Randstad Holdings' (RANJF) CEO Jacques van den Broek on Q2 2016 Results - Earnings Call Transcript

| About: Randstad Holding (RANJF)

Randstad Holdings NV (OTCPK:RANJF) Q2 2016 Earnings Conference Call July 26, 2016 3:00 AM ET

Executives

Robert Jan van de Kraats - CFO

Jacques van den Broek - CEO

Linda Galipeau - CEO, North America

Chris Heutink - MD, Randstad Netherlands

Analysts

Nicholas de la Grense - Bank of America/Merrill Lynch

Chris Gallagher - JPMorgan

Toby Reeks - Morgan Stanley

Tom Sykes - Deutsche Bank

George Gregor - Exane BNP Paribas

Marc Zwartsenburg - ING Financial Markets

Denis Moreau - UBS

Konrad Zomer - ABN AMRO

Rajesh Kumar - HSBC

Suhasini Varanasi - Goldman Sachs

Paul Sullivan - Barclays Capital

Hans Pluijgers - Kepler Cheuvreux

Robert Jan van de Kraats

Thank you. Good morning ladies and gentlemen. Welcome to the Q2 2016 results call. I'm here together with Jacques van den Broek and our other colleagues of the Executive Board and with Arun Rambocus and some other staff supporting us. We're going to discuss the Q2 results, Q2 a quarter which was the 11th quarter with mid or low single-digit growth, which is rather atypical if one looks at it in a bigger perspective. It feels like being in a hovercraft over the water for quite a while now. It's also a quarter where we've seen significant volatility in our stock price and traditionally that volatility has been much higher than the one we see in EBITDA. And if one looks at our cash flow, it's even less volatility. I'll take you through the presentation and at the end we'll move to Q&A.

Moving to Slide five right away which shows some of the details underlying our second quarter results with solid incremental conversion, so conversion from additional gross profit into EBITA. Revenues are up by 3% per working day, and please note that our second quarter is seasonally typically the better quarter compared to Q1. Typically, the third quarter is the best of the year and also typically Q4 is somewhere in between Q3 and Q2. So that would normally be the rhythm. Also please note that the comparables in Q2 are 1.1% tougher than they were in the previous quarter, so some impact from the comparables. Across the board we have seen growth in Europe in quite some countries, we'll get back to that and North America has been flat, so at 0%, and the rest of the world came in with 4% growth. If you look in the American markets, look at the BLS data in the month of May and it explains most of the development there.

Gross margin was up 20 basis points. Please note that we have been a little lucky in rounding it here, so this is an expression at the high end of what happened here. Underlying EBITA improved to 240 million. Foreign exchange had hardly any impact on the result. Here is the ICR for the last four quarters at 53%, the quarter itself at 50%. So that because we have a hard time assessing the world economy, as many of you will also have, so we respond to actual data every week in our branches, in our offices, and then we aim at converting 50% of the additional gross profit into EBITA and of course we aim at beating the market, be it in revenues or in profitability. Adjusted net income improved to 171 million with a good return on invested capital at 18% now. DSO improved again, 50.7 days, and please note that one day makes a difference of roughly €70 million, so it justifies our attention here. If you go back a couple of years, then this was in the high 50s and now we have arrived at the level of low 50s.

Leverage ratio of 0.7 now. This is always the highest quarter in terms of leverage ratio and in terms of net debt typically if the circumstances remain equal. In Q2 dividend was paid but also holiday allowances in the Netherlands and Belgium typically push up the net debt level. EBITA margin now, over the last four quarters 4.6%, and we've been rather busy in the acquisition space. Of course organic growth is our priority but strategically we do add acquisitions to strengthen our positions. We have absorbed in the first quarter an acquisition in the Nordics of profit which was then included for two months. Now it's included for the full quarter. We also have closed acquisitions in Italy of Obiettivo Lavoro and in Japan, Careo and twago, and these are going to come in, in the third quarter as from 1st of July. We have announced some additional M&A which relates to Ausy, a French based player which operates internationally. If you add it all up, the acquisitions that have been closed now and the one in the pipeline, then it adds up to €1.5 billion.

The last four quarters on Slide 6, we have seen stable mid single-digit growth, like we have seen in quite a few quarters before that, in total 11 now, and this shows the P&L, the 240 million, with an incremental conversion ratio underlying of 53%. Gross margin was up over the last four quarters by 10 basis points and our perm growth for this quarter 11% but for the last four quarters it stood at 9%. And the controlled growth of operating expenses by 3% organically resulted in this excellent incremental conversion.

Slide 7, you can see the regional split of our growth. Europe grew 4% which compares to 6% in Q1, and I'll get back to the various countries, but most of the growth we see in the segment with manufacturing, automotive, logistics. North America was flat at 0% compared to 3% in Q1, rest of the world 4% and the Group assets 3%.

