Earnings Transcript for RANJY - Q2 Fiscal Year 2023

Operator: Good day, and welcome to Randstad Second Quarter Results 2023 Call. My name is Priscilla, and I'll be your coordinator for today's event. Please note, this call is being recorded, and for the duration of the call, your lines will be on listen-only. However, you will have the opportunity to ask questions at the end of the call. [Operator Instructions] I will now hand you over to your host, Sander van't Noordende, the CEO; and Jorge Vazquez, the CFO, to begin today's conference. Please go ahead. Thank you.

Sander van't Noordende: Thank you very much, Priscilla, and hello, everyone. I'm here with Jorge, and Bisera and Akshay of Investor Relations. And I'm, of course, pleased to share our Q2 results with you. Overall, we delivered solid results in the second quarter, however, in challenging market conditions, but I'm pleased with how our teams have responded to the current operating environment and the strong adaptability we have shown. Revenue growth for the quarter was minus 5.1%. We've seen growth in APAC and LatAm, mixed trends in Europe and the decline in North America. In terms of our concepts, Inhouse and Professionals were each down 2%, Enterprise Solutions was down 5% and Staffing was down 7% in the quarter. We delivered a robust gross margin of 20.7% with around 18% of gross profit generated by Perm and RPO combined. We've reduced our OpEx by €25 million quarter-over-quarter, demonstrating focused cost management and resilience across our company. And as a result, we have delivered an industry-leading EBITA of €271 million with a solid EBITA margin of 4.2% for the quarter. Our robust balance sheet enables us to continue our strategy of disciplined investments to strengthen our offer, and we were delighted to announce the acquisition of Grupo CTC earlier this month. We're excited by the opportunities in Spain and Portugal, and I would like to take this opportunity to welcome our new colleagues to Randstad. Grupo CTC is a leader in outsourced industrial logistics and sales and marketing services. And the Spanish market is increasingly moving towards outsourcing, driven by recent labor market legislation changes. This provides interesting business opportunities for us, so this transaction is aligned with our strategy of complementing our existing operations with selective acquisitions that provide new growth opportunities. The market trends we experienced in the second quarter have continued in early July with talent scarcity and wage inflation still present. We're still cautious, although our clients seem to become slightly more confident about their business going forward. So, we will invest where we see specific growth opportunities while continuing to adapt our organization where needed. I would say it's all about navigation these days. Our positioning as a partner for talent clearly resonates with our clients and talent as they are looking to navigate this new world of work. Our sources of differentiation, equity, specialization, digital and our delivery models are more and more visible in the Randstad brand. That, coupled with our experienced team and a long track record of execution in all environments gives us confidence as we look ahead. Perform and progress is what we do at Randstad. We're progressing well with our strategic plans, and we look forward to providing an update on this during our Capital Markets Day on October 31. Let me now hand over to Jorge to present the results in more detail.

