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. Madame, 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? I'm on page four of the slideshow. First of all, our first half results are very strong and enable us to fully confirm our 2022 guidance of an organic growth of EBITDA between 4% and 6% growth and 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 enriching of our know-how and 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 five.
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, the significant impact of the first time consolidation of Suez assets since January 18th. The growth of our revenue and results has been very similar in Q2 and Q1 when taking into account the usual seasonality of our energy activities, as well as a very specific base effect of 2021. Revenue grew by 46% to 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 a 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. Waste volumes were strong and we maintained our proactive pricing policy, whereas recycled prices remained quite high. Water benefited from higher 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% and 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 six 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 VVT. Solid waste grew by 8.3%, mostly due to pricing, increased recycling price, tariff increases, and higher electricity revenue from our incinerators, but also thanks to good level of activities in all our geographies and growing volumes.
The increase of hazardous waste is even stronger at 12.2%, notably in Europe and in North America, with volumes and prices sharply up, combined with the high oil prices. Local loops of energy were driven by the strong increase of heat and electricity prices and favorable indexations, notably in Central and Eastern Europe. While weather impact was rather unfavorable due to a mild winter. Energy services and industrial services were also driven by energy prices, but also by contract wins, for instance, in PPP in Italy in 2021. On page seven, I would like to give you the reasons behind our confirmation of our outlook path, notably EBITDA growth of 4%-6%. We reach, 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. 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, and 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 six months, whereas activity levels were far from their normal level in the fall 2020, if you may recall. Regarding inflation, I'm on page eight, high inflation is globally neutral or slightly positive for Veolia, as you can see in our results. Two reasons for that. 70% of our revenue, mainly municipal contracts, is indexed. For the remaining 30%, our proactive pricing policy has resulted in price increases at least matching our cost increases since mid-2021. For the 70% index portion of our revenue, tariffs automatically increase with inflation once or twice a year, sometimes more often, like in Chile or with a bit of delay or with various mechanisms depending on the countries as it is illustrated in page eight.
For the remaining 30%, typically industrial or tertiary clients, I implemented a very strict pricing discipline already four years ago, so that the priority of everyone in the company would be the fair remuneration of our services and not the volumes. This has been one of the key factors of our quick recovery post-COVID. This policy has also enabled us to react quickly in the spring 2021 and to put in place price increases adapted to the new inflationary context, which is bearing fruit today. On page nine, you can see that we maintain a very sustained rhythm of cost savings and achieved EUR 170 million of efficiency gains in H1, fully in line with our EUR 350 million annual objective, which was increased 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 a strength of Veolia for many years now and certainly an asset in the current environment. Discipline remains a priority. We are also very much in line with the synergy plan of the merger with Suez, and we have delivered 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 Januar18th , is attributable to anticipation, preparation and discipline. We have built a synergy plan BU by BU since 2021, which has enabled us not to waste any time and to deliver from day one.
In terms of energy purchasing itself, our hedging policy is protecting us against price volatility. We have also accelerated our efforts in the last 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 purchases are now 95% secured and 70% secure for 2023, to be compared with 35% at the end of Q1. Moreover, our suppliers are always first-rank 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.
Here too, we haven't wasted any time since we launched as soon as last March a specific program called ReSource. EUR 150 million CapEx envelope is dedicated to these plans, which aims to increase our energy production by 5% and to reduce our energy consumption by 5% within two years. We in fact offer services to our customer to help them reduce their energy consumption with fast-growing business, notably in Italy and in the Middle East. We have developed for the last 10 years, step-by-step, various know-how to produce local energy from alternative sources of fuel, from non-recyclable waste to sludge or waste 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.
Beyond that, both our model and our strategic positioning are strengthened by the current environment. A few words to give you colors about these opportunities. The current geopolitical context reinforces the European countries' demand for energy independence, not to depend on unreliable imports from other countries. We have part of the solution with Veolia, as we've learned how to produce locally sourced renewable energy. Our sewage treatment plants, our landfill, produce biogas, and we have the technologies to clean it up and put it back into the grids. 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. Other examples of current events.
