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Veolia Environnement S.A. (NYSE:VE)

Q1 2014 Earnings Call

May 07, 2014 2:30 am ET

Executives

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

Analysts

Lawson Steele - Berenberg, Research Division

Patrick Hummel - UBS Investment Bank, Research Division

Martin Young - RBC Capital Markets, LLC, Research Division

Michel Debs - Crédit Suisse AG, Research Division

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

Emmanuel Turpin - Morgan Stanley, Research Division

Olivier Van Doosselaere - Exane BNP Paribas, Research Division

Arnaud Joan - BofA Merrill Lynch, Research Division

Philippe Ourpatian - Natixis S.A., Research Division

Operator

Ladies and gentlemen, welcome to the Veolia conference call. I now hand over to Mr. Philippe Capron. Sir, please go ahead.

Philippe Gaston Henri Capron

Thank you. Good morning, everyone. I'm here with some of my colleagues from the finance team to present to you the Q1 earnings of -- Q1 results, I should say, of Veolia.

If you turn to the first slide, Slide 3. We've had a strong start of the year, but with a significant contrast between Water and Waste, which is of course the bulk of our activity, and Energy Services. It's not a big secret. You've heard it reported in the earnings call of our large competitors that we've had a record-breaking winter here in Europe. This has probably been the mildest winter in many, many years, a century is what I hear. And that, of course, took its toll on the performance of our Energy Services or Dalkia business.

If you strip out Energy Services, we did have a strong start because our CAFOP or EBITDA is up 9.6%, which is fully consistent with the 10% growth in adjusted operating cash flow which is part of our yearly guidance.

If you turn to Page 4. You can see that our revenue at EUR 5.7 billion has been flat at constant currency. If you take Dalkia France out, it's actually up 3%. And if you add the perimeter impact, I mean, if taking into account the full consolidation of Proactiva, we are actually up 6%. In terms of adjusted operating cash flow, we are at EUR 547 million. This is up 2.3% at constant currency. And as mentioned earlier, if you strip out Energy Services, we are up 9.6%.

On Page 5, you have the new presentation of our businesses by geography. As you can see, we have a significant contrast between France, the rest of Europe and the Rest of the World in terms of growth.

France is stable, plus 0.3% turnover. This is actually good news because it means that French Water, in spite of the successive price decreases, especially the Lyon and the Marseille contract, which are taking effect this year, we are able to offset the price decreases, thanks to our tariff indexation and additional revenues we derived from our activities. So French Water is stable. French Waste is actually stable as well with volumes which are slightly up, which offsets the negative impact of recycled scrap metal prices, which has continued to slip early this year.

Europe outside France has a very healthy growth, 4.3% at constant scope and currency. That is, of course, thanks to U.K. Waste. Our PFIs continue to ramp up. Some of them are coming online, and therefore, this helps with our U.K. sales in Waste. The same applies to the Central European Water which still has some very healthy growth.

The Rest of the World at 17%, which is actually 26% at constant currency, but that includes, of course, the full consolidation of Proactiva. Therefore, if you strip that out, you're back at 11%, but 11% is still a very healthy growth. That's been driven by our Australian business, our U.S. business, which, contrary to the European business, has benefited from climate, so this has been beneficial because they have had a very harsh winter over in the U.S.

China Waste has also handled itself quite well. And of course, if you add Proactiva, then you have this spectacular 26% increase.

Our Global Businesses is also a matter of contract. Hazardous Waste did especially well. But Veolia Water Services, our construction and engineering business, is still lagging a little bit, and this is partly due to the calendar effect last year in Q1. The construction of the Hong Kong sludge factory was in full swing, therefore, benefiting our revenue. Whereas, this year, we've harvested a large number of contracts, but they are -- not all of them have kicked off as early as we thought. And therefore, we are still expecting the impact of this new contract which should materialize later this year.

