Randstad N.V. (RAND) Earnings Call Transcript

Hello, and welcome to the Randstad Q2 2026 Results Conference Call and Audio Webcast. [Operator Instructions] I will now hand the word over to Sander van't Noordende, CEO. Mr. Van't Noordende, please go ahead.

Thank you very much, Elba, for that kind introduction, and good morning, everybody. I'm here with Jorge and our Investor Relations team to share our Q2 2026 results. I'm proud of our team's continued execution of our Partner for Talent Strategy. As we accelerate our transformation, it's delivering a strong foundation for growth. As a result, our overall revenue growth is picking up, delivering 1.9% organic growth for the quarter. Together with our strong cost and productivity focus, this has resulted in a solid performance with revenues of EUR 5.9 billion and an EBITA of EUR 182 million, improving 8% year-on-year and representing a 3.1% margin. We are experiencing a strong uptick in the U.S., especially in our operational segment. Also, our business in Southern Europe remains strong, and it's very encouraging to see both Germany and the U.K. back to growth. This overall positive momentum is largely led by increasing demand in large clients. And furthermore, we're seeing our permanent digital and professional markets stabilizing further across the board. We observed that in the current business environment, clients increasingly favor flexibility. Volume trends have improved through the quarter with continued progress in early July. And our focus on delivery excellence enables us to capture increasing demand, and it gives us confidence as we look to the quarter and the year ahead. As we progress through the year, our partner for talent strategy continues to gain traction. Our focus on specialization is clearly paying off. Through our 10x10x10 initiative, 10 deals of greater than EUR 10 million in 10 markets, we secured EUR 1.3 billion in new client wins in the first half of the year. If we look at our specializations, we see that our Operational business is capturing the broader recovery in industrial and manufacturing activity in line with rising PMIs. We see strong demand for skilled trades, for example, through client wins in the AI and data center sectors. E-commerce and logistics also remained strong, up mid-single digits following new volume wins with major European players. In Professional, we are seeing sequential improvement. This is driven by strong health care growth in key markets like the Netherlands and Italy. Meanwhile, targeted investments like, for instance, in Japan and the U.S. are building solid momentum in engineering. In Digital, we are streamlining our portfolio and have signed a partnership with LTM. We are pivoting the business to AI talent that is, of course, in high demand. We have made good progress with our digital marketplace Torc, resulting in 50% lower recruiting cost and 50% shorter time to fill. In Enterprise, our strong pipeline is converting into results, driving 7% RPO growth. We also secured several major MSP wins across life sciences, manufacturing and semiconductors including a significant global partnership with immunology leader argenx. As we execute our strategy, we're making a deliberate shift to structurally reduce our cost to serve and become a more profitable company. At the heart of this is delivery excellence and the rollout of our talent service models. Over 50% of talent validation is now handled by our talent centers. This takes out friction and drives an increase in talent per FTE. Doing more with our existing teams is how we drive structural profitability. Through our digital marketplaces, we facilitated 1.7 million self-scheduled shifts in Q2, which is up double digits sequentially. There's a clear reason why adoption is increasing. Talent and clients just love the digital model. Talent jumps on the app immediately because it makes selecting shifts and ensuring they get paid incredibly easy. For clients, it's a better value proposition, higher fill rates, lower no-shows since talents choose their own schedules and strong compliance because every movement is recorded digitally. It's a completely modern experience where clients can easily reorder and manage their demand instantly. However, technology and delivery centers are just the engine. Our people are the ones driving it. We are the best team in the industry and our ranking as the #1 HR service provider in the Dow Jones Best-in-Class Index proves it. So I'm incredibly proud of their commitment to serving our clients and talent. In summary, we are running a leaner, more productive business, which puts us in a strong position to capture demand. Jorge, over to you.

