Randstad Holdings' (RANJF) CEO Jacques van den Broek on Q1 2016 Results - Earnings Call Transcript

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Randstad Holdings NV (OTCPK:RANJF) Q1 2016 Earnings Conference Call April 26, 2016 3:00 AM ET

Executives

Robert Jan van de Kraats - CFO

Jacques van den Broek - CEO

Chris Heutink - MD, Netherlands

Analysts

Chris Gallagher - JPMorgan

David Tailleur - Rabobank

Paul Sullivan - Barclays

Josh Puddle - Berenberg Bank

Nicholas de la Grense - Bank of America Merrill Lynch

Toby Reeks - Morgan Stanley

Mark Zwartsenburg - ING

Hans Pluijgers - Kepler Cheuvreux

Yves Franco - KBC

Suhasini Varanasi - Goldman Sachs

Konrad Zomer - ABN Amro

Tom Sykes - Deutsche Bank

Robert Jan van de Kraats

Thank you very much. Good morning, ladies and gentlemen. Welcome to our first quarter results call 2016. I'm here together again with Jacques van den Broek and Chris Hultink, my colleagues on the Executive Board, and also Arun, Investor Relations, and some other of my colleagues supporting us in this call. I'll take you through a couple of slides to explain the first quarter result and then we'll get to Q&A at the very end.

I'll move to slide 5 right away, which shows the highlights of this first quarter. Revenue up by 5% organically, gross profit up almost 4%, and top line growth of 6% in Europe, 3% in North America and 5% in the rest of the world. Please keep in mind that Q1 was roughly 2% tougher than the previous quarter in terms of comparable. Most of the growth we see in the world is in the manufacturing segment. Also one should keep in mind that seasonally Q1 is the weakest quarter of the four quarters in the year.

The gross margin was stable year-on-year at 18.4%. Permanent placement fees continued to grow and now 11.5% of gross profit. Underlying EBITA improved by 10% to a 3.6% margin. And important for us, the organic last four quarter incremental conversion ratio or the drop through rate of gross profit into EBITA arrived at 51%. A 35% improvement in net income and a very healthy ROIC. DSO again improved. The Proffice acquisition was consolidated into these results for two months. The Randstad Award was conducted successfully, very successfully in 25 countries, surveying 5,000 companies, a excellent moment to connect with our clients. And the last four quarter EBITA margin now stands at 4.5%, which is a 30 basis point improvement.

On slide 6, the last four quarters stable, mid single digit growth. We could even say the last 10 quarters, consecutive quarters. It's a bit boring as the pattern is not typical in any way if one looks at the historical economical pattern. But this is what it is, 10 quarters now of consecutive mid single digit growth. If you look at the organic growth, it stands at 6.4% over the last four quarters. The gross profit growth also over the same period at 6.2%, which is an improvement of 20 basis points, certainly supported by firm growth now over the last four quarters at 9%. And this then combines with operating expense at 4%, arrives us at the 51% incremental conversion ratio.

On slide 7, you can see the trends. The green line is going down a bit, but that is the rest of the world. If you look at the European line, that is the reddish line here, it grew 6% compared to 7% in Q4. But the comparables have improved the last year already. So we see good contribution from France and Germany here, very helpful. North America was up 3%. The rest of the world has increased by 5%. And the group assets grew by 5% on a 2% tougher comparison base. Also this quarter included Easter, which in the previous year was in the second quarter.

North America on slide 8. U.S. staffing gaining market share again. Revenue growth up 3%. Some impact of Easter here coming through. Perm stakes improved and also GP was up by 4%. And if you look at the underlying contributions here, firm growth 6%, a little lower; the U.S. staffing and in house business revenue growth of 6%. That also had an impact on GP. And U.S. professionals flat. All of these elements explain the GP improvement by 4%. Pricing was good in the American market. Randstad Sourceright, good increase of spends under management. And Canada, a very difficult market, revenue flat, slight improvement compared to the previous quarter. A very nice contribution EBITA, 4.1%.

Slide 9, the Netherlands impacted by payrolling. So underlying we do see very healthy growth. Revenue at 6%. But if you look specifically at the staffing and in house business, then and one excludes the payrolling business, then it is 13% year-on-year growth here. Most of the government payrolling, which is where a client, the government, has decided to take people on their own payroll and terminate this business. So it's client specific. We continue to see pricing pressure in the market.

The professionals business, it was up 5% compared to 21% in the previous quarter. That requires us to boost commercial activities again. But also there is an impact here from the restructuring which took place last year and also the comparables have been more challenging. EBITA margin now stands at 4.8% versus 6% in the previous year. We are looking at making some adjustments related to the reduction in the payrolling business and we continue to invest in growth. 13% growth is rather significant.

In the French business on slide 10, we do see growth continuing ahead of market, nicely 9% up. Combined staffing and in-house stands at 8% compared to 10% in the previous quarter. Professional improved to 12%. And perm continues to show very nice growth at 27%. Gross profit up by 5%, we do see something like a cocktail of some elements here. Pricing pressure on the one Hand. We have new insurance that hit us, which we cannot completely offset by charges to clients. We have some compensating subsidies that are starting to come in towards the end of the quarter. EBITA margin improved also explained by the release of an accrual.

In Germany, improving growth and profitability, Germany also after quite a few quarters of either no growth or negative growth, its outcome improved again. Revenue growth at 5%. Gross profit improved even more, 7%. Our focus through activity-based fueled saving on the SME segment shows clearly results which also are coming through in the Netherlands, so higher growth of the SME segment. EBITA margin at 3.7% showing excellent operating leverage.

Belgium, profitability improved again, 5.6%. It was a very nice level of profitability. But that went at the cost of some revenue growth because we lost some large clients due to pricing. These were specific customer profitability-based choices that we have made. But we continue to focus ourselves also on catching up with markets again. Gross profit was flat, again the result of client profitability focus.

