Good morning, ladies and gentlemen, and welcome to the Randstad First Quarter Results 2015. My name is Joe and I will be the Coordinator for your call today. I will now hand over to your host, Robert- Jan van de Kraats, to begin today's call. Please go ahead.
Well, good morning, ladies and gentlemen. Welcome to the conference call on the first quarter results 2015 of Randstad. It's a busy day today with many announcements in the Netherlands, we'll try to be efficient again. I'm here together with all the support needed, including Jac and also with Arun and Andrew. I'll start with the presentation, then at the end, we'll get to Q&A. I'll flip through it. The agenda, you can see that we'll talk about performance, the financial results and outlook, then move to Q&A. We've also added some appendices for your benefit. Moving to slide five right away. First quarter 2015, which was a continued profitable growth. That effectively is the combination of continued growth and good leverage in the company.
That results in an EBITDA margin of 3.5, which is a 40 basis points improvement compared to the same quarter last year. Organic growth for working day arrived at 5.6 in the first quarter, whereas gross profit grew a little faster at a pace of 7%, reflecting focus on customer profitability. Gross margin also improved 30 basis points year-on-year, our perm business continued to grow at a relatively solid speed in the quarter of 16%, that is clearly reflecting the micro-strategy we have on this business segment. Operating expenses were up 4% organically, that is defined as operating expenses before integration costs and one-off. This time, only EUR 9 million as one-off cost included, which is a restructuring project in the professionals business in the Netherlands. The last four quarters organic incremental conversion ratio.
Incremental conversion is the part of additional gross profit that we have earned organically that is converted, that is translated, or that drops through into EBITDA, which arrives at 67%. I would say at a healthy 67%. Moving to slide six, the European rebound in Q1 visible in the red line here. You can see that it clearly comes back. It's the growth expansion in Europe where both Netherlands and France are improving. It's not just market, it is also closing the gap to market in these two countries. We're very proud of the fact that the company is coming back to market again in these two countries. We also see growth continuing in North America, clearly above market in the staffing segment, solid growth in most emerging markets also continues. Clearly also Australia reflects that.
Moving on to slide seven, which elaborates on North America solid growth. The last four quarters incremental conversion ratio here arrived at 53%. That, I would say again, is pretty good given the phase of growth that we are in. We've been seeing growth in the North American market now for quite a while, and still we have an incremental conversion ratio north of 50%. Revenue grew by 5%, which compares to Q4 6%. The bad weather in the first quarter in the U.S. had some impact, clearly also in March. But whether it has impact year-on-year, I don't think so. Winters have been bad in the U.S. for a while. But the distribution over the quarters clearly has some impact, and maybe it has some impact at the total level as well, but that's very difficult to measure.
U.S. staffing and in-house continues to grow clearly by 8%, and perm in the staffing segment up 21%. Again, the micro-strategy on this specific business segment. U.S. professionals, a focus on customer profitability. Gross profit up by 6%, but we also have an ambition to grow the business again at the revenue level. That is clearly the strategy going forward. Perm up by 4% here. Sourceright doing quite well. It's our RPO and MSP business delivering profitable growth. And our MSP Spend Under Management was up by 39%. Canada, a difficult market. Revenue growth of 1%, which is ahead of market. Overall, EBITDA margin up to 3.5%. And at this point, I'd like to note also that Q1 is always the weakest quarter out of the four quarters in the year. Typically, Q1 is the weakest, Q2 better, Q3 the best, and then Q4 just below Q3.
Back to slide eight now. France, a strong rebound, a clear improvement. Revenue flat from a -8% in Q4. I would say that's a remarkable development here, and that is partly Randstad coming back to market and on the other hand, the market improving. The combined staffing and in-house business is at -1%, but in-house grew 15%. Construction in the French market is still weak. Professionals up also 4% compared to -1% in Q4, and perm continues to grow here. We have a very strong focus on selective sharing of subsidies, so we're very much focused on customer profitability. Gross profit up by 1%. Our cost and FTEs down sequentially by 1%, and that clearly is in line with the fact that we did have the revenues coming back to roughly zero, but in the fourth quarter it was still at -8%. EBITDA at 4.1%, stable.
The Netherlands on slide nine, accelerating growth. Again, on the one hand, the market improving, but clearly also Randstad coming back to market, bridging the gap. Revenue up by 10% compared to 5% in last quarter. Randstad grows at 8% and Tempo-Team at 9%. A strong focus on the SME segment that is clearly paying off. Also our professionals business in the Netherlands, Yacht, is up by 19%, an improvement again against Q4. And in this business, we have completed the restructuring in March. So we have combined the professionals business under the Randstad name, under the Tempo-Team brand, but also under the Yacht brand together in the Yacht organization. Our costs are down 6% sequentially. The back office restructuring that we announced was completed effectively at the end, in the beginning of January. So we can clearly see that coming through now, also in the FTEs.
The professionals restructuring, by the way, is explaining the EUR 9.2 million charge that we took. EBITDA margin at a solid 6%. Germany, slide 10, with a recovery ratio of 43%. Yes, a recovery ratio because we have negative revenue development here, then we aim to recover part of the lost gross profit through a reduction of OPEX, and we typically aim at around 50%. Of course this is a marginal reduction of revenues, so the 43%, I think, is pretty reasonable. Price effect 2% now. It's reducing from previous higher levels. It's easing out. Labor market is still subdued by the wage cost increases and the regulatory changes. Last time Jacques explained to you that minimum wages in Germany have been increased but have to compete with very competitive rates next door in Poland. That doesn't make it easier.
The perm growth continues, but now even at a much higher level, and we also see a payoff of our focus on SME and on delivery models in order to deal with the gross margin developments. We also have a challenge in the sickness rate. Partly it was explained also in the last call. It can be attractive for candidates to be sick because they might get a higher pay. We also, at this point in time, have record high sickness rates in Germany. The gross margin was impacted by the 13-week calculation rule. When people have holidays or are sick, they get paid on the basis of the previous 13 weeks' earnings, which might be more attractive than the current earnings at a new assignment. Operating expenses were reduced and that explains the recovery ratio, FTEs down, arriving at an EBITDA margin of 3.4%.