And then, of course, as mentioned, Dalkia France is down 20% which is due -- which is a mixture of the end of gas cogeneration contract, which was expected, and the climate impact, which was not.

If you turn to Page 6, you have the traditional presentation of revenue with Water, Waste and Energy. As you can see, Water is up -- is slightly up, 1%, at constant scope and currency. It's actually 2.6% for operations and minus 2.6% for Technology and Networks for the reasons indicated.

The good news comes from Waste, which is up 3.3% at constant scope and currency, therefore, including the positive impact of the large Proactiva waste business. And this 3.3% is driven mostly by a volume increase of 2.8%. So it's, of course, too early to see this as a sign of a stronger industrial recovery worldwide. But in the geographies where we operate, more of course outside of Europe than in Europe, we still see some healthy growth in the waste volume handled, which is certainly good news and something we haven't seen for some time.

Energy Services is down 14%, and that's a mixture of the positive trend in the U.S. because of the climate -- of the harsh climate there and the negative trend in France due to the mild winter.

On Page 7, you have a list of our recent commercial successes. We've harvested some very large contracts over the past -- or in the early months of this year. They've all been advertised separately, but they show that the new commercial policy we are pursuing is showing some successes.

On Page 8, we discuss our adjusted operating cash flow. The CAFOP is up 2.3%, with of course, as mentioned, a significant drag from the Energy Services business in France, which is down 23%. But if you strip that out again, we are up 9.6% for Energy and Waste.

The highlights of this positive evolution is, first, the stability in French Water. As you've seen, we've had a stable revenue, but we've been able also to offset the natural increase of some of our cost, thanks to our cost-saving programs and efforts. And this is working well, therefore, we have a stability in French Water. We've had a stability -- a slow decline in French Waste, actually, because of the price of recycled materials.

Another very significant trend is the turnaround in German Waste, which we are now able to confirm after 1 good quarter. We can -- we start seeing the positive impact of the restructuring which has taken place there. On the other hand, in Germany, we had a negative evolution of Braunschweig [indiscernible] contracts because they are mostly not Water, but Energy, and therefore, they have been affected by the climate on heat and the low electricity prices for the electricity we co-generate and sell.

We've had a strong performance in the U.S. First, there was a calendar impact, of course, because marine services weighed on our results last year, but still, thanks to the climate in particular, but also thanks to the good behavior of our other businesses, we've had a good start of the year in the U.S. And the same applies to China, thanks to stronger Waste activities. Overall, we've continued our cost-saving programs, the -- with good progress for the first quarter because we are able to show a EUR 62 million cost reduction achieved early this year.

If we looked at the business with our traditional glasses, we would observe a slight decline in the CAFOP of Water, but that's mostly due to contract [ph] and energy, and a solid single-digit growth in Waste, high single-digit growth in Waste. It actually would be a double-digit growth in our Waste CAFOP if we included Proactiva.

On Page 9, we discuss our adjusted operating income, and this has been impacted by 2 main items. One is Dalkia International. What has been true in France in terms of climate has been even more true in Central and Eastern Europe. Therefore, in the Czech Republic or Poland, we've also suffered from the mild winter. And as we equity account at the level of the adjusted operating income of Dalkia participation, this has had a negative impact of about EUR 30 million, our share of the impact. The other negative factor is just an accounting quirk, and it is due to pension reversals. Last year, if you may remember that we canceled our so-called golden -- so-called -- or pension plan for the senior executives. This had a EUR 40 million positive impact last year. We continued to clean up our various pension programs this year, but it had only a positive EUR 8 million impact, and therefore, there is a EUR 32 million difference when you compare quarter-to-quarter. But overall, we are very happy with the performance. And at the level of the adjusted net income which, as you know, we don't publish on a quarterly basis, we are actually up compared to last year, thanks to lower finance cost. As we have less gross debt, we, of course, pay significantly less financial expenses, and we also have less minorities because the headwind which we've had this quarter has been mostly on Dalkia, which, of course, we share with EDF, and therefore, we don't have the full impact of it.

