Arcadis NV (ARCAD) Earnings Call Transcript

Ladies and gentlemen, thank you for standing by. I am Jamie, your Chorus Call operator. Welcome, and thank you for joining the Arcadis conference call and live webcast to present and discuss Third Quarter 2026 Trading Update. And the conference is being recorded. [Operator Instructions] At this time, I would like to turn the floor over to Ms. Sinem Baykaloz, IR Officer. Ma'am, you may proceed.

Good morning, good afternoon, everyone, and welcome to our 2026 Third Quarter Trading Update Conference Call. My name is Sinem Baykaloz, and I'm the Investor Relations Officer. Joining me on the call are our CEO, Heather Polinsky; and our CFO, Simon Crowe. As usual, we will start with the presentation, followed by Q&A. Before we start, we would like to draw your attention to the fact that management may reiterate forward-looking statements made in today's press release please note the risks related to these statements, which are more fully described in the press release and on the company's website. Now over to you, Heather.

Thank you, Simon, and hello, everyone. Welcome to our third quarter 2026 results. We delivered another strong quarter and continued to build momentum. Growth accelerated, margins expanded and backlog strengthened. Importantly, the pattern of our performance reflects the priorities we have been putting in place throughout the year. Focus. Growth is being driven by the markets where we have chosen to focus, including water, energy, semiconductors, life sciences and digital infrastructure, simplified. We are progressing our portfolio actions, simplifying our operating model and aligning capacity more closely with demand. Perform. Disciplined execution is translating into margin improvement, stronger billability and cash performance. Our strategy has one clear underlining objective: Continuing to get closer to our clients and converting our expertise into more consistent growth and profitability. The momentum that we have been building throughout the year reflects these strategic priorities and our focus on disciplined execution. We reaffirm our 2026 outlook and are using any headroom we have to: one, reinvest in; and two, transform the business. Let me take you through the quarter in more detail. We have green arrows across the board. Net revenues increased 4.3% in the quarter. capitalizing on sustained client demand. More importantly, the pattern of growth matters. It is precisely in the markets we identified at our Capital Markets Day as strategic priorities. Margin improved year-on-year to 12.5%, driven by our operational actions, while we continue to invest in the capabilities needed to deliver sustainable profitable growth. Our backlog continued to grow, giving us confidence and greater visibility on our future trajectory, which I will expand on shortly. And all while voluntary turnover continued to reduce, reflecting that we are bringing our people along with us on our transformation. Turning now to backlog. Backlog organic growth and rolling order intake have continually increased over the last 12 months. Backlog organic growth this quarter is at 7.9%. This was driven by continued order intake strength in water and resilience and major semiconductor wins in places. Our order intake in mobility reflects the timing of awards. Here, we remain focused on pipeline conversion, aligning our delivery capacity with expected workload and implementing our strategy. Consistent with this positive trend in backlog, organic revenue growth has also been accelerating throughout the year. This progression supports our confidence in the underlying momentum of the business and provides a stronger foundation as we move forward. A great example of this is a significant win in our Mobility business, an award from Irish Rail to deliver advisory and design services for their strategic rail review. Let's now take a closer look at each of our business areas. Resilience remains a consistent performer with sustained growth in Q3 and driven by water across the U.S., Netherlands and U.K., which includes Thames water, Westex Water, United Utilities and the environment agency. In Germany, major grid expansion programs continue to support strong power growth. And in Brazil, mining and critical minerals is supporting growth. The momentum we have been building throughout the year reflects the strategic priorities we have been putting in place and our focus on disciplined execution. This impact is reflected by our sustained improvement in growth and margin. Environmental restoration continues to be a differentiator across our geographies. This quarter, we are proud to have secured a multiyear environmental remediation program with 3M in Belgium to address historical PFAS contamination. Our teams continue to invest in capabilities and client relationships that support ongoing growth across our energy, water and environmental services. In Places our action to focus and invest where we see the greatest opportunity are paying off. This business is starting to turn the corner with positive organic growth of 1.2%. Underlying growth was even higher at 4.2% when excluding the Architecture business in China. This is consistent with the performance we expect from our retained portfolio. That was a good example of the value we will achieve by being more focused, directing talent and investment towards markets where we see sustained client demand and where we have the strongest opportunity to differentiate. This will support greater growth. This quarter, growth was supported by life sciences and digital infrastructure across key geographies, and we expect to see continued momentum here. Book-to-bill was strong at 1.3x following major semiconductor awards. One example is the expansion of our engineering procurement and construction scope for a major semiconductor manufacturing program in the U.S. Going forward, we could continue to refocus our portfolio towards attractive growth markets, progressing the announced portfolio actions in China in architecture and directing talent and investment towards the areas of sustained client demand. Turning now to Mobility. Organic growth was strong in the third quarter, supported by major transportation programs in Germany and Canada as well as closing several contract variations. Order intake, however, reflected the timing of several pursuits. Our pipeline in mobility remains healthy across key markets, and we remain focused on disciplined conversion. Our recent win is an example of this, where we are leveraging the capabilities of our recent acquisitions in Germany and Spain, to win a multidisciplinary project for a major rail hub on the Munich Berlin network. While major infrastructure programs remain central to our mobility strategy, we are deliberately broadening the portfolio towards more programmatic advisory and asset life cycle work. This creates deeper, long-term client relationships and a more balanced business alongside the inherently lumpy nature of our large design build infrastructure awards. Capacity alignment is also important to how we execute our transportation strategy. These actions are intended to improve billability and project delivery, helping us deliver on our financial ambitions, while also reducing revenue variability quarter-on-quarter. I'll now hand over to Simon to take you through the detailed financial performance of this quarter.