Thank you, Sander, and good morning, everyone. So, I think, overall, I'd like to start by saying we delivered a quarter in line with our expectations. Trends are improving, perhaps more importantly, broader and profitability is also up year-over-year. From a business environment perspective, manufacturing and new order PMIs continue to be in expansion territory with large clients planning their demand. Simply said, we have more people at work today. Despite facing tougher comparables, we are seeing a broader than until now step-up in growth in many of our markets. This pattern is consistent across temp, MSPs, where we orchestrate the contingency and incremental work spend of our clients and RPO, spanning both our operational and enterprise specializations. And indeed, with most of our countries in revenue and gross profit growth, the scalability we've built into our operating model and the structural reduction in direct costs is starting to show financial gearing. In practice, we have captured incremental seasonal demand without adding any new capacity. And overall, this shows now in our recovery ratio of over 80% over the last 4 quarters. And this gives me confidence in our ability to show progress for the rest of the year in both revenue and profit growth. But let's deep dive and let me now turn to the regional performance on Page 8, starting with North America. In North America, volumes continued to increase throughout the quarter with strong exit rates in our industrial sectors annualizing and accelerating growth over growth. In Operational, we grew 13%, now growing for 6 quarters in a row, ahead of the market with large clients dominating the early recovery. With its double-digit profit growth of 20%, this starts showing the power of our new model of central delivery and the digital marketplace. Professional is still down 6%, but improving sequentially, as you heard from Sander, with pockets such as perm and engineering already in growth. In Enterprise, the pipeline we discussed early in the year is starting to materialize, and we are back to growth. Digital is still down 3%. Trends are slightly improving quarter-over-quarter. Canada is a pretty good mirror of the United States, back to growth with strong momentum in operational. And overall, our North American EBITA margin was 4.2%, up year-over-year and delivering absolute EBITA growth. And now let's move on to the major European markets on Slide 10 (sic) [ Slide 9 ]. In our major European markets, we see broad-based sequential improvement. Let me start with the relative outlier, the Netherlands. Organic revenue here was down 1% as the market is finding its new equilibrium following the implementation of the new CLA. Volumes in the market have stabilized at a lower level with some of the price increases having a dilutive effect on our gross margins. Positioning is solid with in-house growing within logistics, retail and e-commerce clients while pursuing further growth now in skilled health care. EBITA margin came in at 3.8%, and the organization is adapting well to structurally improve its profitability. Moving to Germany. In Germany, we successfully returned to growth, up 4% this quarter from a minus 4% in Q1, driven by an 8% uptick in our operational business. Manufacturing, logistics, making things and automotive are all firmly back in growth or improving. The current leaner operating model makes us ready to capture future profitable growth. Productivity has improved significantly, and our EBITA margin is now 2.3%. Belgium declined 5% with operational at minus 4%. Adaptability is strong, delivering higher EBITDA, nevertheless, margin year-over-year. And in France. So, turning to France. France, we are turning the corner with now growth in operational crossing over year-over-year, driven by a strong uptick also in in-house revenue, plus 15% already in this quarter in Q2. Automotive and aerospace continues to do well, and logistics and e-commerce is benefiting from new client wins, while perm and healthcare still remains subdued. Overall, profitability came in at 3.9%, down 50 basis points year-over-year, driven by higher branch costs in our Ausy digital business. Italy, growth continued at plus 4% with growth over growth in Operational, up 2% and with professional accelerating now to 17% year-over-year. Year-over-year absolute profit was stable while protecting strategic investments. And turning south, Iberia had another fantastic quarter, plus 11%, led by Spain, where we continue to see future growth opportunities. And let's move to the broader markets, our international market slide on Slide 10. International markets are a bit of a mixed bag. So let me quickly unpack to your benefit. So in Europe, we saw the U.K. also back to growth as the temp market is improving. Growth, again, is driven by in-house clients where we celebrate the go-live as well of our DMP last quarter and adoption continues to increase week after week. Switzerland is also up 1% year-over-year, and Nordics are stabilizing at a lower level, while Poland minus 13%, saw demand down driven by specific client attrition, but the underlying good growth in the market continues. In LATAM, we continue to see good momentum in Brazil, offset partially by ongoing tough macro environment in Argentina. Asia Pacific, Japan, again, continued its solid growth at 5%, and we continue to invest in structural opportunities, particularly in the Digital area. Australia and New Zealand declined 3% and India growth remains robust at plus 10%. Overall, the EBITA margin for the APAC region came in at 3.8%. And that concludes the performance of our key geographies. So now let us walk you through our combined financial performance on Slide 12. Looking at our top line, we saw growth cementing now at 1.9% and overcoming 2% tougher comparable impact from last year, as such, showing true underlying demand improvement. As mentioned before, operational momentum is picking up and growing now at 4%. In Professional, we see momentum improving sequentially as well. Increasingly, we have worked our way through the post-COVID hiring slump and start to see hiring rates slowly moving and returning to the pre-COVID mean. Examples of improvement are in the U.S., perm back to growth in Professionals, Italy, Japan and continued strong healthcare in the Netherlands. Digital saw slightly better