Arcadis NV

AEX:ARCAD

Earnings Call Analysis

Arcadis Targets Steady Growth with Strategic Initiatives

Arcadis projects organic net revenue growth of mid- to high single digits over time, eyeing an EBITA margin of at least 12.5% by 2026, while maintaining a leverage ratio of 1.5-2.5x net debt over operating EBITDA. The company aims to notably reduce its Scope 1, 2, and 3 emissions by 2026 and 2029, respectively. Following a year that saw operating margins improve to 11.8% in key regions and 11.6% in GBA intelligence, the firm is on track with EUR 20 million in cost synergies, anticipating full delivery by 2024. Dividends are set to increase to $0.85 per share, reflecting 34% of net income. CapEx remained at the lower end of its target, with a continued focus on strategic acquisitions and technology investments.

Arcadis Targets Mid-to-High Single Digit Organic Revenue Growth and 12.5% EBITA Margin by 2026

Arcadis has set a thoughtful pace for growth over the extended cycle, projecting organic net revenue growth in the mid-to-high single digits. Their objective is to achieve an operating EBITA margin of at least 12.5% by 2026, showing a strong commitment to profitability. Maintaining a leverage ratio between 1.5x and 2.5x net debt over operating EBITDA is part of their disciplined financial approach. Moreover, a stable shareholder returns profile is planned to coincide with ambitious non-financial targets including substantial reductions in emissions, with Scope 1 and 2 targeted for a 70% reduction by end of 2026, and Scope 3 targeted for a 45% reduction by end of 2029. Additionally, Arcadis aims to maintain employee satisfaction within the top quartile and to enhance its workforce diversity to include over 40% women.

Record Revenues and Operative Leverage Drive Exceptional Q4 2023 Performance

For the fourth quarter of 2023, Arcadis reported net revenues soaring by 9% year-on-year to EUR 941 million, fueled by all Global Business Areas (GBAs) and offset slightly by currency effects. Organic growth stood at 6.5%, propelled by a particularly robust performance in the US and Europe. Record order intake of over EUR 1 billion represented an 18% increase, signifying client confidence and potential future growth. Extraordinary operational efficiency and an effective portfolio strategy lifted the operating EBITDA to new heights, marking an impressive 25% year-on-year increase to EUR 107 million, translating to an 11.4% Q4 margin. The full-year snapshot showed a formidable net revenue increase of 25% to EUR 3.8 billion with 9% organic growth. The operating EBITA margin solidified at 10.4%, signaling effective integration of acquired businesses, and fruition of operational leverage and cost synergies.

Strategic Acquisitions and Reduced Leverage Embolden Arcadis' Financial Structure

Arcadis continued to exhibit financial dexterity and strategic acumen, completing the seamless integration of IBI and DPS. Their Days Sales Outstanding (DSO) saw a considerable drop to 56 days, reflecting a highly commendable industry standard. Thanks to astute net working capital management, the free cash flow reached EUR 190 million for the year after substantial growth investments. The company's leverage ratio improved to 1.7x, achieving a healthier balance sheet. Highlighting specific segments, the resilience margin was buoyed by North America's performance, and business places showed margin uplift, primarily via the DPS acquisition. Mobility also showcased improved margins through effective operational leverage. In 2023, the Middle East did present some margin drag, but plans to exit these markets by the end of 2024 are expected to mitigate this impact. Overall, EUR 5 million in cost synergies already benefited the annual margin positively.

Emerging Areas Like Mobility and Intelligence Augment Revenue and Margin

Key initiatives within mobility, such as significant project wins including the upgrade of the Northeast Links Freeway in Australia, reinforced Arcadis' backlog growth of 9.5%. Today's sustainability and climate imperatives in transport have enhanced the relevance of the company's offerings in areas like electrification, alternative fuels, and new mobility modes. The operating margin enhancement across various geographies, excluding the Middle East, demonstrates the potential for future growth. As for intelligence, the 25% pro forma organic growth in net revenues and an 11.6% operating margin in 2023 denote a rising sector, with the synergy realized from cross-selling initiatives and continued investment in product and integration. Cost synergies, identified at EUR 20 million projected from acquisitions, are set to be fully realized by the end of 2024, laying the foundation for service delivery improvements and increased efficiency.

Arcadis' Dividend Policy Reflects Steady Shareholder Value Amid Investments

Arcadis has outlined a shareholder-friendly capital allocation framework, with a recommended cash dividend increase of 15% to $0.85, corresponding to 34% of the net income from operations. This strategic move upholds the company's financial priorities to distribute a steady return to its investors. Corporate investments maintain a focus on technology, exemplified by a 2023 capital expenditure of EUR 40 million, at the lower end of the EUR 40 million to EUR 60 million target range. This investment discipline, in conjunction with a commitment to an investment-grade rating and a steady dividend payout ratio of 30% to 40% of net income from operations, shapes a strong financial roadmap for the future. Additionally, Arcadis remains poised to capitalize on value-accretive M&A opportunities, targeted to fortify existing operations and speed up the achievement of strategic objectives.

Earnings Call Transcript 2023-Q4

[Operator]

Good day, and welcome to Arcadis Q4 and Full Year 2023 Results Conference Call. Please note, this call is being recorded. And for the duration, your lines will be on listen-only. However, you will have the opportunity to ask questions at the end. [Operator Instructions]. I will now hand you over to your host, Christine Disch, to begin today's conference. Thank you.

