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Veolia Environnement S.A. (NYSE:VE)

Q3 2013 Earnings Call

November 07, 2013 2:00 am ET

Executives

Antoine Frérot - Chairman and Chief Executive Officer

Pierre-François Riolacci - Chief Finance Officer

Analysts

Michel Debs - Crédit Suisse AG, Research Division

Martin Young - RBC Capital Markets, LLC, Research Division

Arnaud Joan - BofA Merrill Lynch, Research Division

Emmanuel Turpin - Morgan Stanley, Research Division

Operator

Ladies and gentlemen, welcome to the Veolia Environnement First Half Year Results (sic) [key figures for the 9 months ended September 30, 2013]. I now hand over to Mr. Antoine Frérot. Sir, please go ahead.

Antoine Frérot

Thank you. Good morning, everyone, and welcome to this conference call, which will last 1 hour.

You will find on Slide 3 of the slideshow the highlights over the past 3 months, which will be the main focus of the presentation. I will walk you through the Dalkia operation, and then Pierre-François Riolacci will go over the figures.

But before we start, I want to announce the appointment of Philippe Capron as the new CFO of Veolia, replacing Pierre-François Riolacci. Philippe Capron will officially take on his new position in January. He has solid experience as the CFO of large listed companies. The main reasons that have led me to offer him this position are the following: First, his experience and his background should enable him to quickly obtain the confidence of and credibility with the Veolia financial community. Second, in collaboration with François Bertreau, our COO, he will be a strong side [ph] partner for me as I put in place the group strategy. And third, his proven managerial skills will allow him to effectively lead the all of the group's finance function which is under his responsibility. I welcome Philippe Capron to Veolia.

And I would like, in your presence, to warmly thank Pierre-François Riolacci for all that he has brought our group over the past 13 years. I refer most of all to his rigor, to his commitment and especially to the support and dedication he has shown me during the implementation of Veolia's transformation these last years. Many thanks, Pierre-François, for all of this. Good luck, and much success in your new positional challenge.

Now I come to the operation concerning Dalkia, and I am Slide 5. This transaction clarifies and accelerates Veolia's strategy. The agreement places Energy Services at the heart of our group strategy. It will give us 100% integration of Dalkia's activities in the most dynamic geographies Central and Eastern Europe, North America, Asia Pacific; and in the most dynamic client segments, both large cities and major industrial companies.

The competencies of Dalkia International's team will enable us to deploy high-value-added offerings in the key priority areas that Veolia has targeted for future growth, for which there is both volume and value. These specific competencies of Dalkia International teams are district heating and cooling networks, energy fluids of industrial platforms, biomass, geothermal energy, recovery of lost heat, energy efficiency and the reduction of greenhouse gas emissions. They are perfectly suited to addressing the key issues that our group is focusing on, which you see on the right of the slide.

On Slide 6. This agreement also places Energy Services at the heart of Veolia's new organization. With 100% integration, the Dalkia International teams will become part of our country-based organization for operation; will strengthen the integrated departments for marketing, sales, technical issues and performance; and will contribute to lower overhead of our support services at headquarters and in the countries.

The contemplated production you can see on Slide 7 simplifies and fully clarifies the complex scheme that was set up in year 2000, and it enables Veolia to take full control of its most promising activities.

This transaction rebalances the group's activities, and I am Slide 8. First, it rebalances the weight of its 3 businesses in terms of revenue where the contribution of Energy Services would rise from 16% to 21% but also and more importantly in term of credit [ph] where the contribution of Energy Services to adjusted operating cash flow would jump from 14% to 27%. Second, it rebalances Veolia's geographic footprint as the share of revenue of the activities outside of France will grow from 49% today to 66%, especially to the benefit of more dynamic geographies. The jump of the share of adjusted operating cash flow outside France will be from 62% to 77%.

I am now on Slide 9. For Dalkia, the potential for growth, but especially for profitability, is distinctly higher outside of France than within France. This has clearly been the case for the past 4 years and should continue in the years ahead, offering Veolia a good trend going forward. I can add that, in 2012 and 2013, the level of CapEx was not much higher for Dalkia International than for Dalkia France.

Regarding the valuation of this operation, Slide 10. The exchange of the stakes held in activities in France for the stake not held internationally would result in a cash compensation payment by Veolia to EDF of EUR 550 million. The implicit 2013 EBITDA multiples would be 6.9x on French activities and 8.9x on international activities. The difference in multiple is therefore 2 points, reflecting the significant difference in growth and profitability between the 2 assets. In addition, EDF would reimburse Veolia for its intercompany loans to Dalkia France, and Veolia will reimburse EDF for its 24% share of the perpetual hybrid debt security of Dalkia International and would recover Dalkia International's cash. Therefore, the exchanges in financing will be neutral on Veolia's net financial debt.