Iberia, Spain and Portugal revenue up 8%, Spain at 9% very good growth in the professional space continues, Perm also very nice at 36% as we continue to invest in further growth. Also Portugal improved again after some quarters with clear choices on customer profitability now at 4% and the result that also gross profit was up 10%, 3.9% EBITA margin now.

The UK, step-by-step over the last quarters, we've seen improvements coming through. Revenue up by 1% now, but even stronger at the gross profit line. EBITA margin stands at 3.1%, which is operating leverage coming through. Sourceright clearly has a contribution in the UK.

Slide 15, the rest of Europe. Italy, it nicely continues to grow double digit 11% with a strong focus on specialties and perm. Switzerland was a bit difficult over some quarters last year but it continues to improve now at 5%. Poland double-digit solid and in Nordics, revenues were stable with consolidation of Proffice. And the EBITA margin now at 2.6%, which is roughly in line with the contribution of Proffice.

Rest of the world, moderate growth across the board, Japan improved from 1% to 3% and perm also, as a result of our specific micro-strategy that you also see in other countries, nice growth of 38%, mostly in staffing segment. Australia and New Zealand showed growth continued at 5%, with a nice contribution also here of perm. Asia shows growth of 5%, in line and Latin America, as a result of customer profitability somewhat reduced growth here. EBITA margin just above 1%.

The financials on Slide 18. Well this is -- when you summarize all the previous comments this is what comes out of it. Foreign exchange impact roughly zero at the EBITA line, which compares to a positive of 5 million in the previous year in the first quarter. We have some one-offs here, mostly M&A-related. And then amortization and impairment a bit lower. And that is a consequence of amortization of certain M&A-related elements and we just have a lower level of amortization here.

Net finance costs and associates, that's a plus, that’s nice. This is always a combination of interest rate, but the interest rates are low, the debt is low and we have some adjustments -- some valuation adjustments here as well as some currency impact. Last year there was a negative. The currency element now is a positive. It's bookkeeping, but it is a positive. The tax rate relatively stable and in line with our previous announcement.

Performance by revenue category, staffing improved EBITA margin from 3.2% to 3.6% strong focus on delivery model, it has been on our agenda for quite a while and it continues to be very important. In-house we continue to transfer clients from staffing to in-house. It's the best way to serve our large clients, lower prices but high level of volumes and high productivity level. The fact that the EBITA margin is lower here is purely the result of improved cost allocation here, we made some adjustments. Staffing in-house are very much together and cost allocation is more art than science. Professionals at 4.5% EBITA margin, a nice growth. We have a very strong focus on the verticals, IT, finance/accounting and engineering here.

The gross margin bridge, we went from 18.4% to 18.4%. Ao we have a positive from perm and a negative from HRS, which includes the Dutch government payrolling business. Not spectacular here.

Slide 21, operating expenses. As you can see, a big red M&A. That's not the M&A cost, that is the addition of Proffice to our consolidation and this is the two months of expenses that came in here. So in line with our announcement, a slight decrease sequentially in the cost day. We continue to invest across the board where we see growth. Net debt now, on slide 22, at roughly 300 million and a leverage ratio of 0.3. Nothing specific. Working capital remains highly efficient. And at the bottom you can see an improved return on invested capital. Underlying, if you make an adjustments for dividend, that's still the case, but the dividend was already taken out of invested capital in Q1 this year due to the annual general meeting taking place in March. So, that reduced the invested capital base slightly, which was not the case last year. But even if one makes adjustments then we still see an improvement in the return on invested capital.

Free cash flow 2016, on slide 23. Rather standard, nothing spectacular. What you see here is the outflow related to the acquisition of Proffice. I'd like to point out here also that typically in our seasonal pattern, again Q1 is the softest quarter of the year. Q2 includes the outflow of dividends and payment of holiday allowances. So typically at the end of Q2, we have a higher debt than at the end of Q1. And then that improves again in the second half of the year. That brings us to the outlook on slide 24. Organic revenue was 5% in Q1. In March, revenue grew by 4.6%, which is better than slightly better than February, and it included Easter. Volumes that we measure every week in terms of people working, in early April indicate a continuation of the exit rates of the quarter.

If I look at the exit rates by country, then looking at the Netherlands, it shows a mid single digit growth rate. In France, we see high single digit. In Germany, mid single digit. In Belgium, flat. In the UK, low single digit. In Iberia, high single digit. In America, low single digit. But that, I should point out, is roughly in line with the average for the quarter. Rest of Europe, high single digit. And the rest of the world, mid single digit. So that brings it to roughly 5% in the month of March. Sequentially the gross margin is expected to be seasonally higher and there is expected to be a small positive impact of the fact that we have a bit more working days in the second quarter, which is driven by Easter, which falls into March this year versus April last year.

In terms of operating expenses, we expect moderate seasonal increase as we continue to invest in growth. Then reflecting a bit on the margin ambition and the scenarios to get there, we started to share these with you in 2014, November, at the Capital Markets Day. And in this slide, we have included some boxes, which provide an update as per today. So this bowl, the bucket, the basket, the ice bowl, whatever, it shows the balls that do drive the performance of the company. The blue one, cost we announced that we were going to some significant cost savings all on track.

We've added one last year, announcing that we're going to improve our IT spend through the implementation of shared service center. That project has now all been prepared in detail and it's going to be implemented as from July. That will mean we're going to gradually transfer data centers and data communication into the shared service center and we'll see some benefits coming in gradually as from 2017. Activity based field steering focused on improved growth and productivity, clearly helping us. Activities up 6%, which helps us to improve the conversion of our activities, so making sure we make calls that convert into business, business that converts into orders and so forth. If you look at the right hand side, you see that this field steering has helped us to drive our permanent placement business, our professionals and our SME. In the SME we see double digit growth. In perm we see 7% growth. Very helpful.