Belgium on slide 11, returning to growth from a -1% in Q4 to 7% in Q1. An incremental conversion ratio, very solid at 73%. Clearly, the gap has been reduced with market in Belgium, and that is also reflected in the EBITDA margin at 5.4%, which is clearly reflecting our focus on customer profitability, but at the same time trying to bridge the gap with market. Professionals also improved in Belgium by 13%, and also here you see solid continuation of perm growth. Gross profit stable growth at 9%. Iberia on slide 12, continued growth, incremental conversion at an excellent 113% rate. Revenues and gross profit up by 12%. Specifically Spain grew by 16%, an improvement clearly. Growth in the automotive and manufacturing segment. Strong focus on professionals, where we did see growth of 87%, now bringing us to a top 3 position in the country.
Perm continuing to grow successfully at the rate of 57%, and that then combined with excellent cost management gives us an excellent incremental conversion ratio. In Portugal, we have a strong focus on customer profitability, and the growth remains stable as a result of that at the level of 4%, specifically growth in manufacturing call centers. EBITDA margin 3.4%. Slide 13, the U.K. Improving profitability now to a level north of 2% EBITDA margin, supported by revenue growth at the level of 3%, but gross profit, more importantly at 5% here. Strong performance in construction in the U.K. market, and we also see finance returning to growth here. Perm fees up by 15%, almost equal to the previous quarter. Operating expenses were managed carefully. We're down 1% sequentially, and headcount was even down 3% sequentially. The other European countries on slide 14. Overall revenue grew by 12%. It's a mix.
Italy at 12% compared to 8% in the previous quarter, with a pretty good return at the bottom line. Focus on specialties and perm here also growing. Switzerland, of course, suffering from the exchange rate adjustments. 9% growth now. I would say still solid. We see strong growth at the in-house business. Poland continues to grow at a rate of 16%, and we're clearly investing in growth here, FTE is up. Overall, the EBITDA margin arrived at 2.7%. Looking at the rest of the world, Japan growth slowed in the first quarter to 2%, and then one has to take into account that last year growth was driven mainly by the adjustments in the consumption tax. That resulted in a lot of work for our flex workers at our clients. We continue to invest for growth in Japan. Australia and New Zealand continue to grow.
Business support is the key segment driving this growth, but also perm continued growth at a nice pace. Asia, we did see growth at 5% compared to 9% previously, but compared to a very high comparable base, China especially, you might remember the extremely high growth rates that we have shown, and we believe we continue to do quite well in this region. Latin America up 18%, which is going hand-in-hand with our focus on capturing productivity improvements here, and we have shifted focus to growth and profitability. As a result of that, our EBITDA went up from 0.5% to 1.5%. Moving to the P&L, slide 17. It is summarizing everything that I have mentioned just before. I would say that EBITDA now arrives at EUR 153 million, and that includes a favorable currency impact because of the fact that we have translated our earnings in dollars into euros.
The effect year-on-year is roughly EUR 5 million. Sequentially, it's almost EUR 7 million. Integration cost, EUR 9 million. I already mentioned that. The restructurings in the Dutch professionals business, the amortization is just a regular application of the bookkeeping rules. Net finance cost. It includes the regular interest charges at roughly a level of EUR 3 million, and then it includes some effects of translating U.S. dollars into euros, which, by the way, benefits the company as a whole because we have a significant increase in equity as a result of that. Also applying some bookkeeping rules, it results in a charge on the net finance line of EUR 20 million, which I want to emphasize is non-cash, as you can see in the cash flow statement. I don't expect this to happen every quarter because this is very much related to the strong increase of the dollar in the first quarter.
Taxes within range, that makes me move to slide 18 because that's where we elaborate on it. Underlying EBITDA up by 40 basis points. The last four quarter organic incremental conversion ratio up by almost 70%. That, I would say, is very solid. We have chosen to look at the last four quarters rate because one quarter typically can give erratic movements, and it's better to look at this over a longer period of time. That's why we have chosen to include this data point in our presentation. Working capital again improved slightly. We continue to be focused on that. The effective tax rate at 28%, well within the range that we have indicated before. Diluted EPS now at EUR 0.50 compared to EUR 0.45.
Dividend has been paid now at EUR 1.29, which was split between cash dividend at roughly EUR 82 million and 65% of the shareholders elected for stock dividend. This compares to a slightly higher number last year. Looking at the various segments, you can see a summary now from looking at staffing, in-house, and professionals. In-house, very solid, very good returns. I already made the remark once that allocation of corporate costs is a bit more art than science, but whatever you do, in-house is showing great returns here, both to us and to our clients. I leave the explanations to your readings on the right-hand side of the page. The gross margin bridge on slide 20, bridging the rate of 18.4% this quarter to last year's 18.1%. Somewhat lower temp margin due to mix, but also due to some pricing pressure that, for example, we see in the Dutch markets.
Permanent placements are clearly adding value here, 0.3% impact. Permanent fees are now north of 11% compared to 10% last year. We always have the data point in mind of 2007, 2008, where it was 12%. At that point in time, it did not include a micro strategy on the staffing segment, permanent placements in the staffing segment. This has been added and is clearly paying off now. What you see here is also continued focus on client profitability. The operating expenses bridge. This one is sequential, so connecting the level in Q1 with last year's Q4. What you see here is a massive impact of the foreign exchange rate translating U.S. dollars into euros. Then we had, as predicted, some savings in the marketing space in the first quarter. That's seasonal, more or less. At the E.U. level, it's more or less flat.
