Earnings Call: Q2 2019

Jul 23, 2019

Hello, and welcome to the Randstad Second Quarter 2019 Results Call. My name is Mahan, and I'll be your coordinator for today's event. During the call, you'll be on listen only. However, you will have the opportunity to ask questions later on the call. I am now handing you over to your host, Jacques van den Broek, CEO to begin today's conference. Thank you. Yes. Thank you, Esmaa, and good morning, everybody. Q2 2019, a solid performance in uncertain macroeconomic conditions. So great to take you through it. And I will go immediately to Slide 6, where we see the heading European Conditions challenging robust gross margin. So when we analyze the 1.7% negative growth we're seeing, we can attribute directly 1%, so 60% of that to automotive and related industries. This is in Germany. Of course, we saw that in Q2 in Q1 already, but also in the Netherlands and Belgium. I'll shed a little bit more light on that one later on. Our North American business did quite well at a fairly stable level with great returns. And when I talk about North America, I'll talk a bit about the current balance we're having in investing in growth and also taking costs down, which is an art more than a science, but I will take you through that. Rest of the world, 10% growth, again, very happy with our performance over there. Yes, what does it feel like? That's probably a question you have on your mind. Actually from a growth point of view, June was not the worst month in the quarter, actually slightly better. But we don't yet feel that that's the basis for bouncing back. Although, again, if you would ask me, if you would ask us, we think it's a pause more than a real slowdown also because it's very directly related to automotive. Our EBITA margin, slightly down, but gross margin, still good. Same picture we saw in the Q1, very happy with that continuing into the year. And then yes, we do not want to kill growth, So in our U. S. Business, in our Rest of the World business, but also still in pockets in Europe, in professionals left and right, We still want to balance our investments in growth and at the same time have a decent return. Invested in marketing for secure for the growth of the future. And our overall quality of results in Q2 is quite good, but Henry will shed a little bit more light on that one later on. It takes time sometimes to adjust the cost base. We've had that discussion in markets like France and Germany already. We now see quite a pretty short quick decline in the Netherlands and Belgium, but these are businesses with great and mature management teams, so they'll react. We're still within those challenging conditions continue to gain market share in the Netherlands, in Germany, in Spain and in Italy. So very happy with that performance because as you know, things can be what they are, but we want to have a, in relative terms, better performance than market. I mentioned gross margin. It's a mix of why we do this as strong management focus on pricing, nothing new there within Randstad. We sometimes walk away, but then we increasingly have our digital tools that very much helps us. And our clients are also because we show increasingly through our digital tools what our labor market looks like, they're willing to pay if a good candidate is tough to find. It's also a quarter where we did some M and A. We bought a company in Australia, ORAC, active in statement of work, engineers and IT and a small one within our OC business, OPTEDI in France. So if people from those companies are on the call, well, Australia might be late already, but very welcome with Randstad, of course. On the IT, on digital, this quarter we would very much like to mention a more foundational achievement we had. We moved 9 25 IT applications and 50 legacy data centers to the public cloud, which is quite an undertaking. It has been a project which ran over 3 years, but we're now set up with a great basis to build our commercial tools upon. Next to that, we had 2 big front office implementations in Germany and Japan, and we'd like to specifically mention those. First of all, because our Japanese colleagues did this, while at the same time growing their business with 9% and our German colleagues did this in Germany with 15% decline. So quite impressive to at the same time undertake this flawless. So a from office implementation is quite an undertaking, but it went quick and it means that our consultants are equipped with the modern way of working modern support tools. So very happy with that. In general, on digital, we're continuing to see good progress. Our workforce scheduling, 20% more implementations compared to Q1. For example, in our U. S. Business, we do see clients where we've implemented this, we take 8% more market share in Q2, whereas where we haven't implemented it yet, it's just 1.5%. So this helps us to strengthen our presence at clients. Video interviewing, we reached 300,000 interviews with candidates through video. In our U. S. Business close to 50 5 0 percent of all candidates presents himself through digital through video and it helps the candidates to present themselves well, but also our clients to make the right selection. So a great supporting tool gathering speed within our portfolio. Taking you to the countries on Slide 7, our North American business. This is one and I mentioned it in my opening statements, this is one where in hindsight, maybe we should have allowed a little bit more people in our staffing and in house business. As you know, we got a great operating team over