Arcadis NV (ARCAD) Earnings Call Transcript

Good morning, everyone, and welcome to this virtual Analyst Meeting. My name is Christine Disch, and I'm the Investor Relations Director at Arcadis. We are here to discuss Arcadis' third quarter results released this morning. With us on the call are Peter Oosterveer, our CEO; and Virginie Duperat, our CFO. We will start with the presentation by Peter and Virginie, which will be followed by Q&A. [Operator Instructions] Kindly keep it to a maximum of two questions at a time. Lastly, I 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. With these formalities out of the way, Peter, please over to you.

Thank you, Christine. Good morning, everyone, and welcome to our third quarter results. Over the last 3 months, we have continued to see strong growth and improved performance across our businesses, driven by our three global business areas: Resilience, Places and Mobility. Our net revenues totaled EUR 740 million and increased organically by 10.9%, while our backlog remains in a strong position with 5% growth, underlining buoyant clients' demand. Our operating EBITDA margin improved to 10.3%, up from 9.5% in Q3 last year, a significant year-on-year improvement driven by all three GBAs. Let's take some time to focus on our three business areas and see what is driving our growth. Our Resilience business, it continues to benefit from increased client demand for environmental restoration, climate adaptation, energy transition and advisory and water optimization solutions, particularly in the U.K. and Europe. This demand led to organic net revenue growth of 13.7% and a healthy year-on-year backlog organic growth of 5.4%. The market outlook remains strong for areas like energy transition, particularly in Europe, given the dependency of Russian oil and gas. We're seeing many energy clients seek secure and sustainable solutions with a growing focus on grids, renewable energy generation, electrification of transport, hydrogen and the creation of local energy systems. TenneT is one such client example where we have recently won a framework to develop a 9 gigawatt offshore wind project in Belgium and the Netherlands. With all eyes on COP27 in Egypt next month and the hope for even greater clarity from world governments and leaders to meet Paris 2050 net-zero targets. It is reassuring to see that our clients remain committed to addressing the impacts of climate change. For example, in New York, we have recently been selected by the Battery Park City authority as lead designer and engineer to help create an integrated flood risk management system on the west side of Laurel, Manhattan. With rising levels posing an ever-present risk, the mile-long flood barrier system will not only help to protect the city from coastal flooding, but will also include wider improvements to the city's drainage infrastructure and underground sewage system. In Places, net revenue organic growth stands at 3.6% with large wins in North America and Germany and increased demand from manufacturing and government clients. This was slightly offset by weakening market circumstances in China, mainly due to the continued COVID lockdowns. We continue to see significant success supporting the development of industrial manufacturing facilities and so-called gigafactories. A salient example is our work with a high-end automotive manufacturer developing their first EV plant by providing design and project assurance. This brings our GBA model to life with experts coming together in collaboration from North America, the Netherlands and the U.K. to provide a seamless experience for the client. This ability and agility of connecting our people with each other and with clients, wherever they are located, is a key strength for Arcadis, as we move forward. The appetite for smart and sustainable buildings and net-zero facilities also continues to grow as clients increasingly want to reduce their carbon and their cost from both existing and new build developments and projects. For example, in Paris, Arcadis is working with partners on an extension to the national archives as part of commissioned by the French Ministry of Culture. Our team will design an intelligent management and control system to optimize the energy footprint and ventilation of the new building, while minimizing the impact on existing green spaces and protected trees on the project. Once complete, it will create a pleasant and cleaner environment for employees and visitors of the Arcadis and ensure that the precious documents stored in the building are protected for generations to come. Within our Mobility business, significant tailwinds in the Netherlands and a growing appetite for smart mobility solutions from highways and public transport clients help to deliver organic revenue growth of over 15% and a very strong backlog growth of 9%. The Mobility and Infrastructure market continues to benefit from infrastructure stimulus packages in North America, in Europe and the U.K. leading to a healthy pipeline of activities for 2023. Client demand for electric vehicle solutions and the increased use of data to inform infrastructure investment and improve the passenger experience also shows no signs of slowing down. The recent acquisition of the IBI Group and their experience in developing digital tools, including CurbIQ and Travel-IQ will further help to pursue new opportunities and strengthen our mobility business, both in North America and across the world. The commitment to sustainability and reducing embedded carbon in infrastructure continues to remain key priorities for mobility clients. In the U.K., as an example, we're part of a joint venture team working with High Speed 2, the largest infrastructure project in Europe, to half the amount of embedded carbon in construction. Our pioneer approach is currently being used on foundation works for one of the project's main viaducts and was inspired by structures on the latest French high-speed TGV lines. By using significantly less carbon-intensive concrete and steel, we will be able to save an estimated 7,430 tonnes of carbon, the equivalent of 20,500 return flights from London to Edinburgh. All these examples highlight our strong desire to create integrated solutions that truly deliver sustainable outcomes and generally improve the quality of life for the clients and the communities we serve. I'll now hand over to Virginie to talk to financial figures in more detail.

