Earnings Call: Q4 2014

Feb 19, 2015

Good morning, everybody. Welcome to the Randstad Headquarters. A special welcome to the analysts, journalists, our board members, and all the other Randstad employees, and also a special welcome to the people listening to our audio webcast. Today is the presentation of our Q4 and full year results. We have a very predictable pattern. Our CEO, Jacques van den Broek, will walk us through the highlights, both strategically and the key highlights. Robert-Jan will take over on the financials, and we finish off with the Q&A. Of course, the fact that all our other board members are present means they are welcome to support any questions you might have on the other OPCOs. Thank you very much. A final remark before Jacques starts. Our annual report is also published today. For more details on our results, please refer to our website for more insight. Thank you very much. Jacques, the floor is yours. Let's see. Good morning, everyone. Also from my part here in the room and everybody online, both from financial community, but also our colleagues across the world. Fourth quarter and full year. The title says it all. Solid performance in Q4 and a good start of 2015. Let me take you through a few highlights here. If you talk about our performance, by the way, before I move on, just wanted to mention that our annual report is online. As the Dutch people will know, we're not going to get a prize this year again for the best annual report because we're not nominated because we won two years ago. Still, a lot of hard work by a lot of people here, and very happy again with how it turned out. Please go online and check it. Continued profitable growth. We've seen quite a stable year. After Q1, where we had a little over 2% growth, we have a pretty stable 4% growth throughout the year against a more challenging comparison base. In that sense, there is strengthening, and you see that also into January, as we mentioned. Very happy with our result in permanent placements. We've seen an increase in growth here. Growth through the year, 14%, with 21% in Q4. This is very broad-based. This is also in Europe, also in countries like France and in Germany and the Netherlands. We provide 25,000 fixed jobs per quarter. You can imagine at a growth rate of 21% that our impact on that part of the market is definitely increasing. Pretty stable operating expenses, and that, of course, translates into a great incremental conversion ratio for Q4, but also for the year. 77% for the full year and 96% for Q4. A bit of a broad look at the market. Rest of the world doing very well. As you know, these are investment areas for us. In a way, ahead of people making full productivity and making money, we invest in more people. You should think markets like India, China, Singapore, Hong Kong, where we are creating a top three position for the midterm. The BRIC countries currently are 6% of the total world market. They're expected in 2020 to be 9%. It's an investment area, but we are a top three player in India today. We are a top three player in China today, and we want to really invest and stay ahead of that market development. North America has been a very stable business for us throughout the year. As you know, economic numbers in the U.S. are great and stable and going forward. Absolutely good. Europe, a mixed picture. Iberia, Italy, Switzerland, Poland, doing very well. The Netherlands improving throughout the year. France still had a tough Q4, but a far better start of the year. Germany remains sluggish. I'll get into that one definitely later. I mentioned emerging markets. Australia is not so much an emerging market. It's a mature market, but we grow more than 20% there. Very happy with that performance on the top line. We need a bit more perm. Australia is an Anglo-Saxon market, so permanent placement is very important there. That still needs a bit more growth. Japan, an acquisition from, what is it now? Four years ago. Four? Three? Yeah. Very happy with our performance there. Welcome. This is our strategic roadmap. We're going to come back on the roadmap. We presented this one to you at the Capital Markets Day, which is very much what we are building in the company, where we are improving in the company. This is the slide I showed you in November. A few highlights. Of course, starting at the bottom today, good improvement from 3.5 to 4.1 EBITDA margin, good growth in revenue, and a corresponding growth in EBITDA. Our activity levels, as mentioned, pretty consistent growth throughout the year. Activity level, meaning phone calls to clients, visits at clients, candidates send out, candidates proposed to clients for fixed jobs. A 30% increase, and we definitely see that into improving performance in many countries. Productivity up, perm, as I mentioned, and certainly SME in the Netherlands and in France, picking up there. France, a tough market, but still growth in SME, which is a strategic target for us in that market, which is a low margin market, and we want to improve our business mix. As a percentage, less big clients and more SME. In the Netherlands, very happy there. Our SME part of the business at Randstad grew 15%, which is ahead of the Dutch market. Again, a result of very consistent commercial activities in that part of the market. Of course, if the economy improves somewhat, you benefit from that development. As mentioned, 60%-70% cost savings in the back office to be realized in the next two years. You've seen us taking provisions to lay off people, certainly in the Netherlands and in some other countries. The 250 people in head office, back office functions have left the company, but we'll be in a setting where we're trying to find new jobs for them. In 2012, where people left us in the Netherlands, 80% of people found a new job in nine months. Definitely, that's a target for us now, 4,250 people to help them to find a new job, and we're optimistic on that happening. Sourceright. Sourceright is our business that takes care of the demand of large clients, organizing on their behalf staffing suppliers so that they have one point of entry. That's called MSP. Taking part of their recruitment function, which we call RPO, recruitment process outsourcing. In Europe, we found that although we are geographically organized, the Sourceright business is better organized on a European level. Clients are increasingly international. We want to run as many of the recruitments within that business through our sourcing center in Budapest, which has a low cost and a high quality of the searches in there. We think that's a good step towards organizational change to be better equipped for the developments in the market. Vertical approach. We've seen in our own business in the U.S., but certainly also with successful competitors, that in the professionals business, they organize themselves in verticals, meaning that they can provide any profile from the low-end profile to high-end profile in IT and engineering and finance to one client. It makes you more attractive as a supplier. We're organized like that in the U.S. We are organizing ourselves in the Netherlands as we speak. The three companies and professionals are being brought together in Q1 into one company. TTA, Total Talent Architecture, our approach where we go to clients and we say, "We can improve your company. We can improve the way you treat people, you hire people. We can look at the productivity of your people." That feeds into a growth in the MSP, RPO, but certainly also in the in-house business, is taking shape. We've created an international project team that's going to train our own people. As I mentioned in London, we're talking about roughly 1,000 clients worldwide, where really staff, flexible staff is a big item. We're going to train around 150 people in our own organization to really be able to present our business in a strategically