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Veolia Environnement S.A. (NYSE:VE)

2013 Earnings Call

February 27, 2014 1:45 am ET

Executives

Antoine Frérot - Chairman and Chief Executive Officer

Philippe Gaston Henri Capron - Chief Financial Officer and Senior Executive Vice President

Analysts

Emmanuel Turpin - Morgan Stanley, Research Division

Olivier Van Doosselaere - Exane BNP Paribas, Research Division

Arnaud Joan - BofA Merrill Lynch, Research Division

Patrick Hummel - UBS Investment Bank, Research Division

Antoine Frérot

[French] Good morning, ladies and gentlemen. I suggest we start. First of all, welcome to this meeting, where we're going to talk about our 2013 full year results. Thank you for coming so early. As you know, GDF Suez is also publishing its results this morning. And accordingly, we decided to bring forward this meeting to enable you to go to both.

Well, today, we will talk about our 2013 results, and also, we'll give you our 2014 guidance. I'll start by summing up last year's results. As you will see, all the objectives set by our transformation plan for H2 were met. Subsequently, Philippe Capron, our new CFO, will describe these figures in detail, and then I'll take the floor again to expand out our guidance for next few years and, in particular, in 2014 and 2015.

In 2013, first of all, we've totally overhauled our group's organization. The old one, by division, has changed into quite a tough [ph] and integrated group, with reinforced steering functions at the head office sites [ph] . They are there, reinforcing our steering functions at the head office. We're amping [ph] to do with strategy and innovation. And also, of course, we, sort of, also decided to have just one head office for all our Veolia.

Then we'll have only one Veolia per country and one support team by country only. This obviously streamlines our organization, makes it more nimble and enables it to react faster to the customers we have picked. That was what improved our group's performance.

The second part of Veolia's transformation is cost cutting. As you know, we have a 4-year program that is to reduce our cost by EUR 700 million. In 2 years, we've already saved EUR 350 million. We are now reducing costs at a pace of EUR 100 million per half year, and we are therefore well set to meet our overall objective.

In Q4 2013, we were able to describe to employee representatives the cost-cutting plan in Water in France, and this enabled us to set aside provisions as early as last year, the EUR 97 million in costs resulting from the implementation of this plan. And you can see this provision here included in the implementation costs in H2 2013. Our objective in 2014 -- our cumulative net savings objective is EUR 500 million.

The third part of our transformation consists in degearing -- deleveraging. We reduced our debt in 2013 by EUR 8.2 billion. We reduced about EUR 2.62 billion to EUR 8.2 billion. So we have far exceeded the initial objective of our plan, i.e. EUR 12 billion. In 2013, this further reduction in our debt was made possible by the fact that capital expenditure was kept in check. Philippe will talk about that in detail.

The excellent performance of our working capital requirement and the hybrid issuance of EUR 1.4 billion and asset divestments totaling EUR 1.2 billion. With respect to this asset divestment program, in 2012 and 2013, it was carried out under excellent valuation conditions and more than 10x EBITDA for the average divestments over the last 2 years. And these disposals affected 29% of the equity -- or the capital of the group was employing and 17% of our operator's growth [ph] . Therefore, these assets were less profitable than others. In other words, we have not sold our crown jewels. Our debt is down to less than EUR 8.2 billion at the 31st of December 2013. Our net debt to capital has been reduced to 5.5 -- 2.5x.

First of all, our adjusted operating income increased by 13.5% at constant consolidation scope and foreign exchange rates. In 2012, as you will remember, it was impacted by Dalkia Italy provisions but are no longer recorded in 2013, of course. Adjusted for these Italian provisions, our adjusted operating income increased to 5 point -- 5% at constant consolidation scope and FX. This was due mainly to the cut in cost, in particular overhead, in particular in H2 2013, in particular in Q4, but I'll talk about that later.

But the group's growth engine also recorded a reduction in cost in Water and energy in Central and Eastern Europe, and the PFI in Environmental Services in the U.K. With this reduction in our debt, obviously, our interest expenses have also decreased and therefore, we have -- we're increasing our adjusted operating income, thanks to this scissors effect. And in fact, our adjusted net income came in at EUR 223 million in 2013, 4x higher than in 2012.

Once again, if we strip out the Italian provisions that impacted our adjusted net income in 2012, in that case, we could say that our adjusted net income has been multiplied by more than 2x. These performances reduced from the decline in our capital expenditure despite restructuring costs that were recorded under adjusted operating income as they were higher in 2013 than in 2012. And these costs are not adjusted in this table.

If we look at 2013 quarter-by-quarter, at constant consolidation scope and foreign exchange rates and without restructuring charges, we started the year in Q1 at minus 6.1% in comparison with 2012. And in Q4, we had plus 0.4%. So we are more than offsetting the erosion in our conventional markets by reducing these costs. So the end of 2013 showed a big trend that we are going to see again in 2014.

