined benefit schemes have been closed to new members since 2006 and to new accruals since 2015.
Moving on now to give you an update on energy, we're now generating an equivalent of 35% of our regulated businesses energy needs, up from 33% at the end of last year. This equates to an increase of 16 gigawatt hours, enough to supply 4,000 homes per year, driven by a combination of increased production from our solar arrays and increased efficiency from our combined heat and power systems, which are used to generate energy from sludge.
We remain on-track to be generating equivalent of 50% of our energy needs by 2020. And our investment program is progressing well. We've now spent around £70 million of the £190 million planned to AMP6, with roughly half spent on sludge and anaerobic digestion and half on non-regulated assets, primarily solar last year and food waste AD this year.
Overall, our energy business generated EBITDA for the first half of this year of £10.6 million and PBIT of £7.4 million. Our focus on energy isn't just about generating more but also on using less. As an example, at Melbourne in Derbyshire, we've recently installed live data monitors on our pumps that will enable us to optimize pump configuration and save around £400,000 a year. And we're looking to roll-out this technology to other sites as soon as possible.
We know RCV growth is a key cornerstone of our investment proposition, and as a reminder based on the final determinations, we're expecting to have the third fastest growing RCV of the water and sewerage companies across AMP6 and the fastest of our listed payers.
So, finally, turning to technical guidance for the full-year, I'll leave you to read through the detail at your leisure. However, there are a few small changes for this half year; first, as we're six months into the year and have better visibility, we're narrowing our expectation of turnover in the Regulated Water and Waste Water business to between £1.5 billion and £1.52 billion; second, we're revising our wholesale TotEx costs down to be between £1.04 billion and £1.06 billion, reflecting ongoing efficiencies and the timing of investments; and third, we now expect our interest charge for the year to be marginally lower than last year as the benefit from lower interest rates on our floating rate debt is only partially offset by higher expected RPI.
And with that, I'll hand back to Liv.
Thank you, James. So, I'd like to start by talking about our winning formula. As we said before, we believe our sector works best when we think about the needs of all of our stakeholders when they're met or exceeded. So, that means our customers, our colleagues, our investors and the community; and our winning formula does that. It puts customers at the very heart of our business and by meeting or exceeding our expectations, it'll help us on the journey towards our strategy to be the most trusted water company.
We're proud of the fact in the last 18 months we've taken some really good strides on our operational performance. And we believe that ODIs, customer ODIs being the measures that customers care about most, we think that we're well positioned to be a winner in a world of incentivization. We can see that, looking forward, it's important to enter the next AMP period in strong state in terms of the cost base, making sure that we're up a quartile and in a good position to be towards the frontier of sector efficiency.
As James mentioned just a second ago, energy is a high-cost base for any water company. And as such, our renewables plan is good business sense, as well as being something that we're proud that we can self-generate 50% of our energy needs by 2020. And all of this is wrapped up in a climate for our sector where competition is increasing and the ability to companies, like ourselves, to be adaptive, to be nimble to respond well to regulatory change is essential for futures success.
So what I’d like to do now is just talking through progress against each of these aspects of the winning formula. So let's start of course with customers. And our customer is something which is a priority for us as a business plan at the same time it's actually also good commercial sense to deliver strong operational performance. In a world where insentifizaiton translates into meaningful financial rewards, this is a good new story for our-self, our customers and our investors. And with that as a backdrop, we've made some encouraging progress on a number of aspects over the last six months, and there’s a few I'll talk about now.
So in September, the Consumer Council for Water, they've shown annual report which examined the performance on complaints of all companies in our sector. And we’re pleased to see that we had the highest reduction year-on-year at 28% drop, but also we’re now the second best performer amongst all of the rest. In July, we received the annual Ofwat report for SIM, the services centered mechanism. And this measure is made-up of quantities and qualities of data that you already received at once a year in July. Our performance last year, we were joined further towards, which is a reasonable performance. It doesn’t matter our ambitions, it doesn’t matter our plan for customer service, but at the same time, we get the opportunity to continue to improve through the course of the years to come. We’re very strong on the quantitative performance, but we just choose variables on some days on the qualitative performance and at that variability so it's continue to work on to deliver amazing customer experience each and every day to each and every customer.
