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Veolia Environnement S.A. (NYSE:VE)

Q1 2013 Earnings Call

May 03, 2013 2:30 am ET

Executives

Antoine Frérot - Chairman and Chief Executive Officer

Pierre-François Riolacci - Chief Finance Officer

François Bertreau - Chief Operating Officer

Analysts

Vincent Gilles - Crédit Suisse AG, Research Division

Olivier Van Doosselaere - Exane BNP Paribas, Research Division

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

Philippe Ourpatian - Natixis S.A., Research Division

Emmanuel Turpin - Morgan Stanley, Research Division

Julie Arav - Barclays Capital, Research Division

Arnaud Joan - BofA Merrill Lynch, Research Division

Operator

Ladies and gentlemen, welcome to the Veolia Environnement Key Figures at March 31, 2013, Conference Call. I will now hand over to Mr. Antoine Frérot, CEO. Sir, please go ahead, sir.

Antoine Frérot

Thank you. Good morning to everybody for this results for the first quarter. I will introduce this conference call and leave the floor after that to Pierre-François Riolacci for the results and to François Bertreau for the including of our cost-cutting plan.

To summarize the first quarter, I will say that the resistance of the activity of Veolia was good during this semester, this first quarter, despite difficult economical context. Our recurrent operational result decreased at 1.5% to EUR 405 million but is increasing of 1.2% [indiscernible] exchange constant.

Veolia today launched a new stage of its transformation by a new organization. This organization will transform the actual organization through the 3 divisions into a more integrated organization defined by countries. We hope through this new organization to be closer to our clients locally and globally, to have a more simple, more direct organization and then to be able to move quicker in the transformation of the group, applying its strategy. And we'll have also better performance in term of economics but also in term of cost-cutting. Through this organization, we upgrade our cost-cutting plan from EUR 470 million of cost-cutting at the end of 2015 to EUR 750 million at the same date. And François Bertreau will detail this new objective for our cost-cutting plan.

Now I leave Pierre-François for the details of the results.

Pierre-François Riolacci

Thank you very much, Antoine. Good morning to all of you, and thank you for being here for this Q1 result.

I will start with the presentation on Page 4. I hope that you can all get at the presentation on the website. And I would like to draw your attention, first, on the very strong deal flow that we had during the first quarter, with very significant contracts back in line with the strategic repositioning of the group on industrial customers and growing markets. On industrial customers, you -- I would signal that the coal gas contract in Australia within -- with the Water business, as well as the potash deal in Canada, here again exactly the core business with heavy industries and the obviously highly profitable customers with very large reach over the world. I would signal also the Singapore contract with the Waste division, and renewable without tender of the Bratislava contract in Slovakia for a 20 years contract with over EUR 1 billion of backlog. I think they are really at the core of what we want to get at, and that's an important feature of the first quarter.

Turning the page, going to the key figures for the first quarter of 2013. You can see that revenue declined by about 3% at constant scope and ForEx. On Water operation, revenues are down. And this is largely due to unfavorable phasing of construction content within the construction and contract, essentially the IFRIC 12 works, which are within this operation. There is also a slowdown in works with the Technology & Network part of the business. I will come back on that one. For Environmental Services, no surprise. We are hit by the lower and the slow production in Europe on volumes and, as expected, by the decline of prices and volumes of recycled raw materials. Overall, the decline -- the adjusted operating cash flow is declined by 6.3% at constant ForEx. This has to do with the contractual erosion in the French Water business, and then you'll see the impact of the slowdown of activity in the Waste. The adjusted operating income, as Antoine mentioned, is quite resilient and it's down 1.2% at constant ForEx at EUR 405 million.

Page 6 on Water, revenues are down by about 3.8% at EUR 2.5 billion. Water operation is EUR 1.7 billion of revenue, down 2.4% at constant scope and ForEx. Once again, the construction content within this operation is down by EUR 60 million, which account for the total of the decrease of the revenues of the operation. It means that, excluding this construction content, the operation, that is volumes of Water and the price effect, are overall stable. In France, if you -- especially in France for operation, if you exclude the IFRIC 12 construction variation, here again as the top line, is stable with a negative impact of the contractual erosion of about 2%; volumes, which are down 1.5%. And in this 1.5%, you've got the impact of the leap year. We have 1 day less in this quarter. And if you correct this impact, the volumes are down by about 0.5%, so quite in line with the general trend. But on the upside, we benefit from the indexation clauses, which are still close to 3% during this first quarter and offset the other 2 impact. On the international business of Water operation, here, again, excluding construction contents, which is mainly in Japan, we have the benefit of higher tariff in Europe. And we can post a per slight progression, slight improvement of our activity in this international part.

