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Edited Transcript of SVT.L earnings conference call or presentation 22-Nov-18 9:30am GMT

Interim 2019 Severn Trent PLC Earnings Call

London Jan 4, 2019 (Thomson StreetEvents) -- Edited Transcript of Severn Trent PLC earnings conference call or presentation Thursday, November 22, 2018 at 9:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Andrew P. Smith

Severn Trent Plc - MD of Business Services

* Anthony J. Ballance

Severn Trent Plc - Director of Strategy & Regulation

* Helen Miles

Severn Trent Plc - Chief Commercial Officer

* James Bowling

Severn Trent Plc - CFO & Executive Director

* James Jesic

Severn Trent Plc - MD of Production

* Olivia R. Garfield

Severn Trent Plc - CEO & Executive Director

* Sarah Bentley

Severn Trent Plc - Chief Customer Officer

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Conference Call Participants

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* Deborah Gilshan

* Iain Stewart Turner

Exane BNP Paribas, Research Division - Analyst of Utilities

* James Brand

Deutsche Bank AG, Research Division - Research Analyst

* Mark Freshney

Crédit Suisse AG, Research Division - Research Analyst

* Mark Robert Nelson

Killik & Co. LLP, Research Division - Research Analyst

* Nigel Bligh Spencer Hawkins

Hardman & Co. - Utilities Sector Analyst

* Timothy Ho

Morgan Stanley, Research Division - Equity Analyst

* Verity Mitchell

HSBC, Research Division - Analyst

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Presentation

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Olivia R. Garfield, Severn Trent Plc - CEO & Executive Director [1]

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Good morning, everyone. I'm Liv Garfield, Chief Executive of Severn Trent, and welcome to the Severn Trent '18/'19 Half Year Results. I'm joined on stage by James Bowling, our CFO; and I've got members of the Executive team, who are eagerly awaiting questions at the end of the presentation.

So it's been a busy 6 months. We've submitted not 1 but 2 PR19 business plans. We've been able to pull out all the stops to cope with increased demand over a very hot summer. We've continued some really strong progress on our financing strategy. And we feel good about the fact we're now UQ, looking forward into the next AMP on financing. We've landed Agrivert, an acquisition which will continue to bolster our green energy business. And we're proud to have been announced and acknowledged as a Pathfinder Company of the Purposeful Company, and I'll talk a little bit about that in a bit more detail.

Now James is going to run us through all the numbers right now. One little number I thought I'd just pull out as a reflection to start with is when you look at the underlying EPS growth of 16% and that gives an EPS, or earnings per share, of 76.2p, we think that reflects the strong operational and also financing performance over the last period of time.

And with that, let's get James to take us through the numbers.

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James Bowling, Severn Trent Plc - CFO & Executive Director [2]

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Thank you, Liv, and good morning, everyone. I'm pleased to be reporting a good set of financial results for the first 6 months of this year, so let's turn to the highlights.

With group turnover up 3.6%, we've delivered PBIT growth of 4.3% or GBP 12.4 million. This increased profit is after absorbing an extra GBP 10 million of operating costs in the hot dry summer and is supported by GBP 18 million of gains from the sale of land in Nottingham that I mentioned in May, giving us a good start on our ambition of delivering GBP 100 million of property profits over the decade to 2027.

On financing, our effective interest rate has fallen 70 basis points to 3.8% as we've worked hard to find the lowest available rates for new and refinanced debt and benefited from slightly lower inflation. Taken together, we've delivered a 16% increase in underlying earnings per share, providing good cover for our interim dividend, which is up almost 8% on last year, reflecting an AMP6 dividend policy of RPI plus growth of 4%.

As we've announced at the full year results in May, we're now managing and reporting our Bioresources and property development activity within Business Services. To help you navigate through this transition year, I'll be showing comparatives on the old segmental basis with a bridge to the new basis of reporting.

So let's turn to Regulated Water and Waste Water. Turnover for this, our largest segment, grew by 4% overall, mainly driven by the RPI-linked tariff increases in Severn Trent and Hafren Dyfrdwy of GBP 28 million. Customer ODIs of GBP 8 million that we earned for outperformance in '16/'17 have been partially offset by the same year's rhythm adjustment, the trues-up billing over the 5-year final determination. And other small differences, including the impact of new connections and meter optants, put the total increase for the year to GBP 33 million. As I mentioned, we've included on the slide a bridge to our new basis of reporting that shows the movement of revenue out of Regulated Water and Waste Water for those activities now managed in our Business Services segment.

Let's now turn to PBIT. We held underlying PBIT for our Regulated Water and Waste Water business broadly flat as the higher turnover I mentioned previously was offset by an increase in net operating expenses. Now in May, I guided you to expect an increase in power costs and environment agency fees, but I didn't forecast the glorious weather we saw over the summer months. And while not exceptional, a hot, dry, wet spell did significantly increase our customers' demand for water. And as you can see from the slide, most of the GBP 10 million of extra cost to meet this were in hired and contracted services and power. In the second half, we'll be absorbing a similar amount of additional costs for operational recovery, which I'll touch on later.

Going through some of the larger movements. Net labor and hired and contracted costs combined were up GBP 10.5 million. Absent the hot weather, combined costs were up around 2% as the annual pay award and higher headcount were partially offset by a higher split of our work allocated to capital programs this year. Power costs increased by GBP 5.3 million year-on-year due to higher pass-through rates, as previously guided, and the cost of pumping more water during the summer. Our bad debt charge increased by GBP 2.5 million, and we're currently providing at 2.1% of household turnover, slightly better than the 2.2% for last year.

And finally, depreciation was 5% higher as we wrote down the value of retiring assets being replaced this year and also see the proportion of investment in innovative shorter-life technology assets increase.

So turning now to our Business Services segment. It's been an exciting year for our nonregulated business. The sale of land in Nottingham at the start of this year generated a profit of GBP 18 million and will enable 830 new homes to be built by the developer.

