Good morning, ladies and gentlemen. Welcome to the conference call discussing the Randstad first quarter 2013 results. Ben and I are here supported by quite some people, including Jan-Pieter van Winsen and Jacques van den Broek. I'm going to take you through the presentation, we'll move to Q&A afterwards. I'm sure you don't want me to elaborate on page two, so I'm moving on to slide five, which has the header that reflects the climate that we have experienced in the first quarter of the year. It was a good start of the year, strong efficiency improvements have supported the return of 2.4% EBITA margin, EUR 92 million for the first quarter. Organic growth through the first quarter improved slightly. Organic growth per working day was down 3.7%, which compares with 5%, just north of 5% for the fourth quarter.
This improvement was not the result of easing comparables. If you look at last year, 2012, January was just below 0, March was just north of 0. We do see continued growth in Japan and a decline in Europe East. Please note that seasonally, this is the smallest quarter of the year. We've got 1.8 fewer working days versus last year. Last year, it was a leap year. It included an extra day in the month of February. If we look ahead, Q2 will generate 0.4 more working days, Q3, 1.0, Q4 will be almost flat, which leaves out most of the leap day that happened in 2012. We would love to see more of these years, by the way, but it only happens once every four years.
The gross margin expansion that we have noted in North America was offset by a lower gross margin in Europe, which was mainly reflecting legislative changes in Germany, the Netherlands, and France. The decline in our business was, to quite some degree, compensated by good cost management. Operating expenses were down EUR 24 million sequentially, which includes EUR 9 million of foreign currency effects. If one looks back at, on a constant currency basis, to Q2 2012, the decline by now is EUR 43 million for the quarter. The FTE reduction supporting this was 2,360 measured on a year-on-year basis, EBITA arrived at 2.4%, reflecting a recovery ratio of 71%. I would not have been surprised to see the same EBITA margin at the bottom line if the working days effect would not have impacted us. Slide six, the trends.
These are the Randstad trends, the growth development slightly improving throughout the quarter. What we see here is a gradual improvement in Europe, which is the pink line here. At the end, you can see it going up somewhat. In North America, we have a strong focus on profitability, which resulted in a better gross profit level and better return. Please note that in North America through the quarter, we moved from -5% at the beginning to -3% in the month of March. We see continued growth in Japan and emerging markets. As mentioned, it improves through the quarter. Slide seven, North America. As I said, focus on profitability. If you look at the bottom of the slide, you see the EBITA margin improving. I would say this is strategy coming through. Revenue was down 3%.
Q4 was flat. In the month of March, it was minus 3. Strong gross margin improvement both in staffing and professionals as a result of focus on client profitability, and also PERM contributed again positively. If we look at the components, the three components, U.S. staffing and in-house down 4, but gross profit up 6. This is adjusted for working days. Good performance in the admin and PERM business. U.S. professionals down 5%, and gross profit was just below last quarter. This reflects lower demand in finance and IT. We did have some projects being completed with our clients, and also here, PERM improved through the quarter. Canada continued its growth rate at 3%. Overall, a pretty good quarter in our North American business. Slide eight is reflecting the usual integration process and synergies, the progress made.
We again made steps. To the right-hand bottom of the page, you see annualized cost synergies. Please note that these are EUR amounts. This reflects the ambition of at least $50 million U.S. dollars. Slide nine, France. Ensuring adaptability. That's not easy in France. That's a rather lengthy process to adjust the organization. That doesn't make life easy in this country. Revenue is down 12%, still an improvement compared to Q4. We did see a stable trend through the quarter, and in-house showing growth, including transfers, whereas professionals was at -15%, impacted also by PERM. Gross profit down less, 9%. The gross margin was up 80 basis points. This includes the impact of the low-wage subsidies, the Finance Act or the CICE subsidies in France. I have some information about this at the right bottom corner of this page.
This is where you see the CICE low wage subsidies coming in. It is being settled in the corporate income tax. That means the cash is only transferred when offsetting it against CIT payments. Given the developments in France, given the reorganizations running in France and the cost related to that, this means that you can see at the bottom here, cash received after 3 years. It takes a while before cash comes in. This has a substantial impact on working capital. It might well increase to a very substantial amount over time. On the right-hand of this picture, you see training and innovation. It's yet a little unclear how much we're going to invest, but it's clear we will invest in training and innovation. We have also included that in our assessment, which we consider to be competitively sensitive.
I will not disclose the details, but it's clearly included in the 80% improvement in the gross margin. There are 2 more things to mention here. First of all, the gain as such is not taxable because it's offset against CIT payments. The expenses in training and innovation are tax-deductible. It's a pretty complex story here, but it supports the return in our French business. The mix in our gross profit had an impact because in-house grew versus a decrease in professionals and as mentioned in PERM. Costs were down 6% year-on-year. This is the result of field steering. It does not yet include the reorganization. The reorganization looks at the new organizational structure. We are anticipating a start in the month of June. As I said, lengthy discussions always in a process like this.