Thank you, Heather. In the third quarter, we continued to focus on our clients, simplify our operations and drive a performance culture. Our third quarter results show that our actions are starting to bear fruit. Our margin expansion has continued to 12.5%. The improvement reflects continued disciplined execution in Energy & Water in Resilience, progress in Places following the cost actions taken in the first half and growth in margin coming from contract variations in mobility. Lower overhead staff costs and our continued cost control also contributed with growth and a more scalable cost base supporting operating leverage. At the same time, we're continuing to invest in the operating model, commercial capabilities, digital and AI. These investments are mostly funded out of operating cash flow, are important to future growth but may impact the pattern of quarterly margin development. We are reiterating today our margin guidance of 2026 of 11.7% to 12% EBITDA. Third quarter cash development was solid year-on-year and supported by our laser focus on improved cash collection and billability. Our working capital percentage as a percentage of annualized gross revenues came in at 12.4%, well below last year's 14% and in line with seasonality. We remain focused on billing, collections and contract terms as we move towards year-end, and we're confident in our trajectory for the fourth quarter. The momentum we've been building throughout the year reflects the strategic priorities we have been putting in place and our focus on disciplined execution. This impact is reflected by our sustained improvement in our growth and margin. For the divestment of our architecture business, we have preparations and separation planning underway, and we have progressed the implementation of our China operations exit, addressing the necessary execution requirements and legal documentation. On a year-to-date basis, the indicative positive impact of these divestments on performance is approximately 150 to 200 basis points for organic net revenue growth and is around 100 basis points for operating EBITA margin. While we anticipate more benefit from the growth created by Focus. These actions are consistent with our strategy to focus on higher growth and margin businesses. And we continue our rightsizing efforts and review of other noncore activities to further optimize our portfolio. Turning to the actions supporting a simpler and more efficient organization. In the first 9 months, we recorded approximately EUR 42 million of restructuring costs and EUR 15 million of other nonoperating costs, reflecting the actions we are taking on rightsizing and implementation of our simplified client-centric model. Importantly, these actions are starting to translate into the operating performance of the business. We are building a lower and more agile cost base with greater accountability, improved availability and better alignment of resources with workload. As communicated previously, we expect the cost-out program to contribute approximately 40 to 50 basis points to our 2026 operating EBITA margin. But there is still work to do. In the fourth quarter, we will continue targeted business and overhead rightsizing and implementation of the simpler client-centric operating model. Looking into 2027, as we set out at Capital Markets Day, we are targeting approximately 1,000 roles as part of overhead rightsizing while continuing to hire selectively in our growth areas. We expect the remaining reset measures to be completed by the end of 2027. The associated restructuring costs are expected to be approximately EUR 60 million to EUR 70 million in 2026 and approximately EUR 70 million in 2027. So this is not simply about reducing cost. It's about creating a more scalable organization improving billability and accountability and ensuring our resources are aligned with where we see the strongest client demand. Our ambition continues to be the EUR 1 billion of EBITDA and this requires driving growth, simplification and our performance culture. With that, let me hand back to Heather.

