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Edited Transcript of ARCAD.AS earnings conference call or presentation 25-Jul-19 8:00am GMT

Half Year 2019 Arcadis NV Earnings Call

Amsterdam Jul 31, 2019 (Thomson StreetEvents) -- Edited Transcript of Arcadis NV earnings conference call or presentation Thursday, July 25, 2019 at 8:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Jurgen Pullens

Arcadis NV - Director of IR

* Peter W. B. Oosterveer

Arcadis NV - CEO & Chairman of the Executive Board

* Sarah Kuijlaars

Arcadis NV - CFO & Member of the Executive Board

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Conference Call Participants

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* Bart Cuypers

KBC Securities NV, Research Division - Financial Analyst

* Frank Claassen

Banque Degroof Petercam S.A., Research Division - Analyst

* Henk Veerman

Kempen & Co. N.V., Research Division - Research Analyst

* Maarten Verbeek

The Idea-Driven Equities Analyses Company - Equity Analyst

* Quirijn Mulder

ING Groep N.V., Research Division - Research Analyst

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Presentation

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Jurgen Pullens, Arcadis NV - Director of IR [1]

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Hello. Our conference call and webcast for the first half year of 2019. With us are Peter Oosterveer, our CEO; and Sarah Kuijlaars, CFO. And we will start with a short presentation, and then we will open for a Q&A. You all received the presentation this morning, and it is also available on our website.

Just a few words about the 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'd like to call your attention to the risks related to these statements, which are more fully described in the press release.

With these formalities out of the way, I'd like to hand over to Peter Oosterveer.

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Peter W. B. Oosterveer, Arcadis NV - CEO & Chairman of the Executive Board [2]

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Thanks, Jurgen, and good morning, everyone. Thanks for joining us during what could considerably become the hottest day in recent Dutch history. So thanks for showing up, and I know that you probably also came because we have air conditioning in the building here. That does help. What we're going to do, obviously, is provide some brief comments on our performance. And I think where we are right now in the middle of 2019, it's probably a good point in time, kind of halfway our 2018-2020 strategy to sort of measure, again, our performance against the goals, which we did share with most of you during the Capital Markets Day in late November of 2017.

In general, just as a general comment, I think I can say that I'm actually pleased with the progress we've made so far, kind of halfway the journey from '18 to 2020. And I'm pleased because I increasingly see more evidence that the strategy, which we developed in late 2017 and which we shared with you during the Capital Markets Day, is the right strategy, is sound. And is starting to yield more and more results. And also that the strategy, which came with commitments we made in terms of our performance for 2020, that the strategy and the commitments we made also have commitments, which are achievable. And to an extent, you could argue that even today, we're already meeting quite a number of the targets we have set for ourselves for 2020.

Before I go deeper into our performance. This structure might not be the most appealing picture to all of you. But I think the picture actually does do justice to the type of work we do and the type of work we increasingly expect to do in the future. This is stormwater drain in Los Angeles, as you can see. And the project we were involved in and the project, which is [certainly] completed -- are completed actually brings the creation of recreational space, detection and adequate protection against stormwater sort of together. So the recreational space is not on the picture. Obviously, the stormwater drain is on the picture, but this project actually created as part of the project a lot of recreational space for the citizens of L.A., while at the same time, allowing to drain water, which ultimately flows to the ocean to be of quality, which would allow it to flow safely into the ocean. So an example of a project, a project we see increasingly done by Arcadis, and also an example of what right now is about a 9 years' engagement with the city of Los Angeles to do projects like this.

So back to where we are at the end of the second quarter, and then bringing it back to the commitments we made to all of you during the Capital Markets Day in late 2017. And the point I made about increasingly seeing more evidence that our strategy is working. We will get into more of that evidence as we go through our presentation, but I'd like to highlight a couple of things, which I really believe have started to get traction in Arcadis, first and foremost, a much more stringent and disciplined focus on our financial performance, on cash collection that, I think, is reflected in the numbers. The focus we have on our key clients and the desire we expressed in during the Capital Markets Day that we wanted to grow for our key clients at least double the rate as we grow for our non-key clients, and you will see evidence that we have been able to achieve that as well. And then the focus, which comes to Make Every Project Count programs. And that's probably a little bit more difficult to specifically measure. But I do sense a different culture in Arcadis. I do sense a higher selectivity of making sure we pick the right projects. And I do sense a deeper understanding and a deeper discipline as well on making sure that the projects actually deliver in accordance with our expectations. That being said, that doesn't mean that the journey has been completed. Also there, we're kind of halfway the journey and more is still to come, but I'm optimistic and positive about the changes I'm seeing in Arcadis.

So just going through the highlights of our performance in the first half of the year. For quite a number of quarters now, we are seeing continued strong performance in particularly North America. Strong performance in top of -- in terms of revenue growth, but also in terms of profit growth and that continues. So that is extremely positive given the size of the North American market and the significance for Arcadis and also given where a few years ago, Arcadis was in North America. So a significant improvement and it does show that with the right focus, with the right management team and with disciplined execution of the plan, good results can be created.

In Europe, the Middle East, we have seen strong performance -- continued strong performance in the Netherlands, maybe not surprising given our position in the Netherlands. But the performance has been very, very solid. We've seen performance in the U.K., which might actually surprise some people because by and large, it is quite similar to what it was in the first half year of 2018. And in fact, we were able, albeit at a really small percentage, to create some organic growth in the first half year as well. And given all the uncertainty around Brexit, I think that is not a small achievement. We also shared with you in prior quarters that we were not satisfied with the performance in Asia, that we were not satisfied with the performance in the Middle East and Latin America. And I'm happy to report that all 3 of these regions have positively contributed to Arcadis in the first half year. The actions are starting to yield results. There's more to come because we are not resting on our laurels to say we've done everything, but at least it is pleasing to see that all 3 regions showing improved performance and contribute positively.

