Veolia Environnement SA (VEOEY) Q3 2023 Earnings Call Transcript

Veolia Environnement SA (OTCPK:VEOEY) Q3 2023 Earnings Conference Call November 9, 2023 2:30 AM ET

Company Participants

Estelle Brachlianoff – Chief Executive Officer

Claude Laruelle – Chief Financial Officer

Conference Call Participants

Ajay Patel – Goldman Sachs

Arthur Sitbon – Morgan Stanley

Vincent Ayral – JPMorgan

Jenny Ping – Citi

Olly Jeffery – Deutsche Bank

Juan Rodriguez – Kepler

Philippe Ourpatian – Oddo BHF

Operator

Good morning, ladies and gentlemen, and welcome to the Veolia Conference Call and Q3 2023 Results with Estelle Brachlianoff, CEO; and Claude Laruelle, CFO. [Operator Instructions] This call is being recorded on Thursday, November 9, 2023. I would now like to turn the conference over to Ms. Estelle Brachlianoff. Please go ahead, ma’am.

Estelle Brachlianoff

Thank you, and good morning to all of you, and thanks for joining us for this conference call to present Veolia’s 9 months results, and I’m accompanied by Claude Laruelle, our Chief Financial Officer.

I’m on Slide 3. Thanks to our strict operational and financial discipline as well as commercial momentum, the performance achieved during the first 9 months 2023 is once again very strong and very similar to that of the first half, whilst our free cash flow generation has improved significantly. At constant scope on ForEx, our revenue increased by 10.7% to €33.2 billion or plus 4.6%, excluding energy price, which are pass-through for us, as you know. So very similar organic growth had in H1.

EBITDA grew by 7.7%, and current EBIT by 14.2%. Our free cash flow stood at €435 million in Q3, a strong improvement compared to 2022. And our net financial debt decreased to €18.9 billion. This, once again, very strong set of results in a complex environment shows that Veolia is technically identify logics, as evidenced by our synergy and efficiency delivery, well ahead of schedule. In only 9 months, we’ve almost achieved our yearly target for synergies, and we will, of course, not stop there and therefore, exceed our yearly target.

These very good sets of numbers are a result of Veolia’s powerful business model of value creation. 85% immune to macro trends and with 70% of our contracts indexed as well as of our unique positioning. We are now 40% outside Europe, including $5 billion in the U.S. with unique technologies and know-how in decarbonization, in depollution and resource generation, each a powerful engine for sustained growth. This was illustrated once again in Q3 with many new contracts, notably a €2 billion contract in Hong Kong and a record high level of bookings in Water Technologies at €3.1 billion.

Given our 9 months performance, we are very confident about our 2023 guidance, which is fully confirmed, including the upper range of our EBITDA growth range, and we can improve our targeted leverage ratio to below 2.9x at the end of the year from around 3x. And that is not even 2 years after the merger with Swiss. Of course, our net result of around €1.3 billion is fully confirmed as well.

To give you some additional color on our 9 months results, I’m on Page 4. The main feature of this 9 months is essentially that all the strong operational levers in H1 continued in Q3. Our revenue grew by 10.7% at constant scope and exchange rate to €33.2 billion. Excluding energy price, our revenue grew by plus 4.6%, which is very comparable to H1.

We registered strong growth in all our activities. Water increased by plus 7.2%, driven by tariffs and good commercial momentum despite lower volumes due to adverse weather during the summer in Europe and in the U.S. Waste activities continued to grow by plus 3.1%, which is the same pace as our 3.3% in H1. Excluding recycled prices, our waste activities grew by 6.1%, thanks to resilient volume in both solid and hazardous waste, good commercial momentum and pricing.

Finally, energy activities grew very fast by plus 30.4%, driven mostly by energy price, which are both Essent heat pass-through for us and very seasonal, as you know. EBITDA growth reached plus 7.7%, above the high end of our EBITDA range, thanks to synergies and efficiency gains ahead of the yearly target. Current EBIT grew by 14.2% at the same pace as in H1. Net free cash flow reached €435 million in Q3, strongly up versus 2022, leading to a decrease in net financial debt to €18.9 billion.

These outstanding results were delivered despite softening economic conditions and continued flat waste volumes. And this is, thanks to our strong foundations and powerful growth engine, which are the following.

First, we benefit from a balanced geographical mix, 40% outside Europe, of which $5 billion in the U.S., and we enjoyed a strong commercial momentum in all activities, thanks to perfect positioning in fast-growing markets. Second, our strong disposal are resilient with 85% macro environment businesses and protected against inflation, thanks to tariff indexation and pricing power. Moreover, our results are derisked from commodity prices.

Third, our balance sheet is very solid with a leverage ratio expected now below 2.9x at the end of the year. And we have resumed our trucking and asset rotation policy after 2 years dedicated to the sales acquisition and antitrust divestitures. And this is to enhance value creation. Fourth, the group is quickly piloted. We’ve maintained our discipline and sustainable strong delivery track record, both in synergies and efficiency gains quarter-after-quarter, both are ahead of schedule. Meanwhile, we continue to implement our strong ESG commitment and, in particular, in Q3 with the launch of our Veolia Cares program worldwide. All these elements allow us to forecast solid growth In our results and our dividend and to fully confirm our 2023 guidance, as I’ve already mentioned.

Slide 6. I would like to illustrate our strong commercial momentum with the selection of commercial successes of Q3. I’ve chosen, for instance, our recent success in Hong Kong to illustrate our resource regeneration as well as decarbonization capabilities. Thanks to our unique expertise, we’ve been awarded a management contract of €2 billion over 20 years. Veolia is building a state-of-the-art landfill site to maximize methane capture and thus avoid the emission of 10 million tons of CO2 over 20 years.

