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Suez Environnement Company ( OTCPK:SZEVF ) Q1 2016 Earnings Conference Call April 28, 2016 2:30 AM ET Executives Christophe Cros – Chief Financial Officer Analysts Martin Young – RBC Julie Arav – Kepler Vincent Ayral – Societe Generale Andrew Fisher – Berenberg Bank Guy MacKenzie – Credit Suisse. Michel Debs – Citigroup Olivier Van Doosselaere – Exane Philippe Ourpatian – Natixis Emmanuel Turpin – Morgan Stanley James Brand – Deutsche Bank Operator Good day and welcome to the Suez first-quarter 2016 revenue results conference call. This conference is being recorded. At this time, I would like to turn the conference over to Christophe Cros, SFO – or CFO of Suez. Please go ahead, sir. Christophe Cros Good morning. Thank you all for attending this conference call, which regards Suez Q1 publication. We have released this morning our revenue, EBITDA, EBIT and net financial debt figures for the three months period ending March 31, 2016. In summary, I’m of the view that there are two items to be highlighted. First, this quarter again our activity increased, both in absolute and organic terms. Revenues reached €3.555 billion. They are up by 1.5% organic and by 1.8% at constant exchange rate. There are significant differences between our three divisions. On the one hand, our international activities kept on soaring, posting a revenue growth by 9.5% organic, while delivering the expected profitability improvement. On the other one hand, our environment in Europe remained lackluster, as the one we described to you at the end of February, including challenges like decreased commodity prices, of which electricity prices and zero inflation in most countries. In this context, our water Europe division grew organically by 0.3% and the recycling and recovery Europe segment decreased by 1.9%. It is noticeable that excluding the impact of the decline in commodity prices in that division, revenue would have slightly increased by 0.8%. So an obvious contrast between international dynamism and European neutrality. Second highlight, Group EBIT reached €253 million organically, up by 0.6%. The evolution of EBIT compared to revenue is mainly due to the decrease in power prices versus last year that affected our recycling and recovery Europe activities and directly filtered to margins. Despite some light deviations between budget assumptions and reality, that set of figures is on track with our annual objective. Before giving you more details of our performance by division, I would like to point out that this quarter ForEx had a significant impact on our P&L metrics, minus €43 million at revenue level, which means the minus 1.2%; minus €13 million on EBITDA, minus 2.2%; and minus €10 million at EBIT level, minus 3.8%. The largest part of that impact is due to the Europe – the Chilean peso, sorry, decreased by 10% versus last year, in average, against the euro. I’m now going to give you more details division by division. If I start with water Europe, our activities declined by only minus 0.9%. I say by only because during Q1 we had the end of the Lille contract, end of last year. You remember that it represented a contribution, a yearly contribution to revenue by €80 million. And we had also a negative ForEx impact by 1.5%. On top of that, volumes were down in Chile by 0.7% due to poor weather summer conditions – summer was cold in Chile – and escalation formula in Europe were hampered by the low inflation context in France. Tariffs increased by 0.4% in France and by 1% in Spain. So all in the turnover reached €1.110 billion, minus 0.9%. I said only because, nevertheless, those headwinds have been partially offset by positive items. First, tariff effect in Chile, up by 6.7%, which is a consequence of the various tariff increases granted in 2015. Second, the commercial activity has been very positive this quarter and contributed to 1.5% of the gross of the division. And finally, I think it’s worth mentioning that prices during renewals, renewals of contracts in France, were up by 2.8%. That is why, all in all, evolution of organic is only minus 0.9% organic. In that context, the EBIT of the division is slightly down versus last year. In recycling and recovery Europe, revenue was down by 2.4% and reached €1.501 billion. The division has been affected by an ongoing negative price evolution for commodities. For us, notably scrap metal, which has decreased by 31% versus Q1 2015, and electricity, which is down, price of electricity, down by 25%. If I start with volumes evolution, one can notice in the division that our processed volumes decreased by only minus 0.4%. And it mainly reflects the poor trend in industrial production in the area during the first three months of the year. If I put aside the cyclical context, the evolution by segment matches with the structural trends in the industry. I mean that the landfill volumes declined, especially in the UK with the continuation of site closures. Overall, landfill revenues are flat because we got firmer pricing, which has been offsetting a small decline in volumes. Recycle volumes increased by 5.3%, mainly driven by France and in the UK. Because of the take-off of the production of refuse refuel [ph], it is significantly positive in the UK. Commodity prices have, nevertheless, impacted the revenue by €29 million, with marginal impact on profitability. The underlying trend in terms of this segment is clearly a positive sign. Finally, energy-from-waste volumes decreased by 1%, which is due to a planned shutdown for maintenance in the Netherlands, so no impact on the full-year result. During the same period, lower electricity prices affected both revenue and EBIT for an amount of €11 million. Such an amount is above our initial assumption given the price evolution during Q1. You certainly have noticed a very sharp rebound of prices quite recently, which should lower the pressure for the coming months. If I look by geography for the division, there has been no change in the trends versus the ones we described to you in the past. In the UK and Scandinavia, organic growth by 4.7%. In Benelux