It's probably also appropriate to not just speak about what we have done, but also where we expect to go next. And with the sort of businesses we cover and the global presence we have, I think we are extremely well equipped and prepared for an opportunity to capitalize on the opportunities, which the world is going to provide to us. And as you've seen from the press release, we increasingly expect to see these improvements and these opportunities to come from cities. No surprise with the number of people who are planning to move to cities. And in fact, are already moving to cities as we speak. Every week, about 3 million people across the globe move to cities. And that pace is going to continue at least, if not, increase. So increasingly, our expectation is that we will get more work from cities, mobility. But not just cities, at the same time, we also are increasingly working to future-proof the industries, which will work. And in fact, most of the environmental work we do in North America is an example of future-proofing industries. Environmental consultancy is a logical example of the last but not least, water management. And just to be sure that everyone gets the full picture, water management is not just providing water to citizens, but it's actually also increasingly protecting citizens against the impact of climate change and specifically, the rise of seawater levels and flooding.

Our priorities are still very clear. Our strategy, the one we rolled out in late '17 is working, and we are, therefore, on track to deliver on the targets for 2020. I'm not going to steal Sarah's thunder. But I just want to highlight a couple of the financial metrics, which are part of the first half year results. Margin improvement, which is obviously positive. And I'm more than happy to also say that margin improvement came to an extent from the focus on Make Every Project Count, a more disciplined approach towards making sure that we pick the right projects, and that we execute them in the right manner.

So margin improvement is positive. Our EBITDA up significantly. That's positive. And definitely, in terms of our financial performance, our financial hygiene, if you like, significant improvements to the point that net working capital is down, DSO is down, as you will see on subsequent slides. Sustained free cash flow improvements. And then last but not least, in terms of our leverage, we are in a much better position now than we have been in a long time and definitely out of what some people might have considered the danger zone. The organic backlog is still growing. We're interested in quality. We're not necessarily interested in high numbers without the quality. So the quality of the backlog is more important to us than the absolute number. And I think we are taking work in backlog, which now has higher quality and a better chance to deliver in accordance with our financial expectations in the future.

I will also speak briefly about ALEN. We are making progress in Brazil. The progress is always slower than what people expect. But if I just highlight a couple of the changes compared to the last time we spoke with you. Then the operational side, we now have 70% of the gas, which comes out of the gas project plan under contract with the expectation that the remaining 30% will be under contract in the not-too-distant future. 70% is under contract with 2 customers. And that is our preferred option to stay with the other 2 customers. We have ramped up the delivery of the gas. So that is -- we'll continue to ramp up throughout the next couple of months to the 70% level.

In terms of the gas-to-power plants, the largest gas-to-power plant, which is the picture on the left top side of this slide has been operational now in full capacity for a couple of months, it's delivering to the grid. I was actually in Brazil 3 weeks ago. If you look at all the facilities and not sure the picture does the real justice to the facility, but it's a really nice-looking facility now, and again, delivering 100% of the capacity we've expected to deliver to the grid. In terms of the divestment process, the information memorandum is being prepared. And actually, we've started to share it with potential buyers. We're still securing additional NDAs with additional buyers. So that is the process, and we're expecting the first nonbinding offers here in the not too distant future. So on progress, we're making progress, on track. And the intent, as we've said for quite some time now, is to still divest of the assets by the end of this year.

With that brief overview, I'm turning it over to Sarah.

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Sarah Kuijlaars, Arcadis NV - CFO & Member of the Executive Board [3]

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Good morning. I'm pleased to share a solid set of financial results for quarter 2 and the first half of 2019. Before doing so, I'll start with a project example from the U.K. This may look futuristic but cities and governments already recognizing a new disruptive frontier in transport, infrastructure and urban living. Connected and autonomous vehicles will radically transform mobility and how we as consumers experience it.

Arcadis is working as part of a consortium on the U.K. government-funded projects to create a high fidelity simulation environment, including AI-trained models and road users to test connected and autonomous vehicles. We will be drawing on our extensive experience in traffic modeling to deliver a simplification tool that can be used by a regulatory body to accelerate the safe development of connected and autonomous vehicles. Our future daily commute may look and feel very different. But let's now return to the here and now with the Q2 financials.

Before talking to the details here on Slide 8, it's worth highlighting that these figures are presented in a consistent basis to previous years in line with IAS 17. Our interim statement also released this morning provides full details in line with both IAS 17 and IFRS 16.

So starting with net revenue for the quarter. We report EUR 647 million, a 4% improvement year-on-year. We have delivered an organic growth of 2%, which is the eighth consecutive quarter of organic growth. This translates to a net revenue for H1 of EUR 1.3 billion. We have delivered an improved EBITDA of EUR 56 million for the quarter; and operating EBITA of EUR 49 million, an improvement year-on-year of 10%. This resulted in an improved margin of 7.6%, up from 7.2% last year and absorbing the impact of 1 less working day. So H1, we report EBITDA of EUR 112 million; operating EBITA of EUR 97 million, an improvement year-on-year of also 10%.

Moving further down the income statement. Our financing charges are flat at EUR 14 million. We have a lower interest expense on a lower average gross debt, but this is offset by lower interest income from loans to associates. The year-to-date tax rate was 35%. This is higher than the H1 rates last year at 26% and is impacted by timing effects and also the global mix of non-deductible expenses and unrecognized losses. We expect our full year rate to be approximately 29% in line with our normalized rate for 2018. Our net income for -- net income of EUR 38 million included operating loss relating to ALEN of EUR 5 million for the first half. Finally, looking at net revenue backlog, we reported EUR 2.1 billion with organic growth of 3%, with strong contributions from North America and Continental Europe.

So moving to Slide 9. I would like to highlight our growing track record of quarter-on-quarter performance. Our revenue growth, this quarter led by North America, with strong contributions in the Environment and Water businesses; improved operating margins with the strongest quarter 2 performance since 2015; and continued tight working capital management delivering a sustained improvement of 16.2%, our strongest performance for quarter 2 for at least 5 years and contributing to our sustained, strengthened balance sheet.

Now turning to cash on Slide 10. From an EBITDA of EUR 112 million, we have normal seasonal working capital movements, tax and interest in line with last year. So we delivered a cash flow from operations of EUR 28 million. We continue to manage CapEx carefully and so deliver a positive free cash flow of EUR 8 million. And a positive for the first half year, which is the first for many years.

So on to Slide 11. Our improved revenue, margin, working capital management, a positive cash flow of EUR 8 million due to a net debt position at the end of June of EUR 378 million. This is our lowest midyear position for 5 years and significantly below our peak debt position of EUR 623 million back in June 2015. With an EBITDA of EUR 112 million, this gives a net debt to EBITDA total leverage ratio of 1.6, well below historic peaks and fully in line with our strategic framework. We will continue to safeguard our now strengthened balance sheet and the flexibility this now brings us.