The fourth part of our transformation consists in the changes on our commercial strategy. I'll talk about that at more length at the end of our presentation, where I'll give you our guidance. But in 2013, already thanks to our new organization, we have defined new commercial targets and started working on meeting them throughout the world and systematically. So in the last few months, initial significant successes were recorded in these priority markets. As you can see in this map, the most striking success story has to do with the gas and oil market with the British gas subsidiary in Australia, with also contracts recorded in Canada with Shell for shale gas contracts, but also Codelco in China -- in Chile for copper, for instance.

There are also new business models for municipalities with Thames Water in Great Britain and Rialto, California in Water. But you also have our commercial -- conventional contracts, such as Marseille, where we renewed contracts, and new contracts that were won in, for example, Kuwait. So a lot about successes, i.e. contracts we have signed with industrial customers have -- would not have been signed 3 years ago. They are remote from our traditional markets and, therefore, require a new kind of approach. Lastly, in 2013, we carried out 2 major transactions. First of all, we took over Proactiva's water. This is in Latin America. I talked about this deal 6 months ago, so I won't talk about it again today.

Next, we also signed a deal with EDF with respect to Dalkia. That solves one of, if not the most important, strategic issues facing Veolia. In other words, the position of Energy Services will now grow. We now have a very clear answer. Energy is at the very heart of Veolia's strategy and its service offering aimed at industrial, as well municipal customers.

Furthermore, this deal with EDF related to Dalkia has accelerated the repositioning of our group in the most dynamic markets since we now hold 100% of Dalkia overseas. These international operations, i.e. in Central Europe, North Asia, North America and the Middle East, are already recording far higher profitability than France and also benefit from far higher growth rate. This deal has mutual respect to the group's debt, and it is expected to be closed once the antitrust authorities approve it in H2 2014. But already -- so you can understand the impact on our group, Philippe Capron, in addition to the traditional results, will talk about the main financial and business aggregates on a pro forma basis, i.e. without Dalkia France and 100% of Dalkia International.

There you are. That was 2013 in a nutshell. To conclude and before giving the floor to Philippe, I'd like to give you an overview of our objectives for 2014. 2014, in line with late 2013, will see us renew with growth, in particular in growth in income, growth in revenue, first of all, thanks to our growth platform. We've already discussed this issue several times with you, but also thanks to our renewed commercial policy and new contracts we have signed.

Adjusted operating cash flow, above all, were increased by around 10%, then cost savings already carried out will have their full impact and will be enhanced by the cost savings we will record in 2014. In 2014, we expect adjusted operating cash flow to grow by around 10% on the basis of the exchange rates prevailing in early 2014. Thanks to this growth in adjusted operating cash flow, adjusted operating income will also grow significantly. The same will apply to cash -- operating cash generation.

I'll now give the floor to Philippe to describe these annual results in detail.

Philippe Gaston Henri Capron

Thank you very much, Antoine. Good morning, everyone. So this is the first time I have the pleasure of presenting Veolia's financial statements, all the more happy to do so as these financial statements are at significant stage in the group's turnaround and are therefore extremely positive. Do be tolerant with me, please, because this group is complex, and I have to admit that I don't quite grasp all figures for all business lines. But don't worry, I'm working on that. I'll get there.

So on this first slide, you can see the main aggregates, revenue up to 23 -- EUR 22.3 billion; adjusted operating cash flow, EUR 1.8 billion, so a slight decline in both cases. However, adjusted operating income surged 15%, and adjusted net income increased by a factor of 4.

Our net income was -- posted a decline because of nonrecurring items that I will talk about later on. So a slight 2% decline in our revenue at constant consolidation scope in foreign exchange rates but excellent momentum, as Antoine talked about, in particular, in terms of Water, where we record a 0.6% increase despite the pressure we're facing in some countries when renewing contracts.

Works in Water declined significantly, down 7.5%, but their rebound has already taken shape since our order book filled up significantly in 2013. So we are certain that revenue in this activity will increase in 2014. Environmental Services were hit by the impact of the economic environmental decline in revenue but held up thanks to some really robust markets. Prices and volumes have tended to flat and now stabilized during the year.

Energy, lastly, as you can see here, where it mostly covers Dalkia France, declined slightly, 1.1%, because of gas cogeneration impact, above all.

Adjusted operating cash flow declined slightly from 2012. The main items accounting for this decline are analyzed division by division in the following slides. Adjusted operating income surged, as we said earlier, from 2012. So this adjusted operating income includes also the profits booked by Dalkia International, as well as the substantial operations in China. So this income increased significantly despite the decline in adjusted operating cash flow, thanks to cost savings, in particular at Dalkia International, but also thanks to the fact that the provisions booked last year, surrounding [ph] Italy in energy, were not renewed in 2013.

In Water, I've already said the crucial development

is the fact that we have renewed with organic growth, but in fact, in France, we are still hurt by the effect of contract renewals and declines in volumes. So we're down 2% in France but up 3.2% outside France, in particular, thanks to our excellent operations in Eastern European countries. So works, as I said, have also declined last year but will pick up again this year. As for operating cash flow in Water, well, it moves in line mechanically with the trend in revenue.