there. We haven't been taking market share with our strong concepts in staffing and in house. And tougher comps, but at the same time, they did well, maybe 1% or 2% growth would be feasible. So we're going to try to allow a little bit more staff into our American business because underlying, we do feel those markets still allow for growth. Stable performance at our Professionals business, perm accelerating to 6% from 0% in Q1, I think signaling the fact that there's still quite some demand in that market. And then a great EBITDA performance in our American business. So very happy with the performance in the U. S. And also in Canada with a bounce back from a slight negative to a slight positive. In our French business, we talk a lot about automotive and there's a distinct difference we feel between French Automotive and German Automotive. So German Automotive sells in the world market and they are hampered by the trade wars by China and the diesel legislation that we mentioned last quarter already. French Automotive sells more within Europe. So although it's not hallelujah, it's way less down in that sense than German automotive. Very happy with our performance in France given the tough market. Our professionals business double digit growth on also tough comps. This is including our subsidiary OZ. Perm doing quite well against very tough comps last year. So our French performance and you see it in the EBITA margin very positive. Dutch business, yes, quite a slowdown from a slight growth in Q1 into negative 3%, very much related to automotive. We do think also in the Netherlands roughly half of it is automotive related industries. Logistics of course geared towards those industries. In the Netherlands there is automotive. They make buses all sorts of investments in those areas. Happy with our professionals performance at very tough comps, 8% tougher comps, still a 5% growth, very happy with that performance and a stable EBITDA margin compared to last year. Then Germany, as mentioned already in Q1, the toughest one out there. The market slowed down further. And then since we're happy, we took out cost. I'm not happy because this is also about firing people, of course. But yes, we anticipated this happening, but still it was a bit worse than expected. Your first question might be okay, so now what? And actually we don't know. We are now in July. It's going to be waiting for September until our clients hopefully know more in their production planning for the rest of the year. We aim to take cost further down into Q3 and Q4 into Germany. Actually, the whole our whole staff is going to work half a day less per week. This is a German system where also the German government chips in. And we can keep everybody on board for at least 6 months and prolonged theoretically for the next 6. So that is what we're currently doing in Germany, hard work for all our colleagues, at the same time implementing a new front office. So in that sense, tough but well done and ahead of market because the Jia Jingbar performance also market figures, it's even worse than our numbers currently show. Belgium, similar to the Netherlands as in automotive. We do see also here see from a 1% up to down 4%, and we can directly attribute half of that to automotive weakness as it specifically mentioned here. Yes, our EBITDA margin last year was relatively high. Our Belgium business offers around a 6% EBITDA, so very happy with that one and absolutely have confidence that that will materialize throughout the year. This year, slightly less also because of a lower contribution of perm, probably logical given the uncertainties currently in the market. But also tough comps compared to last year where we grew 35% in perm. Then again, a highlight in our portfolio, which is Italy. I already talked about the art of managing costs, managing people. We left people in our Italian business and that's paying off for us. We are above market, great perm growth double digit, higher in Q1, but still double digit. And you see the EBITDA margin developing very well for us here in Italy. So very happy with our performance in Italy. Iberia, you see Southern Europe is actually, yes, slightly better than Northern Europe. Our Spanish business at a +3 percent growth. We mentioned in the former quarter the increase in the minimum wage, which has been passed on well to our clients. Although from a distance, unemployment in Spain might still look on the high side, but in specific job categories, there's definitely also scarcity there. Our Spanish business, a well run business, strong pricing discipline and execution, so leading to an increased EBITDA margin. Also our Portuguese business seems to be bouncing back a bit in terms of top line, so happy with that one. Then the rest of Europe, pretty mixed bag, not much to say about it. Our U. K. Business is quite stable. So although perm is under pressure, so but the whole Brexit insecurity is not really gaining in our book a lot of traction. Yes, and you see stable returns. Nordics, slightly better Switzerland, similar outperforming the market by the way and our Polish business stable. Then Rest of the World, yes, continues to be a star performer for us. I mentioned the Japanese growth 9%, Q1 was okay, Q2 was even better. Our Australian business is still doing well, but signaling India. India is it's a huge country with a lot of people, but the formal labor market actually much smaller, 450,000,000 people in the labor force, 50,000,000 are in a formal job. So the market is smaller than you might expect. But our