Suez's (SZEVF) CEO Bertrand Camus on Q2 2019 Results - Earnings Call Transcript

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About: Suez SA (SZEVF)
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Earning Call Audio

Suez SA (OTCPK:SZEVF) Q2 2019 Earnings Conference Call July 26, 2019 4:00 AM ET

Company Participants

Bertrand Camus – Chief Executive Officer

Julian Waldron – Group Chief Financial Officer

Conference Call Participants

Emmanuel Turpin – Societe Generale

James Brand – Deutsche Bank

Anna Maria Scaglia – Morgan Stanley

Vincent Ayral – JPMorgan

Olivier Van Doosselaere – Exane

Fraser McLaren – Bank of America Merrill Lynch

Operator

Good morning, ladies and gentlemen, and welcome to the SUEZ conference call for half year results. Your host for today’s conference will be Mr. Bertrand Camus, CEO of SUEZ and Group CFO. As a reminder, this conference call is being recorded. [Operator Instructions]

Now I will turn the call over to Mr. Bertrand Camus. Sir, you may now begin.

Bertrand Camus

Good morning, and thank you for joining us to talk about our first half results. And I’m very happy to be with you today together with Julian Waldron, our new Group CFO. Although, this call is essentially focused on those results, it is now 10 weeks since I took over as CEO of SUEZ. So it seems to me natural to update you on the development of the strategic review.

We have been making good progress, and I can confirm you today that we will get back to you by October 30. We are running a comprehensive review, engaging clients, senior management and employees. All the teams within SUEZ have been outstanding, motivated and driven by the challenge of creating SUEZ 2030, delivering great service to our customers, developing responsible businesses and creating more value for all our stakeholders.

While we still have more to do before we present you the full plan, I can already share some of my conclusions and accordingly, some of my priorities. I’ll take you through this after discussing our half year results.

Both in term of top line and EBIT growth, those results show a solid dynamic and more importantly, the potential of our company to win profitable businesses. Each of our divisions has delivered revenue and EBIT growth in H1.

However, those results also show where we need to do better, particularly between operating income and net income but also in term of cash flow generation. It is also the case for CapEx allocation, today too widely spread, including towards businesses that do not earn their cost of capital.

Let me comment on the commercial successes of the first half that illustrate where I expect SUEZ to accelerate and grow over the coming years. While consolidating our positions in Europe, notably thanks to innovation, we are developing our two businesses in the international markets.

We are progressively growing the share of our activities with industrial clients, and we are stepping up our efforts in innovative fields to propose differentiating offers on high value-added segments.

Let me come back very quickly on three moves I am particularly proud of. The first one is Manchester. Since June 1, SUEZ has been supporting Greater Manchester in its strategy for a circular economy. This new contract covers the management of 1.1 million tons of waste produced by 2.3 million inhabitants. Our goal here is to significantly improve recycling rates and prevent the storage of more than 96% of household waste.

The second one is Singapore, where we just won a contract in which we will deploy our innovative smart software solution, called AQUADAVANCED, for the drainage system of the entire city. This expert system and at preventing flooding and protecting the natural environment.

The third move is the acquisition of a controlling stake in EDCO in the very promising market of hazardous waste management. This company is located in Jubail Industrial City, the largest industrial city in the Middle East. Those constructs show what SUEZ is capable of, central to the challenge facing communities in the 21st century and able to bring answers based on our technology, our know-how and our management skills as well as innovative business models.

I am now handing over to Julian, our Group CFO, who will dive into our financial performance.

Julian Waldron

Bertrand, thank you very much. Good morning, ladies and gentlemen. It’s nice to be here talking to you. Before I start going through the pages, I’d just like to stress to begin with, there’s no change of method or approach at this stage in the presentation of the numbers.

The format of the slides is as you’re used to getting. There’s also a lot more data in the appendices, so if it’s not on the slides themselves, I believe you’ll find it there. Now one of my objectives as we finalize the strategic review in the autumn will be to propose ways to make our results, I think, more quickly readable, easier to read and easier to understand. So, those changes are for a later date. Today, it is as you’ve seen before.

With that said, I’ll now turn to Page 10 of the presentation and comment on the financial highlights of the first half 2019. So first on the left, we had solid organic growth in the half, revenue is up 3.5%, EBIT is up 4.8% and all divisions contribute positively.

