Adecco's (AHEXF) CEO Patrick De Maeseneire on Q2 2014 Results - Earnings Call Transcript

Aug. 7.14 | About: Adecco S.A. (AHEXF)

AHEXF SA (OTC:AHEXF) Q2 2014 Earnings Conference Call August 7, 2014 5:00 AM ET

Executives

Patrick De Maeseneire – CEO

Dominik de Daniel – CFO

Analysts

Paul Sullivan – Barclays

Laurent Brunelle – Exane BNP Paribas

Chris Gallagher – JPMorgan

Nicholas de la Grense – Bank of America Merrill Lynch

William Vanderpump – UBS

Tom Sykes – Deutsche Bank

Alain Oberhuber – MainFirst

Toby Reeks – Morgan Stanley

Konrad Zomer – ABN AMRO

Operator

Welcome to the Adecco Q2 Results 2014 analyst conference call. I’m Selena the conference call operator. (Operator Instructions). At this time it's my pleasure to hand over David Hancock, Head of Investor Relations accompanied by Patrick De Maeseneire, CEO and Mr. Dominik de Daniel, CFO of the Adecco Group. Please go ahead gentlemen.

David Hancock

Thank you. Good morning. Welcome to Adecco’s Second Quarter 2014 Results Conference Call. Patrick De Maeseneire, Group’s CEO; and Dominik de Daniel, Group’s CFO will lead you through the presentation today followed by a Q&A session.

Before we start, please have a quick look at the disclaimer regarding forward-looking statements in this presentation. So let me give you a quick overview of today’s agenda. Patrick will present the operational highlights, followed by an overview of the country performances. Then Dominik will review the financials, and finally Patrick will make some comments on the outlook. We will then open the lines for your questions.

With that, Patrick, I hand over to you.

Patrick De Maeseneire

Thank you David. Good morning ladies and gentlemen. I will start with the highlights of the second quarter, my colleagues around the world delivered another good performance. We had revenues of €5 billion, an increase of 5% in constant currency. This is just below the 6% we had in Q1, with last quarter we had the small positive impact from trading days while in Q2 the trading day affect was a small negative. Adjusted for this the growth rates was the same in both quarters.

Gross profit grew by 6% in constant currency and the gross margin was 18.1% up 20 basis points year-on-year. Costs continued to be well controlled, SG&A in constant currency and excluding restructuring costs was up 3% year-on-year and down 1% sequentially. This resulted in EBITDA excluding the restructuring cost of €228 million an increase of 18% in constant currency. The EBITDA margin excluding restructuring costs was 4.6% up 50 basis points on the prior year.

Revenues were up 5% for June in constant currency and adjusted for trading days. Let’s have a look at the second quarter operating performance in more details. On this and the following slides I will give our growth rates in constant currency. I will start with the revenue development by region.

In Europe revenue growth was 5% in the quarter which slowed down from 7% in Q1 mainly coming from the trading day effect already mentioned. Within Europe the strongest growth rates continued to be in Iberia and in Italy. In North America growth was solid up 3% year-on-year after an increase of 2% in Q1 both general and professional staffing grew at similar rate. The rest of the world was up 5%. In Japan revenues were up 2% in the quarter.

Australia and New Zealand remained difficult however. Here our revenues declined by 18% impacted by the contract losses that we have mentioned previously. By contrast emerging markets revenue grew 12% with double digit growth in Eastern Europe and high single digit growth in Latin America and in Asia.

Looking next at the revenue development from a business line perspective we see that the industrial business continues to be the main driver of growth this is normal, at this stage over the cycle as industrial in general picks up first in a recovery. In Q2, 2014 revenues in industrial grew by 8%.

In Office, which typically picks up later than industrial revenues were flat compared to the prior year. In professional staffing we continue to see moderate growth. Revenue growth in the quarter was 2% with the slowdown from Q1 again reflecting the trading day effect.

Finally within our solutions business line we saw continued strong double digit revenue growth in our VMS, MSP, and RPO businesses. Let’s also have a look at the second quarter revenue development by service line.

Temporary staffing is our largest service line, growth here was 4% this quarter after 5% growth in Q1. Revenues from permanent placements were up 8% in Q2 a further improvement from the 5% growth in the previous quarter. Within perm, we saw good growth rates in North America, the UK and Ireland and the emerging markets.

Growth in outplacements slowed to 9% this quarter from 13% in Q1. This is in-line with our expectations as the outplacement activity typically weakness as the economy recovers.

We now go to our main markets in more detail. In France revenues were flat on the prior year. Growth in our industrial business line was offset by declines in office and in professional staffing. From an industry perspective we saw modest growth in sectors such as manufacturing and food but there is no broad based pickup in demand.

In the construction sector activity weakened this quarter. Perm revenues in France were up 5% this quarter compared to up 4% in Q1. The EBITDA margin was strong at 6.1% compared to 4.1% excluding restructuring cost in the same period last year. This improvement was primarily driven by price discipline, the impact of CICE and helped by cost efficiencies.