Jorge Vazquez: Thank you, Sander, and good morning, everyone. So, let me take you through a more detailed view of the results. But let me start by saying that in our book, this was a quarter to deliver adaptability. And I think we did, we delivered a solid second quarter, sector-leading operating profit and margin, which I believe now sets us in a position of strength for the next quarters. Context-wise, Sander alluded to it as well, important to remind everyone, we reported in Q1 already a challenging macroeconomic conditions. They continue into the second quarter, though, as you'll see at a different pace for geography and concept. Again, our portfolio today is more diversified than ever, and that shows here in these results. I think also important to highlight, stabilizing and normalizing. Remember, after seven, eight quarters of consecutive growth, in many cases, 20%, 30% increasing, we found ourselves in Q1 in decline, and we do see now signs of debt stabilization and normalization as Sander call it, which is good for us to understand where we are after the pandemic. Let us now turn to our key regions. So, let's start with North America, Page 7. And here, we saw indeed the softening trends in the first quarter pretty much continued in the second quarter. North American revenue, as you can see in the chart, dropped by 14% with Perm here being hit the hardest with a 36% decline; remember, after [experiencing] (ph) a 46% rise last year. With a great resignation, Perm helped well in the previous quarters, albeit now is coming down. And in general, the U.S. labor market is known for being more dynamic, and we're seeing the reflection of that. U.S. Staffing, just to put a little bit more color. So, Staffing and Inhouse declined by 18%, with a softening demand across pretty much all the sectors, manufacturing is perhaps the hardest. U.S. Professionals revenue was down 8% year-over-year. And remember, technologies make up the most significant part of our Professionals position in North America, which again is also facing challenging market conditions. We are adapting though. We have an experienced team, and we have adapted our operations and continue to do so throughout the quarter, with a net reduction of 320 FTE alone versus Q1. The EBITA margin was a solid 5.6%, significantly up from the previous quarter and showing a strong adaptability for the first half of the year, close to 50% recovery ratio. Now, moving on to Northern Europe on Slide 8. Our Northern European countries also saw mixed growth trends. Seasonality-wise, this quarter was affected more than expected in April and May, seeing a more normal return in June. This is something we saw throughout the company, particularly big in Northern Europe. So, April and May, our employees working were more affected than we had originally expected through holidays. However, we were pleased to see a more normal return to seasonality in June. And basically, employees working back to the level that we had in March and higher than any time in the quarter in Q2. Despite lower revenue, though, on the back of a very hot 2022 and the slowdown in manufacturing, we protected operating profit margins, as you can see, and still delivered €91 million, only 5% decline in EBITA versus last year. Remember, from a comparable perspective, in many of the large markets in this region, we are clearly market leaders, well established in the largest countries. And therefore, we were a critical part of the solution that the talent market needed last year on the recovery of the pandemic, so the comparables are particularly high. In the Netherlands, revenue was down 9%, again, continued to the impact of reduced COVID-related business. Perm here was down 17% year-over-year and Professionals performance reflected some portfolio choices that we made. But again, EBITA margin came at a very solid 5.7%, higher than the average of the group, so good profitability whilst adapting to a more regular year. In Germany, revenue was down 4%. Our German business continued to return into sound profitability and sustainability. EBITA margin for the quarter came in at 4%, 170 basis points up compared to last year. That was the priority. Our combined Staffing and Inhouse service business was down 4%, impacted by softening demand again in the manufacturing sector. However, the automotive sector remains resilient, held up again with double-digit growth. Payoff also of our focus in Perm, with solid growth of 10% already over a record year of last year in 2022. Belgium reported a revenue decline of 8%, similar to Q1. Belgium again is one of our long-established market-leading businesses and has shown good adaptability and once again one more time. EBITA margin came in at a solid 4.5%. If we then look at other European countries or Northern European countries, they do reflect mix trends. Let me break it down to you for reference. Nordics was down 6%, Switzerland was down 3%, and Poland was up 3% year-over-year. EBITA margin came in at 2.4%. Let us now move to segment Southern Europe, U.K. and LatAm on Slide 9. Strong results with an improved revenue trend to down 1% year-over-year, still down, but already improved from Q1 and despite a record high last year. Good profitability, again, 5.5% for the region. But here, it's clear, focus remains on getting back to profitable growth ASAP, and we already see pockets of opportunity. Let me break down a little bit more for the key countries. France, revenue was actually up 2% year-over-year. Here is the play of our portfolio. Professionals delivered a solid growth of 13%, predominantly driven by our robust healthcare business in France. This offset the decline in Staffing and Inhouse and Perm, but still a strong example of portfolio focus and delivery. France ended the quarter with an EBITA margin of 5.2%, very solid. Italy

Operator: Thank you, sir. [Operator Instructions] We will now take our first question from Oscar Val from JPMorgan. Please go ahead. Your line is open.

Oscar Val: Yes, good morning, Sander and Jorge. Three questions from my side. The first one, just to understand OpEx for Q3. Could you give us a sense of where employees were running in June? You talked about June being below, but Q2 was down 4% sequentially. How much lower was June in terms of your own employees for OpEx? That's the first question. The second question is on, I guess, restructuring. Obviously, you've done €40 million restructuring in Q2. You talked about that lowering in Q3. Do you have a sense of how much that could be in the second half? And then, the final question is a bit more high level and structural, but the U.S. is underperforming Europe quite significantly. Do you think that is because of, I guess, the nature of labor and the fact that it moves faster? And would you expect Europe to follow the U.S. or not in terms of underperformance? Thank you.