We're netting out Dutch savings with some other increases here Organic growth in North American market resulting in some additional cost and a little lower cost at the corporate level. We continue to make investments in markets where we are growing, like North America, Iberia, Poland, Belgium, and the emerging markets. The balance sheet, as I said, benefited slightly from the, I might also say significantly, from translating U.S. dollars into euros. The working capital as a percentage of revenue is at 3.3% now. I would say that's also typically a seasonal pattern here, which makes it a little higher than what we see in December, but also this time it's a little higher than the previous year, and I'll get back to that. Return on invested capital approaching a healthy 15%. The free cash flow on slide 23.
As you can see here, it starts with the EBITDA, then our charge in operating working capital was a little higher this time. It's always timing at the end of the quarter that is challenging, but also growth is financed here, so nothing irregular. Income taxes are a little higher than last year's first quarter, that is the result of some selective choices on making payments at the right time, giving the right return. Sometimes it can be favorable to be a little early with your payments here. There's very little you get for your money on the bank, by the way. A net additions in plant property and equipment in line with previous years, nothing special. Then if we go down a little further, you can see that we have purchased shares in order to compensate the performance share plan in the company.
All of that has to reconcile with a net debt decrease at the bottom of the page. The net debt, by the way, is composed of various currencies, and we try to reflect the composition of EBITDA, adjusted EBITDA, into the mix of currencies in our net debt in order to have no speculative positions at all. 24, the outlook going forward. Our organic revenue growth was 5.6% in Q1. March was at 4.3%. The volume trend in April so far is a touch better than March. One should keep in mind that last year, the improvement from March to April was close to 2%. This really from a comparable base is a bit more challenging. At the same time, we should realize that we are looking at relatively marginal steps, so sensitivity is relatively high.
We also expect a significant foreign exchange impact again at both at the gross profit, but also at the OPEX level. Somewhat will be left at the bottom line positively. We have focus on profitable growth that continues. Market share improvements are clearly on our radar screen, and this is supported by our activity-based field steering approach. We remain on track to achieve the announced cost reductions and efficiencies in the head office and back office as we have previously announced, between EUR 60 million-EUR 70 million to be realized in 2015 half and the other half in 2016. Well on track. We expect to see a similar number of working days. Actually, we're certain that this will happen. Please keep in mind that seasonally, normally, we'll have a somewhat higher gross margin in Q2 compared to Q1, and also seasonally, the cost base will increase.
Operating expenses are expected to be moderately up on an organic basis. We'll continue our targeted investments in headcount, and reported operating expenses will be inflated somewhat by the foreign exchange movements. The March exit rates for the whole group arrive, as I already mentioned, at a 4.3%. That is broken down to America, continuing at a pretty healthy base of 5%. In France, the exit rate was -3%, but I want to note that it is a relatively erratic pattern throughout the quarter. I think the jump from -8% in Q4 to 0% in Q1 explains that. The Netherlands continues at a very healthy pace, 10% growth. In Germany, we are at the same level as for the quarter, but comparisons going forward will get a little easier. The price effect will ease out. We might see that this is bottoming out in Germany.
Belgium, it's 3% here, but we don't think that's a completely correct reflection of what's happening there. I think it's going to be a little higher if you look at the underlying real developments, if you analyze it a little further. We're not that worried about this number. Iberia continues at a good pace, 8% for the quarter. Again, it has been erratic also in previous months. The U.K. continues at 3%, rest of Europe at 10%, and the rest of the world came in in the month of March at 8%. Again, please note that in the month of March, Japan recorded an impact from the fact that in 2014, the month of March was party time because of consumption tax increase at our clients, as a result of which our clients needed lots of people in that month.
On the month of March exit rates and the feeling for April. I want to conclude with slide 26, which is the one we shared with you at the analyst day, the Capital Markets Day in November. Targets are clearly within reach. This, by the way, is a bucket or a basket with all the balls in there. We have assumed top-line growth in the consensus at the time, mid-single-digit sales growth. If you put in the current numbers, it's a little higher than those assumptions. The savings in the head office and back office, the improved productivity and commercial focus through ABFS, and the business mix changes as a result of our focus on permanent placements, professionals, and SME.
With these assumptions, it's unavoidable to arrive at the range between 4.4 and 4.6, and also it will bring us into the target range in 2016. Of course, different assumptions on the growth line will have impacts on the outcome. That concludes the elaborations from our side. We'll now move to Q&A. I leave it to the operator now.
Thank you. Ladies and gentlemen, if you would like to ask a question, please press star followed by 1 on your telephone keypad now. If you change your mind, you can remove your question by pressing star followed by 2. When preparing to ask your question, please ensure that your phone is unmuted locally. Our first question today comes from the line of David Tailleur of Rabobank. Please go ahead.
Good morning, gentlemen. Actually, two questions on margin expansion, operational leverage. First of all, on France. Actually, I would have assumed that the new incremental subsidy would have driven margins a bit more, also looking at the high perm growth you had in France. Maybe you can explain what's happening there. Maybe you passed on all of the benefits to clients or not. Secondly, if you look at the margins in Iberia, in the rest of Europe, is it right to assume that excess capacity is right now quite limited, and as a result, margin expansion, year-to-date margin expansion has been limited as well? Will it be the trend going forward also? Thanks.
Good morning, David. Can you hear me?
Yes, absolutely.
Okay. Jacques here. In France it's a mixed picture, so we've been quite hesitant or quite negative on sharing any CICE. This is now becoming a part of the margin mix because it's a long-term program. We also said that we would selectively try to conquer business by sharing some of the CICE, and we think we have a good mix now. You see us growing fast in in-house, so that's very helpful. You see us at market the last few weeks sometimes, but it's erratic, as Robert-Jan said, slightly above market, and we do that at a good return. We think we found the right balance there. The other markets, I think you're right. If you look at Italy, if you look at Switzerland, and if you look at Poland, which is rest of Europe mainly, we've seen double digit throughout 2014.
