Arcadis NV (ARCAD) Earnings Call Transcript & Summary

Hello, and welcome to the Arcadis NV Q1 2023 Trading Update Call. My name is Laura, and I will be your coordinator for today's event. Please note, this call is being recorded. [Operator Instructions] I will now hand you over to your host, Christine Disch, Head of Investor Relations, to begin today's conference. Thank you.

Thank you, Laura. Good morning, good afternoon, everyone, and welcome to our webcast. My name is Christine Disch. I'm Head of Investor Relations at Arcadis. We are here to discuss Arcadis's first quarter results, which were released this morning. With us on the call are Peter Oosterveer, CEO; and Virginie Duperat, CFO. We will start with a presentation, which will be followed by Q&A. We would like to call your attention to the fact that in today's session, management may reiterate forward-looking statements, which were made in the press release. Please note any of these risks related to these statements, which are more fully described in the press release and on the company's website. And with these formalities out of the way, Peter, over to you.

Thank you, Christine, and good morning, and good afternoon, everyone. Thanks very much for joining us, and welcome to our first quarter results call of 2023. We I am delighted to report that we've made a strong start to 2023, benefiting from continued growing client demand for our solution and our services, particularly in the North American market. Our net revenue for the quarter is up 37% to EUR 940 million, with accelerated organic growth of 12.3% and a very strong replenishment of that revenue with strong order intake of EUR 1.62 billion, which resulted in an all-time high backlog of EUR 3.2 billion. The growth has been supported by all 4 global business areas: resilience, places, mobility and intelligence with particularly strong developments in environmental restoration, anything related to the energy transition, new mobility and industrial manufacturing services and solutions. Our operating EBITDA margin consequently improved to 9.8%, up from 9.4% in Q1 of 2022. These results confirm that the operating model we introduced at the beginning of 2022 and the strategic repositioning and focus on high-growth markets is delivering for us. I will touch on some of this a bit later. But firstly, let's turn to our 4 global business areas to see what is driving the growth of each of them this quarter. Our resilience business has made a really strong start to 2023 with solid revenue and backlog growth across the entire solutions portfolio. We saw continued good client demand and environmental restoration, where we have a leading position in PFAS, radioactive and incident response. We also continue to see strong growth for our energy transition solutions and viral social permitting, particularly helping clients who require manufacturing facilities to navigate the complex planning and supply chain challenges, inclusive of, for example, permitting processes as well as higher costs due to inflationary pressure. The one solution that continues to drive demand is environmental restoration, notably the cleanup of PFAS contamination. We have supported hundreds of PFAS projects around the world, in Australia, in Belgium, in the U.S., bringing advanced site characterization and incident response techniques. We rapidly assess sites and move them to clean up more quickly with our innovative products such as the plural fighter biodegradable cleaning application. Our industry-leading expertise and use of digital tools, sensors and in immersive technology, we are also instrumental in securing a large 5-year commission to support the U.S. Army National Guard with identifying sites where PFAS may have found its way into the drinking water, evaluate the risk to people in the affected areas and provide a response to eliminate the threat. The market outlook remains strong for our resilience business. We see clients facing supply chain challenges and skill shortages especially in the energy market, which does create opportunities for a more extensive role for their trusted business partners like Arcadis. And we obviously stand ready to provide them with the required support to address their growing demands -- our places business has also seen a strong start to 2023 with revenue growth of 8.7% and backlog growth at 1.3%. As I mentioned at our full year results publication back in February, the acquisitions of Arcadis IBI and Arcadis DPS groups in 2022 have enabled us to strategically reposition our portfolio, focusing on high-growth markets in North America and Europe and pivoting to support clients who develop and build industrial manufacturing and life sciences facilities. In some specific industrial sectors, including automotive, semiconductor and pharmaceuticals, we see greenfield projects on our radar, and we are well positioned to seize these opportunities. Furthermore, in addition to supporting our clients with the CapEx programs, we now increasingly see them require asset management and asset optimization help as they need to accelerate decarbonization initiatives and as a result, need to retrofit and upgrade their assets. This obviously creates an opportunity for Arcadis to provide asset management intelligence and digital tools to both help them to reduce cost as well as meet their net zero ambitions. And an example of work in that space is the recent win for an energy and resources clients to provide overall planning, process engineering and construction management services for the construction of their new renewable energy facility. The combination of our knowledge of the energy transition, combined with our experience in intelligent buildings, convince this client to select Arcadis. In our Mobility business, we ended the quarter with continued strong net revenue growth of over 15% and a backlog growth of 1.8%, driven by strong performance in the U.S., Australia and the U.K. As you are aware, the order intake of our mobility business is lumpy, given the larger projects we pursue. -- electrification and decarbonization solutions continue to be our clients' top priority backed by, amongst others, federal investments. We also see an increasing demand for digital solutions to solve complex mobility challenges, which does drive substantial synergy opportunities between our intelligence and our mobility global business area. And speaking about cross-selling, we continue to identify revenue synergy opportunities with Arcadis IBI in North America and the U.K. And these opportunities range from rapid bus transit projects, autonomous vehicles and traffic planning to advance air mobility solutions. The actual example on the slide is such a project, where in New York, we continue to build on our long-standing relationship with the city authorities by having been selected by New York Metropolitan Transportation Authority to support the $700 million historical capital investment program in public transit. We, together with our joint venture partners, will provide general engineering and consulting services, including program management to support rail and bus transit upgrades with the aim to deliver more than 50 different infrastructure projects by 2024. And finally, thanks to the creation last year of our fourth GBA intelligence, we are now much better positioned to serve our clients with innovative, sustainable and technology-enabled solutions, cementing our position as a digital leader in our industry. As such, we are seeing and new products driving revenue growth across all of our global business areas. Notably, in mobility, as I mentioned before, with solid demand from large clients such as Queensland Urban Utilities and Departments of Transportation of Florida, Nevada, New York State, North Carolina, Pennsylvania and Utah, all looking for traffic, transit and travel solutions. In addition, we also support clients in modeling their asset behavior and help them to prioritize complex decisions that are impacted by factors such as cost, reliability and safety. Our enterprise decision analytics solution is assisting them in delivering balanced investment plans that deliver high return on investment and sustainable outcomes. The recent smart strengthening mobility and revolutionizing transportation stimulus package funded by the U.S. Department of Transportation creates further opportunities for Arcadis and the intelligence DBA in particular, to exploit its experience with connected vehicle projects, sensor deployments, curd management and smart traffic signal technologies. And also here, again, an example in Q1 where we have been selected by the North Carolina Department of Transport to procure, implement, operate and maintain the active vehicle applications for a pilot project across 31 signal intersections in the city of Raleigh. The effective of the 3-year pilot is to improve operations and safety for all road users with an emphasis on transit users and pedestrians. This is a very significant project that combines the advisory solutions and deployment capabilities of Arcadis IBI Group with our intelligence and mobility DBAs in advancing the future of mobility while improving community and societal benefits. As market and customer demand for digital solutions, advanced analytics and Software as a Service model grow, our intelligence DBA will be a clear differentiator for ARCADIS. And I'm confident that this will translate into strong revenue streams over the coming quarters. And with that, I'll hand it over to Virginie to talk through the financial results in a bit more detail.