[Christine Disch, executive]

Thank you, and good morning and good afternoon, everyone. And welcome to this analyst meeting. We are here to discuss Arcadis fourth quarter and full year 2023 results, which were released this morning and are also made available on our website. With us on the call are Alan Brookes, our CEO; and Virginie J. Duperat-Vergne, our CFO. We will start with the presentation by Alan and Virginie, which will be followed by Q&A. We would like to call 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 any of these risks related to these statements, which are more fully described in the press release and on the company's website. And now, let's go over to you, Alan.

[Alan Brookes, executive]

Thank you, Christine. And yes, good morning, good afternoon, everybody, and welcome to our full year and fourth quarter results call. Okay. This has delivered a record quarter and full year performance, delivering gross revenues of over EUR 5 billion. Our net revenue for the full year reached a record high of EUR 3.8 billion, a 25% increase year-on-year, driven by strong performance of the acquired businesses, IBI and DPS, but also strong performance of the remaining business, which is reflected in an organic growth of 9% for the year. Net revenue was exceeded by order intake of $3.9 billion, setting us up well for the future, and we still see continued strong client demand across our key markets with an outstanding result in North America. Our operating EBITDA margin improved to 10.4%, up 9.8% in 2022. And in line with our strategic target of being over 10%. We now have successfully completed the integration of Arcadis IBI and Arcadis DPS. These were both finalized by the end of last year. This is driving revenue and cost synergies for the group, and again, resulted in significant project wins over the quarter. I am pleased to report that we have successfully delivered on all the key targets we set out in our 2021 to '23 strategy cycle, maximizing impact. And last November, we launched our new strategy for 2024 to 26, accelerating a planned positive future. I will share more on this shortly. But first, I'd like to take a look at some of our most important growth-end markets, and the areas where we are seeing Arcadis truly stand and differentiated from our competitors. The first of these is climate adaptation, where there is an urgent need to make communities more resilient to rising sea levels and flooding. We have a long history of designing and delivering flood alleviation schemes globally. And in both Europe and North America, we are working with government agencies and local municipalities using data to help model risk and demonstrate the economic and environmental benefits of flood protection. In the U.K., for example, we are helping the environment agency demonstrate value for money from England's 5 billion flood and coastal risk management program. Combining our sector knowledge with detailed analysis of past Arcadis projects, we have modeled our benefits register aligned with the UN sustainable development goals. This serves a dual purpose and reporting mechanism for sustainability and flood alleviation. The results are impressive. For example, we identified a 500% increase in the benefits that would result from one project alone. This use of data not only improves project delivery, but also provides a compelling evidence-base to target future funding and build stakeholder support. The second project I'd like to talk to you about, you can see here is water optimization. In North America, for example, we have a long-standing relationship with the U.S. Army Corps of Engineers, providing environmental remediation services, spanning safe water and land use. In 2023, this work included our appointment as part of a $200 million shared capacity framework to provide architecture and engineering works on several projects across the Great Lakes and Ohio River division. Our scope of work covers nature-based solutions such as ecological restoration, and the design of both water management and transportation infrastructure. It also includes digitally enhanced water management services, which will be implemented alongside flood reduction and dam-safety engineering. This will bolster long-term resiliency for communities across the region. Finally, as well as cementing our position in the 2 growth markets I've just discussed, the integration of our acquired businesses has helped to reposition Arcadis in new free chip markets, including semiconductors and life science manufacturing facilities. Let's have a closer look. Over the last 12 months, we are focused on integrating Arcadis IBI and Arcadis DPS, both operationally and commercially into Arcadis. In May, we combined Arcadis IBI's buildings business with our architecture firm to create a 2,000 strong architecture and urbanism division. A global leader in urban planning, design and building of resilient communities and spaces of tomorrow. By connecting talented professionals across multiple disciplines with our places GBA experts, we are diversifying our services to our clients and securing new opportunities. This growing talent and expertise is why last month, Arcadis debut at #2 in the 2024 World Architecture 100 List, a remarkable achievement for the business and a direct outcome of our successful M&A strategy. Our intelligence GBA is now fully established with a team of over 1,000 colleagues, many of them highly experienced technologists and digital advisers. We are starting to see new synergy wins already, most notably through the cross-selling of Intelligence digital products like TravelIQ with our mobility clients in North America. One example, which you can see here on the slide is our ongoing transport management work for the Nevada Department of Transportation. We are working on several multiyear advisory contracts, combining mobility and digital solutions that will improve accessibility, safety and sustainability on highways across the state. We have also fully integrated IBI's infrastructure team into our GBAs and in Q4, completed the integration of DPS into our places GBA for advanced industry sector. We now have 3,000 strong team with design, process engineering, and construction management expertise across multiple markets, including pharmaceutical, novel therapies and medical technology facilities. This team brings a wealth of new capabilities to Arcadis and limitless synergy opportunities. One example of our work here is with large