Pennon Group Plc

So, good morning everyone and welcome to the PennOn full year results. So, I'm Keith Haslett, the new CEO of the PennOn Group and I'm now delighted to be in the role having joined on the 1st of April. The agenda for today is an introduction from myself and then I will hand over to our CFO, Laura Flaherty, and you will take you through the financial and operational results for the year. I'll then take you through my key areas of focus across the next few months and then finish up on sector reform and the cost change process. So in terms of, I guess, my background, I'm a chartered civil engineer by origin after following my father into the water industry. I've worked in the industry now for over 25 years in a range of leadership roles. that includes capital delivery, operations and more recently leading Affinity to be one of the highest performing water only companies from a low start point. I'm really passionate about my employees and making a difference for our customers and enhancing the environment through large investment plans and operational excellence. In the past I've delivered a positive step change in delivering world class drinking water for our customers and reaching blue flag status for our beaches. I've also enjoyed watching new apprentices and graduates grow into senior influencing roles across our industry today, something I'm very proud of as a leader. In Penn On, I see a huge opportunity as a listed business to really transform in all aspects and drive tangible performance through our growth plans. but also building capability through improved systems, processes, and more importantly, our employees. Based on my experience in various roles and companies, I can quickly diagnose and gain an understanding of what is working well and areas of opportunity to improve. As you can see, some of my first engagements across the first two months in role is meeting my colleagues across various office locations, hosting Q&A sessions to get a first-hand knowledge of, I guess, the successes, but also the challenges. Site visits to meet some of the frontline to really understand our culture and the ways we work. Meeting our customer call centres, which includes our water retail services as well. And deep dive sessions into all areas of the business to really understand our current position in order to develop coherent plans for delivery. So I guess just some initial observations and opportunities. This initial period has already given me some very clear perspectives about Pinon and how we deliver for our customers and stakeholders. I'm very focused on reviewing our group strategy as a priority, starting with the regulated business. It has been very clear from my first day that we have very passionate employees that want to deliver an excellent service for our customers. and improve the environment that they all enjoy with their families. We have strong foundations and strategies in a number of areas. Clearly there are other performance areas that require improvement plans. Outline plans are now in place after two months and more to follow in the next quarter. So again, looking at customer experience here in front of you, it's important to put customers at the heart of our values, our decision making and our behaviours. CMEX is a great opportunity for improvement in Southwest Water and SES to really mirror our performance in Bristol. Similar opportunities exist on DMEX and BRMEX, measures based on improvement plans being implemented now, and alignment of our resources and systems across the group to be more effective and efficient. Asset lifecycle is an area where streamlining the asset lifecycle from inception to operation and maintenance is key. Reviewing asset health to ensure we have clear asset information and decision-making tools for operational improvement and linking that to future price review submissions. Important to have very coherent total tax investment plans that clearly link to our performance for AMP 8 and beyond into AMP 9. Environmental performance assessment is a really important area. I guess firstly, I'm sure you will have seen that PENON, has been provisionally graded as one star on its EPA rating for last year. I just want to be very clear that I don't tolerate or even recognise one star rating from my previous performance in delivering four star in other jobs in the past. Performance will certainly improve and the bar has been raised to meet the expectations of myself going forward and my action plan has already started. A number of these metrics are in our control to deliver for WNEP, including the WNEP outputs. Really important we deliver these commitments on time. Self-reporting of pollution, we need to improve to meet our requirements on that framework, and improving our compliance against permits linked to the investment program ahead of us. So I guess another area just to talk about is really energy management. I've been surprised the size of the opportunity for improving our approach to energy management based on positive step changes I have made in the past. We have an untapped and sizeable opportunity for solar generation behind the wire for high energy sites. This work has commenced using the skills of our panel and power team, with five sites now identified and being implemented at pace. We have an opportunity to optimise our existing asset base to consume less across our water and wastewater assets. And the bioresource strategy has a great opportunity to centralise six of our sludge treatment centres into one or two to optimise the sludge into biogas, into energy and to create larger efficiencies going forward in the future. So these are some of the initial observations. I will now hand over to Laura for the next section on the financial and operational performance.

