* New services make up more than half of Q1 growth
* Strong euro weighs on international earnings
* Contract indexations boost French water business
* Says year started well, confirms financial outlook (Adds share price gain, M&A and deleveraging comments)
By Geert De Clercq
PARIS, May 3 (Reuters) - Veolia said first-quarter revenue climbed by 3.7 percent to 6.4 billion euros ($7.7 billion) as its French water business returned to growth and international activities showed double-digit growth, with new services driving earnings.
The water and waste group’s shares rose more than three percent and were the biggest gainer on the CAC40 French bluechip index as Veolia said it was confident about the business outlook.
Veolia’s French water business was boosted by new contract wins and higher inflation-linked rises in its municipal water contracts, although waste revenue was down due to lower commodities prices, mainly paper, hit by a Chinese import ban. French revenue rose 0.6 percent to 1.3 billion euros.
International revenue growth was also strong, with Europe excluding France up 7.4 percent to 2.4 billion euros, although unfavourable exchange rates - mainly the strong euro - shaved 204 million euros off its revenue.
Revenue in the rest of the world was up 14.7 percent to 1.6 billion euros, but up just 2.8 percent after factoring in currency swings, while Asia and Latin America both grew more than 20 percent at constant exchange rates.
Veolia CEO Antoine Frerot said new lines of business represented more than half of the first-quarter’s revenue growth. These include plastics and chemicals recycling, toxic waste handling, management of water for aquaculture, production of energy from waste or biomass and the capture of methane.
“This is the main engine of our growth today and will be in the years ahead,” he said.
Frerot said new services now make up about 30 percent of Veolia’s revenue, from 15 percent five years ago.
Veolia is boosting recycling and waste water handling services for industrial companies as its traditional French water business faces pressure from contract renegotiations.
Frerot said Veolia is still eyeing small to medium-size acquisitions and could buy companies valued at a few hundreds of millions of euros this year.
CFO Philippe Capron said that after repaying a 1.4 billion euro hybrid loan this year, Veolia will not deleverage further. It has net financial debt of 9.6 billion.
Veolia’s core earnings rose 3.4 percent to 876 million euros, in line with forecasts for 872 million euros.
Current earnings rose 4.8 percent to 448 million, while net profit jumped 26 percent to 193 million euros partly because of capital gains on the sale of its industrial cleaning unit in the United States.
Veolia confirmed its earnings guidance. For 2018 it forecasts core earnings growth greater than in 2017, while for 2019, it expects core earnings of at least 3.3 billion to 3.5 billion euros.
Frerot said that Veolia could not bid for unlisted smaller French competitor Saur if it were to be sold, for antitrust reasons.
He said Veolia had begun international arbitrage court proceedings with the government of Gabon, which seized its assets there earlier this year. In the first quarter of last year, Gabon accounted for 79 million euros of revenue and 16 million of core earnings.
$1 = 0.8340 euros Reporting by Geert De Clercq; Editing by Sudip Kar-Gupta and Adrian Croft