On Technology & Networks, we are down by 6.9% organic to EUR 792 million. This has to do with the slowdown of works in France and largely on the accounts of bad weather during the month of March. We still have a sluggish environment in the design and build for municipal contract. And we had also, during the first quarter, an unfavorable basis of comparison on Q1 in the U.S. for design and build industrial. But as you understand from the deal flow, we will be able to catch up in the quarters to come. The industrial customers, overall, are still positive. There is no change in this general trend.

On operating performance for the Water business, adjusted operating cash flow and adjusted operating income are down due to the contractual erosion in France. It's about EUR 12 million, which is in line with the EUR 50 million a year, which is our guidance for 2013. We had also, as you know, lower construction activity, as mentioned. But the margins are small. So there is little impact at the level of the operational performance. We have a tough environment in Germany. And the rest of the business proved to be, here again, improving with the contribution of the Efficiency Plan.

On Environmental Services, we are down at 4.6% constant scope and ForEx for EUR 1.9 billion of sale. You have the usual split of the different parameters to the revenues. On the sorting and recycling part of the business, which is about 15%, we have a decline of EUR 55 million. That's for the whole division, 2.5%. The raw material prices impact is about EUR 30 million. You know that the paper price in France was down by about 9%. It was down 14% in Germany. And metal -- scrap metals price went down to 7% to 14% depending upon the quality. Raw material volumes are down by about EUR 20 million, especially in Germany, where we have, obviously, the largest exposure to the sorting and recycling business. For the rest of the activity, we obviously have a negative impact of lower volumes for EUR 70 million.

I would like to highlight 2 very important business for us, France and the U.K. In France, the volumes collected are down on the municipal business for about 5%. And here, you have also the impact of the leap year and the bad weather that we had in March. It's down by 1% in the C&I, which is a very good performance given the current environment. And for the treatment volumes, we are basically in the same softer decline about -- as a mix, about 4% decline on treatment. In the U.K., the municipal collection is up by 2%. And this has to do with market share with -- from the financial performance last year. The C&I collection, on the contrary, is down 11%. Clearly, we have a clear slowdown in the U.K. Landfill volumes are up by 2%. We had a very bad first quarter during 2012. So we have a favorable basis of comparison. And incinerated volumes are up by 5%, here, again, consistently above the last few years. For the hazardous waste, we had some spot volumes in Q1 last year that we don't have any more, but the rest of the trend is still positive, including the ramp-up of the Osilub facility in France. On the price side, it's difficult to get the price increase that would cover the cost inflation, but we have been, overall, able to pass, as an average, 0.9% price increase, which is not that bad given the pressure that we have on volumes.

Taken as a whole, I think that the geographic split is rather compressed [ph]. In France, revenues are down by 7%; in Germany, 13%. It's clear that the impact of the paper price is, obviously, weighting a lot on these 2 countries. The U.K. has been performing well, plus 4%. And this has to do with the PFI and the incineration volumes. The U.S.A. has been pretty steady, minus 1.5%. Asia Pacific is positive, plus 2%.

In the Environmental Services division, the adjusted operating cash flow and adjusted operating income are down, in line with -- obviously, it's in line with the decrease of activity. The conversion rate to EBITDA of the material prices decrease is still 20%. So it's consistent with what we have seen in the past. And the slowdown of activity convert into EBITDA at the rate of about 25%, which is consistent with a sharp decline of the volumes, 3% to 3.5%, overall.

In Energy Services, the figures that you have here do not include Dalkia International or Dalkia [indiscernible] at sales and operating cash flow level, but it does include the contribution and the level of the adjusted operating income, on the net income contribution. In terms of sales, they are stable, plus 0.4% organic growth at EUR 1,268,000,000. France, which is the bulk, obviously, of the activity, is stable, with a positive impact on climate for about 2%; positive impact of prices, about 2%; and the activity which is down due to the cogeneration stop, which is gradually coming since last year to the end of this year, so overall stable. In the U.S., we have a sharp improvement, but this has to do with, here again, the Q1 that was very bad last year due to the climate.

Overall, the adjusted operating cash flow is slightly up despite the erosion of cash cogeneration facilities in France. But this has been offset by efficiency and also very good gas prices arbitration, which proved to be very efficient, again, during this first quarter. The adjusted operating income is up, and this does include a very strong contribution of Dalkia International, which is up by more than 20% for the international operation. This has to do with the restructuring of the Italian operation. So Q1 has been better. You'll remember that the write-off of receivables was not in the Q1 last year, but it was in Q2. So this is not on the account of these receivables write-off. And we have a very strong progression also of -- in respect of the Central European business. Poland, Czech Republic, Romania have been performing very well. To give you a hint of the depth of this improvement, the organic growth of adjusted operating cash flow of Dalkia International is plus 18%, which is, as you can see, very good.

Page 9, on the cost-cutting plan. We are perfectly in line with the strong trend of the second half of 2012. With gross savings on Convergence of EUR 49 million, with implementation cost of EUR 10 million, net savings are EUR 39 million. And given the IFRS 10 and 11 new accounting, the impact on the operating income is about EUR 31 million.