sequential trends, mostly in the United States and Japan, while Europe saw further stabilization. And as Sander mentioned, we saw momentum clearly picking up in enterprise with good MSP and go-lives in RPO. Gross profit is still down minus 1.5% year-over-year, but sequentially, a step-up from minus 3.5% in Q1, 2% improvement. OPEX, on the other hand, remains down 3% year-over-year. And as a result, we are decoupling the link between gross profit and OPEX. The quarter's EBITA margin was 3.1%. Underlying EBITA was EUR 182 million with an adverse FX impact still of EUR 2 million, which we expect to level off further from here. Integration costs and one-offs amounted to EUR 22 million this year and mostly related to harnessing the environment in the Netherlands and Randstad Digital North America as we continue to drive structural change across our organization. In net finance costs, just the regular interest payment matching the seasonality of our net debt. The effective tax rate for the first 6 months was 32%, and we expect for 2026 an ETR towards the higher end of 30% to 32% range. This all leads to an adjusted net income of EUR 109 million for the quarter. And with that, let's deep dive into our gross margin bridge on Slide 13. Gross margin was down 70 basis points versus 80 basis points in Q1. Within that, temp margin is also down 70 basis points, and let me break this out for you. First, we continue to have an adverse geographical and client mix impact that probably accounts for 40 to 50 basis points of the 70. This comes primarily from a continued outperformance, as you just heard, of large clients within key growing markets such as U.S. operational, Italy and Spain and some smaller ones responsible for 40 basis points to 50 basis points. Secondly, as well, we have in France, we are ramping up major new e-commerce logistics and industrial clients, adding up another 10 basis points mix. And lastly, within the geographical and client mix, we continue to see a weak Japanese yen, which overall brings approximately the rest of this impact. Secondly, we still have 10 basis points gross margin dilution. We just talked about it following the CLA change in the Netherlands. And lastly, idle time in digital and increasing long-term sickness in some new countries make up for the rest. Perm contribution, so the second or the third column in the graph above, was down 10 basis points as expected. It's still not growing, but yes, it's at minus 5%, so having a negative impact, but clearly flattening versus last year. U.S. Perm is already back to growth. Last but not least, in HRS, the growth we just talked about contributed positively 10 basis points. And that brings me to the OPEX slide on Slide 15 (sic) [ Slide 14 ]. Remember, this one is sequentially. Operating expenses were EUR 889 million, down EUR 29 million year-over-year or 3%. FTE and indirect costs are flat sequentially. The quarter-on-quarter move is in line with our guidance and solely reflecting the compulsory seasonal effect around collective merit increases that kick in on the 1st of April. We can do, in short, significantly more with the existing capacity. And this is what is already at play in this quarter. As we shift towards talent centers, delivery centers, assisted or fully through our digital marketplace, we continue to free up and reallocate capacity towards sales and growth. And these things are interconnected. We also need less accommodation. We need less spent in job boarding expenditure, and we continue to address our head office costs, emerging now with a cost that is significantly leaner and more scalable cost structure and cost to serve. The last quarters or the last four quarters recovery ratio is now at 82%. This means that we are improving conversions and our ability to convert gross profit into EBITA as growth returns. With that in mind, let's move on to Slide 15, which contains our cash flow and balance sheet remarks. Our underlying free cash flow for the quarter was EUR 39 million positive. This is in line with normal seasonality with Q2 serving as a payout window for annual holiday payments in a few key markets. And at the same time, increased receivables as we have seasonally higher revenue compared to Q1, and we are back to growth. DSO came in at 57.6 days, up 0.2 days sequentially. Our net debt decreased EUR 66 million year-over-year, and our leverage ratio stands at 1.8x, reflecting EUR 284 million payment of an ordinary dividend in April. Perhaps more relevant this quarter, as Sander just highlighted, we signed a partnership agreement with LTM as they acquire our technology and consulting services in a number of European countries and Australia. We expect the deal to close in half 2 with enterprise value of approximately EUR 160 million. And that brings me to the outlook on Slide 16. So looking ahead, starting with June. June was the strongest month in the quarter, the largest month in the quarter, therefore, the most relevant one and also the strongest in the quarter. And volume trends in the first weeks of July continued in the trends seen in June. Q3 gross margin is expected to be modestly down sequentially, reflecting seasonality and mix as on one hand, perm and RPO share of revenue is approximately 1% lower versus Q2 during summer and two, adverse geographical mix, as we just explained, driven by large clients is likely to continue. We expect the year-over-year gap to narrow as we will see an even broader recovery in other pockets and the more markets entering revenue and GP growth. Operating expenses are expected to decrease quarter-over-quarter, reflecting the typical seasonal holiday accrual release and continuing to benefit from a lot of the structural cost savings already being put in place this year. So to summarize, we have rolled out specializations to focus on growth. We're back to growth. We're driving scalability through our talent service models. In the meantime, we take the opportunity to globalize our indirect costs, resulting in a leaner company. This quarter marked a crucial turning point, and we expect the positive growth and profit trajectory to continue. Lastly, as we continue to execute on our partner for talent strategy, the financial benefits will become increasingly clear. And that concludes our prepared remarks, and we now look forward to taking your questions. Operator, Elba?

