With a stagnant economy impeding revenue growth, many companies have been looking to cut costs to either maintain or improve their profit margins. Veolia (NYSE: VE) is in this boat, and since implementing its own cost-cutting plan at the beginning of 2009, the company has made headway in bringing back its operating margin to pre-recession levels.
Veolia was able to improve its operating margin between 2004 and 2007, but it shrank again dramatically in 2008, with costs growing faster than revenue as the recession began to set in. Meanwhile, partial competitors Waste Management (NYSE: WM) and Waste Connections (NYSE: WCN) barely saw a budge in their operating margins. So to keep up with the Joneses, Veolia embarked on a cost-savings program it calls the "2010 Efficiency Plan."
Since the cost cutting started in 2009, Veolia has made some inroads. For the trailing 12 months, its operating margin has risen by nearly 15% over its 2008 level. Its operating income improved by 11.2% in the first half of 2010 over the prior year, thanks to the combination of improved results for its environmental-services division, the efficiency plan, and divestments. Not too shabby.
More specifically, the efficiency plan contributed growth of 132 million euros to operating cash flow during the first half of the year -- about 7% of its total at the time. The largest contributors to the company's cost savings were its water, environmental-services, and energy-services divisions. Compared with the increase in operating cash flow that the efficiency plan created in all of 2009, this year's cost savings is running ahead of last year's at the current pace.
Veolia still has some way to go in re-establishing its previous operating-margin levels, but it has made significant strides in the past two years. Assuming that the cost cutting continues into the future, Veolia's investors could be highly rewarded for their patience as management gradually works toward achieving its stated goal.
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