Veolia Environnement SA

PAR:VIE

Earnings Call Transcript 2021-Q3

[Operator]

Ladies and gentlemen, welcome to the conference call on Q3 2021 results publication with Antoine Frérot, CEO; Estelle Brachlianoff, COO; and Claude Laruelle, CFO. I now hand over to Antoine Frérot. Sir, please go ahead.

[Antoine Frérot, Chairman & CEO]

Thank you, and good morning, ladies and gentlemen, and thank you for attending this presentation of Veolia's 9 months results. I am with Estelle Brachlianoff, our COO; and Claude Laruelle, our CFO. During this call, I will briefly give you an update on the acquisition of Suez, which we are now very close to finalizing, and we will then present our 9 months results, which are again record results. And we will then answer your questions. So I will start with an update on the acquisition of Suez and I am on Slide 5. Since the signing of our agreement to purchase Suez and sell some of the assets, mostly French ones to the Meridiam, GIP and CDC consortium for EUR 10.4 billion, we had three main tasks to complete: the financing of the deal, the antitrust process and the preparation to integrate Suez. We have progressed very fast over the past 3 months, so as to be ready to close the acquisition of Suez around year-end. Regarding the first task, the financing of the operation, we have launched a EUR 2.5 billion rights issue in mid-September, as we have previously announced. It was closed on October 6 and was a great success. The very high take-up rate, nearly double the targeted amount, clearly showed the support of our existing shareholders and they have great confidence in the prospects of the new area. The rights issue was done at a very low discount, enabling us to reduce the number of shares issued. The second target, the EU antitrust filing, has also progressed well. Veolia teams have worked very hard to be in a position to file before the EU in October as planned. We have filed on October 22, and we expect the final clearance of the EU by mid-December. And this, final this year, will be preceded by an intermediary answer at the end of November. This part of the deal was particularly crucial, and it is the only condition precedent to the closing to the tender offer of Suez. The two other countries where they have antitrust issues but of lesser importance, the U.K. and Australia, are also progressing well and it should all be settled in Q1 2022 at the latest. Once again, they are not on the critical path to finalize the acquisition. The third project, which is to prepare for the integration of the sales teams has also progressed very fast. You remember that in late July, I announced the composition of the new Executive Committee, including four members coming from Suez. We will announce the new Management Committee, meaning top 40, top 50 before year-end. And as soon as we close the operation, all country managers and support function heads will be appointed. And in order to allow for Suez teams to meet Veolia executives, several town hall meetings have been organized. And these meetings have received very positive feedback and have confirmed that the two groups share the same culture, the same values and the same objectives. As you can see, everything is going well so that we can approach 2022 with full confidence in our ability to execute the merger successfully and begin the traction of ecological transformation. In terms of financial targets, we confirm the target of EUR 500 million of synergies over the next 4 years and the 40% EPS expectation by 2024. I know that you are very eager to have all the figures of the combined group and the guidance for 2022, and we will give you all that when we release our full year 2021 results on March 15, 2022. This is what I wanted to share with you regarding the Suez transaction. Let's now move to the operational and financial performances of Veolia in the 9 months, and I am now on Slide 7. I will first focus on the third quarter performance, which shows the strong acceleration of both revenue and EBITDA growth after a very strong first half. 2021 was off to a very good start with a record first half in terms of revenue and EBITDA growth. And third quarter revenue is again growing strongly by 5.9% versus 2020 at constant ForEx. And this progression is even more remarkable given that the third quarter 2020 already showed a rebound after the second quarter of 2020 that was, of course, affected by the sanitary crisis. Q3 EBITDA grew by a very strong 17.5%, but including an EUR 83 million one-off linked to an exceptional operating financial asset reimbursement in French waste business due to a project completion in the city of Troyes, which we have financed on behalf of our clients. Please note that this one-off is neutral at the EBIT level. And excluding this one-off, EBITDA growth in Q3 remains very strong at plus 8.2% and current EBIT grew by 12.5%. But what I find most significant is to compare our 2021 performance with 2019, which was a record year for Veolia and before the sanitary crisis, of course. You remember that our objective in 2021 was to beat this record-2019 levels. We were already pretty much ahead at the end of the first half. We clearly confirmed our advance in Q3. Compared to 2019, Q3 revenue grew by 5%, EBITDA by 19%, by 9.8% if we exclude the one-off, and current EBIT progressed by 9.6%. So a significant acceleration at the revenue level, but even more at the EBITDA and EBIT level, even compared to the progression registered in H1. These excellent performances are meeting several factors. First, continued and persistent growth in our priority markets which has, for instance, hazardous waste. And more generally, the rebound of waste volumes, which are now back or really back to the precrisis level in all our markets. Second, continued strict discipline in terms of pricing. We have pushed through several price increases in many geographies since the beginning of the year in order to protect our margin and sell our service offerings at the right price. Third, recycled material prices have also been very favorable, rising continuously since mid-2020. Very high demand for cardboard for fast-growing home deliveries, for example, have driven recycled paper prices to very high level. Fourth, efficiency gains have continued to contribute largely to our EBITDA growth. We are ahead of our annual objective of EUR 350 million, with EUR 299 million already achieved in the first 9 months. Moreover, these excellent levels have been achieved despite unfavorable weather in Q3 with raining summer driving water volumes down in France. On Page 8, you can see the 9 months results. Compared to 2020, revenue grew by close to 10%, EBITDA by 23%, excluding the third quarter one-off, and current EBIT by 69% and current net income was multiplied by more than 5%. Once again, it's even more relevant to compare our performance with 2019, which shows how well and quickly we succeeded in erasing the effect of the sanitary crisis on our growth trajectory. And as you can see, our performance is outstanding. Revenue grew by 4.7%. EBITDA was up by 10.2% and plus 7.3%, excluding the one-off, hence, another improvement of our EBITDA margin of close to 40 basis points. Current EBIT increased by 9.1% and current net income grew by 44% to EUR 667 million. It includes the EUR 122 million dividend we received from Suez on our almost 30% stake. And if we exclude the dividend, current net income still grew by 16% compared to 2019. These excellent results are extremely satisfactory and allow us to fully confirm our 2021 guidance, which we had raised during the summer. I now hand over to Estelle who will detail our operational trends. Estelle, the floor is yours.

