Randstad UK gross profit up 5% as global Q1 results released
In the 'Rest of the world' region, revenue per working day was up 12% (Q4 2014: 15%). As a result of our strategic focus, perm fees grew by 16% (Q4 2014: 21%). In North America and Europe, perm fees grew by 8% and 21% respectively. Fee growth in Asia was 18%, led by Japan and Singapore. In Australia, perm fees grew 21%. Perm fees made up 2.1% of revenue and 11.3% of gross profit (Q1 2014: 10.0%).
“The gradual recovery in Europe is reflected in our results, while we have also closed the gap to the market in both the Netherlands and France,” says Jacques van den Broek, CEO of Randstad. “This is the result of the drive and commitment of our people and the successful execution of Activity-Based Field Steering. I want to congratulate all my colleagues on taking this step toward achieving our ambitions: becoming a strategic partner for our clients, resulting in profitable growth across our markets.”
In Q1 2015, gross profit amounted to &euro 814.8 million. The organic change was 7% (Q4 2014: 5%). Currency effects had a positive impact on gross profit of &euro 44.9 million (5.9%) when compared to Q1 2014.
Gross margin was 18.4%, 0.3% above Q1 2014 (as shown in the graph above). Growth in perm 16% in Q1 2015, had a 30bp favorable impact, while the 20bp favorable impact of HRS/others (solid growth in MSP/RPO) was offset by the 20bp negative impact on the gross margin of Temp (both mix and price pressure).
On an organic basis, operating expenses were down &euro 7 million (&minus1%) sequentially. On a reported basis operating expenses increased sequentially by &euro 20 million, which included an increase of &euro 25 million due to currency effects. Compared to Q1 2014, operating expenses increased by &euro 68 million (of which &euro 40 million was FX-related) or 4% organically.
Average headcount (in FTE) was 28,900 for the quarter, 1% lower than in Q4 2014 (250 FTEs), and 2% higher year-on-year. The main driver was the Netherlands, where the headcount came down 7% sequentially (300 FTEs) as a result of the restructuring and seasonality. In a number of countries with continued growth, we invested in our staff base (North America, Iberia, Belgium, Other
European countries and Rest of the world). We lowered our employee base in countries with topline decline (France and Germany). Productivity (measured as gross profit per FTE) was 11% higher than last year (Q4 2014: 5%). We operated a network of 4,411 outlets, in line with the prior year, although with a different geographical mix.
The operating expenses in Q1 2015 were adjusted for &euro 9.2 million in restructuring costs in the Netherlands. Last year's cost base was adjusted for a total of &euro 4.9 million in integration costs.
Underlying EBITA increased organically by 19% to &euro 153.1 million. Currency effects had a positive impact of &euro 5.2 million. The EBITA margin reached 3.5%, up from 3.1% in Q1 2014. We achieved an organic incremental conversion ratio (ICR) over the last four quarters of 67%.
Amortization of intangible assets, impairment of goodwill, and badwill Amortization of acquisition-related intangible assets amounted to &euro 40.2 million, in line with the level of previous quarters.
Net finance costs
In Q1 2015, net finance costs reached &euro 22.3 million, compared to &euro 2.6 million in Q1 2014. Net finance costs include the net interest expenses which amounted to &euro 1.6 million, compared to &euro 5.0 million in Q1 2014. Foreign currency effects had a negative impact of &euro 20.2 million, compared to a currency gain of &euro 2.6 million in Q1 2014.
The effective tax rate before amortization and impairment of acquisition-related intangibles and goodwill, badwill, integration costs, and one-offs amounted to 28.3% (FY 2014: 30.1%). For 2015, we expect an effective tax rate of between 27% and 30%.
Net income, earnings per share
In Q1 2015, diluted underlying EPS amounted to &euro 0.50 (Q1 2014: &euro 0.45). Stock dividend and the exercise of stock options increased the average number of diluted ordinary shares outstanding by 1.2% compared to Q1 2014.
Operating working capital increased sequentially to &euro 590 million, which is in line with normal seasonal patterns in our business.
