UPDATE 2-Veolia H1 net profit doubles as industrial focus pays off

Thu Aug 28, 2014 7:50am EDT

* Sixty pct of new orders in H1 from industrial clients

* Recycling, dismantling business still a sellers' market

* Revenue growth to come from industrial clients (Adds CEO quotes on industrial sites, dismantling)

By Geert De Clercq

PARIS, Aug 28 (Reuters) - French water and waste group Veolia Environnement's first-half 2014 net profit more than doubled as its focus on waste treatment for industrial clients over municipal water customers began to pay off.

With margins in Veolia's core French water-concession business being squeezed in difficult contract negotiations with its municipal customers, the firm is focusing on waste treatment for industrial customers.

"Commercial efforts targeting the industrial sector are already bearing fruit," Veolia Chief Executive Antoine Frerot said. He also confirmed the firm's earnings guidance.

Consolidated net income jumped to 210 million euros ($277 million) from a restated 85.5 million in the year-earlier period, while revenue edged up 1.4 percent to 11.23 billion euros from 11.07 billion.

Frerot told an earnings call that 60 percent of the firm's new orders during the first half had come from industrial clients and 40 percent from municipal clients.

Frerot cited the extension of a contract with Swiss pharmaceutical company Novartis for technical services and facilities management with a cumulative revenue of 925 million euros over five years, as well as the construction and operation of two biomass plants in Canada that will yield cumulative revenue of 1.1 billion euros.

Veolia also won a contract to build and operate a raw water treatment plant for BP's Khazzan gas field project in the Gulf Arab state of Oman with estimated cumulative revenue of $75 million.

Frerot said the benefit of the industrial market is that it is less capital-intensive. Even if Veolia designs, builds and runs industrial installations, clients generally want to own them, so Veolia does not have to finance them, thereby reducing its capital needs.

Frerot added that margins are also better in these new businesses than in Europe's mature municipal water markets.

"As these are new markets, there are not a lot of competitors yet. Therefore it is a sellers' market and we are happy with the margins that we are earning in these new industrial markets," he said.

Veolia is also building up its dismantling business and has won a contract from transport group RATP to dissemble more than 300 metro carriages, a contract from the French navy to dismantle the Jeanne d'Arc and Colbert ships, and for the French army it will dismantle military equipment and submarines.

"Developed countries no longer scuttle their old ships," he Frerot said, adding that this market is growing quickly and that Veolia wants to become a major player in it.

He also said that from 2018-19 he expects revenue of about 100 million euros per year from the dismantling of nuclear installations.

He said this would start not with nuclear plants but with research installations. The United States already spends several billion dollars per year on dismantling nuclear research sites and French nuclear agency CEA alone some 600 million euros per year.

Two contracts with the CEA to dismantle parts of research sites Marcoule and Cadarach will allow Veolia to build up more expertise in this market, Frerot said.

In this field, Veolia will compete with French state-controlled nuclear group Areva.

Frerot said that he expects Veolia's revenue to grow by at least three percent annually in coming years and that most of this growth will come from industrial clients, as he expects stable revenue in its core municipal water activities.

Veolia's core earnings before interest, tax, depreciation and amortisation (EBITDA) rose 8.5 percent to 1.01 billion euros. Ebitda from its waste activities was up 15 percent to 464 million euros and water earnings were up 2.2 percent. But core earnings from its energy activities were down 5.4 percent due to the mild winter that hit first-quarter profit.

"Things are going well for Veolia, but this is already well reflected in the stock price, which has risen a lot in the past days, so the potential for further gains is limited," a Paris-based trader told Reuters.

By midday, Veolia shares, which are up 16 percent in the year to date, were down 1.2 percent, slightly underperforming the CAC40 index. (1 US dollar = 0.7568 euro) (Reporting by Geert De Clercq; Editing by Andrew Callus/Mark Heinrich)