On Slide 11, you see that the transaction will have a favorable impact on the group's financial ratios. I will ask Pierre-François to comment and then to present the figures, and I will be back for the Q&A.

Pierre-François Riolacci

Thank you, Antoine.

Just a few words about just to finish with this better transaction. As you heard about the financials, we believe this transaction will have obviously a favorable impact on our ratios.

To start first with EPS. Before the impact of the PPA and before synergies, we expect it to be neutral in 2014, 2015. This is not a surprise, as we are stating the assets with the other partner. It was difficult to imagine that, the whole of the transaction, that will be dilutive for one of them. So basically, it would start at 0 before PPA and synergies. And given the future of the 2 assets, we believe it will be accretive obviously from '16 onwards.

We expect to generate overall a capital gain, which would be the result of the divestment of our French assets and the accretion in line with the change of control of the international operation. It could be a significant -- not being very high, but it could be significant at the level of Veolia. And it's hard to assess to date, as the structure of the transaction is not finalized yet.

Same comment for the PPA. You know that it's always very difficult to anticipate the impact of the future earnings of the PPA. Obviously, we took some assumption, but I'm reluctant to comment on the total number that you would expect. However, I can say that we will have synergies on this transaction. There will be headquarter synergies because the bulk of the expenses of those headquarter with Dalkia will flow with the French operation. So we expect to cut the headquarter cost by a significant amount, that could be around EUR 25 million a year. And this would be achieved in day 1 because that would be part of the closing.

We expect also to have further synergies through the country organization, putting together the people and also [indiscernible] joining Dalkia operation into a purchase and procurement program, but also the shared services that were represented of, and they're the former governance of Dalkia. And we would expect, as a goal, about another EUR 25 million of synergies on the account of this operation on the field.

Our view is that, first, purchase accounting impact and synergies, we would expect the EPS to be accretive in '15, '16 and moving up onwards. So our view is that basically the synergies should be in a position to offset the impact of the PPA.

In terms of credit ratios, it's clearly accretive on the net debt-to-EBITDA ratio, which is down 0.5 in average. It's slightly dilutive on the adjusted net debt-to-EBITDA, which is up 0.1 in average, but it does not jeopardize our target of being around 3 in 2014. And it's also dilutive, for 2014 only, on the S&P FFO-net debt. You may remember that S&P awarded us a delegation to their calculation rules of the ratios for 2014. Obviously, it's strongly accretive thereafter because we basically gain the full consolidation of international operation versus French operation, and you know there is much more EBITDA in the international part.

In terms of timetable, on Page 12. It's obviously, on at this time, still very uncertain. However, there are 2 key milestones that you should bear in mind. We first need to get an opinion from the unions, the EFP [ph], which is a French institution. That is to sign the SPA, and we expect to sign the SPA during the first quarter. So depending upon our success with the unions, it could be January or March, but that's something that is still uncertain. And then the second key milestone is, as you see, the antitrust clearance for closing, and we -- at best, we could try to make it at the end of June. It's possible that it could go up to the third quarter.

That's it for the Dalkia operation, and I suggest that we move to September figures.

Page 14, you have the usual key figures of Veolia. As you can see, our revenues are down at 2.4% at constant ForEx. It's down 1.9% organically, pretty much close to the second quarter, and I will come back on that in detail. For the adjusted operating cash flow, it's down 6.6% at constant ForEx. It was down 6.9% in H1.

In the Water operation, you still have the headwinds, as you know, with the contractual erosion in France and the energy prices in Germany. For Environmental Services, we have a stabilization of the adjusted operating cash flow in Q2 and Q3 after a strong decline in Q1, so okay, it's improving. Energy Services, for Q3, it's not very meaningful, but we still obviously face the end of gas cogeneration contract, but that's worse for the winter season.

Just a number that you should keep in mind, we have about EUR 50 million of restructuring cost in the adjusted operating cash flow in 2013. That is about double of what we had last year.

At the level of the adjusted operating income, the results are quite resilient, EUR 621 million, up 20% at constant ForEx. We definitely benefit from the reversal of the EUR 90 million one-off with Dalkia Italy. But if you look at the share in net income of JVs, it's up by EUR 150 million, so it's not only the reversal of Italy. And it goes to about EUR 70 million at end of September.