Summer 2022 is one of the warmest and driest on record in the Northern Hemisphere, and water restrictions are affecting large populations increasingly earlier in the year. The solutions are out there. Veolia knows how to improve the efficiency of water distribution networks to limit losses, thanks to our technologies and know-how, combined with the power of digital technology. We also have a unique know-how, enhanced thanks to the partnership with Suez, to recycle wastewater. The development potential is really, really significant. Just one figure: 15% of the water is reused in Spain, 90% in Israel, and only 0.1% in France. Veolia's business is the ecology of solutions that we increasingly need, as we see every day.
As an illustration, you can see on page 12 a few key innovative contracts won in the first half, showing our expertise in complex water processes, water reuse or decarbonization. In 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 client extend its plant without increasing its water needs. In the Vosges region in France, Veolia will build and operate a biomass cogeneration facility, enabling our client, the paper group Norske Skog, to reduce its CO₂ emission by 200,000 tons per year. Total backlog of the contract, which is EUR 225 million.
In energy again, our very recent contract in Oman, in partnership with TotalEnergies, will allow us to use solar panels to supply energy for the Duqm desalination plant. I could give you many more example of our differentiation and know-how. In this context, I'm on page 13. The merger with Suez is a major advantage and an excellent strategic move with significant value creation in the short term and in the long term. In the short term, of course, 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 Suez team that have joined us is taking place in the best conditions. Thanks to the work carried out in the summer of 2021, all the teams were able to be set up from the first day in the first countries and at the head office. 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 a nearly equal executive team is responsible for combining the waste activities of Veolia and Suez in that country, in which we are now number one of the sector. We are all sharing the same culture, the same vision of the environmental challenges, and the same objectives. Bringing together our teams, know-how, and technologies allows us to enhance our offerings and differentiating solutions, such as water reuse with Advaris in Spain, to give only one example. On page 14, you can see the details of the antitrust divestitures we have signed in the context of the Suez merger.
Valuations are all well above Suez acquisition multiples, which provide 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. Organic growth of EBITDA of between +4% and +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 result of the first half demonstrates once again that Veolia is a solid, efficient, 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, six months after the merger, and I'm very pleased to report a very strong set of results. We experienced a strong revenue growth, +12.9%, that's constant scope and Forex, with continued solid volumes, a favorable pricing and indexation of our long-term contracts, and recycled prices that remain high. EBITDA is up 6.1% in the upper range of our guidance for 2022. As we told you during Q1 presentation, as energy pass-through in a vast majority of our contracts, it is normal to have revenue growing much faster than EBITDA.
Combined group current EBIT is growing very strongly, by 20.2%, leading to a current net income of 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 the revenue variation by the main geographical segments with the new segmentation we presented in Q1. Due to the high energy prices, rest of Europe and its heating network and very efficient cogeneration is really driving the growth of Veolia in Q2, +20.3%. The rest of the world segment is experiencing solid growth of +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, +7.7%, and France had a good quarter with less low-margin works for SADE networks activities. The remaining French business is very solid, as we will see later, with solid waste revenue and good water indexation. I'm on slide 19 with our usual revenue bridge detailing the different growth variation.
First, the scope effect, -1.6%, is due to the disposal of a couple of antitrust assets in France and in Australia, plus a Scandinavia disposal that happened last year. Second, the organic revenue growth is very strong in H1, +13%, with three main causes. The continuous volume and commercial effect, you can see on the slide, for 3%, with a good dynamic, for example, in our energy business in Italy, as Estelle mentioned, and in the Middle East. Also new CMA contracts in the U.K. The energy price effect for more than EUR 1.1 billion or 6.2% revenue increase. The pricing effect on water and waste, +2.8%, that includes escalation formulas in our municipal contracts and voluntary tariff increase in our commercial and industrial waste activities.
We continue to increase waste prices in July. I give you two examples. In hazardous waste, +5% in Europe and +10% in the U.S. I'm moving to slide 20. Let's have a look at the EBITDA bridge showing +6.1% organic growth at the top of the guidance range, which is +4% to +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.
The synergies that have delivered EUR 31 million in Q2 after EUR 21 million in Q1, total 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 recyclates and energy prices for EUR 70 million. It's mostly cardboard for recyclates 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 within negotiations.