relevant way to our clients. There are going to be more on that one probably going forward, but this is where we are today. On the technological developments, as mentioned in London, our ambition is to be the most agile integrator of technology in our business. Any promising development in technology, in HR technology, we're going to bring into our processes to stay ahead of the game in this development, for investments in our innovation fund. Of course, very happy on the M&A part that we're getting an increasingly solid balance sheet, and Robert-Jan will talk a little bit more on that one. North America, as I mentioned, increasing performance. Our staffing and in-house business grows roughly two times market. The market grows 4%, we grow eight. That's definitely something we would like to have in all countries. That's not yet the case. We're very proud of our performance over there. Also, if you see a gross profit growth of 8%, revenue growth of 10%. U.S. professionals, it's the other way around, at 5%. This is more a gross profit business, so perm is very important. U.S. is picking up. Our financial business is doing very well, improved throughout the year. Our engineering business is also doing very well. Our biggest business, our IT staffing business, could still grow faster. Had a good improvement in Q4, ended the year well. They're getting there, also consistent improvement throughout the year. Sourceright, as I mentioned, spent under management. That means the revenue we take care of on behalf of our clients has grown with 61%, so our impact and our presence with these clients has increased massively. Canada, a somewhat sluggish market compared to the U.S. We're in line with market, but it's modest growth as you can see. The result, a huge improvement. France, as I mentioned, difficult market, minus 8%. The good thing in France is, we started the year well. Quite surprisingly, the return from minus 8% in Q4, getting close to the zero mark in January. It's always difficult to see where this is coming from. This might be coming from the fact that politicians or the government in France has announced that there's going to be consistent support in terms of subsidies for the private sector. This might mean that there's a little bit more, I call it trust, and people are investing a bit more. Temporary business is always ahead of the game. Still a tough Q4. As you know, we concentrate on profitable clients, so we do say no to clients who want to work with us at what we think is a too low margin. Despite the negative revenue growth, you can look at the EBITDA development, which is quite good, and that's a result of our strategy in that field. The Netherlands, ABFS paying off, activity-based field steering. The way we go to clients, more commercial contacts is paying off. I mentioned this earlier, Chris organizes his people, every consultant, one day a week in a call center, calling clients, and that is paying off. Overall professionals up 13%. Our professionals business that we're now combining is definitely off to a good start also. Permanent placement growing everywhere, but certainly in the Netherlands. This is from a small base, granted, but 53% up, that's quite impressive. Slight up on cost, so the 250 people, of course, are not in our financial numbers yet. That will be in 2015. A good and stable EBITDA margin, a rather high margin as a result of, well, our business mix over there and also the fact that we contain our cost and certainly our margin, and we grew in perm. Germany. Effectively the most, well, difficult one at the moment. Economy in Germany is okay-ish, not great. A lot has changed for you who know us well, and that a lot has changed in the temporary business. Temps went to equal pay, so the price of a product has risen, and that has led to less demand. Also, and that's funny, the 13-week average calculation rules you see in gross margin, it effectively pays, in Germany, to be ill because then you might get more money than when you work. It also pays to be on holiday. At least this hurts our top line with 3%-4%, and it also hurts our gross margin. This is sort of an anomaly in the system that's created in Germany. We like the fact that temps get paid better. We think that's long-term good for the emancipation of the product in Germany. This 13-week calculation rule needs to go out, we think, because it sends the wrong message. Our workers' council, our own workers' council is actually against this system. We take out costs logically, of course, when the business is flattish, which it is, the EBITDA margin decreased somewhat. Throughout the year, pretty solid picture still in Germany. Belgium. A good development in the EBITDA margin, of course. Strong operating leverage as a result of the costs we took out a year ago. -1% in revenue impacted by strikes. There were three national strike days in Belgium, and that hurts us. Some of our clients were closed. Certainly in our in-house business, as you can see, the growth went down from +13% to 5%. That has picked up now. Belgium starts the year very well, between 7% and 8% growth, so good. U.K., I called it another step. We're definitely not there in the U.K., but again, we double our profits second year in a row, driven by a few businesses, certainly our construction property and engineering business. I don't know if you've visited London lately, but it looks like Dubai with bad weather. There's a lot of cranes. There's building everywhere, and we supply a lot of these people also in infrastructure, so new rail, that sort of stuff. Finance and IT is not too great yet. Parts of finance is, other part isn't. Our education business is doing very well. Our perm fees up 16%. U.K. is a perm business. Iberia. Portugal, Spain. Really looks like the Spanish economy has turned a corner. You see double-digit growth. Could be higher, but we took out some business we didn't like too much that came with the USG People acquisition because of risks or because of low margin. Again, a great start of Spain in the year, +23%. Very happy also for our colleagues in Spain who had a very tough time in the last few years. The market halved, as you might know. Happy there. Also Portugal, doing fairly well. You see the EBITDA margin, very good development. Quick run through the rest of Europe. Italy. Italy is an interesting one because the economy is not doing that great, but the country is becoming more flexible. The penetration of flexible labor on every working Italian, 0.7 was a temp. Now it's above one. You actually see that the economy is not growing in Italy, but our sector is. That's, of course, a development we like. Switzerland doing well, Poland doing well, and a very good EBITDA performance there. Rest of the world. Japan, I mentioned, good growth, 8% in Q4. Australia doing well. Asia, lot of investments in China, Singapore, Hong Kong. Latin America also up, but we're still not making a lot of money here. For 2015, we're going to create a somewhat better balance between growth and profitability. Quite a few of these markets are getting to a critical mass. We now have more than 500 people in China. We know we can make increasing profits there. 