Arcadis
Presenter: Joost Slooten
Thu 7 May 2009
Ref #4458537
Page 1
Arcadis
Presenter: Joost Slooten
Thursday 7th May2009
17h00 CET
Operator:Good day and welcome to the ArcadisQ1 2009 results analystscall. For your information, today’s conference is being recorded. At this time, I would like to turn the call over to yourhost today, Mr Joost Slooten. Please go ahead.
Joost Slooten:Thank you, operator, and welcome to the Arcadis first quarterconference call. Here with me today are Harrie Noy, CEO, and Ben van der Klift, CFO of Arcadis, to answer your questions with regard to the results that were published earlier today.
The management will first hold an introduction to the call based on a presentation that is posted on the Arcadis website, for which the address is and in the investor section you will find that presentation. Management will cue you when the next slide is up during the course of the presentation and again, the web address for that presentation is And I now give the floor to Harrie Noy, CEO.
Harrie Noy:Thank you, Joost, and welcome everybody to this Arcadis conference call where we discuss the first quarter results for 2009. I will indicate when I go to the next slide, which I'm going to do now, so the first slide is about the introduction results first quarter 2009, going to the next slide which gives an overview of the main items of the 2009 first quarter results.
I think in general we feel that we had quite a decent quarter, particularly given the present market circumstances. Revenue and income were kept at a good level. Gross revenue rose by 5%, partly coming from a positive currency impact, and the positive currency impact was mainly caused by the stronger dollar compared to the euro in the first quarter of ’09. We had strong organic growth, particularly in infrastructure, and that compensated for declines in both environment and buildings. On balance, we had a marginal organic decline of activities. Margin remained at a good level, and I will come back to that issue in a minute. Net income from operations has grown slightly. ‘Slightly’ means by about 2%. And of course we’re going to discuss the outlook more extensively, but the outlook for 2009 remains uncertain because of the economicsituation.
Going to the next slide, the next slide produces an overview of the key figures of the first quarter, income in the first quarter, and there I am referring to net income from operations, amount to €15.5 million. Gross revenueincreased to €418 million from €400 million last year, an increase by 5%. Net revenueincreased also by 5% from €277 million to €291 million. EBITDAincreased to €27.9 million from €27.5 million last year, an increase by 1%. Net income increased substantially, by 74% from €11.6 million to €20.2 million, and the main reason for that strong decline…that strong increase, is the sale of the derivatives that we announced already when we announced our annual results, and we’ll come back to that later on during this presentation. Per share net income increased to €0.34 from €0.19, an increase by 79%. Going to net income from operations, which we think gives a clear indication of how the company performed because it excludes those types of extraordinary impacts, net income from operations increased to €15.5 million from €15.3 million, an increase by 2%, so very well-aligned with the increase of EBITDA, which increased by 1%, and per share the increase was from €0.25 to €0.26, an increase of 2% as well. As I mentioned, we had a strong positive currency impact in the first quarter, particularly coming from a stronger US dollar versus the euro.
If I go to the next page, which summarises the most importantdevelopments in the first quarter, I think what is clear from the first quarter results is that the infrastructure market is quite robust against the recession. Of course that’s something that we expected but it’s also nice when it actually appears to be the case. The infrastructure market is to a large extent dominated by governmentinvestments. Governments’ investments are holding quite well in present market circumstances, even without the input of the stimulus package, and that has resulted in that strong performance in the infrastructure in the first quarter.
In most Europeancountries our business has grown organically. That was actually the case in all Europeancountries except for the UK, and UK is the European country where we have seen a strong revenue decline, particularly in the real estate market and particularly in the commercial part of that real estate market, which is bad. The commercial real estate market in the UK is probably as bad as it can be, and that has resulted in a strong revenue decline in that country.
If we look to the United States then we are impacted by the economic crisis as well, also reflected in our revenues, both within RTKL (the architectural design and master planning practice) and also reflected in our environmental revenue. We have seen in the quartercontinued growth in Brazil, at very decent levels, but what we also see is a weakening, particularly in Brazil, due to the lower economic growth in that country.
Looking at the results, these are under pressure, both in RTKL and in our UK organisation, and that’s of course due to the market circumstances and that has also meant that we adjusted our organisation in the first quarter in those two parts of Arcadis. In all other parts of Arcadis besides RTKL and the UK, we have seen a growing level of EBIT, a growing level of profitability, and that includes the United States. So we have had declining revenues in our US organisation. If I, let’s say, exclude RTKL so in the remaining parts of the US business, which is predominantly environment and infrastructure, we have seen a decline in revenues. I'll come back to that in a minute. But nevertheless, our profits from the United States have grown, which shows that despite the market circumstances, we have been able to increase our margin in our US business excluding RTKL.