EBIT is growing a little faster than our revenue so that demonstrates some potential to deliver operational leverage. On the right-hand side of the page, net income rose to EUR212 million. This, of course, includes the positive impact of the Argentine settlement we received in April. Even stripping out Argentina and all the other one-off elements, net income on a like-for-like basis is up 14%.

On a like-for-like basis, net debt is slightly down year-on-year at the half year, and cash flow generation is in line with our guidance for the year as a whole, taking into account seasonality. However, I’m going to come back with some more comments on both these topics later in the presentation.

Looking at group revenue on Slide 11. It was EUR8.7 billion. Foreign exchange had a positive impact for EUR62 million, driven in particular by the appreciation of the U.S. dollar and the dirham against the euro partially offset by the peso in Chile.

Foreign exchange roughly offsets scope effects of EUR53 million explained by the disposable of two small activities in France. So, organic growth was 3.5%. If we now start to look at the performance of each division on Page 12, we’ll start with Water Europe.

Revenue for the division grew 1.3% on an organic basis to EUR2.2 billion, and let’s look at some of the components of that. So in France, volumes were up over the half and tariff indexations were also up 1.8%. These two elements offset the negative impact, notably at the end of the Bordeaux contract on which we commented at the end of Q1. And just as a reminder, for example, the Toulouse contract that we’ve won will only start on January 1 next year.

Turning to Spain. Tariffs were down 0.8%. The decrease that was put in place in May last year in Barcelona continued to impact the first four months of 2019. But as in France, volumes were supportive, up 1.7% this semester.

Growth in Latin America continues to be strong. In Chile, tariffs were up 1.8% and volumes were up 1.3% year-on-year. And its worth remembering that the comparison basis for both tariffs and volumes is a tough one as summer 2018 was particularly warm and dry.

For the rest of Latin America, construction activity was dynamic particularly, for example, in Salvador and Panama. And then looking at profitability, EBIT was helped by revenue growth noted earlier but also by efficiency measures that were put in place notably in France and Spain.

If we turn to Slide 13, Recycling & Recovery Europe. First, revenues increased 4.4% organically to EUR3.2 billion. Market conditions overall have been good this half. Assets are generally saturated in the market and that has supported price changes, in particular, with industrial and commercial clients.

Processed volumes of waste are up 0.2%. We still expect to be up around 1.5% for the year. And I should remind you that we’ve deliberately been reducing our exposure to paper and certain plastics recently as a result of the regulatory evolutions in Asia. In the second half of the year, we’ll get additional volumes notably from the Manchester contract, which Bertrand mentioned earlier. Our hazardous-waste activity has had a good half, thanks in particular to soil treatment and remediation.

We’re still in an environment where recyclate prices are low and overall, the good top line was balanced by increases in our costs. On the other hand, we also continued to work on efficiency in the half. So taking all of that into account, we had 5.9% organic growth in EBIT and our margin in the division expanded by 20 basis points.

Slide 14, International. Revenue was up 4% on an organic basis to EUR1.96 billion. Here, growth in Asia was the standout and accounted for nearly three quarters of the division growth. In China, we’ve taken over our flagship facility in Shanghai, SCIP Water, in July 2018 and our new construction projects in Macao and Zhuhai contributing significantly.

Activity in India is dynamic, so new construction projects have started, driving growth in the Africa, Middle East and India unit. In Australia by contrast, performances evolved as we said it would at the end of Q1 so volumes linked to, for example, the treatment of infrastructural waste, which was particularly dynamic last year, clearly slowed down as these projects came to an end. Australian revenue over the half dropped EUR19 million.

Construction backlog in the division is up 2.3% versus the year-end level and we continue to expect a stable contribution from construction activity to our full year 2019 revenue. So overall, thanks to that revenue performance, EBIT is up 5.1% on an organic basis and the EBIT margin is improving 30 bps to 14.3%.

Last, but by no means least, WTS on Slide 15. Revenue was up 4.8% organically to EUR1.2 billion. Again, it’s worth remembering that 2018 represents a particularly strong comparison basis. The level of orders signed over the period was particularly good at EUR1.4 billion and there are signs that, that order momentum is continuing into the third quarter. Synergies continue to develop well.

Within the division, Engineered Systems was the stronger of the two, up 6% organic. Chemical and monitoring systems was 3% organic. And profitability was, I’d say, satisfactory. EBIT came in at EUR44 million, up 13% versus last year and EBIT margin expanded 30 bps.

