Good morning, ladies and gentlemen, welcome to the Randstad first quarter results 2014. My name is Dan, I'll be the operator for your call this morning. I would now like to hand over to your host, Robert-Jan van de Kraats, to begin today's call. Robert, please go ahead.
Hi, good morning. Welcome, ladies and gentlemen, to the Q1 2014 results call. I'm sitting here together with Jacques van den Broek, with Jan-Pieter van Winsen, but also with Andrew Cook, who recently took over from Pascal Sluiter as the number two in our investor relations department. Of course, I'm also supported by other colleagues, who help me to deal with your highly complex questions that might come up. Please, when discussing the Q1 results, realize that typically in our seasonality, Q1 is the softest quarter of the year. I'm moving to slide five right away, which shows you profitable growth and strong cost control, as we've also stated on top of our press release. If you look at the organic growth per working day, it was up by 3.6, and March was up by 3.5.
We had a pretty strong currency impact, which was compensated by the USG acquisition, which was an acquisition which brought us roughly EUR 400 million of annual revenues. Typically, our revenue trends are a bit erratic, so straight lines are not common practice. Please keep that in mind when looking at the numbers. Our perm business increased by 9%, which is the best performance over the last two years. The gross margin was supported by an increased level of subsidies in France. The operating expenses, when you look at it sequentially, decreased by EUR 34 million, which was the result of the take out of the one-off in Q4 in marketing, which was roughly EUR 17 million and which is clearly paying off, and I'll get back to that when discussing the various countries. Also the result is influenced here.
The OPEX are lower due to the Belgium restructuring, which kicked in in the fourth quarter of last year. The EBITDA margin came out at 3.1% compared to 2.4% last year, and it's reflecting a strong incremental conversion. Incremental conversion is the % of additional gross profit that is retained in EBITDA. As such, there's a very limited addition to the cost base relative to Q1 last year. On slide six, you see the trends in our market. We see growth in various markets, in Germany, Belgium, Iberia, et cetera. Also in the U.S. we see a recovery of the growth. In March, it's +3%. We also see accelerated growth in Japan and the emerging markets. Through the quarter, growth went from 3.2% in January to 3.5% in March, and going forward into April, we do see that trend in the month of March continued.
North America on slide seven, back to growth in March, which is clearly a return on the marketing campaign in Q4 and on the increased efforts in activity-based field steering, as well as an addition in headcount in the second half of last year. That has an impact at the bottom line, so the costs have increased slightly to support this, and we can now see growth coming through. Revenue for North America in Q1 was at -1. But if you look at US staffing and US professionals, we can see that staffing improved to 5% growth and professionals was flat in the month of March, which was clearly an improvement. Within staffing, we did see an even better improvement of the gross profit, also resulting from the strong perm growth, 12% up.
If you look at the professionals business, as I said, it's flat in the month of March, -2 for the quarter, and it's clearly supported by investments in IT, which came back to growth. We also see the finance segment improving following some organizational changes. Perm up also here by 8% compared to 1% growth in Q4, and we have somewhat higher pension medical claim in wage taxes. I would say the quarter is a bit more loaded than it was last year. I would say the impact is $2 million, which should level out throughout the year. Our Sourceright business up by 8%. Canada is in decline by -5. That seems to be a more difficult market. Moving now to France on slide eight, shows improved profitability. The revenue quality remains key here and retaining the CICE, as intended, is our top priority.
Revenue came out at -2, which is equal to the previous quarter. We see somewhat improving trend throughout the quarter. Good performance in the SME segment. Unfortunately, perm fees down by 4%. If you look at the gross profit, there's clearly a delta which is supported by, on the one hand, the fact that the CICE rate has increased from 4% to 6% of the underlying salaries up to 2.5 times the minimum wage level. I want to add here that the signals that we have received is that as from 2015, the outlook continues to be good. There's clearly an intention at the level of the government to either continue this or even expand this system. In Q1 last year, we recognized 50% of the subsidies, given the uncertainty of how to deal with it.
It increased gradually over the year, last year to the mid-80s. In the beginning of 2014, it's just a little bit more now. We've got pretty strong cost control. Costs are down by 5%, which is also the effect of the reorganization last year. The merging of the various branches is on track. EBITDA margin now at 4.1%. The Netherlands on slide nine, revenue at -1. It's not really improving, but that is something we mentioned in the previous discussions or call. We can see that over the last years, Randstad has performed well, especially through its focus on large clients, and as a result, it has outperformed the market for quite a while. Now the SME segment is starting to come in as well, and there we are a bit unhappy with the performance as we have stated before.
We have reinforced our focus on this segment with very intensive activity-based field steering, and we expect this to pay off in the course of this year. Gross profit was supported by perm, which was up 24%, and given the share of Gross profit, we still have quite a way to go here. Cost down by 3% sequentially, also as a result of the lower marketing cost, but also FTE is down and the EBITDA margin at a solid 5%. In Germany, page 10, a stable volume trend. Revenues up by 11%, including a significant price effect, which is the result of collective labor agreement changes. That leaves 2% for growth effectively in the volume, but it is mainly additional hours spent by flex workers. We did see good growth in IT, in Inhouse, and also our Tempo-Team business in Germany.
I just want to point out that the complicated consequences of the collective labor agreement, which were implemented as from November 2013, have been handled pretty well. We also have a stronger focus now on the SME segment, on the perm business in Germany, and on getting the right delivery model matched with the clients. Gross margin is clearly reflecting the collective labor agreement changes, but also the fact that last year, Q1, we did have a higher sickness rate, and this time it is more normalized. It is at a lower level. We are making good progress with the price increases in Germany. Operating expenses are up 5%, but sequentially flat, and the EBITDA margin has improved by 80 basis points to 3.9%. Belgium.