blue chip clients across both the U.S. and Europe to drive sustainable outcomes in advanced industrial facilities. This brings together our mobility, architecture, resilience and places expertise. And our teams are currently working with 8 of the top 25 semiconductor companies in the world, including projects in Albany, Texas, Ireland and Malaysia. Taken together, the scale of these wins and new offerings demonstrates just how transformational the last few years have been for Arcadis. The transformation is also evident in our strong set of results for '21 to '23. As you can see here, we have achieved what we set out to do, and this has been reflected in our net revenue CAGR of 7.6%, and operating margin of 10.4%. We have delivered all our key financial targets and made significant progress against our nonfinancial targets, including our commitment to achieve net 0 greenhouse gas emissions within our global operations by 2035. As I mentioned on Capital Markets Day in November, Arcadis is now a stronger business than it was back in 2020 when we announced our previous strategy. We now have in place an attractive range of market-leading positions, an efficient global business model, growing our existing global excellence centers in the Philippines, India and Romania. And a service offering that spans the full asset life cycle from concept and design to decommissioning or retrofit and reuse. This is all underpinned by 36,000 highly talented people. They are our greatest strength. And this platform positions us well for the future, and it's the foundation to take our business forward over the next 3-year strategy from '24 to '26. Our new strategy is focused on one mission, to accelerate a planet positive future, by addressing our clients' needs and making a profound impact on the world. You'll remember that I spoke about this during our Capital Markets Day. But in summary, our strategy is centered on 3 strategic focus areas: firstly, partnering with our clients on sustainable project choices, second, creating value through digital and human innovation; and finally, investing in future-focused skills and an inclusive workplace powered by our people. Let me just take a moment to describe what these mean. Starting with sustainable project choices, we will deliberately focus on projects that align with our strategy to accelerate a planet positive future. At the same time, we will enhance our profitability by prioritizing higher-margin projects. Our key clients will be an important driver of growth here, often representing larger and more profitable projects where clients expect the same service and quality in different parts of the world, something we are very well-positioned for. Throughout 2024, we will build on the success of our key client program and develop it further. This will allow us to target a broader group of clients, including those from the new growth markets, and introduce more tailored and target-driven approach. We will broaden and deepen these client relationships across our GBAs. We are also developing new commercial models that will enable us to participate in shared value creation with our clients. For instance, through incentive-based pricing or upside sharing models. When it comes to digital and human innovation, Arcadis is a smart, digitally enabled organization. We combine deep asset knowledge with cutting-edge innovation, data and technology to anticipate and advise clients on the best solutions. Our intelligence UBA is critical here, prime to leverage these capabilities to support clients across the entire project life cycle. Over this new strategy cycle, we will invest in digital products to support smart cities and advance the energy transition, fostered greater GBA collaboration and expand our offering to provide greater value and cost savings to our clients. And within our own operations, we will double down on digitalization, standardization, and automation of our operating procedures, driving efficiencies, both internally and for our clients. And finally, if we are serious about our commitment to accelerating a planet positive future, we can't do it without the ingenuity of our people. My commitment is to empower our people to shape their future and advance their careers. In 2024, we are investing in becoming a skills-powered organization. This will prioritize our people's expertise, continuous learning and adaptability over traditional structures. It will ensure the long-term resilience of our people while enabling us as a business to future proof and attract and retain the best talent. We will know where our skills are and align them to our projects, whatever our clients need us. RTCs will also be crucial to our success. We will expand their reach, improve the quality and speed of service delivery, and whilst at the same time, create efficiencies. Over the next 3 years, we will be doubling the GEC's relative contribution to our projects, integrate them further into our business and increase recruitment and explore new locations for growth. I've shared our strategic objectives, and I'm just going to take a moment to discuss how these translate into targets for 2026. We expect to deliver an organic net revenue growth of mid- to high single digits over the cycle, an operating EBITA margin of at least 12.5% in 2026. For our leverage ratio, we maintained the same range of between 1.5 and 2.5x net debt over operating EBITDA. And our shareholder returns profile remains stable as well. On the right of the chart, you can see a summary of our nonfinancial targets. We will reduce our Scope 1 and 2 emissions by 70% by the end of 2026, and reduce our Scope 3 emissions by 45% by the end of 2029. Other top priorities include on Net Promoter Score with our employees to remain in the top quartile, and increasing our gender diversity to more than 40% of women in the workforce. Our goal is to build on the strong foundations of the last strategy cycle, and focus on new growth accelerator markets. With a collective mission of accelerating a planet positive future, together with our own ESG commitments, we are already well underway towards achieving our targets. Partnering with our clients on sustainable project choices. Combining digital and human innovation, and harnessing the power of our people to deliver our clients' aims and ambitions. And with that, I will hand over to Virginie who will take you through our financial results for Q4 and the full year '23 in a little more detail. Thank you.