On Page 10, you have some elements regarding cash generation. First, we continued our CapEx discipline, with a 10% decline in terms of gross CapEx for the quarter. We continue to do what's needed in terms of maintenance, but we continue to be extra selective in terms of growth CapEx.

The free cash flow for the quarter is negative EUR 400 million, but that's the usual seasonality of our capital requirements. It's actually a better performance than the one we had last year, where it was negative by EUR 560 million. So that our financial debt is slightly up at EUR 8.55 billion. But of course, significant -- compared to the close of last year, of course, significantly down quarter-to-quarter given the disposal which took place last year.

On Page 11, just a slide not to forget our beloved business in maritime services between Corsica and the continent, SNCM. There is actually no real change to report since our yearly earnings presentation where there had been no change in the shareholder structure. Funding of the current activity, as you know, has been provided since the start of the year directly by the French government, and we certainly refuse any notion of new financing from either Transdev or Veolia this year or at any time pending a complete solution of this issue.

On Page 12, we are reaffirming our 2014 objectives which, I'll remind you, comprise a return to revenue growth; a growth in our adjusted operating cash flow at constant exchange rates around 10%, and as you've seen, our Waste and Water business are on track to achieve this early this year; a reduction in our financial expenses; a significant growth in adjusted operating income; and significant growth in adjusted net income.

We actually had a budget in Water and Waste for the beginning of the year, which is what is underpinning our belief that we can actually deliver the guidance in spite of the shortfall in Q1 of our Energy Services business. But I assure you that plans are being implemented both in Dalkia France and Dalkia International in order to offset at least some of that shortfall of the early year, and of course, we're praying for a very harsh fall to try and return to the mean climate-wise.

We also reaffirm, on Page 13, our midterm objectives. I won't bore you through reading them, but the slide is just a copy of the previous one, so nothing has changed. Our key objective remains that by 2015 we would be in a position to actually generate enough net earnings and enough cash to fully cover the dividends paid to the shareholders and to our minority partners.

So that was it in a nutshell. And with the team, I'm now ready to take your questions.

Question-and-Answer Session

Operator

We have the first question from Lawson Steele from Berenberg.

Lawson Steele - Berenberg, Research Division

It's Lawson Steele from Berenberg, as you just said. A couple of questions if I may, please, Philippe. First of all, can we have an update on cost-cutting, perhaps an update on where you are with the union negotiations in France and how the staff culture is responding to the new hierarchical structure? Secondly, you said that targets for 2014 now are confirmed at constant exchange rates. Could you perhaps tell us where they would be if today's exchange rates prevailed? And thirdly, do you see -- have you seen or do you anticipate any recovery in pricing power, please?

Philippe Gaston Henri Capron

Thank you. In terms of cost-cutting in France, and I emphasize in France because actually we're cutting cost everywhere and we are trying to streamline, or rightsize our staff everywhere. But we are, for the French water business, the union negotiations have started, they are underway. We are well advanced in the process. As you know, this is, in France, relatively cumbersome. You have to make sure you dot every I and cross every T in order to avoid being thrown back to square one by a judge. But it's doable and we are doing it. And we should see the first departures taking place by year end as planned. We have also in mind another such move which could affect our European headquarter, the European -- the headquarter in France as well. This is in the works. In terms of targets for 2014, with or without external -- I'm sorry, with the currency impact, I mean, clearly, we're a bit down today, especially due to the strength of the euro vis-à-vis Eastern European currencies. I don't have at the top of my mind what the currency impact would be, but I guess it could be a couple of percent if the currency -- if the exchange rates remained what they are today. And I'm sorry, I couldn't take note of your last question.

Lawson Steele - Berenberg, Research Division

Yes. The -- actually, on the first question was -- the second part was, if you could give a comment on how staff culture is responding to the new hierarchical structure?