The green electricity produced from the captured methane will cover 100% of the cost energy need. And the granite extracted from the cycle be used as the Hong Kong construction industry avoiding, therefore, imports. In Central and Eastern Europe, our decarbonization program continues at full speed. The new biomass and RDF facility is being commissioned in Czech Republic [indiscernible]. We have already invested €519 million out of our core exit CapEx plan of, as you know, €1.5 billion by 2030 in Central and Eastern Europe.

Slide 7, a few contracts in the energy spectrum, although we could qualify the Hong Kong one as energy as well. We have won two new major energy efficiency contract in Italy for Cosenza Hospitals as well as municipal buildings in [indiscernible] amounting to €280 million. Each of this contract will provide significant energy savings and CO2 footprint reduction for our clients, thanks to efficiency measures and the installation of photovoltaic systems on roofs.

On Page 8, in Water Technology, where we ranked number one worldwide, we have registered record quality bookings in the 9 months for a total of €3.1 billion, up 20% versus 2022. Thanks to our unique portfolio of technologies in reverse osmosis and Ultra-filtration membranes, evaporation-crystallization technologies and desalination, hence, contributing to reducing the water footprint of our industrial customers, reducing pollution of the affluence and even extraction precious minerals from them, such as lithium. In particular, as illustrated on this slide, we have won one of the world’s largest energy efficiency desalination plant in Abu Dhabi, a contract of €300 million, and signed several contracts with lithium producers, as well as water treatment for semiconductor plants.

On Slide 9, you see the strength of our business model and of our pricing power capacity, which allows us to pass on cost increases. So 70% of our revenue or tariffs are automatically indexed and you have a few examples on this slide. In Water in France, indexation increased by 6%, while in Central and Eastern Europe, tariff increased by double digits. In municipal waste in the UK, indexation ranged between plus 9% and plus 15%. However, our electricity export price are already 70% hedged for 2024 at the same level as 2023. Municipal heat price in Central and Eastern Europe increased sharply in 2023, in line with the cost of energy. For the non-indexed revenue, we really have a pricing power and are demonstrating it quarter-after-quarter. And we’ve continued this year to pass price increases in hazardous waste, in C&I waste and chemical products, for instance. And we have not seen any sign of a reduction in our customer base as a result.

On Slide 10, I wanted to remind you of our strict balance sheet discipline. Veolia delivered solid growth and maintained strict balance sheet discipline. With below 2.9x net debt expected at the end of the year, we are ahead of our plant, barely 2 years after the said acquisition. We have continued to improve our net free cash flow generation in Q3 with €435 million versus €337 million in Q3 last year. We control our capital allocation with very strict investment criteria. Just to give you an idea, the IRR of a project must be above WACC plus 4% and ROCE of those WACC in years 4.

The leverage ratio will remain below or around 3x, and we will, of course, keep our solid investment-grade rating. The 2 years dedicated to the Suez acquisition and antitrust infrastructure. We’ve just resumed our normal policy of cuttings and asset rotation to enhance our growth and create value. We maintained our focus on hazardous waste assets, for instance, with acquisition in Japan and recently in the U.S. with the acquisition of U.S. Industrial Technology, a Michigan-based provider, since 1996. At the same time, we divested a few non-strategic assets, such as our minority stakes in water concession in Italy for about €100 million, and few other non-core assets in various geographies are in the process of divestment as we speak.

Slide 11 and 12 illustrate our strict discipline in terms of cost and operational efficiency. As already stated, the group is closely piloted, and we innovate regularly to enhance our performance. As we’ve announced recently, with the inclusion of generative AI in our upgrade live monitoring tool.

In terms of synergies, we delivered €131 million in 9 months, leading to a cumulative amount of €277 million, since the start of the Suez merger, which was our cumulative target at year-end. Therefore, I can confirm that we won’t stop here for this year, and that we will largely exceed our annual targets.

I can, of course, fully confirm our overall target of €500 million cumulative as the result of a merger, which is bearing fruit at pace. In terms of efficiency, and I’m on Slide 12. We achieved €284 million of efficiency gains in the 9 months, which is ahead of our annual target of €350 million with 80% already delivered. Efficiency gains are part of Veolia’s DNA and will remain so.

On Slide 13. As a double junction of ecological transformation and a benchmark ESG company, Veolia manages its business in accordance with its purpose with a multifaceted performance approach, in which we measure success against financial as well as commercial, social and environmental objectives.

And I’m very proud to announce the Veolia Cares initiative, an unprecedented social protection program for our 213,000 employees worldwide. From September, Veolia guarantees a common base level of social protection for all our employees, even in countries, where there are no such legal requirements. Unprecedented in terms of its scope and scale, the Veolia Cares program gives each group employee access to parental leave, health and death coverage, support for carers and the opportunity to dedicate one day a year to a charity or an enviromental protection project.

Veolia Cares is, therefore, fully consistent with the group’s social commitment to ensure the professional and personal well-being of its employees. I’m on Slide 14. And you’ll see that I am very confident about meeting the upper end of our EBITDA guidance range. Current net income will be around €1.3 billion, and we now expect our leverage ratio to be below 2.9x at the end of the year, an improvement on our initial target of around 3x.

I will now hand over to Claude, who will give you many details on the 9 months results, and then we will be able to answer your questions. Claude, the floor is yours.

Claude Laruelle

Thank you, Estelle, and good morning, ladies and gentlemen. I’m on Slide 16. And as Estelle already highlighted our 9 months 2022 results are remarkable and at the top end of the year’s guidance. With €33.2 billion revenue for the 9 months, we experienced a very strong organic revenue growth of 10.7%, driven in all our businesses by increased indexation on our long-term contracts and the full impact of price increases on non-indexed businesses, and second, good commercial momentum and resilient waste volumes. EBITDA is significantly up at €4.793 billion, an outstanding plus 7.7% at constant scope and ForEx. 9-month EBITDA is above the annual guidance range, which makes us very confident for the rest of the year.