Working capital increased to 3.3% of revenue, with business investment/growth driving the increase. The moving average of Days Sales Outstanding (DSO) improved to 51.5 days (Q1 2014: 51.8), driven by efforts for further improvements in our invoicing and collection processes.
Net tax assets mainly comprise deferred tax assets related to tax loss carry-forward of subsidiaries, which can be used to offset profits in future years, and differences between the valuation of assets and liabilities according to the financial statements and their valuation for tax purposes. The increase of the net tax asset position compared to last year is mainly related to currency effects on the carry-forward amounts.
Other assets comprise property, plant and equipment, financial assets, and associates, less provisions and other liabilities. The increase in this group of assets is mainly due to the Tax Credit and Competitive Employment Act (CICE) subsidy receivable in France.
At the end of Q1 2015, net debt was &euro 425 million, compared to &euro 422 million at the end of Q4 2014. Further analysis of cash flow is given in the next section. The leverage ratio remained at 0.5. The documentation of the syndicated credit facility allows a leverage ratio of up to 3.5, while we aim to maintain a maximum leverage ratio of 2.
Cash flow summary
On an annualized basis, free cash flow was &euro 449.7 million, up 38% compared to last year. In the quarter, free cash flow was impacted by higher working capital requirements. The higher income taxes paid were due to prepayments made to the Dutch tax authorities. Provisions and employee benefit obligations saw a year-on-year L4Q cash flow increase of &euro 53.3 million, primarily related to the net increase in provisions for restructuring in 2014 and net withdrawals from provisions in 2013. Other items include an amount resulting from the implementation of the CICE in France. Based on this law and our tax position, we will receive the tax credits as from 2017. Net capital expenditures (which relate to office refurbishments and investments in IT equipment and software) were in line with the prior year.
Performance by Geography
In North America, organic revenue growth per working day was 5% above last year (Q4 2014: up 6%). Reported revenue was 26% above Q1 2014. Our combined US businesses grew 6% (Q4 2014: up 7%), while Canada grew 1% (Q4 2014: up 1%). The gross margin was up due to mix impact, driven by growth in perm fees (up 9%). Gross profit growth in the quarter was 10% (Q4 2014: up 7%). In Q1 2015, our combined US Staffing and Inhouse businesses grew by 8% per working day (Q4 2014: up 10%). Overall gross profit grew by 13% (Q4 2014: up 8%), driven by a continued solid growth in perm fees of 21%. Our US Professionals business booked 6% gross profit growth in Q1 2015 (Q4 2014: up 5%), while revenues were down 1% (Q4 2014: 0%). The IT business continued to improve in terms of gross profit development. Perm fees were up 4%. Randstad Sourceright North America turned in another solid quarterly performance with revenue growing 21% (Q4 2014: up 12%). Spend under management within MSP was up 39% due to expansion of existing programs and significant new customer wins. In Canada, the topline grew 1%, while the market was down mid-single digit. Growth was driven by a 2% increase in our Professionals business. This was offset by a 6% decline in our Staffing and Inhouse business. EBITA margin for the region increased from 2.8% to 3.5%. The underlying profitability improved across all business lines.
In France, revenue was flat year-on-year, with the gap to market closing (Q4 2014: down 8%). Perm fees were up 15% compared to last year (Q4 2014: down 2%). Revenue of our combined Staffing and Inhouse businesses was 1% below last year (Q4 2014: down 9%). The decline was driven by a further significant deterioration in the construction sector, while this was only partially offset by higher demand in the automotive sector. Revenue from Inhouse Services grew 15% in Q1 2015 (Q4 2014: 0%), driven by new client wins. Staffing was 4% below last year (Q4 2014: down 10%). We have further improved in the SME segment. The Professionals business was up 4% (Q4 2014: down 1%), with a solid performance in healthcare. Our EBITA margin remained stable year-on-year at 4.1%.
