Ladies and gentlemen, thank you for standing by. I am Geli, your Chorus Call operator. Welcome and thank you for joining the Arcadis conference call and live webcast to present and discuss the first quarter 2026 trading update. All participants will be in listen-only mode, and the conference is being recorded. The presentation will be followed by a question-and-answer session. Anyone who wishes to ask a question may press star followed by one on their telephone anytime during the call. Should anyone need assistance during the conference call, you may signal an operator by pressing star and zero on your telephone. At this time, I would like to turn the conference over to Ms. Christine Disch, Investor Relations Director. Ms. Disch, you may now proceed.
Thank you, Geli. Good day, everyone, and welcome to our 2026 1st quarter trading update. My name is Christine Disch, and I'm the Investor Relations Director at Arcadis. With me on this call are our CEO nominee, Heather Polinsky, and Simon Crowe, our CFO. As usual, we will start with a presentation which will be followed by Q&A. We would like to draw your attention to the fact that in today's session, management may reiterate forward-looking statements which were made in the press release. Please note that the risks are more fully described in the press release and on the company's website. Now, please, over to you, Heather.
Thank you, Christine. Good day, everyone. Welcome to our first quarter 2026 trading update. When I spoke to you at the full year results in February, I set out a clear plan focused on three priorities in 2026. In 2026, we are building a simple future-proof model. We are focusing on growth, directing capital and talent to water, energy and power, technology, and major infrastructure projects where demand provides long-term visibility. Our executive leadership team has continued to meet regularly with our key clients who value Arcadis and tell us they want to do more with us. Deepening those relationships and expanding our share of wallet with existing clients remains our clearest pathway to stronger growth. We have continued our restructuring program, and our rigorous overhead cost-out program is well underway, improving our competitiveness. Simon will talk about this later in the call.
As I said in February, 2026 is about execution. That is exactly what we are doing. Since publishing our full-year results, we have made good progress in implementing our plan. While there is still more to do, we have positive momentum. We are mobilizing and energizing every Arcadian in the same direction. This progress allows us to bring forward our Capital Markets Day to September 29, 2026, where we will provide a comprehensive update on our strategy and medium-term financial targets. Turning now to our first quarter results. We have delivered a positive start to the year with strong order intake and margin expansion. Performance was positive in mobility and resilience, while places remains challenging. Our net revenues were EUR 93 million with organic growth of 0.8%.
The order intake was EUR 1.1 billion with organic growth of 7.3%. Net revenue growth was driven by our key markets in the U.S., Canada, and Europe, partly offset by ongoing challenges in property and investment, particularly in Canada and China. In mobility, the acceleration of work on large projects positively impacted our performance. Operating EBITDA margin was 11%, up 10 basis points year-over-year, demonstrating that our focus on cost discipline and operational improvement is starting to take effect. We are systematically executing our strategic plan to drive growth and profitability. Our actions are on track. Moving on to backlog growth and order intake developments in the quarter. Our backlog organic growth in the quarter was 4.6%. This step-up was driven by all of our GBAs.
Resilience backlog grew 5.1% quarter to date with a book-to-bill of 1.16. Order intake was driven by water and climate in the U.S. and Netherlands and environmental programs in Brazil. We are also seeing good pipeline opportunities building in water and energy in the U.K. In Places, we saw backlog growth of 3.1% quarter to date with a book-to-bill of 1.18. Data centers in the U.K. and U.S. continue to be strong drivers of order intake, and we are seeing good momentum with government clients across the U.S. and Europe. Property and Investment in Canada remains challenging, and we are continuing to address that directly.
In mobility, we had a backlog growth of 6.9% quarter to date with a strong book-to-bill of 1.25, with order intake in the quarter driven by project extensions in the U.S., Canada, and U.K. Metrolinx in Canada, where we secured a EUR 39 million three-year extension to our contract, and California High-Speed Rail are good examples of the client relationships driving that momentum. The pipeline of significant opportunities in the U.S., Canada, and Germany also continues to grow. Resilience has benefited from strong tailwinds and a clear right to win in the market. There are considerable opportunities for us, and we are focused on continuing to drive growth and profitability in the solutions where we've historically been strong. On gaining traction through building a stronger pipeline and growing our team in alignment with our backlog growth.
Water in the U.S. remains a star performer, with 15% growth in the first quarter. One win this quarter is a 5-year contract encompassing three key stormwater initiatives for the City of Los Angeles through their Clean Water Program, replenishing groundwater, alleviating and mitigating flooding, and improving water quality. In energy transition and advisory, we continue to grow strong in Europe and the Netherlands, where we were awarded a contract to deliver construction design for grid operator TenneT. In the U.K., we have improved visibility in our water and energy projects, with AMP8-related water work moving forward now. In addition, strong nuclear new builds are creating significant pipeline opportunities. In environmental restorations, a large U.S. contract continues to wind down as planned. Encouragingly, larger opportunities are progressing through the U.S. pipeline, and we are working to strengthen our backlog in our target sectors of power, energy, and government.
