Veolia Environnement’s (VE) CEO Antoine Frerot on Q1 2015 Results – Earnings Call Transcript

By | August 3, 2015

Scalper1 News

Call Start: 02:30 Call End: 03:54 Veolia Environnement’ (NYSE: VE ) Q1 2015 Earnings Conference Call August 3, 2015 02:30 ET Executives Antoine Frerot – Chairman & CEO Philippe Capron – CFO Analysts Harry Wyburd – Bank of America Merrill Lynch Martin Young – RBC Guy MacKenzie – Credit Suisse Lawson Steele – Berenberg Vincent Ayral – SGCIB James Brand – Deutsche Bank Philippe Ourpatian – Natixis Emmanuel Turpin – Morgan Stanley Julie Arav – Kepler Cheuvreux Olivier Van Doosselaere – Goldman Sachs Operator Ladies and gentlemen, welcome to the Veolia conference call for the First Half Results 2015. I now hand over to Mr. Frerot and Mr. Capron. Gentlemen, please go ahead. Antoine Frerot Thank you. Good morning, everyone and thank you for joining our conference call to present Veolia’s first half results. I’m with Philippe Capron, our CFO, who will later present our results in further detail. I’m on slide 4 of the slide show. We’re presenting today very solid results for the first half, completely in line with our annual guidance and even better than that regarding our net income and free cash flow. I would remind you that 2015 is the last year of our transformation plan. Deleveraging, on the one hand and reorganization of the Group on the other hand, have been completed for a year. Hence, for this remaining year, we need to complete the last two objectives of the plan, cost savings and the repositioning of our business. On cost savings, our year-end objective of €750 million in cumulative savings over four years will be largely met and even probably exceeded. We were ahead of plan at the end of 2014 and we have accelerated this advance in the first half of 2015. Regarding the repositioning of our business, commercial successes in our new growth markets, essentially in the industrial sector, have been numerous. This puts us on track to achieve a balance mix in 2018 between our two types of clients, industrial and municipal customers, as well as between our two types of geographies, developed countries and emerging countries. However, our traditional markets, mainly the municipal sector, have also experienced robust development. At the end of the first half of 2015, all systems are go for Veolia. On slide 5, four factors explain the quality of these results. Of course, the weaker euro in comparison to other currencies, 4% growth compared to last year for all our indicators due to this weaker euro. Second, the strategic move made in energy, exchanging Dalkia France for Dalkia International, all while reducing the Group debt. Plus 5% contribution to all our indicators on this strategic move in energy. Third, cost reduction. At the same speed as the previous two years, plus 6% progression to our indicators of results. And finally, new business development which has practically compensated the erosion in our traditional activities. So revenue was up 7%, plus 3% at constant currency, down 1% at constant scope and currency. EBITDA rose 16% and plus 6% at constant scope and currency. Current EBIT increased 37% and plus 24% at constant scope and currency. Finally, the Group current net income more than doubled compared to the previous year to €321 million. And free cash flow before dividend payment and excluding the variation in working capital amounted to €552 million. As usual, we expect the change in working capital requirements to reach equilibrium by the end of the year. I remind you that our main objective for 2015 is to achieve at least €500 million for each of the two previously mentioned indicators, current net income and free cash flow before dividend and before divestment. At June end, a large part of these objectives have already been achieved. Finally, net debt was €9.2 billion down €500 million compared to the previous year, if we exclude the negative currency impacts. On slide 6, our first objective in 2015 is to achieve or even exceed €750 million in cost savings by year end. In the first half of 2015, with €110 million in savings, we have surpassed our planned rate of around €100 million per semester. At the end of June, cumulative cost savings amounted to nearly €700 million. So the €750 million December-end objective will likely be exceeded. All of the Group’s activities contributed but the water business was the main contributor, particularly in France, with a major restructuring program whose positive effects will continue for several quarters. Slide 7, as I announced earlier, commercial development has also been robust. On this slide, you can see some of our major successes this semester with our municipal players. Awards were won throughout the world. But Europe, in particular Great Britain and France, were particularly noteworthy. For instance, one of the most important contract wins in the water business, the Lille contract, seems automatic to me as marking the end of our challenges in the French water business. We should see the return to a more normal period beginning 2016. On slide 8, as for our industrial clients, emerging markets and geographies outside of Europe are more dynamic. Our selection of six priority markets has proven astute. And when oil and gas or the mining sector slows down due to the lower commodity prices, the circular economy of treatment of hazardous waste takes over. As a reminder, at the end of 2014, the Group’s share of revenue attributed to industrial customers was 39% compared to just over 20% four years ago. So our target of 50% in 2018 appears well within reach. On slide 9, therefore, at the end of the first half, we’re very comfortable with our annual guidance. Within this guidance, the main objective is twofold; current net income above €500 million to cover the dividend and hybrid debt coupon payments and free cash flow before final divestment above also €500 million to pay the dividend and hybrid coupon and at the same time, targeting flat net debt at constant currencies. First half results have already enabled us to achieve a good portion of these objectives. Along with achieving these objectives, we have also dedicated the 2015 year to the planning and preparation to execute our new three-year plan 2016-2018. This plan which is progressing well and in line with my expectation, will be discussed and approved by our Board of Directors during a day-long meeting and then presented at Investor Day. Calendar constraints to organizing a full-day board meeting led us to shift this event by a few weeks and the Investor Day is set for December 14. I will now give the floor to Philippe who will provide further detail regarding our first half results. Philippe Capron Thank you, Antoine. Good morning, ladies and gentlemen. On slide 11, you have a recap of the excellent first half figures which Antoine already went through. They put us — they are fully in line with Q1 and they put us fully on track to meet our year-end objectives. I won’t go through them all but you’ll remember we have a 7% revenue increase, translating into a 16.5% EBITDA increase. If you measure EBITDA at constant