Earnings Call: Q1 2014

Apr 30, 2014

Good morning, ladies and gentlemen, and welcome to the Randstad First Quarter Results twenty fourteen. My name is Dan, and I'll be the operator for your call this morning. I would now like to hand over to your host, Robert Jan van de Kraatz to begin today's call. Robert, please go ahead. Hi, good morning. Welcome ladies and gentlemen to the Q1 twenty fourteen results call. I'm sitting here together with Jacques van den Broek with Jan Peter van Wince, but also with Andrew Cook who recently took over from Pascal Slaughter as the number two in our Investor Relations department. And of course, I'm also supported by other colleagues who help me to deal with your highly complex questions that might come up. I'm pleased 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 €400,000,000 of annual revenues. Typically, our trends are a bit erratic. Our revenue trends are a bit erratic. So straight lines are not common practice. So 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 and the operating expenses when you look at it sequentially decreased by €34,000,000 which was the result of the takeout of the one off in Q4 in marketing, which was roughly €17,000,000 and which is clearly paying off and I'll get back to that when discussing the various countries. And 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 percentage of additional gross profit that is retained in EBITDA. As such there is 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 etcetera. But also in The U. S, we see a recovery of the growth in March. It's plus 3%. We also see accelerated growth in Japan and Emerging Markets. And 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 second half of last year and 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 minus 1%. But if you look at U. S. Staffing and U. S. 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 minus 2% for the quarter and it's clearly supported by investments in IT, which came back to growth and we also see finance 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 and wage taxes. I would say the quarter is a bit more loaded than it was last year. I would say the impact is around $2,000,000 which should level out throughout the year. Then our SourceRite business up by 8%. Canada is in decline by minus 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. So revenue came out at minus 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%. And if you look at the gross profit, that'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. And I want to add here that as 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. And 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 and the merging of the various branches is on track. EBITDA margin now at 4.1%. The Netherlands on slide nine, revenue at minus one It's not really improving, but that is something we mentioned in the previous discussions or call. We can see that over the last year, Stronsault 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. So 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. Costs down by 3% sequentially also as a result of the lower marketing costs, but also FTEs down and the EBITA margin at a solid 5%. In Germany, page 10, a stable volume trend. So revenues up by 11% including a significant price effect, which is the result of collective labor agreement changes that leaves 2% for growth in the effectively in the volume, but it's mainly additional hours spent by flex workers. We did see good growth in IT and in house and also our Tempur team business in Germany. And I just want to point out that the complicated consequences of the collective labor agreement, which were implemented as from twenty thirteen November 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's more normalized. It's at a lower level. We're making good prices with sorry 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, yes on slide 11, we went through a restructuring in the fourth quarter of last year and it's always pleasant to see that immediately after that we're getting back on track. Revenue growth now at 4% in house back to growth at 3% and Randstadt 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's in line with the restructuring plan that we discussed with you last year and EBITA 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's 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're not happy with this. And we are 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 as 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 by is driven by logistics and manufacturing and the integration process is to be completed by the end of this first half. And 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, but we're also doing a little bit better in terms of the envisaged revenue losses as a result of the integration. So we do see lower losses in revenues as a result of the integration. So that's a positive as well. In Portugal, revenue growth stable at 8% driven by the Manufacturing segment including automotive. EBITDA now at €3,300,000 including synergies of €1,500,000 and that is clearly a reflection of strong cost control. Then 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% and that's also the result of investments that we made in 2013, which suppressed the earnings a little bit, but 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 EBITA 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 and it's driven by logistics and retail. And 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 hand. On top of that, we are adding additional resources in order to accelerate. And on top of that, we have a micro marketing campaign and 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 and 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, but please note that foreign exchange had an impact here of €100,000,000 at the revenue line, roughly €18,000,000 at gross profit, 16,000,000 at the OpEx level and as a result of that €2,000,000 at EBITA. At Randstadt we have a policy of matching the EBITA the expected EBITA streams with the net debt of the company. And 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 €74,000,000 compared to last year. And as you know at