On the cash flow statement, I think the major feature is the debt reduction of EUR 700 million. The debt is down to a bit more than EUR 10 billion, and this is thanks to the hybrid issue that we made in January for close to EUR 1.5 billion. The capital expenditure are sharply down by about 40% compared to last year. Last year, we had a one-off with the buyback of a minority stake in Central Europe for about EUR 80 million, but given -- taking in account this one-off and even taking an account of the CapEx which have gone with the assets that we have disposed off during 2012, the capital expenditures are down compared to last year, in line with the effort of reduction that is planned for the full year.

The variation of working capital is very strong, with cash consumption of EUR 655 million. This has to do with the cyclical effect, which is about EUR 7.5 million like every year. On the top of it, we have a negative one-timer on that year for about EUR 150 million. And this was largely down to a payment that was due on Good Friday, which was a bank holiday, so -- and you see there have been impact on the 29th of March. We've been paid on the 2nd of April. And this accounts for more than EUR 100 million as such. On Technology & Networks, we had lower bookings, as I just mentioned, during the first quarter. And you know that the working cap is directly linked to the prepayment that we get during these bookings. We had a very strong fourth quarter, a lower first quarter. And this accounts for about EUR 50 million. And this, we will -- shall see where we are at the end of the year. And also, there is structural deterioration on the French Water business for about EUR 50 million. This has to do with implementation of the new rules of invoicing in France. And this is something for this quarter, and this is for the full year. So we expect to reverse, as usual, significant chunk of this working cap. I'm not saying that we'd be able to do like we've done during the last 3 years to reverse all of it. But we will, obviously, reverse a large part of this EUR 675 million by the end of the year on the account of the seasonality of the working cap.

Maybe to understand the debt, I need to signal also that we have over-financed Dalkia International in the context of -- as a March restructuring of the financing of Dalkia International. This cost us about EUR 200 million of debt. And this will also be reversed by the end of the year when Dalkia International repays a part of the loan that we have consented today.

The adjusted net debt is down at EUR 6.8 billion. And as you can see, we have also engaged some further divestments, the Moroccan Water operation for EUR 370 million and the closing is expected by the end of the year but should be more in the fourth quarter, and also the disposal of the Portuguese Water operation for about EUR 100 million. This one is expected to close either in Q2 or in Q3.

That's it for the financial result of the first quarter. And I leave the floor to François to take on the Convergence Plan.

François Bertreau

Good morning, everybody. Just going back to what have been said by Pierre-François on the Convergence Plan, as you can see on the Slide Page 12, we are really on track. We say that we have been able to save EUR 39 million during the first quarter. And you see that the objective for 2013 was EUR 170 million.

In fact, during this quarter, we have done 2 things. We have reviewed all the performance programs, cost-cutting programs. And also, we have been working on a new organization. And that's the reason why we're able now to -- in fact, to announce that we kind of really increase sharply our net cost reduction target at the origin of 2015. In fact, on Page 13, you see that we have been able to add some new objectives in terms of savings. And instead of targeting EUR 470 million in 2015, we will reach for the EUR 750 million in savings. If you look at all the savings we are making, roughly 50% of that is made by working on very specific business project. This has been slightly increased. And roughly 50% of this amount of EUR 750 million is made by what we call transverse projects, taking into account the whole company. And in fact, transforming the organization will allow us to save a lot of money. And that's the reason why we are very confident we can reach EUR 750 million at the 2015 period. The intermediate year will be 2014, and we aim EUR 400 million in savings during this year.

Pierre-François Riolacci

Thank you, François. Based on this increase of cost-cutting, we're obviously very confident about our midterm objectives, which have been left unchanged.

And I think that, that will close the presentation. And I suggest that we now move to the Q&A session.

Question-and-Answer Session

Operator

[Operator Instructions] We have a question from Vincent Gilles from Crédit Suisse.

Vincent Gilles - Crédit Suisse AG, Research Division

I'll ask my question in English, and I'm sure 99% of everyone is French around these telephone lines. Anyway, a few questions. The first one is on the savings you've just upgraded. Can you tell us how much you still intend to keep internally to yourself? I know Convergence is supposedly 100% for you, but you've got 1 year of experience now. So maybe you can tell us how much you managed to keep in the last 12 months? And the second question is, inevitably, the picture you drew on prices and volumes for Water and Waste, particularly in France, are terrible. Can you tell us a bit more about Q2 and Q3, as much as you can do it, and what we should expect maybe for the full year?