EBITDA margin at 1.7%, also reflecting 1.5 fewer working days in France. In the Netherlands, the gross margin pressure continued, but this time it was very much the result of higher Social Security charges. Price increases are being implemented but in a competitive environment. We do have various other initiatives in scope, like we are retaining the cost of sickness of the flex worker, and we believe that that will positively contribute to the bottom line. We are looking and implementing delivery model improvements to serve clients when prices are not at the level we would like to see them. Revenue is down 1%, and this includes Yacht at -13%, where we still see an improved utilization rate, but still a -13%, a significant -13%.
Costs are down 8% versus the previous quarter, on a sequential basis, also including lower marketing costs. The restructuring programs that we have announced are starting to materialize as a result of which next to field steering, FTEs is down by 4%. EBITDA margin at 4.7%. Last year, we reported a divestment which included a book profit, so that supported the result. We have got two working days less and happy to see the recovery ratio in the Netherlands at 58%. In Germany, we see also an easing decline. Revenue is down 4%. This compares to 9% in the fourth quarter. It does include a significant price effect as stated here. Through the quarter, we did see an improving trend towards the month of March. We do not believe there is a reduced amount yet from Equal Pay, but it has an impact on the gross margin.
Professionals did slow. We did see good performance in the IT business in this segment. Gross margin in Germany, there is some pressure here, and it is quite a cocktail of elements. The implementation of Equal Pay does have an impact here, and that is reflecting the fact that we charge it on to clients, but we do not generate, if it relates to holidays, we do not generate the typical gross margin on this, and we do still have some discussions with clients on how to charge this. We also did experience a flu epidemic in the first quarter. Higher sickness, and we believe it impacted the gross margin by roughly 40 basis points. We have also changed the accounting method for surcharges during the holidays. Typically, we were taking those in the quarter in which the holidays appeared. Now we are accruing throughout the year.
The three fewer working days in Germany clearly had an impact. Strong cost control, FTE is down by 4%, and we have adjusted the results for an additional restructuring charge of EUR 1.1 million. EBITDA arrived at 3.1%, the recovery ratio close to target at 49%. The focus in Germany is on client profitability and delivery models. Belgium, a difficult market, not easy at all, taking into account the remark in the middle here, wage inflation. This country has an automatic wage inflation system which increases the cost base by at least 3%-4% and has a serious negative impact. Also, I would say it makes the country less and less competitive. It is not a system that can continue forever. Revenues at -9%, almost the same as in Q4, stable through the quarter.
Focus that we have is on profitability, client profitability, supported by field steering, cost management. The EBITDA margin arrived at 3.1%. The recovery ratio tells you some of the story, 39% need to do a little more here. The U.K., the positive trend continues. Internal discipline drives the results here. Field steering clearly supporting the improved profitability in the U.K. Revenue at -1% now compared to -7% in Q4. We do see an improving trend also here throughout the quarter, and good growth in professionals, including the public sector education. We see a further decline in in-house, but that is reflecting the focus, the internal focus, the discipline. We continue to see good growth in MSP and RPO and perm fees are now at -9% compared to -16% in Q4.
Back office centralization well on track. EBITDA now at 1.4%, reflecting the improved business mix, more professionals, and two working days less in the U.K. Iberia, finally a plus. It's only in the month of March. Revenue for the quarter in Spain was -1%. That compares to -4% in Q4, but March showed a plus of 4%. This clearly is our own performance also in the market doing well. Q4 still at -12%. That was quite a difficult quarter. -1% now feels somewhat better, I can say. Trends are positively impacted by Easter because of hospitality business. The improving trend is also driven by manufacturing. You might all have read that some of the automotive manufacturers have moved or are moving activities to Spain because of more attractive conditions.
Given the story on France that I just shared with you, this is understandable, I would say. Professionals also showed continued growth. In Portugal, not an easy context. -14% in Q4, -8% in Q1, and March now by 1% plus. Good performance in our call center business, which is a substantial part of our Portuguese business. A decline, a continued decline in manufacturing, but also in automotive here. Costs down, good cost management, FTE is down by 12%, resulting in an EBITDA margin of 2% with three fewer working days. In a rather competitive environment, everybody is searching for business and a very good recovery ratio, as you can see. Looking at the revenue development per industry, per segment. These are Randstad data. I think the pluses and minuses speak for themselves.
Food in the U.S. is better than in Q4. Quite some sectors in negative territory. Some of that also because of choices that Randstad has consciously made. In Germany, the minus at automotive is still a double minus. It improved versus Q4. Moving on to the financial results now. The outlook on page 17. The income statement reflecting the numbers that I've just elaborated on. I'm just adding a comment here on amortization and impairment. It's less than the previous year. This is sort of reflecting bookkeeping rules. It's a little less because we have finalized some of the amortization. As a result of that, the rhythm has changed now EUR 41 million in the quarter. Slide 18, summarizing the key financial points. Free cash flow at EUR 42 million versus EUR 58 million last year. It's a little lower profitability as stated at the beginning of my contribution.