On slide 11, we went through a restructuring in the fourth quarter of last year, and it is always pleasant to see that immediately after that, we are getting back on track. Revenue growth now at 4%, Inhouse back to growth at 3%, and Randstad is ahead of the market if you look at the admin segment. Also, our professionals business in Belgium has returned to growth. Our costs are down significantly. That is in line with the restructure plan that we discussed with you last year, and EBITDA margin now at 4.9%. And if you look at the graph to the right upper corner, you can clearly see that improvement in the EBITDA margin. The U.K. on slide 12, we see improving performance. Revenue, slightly less growth than the previous quarter, but that is due to the third bullet, strong focus on client profitability. We continue to be rather selective.
What we also see in the U.K. is continued growth in the professionals business, 6%, especially led by education, and this clearly links to our marketing investments that we have executed in Q4. We did see a slow start of the year in the finance segment. We are not happy with this. This is mainly a perm business, and we are reinforcing our tight activity-based field steering here. Perm fees were up by 2%, and March was a good month with 14% growth. As I said, further focus on improving the performance, especially on field steering and such on productivity, but also on client profitability. EBITDA margin, 40 basis points up. Iberia showing a strong performance. Enjoyable to look at this. The Spanish business shows a revenue increase of 4%, and that includes a lot of the USG business as well.
The growth is driven by logistics and manufacturing, the integration process is to be completed by the end of this first half. What we see coming through, and that's what I was just referring to, is that we are both on track in terms of cost synergies, we're also doing a little bit better in terms of the envisaged revenue losses as a result of the integration. We do see lower losses in revenues as a result of the integration. That's a positive as well. In Portugal, revenue growth stable at 8%, driven by the manufacturing segment, including automotive. EBITDA now at EUR 3.3 million, including synergies of EUR 1.5 million, and that is clearly a reflection of strong cost control. We have the other European countries. Italy, also here we did have a marketing campaign, a micro-marketing campaign, very much directed specifically. Revenue up by 14%.
That's also the result of investments that we made in 2013, which suppressed the earnings a little bit, it's clearly coming through now. Integration of the USG business also here to be completed in Q2. Switzerland, good growth. In Poland, excellent growth at 23% continuing, and the EBITDA margin is now at 2.9% for this segment. Rest of the world on slide 15. Japan grew by 11% in the first quarter compared to 4% in Q4. Excellent performance, it's driven by logistics and retail. It also comes in with a solid return at the bottom line. Australia and New Zealand, it did grow, but we're not happy with the perm performance. That's still something to improve because that's where the earnings are. Asia is up 13%, and then especially in China, we see the reflection of activity-based field steering on the one end.
On top of that, we are adding additional resources in order to accelerate. On top of that, we have a micro-marketing campaign. All of that has supported this very high level of growth. We continue to invest in the various countries in Asia. Latin America is up by 9%. We are now capturing the productivity improvements from our recent investments, we're also repositioning to the right segments here. Overall, in this segment, the EBITDA margin is below what we find satisfactory. Moving to the financial slides, the income statement on slide 17. It's the numbers you've seen. I'm not going to go through all of those, please note that foreign exchange had an impact here of EUR 100 million at the revenue line, roughly EUR 18 million at gross profit, EUR 16 million at the OPEX level, and as a result of that, EUR 2 million at EBITDA.
At Randstad, we have a policy of matching the EBITDA, the expected EBITDA streams, with the net debt of the company, as such, economically, we are hedging the currency flows. Looking at our net finance costs, you can see that they are at a very low level again. Slide 18, some of the financial key points. Free cash flow of EUR 74 million compared to last year. As you know, at Randstad, we love to benchmark ourselves, we can see that the performance of Randstad at the working capital line and the financial expenses line shows up quite good. Leverage ratio improved to 1.1, which makes us comfortable. We have an effective tax rate of around 31%. We can clearly see governments aiming for cash, that's discussions we have in various countries, and that's all the potential consequences of that are included here.
I think this is good guidance. Diluted EPS now EUR 0.45, an improvement compared to EUR 0.33. The dividend, we now have the results, as you might have noted from the press release, we now have the results of the optional stock dividend, and 66.6% of our investors has elected for stock dividend. There is a clear demand for stock rather than cash with quite a few investors. If we look at slide 19, we see the segmental performance of Randstad, repeating quite a few of the issues that I've just mentioned. If you look at the professionals business, you see a decline in the EBITDA margin. That's our U.S. Prof business, which I referred to earlier, and which is now getting back on track. We should see a reverse in that trend as well. I'm moving to slide 20 now, the gross margin bridge.
You can see that last year it was 17.8%, now it's at 18.1%. The main components are the improved margin in North America, the CICE contributions in France, but also the very strong focus on client profitability. Perm fees are now 10% of GP, again, compared to more than 12% in the year 2008. Still a way to go. Next to our reference to 2008, at Randstad, we also have a very strong focus on developing this according to a standardized best concept in order to be successful. We see that coming through, as I mentioned, in various countries. 21, the bridge, the sequential bridge, I should say, of operating expenses, where you can see that last year, Q4 was EUR 628 million. We guided for lower OPEX. It came out at EUR 594 million, which is clearly reflecting the growth rate that we have seen in Q1.
The development includes a beneficial foreign exchange impact of EUR 4 million compared to Q4, but also USG synergies. USG synergies are included here of EUR 1 million. If you look at it on a comparison with last year's Q1, we now have EUR 3 million of quarterly synergies in the pockets. As you know, the ambition is to end up between EUR 15 million and EUR 20 million annually. We still have a way to go. The reduced marketing expenses, as was mentioned, but also the impact of the Belgium recovery is coming through, and we continue to invest in our emerging markets. Slide 22, the net debt down by EUR 260 million compared to last year. It's clearly explained here.