North America on Slide 8, stable revenue but record profitability we note. Revenue stable, gross profit as well. Perm fees showed very limited growth, U.S. staffing and in-house came in at revenue growth 1% compared to the 6% in the previous quarter. And we are and we remain to work hard to improve our revenue growth in the professional space. Sourceright clearly improving, spend under management up now by 33%. Canada, a difficult market but we remain ahead of this challenging market by recording 2% growth. Again EBITA margin 6%. If you look at the slide, the right upper corner slide, it shows you the trend. If we look at the month of July we see a continuation in our volumes for the first two weeks of what we did see across the second quarter.

Slide 9, the Netherlands, good underlying growth but still suffering from the decline in the payrolling business, revenue at 3%. Now the loss of the government payrolling business we have discussed extensively in the Q1 call. It should start to fade out gradually as from Q3 but it will take a while before it's completely absorbed in the comparables. Perm is doing quite well, up by 18%, and our combined staffing and in-house businesses do show growth if one excludes the payrolling business of 8%. Our professional business also back again to double digit growth at 11%, EBITA margin now at 5.5% and we continue to work on our plans, as discussed last time to bring us back in the 6% to 7% zone. France. Growth impacted by strikes, especially in the distribution business, but a strong return at 5.9%. Revenue up by 4% now, professionals growing nicely at 10% and perm, please note that 37% growth. For the sake of customer profitability, we again have decided to reject certain opportunities because we felt these would not add value.

Germany on Slide 11, improving growth and profitability. It's nice to see our SME business now outgrowing our large clients. I would say this is a direct result of tight activity based field steering and it comes through nicely. The 5% growth that we see is mostly volume growth. So that is I would say confirming the fact that this is rather solid. EBITA margin now at 5%. That's the result of good operational leverage. Belgium, further improvement in profitability to 6.3%. I would say that's a pretty attractive level, revenue now minus 2%. This is the staffing and in-house business. We suffered somewhat from the situation at the Brussels Airport because we have significant business in that space. Gross profit improved by 4% which is the result of a strong focus on client profitability. The gap with market in terms of revenues was reduced somewhat. Iberia, improving margins while continued growth, 5% now. In Spain it's clearly a challenge. Customer profitability and creditworthiness of our clients is leading our selection here. Professionals gross profit was up by 13% and the perm growth was 42% like in other countries the result of a very specific strategy. Also our Portuguese business improved by 5% especially the gross profit has improved, also customer profitability being a key focus in this market.

The UK. Brexit impact limited so far. Of course this was late Q2. It's rather difficult to identify any direct impact. At best we have some anecdotal conversations or evidence with certain clients but nothing really significant so far. Revenues at 0% compared to 1% in the previous quarter but our EBITA margin has improved to 3%. Please note that this is a rather specific market. We also discussed earlier today the fact that in the UK we have twice as many staffing operators in the market than in the U.S., whereas that market has five to six times as many people living in it. So, clearly a fragmented market with quite some competitive pressure. Our business in the UK has been adjusted over the last couple of years, less exposure to the manufacturing segment, good exposure for example also to education and care. On the whole, the impact of the UK to the Randstad Group is less than 4% of revenues and 2% of profit. In other European countries we do see continued growth in those markets, especially Italy. We've been busy with acquiring but at the same time we've been very busy in expanding our business organically, and I would say successfully. Also in the perm and specialty space we do see interesting growth. Switzerland it came from a low point last year.

Q1 already 5% growth and now back at 10% in the second quarter. Poland also a good indicator always, growth at 13% now. And in the Nordics we do see good work on the integration, it's well on track, and our Finnish business, which came with the acquisition, has been transferred to a Finnish player with whom we have now entered into an exclusive partnership to serve our clients also in the Finnish market. EBITA margin improved in this space to 3.9%. So across Europe we do see good growth in most of the markets. The rest of the world also mid single-digit growth at 4%. Japan improved to 4% with excellent growth in the perm space, 65%. It shows what an opportunity it is and how it works out if you focus on it. Australia and New Zealand 4% growth now, but more importantly the perm space showed growth of 26%. Overall in Asia we did see 4% growth. Latin America up by 6% but good focus on profitability here which you see in the final bullet here, 1.9% EBITA coming out of it now.

Moving to Slide 18 the P&L which effectively puts it all together, so all items have been addressed now, integration costs and one-offs related to some M&A, and restructuring relatively limited. The rest is rather standard.