current management is doing a great job in finding pockets where we can have profitable business. They're very happy with our Indian performance. And Latin America, I want to congratulate our Argentinian colleagues. They moved to the number one position in Argentina. Our Brazilian business also doing very well. So a great complement on their performance, which overall leads to an improved EBITDA percentage. Then to Global Businesses. For me, looking at Rest of the World and Global Businesses, I do see a lot of similarities. So bear with me on that one. So roughly 5, 6 years ago, we knew from a strategic point of view that the rest of the world markets like Japan, India, China, South America were promising markets for us. And to develop a global company, we would need to invest in those markets and we've done that for years. And even in somewhat more adverse times, we went on investing and it now pays off. That's very much the feeling I have with global businesses. We do see a trend that clients want to buy from less suppliers worldwide. They want to talk about total talent architecture. They want us to help them to manage their workforce on a global scale and we're doing that. But to be able to do that, you need to invest. You need to invest in people. You need to invest in technology. You need to invest in data to show clients what labor markets look like to handle that to help them with training and whatsoever. And the same goes for Monster. You know it's our ability or it's our wish, our strategic wish to have the biggest data lake, the most profiles available to support our clients and candidates in their career and in finding great candidates. And again, with that come investments. I mentioned last quarter that we nominated Rebecca Henderson as responsible for global businesses and we do see this paying off. We do see certainly we're very positive about the portfolio and new clients of Sourcite in the second half of the year. But also on a somewhat smaller scale, RyzeSmart, our digital outplacer, is gaining quite some speed in the markets it's in. So very happy with that decision we took. So on that note, Henry, can you shed a little bit more light on the numbers? Of course. Thanks, Jacques. So my pleasure to take you through the Q2 financials. Please note that all figures are included IFRS 16 unless specifically stated otherwise. So as mentioned by Jack, the company delivered a solid operating performance in an increasingly uncertain economic climate, especially in Europe. And while being mindful of this macroeconomic uncertainty, our good gross margin performance provided room for continued selective investments to secure competitive growth. And we are pleased to experience a robust gross margin performance, which is the effect of increased management focus and the wider use of pricing tools in conjunction with ongoing tight labor markets. But obviously, there's also some supportive mix effects at play. Let me run you through the P and L to provide you in a bit more detail. So revenue is down minus 1.7%, with more than half of the decline is coming from automotive. And it's very good that it can rely on our strong portfolio with North America and the rest of the world showing positive momentum. Equally important is the fact that we could continue to achieve market share gains in several of our largest countries. On the next line, the gross margin came in strongly at 20%, up 20 basis points year on year and ahead of our guidance. We'll take you through to more detail on the next slide. Operating expenses were stable year over year, reflecting our ability to support our most promising growth opportunities, whilst going through continued efforts to adapt our cost leverage to harsher market realities. EBITDA came in at EUR 277,000,000 with a 4.7 percent EBITDA margin. And please note that our diluted underlying earnings per share fell by 14% year over year, impacted by 2 main noncash items. Firstly, as guided, we experienced a 4 percentage points higher P and L tax rate due to the change in the French subsidy system. And secondly, last year, we had a positive ForEx movement impacting the comparison. So all in all, we see good quality of our quarter 2 results. And so now as promised on Page 14, we show the gross margin in a bit more detail. So what you can see on Page 14, the temp margin continued in positive territory in quarter 2 being up 10 basis points year on year, very similar to quarter 1 where we experienced improved pricing trends as a result of structured management effort to utilize labor market data feeding our value based pricing tools across our portfolio. And as a result, we are better able to benefit from tight labor markets in regions like the Netherlands, France, Japan and Spain, who benefit in a significant way. It confirms our ability to price for superior value delivered to our clients globally. The bar in the middle shows the positive impact of our still growing firm business, 2% growth driving 10 basis points positive mix. It's all fee income and therefore gross margin accretive. And lastly, the bar on the right represents HR Services, which shows a neutral effect on the gross margin and an adverse Monster mix effect was offset by positive ForEx effect in other growing HR Services businesses. So in volatile markets, we see some significant shifts in growth rates per region and concept, and hence, we're keeping a close eye on gross profit in relation to OpEx to ensure enough benefits showing up in EBITDA. That brings me to the OpEx first on Page 15. So as Jack