and Germany, organic growth is up by 0.4%. And in France, organic growth is down by 5.4%, sorry, at constant scope and exchange rate. Those evolutions lead to a decrease of the EBIT of recycling and recovery Europe division. International division now. International division keeps on growing at a high pace. Revenues reached €920 million, they are up by 9.5% organic. It is pleasing to point out that this is due to the very good performance of all geographies and all businesses. In Asia, we achieved an excellent quarter, with revenue growth by 30% organic thanks to very strong activity in Hong Kong and in Mainland China. In Middle East, Africa, India, activities are up by 11.4% organic thanks to additional revenue linked to new contracts, like Doha or Mirfa in Middle East. Growth is also favorable in the OECD more mature countries. Australia reported also good increase in activity, with revenue up by 5.3% organic, higher collected, higher treated volume. And in Northern America, organic growth is plus 3.7% due to the positive effect of rate cases. Maybe you certainly have noticed that we obtained yesterday an increase of tariff for a most important utility in New Jersey. If I look at the design and build backlog, it amounts to €1.2 billion, which we see as favorable. Finally, the EBIT of the international division is clearly up. As a conclusion, I think those figures match with our 2016 financial trajectory and the Group is mobilized to meet its objectives for the year. That being said, the dynamic of our operational performance in Europe in the first quarter was more lackluster than the one we were hoping for. That can be explained by the consequences of low inflation for businesses, as well as by the impact of the strong decrease in electricity prices. The volatility of those factors require us to remain proactive. We are indeed presently working on increased measures in order to speed up profitability growth. So thank you very much for your attention, and I’m now ready to answer all the questions you may have. Thank you very much. Question-and-Answer Session Operator [Operator Instructions] Our first question comes from Martin Young from RBC. Please go ahead, your line is open. Martin Young Yes. Good morning to everybody. If I can ask two questions, please. The first relates to the moderate impact on profitability from a lower-commodity-price environment. If we were to think about, say, a €100 million hit, revenue, from commodities, ballpark, what would be the impact on EBIT of such a decline over the full year? And then the second question, in your conclusion you alluded to measures about profitability and you referenced reiteration of the objectives for 2016. To what extent do you feel that you can dial up on the cost-reduction program to ensure that you can meet those objectives over the full year of 2016? Thank you. Christophe Cros Thank you, Martin. When it comes to the lower commodity prices, which was even, and I said it clearly, even a little bit more lower than our initial budget assumptions, I should split between the two key commodities, of which the consequences are very different. So when it comes to ferrous metal prices, as you know, the impact is much more relative to turnover than profitability. We do consider that during the Q1 the global impact of a commodity for that was approximately limited. The second topic, which is more important to us, is the electricity prices, the electricity we sell on the spot market. And as I told you, we consider that the turnover which is equal to the EBITDA and EBIT impact during Q1, was minus €10 million to €11 million. So it gives you an indication about the evolution, but once again, you need to take into consideration that if you have been following up the recent evolution of those prices, there was clear rebound during, I would say, the very last week. So this is the global assumptions we make for the full year. Martin Young Can I just ask, on electricity prices, how much do you get then as an offsetting saving within the Group from lower electricity costs for your own consumption? Christophe Cros We are used to say that, conceptually, there is some kind of a natural hedge. But I say conceptually because when it comes to the purchase of electricity – and we benefit from the lower prices in electricity even if they are not directly linked to the spot market – I would say that the customers benefit from a very large part of those evolutions. So you need to split also the electricity that we sell and the part that we sell on the spot market. To give you an indication, last year the turnover of electricity sales on the spot market was approximately €100 million. I go now to – I take your second question, which is related to efficiency savings and COMPASS. So first comment, as the end of Q1 we are fully in line with our trajectory for COMPASS for this year. And you would remember that we increased the target because of the nice results we got last year, and we feel comfortable in order to get an improvement, anything else being constant. And we are also not only thinking, but preparing additional measures in case, I would say, the stability to be nice we observe, noticeably in Europe, would continue. Martin Young Thank you. Operator Our next question comes from Julie Arav of from Kepler. Please go ahead, your line is open. Julie Arav Yes. Good morning. Thanks for taking my questions. The first one, you mentioned to be on track with your full-year guidance, but as we’ve seen, your Q1 revenue and EBIT growth are far lower from the 2% at least you’re targeting. So I understand that you expect a bit of reversal on the power prices impact, but beyond that, what makes you confident that you will be able to catch up in the quarters ahead? My second question is on the waste volume outlook in Europe. We’re seeing signs of improvement in the auto steel construction industries in Europe, so do we expect to benefit from this trend? And if so, when? And my last question is about the industrial water revenue contribution in Q1. Can we also have an idea of the growth year-on-year on this segment? Thanks. Christophe Cros