Arcadis' (ARCVF) CEO Neil McArthur on Q2 2016 Results - Earnings Call Transcript

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Arcadis NV (OTC:ARCVF) Q2 2016 Earnings Conference Call July 27, 2016 4:00 AM ET


Jurgen Pullens - Director, IR

Neil McArthur - CEO

Renier Vree - CFO


Andre Mulder - Kepler Cheuvreux

Philip Ngotho - ABN AMRO

Philip Scholte - Kempen & Co.

Dirk Verbiesen - KBC

Quirjin Mulder - ING

Edwin de Jong - NIBC

Luuk van Beek - Petercam

Joost van Beek - Theodoor Gilissen


Ladies and gentlemen, thank you for holding. And welcome to the Arcadis NV Q2 Half Year Results Presentation. At this moment, all participants are in a listen-only mode. After the presentation, there will be an opportunity to ask questions.

I would like to hand over the conference to Jurgen Pullens, Director, Investor Relations. Go ahead please.

Jurgen Pullens

Thank you. Good morning everyone. My name is Jurgen Pullens, I'm the Director of Investor Relations for Arcadis.

I like to welcome you to this Arcadis analyst meeting conference call and webcast. We are here to discuss the company's results for the second quarter and the first half year 2016, which were released this morning. With us during the call are Neil McArthur, Chief Executive Officer and Renier Vree, the Chief Financial Officer. We will start with a short presentation by Neil and Renier, and then, we will open up for a Q&A.

You all received a presentation this morning and it's also available through the Investor section of the Arcadis Web site for which the address is

Just a few words about procedures before we start. We will begin with formal remarks. We 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 would like to call your attention to the risks related to the statements which are more fully described in the press release and on the company's Web site.

With these formalities out of the way, I like to hand over to Neil. Neil?

Neil McArthur

Thank you, Jurgen, and can I add my own personal welcome to those here in the room in Amsterdam and also those attending the webcast and the conference call.

As it's normal practice, I'll have a few opening remarks and then hand over to Renier Vree for our CFO, who will take us through the financial results for Q2 and the first half year and then I'm going to come back and talk a little about the progress that we are making on our leadership priorities and strategically, and then, we will open the floor for Q&A.

So, for the first half year 2016, as expected tough conditions in the emerging markets and for our North American business as it's going through its transformation are impacting our results. In the emerging markets, we are still confronted with a deep recession in Brazil. The slowdown in Asia and clearly given with the current level of the oil price still relatively depressed, spending cuts in the Middle East that impacts not just the Middle East but also our oil and gas clients around the world.

In this quarter, we have had the added economic uncertainty due to the Brexit. However, we see more favorable conditions in a number of our end markets including Continental Europe and Australia. So, we expect the tough conditions that we experience in the first half of the year to continue in the second half of 2016.

As we shared at the beginning of the year, we have a number of leadership priorities in those [domain] [ph], and I will come back and talk about those a little bit more in detail in our presentation.

So where do we stand financially in the first half year. Gross revenue was down 1% at €1.678 billion. Net revenues were down organically 3% in the first half year at €1.263 billion and that's due mainly to Brazil and North America, which were only partially compensated by Continental Europe and the U.K and Australia growth.

Our EBITDA in the first half year was €88 million, operating EBITDA of €97.6 million; our non-operating costs were significantly lower than they were in 2015 at €9.6 million; net income from operations as we said to €54.9 million. Now, in free cash flow in the first half year minus €62.3 million and that working capital increased to 19.9% mainly due to the Middle East and we will come back and talk about that in a lot more detail during the presentation.

Now forward-looking backlog grew organically 1%, but that's two very different stories. We are very pleased to report on organic growth between 8% and 12% in our developed markets, and we have in the emerging markets minus 11% organic decline in the backlog including roughly 3% of cancellations in countries like Brazil, Qatar and China. And that represents a very healthy 11 months of revenue for Arcadis forward-looking.

And with that, I would like to hand over to Renier Vree, our CFO.

Renier Vree

Yes. Thank you, Neil.

Let's zooming a bit more on the financial results for the first half year and the second quarter. You've seen in the second quarter 4% reduction in both gross and net revenues. We now look at net revenues organically was a decline of 3%, which is a balance of decline of revenues in North America, Latin America and Asia. You saw stable revenues in the Middle East and then we saw growth in Continental Europe to U.K. and Australia Pacific. And in fact, the picture for the first half year is very much inline and what we have seen in the second quarter.

Our EBITDA up in the second quarter compared to last year by 3% is also important to add that last year we did have a project cost overrun that impacted the results then. So like-for-like it's a decline compared to last year.

And let me then, take into account the non-operating costs as Neil mentioned from approximately €24 million last year to €10 million this year. We came with a margin -- operating margin of 7% for the first half year compared to 8.8% last year, and you can make that like-for-like comparison with that project cost overrun, it's approximately 2 percentage point drop in operating margin and I will come back to that later on in the presentation.

Zooming in then on the details of the P&L. Below EBITDA, there is the amount of amortization which has come down because some of the intangibles for the acquired companies have been amortized in the meantime. Final expenses up somewhat for this because last year we translated some of the loans we had in variable interest rates to fixed interest rates which changed that. The tax rate very much similar 25% included for the first half year based on the expected tax rate for the full year. And also when it comes to income from associates and non-controlling interest, no significant changes compared to the first half of last year.

And it brings net income operations; net income adjusted for especially amortization at €54.9 million or 7% below last year that Neil mentioned. And if we take into account that we have 2% more shares almost 2% more shares outstanding than we had in 2015 at mid-year than the earnings per share went to €0.66 from €0.72 in the first half of 2015.

And then here is the overview of the -- summary of the balance sheet. There is a comparison with end of 2015. In total increase of €120 million very much reflecting the seasonal increase in our working capital. There is one change compared to last year. There is a joint operation we do in other company in the Middle East, which we have to partially consolidate that means not only our own net revenues, it's also the subcontracting in that joint operation that's included in the balance sheet that's the receivable part -- most of the work in progress. But also the other part of it which is payables linked to the subcontracting that's an amount of €22 million on both sides of the balance sheet.

The net debt leverage ratio for the point in time, so for June is at 2.4x our EBITDA. And if we look at way we calculate the covenant ratios within the average of the December and June. The ratio is at 2.2. You may remember that level we have to stay below with our -- in our bank covenants is 3.0.

Then looking at the days sales outstanding and networking capital developments, you see an increase there from December and also compared to June of last year. And starting with North America, there -- I think a good performance which was sustained in 2016. There is an increase significantly in the emerging markets main reason for that is the -- this slow invoice approval process in the Middle East and to a lesser extent Asia. And also just joined operation with all the company that I mentioned hasn't impact specifically for the emerging markets of 10 days.

And as reported before, we have number of large milestone based contracts we are working on in the Middle East and those will continue to impact our DSO and that is expected to last for another four quarters.

In continental Europe also down, an increase of days sales outstanding, you may have seen that in a number of oil and gas clients have just laterally extended pay terms which worked its way through our receivables.