Thank you, Simon. Let me close by coming back to momentum. Because for me, this is about much more than the results of 1 quarter. Our simplification is designed around 1 objective, getting closer to clients and converting our expertise into more consistent growth and profitability. Over the last 9 months, we have built a renewed executive team, met with over 200 clients, developed and communicated a clear strategy, focused on immediate delivery and at the same time, reset the organization for a new way of working. And we have done that while continuing to invest in the business and deliver for our clients. Growth has recovered faster than we initially expected. But that has taken investment, and we will continue to invest in the people, capabilities and transformation required to sustain that growth, and this may impact the pattern of margin development. Just as importantly, we have begun building the organization behind the strategy. And our client connections are giving us a sharper insight into where we can differentiate and where we need to improve to more consistently win. Capital Markets Day was another important step, but it was not the end point. Immediately afterwards, we brought together 160 leaders to begin taking the strategy through the organization. We are now moving from that leadership cascade to mobilizing 34,000 Arcadians around the same direction and priorities. We are building a stronger cadence of execution, greater clarity on where we focus, simpler ways of working, clear accountability and a clear performance mindset. And that is why I see the momentum in our third quarter performance as important. It provides evidence that the actions we are taking are gaining traction and creates the opportunity for us to continue investing in long-term value creation. With that, let's open the call for questions.

[Operator Instructions] Our first question today comes from Sangita Jain from KeyBanc Capital Markets.

So one, maybe on the net revenue growth for this year. Obviously, 3Q was very strong, and the order intake has been also very strong. So how should we think about 4Q? Should we think about the strength continuing and you may be getting to the high end of your low single-digit target range for this year?

Sangita, thanks for the question. We are confident in the direction that we're going. We're confident in our backlog. And you're right, we are seeing progress -- our -- as we've mentioned, not only have we been able to convert the backlog into net revenue, we are seeing that backlog grow. So we are confident in our fourth quarter performance.

Great. And then maybe a little bit detail, if I can get some on the strength in U.S. water. The types of projects that you're seeing, the duration of the backlog and the sustainability of the growth.

Yes, absolutely. We are -- in our water business, it is spread throughout the full U.S. and it's a strong contributor to our resilience growth. The order intake and the net revenue growth have been pretty consistent for not just this year but actually the last several years, as our team has really differentiated and focused on our ability to grow. Last quarter, we recognized hundreds of wins that we've had within our Water business. Our Water [indiscernible] business is also a pretty diversified business. We do everything from asset management to environmental permitting and planning to design and engineering and advisory services for our clients. So it does bring forward all the full capabilities of Arcadis. And we have both MSAs that we work under for our clients and large design build projects. So it's pretty diverse geographically as well as by subject area and service.

Our next question comes from Dirk Verbiesen from ING.

Yes. My first question is on the remark you made during this presentation on that growth is recovering faster than initially expected and requiring some investments. So how should we read this as you also said, it may affect the margin development because there's still quite an intense headcount reduction program ongoing into 2027. So what kind of moving parts should one expect? And in what way would that affect the margins in maybe the upcoming quarters? That's my first question. And the second question I have is on the order intake in the mobility business. I do acknowledge that it can be quite lumpy on a quarter-to-quarter basis. But let's say, the 0.7 in this Q3 is quite a low point. What does the pipeline actually look like? And do you foresee an improvement in the upcoming quarters?