Then the orange ball, when we discussed this last time we put in a scenario of having high single digit sales growth in 2016, which then together with the activities in the other balls, might bring us to the low end of the 5% to 6% range. That's not what we have seen over the last quarters. This high single digit sales growth, not at all. We have now seen 10 quarters of low to mid single digit sales growth. So if we put that into a model as a scenario and look at the analyst consensus, which currently stands at 4.8%, it is not impossible to get there. So as a scenario, we have no insight beyond what is happening in April. But as a scenario, just looking at it mathematically, that's not an impossible scenario.

That brings me to Q&A. And I would want to ask you to limit your questions to two max. Thank you so much.

Question-and-Answer Session

Operator

Thank you, gentlemen [Operator Instructions]. Our first question today comes from Chris Gallagher with JPMorgan. Please go ahead.

Chris Gallagher

Good morning. I’ve two questions, the first around the pricing environment, specifically in Netherlands, France and Belgium. If you give us details on how you've seen that evolve. And then the second on the UK, have you had any discussion with clients whether the upcoming referendum is likely to slow decisions and what's your view on the outlook? Thank you.

Jacques van den Broek

Yes. Let me take -- good morning, Jacques here. Let me take UK first. Of course these discussions always lead to a bit of uncertainty, and uncertainty never helps economic development. You see the top line in the UK being rather modest to flat. So it probably plays a role, yes, but always tough to really scientifically ascertain, of course. Pricing environment, we're the market leader in the Netherlands, the market leader in Belgium. And well, that's already six, seven years ago decided not to play the pricing game in France, although we're the number three in that market.

So that means that we make our choices. Robert Jan already alluded to it. Certainly in the Netherlands, we've seen one of our competitors I won't name names, but becoming Japanese soon, being quite aggressive last two quarters on price. And then we take our decisions. That leads to either discontinuation of client relationship so less growth or renewal of a contract at a lower price, and that leads to a slightly lower margin. And Belgium is a bit the same. Belgium, you can see there very clearly, a top line which is quite modest. We were nearing the market in Q4. Again we took some decisions not to renew contracts Q1. You do see that in our numbers, but Belgium is currently our country with the highest earnings and compared to competition, and you'll see the difference.

Operator

The next question is from the line of David Tailleur of Rabobank. Please go ahead.

David Tailleur

First of all on the Netherlands, EBITA margin declined. Could you maybe provide a little bit more color on the impact of pricing pressure and the payroll business?

Jacques van den Broek

Yes.

David Tailleur

And then secondly, on France -- there's a bit of two noises here -- on France, the impact of the one-off, could you quantify that? Thanks.

Robert Jan van de Kraats

I'll take the French one first. As I said, it's a bit of a cocktail. So on the one hand we have pricing pressure. We have the additional cost of insurance, which is slightly offset by some additional subsidies. On top of that we have improved productivity, clearly because of the high level of growth. And then the remainder relates to this cost accrual, which explains the biggest part of the improvement but not all. I think that will guide you well, David.

David Tailleur

Yes. That's enough, thanks. Thanks. And then on the Netherlands...

Jacques van den Broek

Yes, on the Netherlands. So the payroll business, it's a €350 million business. And we stand to lose a little over €100 million due to the decisions the government is taking. And this is a highly leveraged business because it's highly automated. And we think we're going to lose anywhere between €8 million to €10 million EBITA. So that's just something that happens, that does then hurt our EBIT and also our top-line growth, of course.

And then there is a few other things, one is we are -- we carry out own cost in sickness of temps. We've been doing that for quite a while. And that also goes up and down a bit. We've seen a flu epidemic in the Netherlands in Q1 and that hurts our EBITA. This is non-recurring, so that helps. Second one is in great English, the [indiscernible], which is a severance with temps which now comes in into Q1, and it also has an effect, probably will have an effect throughout to 2016 and then in comparisons. Because it's a pretty stable number will probably fall away. Yes, and then the last, there's pricing pressure. Yes.

David Tailleur

And that's that roughly equally spread in your guidance or...

Jacques van den Broek

The pricing pressure is a bigger bucket than sickness and the [indiscernible]. Yes. And the other one I just explained. You can probably calculate that one yourself as a percentage of the €8 million to €10 million.

David Tailleur

Yes. That's a fair guidance, Jacques. Okay. Thanks a lot though.

Jacques van den Broek

It may be good to mention, in essence -- another one, of course is the funny mix development. So you know we take out cost, so we invest in growth. And in the Dutch business we do see 13% growth in the rest of the market. And we're not cutting costs there because, yes, the growth is very good. But in this payroll business we cannot take out cost due to the high leverage. So that makes it a bit tough from a short-term cost theory perspective, but it'll weed out over the year.

Robert Jan van de Kraats

Yes. And we're looking at making some changes, but that'll take a bit of time.

Operator

And the next question is from Paul Sullivan of Barclays. Please go ahead.

Paul Sullivan

Just last one on Holland. The perm performance was fairly weak. Is that a transitionary issue and will that wash through as we go through the rest of the year? Or is that a drag that we should see continuing for a little bit longer? That's the first one.

And then second one on M&A in the pipeline. I don't know whether you can give us a little bit more color on your thinking in terms of future acquisitions or how you see the pipeline shaping up for the rest of this year? And in this choppy environment, does that put you off doing deals or actually does it encourage you to do more deals?

Jacques van den Broek

Okay. I'll take the Netherlands first. Perm is a mixed picture. It's actually quite good in our two staffing companies, again from a low end. But there you do see the trends we've seen in quite some markets is that we do want perm in staffing to grow better, training our consultants to sell perm of the same profiles they sell temping in the market. That's still working very well for us. In our professionals business, we do see a bit of call it post-integration blues. We integrated three companies in the Netherlands into one professionals company. That went surprisingly well.

