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Hello, and welcome to the Randstad Second Quarter 2019 Results Call. My name is Mahan, and I'll be your coordinator for today's event. [Operator Instructions] I am now handing you over to your host, Jacques van den Broek, CEO, to begin today's conference. Thank you.
Yes. Thank you. Yes, Mahan. Good morning, everybody. Q2 2019, a solid performance in uncertain macroeconomic conditions, so great to take you through it, and I will go immediately to Slide 6 where we see the heading, European conditions challenging and robust gross margin. So when we analyze the 1.7% negative growth we're seeing, we can attribute directly 1%, so 60% of that, to automotive and related industries. This is in Germany. Of course, we saw that in Q2 and Q1 already, but also in the Netherlands and Belgium. I'll shed a little bit more light on that one later on. Our North American business did quite well at a fairly stable level with great returns. And when I talk about North America, I'll talk a bit about the current balance we're having in investing in growth and also taking cost down, which is an art more than a science, but I will take you through that. Rest of the world, 10% growth, again, very happy with our performance over there.Yes. What does it feel like? That's probably a question you have on your mind. Actually, from a growth point of view, June was not the worst month in the quarter, actually slightly better, but we don't yet feel that that's the basis for bouncing back, although, again, if you would ask me, if you would ask us, we think it's a pause more than a real slowdown also because it's very directly related to automotive.Our EBITA margin slightly down, but gross margin still good. Same picture we saw in the first quarter, very happy with that continuing into the year. And then, yes, we do not want to kill growth so in our U.S. business, in our Rest of the world business, but also still in pockets in Europe in Professionals, left and right, we still want to balance our investments and grow and at the same time have a decent return. Invested in marketing for secure -- for the growth of the future. And our overall quality of results in Q2 is quite good, but Henry will shed a little bit more light on that one later on.It takes time sometimes to adjust the cost base. We've had that discussion in markets like France and Germany already. We now see quite a pretty short -- a quick decline in the Netherlands and Belgium, but these are businesses with great and mature management teams, so they'll react. We still, within those challenging conditions, continued to gain market share in the Netherlands, in Germany, in Spain and in Italy. So very happy with that performance because, as you know, things can be what they are, but we want to have a, in relative terms, better performance than market.I mentioned gross margin. It's a mix of why we do this. Strong management focus on pricing; nothing new there within Randstad. We sometimes walk away, but then we increasingly have our digital tools that very much helps us. And our clients are -- also because we show increasingly through our digital tools what a labor market looks like, they're willing to pay if a good candidate is tough to find. It's also a quarter where we did some M&A. We bought a company in Australia, Aurec, active in Statement of Work, engineers and IT; and a small one within our OC business, Optedis, in France. So if people from those companies are on the call, well, Australia might be late already, but very welcome with Randstad, of course.And on the IT, on digital, this quarter, we would very much like to mention a more foundational achievement we had. We moved 925 IT applications and 50 legacy data centers to the public cloud, which is quite an undertaking. It has been a project, which ran over 3 years, but we're now set up with a great basis to build our commercial tools upon. Next to that, we had 2 big front office implementations in Germany and Japan and we'd like to specifically mention those, first of all, because our Japanese colleagues did this while at the same time growing their business with 9%, and our German colleagues did this in Germany with 15% decline. So quite impressive to, at the same time, undertake this. Flawless, so a front-office implementation is quite an undertaking, but it went quick. And it means that our consultants are equipped with the modern way of working, modern support tools. So very happy with that. In general, on digital, we're continuing to see good progress. Our workforce scheduling, 20% more implementations compared to Q1. For example, in our U.S. business, we do see clients where we've implemented this. We take 8% more market share in Q2 whereas where we haven't implemented it yet, it's just 1.5%. So this helps us to strengthen our presence at clients. Video interviewing. We reached 300,000 interviews with candidates through video. In our U.S. business, close to 55.0% of all candidates presents himself through digital, through video and that helps the candidates to present themselves well, but also our clients to make the right selection. So a great supporting tool gathering speed within our portfolio.Taking you to the countries on Slide 7. Our North American business, this is one -- and I mentioned it in my opening statement, this is one where, in hindsight, maybe we should have allowed a little bit more people in our Staffing and Inhouse business. As you know, we've got a great operating team over there. We have