We are also seeing an increase in PFOS-related opportunities. We have invested in strengthened account leadership to reinforce sales with targeted hires. We've also introduced account leader training across our key client accounts. Places had an organic revenue decline of 6% in the quarter, and we are addressing the underperformance in property and investment. We have taken strong action in Canada to refocus the business towards growth markets and reduce headcount to preserve margin while investing in areas of stronger demand. With improved backlog and billing, we recorded strong order intake in almost all markets outside of property investment in Canada and China. Our discipline is translating into stronger delivery cadence and improved pricing and pursuit quality. To give some examples of the prioritized actions we've taken, we have exited around 150 people since January. We have reorganized toward growing markets.
For example, we have four new senior leaders joining us to drive sales in high-growth technology and manufacturing sectors. In March, we launched a recruitment campaign with referral incentives to fill over 1,000 roles in key markets such as data centers and life sciences. We have scaled our global excellence centers and are embedding fast starts for recent wins to support our Q2 performance. Industrial manufacturing showed good performance this quarter, driven by U.S. pharma, supported by government onshoring investments. In technology, our data center business delivered 36% growth year-over-year, while our semiconductor solutions were impacted by large contract wind downs. In government and public facilities, we are seeing good growth in the U.K. and have been awarded a GBP 250 million framework in the quarter. Mobility was our strongest performing GBA this quarter, delivering 6.5% organic growth.
This result was driven by an acceleration of large projects and continuation awards on large contracts, including Metrolinx in Canada, California High-Speed Rail, and Westport in Australia. At the same time, continuous focus on improved profitability through strong project management and discipline produced a very positive project performance. Major infrastructure projects are critical to our strategy. We have worked to get a greater line of sight on backlog phasing and execution. We are using this visibility to confidently invest in large opportunities in the U.S. and Canada, diversify in locations like Australia, and continue to capture performance in the U.K. to replace project wind downs of HS2. An example of our commission to deliver an end-to-end program, risk and construction management for the TransPennine route upgrade, a GBP 50 million framework over five years to modernize major rail corridors in the U.K.
In Europe, both the Netherlands and Germany delivered strong growth in the quarter, and our continued relationship with ProRail led us to an award to deliver safer and more efficient train services in the Netherlands. Going forward, we will continue to focus on diversifying our business in Australia while hiring in the U.S. and Canada to support our backlog and pipeline demand for major infrastructure projects. Building on the momentum you've seen across the business, this next example shows where we're gaining real traction, delivering tangible results in a key growth market. In water and climate, we are combining market focus, AI at scale, and measurable client outcomes. Across our water sector, we are deploying digital solutions such as enterprise data analytics in a partnership with Vaideo AI, now live across 22 utilities in the U.S.
By applying AI to risk prioritization and field execution, we are delivering 50%-60% reductions in excavation costs while accelerating regulatory compliance for our clients. At the same time, the Climate Risk Nexus platform uses AI-driven hydrologic modeling to assess risks across large asset portfolios. For a major North American freight rail operator, this has shown that just 2% of assets drive around 80% of total risks, enabling targeted investments and informing asset management, insurance, and long-term resilience planning. Alongside this, we are supporting clients in shaping their AI data strategies with over 50 workshops delivered since mid 2025, mainly directly with utility C-suites. All of this translates into growth, specifically around 100 million in water project revenue, where AI-enabled advisory and solutions have been applied. This is not experimentation.
This is scaled delivery, it is a clear example of how AI is enhancing how we work, strengthening our differentiation, and sharpening our competitive edge. I spoke earlier about the 3 strategic priorities. Let me now walk you through our progress and how we'll execute our plan in 2026. In Q1, our focus was on high-growth markets. We moved decisively to invest where we win. That includes targeted hiring in priority markets, strengthening leadership, and launching the AI Studio, a dedicated capability that brings together data, digital, and domain expertise to develop scalable client-facing AI solutions that enhance productivity, insight, and delivery for our clients. Initial use cases were focused on environmental planning and permitting, including stormwater programs such as the City of Los Angeles' Clean Water Program.
At the same time, we have completed detailed pricing diagnostics and are now advancing a more disciplined value-based pricing strategy, ensuring we move both win rate and earning qualities forward. Our account leadership model is now fully in place, with over 60 leaders actively building pipelines, and we are continuing to strengthen our position in high market growth sectors, including recent senior hires in water, technology, and life sciences. Looking ahead to the rest of 2026, our focus is clear. Complete a portfolio review, concentrate investment in high-growth areas, scale digitally enabled services, and embed pricing as a core commercial capability. Second, we are creating a simple and future-proof operation. We are reshaping the business to improve agility, efficiency, and client closeness. We have made progress in Q1 on right-sizing, simplifying our decision authorities while also transforming core processes to include our project pursuit workflows through AI and automation.