Getting closer to our customers, it's something we've worked hard over the last couple of years, working well with them in more personalized manner. And we believe that it's playing through in terms of our improved bad debt performance. We're pleased to offset to leading bad debt performance in the household area, dropping from 2.2% to 1.8% this year. And we’re very proud of the fact that we’re now travelled the number of customers that we’re helping that are vulnerable. We generally believe that customers that can't pay should pay, and customers that are struggling need help, and we we're happy to work with them and that troubling of those customers, but also the recognition of winning the utility of the year for vulnerable customers is really pleasing to the team, but the vast testing was spending time in assets to transform our business.
So let's move on now and talk about how we’re doing operationally. So ODIs, they are the key bucket of measures across our sector, and we've mentioned to you in May that we delivered £23.2 million reward in the first year. Now post-tax, like they stands at £92 million, and we’re pleased to have compared well favorably to our peers and that's what this chart shows is the overall performance for the last year. We said that we’ll try and start the AMP strongly by the momentum, energy and also get our people focused on the fact that these were the critical customer measures. And we believe we've got the opportunity to sustain that looking forward.
The measures do get tougher year-on-year, but we believe we’ve got that lined-up across our organization. And let’s jump on now and look at our performance for the first six months. And by now you’ll all be very familiar with the ODI swingometers and these are the top eight measures, the ones that have the most value and also the ones that customers said they cared about most. And we're pleased it had a decent start. Now there is a couple of things to mentioned; the first thing is whilst there are a good number of greens, there is also one red there, which is worth talking about, and it was a quality in place. With said at opening that we’ve had a very broad ambition where actually a median performer in the sector is just that our ambition I’d to dramatically improve. And as such, we’ll continue to find ourselves, but even though we can see some of the initiatives that are beginning pay through, we can still see nonetheless that we’re still in red zone or this measure which is as expected we said it would take two to three years that we felt we’ve been in turnaround.
On the others we’re very pleased that in spite the fact it had a real step change on targets from last year to this year, we're really pleased with the half year point with our performance so far. Now, we still have winter to going and winter is always trickier to deliver the ODI measures, but nonetheless we think we’ve got the right ambition, the right trajectory, and lot of momentum to make the success of this year and deliver the £15 million, which we’ve guided to for the full year this year.
So how we’re doing on our TotEx out performance? We’ve amended another £50 million locked-in through the course of first six months of the year. So to give you variable context, we’ve guided that we think we’re going to deliver £670 million savings during the quarter of the AMP. And that includes the £410 million, which is the challenge set by report and then the outperformance which we’re recording to be £260 million. And the £50 million that is locked-in during the course of the first six months is months is most of it is in the capital arena in the supply chain savings, and there is far more going continue improvements and the efficiency rate across contracts and across or working practices.
We’re pleased with the progress against this that leaves 130 still to lock-in for the remainder of the registry period. So how are we actually performing on our overall asset creation and our capital build programs? We thought that since RCV and a growing RCV is close to proposition, what I thought I’d do now is walk you through the progress we’ve made on our capital schemes. So there are some images here, the one on the left is our largest capital program in this end, the Birmingham Resilience scheme. In order for us to just deliver a growing RCV, we have to deliver all of our schemes to time, to budgets, to quality, avoiding shortfall in the future but also avoiding ODI penalties against the larger schemes. We’re proud of the fact that in the last few months we’ve landed a few of the really key aspects of the Birmingham Resilience deal. We’ve now let all the contracts and we’ve secured all the planning permissions. That means the teams are all beavering away and actually to the standout side with one of my colleagues forward who’d love to share with you the latest. Now you can see a photo here for tunnel-boring machine and we’re due actually to break-through on the completion of the first of the tunnel sometime in the next few weeks, which is absolutely fantastic.
In terms of the other things we said we’d do in the TotEx mindset, as we said we’d look at things constantly through the angle of TotEx rather than capital. And a good example of that is recent decisions we’ve made around Draycote. Draycote is one of our reservoirs. We’ve got population growth in that area and heading into the AMP with increased demand we would have thought we would probably looks to enlarging that reservoir. But actually, we’ve been able to look it through TotEx mindset and do the UK’s largest water trade abstraction, meaning that we can meet our demand through another way; a better way for the community, a better way for us. But also 58 DWI obligations, which are critical obligations we must deliver during the regulatory period. We’re doing well against those, they’re right at the half of our plans to invest and do more on water quality and we’re on track to deliver all of those through the regulatory period.