So overall, there are many areas, which saw strength in H1 and as a result, we can confirm our objectives for the full year 2019, as you see on Page 16. Now we’ll start talking about net income, cash flow and net debt. And to start with, I just wanted to come back on Page 17 on IFRS 16. Just wanted to confirm that the indications we’ve given you previously are fully in line with where we’ve come out at the end of June.

So turning to Slide 18, net income. It’s a busy slide, and I’m going to talk first about the key data below EBIT and then I’ve got some general comments to make when I wrap the presentation up when talking about net income.

So first, as you can see from the left-hand side of the table, financial charges rose slightly year-on-year. A lot of this is due to IFRS 16. We also had some lower returns on gross cash and about EUR11 million of additional currency hedging costs.

Income tax was a little better than last year. That stood in the high 30s. I’ve got no particular changes to call out in the half compared to last year. Minority interest rose, but this is largely explained by the sale of the 20% stake in our North American regulated water business, as you know.

So net income rose by 135%, thanks to Argentina. Impact after tax of Argentina was EUR145 million. If we strip this and the other one-off effects in 2018 and 2019 out. And you can see the calculation on the right-hand side of the page, net income was up 14% year-on-year on a like-for-like basis.

Let’s turn now to cash flow and debt. Two points to make on Slide 19. Firstly, on cash flow, the free cash flow numbers are boosted by Argentina and reduced by a higher CapEx spend in the first half. On CapEx, we’re more front-end loaded this year than last, so more seasonality. And we’re in line with our expectations overall, I would say.

On working capital, outflows are always seasonal in SUEZ, averaging around EUR250 million in the half over the last four to five years. We’ve got more than that this year, and I’ll come back to that a little later on.

Comparing debt on a like-for-like basis, we’re slightly lower than last year by EUR87 million. We are at 3.3x debt-to-EBITDA at the half year. And given the seasonality of the business from both a profit perspective and a working capital perspective and the frontloading of our CapEx, we’re broadly in line with our full year objectives.

Now having said all of the above and probably for me to conclude on the results, as Bertrand said, we can’t be happy with the performance on net income and cash flow this half. Our net income, the drop-through from EBIT is poor. The earnings accruing to shareholders, notably after the hybrid coupons, is quite unsatisfactory.

On all these three main areas, financial charges, tax, minorities, they’ve already been part of Jean-Marc’s focus, and they will remain central to what I need to do for the group over the next few months. Change needs to be quicker and sharper from what we’ve been able to achieve up to now.

On cash flow, I have the same conclusion. Selectivity on CapEx will be critical. We’re still spending too much in areas where the returns, both short- and long-term are not evident. Operational performance and cost reduction will be the source of sustainable cash flow growth in the coming years. And last but not least, the overall level of working capital and its seasonality are areas that we’ve started to look at closely.

There’s a lot to do. It’s been a really exciting last few weeks. It’s been great getting to work with Jean-Marc and with Bertrand, and I can start to see the potential we have to make meaningful change going forward.

So with that, I’ll hand back to Bertrand.

Bertrand Camus,

Thank you, Julian. Over the last 10 weeks, I have had the opportunity to meet with many of our customers and many of our employees in the different divisions. They’ve all shared with me the conviction that we have tangible differentiating factors that makes SUEZ unique. First, our businesses respond fully to our clients’ needs as they seek to adapt to future challenges, climate change, in particular.

We have exceptional teams and the best-in-class platform of technologies, experience and know-how. We enjoy a phenomenal reputation. Our clients can leverage these differentiating factors wherever they are in the world and trust us with their critical public and industrial services around water and waste.

However, as rightly said by Julian, there are many areas of improvement that we have to take on to be successful in a world that is rapidly changing. They are critical to be me and to the Board and are at the core of our strategic review.

I see the following priorities; the first one is profitable and selective growth. To grow profitably, we can leverage our differentiating strengths as we saw in our H1 commercial performance. I believe we can grow thanks to more innovation and more technology and also thanks to a more selective investment policy and new business models. By selective, I mean focusing on businesses that are winning in growing markets and where we sell based on our differentiation.

Our second priority is to improve our operating performance. We must, we can and we will reduce our cost. Operating performance is the critical lever to increase our return on capital employed and our earning per share as strongly as our shareholders expect and as our growth ambition request.

Last, we will also need to look at returns across the company as a whole. We will make choices and focus our resources and efforts on markets where we can create value.

