ARCADIS : delivers strong growth in H1 2015, good progress on leadership priorities, profitability impacted by Brazil and one-off US project cost overruns

 First half-year highlights 

• Gross and net revenue growth +41%; organic net revenue growth +2%; organic backlog up +1%
• Operating EBITA up +22%, positively impacted by Performance Excellence program but negatively impacted by one-off -€13.9 million US environmental project cost overruns, and Brazil
• Operating EBITA margin of 8.6% (H1 2014: 10.0%), excluding one-off project cost overruns 9.5%
• Integration of Hyder on track with synergies captured faster than with previous acquisitions and operating EBITA margin improving to 8.1% in Q2 from 5.3% in Q1 2015
• Net income from operations up +3% to €57.3 million
• Working capital improving to 20.2% of gross revenues vs. 22.3% in Q1 2015
• Free cash flow improved by €38 million to -€30 million (Q1 2015: -€68 million; H1 2014: -€12 million)

Full year outlook: We expect to benefit from strong revenue growth from acquisitions for the full year and from positive currency effects. In the second half of the year, we expect operating EBITA margin to improve to 10.5 - 11% supported by increased contribution from Performance Excellence program and by our actions to expand margins from the acquired companies. As a consequence, ARCADIS expects 2015 revenues to grow by about 30% and anticipates net income from operations to increase by approximately 20%.

July 29, 2015 - ARCADIS (EURONEXT: ARCAD), the leading global natural and built asset design & consultancy firm, today announced that in the first half year of 2015 ended June 30, the Company grew net revenues by +41%, mainly driven by acquisitions and favorable currency effects. Organic net revenue growth was +2%, reflecting the combination of an 8% growth created in rest of the world and an organic decline in North America of -2.5%, and -16% in Brazil where tough market conditions persisted. Overall, the operating EBITA increased by +22%, helped by our Performance Excellence program, in spite of one-offs and Brazil. The operating EBITA margin was 8.6%. Net income from operations grew +3%.

ARCADIS CEO Neil McArthur commented:
"We made good progress on our leadership priorities for 2015. However, our Q2 results have been impacted by continuing poor market conditions in Brazil and cost overruns on four environmental remediation projects in North America.

Brazil: Due to the recession, lower spending by mining clients and the national slowdown in procurement processes triggered by the integrity issues in the oil & gas industry, led to an organic decline in revenues of -17% in the second quarter. We expect the tough market situation to continue also in the second half of this year and anticipate a decline of -25% to -30% in our revenue in the second half of 2015 compared to 2014. Maintaining our operating EBITA margin above 10% is a key priority consequently we are adjusting our capacity by -25%. In the longer run, as these integrity issues subside, we are well positioned to benefit from our long standing presence and reputation.

North America: During the second quarter we recognized a €9 million cost overrun on a ten-year old lump-sum environmental project. Based on a subsequent review of the US environmental lump-sum project portfolio, cost overruns estimated at €4.9 million across three other projects were recorded. Having completed the review, we are confident these adjustments are one-off in nature.

Working capital: We were successful in reducing working capital, now 20.2% of gross revenues versus 22.3% end of Q1 2015. We expect further improvements as ARCADIS processes are rolled out in the acquired entities.

Leadership priorities: We are making good progress on our three leadership priorities:
1.  Acquisition synergies: with Hyder, our targeted £15 million operating EBITA run rate synergies by Q4 2016 will be achieved through cost out actions only. Revenue synergies through contract wins are tracking faster than for previous major acquisitions, partially driven by increased use of Global Design Excellence Centers. Hyder's operating EBITA margin in Q2 increased to 8.1% from 5.3% in Q1. Synergy initiatives with Callison are also on track with an operating EBITA margin of 13%, reflecting good revenue growth globally except in China.
2.  Performance Excellence: the first results from the program are visible contributing +0.6% to ARCADIS' operating EBITA margin, ahead of plan.
3.  North America turnaround: on track, organic revenue decline slowed to -2.5% and operating EBITA margin improved to 11.5%, excluding environmental project cost overruns.

Looking forward: Growth will be strong this year driven by acquisitions and aided by currency effects. Organically, net revenue growth is expected to fall short of our strategic goal of 5% as increases in UK, Continental Europe, Asia and the Middle East are offset by declines in Brazil and North America. I am confident that our profitability will increase in the second half of this year as we see increasing benefits from our Performance Excellence program and the impact of actions taken to further enhance the margin contribution from acquired companies."