Thank you, Peter. Good morning and good afternoon, everyone. In the first quarter of 2023, Arcadis Group delivered a record net revenue of EUR 940 million, corresponding to a very strong organic growth of 12.3%. Our operating EBITDA was EUR 92 million in the first quarter compared to EUR 64 million in Q1 2022, and the operating EBITA margin was up at 9.8%. The negative free cash flow generation of EUR 108 million during the quarter reflects the combination of 2 elements. First, a year-on-year increase in line with our usual seasonal net working capital pattern applied to a significantly larger business volume increasing around 40% year-on-year. And in addition, investments in net working capital from the very strong revenue growth, largely back-end loaded in the quarter. As a consequence, our net debt slightly increased to EUR 1.72 billion from EUR 1 billion at the end of the year. And now let's move on to the next slide to talk about our debt maturity profile. Late February, we issued our Eurobond of EUR 500 million with 5-year revenue to partly refinance the EUR 750 million bridge loan. The [ senior ] unsecured fixed rate notes have an annual coupon of 4.875%, an investment-grade rating of BBB- with a stable outlook from Standard & Poor's. Apart from the remaining part of the bridge, we have no material upcoming debt maturity. Now let's talk more about the trends on the following page. Our quarterly net revenues at EUR 940 million show a very strong year-on-year organic growth of 12%. In Q1, growth was driven by all the GBA with an exceptionally strong performance in North America. During the quarter, the currency impact was 0.5%. The strong net revenue generation was accompanied by a very solid order intake performance, reflecting the business momentum in the quarter. As of the end of March 2023, order intake was at a record high of EUR 1.1 billion, with almost no cancellations in the quarter. This resulted in an organic backlog growth of 3.9% quarter-to-date with a positive contribution of all GDLs. The operating EBITA margin improved to 9.8% versus 9.4% 1 year ago. Day sales outstanding was 70 days at the end of the quarter. And our net working capital as a percentage of annualized course revenues was at 12.9% on the back of our disciplined working capital management and absolutely in line with Q1 last year. Turning now to the performances of our 4 global business areas. Our resilient business goes on being very strong across markets, including North America, the U.K. and Brave. We take some opportunities to increase our cross-selling capacity on the existing clients of Arcadis IBI. An example to this would be a recent win we had for the existing IBI client, City of St. Thomas in Canada to perform planning and engineering of 1,500 hectares of land combined with resilience solutions. Our focus remains to be very selective in our bidding strategy, facing such a strong market. With this in mind, we invest more time in further advancing the pipeline at [indiscernible]. Our Places business then delivered strong revenue, now making up 41% of the total portfolio, especially in our key markets, North America and Europe. During last quarter, we've seen some signs of gradual pickup in the Chinese market. We remain, however, highly selective, focusing on our repositioning towards project management for international key clients. Furthermore, we launched our architectural and urbanism business, which is now up and running as part of the places DVA and see strong momentum as it launches its first commercial events. We have already quantified substantial synergy opportunities in the pipeline and have booked first sizable synergy projects in our order intake, which Peter will elaborate on in a bit. Now turning to mobility. A very strong net organic growth, mainly driven by the large project backlog we need to execute in the U.S., in the U.K. and in Australia. As Peter highlighted, we are happy to see some project wins to be materialized that would have been out of reach before. The increased collaboration with Arcadis IBI and intelligence GBA strengthens our market positioning, and we can now compete for more sizable projects together. It gives us comfort to have a high revenue visibility for mobility for the remainder of the year. And finally, our new GBA intelligence delivered EUR 21 million revenues in the first quarter, while recording the same amount of order intake and collaborating to several bids in the intelligence management team is set up and works to set a fit-for-purpose organization, consolidating the various organizations and fostering innovation. And with this, I would like to thank you and hand you back to Peter.

