Veolia Environnement. (VE) 1H 2016 Earnings Conference Call August 1, 2016 2:30 AM ET
Antoine Frerot – Chief Executive Officer
Philippe Capron – Chief Financial Officer
Michel Debs – Citigroup
Olivier Van Doosselaere – Exane
Martin Young – RBC Capital Markets
Julie Arav – Kepler Cheuvreux
Pinaki Das – Merrill Lynch
Philippe Ourpatian – Natixis
Thank you. Good morning, everyone, and thank you for joining our conference call on Veolia’s First Half Results. I am with Philippe Capron, our CFO. I will begin this conference by pointing out the highlights of this results. Philippe will then go over them in detail. After that, we will both be available to answer your questions.
I begin on Slide 4. These first half results are very solid, with all indicators showing improvement, sometimes significant improvement compared to the first quarter that allows us to be comfortable with our full year guidance, which I will recall in a few minutes.
Gross savings are being achieved at a substantially quicker pace than planned for the 2016-2018 period that is €100 million per semester. And we are already reaping the first benefits of our development efforts. Thanks to the financial successes of this past month, for example, the sulfuric acid regeneration acquisition for Chemours, the treatment of low level radioactive waste with Kurion, or the win of the major water cycle management contract with Sinopec, our revenue growth should accelerate in the second half. And we also reached a draft agreement with Caisse des Depots on our exit from Transdev.
On Slide 5 now, in the first half, revenue declined 1% at constant exchange rates, but it was up very slightly by 0.1% in the second quarter whereas it had fallen in the first quarter. Excluding energy prices, which have impacted our heating activities in Q1 and excluding construction inactivity whose volume we intend to reduce while improving profitability, the revenue was up 1.9% at constant exchange rates in Q2 after plus 1.2% in Q1.
EBITDA is up 5.6% at constant exchange rates, 5.6%, with an increase of 6.9% in Q2 alone, up to 4.4% in Q1. Current EBIT at €750 million increased by 8.2% at constant exchange rates, up 11% in Q2 and 5.9% in Q1. Current net income amounted to €342 million; it too is sharply higher than last year. Excluding net financial capital gains or losses, which are lower this year than last, current net income amounted to €301 million, a 15.7% increase from the first half of 2015.
Lastly, net financial debt is well under control, slightly below €8.7 billion. That is €550 million less than in June 2015, including a favorable foreign exchange impact of about €350 million. Cost savings now on Slide 6. Cost savings are the first pillar of our three year plan and they reached €121 million in the first half, well above target. As planned, these cost savings come from cuts in G&A, gains in purchasing and operational efficiency.
Cost cutting involved all geographies, but especially significant in certain countries where activity was less favorable such as France. The challenging environment in France have led us to decide on further restructuring efforts. We are divesting our French scrap metal recycling business, Bartin, and we have launched a new resiliency plan in our French business, French water operation. The charges relating to this plan as well as the measures already underway in the U.S. and in the VWT business have been provisioned and included in non-current results.
Topline, Slide 7 now, topline growth is the second pillar of the new three year plan focusing on both the municipal and industrial markets. With municipal clients, for instance, you can see here some of our biggest successes: the district heating network of Prague Left Bank in the Czech Republic, or the biggest landfill in Sao Paolo, Brazil. With industrial clients, the most significant developments involve the treatment of low level radioactive wastes with the acquisition of Kurion, the treatment and recycling of sulfuric acid waste in the U.S. acquired from Chemours, and a major contract worth more than €3 billion over 25 years to manage the public water cycle for a very big industrial site belonging to China Sinopec.
These five big contracts alone have not yet contributed much to revenue growth in the first half year, but will contribute fully in the second half during which we should therefore see a much better increase of our turnover. So the second driver of our three year plan for revenue growth is now going at full speed.
Finally, we have continued asset arbitrage and further refined our asset portfolio. As I just mentioned, we have agreed to sell in the first half, the Bartin scrap metal recycling business in France, we have reached a draft agreement with the Caisse de Depots for the Transdev divestment and I will come back to this in a few minutes, and we have decided to end the divestment process for the SADE business. The offers we received were insufficient and not satisfactory. We have no intention of selling our assets via a fire sale. We will therefore continue to manage SADE ourselves within the Veolia Group.