Philippe Gaston Henri Capron

I guess positively. I mean, it -- this may be due to the fact, as you know, that 50 out of the 100 top executives we had 2.5 years ago have left. So the people who were not so happy with the current -- with the transformation of the business, and in any transformation, you have people who will feel that their job is becoming less interesting, all left. All the others, the ones who have been empowered by the disappearance of the division and who now report centrally, and therefore, have more autonomy, because they report centrally to the global headquarters, I guess are very happy. I'm not a good judge of this because I've been with the company for only 4 months now, but I sense a lot of enthusiasm and a lot of energy unleashed by the new structure, first, again, because of the direct reporting to the headquarters and the direct link with the headquarters function; second, because of the ability to cross-sell across the various business lines. And then some of our operational people are eagerly awaiting the closing of the Dalkia deal, so that they can start expanding this not just across water and waste, but also across Energy Services, which makes a lot of sense, especially vis-à-vis industrial clients.

Operator

We have a new question from Patrick Hummel from UBS.

Patrick Hummel - UBS Investment Bank, Research Division

Yes, Patrick Hummel at UBS. Three questions, please. First one, regarding the Dalkia business. Are you able to quantify for both Dalkia France and Dalkia International the weather impact? How would have Dalkia looked like if Q1 would have been a normal weather or normal winter? The second question, you said that you tried to mitigate the weak Dalkia quarter and then you're looking at plans to offset the weakness you have experienced there. I guess we are talking about additional cost-cutting. Would that mean that you will try to pull in cost measures that may be part of the 2015 cost-cutting target or would that potentially be additional cost-cutting measures over and beyond what is included in your 2015 plan? And the third question, can you just be a bit more granular in terms of the Waste volumes? You said 2.8% up across the board or overall on average. How would that split between EU and non-EU and maybe by country?

Philippe Gaston Henri Capron

Okay. So for Dalkia France, the impact of climate is about half of the revenue shortfall. We have a revenue shortfall of about 20%. And about half is due to the end of cogeneration, half is due to the climate impact. In terms of CAFOP, more is due to the end of gas cogeneration than to the climate, but still, the climate impact has been sizable. For Dalkia International, it's, of course, all due to climate. And there, the impact is large as well because the impact for our share has been in excess of EUR 30 million. The measures -- and that's, again, not to -- that's just the impact on Q1; we don't expect any significant impact beyond Q1. We are planning to offset part of this, as I said. It's a moot point to know whether those are measures which would have taken place anyway in 2015 and are being brought up or whether they are additional measures. It's a mix of all of them. It's taking a hard look at our maintenance programs, taking a hard look at any new expenditures which we would have had, trying to reduce headquarters costs even further ahead of the split with EDF. It's a variety of measures. There's no large single measure. But overall, for Dalkia International, we are targeting EUR 30 million for the whole business, not just our share, of course, but EUR 30 million of additional cost-cutting on top of the existing programs. For -- in terms of waste, what can I say? We've had -- I mean, it's a -- the municipal, I mean, some figures which we have, the municipal volumes we've collected in France are up 4%. Commercial and the industrial collection is stable on the other hand, that's still in France. Incineration is up 1.5%, but landfill down 13%. And outside of volumes, the main impact has been the raw materials prices, which has continued to be down, for metals especially. Paper rates is slightly up. In the U.K., we have similar indications which are: municipal volumes, plus 2%; commercial and industrial, plus 5%; incineration volumes, plus 18%, but of course, that's with the new PFI in operation in Staffordshire; and landfill, down 20%, with the closure of 2 landfills joined this quarter. In Germany, it's been a mixture of volumes which continued to be down, especially for papers where we have a large share of the market, as you know, but this is offset by paper prices which have gone up significantly so that, overall, it's about flattish. But I mean, Europe is still nothing to write home about. It's been mostly out of Europe, especially in Australia, that we had a very encouraging volume growth.

Operator

We have a question from Martin Young from RBC.