Thank you, Keith, and thanks all for your time today. So I'll first of all start with taking you through some of our financial performance. So the group have seen a return to profitability in the 2025-26 financial year with a 55% increase in EBITDA and underlying operating profit more than doubling to £326 million. Return on regulatory equity for the year is 6.7%. without performance in respect of financing and Totex, offset by ODI penalties as a result of operational performance, which I will come back to later. We incurred £644 million of group capex in the period, as we continue to invest in improvements to our asset base across the water group, whilst gearing for the water group remains stable at 61.8% at the end of the year. We've proposed a dividend for the year of 29.29 pence per share in line with our policy. So, first of all, focusing a little more on the income statement, increased revenues provided a material benefit year on year, partially offset by an 8% increase in our underlying operating costs, which together provided that 55% EBITDA growth year on year. Non-underlying costs of around 20 million, include costs from the implementation of our new customer experience platform, as well as some restructuring costs. And they also included the close-out costs of two regulatory investigations. Firstly, the income statement impacts of the off-what wastewater investigation, for which enforcement undertakings were agreed last August. And then secondly, the bricks and water quality event judgment was received on the 2nd of June with a full fine of £1.9 million recognised in the four-year results. Our ongoing capital programme has led to increasing depreciation charges and financing costs are also higher as net debt has increased as we fund investment in our asset base. And as I mentioned, our dividend per share remains aligned with our policy and increased by CPIH. So as I mentioned EBITDA has shown strong improvement year on year and revenue has provided significant benefit with a 23% increase in our water tariffs reflecting our regulatory determination as well as to a lesser extent increased consumption from our customers. The start of the new regulatory cycle has resulted in an increase in our underlying cost base through a reset of regulatory and environmental charges coupled with inflationary increases. Our focus on commercial, operational and integration measures to drive efficiency savings across the business has resulted in savings in the year and going forward, whilst our commodity price hedging has also provided cost benefits year on year. However, operational incidents resulted in around 18 million of cost increases caused by storms and adverse weather conditions, as well as the Dow's and drinking water supply interruption in April last year. Whilst revenue in our non-household retailers has also increased in line with sector-wide tariff increases, wholesale water costs have also increased in these businesses. A net EBITDA improvement of £2.4 million in those businesses therefore results from a strong focus on margin improvement and contract retention and renewal. Penn on Power has also seen its first income with £1.8 million EBITDA this year as a result. Catching on our capital expenditure, our capital programme has continued with a focus across our business on delivery against our AMP8 targets as well as ensuring close out of our AMP7 deliverables. CapEx has been lower than originally anticipated in the water group as we re-profile spend to ensure robust modelling and clear design across our major projects prior to commencing on-site delivery. Our ongoing investment programme is supported by a robust balance sheet with a diversified debt portfolio and strong liquidity. Water group gearing is flat year on year and within our guidance. We raise £635 million in the year to fund our capital expenditure through our bond programme and other bilateral or lease arrangements. At a Greek level, debt is a few percent higher at around 65%. So our out-turn position results in Rory or return on regulated equity on a real basis of 6.7% in year, slightly below our 7% target. This reflects outperformance as anticipated on financing costs as higher inflation and new financing provided benefit against the allowed cost of debt. CapEx efficiencies are being delivered as we work through the capital programme. although the in-year performance is also aided by timing differences which we anticipate to reset over years two and three. From an operational perspective, our performance has been impacted by the adverse weather conditions, resulting in net penalties across our business. This reflects network resilience challenges in water, And whilst we have seen underlying performance improvement in wastewater, we still incur the net penalty as the last four months of the financial year materially impacted on some of the measures, reducing reward and increasing penalties. Overall, this results in 6.7% Rory in real terms despite the adverse operational performance in the year and allowing for inflation and the actual balance sheet, this would result in a regulatory return of 12.4%. Moving on to next year, we anticipate a further improvement in financial results, with revenue increasing by around 50 to 70 million, whilst water group costs will increase by up to 5% year on year. Revenues and costs for our retailers will reflect sector-wide tariff changes, with EBITDA remaining stable. So overall, this will result in a group EBITDA growth year on year of around 5 to 10%. Depreciation and financing costs will continue to rise as our capital programme progresses and we'll see increases of up to 10% and 15% respectively. CapEx is anticipated to remain in a similar range of between £620 and £700 million. We anticipate that underlying operational performance will improve year on year, Although with stretching targets and some measures still impacted by the extreme rainfall in the first quarter of 2026, it is anticipated that the Water Group will remain in net ODI penalty next year. So let me talk a little bit more about our operational performance this year. Firstly, as you will recall, we continue to focus on our four strategic priorities. These are aligned with the outcomes in our five-year business plan and are critical to delivering on our commitments across our operating regions. As is clear from the net operational penalties we've incurred, in-year operational performance has been challenging and has been impacted by weather conditions, which have often been localised and