Suez Environnement Co SA (OTCPK:SZEVF) First half 2016 Results Conference Call July 28, 2016 2:30 AM ET
Jean-Louis Chaussade – Chief Executive Officer
Christophe Cros – Chief Financial Officer
Michel Debs – Citi
Julie Arav – Kepler
Philippe Ourpatian – Natixis
Olivier Van Doosselaere – Exane
Guy MacKenzie – Credit Suisse
Pinaki Das – Bank of America Merrill Lynch
Louis Boujard – Oddo
Sean Sutkus – Covalis Capital
Ladies and gentlemen, welcome to the Conference Call for the Announcement of the Half-Year Results of Suez. This is going to be recorded. I would like to hand over straightaway to Mr. Jean-Louis Chaussade, who is the Chief Executive Officer.
Thank you. Ladies and gentlemen, good morning. We are very pleased, Christophe Cros and myself, we are very pleased to present to you the financial results of the half-year of 2016 for Suez. Let me say to you as usual that this presentation can be consulted by webcast video and you can download it on our Internet site. Let me start this presentation with a summary of the key messages of this half year. This half year I consider to have been rather disappointing. Let me explain the reasons for this.
Christophe will be giving you then the financial results of the Group, and after him I will be explaining to you why I remain optimistic for the future and the measures we have taken for the short and medium term in order to pursue our objective of transforming the Group so that we can seize all the opportunities which are offered by the revolution in the resources but also to face up to the challenges of digitalization by creating maximum amount of value for all stakeholders and of course for our shareholders.
The performance of this half year is contrasting. There's a slight divergence between, on the one hand, the improvement in our activity, which is 2.2%, and on the other hand, operating profitability, which is down by 1% in terms of EBIT figures. After the activity of H1, which is I think weak, but up to expectations nevertheless, in Q2 in the Europe division we've had disappointing performance because of external factors, particularly abnormal rain for – in Chile and in France with a whole series of floods, interruption of services with pipes breaking and so on.
R&R in Europe has seen its activity becoming more stable, but profitability has suffered from the fall in the price of raw materials, particularly electricity. Our international division has continued to improve, with sustained growth there and revenue and profitability there are up. We're very satisfied with this performance, which validates our strategy. Let's emphasize the net earnings up. Christophe will be explaining to you the characteristics of this.
We are repeating our targets for 2016, and to achieve these, we are fully mobilizing the Group with an extra EUR30 million cost-cutting measures have been decided on. I've also wanted to speed up the transformation of the Group to make it more integrated and more responsive, more focused on innovation and commercial conquest in situation of cost-cutting – in the context of cost-cutting within the Group. So we want to do things better, more quickly with less.
This will be down to our transformation strategy, which we've introduced and decided upon, decided to accelerate. Last February, when we presented the prospect for 2016, back then we highlighted the factors, which were braking our growth. The reality has turned out to be worse, in fact. Industrial production in Europe is really flat. There have been a few signs of recovery in the UK, in Belgium and in Holland.
But tied up with weak inflation, this situation makes the balance and the well-being, if you like, of our contracts more fragile. France is basically in a depressed situation. Volumes are down in water, inflation is flat and people are even thinking there will be long-term deflation.
The emerging economies are slowing down. With the outstanding exception of India, where the Group is very active with revenue of EUR100 million and we've recently invested in the Driplex company, which works in – we've contract on processing the industrial water. There's also been a reduction in the price of raw materials, which has slowed down our activity, particularly in scrap metal.
Fifthly, electricity prices have remained at a very low level in Europe, whereas we were anticipating faster turnaround in the price. Sixthly, Europe has gained value compared with most other currency, particularly those which are important for us, the Chile peso, the Australian dollar, the UK pound, and this is impacting our accounts. All these factors together, of course, are part of the inherent risks which we have to manage.
But we have to add to that in Q2 very unusual weather patterns which have impacted our operating profitability, with outstanding rainfall in France leading to floods and abnormally low levels of volume in the second quarter, and in June dryness and then in Chile bad weather. In fact, the Maipo River, which is the main river around Santiago, swelled and led to water cuts in the capital. 4.5 million inhabitants of the capital were deprived of drinking water for 36 hours and the raw water was saturated with mud and therefore could not be processed.
In both cases, we have to put up with extra costs, which make our costs higher, and were losing money. However, the commercial momentum in the course of this past year has been very good, I would say very good over all our zones, and this is particularly true internationally with a new geographical organization we've had over the past two years and is starting to really bear fruit.
The commercial quality of our teams is improving and the number of contracts we've won and which we've renewed throughout the world means that we can look forward to the future with confidence. They're very often the result of innovative offers, innovative in terms of technology, the commercial terms and contractually as well. Let me illustrate what I'm saying by commenting some of the contracts we've won recently internationally, where the accumulated amount of all the wins is above EUR2 billion.
Let me also quote the extension of the operating and maintenance contract for the drinking water site in Sydney. The contract has been prolonged by 14 years for EUR650 million. This illustrates the fact that we're continuing to strengthen our position on this continent with recently the acquisition of Perthwaste, which is one of the key service providers in the region around Perth.
In China, our growth is speeding up. Environmental worries are at the heart of the Chinese government's development policies. Two examples of this, building and operating of the industrial residual water site in Changshu. This is a contract for EUR350 million roughly, over 30 years. Then the operation of our Hong Kong site for 15 years. We are preferred bidders too for an operating contract for the biggest desalination site in California. This is a site, which in two phases will be producing 380,000 cubic meters of water per day and the duration is for 37 years.
Now this success is mirrored in Barka in Oman. We've won a contract for finiting and operating another desalination site for 20 years. Let me also remind you just some of the many successes we've had in the industry. Arkema, 28 of its industrial sites and with Renault in Tangiers in Morocco.