So moving to Slide 19, where we have the performance by segment. Finally, professionals in the lead here with 5.8% return, as it should be. In staffing we're led by a focus on customer profitability here and that very often results in changing delivery models, be it in-house or central delivery, now coming in at 4.8% EBITA margin. In-house we continue to see transfer of clients from staffing also to in-house here to ensure the right delivery model is offered, and an excellent return at 5.2% I would say. And professionals, good focus on IT, finance and accounting and engineering paying off here. Gross margin bridge, to explain the jump from 18.7% to 18.9%. At the beginning I already elaborated on the fact that this is also a rounding, but this effectively puts it all together, what we have said before. The temp business mix helping us here, M&A profits being added with a slightly higher gross margin, the perm business 11% now which is now just north of 11% of gross profit and just north of 2% of revenues, so expanding nicely. And then in the HRS box you see the impact of the Dutch payrolling business.

Comparing our OpEx sequentially, so from Q1 to Q2, some changes, FX slightly which was almost the same at the gross profit level, so at EBITA it was only an impact of roughly 1 million negative. M&A is the addition of Proffice mostly. This is three months rather than two months included now. Marketing, the typical seasonal pattern, we spend more always on marketing in Q2 because business volumes are higher than we do in Q1. And then growth related investments in people, in the field organizations, in the EU. Moving to the balance sheet of Randstad, net debt grew at 634 million, leverage ratio 0.7%. If you look at operating working capital here, it reflects growth, net tax assets are lower. That's partly explained by the opening position last year, some specific issues, and it has reduced mostly because of the fact that we have used the American net operating losses. I mentioned already DSO. Solid working capital at 4%. This is the high point and throughout the year it will reduce to 3% again. And the return on invested capital, almost 18%. Our free cash flow rather standard again. Investments in operating working capital, this is typically a negative quarter due to the fact that dividend is paid. So nothing further out of the ordinary.

Moving to the outlook for the full year on Slide 24, organic revenue growth was 3% in Q2. In June revenue grew by 2% and the volumes early July indicate a continuation of the Q2 growth rate. If I'm going to share now an indication of the June exit rates with you. In the Netherlands that came out at low single-digit, France mid single-digit, in Germany mid single-digit, in Belgium it was down low single-digit, in the UK it was close to flat, Iberia mid single-digit, North America flat, rest of Europe high single-digit and the rest of the world mid single-digit. So that's on the exit rate. We do anticipate the Q3 operating expenses to remain more or less stable sequentially on an organic growth basis -- on an organic basis, and this should be typical to the trend that we see in the month of July in our volumes. As of Q3 the acquisitions of the Italian company, Obiettivo Lavoro and Careo in Japan will be added so that should be included in your spreadsheet. And we do not see a material working day impact for Q3.

So that concludes what we believe should be elaborated upon. Now time for Q&A. Operator, up to you?

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is from Chris Gallagher from JPMorgan. Chris please go ahead.

Chris Gallagher

[Indiscernible]

Robert Jan van de Kraats

I think we answered it already.

Operator

Next question is from Nicholas de la Grense from Bank of America/Merrill Lynch. Nicholas please go ahead.

Nicholas de la Grense

Just one quick follow-on from the exit rate comments you just gave and then a couple on M&A. So obviously the June exit rate was a bit weaker than the volume trends in July. Were there any -- and you've just given us the June exit rates presumably by region -- were there any regions where there was a big difference between the exit rate and July that we should be aware of? And then the other questions on M&A. Obviously it's been a very active six to nine months. Can you talk about what the pipeline now looks like and whether the recent market sell-off is actually helping or hindering progress there? And then I wonder if you could elaborate a bit on the recent Ausy acquisition, particularly in terms of the bench risk that you're taking on there, because my understanding is that the majority of your contractors there are going to be on your permanent payroll, so what that means for margin volatility et cetera?

Jacques van den Broek

On your -- so June was a tad lower, mostly because we saw that in France many people were not able to get to work in May but also to a lesser extent in June. We estimate this revenue and it turned out in June that in May people just worked less hours. So underlying the trend of France in revenue will be slightly stronger in July than it is in June. The second effect was in Belgium where we mentioned the fact that in June more May than June but also the Zaventem Airport opened up more fully for business, so that will help. So those are the two outliers in June. On Ausy, yes sure, on the one hand this is a business that has bench risks, on the other hand we're working with people which are very hard to find who have unique capabilities. Francois and I spent quite some time coming up to this acquisition meeting with people so we're very confident that this will be a very strong business for us where the risk is more how do we find more people to do the work than the bench risk as such, which is the name of the game. If you look at the earnings of this company, they are very able to manage these bench risks.