The strategic review we are carrying out will define how we handle these priorities. My project for SUEZ is a project of profitable and seasonable growth, and my conviction is that with a renewed strategy, SUEZ has the potential to become the world leader in environmental services. Our plan will address a clear and readily understandable value position, reflected in a simpler presentation of our industrial and financial performance and potential, a financial trajectory that shows a sharp change in cost and performance in the near-term and creates long-term value.

As a result of our full portfolio review, a strategy to manage assets, which we believe cannot deliver satisfactory return, and we will also address the redirection of our capital resources to businesses where we want to accelerate and grow. As I already said, we will present this plan by the end of October, so I’m not going to say more about this at this stage.

Coming back to H1, Julian, and I are more than happy to take your questions.

Question-and-Answer Session

Operator

[Operator Instructions] We will now take our first question, and it comes from Emmanuel Turpin from Societe Generale. Please go ahead. Your line is open.

Emmanuel Turpin

Good morning, everybody. I understand that we will have to wait until the presentation by end of October to get more detail about capital allocation and cost cutting, et cetera. But I would like to maybe rebound on what Julian said, his comment about the unsatisfactory flow-through from EBIT to net earnings.

You did mention the financial costs, and I think the tax line or maybe the hybrid costs as being elements if – he wish to work on. I would be quite interested in knowing what his initial views are on these different lines. I guess we should give credit to the previous team on, I guess, the general sentiment, which I definitely share. SUEZ has been a pretty well-managed company.

And therefore, I’m interested in his assessment of amongst those 3 below the EBIT line, where is his best opportunities to improve profitability? And particularly in the financing line, is there any room to force early refinancing to improve the financial cost? Is the cost of the hybrids something which is not – no longer palatable, for instance, although it is very helpful in terms of ratings? Any comments you may give on those below-the-EBIT-line opportunities would be helpful. Thank you very much. At least as a general comment if you are not able to give some quantification. Thanks.

Julian Waldron

Yes. Thanks, very, very much for the question. And I’m sort of a little bit split here because I’d love to be able to give you more detail, but as you’ve said, I think we’re going to wait until we get to the end of October before we start going into these things and numbers. So I will, if you’ll allow me, stick to broad principles.

So first is the drop-through is not satisfactory. What we need to deliver for shareholders is growth in earnings per share, and that’s why I mentioned the hybrid coupons. It’s not so much that I have a particular issue with that as a form of financing. I mean we’ll have to look at what we want to do in the round. But I think when we look at what accrues to shareholders, we need to start at the bottom, bottom, bottom of the P&L.

Secondly, you’re right in the first comment you made. There’s a lot of work that’s – Jean-Marc and his team have started, and I’m going to pick up on many of those good things and drive them forward.

Thirdly though – and I think this is what’s important to me. If you change the way that you want to manage the business, then you can start to look at things in a different way. So – and that, I think, goes for all three of those aspects of the P&L. It goes for the way in which you look at financing your businesses around the world; the way in which you organize them for tax purposes, for example; and where you do and you don’t find it strategic to have minorities.

So I think we need to look at all three areas, but we need to look at it on the basis of the plan that we want to put in place to run the business. Now without going into details, I’m certain that when we look at the business like that, in a different way, when we start to manage it in a different way, that we will find opportunities in all of those three pockets to work differently and, therefore, to have a different outcome.

Now that’s what I’ve just said for the gap between EBIT and net is, frankly, the same thing for above EBIT. Again, if we look at cost, if you start to run the business in a slightly different way, if you don’t run all of your businesses for growth, for example, then you can start to look at the costs you carry in those businesses in a different way. So I put everything in terms of what I believe we can do over the next few years down to how is it we want to run the business to create value. And if we have a clear view on that, then I know that there’ll be opportunities to change the way the P&L looks going forward. I apologize I can’t give you more specific detail today, but I hope that gives you an idea of the – of why I’m so confident and the areas that I want to go and attack.

Emmanuel Turpin

Helpful. Thank you very much.

Operator

Thank you. Our next question comes from James Brand from Deutsche Bank. Please go ahead. Your line is open.

James Brand

Hi. Good morning. I also had a few questions for Julian. Firstly, I was wondering whether you could just give kind of initial view on whether you think – you had 3x net debt-to-EBITDA target for 2019 is where you’d like to end up in the medium term.

