Veolia Environnement SA (VIE) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the 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.

Thank you. Good morning, ladies and gentlemen, and thank you for connecting to this conference call on Veolia's H1 2022 results. I'm 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 takeaways of this first semester, and I'm on Page 4 of the slide show. First of all, our first half results are very strong and enable us to fully confirm our 2022 guidance of organic growth of EBITDA between 4% and 6% growth and a current net income of EUR 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 as 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 the 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 strategic positioning and the reaching of our know-how in technologies. Already the potential for synergies that we identified at the beginning of this operation is fully confirmed and is bearing fruit with the first synergies delivered in H1. 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 H1 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 H1 shows a very strong growth of our results compared with H1 2021, including, of course, a significant impact of the first-time consolidation of Suez assets since January 18. 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 EUR 20.2 billion for the half year. And current net income progressed by 33% to EUR 528 million. Compared to H1, 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 tariff 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 current 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 the 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 tariff 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 recycled price, tariff increases and higher electricity revenue from our incinerators, but also thanks to a 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 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 our other parts, notably EBITDA growth of 4% to 6%. We reached, in fact, the high end of the guidance range in H1 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 industrial waste which is also benefiting from the very promising trends of recycling and more generally of the implementation of circular economy for our clients. On top of that, the sole implementation of the synergies of the merger is guaranteeing a very strong growth of our results in the years to come Also equally important to me, Veolia's 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 6 months, whereas activities level was 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 contract 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 increased with inflation once or twice a year, sometimes more often, like in Chile, or with a bit of delay or with various mechanisms 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 4 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 adaptive 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 EUR 170 million (sic) [ 178 million ] of efficiency gains in H1, fully in line with our EUR 350 million annual objective which was increase to take into account the enlarged perimeter. 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 the 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 EUR 52 million of synergy out of our annual objective of EUR 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 purchases and sales, our hedging policy is protecting us against price volatility. We have also accelerated our efforts in the last few 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 procurement. For 2022, our energy purchase are now 95% secured and 70% secured for 2023 to be compared with 35% at the end of Q1. However, our suppliers are always first strong national producers or distributors in order to deliver essential services, such as municipal heating, which all countries consider 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. The EUR 150 million CapEx envelope is dedicated to this plan, which aims to increase our energy production by 5% and to reduce our energy consumption by 5% within 2 years. We, in fact, offer services to our customers 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 nonrecyclable waste to sludge or wasted heat, very valuable activities we intend to accelerate. I'm now on Page 11. 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 color 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 landfills produce biogas, and we have the technology 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 solutions are 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 waste water. 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 in 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 Guyana, 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 U.S. chip manufacturer, our process water technology will help our clients extend its plant without increasing its water needs. In the [indiscernible] region in France, Veolia will build an operator biomass cogeneration facility, enabling our client the paper group Norse Skog to reduce its CO2 emissions by 200,000 tonnes per year. Total backlog of the contract reaches EUR 225 million. In energy, again, a very recent contract in Oman in partnership with Total, will allow us to use solar panels to supply energy for our desalination plant. And I could give you many more examples 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, with cost 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 U.S. or in Chile, which offer high returns and visibility to our portfolio. The integration of the sales 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 the first countries and had 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 an executive from Agbar to manage all 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 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 waste reuse with Agbar 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 the 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 difficult 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 EUR 350 million of efficiency gains complemented by EUR 100 million of synergies from the merger with Suez. Current net income of around EUR 1.1 billion, an increase of more than 20%, confirming an EPS accretion of around 10%. Leverage ratio is expected at around 3x. Our dividend policy will remain the same, with dividend growth in line with current EPS growth. In conclusion, the excellent results of the first half demonstrate once again that Veolia is a solid, efficient and agile company with strong prospects for growth and value creation, particularly linked to the merger with Suez, which is on a very good track. I'll now hand over to Claude Laruelle, who will detail our H1 2022 results. Then we will answer to your questions. Claude, the floor is yours.