Thanks to the operating leverage, current EBIT is growing faster at €2.518 billion and is up 14.2%. This shows the strength of our business models, highly resilient, delivering results quarter-after-quarter. Net free cash flow improved significantly in the 9 months to €357, thanks to working capital reduction due to strict cash collection discipline and lower noncurrent charges associated with Australia deal.

Free cash flow generation, as Estelle highlighted, in Q3 was very strong at €435 million. Therefore, net financial debt decreased to €18.89 billion. We now expect a net debt around €18.5 billion at year end and a leverage ratio below 2.9x. You can also see on the slide the detailed ForEx impact in 9 months, which were slightly negative and more significant in Q3 than H1. The negative impact in Q3 came from the U.K., Latin America, Australia, China, but also from the U.S. dollar. As a reminder, as we operate in local currency, ForEx impacts are only translation and not transaction impact, and we expect a continuation of the historic trends in Q4.

Moving to Slide 17, you can see the quarterly growth of our main businesses. We continue to register a solid growth in Q3, plus 4% at constant scope and ForEx, which was obviously lower than in Q2 due to the end of the heating season. Excluding energy prices, organic growth was 3.3% in Q3, which is comparable to Q2 and only slightly lower due to adverse weather in water during the summer and project completion in Water Technologies with little impact on EBITDA. This is just a timing effect, and the bookings of Water Tech increased sharply in 2023 by 20% to €3.1 billion. Focusing on Q3, we continue to register solid growth in our 3 activities. Water grew by 5%, driven by indexation and well-oriented works. Water Technology revenue growth was slower due to project phasing with vital impact on EBITDA, as I said.

Waste activities continue to grow by 2.8%, very similar to Q1 and Q2, and 5.8%, excluding recycled prices, thanks to resilient volumes, commerce impact, positive commerce impact, price increase and indexation. Finally, energy activities grew by 4.2% as there is no heating activity during the summer.

Moving to Slide 18. Revenue increased strongly in 9 months by 10.7% to €33.2 billion. The majority of growth came from outside France. Water Technologies to start with, were up 6.3%, which is very good with a very solid pipeline of new projects. We registered strong bookings in Q3 in desalination and lithium projects.

In the rest of the world, strong growth continued in Q3, leading to plus 10.9% in the 9 months, coming from all geographies. In the rest of Europe, all our operations were well oriented and experienced high revenue growth plus 16.3% in the 9 months with strong energy prices in Central Europe. The U.K. continued to perform well with resilient rolling, good commerce and price increases, leading to 5.6% revenue growth. Iberia grew by 8.3%, and Italy revenue decreased due to lower gas prices immediately passed through into the tariff without any EBITDA impact. Frontend Hazardous Waste Europe is up 2.2%, with lower water volumes due to adverse weather. Waste volumes remain weak like in H1, while recycled still suffered a very high comparison basis, which should soften in Q4.

On the next 3 slides, we detail our performance by activity, water, waste and energy. And we start by water, our largest activity. I’m on Page 19. Our water business experienced a solid organic growth of 7.1% to €13.5 billion. Growth was driven by increased indexation and prices, 4.2%; and volumes come at work accounting for 3.4%. Weather impact was minus 0.5% due to rainy summer. In France, higher indexation of 6% were partly offset by the end of the Lyon contract and lower volume due to adverse weather.

Commercial momentum remains strong. If you remember, we have the enlarged [indiscernible] contract for €700 million backlog. The renewal of lease contracts, €700 million as well, and a new wastewater treatment plant in Strasbourg for €150 million backlog. In Central Europe, revenue was up 17.9%, driven by increased tariff indexation and strong works activity and stable volumes.

In Spain, revenue increased by 9.7%, driven by tariff increase and strong work activities with flattish volumes. U.S. water progressed by 6%, mostly thanks to tariff indexation. Latam revenue increased by 10.6%, with both volumes and tariff growth. Our Water Technology business performed well, growing by 6.3%.

Veolia Water Technology increased only by 1.1% due to project completion, but bookings are sharply up €300 million, at €1.4 billion, with significant wins in our priority segments. WTS revenue grew by 9.1%, with solid growth in all its business lines and continued price increase in the chemical business. Engineering backlog increased by 9% to $1.7 billion. And the performance of the segment is very good with EBITDA of Water Tech up by more than 10%.

I’m now on Slide 20. And you have the main trends of the waste activities. Our waste activities performed well despite slight volumes and low recycled prices. We have delivered a strong performance, thanks to our pricing discipline and indexation in municipal business, contract selectivity, operational excellence and an improvement in mix in hazardous waste in the U.S.

Revenue grew by 3.2% like-for-like to €11 billion. Excluding recycled price impact, revenue grew by a solid 6.4%. The scope effect is minus 7.1% is significant. It is due, of course, to the antitrust disposal made in November 2022. It includes U.S., UK that was sold in November and assets in Australia sold earlier in the year. The growth came mainly from pricing complemented by rising on volumes and partially offset by the negative impact of lower recycled prices. Volumes were stable with the rest of the world better than in Europe, like in the first half.

Commerce [indiscernible] 0.7% was solid, notably in the UK. The main driver of revenue growth was pricing, this was plus 4.6% impact, partly compensated by lower recycled prices. We see that prices have decreased since August 2022 from record high levels. And in the 9 months, higher electricity prices contributed to 0.7% to revenue growth. The impact at the revenue level was mitigated by taxation and profit sharing at EBITDA level. As of these rates remain well-oriented, notably in North America.

Moving to Slide 21. You have the detailed business of our energy, the details of our energy business. As a reminder, energy activity is much lower in Q3, due to the end of the heating season in May. Energy revenue in 9 months was €8.6 billion. Gross achieved 30.4% like-for-like due to the sharp increase of energy prices for 27.4%.