We're nearing completion of our acquisition of Agrivert, which will add 5 food waste anaerobic digestion plants to our portfolio, generating the equivalent of 106 gigawatt hours per annum. Agrivert brings with it significant management expertise, secure long-term contracts and 20-year Renewable Energy subsidies, all of which make it a great fit for our existing food waste business.

On a like-for-like basis, Business Services turnover and PBIT are marginally down this half as we're lapping a busy period last year on the MoD contract and absorbed start-up costs on our new Derby food waste plant, which will be operational in the second half. However, we expect turnover and PBIT both to be up for the full year.

So turning now to cash flow and net debt. We generated cash from operations of GBP 490 million, and we reinvested much of this in capital projects, with CapEx spend up GBP 70 million this half year to GBP 340 million as planned. Work on projects such as the Birmingham Resilience Programme, upgrades to our waste assets as part of the Water Framework Directive and improved sludge processing in our new THP sites mean that 2018/'19 will be Severn Trent's biggest year of capital investment in the last decade. After accounting for tax, interest, dividends and other items, net debt increased by GBP 62 million over the period.

So let's now turn to our financing performance. It's been a good year so far as the balanced financing strategy we've followed since 2015 has delivered further significant reductions in our finance costs, down GBP 17 million this half year. Our effective interest rate for the first half is down to 3.8%. That's 70 basis points lower than last year. This reduction is driven by a number of factors: First, we replaced expensive fixed-rate debt such as our 6% GBP 400 million bond, which matured in January, with new low-cost debt.

Second, through our balanced debt mix, we've continued to benefit from the lower for longer interest rate environment for new funding.

And third, we've seen lower inflation this year, which has helped reduce the inflationary roll-up on the 1/4 of our debt portfolio that's index-linked. We expect our full year effective rate to be only slightly higher at around 4% due to higher inflation expected in the second half.

So turning to our debt portfolio. We accessed the U.S. private placement market this year and raised GBP 323 million across a range of maturities between 10 and 20 years, which we fixed at current low rates. We delayed drawing down the funds until this month so they're not reflected in our interim accounts, and the placement takes the total funding raised in AMP6 to GBP 3.3 billion and gives us liquidity out to early 2021.

Our regulatory gearing was 59% at the half year. And as a reminder, we typically see gearing dip slightly at the interims due to higher bill receipts in the first half and higher interest payments in the second. And we still expect to exit the AMP with gearing levels close to the PR19 notional level of 60%, which will position us well at the start of AMP7. We continue to carefully monitor market conditions and our interest rate exposure. Roughly half of our portfolio is at fixed rates, and 1/4 each is in floating and index-linked. We're confident we have the right balance of flexibility and financial resilience for the future.

On pensions, actuarial gains and other adjustments in the period reduced our deficit to GBP 466 million. Note that this figure doesn't reflect any potential liabilities relating to the equalization of the guaranteed minimum pension, which we're working on with our advisers and the trustees and expect to recognize in the second half.

So finally, let's turn to our technical guidance for the full year. I'll leave you to read through the detail, but there are a couple of points I want to highlight. We're forecasting the -- higher energy pass-through costs and EA license fees to continue through the second half of the year. As I mentioned earlier, the activity to meet customer demand during the hot weather cost us around GBP 10 million in July and August, which has been fully reflected in our first half results. We're forecasting a similar amount of spend on operational recovery after the event in the second half, and we expect to absorb -- which we expect to absorb through ongoing efficiencies to leave our guidance across operating cost and IRE unchanged.

We continue to expect a neutral position on customer ODIs for year 4 based on the current incentive cap on waste ODIs. Now as you know, earlier this year, we applied to Ofwat to lift the cap on waste ODIs. On the 1st of November, Ofwat published a consultation document relating to the application. We're assessing the proposal they've outlined, and we'll respond this week. So we'll update the market and if necessary, our guidance following the consultation phase. The rest of our guidance remains unchanged.

And with that, I'll hand over to Liv.

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Olivia R. Garfield, Severn Trent Plc - CEO & Executive Director [3]

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Thank you, James. And it's his birthday today, so thank you for spending the day with all of us today on his birthday.

Well, then, we set out in 2015 that we absolutely wanted to make sure that our vision was to be the most trusted company in our sector. And we knew that in order to do that, we asked our customers, "What would that look like?" And they shared there would need to be fantastic value for money, environmental leadership and great service. And we knew that in order to achieve those ambitions, we'd have to do really well for all of our stakeholders, our customers, our colleagues, our investors and also our communities. And so with that backdrop and the effort we've put into this, we were so pleased with the most recent independent tracker to see that we're now the most trusted company in England in our sector, and it feels like it's really in the DNA of our company and it puts us in a really strong position for the future.

Now, trust, you have to earn it. You have to maintain it. It does feel as though as we head forth that that sense of trust and societal purpose is something which we are really believing as a key part of the future. And the way we view this is we view the fact that to be the very best Severn Trent we can be is built on a culture of trust with all of its various stakeholders. We also think it's good for those stakeholders. We believe that sense of trust at the heart is good for customers, it's good for colleagues, it's good for the environment. And we actually believe for investors, it creates value as well for the long term.

So that's why we've made 2 changes to our presentation set-up today. You will have noticed on your seats, not only do you have the beautifully crafted slides from the IR team, which will take you through the results, but you also have a lovely document, if you have time to peruse that later, and in that document, you'll see a whole heap of concrete examples that try to bring to life the efforts and the outputs which have led to us being acknowledged as a Pathfinder Company in this Purposeful space, the only utility to be acknowledged as a Pathfinder.

You'd also have seen, hopefully, on the way in that we've actually also begun to evidence how we're performing against 11 of the 17 UN Sustainable Goals. And what you're going to see in a second or 2 as I flip onto my slides, is you're going to see little icons, and those icons reference where we're making efforts and delivering things against the sustainable UN goals. It's a real passion for us, and we think it's something we can talk about more to help maybe bring out that sense in our business to make it more visible to yourselves.