Thank you, Peter, and good morning, everyone. Before we go through the quarterly results, I would just like to highlight that our financial statements reflect the closing of the acquisition of IBI, which happened on 27th September, 2022. Therefore, the balance sheet fully includes IBI contribution as well as related balance sheet KPIs. The P&L contribution of IBI of 3 days in the quarter has been assessed as nonsignificant. And as such, the P&L elements of the quarter as well as related KPIs do include Arcadis contribution as a stand-alone. Over Q3, we delivered net revenues of EUR 740 million, representing a strong organic growth of 10.9% and growth was driven by all three GBAs with Resilience and Mobility being exceptionally strong in North America and the U.K. In addition, the currency impact was 9%. Our operating EBITA was EUR 76 million as the operating EBITA margin improved to 10.3% versus 9.5% in Q3 last year, driven by all 3 GBAs with a significant year-on-year improvement of places from improved operational efficiencies despite lower working days, hitting whole 3 GBAs in the U.K. and Australia due to the Queen Elizabeth's funeral. Our EBITA was EUR 27 million for the quarter, as nonoperating costs amounted to EUR 49 million and includes some transaction costs related to this very recently announced acquisitions and a net loss on divestments of noncore geographies in Singapore, Malaysia, Hong Kong Design & Engineering business and non-core activities at Switzerland's labs and France Environmental Restoration and Waste business. These net losses are noncash costs. Free cash flow generation during the quarter was EUR 38 million and below last year's EUR 75 million, driven by sharp revenue growth, elevating working capital levels and some transaction costs related to the recent acquisitions. Free cash flow generation year-to-date was EUR 27 million, which was impacted by a normalization of working capital levels compared to 2021. Our net debt increased to EUR 880 million as we do the bridge loan of EUR 600 million to close IBI transaction and IBI net debt elements are bringing an additional EUR 54 million on our balance sheet. Revenue growth accelerated in third quarter to a very solid organic growth of 10.9%. And the operating margin for the third quarter at 10.3% improved year-on-year and followed our seasonal pattern of a typically stronger second half of the year. We continued our efforts to successfully pass on wage inflation. Net working capital percentage improved versus last year. We remain disciplined on net working capital management in these times of significant revenue high growth, maintaining a 13.8% net working capital as a percentage of gross revenues and 72 days of DSO. We saw favorable network development during the quarter. And with an organic increase of 5% year-on-year, we had a very strong order intake of EUR 718 million. Finally, divestments of noncore geographies and businesses resulted in a backlog reduction of EUR 94 million, and we saw almost no cancellation in the quarter. IBI's backlog of EUR 530 million was added. And all in all, this resulted in a net record backlog of EUR 2.8 billion. Turning to the performance of the GBAs in the quarter. As Peter mentioned, we saw Resilience delivering a record 13.7% organic growth during the quarter, thanks to the strong contributions of U.S. Environmental and Water Solutions and even stronger U.K. and Continental Europe contribution. In this area, the growth has been supported by the successful optimized onboarding of new hires. Our places GBA did delivered a modest organic growth of 3.6%, resulting from the combination of a very strong growth in the U.K. and in a slightly lesser extent in Continental Europe and in the U.S., offset by a decline in Greater China area, where we currently see market circumstances weakening and where we have a very selective approach in the project we take in all type of solution we offer on project management, cost and commercial activities to architecture. Finally, our Mobility GBA delivered a steady growth performance with an organic growth rate of 15.4% in the quarter, resulting from the execution of large mobility projects in Australia and in the U.K., notably, supported by double-digit growth in almost all markets where we operate. Globally, on all GBAs, the pace of growth has allowed to limit the effect on P&L of the addition of an exceptional additional bank holiday in the U.K. and in Australia in the quarter. On the back of the strategic decisions we took earlier in the year, we started our first quarter with a record EUR 2.8 billion backlog value, our highest ever. This includes IBI backlog, which, again, is EUR 530 million at the end of Q3, and that represents a strong backlog loss of 17% year-on-year, which is almost fully an organic growth. In terms of geographic split, we show a rebalanced backlog tailored to high-growth geographies and businesses with an increased share for Americas, representing now 50% of our backlog. And on average, Places and Mobility backlog contain projects of longer duration compared to Resilience. And that's the reason why we have 30% backlog -- 34% backlog for Resilience at the end of the quarter and a rather longer backlog on Places and on Mobility. And with that, I will hand you back to Peter.

