Veolia Environnement SA (VIE), the biggest water company, fell the most in a year after pledging to extend investment and cost cuts as Italian and waste operations slow.
Veolia slid as much as 12 percent in Paris trading, the steepest drop in a year. First-half results were hurt by Italian writedowns, slowing economies and “contractual erosion” at Veolia’s water division in France, the Paris-based company said today. Recycled raw material prices and waste volumes dropped.
“The results weren’t good because debt isn’t going down fast enough,” Louis Boujard, a utilities analyst at Banco BPI, said today by telephone. Still, “The picture hasn’t changed dramatically enough to justify such a drop in share price.”
Veolia fell 12 percent to 8.127 euros by 3:04 p.m. in the French capital, bringing the drop to 46 percent in a year.
Chief Executive Officer Antoine Frerot plans to restructure by selling assets, cutting debt and curbing global reach to lift profitability. This year he fought off a bid to oust him and has since overseen the sale of the utility’s U.K. regulated-water, U.S. waste-management and Baltic waste businesses.
The utility plans to sell 5 billion euros ($6 billion) of assets and cut investment by 500 million euros this year and next. The water company will also lower operating costs by 270 million euros in 2013 and 500 million euros in 2015.
“In this difficult context, we have decided to increase our cost reduction efforts and reduce investments,” Frerot said today in an earnings statement.
First-half net income of 153 million euros compared with a loss of 67.2 million euros a year earlier, Veolia said. The utility has completed 60 percent of its planned asset sales.
Veolia affirmed targets given in December for annual sales growth of more than 3 percent from 2014 and adjusted operating cash flow increasing by an average of more than 5 percent.
Operating income rose to 523 million euros in the half from 180 million euros a year earlier. Sales were 14.8 billion euros.
“First-half results show weaker-than-expected underlying trends,” said Marco Mautone, a Bank of America Merrill Lynch analyst, in a note, cutting the stock to neutral. There may be more Italian writedowns and asset sales of Transdev and possibly Berlinwasser may be delayed to the fourth quarter, he said.
Italy is “giving us a hell of a time,” Chief Financial Officer Pierre-Francois Riolacci said on a conference call.
It took a charge of 89 million euros and is implementing a “legal reorganization” of Dalkia in Italy, where it has lost 400 staff since 2011 and some waste and water operations are being shut. Drinking water tariffs in Berlin may be cut by 18 percent this year and 17 percent from 2013 to 2015, Veolia said.
Without the ability to protect its rights to run a water contract, Veolia will sell its stake, Riolacci said.
Lower water volume and “contractual erosion” hurt France, where Veolia has about 35 percent of the drinking water market and 22 percent of the treatment industry. Competition for orders is strong, Riolacci said, citing a recent tender in Bordeaux.
Veolia risks losing contracts in France, “and margin erosion,” Verity Mitchell, an analyst at HSBC Securities Inc., wrote in a note published yesterday. The utility will also have to deal with a downturn in volumes of waste to be treated.
The company has said it will narrow its geographic reach to about 40 countries. Former CEO Henri Proglio’s expansion spree, begun in 2006, took the utility to 77 countries.
Veolia’s net financial debt was 14.7 billion euros at end- June. Frerot aims to cut borrowing to less than 12 billion euros by the end of 2013 and will trim the dividend to 70 euro cents a share this year and next, from 1.21 euros in 2010.
To contact the reporter on this story: Tara Patel in Paris at firstname.lastname@example.org