We have a reinforced focus on the collection of trade receivables. It's always difficult at the end of a quarter. Typically, there's a weekend that has an impact. Easter has more of an impact than the Friday before Easter. Some of the banks were closed in some countries, and that has an impact on working capital. Also the timing effect on the French subsidies, as I explained, will have an impact. Leverage ratio at a comfortable 1.5 within the range, clearly. DSO improved again, one day year-on-year. The story continues. Our overdues are still close to 20%, so we believe there's still room to improve. We've issued the preference shares for EUR 114 million against 5.8% yield, which is fully committed long-term capital. Cheap equity, and it's used to reduce the net debt position. The effective tax rate amounts to 31%.
Again, very little impact from the French subsidies because we are conservative taking that given the tax position in the French business. Diluted to EPS now down to EUR 0.33 compared to EUR 0.39 in the first quarter of last year. Dividend cash, EUR 84 million. We're going to issue, as we have announced in a separate press release, 4.5 million ordinary shares to cover the stock dividend, which compares to a dilution of 2.6%. Our segments. I would like to point out the EBITA margin improvement in the in-house business and in the professional business. It's clear that selected clients that have been transferred to in-house, it's reflecting win-win. Both the clients are more satisfied. We free up the capacity in the branch, and we serve them with high efficiency, as you can see here.
I'd like to mention in the staffing segment, again, improved profitability in the HRS segment, which includes outplacement, MSP, RPO. Gross margin bridge on slide 20. Last year, first quarter. Again, the first quarter is different from Q4. Sequentially comparing gross margins does not make sense. Q1 last year arrived at 18%, we're now at 17.8%, and as you can see, in between, an additional 0.2% impact in the first quarter of this year, which is explained here in the boxes below. We have margin expansion, so a plus in North America. We have the benefit of the subsidies in France, but we have fewer working days compared to last year, and the changes in social securities, and the system in sort of the legislative context in Netherlands and in Germany.
HRS continued to grow. Contributed to positive 20 basis points here. Perm fees now arrived at 10.1% of gross profit compared to 9.9% last year. It's been a while ago that we were above 10% of gross profit, so back to that level now, but still a way to go to the historical levels of 2007, where it was between 12% and 13%. Operating expenses down on slide 21. Comparing the sequential development at the upper part of the slide, Q4 last year, EUR 616 million, now it's EUR 592 million. I would say next to foreign exchange and synergies and disposals, the typical adjustments organic in Europe and organic in the rest of the world. FTEs are down by 890 people sequentially from Q4 to Q1.
If we compare year-over-year, EUR 638, and I already mentioned, if you go back to Q2, it was EUR 635 on a constant currency basis. If you take Q1 as the base, we are well ahead of our target of EUR 70 million to EUR 100 million within a year as from Q2 last year onwards. Impact of wage inflation plays a role here. That is something that is hard to compensate, but we're working on it. Cost reduction initiatives, the slide that we always provide you here at the bottom, slide 22. You see a plus this time in the flexibility. Out of the total of EUR 13, it combines both an increased cost because of, again, the wage inflation and some adjustments, including marketing here, which we anticipate to adjust going forward. I'll get back to that. Moving on to the balance sheet elements here, slide 23.
Again, DSO, a good development, one day down. Not much to mention here. We continue to see good performance on bad debts. Leverage ratio 1.5. I would say good balance sheet. Looking at the next slide, which is cash flow. It reflects the somewhat lower EBITA to start with. The typical trend in working capital in the first quarter. Very little additions to CapEx, only EUR 3 million. That's also because of the reduced infrastructure. Some impact of the French subsidies here in the free cash flow, limited though. In the lower part, you can see the purchase of ordinary shares, which was related to the performance share plan and the issuance of preference shares of EUR 140 million, arriving at a net debt decrease of EUR 165 million. That brings me to outlook. Again, stable trend from -5% in January to -3% in March.
Some signs of improvement in some countries, please note again that there's never a linear trend here. It's always a bit erratic and our forward visibility is very limited. Comparison base is rather stable last year. Positive working day effect this time of 0.4 days in Q2, which includes 1.6 days more in Germany. There might be some impact of bridging days that are days in between public holidays and the weekends. We believe we're well positioned for 2013. The strong efficiency improvements that have been carried through create a foundation, a platform going forward and we'll also continue to see some of the cost reductions coming in. We anticipate a limited organic cost increase in Q2 due to higher marketing costs. That might be a few tenths of a percent going forward, and that, of course, will depend on the developments in the market.