[Operator Instructions] Our first question comes from Andy Grobler from BNP Paribas.

Could I start with a question on gross margins, if that's okay? Just you've talked through the impacts in Q2. Could you just give a little more detail in terms of expectations for Q3 when you say modestly down, what does that mean? And also within that, are you [Technical Difficulty] normal cyclical rotation through the period? Or is there anything else that is impacting gross margins at this stage?

Andy, you broke out a little bit. I'll have a go at the answer, and I hope I meet what you -- because the last part I could not really hear. So in short, I mean, modestly down. I mean, we've been going from, let's say, 90 basis points then Q1, we had 80 basis points. Q2, now we are at 70 basis points. I mean, obviously, we don't need like a lot of ceconometrics to basically conclude what we are looking at into Q3. Now there's always puts and takes. What we see is clearly large clients, a lot of the incremental work even now in more geographies. We have the U.K. back to growth. We have Germany back to growth. Basically, it's led by large clients. So there will always be puts and takes. On the other hand, we also see perm starting to flatten year-over-year. So as we cross over into the next quarter, you continue to see the trends to improve. So it's difficult to exactly say what it will be. But if I had to basically follow the order that we've been, we basically see that trend continuing now. I think what is important to say is in all the markets where we have in growth, we have growth in gross profit. We have more companies -- company coming into growth. That gross profit is converting into EBITA. So in many ways, the financial model is working well, and we're building a more scalable and profitable Randstad.