Our business models allow us to pass the cost to the offer energy increase to our clients, which protects our results. Weather was unfavorable due to the mild winter in Central Europe with an impact of minus 0.7%. In the 9 months, we continue to implement heat price increases, notably in Poland, in line with our fuel cost increase. Electricity revenue is fully hedged for 2023 as well as our energy purchase, and we have hedged approximately 3 quarters for 2024. Our visibility is, therefore, very strong. Building & Industrial Energy Services have also performed well with new contracts in the Middle East and in Spain, offset by lower energy prices in Italy.

On Slide 22, you have the usual revenue bridge detailing the different FX. ForEx has a negative impact, as I said, of 2.2%, minus €663 million, due to lower GBP, Australian dollar, Chinese yuan, U.S. dollar and Argentinian peso. Scope impact was minus €183 million and is including, as I said, the divestment of UK.

The 10.7% organic growth is fueled by good commercial momentum, resilient volumes, energy price increases and price and indexation increases. This solid commercial momentum, as Estelle highlighted, is contributing for 2.2% to revenue growth. To give you some examples, that we talked about in the last presentation. Gold Coast – future of Gold Coast waste contract in Australia started in Q1 this year. ADNOC Hazardous Waste project during the summer in Abu Dhabi, and many new contracts were signed in C&I in the U.K. and building energy service in the Middle East. The weather impact was slightly unfavorable, minus 0.4%. The contribution of price increases in water and waste was plus 3.8%. Energy prices contributed for €1.9 billion or 6.2%. It was partly offset by lower recycled prices for minus €240 million or minus 1.1%.

I’m moving to Slide 23. And let’s have a look at the EBITDA bridge detailing the remarkable 7.7% organic growth, to above our annual guidance range. Scope and ForEx impact were more significant than in H1. As you can see on the slide, scope amounted to minus €23 million, and ForEx negative impact reached €65 million after minus €21 million in H1. Volume and commerce impact was plus €82 million or plus 1.8%. Weather impact was slightly negative for €48 million. And as usual, the main contributor to our EBITDA increase is a net efficiency and synergies. The gross efficiency gains reached €284 million, ahead of our €250 million target for the year.

Net of shared efficiencies with clients and contract renegotiation. Net efficiencies amounted to €99 million. The synergy delivery was also very good, reaching €131 million ahead of our annual target. In total, synergies and net efficiencies contributed to €230 million. Energy and recyclate impact was €84 million with energy more than compensated the decline in recyclates. The favorable energy impact mainly comes from the benefit of the new biomass project in Germany, generating higher EBITDA, higher electricity prices for incinerators in France and in the U.K. The positive impact of the catch-up of prices in Central Europe, China and Italy and few opportunity gains in electricity in Central Europe.

Our Energy business will remain a strong contributor to our results in 2024, thanks to our secured history for the next heating seasons, which represents a very large portion of our cogeneration revenue. And thanks also to our hedging policy. The negative impact of recycled prices of minus €87 million offset the exceptional positive impact of 2022, which was plus €79 million. So, we are back to our normal level of profit in recycling.

Moving to Slide 24. And let’s see how the EBITDA increase is fueling the current EBIT, which is growing very strongly by 14.2% at €2.518 billion. Renewal expense of €223 million are comparable with 2022. Amortization and offer amounted to €2.271 billion, slightly above last year. Industrial capital gains, net of provision and asset impairment, €129 million, includes notably €54 million of industrial capital gains, pension scheme alignment between Veolia and Suez combined with the implementation of the new pension law in France and lower asset impairment than in 2022. JVs amount to €90 million compared to €105 million last year, mostly due to divestments.

I’m on Page 25, and you have the detailed free cash flow of the 9 months. Comparing 9 months 2022 with 9 months 2023, free cash flow improved very significantly from €33 million to €357 million. First 9 months CapEx reached €2.5 billion compared to €2.1 billion, due in particular to increased discretionary CapEx from €267 million to €399 million. Decarbonization CapEx in Central Europe, €123 million in the 9 months, with a total, as Estelle said, of €519 million, since January 2020, well above our initial commitment of €400 million at the end of 2023. Ongoing construction of three large hazardous waste projects in the U.S., in Germany and in the Middle East that will fuel the growth of the group in the coming years.

Second, we improved our working capital variation by €103 million compared to 9 months last year, despite strong revenue increase, thanks to our numerous cash initiative across the group. Net financial debt reached €18.9 billion, including almost €200 million of negative forex. After this very good Q3 performance, we expect net debt to be around €18.5 billion at year-end and a leverage ratio below 2.9x.

I’m now on Slide 26. And you have the details of the net financial debt variation, where you can see the different FX I have just highlighted.

Moving to Slide 27. You can see that we enjoyed a very good debt profile with a very smooth repayment schedule, more than 80% fixed rate, a very high net cash position of €6 billion, allowing us to manage our debt issuance program.

I’m on Slide now 28. And you have, on this slide, our 2023 guidance, which I fully confirm. EBITDA organic growth is expected at the high end of the 5% to 7% range, driven by €200 million – €250 million of efficiency gains, more than €280 million cumulated synergies at the end of 2023. Leverage ratio will be now below 2.9x. Current net income will be around €1.3 billion, which means a double-digit growth compared to last year. And as usual, our dividend will go in-line with our current EPS. Given our remarkable 9 months delivery, we’re, of course, very confident for the full year. Thank you for your attention.

Estelle Brachlianoff

Thank you, Claude. And now we are together here to answer your questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] We have our first question coming from the line of Ajay Patel from Goldman Sachs. Please go ahead.

Ajay Patel

Good morning, and thank you very much for the presentation. I have three questions, please, if I may. The first one is, look, these are very strong results. EBITDA is up 8% on an organic basis. And your guidance for the full year is 5% to 7%. With cost cutting running very nicely and the delivery that you’ve put through in the first 9 months, how come that doesn’t translate in a changing either guidance for the EBITDA line or even guidance on the net income line of the €1.3 billion? Could you help us, one, with the EBITDA guidance in terms of – is it conservatism built in for Q4? Or there any dynamics in Q4 that we need to understand that may imply a lower growth rate in Q4? And then could you help us with the dynamics on – from the EBITDA line down to the net income line, just to ensure that we’ve got those in the right place. And then I’ll come back with the other two questions.