We have a stable amortization charge, excluding the landfills cover, and that's clearly the first effect of the capital discipline that we have in CapEx over 2012 and the beginning of 2013. So clearly, the amortization charge is now stabilizing. We benefit from the closure of the defined benefit pension plans of about EUR 40 million. That was a Q1 event, and I'm sure you remember. We benefit also from higher capital gains in the adjusted operating income, it's closer to EUR 100 million at the end of September '13. We have seized EUR 50 million at the end of September '12.

The debt is at EUR 9.6 billion. It's down by more than EUR 400 million compared to June. We generated during the Q3 a good level of gross cash generation, gross cash generation being EBITDA minus net CapEx, with the benefit of a strong CapEx management. I will come back on that. We improved during the third quarter the working cap by about EUR 150 million, and that's a good news that we didn't have last year. And also, we further refinanced Dalkia International for EUR 200 million during the third quarter. That is a consequence of the restructuring we made in March earlier.

If you go Page 15 for the breakdown of revenue by divisions. So EUR 16.1 billion of revenues, down 1.9% organically. For Water, it's down 3.4% organically. It's in the account of works. It's comes for -- first from technology and networks, which is down for about EUR 250 million, and that is mainly the unfavorable base effect of Design and Build in the municipal markets, and especially Hong Kong sludge coming close to completion; and slowing down in terms of revenues. We have also a decline in work activities of our operation unit. You know that, within the operation, we have a significant amount of works which are not -- which are within the contract but which are not ordered through the contract. And we had a decrease in these activities in France, in the U.K. and in Japan. Nothing new in Q3 but the same trend that we had in H1 was there, and it cost us a bit more about EUR 100 million of sales.

Environmental Services are down 1.6% organically, getting positive in the third quarter. I will come back on that. For Energy Services, the third quarter is not meaningful, but we had lower level of works in Energy Services. I will give you a brief comment.

Page 16, you've got the quarterly variation of our sales. For Water, Technologies and Networks are not very meaningful, again, on a quarterly basis because you have milestones in the contracts which are very important to book revenues. So you can have a high level of volatility from 1 capital to the other, although it's improving during the third quarter, but it doesn't give you a trend. We know -- I will comment a bit further on this activity.

So operation. We have an improvement in volumes sold in Q3. You'll remember that, in the French Water operation, the volumes were down by 1.9% in H1. It's down by 1.4% in -- at the end of September, with the month of July that was much better than last year. However, revenues are down, and this is due to the significant decline in works that I've detailed a bit earlier.

For Environmental Services, the 9 months variation is minus 1.6% at constant scope and ForEx. It was minus 3% at the end of June, minus 4.6% at the end of March. The 9 months figures is driven by lower prices and volumes for recycled raw materials, it accounts for about 1.7% of the decrease, and lower volumes in the activity of 0.7%. However, you can see that we have reversed the trend in Q3 with revenue increase of 1% organically.

Our Energy Services, in Q3, we had less works, especially in France.

Page 17, for Water. Its revenue is down by 3.4% organically at EUR 7.5 billion. For operation, we have a stable revenue at constant scope and ForEx, around EUR 5.1 billion. It's worth to note that these revenues would have increased by about 2% organically without these works impact that we have within the operation. These works are down close to 20% on this business.

The revenue in France is down 2.8% organically. It would have been stable excluding this construction and work effect, and this has to do with the indexation effect, which is positive, plus 2.4%; new services which are sold around our contract. And these 2 impact overcome the lower volumes that we have, minus 1.4%, and also the contractual erosion at the level of the top line.

Outside France, we booked a 1.2% growth, organic growth. And here again, this growth would have been 4% organically excluding these works negative impact. And this is mainly due to the Central Europe performance, which is doing very well since the beginning of the year.

For technology and network, the revenue decline was slowing down in Q3. This is due to better franchising and despite Hong Kong closing to completion. We are, as you know, optimistic on this activity given that we have strong bookings. And at the end of September, our bookings were sharply up compared to last year at the same period.

We have lower activity at SADE, and SADE is a business of pipes and mainly in France. And this is on the account of poor weather conditions this winter but also from a depressed demand from our public customers in this business.

That is for the activity of Water.

The adjusted operating cash flow is down organically, in line with H1. And this is on the account of contractual erosion in France, lower energy prices in Germany and the weaker technology and network contribution, including the negative margin of Hong Kong sludge. Adjusted operating income was negatively impacted by provisions on old contracts in the U.S. And we had also, as some of you may remember, in Q3 last year, a midsized capital gain linked through the restructuring of a joint venture with Azaliya in the Middle East Water operations.

