Veolia Environnement S.A. (OTCPK:VEOEY) H1 2022 Earnings Conference Call August 3, 2022 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 – JP Morgan
Tancrede Fulop – Morningstar
Arnaud Palliez – CIC Market Solutions
James Sparrow – BNP Paribas
Verity Mitchell – HSBC
Ahmed Farman – Jefferies
Operator
Ladies and gentlemen, welcome to Veolia Conference Call on 2022 Half Year Results with Estelle Brachlianoff, CEO; and 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 connecting to this conference call on Veolia’s HI 2022 results. I am accompanied with Claude Laruelle, our CFO to present you our half year results which are, once again, very solid and growing strongly.
What are the key take away some of this first semester? And I am on Page 4 of the slideshow. First of all, our first half results are very strong and enable us to fully confirm our 2022 guidance of an organic growth of EBITDA between 4% and 6% growth and the current net income of €1.1 billion. We are perfectly in line with our annual trajectory. This first half is once again an opportunity to demonstrate the relevance and robustness of our business model as well our ability to anticipate and adapt in the face of an uncertain environment. I will come back to this in a few moments.
One of few key priorities of 2022 is of course the Suez integration. And I can already confirm that the combination is progressing very well, both from an HR perspective and an operational point of view. These last few months have confirmed that the merger with Suez is a major source of value creation both short-term and more largely for our strategic positioning and the enriching of our know-how and technologies. Already, the potential for synergies that we notified at the beginning of this operation is fully confirmed and is bearing fruit with the first synergies delivered in HI. Moreover, the antitrust remedies were signed at a very high valuation well above Suez acquisition multiples and allow us to crystallize immediate value.
Let’s now move on to our HI results, and I’m on Page 5. 2022 has started very well and this good start to the year continued in Q2 both in terms of activities and results. Our financial performance in HI shows a very strong growth of our results compared with HI 2021, including of course a significant impact of the first time consolidation of Suez effects since January 18th. The growth of our revenue and results has been very similar in Q2 and Q1 when taking into account the usual seasonality of our energy activities as well as a very specific base effect of 2021.
Revenue grew by 46% to €20.2 billion for the half year and current net income progressed by 33% to progress by 33% to €528 million. Compared to HI, Veolia Suez combined figures and at constant scope and ForEx, results have also progressed considerably. Revenue grew by 20.9%. And excluding the impact of energy prices, revenue was still up by more than 6.7%, once again showing the strength of our business profile in times of high inflation.
Revenue progressed strongly across all our activities with volumes were strong and we maintained our proactive pricing policy, whereas recyclate prices remained quite high. Water benefited from high tariffs indexation in all geographies. Finally, energy was driven by the sharp rise in prices and the very good operational performance of our cogeneration units. As far as EBITDA is concerned, EBITDA has increased by 6.1% or 7.5%, excluding negative weather impact, and currently EBIT by more than 20% at 20.2%. This excellent performance is due to continued efficiency gains and the benefits of the first synergies of this Suez merger.
You can see on Page 6 that the very favorable Q1 trends continued in Q2 across all our businesses. I will start with Municipal Water up 4.9%. In Spain, volumes were good helped by hot weather and tourism recovery and in France as well. North America and Chile benefited from increased tariffs in regulated water. Besides summer season in the northern hemisphere is looking quite good in terms of volume. Water Technologies are progressing by 4.7%, growth was driven mostly by WTS but also by the services and technologies arm of [VWT].
Solid waste grew by 8.3% mostly due to pricing, increased recyclate price, tariff increases and higher electricity revenue from our incinerators, but also thanks to good level of activities in all our geographies and growing volumes. The increase of hazardous waste is even stronger at 12.2%, notably in Europe and in North America, with volumes and prices sharply up combined with the high oil prices.
Local loops of energy were driven by the strong increase of heat and electricity prices and favorable indexations, notably in Central and Eastern Europe, while weather impact was rather unfavorable due to a mild winter. Energy Services and Industrial Services were also driven by energy prices, but also by contract wins, for instance, in PPP in Italy in 2021.
On Page 7, I would like to give you the reasons behind our confirmation of other parts, notably EBITDA growth of 4% to 6%. We reached, in fact, the high end of the guidance in HI with 6.1% and we don’t see any economic slowdown in our volumes which are progressing. Veolia has little exposure to the economic cycle or an economic slowdown, thanks notably to our business mix, and 85% of our revenue is not exposed to industrial production. Our resilience was, again reinforced with the acquisition of Suez and an increased footprint in municipal and regulated water.
The only activity partially sensitive to the economic cycle is Waste of which only half is commercial and industrial waste, which is also benefiting from the very promising trends of recycling and more generally, of the implementation of circular economy for clients. On top of that, the sole implementation of synergies of the merger is guaranteeing a very strong growth of our results in the years to come.
Also, and equally important to me, Veolia management has recently demonstrated its ability to react quickly and strongly when needed. Our Recover and Adapt Plan launched in spring 2020 enabled us to recover our pre-COVID level of results in six months, whereas activities level were far from the normal level in the fall 2020, if you may recall.
Regarding inflation, and I’m on Page 8, high inflation is globally neutral or slightly positive for Veolia as you can see in our results. Two reasons for that, 70% of our revenue mainly municipal contracts is indexed. And for the remaining 30%, our proactive pricing policy has resulted in price increases at least matching our cost increases since mid-2021. For the 70% index portion of our revenue, tariffs automatically increase with inflation once or twice a year, sometimes more often, like in Chile, or with a bit of delay, or with various mechanism depending on the countries as it is illustrated in Page 8.