already mentioned, when it comes to OpEx steering, we always try to finding a smart balance to swiftly adjusting the cost base for the macro environment, while securing enough funding to capture the many growth opportunities we continue to see in the marketplace. Excluding ForEx effects of €3,000,000 sequentially, we reported OpEx up by €12,000,000 which is year on year stable. Our efforts to flexibilize the cost base to stay resilient in the face of volatile markets and to further improve our ability to steer our investments into places with the highest long term return are paying off. As already mentioned, the good gross margin performance provided some extra space to support our brand building and bolstered our investment to support the digital road map. Finding the right balance between tough cost management and nurturing our growth engines remains the key priority. And given the tougher macro environment, we will tighten our belts accordingly. Let me close that chart with a confirmation that we are fully on track to deliver our cost saving target of SEK 90,000,000 to SEK 100,000,000 annually by 2019. And now on Page 16, let me shed some light what it all means for our cash flow and balance sheet. So we reported in quarter 2, 2019, a positive free cash flow of EUR 25,000,000 which is an improvement of EUR 35,000,000 in absolute terms. It's the first positive cash flow in the Q2 for a very long time. In fact, we look back for more than 10 years. Main driver for the good free cash flow was the change in the French subsidy system. Under the new system, we received the subsidy without delay versus more than 3 year wait for CICE. And the free cash flow in quarter 2 includes quite an increase of operating working capital and a significant decrease of income taxes paid, both impacted by the timing of payments. In fact, it's largely a reversal of what happened last year in quarter 2. The last bullet on the left shows day sales outstanding, which is virtually stable versus last year and quarter 1 2019 on a 12 month moving average. On the right hand of the chart, going straight into our strong balance sheet, our net debt position improved by EUR 143,000,000 versus quarter 2 2018 to EUR 2,026,000,000. Please note, this includes the lease liabilities related to IFRS 16. As we reported to you, this is optically a slight upward effect on our leverage ratio. However, pre IFRS 16, our leverage ratio arrived at 1.2 versus 1.3 last year in quarter 2. This adjusted leverage ratio will also be the basis of our unchanged capital allocation strategy going forward. For 2019, we see further improved free cash flow versus 2018. And finally, let me reiterate that the outstanding CICE receivable of €491,000,000 will be collected in the coming 4 years, of which about €105,000,000 will be received in quarter 4 2019. Also, please be reminded that we will pay a special cash dividend of €1.11 per share in quarter 4 on top of the €2.27 we paid already beginning of this quarter. So and finally, on Page 17, let me summarize the key messages and provide you with an outlook for quarter 3 2019. Firstly, it was good to experience another quarter of solid operating performance. Competitive top line trends and balanced cost management delivered against the backdrop of a lower economic growth in some of our main markets. June traded in line with quarter 2. Secondly, we are pleased to be able to report ongoing positive gross margin trends. We are definitely better positioned to monetize the added value of our services and tight labor markets with our pricing tools gaining further traction. We see Q3 gross margin to be in line or better than last year, however, slightly lower sequentially driven by seasonality. And thirdly, while market conditions are uncertain, Randstad is very well positioned to capture growth opportunities in the future. Our portfolio is much more diversified than 10 years ago, and we have full confidence in the ability of our people to quickly adapt the cost base to new economic realities. We see OpEx to come down slightly sequentially. And please note, quarter 3 has a positive 0.9 impact on number of working days. Well, that concludes our prepared remarks, and I hope it helps to shed some light on our quarter two results. We'll be delighted to take your questions. Esmaan? Absolutely. So we have a few questions coming through. The first one being from the line of Thujasin Ibaranassi from Goldman Sachs. Please go ahead. Good morning, everyone. Just a couple from me, please. You mentioned in your exit rate that June was in line with 2Q and early indications that July was basically in line with the 2Q number. So that doesn't makes it to mean that July is still a negative number? That's your question? And the second question, that's the first one. I can ask the second one later, if that's okay. Okay. Okay. Yes, July is tough to call. We have 2 weeks of volume. So that's just too early. But it was a negative number basically. Is that what that means? No, no, no. The employees working are still below last year, yes. Okay, got it. And the second one is on the perm growth. You have been getting a nice boost on the gross margin because perm has been growing nicely. I suppose it has been slowing though in Europe over the last two quarters. What are you seeing in the market? I mean is there a risk that there is a hiring freeze and the growth slows further and therefore there's an impact on your gross margin as a result? Yes. It is not everywhere in Europe. We still see quite some growth in France and in Italy and in