Randstadt we love to benchmark ourselves and we can see that the performance of Randstadt 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 and that's discussions we have in various countries and that's all. All the potential consequences of that are included here. So I think this is good guidance. Diluted EPS now €0.45 an improvement compared to the €0.33 And the dividend, we now have the results. As you might have noticed from the press release, we now have the results of the optional stock dividend and 66.6% of our investors has elected for stock dividends. So 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. Props business, which I referred to earlier and which is now getting back on track. So 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 18.1%. And the main components are the improved margin in North America, the CICE contributions in France, but also the very strong focus on client profitability and perm fees and our 10% of GP again compared to more than 12% in the year 02/2008. So still a way to go. And next to sort of our reference to 2008 at Randstadt we also have a very strong focus on developing this according to a standardized best concept in order to be successful. And 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 €628,000,000 We guided for lower OpEx while it came out at €594 which is clearly reflecting sort of the growth rate that we have seen in Q1. The development includes a beneficial foreign exchange impact of €4,000,000 compared to Q4, but also U. S. Synergies USG synergies are included here of €1,000,000 If you look at it on a comparison with last year's Q1, we now have €3,000,000 of quarterly synergies in the pockets. And as you know, the ambition is to end up between 15,000,000 and €20,000,000 annually. So 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 €216,000,000 compared to last year. It's well clearly explained here. I 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 €74,000,000 on slide 23, euros 74,000,000 free cash flow. Last year that was €42,000,000 And if we look at the last four quarters in 2014 then you see $325,000,000 compared with the last four quarters in 2013. There's a gap if you exclude the €131,000,000 that we had as a long standing liability to the Dutch tax authorities, which was paid in Q4. Then on a comparable basis the $325,000,000 should be increased to $546,000,000 sorry €556,000,000 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, CICE is only paid through a compensation of corporate tax to be paid. And if that's not sufficient, it takes three years before it's settled. And that means it's 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 and L, it's low, but also in the cash flow statement it's very low, 2,000,000 compared to €3,000,000 last year. We purchased some shares which was to offset the dilution of our performance share plan. So 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. And the exit rates for the month of March, I'm going to list them to you now. The Netherlands was at minus 2%, France at minus 2%, Germany at plus 9%, Belgium at plus 3%, The U. K. At plus one Iberia at plus 4%, North America as I mentioned at plus 1%, rest of Europe at 18% plus and the rest of the world at plus 12% and 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. So we have as I mentioned intensified our focus on activity based field steering to enjoy whatever opportunities there are. We are pleased to 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's the normal seasonal pattern. We always spent a little less in Q1, for example, on marketing. We'll see some limited investments in headcount coming through in selected markets. Synergies relating to UAG will increase gradually towards the end of the first half year. And we are aiming for an incremental conversion ratio, so conversion of additional gross profit into EBITDA of around 70%. And 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 Peter van Winson, but he will be succeeded by Arun Ramboukos who will join us soon. So we're now moving to Q and A and I ask you to limit your questions to two per person. Thank you. Operator? Thank Our first question today comes from Paul Sullivan from Barclays. Just a couple for 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. The rest Shag 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 preplanned basis in there to contact all their SME clients in their database. So 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. So we're optimistic that this will pay off. But answering your question directly, like 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, takes like two, three quarters to be at market again. But you're not going to sacrifice profitability to chase top line. That's quite clear. Yes, but that's not where we are today. So 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. And then just finally, you talked about actions taking actions to improve margin in the rest of the world. Could you just maybe elaborate on what you're trying to do there? And do you have any targets in mind for the rest of the world margin? In the rest of the world, yes. Well, we're mostly unhappy with our results in Australia, which looks funny if you which sounds funny if you look at the top line, but we need far more perm. And it's the same name of the game everywhere around the world. So again, more targeted contacts with the database. In Australia, 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 yes, we still need to again intensify and be consistent in the way we go to market. And 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. So 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. And Paul to add, the rest of the world, it includes Japan. I already made some comments that we're happy with the returns over there. And then we have our positions in India and China. And these countries are 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. Just firstly on U. S. Growth, could you maybe give an outlook on make some commentary on U. S. Manufacturing and light industrial and what the outlook is there? And then 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 sort of at the expense of growth, but trying to push gross margin 