Just want to point out that working capital as a percentage of revenues now stands at 2.8%, which is a clear reflection of our EVA focus that we have now been working on for quite a few years. Free cash flow to EUR 74 million on slide 23. EUR 74 million free cash flow. Last year, that was EUR 42 million. If we look at the last four quarters in 2014, then you see EUR 325 million compared with the last four quarters in 2013. There's a gap if you exclude the EUR 131 million that we had as a long-standing liability to the Dutch tax authorities, which was paid in Q4. Then on a comparable basis, the EUR 325 million should be increased to EUR 556 million. Looking at two items in the overview here, net additions in property, plant, and equipment are mainly related to our branch mergers in France and the other items.
Please note that CICE is only paid through a compensation of corporate tax to be paid, and if that is not sufficient, it takes three years before it is settled. That means it is clearly a benefit to the company, but not yet at the cash line or hardly. Net finance cost paid, I mentioned it before, in the P&L it is low, but also in the cash flow statement it is very low. EUR 2 million compared to EUR 3 million last year. We purchased some shares, which was to offset the dilution of our performance share plan. That brings me to the final slide, 24, the outlook for Q2. Organic revenue growth was 3.6% in Q1, while it was 3.5% in the month of March. We did see some improvement throughout that quarter and a significant foreign exchange impact, as I explained.
The exit rates for the month of March, I am going to list them to you now. The Netherlands was at -2%, France at -2%, Germany at +9%, Belgium at +3%, the U.K. at +1%, Iberia at +4%, North America, as I mentioned, at +1%, rest of Europe at +18%, and the rest of the world at +12%. That adds up to the 3.5% in the month of March. We also see a gradual recovery that is continuing into the month of March, but no acceleration of growth yet. We have, as I mentioned, intensified our focus on activity-based field steering to enjoy whatever opportunities there are. Please note that we have the same number of working days in Q2 as last year, and the season typically brings us a somewhat higher gross margin in Q2.
The cost base will increase sequentially. That is the normal seasonal pattern. We always spend a little less in Q1, for example, on marketing. We will see some limited investments in headcount coming through in selected markets. Synergies relating to USG will increase gradually towards the end of the first half-year. We are aiming for an incremental conversion ratio, so conversion of additional gross profit into EBITDA of around 70%. Please also note that our net debt will typically increase due to the dividend payment and holiday allowances. A final addition to make here is that the Q2 results will be published late July, and these will be published under the leadership, again, of Jan-Pieter van Winsen. He will be succeeded by Arun Rambocus, who will join us soon. We are now moving to Q&A, and I ask you to limit your questions to two per person. Thank you.
Operator?
Thank you. Ladies and gentlemen, if you would like to ask a question, please press star followed by one on your telephone keypad now. If you change your mind and wish to withdraw your question, then press star followed by two. Please ensure that your phone is unmuted locally when preparing to ask your question. Our first question today comes from Paul Sullivan from Barclays. Paul, please go ahead.
Yeah. Hi, good morning. Just a couple from me. Firstly, just in Holland, are you tempted to start to chase market share again? Or should we expect you to lag the market for the rest of this year? That's the first question.
Well, Sjaak here. Good morning. The rest of the year is still long. What we are currently doing is we have an intensive phone campaign, actually, towards all our SME ex-clients and prospects. What we're doing is we've created a call center environment, several locations throughout the country. Our marketing director used to run our call center business where we take our consultants on a pre-planned basis in there to contact all their SME clients in their database. This will definitely increase the amount of contacts. This is not a segment that is linked to one competitor as such. If you're there, they have demand, you'll get the job. We're optimistic that this will pay off. Answering your question directly, will we trail the market for the rest of the year, or when will we be at or above market? That's difficult to say.
Normally, this takes two, three quarters to be at market again.
You're not going to sacrifice profitability to chase top line. That's quite clear.
Yeah. That's not where we are today.
Yeah.
That was the name of the game in the crisis as such, because then you have a client, a tender comes up, we see funny pricing, then you sacrifice top line for profitability. Now we think there's good profitable business to be had, but we need to catch it and find it.
Okay. Just finally, you talk about taking actions to improve margin in the rest of the world. Could you just maybe elaborate on what you're trying to do there? Do you have any targets in mind for the rest of the world margin?
In the rest of the world? Yeah. Well, we're mostly unhappy with our results in Australia, which sounds funny if you look at the top line. We need far more perm. It's the same name of the game everywhere around the world. Again, more targeted contacts with the database. In Australia, we have many different teams selling in different businesses, and we do see the teams that pick up the way to go are actually quite successful. Others aren't, so they need to learn from their colleagues. I was there a few weeks ago. The atmosphere is good, but, yeah, we still need to, again, intensify and be consistent in the way we go to market. Again, when we will then be profitable, I don't know yet. The market as such in Australia is not so great. You've seen it at the results of our competitors.
This is a tough market, which means that you will have a relatively high amount of activities to convert into business. Difficult to say, but we're not happy yet with the performance in Australia.
All to add, the rest of the world, it includes Japan. I already made some comments that we're happy with the returns over there. We have our positions in India and China, and these countries we have a very strong focus on growth, so returns are immediately invested in acceleration of growth.
Okay. Thank you very much.
Our next question today comes from Tom Sykes from Deutsche Bank. Tom, please go ahead.
Thank you. Morning, everybody. Firstly, on U.S. growth, could you maybe make some commentary on U.S. manufacturing and light industrial and what the outlook is there? Also, I suppose following on from Paul's question is maybe particularly in the U.S., but it does seem to be other markets as well. It's a very long time that we've heard about companies sort of focusing on profitability, and sort of at the expense of growth, but trying to keep the gross margins up. Are you trying to say now that you think that the sort of gross margins grinding lower is stopping, you think that those are maybe stabilizing, moving upwards again? Is it that you feel your cost structure is now in a position which you can take on the volume profitably now? Could you maybe give a view on that, please?
Tom, good morning. That was a long question. Talking about our U.S. staffing business, we've invested in growth there. We're now working with 100 more consultants, put very systematically into units. We can say that our U.S. staffing business, as you probably know, is half of our total business, around $2 billion. Is very tightly run when we talk about activity-based field steering, daily planning on what we need to do. We do see the growth there. We target parts of blue collar. We target SME white collar. We take our pick in that market, and the growth there leads to profitable growth as such. As you've seen, 5% growth in March. It looks like we are at or even slightly above ASA numbers in March. We think we're getting there.