So turning to the regions. Our performance is led by a strong 11% organic growth in North America for Q2 and a 10% organic growth in North America for H1. North America of course continues to be an important region for us with 30% of our business. Our Environment business, now more than half our North American business, continues to be very strong covering both the public and the private sector. It achieved year-to-date both double-digit percentage growth and percentage EBITA margin. Water, our second-largest business, also continues to contribute strongly to the excellent North America results.

Now turning to our example. Arcadis is working with the Los Angeles transportation authority as they embark on a multibillion capital program to provide a world-class transportation system to more than 9.6 million people. Arcadis is working here under a long-term construction claim support service contract. We do show a higher gross revenue increase in North America. We are becoming more involved in larger programs and where we are a lead consultant of projects, we use third-party subcontracting. For example, in our successful environmental FieldTech Solutions, we provide the consultancy services and use third-party blue-collar workers to execute the work on the ground.

Latin America, with 3% of our business, also showed strong growth for the third quarter in a row led by Brazil. EBITA margins were positive showing a marked year-on-year improvement. And across the Americas, backlog growth is strong.

Turning now to Europe and the Middle East representing 45% of our net revenues. Continental Europe net revenue development was flat. However, order intake continued to be strong. The U.K. growth is now beginning to see some dampened dynamics given the ongoing Brexit uncertainties. However, we have a very well-diversified portfolio of buildings, particularly the private sector and the Environment business have proven to be very robust to date.

An example of this is the recently announced renewed framework agreement with a U.K. environment agency. This covers climate-resilient infrastructure, including floods and coastal management.

The Middle East showed lower revenues year-on-year as a result of our continued disciplined approach with respect to selective bidding. The Middle East continues to focus on stabilizing its footprint. Peter mentioned margin delivery continued to be strong in the Netherlands. And here is a Dutch perfect example. Arcadis is participating in the upgrading of the [Central Station Island]. Arcadis provides consulting services on the condition of the canal, cables and pipes, flora and fauna, utilizing our experience in both water and maintenance.

Elsewhere, EBITA was impacted by the number of working days in 42 when compared to last year and a weaker performance in Southern Europe mainly France. It's worth highlighting that half year operating margin is broadly in line with last year. DSO is down positively influenced by the sustained discipline on cash collections, particularly in the Middle East. Backlog growth is positive with year-on-year backlog growth for U.K. and Continental Europe, offset by decline in the Middle East, in line with our strategic review for the second half of 2018.

Turning now to Asia and Australia Pacific, representing 13% of total net revenues. Australia showed positive growth for Q2 although a slight year-on-year decline for H1, which is due to the timing of the ramp-up of the large projects. H1 backlog continues to be healthy. Operating EBITA margin continues to be excellent. Asia shows slight positive growth for H1 led by China, and an improved operating EBITA margin for both Q2 and H1 compared to last year. For our project example here, Arcadis designs, secures and supervises the management operations and maintenance services on the Hong Kong side of the 55-kilometer Hong Kong-Macau bridge. We continue to focus on our portfolio footprint and have divested a small part of our DNA portfolio.

And finally, Callison. CallisonRTKL delivered a revenue of EUR 111 million for H1 representing a slight revenue decline and a still solid operating EBITA margin of 8.1%, with important contributions from U.S. and China. On a recent award-winning project, CallisonRTKL revamped the headquarters of a federal government building to reinforce their collaborative and cultural transformation. This project achieved LEED Gold certification. It means Leadership in Energy and Environmental Design, and is the most widely used green or sustainably focused building rating system.

We welcomed Kelly Farrell as the new CEO, a very experienced architect and a promotion from within. Kelly and the team are very focused on winning work, building an energized team with lower attrition and stronger business results back to historic margins.

Let's conclude. This is a solid set of results with a particularly strong contribution from North America contributing to a sustained improvement on all key financial metrics; a strong free cash flow; and a sustained, strengthened balance sheet with healthy leverage ratios. We have a healthy business outlook for second half of 2019 and remain committed to build on these results quarter-on-quarter.

And I'd now like to pass back to Peter.

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Peter W. B. Oosterveer, Arcadis NV - CEO & Chairman of the Executive Board [4]

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Okay. Thanks, Sarah. Just to put a couple of closing comments in front of you. First of all, an interesting project for those of you who've been in Shanghai before. You probably recognize the skyline. And China, in spite of uncertainties such as the looming trade war between China and North America, continues to be a significant market for Arcadis, a market which will change. The service we provide, most of the service we provide in China are quantity surveying or cost and project management, and we do see a change. And in fact, we are trying to be on the forefront of that change in terms of how that is being delivered. And that's all, no surprise to you, probably be largely digital or completely digital. But the database and the information we have on cost of buildings such as the buildings you see in China will probably put us in a very favorable position to be on the forefront of that innovation.

So I already told you in my opening comments that I'm actually pleased with the progress we're making. I'm also pleased with the balance, which I think we have been able to demonstrate between focusing on the short term, we need to get the house in order, whilst at the same time focusing on the -- if I say long term, it's probably too late, too far out, but at least we continue to make investments, which will get us ready for the future. And the future will look different than the past, which is obvious. And I think a couple of proof points I'd like to highlight to you, which give me the confidence that indeed, we are making the progress I suggested to you.

If I look at the culture, and I know that, that's probably sometimes difficult to measure, but I surely believe that culture does provide an important foundation and tends to be an important contributor to improved performance. I really see the signs, which suggests that the culture is not only changing, but that we're really embedding the change in culture into Arcadis. Just use a couple of examples there to focus on Make Every Project Count. The focus on making sure that we do not select each and every project, but that we select the right projects, projects for the right clients as also evidenced by the focus we now have on our top 250 clients. The evidence is pretty compelling and that's focusing on the top 250 clients. And then looking at the growth we have been able to create for the top 250 clients is indeed the right focus. I'm also pleased to report that in terms of People First, which is a value we added 2 years ago or almost 3 years ago, that we're now finally seeing an improvement in our voluntary turnover across Arcadis. So that's positive. We're not where we want to be, but at least we're seeing an improvement.