extreme, particularly in Devon and Cornwall. This means that whilst the UK as a whole have seen lower than average rainfall. In the South West we have still seen above average rainfall and we've also seen extremes with dry, hot weather in the summer and periods of intense rainfall including 190% of rainfall across January and February this year in Devon and Cornwall. So let me talk you through a little bit more of our strategic priorities and our performance measures. Our first priority, reflecting the top priority of our customers, is building water resources and improving water quality. We've seen significant challenges this year, as the hot summer period followed by free-thaw conditions and heavy rainfall in the winter put pressure on our networks. You can see from the chart that January in particular was challenging. There were five main storms, including the Red Storm Goretti, which heavily impacted power supplies in Cornwall. This created tough operating conditions and impacted our performance across a number of metrics. Underlying performance outside one-off or weather-related events remains strong and the operational teams are working hard to bring performance back in line with their ambitious targets. However, this has led to material penalties in terms of supply interruptions, mains repairs and leakage. meaning that network resilience and asset health is an area we will focus on as we move forward. Water quality remains set to leading in SES, with South West Water also retaining a top quartile position and Bristol showing underlying improvement year on year. Moving on to our second priority of tackling pollutions and storm overflows. This has been a particular focus given challenging targets and the topography and historic performance of South West Water. As many of you will be aware, this has been an area of continued focus and one where we have seen improvement over the past year. Our pollution incident reduction plan has been key to this improvement with reductions in pollutions to a water course as well as spills from storm overflows. The absolute number of pollutions has reduced by around a third whilst our revised sewer length, agreed with the Environment Agency, resulted in normalised pollutions reducing by around 53% year on year, bringing us within the range of performance for the sector for the first time. We continued to work hard to reduce spills from storm overflows and saw the benefit with 17% lower spill numbers, whilst spill duration reduced by around 25%. These improvements resulted from our continued focus on initiatives to reduce the underlying number of spills, and we've taken action at our top five spilling sites to reduce spills across those sites by more than 50% through both targeted operational interventions and focused investment. Soil flooding remains an area of strength. We're in reward on internal sewer flooding, although this is lower than we had targeted as the extreme rainfall in January and February impacted our network. This increased the number of customers affected and reduced the reward relative to a more normal year. As such, while good progress continues, the year outturned with lower benefit from outperformance and higher penalties resulting in a net wastewater ODI penalty. In addition, and as Keith mentioned, whilst we've made good progress in moving forward our capital programme, four projects related to our WinEx programme were not completed by the year end, which will impact on our EPA scorecard. Alongside performance in respect of normalised and series pollutions, this has resulted in a provisional one-star assessment for the 2025 EPA. We do remain focused on protecting the environment, not only by improving performance in our wastewater business, but also by delivering on a number of initiatives which will provide environmental gains. We've continued our award-winning upstream management programme and peatland restoration to support biodiversity and environmental net gains across our regions. Our renewable investments in Penn on Power saw two sites energised in the year, with first revenues also occurring. The remaining two sites are making good progress and we're also progressing some behind the wire projects that will provide multiple benefits in terms of financial returns, resilience and carbon offset against performance commitments to the regulated business. And then last, but by no means least, our final priority relates to customer affordability and support. With tariffs increasing, the past year has been challenging across the sector and our customer teams have been managing increased calls due to higher bills coupled with continued focus on the service we provide as the water industry remains under the spotlight. It's therefore been important to ensure we are communicating, supporting and engaging with customers across our regions. From a support perspective, we ended the last five year cycle with support provided to all customers deemed to be in water poverty. And despite tariff increases, our target is to return to this position by the end of the five-year cycle. In this year, with a step up in tariffs, it's therefore been vitally important to support customers who cannot afford their bills. And we increased the number of customers receiving support by 11% year-on-year, both in response to customer contact as well as by proactively enrolling customers on tariffs where we think they need the support. We're also focused on ensuring we support all our customers and drive improvements in the services we provide. We listen, learn and respond to feedback from our customers through our programme of research and community drop-ins, as well as using the feedback we get every day on the services we provide. We continue to work with our WaterShare Plus panel to ensure we're putting customers at the heart of our decision making. Our retailers are also going from strength to strength, engaging every day with business customers across the UK. We've seen excellent Trustpilot scores, including a step change for SES Business Water. And finally, we're making good progress in investing for the future in our customer service. Both in South West Water and in our retailer business, we're implementing new technology platforms that will drive best-in-class customer service, better functionality to allow customers to self-serve, and improved capabilities for communicating and engaging with customers, whether on their bills, on the service they receive or the improvements we're making. With that, I'll hand back over to Keith.