Spain. So it's not across the board. And yes, we have our American business, which still looks good. Southeast Asia still looks good. So it's going down, but yes. And perm is always the toughest to call. It's quite volatile. So yes, we don't provide an outlook for our staffing business even let alone perm. So working hard on it to keep it growing. Got it. Thank you. Okay. So the next question comes from the line of Tom Sykes from Deutsche Bank. Please go ahead. Yeah. Good morning, everybody. Firstly, just on a technical one. The depreciation number is €8,000,000 lower. And I don't think you had any one offs last year. And in Q1, it was flat. So why is that €8,000,000 lower, please? There's about a 3% benefit to the EBITA. Hi, Tom. I need to take that offline. So we'll get back to you on that one. Okay, fine. And then is it possible just to say how much actually of your sales is Argentina? And then also just could you possibly expand a little on why the French operating profit was so much better when revenues weren't placed? The Argentinian business is around EUR 250,000,000? Less of annualized sales. Because there is also inflation there. So you need Exactly. We also need to grow hard. But then still doing well relatively in that market. That's why we took market share. So in that sense, very happy with that performance. Yes, it's a mix in France. It's a mix of Perm still doing well, our OG business, our Professionals business doing well, which comes in above the board. So that helps. It's a more profitable business than our French average. So those are the main reasons. And Orsi is growing and you're getting leverage on Orsi as well as it being a mixed benefit, are you also getting leverage out of that business to push itself its own margin higher? Yes. It's a business that comes in with a higher EBITDA than the French business overall. That was one of the reasons for investing more in that business. The 2 acquisitions we announced are in that space, and that helps our improvement of our results, yes. And when you look at the growth outlook for just Orsi particularly, you probably have a bit more visibility on that. What can you say about the sort of H2 growth outlook for Orsi? It continue at the same rate? Yes. We're not doing outlooks for individual businesses. And certainly the French part is doing quite well. Absolutely happy with that, and we hope that they can keep it up. Okay. Many thanks. Okay. The next question comes from the line of Anvash Agrawal from Morgan Stanley. Please go ahead. Hi, good morning. I got two questions. First on the legislation that is through the Balanced Labor Market Act in the Netherlands, it's due to come through in Jan 2020. And my understanding is that it will increase the cost of fixed term employment and also will impact your payrolling business. So maybe if you just kind of give us some brief overview of what you see there and how should we think about the impact next year on your Netherlands business? And the second one is on the cost benefit. So this €900,000,000 to €100,000,000 cost saving that the run rate, should we assume that the benefits comes are too huated? Or have you because given you have now completed the migration of your IT system, so should we expect more benefit in 2H than what you had in 1H so far? I'll take the first one on the Dutch law. It's early days because we now go talk to our clients to say, okay, so what does your business look like? What is happening in your temping business, your payroll business? And do you want more perm? So it's very tough to call in terms of effects. So we are working on a program to go out to all clients and discuss the consequences of this law regarding their workforce as ups and downsides, so a bit early. But can you give any example like where you had a similar change in the regulation in any other geographies and what was the impact there or this is pretty unique? Just to get the feeding off it. Yes. Let's first comment on the effect of the law. It always goes wrong. So politicians think if they increase the price of flexibility, there will be more fixed work. That's not going to happen. So we're working very hard with our clients, but also with regulators to say, the risk is that you get more bad regulated work. So that's the first one. So that's our advice to the government. 2nd of all, what we've seen with most of these laws is that the effect is always way more limited than we actually envisioned going forward. So early days, but let's come back probably after Q1 next year to see what the immediate effect has been. Okay. And the cost one, please? Yes. Anders, on the second one, the cost benefit, actually, we don't see any phasing impact or more benefit flying into H2. It's an ongoing OPEC. Okay. That's clear. Thank you. Yes. It's probably also good to mention that the objective to do the transformation we mentioned is not predominantly to save costs. As you know, we're digitizing the company and with that comes an IT infrastructure that should be cloud based, and we took a quite aggressive project underway to do this. So it means that we're well equipped to handle our digital transformation. Okay. That's clear. Thank you. Okay. So we have one more question in the queue. And the next question comes from the line of Konrad Zomer from ABN AMRO. Please go ahead. Hi, good morning, gentlemen. My first question is on the margin development in the U. S, which I think looked very strong. Can you maybe explain in a bit more detail why your margins was up so much year on year? And my second question