[Estelle K. Brachlianoff, Chief Operating Officer]

Thank you, Antoine. It certainly has been a very good Q3 pretty much all across the board, both in terms of revenue and new business wins as well as cost cutting and margin levels. I'm on Slide 9. And you can see, in terms of revenue, we are back to pre-COVID levels or even higher in almost all our activities with an overall 5% increase compared to 2019. The quarter has been particularly strong in our solid waste activities posted by recyclate prices as well as by a sustained pricing strategy, targeting specific geographies or customer segments. Volumes have bounced back, including in C&I, which is now around or above 90% of pre-COVID levels everywhere. Hazardous waste activities have enjoyed another outstanding quarter with 8% revenue increase this year compared to 2019 without even including any tuck-ins. Just to mention one example, a state-of-the-art high-temperature incinerators in France have generated 17% more revenue this year than in 2019. We have opened new capacities in China as well. And as far as our U.S. activities are concerned, we are performing well there despite being hit by exceptional weather events in January and September. Volumes of water distributed have been slightly behind in Q3, given the very rainy summer we've had in France. But overall, a strong year for our water activity so far. We have seen a good bouncing back of our industrial services, partially offset by supply chain interruptions, hitting some of our customers typically in the automotive industry. So inflation now. It's a positive news altogether for Veolia, and I thought I should take a few minutes to explain how. And I'm on Slide 10. Starting with our revenue. Most of our contracts are indexed. Typically, each year at the anniversary date of our municipal contract, we compute an indexation formula and increase our price accordingly. Although we can have some lag effects, this is quite protective of our P&L. With regard to nonindexed contracts, typically in the C&I waste collection or hazardous waste treatment, we are designing our pricing strategy which can lead to raising prices at times more than once a year, if relevant in certain geographies. Of course, this has to be combined with a strict control of our cost base, starting with wages increase, which we ensure are not disconnected from contract indexations. Specific and limited exception has to be granted in the U.K. given the shortage of drivers following Brexit. Moving to recyclate price increases. This is overall good news for Veolia. In general, we passed through such price increases or decreases to our customers, be they municipalities or private companies. But they are usually combined with an incentive or sharing mechanism. And last, but not least, energy prices. Here, we have multiple effects that, when combined, lead to an overall slightly positive impact for Veolia when energy price increased. Starting with our energy activities, both in distributing and building energy services. The vast majority of our energy contracts have high pass-through clauses or tariff increases linked to the prices of energy purchases. Following with our energy purchases, our internal policy is designed to protect our P&L from virtual evolutions of the energy price. Therefore, we hedge our gas, CO2 or coal purchasing. Lastly, with regard to power price, we are a net producer of electricity and have implemented the same hedging policy for our power sales. Overall, some delayed tariff increase can lead to temporary benefit or price-cost squeeze, but this effect vanishes midterm. Let's not forget as well that high energy and commodity prices over the long term are boost to Veolia services as we offer our customers the ability to save energy or scarce resources, thanks to our digital tools like Hubgrade or circular economy solutions. And moving now to Slide 11. And I would say 2020 was a lot about adaptation and recovery. I'm very pleased to see that now, in 2021, we are enjoying very good commercial momentum built on strong foundations. I won't mention the full list of contracts won this year. As you can see, the slide is busy. But let me share my satisfaction by mentioning a few of them where Veolia differentiation was paramount. Our know-how in operating and [ optimize ] plants with best-in-class performance and availability as well as electricity generation has been recognized again with the renewal of our Nice contract and the gain of a new plant in Taiwan. We are expanding the boundaries of the concession model as well with a 13-year concession contract to operate the district heating of Tashkent, a massive contract which doesn't use Veolia's balance sheet and follows our winning bid to operate the water in Miyagi, Japan early in the year. Our proprietary technologies are ahead of the competition as well, and I'm on the Slide 12 now. As confirmed with our salt crystallization process, of which we sold new units in Louisiana and Australia to help recycle lithium or our treatment technology for pulp and paper industry influence with the win of an important contract with Suzano in Brazil. We are exploring new frontiers as well. As a leader of ecological transformation, we have to anticipate and find new solutions each time our customers face new challenges in their journey towards a more secular, decarbonized economy or the treatment of new provisions. This is particularly obvious with our initiatives to recycle lithium-ion electrical car batteries in partnership with Renault and Solvay or the production of biofuel we are exploring with TotalEnergies or the full-scale water reuse project in France. I move to Slide 13 and I would say we are still fully committed to transforming this growth and unique positioning into the bottom line, of course, which remains a priority for us all. Our cost cutting and efficiency program is delivering as planned and is definitely continuing full speed ahead. We've achieved EUR 299 million in 9 months, ahead of our annual target of EUR 250 million, which was complemented, as you know, with EUR 100 million COVID-specific recovery and adaptation plan. As planned and expected, the split of this efficiency savings amongst various levels has moved progressively from a large chunk of G&A to now a majority of operational measures, including typically plant yields and digital. Altogether, a very good quarter on all fronts, showing both growth and exceptional margin levels. Just weeks before the merger with Suez, those good results show Veolia can rely on strong foundations.

