Welcome to the Randstad Q3 2013 conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded. I will now turn the call over to your host, CEO Ben Noteboom and CFO Robert Jan van de Kraats. You may begin.
Good morning, ladies and gentlemen. Welcome to our third quarter 2013 results. I'm joined here by Jack van den Broek, Leo Lindelauf, Robert Jan van de Kraats, and our investor relations team. Before I hand over to Robert Jan, who normally hosts these calls, I have a personal message, obviously. As many of you will have learned from our press release this morning, I'm stepping down as CEO of Randstad as per February 28th in 2014. If we include my interim period, I will have been in this role for 11 and a half years, and it is time for an orderly succession. It's been an amazing period in my life as CEO. We, because it's not me, obviously, but we, inherited a company with strong core values, but in not too good a shape. We also, of course, realized the great potential this company had.
With our many dedicated colleagues, we've been able to unlock the potential and create a world leader in its field. We are the only one of the top three large firms in the world who have been able to roughly triple our global market share during this period. My motivation has always been to improve our role in performing a very worthwhile function for society. It is impossible not to think every day about how we provide work on a daily basis for over half a million people and how important that is for them. We also have quite a few supporter investors, and part of our success we certainly also owe to their support. Continuity and orderly leadership transitions are very important to be able to fulfill our role also in the future.
I'm proud to be able to say that we are in excellent shape to transfer the leadership as we inevitably must. There is a strong team in place, and all the ingredients are there to build an even stronger Randstad. On a personal note, this pride is mixed with the realization that I will certainly miss you all very much. Again, we'll have ample time to say goodbye. Jack van den Broek, who is sitting next to me here, and I will use this period until the next quarterly results to make sure we will have the smoothest transition possible. Until that day, it's business as usual. I'd now like to hand over to Robert Jan van de Kraats to take you through the results. Thank you.
Ben, thanks. Thanks, Ben. Moving to the Q3 update, looking at performance, the financial results, and the outlook, finally, Q&A. On slide five, some key items on the third quarter, the header says most of it back to growth in September and also the best third quarter since 2008. That's quite a good development. Looking at the numbers you can see over here, since Q2, we've added USG, which was not consolidated in the second quarter. The third quarter has three working days more. Organic growth during the quarter was negative -1.1%, up in September, 0.6%. The consolidation of USG was more than offset by the negative currency impact, on a year-on-year basis, we had one more working day. The gross margin, as you can see, 18.2% was flat.
This was impacted by the French low-wage subsidies, the CICE subsidies, which have an impact of roughly 200 basis points on the French business and roughly 0.4% at the group level. We also see improved gross margin expansion or gross margins in the North American market as a result of our focus on customer profitability or revenue quality. This is set off by a decrease in Europe as a result mainly of legislative trend changes in the Netherlands and in Germany. OPEX up EUR 11 million sequentially and down EUR 26 million year-on-year. The EUR 11 million sequentially is mostly the result of adding USG, roughly EUR 13 million, the other items were somewhat higher cost in Europe, reflecting our first investments in marketing and some bonus accruals, set off by the foreign currency impact.
EBITDA at EUR 184 million, which is up 16%, arrives at the margin of 4.2%. On the next slide, you can see the gradual recovery in Europe. We've limited the scale a little so that you can see the differences group, Europe, North America, and rest of the world since Q3 2011. We see growth in Germany, in Iberia, in the U.K., in Italy, in Switzerland, Poland, Norway, and Sweden. Strong focus on profitability or revenue quality in the North American market, which means that our key focus is on gross profit here. Continued growth in Japan and the other emerging markets. We have seen a move from -2.6% in July in revenue trend to 0.6%+ in September. We are now finalizing seven quarters with either zero or negative growth, the first quarter was the first quarter of 2012.
If we would refer to the longer-term trends, the slide that you typically see from us, you can see that normally, from here, if things start to improve, as you know, Randstad's visibility is very limited, the typical scenario is that it offers opportunities for significant growth. North America. Record profitability this quarter, 5.5%. Gross profit is up by 2% year-on-year. Again, the focus on revenue quality here. Revenue is down -3%, which is equal to Q2. A little improvement towards the end of the quarter, September at -2%, very limited impact from the government shutdown. Looking at the staffing and in-house segment and professional separately, staffing and in-house gross profit up strong 4%, revenue down 4%.
We see good performance in admin and perm, but at the same time, we see significantly less demand in the banking and finance sector. U.S. professional GP down, but September at zero. September flat. Revenue was minus three in the quarter. We do see, however, an improving trend through the quarter, especially at IT. Firm is at 5%, and we have taken some measures. We have simplified the management structure, reduced a layer in the organization. EBITDA margin, as I mentioned, moved from 5.1% to 5.5%, which reflects good cost control and synergies from the SFN transaction. On slide eight, some words about France. It's a bit more of a difficult market in Europe, but also here we see improvements. It's a gradual recovery, higher gross profit, and some help from the low wage subsidies. Revenue down by six compared to last year, minus 13.