We have also discovered a couple of one-off on the waste 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. I'm 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 reminder, were strong in the other geographies. We continue to have a similar trend of good volumes in July. Price increases remain good at 3.2% and cover inflation in our waste activities. Recycled prices continue to stay at a high level in Q2, leading to +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, +0.3%, and good tariff indexation, +3.4%. The slight decrease in revenue is due to a non-core 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 in 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, +7.4% for the semester after +6.8% in Q1.
Hazardous Waste Europe and the Suez combination are producing strong results. Finally, the SADE Networks activity 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, +47% in all countries. Water revenue is +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, +11.8%, both on the commercial and operational side. On the commercial side, we continue to gain C&I contracts, driving the activity organically. On the operational side, we have a new record of PFI availability at 94.8%. Southern Europe is also growing strongly, up 24.5%, with the effect of the energy prices in our three main countries. In Spain, Agbar volumes were up 2.2% in 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 recycled 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. Fourth, in Australia, with robust and solid waste volumes. In Asia, we had 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 technology segment. Veolia Water Technologies continues to perform well with a strong financial performance despite lower revenue with a strong solution business, but less large desalination project this year after the completion of three main projects in the Gulf area. The new business model allows Veolia Water Technologies to work on the higher margin segment and can be more selective in new bookings. We have a very strong pipeline of projects which is promising for 2023. WTS continue to be under wholly 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 EWT despite a slightly lower revenue, demonstrating the strength of the new business model. When on the other side, WTS EBITDA is down with few one-offs in Q2 2021, highlighted in the EBITDA bridge on the previous slide. I'm now on page 26, and let's see how EBITDA increase is feeding the current EBIT. Renewal expense are only slightly up by EUR 7 million at EUR 147 million. Amortization and provision are slightly down by EUR 34 million. 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.
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 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 scope that we have acquired, we are not able to issue a pro forma calculation for this lower part of the P&L.
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 standalone side, after an exceptionally low level of interest paid in H1 2021, with few positive one-off and much lower swaps to local currency than usual, in H1 2022, we are back to the same level as 2019 and 2020, despite much higher interest rates. The euro and dollar debt is at a very, in a very large proportion, more than 85% at fixed rate. As we don't have to issue new corporate loans 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 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. 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. I'm 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 two 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 non-current 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 non-current 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 has improved by EUR 150 million compared to Q1, and the working capital remains 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 eight 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 15th and paid on July 6th, 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 disposal that are under process, which total 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.
After the Suez UK disposal, the leverage ratio will be well below 3 x 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 a 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. After this good H1, we fully confirm our guidance for 2022. Like-for-like, EBITDA will grow between 4%-6%. The current net income will be around EUR 1.1 billion, which means an increase of more than 20%. EPS accretion for 2022 around 10% and around 40% for 2024. The leverage ratio around 3 x at year-end. Thank you for your attention.
Thank you, Claude. I will now let you ask questions.
Ladies and gentlemen, if you wish to ask a question, please press zero one on your telephone keypad. We have a first question from Ajay Patel from Goldman Sachs.
Morning, thank you very much for the presentation. I have three questions please. Firstly, just on the working capital swing and the guidance that that should reverse in the second half of the year. I just wanted to understand with the current market environment, high commodity prices, is there a step up in the working capital that needs to come through over the coming years and a greater requirement of capital just in this environment? Secondly, on your slide on 20, where you talk about the price cost inflation 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 talk about hedging. I'm very thankful for that. Just any indications of price that you could help us with there? That's it. I think that would cover everything I have for right now. Thanks.
So.
Claude, maybe for the.
First two.
First, two questions.
Yes. In terms of working capital reversal, what we see is that we had a significant revenue increase in H1. It means that this revenue increase is driving working capital up. We expect the same type of trend in Q3 and Q4. 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.
You understand that it's a mix of a contract renegotiation because we continue to give, when we renegotiate a contract, we give back productivity to our clients, and also the cost which is not yet passed to our clients. What you have to understand, we saw some inflation going up during the first semester, so the escalation formula in our municipal contract is catching up with inflation. As long as we have inflation going up, we'll not be able to reduce that level. When inflation is stabilized, we'll be able, with our escalation formula, to recover the inflation that is not yet in the escalation formula.