Pierre-François Riolacci

On the savings side, clearly, we expect to get -- to retain as a whole of the upgrade in the savings target. To give you an idea about Convergence, we have decreased the G&A during the first quarter by EUR 60 million, including a one-off which is linked to EUR 62 million at the organic impact, including the one-off for more than EUR 30 million that's through -- of the retirement plan, which has been suppressed. If you all take this one-off, it means that during this first quarter, we booked only at the level of the G&A a positive contribution of about EUR 25 million. And this is after inflation. So you can see that we have retained the EUR 31 million that has been posted during the first quarter. We are retaining totally this contribution to the P&L. And you can see 80%, 90% of this contribution straight into the G&A. And I am confident that the G&A will continue to decline and you will be able to track the cost of decrease on this line of the P&L. So obviously, very strong that this increase of the cost-cutting will flow in the adjusted operating income line. On the volumes for Water, clearly, we do not have any warning at this stage. You know that the first quarter is a weak quarter anyway. But once you've treated the leap year effect, we are in line with the usual decline in volumes in the French Water business. So there is no signal of any deterioration. On the Waste side -- on the Waste business side, I mentioned that the industrial customer had been very resilient. And I think that given the current environment, minus 1% in France is quite a good performance. So we are happy with that. On the municipal collection, indeed, there have been a strong decrease, 5%. However, you have to factor in the impact of bad weather. And I think that it's early -- it's too early to say that there would be a very strong deterioration in France. Now it's clear that we are cautious about what would happen in Europe during the next quarters. It's clear that -- you remember that during the second half of the year, last year, we had a slowdown on the economy. We had been able to offset this impact through somewhat -- some performance, internal performance, either a very strong incineration availability of our plants in France or spot volumes that we grabbed in Australia. During this first quarter, we didn't have this positive effect. So we have been exposed into the decrease of the economy. There is no strong deterioration compared to what we had in second half of the year. It's still a sluggish environment, not a sharp decline. And our view is that it will carry on that way during the second and third quarter. I would like to highlight that last year, the second quarter had been very difficult. And that was the time when the economy started to decline. So the first quarter is certainly -- has the worst basis of comparison because of prices of recycled materials were high and as volumes were not bad. So that's what we can say so far on the activity for 2013.

Operator

We have the next question from Olivier Van Doosselaere from Exane.

Olivier Van Doosselaere - Exane BNP Paribas, Research Division

A couple of questions on my side. Firstly, on the cost-cutting, when we look at the evolution of the plan, it seems to be quite back-end loaded. I was wondering if you add a detail a bit how you expect a big increase by EUR 350 million between 2014 and 2015. What would be the driver of that? Secondly, as you indicated, Dalkia International had a good performance in Q1 year-on-year. I was wondering if you could give any indication of where you expect associates to be at the end of the year 2013 in your P&L. And then after that, also, you indicated that the CapEx was down materially compared to last year. I was wondering if the EUR 1.7 billion CapEx target for this year still stands. And then finally, if you could give an indication on the cost-cutting, to what extent the target might include or not the impact of the French tax credit on labor cost? And if it doesn't include it, what kind of impact would you expect in on top of it?

Antoine Frérot

Maybe you can answer the third one on the labor cost. It's not included in it.

Pierre-François Riolacci

No, sorry, on your first question about the CIC -- actually, the tax credit on the labor cost, it's not included in the EUR 750 million. We have, obviously, a positive impact during the first quarter, which is about EUR 10 million. That is the gross impact. We -- so far, we don't know what is the net impact over the year. I mean, you may know that there are discussion, obviously, about the indexation clauses, so -- but during the first quarter, we obviously had a positive impact for about EUR 10 million. And that's only for the tax credit, excluding any other negative impact that we have on other tax schedule of the trends around that. For the CapEx number for the full year, yes, we expect to have about EUR 1.7 billion. It's clear that based on the first quarter, we are confident that truly, we'll reach our CapEx cut target for 2013. That's where we are, and we are confident based on the Q1 trend. Maybe you want to say something about the...

François Bertreau

Yes, on the EUR 350 million addition, in fact, you have got the effect of your programs on the first days. So for sure, the savings will come not in 2014 or 2013, but only in 2015. We have some things to put in place. So it may take a bit of time. And in fact, I think the saving will increase largely because of savings on the administrative and overhead in general expenses at that time. You know that especially according to French laws, it's a bit complicated and lengthy to put in place. But in fact, the effect will be a full impact, in a way, in 2015. That's the first point. The second point is that clearly, we have reviewed all the programs, either transverse or lumps [ph] or it's a business, Water, energy, waste management programs. And we are reviewing all of that, and we are very confident that, in fact, we will speed up the result of savings and efficiency for all these programs.

Olivier Van Doosselaere - Exane BNP Paribas, Research Division

And maybe on the D&A and associates for this year?

Pierre-François Riolacci

I mean, we don't give guidance for the full group. So you're asking guidance on top of it. Let's say that at the first quarter, the contribution of the joint venture was in excess of EUR 100 million. That's the bottom line that comes into the adjusted operating income. The first quarter is very strong for this business because you have, as you can imagine, a large part of it, which is coming from the international operation of Dalkia. So you should be careful not to multiply by 4 this number. But if you are multiplying by 2, then probably, it would be something reasonable.

