With Vedior consolidated since May 16 2008, the Q3 2008 actual and pro forma results are equal. For Q3 2007 this was not the case, as the companies were not combined. We therefore focus in our analysis of revenue, gross profit, operating expenses and EBITA on the pro forma comparison, adjusted for one-offs, as this reflects underlying performance best. Below EBITA, and in describing the balance sheet and cash flow, we focus on actual results to reflect the impact of the transaction.
Highlights third quarter 2008
- Revenue amounted to € 4.5 billion (pro forma organic growth1 amounted to -2%)
- EBITA margin holding up well at 5.4% (vs. 5.5% pro forma), EBITA2 reached € 242.4 million (-4%)
- Realization synergies on schedule; operating expenses € 670.9 million, 4% lower than in the previous quarter
- Solid cash generation; net debt improved by € 253 million to € 1.9 billion, leverage ratio improved to 1.9
- Adjusted net income3 attributable to ordinary shareholders up 38% to 154.6 million
- Impairment of € 50 million on Dutch payroll services due to slower than expected trend towards outsourcing
"In this challenging quarter we have done really well", says Ben Noteboom, CEO of Randstad. "Our priorities this quarter were to drive our integration efforts in line with plans, and to manage the change in market conditions at the same time. Managing both is a challenge, and we have shown that we are up to it. The integration projects are on target, we now participate in many more client proposals than before, we maintained our margins, we controlled our costs where needed and we managed to grow our market share in several important markets. I am very proud of the way our people rose to the occasion."
Gross profit
Gross profit amounted to € 936.0 million. This amount includes one-offs for a total of € 22.7 million, including an earlier announced gain relating to French payroll taxes of € 31.0 million, partly offset by a social security related provision in Germany of € 8.3 million. Excluding these one-offs the gross profit amounted to € 913.3 million, while the underlying gross margin reached 20.4% compared to 20.5% in Q3 2007. The temp margin was up by about 0.1%, reflecting continued rational pricing, while the reduction in perm fees had a negative effect of about 0.2% on the total gross margin.
Operating expenses
In view of the decelerating markets we have a clear focus on cost containment. Underlying operating expenses amounted to € 670.9 million, 3% lower than in Q3 2007 and 4% below the level of Q2 2008. Total operating expenses amounted to € 692.8 million. The reported operating expenses have been adjusted for a total of € 21.9 million. The adjustments comprise integration costs of € 17.6 million, an amount of € 2.5 million of obligatory French profit sharing related to the one-off gain on payroll subsidies, a debt write-down of € 5.2 million related to the financial crisis (primarily Lehman), and a book gain of € 3.4 million on the sale of Randstad Portugal. Realized cost synergies amounted to approximately € 7 million, reducing operating expenses by about 1% in Q3 2008.
At the end of the quarter we operated a network of 5,548 offices, 54 less (-1%) than in the previous quarter. The number of inhouse locations increased by 52 to 1,084, as clients were added, while 19 Dutch Vedior satellite on-sites (which were not counted as outlets) are now working as and included as regular inhouse outlets. The number of other offices has come down by 106 (-2%), of which 30 through the divestment of Randstad Portugal.
EBITA
Underlying combined EBITA decreased by 4% to € 242.4 million, almost equal to the reported number of € 243.2 million, as the one-offs in gross profit (€ 22.7 million) and operating expenses (€ 21.9 million) almost balanced each other out. The EBITA margin reached 5.4%, compared to 5.5% pro forma in Q3 2007. The conversion ratio remained strong at 26% (27% in Q3 2007).
Impairment
We have reassessed growth ambitions and potential for our Dutch payroll business. The trend towards outsourcing in the Netherlands is developing at a slower pace than expected, whilst pricing for basic payroll services is under pressure. This affects growth potential for the business portfolio we put together in recent years. This reassessment has resulted in a goodwill impairment of € 50 million.
Outlook
During Q3 2008 our markets continued to decelerate. In September 2008, for the Group as a whole, revenue per working day decreased by about 6% organically. In the first weeks of October the volume contraction is a few percent larger than in September. We have a clear focus on productivity and profitability and will adjust the cost base quickly where possible. In Q4 2008, we expect to incur restructuring charges of € 10-15 million. We expect a one-off social security release of the same magnitude. The integration of Vedior is progressing well, while the enlarged footprint, the enlarged presence in the professionals segment, the increased network density and the expected synergies are useful in managing through the cycle.
