Ladies and gentlemen, welcome to the Randstad’s second quarter results 2016 conference call. My name is Chach, and I’ll be coordinating your call today. If you’d like to ask a question on today’s presentation, you may do so by pressing star one on your telephone keypad. I’ll now introduce you to your host, Robert-Jan van de Kraats. Robert-Jan, please go ahead.
Thank you. Good morning, ladies and gentlemen. Welcome to the Q2 2016 results call. I’m here together with Jacques van den Broek and our other colleagues of the executive board and with Arun Rambocus and some other staff supporting us. We’re going to discuss the Q2 results. Q2, a quarter which was the 11th quarter with mid or low single-digit growth, which is rather atypical if one looks at it in a bigger perspective. It feels like being in a hovercraft on the water for quite a while now. It’s also a quarter where we’ve seen significant volatility in our stock price, and traditionally, that volatility has been much higher than the one we see in EBITDA. If one looks at our cash flow, it’s even less volatility. I’ll take you through the presentation, and at the end, we’ll move to Q&A.
Moving to slide five right away, which shows some of the details underlying our second quarter result with solid incremental conversion. Conversion from additional gross profit into EBITDA. Revenues are up by 3% for working day. Please note that our second quarter is seasonally typically the better quarter compared to Q1. Typically, the third quarter is the best of the year, and also typically Q4 is somewhere in between Q3 and Q2. That would normally be the rhythm. Also, please note that the comparables in Q2 are 1.1% tougher than they were in the previous quarter. Some impact from the comparables. Across the board, we have seen growth in Europe in quite some countries. We’ll get back to that. North America has been flat, so at 0%, and the rest of the world came in with 4% growth.
If you look in the American market, look at the BLS data in the month of May, it explains most of the development there. Gross margin was up 20 basis points. Please note that we have been a little lucky in rounding it here. This is an expression at the high end of what happened here. Underlying EBITDA improved to EUR 240 million. Foreign exchange had hardly any impact on the result. Here is the ICR for the last four quarters at 53%, the quarter itself at 50%. That, because we have a hard time assessing the world economy, as many of you will also have. We respond to actual data every week in our branches, in our offices, and then we aim at converting 50% of the additional gross profit into EBITDA.
Of course, we aim at beating the market, be it in revenues or in profitability. Adjusted net income improved to EUR 171 million with a good return on invested capital at 18% now. DSO improved again, 50.7 days. Please note that 1 day makes a difference of roughly EUR 70 million. It justifies our attention here. If you go back a couple of years, this was in the high 50s, and now we have arrived at the level of low 50s. Leverage ratio of 0.7 now. This is always the highest quarter in terms of leverage ratio and in terms of net debt, typically, if the circumstances remain equal. In Q2, dividend was paid, but also holiday allowances in the Netherlands and Belgium typically push up the net debt level. EBITDA margin now over the last 4 quarters, 4.6%.
We've been rather busy in the acquisition space. Of course, organic growth is our priority, but strategically, we do add acquisitions to strengthen our positions. We have absorbed in the first quarter an acquisition in the Nordics of Proffice, which was then included for 2 months. Now it's included for the full quarter. We also have closed acquisitions in Italy of Obiettivo Lavoro and in Japan, Careo and twago, and these are going to come in the third quarter as from the 1st of July. We have announced some additional M&A which relates to Ausy, a French-based player which operates internationally. If you add it all up, the acquisitions that have been closed now and the one in the pipeline, it adds up to EUR 1.5 billion.
The last 4 quarters on slide 6, we have seen stable mid-single digit growth, like we have seen in quite a few quarters before that, in total 11 now. This shows the P&L, the EUR 240 million with an incremental conversion ratio underlying of 53%. Gross margin was up over the last 4 quarters by 10 basis points, and our perm growth for this quarter 11%, but for the last 4 quarters, it's 2.9%. The controlled growth of operating expenses by 3% organically resulted in this excellent incremental conversion. Slide 7. You can see the regional split of our growth. Europe grew 4%, which compares to 6% in Q1, and I'll get back to the various countries, but most of the growth we see in the segment with manufacturing, automotive, logistics. North America was flat at 0 compared to 3% in Q1.
Rest of the world, 4%, and the group as such at 3%. North America on slide 8, stable revenue, but record profitability, we note. Revenue, stable gross profit as well. Perm fees showed very limited growth. U.S. staffing and In-house came in at revenue growth 1% compared to the 6% in the previous quarter. We remain to work hard to improve our revenue growth in the professional space. Sourceright clearly improving spend under management up now by 33%. Canada, a difficult market, but we remain ahead of this challenging market by recording 2% growth. Again, EBITDA margin 6%. If you look at the slide, the right upper corner slide, it shows you the trend. If we look at the month of July, we see a continuation in our volumes for the first 2 weeks of what we did see across the second quarter. Slide 9, the Netherlands.