2015 for this part of the world, it's still growth, but it's also making money. That's the operational update. Before I go on. For us, this is definitely a moment. Leo Lindelauf worked 36 years at the company. He started when he was 14. We are a company with values. Randstad company values to know, to trust, and to serve. Striving for perfection and simultaneous promotion of interest. You can talk a lot about that, but it's actually your leadership that sort of creates these values and strengthen these values. Leo, you've always been the embodiment of the values in the company. You literally grew with the company. You emigrated from Limburg in the Netherlands to Amsterdam. You took quite some risk. Personally, I'm very happy with the role you played in my first year as a CEO. We had a slightly new team, we had a young team. Your coaching role has been tremendous there. It's goodbye to the executive board. You still stay on for another year, doing some tasks that we feel are very important for the company. On this stage, thank you very much for everything you did for the company. With all that, I give over to Robert-Jan. Thank you. Well, both of my colleagues have said something about the annual report. I have to say something about it as well. Actually, I hope you're going to enjoy the fact that we have moved towards integrated reporting a step further again. We don't get a lot of feedback on it. That's why I promote this now. Second point is that in the context of quite a few failures in the world, failures in companies, we have added to our risk management paragraph how we come to the conclusion that we are in control. Not just that we are in control, but how we get there. It's up to your evaluation. The final point is that we also have included the new style audit opinion again, like we did last year, but a bit more extensive. We need some feedback here to make sure that we know if this lands well. That is my contribution to the annual report. Looking at the income statement for the fourth quarter here, everything has more or less been addressed. Let me just address a few points, specifically from a finance angle here. We have integration costs and one-offs, EUR 34 million. This is mostly the Netherlands, was announced extensively. The second largest part is Germany, but it's only relating to reorganizations here. Last year, actually, EUR 37 million was Belgium mostly, and integration costs relating to USG. It looks as if we have a rhythm of announcing reorganizations in the fourth quarter of the year. That's not the case. This is just a coincidence. If you look at the currency impact here for the final quarter, it was roughly EUR 15 million at the gross profit line, then EUR 13 million at OPEX, which leaves EUR 2 million positive at the bottom line. If you look at it for the full year, it's the other way around because it's very much at the end of the year, the dollar started to appreciate against the euro, but for the full year negative impact of EUR 4 million at the bottom line. That's a different picture here. Final point here, net finance cost. We have roughly EUR 4 million of interest expenses relating to our financing at Randstad, which is the result of our policy on floating interest rates. The remainder relates mostly to currency effects on our short-term positions here. Bookkeeping. Looking at the segment performance. Staffing, in-house professionals. If you look at the EBITDA percentages, improvements across the board, what sticks out here is the EBITDA margin on in-house, 5.8% is pretty good. Cost allocation is always a bit of an art rather than a science, so that might overstate it a little bit, and staffing might be a little higher, but I think it continues to indicate that we have a very successful business here. Let me also point out in in-house here, the second bullet, good growth continues in the Netherlands, Belgium, Iberia, North America, and emerging markets, mainly in the industrial and logistics segment. This is typically if you're well-positioned here, and Jacques referred to it when looking at France. If you look at January, France, -1%, if you're well-positioned through in-house in industrial segment, then typically you really benefit if activity levels are picking up. This is really a strong pillar in the phase 1 of growth. If this continues, that I will get back to at the end. The gross margin connection between last year Q4 and last year being 2013, sorry, and Q4 2014. Actually, the middle explains most of it. Jacques mentioned it already. Our micro-strategy on permanent placement is working quite effectively and is clearly contributing to the gross margin. Operating expenses. This is not year-over-year. This is sequential. Q3 to Q4. The trend here, mostly foreign exchange here. If you look at the marketing expense, that's an addition that is specifically related to campaigns, and it is also the seasonal pattern. FTE growth, wherever we do see growth, we follow that. We typically are in phase 1 of growth. Phase 1 of growth means we try to do more with the same people, paying extra bonuses and commissions. Then you get quickly to a level that you have to start adding some people, but only field. Relatively limited gross, the productivity should improve. Incremental conversion is typically high over a period of 4 quarters. It typically ends up in the range of 70%-80%, if it is well distributed across the world. The U.S. has been growing for a longer period of time. There you see different numbers. Then you move to the phase 2 of growth, where you start to really add people on a larger scale. Then the incremental conversion, incremental conversion indicating what is retained of additional gross profit in EBITDA. The rest is spent on OPEX. It starts to move towards the 50% area, only in the phase 3 of growth, which lasts long, you really start to add branches on large scale. You might start to add people in the back office, that is really quite a phase ahead of us. We're not approaching that by any means. We are adding branches as we speak, but most of that is in the in-house business, and this is where we set up on site of the client. Net debt, the balance sheet. It looks quite nice. If we start at the bottom here, 15.8% return on the invested capital gradually improved throughout the year to this level. Effectively, this is like the economic return. If you look at where we put the money, it's mostly in goodwill and intangible assets, EUR 2.6 billion. Operating working capital is half a billion EUR, that's the balance between the receivables from clients and the payables, for example, to the Social Security authorities, to tax authorities. That is 2.8% of revenues. If we grow our business, we typically, on average, it depends and it differentiates per market, but we typically need 3% rounded of our revenues on working capital, which explains that growth from a financial standpoint is almost unlimited. There are no real limits to growth. We need to make sure we get the right receivables, and we need to make sure they pay on time. We're doing a pretty good job there. This tells you that this is not an obstacle at all to any growth ambitions we have. The net debt level for 2022, that got quite a push at the end of the year, because if you look at DSO, it's been rather stable. Towards the end of the year, our efforts to reduce it further were successful. We've looked at the January numbers to make sure it was not just December, and also that month looks good. It really indicates that we are rather successful here. If you look at the 2014 full year charts for bad debt, what hit the P&L, it was roughly EUR 12 million, which is seven basis points of revenue. Across the board, our receivables management has been doing quite well. The free cash flow of Randstad, up significantly to 61%. We got a little help here because 2013, the fourth quarter here included an item of EUR 131 million, which was a long lasting and a longstanding payable to the Dutch government, where we had a special arrangement, this was dealt with last year, not in this year. We have our contribution from EBITDA, the change in working capital, a positive here. We have our taxes paid. This is the provision. We have provided in the P&L, which is spending in the new year. That's why it's a positive here. If you look at our net additions, this is our CapEx, EUR 23 million in the quarter, EUR 63 million for the full year, roughly equal to depreciation in the company. Net finance cost, I just elaborated on that one. Pretty solid story here. If you then dive into it a little bit, this is reflecting the net debt