Before handing over to Christophe, let me just say a word about an operation, which is currently being finalized. This is an operation which is very close to my heart, because it meets or answers one of my convictions, that of our high potential for development in Italy, particularly in the water sector. We want to increase our shareholdership in ACEA up to 32.3% of the capital compared with 12.5% at the moment.
By acquiring ACEA's shares from the Caltagirone Group, which is our partner. This operation will be financed by an issue of new Suez shares as part of the negotiations of strategic partnership over the long term, which is currently being finalized with the Caltagirone Group. ACEA, as you know, is a listed company on the Milan stock exchange, and is one of the key players in terms of environmental services in Italy.
Now I'm going to hand over to Christophe, who will be giving the details of the accounts of this half year. Christophe, over to you.
Thank you, Jean-Louis. So I shall repeat what we had presented to analysts, with a few additional details. Let me begin by telling you about the changes in our turnover. As you might have noticed that, growth in our business is of 2.7% and this is despite all the scope and exchange effect, so 2.7%. In fact, the exchange effects are quite high and they increased in the second quarter as opposed to the third quarter, and they have a negative impact of EUR116 million. That both shows that the euro went up against the pesos, the Chilean peso, and also to the Australian dollar and the pound sterling.
However, this was made up for by the scope, by an increase in our scope. Here you see the recording of Driplex, which we bought in India, specializing in industrial water and it is now part of our scope in Suez. So this level of growth, both organic and other, is extremely great. What's more, this was always driven by very good international performance.
This improved in the second quarter – second half year, because here you see the breakup of our performance in this period, which means that the driving force that we have had, ever – thanks to the international division also increased in the second quarter. However, this is relative – for different reasons that I shall be relating to you, there's a relative stagnation in water Europe and recovery and recycling.
On the whole, this is a demonstration very clearly of our resilience in our portfolio and the care that we've always taken to make sure that there's a perfect balance in our various geographical components. So you can see the results of this during this half year.
Let me now talk to you about the EBITDA. It is at EUR1.8 billion as opposed to a little under a year ago, and so there's an improvement of EUR1 million, the differences of 1.9% in growth as well as minus 1.9% in organic. Here too there's an exchange rate effect, which is made up for by the scope.
Now in this effect we have clearly pinpointed a recovery of EUR36 million of a provision that we had made with a view to covering a payment risk in capital gains with Derun that is our partnership with Changshu water in China. Since the taxation was really favorable for us, so we took it back in the first quarter and so now it's been stated as a variation of the scope.
Now if we look at the organic development of EBITDA, so there's a different situation for all three divisions. International is doing really well all through. There's also a persistence in water Europe, which is suffering, and I'll also show you the impact of the price of electricity, which remains quite important.
Apart from that, you also have a very mediocre performance by water Europe, which was further increased by the EBITDA with the end of the contract. So in all, there is a drop in margins, in EBITDA. This is extremely significant, due to the exchange rate effect because of the higher level of operational profitability that we had in Chile. As a result all marginal changes in operational profitability has more than proportionate effect on profitability in general. So that is as far as EBITDA goes.
Now let me speak to you briefly about EBIT, and this was at EUR580 million, so a drop of EUR6 million as opposed to last year. That means a drop of 1% and minus 2.3% in organic growth. So this variation in the EBIT reflects the EBITDA as well. I will be showing you what the results are for each division.
However, you will get all the results in the annex as well as of our Compass program, which is for further operational efficiency. In the first quarter of 2016 it led to EUR114 million right through. So that is in compliance with its geographical distribution and the various sources. Might I remind you that we have already increased our aims in the light of results that we obtained in 2015. Jean-Louis will touch upon it later.
Now let's talk about our divisions one by one. Let's start with water Europe. Water, as we all understand, was extremely disappointing in this first half-year, particularly if you look at the bottom left in the document that you received, because in France and in Chile, we see a major drop in volumes. This is the impact of climate, and exceptional climatic conditions that Jean-Louis mentioned a little earlier, extremely heavy rains in France in the last three years and during the third quarter.
As Jean-Louis pointed out, in addition to the heavy rains, there's been a very low demand for our volumes. There was also accidents in France, which were not completely covered by our insurance as well as in Chile. So we believe that in the second quarter or half of 2015, the impact of all accidents, incidents and rain account for nearly EUR15 million less of business.
Now in Spain however, there is a normal development of business. In Barcelona, however, the development is faster than in the rest of Spain. So these short-term events were quite clearly unexpected, and they are part of a general depression, which is hardly surprising. I would say that this depression is due to various reasons. To begin with, a deflationist environment which is unfavorable to all price changes, particularly in our model. Besides, as you can see over here, if we look at our public service delegation in France and their scope, it's limited to 0.4% in the first half year.
The second reason for this depression is the expectations on the side of the Spanish regulators because of the political context as you know it. So we haven't even started or concluded any kind of rate or tariff negotiations. We have Spanish contracts but which are being negotiated on a yearly basis. In the last few weeks, the pace of renegotiations have picked up a normal pace, but nothing has happened so far.
Then finally, there were very few renewals of contracts, as you can see over here, and it's for these three reasons that were the base, if you like, and in addition to that we had bad – heavy rainfall and accidents. Also, I was talking about this parallelism between EBITDA and EBIT. In water Europe there's also the end of the Lille contract, because that led to a drop in concession rate and as a result of depreciation as well.
Now briefly let's talk about recycling and recovery in Europe. Now I'll begin with the changes in business. So look at all the volumes that we are processing in our various – on our various sites. So here we see that there is a slight drop. I am being cautious, but undeniably, right through the second quarter we've noticed that there is a slight improvement as opposed to the other years.
You see that, because if you look at what we call our synthetic index, which gives you all volumes that we have processed on our various sites, there's a slight increase of 0.7%, whereas at the end of March I showed you a figure which showed minus 1.4%. So there's both a pursuit of orientation towards more value and less elimination. So we've got two tonnes for one, which was in fact the target we had in mind.