Regarding our successes in the industrial market, Slide 8, and aside from the three big examples I already cited, Kurion, Chemours and Sinopec, we also had many other commercial successes in the first six months. They cover all our geographies, and we have chosen to highlight on this slide the most significant wins involving Europe. Because in Europe as well, Veolia’s know-how in treating the most difficult pollution in circular economy activities and in energy optimization and efficiency are increasingly sought out.
The same is true with municipal clients on Slide 9. On this slide, beyond Europe, we have also added some of the contract wins in the United States in the water sector. It is also worth noting the strong dynamism of the UK, both in the municipal and industrial markets. Brexit will have very little impact on Veolia’s activities. We provide our services in the same currency we sell them in, our investments have been and continue to be financed in sterling and our very important network of PFIs for the treatment and recycling of waste have long-term contracts and constitute real hubs that enable us to increase our marketshare of waste volumes in the surrounding area at very good economic conditions.
Now, on Slide 10, we have concluded a draft agreement with Caisse des Depots to divest our 50% stake in Transdev. I remind you that in March, we already obtained the full repayment of the loan we had made to Transdev amounting to €345 million. The agreement reached now with Caisse des Depots first, sets the price for our 50% stake at €550 million for the share plus €10 million of dividends; secondly, establishes the divestment of 20% of Transdev in 2016 to the Caisse des Depots for €220 million; and third, plans to divest the remaining 30% between now and two years, that is 2018 at the latest under the same pricing conditions as the initial transaction given a put option Veolia gets from the Caisse des Depots.
During this two year period, we will jointly seek another buyer for the remaining 30% at a higher price. If we succeed, the excess capital gain will be shared between Veolia and Caisse des Depots. If not, the put will be exercised in two years, at the initial price. Compared to the value of our 50% stake in Transdev on our books, which is €466 million at June 2016, this transaction will generate a significant capital gain, which will be booked on a pro rata basis as the divestment is executed. The conclusion of this agreement and its prophesied execution will put an end to Veolia’s presence in the transportation sector.
And Slide 11 now, these solid results for the first half allow us to easily confirm our 2016 objectives of revenue and EBITDA growth at constant exchange rates, current net income of at least €600 million and the free cash flow before financial operations and dividends above €650 million. These results also demonstrate that our new three year plan covering 2016 to 2018 have successfully entered the phase of intensive re-growth and disciplined execution focusing on the twin pillars of revenue growth and operational efficiency. We can therefore also confirm our 2018 targets for the Veolia three year plan as communicated during the December 2015 Investor Day.
So I now hand over to Philippe Capron for the presentation of the detailed results, and I will be back with him to answer your questions. Philippe, the floor is yours.
Thank you, Antoine. Good morning, ladies and gentlemen. On Page 13, you have a recap of the figures already outlined by Antoine. For H1 2016, we have reached a revenue of almost €12 billion, that is minus 2.9% year-on-year, but minus 1% at constant currency and more on that later. EBITDA at €1,580 is up 3.2% year-on-year, that is 5.6% at constant currency with an acceleration over the two quarters. That means a new improvement in our EBITDA margin which grows by 80 basis points to 13.2%.
Current EBIT grows by 5%, 8.2% at constant currency at €750 million. Current income group share grows by 6%, actually 10% at constant currency reaching €342 million. If you exclude the €40 million of capital gains which were registered since the beginning of the year, the improvement is actually 15.7% because last year was the sale of our Israeli activities, we had roughly €60 million of capital gains.
Net income Group share is at €250 million. It is impacted by a restructuring charge mostly relating to our French water activities but also spread to some of our other business lines, I will get back to this. Gross industrial CapEx is in line with the previous year, so things are still very much under control especially as we took advantage of some interesting external growth activities instead of using the CapEx within our own businesses.
Net free cash is roughly comparable with the previous year, minus €100 million due to the seasonal reversal of a working capital requirement. This does not prevent a very significant improvement in our financial position with our financial net debt down €550 million that is actually if you take out the positive impact of currencies, mostly due to the drop in the value of the sterling pound, we still registered a €200 million improvement in our net debt.