Indeed, if we want to grow further, we want to add people. Again, there's a big seasonal impact here. Q1 here is also by far seasonally the lowest result.
David, adding to what Jacques said here, and we'll talk about it next week as well in Barcelona. We are in phase 2 effectively of the growth.
Yeah.
You remember phase 1 lasts for one year. We have a very high incremental conversion, then after one year, more or less as a rule of thumb, we move into phase 2 with an incremental conversion ratio of 50. That clearly reflects the addition of people to support further growth.
Yeah.
What's interesting to see, of course, is that we try to also, for the longer term, change the business mix in the rest of Europe. In Portugal, we're shedding low-margin business. That has an effect on the top line, but we're okay. Should over time improve our profitability over there. You've seen our spectacular improvement from scratch into third place in two years in professionals, which will definitely give us a higher return in the Spanish business mix going forward. The same, to a lesser extent, though, is true for the Italian market. Yeah, we're on the way of improving our business mix long-term there.
Because about the 50% conversion ratio in stage 2, I fully agree, in some markets, it seems to be that you might already have entered basically stage 3. Then the conversion will probably be a bit below that level.
Yeah, it could be. You know how this works. It's not an implicit goal for us to manage the incremental conversion. What we do is we try to balance the growth, investing in business mix going forward to create a better company over time. That's also why we now work with a four-quarter conversion rates, so as not to discuss all the time how it was in this quarter and because of the weather or whatever, my car had a flat tire and therefore it's lower. It's a bit more of a consistent picture we try.
David, by the way, the incremental conversion ratio over the last quarters arrives at 113%, supporting the story we just said. By the way, thanks for asking just two questions. I suggest that's the standard for the next questions as well.
Yeah. Actually, on France, I had a quick follow-up. Apologies for that, because it was not only related to CICE, actually, it was more related to the new subsidy. I think it was called family allowance or whatsoever. That has impacted your gross margin on a gross level. That's right or not?
Yeah. Subsidies is a part of life in France. The government has a firm belief that subsidies will shape the world of work. You know our opinion. As I mentioned earlier, we're trying to find the right balance, and we like the growth and we like the results.
We're not unhappy with 4.1% EBITDA.
Okay. Can imagine.
Yeah.
Apologies, guys, for the third question. Thanks.
Thank you.
The next question is from Paul Sullivan of Barclays. Please go ahead.
Morning, guys. Just to follow up on the temp gross margin, the erosion of 20 basis points within the mix there in the quarter. Presumably, that was largely skewed to Holland. Maybe you could give a bit more color on pricing pressure there and more generally, your thoughts on that into the second quarter. That's the first question. Then just from a technical perspective, the FX drag on the interest cost. If rates stay where they are, can you give us any sort of sense of the drag in the second quarter?
I'll do the first one. There's always pressure on margin with large clients, certainly in the Dutch business, but also in the Belgian business, the French business, the German business. When there are large tenders out there, clients are educated. Sometimes they use consultancy firms. It's a big party out there. What we're trying to do is hold on to these clients if we got the right delivery model. Through our in-house business, we got a conversion of 30% from the gross margin into results. We can handle a lot. Sometimes, well, we don't. In the Netherlands, we created delivery models for country-wide clients that are delivered from one central point. Clients are happy, costs are relatively low. You can see in the overall result development in the Netherlands is that we can cope with this price pressure.
At the same time, we're trying to, again, change the business mix more favorably towards SME professionals, 19% growth in the Netherlands. Perm, of course, helps enormously. It's a fact of life. It's not a hugely damaging trend, but we can cope with it. Overall, you see that we have a good improvement in our profitability.
Paul, the conversion that Jacques just mentioned is the conversion of gross profit into EBITDA, which is very high at the in-house business. By the way, if you look at the large client impact, you see it indeed in the Netherlands, but we tend to look also at the bottom line where we see very solid performance. On the FX impact, your assumption, if the foreign exchange rates remain as they are, the impact will be zero. If you look at the previous quarters, it started to come in in Q3 and 4 last year, and before that it was typically either around zero or a few million EUR. That's it.
That's great. Thank you very much.
Yeah.
The next question today is from Chris Gallagher of JPMorgan. Please go ahead.
Hello. Good morning. I wonder if you could discuss a little bit the penetration rate you're seeing in North America in the market, and how you could see that evolving. Could it go further than peak levels at the minute? Then also potentially on M&A, how you're moving in that space as you find any targets you're talking to. Thank you.
Penetration rates in the U.S. are at a peak level. That's the good news. It was a bit of a noisy quarter, as we call it in Q1. We talked about the weather, there was also some strikes left and right. A lot of things happened in the quarter. Underlying, we still see solid trends. We still see good demand in the industrial. We see a bit of wage inflation even in industrial of around 2%, which for us is still an indication that things are moving in the right direction. We see good and stable perm demand. Overall, as you see in our numbers, for us, the U.S. is a pretty stable place currently.
On the question on M&A, our strategy focuses on organic growth. Next to that, we look at ways to accelerate. We are very happy with the current geographical footprint that we have. We're not really looking at expanding that. Within that footprint, we'd like to increase size, and M&A could support that. Of course, things have changed over the last quarters. It has become more expensive. We continue to look at options in a very disciplined manner. That effectively potentially could result in mid-sized acquisitions going forward. Again, the discipline that we have to make sure that we can create economic value is driving us. I don't expect any announcements in the short term. That means we're not going to surprise you in the next few weeks.
Thank you. Very helpful.
Our next question is from Matthew Lloyd of HSBC. Please go ahead.
Good morning, gentlemen. Couple of questions from me. The first one, in France, when you book a CDD as a placement fee, are you calling that perm or are you calling that temp? Just so I try to understand the dynamics of the French market. The second question is about Germany, and that's my understanding from some of your competitors is that the sort of changing in law about contractors, meaning that they might have to go perm, has caused a bit of a sort of stalling in temp demand, and that's why temp demand's awful, but job vacancies are so incredibly strong for perm. Is that what's really happening in the German market or are there other things going on?