Robert Jan van de Kraats

On the pipeline for M&A and the process of Ausy, we're now going through the formal approval steps with Ausy. That takes time and that will result in the process taking a couple of months to finalize. So we'll see how that goes. On the rest of the pipeline, we've done quite a few transactions, but it doesn't mean that we'll continue this rhythm. We are looking at strategic additions that are relevant to the company. I would say the limitation that we clearly set ourselves is the leveraging of the balance sheet up to two times EBITDA, and I would say size should remain small to midsized, nothing sort of moving in terms of size. I hope that…

Nicholas de la Grense

That does. Just a clarification on the balance sheet point. Does the deteriorating macro make you slightly more cautious than you would otherwise be in terms of taking leverage up to two times or are you not concerned about that at this stage?

Robert Jan van de Kraats

Well, that's an interesting point which of course we elaborate on ourselves and also in the Board. We have gone through severe testing in the past and we've built in a lot of flexibility. You might remember our capability to reduce our costs by 30% in six quarters in 2009. So, we really have the whole toolkit available, so we've tested ourselves against various scenarios and we do not see any scenario which will bring us into any sort of sensitive zone. Our agreement with the banks allows us to go up to 3.5 times, and following a significant acquisition, we even can go up to 4.25. So, we are rather comfortable with all the scenarios that we have looked at. And given the experience of 2009, we've looked at serious scenarios, I tell you.

Operator

Our next question is from Chris Gallagher from JPMorgan. Chris, please go ahead.

Chris Gallagher

Hello, good morning. A little bit on North America. You've seen staffing slow there. Is there any sectors or regions specifically? And if you strip out Sourceright where MSP was up a lot, how does that change that number?

Linda Galipeau

Yes. We…

Robert Jan van de Kraats

Linda coming in.

Linda Galipeau

Yes, hi, good morning. This is Linda. In terms of the sectors where we've seen slowdowns, our RIS business for the last has been growing well above market. I think they're still above market but we have seen the volumes moderate quite a bit. It seems to be stable, April was very strong, May and June were a little softer, July it's too early to tell but the volumes seem certainly not to be deteriorating. But certainly it is the blue-collar sector in RIS where the growth levels have been much more moderate than they have been over the past years. In terms of Sourceright, yes our MSP business is way up. Our payrolling business is also doing well. Our RPO business is having a bit of a tough year. This is largely related to a couple of large customers, so it's not an overall weakness or loss of new program wins, and the underlying business remains very strong, we have a couple of large clients whose volumes were quite down this year and that is causing some pressure in the RPO revenue line.

Robert Jan van de Kraats

So maybe as an add-on to the MSP business, the fact that the spend under management is up 33% is mostly due to new wins, not as much to do with the market as such. We just manage more programs than we had last year at the same time.

Chris Gallagher

Okay, thank you. How do you think then your competitive environment in terms of RPO and MSP because I think one of your competitors spoke about quite a successful period in Q2 in terms of wins in RPO? Do you think you're a better offering in MSP, RPO or is it just simply a movement in a very short period of time and difficult to read much from?

Linda Galipeau

Yes, no, I would say we've had a tremendous win season, so we've had lots of wins in RPO and in MSP and again the RPO number is really related to a real tough comparable to large customers last year. So it's not reflective at all of the health of the business and certainly wins remain strong probably at their highest levels ever I would say.

Chris Gallagher

Okay.

Unidentified Company Representative

Sorry I just want to ask you, can you limit yourself to two questions to make sure that we address everybody's questions?

Chris Gallagher

Well, with that in mind I will not ask the next one. Okay, thank you.

Robert Jan van de Kraats

And I'm just adding one comment on the M&A. I don't anticipate that the balance sheet will be leveraged up to 2 times EBITDA at the end of the year. That's not the speed we do anticipate. And just to give you a little more clarity here, the size of the acquisition of Ausy I would say is the higher end of the range, so mid-size to small, that means €100 million or so. You've seen the Japanese one up to the size of max I would say, €0.5 billion in that space and then we do not expect to see the balance sheet leveraged fully to the level of 2.0 times at the end of the year, just to give you some guidance here. Please continue the Q&A.

Operator

Our next question is from Toby Reeks from Morgan Stanley. Toby, please go ahead.

Toby Reeks

Two if I may. The first is on your expectations for Q3 SG&A which you expect to be sequentially stable on an organic basis. Usually wouldn't we from a seasonal perspective expect it to fall sequentially?

And then the second one is on the U.S. You've been outperforming in the U.S. due to the in-house business. You're now tracking below the market, in-house has slowed from 6% to 1%. What's the outlook there just around that in-house business in the U.S. please? Thank you.

Robert Jan van de Kraats

The typical pattern from Q2 to Q3 is that Q3 is the stronger quarter and typically that goes with slightly higher expenses, but given the current development that we have discussed, we anticipate it to be close to flat. And by the way, let me also address the M&A side of it. Adding the companies as from July 1 means that we do anticipate to see our cost base going up by roughly 15 million for the quarter related to those acquisitions.

Toby Reeks

Sorry, 15 million, yes?