There's also an excellent performance to be noticed in Water, with operation up 1.1% mostly because we're starting to benefit from the cost-cutting efforts that are gradually taking shape in our operating accounts. Adjusted operating income declined slightly because of the increase in our provisions and because of administrative expenses in Water and the loss of some contracts outside France.

In Environmental Services, the year was, once again, tough. Obviously, this business line is highly sensitive to the economic environment, in particular, industrial production. But its improvement kept its pace throughout the year. As you can see here, on this line [ph] , the momentum was percent positive, although we are still facing pressures on volumes and prices. But this led to a leveling out at the end of the year.

If we look at the situation country by country, overall, we can see that there's a contrast between France and, above all, Germany, where the year was tough; and conversely, the excellent performance of Environmental Services in the U.K., thanks to PFI contracts, as well as Australia. All in all, adjusted operating cash flow declined 4.6% as the efficiency gains did not offset the constant consolidation scope effects, as well as the other effects I talked about earlier. But there was a 16% increase in adjusted operating income because 2012 have been hurt by Marine Services in the U.S.A. and operations in Italy.

In energy, there's not much to be said apart the fact that the end of the cogeneration contracts, a major development, had a negative impact on our revenue in France, as well as our operating cash flow. Conversely, adjusted operating income, that includes the results of Dalkia International, surged because Italian losses in 2012 were not repeated.

If we look at Dalkia International, their financial statements, we can see that at a constant consolidation scope, revenue remained flat, as well as operating cash flow, if we restated for the provisions. There's also a significant decline in our CapEx, down by EUR 100 million. That shows the efforts achieved by these business units, as well as others.

In Dalkia International, once again, we suffered, from an economic and regulatory context that was difficult for us, with electricity prices that were very low, regulatory constraints. And we are net purchasers of CO2. But that was largely offset by our productivity gains, as this is the case everywhere in the group, and the starting up of major industrial projects supported by a dynamic commercial drive.

Now going from operating cash flow to adjusted operating income. Well, that doesn't require any particular comment. We already alluded to this. And what I said earlier, there is -- in terms of amortization and capital gains, these figures are comparable to last year's. The main change is the contribution of the joint ventures, in particular, Dalkia International, because of the Italian operations, basically. But as Antoine said earlier, if we correct that effect, the recurrent -- adjusted, sorry, operating income would have increased by 5%.

Now to go from adjusted operating income and just on what Antoine said, well, there's the drop in financial charges, around EUR 100 million. And that's what makes it possible for us, on the basis of a rising adjusted operating income, to have a major rise in adjusted net income.

Now why did the financial cost go down? Well, the debt went down over the year, and it -- financing became a bit less expensive, although that was offset by the fact that because of the disposals, we had a bit more cash through the share buybacks. So therefore, we didn't fully benefit from the debt -- in terms of the debt reduction, but we think that over time, the effects of it will be -- will become more sharper.

We are really attached to our high rating that we have with S&P and Moody's, and we will do our very best to deserve the trust of the rating agencies, which makes it all the easier for us to access money markets.

In terms of the tax rate, I have little to say. We pay taxes, although globally, we are running a deficit. So the structure of the group is rather ineffective, and this is something that we are working on. We think that an improvement can be made to our structure, thanks, in particular, to the new geographical structure of our group.

Let me come to the nonrecurrent elements that marked the end of the last year. First of all, we had to base an impairment. There are so many activities in Veolia that each year, we had to adjust certain items. Here, we have the significant impairment test on Environmental Services in Germany. As the new CFO, you can see that I tried to run through this with a fine-tooth comb.

And then clearly, there was some improvement that we made in Germany in the value of the other assets, on the right side, so therefore, in Veolia. So therefore, I hope that this will serve to be free [ph] . When it comes to Environmental Services in Germany, there was worsening in the market conditions in Germany, which meant that we had to address value. However, we set up a recovery plan and restructuring plan.

We can clearly see that we will return to growth and that we are confident that on the basis of the new value of -- decreased by EUR 150 million, that capital employment activity will bring us what we can call normal profitability. Something that Antoine referred to now is that we went EUR 100 million -- EUR 140 million in restructuring charges.

The main aspect is the EUR 97 million in involuntary departure plans regarding France. That is investment for the future because that will serve to increase our productivity and our profitability tomorrow. Our accounts reflect the difficulties with the SNCM. All in all, SNCM were -- costs around EUR 55 million to our account this year. We hope that, that will be the last year that, that will happen.

Now when it comes to our situation with Transdev, we would like gradually to leave transport. We think that the Caisse des Dépôts agrees with us. They would like to take over Transdev. That operation was delayed because of the problems in the SNCM, but we have high hopes that as soon as the SNCM no longer is a problem, we will be able to resume our dialogue with Caisse des Dépôts and achieve an agreement and conditions close to those of the previous agreement so that we could no longer control Transdev.