And in the U.K., there is a privilege factor, they have taken a bit more time to approve the unfortunate, I expect that to not last that long, but it impacted our June numbers. And that brings the overall working capital by the end of June at 19.9%. So an increase compared to the first quarter and also compared to last year.

You see here also back on the next page 10 in the cash flow statement where next to the -- below the EBITDA that's the changes in working capital which is a bit higher than it has been last year. And also we see that tax paid is a bit more we have had for while that the cash tax paid was lower than the accrued tax that's the other way around in the first half. And also the utilization of the restructuring provisions let to a cash out which impacted our cash low has brought the overall free cash flow to €62 million outflow in the first half year compared to around €30 million in 2015.

And if you look at the picture to the right where you see the typical seasonal pattern we had at Arcadis within the first half year and the full year and you can also see here that typically in the second half of the year the cash flow turns the other way around and turns positive for the full year.

Looking at the Slide 11 on the operating EBITDA margin 8.1% in Q1 and 7.3% of net revenues in the second quarter. And we look at the amounts that's in the graph below from around €260 million last year to €98 million this year and at the two region or countries that jump out are North America and Brazil. In North America reduction of €6.5 million which is a combination of that project write-off last year, and then, if you adjust for that sale €20 million comparable decline which is a split between environment water and architecture in more or less equal size in the first half of this year.

And in Brazil, it's an impact of the much lower revenues, Neil will show a bit more figures about that later that went from a high profit in 2015 still to a small loss in 2016 which has delta of €9.6 million. And as you can imagine with this type of reduction of volume in the market also price levels in Brazil have come down.

There is also the contribution from performance excellence and integration synergies which compensate for a lower margin in Continental Europe operationally and as a pick up margin in Australia Pacific.

The business lines shown here, I'm going to talk too much about it, here you see a bit of the description you can read about of the activities we do in the four business lines. And then on the Slide 13 detailed tables of the performance of the individual business lines, let me call out a few of the numbers. Infrastructure had a strong half year where we have seen organic growth after declines in the prior year's that despite the impact of Brazil, so here a good performance but also an improving EBITDA and a stable operating EBITDA. This is contributed by the larger activities, there are also the global design concept help just to be competitive and grow this business line.

In water a 6% decline of organic revenues, North America, Latin America being the chief contributors to that decline, which also led to a reduction in operating margin. In environment, North America is the reason for the reduction in revenues here of organically 6% by the most extent and operating margin higher than last year, but again, you will understand that the one-off in 2015 impacted the numbers at that point in time. So like-for-like there is a decline of the operating margin.

And then in buildings which have seen the highest growth in the last year's that has changed with the different economic sentiment in the emerging markets particularly Asia, the Middle East, but also the U.K. where we have seen in the buildings and market a decline of revenues you see the minus 5% organically in net revenues, which also had an impact on the margin.

Let's talk a bit about the four regions in our results, starting with North America on Slide 15. With an organic development of the net revenues of minus 6%, you see the environmental business, the water business and architectural activities that saw lower revenues. On the other hand we have seen infrastructure and buildings services growing in revenues. With the margin at operationally at 8.9% that we have seen strong competition in the environmental business. And in water we have decided and Neil can talk more about that later looking at the expected order intake to hold on to capacity which has an impact on availability and therefore the margin in the first half of this year.

In environmental, water has a strong growth of our backlog, order intake was good, so you see an organic development of plus 8% which is in very good development compared to the low order intake we have seen in the second half of 2015, which worked its way in the margins in the first half of this year. And also in infrastructure there we have seen good growth in the work we do there in transportation in the States of Georgia and Florida.

The emerging markets on Page 17, net revenues down sharply at 12%, the main reason for this is Brazil, which had a 38% decline in the first half, so both in Q1 and in Q2 a 38% decline of revenues on top of the 17% decline you saw in the first half of 2015 for showing what a significant recession is taking place in that market. And as I said earlier of course also having a big impact on our EBITDA, in fact the whole delta between last year and this year is explained by that change of profitability in Brazil.

In Asia, we have seen China relatively stable, while Hong Kong and Singapore, the two more mature markets in Asia seeing a decline of revenues based on lower infrastructure and particularly real estate spending, while the rest of Asia is solid. And the margin in Asia developed well. Also in the Middle East stable revenues, we do see the oil price being at this current low level having this impact in the behavior of our clients with the slowdown in order intake those on pricing and cash flow seeing the impact there.

Finally, Australia Pacific very strong performance we have seen that the contribution of Arcadis through this Hyder franchise that we acquired almost two years ago that led to a significant growth of revenues and profit particularly in the infrastructure business in Australia Pacific and overall the backlog for the emerging markets down 11%.

Moving to Continental Europe on Slide 19, here strong growth -- good growth of net revenues at 4% and that's particularly in the buildings and infrastructure business, while the environmental and water activities were stable. The EBITDA margin moved up on the reported level to 6.8%, we take out restructuring which has come down significantly between 2015 and 2016, the operating margin was lower and that's mostly because of France and Belgium. Our intake in Continental Europe was strong and for the first time in quite a while we also see the public sector starts to become stronger in Continental Europe also helping their backlog development.

And finally, United Kingdom on Slide 21, revenues organically up by 3 percentage share points. We have seen our clients responding to the uncertainty about the Brexit fault already prior to the vote itself by slowing down investments in the real estate which also led to a decline of our buildings revenues. On the other hand a very good development in the infrastructure business where we had good wins and also the spending by the government is strong here which has been one of the drivers for organic growth and water wins here in work program management and engineering advisory work for the water utilities which have been right in the revenues and also on the environmental side. The planning work often linked to infrastructure being strong, while on the multinational client side you see there somewhat weaker development, so net-net a limited organic growth.

And a margin development in the United Kingdom was strong with over 10% margin in the first half of this year and as mentioned backlog overall for the U.K. also developing strongly with a growth of 8% despite this uncertainty around buildings.

I think with that Neil over to you.

Neil McArthur

Super. Thank you, Renier. First, a little bit about our leadership priorities that we communicated at the beginning of 2016. They remain very much our focus as leadership. In terms of the acquisition synergies we are very much on track for the cost synergies that we've identified and communicated earlier with both Callison and Hyder.

In terms and Hyder, Renier alluded to that in the growth that we've seen in both our infrastructure business and in the U.K. So, infrastructure globally and particularly our business in the U.K. has grown substantially an over-delivering on the revenue synergies through Hyder.

I'm going to come back and talk about performance excellence in North America and Brazil. I think Renier covered where we stand on working capital and just to reiterate from management perspective a priority for us, has been since the beginning of the year. And we'll continue to be during the rest of the year. In terms of our strategy update beyond 2016, when we come out with the Q3 results we'll indicate, when we're going to provide the market with our strategy update at Q3 results in October.

So, if I then turn to North America, as we have communicated, Arcadis, going through its transformation. We launched that in the first half of last year. We have to stay the course, the transformational changes are underway and we need time for that to show through in the results.

The levers that we have for changing the North American business are the three that we've indicated before. So implementing the revised market approach; delivering on performance excellence in North America; and evolving our operating model.