been taking market share with our strong concepts in Staffing and Inhouse. And tougher comps, but at the same time, they did well. Maybe 1% or 2% growth would be feasible. So we're going to try to allow a little bit more staff into our American business because, underlying, we do feel those markets still allow for growth. Stable performance at our Professionals business. Perm accelerating to 6% from 0% in Q1, I think signaling the fact that there's still quite some demand in that market. And then a great EBITA performance in our American business. So very happy with the performance in the U.S. and also in Canada with a bounce-back from a slight negative to a slight positive.In our French business, we talk a lot about automotive and there's a distinct difference we feel between French automotive and German automotive. So German automotive sells in the world market and they are hampered by the trade wars by China and the diesel legislation that we mentioned last quarter already. French automotive sells more within Europe. So although it's not hallelujah, it's way less down in that sense than German automotive. Very happy with our performance in France given the tough market. Our Professionals business, double-digit growth on also tough comps. This is including our subsidiary, OC. Perm doing quite well against very tough comps last year. So our French performance, and you see it in the EBITA margin, very positive.Dutch business. Yes, quite a slowdown here from a slight growth in Q1 into a negative 3%, very much related to automotive. We do think, also in the Netherlands, roughly half of it is automotive-related industries. Logistics, of course, geared towards those industries. In the Netherlands, there is automotive. They make buses, all sorts of investments in those areas.Happy with our Professionals performance at very tough comps, 8% tougher comps, still a 5% growth. Very happy with that performance. And a stable EBITA margin compared to last year. Then Germany, as mentioned already in Q1, the toughest one out there. The market slowed down further then since. We're happy we took out costs. I'm not happy because this is also about firing people, of course. But yes, we anticipated this happening. But still, it was a bit worse than expected. Your first question might be, okay, so now what? And actually, we don't know. We are now in July. It's going to be waiting for September until our clients hopefully know more in their production planning for the rest of the year. We aim to take cost further down into Q3 and Q4 into Germany. Actually, the whole -- our whole staff is going to work half a day less per week. This is a German system where also the German government chips in, and we can keep everybody onboard for at least 6 months and prolonged theoretically for the next 6. So that is what we're currently doing in Germany. Hard work for all our colleagues at the same time implementing a new front office. So in that sense, tough, but well done and ahead of market because judging by performance, also market figures, it's even worse than our numbers currently show.Belgium, similar to the Netherlands as in automotive. We do see -- also here see from a 1% up to down 4%, we can directly attribute half of that to automotive weakness as it's specifically mentioned here. Yes, our EBITA margin last year was relatively high. Our Belgian business hovers around a 6% EBITA. So very happy with that one and absolutely have confidence that, that will materialize throughout the year. This year, slightly less also because of a lower contribution of perm, probably logical given the uncertainties currently in the market, but also tough comps compared to last year where we grew 35% in perm.Then, again, a highlight in our portfolio, which is Italy. I already talked about the art of managing cost, managing people. We left people in our Italian business and that's paying off for us. We are above market, great perm growth, double digit, higher in Q1, but still double digit. And you see the EBITA margin developing very well for us here in Italy. So very happy with our performance in Italy.Iberia. You see Southern Europe is actually, yes, slightly better than Northern Europe. Our Spanish business at a plus 3% growth. We mentioned in the former quarter the increase in the minimum wage, which has been passed on well to our clients. Although from a distance, unemployment in Spain might still look on the high side, but in specific job categories, there's definitely also scarcity there. Our Spanish business, a well-run business, strong pricing discipline and execution, so leading to an increased EBITA margin. Also, our Portuguese business seems to be bouncing back a bit in terms of top line, so happy with that one. Then the rest of Europe, pretty mixed bag, not much to say about it. Our U.K. business is quite stable so -- although perm is under pressure. But the whole Brexit insecurity is not really gaining, in our book, a lot of traction, yes. And you see stable returns.Nordics, slightly better; Switzerland, similar, outperforming the market, by the way; and our Polish business, stable.Then Rest of the world, yes, continues to be a star performer for us. I mentioned the Japanese growth, 9%. Q1 was okay. Q2 was even better. Our Australian business is still doing well. But singling India. India is -- it's a huge country with a lot of people, but the formal labor market is actually much smaller. 