Estelle Brachlianoff

Okay. So we’ll start with this one, which is a full one. A few answers. So first, I am very confident about reaching the upper range of the EBITDA guidance, which means, as you know, 5% to 7%, and I’m saying, I’m very confident we should reach the upper range of this range. That’s the first answer. Do I expect anything bad in Q4? The answer is no. We have good visibility, and we don’t see any change in trends in our businesses. I guess the only thing I would say, I don’t put any personal energy into trying to have an impact is weather. I should not imagine, and we have the heating season just starting. October was not particularly cold. So we have a little bit of certainty on this one. On the rest, I can tell you, we are, again, very confident, no change in trends, and we target the upper range of the EBITDA guidance in terms of – with full confidence. That’s the answer. Do you want to complement on that one, Claude?

Claude Laruelle

And Ajay, you will have the – you have seen the translation from EBITDA to EBIT, and you have the same translation from EBIT to net results. So we’ll have a strong net results at year-end. So we – but as Estelle said, we are very confident for the rest of the year. So you have a very strong net result from the translation from EBITDA-to-EBIT to net results.

Estelle Brachlianoff

So maybe your other two questions.

Ajay Patel

And the other two are relatively short. It’s more on cost-cutting translation. So you delivered – if I take the net efficiency benefits of €99 million that you flagged and then take the cost cutting that you delivered, which is €284 million, it feels around 35% of the cost cutting is translating into underlying EBITDA gains. And I just wondered, is that the right way to think about how cost-cutting will translate going forward? Or is there something specific about the 9 months that, that number is a little lower? And then the last question is on working capital. You achieved $745 million of benefits. Just wanted to understand what might unwind over Q4 so that I can model the full year a little bit better?

Estelle Brachlianoff

Claude, maybe for those questions.

Claude Laruelle

So if I start by working capital, as you know, Ajay, we have a strong working capital reversal in Q4, and so we don’t expect any changes as what we have seen in the previous years in terms of working capital reversal in 2023. For the cost-cutting translation, we have always said that we keep 30% to 50%. We are at 35% in 9 months. So nothing specific. We are in the range that we are – that has been always the range of Veolia in terms of net efficiency gains at 35%, we are in the range of Veolia.

Estelle Brachlianoff

And in terms of synergy, in a way, the translation is really fully to EBITDA, as you know.

Ajay Patel

Okay, thank you very much, Estelle.

Operator

Our next question comes from the line of Arthur Sitbon from Morgan Stanley. Please go ahead.

Arthur Sitbon

Thank you for taking my questions. The first one is, I thought that you’re going to host several events in 2024, three of which will be thematic events on, I think, energy, U.S. activities and whether technology and innovation. I was wondering if we should look into the selection of these activities as an indication of how you think about them. What I mean by that is does that imply that these three activities are all core to you? Does it imply that you believe that they are not well understood by the market? Basically, I just like some thoughts around why did you pick these three activities to do a thematic event on that, that would be very helpful. And that’s the first question.

The second question is on the third quarter. I mean there was slightly slower organic EBITDA growth. But if anything, it seems to be due mainly to the weather. So volumes seem broadly in line with previous quarters. I was wondering maybe, if you can give some details on the areas that have been doing well that have been very resilient, those that have been doing maybe less well? And how is it going so far in the fourth quarter from this standpoint? Thank you very much.

Estelle Brachlianoff

Thank you very much for the questions. So I hope I understood your question, why because the line was not exactly a great from this end. In terms of the why have we selected those teams for the deep dives. I guess, it’s really – are they core? Yes, they are. Are they fully understood? I don’t know. We’ve had a lot of questions over the years. And we understood that at times, you need to take a bit more time than just the usual quarterly or even CMDs to deep dive and to explain what it is. The energy at Veolia, which as you know is local energy, which is a very specific sweet spot for us and quite unique, just to give one example, or even the U.S. where there is probably an underappreciation in my view of our unique positioning in the U.S. following the merger with Suez and the fact that we are now really very well positioned in key markets in this country, just to give two examples. So it’s probably, I don’t know, like a series of the – a lot of question about could we spend more time on this and that, plus under appreciations maybe of some of the key markets we have in Veolia would be probably my answer.

In terms of EBITDA growth from one quarter to the next, you’re exactly right, we’re exactly on the same range as Q2 and Q1 with the slight difference being really the weather, which hasn’t been wonderful in terms of the water in Europe and in the U.S. this summer. But in each quarter was really at the upper end of our guidance range and even above our budget. So I guess it’s all – every single of the quarters have been good in a way so far. I would say that if you look at EBIT, the third quarter was even higher slightly than the quarters before. So it’s another way of looking at that.

Where are we performing well? I guess we have a portfolio of activities. I would mention hazardous waste, which is still performing super well in the U.S., notably, where we really have a record revenue growth of plus 30% and EBITDA translates into a very, very big EBITDA growth for us as well as the energy activities. As I said, it’s local energy activities, which are performing very well. Not specifically in the third quarter because, as you know, we have a seasonal effect on energy. But in the overall year, it will be a good year for energy activities, local energy, as I mentioned. Claude, do you want to…

Claude Laruelle

Yes. And if you look at Q3, it’s mostly the water volumes – the water volumes. We have bigger volumes sold in – during the summer. So the impact of water volume, even though it’s in the same range at the start of the quarter, is slightly higher, but nothing very specific. So EBITDA deliveries in Q3 is very strong, as Estelle said. And the biggest impact is the water, because of – now which was raining, if you have been in France. And even in Spain, that was slightly negative. And for Q4, maybe, Estelle, the Q4, or the start of October?