levels of Randstad on this axis, going from north of EUR 2 billion to a decline, then acquiring here both SFN and Fujitsu staff, and now reducing to a level of around EUR 400 million. The blue line is the leverage ratio, and it is shown here. We've had a few peaks north of the 2 that we consider to be our maximum, and that was due to the volatility of our earnings. We are very careful here in addressing this properly, and that translates also into our M&A policy going forward. We clearly are looking for bolt-on acquisitions. We continue to do that in the countries where we operate. We are happy with the geographical footprint. We are not looking to add countries, but we are looking to become bigger in the countries where we operate or in the segments specifically where we operate. We have a pretty strong sort of economic return policy here. That means it is not that easy because the value of Randstad has increased and the value of many targets has increased. Effectively, that translates to us not expecting that we are going to announce to you a deal anywhere very soon from this moment. We continue to sort of look at relevant opportunities across the globe. Whenever they are available, we will be involved. Again, back to this slide. Strong DSO performance really paying off here. Productivity is another key element here in our financial performance. This is gross profit earned by each and every FTE in the company, including the board, everybody in the back office. This is what we earn on gross profit, and gross profit is the difference between revenues and the wages and et cetera, benefits paid to flex workers. This is quite a high point here. After that, we did go through the crisis. We never really yet returned to the level pre-crisis. As you can see, we still haven't arrived at the level in the past. In the meantime, we had some inflation, not a lot. That should also be compensated for. How do you get it up here at the very end? There are a few components. Activity-based field steering, which means you get more GP out of the people in our company. That is what it should lead to. The second point is delivery systems. We are looking at making sure we deliver the clients in the right way, most efficient way. Large clients, preferably through in-house and not the branch network, or central delivery. The final point is what we announced last year, adjustments to the head office and the back office on the back of our benchmarking exercise, which we are currently addressing globally. That should help us to improve this number. Then very proud, of course, the dividend. We wanted to share this with you, a bit of flashback. Of course, we had some difficult times during the crisis to protect the balance sheet, but across the board, you can see here the dividend improved towards the last 10 years and now EUR 1.29. It is a straightforward translation of the policy. The policy is between 40%-50% of adjusted net profit. The range, we choose the point in the range based on the balance sheet. Balance sheet good, high end of the range. That's the simple translation here. The default is cash. The choice is between cash and shares. Last year, more than 60% of the shareholders took stock, including the founder of Randstad. The outlook for the period going forward. Our organic growth in Q4 was 3.4. It was up 6.5 in January. We already made the point in the press release, bridging days are always making the calculation a little bit more complicated. I'm not going to take away the positive news here. I'm just trying to make sure that the real underlying trend is visible. If you look at the last week of the year, the last week of December, in 2013, there were two December working days, and in 2014, there were three working days. That adds one day in the calculation if you calculate the growth per working day. That day is in between Christmas and New Year, not many people working. This is where the formula is correct, but the outcome you need to think about a little longer. In January, it's the other way around. That's why our assessment is that the 6.5 might be a little high, but it's certainly north of five. We do see the February volume. We don't plan at Randstad because we need to adjust. We spend all our time and money in making sure we adjust everywhere in the world to whatever happens at a certain point. That means we expand whenever necessary, whenever the opportunity is there. We don't have a huge pipeline, but we follow the volumes every week at board level. If we look at the volumes in the month of February, they are in line with what we see in the month of January. At the very end of the month, we know the number in revenues, but we follow the people, the number of people working, and we follow the volume of our permanent placement business every week. Please note that the first quarter is always the weakest quarter of the year. Many of you know, but the strongest quarter is Q3, then you have Q4, then two, then one. It's always a soft start. It seems that many countries are closing down business around Christmas, it picks up again. Same number of working days. We expect a moderate decrease in the underlying cost base sequentially, really moderate. Note, please, that as per the 1st of January, we have some salary increases across the globe. We clearly have growth in some parts of the company that we continue to invest in, be it in countries or in segments. The restructuring effects are coming through in the first quarter, it starts to come in the course of January. We'll see that moving on. We do expect the FX sequentially to have an impact here on OPEX of, as we state here, of EUR 23 million, assuming the level of the previous periods. A substantial impact here at the OPEX level. We have our annual general meeting in April on the 2nd. These are the exit rates of the month of January. Jacques referred to quite a few of them already, I think across the board, quite nicely, the Netherlands clearly sticking out. Germany was elaborated on by Jacques. If you look at the Iberian situation, we even have the Iberian team sitting here or the Spanish team sitting here. Quite nice performance in the month of January, adding up to the 6.5. Finally, this should be a bucket in which we have the balls that will help us to perform better. Just repeating it, the cost management, our ambition to save EUR 30 million-EUR 35 million in 2015 and 2016 in the head office, back office. Our activity-based field steering helping us to improve productivity. Our assumptions that you gave us in your consensus estimates having been applied here, then if we grow and if we continue to work on our strategy in permanent placement and professionals and SME, we'll see the business mix improving, also contributing to a better bottom line. This is just stating again, repeating what we shared with you at the Capital Markets Day, our 5%-6% ambition is within reach, just making sure I use the right words, within reach for 2016. Thank you. We're now moving to Q&A. Okay, let's start in the room first. Please really stick to two questions. David, go ahead. Thanks, Arun. David Rabobank. First of all, on the excess capacity, could you highlight the markets where you see the most excess capacity? Maybe also broadly quantify that in percentages. Then secondly, to the Netherlands. I remind that during the Capital Markets Day last year, you specified the margin of 6%-7%. If you look at the current growth in the Netherlands, it looks much better than the pace in Q3 when you mentioned this for Q4. Is it right to assume also looking at the cost savings you announced that, let's say, it looks a bit on the conservative side, your previous margin guidance? Also looking at the 6.1% you achieved for 2014. Thanks. David. Your first question on excess capacity. We think we have excess capacity in the operating companies where we have just started to grow. The