We'll also in the gross margin continue to see the impact of the legislative changes that have impacted Q1, which again will be compensated to the degree possible by price increases and good cost management. The USG closing process continues to move as announced in the press release. Our key priorities are capturing profitable growth in North America, Asia and Latin America. Diversification of the portfolio. field steering, it won't disappear from the plate. Client profitability focus, and this is supported by delivery models and focus on cost. Now I'm going to move to the exit rates for the month of March, then we'll move to Q&A. March 2013 for the Netherlands was at -1%. France, -11%. Germany, -1%. Belgium, -11%. That looks a little bad, but that was especially because of developments in March 2012.
I think underlying, it is kind of flat through the quarter. The U.K. at 0%, Iberia +3%. In North America, -3%, rest of Europe +7%, rest of the world +8%, and that brings the total to -3% for the month of March. We are now moving to Q&A. Please go ahead.
Thank you. We will now begin the question and answer session. If you have a question, please press star then one on your touch tone 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. Margo Joris from KBC Securities is online with a question.
Good morning, gentlemen. My first question is on Germany. The EBITA margin declined by 40 basis points, and you mentioned a 40 basis point negative impact from the sickness rates in the first quarter. Could you also share the impact from equal pay and fewer working days, please? My second question is on the North American business. Could you shed a little bit more light on the trends in the PERM business, please? Thank you.
Good morning, Margo. Jacques here on Germany. The impact of the sickness rate, as mentioned, was 40 basis points, and this was mainly January, February. We do think this will not be recurring in Q2. That is the good news. Your second part of the question is a bit more complicated because, on the one hand, you see the impact of equal pay increasing. After six weeks you see an increase for some people. We do see more and more collective labor agreements coming into play. There is now roughly some 40% of people touched, but we do not know yet what clients will do. As Robert Jan stated, we do not see less demand as a result of this system. Currently, you have seen the exit rates in Germany. We are looking at a roughly stable volume, but an increasing price effect, a positive price effect. That's roughly where we are in Germany currently.
Hello, Ben Noteboom . If you look at the PERM development in North America, then we see that professionals is more or less flat, and we see an over 40% growth in staffing PERM placement. They are really doing very well.
Including RPO.
Including RPO, indeed. Excluding RPO. It's even more than that, but the RPO is a different tune. It's getting better there, actually. Again, professional is flat, but staffing is doing very well.
Are you outperforming the market there?
I don't know. We don't have reliable data on PERM placement in the market.
Okay.
What we do know is if you look at our total North American performance, that top line, we are under market. We don't care.
Yeah.
If you look at our gross margin line, we are at least at market, I'm sure, because we really are improving there.
Okay, thank you. I have maybe a third question. What kind of measures are you taking in Belgium to improve the recovery ratio there?
Yeah, Margot. It's Jacques again. We're disappointed with the bottom line. Of course, yeah as always, it's about a focus on cost. What can we do in this trend, which at first sight doesn't, on the short term, improve?
Operator?
Thank you.
Next question. Paul Sullivan from Barclays is online with a question.
Yeah. Good morning, guys. A couple of questions. Firstly, just on cost. Can you just give a little bit more color on the development from here? Is the fourth quarter restructuring that you did, is that largely all reflected in the Q1 SG&A now? You've mentioned a slight step up in Q2. We should see a step down in Q3 and because of the French business kicking in, is that correct? Is that the way we should be looking at it? In terms of the underlying cost inflation and any further investment, what are your thoughts on that? Can you still mitigate that, or should we start to see a bit of cost creep as things in Europe improve? That's the first question.
Yeah. As I mentioned, the French restructuring will kick in as from Q3.
Yeah.
That's one point. We hope that we come to a conclusion in Q2. We'll see an increase in marketing expenses, as I mentioned in Q2. I have to say, the Q3 expenses will be a function of field steering. It depends on the trend that we'll see, and I can actually say I hope it's going to go up because that would reflect a positive business trend.
We should view, unless things get worse, we should view Q1 definitely as the trough in cost.
Yeah. It very much depends. If Q3 is going to show a more negative development, which we, at this point in time, do not see, then we'll make sure we'll adjust the cost base. I think that is exactly the story that has come through in Q3 and Q4. Randstad is adapting to whatever trend we see in the market.
Then there was cost creep.
No. We are just going to ensure that our marketing investments will be appropriate. That is a long-term issue that we need to address.
Okay. Just following on from that. In France, your ability to retain the gross margin from the tax rebate, how do you view that over time? Is there a risk that it will be competed away?
You never know. It all depends, of course, on market. That will be actually strange because you've got an explicit instruction from the French government stating clearly that the subsidies belong to us. Being the employer, we're spending the money where we should spend it, on training, et cetera. We are optimistic about the fact that we can retain a fair share of that money for Randstad.
Okay, thanks. Just finally, on page 32, the outlets. Something just caught my eye, the step-up in Holland, what was behind that?
There were a number of in-house locations that were not actually counted for. There was a correction in the past. It's not a big increase as you would conclude from looking at the numbers. Our apologies for that mistake.
There's no debit and credit here, sometimes you're not completely on the right mark.