Estelle Brachlianoff

Start of October is good, as in we don’t see any change in trends. And in terms of the rest of the year, again, as I said, we don’t see any specific negatives anywhere. The only uncertainty being the weather so far, in my opinion, for the heating season to come. I shall, if I may, insist on the fact that we are delivering these very, very good results quarter-after-quarter with flat waste volume. And they’ve been flat for now pretty much 1 year, since September in 2022, if you have a look at our quarterly presentation. So I think it’s a proof – and I’ll come back to my introduction, it’s a proof that it’s based on the solid foundations and piloting as we’ve highlighted a few times already.

Operator

Thank you. Our next question comes from the line of Vincent Ayral from JPMorgan. Please go ahead.

Vincent Ayral

Yes. Good morning. Thank you for taking the presentation. Three questions on my side. One, bouncing on just your last comments. Yes, indeed, this is very good, despite flat waste volumes to keep delivering organic growth in the waste segment. There is the U.S. and ramp up of activities. But the question I have is you’ve – when you look at your – on your presentation, you say continued favorable impact of price increases in indexation in waste. Could you explain us a bit like the dynamic? If the volume remain in some areas in the negative trend, you don’t seem to see any price war. I’d be very interested in having some color on what’s the situation as of now. The other question would be regarding synergies. You’ve been doing very well. Could you give us a couple of examples of action and key synergies you’ve managed to unlock and the way you see the main areas of progress going forward? I’m thinking on Q4, but ‘24 and beyond.

And finally, on the inflation, inflation has been quite a positive, but – in your indexation for contracts. But there is also the cost inflation. And you have, last year, increased, among other things, on the employee wages and everything. What do you see going forward and the situation, the net between cost inflation and contracts indexation? Is it that we should remain very steadily in a net positive position as well now? Or should we assume some level of temporary compression? What is the mechanics between top line and OpEx on that one? Thank you.

Estelle Brachlianoff

Thank you for your questions. So in terms of your question about volumes, price and price war. I would say, if you look at, for instance, the Slide 20 of our presentation, which is on waste, which I assume was the underlying part of your question. We haven’t seen a decline in volume. We’re seeing flat volumes, so a bit of miniscule minus or miniscule plus for the last four quarters, basically quarter-on-quarter with flat volume. But you can see quarter-on-quarter, prices increasing on this one is, I guess, on the 9 months is plus only 6%. And I don’t have top of my mind last year, but it was again 3-point something. So we are good at using high pricing power. I think the key word here for the 30%, which are non-indexed because again, 70% are indexed. So it’s not even pricing power, it’s automatic. So for the 30% which is not pricing power is key.

Do we see a price war? No, because we have, again, the pricing power. We are very good at what we do. We have the quality of service, which is well understood by customers. We are in a social service for them. When I say it’s well understood by a customer, we measure our Net Promoter Score, which is very good and increasing year-on-year. So we are a happy customer, good position on our market. We are, as I highlighted a few times already, in the top three usually of our markets. So we are not a small player. When we play, we want to play big and strong in the country. This what is what allows us to have this price power – pricing power, which I’ve just highlighted.

In terms of synergies, yes, we’re very happy about the track we’re in because the quality of the delivery of the merger with Suez is as important as the merger itself, in my opinion, and this is what demonstrates the synergies. If you want example, as – I guess started more with HQs, and it’s now more down to operational stuff. I say HQs because, of course, I’m not talking only about the central corporate HQ, but countries HQs, we have in each country, which have merged. That was for the first half of the synergies. Now we are more down to more operational stuff, such as rerouting of trucks by merging depots in waste collection or purchasing power, which is taking off as we speak and will go on until 2024. So the two examples I mentioned are really already starting, but will deliver fully in ‘24 and ‘25. So that’s for your second question.

In terms of inflation, we always said that inflation was neutral or slightly positive to Veolia. And when I say that, it means neutral or slightly positive for our margin and results. Of course, revenue is something else. But what we tend to target is to protect our margin. Again, we have demonstrated with high inflation or higher than – I guess to know in the last 18 months that we have been able to protect our margin and even slightly benefit from it from time-to-time, including in the energy price as well. Do we expect any squeeze in the other direction next year, the answer is no, because I monitor that very closely from employees wage through to everything we buy as chemical products or energy. And it goes back to your previous question about purchasing, for instance, so no negative to anticipate. Again, inflation is neutral or slightly positive for Veolia and will remain so, even if it goes down like it is now.

Vincent Ayral

Thank you.

Operator

Thank you. We have our next question coming from the line of Jenny Ping from Citi. Please go ahead.

Jenny Ping

Hi. Thanks very much. Firstly, two questions first out, please. Just on the price inflation, can you help us to understand, when we will start to see some of the lower inflation, i.e., the reset coming through starting to impact your numbers? And I know you said net is neutral to positive. I just wanted to see when some of that starts to flow through. Secondly, can you just comment and update us on what’s the latest around city contract. Obviously, there has been some press coverage around the process and the issues with various processes. Is there going to be a re-tender of the contract, which will effectively drag out the process a bit longer? So, can you give us an idea on that? And then two numbers questions, please, if I can refer back to Slide 23, just on the base EBITDA number for the full year ‘22. For the nine months, you had sort of talked about roughly around €88 million for FX and scope as a base year – base adjustment for nine months. So, are we looking for the full year to the tune of €120 million, €130 million for those two elements together, just to give us a sense of the starting point. And then on the €1.3 billion net income, which you have reconfirmed today, can you just tell us what the FX drag you are expecting on that would be? Thanks.