U.S. clearly is in a different position. Japan is in a different position. China and so forth. Clearly in Europe, we have excess capacity, and our estimates would be that is in between 10%-20%. Of course, you need to be a little luckier because if you have excess capacity in Northern Germany and you grow well in Southern Germany, that's very difficult to net out because that's quite a distance. Your second point was on the Netherlands, the profitability. Right. The savings that we announced in the Netherlands, I think Chris was also quite clear about it, are also intended to make sure that we retain our competitive position and that we are able to continue our profitability around the level where it's now. In the meantime, to again, get back to market share and eventually gain that. That's the policy here. A quick follow-up then. Basically, you're saying that the gross margin underlying is going down at a relevant level. Probably you will not be willing to quantify that, but it's not by 10 basis points down. In the Netherlands. The Netherlands is a bit like what you see on a group level. There's definitely pressure with large clients. We landed quite a few nice, big clients in the Netherlands. That helps us grow. There's absolutely pressure. We have the growth in the SME. We have the growth in the PERM business. That's offsetting. Pretty stable as a result of all that. Gross margin. Hans. Yes. Looking at France, for this year, there's an additional relief expected from the so-called family tax, so lower contribution to that. How do you see that impacting the competitive environment? Currently, already your profitability at 5%. How do you see it going forward? It's already at historically high levels. Secondly, on the cost and the incremental conversion ratio, which was quite high in Q4. A clear pickup compared to Q3. You already indicated that you expect to come down. First of all, what are the drivers that it was so high in Q4? Because I can't calculate it from the numbers. Secondly, how do you see that going forward? Do you still see the same trend or maybe you're a little bit more positive on that number? Let's do France first. We've been pretty consistent in maintaining our price levels. Therefore, we were below market. There is another relief coming in. That's one, but more importantly is the fact that the French government has stated that reliefs are going to be long-term. We think that will lead to more demand, so that's good. For 2015, we are going to be a bit more open to give some of the subsidies away if we get business for it because we've seen some mid-size players gaining quite some revenue on this one. We're happy with the fact because that's easiest to manage for your people to say it's a no always. Now it's a no, but. On the incremental conversion ratio. Please note that we have a seasonal pattern in our gross profit, but not the same seasonal pattern in our cost base. For that reason, it makes sense to look at the ICR for a period a little longer than just a quarter. It helps you if you look at it for a couple of quarters in a row. Actually, Q1 last year was also high. I would like to sort of refer back to the model that I explained. High incremental conversion in the first phase of growth, 70%, 80%. Going back to 50% in a period which is typically starting from the second year of growth and only over time gradually converting to the level of EBITA. For 2015, you should consider this to move from the high levels where we've been towards the 50%, but hopefully still staying north of it. It very much depends on the speed of growth. There's also one specific thing on Q4 last year. If you might remember, we put in a marketing boost. It's around EUR 15 million. That's also a reason why you have a somewhat higher incremental conversion than you would normally see in the development that Robert Jan just painted. Yeah. If you take that one out, the ICR for the last quarter of 2014 would still be north of 70, in line with what I just explained. Konrad. Hi. Konrad Zomer, ABN AMRO. Two questions. The first on the U.S. Can you update us on the potential impact that the integration of maybe the professional business following SFN could have on top-line growth? Second question on the Netherlands. You told us at the Capital Markets Day in November that your SME revenues at Randstad and Yacht were up more than 20% in the last few months of last year. That Tempo-Team was still a little bit below that. Can you update us on the last few months and whether or not the margin difference between SME Randstad and Yacht and SME Tempo-Team is very big or not? Thank you. Okay. Well, on the U.S., we have an expert in the room. Could you clarify your question? The integration of SFN is sort of behind us, so I'm not sure what you mean. I'm talking about the integration of the professionals business. Right. I know that the general staffing business of SFN, that integration is fully behind you, but I seem to remember that there's still some final integration that needs to be done. Yeah On that other part of the business. I wouldn't call it integration. The business is fully integrated. We are in the process of upgrading the financial systems, the back office systems, of various professionals companies and also our Randstad Sourceright company. That's a separate activity. That is going forward. We're doing it within our regular operating budgets. It's probably a two-year process, but it's nothing impactful or transformational. We hope over time also that will play a role in bringing down our head office costs. Every time we bring in one of the companies, we are seeing decreases, but I think that's already been communicated, the cost savings we anticipate around that. Okay. On the Netherlands, it's a pretty similar development we see at Tempo-Team and Randstad. Tempo-Team had somewhat easier comparisons in 2014, therefore their growth was a bit higher. They're also, in the same way as Randstad is doing it, is investing a lot of time and effort in the SME and also at Tempo-Team that's paying off. The margin differentials in that segment are not great. It's similar. We're happy with both. Okay. Next question. Mark. Two questions. First on Germany. Jacques, you mentioned still a difficult market, if I take out the pricing impact, is it then fair to say that the trend moved from, say, -5 in Q4 to around -2 in January? Because the pricing component, I think, kicked in last year also in the first quarter. Can you perhaps give a bit more feel. Sure on what's going on in Germany? Yeah. It seems to me underlying that there is some improvement. Underlying, it's still pretty stable from a volume point of view. We are at -5, -6 in volume, which is already what we saw. The level is decreasing between volume and price. Maybe to elaborate a bit on Germany, what we do see is that as a result of the price increases, the clients with strategic flexibility are not toning down. They still need these people. It's an integral part of how they run their business, which are predominantly the large clients. The SME clients in Germany, where it's a bit more of an ad hoc relationship, there we do see less demand. We think over time they will get used to the changes. Yeah, an SME might have asked for a temp a year ago, and now if they ask for a temp, it's very much more expensive. Also because there was a minimum wage increase in Germany. We do see some fallout there. Hope that it picks up, we don't see the signs yet. It's pretty stable in Germany. Unfortunately, no pickup yet in January compared to December in volume. Still around -5? Yeah. My second question on the Netherlands. Robert-Jan, did you say that you expect profitability in 2015 to remain at the current level, say the 6.2% you reported on 2014, while the target is towards 7%? You've got cost savings coming in, you've got productivity increases. I'm a bit puzzled on what your