[Virginie Dupérat-Vergne, executive]

Thank you, Alan, and good morning, good afternoon, everyone. Let's start maybe with our results for the fourth quarter of 2023. Net revenues increased 9% year-on-year to EUR 941 million, driven by all GBAs with currency effects of minus 3.2% from weakening U.S. and Canadian dollars against Europe. Organic growth was 6.5% driven by all GBA. Growth was particularly strong in key markets, U.S. and Europe. However, it also reflects increased activity in product choices in Arcadis, DPS and China. Order intake showed a significant step-up from the third quarter and reached a record level of over EUR 1 billion for Q4 with an 18% increase, outperforming the total revenue growth of 9%, resulting in a book-to-bill of 1.09 versus the 1.01% in Q4 2022. Organic backlog growth up 4%, reflects good order intake across all key markets, well-balanced between our 3 biggest businesses and including a growing share of intelligence. Operating EBITDA increased 25% year-on-year to EUR 107 million for a record Q4 margin of 11.4%, 140 basis points higher than Q4 last year, driven by operational leverage and an optimized portfolio. For the full year 2023, Arcadis delivered a strong set of results with improved performance across key metrics. Our net revenue increased 25% year-on-year to EUR 3.8 billion with 9% organic growth, driven by the strong performance across all of our GBA. We recorded an operating EBITA margin of 10.4%, driven by the performances of the acquired businesses, operating leverage and materialize cost synergies, while we continue to invest in operational efficiency, people development and digital product and skills.In 2023, we successfully integrated IBI and DPS. And please note that 1 month of DPS and 3 months of IBI were consolidated in 2022 financials. We continue to show financial strength and discipline, significantly reducing our DSO to only 56 days versus 60 days in Q4 of 2022. This marks a significant improvement and a strong performance in our industry. Our improved performance, combined with our disciplined net working capital management resulted in a free cash flow generation of EUR 190 million for the year. This is after having covered the financing cost for growing our business by 25%, following the 2 acquisitions and an organic growth of 9%. We have also reduced our leverage ratio to 1.7x versus 2.2x at the end of 2022, well within our target range. Now, let's take a closer look at the drivers of the margin improvement. It's first very important to notice that all our GBAs contributed positively to the full year margin improvement in 2023. Resilience margin was driven by the excellent performance in North America. And in this region, already above group level margins showed further improvement, and the region continued to represent the largest contribution to the total resilience. Business places showed good margin expansion with margins improving at our acquired business DPS, as well as in architecture and urbanism division. In Mobility, margin improvement was driven by strong operating leverage coming from high performance on large projects, which even in some cases, benefited from the contribution of variation orders. In intelligence, the year-over-year margin improvement at the GBA was strong. However, given its current share of 3% of the total business, its contribution shown here is small, but promising given the pro forma 25% revenue growth of intelligence this year, with more exciting growth to come. Middle East softened our margins with an incremental impact of 40 bps from 2022 to 2023, and mainly resulting from a receivable provision taken on the product of the due. We plan to finalize winding down activities in the Middle East by the end of 2024, and have now only a few design activities to conclude and site supervision activities to execute on a small number of projects. And finally, in 2023, cost synergies of EUR 5 million had a positive impact of 10 basis points on full year margin. And I will come back on cost synergies with a bit more detail later. If we move to our GBAs now. First, let's go to resilience. In resilience, we delivered an excellent year, especially very strong in North America and Europe. Market demand continued to be robust, with strong market momentum for solutions in water optimization, climate adaptation, and energy transition with increasing tailwinds on the PFAS regulatory front, both in the U.S. and in Europe. Data optimization offerings have been particularly strong with additional framework contracts in the U.K. and significant water program projects in North America. In planet adaptation, we continue to differentiate with our digitally driven multi-asset-based climate risk assessment. In 2023, resilience operating margin expanded to 11.8%, while we grew our backlog organically by 11.5%. We continue to invest in our people to be able to meet the challenges faced by our clients in our high growth markets. With our recently launched Arcadis Energy Transition Academy, we aim to reskin and upscale our employees, as well as those in the industry. Moving on to places. We delivered good revenue growth and improved underlying margin. U.S. and most of Europe experienced positive momentum in the quarter from clients across government, advanced industrial facilities and technology. We also started to see positive trends in the U.K. Our backlog improved in Q4 2023 with significant recovery in order intake, and continued momentum in January. Albeit organic backlog growth for the full year was impacted by our increased diligence of our project choices. Pipeline continues to be strong in advanced industrial facilities in North America and Europe on the back of government stimulus, and Arcadis focuses on differentiating with its collaborative capacity across regions, and its agility to address fast-evolving needs of those clients. Margin improvement was driven by strong performance of the acquired businesses with DPS margin catching up faster than expected to align with the average places margin and strong performance from architecture and urbanism business. The underlying margin improvement was very strong at places. When excluding Middle East, operating margin stood at 10.6% for the full year compared to 9.9% in 2022. Turning now to mobility. We experienced continued strong client payment and delivered underlying margin improvement. We recorded strong revenue growth across all of our key markets, and grew our backlog by 9.5% organically. This included multiple larger wins such as upgrading Northeast Links Freeway in Australia in the fourth quarter. Collaboration between intelligence and mobility helped to drive revenue synergies. We see sustainability and climate impact continues to grow as a relevant part of mobility solutions. Electrification trends, alternative fuels, new mobility mode, and the ongoing growth of transportation challenges across the large cities we operate continue to provide ample opportunities for our global capability. Our operating margin improved in the U.S., the Netherlands and Australia, helped by some sizable variation orders on large mobility projects. When excluding Middle East, operating margin stood at 11.8% for the full year versus 10.5% in 2022. And finally, our fourth GBA intelligence. Intelligence delivered EUR 94 million in net revenues in 2023 for the first year with a pro forma organic growth of 25% and an order intake of EUR 104 million. Our strong suit of software and digital products, enhanced by how our cost and engineering knowledge was the grinding force behind this. We achieved good synergy wins through cross-selling, and continue to invest in product development, integration and setup. Our operating margin improved significantly to 11.6% in 2023 versus 9.1% in 2022, with fast cost synergies being expected. With 9% organic backlog growth, we saw a strong pipeline of opportunities for cross-collaboration across our GBA.Let's have a look now to our progress in cost synergies with identifying and delivering these cost synergies resulting from both our acquisitions. As we communicated during the first half 2022 results, we identified a total EUR 20 million of cost synergies. These are to be generated through rationalization of overhead, insurance and support driving operational IT integration and platform improvements within technology, as well as through integration and rationalization in the workplace. Energy implementation is ongoing and expected to be fully delivered by the end of 2024. In '23, we already realized the positive impact of EUR 5 million in our full year P&L, and we will go on extracting additional efficiencies as we progress in the process. Now, we can provide our clients with a full asset life cycle of services and solutions. With our combined capabilities and expertise, we booked significant synergy wins in the first year of the acquisition with a total net order intake exceeding EUR 100 million, and we see an additional EUR 300 million in the order pipeline. As an example, in the U.K., we are seeing greater collaboration between our places and architecture urbanism team, and the U.K. government's new hospital program to build 40 new hospitals by 2030, leading to new commissions and opportunities, in line with our balanced capital allocation framework. We will propose to have our shareholders to increase our cash dividend up to $0.85, 15% higher than last year, and representing 34% of our net income from operations, well within our target range. Our leverage significantly improved at 1.7x at the end of 2023, at the lower end of our target range of 1.5 to 2.5x, having successfully deleveraged from 2.2 end of 2022. Our capital expenditure for the year came in at EUR 40 million, again, at the lower end of our target range of EUR 40 million to EUR 60 million, and mainly composed of technology investments. Now, a reminder of what we set out at our Capital Market Day back in November. For '24, '26, we confirm our commitment to a dividend payout ratio of 30% to 40% of net income from operations for the strategic cycle, complemented by additional shareholder return when approximate. Secondly, this will be achieved while further strengthening our balance sheet, keeping our leverage within our target range of 1.5x to 2.5x, and retaining our investment-grade rating. Then with regards to CapEx, we will invest EUR 40 million to EUR 60 million a year, mainly in technology infrastructure and development costs, as well as in further development of new time collaborating working environment. And finally, we will continue to pursue value-accretive M&A opportunities in line with our strategic priorities. Focusing on those targets that complement our businesses and accelerate the delivery of our strategic plan for revenue synergies. And with this, I'd like to thank you, and then back to Alan.