Okay. Your first question, no. If we have a CDD, which is for the people on the line, that's a contract for a fixed period. We don't book that as perm. Perm for us, by the way, in all of our business, that's really when a client demands for a perm placement, we fill it in and we get a fee. That's really what we see in France. The whole development of CDD, but also CDI, an indeterminate period, is moving very slowly. I think we now have around 1% of our total workforce on a labor contract. Which, comparing to the Netherlands in our staffing business, this is probably between 10 and 15. This has quite a while to go still. The German one, there has been a lot of fuss around, how do you call it? Artificial. How would I translate that?
Self-employed.
Yeah. Freelancers working for the same clients for 10 years, of course, they need to be employed, really. We don't see that as a bit of a drag on our business. What is a drag on our business is, as Robert-Jan mentioned, the legal change, equal pay, that sort of thing. Also, the fact that there's a gentleman's agreement between unions and some employers to hire temps after 2 years or replace them. That's a drag. We do see penetration rates in Germany. The only country where penetration rates were higher in 2008, going down a bit. However, we think this is short-lived. Robert-Jan already mentioned bottoming out. We do see volumes in Germany picking up ever so slightly, and against easier comparisons, we are a little bit more positive about Germany going forward.
From a risk standpoint, from an idle time standpoint in France, we are not unhappy with these contracts for a defined period of time or for indefinite contracts. As long as it's a limited part of our portfolio, we typically place these people first, and we can see in the Netherlands and in Germany that this is a pretty successful business.
Okay, thank you very much. One very quick follow-up because people are asking about penetration rates. In Europe, do you know what your penetration rates are as a percentage of temporary workers? Sort of agency temps as a percentage of agency workers, and how that might have changed over the years?
No, Europe is a pretty diverse place where the quality of market data is hugely different. No, that's not really a question I can answer.
Matthew, I suggest you have a call on that with Andrew or with Arun.
Okay, thank you.
After two and a half questions, the next one now.
The next question is from Tom Sykes of Deutsche Bank. Please go ahead.
Yeah, morning everybody. Following on from Herr Lloyd's questions on Germany, just had one on the split of where growth might be coming from. Could you outline maybe what's happening in autos versus non-autos, and perhaps East Germany versus the rest of Germany, given what you said about the competitiveness of neighboring countries? Perhaps just in North America, could you maybe give a view of what's happening to non-wage personnel costs? How quickly are SUI and workers' comp costs coming down, and is that a benefit to your gross margin? Are you seeing the same large account issues in North America as you are alluding to in other countries, or is it not the case there? Thank you.
Okay. Well, in Germany, it's not so much a, call it a geographical difference in where we see the market development. What we do see is that because of the cost of a temp being higher, we do see some, call it fallout or weak demand in the SME space. The larger clients, auto definitely, but also some other large clients, have got structural flexibility. They're not changing their strategy as such. We do see still quite stable demand there.
On your question on North America, the view on non-wage costs, I think there's nothing peculiar at the moment other than the ACA-related costs, which we are charging to our clients. Using your question, just to give you a bit more perspective on wage cost itself, we now see some wage inflation coming through. Actually, the first signs of wage inflation in the North American market in the blue-collar segment. It's early stages, but that is a signal that we see coming.
Okay, thank you. Could I ask a quick follow-up for just, can you venture some comments on industrial versus clerical versus professional at the market level in the U.S., please?
Yeah. It's going well. Blue collar is still doing well. White collar is actually a bit better. Also on professionals, honestly speaking, the market is very solid, and we should improve. We're sort of not so happy yet. As you know, Tom, we're trying to outperform any markets. Took some great steps in quite a few markets. U.S. profs could still take a step up, but the market is solid.
Okay, great. Thank you.
The next question is from Nicholas de la Grense of Bank of America Merrill Lynch. Please go ahead.
Morning, guys. Firstly, if on the contribution to gross profit from perm, you kind of alluded to 12% having been the peak in the past, but the micro strategy potentially taking that further. I was wondering if you could kind of give an indication of where that could maybe get to, and whether you think that the mix shift towards perm is going to be enough overall to offset continued pricing pressure or gross margin pressure in temp. Just in the U.S. I know one of your peers has pointed to decelerating trends through the first quarter, which doesn't seem to be evident in your numbers.
I was just wondering if you could maybe give a little bit more color on what impact you may have seen from weather impact in the U.S., or whether your clients are starting to dial back demand in manufacturing, for example, on the higher dollar impacting competitiveness. Thanks.
Yeah, I'll do your last one, RJ will do your first one. Well, the weather effect and all the somewhat funny stuff, strikes and what have you, we think is around 2% negative impact through the quarter. Yeah, we don't see it decelerating. We see, as I mentioned earlier, a pretty stable picture also in April, in blue-collar manufacturing and also in perm demand. No acceleration, that's not to be expected. As Robert-Jan said, it has been quite stable for us in U.S., we do see that picture continuing.
The share of gross profit earned from permanent placement fees, I already mentioned that it compares to 2007, 2008 being north of 12%. It improved from 10% in Q1 last year to more than 11% in Q1 of this year. At the time, in 2008, 2009, it was primarily the result of permanent placements in the professional space. Now we have been building a strategy to also actively sell this in the staffing space. I have to say, that's going very well. It also allows us to have a high level of synergies with the staffing business, because lots of this is sold through what we call hybrid or blended units, where people do both perm and temping. The comparable base has changed. The 12% in the past should not be the target going forward.
Fortunately, we like every business. Because of the low capital intensity, we try to grow everywhere. Under normal conditions, we should be able to exceed the level of 2007 and 2008, given the fact that it now also includes permanent placements in staffing.