So with that, let's go on and talk about PR19. We couldn't possibly have a presentation and not have one slide on it. You would definitely have missed it. So we submitted our plan. We feel our plan is robust. It's balanced. It's ambitious. We think that it matches the needs of our customers and also our regulators. And to remind you of what the sum of our plan is, it's based, first of all, on a 5% bill reduction, which is the largest in 2 decades, and continues to make ours the lowest bills in the land through to 2025, both in England and in Wales.

It's also predicated, the Severn Trent plan, on a 13% reduction in cost. And that actually, we believe, depending on the model that Ofwat chooses, could well see us up a quartile in wastewater and retail. It's called the largest RCV growth of any of the listeds. It's based on the fact that it's got a strong financing sustainable backbone through it, whether that's the credit rating, the dividend policy or the gearing. And crucially, it has the largest of the RoRE ranges on ODIs. And that's because we absolutely embrace incentivization. We have in this 5-year period. We absolutely want to do the same in the next 5-year period. Now it's not long until we get our feedback. 31st of January is the date at which Ofwat will give us that initial mark of our plan, and we look forward to that date.

In the meantime, what we're clear on is that our stakeholders, all they absolutely want us to do is prepare ourselves to be in the strongest possible shape to start AMP7, to make sure that that journey has already started and continues. So as we arrive into PR19, we're in the right shape and raring to go, and that's what we, as a management team, are focused on delivering.

So let's move on and think about what have we learned from the whole customer research that we've just recently been involved in. We've done the most extensive customer research in our history, and that's given us heaps of insights, which helps us create an even better Severn Trent for the future. We've now got a brilliant community, an online chat community of 15,000 customers, that have a really rich dialogue with us and who give us real-time insights into what they're thinking, how they're feeling, answer questions for us on where we should go next on particular topics.

We also feel good about the fact that, actually, when you look at the 2 big customer experience metrics for AMP7, D-Mex and C-MeX, when you look at the current metrics that most closely map to those measures, we're actually up a quartile on those metrics today, which gives us a strong start to go into AMP7.

And as you can see here, we are really excited about new innovations that are coming as to how we engage with customers. One of these that went live over the summer was the opportunity for customers to FaceTime live to our engineers to raise a problem and to actually show that problem live. So rather than just waiting to go out and see it, customers could get real-time diagnosis. It means we can deploy a resource owing to the right activities. It's really popular with customers because it's a quicker time to fix typically on the issue. And of course, it's much more effective end-to-end as in our process. That's an example of some of the new technology we're beginning to deploy now to get ourselves in that total tip-top shape ready for AMP7.

So let's start by talking about water. So we've continued to make good progress over the course of the last while, and we're getting ourselves ready to be in the right shape as we enter AMP7. On water quality complaints, which is something we've talked about over the last couple of years, we've made a further progress. We're confident this year of improvement by 6%, which is based on last year's 12% reduction, again, on water quality complaints. And we still believe that we'll be in good shape to be in reward territory by the end of next year for to exiting the AMP in strong shape in water quality complaints.

We've got a laser-like focus on leakage. Whether that's to find a fix activity or whether it's new innovations that we're scouring the world to bring in, we know we've got a really ambitious 15% target in next AMP. And our mind is very much focused on getting ourselves into the right position for that bigger AMP7 challenge.

And one of the things we haven't talked about as much, but it's the kind of perfect timing, is we've done a whole heap of work in the environmental arena. And actually, we've got some of the team here today that you can have a chat to afterwards. And it's the opportunity for us to really change behaviors with farmers. We've had this scheme of working with farmers called Farm to Tap, and we've been educating and working with changing the behaviors of 800 farmers over the last few years. And quite simply, what it means is that we work with them on how to make the ecology of the river better, how to make sure that we actually spend less money on treatment processes, we're actually supporting them in their farming methods. And the great news is that's gone really well. And actually, there's now an opportunity this year for us to earn up to an GBP 11 million ODI reward at the end of AMP4 for our performance in that catchment area.

Now as James mentioned earlier, we have seen some absolutely glorious weather. And of course, that brings with it some challenges for us to manage during the course of the summer. And we're really pleased with how we managed that position. We have the reservoirs at 98% capacity. We went into it in a strong position to be able to manage the 22% increase in demand that our customers drove at peak moments.

We're on track to still improve on our supply interruptions' year-on-year performance. We said we'd halve that this year, and we're on track to that performance, which, again, is a good improvement.

And I think when James mentioned it earlier, it will cost you money. If you have a situation like that, where there is just a step-change in customer demand, more activity to be had across the business, then, of course, it will have cost us. And we've swallowed the GBP 10 million cost for the first half of the year. For the second half of the year, we now need to rebalance water around the network, make sure we're in exactly the perfect place to enter into another summer and that's why there will be a further cost allocation in the second half again, which we'll swallow in normal operating cost.

Now moving to waste. We believe that we truly excel in this part of the sector. And if you cross-compare our factual performance in this AMP, whether it's ODIs, whether it's our cost base, whether it be in frontier, whether it's our environmental performance, where the 2 of the last 3 years we've enforced our status that coveted EA rating, we think we've demonstrated that we're real leaders in the waste part of our business.

And we don't talk enough, I think, about how we deliver that, and it's on this basis of the catchment work. So quite simply, we have some of the best asset models in the sector, and that allows us the data to understand where we're going to put our efforts. It means that by using the culture -- our performance culture that we've embedded for the climate of ODIs, with the telemetry that we have across our network, combined together, we intercept, we then prevent and we really make sure that we've got this really good virtuous circle of activity that limits customer pain and creates a much stronger environmental performance. And it's that sense that we think is right at the heart of why we do well in wastewater.