We did it in Q2. Numbers in Q3 and Q4 were quite good. But at the same time we also changed roles a bit. So we went from 360 consultants, selling and servicing like we have in staffing, to split desks, as we have in other professionals businesses. So we lost a few people on the front end. And as you know, perm then immediately reacts and therefore perm and professionals is lower than we expected. But again, this will weed out over time. We're taking measures to improve growth again in perm and our professionals business in the Netherlands. But for Q1 it was not as good as the last as Q4.

Robert Jan van de Kraats

On M&A, our strategy is unchanged compared to the previous quarters. You're right; the market is sometimes a bit difficult. We can find targets but not always at the right price. Randstad has some firepower so we are willing to use it and you can see that coming through last year. In the second half we acquired RiseSmart in the placement space. And this, the first quarter we've acquired Proffice, which is nicely contributing here. And actually Proffice provides the profile that we really like. It comes in with expanding our staffing footprint and it comes in with expanding our professional footprint. And these two are the priorities across the globe.

We're using our DCF approach, where we typically look at modeling it according to various scenarios, but they all include a downturn to ensure that we don't just base ourselves on hockey stick. And that drives our willingness to pay a certain price. So we continue to have a pipeline. We're working on it. And we're rather happy with the pace we're making, and hopefully we're going to see some more coming through in the rest of the year. Size of transactions will be mid-sized. So typically that would be anywhere between 100 million at the lower end and 500 million at the high end.

Operator

Next question is from the line of Josh Puddle of Berenberg Bank. Please go ahead.

Josh Puddle

The first question is on the Netherlands. How much of your business there remains exposed to the government? And are there any further areas beyond payrolling which you think might be at risk?

And then secondly on Germany. You saw a decent acceleration in Germany in Q1, and that's despite the timing of Easter. What do you think is driving that acceleration and what trends have you seen so far in April?

Jacques van den Broek

In Germany we see a good acceleration. We're very happy with the fact and Robert Jan already mentioned it but I'd like to mention it again, is that in Germany our SME is now really outpacing our large clients, which is definitely a first in Germany ever. So that makes us a stronger company. We've given you the extra grades I think that's good enough in terms of transparency. So we're happy with our German performance.

On the exposure of the Dutch business in the Netherlands with government, it's 15%. We don't expect this business to be at risk. The payrolling business is really like a central decision that has been taken. I'm not commenting on the motives for this. But yes, it happened quickly and this business has been quickly disappearing. So these people are being hired. We don't expect that in, like I say, real temping part of this government business. We don't see any sign.

Robert Jan van de Kraats

And this should be fully implemented in Q2. May 1 actually it should be finished.

Josh Puddle

Okay. Great. Thank you.

Robert Jan van de Kraats

It's not really a reflection on other businesses. It's only payroll.

Operator

Next question is from the line of Nicholas de la Grense of Bank of America-Merrill Lynch. Please go ahead.

Nicholas de la Grense

Two questions, please. Just a quick follow-on on Germany, I was wondering whether you could give us an indication of how much of the 5% was down to pricing versus volume? And then a question on the Proffice acquisition, it had a positive gross profit impact or gross margin impact and a bit negative on the EBITA margin, as we would expect. Is there scope to take synergies out of that business? Do you think that's going to be a positive contributor to EBITA margins eventually? Thanks.

Jacques van den Broek

Yes. The German breakdown between price and volume, that was your first question. We think that it's roughly half-half, volume contributes half and price contributes the other half. Your question on Proffice, you're right, it indeed has a provides us with a positive contribution at GM level, the gross margin also because it comes in with a substantial contribution in permanent placement. At the EBITA level it's roughly at par with what we show rest of Europe. Your question about the synergies, of course there will be some synergies. But the main focus here is on driving growth. The company has been on our radar screen for the last 10 years. We always found it too expensive. It then showed the deteriorating results. And just when it started to come back a little, we were able to agree on a transaction. So we're jointly try to drive growth here, which is the main focus in the especially in the Swedish market and in the professional space in the Scandinavian market.

Robert Jan van de Kraats

Maybe to add a bit of color, there's also like what we would call concept synergies. So we definitely feel there's scope in the blue collar business and part of the white collar business to also implement our in house concept and therefore increase conversion. We do feel, probably this is not a 2016 thing, but the Swedish market certainly provides enough potential to have this business performing at Group level in terms of EBITDA. Of course the Norwegian part, which is the smaller part, is a bit hampered by the oil and gas development. So that remains to be seen.

A - Unidentified Company Representative

Yes, and which was included in our DCF analysis.

Jacques van den Broek

Yes.

Operator

Our next question is from Toby Reeks of Morgan Stanley. Please go ahead.

Toby Reeks

Morning, guys. It's very good to hear you've all survived the flu epidemic. Could I ask two questions? One is on the in house business. Is there a natural limit for growth in that business? How much further is there to go? And I think you talked about margins, when you were talking about margins you talked about cost allocation being more of an art than a science. Could you talk a little bit about that? What do you think is the actual margin there? And then secondly on France, there's lots of talk in Les Echos and I guess around the politicians talking about potentially becoming more aggressive against temps through subsidies or through taxation. Could you comment around that, please?

Robert Jan van de Kraats

It's very tough to talk to comment on politicians who talk in the newspaper.

Toby Reeks

I can imagine.

Robert Jan van de Kraats

In heating up for towards campaign, you've heard us talk about this before, but no problem to reiterate. The French market has been always there always was subsidies have always been part of life. They're quite stable. There seems to be nothing more permanent than a temporary measure. So Cisse, it's up to and including 2017. There's going to be elections in 2017. Regardless of who wins these elections, of course we don't think immediately something will change, let's say up to and including 2017. And then who's going to take away this? The overall sentiment in the French market on Cisse is that it works. So unemployment is not really going down but our market is growing. And if that continues then normally unemployment should go down. That is recognized, so they do regard this as a system that works. So the socialists won't take it out. But then will the other party take it out? But that's bad news for the private sector. So we'll see. We'll see. But, yes it's still almost two years now.