450 million people in the labor force, 50 million are in a formal job. So the market is smaller than you might expect, but our current management is doing a great job in finding pockets where we can have profitable business. So very happy with our Indian performance. And Latin America. I want to congratulate our Argentinean colleagues. They moved to the #1 position in Argentina; our Brazilian business also doing very well. So a great compliment on that performance, which overall leads to an improved EBITA percentage.Then to Global Businesses. For me, looking at Rest of the world and Global Businesses, I do see a lot of similarities. So bear with me on that one. So roughly 5, 6 years ago, we knew from a strategic point of view that the Rest of the world, markets like Japan, India, China, South America, were promising markets for us. And to develop a global company, we would need to invest in those markets and we've done that for years. And even in somewhat more adverse times, we went on investing and it now pays off. That's very much the feeling I have with Global Businesses. We do see a trend that clients want to buy from less suppliers worldwide. They want to talk about total talent architecture. They want us to help them to manage their workforce on a global scale. And we're doing that. But to be able to do that, you need to invest. You need to invest in people, you need to invest in technology, you need to invest in data to show clients what labor markets look like to handle -- to help them with training and whatsoever. And the same goes for Monster. You know it's our ability -- or it's our wish, our strategic wish, to have the biggest data lake, the most profiles available, to support our clients and candidates in their career and in finding in place candidates, and again, with that come investments.I mentioned last quarter that we nominated Rebecca Henderson as responsible for Global Businesses and we do see this paying off. We do see -- certainly, we're very positive about the portfolio, our new client, Sourceright, in the second half of the year. But also, on a somewhat smaller scale, RiseSmart, our digital ad outplacer, is gaining quite some speed in the markets it's in. So very happy with that decision we took.So on that note, Henry, can you shed a little bit more light on the numbers?
Of course. Thanks, Jacques. So my pleasure to take you through the Q2 financials. Please note that all figures are included IFRS 16, unless specifically stated otherwise.So as mentioned by Jacques, the company delivered a solid operating performance in an increasingly uncertain economic climate, especially in Europe. And while being mindful of this macroeconomic uncertainty, our good gross margin performance provided room for continued selective investments to secure competitive growth. And we are pleased to experience a robust gross margin performance, which is the effect of increased management focus and the wider use of pricing tools in conjunction with the ongoing tight labor market. But obviously, there's also some supportive mix effects at play.Let me run you through the P&L to provide you a bit more detail. So revenue was down minus 1.7% with more than half of the decline coming from automotive, and it's very good that we can rely on our strong portfolio with North America and the Rest of the world showing positive momentum. Equally important is the fact that we could continue to achieve market share gains in several of our largest countries. On the next slide, the gross margin came in strongly at 20%, up 20 basis points year-on-year and ahead of our guidance. We'll take you through the more detail on the next slide.Operating expenses were stable year-over-year, reflecting our ability to support our most promising growth opportunities whilst going through continued efforts to adapt our cost levers to the harsher market realities. EBITA came in at EUR 277 million with a 4.7% EBITA margin. And please note that our diluted underlying earnings per share fell by 14% year-over-year impacted by 2 main noncash items: firstly, as guided, we experienced a 4 percentage points higher P&L tax rate due to the change in the French subsidy system; and secondly, last year, we had a positive ForEx movement impacting the comparison. So all in all, we see good quality of our quarter 2 results.And so now as promised, on Page 14, we show the gross margin in a bit more detail. So what you can see on Page 14, the temp margin continued in positive territory in quarter 2, being up 10 basis points year-on-year, very similar to quarter 1 where we experienced improved pricing trends as a result of structured management effort to utilize labor market data feeding our value-based pricing tools across our portfolio. And as a result, we were better able to benefit from tight labor markets and regions like the Netherlands, France, Japan and Spain will benefit in a significant way. It confirms our ability to price with superior value delivered to our clients globally. The bar in the middle shows some positive impact of our still-growing perm business, 2% growth, driving 10 basis points positive mix. It's all fee income and therefore gross margin accretive. And lastly, the bar on the right represents HR services, which shows a neutral effect on the gross margin and an adverse Monster mix effect was offset by a positive ForEx effect and other growing HR services businesses. So in volatile markets, we see some significant shift in growth rates per region and concept, and hence, we're keeping a close eye on gross profit in relation to OpEx to ensure enough benefits showing up on