In between, if you look at the quarters, it has been very difficult in France. Q4 last year actually was at minus 14. This is finally an improvement. Gross profit up by 10%. I have a few words to add, by the way, on revenue. We see an improving rate of decline also through the quarter, and we also see growth at in-house accelerating, which is driven by client wins and also transfers from our regular staffing business into in-house. Professionals also slightly better at a level of minus 11. Gross profit up 10%, which includes the impact of the CICE subsidies. Effectively underlying the CICE subsidies, the gross margin is roughly flat, and part of the subsidies are being invested in employment. Costs are down by 4% year-on-year.
FTE is down mainly due to natural attrition here, 7%. This is something we anticipate to continue. We have a reorganization program which was announced at the end of last year, which now stands at a voluntary leave plan of 110 FTEs, and we have started the process of merging branches. It's on track, and we expect completion in the first quarter of 2014. This is about 275 branches being converted into larger branches, 65 in total. In Q4 2012, we announced this reorganization. The rule at Randstad is as from the moment cash goes out, we aim at returning this within 12 months. We already indicated at that time that given the fact that this is mostly management, that the returns would take a little longer here. In the meantime, we have also released part of this provision because we can do it a little more efficient.
Instead of EUR 28 million, we're now on track towards the EUR 22 million, out of which EUR 15 million relates to people, on which we have a return of EUR 10 million, as you can read in the press release. The remainder relates to branches. These branches will be replaced by larger branches, savings will take even longer to come in. The EBITDA margin is up to 4.5% now, which compares to last year's 2.5%. The Netherlands, slide nine. Good profitability. A recovery ratio of 179%. This market, by the way, has been hovering around this level for quite a while now. If we look back at 2012, we see quarters at minus two, minus one, minus three, minus three. Also in 2013, minus one, minus four, minus four. It's been hovering around this level. Our focus here is on client profitability and efficient delivery models.
The development in the Netherlands is also slightly better in the month of September. Randstad Netherlands is at -1. Tempo-Team is at -9. This is also the result of the fact that we have some non-recurring projects at in-house services, and also due to the strong focus on client profitability. The development at Yacht improved to -9. This was -13 in the previous quarter. We see the gross margin effects easing. We still are looking at slightly lower gross margins here, which is the result of higher Social Security charges, but we have some initiatives in place to deal with this. This is, for example, a positive adjustment of self-insurance, taking some risks on our own book and managing these very tightly.
We also are in the process of pricing increases to address the cost price increases and also implementing efficient delivery models wherever possible. Our costs are down 10% compared to last year's. This is mainly, as you can see, FTEs. We're also going through a simplification of the regional management structure at Tempo-Team. At the same time, we have started our additional investments in marketing campaigns. The EBITDA margin arrives at 6.5%, which is an improvement compared to last year. It includes one additional working day. A higher contribution from professionals, including Yacht. Improved business mix, a growth of HRS and also in-house. We have adjusted for a 2.6% restructuring charge at Tempo-Team. In Germany, we see growth strengthening.
Last year, at the end of the year, we were at -5, in Q3, -9, then it sort of grew to flat in Q2, and now it is at +4 in the third quarter. We also include here a significant price effect, which is sort of the result of the implementation last year, Q4, of equal pay and some collective labor agreement increases. As such, because this was implemented last year, it will fade into Q4. We do see good growth in the IT business. As I said, the collective labor agreement is included. Gross margin effects are easing here. It improved, but still not at the level it was, which is the result also of the adjustments in the collective labor agreement, the implementation of equal pay. The gross margin improved in our staffing and in-house business. Operating expenses are up by 1% year-on-year.
FTEs are down 6%. We are adding, however, some FTEs in segments that do show growth. We are investing in continued growth here, and also bonus accruals are slightly up. Also, in this country, in Germany, we have started our marketing investments. EBITDA margin now at 5.7%, compared to 6.2% last year. As you can see in the graph, there's a bit of a strong seasonal pattern in the German market. We do, at this point in time, by the way, not really see an impact on the demand in the market of the recent changes in the collective labor agreements. In Belgium, strong focus on costs. Revenue at -6%. It's a difficult market. It's a relatively difficult market compared to other markets in Europe. It might well be that the competitiveness of this market is under pressure.
We're looking at a significant decline last year, starting at -6%, ending in last quarter at -8%, beginning of the year at -9%, second quarter, -8%, now -6%. We do see, as such, a somewhat lower rate of decline. The administrative segment is holding up relatively well, but in-house, so mostly blue collar, is at a -17%, which is mainly automotive. When we see an improving trend in our professionals business here. We have a strong focus on profitability, on client profitability, field steering service as well. As such, FTEs are down by 11%, and this is related to natural attrition and some smaller divestments.
We are in the process of putting together a restructuring program, of discussing a restructuring program, which is aiming at a more efficient organization, reducing jobs, specifically in management and support, 130. We have our discussions with social partners ongoing, hopefully, there will be more clarity for our people in the fourth quarter. EBITDA margin stands now at 3.3%, which compares to 3.8% last year. Please note that in Q3, as announced at the time, there were some subsidies relating to prior years included in the results. In the U.K., we see continued growth, strong cost control. Revenue now at +5%, compares to +2% in the second quarter, also comparing to quite a hefty 2012. This is clearly an improvement. Revenue is at 10%, so +8%. We see continued growth in professionals, led by education, construction, and finance.