Underlying growth, but still suffering from the decline in the payrolling business. Revenue at 3%. The loss of the government, the payrolling business, we have discussed extensively in the Q1 call. It should start to fade out gradually as from Q3, but it will take a while before it's completely absorbed in the comparables. PERM is doing quite well, up by 18%, and our combined staffing and In-house Services do show growth if one excludes the payrolling business of 8%. Our professionals business also back again to double-digit growth at 11%. EBITDA margin now at 5.5%, and we continue to work on our plans as discussed last time to bring us back in the 6%-7% zone. France. Growth impacted by strikes, especially in the distribution business, but a strong return at 5.9%. Revenue up by 4% now.
Professionals growing nicely at 10%, and PERM, please note that, 37% growth. For the sake of customer profitability, we again have decided to reject certain opportunities because we felt these would not add value. Germany on slide 11. Improving growth and profitability. It's nice to see our SME business now outgrowing our large clients. I would say this is a direct result of tight activity-based field steering, and it comes through nicely. The 5% growth that we see is mostly volume growth. That is, I would say, confirming the fact that this is rather solid. EBITDA margin now at 5%. That's the result of good operational leverage. Belgium. Further improvement in profitability to 6.3%. I would say that's a pretty attractive level. Revenue now minus 2%. This is the staffing and In-house Services.
We suffered somewhat from the situation at the Brussels Airport because we have significant business in that space. Gross profit improved by 4%, which is the result of a strong focus on client profitability. The gap with market in terms of revenues was reduced somewhat. Iberia. Improving margins while continued growth, 5% now. In Spain, it's clearly a challenge. The customer profitability and credit worthiness of our clients is leading our selection here. Professionals growth. Gross profit was up by 13%, and the PERM growth was 42%. Like in other countries, the result of a very specific strategy. Also, our Portuguese business improved by 5%, especially the gross profit has improved, also customer profitability being a key focus in this market. The U.K. Brexit impact limited so far. Of course, this was late Q2. It's rather difficult to identify any direct impact.
At best, we have some anecdotal conversations or evidence with certain clients, but nothing really significant so far. Revenues at 0 compared to 1% in the previous quarter, but our EBITDA margin has improved to 3%. Please note that this is a rather specific market. We also discussed earlier today the fact that in the U.K., we have twice as many staffing operators in the market than in the U.S., whereas that market has 5-6 times as many people living in it. Clearly, a fragmented market with quite some competitive pressure. Our business in the U.K. has been adjusted over the last couple of years, less exposure to the manufacturing segment. Good exposure, for example, also to education and care. On the whole, the impact of the U.K. to the Randstad book is less than 4% of revenues and 2% of profits.
Some other European countries, we do see continued growth in those markets, especially Italy. We have been busy with acquiring, but at the same time, we have been very busy in expanding our business organically, and I would say successfully. Also in the perm and specialty space, we do see interesting growth. Switzerland, it came from a low point last year. Q1 already 5% growth, and now back at 10% in the second quarter. Poland also a good indicator always, growth at 13 now. In the Nordics, we do see good progress on the integration. It is well on track. Our Finnish business, which came with the acquisition, has been transferred to a Finnish player with whom we have now entered into an exclusive partnership to serve our clients also in the Finnish market. EBITDA margin improved in this space to 3.9%.
Across Europe, we do see good growth in most of the markets. The rest of the world also mid-single-digit growth at 4%. Japan improved to 4% with excellent growth in the perm space, 65%. It shows what an opportunity it is and how it works out if you focus on it. Australia, New Zealand, 4% growth now. More importantly, the perm space showed growth of 26%. Overall, in Asia, we did see 4% growth. Latin America up by 6%, but good focus on profitability here, which you see in the final bullet here, 1.9% EBITDA coming out of it now. Moving to slide 18, the P&L, which effectively puts it all together. All items have been addressed now, integration costs and one-offs related to some M&A and restructuring, relatively limited. The rest is rather standard. Moving to slide 19, where we have the performance by segment.