scope and currency, it is still a 6% increase which is all the more remarkable that some of you may remember that in Q2 last year we had a 17% increase in EBITDA for Q2 at constant currency and perimeter. So this performance is more remarkable. This translates into a 25% current EBIT increase and a doubling of the current net income. We’ll go through these figures in more detail again in the next slides. If you turn to page 12, the results, the revenue growth is broken down by geographies. France is slightly down which is not a surprise due to the large commercial impacts of French water contract renegotiations. But you have to keep in mind that this is the last such year. It is a big year because we have Lyon and Marseille which are two large contracts, both impacting the figures. And overall we have a €70 million drag due to those contacts and some others. But again, this is the last year. Waste is up, however, with a strong pickup in Q2, mostly due to commercial wins. In the rest of Europe, you have some negative figures due to the UK construction revenue. But as you’ll remember this is pass-through, no margins. And due to the ongoing German restructuring, the rest of Europe, especially central — our central European activities, are doing well thanks to colder weather in Q2 in the case of our energy activities. The rest of the world continues to do very well, excellent growth at 14%, still 3.4% at constant perimeter — at constant currency. This is especially driven by emerging markets. Asia, Africa and Middle East and Latin America are driving this growth. Global businesses, however, are down with less construction activities. This is in part a calendar impact on large contracts and also in part the indication of a slowdown in government and municipal spending in Western Europe. If we move to page 13, we broke down the revenue growth to show the contrast between the two quarters. If you look quarter to quarter, you see that there is a marked improvement in Q2 for service activities. This is true in France, this is true in the rest of Europe and this is true in the rest of the world. In each case, Q2 is a marked improvement. And if you add those first three lines, you’ll see that we’ve gone from a 2% decline at constant perimeter and currency to a 0.5% increase which shows that the cycle for us is turning in the right way. However, if you include global businesses, you have a very different picture because as you see, we’ve gone from plus 2% to minus 8%. Keep in mind of course that global businesses contribute much less to the bottom line as they are much less capital intensive than our service activities. On page 14, we look at the revenue in terms of our main activities. Water operations are stable overall, in spite of contractual erosion in France and in spite of what we’ve just said about the construction activity which is mostly around water. Waste has suffered from lower PFI construction revenue and lower recycled prices though paper at the end of the quarter and to a lesser extent scrap are recovering. But volumes have been good and especially so in China and in hazardous waste. Our energy activity is impacted by lower energy prices in Germany or in the U.S.. But this is on a pass-through basis with no impact on margins. And this impact has been largely offset by the weather which has been better in Q2, i.e. colder and by commercial wins overall. On page 15, you have the usual detail we give on our waste revenue. As you can see, activity levels and service prices are holding up even though this is offset by recycled prices overall and construction revenue in the UK. On page 16, as we have seen our sales have been roughly stable in real terms, actually slightly declining. But our EBITDA has grown significantly, plus 6% at constant currency and perimeter. This is true even in France where we have a very slight increase despite contractual erosion in water thanks, of course, to the completion of our cost-saving exercises, especially the redundancy plan in France. Over the past three years, 12% headcount reduction has been registered in this activity. In — additionally, our waste activities overall benefit from cheaper fuel. In the rest of Europe, especially in Central and Eastern Europe, we’ve had additional cost reduction actions, especially following a disappointing Q1 in terms of climate and this has driven the sharp increase at 9% at constant scope and currency which you see for the rest of Europe. In the rest of the world, also cost cutting has gone ahead but it has added its effect to sales growth which has been — and an environment which has been overall much more supportive. And therefore at the end of the day, only global businesses have suffered because of the low activity. On page 17, you see the main drivers of the EBITDA evolution. Scope and currency of course have helped. They have roughly offset the impact of the French water renegotiations and the construction decline. But the other elements have been supportive, especially what we call effects which is volumes and the balance of new contracts. But as with the previous quarters, the main contributor to the EBITDA growth has been our cost cutting. Actually, if you exclude the currency and perimeter impact, cost cutting explains more than 100% of EBITDA growth. On page 18, you see how we go from EBITDA to EBIT. Depreciation is flat which is a reflection of our CapEx discipline which has been maintained over the past years. We have a net provision adjustment which is positive. Some risks which we had booked in the previous quarters did not materialize so that current EBIT grows by 35%. But overall, it is to be noted that we have an excellent EBITDA conversion into EBIT because even without this flat factor, the reversal in our provision adjustments, EBIT would still grow by 25% on the back of a 10% growth of EBITDA. Moving on to page 19, you can see that financial expenses are down. The reduction of our cost of carry, as we’re reducing our cash balances, has outweighed the negative currency impact on our interest charges. The income tax apparent rate is down thanks to more profit coming from Poland and the Czech Republic as expected. We have other financial income which includes €63 million in capital gains but that’s versus €48 million last year. And on the other hand, IFRIC 21, the change in the accounting of some of our taxes has had a negative — production taxes has had a negative impact on net income of €27 million which will be reversed, of course, by the end of the year. Overall, current net income has more than doubled at €321 million. On page 20, you see how the current net income translates into the reported net income, the purely IFRS net income. And its’ a very simple table this year because we’ve had no significant non-current items to report, no depreciations, no impairment or whatever. The only difference between the two figures is the Transdev contribution. As you now, we account for Transdev as a non-core asset and therefore it is below the line. This contribution is positive by €25 million which is attributed to the improvement of the result of Transdev