Thank you, Virginie. I hope you do agree with us that these are a strong set of results. I'd now like to focus a little bit more on our strategic progress to date. And let me begin by doing so and showing how we are bringing digital leadership to the heart of all we do at Arcadis. Following the successful completion of the IBI acquisition in September, we're now moving forward with establishing our fourth GBA, called Intelligence. The new GBA will combine the best of IBI's Intelligence segment and Arcadis Gen to create an attractive suite of data-driven products and solutions to meet the ever-changing priorities of our clients. Intelligence will support Arcadis' existing GBAs and deliver a wide range of services from tech-driven consulting, such as software and systems design and integration, Software as a Service or Software as a Product. And one such example is Travel-IQ, an advanced traveler information system designed by IBI that provides real-time multimodal trip planning to the public, which is highly complementary to our Mobility GBA solutions. For sustainable solutions, I want to put the spotlight on the recent and intended acquisition of DPS. The acquisition of 2,800 people business will drive our ability to increasingly serve our clients with sustainable solutions across all phases of their asset life cycle. Clients in the life sciences and semiconductor sectors, which are the sectors in which DPS operates, are increasingly looking for full service offering from an adviser they can trust and an adviser that offer speedy delivery. Arcadis already has a critical role in early stages of these type of projects, particularly around site identification, environmental planning and permitting and at the end of the project, including facilities management. Our DPS fills in the significant gaps providing expertise at the core of the project in the case of semiconductor manufacturing, the design and build of the manufacturing facilities to ultimately produce the semiconductor chips. Together, Arcadis and DPS are strongly placed to be that full service provider for clients in the life sciences and industrial manufacturing and technology markets, combining our complementary service offerings expertise and our global reach. On focus and scale, throughout Q3, we've made significant progress in optimizing our strategic portfolio and focusing our efforts on operations where we see most attractive opportunities. As Virginie mentioned earlier, this has resulted in the divestment of our noncore business in Switzerland, Malaysia, Singapore and our Design & Engineering business in Hong Kong. These divestments represent about 900 people and about EUR 47 million of annual net revenue. And they were in addition to the divestments of the Czech Republic, Slovakia, Thailand and our noncore environmental restoration business in France in the first half of 2022, which altogether represented about 190 people and about EUR 11 million of annual net revenues. We will continue to review the strategic portfolio in Q4, again, based on criteria including scalability, long-term growth potential, financial performance and scope of services available to our clients. To conclude, I'd like to summarize our strategic progress this year, following the implementation of our global operating model and the creation of the 3 GBAs, I am confident well-positioned organic growth with inorganic growth opportunities. The acquisitions of IBI, Giftge Consulting and the planned acquisition of DPS are not only fully in line with our strategy, but they will also allow us to accelerate the delivery of our 2021, 2023 targets. Furthermore, we have seen growing demand for digital products and sustainable solutions from clients, highlighted by strong results and a record backlog. The recent acquisition of Giftge Consulting will only further strengthen our position in the energy transition market. And Arcadis, joining forces with DPS, will allow cross-selling of sustainable solutions, including sustainability advisory, enviro, social planning and permitting. By focusing and scaling our business across 2022, we have driven operational efficiency through the new GBA model and greater use of GECs, focused on high-growth markets and moved away from countries that are considered noncore from a geographical or from a services point of view. In 2023, we see greater opportunities to further scale our operations and focus on the buoyant North American market, bringing the best Arcadis has to offer to address clients' needs. So to wrap up, although the evolving geopolitical situation and Inflationary headwinds remain firmly on our radar, our strong revenue growth, record backlog, combined with the exciting new growth opportunities, IBI, DPS and Giftge offer positions us really well to meet our 2023 strategic targets. I can only be very proud of all the teams across Arcadis that have kept the right focus on our clients in these busy, but yet exciting and challenging time for our company. It is on that note that you will have also heard my news today that I plan to retire at our AGM in May of next year and hand the baton over to Alan Brookes, our Chief Operating Officer. Alan brings significant international senior leadership experience, a very strong strategic commercial and operational background and a deep understanding of Arcadis. It's been an honor and privilege to lead Arcadis over the last 5.5 years. I will, obviously, miss these sessions with all of you greatly. And with that, I'd like to hand it over to Christine, who will after some short introductions, open it up for Q&A.

Hereby, I would like to open it up for Q&A. I already see some requests for questions coming in. Okay. Martijn, I see that you have a number of questions. Please go ahead.

Can you hear me?

Yes, we can. Go ahead.