So all-in-all, this has just meant to share a bit of a color of the various things that works from an capital phase, and give you increased, I guess a focused ambition on the fact that we will deliver everything we’ve said we will during the course of this regulatory period. And in order for us to continue to outperform we need to be innovative. And I thought I’d give you a couple of examples around the innovation culture that we’re embedding. So on the left-hand side is one of our waste water examples. On the right-hand side is a clean water example.
So in the sewage process, there is phospurus as a chemical which is actually created. It’s expensive for us to treat and it has to be treated before it goes back out to the environment. And we’ve traditionally spent a lot of money on this in the sector. And at the start of this regulatory period, we asked the R&D team to try innovative ways of what else could we do with a longstanding problem. And what they’ve come up with using a range of different things is some clever blended technologies which we’re now running at across our estate but to give you the opportunity to not only save money in the process but actually to be able to make sure that we take the phosphate and be able to actually use that for farmers in fertilizer going forward as expected for whole community for much better for our cost base as well.
On the right-hand side, we’ve got an example around pressure we get surges of pressure in our pipes. And because they’re underground, we just can’t see it. And previously we have our telemetry of every 15 minute give you as an indicator of the pressure surge that’s coming through it. With our new smart networks program, we’re now able to see a 128 times a second what pressure is happening and like there is an opportunity to better invest in our assets and to understand our estate in much more detail ideally bringing down both for the future and allowing us to do better management of our overall estate from a network perspective.
So let's jump on now and talk about us as a responsible business. Now, we believe that being a responsible business is how business should be done and it's good business; it's always been at the core of our values. And a couple of things we've done recently that we think I guess -- explain I guess how we're trying to bring it to light; the first is continual investment in talent. So we've actually chosen to treble our apprentice intake and increased our graduate intake by more than 50%. This is around our preparing ourselves for the future with future leaders and also, technical experts of the future as well.
We’ve mentioned about a year ago, about 14 months ago, we announced our two CSR key tenets; the areas we wanted to focus on in our corporate responsibility agenda; and one was around healthier rivers in our region; and the second was around water efficiency in our region. And we continue to make good progress against it. Again, there are some examples of things we're doing in the stands next door. But to bring one thing to light, the DWI recently recognized us for the amazing work we're doing on management as an example of real focus and step change flowing through to healthier rivers.
We've had quite a number of recent accolades, so to bring three to light in the social responsibility space. We've been commended in the Hampton-Alexander review for the work we're doing on gender diversity. We actually have been announced as the Employer of the Year in the inaugural Asian Apprentice Awards, and we've been recognized as part of the FTSE4Good index, just to bring a few examples to life.
So, let's move on now and talk about regulatory visibility. To be successful in our sector, we believe that having a regulator that allows us transparency and visibility is great news for all of us. It gives a chance to the management team to prepare. And we believe over the last six months we've continued to see that increasing visibility through to 2025. And some of the things that have been issued since last time we met is we're seeing more details on the movement towards CPI from and an RPI index.
We're seeing more details on debt how it's going to be handled in the next price review. So, new cost of debt obviously indexed differently, but the ability still for companies to retain the outperformance they deliver. We've seen the regulator continue to reaffirm their support for a risk/reward scheme. Clearly, we believe passionately in that as a winner in the world of incentivization. And we've also seen additional snippets on some of the areas of the new competitive world whether that's bio-resources or whether that's water resources.
Now, we believe these increased visibility allows us the opportunity to the management team to prepare our business to be successful in future AMPs, and you can be rest assured that that's what we're doing. As all of these extra details come out, we factor them into our plans, making sure that we can continue to be successful for this AMP but also moving into the five years and 10 years thereafter.
Now, one thing just to mention before I sum up is that you will, of course, have seen that we made a bid last week and then we raised it last night for Dee Valley. And we believe that this is a really good opportunity for us to create value for our shareholders, but also be the best outcome for Dee Valley customers, we deliver fantastic customer service to that. I am limited in what I can say today, so I guess I'm just offering that up straightaway before we get to the Q&A section but I just wanted to flag that to you.