so that for the first time in a number of quarters or semesters, we actually have reported net income which is above the current net income. Moving on to page 21, our CapEx is in line year on year. Its slight reduction is only due to the lower construction revenues for PFI in the UK which we’ve already mentioned. We still have working capital requirement seasonality which explains the negative free cash flow but it improves by €100 million year on year. And this contributes, of course, to the financial debt evolution which has been impacted year on year by €760 million that’s — because of the currency. If you strip that out, it actually has improved by €500 million due to the strong cash generation and some of the disposals which have taken place, especially our Israeli activities at the beginning of this year. Moving on to page 22, you can see that free cash generation in H1 has been extremely strong, as mentioned by Antoine. Leaving out the working capital requirement evolution which is a negative of €600 million for the first half, but we assume of course that this year as every preceding year, we will be reversing this during H2. So leaving this factor out, we’ve actually generated €552 million of free cash which is of course very encouraging because it is our yearly objective. Keep in mind though that we will be spending more in terms of CapEx during the second half. But still it’s very encouraging to see that we’re in good shape in terms of generating the expected amount of free cash. On page 23, I won’t go through the guidance again because it’s been shown to you already by Antoine. Needless to say we’re extremely confident, thanks to this very strong set of figures, that we will be able to reach our objectives this year., especially the generation of €500 million of current net income and the same amount in terms of free cash excluding financial divestments. We’ll be in a position to tell you more about this and to give you more color about the years to come when we meet on December 14 for our investor day. Thank you very much. Antoine Frerot Thank you, Philippe. And now, ladies and gentlemen, we’re ready for your questions. Question-and-Answer Session Operator [Operator Instructions]. The first question is from Harry Wyburd. Sir, please go ahead. Harry Wyburd Two from me, please, the first one’s on waste volumes. If you average out the first and second quarter from waste volumes I think the average is about plus 2.5%. But overall on a Group basis, it’s just plus 0.8%. So please could you just give a bit more detail on the regions which are performing less well? And then secondly on China, a number of companies across the market have been cautioning on China, given what’s been happening in the Chinese equity market. Do you see any exposure to a potential China slowdown in the second half of the year? Thank you. Antoine Frerot I will answer to the question about China. In our case, in China, we’re well positioned, geographically speaking. Where we see some decreasing of the growth of economy in China is not especially on the most modern industries and more in the center of the country than on the cities of the coast. We’re in the cities of the coast. And during the first semester, we enjoyed an increase of our water volume more than plus 2.3%. And we had also an increase of our hazardous waste volume. So we see a very good growth in terms of revenue. But because we have long-term contracts and progressively we get the benefits of these long-term contracts, our profit increases much more than the revenue in China. So I’m completely confident for Veolia in China because our positions are well placed and I think we will not suffer about an eventual decreasing of the economy acceleration. We’ve had a splendid first semester and I think it will continue for the second part of the year. For the waste volume, Philippe? Philippe Capron For the waste volumes — well, on China first, I would add that keep in mind that we’re supplying basic services, elasticity to GDP is usually less than 1. We’re not surfing on very high growth when it occurs but we’re not impacted by slowdowns. This is not luxury goods we’re talking about. On waste volumes, I can give you the details for the first half volumes country by country for the major countries. France is up 2.6% with a significant pickup. It was 1.1% in Q1 and 4% in Q2. So this is encouraging. The UK is 1.4%. In the UK there has been a slowdown but it’s just a technical effect because we had — it’s a year-on-year comparison impact due to the scheduling of our PFIs coming online. Northern Europe, that is mostly Germany, is down 4.7%. But it is largely self-inflicted. It’s the ongoing restructuring which continues. The U.S. is roughly flat. Australia is slightly down at minus 2.9%. Our Asian activities overall and that includes a large part of China, is up 4.7%. Latin America up 5.7% but this reflects in particular a new contract in Buenos Aires which has started at the beginning of the year. And our hazardous waste activity is up 2% overall with a significant pickup. Growth doubled from Q1 to Q2. Operator The next question comes from Martin Young. Sir, please go ahead. Martin Young I’ll limit it to two questions as well. The first is on Transdev, wondered if you could just update us on the expected timeline to the alteration of the corporate structure there please? And then secondly, you’ve made it very clear that you are going to deliver the cost-reduction objectives for 2015. I very much feel that ongoing cost reduction is part of the DNA of your company going forward. I just wondered if you could give an indication of how much you think you can eliminate from the cost base on an annual basis from 2016, please? Thank you. Antoine Frerot You know that our exit from Transdev is linked to a solution for the board SNCM business. And as you know, the court decided to wait for end of September to decide about this solution. We think that the court will not have a large room for expanding again the time for decision because of problem of cash of the SNCM. So we think that during the end of the year, after this solution will be decided by the court we will find a way with our partner in Transdev, Caisse des Depots, to program our exit from the business of Transdev. But, as you see, we’re not so in hurry because first we don’t need the €1 billion or €800 million today invested in Transdev and also because the results of Transdev are better year after year. But I could confirm you that we want to exit as soon as possible with a good deal with Caisse des Depots. I understood that Caisse des Depots is always ready to take the control of Transdev and then at the end of the year I think we will have some news about that. About cost savings, we’re in a region of €200 million of savings every year, around €50 million each quarter. It is the plan of four years 2012 until 2015. During these four years the savings came mainly from stricter cost, SG&A or G&A cost. For the next plan, the next program, we prepared also new efficiency actions but perhaps not so much on G&A but more in operational efficiencies and also