statement actually means. We're going to involve the expert here now. Chris is already preparing his notes. I think Robert-Jan makes the right comment in the question what was before, because we also want to invest, and we want to stay with the market. We will see, I think, the range of 6%-7%, as declared also in London. No changes there. I have to assume that you don't invest all the cost savings away and that there will be some operational leverage. Yeah particularly with the opportunity you mentioned. That's also fair. We can talk about the percentage. The real ambition is to get a revenue volume out of this, on which we get the percentage. Okay. Now we understand each other. Thanks. Okay. Yves. Hi, good morning, gentlemen. Yves Franco, RBC Securities. On the Netherlands, on your professionals performance there. I seem to see a very large difference between your Randstad and Tempo-Team Professionals versus your Yacht. Where will we see this going as from 2015 when the reorganization will be completed, and what's explaining this big difference? The second question, still an underlying stable margin in Europe, stable gross margin, but negatively affected by the mix. Is that the geographical mix, both, or do we see some business lines there that are less profitable? Thanks. Okay. I'll take the last one, Chris, you do the professionals business in the Netherlands. We do see blue collar picking up. It's the mix again. You see in-house growing faster than staffing, and that's also overall the case in the Netherlands. We have a great conversion, of course, from gross margin. That's the underlying gross margin pressure because of business mix, but still translates into a good return on EBITDA. When it comes to the growth of professionals and the difference between Yacht and Randstad and Tempo-Team, I think I tried at least to explain also in London that Yacht is based actually on a lot of indefinite contracts, which makes it a bit more difficult to grow in certain markets. We're changing this, Randstad and Tempo-Team Professionals is more based on a mix of contracts, there's more short-term and also more flexible contracts, I would say. If you look at the last quarter, it is 13% of growth in professionals in total, I expect actually to continue that growth rate. Continue that. Yep. What you see is that Yacht is an established business, and sometimes it's very difficult to take an established business and sort of recreate the buzz that's very necessary in our business. What you see in Randstad Technologies and also Tempo-Team or Randstad Professionals, it's sort of a younger organization with a lot of energy. We also hope that by merging this, we get a little bit more of this excitement into the total professionals business, also helping the former Yacht business mix up to a higher level. Yeah. Okay. Thank you very much. Now we move to the call. Please, can we have some questions from overseas, please? The first question is from Toby Reeks of Morgan Stanley. Toby, please go ahead. Hi, guys. I've got a couple as well, if I can. You talked about the drop-through rate a little bit. I'm assuming we're moving into phase two, so sort of towards that 50%, but hopefully a little bit above this year. Can you clarify whether you're including restructuring benefits within that, or should we think of that as an underlying number? The second one is on, I guess, around the capital structure. You've obviously said you're targeting bolt-ons. Could you give us an idea of what sort of size you mean by that? If we're not expecting any deals sort of reasonably, when do you think the sort of cash on the balance sheet becomes something you'll need to think about a bit more? As an extension to that, when do you actually get the cash from the CICE? I think it was deferred, wasn't it? You should start getting that in the next couple of years. Thank you. Yeah. Toby, it's a bit difficult to hear what you're saying exactly, but let me respond to what I think I heard. You were talking about the drop-through rate, which is effectively the incremental conversion ratio. Indeed, it includes the savings from the restructuring, but it will bring us a bit higher in the range. Of course, you'd like to know precisely where we're going to end up in the range. Well, actually, we don't know because it depends on the growth rates and the opportunities for investments that we're going to see. I expect these savings to be relatively easy to identify going forward. Your second point is about M&A. I think I heard you ask about the profile of acquisitions. Yes, indeed, bolt-on, as I said, in the countries where we operate. Typically, we would look at mid-sized acquisitions here with a clear ambition to fit strategically, to be able to manage it successfully, and to maintain a strong balance sheet. Which means that the leverage ratio should not be north of two. I heard you ask questions about when will you arrive at a net cash position. Well, if the current rate continues, it's unavoidable that we're going to end up with a net cash position somewhere next year, probably not at the end of the year if you just sort of extrapolate current developments. Please note that throughout the year, the second quarter shows the highest net debt level due to dividend payout and payout of holiday allowances. Clearly 2016, if it will be silent, so to say, on acquisitions, the balance sheet will show a net cash position. As we said, if that happens, we will come back to you. Okay. Sorry, just two points because I do not think I came through clearly. The first one is, what do you mean by mid-size deal? Could you sort of quantify what that would entail? Secondly, I think you get cash from the CICE, which was all deferred. When does that cash actually come into your cash flow? Yeah. Mid-size means EUR a few hundred millions. The CICE is paid after three years, as from the moment it was sort of earned. That means it starts to come in in 2017. May 2017 as well. Yeah. May 2017, we will see the first payments coming in. The balance sheet at the end of 2014 contained EUR 170 million of CICE. Thank you very much. The next question is from Chris Gallagher of JP Morgan. Chris, please go ahead. Good morning. I just wanted to clarify on what you see in January and February. When you talk about February being at the same kind of volume levels as January, do you mean the 6.5% growth, or do you mean the around 5% underlying that you had mentioned? Yeah, I meant volume, 6.5 is revenues. We don't measure revenues on a weekly basis, we look at volumes. What we can share with you is the volume development, and that typically translates in more or less similar revenue levels, given the fact that business mixes don't change that quickly. I was referring to if you look at revenues, then it should build from the north of 5%. I didn't say five, I said north of five in January. Thank you very much. The next question is from Nicholas de la Grense of Bank of America Merrill Lynch. Your line is now open. Morning, guys. Two questions, please. The first one just on France. Can you give us an indication of what the underlying pace of decline might be there? I'm just trying to interpret the weaker than expected 8% in the fourth quarter and the much better minus one in January. Was the holiday impact that you discussed at group level, particularly acute in France? The second question is just on the tax rate guidance for 2015, 27%-30%. Should we apply that going forward beyond 2015 or are there specific reasons why it's going to be lower this year? Thanks. Well, on France, we're approaching the zero line. That means that currently as we see, we're very close to the zero mark in our growth rate in France. We're happy there. We also see the market getting back again. It looks like a You can never say stable, and you can never say solid because you never know. A good start of the year, which is