We will continue with our investments in digital, obviously. You also saw in the press release that we are in the stages of forming a separate organization in Arcadis, which brings together the asset knowledge we already have in the company with the recent asset knowledge and digital capabilities we acquired through the likes of SEAMS and EAMS. More to come in the future, but I wanted to demonstrate to you that we are taking the steps, not only to focus on today but also the steps, which are needed to make us ready for tomorrow. Another one, which I think is evidence that the strategy is working, is the strong growth we've seen in Arcadis FieldTech Solutions in North America. Most definitely, an important contributor to the growth we have enjoyed in Environment in North America.

In terms of our financial performance. As I already spoke about the highlights so I'm not going to repeat it. Most of the financial metrics we are demonstrating today are well within the brackets we have committed to you and to ourselves to be achieved in 2020. So it gives us reason to be positive about the progress we've made so far.

I want to give you a bit of an insight. And actually, in a way, maybe also take you back to where we were in November of 2017 when we launched our new strategy. And those were the trends, which we explained to you, would impact Arcadis and we can now safely say, no surprise that these trends continue to impact what we do. Urbanization, the move of people to cities; the mobility, which comes with it. And then definitely, also the focus on sustainability, the impact of climate change, resilience and support. And then globalization, of course, is kind of in the middle of all of this. And digitization, as it impacts all of us, but digitization as we will let it impact our work is in the midst of all of this as well.

Just to show a couple of pictures, which came out of the public domain to show that's where the opportunities are. And then trying to make the connection with where we see the opportunities, as we also said in our press release, we definitely see our opportunities increasingly in delivering solutions, which creates sustainable cities. And provide smart mobility to the people who live in these cities. That being said, as I mentioned before, we're not just focusing alone on cities. We do see an opportunity and a responsibility to also help our industrial customers to future-proof their facilities. And we see plenty of examples of that as well. Environmental consultancy, most definitely, the backbone of what we do in North America. But we see opportunities to actually do that in other places as well. In fact, we just won our first significant environmental consultancy contract in China for an international customer. So it does show that increasingly, even developing countries are, and rightfully so, starting to focus on the need to be environmentally responsible. And last but not least, water management and resilience. Plenty of examples of opportunities already in our current backlog as well.

So in closing, I think that our strategic priorities for the rest of the year are very clear. We have the right focus on the strategic priorities. First and foremost, our focus is on further improving our margins to ultimately arrive at the back of which we have committed to you, which is between 8.5%, 9.5% by the end of next year. So our focus is definitely on improving the margin. We still have the same levers to achieve that. That comes through the continued focus on Make Every Project Count, that comes through increased availability, that comes through the use of the Global Excellence centers. This year, we've seen some encouraging increase in the use of Global Excellence Centers in the first half of the year. We did, as part of our plan for this year, committed to increase the number of billable hours in the Global Excellence Centers by the end of the year with about 15%, and we're nicely on track to actually get to the 15% increase of the Global Excellence Centers.

Revenue growth, it will be measured because quality of revenue and quality of earnings is the most important characteristic to create revenue growth, but no doubt that we expect to create revenue growth in order to meet our commitments. And what we're seeing is that the focus we now have, as I mentioned before, on the right clients and particularly, the focus we have on our top 250 clients who are together responsible for between 55% and 60% of our revenue that, that focus is starting to pay off. We'll look for opportunities to further optimize our cost, particularly as you think about real estate and the way we procure goods and services. It is definitely still our intention through the rest of the month core clean energy assets in Brazil by the end of this year. And I wouldn't finish this presentation by saying that we will continue to focus on strengthening the balance sheet, and we'll continue to make sure that everyone focuses on collecting our cash as well.

So with that, I hope that this insight was useful, and we are now ready to take your questions.

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Questions and Answers

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Bart Cuypers, KBC Securities NV, Research Division - Financial Analyst [1]

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Good morning, Peter and Sarah. Bart Cuypers, KBC Securities here. Two questions for me to start off. Perhaps starting with the outstanding results in the quarter, North America both in terms of organic revenue development as well as margins. On the margin front, that's really high number. Is that really only on the back of the very high organic growth and economies of scale? Or there are also extraordinary effects that have played so far, and that will disappear going into the second half of the year? Then -- yes.

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Peter W. B. Oosterveer, Arcadis NV - CEO & Chairman of the Executive Board [2]

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Go ahead, sir. Finish your question.

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Bart Cuypers, KBC Securities NV, Research Division - Financial Analyst [3]

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Okay. And then, yes, on the other side, to Callison. Yes. The margin, a little lagging in this quarter. So if you could maybe perhaps give some more color on what has happened there. And how is that looking into the second half of the year? Maybe also touching up on the voluntary turnover of personnel that you talked about in the group, has it stabilized in Callison in particular?

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Peter W. B. Oosterveer, Arcadis NV - CEO & Chairman of the Executive Board [4]

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Yes. Okay. So let me take the first question first on the margin in North America. And I think the question was, is it from the continued operations? Are there any extraordinary items in there, which would disappear? The answer is the first. It is the result of the focus the team has. It is also a result of volume. We've hired about 800 people in North America. So that's a significant number of additional people, and that's where in our business model, volume does come into play because your fixed cost can get divided over a larger population. And that does help with your margin as well. So there's no extraordinary item in the performance in North America, which would potentially disappear in subsequent quarters.

In terms of CallisonRTKL, that is definitely one of the areas, which will get more attention going forward because we are not with CallisonRTKL where we want to be. We want CallisonRTKL to restore to levels we've seen in the recent past and they're typically double-digit profit margin percentages. Where we are, though, with CallisonRTKL to be fully transparent is still dealing with the remaining issues, which came out of the strategic review and not so much a strategic review per se, but more the uncertainty and ambiguity we've created for the employees. In addition to that, as you -- as Sarah say, we did make a management change. We selected a CEO from within CallisonRTKL to take the reins and restore Callison back to the performance we've seen in the past. And needless to say that all of this has come with a degree of uncertainty. I can say though at the same time that the appointment of Kelly as someone who came from within, as is most always the case, has been extremely well-received within CallisonRTKL. Kelly has been with the organization for 20 years, is a registered architect and not only a registered architect, but she was well respected, was part of the management team. So the expectation is that following the rest of this year, we will start to see an improvement.