Secondly, I – to follow up on the last kind of thread to some degree but focus and appreciate you said that you didn’t want to give precise numbers until the end of October. But I was wondering whether you could just maybe give some initial comments and build a little bit more specifically on tax. Because obviously the tax rate is very high at the moment, and there’s medium-term guidance for it to come down slightly but still to remain above the 33% normal tax rate. And I was just wondering whether anything you’d seen so far perhaps made you more optimistic that, that progress in that particular area could be undertaken faster.

And then just thirdly, I was wondering if you could just comment on WT&S that there had been some growth coming through there but perhaps, less than one might have thought given the targeted synergies for that business. And you mentioned that 2018 was a very strong year, so perhaps it’s just a little bit of maybe all the cost cutting is not coming through just because it was a particularly good half last year. But maybe you could comment on that as well. Thanks so much.

Julian Waldron

Thanks very much. I’ll take those. I’ll try to take those three in order. Debt-to-EBITDA. So first of all, what I think is going to be the right level of debt-to-EBITDA going forward depends very much on the portfolio of activities that we expect to have. So again, with apologies for somewhat ducking the question. I think what I need to do and you need to do is to see what the overall portfolio direction of the company is going to be. And then I think from that, we’ll drop out what is the right level of debt-to-EBITDA. Having said that, I don’t think it’s going to be radically different from where we are today. But again, I won’t prejudge until the end of October.

What I do think is important, though, is that we don’t so much focus on the debt-to-EBITDA level, but we focus on the cash flow. What’s important to me is, how can we drive cash flow in this company higher, it’s a – again, it’s going to be a recurring theme of what we say. So I appreciate the question. I don’t have a direct answer, but I can tell you I think I’m much more focused on the cash flow than I am on the level of debt at this point. Because that’s going to drive so many other things around creating value for shareholders.

Second question on the tax rate. So first of all, I think there’s no particular news that I can give you on the progress of taking the tax rate from where it is down to the medium-term expectations that we’ve expressed. I think we’re starting to make progress on that. It’s a little bit below at the half year where it was a year ago. I think, for example, when I look at the work that was done or that has been done on the Argentina settlement, I think the tax there came in probably a little better than we expected overall.

Tax is not necessarily a particularly complicated thing. It’s a question of where you have profits and can you offset those profits if you have losses at the moment. We’ve been struggling to do that. So again, I think some of those things cannot be fixed overnight. Again, I think last thing for me that’s important is how can we review the overall tax rate, and I’ve actually got two things. The first is how can we review the overall tax rate in light of the strategy that we have. The strategic direction that we take, different businesses is going to have an impact on their profitability, their costs. Occasionally, it’s going to have an impact on the perimeter of the group as well. All those things are going to give us clarity on how we can work the tax rate down to something more sustainable.

The last comment I’d make is we need to make a difference as we look at tax as well between accounting and cash. Over the last three or four years, the cash tax spent has been somewhat below the effective tax rate. I don’t have anything to comment or a reason to explain that. But that’s something that gives me confidence that the work will drive to a lower tax rate over time. And as I said earlier, for me, over and above accounting, cash is very important. It is absolutely central to all that we want to do with the company. Sorry, long answer to a short question. Apologies for that.

Lastly, on WTS, it is a tough comparison base. I think the number that I’d point you to is the order intake up 12%. That was a good half for order intake. It seems to be continuing into Q3. Everything I think we see about WTS doesn’t change any of our views on that business. Thank you very much.

James Brand

Yes. Thanks for the answers.

Operator

Thank you. Our next question comes from Anna Maria Scaglia from Morgan Stanley. Please go ahead. Your line is open.

Anna Maria Scaglia

Hi, it’s Anna Maria. Good morning. Just two questions for me. The first one is regarding the waste business and the pricing power. Comments were made at the first quarter results about the cost of diesel and transport are moving higher. So I was wondering whether you see it as a pricing power going forward, looking more at the EBITDA and operating lines. And actually, how much of that are you able to retain? And the second question is regarding Chile and the regulatory review there, if you have any update. And just one in terms of potential impacts.

Bertrand Camus

Maybe I will take the one on Chile and leave Julian answer to the first question around the waste pricing power. Thank you very much for your question. Chile, no particular comment to make at this stage, and we are still in the tariff review process. It’s progressing according to the right schedule, and we should have a definition by the end of the year. Julian?

Julian Waldron

I think on waste pricing power, we’ve commented earlier this year and I think I covered it – I hope I covered it as part of my comments because it’s a good point and a good question. Pricing was good over the half, and we see no reason for those sorts of dynamics to change. So I think that’s a relatively sustainable positive message from us.