Again, talking about the targets, we segment also with a concentration on perm placements in staffing profiles will give us good returns. Our profitability in our U.S. staffing portfolio, by the way, is quite good compared to peers in the U.S. In our professionals business, slightly different picture. If you look back into our IT portfolio, we've had a great year in 2012. We didn't invest timely in people. We dropped in growth in 2013. We redressed that in Q4 2013, we now see return to growth in our IT business, which again gives us very good returns. Quite confident that this will help both our top line at group level, but also our profitability, because it comes in ahead of group average. Lastly, our finance business. We've changed management there.
Now, combining the businesses we also saw, we bought in SFN, so our Tatum business, which is top of the line in finance, providing CFOs, combined with our own finance business , gives us a great offering in the American market. How quick we will see the uptick in top line, we don't know. What we do know again, is increase in growth there is also increase in profitability because we target profitable segments.
Okay, just maybe the light industrial outlook in the U.S.
Yeah. As you know, Tom, although we're the number three player in the U.S., we have a limited market share of around 4%. An outlook on light industrial, I don't really know. We take a part of that, our Inhouse businesses in light industrial to a certain extent, and that's growing.
Okay. I'm not sure you fully answered. You answered the question about the U.S., but maybe in terms of the gross margins and your focus on sort of profitability. What do you see in pricing then in the U.S.? Do you see that stabilizing? Is that still grinding a bit lower, but you feel you need to go for growth a bit more now?
Yeah, I answered your question, but implicitly.
You're not going to spell it out for me?
That's no problem, Tom. The parts of the market we're targeting, both in our staffing portfolio and in our U.S. portfolio, will give us, if we grow there, profitable growth. In our IT, we're not going for huge 1 billion tenders with clients with single-digit margins. In blue collar, in staffing, we're not going for large clients with a high liability, with an MSP giving us a part of the business, and we're not the MSP. Therefore, implicitly, again, growth will lead to improved profitability through the targets in the market, but also the fact that we've invested and our GP per head is increasing at the same time.
Okay. Thank you.
Our next question comes from David Tailleur from Rabobank. David, please go ahead.
Good morning, gentlemen. Maybe a quick follow-up on the Netherlands. When did you actually start, let's say, the new initiatives? The exit rate in March seems to be a little bit weaker than the quarter view run rate.
Yeah
let's say, a monthly blip, of course. Secondly, if you look at your professional margins, the drop of 60 basis points year-on-year, you're describing it's mainly related to the U.S., but I'm only seeing a 4% gross profit decline. Is this indeed mainly due to higher SG&A investments? Do you expect this to reverse to coming quarters to some extent? Thanks.
Okay. Yeah. No, David, good morning.
Good morning.
On the Netherlands, we started doing this mid-February. March last year, we had good growth, highest in the quarter. It is a bit of a comparison thing. We're now at it for, what is it, five to six weeks.
Okay.
Again, that takes some time. Maybe you can comment on professionals.
Yeah
There's a bit of technical thing here.
Yeah. Professionals in the U.S. last year did have a very strong quarter. The comparison base, and I mentioned that also, was specifically relating to pensions and social securities or wage taxes was impacted by roughly $2 million. That also has an influence here.
Okay, it's not like you invested, let's say, like what happened at group level in Q4, quite a lot in marketing or growth initiatives, and that SG&A will decline in coming quarters for U.S. professionals.
No.
Okay. Thanks a lot to you guys.
Our next question today is from Konrad Zomer, from ABN AMRO. Konrad, please go ahead.
Hi. Good morning. I have a question about your professionals business in the Netherlands. It was up 3% in the quarter. Can you tell us in what specific areas you achieved that growth rate? A related question is on Yacht. It was down 2% in the quarter, which I think is a good performance. Can you give us a bit more insight into at what level the EBITDA margin of Yacht currently stands? Thank you.
Yeah. The last one we're not doing. It adds to our performance. Yacht was a laggard, of course, in our portfolio in the Netherlands and took result down. Now it helps. What's good with Yacht is the fact that we are growing with government again, which, as you know, has been a while. We took quite a hit there. We're also growing in HR, which we don't think is a market thing, but we've got good management there. We've centralized the way we do HR in one location, and that's paying off. Lastly, we see quite spectacular growth in freelancers, which is both the freelancers we put as candidates to our clients, but also the brokerage, which we do at Yacht. That leads to a doubling of the amount of freelancers we've put into the market. That drives the performance of Yacht.
Yeah. David, the professionals business, when you look at the segmental reporting, you see growth by 3%, that relates to the professionals business of Randstad in the Netherlands, which is clearly accelerating.
What sort of end markets are growing the fastest then? Is that, I don't know, accountancy? Is it engineering? What sort of activities are they?
This is very broad-based, which is the good news. We're still in what we would call the professional segment at Randstad, which is a bit the lower part of what we would call professionals. We're underrepresented. We started targeting this segment much more intensively a year ago. It's a pretty broad-based growth. What's also good to mention is that at Randstad, we also grow quite spectacularly in perm placements, 24% from a low base. We don't think that has anything to do with market, but again, as a result of a very targeted effort in this segment. Again, broad-based in terms of profiles and clients.
Okay. Thank you.
Our next question is from Marc Swartzenberg from ING. Mark, please go ahead.
Yeah. Good morning, everybody. First question on your statements in your outlook. You mentioned to see expected Well, actually, you're convinced that the gradual recovery continues, but if I look to the exit rates, particularly for the larger regions in Europe, the exit rates are a little bit below the quarter average. What makes you convinced that the gradual recovery continues? Is that because of the first weeks in April are showing convincing trends? Can you share a bit with that? And the other one is on your SG&A. You're guiding for a normal seasonal pattern with some additional marketing spend. Can you share a little bit more light on what you mean by normal seasonal trend? Is that the EUR 10 million, EUR 15 million increase quarter-on-quarter we've seen over the last one or two years? Or is it anything different?