So where are, we in terms of the revised market approach or an environment remember we built and then launched Arcadis Field Tech Solutions to help our clients with their more simple remediation request. We launched that last year and we've now several multi-year wins for Arcadis Field Tech Solutions.

We have growth in our environmental business consultancy part of Arcadis with the legacy complex remediation that is highly competitive market with pricing pressure and that business continues to decline.

In Water, we continue to focus growth in conveyance, in resiliency, in industrial water and program management and business advisory.

Buildings and infrastructure, as Renier also alluded to when he went through North America, good growth in new and existing geographies and sectors in North America with a clear decline in the architectural business.

In terms of performance excellence, we're rolling out the training on project management best practices that's bringing to together and harmonizing our best practices on the global basis for project management. We've implemented and in the process of rolling that out, new training, e-modules around the world for all of our project managers and we're rolling that out as we speak in North America.

We've optimized our staffing levels and the shape of our pyramid and we're leveraging more and more concept of our global excellence centers, so global design coming now into the North American business.

We continue to look at our footprint to optimize our cost to be where, we need to be to serve our clients effectively and we're consolidating working on our vendor-base with good results in key spend areas like our subcontracting for laboratory spending.

If you look at the operating model, you remember we made large structural changes and how we go to market in environment, in the second half of last year. And we see that back in increasing organic growth in our backlog in environment. And remember we did the same at the end of 2015 and launched that at the beginning of 2016 in our water business. And therefore, we see also strong growth in our order intake and backlog in water for the last two quarters.

And then, clearly driving the client focus and accountability for growth and business results, across the entire enterprise in the North America, remains one of the key elements of our transformation.

Brazil, getting back on track, we've made significant adjustments in response to the shortfall in demand. But more actions are planned to restore profitability. So the three areas that we're focusing on is responding to that significant drop-off in demand, because of the severe recession and it's the most severe recession in 25 years and in some commentaries they even say ever in Brazil.

We look to continue to pursue market opportunities for growth across Latin America and preparing scenarios as part of our strategy update. So if you look at that decline in demand driven by the recession in Brazil just put some figures around that, two years ago at the mid-year point our net revenues where €148 million and that's dropped to €76 million in the first half of this year.

As Renier, pointed out, our organic decline in the first half of last year was minus 17% in the first half of year minus 38% and in the second half of last year it was around minus 35%. So, you can see that the market is not quite bottomed out yet in terms of Arcadis.

If you look at our business in terms of our people, we were 3,200 people in June 2014. We're down to under 1,700 people in June 2016. So that's a huge leadership challenge for the team in North America and for the executive board to manage that kind of decline to maintain profitability.

We've done very well in terms of reducing our fixed cost around office space and also something backed down our operating model that was grown through the period of growth over the last -- previous four years in Brazil and looking for a savings across where we can in all areas of procurement. So team here has done significant adjustments and there are more actions planned to get us back on track in terms of profitability.

In terms of opportunities for growth, infrastructure for transportation systems and program management for industrial clients is something that we're actively pursuing. And water demand is much more dependant on public sector funding and as you know that's an issue currently in Brazil for both water conveyance and sanitation projects. And remember there is a significant proportion of the Brazilian population still don't have access to sanitation, the basic human need.

The environmental business is relatively stable and the stronger demand for permitting and actually due diligence were given where the exchange rate is and the economic is there are companies now looking at Brazil for inward investment and that gives us opportunity to help them through their due diligence processes. We also see emerging opportunities both in infrastructure and also in environment across other Latin American countries where we can leverage the very strong capabilities that we have in Brazil in pursuing those market opportunities.

And then as I said in my opening remarks, we will use the strategy update process. We're looking at different business scenarios for Brazil and we'll give an update with that for beyond 2016 in the second half of this year when we come out with the strategy update for beyond 2016.

We then turn to performance excellence. Again, strong delivery of results and remember we have five areas that we're looking at to improve our performance across Arcadis project management, increased use of our Global Design Excellence centers through global design, resource optimization, procurement and how we actually have our office infrastructure in terms of workplace and collaboration.

If we look at the program project management and I talked a little bit about that with North America, we have harmonized our approach to project management on a global basis Arcadis has grown through acquisitions over the last decade. And now we've harmonized one way of doing project management, the Arcadis, we are doing project management.

We've now built that into series of e-learning modules that we're rolling out globally and we certifying our project managers worldwide. And we're getting real tangible results for that, and improved project margins in the U.K., in Continental Europe and Australia, the door head of the curve in the implementation of that.

In terms of global design, using our Global Design Excellence centers across the world help us to win more work and the highest penetration of that is in -- infrastructure where 40% of our people in Global Design Excellence centers are now serving the infrastructure market and as you saw that that's driving high levels of organic growth and improving our level of profitability, despite the significant downturn in Brazil.

So, the headcount in Global Design Excellence centers versus a year ago has increased by 45% and it's now 6% overall of our people in Arcadis. And remember prior to the Hyder acquisition less than 1% of our people where in Global Design Excellence centers.

Resource optimization, we've made good year-over-year billability improvements in number of our markets including Australia, the U.K. and Continental Europe and you see that back again in their results and leveraging the lessons learned there to the Middle East to Asia and CallisonRTKL.

In terms of procurement, we've expanded the reach of the procurement teams and we've captured €4 million of savings in the first half of 2016. And then, in terms of our office footprint we're implementing our plan to reduce our footprint to be where we need to be to serve our clients effectively and to increase our collaborative working environment and we're on track to deliver €6 million of savings in 2016.

So in terms of moving forward, we expect the tough conditions experienced in the first half year to continue in the second half of 2016. In terms of the emerging markets, the deep recession in Brazil, as we said has not bottomed out for us yet. This is the slowdown in Asia and with oil still where it is we've seen and we'll continue to see spending cuts in the Middle East, but also the impact -- knock on the impact for our oil and gas clients in the environmental business.

In North America, as it continues through its business transformation and also the economic uncertainty that's now being created a number of our markets due to the Brexit.

More favorable conditions exist in number of end markets including Continental Europe and Australia.

So with that, I would like to open the floor for questions.

Question-and-Answer Session

Q - Andre Mulder

Good morning. Andre Mulder, Kepler Cheuvreux. And three questions from my side. First of all, on DOS, as I understand a little bit is that through the first half, the organic sales growth deteriorated somewhat, also because you show an infrastructure, where architecture and water also have some deterioration. And the same time, you're talking about an improvement, strong improvement in the backlog also for those areas. If you could explain what you're seeing, let's say is that development is so different? That is my first question.

Secondly, you already, let's say indicated was the Q1 numbers and that you let us expect through the year also based on your reduction in cost that operating result should again start to improve if you on Brazil change you see that’s a -- is it still from a less than expected, saw some negative surprise there, [give us some feeding] [ph], how you see sales developing going forward. And also again on your operating profit.

And thirdly, on your working capital, yeah what tools do you still really have to really bring that working capital and improvement in payments, to bring capital down improvement in payments, let's say working on your relationships or you believe also that you have into a process, you still have to work which could result in a significant improvement.

