Veolia Warns of Lower 2011 Earnings Amid Reorganization

Veolia Environnement SA warned of lower full-year earnings as the world’s biggest water utility slims down amid slower economic growth that could hurt its industrial waste business.

“We are all expecting austerity plans and this will leave us exposed to an economic slowdown,” Chief Financial Officer Pierre-Francois Riolacci said today on a call. “Today there is no clear signal that things are turning very bad.”

Veolia “expects a downturn” in adjusted operating income for 2011, similar to the 13 percent drop seen in the first nine months excluding the transport business. Chief Executive Officer Antoine Frerot has pledged to stop operations in at least 37 countries and sell 1.3 billion euros ($1.8 billion) of assets this year.

“Visibility on the future costs of the restructuring program remain very low,” Yohann Terry, a utilities analyst at Exane BNP Paribas, wrote in a research note. “The worst of the crisis is to be seen.”

Nine-month operating income fell to 1.25 billion euros from a restated 1.34 billion euros a year earlier, Veolia said in a statement today. Sales rose 3.7 percent to 24 billion euros.

The decline was attributed to a French water contract in suburban Paris, losses in Italy and the Gulf of Mexico as well as the cost-cutting program, the company said.

Share Performance

Veolia, which has lost more than half its market value this year, previously reported a first-half loss on writedowns on operations in Italy, Morocco and the U.S. and after fraud was uncovered at a U.S. business it’s now trying to sell.

Veolia gained 1.2 percent to 9.146 euros as of 12:59 p.m. in Paris. The shares earlier fell as much as 4.8 percent.

The utility will provide more details about asset sales, plans for the 2011 dividend and 2012 financial targets at an investor day Dec. 6, Riolacci said. The company “does not want to go for a rights issue of any kind,” he said.

“The reorganization is progressing and the operational difficulties in southern Europe, North Africa and the United States are in the process of being resolved,” Frerot said in today’s statement. “Investments are under control and the 2011 divestment program has largely been completed.”

Water volumes dropped almost 10 percent in France in July and fell in August because of the weather, Riolacci said. Volumes of company and industrial waste collected slid about 8 percent in France, grew more than 10 percent in Germany and tailed off in the U.K., he said.

Recycled Materials

Prices for recycled materials were higher and the toxic waste treatment business in France and the U.S. was “good,” he said. Paper prices dropped 12 percent in October.

Veolia’s net financial debt fell to 15 billion euros at the end of September from 15.2 billion euros at the end of 2010.

Asset sales include Veolia’s Proxiserve business and the unprofitable Marine Services in the Gulf of Mexico, Riolacci said, adding that the utility isn’t in any rush to close deals by the end of the year.

“We are very confident that we can achieve our disposal program even with the tough context,” he said.

The restructuring marks the end of the global expansion started by Frerot’s predecessor Henri Proglio, who became chairman and CEO of Electricite de France SA in 2009 while remaining chairman of Veolia until last December. He remains a director at Veolia.

Veolia, which supplies water to more than 100 million people worldwide, has said it will exit the transport business in Morocco, environmental services in Egypt, marine services in the U.S. and will proceed with “significant disengagements” in southern Europe including a review of operations in Italy, where management has already been replaced.

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