When it comes to the SNCM, I think that you have followed the different events. What's important to note is that in Transdev, Veolia and the Caisse des Dépôts agreed. They had a common position. Transdev reaffirmed that they would no longer finance the SNCM, that the current recovery plan -- the SNCM recovery plan is not credible. We would not take part in financing new vessels. In fact, we voted against that idea 3 days ago with the Board of Directors of SNCM. When I say we, I mean Transdev. But the state abstained. So therefore, the resolution wasn't carried.

So we think that it's reasonable to renew the shareholding of that company. And perhaps, renew the legal framework in order to protect that company against the recurrent threat of Brussels stepping in and levying fines, and we're sure that's inevitable. So that's the only solution for that, for the SNCM. At any rate, we said that we do not want to remain shareholders, and we would invest no new money in the SNCM.

Now just a quick word. Antoine referred to this on investment. When you look at the gross figures, they're down sharply when we compare that -- when we do this -- compared this on a like-for-like basis, there's a decrease of EUR 300 million, which is quite significant. And that goes to show you that the discipline set up by Antoine Frérot and François Bertreau bore fruit this year. We -- our businesses are learning to live with a more selective CapEx, more focused on the most profitable investment.

Antoine will sketch out the framework for that work of selectivity in targeting EUR 300 million. Therefore, it's a considerable effort. And that helps explain why last year, we came up with a free cash before disposals, free cash flow, which is still modest, EUR 90 million. That's far from our objective, which is within 2 years, we want to cover all of the dividends that we distribute, thanks to the cash generated by operation not counting this divestment, and then that should be covered by our net income.

And that's what we're working on pursuant to our plan. But last year, our adjusted operating cash flow covered investment financial charges and taxes with a small surplus. Debt reduction was enabled, first of all, by disposals and also by the hybrid accounting treatment that we came up with a very significant investment, EUR 2.6 billion, reducing the debt to EUR 8.2 billion, which is really at the lower end of the range that we announced at the end of the year. And that will help us to strengthen our ratings and the trust of the market.

Just one last thing regarding 2/27/2013. We reprocessed the figures to put them in the presentation, which I hope will soon be ours, thanks to the closing of Dalkia's operations. In the figures, you have all Dalkia International and you no longer have consolidation of Dalkia France. So on that basis, we will have revenue, which -- only 1/3 of which will be French.

Our adjusted operating cash flow of EUR 2.4 billion are 3% up at constant scope and FX, and that's what we're aiming at. If there has been a strategic motivation for our Dalkia operation, it's that our growth profile will become more dynamic, thanks to that operation. So that calculation strengthens our conviction that 2014, as Antoine said, will be a year of return to profitable growth. Thank you.

Antoine Frérot

[French] Thank you, Philippe. Let me turn back to the new prospects. Let me just briefly give you our objectives, our figures for 2014. I will look at the different prospects for 2014 and beyond, profitable growth that is, and what our new Veolia will look like.

First of all, you will find on this slide the main strategic objectives that we've set ourselves. You are already familiar with them: first of all, to focus our resources on the main environmental issues facing our plan, where we can really bring added value, where we can really make a difference, and where we can address markets with volumes and values, for example, treating the most difficult cases of pollution solutions given the growing scarcity of energy, water and raw material, so the management of major complex services for the biggest cities. Secondly, to increase up to 50% the share of our activities with our industrial clients that are already in our portfolio; and to reach 50% of the same revenue on growing markets -- key growing markets.

That growth will come from 2 different areas. First of all, those who aren't yet our customers or are not big enough customers, both in the private sector and the municipal sector. Since July, with our new organization, we have identified our prime commercial development targets and set up the human resources that we need in order to address those markets systematically. Those priority markets with a high-growth potential were selected. I'll come back to them in a few minutes.

Around 40 ideal targets within those priority markets have been identified and addressed actively. And the contracts that we signed a few weeks ago concern those very priorities. I said that those contracts were -- we signed a few weeks ago or a few months ago. We signed them for -- to the tune of EUR 7 billion in the backlog. I show that on this slide.

These are contracts that we could not have signed just 3 years ago. So this really bespeaks the change in our company. And then we explained this -- what this change consists of, but we will not abandon our traditional markets. And let me begin with them, our traditional markets -- our traditional models: concession, which have really held up very well over the last few years. Even we if we had, significantly, to lower our prices, we renewed many of the contracts that had lapsed, and especially the biggest ones for 2013, Marseille and Lyon, in particular.

We have [ph] opportunities, for example, in Warsaw in energy, in Britain for Environmental Services, or in Sofia, Bulgaria for Water. But those opportunities are becoming scarcer and scarcer in our historic geographies, where the model, sometimes, is called into question. And also, this is more risky in the emerging geographies for -- often for legal reasons.

However, although these opportunities are rarer, nonetheless, there are some very profitable ones remaining in our 3 business lines. And we would like to take these opportunities and finance what I call the cream of the crop with our own resources, perhaps at a rate of 1 or 2 per year. At any rate, the group's debt will not go up whatever happens.