That is for Water.

For Environmental Services, the revenues is down organically by 1.6% at about EUR 6 billion. As I mentioned earlier, it reversed growth in Q3, limiting the 9 months variation to minus 1.6% at constant scope and ForEx, improving from the previous quarter. There is clearly the slowdown of the unfavorable impact of recycled raw material in Q3. The top line was negatively impacted by about EUR 50 million per quarter during the first half. It's down EUR 10 million, with the average price of paper and carbon improving in Q3, at least for France, while the scrap metals prices are still down and also the price of paper in Germany is still under pressure. So it's mix environment, but getting much better in Q3, so the impact of prices is neutral in basically in Q3.

For volumes, I mean the volumes of the mainstream, we have a total decline of EUR 42 million. That is minus 0.7% of the total of our sales in the Waste business. This is on the account of collection, which is clearly getting down. The good news is that, after a sharp decline of 3.5% in Q1, we have a stabilization. It was plus 1% in Q2, it's 0% in Q3, so basically, volumes are now stable year-on-year.

To give you some color per geography. You should know that France is down by over 3%, and this is on the account of lower volumes collected, especially in the municipal market which is down by 2.6%. The U.K. is up by a bit more than 2%. Collection is obviously under pressure, especially collection in the C&I, which is down by about 10%. However, we have flat volumes in landfills, which I think is a good news for 2013, and we therefore have even an increase in the top line because the taxes are still moving up. And obviously, we have a positive impact of the PFI's contribution, which are organically growing over 5%.

Germany is bad, minus 9%. It's improving compared to H1 but still a minus 9%. And this has to do with the restructuring of the municipal market. We are clearly giving priorities to prices. And we are definitely restructuring our position in the municipal market whilst the environment -- the economic environment is obviously not very good. In the U.S., it's up by 2% both for industrial services and hazardous waste. And Asia Pacific is strong, plus 5% overall.

Thanks to the stabilization of volumes, we have also a stabilization adjusted operating cash flow in Q2 and Q3 after a decline in Q1. The adjusted operating income is increasing. This is thanks to the reduction of risk in Italy. We had a good news, which was, during in July, the approval of our [indiscernible] that is basically a Chapter 11. And thanks to this approval, we have some good news of the level of risk that we should retain on Italy. We have some bad news in the U.K. because we had to increase our cover for landfills even the limited future of this operation. So net impact of both is about plus EUR 20 million.

On Energy Services, revenue continued to increase for the first 9 months. Here again, there is no waiting season in Q3, so you need to be careful with the numbers. But it was disappointing in Q3 for the level of works activity in France. We benefit from the rise of favorable energy prices, that is about EUR 40 million; weather impact in the winter seasons, that was close to EUR 60 million. And we had the negative impact of the end of a gas cogeneration contract in France.

That's it for the business presentation.

If you look at cost-reduction program. We are definitely on track with EUR 109 million of net savings in the end of the 9 months. I think that what is the most important is that, on a gross basis, we have achieved nearly EUR 300 million in not really 2 years, and that's 7 quarters, to be compared with the end-2013 target of EUR 270 million, so it's clear that we will exceed our gross savings target at the end of 2013 compared to 2011. We are also very satisfied with the current run rate per quarter, which is EUR 50 million since the beginning of the year. So there may be higher quarter than other, but we are still at EUR 50 million average, which has been in line with our expectation and what we need to achieve.

On a net basis, we are also well on track compared to the end-2013 target of EUR 170 million, accumulative 2012, 2013. I think one of the key question, it's not new, which is open is our ability to reserve the amount of the restructuring plan for the alternative [ph] plan in the French Water operation. That is a question that will be dealt at the very end of the year.

That's for performance.

If you look at the cash flow. Just to add that the net debt is down EUR 400 million compared to June end. We have carried now the effect of a strong capital discipline with the level of CapEx. CapEx is less than EUR 1 billion at the 30th of September, which is an achievement, EUR 995 million, to be compared with EUR 1,863,000,000. This sharp decrease is due to the high level of financial investment and scope impact that we had in 2012 for about EUR 600 million. It's also linked to investments in discontinued operation, operation which have been sold for about EUR 80 million. But we do have a reduction in CapEx like-for-like and we have lower industrial CapEx, down by 13% both for maintenance and growth. That is clearly an achievement, which is also eased by the fact that we are getting close to the end of a big investment cycle, and this will be confirmed in the future years.