Jorge Vazquez: Yes. Very good. Should I take the first two, Sander?

Sander van't Noordende: Yes. Also please [indiscernible].

Jorge Vazquez: So, on OpEx, look, I think -- yes, as I said, we've continued to -- well, to adjust our structure, obviously, in part, taking natural attrition, in part, taking the restructures that we will discuss in a minute. Our FTE exit rate was indeed lower in June than the average of the quarter, just a tad lower. So I mean, I wouldn't talk much more than that, but gives us confidence going into Q3 that we can deliver a lower OpEx. On the restructuring, the €40 million, I think, it needs to be seen in light of -- also, again, after seven, eight quarters of strong growth, we found ourselves in Q1, obviously declined. So the grant of the adjustments we had to make in addition to the normal attrition and normal management of the factory that we have is done. And in that respect, I expect it to be significantly lower in Q3 and Q4 for that matter. At the same time, I mean, there is a -- yes, obviously, these are one-offs. So, it's very hard to predict with certainty what will happen. From what we see, the trend we see, significantly lower than what we saw until now. Sander, on the...

Sander van't Noordende: Yes. No, let me say a couple of words on the restructuring. Oscar, the way I look at it with these restructurings, it's something like you're damned if you do, but you're even more damned if you don't. Meaning it's our experience, if there are challenges, you need to take action, it's better to take action sooner rather than later. And that's what we do, what we've been doing, and I think it will pay off over time. On the U.S., I think you already alluded to it, it's primarily the nature of the U.S. economy and the flexibility in the labor market there that is driving this. U.S. companies always respond faster when things go up, when things go down. For instance, in corporate, you saw the unemployment in the U.S. peak at some point of 20%, would then go back to 3.5% over the period of a couple of quarters. So, it's just the dynamics of the market that's driving that. In terms of the overall global economy, our sources tell us that global economy is expected to go sideways over the next couple of quarters, and that is sort of what we are preparing for. Of course, we don't say anything more than the trends in early July.

Oscar Val: Okay, great. Thanks a lot.

Jorge Vazquez: Thank you.

Operator: Thank you. [Operator Instructions] We'll move on with our next participant, Hans Pluijgers from Kepler Cheuvreux. Please go ahead. Your line is open.

Hans Pluijgers: Yes, good morning, all. Two questions from my side. First, on North America, yes, you already indicated the market is slightly more towards dynamic. Could you give maybe some feeling on what sort of the dynamics are by verticals, so the IT manufacturing and office, and also, how do you compare to the market in those verticals? Yes, certainly interested to have some flavor there and maybe also some changes in the picture compared to, let's say, the first quarter. And secondly, on HRS and other and the gross margin. You already alluded that, let's say, of course, RPO has a quite significant impact, but still, the change in the impact on the margin is about 60 basis points, if you compared to the positive contribution still in Q1. So, could you give maybe somewhat more flavor on, precisely the building blocks? Our placement was up, but yes, it looks still quite significant jump compared to Q1. So, could you maybe some more feeling what's happening? And especially, what do you expect for, let's say, H2?

Sander van't Noordende: So, shall I take the one on the U.S.? Hans, I would say the broad mixture is pretty much in line with Q1. No major changes except that it sort of deteriorated across the board. In terms of industries, automotive has been particularly challenging, public health and education has been sort of the best-performing industries, with the other industries somewhat at par. If you look at the different profiles, it is obviously clear that the professional skilled profiles, so the higher skill profiles have been holding up better than the lower and medium skilled profile. So that's also a difference in the market there. The main driver has been in the United States, let's say, existing clients with lower demand. So it's not that we're losing clients, but it's existing clients, we're just asking for fewer people. So, as long as we keep those clients and demands coming back, we can ramp up quickly if and when the demand comes back, of course.