So for those who opportunities that we find really interesting, but which we won't finance ourselves, what I call the cream but not the cream of the cream. Our reputation, our know-how, our track record will bring in more and more financial players, particularly infrastructure investment funds, whose demand in terms of profitability are now compatible with the fact that the group can keep the fruit of its work.

In other words, they finance, we operate on the basis of long-term contract. We will, of course, intensify that approach. We -- that's taking the operational control, a few weeks ago, of heat networks in the Netherlands.

Let me now come along to those who are not yet our customers. Here, you have the 7 priority markets that we will focus our growth efforts on. As you can see on the right, each of -- in each of this field will represent a large market, several billion, even tens of billions of euros in some cases. Most of these markets are not new for Veolia. We have technology.

We have expertise, know-how and references of these markets. And in fact, at times, we are the -- in some cases, we are the leaders in some of these markets. But what's new is that our fields of expertise are now becoming a sort of differentiation in the value creation for the market players. And our -- therefore, our skills have become strategic for them. For example, between the -- in 1 century [ph] , the cost of raw materials, measured by McKinsey's commodity price index, went down by half in the century [ph] . Since the year 2000, in just 13 years, it went up nearly threefold.

So to de-correlate -- decouple economic growth and the consumption of raw materials, the circular economy will become essential. Another fact is that the mining industry is the second -- the biggest water consumer in the world. It's equivalent to the domestic water consumption of the entire United States. 70% of the 6 major mining companies are -- their projects are located in regions where there's a major water -- hydric stress. Therefore, their economic performance will depend on their ability to limit or even to avoid any consumption of water from the natural environment.

These changes, which are occurring in a big way, mean that our know-how in terms of pollution control, in terms of resources, will become elements that will provide some competitive edge for the industries of oil and gas, agri or food and mining.

So therefore, Veolia will be entering a world that's unknown to it, strategic partners with these new major industries to cover all of their environment concerns, their concerns regarding access to raw materials and their very accessibility to the local populations in the countries in which they work. Now is the time for -- to strike those priority markets because now's the time when they are going to take up.

Let me give you some quick example. You all know the water problems with shale gas. That, in fact, was the point of the major companies within Australia last year. Things are even worse for oil. So Shell has entrusted us with a major contract to eliminate all water pollution around these operations in Canada in order to reach performance close to 0 liquid waste in the natural environment. For Shell, what they want to do is to make sure that its operations are secure and continuous.

Another case is Diageo, which is one of the biggest whiskey producers in the world. First time for a long time, they decided to build a new large distillery. And to guarantee the economic efficiency of that, they asked Veolia to drastically bring down its energy bill by providing almost all of these to the -- in biogas by doing away with elimination of distillation waste and by recycling all of the water used in their distillery process. And that's to avoid drawing water from the local water table.

A third example, dismantling as an activity, i.e. dismantling oil rigs, in particular. After 40 years of operations, 2,000 rigs will have to be dismantled over the next 10 years in the North Sea, in the Gulf of Mexico and in Southeast Asia. Such dismantling could have a very highly negative impact on water. It's also very dangerous for the teams that have to carry out this dismantling.

Moreover, dismantling is extremely expensive for the owners of the platforms, and costs could be slashed because, in fact, 98% of the materials used in these platforms could be recovered. Veolia was recently entrusted with the task of dismantling 11 such rigs in the North Sea and the Gulf of Mexico. Problems faced in dismantling oil rigs are similar for trains, submarines, old plants, nuclear plants or electronic devices -- electric devices.

This dismantling market is just starting up. It will have to be carried out in such a way that danger in pollution is avoided, and our group is ideally positioned to seize the best opportunities.

Let me give you the last example, in respect to our municipal customers. A lot of cities don't want to delegate their utilities that need our cutting-edge expertise. It's the case in many countries, including France, sort of municipality-owned companies provide 90% of water and heating services throughout the world.

1% to 2% out of 90% is about 10% or 20% of the market we can gain access to. So we can use our expertise, and we're doing that very quickly in the United States. So this slide shows our latest success story, Washington, after New York, Pittsburgh, Winnipeg or L.A.

And this model, in which high value-added services are segmented, does not require any investment but just entails different kinds of remuneration, different from those of our more conventional markets. We will not -- remuneration will not depend on volumes, like in concessions or countries [ph] , but just like with our contracts with industrial customers, the remuneration will come from a sharing of the benefits that have been achieved. And we will roll out this model in all the markets in which we operate for our public service customers.

In other words, after 2 years, we can now say the strategy we announced in late 2011 has been implemented. Veolia has been transformed. We had announced several objectives, and we have walked our talk. In some cases, we've actually exceeded these objectives. We are now positioned in an optimal manner in the Environmental Services market and its most interesting segments. So we'll work with [indiscernible] for the last 2 years allow us to announce that we will renew in 2014 what's selective, profitable and sustainable growth, in particular, in terms of our profitability.