is on the financial impact in Germany of the government chipping in. Can you maybe quantify the impact it might have on your performance there? And my last question is, given the slowdown, which continued in Q2, but the fact that June was slightly better than May, Can you give us the organic revenue decline of May, please? Shall I take the first one on U. S. Margin? Hi, Konrad. Thanks for your question. So the U. S. Margin actually, first of all, it starts with very good pricing discipline in there. So we have been able to price for scarcity in the labor market. We definitely see that coming through. Also being slightly helped by better mix in there. And as you can imagine, with a slightly weaker Europe, we needed that help from the U. S. Business to compensate for the overall cost picture. So slightly better gross margins, overall good cost management. But you've heard Jacques talking about it. We feel that we can actually invest a little bit more into the asset capture more growth. Okay. Yes. But Konrad, May June are always very tough months because of all the holidays falling left and right in May June. So I wouldn't make a big scientific effort on the growth rates in May June. That's what I also decline because it's such an uncertain environment. So we really need to look at the return, and then September is going to be a crucial month to really read it. So on the in good English, Kurz Arbeit in Germany, that means that if the people work 10% less per week, the net effect for them is 2%. So that's good in a sense that we keep our whole body of people on board in this sense to weather the storm a bit and the financial effect for our people is fairly limited. Very happy with the cooperation we had from the German government in this both on willing to do this, but also on the swiftness of the response, which we think is a best practice in Europe. Just one other comment on the growth rate within the quarter. There were several investors that made a point to us earlier this morning about the fact that if April, the volume trends continued in line with Q1 and you were still growing in Q1 and June was in line with Q2, which was minus 1.7, then an analyst can do a calculation and come up with quite a negative number for May. So it's not necessarily about the actual revenue decline in May that I'm interested in, but it's just the trend looks like it's still deteriorating. Yes. Let me I mean, when we talk about April, we only talked about 1.5 weeks when we last met. So actually we see a pretty good profile in quarter 2, let me put it like that. And it's not currently declining more, but we also don't see an uplift. So it's a pretty stable picture. In volume, it's a pretty stable picture. And then month per month, yes, it's very much the holidays, also the fact that the Dutch and the Belgian business went into quite a steep decline into the quarter. Overall, it's a pretty stable picture. Again, easier comparisons in quite some markets, but let's see if that happens. Okay. Well, that explains it a lot better. Thank you very much. Okay. So we have a few questions coming through. The next one being from the line of David Ryu from Bank of America. Please go ahead. Good day, gentlemen. Just two questions from my side. The first question relates to the change in the French subsidy system. I was hoping you could give us the actual amount of the cash inflow included in your free cash flow. And was there any benefit perhaps to gross margin in the period from the change in the system? And then my second question relates to Automotive. Can you just remind us what group revenue exposure is to automotive and then in particular to German automotive? Thank you. I can give the particular on German Automotive, which is 20% to 25%, so quite hefty. But our overall German business is roughly 8% of the global picture. So it waters down quickly on a global. So on a global, it's, I don't know, less than 5 probably. But in Germany, to a lesser extent, Belgium and Netherlands, it's a sizable part. So that's why it hurts. On your first one, David, on the change of CICE, we've guided earlier that we see overall a quite neutral picture for the P and L in France. What we did say is that probably the 1st three quarters will impact minus 5 basis points in gross margin and then the quarter 4 plus 15%. We stick to that guidance more or less, and I think you can work with that one. Okay. Thank you very much. The next question comes from the line of Kean Mardin from Jefferies London. Please go ahead. Morning. Do you agree with Manpower's comments regarding the French finance bill impact on corporation tax that they made last Friday. And would you be looking to take a similar approach in the Q3 to the one that they guided? In general, we agree with it. But what we would say is that we guided for corporate tax rate between 26% 28%, and we stick to that guidance. It might kind of shift it a little bit upwards, but it's more or less in the same ballpark. Yes, understood. Thank you very much. Okay. So the next question comes from the line of Andy Grobler from Credit Suisse. Please go ahead. Hi, good morning. Just a quick follow-up on the automotive question from earlier. You mentioned that automotive took about 1% of group negative impact on group revenue. And you also mentioned that it was about 5% of the total group. When you're talking about that 1% decline, is that just the pure automotive, that 5% or related activities? And if so, how big is that related activity, if possible, please? Yes. It's a related activity. So it's, of