Toby Reeks

I think aren't they more thinking that the Cisse was there to create low paid permanent jobs rather than temporary jobs and that's the issue? And I think Les Echos have been talking about increasing the costs on temporary contracts and decreasing costs on permanent ones. Do you think that's all just posturing and the reality is we don't know where we are? I agree, Cisse is unlikely to go it's just how its allocated might change.

Jacques van den Broek

You never know. What you're just stating is something that never works. So if anything, this leads to a lot of worse regulated jobs. So let's not hope they put that system in. This never works in no country.

Robert Jan van de Kraats

And very often language and actions are different. Your point on Randstad in house services, today it's roughly 20% of our revenue base. We see significant room to grow that further. We have quite a differentiated pattern in our own Company. A very high share of the German revenues comes from in house, whereas other countries are much lower so we still have a way to go in most of our operations. But we also can see it expanding, this in house concept. We have a significant presence in the call center space. But it might even go further in the clerical space.

And even we are looking at expanding it in the professional space. But it's just one of the delivery models. We have other options as well, for example, central delivery, which has been explained at the previous Capital Markets Day also. In the Netherlands, we serve large clients with in house, but we could also do through central delivery, building a team at the central point and then supplying that to the client without interfering with the extensive branch network, so it's one of the delivery models.

Jacques van den Broek

And one very promising here to mention is also what we call Randstad Corporate Services. So in-house is the single site, well, single profile or limited profiles, mostly starting at the bottom end to mid end of the pyramid. Randstad Corporate Services is named corporate because it's mostly at head offices. So this is single a site but multi-profile, multi-service. We have a little over 30 locations now in the U.S. And effectively, if you look at the people we deliver, it's mostly professionals.

So we think this is a very promising model because clients increasingly don't want to work with 40, 50 suppliers and professionals. The basic MSP model is also with all here and RCS provides what our IS also does. So we take care of the workforce and provide a mid- to long-term view on how this develops, including employer branding, productivity of people and automation of the transactional part of the service. So we do think that's very interesting. So in a way this is in-house for professionals.

Toby Reeks

And then that comment around allocation of costs, could you talk about that a little bit, please?

Robert Jan van de Kraats

Yes. I think to simplify that, the margin ambition with our in-house business model stands at between 4.5% and 5%. We've been around 5% for quite a while. If you look at the last four quarters we're now at 4.9%. The previous last four quarters in ’15 was 4.3%. So that comes through nicely. And the cost allocation remark that I've made is, how do you allocate costs in a business that is rather integrated, because growth of in-house is delivered mostly through the branch network. So we develop a client in the branch network and then transfer the client when the client has grown to a certain level. Then we transfer it into the in-house structure.

So allocation of head office costs, for example, and in the restructuring in the Netherlands at the beginning of last year, we looked at again how that worked out. And now we've made some changes which we believe help us to set the cost price better. And as a result also the reporting is impacted. Nothing really big, but deciding on how to allocate costs, as I said, is more art very often than science. But we think this is better art.

Toby Reeks

And to be clear, that's taking some cost out of branches and putting that into the in-house area. Is that right?

Robert Jan van de Kraats

It's the other way around. So we've reduced the return on in-house by allocating a bit more of the cost to in-house.

Toby Reeks

Yes, from the networks. Yes.

Robert Jan van de Kraats

Yes, correct.

Operator

And Your next question comes from the line of Mark Zwartsenburg of ING. Please go ahead.

Mark Zwartsenburg

I want to come back on France on the cost accrual. Robert Jan, I think you mentioned that most of the increase in France, I presume then talking about EBITA, is driven by this cost accrual. So is it fair to assume that the cost accrual release was around €5 million then in the quarter? And can you confirm that it is indeed one-off? That's my first question. And then my second question on the Netherlands. The transition, well, subsidy perhaps is a better word, you said that [indiscernible] will have an effect in 2016 it will fall away. Can you give us a bit of an indication how big in terms of basis points on the margin for the Netherlands that transition subsidy was, say, for instance, in 2015? And then perhaps a final one if I may on the trend in March and April, how reliable is that 4.6% on March? Is that working day-adjusted? And the first indication on April since there's so many holiday impacts in there, the Easter timing, how reliable is that number? Can you perhaps provide a bit more color on that? Thank you.

Robert Jan van de Kraats

I'll do the first. Yes, Mark, it's really not a transition subsidy because we're paying it.

Mark Zwartsenburg

Okay.

Robert Jan van de Kraats

Not a transition subsidy. Now transition is a severance for long-term temps if you don't immediately find a job for them. We think it's around 20 basis points. What I was trying to say is a bit like what we've seen in Germany. So in the comparables, it will weed out at the end of 2016 because we do think it's a pretty stable number. It has to do with your mix of people. Of course we're managing our own people to give these people as quickly a job as possible. But sometimes you do need to pay this severance. And it's not a problem because it's the law. But it's 20 basis points probably for the rest of the year.

Mark Zwartsenburg

So it's a subsidy to the government, that's what it is.

Robert Jan van de Kraats

Yes, you could also call it tax. But then we have a [indiscernible].

Mark Zwartsenburg

All right.

Robert Jan van de Kraats

On your question on France, I explained it's a cocktail. So we have the pricing pressure, the increase in insurance cost and the subsidies and the productivity improvement. The latter offset effectively the previous elements. And then beyond that in the margin was mostly the result of this accrual release. But your number is a bit too high. But mostly there is.

Mark Zwartsenburg

And it's one-off?

Robert Jan van de Kraats

It's one-off, yes. Correct.

Mark Zwartsenburg

Good. Thanks.