EBITDA.That brings me to the OpEx bridge on Page 15. As Jacques already mentioned, when it comes to OpEx steering, we've always tried finding a smart balance, specifically adjusting the cost base to the macro environment while securing enough funding to capture the many growth opportunities we continue to see in the marketplace. Excluding ForEx effect of EUR 3 million sequentially, we reported OpEx up by EUR 12 million, which is year-on-year stable. Our efforts to flexibilize the cost base to stay resilient in the face of volatile markets and to further improve our ability to steer our investments into places with the highest long-term return are paying off.As already mentioned, the good gross margin performance provided some extra space to support our brand building and bolstered our investments to support the digital road map. Finding the right balance between tough cost management and nurturing our growth engine remains the key priority. And given the tougher macro environment, we will tighten our belts accordingly.Let me close that chart with a confirmation that we are fully on track to deliver our cost savings target of EUR 90 million to EUR 100 million annually by 2019.And now on Page 16, let me shed some light what it all means for our cash flow and balance sheet. So we reported in quarter 2 2019 a positive free cash flow of EUR 25 million, which is an improvement of EUR 35 million in absolute terms. It's the first positive cash flow in the second quarter for a very long time. In fact, we look back for more than 10 years. Main driver for the good free cash flow was a change in the French subsidy system. Under the new system, we received the subsidy without delay versus a more than 3-year wait for CICE. And the free cash flow in quarter 2 includes quite an increase of operating working capital and a significant decrease of income taxes paid, both impacted by the timing of payments. In fact, it's largely a reversal of what happened last year in quarter 2.The last bullet on the left shows days sales outstanding, which was virtually stable versus last year and quarter 1 '19 on a 12-month moving average.On the right hand of the chart, going straight into our strong balance sheet, our net debt position improved by EUR 143 million versus quarter 2 2018 to EUR 2.026 billion. Please note this includes the lease liabilities related to IFRS 16. As we reported to you, this is optically a slight upward effect on our leverage ratio. However, pre-IFRS 16, our leverage ratio arrived at 1.2 versus 1.3 last year in quarter 2. This adjusted leverage ratio will also be the basis of our unchanged capital allocation strategy going forward. For 2019, we see a further improved free cash flow versus 2018.And finally, let me reiterate that the outstanding CICE receivable of EUR 491 million will be collected in the coming 4 years, of which about EUR 105 million will be received in quarter 4 2019. Also, please be reminded that we will pay a special cash dividend of EUR 1.11 per share in quarter 4 on top of the EUR 2.27 we paid already beginning of this quarter.And finally, on Page 17, let me summarize the key messages and provide you with an outlook for quarter 3 2019. Firstly, it was good to experience another quarter of solid operating performance. Competitive top line trends and balanced cost management delivered against a backdrop of low economic growth in some of our main markets. June trend is in line with quarter 2. Secondly, we are pleased to be able to report ongoing positive gross margin trends. We are definitely better positioned to monetize the added value of our services in tight labor markets with our pricing tools gaining further traction. We see Q3 gross margin to be in line or better than last year, however, slightly lower sequentially driven by seasonality. And thirdly, while market conditions are uncertain, Randstad is very well positioned to capture growth opportunities in the future. Our portfolio is much more diversified than 10 years ago. There'll be full confidence in the ability of our people to quickly adapt the cost base to new economic realities. We see OpEx to come down slightly sequentially. And please note quarter 3 has a positive 0.9 impact on number of working days.Well, that concludes our prepared remarks, and I hope it helped to shed some light on our quarter 2 results. We'll be delighted to take your questions. Yes, Mahan?
[Operator Instructions] So we have a few questions coming through, the first one being from the line of Suhasini Varanasi from Goldman Sachs.
Just a couple from me, please. You mentioned in your exit rate that June was in line with 2Q and early indications that July was basically in line with the 2Q number. So does that basically mean that July is still a negative number?
That's your question?
And the second question -- that's the first one. I can ask the second one later, if that's okay?
Okay. Okay. Yes, July is tough to call. We have 2 weeks of volume. So that's just too early.
But it was a negative number basically? Is that what that means?
No, no, no. Yes, the employees working are still below last year. Yes.
Okay. Got it. And the second one is on the perm growth. You have been getting a nice -- a boost on the gross margin because perm has been growing nicely. I suppose it has been slowing, though, in Europe over the last 2 quarters. What are you seeing in the market? I mean is there a risk that there's a hiring freeze and the growth slows further and therefore, there's an impact on your gross margin as a result?