Martin Young - RBC Capital Markets, LLC, Research Division

I'll just stick with 2 questions so everybody else gets a chance. The first one is in relation to your cost-cutting program and how that might look slightly different as Dalkia France exits the group and Dalkia International enters the group on a fully consolidated basis. Maybe you could just tell us how that EUR 750 million might split up or whether that EUR 750 million might even be a different number? And then secondly, I see from the appendices to the presentation that you've done a bit of a matrix that maps the old divisions to the new divisions. I just wondered when we're going to get that information for each of the quarters of the year, and when we will get EBITDA, EBIT and CapEx for those new divisions as well on a historic basis?

Philippe Gaston Henri Capron

Okay. On the cost-cutting figure, you're absolutely right, will be adjusted when we have the exact separation date between Dalkia France and the rest of the Veolia businesses, so we'll have to provide you with data then. It really depends when we -- when the separation takes place. We -- which brings me to a question you did not ask, but I will try to answer nonetheless, which is, when do we actually close the Dalkia deal? We think there is still a good chance this could occur soon, and that the European Commission would give their go-ahead to EDF because the Veolia part of the deal is a relative no-brainer. And that part, that does not -- we do not anticipate any difficulty there. The EDF part is a bit more complex, and therefore, we are not absolutely sure that the European Commission will give them a Phase I agreement. If they did, which we'll hope because we have a fully aligned interest with EDF there in closing this deal quickly, then they -- maybe we could hope to close in the early Q3, very early in Q3. And if not, that still means a year-end calendar, a year-end closing date. In terms of providing more details on our earnings both by geography and by the traditional divisions, as you know, this is an information which we provide with the half yearly, and of course, the yearly earnings, and so far, we have no plans to change the way we operate. So you'll get more information on the CAFOP by geography and by the old divisions just 3 months down the road.

Operator

We have a question from Michel Debs from Credit Suisse.

Michel Debs - Crédit Suisse AG, Research Division

I would like to go back, please, to the Waste volumes. You indicated at group level, they have grown by 2.8%. Could you please break this up in the scope effect, i.e. the Proactiva consolidation, the new capacity coming online, so that we can understand, out of the 2.8%, what is the underlying growth in volumes? The second question is in Water. What kind of volume trends have we seen in Water? And my third and last question will be on the balance sheet and cash flows. You have made progress on free cash flow generation, but it's still minus EUR 400 million. Where do you think you will end up at year end? And under how much pressure are you from rating agencies on the credit side to either do a hybrid bond or sell more assets, and what is your game plan there?

Philippe Gaston Henri Capron

You're welcome, Michel. That's more than 3 questions by my count, but I'll try to answer them all nonetheless. Well, first, on the Waste. The 2.8% does not take any scope effects into account. With the scope effect -- the 2.8% corresponds to the 3.3% revenue increase in Waste. If we added Proactiva, it would be much more than 2.8%, so there is no scope there. Second, in terms of Water, we continue to observe the main trends. I think Water volume was down 1% in France in the first quarter, and I -- similar figures are observed all over mature countries, including Central Europe where we also have the same trend of about 1% yearly decline for Water consumption. The exception, of course, there is China because, as you know, our Chinese concessions, which are not consolidated, and therefore, fully reflected in our accounts, do have significant growth of about 3%, which is due to extensions, geographic extension of those concessions over time. In terms of balance sheet and free cash flow, I mean, the increase, that is seasonal. We observe it every year. We actually had a slightly better performance in terms of working capital requirements increase this quarter than in the previous -- the similar quarters of the previous year, so we are not worried. We do not -- I mean, we have an ongoing dialogue with the rating agencies. And so far, we don't have any significant pressure on their part for us to, for example, issue a hybrid bond. I mean, we'll discuss the situation again now that we've published our earnings, but I do not anticipate such a pressure. And where we'll end up in terms of balance sheet will depend on mostly on the perimeter variations which we'll have. I mean, we have a series of small disposals, small by Veolia standards, underway. Whether we close those disposals before year end or not will be probably the main driver of our net debt. But the order of magnitude should remain about what that was at year end last year. Probably, if we succeed in closing some of those sales, a bit below.