Thank you, Julie. So I take the first question. You said far lower. Okay, I’m not going to challenge your adjective. It’s a strong adjective. We are in line with our expectations and we maintain our annual objectives. As you know, Q1 is not – really not fully representative of full-year activity because, for instance, the seasonality effect in the water business. Q1, as I say, was also affected by lower commodity prices compared to our budget assumptions in the recycling and waste recovery business. But overall, we remain confident that we will reach our full-year target. When it comes to waste volumes, your question is interesting because if I take the last part of your question, and you know that we are quite active in the recycling of what we call new scrap metal for the industry – car industry and manufacturing, I confirm that they are positive evolutions. But first, they do not translate directly into EBITDA and EBIT and they’re only a part of the year. End of Q1, we processed whatever the definition of processed, we processed approximately six million tonnes of waste, including new scrap metal. So what is noticeable is that the trends I stated during my short presentation are confirmed. Globally, those volumes processed during the first quarter, they are minus 0.4%. So it’s really very limited compared to last year. And if I split that minus 0.4%, I can notice that I have approximately minus 6% when it comes to elimination. And elimination is mainly landfilling, as you know. And this is a confirmation of the trajectory. We are now close to the definitive exit from that business in the UK. And as I said in my presentation, in France the figure is still negative, much more limited compared to last year. And it is offset, but I would say a good situation or better situation in terms of pricing. So elimination is minus 6%. And if I look now at recovery, whatever it is, recycling, energy recovery, the trend is plus 2.8%, which gives a better indication. For industrial water, we are on line with the significant growth. I’m sorry to say that, as you know it very well, the global figure is very limited compared to the total activity of the Group. So the growth is still significant. There is seasonality in the growth, but those figures are still, to a certain extent, marginal compared to the total figures of the Group. Julie Arav Thanks. Operator Your next question comes from Vincent Ayral from Societe Generale. Please go ahead your line is open. Vincent Ayral Yes. Good morning, everyone. Just to come back on the question regarding the EBIT, is there anything we should know regarding the calculation of the EBIT, what could have been attributed there? I don’t know, higher restructuring cost [indiscernible] provision or any non-rec or anything which could basically weight on the comp for Q1. So that would be the question number one. The second, to come back again, I’m sorry, on the impact of electricity prices. We saw a rebound over the last few weeks, true. However, if we were to base on the current forward period for the electricity price, is this pretty much in line with what you had budgeted? If not, what would be the difference in terms of EBIT contribution there? Thank you. Christophe Cros Okay. When it comes to EBIT, once again I’m going to repeat what I said previously, which is that – and you know it very well – Q1 is not fully representative of the full-year activity because of seasonality, seasonality in the water business notably. What is right also, and I said it, is that the low-inflation environment in France, in Spain, is pressing a little bit upon, through the escalation formula, the margin in the business. But this should improve within the year with higher activity. So we are in line with our expectation and we maintain the objective. When it comes to electricity, I agree with you. So I have in front of me the chart of the of this [indiscernible] spot market with the forward. So I said also that the decrease had been stronger than what we had expected at the time we made the budget. And this is why at both turnover and the EBITDA and EBIT, because it is directly translated, we have an impact by €10 million during Q1. So this is the basis, and we can elaborate maybe later about what would be the full consequences for the year. But we need to be more assured about what is going the evolution in the coming months because it’s clear that even if I looked at the forward chart, there is rebound recently which is quite significant. So to be monitored carefully. Vincent Ayral Thank you. And I would ask another question if I may. It’s regarding the growth in the international business for the rest of the year. You have a strong backlog. I wanted to understand a bit if you expect further acceleration, and despite the [indiscernible]. Thank you. Christophe Cros When it comes to the backlog, what I said is that it is 1.2, so compared to last year it is up by 16%. The starting of the year was, I would say, stable. So what we focus and we have always said that we don’t want to grow too far the backlog. We are not a construction company. We deliver services, and in order to deliver services we also need the backlog of construction. So the key priority, because of the numerous commercial successes, which is pleasing to point out, the key priority is now to build and deliver. So we see the level as it is now as a fair level. Vincent Ayral Thank you. Operator Our next question comes from Andrew Fisher from Berenberg Bank. Please go ahead your line is open. Andrew Fisher Good morning, everyone. Just a quick question on the cost savings, please. Could you just remind us of what you’re expecting please in terms of implementation costs for the COMPASS plan for 2016? And also, what should we think about in terms of implementation costs going forward? Is there a rule of thumb or something that we could use perhaps to think about these costs in terms of the – I don’t know, as a percentage of targeted savings or something, please? Christophe Cros Okay. I would speak my answer first reminding you that COMPASS was, last year, part of the three-year long plan and we aim