Yes, it's not everywhere in Europe. We still see quite some growth in France and in Italy and in Spain. So it's not across-the-board. And yes, we have our American business, which still looks good. Southeast Asia still looks good. So it's going down, but yes -- and perm is always the toughest to call. It's quite volatile, so yes, we don't provide an outlook for our Staffing business even there, let alone perm. So working hard on it to keep it growing.
Okay. So the next question comes from the line of Tom Sykes from Deutsche Bank.
Firstly, just on a technical one. The depreciation number is EUR 8 million lower and I don't think you had any one-offs last year, and in Q1, it was flat. So why is that EUR 8 million lower, please? There's a 3% benefit to the EBITA.
Tom, I need to take that off-line. So we'll get back to you on that one.
Okay. Fine. And then is it possible just to say how much actually of your sales is Argentina? And then also, just could you possibly expand a little on why the French operating profit was so much better when revenues weren't, please?
The Argentinean business is around EUR 250 million, probably less.
Of annualized sales?
Because there's also inflation there, yes? So you need -- you also need to grow hard, but then still doing well relatively in that market. That's why we took market share. So in that sense, very happy with that performance. Yes, we -- it's a mix in France. It's a mix of perm is still doing well. Our OC business -- our Professionals business is doing well, which comes in above the board. So that helps. It's a more profitable business than our French average, so those are the main reasons.
And OC is growing and you're getting leverage on OC as well. As well as it being a mix benefit, are you also getting leverage out of that business to push it, its sell, its own margin higher?
Yes, it's a business that comes in with a higher EBITA than the French business overall. That was one of the reasons for investing more in that business. The 2 acquisitions we announced are in that space and that helps our improvement of our results, yes.
And when you look at the growth outlook for just OC particularly, you probably have a bit more visibility on that. What can you say about the sort of H2 growth outlook for OC? Should it continue at the same rate?
Yes. We're not doing outlooks for individual businesses. Certainly, the French part is doing quite well. Absolutely happy with that, and we hope that they can keep it up.
The next question comes from the line of Anvesh Agrawal from Morgan Stanley.
I've got 2 questions. First, on the legislation that is through the Balanced Labour Market Act in the Netherlands. It's due to come through in Jan 2020 and my understanding is that it will increase the cost of fixed-term employment and also could impact your payrolling business. So maybe if you'd just kind of give us some brief overview of what you see there and how should we think about the impact next year on your Netherlands business? And the second one is on the cost benefit. So there's EUR 90 million to EUR 100 million cost saving that -- the run rate. Should we assume that the benefit comes are 2H weighted? Or have you -- because given you have now completed the migration of your IT system, so should we expect more benefit in 2H than what you had in 1H so far?
I'll take the first one on the Dutch law. It's early days because we now go talk to our clients to say, okay, so what does your business look like? What is happening in your temping business, your payroll business? And do you want more perm? So it's very tough to call in terms of effects. So we are working on a program to go out to all clients and discuss the consequences of this law regarding their workforce. There's ups and downsides, so a bit early.
But have -- can -- sorry, sorry. Can you give any example like where you had a similar change in the regulation in any other geographies and what was the impact there or this is pretty unique? Just describe the feeling of that.
Yes. Let's first comment on the effect of the law. It always goes wrong. So politicians think if they increase the price of flexibility, there will be more fixed work. That's not going to happen. So we're working very hard with our clients, but also with regulators to say the risk is that you get more bad -- badly regulated work. So that's the first one. So that's our advice to the government. Second of all, what we see with most of these laws is that the effect is always way more limited than we actually envisioned going forward. So early days, but let's come back probably after Q1 next year to see what the immediate effect has been.
Okay. And the cost one, please?
Yes, on the second one, the cost benefit, actually, we don't see any phasing impact or more benefits sliding into H2. It's on ongoing OpEx.
It's probably also good to mention that the objective to do the transformation we mentioned is not predominantly to save costs. As you know, we're digitizing the company, and with that comes an IT infrastructure that should be cloud-based. We still -- and we took a quite aggressive project and a way to do this. So it means that we're well equipped to handle our digital transformation.
Okay. So we have one more question in the queue. [Operator Instructions] And the next question comes from the line of Konrad Zomer from ABN AMRO.
My first question is on the margin development in the U.S., which I think looked very strong. Can you maybe explain in a bit more detail why your margins were up so much year-on-year? And my second question is on the financial impact in Germany of the government chipping in. Can you maybe quantify the impact it might have on your performance there? And my last question is given the slowdown which continued in Q2, but the fact that June was slightly better than May, can you give us the organic revenue decline of May, please?
