Arcadis : Trading update Q1 2021 - transcript

Arcadis N.V. Q1 2021

Trading Update

Tuesday, 20th April 2021

Transcript produced by Global Lingo

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Arcadis N.V. Q1 2021 Trading Update

Tuesday, 20th April 2021

Arcadis N.V. Q1 2021 Trading Update

Jurgen Pullens: Good morning, everyone, and welcome to this virtual analyst meeting. My name is Jurgen Pullens, Director of Investor Relations, Arcadis. We are here to discuss the company's trading update for the first quarter released this morning. And with us are Peter Oosterveer, CEO, and Virginie Duperat, CFO.

We will start with the presentation by Peter and Virginie, which will be followed by a Q&A. For the analysts attending this call, in case you would like to raise a question, please notify us by using the chat box typing I have a question or simply question. Please do so only after we have opened for the Q&A. I will call out your name, after which you can verbally raise your question to Peter and Virginie. Kindly, keep to a maximum of two questions at a time.

Lastly, we call your attention to the fact that in today's session management may reiterate forward-looking statements, which were made in the press release. We would like to call your attention to the risk 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 begin.

Peter Oosterveer: Okay. Thanks, Jurgen. Good morning, everyone. Thanks again for joining us today to discuss our trading update for the first quarter of 2021. I will start by providing you with a summary of our operation results for the first quarter followed by some more insights in the current market developments and also talk about our order intake. And I will then turn it over to Virginie to get into further detail on our results.

When looking at our performance for the first quarter, it is almost hard to imagine that we are already dealing with the pandemic for over a year and still largely working from home, finding new ways of collaborating with colleagues and with clients, while growing our business at the same time. And in that context, and with that as a backdrop, therefore really proud and pleased to report that we started 2021 strong, driven by the dedication of the more than 27,000 fellow Arcadians, who have continued to support our clients during the current pandemic.

Our now institutionalised performance enhancements, such as Make Every Project Count and focus on our key clients, combined with the actions we identified in the early part of last year, have created further margin improvement as well as continued strong order intake in the first quarter. The order intake was driven by large infrastructure investments and a further increased focus by our clients on carbon reduction and climate change mitigation. And I will talk about some of that in more detail a little later.

As you will have seen, the revenue was organically 0.5% higher than Q1 of last year, 0.8% when excluding the Middle East, and back to growth compared to the previous three quarters, which of course were impacted by COVID-19.

Our operating margin improved like-for-like with 2 full percentage points to 9.2%, driven by particularly strong performance in North America and the UK, as well as at the beginning of a recovery in China now that it returns to a degree of normalcy.

Our performance in the first quarter, combined with our strong balance sheet and our 3% growth in backlog, gives me confidence in our ability to create further growth throughout the year, despite the still challenging circumstances. As we discussed during our Capital Markets Day, we see four global megatrends - urbanisation, climate change, digitalisation and societal

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Arcadis N.V. Q1 2021 Trading Update

Tuesday, 20th April 2021

expectations, across the globe, which impacts societies and also obviously impact our clients, and which, as a result of that, provide many opportunities for Arcadis.

In addition, we see public stimulus and regulation in especially the US and Europe that also favour the variety of solutions we can offer in resilience, in mobility and in places. The EU taxonomy, which is an important enabler to scale up sustainable investments sees energy, transport and construction, but also water supply and remediation activities as sectors that have the biggest opportunity to contribute to greenhouse gas emissions reduction.

And these are obviously the exact areas that many of our clients are in, and where we can advise them on how to best mitigate their impact on the climate and allow them to meet their sustainability goals.

The US stimulus programme focuses, amongst others, on new mobility, clean energy, electric grid modernisation and EV network support. And we already see many EV-related infra opportunities globally and are increasingly advising large automotive clients on the new built or the transformation of their factories to accommodate them in meeting their sustainability ambitions.

In Environment, we see a strong pipeline of opportunities for key clients such as, for example, the US Federal government, which actually also includes opportunities for PFAS remediation.

In Water sector, clients increasingly choose us as their innovation specialist. We use artificial intelligence practices to optimise the enormous water consumption that clients face across many industries. It goes without saying that sustainability has become mainstream, and for us that includes clients, who for instance need[?] new data centres, which in itself is already a market growing at a 10% growth per annum. Pharmaceutical, chemical clients just to name a few.

And finally, in places, we see an almost obvious increase in clients requests obviously accelerated by COVID to optimise and repurpose their office space, as well as optimise their operational and maintenance spend through deeper data analytics.

Looking ahead, we are really well-positioned to maximise our impact, as well as the impact of all of our stakeholders by seizing the opportunities which really play to our strengths, allowing us to apply our global capabilities, our global knowledge and our global expenses, continue to invest in our strategic priorities and delivering the resilience and future-proof solutions that our clients need. And you will actually see a few examples of these future-proof solutions on this slide.

The order intake in the first quarter was €693 million, resulting in a favourable book-to-bill of 1.1, and an improvement on a like-for-like basis compared to Q1 last year. Our further sharpened focus on our key clients continues to generate more work for these key clients. For example, we won projects for a total of $24 million for the US Army Corps of Engineers related to the remediation of several defence sites.