Estelle Brachlianoff

Okay. On – so it’s four questions or 3.5 because, three and four about ForEx. I guess I would start with the first, but I think, you will have anyone to complement, Claude. On inflation, inflation is already lowering. Of course, it depends on each country and each type of contract. As we said, we have a lagging effect of our mechanism of indexation for the 70%, which is indexed. And of course, we monitor it, so that the cost is not squeezed by increasing, whilst the inflation starts decreasing and therefore the indexation. So, we plan all of that in a nutshell. So, nothing negative to expect here. And by the way, we don’t see any – we don’t have any price decrease. So, it’s more, I would say, what we start to see is the increase slowing down. So, I am talking about like the plus 10% is more plus 8% here or nothing like decrease in price, and I am very confident we should not see any decrease in price and indexation formula work like that. So, it’s quite protective for us. Maybe an example…

Claude Laruelle

An example on Water France, Water France escalation formula, they were 6% this year. With the lag effect, as you know, Jenny, that will be between 4% and 5% next year. So – but it remains a very strong escalation formula impact on the Water France to give you an example.

Estelle Brachlianoff

And our cost base has increased less than those numbers, including the lower than – of the two, so no anticipation of squeezing in our margin there. In terms of the cities tender, which we know is a large contract we have in the providing water for the outskirts of Paris. Shall, I remind that we have renewed this contract in 2010 already. This tender was launched 2 years ago. We have already answered to thousands of questions on providing cubic meters of document. And I can tell you we have a very, very good, high-quality offer, I am very proud of. You know there was an incident in April, where there was data provided to us by the cities too, which was not meant to be sent to us. And the cities has therefore taken the stance that they had already all the information they needed to judge the merits of both offers on the day before these incidents. So, that’s the decision they have announced they have taken. So, as we speak, they are analyzing the merits of both offers based on the data the days before. In terms of the fact, the cities again said they would decide by the summer next year, who is the best contender, having in mind that the end of the contract is at the end of 2024. In terms of ForEx, Claude?

Claude Laruelle

So, in terms of ForEx, let’s start. Jenny, it’s always difficult to predict the ForEx. But what we see, we had a higher ForEx impact, of course in Q3. And if we don’t have many big changes in ForEx, we expect quite the same trend, as I said, in Q4. In terms of scope, it’s different because we have made a few tuck-ins. They will have the full year impact, including the last one in hazardous waste in the U.S. And we – if you remember, the divestment of Suez UK was done in November last year, at the end of November. So, you will have to correct a little bit the scope impact with this. And for the – at net income level, our ForEx impact, as you know, is much, much more limited. So, we expect a very small number in terms of ForEx impact that net income, we are very confident with the delivery of the net income for the full year 2023.

Jenny Ping

Sorry, just a follow-up. So, can I read that as €100 million in totality, assuming FX stays where they are currently?

Claude Laruelle

Jenny, we don’t know the ForEx of November and December. But if we have the same trend as in Q3, you are correct.

Jenny Ping

Thank you.

Operator

Thank you. We have our next question coming from the line of Olly Jeffery from Deutsche Bank. Please go ahead.

Olly Jeffery

Thanks very much. A couple of questions, please. So, the first one, I would like to ask about is, just coming back to the waste volume trend that you have seen in the last quarter, which have been a repeat of what we see over the preceding quarters. French PMI volumes – PMI reading was not very good for September. Can you comment on the mix of how you are seeing waste volumes? So, I expect with France and Germany is probably not doing as well as others. But can you at least talk to whether you are seeing any stabilization within those markets, or if you are seeing volumes getting worse? So, some detail on that would be great. Could you also please give an update on what’s happening with the Lille contract in Morocco, there has been a few things in the press regarding that. And then last question I have is just slightly more broader, with synergies and clearly that’s going very well. And your target initially is 4 years to do the €500 million. I assume that you are not going to stop at €500 million, when we start to think is going beyond 2025, there might be a possibility of looking to push beyond that. Any commentary you can give on those questions would be great. Thank you.

Estelle Brachlianoff

Thank you very much. First, on waste volumes, I will slightly start with not talking about waste volume, but waste revenue, which is basically volume times price. And highlight what we have put on slide – is it 18 or 17, Claude? 17, Slide 17, where you see that it’s plus 3.1%, 3.2%, whatever depending on the quarter, so it’s super stable revenue. Hence, my comment on the price because the underlying volume is more like zero plus, zero minus, depending on the quarter. In terms of the detail behind those volumes being flat because you are right, the worse geographies has quite a different stance. Claude?

Claude Laruelle

So, if you talk about France, we have the same trend in Q3 than in Q2 pretty much. And in Germany, we have seen in October stabilization in mixed industrial waste. Meaning that mixed industrial waste in October 2023 was at the same level and even slightly better than in 2022 to give you two examples.

Estelle Brachlianoff

And if you want to have an idea of the various weights of various type of business within the waste, it’s Page 20, where you see the [indiscernible] in solid waste and hazardous waste. And with those percentage, you have basically the 80-20 rule of, where we are big. So, you are thinking – your question was about France and Germany, but we are big in the UK. We are very big in Australia as well, which is in a very positive, I guess trend as we speak. And in terms of hazardous waste, we are very strong in the U.S., for instance. So, I guess I would diesel in a little bit to your question because, as I have said, we are very much more outside Europe than we were a few years ago. So, U.S., Australia, typically have taken a bigger share than it used to be the case. In terms of your question on Lille, there is no specific news. We are going on with discussing with the antitrust authority on one side and the Internal Minister on the other to try to find a solution, which will be compliant with like other parties, constraints and wheels. And we are really under discussion as we speak today. So, there is nothing specifically new to say today. In terms of synergies, yes, you are right, we are really on a very good trend. That’s why I can confirm that this year, we will exceed our targets, which have accumulated from day one to 180. Of course, we will do much more. You can do the math. So, it will be much more this year. And I don’t intend to slow down the pace. The €500 million cumulated over 4 years, I guess you know I am very confident we should achieve it. And I am more a delivery than promise type of lady. So, I want to secure this. And I am very happy we are really securing this delivery. And of course, if we can do more, we will. But so far, I am focusing on delivering for €500 million to start with.

Olly Jeffery

Thank you.

Operator

Thank you. We have our next question coming from the line of Juan Rodriguez from Kepler. Please go ahead.