Olivier Van Doosselaere - Exane BNP Paribas, Research Division

And on the D&A, you wouldn't say anything either?

Pierre-François Riolacci

I didn't catch your question on the D&A, I'm sorry.

Olivier Van Doosselaere - Exane BNP Paribas, Research Division

Just where you would expect D&A to be in your P&L this year?

Pierre-François Riolacci

D&A should be in the range of EUR 1.2 billion.

Olivier Van Doosselaere - Exane BNP Paribas, Research Division

And I'm sorry just to come back on the CCA [ph], just to be clear, does that mean the EUR 10 million in Q1, is that kind of the run rate that you see per quarter. And so would you expect, let's say, a maximum impact of EUR 40 million net per year?

Pierre-François Riolacci

There is no reason to believe that the future quarters would be very different from the first one.

Operator

We have the next question from Nathalie Duval (sic) [Nathalie Casali] from JPMorgan.

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

Nathalie Casali from JPMorgan. I have 2 questions, please. The first one on the cost-cutting targets. You've obviously increased them by quite a lot. Do you expect that this increase will be incremental to your EPS, or will it simply offset the underlying deterioration in the business? So I think you talked of a soft guidance of EUR 0.70 per share for 2014 EPS previously. Do you expect this to be increased to around EUR 0.90 per share, thanks to the cost cutting? The second question is on a potential agreement with EDF on Dalkia. I just wanted to know whether there are talks progressing on this, and what do you expect in terms of leverage if you were to take all of Dalkia International and sell Dalkia France to EDF?

Pierre-François Riolacci

Thank you very much for your 2 questions, Nathalie. On the impact of the cost increase on the EPS, I think that we -- I took you through a reasoning and a calculation during the financials, the full year financial presentation, which is still valid. There is no deterioration of the underlying trend in the business. Now on the contrary, clearly, we have a tougher environment in the economy in Western Europe. That's for sure. And our view is that this effort on the cost cutting is necessary to give us above -- against any potential decrease or deterioration of this environment. You remember that we had a sort of mid-cycle target of 2015 midterm target. We are not there today. And clearly, we are deteriorating environment. That's what we see. And if we want to maintain our profitability, we need to increase this cost-cutting plan. Now, compare to what we saw in February, there has been no dramatic change in the environment. It's clear that the news flow is not very good when you look at growth forecast, which are delivered for the Western Europe countries. They are all getting down, so it’s still directing. We are confident with this cost increase that we'll be able to reach our target, and possibly, to beat it if we get a better economic environment. On EDF and Dalkia, I think that we've been clear. There is no ongoing discussion with EDF about the strip of the asset. And we do not comment, further suppressed about it. But there is no ongoing discussion on this, on Dalkia with EDF.

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

Sorry, just one clarification. When you say you're confident you'll be able to reach your targets, are you referring to both the soft EPS guidance that you gave in the 2015 grace targets, or are you just referring to 2015 targets?

Pierre-François Riolacci

No, both of them.

Operator

We have a next question comes Philippe Ourpatian from Natixis.

Philippe Ourpatian - Natixis S.A., Research Division

I have several question. First of all, concerning the water price in Asia and Pac Coast, you mentioned that there is some increase. Would you give us some color about this magnitude of increase. The second question is concerning Technology and Network. You mentioned that there is a kind of cycle following strong activity in the last years. Could we have an idea about the order book you have at the end of Q1 '13? And what are your prospects for 2014, too? Concerning the restructuring of Energy Services in Italy, could we have to understand that there is a clear turn in terms of profitability? Clearly, are we positive or are you positive in Italy regarding your activity of Energy Services. Next question is concerning the working capital. You mentioned minus 50 for the French water activity on Q1 linked to some specific items. What's going to be the trend for the full year in terms of working capital concerning this activity. And last, concerning the cost-cutting plan, the EUR 280 million additional one, you mentioned, if I have well understood that, we're going to reach a cumulative figure of EUR 400 million in '14. First, is this correct? And secondly, what is the kind of clear schedule concerning the implementation, and what are the implementation cost of this additional cost cutting because EUR 280 million seems to be a net of 50% [ph] costs.