Regarding CICE, please note that as from Q1 there was again a positive effect year-on-year in Q2, this is due to the increase in the rate of the credit from 4% to 6% and the positive impact of the reassessment we made in Q3 of last year of the CICE relating to prior periods and going forward. In June, revenues were up 1% adjusted for trading days.

We turn next to North America, revenues were up 3% with growth of 3% in general staffing and 2% in professional staffing. Within general staffing we saw good growth in the industrial business at 10%, this was driven by good demand from the logistics, chemicals and technology sectors.

The Office business remained soft, declining by 5% primarily due to less demand in the financial services sector. Within professional staffing we saw growth of 3% in IT, 5% in finance and legal and 6% in medical and science. In Engineering and technical, revenues were down 1%.

In perm we delivered another strong performance with perm revenues up 10% in North America. The EBITDA margin excluding restructuring costs was 6.2% in the quarter up 100 basis points year-on-year. In June revenues were up 5% adjusted for trading days.

Turning next to the UK and Ireland. Revenues overall were up 3% again driven by professional staffing. In our large IT segment revenue growth was 9%, perm revenues accelerated strongly and were up 13% in the quarter. This drove a good improvement in profitability, the EBITDA margin was 2.5% up 70 basis points compared to the last year. Revenues in June were up 1% adjusted for trading days. However please note that due to changes during the course of Q2 for some of our UK Master Vendor and related sub-supplier agency contracts, third party revenues that were previously reported gross will now be reported on a net basis.

This has the effect of reducing the reported rates of revenue growth in UK and Ireland. Excluding this impact revenue growth adjusted for trading days in June would have been 5% instead of 1%.

This will also have an effect on reported growth rates for the coming quarters by a similar amount as we saw in June. In Germany and Austria revenue growth decelerated to 7% in Q2 from 13% in Q1.

This slowdown was mainly driven by the trading day affect and lower rates and related price inflation. We saw good demand in our industrial business which grew by 11% in the quarter. The demand in the manufacturing and logistic sectors was strong and growth in automotive continued to be good.

Revenues in professional staffing fell by 6%, engineering and technical which is our largest professional staffing business in Germany also declined by 6%. EBITDA was €10 million given an EBITDA margin of 2.3%, this was down year-on-year mainly due to the timing of bank holidays which had a negative effect in Q2 compared to last year. In June our revenues were up 7% adjusted for trading days.

In Japan revenues returned to growth up 2% compared to the prior year, a majority of our business in Japan is in office which is typically later to benefit from a pickup in economic activity.

That said our export oriented engineering business did see continued solid growth. Profitability remained good at 5.5% although this was down compared to the prior year partly due to a decline in our perm business. In June revenues were flat adjusted for trading days.

Finally in terms of regional performance I will touch briefly on some of our other markets. Iberia and Italy continued to deliver the strongest revenue growth up 21% and 18% respectively. In Australia, New Zealand, market conditions remained challenging, although stable sequentially.

As you know we are not satisfied with our performance there and we made some management changes earlier this year. In Lee Hecht Harrison, our activity levels moderated somewhat which is normal in a time of economic recovery. In Q2, 2014 revenue growth was 5% while the margin remained strong at 28.4%. Yet again Lee Hecht Harrison had outperformed the market on the top and on the bottom line.

And with this I hand over to Dominik to take you through the financials in more detail.

Dominik de Daniel

Thank you Patrick. Good morning ladies and gentlemen. I will start with an overview of the P&L. Patrick already mentioned in the operating highlights that we had revenues of €5 billion and EBITDA of €224 million, while €228 million excluding restructuring cost.

EBITDA excluding restructuring cost increased by 18% in constant currency. I will give some product details on drive of this performance and interest guidance. Looking forward on the P&L effective tax rate was 27% this quarter. Net income grew by 15% and basic EPS grew by 18%, helped by the ongoing share buyback program.

Now we look at our sequential revenue growth analysis. This slide shows the sequential growth adjusted for currencies, acquisition and trading days for each quarter compared to the long term sequential grew for the quarter. In this way we show the sequential growth adjusted for seasonality.

Based on this analysis we can see that we have been back in line with the long term improvement since Q1, 2013. Whereas before we were below the trend for all of 2012 when Europe was in a mild recession, the consistency of this picture gives us confidence that we will continue to see steadily improving market condition. Sequential growth from Q1 to Q2 was encouraging being again in-line with the long term trend. Slight underperformance in the UK and in Germany was fully offset by the strong outperformance in Italy and in Iberia.

Next let’s have a look at the -- our year-on-year gross margin evolution. The group’s gross margin was 18.1% in Q2, 2014 up 20 basis points year-on-year. Temporary staffing had a 30 basis points positive impact on the gross margin driven by our continuous quick approach to pricing as well as effect of the French [ph] season.