I guess in addition to what Claude said, I think basically half of our cost efficiency savings translated and kept, if you want, in EBITDA growth is a very good achievement that we've been achieving over the last few quarters, and we intend to go on this way. In terms of your third question about hedging of energy, the overall idea for us is really to protect our P&L, and that to be able to confirm that inflation is neutral or slightly positive for Veolia. Meaning we buy and sell energy in advance to protect from the various variation. Plus on the other side, on the revenue side, we have indexation and tariff increase, which basically follow the price we have bought the energy, if you want, with some lagging effect at times.
Overall, it protects us from the ups and downs. That's why, you know, inflation, including in the energy price, is neutral for Veolia.
Thank you very much for the answers. Thanks.
Thank you. The next question is from Arthur Sitbon from Morgan Stanley.
Hello. Thank you for taking my question. The first question would actually be on, I was wondering if you could comment on the performance of the business so far in the third quarter? In July and, well, the first few days of August, mainly on the more industrial activities of the business. Then my second question is on energy in Eastern Europe. I was wondering if you consider your ability to pass through the cost as in, for now, and if there are any discussion on intervention on tariffs in the various review of? I know there are talks of windfall profit taxes on electricity in the Czech Republic, for example.
I was wondering if there is any to the tax business activities. Thank you.
Thank you for your question. I guess, you know, in the third quarter, as you may expect, you know, we're only three days into August, so I won't comment on the quarter as a whole. 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 and in the first quarter of the year. 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. It's a base effect plus, on the opposite side, a really a flip to the opposite this year. 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, you know, 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. It costs a lot less for a family to heat their home when they are connected to a district heating than if they were to do it by themselves. It is a push towards a district heating connection as well.
Thank you.
Thank you. The next question is from Vincent Ayral from JPMorgan.
Yes, good morning, and good set of results today. I have two questions here. One coming back on the summer which has been extremely hot, third heatwave starting in France. Do you have any sensitivity you could provide to us, basically, on this topic? Because every year we have to check what has been the weather and see if it's a net positive, net negative. Ultimately, your volumes so far for Q3 have been up how much globally? Not the Greater Paris area, but how much at a global level? 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 to Veolia. You hedge yourself for that. I clearly this makes sense, especially on the electricity front, where you're probably long energy. The question I have is regarding other parts of the business, like, for example, gas at the pump for the waste collection, all that kind of things. Basically, you have a pass-through, but that comes with a lag. Do you have any specific hedging practice to cover that, or do you see some moderate margin squeeze? Could you explain us a bit, give us a bit more color on the energy price per type of energy, if you don't mind? Thank you.
Okay. On the summer, maybe Claude you want to comment on that. You know, the sensitivity of the volume of three weeks in July or 4 weeks in July, I won't comment specifically, but just to say that it's on the plus side. I can fully confirm our guidance for the year, and I'm very comfortable with it, as explained in the introduction. I think that's a testimony to that. Again, no slowdown we see in the volumes.
As I said, Vincent, regarding volumes in Spain, we continue to have additional volume increase in July. Good vacation bookings, good tourism resuming, so we should be even higher in July. We are even higher in July than in H1. Also good recovery in Spain in terms of tourism that will help. The heat wave is not only France, but you understand it's also in Central Europe, where we have the heat wave now in Central Europe and especially in the Czech Republic.
As you know, we are distributing water in many, many countries, in Europe, in the U.S., in South America. I guess this is goes well beyond your right, France, and all those is oriented in a positive way. In terms of your question on energy, what I said about hedging is concerning all type of fuels. You know, the protection against, you know, the various price increase back to the tariff. I gave you one example with, you know, the coal or gas we buy in advance to provide district heating in Eastern Europe.
If you talk about, you know, fuel in the trucks, or diesel in the trucks, you know, it's passed through back to our customer as well, through the price increase. Again, we've seen a 6%-10% price increase in France C&I collection, for instance. In municipal, it's municipal collection, it's back into the indexation formula. It's exactly, it applies in the same way. The fuel cost goes up, but the premium goes up as well, in the same way. In terms of price increase, we've been starting those price increases, I explained many, many quarters ago.