For the remaining 30%, typically industrial or tertiary clients, I implemented a very strict pricing discipline already four years ago, so that the priority of everyone in the company would be the fair remuneration of our services and not the volumes. This has been one of the key factors of our quick recovery post COVID. This policy has also enabled us to react quickly in the spring 2021 and to put in place price increases adapted to the new inflationary context, which is bearing fruit today.
On Page 9, you can see that we maintain a very sustained rhythm of cost savings and achieved [€170] million of efficiency gains the H1, fully in line with our €350 million annual objective, which was increased to take into account the enlarged parameter. The majority of the savings are coming from efficiency gains such as the early replacement of pumping systems to decrease energy consumption, just to give you one example.
Cost discipline has been a strength of Veolia for many years now, and certainly an asset in the current environment. Discipline remains a priority. We are also very much in line with the synergy plan of the merger with Suez and we have delivered €52 million of synergy out of our annual objective of €100 million. This remarkable performance only a few months after the closing of the tender offer on January 18 is attributable to anticipation, preparation, and discipline. We have built a synergy plan BU by BU since 2021, which has enabled us not to waste any time and to deliver from day one.
In terms of energy purchasing itself, our hedging policy is protecting us against price volatility. We have also accelerated our efforts in the last two months to fully secure our 2022 Energy purchases, which was already the case when we published our first quarter results and which is now almost the case for 2023 procurements. For 2022, our energy purchase are now 95% secured and 70% secure for 2023 to be compared with 35% at the end of Q1.
Moreover, our suppliers are always first strong national producers or distributors in order to deliver essential services such as municipal heating which all countries considered priority in their procurement strategy. Therefore we do not anticipate any supply shortage. Veolia also has specific assets and know-how, enable us to seize the opportunities coming from these high energy prices.
And here too, we haven’t wasted any time since we launched as soon as last March a specific program called ReSource. €150 million CapEx envelope is dedicated to this plan, which aims to increase energy production by 5% and to reduce our energy consumption by 5% within two years. We in fact offer services to our customer to help them reduce their energy consumption with fast growing business notably in Italy and in the Middle East.
We have developed for the last 10 years step by step various know-how to produce local energy from alternative sources of fuel from non-recyclable waste to sludge or wasted heat, very valuable activities we intend to accelerate. I’m now on Page 11. And Veolia knows how to anticipate, react quickly and strongly to face geopolitical or macroeconomic uncertainties but beyond that, both our model and our strategic positioning are strengthened by the current environment.
A few words to give you colors about these opportunities. The current geopolitical conflict reinforces the European country’s demand for energy independence, not to depend on unreliable imports from other countries. And we have part of the solution with Veolia as we’ve learned how to produce locally sourced renewable energy.
Our sewage treatment plants, our landfill produce biogas, and we have the technologies to clean it up and put it back into the grid. On a France-wide scale, if some regulatory locks were lifted, 25% of the gas we import from Russia could be replaced by renewable gas produced in France at affordable prices. Another example of current events, summer 2022 is one of the warmest and driest on record in the northern hemisphere and water restriction are affecting large population increasingly earlier in the year.
The solution is out there, Veolia knows how to improve the efficiency of water distribution networks, to limit losses thanks to our technologies and know-how combined with the power of digital technology. But we also have a unique know-how and hence thanks to the partnership with Suez, to recycle wastewater. The development potential is really, really significant. Just one figure, 15% of the water is reused in Spain, 90% in Israel and only 0.1% in France. Veolia’s business is the ecology of solutions, solutions that we increasingly need as we see every day.
As an illustration, you can see on Page 12, a few key innovative contracts won in the first half, showing our expertise in complex water processes, water reuse or decarbonization. In Vienna, the unique know-how of Veolia in terms of complex water treatment and in particular sulfate extraction membranes will help SBM Offshore for the 14th time in order to optimize the oil extraction process while minimizing the CO2 footprint. In Taiwan, for Micron, a US chip manufacturer, our process water technology will help our client extend its [plan] without increasing its water needs.
In the Bourges in France, Veolia will build and operate to biomass cogeneration facility, enabling our client the paper group Norske Skog to reduce its CO2 emission by 200,000 tons per year, total backlog of the contract which is €225 million. In energy again, our very recent contract in Oman in partnership with Total will allow us to use solar panels to supply energy for the nearby desalination plant. And I could give you many more example of our differentiation and know-how.
In this context, I’m on Page 13, the merger with Suez is a major advantage and an excellent strategic move with significant value creation in the short term and in the long term. In the short term, of course we’ve got synergies which are in line with our business plan, but also in the medium term with the integration of technologies and know-how to serve the growth of the group.
Finally, the current context has only given us additional arguments as the merger strengthens our presence in North America and has enabled us to acquire at the average price of the Suez acquisition regulated water activities in the US or in Chile, which offer high returns and visibility to our portfolio. The integration of the Suez team that have joined us is taking place in the best conditions. Thanks to the work carried out in the summer of 2021, all the teams were able to be set up from the first day in diverse countries and at the head office.
And all teams are now mobilized to deliver the expected results starting with the synergies which are perfectly on track. Joint management teams are in place in all the countries as well as in the HQ. For example in Spain, we have chosen in executive from Agbar to manage all our activities in this country both the municipal water acquired from Suez and the energy efficiency already at Veolia.
In Australia, on the other hand, a Veolia manager with nearly equal executive team is responsible for combining the Waste activities of the Veolia and Suez in that country, in which we are now #1 of the sector. We are all sharing the same culture, the same vision of the environmental challenges and the same objectives. Bringing together our team’s know-how and technologies allows us to enhance our offerings and differentiating solutions, such as water reuse with Agbar in Spain, to give only one example.