As Patrick already mentioned please note that this quarter sees again had a positive effect year-on-year as it did in Q1, 2014. This is due to the increase in the rate of the credit from 4% to 6% and a positive impact of the reassessment we made in Q3, 2013 of CICE relating to prior periods and going forward. Perm placement and outplacement had a neutral effect while other activities had a negative effect of 10 basis points. Now let me discuss our cost base development in the second quarter. We continue to monitor revenue developments closely and manage the cost base accordingly. SG&A in Q2 was up 3% compared to the same quarter last year, in constant currency and excluding restructuring costs.

This mainly reflects higher IT cost, a 1% increase in FTEs and higher bonuses resulting from the good performance in Q2, 2014. In the quarter FTEs were up 1% and branch networks decreased by 3% compared to the prior year. Our Q2, 2014 results included €4 million restructuring cost compared to €2 million restructuring cost in the same period last year. Sequentially our cost base was down 1% in constant currency and excluding restructuring cost.

Turning to the cash flow statement, in Q2, 2014 cash flow from operating activities was €130 million compared to €17 million in the same period last year. During the quarter we saw part of the CICE received generating cash proceeds of €109 million. DSOs into 2014 the 54 days compared to 53 days in Q2, 2013.

Into 2014 the group invested €18 million in CapEx, paid dividend of €291 million and spent €52 million on the purchase of share. To-date and our share buyback program of up to €250 million with acquired 2.8 million shares for €162 million. Net debt at the end of 2014 increased to €1.3 billion compared to €1 billion at the end of March. Our net debt to EBITDA ratio stood at 1.2 billion at the end of Q2, 2014.

Looking forward our financial guidance is as follows, CapEx for the year is now expected to be approximately €80 million. Interest expenses excluding interest income are now expected to be around €70 million for 2014. This is a little higher than our previous guidance due to the interest cost from the sale of part of the CICE received, we anticipate profit cost [ph] of approximately €100 million. And amortization of intangible assets is expected to be approximately 35 million. In 2014, we expect to incur restructuring expenses of approximately €20 million.

For Q3, the underlying tax rate is again expected to be around 28%, however we expect that the Q3 effective tax rate to be approximately 23% actually had a positive discreet event in July. SG&A in Q3 is expected to be at a similar level to Q2 in constant currency and excluding restructuring costs. For modeling purposes purchases please recall the Q3, 2013 had a positive impact from the reassessment we made of CICE.

As we said at the time, the impact relating to prior periods positive to affected the temp gross margin and the group EBITDA margin by approximately 50 basis points in Q3, 2013.

With this I hand back to Patrick.

Patrick De Maeseneire

Thank you Dominik. We would like now to finish with our outlook. The momentum in our business remains positive, during the first half of the year, revenue growth has been consistently between 5% and 6% in constant currency and adjusted for trading days and this trend continued in July.

Along with price discipline and good cost control this has driven an improvement in profitability which we expect to continue. Given the current development in profitability, we’re convinced we will achieve our EBITDA margin target of above 5.5% in 2015 also as we expect demands for flexible labor to increase further over the coming quarters. We thus focus on reaching this target we’re positioning Adecco strongly for the future.

In addition within our solutions business we see the opportunity to further enhance our leading positions with one or two small bolt-on acquisitions. There is no change in our position on M&A in the staffing business where our initiatives on segmentation and the centralization of our IP platforms mean we will not consider acquisitions for the foreseeable future.

And just to be clear we will maintain our shareholder friendly use of our strong cash flow. Our dividend policy will not change as our share buyback program continues as planned.

And with this I would like to open the floor for your questions.

Question-and-Answer Session

Operator

(Operator Instructions). The first question comes from Mr. Paul Sullivan from Barclays. Please go ahead.

Paul Sullivan – Barclays

Just coming back to your ending comment about cash Patrick, I mean with -- the leveraging starting to accelerate with your -- you monetize your CICE benefit. Doesn’t that or couldn’t that change the way you start to think about cash returns and does that -- we could theory start to see a bit more than acceleration there, that’s the first question?

Patrick De Maeseneire

I mean first of all if you look to the CICE why we bought the CICE back you know, that we get this always of three years delay and the financing conditions are very good for this kind of product to get it out of the balance sheet because it is out because -- adjusting from the shareholder approach and for the free cash flow development it just makes sense to buy this back. Now we have not bought this back because we have throughout an anticipation to change something -- our policy and our dividend policy is very clear, very strong and our policy to shareholders value on occasion is validate, means if there is free cash flow we always reassess whether there is opportunities for share buyback or not and this is what we have done.

We concluded last year 400 million program, we are in the process of finalizing the 250 million program but we will only comment on new programs if any, if programs are finished now and we talk about 100 million it's also not the biggest amount of the CICE which is 109 million.

Paul Sullivan – Barclays

And when I know, what period does it reflect?