Pierre-François Riolacci

Thank you, Phillip. I leave Francois to answer may be the last question. On what prices during this first quarter, we didn't get any price increase in China. They are scheduled in Q2, Q3 and Q4 on the different concession, but there is no impact of 2013 price increase. You know that it usually ramps on the 1st of April to December. That's pretty usual. In Europe, we benefited from some price increases in Central and Oriental Europe, the magnitude being 5% to 7%, so still a significant price increase in some of this contract. On the Technology and Network backlog, what I can tell you is that during the first quarter, we had bookings of about EUR 900 million for the news of about EUR 800 million. So we are obviously covering. It was a bit less performing that last year because, as you can see, we are overbooked about EUR 100 million, where last year, we were up -- it was up to EUR 200 million. And this has to do with design and build municipal, which is still sluggish. So that's where we are. For our Italian operation in Energy Services, we are positive, and we will be positive during the year. This [indiscernible] is yielding about 6% to 7% of adjusted operating income margin, so it's not a loss-making business. The point with Italian operation is that we have heavier working cap, so the margin needs to cover the cost of this working cap. And clearly, all the business model is based on our ability to sell the receivables, so that we do not have to finance a large amount on the balance sheet. So far, we've been able, as you know, during the last quarter last year, to secure large amount, a larger amount of securitization of receivables. And we have no signal during this first month that we would not be able to carry on with this receivables securitization program. It's a bit difficult to tell you the trend, full year trend, of the working cap for Technology & Network because it will be very much depending about the bookings that we'll incur at the end of the year. We do not plan, obviously, a deterioration of the working cap during 2013. But as you know, it's very volatile, and there would be -- at any year, there will be in December a push to make sure that we get the prepayments from our customers. That's the usual stuff with Technologies & Networks. François, maybe you want to say a word about...

François Bertreau

Yes, about the EUR 400 million, it's an x saving. In fact, there is an increase -- the increase is mainly due to the purchasing plan, the purchasing optimization. We have started the process last year, but we are speeding this process now. So in 2014, we expect a strong savings on purchasing. We have also IT revamping of the group. We have started that the beginning of this year, so we expect to be able to make a lot of savings starting into 2014 and actually already in 2015, by the way. And in Veolia also, the country [ph] neutralization has been launched this year, and we expect to have some high savings in 2014.

Operator

We have the next question from Emmanuel Turpin from Morgan Stanley.

Emmanuel Turpin - Morgan Stanley, Research Division

First question would be to ask if possible for a summary of the nonrecurring items, positive or negative, that may affect EBITDA or EBIT. They usually have a few in your accounts. And I noted one in the press release, which is something about the pension schemes for managers. But in general speaking, could you guide us towards the underlying feel for Q1, so that we can ready for the rebasing next year? Number 2, you announced large cost-cutting as part of the new organization, that's a major change in the life of the company. My understanding is that you're now going to get organized through geographies. I would be interested to know what your main geographical breakdown will be from here, on how you're think about tackling some of the potential drawbacks of moving towards geography as opposed to business, i.e. transfer of this practice within a same line of business? And number 3, you highlighted quite a number of new commercial wins that looked quite sizable indeed. It's difficult to get a grip of what sort of contribution we could get. I understand you will probably shy away from individual contracts contribution, but could you give us an idea of what these new commercial wins will bring the group in maybe 2014, '15 or '16, in terms of, let's say, EBITDA? So group share of EBITDA [indiscernible] -- which seems to be a funny question. And also, if you look at these new contracts, what sort of capital intensity you have for these contracts?

Pierre-François Riolacci

Thank you, Emmanuel. I will start with the last one. I think, as you can imagine, it's a bit difficult to give you an update on the EBITDA contribution of the deal flow, because that's an information that's a bit difficult to share publicly. We gave an indication, an overall indication through the midterm targets. When we say that when we grow the top line by 3%, we'd convert that to 5% EBITDA of the midterm. I think here's an idea of some sensitivity that we can have in terms of growing the EBITDA for new business. This -- the bulk of the contract, which I have flagged has a low capital intent. That's the case for 2 big contracts for water. There are contracts within this here, customer. And in both cases, we do not face any CapEx and there are fewer operating contracts. As such, obviously, they will not be contributing very strongly to EBITDA because when there is no capital, you will end up with a usual margin for operating contract or construction contract, which is let's say, about 5%. That's what we usually get on this sort of contract. On your one-off questions, you're right, we usually have one-off. We're even sometimes, that's negative one-off. In the case of the Q1, we obviously have, as you can imagine, a string of small and midsized positive and negative one-off, and I will not comment there. But we felt that it will be useful for you to know that there is 1 significant item, which is actually a suppression of pension scheme of the [indiscernible] and the major, the key manager of the group. And this decision has been taken beginning of the year. And as such, there is the one-off of over EUR 30 million, which is a noncash item, which is actually is the DBO [ph], the defined benefit obligation getting off the balance sheet due to this change of the pension scheme. And the ongoing cost reduction would be about EUR 3 million a year. That was the former cost of this scheme, and this is gone, so it improved our income by about EUR 3 million a year. That's it for the one-off. I cannot -- there have been some provisions and noncash items, but for small amounts. François, maybe on the geography....

