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Veolia Environnement announced financial results for the first half of 2011. The company reported an operating loss per share of €1.05 in the first half of 2011 versus operating earnings of €0.67 in the first half of 2010.

On a GAAP basis, operating loss during the first half of the year was €0.14 versus earnings of €0.78 in the first half of 2010. The difference between GAAP and operating loss was due to a one-time gain of €0.91 from discontinued operations.

Total Revenue

In first half of 2011, the total revenue of the company was €16.29 billion versus €14.10 billion in the similar period of 2010, reflecting a growth of 15.5%.

The year-over-year growth in revenue was boosted by the positive impact from the acquisition made by the company in the previous year.  The first time consolidation of the Veolia Transdev joint venture also backed the improvement.

Segment Results

Water: Total revenue from this segment was €6.12 billion versus €5.89 billionin first half of 2010, up 5.5%. The growth was primarily attributable to higher level of activity in Europe, particularly the United Kingdom, Germany and Central Europe as well as the ramp-up of activities in Asia.

Enviornmental Services: Total revenue from this segment was €4.9 billion versus €4.5 billionin first half of 2010, up 8.4%. This growth was mainly organic. The increase in activity levels for industrial services, treatment of hazardous waste and commercial waste collection in the main geographical areas boosted results.

Energy Services: The segment generated total revenue of €3.86 billion versus €3.70 billionin the first half of 2010, up 4.3%. The growth in this segment was attributable to the favorable impact of energy prices, offset partially by the impact of adverse weather.

Veolia Transdev: Contribution from this new segment in the reported period was €1.3 billion.

Operational Update

During the first half of 2011, the company experienced a 24% growth in the cost of sales compared to the prior-year period. The general and administrative expenses and selling costs also surged by 10.4% and 1.4% from the first half of 2010.

Operating income of the company decreased to €0.25 billion from €1.1 billion in the first six months of 2010 and was negatively impacted by non-recurring write-downs amounting to €0.7 billion mainly in Italy, Morocco and the United States.

Finance costs in the first half of 2011 were €435.6 million, marginally lower than €439.3 million reported in the first half of 2010.

Financial Update

Cash and cash equivalents of the company as of June 30, 2011 were €5.6 billion versus €4.6 billion in June 30, 2010.

Net cash from operating activities in the first half of 2011 was €0.86 billion versus €1.3 billion in the same period of 2010.

Restructuring and Convergence

During the first six months of the year, the company continued to work on restructuring and convergence of its operations to make it more profitable. To achieve its goal the company has decided to lower its geographical exposure and concentrate on 40 countries by 2013 as against 77 countries at present.

The company will also work on rationalization of the organization, processes and local headquarters and has made plans for additional cost savings aiming to add a minimum of €150 million in operating income  by 2013 and gradually increasing the level to a range of €250 million to €300 million annually by 2015.

Guidance

For 2011, Veolia Environnement expects a marginal decline in adjusted operating income at constant exchange rates, compared to its previous expectation, excluding Veolia Transdev.

The company will continue with its plans for strategic asset divestments and divest €1.3 billion in 2011. At the same time, it expects to save €250 million in 2011 through its cost savings plan.

Our View

Veolia Environnement is bent on reducing costs in the forthcoming years, which can potentially boost margins. The company has entered into a few major contracts during the first half of 2011, which are likely to boost its topline. A €1.5 billion contract from The Private Finance Initiative and €1.2 billion contract awarded by Dalkia are worth mentioning.

Veolia Environnement retains a Zacks #3 Rank (short-term Hold rating). Veolia competes with Connecticut Water Service Inc. (CTWS - Snapshot Report) and York Water Co. (YORW - Snapshot Report).

Based in France, Veolia Environnement is a provider of environmental management services to its worldwide consumers. It operates through four segments, which are Water, Environmental Services, Energy Services and Veolia Transdev.

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