Now we recently asked our customers what they'd like for the future, and they came back strongly with a real push on the fact that they really care passionately about this part of our organization. And that's why we've continued to make sure that our AMP7 plan factors that in strongly. We've got the largest ODI range on waste measures. We've also made sure that on the 2 measures that you can supersize, we've supersized both of those. And we've also listened to our customers quite carefully and included some bespoke ODIs that we've not done before, so our customers have said they're really passionate about seeing progress in that space. So we've got strong momentum and strong progress in AMP6 on this area, and we feel good for the challenges in AMP7.

So let me just touch now on our people. So it's the culture of Severn Trent that we think makes it a special organization, and it's been a jampacked people agenda over the last period of time. Our people were genuinely proud of the fact that, once again, we were named in the Social Mobility Index. It's a real passion for us. 30% of the nation's cold spots, places where if you're born, you've got less chance of getting on with your career, are in the Severn Trent patch. And we have a huge opportunity here to really influence the lives of people in our region for the better. And we were praised as part of that, for the work that we're doing specifically on recruitment in those cold spots.

Equally, we like to kind of trail-blaze on topics that are a bit more taboo in the workforce. And that might be menopause, but it might be mental health. And perhaps your (inaudible) stand earlier, we talked about the fact that 70% of our line managers have been educated and trained in how to really engage on mental health topics. And it's really made a difference culturally internally for what I think is a business topic that affects every business today.

And just last week, we were named once again in the top 4 in the nation for the Hampton-Alexander report. We were the top utility again for the second year running. And this, I guess, is testimony to the fact that we are passionate about diversity and inclusion. And as a senior team that is heavily female, we really strongly believe that it's the obligation of us to create footprints for others to walk in to try and make sure this becomes a much more normal diverse mix across all sectors and across the U.K.

And many of you got the chance to come along with 900 of our line managers to the truly immersive AMP7 experience in September, which I hope you enjoyed. It certainly created a huge buzz internally. What we're looking to do with that was to get our workforce really excited about AMP7, to get them lined up with 18 months to go. They knew where the challenges were, they knew what the ambitions were, and we could get ourselves pointing in the right direction with ample time to get ready for the next 5-year regulatory period.

So with that, let me summarize. What I thought I'd do by summarizing is just to contextualize before we get to Q&A the whole last 3.5 years. We're 3.5 years in of what is a 5-year journey. And we started the AMP really passionate about saying how do we make sure our bills are the lowest for the future? What can we do on efficiencies to drive that long-term ambition for our customers? And that meant we've identified GBP 870 million worth of efficiency savings, which we're proud of. We also went live with a new financing strategy, which has paid off well and got us in a strong place UQ for the next period.

We then also said to ourselves that we want to make sure we achieve really good things that our customers and our communities are passionate about. And that's why we're so proud to have landed strongly for all 3 years of the last 3, we've been the outperformer on ODIs, and that's the measure that customers care about most. We've also made some good progress on some of the customer topics and made sure that we've got that environmental 4-star status for 2 of the last 3 years.

And then it's about planning for the future. Having done a decent job in this AMP, what's our next phase? How do we get ourselves ready for the long term in Severn Trent? And that's why we've reinvested GBP 220 million for the future to make sure on areas where we know we can do better, we're in exactly the right shape. We're pleased to be sharing today that, actually, our self-generation -- we'll actually overachieve this by year. The acquisition of Agrivert will actually achieve 50% by 2019, which is a year ahead of target and puts us in good shape for that agenda.

And we're now forecasting an 8.9% RCV growth during the course of the 5-year period. And all of these efforts cumulatively have gained us an upper quartile position in RoRE for the first 3 years of the AMP at 9.3%.

Now a year ago, I talked to you about the fact that we're doing a reorganization internally that we thought would get us in better shape for the future. That's landed well, and that again gets us with the momentum of our results from this AMP, the reorganization that we did last year that we think gets us in the perfect shape for the future, we feel as though we're ready and we're raring to go as we begin to move out of AMP6 and towards AMP7.

With that, we're going to take Q&A. I'm going to ask 5 members of my team to come and join us here, and we'll see who's got some questions for us.

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Questions and Answers

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Olivia R. Garfield, Severn Trent Plc - CEO & Executive Director [1]

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Great. So have we got a mic? Do we have a mic? No, it's for questions. Yes, I know you guys have got one. The questions are -- sorry, you're next.

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James Brand, Deutsche Bank AG, Research Division - Research Analyst [2]

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James Brand from Deutsche Bank. Just one question and it's on Brexit. So sorry about that. I also asked a very similar question yesterday to United Utilities, but I'm interested in your view. Because, obviously, e-legislation has been very important in driving environmental regulations in the U.K. and CapEx for the water sits for a long time. We're starting to get a bit small visibility on what Brexit might look like with the draft withdrawal agreement and the political declaration. So just wondering whether you have any views at this stage, whether you felt like you had any more visibility on who would be setting the rules going forward, what they might look like. There were nonregression provisions, I believe, in the withdrawal, [BT], so maybe there's some insight in those. And if it's not going to be the EU, whether you've had any initial discussions with the U.K. government over -- or they might think about environmental regulations per site.

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Olivia R. Garfield, Severn Trent Plc - CEO & Executive Director [3]

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Great. So let's hope I give a similar answer, I guess, to the EU answer yesterday. So the way that this is set, it's actually between now and 2027, the regulations are actually outlined quite clearly. So there are already a strong forward-looking period, where we know exactly what it is that we need to deliver as a sector and as an organization. And that's actually something that's been always good for us for the last, I guess, couple of decades as a sector, is that environmental obligations arrive and they set the future. So as part of PR19, we're committing to, over the next, I guess, you'd say from today, 6 years of our lives in that environmental space. Looking out beyond that, the conversations that we've had with [Jeff] from the UK government is that there was real pride quite rightly in the nation for how far we've come as a sector over the last 20 years in the environment. And when you talk to customers, they're passionate about the environment being even more important going forward. So I think what we're going to get a sense of is that the U.K. government wants to hold on to that crown of having made such progress, whether it's water quality, whether it's beaches, whether it's wind spaces and biodiversity. So I think there'll be even more encouragement going forward for good investment in that space.