The decline in in-house is persistent, that is very much the result of our own selection process. We also continue to see good growth in MSP and RPO, our perm placement fees improved to a level of -2%, which was still -13% in the previous year. Unfortunately, these, at the consolidated level, are translated into EUR, then the impact is not as strong as it is at the local level. Our focus is on managing costs. Our costs are down as a result of FTEs down by 11%, our back office centralization is very well on track. If you look at the graph here, the performance in the U.K., you can see a lower level of profitability. Again, here we have a very regular seasonal impact. We consider this to be a regular pattern. Moving to the Iberian market.
Also here, we see improved profitability. In Spain, we're looking at revenues at 0%, flat. This is somewhat impacted by selection of businesses, of clients, on the back of client profitability at the USG businesses in the portfolio. We clearly see an improving trend in manufacturing. We even see some movements throughout Europe into Spain. Some higher growth in professionals, mainly perm and HRS. We have announced a new organizational structure, the integration of the USG business is expected in the first half of 2014, this is perfectly on track. It's following the plan that we have produced before. In Portugal, we see revenues up by 4% compared to -2% in the second quarter. Good performance in the call centers and also continued growth in manufacturing and automotive. Good cost control, EBITA margin now at 3%.
If one would compare to last year, excluding USG, the improvement would be even 1%. By the way, if we include USG last year. We have one more working day. We don't have slides on the rest of the business, but just a few remarks. Japan and Italy continued their good growth and also solid profitability. In Australia, we still have challenging circumstances. Revenue development per industry on our next slide. This is what we see in those segments, in those markets, and partly that's the result of our selective process on the back of customer profitability. I'll leave that for your information. We are moving to the financials update of the transaction of USG. It's on track. It's completed in three countries, Poland, Switzerland, and Luxembourg. Rebranding in Austria has been done because Randstad did not have any business in Austria.
In Spain and Italy, we're on track, as I just mentioned. The financial consolidation and the purchase price allocation has been completed. I'm sure you don't experience it very often, but we have a case of goodwill here, and it sounds bad, but it's good. It's because we effectively, and I mentioned this already at the end of the second quarter, we have acquired a business with net assets exceeding the purchase price. As a result of this, there is a sort of positive impact in the P&L, reflecting EUR 29 million. That's the difference between net assets and the purchase price. We also have anticipated annualized pre-tax cost synergies of EUR 15 million-EUR 20 million, as mentioned before. The first part of that has come in in Q3, EUR 1.2 million.
The majority is anticipated to come through in the first half of next year, and the total expected integration cost will amount to EUR 15 million, of which by now we have incurred EUR 4 million. We also have some additional tax synergies in scope as a result of identified net operating losses that can be compensated, which are valued at roughly EUR 10 million. This is not annually, this is EUR 10 million every year. We're moving to the income statement, Q3. We have EUR 4.3 billion of revenues coming to the 18.2 that was mentioned just before. Integration cost now at EUR 4 million, which includes both USG and some SFN. It compares, by the way, to last year, EUR 16 million, which was partly integration cost at SFN, but mostly reorganization costs. I'll leave the page for your information further, and I'm moving to 18, Q2, the financial key points.
Cash flow amounted to EUR 310 compared to last year's EUR 207. We have, first of all, contributing here a somewhat higher level of profitability. DSO also improved by one day. I just want to emphasize this, we have favorable timing effects on the payables. This will have an impact on Q4 as well. This time, the end of the quarter was not a weekend, so that's also a little helpful. If you look at the underlying details, by the way, of free cash flow, and you look at working capital, and we benchmark that against some of our competitors' working capital, our financial expenses, but also our tax expenses, you can see that we're doing rather well here. Leverage ratio now stands at 1.2, 1.23 to be precise, down from 1.8 in the second quarter. This will also result in somewhat lower interest expenses again.
We've also incurred an impairment in Australia. It's a non-cash item. It was driven by the fact that our profitability has remained somewhat behind our expectations, and this has resulted in a hit of EUR 36.6 million in the third quarter. The effective tax rate, again, this is always a sort of a mixed bag of some issues together. We are looking at a slight increase compared to where we were in the first part of the year. For the full year, we are giving some guidance at 32%, which is equal to last year but higher than the first part of the year. This is the result of the three mentioned items here. We have had to pay a non-recurring withholding tax because of dividend payments.
The goodwill impairment and bad will are not taxable. The mix of our profits throughout the world has changed slightly to countries with an above average tax rate. This cocktail is the reason behind this development in the tax rate. Our guidance stands at 32%. Our segment performance on slide 19. You can see the specific developments in staffing with a decline of 5%, with the EBIT margin moving up again. The items that I have mentioned before, in-house also growth led by France, NL, Germany, and Iberia. The U.K. remains in decline, but that is because of our selective process here. Professionals, an improving trend across Europe and North America, and good growth in the U.K., mainly in education and IT. The gross margin bridge on slide 20. Again, I mentioned that already, 18.2% at last year and still 18.2%.