Robert Jan van de Kraats

Yes, one-five, correct.

Linda Galipeau

Yes, on the U.S., I'm not sure I understand the categorization of below the market. I think we are in line to slightly ahead. Again, we have to see how our like-for-like competitors come out but based on reports so far I don't think that's how we see it. What's very interesting is the in-house business and our general staffing, again very strong comparables. It is definitely still above market, it's just not as far above market as it is. Where we see the pressure is in our branch business. So our traditional local branch business, particularly in the O&A sector where there's very little structural growth, if anything it's going a little bit the other way, so that's our white collar clerical business, and that's probably where we see the most pressure. On the professional side we do see good growth in our in-house professionals business, which is very interesting. So the type of skills that we are servicing through in-house is broadening and we do see quite good demand there and demand that remains very healthy.

Operator

We have a question from Tom Sykes from Deutsche Bank. Tom please go ahead.

Tom Sykes

Just on Belgium, would you be able to just say perhaps excluding what unfortunately happened in the attacks, what's happened to the industrial business in Belgium please? And then could you maybe give us an update on the Netherlands as to when you -- what's actually happening gross profit costs when you think the effect of the payrolling business will be less pronounced at the EBIT level please?

Jacques van den Broek

Yes, on Belgium, the attacks have not had any material effect on the blue-collar business as such. What we do see is we're quite sticky on the business we get. As in any market, but also in Belgium, it's quite easy to grow through low margin blue collar business but if it's really just a procurement play then we normally don't play, so that has an effect. As such, the Belgium market is still in good shape. We're still slightly below that market, partly deliberate as you see in our profit development but at the same time we also think that our Belgium business can still grow, a bit faster in SME as we see in France, as we see in the Netherlands, as we see in Germany. So we're very happy with our Belgium business in general, we're not so happy with their commercial performance in the SME space. So that's one thing we're still working on, the market as such we think it quite good. The Dutch market, well, the payroll business plays on two elements, both top line, which we will weed out over this year, but also the leverage in this business is quite high. So we are growing again, against the curve. We were very strong in the government business in payrolling and we're now growing into the private sector. So we do expect this business when the comparison weeds out into '17 to be a growing business again, but smaller in the total portfolio. So it will still have a dampening effect on our overall profitability in the Dutch business. So it is something we need to deal with, for example by growing our perm faster, which 18% growth in this quarter definitely helps and we see a lot of upside potential there, for example. We'll probably update you, as we've done last year, more elaborately on our important markets in the capital market day. But we'll keep you abreast of things.

Tom Sykes

But when you consider that you're growing against the curve as you say, in the private sector, your professional is doing quite well. Your overall top line is obviously going up but you seem to be getting a little bit worse leverage now than before in the Netherlands. Is pricing incrementally -- how would you characterize the pricing market there in the Netherlands?

Jacques van den Broek

Pricing, Tom, is as we said, it's tighter. We've seen, let me call it very creative pricing from USG presenting itself as a to be bought company last year and it's quite evident in their margin and results development. Let's hope that the Japanese owners don't like that, given the price that they paid probably the money still needs to come out. So we're happy that they will see that. We see for example the European Commission being involved, at a very low margin coming back to us in Belgium, might be an early sign. But all in all we do see, if you look back to 2008, 2009 and you've been also looking at the sector for a long time, there is commodity in margins, commoditization in margins, which we offset with our delivery models, as Chris presented last time. So there is this shift, yes, but we're confident as we mentioned before, that we can still get good and above Group average profitability in our Dutch business.

Operator

Our next question is from Paul Sullivan from Barclays. Paul, please go ahead. We've got George Gregory from Exane. George, please go ahead.

George Gregory

Good Morning. I wondered if you could maybe just clarify a few points on the deals. So firstly, the dates of consolidation of both Lavoro and Careo and also perhaps you could provide us with some high level numbers of Careo, please. Thanks.

Jacques van den Broek

Well, I mentioned this before, consideration as from the 1st July, revenues together roughly close to €500 million. Just note that €400 million is the Italian acquisition and profitability of the combined businesses, I would say just below the Group average for now but with the potential to clearly improve. That's why we were very enthusiastic about these deals.

George Gregory

Okay. And the so just to clarify around Lavoro, you said around 400 million. I think Lavoro did 436 last year. Is that down or was that just the rounding?

Chris Heutink

Lavoro is in a growing market now a bit flat, although the Italian market is also not as exponential as it was. Although, we as Randstad had growth in May of 70% so we are clearly outperforming the market. But you will see a bit less of revenue because we will divest a few of the foreign activities of [indiscernible] Lavoro. So, it will not be the 400 million, it will be a bit less because [indiscernible].

George Gregory

Okay, and sorry, just your point on the profitability, I missed that point.