Yes. Thank you, Virginie, for taking us through a more detailed review of our financial progress in the first quarter. As I mentioned to you, when we released our Q3 results back in October of last year, one of the key priorities in my last 7 months at Arcadis was to ensure a seamless integration process for both Arcadis IBI and Arcadis DPS. And I'm pleased to report that we are well on track with the integration. And while doing so, we didn't lose our focus on our clients and even more specifically, our focus on synergy opportunities. As Virginie noted a minute ago, the architecture and urbanism business is now up and running as part of the places GBA and is attracting strong interest in which we expect to further grow as we launch our first commercial event in Toronto later this month, promoting the enhanced range of architectural design services and solutions. The intelligence GBA management team has been appointed and is underway integrating organizations, products and services. In Arcadis DPS work is continuing to progressively embed the business into the places GBA, creating additional strength in the industrial manufacturing and life sciences sectors. Our sales pipeline is looking incredibly promising with over 250 synergy opportunities identified, opportunities we individually would have not pursued and a number of them already converted into order intake during the first quarter. This includes, for example, the design and construction management for a semiconductor facility in Europe with Arcadis DPS and a new industrial manufacturing plant expansion with Arcadis IBI for Bridgestone Americas. We're also seeing the benefits of bringing Arcadis IBI and Arcadis DBS clients into our already successful key clients program. And one such example is QuadReal Property Group, a Canadian real estate company operating on a global scale. Arcadis IBI currently works for QuadReal as program managers and designers on the Vaughan Metropolitan Center project, one of their flagship developments in Toronto. QuadReal owns and manages assets in 25 global cities. This relationship holds the potential to develop into a true Arcadis global key client relationship, providing more synergy opportunities. And I want to take this opportunity to thank those Arcadians who will be actively involved in the acquisition and integration process over the last 12 months. As presumably many CEOs will agree, the integration of a new business, a little on 4 can be intense. It can be challenging and fraud with structural and cultural hurdles. But I'm delighted to see how all Arcadians inclusive of those who joined us through these acquisitions have risen to the challenge and delivered strong progress. So, to wrap up our Q1 trading update, let me please summarize. Despite the ongoing global geopolitical challenges, we are blessed with continued strong client demand, resulting in good revenue and order intake growth, especially across the North American markets. These strong conditions have also had a positive impact on our operating EBITDA of EUR 92 million for the quarter and an improvement of our operating margin from 9.4% last year to 9.8% this year. The integration of Arcadis IBI, Arcadis DPS and the 2 smaller acquisitions is progressing well with synergy wins materializing and a growing number of further opportunities in the pipeline. That all gives me confidence to confirm that we are well on track to deliver our strategic priorities at the close of 2023. Those we committed to you during our 2020 Capital Markets Day. I closed the book on my 6-year tenure as CEO of Arcadis, an extraordinarily rewarding and fulfilling journey. But I don't want to do that without reflecting on a few of the major chapters. I believe that our organization is now very different from the one I joined in 2017. Together, we have invested in our people and our culture are a much more diverse and inclusive company now and brought back the pride and engagement of the Arcadians. We prioritize the very important relationships with our clients and enjoy the results of our key client program. We significantly improved our focus on successful project execution through the launch of the Make Every Project Count program and a broader use of the Global Excellence Centers. We did endure the pain of the Oracle implementation across the company but now see that running a large enterprise without it would be impossible. We lead the way with our net 0 commitment and increasing, we see that our clients trust us and ask us to assist with their sustainability strategies and solutions. We transformed our operating model with the introduction of the global business areas, and we and our clients benefit from a much improved global sharing of experiences, capabilities and knowledge. And last but not least, we changed and optimized our portfolio with exciting new acquisitions while divesting noncore areas. All of this has resulted in improved and much more predictable performance and crucially earned us the trust and confidence of our shareholders. So, I'm sitting here, reminiscing about the fact that we have achieved a lot through the past 2 strategy cycles and can collectively take pride in our results. But there's also still so much more Arcadis can accomplish in the future. And I believe that I speak on behalf of all Arcadians when I say we feel a responsibility to do more to create a more livable and sustainable world for all citizens and to safeguard the future for the next generation and those to come thereafter. I am absolutely convinced that the future of Arcadis is bright, and I'm very comfortable handing over the reins to Alan Brookes, who supported by the rest of the organization will absolutely do a stellar job in attracting and retaining talent in delivering profitable revenue growth and future success for the business. Our shareholders will meet next week at our Annual General Meeting to vote on Alan's appointment, and I wish him Regine and the rest of the Arcadis team, my very best for the future. It's been both an honor and a privilege to lead Arcadis over the past 6 years. I do owe my fellow Arcadians, my debt of gratitude. They have been immensely supportive from the moment I joined Arcadis, and I will forever remember their sincere passion and drive to improve quality of life. I make we excited to now start to devote more time to my wife and our trade auditors as payback time has arrived, providing me with an opportunity to work on the overdue debt I racked up with them over the many years. I want to thank you all for your support over the years for the many great interactions for your challenging questions, but most of all, for your continued interest in Arcadis. Thank you for letting me indulge a little. Now over to Christine for questions.