Should we take into account some additional spend on top of that? Thanks.
Okay, Marc. Thanks. Your first question on the exit rates and moving into April, you should note that in our business, the growth always includes some estimates at the end of the month that needs to be made. We also look at the month of April. Indeed, what we see in the month of April, where we follow our volume development across the world every week, we see that trend in the month of March continuing into April. It's also based on our customer conversations. That's what you hear us saying. With regards to the cost base, I was thinking that we did give you quite something to hold on to by sharing the incremental conversion ratio, and now you want us to state the EUR number again.
The reason why we state the 70% is because we today don't know what is going to happen, especially not in June. We have a little feel for May, but not complete, and then we have uncertainty about the month of June. That's why we thought we should share with you the fact that we expect an incremental conversion ratio of 70%. If you, however, would apply the 70% to, let's say, low continued growth as we see now, you indeed get to the increase in OPEX as you just mentioned, applying the 70%. That's straightforward. We just try to give you something to hold on to, even if you believe growth could accelerate a little further.
Yeah. Well, one follow-up on this one. You said March trend continued in April. Do you mean that the 3.6 continued or the development from January, March, and then forward? Is that what you mean?
No. What we mean is that April looks in to be in line with the month of March.
I see. A follow-up on my second question. On the gross margin, was there anything in Q1, say, the German passing on of the price increases? Did it have any negative impact on Q1's gross margin? Should we expect that to filter through in Q2 and the rest of the year?
Marc, Jacques here. Good morning.
Hi. Good morning, Jacques.
Just one on the growth trend. What is an important statement to make, of course, is if you look how U.S. finishes the quarter, if you would just prolong that line into Q2, you already have some good growth and profitable growth at a group level. That helps. The other one is on Germany. We're not happy yet with the volume development in Germany. As I mentioned in earlier conversations, Germany is a very strong organization, but it's a large client organization. They're still turning the corner in their activity-based field steering. The fact that volume is flattish is not due to clients doing less because the price is higher. The development at these large clients is rather stable on average. We need to pick up. We need to sell more. It's roughly the same program we have in the Netherlands.
In Germany, this is less in their DNA. This might take a little bit more time. Overall, solid passing on of the CLA change because, of course, on a positive note, Robert-Jan mentioned this, Germany has gone through quite some changes last year. Again, a huge CLA increase January 1. That's all handled very well. Now it's back to selling and increasing the volume.
Did it have any negative impact on your gross margin in the first quarter? Those price increase and passing it on?
No. Certainly not from a nominal point of view. Of course, because the overall bill rate increases, then as a percentage, it goes down. The cost goes down. Overall, you see an increase in our percentage earnings. That's good.
Okay. Thank you very much.
Our next question today is from Nicholas Diepgenk from Bank of America Merrill Lynch. Nicholas, please go ahead. Nicholas, your line is open. Please go ahead with your question.
Hi. Sorry about that. On mute. Two questions from me, please. Firstly, on incremental conversion rates. The 70%, does that apply to just Q2? Is that more of a kind of going forward, that's going to be the target? I think before you've referenced an 80% incremental conversion rate on the early stages of growth.
Yes, Nicholas. Thanks for asking this. Indeed, over time, of course, this is going to decline. Our policy that we have shared with you constantly is that we aim to return more than 50% of additional gross profit. In the early stages of growth, we said it should be higher. It's 94% in Q1. We're now indicating around 70% in Q2, and that means it's Q2 indications. Gradually, this will decrease. Of course, we'll do our utmost to come in as high as possible. Ultimately, we'll have to add people. The early stages of growth are serviced almost without adding people, but just adding bonuses, commissions, and a bit of marketing. The stage 2 means that we're going to add some people in the front office, which is happening in a few spots in the world.
Over time, and that's not going to happen in the foreseeable future, we're going to add significant expenses in terms of branches and back office, that will not occur this year, I think.
Okay, thanks. For the full year, I think consensus was kind of in the 80% range. That sounds like it's a bit high. Obviously, Q1 is strong, but if the rest of the year is going to be more like 70%. Is that fair to assume?
I think it's fair to say that the 80% is a bit on the high side. It also depends on the speed of growth. If growth accelerates, then typically we can do with less customer visits and enjoy more business. Now it's going a bit slowly.
Okay, thanks. Just one on the CICE. You mentioned it briefly during the call that there have been some positive developments recently, obviously the government's released some preliminary details of the Responsibility Pact. It looks like the rebates could be increased for those on lower wages. Can you say how many of your temps on assignment currently earn less than one and a half times minimum wage?
No, I cannot tell you. It actually refers to both our flex workers and our internal people, but of course, the majority is the flex workers. We've shared with you that last year, the impact for the group was almost EUR 70 million, and in 2014, it's anticipated to amount to roughly EUR 100 million. That gives you some ratio to work with, I think.
Okay. I'm more referring to kind of beyond 2014, if the terms of CICE do get changed. I know that there's talk of it being extended to those on salaries up to three and a half times minimum wage, also increased for those on salaries one and a half times.
Yeah.
I was just trying to get an understanding of the breakdown in your temp base.
Yeah, I can't share that with you. Please note that by far, the majority of the people that we place with our clients is at the lower end of the pay pyramid.
Okay. When are you expecting to get absolute clarity in terms of what will happen to CICE beyond 2015? Do we know when the Responsibility Pact will get voted on?
No, we don't know. We're following it tightly. We're having our links organized, we hope to hear more as soon as possible. Yeah.
Okay. Thanks very much. Apologies for mute at the beginning.
Nicholas, what you're asking us to predict a government.
Yeah. Thank you.
not just a government, a French government. Thanks.