[Antoine Frérot, Chairman & CEO]

Thank you, Estelle. And I move to Page 14, where you can see our detailed guidance for Veolia stand-alone for the year 2021. You remember that we have raised these objectives when we released our first half results with an EBITDA target now expected above EUR 4.1 billion, representing growth of more than 12% versus 2020. Revenue will clearly be above 2019 as we forecasted. In terms of balance sheet, we target net financial debt below EUR 10 billion. And in terms of dividend, we intend to recover our pre-crisis dividend policy in 2021. Ladies and gentlemen, as you can see, our growth momentum and outstanding levels put us in a very solid position as we are about to integrate Suez in the beginning of 2022. These dynamics will be a great advantage for us to successfully execute the merger and create the world leader in ecological transformation. I now hand over to Claude, who will give you details on our 9 months results. Then, we will answer all your questions. Claude, the floor is yours.

[Claude Laruelle, Chief Financial Officer]

Thank you, Antoine, and good morning, ladies and gentlemen. First, I have to say that I am really impressed by what we delivered over the last 2 months with a clear focus and a lot of hard work from our teams, with a EUR 2.5 billion capital increase and the filing of the EU antitrust. This is really remarkable and it's exactly the time line we gave you when we first announced the operation back in August 2020. I'm also very pleased to present the 9 months figures that show outstanding results in Q3 after our very strong Q2 delivery with weaker profitability and record free cash flow generation. As you can see on Slide 16, for the 9 months figures, revenue grew by 4.7% compared to the same period in 2019 at constant ForEx, which is remarkable, and by 9.4% compared to last year, of course, marked by the lockdowns in Q2 2020. Thanks to a strong operating leverage, with amplified cost cutting, waste volume almost back to normal and increasing recycled prices, EBITDA is above EUR 3 billion, at EUR 3.140 billion and grew by 10.2% compared to 2019 at constant ForEx and by 26.4% compared with last year with a very strong performance in Q3 in almost all our activities, as Estelle described earlier. As Antoine told you, Q3 EBITDA includes EUR 83 million positive one-off due to OFA repayment in our waste activities in France. And I confirm that this has no impact at the EBIT level. This EBITDA-only one-off will be offset in Q4 by CO2 quotas cash payment and IFRS 38 new rules of accounting for IT projects. Current EBIT at EUR 1.258 billion is up 9.1% compared to 2019, thanks to strong EBITDA growth and good CapEx management. Current net income has reached a record level of EUR 657 million for the 9 months and is up 44% compared to 2019. Thanks to a strong and continuous focus on cash management and lower CapEx spending, our free cash flow generation is at a record high in Q3 at EUR 583 million for the 9 months to which you can add the EUR 122 million dividend that we received from Suez in July, leading to a net financial debt of EUR 13.4 billion at the end of September, and not including of course the capital increase, with a significant decrease compared to Q2. We'll see later in the presentation that our debt is well under control. Moving to Slide 17. Let's have a look at the Q3 performance by the main geography blocks and focus on the Q3 2021 column. You can first notice the strong group revenue increase by 5.9% in Q3, keeping in mind that Q3 2020 was the first quarter of a strong recovery last year. If you compare these figures with 2019, you will get 5% in Q3, which is remarkable, and shows the dynamism of our activities with the equivalent of 2 years of growth confirmed in Q3 after Q2. Let's have a look at the different segments. First, France, plus 3.4% in Q3. Water France experienced lower volume during the summer but was much colder and rainy last year -- rainy than last year, partially compensated by tariff increases and recovery in works associated with our contracts. Waste France shows a continuous remarkable performance in Q3, plus 15.5% revenue growth with good volume, similar to Q2, continuous price increases and even higher level of recyclate prices. We'll see later in the presentation that French waste performance is indeed very strong. Second, Rest of Europe with outstanding growth for the third quarter in a row of plus 13%, with very strong growth in Central Europe and a good continued growth of our waste activities in Germany. Sales from the Rest of the World segment, which is still contrasted with 7.5% revenue growth. North America is recovering well, plus 6.1%. Lat Am is back to double-digit growth at plus 12.8%. And Africa, Middle East has also grown double digit with a solid commercial momentum. And Asia progressed by 6.7%, with strong growth in most countries and very strong hazardous waste in China. And fourth, Global Businesses, minus 5.8%, with continued strong hazardous waste revenue plus 30% compared to Q3 last year, offset by slightly lower technology and network activity in Q3 due to high Q3 2020 comparison basis for SADE networks and VWT. But overall, very good earnings delivery for the Global Business in Q3. EBITDA in Q3 is up 17.5% compared to last year. And without the one-off I have mentioned, is up 8.2%, which is remarkable. On Slide 18, you have the usual revenue bridge comparing 9 months 2021 with 9 months 2020. Despite a slightly negative effect from ForEx due to weak currencies in the Americas, all the other blocks are contributing to the sharp rebound of 9.4%, driven first by volumes, plus 4.3%, due to much better commercial and industrial waste volumes despite wave 3 of COVID in Europe, and solid commercial momentum in almost all our geographies. The second main effect was 2.6%, it's coming both from energy prices, which have increased a lot this year, and of course, from the recyclate prices for a total of EUR 489 million. Recyclate prices have increased again in Q3 after a very strong Q2 due to the shortage of cardboard and higher commodity prices. Finally, as we have also told you for quite a long time, we have continued to increase our prices, notably in our waste segment, contributing EUR 280 million in the 9 months or plus 1.5%. Moving to Slide 19. You have more granularity in our waste recovery. Let's focus on the Q3 column where you can see the strong contribution first from recyclate prices, plus 6.3% in all geographies, and up 5.7% in Q2 due to continued increase of recyclate prices in Q3. Carbon in France, for example, hit a record of EUR 172 per tonne in September. Second, from volume rebound, plus 3.2% in Q3 despite continued lockdown in Australia. All our main countries are contributing to this volume rebound. And as an average, with a little bit less C&I but more hazardous waste, we are back to 2019 levels. Third, the solid pricing contribution, plus 3.1% in Q3, with Waste France and hazardous waste Europe leading the effort in line with our policy to gradually increase our pricing, especially for C&I collection and treatment. I'm on Slide 20, where you have more details about the EBITDA evolution between 9 months 2020 and 9 months 2021, with a full operating leverage recovery and weaker profitability of 15.4% coming from very supportive business trends and highest level of efficiency. What do we see as main contributors? First, a massive volume recovery impact for EUR 267 million or plus 10.7%, with strong rate volumes overall and good commercial momentum as the Estelle described earlier. Second, the strong cost-cutting effect of EUR 299 million resulting from an ambitious cost-cutting plan of EUR 250 million for 2021 that is well advanced and highly competitive. Third, one thing to highlight on the slide is a