Principal Markets - Environment

This business line is focused on activities that protect the environment and enhance sustainability. The largest activity involves the cleanup of legacy issues related to soil and groundwater pollution and the decommissioning of industrial operations and contaminated buildings. ARCADIS also assists clients with environmental assessments, site closures and redevelopment, product stewardship issues, regulatory compliance, due diligence, climate change mitigation - including carbon footprint minimization, energy efficiency and renewable energy - health & safety issues and services for noise abatement, solid waste disposal and the preservation of nature and the natural landscape. In 2009 these activities represented 35% of revenues (2008: 37%).

Clients

In Environment we do a lot of work for the private sector, including the oil and gas industry, chemical industry and transportation sector. Many of the Fortune 500 companies are longstanding clients. We also work for governments; from federal clients (such as the U.S. Department of Defense) to municipal customers.

Socio-economic drivers and changing client needs driving growth

Quality of life. As living standards increase, people want a higher quality physical environment. This leads to higher investment levels in the built environment, measures to conserve or upgrade nature and landscape, and sustainability as being inherent to quality.

Urbanization. Population growth and migration to cities cause greater urbanization and a growing number of mega cities. This means investments in residential areas, industrial sites, commercial properties and other facilities, not only in new urban areas but also in deteriorated inner cities, requiring redevelopment and remediation works.

Sustainability. An issue of paramount importance is preserving quality of life for future generations. Sustainability is integrated in everything we do. All our projects are evaluated in terms of their environmental impact with the intent to take mitigating measures in as far as is possible and feasible.

Climate change. This creates unprecedented challenges for delta areas where more than 50% of the world's population lives. The resulting opportunities for our business are many: reduction of greenhouse gasses; lowering the carbon footprint of projects; identifying new water resources; and counteracting the effects of potential flooding through better water management and flood protection.

Energy. The growing population, strong economic expansion and need to reduce emissions cause stronger demand for energy, especially renewable energy. This is a growth driver for all of our business lines.

Water. Scarcity of clean, safe, potable water is becoming an important issue. Water can be considered "the oil of the 21st century". This leads to a rising demand for services related to water supply, treatment and reuse. Globalization of industry. Multinational companies increasingly seek service providers with global capabilities. Many have vendor reduction programs in place to safeguard quality standards across their operations and increase efficiency.

Outsourcing and privatization. Companies are focusing on their core businesses, while outsourcing non-core functions such as facility management or environmental activities. A comparable trend is taking place in the public sector where the focus now is on policy making, while design and engineering are outsourced to the private sector.

Risk participation. Increasingly clients ask or require ARCADIS to take certain project risks. In these cases, our fee is dependent on our performance. ARCADIS has internal procedures to control the related risks.

We actively anticipate these changing client needs by partnering with clients and other parties in the supply chain in order to create more added value for clients. That gives opportunities for bigger projects and larger contracts, requiring a broad and deep knowledge base, adequate risk management and being global but acting local, providing ARCADIS with a competitive advantage.

Present position and strategy

ARCADIS is a leading player in environment

A major part of the environmental market is driven by legacy issues related to soil and groundwater contamination. ARCADIS is a leading player in that field and the largest global provider of environmental services to the private sector. Our competitive strength is based on our worldwide presence and strong local resources that enable us to serve multinational clients internationally; our advanced, cost-effective remediation technology; our GRiP® program for guaranteed solutions; and our strong health & safety program and culture.

SWOT Analysis

Ambition: Global leadership in Environment

Our ambition is to further strengthen our position as the world's leading provider of environmental services, especially to private sector clients. Our organic growth target is 12% per year; the margin target is 12% to 13%. We plan to achieve our ambitions by:

• Maintaining a strong focus on multinational clients and key national clients in the private and public sector;
• Operating as one firm, sharing clients and knowledge across borders while seamlessly delivering a growing range of services;
• Expanding our leadership position in providing performance-based remediation (GRiP®);
• Expanding services, especially in Strategic Environmental Consultancy and Deactivation, Decommissioning, Decontamination and Demolition (D4);
• Further strengthening our presence in Europe while growing our presence in the Middle East and Asia;
• Continuing to develop and share innovative technologies.

Progress in implementation of strategy

The Global Business Line Team for Environment drives strategy implementation and focuses on developing our client portfolio, delivering seamless service globally and sharing resources across geographies. Besides Remediation Technology in the United States, new Centers of Excellence have been established for D4 in Germany and for product stewardship in Belgium. We have made limited progress in expanding our footprint in Asia and the Middle East.

Recent results

Strong impact from recession, but demand picking up

After a period of strong organic growth, the recession impacted our environmental business as of the second half of 2008. While organic growth in 2008 was still 8%, in 2009 it turned into an organic decline of 12% as private clients reduced their environmental spend. In net revenue, organic decline was 'only' 4% as we lessened subcontracting. In the second half of 2009, demand started to pick up again, reducing the organic decline compared to the first half. Except for the United States, Brazil and France, all countries showed organic net revenue growth. In Europe this resulted from solid demand from the public sector while in Chile work for mining clients continued to grow. The contribution of 8% from acquisitions primarily came from Malcolm Pirnie and to a lesser extent from LFR (United States) and SET (Italy), both acquired in 2008. Despite the challenging market conditions, margins reached target level at 12.3%; excluding the impact of carbon credits, margin was 13.1% (2008: 13.7%).

Outlook

Our environmental business is based on strong market fundamentals relating to sustainability, climate change and compliance with regulations. Although the economic crisis impacted client spend in the private sector, we saw revenues stabilizing in the second half of 2009. Much of our remediation work runs multiple years and aims at protecting asset values and eliminating or reducing liabilities on the balance sheet. As the result of several large contract wins, environmental backlog at the end of 2009 improved substantially compared to one year ago. This is partly caused by clients outsourcing portfolios of contaminated sites. We expect to see more of this as it allows clients to redirect their resources to core business activities and drive more of their environmental expenditures towards reducing their liabilities within a fixed period of time. Vendor reduction programs and our advanced cost-effective remediation technology will allow us to continue gaining market share. Using our strong client base we can expand our services by assisting clients with disposing or redeveloping their assets, reducing carbon footprints, energy saving schemes and planning and permitting to comply with regulations. Demand for environmental due diligence is likely to recover alongside consolidation in the market. Environmental work related to infrastructure investments, including renewable energy projects, will continue. Overall, the outlook for the environmental market is positive and we expect a gradual return to growth, also depending on the speed of economic recovery.