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 and 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 $2,000,000,000 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 white collar. So 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. So we think we're getting there. And again talking about the targets resegment also with a concentration on perm placements in staffing profiles will give us good returns. And 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 then dropped in growth in 2013. We redressed that in Q4 twenty thirteen and we now see return to growth in our IT business, which again gives us very good returns. So quite confident that this will help both our top line and group level, but also our profitability because it comes in ahead of group average. Then lastly, our finance business. We've changed management there. Now combining the businesses we also saw in and we bought in SFN. So our Tatum business, which is top of the line in finance providing CFOs combined with our Onsat Finance business gives us a great offering in the American business in the American market sorry. How quick we will see the uptick in top line, we don't know. What we do know again is increasing growth there is also increasing profitability because we target profitable segments. Okay. And just the maybe the light industrial outlook in The U. S? Yes. As you know Tom, although we're the number three player in The U. S, we have a limited market share of around 4%. So an outlook on Light Industrial, I don't really know. We take a part of that, our in house businesses in Light Industrial to a certain extent and that's growing. Okay. And but 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? Are you do you see 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? Yes. I answered your question, but implicitly. So the segmented Not yet, parts of the that's for me. Yes. 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. So in our IT, we're not going for huge 1,000,000,000 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. So therefore, implicitly, again, growth will lead to improved profitability through the target of the market 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 Telia from Rabobank. David, please go ahead. Yeah. Good morning, Maybe a quick follow-up on The Netherlands. Did you actually start, let's say, the new initiatives because the exit rate in March seems to be a little bit weaker than the quarterly run rate. But it could be let's say a monthly blip of course. And then 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. So is this indeed mainly due to higher SG and A investments? Do you expect to reverse to coming quarters to some extent? Thanks. Okay. Yeah. Daviv, good morning. On The Netherlands, we started doing this mid February. March we had good growth highest in the quarter. So it is a bit of a comparison thing. So we're now at it for what is it five to six weeks. So again that takes some time. Maybe you can comment on Professional because there's a bit of technical thing. Yes. Professionals in The U. S. Last year did have a very strong quarter. So the comparison base and I mentioned that also specifically relating to pensions and social securities or wage taxes was impacted by roughly $2,000,000 So that also has an influence here. Okay. So 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 and A will decline in coming quarters for U. S. Professionals? No. No. 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. And can you tell us in what specific areas you achieved that growth rate? And a related question is on JORT. It was down 2% in the quarter, which I think is a good performance. But can you give us a bit more insight into at what level the EBITA margin of JORT currently stands? Thank you. Yes. The last one we're not doing, but it adds to our performance. JORT was laggard of course in our portfolio in The Netherlands and took result down. Now it helps. What was good with Jalt 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 marketing, but we've got good management there. We've centralized the way we do HR in one location and that's paying off. And lastly, 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 York. And that leads to a doubling of the amount of freelancers we've put into the market. That drives the performance of York. Yeah. And with the Professionals business when you look at the segmental reporting you see growth by 3% and that relates to the Professionals business of Randstad in The Netherlands which is clearly accelerating. But what sort of end markets are growing the fastest? And is I don't know accountancy? Is engineering? What sort of activities are there? This is very broad based, which is the good news. We are still in what we would call the professional segment at Randstad, which is a bit the upper the lower part of what we would call professionals. We're underrepresented. We started targeting this segment much more intensively well a year ago. And 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. And again broad based in terms of profiles and clients. Okay. Thank you. Our next question is from Mark Swatzenberg from ING. Mark, please go ahead. Yeah. Good morning, everybody. First a question on your statements in your outlook. You mentioned to see expect to 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 your gradual recovery continues? Is that because of your the first weeks in April are showing convincing trends? Can you share a bit with that? And the other one is on your SG and 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 a 10,000,000 €50,000,000 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. So we also look at the month of April. And 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, but it's also based on our customer conversations. So 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 number the euro number again. 