[Alan Brookes, executive]

Thank you, Virginie. And so just to summarize. I think it's fair to say that the last strategy cycle has been truly transformational for Arcadis, and 2023 has been a record year. We've achieved all our key strategic targets, including finalizing the integration of Arcadis IBI and DPS with some important operational synergies now materializing. Looking ahead, we have a positive outlook and clear priorities for the business. Strong market conditions had resulted in high-quality pipeline. And with the launch of our new 3-year strategy resonating strongly with our clients and our people, I am confident that we are well-positioned to capitalize on significant opportunities in our key growth markets as we move forward. So I'd like to thank our people for a remarkable year, and our clients for their continued partnership with us on many fantastic projects in 2023 and over the last strategy cycle. Over the next 3 years, we have a great opportunity to lead our industry, driving innovation and sustainability, while delivering value-added solutions that address the evolving needs of clients and communities worldwide. And with that, I'd like to open the call for any questions, please, that come from those who have joined us.

[Operator]

Thank you. Ladies and gentlemen, [Operator Instructions]. We'll pause for just a quick moment to allow everyone an opportunity to signal for questions. We will take our first question from David Kerstens, Jefferies. Your line is open. Please go ahead.

[David Kerstens, analyst]

Hi, everybody. Thank you for taking my questions. So two questions. First question is on China. So you single out China as a factor in the slowdown in organic revenue growth in Q4 market conditions. Can you elaborate exactly what is happening there? And what is your remaining exposure to China? I think a year ago, you said it was 10% of places, including the Philippines. And related to that, the second question then is regarding the U.S. markets and the exposure of places. I think the U.S. is 30% or so of places. What are you seeing there in the commercial real estate market and in the office market, in particular? Is that any potential downside risk similar to what you're currently seeing in China for 2024? Thank you very much.

[Alan Brookes, executive]

Thank you, David. Maybe to start with China. First of all, our exposure is less than 3% of our revenues now. And I think, therefore, not as material as it was previously. We have been repositioning ourselves, and that's been really quite important for us. We've been looking firstly to our global clients from China, our Tier 1 clients as we call them, so that we are well-positioned there with clients who understand the global markets. Secondly, we've been moving our service delivery from the sort of quantity surveying into the much more respected and higher-margin project and program management. And so these are choices we've been making. And with those choices has become a drop in our revenues in China, which we think is sensible at this stage, and reducing our exposure there really to those global operating clients. In terms of the U.S. market, most of our business in the U.S. market in place is not really connected so much with the commercial real estate. We are doing architectural work with our ANU. As I said on the call, we are #2 in the world now. And the market for us is good in terms of those key clients, both in Canada and the U.S., where we're doing the architectural urban planning work. In terms of the places business, otherwise, we've really been focusing on the semiconductor work, the actual high-technology industrial work there. And so we don't feel exposed in the sense of our client base, which is more blue chip, large-scale industrial technology-driven clients. So not feeling would it at this stage about the U.S. market exposure to offices.