purchasing efficiencies. We will present to you in detail during the Investor Day what we’ll target and how we will do it. But we’re really confident that the savings in Veolia will not be over at all at the end of this year. And the magnitude of these new savings will be presented to you in some months. So it will be I think a good plan and a good rhythm for the three next years. Let us prepare it precisely to give you a precise picture of that at the end of the year. Operator The next question comes from Guy MacKenzie. Sir, please go ahead. Guy MacKenzie Three questions from me, firstly, you mentioned the slowdown in construction activities in the public markets in France and also the contract in Peru which I think you also mentioned in Q1. Wondering if you can give an update on the situation in Peru and also if you think that this might hinder the sale of SADE this year? Secondly on your longer-term targets, in 2013 you set some specific targets in industrial water, specifically you were targeting growth of what worked out to about 120% in oil and gas to 2020 with a €3.5 billion revenue target, 45% growth in mining across 2014 to 2020. I was just wondering if given the subsequent decline in commodity prices whether you still see those targets as attainable? And finally just a very quick question on your waste EBITDA, you mentioned that it benefited from a favorable impact of a litigation payment. Just wondering if you were able to quantify the amount of that litigation payment? Thanks very much. Philippe Capron Okay, on the construction question indeed we’re affected by the lack of or the slowdown, let’s say, of public orders in France. But SADE has been able over the past years to offset this in two ways. One has been to develop their telecom network construction activity in France and elsewhere and second, a large part of SADE revenue now comes from overseas. So that overall their backlog has actually increased this year compared to the previous year if you add all up. The contract in Peru to which you allude to in Cerro Verde is now over so it’s been done. Any losses pertaining to this contract have been taken and we actually now are in the claims recovery and negotiation phase so that the same contract should positively impact our H2 income. Regarding the sale of SADE, I have no remark to make. The process is ongoing. Antoine Frerot Oil and gas, I will answer this question. It is true that during the first semester, because of the lower price of oil, the new projects of oil and gas companies have been postponed, a major part of these big new projects. But your question is about medium term and despite the fact that today the price of oil is low, it is difficult to imagine that this price will stay at the same low level during four years. So we’re really confident that first the world will need oil and gas coming from alternative resources, especially shale gas and shale oil and you know that the extraction of these alternative resources needs between 10 and 20 times more quantity of water to extract them. So perhaps it will not be for this year, perhaps not also for the first part of next year, but until 2020 we’re sure to see a lot of new projects, especially in the U.S. and perhaps also in Australia for this type of new energy and then big business for water specialists. But as I told you during the introduction, when oil and gas and mining sector slows down for our development due to lower commodity prices we have other drivers in our industrial market to grow. And for this first semester it has been much more the secular economic projects and treatment of hazardous waste projects which have grown during the first semester. So we still have drivers amongst our six main new markets. We have oil and gas and mining but also food and beverage which are going quite well, secular economy, hazardous waste treatment and also a [indiscernible] as trends, rigs and other boats. So we have room for growth during this year and next one despite the low price of oil. Waste EBITDA? Philippe Capron I’m not sure if I understood your question regarding waste EBITDA. Guy MacKenzie Sorry, it mentioned in the press release that waste EBITDA benefited from the favorable impact of a litigation payment and I was just wondering how much that litigation payment was if you’re able to say. Philippe Capron We have not disclosed it. It’s significant but not huge. The main drivers in the improvement of our waste EBITDA overall has been of course cost reduction. It’s been also the price of fuel which with time of course we’ll have to give back to our customers but which for the initial quarters we’re still able to enjoy the benefit from. Operator The next question comes from Lawson Steele. Sir, please go ahead. Lawson Steele Lawson Steele from Berenberg. My first question is on cost cutting. I appreciate we need to wait until December 14 for the full lowdown on future cost saving plans but, given your confidence in achieving this year’s €750 million target, could you please give us some specific examples of additional measures undertaken to offset the declines of — the effects of Dalkia and so on and what sort of new savings have you unlocked relative to the original plan? Also versus the original plan where have gains been better than expected and where has progress been shall we say a little disappointing? And also how much of that likely €750 million cost beat is due to FX? Secondly, could you give us more details on the Olivet provision reversal and how much of that, of the €24 million total net charges to operating provisions, in other words related to the EBITDA reconciliation on page 11 of the press release? And then finally just, Antoine, to follow up on the oil and gas, are you still seeing E&P companies’ investments in existing wells offset the decline in CapEx on new projects? Thank you. Antoine Frerot So Philippe will answer the two first questions; I will come back on oil and gas after. Philippe Capron For the past, as you know, a large part of our cost reduction has come from SG&A, redundancy plans. Major examples are the two such plans we had for the headquarters. As you remember, the headquarters went from 1,400 people including the divisions now extinct to 700 people today. Similar evolutions have taken place in various countries. So this reduction of SG&A, this reduction of headquarters has been a significant driver. But, as one of you said earlier, cost reduction, cost cutting is now in the DNA of this company so this is an ongoing effort, even though, as hinted by Antoine, the focus may change over the next period. Today clearly at €690 million and with a normal rhythm of €50 million per quarter we’re fully on track to surpass the €750 million objective for the next period. We’ll give you more color during the Investor Day. For the provision reversals, those provisions are below the EBITDA so they do not include any operational elements. It’s not a single big ticket item, both in last year for the negative impact and this year for the net reversal; it’s a multitude of small elements positive or negative. Last year there was a big negative chunk