[Operator Instructions] We'll now take our first question from Martijn den Drijver at ABN AMRO.

My first question relates to the annual salary increases that you've implemented in April. What type of increase should we assume, should we take into account? And will you be able to match that with rate increases in the course of the second quarter and third quarter? And in relation to that, can you tell us a little bit about attrition and recruitment levels in the quarter? That's question one.

I'll take the second part and maybe help you also the first time. Thanks for the question. So, our attrition continues to come down, which, of course, is positive. We have always combined any feedback on attrition with another important KPI, which we measure quarterly, which is the engagement. We did see a significant improvement of our engagement in 2022. And I'm happy to report that since we have the score of the first quarter this year that our engagement or the engagement of our people, I should say, continues to go up. So those 2 together, the still downward trends on the attrition and the improving and continuously improving engagement gives us a lot of comfort that people enjoy working for Arcadis. On the salary increases from a competitive perspective, we are not disclosing the exact percentages, but assume to be on the safe side that, of course, we pay market rates. We keep a close eye on what's happening in the world. And we will be able to pass that on to clients. We have been quite successful to do that in 2022. And with the buoyant market we have, we expect to continue to be able to do that.

Perfect. Then moving on to the second question, which relates to DPS and IBI. I know you probably don't want to share actual growth rates or EBITDA margin. But has the trend been any difference at GPS and IBI relative to what they reported prior to the acquisition, which was for IBI EBITDA margins between 11% and 12% EPS, 78% with high double-digit growth. Any color you can give on the performance of DPS and IBI in the quarter?

This is Virginie. On DPS and IVI, I think that we can recognize quite a nice quarter. They are contributing in line with what we expected. So more or less, one of them just being just a little bit relative. The other one being just a little bit dilutive, which has almost no impact at the end of the day on the average margin of Arcadis as a whole. We see strong momentum going on in terms of activity, but there is definitely in the, let's say, so-called historical business of Arcadis, a strong momentum also, which is pushing, which you can see largely in mobility and resilience, which are not absolutely pure original business is coming from Arcadis. But at the end of the day, I think that the vast majority is the policies on that side.