We'll give you that one. All right. Thanks, guys. Cheers.
Thank you.
Next question.
Matthew Lloyd from HSBC is online with a question.
Good morning, guys. I just wanted a little help in understanding something. If I look at your French website, it shows 3,167 temp vacancies in April and 837 for March. I know a lot of the March vacancies will have been filled, but you see a similar level of step-up in CDD and in PERM. Are you seeing a lot more vacancies coming in, or is that the normal rate at which I would see that number?
I'll answer because everybody is smiling and pointing at somebody else. We don't know how the website actually refers to the actual number of vacancies. What we do know, if you look at randstad.com, you'll see our global number of vacancies, which is an interesting indication. I honestly don't know how they came to the 800 or nor to the 2,100.
Okay.
It seems extremely low, given the fact that we employ some 80,000 people in France.
I accept that. It's probably got multiple vacancies for each thing. If there's 10 people in the factory and stuff like that. Just one quick follow-up question. CDD, are you still booking that as a fee like it's PERM, or are you starting, as I think the law enables you to do now, has anybody asked you to treat that like a temp placement for the one-year fixed or the 18 months? Is there a change in the CDD market?
Not yet visible in our numbers. If we have CDD, we still would quote it as recruitment.
Thank you very much.
Although we're happy with the opening to have more CDD in our own base, as we also have in the Netherlands, for example. We've been lobbying for this for quite a while, so we're happy on the development as such.
Do you have salespeople out actually selling the concept of doing it to clients who use CDD? Because if I understand it correctly, 70% of French jobs start as CDD.
Yeah. We have what we would call an integral selling model. All our consultants sell all possibilities in terms of staffing and CDD on the same profiles. Then we let the client decide on what he wants.
Okay. Thank you very much.
I have two questions. I think someone should put on mute because we hear some rumors in the background. The second question I have, can you limit yourself to two questions, please? Operator, please go ahead.
[ Floris ten Duis] from ABN AMRO is online with a question.
Yes. Good morning, gentlemen. I'll stick to two questions. First is on the cost reduction you mentioned. You mentioned an underlying cost reduction of EUR 5.1 million, which is reduction from field steering and restructuring offset by wage inflation. Can you give a split for that, what the reduction is from the field steering and restructuring and what the wage inflation and bonus accruals would have been? My second question is on the profitability that you've shown in the staffing in-house and professionals. We see in-house and professionals going up. Does that imply that the efficiency improvements that you've seen are not visible in the staffing?
Your first question, on slide 22, the EUR 13 million cost reduction. That's net after fixed effects is broken down into restructuring and synergies. Synergies out of that is limited because we have stated that at the slide on SFN. That's only a very limited amount, I think a bit more than EUR 1 million, to change. EUR 6.1 million includes the synergies, that leaves EUR 5 million roughly for restructuring, and flexibility is the EUR 7 million. That includes a reduction in marketing expenses, which we'll always see from Q4 to Q1. I think that answers your question. The second part?
The effect, of course, of the reorganizations was mainly head office. That means it reduces the charges on top of, let's say, the operational result. That's equal for all the countries, of course, and basically means it's equal for relatively for in-house professionals and staffing. The thing where, of course, staffing suffers is that both in Holland and Germany, we saw lower profitability. That's the impact. It's going to look better the rest of the year.
All right. Sorry, on your first answer, because I didn't fully understand it, because in the press release for operating expenses, you mentioned that the marketing costs were EUR 8 million below the level of Q4, and that the remainder, EUR 5.1 million, was the net result of restructuring and field steering.
Yeah.
The fact that we have lower marketing costs is compensated by the wage inflation that we referred to earlier.
Okay. Can you split the EUR 5.1 million into the restructuring and field steering versus the wage inflation and higher bonus costs?
No, [inaudible], that would be too detailed.
Okay. Thank you very much.
Thank you.
Toby Reeks from Bank of America is online with a question.
Hi there. Could I ask one on gross margin? I think in the past you said you think you'd get 50% of the gross margin from the changes in France. Do you still stand by that, or it sounds like you're a bit more positive? On that French gross margin, if you look at the long term, clearly gross margins have been coming down over time. Just in the temp gross margin, what do you think your ability is to actually raise that going forward? Obviously, it's difficult to see over the short term, but it does seem that getting back gross margin is much harder to do than giving it up.
Yeah, I know. We took half a percent in Q4 of the CICE, of course, the margin to a large extent, the development is due to mix effects because we see a bigger decline in professionals than we see in other businesses. Jacques is waving that he wants to add another point.
Yeah, maybe also please take into account that on the subsidy level, we also saw a decrease of more than 1% two years ago due to the which we fully compensated. It's quite an uphill or downhill ride, however you look at it. Again, it needs to come from business mix. We've invested a lot in units aiming at specialty businesses. That's also the basis for our reorganization, larger branches in the cities to sell a broader portfolio, not just blue collar, more permanent specialties. We're quite confident that over time, that business mix will take our gross margin up, although France will always be a tough market from a gross margin point of view.