Operator

Okay. Thank you. We will now take our next question from Vincent Ayral from JPMorgan. Please go ahead. Your line is open.

Vincent Ayral

Yes, good morning. Few questions. So first, you’ve been talking about the EBIT and net income drop-through so we can see that H1 being potentially worse than could have been expected. Wanted to understand a bit what happened with restructuring costs actually here and see what you’re expecting on your line or expecting for full year there. This is important as well when we think about the cash flow generation of the business. So that would be a first one.

Regarding tax, yes, everybody seems to be high. That will be part of the restructuring plan you will present. Now the question will be why couldn’t it be normalized within two years like at most other companies? Is it a fair assumption? And importantly, on trends more specifically, do you have tax assets? And how much do they represent? And I couldn’t find that. That would be very interesting.

I would – regarding the restructuring, I’d like to comment. Obviously, everybody has seen the intervention from Amber with his paper talking about a potential for a wage improvement of 3%. Just wanted to know if you think it’s achievable. And if like the one thing regarding the management incentive that need to be aligned and I think that’s a fair point. I wanted to know if you – part of the restructuring are looking out to best incentivized management in their annual variable compensation with KPIs on the return on capital EPS cash flow generation rather than your [indiscernible].

And the last question there would be on the minorities. You’ve talked about it a few times, this focus on minorities. However, when we look at an asset-light type of strategy, it tends to bring more minorities. So how do you look at this at this stage? What’s your current thinking on that?

Julian Waldron

So shall I take the first question?

Bertrand Camus

Yes, Julian, maybe. Thank you very much for your question. I will let Julian answer to the first part of your questions, and I will take on afterwards.

Julian Waldron

So I think just on restructuring. Most years on an as-is basis, there’s some restructuring across the group. There was maybe a little more in the first half than we would traditionally do on a normal basis. There were some changes and movements in personnel, as you undoubtedly know. I think – so I don’t – on an as-is basis, I don’t have anything particular to call out for the rest of the year. I think what we need to do, again, in – as we come through the balance of the year, is to think to ourselves what steps do we need to take in order to implement the new plan. So again, I think the – on an as-is, business-as-usual basis, nothing to call out. We’ll need to think about what we want to do around the strategic plan as we finalize that.

On France – sorry, on tax, I think I would echo the words that you’ve heard from us before. You cannot expect to address tax always overnight. It needs to be addressed with a certain amount of care, and it needs to be done properly. So I don’t have any better time frame than you’ve had from us previously. I caution you about thinking that it’s a three-month process. It isn’t. It’s a complicated process that takes a while if you do it properly. I don’t have a fixed timing, and I don’t have, at this point, an objective to give you. And I don’t want to be overcautious either. We need to be ambitious as we put our plan together. But tax is a complicated matter, particularly if you want to be ambitious in the overall level. Bertrand?

Bertrand Camus

With respect to the plan and the suggestions we are receiving from different stakeholder, I think that’s one thing that I have been very insisting on with the team in the last six months developing and developing the plan is really to be in a listening mode and really engage with all our stakeholders, shareholders, of course, but also our clients, our teams, to make sure that we get as many input as possible. And therefore, we welcome comments from our investors, and you will understand that I cannot and will not comment on specific relationship and interactions with our investors.

Our purpose and I think that our goal was clearly set out during our intervention this morning. It’s really to focus and create value for all our shareholders and our shareholders’ input, in particular, by putting in place the right vision and the transformation plan that we all agree we needed.

On management incentive, that’s definitely a part of the plan as we are going to, of course, determine some KPIs to be able to communicate with you and inform you that not only where we go, but also be able after that to follow the execution of the plan. And of course, management incentive will be aligned with those KPIs. I would note that there is one KPI that has been increasing – its share has been increasing in the bonuses and incentive of the teams is around health and safety, which is not always pointed out in some of the comments that are being published. It is something that is critical to us, and I will be very insistent on that.

Then you have a question around minorities and business models. I would just stress that our businesses are so critical for the populations and the government and our clients in general. And they are also very local even if they benefit from our global expertise that I think minority partner in regions and in areas is sometimes something that we consider necessary to share the risk and secure our businesses. And this is part of the DNA of the group of being able to develop long-term relationship with strong partners that have been doing business with us for a very long time.