Yes.
Shall I take the first one on U.S. margin?
Yes, sure.
Konrad, thanks for your question. So the U.S. margin actually, first of all, results were very good, pricing discipline in there. So we have been able to fight for scarcity in the labor market. We definitely see that coming through. Also being slightly helped by better mix in there. And as you can imagine, with a slightly weaker Europe, we've -- we needed that help from the U.S. business to compensate for the overall cost picture. So as I said, better gross margins, overall good cost management, but you've heard Jacques talking about it. We feel that we can actually invest a little bit more into the U.S. to capture more growth.
Yes. Konrad, May and June are always very tough months because of all the holidays falling left and right and in May and in June, so I wouldn't make a big scientific effort on the growth rates in May and June. That's what -- I also mentioned that, objectively, if you look at June, it's slightly better than May, but we think it's too early to call that this is the end of the decline because it's such an uncertain environment. So we really need to look at the return, and then September is going to be a crucial month and we'll read it. So on the -- in good English; [Foreign Language] in Germany, that means that if your people work 10% less per week, the net effect for them is 2%. So that's good in a sense that we keep our whole body of people onboard in this sense to weather the storm a bit and the financial effect for our people is fairly limited. Very happy with the cooperation we had from the German government in this both on willing to do this, but also on the swiftness of the response, which we think is a best practice in Europe.
Just one other comment on the growth rate within the quarter. There were several investors that made a point to us earlier this morning about the fact that if April, the volume trends continued in line with Q1, you were still growing in Q1. And June was in line with Q2, which was minus 1.7%. Then an analyst can do a calculation and come up with quite a negative number for May. So it's not necessarily about the actual revenue decline in May that I'm interested in, but it's just the trend looks like it's still deteriorating.
Yes. I mean when we talked about April, we only talked about 1.5 weeks when we last met. So actually, we see a pretty good profile in quarter 2, let me put it like that.
And it's not currently declining more, but we also don't see an uplift. So it's a pretty stable picture. In volume, it's a pretty stable picture. And then month-per-month, yes, it's very much the holidays; also, the fact that the Dutch and the Belgian business went in to quite a steep decline into the quarter. Overall, it's a pretty stable picture. Again, easier comparisons in quite some markets, but let's see if that happens.
Okay. So we have a few questions coming through, the next one being from the line of David Roux from Bank of America.
Just 2 questions from my side. The first question relates to the change in the French subsidy system. I was hoping you could give us the actual months of the cash inflow included in your free cash flow? And was there any benefit perhaps to gross margin in the period from the change in the system? And then my second question relates to automotive. Can you just remind us what group revenue exposure is to automotive and then, in particular, to German automotive?
Yes. I can give the particular on German automotive, which is 20% to 25%, so quite hefty. But our overall German business is roughly 8% of the global picture. So it waters down quickly on Global. So on Global, it's, I don't know, less than 5% probably. But in Germany, to a lesser extent, Belgium and Netherlands, it's a sizable part so that's why it hurts.
On your first one, David, on the change of CICE, we've guided earlier that we see overall a quite neutral picture for the P&L in France. But what we did say is that probably the first 3 quarters will impact the minus 5 basis points in gross margin and then in quarter 4, plus 15. We stick to that guidance, more or less, and I think you can work with that one.
The next question comes from the line of Kean Marden from Jefferies, London.
Do you agree with Manpower's comments regarding the French finance bill impact on corporation tax that they made last Friday? And will you be looking to take a similar approach in the third quarter to the one that they guided?
In general, we agree with it, but what we would say is that we guided for a corporate tax rate between 26% and 28% and we stick to that guidance. It might kind of shift it a little bit upwards, but it's more or less in the same ballpark.
Okay. So the next question comes from the line of Andy Grobler from Credit Suisse.
Just a quick follow-up on the automotive question from earlier. You mentioned that automotive took about 1% of group -- negative impact on group revenue and you also mentioned that it was about 5% of the total group. When you're talking about that 1% decline, is that just the pure automotive, that 5%, or the related activities? And if so, how big is that related activity, if possible, please?