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Mark Freshney, Crédit Suisse AG, Research Division - Research Analyst [4]

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Mark Freshney from Crédit Suisse. I have 2 questions. Firstly, on the new business segment, Business Services, and specifically property. You're reporting profits within there, but my understanding is some of those profits go back to consumers through the regulatory process rather than being retained for shareholders. So can you give some clarity surrounding the accounting there? And specifically, whether shareholders will actually benefit from any of that? And my second question is on the GBP 2.8 billion pension obligation and the court ruling I think last month. Can you give us some kind of indication on how many scheme members -- or what proportion of the scheme members might be impacted so we could start to think about what the impact on the GBP 2.8 billion liability might be?

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Olivia R. Garfield, Severn Trent Plc - CEO & Executive Director [5]

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Both definitely great questions for James.

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James Bowling, Severn Trent Plc - CFO & Executive Director [6]

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Yes. Right, okay. So on the accounting for property profits. So I think a couple of presentations back, we kind of laid out how that would work. So there is an Appendix that we did I think about a year ago that shows that. But broadly, think of it like this. What goes through as PBIT will get shared with customers. So think about it as being around 50-50 of what we show will go back to customers in the form of an adjustment to RCV at the end of each AMP period. So that's how the mechanics of it work.

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Olivia R. Garfield, Severn Trent Plc - CEO & Executive Director [7]

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But we'll send you the details. The PBIT number stays. It's an RCB adjustment over a 20-year journey. But we'll send it over to you. So I think you missed that, Mark, so we'll get it over to you later.

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James Bowling, Severn Trent Plc - CFO & Executive Director [8]

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Yes. Second one, don't have percentage of scheme numbers, I'm afraid. We're obviously working through it. This is sort of a live issue that all companies with defined benefit plans are working through. I think the general view is, and this is a general view, that the GMP equalization could be around 1% of the overall level of liabilities. But as I said, I can't give you a definitive number. Now for us, it'll be very much dependent on scheme rules and how we as the sponsor and the trustee interpret those and how we implement it. And my expectation is that we'll have some numbers that we can incorporate into our balance sheet in May.

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Olivia R. Garfield, Severn Trent Plc - CEO & Executive Director [9]

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Thank you. Who's next? Great. So we -- Iain over here. Thank you.

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Iain Stewart Turner, Exane BNP Paribas, Research Division - Analyst of Utilities [10]

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It's Iain Turner from Exane. Can you be the most trusted water company in England if you miss your leakage target?

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Olivia R. Garfield, Severn Trent Plc - CEO & Executive Director [11]

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So in turns out, you can, because the most recent independent tracker says that we were the most trusted water company for the last 6 months. And yet for the first time in many years, we did just miss our leakage target last year. Is leakage important to customers? Massively. Is it something that we work really hard in every year to make sure we deliver? Yes. But actually, customers view your entire performance across a whole range of measures. They judge you on value for money, on environmental leadership and on customer service. And it's the combined that gives you that sense. Brilliant. Nigel there.

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Nigel Bligh Spencer Hawkins, Hardman & Co. - Utilities Sector Analyst [12]

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Nigel Hawkins, Hardman. Some months ago, when you put in the plan, they appear to have given up on trying to get an improvement on the 2.4% WACC. When you put in your plan, you can see that it's effectively given 2.4%. Are you going to try and persuade Ofwat to increase it? Or are we, to use an old CBI phrase, going to have a bare-knuckle fight with Ofwat to get that figure essentially increased?

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Olivia R. Garfield, Severn Trent Plc - CEO & Executive Director [13]

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Tony, do you want to talk about how we handle, I guess, I suppose the relationship, which is not a bare-knuckle fight? We tend to give a more constructive dialogue. Do you want to give a sense of that?

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Anthony J. Ballance, Severn Trent Plc - Director of Strategy & Regulation [14]

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Yes. I think the key is we've put a plan in that in the round, we obviously think is financeable. As Liv said, we think it's a robust, ambitious plan. I don't think it's appropriate, first, to be kind of commenting on how we're kind of engaging with Ofwat around that particular issue. We factored the number that they published early into our financial models and then worked around that to ensure that the package that we've got is, as I say, financeable and robust. And we'll have to remember after all that we did, as a sector, want Ofwat to put the numbers out early in the process such that we could effectively deliver plans that in the round weren't waiting for Ofwat to pronounce on a WACC number later on in the process. So I think that gives you a sense of where we've come at this from.

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Nigel Bligh Spencer Hawkins, Hardman & Co. - Utilities Sector Analyst [15]

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Just on that issue, perhaps on the FD, could you just reconcile the 4% interest cost you're projecting for this full year with the debt component of Ofwat's forward 2.4% WACC -- or WACC proposal?

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Anthony J. Ballance, Severn Trent Plc - Director of Strategy & Regulation [16]

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It looks good. So if you break down the debt element of the AMP7 allowance, I think they expect that the embedded debt portion of that will be around 4.6% on a nominal basis. So we're at 4%, which I think looks good. And I think when you look at what they're forecasting for new debt, I think that the kind of recent issuances we've done compare favorably to that as well. So I'm confident that we're in the right place going into AMP7 in terms of our balanced debt strategy.

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Olivia R. Garfield, Severn Trent Plc - CEO & Executive Director [17]

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And we've taken a good number of years to get there. So I think -- if you think about an Ofwat view as a sector, they look at an average across the sector. And we've had to work hard to get ourselves from being a less good performer to now being upper quartile in that space.

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Nigel Bligh Spencer Hawkins, Hardman & Co. - Utilities Sector Analyst [18]

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Can I ask a question about your business plan? You seem very upbeat about it. Should we assume that you're odds-on to be fast-tracked by Ofwat, unlike, I think it's fair to say the chance of Thames and Bristol Water being fast tracked, certainly not odds-on -- you're odds-on, do you think?