I have to make a correction. We had no CICE in Q4. We forecasted that the results of Q4 that it would have an impact of about half a percent on our gross margin. It turned out to be a bit higher this quarter. We had zero in Q4.
It's still uncertain. It's still an assessment.
Yeah.
Okay. The second one's on the cost base. Just picking up what you said earlier, I think you said that unless Q3 was more negative, i.e., the revenue growth trajectory was more negative than Q2, you wouldn't be taking any more costs out. I think at the last quarter, you were sort of talking about further field steering, restructuring programs that still have yet to be executed. Is it the case that as long as we are in negative territory, you will continue to take out costs? Are we actually seeing some of that cost will start to come back in, even if we are in negative territory? The other point is, could you actually quantify the increase in the marketing expenses on a sequential basis expected in Q2, please?
Yeah. Your first question, we are looking at this country by country and effectively within the country, even at more detailed level. We have shared with you that we've got field steering and from the top we put pressure on it. In case of growth, we aim at return at an incremental conversion ratio of at least 50% and in a scenario of decline. If that happens, we will be aiming at a 50% recovery ratio, which means a compensation of at least 50% of lost gross profit through cost reduction. That will also apply to the scenarios that will happen in Q3. That will drive our decisions.
Okay. Very clear. Quantifying the cost from marketing, the sequential increase.
Yeah, I'm not going to give the exact number.
The rough number.
Yeah. No, let me finish first and then you can ask again. From Q1 to Q2, there is no additional initiatives. The increase will be actually more or less equal to last year. It's a normal seasonal effect. In Q3, we plan to spend a couple of tens of revenue extra. Well, a couple of tens of extra on revenue is easy to calculate.
Okay. Thank you.
Next, please.
David Taylor from Rabobank is online with a question.
Yeah. Good morning, gentlemen. A follow-up on the CICE impact in France. If you look at the gross margin impact, how much does filter through into the EBITDA margin? Is that to the full extent, or is that, let's say, half of it? Maybe you can give some color on that. Secondly, in terms of improvements in March and also into April, and I'm purely looking at a volume base, what kind of markets are improving at the volume level year-on-year compared to the Q1 trends? Thanks.
Yeah, David, I'll take your question on the French subsidies first. I made the point in the presentation, the gross margin is up 80 basis points. That includes the contribution of the CICE, and that means it is already taking into account provisions for future investments, which is only an assessment at this point in time because we still don't have all the details that we need to come to a final conclusion. That comes through at the bottom line. Ben?
Okay. The full impact is visible.
Yeah. Again, taking into account the provisions that we deem necessary, the accruals, I should say, that we deem necessary. What was your second question, David?
On the volume trends, because for example, Germany is improving, but that's more driven by price effects, if I understand correctly. Let's say on a volume basis, what kind of markets are improving the most into April?
That's rest of Europe. For example, Sweden, what have you, small markets. That's Spain, as we said, with growth in Q4. Actually, as you got the exit rates-
Yeah.
Wage inflation, in general, is not very high, with the exception of Germany.
Yeah.
Belgium. You could more or less actually take those trends and translate them to volume, David.
Okay. Maybe a quick follow-up on CICE again. For next year, there will be an impact of 6%.
Yeah.
Could you share with us your thoughts on next year, what the impact would be on the growth margin?
Yeah, David, your assumption is right. It will move from 4% to 6%. It will be, again, offset through corporate income taxes. The impact will increase in terms of working capital absorption, and that's going to be a substantial number, north of EUR 100 million, clearly. The way we're going to see that coming through at the bottom line will be very dependent on the same issues that I've just shared with you. We need further details, which we don't have today.
Thanks a lot, guys.
Of course, we have an ambition here.
I can imagine. Thanks.
Yeah. Next, please.
Arun Rambocus from Kempen is online with a question.
Yes. Good morning, gentlemen. A couple of questions on the Netherlands. Can you talk about the difference between the private sector and the government vertical? Is there any kind of bottoming out in the government as well? The other question was about, going back to slide 10, the comment made about pricing in a competitive environment. Why would you be able to raise prices in a competitive environment? What's behind that? Can you explain the rationale? Finally, can you update us on what the higher social charges are all about and what the impact was on the gross margin, and what kind of impact we should expect further in the year? Thank you.
On your final question, there was 3%, and that also then again refers back to price increases. We had to increase prices with anything between 4% and even 7%, I think. We managed to a certain extent, but not completely. That's the effect on the pricing and that's the pricing initiative. On government, as you can see, I think it's slide 15, you see that we are growing. It's still the same picture as we've seen the last couple of quarters, whereas the growth is not in the professional segment, it's in the staffing segment. We see Randstad Netherlands, for example, really growing. We've also taken share, obviously. That sector is doing better, but not for professionals, and I hope to say in brackets, not yet.