Yes. It's related activity. So it's, of course, the first tier, also second tier and then it becomes tougher to really -- because you've got logistics and then you've got logistics that took part for automotive and part not. Yes, next to that you have a -- sort of, in Germany, a bit of a growing uncertainty in general. So I think this is about as close as we can get to really calculating what it means for us.
And what would -- because, I guess, if you've said that it took organic growth down by 1%, you must have done that calculation. So what proportion of the business were you talking about when you did that calculation?
That is directly attributed to two, first and second tier automotive and logistics, that we can really directly relate to automotive.
So more than the 5% that is specifically auto, just to be clear?
Yes, that I didn't know because, as I said, it's watered down. So the bulk is in these 3 countries. That's why we can do -- if you asked me the question how much is of our total sales, we do have automotive in Spain, we do have automotive in Italy. I don't have -- the 5% is more of a ballpark and the 1% is quite factual.
Okay. And just -- sorry, just one last follow-up on that. In terms of what your auto-related clients are saying in Benelux and Germany, what is the feeling coming from them? Are they still very cautious? Or are they a bit more hopeful into the end of this year and next year?
Yes. Well, my predecessor always said, if you don't listen to your clients, you go bankrupt; and if you listen to them also, so they don't know. They are quite uncertain because trade war, right? Yes, there's nothing they can influence in that. China, very tough to call. And then there's -- yes, there's the diesel legislation. So what's probably frustrating for them is that they cannot influence a law, so those are currently the conversation we are having with them. So it's quite unclear. That's also the reason why, in Germany, specifically in this case, we're still taking costs down for the rest of the year to be on the safe side.
Okay. So we have 4 more questions in the queue, next one being from the line of Marc Zwartsenburg from ING.
First, a question on Germany -- two actually. The measure to take out half a working day for FTE, when will that really kick in? Have you already started with that in Q2? Or shall we see the full effect in the second half? And does this help closing the gap a bit with last year's margin gap? Is that -- how big is the savings from such an element? And then also Germany, you have a new front office implemented and cloud projects. Did it have any additional impact on the rest of trend there? And did it also bring extra cost for Germany in the second quarter? Should I maybe adjust the numbers a bit for that as well? And yes, what is the rollout plan of the front office implementation going forward? How far are we there? Are there more countries lined up? That's my first question.
Yes. So the front office is cost we took, so there's not going to be more cost going forward. Yes, it will have effect on our costs for the second half of the year, but we still don't rule out that maybe throughout the end of the year, we're going to ease up again. So I'm not guiding yet for the impact on cost. It started 1st of July, Marc, by the way, but the effect in the beginning is more limited because, yes, people are on holiday and then it doesn't count in that sense. So it's going to help, absolutely, but we're not guiding yet for the exact number.
And your working -- the savings, can you quantify that? How many millions are we talking about?
No. Yes. Again, as I explained that's -- we're not guiding for the absolute number here.
Okay. Okay. And then in terms of auto M&A, there was a small bolt-on here. Could we see more bolt-ons rolling in now that the market is perhaps a bit more shaky and that maybe sellers are perhaps more willing to talk? Is there anything we should expect there in terms of pipeline? And what kind of size?
Yes, what I've seen historically is that it never really picks up. We're also not buying on weakness, that's not our strategy. So we're working on sort of a pipeline, mostly in our Statement of Work space. You might see us also doing something in our RiseSmart space, entering new countries where we don't have an activity yet, but it's relatively small stuff. We like it, but as we said, going back to our capital allocation strategy, we're basically on a strategy with organic growth. So I wouldn't expect too much on a short notice.
In terms of the capital return policy, your special divi in this respect, would that have any impact on the decision of acquiring a company to say, well, maybe not this size because it will endanger the special dividend? Or will you simply look at it on a ROCE basis, like this is a better return on investment, we will do it anyway?
Yes. Well, we always said about the special dividend that this is to be discussed every year based on the economic outlook, based on the debt level, and yes, if that were to be the case, also some M&A. But at the same time, we only talked about mid-level M&A. So in our capital allocation policies, there is the potential of midsized bolt-on M&A always. But we look at it every year. Point we need to make on dividend is actually quite positive. We're very optimistic about the free cash flow development for the rest of the year if this is the scenario for the rest of the year. So in that sense, from a dividend point of view, still good news.
And then maybe a final one, if I may, on the temp margin. The improvement, again, 10 basis points. Of course, these are rounded numbers. Do you see some underlying further improvement in terms of the impact of positive pricing? Or is that now fading a bit now that the market is weakening?