Okay, so thanks, Laura. Look, I'm very focused on now over the next few months completing, I guess, an operational review that will now deliver material improvements for our customers and stakeholders So you can see in front of you, there are five key areas that will focus me in terms of the regulated business across the next few months that include our customer transformation, our people and culture, our target operating model, asset management and reliability, and our capital investment program. So I guess just to unpack that a little bit, there's a comprehensive plan now in progress. Actions are being taken, as you can see, and that's already underway with the team as we speak Customer transformation is an area where we have a project fusion going live for our new CRM system in October, which will transform our customer experience with further capability planned. We are planning the next phase to introduce channels of choice to our customers and using artificial intelligence applications already built into the Salesforce platform. The focus is really to improve our customer experience by reducing our cost base, throughout BATE and beyond. People and culture. I've completed a survey now with employees and created tangible action plans with our teams. I've introduced a new scorecard from CEO down to the front line to really start to introduce a performance-led culture. I've recruited a new chief people officer who is passionate about cultural transformation in alignment with my approach and ambition. I have elevated the importance of technology and data in our business and our existing chief information officer is now part of the exec committee and reports in to me. In terms of the target operating model, I am now introducing a best practice approach from my experience in previous roles to ensure we maximise our capability and performance. I have introduced new clear lines of accountability and responsibility within my executive team and the senior leaders. I have observed a range of excess processes and roles that require simplification to achieve the required outcome. And I've also made a number of structural changes to accelerate our improvement plan within the initial two months. So real past in mind is also asset management and reliability. I've appointed a new chief asset officer who started in May and centralising all asset management functions, which now includes the capital delivery team. Targeted recruitment now for some of the best asset leaders in the industry and they are due to start in the next few months. Completed a review of our asset management structure and required deliverables for Ambit and beyond. And introduced a new capability for improving asset reliability with a clear focus on asset performance to mitigate and remove the unplanned failures of the past. Building our picture, I guess, on asset health for current and future investment plans. including the cost change submission. And lastly, on our capital investment programme, I've completed a deep dive into the ambient delivery plan for enhancing our environment. There are certainly opportunities to accelerate the programme linked to our performance commitments in an efficient way. And it's important that we map our key dependencies for the investment programme to ensure we always deliver on time and to budget. And of course, this will help to improve our EPA rating going forward as I talked about earlier. So it has been a solid start in terms of progress and more details will follow in the coming months. So just to talk a little bit about sector reform, we continue to be well positioned and supportive of sector reform and we are engaging regularly with government and regulators. It is clear that government intend to organise industry reform that includes increasing the team at DEFRA with a new structure to support reform workstreams, the appointment of Dame Julia Black as the Environment Secretary's new senior adviser on water reform transition. The Environment Secretary is to be given the powers to appoint the chair of the new regulator as well as its inaugural CEO. The transition plan is expected to be published and the clean water bill introduced by the end of the year. So in terms of cost change, today we've announced that we submitted just over 250 million in 2026 cost change claims as part of the re-opener process with Ofwat with in-amp funding requested as part of that submission. We have targeted most of the investment to asset health with a focus on sewer rehabilitation, network storage and rapid gravity filters for water assets. We also put in a discrete growth claim for new key sewage treatment works and a claim for cyber security. This represents a carefully prioritised investment package to deliver benefits to our customers and the environment earlier, based on customer research and engagement with our WaterShare Plus panel. So in summary, the first year results of CAIT demonstrate a positive shift in profitability, but our performance must improve. across the regulatory commitments for both customer service levels and improving the environment. I can assure you that my current observations have identified key areas of opportunity, have refreshed plans to target improved performance and have set clear accountability for delivery. Pulling all of that together, I look forward to sharing my operational and strategic update in late September. I would like to take this opportunity to thank everyone at Pennon for welcoming me. I look forward to engaging with all investors and stakeholder groups across the coming months and years ahead. So that's it for the end of the presentation. We will now take questions from the room.