Arcadis NV (ARCAY) (Q2 2024) Earnings Call Transcript Highlights: Strong Growth and Improved Margins

Arcadis NV (ARCAY) reports robust order intake, significant revenue growth, and improved operating margins for the second quarter of 2024.

Summary
  • Order Intake: EUR1.1 billion, reflecting growth of 8.6%.
  • Net Revenues: EUR991 million with 6% organic growth for the quarter.
  • Backlog: EUR3.4 billion, reflecting 5.6% organic growth year-on-year.
  • Operating Margin: Increased from 9.7% last year to 11.5% for the quarter.
  • Net Revenue (First Half 2024): EUR2 billion, with 5.2% organic growth.
  • Operating EBITDA Margin: Improved to 11.1% from 9.7% in the prior year period.
  • Cost Synergies: EUR10 million delivered in the first half.
  • Net Working Capital: 12.7% with day sales outstanding at 66 days.
  • Free Cash Outflow: EUR88 million, including EUR24 million interest payment on Eurobond.
  • Net Debt: Decreased to EUR1 billion, with a net debt to operating EBITDA ratio of 1.9 times.
  • Order Intake (First Half 2024): EUR2.2 billion, resulting in a book-to-bill ratio of 1.12 times.
  • Net Income from Operations: Increased 23% to EUR126 million or EUR1.40 per share.
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Release Date: July 25, 2024

For the complete transcript of the earnings call, please refer to the full earnings call transcript.

Positive Points

  • Arcadis NV (ARCAY, Financial) reported a record order intake of EUR1.1 billion, reflecting growth of 8.6%.
  • Net revenues for the quarter reached EUR991 million, with solid organic growth of 6%.
  • Operating margin improved significantly from 9.7% last year to 11.5% this quarter.
  • Backlog stands at EUR3.4 billion, reflecting an organic growth of 5.6% year-on-year.
  • Significant wins in water optimization and advanced industrial manufacturing, including major contracts with UK water utility companies and data center advisory services.

Negative Points

  • Net working capital percentage increased to 12.7%, driven by a strong June performance.
  • Free cash outflow of EUR88 million, although in line with seasonality, included a significant interest payment on a Eurobond.
  • Middle East operations continue to unwind, incurring costs that offset some revenue gains.
  • Despite strong order intake, some framework agreements will not translate into immediate bookings until next year.
  • Geopolitical factors and election cycles could impact market dynamics and client investment decisions.

Q & A Highlights

Q: Can you elaborate on the different growth rates you're seeing in order intake by GBA, particularly the very strong acceleration in places to 21%? But at the same time, you're also saying there's more discipline in resilience with where order intake was only 1%. Would you expect that based on your current order backlog and these differences in order intake, you would see an acceleration in organic revenue growth in the second half of the year?
A: Alan Brookes, CEO: We've seen 21% in places due to significant investments in data centers and the semiconductor market. In resilience, we have been more selective, which is reflected in the order intake. We are confident in continued demand for our services in resilience and expect an uptick in H2. The stimulus packages are starting to convert into projects, and our focus on key clients is providing more visibility and focus.

Q: On the profitability in resilience based on the selective order intake, you had very strong progress in your margins. Is there still room for further upside? Or should we think about margin improvement more in places and in mobility from here?
A: Virginie Duperat-Vergne, CFO: The increase in our operating margin in resilience is driven by the energy transition market, especially in Germany. There is still significant room for further development in this market, particularly in climate adaptation and advisory solutions.

Q: I understand that organic growth was mainly driven by price increases. Do you see further room for improvement? And why was there no better billability for the FTE increases within Arcadis, but also at the GECs?
A: Alan Brookes, CEO: We will continue to see improvements through other levers such as growing the GECs, standardization, and automation. The GECs are significantly used by mobility, and as large projects come through, we expect an uptick in billability.

Q: Do you think it's still feasible to go back to the 9.3% net working capital to sales ratio for the whole of 2023?
A: Virginie Duperat-Vergne, CFO: Achieving a strong performance and maintaining discipline around DSO is crucial. We expect to remain around the current level, but the ramp-up of large projects might impact working capital.

Q: You mentioned EUR20 million of savings on track. How much did you realize in the first half of that EUR20 million?
A: Virginie Duperat-Vergne, CFO: We realized EUR10 million in the first half.

Q: How is the progression of the Global Excellence Centers (GECs)?
A: Alan Brookes, CEO: We have developed criteria for a new GEC and are in the search process. We saw a 21% growth in GECs this year, with the majority of headcount increase in GECs. This is aligned with our strategy to increase capacity and capability in GECs.

Q: What do we expect for the results in the Middle East in the second half of 2024?
A: Virginie Duperat-Vergne, CFO: The cost of winding down remains at 3% of margin cost into H2. We saw some cash inflow from old values being paid, which offsets the winding down costs.

Q: Can you walk us through how AMP8 framework agreements translate into bookings?
A: Alan Brookes, CEO: Framework agreements mean we have the work, but bookings only occur when we receive an instruction or purchase order. The visibility of committed expenditures provides us with future pipeline and order book insights.

Q: Can you elaborate on the strength in energy transition investments?
A: Alan Brookes, CEO: We see significant demand in Germany for renewable energy and grid upgrades. In the UK, there is a focus on decarbonizing the grid. The energy transition projects are diverse, and we are building and training resources to meet this demand.

Q: Can you elaborate on the potential for further price increases beyond making up for inflation?
A: Alan Brookes, CEO: We are improving our pricing position by being more selective and focusing on high-value projects. As inflation becomes lower, we will focus on building out our solutions portfolio, which provides opportunities for continued pricing improvements.

For the complete transcript of the earnings call, please refer to the full earnings call transcript.