Earnings Transcript for VIE.PA - Q4 Fiscal Year 2022

Operator: Ladies and gentlemen, welcome to the Veolia Conference Call on Full Year 2022 Result with Estelle Brachlianoff, CEO; Claude Laruelle, CFO. I now hand over to Estelle Brachlianoff. Madam, please go ahead.

Estelle Brachlianoff: Thank you. Good morning, ladies and gentlemen, and thank you for joining us for this conference call to present Veolia's 2022 results. I'm accompanied by Claude Laruelle, our CFO. This conference will last one hour, until 9, and we will focus on the analysis of our 2022 results. Followed that, 9

Claude Laruelle: Thank you, Estelle. And good morning, ladies and gentlemen. I'm on Slide 23. And before starting the review of the full-year results, I wanted to inform you that we are now using an adjusted definition of our current EBIT, current net income and net debt in order to be in line with our previous guidelines that excluded the price purchase allocation -- the purchase price allocation impact of the SUEZ acquisition. The numbers you have on the slide are therefore before PPA allocation and, of course, there is no impact at the EBITDA level. And if you look at the PPA impact at the current net income level, it's limited to EUR52 million. As Estelle already highlighted, our 2022 results are outstanding and we delivered record high numbers for all the KPIs of our P&L, despite all the uncertainties we faced in 2022. This is clear evidence of our ability to adapt quickly to a rapidly changing economic environment. As you can see, we experienced a very strong organic revenue growth in 2022, plus 14.1%, driven by continued solid volumes in all our activities, good indexation mechanism on our long-term contracts and a strict pricing discipline on non-indexed businesses and, of course, the favorable impact of energy price increases, which is passed through. EBITDA is significantly up at 7.2%, which is above the top of the range of our guidance, 4% to 6% EBITDA organic growth, and also above the organic growth of revenue, excluding energy prices. Thanks to the operating leverage, current EBIT is growing faster and is up 16.3%, and our current net income is up 29.7% at constant -- at current ForEx and 27.7% at constant ForEx at EUR1,162 million, above EUR1.1 billion objective. Net CapEx remain well under control at EUR3.1 billion and net debt was massively reduced in Q4 by EUR4 billion as 99% in value of our antitrust disposals were completed in December and we also fully reversed the working capital. The net debt landed at EUR18.1 billion, allowing us to achieve a leverage ratio below 3 times, one year ahead of our initial plan. Moving to Slide 24. You can see the quarterly growth on our main geographies. The different trends that we experienced over the first three quarters of 2022 remained more or less the same in Q4. In Q4, the acceleration of our revenue growth, 16.2%, is due to the impact of high energy prices on our district heating business, for which revenue is of course mainly generated in Q1 and Q4. If you look at the Q4 earnings, these are the main trends. France and hazardous waste Europe are up 1.1%, water revenue in Q4 was up 2% with volumes almost stable in Q4, but the tariff indexation was good at 3.8%. Our solid waste business was slightly down due to contract selectivity and lower recycled paper prices. Hazardous waste business remained well oriented, both in terms of volume and prices up 4.8%. All our operation in the rest of Europe were very well oriented and experienced high revenue growth, 30. -- 32.5%, boosted by very strong energy prices in Central Europe and, to a lesser extent, in Southern Europe. In the UK, our volume was good, and we benefited from higher power prices in our waste to energy facilities. In the rest of the world, the trend remained very solid of other year between 8% to 10% every quarter. The US operation grew by 12% with both hazardous waste and municipal water growing at double-digit pace. Australian waste volume continued to be well-oriented in Q4. And in Asia, we delivered growth despite the economic slowdown in China. And, in Q4, our Chinese operation were back to an encouraging moderate growth, thanks to a good level of activity in December. Water Technologies were up 10%, which is very good. Q4 growth was plus 8%, including WTS up 14.5%, thanks to significant price increase in the chemical business. On the other side, Veolia Water Technology was flat in Q4 with a completion of the desalination project in Q3, but the results were very good. I'm now on Slide 25, you can see the strong increase of all our business in all geographies. Excluding energy prices, we delivered 6.5% organic growth, which is clearly very satisfactory. It demonstrates that inflation in our cost is passed to our clients in all geographies either by indexation or by voluntary price increase. And, in 2023, the trends will remain well oriented. On the next three slides, as in Q3, we will detail the performance by activity water, waste and energy, and we start by water on Page 27. With EUR18.3 billion revenue, our water operation represents more than 40% of our total revenue. We have put a reminder of the top geographies for Veolia, France, US, LatAm and the Czech Republic. Our water business experienced a very solid organic growth at 8.2% as all our contracts are protected against the inflation by tariff indexation. The SUEZ acquisition has significantly increased the size of our water operation in the US, in Chile and in Spain, reinforcing the visibility in our operation. In 2022, we experienced solid price indexation at 3.2%. Volume and works contributed to 3.6% to the water business growth. On water technology, we performed very well, growing by 