On Page 14, you can see the details of the antitrust divestitures we have signed in the context of this Suez merger. Valuations are all well above Suez acquisition multiples, which provides immediate value creation.
On slide 15, you can see the key figures of our 2022 guidance which we confirm, thanks to our very strong first half delivery and despite the current difficulty international context. Let me recall them quickly. We target solid organic revenue growth, an organic growth of EBITDA of between plus 4% and plus 6% versus combined 2021, including more than €350 million of efficiency gains, complemented by €100 million of synergies from the merger with Suez. Current net income of around €1.1 billion, an increase of more than 20% confirming an EPS accretion of around 10%. Leverage ratio is expected at around three times. Our dividend policy remains the same with dividend growth in line with current EPS growth.
In conclusion, the excellent result of the first half demonstrates once again that Veolia is solid, efficient and agile company with strong prospects for growth and value creation, particularly linked to the merger with Suez, which is on very good track.
I’ll now hand over to Claude Laruelle, who will detail our HI 2022 results. Then we will answer to your questions. Claude, the floor is yours.
Claude Laruelle
Thank you, Estelle and good morning, ladies and gentlemen, I’m on Slide 17. This is the first semester presentation of the combined Veolia Suez group, six months after the merger. And I’m very pleased to report a very strong set of results. We experienced a strong revenue growth, plus 12.9%, that comes on scope and ForEx with continued solid volumes, a favorable pricing and indexation of our long term contracts and recyclate prices that remain high.
EBITDA is up 6.1% in the upper range of our guidance for 2022. As we told you during Q1 presentation, as energy pass through in a vast majority of our contracts, it is normal to have revenue growing much faster than EBITDA. Combined group current EBIT is growing very strongly by 20.2%, leading to a current net income of €528 million, totally in line with a €1.1 billion goal for the year.
As you can see on the right hand side of the slide, ForEx has a positive impact on the P&L with the euro-dollar parity now but a bigger impact at the debt level. Our net debt is at €22.3 billion at the end of June. Of course, it doesn’t factor any antitrust disposal yet. All the processes have been already launched and some have been signed and will be closed later this year. The leverage ratio will be as committed around three times at year end and well below three times once all the antitrust proceeds will have been received, allowing us to have room to maneuver.
Moving to Slide 18. You can see the revenue variation by the main geographical segments with the new segmentation we presented in Q1. Due to the high energy prices, Rest of Europe and its heating network and very efficient cogeneration is really driving the growth of Veolia into Q2, plus 20.3%. The Rest of the World segment is experiencing solid growth of plus 7.8% with double digit growth in all continents except Asia, which of course is impacted by the COVID lockdown in China. Water Tech is also very dynamic, plus 7.7% and France had a good quarter with less low margin works or SADE networks activities. The remaining French business is very solid, as we will see later, with Solid Waste revenue and good Water indexation.
I’m on Slide 19, with our usual revenue bridge detailing the different growth variation. First, the scope effect, minus 1.6% is due to the disposal of a couple of antitrust assets in France and in Australia plus a Scandinavia disposal that happened last year. Second, the organic revenue growth is very strong in HI, plus 13% with three main causes. The continuous volume and commercial effect you can see on the slide for 3% with a good dynamic, for example, in our energy business in Italy, as Estelle mentioned, and in the Middle East, and also new C&I contracts in the UK. The energy price effect for more than €1.1 billion of 6.2% revenue increase. The pricing effect on water and waste plus 2.8%, that includes escalation formulas in our municipal contracts, and voluntary tariffs increase in our commercial and industrial waste activities. And as we speak, we continue to increase waste prices in July. I give you two example, in hazardous waste, plus 5% in Europe and plus 10% in the US.
I’m moving to Slide 20. Let’s have a look at EBITDA bridge showing plus 6.1% organic growth at the top of the guidance range, which is plus 4% to plus 6%. It is very similar to the Q1 EBITDA bridge with the same business trends. As usual, the main effect on our EBITDA increases the efficiency and synergies for €230 million, with efficiency plan at €178 million, totally in line with €350 million goal for the year. And the synergies that have developed €31 million in Q2 after €21 million in Q1, total €52 million, also well in line with a €100 million objective for the year.
It shows that the combined group organization has been put in place quickly, as Estelle explained, to deliver significant synergies well prepared before they [won]. You can also notice the effect of the recyclate in energy prices for €70 million. It’s mostly covered for recyclate and the slight favorable impact of high energy prices and cost of fuel.
The price for Suez remained at the same level in Q2 as in Q1 for a total of €97 million for HI, including contract renegotiations. We’ve also discovered a couple of one-offs on the Suez scope in Q2 2021, especially for WTS and the Middle East, for a total of €33 million that are mentioned on the right hand side of the bridge. It represents 1.1% of the semester EBITDA and 2.2% of the Q2 EBITDA.
I’m moving to Slide 21. And we have a look at Waste revenue variation details with good volumes and prices and continued increase in recyclate prices. It’s leading to an organic growth of 9.9% for the semester, which is remarkable. Volumes are up 1.3%. In the UK and in Australia, C&I volumes are well oriented compared to lower in HI 2021. That was impacted, if you remember, by COVID restriction and we had a weak Q1 2021 in those countries and a much stronger Q2 2021.