So, let's move on now and just look at our summary before we go to Q&A. So, in terms of the highlights of the first six months of the year, we're pleased to have locked in a further £50 million of our 617 TotEx outperformance. We're pleased to be on the right trajectory for £15 million for the ODI rewards this year. I'm also pleased with the year-on-year financial performance that’s being delivered to the 40 basis-points improvement; we think that's a strong performance. That said we're very clear that we can't afford to take the foot off the gas, so there's loads more that still remains to be done.
We still need to lock-in the remaining 130 of our forecast savings. We still need to make sure that we create fantastic customer experience, each and every day to take out the variability that we see in areas such as SIM. And there's always going to be change; there'll always be a new regulatory agenda; there'll always been things that come left field. We need to make sure that our business is adaptable to change and ready to be successful with whatever arrives, and that's what we’re working hard to do as a team. But I do believe we've got the pace, the momentum, and the right team in place to be able to make this a really successful era for Severn Trent.
With that, we're going to move to Q&A. And with all my senior team on the front row here’s their lovely faces, so we’re all available for questions and one ask would be, could you please say your name and also the name of your company during the course of the Q&A session. Thank you.
Q - Guy MacKenzie
It's Guy MacKenzie from Credit Suisse. I just had some questions on your pension, your financing strategy, and also your unregulated AD investments. Firstly, James, just to be clear am I correct that Ofwat's giving you allowances of around £9 million to £10 million per annum for financing your pension over 2015 to 2020, and then nothing afterwards? So on the £15 million per annum repair payments, we can think of that as a £6 million net per annum until 2020, and then £15 million net per annum after that? Secondly, just on your financing strategy given the recent volatility in bond yields. Just wondering whether that's changed in terms of the focus on floating rate debt or whether we can still expect your portfolio to be up to 40% floating rate by the end of the AMP? And then finally, just on the unregulated food waste AD investments. You mentioned making good progress on construction of your second asset. Wondering how many of those you're intending on building. And then secondly, I mean that market is reportedly quite challenging right now with overcapacity, and I think DEFRA put out a report last year saying that they expected capacity to increase fourfold over the coming three years. So just wondering how or why you're expecting to earn such good returns there when the rest of the market seems so challenging.
Very good, James on the first thing...
So pensions, so around £10 million a year at 12 to 13 prices what we can recover through bills, and I think that runs through 20 to 25. SO this time probably next time, so that's what recovers through bills and the balance is for the Company. In terms of recent volatility, and you are absolutely right, and that has of course driven our accounting deficit as well. And so it is more important to see in market, and the 40% number you quoted, if I did nothing but all of new debt was at floating, I would end up with around 40% at the end of the year.
Now of course we keep a very close eye on markets in where range to review our strategy, and if indeed that's the right thing to do. So we’re comfortable with the strategy currently, and we remain ready for any changes that we think might be needed.
So I'll start up on the energy asset in our industry foundry as well, because they’re also doing all the hard work that needed. So a couple of things, so we are making good progress on the build of the second site, and Andy will share how many we plan to build. The key thing about this is geographical patch makes quite a big difference in terms of demand. So Andy, do you want to comment on AD.
Yes, you’d said we were building our second one, we’re in planning with our third, and we’re looking at another two beyond that. We look very carefully on the economics of all of this, and the key factors, as we've said before, our building on things at a right cost and we've got a good track record on that, sell supply is critical and having locally sourced food waste. The travel time and the distance in picking on the theme that Liv said we’ve delivered a fantastic customer experience for those customers that are sending their food waste to us. So those are the factors that we’re seeing, but rest assured that we will be focusing very-very clearly on the economics of all that. So there is a combination of great investments, great operations, taking advantage of our position.
It's James Brand, Deutsche Bank. Just one question, do your TotEx savings become easier to deliver in a high inflation environment compared to a low inflation environment? I presume in a lot of your procurement contracts you have inflation, but if you could just further comment around that that would great. Thanks.
So you should assume that we're confident in all environments of being able to deliver our savings, and we’ve said before that we try to take out some of the inflation linkages, so we actually that out when inflation was lower. So you shouldn't assume that they all have linkage. Well, I won't get Evelyn involved in telling you the full details before she reveals everything around future buying strategy. I think we believe that we should be able to manage the low pressure environment and if there is a high environment that’s an upside for the sector, and we should expect that to be an upside for us.