In our effort to improve recovery, I'd like to point out to you, and you've got it in the details at the back of the document, we will be bringing into service three recovery initiatives, four in the UK and one in Poland. We would also like to mention the major effect that we are making to launch our digital order in France, and that is extremely important, our partnership with Terracycle in France, plus an Internet offer that we launched in France.
So all in all, we find that because of all this new business plus the direction that we have taken, the development is as it is. On the other hand, in this division, we do find that there is a persistence in the low cost of raw material and I'd like to include electricity over here too. This is what we sell. So the point surely all – because of all these reasons in the first six months, the EBIT rate of this division has remained constant as opposed to the first one at the same time last year.
I could say this differently. I would say that the organic variation of minus EUR11 million and the only impact – plus the impact of electricity, is at minus EUR16 million. So I think that very clearly shows that the efficiency measures that division has undertaken have proven to be good.
Now, briefly let's talk about the international division. Here, despite the exchange rate, which is extremely negative, nearly 2.4%, the total growth is of 10.7% and 11.6% in terms of organic growth, which is extremely satisfactory. We find that all the components in this division are contributing to this positive development, makes up for the non-existent growth in Latam and Europe. We find that this is quite satisfactory.
Apart from that in Australia too, our business is doing well. In North America, volumes and prices are doing well, particularly in water, which is virtually all that we have in North America now. In the Mediterranean basin, which is also where we are taking advantage of a major contract that has been implemented in Barka and the desalination plant in Oman, we're doing fairly well.
In Asia, and in line with what we had announced, we are showing both volume maintenance, plus a development of our business in hazardous waste treatment where we have very high demands. The order book has also increased by 10%, almost EUR1.7 billion – EUR1.3 billion. So this growth in turnover is being also followed by greater profitability, operational profitability so an increase of 5% in EBIT.
I'd like to remind you that it is in this division that any changes in scope that we have recorded because of tax provisions that we had taken up and at the time of the setting up of the partnership within the Group, so there are three major developments which shows a greater difference in the various divisions that make up Suez in – against a background which is also extremely diverse.
Now, if we look at things in general, now from EBITDA I look at operating income, I already mentioned that there is a major similarity between EBITDA and EBIT and their changes. Now as far as EBIT is concerned, you might note that the rebranding costs have dropped EUR7 million as opposed to EUR18 million in the first quarter – half year of 2015. That is because of strict cost control. Apart from – as a result of all this, there is an improvement of EUR22 million in operating activities.
Let's take a look now at the income from operating activities. You will find that there's an increase in the net debt, which is the impact of another reason. We've also noticed that there is a drop in our net debt, which is 3.8% – 3.78%. It was 4.3% about a year ago. At the same time in the week of our purchase in Australia, we have a volume effect. So in all, there is an increase in the cost of net debt.
Now the effective tax rate is EUR66 million as opposed to EUR65 million, 26.9% as opposed to 23.1%. So a fairly regular rate, because we had a tax credit which was a non-recurrent effect. So these are the impacts on our share price, and that is EUR265 million.
Apart from that, there is also a major drop in minority interest. This is because of the fact that our minorities in Australia have gone and to a lesser extent the drop in euros of the results that we have obtained in Chile. So as a result, the net result Group share has increased. It is EUR174 million, as opposed to EUR141 million about a year ago. And the details, once again are in the documents. You've also got the effect on the share price. That is EUR0.3.
Let me speak to you now about the financing. Let's start with the CapEx. In the first half-year all our investments, financial and industrial, were at EUR623 million, an increase of 5% over last year. This is made up of – we might keep in mind that we must be extremely careful in terms of all investments in infrastructure, because within the EUR623 million, EUR104 million were financial investments whereas there were just EUR10 million in the first half of last year.
So these financial investments, as Jean-Louis mentioned, are essentially Driplex in India and Perthwaste in Western Australia which now gives us a provision of major volumes, particularly in this part of the Australian continent, and now CapEx represents 3.9% of our turnover, which is line with our medium-term business.
Now development CapEx has come down by 13%, which is a reflection of our choice of dropping investment in our traditional business lines in Europe. Now investments that are dedicated to our regulated water in America, USA, have gone up by 12% as opposed to the same period last year, and we would like to take advantage of our assets in US, $1.3 billion, because we have a major – a more profitable return on the whole. Changes in CapEx just is a reflection of our selectivity in terms of our business in water.
Now let's take a look at the free cash flow. So this production was at EUR179 million and this includes the traditional effect of working capital requirements in the first half-year and to which was added, as expected, the specific impact of the working capital which was following the Lille contract ending, EUR141 million. So this would be a seasonal effect, which would be turned around by the end of the year so we have now done all that should be done to ensure that free cash flow is in line with our guidance.
So now to conclude, I'd like to talk to you about the net debt. It's EUR8,765 million. So this reflects in a semester when free cash flow is normally quite low the payment of dividends to our shareholders and minorities, and it represents EUR547 million and EUR104 million in financial assets that I mentioned to you earlier.
So on the whole we've got a leverage of 2.3 times of EBITDA and we've continued our very active management of debt. You'd have seen the success of our operation, our 12-year operation, in the month of May. You've got a graph which is showing you the cost of net debt and gross debt and the drop in these costs and these expenses. So Moody's has given us an A3 rating which is very appreciable given the present turbulent financial conditions.
So these are the main features of all the major figures and elements – financial elements, and of course we shall draw our own conclusions and for which I give the floor to Jean-Louis.
Thank you very much, Christophe. Christophe has just given you the details of the accounts and I'm going to explain to you why I remain optimistic in this context, which is more difficult than had been anticipated.