Q2 2021 volumes, also as a reminder, were strong in the other geographies. And we continue to have a similar trend of good volumes in July. Price increases remain good at 3.2% and cover inflation in our waste activities. Recyclate prices continue to stay at high level in Q2 leading to plus 3.4% revenue increase for HI. You can also notice that the energy price impact is 0.6%. It is due to our hedging policy.
I’m now on Slide 22. And we are starting the review by geography with a new segment that we presented in Q1, France and Hazardous Waste Europe. What do we see? First, Water France had good volumes in H1, plus 0.3% and good tariff indexation, plus 3.4%. The slight decrease in revenue is due to a noncore disposal in 2021, an internal asset transfer within the group. We expect a strong Q3 in Water France with the effect of the heat wave in July that continues in August, where as the summer of 2021 was rainy and cold.
Second, West France continues to experience a very solid revenue increase of 6% due to price increases in recyclate. Volumes are slightly down as we continue to be selective on contract renewal especially on municipal collection. The C&I collection business remain solid. Third, Hazardous Waste Europe continues to perform very well, plus 7.4% for the semester after plus 6.8% in Q1. Hazardous Waste Europe and the SADE [indiscernible] combination are producing strong results.
Finally, the SADE networks activity is at normalized level in Q2. And the comparison with 2021 is only due to a post COVID recovery effect that boosted civil works in H2 2020 and H1 2021. The EBITDA of France is up 6.8%, due mostly to price increases, higher indexation with robust volumes.
I’m now on Slide 23. And let’s review the Rest of Europe segment. Central and Eastern Europe, as you know now includes Germany. Revenue growth in this geography is driven by the energy activities, plus 47% in all countries. Water revenue is plus 8% is also well oriented with good volumes and higher tariffs indexation. With the July heat wave, we are also expecting a strong Water business in Q3.
Northern Europe is mostly driven by the strong performance of the UK business, plus 11.8% both on the commercial and operational side. On the commercial side, we continue to gain C&I contracts driving the activity organically. And on the operation side, we have a new record of PFI availability at 94.8%.
Southern Europe is also growing strongly, up 24.5% with the effect of the energy prices in our three main countries. In Spain, Agbar volumes were up 2.2% in HI and with tourism assuming nicely, we expect a strong Q3 in our Water activities in Spain. EBITDA of Rest of Europe is growing by 8.5% despite adverse weather impact due to excellent operational efficiency, and good recyclate prices.
I’m moving to Slide 24 showing the good start to the year of the Rest of the World segment with good business momentum. First, in Latin America, with very good water tariff indexation in Chile covering the inflation; second, North America with strong price increases, as I mentioned, in our Hazardous Waste business, for example; third, Africa Middle East with strong volumes in Morocco, and new contracts in the Middle East; and fourth in Australia with robust and solid Waste volumes.
In Asia, we have a very contrasted situation with solid growth in all countries, except China that went down by 6% in HI with a strong effect of the lockdown during the April/May COVID wave. China is now restarting, and we have a rebound and we see much higher Hazardous Waste volumes in June and July. The EBITDA of the segment is down by 2.4% due to the COVID in fact, and the lockdown in China.
I’m moving to Slide 25. And we have a quick look at the Water Technology segment. Veolia Water Technology continues to perform well with a strong financial performance despite lower revenue with strong solution business but less large desalination project this year, after the completion of three main projects in the Gulf area. The new business model allows Veolia Water Technology to work on the higher margin segment and can be more selective in new bookings.
We have a very strong pipeline of projects, which is promising for 2023.
WTS continue to be under whole separate management by the British CMA. That’s the reason why we cannot give you more detail yet on WTS. The EBITDA of the segment is down by 8.2%, with on one side a strong performance of VWT despite a slightly lower revenue demonstrating the strength of the new business model. When on the other side, WTS EBITDA is down with few one-offs in Q2 2021, highlighted in the EBITDA bridge on the previous slide.
I’m now on Page 26. And let’s see how EBITDA increase is feeding the current EBIT. Renewal expense, only slight higher by €7 million at €147 million; amortization and provisions are slightly down by €34 million; and industrial and capital gains are slightly higher than last year by €22 million and include the effect of the divestment of a landfill in Australia, partially offset by asset impairments. And JVs are almost stable at €59 million with very limited effect of the COVID lockdown in China due to the resilience of our municipal activities. All of this leading to a very strong current EBIT growth of 20.2% at constant scope and ForEx.
I’m on Slide 27, and you can see the current EBIT is translated into current net income of €528 million, up 34% and perfectly in line with a €1.1 billion objective for 2022. As we do not have the split of the P&L expenses below EBIT for the Suez scope that we have acquired, we are not able to issue a pro forma calculation for this lower part of the P&L. And you cannot really compare the 2021 we posted and 2022 combined as the scope is completely different. The cost of the net financial debt of €320 million is a combination of the historical Veolia debt and the one who have acquired with Suez.
On the Veolia standalone side after an exceptionally low level of interest paid in H1 2021 with few positive one-off and much lower swaps to local currency than usual, in H1 2022, we are back to the same level as 2019 and 2020 despite much higher interest rates. The euro and dollar debt is at the very — in a very large proportion more than 85% at fixed rate. And as we don’t have to issue new corporate bonds in 2022 we will not be impacted by higher interest rates for long term corporate debt in 2022.
The other financial income and expense of €194 million include the Veolia perimeter and now also the Suez perimeter. It includes increase IFRIC 12 and IFRS 16 interest for the new group with stable interest. The income tax expense is a result of a current tax rate of 29% applied to a much bigger income before tax. And as we told you, the tax rate is not optimized in 2022, as we are creating new tax groups in each country to get a better tax rate in 2023, and the years to follow.