In the UK, we had a really nice 3 million win from Roche to set up laboratories across UK hospitals. And another example, a little closer by, in Germany, we won a project where we offer our digital solutions for groundwater management by making use of modelling and flood simulations. And back in the US, we continue to win work from significant public clients like the

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Arcadis N.V. Q1 2021 Trading Update

Tuesday, 20th April 2021

Department of Transportation in Alabama, Louisiana and Georgia, to help reduce congestion and improve mobility for people around major cities in these states.

As we have started to implement our new strategy, maximising impact, we will obviously continue to focus on creating a lower carbon future, mitigating the impacts of climate change and consistently provide digitalised and sustainable solutions to our clients. This is clearly exemplified in the work we have won from both our public and our private sector clients.

Additionally, our recent wins in Infrastructure demonstrate our excellent position in capitalising on the significant investments made in sustainable infrastructure, in particular, in Europe, including UK, but also obviously in North America.

And I will now turn it over to Virginie for further detail on our financial performance.

Virginie Duperat: Thank you, Peter, and good morning, everyone. Let me share with you some further comments on our performance in the first quarter.

First, operating margin and free cash flow improved. In our first quarter, we delivered a net revenue of €632 million, which resulted in a 0.5% organic growth, and excluding Middle East, this organic growth was 0.8%. Foreign exchange resulted in a negative translation impact of 4.5%, notably due to the weakness of the US dollar, taking €30 million of our top line in the first quarter.

Our operating EBITA in the quarter further improved by 21% to €58 million, leading to an operating margin of 9.2% in the quarter. As usual, we annually have cash outflow in the first quarter, but Q1 2021 free cash flow with the negative €39 million showing a significant improvement compared to a negative €84 million end of Q1 2020. This resulted in a net debt position of €107 million to be compared to €424 million a year ago.

To put our quarterly results in perspective, you see that we reversed the negative organic growth trend this quarter. After three quarters of revenue decline, we are back to organic growth despite still challenging circumstances. As mentioned, our operating EBITA in Q1 increased significantly to €58 million or 9.2% creating one of the best first quarters in many years.

Net working capital as a percentage of gross revenues was 15.3% compared to 19.2% in Q1 last year. And days sales outstanding decreased to 78 days compared to 95 days one year ago. And this is clearly the result of the cash programme undertaken launched at the end of Q1 2020. The working capital levels are impacted by a seasonal pattern and generally are at a higher-level end of first quarter.

As you are used from us in trading update, please find a few comments on the revenue developments in the segments. In the Americas, we have seen an organic growth of 3% and an FX impact of minus 10%. In this region, and especially in North America, growth in Infrastructure and Water for public clients compensated for decline in Environment for private sector clients. And in Latin America, organic revenue growth was really strong, driven by infrastructure work in Brazil.

In Europe and in the Middle East, revenue growth was 3%, despite the declining footprint in Middle East. Net revenues in continental Europe were in line with last year. Slight revenue decline in the Netherlands was compensated by growth in infrastructure work, especially in Belgium, Poland and in France.

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Arcadis N.V. Q1 2021 Trading Update

Tuesday, 20th April 2021

Net revenues in the UK increased organically due to strong growth in Infrastructure, Water and Environment, compensating for decline in buildings. And finally, revenue in the Middle East, slightly declined, driven by our decision to reduce our footprint in this region.

Moving to Asia-Pacific, revenue decline was minus 4% as China recovery did not fully compensate the decline in other Asian countries continuing to face challenges due to COVID-

19. Moreover, Australia shows a decline in revenue as Q1 '20 was exceptionally strong due to the contribution of one significant project. And COVID-19 crisis resulted in a temporary delay in award of projects in 2020.

Net revenues in CallisonRTKL are in line with Q4. However, like-for-like impact of COVID-19 is still highly visible. Organic net revenues declined by 18% affecting mainly retail and commercial sectors, which were severely impacted by COVID-19 and which show small signs of recovery in healthcare sector.

To conclude, return to revenue growth in combination with good order intake and solid backlog position demonstrates that we are on track to deliver solid organic growth for the year.

And with that, let me hand it back to Peter.

Peter Oosterveer: Yeah. Thank you very much, Virginie. And let me now wrap up our presentation reminding you about the strategic targets we set for 2023, which we did present back in November of last year during the launch of our strategy maximising impact. I'll also then provide a brief summary of our Q1 update, before we obviously will go over to questions and answers.

We are maximising our impact in our projects driven by our passion to improve quality of life, making the world we live in a better place for our clients, for the communities in which we work and for all of our people obviously as well. And we will continue to make the right choices to remain a resilient business, focusing on regions, on clients, on projects, which clearly provide us an opportunity to win, while addressing the global societal challenges through sustainable people-centric solutions.

In terms of our financial targets, we simply aim for further improved predictable and profitable growth, satisfying the interests of all our stakeholders, and we feel confident about our ability to deliver on the commitments we made during the recent Capital Markets Day.

In terms of non-financial targets, we want to further advance our course to be the employer of choice through a lower voluntary turnover and higher engagement by creating a diverse inclusive culture in which everyone can be their self. We commit to further lowering our carbon footprint to align with the 1.5 degrees science-based targets and to achieve this as soon as possible, but in any event before 2030.

We furthermore plan to develop a structure which will allow us to, in a more tangible way, define how the work we deliver on projects for our clients contributes to a better and a more sustainable world.

To summarise our performance in the first quarter, I really believe we had a good start of the year, considering the circumstances. Our current performance, in combination with a strong order intake, gives me confidence that we are on track to realise further growth in 2021. The strong underlying industry fundamentals and economic expectations do support this strongly.

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