Robert Jan van de Kraats

Mark, keep in mind that we always have one-offs in our business. We have releases because we accrue and then a decision is made or we meet certain requirements and then we pay less. So this is the name of the game in our business. On the March, April trend, the 4.6% impacted by Easter. So that makes it that it should be a little higher. And we also looked in detail at the volumes in April, which give us a comfortable feeling about sharing the 4.6% with you. We're not worried by it at this point in time.

Mark Zwartsenburg

Okay. Again can you perhaps give us a bit of a feel for the comps through the quarter?

Robert Jan van de Kraats

You mean last year?

Mark Zwartsenburg

Yes. Correct.

Robert Jan van de Kraats

Mark, I thought you have all these details.

Mark Zwartsenburg

I have a feel but I just want to get the confirmation of it.

Robert Jan van de Kraats

What's going to be important is the Dutch market in May. As you might remember, last year we had May 5, which was officially a holiday. It turned out to be a day where most people worked except the government.

Jacques van den Broek

Yes. Last year was 596. That's the May.

Robert Jan van de Kraats

Yes, that's the May thing so take that one out.

Operator

Next question is from the line of Hans Pluijgers of Kepler Cheuvreux. Please go ahead.

Hans Pluijgers

Two questions from my side on the U.S. First of all, looking at the general staffing side, a deceleration in growth. Could you give some indications on the developments by industry segments? So what's manufacturing doing and the other segments through the quarter? And what do you see also with respect to the length -- the average contract length for temps in that segment? And secondly, on the professional side, revenues are flat. Yes, what is it you're working on to improve the performance of the professional business in the U.S.? I think the number is a little bit disappointing. Are you, let's say, going to take some additional measures here? What do you expect going forward on this side, on your professional side?

Jacques van den Broek

Mark, I'll take your -- sorry, Hans, I'll take your last question first. Profs in the U.S., you said it's a bit disappointing. Yes, we agree; it should be higher. We've made changes in the past. Linda is not with us today but she's working hard on getting our field steering organized properly. We also in the meantime integrate -- continue to integrate part of the back office. So we feel we are pushing the right buttons but success is coming through relatively slowly.

Robert Jan van de Kraats

Yes. And it's always a bit tough because when I tell you the sectors in the U.S., you will relate this to the market. But we have a whopping 3% market share in the U.S. So I wouldn't take what happens in our sectors as an indication for the market. We do see in the ASA numbers or the market numbers a slight slowdown in this market. With us what's mostly doing well still is our blue collar part. We do see -- but that happens if you see a slight slowdown, transport and distribution doing a bit less, from high double-digit to still doubl-digit but lower. So it's a little bit less. But this is the third year of growth so we're not worried.

Jacques van den Broek

And no significant change in contract length in the U.S. I already mentioned that April is in line in the staffing business in the U.S. roughly with the efforts of the first quarter.

Robert Jan van de Kraats

Yes. We do see 2% or 3% wage inflation and we do see good margins. So these are signs of still a good market.

Operator

Next question is from the line of Yves Franco of KBC. Please go ahead.

Yves Franco

Could you maybe give us what's on in Germany, maybe what regulatory changes can be expected for the rest of the year? I guess are they talking about again some price increases in July -- June/July, which can offer some support, of course? And then second question, just read that the plans of the Dutch Social Minister -- Minister of Social Affairs imposing also an official law on the payrolling business has been cancelled due to insufficient support in the parliament, which was as expected. Does this give some -- will you now increase some marketing efforts in the private sector payrolling business to recoup some of that lost revenue given that probably there will be no stricter legislation? And how well was this anticipated by you, this drop-out because I guess the minister already mentioned that last year -- half of last year, have you been immediately looking at some additional cost measures? Or is this 1Q drop-out really striking for you and are you now only starting at additional measures in the Dutch business? Thanks.

Jacques van den Broek

I'll do Germany and then Chris will follow up with the Netherlands. I get a rebate from the KLM on flying to Berlin, so that's helpful. So I don't know. There's still -- there's a lot of different topics on the table with German politicians currently. Of course they were quite surprised with the Alternative fuer Deutschland, the slightly populist party that suddenly, in three states, got quite some votes. I think they're still recovering from that. And then refugees is a whole topic, as you can imagine. And also on the table with a few more other topics is the regulation on temping. So we actually don't know where it is currently. It's still in the pre phase of discussion. So very difficult to say.

Yves Franco

So no CLAs expected to come in, Jacques, in the course of 2017?

Jacques van den Broek

There is a moment of increase again, off the top of my head, 1st of June, which is a regular one based on the current situation. And that's an opportunity for us to hopefully, if we do it well, it's always very complicated. But we did well last April and let's hope we do well again now.

Yves Franco

Okay. Thanks.

Chris Heutink

On the payroll question or the law, there's a difference between the multi [Indiscernible], as we call it, that has to do with general payroll in the Netherlands. And that's where you mentioned that it's not supported by the Second Chamber and also not by the [Indiscernible]. So that's away. But it doesn't matter, the Minister of Social Justice Asscher, he announced this payroll ban for the public sector. So that will pay. Secondly or thirdly, you asked us if we could have foreseen it. Yes, of course we knew that this law or this measurement was coming in, although it's always a bit of a thing, well, how they deal with it. So different departments are dealing with it in different ways. So it was a bit underestimated probably, but we were seeing it and we still see it and we take our measures.

Yves Franco

Okay. And now that, Chris that the private sector won't be impacted there since the law will not be voted, will you increase your efforts a bit to recoup or to put some of the business back into the private sector? That would be logical.

Chris Heutink

Yes, we are increasing our sales there already a long time actually to compensate for the loss in the public sector. And secondly, we of course react on the freelance measurements, which are announced and the new law, the DBA. So here we sent out a press release, I think two weeks ago, that we are full in the sales mode also on the freelance contract.

Yves Franco

And is it can you give us a number how much of this lost public business can then be recouped on the private sector in the long term? That's probably difficult to.

Chris Heutink

Too early.

Yves Franco

Yes, of course. Thanks a lot.