Key figures second quarter

¹⁾         Excluding acquisition, restructuring and integration-related costs

Review of performance for the second quarter

Net revenue increased +41% with a +29% contribution from acquisitions, and +14% from currency effects. Organic growth was +2%. The remaining -4% relates to the impact from the project cost overruns. In North America our turnaround is on track and the decline in revenues is slowing. Environmental activities did not yet recover, while water saw a good organic pick-up, and infrastructure and buildings realized increased growth. In Brazil project delays and cancellations caused a decline of -17% triggering accelerated adjustments of our capacity (-25%) to protect margins. Continental Europe grew, driven by private sector demand. Middle East grew on the back of investments in buildings and infrastructure, with the latter bringing a number of significant synergy project wins for metro systems during the quarter. Organic growth in Asia remained high, with the exception of China where it slowed down. UK activities grew strongly, also organically, reflecting high investment levels in transportation infrastructure and buildings. Australia Pacific performed well, mainly driven by growth in infrastructure and buildings activities.

The US project cost overruns of €13.9 million affected both reported and operating EBITA. Reported EBITA was level with last year at €41.7 million, aided by currency effects and impacted by €0.8 million in costs related to acquisitions, as well as €11.5 million in restructuring and integration charges. Operating EBITA was up +11% to €53.9 million or 8.2% of net revenues. Excluding the one-off project cost overruns, the operating EBITA margin was 10.0%.

Key figures first half year

¹⁾ Excluding acquisition, restructuring and integration-related costs
²⁾ Before amortization and non-operational items (net of income taxes)
³⁾ Cash flow from operating activities minus investments in (in)tangible assets

Reconciliation of operating EBITA margin from H1 2014 to H1 2015

Review of performance for the first half year

Of the +41% growth in the first half year of 2015, net revenue was positively impacted by +28% growth from acquisitions (Callison, Hyder, Franz), +13% from currency effects and +2% from organic growth. Organic growth was driven by increases in Continental Europe, UK, Middle East, Asia, offset by the decline in North America and a negative impact from Brazil, where revenues dropped by -16%.   

The one-off US project cost overruns of €13.9 million also affected reported and operating EBITA and net income in the first half year. Reported EBITA increased +7% and included acquisition-related costs of €1.0 million and €23.3 million in restructuring and integration charges. Operating EBITA rose +22% to €113.3 million (H1 2014: €92.7 million). The operating EBITA margin was 8.6% (H1 2014: 10.0%), as project cost overruns, lower contribution from the Americas, and dilution from acquisitions offset the contribution from the Performance Excellence program. Operating EBITA margin excluding one-offs and Hyder/Callison was 10.0%, in line with H1 2014. Excluding one-offs only, it was 9.5%.

At 25.0% (H1 2014: 29.6%), the decline in the effective tax rate is due to the change in geographic profit mix. Financing charges were above last year at €10.3 million (H1 2014: €7.8 million) as debt was higher due to the debt incurred to finance last year's acquisitions. Income from associated companies was a loss of -€1.8 million (H1 2014: -€1.0 million) due to the underperformance of energy assets in Brazil.

Net income declined -16% to €38.3 million or €0.47 per share compared to €45.6 million or €0.63 per share in the first half of 2014. Net income from operations increased +3% to €57.3 million (H1 2014: €55.8 million) or €0.70 per share (H1 2014: €0.77).

Cash flow and balance sheet

During the second quarter, good progress was made in addressing the level of working capital, bringing it down to 20.2% of gross revenues (Q1 2015: 22.3%). This resulted in a positive free cash flow generation of €38 million in the quarter, bringing the year-to-date free cash flow to a level of -€30 million, compared to -€12 million in the year-ago period. Net debt was €623 million (H1 2014: €284 million), primarily due to the financing of last year's major acquisitions and currency impacts. The issuance of a €170 million bond (Schuldschein) in May helped extend the maturity profile of our debt at attractive rates.

Based on average net debt for December 2014 and June 2015, our leverage ratio was 2.4 (H1 2014: 1.1).

Developments by business line
Figures below are for the first half year of 2015 compared to the same period last year, unless otherwise mentioned.

¹⁾ Rounding and reclassifications may impact totals
²⁾ Organic development compared to year-end 2014

• Infrastructure (25% of gross revenues)

Several large synergy wins including a new transport system for the city of Jeddah, a metro system for the city of Doha and Crossrail in London confirm the strengthened market position in the Middle East and the UK through the combination with Hyder. In North America growth remained steady at good levels, while Continental Europe further improved. In Latin America, market conditions worsened with reduced spending in public and private sectors.

• Water (14% of gross revenues)

While overall growth is fueled by the addition of Hyder, organic growth was driven by North America, where municipal clients are responding well to our renewed client focused approach. The UK and Middle East also performed well. In Brazil, municipal water supply companies are suffering from budget constraints.

• Environment (24% of gross revenues)

The decline in environmental activities in North America continued as competition from smaller market participants at lower prices is increasing, underlining the relevance of our newly launched FieldTech Solutions which allow us to address both the complex and simple remediation needs of our clients. The UK and Continental Europe remained essentially flat, economic conditions in Brazil caused a decline.

• Buildings (37% of gross revenues)

In Buildings overall growth is driven by the addition of both Callison and Hyder. Good organic growth was achieved across all regions. North America and the Middle East are also doing well in architecture. Good growth was achieved in Asia despite the slowdown in China.