[David Kerstens, analyst]

Great. Thank you very much.

[Operator]

We will take our next question from Sangita Jain, KeyBank Capital Markets.

[Sangita Jain, analyst]

Yes, thank you so much for taking my question. So I have a question on margins and then a follow-up. So you obviously ended 2023 on a very strong note and ahead of your earlier 3-year targets. So to get to that 12.5% in 2026, should we think of it more of a ratable cadence, or is it more back-end loaded?

[Virginie Dupérat-Vergne, executive]

Thank you, Sangita. Maybe I will take this one. Basically, we ended '23 on a strong foot, 10.4% is already quite ahead stem. So that's a good achievement. And if it will be a progressive step up year after year. I wouldn't want to see us having to do something very much back and load. If you think about the indications we have been given, it's super clear that we are going to extract a large part of our growth in margin next year from the realization of the cost synergies. We have already EUR 5 million that got up in our '23 P&L, but the rest of the EUR 20 million is to be expected and to profit to our '24 P&L. If you think about Middle East also, the moment we are fully read out Middle East, and that I agree with you, will not only happen before the end of the cycle. In the bridge that I showed earlier, there is an incremental 0.4% compared to the traditional 0.3% that we had on the Middle East margin. So if you remove that from our performance of the year, that's an 0.7% that mechanically will disappear the day we are completely released with Middle East. We still have penalties over there, around 50 projects that are going on, and that goes with engineering licenses and some costs and such. We want to be as soon as we can out of it by the end of '24. And if we might make the decision of keeping some licenses in '25, if there is still some cash to collect, because once we have closed offices and its we can't get the cash back. So that's, I would say, this is the biggest indication. The rest of the levers will progressively contribute. The product portfolio is already there, but I would rather think about gradual and steady production of the margin around the cycle.

[Sangita Jain, analyst]

Great. Thank you. That's very helpful. And if I can ask you a follow-up on the CHIPS Act and the IIJA in the U.S. We're starting to see some CHIPS Act funding getting loosened up. So just want to see what your thoughts are and what you're seeing in terms of your places backlog going into 2024?

[Alan Brookes, executive]

Yes. Thank you for that. I think -- probably like you, we're seeing the early signs of the sort of CHIPS Act coming through. Most notably, I think we've had our sort of really first proper project coming through with the University of Albany, and that was really good project there, which is the Nanotech complex near the university. What we've also seen now is more projects starting to look like they will develop. But these are blue chip clients. And we expect really for us, H1 will start to secure some of the funding. We're already working with the clients and H2 will see the real drive into our performance there. So some wins already. We're positioned well with clients. We're talking in detail to quite a few clients now, and we expect the funding to land in the U.S., and as I said, the projects to move in H2. So yes, we're very well-focused on that, and think it will be a good uplift in the second half of this year.

[Sangita Jain, analyst]

Great. Thank you so much for answering my questions. Appreciate it.

[Alan Brookes, executive]

Okay. Thank you.

[Operator]

We will take our next question from Quirijn Mulder from ING.

[Quirijn Mulder, analyst]

Yes. Good afternoon, everyone, and good morning for the U.S. people. My questions are a couple of -- with regard to the extraordinary charge you took, as you estimated, or you reminded us of of EUR 48 million at the end of the full year 2023. So can you maybe elaborate for what the noncurrent results was there? And how do you see the split? And then with regard to the cash flow, what was the impact of the effect of the taxes with regard to the intangibles in the U.S.?

[Virginie Dupérat-Vergne, executive]

Thank you, Quirijn. So I'll start with the non-operating cost that we have taken, which amounts to EUR 48 million this year. A large part of that, a bit more than answer of it is about restructuring cost. That's coming obviously from the integration of the acquisitions, but also some restructuring costs in China, as you could expect. So that's part of that. Part of it is not cost that have been already executed its provision for some departures that will happen rather or plan that will be executed in '24 in that respect. We have also some technical, I would say, integration costs such as IT harmonization, things like this, which we have over there. And that's probably the vast majority of the cost that we have. And the second question was about the free cash flow. So then I'll go back to the cash flow and the impact of tax across the years. And Section 174 probably represented something like EUR 50 million, EUR 60 million equivalents in dollars that we pushed out. And we recently followed the news about the fact that it might be potentially canceled or suspended as to 2026. So we'll see what's going to happen in the coming year.

[Quirijn Mulder, analyst]

Okay. Thank you.

[Virginie Dupérat-Vergne, executive]

Thank you, Quirijn.

[Operator]

[Operator Instructions]. We will take our next question from Chase Coughlan, Kempen.

[Chase Coughlan, analyst]

Hi, good afternoon, all. And thank you for taking my question. Firstly, on your capital allocation plans. So obviously, your leverage is quite comfortable right now given your targeted range. And I know you mentioned that you plan to continue your value-accretive M&A strategy. And I'm just wondering, should we expect any more sort of larger M&A deals like we saw with IBI and DPS? Or is your strategy more to do the smaller bolt-on acquisitions, mainly in the intelligence unit. Just some more color on your M&A strategy there?