Juan Rodriguez

Hi. Thank you. Good morning and thank you for taking our questions. I have a follow-up, if I may, is on the – mainly on the leverage side. I think I heard correctly that you signaled something around €18.5 billion target for the end of the year. And looking at the new adjustment on the leverage target, if we look at the top part of the range, would be something closer to 2.8 and 2.9 net debt, is that correct? And the second one is on the pricing of new contracts. You signaled something around 4% to 5% on the water in France. What have you – what other trends are you expecting? And what have you seen in H2 already because you signaled there was already a pricing for the energy sector and expected early in 2024, this could be quite helpful. Thank you.

Claude Laruelle

Maybe I will start with the first one. On the leverage side, if you do the math, you are right, €18.5 billion divided by the EBITDA at the end of the year, you have 2.85. So yes, so that’s the reason why we said below 2.9. Well, and we know that we will be below 2.1 at year end. That’s the reason why we have improved our guidance for the full year.

Estelle Brachlianoff

And I guess the only uncertainty would be the ForEx, Claude, right?

Claude Laruelle

No question. Yes. And your second question, Juan, was about pricing of new contracts for – sorry?

Juan Rodriguez

Yes. Price of the new contracts on H2, and what do you expect for early 2024?

Claude Laruelle

On new contracts in general, so there is no big change in terms of pricing. And we continue to increase our pricing, sorry. And as we have said, the escalation formula…

Estelle Brachlianoff

Maybe I haven’t understood fully your question, if you could rephrase it, so maybe we will give you a more precise answer.

Juan Rodriguez

Yes. On the pricing, you signaled already around 4% to 5% increase expected for water in 2024. I saw in the presentation that you signaled that you already negotiated the energy contracts for the winter season. And what are your expectations going forward as well? It’s just to get a better idea of what the review dynamics is in terms of inflation against price indexation and contract review?

Estelle Brachlianoff

So, I guess on water, the way it works is we have anniversary dates of the contract, which could be in January, in April, in July. So, it’s a bit of a mix, hence, my comment on the lagging effect. So, the 6% for this year, which Claude mentioned, is a series of four here, seven there, depending on the date, if you want, the anniversary date, which is a mix, which altogether will be around 6% this year. And again, as I have said, our cost base is increasing by lower than this amount. In terms of the 4% next year, we don’t know what we don’t know about inflation, but we have some anniversary date in January. So, we have a little bit of visibility here and then April and so on and so forth. So, our expectation is that, yes, it slowed down to something around 4%. And therefore, we won’t have like our cost base increasing by more than this amount. We will try to be, of course, increasing by less than this amount in order to protect our margins. So, just to try to detail a little bit the logic in our thinking here. In terms of energy contracts, we have two types of energy contracts roughly. The district heating on one side and the building energy services on the other. But on both cases, we buy the energy in a way on behalf of our customers. And that’s why I said it’s pass-through for us. And therefore, as you know, we are hedged for the energy price for next year, around three quarters of it, as Claude mentioned, so which means that whether the energy price is up or down, we protect again next year’s results. But maybe on the second point, you want to complement, Claude?

Claude Laruelle

Nothing much to say, Estelle. We can give you one more comment on energy contracts. The energy that we sell from the waste-to-energy businesses, so we have also hedged in the UK and in France, which are the two main contributors. In France, we have better prices than last year. And in the UK, it is the same range as – sorry, for 2024, we will have better prices than 2023. And in the UK, that will be in the same order of magnitude.

Estelle Brachlianoff

So, all-in-all, in the energy, that’s why we always said it’s, again, neutral or slightly positive. And the slightly positive comes from the various opportunities we have of selling extra services, when the energy price is high, let’s say, on services as an example. So, it’s an indirect impact, which makes it slightly positive.

Juan Rodriguez

Estelle and Claude, thank you very much.

Operator

Thank you. We have our next question coming from the line of Philippe Ourpatian from Oddo BHF. Please go ahead.

Philippe Ourpatian

Yes. Good morning to all of you. Just two questions. The first one is could you just, Claude, mainly regarding what Ajay requested in terms of net efficiency. Could you just remind us what could be the reason to be positioned between the 30% of keeping the net efficiency to the 50%? What are the main, I would say, moving parts, which are positioning your net efficiency on one side of the range versus the other side of the range, just to remind us, how this 34% is linked to? That’s the first question. And the second one, you mentioned in your presentation that you have €6 billion of net cash and no issue, I would say of new debt. Could you just provide us also the level of liquidity you have means mainly the guaranteed no credit line in your balance sheet, please? Many thanks.

Claude Laruelle

So, maybe I will start with the first question. So, on top of this, we have – in terms of RCF, we have a new RCF that has been renewed for €4.5 billion. So, in total, it’s the cash that we have plus €4.5 billion to answer the first question. The second question…

Estelle Brachlianoff

So, in terms of the first question, so what are the typical moving parts? One is how much does this cost us to deliver those efficiency plan, because that time you have to invest a bit – invest as in not CapEx, but invest as in there a little bit of a cash cost to deliver this. This could be, for instance, I don’t know – when we merged, we changed location to go for a lease, which is less expensive in the city. At a time, you have a little bit of a breakup cost to exit your existing lease to go for a less expensive one, just to give you an idea. So, that’s net of the gain. So, that’s one moving part. The other one is that you give back to the customer because when we renew contracts, we tend to give back some of our efficiency to the customer. So, it’s a typical moving part. So, it’s those which goes up and down and over the years are between 30 or I guess, a third and half which we retain net of those costs.

Philippe Ourpatian

Many thanks. Very clear.

Operator

Thank you. There are no further questions at this time. I would now like to turn the call back over to Ms. Brachlianoff for final closing comments.

Estelle Brachlianoff

Thank you very much for all your questions. You have understood that we are very, very confident not only – we are very happy about the very solid results, but the foundation of the company are there as well as the pilot team. So, we are confident not only for this quarter, but for the quarters to come. Thank you very much.