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. So 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. So we just try to give you something to hold on to even if you believe growth could accelerate a little further. Yes. Well, 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 to be in line with the month of March. I see. And a follow-up on my second question on the gross margin. Was there anything in Q1, sorry, the German passing on of the price increase? Did it have any negative impact on Q1's gross margin? And should we expect that to filter through then 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 And then if you would then just prolong that line into Q2, already have some good growth and profitable growth at a group level. So that helps. The other one sorry 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. So they are still turning the corner in their activity based field steering. So 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. But we need to pick up. We need to sell more. So it's roughly the same program we have in The Netherlands, be it that in Germany this is less in their DNA. So this might take a little bit more time. But overall, solid passing on of the CLA change because of course on a positive note, and Robucha mentioned this, Germany has gone to quite some changes last year. And again a huge CLA increase January 1. That's all handled very well. And now it's back to selling and increasing the volume. Did it have any negative impact on your gross margin in the first quarter, gross price increase in passing it on? No. Not certainly not from a nominal point of view, of course, because the overall bill rate increases then as a percentage it goes down, but that's also the cost goes down. So overall, you see an increase in our percentage earnings. So that's good. Okay. Thank you very much. Our next question today is from Nicolas Delegrenz from Bank of America Merrill Lynch. Nicolas, please go ahead. Nicholas, your line is open. Please go ahead with your question. Hi, sorry about that. On mute. Two questions for me, please. Firstly, on incremental conversion rates, the 70%, does that apply to just Q2? Or is that more of a kind of going forward, that's going to be the target? Because I think before, you've referenced an 80% incremental conversion rate on the early stages of growth. Yes, Nicolas. Thanks for asking this. Indeed, it's over time, of course, is going to decline. So 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 70% around 70% in Q2. And that means it's Q2 indications. Gradually this will decrease, but of course we'll do our utmost to come in as high as possible. But ultimately, we'll have to add people. So the early stages of growth are serviced almost without adding people, but just adding bonuses, commissions and a bit of marketing. The second stage means that we're going to add some people in the front office, which is happening in a few spots in the world. And then 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, but that will not occur this year I think. Okay. Thanks. So for the full year, I think consensus was kind of in the 80% range. That sounds like it's a bit high for I mean, Q1 is strong, but if the rest of the year is going 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, but it also depends on the speed of growth. If growth accelerates then typically we can do with less customer visits and enjoy more business and now it's going a bit slowly. Okay. Thanks. And just one on the CICE. You mentioned it briefly during the call that there have been some positive developments recently. And 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 1.5 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. But we've shared with you that last year the impact for the group was almost €70,000,000 and in 2014 it's anticipated to amount to roughly €100,000,000 So that gives you some ratio to work with I think. Okay. But 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 3.5 times minimum wage, but also increased for those on salaries 1.5 times. So I was just trying to get an understanding of the breakdown in your temp base. Yeah, can't share that with you. But 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. And when are you expecting to get absolute clarity in terms of what will happen to CCIE beyond 2015? Do we know when the responsibility pact will get voted on? No, we don't know. But we're following it tightly. We're having our links organized. So we hope to hear more as soon as possible. Yeah? Okay. Thanks very much. Nicolas, what you're asking us to predict a government. Thank you. And not just the 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 differential in gross margin between sort of white collar SME and the sort of larger account MSP kind of business. So could we see a gross margin lift as the nature of the mix alters? And secondly, do you think that part of the underperformance in The Netherlands is just your alignment to the sectors as it 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. And 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. Of course, 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. So we're now beefing up our activities in that segment. Back to your margin. Yes, 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? So yes, it's higher, but it's all about the business mix. So which part of your business mix then comes in at which speed at this percentage. But 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, yes, and 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 a bear with me mind your answer? Can I ask a quick You've sort of indicated that you're 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? Yes. Again, that's implicitly a question on prediction. That's difficult. But 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. And Matti just adding the normal pattern, growth has just been started in I think we reported the first growth in September. Typically growth builds up from blue collar into white collar and then finally into professionals. And of course, you always see some early signals as we see them today as well. So normally the share of blue collar business will grow throughout 2014. And typically that comes in for quite a degree through in house, which brings us a somewhat lower gross margin, but a solid return as you can see in the segmental reporting. So 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 in house arriving nicely at the bottom line. So don't be too focused