Jacques van den Broek

This was Chris, by the way. He is responsible for the Italian business. And the combination, that's exactly where we see part of the synergies is that our track record in growth will support the expansion of this, the newly acquired business. That's the ambition. And in terms of profitability, I made the point that the acquisitions together come in just below the average of the Group profitability with the potential to clearly catch up.

Robert Jan van de Kraats

And just to give you a bit of meat on those bones, we acquired in 2013 USG which was roughly 20% more in the Italian market. It came in at 1% operating profit or less, while look at our Italian business today. So, there's a lot of synergies, head office, branches, that sort of thing, you shouldn't expect anything this year. So we will start recalibrating both businesses as of the beginning of 2017.

Operator

Our next question is from Marc Zwartsenburg from ING. Marc, please go ahead.

Marc Zwartsenburg

Yes, thank you, good morning all. Two questions from my side. First of all, could you give an indication on the comparison base with July over September last year, because my feeling is that the comps are getting a bit easier. And also maybe Linda, can you give a bit of an indication how your blue-collar or in-house is trending into July? Do you see there some stabilization bottoming? Any feel for that will be great. And then the second one, since the M&A pipeline is more small to midsized acquisitions generating quite some cash, is it already a topic in the Board? And could you perhaps give a bit more flavor on what you would do in case the market goes down to say mid-single-digit decline and that your EPS goes down to less than last year? Would it then be logical to assume that maybe on the dividend you might provide some support and keep it at least steady versus last year as a sort of floor? Is that anywhere in the cards for next year? I know it's early but if you have any flavor on that, that would be great.

Robert Jan van de Kraats

You're always early, Marc. You know we have -- I'll take that question and the one Q2 -- Q3. We have a dividend policy which is -- which describes that up to 2.0 times the EBITA we have a policy that pays out cash with an option to take stock. If we get north of that we'll promote stock, and if we get north of 2.5 it will be stock. That's the policy we have and within that policy we'll make choices. Last year, on the dividend over last year we decided that given the very low leverage ratio it should just be cash. But I think the policy sets the sort of the framework for a good decision going forward. So most likely with circumstances as they are now and trends as they are now, we'll be clearly below 2.0 times EBITA, and that will bring us to the standard policy, which is cash as a default and optional stock dividend. Your question on Q3. Q3 last year showed a growth which was slightly lower again and so Q2 was at peak last year compared to Q1, it went up. And now Q3 last year was lower again by just a bit more than 1% and throughout the quarter last year was kind of stable at the same level.

Linda Galipeau

On the U.S., Marc the RIS business is off to a pretty good start, actually going into July. It's a bit of a tricky comparable though because of the movement of the movement of July 4. So we have two weeks and again the numbers make us quite hopeful, but with the July 4 there it makes it quite tricky. The other thing to know about the U.S. is I would say we're at the most challenging recruiting market we've seen in a long time. So there's a demand side which remains still quite good, but a supply side where we're definitely working to up our recruiting game, because I would say that on the supply side it's [indiscernible].

Marc Zwartsenburg

But given the strong BLS data in June and your comforting statements on July, it seems that things are getting at least not worse. But now I see that the ASA, and in the American Staffing Association, they've been looking at it [indiscernible] and then the other. Now that one is trending in the other direction, so how would you read that?

Linda Galipeau

Yes, I know the data is a bit schizophrenic. I think if you add it all up it comes out looking a lot like our numbers, it looks pretty flat. Yes, I think it's all over the place right now but we'd just read it as a flat level.

Jacques van den Broek

Maybe to elaborate a bit on what Linda was saying, this is the, call it the negative effect of a positive market. So because of the relative scarcity in profiles people are tough to find, we do see a tendency that clients hire people quicker. So it means that our order duration goes down a bit, so that as we need to work harder to keep up the volume growth. So that's an interesting one.

Robert Jan van de Kraats

And the perm business still remains.

Jacques van den Broek

Yes, sure.

Operator

Our next question is from Denis Moreau from UBS. Denis, please go ahead.

Denis Moreau

My first question relates to France and to more specifically the automotive market. I'd like to know how big is this market to you and if you see any signs of decline at this stage. Peugeot has mentioned some reduction in their production plants from September, so I'd like to know if you see an impact of that now. And my second question relates to the acquisition of Ausy. I'm aware that you can't say much given the bid underway, but M&A has been a critical component of the strategy of this Company and so I'd like to know how much capital you plan to allocate for this Company for its own M&A action. Or do you expect them to grow faster than in the past on the M&A side or at the same pace? Some color on that could be helpful.