We have therefore a good level of gross cash generation, which is also improving -- improved by the working cap variation, EUR 150 million in Q3. We didn't have that last year, and it tends to prove that the very high level of the negative variation of working cap at the end of June was probably a peak and it's coming back to a level at the end of -- the working cap is coming back at the end of September to a level much closer to 2012. However, we know that we have some structural deterioration of the working cap, of about EUR 50 million on the French Water operation, with new provisions of contract that make us to pay the royalties much earlier; and another EUR 50 million on the account of CIT, that is a tax credit given by the French government on unemployment, for about EUR 50 million here again at year end. So let's say, EUR 100 million structural deterioration at year end that could help you to see what is at risk for the Q4.

The refocusing program is also on track even if the level of disposal is only EUR 430 million. You know that we have 2 big deals to be closed during the first quarter, which are the Water American operation for EUR 360 million and the Berlin contract for over EUR 600 million. However, in this EUR 431 million, we have 2 major achievements in Q3. The disposal of our Marine Services assets, you remember, or for some of you, in 2011, that it gave us a hell of a time. So it's gone, it's closed. And same, we have the exit of our Calabrian operations, waste-to-energy operation, in Italy, which is also a big success. Both of them have been completed this quarter without any negative impact, and even a positive impact for Italian operation, on the P&L.

That's basically it for the net debt.

Before moving to the mid-term target, I would like to say a few words about the Transdev update, that's Page 22. I will start with an update of the SNCM operation. You know that the delegated public service contract has been awarded for another 10 years, starting January 1, 2014, to SNCM. That's the good news. Bad news is that the operational deterioration has been exacerbated by the nonpayment by the Corsican authorities, a part of the subsidies with the execution of the decision of EU about repayment of subsidies under supplementaries. For our -- you remember that we have a claim of over EUR 200 million on the account of this repayment. Given this difficult operation, the management of SNCM decided to file a legal procedure, which is called a conciliation, legal conciliation, looking for the good framework to continue the operation. And it will definitely help to structure a solution for SNCM. Therefore, the transfer of SNCM to Veolia Environnement is today clearly impossible. It was delayed at the beginning by the refusal of the employees to give an opinion. And now given this situation and the filing of this legal conciliation, it's clearly impossible.

The maximum risk of loss on the account of SNCM, at the level of SNCM, for 100% of SNCM could be around EUR 300 million, including this repayment of state aid on -- of Corsica and aid on this service. This amount is not including another claim which has to do with step subsidy [ph] at the time of privatization. We have no information about this claim, but we know that it has been filed. We are expecting a decision from the EU probably by year end, but we do not have any information about the amount.

It must be very clear that SNCM is a stand-alone company and that neither Transdev nor VE has any commitment with regard to the liabilities of SNCM. And this is obviously true as well for the French state, which is a 25% shareholder of SNCM.

That is for SNCM, which is obviously going through a roller coaster period. And we expect for in the upcoming weeks to have, obviously, many neat [ph] stories about SNCM, which is normal because now it's going into this restoring phase.

For Transdev, you remember that we signed in October 2012 an MoU that was restructuring the shareholding of Transdev and organizing the control by Caisse des Dépôts of Transdev, but it was with a condition precedent that was the transfer of SNCM to Veolia. As this transfer is not possible, the MoU has come to an end at the end of October 2013. It doesn't mean that we are not carrying on with discussion with Caisse des Dépôts about the future of Transdev, both obviously the controlling and the restructuring of the balance sheet, because, you are all aware that, Transdev has a significant amount of shareholder loans falling due in March 2014, and obviously, Caisse des Dépôts and Veolia are willing to find the proper restructuring to make sure that Transdev, which is a very good company and now clearly on track on the development plan, has a clear and clean future.

In accounting terms, you'll remember that Transdev was accounted as discontinued operation on the basis of the MoU. Now that the MoU is gone, we still have a business prospect of getting out from Transdev, and Caisse des Dépôts has a prospect of taking control. However, we do not have a clear timetable because we have no timetable about SNCM getting away from Transdev. Therefore, we would not maintain in year end the treatment at discontinued operation and we will book Transdev as an equity consolidated company, it's a joint venture falling into IFRS 10 and 11.

A specific of Transdev is that it is a non-core activity. That is that we do not have any other transportation activity in the group, that's one; and two, we definitely want to exit this business. As such, it will be recorded as an equity consolidated item, which is non-core. And so as a consequence, we will have in the net income, clearly as a normal recurring item, the impact of Transdev, including SNCM net income. But for the rest, revenues, adjusted operating cash flow, operating income, adjusted operating income, adjusted net income, obviously for all the cash flow statement items, the net debt or adjusted net debt, there would be no impact of this change in accounting.