François Bertreau

On geography, in fact, one of the purposes of this organization is to have a group, which is really more guised, more simple and quick in his answer to the market. So the first point is really to have something fast moving. The second point is we are perfectly aware of the necessity to, in fact, to benchmark toward the best practices all over the world. That's the reason that we are in the process of setting up a big management group in charge of that. It's called [indiscernible] performance technique for the time being. And it's really -- the main idea is to cross capitalize in the group and also to really to widespread all the best techniques we have. And I think it will be done really more simply that way instead of having a kind of filter by division. So we -- in fact, we are working on simplifying the organization, and we want to foster the 2 things: The first one was the sales group or commercial and sales group we have spoken about last quarter. We're really in the process of appointing key account manager dealing with specific clients in specific industry or sectors. And in fact, the [indiscernible] of that is the technical department, and we are in the process of appointing a bunch of experts each in his field in order to be sure that all the knowledge, which has been gathered by Veolia over time is really widespread in the group. So I'm really confident it will work a lot better in such a simple case.

Operator

We have the next question from Julie Arav from Barclays.

Julie Arav - Barclays Capital, Research Division

I have 3 questions, if I may. The first one is can we have an idea of the additional cost savings breakdown by division? And I'm not sure you answered this question, but can we have the amounts and the phasing of the implementation cost for still these additional savings? And what's the contribution of the Efficiency Plan during the quarter? You didn't mention that in your presentation. This is my broader one question. The second one is can we also have an idea of the price indexation in your Water division in France, not in China at the time, but in France? And a last question is on the debt. Can we have an update on your view on how likely you are to keep your BBB+ rating plus IFRS rules, and also what's your cash position in Q1?

Pierre-François Riolacci

Thank you, Julie. Many questions. I count more than 3. On the cash position, at the end of the quarter, it's EUR 5.4 billion. The price indexation that we got on the French contract is, the top of my head, about 2.8%. That's what we got for the first quarter. The contribution of the Efficiency Plan is about EUR 40 million gross, and that's about 30-plus net. And BBB, I think, that -- you know that it's the season of discussion with the rating agency. We have an ongoing dialogue on the -- on the impact of the new accounting. Both of them made very clear that a change in accounting could not figure a rating action. So we are, today, discussing it with them. The work that we are going to deal with this new item. As you can imagine, they are not very keen to change their own rules, which I think is fair because they need to also benchmark also corporate [indiscernible]. I think that all of them have indicated that we had ratios to meet. And I think that the discussion may have turned out to be the way we meet these ratios, the timing to meet this ratios. So that we have sufficient time to manage the issue of the financing of this item. You know that the key issue within your accounting is linked to the financing model, which is that we have debt on the balance sheets to finance some JVs without having EBITDA. If there were external financing, there would not be any significant impact of the ratios. And when you look at the numbers, you know that we have actually 2 issues: One is the Veolia Transportation; the second one is Dalkia International. On Veolia Transportation -- sorry, on Transdev, which is now the right name. On Transdev, you knew that we have memorandum of understanding with Caisse des dépôts. And we plan to reduce our commitment with Veolia Transdev. I mean I'm not going to tell you again the structure of the transaction because, I think, on the call you know, all of you know that is a capital increase and external refinancing. And disposal proceeds that would be allocated to the debt paydown of Veolia. I think that we are moving quite on schedule on all the technical matters. I think that's what is left on the critical part is that ability to transfer the stocks of SNCM to Veolia, which I think, is obviously last thing to get. And once this is done, we are very confident that we'll be able to restructure the balance sheet of VTD and transfer and then reduce the debt accordingly. And this will ease the ratio calculation from first for [indiscernible] '10 and '11. That's the first one. For Dalkia International, we have significant amount of loans, which is on the balance sheet. We have an ongoing dialogue with Dalkia and EDS about the possible refinancing of this transaction. What is important is to have sufficient time to execute. And I think the rating agencies are prepared to give us the time, which is necessary to execute. And we would not be on the hook of the rating to restructure the financing of such JVs. Once the restructuring is done, we do not have actually much of an issue with the new accounting. I think that it maybe -- Francois, you want to update on the cost-cutting plan.

François Bertreau

By division, in fact, as I told you 50% of the savings plan is progress projected roughly 50% is by division, if I may say so, business project. Out of this 50%, water is the main objects with over 50% of that. And as of the 2 other trade, energy and waste management represents the last 50. Obviously, we have implementation costs for this plan. In the former plan, we were spending roughly EUR 100 million in 2013 and 2014 per year to generate this EUR 170 million and the EUR 270 million. And roughly, we will add EUR 100 million in 2014 to the -- reach the EUR 400 million.

Operator

We have a next question from Olivier Van Doosselaere from Exane.