Moving on to Page 14, this is a breakdown of our revenue performance quarter by quarter and as you can see, we have clearly entered an acceleration path following a slower Q1. Q2 is showing a marked improvement. Q2 at plus 0.1% is flat after minus 2% in the previous quarter. And this improvement is true in all geographies except France, but of course in France, we had especially in the water side, a very significant climate impact because of the rainy spring we have been having. So less volumes being distributed. But France excepted, as you see, our business is picking up everywhere.
This is also true if you exclude construction and energy prices, which have weighed of course mostly on the first quarter because that is a heating season, we have gone from 1.2% – plus 1.2% to plus 1.9% in the second quarter so as you see, things are picking up. And of course, future gains will be fueled by our commercial gains, the new contracts we’ve signed and our recent acquisitions. Those have been outlined by Antoine.
Moving on to Page 15, you can see the various elements in the dynamic of our sales. French waste is slightly down in spite of good volumes in generation and landfill, but this is mostly due to a weak economy and low – which has affected our collection activity in part and low scrap prices but this has been addressed by the Bartin disposal for the future.
French water benefits from the Lille contract which has been a significant help but overall, volumes are lower than the previous year and of course, in a non-inflationary environment, there is practically no contract indexation to speak of which is a big impediment.
Europe is flattish but that is a mixed bag, we have good progress in Germany, thanks to a good level of paper prices, but also due to the successful restructuring of our business in that country. On the other hand, we have less construction revenue in the UK because year-on-year, there is a calendar impact. We have not been building PFIs for this half year contrary to the previous year. And we also suffer from lower energy prices in Eastern Europe but they have been mostly pass through.
In the rest of Europe, we still register good growth in emerging markets, Latin America, Africa, Middle East, Asia, but this has been offset by a slower activity in the U.S. and Australia. Especially in the U.S. in the first quarter, things have recovered somewhat in the second quarter and we are catching up. And then, for global businesses, we have had strong activity in hazardous waste but of course less construction revenue for the reasons indicated by Antoine, we have been more selective. Overall, if you look at the results at constant currency and excluding construction energy prices, you see that the dynamic is good everywhere except in France.
On page 16, you have the calculation of our revenue valuation at constant currency excluding construction and energy prices and you see the 1.5% figure which reflects this and as a reminder, it is plus 1.2% in Q1 and plus 1.9% in Q2 which leads to this 1.5% average over the half year.
On Page 17, we give a breakdown of our EBITDA growth. We have registered significant decline in France for water. This has been driven by a variety of factor; first, there are still some contractual headwind less than the previous year, second, the Brottes Law is starting to have an impact on the payment behavior of individual customers. Then the volumes as I have said, have been weak especially in Q2 due to the climate. Add to that the price pinching due to very weak price indexation when it’s not possible to keep all our cost, especially our labor costs fully at zero growth. You get a situation where we have had a significant decline in French water.
The same applies to waste in a different way. Waste has been impacted by the scrap metal prices as I mentioned. Keep in mind also that there is a calendar effect there because we have a significant positive one-off last year and that explains why waste is not doing as well as the previous year.
On the other hand, the rest of Europe has shown excellent performance, plus 15% EBITDA, and this on the basis of a flattish topline as we have seen. The performance have been very strong in all those geographies thanks to cost reductions especially in Central and Eastern Europe which have also benefitted from a colder climate in Q1, thanks to the PFI performance; both their operational performance and the new activities, which develops around those tools, those facilities; and last but not the least, Germany has shown good momentum both in terms of volumes and in terms of the harvesting of the efficiency efforts which we have made over the previous quarters.
The rest of the world is showing continued growth but there again, it’s a mixed bag. We have had very strong performance especially in China with higher volumes, new equipment being commissioned and a very strict cost discipline, which has led to significant operational improvements, but this has been offset partly by the weaker performance in the US and Australia. To be fair, the U.S. has actually started to catch up thanks to the restructuring measures and the management changes measures, which we took earlier this year. Global businesses have done very well thanks to the discipline, which we have shown with the new contracts, and thanks to very strong hazardous waste activity.
On Page 18, you see the drivers behind that EBITDA performance. No surprise there, I mean we are showing basically the same slide with hardly different figures every quarter. EBITDA growth is mostly driven by our cost efficiency. No surprise.