10%, thanks to our superior technologies and a very good market positioning. Veolia Water Technology has contributed to significantly increase its EBITDA, plus 16% in 2022. The strategy to refocus activity towards more recurring services and no construction risk to restore profitability has been a success. EBITDA margin reached a record high of 7.7%. On WTS, revenue grew by 13.5%, driven by commercial successes and strict pricing policy. I'm now on Slide 28, and you have the trend of the waste activities which represents 36.5% of the group revenue at EUR15.8 billion, up 6.8% like-for-like. The growth came mainly from our strict pricing policy complemented by a resilient volume and a small positive impact from recycling. The strong growth of our waste activities, despite the economic slowdown in Q4, is a confirmation of our ability to mitigate economic trends on our operations as we always told you, thanks to our mix and our strong pricing discipline. Let's have a look at the different items in detail. Volumes were up 1.2% comparable to the first nine months with solid waste activities in our key geographies, especially Australia, US, LatAm and Asia. We continued to remain selective in our contract renewal portfolio, especially in our municipal activity in France, which explains the slightly negative net contribution of our commerce. Price increase, plus 4.6%, continue accelerating compared to Q3. That was 4.2% as we progressively have the full effect of the price increases decided in H1 and the additional ones implemented in H2. The priority goes to the quality of the tons and the profitability over the volume. We are clearly looking for the best volumes to be collected and treated. Our hazardous waste business contributed to the solid performance with a 12.1% growth over the year, which is remarkable. Veolia is an important energy producer, thanks to our waste businesses with the generation of 3.7 terawatt hours on a yearly basis. The price of the electricity and biogas produced on our waste to energy facilities and in our landfills has benefited from higher energy prices and contributed to 0.9 point (ph) of growth in our waste activities. In 2023, average foreign gas prices will continue to increase in our revenue, given our three-year rolling hedging policy. Recycled impact progressively decreased in our revenue since Q3, reflecting mainly paper and cardboard price decrease. The scope effect, minus 4.2%, is mostly coming from the antitrust disposal of assets in Australia to Cleanaway and Remondis, and a few hazardous waste in Europe for the antitrust after we have decided to do that in Europe. In 2023, our waste operation will take into account the disposal of the Suez UK waste assets completed in early December with a record high multiple. I'm moving to Slide 29, where you have the detail of our energy business. Energy revenue was EUR9.2 billion. It represents 21% of our total group sales. Growth last year achieved an outstanding 44.7% like-for-like in this business, accelerating from nine months because of the seasonality of the district heating business. The main driver of this high revenue growth is a sharp increase of energy prices, plus 36.6%. Our business model allows us to pass the increase to our clients, which protects our results. Our volume have grown significantly, thanks to a very good commercial momentum in Italy and Spain, and the strong performance of our cogeneration, allowing us to increase our electricity revenue as well. Contribution to growth is 6.4%. Weather remained unfavorable due to a mild winter and fall 1.5 points (ph). In summary, our combined heat and power generation and our district heating networks continue to drive the growth of our energy business and delivered a very solid performance due to strong increase of heat prices, very high electricity prices in Europe, and a successful commercial development. I'm now on Slide 30 and you have the usual revenue bridge detailing the different effects. ForEx has been a tailwind for 1.8%. Negative scope effect offset the ForEx with a mix of small antitrust remedies and asset disposal. The 14.1% organic growth is fueled at 50% by energy price increases, but on top of that we benefited from good commercial momentum and volumes complemented by our strict pricing policy. These solid commercial momentum, as Estelle highlighted, is contributing 2.4% to revenue growth. The contribution of price increases in water and waste was almost EUR1.4 billion or 3.7% revenue impact. It is a result of escalation formulas for 70% of our business and voluntary price increases for the remaining 30%. With the escalation formulas taking more into consideration the impact of the 2022 inflation, we see an acceleration of this pricing effect in our revenue, that was 2.8% in H1, 3.5% in nine months and now 3.7%. The weather impact was slightly unfavorable, minus 0.3%, and recycled prices were slightly positive 0.7% with lower paper and cardboard since August. Let's now, on the following page, look at the EBITDA bridge, detailing the 7.2% organic growth in 2022, which is above our guidance, which was 4% to 6%. As a reminder, we were up 5.2% after nine months, meaning that the Q4 was a very strong contributor to EBITDA. Compared to the nine months, the negative scope effect is higher after the closing of some antitrust disposal like the Suez UK waste since December. Like-for-like trends otherwise are comparable to the nine months with just one exception for energy prices, on which we have been very reactive to adapt to the electricity market move in Q4. Volume and commerce contributed EUR81 million or 1.4%. As usual, the main contributor to our EBITDA increase is the efficiency and synergies for EUR517 