First of all, we are facing up to the major challenges of the 21st century. We have always been key players in waste and water management within France. Recently we've become a key international player in getting energy from waste, from managing resources. We're recognized for the quality of service, use of technology, quality of our contracts. But we have to keep going; we have go to go more – go further.
There's a real scarcity of resources which is going to emerge over the long term. Regulations concerning the environment are becoming more stringent with climate change for example. All this is impacting our world, our world which will become more circular, more cross-cutting, more based on partnerships, and I certainly intend to keep working on all these different points.
Our business is changing and therefore there are many opportunities to seize. We have to seize them with a clear strategy in mind. This strategy is based on our determination first of all to be excellent in two fields, our key activities, waste, transforming waste into energy, and then water, which has become a scarcer, and we have to of course manage the whole of the value change.
Our determination is to manage a balanced portfolio, working on balances between the geographical zones, Europe, internationally, local versus national, industrial, regulated, non-regulated, long-term contracts which are very often capitalistic, and short-term contracts which are very often more competitive but don't require CapEx. And we have to concentrate our resources on the sectors which provide growth for the future. And you know that we have four big boosters here, smart, value, industrial customers and the international activities.
Despite the political and economic uncertainties though, which certainly are impacting and reducing our possibility for growth, and despite the fact there is a deflation in Europe or a deflationary context at any rate, we are maintaining our growth – our revenue guidance for 2016 of organic growth of above or equal to 2%. EBIT will be higher organic growth than revenue.
Over the medium and long term, we have to react in order to achieve our end-of-year objectives, and let me tell you that we've already started to react. You know that our targets cover five points, improving the organic growth and EBITDA 2% with the hypothesis you know, financial lever of 3 times and dividend of EUR0.65 and free cash flow of roughly EUR1 billion.
In the course of this half-year, I've decided to really focus on two things. In the short term, working on our Compass program, so the 2016 program will go from EUR150 million to EUR180 million in savings. Secondly, we'll be managing more strictly our investments – Christophe has alluded to this – particularly in France, and we want to be more stringent in terms of the debt. We will be also emphasizing the geographical zones and the business sectors which bring in the most money.
We'll also be managing the cash flow of the Company more tightly and this of course concerns the working capital requirements. At the same time, we're involved in a major transformational plan which will make Suez more integrated, more agile, providing better performance and closer to our clients.
We want to break, if you like, with the history of the Group or if you like speeding it up. We used to be 40 big entities with different pasts, different backgrounds and quite a high level of independence. Bringing in one single name, Suez, setting up an independent Group, having to – really needing to share very quickly our innovation meant that we've introduced a better form of structure for the Group. And this will meet the needs of cutting back on costs, restructuring in order to make more resources available for commercial development and innovation.
This translates in terms of fewer hierarchical levels, more cooperation, cross-cutting skills and more pooled talent and skills. And we'll have a Group culture which will be more focused on the client. Wherever possible we'll be working on integration – that will be the key word – in order to fully profit from the fact that we're an integrated Group sharing good practice and we have functional skills and talents which are all focused on our operational needs.
This transformation affects everybody. It will be mobilizing hundreds of people within the Group and therefore I wanted to involve of course all the partners, managers, the staff and of course the unions.
We've kicked off discussions with the representative organizations of the staff in June and these negotiations and discussions are ongoing; they'll be ongoing throughout the summer and they will be winding up in September leading to concrete measures which we will give you information about when we give you the results of Q3 on October 27.
Speeding up all this process, which will allow us – must allow us to achieve this transformation within a maximum period of three years is absolutely essential; I would say even two years better. It's essential for guaranteeing the success and development of the Group which I'm fully committed to.
To conclude, let me confirm that in a more difficult context we are implementing all the measures necessary to achieve our targets of 2016 and this is what gives us confidence, but we're also very watchful about what we're doing and for the future. Thank you very much for your attention. Christophe and myself are now of course available to take your questions. Thank you.
Thank you. [Operator Instructions] First question, Michel Debs from Citi.
Good morning, everybody. I've got a question about trends in the EBIT margin. In the international division, page 13 of the presentation, you were saying that revenue had gone up, going from EUR1.8 billion to EUR2 billion, EBIT had gone from EUR203 million to EUR254 million, which is an increase in the margin therefore. However, if I understand the graph which is on the bottom of page 13, the EUR254 million of EBIT which is showing also cover a reversal of provision of EUR36 million, also the impact of the savings you made in H1, representing EUR21 million.
That is a total of EUR57 million. In other words, if I understand your presentation properly, the EBIT of the international division, if you were to exclude the non-recurring impact of reversal of provisions and the impact of the cost cutting, the figure would be down compared with last year. So first question, is there that much pressure on your activities so that excluding the non-recurring elements this market should be more buoyant?
Second question is to try and understand all your growth prospects. Previously you said that for 2017 your ambition was to make an acquisition. This acquisition would allow you to achieve synergies and now we understand that this ambition is not a key one. You've been talking about ACEA. ACEA is a long-term strategy, this is a five- to 10-year plan on the Italian market. So if we're looking forward to the next one to three years, you probably put aside the capacity of making acquisition.
You had put EUR2 billion set aside. What are you going to do with this money? Are you going to try and make acquisitions or are you going to try and reduce your level of debt in order to cut back on the expense of the debt, the interest, and improve your free cash flow? Thank you.
Thank you. Let me ask Christophe to answer the first question on the EBIT of the international division and then I'll ask about the EUR3 billion target we have and how we see our acquisitions in the future. It's clear that – and you said it very well, it's clear that our ambition of EUR3 billion has really been – is no longer to the forefront.
First of all, because we didn't find as of today any significant asset which was interesting, advantageous enough for us to buy. But let me say that we have carried out a whole series of operations, the latest one being the ACEA operation. You described the ACEA operation as being a medium-term operation. In actual fact, well, you're right, it is an operation where little by little, as we did and we have done in other zones, for example in China with the agreements with New World Group and also the Caixa agreement in Spain. In our business time is a factor or constraint which has to be worked into the equation.