You're close to 0% in the professional sector in public. That's what you're saying?
No, not yet.
Decline in professionals in the Netherlands moved from a double-digit decline to single-digit decline.
Yeah.
A gradual improvement.
Okay. Thank you very much.
Thank you.
Marc Zwartsenburg from ING is online with a question.
Good morning, gentlemen. Two questions from my side. First, I want to drill a bit into the gross margin. Could you share with us the impact on the Dutch gross margin from the Social Security premiums? You mentioned also the initiatives on sickness days. Following up on that, on gross margin, what do you feel, what could be the trend going into the second quarter? You have a little bit of tailwind from working days. Nevertheless, would you expect to see the gross margin trending up a bit, or do you expect a more flattish trend into Q2? That's the first. The second one, on top line trends going on to the second quarter. You mentioned in April seeing the gradual improvements continuing like seen in Q1.
You mentioned it's working day adjusted, but I can imagine that only with three weeks in with a week including Easter, it's hard to guesstimate the working day impact because people might have taken more holidays. Would you say that the trend is really improving, or is it more like Manpower said, a stable trend?
I don't know what a stable trend is.
I'd say a similar rate in terms of volumes. If I hear you saying rest of Europe, Spain, and some smaller countries seeing some improvements, but the big countries not, I would suspect that's more a flat line.
I think the improvement in Sweden is something like 62%, so that's not small. It's a small country, so the effect is small. That's why I referred to small. We just mentioned, by the way, your first question I just answered to Arun. It's a 3% effect of Social Security charges. The sickness, actually, again, we obviously built a business case, and what we have had for years is an organization within our Dutch opcos that actually makes sure that we reduce limit and the sick leave to a minimum, and if people get sick, to get them back to work ASAP. We have eight years of reliable data. Based on that, we built a business case that if we would take risk ourselves instead of being charged the average, we could make money. There's no reason to actually not see that happening.
Obviously, the first quarter still had a limited impact because we're building up the provisions, et cetera. That's going to have a positive effect. I don't want to quantify it yet, but I'm sure we can share more insight in the course of the year.
It's really sizable.
It is sizable. Yeah.
The 3% Social Security charge, how do we calculate that back to the margin?
Actually, that was, of course, 100% margin. Then we compensated a bigger part of it by price increases. Are still working on that because that's always a process that takes a bit more time. Not every client is happy to increase his charges in the midst of a contract, for example, so you need some time to compensate for that.
What do you think the balance will be of the two?
On balance, because you also asked our expectation for the second quarter in margin. Normally, of course, the margin goes up through the year based on different things. One of them is the different initiatives we have, more efficient, better price management again, more working days as I said, et cetera. All the effects normally lead to a higher gross margin in Q2, 3 and 4, and I don't see any reason why that would not happen this time.
You don't think that the Equal Pay, the ramp-up of that, will mitigate a bit of normal seasonal trends?
I think we'll still have the seasonal trends. We can have a few 10s of a difference, David. That's too early to call that. Again, I think we're doing a lot both on the pricing and on the efficiency internally to compensate for those effects.
Of course, the gross margin in the U.S. continues to expand, so that is also the opposite.
Thank you very much.
Thank you.
Tom Sykes from Deutsche Bank is online with a question.
Yeah, good morning, everybody. Just a couple of questions on North America, please. Firstly, do you have a view on how much more revenue you may shed in North America? Secondly, I suppose on the market data, if we look at it, the number of temps is sort of back to peak. The penetration's back to peak. One presumes the mix of that is different to where we were in 2007, in that we're now getting some signs of clerical improving, and you allude to clerical improving. Would you expect that to push the penetration rate higher and what are you actually seeing in the clerical market, please?
I would expect the penetration rate to go up. Again, rightly so, as you mentioned, the effect is double. Price times quantity. Price is going up because penetration rates in professional markets is structurally increasing. The amount of revenue we want to shed, obviously, is difficult to forecast because what we do is we go to a client and tell them, "Listen, we love you, but we don't like you anymore. We'll stay good friends, but we leave." A number of them then actually accept price increases. It's difficult to actually call that number exactly. I'm also not too focused on that because I look at our gross margin development, and that's favorable, and that's what we're looking at a lot more than on the top line.
Okay. Thank you very much.
Thank you.
Konrad Zomer from Berenberg Bank is online with a question.
Hi, good morning. Two questions. First on the automotive business, both in Germany and France. You mentioned at the time of the full year results that volumes were down at a double-digit rate in January. If we look at the numbers from the car manufacturers, they have been very poor, particularly for March. I was slightly surprised you mentioned earlier that the automotive business in Germany had actually slightly improved throughout the quarter. Can you maybe share with us, is that a company specific thing or is that something you see different in the market? My second question, I may have missed this earlier, but can you explain a little bit more what the working capital impact could be in France from this tax credit and why it would have such an impact on working capital going forward?