Okay. My first question is on the organic backlog development. If you take the last 3 quarters, even though still healthy, they have declined yet you speak in the press release about strong demand. Can you explain the developments? And secondly, and this is the one question, should we read that statement on strong demand that you're expecting an acceleration again going forward? So that's question one. And the second question is about cash conversion. Obviously, leverage is up at 2.2% -- 2.2x net debt to EBITDA pro forma at the end of this quarter. You've mentioned talking about the acquisitions that deleveraging will mainly come from the high cash flow conversion, yet cash conversion in the last two quarters hasn't been that great. So my question is, what are you going to do to improve that? And when will that actually happen? Is that already going to happen in the fourth quarter or will that take a little bit more time? And then I'm just going to sneak in a third question, have you guys had any update in terms of thinking about your balance sheet? The debt and refinancing question.

Yes. Thanks, Martijn. So let me -- as we almost always do kick it off and address probably the first half of your three questions, and then I'll turn it over to Virginie to answer the second half. So the strong demand is, obviously, reflected in the backlog, which we already have. And to grow a backlog, while you, at the same time, also grow the work you execute, I think, is a reflection of that demand. We have grown substantially, but yet with the growth, we have still been able to take on more work than we have performed. And then maybe a bit more anecdotally, and not reflected in the numbers, but still important is what we're hearing from our clients. And despite the challenges, which I think we all face with the geopolitical tension, the inflationary environment. At the same time, many clients, particularly in the, say, private domain, do see the need to accelerate the energy transition as a way to actually allow them to survive. That sounds somewhat dramatic, but it is a fact. It is a fact that if they don't accelerate the energy transition with the challenges we see immediately ahead of us that it will be really difficult for them to survive. And we see examples, which I don't need to probably mention, but you just have to follow what has been seen, if you like, in the local press recently. So the strong demand is something we expect to continue despite the -- that doesn't mean that we're ignorant and turn away from recognizing that these challenges exist. But the fact of the matter is that what we hear from our clients is a need to help them with energy transition and climate adaptation. And if you then add on top of that what we obviously see from the public clients, particularly in the regions, which have our full focus, and that, of course, includes Europe and North America and particularly when you look at government investments in many plants, which have to do indeed with a greener future with more sustainable assets than that does indeed at the end of the day, suggest that the demand is still very strong. So your second question is on free cash flow. What are you going to do to improve that? As you will have noted from prior years, free cash flow is quite seasonal. That has also been the case last year. And our expectation is that it will be exactly the same this year as well. So it is not like we need to do a lot of new things. The focus on free cash flow started back in early 2020. I think from that moment onwards in 2020 and 2021, over the year, we have generated strong free cash flow. And with a strong finish to the year, we expect to do the same in 2022.

If I may follow up on that. So in the second quarter, you mentioned that unbilled receivables went up because of high growth. You're saying that, that is basically what happened in the third quarter again, and that will reverse in the fourth quarter. That's basically the message?

The fourth quarter will be the usual strong fourth quarter as we've seen in prior years.

Okay. Got it.

And again, I think that if you have a look on the big metrics of the balance sheet, you can see that the [indiscernible] remain maintained and the net working capital percentage is also really maintained, which shows that, yes, it's increasing, but it's not increasing in the same pace. So then the effort of the team to maintain that are quite good. And I would say that what is impacting the cash flow of the quarter is, obviously, additional year-on-year elements of payments that we've been doing due to the transaction that has been happening over the third quarter and that the discipline is there and the cash conversion levels are maintained. So that is -- yes, we have really cash conversion, which is really back-end loaded in the year. We have typically very high [indiscernible], of course, to the end of the year. We still expect to see that this year. And there is no specific issue on our side, seeing where we are today. This is fully in line and what has been happening to the group over the last 6 to 12 months, I would say.

Just one minor follow-up. Will you be able to share the amount of the transaction costs, so we can calculate impute ourselves a bit what the working capital impact was?

Get the full P&L in the full year as usual, getting everything in part of it, for sure, will probably go on following in Q4, but that remain a small bucket, of course, quite well managed. I would say that the biggest element is noncash cuts related to the loss of -- attached to the divestments of Southeast Asia and other small European elements. I think that the last question of Martijn was around financing and such. So I don't want to really forget on that one. So Martijn, thanks for the question. I think that we have the bridge financing, which is in place. We've been growing it as you can expect. So it's there. It's something, which is valid for the next year with two opportunity of extending it. It's quite an attractive rate and such. Hence, we are not going to sit on it because that's not the governance of the company. So we'll see any window, who think is opportunistic in the [indiscernible] and in front of us to combat that in a solid financing element.