Jorge Vazquez: Yes. Hans, on the HRS impact. So it is, as you said yourself, a mixed bag, I'll say it. I mean, in general, compared to Q1, the trends have decelerated. So, I mean if you look at Perm, definitely came down significantly more than we were seeing in Q1. Also, RPO significantly more. And if you now look at the mix on those two alone being, those two together are approximately 18% of our gross profit today, whereas last year, they were representing 21%. So that delta alone justifies the margin. Again, it is a mixed bag, then. So I mean, one important point, there's other businesses. You look at outplacement. That business is doing phenomenally well. You can see also that the profit from Q1 to Q2 in Global Business increase. So, in general, it is a mixed bag with opportunities, but definitely a very deceleration moment in RPO to which we responded.

Hans Pluijgers: Okay, thanks.

Jorge Vazquez: Thanks, Hans.

Operator: Thank you. We'll move on to our next participant, Marc Zwartsenburg from ING. Please go ahead. Your line is open.

Marc Zwartsenburg: Yes, good morning, everybody. Thanks for taking my questions. Just to dig into the Perm business a bit. You mentioned in the call, I think that Perm in the beginning of July, as Sander mentioned it, that the trend is more or less in line with Q2, but we did see a difference in trends from Q4 to Q1 to Q2. Is that because the U.S. is bottoming a bit there? Or are there other trends [feasible] (ph)? Because my worry is a bit that what you see in the U.S., of course, is more in boom-bust markets. But yes, with Europe still being up a bit on scarcity, should we then expect that at some point that weakness might also come to Europe and that we should still expect a weaker boom trend? Can you maybe give a bit more color there?

Sander van't Noordende: Well, I would say we leave the expectations to you, Marc. We manage the business based on what we see and hear from our clients. We look at what the economy is doing. We keep that in the back of our mind, but we respond to what our clients are saying. And what we are seeing today in the first three weeks of July is what we've seen in Q2, and I think we'll leave it with that, because all the rest is speculation.

Marc Zwartsenburg: Yes, but [indiscernible] so then I would expect Q2 to continue to weaken at the exit rate would have been a bit weaker [indiscernible], et cetera.

Jorge Vazquez: Marc, if I can put some color to that. So good to speak to you, by the way. So quickly, if we look at our Q2, I would say the trend is not necessarily weakened. Of course, from Q1, we had the Perm and RPO decelerating. Again, we have discussed this. From a Temp perspective, you will see that if anything, it's turned somewhat slow due to a more prolonged holiday impact. But in June, we just recovered, and we saw pretty much normal seasonal trends we would have expected from Q2. Also from a North American perspective, even last year, comparable was actually going up from Q1 to Q2, so it is a difficult quarter to see. Overall, I think the best number that gives us comfort of stabilization is we have 600,000 people at work at the end of Q1. If we look at Q2, and again, June was slightly higher, we also have 600,000 people. So, I would say, in general, things have stabilized from, let's say, [indiscernible] on the decline from Q4 to Q1.

Marc Zwartsenburg: Okay. Thanks for that. And then looking to your guidance on the gross margin that it might come in slightly weaker than Q2. Is that a normal seasonal mix effect? Or would you say that's also partly in RPO still lagging effect?

Jorge Vazquez: Yes, good point. I mean you saw also last year, so from Q2 into Q3, if I'm not mistaken 20 basis point, yes, 20, I think, basis points down. I mean it's hard to predict, Marc. But if we say if we were to have a view on what's likely to happen, then I think there's more risk to have slightly lower gross margin, I'd say, 10 basis -- I mean we're talking reasonably small variances versus where we were in Q2. Indeed, from RPO, it's very difficult to predict. You see different trends or different growth environments around the world. But if we take the U.S. as an example, RPO, I mean, it's unlikely to improve. So I would say 10 basis points as a good reference.

Marc Zwartsenburg: Okay. And maybe lastly, on the trends versus your peers. So, we look at Manpower reported, they guide from minus 3.5. You are guiding basically, let's say, minus 5.1, is a bit the ballpark to start with. We don't know [indiscernible] different comps, obviously, but they were growing actually pretty fast at the beginning of the year because that's coming from a very low base. Do you see the relative performance in markets? Do you see others becoming more aggressive because the market is tougher and there's a bit more hunting for business? What do you see?