The whole team has a habit of passing them back to the customer 6%-10% in C&I in France, and it was already the case part of last year. It's a sustained strategy and effort from the teams. It really applies my hedging comments as well as the pass-through applies to all type of cost and energies type.
Thank you. Next question is from Tancrède Fulop from Morningstar.
Hi. Good morning. Thank you for taking my question. My first one would be on contract expiration. In the presentation of your last capital market day, there was a slide showing that 2022 would be a big year of contract expiration with around EUR 0.5 billion. During your presentation, you mentioned a few negative elements, the EBITDA bridge price pressure related to those contract renegotiation and also volumes down in France due to selectivity in contract negotiation. Could you maybe give us a clearer picture about maybe the full year impact of those this contract expiration in 2022 maybe? What you will weigh and the negative impact, if any.
My second question would be on capital allocation. You mentioned that upon the completion of all antitrust remedies, I guess including the disposal of the U.K. Waste business, you will be well below leverage ratio of 3 x. I calculate like that you will be around 2.5 x, so that gives you, if you want to go back to 3 x, that give you a headroom of around EUR 3 billion. What are the capital allocation options that you would favor? Maybe external growth or higher organic investments or incremental returns to shareholders? This will be my two questions. Thank you.
Claude, do you want to start with commenting on the bridge and the price increase?
And the contract expiration maybe. In the contract expiration in the last Capital Markets Day, we had two main contracts expiring at the end of 2022 in this, but it has changed. The one was the Lyon contract, the water in Lyon, and the second one was the SEDIF contract in the Grand Paris area. The first one, as you know, will be taken over back by the municipality of Lyon. It's not a contract renegotiation per se, but we will continue to supply services to the city of Lyon, especially on the customer side, to continue the customer quality of the service that we have provided before.
On the SEDIF contract, it has been extended by one year, so now the expiration of the SEDIF contract is the end of 2023. What I was mentioning in the slide is about minor contracts in 2022. As we renegotiate contracts even with industrial clients, we have renegotiated a large contract with PSA, now Stellantis. In the contract renegotiation, of course, we had to make some productivity improvement, and it's part of the productivity that we give back to Stellantis at the end of the contract. That's one of the few example that we have in 2022. This is, as I would say, business as usual for Veolia in terms of contract renegotiation.
Exactly. No specific, you know, like, news here. It's the usual life of Veolia. You know, renegotiation, we have a very high renewal rate, and we have maintained it this way. At times we have to make productivity effort, sorry, which we compensate by, you know, our own, cost savings. That's a traditional way of renewing our contract in Veolia, and there is no specific change, that we've seen or we anticipate going forward. In terms of, the, U.K. disposal, I won't comment on your calculation. We said we'll be, well below three times once we have, sold the U.K. waste asset. You're right, it will be giving us some headroom to reinvest.
In terms of where would we reinvest, exactly in line with our strategy, which was presented to you and is called Impact 2023. With selective acquisition, maybe in the mix, in line with our strategy and, in line with, you know, of course, value creation, for our shareholders.
The growth, as you understand, is a mix of organic growth and is a mix also of bolt-ons. It has already been the case for the last couple of years.
Okay. Thank you very much.
The next question is from Arnaud Palliez, from CIC Market Solutions.
Yes, good morning. Thank you for taking my question. The first one is on inflation and especially on wage inflation. I would like to know the kind of level you're experiencing for the time being and what is the outlook for next year? Do you expect some very significant increase in salaries? That's the first one. The second one is regarding energy transition. You've mentioned a few new projects in terms of energy transition.
I would like to know if you can give us some color, some quantification about the acceleration in the number of projects that are being awarded, and also if it will imply some significant increase in CapEx in the coming months.
On your first question regarding wage outlook and inflation, when I said that, you know, we protect our P&L because when the cost base increase, the price increase or the indexation plays its game, it includes of course the wages part of the cost. Meaning, we try and we succeed in maintaining the wage growth roughly in line with indexation or price increase. No higher than what we get from the revenue or the tariff increase. Of course, you know, in terms of precise number, it's very different from one country to the next because inflation is very different from one country to the next, and indexation is very therefore different from one country to the next.