Page 19, to go from EBITDA to EBIT, we subtract the renewal expenses and depreciation and amortization, this has been roughly in line with the previous year. In terms of provisions, you see that we have a reversal as we did last year but it’s of a very different nature. Last year, there was a big ticket item which was some Olivet-related provisions in France which have been reversed after many years.
Now, it’s not the same, we have all a series of very small ticket items, none of them is significant. We see this as a good sign actually. We see this as a sign that the business is strong enough that we don’t have to take provisions but we can actually take back some of them over the years which we see as a sign of health. To be added, we have had industrial disposals generating capital gains of €18 million versus €10 million last year. This is a difficult element to predict, of course, it’s not very relevant but there again, we see this as a very good signal. The fact that people are chasing the unused equipments selling quickly the idle truck fleet here or there is a signal that – is a sign of good housekeeping and tight balance sheet management and looking for cash when you can take it. So we see it as a good signal.
Net income of our joint ventures, the equity-accounted for ones, has gone down by €10 million, and this is not due to our Chinese performance, it’s exactly the other way around, our Chinese JVs are slightly up. But it is due to a mixture of currency impact and scope impact mostly.
On Page 20, we show how we go from the current EBIT to the current net income. Our financial cost continued to trend down. Capital gains have reached €41 million versus €63 million last year. Last year, it was a big ticket item, the sale of our Israeli activities. This year, it’s a number of smaller divestments which have taken place and which we also see as a good sign. Our income tax expense is roughly in line in terms of percentage versus the previous year, and leading to a current net income, which is up by 6% at €342 million or 68% if we exclude all capital gains.
Keep in mind that on this last figure, the €301 million current net income Group share excluding all capital gains we’re exactly at the half of our yearly objective, but also keep in mind that because of the new IFRIC 21 rule which we applied this year and which we applied last year as well, of course, we are actually €25 million ahead because structurally, we have already taken those taxes through the P&L and they won’t impact H2. So this means we actually are slightly ahead compared to our objective for the full year.
On Page 21, you see that there has been a significant change compared to the previous year. Last year, the first half had not been impacted by any restructuring charges, actually we took back €8 million of them. This year, we’ve had €95 million of charges taken. They relate for some of them to expenses already incurred especially in the U.S. and for VWT, our construction businesses, but mostly €60 million worth of it to the redundancy plan, the voluntary departure plan which we will be launching at year-end in French water and which Antoine has alluded to. The share of net income we get from our other equity-accounted activities, non-core items, Transdev mostly, is slightly down at €22 million compared to €26 million and this all leads to net income Group share of €250 million.
On Page 22, some financial figures, CapEx is basically in line with last year, with still not much discretionary CapEx but I mean, it takes time for our new projects to develop and also as mentioned by Antoine, we see some attractive external growth activity. Of course, this is only roughly one-third and not one-half of our yearly budget so we should expect more activity in terms of CapEx in Q2, in H2 as is usual for Veolia.
The working capital requirement, I already mentioned. I mean we are making of course sure that this performance should be reversed by year-end, as happens every year. And the net financial debt has already been commented. It’s interesting to note that our leverage ratio, debt over EBITDA, is now standing at 2.8 times, meaning well below 3. That means we have now reasonable flexibility, in spite of the acquisitions, which we’ve made since the beginning of the year.
Another way to look at this, on Page 23, is to say that, taking out the working capital valuation since the beginning of the year, we’ve actually generated free cash flow of €600 million. Now of course we must not get ahead of ourselves and compare this immediately to the yearly objective of €650 million because we know that we’ll have more CapEx in H2. But still it’s a very encouraging figure. Among others, especially the acceleration of our revenue line, the improvement of our EBITDA margin, which continues to, quarter after quarter, all these factors make us very confident that we will achieve our 2016 objectives, which you are reminded of on Page 24. This of course includes our perspective of a 10% dividend increase.
Thank you for your attention.
Thank you, Philippe. And we are now at your disposal for the questions.
[Operator Instructions] We have our first question coming from the line of Michel Debs from Citigroup. Please go ahead.
Yes, good morning, everyone. I have two questions please. The first one is the obvious question on cost cutting. You have a three-year target of €600 million and you’ve done €121 million in one semester. So the question is really, are you upgrading your three-year cost-cutting target or have you been particularly active in the first semester? I’m asking because my understanding last December was that the cost cutting would be back-loaded, and it seems to be front-loaded here.