No. For the remainder of the year, we're not guiding on gross margin, but we've now -- there's a bit of a track record in our gross margin, we unpack it. The working day impact was slightly negative in the quarter; also CICE, a slight negative. But we do see good pricing coming through. It's very hard for me to make a forecast on that, but we also see that the ability, the muscle we're building around data to be used in that regard is increasing. So I'm very positive about it.
Okay. So we have 4 more questions in the queue. The next one comes from the line of Bilal Aziz from UBS.
Just one from my side. Do you anticipate, and I know it's very early days actually, but any large-scale changes from the French labor reform activity given it's early days. But what impact do you see on your French business from that side?
Well, Bilal, congratulations on your numbers also today. But that's a side note. No, it's early days. So we've had discussions before on legislation. We always take the approach that we want to know what it really is and then we'll inform you guys on what we think the effect will be. So this is, yes, as you state yourself, early days.
The next question comes from the line of [ Rahul Shutra ] from HSBC.
Three quick questions for me. In terms of, the first one, how much of gross margin improvement in 2Q was driven by sizing versus the mix? The next follow-up, excluding seasonal effect...
Excuse me. Those are very hard to be picked up. Could you run that again? It's a very bad line.
Can you hear me now?
Yes, we can hear you, yes. Just found it a little bit -- yes.
Okay. Yes, how much of the gross margin improvement in 2Q was driven by sizing versus the mix effect? And the follow-up quickly, excluding seasonal effects, how should we think of the pricing impact from -- in 3Q? Secondly, in terms of -- can you give us a sense of what was the extent of decline in manufacturing in Europe and particularly Germany, France and Netherlands? And the third one, what is the impact of wage inflation across geographies in terms of give a sense of what they're doing?
Yes. Wage inflation in the U.S. is between 2% and 3%. In Europe, it's -- well, it helps in Spain, yes, given the -- but that's quite a specific one on the minimum wage. So wage inflation in Europe is still happening, but not yet to the effect of the U.S. Yes, so we talked about sequentially a lower gross margin, yes? So in gross margin effect, we always need to compare with the same quarter last year given the seasonality in our business, and as we said, we still expect, you never know, but as we are trailing now, that the margin and the improvement that we've seen throughout the year will continue into Q3.
Okay. So in terms of the manufacturing decline, which is -- can you give a sense of that in terms of how that was doing?
No. Because then we give guidance for the quarter and we don't know. As I said, we're now in July. Our clients are quite uncertain. So we'll see what they come back with in September.
Okay. So the next question comes from the line of George Gregory from Exane.
Just a couple from me, please. Firstly, just, I suppose, following up on some of the previous questions around the gross margin. Your Q3 guidance would appear to indicate that the gross margin would be broadly stable year-over-year; whereas you've indicated you'd expect the positive price/mix dynamics to persist. Just wondering how we can reconcile those two, please.And secondly, I just wondered if you had any thoughts yet on the previously tabled plans in France to extend the payroll subsidies to compensate for the loss of CICE, which I think were due to come in, in October. I just wondered if you had any thoughts as to whether those were still likely, and if so, what we should be factoring in for them.
Yes. George, I'll take the last one. As stated previously on this call, we don't do this, if what might happen, if it's a law and it's passed, then we'll know and we'll share the effects with you. Too early. We've seen that before. Then it comes, it's a different version. For us, it's a bit of a waste of time. We just take it, if it's a fact. And then again, we're going to talk about it with you.
Yes. On your first one, on gross margins, so what we said is kind of gross margin actually slightly down driven by seasonality, but stable or slightly up versus last year. So that gives you kind of a window of 10 to 20 basis points, which is, I think, an acceptable margin of guiding us so and it does expect that we have no big change on our top line. Of course, working day effect, you've seen, slightly positive next quarter. So with that, I think we can work out the gross margin.
Yes. And again, George, the drivers we saw in Q1 and 2 are still at play in Q3. So that's as much as we can do.
Okay. So we do not have any more questions in the queue. [Operator Instructions] Okay, so no questions coming through. So hand back over to your host.
Yes. Well, thanks for calling in. We wish you all a great holiday and a great summer. In the Netherlands, it's 34 degrees. So always good for our beer and ice cream business, but we'll see if that helps the top line. Wish you a great summer. See you next quarter.
Thank you.
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