That brings me to the last point of the slide, the overall margin. The overall margin stayed at a good level and that’s mostly due to strict cost controls that we have implemented already as from the first quarter of 2008 and that we continue to focus on through the first quarter as well.
Next it gives an overview of organic growth, and that reflects clearly what’s happening in the market circumstances. In ’06 we still had an organic growth of 10%, ’07 of 16%, ’08 it went down for the total year of 6% but you remember that there was a big difference between the first half and the second half. First half organic growth was still at levels close to 10% I think on average, and in the second half it went down to levels, let’s say somewhere in the range of 3%-4%, resulting in an overall level for the total year of 6%. And that development, that decline in development of organic growth continued in the first quarter, as the first quarter on balance we produced a marginal organic decline of about 0.5%, and we mentioned that it was 1% in our net figures.
The next slide continues with EBIT. That also reflects, I think, the present market circumstances. EBIT still increased by 1% to 27.9% but that was to a large extent also due to the impact of the increased value of the dollar compared to the euro. That currency impact had a negative…had a positive impact of 7%, so excluding the currency impact, the EBITDA declined by 6%.
Going on to the next slide, that shows you the developments in EBIT from the first quarter of ’08 to the first quarter of ’09. The first quarter of ’08, EBITDA amounted to 27.5% then we had a currency, positive currency impact of 7%, a contribution from acquisitions which amounted to 2% and then resulting organic decline of 8%. And that resulted in an EBITDA in the first quarter of ’09 of €27.9 million. What we have to take into account is that we did not have a contribution from carbon credits in the first quarter of ’09. In the first quarter of ’08 we had still €600,000 contribution from carbon credits. If we take that into account and we compare the first quarter of ’09 with the first quarter of ’08 then the organic decline amounts to 6%, and 2% is actually caused by the fact that we do not have a contribution from carbon credits in the first quarter of ’09.
That’s also explained on the next page where we have some financial details. As mentioned, no contribution from the sale of carbon credits in Brazil. That’s due to procedures that take more time, so we still expect those carbon credits that we have produced in the first quarter to be certified but before these are being certified, it takes more time because of lengthier procedures than we expected. So that contribution will still come, but in later quarters than the first quarter.
As mentioned, the organic…the EBITDA decline was 8%, excluding the impact of carbon credits, 6%. Margin amounted to 9.6% but if we exclude the impact of the carbon credits that we didn’t receive in the first quarter then the margin actually amounted to 9.8%, which is very comparable with the 9.9% that we produced in 2008. So basically you could say that excluding the impact of carbon credits, margin was more or less stable, which is I think a good achievement that we reached due to the strict cost controls that we had in place, anticipating the market circumstances that were deteriorating as from the second half last year.
We have unwound the derivatives that we had in place. We have explained that when we announced the year end results. An unwinding of those derivatives had a positive impact of €7.5 million. That €7.5 million contribution is included in the financing costs, so in the line ‘Financing costs’ you see that positive contribution. That’s the reason why we report positive financing charges, which is quite unexpected given the debt that we have. But if you exclude that, actually the financing charges also were more positive than the last year, I think €2.4 million compared to €3.6 million corrected for the derivatives in 2008.
The positive impact of these declining financing charges was to some extent offset by an increased tax pressure, and that meant…and there was also a lot of minority interest due to less profits in Brazil, particularly due to the fact that we did not have a contribution of carbon credits and that all in all, this shows an net income from operations which shows an increase of 2%, very well in line with the increase of 1% that we saw at the EBITDA line.
Next slide goes to the market segments, first infrastructure. In the first quarter 2009, infrastructurerevenues increased by 11%. Organic increase was 12%, acquisitions contribution was on balance zero and the currency impact was a negative 1%. We have seen for the total revenues that the development of gross revenue and net revenue was very well-aligned. Both increased by 5% overall, so I'm not talking now about infrastructure but I'm talking about overall revenues increased by 5% in total. We had a currency impact for the total business of 4%, a contribution from acquisitions of 2% and that meant on balance an organic decrease, a marginal organic decrease of 1%. And that development was comparable for gross revenue and net revenue.
Looking at the business lines, there’s a substantialdifference between the organic developments in gross revenue and net revenue, and that’s the reason why we have included in our reporting also the organic increase or decrease with respect to net revenues. In infrastructure that organic increase amounted to 8% and a difference compared to the organic increase of gross revenues was due to a lot of subcontracting in energy projects in Brazil. So all the other businesses’ developments of gross and net revenue were more or less in line with each other.