Operator

And our next question is form the line of Suhasini Varanasi of Goldman Sachs. Please go ahead.

Suhasini Varanasi

Hi. Good morning, everyone. Just a couple of questions from me. When I look at the growth in the first quarter, it looks like the growth has swung quite crazily through the months. You had 6.6% in Jan. Maybe close to 4% in Feb and then improved to 4.6% in March. Can you comment on what exactly drove this? Was it just a reflection of the underlying macro in the different countries? And secondly, in North America, when you reported the full year results, I think you talked of mid single digit exit rates in Jan, but ultimately you ended up with 3% growth in the quarter. So is it the macro slowdown which ultimately affected the growth there? Happy to share your thoughts there. Thank you.

Robert Jan van de Kraats

Well we always have erratic growth rates. They are never linear. The comparison with the previous year plays a role. So we don't really look at it month-by-month. Of course we measure it month-by-month, but we look at it a bit for a bit longer period of time. So to us this is a continuation of a trend. I have to say that, and we've pointed that out, the growth in the professionals business in the U.S. is below market and we have offset most of that. The growth in our staffing business is ahead of market, and that's the way we like it. So the erratic picture throughout the quarter, I actually gave you just the Q2 last year growth rate, which explains 596. So that's what happens. Working day impact comes through this, so nothing specific, I would say. And we don't really analyze the macro trends underlying because we feel the company responds to whatever happens in the market.

Suhasini Varanasi

Understand. And can you tell me what is the split of professional versus general in staffing in the U.S. given you had such different growth rates there?

Robert Jan van de Kraats

Well staffing is a bit more than half and professional is a bit less than half. At the gross profit level, it's about equal.

Suhasini Varanasi

Okay. Thank you. And yes, understood. Thank you.

Operator

Next question is from the line of Konrad Zomer of ABN Amro. Please go ahead.

Konrad Zomer

Hi. Good morning. My first question is on Belgium. You mentioned several large accounts being terminated. Can you give us an idea of what the impact could be for the remainder of the year? And my second question is still on the payrolling business. If you've lost something like, let's say, 120 million, are you saying that the remaining payrolling business is not related to the government? Or is that related to both the government and the private sector but that it's not at risk of you losing it?

Robert Jan van de Kraats

Okay. I'll comment that one. The largest part, the vast majority of the business that's gone is the government. And there's one other private client that we've not lost but they decided to in source. For the rest the payrolling it's in the private sector, it's the growth market. So we have as Chris said to Yves, we don't give guidance and we actually don't know because we're on a sometimes long sales cycle. If we can how much we can recover in the private sector, we definitely don't feel that we're going to lose more. It's a very specific -- yes, you should call Lodewijk Asscher why they are doing this. So we actually don't know, but we never comment on our clients.

Konrad Zomer

But so we will have one more quarter where there's going to be a negative impact from the lost government payrolling business, which is the second quarter?

Chris Heutink

No, that will be throughout the year. But this €100 million to €120 million you're mentioning is full year.

Konrad Zomer

Sure, okay. I think, Chris, you also mentioned that it should all be done by May 1.

Chris Heutink

No, that's what Lodewijk Asscher said. 1st of May, people have to adjust to this measure.

Jacques van den Broek

It's the government department, they....

Chris Heutink

So they're doing it already right now and this will continue after May 1, 2016.

Konrad Zomer

Right. Okay.

Jacques van den Broek

Then on Belgium, what we didn't mention but last year Belgium had a, what is it, a little over 7% swing from Q4 into Q1, so Q1 had a growth of a little over 6% but Q4 was slightly negative. So that's quite a swing. The clients we're not taking, of course, we're not commenting on clients we're not taking. But if they are, and one or two are, they're big and loss-making, then that doesn't help. We also had a bankruptcy of one client in the temping portfolio, that's all of course borne there. That doesn't help. But again, we have a role to play here. We're the number one and two in the Belgian market with also the [indiscernible]. We took our decisions and it shows in our profitability. And hopefully clients will come back once they see that there's also a different service to a different [price].

Chris Heutink

And Francois is working with the team on getting closer to market again.

Jacques van den Broek

Yes, we will get closer to market.

Operator

Next question is from the line of Tom Sykes of Deutsche Bank. Please go ahead.

Tom Sykes

Just firstly on the U.S. and France, you've been taking market share for a little while there. Are there any particularly large contracts that are driving that or do you think that you can continue to take market share in those two geographies? Then just on the MSP business and Sourceright in general, it looks like your MSP is spend under management up about 60%, maybe from a low level but up about 60% in the last couple of years. What are you seeing happening to the rates or the percentage of spend under management that you can charge-in in MSP and VMS? I know you've always said before it's not a profit center for you, but how do you see that changing? And then just on the profitability of the U.S., if this was answered earlier in the call. But you've gone from 2.8% to 4.1% over the last couple of years, but your revenue's only up about 8%. You have a slightly high gross profit movement, particularly this year are there any one-offs in the costs there? Or what are you seeing happening to non-wage labor costs that come into SG&A or gross profit, please?

Jacques van den Broek

Okay. Those were two questions, Tom, or 14?

Tom Sykes

It was kind of two rambling ones.

Jacques van den Broek

Yes, okay. Good. Well let's try to answer them then. Taking market share in the U.S., in staffing, we do it pretty much across the board, although certainly our in-house works well here. That's a double-digit growth certainly in 2015 and we're already opening quite a few new clients this year. So, you know the story. It also works well here, definitely not on price here. You can see our gross margin is actually quite healthily increasing in our staffing space. So, it's the ideal combination of taking market share and also having an overall higher margin, so very happy with that one.