That's it for Transdev.

And for the rest, given the numbers that we have at the end of September, we do not have any reason to change our targets for 2013 and onward. And obviously, we'll give you a full update in February given that year [ph] number because one of the key question is obviously, how will be Veolia with this suite of Dalkia operations.

That's it for this presentation. And I'll be joining now Antoine for the Q&A.

Question-and-Answer Session

Operator

[Operator Instructions] The first question comes from Michel Debs, Credit Suisse.

Michel Debs - Crédit Suisse AG, Research Division

I have 2 questions, if I may. The first one is on free cash flow generation. You indicate your free cash flow is about EUR 1 billion positive, which is good news compared to the same period last year. However, it seems to include EUR 1.5 billion of hybrid bond issuance, which means the underlying from operations is closer to minus EUR 0.5 billion. When do you expect to become free cash flow positive again? And the second question is about cost cutting. You've told us you are on-track, you are delivering, that is great news. But I am a bit lost because, on the one hand, we have Dalkia France coming out and probably with it a chunk of cost cutting; on the other hand, you now have the full impact of Dalkia International; and on the third hand, we have the joint ventures. Could you tell us, in the current group shape and form, what is the translation of the old targets for 2014 and where you're at versus them?

Pierre-François Riolacci

Thank you. On the free cash, you remember, we are right at the end of September. We will obviously deliver a very strong Q4 in terms of cash flows. As I mentioned now here, we expect to book over EUR 1 billion of disposal during the Q4. And two, we will have the reversal of the working cap, which is very seasonal with Veolia, a reversal of working cap that you would expect to be at least EUR 400 million. So it will total EUR 1.4 billion-plus during the Q4, and that will definitely improve the cash flow. However, your question is going further, which and I know that's a key question mark on Veolia from the market. I mean, that's, the free cash generation, not -- including not only the hybrid but also the financial investment, we would expect, for 2013 -- when you retreat the impact of the discontinued operation, the financial disposal, I'm not talking about the disposal of industrial assets -- but when you retreat these items, including also the financial investment because we will, as you know, buy assets interests in Proactiva during the Q4. When you're looking for these financial items, we believe that, in 2013, we should be at free cash flow net full [ph] before dividend, that's basically what we are working on. And that is for 2013. And you know that our target is to increase this amount so that, in 2015, we should be in a position to cover the dividend without any hybrid but also without any financial disposal. We are on this target and we have no reason to changing this target. That's step one. All right, on your second question, about cost. I'm talking about -- I'm talking on those the control of François who is managing, obviously, the program. But on your more accounting question: In 2013, as you can imagine, it won't be closed, so in terms of economic interest, nothing changed. And we will have the benefits of the savings of Dalkia France and we will have our share of the savings of Dalkia International. If you are referring to the number in management, that is, the EUR 750 million of savings that we are managing, you're right to point out that we will lose the Dalkia France impact, but we will gain compared to this number about 25% of the savings in Dalkia International because this EUR 750 million number was built at the time we had productional integration. And at that time, we were consolidating 75% of Dalkia International. So we are swapping basically 100% of -- in the EUR 750 million, 100% of the savings in Dalkia France versus 25% of the savings with Dalkia International. So we are working on it. I mean, we may adjust this amount, possibly. However, when it comes to economic interest, there won't be any decrease because our share in Dalkia France was only 66% and our share in the 75% of Dalkia International was actually only 50% of it, and this is on the account of the 34% stake that EDF had in Dalkia Holding. Therefore, we believe that, on the net -- of the -- in economic terms, in the net impact for Veolia, the operation is neutral because even if the global amount is a big figures, our share of the global amount will increase. And therefore, there is no reason to change the net impact for Veolia. I just wanted to add up one thing that I did not add up during the meeting: On the account of cost cutting, I draw your attention also on the G&A. We posted strong numbers at the end of June. And at the end of September, on constant scope, constant metered, constant ForEx, and taking away any restructuring cost, taking away the provisions or reversal of provisions, the defined benefit, and taking away everything, our G&A are down by 4%. And we are down by 4% in current rules, which means that, in constant money, it's probably going to 6% to 7% down. And I think that's the clear illustration that the cost cutting is biting in 2014. Thank you.

Operator

The next question comes from Mr. Martin Young, RBC.