And just a follow-up, a slightly different topic. In terms of the digital platforms, could you talk about the growth through the quarter? And also to what extent are you seeing positive operational leverage come out of those platforms? Have they reached sufficient maturity to be experiencing that at this stage?

Yes. So good question, Andy. Obviously, where we have those platforms, and I think the most prominent case in point is the U.S. Operational. We've seen good growth and therefore, leverage. You've seen the profitability in North America and the U.S. going up a little bit in the quarter. So that's moving in the right direction. I would say more work to be done in refining the model, meaning refining the model in 2 ways, meaning making sure we have our people focused on sales rather than on delivery. That's one. And we are increasingly complementing the model with our AI agents for talent outreach and validation. So that's sort of the next step in the game there. So North America is working well. Our healthcare businesses here in the Netherlands, but also in Australia are tracking well. In France, it's also tracking well from a digital point of view, but there, the business is quite challenging in healthcare, but the digital model is progressing. So I'm actually pleased with the progress we're making. We are bringing online -- or we have brought online just recently a number of marketplaces in Belgium. In Japan, -- we're working on Spain. The U.K. has gone live. Jorge is adding here. So I think we're making progress step by step. And the overall picture is talent extremely excited. Clients absolutely appreciative of the model. It comes with a lot of work in terms of implementing it at clients, implementing it in our business. So it's definitely not a walk in the park, but I'm pleased with the progress.

The next question comes from Suhasini Varanasi from Goldman Sachs.

My first question is on the drop-through rates, please. You've seen an amazing drop-through rate given the focus on SG&A. But if this growth momentum continues for the rest of the year, can you discuss the requirement for investments and what kind of drop-through we should be ideally looking at by the end of the year? Second question is for Q3, normally, September is the key month. Given your exposure and your growth is actually coming from larger clients, does this give you a bit more visibility on Q3 trends compared to, let's say, getting growth from SMEs, which has been weak so far?

Shall I say a few words on the drop-through rate or, let's say, in general. Well, first of all, our number of employees working per FTE has gone up by 5%. So there is also a productivity improvement in there, so as seen. So I think that's an important thing to note. And yes, we are absolutely focused on our indirect cost, and we will continue to be focused on that. So the trajectory that we have put in motion, we will continue to focus on. So our intent is to keep the team stable -- and let's say, our volume growth in July was encouraging. Well, it's too early to say something about the full quarter, Q3 or even Q4. But the intent is to keep increasing the productivity and not increase the team a whole lot further.

[Technical Difficulty] Comes from Rory McKenzie from UBS.

It's Rory here. I wanted to extend Andy's question to kind of more mid-term gross margins, I guess, because group organic revenue obviously improved to be in 2% year-over-year growth, which is the net result of lots of segments that are growing and a few still declining, but gross profit is, of course, still declining overall. So can you say what the average gross margin is across those segments which are growing, if that makes sense? Because at the moment, we can't really calculate like an incremental gross margin. And so how should we think about this new mix of your business? And where does that gross margin kind of trend to as this mix matures, if that makes sense?

Yes. So Rory, good morning, so let me put it in slightly different angles. So I mean, at the moment, the growth we have in the gross profit is down, but let's also be, let's say, very factual here. Where we have growth, gross profit is up. And we have primarily 2, 3 countries that are dragging our overall gross profit down. But even this quarter, we went to already up 2%. So we are at minus 1.5% year-over-year. So made big steps in terms of gross profit growth. Those 3 markets are the France, the Netherlands and Randstad Digital. You put those 3 aside, the company is on gross profit growth, like all markets are on growth. The market at the moment is the market where it is. Typically, it's not that strange in terms of early cyclical recovery being primarily led by manufacturing, logistics and large clients that plan ahead for their demand. I mean smaller clients can typically do with a little bit extra hour here, an extra hour there, someone helps and they can do. But large operations need to plan for their incremental work needs. So that's basically what's leading the pack now. Just to put into other perspective, our in-house business is up 7% year-over-year. So clearly, it's large clients, large demand-led recovery. Also, if we put it from a gross margin perspective, and again, excluding these 2, 3 drags that we have and we are addressing towards the second half of the year, if you compare it to the company, let's say, of 2019 pre-COVID, we have a fundamental change in portfolio. I mean Italy has grown almost 46% in our mix. Spain, 50% in our mix. So it's very -- we have to be very careful that we don't confuse gross profit margin with gross profit and with profit. I think ultimately, a lot of this extra gross profit that we're generating to the point of Suhasini is converting 100% into profit. And that's basically what makes us exciting in terms of the model is working. We are structurally a leaner company, more scalable. So the growth we find, we want to convert into extra profit.