We are now starting to see the first benefits from restructuring and cost-out actions that we began last year. This quarter, we exited another 250 roles, and we are continuing to proactively address underutilization across the business while intensifying our cost-out actions. As we move through 2026, we are reorienting the organization around sectors with a new sector leadership team now in place. Alongside this, we are simplifying how we operate and accelerating digitization of the processes to drive productivity. Third, driving cultural change. Culture is a personal priority for me, and in Q1, we began embedding a more commercial, performance-driven mindset across the organization. This includes targeted leadership changes, strengthened commercial discipline and controls, and more focused sales incentives aligned to our priority clients.
In addition, we have launched a new short-term leadership incentive program for our top 2,000 leaders directly aligned to individual contributions, commercial outcomes, and performance. Looking ahead, we will continue to invest in talent, sharpen incentives and performance management, and empower leaders to operate with greater accountability, entrepreneurial focus, and a client-centric mindset. As you have all heard, we have clear priorities. We are taking decisive action, and execution is firmly underway. I will now hand over to Simon to take you through the financial results.
Thank you. As Heather outlined, Arcadis has delivered a positive start to the year, reflecting early momentum from actions taken, including leadership changes, improved incentive alignment, targeted restructuring, and disciplined control of operating expenses. We feel positive about the potential, supported by the strength of our talent, relationships with our clients, and pipeline of work that we see. We recognize that the macro environment remains volatile, and 2026 is a transition year for our business, with further changes in execution underway. Let me now take you through our financial results for the first quarter. Organic growth was 0.8%, with strong growth in resilience and mobility driven by U.S., Canada, and Europe.
This was offset by places where we're continuing to address the ongoing challenges in property and investment in Canada, where we changed some of the finance leadership team to improve the quality of reviews and controls in this area of the business. Excluding property and investment, organic growth was 2.3%, a step up from the 0.6% in Q4 last year, demonstrating the underlying momentum in the rest of the business. Operating EBITDA margin was 11%, up 10 basis points year-on-year, supported by our ongoing rightsizing actions and cost discipline. We have put additional controls in place across all areas of the business. That scrutiny will continue throughout the year. Our non-operating costs of EUR 15 million in the quarter reflect these actions, which affect approximately 150 roles in underperforming areas and approximately 85 roles in overhead functions.
Turning now to cash and the balance sheet. Free cash flow was negative EUR 149 million in the first quarter, which is in line with seasonality. As usual, payables are normalizing following the strong cash performance we delivered at the end of last year. DSO was 64 days in Q1 2026, again in line with seasonality, and improved when comparing to the first quarter of 2025 at 67 days. Net working capital as a percentage of analyzed gross revenues was 12.1%, down from a peak of 14% in Q3 2025. This is within the expected range and reflects the progress we're making on cash collection.
Our net debt at the end of Q1 was EUR 974 million, with leverage at 1.9 times, comfortably within our strategic range of 1.5- 2.5 times. Our BBB- investment grade from S&P has been recently reaffirmed. Turning to margin and the levers through which we'll deliver our guidance of 11.7%-12% operating EBITA margin for the full year. First, our cost out program, which we expect to contribute 40-50 basis points. This will come through corporate restructuring, where we've already reduced headcount in the fourth quarter of last year and continue reduction this quarter. We have also maintained our disciplined OpEx management, where we've reduced travel and advisory costs. Secondly, the rightsizing of the business.
We are systematically working through each market and function to address roles where billability is not where it needs to be, ensuring we have the right people in the right places. The third margin lever is the continued utilization of our global excellence centers, as well as greater automation, scalability of our delivery model, and more selectivity in the projects we pursue. Taken together, these actions give us confidence in our ability to deliver the margin progression targeted through 2026. In summary, in the first quarter, we've continued to execute on the strategic actions we outlined in our full year results and are fully focused on driving these forward through the rest of the year. We have a clear plan to focus on growth and margin expansion, as well as continuing to streamline our operations. I'll now hand back to Heather for her closing remarks.
Thank you, Simon. Let me now bring together the key themes from today before we open for questions. The message I want to leave you with is we know what needs to change, and we are changing it. We are also moving at pace. We have strong positions in water, energy, technology, and major infrastructure, and those businesses are performing. Where performance has fallen short, we are taking direct action by reducing overheads, rightsizing the business, scaling our Global Excellence Centers, and applying greater discipline to project selection. We continue to invest in digital and AI, building on our deep asset knowledge and long-standing client relationships. These actions are already making a difference. We have had an encouraging start to the year. Macroeconomic uncertainty, however, has increased, and 2026 remains a transition year focused on repositioning the business. The actions we are taking give us confidence.
In February, I said you should hold me and Simon accountable for delivering this change. That commitment stands, and the actions we have taken this quarter are the first proof points of that. We have a clear line of sight to where the business is going, and we are continuously repositioning the portfolio toward the high-growth opportunities. Our Capital Markets Day on 29 September in Amsterdam is where we will set out our next strategic chapter in full. With that, Simon and I are happy to open it up for questions.
