Veolia Profit Declines as Mild Winter Curbs Energy Services

May 07, 2014 1:21 pm ET

(Updates with closing share drop in second paragraph.)

May 7 (Bloomberg) -- Veolia Environnement SA, Europe’s biggest water company, reported a 7.3 percent decline in first- quarter profit after a mild European winter curbed demand for its energy-services business. The shares fell.

Adjusted operating income slid to 376 million euros ($523 million) from a restated 406 million euros a year earlier, the Paris-based utility said today. Veolia dropped 2.6 percent to a 2 1/2-month low of 12.985 euros at the close in Paris.

Chief Executive Officer Antoine Frerot, who survived a leadership challenge this year, is seeking to cut debt, improve profitability on municipal contracts and move into new markets such as water-treatment works in the oil and gas industry. He has pledged to increase Veolia’s reliance on industrial contracts, narrow its global spread and focus on “high growth” economies such as China and the Middle East.

“We achieved steady growth in our businesses with the exception of Dalkia, which was heavily penalized by an exceptionally mild winter that weighed on heating activity,” Frerot said in the earnings statement.

Revenue at the French business of Veolia’s Dalkia unit, which provides energy services, fell by a fifth while the impact was also felt in Poland, the Czech Republic and Lithuania, Veolia said.

In contrast, waste-handling volumes rose 2.8 percent in the quarter, aided mostly by nations outside Europe, especially Australia.

‘Too Early’

“It’s too early to see this as a sign of a strong industrial recovery worldwide,” Chief Financial Officer Philippe Capron said on a conference call with analysts. “Europe certainly isn’t anything to write home about.”

Veolia reported a negative free cash flow of 407 million euros while net financial debt rose to 8.56 billion euros at the end of the quarter compared with 8.2 billion euros at the end of 2013.

“So far we don’t have any significant pressure from the rating agencies for us to issue a hybrid bond,” Capron said. Veolia has some smaller disposals that could close by year-end which would bring debt “a bit below” end of 2013 levels.

Veolia retained its 2014 targets for earnings and cost- cutting and reiterated it expects to return to growth this year. About 10 percent expansion is expected in adjusted operating cash flow and “significant growth” in adjusted operating income and adjusted net income.

The company previously announced a plan to reduce expenses by 170 million euros this year as part of a 750 million-euro cost-saving program through 2015. The figure “will be adjusted” once a previously agreed-upon deal to divide Dalkia between Veolia and Electricite de France SA goes through, Capron said today.

Talks with unions have started on job cuts at the French water division and “the first departures could take place by year-end,” Capron said. There could also be “another such move that could affect headquarters as well.”

Suez Environnement, Veolia’s main European rival, reported a slight improvement in first-quarter waste volumes last month.