The second question has to do with M&A. Your balance sheet seems to be in better shape; that’s great news. You’ve also done two operations during the first semester. So, what can we expect in terms of behavior from Veolia in the next three years? Are you going to continue to do relatively small deals, like the ones you’ve done over the first six months of the year? Or was this just random thing and we should not expect more? I would like to understand how you think about external growth and the allocation of your balance sheet between that and repaying the hybrid bond. Thank you very much.
Well, I begin with the cost cutting. You are right, Michel, we have been active during the first half. But we will continue to do. It is not a reason to change the guidance we have, or the objective we have for the full year, but we operate, and we will continue to try to beat. But more important than the cost cutting is the consequence of the cost cutting, meaning net result and net free cash. So we’ll continue to progress, but at the mid of the year we’ll not change our guidance.
About M&A now. If you remember well, during the Investor Day, we explained the plan we have for our growth. If you remember, we said that we spend every year around €1.2 billion for maintenance CapEx and CapEx already earned back in all of the design contracts. And on top of that, we have around €500 million more for our new developments, because we were at the end of – or about at the end of the construction of the UK PFIs.
So we forecasted to spend around €1.7 billion every year during the three years of the plan because we want to keep our balance sheet and our debt level around €8 billion, between €8 billion and €9 billion. We are still on that way. And I don’t want to expose the debt level. So we will stay between €8 billion and €9 billion.
During the first half, we found better opportunities of excellent growth, small or medium size, than perhaps organic growth opportunities. It is why we go more there. But we don’t want to change a lot the goal we have for our capital employed level and our debt level. So we could continue to see better opportunities of M&A rather than organic growth, but we could also find now better opportunities organic growth, but between organic or external small and medium size, it will be the same. For example, if you take the example of the recycling sulfuric waste of Chemours, we bought some factories a bit – at smaller level than the price or the cost of these factories.
So it is external growth, but it could be also construction of factories for these recycling activities. So, small or medium-sized external or organic is a bit the same. But we are still on our plan €1.7 in average during the three next years, 2016-2018, with the objective we have for our turnover, for our EBITDA, current debt income, and free cash at the end of the plan. So we don’t intend to change the size of acquisitions.
Thank you. The next question is coming from the line of Olivier Van Doosselaere from Exane. Please go ahead.
Olivier Van Doosselaere
Yes, good morning, everyone. Thank you very much for taking my questions. I will ask three at this stage. One is on the pipeline. So yesterday you’ve announced a number of very interesting deals and this is quite a few in the recent months. You continue to show pipeline that is as full as this, and most specifically, are there some specific areas where you’re seeing some potential upside in your developments?
Second one, on the U.S., that was a big focus on the Q1 results. I think you’re reporting now revenues down 9%, at [indiscernible], I think it was down 14% in Q1. So, are we getting close there to stabilization of the revenue evolution?
And then a third point I would like to ask is on – to understand well how you’re looking at the guidance. I think in the beginning of the year you had said that the €600 million current income guidance assumed some €10 million of capital gains. With what you’ve published now in H1, €40 million capital gains, does that mean that we would be right to assume at least €630 million for the full year? That’s it for me. Thank you.
Okay. I will take the last question first. Yes, you are right. Our €600 million of target was with around €10 million of capital gains. We have more – already more at the end of June, so we will likely be up to the €600 million at the end of the year. You are right, this is why I told you we can easily confirm our guidance. For the second question, about U.S., Philippe, perhaps?
Okay. Yes, you are right indeed, we are catching up in the U.S., and it’s very encouraging. Of course, the minus 14 for Q1 and the minus nine for H1 cannot be completely compared because you’ll remember that in Q1 the main drags or very significant drags had been: a) climate, and b) energy prices. And of course those had a much lesser impact on Q2.
Still, if you just focus on the other drag, which was about a minus 15% activity figure for industrial services, we’ve already caught up. We’re still down but only slightly down. And actually the change in commercial orientation and the management changes which have occurred have already restabilized the U.S. business. So we are very encouraged. We are not sure they’ll catch up with budget over the whole year, but they will certainly be close to that. So we’re very happy with the evolution there.