Martin Young - RBC Capital Markets, LLC, Research Division

Just got 3 questions, if that's possible. The first one gets back to the issue of cost reduction. There's been some suggestions that perhaps the speed of progress with the unions in France isn't what you would have expected a few months ago. Could you just update on that and in particular confirm that you will be able to stick with your 2015 cost reduction targets even though we've got this slight delay? Secondly, in terms of the Waste volumes. And firstly, a technical question, is the activity level, excluding that, that goes to recycling? And then more importantly, whether you could share some thoughts on where Q4 and 2014 might now turn on Waste [ph] volume. And then the final question is around the accounting presentation of Transdev and what you are doing there. Unless I'm mistaken, I thought SNCM was actually in the Other category at this juncture. Does that now move to the discontinued non-core -- sorry, does it move to the non-core activity? And surely, on a nonrecurring basis, there's no change in net income because you would have been recording the income from the discontinued operations as a nonrecurring item.

Pierre-François Riolacci

Thank you, Martin. On the French Water program, we are definitely confident that we will meet our target for 2015, all right, they are not at risk. The discussion, the question is more about when are we able to book this provision against the redundancy plan. And actually, what is at '15 [ph]? Shall we book that in Q4 2013? Shall we book that in Q1 2014? That's the question. I know it's important for you and for us, obviously, in accounting wise, but it is a nonrecurring event here again. So that's important, however, it has to be balanced with the good execution of the plan. So we don't want to put too much pressure on the operational people on this particular aspect. However, here again, either it is Q4, either it is Q1, in terms of provisioning, it doesn't change anything about the capacity to achieve our targets overall. But also for French Water operation in 2015, we consider that we are not at risk on this point. It's just an accounting point, but also clearly, the management of the relationship with the unions on this French Water business. On Waste volumes, I just confirm that the indication that I gave is excluding the volumes of recycled raw materials. It's very difficult to give you an idea of volumes for Q4. I think it's a bit premature. And you know that we are still in a macroeconomic environment which is uncertain. And we had a Q2 and Q3 which were plus 1, 0. That's what we would expect for Q4, but I mean, clearly, we are at risk on that and we will not comment much further. Your point on the SNCM is right, SNCM now is -- has moved to non-core, together with Transdev. This is a change compared to what we had before because we have Transdev in discontinued operation. But SNCM, as we were deemed to stay and to become actually the controlling owner after the closing, SNCM was in the recurring event. So to -- clearly, SNCM contribution will now move to the non-core, together with Transdev, which means that it will be nonrecurring.

Operator

The next question comes from Mr. Joan, Bank of America.

Arnaud Joan - BofA Merrill Lynch, Research Division

I have 3 questions, please. The first one is on your performance in Q3. If we take a look at the EBITDA in Q3, you were down 9% year-on-year. Can you just first explain to us why it would be down 9% given what you said at the end of H1 and given the fact that cost cutting is on track; given the fact also that Q4 is a tough comps basis, what should it lead us to assume for the full year EBITDA for '13? Second question, could you just comment on some drivers and trends going from '13 to '14 in terms of EBITDA? What kind of growth can we assume with Proactiva and with other internal drivers? And the third question is about Dalkia. I -- can you just come back on the impact on your credit metrics? Are you talking about a slight deterioration in adjusted net debt-to-total cash generation? If I take a look at the figures you mentioned, I get to an EBITDA increase of EUR 270 million, but with a net debt increase of close to EUR 2 billion coming out from your adjusted net debt figure, so I would get to much more a deterioration. So can you just give us some more granularity on this? And maybe also on the cost synergies or cost cutting that you expect to extract from this deal.