On the French one, yes, it's both actually. We do -- so France, as opposed to the U.S., France already historically of course had quite a lot of large clients treated through the branch, and already for quite a few years now we were transferring them. But more and more we're also selling new clients. The concept is really liked, which is not a surprise in France given the cost of labor. So a concept which in-house is that ups the productivity of people and lowers the transaction cost is a very popular contract, a way of service, by the way, sorry. And secondly, when we transfer a client to in-house, we repopulate the branch with people who're going to work in the SME. We're also growing in the SME very healthily. So again it's a good combination. The margin goes down slightly in France, but that's not so much the result of competitive pressure; it's more the result of not subsidies, but the other way round, new healthcare costs that go into margin which is tough to offset. But then still overall a better return. So, quite happy with our situation in France at the moment, because the 9% growth comes at an 8% tougher comparable from Q4 to Q1, so that's quite impressive overall.

Robert Jan van de Kraats

And Tom on OpEx in the U.S., nothing atypical, so we see a regular trend in our OpEx, also in our non-wage OpEx, no relevant releases or additions to provisions other than the typical ones.

Tom Sykes

Okay. And how long can you continue to grow the EBIT at 20% organically on revenue of plus 3%?

Robert Jan van de Kraats

Yes, that depends on the distribution across the country. We've made this point before when we showed you the three phases of growth. Just the early stage, where the incremental conversion typically could be up to 70%, 80%, then the second stage, where we can grow a lot more with the existing base, branches and back office. And then stage three where we need to add to the branch network, IT expenses, back office and so forth. Well we're still in stage two. So we believe that we'll have some time to go with a relatively good incremental conversion ratio, but not north of 50%. It will be -- it is below at the moment and it will reduce a little further. But we still see opportunity for further operational leverage.

Jacques van den Broek

Maybe to elaborate a bit here, so we're very happy with our returns in staffing. We don't expect them to go up as a percentage of sales. We do grow a lot in firms, so our business mix within staffing is also slightly enriching, so that's good. But we're really betting on growth as much as we can. The other one is more business mix. So we mentioned that we're not happy with the growth rate of our professionals business. So our business mix and the growth -- the mix of our growth should become more towards professional. This is internally because the market is quite good, both in technologies and in non-tech profs. So we should improve here, which, from a market point of view, provides us with an opportunity. But I'm well aware of the fact that this is not the first time we mentioned this. So it's also not automatically going to happen in Q2, to be honest.

Robert Jan van de Kraats

And the ICR at this point in time in North America is north of 40%. If we're going to see increased growth in the professional space, that is a business, and we've mentioned this before, which comes in with a relatively lower incremental conversion ratio due to commissions and bonuses.

Tom Sykes

Okay.

Robert Jan van de Kraats

And we love it and we'd like a lot more of it.

Tom Sykes

Okay. Thank you for those. And, sorry, just MSP question? You've grown really rapidly in Sourceright in the last couple of years.

Jacques van den Broek

Yes, well that's actually an interesting question. And I'm not going to answer it isolated in MSP. So what we've done is we've regrouped our business in the U.S., which is of course still partly the result of acquisitions we did into one as we call it, talent solutions group. In this talent solutions group sits MSP, RPO. And the sales approach we have here is what we call integrated talent management. So the market in the U.S. is very siloed. So you've got MSP, managing contingent, going from neutral now to end up positive by the way, so that helps direct delivery, therefore the return on MSP. Not so much the fee we get for it but certainly the ownership of clients and market share of clients. And then RPO is also a different silo. Tom, you know the market well so you know that in the UK that's a different picture; it's more integrated. And certainly in Europe, where we are an early mover, it's also a far more integrated total talent solution. And indications are now in the U.S. that we see more and more our portfolio with clients going from MSP to RPO to RIS to RCS. So a very promising development here, which I think also favors the bigger players in the market, of which we're one.

Tom Sykes

And you see that more as a profit benefit now that you have the embedded client base that you can grow the market share with than you did before?

Jacques van den Broek

It's a good position to have, whereas we don't see the actual profitability within the fee-based MSP increase. But we do see -- because we sell it more integrated and we take the client along on this journey, we do see a better return and a better market share on the client overall and more services that we deliver.

Tom Sykes

Okay. Great. Thank you very much.

Operator

[Operator Instructions]. Next question is from the line of Peter [indiscernible] of [SMS].

Unidentified Analyst

I've got one follow-up on the Dutch transition payment cost that you recorded. Did I notice correctly that you said that this has 20 basis points' impact and that this 20 basis points will be there let's say, until this regulation stops?

Robert Jan van de Kraats

Yes. The 20 basis points of course will be there until this regulation stops probably. It's always difficult, of course. It has to do with the overall development of the mix. But let's assume this stays, but then of course in the comparison next year it will be out again because then it's a stable 2 basis points. So take it four quarters and then in 2017 we're stable again.

Unidentified Analyst

Okay. But still 20 basis points lower also for this year?

Robert Jan van de Kraats

Well not on a comparison, Peter.

Unidentified Analyst

No. Okay. All right. That's semantics. But [indiscernible] and this is something that really came to the fore this quarter, because I thought this regulation already started in July 1 last year?

Jacques van den Broek

Yes. But when it starts there's not immediately people claiming it so it has some time before it really materializes.

Unidentified Analyst

Okay. All right. Understood. And then with regards to the comments that Robert Jan made regarding M&A and a few acquisition targets that are currently available, does that currently already has any impact on your thinking with regards to cash remuneration to shareholders? I have to ask it, Robert Jan.

Robert Jan van de Kraats

No. No change. Healthy pipeline. Hopefully we're going to see a few transactions coming through.

Jacques van den Broek

And I hope our record dividend has been wise for you last month.

Unidentified Company Representative

Yes. Absolutely. That's been a good one. Those are my two questions. I think most of the other questions were already asked, so thank you very much.

Jacques van den Broek

Thank you.

Robert Jan van de Kraats

Operator, I think this was the last question. So I want to thank everyone for joining us in this call. We're looking forward to talk to you again on July 26 to discuss the second quarter results. Thank you. Have a good day. Bye.

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