Patrick De Maeseneire

This is, let’s say it considers basically the gross amount of last year. I don’t see this now as EBIT because as you know from part of this money it's not showing up in the EBIT and part of this money we spent but this is the gross amount of last year.

Paul Sullivan – Barclays

And then just on the operations in Germany, can you sort of give us a bit more color on volume pricing trends there and a bit more color no professional. It looks like it got a little bit worse in the second quarter.

Dominik de Daniel

That’s correct. If we first look to the German development, you have seen that the growth decelerated for the whole company from 13% to 7%, now what is the reason of this gross deceleration basically two reason, one is the trading day impact especially in the country like Germany but also in the UK for example, the trading day impact was bigger than maybe this 1% which we have for the whole company. This explains half of the deceleration and the other half of the deceleration is basically the wage and price inflation it's in Q2 from a year-on-year comparison less than in Q1 and this is purely a function of the base effect because last year we had basically because of collective wage agreement and this other things sequential pickup of wage inflation.

So the underlying volume grew for the whole company is basically stable. Looking now to your question in terms of professional, general staffing and especially industrial business is doing very well and professional staffing weakened somewhat minus 6% last quarter. Now looking to this in the engineering business we have two big outlines who slowed down that demand this was client specific and these are bigger clients and we really have to broaden our customer base more and there it needs more commercial activity. This business has a high profitability but it's also time now to really strengthen more commercial activity and get more midsized companies on the client base and there we’re working on and this we have effects of this, we have not yet seen but we are very active to work on this.

Patrick De Maeseneire

I think it's also important to mention Paul that you will see a much better profitability in the third quarter for Germany. We expect that to be in the high single digit range.

Dominik de Daniel

To Patrick’s remark this is of course related to this bank holiday. In Q2 we have six last and Q2 we had five and disrupt the profitability as we recognize the expenses being the (indiscernible) and in Q3 we have exceptional -- there are no bank holiday that leads to very high profitability.

Operator

The next question comes from Mr. Laurent Brunelle from Exane BNP Paribas. Please go ahead.

Laurent Brunelle – Exane BNP Paribas

Three questions from my side if I may, first on France, how do you explain the declining of 16% in CICE [ph] segments, so what percentage you need for France and what do you see for Q3 please in term of revenue trend. So going, are you still confident of achieving high single digits growth in 2014 like you mentioned previously or is that a big change given what happened in Q2 and lastly, how do you explain the reduction in CapEx from below 100 million to 80 million please.

Patrick De Maeseneire

I will take your second question on the high single digit growth. As we said in the presentation we have been growing between 5% and 6% consistently over the first half year and also in June. Now we say because of course this question I’m sure it's related also to the achievement of our 5.5% minimum target and we stay as confident as we were before to reach that target because if you see for the first half year despite the growth of 5% to 6% we have increased our profitability for the first two quarters combined with 70 basis points. So this 5.5% has three components, has a top line component of course it has gross margin component, it has a cost component. Costs have been again being very well managed sequentially down 1%, gross profit is very well defended here and so with the 5% to 6% we’re okay on starting the year. You have to put in-line also with a very moderate GDP growth. If you see our growth in Italy for explain of 18%, knowing that Italy was announced this week to be in a recession in or have been in a recession in the second quarter. We clearly see that there is a demand out there for temporary labor and that the demands will continue.

The outlook on GDP for the second half of the year is bit more positive and I think now ups of what’s going on geopolitically but if that is the case we see further demand pickup also for our temporary labor demand but of course this GDP demand has to come through and we will give you more color on that during the Investor Day because then we’re after the summer break and that will be then a clear indication for us for the rest of the year.

Dominik de Daniel

If you look to the office segment in France it's currently 65 to French phase it's a rather small piece. Looking to it where the sales decline is coming from, it's basically less demand financial service industry but also in call center related services who are weak here and I don’t think this will materially change in the short term.

Then coming to your other question regarding CapEx, is that after Q1 it will be less than 100 million and we look to a different approach and from today’s point of view it will be in the area of €80 million for this year.

Laurent Brunelle – Exane BNP Paribas

Okay so just a follow-up on the what you said, but I think -- basically you’re saying that you will need less top line growth than previously anticipated which is your 5.5% EBITDA margin targets.

Patrick De Maeseneire

No. What I’m saying is we said that we need high single digit growth two years in a row for the first half again every month we were between 5% and 6%, we increased our profitability with 70 basis points. If we had more growth it will help but we are really pleased with the result so far being up 70 basis points with good cost control and we always managed the cost in-line with the top line and gross margin development and we will continue to do so. So we stay confident that we will get there.

And yes you have to see also if you look at the growth rates in Europe, if we exclude France and unfortunately we can’t exclude France from Europe, sorry that’s a joke but if we exclude France we are up no Continental Europe with 10% which is still very strong and are led by the industrial business. So France being flat and being in the rest of Europe up 10%, once France picks up and France also one day will have to pick up because the surrounding countries are very strong and it's not an isolated country although the French would love it but it's not an isolated country but France will also benefit from what’s going on in Europe and once France picks up this will then increase our growth rate as well but this has to happen first.