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Olivia R. Garfield, Severn Trent Plc - CEO & Executive Director [19]

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So Nigel, I'm the most positive, optimistic person you'll ever meet, so there's no way I would ever do a presentation where I'm not optimistic about life. So you should assume this is just my normal demeanor. It's that I enter every meeting in a positive manner, so you should not interpret anything from the fact that I'm a smiley, cheerful soul. That is just me on a normal day. So we've submitted a robust ambitious balanced plan. Ofwat have got a good number, I'm sure, of really good plans to look at. We'll -- we're going to have to wait until the 31st of January to get any new music from it.

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Nigel Bligh Spencer Hawkins, Hardman & Co. - Utilities Sector Analyst [20]

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So confident but not complacent?

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Olivia R. Garfield, Severn Trent Plc - CEO & Executive Director [21]

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No, no, no, just naturally cheerful. Definitely not. So I'm definitely giving you no wording. I'm saying I'm a naturally cheerful soul. Don't interpret cheerful voice tone to mean any insight. Great. We pass (inaudible).

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Timothy Ho, Morgan Stanley, Research Division - Equity Analyst [22]

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Yes, it's Timothy Ho from Morgan Stanley and a couple of questions from me. The first is on the potential uncapping of the ODIs from Ofwat. When do you expect to hear from them on that? And can you give any more color about kind of your view on that consultation? And secondly, on the dividend. As we're getting towards business planning final determination, what do you think the timing will be on policy? And what will be the key kind of drivers in your decision-making on the dividend when you think post-2020?

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Olivia R. Garfield, Severn Trent Plc - CEO & Executive Director [23]

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We've always said that we wouldn't share anything on the dividend formal policy until after December 19 because you need to get the final WACC calculation and that won't all come out in the wash until the very end. So that remains exactly the same. And we've also got a bit of a policy of not really talking about consultations when they're live because they are that, they're a consultation. So we will submit some thoughts this week, and Ofwat will do a final conclusion on the 12th of December. And as James said, we'll definitely share with everybody what comes out of that at that stage. But it's probably best managed on the 12th of December, which is a real shame. So I feel bad not answering either of your questions in any detail. I'm up for taking another question, your third one, but I feel guilty now. I'm giving you no real guidance on either question. Other questions? Brilliant. Mark has got another one, then Verity. Well, that was swift. Got another one on.

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Mark Freshney, Crédit Suisse AG, Research Division - Research Analyst [24]

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Mark Freshney from Crédit Suisse. Can I please ask on the debt that's aging. I mean, it's pretty tough out there on the high street, for instance. And I mean, you alluded in the statement to some of the older debt balances being difficult to collect. Could you give us a quantum of that and how you see collection in general?

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Olivia R. Garfield, Severn Trent Plc - CEO & Executive Director [25]

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Great. So I'll get Sarah in a second just to give some insights as to what we're doing to keep focused on collection. James, do you want to give any further information on aged debt or have we given enough?

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James Bowling, Severn Trent Plc - CFO & Executive Director [26]

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Yes. We -- you have to -- we look at the sort of the debt profile overall. The good -- the key thing to -- the good news to take away is that when you look at our actual performance year-on-year, on a like-for-like basis, when you adjust for the increasing revenue, we're actually collecting more -- GBP 13 million more cash than we did last year, which is good. The mix is slightly different. So we are collecting a higher amount, better, faster amounts from more recent debt, which I think in the long term bodes well because there's less going out into the older buckets. But we are seeing it being slightly slower collecting some of that older debt. It is a smaller part of the overall debt portfolio. But that has meant that I've decided to be a bit more prudent with that debt and to keep our provisioning at around about the same level as we had last year. So that's -- I think it's tough out there for some people. I think that's why we've seen a good takeup for our -- from our Big Difference Scheme. And we are committing to help even more customers in AMP7 because we recognize that for some folk, they do find it difficult to pay their bills.

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Olivia R. Garfield, Severn Trent Plc - CEO & Executive Director [27]

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Sarah, do you want to share some things we're doing to improve debt levels?

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Sarah Bentley, Severn Trent Plc - Chief Customer Officer [28]

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Yes, absolutely. I mean, I think I've said this for quite a while now. We've got sort of 2 basic prongs. Kind of a very targeted sophisticated databased analytic way of dealing with people who won't pay and a very empathetic, caring and supportive way of dealing with people who can't pay. And we've got very, very clear tracks. And if I look at some of the progress we're making, James talked about the newer debt, getting much more sophisticated in the data sharing that we're doing, but then also the analytics that we're doing on top of that to sort of micro segment people who won't pay into different categories and take the appropriate debt strategy for them. So all of the groundwork that we've talked about is really paying off in terms of that space. And I'm also just massively delighted. We've talked about our social purpose, all the work that the care and assistance team, which is constantly being acknowledged as leading in this space, working with a range of different charities, extending the scheme. I can't tell you how delighted I am that all of the engagement we did through PR19 has shown a massive step-up in the support that we've got broadly from our customer space to support people who are struggling financially. So I'm kind of -- I'm excited about the progress that we're making, and I'm really enthusiastic about the support we've got going forward.

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Olivia R. Garfield, Severn Trent Plc - CEO & Executive Director [29]

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Verity, I think you were next.

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Verity Mitchell, HSBC, Research Division - Analyst [30]

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Yes. Verity Mitchell, HSBC. Just a question about whether the dry summer changed any of your thinking for the next AMP. And also just an update on the reinvestment, the GBP 220 million. Is that very much the things that you plan to do? Has there been any variation? And how have you been sharing that with Ofwat?