And now on your first question, about our future development. First, you saw that we had really good deal flow of new developments during the last weeks. I insisted, especially on the five big deals, Prague, Sao Paulo, Kurion, Chemours, and Sinopec, just with these five big deals, they represent, in terms of turnover, around 2% of the turnover of Veolia. They did not contribute a lot or very few the first semester. So we’ll have this 2% fully during the second half and for the full year next year.
Of course, I will not comment about the future deal flow. We have a lot of capabilities, but I will not comment because I – before they’re signed, I don’t want to give any element to our competitors, so, to make some pressure on our teams in front of the clients. So we’ll have – we have a lot of – all the opportunities under negotiation and hope we will be able to continue to announce during the next months the same rhythm of new development. But you could understand that I could not comment. They are concerning all our geographies and all our businesses. But I will keep there. I will stay there.
Olivier Van Doosselaere
Okay. Thank you very much.
Thank you, sir. Next question is coming from the line of Martin Young from RBC Capital Markets. Please go ahead.
Good morning to everybody. I’m just going to ask one question, and that’s for a bit more of a discussion around the challenges facing the French business. Looking at 2015 EBITDA, it was down versus the 2014 EBITDA, at least in the first half of this year it is down again versus the corresponding period of last year. How many of these challenges that you are currently facing in France are, a permanent impact on the EBITDA level? And I guess the second part of is that, if 2016 EBITDA is down versus last year, could we consider this then to be the trough point of the contribution from France? Thank you.
Unfortunately, some of those challenges are pretty permanent, if you speak of slow industrial growth in France for waste, or the no inflation environment, which is impacting the top line of French water or the Brottes Law which unfortunately may continue in the future to have an impact on our results. All those elements are permanent, which is why we are, on both sides, envisioning new rounds of restructuring. We’ve announced it for French water, the issues are very different for French waste, it’s – but still on both sides we will continue to generate earnings and to accelerate cost reductions.
We – if you look at the breakdown of our €120 million of cost cutting for the first half, you’ll see that there is a disproportionate part coming from France, 33%. Actually for last year it was 40%, whereas France represents roughly 22% of our sales. So it’s not – I mean we are not – you would not be surprised if we continue to put a lot of pressure on higher efficiency in our French operations given this very dismal picture.
At the very same time, we’ve had some good news. We had some good news with four big renewal of large incinerators in France. I mean that means we’re not looking market share, we’re actually – we had quite a few commercial gains at the end of the previous year if you remember. Same applies to French water with the Lille contract, which was a major win, which is going into activity this year. And in the same way, we are hard at work tailoring new solutions with specific companies in French water, broadening audience and broadening client base even beyond water and using our knowhow in novel ways. It’s not very significant in terms of sales yet, but we’re very hopeful that this will help rebalance our French businesses.
Can I just follow up then on the cost reduction side of things, linking back to Michel’s question? If you are launching a new restructuring plan in France, what incremental uptick to the €600 million cost reductions should we be looking for on that?
Let’s just say it’s going to be an uptick, but of course when we do a three-year cost-cutting objective, we incorporate things such as this new plan, which we not necessarily precisely define three years ahead, as you may well imagine. But clearly, just let me say that we are not letting up and that clearly you should not consider that the €20 million of advance, so to speak, for the first half, would be caught up later in the year or over the next three year, I mean. We – but let’s take the quarters one at a time, if you allow us.
Yes. And I could add that we accelerate our restructuring in France because we have some special headwinds, we did not have forecast. So the restructuring and the cost saving due to this restructuring is done to compensate these headwinds.
Okay, thank you.
So if you take cost cutting plus headwinds, you could stay easily with the €600 million as a global objective.
Thank you, sir. Next question is coming from the line of Julie Arav from Kepler Cheuvreux. Please go ahead.
Yes, good morning. I have a few questions if I may. Can we have just an update on the restructuring costs? Because it seems like initially, in your three-year guidance, you were targeted €60 million in 2016, €30 million in 2017, and €10 million in 2018. Only in H1 you are already at €95 million. So, can we have a bit of an update on the restructuring cost?
The other question would be on the use of the cash from Transdev. In the past you mentioned that it would be likely used to reduce the debt further. Can you please confirm that? Or is there any hope that some of the cash, even in the next two years, could be returned back to shareholders?