Yeah. The remark on automotive Germany was that the decline was less than it was in Q4. As you can see on slide 15, I think it is, you also see that, for example, automotive in the Netherlands, and that's mainly truck manufacturers, is actually double-digit improving. Anyhow, for Germany, it's a lesser decline than it was in Q4, Konrad. Maybe we didn't express that clear enough. Then on the [T-shape].
Well, yeah. No, I expected that to be a decline anyway. It has actually, in terms of the output and the production of the car manufacturers, the decline in March was actually a lot worse than the decline in January.
Yeah. Well, can be maybe they work less efficient. I don't know. I don't have the insights that detailed on the automotive. I'm sorry.
Right. Okay.
The quarter as a whole. Your question about the working capital impact of the French subsidies, as I mentioned, it will grow to a level over time because next year it goes from 4% to 6%, to an amount north of EUR 100 million and I still think below EUR 200 million, but somewhere in between. Very substantial. It will last three years before the money is collected, so before the cash flow arrives in the company. That's our assessment now. This again relates to the tax position of the company.
Okay.
Effectively, it means you have to pay tax before you can get the money. If we come to the point that we're going to pay tax, this will be the one to offset it against.
Okay. Thank you.
Thank you.
Olivier Lebrun from Natixis is online with a question.
Good morning, Olivier Lebrun, Natixis. My first question relates to the U.S. staffing. Will the focus on profitability continue in Q2, and will it continue to affect the organic sales growth in Q2? Second question on France and on CICE. It is already possible to quantify the full year positive impact of CICE on gross margin in France, please?
The first question, the answer is yes.
The second question, the answer is no.
No. Obviously, we keep on focusing on profitability. That's clear. Again, I don't care about top line. I care about gross margin increases. We're doing very well here. We have shed some low-margin contracts. Our perm is growing over 40% in Q1 in staffing. The mix is better. There's more white collar. That's actually doing well. We're very pleased about that. Yeah, on the CICE, we already mentioned that the result of the calculation is a result of quite a few variables, and a few of them actually we cannot forecast because it's behavior of clients, competitors, government, et cetera. By the way, also temps, because if there's training available, they have to go and follow trainings. That's still too flexible a mix to forecast it exactly.
Okay, thank you.
Thank you. Final question, I guess.
Yeah, we're getting to the final question now, huh?
Yeah.
The final question is from Hans Pluijgers from Cheuvreux.
Yes. Good morning, gentlemen. Two questions from my side. First, looking at the gross margin, you indicated that at the EBIT level, the workers less working day had an impact of about 30 basis points, at least that I could read from that you're saying that it would be, let's say, equal to last year. Is that correct? That also growth margin, the impact was about 30 basis points. Secondly, looking at Yacht, clear decline in sales. You said the bill rates are clearly under pressure. How long are you able to adjust your own capacity to keep going on with such a decline in hours worked and the bill rate? How flexible are you on that side?
Yeah. Yacht is simple because Yacht is profitable based on the reorganizations we have had. Obviously, we can still reduce costs, the main thing and the main effort today is be more efficient in sales and recruitment. I think it's an ongoing increase in productivity that, again, now has led to a reasonable profitability. We're actually not unhappy there. It's quite an improvement.
Yeah. The extra working days, if we would have had them, would have brought additional revenues, additional gross profit, that comes through with a sort of controlled cost base at the bottom line. That was the base for my remark that I believe that it might have arrived at the same % last year. It's the contribution to gross profit rather than to the margin.
If you would only look, for example, at Germany, again, as we know, the impact of three working days less is huge. That sort of effects, of course, you have to quantify them for the whole group. Anyhow. Yeah.
In principle, that means that if you let's say the impact on the EBITA level is about 30 basis points, it would also be at gross margin. Are you talking only about absolute numbers here?
Yeah. Correct. Gross profit rather than gross margin.
Okay.
That's what I conclude.
Clear.
It's more revenues with gross profit and good conversion to the bottom line. That's it. All right.
One follow-up on Yacht with respect to, because if the bill rates are under pressure, how able are you to also reduce your wage you pay to your temps or your second people? That of course, and also an issue if you are able to do that. Otherwise, your gross margin would come under pressure.
Exactly. We've taken provisions to reduce the number of people we employ permanently.
In general, those were the people that were, if you want, not conversely, but let's say, overpaid, if you would position them in the current market. For those people, we could not get the right rates and/or we could not get the jobs. We've actually reorganized that. We've done it on two sides. We reduced the number of people we cannot put to work or difficult or not at the right price, and we've made the internal organization a lot more efficient, resulting in, again, I said, a very reasonable, especially given the fact that it's the first quarter, very reasonable profitability for Yacht with a good outlook for the rest of the year.
Okay. Thank you.
All right. We're going to complete the call now. Thank you very much for joining us, and we look forward to speaking to you again at the end of July when announcing the first half-year result. Thanks again. Bye.