It's Iain Turner from Exane. Last year's ODI performance was a lion share of that was from sewer flooding, and outperformance against the targets. And I think there was a suggestion that the weather really helps with that. And obviously this year looks like looking at lower number. Is that really just a reflection on what’s been happening to the weather? And I guess what I'm kind of groping towards asking you is it was the first-year ODI performance a little bit lucky?
So we don’t think that it was lucky. So we don't think it was lucky. And the targets just get trickier every year, so remember that we -- our targets gets trickier typically, double-digit percentage trickiness for the first two years. So the reason between the 23 last year and the 15 this year is a target have just got trickier and the deadbands have got smaller and, in many instances, just gone away. So it's a stronger performance delivering 15 this year is a much stronger performance delivering 23 last year. So it’s not a lucky, we did have a very good performance year last year. And you were right that weather can a factor, and that’s why even-tough we’ve had a strong half year, we’re guiding you still to £15 million on the basis that winter is still to come.
I mean to give you a couple of facts, if it been lucky, then we would have seen maybe a few percent improvement, but on many of our measures, we’ve improved by 40%, 50%, 60% year-over-year performance is bit of a last year’s numbers. And we've got to deliver again by a good few percent across the piece to deliver this year’s numbers. And taking out 28% of complaints, which flows through into how many activities you’re looking at that requires a bit more than luck.
And last year it was mostly still....
And in that we were up, we were green on last year at the TotEx measures, I think we were green on eight, amber on one, red on one.
But in the terms of the financial...
The financials, the numbers, and sewer flooding does have a big contribution.
Facility ground for every sewer...
It is they are pricey, for sewer flooding, [multiple speakers]. They're an expensive business but at the same time if the other measures haven’t been green then I'd agree with you measure, but the fact that across the piece, we had almost all of the ODIs green shows that we're making operation that we're making operational improvement performance across the piece. Andy anything you want to add.
Yes, as Liv said, we improved across a number of different metrics. Although, sewer flooding is a big driver, pollutions performance is another big driver as well, where we actually saw 30% improvements. We have to continue to see those sorts of improvements to be able to deliver the same reward. I think the other thing that we we’re doing, Liv's talked about variability in SIM. We need to make sure we’ve got really robust processes for weather events. So we’re also spending a lot of time and efforts to make sure those are robust as we go into the winter, so that we can protect ourselves. And frankly this week with some of the weather that we’ve had, it's been a good test of those processes, so you can be assured that we are thoroughly ready.
Nigel Hawkins, Hardman & Co. Two questions if I may, first of all on pensions. I was just wondering, why the deficit more than doubled in just six months? Off my head, I can't think of any other FTSE 100 company, seen such a deterioration over so short a period, without being too jocular even BT’s wretched pension funds has never done that? And secondly in terms of your pension situation have you been studying United Utilities where, as I understand things are rather different. And bear in mind back in 1989, from memory, the two started roughly on a similar basis pension wise. So I wonder why things have changed to market between two companies. Another question was on energy supply, of course, there is Chief Executives do it. Given that your retail customer base is one of the largest in the UK, and you are now generating more electricity. Do you rule out entering the energy supply market, especially if the supply businesses have heavily indebted E.ON and RWE come up for grabs and particularly since E.ON is too strong in the Midlands?
So, I'll answer the second one, and let James to continue on the first one, so on the second. And as it stands now plans -- our growth opportunities are firmly ahead of us as being a really fantastic company in the water sector. We’re obviously continuing to make a good progress in our renewables agenda, but I don't think right now is the time is to talk about multi-utility strategy.
So, if we roll-out those...
Just now it's not the right time to talk about any future strategy of that nature. So, we're taking it further, but our focus is firmly on being an actually amazing water company and that's what ahead of us for the moment.
So, on pensions, our pension deficit is the difference between two really quite large numbers, the liabilities on one hand and assets on the other. And on the liability side, over the last six months as I mentioned in my presentation, we have seen one of the largest pools in bond yields that has been seen over six month period, and that has materially impacted our liability position. But equally at the same time, we also saw our assets perform really well, but notwithstanding that the difference has been a large movement in our deficit.