Thanks, guys.
Our next question today is from Matthew Lloyd from HSBC. Matthew, please go ahead.
Good morning, gentlemen. A couple of quick questions. Firstly, in the Netherlands, what's the sort of order of differentiating gross margin between sort of white collar SME and the sort of larger account MSP kind of business? Could we see a gross margin lift as the nature of the mix alters? Secondly, do you think that part of the underperformance in the Netherlands is just your alignment to the sectors that are growing isn't what it should be?
The answer to your second question is yes. We concentrated, and rightly so, by the way, in the downturn on our large clients. We did well there. We improved our position. By the way, took market share for a long period as a result of it. The SME now seems to rebound. We're a bit late. Implicitly, you also push your competitors into the SME segment by concentrating on your large clients, but that's not an excuse by no means. We're now beefing up our activities in that segment. Back to your margin. That's a tough one to answer because, of course, which part of a large client and which margin of clients do you compare with which SME type business? Yes, it's higher, but it's all about the business mix.
Which part of your business mix then comes in at which speed at this percentage? We've seen in earlier cycles that if there's an upturn in the market, business mix improves, you see more perm, you see more SME margin. Your margin as a whole improves. Where we are now in a cycle, you see that underlying the margin is pretty stable. Hopefully, in a next phase, if it further strengthens, we'll see a slight uptick in gross margin.
Can I just ask, bearing in mind your answer, can I ask a quick follow-up? You've sort of indicated that perhaps the incremental drop through gross profit to operating profit could be 70%, which is a little lower than some. Do you see scope for the gross margins to go up during this year?
Again, that's implicitly a question on prediction. That's difficult. Definitely, if the cycle persists, and also where we're investing, again, in perm, in white collar, then underlying margin should increase, absolutely. You might always also say that it would be good news if throughout the year, our incremental conversion would go down, because as Robert-Jan mentioned, we're then investing in growth, which at the end of the day, is always better than maintaining a tight cost base to weather a storm. Matt, just adding the normal pattern, growth has just been started in I think we reported the first growth in September last year. Typically, growth builds up from blue collar into white collar, and then finally into professionals. Of course, you always see some early signals as we see them today as well. Normally the share of blue collar business will grow throughout 2014.
Typically, that comes in for quite a degree through Inhouse, which brings us a somewhat lower gross margin, but a solid return, as you can see in the segmental reporting. To us, this is not a business that we purely steer on gross margin. Of course, we monitor it tightly, but it could well be that blue collar growth comes in through Inhouse, arriving nicely at the bottom line. Don't be too focused on the gross margin line here.
Okay. Thank you very much.
Our next question today comes from Laurent Brunelle from Exane BNP Paribas. Laurent, please go ahead.
Yes, good morning. Laurent Brunelle, Exane. Two question for me on France. I know it's not an easy country to forecast, but what's your view on the current market situation, and do you see any sign of recovering the early cyclical segments? Do you believe that your slight, let's say, market underperformance is related to your ongoing organization? And when do you expect to grow, let's say, in line with the market? And secondly, just to be clear about your strategy to invest into marketing spend. I'm a bit confused compare to what you said in Q4. When I look at your OPEX spend in Q1, is it just related to seasonality, or do you intend to invest more in marketing spend, please?
Good morning to you. On France, we are doing well in the segments that we target in France because our first and foremost priority is not to grow the top line, because that's still doable, but that comes at a high price. You need to say yes to clients with a low margin who might even discuss CICE or margin decreases, whatever. We want to change and improve our business mix. We are happy with the fact that we grow in SME. We are also happy with the fact that we're growing Inhouse more than 20%. There are some transfers included from the branches, but Inhouse is also an added value solution to our clients. We like that. The market is not great yet. It's still negative. We do not see any immediate signs of improvements.
For example, our Appel Médical business is suffering from a decrease in spending in public healthcare and also our Spectra business, and that's what's to be expected, is also negative. Having said that, although we're negative in permanent placement, which again is a spearhead in our strategy, we think that's ahead of market even at -7. That's where we are in France. Again, back to marketing. We have invested in marketing because in some markets, young markets where the Randstad brand was young, we arrived at questionable top of mind. That means that our people need to sell a lot to get a contact from a client, and France was one of those. Even though the market was not great yet and still isn't, we thought it was wise to invest there. Our top of mind in France has returned to good levels.
That means that our people are more successful in selling. That probably shows in the SME development. That's all great. We don't do it now. We're now analyzing the results. If growth picks up again, we might invest a little bit more in marketing. Seasonally, we will in Q2, by the way, but not to the size that you saw in Q4. We'll take a more gradual approach throughout the year.
Okay, clear. Thank you very much.
Our next question today is from Toby Reeks from Morgan Stanley. Toby, please go ahead.
Hi there. I've got two if I can. First on CICE. I think you indicated that Q1 retention was above 80%. Is that the maximum you guys are going to be able to achieve? Where do you expect it to go? As a follow-on from Laurent's question earlier, I think you just mentioned that some of the smaller competitors in France are willing to talk about ceding the CICE and giving it up towards the customers to get more revenue. How much of that is going on? Is that something that's increased in pressure? Then I've got one on SG&A. Thank you.
Well, hi, Toby.
Hi there.
On CICE, the retention, I mentioned we started with 50, then we increased it to the mid-80s, and now we have increased it a little further. I think that's sort of it. We expect this current level to continue on the back of the way we experience the market right now.
Okay. If we achieve sort of 90 and you're not getting any pressure to reinvest that into training and all the other IT investment that you initially thought you might be having to do.
Yeah. It looks like a straightforward question, but it's not. There's a lot of ongoing investments in training that we are making, and matching that exactly with the CICE streams is a challenge. We have investments in new type of workers in France, where we take people with a permanent contract into our business, which clearly is an investment in order to improve employment in France. It's impossible to match that with the CICE. It's not even allowed, by the way.