Dirk, it's Simon here. Yes, just on the growth. Yes, we've been really pleased with the change that we've had over the last 3 quarters have been very positive. Obviously, we started the year with a little bit of uncertainty, but we've built on the momentum that we've seen in the market. We've been focusing, as we said in the Capital Markets Day on those strong markets, and they've been doing very well for us. So I think what we're just trying to do is to be very balanced and very measured. We are taking costs out. We're looking for that to drop down through to the margin. But we are making investments for growth. That's really key. We're hiring some great people in our strong markets in semiconductors, in water, in pharma and in some of our other businesses in rail and road and power and energy as well. So we're making those investments. Those hires take time to vet in. It takes time to ramp up. They take time to really be fully utilized. So we're just being a little bit balanced and cautious, but we've had a good 3 quarters, and we continue to push on through Q4 and into 2027. So that's how I would sum that up. In terms of mobility, your second question, and I'm sure Heather wants to come in here as well. But look, we've -- it is a lumpy business. We've had some really good projects. We continue to build on a very good pipeline that we have. Obviously, we're looking for those to convert. But it is lumpy. And if you look back over history over the last few years, is a lumpy business. One thing we are doing is sort of focusing on some of the medium and smaller end, we don't want to rely on these large projects all of the time. We've got these large projects, and we really welcome the large projects. But ultimately, we have some great teams and great resources across the world that we deploy onto these projects. So we're looking to make sure that our strategy is very focused on winning big, but winning small and winning medium projects as well. Heather, perhaps you got something to add?

Simon, I think you said it, we have won quite a few MSAs this year for our mobile business. I think you're all aware, we do not book the MSAs. They're not counted in our order intake. And so therefore, that's one of the reasons we have such a strong belief in our pipeline because converting those. In some cases, we are a single awardee. And in other cases, there is a significant spend and just a few awardees and our teams are positioning for real projects that we see really coming to life to help us achieve the long-term growth and to implement this strategy.

Our next question comes from Martijn den Drijver from [ Oddo ] ABN AMRO.

I have 2 questions, and I'll do them one by one, please. Heather, can you talk a little bit about the behavior of clients split into public regulated and private clients in light of the higher interest rates on both sides of the Atlantic and the impact on governmental budgets? .

Yes. So Martijn, thank you for the question. We have actually not been seeing a significant impact in our U.S. public markets as a result of this. As you're aware, the U.K. has been a challenge for us in some of the key areas. And in Europe, we are seeing projects continue to go forward because of the market drivers. So we're still seeing growth across the market. We've not seen delays or cancellations as a result of interest rates. And on the private side, earlier this year, we had some concern from our teams that projects would be delayed but we're not really seeing that. We're seeing the investment, the reshoring, the digital infrastructure continue to move forward, with significant demand, and I think that's reflected in our order intake and our backlog.

Understood. My second question is for Simon. Simon, if the Q4 2026 free cash flow mimics anything like Q4 2025, and you seem to allude to that. I get to a net debt to EBITDA at the end of this year, 1.1x. Absent the M&A, does that meet the criteria of below optimal leverage that would allow Arcadis to opt for share buyback?

Great question, Martijn, and thank you for asking that one. I think we are pushing hard to collect the cash like we did in Q4 2025. You remember those days in Q3 and Q4 of 2025, and we had a big push, and we obviously delivered a record number for Q4 2025. So we'll continue to push hard, and we'll continue to evaluate the M&A spectrum. There's lots of really interesting bolt-ons out there. Our pipeline is pretty full, and we're evaluating things. And then obviously, as we get to Q4, we'll look at the opportunities to deploy the capital and our capital allocation in line with what we said at Capital Markets Day. So yes, we're positive about collecting the cash positive, M&A and positive about looking at the capital allocation.

Our next question comes from Simon Van Oppe from Kepler Chevreux.