Neil McArthur

Super. Thank you for those questions. Let me start first with North America, and may be take a little bit more time and give a little bit more color on North America. So, we launched the transformations, our biggest business in the first half of last year. Europe that we transformed, remember the deepest point Europe was 3.2% operating margin, we got that back to 10% before we acquired the Hyder business in Germany.

Net revenue has declined minus 6% and that's driven by environment, its driven water, it's driven by architecture. And as Renier highlighted, we've seen the significant decline in the operating margin when you adjust for the one-offs last year that's a €20 million drop and roughly a third of that is environment, a third water and a third architecture.

The good news is that backlog growth has grown 8%. So let me handpick that a little bit more. The story around -- the market story around water and environment and our business is somewhat similar. And I go back to Q1 2015, if you look quarter-by-quarter for both of those businesses, the net order intake decreased quarter-on-quarter throughout the year, which means that the backlog decreased throughout the whole year for water and environment. And we saw the low point in that in Q4 last year.

If you look forward looking, we have seen two quarters of increased order intake in both water and in environment. And that's what's driving -- partially driving this 8% growth in the backlog. So the low point in order intake in both was at the end of last year. If you look at what's driving margin in environment that's the highly competitive market now for the complex remediation which was historically very high margin business for Arcadis. And so that's driving margin.

If we look at water, we have done some capacity adjustment in our water business, but given the pipeline of opportunities that we saw and putting in place the new operating model that we launched in the beginning of 2016 in water. We decided very deliberately to hold more capacity in water which is impacting our margin and we see that back now in the order intake that we've seen in Q1 and Q2 in water.

Then turn to the architecture business, second half in particularly the fourth quarter of last year, we saw a significant decline in the order intake in North America. And we've seen an up tick in the order intake in both Q1 and Q2 back to more normal levels in architecture.

If we look at the revenue decline that's driven by a slowdown in the healthcare market across North America and also remember our healthcare people in North America also produced some of the work for places like the Middle East where we've seen a significant slowdown in architecture in healthcare. And then, in North America we also produced some of the work for commercial work in architecture in Asia and there again because the slowdown in Asia we've seen less work for those people in North America, but again, if we look at the backlog, which again hits its lowest level in Q4 in architecture. We've seen an increase in Q1 and in Q2, so we held -- we did make some capacity adjustment, but have held on to that capacity so we can [indiscernible] the revenue moving forward.

And again, as I shared, we see in the Arcadis buildings business excluding architecture good growth and the same in infrastructure. You want to do Brazil?

Renier Vree

Yes. And let's talk about Brazil, so operating results there very much strong focus on cost reductions. And I think we have done a good job there under the circumstances. If there are surprises, it's on the commercial side where we did see also one project that we were about to start on -- did get canceled, and you have to act, in fact, immediately that has made Brazil a volatile market.

In terms of margin development, the second quarter wasn't that bad, so there is still small loss, when I talk about the first six months because all the efforts we are taking that we'll be steering for being break even in the second half year which requires further actions when it comes to cost.

And yes, Neil mentioned number of the commercial opportunities that are there in Brazil. And in the countries around that, so not possible I think at this point in time to really predict exactly what will revenues be in the next quarters sequentially, I expect that Q3 and Q4 will be lower than Q2 still. And then at some point in time, it will bottom out and if I listen to what economists are saying now about Brazil, number of them are saying the bottom is around where we are right now that would be great. I would say we are not just in that position to confirm that but we are close to bottomizing that realistic expectation.

That comes to our working capital, I think you called out two main elements, one is the relationships which depending on the market they're active in plays a bigger role or not. In the Middle East relationships are very important and that can be a tedious process to get your invoices approved at various levels of the client than often at the ministry have to finally do the sign-off. And then you get paid very quickly when all those signatures have been obtained, but it's pretty complex and tedious process to get that done, which requires a lot of effort from our people in those relationships and that's happening.

And we also keep a very close eye on that as an Executive Board and the other part is internal processes, I think they have -- and it is about making sure everything is visible in a good level of detail and no areas of improvement there. I think we have a full transparency in the company spending in terms of either work-in-progress or receivables and also the accountability program managers, project managers, client managers, country managers also the accountability structure is very clear around this. So we also know who to count on to do this and who to engage with to get progress reports.

Andre Mulder

Sorry, one follow-up on U.S. What's the lead time for new contract or let's say the contract starts, or do you say bottoming out, the bottom was reached in Q4 and then growing the backlog again in Q1 or Q2 of that new backlog have you ever -- already seen somewhat already translated into revenues or are we going to see that in the second half of this year. Just want to have a feeling on that.

Neil McArthur

It depends on the clients. And so if you look at the time to move from moving and having the net order intake in water for public sector clients, and yes, it can take even up to four months to get contracted, and then, to start work. So there is, can be two quarters of delay between contracting through or winning the work and getting it into backlog and then being contracted and actually able to start work.

Philip Ngotho

Philip Ngotho, ABN AMRO, my first question is on the follow-up on the working capital and especially for major markets, we saw that the DSOs increased to nearly 140 days. So and you indicate that it's probably going to get -- the situation will probably get worse or might deteriorate further until we see an improvement in mid-2017. Can you give us an idea on what the level is that might be looking at in terms of the DSOs, what you have as -- if you have a view on that?

And then also, do you have a -- can you give any guidance on what you're targeting before year end or year end 2016 where working capital should be at.

And then, my second question is on the order book, we saw a strong increase in organic growth. I'm just wondering if you could give a bit of a color on how that compares in business lines not regional, but really more on the business line.

And then also, I'm wondering for North America you indicated that a part of it is driven by Field Tech Solutions. But as you indicate yourself, it's more of a low -- more of a commodity business. And I'm wondering despite the higher order book, how do you look at the margins in those -- in that order book? Is it, I mean we've seen that's a significant decline in margins year-on-year, are we looking may be at a new normal of this around -- levels of around 7%, 8% and maybe you can share your views on how that's -- how the projects in your order book going to look at and if you still believe that it should be going through its 10%?

Neil McArthur

Let me take the third question first Philip. So if you look at where we are in terms of the environmental business, historically the margin is driven by the complex remediation were higher and significantly higher in some cases than the average for Arcadis. And we've very clearly guided that that market has been in decline for a significant proportion of time now and increased competition meaning lower pricing levels and putting margin pressure.

We specifically built Arcadis Field Tech Solutions with the intension of serving our clients for their more simple remediation needs with a different business model. It would allow us to have average Arcadis margins for Field Tech Solutions. So, therefore, as that becomes a more important part of our revenues because remember its order intake at the moment and not seen it back yet in revenue because that then follows. You would expect for the Arcadis Field Tech Solutions to move back to the average of where we want to be as Arcadis.

Renier Vree

Now the order maybe there is some kind of -- bottom to the top, the order book per business line we had a few things about that in the press release. So in the environmental business, we did see the increase for the reason that Neil mentioned particularly in North America. And in buildings and water it was a stable backlog while in infrastructure there was a decline and the biggest reason for the letter is the emerging markets where we have seen a number of cancellations like in Brazil, Qatar for infrastructure projects.