The reasons in between are mentioned at the bottom, margin expansion in North America. Some impact of CICE, but also some negative impact in the Netherlands and Germany. All in all, a flat development. I mentioned already the perm fees are a little lower than last year, but this is not so much the underlying perm fees. It's very much the translation into EUR coming from GBP and US dollars. Operating expenses on the next slide, both sequentially, the development at the top of the page, but also year-over-year. You can see sequentially the development of adding USD and somewhat lower FX effect and some organic changes in Europe, which are the result of marketing costs and some bonus accruals. The fact that FTEs are up in the third quarter is the result of USD inclusion, but also the seasonal pattern.
Net debt down by significant EUR 647 million. In the meantime, operating working capital at EUR 466. Net debt, as I mentioned, it's been served well in the third quarter. In the fourth quarter, it's also included in our outlook page. We will pay a tax payable of EUR 130 million, so this will be cash out. There will be some impact of the timing at the beginning of the quarter, so the advantage in Q3 will be slightly disadvantaged at the beginning of Q4. We're not looking at massive changes in the net debt level in Q4. Free cash flow up. Not a lot to say here. The other non-cash items, by the way, are the CICE, because these are tax credits. That means that we can only cash in after three years. Flipping to the outlook page. Here, revenue development per working day was at 0.6% in September.
We are having a continued improvement into Q4. I think it's unavoidable we're going to see growth in the fourth quarter. The comparison base is 2% easier into Q4, that makes a difference as well, that makes it even more unavoidable. By the way, Christmas is a bit more advantageous in terms of planning than it was last year, hopefully that provides with some impact as well. With the same number of working days, we're going to make some additional investments in marketing again. EUR 10 million is anticipated as we speak. We also have EUR 10 million of annual cost savings relating to the restructuring plan in France and the payment of the tax receivable. Our key strategic priorities remain as they have been, no change here. The exit rates in our book in September are -3% in France.
In Germany, we've taken the blended rate of August and September because the cutoff moment is always challenging. It's roughly +5%. In Belgium, it's -4%, in the U.K., +8%, Iberia, +1%, in North America, -3%, the rest of Europe at +10%, the rest of the world at +5%, adding up to the 0.6% that was mentioned before. That completes the presentation. We're now moving to Q&A.
Thank you. We will now begin the question and answer session. If you have a question, please press star then one on your touchtone phone. If you wish to be removed from the queue, please press the hash key or the pound sign. If you are using a speakerphone, you may need to pick up the handset first before pressing the numbers. Once again, if you have a question, please press star then one on your touchtone phone. Konrad Zomer from [Zimmer Capital Management] is online with a question.
Hi, good morning. Two questions. The first one on the U.S. Lower revenues, a great improvement in your margin. Can you indicate to us how long you can improve margins, assuming revenues continue to contract? Related to that, you mentioned Daniel Foley has left the business because of the performance in your professionals business. Can you give us an indication what the margin development was in Q3 in your professionals business, please, in the U.S.?
The optimization of business, obviously, if you look at total market and the market share we have, there is a lot of room for improvement. However, it is not our ambition to keep on fine-tuning our business until we have this one most profitable client left that is in the market. Obviously, for next year, our target has to be to have growth in line with market to start with, and then we should exceed market. It is obvious that is the position we should be in. We have taken some steps to actually improve our business. To share with you the reason we see for the backdrop, if you look at our performance compared to market. That is due to effect of underinvestment in good businesses. Management was trying to optimize profit a bit too much and underinvested, so actually did not execute field steering good enough.
That has now been corrected, and we already see the first signs in September, so we are pretty optimistic. It always takes a little bit of time that we will be back at top-line development, at least in line with market. We do not share the separate gross margin developments. What I would like to share with you is that it is a touch better than last year. If you look at the gross margin percentage compared to last year.
Okay. Maybe just a quick last question from me about Yacht. You mentioned the profitability was relatively strong. Can you give us a feel for what the positive impact of your profitability was on your overall Dutch EBIT margin, which improved by 80 basis points over the quarter?
That is a calculation that I would have to do. Let me see fast. Anyhow, what we see is that the profitability. I will help you this way. The profitability of Yacht in Q3 was a touch above the average of the company.
Okay. That's clear. Thank you very much.
Paul Sullivan from Barclays is online with a question.
Yeah. Good morning, guys. Just a few questions, if I may. Firstly, in France, are you seeing or are you getting any pressure, or are you seeing any signs of pressure to pass on some elements of the CICE subsidy in any renewals that are coming up in terms of contracts? Do you still expect a sort of a 10 to 15 basis points gross margin uplift from it for next year? That's the first question. Secondly, could you just remind us of the sort of cumulative cost impact from all your various restructuring initiatives as you see them coming through in 2014? Just to give us a sort of a sense. I estimate about sort of EUR 50 million-EUR 60 million, but I just want to get your sense on that. Final question.
Obviously, your net debt to EBITDA position is improving quite dramatically and will continue to improve. What are your thoughts on the timing and magnitude of M&A? Presumably acquisitions are still your preference over potential cash returns?
Yeah. Good morning. Sjaak van den Broek here on the question on France. Pressure in France on margin and questions from clients on rebates, I've seen that for the last ten years when I was involved in France, there's nothing new. Please remember that CICE is a subsidy, but we already, for quite some years, had Allègements, which is also a subsidy. Discussions on margin are ongoing, but we're quite adamant. CICE belongs to the employer. We're the employer. Therefore, the answer to those questions on our behalf is no.