And moving to Page 28, and let’s have a look at the net income group share, up 34% compared to the reported 2021. As you know, 2022 is an exceptional year with a lot of costs linked to the Suez acquisition and integration of the two businesses. This is what you can see on the first line of the table for €154 million in 2022. We have also decided regarding the status of the war in Ukraine to impair the goodwill of our Russian business for €80 million.
As you can notice, we have less non-current impairment than last year and the same level of restructuring charges. This leads to a net income of €236 million for H1, which is absolutely not representative of the expected performance for the full year of 2022 as we expect non-current capital gains in H2, and we will have no further Suez acquisition cost in H2.
I’m now on Page 29 on CapEx and free cash flow items. As you can see, the level of net CapEx for the combined group is in line with the previous year with more growth CapEx linked to Hazardous Waste project in the US, Middle East, Germany and ongoing decarbonization CapEx in Central Europe and Germany. The net free cash flow has improved by €150 million compared to Q1 and the working capital remains at a high level, €831 million due to the seasonality and the strong revenue increase. As we told you, it will be reversed by year end as we did over the last eight years.
Regarding the net financial debt of €22.3 billion, the increase is a result of the €700 million shareholder dividend voted at the AGM on June 15th and paid on July 6, and the reimbursement of a €500 million hybrid bond issued by Suez before the merger. It also includes a ForEx effect for €400 million.
Taking into consideration all antitrust disposal for the European Commission and the asset disposal that are under process, which total for more than €1.5 billion and the strong H2 free cash flow that will include the working capital reversal and the EBITDA generation, the leverage at year end will be around three times. And after the Suez UK disposal, the leverage ratio will be well below three times EBITDA and will give us balance sheet headroom to fuel our development
I’m on Slide 30. And you have the main debt variation with the strong impact of the Suez transaction for €10.4 billion and the other items I have already mentioned.
I’m moving to Slide 31, and after this good H1, we fully confirm our guidance for 2022: like-for-like EBITDA will grow between 4% and 6%; the current net income will be around €1.1 billion, which means an increase of more than 20%; EPS accretion for 2020 of around 10% and around 40% for 2024; and the leverage ratio around three times at year-end.
Thank you for your attention.
Estelle Brachlianoff
Thank you, Claude. I will now let you ask questions.
Question-and-Answer Session
Operator
[Operator Instructions] We have our first question from Ajay Patel from Goldman Sachs.
Ajay Patel
Good morning and thank you very much for the presentation. And I have three questions, please. Firstly, just on the working capital swing and the guidance that that should reverse in the second half of the year. I just wanted to understand with the current market environment, high commodity prices, is there a step up in the working capital that needs to come through over the coming years and a greater requirement of capital just in this environment? Secondly, on your slide on 20, where you talk about the price cost inflation in contract renegotiation line, it’s about €97 million over the half. I just wondered as inflation filters through the contracts that you have, would we expect this number to improve sizably as we go into Q3, Q4, and into next year? On Slide 10, I think you talk about hedging. And I’m very thankful for that and any indications of price that you could help us with there? And that’s it. I think that would cover everything I have right now. Thanks.
Estelle Brachlianoff
Claude, maybe for the —
Claude Laruelle
The first two.
Estelle Brachlianoff
First two questions?
Claude Laruelle
Yes. So in terms of working capital reversal, so what we see, we see that we had a significant revenue increase in H1. So it means that this revenue increase is driving working capital up. But we expect the same type of the trend in Q3 and Q4. But we are the maximum of the working capital, and we know how to reverse the working capital by year end. And I can confirm that despite the high commodity prices and the high energy prices, it will be with us by year end.
In terms of price cost squeeze, you’re mentioning the €97 million, so it’s — you understand that it’s a mix of contract renegotiation because we continue to give — when we renegotiate a contract, we give back productivity to our clients and also the cost which is not yet passed to our clients. What you have to understand, we saw some inflation going up during the first semester. So the escalation formula in our municipal contract are catching with inflation. So as long as we have inflation going up, we will not be able to reduce that level. But when inflation is stabilized, we will be able, with the escalation formula to recover the inflation that is not yet in the escalation formula.
Estelle Brachlianoff
And I guess, in addition to what Claude said, I think basically half of our cost efficiency savings translated and kept, if you want in EBITDA growth is a very good achievement that we’ve been achieving over the last few quarters, and we intend to go on this way. In terms of your third question about hedging of energy, the overall idea for us is really to protect our P&L and that to be able to confirm that inflation is neutral or slightly positive for Veolia. Meaning we buy and sell energy in advance to protect from the various variation. Plus, on the other side, on the revenue side, we have indexation and tariff increase, which basically follow the price we have bought the energy, if you want, with some lagging effect at times. So overall, it protects us from the ups and downs. That’s why inflation including in the energy price is neutral for Veolia.
Ajay Patel
Thank you very much for the answers. Thanks.
Operator
Thank you. The next question is from Arthur Sitbon from Morgan Stanley.
Arthur Sitbon
Hello, thank you for taking my question. The first question would actually be on — I was wondering if you could comment on the performance of the business so far in the third quarter, so in July or the first few days of August, mainly on the industrial activities of the business? And then my second question is energy in Eastern Europe. I was wondering if you consider your ability to pass through cost [indiscernible] for now. And if there are any discussion on the intervention on tariffs and the various [Europe], no doubt of windfall profit taxes on electricity in the Czech Republic, for example. So I was wondering, there is any further adverse impact in those activities? Thank you.