And around business models and developing alternative and innovative business model that can bring growth without consuming too much capital that has been the strategy of the group for quite a while. I would not enter into details today, but we have a lot of references of projects that we have been developing without consuming capital or very little in comparison with the revenues and value we are able to create with those businesses.

Vincent Ayral

Just wanted to follow up on one question, which was not answered, which was how much tax assets do we have in France?

Julian Waldron

I’m sorry. I did not answer it. That’s 148.

Vincent Ayral

You were talking about what’s in the books today…

Julian Waldron

Sorry. It’s 148, and my apologies for not answering that. Did you get that or – Okay. 148 is – 1-4-8 is the answer. My apologies for not giving you that right away.

Vincent Ayral

Thank you very much.

Operator

[Operator Instructions] We will now take our next question from Olivier Van Doosselaere from Exane. Please go ahead.

Olivier Van Doosselaere

Thank you very much and good morning. So, yes, thank you for taking our questions. I have four, if I may. The first two are on numbers. You’ve talked a bit already about your industrial water division. I think what we see there is that you finish the first half with more than 4% of organic top line growth, but I think we were above 8% in Q1. So, I know you already spoken about base effects, but I just wonder if you can help us understand a little bit better what kind of volatility we could expect on a quarterly basis from this activity going forward. And what might be driving that?

Secondly on EBIT, you reiterate your guidance for between 4% and 5% of organic EBIT growth for the full year. Now you finished the first half at the very high end of that. But clearly, that was with a first quarter that was not complicated, where you did 3.3%. And so we saw good acceleration there in the second quarter. I think the first quarter was actually also negatively affected by some one-off on the Macron premium compensation. So looking at current trends, would you think it’s fair to say that the current guidance looks a bit cautious for the full year? You will notably have the full impact of the Manchester contract in the second half, which only had a probable marginal contribution in the first half.

And then after that, on the – on your water contract in Barcelona, so the tariffs for 2019, they were kept stable. But just at the first half, you had the negative rollover effect from what happened last year. With that elections now done, and I think the last mayor – or the last mayor has been confirmed to stay in place, I wonder what your initial discussions are with the city at the moment. And what you think could be the key challenges and opportunities for that contract to evolve going forward.

And then my last question, again, I fully understand that those type of questions will probably more be answered in October. But I wonder if you think from a balance sheet perspective, if you believe that you have currently the room to really accelerate significantly in a specific direction in terms of reinvesting with the balance sheet that you have. Or do you think that if you would want to do that, that would necessitate a significant asset rotation strategy? Are you making disposals before being able to reinvest more significantly in your key business going forward? Thank you.

Bertrand Camus

Thank you very much for your four questions. I will take the two last ones. In term of where we stand in Barcelona, as you may know, tariff are subject of negotiation each year. It’s part of the way the regulation works in Spain. So today, as you rightly say, that we have the carryover effect of the last decision. And we are still in discussion with the authorities for the next round of discussions. Of course, there are discussions around tariff but also there are discussions around services, around investment that have to be done to secure the provision of water for the Greater Barcelona so those discussions are being carried out, all of that with a contract that has very specific procedure to deal with those issues. So, I think that we will be able certainly to say a little bit more about the outcome of the discussions by the end of the year.

On the last topic you raised about the possibility to accelerate. The plan, yes, is definitely a growth plan with the willingness to accelerate the transformation of the group, to accelerate the redeployment of our capabilities to other growing market, both in term of activities and geography. And as we explained, looking at the overall portfolio we have today, we are at the same time looking at underperforming activities, if I may, call them like that, where, of course, our first duty is to do whatever and we can to improve the profitability, both in term of growth and as we insisted a lot this morning, in term of operational performance. And based on that, what we will present you in October, as I said, we’ll show you where we want to go, where we consider we cannot get where we want to be and the consequences and the decision that will be taken around that topic. Julian?

Julian Waldron

Bertrand, thank you. I think just to – a couple of points for me to complement, and then I’ll answer the two questions. We do see opportunities to improve our cash flow. If we can improve our cash flow, we improve the cash that we can redeploy, we improve our debt ratios and so on and so forth. So we need to focus on cost and performance.

Secondly, as Bertrand said, it’s not a question of whether we need to rotate but – and when you go through a plan like this, you will find assets, you will find businesses that can’t meet your returns. And one of the things that we want to do as we come back to you in October is to try and make those things clear to you. Now please, as a word of caution, don’t expect us to come in the autumn with a big long list of things that we’re going to sell. I think that will be just to shoot ourselves in the foot. So I caution you against expecting us to come out with things which are just going to be detrimental to shareholder value. But hopefully in the couple of hours that we’ll have with you in October, we will be able to present a clear and concise set of messages about how we’re going to change the company internally, how we’re going to find the cash that we need to redeploy in those promising areas in which we’re so confident and so excited.