Ladies and gentlemen, at this time, we will begin the question-and-answer session. Anyone who wishes to ask a question may press star followed by one on their telephone. If you wish to remove yourself from the question queue, then you may press star and two. Please use your handset when asking your question for better quality. Anyone who has a question may press star and one at this time. In the interest of time, please limit yourself to two questions. one moment for the first question, please. The first question is from the line of Sangita Jain with KeyBank Capital Markets. Please go ahead.
Good morning. Thanks, Heather, Simon, Christine, for taking my questions. Heather, maybe I can start with, can you share your observations since you took the lead on what has positively surprised you in implementing your core priorities and where you think you may need more work than you had anticipated?
Hi. Could you repeat the question? Your line is a little bit fuzzy.
I'm sorry. I just was wondering if Heather could share her observations since she took the lead and what has positively surprised her in implementing her core priorities and where she may think more work is needed.
Yes. Thank you very much. I'm pleased with the momentum that we're seeing across the business. We have been able to move with clear discipline in transitioning some of our staff and pivoting in some of the areas that have been a challenge. Our markets are strong, and the work that we're doing and the feedback that I'm getting directly from clients and our team is outstanding. I think we're on the right path. I believe in the actions that we're taking. As we'd mentioned in February, it will take a little bit of time, but we're making the progress that we indicated.
Great. I know you're early in this process, but can you share your thoughts on how you think further M&A or buybacks could be included in your strategy?
Yeah, I'll take that one. M&A, look, we're continuously looking around in the market. Obviously, our multiple is where it is, we're not looking at large acquisitions. There are small bolt-on acquisitions of, or team takeouts that can improve and accelerate some of our sectors or some of our services. We continue to be active in the scanning of those opportunities and continue to evaluate those. Where appropriate, we'll make offers for small opportunities. They will be very, very small at this point, and just help us turbocharge some of our services or sectors. Share buybacks, we obviously executed one last year and into the early part of this year. It's early in the year for us. It's a negative cash flow quarter.
As you know, that's a seasonality that we have. Obviously, we're focused on investing in the business at the moment. We'll keep that under review as we move towards the Capital Markets Day.
Got it. Thank you so much.
The next question is from the line of Martijn den Drijver with Oddo BHF ABN AMRO, please go ahead.
Yes, thank you, operator. Good morning, Heather. Good morning, Simon. My first question, despite all the explanations on some of the tailwinds from cost savings, I was wondering, if you look back at what you did in 2025, you reduced headcount by over 1,000, of which a significant portion in the second half. You had faster than expected positive organic growth, yet that EBITA margin only went up 10 basis points. While normally getting all those savings and that operational leverage, you would expect a slightly higher uptick. What is keeping that back? Is it the type of level of improvement we should count on going forward? That's question one.
Yeah, Martijn, I'll take that. It's Simon here. Look, we did make a lot of progress in Q4. I'd love to see that flowing through to margin expansion much more quickly. It takes time for that, those run rate savings to drop through to the bottom line. Yeah, we did grow the top line, it, you know, it's not a huge amount of growth there. The operating leverage is not gonna really kick in until you get more, more and higher growth. We're attacking underperformance. We're attacking excess costs. We've put controls in place in the business. It takes time for these, the run rate to come through. It's as I see it, the overhead run rate is coming down.
It's not coming down fast enough. We're working harder to get that run rate, but it will take some time for it to manifest itself out. We're gonna keep going. We're gonna keep moving forward. We've got a good rhythm and good cadence. We can see areas of low billability that we're attacking. We're trying to move those people onto work. The order intake is good, that's good for billability as well. That should move up. We also, you know, focus on the multiplier as well. We want to see that move up along with our capture rate. All of these things work in tandem, as you know very well.
Mm-hmm.
I'm afraid it just does take a little bit of time for it to full through into that margin expansion. We'll push on towards the 11.7 and 12, as I outlined in the slide that I talked through earlier.
Got it. Understood. My second question is for Heather, and it is with regards to the guidance. You mentioned the macro economic uncertainty. What have you since seen since the start of March? You travel all around, you speak to a lot of clients. What have you seen in terms of delays, cancellations that you are, in my opinion, slightly cautious on, for example, the EBITA margin guidance? What have you seen from clients?
Yeah, absolutely. I've been able to meet over 50 clients along with our executive team members over the past few months, and we've seen no signs of changing client behavior yet. The fundamental demand across our markets remains intact, and it's underpinned by long-term structural drivers related to asset integrity, for example. Those don't seem to be sensitive to short-term macro volatility. The increase in energy prices that can typically have impacts in both directions. You know, we're seeing an ongoing structural shift by clients to reduce their dependence on fossil fuels, which is helping us and driving demand for energy security and asset optimization services. We continue to monitor the situation very closely because it's important for us to understand, you know, how our clients are being impacted.
While it might not have a direct impact to us, we are cautious about that. The situation is volatile, and we're just cognizant that the prolonged period of uncertainty, combined with things like budget deficits and rising debt levels and political uncertainty in key markets, might impact client demand and some of the larger projects we have.
Understood. Thank you very much for my questions. Those were all my questions.