Okay. And then if I could sneak in one more. Can you elaborate a little bit on the backlog growth in the quarter year-to-date, that seems somewhat muted relative to the reported organic growth in the quarter, but also the statements about strong robust demand in all GBAs, -- perhaps you could share why those numbers differ so much.

I'm not sure. I think that the numbers differ so much. I think that for me, what is important is that -- the size of the company has particularly been changed in 1 year to the other. So, I don't feel -- and that's the reason why we would not disclose the more or less organic backlog then yes because it doesn't mean a lot. And where would I put the synergetic projects in or out and progressively that will become quite a burden. So, I think that the very important thing is to realize at the end of the year, we have included these 2 acquisitions in. And then commercially, we now start the year on an inclusive front where everything is together. And then we see that in a single quarter, we've been able to grow the backlog by 3.9% in a moment where we delivered a record revenue growth meaning that we have used quite a large part of our backlog in the same quarter. And in the meantime, we've been refinishing it even more than what we've been using. And you also know that quite a number of the things that we generally get an order intake and also including in our backlog does not add significant amount. I think that Peter has been disclosing a few examples of projects today, which are important projects we wanted to highlight. Let's think about the I think it's probably nothing in the backlog as we speak because this is by designing the way it works. It will come through service orders over the 5-year period, it is mentioned. And I think that if we think about the intelligence project in the North Carolina one, which is quite a salable and large projects. It's obviously not included in the EUR 20 million order intake because same thing, you will get additional service orders are getting in. So, for us, it's a very, very positive momentum, and that's why we want to insist and highlight that what matters is our capability of being selective.

Okay. And Peter, big things from my side as well. has been a pleasure Absolutely.

Thank you, Martijn.

We'll now move on to our next question from Quirijn Mulder at ING.

Yes. Great. I'm from ING in Amsterdam. Thanks for picking up my questions. Peter, thanks for everything. My question is for you. You mentioned 250 initiatives or opportunities. So, can you give me an idea about what you expect the size of these opportunities is in total to give an idea about, let me say, the cross-selling effects? My second question is on the acquisitions of IBI and DPS. It looks to me that the order book is somewhat smaller than it was at the end of the year. But maybe that's partly FX, but maybe there's also some organic impact there. Can you maybe elaborate on that? That are my first 2 questions.

Yes. Thanks, Quirijn. I'll take the first one. Obviously, we're not -- for competitive reason, wanting to necessarily disclose the exact number on those 250 synergy opportunities, which we expect to actually go. To suffice it to say that it is a sizable number with 3 digit before the coma...

And sorry to jump because the question is profit, but I will take it, whatever. On the backlog side, Korean, but I think that on the IDI side, we are still absolutely going. On EPS side, we had a growth of 35% last year in terms of order intake. So, it's very solid at the moment, and we go on getting a large number of projects then if we would calculate or compare the order intake year-on-year, but I'm mentioning it in Q1. I suspect that we are not going to go that by 35%, again from one year to the other, potentially for 2 reasons also. It's also that they now are largely part of the [ RPs ] family. So, the selectivity also applies to everyone as we can in age. And we want really to focus on those projects that helps us get where we want to go and get into the higher part of the value chain also.

Okay. And then with regard to the raise in profitability, 40 basis points, can you give an indication whether this -- all the TBAs were up in terms of organic growth of the EBITA margins?

I think it's -- there is no major decent. We do not report by segment, as you know, on Q1, but there is nothing to significantly highlight that would be a problem anywhere. I don't see any point we grow fast, we grow a lot. So that's also supporting the operating EBITDA performance, as you can motion.

No, but you can imagine that resilience with its growth and let me say, also the better order intake, et cetera, and the inflation being passed on that it is certainly supportive to the higher end may higher EBITA margins, and that's probably also the case on mobility. So at least the places where that is also joining this 40-basis point increase. That was my question.

Everyone is contributing to it. I think it's okay, obviously, resilience is not defend on what it has been in the past quarters. But we have a very nice performance of our architecture and urbanism business, if that is your question.

And , maybe to add to it, we're holding everyone to the same consistent standard within locates. There's no distinction between the GBAs.

Okay. No. But let me say there's a big acquisition in place. So that has a major impact there.

Yes. But it's -- frankly, the performance is really okay everywhere. Maybe the only one which is still I'm not sure that there is anything to really -- it's quite comparable to that quarter, okay?

Sorry.

Quite comparable to last quarter?