not due to any technical calendar effect, but looks like an improvement for ourselves. We're currently growing around 20%-0% in in-house. The tax rate indication, we're trying to help you with your calculations, and now you're asking me to give you the tax rate beyond 2015. It's 27%-30% effective tax rate for 2015. Beyond that, I can't give it to you. It's very much depending on the mix of growth. If we grow rapidly in, for example, the U.S., the corporate tax rates goes up. If there's more growth in the Netherlands, it goes down. That is currently this is our assessment with possible scenarios for 2016. You'll have to wait a little. Thanks. Just one quick follow on with France. If there's no particular calendar effect in January, that minus one is obviously a pretty strong number, and we've had the Prism'emploi data, which showed that the number of temps at work in Jan was minus three. Do you feel that you're no longer underperforming the market there? Does that have something to do with the comments you mentioned about being a bit more flexible on price discussions? No, we're definitely getting closer to market, that's true. Also, there are some comparisons which are not too great in France. We ended with slight growth in 2013 Q4. Therefore, Q4 was a tough comparison base. Then we started 2014 rather weak, which continued throughout the year. There is some easier comps there, but there's also improvement. Okay, thank you very much. Our next question is from Tom Sykes of Deutsche Bank. Tom, please go ahead. Morning, everybody. Just on the gross margin development in Q1, there's obviously quite a and specifically just on the temp gross margin. You spoke about what may be happening in the Netherlands, but there's quite a bit going on in terms of perhaps non-wage effects in the U.S., the annualizing of CICE, other subsidies, Germany, et cetera. What's your view on where the overall temp margin or the basis point movement in the temp margin is going to come out at play in Q1 as it stands versus that -10 basis points in Q4, please? It looks like a pretty stable picture. On the one hand, you do see pricing pressure with large clients, and sometimes you go ahead with it, sometimes you don't. On the other hand, we do see in January the perm growth continuing, and as you've seen that offsets, certainly in Q4, offset the margin going down in staffing. Yeah, pretty stable picture, Tom. Yeah. Okay. It was really excluding the perm effect. When one looks at your perm growth, are you coming in at the market price point on perm too? Are you being commercial in perm to try and build up your market share? Obviously it's still coming in at 100% gross margin, but you might be a little bit cheaper than others. Yeah. Where were you on your price point there? It would be a first in any service, Tom. You know as well, we've never competed on price, and we always compete on quality. Definitely not growing perm because of pricing. Robert-Jan alluded to this being a micro strategy. Certainly perm in staffing, Linda's business in the U.S. has done very well and has increased their perm as a percentage of gross profit from 3% to 7%, close to 8% in her staffing business. The European businesses are taking on board the way they've done this, and so far this is very successful. The European businesses also are at like 2%, 3% of total gross profit in perm. These are basically the same profiles you see in staffing, but we're training our people to sell both. It works very well. It's a profitable business, it's not on price, and it's growing, and we don't see the end of it yet, honestly speaking. Okay, great. Thank you. The next question is from Laurent Brunel of Exane BNP Paribas. Laurent, please go ahead. Yes, good morning, guys. Two question on my side. First, regarding your activity levels. Can you update, compared to what you said during your capital market day? It was up 29% in the last six months. It really shot in Q4, please. Second, a follow-up on France. I've understood that the growth well, the improvement is driven by your in-house services. Can you maybe comment by segment? Is it the auto sector which is picking up or? Thank you. I understood your last question, not your first. In-house is, of course, by nature, certainly in France, a blue-collar business. It's in automotive, it's in food, it's in logistics, and there's not so much sectors because we open individual new branches, and they could be everywhere because we, of course, sell to many potential clients. Not one sector sticking out there. Just a second. It's going over activity levels. Okay. Regarding my first question, it was regarding your activity levels. Yeah. You communicated on the 29% increase. Oh yeah. Activity levels. Well, of course, it's driven by quite a few countries in 2014, which came from low levels. In the Netherlands, there's quite an increase. Also in Germany is quite an increase. Normally this percentage increase should go down. That's not a problem because also here, there's sort of a cycle. You start with increasing your sales levels, then you look at your conversion. How much of these sales activities leads to more business. You look at the quality of the calls of your people. You look at the quality of your database. You look at the quality of your web presence and your candidate handling, and then you take it from there. I would expect the increase to go down, but at the same time, the conversion to go up, but that's always a tough one to calculate. Okay. Thank you. Our next question is from Andy Grobler of Credit Suisse. Andy, your line is now open. Hi. Good morning. Just a couple of quick questions from me. Firstly, on France, you mentioned the French government has talked about more consistency in terms of subsidies. Do you think that also applies to CICE, and does that mean you're more optimistic, I guess, incrementally that CICE will be maintained into 2016? Secondly, just on finance charges. You noted the FX impact within Q4. Do you expect similar impacts through the start of 2015? Thank you very much. I'll take the last question first. The answer is yes. Yes. We're also absolutely certain that we'll get CICE in 2016 because it's a three-year scheme. It was announced as such. It's not necessarily the fact that the pure technicality of CICE as a support package will continue into the years after, but there will be probably different or similar support packages going forward. The technicalities we don't know. The government has been quite vocal and I met with Valls personally, the Prime Minister, and they really want to support the private sector. They do this in the French way, which is through subsidies. The fact that they are now so vocal and sure about it, we hope, will help the confidence of investors in France, which is important. Okay. Thank you. The final question from the phones is from Angus Staines of UBS. Angus, please go ahead. Hi, guys. I was just hoping you could confirm that the conversion ratio guidance assumes constant currency and if possible, maybe even give some indication of the relevant or the relative currency impacts on sales compared to costs compared to the net finance charge. It's constant currencies, yes. Roughly the formula is simple. If you look at Q1 2015 and you compare year-over-year, taking the current levels, the impact at OpEx level is EUR 38 million. GP would be EUR 43 million, leaving the EUR 5 million benefit at the bottom line. I cannot sort of get you further details on the FX. It will continue to show up given the current trend in Q1. This is bookkeeping. Economically, we aim at doing the things right, but bookkeeping forces you to present it in a certain manner. Fair enough. Thanks. Okay, thank you very much. Maybe as a final question. Oh, we have two questions left. First give the floor to our old colleague, Piet Hein. Piet Hein, go ahead. Yeah. A couple of things, not too difficult