Finally, professionals in the lead here with 5.8% return as it should be. In staffing, we led by a focus on customer profitability here, and that very often results in changing delivery models, be it In-house or central delivery. Now coming in at 4.8% EBITDA margin. In-house, we continue to see transfer of clients from staffing also to In-house here to ensure the right delivery model is offered and an excellent return at 5.2%, I would say. Professionals, good focus on IT, finance and accounting and engineering paying off here. Gross margin bridge to explain the jump from 18.7% to 18.9%. At the beginning, I already elaborated on the fact that this is also a rounding, but this effectively puts it all together what we have said before. The temp business mix helping us here. M&A profit is being added with a slightly higher gross margin.
The perm business 11% now, which is now just north of 11% of gross profit and just north of 2% of revenue. Expanding nicely in the HRS box, you see the impact of the Dutch payrolling business. Comparing our OpEx sequentially, from Q1 to Q2. Some changes, FX slightly, which was almost the same at the gross profit level. At EBITDA, it was only an impact of roughly EUR 1 million negative. M&A is the addition of profits mostly. This is 3 months rather than 2 months included now. Marketing, the typical seasonal pattern. We spend more always in marketing in Q2 because business volumes are higher than we do in Q1. Growth-related investments in people, in the field organizations in the EU. Moving to the balance sheet of Randstad. Net debt new at EUR 634 million, leverage ratio 0.7.
If you look at operating working capital here, it reflects growth. Net tax assets are lower. That's partly explained by the opening position last year, some specific issues. It has reduced mostly because of the fact that we have used the U.S. net operating losses. I mentioned already the solid working capital at 4%. This is the high point, and throughout the year, it will reduce to 3% again, and the return on invested capital, almost 18%. Our free cash flow, rather standard again. Investments in operating working capital. This is typically a negative quarter due to the fact that dividend is paid. Nothing further out of the ordinary. Moving to the outlook for the full year on slide 24. Organic revenue growth was 3% in Q2. In June, revenue grew by 2%, and the volumes early July indicate a continuation of the Q2 growth rate.
If I going to share now an indication of the June exit rates with you. In the Netherlands, that came out at low single digits, France mid-single digits. In Germany, mid-single digits. In Belgium, it was down low single digits. In the U.K., it was close to flat. Iberia, mid-single digits. North America, flat. The rest of Europe, high single digits, and the rest of the world, mid-single digits. That on the exit rates, we do anticipate the Q3 operating expenses to remain more or less stable sequentially on an organic basis. This should be typical to the trend that we see in the month of July in our volumes. As of Q3, the acquisitions of the Italian company, Obiettivo Lavoro, and Careo Group in Japan will be added. That should be included in your spreadsheet. We do not see a material working day impact for Q3.
That concludes what we believe should be elaborated upon. Now time for Q&A. Operator, up to you.
As a reminder, ladies and gentlemen, to ask any further questions, please press star followed by one on your telephone keypad now. Our first question is from Chris Gallagher from JP Morgan. Chris, please go ahead.
I think we answered it already.
One moment. Next question is from Nicholas de la Grense from Bank of America Merrill Lynch. Nicholas, please go ahead.
Morning, guys. One quick follow-on from the exit rate comments you just gave and then a couple on M&A. Obviously the June exit rate was a bit weaker than the volume trends in July. You've just given us the June exit rates, presumably by region. Were there any regions where there was a big difference between the exit rate and July that we should be aware of? The other question's on M&A. Obviously, it's been a very active six to nine months. Can you talk about what the pipeline now looks like and whether the recent market sell-off is actually helping or hindering progress there? I wonder if you could elaborate a bit on the recent Ausy acquisition, particularly in terms of the kind of the bench risk that you're taking on there.
My understanding is that the majority of your contractors there are going to be on your permanent payroll. What that means for margin volatility, et cetera. Thank you.
Okay. Hi, good morning. Jacques here. June was a tad lower mostly because we saw that in France many people were not able to get to work in May but also to a lesser extent in June. We estimate this revenue and it turned out in June that in May people just worked less hours. Underlying the trend of France in revenue will be slightly stronger in July than it is in June. Second effect was in Belgium where we mentioned the fact that in June, more May than June, but also the Zaventem Airport opened up more fully for business so that will help. Those are the two outliers in June. On OC, yeah, sure. On the one hand this is a business that has bench risk. On the other hand, we're working with people which are very hard to find, who have unique capabilities.
François and I spent quite some time coming up to this acquisition meeting with people. We're very confident that this will be a very strong business for us, where the risk is more how do we find more people to do the work than the bench risk as such, which is the name of the game. If we look at the earnings of this company, they are very able to manage these bench risks.