Jacques van den Broek

Now, first of all, on automotive, it's an important sector, probably 10% to 15% of sales. And Peugeot has announced that they will have -- they will close their plants for two or three days I think. Good news for us is that Peugeot isn't a client. Well, sometimes you've got good news when you don't have a client, and they're not really in the high margin, to put it mildly. But anyway, apart from that, definitely Ausy as you've seen has been acquiring companies, which we do think is part of their DNA which we find attractive, certainly because these businesses are businesses which are in what they do with their core business is a bit new to us. So we will definitely allocate opportunities to them to buy. Having said that we will first concentrate on organic growth for Ausy because as a company, a mid-sized company they needed to do two things. So they bought, invested and also needed to pay it out of their own cash flow and growth. So that's tough to balance. So for us, first organic growth and then afterwards we'll concentrate on acquisitions again but we're probably talking through '17 to make this change. So this is a bit early to say, and then, honestly speaking, we will not of course divulge externally the kind of money we would give them. They would just be looking for good deals and then come to us, and then once we do a deal we'll inform you.

Robert Jan van de Kraats

And we'll have the same financial discipline as we do for any other deal.

Jacques van den Broek

Absolutely.

Operator

Our next question is from Konrad Zomer from ABN AMRO. Konrad, please go ahead.

Konrad Zomer

I have a question on your professionals business, which I think delivered a very strong performance in the second quarter. Could you rank for us what countries had the biggest contribution to your overall 100 basis point margin improvement in the second quarter, please?

Jacques van den Broek

Well, a very strong business, certainly France. So, in France our Appel Med business grew a lot, as our medical business grew a lot, certainly in perm but also our Expectra business delivered a very good performance. Our Dutch business is also quite solid, you see the turn in perm in our professionals business in the Netherlands, which helped. And in general, we do see our European business, we put our businesses, our European professionals businesses together in what we call a community. That definitely helps to talk about where to grow, how to grow. So, we do see some early signs of improvement here and I'm very happy, and thank you for the compliment, Konrad.

Konrad Zomer

Okay, my pleasure. The second question is on the professionals business by segment. Can you tell us about the Dutch market in particular, what happened in your engineering business, in your IT business and in your finance and accounting business, just in terms of growth and margin development?

Chris Heutink

Okay, I will give you. This is Chris, by the way, Konrad. If you look at engineering, it's more or less a kind of a flat market. We are a bit below, it's always something to do with our comparables. Finance is probably for us it's in Q2 a plus 5% market more or less, or our results are [Indiscernible] performance. The market is also growing, probably at the same pace or a bit higher. When you look at the ICT, which is the biggest growing market in vertical, we are growing at 25% where market is close to 20%. And there is another vertical which is exponentially growing, that's the legal and the social domain sector where there's a shift of course from central government to the local government in the Netherlands and we see a lot of growth there, also high double digit.

Operator

Our next question is from Rajesh Kumar from HSBC. Rajesh, please go ahead.

Rajesh Kumar

Hi, good morning. Just following up on your commentary on North America earlier, you said people are getting a bit more tougher to find. Have you seen any impact on the gross margin as a result of that?

Linda Galipeau

Where you see actual wage pressure, which is where the gross margin would be impacted, it's certainly in the blue collar sector. We have seen some wage inflation in the blue collar sector but we have also instituted parallel price increases. So, we are not seeing any margin erosion as of yet, nor are we seeing any great margin expansion. So, I would say that we are making sure that bill rates and pay rates fluctuate in a mirrored way, I would say.

Rajesh Kumar

Sorry, that's almost counterintuitive. If it is more difficult to find people and you are a staffing company, you should be charging higher prices. Why would anyone expect price erosion?

Linda Galipeau

I think I'm going to hire you to go to talk to many of our customers because I think that's a very helpful point of view and one we share. Yes, no, you make a very good point.

Rajesh Kumar

Okay, and just to follow up, for September, could you just give us some color on the shift patterns, what we know as of now?

Robert Jan van de Kraats

For September?

Rajesh Kumar

Yes, as in you would have some indications from your client what shift patterns they are looking to put in place.

Robert Jan van de Kraats

Someone told me once, if you listen to your clients -- if you don't listen to your clients you go bankrupt, if you listen to your clients also. So they are in the same uncertain environment that we are and planning for September is very early days. It's the end of July. September is always a reset so no, there is no comments here. Visibility is fairly limited, it is normally certainly in this time of year and also in these environments, so no, sorry no color for September.

Jacques van den Broek

We have organized for this so we don't really have to think about it too long because we respond to actual data that we get every week. So that with our flexible structure, that allows us to get the most out of it rather than plan well in advance for this.

Robert Jan van de Kraats

Figures probably will be wrong planning it.

Operator

Our next question is from Suhasini Varanasi from Goldman Sachs. Suhasini, please go ahead.