The next question is from the line of David Kerstens with Jefferies. Please go ahead.
Good afternoon, everybody. I've got two questions, please. First of all, you highlighted several new orders in the U.K., and it also seems the business confidence in the U.K. has recovered somewhat. Are you also seeing improving revenue momentum in the U.K. after the 8% decline last year? How do you see the outlook for the business in the U.K. for the remainder of the year?
We're very positive and optimistic, based on what we've been seeing and the opportunities that have been in place. As I mentioned before, that macroeconomic environment is one that makes us cautious. We are seeing some movement. For example, I mentioned on AMP8, we are having success outside of the HS2 drawdown. Our backlog is up, that's what gives us that confidence. While our net revenue is still impacted slightly, by some of the slowdowns or cancellations of projects, specifically HS2, our backlog is what gives us that confidence up at 6%.
Yep. U.K. was still down in the first quarter?
Slightly.
Okay, thank you. My second question is for Simon about the phasing of free cash flow and working capital. Do you expect it to be similar to last year, with a strong reversal in the fourth quarter, or will it be more equally spread throughout the year?
Yeah, look, I think if you look back, and we provided a slide in the appendix, you can see our seasonality over the last couple of years. Look, we're pushing hard on that, but ultimately, this is the pattern that Arcadis is used to. What we are doing is monitoring it very closely. We don't want to have the experience we had in Q3 last year or take our eye off the ball as it seemed like we did in Q2 into Q3. We're pushing hard on the DSO, pushing hard getting to get bills out, pushing hard to collect the cash. You know, I have a monthly call now with the bottom five performers.
They're dragged in to see myself and some of my finance colleagues, and we drum into them the need to really be on this. Got dashboards. Everyone gets their weekly billing and accounts receivable numbers, and there's no excuses, absolutely no excuse, and there's nowhere to hide.
Okay. Thank you very much.
The next question is from the line of Kristof Samoy with KBC Securities. Please go ahead.
Good afternoon. Thank you for taking my questions. The first question I have is on mobility. We see that order intake benefiting from-
Mr. Samoy, this is the operator. I'm sorry to interrupt. Can you please speak a little closer to your microphone? Because I'm not sure management can hear you.
Hi. I have a first question on mobility and the order intake there, which benefited from program extensions. Could you disclose the ballpark size of these extensions in terms of EUR value? Are these merely extensions, or do they also have a wider scope than before? When will these project extensions be converted into revenues? That would be your first, please.
First of all, the mobility backlog growth was at 6.9%, and that includes those extensions that we've seen on some of the major projects that I mentioned. It includes rail in the U.K. as well as U.S. extensions and Canada for Metrolinx and California High-Speed Rail. We see ourselves being able to roll into those projects right away and continue. It's a nice part of them being extensions and continuations of the existing projects. We already have the teams in place and continue to hire, as I mentioned, to meet that increased backlog to be able to drive net revenue into Q2 and through the rest of the year.
Okay. A second question, if I may, and once more on the guidance. I mean, what happened since mid-February when you reported fourth quarter numbers and you indicated that 2026 got off to a weak start, and now it turns out that the first quarter was okay. You even described it as encouraging. We still see an unchanged guidance. What arguments besides spillover effects from the Iran conflict can you bring to the table for not upgrading your guidance? Thank you.
First of all, I'll start. Simon can add in here. Like, we're pleased with the start of the year, and it's really early signs that our strategic efforts are materializing. As I mentioned, we had strong growth in mobility in North America and some of our key clients. Our order intake and revenue conversion is particularly strong due to some of these extensions, especially seeing our work in Australia be able to manifest itself a little bit faster. Some of the underperforming parts of our business are still underperforming, and we're in a correction mode on those. We're repositioning them. 2026 is still a transition year for us. It requires us to invest, and we wanna make sure that we have the capacity to be able to do that for long-term value creation.
Yeah. I mean, I'd just echo that really. You know, we're being cautious. There's macro headwinds out there. We've got a transition year. We're busy repositioning the business. We're busy focusing on cost out. We're busy focusing on the growth. As Heather said, some of our parts of our business are not performing, and we're working really hard to turn those around. Yeah, we're cautious and we feel good about where we are, but we wanna take one step at a time.
Okay. Thank you.
The next question is from the line of Natasha Brilliant with, UBS. Please go ahead.
Thank you very much. Good afternoon, everyone. My first question is just around the pricing environment. If you can just talk about how pricing for your projects has developed year to date and any thoughts for the full year. I'm just thinking about the slightly better top-line growth, but perhaps slightly softer margins. Is there any sort of trade-off there? That was my first question.
Yes. Thank you very much for the question, and it's an area that we've been focused on is making sure that we are strategically pricing and that our pricing matches the environment of each one of the sectors as well as having that differentiation. We've been pleased to see the progress that we've been making on pricing and strategically pricing. As you may know, about 60% of our work is lump sum and 40% time and materials. We're pushing to do more of that work, more of the work on the lump sum space for us and really drive our performance through all the things that we talked about earlier, like AI, our Global Excellence Centers, et cetera. That's all part of our pricing strategy.