Pierre-François Riolacci

Okay. On the '13 EBITDA, you know that we are reluctant to give guidance in this transformation period. But you've seen that, at the end of September, we're at minus 6.6% in terms of EBITDA constant ForEx. You're right to point out that Q4 is a tough base of comparison. However, the trend is improving in Q3 compared to H1. We have our cost-cutting measures. So we would expect overall -- even if we have a strong base of comparison in 2012 for Q4, we would expect for the year to be roughly in line with the end of September, possibly a bit better than what we had at the end of September given that the cost-cutting plan is moving properly. It would depend also on the volumes that we have at the end of the year, that was the -- Martin's question, in the Waste business. For '14 EBITDA, I would not comment further. I mean, it's -- it will not be fair for [indiscernible] to commit now on the '14 EBITDA. But maybe I would just -- I will not elude your question. I mean, clearly, the rationale that we have developed together in many occasions is not at risk. I mean, we have -- you have the headwinds, as you know. You have the cost-cutting plan. And you know the story. And we have not identified at the end of September anything that would be jeopardizing this reasoning. Proactiva will be a strong contributor, indeed. You had some numbers that were disclosed at the time of the acquisition. It's clear that 20 -- we expect in 2014 to beat this number because it is a growing business. And we would expect some further improvement to EBITDA on Proactiva, but I will not comment further. On the credit, Dalkia, as I mentioned, we are slightly dilutive on the adjusted-to-net debt EBITDA ratios. Don't forget that we will get -- payback, the debt which is located with Dalkia France, that is about EUR 550 million. So this will improve, obviously, our net debt position. And that's why the total debt is neutral. I would say that the division would be a bit higher during the first 2 years and improving afterwards and to break even a bit later. On synergies, I think I've been -- I gave you very clear numbers. We expect EUR 25 million, and that should be in year 1 for the headquarter synergies; and another EUR 25 million based on country organization and scale effect on the P&P and shared services, and that will probably take, let's say, 18 months to be achieved. So we are comfortable with EUR 50 million of synergies on the account only of cost synergies. But as Antoine developed a bit earlier, we have also a top line synergies that we should be able to raise, and this has not been accounted for, obviously, in the evaluation.

Operator

The next question comes from Emmanuel Turpin, Morgan Stanley.

Emmanuel Turpin - Morgan Stanley, Research Division

First question, on the Q3 numbers. You mentioned some capital gains taken in between EBITDA on EBIT, as per usual. Could you just give us a clear picture if we compare 3Q '12 on 3Q '13 and if we basically add up the capital gains, and maybe changes in provisions between EBITDA and EBIT, to have an idea of how these volatile items have moved year-on-year? That's the first point. Second question, as we are now at the end of the third quarter and as we look into 2014, a first job we should all do is to look back on the first 9 months of this year and identify the elements that will not or may not reoccur, whether they are treated as recurrent or not in your earnings, if you see what I mean. So not talking about the new -- continued headwinds, French Water, et cetera, for next year, what in this year's 9 months, in your view, that we should not consider for '14, whether they are positive or negative this year? And lastly, this is your last conference call with us for a quarterly review of Veolia. And maybe this is the last opportunity maybe to update us on previous comments on previous calls regarding either soft [ph] guidance or ability of the group to cover dividends by EPS. And I was wondering if you had anything new or different to tell us compared maybe to the message of H1.

Pierre-François Riolacci

Thank you, Emmanuel. On Q3 noncash, I think I was pretty transparent with -- when elaborating about the Waste development, and stating that there is the net of the capital gain on Italy and the landfill reserve for about EUR 20 million. On the contrary, in the Water business, you have some risk cover, I would say, for, let' say, EUR 10 million for the quarter. So I think that, on the quarter, there is not that much that is actually a big discrepancy year-on-year. However, when you look at the full 9 months and you ask me what shall we be careful with for next year, I think that's the EUR 40 million of defined benefit provision that was booked in Q1, which is something that you need to iterate. It doesn't mean that there won't be further improvement in other things in 2014, but it's clear that this EUR 40 million in Q1 needs to be flagged. And I think that's it. And I do not see any other big deal because, the reversal of the write-off in Italy, it's a positive variation, clearly, from '12 to '13, but it's there. And you won't be -- there won't be any negative in 2014. But I think you can adjust for this Q1 item and that's it. And then you come to the soft guidance and the reasoning about the EUR 350 million and the EUR 500 million, both for the EPS and the free cash flow. I tried to answer Arnaud and I would tell you the same, there has been nothing which has been identified so far that would jeopardize this target. I think that, operating wise, we are exactly where we wanted to be. It's clear that the environment is not helping, that's for sure, so we probably are under pressure on that side. However, we have -- below the operating results, we have managed the debt reduction and the cost of debt properly. And probably at the end of the year, you will see that the cost of debt is getting down and is getting closer to our 2014 target. So it's going the right way. And I think that, on the tax charge, we probably have been through the tougher period. And here again, thanks to the cost-cutting plan and the improvements in operation, we should find some leeway in 2014, 2015. So I can hardly see why we should question a recovery in EPS so far.

Antoine Frérot

So ladies and gentlemen, it is 9:00 now. We promised to close after 1 hour. It has been the last question.

Thank you very much for having attended this conference call. And our next meeting will be for the full year results. Thank you very much, and goodbye.

Operator

Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may now disconnect.

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