Laurent Brunelle – Exane BNP Paribas

And there is no sign of recovery in France, I mean --

Patrick De Maeseneire

At the moment Laurent, if you see adjusted for business day that we had the similar development like we had for the group, France being flattish in the first quarter it was up 1%, it's 0, but it's a small difference and again adjusted for the business days and then we had an additional impact in France being of the five bank holidays, three being on Thursday this year where as last year they were on a Wednesday. So lot more people making the bridge but if you see there is no material difference from the second quarter to the first quarter and now we have to wait until September to see what is really happening after the summer break but for the moment we have not indication that this will change.

Operator

The next question comes from Mr. Chris Gallagher from JPMorgan. Please go ahead.

Chris Gallagher – JPMorgan

So just on the growth in July are you seeing any major differences to the June growth rates and also are you looking to increase head count anywhere successfully?

Dominik de Daniel

If we look to the July growth rate it's pretty similar, if we look to the whole year every month adjusted for trading days was between 5% and 6%. There was no month where we had no 5% or 6% and this range we also developed in July for the whole company and it's basically I would say across all countries, it's really basically July is similar than June let’s say plus minus one but very similar and there maybe one positive exception and one slowing down. Switzerland is really picking up and then the outplacement business saw a slowdown from the level of 5% which we have so far and which makes some percentage income is picking up at the outplacement.

And the other basically plus minus to say plus minus 1% it seemed like the exit rate in Q2. And in terms to the head count, when it comes to the headcount development there may be some selective hiring’s if we look for example to Spain there we now have three quarters in the row, it strongly outperformed the long term trend and we will make some higher range if we look to our solution businesses which is growing very strongly, we are winning new clients, we need implementation people. There will be some hiring’s but as we do is very selectively.

Chris Gallagher – JPMorgan

And just to clarify, what was the one part of exception in July? I missed that.

Dominik de Daniel

It was 600 [ph].

Operator

The next question comes from Mr. Nicholas de la Grense from Bank of America Merrill Lynch. Please go ahead.

Nicholas de la Grense – Bank of America Merrill Lynch

Two questions for me, first one on France and the competitive landscape there. You have lost a little bit of market share as of some of your other larger peers and it's clear that some of the smaller players are sacrificing price to in volume. Can you tell us which parts of the market are feeling most competitively challenged? Is it the SME segment, larger accounts or there are specific sectors and then the second question we have been talking about for a couple of quarters about industrial outperformance being a good lead indicator of improving growth across the rest of the group. Have you been disappointed with how quickly the non-industrial sectors have developed or is this a kind of the as you might have expected then the growth would really come in the next coming quarters. Thanks.

Patrick De Maeseneire

Nicholas I will take your question on France. We don’t have the impression here that we’re losing market share certainly not against the main peers. The market is highly concentrated in France and if we see that we’re flat, and another peer is up to and another is minus 1%, we consider ourselves in-line then again if you look at our profitability which is strong and which is the 6.1% absolutely leading this is of course always our priority is to be at least there are strategies to be at least in-line with the market but having the leading profitability meaning we don’t give up profitability for market share. Overall I think the pricing environment in France is okay, it's rational. You see that also on the improvement of the profitability of the different player. I wouldn’t exclude the fact that the next tier players are more aggressive in the market and you see that also in their growth rates but when it comes down to the main players in France I would say the pricing behavior is very rational and it's certainly from our side as you can see in our development in order of profitability.

Nicholas de la Grense – Bank of America Merrill Lynch

And just one follow-on from that do you not see a risk, the aggressiveness of the smaller players could trickle through some of the larger players. I know you’re all being very clear that you want to keep hold of the CICE benefit but is it --

Patrick De Maeseneire

We follow up on, you’ve to look at the overall market and we have our weekly numbers on the market that we receive from the PRISM [ph] and we compare ourselves and the difference between us and the market is really very limited. So the smaller players they have a number four and a number five there which do a bit more than a $1 billion in revenues and I’m not saying that they are not important, not at all but we shouldn’t focus on that. In the end I think the most important thing is that we especially in a market like France which has always been a low margin market that we generate very good profitability and that we generate this profitability even with flat sales so that we create very good leverage in the future, that should be our focus area and not one or the other player that is growing a little bit faster as long as again if we look at the main peers that we’re growing in-line with those.

Dominik de Daniel

And to your question regarding the different segments. I mean we always said this is an industrial sector we grow and we have covered and it takes some time some quarters that other segments. So I would have not have the expectation that now in Q2 professionals is picking up it would be just too early. Should it in one or the other country should be ceded under normal circumstances or what the cause of the second half, yes but not expectation for Q2.

Operator

The next question is from Mr. William Vanderpump from UBS. Please go ahead.