On the pipeline for M&A and the process of OC, we're now going through the formal approval steps with OC. That takes time, and that will result in the process taking a couple of months to finalize. We'll see how that goes. On the rest of the pipeline, we've done quite a few transactions, but it doesn't mean that we'll continue this rhythm. We are looking at strategic additions that are relevant to the company. I would say the limitation that we clearly set ourselves is the leveraging of the balance sheet up to 2x EBITDA, and I would say size should remain small to mid-size. Nothing sort of earth moving in terms of size.
That does. Just clarification on the balance sheet point. Does the kind of the deteriorating macro make you slightly more cautious than you would otherwise be in terms of taking leverage up to 2x, or are you not concerned about that at this stage?
Well, that's an interesting point which of course we elaborate on ourselves and also in the board. We have gone through severe testing in the past, and we've built in a lot of flexibility. You might remember our capability to reduce our cost by 30% in six quarters in 2009. We really have the whole toolkit available. We've tested ourselves against various scenarios, and we do not see any scenario which will bring us into any sort of sensitive zone. Our agreement with the banks allow us to go up to 3.5 times and following a significant acquisition, we even can go up to 4.25. We are rather comfortable with all the scenarios that we have looked at. Given the experience of 2009, we've looked at serious scenarios, I tell you.
Okay. Thank you very much.
Our next question is from Chris Gallagher from JP Morgan. Chris, please go ahead.
Hello. Good morning. A little bit on North America. You've seen staffing slow there. Is there any sectors or regions specifically? If you strip out Sourceright where MSP was up a lot, how does that change that number?
Yeah.
Linda coming in.
Yes. Hi. Good morning. This is Linda. In terms of the sectors what we've seen slowdowns, our IS business growing well above market. I think they're still above market, we have seen the volumes moderate quite a bit. It seems to be stable. April was very strong. May and June were a little softer. July is too early to tell, the volume seems certainly not to be deteriorating. Certainly it is the blue-collar sector in RIS where the growth levels have been much more moderate than they have been over the past few years. In terms of Sourceright, yes, our MSP business is way up. Our payrolling business is also doing well. Our RPO business is having a bit of a tough year. This is largely related to a couple of large customers, so it's not an overall weakness.
There are lots of new program wins, and the underlying business remains very strong. We have a couple of large clients whose volumes are quite down this year, and that is causing some pressure in the RPO revenue volumes.
Maybe as an add-on to the MSP business, the fact that the spend on the management is up 33% is mostly due to new wins, not as much to do with the market as such. We just managed more programs than we had last year at the same time.
Thank you. How do you think your competitive environment in terms of RPO and MSP, you think one of your competitors spoke about quite a successful period in Q2 in terms of wins in RPO. Do you think you have a better offering in MSP or RPO, or is it just simply a movement in a very short period of time and difficult to read much from?
I would say we've had a tremendous win season. We've had lots of wins in RPO and in MSP. Again, the RPO number is really related to a real tough comparable in two large customers last year. It's not reflective at all of the health of the business, and certainly wins remain strong, probably at their highest levels ever, I would say.
Okay.
Sorry, I just want to ask you, can you limit yourself to two questions to make sure that we address everybody's questions?
Well, with that in mind, I will not ask the next one. Okay. Thank you.
I'm just adding one comment on the M&A. I don't anticipate that the balance sheet will be leveraged up to two times EBITDA at the end of the year. That's not the speed we do anticipate. Just to give you a little sort of more clarity here, the size of the acquisition of Ausy, I would say, is sort of the higher end of the range. So mid-size to small, that means EUR 100 million or so. You've seen the Japanese one up to the size of max, I would say, sort of half a billion euros. In that space, and then we do not expect to see the balance sheet leverage fully to the level of 2.0 times at the end of the year. Just to give you some guidance here. Please continue the Q&A.
Our next question is from Toby Reeks from Morgan Stanley. Toby, please go ahead.
Morning, guys. Two, if I may. The first is on your expectations for Q3 SG&A, which is expected to be sequentially stable on an organic basis. Usually, wouldn't we, from a seasonal perspective, expect it to fall sequentially? The second one is on the U.S. You've been outperforming in the U.S. due to the In-house Services. You're now tracking below the market. In-house Services has slowed from 6% to 1%. What's the outlook there, just around that In-house Services in the U.S., please? Thank you.
The typical pattern from Q2 to Q3 is that Q3 is the stronger quarter, and typically that goes with slightly higher expenses. Given the current development that we have discussed, we anticipate it to be close to flat. By the way, let me also address the M&A side of it. Adding the companies as from the 1st of July means that we do anticipate to see our cost base going up by roughly EUR 15 million for the quarter related to those acquisitions.