to reach savings by €400 million. And obviously last year we got immediately an additional amount, and that’s why we said that we contemplate €160 million for the year 2016, everything else being constant. The implementation cost associated to that program, I would say they are marginal. There are no consequences. You could see something after EBIT, but I would say that it is marginal. So as we are clearly re-evaluating the ambition of the COMPASS plan for this year, but I would suggest that we wait until the presentation of the first-half-year result. I will update you about any additional implementation cost, being said again that what is associated to the normal delivery of the plan for this year is marginal. Andrew Fisher Okay. Thank you. Operator Your next question comes from Guy MacKenzie from Credit Suisse. Please go ahead you line is open. Guy MacKenzie Hi. Good morning. A few quick questions from me. Firstly, just wondering if you can give us any update on M&A. I think you said earlier this year that you were at least looking at Urbaser, ACS’s waste business as a potential M&A target. I was just wondering if you can confirm whether you’re still looking at that asset or if you’re no longer interested. Secondly, on that same note, you reiterated the €3 billion EBITDA ambition for 2017, but of course there still haven’t been any sizeable acquisitions lately. Just wondering, given that lack of M&A, how much confidence you have in that €3 billion EBITDA ambition and at what point we might potentially see an update to that guidance if M&A opportunities don’t arise in the next six months or so. Finally, on contract renewals in France, I think you actually said that you saw improved pricing in Q1. I think in recent years we’ve generally been seeing lower pricing on renewals. I was just wondering if you’re starting to see any changes in the competitive dynamic in French water or if it’s something else that’s driving that improvement. Christophe Cros Okay. Thank you, Guy. So when it comes to M&A, yes, we have looked at the file – when you refer to the waste-to-energy subsidiary of ACS, and we reached the conclusion that that project was not attractive enough. So at the time we are talking, we decided not to make an offer, which is I think a good illustration of your larger questions. We confirm the ambition we expressed February 2015 to reach €3 billion of EBITDA. And the increase compared to the basis, which at that time was €2.6 billion, was twofold and to balance part organic and non-organic. I had already many times before [indiscernible] to tell you that we stick to that ambition, but we never will stick to that ambition at any price. And to a certain extent my answer to the first part of your question is a good illustration because, as you know, the Company will stick to the rule of thumb, which is that financial discipline rank first compared to the implementation of that ambition. So would there be a delay in the making of that ambition? I do consider, as the CFO, and I know that Jean-Louis Chaussade, my CEO, totally shares that view, that we rank first financial discipline of the Company. So there are opportunities. We made two quite interesting small acquisitions, one in Western Australia, Perthwaste, one in India. They are not there in order to fulfill the €3 billion ambition, but they show I think that, one, we stick to the financial discipline. And probably if there is a need for being a little bit more modest in the timing of that ambition, we don’t dare to say it to you. About renewals, yes, I said that when I look at the renewals in France, in average, prices were up by 2.8%. So it is an indication about, I would say, the rationality of behaviors of competitors. But it is not new because we said when we presented the result for the full year 2015 that it was already, I would say, palatable. So there is no change, but what is pleasant is that, yes, the risks that could have been afraid of some years ago obviously are now all close to zero. Guy MacKenzie Okay. Thanks very much. Operator Our next question comes from Michel Debs from Citi. Please go ahead. Your line is open. Michel Debs Thank you. Good morning. I have a question on the water division because you have one bullet point, and you’ve mentioned France, which we have commented. And I would like to talk about Spain and Chile. You have lumped them together. They’re presented as a combination in your press release. Could you help us break down the impacts of Chile and Spain? And if I look at the revenue of water Europe and if I was excluding Chile and just looking at France and Spain, what would have been the evolution of revenue and, possibly, if you could tell us, the trend in margins? Thank you. Christophe Cros Okay. Maybe the precise calculation, I am not going to do it live, and I’m sure that the team and I, we will help you. But I answer first your question and I speak to Spain and Chile. In Chile, volumes were slightly down for one reason that I mentioned in my summary, which is that the summer, which takes place, noticeably, in December in Chile, was very cold. So we have a very light decrease in volumes, which is really due to weather. When it comes to Spain, we have a light improvement in volumes. I would say that the volumes are flat. It is 0.1% growth. And I could even split between Barcelona, which is much more positive, and other places in Spain which are, I would say, slightly negative. But all in, it makes for volumes in Spain, plus 0.1%. If now I look at prices, Chile I explained. We are still in the wake of the five years’ renegotiation. You know that we are – we have inflation indexation in Chile, so there was an increase by 6.7% for the tariff. In Spain, the increase in prices which are charged to customers is still positive. It is approximately 1% in Q1. Maybe my only one precision is that it is, I would say, the automatical work of last year because there are still many tariff negotiations inside the long contracts in Spain that are, in average, 19 years long, as you know. Inside those frameworks we have yearly negotiations and a very significant proportion of