Company: Arcadis N.V.
Conference Title: First Quarter 2010 Results
Date: Friday 7th May 2010 – 15h00 CET
Operator: Good day and welcome to Arcadis First Quarter 2010 Results call. For your information, today’s conference is being recorded. At this time I would like to turn the conference over to Mr. Joost Slooten. Please go ahead, sir.
Joost Slooten: Thank you, operator. Good afternoon and good morning. My name is Joost Slooten; I’m the Director of Investor Relations for Arcadis. I’d like to welcome you to this Arcadis conference call. We are here to discuss the company’s announcements of the first quarter results 2010 which were released this morning. With us during the presentation today are Harrie Noy, Chief Executive Officer, and Jeroen Bruggeman, Group Controller. The PowerPoint presentation that is being used during today’s call is available through the investors section of the Arcadis website, to which the address is www.arcadis.com/investors. Again that address is www.arcadis.com/investors.
Just a few words about procedures before we start. We will begin with formal remarks and we’ll 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’d like to call your attention to the risks related to these statements which are more fully described in the company’s risk management reports, which are also available on the website. With these formalities out of the way, Harrie, please begin.
Harrie Noy: Thank you, Joost, and welcome to all of you to this Arcadis conference call. I’ll start with the slide just after the disclaimer. I am glad to report an increase in revenues and profits despite the impact of the economic crisis. Gross revenues were 7% higher, of course helped by the acquisition of Malcolm Pirnie that was finished early July 2009. Net income from operations was up by 10%.
If you look to the different market segments then we have seen that the Infrastructure market is impacted by the local markets where government budgets are under pressure. That's also the case in the Water market but to a lesser extent. The Environmental market is improving, particularly due to private sector demand, which is increasing, especially in the United States. The Buildings market is stable, helped by good order intake in Asia and the Middle East. We have seen an increased backlog in all business lines and also based on that, we expect a possible return to organic growth in the second half of 2010, but looking to the developments in the first quarter, we can conclude that Arcadis is well positioned to benefit from the economic recovery.
And going to the next slide, which gives you an overview of income in the first quarter 2010, income in the first quarter of 2010 increased to €17.1 million (that’s net income from operations). Gross revenue increased by 7% to €448 million from €418 million. Net revenue increased by 12% to €325 million from €291 million. EBITDA increased by 5% to €29.3 million from €27.9 million in 2009. Net income from operations increased to €17.1 million from €15.5 million, an increase by 10%; and earnings per share were stable at €0.26 per share at a number of shares which was at 66.5 million, a clear increase compared to the 60.1 million of last year, and that increase is of course due to the acquisition of Malcolm Pirnie, which was partly financed by the issuance of new shares. The currency impact in the first quarter was –1% on revenue and –2% on EBITDA.
Going to the next slide which gives an overview of the most important developments and most important points in the first quarter of 2010, the Infrastructure growth, growth in the Infrastructure market is softening because of pressure on budgets in the local markets, but if you look to the Environmental and the Buildings market then the conditions in these markets are clearly improving. Revenue development in the first quarter was impacted by the end of large projects, especially in Brazil, with a high level of subcontracting. We announced that already when we published the fourth quarter results for 2009, so this was in line with expectations and that expectation has been fulfilled in the first quarter of 2010. Net revenue development stabilised at –4%, same level as we have seen in the fourth quarter of 2009.
Due to the restructuring that took place in the United Kingdom last year, we have seen recovery of profitability in that country. In the United States and in RTKL, our margins improved compared to the first quarter last year, which is I think quite a good improvement, quite a good development which shows also, which reflects also the improved market conditions both in the United States market but also at RTKL. Revenues and profits were impacted by the severe winter. We had a severe winter both in Europe and the United States. We have always an impact of the winter in the first quarter; that’s the reason why the margins in the first quarter are usually lower than in the other quarters within our business, but this time the winter had a very strong impact and that's reflected both in revenues and profitability. And in Brazil we have some energy projects, as you know, we have invested both in the Biogas installations on three landfills and we have invested several hydropower projects, but also in a few of the many opportunities that we have in the Brazilian market, we are at this point in time reviewing the options for those energy projects.
Going to the next slide, that’s about organic growth. The yellow bar represents organic growth 2006, 2007, 2008 and then in 2009 each of the separate quarters and the first quarter of 2010. Organic revenue growth in the first quarter of 2010 was –8%, which is in line with the –7% that we have seen as from the second quarter of 2009. Keep in mind that the basis for comparison in the first quarter of 2009 was still pretty high because in the first quarter of 2009 we had only a negative organic growth of about 1%, so we’ve had now four quarters of about 7% organic growth and that shows that going forward the comparison basis for our revenue development is improving.
Going to the next slide, the next slide gives an overview of recurring EBITDA. Recurring EBITDA ended at €29.3 million, was impacted by a negative currency impact of 2% and without that currency, EBITDA actually improved by 7% compared to last year.
The next slide gives an overview where the improvement of EBITDA comes from. EBITDA in the first quarter of [2010] was €27.9 million. Currency impacts is –2%, the impact of acquisition/divestments is +13%, organic development is –6% and that brings EBITDA in the first quarter of 2010 at €29.3 million.
As I mentioned, the restructuring in the United Kingdom last year is actually paying off as contributed to an improvement of results in the first quarter. We have also seen a slight improvement in most other European countries, a limited decrease of profitability in the Netherlands and Belgium, partly due to the severe winter; and there was also quite a strong impact from one of the Brazilian energy projects that generated a loss in the first quarter of €1.5 million, and that also contributed to the negative organic development of EBITDA. We have restructuring charges in the first quarter of €0.7 million. That includes also the cost for the integration of Malcolm Pirnie compared to €2.5 million reorganisation costs in 2009 first quarter.
