Veolia Environnement SA (ADR) (OTC:VEOEY) has done a great job over the last five years or so of working itself back into shape. A victory lap would be well deserved, and shareholders should be pleased with the company they own today. But the biggest problem here is that Veolia can't let itself get soft -- it needs to stay in fighting shape.
As a verb, "sprawl" means to relax with one's arms and legs spread out in an ungainly or awkward way. As a noun, it's often linked to the word "urban," as in "urban sprawl." That's when residents of a city center start to move outside the city but continue to rely on the city for income and such. That type of sprawl is accused of everything from environmental damage to segregation and has led to calls for managing the way in which cities and their surrounding areas grow.
But one could just as easily use the word "sprawl" to describe a company. "Corporate sprawl" suggests a company that's grown too big and complex through organic growth that hasn't been well planned, or through acquisitions that may not have fit as well as advertised. In 2011, it would have been fair to tag Veolia with the "corporate sprawl" moniker.
At that point it was operating in some 77 countries around the world. Yet one country, its native France, made up 40% of revenues. So the other 76 countries weren't offering up as much diversification as you might think. Worse, long-term debt made up a huge 70% or so of the capital structure. So Veolia had operations all over the place and a heavy IOU burden hanging around its neck. Something had to give.
Lean and mean
Today, after billions of dollars' worth of asset sales, Veolia operates in 44 countries. And France accounts for only a little over 20% of revenues. That's left the company's global footprint far more balanced. It still operates across three key industry spaces, but even there diversification is reasonable, with its core water utility business accounting for around 45% of revenues, waste 35%, and energy 20%.
Debt, meanwhile, is down to around 50% of the capital structure. That's in line with U.S. water peers such as American States Water (NYSE:AWR), where debt is about 40% of capital structure. And it's basically the same as electric utility Duke Energy (NYSE:DUK) and trash hauler Republic Services (NYSE:RSG), which are both at about 50%. Perhaps more important, it's a whole lot better than the 70% of just a few years ago.
So Veolia has done a really nice job at slimming down and focusing on the businesses that it believes have the best prospects. And all of that work is flowing through the company's financial numbers. For example, despite the slim down, revenues have advanced in each of the past three years. So, too, has net income, which jumped 80% last year as the company nears the end of its transition period. Just to give some perspective, net income was in the red three years ago. Net income per share, meanwhile, just about doubled in 2015. But what now?
Harder to gain and lose than to have never have gained at all
There are two takeaways from what Veolia has done. First, it's a much better company today than it was about five years ago. Second, it took five years to slim this business down. It's like dieting -- it's much easier to not gain weight in the first place than to gain it and then try to lose it.
Veolia learned that the hard way. But will it remember?
Companies, if they're around long enough, go through cycles of expansion and contraction. Veolia is over 160 years old. So it's seen some ups and downs over the years. The recent five-year turnaround effort would probably fall under the down side of things. Now that it's working on the upswing, you'll want to make sure that management doesn't lose its way and start turning back toward ungainly corporate sprawl again.
This isn't a reason to avoid or even sell Veolia. But don't just assume that what you see today will be what you own tomorrow. That's just not how it works. And with a history that's included too much debt and too many businesses in too many countries, one of your biggest concerns should be Veolia's ability to keep itself in fighting shape.