Sorry, EUR 15 million, yeah?
Yeah, 15. Correct.
Okay.
On the U.S., I'm not sure I understand the characterization of below the market. I think we are in line to slightly ahead. Again, we have to see how our like for like competitors come out. Based on reports so far, I don't think that that's how we see it. What's very interesting is the In-house Services business and our general staffing, again, some very strong comparables. It is definitely still above market. It's just not as far above market as it is. Where we see the pressure is in our branch business. Our traditional local branch business, particularly in the O&A sector, where there's very little structural growth. If anything, it's going a little bit the other way. That's our white-collar clerical business. That's probably where we see the most pressure.
On the professional side, we do see good growth in our In-house for professionals business, which is very interesting. The types of skills that we are servicing through In-house is broadening, and we do see quite good demand there and demand that remains very healthy.
Okay. Thanks, guys.
We have a question from Tom Sykes from Deutsche Bank. Tom, please go ahead.
Thank you. Morning, everybody. Excuse me. Just on Belgium, would you be able to just say, perhaps excluding what unfortunately happened in the attacks, what's happening to the industrial business in Belgium, please? Could you maybe give us an update on the Netherlands, what's actually happening to the gross profit costs when you think the effect of the payrolling business will be less pronounced at the EBIT level, please?
Yeah. On Belgium, the attacks have not had any material effect on the blue-collar business as such. What we do see is we're quite picky on the business we get. As in any market, but also in Belgium, it's quite easy to grow through low-margin blue-collar business. If it's really just a procurement play, then we normally don't play. That has effect. As such, the Belgian market is still in good shape. We're still slightly below that market, partly deliberate, as you see in our profit development. At the same time, we also think that our Belgian business can still grow a bit faster in SME, as we see in France, as we see in the Netherlands, as we see in Germany. We're very happy with our Belgian business in general. We're not so happy with their commercial performance in the SME space.
That's one thing we're still working on. The market, as such, we think is quite good. The Dutch market, well, the payroll business plays on two elements, both top line, which we'll weed out over this year. Yeah, also the leverage in this business is quite high.
Yeah.
We are growing again against the curve. We were very strong in the government business in payrolling, and we're now growing into the private sector. We do expect this business, when the comparison weeds out in 2017, to be a growing business again but smaller in the total portfolio. That will still have a dampening effect on our overall profitability in the Dutch business. That's something we need to deal with. For example, by growing our PERM faster, which 18% growth in this quarter definitely helps, and we see a lot of upside potential there, for example. We'll probably update you, as we've done last year, more elaborately on our important markets in the Capital Markets Day. We'll keep you abreast of things.
Okay. When you consider that you're growing against the curve, as you say, in the private sector, your professional is doing quite well. Your overall top line's obviously going up. You seem to be getting a little bit worse leverage now than before in the Netherlands. Is pricing incrementally? How would you characterize the pricing market there?
Yeah. Pricing, Tom Sykes, as we said, it's tighter. We've seen, let me call it very creative pricing from USG presenting itself as a to-be-bought company last year. That's quite evident in their margin and results development. Let's hope that the Japanese owners don't like that. Given the price that they paid, probably the money still needs to come out. We're happy that they will see that. We see, for example, the European Commission being bought at a very low margin coming back to us in Belgium. Might be an early sign. All in all, we do see, if you look back to 2008, 2009, and you've been also looking at the sector for a long time, there is commoditization in margins, which we offset with our delivery models, as Chris Gallagher presented last time. There is this shift. Yeah.
We're confident, as we mentioned before, that we can still get good and above-group average profitability in our Dutch business.
Okay. Thanks, Jacques van den Broek. Thank you.
Okay. Good night.
Our next question is from Paul Sullivan from Barclays. Paul, please go ahead. Oh. We've got George Gregory from Exane. George, please go ahead.
Morning. I wondered if you could maybe just clarify a few points on the deals. Firstly, the dates of consolidation of both Lavoro and Careo. Also, perhaps you could provide us with some high-level numbers of Careo, please. Thanks.
Well, I mentioned it before, consolidation as from the first of July. Revenues together are roughly close to EUR 500 million. Just know that EUR 400 million is the Italian acquisition. Profitability of the combined businesses, I would say just below the group average for now, but with the potential to clearly improve. That's why we were very enthusiastic about these deals.
Okay. Just to clarify on Lavoro, you said around EUR 400 million. I think Lavoro did EUR 436 last year. Is that down, or was that just the rounding?