William Vanderpump – UBS

Just a couple for me, on Germany just to clarify on the volume versus price, Dominik to two side that was, it was flat volume right at the end of your commentary on Germany and then secondly on Italy and Iberia, which are clearly growing well in Q2, maybe I have missed a bit if you could give the exit rate and I suppose a view of growth rates in two ways to obviously when the comps get much harder. Thanks.

Dominik de Daniel

If we look at the exit rates for Iberia, they are similar and in like the development in the second quarter. So, we have a similar development like we’re having for the group.

William Vanderpump – UBS

And in Italy as well?

Dominik de Daniel

Yes.

William Vanderpump – UBS

Okay so it's in-line with the high growth in Q2?

Dominik de Daniel

Yes. And if you I mean if we look to the second half and you know we have lots of high visibility in our business but if I just look how they outperformed the long term trend over the last couple of quarters it's not that we’re now confirmed that this growth rate in these countries -- very nicely decelerate right? It’s not that it becomes (indiscernible) for sure not but they will stay on the very good level at least what is so far experienced in this countries.

And then regarding Germany, I said not flat in volume I said the growth rate in volume in Q1 and Q2 was the same.

William Vanderpump – UBS

Okay, so sort of mid-single digit?

Dominik de Daniel

It's between low and mid-single digit.

William Vanderpump – UBS

Okay. And just going back to Italy, it's quite good example, the way GDP in Q2, I suppose quite a short comment on the performance that was specifically is driving that, can you give some examples as how you can grow so much ahead of the economy?

Dominik de Daniel

If we look to Italy I think different components coming together, in general there was -- that was more than one year ago. If you remember this there was the shift to more flexibility decline was also from workers’ comp unions pushed to rather used camps [ph] as good flexibility than just only limited context, so that helped. Secondly, I think it is true the GDP is weak, we have seen it in data but I think there is a big difference. If you look in Italy through the different reach, if we look to the north of Italy, even that I don’t have details by GDPs of Italy, this is doing clearly better than the (indiscernible) of Italy and a lot of this companies -- they have much more in the quarter than overall. And a lot of these companies who are very specialized are sub-suppliers to German automotive to German manufacturing as long as they demand coming they are doing well, but they are not higher rate. And then finally I have seen that our team is doing a very strong job because this is not market proof I think we believe we’re outperforming the market in this respect and if we look to get a little bit color with segment driving this growth this is the automotive business doing very well and the logistic transportation is doing well, manufacturing is very strong so the normal I would say cyclical stuff.

Operator

The next question is from Mr. Tom Sykes from Deutsche Bank. Please go ahead.

Tom Sykes – Deutsche Bank

I just wanted -- could you guys maybe through the operating leverage in the U.S. business and a little bit more detail please. I think in the last couple of years you probably up only around about 6% in constant currency you’re down a bit and you reported obviously your EBITDA is up by about 30%, so could you maybe go through what’s driving that leverage? Thanks.

Dominik de Daniel

If we look to the March an increase in the U.S. which was up very good in the second quarter. You have to remember in Q1 for example the March increase was a bit hold back because of this weather condition in general and now in the second quarter we had a very temp gross margin, both are fair to say that last year Q2 but also Q3 last year we had a bit of more healthcare and now they are down again from this point of view to this end.

And furthermore, office [ph] of course has been developing well growing double digit. It was already before and then on top of it our (indiscernible) line business, our solution business the big maturity of this businesses is in the U.S. are also report in the U.S. segment and they show quite strong level which has of course the whole reach in terms of profitability.

Tom Sykes – Deutsche Bank

And say if sales growth was to go negative do you think -- you would see the same level of operational gearing underway down and also just on profitability in LHH, obviously we’re looking at maybe things slowing a little as you’re seeing things are improving. What’s your outlook for profitability which we already always said that you can hold profitability at a reasonably good level in LHH but what’s your outlook there, please?

Dominik de Daniel

First of all in North America it of course each year to take cost out and if you look back to the historic development of our company we always managed the cost base accordingly. So and we will take cost out if things get weaker. This is what we always do but we will continue to do and that advantage in North America is that we have not labor rules -- who makes our life difficult. of course the preassumption is that the gross is at similar level but this is how we manage it, you can look at prior cycles and apply the same methodology.

Coming to the Hecht Harrison, Hecht Harrison has a very high profitability. Our model is pretty flexible and when it comes to real estate and other things and I mean the rule of thumb is basically if we lose $1 sales across profit, we try to get $0.60. So this means yes, if Lee Hecht Harrison has steady line the March will decrease operating margin but always in a way that it's very solid.

And maybe one more point, if you look now the sales deceleration, if you look from Q1 to Q2, this was coming primarily from the U.S. because the U.S. economy is now recovering so the sales decel slowing down, you see that that we’re able to cope with it, from a gross point of view it's showing very good profitability in this business.