And still on Transdev, you mentioned that the entry of a third party is not excluded. Can you give us a bit of color on whether some negotiation are still engaged or if you had any mark of interest from industrials or financial partners for the remaining 30%?
And two last questions, sorry. When you say you confirm your guidance, do you include, I guess, yes, but reversal of provisions? And can we know roughly what kind of amount should we stay in the same range of the one delivered in H1? And last question if I may is, can you quantify the expected impact of the Loi Brottes on your full year guidance? Thanks.
Philippe about Transdev first.
Okay. About Transdev, first, we’ve had numerous marks of interest for the 30% from investment banks, which doesn’t mean anything. But I mean there is interest at least from intermediaries. Kidding aside, we know that some infrastructure firms, some private equity, or some industrial investors, would look at this. We have yet to start this process of course in earnest.
This is something which we’ll do very professionally with Caisse des Depots. We have a shared interest and so we’ll be splitting the possible additional capital gain 50/50. We have a joint interest in making this a successful process. We want of course together higher price than the €330 million price tag. And at the same time, we want a partner which would be a good partner for Transdev and a good partner for Caisse des Depots. So this has to be piloted among the two of us, but the process will probably start at the end of the year and probably will be based on the 2016 earnings for Transdev. So, don’t hold your breath. This will take a bit of time.
Yes. About the use of cash, I already explained the rhythm of our investment as an organic growth, as an external growth. So we’ll be and stay on the rhythm we forecasted for the three-year plan. And of course we knew when we built this plan that we will get one day this money from Transdev, so it will come into our balance sheet, either to reduce the debt, either to finance some investment, but we have enough cash flow, free cash flow, to finance our growth. So, probably it will come to reduce the debt. But we don’t intend to send the money back to shareholders. We intend to increase regularly the dividend, at least up 10% every year during the three years.
About the Loi Brottes now, I could tell you really how many we suffer during the first half, is €12 million. Perhaps it will double during the second half, but it will also go through an asymptotic curve. One day, perhaps after the first year, this year, it will reach a sort of asymptotic curve. So we could have €25 million this year, perhaps it is not increased a lot after that.
On the two other items, the reversal of provisions and the restructuring cost, those are two of the most difficult forecasts we have when we budget, and especially when we plan ahead for a couple of years. You’re right, in terms of restructuring cost, we are a bit ahead of schedule, so to speak. We did not expect to launch a new voluntary departure plan of that extent in France as soon as this. But think of it as good cholesterol. I mean it’s probably – I mean I don’t want to sound cynical, but this is one of the best investments we can do in terms of payback. And therefore we’re not sorry that our various businesses have decided to accelerate on this.
It does – as you know, the focus of the next three years is not going to be SG&A reduction and restructuring per se, so you shouldn’t expect much more, especially this year. I don’t think that this year we should have – there should be a significant variation of this €95 million figure by year end. That’s about all I can say on this.
On the reversal of provisions, to be fair, Julie, we were as surprised as you are, because we had not expected that many small ticket items, actually adding up to something which was comparable to the Olivet reversal last year. We had not expected as much diligence, in spite of our strong urges, as what we’ve witnessed in terms of making sure that all unused industrial equipment are immediately sold, thus generating cash and capital gains. So in a way we’re happy to see this. I don’t think you should double the figure, certainly not. But we’re happy to see this, and it means that our people are reacting to the pressure we put on them to manage a tight ship.
Thank you. Next question is coming from the line of Pinaki Das from Merrill Lynch. Please go ahead.
Hi. Good morning guys. Thank you for taking my questions. I’ve got two questions. The first one is just a follow-up on the restructuring cost. You mentioned €95 million. I understand that your free cash flow guidance is after restructuring cost, which you’ve kept unchanged. So if your restructuring cost’s €30 million, €40 million higher, how you’re making it up in the free cash flow if it’s unchanged? That’s my first question.
My second question is regarding the new deals that you have mentioned, both organic as well as sort of contract wins. Could you give us some indication around what sort of revenues would you expect in H2? You’ve mentioned already 2% for the full year next year, but in H2, just to get an understanding around that.
And also when you get these new revenues, would you – how do you look at the profitability of those revenues? My understanding is that in the initial years it’s quite low profitability and then it ramps up after three, four years, but just some color around that would be helpful. Thank you so much.