Suhasini Varanasi

Hi, thank you. One question, it's on Netherlands, please. You mentioned that you expect payroll impact to actually fade out slowly from Q3 but if I'm right the impact started in Q1 and probably annualized in Q4. So are you may be getting some positive benefit from somewhere else, which is why you're seeing the fading out? And perhaps can you remind us, what is the actual impact from payroll in Q2? I think in Q1 you mentioned it was a 7% impact to staffing and in-house. Thank you.

Jacques van den Broek

Chris is looking at some details but before he does that, my remark was that it gradually will fade out as from Q3 onwards.

Chris Heutink

So to remind you, it started in the second half.

Suhasini Varanasi

Of last year, okay.

Chris Heutink

Last year. I'll just take the…

Jacques van den Broek

He's moving closer to the microphone.

Chris Heutink

It started actually in the end of in the third quarter, sorry of 2015. We will see it all over the year, because we mentioned in Q1 already that it will be an impact of more than 100 million in terms of revenue, with a high leverage on EBITA. So that's I think you will see the FX still in 2016, of course in 2017 it will change in terms of comparables. We do see what Jacques was mentioning, that we are getting some new contracts in the more private sector but this is not offsetting for sure not this year, the decline in the public.

Suhasini Varanasi

Thanks, and perhaps just one follow-up. Could you remind us what the impact was from government payroll in Q3, Q4 last year?

Chris Heutink

I don't have it here right now.

Robert Jan van de Kraats

The total…

Suhasini Varanasi

Okay, we can follow it up later.

Chris Heutink

I'll take it offline, Suhasini. Give me a call after.

Operator

Our next question is from Paul Sullivan from Barclays. Paul, please go ahead.

Paul Sullivan

Hello, can you hear me now? Hi, good morning everyone.

Jacques van den Broek

Yes.

Paul Sullivan

Just a very quick follow-up on the acquisition contributions, profitability overall is broadly in line with the stuff you're going to consolidate in Q3. Does the same go for gross margin? Do you anticipate any sort of gross margin impact from M&A in the third quarter? And then just on Germany, maybe you can provide a little bit more color on what's driving the good growth there and I'd be interested to know whether you're starting to see any benefit from the migrant inflow we've started to see in the country over the last six to nine months.

Jacques van den Broek

On the M&A, the acquisition I mentioned before, it's going to come in with somewhat below average profitability, so relative to the Group returns but with the potential to catch up. I would say at the gross margin level the Japanese business is clearly in a higher segment as a result of which it comes in with a higher gross margin. The Italian business with somewhat lower gross margin. So most, or the biggest part of it comes in with a slightly lower gross margin, and again it's adding 15 million, one-five million, to the cost base in Q3. [Indiscernible] the other question was?

Robert Jan van de Kraats

Germany.

Jacques van den Broek

Oh, Germany, yes. Germany, as Robert Jan alluded to, we now see a net -- yes, I think if ever, the first time that SME is really seriously outgrowing larger clients. By the way, you should take into account that SME is then the German, how do you call it, abbreviation, so this is nearly small, small companies. We -- historically we've always been a large client business, like really big internationals, automotives. We're now moving to actually a big sector of the German economy, which is really family owned company, mid-sized companies in local areas, which is definitely due to the fact that we upped our sales with 20% to 30% in terms of calls and visits per consultant. It took us a relatively long time but of course it came from nowhere honestly speaking, so one and a half years we saw the early effect second half of last year and it's now really coming through. So that helps a lot. I know Robert Jan said most of the 5%, the larger part is actually volume development, so very happy there with our German performance. Inflow of migrants, not really.

Operator

Our next question is from Hans Pluijgers from Kepler Cheuvreux. Hans, please go ahead.

Hans Pluijgers

A couple of questions on the U.S. I understand your average contract duration is coming down somewhat, and can you give some feeling as to where you are in the cycle with respect to the average duration? And secondly, how far away from peak and/or a trough? And secondly, do you see any [indiscernible] structural changes in the average duration of contracts?

Linda Galipeau

Yes, I'm not sure where your duration question is coming from. I don't think we've seen any duration change.

Jacques van den Broek

I mentioned the fact that people are getting hired quicker by our clients.

Linda Galipeau

Oh, that's right.

Jacques van den Broek

So our order duration goes down and we need to work harder. We don't work with mathematical models to say where we are in a cycle, Hans. We're at peak penetration in the U.S. as opposed to Europe which is still 15% below peak. So we might go into new things, we don't know. What you do see is stabilization currently as we mentioned, of the growth in the U.S., so that's what we're seeing.

Robert Jan van de Kraats

Operator, I think this was the last question. So ladies and gentlemen, I want to thank you for participating in this call and we're going to end it now, and we're looking forward to again see you or meet you or at least talk to you in the next couple of months, and we'll have the Q3 call planned for the end of October, 25th of October. Thank you so much. 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!