Estelle Brachlianoff
Thank you for your question. I guess, in the third quarter, as you may expect, we are only three days into August, so I won’t comment on the quarter as a whole, but I can on — give you a few trends and feeling about the month of July. Basically, we don’t see any slowdown in July, so it’s exactly the same trend that we have seen in the second or in the first quarter to the year. And on top of that as Claude mentioned in his presentation, the weather allows us to tell you that the volumes of water distributed should be even on the plus side given the temperature in many countries, so in France and in Spain. Just to give you one figure, in the Greater Paris area, for the month of July, we’ve seen 8.9% increase in volume compared to last year, last year having been quite friendly as well. So it’s a base effect plus on the opposite side a really a flip through the opposite this year, so no changing trends. The start to the third quarter has been exactly aligned with what we’ve seen in Q1 and Q2.
As far as the energy pass through is concerned in Eastern Europe, in particular, we are confident, and we’ve been able to increase the tariffs exactly, alongside the inflation of our cost base and energy price in the past, and we are confident for the future exactly in the same way. The energy bills of our consumer units in Europe are very, very affordable. Thanks, notably to the fact that district heating being collective way of heating is very much more efficient than individual heating, if you want. So it costs a lot less for a family to heat their home when they’re connected to district heating than if they were to do it by themselves. So it is a push towards the district heating connection, as well.
Operator
Thank you. The next question is from Vincent Ayral from JP Morgan.
Vincent Ayral
Yes, good morning, and good set of results today. I have two questions here. One, coming back on the summer which has been extremely hot, third heat wave starting in France. Do you have any sensitivity you could provide to us, basically on this topic because every year, we have to check what has been the weather and see if it’s a net positive, net negative? Ultimately your volumes so far for Q3 have been up, how much, globally? Not the Greater Paris area but how much at a global level and what type of sensitivity could we use in order to see the upgrade coming on this side of the equation? Now that’s the question number one.
Question number two would be regarding energy prices. Basically you say energy prices are neutralized area. And you hedge yourself for that. Clearly this makes sense especially on the electricity front where you’re probably along energy. But the question I have is regarding other parts of the business, like for example, gas [spend] for the waste collection, all that kind of things. And basically, you have a pass-through but that comes with a lag. So do you have any specific hedging practice to cover that? Or do you see some moderate margin squeeze? Could you explain us a bit? Give us a bit more color on the energy price for the type of energy, if you don’t mind? Thank you.
Estelle Brachlianoff
Okay, on the summer, maybe Claude, you want to comment on that. But the sensitivity of the volume of three weeks in July or four weeks in July, I won’t comment specifically. But just to say that it’s on the plus side. And I can fully confirm our guidance for the year and I’m very comfortable with it as explained in the introduction. And I think that’s a testimony to that, again, no slowdown we see in the volumes.
Claude Laruelle
And as I said, Vincent, regarding volumes in Spain, we continue to have additional volume increase in July, good vacation bookings, good tourism resuming. So we should be even higher in July — we will be, we are — sorry, even higher in July than in HI. So also good recovery in Spain in terms of tourism that will help and the heat wave is not only France, but you understand is also in Central Europe, where we have the heat wave now in Central Europe and especially in the Czech Republic.
Estelle Brachlianoff
And as you know, we are distributing water in many, many countries in Europe, in the US, in South America. So I guess this goes well beyond, you are right, France and all those is oriented in a positive way. In terms of your question on energy, what I said about hedging is concerning all types of fuels and you know the protection against the various price increase back to the tariff. So I’ll give you one example with the coal or gas we buy in advance to provide district heating in Eastern Europe. If you talk about fuel in the trucks or diesel in trucks, it’s passed through back to our customer as well, through the price increase.
And again, we’ve seen a 6% to 10% price increase in France C&I collection, for instance. In municipal collection, its back into the indexation formula, so it’s exactly applies in the same way. The fuel costs going — goes up, but the revenue goes up as well in the same way. And in terms of price increase, we’ve been starting those price increases, I explained many, many quarters ago. So the whole team has a habit of passing them back to the customer, 6% to 10% in C&I in France, and it was already the case, part of last year. And it’s a sustained strategy and effort from the teams. So it really applies to my hedging comments as well as the pass through applies to all type of cost and energies type.
Operator
Thank you. Next question is from some Tancrede Fulop from Morningstar.
Tancrede Fulop
Hi, good morning. Thank you for taking my question. My first one would be on contract expiration. In your presentation at your last Capital Markets Day, there was a slide showing that 2022 will be a big year of contract expiration with around 0.5 [indiscernible]. And during your presentation, you mentioned a few negative elements, the EBITDA bridge price pressure related to those contract renegotiation, and also volumes down in France due to selectivity in contract negotiation. So could you maybe give us a clear picture about maybe full-year impact of those contracts, this contract expiration in 2022 maybe? So when you will rate in the negative EBITDA impact, if any?
And my second question would be on capital allocation, you mentioned that upon the completion of all antitrust remedies, so I guess including the disposal of the UK Waste business, you will be well below the leverage ratio of three times. I calculate like that you will be around 2.5 times so that if you want to go back to three times, I’d give you a headroom of one €3 billion. So what are the capital allocation options that you will favor, maybe, external growth or higher organic investments or incremental returns to shareholders? It will be my two questions. Thank you.
Estelle Brachlianoff
So Claude, do you want to start with commenting on the bridge and the price question?