Okay. On restructuring cost, at this stage this is not a cost. This is mostly a provision, at least for French water. Some of the expenses have been incurred or will be incurred this year for VWT and the U.S., but in France, due to the process we have to follow, those €60 million will be spent next year. So they don’t have – they do not have an impact on this year’s free cash flow and free cash flow guidance for the most part.
About the five big deals, just indicative information. The heating network of Prague should bring to us around €70 million of turnover a year. The landfill of Sao Paulo around €30 million. The Sinopec deal, €130 million. The sulfur activities probably within the U.S. it’s $280 million probably around €50 million. And the radioactive waste treatment is around €100 million. So it’s a bit more than €500 million per year, divided by two, €250 million for the second half ramp-up.
And the profitability outlook?
The profitability is at least better profitability of the average profitability of the Group. But I will not detail them, to give some bad ideas for our clients.
Right. Thank you so much.
Thank you, sir. Next question is coming from the line of Michel Debs from Citigroup. Please go ahead.
Yes, good morning. I have a follow-up question. I just want to wrap my head around your guidance and make sure I understand very clearly what you’re saying. When you say that for 2016 you will achieve a new income of at least €600 million, if I understand correctly the Q&A session, that number includes provision reversals, cost cutting, and capital gains. So, given the fact that you had better provision reversals and capital gains than expected, should we believe that, A, the €600 million becomes €630 million or €640 million, or should we say that it stays €600 million, because against those positive items, you also have increased headwinds. Thank you very much.
Yes. To be clear with you, Michel, we’ll come back on what we said when we presented the guidance. We said €600 million of current net result, including a maximum of €10 million of capital gain. That is €590 million plus €10 million at least. So, because we have €30 million more in June, we will have €30 million more probably likely at the end of the year. But for the rest, that whole, because we have also the ForEx which is probably higher than you forecasted and we forecasted also, so the provision will compensate the ForEx. So we will be likely up to the €600 million with the capital gain, but the rest will be compensated. Is it clear?
Thank you very much. It’s very clear.
ForEx is costing us €12 million for the first half, could cost us probably something between €25 million and €30 million for the full year, at the net income level.
Thank you, sir. Next question is coming from the line of Philippe Ourpatian from Natixis. Please go ahead, sir.
Yes, good morning to everybody. I have just two questions. One is concerning the cost cutting. As you mentioned, some headwind in France and some maybe more headwind than expected. Could you just have the figure, the net figure of the H1, as you mentioned, €300 million of headwind for the 2016-2018 period, at the strategic presentation, in your €120 million, which is the gross figure, may we have the figure in net just to monitor where you are exactly? And as I imagine, as you have mentioned some new measures, we might be a little bit above your expectation in terms of headwinds.
And the second question is concerning the income tax. You have had previously a quite comfortable position on the French fiscal perimeter. You mentioned, if my memory is good, €450 million of tax carry-forward. Is there any figure you might take in your consolidated account for the full year? And is there any, I would say, part of this carry-forward in the H1 figure too? Many thanks.
Okay. So on the headwinds, you can go back to Page 18 and you have some indication there. Leaving the ForEx aside, as you can see, the energy prices on recycled and the prices net of cost inflation, which is tantamount to what we called a headwind when we take a helicopter view of the Company, is €43 million for the half, which is roughly in line with the indication of minus €100 million for the full year. It’s lots of small carrots and apples, of course, and it’s very difficult to have a precise figure given the widespread nature of the business, but I guess that’s the best proxy of what we call the headwind.
On the taxes, we have not recognized any value to our French deferred tax assets and we have no plan to do it for this year. Of course if we did, we would flag it, and that would come on top of the yearly net income guidance.
Many thanks, very clear.
Thank you very much. We have no further questions. [Operator Instructions]
So if there is no more question. I will thank you, all of you, for your presence on this conference call. Just summarize our results in our view for this first half. We are, as you understood, we are really confident for the future. We could easily confirm our objective for 2016, especially the net income of €600 million, and yes, we think we will be above this number because – this figure – because of our capital gains.
And we could also confirm our long-term targets, 2018 targets, because our growth rhythm now is at the – in full speed. The big contracts we just win or the big new activities we just win during the last weeks allow us to be comfortable with all our objectives.
Thank you very much and good summer to everybody.
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