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, 6 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% at constant 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 energies 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 EUR 528 million, totally in line with our EUR 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 a euro-dollar parity now, but a bigger impact at the debt level. Our net debt is at EUR 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 3x at year-end and well below 3x once all the antitrust proceeds will have been received, allowing us to have room to maneuver. Moving to Slide 18. You can see our revenue variation by the main geographical segments with a new segmentation we presented in Q1. Due to the high energy prices, rest of Europe and its heating networks and very efficient cogeneration is really driving the growth of Veolia in 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 workflow [ SADE ] network 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 the Scandinavia disposal that happened last year. Second, the organic revenue growth is very strong in H1, plus 13%, with 3 main causes. The continuous volume and commercial effect, you can see on the slide of 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 U.K. The energy price effect for more than EUR 1.1 billion of 6.2% revenue increase. The pricing effect on water and waste plus 2.8%, that includes escalation formula in our municipal contracts and voluntary tariff increase in our commercial and industrial waste activities. And as we speak, we continue to increase waste prices in July. I'll give you 2 examples in hazardous waste, plus 5% in Europe and plus 10% in the U.S. I'm moving to Slide 20. Let's have a look at the EBITDA bridge showing plus 6.1% organic growth at the top of the guidance range, which is plus 4 to plus 2.6%. It is very similar to the Q1 EBITDA bridge with the same business trends. As usual, the main effect on our EBITDA increase is the efficiency and synergies for EUR 230 million, with efficiency plan at EUR 178 million totally in line with our EUR 350 million goal for the year and the synergies that have delivered EUR 31 million in Q2 after EUR 21 million in Q1 totaled 52, also well in line with our EUR 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 the one. You can also notice the effect of the recyclate and energy prices for EUR 70 million. It's mostly cardboard for recyclate and a slight favorable impact of high energy prices and cost of fuel. The price-cost squeeze remained at the same level in Q2 as in Q1 for a total of EUR 97 million for H1, including contract wins and negotiations. We have 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 EUR 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. Moving to Slide 21, and we have a look at the waste revenue variation details with good volumes and prices and continued increase in recycled prices. It's leading to an organic growth of 9.9% for the semester, which is remarkable. Volumes are up 1.3%. In the U.K. and in Australia, C&I volumes are well oriented compared to a lower H1 2021. That was impacted, if you remember, by COVID restriction, and we had a weak Q1 2021 and in those countries and a much stronger Q2 2021. Q2 2021 volumes, also as a remainder, were strong in the other geographies. And we continue to have a similar trend of good volumes in July. Price increases remained good at 3.2% and cover inflation in our waste activities. Recycled prices continue to stay at a high level in Q2, leading to plus 3.4% revenue increase for H1. 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 and 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, whereas the summer of 2021 was rainy and cold. Second, Waste France continues to experience a very solid revenue increase of 6% due to price increases and recyclates. Volumes are slightly down as we continue to be selective on contract renewal, especially on municipal collection. The C&I collection business remains 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 ] combination are producing strong results. Finally, the SADE network activities is at a 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 tariff 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 U.K. 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 operations 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 3 main countries. In Spain, Agbar volumes were up 2.2% in H1 and with tourism resuming nicely, we expect a strong Q3 in our water activities in Spain. EBITDA of the 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 H1 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 impact and the lockdown in China. I'm moving to Slide 25, and we have a quick look at the Water Technologies segment. Veolia Water Technology continued to perform well with a strong financial performance despite lower revenue with a strong solution business, but less large desalination projects this year after the completion of 3 main projects in the Gulf area. The new business model allows Veolia Water Technology to work on the higher-margin segments and can be more selective in new bookings. We have a very strong pipeline of projects, which is promising for 2023. WTS continued to be under whole separate management by the British CMA. That's the reason why we cannot give you more details 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 filling the current EBIT. Renewal expense are only slightly up by EUR 7 million at EUR 147 million. Amortization and provisions are slightly down by EUR 34 million, and industrial and capital gains are slightly higher than last year by EUR 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 EUR 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 -- how the current EBIT is translated into current net income of EUR 528 million, up 34%, and perfectly in line with our EUR 1.1 billion objective for 2022. As we do not have the split of the P&L expenses below EBIT for the Suez group 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 reported and the 2022 combined as the scope is completely different. The cost of the net financial debt of EUR 320 million is a combination of the historical Veolia debt and the one we have acquired with Suez. On the Veolia stand-alone side, after an exceptionally low level of interest paid in H1 2021 with few positive one-off and much lower swaps to local currencies 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 -- 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'll not be impacted by higher interest rates for long-term corporate debt in 2022. The other financial income and expense of EUR 194 million (sic) [ 199 million ] include the Veolia perimeter and now also the Suez perimeter. It includes increased 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. 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 the integration of the 2 businesses. This is what you can see on the first line of the table for EUR 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 EUR 80 million. As you can notice, we have less noncurrent impairment than last year and the same level of restructuring charges. This leads to a net income of EUR 236 million for H1, which is absolutely not representative of the expected performance for the full year 2022, as we expect noncurrent capital gains in H2. And we will have no further Suez acquisition costs 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 U.S., Middle East, Germany, and ongoing decarbonization CapEx in Central Europe and Germany. The net free cash flow is improved by EUR 150 million compared to Q1, and the working capital remained at a high level, [ EUR 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 8 years. Regarding the net financial debt of EUR 22.3 billion, the increase is a result of the EUR 700 million shareholder dividend voted at the AGM on June 15 and paid on July 6. And the reimbursement of a EUR 500 million hybrid bond issued by Suez before the merger. It also includes a ForEx effect for EUR 400 million. Taking into consideration all antitrust disposal for the European Commission and the other disposals that are under process, which totaled for more than EUR 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 3x. And after the Suez U.K. disposal, the leverage ratio will be well below 3x 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 EUR 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 EUR 1.1 billion, which means an increase of more than 20%. EPS accretion for 2022 of around 10% and around 40% for 2024. And the leverage ratio around 3x at year end. Thank you for your attention.