The ACEA operation is one where we put the income used on the equivalence method and we think that the EBIT will be about EUR22 million. On your question of what we're going to do with our financial flexibility, well, this is something we've used so far on two things. You said yourself, managing the debt, which is an essential part of our strategy, keeping the net debt over EBITDA ratio at below 3 times. This is key for us and also, as we see opportunities arising we want to make acquisitions. So this is what I can say on this point. Christophe, would you like to answer the other question.
Yes of course. Concerning trends in the operating profitability in the international division, your sums are absolutely spot-on. The reversal of provision, which is good news in fact, is treated as a variation in scope. If I focus in the variation in the organic trend of EBIT though, which went up by EUR29 million in the international division, let me just make two comments, and of course the profitability and operating profitability has gone up considerably.
First of all, we have Compass, but in the international division this doesn't take the same shape and form as the Compass measures we have in Europe Water and Europe Waste. Compass in international division represents – is more focused on the commercial performance rather than actually cutting back on costs per se.
If you look at the annexes – and we always present things the same way – you'll see that in 2015 the EBIT of the international division in H1 had enjoyed a reversal of provision. I think it was EUR12 million. So this gives you a baseline for comparison. So I can say yes, it is an improvement in the operating profitability following on from the improvement in revenues of the international division in H1.
Thank you. Julie Arav from Kepler.
Yes, good morning. I've got three questions. The first one concerns the ACEA operation. Can you tell me if the increase in shareholding by the Group will change your influence within the governance structure of ACEA? Will you have more seats on the Board? I understand the industrial logic of this operation over the long term, but do you think that at the end of the day you'll be able to – if you compare it with Agbar – it could take a few years for things to pan out. Do you think the long-term objective is to take over control of this company where you think there's a real organic growth potential? And do you have an idea of the closing date on this?
The second question concerns this year's guidance. Let me just do a few sums with you. If we applied the minimum 2% of organic growth on EBIT and if you take away the capital gains of last year, we would at the end of the day have a target EBIT which would be EUR1,255 million before ForEx. If you consider the ForEx impact we'd be at EUR130 million, EUR140 million, so the target EBIT would be EUR1,220 million, EUR1,230 million before capital gains.
Now if this figure is right and if you take away the EUR36 million of capital gains, then this means that in H2 you'd need to have organic growth in EBIT of roughly – organic plus ForEx of roughly 6%. Now I know that there's a Compass program which is working, but if my calculations are right there's still another EUR10 million to EUR15 million which you're running after. Are you looking forward to positive figures in H2? And do you not think that the figures might go off the rails in terms of volumes for water, for waste? There we are.
And what about 2017? G&A are flat but I think that you said there was an underlying macro ambition of EUR2 billion with a euro GDP of just over 1%. Don't you think that this could be – this figure should be based on the underlying organic growth of your M&A.
As far as the last question that you asked is concerned about our ambition and our growth, we had said that we were planning to continue our growth of 2.3% in the medium term in the given environment.
As far as M&A is concerned, you were quite right. You said that we weren't going to anymore. Well, we have undertaken quite a few operations but what is true is that we have not really found any assets of the kind that we would like and that is why we haven't done what we were planning to but that doesn't mean that we have given up on our ideas. It just means that at this point in time, we will not be doing anything before the end of 2017.
Now, as far as guidance is concerned, I will let Christophe discuss that with you and he will give you all the details. He will answer to all the details you give him. As far as ACEA is concerned, I have no date as such for closing. And I might just add that if all goes well, because as you do know, this is a share swap and so we need to have the auditor and the French registration so that takes a while. Closing would take place towards the end of the third quarter.
Anyway, it would be at the end of the year in all cases and that is when we would have a physical exchange or swap of these shares. Now that would be once the commission has validated all the assumptions that we base the swap on. Now have we any influence on that share? I think we do. I do believe what I feel is extremely important, is that we could help ACEA to raise a couple of challenges, some challenges in our business.
Firstly, consolidation of the water market in Spain, as you know, between the consolidation in the north of Italy, be it Lazio or near Florence, some discussions are underway which will take time, but there will be a consolidation on the Italian market in the years to come as far as water goes. So that's one issue in which due to our presence, we would help ACEA considerably.
Apart from that, in waste, there is a requirement now to finite the treatment for the City of Rome, or to find another possibility because so far, all this is being shipped out by train and being sent to America, but we will bring in our own know-how. So we bring in our technical influence as such, and that can only increase in the coming months and years.
As you said and as I often repeat in myself, these are all long processes. Anyway, thanks to this acquisition, we have increased by EUR22 million, our profit as far as EBIT and EBITDA are concerned. And all thanks to this operation. Christophe, would you take over now as far as guidance is concerned?
Right, concerning guidance, yes, good morning, Julie. Your arithmetic are very relevant as usual. Your math is very good. There might be a difference in terms of variation of exchange rates but I will leave that out for the time being. So it just means that firstly, we have of course to recognize that we were disappointed the performance in the first half year, and particularly, this third quarter.
Well, will we actually have the guidance for EBITDA at the end of the year? We don't know. Is it realistic? Yes. And for that, there are several reasons. Firstly, and I think you know the answer and that is because of the seasonality of EBIT. It's normally about 60% of EBIT that we make in the second half-year. Secondly, as Jean-Louis said, we have already implemented the increase of our cost saving and efficiency programs. So that is nearly EUR30 million for the whole year. It should get to EUR130 million by the end of next year.
Thirdly, in the course of the second half year, and at the end of the year, we will have an impact of the new sites that will be brought into service. You've got the recovery sites in the UK, the Poznan generator in Poland as well as the desalination plant in Barka so which means that our goal will remain accessible.