The retention there was another question you asked, the voluntary turnover. It's going up and down a little bit. But by and large, the trend is that it's stabilized now and that we have the worst behind us in terms of voluntary turnover. But we will still use the rest of 2019 to further improve the foundation and get CallisonRTKL ready for growth thereafter.

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Henk Veerman, Kempen & Co. N.V., Research Division - Research Analyst [5]

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It's Henk Veerman from Kempen. I have a couple of questions, and I'll run through them one by one. So firstly, on your margin in Q2, 7.7% EBITA margin. Last year in quarter 2 was 7.2%. And from what I understood last year, there were some project impairments in there. Could you maybe share with us probably the underlying margin last year, excluding the one-offs?

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Peter W. B. Oosterveer, Arcadis NV - CEO & Chairman of the Executive Board [6]

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Second quarter of last year, I think it was the first quarter of last year that we had some project impairments. You're speaking about project impairments in China?

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Henk Veerman, Kempen & Co. N.V., Research Division - Research Analyst [7]

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Yes. I'm not exactly sure where it's coming from.

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Sarah Kuijlaars, Arcadis NV - CFO & Member of the Executive Board [8]

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In quarter 2 indeed, there was some minor impairments in some of the Asia projects last year.

But I think it reinforces that this year, part of the improvement to 7.6% we see the overall Asia portfolio delivering at a higher margin than last year.

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Henk Veerman, Kempen & Co. N.V., Research Division - Research Analyst [9]

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Okay. And then secondly, if I look to your half year results in a bit more detail. I see that there have been some provisional releases this half year. Is it correct to say that they are higher than last year, during the half year?

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Sarah Kuijlaars, Arcadis NV - CFO & Member of the Executive Board [10]

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I think in a project environment, there are always provision releases. But I think on balance, that's not a major contributor to the bottom line.

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Henk Veerman, Kempen & Co. N.V., Research Division - Research Analyst [11]

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Okay. And if I then go to your guidance for 8.5% to 9.5% EBITDA margin as of year-end 2020, I assume. So conceptually, you have 12 to 18 months to achieve that. I think it's -- assuming a stable revenue, it equals about EUR 50 million of EBITDA growth. How realistic is it really to assume, let's say, the upper end of the range? Or is it time to maybe narrow it down a bit?

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Peter W. B. Oosterveer, Arcadis NV - CEO & Chairman of the Executive Board [12]

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No. I don't think that we see a need to adjust the range. I know that this companies who tend to adjust the range or narrow the range by the time they get closer. I think we defined a range with a margin, which we felt was appropriate. And I still think that, that margin is appropriate. So I don't think that -- I don't see a need to actually narrow or change the range. It is between 8.5% and 9.5%, and we still have confidence that we will get to this range. And not only confident, we actually see the levers we have available to get there.

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Henk Veerman, Kempen & Co. N.V., Research Division - Research Analyst [13]

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Okay. On ALEN, you express again that you expect to achieve profitability before year-end. We're already almost in August. Is it maybe time to maybe disclose what kind of profitability are we talking about? Is it marginal profitability? Or should we expect double-digit profit coming from this asset?

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Sarah Kuijlaars, Arcadis NV - CFO & Member of the Executive Board [14]

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Yes. So I think -- so in half 1, indeed, there were continued losses coming from ALEN as Peter referred to. But now we've got 70% of contract cover for gas-to-gas, which is the biggest plant that will then lead to gas deliveries there. And then it obviously improves the revenue stream and the operational profit. The gas-to-power plant is fully operational and that is a positive. It's small, but it's a positive margin contribution.

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Henk Veerman, Kempen & Co. N.V., Research Division - Research Analyst [15]

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Okay. And to what extent is achieving profitability a hard requirement for the sale of the assets?

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Sarah Kuijlaars, Arcadis NV - CFO & Member of the Executive Board [16]

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As I just said, we described that the memorandum is now being shared and valuation beyond future cash flows. And then those are in line of sight.

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Henk Veerman, Kempen & Co. N.V., Research Division - Research Analyst [17]

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And so again, the target is to divest it before year-end. What makes you so comfortable to say that, that will be achieved given that as you -- for example, have you already seen strong interest from multiple buyers? Or is there another reason for it?

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Peter W. B. Oosterveer, Arcadis NV - CEO & Chairman of the Executive Board [18]

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The reason why we are -- why we still express the intention to divest of them in 2019 is the interest we're getting from potential buyers. The fact that a similar facility as the one we had in Nova Iguaçu was sold, similarly in terms of capacity, not necessarily similar in terms of condition, to a large pension fund and a pension fund, which happens to be also amongst the potential parties interested in our assets. So we have enough signals, which give us confidence that we will get traction on the sales process because of the number of potential buyers. And let's say, the variety of buyers as well. So just all in one category.

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Henk Veerman, Kempen & Co. N.V., Research Division - Research Analyst [19]

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Okay. Last question on the receivables. It's up versus half year. Is this something to do with seasonality? Or maybe could you give a little more color on why it's up?

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Sarah Kuijlaars, Arcadis NV - CFO & Member of the Executive Board [20]

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So I think the -- it's important to highlight there. Obviously, the working capital position has significantly improved compared to half 1 2018. So the business is growing, and that massive ramp-up in revenue inevitably translates to the working capital, applies to working capital.

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Henk Veerman, Kempen & Co. N.V., Research Division - Research Analyst [21]

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And the receivables is up EUR 80 million, right? Or I should...

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Sarah Kuijlaars, Arcadis NV - CFO & Member of the Executive Board [22]

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I don't have it in front of me, but I think come back to the -- particularly that ramp up in North America, yes. In the consortium, of course, it impacts the -- both the receivables and the payables. It's worth highlighting that for North America, working capital is flat compared to H1 last year.

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Frank Claassen, Banque Degroof Petercam S.A., Research Division - Analyst [23]

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Frank Claassen, Degroof Petercam. I've got a question on the overdue receivables, especially the bracket above 120 days. You improved it by EUR 28 million. Were there any -- what was the main driver? Were there any one big one-offs in there? Or is it just across the board? And what do you expect for the rest of the year? Do you expect to improve this, especially this bracket further in the rest of the year?