Just coming back to your two specifics and then I think I’m going to let – then I think we’ve got one more question and then we’re going to close. On industrial water, so on WTS. Second quarter, particularly around petrochemicals in the U.S., you normally have, as you go through the summer shutdowns. I think given the volatility of the oil price, we saw some customers pulling those shutdowns earlier into the year than they would do traditionally. So, we’ll see how that pans out in the second half of the year. But what was most critical to us, looking at the underlying business, is those level of orders at 12% this year. Even on a – again, on a strong comparison base, we were really very pleased with that, and that trend looks to be continuing into Q3.

As far as the EBIT for the full year is concerned and your comments on that, so first, we confirmed our objectives for the full year again, to the extent, it needs repeating, I’ll repeat it. We’ve got businesses that make their profit relatively evenly over the year. We’ve got businesses as well that make a lot more in the second half than they do in the first half. So, I think the right thing for us to be is prudent, cautious. The first half is broadly in line with what we wanted. Some parts are a little better. Maybe some parts are a little softer. But overall, it’s pretty much what we wanted to see. So far, so good, and we go into the second half with confidence. But there’s no need for us to change anything at this point. So, thank you very much, indeed.

Bertrand Camus

If I may, just make a comment on WTS, because it has been the latest and largest move of the group over the past years. Just to confirm all of you that I’m really very, very confident in this portfolio of activities. It’s a great company. We have a very strong portfolio of technologies, strong portfolio of clients. Wherever we go in the world, we see opportunities to develop businesses, and this is clearly, the increase of our exposure into industrial water. It’s clearly a very good opportunity of development for SUEZ as a whole.

Olivier Van Doosselaere

Thank you very much for that. Thank you.

Operator

We will now take our last question. It comes from Fraser McLaren from Bank of America Merrill Lynch. Please go ahead, your line is open.

Fraser McLaren

Good morning everyone. Just three quick questions on waste, please. First of all, may I ask about the extent to which fuel costs have been reflected in the recent price increases? Or if there needs to be further moves in order to protect margins? And if so, what scale might be necessary? And could this impact on your market share? The second question is if you could just speak a little bit, please, about recycled prices. If you think we stay at these low levels for a while? Or are you confident about seeing improvement emerging before too long? And then finally, the growth in hazardous waste has been strong again. Do you see this as being a sustainable trend for the medium term, both in terms of the market and your ability to increase capacity?

Julian Waldron

So, if I take – you take the hazardous waste, because I think that’s actually quite an exciting, strategic thing for us to talk about. Firstly, on fuel, yes and you see actually in the strong revenue growth in the first half, it doesn’t drop particularly far into the bottom line. So, you’ve got both price increase, and you’ve got things like fuel prices going up. So, I think so far, every cost increase we’ve seen has been flipped back. On commodity prices generally, I think we continue to see downward pressure on those. Now that covers both – your specific question also covers some of the input side. But I think commodity is generally we’re going to see price pressure. Bertrand?

Bertrand Camus

Yes. Just a general comment on hazardous waste markets and activities. And this is what we see on a worldwide basis. First of all, there is, I will say really growing, not concerned, but action by governments in term of regulations to really deal with those type of wastes in a much more stringent and regulated way. I could speak about China, for example. And then also the way operators, and in particular, industrial clients are looking at those topics, they also have to take strong commitments and in term of their corporate social responsibility, also their license to operate. So, we see a growing market in term of those activities of hazardous waste treatment, and that’s definitely something we are looking at the something also very promising for the future of the group.

Bertrand Camus

To maybe, just to finalize our call, first of all, thank you very much for attending this call. Very happy to have had this opportunity with Julian to share this first call with you. It is only for me the first one of a long series to come. I’m very positive about what we have in front of us in term of potential development, how can our group redeploy its – all its skills, its strength, its brand, its reputation towards developing markets.

We know that we have a lot to do to get where we want to be as we explained earlier. But we are very, very positive about what is in front of us, because once again, our businesses are totally essential to the future of the world, and we are committed to go – not only growing and satisfying our clients and our shareholders, but also make sure that the future is brighter for all of us. Thank you very much.