on the gross margin line here. Okay. Thank you very much. Our next question today comes from Laurent Brinelli from Exane BNP Paribas. Please go ahead. Good morning. So Laurent Brinelli, Exane. Two questions 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 recovery in the early cyclical segments? And 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 compared to what you said in Q4. So 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, well 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 because then you need to say yes to clients with a low margin who might even discuss CICE or margin decreases whatever. So we want to change and improve our business mix. So we're happy with the fact that we grow in SME. We're also happy with the fact that we grow in in house more than 20%. There are some transfers included from the branches. But in house is also an added value solution to our clients. So we like that. The market is not great yet. It's still negative. And so we don't see any immediate signs of improvements. Also, for example, our Apel Medical business is suffering from a decrease in spending in public health care and also our Expectra business, yes, 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 minus 7%. So 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. So 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. Yes, and 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, 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. Thank you very much. Our next question today is from Toby Reichs from Morgan Stanley. Toby, please go ahead. Hi there. I've got two, if I can. First is on CICE. Your 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? And 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 giving seeding the CICE and giving it up towards customers to get more revenue. How much of that is going on? Is that something that's increased in pressure? And then I've got one on SG and A. Thank you. Hi, Toby. On CCES, the retention, I mentioned we started with 50,000,000 then we increased it to the mid-80s and now we have increased it a little further. I think that's sort of it. So we expect this current level to continue on the back of the way we experience the market right now. Okay. So if we assume sort of 90,000,000 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 see? Yes. This is a 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. So 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 CSA. It's not even allowed by the way according to the reporting standards. So 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 Q3 and Q4. Okay, fine. And then just following on CICE before we talk about SG and 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 sort of couple of quarters? Or is that just always been in the background? 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. And again, there's nothing new about this in the French market. Discussions with French clients, unfortunately, for the last ten years that I've looked into France have always been the same. And the arguments differ. It's either Cisse or it's a Legend Mans or it's margin as such. And we're trying very hard with our clients to talk about total cost. And that's why in house is much more geared towards because we can help French clients with decreasing their cost of labor. And we don't do that by decreasing our margins. We do that by helping them to run their workforces more effectively. So that's what we bank on. Given the growth in in house, 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. And again, we're not willing to do that. Okay, okay. And then in terms of SG and A, I obviously realize you don't want to give us numbers around seasonality and marketing. But could you give us an indication of the sequential move from Q4 into Q1 terms of euros because it's historic obviously that was seasonality. And in terms of marketing, it sounds like you're going to pick it up. I mean 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 centers 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 that on a. Okay. Well, you should. It's quite a hectic environment and 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. So then they can just do what they want to in full concentration. And then the next day they go back to the branch and then they handle the follow-up of the calls. So 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. So your marketing expense is very much branding, targeted branding within specific markets and that's the bit you expect to go up. So I think your comment earlier was that you're increasing marketing in France. But 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 called a boost, which we, by the way, also announced a quarter earlier. So no, no, no. Okay. Fine. Yes. 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. But 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 January 1, which is included to quite a limited degree here. So there's clearly a low level of wage inflation across our businesses. So I would say that's the way to look at OpEx. Okay. No, I mean, clearly I get the sequential side of things. But 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? Yes. That's exactly why we gave you the change in expenses, the marketing expenses. And there are a few items for a few million, but that's about it. Okay. Okay. Thank you. Thank you. Our next question is from Hans Plagas from Kepler Cheuvreux. Hans, please go ahead. Yes. Good morning, gentlemen. A follow-up on your outlook statement because your answers here could interpretation could be twofold in my opinion. You're talking about stabilization growth. Do you mean let's say the stabilization in year over year growth? And do you see let's say the normal seasonal patterns through the quarter so sequential improvement month by month? And is also what you expect going forward for April? And secondly, you also clearly stated that you were quite happy with the leverage. Is there any thoughts let's say maybe changes in how you're going to let's say use additional maybe cash to buy back? So or are you becoming more active on M and 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. And 