On working capital, emerging markets, the key focus there is the Middle East. And in fact, it's a limited number of clients that we have number of large programs for and those programs a number of project, so its pretty specific what needs to happen there. The projects are milestone based that we have explained earlier, quite a number of them will start to taper off toward the end of this year and beginning of next year and then that simply to completion of the invoicing and payments.

I think the right time now to say the specific numbers that we expect by month, by quarter, we have planned out by client what we expect in terms of how DSO will evolve both the expected collection of cashes, what the development is of work-in-progress, we have a kind of monthly update, we do with those big clients.

And so also has a target for the end of the year, a number of the payments for those projects are crucial for the level of cash collection for the full year. So in the end, working capital by year end is depending on a number of significant payments, which also is a reason I'm not going to give you a specific number that I expect, we will be at by the end of the year.

What I want to add is that there is no question that you will get paid that's also other signals that we have to work. We deliver the relationship with those clients. So its matter of when we get paid, not where do we get paid just to make sure that the fear is not remaining in your heads.

Philip Scholte

Yes. Thank you. Philip Scholte from Kempen. Taking maybe somewhat a holistic view about the whole company, what kind of margin business do you think this company is, because I think with the recent deterioration in margin there is a lot of doubt about how should you actually be looking at the whole group?

My second question is, related to maybe what happened in Brazil, but then actually referring to the other regions, there where such a sharp or long decline is actually impacted your margins, because in the end, you are being hit by maybe fixed cost base. Is there any region where you fear that you are about to hit that same problem and how are you dealing with that?

And my third question is about the full year outlook; actually you used to give somewhat more specific guidance for the full year at the mid-year point. Why have you decided not to do that today?

Neil McArthur

Let me take the question around the Brazil, that we, do we expect another Brazil somewhere in Arcadis. I mean, it's a very specific situation with the country that is politically in turmoil. And as all the commentators say the deepest recession either ever or at least for 25 years. So that's a very specific situation. And what we've proven historically is that Arcadis is able to where possible, move quickly in adjusting its operations to maintain margin.

So, we do that not just in Brazil today, but in other areas of our business, we're looking to optimize how we do our operations on a weekly-by-weekly basis is based on what we see. So is there another Brazil out there, I can't predict the economy. But, there is more uncertainty today than there was three years ago, when we laid out our strategy. Do you want to talk about the margins for the whole group, Renier?

Renier Vree

Sure. I think for the margins there is ultimately a pretty strong correlation between organic growth and margin. And when you see, they have now couple of quarters with negative revenue development, it takes time to have the cost-based adjusted and particularly when you have also a number of markets where competition is more intense because of slow down in demand. Then also price levels have suffered. So I think that's the spot we are in right now.

And I think with all the measures that we are taking around performance excellence, we know what it takes to improve projects results, how to optimize resources which part of the market to go to where opportunities are bigger that should stimulate margins to improve.

Neil McArthur

Don't forget that Brazil is a unique situation and last year impacted organic growth negatively for Arcadis by minus 3%. And in the first half of this year, it's roughly minus 2%. So it weighs heavily on our organic growth, when you exclude that we're working very hard on growth opportunities around the world. I can assure you that. Do you want to take the last question?

Renier Vree

Yes. On the outlook, I think that you can use a number of reasons, one part is that increasingly I think you see that covenants is emerging that it's increasing less common to give quantitative guidance for how the year will develop. We have done it until last year or so, I think at the beginning of this year we're already a bit less specific. And we think actually also looking at the uncertainties around us in the markets there is Brexit fell that happened during the year. We think therefore it's the right approach to be prudent and not guide with a specific target for profit or growth for this year.

Dirk Verbiesen

Yes. Dirk Verbiesen, KBC. Question on the -- you stated earlier in the presentation on the field order wins. You said, if I understood you correctly, it's a multi-year larger contracts added to the backlog in that specific new segment for you. Can you say a bit more on the volume and feasibility and maybe the volume also in euro terms what the order wins in Field Tech Solution we present by now?

Then on the Brexit discussion, I appreciate your previous comments, but the buildings segment should we see that now as a broader, if you compare to your comments made in Q1, I think you were referring at that time to luxury apartments specifically. Is the Brexit now also affecting commercial property or offices or whatsoever? Maybe some more explanation there.

And then on the backlog more in general, you are stating that it's up 1% versus year end. But if I apply the percentages you gave on emerging markets and the other regions. It's year-on-year, it seems to me year-on-year comparison versus the plus one because if you do the way that the average of those increases you get 2%, 3.5%, 4% growth in the backlog. So what am I missing is that…?

Renier Vree

Well, maybe just to take that last one there, the calculation of the backlog is based on the backlog, weighted average backlog that should not be weighted with the revenues. And the backlog for emerging market tends to be longer than for the other markets. And U.K. has to be the shortest backlog, so the weighted average of the backlog based on the size of the backlog is different than based on the revenues of the individual regions. If you hope that make sense, so it is a half year development of backlog that's the comparison.

Dirk Verbiesen

So the percentage on the Page 4 in the press release are also versus year end?

Renier Vree


Neil McArthur

And if I come back to the Arcadis Field Tech Solutions, what I can share is that we're ahead of our plan for the year, for order intake for this new proposition that we brought to market. And roughly 20% of the sales that we've had this year so far in our environmental business in North America are Arcadis Field Tech Solutions. That hasn't made its way into revenue yet. This is a like between order intake and revenue.

Dirk Verbiesen

And what is the -- can you say that and what the percentage in the environmental backlog and of the Field Tech Solutions as we stand now? That's more than 20% or?

Neil McArthur

In terms of the order intake, I can tell you that it's roughly 20% of the order intake. In terms of the backlog, I'm not sure.

Renier Vree

I think we'll be a bit lower, we had this till last year. So I think we need to get backlog, it will be a bit below the 20%.

Neil McArthur

But it's 20% of sales of U.S. environment.

Dirk Verbiesen

This year?

Renier Vree

This year, yes. And on Brexit, yes, indeed we did see at the beginning of the year particularly in the luxury apartments, reduction in work and clients had become more careful, so you see investment decisions by U.K. investors, but also foreign investors in the U.K. They have been waiting for developments. So, companies have delayed decisions on headquarters or expansions or adding or reducing capacity in London. So you see that in commercial property as well as for more multinational clients, we have seen there a shift in their decision-making in the sense of slowing it down, which impacted order intake and revenues of buildings in the second quarter.

Neil McArthur

And if you just complete the -- perhaps complete the whole story around Brexit then in the U. K. We're very pleased that the U.K. government have made statements around investing in infrastructure as a way of maintaining GDP growth in the U.K. And in Q2 actually infrastructure driven off the legacy Hyder business is the largest business that we have in the U.K. and that's growing very nicely for us, we've had very good wins in that space this year. So that bodes well for the infrastructure side of the business.