You were quite right to point out that there are two hazards that might have an impact on rates and that would be the water volumes which would be during a period which is very important particularly in Spain and in France. Also, if there is a mild improvement, an actual improvement that we saw in volumes in recovery and recycling in Europe, then it would help.
Now, to relate to what you were talking about, organic growth of EBIT between now and 2017. As Jean-Louis mentioned, there will be a revision in forecast that undertook and this will be in line with the figures that we now have.
And in passing what you mentioned about giving up our ambitions, I wouldn't have said that in that particular way, when it comes to external growth because by definition, when this agreement with ACEA will be concluded, we will have improved EBITDA and net income thanks to this contribution at present, there would be an increase of EUR22 million with the addition of ACEA between now and 2017. Thank you.
Thank you. Philippe Ourpatian from Natixis.
Yes, I have a question, good morning. And it is concerning the waste volumes in the UK and hazard waste, as you mentioned in the press, you had said that it had increased in volumes. I thought that this contract for hazardous waste was a short-term contract and that it would keep on increasing your growth.
And then two technical questions for Christophe. Please give us your financing cost. You said that in the press release but I would like to have the depreciation and the charges and costs. Also, what would be your financial costs if you into account all this?
Secondly, what should be the rate between now and end of 2016 because we have certain tax effects, which are fairly high, between one quarter to the next, and you see the variation in the course of this half year. So will it be 25% this EPS rate or will it be higher? Thank you very much.
The income tax rate, well, thank you, Christophe, if you would answer all the questions.
All right, now, about the dangerous or the hazardous waste, it was petrochemicals waste, pharmaceutical waste, and that has given us a lot of momentum, particularly in all continents and we mentioned that twice. We mentioned it in Asia and in Africa where we've got three sites, three treatment sites and we have a medium term or long-term contract there.
In Europe, we have also recorded excellent momentum in hazardous waste treatment. Indeed, these are short-term contracts, particularly because in line with the hazardous waste, we also have a lot of polluted soil that has to be treated which are always spot contracts. However, they are at a very high level for each quarter.
Concerning the cost of financing, we never include the impact of the securitization operation and that is about EUR380 million. Apart from that, if I understood your question, today, we have a proportion of fixed rates, which you will get in the annex, which is about 71% to 72% at the end of the first half year. Keeping in mind that we also have a special debt index in Chile because of regulated water activities is covered by protection against inflation when it goes over 3%.
Your last question was concerning our income tax rate. Now since there was certain favorable effects particularly in Spain and in Chile, if you remain at 28% and 30% of income tax, then that would be a fairly good indication of what would be our results in the second quarter.
About the polluted soil, you talked about spot contracts, would that be for the whole year or would there be a short stop between the third and fourth quarter and if they are going to be slightly longer, when would we have a volume effect which would give us a different rate now or next year?
While listening to your question, I was going to say that since the polluted soil business, you do know that we have huge stocks that have to be treated as urbanization also increases so I would be tempted to say that this would be a long-term effect since there is accumulated effect of several small contracts. However, I would be incapable, Philippe, of giving you a threshold effect. In the medium term, you might imagine that this momentum is likely to last when it comes to polluted soil.
Thank you very much.
Thank you. Olivier Van Doosselaere from Exane.
Olivier Van Doosselaere
Good morning and thank you for your presentation. I have three questions. Firstly, is about the cost of electricity and you counted the impact in the first half year, EUR60 million it represents. The price of electricity have increased and so the comparative base would be better. Do you have an estimate of what that is likely to represent for the entire year 2016?
The second question is to come back to your former ambition of EUR13 billion of EBITDA between now and 2017 with all your acquisitions. Now apart from the fact that there were no major opportunities, we note that it's 3 points twice, and that you brought down your ambitions twice as well. Given your aims that you had announced last year, do you feel there is going to be a slowdown in EBITDA and that is why your financial flexibility will be not so great and so you won't have the ability to make all the big deals that you made last year.
And my third question perhaps to clarify guidance, organic growth would be a minimum of 2% of EBIT and I imagine that this excludes a potential negative impact of EUR20 million considering your less treatment of water volumes in the summer. Could you also please mention in light of what happened in July compared to last year same time for the same volume of water.
Thank you for your questions, Olivier. Regarding electricity, the impact of electricity prices on the entire year, quite honestly, at this point in time, as you said very clearly, electricity prices keep varying so it will be very difficult to give you an exact figure. However, if everything remains the same, EUR13 million worth of impact would perhaps be roughly what it should be unless, of course there is an unexpected increase or drop in electricity rates in the coming weeks.
Now regarding our ambition of EUR3 billion, it is true that we didn't find assets to our liking, however, we would like to say that ever since we started looking, we have looked at a certain number of operations. There was one that we attempted in Northern Europe on hazardous waste and we were not selected. Another one was in Chile.
We did buy a certain number of assets in Australia for instance, last year. We have been active but we have, indeed, not found anything really interesting which would be strategically satisfying, which would fit with our own financial criteria. We haven't given up, it's just that we were not able to find the right conditions to achieve all that we set out to do.
Now, regarding this giving up of – about the audit or our financial flexibility in the Group, we have always been extremely clear. If we were to make a big acquisition one day, yes, indeed, we would really go above 3 times as we did when we acquired our Agbar site, and it would also explain to the market how we get to this leverage of 3 times of EBIT and in what time scale.
To conclude, I would say that we are extremely careful, depending on the increase of EBITDA, we always adjust our debt in order to ensure that the ratio always remains at about 3 times. So there is financial vigilance and I think Christophe and I have mentioned this and I have mentioned this and it's also because of existing opportunities. If there are opportunities, we will come back to how we will actually finance the operation.
We hadn't changed our strategy at all, in fact, I would like to remind you that the actual operation is very much part and parcel of our desire to increase our business, particularly the more stable ones. In those areas where we feel there is growth. Now, regarding guidance, would you like to answer, Christophe?