very positive impact of recyclate prices of EUR 75 million, thanks to high commodity prices and, again, high demand for carbon and paper. You can also notice the favorable impact of the scope effect for EUR 66 million, which is mostly the impact of our recent acquisition in Central Europe, and also all this performing very well. Moving to Slide 21. Let's review now our activities by geography, and we start, as usual, by France. Despite rainy cold summer, Water France revenue, as you can see, is up 1.7% compared to 2020, with tariff increases of 0.7% and waste recovery. Waste in France experienced a very sharp rebound in Q3, plus 20.6% compared to last year and even plus 10% compared to Q3 2019, even higher than H1, which remain the effects. First, the volume is impacted by lockdown measures, overall, up plus 7.3% year-to-date. Second, continuous price increase in C&I collection and treatment. And third, sharp increase of recycled prices, especially in nonferrous metal and cardboard.EBITDA of France is sharply up even without the EUR 83 million one-off item in waste, thanks to the resilience of the water activities and the strong rebound in the waste business. Moving to Slide 22. Let's have a look at our activities in the Rest of Europe with a strong growth in Q3 in line with H1, starting by Central Europe. Revenue increased by 23.3% compared to last year, in line with H1, mainly driven by a very strong contribution of our energy district heating business, linked with energy price increase and the integration of the assets we bought last year in Prague and Budapest, which continue to perform very well. U.K. revenue increased by 6.3%, showing a solid rebound after a decrease in Q1 and a rebound in Q2 due to much better C&I waste volumes after the end of the lockdown. Thanks to the very solid C&I business model and a record availability of 93.7% and good cost control, the U.K. financial performance has recovered very well. Germany also experienced excellent results despite lockdown measures at the start of the year, thanks to restructuring and high recyclate prices and strong energy business benefiting from cold weather in Q2. EBITDA performance of the Rest of Europe is very strong compared to 2020 with a good operating leverage and an outstanding contribution from Central Europe. Moving to Slide 23. We have seen a confirmed recovery in all regions in our Rest of the World segment and a good operating leverage, and let's start by Asia. Revenue grew by 3.5% compared to 2020 coming especially from China. Chinese activities are up 6.5% at constant ForEx. And our hazardous waste business in this country continues to grow very well, with revenue up 35% compared to last year and up 68% compared to 2019, boosted by the new sites under operation. India as well is growing fast, plus 48%, with new investments in hazardous waste as well coming online. Latin America continues to grow at a strong pace, plus 15.1%. As we told you, North America refineries are running now at full capacity and the industry is recovering well. Our North America operations are growing by 3.5% with continuous strong performance of our municipal waste activities, water activities as well. Australia, despite good weather conditions, experienced some remaining COVID impact in Q3 and has not yet fully recovered its nominal C&I waste volumes. And Africa, Middle East is performing very well, plus 10% after flat 2020, with new building energy service contracts in the Middle East and solid volumes in Morocco. EBITDA of the segment is sharply up compared to 2020 with a strong contribution from the high-margin businesses such as hazardous waste. On Slide 24, you have the details of our Global Business activities showing a very strong rebound. Water technology continued to perform very well with revenue up 6.1%, with very good commercial momentum, especially in the niche business such as sulfur removal for offshore rigs or evaporation and crystallization with cutting-edge technology. SADE network activities are fully recovered at constant scope after the disposal of our telecom activities in November last year and is well oriented, plus 7.3% at constant scope. Hazardous waste is performing amazingly well in Q3, as Estelle told us, with price increases and better volumes leading again to a weaker profitability. EBITDA of the segment is also strongly up, in line with increased revenue and efficiency measures. Now let's go down the P&L in the next two slides before we have a look at the cash flow generation. I'm on Slide 25, where you can see how the 26.4% EBITDA increase at the end of Q3 is boosting our current EBIT by 68.7% at EUR 1.258 billion. Renewal expenses are very stable if you compare to previous years. Depreciation and amortization are stable at constant scope and ForEx compared to last year. The increase is mostly coming from the acquisition we made in Central Europe. You can see the effect of the French waste OFA repayment, offsetting the EUR 83 million EBITDA one-off. So it has no impact at EBIT level. On provisions and fair value adjustments, we are benefiting from a few industrial capital gains on asset disposal in Scandinavia and also lower insurance provisions as we had to take a strong provision for insurance over the last 2 years. Our JVs have performed much better this year than 2020. And the impact, if you compare the numbers with 2019, is mostly coming from the Shenzhen concession disposal. As a result, current JV is at a record-high level at the end of Q3 and is growing by 9.1% compared to 2019, which is again remarkable. Moving to Slide 26. Let's have a look at our record current net income of EUR 667 million, plus 44.4% compared to 2019. The cost of net financial debt is at a record-low level at EUR 242 million. We are benefiting, as we told you in Q2, from lower interest rates in many countries leading to lower cost of euro debt swaps into foreign currencies. And as a reminder, we had a EUR 20 million positive one-off in Q2. You can notice the impact of the Suez dividend for EUR 122 million voted on June 30 and paid on July 8. Our income tax rate is at 25%, in line with our expectations for 2021. Let's talk now about the free cash flow generation. I'm on Slide 27. You have more details about the very strong cash delivery in Q3, almost EUR 1 billion better than last year. After an outstanding free cash flow in H1, we continue to perform very well in Q3 by generating more than EUR 300 million for the third quarter, just on the operating side, thanks to strong EBITDA growth, good CapEx management, especially on maintenance CapEx, and very strict cash discipline in all our countries. The different layers of management continue to focus very well on cash delivery with impressive effects at group level. Looking at the debt level. We can compare September 2021, after our investment in Central Europe, with September 2019, before the disposal of C&I in the U.S., the heating district in the Boston area. Thanks to our strong cash management and discounting, the EUR 1.4 billion for Suez block acquisition, our net debt is almost EUR 500 million below 2019. EUR 12 billion this year compared to EUR 12.5 billion 2 years ago, with the group producing more EBITDA and more EBIT. After the sanitary crisis and before merging with Suez, Veolia is leaner and more profitable. I'm on Slide 28, where you can see the details of the debt variation since the beginning of the year with a net CapEx booked at EUR 1.355 billion, and the working capital variation sharply reduced at EUR 360 million, thanks to our strong collection in most of our geographies. I'm on Slide 29. After this record-high Q3 and its outstanding financial performance, I can fully confirm our strong confidence in the end of 2021 and fully confirm our guidance for the year. Thank you for your attention.