[Alan Brookes, executive]

Thank you. I think on this one, we're very much focused now on looking at how to connect digital into our clients. And obviously, as you say, that will be part of the intelligence unit. We're really focused now on looking at how this would align with our 3-year strategy, particularly around sort of the asset life cycle management, and really helping our clients on de-carbonization and things in this area. So I think what you could expect is that we will be looking at these areas to supplement and accelerate our offering there. And I think this is probably where we will focus. So these, by definition, are usually sort of small to midsized businesses, and we'd want to do something that is really getting us into our clients with strong margin and connecting us to good cash generation. So I think this is where we are focused right now, and this is what we'll be looking at in the year ahead.

[Chase Coughlan, analyst]

Okay. Now, that's very clear. And maybe a follow-up on that then, because obviously, this whole digital push is a real theme not only for Arcadis, but also for a lot of the other players in the space, both in Europe and in the U.S. But I'm just curious if you're seeing quite a lot of competition for M&A now in that digital space. I'm wondering how you're seeing the multiples respond there, and if that might become increasingly expensive in 2024 and 2025, if you have any more views on that?

[Alan Brookes, executive]

Yes. I think I'll start off by saying I think we're seeing this an attractive business, quite honestly, because of the way that we operate. And obviously, in creating the intelligence units, we've got good visibility and people liked us in terms of attractive for us. And maybe I'll ask Virginie just to maybe comment on what she's seeing in terms of the multiples and so on.

[Virginie Dupérat-Vergne, executive]

Yes. I think that it's very diverse. It really, really depends on who you are talking to. I think we've seen exactly the example in the recent acquisition that we did when you are in a direct discussion with someone for a very long time, I would say that you can be also quite outside the market. It's a very different mode of discussion. And when you are doing a listed deal, for example, it can be super different. The market is still very, very fragmented, be it directly in our space, in the engineering and consenting space. And then that also reflects in the potential targets even in the digital world that we could get into. And some of the targets we are discussing and also we can also look very much about some niches and such, and do complements from people, but not as a one. So that, I think, is the thing we could try to play on. Then definitely, there is a lot of focus of private ability in our space. We see consolidation happening in the market, and that definitely has an impact on the average multiples of some of the operations that we see happening.

[Chase Coughlan, analyst]

Okay. That's very helpful. I'll jump back in queue.

[Operator]

We will take our next question from Maarten Verbeek, The Idea.

[Maarten Verbeek, analyst]

Good afternoon, it's Maarten Verbeek, The Idea. I would like to get back to the exceptional restructuring charge, not specifically for the full year, but for the fourth quarter because full year was EUR 48 million, but a very high number for Q4, EUR 24 million. You also stated that you completed, so more or less the last remainder of your integration of DPS and IBI. And I can't imagine that, that was a very costly exercise to do the last bits and pieces. So could you give a bit more color on what happened over there? What kind of charges you took?

[Virginie Dupérat-Vergne, executive]

So the charges that we took is because when you make the decision, you need to book the charges, meaning that it is executed. So as I stated in my earlier answer, large part of it is provision for restructuring the operation to be happening on the course of the next year. And as we finalize the integration, obviously, we have a very clear idea of how we will be structured and notably in the enabling functions beyond the field once we have integrated everyone. And we know once, we have a single system and things like this, what we need to keep in terms of support in all the regions. So that's why and that's how you happen to have all that being booked at the moment. It is fully finalized and announced.

[Maarten Verbeek, analyst]

Could you give some guidance what kind of regular restructuring charge you expect for this fiscal year?

[Virginie Dupérat-Vergne, executive]

'24, you mean?

[Maarten Verbeek, analyst]

Yes.

[Virginie Dupérat-Vergne, executive]

So we don't give any guidance on that. But I would say we stated that we need to be out of Middle East by the end of next year. That's our intent. And if we get into, let's say, the realization of this plan, there might be additional elements of restructuring to be booked in the P&L as we make the decision and engage the operations in Q4 on that front. Vast majority of that being potentially onerous contract in terms of offices and workplace. When you have to get out of this contract. A very lower amount compared to what we have this year, except if we happen getting again in new types of operations that would change the decision-making.

[Maarten Verbeek, analyst]

Okay. Thanks. Then Middle East is still weighing on your results. By the information you provided, it seems that to depress our EBITDA by some EUR 25 million to EUR 30 million. Firstly, do you expect that to come down considerably this year and then more or less, would you say we have wind down everything by the end of this year? So in '25, virtually, there will be no losses from the Middle East anymore?

[Virginie Dupérat-Vergne, executive]

Ideally, yes. As I stated, so long as I need to keep some licenses and operating, I might decide to keep a little bit of cost. If you think about Middle East over the last 3 years, the achievement in terms of a reduction in working capital by getting the cash in has been very, very significant. Meaning that the decision we have taken to progressively run down an ongoing something super last are proving to be really successful in terms of cash management and sound management of our P&L on top of the relationship with our clients. So that's the reason why we are not going to try to accelerate anything now. We are reaching the end, but make sure that we are doing the right thing. One of the nice things that we've been able to do is that when we acquired IBI, there was some footprint in the Middle East. And within 1 year, we have almost managed to get that down back to 0. So then the additional Middle East elements that we added to ourselves is something that we have managed to address as a priority.

[Maarten Verbeek, analyst]

Okay.

[Operator]

We will take our next question from Sahabat Khan, RBC.