Okay, great.
I'll answer the third question, Robert Jan will answer the second question on the savings. Obviously, the leverage ratio is going down. As we've also shared in Q4, there will not be a big decline because of the fact we have to repay EUR 131 million that we owe the Dutch government. Our strategy hasn't changed. We've always shared with the market that we will return excess cash we have to shareholders unless we find a more value-creating target for that money. In general, so far, the biggest chance of creating more value is actually investing in the right businesses. We've also shared quite often the strategy we have. We want to have a bigger density of business since market share, relative market share, and the market correlates 100% with profitability. Two, we want to buy in markets where we have a strong management team that can handle the merger.
Three, we have a slight preference for more Professionals business. Would we not find, obviously, the right targets at the right price in the right market, as we said, we will return the money to shareholders. Indeed, it's a second option. Paul, can you repeat your second question, please?
Well, it's just your thoughts on the cumulative cost savings from your various-- You've got three or four various plans running into next year, and I just want to get your sense on the cumulative cost impact that you see from all of those in 2014 over 2013.
Yeah. The anticipated cost savings relate to the programs that are to be executed or in execution. Belgium and France, I would say that's around EUR 30 million on an annual basis. That, again, you won't see coming through because in the meantime, we'll make our investments whenever necessary if we see growth, also our marketing investments will continue.
Okay.
Please note that as from the middle of this year, USG has been included, which has an impact of €13 million per quarter on the cost base.
Great. Thank you.
Robert Plant from JP Morgan is online with a question.
Morning, Ben and Robert. The U.K. saw good growth in education, up 22%. Hays also talked about education doing well. They thought it might not last. What's your view on education? Perhaps more generally, you mentioned the public sector is showing strong demand. Do you think that's going to be sustainable, accelerate? Thank you.
Okay. Sjaak van den Broek again. We definitely think education will last. It should last for a long time, on a more general note. Seriously, looking at the business, it's a very seasonal business, as Robert alluded to earlier. In August, schools are closed. The main part of the education business is really a day-to-day business. It's filling in people on the short term. On the one hand, it's a volatile business, difficult to predict. On the other hand, we started the academic year really well with, again, double-digit growth, and at the same time, we're investing in this business to take more of this growth going forward. Quite optimistic on that one. Your more general question on the public sector, I cannot answer in detail because really education is most of the business we have there.
Thank you, Sjaak .
Tom Sykes from Deutsche Bank is online with a question.
Yeah. Morning, everybody. Just a couple of questions on in-house, actually. I wondered if you could give a feel for the scale of transfers that were made into in-house this year or in this quarter. Also, could you say how much of the CICE benefit from France that was actually felt in in-house, please?
Yeah. The amount of transfer is no more than about 30% at this point in time. The big gains are the combination of new clients and higher market share at existing clients, which we usually see happening. I don't think the percentage of CICE is different in in-house than in the other staffing business. I think you can apply about the average margin that we have in France.
Okay.
It's brought up. That's Tom, yeah. It might be slightly more, it really is a very small difference.
Okay. I don't know exactly how much of your in-house business is in France. Are you able to put a number on that at all, please?
Yeah. We can give you an indication in a minute. It is big anyhow. It is from EUR 600 million, huh?
Yeah, Tom, you can find this in the annual report.
Yeah.
That's where we typically give that.
It's in the range of EUR 500 million-EUR 600 million. I'll give you the details. There's no secrets here. EUR 360. Yeah.
Between 15% and 20%.
Between EUR 500 million and EUR 600 million, Tom.
Okay, thank you. Then just, if I may, on your ability to grow and retain gross margin, obviously, you're going to get a bit more of a CICE benefit next year. You're going to annualize part of the benefit this year, though. You've been cutting your way to profitability, perhaps in some geographies and letting go of low-margin business. How confident at this stage do you feel that if you get back into growth excluding the CICE benefit, you'll actually be seeing gross margin stability in Q4 and hopefully into Q1?
Obviously, we can't forecast this per quarter. If you look at what's happening in our main markets, of course, we had two rather big setbacks in margin, mainly due to Social Security charges. This happened both in Germany and in the Netherlands. As you have seen in Netherlands, as we said, we had a good plan, I think, to compensate for it, but obviously, that takes some time. In Germany, we also needed some time to adjust all the charges, et cetera, we have in those countries. In that respect, if you look at the biggest bleeders, the bleeders we had in gross margin, I think that those have been fixed. Then we look at normal market developments, because that's in the question. If, and I'm not pessimistic here, if we return market improving, then we have always seen that with a delay, you also see two effects.
One is you see that the pricing power shifts. That means we will have better margins at our clients, not at the old levels, but improved. The other one is, of course, that the business mix improves because both perm, and I think we have a fantastic opportunity here because we have probably 1,500 or something consultants more trying to sell perm than we had in the past. We will have more professionals business later in the cycle. That also will have a positive effect on our gross margin. The average gross margin is not necessarily a reliable indicator of profitability, but if indeed the mix improves like that.
Yeah
As I just described, obviously it inevitably will have an effect on our profitability. In that way, unless the market changes a lot, we're not pessimistic about being able to have a better profitability next year.
Thank you.