I think. You've been very nice in quantifying the gross margin online of year-over-year developments for almost all regions. Could you shed a little bit of light for quantification on Germany and the Netherlands as well? I think that would be consistent. Secondly, could you elaborate a little bit more on how the volume development in Germany would go, let's say, beyond this soft patch? We're at very low levels of unemployment. Is there still scope to see, let's say, high or double-digit numbers growth going further into this cycle in Germany? Could you shed a little bit more on the longer-term outlook for Germany? Okay. I'll handle both questions. Piet Hein, we don't give gross margin developments per country because we do give EBIT growth and basically everything else. Every country you give the development in gross profit. Yeah. Okay. Robert-Jan will elaborate then. Germany, politically, things are going not in the right way. Germany was the sick man of Europe some 15 years ago, then under Gerhard Schröder, which probably you were still working with us. He visited some branches from Randstad to look at the model in the Netherlands. That was effectively adopted by the social democrats in Germany. The Hartz law made Germany flexible, created a lot of jobs. It wasn't good for the Social Democrat Party. They lost a lot of votes. Now we see the Social Democrats Party coming in again with a very old-fashioned agenda, bearing down on flexibility, increasing minimum wage in the eastern part of Germany to EUR 8.50, where it's, as I mentioned, EUR 2.65 in Poland, 40 kilometers to the east. We think that's bad news. We think it's old-fashioned. We're lobbying hard against it. Merkel doesn't give a lot of pushback. They have some dogmatic points and yeah, that's not great. That won't help penetration rates as such. Germany was the only country in Europe, which in 2012 had a higher penetration rate than in 2008. All what we lost in the Netherlands and France has not been gained back. It was in Germany. Yeah, the last two years have, in that sense, not been great. Yeah, remains to be seen. Certainly also in Germany, we concentrate on SME business, white collar business, and perm business. Also changing our business mix a bit away from where we were to see some compensation there. Currently not enough. A little help from my side on gross margins. In the Netherlands, it's roughly flat. There are a couple of components here. Social securities have changed. Overall it's just a little bit below, but not much. If you look at Germany, it is below the previous year. Please refer to what Jacques explained on the legislative changes, the 13-week rule. I would say that on an annualized basis, would be a cost of around EUR 20 million. That's very substantial. Of course, the margin as a percentage in Germany has gone down also because the price increases, but also the cost as a percentage has gone down. In that sense, they talk to each other. The margin nominally is pretty flat. That's still okay, but as a percentage, it goes down. Final question for Hans. Two questions, if I may. First of all, on Spain, we saw quite a pickup in January in growth rates. Of course, you indicated that you shed some- Yeah let's say, former business of USG operations. Is it, let's say that the comps are becoming somewhat more easy? That's the main reason that you see a big jump? Or are there also underlying drivers that you really see that you are gaining clients and traction? Secondly, on your dividend policy and M&A. So far, we have, let's say, discussed quite a few times over the last few quarters what you should do with your cash and increasing dividends. In that moment in time, you always said, "Well, of course, we have to look at M&A," those kind of things. This time, the statement was quite clear. If the balance sheet is strong, we will be in the upside, the top end of the range. You were more clear. That also means that you, let's say, see that M&A is becoming more difficult. You already indicated that prices are a little bit on the high end. Is that really belief that M&A is really becoming more difficult? More difficult to get very interesting targets? Yeah. That's exactly what I said. It will be a bit more complicated. The choice for dividend is clearly following the strength of the balance sheet. We're looking at mid-size deals, as I explained, and we'll continue to do so, and we might identify one or more during the year. We'll see, and we'll get back to inefficiency in the balance sheet only when we have net cash in the balance sheet. Really, we're a high service company, of course, and we've brought you just for today, a specialist on Spain. Rodrigo, our MD there. Can you comment on the Spanish developments? Thank you. I would say on Spain, it's a combination of things. We are happy with the turnover rates we are seeing for the first time in several years. I would say it's a combination of different things. First thing is in perm, both Randstad Professionals and perm staffing. We have developed a model, a business model that is somehow allowing us to beat the market quite consistently. That's the first part. The second is linked to USG because comparables are getting better now because the divestment that previously Robert-Jan mentioned were made at the beginning of last year. Third thing, we have been rebalancing the company in the second half of last year, again back to growth, because as you have seen, we have got a solid improvement in profitability. We were feeling comfortable with that. Mainly through activity-based field steering, we have been rebalancing back to growth to catch the market moment that we are starting to see there. Against pretty serious comparables. Okay. Sorry. If you can go ahead, one question, please, and then we move to coffee. Thank you very much. Sorry, one last question from me. The sickness thing in Germany. It was implemented in, I don't know precisely when, but is it the first quarter you mentioned that there's such a severe gross margin impact? Is this the first time, or was it also there previous quarters, or should we see this as how should we see this going forward in 2015? Of course, we mentioned the total effect for the full year, that's why it's a big number. I or we commented on the fact that this was a funny thing, and that sickness was relatively high as well. Normally, you would see a sickness rate of, in the summer at least, of 2.8%, and we were above four in the summer. You know something's wrong. It's a funny system. You work with a client for a few months, and your wages go up. That's not to say what you're going to make at the next assignment. If you know that it's going to be lower, something happens. I don't know. Headache, whatever. You fall ill. In the Netherlands, we are privately insured, we take the risk of illness ourselves, and we got an operation in place to assist our people getting back if they're ill. In Germany, it's still pretty old-fashioned. You can't even really call the temp. It's still the system we had in the Netherlands years ago. You go to a doctor, he says, "Ooh, you don't look good. Please take two weeks and come back." In temping, it's a day business, we want you to be back if you're not ill the day afterwards. We cannot really touch those people. That's why and the same, in a way, goes for holiday. You also go on holiday if your next assignment sort of is at the low end. These are funny effects, and we saw them coming in because people get used to it. We saw them coming in more. Yes, this is also going to be part of the game for 2015. We're trying with our price increases to sort of offset this to clients. Compared to the fact that also the bill rates went up, that's going to be tough. Okay, thanks. Okay, thanks everybody. Thanks for showing up. I invite you all for some coffee and some refreshments. Thank you very much, and see you next time.