Operator

We have a new question from Nathalie Casali from JPMorgan.

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

Firstly, I wanted to ask you about the cost-cutting programs. And so on the EUR 750 million target, I just wanted to understand whether this is stated before cost inflation, and if so, what do you estimate cost inflation to be on an annual basis for the group? And the second question is on the revenue growth target from 2015 of 3% or more, what is the CapEx, net of disposals and acquisitions, that you think you need to deliver this?

Philippe Gaston Henri Capron

Thank you. Well, first, the EUR 750 million target of cost-cutting is before cost inflation. Cost inflation worldwide is difficult to calculate because, of course, the inflation rate varies greatly from country to country. But overall, it should be somewhere around 2.3%, probably closer to 1.5% in countries such as France and up to, I don't know, 7% in China. It is, but you have to be reminded that this is half offset to in many of our businesses by price indices. So some of that cost inflation, we are in the position to pass on to our customers, especially our municipal customers with long-term contracts. In other cases, the way we pass it on, of course, is to include it in the price of our bids. But we are not in a -- I mean, compared to other industrial companies, we are not fully exposed to -- I mean, we are not fully unable to pass on those price increases on to our customers. So a large part of our cost-cutting effort, indeed, just offsets cost inflation. But part of it also goes down to -- for a durable increase of our bottom line. In terms of CapEx net of disposal, our objective is to remain, this year, at least that's what we had in the budget, at the same level as last year, meaning EUR 1.5 billion. And we feel that with that level, we're still able to fuel some of the necessary new projects which help with future growth.

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

Can I just follow up on your answer to the first question? What would you say the proportion is that you pass or that you keep basically that flows to the bottom line?

Philippe Gaston Henri Capron

It's a simple question, and I asked this question when I joined the company. The answer is not simple. I guess probably 2/3 or I would guess at probably 2/3 of our business, let's say, half of our business probably had automatic price indices. 1/4 of our business probably -- does not have price indices, but has price renegotiation formulas, which means that every 2, 3 years, we have a discussion with the municipality or with the customers, and we negotiate in order to agree on an indexation. It's not automatic, but it's negotiated and it's embedded in the contract that such a negotiation should take place. And then there is probably 1/4 of our business where there is no index and that's mostly because it's short-term contracts.

Operator

We have a new question from Emmanuel Turpin from Morgan Stanley.

Emmanuel Turpin - Morgan Stanley, Research Division

And my first question is just to check how much you have booked by way of capital gains on industrial disposals in the first quarter of '14? And as a reminder, how much did you book in the first quarter of '13? From memory, you booked that in the -- in between the EBITDA and the EBIT. Second question, I would like to come back on the Waste volumes, and sorry about this. You mentioned -- you gave us quite a lot of granularity per country, France, U.K., Germany, but could you give us a simpler indicator to allow us to benchmark Europe as opposed to the Rest of the World, which is doing very well indeed, along the lines of either a broad Waste volume or maybe of treatment volume or whatever indicator you would like to benchmark versus what you used to do last year. And maybe a summary statement/question. Considering your EBITDA achieved in Q1 on the fact you reiterated your full year guidance of plus 10, you should be able -- you should deliver about a 12% increase in EBITDA for the remaining 9 months of the year, if my math are correct. And on the reason you feel comfortable with keeping the guidance despite the bad weather impact in Q1 is extra cost-cutting, on being ahead operationally, whether it's on cost-cutting or the business generally in Water and Waste, how much is cost-cutting, how much is underlying business compared to budget? That would be helpful.