for our Polish waste business which has been sold. This year for example there is another negative impact which is due to the settlement of a large litigation somewhere in Eastern Europe. It’s lots of small elements going up and down; there is no large ticket. Antoine Frerot Yes, I add something about the cost cutting. You understand I think that we will certainly exceed this year the famous objective of €750 million at the end of the year. How much we could not say precisely and because we will exceed it we will also exceed our €500 million in current net result and free cash. I could not tell you how much but we will beat it and this is very good news for us. How much? Perhaps, €50 million , perhaps €100 million, too early to tell you. Now I’m coming back for oil and gas. When an oil and gas company invested in new assets it is too late to stop it, so they prefer to operate them. And it is why on our existing contracts we had good business with oil and gas customers. And when they stop the construction of new assets they push, as they could, the production of their existing assets. It is why they use more water on the existing assets to expand the production. And they stop at the same time their investment because they are not sure that it is a good time to do that. But when the investments are done it is too late for them and the cost of production after investment is much below the price of the actual price of oil. So that interest to push and to stop do investments. So we had on the existing contracts good business with oil and gas customers. Lawson Steele Okay, can I just follow up please? Specifically I want to know what has offset the — on the cost savings what has offset the Dalkia savings which were sold and also how much of the cost cutting improvement is down to FX please? Philippe Capron We’ve not done the exact calculation regarding the FX but it’s totally marginal. I would say — if I were to bet I would say about €20 million perhaps overall. So as we’re €40 million above the objective at the end of the quarter this has not been significant. In terms of Dalkia, the figure you’re looking for may be perhaps €10 million. But, as you know, we’ve changed the perimeter. The initial perimeter did include Dalkia France and of course we do not — and it included both Dalkia France and Dalkia International in the original €750 million. So we’re actually short the Dalkia France savings which I’m sure continue but which we do not record anymore. This certainly does offset the favorable FX. Antoine Frerot I want to avoid a misunderstanding. The €110 million of savings we had during the first semester are at constant scope and currency, meaning that they include the savings we did on the Dalkia International business. But we don’t include any cost savings in Dalkia France; it is no more our business now. So the €110 million is on the perimeter full water waste business and Dalkia International. And yes we did also savings, especially in G&A on Dalkia International because we immediately included Dalkia International in our new organization, one Veolia per country and then on the Dalkia International teams in each country we had some savings through this integration. But it’s not — this €110 million has nothing to do with the deal with EDF concerning Dalkia France and Dalkia International. The savings aren’t concerning Dalkia International at all. Operator The next question comes from Vincent Ayral. Sir, please go ahead. Vincent Ayral I would like to come back a bit quickly on the SNCM and Transdev. You say that we should have a solution by the end of the year. We’ve seen the thing sliding a number of times. I’d like to understand why are we now sure that the whole SNCM issue should be done. Because I understand that cash-wise it would have been difficult for them to reach the summer. Now they reached the summer where they refill a bit the coffers in terms of cash so what’s the assessment of the situation and why a resolution by year-end? And then moving on Transdev, the results of Transdev seems to be improving materially. Can we expect something material in terms of an improvement of the Memorandum of Understanding you have with CdD so basically selling this business for a much higher valuation? Do you think this is something that can be done, reopening the MOU or are you stuck with the current price? Thank you. Antoine Frerot Okay, about SNCM, there are two big reasons why a solution should be found before the end of the year. The first is because the European Commission push and push for the payment of the fine they decided for SNCM. So this pushing will not leave big room to the French Government and also to the court. The second one, perhaps in more urgency, is that probably at the end of September or at least at the end of October there will be no more money in the cash box of SNCM, even if they away them all the maintenance costs, the cash they burn during — after the season is so huge that at the end of September or October no more money. And in this case with no more money to pay the employees the court will have not have other solution to decide the liquidation of the SNCM if they did not decide the transfer before that date. So it is why we think that SNCM could not live because of problems of cash for a long time. About Transdev Philippe? Philippe Capron About Transdev, the MOU has lapsed so there is no obligation by either party. Of course it’s a useful reference point but it’s very fair to say that given the, I would say, spectacular turnaround done by the present management of Transdev we could expect a better price. It will be a question of negotiations with our counterparts at Caisse des Depots but it would be fair to expect a better price. The company has had a €50 million net earning — net income for the first half of the year of which we enjoy half. So €50 million is a very significant figure after another year, last year which was a return to profit where they had a positive income though at a lesser level. So we’re very encouraged and when you see the plans of Transdev in thinking that we might get a better valuation. Vincent Ayral And one last question on SNCM to come back. If you have a solution and you manage to exit SNCM without having the fine, what could we expect P&L-wise in terms of maybe provision release or anything like that? Thank you. Antoine Frerot Nothing, nothing, nothing more we already have in our accounts because we told — we repeated, we as Veolia but also Transdev told and repeated that we will not put any new penny or any new euro in SNCM up to what we decided to propose for the liquidation of SNCM totally or partly if part of SNCM is taken over by another company. So we propose, as you know probably, €85 million to pay the — €85 million for two shareholders, Transdev and the French state, meaning around €62 million for Transdev. And that would be all. And these amounts are already in our books so we don’t forecast any new provision for that. Operator The next question comes from James Brand. Sir, please go ahead. James Brand Three questions, firstly, you mentioned in response to a prior question that