We do believe that the backlog growth is related to us really having greater commerciality. It's not just pricing, but it's being closer to our clients, understanding what their real needs are, and producing proposals and pricing that matches those needs. As well as when we execute, executing with strong delivery teams and strong commercial controls.
I just add everyone's a salesperson at Arcadis, so we have account leads. We've nominated all of those. They've got incentives. They've got new incentives. They've got exciting incentives. We know each and every one of those account leads and account executives now for all of our key and emerging clients. They're incentivized to grow, but all of our teams are in the clients' offices every day. The best time to sell something to a client is when a project's going really well and you're gonna go and try and fix the next problem for them. We've had some help as well from outside organizations.
They're helping us on some major bids, looking to differentiate, looking to make sure we've got the right risk profiles and the right scope, when we go into bid and then hopefully expanding that opportunity with those clients. Heather and I have met a lot of clients over the last couple of weeks and, you know, we hear really good things from them, and we just wanna build on that.
Got it. Thank you. My second question is just around utilization rates. You said, you know, there is underutilization at the moment. Can you just give us a bit of a flavor of sort of what level of utilization you're seeing at the moment and where you think that can get to?
I'd like to see an expansion of a couple of percentage points. That would be ideal of utilization. I am starting to see. You know, I'd focus on these quite a lot. I'm a sort of a multiplier and a utilization focused guy, and I'm starting to see a sort of a little bit of a turn there as we are taking out some of the underutilized people or reassigning them. Yeah, a couple of percentage points would be great. That takes time, and it's hard yards, but we are focused on that now, and that's coming into the daily discussions that we have, the dashboards that obviously everyone can look at.
The team leaders and the business leaders are focusing on that and, we're working hard to improve that utilization.
Super. Thank you very much.
Thank you.
The next question is from the line of Dirk Verbiest with ING. Please go ahead.
Yes, good afternoon to you all. Two questions from my side. First, on the situation in Canada and the property and investment activities. What have you actually now implemented to turn that around, also with regards to the reporting issues, which you recognized last year? That's on the property and investment. Following that, now also China is weakening. Is that a new kind of weak spot that has popped up? What are the expectations there going forward? The second question I have is the contribution from improved project margins. What is the potential that you actually see there, and how should that change by what measures you have implemented to really turn that structurally in a more positive way?
It is a small bracket in the overview Simon gave on the improvement points in terms of margin increases. How should we see that moving forward? Thanks.
A lot to unpack there. I'll take China first. It's a tiny part of our business. It's not material for us at all. It's not something that overly concerns us. In property investment, look, we've acted very quickly, you know, from last year. We have now taken out people that have not been billing. We continue to look at the billability and the projects. We've changed out some of the leadership there. We put some of our best finance people in there. We've crawled over pretty much all of the projects, every single project, we know exactly what they're doing, those projects.
We're pivoting away from the places, sorry, the condo market in Canada in particular, which obviously declined last year quite substantially. We're pivoting towards transit. We're pivoting towards senior living and student living. We've got new people joining us both in the finance function and in the leadership function in property and investment. We launched a big recruitment campaign in places around data centers and life sciences. We're pivoting some of our property investment people to those high growth areas. We've obviously continued to utilize our Global Excellence Centers where it's necessary. I've got confidence that we've got a good team in there now who's crawled over all of those projects.
We did do an independent review, as you know. We're I think making really good progress to sort everything out there. Just maybe you could just repeat your the last piece of your question. There was quite a lot to unpack there.
Yeah. Thanks for that, Simon. The second question I had is on the, let's say, the upside you see in the project margins. There, there's a slide in the presentation on the margin improvement profile this year and the different contributions on the cost saving. You also mentioned project margins, and how should we see that moving forward, and what kind of measures do you implement to really structurally improve the overall project margins apart from the positive impact from your cost measures? Because it sounds like an operating improvement instead of a financial impact from savings left or right.
No, I think you're right. I think, you know, there's a savings part of it, but really what it is driving top line. It's driving the billability, driving the top line, driving the right project choices, driving the right GEC contribution, and driving the right cost structure. It's making sure our project leaders are more entrepreneurial. I think Heather mentioned earlier, the commerciality. We're introducing some training. We're introducing third parties to help us, and we're really focusing on the pursuit to project as well.
We've implemented a new bid book process, which is simpler, easier to use, uses AI to write proposals, and helps our teams really find out where the value is and where they can maximize the margin. There's a lot going on. It's not a simple one thing fixes all, but there's multiple parts of the business that we're working hard on. Heather.
Yeah. It's also a cultural part of our cultural change. Performance management and holding our teams accountable, being really clear what their objectives and goals are, is really a key component of that, so that they embrace the new ways of working and they embrace the commerciality and really see how this makes their lives easier and increases their client relationships. A well-run project actually tends to have the best client relationships and produces the greatest profitability. We're really focused on the cultural change of really creating those incentives that I spoke about to align and reinforce the behaviors that we want from our teams.