Lavoro is in a growing market now, a bit flat. The Italian market is also not as exponential as it was. We as Randstad grow in May at 70%, so we are clearly outperforming the market. You will see a bit less of revenue because we will divest a few of the foreign activities of Lavoro. It will not be the EUR 400 million, it will be a bit less because of this divestment.
Okay. Sorry, just your point on the profitability. I missed that point.
This was Chris, by the way. He is responsible for the Italian business. The combination, that's exactly where we see the part of the synergies is that our track record in growth will support the expansion of this, the newly acquired business. That's the ambition. In terms of profitability, I made the point that the acquisitions together come in just below the average of the group profitability, with the potential to clearly catch up.
Just to give you a bit of meat on those bones, we acquired in 2013, USG, which was roughly 20% more in the Italian market. It came in at 1% operating profit or less. Look at our Italian business today. There's a lot of synergies, head office, branches, that sort of thing. You shouldn't expect anything this year. We will start recalibrating both businesses as of beginning of 2017.
Okay. Thank you.
Our next question is from Marc Zwartsenburg from ING. Marc, please go ahead.
Yeah, thank you. Good morning, all. 2 questions from my side. First of all, could you give an indication on the comparison base with July, August, September last year? Because my feeling is that the comps are getting a bit easier. Also maybe Linda, can you give a bit of an indication how your blue collar or In-house is trending into July? Do you see there some stabilization bottoming? Any feel for that will be great. Then the second one, since the M&A pipeline is more small to mid-size acquisitions, generating quite some cash, is it already a topic in the board? Could you perhaps give a bit more flavor on what you would do if in case the market goes down to, say, mid-single-digit decline and that your EPS comes down to less than last year.
Would it then be logical to assume that maybe on the dividend you might provide some support and keep it at least steady versus last year as a sort of floor? Is that anywhere in the cards for next year? I know it's early, but if you have any flavor on that would be great.
You're always early, Marc. I'll take that question and the one on Q2 or Q3. We have a dividend policy which describes that up to 2.0 times EBITDA, we have a policy that pays out cash with an option to take stock. If we get north of that, we'll promote stock, and if we get north of 2.5, it'll be stock. That's the policy we have, and within that policy, we'll make choices. Last year on the dividend, over last year, we decided that given the very low leverage ratio, it should just be cash. I think the policy sets the framework for a good decision going forward. Most likely, with circumstances as they are now and trends as they are now, we'll be clearly below 2.0 times EBITDA.
That will bring us to the standard policy, which is cash as a default and optional stock dividend. Your question on Q3. Q3 last year showed a growth, which was slightly lower again. Q2 was a peak last year compared to Q1 it went up, and now Q3 last year was lower again by just a bit more than 1%, and throughout the quarter, last year was kind of stable at the same level.
On the U.S., Marc, the RIS business is off to a pretty good start actually going into July. It's a bit of a tricky comparable though, because of the movement of July 4th. We have two weeks, and again, the numbers make us quite hopeful. With the July 4th there, makes it quite tricky. The other thing to know about the U.S. is I would say we are at the most challenging recruiting market we've seen in a long time. There's a demand side, which remains still quite good, but a supply side where we're definitely working to up our recruiting game because I would say that on the supply side, it's been quite tricky.
Given the strong BLS data in June and your comforting statements on July, it seems that things are getting at least not worse. I see that the ASA, the American Staffing Association, we're looking at their data, the other. That one is trending the other direction. How would you read that?
Yeah, I know the data's a bit schizophrenic. I think if you add it all up, it comes out looking a lot like our numbers. Looking pretty flat. Yeah. I mean, because it's sort of all over the place right now, but we read it to a flat level.
Maybe to elaborate a bit on what Linda was saying, this is the, call it the negative effect of a positive market. Because of the relative scarcity in profiles, people are tough to find. We do see a tendency that clients hire people quicker. That means that our order duration goes down a bit. We need to work harder to keep up the volume growth. That's an interesting one.
The firm business remains fantastic.
Yeah, sure.
Okay. Well, thank you very much.
Yep.
Our next question is from Denis Moreau from UBS. Denis, please go ahead.
Good morning, everybody. Denis Moreau, UBS. My first question relates to France and to, more specifically, the automotive market. I'd like to know how big is this market to you and if you see any signs of decline at this stage. Peugeot has mentioned some reduction in their production plans from September. I'd like to know if you see an impact of that now. My second question relates to the acquisition of Ausy. I'm aware that you can't say much given the bid underway, but M&A has been a critical component of the strategy of this company. I'd like to know how much capital you plan to allocate for this company for its own M&A action. Do you expect them to grow faster than in the past on the M&A side or at the same pace? Some color on that would be helpful.
