Veolia Soars on Plan to Cut Costs, Sell Assets

By Tara Patel

Aug. 7 (Bloomberg) -- Veolia Environnement SA, the world's biggest water company, rose the most in more than 18 months after announcing a plan to reduce investment, cut costs and sell assets to boost profit growth.

The company today reduced its 2008 growth target and pledged to dispose of businesses after the dollar's decline and higher energy prices curbed first-half profit. It will raise its 2008 dividend by 10 percent.

Veolia gained as much as 9.8 percent to 36.50 euros and was 2.79 euros, or 8.4 percent, higher at 36.04 euros at 12:47 p.m. in Paris trading. The shares have slumped 43 percent this year on concern earnings growth will be restricted by record oil prices and a lower U.S. currency.

``The plans to cut costs and restructure look very investor-friendly,'' Verity Mitchell, a London-based analyst at HSBC Holdings Plc said in an e-mail. ``Dividend growth shows management is confident it can deliver them.''

Net income was 500.5 million euros ($772.2 million) compared with 493 million euros a year earlier, Paris-based Veolia said today in a statement. That missed the 520 million- euro median estimate of analysts surveyed by Bloomberg News.

Boost Profitability

``The results weren't satisfactory,'' Chief Executive Officer Henri Proglio said during a conference call with reporters. The company will implement a ``robust'' plan to cut costs by 400 million euros and sell 1.5 billion euros worth of assets by the end of next year, he said. On May 6 Jerome Contamine, a senior executive vice-president, told analysts the company was aiming to save 200 million euros by the end of 2010.

The asset sales mark a turnaround after Veolia spent about 4 billion euros in the past two years on acquisitions. The company is also facing competition for investors from rival Suez Environnement SA after its spinoff and listing last month as part of Suez SA's merger with Gaz de France SA.

Veolia said full-year cash flow from operations would be 6 percent, lower than the target announced March 7 for 2008 growth of ``at least 10 percent in our revenue, cash flow from operations and net income.'' Revenue will grow in 2008 by more than 12 percent, the company said.

Cutting Costs

The company said it would cut structural and head office costs and sell assets ``with the aim of improving profitability of the businesses'' and achieve after-tax return on capital employed targeted at over 10 percent by 2010. Veolia also plans to reduce investment this year to 5 billion euros from a planned 5.5 billion euros, Proglio said.

Veolia said it plans to cut purchasing, operational and support function costs, and will aim to restore profit margins in regions where they are insufficient.

Earnings before interest and tax advanced to 1.30 billion euros in the first half from 1.27 billion euros, missing the 1.32 billion-euro median estimate in the Bloomberg survey. The weaker dollar shaved 30 million euros off operating income while rising fuel costs took off 36 million euros, Veolia said.

Sales gained 17 percent to 18.1 billion euros, the company said. Revenue was boosted by acquisitions including German trash-handler Sulo Group and TMT, the waste-management unit of Italy's Termomeccanica Ecologia.

The asset sales will be ``small and medium-sized'' and mostly in non-strategic countries, Proglio said. That move would also be accompanied by a management reorganization across geographic regions, he said.

Waste Management

Net financial debt was 16.3 billion euros as of June 30, compared with 15.2 billion euros a year earlier.

Revenue at Veolia's water division rose 15 percent in the first half to 5.99 billion euros, with organic growth at 3.3 percent in France and 19 percent elsewhere, in part because of non-regulated operations in the U.K. and the start of new contracts in China, according to the statement.

At the waste-management division, sales advanced 21 percent to 5.09 billion euros, mainly because of acquisitions including Bartin Recycling Group in France, which was completed in February.

German paper and plastics recycler Sulo is the ``only real disappointment on external growth,'' Proglio said. Contract renewals by the German waste collection authority led to a fall in market share and earnings, executives said.

Veolia plans to change top management at the unit by the end of the year at the unit which will have a 40 million euro shortfall in ebitda this year compared to the target, the company said.

Energy Services

Revenue growth at the energy-services division was up 22 percent at 4.05 billion euros following an increase in energy prices and the acquisition of Thermal North America Inc. in the U.S., Veolia said.

Sales at the transport division rose 9 percent to 2.97 billion euros, the company said.

Veolia supplies water to about 110 million people worldwide and collects and manages trash for 50 million. It provides public transportation in 27 countries and is also developing airplane and ship dismantling and recycling businesses in France.

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