We have a very broad portfolio of figures here. Just a specific comment on wages and on the scarcity for talent, which is a reality in many, many countries, as you know. We enjoy in Veolia a very high retention rate. People are very committed to delivering for the ecological transformation, and that's a key success factor of our employees' engagement. I intend it, of course, to keep it this way. That was even, you know, like confirmed with the Suez merger and with the Suez team being brought together with the Veolia team. In terms of your second question on energy transition, no, there is no increase in the CapEx that you have to anticipate behind that.
You know, we apply the same rigor for the balance sheet as we have over the last few years, and a three times criteria is an important one for Claude and myself, which means that, you know, if we see some more promising projects, I would say, free a CapEx envelope to the detriment of other project, which will be less interesting and less promising for growth. Therefore, the ReSource plan, you know, the EUR 150 million CapEx envelope dedicated to this specific energy transition was freed, I would say, to the detriment of other less promising or less growing projects. The second comment is we don't necessarily need CapEx as well to help with this energy transition. Let me give you two examples.
We enjoyed a very rapid organic growth of our energy efficiency portfolio of activities in Southern Europe, typically in Italy and Spain, where we have 5%-10% organic growth year-on-year. It's purely organic growth with no increase in CapEx at all. Basically, we help our customers save energy by putting sensors, artificial intelligence of, and all our know-how to be able to typically, thanks to what we call Hubgrade, which is a piloting tool, we monitor the energy consumption every single minute of our customers, and we're able to reduce by 15%-20% the energy efficiency of our customers. We're talking about making sure that's not a huge CapEx here.
Another example, when we've done the project to accompany Solvay in the eastern part of France, with their energy transition out of coal through to RDF, which is a fuel made out of non-recyclable waste. We've done it with an asset OpCo model, and we haven't, you know, like, used much of the balance sheet of Veolia to supply this service to our customers. Energy efficiency or energy transition out of coal from this other example have been delivered without much CapEx really from Veolia's side. Again, the rigor in our balance sheet is something very important for us.
Very interesting. Thank you.
The next question is from James Brand from BNP Paribas.
On the credit side, actually, it's about the sort of legacy Suez hybrids on your balance sheet. As I understand, you're still not getting any equity credit from S&P on those. I'm just curious to understand a bit more how you think about those, especially given the, you know, the positive outlook for the balance sheet, getting leverage well below 3 x. I mean, do you think you need to try and get equity credit on those, or could you think about just retiring them like the previous Suez hybrid? Thank you.
That's a question for Claude.
Yes. In terms of hybrid bonds, just as a reminder, what we got from Suez is EUR 1.6 billion, three hybrid bonds. 1 has been reimbursed, and the two other ones you're talking about, they were ranked only by Moody's. Moody's gave equity credit, and we are renegotiating with our bondholders in order to get S&P equity credit, and that will be done at year-end. The goal, as you know, is to remain solid investment grade as Veolia. We are talking both with S&P and the bondholders to get the equity credit on the Suez hybrid bonds.
Very clear. Thank you.
I'm sorry for.
The next question is from Rajesh Singla from HSBC.
Good morning, everybody, and thank you for the presentation. I've just got two questions. I was very interested in the paper and cardboard strength. Do you think this is a new trend that might continue because of e-commerce? We assume that plastics are still remaining strong. First question. Second question, thank you for clarifying the EUR 6 billion of C&I revenue exposure. Could you talk a bit more about the dynamics between volume and service in that business? Thank you.
You're right on the paper and cardboard. You know, we see a trend which is explaining the high price we've enjoyed in the last now roughly 18 months. What is this trend? This trend is mainly we read a lot less newspapers, but we order a lot more online. Therefore, the cardboard is very much more used than it used to be even, you know, like two, three, four years ago. The COVID has sped up this trend quite dramatically. There is a big demand. There is also a big demand in Europe, specifically with new plants, new paper mills, if you want, which have opened in Germany over the last one year. All that contributes to a big demand in cardboard.