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Sarah Kuijlaars, Arcadis NV - CFO & Member of the Executive Board [24]

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So a large portion of the overdues does come from the Middle East. And as you're aware, there are some large projects out there. So they're quite lumpy receivables. And indeed, we did see some good progress in Q2. It is a slow process, but I think that we're demonstrating that, finally, we do get paid. And I can assure you that focus remains in Middle East and also globally to keep focusing on the overdue receivables, particularly the older debt.

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Frank Claassen, Banque Degroof Petercam S.A., Research Division - Analyst [25]

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Can we expect a lower number year-end, normally?

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Sarah Kuijlaars, Arcadis NV - CFO & Member of the Executive Board [26]

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Yes. So normally, yes. We're continuing to focus internally on maintaining strong focus on cash and working capital.

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Quirijn Mulder, ING Groep N.V., Research Division - Research Analyst [27]

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Quirijn Mulder from ING in Amsterdam. On ALEN, is there a small shift in your outlook because you said second half year will be positive, cash flow will be positive for ALEN? Now you speak about profitability year-end. Is there any difference there in your remarks?

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Peter W. B. Oosterveer, Arcadis NV - CEO & Chairman of the Executive Board [28]

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I think the only difference, the language, that's probably worth mentioning in response to the question is the ramp-up of the gas-ready facility. And the certainty now around the 70% of the gas being under contract and being taken off. The process, I can get into an awful lot of detail, but the process to actually ramp up the production is probably a little bit slower than we had expected. The process of buying the gas is being transported by trucks. And so the ramp-up to get to the 70% is just going a little slower, and that's probably the biggest impact. The rest is negligible.

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Quirijn Mulder, ING Groep N.V., Research Division - Research Analyst [29]

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My second question is about the IT platform you're going to create. Maybe you can elaborate on it, what you're doing there, a separate business or how do you see it?

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Peter W. B. Oosterveer, Arcadis NV - CEO & Chairman of the Executive Board [30]

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I'll talk for a minute but you can cut me off. By the way, let me mention that now, this actually happens to be the week where we've gone live on the Oracle platform in North America. I thought that, that's what you mentioned. And that's a big step. I think we've reported in the past that we have a number of regions on the platform, which totaled about 30%, 35% of the revenue. And with North America going live or having gone live this week, that almost gets double. I guess more than double. So that's one more big reason to go after that, which is Continental Europe and then everyone will be on the same platform. So that was an important step.

I think your question, Quirijn, was on the new entity. So what we're seeing is that a lot of innovation is already taking place within Arcadis. Quite often, it stayed at a project level or at the regional level. And we, of course, because of what we do for a living in the many places which we operate, we have a tremendous amount of asset knowledge. Like the example I used on Shanghai, we've been doing quantity surveying for ages and we have a tremendous database of information. But not always do we necessarily use that information and that knowledge for the benefit of Arcadis as a whole. It kind of, in most cases, sort of stays regionally. So it's one of the steps in the journey of becoming more of a global company and more of a digital company. So what we're doing is we're taking the knowledge we already have within Arcadis and combine it with the knowledge we've acquired through the acquisitions of SEAMS and EAMS. And we gave SEAMS and EAMS somewhat of a soft landing in Arcadis by not necessarily completely bringing them into the larger Arcadis, but make them part of the U.K. initially, which is where both of them actually originate as well. So it made perfect sense. Now that we have firmly established them in the company, we believe it is time to consolidate the various capabilities so that we can scale them up faster. And can use them for the benefit of the whole of Arcadis so that they don't stay in a particular region, but are now being used more consistently across the globe. So to me, it's almost a logical step that you have in the process of becoming a truly global company by consolidating the capabilities we now have in different places.

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Quirijn Mulder, ING Groep N.V., Research Division - Research Analyst [31]

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And these people also -- this entity or platform, whatever different remuneration, et cetera, a different...

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Peter W. B. Oosterveer, Arcadis NV - CEO & Chairman of the Executive Board [32]

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No. It's just a change of our structure to make us more efficient in how we put the pieces together and how we reuse information. So no, there's no change in their important condition or their remuneration.

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Quirijn Mulder, ING Groep N.V., Research Division - Research Analyst [33]

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Okay. My final question is about the Far East. And you have new management here. They were working 2018, first half 2019. Are there still some countries to be looked at or projects? Are there still risk there that you'll find some dead bodies in the -- somewhere? How do you say that in English?

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Peter W. B. Oosterveer, Arcadis NV - CEO & Chairman of the Executive Board [34]

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Bodies out of a skeleton. Yes. So with management, actually we've made a couple of changes. The new CEO came on the 1st of September, and the new CFO came early this year, right?

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Sarah Kuijlaars, Arcadis NV - CFO & Member of the Executive Board [35]

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Early this year.

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Peter W. B. Oosterveer, Arcadis NV - CEO & Chairman of the Executive Board [36]

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And of course, they are significant changes. So we let them use their time to come to grips with what they inherited. And I think it's safe to say that they have pretty much covered the regions now. Are there -- is there a possibility that they'll find something, which is a surprise to them or a surprise to us? Yes. But will it be material? No. That's not the expectation because as I mentioned before, they have started, obviously, to focus on the bigger regions. In addition to focusing on the bigger regions and the bigger projects, we've made a number of decisions. As you might have actually seen from the press release as well, we have moved out of the design and engineer work in China that happened through a management buyout. So we actually sold off the business to the former managers. We have decided to depart from Taiwan, which is where we had a relatively small presence. And we've also decided to depart from India and -- not as in departing from India with our GECs because we still have that large capability GECs and in fact, plan to grow it, but more as in doing local work in India. Simply because we've not been able, at this point in time at least, to make that very profitable. And then we're looking at 1 or 2 countries more whereby we could end up in similar situations as the one I just described, depending on the entire process, but most of the actions have now been taken. So we are in lesser places, stronger focus on the top 5 or 6 countries.

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Quirijn Mulder, ING Groep N.V., Research Division - Research Analyst [37]

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You still have activities in Indonesia and I think in, what is it, Vietnam.

