Veolia Quarterly Earnings Decline 12% as Water, Waste Slow

Veolia Environnement SA (VIE), the French waste and water utility burdened by rising debt, reported a 12 percent slump in earnings as a “difficult” economy hurt waste operations and profit from domestic water contracts dropped.

Adjusted operating income fell to 543.5 million euros ($715 million) in the first quarter from 618.8 million euros a year earlier, the Paris-based company said today in a statement. The utility also booked provisions from its “transformation plan.”

Chief Executive Officer Antoine Frerot is seeking to revive the world’s biggest water company by selling assets and cutting costs, targeting a reduction in net debt to less than 12 billion euros from 15 billion euros by the end of 2013. His strategy, hampered by slowing economies in Europe, departs from the expansionary focus of predecessor Henri Proglio, who took Veolia to 77 countries from Argentina to South Korea.

“Fears of a recession in Europe and the possible fall in volumes of waste treated and pressures from local authorities on water rates may weigh on margins,” Olivier Bails, an analyst at CM-CIC Securities in Paris, wrote in a note today.

The European waste-collection business is in decline and profit margins on French water contracts are narrowing, Pierre-Francois Riolacci, Veolia’s vice president in charge of finance, said today on a conference call.

Cost Cuts

The company confirmed an annual revenue growth target of more than 3 percent from 2014, while adjusted operating cash flow will increase by an average of more than 5 percent. Veolia plans to sell 5 billion euros of assets this year and next, cut operating costs by 120 million euros in 2013 and narrow its geographic reach.

Frerot carried out a management shakeup in March to boost investor confidence after the shares dropped 40 percent in 12 months on concern Veolia was struggling to rein in borrowings. Veolia jumped as much as 6.4 percent today after saying it received interest in its stake in Transdev, a mass-transit unit.

“More than earnings, the market is closely watching the progress of the disposal program,” Bails said.

The costs of Veolia’s overhaul are expected to increase in the second half from the first six months of the year, according to Riolacci.

Water Contracts

Veolia, like competitor Suez Environnement (SEV), is under pressure from French municipalities to lower the cost of water to consumers when contracts come up for renewal.

“There was a decline in the French water business due to contractual erosion,” Riolacci said. “At the time of a competitive renewal, we will lose about 80 percent” of margins on earnings before interest, tax, depreciation and amortization.

Veolia also reported a “slight” drop in operating income at its waste unit, citing a “difficult macroeconomic context” and lower prices for recycled raw materials. Volumes of commercial and municipal waste collected in France fell, while those going to landfill and treatment plants rose, it said.

Free cash flow was a negative 519 million euros at the end of the quarter, in part because the utility didn’t complete any “significant” asset sales in the period, it said.

Suez Environnement, Europe’s second-biggest water company, said last month that first-quarter earnings fell 4.5 percent as a sluggish economy and a cold spell in February hurt its waste- treatment business.

To contact the reporter on this story: Tara Patel in Paris at tpatel2@bloomberg.net

To contact the editor responsible for this story: Will Kennedy at wkennedy3@bloomberg.net