negotiations about tariffs, including Barcelona in Spain, going on. But as of end of June, the tariff increase was plus 1%. Michel Debs Just so that I am sure I understand, in Spain you could still see tariff indexation coming in, in Q2 and Q3? Christophe Cros Yes, because the negotiations are pending, which is normal. There is no specific signal. So you benefit, I would say, from the automatical implementation of what had been negotiated the year before. And as usual, the teams are negotiating the yearly [indiscernible] of the contract for 2016 in a significant proportion of the business, which is normal. Michel Debs Thank you. Operator [Operator Instructions] Our next question comes from Olivier Van Doosselaere form Exane. Olivier Van Doosselaere Yes. Good morning. Thank you very much for taking my questions and the time to explain this, this morning. I just had two questions. One was on the – again on M&A and on the leverage because, yes, you are saying on the one hand that you will keep your financial discipline and therefore not do M&A at any cost and so your 2017 target of €3 billion of EBITDA is partially dependent on that one. But sticking to that financial discipline, I was wondering if you have any impression that maybe in terms of leverage you may not be exactly where you expected to be because at 3.1 times net debt to EBITDA I wonder what your financial flexibility really is to do significant M&A in order to reach the target. And then the second question was on Barcelona. There’s been some news actually about some legal action that was taken against the Barcelona water contracts earlier this year. I was wondering if you could give us some information there and what you expect that the conclusions might be from that one. Thank you. Christophe Cros Okay. Thank you, Olivier. Olivier, as a matter of fact, I start with the question about Barcelona, so it’s important to be precise. There was a court decision in Barcelona, which is not a denial of any contract, but a challenge, which has been fueled by a competitor. There was no secret about that. Again, the fact that at the time there was an agreement in order to set up the company. And you remember that that company is owned by – 70% by us, 15% by Caixa and 15% by the metropolitan area of Barcelona. And that company was set upon order to manage, jointly, the potable water and the waste water business. So the court decision is just about the fact that setting up that company was not part of a tender. So what are the next steps? The next step is to go to the Supreme Court in Madrid. It’s going to take some time, probably something like plus/minus two years. And if I take, to be very simplistic, the worst-case scenario, let us assume, and I don’t think that that has to be the logical scenario, but I take the worst-case scenario to explain my point, and that it is said there should have been a tender. What would be the consequences? The consequences would be that we keep as it was before the potable water business, which is approximately €300 million out of €400 million [ph], and the metropolitan area take back the waste water treatment. So it is not a court decision challenging contracts. It is a court decision challenging the fact that setting up the company was not part of a tender. I go back now to your larger question about M&A and leverage. The before leverage, end of Q1, you shouldn’t exaggerate the usual seasonality effect, which is, as every year, part of the evolution for the 3.1 because, remember, that – and we get some details about that – that the main effect during Q1 is the variation in needing working capital. So we are fully, I would say, consistent with the usual seasonality. So it means that we still see some flexibility in terms of M&A, but it is always part of what I had the opportunity to tell collectively on a face-to-face basis, which is that we have flexibility, but we will always defect to the 3 times net to EBITDA. So would there be an opportunity which would deepen the financial discipline of the Company and would that opportunity create an increase in the net debt to EBITDA ratio? I would tell you immediately this is how long and how we are going back to three times. And if I may I remind you that we did that at the time of the final acquisition of the last shares of Aigues de Barcelona. So no change in terms of flexibility. And don’t forget the seasonality effect, which is every year present in terms of impact of a change in working capital at the end of March. Olivier Van Doosselaere Okay. That’s very clear. Thank you very much. Operator [Operator Instructions] The next question comes from Philippe Ourpatian from Natixis. Take access please ahead your line is open. Philippe Ourpatian Yes. Good morning to all of you here. Only two remaining questions. One is concerning the timing of your M&A. As you mention, €3 billion is an ambition. If you want to reach it in 2017 you will have at some point to realize some deals in order to fulfill this ambition. In terms of timing, when do you think could be the ideal diary for your to review or confirm at the end of the game this €3 billion? Do we have to wait first half or at least end of September? That’s the first question. And the second one is concerning the cost. I think you mentioned some additional measure that already decided by the management. These additional measure, are they going to really enter in 2016 in order to fulfill the guidance or it’s an optional measure that could or not be in place in order to maybe confirm the 2017 target? Christophe Cros Okay. You are very clear. So I go back to the M&A question and about the perfect timing. I just reiterate what I had the opportunity to tell each of you when we have the pleasure to meet together, which is that when we will present the result for the first half, and we will comment then probably beginning of September, we will update you about are we now in a full position or will we need some more time in order to reach what has always been presented as an ambition. We are ambition, but we are realistically ambitious and we will not make any stupid bet because of lack of financial