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Peter W. B. Oosterveer, Arcadis NV - CEO & Chairman of the Executive Board [38]

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Yes. We have -- so the bigger countries, they're Hong Kong, Mainland China, Macau, Malaysia, Singapore and the Philippines. And they will definitely remain, and then the smaller countries are Vietnam, Thailand and Indonesia.

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Quirijn Mulder, ING Groep N.V., Research Division - Research Analyst [39]

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And these will be left as well sooner or later?

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Peter W. B. Oosterveer, Arcadis NV - CEO & Chairman of the Executive Board [40]

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Not definitely. In fact, Thailand we'll probably not depart from because we have a fairly good position. In Vietnam, we took a decision already. We closed our office in Hanoi and consolidated everything in Ho Chi Minh City and made some changes to the team there. We now have at least a stable environment and not an environment, which we expect to be a non-profitable environment. Indonesia is a country we're still looking at what the best outcome can be.

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Jurgen Pullens, Arcadis NV - Director of IR [41]

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I would like to switch to the call to give people also the opportunity to raise their questions.

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Operator [42]

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(Operator Instructions)

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Jurgen Pullens, Arcadis NV - Director of IR [43]

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I think no questions on the call. Are there any more questions here in the room?

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Maarten Verbeek, The Idea-Driven Equities Analyses Company - Equity Analyst [44]

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Maarten Verbeek, from IDEA. Firstly, on your backlog, you mentioned that it's getting a better quality, higher quality. I presume it also implies that we end up continuing the order book to see a better profitability. And this profitability towards your goal of -- the improvements to your goal of 2020?

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Peter W. B. Oosterveer, Arcadis NV - CEO & Chairman of the Executive Board [45]

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Yes. The description on quality, Maarten, is indeed the description about better profitability and less loss-making projects. So that actually is part of the whole Make Every Project Count process. But getting a deep insight in the exact profitability on the 30,000 projects can probably only be provided by the time that we're all on Oracle. And we're not there yet, unfortunately. So there is places where we have a good insight, particularly around, for instance, our top 250 clients. We have a fairly good insight in what we take in. But to safely say for Arcadis as a whole, consolidated, we have -- for the full backlog and insight and the profitability, we'll probably only have that by the time when we are all on Oracle.

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Maarten Verbeek, The Idea-Driven Equities Analyses Company - Equity Analyst [46]

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You mentioned on your backlog that every region improved. So that also includes Middle East? And how should I see that in context of your selective bidding?

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Peter W. B. Oosterveer, Arcadis NV - CEO & Chairman of the Executive Board [47]

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Middle East. Yes. You want to give an answer here?

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Sarah Kuijlaars, Arcadis NV - CFO & Member of the Executive Board [48]

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Yes. So you're looking at the EME segment, which is positive. When you strip out Middle East -- so yes, when you strip out, the Middle East is negative because of the data and selectivity, particularly year-on-year. And that's balanced by the strength in Continental Europe and the U.K.

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Maarten Verbeek, The Idea-Driven Equities Analyses Company - Equity Analyst [49]

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Okay. And with respect to the Middle East, you've said a couple of times that you expect that the bottom in sales in Middle East will be somewhere this year. It's still something you pursue?

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Peter W. B. Oosterveer, Arcadis NV - CEO & Chairman of the Executive Board [50]

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Yes. I think the -- what we see in the Middle East is a discipline we'd like to see. So we're happy with that. The bottom is definitely still here. In fact, we -- in terms of book-to-bill, we are now close to 1 for the first half year. So that's at least a positive. We're not rushing into pushing the team to show us a higher book-to-bill and leave the discipline behind. So definitely, this year will still be a year whereby you could describe it as the bottom.

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Maarten Verbeek, The Idea-Driven Equities Analyses Company - Equity Analyst [51]

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So in H2, we should expect a somewhat lower decrease compared to H1?

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Peter W. B. Oosterveer, Arcadis NV - CEO & Chairman of the Executive Board [52]

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Lower decrease?

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Maarten Verbeek, The Idea-Driven Equities Analyses Company - Equity Analyst [53]

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Yes.

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Peter W. B. Oosterveer, Arcadis NV - CEO & Chairman of the Executive Board [54]

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Oh, if we are successful in winning the right type of work, then you should see a lower decrease. Yes.

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Maarten Verbeek, The Idea-Driven Equities Analyses Company - Equity Analyst [55]

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And then with respect to ALEN, you still expect to divest in 2 tranches?

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Peter W. B. Oosterveer, Arcadis NV - CEO & Chairman of the Executive Board [56]

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Very likely, yes. That hasn't changed. In fact, we now have probably a better insight in the type of buyers. And it's now more likely that we will find a buyer for the gas plant and a buyer for the power plant.

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Maarten Verbeek, The Idea-Driven Equities Analyses Company - Equity Analyst [57]

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Since the gas power's smaller, is it something we should expect a bit earlier to be announced than the other one?

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Peter W. B. Oosterveer, Arcadis NV - CEO & Chairman of the Executive Board [58]

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That's probably a little bit of a speculation. Yes. that's probably a little speculation.

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Maarten Verbeek, The Idea-Driven Equities Analyses Company - Equity Analyst [59]

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And lastly, with respect to your balance sheet ratios and targets, you're well within the net debt and net working capital, et cetera, et cetera. Likewise, question on operational margin. Are you tempted to sharpen these?

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Peter W. B. Oosterveer, Arcadis NV - CEO & Chairman of the Executive Board [60]

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Are we tempted to -- sorry?

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Maarten Verbeek, The Idea-Driven Equities Analyses Company - Equity Analyst [61]

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Sharpen the targets.

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Peter W. B. Oosterveer, Arcadis NV - CEO & Chairman of the Executive Board [62]

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No. Well, it's the second quarter. Now we've had that question, so that's a positive trend compared to prior years, I would say. And we debated that and certainly further. We don't see a need to do that now. But at the same time, we don't want to give the impression that now that we've achieved a number of targets, we take the foot off the pedal. We still think -- well, not think it's the fact that in terms of EBITDA margin percentage, we still have some work to do. So before we sharpen targets in some areas, and we could potentially do it, I'd like to first see further improvement to the goals we have from the EBITDA margin in the percentage. But trust me, we're not taking the foot off the pedal.

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Unidentified Analyst, [63]

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Yes. With regard to your top 250 clients, can you elaborate on what was the organic growth of these in the first half of 2019.