I have a question on margin development. So on Slide 14 of your presentation, you indicated that the cost-out program is expected to contribute roughly 40 to 50 basis points to the full year 2026 operating EBITDA margin with a further reduction of, yes, 1,000 overhead planned for 2027. Could you please clarify how much of the 2026 benefit reflects the annualization of measures you implemented last year versus new savings realized this year? And how much additional margin improvement we should expect in 2027 from the annualization of the 2026 measures and the planned overhead reduction.

Thank you, Simon, for the question. Look, I would say a lot of the margin accretion, the [ 40, 50 ] has come from everything we've been doing sort of Q4 onwards from 2025. So it's really difficult to parse it out a lot of -- the timing is not exact. Obviously, we announced the numbers of the market and then it takes time for things to work through. We have obviously guidelines to have legislation in certain countries. We have timing to be considered. So we'll work hard. And look, on the margin, we remain committed to our Capital Markets Day's targets. We're pushing and pulling every lever we can to get the growth and get the operating leverage to make sure we've got cost discipline. And we'll just keep doing that. We'll just keep doing that every day and keep driving forward. We've got good markets. So we're optimistic about growth. And then we've got good control and good discipline around costs and where we see we don't need those resources, we'll either try to redeploy them or ask -- see if we can exit those resources. But it's constant just really trying to pull the levers all the time and work on that Capital Markets Day, Martin.

Our next question comes from Kristof Samoy from KBC Securities.

I have a question on Mobility. You specifically made reference to the recognition of variation orders in the third quarter. I do not recall recent earnings calls with reference being made to this. Can we -- can you disclose the size of magnitude of the variation order recognized this quarter? And is this something that we can expect more going forward? Is it linked to the increased push towards commerciability? Or is it just a one-off thing? And then, yes. Maybe that's the first question for Simon. .

Yes, Kristof. So look, it's a couple of million. It's not a huge number in terms of the variation which contributed to growth and margin expansion in Mobility. And as I said in the prepared remarks, it's lumpy. It's lumpy. We win large awards, and we have a lumpy profile in Mobility. We're looking to change that. So we've got more predictability of earnings and more predictability of resource allocations as we go. And a lot of our projects are large projects. They will have some one-off variations. Hopefully, they're all positive. Sometimes they're not how our business is. But it was a couple of million in this case for this quarter.

Okay. And then just I was wondering regarding your planned exits and disposals. Can you already give some indication about the accounting treatment [ for year end ] of these assets? Will they be treated as held-for-sale assets? .

Yes, Great question, Kristof. look, We're accelerating as fast as we can to get to that position so that we've got a nice clean set of accounts that we can show you. I can't guarantee you year-end, but I'm really, really pushing -- if we meet those criteria, you know what they are about immediately available and all the rest of it. We're working closely with KPMG and our internal accounting guys to just make sure that we meet those criteria as we can. But as you appreciate, our architectural business spread it's tentacles throughout the business, and we've put a nice perimeter around that now. We've got advisers coming on board very soon. We've got about, I think, about 15 work streams set up to get that all sorted out. We've got a leadership team as well now appointed internally, which is really good and the highly motivated and excited about that. And the same goes for China. So architecture in China, we'll push as hard as as we can, Kristof, to get to that held for sale. That's the question I was asking in the last few months, how can we get there quickly. So we've mandated the team to do that as fast as possible.

So -- and then if you were to report them as of the fourth quarter as held for sale, so that means then by virtue of simple mechanical accounting treatments, your full year reported operating margin will grow by 100 basis points pro forma?

No. I mean we'll hold them for sale. We will give you the alternative performance measures which we've given today. So we gave you the growth and the margin impact by removing China and removing architecture. We'll just keep those indicative until we've got a really tight handle on it, and it is held for sale. So that's -- that's how we're going to report, I expect in the fourth quarter. And as soon as we meet the criteria, we'll make those proper disclosures so that you can review them as you should do. So we're going to be as transparent and as open as we need to be as we want to be and we will be as we did today.

Okay. And then just 1 last question. Resilience, there were some comments made to double-digit growth in U.S. water. I mean the overall resilience organic growth is 5.6%. What type of activities in there pull down the U.S. water double-digit growth rate. If you could give some color there, please? .