So once again, I'm going to show you this slide that sums up our 2014 objectives. So we will write black ink once again in 2014 in Veolia in terms of revenue, but also operating cash flow, where the cost cutting already implemented will enable operating cash flow to come in around 10% in 2014, with the subsequent impact on adjusted operating income and on cash generation.

Accordingly, of course, we confirm our 2014 dividend in respect of the 2013 fiscal year that will be EUR 0.7 per share or can be paid in shares according to investors' choices. The 2014 outlook I've just described makes it possible for us already to announce that in 2014, we will -- in 2015, we'll have a dividend like -- that will be at least as high. And as of 2015, our dividend will be covered by net income and will be paid by free cash flow, excluding divestments and adjusted net income.

We will now have a Q&A session, and Philippe will help me answer your questions.

Question-and-Answer Session

Operator

[Operator Instructions]

Unknown Analyst

I'm from Credit Suisse. I'll have 2 or 3 questions, please. First is the capital [ph] . You talked about making severe cuts in the financial situation of the group. So the risk of write-downs, therefore, would be 0? My second question has to do with debt. When you're talking about 2014, you didn't talk about debt per se. What do you think will be the situation in 2014? Maybe you're going to make some additional divestments or not. The third question, in respect to the dividend. The 10% growth in EBITDA you're forecasting for next year, what are the assumptions in terms of GDP volumes so forth that enable you to talk about 10%? Lastly, if I may, Mr. Frérot, you talked about the dividend being EUR 0.7 at least. I heard you correctly, didn't I?

Antoine Frérot

Yes, you heard me very well, at least EUR 0.70. I'll start off with your question on debt, and then we'll talk -- we'll answer your EBITDA operating cash flows next year. Around EUR 8 billion, I believe, we can say that deleveraging at Veolia has been more or less completed. And quite obviously, we're not going to increase that debt once again. We're not going to end up in the same trap as we struggled so hard to get out from. We don't intend either to try and reduce the debt significantly. Any strategic investment, i.e., a significant amount, if it is not covered by free cash flow, will [ph] lead to a trade-off in terms of assets within the group. But at close to EUR 8 billion, Veolia debt, in my opinion, is at a satisfactory level. With respect to 2014 and our operating cash flow, your question was...

Unknown Analyst

[French]

Antoine Frérot

The assumptions, yes, of course. First assumption has to do with FX. We are not caught in a scissors effect because we are paid in the same currencies as our cost, but then, of course, FX effects do impact on our income at the end of the day. So in December 2013, we drew on exchange rates prevailing in late 2013, early 2014. As for the economic environment in Western Europe, we assume it's not going to change radically, and that has been the case, in fact, in January. In other words, the economic environment will more or less be the same as in H2 2013. And in other areas, the trend will be quite similar to 2013. And that leads me to say that growth in operating cash flow will result, above all, from cost cutting and then from what we call our growth engines, i.e., activities that are growing structurally in Central and Eastern Europe, British PFIs, and the new contracts we've just signed. But it will not result from an improvement in the business environment, and we don't expect a deterioration either.

Philippe Gaston Henri Capron

I'd like to add a few points here. You need to understand that this company is changing its corporate structure. Originally, it didn't have in its ADN [ph] this religion of cost cutting, but they're suggesting this change as we grew outside France, but there's also a change in France. And now under the impetus given by Antoine and François, there's now permanent drive to squeeze costs as has been the case in other companies for far longer than has been the case for Veolia. So this drive is not meant to last 2 or 3 or 4 years. But to be permanent, it is meant to occur every -- sort of heart of component of the company. With respect to the debt, EUR 8 billion, we're at ease with such a level. The problem is, in fact, operating cash flow and the need to ensure it grows further. But when we drop our plans, we can be -- we are helped by the fact that the level of debt is perfectly manageable for all the company. We don't need to look -- consider major divestments. Of course, there will always be tactical trade-offs. As for the risk of impairment, I can hardly say we can roll that out. Every cost will depend on operating conditions. But right now, there is no factor of obvious vulnerability that could lead us to say, "Ouch, in 6 months or 1 year, we'll have to carry out such initiatives." I don't want to be overly optimistic, but there is no further deterioration. This will be, above all, thanks to the efforts we've made to curb our operating cash flow and CapEx.

Emmanuel Turpin - Morgan Stanley, Research Division

Emmanuel Turpin from Morgan Stanley. I have 4 questions. A small one about your restructuring program, you talked about the fact that gross gains to be expected according to your plan will be met in 2015. Can you say that for your forecast restructuring cost, i.e. roughly EUR 400 million, has -- that not changed? Or are you expecting additional savings? With respect to EBITDA, second question, you're talking about growth around 10% in 2014 under the current reporting format. There is, of course, the deal with Dalkia. I expect Dalkia International to post higher growth than Dalkia France. That's the whole idea behind the deal. So can we expect more than 10% under the new format? Then maybe you already have a figure for it. Third question, with the intermediary lines in the income statement. Can you talk about the fact that although CapEx remained relatively low, your capital gains on disposals increased, whereas we were expecting 2012 to have been the end of the period of major divestments? So what can we expect in 2014? And lastly, could you talk about overheads and give us some information on that? Lastly, with respect to net income that will benefit from an additional EUR 200 million in EBITDA, according to your answers, will be able to sort of fine-tune our figures. Is that, after tax, your net income should increase quite significantly?