discipline. But I would say September is probably the right timing to do that. When it comes to additional and, as you said very properly, optional increase the COMPASS measure, I would like to make clear that as of today we should be able to reach our guidance without higher savings. However, if the global context remains, and I said I think clearly that the European environment is, I said, lackluster, so would there be the same global context, more unfavorable versus our own budget assumptions, we would be likely to increase our 2016 COMPASS target by the end of the year. Once again, when we will present the half-year result we will update you precise. Philippe Ourpatian Many thanks. Operator Our next question comes from [indiscernible] from Bank of America. Please go ahead your line is open. Unidentified Analyst Yes. Hi. Good morning, everybody. Thanks for taking my questions. I just have one question. There’s been a lot of questions asked already. I just have a question on electricity prices. I just wanted to conceptually understand how it’d work. You obviously heard the news around the carbon floor in France that might move power prices up. As a Group, you did mention about your outright exposure to power prices, to the energy-from-waste plants, but also from the contracts where there are some pass-throughs. So over a two/three-year period, if power prices were to go up in France or some of your other areas, would you say that’s net positive for you or is it neutral for you? How would you look at it? Christophe Cros Okay. Just maybe in order to avoid any risk of confusion, there were effectively some comments, material comments about carbon tax pricing and so on and so on. As of today, nothing has been precisely decided, so nothing has been implemented. And globally speaking, never forget that we reduce more CO2 than we produce CO2. So in terms of exposure to any kind, which is not the case so far, of CO2, let us say, regulation and pricing in France, we would probably benefit from that. But as of today, it is still premature. When it comes to electricity, if I may here to repeat that we are both purchaser and seller of electricity in proportions which are much limited compared to the fact that we are more limited as a purchaser and seller than producer and consumer. We ought to consume a large part of our electricity. So if I look at sale of electricity, which is – sorry, purchasing of electricity, which is mainly in the water business and purchase of electricity is mainly in the water business, I said that due to escalation formulae the price of energy, with the price of electricity, is passed through to the final customer whether it is up or it is down. When it comes to the sale of electricity which is generated by waste-to-energy facilities, part of it is part of long-term agreements. For instance, in the UK, exposure in the next coming five years is very limited because as soon as we implemented the PFI schemes there were agreements which had been signed in terms of electricity pricing for the first period. So exposure is more important in the Netherlands and Belgium and in France because maybe you remember that usually, for any company, not only for Suez, we have been ending a period of 15 years, during which there was a fixed price for the sale of electricity generated by waste-to-energy facilities. So we have now an increased exposure to the spot market and this is why we were sensitive during Q1, more sensitive than expected to the more-than-expected decrease in the spot prices. So globally speaking, if I take the scenario that you mention, the global consequences should be rather positive for the Company. Unidentified Analyst Thank you so much. Very clear. Operator Our next question comes from Emmanuel Turpin from Morgan Stanley. Please go ahead. Your line is open. Emmanuel Turpin Good morning, everybody. Christophe, I’ll come back on your last answer on power price just with a couple of follow-up questions. We understand well that for some of your incinerators in the UK, mainly the ones off balance sheet I guess, you don’t have any exposure, which is great. Is it – would it be possible to still get some figures about annual output for power which are exposed to market prices for the Group in Europe, with a split between continent and the UK? And number two, maybe a word about your hedging policy. I guess not all of the power is sold spot and I guess that you may be selling some forward. Would you be able to explain to us in broad terms how you manage your revenue line on the forward versus spot? Secondly, moving onto commissioning of new plant – new incineration plants, I believe there is some positive to be expected in the coming quarters. Could you just remind us of the timing and tell us whether the timeline is – you are on time for the commissioning as expected? Thank you very much. Christophe Cros Okay. Thank you, Emmanuel. So for electricity, you guessed well because there is no one unique and simple answer because, as you know, the power market dynamics are very different from a country to another, from one contract to another. What I said for the British waste-to-energy facilities is either on balance sheet or off balance sheet because at the time we clinched the PFI deal there is usually a five years’ period electricity prices, so we are protected. If I may help you, I would say that we sell more than 4 gigawatt hour per year, out of which one-third is sold on the spot market. So 4 gigawatt hour per year and one-third is sold on the spot market. This exposure may look quite high, but it reflects the long-term view of a European power market. At current conditions, to help you, and maybe later on we can dig into details, we do consider that plus or minus €1 per megawatt hour corresponds to plus/minus €1 million, minus €2 million of revenue and EBITDA. This is the proportionality we have right now. So plus or minus 1 megawatt hour – €1 per megawatt hour, plus/minus €1 million to €2 million revenue and EBITDA. When it comes to the timing of the waste-to-energy facilities, so as we said – and if I am not wrong in the appendix to