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Peter W. B. Oosterveer, Arcadis NV - CEO & Chairman of the Executive Board [64]

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Was it 6%? 6% yes.

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Unidentified Analyst, [65]

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6%, and the total is 2%. That means of course about 0% or even minus 1 for your 50% of the revenue?

So about 6%.

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Peter W. B. Oosterveer, Arcadis NV - CEO & Chairman of the Executive Board [66]

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Yes. So that should be correct.

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Unidentified Analyst, [67]

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And with regard to declines, are you going to make more -- because I think the declines means also that you have a couple of governments or utilities included in there. And you also include a lot of oil and gas companies, I think.

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Peter W. B. Oosterveer, Arcadis NV - CEO & Chairman of the Executive Board [68]

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No. Not necessarily. Why do you say that because of...

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Unidentified Analyst, [69]

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Because they are by origin 5 weeks. So what are you doing to -- let me say 6% is quite impressive. But what are you doing to accelerate that even further given -- for cities, it's quite clear. The City of Amsterdam, they have a lot of issues with mobility, et cetera, that I can understand. But what about the big commercial clients? What are you doing there to move? Are you moving up to the top of organization and to try to do business with them and not with the local guys?

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Peter W. B. Oosterveer, Arcadis NV - CEO & Chairman of the Executive Board [70]

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Yes. The -- so as you break down the 250 clients, just to put it in perspective, there's about 45 or so, which are truly global clients. There's people who we serve in many different places in the world and the rest are either regional or local. And when you think about local then, for instance, (inaudible) in Netherlands would be an example of a local client. And largely, in infrastructure, you find actually mostly local clients anyway. So you're right in that the typical clients who are global are either financial institutions, oil and gas clients, chemical clients or automotive clients. Those are the typical clients we serve in many different places. So what have we done on the -- on making sure that we get our arms around the clients in the broadest possible sense? We now have -- we already have account managers for all these clients, obviously, but we now have executive sponsors for all of these clients. I happen to be an executive sponsor on 3 of them. And the intent indeed is to use the different levels in an organization to create connections with similar levels in the clients' organization, so that we are indeed connected, not just at the sales level because if you connect at that sales level only, then you run the risk of always competing on price. And we don't always want to compete on price. In fact, we prefer to not compete on price, not because we don't like to compete on price but not competing on price is a better solution at the end of the day.

So we're doing a number of things to make sure that we get the connections at all levels. And in fact, this whole thing works now also much better in terms of Make Every Project Count because we're now seeing our account managers going after the cash, which might sound like an obvious thing, but it wasn't necessarily the case in the past. Account managers were feeling themselves largely responsible for doing the sale. And then they were focusing on the next sale. And now we brought in that responsibility and involvement. So increasingly now, we are using our account managers to make sure that we get paid as well. And it's actually working.

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Unidentified Analyst, [71]

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And then my last question, maybe that's about pricing levels. Is there -- can you say anything about it? Or is that -- especially in the U.S., for example, is that something which is a concern to you, prices of wages, et cetera?

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Peter W. B. Oosterveer, Arcadis NV - CEO & Chairman of the Executive Board [72]

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Not an extraordinary concern. We see the regular increases in most places. Can't think of a place where we've seen exceptional increases. Particularly on the U.S., probably a comment, which I would make is that we still have an opportunity to expand on the use of the GECs in the U.S., much more than we do today. And that would be a tool we could also use to balance or offset any price increase you would get because that will give you an opportunity to be much more competitive -- well, actually much more profitable as well. We have seen a significant increase, by the way, in North America this year with the use of GECs. But it's still at a level, compared to other regions, lower and therefore, has the opportunity for further growth.

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Maarten Verbeek, The Idea-Driven Equities Analyses Company - Equity Analyst [73]

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Maarten Verbeek, from IDEA once again. Last, I think the full year figures, you made a nice breakdown of your key markets and your improvement areas into revenues, but also the difference in organic growth, operating EBITDA and ND as well. For us, we'd get a better feeling of the progress you are making, first of all, of continued improvement and growth in key markets and the recovery into the improvement areas. Could you give us some feel how these blocks are?

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Peter W. B. Oosterveer, Arcadis NV - CEO & Chairman of the Executive Board [74]

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The ones we put in the [83] category or the ones we put in the [17] category? Yes, that one. So that was the 83. I think that slide was the 83 , right, if I'm not mistaken?

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Maarten Verbeek, The Idea-Driven Equities Analyses Company - Equity Analyst [75]

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[83 to 17 as well as breakdown]. Could you also give some feeling about what the organic growth is for these 2 blocks and the operating margin for these 2 blocks?

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Peter W. B. Oosterveer, Arcadis NV - CEO & Chairman of the Executive Board [76]

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Likewise, what you just -- yes. No. Let me just look at my notes here. So which one do you want to go first, Maarten? Asia?

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Maarten Verbeek, The Idea-Driven Equities Analyses Company - Equity Analyst [77]

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Whatever. You have it probably.

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Peter W. B. Oosterveer, Arcadis NV - CEO & Chairman of the Executive Board [78]

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So the organic growth in Asia was 0.3%. Then the next one we have was the Middle East. This year, of course, still minus. But that is to be expected. Again, we are focusing much more on the top line. And there, we've seen an improvement. Last one we had was LatAm if I remember correctly. And that one was 9.9%.

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Maarten Verbeek, The Idea-Driven Equities Analyses Company - Equity Analyst [79]

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[Your] profitability. And again, maybe as a whole building block. I don't have these numbers to get but I don't think you want to break down?

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Peter W. B. Oosterveer, Arcadis NV - CEO & Chairman of the Executive Board [80]

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No. I don't initially break it down in great detail, but I can just directionally give you a few points. So I'll start with Asia again, higher than last year. Latin America, obviously, higher than last year because for 2 quarters now, Latin America has been positive. So by definition that should be higher. And the Middle East, about 2x as -- actually, yes, 2x higher than last year.

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Jurgen Pullens, Arcadis NV - Director of IR [81]

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Are there any more questions? No. Then I would like to thank you for your participation. Thank you.

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Operator [82]

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Ladies and gentlemen, this concludes the conference call. You may now disconnect your lines. Thank you for joining and have a very nice day.