Antoine Frérot

You usually split. You calculate very well. So yes, we need to answer about EBITDA, and you can then look at the income statement afterwards, but it won't be very difficult. There's always uncertainty about the level of tax expense. Of course you have threshold effects in different countries. So we could, for instance, reactivate sort of different tax deferrals or pay additional tax. That's up to you to see. But first of all, with respect to restructuring costs, expenses occurred in implementing our cost reduction plan in -- throughout the plan, yes, we have more or less the same overall amount. I say about EUR 50 million in late 2015. But the pace at which you recognize expenses has also changed because in 2013, we provisioned a larger amount than expected. In 2013, if you remember, we were expecting EUR 270 million in gross cumulative savings and EUR 100 million in implementation costs. In fact, we ended up with EUR 350 million, a higher amount of savings, and we also provisioned a larger amount on the forecast EUR 100 million. So we're ahead of our schedule. With regard to growth in our operating cash flow and capacity, quite obviously, growth will be more substantial in pro forma terms. We are already looking at the group's ultimate consolidation scope at the end of 2014, i.e. including Dalkia International and without Dalkia France. And this projection of around 10% was calculated according to that framework. The other questions, in fact, were addressed to Philippe more to a greater extent.

Philippe Gaston Henri Capron

With respect to amortization and depreciation, in 2013, an IT program in Water France weighed EUR 24 million. Otherwise, amortization and depreciation remained relatively flat. We don't expect any major change the next few years apart from the fact that as CapEx shrinks, obviously, we will start reaping the benefit from that with low investments. As for capital gains on divestments, we have no specific comment to make about 2014. Everyone will depend on the divestment program. But obviously, it will slow down sharply in comparison with 2013. As for interest expenses, they're expected to decline further but at a slow pace, unfortunately, because divestments mean that we are cash-rich. We have more than EUR 3.2 billion at Veolia. And at current interest rates, of course, that hardly generates any income. So interest expenses will decline more slowly than our debt, all other things being equal.

Unknown Analyst

I'm from Natixis. I also have 4 questions. The first, 2 small questions about details. You talked about a sharp drop in adjusted operating cash flow in Braunschweig in Germany. Do think you might end up in a similar situation to BWB? The other question as to Water, too, but outside France, so you talked about taking into account contractual risks in this business line. So what provisions have you set aside? And 2 more general questions. First, could we have an idea of the size of CapEx in 2014 to finish our cash flow statement? And what is your long -- medium-term vision in terms of how operating cash flow is going to grow? The pace you were talking about 1 year, 1.5 years ago, have you changed that -- your forecast? Or do you believe it might actually pick up divestments in 2014?

Unknown Executive

I hope François was here. He's in charge of CapEx. I don't believe I'm wrong, François, if I say that CapEx in 2014 will remain more or less flat in comparison to 2013. Next question, I forgot to show you the slide here. So your question is, do we confirm that the cruising pace, looking beyond 2014, with respect to the objective we set in 2011 will be maintained? Yes. This, of course, assumes the economic environment will not change radically, but yes, we do confirm that figure. Water in Germany, the Braunschweig contract is classified in Water as they came pitching us because of our expertise in water, but, in fact, the contract covers energy to a greater extent than water. 80% is heating network, and 20% was wastewater treatment. So the Braunschweig contract, after recording substantial gains in the previous years, was hit by the cut in electricity prices. Braunschweig's budget will increase in 2014 because their operations generate their own energy. We are, therefore, going to add a boiler -- commission an initial boiler. So we have a forecast of growth in this activity in 2014. We're also taking questions on the telephone. Go ahead.

Operator

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

Olivier Van Doosselaere - Exane BNP Paribas, Research Division

I'd like to understand, first of all, what you mean when you talk about the dividend after 2015, when you say, will be covered by net income and free cash flow, does that mean you're expecting net income or EPS at EUR 0.7 at least in 2015? I suppose we shouldn't expect any risk on the 2015 dividend.

Unknown Executive

When we talked about dividend payout, we're obviously talking, first of all, about the dividend paid to the earlier shareholders, but we also have minority shareholders in some subsidiaries. So generally speaking, we're talking about EUR 500 million, including EUR 350 million, roughly speaking, paid to Veolia Environnement shareholders at the payout price of EUR 0.7. So there, this is why we are targeting free cash flow before divestments and adjusted income -- net income of about EUR 500 million in 2015. [French] Another question perhaps over the phone from Arnaud Joan, Merrill Lynch.