We had a particularly strong performance in the Netherlands and in Poland due to strong investment, governmentinvestments in both rail and roadway projects. In Poland we still benefit from the very strong backlog that we have which amounts to more than two years. Strong investments, governmentinvestments supported by European funding but also in the Netherlands we see that the government is investing in both adjustments of highways and railways and that produces a lot of work for Arcadis, particularly given the fact that Arcadis has a very strong competitive position in those areas.
We produced also growth in other Europeancountries, and there I am referring to France, Belgium, also Germany. Also the United Statesinfrastructure markets contributed to growth, particularly in the water markets where we have a very strong backlog which is fuelled by the New Orleans contract. And also in South America, both in Chile and Brazil, growth continued but we see some pressure on private sector investments due to the weakening economy in Brazil.
The next slide is about environment. First quarter 2009 we produced a revenue growth, gross revenue growth of 2%. Organic gross revenue developed, was minus 11%. Acquisitions contributed 5%, and that contribution from acquisitions mainly came from LFR that was acquired by the end of January 2008 and still has an acquisition contribution due to the month of January 2009, and of course we acquired last year also SET, a company, a small company in Italy that also contributed to acquisitions.
Currency impact was high because a large part of our environmental business comes from the US and, given the fact that the dollar was stronger, the currency impact in the environmental business line was a plus of 8%.
A big difference between the organic decline of gross revenue and the organic decline of net revenue. Organic decline of net revenue amounted to 4% and the reason of the difference is that in the course of 2008 some large projects with a lot of subcontractors were ended in the United States and of course in the present market circumstances we do also more of the work by our own staff, which also creates the difference.
What has to be taken into account in looking at those organic developments is that the comparison base is related to the first quarter of ’08 and that comparison base is relatively high because in the first quarter of ’08 we still had an organic growth of gross revenue of 19% and of net revenue of 12%. So you have to see this organic decline of net revenue also in perspective.
Revenue decline mainly comes from the United States where part of our private sector clients are seriously affected by the crisis, which has an impact on our environmental business. We anticipated that impact so we have reduced our capacity. That’s also a reason that our net revenue went down organically but due to the fact that we decreased our capacity, anticipating the lower backlog that we noticed in environment, we were able to maintain the margin in the United States at a good level and even in the first quarter in the United States in our environmental business, we were able to increase our margins.
In Europe we continued with growth in environment, notably in the remediation work but also environmental impact assessments for infrastructure projects contributed to growth in environment in Europe.
Then we go to the next page, buildings. First quarter of 2009, a decline of 1%, organic decline of 4%, contribution of acquisitions 0% and a currency impact of 3%. Here we see the reverse compared to the environmental segment. Net revenue organic decline is stronger than gross revenue organic decline. Net revenue organic decline amounted to 7%. The difference is caused by the growth of facilitymanagement, which has relatively speaking a high amount of subcontracting. Buildings is the segment that is the most hit by the present market circumstances. The strongest decline took place in the United Kingdom where the real estate market, particularly in commercial real estate, came to a standstill.
Also RTKL is suffering, particularly in the commercial market in the United States. It’s not as bad as in the UK but definitely market circumstances are poor in the commercial market. Healthcare and government business in the United States are holding up quite well. Actually we had growth in the first quarter in both healthcare and government, more in healthcare than in government but both segments produced growth within RTKL.
Also our international business of RTKL is doing quite well. We are particularly successful in Asia, both in master planning but also in architectural design, and part of that work is being executed in the United States, so that compensates for the decline in commercial projects from the United States, but that’s insufficient to compensate for the decline in the US commercial market, so in the meantime we have adjusted capacity in RTKL to deal with those circumstances and also to protect our margin.
Facilitymanagement is doing quite well and we have also concluded a new contract in the first quarter with the Dutch railways, and that’s going to contribute probably as from the third quarter this year.
Then we go to the outlook, which is a slide in between, and then we go to the outlook per segment, which is the next slide. The outlook has not changed that much compared to the outlook that we discussed when we issued our annual results. Infrastructure market is probably the most solid market in present circumstances, as I mentioned, because it’s dominated by the government. Both in the United States and in Europe we see governmentprogrammes to stimulate the economy but besides that, because the impact of those governmentprogrammes is not particularly strong at the moment, we expect those programmes in the US to have an impact as from the third quarter this year but the major impact will be in 2010. We see a little bit of an impact already because of clients asking us to prepare plans so that they can immediately benefit from the stimulus package but that’s not playing a major role at this point in time.