Olivier Van Doosselaere - Exane BNP Paribas, Research Division

A follow-up question. I think you have given a number on the impacts of the contract negotiation in France under EBITDA in Q1. Sorry, I missed that figure, if you could please repeat where you were? And then the second point, just going forward the level of your reporting, I suppose that it means that we will no longer get the numbers by division, but that we will have to switch also from the reporting side to the geographic split, or do you intend to still provide both? That's all.

Pierre-François Riolacci

Thank you, Olivier. On the French Water contract negotiation, it's about EUR 12 million, 1 2, which is pretty much in line with the EUR 50 million year-to-date that we expect for 2013. On the reporting point, we clearly thought there will be no change for 2013. I mean, as you know, that reporting is obviously a big point. And that's not something you change just snapping your fingers. So we'll be reporting 2013 consistently. We'll see what you know. We have made no decision yet about the external reporting. I think that, as François pointed out, we will be managing the group on a geographic standpoint. But obviously, we will still have a strong grid on the business lines, maybe even stronger than ever. And we will, obviously, share information with you about this business line. And we know it's important in terms of the tactic of importance in terms of valuation to have also this information. So I'm sorry, but I cannot answer your question for the midterm. For the short term, we'll be reporting under the usual Water, Waste and Energy Services.

Olivier Van Doosselaere - Exane BNP Paribas, Research Division

Okay. And maybe just the final one on the implementation costs you mentioned for 2013 and '14, but could you please give an indication of where you expect your implementation cost to be in 2015 to get to the EUR 750 million number, the 798 [ph], where we could switch over then in 2016?

Pierre-François Riolacci

In fact, in 2015, the implementation cost is -- we have a 3-year program, so we are spending a bit of -- it was the same -- as the former plan. We are spending more money at the beginning and less money at the end. So in fact, the implementation cut in 2015 will be around EUR 50 million, less than in 2014 for the reasons that we are. At what point of time we have to reach the reward of our efforts, so it will be roughly EUR 50 million.

Operator

We have the next question from Arnaud Joan from Bank of America.

Arnaud Joan - BofA Merrill Lynch, Research Division

I have 2 questions, please. The first one is on the operating cash flow. I know that you don't have a guidance for the full year 2013, but if we had minus 7% at the end of Q1, if we consider that H2 of last year offers quite a tough comparison basis? And if we assume that there is no further deterioration of the environment, can you just tell us what kind of level you would be comfortable with in terms of operating cash flow for the year? And the second question, could you just tell us what is at stake with the SNCM news flow we had today and the decision by the European Commission?

Pierre-François Riolacci

Thank you, Arnaud. I don't share your views that the rest of the year will be a tougher basis of comparison. You remember that there has been the economy started to stall during the second quarter. And then indeed, the second half of the year did not deteriorate further, but really there's been a change in inflection point during the second quarter. That's true for the level of activity, but that's also for the prices of affected materials. So we would expect, actually, on the waste business to benefit of a better basis of comparison during the next 3 quarters than the first quarter. And that's something that we flagged during the full year presentation that the first quarter was a tougher basis of comparison. So back to that, unless there is a further deterioration of the economy, we should be better off with the next 3 quarters, than we had during the first one, hopefully. And then we'd be benefiting also of the Efficiency Plan and cost-cutting measures that we'll be pushing throughout the year. On SNCM, you know that it's always a very immediate [ph] and a hot topic. I think that it was expected at some stage that -- with -- for the repayment of subsidies, that's not a big surprise. That's part of the overall discussion about the future of this company. Those that we are in the process of the tender for the contract to Corsica. There is this litigation. There is another litigation, which has to do with the privatization condition, and this -- there is a bit, a further decision, which is expected to come within weeks or months, we don't know exactly. It's clear that with EUR 200 million, it's a massive amount. We, obviously, are prepared to contact the -- French government has clearly stated that it will contest this decision. In any case, we will not pay. And Veolia is not prepared to pay any amount, which is linked to this decision. That's for sure.

Arnaud Joan - BofA Merrill Lynch, Research Division

Okay. Just to follow-up. When I mention the tough basis, if I'm correct, the Q4 of last year -- and you mentioned it was up 3% for the whole group, so that's what I meant by saying that Q3 and Q4, if I take a look at your full year presentation were up 2%, 3% year-on-year at operating cash flow level, so that's what I meant by tough comparison basis.

Pierre-François Riolacci

It was a 3%, it was 3% up, but compared to basis of comparison in 2011, which was not really brilliant. So our view is that when we take a picture of what we have in our portfolio today, you're right to mention that there has been an improvement of profitability at the end of last year. Still, we believe that we are in a better shape today than we were last year. And we see the next quarters being rather busier than the first one, but that's it.

I think that was the last question. So I suggest that we would close the call. Thank you very much for attending. And well, we will have the occasion to discuss again, I'm sure. Thank you very much. Bye-bye.

Operator

Ladies and gentlemen, this concludes the conference call. Thank you, all, for your participation. You may now disconnect.

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