the yearly presentation we give all the details – we expect to open four new facilities, significant new facilities, waste to energy, in Europe during this year, three in the UK and one in Poland. They are all on budget. Only one is slightly delayed because of construction, which is the one – the waste-to-energy facility in Cornwall. We are expecting a delay by six months, but please don’t fasten your seatbelt because you know that we are not constructor. There is an EPC constructor and any consequence due to any delay is automatically, because of the contract, passed through the EPC contractor company. And the customer is fully aware of that. So we are online with what was expected for this year and what was taken into consideration in the budget and guidance. Emmanuel Turpin Thank you. Operator Our next question comes from Vincent Ayral from Societe Generale. Please go ahead your line is open. Vincent Ayral Thank you. Most questions already were asked. I would just have two last. The one is the M&A envelope you’re looking at, is this to be around €1.5 billion? Question number one. And question number two, when we’re looking at the electricity, the exposure, basically you’re a net consumer in water, a net producer in waste. Are you considering having a division which basically will manage both in order to ensure you hedge yourself at maximum and improve the earnings quality there? Thank you. Christophe Cros Okay. When it comes to M&A, nothing new compared to what I said. What we – we look carefully at many opportunities. There are many opportunities, and you know the various evolutions. If I take, for instance, the waste business in Europe, there are, I would say, many companies for sale. I see still a lot of ambition from the sellers in terms of price. Maybe this is triggered by the fact that there were some operations triggered by Chinese investor, Mainland Chinese investor. So what I can just say and repeat and repeat is that we never do any operation against the financial discipline of the Company, even if it is at the price of delaying the implementation of the ambition. When it comes to your second question, I’m absolutely afraid I lost it. It was about, sorry? Vincent Ayral As I said you’re a net consumer in water. Christophe Cros Okay. Sorry. Yes, okay. What I said is that, conceptually, we are of the view that there should be some kind of natural hedge between the purchase of electricity and the sale of electricity. Unfortunately, it’s largely conceptual because, first, for instance, I said that the purchase of electricity is, by definition, linked to the water business. So we are mainly purchaser in Spain and in France and we are, for instance, not producer of electricity in Spain. And huge geographical market, I am not going to teach anything because you are much better than I am, but you know that there is no, I would say, full transparency in the European – between the European countries. Second, we need to take into consideration the various contracts. So when it comes to purchasing of electricity, it is part of, I would say, the purchasing division of the Company and we monitor very carefully the kind of purchases we do. When it comes to selling electricity, it is more linked to the effective production of the waste-to-energy facilities. And we make choices which are based upon our own assumptions. And I said clearly that the decrease in electricity prices that we expected was even higher, so the consequence by €10 million, €11 million for Q1. So the hedging policy is centralized for the monitoring of electricity, but we don’t hedge systematically because it would be, to a certain extent, not satisfactory due to the nature of the production and the cycle of production we have with the waste-to-energy facilities. Vincent Ayral Thank you. Operator Our next question come from James Brand from Deutsche Bank. Please go ahead your line is open. James Brand Hi. Three questions if I may. The first is on Chile. I was wondering whether you expected any further tariff prices this year. I know it’s dependent on inflation and inflation’s pretty high, but maybe that’s kicked in already. Second question’s on the renewals in France. Should we draw any more structural conclusion from the higher prices that you’ve got from these renewals that maybe the pricing pressure is easing a little bit or perhaps municipalities are looking for water companies to do a little bit more than they have in the past? Obviously it’s pretty lumpy depending on the contract. Maybe we shouldn’t draw any of those conclusions. And the third question is just on the international business. I wondered whether you had a split either of the absolute revenue or the growth between how much of it is driven by construction contracts and how much of it is either long-term contractor revenue and coming from assets that you own, a split between construction revenue and other. Thank you. Christophe Cros When it comes to Chile, you are absolutely right, which is that – so we have the full implementation of the tariff contract. But the next step is to follow up the level of inflation in Chile because inside the contract we benefit from an automatical indexation when inflation is over 3% on a yearly trend. As of today, inflation in Chile is 3.7%, so there will be, eventually, update. But the full mechanism is extremely protected. When it comes to the pricing of renewables, I’m not sure I would say structural. I don’t want to send a negative message. I am not telling you [indiscernible] pieces of news. 2.8% is satisfactory. It could be even greater and I would be even more satisfied. But it shows that even if the competition is quite fierce, because, no ambiguity, competition is quite strong, it is a competition with rationality in terms of pricing by competitors in France. When it comes to the split of the international division growth, I would say it’s balanced. To make it clearer, the very positive figures we are satisfied with are not only stemming from construction. It is – and, for instance, I gave the figures, which are quite satisfactory, for Australia or America. We have no – or China. We