Philippe Gaston Henri Capron

Okay. Well, first, for capital gains in Q1 this year, the answer is EUR 2 million only for 2014 with -- I'm sorry. I'm being given figures by my staff which I do not understand. Okay now, I'm sorry, so the answer is EUR 8 million. In terms of waste volumes, I'm waiting for them to give me some figures. In terms of our confidence for the 10% growth of CAFOP for the whole year when we've achieved less, obviously, because of the Dalkia impact in the first quarter, this confidence is based on a couple of things. One is that, as I mentioned, we're -- in spite of Dalkia France, we are still well ahead of budget, which means that, overall, the safety layers we have in the budget have not been used up in spite of the bad weather in Dalkia. And the way the budget was built was actually a higher growth for the next 3 quarters, which is due in large part on the fact that there were some significant negatives weighing on CAFOP for Q2, Q3 and Q4 last year, which we do not expect this year. So we are reasonably safe that the normal evolution of the business will indeed provide for more than 10% EBITDA growth for the balance of the year, therefore, allowing us to meet our overall guidance. The one-off, the negative one-offs which we had last year, all told, are close to EUR 100 million for the last 3 quarters of last year, which was not the case for the first quarter. But we're relatively hopeful. In terms of Waste volumes for Europe versus the Rest of the World, I'm being handled some things which do not include any figures, so [indiscernible] that Ronald and his team, Ronald, Ariane and Thierry will be happy to provide you with more figures when you call them later today. Sorry about that.

Emmanuel Turpin - Morgan Stanley, Research Division

No worries. Could I just come back on your answer regarding the negative one-off items over the last 9 months of 2013? You mentioned about EUR 100 million which should not rehappen this year. Could you just refresh our memory and give us a couple of examples of this EUR 100 million, please? What are they made about?

Philippe Gaston Henri Capron

One was the restructuring plan at the headquarters -- the global headquarters, which was about EUR 30 million. Hong Kong, the -- I mean, Hong Kong, the Hong Kong sludge factory weighed for about EUR 40 million last year in our account. Those are the main ones. Then we have a large number of smaller ones.

Operator

We have a new question from Olivier Van Doosselaere from Exane BNP Paribas.

Olivier Van Doosselaere - Exane BNP Paribas, Research Division

Actually, you already answered most of the question that I had. Maybe just one remaining. I was just wondering if you could tell us again, I appreciate this happened maybe before you joined, but if you could tell us again why 2 years ago, there seems to have been discussions with the Suez Environnement, but that, that did not lead to any alliance or a tie of the 2 companies?

Philippe Gaston Henri Capron

Well, I wasn't there at the time. The only thing I can tell you today is that there is no discussion planned. There is, I mean, speaking for Veolia, I cannot speak for Suez or for Suez Environnement, of course. But speaking for Veolia and its management and its board, we are fully focused on our transformation program. We have a lot to do to continue to turn around this company in terms of CapEx discipline, in terms of cost savings, changing the DNA of the company towards continuous improvement and industrial discipline, and at the same time, trying to develop new types of clients, new type of activities where we hope to be less challenged by low cost and low technology competitors. So there is a lot to do within Veolia. And clearly, our analysis is, we don't want to get distracted by dreams or whatever of a marriage with Suez. We have enough on our plate today. We feel that we are starting to show the first results, the first consistent results of the turnaround we promised the market. We did improve the balance sheet over the past 2 years. We feel now that we are back on a growth path in terms of the business itself. We are very happy with the results we've registered on the Waste and Water early this year. So therefore, we don't want to get distracted and to distract our managers at a time when we have so much to do. Keep in mind that we also have to fully close the Dalkia deal and to complete the integration of Dalkia within our geographical teams. So this is another significant transformation ahead from which we expect headquarters cost synergies locally, and at the same time, top line synergies. So please don't spend too much time speculating on the Suez deal because it's not happening anytime soon.

Operator

We have a new question from Arnaud Joan from Bank of America.