Claude Laruelle
Yeah, and the contract expiration maybe. So in the contract expiration in the last Capital Market Day, where two main contracts expiring at the end of 2022 in this but it has changed. So the one was the Lyon contract, the water in Lyon, and the second one was the SEDIF contract in one Paris area. The first one, as you know, will be taken back by the municipality of Lyon. So it’s not a contract renegotiation per se but we will continue to supply services to the city of Lyon especially on the customer side, to continue the consumer quality of the services we have provided before. And on the SEDIF contract, it has been extended by one year. So now the expiration of the SEDIF contract is the end of 2023. So, what I was mentioning in the slide is about minor contracts in 2022. As we renegotiate contracts even with industrial clients, we have renegotiated a large contract with PSA, now Stellantis and in the contracts renegotiation, of course, we had to make some productivity improvement and it’s — so it’s part of the productivity that we give back to Stellantis at the end of the contract that one of the few examples that we have in 2022. So this is as I would say business as usual for Veolia in terms of contract renegotiation.
Estelle Brachlianoff
Exactly, so no specific news here. It’s the usual life of Veolia, renegotiation, we have a very high renewal rate and we have maintained it this way. And at times, we have to make productivity effort, sorry, which we compensate by our own cost savings. And that’s a traditional way of renewing our contract in Veolia, and there is no specific change that we’ve seen, or we anticipate going forward. In terms of the UK disposal, I won’t comment on your calculation, we said, we’ll be well below three times once we have sold the UK Waste assets. You’re right. It will be giving us some headroom to reinvest. And in terms of where would we reinvest? Exactly in line with our strategy, which was presented to you and it’s called Impact 2023 with selective acquisition may be in the mix, in line with our strategy, and in line with, of course, value creation for our shareholders.
Claude Laruelle
And the growth as you understand is a mix of organic growth, and is a mix also of tuck-ins. So it’s — it has already been the case for the last couple of years.
Tancrede Fulop
Okay, thank you very much.
Operator
The next question is from Arnaud Palliez – CIC Market Solutions.
Arnaud Palliez
Yes, good morning. Thank you for taking my question. The first one is on inflation and especially on wage inflation. I would like to know the kind of level you’re experiencing, so for the time being, and what is the outlook for next year? Do you expect some very significant increase in salaries? That’s the first one. The second one is regarding energy transition. You’ve mentioned a few new projects in terms of energy transition. I would like to know if you can give us some color, some quantification about the acceleration in the number of projects that are being awarded and also if it will imply some significant increase in CapEx in the coming months?
Estelle Brachlianoff
So on your first question regarding wage outlook and inflation, when I said that we protect our P&L because when the cost base increase the price increase or the indexation plays its game, it includes, of course, the wage is part of the cost. Meaning, we try and we succeed in maintaining the wage growth roughly in line with indexation or price increase. So, no higher than what we get from the revenue or the tariff increase. So of course, in terms of precise number, it’s very different from one country to the next because inflation is very different from one country to the next and indexation is very — therefore, different from one country to the next. So, we have a very broad portfolio of figures here.
Just a specific comment on wages and on the scarcity for talent, which is a reality in many, many countries, as you know, we enjoy in Veolia, very high retention rates. People are very committed to delivering for the ecological transformation. And that’s a key success factor of employees’ engagement. And I intended, of course, to keep it this way. And that was even like confirmed with the Suez merger and with the Suez team being brought together with the Veolia team.
In terms of your second question on energy transition, so, no, there is no increase in the CapEx that you have to anticipate behind that. I’ve been — we are — we apply the same rigor for the balance sheet as we have over the last few years and the three times criteria is an important one for Claude and myself which means that, if we see some more promising projects, we — I would say, free a CapEx envelope to the detriment of other project which would be less interesting and less promising for growth. Therefore, the resource plan, the €150 million CapEx envelope dedicated to this specific energy transition was freed, I would say to the detriment of other less promising or less growing projects.
And the second comment is, we don’t necessarily need CapEx as well to help with this energy transition. Let me give you two examples. We enjoyed a very rapid organic growth of energy efficiency portfolio of activities in Southern Europe, typically in Italy and Spain, where we have 5% to 10% organic growth year-on-year. It’s purely organic growth with no increase in CapEx at all. Basically, we help our customers save energy by putting sensors, artificial intelligence, and all our know-how to be able to typically, thanks to what we call, Hubgrade which is a piloting tool. We monitor the energy consumption every single minute of our customers, and we’re able to reduce by 15% to 20% the energy efficiency of our customers. We’re talking about sensor, that’s not a huge CapEx here.
Another example, when we’ve done the project to a company Solvay in the eastern part of France with their energy transition out of coal through to RDF, which is a fuel made out of non-recyclable waste. We’ve done it with an AssetCo – OpCo model. And we haven’t, like used much of the balance sheet of Veolia to supply the service to our customers. So energy efficiency or energy transition out of coal from this other example, have been delivered without much CapEx release from the Veolia’s side. And again, the rigor in our balance sheet is something very important for us.
Arnaud Palliez
Very interesting, thank you.
Operator
The next question is from James Sparrow from BNP Paribas.
James Sparrow
And on the credit side, actually, and it’s about the — so legacy Suez hybrids on your balance sheet, as I understand you’re still not getting any equity credit from S&P on those. I’m just curious to think, to understand a bit more how you think about those, especially given the positive outlook for the balance sheet getting leverage well below three times. I mean, do you think you need to try and get equity credit on those or could you think about just retiring them like the previous Suez hybrid? Thank you.
Estelle Brachlianoff
That’s a question for Claude.