Thank you, Claude. I will now let you ask your questions.

[Operator Instructions] The first question is from Ajay Patel from Goldman Sachs.

I have 3 questions, please. Firstly, just on the working capital swing in 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 and contract renegotiation line. It's about EUR 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 talked about hedging. I'm very thankful for that. Any indications of price that you could help us with there?

Claude, maybe for the first 2 questions.

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 trend in Q3 and Q4. But we are at 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 reversed by year-end. In terms of price cost squeeze you're mentioning the EUR 97 million. So it's -- you understand that it's a mix of a contract renegotiation because we continue to give -- when we renegotiate the 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 contracts 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 our escalation formula, to recover the inflation that is not yet in the escalation formula.

And I guess, in addition to what Claude said, I think basically half of our cost efficiency savings translated and capped, 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 booked 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.

The next question is from Arthur Sitbon from Morgan Stanley.

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 and for the first few days of August, mainly on the industrial activities of the business. And then my second question is on Energy in Eastern Europe. I was wondering if you consider your ability to pass through the cost for now? And if there are any discussion on intervention on tariffs in the various review of no doubt as of windfall profit taxes on electricity in the Czech Republic for example. So I was wondering there is any further adverse impacts on the business activities.

I guess, in the third quarter, as you may expect, we are only 3 days into August. So I won't comment on the quarter as a whole, but I can 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, in France or 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 rainy as well. So it's a base effect. Plus on the opposite side really a flip through the opposite this year. So no change in trend. 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 tariff 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 a 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 a district heating than if they were to do it by themselves. So it is a push towards district heating connection as well.

The next question is from [indiscernible] from Morgan Stanley.

Good set of results today. I have 2 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 while in 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 question number one. The question number two would be regarding energy prices. Basically, you say energy prices are neutral at Veolia and you hedge yourself for that. Clearly, this makes sense, especially on the electricity front where you're probably long energy. But the question I have is regarding other parts of the business like, for example, gas [indiscernible] for the waste collection, all that kind of things. 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 -- give us a bit more color on the energy price, the type of energy, if you don't mind.

On the summer, maybe, Claude, you want to comment on that, but the sensitivity of the volume of 3 weeks in July or 4 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.

And as I said, [indiscernible] , 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 H1. So also good recovery in Spain in terms of tourism that will help. And the heat wave is not only in France, but you understand is also in Central Europe, where we have the heat wave now in Central Europe and especially in Czech Republic.

And as you know, we are distributing water in many, many countries in Europe, in the U.S., in South America. So I guess this goes well beyond the [indiscernible] 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 type of fuels. And 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 the 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, it's back into the indexation formula, so it exactly applies in the same way. The fuel cost 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, as 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, my hedging comments as well as the pass-through, applies to all type of cost and energies pipe.

The next question is from Tancrède Fulop from Morningstar.

My first one would be on contract expiration in your -- in the presentation of your last Capital Markets Day, there was a slide showing that 2022 will be a big year of contract expiration with around EUR 0.5 billion. And during your presentation, you mentioned a few negative elements. The EBITDA bridge, price pressure related to those contract renegotiations, and also volumes down in France due to selectivity in contract negotiations. So could you maybe give us a clear picture about maybe the full year impact of those contract -- this contract expiration in 2022, maybe? So when you'll rate 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 U.K. waste business. You will be well below leverage ratio of 3x. I calculate like that you will be around 2.5x. So that gives you -- if you want to go back to 3x, that gives you a headroom of around EUR 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. This will be my 2 questions, thank you.

So Claude, do you want to start with commenting on the bridge -- on the price cost bridge?