It's less the case in newspaper type of paper, as you would expect. That's overall net positive and explaining the high level we've seen. We don't see any reason so far that it would go down. In terms of the C&I, you know, I guess the volumes as Claude explained is really still on the upside in the second quarter, and we don't see any slowing down in the volume. All together, the trend of our portfolio is much more into recycling and being paid for the service as opposed to per the volume. Therefore, we see a positive trend for our services to help our customer recycle more and going more circular. You're right.
From 10 years ago, very much driven by volumes, we see much more of the driven by value type of activity in the C&I waste, as I commented earlier on.
Thank you.
The last question is from Ahmed Farman from Jefferies.
Yes. Hi. Thank you for taking my questions. I've got a few. I just wanted to first come back to the point you made about district heating and how affordable that is. I was hoping if you could put that in the context of some numbers for us as to sort of, you know, where would you see, where was the bill for an average customer in 2021, where it is today, and where do you see it in 2023? Any thoughts on, you know, any concerns around bad debts or delays in payments and collections on that business. That would be very helpful. My second question is on the working capital. I think you mentioned that you expect it to sort of reverse over the second half.
If you could sort of elaborate again on the drivers of that would be helpful. The third one is for the margin in the Water Technologies business. I think it's, you show it on slide 25, EBITDA margin at 10.2%. A little bit down on last year, and I'm just wondering if you could share some thoughts on how do you see the profitability and margin in this business in the second half. Thank you.
I'm gonna take the first question and let Claude answer to your,
Okay.
In terms of district heating, just to give you one example, in Poland, the average bill now after the price increase with which has been the case in the first part of the year, would be around EUR 40 for a household of a family of four. EUR 40 per month, sorry. It has increased, yes, but EUR 40 per month even taking into account the different cost of living in Poland compared to France or the U.K., say, is still very affordable. Hence my comment earlier on that, you know, we are far from having reached the affordability, I would say, limit. Again, if I were to compare with individual heating, in the country will be really much higher.
Hence we see some, you know, going back if you want or going to district heating and expansion of our network and the connection, given this difference in price.
In terms of working capital, you know that in the last couple of years we have made a lot of progress on cash management within Veolia. I will give you a few numbers. When you look at 2017, 2018, at midyear, the working capital of the group was around EUR 800 million. With a stronger movement in terms of cash collection in all countries, new tools to improve also cash collection, we are able to reduce, for the Veolia standalone scope, the working capital to something around EUR 500 million, which is a significant improvement. If you remember last year, we were even in positive free cash flow in H1.
We continue to do the same type of cash management, and we know where we are in the different countries one by one, and I'm monitoring this myself very closely, as I explained many times before. In terms of working capital, what do we have? First of all, we have a larger group. We have an additional working capital from Suez, which is around a little bit more than EUR 100 million, plus the boost of revenue of EUR 200 million. We know that all of this will be reversed by year-end, as we have done in the last eight years. As I said, we are able to reverse EUR 800 million on the Veolia standalone basis in 2017, 2018. We did the same amount in 2019 and 2020, 2021 as well.
At the end of the year, working capital was even a resource, feeding the free cash flow of the group. I can tell you that I've no doubt that we will reverse the working capital at year-end, and that we will be around 3x at year-end in terms of Net Debt to EBITDA. After the Suez U.K. Disposal, we will be well below 3x in terms of Net Debt to EBITDA. In terms of WTS, if you look at Water Technologies & Solutions, is a significant one-off. It's EUR 21 million, which is a one-off that happened in June 2021 that is affecting the results. The underlying project and so on for WTS remains strong. They are passing price increase to their customers as well, especially on the chemical side.
Projects are performing well, and they are completely sold out in terms of membrane, new membranes, membrane replacement. We are investing in new facility in order to boost the production of WTS globally. The fundamentals of WTS are strong, but it's a one-off effect that just incurred in June 2021.
Thank you. Unless you have other question, I think we're gonna close this conference. I would like to thank you for attending. Again, very happy to present you today strong and solid results for the first part of the year in Veolia. I can confirm our guidance for the year. Thank you very much.
Thank you.
Thank you, ladies and gentlemen. This concludes the conference call. Thank you all for your participation. You may now disconnect.