Veolia Environnement (VE)

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Veolia Environnement S.A. (VE)

2012 Earnings Call

February 28, 2013 3:30 am ET

Executives

Antoine Frérot - Chairman and Chief Executive Officer

Pierre-François Riolacci - Chief Finance Officer

François Bertreau - Chief Operating Officer

Jérôme Gallot - Chief Executive Officer of Veolia Transdev

Analysts

Nathalie F. Casali - JP Morgan Chase & Co, Research Division

Olivier Van Doosselaere - Exane BNP Paribas, Research Division

Martin Young - Nomura Securities Co. Ltd., Research Division

Ignacio Perez Cossio - UBS Investment Bank, Research Division

Presentation

Antoine Frérot

[Audio Gap]

accounting standards, and in particular, the ending of proportionate consolidation. I'll then give the floor to François Bertreau, our new Chief Financing (sic) [Operating] Officer in charge of the transformation of the group drive, who will talk about our cost-cutting program. And then I'll take the floor again to give you our guidance.

To kick off, I'd like to say that at the end of the first year of the Transformation program, Veolia is ahead of its objectives and is now clearly on the path I had defined for the group a little bit more than a year ago. 2012, first of all, witnessed a major change in the group's governance and organization. Also in 2012, an asset divestment and refocusing of our business activities being implemented and that led to a sharp drop in its debt. Furthermore, the cost-cutting program was vigorously launched, and the savings at the end of this first year exceed expectations. As a result, thanks to those savings, as well as the good performance of our growth platforms and also the fact that our Environmental Services held up very well in late 2012 despite a rather bleak environment, our operating cash flow has significantly improved in the -- at the end of the second half, and we are somewhat ahead of the priority targets we had set for our growth.

Last year, Shareholders Meeting, as you all remember, appointed 4 new directors including Groupama, Maryse Aulagnon, Nathalie Rachou, Jacques Aschenbroich and Groupama. And this year, Henri Proglio resigned and Marion Guillou was coopted.

The group also changed its organization, appointing a new Chief Financial -- Chief Operating Officer in charge of the group's transformation, and in particular, in charge of industrializing our work methods, i.e., François Bertreau, whom I'm delighted to introduce today for the first time as we present our results. François, as you already heard, will be talking to you in a few minutes.

With respect to the group's refocusing. First of all, we wrapped up 2 major divestments, regulated water activities in the U.K. and solid waste in the U.S. But furthermore, we finalized 30 smaller transactions, along with the usual financial divestments and that totaled EUR 3.7 billion. Furthermore, changes in the Berlin Water company shareholding led to additional deleveraging of EUR 1.4 billion. So all in all, we have reduced our debt by EUR 5.1 billion, whereas we had projected this program over 2 years, and some transactions that have already been signed have yet to produce their results, for instance, our pullout from transportation.

And as of 31st of December, 2012, capital employed by the group was constrained on 48 countries. In the last 18 months, we have sold business units because we wanted to pull out from countries, you can see them here in red. We have closed down loss-making operations, in yellow here; Or sold assets we wanted to discard, although we did not want to pull out from the country, and that's where you have green dots.

At the end of 2013, capital employed by the group will be concentrated on 40 countries. Thanks to this divestment program, but also the keeping in check of CapEx, as well as the excellent performance of working capital requirements, in particular, in Q4, debt has contracted to a significant extent. Because at 31st of December, 2012, it was down to EUR 11.3 billion. You remember now, our objective was to lower it under EUR 12 billion as of the 31st of December, 2013, so we are more than a year ahead of this objective. Our group's debt dropped by EUR 3.4 billion, and since November 2009, it's dropped by more than EUR 5 billion.

Given the advance we had built up over our initial objectives, we have reviewed our deleveraging objective, and I will confirm this when giving you guidance, and our target at 31st of December, 2013 will be ranging between EUR 8 billion and EUR 9 billion. And as Pierre-François will explain, this will lead to an adjusted net financial debt of EUR 6 billion.

Given this major decline in debt and deleverage and the good conditions of our divestments, the group's leverage has increased from -- further dropped from 3.88 to 3.26 as of the 31st of December, 2012.

The second component of our Transformation program was cost cutting. As you know, we have a 4-year program with EUR 500 million in savings, adjusted savings, by 2015. The objective was to reduce costs by EUR 100 million in 2013, and that's what you can see on the right-hand side in red. Once more, we have topped our objective, because savings total EUR 142 million versus EUR 82 million in terms of implementation costs, so a net saving of EUR 60 million that can be found in general and administrative costs.

Actually, in this slide, what we can see is that adjusted operating cash flow has improved despite the deterioration in our environments. This increase, of course, results partly from saving, cost savings, but also the excellent performance of Environmental Services and the good contribution of our growth platforms.

Lastly, in 2012, we also stepped up the group's repositioning on high-growth markets and recorded some superb successes with our new business models. These new business models, for instance, in Water, led to successes in the United States, in New York, recently in California, but also in Pittsburgh and in Winnipeg, but also in France. In India, for the drinking water -- operating the drinking water network of the City of Nagpur, we have been awarded that contract. And we've also renewed most of our contracts in France.

In Environmental Services, in the United Kingdom, we were awarded a major PFI contract for residual municipal waste treatment in Leeds with a 25-year duration. In China, in Hunan Province, we were also awarded a contract for a hazardous waste treatment center. In France, we commissioned 2 new lines of recovery, one for used motor oil recycling in Le Havre, Normandy and another one in North France, close to Arras, for anaerobic digestion of waste.

In Energy Services, in Central and Eastern Europe, we increased our order backlog by around EUR 1 billion with the operation of the urban heating network in Romania, and in France, where we also renewed contracts and we commissioned the largest biomass plant in Europe.

I will now give the floor to Pierre-François. He's going to talk to you about the financial statements in detail, also talk about the consequences of the change in accounting standards. And I'll come back to talk about 2013 and our outlook.

Pierre-François Riolacci

[French] Good morning. Well, this is going to be a double serving. You're going to have the accounts and then the new IRS -- IFRS standards.

Let's get down to brass tacks. Antoine has already pointed out some of the highlights for 2012. You also heard the main figures from GDF if you're listening to the news. In any event, 2012 was a good year of organic growth for us, 1.5% against a very, very negative business climate. We have stock performance of adjusted operating cash flow with the divestments in Italy that haven't had an impact in the second half of the year. So this means that we've seen a welcome brightening of the picture in the second half of the year. You can look, this year, we've had significant capital gains from our divestments instead of the write-downs that we saw last year. And you can see that the free cash flow is down at around EUR 3.7 million -- EUR 3.7 billion.

Here's the breakdown of revenue by division. Again, this is the direct impact of the drop in secondary raw materials from 2011 to 2012. This accounts for about 16% to 17% of our revenue. We would have been flat in Environmental Services. But nonetheless, we've held up well despite the drop in industrial output. In Q4, we've seen 2.9% increase in organic growth. We were down at 0.8% in the second quarter and -- or minus 0.3% in the third quarter, so we saw a marked improvement towards the end of the year.

Okay, let's go through the details of each of our business activities. Water, we're looking at revenue of about EUR 12 billion with just 1.3% of organic growth. You can see something that is quite surprising is that France posted a growth rate of 1.3%. This is due to the continued contractual erosion of EUR 500 million versus our lower volumes, which represent about EUR 15 million in revenue, but we've got the positive impact of pricing construction activities, up 3%. And also we've seen strong performances of services, all of the construction activities that is sort of an appendix to all of our other activities and that's contributed some EUR 30 million in revenue.

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