According to the reporting standards. I think there's more investment than you see, but given sort of the way business is developing, that's why I made the comment, the current retention level is to continue into Q2 and 3 and 4.
Okay, fine. Just following on CICE before we talk about SG&A, you mentioned that some of the competition are willing to give some of that up to win business. Is that something that's become more material over the last couple of quarters, or has that just always been in the background?
No, I think I said we were not willing to give it away. I didn't say that competition was. There is some competition with increasing top lines. That's the only thing I can say.
Right.
Again, there's nothing new about this in the French market. Discussions with French clients, unfortunately, for the last 10 years that I've looked into France, have always been the same, and the arguments differ. It's either CICE or it's or it's margin as such. We're trying very hard with our clients to talk about total cost, and that's where Inhouse is much more geared towards. We can help French clients with decreasing their cost of labor. We don't do that by decreasing our margins. We do that by helping them to run their workforces more effectively. That's what we bank on. Given the growth in Inhouse, there is a part of the French market that is picking that up. There's also a part of the French market which still wants to only discuss on decreasing gross margin with whatever arguments.
Again, we're not willing to do that.
Then in terms of SG&A, I obviously realize you don't want to give us numbers around seasonality and marketing. Could you give us an indication of the sequential move from Q4 into Q1 in terms of EUR that, because it's historic, obviously, that was seasonality. In terms of marketing, it sounds like you're going to pick it up. How should we think about that? Is making all your consultants work in call centers an extra expense?
No, certainly the last is not that. Our consultants working in call center is really a way for them to be very concentrated on phoning clients. Have you ever been in a branch, Toby?
No, I haven't had the honor.
Okay. Well, you should. It's quite a hectic environment, you need to take time away to really plan to call your clients. In this call center environment, their own database is loaded up. They have a headset, and they have a call center manager who actually manages them. Then they can just do what they want to in full concentration. Then the next day, they go back to the branch, and then they handle the follow-up of the calls. That's what we're currently doing. That's not extra cost. That's just using our people more effectively and helping them to become more sales effective.
Fine. Your marketing expenses is very much targeted branding within specific markets, and that's the bit you expect to go up. I think your comment earlier was that you're increasing marketing in France. As a comment for the group, how much should we think, or I guess in terms of just direction, is marketing expense going up on a sequential basis?
Okay. Well, yes, it's going to go up on a sequential basis, but not to the likes of what we saw in Q4 because that we explicitly call the boost, which we, by the way, also announced a quarter earlier. No.
Okay, fine.
I'm just using the opportunity here to explain the principles of our business. Typically, you cannot compare gross profit sequentially because we have seasonality there. Expenses, you can compare better to quite a degree. The differences between Q4 and Q1 are typically that we have more marketing spend at the end of the year than at the beginning of the year, and we have typically wage inflation coming in as per the 1st of January, which is included to quite a limited degree here. There's clearly a low level of wage inflation across our businesses. I would say that's the way to look at OpEx.
Okay. No, clearly, I get the sequential side of things. In terms of when you look at your organic decrease on a sequential basis from Q4 into Q1, what I'm trying to ask is how much of that was seasonality? How much of that was other ways of reducing costs?
Yeah, that's exactly why we gave you the change in the marketing expenses. There are a few items for a few EUR million, but that's about it.
Okay. Thank you.
Thank you.
Our next question is from Hans Pluijgers, from Kepler Cheuvreux. Hans, please go ahead.
Yes. Good morning, gentlemen. A follow-up on your outlook statement because your answers interpretation could be twofold, in my opinion. You're talking about stabilization in growth. Do you mean, let's say, the stabilization in year-over-year growth? Do you see, let's say, the normal seasonal pattern through the quarter, so sequential improvement month by month? Is this also what you expect going forward for April, May? Secondly, you also clearly stated that you were quite happy with the leverage. Is there any thought, let's say, maybe changes in how you're going to, let's say, use additional maybe cash to buy back? Are you become more active on M&A? Could you give some feeling what you are planning to do with, let's say, the good cash generation?
Yeah, Hans, I'm trying to comprehend your first question. I think I've got to go back to the clear statement we're trying to make. When we're looking at the month of April, we can see the growth rate of comparing April with last year April, compared to the trend in March, which compares March this year with last year. We can see that continuing. I think the additional comments of Jacques, for example, about the U.S. gives you some comfort in underlying that statement. Your second point on the leverage ratio, we're indeed comfortable. We have an ambition to have a leverage ratio between zero and two times EBITDA. We have learned at school that repurchasing shares is not a value-creating activity, typically.
If we would sit on that cash for a while, we would entertain a discussion with the supervisory board, with the shareholders, and of course, also with yourselves. That's not in the plans now. The flip side of that remark, I realize, is, do you have any acquisitions in the pipeline? We think we should use the balance sheet to support expansion of the company. For now, I think you can feel that in the tone of voice that we are sounding to you is that the primary focus is on organic growth, and we're clearly completing our radar screening of options, but nothing imminent.
Okay. Thank you very much.
Our next question today comes from Yves Franco from KBC Securities. Yves, please go ahead.
Hi. Good morning. Two questions from my side. For the Belgian restructuring, you guided on annual savings of EUR 16 million. Is that coming in for the whole quarter already, EUR 4 million per quarter? Is it fully incorporated or did it only start after some months? The second question on the Tempo-Team performance in the Netherlands. How do you see things evolving there? Is it a bit linked to the SME segment, which are you clearly investing in since mid-February? Thanks.
Yves, I'll take your first question. That's a clear yes. It was included as from the beginning of this year.
Okay.
Jacques.
The second one is also a yes, but that's too easy.
Yeah.
Tempo-Team is closing the gap with market a bit, but we're still unhappy with where Tempo-Team is. Tempo-Team is the clear number two in the market. It's a sizable company. From a board perspective, we don't see there should be a difference in the growth rate of Randstad and Tempo-Team, or the growth rate of both with the market. Well, both are below the market, so we're still unhappy. Definitely also Tempo-Team needs to find quite a bit of their return to growth in the SME segment. Yeah, that's why I started with a yes.