Adding something to the CICE comments in general, I'd like to make sure that people understand the full picture here of sort of the net effect here. We generate those provisions, but these are paid as a tax credit. That means it takes 3 years before the money arrives at Randstad. The second point is because it's a tax credit, it also reduces the impact of the regular tax planning at Randstad. In terms of, let's say, in the end, the net sensitivity for CICE is less than the result that's coming through at the Gross Profit line, clearly.
Right. Thank you. I think, what I'm trying to get to on the in-house business is that you obviously got a CICE benefit there. You're up by 13% in revenues, some of which are transfers, then you're up by 30% in EBIT. I was trying to work out Would you have got gearing in the in-house business if it wasn't for CICE? Or would you expect the revenue and profitability to be-
Yeah, I think based on the information we gave you, the calculation is not so tough anymore. To be honest, I don't want to be impolite. These are a lot for two questions, I think. We think we move on to the next one. Thank you.
Okay. That's fine. Thank you.
Laurent Brunelle from Exane BNP Paribas is online with a question.
Yes, good morning. Laurent with Exane BNP. Two question, if I may. First, looking at your top-line development, do you see a recovery in the end market in Europe today, or is it just the reflection of easier comps? Maybe can you say a word on October trends? Second, on the French social plan, when do you expect the payback for the EUR 22 million? Can you elaborate a bit more on this organization, please?
On the first question, what do we expect in October? What exactly was the point you were trying to get? The growth rates? Okay.
Yeah.
If we are optimistic about Europe, that was the question more or less, huh?
Yeah. We are. The trends are positive. Again, we've seen growth in September. We see main markets improving, and we used to have a very favorable mix. At this point in time in the cycle, the mix is a little bit less favorable because obviously the Netherlands and Belgium and France are lagging behind a bit, but also improving. It's inevitable if one of the big engines like Germany is actually growing. If we see growth in Iberia, if we see growth in the U.K., if we see growth in Italy, it's inevitable that the rest of Europe would not follow. Again, unless there's a strange event that would actually drastically change the cycle, we don't see any reason not to be optimistic. Let's not get overexcited, the trend is for sure positive.
Maybe a bit more elaborate on France, because we just touched on the fact that we will have bigger branches in the metropolitan areas. Of course, we're doing much more in France. The French business, the old Vedior business, was organized in a different way than we do at Randstad. They were in silos, in a way, geared at certain profiles. We, in the bases, always have a geographical business and then specialties within the branches. We have now changed the French organization into these regionals. Five regionals, Paris Metropolitan, and then the four other corners of the country. We do feel that's a type of organization which suits our purposes much more. We're very optimistic about the outcome of that. At the same time, we're creating these bigger branches, which will definitely help. Back to your question on the cost advantages.
It's going to be around EUR 10 million immediate return on less personnel. As Robert Jan already mentioned, the impact of the change in branches is much more long-term, because we had to really close the 275 small spaces. We had to open up 65 totally new ones. That's quite a long business plan, if you may. That will come into the P&L on a much more gradual basis.
Okay. Just on France, the exit rate was minus 3%. Do you believe that you can return to positive growth very quickly? Given easier comps?
Yeah. As we mentioned here, you also see it in the Prism'emploi numbers. The market is improving, although this is still largely fueled by comparisons. As Robert Jan showed you earlier, we still had quite a tone-down in Q4 last year, also on permanent placement. Comparisons are good. It is not that we are seeing an absolute return to growth based on increased demand.
Yeah, sure. Okay, thank you very much.
One more addition, [though]. I overestimated the in-house in France a bit. It is a touch below EUR 500 million. That was still for Tom, but growing obviously, yeah. We will get to the EUR 500 million-EUR 600 million, yeah.
David Tailleur from Rabobank is online with a question.
Yeah, good morning, gentlemen. If I may, a quick comment. Ben, thanks a lot for all your efforts the last years. Sjaak , congratulations, of course. Questions on Germany. I see a volume decline of, let's say, 4%, if I use the same calculation as you are preparing, and a 1% increase in SG&A. Is that a reflection of your, say, short-term expectations in terms of trends in Germany? Paul, on to you.
Okay. Well, David, the increase is mostly, as mentioned on a general note, marketing, because Germany is definitely one of the companies where we have campaigned. Also, on a positive note, bonus accruals. Not so much headcount, David. Just a short word on Germany, what's going on, because as you know, there's currently coalition talks between Angela Merkel, CDU, and the SPD. One major topic here is implementing a minimum wage, which is supposed to be EUR 8.50 for the whole of the country, to be implemented 1st of January in the western part. It's still a debate in which phasing this is going to kick in in the eastern part. Overall, we don't know yet the absolute effects of a new coalition in Germany.
The system in Germany always works that politicians, politics, government gives guidance, then it's up to social partners to work out the details. There's some unclarity still that we need to wait for probably the next few weeks.
Do you see more downside or upside risk in this?
Yeah, we in general think there's of course long-term upside in the fact that people are paid well. Although in Western Germany, the impact will be limited because many people in our collective labor agreement are already above the minimum wage. We're kind of neutral on this one.
Okay. A quick one on the U.K. The perm is down by 2%. If I see some competitors reporting quite some growth.
