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Veolia Pledges to Reduce Costs as First-Quarter Profit Falls

May 3 (Bloomberg) -- Veolia Environnement SA, the biggest European water company, will increase cost cutting and organize operations along geographic lines following a slump in first-quarter earnings and its handling of industrial waste.

Adjusted operating income fell to 405 million euros ($531 million) from a restated 411.1 million euros, the Paris-based company said today in a statement. Veolia raised its target for cost cuts to 750 million euros by 2015 from 470 million euros.

Veolia advanced 0.6 percent to 10.50 euros by 11:48 a.m. in Paris trading, bringing its gains for the year to 15 percent.

Chief Executive Officer Antoine Frerot is seeking to turn the utility around by reducing debt and improving profitability on contracts. He has pledged to increase Veolia’s reliance on industrial contracts, shrink its global spread and focus on “high growth” economies such as China and the Middle East.

“Earnings per share in 2015 could be 35 percent higher than the current level,” assuming Veolia achieves its planned cost cuts, Julien Desmaretz, an analyst at Bryan, Garnier & Co., said today in a note. He recommends buying its shares.

Veolia reported a 6.7 percent drop in adjusted operating cash flow from shrinking margins on renewed contracts, mostly in the French water business, and a decline in prices and volumes for waste management, according to today’s statement. Like-for-like water revenue at constant exchange rates dropped 3.8 percent, while it fell 4.6 percent for the waste business.

Industrial Waste

Industrial waste volumes slid 1.2 percent in France and 11 percent in the U.K., Frerot said. Municipal waste volumes dropped 5 percent in France and rose 2 percent in the U.K.

“We are cautious about what will happen in Europe during the next quarters,” Chief Financial Officer Pierre-Francois Riolacci told analysts on a call. “There is no strong deterioration compared to what happened in the second half of last year. It’s a sluggish environment and our view is that it will carry on this way until the end of the third quarter.”

Frerot is pushing through a reorganization after surviving a bid to oust him last year and making changes in the boardroom. A focus along geographic lines rather than operating divisions will boost commercial development and growth and add to cost savings, the company said today. The structure will be “simpler, more reactive and nimble,” it said.

Financial Debt

Veolia reiterated asset sales of 6 billion euros for 2012 and 2013, with 1 billion euros completed this year. It plans to pay a dividend of 70 euro cents a share for each year. The company will reduce costs by 170 million euros this year.

Net financial debt was 10.1 billion euros at end-March, from 10.8 billion euros at end-2012. Veolia sees net borrowing of 8 billion euros to 9 billion euros by the end of this year.

The company in March announced the sale of its water and wastewater business in Portugal to Beijing Enterprises Water Group Ltd. for 95 million euros and the sale of Moroccan water activities to Actis investment fund for 370 million euros. The utility plans to sell small and mid-sized assets in 2013, with those in the first quarter “small,” according to Frerot.

Former CEO Henri Proglio’s expansion spree from 2006 took Veolia to 77 countries. The company plans to narrow the reach to about 40 by the year-end, down from 48 at the close of 2012.

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

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