Okay. First of all, on automotive, it's an important sector, probably 10%-15% of sales. Peugeot has announced that they will close their plants for two or three days, I think. Good news for us is that Peugeot isn't a client. Sometimes you got good news when, hey, you don't have a client. They're not really in the high margin, to put it mildly. Apart from that, definitely Ausy, as you've seen, has been acquiring companies, which we do think is the part of the DNA which we find attractive, certainly because these businesses are businesses which are, in what they do, their core business, a bit new to us. We will definitely allocate opportunities to them to buy.
Having said that, we will first concentrate on organic growth for OC, because as a company, a mid-size company, they needed to do two things. They bought, invested, and also needed to pay it out of their own cash flow and growth. That's tough to balance. For us, first organic growth, afterwards, we'll concentrate on acquisitions again. We're probably talking full 2017 to make this change. This is a bit early to say. Honestly speaking, we will not, of course, divulge externally the kind of money we would give them. They would just be looking for good deals and then come to us, and then once we do a deal, we'll inform you.
We'll add the same financial discipline as we do for any other deal.
Absolutely.
Okay. Thank you.
Our next question is from Konrad Zomer, from ABN AMRO. Konrad, please go ahead.
Hi, good morning. I have a question on your professionals business, which I think delivered a very strong performance in the second quarter. Could you rank for us what countries had the biggest contribution to your overall 100 basis point margin improvement in the second quarter, please?
Well, a pretty strong business, certainly France. In France, our Appel Médical business grew a lot. Our medical business grew a lot, certainly in PERM. Also our Expectra business delivered a very good performance. Our Dutch business, also quite solid. You see the turn in PERM in our professionals business in the Netherlands, which helped. In general, we do see our European business. We put our European professionals business together in what we call a community that definitely helps to talk about where to grow, how to grow. We do see some early signs of improvement here. We're very happy, and thank you for the compliment, Konrad.
Okay. My pleasure. The second question is on the professionals business by segment. Can you tell us about the Dutch market in particular? What happened in your engineering business, in your IT business, and in your finance and accounting business, just in terms of growth and margin development?
Okay. This is Chris, by the way, Konrad. You look at engineering, it's more or less a kind of a flat market. We are a bit below. It's always something to do with our comparables. Finance is probably, for us, it's in Q2, a plus 5% margin, more or less, our results or performance. The market is also growing, probably at the same pace or a bit higher. You look at the ICT, which is the biggest growing market in vertical, we are growing at a 25%, where market is, well, close to 20. There's another vertical, which is exponentially growing. That's the legal and the social domain sector, where there's a shift, of course, from central government to the local government in the Netherlands, and we see a lot of growth there, also high double digits.
Okay. Thank you very much.
Our next question is from Rajesh Kumar from HSBC. Rajesh, please go ahead.
Hi. Good morning. Just following up on your commentary on North America earlier. You said people are getting a bit more tougher to find. Have you seen any impact on the growth margin as a result of that?
Where you see actual wage pressure, which is where the growth margin would be impacted, is certainly in the blue-collar sector. We have seen some wage inflation in the blue-collar sector, we have also instituted kind of parallel price increases. We are not seeing any margin erosion as of yet, nor are we seeing any great margin expansion. I would say that we are making sure that bill rates and pay rates fluctuate in a mirrored way, I would say.
Sorry. That's almost counterintuitive. If it is more difficult to find people and you are a staffing company, you should be charging higher prices. Why would anyone expect price erosion?
I think I'm going to hire you to go talk to many of our customers, because I think that's a very helpful point of view and one we share. Yeah, you make a very good point.
Okay. Just to follow up, for September, could you just give us some color on the shift patterns? What we know as of now?
For September?
Yeah. You would have some indications from your client what shift patterns they are looking to put in place.
Someone told me once, if you don't listen to your clients, you go bankrupt. If you listen to your clients also. They are in the same uncertain environment that we are, and planning for September is very early days. It's the end of July. September is always a reset. No, there's no comments here. Visibility is fairly limited. It is normally certainly this time of year and also in these environments. No, sorry. No call for September.
We have organized for this, so we don't really have to think about it too long because we respond to the actual data that we get every week. That with our flexible structure, that allows us to get the most out of it rather than plan well in advance for this.
Thank you.
Because probably we'll be wrong planning it.
Okay. Understood. Thanks.