course, the 1st tier, also 2nd tier. And then it becomes tougher to really because you got logistics and then you got logistics that do part for automotive and part not. Yes, and next to that you have a sort of in Germany a bit of a growing uncertainty in general. So I think this is about as close as we can get to really calculating what it means for us. And what was because I guess if you've said that it took organic growth down by 1%, you must have done that calculation. So what proportion of the business were you talking about when you did that? No. That is directly attributed to 1st and second tier automotive and logistics that we can really directly relate to automotive. So more than the 5% that is specifically auto, just to be clear? Yes. That I didn't know because as I said, it's watered down. So the bulk is in these three countries. That's what we can do. If you ask me the question, how much is of our total sales? We do have automotive in Spain. We do have automotive in Italy. I don't have. The 5% is more of a ballpark and the 1% is quite factual. Okay. And just sorry, just one last follow-up on that. In terms of what your auto related clients are saying in Benelux and Germany? What is the feeling coming from them? Are they still very cautious? Or are they a bit more hopeful into the end of this year and next year? Yes. Well, my predecessor always said, if you don't listen to your clients, you go bankrupt and if you listen to them also. So they don't know. They are quite uncertain because trade war, right? Yes, there's nothing they can influence in that. China, very tough to call. And then there's yes, there's the diesel legislation. So what's probably frustrating for them is that they cannot influence a law. So those are currently the conversation we're having with them. So it's quite unclear. That's also the reason why in Germany, specifically in this case, we're still taking costs down for the rest of the year to be on the safe side. Okay. Thank you. Okay. So we have 4 more questions in the queue. Next coming from the line of Mark Swartzenburg from ING. Please go ahead. Yes. Thank you. Good morning, guys. First, a question on Germany. 2, actually, the measure to take out half of working day per FTE. When will that really kick in? Have you already started with that in Q2? Or should we see the full effect in the second half? And does this help closing the gap a bit with last year's margin gap? Is that how big is the saving from such an element? And then also in Germany, you have new front office implemented and cloud projects. Did it have any additional impact on the revenue trend there? And did it also bring extra cost for Germany in the second quarter? Should I maybe adjust the numbers a bit for that as well? And what is the rollout plan of the front office implementation going forward? How far are we there? Are there more countries lined up? That's my first question. Yes. So the front office is cost we took. So there's not going to be more cost going forward. Yes, it will have effect on our costs for the second half of the year. But we still don't rule out that maybe throughout the end of the year, we're going to ease up again. So I'm not guiding yet for the impact on cost. It started 1st July, Mark, by the way, but the effect in the beginning is more limited because, yes, people are on holiday and then it doesn't count in that sense. So it's going to help, absolutely, but we're not guiding yet for the exact number. And the working day savings, you quantify that? How many millions are we talking about? No. Yes. Again, as I explained, that's we're not guiding for the absolute number here. Okay. Okay. And then in terms of M and A, there was a small bolgong here. Could we see more bolgongs rolling in now that the market is perhaps a bit more shaky and that maybe sellers are perhaps more willing to talk? Is there anything we should expect there in terms of pipeline? And what kind of size? Yes. What I've seen historically is that it never really picks up. We're also not buying on weakness. That's not our strategy. So we're working on sort of a pipeline mostly in our statement of workspace. You might see us also doing something in our RISE Smart space, entering new countries where we don't have an activity yet, but it's relatively small stuff. We like it. But as we said, going back to our capital allocation strategy, we're basically on a strategy with organic growth. So I wouldn't expect too much on a short notice. In terms of the capital return policy, your special dividend in this respect, would that have any impact on the decision of acquiring a company to say, well, maybe not this size because it will endanger the special dividend? Or will you simply look at it on a ROCE basis like this is a better return on investment, we will do it anyway? Yes. Well, we always said about the special dividend that this is to be discussed every year based on the economic outlook, based on the debt level. And yes, if that were to be the case, also some M and A. But at the same time, we only talked about mid level M and A. So in our capital allocation policies, there is the potential of midsized bolt on M and A always, but we look at it every year. Point we need to make on dividend is actually quite positive. We're very optimistic about the free cash flow development for the rest of the year, if this is the scenario for the rest of the year. So in that sense, from a dividend point of view, still good news. And then maybe a final one, if I may, on the temp margin. The improvement, again, 10 basis