A large part, David, is Forex. Again, as mentioned, if you would look at fees in pounds, you probably see-
7.5%
7.5% growth, it translates into Euros, you're down.
Got it. In Iberia, is it impacted by the USG integration to some extent? I think that the market is doing a bit more.
Sorry, I didn't get the message there.
Sorry, Iberia is doing 1%. I've seen that the market is growing by at least 5%. Is that the impact of the USG integration?
Yeah.
Correct. That's what it is. It has to do with the selection of clients. David, just to make sure that we have the U.K. perm fees clear, it's -2 in U.K. sterling. It improved from -13 in the month of September, showed growth. Okay. Next, please.
Marc Zwartsenburg from ING is online with a question.
Yeah, thank you. First of all, indeed, congrats to you, Sjaak , and we're looking forward to the farewell drinks invitation, Ben. Two questions from my side. On SG&A, first, I want to clarify a little bit on the French savings, because I heard, I think, Robert Jan speak about EUR 22 million savings, but in the press release and also on the slides, I read EUR 10 million. Is that because EUR 10 million is set for next year and there will be some phasing later on, that it will eventually be a higher number? Continuing on SG&A, looking forward to Q4, there's some cost savings kicking in. Maybe you can elaborate a bit on what we should expect for Q4. We have some EUR 10 million more marketing spend and bonus accruals.
Can you, a little bit, give a feel for the cost base for Q4 versus Q3, whether it will obviously be up, I think, but is that a significant amount or a small amount? So that on SG&A. My second question is on the CICE Act , again, coming back on that, I think, Robert Jan, you mentioned that underlying the impact was 200 basis points, but I thought it was 270. So maybe you can clarify what was the real impact of CICE Act in Q3 on the margin.
I'll take your last question first, Marc. The 270 was Q2, which included an adjustment for Q1. The 200 basis points is just Q3.
Yeah, that's true.
Now back to SG&A, the French development. Just to make sure that it's clear, what I mentioned was that originally we set aside EUR 28 million. This was now reduced to EUR 22 million. The EUR 22 million mostly relates to people, roughly 15. That mostly relates, as also Jaak pointed out, to management, and we expect to see the savings relating to this investment of EUR 15 million to come in in Q4, and the amount will be roughly €10 million. That is because severance payments are a little higher than typical. This is the annualized amount, by the way, EUR 10 million on an annualized basis. Please note again that severance pay is a little above average here. So typically, and if we've evaluated that, reorganizations in Randstad return within 12 months, not this one. The remainder relates to branch closures and movement to larger branches.
That also was, I think, well explained by Jaak. We'll see savings coming in, but that will take longer.
That's the whole 2014.
The return will be a little lower than we normally have. Sorry, Marc.
Yeah, no, that's clear now.
Q4, yeah, I think your conclusion is right. We're going to see a slight increase of the cost relating to the items you mentioned, for example, the marketing. I don't want to pinpoint a precise amount, but just a few EUR million more than it was in Q3.
Clear. Maybe a final one. The trend in Spain, ex-USG, what was the growth there? Do you still track that?
It was, let me think. It's a quarter of the business. It's a few % difference. I don't know. The USG business was in decline, and we were growing. And it's about 25% of the business.
Okay. Closer to five that David mentioned.
Yeah.
Too high.
Too high.
Too high. We are plus two.
Spain excluding was 2% up, I just learned here. Yeah.
Okay. Clear. Thank you very much.
Jan de Vleeschauwer from KBC Securities is online with a question.
Good morning, gentlemen. Two questions from my side, please. First one on the Dutch market. Your sales declined by 4% in the third quarter. This seems to be weaker than the market. Could you elaborate a bit more on this, please? Is this due to your professional staffing business, or is it because of your focus on client profitability? A second one, do you believe that if the positive trends continue in 2014 and growth accelerates gradually, you reach your 5% margin target in the third quarter next year? Thank you very much.
On the Dutch market, indeed, the big effect is Yacht, as we also shared with you. It's -9%. That doesn't help. Tempo-Team is also below market, and Randstad is a bit better. Indeed. First of all, that's one. The Yacht members are not the professional market data are not in the data that are being released by the ABU every four weeks. We think indeed we are a touch below market, but not a lot. The 5%, for sure, as we said, is we need growth, and we need a better mix. It's a bit of a difficult question to answer. In the future, if mix and growth are there, indeed, we'll reach the 5%. It's difficult to forecast the speed of the recovery of markets.
Maybe you think I'm a bit of a coward, but I think it would be too courageous here to forecast that by, let's say, August next year, the market will have developed in such a way that we will be able to forecast 5%. We are very confident we'll get there. Sjaak says I could take risk this time, but that's not how we work.
Thank you.
William Vanderpump from UBS is online with a question.
Morning, everyone. Just a question on Germany, please. Could you comment on the gross margin pressure? Is that just the equal pay effect, or is there anything else going on that you could describe to us? Just on Germany as well, in terms of the growth rate, obviously good performance in the quarter and a solid exit rate. You commented on some pricing benefit dropping away. You've obviously got a much easier comp in the fourth quarter. Do you see further acceleration in the German business continuing, please?