Our next question is from Suhasini Varanasi from Goldman Sachs. Suhasini, please go ahead.
Hi. Thank you. One question. It's on Netherlands, please. You mentioned that you expect payroll impact to actually fade out slowly from Q3. If I'm right, the impact started in Q1 and probably annualized in Q4. Are you maybe getting some positive benefit from somewhere else, which is why you're seeing the fading out? Perhaps can you remind us what was the actual impact from payroll in Q2? I think in Q1 you mentioned it was a 7% impact to staffing and in-house. Thank you.
Kees is looking at some details, but before he does that, my remark was that it gradually will fade out as from Q3 onwards.
To remind you, it started in the second half.
Of last year. Okay.
Yeah. I'll just take the
He's moving closer to the microphone.
It started actually in the third quarter of 2015. We will see it all of the year because we mentioned in Q1 already that it will be an impact of more than EUR 100 million in terms of revenue.
Yeah.
With high leverage on EBITDA. That's, I think, you will see the effect still in 2016. Of course, in 2017 it will change in terms of comparables. We do see what Jacques was mentioning, that we are getting some new contracts in the more private sector, this is not offsetting, for sure not this year, the decline in the public.
Thanks. Perhaps just one follow-up. Could you remind us what the impact was from government payroll in Q3, Q4 last year?
I don't have it here right now.
The total
Okay. We can follow it up later.
I take it offline, Suhasini.
Yeah.
Give me a call.
Sure. Will do. Thank you.
Our next question is from Paul Sullivan from Barclays. Paul, please go ahead.
Hello, can you hear me now? Hi.
Yes.
Good morning, everyone.
Morning.
Just a very quick follow-up on the acquisition contributions. Profitability overall is broadly in line from the stuff you're going to consolidate in Q3. Does the same go for gross margin? Do you anticipate any sort of gross margin impact from M&A in the third quarter? Then just on Germany, maybe you can provide a little bit more color on what's driving the good growth there. I'd be interested to know whether you're starting to see any benefit from the migrant inflow we've started to see in the country over the last six to nine months.
On the M&A, the acquisitions I mentioned before, it's going to come in with somewhat below average profitability, so relative to the group returns, with the potential to catch up. I would say at the gross margin level, the Japanese business is clearly in a higher segment as a result of which it comes in with higher gross margin. The Italian business with somewhat lower gross margin. The biggest part of it comes in with a slightly lower gross margin. Again, it's adding EUR 15 million to the cost base in Q3.
The other question was?
Germany. Germany, as Robert-Jan alluded to, we now see, and that's, I think, if ever, the first time that SME is really seriously outgrowing larger clients. By the way, you should take into account that SME is the German How do you call it? Abbreviation. This is really small companies. Historically, we've always been a large client business, like really big internationals, automotives. We're now moving to actually a big sector of the German economy, which is really family-owned company, midsize companies in local areas, which is definitely due to the fact that we upped our sales with 20%-30% in terms of calls and visits per consultant. Took us a relatively long time, but of course it came from nowhere, honestly speaking.
One and a half years, we saw the early effect second half of last year, and it's now really coming through. That helps a lot. Also Robert-Jan said, most of the 5%, the larger part is actually volume development. Very happy there with our German performance. Inflow of migrants, not really.
Thank you very much.
Okay.
Our next question is from Hans Pluijgers from Kepler Cheuvreux. Hans, please go ahead.
Yes, good morning. A follow-up question on the U.S. I understand the average contract duration coming down somewhat. Again, can you give some feeling, let's say, where you are in the cycle with respect to the average duration? Secondly, how far are you away from peak and/or trough? Secondly, do you see any massive structural changes in the average duration of contracts?
Yeah, I'm not sure where your duration question is coming from. I don't think we've seen any duration change.
Yeah. I mentioned the fact that people are getting hired quicker by our clients.
Oh, that's where it's coming from.
Our order duration goes down, and we need to work harder. We don't work with mathematical models to say where we are in the cycle. We're at peak penetration in the U.S. as opposed to Europe, which is still 15% below peak. We might go into new things. We don't know. What you do see is stabilization currently, as we mentioned, of the growth in the U.S. That's what we're seeing.
Okay. Thanks.
Operator, I think this was the last question. Ladies and gentlemen, I want to thank you for participating in this call. We're going to end it now, and we're looking forward to, again, see you or meet you, or at least talk to you in the next couple of months, and we'll have the Q3 call planned for the end of October, the 25th of October. Thank you so much. Bye.
Ladies and gentlemen, this concludes the Randstad Second Quarter Results 2016. Thank you for joining.