Because you also said if we would see it compensating the price pressure in temp. That's a very tough question. Perm is not the only tool there. Price pressure says something about the gross margin. There's also a lot of stuff going on in delivery models, in-house being our more prevalent one, as we talked about earlier. Again, we do see more and more large-scale delivery models where, again, as I mentioned earlier, in some countries, we deliver highly automated a nationwide client from one area. Then again, we have a good conversion of a relatively low margin. It's a mix of things, and we're trying to optimize as best we can.
At the end of the day, that should result in the targets, the financial targets, the EBITDA targets that we've put forward for you for the next two years.
Just sorry, one very quick follow-on on that. When you're talking about the EBITA margin targets, is there an expectation that gross margin goes up over the next two years, or is that more a case of operating leverage?
You should look at the basket or the bucket there. We're still deciding whether it is a basket or a bucket. If you look at all the balls in the basket, then it's a good mix of all of that. Of course, very difficult to predict countrywide growth, perm growth, where are we growing, what kind of clients, what kind of sectors. It's a big company, it's a big world.
Helping you out a bit here. If you follow the normal pattern, Europe should start to contribute more. The Netherlands should contribute more. For example, permanent placement typically goes up, the admin sector starts to grow, professional starts to grow. A typical pattern, normally in a model, would show your gross margin going up. Again, if we earn through in-house, as you can see at the EBITA, returns from in-house, we would be very happy as well.
Cool. Thank you very much, guys.
Our next question today is from Hans Pluijgers of Kepler Cheuvreux. Please go ahead.
Yes, good morning, gentlemen. A few questions from my side. First of all, on the U.S., a follow-up question on the professional segment. Actually, little bit still lacking the market trends. The market is quite positive, you're already lacking the market for some quarters. Are you, let's say, intend to implement some additional measures to really catch up with the market? Secondly, on France, you already said construction remains weak, could you give some other indication on the other end markets, how there the trends are going? Let's say, also in France, your improvement compared to the market, is that across the board or in specific segments or with specific clients?
In France, it's pretty much across the board, driven by in-house. We've opened up quite a few new clients in in-house. As you know, this is a unique concept. We're the only one who really sells this, apparently our clients like it. It also works well in uncertain circumstances. That's pretty much across the board. As you know, we've already targeted the SME space, doing relatively well against market there. What still needs to come through there is the fact that if we transfer a big client to in-house, that the branch then needs to start growing in the rest of the market. That is taking time. In a sluggish market, we've talked a lot about our ABFS, then you need to put in a lot more sales, it takes longer. That brings me to the U.S.
As mentioned, we think we can improve. This is an internal thing. We're not putting in any additional measures, we're just trying to look hard at where we can improve. It's a mix of things. Sometimes you're stuck with some attrition rates, some players in branches leaving you need to start all over again. Sometimes it's the conversion from the sales into the order, the conversion from the order into an actual match. It's a mix of things. We need to speed up, work more effectively, we should improve over time. There's no silver bullet there.
A follow-up on the in-house. In the past, let's say, the growth in in-house was a big part coming from re-qualification from general staffing to in-house. As I look a bit at the numbers, that impact is relatively limited for the growth in in-house. Is that correct? You don't see really that much re-qualification from staffing to in-house anymore?
Well, fortunately, it's going down. Of course, we've been doing this in France for quite a few years, and we're very happy with the fact that we are more and more selling new clients. Clients we take from competition, that we move from being handled through the branch of competition directly to the in-house model, or client has one form of in-house, but not really the way we treat it, and they like our story better and they switch. It's really taking market share in that segment.
Okay, thanks.
The next question is from Toby Reeks of Morgan Stanley. Please go ahead.
Good morning, guys. I've got two. Sort of following on from the chat you had with Nick about the drop-through rate. I know you don't want to think about drop-through rates on a quarterly basis, but your target imply 100 basis points of margin improvement in 2016, which is a pretty strong drop-through rate relative to expectations. Not that consensus has got that number in, but now we are a bit closer to when that needs to be delivered, I guess. How have your underlying assumptions on how you get there in terms of mix, geographic growth, professional perm changed, or has that not really changed at all? Secondly, on the North American market, could you tell me how big Sourceright is, and could you talk about the margins achieved in that business at the moment? Thank you.
Yeah. MSP and RPO are different animals.
Yeah.
MSP is almost a cost-neutral activity, and the value lies in knowing a lot about the client and also trying to deliver there. RPO is a very profitable business mix in itself, high single-digit EBITDA margins. We're very happy with the growth there and definitely helps our overall GP growth, of course, in the U.S. because RPO is a GP business, by and large.
How big is the RPO piece in North America?
How big is the RPO piece in North America? It's a fee-based business. We'll find out.
Okay. Thank you.
If you look at where we are after, we said we're right on track. If you would go through, again, the buckets.
Yeah
on the slide here, the cost is on track, maybe a bit better. The top line growth is 5.6%, so that's in the mid-single digit range. That's according to our principles. The business mix is improving mostly through perm but also professionals growing, for example, 19% in the Netherlands. SME in Europe picking up because economic growth is improving, therefore, there's more demand. We're also targeting this segment very effectively through our field steering approach. The mix of that has made us take a good step in Q1. That's it.
Okay. No change to the way you are thinking about GP.
Toby, I'll add something to your analysis because I don't think we're looking at the same numbers here. 2014, EBITDA was 4.1%.
Yep.
To get to the target range, which is 5%-6%, we need a 100 or 90 basis points improvement. We're now taking the first step because it's going in two years. I think we need to get the numbers right. That's why I'm adding. Still, I think the comment of Jacques explains how to get there.
Yeah, sure. Well, a consensus EBIT margins of what? 4.6% in 2015. You're targeting 5%-6% in 2016, yeah?
Yeah, correct.
Yeah. It's 100 basis points margin improvement, which implies a pretty strong drop-through rate from gross profit, assuming consensus expectations around gross profit. That's the point I was trying to make.