And yes of course we look at other companies as well, and we're aware of United Utilities' position. What we've focused on most importantly is the cash contributions that we're going to be making as a company to the scheme. And as I said, we're really pleased to have negotiated what I believe is a good deal and in terms of the cash contributions and going into the scheme from the company which gives us stability over next round.
Just one to try to recognize is the fact that many other FTSE 100 companies suffered from the impact of bonds on the pension funds over the last few months, but we’ve don’t seen such a duration in their pension fund deficits compared with your own?
I can't comment on other company specifics, and it will depend on the longevity of those liabilities, it'll depend on the strategies they have with their liabilities within the pension fund. And indeed whether those funds are still open to accrual of course our fund is close to accrual and to new members as well.
Perhaps just finally on the subject, looking back was there a period perhaps over the last few years where you got involved with Severn Trent, where pension fund contributions perhaps were inadequate?
I think that's a very tricky question, and a tack to go down. I think you've got to remember that the fund -- I totally hear your point that it has got -- it has worsened during the last six months. But I guess we work with the trustees and as always been continue to happy with the repayments we made by the company, and we've always been continue to have good relationship they have, so I think the trustees are the expert. They guide us towards what they believe is the right contribution for the company, and over long period of time, Severn Trent has been seen as a good employer and a good pension contributor.
It's Ashley Thomas from Societe Gen. I wondered like to the point on pension, so I'll ask my pension question later. But on Ofwat published this week the RoREs for all the companies on their definition, but it's like to yourself that it's going to be a recalculation. I just wanted to check, are you expecting any material change on that RoRE?
So this is headline and James might get into detail. So, the difference was less than 0.1% 0.0% almost that’s tiny and most of the difference between the calculations was around our initial number, so I think it was 8.01% and 8.4%, and the other. So it's tiny-tiny number.
Actually wanted us to use notional gearing and we used actual gearing. So the promotional gearing of 62.5% are after gearing was around 61%, so it was very [multiple speakers]...
61.6% was at the time, so it's a tiny-tiny.
It's Dominic Nash from Macquarie. Two questions and my apologies I'm going to go back to the pension and one other as well. On the pension one, you said there is a snapshot on September 30th, and then there is change considerably since then. Could you guys view if you’re going to run this today, what the number is which is probably closer to and that is a pre-tax number as well. Can you just confirm for the numbers pre-tax from the post-tax deficit? And the second one is going back to the TotEx, and the £120 million that you’re going to give back to your customers drove underperform other than that you’re going to look at this. How is that going through in the RoRE numbers on the return of the £120 million, and have you actually identified your projects now for the £120 million?
So I’ll do a merger on the second one and James will cover pension, do you want do the pension first?
Yes, so since the U.S. election you see bond yields go back-up a little bit, quite a lot, and so that has kind of reduced it. If I ran the numbers today, the deficit would I think have a 5 in front of it rather than 7, so it has been material movement, which of reflects the fact that we are in quite volatile times. But as is said, I think the focus for us just to make sure that we secure those cash contributions going forward, so I think that gets to see certainty in terms of what we’re going to be paying out over the remainder of the AMPs, so that's what we've been focused on. And the number in the balance sheet does have a deferred tax adjustment on it, so it's adjusted for tax.
So yes we've got all the areas identified, and we’re live with spending money against those. So, it's investment to more traffic which will get us towards quarter-after-quarter I guess in the future, it's enhancing vulnerable customers in terms of investments in that phase, and it's also just been spend on digital and cyber security. So you should expect that to be spread through the next two years of the AMP period. And effectively that becomes real money so it just gets spent against TotEx like real money does.
So you spent some of it in this six month period. Can you quantify how much you spent?
No, because if we end up giving you more guidance on everything, it will just get tricky. So at this stage no, and I hear the feedback that you'd quite like to know at some stage how we’re doing against 120, so we will reflect on that in full year.
I mean actually this is a pension thing as well, but background I'm not going to change. That's why you said that was deferred tax on it, I thought it was clear of tax, the £11 million...
Yes, I will come offline with you on that, and just to make sure I’ve got it right. I think there was a deferred tax adjustment for pensions in the deferred tax line.
In the differed tax line, not in the -- yes, of course, okay.