In the Netherlands, revenue per working day was up 10% compared to last year (Q4 2014: up 5%). Overall perm fee growth increased to 21%. Our combined staffing organisation is in line with the market with Randstad’s revenue per working day up 8% (Q4 2014: up 4%), and Tempo-Team growing 9% (Q4 2014: up 8%). Both brands noted a further acceleration in SME. Yacht's revenue (which is now made up of the combined Dutch professionals business) was up 19%, this compares to 13% in Q4 2014. In line with our earlier announcements, we took a &euro 9 million charge for the restructuring of our Dutch Professionals operation in the quarter. This is in addition to the earlier restructure of the Netherlands back and head office which was completed in line with expectations in Q4. Dutch EBITA margin came in at 6.0%, compared to 5.0% last year. Underlying operating expenses were lower, as the number of FTEs dropped by 7% sequentially, driven by last year's restructuring.
In Germany, revenue per working day declined by 3% (Q4 2014: down 1%). The continued decline in volume has been partially offset by a favorable price effect of 2% resulting from CLA-related price increases and equal pay adjustments (in Q4, the price impact was 4%). The pressure on gross margin persists in our Staffing and Inhouse businesses, with the 13-week average calculation rule on sickness and holidays having a clear impact. Underlying German EBITA margin was 3.4%, compared to 3.9% in Q1 2014.
Belgium & Luxembourg
In Belgium & Luxembourg, revenue per working day was up 7% (Q4 2014: down 1%), the gap to the market has narrowed. Gross profit growth was 9% (Q4 2014: 9%). Inhouse Services saw revenue growth of 8% (Q4 2014: up 5%), while Staffing was up 5% (Q4 2014: down 3%). The Professionals business grew 13% (Q4 2014: up 7%), and perm fees were up 20%. EBITA margin improved to 5.4%, from 4.9% last year.
In Iberia, both revenue and gross profit saw growth of 12% (Q4 2014: up 9%). Spain was up 16% (Q4 2014: up 12%), with Inhouse growing 32%. Solid growth resulted from our focus on permanent placements (up 57%) and Professionals (up 87%). In Portugal, revenue grew by 4% (Q4 2014: up 4%). Growth was led by the manufacturing and call center segments, and our focus on permanent placements continued to pay off. Overall EBITA margin for Iberia improved to 3.4% in Q1 2015, up from 3.3% in the same period last year.
Revenue per working day in the UK was up 3% (Q4 2014: up 2%), while gross profit was up 5% (Q4 2014: up 9%). Overall perm fees grew by 15% year-on-year (Q4 2014: up 16%.
Construction/Engineering again experienced strong growth, as did most other business lines. Finance returned to growth. EBITA margin increased to 2.1% (Q1 2014: 1.8%).
Other European countries
Across Other European countries, revenue per working day grew by 12% (Q4 2014: up 11%), driven by double-digit growth in Italy and Poland. In Italy, revenue grew by 12% (Q4 2014: up 8%) and Poland had revenue growth of 16% (Q4 2014: up 17%). Our Swiss business grew by 9% (Q4 2014: up 13%) despite challenging market circumstances. In the Nordics, revenue grew by 7% (Q4 2014: up 5%). EBITA margin for the Other European countries reached 2.7% (Q1 2014: 2.9%), as we continued to invest in growth (FTE base was up 12% year-on-year).
Rest of the world
Overall revenue in the Rest of the world grew by 12% organically (Q4 2014: up 15%). In Japan, revenue grew by 2% (Q4 2014: up 8%). Last year, our business benefited from the boost created by the VAT increase. Revenue in Australia grew by 21% (Q4 2014: up 24%), with solid contributions from both Professionals and Staffing. China grew by 11% (Q4 2014: up 41%), impacted by the comparison base. Latin America grew 18% (Q4 2014: up 17%), with solid contributions from Argentina and Brazil. EBITA margin improved to 1.5%, compared to 0.5% in the same period last year.
Revenue grew by 5.6% in Q1 2015 and in March it was up 4.3%. The volume trend in April (so far) looks a touch better than March. We expect a significant favourable FX impact on our reported figures. There should be normal seasonal increases in gross margin from Q1 to Q2. The focus on profitable growth continues through the development of activity based field steering, SME and permanent fees. We remain on track to achieve cost reductions/efficiencies as previously announced. We expect operating expenses to be up moderately on an organic basis in Q2 as there will continue to be targeted investments in headcount in selected growth markets. The reported operating expenses will be inflated sequentially by FX movements (around &euro 12 million impact, based on current rates). There is no significant working day impact in Q2.