Suez Environnement Net Drops 14% on Spin-Off Costs

By Tara Patel

Aug. 28 (Bloomberg) -- Suez Environnement SA, Europe's second-biggest water company, said first-half profit fell 14 percent on costs related to spinning off the unit from Suez SA.

Net income dropped to 201 million euros ($297 million) from 233 million euros a year earlier, with costs of the company's July 22 listing at 19 million euros, the Paris-based company said today in an e-mailed statement.

Earnings before interest, tax, depreciation and amortization, or Ebitda, increased by 5.2 percent to 1.01 billion euros from 956 million euros, in line with the median estimate of seven analysts surveyed by Bloomberg News. Suez Environnement maintained its financial targets through 2010.

``Net profit growth will exceed that of Ebidta this year,'' Chief Executive Officer Jean-Louis Chaussade said on a conference call. First-half profit was hurt by higher costs of running the company as a separate entity, charges for the spinoff and a new employee share-holding plan, he said.

The utility was spun off from Suez and listed last month as part of its parent company's merger with Gaz de France SA, almost 2 1/2 years after the combination was first proposed by the French government. Suez Environnement soared on its trading debut as investors considered them a bargain compared with Veolia Environnement SA, Europe's largest water company and a rival in water and waste markets at home and abroad.

Share Performance

Suez Environnement were trading 0.2 percent lower at 18.60 euros at 11:46 a.m. Paris time.

The results were as expected except for some ``disappointment with the profitability'' of European waste handling operations, CM-CIC analyst Patrice Lambert de Diesbach said in a note to clients, reiterating a `buy'' recommendation on the stock. Lower profit margins for the business may be due in part to higher fuel costs, he wrote.

Suez Environnement confirmed financial objectives for this year and through 2010, which were given in June, of 2008 Ebitda of 2.1 billion euros to 2.15 billion euros. Operating profit last year was 2.06 billion euros. Industrial investments in the 2008-2010 period will be about 4.5 billion euros, the company said today.

First-half revenue growth, excluding the effect of the sale of the Applus certification business sold in the fourth quarter of last year, was 6.7 percent, the utility said previously. The company is targeting average annual sales growth `` equal to or in excess of 5 percent'' and plans ``small'' acquisitions that could raise sales by 2 percent or more, the company said today.

`Clear Preference'

Suez Environnement's waste collection business was hurt by higher fuel costs, which wasn't totally passed on to clients or hedged, Chief Financial Officer Jean-Marc Boursier said during an analyst conference. About 15 percent of the 230 million liters of diesel used on average annually was hedged this year, he said, adding that the company wants to hedge more in 2009 and 2010.

An increase in the cost of raw materials including paper and metals benefited prices obtained for recycled materials, Boursier said.

The company would benefit from a 500 million euro fiscal legacy from Suez SA over the next two or three years, he said.

Water Unit

Suez Environnement's European water division had a 3.2 percent drop in ebitda to 388 million euros from 401 million euros due to the sale of lower volumes of water because of ``unfavorable weather conditions,'' the company said. ``At the end of July there were lower volumes than during the same period last year,'' Chaussade said, referring to summer sales in France.

The company's European waste business had a 3.6 percent rise in ebidta to 459 million euros from 443 million euros a year earlier. Margins were lower at the Sita waste collection division due to higher fuel costs, Boursier said.

Suez Environnement's international division had a 19 percent rise in ebitda to 185 million euros from 156 million euros previously due to ``higher margins and wastewater contract renegotiations,'' the company said.

Suez Environnement's debt at the end of the first half was stable at 5.4 billion euros compared to the end of last year, the company said.

``We have a clear preference for Suez Environnement relative to Veolia Environnement due to Suez's lower energy price exposure, more conservative strategy and lower relative valuation,'' UBS AG analyst Rohit Agarwal said in a note to clients yesterday.

Merger Terms

Of the 13 analysts tracked by Bloomberg who cover Suez Environnement, 11 recommend buying the shares, one advises holding the stock and one says ``sell.''

Suez stockholders were given shares in Suez Environnement as part of its merger with Gaz de France. Merger terms were for Suez to swap 22 shares for 21 of Gaz de France, after spinning off 65 percent of the water and waste division. Suez distributed one share in that unit for four Suez shares.

Suez Environnement signed contracts in the first half including recycling deals with Renault SA and Michelin & Cie., a waste-management agreement with Airbus SAS and drinking-water accords for Jersey City, Mumbai and Jeddah.

To contact the reporter on this story: Tara Patel in Paris at tpatel2@bloomberg.net