the waste business had benefited from lower fuel costs in the first half of the year but that some of that might have to be passed back to customers. I was wondering whether you could give any kind of quantification around that? And a slight follow-on from that, I was wondering whether Transdev had also benefited from a similar phenomenon and therefore whether perhaps some of the improvement in — the great improvement in net income that you’ve seen might again be transitory? The second question is just on — you mentioned paper prices having improved quite considerably recently. If they stayed where they’ve got to, how much would that mean in terms of increased profitability for you? And thirdly, just on depreciation. You obviously have slightly lower depreciation in the first half in spite of all the currency effects which might have been expected to push it up. That’s something that’s been commented on in the past in terms of guidance but I was just wondering whether you could talk through in a bit more detail what’s going on there in terms of depreciation and whether we should expect that to be sustained going forwards? Thank you. Philippe Capron In terms of the impact of fuel for waste, the theoretical impact would be €30 million or €40 million a year. Of course this is not happening or at least not kept, because of the index mechanism and just because of competition. Many of our contracts, especially collection or haulage contracts, are short term and they’re periodically renegotiated or re-auctioned and therefore those savings tend to pass fairly quickly to the customers. So overall maybe we keep about €10 million — maybe we’ve kept about €10 million which is significant but not a game changer. In terms of depreciation, we don’t have a detailed analysis. You’re right; we should have expected a slight increase due to the currency impact. I guess this has been offset by the mix of investments we’ve done, probably with shorter depreciation periods due to the fact that we tend to shy away from long-term large CapEx deployments nowadays. I don’t have a ready answer except to say that this is according to our forecast and you should not expect this figure to increase over the next quarters. I missed the second question. Antoine Frerot The price of oil for Transdev. Philippe Capron The price of oil for Transdev, it’s the same. It’s a positive of course and the contract structure in many cases surprisingly enables them to keep it. So it’s been one of the elements which has sustained their earnings, even though over the very long run of course they probably won’t keep it. But for some of that contract they are just supplying the service but they are not themselves keeping — benefiting from the price of oil. Some of them, especially their car — their bus transportation business in France, they do keep the advantage. James Brand Paper prices? Philippe Capron Well, paper has picked up nicely during the — at the end of Q2. This certainly helps our German business and this and the restructuring of our activities there certainly explain why their results are rebounding in spite of sales being — going downward. It’s a bit early days. We’re not yet at record levels but my recollection is that over the course of the quarter it’s gone up 7% which definitely helps. Operator The next question comes from Philippe Ourpatian. Sir, please go ahead. Philippe Ourpatian I have three questions, the first is concerning the working capital. Could you just elaborate a little bit more the reason of quite high working capital excluding the seasonality effect? Is there something special this quarter which could be reversed during the coming months? That’s the first question. The second one is concerning the €34 million of others in the EBITDA bridge, could you just elaborate on that? And the last is concerning the reduction of your tax rate. What do we have to take into account regarding this year and maybe on the medium term rather than a normative level? Many thanks. Antoine Frerot Okay. About working capital, the amount of €628 million is as usual, if I could say that. We have this amount around every year the same magnitude. So there is not a lot of change if we take into account of course that we have now Dalkia International at 100% and no Dalkia France. So it is the usual seasonality effect because during the four previous years we term this requirement we think we will be able to do it again at the end of this year. So there is not a change; it is just a seasonality effect. About, add this quickly, yes, compared to last year, the working capital requirement improved by some tens of millions euros so it is even a bit better than last year. So it is completely at the same level of the other years– Philipp Capron We will remain, of course, very attentive, to make sure that the reversal of this working capital requirement does occur as it did every previous year. Regarding the €34 million item on the EBITDA bridge, on page 17, it is most — it’s all of the others, of course, that it’s mostly the increase in the renewal rates. That’s the main — renewal expenses that’s been the main component. Of course, it’s eliminated at the EBIT level. Antoine Frerot And tax rate? Philippe Capron And regarding tax rate, I missed the question. But, as I mentioned, our parent tax rate is going down for two reasons. One is more profits coming from low-rate countries, especially the Czech Republic and Poland. The second is better efficiency of French tax Group, as we tend to improve our earnings in France. We’re — the French tax Group is getting closer to being in a profit situation, in spite of France bearing the headquarters cost for the part which is not passed on as management fees to a business unit. And the financing cost of the Group, because it was the — most of our bonds were issued from France. So, in spite of those two elements, we’re getting close to having a profit. And, therefore, that limits the drag on our apparent tax rate which was due to the fact that we had negative tax income in France which we could not offset by recognizing a tax asset. Antoine Frerot And for your calculation for the rest of the year, you could make the assumption that the split of the profit of Veolia will stay during the second half as it has been for the first half with the same geographies. So, I think you could use the same rate for H2 compared with H1. Philippe Capron Maybe a bit less, because Q3 is a weak quarter for energy and, therefore, our Polish and Czech activities will not generate as much profits. Typically they don’t during H2. But, I mean, that’s second order of magnitude given all the uncertainties there is in calculating the apparent tax rate. Operator The next question comes from Emmanuel Turpin. Sir, please go ahead. Emmanuel Turpin I would like first to come back on the guidance. Your message at the start of this call was very confident. And looking at the guidance it’s, of course, open-ended. It’s not a single figure. You want to basically cover your dividend by net earnings of free cash flow at least. Would you mind coming back on the main parameters you set on these