[Antoine Frérot, Chairman & CEO]

Thank you, Claude. And ladies and gentlemen, the floor is now yours. We are ready with the [ Veolia ] group to answer your questions.

[Operator]

[Operator Instructions] We have the first question from Xavier Regnard from Bryan Garnier.

[Xavier Regnard, Research Analyst]

Xavier Regnard from Bryan Garnier. Congrats for the results. Just one question from my side. We've heard U.S. waste managers speaking about labor inflation, shortage of drivers and cost and supply chain constraint. A few also experienced this inflationary environment, and there is this price escalation formula attached to an index, which is often based on a look back over the prior year. Can we expect your pricing power to accelerate next year to reflect this high cost and potentially drive margin expansion?

[Antoine Frérot, Chairman & CEO]

Thank you. Estelle will answer your questions, sir.

[Estelle K. Brachlianoff, Chief Operating Officer]

Thank you for your question. I guess, two parts of our business, the indexed and the nonindexed. So I said, the vast majority of our contracts are indexed. So you are right. Since the inflation is going up throughout the year, we expect the indexation formula next year to reflect back on the inflation of this year, and therefore, be positive and upper -- on the upper side next year compared to this year. So yes, we should have a push on the indexation formula next year very certainly. So there is a little bit of lag effect, but that's exactly -- the description you made is exactly right. In terms of the non-indexed contract, which is reduced, as I said, and particularly in the case for say, waste contracts, pricing power is more constant. So it is as it goes. And we've already increased prices this year. As you can see on the slide -- let's me check which one it is, the slide about waste price increase, on Page 19, you'll see that we've increased the price by 3% for the quarter and more than 5% for the first 9 months of this year. And we intend to go on exactly like that at this same type of pace for the next few quarters. So basically, yes, the price and the indexation should go up in the next few months, just following what we've seen this year.