[Sabahat Khan, analyst]

Great. Thanks, and good morning and good afternoon. I guess there's earlier a bit of discussion on the margin kind of progression recently. Can you maybe just talk about this -- just remind us of the targets around the 12.5% target by 2026. Maybe just how we should think about the cadence over the next 3 years, including '24 to kind of get to that target?

[Virginie Dupérat-Vergne, executive]

Hi, Sabahat. Sure. I think it's going to be a progressive margin incremental progression, as I stated earlier. Think about '24 is about execution of cost synergies. That's the first element that should cut additionally to the P&L. Middle East is weighing 0.7% this year. I would expect it to be a bit lower next year, and then will progressively disappear. And in parallel, all the 3 levers that we are working on, be it the sustainable project lever, or the digital and the human one, or the program by people should progressively bring their fruit. So that I think, the way I would see it, I would have a tendency of thinking that the GEC part might be quite back-end loaded because of the need of deciding and opening of an additional center. And obviously, I would expect us to have to open that during '25 or work on it in '24, open at the beginning of '25. And then progressively ramp up and help us accelerate in our capability of moving faster with Global Excellence Center. But the way we have built it, and the fact that we really try to shift very early on the sustainable project strike. And as we stated during Capital Markets Day, we now already have more than 50% of our portfolio, which is already at or above the 12.5% margin, really makes us confident that we can take positive steps in to increase our margin. As you know me a little bit from the years now, and I hate having to have stomach problems by the end of the year on the cycle. So we'll try to make sure that we rather capitalize progressively on the statute.

[Sabahat Khan, analyst]

That's helpful color. And then --

[Operator]

We will take our next question from David Kerstens, Jefferies.

[David Kerstens, analyst]

Hi, thank you for taking my follow up. I just wanted to go back to the significant projects and some pipeline opportunities. Did I hear correct that you said that the project ends have now increased to EUR 100 million and the pipeline to more than EUR 300 million. So my question would be how -- when will that pipeline be converted into orders and revenue? And what does that do to your returns on invested capital on the acquisitions of IBI and DPS? And then I had a question on data-driven that you added to your company description.

[Virginie Dupérat-Vergne, executive]

Okay. Maybe I'll do the technical part of the order intake conversion, and I'll let Alan had a comment on the business. It's probably better. We have EUR 107 million in order intake, meaning that we have sometimes signed a firm that we can take and execute. And when we say we have EUR 300 million in the pipeline, it has a project that are in framework agreements, for example, that are going to be converted. It doesn't mean that everything is going to be conducted in a single year or in 2 years, and such that can be very, very different. And that's the way we see the pipeline. But for example, if we come back on our Q1 announcement. In Q1, we had in mind EUR 100 million of pipeline from cost synergies, and we manage it to convert just about EUR 100 million in a single year in terms of order intake. Having EUR 300 million at the moment in the pipeline give us quite a strong incidence that we can go on sizably, sustain a sharp progression, a sharp increase in our revenue -- net revenue growth.

[Alan Brookes, executive]

And maybe just to give color to that. Sometimes what you'll see is individual projects coming through. So you'll get a single project such as the semiconductor manufacturing, which will convert quite quickly as soon as the client has agreed the funding and established, and we've seen several of those coming through. We expect, for example, 5 awards in the U.S. administration announcements to come through. So they would be pipelined. -- they'll convert as soon as that announcement is made and confirmed. Others might be multi sort of framework contracts where Nevada Department of Transportation, I think I mentioned, we were awarded multiple contracts there. And therefore, you'll see those coming through in stages over some period of time. Or infrastructure Ontario and Canada, where we've just won a 5-year sort of deal, which will come through over time again. So it does -- they will convert and some of the revenue will land almost through the year immediately. Others will be progressively over several years potentially. So it depends on the size and the type of contracts we're winning, but we're seeing good healthy pipeline, as we said, really pleased with our year-end position, and our order book at the year-end, which bodes well as well for 2024.

[David Kerstens, analyst]

Yes. That sounds good. Great. And there was one point in the press release, and I noticed that where you added data-driven to your company description. Is that just a clarification, or is it a change in the way you sell solutions to customers?

[Alan Brookes, executive]

I'd say it's trying to make it clear that increasingly, we are using data with our clients to inform how we operate and the recommendations that we make. And secondly, as we develop more software products, and we are starting to see now clients really liking the idea of looking at data-driven solutions around managing their assets through the asset life cycle. And we want to make it clear that we have products, and we're using data to advise clients and increasingly, that will become important to us. So that's why we've added that. Just to be clear, that's what we are doing as we move forward. It's an integral part of our offering.

[David Kerstens, analyst]

Sounds good. Thank you.

[Alan Brookes, executive]

Thank you.

[Operator]

That is all the time we have for question-and-answer session today. I'd like to turn the call back over to Alan Brookes for closing remarks.

[Alan Brookes, executive]

Thank you. And briefly, as I said, I think it's been a privilege to be able to announce a record year for Arcadis. On behalf of all my Arcadis colleagues who've worked really hard in the last year, and particularly in Q4, and to our new colleagues joining us from IBI and DPS in the year, who have made a difference. And I'd just like to say we look forward to the next 3 years, the great opportunities ahead of us in driving that innovation and sustainability in the way that we operate and meeting our next 3-year strategy goals, as well as we've made the last 3 years. So thank you all for listening and your questions. Thank you all very much.

[Operator]

Thank you for joining today's call. You may now disconnect.