Well, the pressure in the German market is actually more a percentage-wise pressure because, as you see, the bill rates go up with some 8%. Therefore, the percentage margin drops. At the same time, also the percentage cost drops. If you would go back to nominal margins, they have been quite stable, and we're quite proud of our German management team on managing this quite massive change in the market really well with the good IT support they also created there. That's absolutely positive news in a way. At the same time, improvements are slightly kicking in. Volume wise, we're getting closer to the zero mark in the last few weeks. Actually positive again there. In comparison, the difference falls away.
These increases started in November last year, and there, of course, every quarter you'll see a slightly more tough comparison from an absolute bill rate point of view. That was the point we were trying to make here.
You could, I suppose, if your price increases have all sort of annualized, you could potentially drop back a bit closer to that volume number in the fourth quarter.
As with many European countries, and already explained by Ben, we're also optimistic about the German development since Q4.
Okay. Perfect. All right. Thank you.
Hans Pluijgers from Kepler is online with a question.
Yes. Good morning, gentlemen. Two questions from my side. First of all, coming back on the gross margin in the U.S. If I make a quick calculation, I come out at improvement year-over-year by about 100 basis points. Is that a fair calculation? It's slightly less than what we've seen in the previous two quarters, an improvement year on. Is that a good calculation? Can you give some feeling on that? Secondly, looking at your in-house, you always indicated that in principle, the EBITA margin for in-house could be between 4%-5%. You're currently already slightly above the 5%, of course, partly supported by the CICE. How do you see that in the longer term? Because you're still growing quite handsomely there. See maybe in the longer term, also some potential higher EBITA margins there.
The last question on working capital, you said payables had a positive impact. Could you give some flavor to that? What's happening there? Also in Q4, there will be an impact. Is it positive or negative?
No, Hans. The gross margin improvement in the U.S. is higher than you indicated. One, we're not going to share the gross margin levels, as we've mentioned before. The other nice thing is, of course, we shared a 4%-5% target for in-house. Usually, people don't get punished if they exceed their targets, and the same is true for Randstad. Obviously, you should also realize indeed that we have the strongest season here. In Q3, we always have the highest profitability. Of course, largely also depend on the mix, where would we see growth in in-house compared to profit levels? There's a variation there, so it's difficult to forecast. Indeed, we are very pleased with the 5.3%. Robert Jan will get the working capital.
Hans, the working capital, the payables impact. I tried to give you clarity by indicating the end-of-year position. This is a difficult one because it's relatively volatile and dependent on events at the end of a period. The point I made was, we anticipate at the end of the year, as a result of the free cash flow, the payment of the tax amount of EUR 130 million at the end of the year, and we expect a somewhat lower net debt level than at the end of Q3, but not too much. That is because of some of these payables will have a negative effect on Q4. The benefit in Q3 will be reversed in Q4. We don't want you to plot last year's number directly on Q4 because that will be a little unfair.
Okay. Thank you very much.
Final question, I guess.
Arun Rambocus from Kempen is online with a question.
Thanks for taking my question. I have one left. Just quickly looking at the North American business, obviously quite satisfactory results. If you look at the revenue trends compared to the ASA data, the American Staffing Association, which showed an acceleration, there is quite a sort of widening gap. First of all, do you recognize the underlying accelerating trend in the American market? Secondly, can you give a guidance on when you think the gap versus Randstad in the market will become narrower despite the satisfactory results, obviously. Can you shed some comments on that? Thank you.
We look at the gross margin line, Arun, to see whether or not we are in line with market. Then you look at staffing, which of course is the ASA, then we are more or less in line with market. We are not too worried about that development. In spite of that, obviously, over time, we also will need to catch up on the top-line developments. Again, the quality of our business has improved tremendously. The investment we have made in more permanent placement, more white collar, in-house, blue collar only through in-house if it is large scale, et cetera, really has made a major difference, leading to the record profitability we have had. The area where we are more behind market, and I think where there is more emphasis necessary, and we have also put it there now, is in the development of the professionals.
I think there we are more behind. Those are not included in the ASA numbers.
Okay.
Still, we know we are behind market. Again, we have made some steps, amongst other things, change of management. I already mentioned that it was clear that we under-invested in some businesses that actually had good growth opportunities. Next to better quality of business, which we did achieve in professionals, we should have been able to capture more growth, and we are now making the investments to make that happen ASAP.
Can I sneak just one more in about the dividend policy? Maybe an unexpected question, a bit too early to discuss that part. If I recall correctly, the dividend policy was changed last year, December, where it was guided with a 40%-50% payout of the adjusted net profit, but it would come in at the lower end of this range. Given the development in your cash flow and in your net debt, and the fact that markets are improving, what would make you change, going to a more higher end of that range? Is it already time to look at that?
No, it's early, Arun. Just to make sure, our policy is 40, but we have expanded the range up to 50 to take care of, let's say, special circumstances, and that is an evaluation that will take place later.
Obviously market circumstances have improved since you changed your policy and when you made your first comment about policy, right?
Yeah, correct. Because they are changing to sales, Arun.
Okay. Thank you.
Thank you, Arun.
Bye.
All right, operator. Thank you so much. I'm going to close the call now because I think we've dealt with the questions. Thank you so much for joining us at this discussion. We look forward to talking to you again either soon or at least in February again at the announcement of our Q4 results. Thanks. Bye.
Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.