Developments by region

Figures below are for the first half year of 2015 compared to the same period last year, unless otherwise mentioned.

Synergy effects from acquisitions

For our combined architectural business, Callison (acquired in October 2014) and RTKL, the cost and revenue synergies are in line with our expectations. Although the slowdown in China weighed on revenues, the operating EBITA margin of the combined business is 12%.

For Hyder (acquired in October 2014) the target £15 million EBITA synergy run rate by Q4 2016 will be achieved solely through cost out initiatives. Hyder grew net revenues by 18% in the first half of 2015 supported by synergy wins and growth in infrastructure and buildings. On revenue synergies a total of €53 million in revenue bookings has been realized. As a percentage of revenues, this exceeds the level that was achieved by EC Harris and Langdon & Seah in the same timeframe. The operating EBITA margin of Hyder improved to 8.1% in the second quarter, up from 5.3% in the first quarter of 2015.

Progress in Performance Excellence

In the US, UK and Continental Europe we are beginning to reap the benefits of our Performance Excellence program, contributing +0.6% to ARCADIS operating EBITA margin, ahead of plan. In the second quarter, we realized billability gains in these three regions of ~1% over Q2-2014 through our resource optimization efforts. In Australia Pacific we completed a review which should lead to further margin improvements in the second half of 2015. In each of the three targeted regions procurement capabilities were established. In workplace and collaboration global standards have been defined for our offices and we have initiated a global portfolio prioritization for office improvements. In North America, a program to reduce our footprint by 25-30 offices by the end of 2016 is now underway. In bids that are brought to market in Continental Europe, Middle East, UK and US as well as for Architecture, we are now using our Global Design Excellence Centers to create competitive advantage. We are investing in these centers and headcount increased by +9% in the first half year. For full year 2015 the contribution to margin improvement from Performance Excellence is expected to accelerate to +0.8%.

Backlog

Backlog versus the end of 2014 was up +6% due to favorable currency effects. Organic backlog development was up +1%. Net revenue backlog was at a level of €2.5 billion at the end of the second quarter representing 11 months of revenue in line with previous quarters. We saw limited growth in backlog in infrastructure and environment being offset by slight declines in water.

Outlook

ARCADIS expects 2015 revenues to grow by about 30% and net income from operations by approximately 20%, barring unforeseen circumstances.

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Analyst meeting and webcast
ARCADIS will hold an analyst meeting to discuss its first half year results for 2015 on July 29, 2015.  The meeting will be webcast live and will begin at 15.00 Amsterdam, 09.00 New York, 14.00 London, and can be accessed on the company's IR website at www.arcadis.com. A replay of the webcast will be available on the site approximately two hours after the end of the live call. The first half 2015 financial report and statements and the presentation for the analyst meeting and webcast are available through the link at the bottom of this press release.

For more information, please contact Joost Slooten of ARCADIS at +31-202011083 or outside office hours at +31-627061880 or e-mail joost.slooten@arcadis.com.

About ARCADIS: ARCADIS is the leading global natural and built asset design & consultancy firm working in partnership with our clients to deliver exceptional and sustainable outcomes through the application of design, consultancy, engineering, project and management services. ARCADIS differentiates through its talented and passionate people and its unique combination of capabilities covering the whole asset life cycle, its deep market sector insights and its ability to integrate health & safety and sustainability into the design and delivery of solutions across the globe. We are 28,000 people that generate more than €3 billion in revenues. We support UN-Habitat with knowledge and expertise to improve the quality of life in rapidly growing cities around the world. Please visit: www.arcadis.com:
http://www.arcadis.com.   

Statements included in this press release that are not historical facts (including any statements concerning investment objectives, other plans and objectives of management for future operations or economic performance, or assumptions or forecasts related thereto) are forward looking statements.  These statements are only predictions and are not guarantees.  Actual events or the results of our operations could differ materially from those expressed or implied in the forward looking statements.  Forward looking statements are typically identified by the use of terms such as "may," "will," "should," "expect," "could," "intend," "plan," "anticipate," "estimate," "believe," "continue," "predict," "potential" or the negative of such terms and other comparable terminology. The forward looking statements are based upon our current expectations, plans, estimates, assumptions and beliefs that involve numerous risks and uncertainties.  Assumptions relating to the foregoing involve judgments with respect to, among other things, future economic, competitive and market conditions and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond our control.  Although we believe that the expectations reflected in such forward looking statements are based on reasonable assumptions, our actual results and performance could differ materially from those set forth in the forward looking statements.

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Geographical information (amounts related to the first half year)
Amounts in € millions or %

¹⁾ Based on origin of production
²⁾ After allocation of corporate costs
³⁾ Reported EBITA adjusted for acquisition, restructuring and integration-related costs

Information about business lines (amounts related to the first half year)
Amounts in € millions or %

¹⁾ After allocation of corporate costs
²⁾ Reported EBITA adjusted for acquisition, restructuring and integration-related costs