Yes, Olivier, you are quite right. In our EBIT guidance, we had clearly declared that EUR20 million in 2015 which was due to adverse climate conditions in Spain and in France end of July, I would say that since end of June, early July, the climate is in our favor in Spain and in France, which was not really the case. It has evened out the effect.
Yes, good morning to everybody. The first question relates to Italy. Do correct me if I'm wrong but I see the Catagirone Group is holding a little short of that 16% of ACEA. So why are you only stepping up then to 23.2% by this transaction?
The second part of that question that was sort of touched upon earlier in a previous question, what is the longer-term thinking about the shareholder level that you want to have in ACEA noting that in the past, you have progressively increased to full ownership of the likes of Sita and Agbar? Have you got ambitions ultimately to talk to the City of Rome and see if you can do something with their shareholding too.
Then the second question is just a little accounting question, just looking at the presentation pack. You've got the IFRIC 21 impact base for this year, and lastly, can you just confirm that by the time we get to the full year, they are no longer there as a reconciling item between operating income and income from ordinary activities. Thank you.
Okay, I will answer the first one and Christophe the second one. Well, it is true that the shareholding of Catagirone is higher than the one we are going to buy. The reason is very simple, as it was mentioned in my presentation, what we want to do is to have a long-term cooperation, not only with the City of Roma but also with Catagirone. Catagirone will therefore, maintain in both company, ACEA and Suez, a shareholding and that is part of the common strategy that we want to develop together. So we are very happy to long-term partners with them, we will continue in a different way and that explains why we will only be a 23.5%.
Now, on the long-term, of course, you know very well that the City of Roma owns today, 51%, it will depend of their willingness or not to keep the shareholding. If they want to move, then we will discuss with them. There is no problem. Our ambition is to give the best possible service to the city, to develop business with the city and with Catagirone in Italy and probably in some other places. As I mentioned before, it was and it is even more today than yesterday, a long-term relationship with both partners. Christophe, can you answer?
Yes, Martin, I confirm that end of the year, the IFRIC impact would be like last year.
Thank you. We will take our next question from Guy MacKenzie, Credit Suisse.
Good morning. A few questions from me. Firstly, just a question on international. In US water, I think you did organic growth of just under 4%. I just wanted to ask, I mean your peers have been far more active than you recently in privatizations. I know you have previously talked about valuations as a key impact in ACEA, but I'm just wondering with recent legislative changes in New Jersey and Pennsylvania, for example, it seems to be less of an issue. And you have looked potentially to deploy more capital into United water in H2.
Secondly, also on the M&A front, you mentioned that you have looked at BGG in the Netherlands and you walked away, I assume that is primarily on antitrust impediments. Just wondering what you could comment on whether or not you are looking at Atero. I asked because the synergy seems a little less clear to me given the nature of the business and competition on those sort of assets have been pretty fierce from Asian buyers but I just wanted to get your thoughts on that.
Secondly, on the targets, once we get the 2017 EBITDA and this is clearly not a priority anymore but still talking about 2% to 3% growth this year and medium term. I guess that is probably based on the 68% growth in international but you have done quite a bit better than that in each one and Q2 has clearly done better than Q1.
You had tough weather taking about EUR15m off the EBIT in water this year and that saw an upside of about EUR20 million we had on weather last year. I was wondering why there is about a EUR35 million difference. Just wondering, I mean your target seems a little bit conservative. I'm just wondering if that is on the back of expecting further downside in Spain or if we should really be seeing further upside potential from there.
On the US market, it is clear that the regulated water business is one of the key assets we have in the US and it has been growing steadily so we are quite happy with it.
Now, in terms of external growth, it is possible and we are doing some tuck-in acquisitions, but we do not anticipate any large regulated business buy in the US because today, it seems to me that the multiples are very, very high.
Therefore, what we try to do and what we have been developing in the recent past is the fact that, we are trying to develop as we say, we have done last year, new models by which we offer our technical knowledge of services but the financing is done by specific fronts or specific companies.
Therefore, we are much more in the idea that we can develop, if I can say, the non-regulated market and for the regulated market, we are doing the classical tuck-in acquisitions. Don't forget that in the regulated market, each time you buy with high premiums, the goodwill that you get is not usually remunerated by the regulator. Therefore it is a strong limit to any development in this kind of business.
But there is opportunities in the US, in the water US business and it is something we have been looking at and still looking at to develop our business in the US.
Now, you ask me, if I am interested by the new, if I have understood well, the Atero opportunities, clearly, as usual, we are looking to all, I should say, the opportunities, the potential opportunities and I am not going to comment anything about something which is in the process, just look to the past. It is not the first time Atero is coming to the market and as far as I know, we are not the owner of Atero today. So on the last question, on the targets, Christophe, do you want to – can you answer please?
Yes, Martin, I dare to say that you would tell us we are slightly exceedingly conservative and one of your colleagues some minutes ago told us that we were maybe fearless, so I got the feeling that I should be in the right range.
Our next question comes from Pinaki Das, Bank of America Merrill Lynch.
Hi, good morning, everybody. Thanks for taking my questions. I've got a few questions. The first one is on strategy. Just looking at the Benelux market, obviously you haven't taken part, or you did not go ahead with Van Gansewinkel, could you give us an update on your competitive position in the Benelux market now that the market has changed with Shanks and Van Gansewinkel merging? What is the strategy to improve the situation there? Are you looking at sort of smaller tuck-in acquisitions in the Benelux market. That is the first question.
The second one is on our – of course, we have seen that power prices have gone up in the last couple of months, mainly helped by coal prices, but also the carbon floor coming to the mix now in France, are you looking at greater hedging for the next couple of years compared to, let's say, 2016? Were we impacted in Q1 or are you waiting for potential for further upside in the power price if the carbon floor is implemented as indicated? That is my second question.