[Xavier Regnard, Research Analyst]

Okay. And so it could potentially drive your margin higher, right?

[Estelle K. Brachlianoff, Chief Operating Officer]

So I guess in terms of the margins, we have some element of, yes, it should help a little bit with the margin. Inflation is usually good news for Veolia, as long as we maintain which is, of course, our intention, our cost base under strict control. And it's exactly what we've seen this part of the year, and we intend to maintain in the next month and quarters ahead of us.

[Operator]

Next question from Nicolas Bouthors from AlphaValue.

[Nicolas Bouthors, Analyst]

I had a question regarding France because I would say, starting from 2 to 4 years, a material part of your concession contract will be renewed and renegotiated. So I'm wondering if you could elaborate a little bit on what the competition should be given that Suez will be much smaller and Veolia mechanically much higher and much stronger. So do you think it will change the game? And what is more generally your view regarding the competitive environment and mid- to long-term outlook for France?

[Antoine Frérot, Chairman & CEO]

Don't worry the news media. It will be a EUR 7 billion company. We'll be between the three main competitor, main players, in the water business in the world, meaning that with all the competencies they already have in France, they will be the same strong competitor in the French business and also elsewhere. So we'll have exactly the same level of competition we had in the past in France, especially because all the forces of the actual Suez will stay with the new Suez, and they know very well our business, of course, and they will be the strong competitors they already are.

[Operator]

Next question is from Tancrède Fulop from Morningstar.

[Tancrède Fulop, Equity Analyst]

I have three. The first one is on the contribution of commerce and volumes to the EBITDA. It seems that it was negative in the third quarter. So if you could explain us why. Maybe it's mostly linked to the lower water volumes in France. This is my first question. The second one, year-over-year, EBITDA target now seems very conservative. So I was -- so if you could explain why you maintained it.And the last question regarding hazardous waste. You highlighted the very strong performance, and it would be interesting to know if it is running in line or above your 2023 revenue target of EUR 4 billion for hazardous waste.

[Antoine Frérot, Chairman & CEO]

Thank you. Claude, can you please answer the question?

[Claude Laruelle, Chief Financial Officer]

So the contribution of commercial and volume, you're comparing, if I understand well, the bridge of EBITDA with the bridge of EBITDA in Q2. I don't...

[Tancrède Fulop, Equity Analyst]

Yes.

[Claude Laruelle, Chief Financial Officer]

Okay. So what we can tell you about the contribution of the different segments, yes, you have the impact of the rainy season in France because Water France volume are minus 2% year-to-date. But we don't expect such a good event versus strong performance, Water France continue to perform well in terms of -- because they are doing some cost savings in terms of EBITDA delivery. We will look maybe a little bit more in detail to go further to this answer.

[Estelle K. Brachlianoff, Chief Operating Officer]

And shall I add to Claude's answer because you commented on the volume of water, which is not predictive of the future. It's just the fact of the rainy summer. But in terms of volume of waste is a plus all across the board, pretty much in all geographies in Q3. And we've seen a bouncing back in volumes in C&I as well as in other stuff. As you can see on Slide 19, because the volumes and activity level is up by 3% in the third quarter, like it was up in the quarters before as well. So it's a continuous growth in volume and not only in price in waste.

[Antoine Frérot, Chairman & CEO]

Claude, about our guidance?

[Claude Laruelle, Chief Financial Officer]

So in terms of guidance, as you know, and as Antoine tells you all the time, we don't raise the guidance usually every year -- every quarter. So we raised the guidance exceptionally for the -- in Q2 after the very strong Q2 delivery and a very good start to the year. So, again, we are telling you that we will deliver about EUR 4.1 billion. And as we told you, we are very confident to have this very strong contribution of Q4. And so we are very strong -- we have very strong confidence that we will have a good Q4 and have a strong delivery. So as we don't raise the guidance every quarter, you understand that Q4 delivery will be good. And at the end of the year, we will show you good EBITDA numbers.

[Antoine Frérot, Chairman & CEO]

And perhaps some comments about the one-off we have in Q3 on EBITDA level.

[Claude Laruelle, Chief Financial Officer]

So we have the Q3, which is EUR 83 million. And you understand that this Q3 will be offset in Q4 by the CO2 quotas cash payments and slight -- and also a slight impact on the IT new accounting rules. But overall, we expect Q4 to be strong in terms of volume and prices.

[Antoine Frérot, Chairman & CEO]

So we are comfortable to confirm our guidance we have at the end of the H1. About -- your last question, you see that we progressed a lot after 9 months, for example. In terms of turnover of our hazardous business, the growth between 2021 and 2019 is more than 16%, and well split between all geographies, meaning between Europe, for example, and outside Europe. So we are and we will be on the trajectory to reach our goal of EUR 4 billion in 2024 despite the prices. And we are comfortable with this goal we have. You know that we still have some plants under construction in Asia, in North America. And we will continue to grow quickly in this business. So we confirm the EUR 4 billion target.