Okay. Thanks.
Our next question today comes from Tjeerd Tuijts from Kempen. Tjeerd, please go ahead.
Yes. Good morning, gentlemen. Two more questions from my side. One on the conversion ratio, the 70% that you have guided for the second quarter. First of all, incremental means quarter-on-quarter. The 70%, do you regard that as a minimum level or is that really a firm level that you're guiding for? A second question is on your cash generation. You mentioned a improvement in your working capital, but it seems like payables have been driving this as the normal seasonal lowering of the payables did not happen in Q1 as we have seen in other years. Can you indicate how sustainable you regard this working capital improvement? Thank you.
Hi, Tjeerd. Welcome back.
Yeah, thank you for stealing my colleague.
Yeah. Tjeerd, the 70% is around 70%. That's what we made explicit. It could be just under or just over that number. It is a number that's calculated on a year-on-year basis.
Okay.
The cash generation. Yeah, the closing moment of a quarter is always having some impact. Managing payables is also financial management, and that's what we have been doing. You're right, we wrote it in the press release that the payables are supporting this slightly. If you go back to the core here, 2.8% working capital of revenues. If you look at the trend over the last years, over the last quarters, you can see an improvement from a level of north of 5%, 6% almost in the past. This is not just a one-off, this is a constant and consistent stream of improvement so far.
Yeah. You would say this is sustainable improvement in your working capital?
Yeah, we still have improvement opportunities here. We've discussed that also at the investor event that we've had. Our overdues are still ranging around 20% of total receivables. There's still a substantial opportunity here. We've got quite tight receivables management in place. You might even recall the DSO at the time Randstad and Vedior merged, it was at 60 days. Now we're close to 50, and we still have an opportunity here. Our ambition continues to be that we should have an improvement coming through.
Okay. Just one quick follow-up on the conversion rate. If we would exclude the CICE impact, would you say that the conversion rate that you reported today is still in line with the normal trend in an earlier stage of recovery?
Yeah, it's more or less in line. It very much depends on the steepness of the curve because growth of 3.5% means that we still have to go through serious efforts to sell our services. Whereas if the market gets more demanding, you get a bit more productivity. We also, in most countries, have a huge number of people that apply for jobs. Which of course takes time of our consultants, and that could well improve a bit if the growth rates go up a bit more steeply.
Okay.
At the same time, Tjeerd, good morning. Sjaak here.
Hi.
Please bear in mind that markets are in different phases. In the U.S. we're growing already, and the other conversion is lower, but deliberately so. As I mentioned earlier, historically, if you would look at our IT business, a great year in 2012, no investment. A bad year in 2013, top line drops. Now we're investing in growth again. Lower conversion, but top line increases, and it comes in at good returns both in our staffing and in our professionals business. That's what we need to equate on a global scale, and that's why we say around. One more follow-up on the DSO, by the way. There's also a reason why DSO could go up, which again is a good one, and that's if we start growing again and more.
Yeah. Adding to Sjaak's comment, because I think that's a very fair point. Sort of the blend of incremental conversions throughout the group. We've made analysis where we compare ourselves against the upturn in 2003, 2004, and also in 2010, 2011. Indeed, in those years you could see 80+%, in this case, the U.S. has not seen that decline, which we did see in 2001, 2002, 2003, partly even also in 2009 and 2010. If you look at the incremental conversion ratios per country, you can clearly see similarities with historical patterns. Again, if growth increases, it gets a little easier.
Yeah. No, fully understood. One thing to clarify, because Sjaak just mentioned that when you're growing, DSO is going up, I assume that working capital is going up, but not DSO, right?
Yeah. That's a fair comment. It might be that if France comes back into growth, that I think is what Sjaak is referring to, that comes in with a relatively high DSO, which has an impact on the blend, of course.
Yeah.
You're absolutely right. The total of receivables will go up. We will be extremely happy to finance working capital, so to speak, if it remains at roughly 2.8.
Okay. Thank you very much.
Thank you.
Our final question today comes from Anasuya Sana from JP Morgan. Anasuya, please go ahead.
Morning, guys. Just a quick question. Are you able to give us your headcount and FTE plans broadly by geography?
Are any of that included?
No.
Okay. You're asking for the potential expansion of headcount, huh?
Yes, that's right.
Yeah. That's a number which is completely dependent on the trend that we see. Just using, again, the question to elaborate briefly, we don't plan in Randstad. Of course, we have ambitions, we have budgets, but we really run our business on the back of what we call activity-based field steering. For example, if in the northern part of Milan, a branch has a unit of two people that's serving the call center segment, and we see an increase of activity there, we hit certain thresholds, then we start to add consultants right away to continue that growth. That's sort of the model. We have no dependency on board decisions here. It's a decision that's depending on the model. The model is implemented across the globe.
If business is going to grow as it does today, you'll see some addition of field staff across the globe, but not everywhere. It will take a long time before you'll see any significant addition to back offices. That's the only guidance that I can give. Ultimately, this arrives in the incremental conversion ratio, which we have indicated to be at roughly 70%, around 70%.
Yeah. Just to give you even more color on how we do this, it takes us around 20 days to put someone in new. If we see growth, we can do it within 20 days. A quarter in that sense for us, and certainly predicting it, is already long.
Right. Thank you.
All right. Any further questions?
No.
We currently have no further questions, Robert.
Well, perfect. I think this was an excellent opportunity to share the Q1 results with you and elaborate on those. We're looking forward again to speak to you at any point in time, but certainly at the end of July, sharing the Q2 results. Thanks, and see you soon. Bye.
Ladies and gentlemen, this concludes the Randstad First Quarter Results 2014. If you would like to hear any part of this conference again, a recording will be available shortly. Thank you for joining. You may now replace your handsets.