million with the efficiency plan delivering EUR371 million, above our EUR350 million target for 2022. And the synergy delivery has been remarkable, above our initial objective of EUR100 million, reaching EUR146 million, which is close to 30% of the total EUR500 million cumulated synergy objective. The price cost squeeze that also include contract renegotiation, that's minus EUR220 million. Recycled impact is EUR75 million for the full year and it was EUR79 million after nine months. The price decrease of paper and cardboard and, to a lesser extent, plastic had the limited impact at the EBITDA level. As we told you, Veolia business model on recycled have been progressively de-risking in order to be less exposed to commodity price volatility. As a reminder, we have isolated one-off items in the less bridge for minus EUR116 million. They are the same two items that we showed for the first nine months. On Slide 32, let's see the -- how the EBITDA increase is fueling the current EBIT, which is growing very strongly by 16.3% at EUR3,062 million. Renewal expenses at EUR303 million is slightly up compared to 2021, amortization up EUR40 million with stable at constant scope and ForEx. You can notice the Veolia operational financial asset repayment one-off for fixed EUR83 million in 2021. It had only a positive effect on the EBITDA 2021 Q3 with no impact at the EBIT level. Industrial capital gains of EUR157 million are mainly linked to the divestment of a landfill in Australia in Q1 and to antitrust industrial water disposal in Q4 and were partially offset by asset impairments from minus EUR61 million. JVs had a lower at EUR127 million after the Shenzhen JV disposal in 2021. Let's move to the Page 33, to the current net income, up 29.7%. In 2022, the current net income group share is reaching EUR1,162 million, which is above our target of around EUR1.1 billion. It excludes the PPA impact of the SUEZ acquisition, which amounts to EUR52 million. The cost of the net financial debt, EUR707 million, is a combination of the historical Veolia debt and the one we have acquired from SUEZ. On the Veolia standalone side, in 2022, after an exceptionally low level of interest paid in 2021 with few positive one-offs, we are back to the same level as 2019 or 2020, despite the much higher interest rates. The euro and dollar debt is at 83% at fixed rate and we did not issue any new corporate bonds in 2022. So, the impact of higher interest rates has been limited. The increase of the other financial income and expense at EUR386 million compared to the reported number in 2021 include EUR128 million of non-cash financial costs due to the Aguas Andinas inflation linked bond. These costs are factored into the tariff indexation we benefit in Chile and have only a very small impact on the bottom line due to minority interest. The EUR70 million capital gain are mostly coming from the Landrow (ph) water concession in China that we sold this year. The income tax rate is at 26.9%. As we told you, the tax rate is not optimized in 2022 as we are creating new tax group in each country to improve our tax profile in 2023 and afterwards. Minorities stand at EUR363 million, more than doubling compared to the Veolia perimeter standalone, as SUEZ operation integrate minorities in Chile, in the US regulated business and in WTS. On Page 34, let's have a look at the net income group share that increased by 77% to EUR716 million. The net non-recurring charges amounts minus EUR446 million, which is exceptional, because it is the first year of the SUEZ merger. The main non-current item of the following one, the SUEZ acquisition and integration costs for EUR285 million. The second is a non-current impairment of EUR275 million, of which 100% of our Russian assets, the third one, is a non-current capital gains of EUR322 million, an antitrust remedies requested on Veolia's assets. We have generated outstanding valuation multiples crystallizing significant value creation. In other items, there is of course the EUR52 million PPA impacts. On Slide 35, we have the free cash flow generation, which is above EUR1 billion. Both gross and net CapEx remained under control, despite inflation which is very satisfactory. Gross CapEx is stable at constant ForEx at EUR3.7 billion and the net CapEx envelope is slightly down at EUR3.1 billion with significant antitrust asset disposal in 2022. Discretionary CapEx increase through increasing decarbonization spendings in Central Europe, so EUR165 million, and hazardous waste projects under construction in Germany, Saudi Arabia and in the US. But the strongest achievement is a full working capital reversal to register another working capital improvement of EUR48 million, despite the strong revenue increase. The very strict balance sheet and CapEx discipline allowed us to achieve a leverage ratio below 3 times one year ahead of our initial plan at EUR18.1 billion. On the following slide, you have the main debt variation with a strong impact of the SUEZ transaction for EUR8.1 billion, net of the proceeds from the antitrust remedies and the other items, I've already mentioned. I'm moving to the Slide 37, which is our guidance for 2023 fully in line to deliver our 2024 accretion target. Estelle recalled high 2022, we're expecting another year of solid organic growth with an EBITDA increase that will generate between 5% and 7%, driven by EUR350 million of efficiency gains, around more than EUR280 million of cumulated synergies at the end of 2023. Current net income, around EUR1.3 billion, which means a double-digit growth compared to 2022. Our leverage ratio will remain around 3 times. And, as usual, our dividend will grow in line with our current EPS. Thank you for your attention.