[Operator]

Next question from Emmanuel Turpin from Societe Generale.

[Emmanuel Philippe Turpin, Equity Analyst]

Two questions on my side. First of all, to focus on the growth in waste volumes in Q3, very good at 3.2% year-on-year. Could you give us a bit more color in terms of how it looks on the different components of waste -- landfill waste to energy and sorting and recycling? And any effect of scope in this good volume growth? That was my first question. On the second one, to some extent linked to the first one, is about your comments on the supply chain disruptions. You did mention it had some effects in some of your services. I was wondering if you could give us more color on how this global supply chain disruptions affected your business. It didn't look like it was such a negative effect, but a bit more color would be appreciated in terms of Q3, but also what's your anticipation for coming quarters as you discuss this with your many different clients?

[Antoine Frérot, Chairman & CEO]

Thank you, Emmanuel. Estelle will answer your questions.

[Estelle K. Brachlianoff, Chief Operating Officer]

Thank you, Emmanuel. In terms of the volume of waste, you're right, we've seen an increase of 3% -- 3.2% in the third quarter compared to the year before. And the answer is pretty much all across the board in all geographies and all types of businesses. So there is no scope effect to answer your question. It's more even the opposite way around. We sold the depot here and there. So it's really, I would say, organic growth of volumes and in all geographies. So we've seen the bouncing back in Germany, a bouncing back in the U.K., a bouncing back in France in terms of volumes. I guess the only nuance would be a little bit of lockdown, few weeks in Australia. But apart from that, really, it's all across the board. And it's all across the type of businesses we have in waste. So obviously hazardous waste has seen a plus in volumes. But we've seen C&I bouncing back a lot which, as you know, is a big indicator of like the economy and GDP. So that's something we track super like, I would say, not week-on-week, but month-on-month. And we've seen a good bouncing back on C&I as well. I guess apart from a few here and there land fillings, which were a little bit lagging behind here and there, it's really across the board plus in waste volumes. In terms of supply chain disruption, basically, we haven't seen any supply chain disruption of our own supply chain. So we've been able to maintain pretty much everything we wanted to deliver be it on CapEx delivery, on our purchasing. I guess, supply chain disruption is something we've seen for our customer on the opposite. As been typically, automotive industry, as you know, has been hit by the shortage of chip coming from part of Asia. So some of our customers in the automotive industry have closed their plants or reduced their production compared to their anticipation because of supply chain disruption. And therefore, it's why this business of serving automotive industry was lagging a little bit behind in Veolia, but we haven't been hit ourselves.

[Antoine Frérot, Chairman & CEO]

Thank you, Estelle. Another question?

[Operator]

Next question from Philippe Ourpatian from ODDO BHF.

[Philippe Ourpatian, Analyst]

I have two questions. The first one is concerning the different lag you mentioned. It was good view of an issue to re-mention how inflation was impacting Veolia, but could we have a kind of, let's say, gross figure concerning the lag you are already embarking at the end of the 9 months or the estimation on '21? What could happen and be offset in '22? It could be a global figure or somewhere splitted between the main two, which are waste and Energy Services. That's the first question. And mainly for Energy Services concerning, as you can imagine, the heating business in Eastern Europe. That's the first question. The second question is, could you just make some comments about the inquiry launched by the Suez Trade Union with the [ Park National CNOC ] just to give us your view and what could be, let's say, the "potential impacts" on the company and on the merger?

[Antoine Frérot, Chairman & CEO]

Philippe, Claude will answer the first question. I will just comment on the second one. It is more a question of journalist than a financial analyst, as you can see. But I understand your question given the context. So I want to take time to answer it in a complete way. There is no impact to Veolia about this case. And I will answer in the complete way. Probably in the next call we will have at 10:30 with journalists, I propose you connect yourself on the call to have this complete answer. Claude, please, about the financial results.

[Claude Laruelle, Chief Financial Officer]

Yes. It's well-explained that due to the tariff mechanism, especially on the heat business in Central Europe, which is the biggest one, we are -- they are taking into account previous year's cost in order to forecast and to fix the next tariff. But Philippe, you have to keep in mind that we have a hedging policy. And the hedging policy is not only on electricity, it's also on fuel that we are using for those contracts. So as we have a gradual impact on energy prices and also heat, we have also a gradual impact on our side based on CO2 quotas and also the fuel we purchase. So the -- in terms of lagging effect, it's very limited, and it has no material effect for 2021.

[Operator]

Next question from Andrew Fisher from Berenberg.

[Andrew Fisher, Analyst]

Just one quick question on the margin sharing that you talked about on secondary raw material prices. I'm just wondering, is this the same across all of the main secondary raw materials that you process? Or is it specific to the fact that it's paper and cardboard that's particularly strong at the moment? And then just also, should we take the EUR 75 million of EBITDA increase against the EUR 360 million -- or just about EUR 360 million revenue increase as a rule of thumb as to how we should sort of think about this margin-sharing going forward? Or is there some sort of threshold that comes into play before the margin-sharing takes hold for you, please?

[Antoine Frérot, Chairman & CEO]

Estelle, perhaps?