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 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. And your second point on the leverage ratio, we are indeed comfortable. We have an ambition to have a leverage ratio between zero and two times EBITDA sorry. We have learned at school that repurchasing shares is not a value creating activity typically. So if we would sit on net cash for a while, we would entertain a discussion with the Supervisory Board, with the shareholders and of course also with yourselves. So that's not in the plans now. The sort of 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. But 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 €16,000,000 Is that coming in as for the whole quarter already, so €4,000,000 per quarter? Is it fully incorporated? Or did it only start after some months? And then 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? It's I'll take your first question. That's a clear yes. So it was included as from the beginning of this year. And Okay. Jacques take your And the second one is also a yes, but that's too easy. Tempur team is closing the gap with market a bit, but we're still unhappy with well, where Tempur team is. Tempur team is a clear number two in the market. It's a sizable company. So from a Board perspective, we don't see there should be a difference in the growth rate of Randstad and Tempur team or the growth rate of both with the market. Well, both are below the market, so we're still unhappy. And definitely also Tempestine needs to find quite a bit of their return to growth in the SME segment. So yes, that's why I started Okay. With the Thanks. Our next question today comes from Thune Chuviz from Kempen. Thune, 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. And then the 70%, do you regard that as a minimum level? Or is that really a sort of firm level that you're guiding for? And the second question is on your cash generation. You mentioned an 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. So can you indicate how sustainable you regard this working capital improvement? Thank you. Hi, Tun. Welcome back. Yeah. Thank you for speaking my colleague. So the 70% is around 70%. That's what we made explicit. So it could be just under or just over that number. And it is a number that's calculated on a year on year basis. And then the cash generation, yes, 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. So you're right we wrote it in the press release that the payables are supporting this slightly. But 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. So this is not just a one off. This is a constant and consistent sort of stream of improvement so far. Yes. So you would say this is sustainable improvement in your working capital? Yes. We still have improvement opportunities here. We've discussed that also at the investor events that we've had. Our overdues are still ranging around 20% of total receivables. So there's still a substantial opportunity here. We've got quite tight receivables management in place. I mean you might even recall the DSO at the time Randstad and Vidyo merged. It was at sixty days. Now we're close to fifty. And we still have an opportunity here. So our ambition continues to be that we should have an improvement coming through. Okay. And then just one quick follow-up on 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? Yes, 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 grow to go through serious efforts to sell our services, whereas if the market gets more demanding you get a 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 would that could well improve a bit if the growth rates go up a bit more steeply. Okay. At the same time, Thijn, Hui Mor, Jacques here. Please bear in mind that markets are in different phases. So 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. So 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. So that's what we need to sort of 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. Yes. And adding to Jacques' 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 02/2024 and also in twenty ten, twenty eleven. And then indeed in those years you could see 80%, 80 plus percent. But in this case, The U. S. Has not seen that decline which we did see in 02/2023 partly even also in 02/2010. So if you look at the incremental conversion ratios per country, you can clearly see similarities with historical patterns. But again, if growth increases, it gets a little easier. Yes. No, fully understood. One thing to clarify because Jacques just mentioned that when you're growing, DSO is going up. But 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 and that I think is what Jacques is referring to then that comes in with a relatively high diesel which has an impact on the blend of course. But 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 Okay. At two point eight Thank you very much. Thank you. Our final question today comes from Anasuya Sana from JPMorgan. Anasuya, please go ahead. Good morning, guys. Just a quick question. Are you able to give us your headcount and SG and A plans broadly by geography? Okay. You're asking for the potential expansion of headcount? Yes. That's right. Yes. That's a number which is completely dependent on the trend that we see. So 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. So 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. And that's sort of the model. So we have no dependency on Board decisions here. It's a decision that's depending on the model. And the model is implemented across the globe. So if business is going to grow as it does today, then you'll see some addition of field staff across the globe, but not everywhere. And 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. And ultimately, this arrives in the incremental conversion ratio, which we have indicated to be at roughly 70%, around 70%. And just to give you even more color on how we do this, it takes us around twenty days to put someone in new. So if we see growth, we can do it within twenty days. So a quarter in that sense for us and certainly predicting it is already long. All 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 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.