guidance’s at the start of the year and tell us how this is looking like now? I’m thinking about the macro environment, the weather and the FX which, I believe, is better than what you had budgeted. Still on guidance, you are printing a positive position reversal of just short of €40 million. I think people will like — would be interested in knowing on whether you would be counting on such a positive provision reversal to make your guidance. I would personally love to get your view on whether, on the back of this strong H1 and taking into account some delta versus your budget, mainly the FX, actually a €500 million net earnings is probably a low end of a net earnings range that you — we should expect for the full year on –? Basically, in other words, should we expect more than just €500 million? And, secondly, commercial activity, your friends and competitors Suez Environnement mentioned on their H1 conference call that they had seen a strong increase in new commercial opportunities in recent weeks across a number of geographies. So, they were talking about an increased number of projects they were tendering for. I would love your view on commercial activity in your businesses across the geographies. Where are you seeing particular, I would say, increase in tendering, if any? Thank you. Antoine Frerot So, about the guidance, Mr. Turpin, Philippe will perhaps begin by answering the technical questions about the provision we will have or not. perhaps also with the new rules of accounting about tax and so on. Could you — some figure about that? Philippe Capron Well, we mentioned early in the year that we were not accounting on a larger amount of capital gains. And the same is true in terms of provision reversals. We’re not — this is not something we budgeted, of course. This is something we have to account for. We now and then have to make — to take provisions and when they are not justified we take them out. We do not — this is probably not something which will be repeated at year end. We might end up having a zero or a negative amount on this line during H2. I really don’t know, because I can’t forecast the future. But, we’re not banking on this to achieve our guidance, obviously. Regarding the guidance itself, we’re not in the business of increasing it periodically but I heard Antoine loud and clear mention the figure of €50 million to €100 million improvement on the guidance which could be expected. So, if we were reviewing the guidance we might then say — tell you that we’re between €550 million and €600 million in our internal calculations, but we’re not. Antoine Frerot I complete, of course, Mr. Turpin, we will overpass, surpass the €500 million. For the free cash before divestment, financial divestment, we’re at the end of the first semester ahead of this target. So, for that, for sure, we’ll surpass it. And for the natural recurrent that we will also, we will not have technical gain, perhaps, not also new positive provision but in the other way we have new rules about tax calculations so –. Philippe Capron €27 million. Antoine Frerot We will have the benefit of that during the second half. As about the weather, for sure, I hope we will have very good volumes of water during July at least. So, yes, we’re completely confident to surpass quite significantly our €500 million. But, again, it is too early to tell you precisely where we will be. So, we’re very happy and have the pleasure to beat our guidance and to be sure that the middle of the year to beat it, but we could not tell you a precise figure. Again, between €550, €600 million, for the net result, it is too early. And for the free cash it will be a little bit better because it is still much better for the first half. About commercial, we have, as our friends and competitor, Suez, a lot of projects in pipe, of course. We’re in front of them for the municipal clients everywhere in the world and we have also our new industrial markets also. And in these markets, especially in energy efficiency, in [indiscernible] treatment, in secular economy also for food and — industry we have a lot of projects in pipe. So, we hope, of course, to win a big part of them. We already have a good result during the first half. And I think we will be in the same position during the second half. Our decreasing of our cost put us in a rather better position than we were last year or two years ago, because we could bid with more efficiency. And we have been successful during the two last years, especially in front of our competitor. So, we’re still in a better position today. It is why I think we will make profit of a large part of this project into the pipe today. Operator The next question comes from Julie Arav. Julie Arav I have three short questions, if I may. The first one you mentioned on the global businesses that the growth was impacted by some delays in some project at Veolia water solution and technologies. Can we have an idea — can you quantify the impact of these delays? And also does that mean that these contracts should contribute to Q3 or Q4 growth? Are they just delayed for good? Just to make sure that I understand correctly the impact from the decline in oil prices, is it right to understand that the short-term slowdown doesn’t call into question your midterm revenue target of 3% coming from new industrial contracts? And last question, can we have an idea of how much the new industrial contracts have contributed to the overall H1 organic growth? Thanks. Antoine Frerot Yes, because the decline of global business is a decline of construction business. You should have in mind that at the end of March the big sludge Hong Kong contract finished. And this big contract hasn’t been replaced during the Q2 by another big object. And it is a big part of the decline of the turnover of the construction business. We did not replace during this Q2 this big animal. And we have some bids and offers in the nature to replace this big animal. It is not the case today. We hope we have that before the end of the year. Now, I come back on our target of increasing of turnover during the next plan. You should have in mind that during the first transformation plan and in 2015 we’re still in this plan. We focus completely the Group on the restructuring and the increasing of margin and profit. So, we did not invest a lot for growth, even organic growth. The investments for growth are slow because the main priority of the Group is to expand the profitability and the return and the margin. During the past semester compared to the first semester of 2014, we increased the EBITDA margin of 90 basis points. So, it is huge and the priority of the Group until the end of this year is the profit, not the development. For the next period, we will have two drivers for boosting our turnover. The first is that we will invest all our free cash, exceeding the dividend, in organic growth. And we target the best opportunities of this organic growth with our net free cash after dividend payment. It will bring to us a fuel for growth of turnover. And the second thing is that the declining of the turnover of the French water business will be