have no construction impact there. James Brand Great. Thanks. Operator Your next question comes from Michel Debs, Citigroup. Please go ahead. Your line is open. Michel Debs Thank you. I’m back with a question on China actually. You have, last summer, restructured your holdings in China to dilute yourself in water and gain exposure to waste, if I understood correctly what you did at the time. Now that we are eight, nine months after that, how is this going? And is the Chinese slowdown affecting the prospect in waste that you wanted to get exposure to or are you still being driven on by regulation trends? Christophe Cros First, if I may, I would like to correct what you said. We didn’t do that in order to be diluted. It’s very different. What we did is that – and it is a demonstration of the strong partnership and the strong ambition we share between Chongqing water authorities and ourselves, including a very long-time partner, New World. So it is the implementation of our ambition, which is to set up one of those very powerful vehicles which are going to structure the environmental services market in Mainland China for the coming year. There will be – and it is a decision which has been taken by the Chinese authorities in Beijing – probably something like between 8 and 12 large environmental services companies dealing with waste and water. And we are super pleased, I say super pleased, to be part of one of them because that new vehicle – the name is Derun – that which set up in partnership with Chongqing, and we own 25% of it, is going to be one of those vehicles. So it has nothing to be with dilution. I would like to correct that eventual impression. And we are now looking at a project starting from that vehicle. And I have the pleasure to tell some of you that that vehicle, Derun, has a COO. She is a COO and some weeks ago she was still an employee from Suez in China. So it shows the very high level of confidence between Chongqing and us in order to, mainly in China, but maybe also outside China, grow and develop both waste and water businesses. Michel Debs Thank you for the precision, Christophe, but is the trend still as positive as you expected? Because you’re gaining exposure to waste, if I understand correctly the move, and yes, there is certainly a lot of growth. But at the same time, for people like us who are outside, the Chinese economy seems to be slowing down. So if we balance the regulatory pressure to be cleaner in China and the slowdown in industrial production in China, are you on a net positive trend or a net negative trend right now? Thank you. Christophe Cros We are clearly on a net positive trend, no ambiguity, because I would like to make a light correction. I do not deny there is an industrial slowdown in China, but if I say an industrial slowdown in China it means, I dare to remind you, that our customers, local authorities, are helpful, are individual. When I look at the trend, both in terms of pricing and volumes in the water business, they are still positive. Second comment, which is even as important, it is that there is a clear awareness by Chinese authorities that if they want to offset the industrial slowdown they need to improve the environmental infrastructure. So I dare to consider that even if there is an industrial slowdown, and I do not deny it, it doesn’t affect the need, which has been restated by Chinese authorities, to improve environmental infrastructure. So I do consider that we are really well positioned for that. Michel Debs Thank you very much. Operator Our last question comes from Julie Arav, Kepler. Julie Arav Yes. Thanks. Just a quick follow-up question. I was wondering, Christophe, if you can provide with the gate fees by region in incineration and landfill, just for us to have an idea of how this piece has evolved over the last few years. And when I’m talking region I’m talking mainly UK, France and Belgium and Netherlands, please. Thanks. Christophe Cros Okay. So we have the same geographical understanding, which is right. And your curiosity is strong, but not illegitimate. If I may I would make three different answers. In the UK the market is driven by the PFI we were awarded, so the price was set up. It’s some kind of a fixed price. And of course, the level of price is totally consistent with whatever it is, off or on balance sheet, the capital intensity which is requested in order to get the appropriate level of return on capital employed. So no topic in the UK and it is satisfactory. In France, waste-to-energy contracts are, in average, rather long-term contracts, so there is a stability. And when there are renewals, it’s not a matter of gate fee. There is no big change in the gate fee, so there is stability. Last item, as you said, is, as long as we are concerned, Benelux, and it means Belgium and the Netherlands. I don’t put Germany inside because we have one incinerator in Germany, so it’s very limited exposure. And there is a confirmation of a positive trend because if I look at the spot market for waste-to-energy gate fee in the Netherlands, I told you that, at the deepest of the crisis, price were as low as maybe €45 per tonne, gate fee for municipal waste. If you give a call today in order to bring municipal waste to any waste-to-energy facility in the Netherlands you will be closer to €100 than €90. I checked the figure yesterday. So clearly, it is partly due to imports and so on, but the balance in the Dutch market is reflected in the significant improvement of spot market gate fees in that country. Julie Arav Very clear. Thanks. Christophe Cros Okay. Thank you very much for your attention. As you know, we have this afternoon’s General Shareholders Meeting of the Company. And my team and myself would be very pleased, as ever, to welcome you or to answer your questions in the wake of that conference. Thank you again for your presence and your kind attention. Operator Thank you for your participation, ladies and gentlemen. That will conclude today’s conference call. You may now disconnect. Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) 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