Estelle Brachlianoff: Thank you, Claude. We'll have time for very few questions. And, of course, since there is a CMD in half an hour or so, you will have an extra time after the CMD, of course, for extra questions. So, the floor is yours for questions.

Operator: Thank you. [Operator Instructions] The first question comes from Michael Gallo (ph) from Societe Generale. Sir, please go ahead.

Michael Gallo: Hello. Good morning. Thank you very much for the presentation, and thank you for taking my question. Maybe if I could start by focusing on water. So, not so long ago, water is to be somewhat risky activity from a political point of view. And I'm not just thinking about Veolia but also SUEZ and it seem like that has improved a lot in those small parts due to the energy crisis, which brings the focus on energy and not water. So, if you could update us on your relationships with the different local governments and municipalities, whether it is in France, in the US, in Chile, and how that is going? And, also, if I could ask a second. And the second question is about -- and on the contract renegotiations, I think in terms of the contract renegotiations, we don't have much coming up aside from the service contracts in 2023, which is -- may be extended into 2024, is that right? Or is there something else that we should be keeping in mind? Thank you so much.

Estelle Brachlianoff: Thank you for your question. I will start with first part. And you will have the exact answer in the CMD in a few minutes about what is up for renewal in the next few years, but you're right, the answer is not much apart from the usual suspects you've just mentioned. So, in terms of what is our relationship with the political landscape in general and our customers, local authorities, in the water sector, and they are very good and it's fair to say that it's probably due to two things. One is the quality of the service we give to those customers, which has been over and over the year, as you know, delivering good performance, efficiency, and delivering the best value for the end customers. That's probably an important part of it. And, as mentioned, just one figure this morning, which is 320 million cubic meter of water saved, thanks to the efficiency of the distribution network and I think our customers are sensitive to these type of statistics as much as like the planet is asking for it. The second probably reason for that is that COVID helps everybody realize that it's a social service and its super important to have a reliable partner to deliver this type of service when we are in big crisis time and we've been always there during the COVID crisis and want to thank again all the teams in Veolia who've been in and out to actually go on delivering the goods service. So, I guess, the quality of our service plus like being resilient and always there, including when bad times comes, are probably to larger element of the answer. And, in a nutshell, we typically have 90% or over 90% renewal rate of all our contract worldwide and this is a KPI we monitor closely, and which is consistent.