Arnaud Joan - BofA Merrill Lynch, Research Division

I have mainly a few questions as regards the 1Q -- the Q1 performance at EBITDA level. Could you just give us some more granularity on the impact from the Proactiva deal on the EBITDA? Could you give us the increase or the impact coming from your U.S. Energy Services business? And finally, if I'm correct, you sold in 2013 the Marine Services business, I assume that this was lossmaking, so was there any benefit scope-wise from the fact that this is not anymore accounted for in your results?

Philippe Gaston Henri Capron

Okay. First, the impact of Proactiva is EUR 120 million in revenue, and EUR 17 million, 1 7, in CAFOP, in EBITDA. In terms of Energy Services in the U.S., which benefited from the harsh winter there, it's about -- the impact on EBITDA was about plus 10, which just about offsets the negative impact we had in Germany, which is included in Water, which is also EUR 10 million or plus EUR 10 million, minus EUR 10 million. And then, the Marine Service, the negative Marine services impact last year was about EUR 9 million for the quarter.

Operator

We have a new question from Philippe Ourpatian from Natixis.

Philippe Ourpatian - Natixis S.A., Research Division

Most of my question have been answered. But I have 2 one more. Could you just remind us what's going to be the impact of the Marseille and Lyon contract? The negative one, renegotiation tariff you mentioned, as those 2 contracts renew starting the beginning of this year? Could we have the impact on the full year basis, first of all, and also for the quarter? And could you give us your flavor about the trend post Q1 regarding U.S. volumes? I'm mentioning for April and May, please.

Philippe Gaston Henri Capron

Okay. Well, first, I mean, we don't single out Marseille and Lyon, but it's clear that those were 2 large contracts. So the headwinds which we've observed over the past year which have been about EUR 50 million on our French water business should be observed this year again. I mean, the bulk of this issue will be made up of the Marseille and Lyon impact, full year impact. But we have also a lot of smaller contracts which are being renegotiated. The good news there, of course, is that, by the end of 2015, we'll have renegotiated all our significant contracts. And that, as you know, we have only Montpellier, which is much smaller than Marseille or Lyon, still ahead of us. So we are starting to see the end of the tunnel on a period during which we'll be in a sweet spot because since all contracts will have been renegotiated, none will be for at least a couple of years, probably up to 5 or 6 years. In terms of Waste volume, I mean, if I was able to forecast industrial production worldwide, I would probably be working at the IMF or the World Bank or in one of your establishments as a successful trader. So I have no significant clue for the balance of the year, except my guess would be a continuation of the observed trends, in March -- in April and May, I mean very early to speak of May, but in April we've seen more of the same. We've not seen any either acceleration of growth or negative tendency.

Operator

We have a question from Lawson Steele from Berenberg.

Lawson Steele - Berenberg, Research Division

The second question would be on CapEx, where Q1, you had EUR 298 million. Should we expect that to be a run rate for the year, taking it to 1,200 or so, or would you expect that to accelerate?

Philippe Gaston Henri Capron

Thank you. It should accelerate a little bit because the budget is EUR 1.5 billion. It's relatively typical that projects are launched at the beginning of the year, therefore, there tends to be a bit more CapEx at the end of the year. But this should, again, all be constrained within the EUR 1.5 billion global envelope. And it's even possible that we end up doing a bit less. By the way, the EUR 300 million you see for Q1 includes a very small acquisition in North American energy, Kendall, for EUR 20 million, so industrial CapEx is actually a bit lower than the figure you see there.

Operator

[Operator Instructions]

Philippe Gaston Henri Capron

Well, if there is no further question, I -- there remains for me the pleasure to thank you for your listening in to this call, and I want to reassure you that everybody is on the Veolia deck, making sure that we do meet that guidance for the year. We are encouraged by, overall, the strong start of the year in spite of the negative climate impact. So thank you all.

Operator

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

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Source: Veolia Environnement S.A. (VE) Q1 2014 Results - Earnings Call Transcript
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