Ed Reid from Lazarus. Not to ask you a pension question to save you from one. Ofwat published its views on retail competition, I think a couple of months ago. I just wondered what you thought. Obviously, there are a bunch of scenarios. What do you think the advantages are for customers and the potential savings?
So, all-in-all, we support anything, any form of competition which is good for customers. So, I think we now kind of sit back and await what government is going to do, they've taken all the various inside in. I think we've read carefully everything that's been said. I don’t think we have the -- I don’t we're the best-placed people to comment on the customers would save X and they would gain these. I think it depend what scenario is chosen, so it's very hypothetical to get into it. But if competition does happen then we’re confident of our ability to do well against it. We've got a fantastic customer track record. We're good at bad debt. We connect well with our customers, and we’re working hard to make sure that they recognize us as being a good player.
One of things Ofwat looked at was the potential to reduce bad debt, and I think that compared also to energy. Do you think that's a valid compression, I think there has been some issues around it.
I’ve never worked in energy, so I'm probably not best-placed to comment on an energy direct comparison. James hasn't worked in energy either, so we can’t help you.
Thank you. It's Chris Laybutt, JPMorgan. Just a question on your bad debts, it’s reduced significantly this period your expectations to that going forward. Where do you see that tracking and how much more can you improve that level? And just further on vulnerable customers, have you identified how many you have in your region? And you’ve said that the numbers trebled, but trebled to what?
So I'll start a couple of answers and then I've got fair at these, while we done all the hard work and deliver this fantastic influence. And so I’ll give Sarah to comment as well. So in terms of the fact, we just gone through the 40,000 mark in terms of number of customers helped this year. We set ourselves an ambition of 50,000, so that's a well-stated ambition. At the start of this regulatory period, we wanted to help 50,000 customers, and that is based on understanding of our region, to answer bit of your question of how many. But it’s also worth remembering that people go through a phase of being vulnerable. Typically, it's around supporting them to come back out of that category type, and I guess get back into get back into paying their bills, and that’s what we look to do. If you don’t become vulnerable forever, you're heavily weighted but actually you also supported to them, I guess getting back on track across the wider piece. So, Sarah, do you want to talk about our expectations for bad debt going forward, and also anything else you want to comment on.
Yes, so I think we’re point out that 1.8 hasn’t come without quite a lot of efforts. And somebody mentioned about the energy sector earlier, and I think it’s worth pointing out that in water there is no opportunity for recourse. So if somebody doesn’t pay their bill, we’re legally not allowed to turn them off. And so 1.8 comes with a huge amount of effort, and I wouldn’t want to encourage anybody to think that we’ve got any aspirational targets beyond that given the challenges we’ve got in enforcing people to pay.
I think the moves that we’re making are increasingly understanding our whole customer base, and Liv talked a bit in her presentation about personalization. So, we’re using a lot of increased access and analysis of data to understand the differences between can't pay and won't pay. So, in terms of vulnerability within the region, we’ve got a real mix in the Midlands of some incredibly affluent areas and some very, very deprived areas. So our customers in PR14 said as a whole, that they are prepared for us to support up to 50,000 people and we’re well on track with that target. And we would be looking to the PR19 consultation and the understanding of customers, and to see what more we could do as a good employer and a good service provider for our communities.
So we've seen one point going forward looking for sales guiding results.
It's Iain Turner from Exane, again. Just on bad debt, I think what we're talking about what is so much the accounting measure of bad debt, it was the voice and people that weren't even there on your system. I wonder if there was an update on your thinking on that.
Yes, so, we've continued to work on that through the course of this stage. So it's something that we are all conscious of that we believe every customer should pay a fair bill, and if we don't continue to focus on voice and things of that nature then it means other customers are funding a bill that isn’t fair. So we are one of those people that just steadily work away that throughout each regulatory period, and we're going to do that this regulatory period, we'll do that next regulatory period, we did it last regulatory period.
Do you have any positive metrics on it [indiscernible]...
So of course we've metrics and we analyze them internally, we don't publish them and I don't think we intend to add some more data into the external publishing. Ruban's giving me the look, says we're definitely not publishing more data.
Are there any questions online? I’ve been given the nod by Rich just to check if there're any questions online.
Good. There seems to be no questions online, and there're no further hands in the room. So, I think we're concluded. So, just thank you very much everyone for coming today. We appreciate your attendance. Thank you very much.
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