And then, there is clearly, this period of indecision for private sector clients and multinational clients about their investment decisions if they were going to production facilities in the U.K. is that going to remain or are they going to think about putting it in Continental Europe. Now that's indecision, uncertainty in the short run which may impact our business in 2017 in the U.K. We can't tell sitting here today. We are in close contact with our clients. It's been a great opportunity to out reached our clients to understand their planning for Brexit to be very clear that there is a lot of uncertainty with them, how things are going to pan out. So we need the dust to settle. We need clarity from them. But, it's not unlikely that there could be an impact in 2017.

If you take the mid-term perspective as Arcadis, we are a natural edge because we are the company with the strongest Continental European footprint and U.K. footprint, so we can help our clients if they change any investment decisions from U.K. into Continental Europe. But that's a mid-term growth opportunity for us, should that happen.

Dirk Verbiesen


Quirjin Mulder

Good morning. Quirjin Mulder from ING. Couple of questions, first about the net working capital. It seems that the people of [indiscernible] have left and so I'm very interested whether they are still in the line of improvement in the net working capital? And also can you maybe explain the €22 million effect on the whole working capital. You said we have to participate to -- consolidate the participation. So, is that an IFRS issue or is that something else. That's my first question.

Then on Brazil, you said Brazil will be profitable in 2016 still today you say okay, we are focusing on breakeven level in the second half, first half year was minus €0.5 million. So, as you left part of profitability in Brazil and what was the order position in Brazil to get guidance, idea about the second half of 2016?

Again, you also give some more flavor on the order position in the different emerging markets for us to get an idea about what direction the different countries will do. And then, the final question is about, what's happening in Belgium and France?

Renier Vree

Okay. Thank you. Well, on working capital we still to get some support, it's not company mentioned, because nor there -- not the big four companies help us in the countries where we have the biggest opportunities to steer head this and to have clear actions defined. So that's ongoing.

Joined the operation means you have in the project together with another company and it's technically not a JV because it's not incorporated, but it's managed as if it is a JV. That means if there are subcontractors used you have to also consolidate proportionally to your stake in that joint operation the full P&L not just your own people, which are already in of course in net revenues. But also the work happens through subcontractors, which brings gross revenues and suppliers also payables to the balance sheet. So in detail, an IFRS requirement to do it like that.

Talking about Brazil, yes, small loss in the first half and I said we are working towards breakeven in the second half so that will make the full year -- should be pretty close to breakeven, difficult to expect and predict that precisely. Order intake has not been great as well we would expect, also we do see tender activity going up recently. So, it also shows the market is not completely quite, which of course is important to replace existing projects when they finish to win new projects and get revenues from that.

Because if you look at the emerging markets, order book development that's minus 11% you have seen in our presentation and press release. There you see that the impact in Latin America is lesser than that. Middle East is around that level and Asia is a bit better than that level a little bit more and more color to this.

And Belgium and France, overall, Europe had a good second quarter and half year. But, we do see some imbalances like in France. There is a lot of work in Paris. It is more difficult to have sufficient work in -- other cities in France like Marseille or Lyon or Strasbourg where -- so our capacity is more needed in Paris and we have people available in other parts and it's not always easy to optimize that which impacts then the availability.

And also in Belgium, we have seen the level of spending by the Federal Government on infrastructure at a pretty low level in the second quarter, which also had an impact on the results in Europe.

Quirjin Mulder

One final question left about U.S. If I look at the numbers of the second quarter, your EBIT from operations goes down with 30% and it's about €20 million. And if I look at these numbers and I look at U.S. that is also down seriously. Can you give me an idea about what percent, what was the breakdown between keeping people idle like you did in Water as you have elaborated against let me say price pressure?

Neil McArthur

Just to clarify what I said and Renier said in his presentation roughly a 3rd, a 3rd to 3rd across environment water and architecture with different reasons across each of the three. So in environment as we said it's the more competitive complex remediation market that is driving a decline in -- and then we said in both water and architecture we kept capacity seeing what we saw in the pipeline moving forward.


The question, can you just break it down to a number between the two drivers, I think that gets a little too academic to be too precise about it. So there were two main factors that Neil mentioned to competitiveness as well as the low billability anticipating the order intake, but not easy to break it down into specific numbers.

Quirjin Mulder


Neil McArthur


Edwin de Jong

Edwin, NIBC. Few questions left on Brazil. How are we with this side of the hydro power participations and is there any news on the compliance issues in the San Francisco river project? And that's one. And the other one on general, the order business. What do you really need to get margins there to Arcadis averages again -- for averages.

Renier Vree

Let me take the first one on Brazil, on the -- the compliance case that we -- this was extensively at the beginning of this year. There are no developments. There has been no request towards Arcadis. And also we keep an eye on the police file, which is publicly available if you are a party of [host] [ph] in this and there are no developments that are relevant for us.

On the non-core energy assets, which includes those hydro power, so biogas installations. There we have seen positive developments. We have signed an agreement with the international investor that will make additional investment in biogas which will mean that usage of the capacity of the gas production plant that we have in Brazil will go up significantly towards the end of this year. And therefore, that business billed to profitable as of 2017.

While having said that, we continued to be focusing also on divesting it, but we also saying that with this development, there the case for divestment becomes much stronger for potential buyers.

Edwin de Jong

But still this year, you said expected to be some divestments or?

Renier Vree

Well, I'm careful to guide for that. But, we are pursuing that and talking to potential investors in those businesses.

Edwin de Jong


Neil McArthur

Water, clearly as Renier indicated earlier, organic growth is one of the key success factors for driving higher margins across all of our businesses. So as a global business line, we are focusing on individual pockets of growth in our regions around the world with our strategy focused on not just inside the French water treatment, but also conveyancing, also water for industry, also business advisory and program management. So we will continue to do that and where we are able to do that we see good growth like in the United Kingdom and good margin development while maintaining the appropriate use of Global Design Excellence centers where we can and there is an increase in penetration of that in our water business that needs to continue the journey like we have very successfully so far in our infrastructure business. All of those should add up to improving our margins in our water business.

Luuk van Beek

Luuk van Beek of Petercam. Have a question on the cancellations which were about €70 million. First, do your clients have to pay a penalty for cancellation? And second of all, and the cancellations were in your emerging markets business and they were pretty large compared to the revenue level of your emerging markets where the Q2 results have negatively affected by the fact that all of a sudden a lot of people were not able to execute any work because of short-term cancellations. And if possible could you even quantify that say one, two or maybe more millions of euros negative impact?

Renier Vree

So, you are right. Cancellations as mentioned happened in Qatar, China and in Brazil. Other penalties usually not in the contract which you get into a discussion with your clients, you have to demobilize your people to get paid for that and that also typically leads to an agreement that you get paid for a certain period after the decision is taken that your people have to go off a project. And one of the case, it was also project we haven't started yet.

So more that you are gearing up to do things and then the clients says well, I'm going to make this investment, in fact it was a mining client that still decided not to do a project. Then there is no financial settlement for that. But, always when there is a cancellation, there is a discretion with the client, what does it mean for us? And of course, other suppliers as well, how do we solve that.

But to say, is there a number I can pinpoint on the EBITDA that has impacted for the quarter, I would say that's too hard to really quantify.

Luuk van Beek

But on balance it was negative.

Renier Vree

It was negative certainly.