Michael Gallo: Thank you very much. That was really helpful. Thank you.

Estelle Brachlianoff: We maybe have time for another question.

Operator: Yes. Thank you. The next question comes from Arnaud Palliez from CIC Market Solutions. Sir, please go ahead.

Arnaud Palliez: Yes. Good morning. I just have one question about your financial leverage target for 2023. I just would like to understand why you keep it stable at 3 times? Does it imply that you're going to accelerate on acquisitions or on CapEx?

Estelle Brachlianoff: I guess, we always, over the last few years, have set ourselves a target of being around 3 times EBITDA as a leverage. So, we will maintain this target as we think it's a sustainable good way of being able to seize the opportunity, but being very rigorous on our balance sheet as well. So, no specific idea in mind in terms of acquisition, but that's a typical target we've had over the years and we will maintain for 2023.

Arnaud Palliez: Okay. Maybe a second question also on the working capital requirement. Can you be a bit more specific about the 2022 evolution? And what we can expect at this level for this year?

Claude Laruelle: So just to answer your question, Arnaud, regarding working capital, we have the usual evolution of the group with a lot of revenue and working capital negative in Q1 and Q2, with the reduction in Q3, but in Q4 we have a stronger push on working capital every year. Each year it has been a positive contributor to the free cash flow, some year it's more and some year it's a little bit less, EUR48 million is a very strong achievement. If you look at revenue increase, 14% revenue increase, and working capital contribution of EUR48 million, which is slightly positive, is a massive effort of our teams in order to work on the collection and we achieved a record high collection in December. We will continue to work on the cash flow generation and working capital improvement, I would say, in the countries where we see some potential as well. So, we keep the best-in-class as best-in-class and we will continue to improve where we have to improve in the other different countries. So that will -- so, I don't -- I'm not expecting for 2023 a different level of working capital. We have the same kind of the same yearly curve as we have seen in 2022, but we expect, again, the -- I would say, the less performing be used to improve significantly in 2023.

Estelle Brachlianoff: And if I want to wrap up in a way your two questions in one, you have a team here which is very dedicated to maintain the rigor we've seen in the last few years in terms of balance sheet as well as cash management.

Arnaud Palliez: Okay. Thank you, and congratulations for these good results.

Estelle Brachlianoff: Thank you. Maybe, time for just one last question, if there is one.

Operator: [Operator Instructions] We have a new question from Arthur Sitbon from Morgan Stanley.

Arthur Sitbon: Question, just first a quick follow-up on the leverage target, around 3 times, I was wondering if that means you expect a stable leverage compared to 2022 or if you would still expect some deleveraging versus 2022? That's the first question. And the second question, I see there were some capital gains in your results in 2022. I was wondering if you could provide a bit more details around that? Thanks a lot.

Estelle Brachlianoff: Claude, maybe.

Claude Laruelle: So, on the leverage target, what we expect we will see how the year will come, but we continue to have a very strict balance sheet management. So, we -- as we are looking at -- as Estelle said, we have the room and balance sheet, so if we can see some opportunities, we will see them. But regarding -- and we will continue to keep the balance of the group. And you have to keep in mind that we have to keep our BBB rating, so a key driver for us is to keep the leverage and to keep the BBB rating with S&P. On the capital gains, we have few capital gains in 2022. The biggest one, if I remember correctly, was in Australia, where we have sold a landfill and the big one, which was also -- was the mobile unit we sold for -- we sold to Saur at multiple -- the record high multiple of 19 times EBITDA. It was around EUR150 million, but it is in non-current items.

Estelle Brachlianoff: Thank you. And I suggest that you close the floor for now, because we'll see you in half an hour for our Capital Market, and you have the opportunity to ask extra questions obviously. Thank you very much.

Operator: Ladies and gentlemen, this concludes the conference call. Thank you all for your participation. You may now disconnect.