points, of course, is our rounded numbers. Do you see some underlying further improvement in terms of the impact of positive pricing? Or is that now fading a bit now that the market is weakening? No. For the remainder of the year, we're not guiding on gross margin, but we've now a bit of a track record in our gross margin. If we unpack it, the working day impact was slightly negative in the quarter, also CICE side negative. But we do see good pricing coming through. It's very hard for me to make a forecast on that. But we also see that the ability, the muscle we're building around data to be used in that regard is increasing. So I'm very positive about it. All right. Well, thank you very much. Those were my questions. Thank you. Okay. Thanks, Mark. Okay. So we have 4 more questions in the queue. The next one comes from the line of Bilal Haziz from UBS. Please go ahead. Good morning, everyone. Just one from my side. Do you anticipate I know it's very early days actually, but any large scale changes from the French Labor Reform Act 2 given its early days? But what impact do you see on your French business from that side? Thank you. Yes. Well, Bilal, congratulations on your numbers also today. But that's a side note. No, it's early days. So we've had discussions before on legislation. We always take the approach that we want to know what it really is and then we'll inform you guys on what we think the effect will be. So this is, yes, as you state yourself, early days. Sure. Thank you. The next question comes from the line of Rahul Chutra from HSBC. Please go ahead. Good morning. Three quick questions from me. In terms of the first one, how much your gross margin improvement in 2Q was driven by pricing versus mix? And a follow-up, excluding seasonal Excluding those are very hard to pick up. Could you run that again? It's a very bad laugh. Hello. Can you hear me now? Yes, we can hear you. Yes. So just one is a little bit yes. Okay. How much of the gross margin improvement in 2Q was driven by pricing versus the mixed effect? And the follow-up, quickly, excluding the seasonal effects, how should we think of the pricing impact from in 3Q? Secondly, in terms of can you give us a sense of what is the extent of decline in manufacturing in Europe, in particularly Germany, France and Netherlands? And the third one, what is the impact of wage inflation across geographies in terms of give a sense of what they're doing? Thank you. Wage inflation in the U. S. Is between 2% 3%. In Europe, it's well, it helps in Spain, yes, given the but that's quite a specific one on the minimum wage. So wage inflation in Europe is still happening, but not yet to the effect of the U. S. Yes, so we talked about sequentially a lower gross margin. So in gross margin, effectively, you always need to compare with the same quarter last year given the seasonality in our business. And as we said, we still expect, you never know, but as we are trailing now that the margin and the improvement we've seen throughout the year will continue into Q3. Okay. So in terms of the manufacturing decline versus, can you give a sense of that in terms of how that was doing? No, because then we give guidance for the quarter, and we don't know. As I said, we're now in July. Our clients are quite uncertain. So we'll see what they come back within September. Okay. Thank you. Okay. So the next question gentlemen. Just a couple for me, please. Firstly, just following up on some of the previous questions around the gross margin. Your Q3 guidance would appear to indicate that the gross margin would be broadly stable year over year, whereas you've indicated you'd expect the positive pricemix dynamics to persist. Just wondering how we can reconcile those 2, please. And secondly, I just wondered if you had any thoughts yet on the previously tabled plans in France to extend the payroll subsidies to compensate for the loss of CICE, which I think were due to come in, in October. I just wondered if you had any thoughts as to whether those were still likely? And if so, what we should be factoring in for them? Thanks. Yes. George, good morning. I'll take the last one. As stated previously on this call, we don't do these if what might happen if it's a law and it's passed, then we'll know and we'll share the effects with you. Too early, we've seen that before. Then it comes, it's a different version. For us, it's a bit of a waste of time. We just take it if it's a fact. And then again, we're going to talk about it with you. Yes. On the first one on gross margins, so what we said is kind of gross margin actually slightly down, driven by seasonality, but stable or slightly up since last year. So it gives you kind of a window of 10 to 20 basis points, which is, I think, an acceptable margin of guiding us. And it does expect that we have no big change in our top line. Of course, working day effect, you've seen slightly positive next quarter. So with that, I think we can work out a gross margin. And again, George, the drivers we saw in Q1 and Q2 are still at play in Q3. So that's as much as we can do. Thank you. Okay. So we do not have any more questions in the queue. Okay. So no questions coming through. So I hand back over to your host. Yes. Well, thanks for calling in. We wish you all a great holiday and a great summer. And in the Netherlands, it's 34 degrees. So always good for our beer and ice cream business, but we'll see if that helps the top line. Wish you a great summer. See you next quarter. Thank you. Thank you for joining today's call. You may now replace your