Yeah. It's pretty ambitious, it's also partly supported by additional cost savings, head office, back office, that should support that drop-through rate.
Okay.
Again, it's not just about a drop-through rate, because if you grow more in perm might not essentially have a huge drop-through rate, it might still overall help your performance. You shouldn't just concentrate on the drop-through rate. This is a tough word.
Yeah.
You should concentrate on, again, all the circles in our model.
Yeah, sure. Implicit in your numbers is gross profit, gross margin improving because perm's going up, yeah.
Yeah. Again, as Robert-Jan said, if the European economy continues, then we'll see a somewhat richer business mix. This helps, and it's implicit in our model. Then our Sourceright business is around half a billion U.S. dollars.
Thank you.
Our next question is from Konrad Zomer of ABN AMRO. Please go ahead.
Hi, good morning. Two questions, please. The first one on the Netherlands. Can you tell us what you think the impact might be on your business from the regulatory changes that will come into effect on the 1st of July, the Wet werk en zekerheid? The second question is on your finance charges in Q1. Can you explain to us why the strength of the US dollar led to such a highly negative finance charge in your Q1 results? I know it's non-cash, but I just would like a bit more explanation on the metrics, please.
Okay. I'll do the first one. Well, we're able to pass through these costs for the effect of, we have a very nice way of calling the Wet werk en zekerheid. You do it with an English accent. That's very interesting. Yeah, it's just a reset of the rules of the game. It's always been the case that the client, at some point in time, needs to decide if he wants to hire a temp or if we hire a temp. We don't see it currently as a big effect on the top line. The biggest effect, as always on the top line, of course, is economic growth. That is improving in the Netherlands, and there's also sort of a catch-up effect because a 10% growth rate, given where we are economically, implies that there's again some catch-up effect.
As you probably know, Konrad, penetration rates in the Netherlands are lower than they were in 2008. Yeah, we'll have the discussion with clients on the ideal mix that he has as a company, but they're also faced with an uncertain future. We don't expect penetration rates as a result of this law to go down.
Well, Konrad, welcome in the bookkeeping world. The currency change or the increase of the US dollar, again, has resulted in a significant increase in the equity position of Randstad. It also looks at positions internally. Let me be very clear. At Randstad, we follow economic logic, so that means that we match US dollar earnings with net debt composition. We aim at redeeming the syndicated loan through the dollar earnings, for example. That streams through clearly. In order to get US dollars from America to our treasury center in Switzerland and then into the syndicated loan, you can wait for dividend payments, but that takes a long time. You cannot pay a dividend monthly. We'd like to redeem the loan very frequently because that economically is the most efficient way to do it.
What we do is we take out money from the U.S., we bring it through the treasury center into the syndicated loan. As a result of that, you get a current account, which is netted out against the dividend payment a little later. That's where you get a currency translation effect in the P&L. It is translation of temporary internal positions. I hope this helps. If it doesn't, give me a call.
Okay. Just to follow up on my first question. What I haven't been able to figure out from the legislative stuff on the Wet werk en zekerheid, if a temp has been employed by, let's say, ING or Nationale-Nederlanden, which has been in the press recently for two years, they should offer him a permanent contract. Does this also apply, this two-year period, to temps that have been working for Randstad for two years? i.e., do you need to offer them a permanent contract once they've worked for you at various employers for two years?
First to ING and Nationale-Nederlanden, it's always a bit interesting that one client then becomes the headline. As you probably know, Nationale-Nederlanden and ING have been trimming down their fixed headcount for quite a while and rather dramatically. They're not the only one. Many banks and insurance companies are doing that, and you know the reasons why. This is a client that looks at his flexible layer, and also compares it to his own fixed headcount going down. He's not prone to hire temps after a certain period, because that's not what he wants to do. It's an isolated discussion which is far more geared towards the strategic outlook of a client on his headcount than it has to do with the law as such.
Indeed, if a temp has been working through us at the same employer for 2 years, then the moment comes up, as it has been for 3 years in the last legislative system, then something needs to happen. We either hire him, the client hires him, or the job finishes. We do think this is a bit of a too isolated look from the government. You know our vision on this. You need to look at changing the labor market towards a future, the future is flexibilization. The future is jobs on demand. The future is working at home. You need to regulate flexibility. If you don't do that, you get the systems that we had in Latin Europe. Even before the European crisis, there was 8%-10% structural unemployment. It's not like if you make flexibility unattractive, it becomes fixed.
It becomes either jobs that disappear, or it becomes bad regulated flexibility, because next to the structural unemployment in Southern Europe, we've always seen quite an extensive, call it gray or black sector of around 20%-25% of total economy. As mentioned by me in several media, we're very open to discuss with the legislative in the Netherlands on a holistic approach, creating a modern job market and labor market with a place for everyone. It's about work and not a job.
Thank you very much.
Konrad, I'm adding two lines that might benefit others as well on the currency issue. If you translate within Randstad the value of our American business on the consolidated balance sheet, that adjustment relating to the U.S. dollar goes into equity. If you translate a U.S. dollar position within the treasury center in Switzerland, which is denominated in euros, if you translate those dollars, it goes into the P&L. This is bookkeeping, and I'd like you to keep that in mind as well.
Okay. That's very helpful. Thank you very much.
Our next question is from Marc Zwartsenburg of ING. Please go ahead.
Good morning, guys. Two questions from me as well. First, Robert-Jan, can you give an indication of the cost savings that you achieved already in Q1? Is it that the EUR 9 million charge you take for your Netherlands, will that add to the cost savings targets? Does this also imply that the Netherlands might overachieve its target, the 67%? That's my first question. The second question is on the Netherlands. Looking to your EBIT margin, I also heard the accusations from one of your peers a couple of weeks ago on the Dutch gross margin. Can you give us a bit of a feel? Because it seems to me that that's more a mixed thing and a difference in delivery models than pure pricing pressure, or how you call it.