The next question is from the line of Simon Van Oppen with Kepler Cheuvreux. Please go ahead.
Good afternoon. Thank you for taking my questions. I have one on the 40- 50 basis points cost out benefit that assumes that no roles are replaced, but given you are simultaneously hiring in data centers, life sciences, water, and U.S. environmental restoration sales force, what is the net FTE trajectory for the year, and how confident are you that the cost savings are not being fully offset by new hires? Secondly, places declined by 6% organically in Q1, measured against a restated and therefore easier comparative base of minus 2.8%. That means actually that the underlying deterioration is worse than the headline number suggests. Could you please elaborate on what the realistic timeline is for places returning to positive organic growth? Thank you.
Let me take the margin, the cost out and the FTE question. I mean, look, we're looking at the overhead. We're looking at automating as much as we can. We're looking at reducing our overhead FTEs. We're gonna be hiring, you know, like crazy, in data centers, and pharma and water and semiconductors. We can see a lot of opportunity there. We're gonna be hiring. You know, I would hope and think and it'd be great if our net FTE was up for the year in the business. I would hope it would be down in the overhead as we automate, as we find efficiencies, as we get better at doing things quicker. There's two stories there.
There's one about the overhead, and there's one about the business. The business needs more people, it needs that high availability, and we continue to monitor that. I think the second question and it, I'm sorry, you might have to repeat some of it, was around, you know, when these places is coming back. You know, it's, I don't wanna call it's, it's there's some positive signs. We're making some progress. We've got the right people there. We've got the right reviews going on. We're pivoting away from certain areas that aren't as profitable as others. We're finding areas for those people to go and work on the data centers and things like that.
I'm confident that we are moving forward at pace to sort out the property investment. Look, all the places is not a bad business at all. It just happens to be property investment got caught out last year, and we didn't move quickly enough. Shame on us. We are now moving quickly in property and investment to pivot away. Look, too early to tell, and of course, there are macro headwinds out there. There are governments with, you know, big deficits. There's a, there's a, there's a complicated world out there. We're, we're doing everything we can within our control to move our business forward and to turn the corner.
Simon, just to reiterate, the areas that we're seeing backlog growth of 3% in the quarter was driven by data centers in the U.K. and the U.S. It was driven by government clients in the U.S. and Europe. That's showing a positive trajectory, and it's reinforcing our focus to pivot these resources to the growth markets.
Thank you very much.
Thank you.
The next question is from the line of Derric Marcon with AllianceBernstein. Please go ahead.
Yes, good afternoon. Thank you for squeezing me in. One question for me about mobility. I was wondering if you could help us to understand what's the in the Q1 performance, the 6.5% organic growth you recorded, what is coming from comparison basis, favorable comparison basis, one-off, that surprised you in Q1, you said accelerated, on large project or revenue recognition on large project. What is sustainable in this 6.5% we saw in Q1 for the coming quarters? Thank you.
First of all, our backlog has been strong in mobility. While we talked about it having high variability, the team was really able to drive forward some specific deliverables at a faster rate and generate revenue earlier in the year than what we had originally anticipated. I think this is also an example of the shift in the culture change of a high-performing team, which is do the work when we can do the work so that we create space for the next project and the next growth. We're actually feeling very positive about Australia, the U.K., and U.S.'s ability to speed up that backlog generation to create the net revenue growth. This is what we're pushing all of our teams to do.
Once we win that work, let's speed up fast, let's deliver, let's get ramped up, and let's deliver it so that we can show our clients that we have additional capacity to take on more responsibilities and continue to grow. This is how we get back to growth. This is an example of how we get back to growth, which is winning projects, executing them well at speed, and being ready for the next win.
It means either that, the good surprise you had in Q1 does not necessarily mean that, it will not repeat in Q2 because the backlog is, as you said, up quite nicely on a sequential basis. At the same time, you accelerated revenue recognition in Q1. Am I correct?
We have a good pipeline. We have a really good, strong pipeline of business that's converting into order intake, that's converting into backlog, that's converting into revenue. We continue the performance culture change. We're rewarding culture. We're holding people accountable. That seems to be starting to show some very early signs. We have to balance that with the world and what's going on out there. We don't wanna get ahead of ourselves, but we have a strong pipeline.
Understood. Thank you.
The next question is from the line of Martijn de Dreuver with Oddo BHF ABN AMRO . Please go ahead.
Yes, thank you, operator. Thank you for allowing a second set of questions. My first question is on price again. Sweco actually mentioned quite a beneficial pricing environment, stating that the average hourly rate was up quite significantly. Can you tell us what the average hourly rate increase in Q1 was? How should we think about the rest of the year, given the higher inflationary environment? In COVID, you've shown to be able to very well cope with that type of environment. That would be question one.