Operator

The next question is from Mr. Alain Oberhuber from MainFirst. Please go ahead.

Alain Oberhuber – MainFirst

I’ve three question, the first question is about again price discipline. Could you let us know in which countries we currently see some kind of price pressure if at all, the second question is on Germany and the EBIT margin there the potential development for the second half. What was gross margin in Germany in Q2? Was it stable? And then what could we expect then for the rest of the year if we see this strong pick up because of lower bank holidays in the second half and the last question is on acquisitions. You mentioned Patrick potential acquisitions in the solutions business what could be the size of suck kind of acquisition and what is your allocated fire power for such kind of acquisitions?

Patrick De Maeseneire

First of all on the price discipline I will say overall the pricing environment is very rational. You always see here and there some aggressiveness. Sometimes we see it for one or the other leading the Dutch market sometimes in Australia, sometimes in Canada but overall I would say the pricing environment and again you see that also in the development of the profitability of the main players the pricing discipline is there and the pricing environment is very rational. On the acquisitions gain, we are talking here about enhancing our existing technology environments. We’re talking about built on acquisitions so couple of 10s of millions nothing material but you know the solutions business are less fragmented then the staffing businesses and if there are opportunities there and we can for example in the technology move faster by buying instead of building I think we should do it but we are talking about a couple of 10s of millions here, one or two small bolt-ons in the foreseeable future. Nothing in staffing at all and again we are not changing at all our strategy here or changing our strategy towards our shareholder friendly policy.

Then on Germany, Dominik?

Dominik de Daniel

If we look to Germany the gross margin the second quarter of cost was up, this was also the reason why we have a lower profitability and there are two main reasons, the first reason is that we had six bank holidays this quarter compared to 5 bank holidays the year before in the second quarter and this of course impacts the profitability as we have the people on the bench and basically have to pay them this whole bank holiday. The second reason is of course the mix comp in Germany is negatively changing from a margin point of view as our general staffing business is doing very well, our industry business is growing very strong and professional is minus 6% which has materially higher gross margins which is of course a big mix change which brings the gross margin down.

Now if we look going forward let’s look to Q3, in Q3 we believe we will have high profitability on the high single digits because it's again a normal, it's a normal quarter we have bank holidays it's same like in the before that we can show high profitability of course knowing that the mix is still negative there because it will not change from one to the next quarter in this point of view but at least consider Q2, this is every year the same very profitability, very high.

Operator

The next question is from Mr. (indiscernible). Please go ahead.

Unidentified Analyst

One question on the UK, did I understand correctly that this different revenue record for the third parties has no impact on EBITDA? Can you clarify that and then the second question is I’m not sure if you mentioned it but your policy regarding those CICE receivable sales going forward will you continue doing that next year as well or what’s your thinking there? Thank you.

Dominik de Daniel

If we first look to the UK, that’s correct, there is no impact on the absolute gross profit nor on the absolute EBIT. It's just a recognition gross value net of (indiscernible) in this respect. There is no impact on absolute gross profit absolute contribution in this respect. This to the sales, I mean in general we will not pull out, if we continue to do this subject to the financial conditions right? But in channel we believe this is a good way to materialize the cash of this incentive much earlier than what is foreseen so far.

Unidentified Analyst

What does it cost you? You mentioned?

Dominik de Daniel

It will not cost a lot because that cost are very currently.

Operator

The next question comes from (indiscernible). Please go ahead.

Unidentified Analyst

Few questions from my side, first of all on the cost side was down sequentially 1% in a constant currencies, if you look let’s say it's some building blocks like the number of per yields which were slightly up and bonuses are up in Q2, seasonal impact there. So what cost are then down, how should I look at? On marketing cost have been doing sequentially, could you give some on the breakdown of the cost and secondly on the DSO and (indiscernible) payables you saw up positive impact on the cash flow, was there some timing impact there, what was the reason behind that and lastly you mentioned tax event in July because you can give some detail -- a background of that?

Dominik de Daniel

If you look first to the cost and the cost what are the components which drive the cost down from Q1 to Q2 and the one we have less damages [ph] expenses and this still has to do from the restructuring which we have done partly was from the basically Q4 restructuring where we benefit this from now up finally empty branches that we had already accrual and now going forward we have no additional rent or premise expenses when sequentially down then it's also the case that we have less bad debt in Q2 compared to Q1 and IT cost, you know IT, it depends which project is just being run IT cost in Q2 somewhat lower than in Q1. These are basically the main issues. Now there is one component which you also have to consider, it's always the holidays, how people take holidays and with that after the full year. Q1 is normally a quarter where we have not a lot of holidays because we want to have the people in the beginning of the year, we’re back in the business focusing on operations and of course in the second quarter it's always bank holiday people take a bit more off, so it's holidays, salaries or accruals (indiscernible). These are different components.

And when we look to the tax separation they are always discreetly done where you have accruals and discussions with tax authorities and if you have the conclusion you either have the charge or the benefit in this case in one justification we had the benefit.