finished in the first half. During this first half of 2015 you saw that we lost, how much, €70 million of turnover in France? Philippe Capron Yes. Antoine Frerot Yes, €70 million. Philippe Capron €50 million. Antoine Frerot Next year we don’t have that and au, contraire we will have the production of the new Lille contract which is €60 million a year. So, we will [indiscernible] also the dynamic of turnover of the transporter business plus the organic growth. It is why the turnover of this first half of 2015 has nothing to do for explaining what we will do during the next plan. Julie Arav The last one on the new industrial contracts’ contribution to the H1 organic growth. Can you provide a number on that? Antoine Frerot No we need some time to make the calculation a bit, so we will give it to you when we will get it. I could tell you that for the win of the new contracts during the first half 57% came from the municipal sector in terms of turnover and backlog. And 43% comes from industrial customers. Operator The next question comes from Olivier Van Doosselaere. Olivier Van Doosselaere I’ve got just two questions remaining. One is I was wondering if you could maybe say a bit more about Central and Eastern Europe which has now become a significant part of your business. On the water side you’re talking about figures — increases in water tariffs. I was wondering how much those were. And to what extent that could be recurring. And then on the energy business I was wondering if you could just pick up a bit more about the ongoing trends, going beyond just the impact of lower power prices, what you see in terms of contract backlog and so on. Thank you. And the second question would be on the French water restructuring. I think you had taken a provision of €90 million or €95 million in the past. I was wondering if you could say how much of that provision has by now in total already been reversed. Thank you. That’s all. Antoine Frerot Okay. I just got the answer to your first question, Olivier. The prices of water, well, type of water in Central and Eastern Europe, increased on — for 0.9% during the first half compared to last year. And the second question is about –? Philippe Capron Energy trends in Eastern Europe. There is not much to say except that this business, has been helped by a colder Q2 after a disappointingly mild Q1, almost in line with the previous year. We also had a decline in the price of fuel but which mostly is passed through so it typically has no impact, no negative impact, on our contracts. And it’s also fair to mention that we have significant round of CapEx in those — in the Czech Republic and Poland due to the new European norms and therefore we have to comply with those norms. So, that means a significant CapEx influx which, of course, is well — is accounted within our normal investment envelope. So, this is not unexpected. We knew this when we bought Dalia International. Antoine Frerot And on the commercial side on this energy business in this geography we have what I could say good knowledge, meaning that some clients should appear to be ready to subcontract some of our activities of energy management and especially heating district. And we have in the pipes, because we talk about the pipe of new contracts some minutes ago, we have in our pipe some of these quite big contracts for [indiscernible] management. And perhaps even before this, the end of this year, we will be able to announce good news in that pipe and that field. It will be also a part, just a part but a part, of our organic-growth program for the next three-year plan. Philippe Capron For French water restructuring the provision has been consumed now. The plan is over in terms of the voluntary departure plan. And, therefore, the provision has been — has gone through the P&L and there is — it will have no further impact. Operator The next question is from Vincent Ayral. Sir, please go ahead. Vincent Ayral Sorry to come back, I just wanted to do a follow-up on the lower oil price. I understand that a theoretical potential uplift would be €30 million, but you just expect €10 million. I guess there’s two questions here just to be — to try to understand the whole thing. When you have this indexation are you using an average oil price over the last, I don’t know, 3, 6, 12 months or are you using spot price? And to lose, like, two-thirds of the drop in oil price instead of just half that would assume that the distribution of your indexation is mostly done like in H1. Could you explain a bit this? And the second thing is, on the energy business, what would you expect, assuming normal weather next year, the uplift to be? Or, you can ask the question the other way, what was the weather impact on your energy business in H1? Thank you. Antoine Frerot What do you mean by normal weather? Do you know that this concept of normal water? But it’s always difficult to tell you for sure. In the 10 last years we have colder winter than we had at the beginning of this year. But what would be a normal one we could say that we did half of the weight between 2014 and 2015 to compare to an average over the 10 last year. So, if we come back on the average for the future, we still have room for growth that could be some dozens of million, we said that in euro, in term of provision. Philippe Capron In term of the impact of lower fuel on the waste business, you have a wide variety of situations. First, when it’s a long-term contract with an index, you have all sorts of indices. It really depends from country to country and actually from contract to contract whether it’s spot or average. And — but in most of those contracts you have an index which represents the bar chart of our cost and, therefore, has a large or a significant fuel component. And, therefore, with some delay, it can be yearly or half yearly, this is passed on to the customer. But in many other cases you are dealing with shorter-term contracts with no indices. And it’s just the way the contracts are renegotiated or re-auctioned due to the pressure of competition which forces us, essentially, to pass the lower fuel cost onto our customer. So, there is really no precise answer to your question and my own answer was just an estimate, not a totally precise one. Antoine Frerot So, ladies and gentlemen, it is time to conclude our conference call. In conclusion, I will remind you that the progress on margins improvement has been again very satisfying and really [indiscernible] we said during the first half. EBITDA margin improved by 90 basis points. It is a huge progress. The free-cash target has been already achieved at the first semester for the whole year compared to our guidance. And the EBITDA gross conversion into net income is massive. So, for all these reasons, we’re very satisfied for these reasons but also really completely, very confident for the rest of the year, to surpass our guidance. Thank you for your presence and goodbye. Operator Ladies and gentlemen, this concludes the conference call. Thank you all for your participation. You may now disconnect. Scalper1 News

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