Next slide shows you an overview of the developments of the margin. The margin in 2010 first quarter ended at 9.0% compared to 9.6% in the first quarter of 2009. Several developments impacted – several factors impacted that development. First of all, there was an impact of differences in currency mix because as we have noted, the organic decline, or the currency decline in EBIT was –2%, currency decline in net revenue was –1%, so that had an impact on margins. There was an impact from acquisitions. Malcolm Pirnie contributed in line with expectations. Within the framework of the merger with Malcolm Pirnie we have issued about 2 million options and the cost for those options are expensed over 12 quarters and that has a cost component in the quarter of about €700,000 so that had an impact. The severe winter had an impact. What was not mentioned on the slide but which was also a strong impact was the project loss on one of those energy projects in Brazil which amounted to €1.5 million.
That brings me to the next slide, some financial details. In the quarter we had no contribution from carbon credits. That was the same as in the first quarter of 2009 when there was no contribution from carbon credits as well. We do expect a contribution from carbon credits again from the second quarter this year as the delay in the procedures is coming to an end. In the first quarter of 2009 we had still a booked profit on the unwinding of derivatives of about €7.5 million, which had a positive impact on the financing charges in that quarter. So if we compare the financing charges in the first quarter of 2010 with the first quarter last year then last year it was €2.4 million compared to €4.1 million this year, an increase of €1.7 million. That increase of financing charges resulted from acquisitions of about €1 million and from the financing of energy projects in Brazil for about €0.7 million. The tax pressure in the quarter was somewhat lower than last year, and income from associates was a little bit higher, and that income from associates also derives from Brazil.
That brings me to the business lines: Infrastructure, Water. Environment, Buildings. This is the first quarter that we report separately on Water as a business line within Arcadis.
First about Infrastructure, revenues were down by 4% in the first quarter of 2010, organically by 7%. Currency impact was +3%. The organic decline of 7% was partly caused by the end of several large projects with extensive subcontracting, and especially the turnkey project – turnkey energy project in Brazil contributed to this decline. That project was finished, as we mentioned before, in the fourth quarter of 2009 and then had an impact in the first quarter of 2010. Net revenues declined only slightly, and that slight decline was also caused by the severe winter in both the United States and Europe. We have seen also, we had seen already some pressure in local markets in the United States last year. It started to be shown in the fourth quarter of 2009 also in Europe, and that has continued in the first quarter of 2010. Central governments continue to invest in infrastructure, and that resulted in growth in Belgium, the Netherlands and also in Poland and the Czech Republic. There is a trend towards public-private partnerships. This type of an approach has been limited over the past couple of years due to the lack of private financing but we see a trend coming in relation to those public-private approaches, and Arcadis has been selected as part of a consortium for a high-speed railway project in France. It’s the Tours-Bordeaux line which is the largest public-private partnership ever in France and I think even the largest public-private partnership in Europe.
The second market segment is Water, on which we report for the first time in this quarter. Gross revenue is more than doubled of course through the merger with Malcolm Pirnie. Organic growth, the net revenue was 4%. That does not include the developments in Malcolm Pirnie as we report a contribution from Malcolm Pirnie during the first four quarters after the merger as a contribution from acquisitions. So organic growth of net revenue in our existing business was 4%, mainly due to increased demand in water management services. A nice example is a large contract which we won in the first quarter in Brazil for the Sao Francisco River, a project which is aimed at combating water shortages in the northeast of Brazil. Also in the water market we see pressure on local budgets, but to a lesser extent than we see it in the regular infrastructure markets. Malcolm Pirnie is developing in line with expectations. There is a decline in revenue in both the western part and the southern part of the United States because of less investment in the residential development, but that’s compensated with growth in the northeastern part of the United States and especially the City of New York is investing heavily in water projects.
The next slide brings me to Environment where revenues were up by 2%, organically declined by 6%, acquisitions contributed 11%, currency impact was –3%. Contribution from acquisitions comes from the environmental business of Malcolm Pirnie. Organically, gross revenue declined by 6% but net revenue declined by only 1%, which is a clear improvement compared to previous quarters. In the fourth quarter of 2009, the organic decline was still 4%; we’re not at a level of –1%, which shows the improved conditions in the Environmental market. This improvement is driven by several large contracts in the United States that were won in the second half of 2009 and also of course by increasing demand in the private sector as a result of the improved economical conditions. In Europe our Environmental business grew almost across the board and that’s also partly due to contracts that we got from ExxonMobil for ten European countries, five-year framework contracts and Arcadis has been selected for all ten European countries that were included in that framework contract. We are the only one that has been selected for all ten countries.
That brings me to Buildings. First quarter 2010 revenues were down by 15%, organically by 13%, acquisitions contributed 1% and the currency impact was –2%. The contribution from acquisitions comes from a small healthcare acquisition in the Netherlands that was finished, that was completed early in the first quarter of 2010, healthcare being an important growth market also in Europe. Net revenue declined more or less at the same level as gross revenue, by 14%. Commercial real estate both in Europe and the United States has stabilised, but at a low level, and RTKL was able to compensate the decline in the commercial market and the decline in the United States and Europe with work from Asia and the Middle East. Order intake has been there very successful and the Shanghai Changzheng Pudong hospital marks the breakthrough of RTKL in China. In Belgium we also provide services to industrial customers and we see that demand for industrial services is gradually increasing.