Luuk van Beek


Renier Vree

It impacted billability.

Luuk van Beek

And on those cancellations, are those projects scrapped indefinitely or do you see possibility for them to come back and say one or two years from now?

Renier Vree

I think we see it more often, for instances in the -- on the building side, the client postpones a project, I said well, this is not the right time. So for the next two years, we all work on this and they drop it. Some times they bring it back with the same contracts, some times they retender it. So that's hard to predict. I think on the -- in the case of this mining client, it has a lot to do with the prices of commodity. If they come back and they are in a hurry, they would just right away take the old contract, can you start tomorrow? If the timing gives them more opportunities to restart the project, it could be different. So it's -- very much client specific how that it goes.

Neil McArthur

And I think just building on that, if you look at the Middle East, the cancellations that we have seen there, it's -- what I would call, the non-critical infrastructure for events in Qatar like the World Cup. So it was perhaps some nice to have projects rather than the critical infrastructure. So those won't -- I don't think come back any time soon.

Luuk van Beek

Okay. Thank you.

Neil McArthur

I understand there are also questions in the conference call, so I would like to switch to the conference call now.


There are questions from Joost van Beek, Theodoor Gilissen. Go ahead sir.

Joost van Beek

Good morning. Few questions left. Firstly on let's say the non-recurrent charges, restructuring related charges for the full year. Are you able to give some guidance of what you expect for the second half? And then, on the competitive environment, be interest to hear what are you see competition mainly from local or probably larger companies increasing -- can imagine large companies usually better competitive than the smaller ones. And worsened competitive environment, if you look at the different regions?

Renier Vree

Hi, Joost. Maybe starting with the non-recurring charge and operational cost, which were just under €10 million in the first half of the year, I think we've already said that the first quarter results, we expect those to be not more than half of what it has been in the 2015, which indicates that's the guidance of around €20 million for the full year, is still what we are comfortable with as an expectation for the year.

Neil McArthur

If we talk about the competitive environment and let's try and do that relatively quickly and go around toward that. If you are looking in Latin America and Brazil, we are one of the very few international players -- global players, so that tends to be local competition. And I think we've talked a lot about the competitive environment and the dynamics in Latin America.

If you look at North America, in our biggest business, the environmental one we have been seeing that for a while, now that we see competition from the smaller players moving from the more simple remediation into the complex. And we see continued competitive pressure from our global peers in the complex market. So that's our biggest business in North America.

If you go to the Middle East, we tend to compete with the global players in the Middle East and that's a very transparent and competitive market today. If you look at Continental Europe, it's mainly strong country based players. There are few Pan European players like Arcadis in Continental Europe. In the U.K., it tends to be some strong national players and our global peers where this again a very competitive, but growing market in the U.K.

In Asia, we are the leader in buildings and cost and project management. There a number of global players that play in that marketplace as well. So that's who we come up against mainly. But there is local competitors in cost management and we compete very strongly on our capabilities and our reputation.

And then, in Australia Pacific, with the Arcadis brand now, we moved from -- what is seen as a small local player to being a global player where we compete with our global peers that have also significant operations Australia Pacific.

Joost van Beek

And in terms of -- further shifting you work force to the Global Design Centers. What kind of opportunity you see there because I believe that is one of the key competitive advantages of Arcadis?

Neil McArthur

Sure. As we shared in the presentation and discussion so far versus a year ago, we've grown our global design excellence capability by 45%. That is allowing us in infrastructure to win new work in developed and emerging markets. And it has allowed us to improve our margins.

Remember prior to Idaho we had less than 1% of our people in global design excellence centers today we are up to 6% of our people in global design. And that's a journey that we will continue because it helps us to drive organic growth which is good for our regions and good for our global design excellence capabilities.

Joost van Beek

Okay. Thank you.

Neil McArthur



There are no further questions from the call. Please continue.

Q - Philip Ngotho

Philip Ngotho, ABN AMRO. I have two follow-up questions. First of all, still again on the order book -- the backlog, the quality of that. I'm just wondering if you could -- maybe still give a bit of an idea because I understand that for Field Tech Solutions maybe difficult to -- we have to see where the margins have entered the new business. But for the other businesses area, of course, it's existing business. And I'm just wondering through what extent did you have to compete on prices given that you comment about price pressure in the market and understand you can improve margins by reducing cost. But, I'm just wondering to what extent has there been -- have you been giving some discounts on projects prices.

Then the other question is on Field Tech Solutions again. I was a bit surprised by the comment that it will be 20% of sales -- 20% of environmental business for this year in the order book it is, okay, because maybe you could clarify that a bit. I understand my understanding was that at the moment you have around 200 employees in Field Tech Solutions, so I thought it was actually quite minor in terms of volumes. It's a new business, so I'm just wondering, when are you going to see them deeper than 20% because it is, in terms of employees it sounds very minor on the total?

Neil McArthur

Yes. So let me take that that first Philip. So to be very clear, in the first half of this year, of the environmental order intake in North America 20% has been Arcadis Field Tech solutions. And there are several multi-year contracts associated with that.

If you look at our revenue in Arcadis Field Tech Solutions in the first half of this year, it's still a small proportion of our environmental business in North America.

If you look at the quality of the order book and the back log in general where we have price competition that's why so important for us to make use of our Global Design Excellence capabilities so that we can take the market price and still manage our margins effectively. And I think the best example of that as I highlighted earlier is where we are today in infrastructure. We have -- if we talk about our legacy Hyder business that was a significant infrastructure business and used to working with Global Design Excellence. We have Arcadis, this is legacy infrastructure business that is now fully embracing the Global Design Excellence concept so much so that 40% of our people in our Global Design Excellence Centers are now infrastructure. And you can see that we're growing organically despite the downturn in Brazil. And we're improving our margins. So and that is a more price competitive market in global infrastructure than some of the other businesses that we're in and yet with this new business model and the success that we're having we're able to improve our margins.

Q - Philip Ngotho

Okay. That's why you have to follow the market in terms of prices so and that -- there is also -- if you look at the project prices those haven't declined as well.

Neil McArthur

In infrastructure there is a market price where whoever is going to win is going to win and we judge what the market prices required to win and then we assess whether we can make our target margin before we bid.

Q - Philip Ngotho

Okay. And then…

Neil McArthur

And then, it's about project execution.

Q - Philip Ngotho

Of course. And the other two businesses, because you mentioned infrastructure, but on the other parts of the business have you had to compete on prices as well?

Neil McArthur

Well, I think, we've…

Q - Philip Ngotho

It's always a part of it, of course, but sometimes you try to win on different other metrics.

Neil McArthur

Right. And remember I don't want to sound flippant but we have all of the four global business lines in each of the seven regions which wins this 28 intersections and each one has a different specific market dynamic. But what we're aware of is where is the market price to win, and then, how are we going to produce the margin with our team in order to win that work and we go there in each one of our regions with the intention of improving our margins.

Q - Philip Ngotho

I’m just asking because you know that I understand order book has increased, I mean at the end -- in the end it means that your margins would be the new normal somewhere, it would be at 8% then, maybe that will be disappointment a year from now because that's why I was asking. Otherwise, thanks for the clarification.