For the DSO, the DSO maybe up half day and this was just how it rounded depending on the different countries were underlying we’re not seeing the deals [ph] who are changing, the last couple of quarters we have a 60 days, this quarter was up by 54 days.

Unidentified Analyst

And on the trade payables saw that positive impact in the cash flow, let’s say timing impact or should or--

Dominik de Daniel

I mean there was, last year we had bit more accruals but that is not materially active.

Operator

The next question is from the line of Toby Reeks from Morgan Stanley. Please go ahead.

Toby Reeks – Morgan Stanley

I have got a couple, first of all on the gross margin you got 30 basis points now to 10 gross margin on a year-on-year basis. I think you should have got about 50 basis points out of the CICE. Could you explain the difference between the two?

Dominik de Daniel

I have not understood.

Toby Reeks – Morgan Stanley

It looks like you should have got about 50 basis points out of the CICE positive year-on-year benefit and in temp, at group level in temp gross margins you’re up 30. So what’s the difference between those 30 and the 50?

Dominik de Daniel

I think it is correct to say, this is CICE impact because we always said CICE is not part of the normal situation and there is also sometimes it has difficult to pass on new indirectly but cost we have been in front now in trading front where which we have to support. Where it's very difficult to pass this on, to declines because they all -- you have the CICE, I think we cannot differentiate in this way. Now that said, of course it's from a positive have contributed to the overall temp margin in the second quarter. Now what you have to consider in the Q2 in general is we have first of all in countries like Germany, we have one bank holiday more which impacts our margin and also the contribution to overall result. So the Q2 margin is also temp wise negatively impacted by this bank holiday is compared to the prior year.

Toby Reeks – Morgan Stanley

And on the CICE is there any sort of move in terms of how that might evolve, is there been any announcements? I haven't seen any of your discussions in France.

Patrick De Maeseneire

We have no reason Tony to think that this would change after the elections, the French government has been slightly adapted or has been composed and clearly saying that they really want to support the economy further and they also see that it's absolutely needed so we have no indication that the approach or CICE will change for this year or next year.

Toby Reeks – Morgan Stanley

And then one cost it feels like you sort of, you obviously trading sort of 5% range, June, July. In terms of your comments around similar cost on a sequential basis. I think that was pretty much your guidance last time and there was some 80 million underlying cost improvements. I mean how should I think about? Should I think okay, similar means 18 million is that or is that just over simplifying things?

Dominik de Daniel

You mean up from Q1 to Q2 or?

Toby Reeks – Morgan Stanley

Yes from Q1 to Q2.

Dominik de Daniel

We’re said similar lines we’re now coming in sequentially 1% down. I explained also a couple of reasons like bad debt was also somewhat better, our IT spending was a bit less. It has given us a little bit of freedom [ph] that we cannot use by million the cost of it for the quarter right? It's very -- the cost will be similar.

Operator

The last question for today comes from Mr. Konrad Zomer from ABN AMRO. Please go ahead.

Konrad Zomer – ABN AMRO

My first question is on the pickup in the office segment, it looks like that might take a bit longer than some of us might have expected earlier. If that wasn’t to materialize for let’s say two to three quarters, would that still have a negative impact on your EBITDA margin for the group because it seems to me that the margin gap between industrial and office might have come down over the last few years and my second question is a shorter one, can you give us the percentage of your gross profit that’s currently coming from your permanent placement business please.

Dominik de Daniel

I mean there is definitely an area where we have -- our business in office it's also related to Japan that we have now a bit better development, there is plus 2% but we have to see how Japan is going on to charge the office parts. Then finally the margin gets between office and industrial you’re right, it especially coming closer together which of course has partly also due to the France that’s because in France, at the CICE you see our French results in terms of profitability and from the French business office is only 6% versus industrial where the main benefit in both segments -- you can see the benefit but at the end of day the industrial business takes relatively speaking much more in this respect. It's a little different.

And then finally Tom, for the gross profit, it's only 10%.

Konrad Zomer – ABN AMRO

But to finally come back on that office segment, if that was to take a bit longer it wouldn’t endanger your view on getting to an EBITDA margin of at least 5.5% in the next year.

Dominik de Daniel

To be honest I think that there are so many different components which impacting how you can come to this 5.5. I would not say now it is depends in that office side to pick-up whatever in October or November, this is really not how we look to this thing. In channel I would say, I don’t think so.

Patrick De Maeseneire

Ladies and gentlemen this concludes our call for today. Thank you very much for your interest in our results and in our company. I would like to stress again that we have our investors day on the 24th and the 25th of September in Rome and our hope here to meet you there if not we for sure speak to each other the 6th of November when we announce our third quarter results. Thank you very much and have a good day.

Operator

Ladies and gentlemen the conference is now over. Thank you for choosing chorus call and thank you for participating in the conference. You may now disconnect your lines. Good bye.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!