Look, we're not really disclosing, Martijn, our hourly rate and where we are on that. Look, we have pass-throughs in our projects. You know, if inflation is up, then we look to pass that through our contractual structure. I think we all learnt from COVID that the entire industry learnt that things can come along and shock. We have learnt from that, and we'll have the mechanisms to build those increases in. You know, we have a healthy fixed price element of our contracts versus tme and material. We seek to continue to balance that and optimize that where we can.
All I can say is, look, you know, if prices go up, we'll seek to pass those on and make sure that inflation is passed on to our clients.
Simon, part of the pricing, diagnostics that we've done.
Yeah
... is very much about understanding the markets where we can have increased rates and increased prices and those that are feeling a little bit more pressure and being much more strategic about how we price based on what's going on and the value that we're creating in that pricing. We'll elaborate more on this, I can imagine, in our CMD.
Yeah.
All right. My second question goes back to that net delta, if you will, in terms of employees. Back to that question, I think it was from Kepler. Last year you said, this is for Simon, you said, "Well, we've reduced the employees roughly by 1,000, and we're aiming for a similar number again in 2026." Is that number out still the same? I'm not talking about net, but that number of underperformers and overhead, that 1,000 that you mentioned, is that still applicable or not?
Yeah, absolutely. Absolutely. No, that's still. Sorry if I was not clear. That we said we'd do, we did about 1,100 people left the business as a result of our actions last year, and we're looking for a similar number to leave the business this year. It's about cost out as well. That number may fluctuate a little bit, but we'd like to achieve this, the same amount of cost out. You know, we're simplifying the business. We're becoming more agile. We're employing AI. We're employing automation. Some of those roles will naturally not be needed. Yes, very clearly, we're looking for that same number that I said, 1,100 people this year.
Simon, we started at the beginning of this year with senior roles.
Yes.
Being very strategic as to the roles that we have been removing.
Yeah, exactly. Some of the senior leaders, who are the highest cost, obviously, we asked to exit. Yeah, it's, absolutely.
If the operator allows, could I ask a third one, please?
Sure. Go ahead, Maarten. You're on a roll. Go for it.
In terms of free cash flow phasing, you almost all of the opcos hang out on Oracle in the cloud, which should give you much better control and visibility. Should we therefore still think about phasing the same way as we did in previous quarters? Again, you know, positive as of Q2, positive in Q3, and a massive positive in Q4. Is there a bit more better division between the kind of quarters?
It's always fairly similar. I've got a slide in front of me going back three or four years, and it's always sort of exhibited that negative Q1, sort of a flat Q2, then starts to uptick in Q3 and a really strong finish in Q4. It's the seasonality of our business. It's the nature of our contracts. People wanna get their budget spent. You know, we have a lot of government work. They wanna get their budget spent by the end of the year. That's kind of what happens to a lot of our contracts, and there's a push for the year-end. Yeah. We do have visibility. The Oracle system and all our systems give us that visibility.
We've got increased visibility and increased pressure on the WIP and on the AR. We'll continue to push, Maarten, but we can't control some of our clients.
Understood. Thank you.
The next question is from the line of Maarten Verbeek with The Idea. Please go ahead.
Good afternoon. It's Maarten Verbeek of The Idea. Two questions from me. Simon, last year you divided Arcadis into three buckets. A high growth area, about a third, growing slightly over 10%. Another performance of bucket growing, declining by almost 10%. Did those buckets and growth rates differ much in the first quarter of this year?
I think, you know, similar-ish things. Things started to improve in certain areas. We had some, you know, some successes. We've got a portfolio. You know, it's a portfolio business, so there are lots of different. You know, U.K. started to improve, Australia started to improve, so we saw some green shoots there that perhaps we were pleasantly surprised at. It is a portfolio. There'll always be bits that aren't slightly slower than others. It seems like some of those underperformers are starting to perform and you heard us talk about the U.K. earlier. You know, let's not get too excited, let's celebrate some success in the U.K.
You mentioned that you might do some bold on acquisitions, but on the other hand, you are now analyzing and monitoring the underperformance of bucket quite in depth. Have you also more or less concluded that parts of this underperformance bucket is something which will not be part of Arcadis in the near future?
Look, we are doing a portfolio review. We continue to study very hard some of the parts of the business that we're in and, you know, whether an exit makes sense, absolutely. We'll continue to look at very small bolt-ons. As and when we've reached that conclusion, we'll let you know, when it's appropriate to disclose that. Yes, we are looking at every part of the business with fresh eyes.
Okay. Thanks.
Ladies and gentlemen, with this question, we conclude our Q&A session. I will now turn the conference over to Ms. Polinsky for any closing comments. Thank you.
Thank you all for your comments and your interest in Arcadis. I'd like to leave you with just this. We know what needs to change, and we're changing it. We are moving at pace, and where we have strong positions, the business is performing. Where performance has fallen short, Simon and I are directly involved in taking action, and these actions are starting to make a difference. We've had an encouraging start to the year and are looking forward to 2026.
Ladies and gentlemen, the conference is now concluded, and you may disconnect your telephone. Thank you for calling, and have a pleasant day.