[Estelle K. Brachlianoff, Chief Operating Officer]

Yes. Thank you. I guess, two questions in one. In terms of, does it concern all the materials? The answer is basically, yes with, I would say, an exception in some contracts in plastic, where we on purpose de-correlate it totally from virgin, and we are paid basically a transformation fee, if you want. So in terms of all the other materials, yes, it's kind of shared across the board. You have to have into mind that basically, in terms of recyclate we sell, half of it roughly is paper and cardboard. Hence, the big effect of the paper and cardboard price, which is basically double that of last year as we speak today. In terms of sharing mechanism, the rule of thumb you have, which is basically 20% ends up in the EBITDA or the bottom line is a good one. Of course, you have plus and minuses and it's a mixture of our contract, but the rule of thumb will be exactly the right one.

[Operator]

Next question from Juan Rodriguez from Kepler Cheuvreux.

[Juan Camilo Rodriguez, Equity Research Analyst]

I have three in my side. First is coming back to the inflation-linked contracts. So can we expect most of the upward-taking inflation to be passed on through tariffs for 2022? Or we could see some spread over '22, '23 period? That is the first one. The second one is on energy prices, especially coming back to the sensitivity power CO2 price as you signal is neutral for 2021. Can you please give us more color as to what is your hedging in terms of prices and net import for 2022 and '23? That's the second one. And the third is on the new Suez agreement. Now that the discussions with antitrust authorities have officially started, if there are additional remedies requested from the EU or the U.K., could there be an evolution on the agreed terms for new Suez to account for additional assets? And where do you see the earn-out likeliness you were saying after the Suez' strong 9-month performance?

[Antoine Frérot, Chairman & CEO]

Thank you, Juan. Estelle will take the two first questions. I will answer the last one.

[Estelle K. Brachlianoff, Chief Operating Officer]

So I guess, the first one, basically, the lag effect will come into place and progressively into 2022. But at the end of 2022, I guess, the extreme majority of it will have been transfer through tariffs. So basically, no impact to anticipate in 2023. So it's 6 months to a year basically lag effect. No more than that. In terms of hedging policy, our hedging is basically over 3 years, which means now we've purchased, of course, 100% for this year, 2021. We already have purchased 75% of all CO2 and gas and all the rest of it for 2022, and 25% for 2023. That's the way we hedge and protect our P&L from big variations, as I explained in my presentation.

[Antoine Frérot, Chairman & CEO]

About the last question, Juan. You know that we already addressed the main task in terms of antitrust in Europe when we decided to leave to the new Suez the entire French water business and the solid waste business. So for the EU, the antitrust issue are much smaller. You probably hear about the industrial water business. You should know that for Veolia, this industrial water business in the EU is a very small one, around EUR 60 million. It is the same size for Suez. So even there are some overlap. The remedies we will propose will be a very small amount in terms of turnover and it will be the same for the rest of the issues. And in U.K. and Australia, as we forecasted from the beginning that we will have also some small remedies. Globally, the remedies should be small compared to the size of the deal. And it will be, I would say, small or marginal compared to the EUR 10 million of turnover we've won from this deal.

[Operator]

Next question from Mikel Zabala from Bank of America.

[Mikel Zabala, Associate]

It's just one on the antitrust, especially on the time line. So you said we should expect preliminary feedback by the end of November and then a final communication on Phase 1 by mid-December. If the European Commission has any concerns on the deal, presumably small, what would be your ability to address those between those two communications? So between the end of November and mid-December. Would you, for example, have the chance to propose new remedies or address their feedback to some degree? Or would that have to wait, if anything, to phase 2?

[Antoine Frérot, Chairman & CEO]

Estelle, please.

[Estelle K. Brachlianoff, Chief Operating Officer]

Yes. The system works as if we file or filed, which we've done on the 22nd of October, as Antoine mentioned. Then we have a few weeks of discussion with EU. As you can imagine, we've been having those discussions for the last 9 months, pretty much. So we've done a very long prefiling. So we know, of course, all the questions and we've discussed at length with the EU about that. So we don't anticipate a big surprise at all. And we -- the date of the end of November is precisely here for us to put remedies on the table. So it's not a now-or-never moment. We have a few processes which will go on until the end of November to finalize a remedies package, typically, on industrial water, as Antoine mentioned. That's exactly the next few weeks, we have to finalize this package. And then, of course, the decision will be made in the next 2 weeks following this remedies package being put on the table.

[Antoine Frérot, Chairman & CEO]

It is the reason why we think we will get the clearance at mid-December because the remedies, which will be not very big, it's a small size. We will be in a position to satisfy the commission.

[Operator]

There are no more question by phone. Mr. Frérot, any further conclusion?

[Antoine Frérot, Chairman & CEO]

Yes. Thank you very much for being here during this presentation of our results. You certainly understood that, that's why I would say, new record results after the record year of 2019. We are very comfortable with our guidance. And we are in a very good position to integrate or to merge with Suez from the beginning of the next year to build a splendid company. So the next meeting we will have together will be for the full year results, but we will also give you at that time the figures for the new company. The first figures, it will be March 15. Thank you very much, and have a good day.

[Operator]

Thank you. Ladies and gentlemen, this concludes the conference call. Thank you all for your participation. You may now disconnect.