Claude Laruelle
Yeah, so in terms of hybrid bonds, so just as a reminder, what we got from Suez is 1.6 billion three hydrid bonds, one has been reimbursed. And the two other ones you’re talking about, they were ranked by only by Moody’s. So Moody’s gave equity credit and we are renegotiating with the bondholders in order to get S&P equity credit. And that will be done at year end. So the goal as you know is to remain solid investment grade at Veolia. So and we are talking both with S&P and the bondholder to get the equity credit on the Suez hybrid bonds.
James Sparrow
Okay, thank you.
Operator
Our next question is from Verity Mitchell from HSBC.
Verity Mitchell
Good morning, everybody. And thank you for the presentation. I just got two questions. I was sort of interested in the paper and cardboard strength. Do you think this is a new trend that might continue because of e-commerce and we assume that plastics are still remaining strong, the first question. And the second question, thank you for clarifying the €6 billion of C&I revenue exposure. Could you talk a bit more about the dynamics between volume and service in that business? Thank you.
Estelle Brachlianoff
So you’re right on the paper and cardboard. We see a trend, which is explaining the high price we’ve enjoyed in the last now roughly 18 months. And what is this trend? This trend is mainly reread or less newspaper, but we order a lot more online. Therefore the cardboard is very much more used than it used to be even like two, three, four years ago, and the COVID has sped up this trend quite dramatically, so there is a big demand. There is also a big demand in Europe specifically with new plants, new paper mills, if you want, which have opened in Germany over the last one year. So all that contributes to big demand in cardboard, it’s less the case in newspaper type of paper, as you would expect. But that’s overall net positive and explaining the high level we’ve seen. And we don’t see any reason so far that it would go down.
In terms of the C&I, I guess the volumes, as Claude explained, is really still on the upside in the second quarter. And we don’t see any slowing down in the volume. But altogether, the trend of our portfolio is much more into recycling and being paid for the service as per — as opposed to the volume. And therefore, we see a positive trend for our services to help our customer recycle more and going more circular. So you are right, from 10 years ago, very much driven by volumes, we see much and much more of the driven by value type of activity in the C&I waste as I commented earlier on.
Verity Mitchell
Okay.
Operator
And the last question is from Ahmed Farman from Jefferies.
Ahmed Farman
Yes. Hi, thank you for taking my questions. I’ve got a few. I just wanted to first come back to the point you made about district heating and how affordable that is. And I was hoping if you could put that in the context of some numbers for us as to sort of where would you see, where was the bill for an average customer in 2021? Where it is today and where do you see it in 2023? And any thoughts on, any concerns around bad debts or delays in payments or collections on that business, that would be very helpful.
My second question is on the working capital. I think you mentioned that you expect it to sort of reverse over the second half. But if you could sort of elaborate again on the drivers of that, that would be helpful. And the third one is for the margin in the Water Technologies business. I think it’s you showed on Slide 25, EBITDA margin at 10.2%, a little bit down on last year. And I was just wondering if you could share some thoughts on how do you see the profitability and margin in this business in the second half? Thank you.
Estelle Brachlianoff
I’m going take the first question, and let Claude answer to your second and third. In terms of district heating, just to give you one example, in Poland, the average bill now after the price increase we’ve — which has been the case in the first half of the year, would be around €40 for household for a family of four, €40 per month, sorry. So it has increased, yes, but €40 per month, even taking into account the different cost of living in Poland compared to France or the UK, say, is still very affordable. So hence my comment earlier on that we are far from having reached the affordability, I would say, limits. Again, if I were to compare with individual heating in the country, will be really much higher, hence we see some going back if you want or going to district heating and expansion of our network and connection, given this difference in price.
Claude Laruelle
So in terms of working capital, you know that in the last couple of years, we have made a lot of progress on cash management within Veolia. And I will give you few numbers. When you look at 2017/2018, at mid-year, the working capital of the group was around €800 million. And with a strong movement in terms of cash collection in all countries, new tools to improve also cash collection, we were able to reduce for the Veolia standalone on scope, the working capital to something around €500 million, which is a significant improvement. And if you remember, last year we were even in positive free cash flow in HI. So we continue to do the same type of cash management. And we know where we are in different countries one by one and I’m monitoring this myself very closely, as I explained many times before.
So in terms of working capital, what do we have? First of all, we have a larger group, so we have an additional working capital from Suez, which is around a little bit more than €100 million plus the boost of revenue of €200 million. But we know that all of this will be reversed by year end as we have done in the last eight years. As I said, we are able to reverse €800 million on this Veolia standalone basis in 2017, 2018. We did the same amount in 2019 and 2020, 2021, as well. So we, at the end of the year, working capital was even a resource feeding the free cash flow of the group. So I can tell you that I’ve no doubt that we will reverse the working capital at year end and that we will be around three times at year end in terms of net debt-to-EBITDA and after the Suez UK disposal, we will be well below three times in terms of net debt-to-EBITDA.
And in terms of WTS, if you look at Water Technology segment, is a significant one-off is €21 million which is a one-off that happened in June 2021 that is affecting the results. So the underlying projects and so on for WTS remain strong. They are passing price increase to their customers as well, especially on the chemical side, projects are performing well. And they are completely sold out in terms of membrane, new membranes, membrane replacement. So we are investing in new facility in order to boost the production of WTS globally. So the fundamentals of WTS are strong. But it’s a one-off effect that just incurred in June 2021.
Estelle Brachlianoff
Thank you. And unless you have other question, I think we’re going to close this conference. I would like to thank you for attending. And again, very happy to present a strong and solid result for the first part of the year in Veolia and I can confirm our guidance for the year. Thank you very much.
Operator
Thank you, ladies and gentlemen, this concludes the conference call. Thank you all for your participation. You may now disconnect.
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