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Olivia R. Garfield, Severn Trent Plc - CEO & Executive Director [31]

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Very good. So I'll get Helen and James involved in these as well. So the great thing about an organization like ours is you're constantly playing for the very long term as well as planning for the near term. The thing that's exciting about water utility is the chance to look at multiple different horizons. And one thing that we've had for -- well, we said 2 things that will change our sector are climate change and population growth. They've been long-term challenges we've talked about. And I think what we've seen in the summer is a little bit of that playing in, but we already had some really good long-term plans. It's also given us some opportunity, though, this year to find out who uses the most water now in a dry situation because we don't all use the same. Different people behave in different ways. We're all different people. And actually, we've got some extra insight from this summer, which has helped us with some local stuff as well. So James, do you want to talk about our longer-term ambition on kind of supply-demand.

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James Jesic, Severn Trent Plc - MD of Production [32]

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Yes. Thanks, Liv. So I think it's worth bearing in mind that going into the summer, we're in a really strong position. So I think Liv referenced at the start, we're at 98% in our role to reservoirs. And the challenge during the summer was being able to treat that water effectively and get it through our [treatment works] out into the distribution network at the rate in which people are using it. We've got an extensive plan for resilience in AMP7, and that's building our current resilience profile that we've got today. But off the back of the summer, what we've been able to do is really look across our areas and look at local resilience issues and how we improve that resilience in those particular areas. So for instance, what we've done in one area is we've brought a new water source back in supply. That provides additional 2 million, 2.5 million liters of water a day to that particular area. And once we got through in that area during the summer through tankering systems, what that will mean is we won't effectively need to do tanker in the future. So we're not only improving resilience across our network, but we're also reducing the cost of these sorts of events and the impact that they have on our OpEx going forward in the future. There's other things that we're doing as well around looking at things like our own internal tankering capability. So again, we did -- James alluded to the cost that we spent on hired and contracted. That, again, just reduces that cost going forward in the future, as I say. So we're expecting more of these events. We've -- we're confident that we can deal with these sorts of events in the future. We know that they will come again. It's how do we just make sure that going forward, we'll continue to maintain and build on that resilience and drive cost down at the same time.

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Olivia R. Garfield, Severn Trent Plc - CEO & Executive Director [33]

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Great. And Helen, so the GBP 220 million that we're reinvesting for the future, do you want to give a few little examples? So I guess, overall, how we're doing as an example?

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Helen Miles, Severn Trent Plc - Chief Commercial Officer [34]

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Yes. So there was GBP 120 million that we committed to a while ago on vulnerable customers' water quality and security. And a large portion of that money has been spent and we're well on with that program. That's going really well. And then back in May, we announced a further investment of GBP 100 million. That's still in early days. We've identified what we're spending the money on. So you'll recall our academy, which is a key part of our AMP7 plan. Also, monitoring and logging of our networks. So we're well underway with that. And also, assets in our key site. And part of what James is talking about is some of the investment we're putting in there. So that's still in early days, and we'll be spending the majority of that money over the next 12 months.

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Olivia R. Garfield, Severn Trent Plc - CEO & Executive Director [35]

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Well? Follow-on question? Follow-on question, I really love it.

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Verity Mitchell, HSBC, Research Division - Analyst [36]

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Some follow-on questions. So how do you report that to Ofwat? Do you just go ahead and spend it? Or do you run it past them to start with because they're quite material amounts of money?

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Olivia R. Garfield, Severn Trent Plc - CEO & Executive Director [37]

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No. So it's -- so the regime is an output-based regime. So Ofwat would hold our feet to the fire through our performance quite rightly on all the measures. And whether that's making sure that our assets are in the right shape for the future or whether that's ODIs, which are kind of the interim performance measures, they will hold our feet to that. And it's for us, as a senior team, to make sure that we are focused on the short, the medium and the long term in the right manner and manage that balance. So it's for us to make the right decisions for the different time horizons. They would hold us, quite rightly, feet to the fire for the results. Great. Other question? There we go. Nigel has got one.

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Nigel Bligh Spencer Hawkins, Hardman & Co. - Utilities Sector Analyst [38]

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Nigel Hawkins, Hardman again. Two questions. And it's a bit one for each of you. First of all, on the land sale, which I think if I remember was the Persimmon, I see the profit number. I don't see the sales proceeds number. So I just wonder about whether you could let us know how much you've actually got from selling that land. And secondly, you've waxed lyrical [prose] about the Dee Valley acquisition, I wondered whether that is going to be the last waste and water acquisition you're going to make in the U.K. I think (inaudible) Bristol, which has had a checkered career in recent years. And also, I'm old enough to remember when one of your predecessors said he's launching a bid for South West Water. Is Dee Valley the last? Or should we expect other [facilities] expanding your core business?

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Olivia R. Garfield, Severn Trent Plc - CEO & Executive Director [39]

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Good. So I think I'll take the second one quickly, whilst James and Andy decide to talk about the Teal Close deal. So you know we never get -- we never debate M&A strategy. But right now, I can share that our plan is to get ourselves in good shape for AMP7, and Dee Valley was a -- it was a good buy for us because we thought we could make a better answer for customers there. We thought economically it would provide us with synergies, and we're pleased with the over 20% synergies that we have achieved. But as importantly, it had a Welsh license and we thought that was strategically important to us. So for reasons across a range of areas, Dee Valley was a good situation. Right now, tension is on AMP7 preparation and getting ourselves in the right shape there. James, Andy, do you want to talk about Teal Close?

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James Bowling, Severn Trent Plc - CFO & Executive Director [40]

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It's around GBP 21 million of proceeds.

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Andrew P. Smith, Severn Trent Plc - MD of Business Services [41]

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GBP 18 million profit.

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James Bowling, Severn Trent Plc - CFO & Executive Director [42]

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Yes.

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Olivia R. Garfield, Severn Trent Plc - CEO & Executive Director [43]

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Thanks.

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James Bowling, Severn Trent Plc - CFO & Executive Director [44]

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To the point.

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Nigel Bligh Spencer Hawkins, Hardman & Co. - Utilities Sector Analyst [45]

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The merger, et cetera, do you feel constrained by current legislation on expanding the core business? I'm thinking particularly of the grocers, for example, where we may end up with 2 grocers having a 6% market share between them. It'd seem odd if water is limited to having (inaudible). You said more than 15% was there.