And the third question is just on weather and sort of trends in July, we still have an impact from weather which is kind of one-off, which should not hopefully, impact next year but, are you seeing any sort of different trends in July compared to H1 and in general, anything different in July apart from weather which is different from actual? Thank you.
Just on July weather, don't forget that last year, the July weather was also very good and very hot months, therefore, when Christophe said that for the time being, it is balanced, it is something that you have, I think it's a good answer and of course, it will depend now really on what is going to happen in the industry, in the three months of the summer time which means July, August and September.
On the strategy on Benelux and Van Gansewinkel, etc., first of all, it is clear that we remain after, if it occurs, I will talk about that, but Shanks will be our main competitor after the merger with Van Gansewinkel, but we will remain number one. Second, of course, we are going to see and we are waiting what is going to be the answer of the – to from antitrust.
Clearly, in my view, I could be wrong but I think that Shanks will have to sell some assets because it cannot, in my view, keep all their asset is buying from Van Gansewinkel and then we will see exactly at the end of the day, what does it mean in terms of the positioning for each company, but clearly, we will remain number one competitor in this part of Europe. For the hedging, Christophe?
Sure. In the wake of what I explained end of first semester, we said per year and we said in the European recycling and recovery division, approximately 4 gigawatt hour per year. Hedging is complex because it has to be done by country, by contract, and so on, but you can consider that we hedged two-thirds of the production.
So the topic is not so much are we going to hedge because we have a hedging policy, that you question and you pointed it out, at which time do we want to trigger some kind of hedge, it is clear that this year, we had underestimated the strength of the deterioration in power prices. But we have the full time permanent hedging policy.
Thank you so much.
[Operator Instructions] Next question, Louis Boujard from Oddo.
Yes, good morning. Two or three quick questions. The first one concerning the slides on page 41. Could you just talk about the negative contribution you had over this H1, roughly EUR1 million compared with last year. In EBITDA, EUR15 million, if the recurring and non-recurring part could change by the end of the year, what would be your objectives and targets for the end of the year?
Secondly, the contribution of assets which are currently being built and finalized, you said that these should come through in Q4. Can you talk us through about the contribution in terms of EBIT for the full year and the sequencing of this? Will the contribution come in the middle of the quarter, what kind of impact would this have on the full-year results then?
Then the final question concerns the international division with a growth, which is above your medium term guidance, it's double-digit in fact, how do you see the trends in this business for H2? Looking forward to 2017, are you being cautious about your medium-term guidance for international?
Lastly, for the USA, you seem to be still investing organically in activities over there and therefore, there should be fallout from that, what can you say about this in the short to medium term, can we look forward to positive impacts of this in the USA?
On the international division, you said that our guidance and focused at 6% to 8%, but we are doing our outmost particularly by investing more in the international activities doing everything to speed up even more this growth trend. We have our targets which are external ones, if I can put it that way, and then the internal ones that is what I can say on that. Christophe, would you like to pick up on the other questions?
Yes, good morning, Louis. For the two other questions, I think you can say that for the new units of energy from waste, in the full year, this will represent 1.2 million extra tonnes, so that is a lot, the UK, three units, Poznan in Poland as well, we believe that for full year, per unit, this have an impact of 5 million for EBIT and EBITDA, very little difference between EBIT and EBITDA, given the financial structure. This is for the full year.
The first question concerns the contribution of others, let me just say we are not trying to hide anything at all in terms of organic contribution, this is flat. There are a couple of things which kick and which point up this apparent discrepancy. Last year when we were negotiating our main lease, we didn't have to pay the lease and then we have a captive audience with the group which had favorable results.
So if I look at all this, basically, we are flat in organic terms for this particular contribution. Thank you very much.
Our next question comes from Sean Sutkus, Covalis Capital.
Hi, hello, Jean-Louis, thank you very much for taking my questions. I have in fact I used two questions. Correct me if I'm wrong but if I remember right, the guidance for this year excludes the ForEx impact which we should take into account for EBIT. Then once this is done, it seems to me that the second half EBIT level has to grow materially year-on-year somewhere in the high single digit level?
Secondly, I didn't understand the comment with respect to 2% to 3% growth going forward. Was that the EBITDA or was that the EBIT – could I just clarify? I mean, 2017 and further years? Thank you.
Christophe, if you can answer those questions please.
Sure. So when it comes to EBIT for the second half of the year, so we admit that the H1 performance is disappointing and we didn't expect to have so many headwinds mainly in the water division when we set the guidance.
When it comes to reaching 2016 EBIT, and I confirm that it is organic guidance, so ForEx is excluded, it is going to be challenging but I said previously in front that it is reachable and possible. In order to do so, we need to get a level which would be close to the one we achieved last year, and last year, effectively, we were helped by favorable weather conditions, but international performance was poor.
We have increased the Compass target by EUR30 million in order to reach EUR180 million at the end of this year. On top of that, as I said, we should be helped by the startup of the four new energy from West facilities, UK and Poland, the construction of the Barka desalination plant. So this is why the organic EBIT guidance is reachable, not easily but reachable, and I repeat that there will be two key question marks to be followed up very carefully. The first one is related to water volumes in Europe during the summer, and the second one is what is going to be the next step of the slight improvement we noticed in waste volumes at the end of Q2.
When it comes to the second part of your question, my understanding is that Jean-Louis said in the conclusion that when we look at the medium and long term, we confirm that we should enjoy an organic growth by 2% to 3% at turnover level, and this is why we are still sticking to the 9% ROCE, which is the target we are aiming to.
[Operator Instructions] There are no further questions. So that concludes the Q&A session today. Now, I shall give the floor to the board.
Well, thank you, all very much. Thank you for attending our conference and I would like to wish you all a happy summer.
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