Can you give us a bit of a flavor what the gross margin trend is in the Netherlands and what part of that is driven by mix from in-house, for instance? Thanks.
On your first question with regard to the cost savings as a result from the restructuring at the end of last year, we said it would come through in the course of Q1, starting relatively early. That means it's just north of EUR 5 million per quarter, we're very close to that number for Q1.
The professionals one is a different one, Marc.
Yeah.
What we did, and by the way, one quarter earlier than we would have expected, we've grouped these three companies together. When you look at our professionals business in the Netherlands, based on what we call effective modeling, the teeth-to-tail ratio was not great, meaning we had too much management and not enough frontline people. Most of what you see coming out at the EUR 9 million severance provision, but it's also real estate, by the way. It's a mix of these two things. We're going to also, of course, work with less and combine branches. We would like to put in also, well, a large part of this EUR 9 million over time back into frontline people. As you can see, the business is growing at 19%. If you keep up this commercial momentum, it's definitely the right moment to get these people in.
It's not like EUR 9 million is going to be pure cost savings. Lots of it is going to be invested in frontline people. That's good. Well, we're very happy with our Dutch performance. Commercial aggressiveness has been upgraded, as you can see. It's taken effect in the SME space. Definitely helps in our business mix. Perm is growing 20%, very helpful. Indeed, delivery models. An increasing part of the orders in the Dutch business is not generated through the branch, but through delivery models. Not just in-house, but also for large banks, large government offices in central delivery models, in central locations, heavily automated. Again, it gives us a relatively high return on the gross margin. Gross margin is one, conversion is the other. Apparently, we're doing slightly better than competition here.
Yeah. No, true. On the conversion, that's also what I see. Can you give us an indication of the gross margin trend year-on-year and if that is purely down to, for a big part, due to just mix and different delivery models?
Yeah, it's overall pretty stable. We do see pressure with large clients. It's slightly going down, that's offset by, again, conversion and cost level.
Okay.
We can work with going down, as you know. If you would look at the gross margin in the Netherlands quite a few years ago where it is now, it's a tough job, we're coping.
What you're saying is actually that the price pressure is offset by putting in a different delivery model, that's why the EBIT margin-
Yeah
seems like that.
Yeah.
Okay.
Yeah.
Clear. Thank you very much.
The next question is from Angus Zains of UBS. Please go ahead.
Hi, guys. Just one question from me. Sorry. You've already discussed it in a bit of detail. Is there any more color you can give around the in-house strength growing by 17% organically and an expansion in margins? Any idea or indication where that is regionally or perhaps even expand on the comment that you made around the certain circumstances in France where it works well? Thanks.
If I understand you correctly, you want us to give color on the in-house growth per country?
Big picture, yes, please. It doesn't need to be too detailed.
Big picture is we see pretty decent growth in many markets. Certainly, it's mentioned but not with percentages, by the way, on slide 19. Of course, France, we do it there explicitly because it's a large part and very much against the market in a good sense. Also our Dutch business still doing well. Also our German business. This goes back to my earlier answer to another question that our large clients are still using structural temps and like it. It's pretty broad-based, as you can see. Iberia, North America. This is partly the uplift, also the fact that our in-house model, which started in the blue-collar logistics environment, is now increasingly used also in the white-collar environment, and it opens up the market more for us. This also fuels growth.
Great. Thanks.
Last question, I think, operator.
Our final question today is from Yves Franco of KBC Securities. Please go ahead.
Hello. Good morning, gentlemen. Some questions from my side. Can you give us some timing or is it difficult on the rebound of the U.S. professional segment? I understand from your IR colleagues that should be around the second half of 2015. On the Dutch segment, clearly you're becoming commercially more aggressive in SME for some time now. Can you share with us where you are in share of wallet there? You were at 20, your target was 30% of revenue. How far are you now? Thanks.
Yeah. On the first part, that's a tough call, Yves. We're working hard on it, and I say to my people as soon as possible, but I cannot give you an exact call. It's simple. We're working in a good market. Our ambition is to be at or ahead of market, and yeah, they need to move faster here. Cannot give you a timetable. This is about people.
Okay.
The second question was on SME. Yeah. This is a bit too detailed in a way. It's simple. SME is if it outgrows the overall growth in the Dutch market, at 10% overall, SME growing between 15 and 20, it becomes a bit of a larger pie, but it's probably currently around 20%, 25%.
Okay. Thanks.
All right.
Okay, that's fine. Good.
Well, tell us, what is it?
Maybe some follow-up question on the increased activity levels. Last year you recorded a 30% year-on-year growth.
Yeah.
Where does this figure stand now? It's difficult to say which conversion results from placements that have been recorded from that increased activity, I guess. Can you share with us if this level goes up further still or?
Yeah.
Thanks.
Yeah, we're now focused, well, less on the absolute amount of activities because that's what you start. You start visiting and calling more, sending out more candidates. We're now focusing more on the quality of the funnel, as we call it. We're looking at what people are doing, what are they discussing with clients, and how does it lead to a more effective order intake. Of course, when we talk candidate management, certainly in our professional space, can we fill more orders? We're now more focusing on the quality of what we do. The quantity is by and large, we think, sufficient, to fuel our growth goals.
Okay. Thanks.
All right.
Thank you. Well, I'm sort of finalizing the call now. Before doing that, I'd like to again, mention the analyst event that we'll have next week in Barcelona on the 7th and the 8th of May. I think we're going to see 15 of you over there. We'll talk about some of the details of our business in Southern Europe, for example. We have the publication of the second quarter results, which is scheduled for July the 30th. Looking forward to either see you next week or to meet you again at the end of July. Thank you so much. Have a good day. Bye-bye.
This concludes the Randstad first quarter results 2015. If you would like to hear any part of this call again, a recording will be available shortly. Thank you for joining. You may now disconnect your lines.