Sander van't Noordende: I would say, Marc, the overall context is the market is normalizing after an enormous surge in demand of which we have been benefiting greatly. So, now the question is about the trade-off between volume and value. So, where we see opportunities to grow, we invest to grow. Where we don't see that growth, we adapt because we need to, and you can see that in our EBITA. So, finding the right balance between volume and value is the name of the game. And we believe we have found that right balance in Q2 as we have in Q1 and as we will in Q3. Other people may make other trade-offs, but I suggest you ask them.

Marc Zwartsenburg: Certainly. All right. Thank you for [indiscernible]. Thank you.

Operator: Thank you. [Operator Instructions] We'll move on with our next participant, Konrad Zomer from ABN AMRO. Please go ahead. Your line is open.

Konrad Zomer: Hi, good morning. Thanks for taking my questions. The first one is on your free cash flow development. It was particularly strong in Q2 because of the unwinding of working capital. Can you maybe comment on what you expect to happen with working capital in the second half of this year, particularly if the run rate of revenues continues, let's say, at the current pace? And my next question is on France. I think you had a very strong performance, both top-line and margin-wise in France. Is that related to a business mix difference, particularly the previously OC business? Or are there any other developments that make you perform so strongly in France? And my final question, can you make any comments on the Temp to Perm conversion within your business? Because labor markets are still in short supply. The Perm business was down quite a lot, particularly in North America. Just curious to know if there's anything changing in the Temp to Perm conversion. Thank you.

Sander van't Noordende: Shall I take the France on first?

Jorge Vazquez: Okay.

Sander van't Noordende: Konrad, on France, a solid performance, indeed driven by two sectors

Jorge Vazquez: Yes. So, let me take the one on DSO, [Hans] (ph), by the way, good speaking to you. So on the seasonality of cash flow and in general, our working capital, so I think Q2, in particular, was impacted -- I mean, indeed, we're investing less in working capital and I would say, impacted by favorable timing in terms of payments. To be honest, it's extremely hard to predict. It's almost like dependent also many variables when exactly payments have to happen. I think there's two points to highlight. Typically, indeed half two, so the second half of the year, from a cash flow perspective is richer, it's -- we generate more cash on the second half of the year, primarily due, if nothing else because a lot of the larger social security payments, holidays, a lot of those spends came in, in the first half and typically in the second quarter. So if I would have to say something, I'd say the second half of the year is stronger in terms of cash flow. But I think especially what I will highlight is the focus on DSO. At the moment, I mean, we're living in a challenging environment in many ways. Interest rates are also higher. We've even have turned business away from a payment terms perspective. We focus on it. Our overdues are lower actually than last year. So, I think in general, there's just a strong focus on cash flow generation. And we like, as you know, strong balance sheets, and we'll just focus on that until the end of the year.

Konrad Zomer: Okay. And my final question on the Temp to Perm conversion?

Jorge Vazquez: Look, that, I don't think it has particularly changed. I think Temp has stabilized. Perm -- I mean one comment also to the U.S. just to give a bit more color, we discussed myself and Sander before, what we've seen about is, of course, we had a great resignation. We had high levels of talent scarcity. And therefore, last year, a lot of perm hire, including jobs that potentially could have been hired on a temp basis hired on a permanent basis, and we benefited from that. I mean we've never had so much perm and we continue still much higher than pre-pandemic levels. I think what we're seeing now perhaps is some companies holding up to talents and waiting to see if nothing else fearing that in a talent scarcity environment, we do not want to have the sort of talent going forward. That puts pressure on our Temp and Perm business at the moment. But again, U.S. is a dynamic labor market on the way down, but also on the way up.

Konrad Zomer: Okay. Thank you, guys.

Jorge Vazquez: Thanks, Hans -- Konrad, sorry.