Neil McArthur

I understand. Yes. Okay. Quirjin, I think was first.

Quirjin Mulder

Yes. Can you maybe go somewhat deeper into this -- the more complex environmental service contracts. In my view, it's the government has almost stepped out, you might be aware that a lot of remediation programs et cetera. And the clean up of military site et cetera. That was backbone of Arcadis Limited 10 years ago -- until five years ago. At the same time, more complex environment service contracts are mostly went from typical multi-national company in my view. Oil and gas and probably also chemical guys maybe power plants and maybe some mining firms. So what’s the future of these complex contracts? And at the same time what do you think as the Field Tech solution to be the maximum percentage of your order book in the future? So what is your ambition there?

Neil McArthur

If you look at the environmental market, clearly there are pockets where today with the depressed oil price and the depressed commodity prices both oil and gas and mining clients are spending less on the legacy issues that they still have on their balance sheet. So they are going to have to address those because there is legislation in the developed world for addressing those. So, long run they have issues that they have to address and what Arcadis Field Tech Solutions helps us do is position with those clients for their more simple needs together with the complex. And they have been very clear to us that they want to rationalize number of suppliers not just those who do complex, and not those that just do simple but they want to bundle that with suppliers like Arcadis, they can provide both sets of capabilities. So that's a request from our clients that we have responded to. And they still have those legacy issues on the balance sheet, but it is very clear that in the short run with the oil price and commodity prices, it's not the priority for spending money at the moment.

There are other sectors where there is new legislation over the last few years and the power sector in North America with coal ash where clearly that's a growth opportunity for us where we have been building capability and building new clients. And we will continue to live for those pockets of growth in our core historical complex remediation business.

Quirjin Mulder

But, let me say, Field Tech Solutions in fact replacing complex, because it seems to me that some complex, environmental service contracts cannot be replaced by Field Tech solutions. Or if that is the misunderstanding from my side?

Neil McArthur

The pure complex is declining and the simple is growing. I can’t say any clearer than that.

Quirjin Mulder

Yes. Question on the backlog. You also indicated that Field Tech Solutions some longer contracts in general, how should -- duration of the backlog developing, is it also changing material, you indicated it's a 11 months of revenues but if that duration is much longer than in the past then we have to look at it differently.

Neil McArthur

I can talk for the last five years that I have been with Arcadis, the backlog has been between 10 months and 12 months and we are at 11 today. And first quarter was also 11 months. So stable.

Renier Vree

And Field Tech Solutions that's part of the total global backlog is not that huge that it would change the duration significantly. So it's an element of it, but not swinging that duration.

Neil McArthur


Q - Philip Ngotho

Yes. Thanks. I'm trying to reconcile some business line or region margins because in your presentation you are mentioning improved availability in Continental Europe as a result of fair Europe performance excellence but the margins in Continental Europe are down. And I'm also struggling a bit to reconcile the buildings margins because it is down so much. I actually would have expected that one to hold up pretty well, is that mainly architecture business, can you say something about the regions within buildings which are actually driving that margin growth?

Renier Vree

I think in Continental Europe to take that one first we did see a billability increase, but between the countries in Europe there are differences. So the Netherlands has done a good performance, the strong half year, well as mentioned earlier we see the opposite in Belgium and France, affect France and Belgium. And therefore, on balance there is a decline of the margin in Continental Europe. And when it comes to buildings and margins, well in the U.K. buildings business is very strong and very profitable having lesser revenues there just as an impact on the total. And yes, as I said in Architecture we did see a reduction of revenues and margins because of the activities from North America for Asia and of course the healthcare, but for a while can backup again, if you've seen last year pre-good run on the healthcare projects, the hospital renewals that has softened in the first half of this year.

Neil McArthur

But the funny thing is that actually if you look at the margins in U.K. they were actually up. But that was not driven by buildings, but more by the other segments.

Renier Vree

Correct, yes. Particularly the infrastructure had a very good half year.

Neil McArthur


Dirk Verbiesen

Yes. Still one question to pull up on the Continental Europe. You already indicated, especially in France, [indiscernible] issue with the capacity and the mismatch region. Are you going to take measures to touch to reestablish that and the same for Belgium, are also going to plan some capacity reductions to bring that again to better level?

Renier Vree

Yes. In France, we have already for the last year made adjustments and those continue. But, there are only certain phase in which they can do get, given legislation that's in force. And in Belgium, we think the issue was there more of an hiccup in terms of -- whether all their spending on infrastructure projects. So I think in Belgium the issue is not so much capacity adjustment they have to make. I think things got normalized because of market developments.

Dirk Verbiesen

So should I read then for France maybe that, that outlook that could continue into H2, but for Belgium maybe already can see an improvement that how to read it?

Renier Vree

Yes. The good way to look at the outlook for Europe.

Unidentified Analyst

Great. And to follow Philip's question about the U.K. margins, is the margin improvement in infrastructure related to a better order book or is it related to the tail-end of the cost saving from Hyder which you promised let me say something in 2014 that's 50 million pound sterling?

Neil McArthur

I think when you look at infrastructure in the U.K. We have done a very good job and how to integrate our businesses for that Arcadis is small in for business and Hyder a big one. We put them together which has helped to become more efficient in the delivery of work. And with also the overall market situation for infra is good, there are large projects for rail, high speed rail, cross rail, there are also highway projects. So just the demand for engineering and services and consultancy services is strong, which also helps the price levels. So, I think both from a market and an internal point of view have contributed to the margin infrastructure in the U.K.

Unidentified Analyst

My final question about second half 2016, given the -- you're not saying, you say conditions will continue. But given the -- that the situation becomes more easy comparison given the organic decline in the second half 2015. Is it reasonable to expect the organic decline will diminish in the second half of 2016 compared to the first half year -- year-on-year?

Neil McArthur

Well, I think when we make a statement that we don't provide quantitative guidance that's the statement we would stick to. As I'm not going to answer you actually right now. And I think also one of the interesting parts of the jobs of analyst is to make good prediction for the second half of this year.

Unidentified Analyst


Neil McArthur

You're welcome.

Renier Vree

I would like to give you the opportunity to ask for a last question.

Dirk Verbiesen

Yes. It's Dirk Verbiesen, KBC. If I may on the working capital, you're not specifically providing a target or where you want to be at by the year end. But the processes you describe that impact that working capital unfavorably, are those processes, will those processes also affect, or impact the seasonal pattern we normally see in the second half, do you think or?

Renier Vree

You can see from the past that during the year you see particularly work in progress building up against built and of course of the year and paid by year end and we expect that to continue, largely different this year than other years. Within that work in progress and those large product in the Middle East those are swing factors that in the end determine the ultimate result for the year. And that's more -- would say binary that has been in the past. That wouldn't have those contracts that would ultimately decide specific number within a calendar year.

Dirk Verbiesen

So that's only a timing issue?

Renier Vree

Just a timing issue, indeed. Yes.

Neil McArthur

Okay. When there are no more questions, I would like to thank you for your participation and close this meeting. Thank you.

Renier Vree

Thank you.

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