Arnaud Joan - BofA Merrill Lynch, Research Division

I only have one question concerning the bridge, the EBITDA bridge for 2014. You speak of an increase of around 10%. If I remove the Proactiva impact, that's a bit less than EUR 100 million on operating cash flow. Now the cost-cutting plan should have brought in an amount close to EUR 150 million to EUR 200 million. Can you just say sort of how you see things in terms of organic growth and give us some better visibility on what might have an impact in 2014, whether it's waste management or Water?

Philippe Gaston Henri Capron

More details than you, yourself, provided would be impossible because you've already done your homework. However, don't forget that when it comes to cost, there are some cash charges for restructuring operating cash flow charges that will have an impact in 2014. And then there are all the other factors, too. We are still facing what I call a price cost squeeze -- price -- the cost go up. We can't always pass them on to our customers. So therefore, we have constantly to make additional savings efforts, efforts which won't have an immediate impact on the P&L. And that's the whole problem -- that's the whole reason for changing our models and for signing new contracts, as Antoine said. That is to -- we can't be main contenders simply billing our additional cost -- billing our customers, our additional cost. We have additional cost that have to reflect an additional value that we bring in.

Operator

We have a question from Patrick Hummel from UBS.

Patrick Hummel - UBS Investment Bank, Research Division

Three, if I may. First one, regarding your CapEx guidance for 2014, basically flattish, year-over-year, so EUR 1.5 billion. Do you think that's a sustainable CapEx number to achieve the 5% EBITDA growth that you're talking about, medium term, over the cycle? That's my first question. The second question relates to D&A. Do you already have any idea what will happen to the D&A, post- the Dalkia deal as far as the purchase price allocation is concerned? How much could that add on top of the D&A that is within Dalkia International? And the third question, on cost cutting, I mean, you seem to be very well on track to deliver against your target. First, do you think there is even upside to the EUR 750 million number from today's standpoint? And second, when do you actually plan to roll over your cost-cutting target or give additional guidance over and beyond 2015?

Unknown Executive

Well, if you look at the guidance for 2014 on the EBITDA, a cap of [ph] 10% minus Proactiva is 5% actually. So what we have in mind is that the following years would be pretty much sustained, again, mid-cycle. The second -- I mean, in terms of cost-cutting, I mean, let us first achieve this plan. As I mentioned earlier, it will not be the end of cost-cutting. Actually, it's now in the company's DNA. So we will, of course, continue these new plans, but we'll cross that bridge when we get there, and I'm sure that François will set new targets when we have achieved the first plan. And in terms of the Dalkia, it's early days yet. We haven't done the PPA. So it's too early to answer your question.

Operator

[French] There are no further questions from the -- over the phone.

Unknown Executive

Perhaps, we can come back to the room. Are there any other questions from the floor? Mr. Gino [ph] ?

Unknown Analyst

Let me come back to my first question, price volume, the price volume in waste management over the coming months. I know it's very difficult. I mean, you look at this month-by-month, quarter-by-quarter, but can you just give some idea?

Unknown Executive

We already see stabilization, slight recovery, but no spectacular recovery. You speak of 0.1%, 0.2% at the very most. And to the extent that we can see the future in our rearview mirror, that's where we see, so no spectacular recovery in volume terms there, 0 point something. In terms of the price of recycled raw materials, some are higher, some are lower, but all in all, flat. In terms of volumes, it's flat as well, all in all. But that's the way we see things as of January, and March things might change. The recycled materials depend a lot on demand from Asia, particularly from China. And for various reasons, either reasons of economic activity or the ones in different -- we have different storage requirements, this situation can change all of a sudden.

Unknown Analyst

I'm from Morgan Stanley. There's a climate -- unfavorable climate effect on Dalkia International, and if I understood correctly, CO2, cost effective. Can you, please, give us some figures as to how much that cost for the climate or what's sort of resilience there can be in terms of a standardized normal climate? And what about the CO2 effect? Is that a threshold effect, where [ph] there will be a volatility and an upward thrust next year?

Unknown Executive

Well, in 2013, there was a favorable climate effect on Dalkia France, less favorable on Dalkia International. In the early 2014, well, we pray the end of this cold, especially in Eastern Europe. Every day it's cold in the U.S. That's good for us, but we're more present -- we have more of a foothold in Eastern Europe than in the U.S. So that's all we can say for the time being. In terms of CO2, the thing is, if I understood correctly, we went from a company in which we have a net seller situation, which we are net purchasers of CO2 quotas, which cost us around EUR 40 million last year. That has cost Dalkia International around EUR 40 million last year. That isn't such a bad thing after all because we were net sellers of CO2 quotas whether [ph] they were more expensive. And now they are cheaper and we happen to be purchasers. Are there any other questions from the floor? Very well, so I'd just like to thank you for having -- coming here so early in the morning. Thank you for your participation. As you know, the Investor Relations team is in your hands for any questions you might have when you read through our documents. Thank you very much.

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