Operator: Thank you. [Operator Instructions] All right. Dear speakers, it appears there is -- all right, we have one participant, Anvesh Agrawal from Morgan Stanley. Please go ahead. Your line is open.

Anvesh Agrawal: Hi, good morning. I got three questions. Now obviously, September is quite a big month in Q3 and in context of the [SND] (ph) trends. Did you have any sort of interactions with your clients in how they're thinking about the return to post holiday? I know it's sort, obviously not asking for an exit rate or sort of your expectation, but any sort of qualitative discussions you had with the clients in terms of how they're thinking about post-holiday return to work? And then second is on wage inflation. I mean, on absolute terms, sort of still quite high, but y-o-y, does the comp start to then catch up in the second half? Just wondering the impact it can have on the organic growth. And finally, in the first half, you had a recovery ratio of about 48%, which is kind of pretty close to the rule of thumb of 50% in a downturn. Is that the way you sort of continue to manage the business? Or given the mix of the growth, wage inflation and everything, should we expect anything different on the recovery ratio this cycle?

Sander van't Noordende: Yes. So, let me start. We have conversations with our clients all the time as you would expect. But there is no, let's say, we cannot share any nature of those conversations, let alone trends from those conversations, because it's not what we do. On the wage inflation, it is interesting to see that where the U.S. came out of the blocks quickly back to the dynamic labor market on wage inflation rapidly last year. Wage inflation now in Europe is -- in some parts of Europe, I would say, is higher than in the U.S., from the official statistics and we see that reflected, of course, in our [indiscernible]. So Europe is lagging on the wage inflation.

Jorge Vazquez: Anvesh, let me take the one on recovery ratio. So yes, we are pleased with half one. I mean, look, internally, it's very clear. It's what gives us comfort, let's say, and what gives us options, it's kind of how I mentioned, so it is the level we strive for. There might always be a lag sometimes, I mean, depending on the fluctuations that are thrown at us. But everyone and let's say, every single part of our business knows how good looks like and knows what is expected. So to be honest, this is kind of embedded in the organization. Also to give some comfort there, I've talked about it in the prepared remarks, the restructures, typically, we strive to have a payback period of maximum one year, so that also supports us going forward in Q3 and Q4. So let's say, the cards that we're playing should support a recovery ratio of good in the second half of the year. But as you know, it's impossible to predict, but nevertheless, it's what we strive for. And -- yes, go ahead.

Anvesh Agrawal: Sorry, go ahead.

Jorge Vazquez: No, you please ask next question.

Anvesh Agrawal: No. Just on the wage inflation, my point was more around like -- I mean, I know that Europe is kind of lagging the U.S. and it's still quite strong. I'm just wondering, do the comps start to sort of play the part in the second half, and therefore, the y-o-y wage inflation in terms of percentage start to come down for your Temps. So just a question more around that rather than Europe versus the U.S. really.

Jorge Vazquez: I would expect -- look, Europe is still collective labor agreement base, so that's very hard to predict as a general rule. But typically, they last for one year, so you can argue they will stay on. In the U.S., indeed, it's coming down, it's public data. It's hard to predict again, probably stabilizing, I would say. But yes, if you ask different people have different opinions, but we hope for stabilization because then decisions can be made. And last comment, I think, from all of us, I wish you all the best. So, we've followed you attentively over the last years, so we know you're taking a different path. I just want to thank you for everything you've done for Randstad and all the coverage as well.

Anvesh Agrawal: That's very kind. Thank you so much. I thoroughly enjoyed coming in. Thank you.

Operator: Thank you. [Operator Instructions] Okay. Dear speakers, it appears there is no further questions at this time. I'd like to turn the conference back to the host for any additional or closing remarks. Thank you.

Sander van't Noordende: Thank you, Priscilla, for that for facilitating, and thank you all for joining the call today. Before we wrap up the call, I would like to thank all our 600,000 Randstad talents and employees for all the hard work for our clients over the past quarter, and we're going to continue for the next quarter as well. Yes.

Jorge Vazquez: Thank you, everyone, and have a good summer.

Operator: Thank you for joining today's call. You may now disconnect. Have a nice day, everyone.