Yes, that makes sense. And so the kind of key point there is that there's nowhere you have revenue growth, but gross profit decline in absolute terms?

Exactly. No.

Simon Van Oppen from Kepler Cheuvreux.

I have a question on Germany. We saw Randstad operational growing at 8% in the quarter. Can you please give a bit more color on the improvement there, specifically how it progressed through the quarter? And at which sectors do you see the demand? And maybe also on Randstad professional and digital in Germany, how did it perform in Q2?

Yes. So let me say a few things in general. I would say Germany, Simon, is a prime example of building back better. We've worked and the team has worked very hard on rightsizing our business, but at the same time, building the business back in a new and more efficient model with talent centers, delivery centers focused on our largest clients. The growth in Germany is driven by the overall economic activity. I mean, we've seen the Ifo Confidence Index moving in a positive territory. We've seen the PMIs above 50. So the first thing we've done is I would say, drive higher productivity out of our existing people, meaning our people at the client have worked more hours in Q2. And that's been in automotive. Defense is increasingly having good traction. It looks like the big bazooka that Germany pulled out, EUR 800 billion is starting to trickle through in the numbers. So I'm absolutely pleased with where we are. More work to be done in terms of professional and digital. I want to remind you that our digital business in Germany is part of the deal that we struck with LTM. So that one is moving out, and we will focus in Germany on our digital talent services. So you'll see some improvement over time there as well. I think you had a question about the numbers moving through the quarter.

Yes. So the exit rate in Germany, Simon was strong throughout the quarter. So we see the same trends entering into Q3. Elba, next question?

Do we have next questions?

Can you hear me?

Yes, we can hear you, Elba now.

I just had a question on cash. Can you help us understand a little bit how to think about the second half of the year in terms of cash, working capital dynamics? Anything that we should keep in mind considering seasonality trends?

Yes. Thank you, Virginia, and good to speak to you. So, I mean, typically, so the first half of the year, we have relative investments in operating working capital. As we now look into the second half of the year, what we'll see is basically 2 things. One is we have higher EBITA or higher EBITDA. So that has a strong impact on our cash flow generation. And on top of that, we also have positive working capital movements, and it comes down to a few things. So one is bonus and all that typically we pay heavily on Q1 and Q2. This quarter, always we have in a few key countries where we are present, big holiday outflows. So it's a big holiday payout month. And it's also where we start investing because it's the richer quarters of the year. As we go into the second half of the year, we don't have this bonus payouts and holiday outflows. Also, you start getting the larger quarters paid out. So typically, we boost free cash flow in the second half of the year. And that's what, again, we are expecting as we enter the year.

[Operator Instructions] And the following question comes from Marc Zwartsenburg from ING.

I have a question about North America and the Netherlands on the margins there. So if you look at North America, the margin progression was a bit muted in Q2 if you compare to the top line growth and improvements with the digital platform productivity gains you should expect. How should I look at that gross margin? So first of all, maybe can you explain a bit Q2 and what should we expect going forward for North America? And actually, the same question for the Netherlands a bit with the new CLA having maybe a slightly negative impact, as you said, on gross margin. But you would expect also with the new CLA to have higher prices, et cetera, that you would see also some drop-through to the margin. So maybe you can drill down into those 2 areas, please.