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Olivia R. Garfield, Severn Trent Plc - CEO & Executive Director [46]

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So I feel at the moment that each Chief Executive -- each senior team should focus on where they're going to create best value right now. And when I look at the regulatory regime going forward, I think Ofwat created an exciting regime that will have winners and losers, and our focus is on making sure that we're a winner in AMP7. So I feel as though that's where I've -- set ourselves to the task and we feel good that that's the right focus for us right now. Great. Sorry, we missed you. My apologies.

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Deborah Gilshan, [47]

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My name is Deborah Gilshan. I'm from Aberdeen Standard Investments. I wondered if you could talk a little bit about culture within Severn Trent. But also, you've mentioned the placing -- the great placing of Severn Trent in the Hampton-Alexander review. And so how are you using diversity, including gender diversity, as a strategic imperative rather than a nice to have?

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Olivia R. Garfield, Severn Trent Plc - CEO & Executive Director [48]

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Really, good. And we believe passionately in diversity and inclusion like across the whole organization for different backgrounds, for different ethnicity, for different genders. So we're not just actually convinced that the gender diversity has an answer to it. We believe that the best cultures, everybody feel they can do the very best where they can, and that means that they feel totally included to be themselves every day. That's our belief as a senior team. And as such, we believe that if you've got the right footprint, then people will follow. So it's not about protests. It's not about driving things towards a particular result. It's about creating the right culture and actually, the results just follow. We never set out to be a Hampton-Alexander leader. We happened to be a Hampton-Alexander leader on the basis that we've got an inclusive atmosphere within the company, and that has ended up with that result. The types of things that we do to get the right culture is, first of all, we've got to be accessible. So we, as a senior team, spend a day a week and then longer out and about with teams, trying to really make sure that we're listening, so top to bottom listening across the organization. We think that's important. We believe that celebrating success is important, so we're quite passionate about that. So for example, we have -- I'm not talking big things like big prizes, but we actually ask colleagues to peer nominate each other. So we had -- last year, we had about 5,000 colleagues nominate another peer just for a thank you. It's quite a brilliant people thing. And it's a real moment to celebrate, and it works definitely well. We try to get taboo topics not to be taboo. So menopause, for example. I had a lovely moment last week. I was out and about to -- on a back to the site day. And I was just on the floor cleaning a cabinet getting our site DWI ready, and this lovely apprentice, he was like about 20, he said, "Liv, are you perimenopausal?" And I almost bashed that head out. But the truth was he's just been on his menopause training and he's desperate to get it in. And it was just this absolutely lovely moment that we've managed to really create that culture. That actually, these are the types of topics you should feel comfortable to ask. It was one of those moments of insight. We try to create a much more, I guess, informal organization so that it doesn't feel the same sense. That's the type of things we try to do. And the way that we know we're making progress is because our engagement scores are up, and we can see that we're 6% ahead of the average in the U.K. and Ireland. And we can see that we're on a real improvement across the whole organization. They're the types of things that we prize ourselves on, and that's what we try to focus on culturally. Very good. Verity?

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Verity Mitchell, HSBC, Research Division - Analyst [49]

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This is a very prosaic question after that one. Just on corporate overheads, they've gone up GBP 1 million. Is that a reflection of the increasing diversity of your business? And how should we think of that going forward?

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James Bowling, Severn Trent Plc - CFO & Executive Director [50]

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Yes. It's -- remember that within that GBP 1 million of corporate overheads, I think we've absorbed around GBP 3 million of the kind of the cost of the Agrivert acquisition, which you'll see the benefit of in the second half of the year. So it's...

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Olivia R. Garfield, Severn Trent Plc - CEO & Executive Director [51]

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It's not an exceptional item, which means that that's been incorporated. So actually, it can give you a bit of a false number because it -- we swallowed everything.

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James Bowling, Severn Trent Plc - CFO & Executive Director [52]

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So it's not moving significantly going forward would be my view.

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Olivia R. Garfield, Severn Trent Plc - CEO & Executive Director [53]

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And actually, we believe -- to get ready for AMP7, one of the things we've said openly is we need to make sure that we are fit for AMP7. And that means really making sure that we drive ourselves to be effective in all parts of our business, corporate overheads being one of the areas we've got to be cost-effective. So it's probably a masked number based on the acquisition. Great. There we go. We have 2 more questions.

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Mark Robert Nelson, Killik & Co. LLP, Research Division - Research Analyst [54]

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Just on the -- sorry, Mark Nelson from Killik & Co. Just on the property profits. I think I'm right in saying that you want to make GBP 100 million over the next decade, so GBP 18 million puts you sort of ahead of that on a run-rate basis. Should we expect that to be front-loaded? Or is it just going to slow down as we move over the next decade?

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Olivia R. Garfield, Severn Trent Plc - CEO & Executive Director [55]

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Since Andy's delivering it, we'll let him answer that question.

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Andrew P. Smith, Severn Trent Plc - MD of Business Services [56]

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Yes. We've said for -- the Teal Close is one of our biggest sites, so that is quite exceptional. So we expect it to be steady over the next period, the next 8 years we got left. As we've guided, it'll be up and down, we've said, between GBP 5 million and GBP 15 million and we expect to keep it in there. We expect to keep it in that range. We've got a good set of properties in the pipeline. Julie and the team are set up well. We're engaged with the right people in the right planning process. So our promotion partners are working well. So we'll see some variation. But by and large, it'll be steady throughout the rest of the year period, I would expect.

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Olivia R. Garfield, Severn Trent Plc - CEO & Executive Director [57]

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Very good. I think we are now complete, is that correct? No further Q&A? Well, thank you very much for coming today. Much appreciated. I hope we'll see you at the end of the year.

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James Bowling, Severn Trent Plc - CFO & Executive Director [58]

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Thank you.