Temporary labour and secondment organization USG People presents better-than-expected results, but the press release still shows a few worrisome snippets. These might indicate that genuine economic growth did not really take off in The Netherlands

Today, the Dutch, internationally operating temporary labour and secondment organization USG People presented its 2014Q1 results. The general impression was that the company did a fine job in reducing its cost structure and improving its revenues; in The Netherlands, as well as in the other key countries.

The following, most important snippets come from the (Dutch) press release, which can be found here. I will add my comments to these snippets, where applicable, but gladly refer to the whole press release for more detailed data:

General results

USG People realized a Q1 revenue growth of 4%. The revenues rose to € 542,8 million from € 524,4 million in Q1 last year. There has been a positive trend during the quarter. In March, revenues grew by 5% year on year. Growth was realized in all key countries, of which The Netherlands performed best. 

Year on year, revenues grew by 5.5% in The Netherlands. This was a significant improvement in comparison with growth in 2013Q4 (2.3% y-o-y) and also the benchmark growth for the whole industry was again exceeded. 

The demand for recruitment lagged somewhat, in comparison with the activities that profit first from economic growth. The growth of recruitment (1.1% of the group revenues) was 5.1% below last year.

My comments: A year-on-year revenue growth of 4% is very good and an optimistic signal indeed. However, one should not forget that 2013Q1 came at the end of a two-year period of serious economic decline in especially The Netherlands (the most important market for USG People).

GDP development in The Netherlands
since 2005, against 2005 prices
Chart by Ernst's Economy
Data courtesy of: statline.CBS.nl
Click to enlarge

Since then the Dutch economy showed some cautious growth, which has been reflected in the growth figures of USG People. So these figures are good, but not a reason to raise the flag yet. All depends on whether the economic growth will either accelerate or stabilize in the coming months. 

The fact that recruitment is (seriously) lagging year-on-year is a worrisome signal in my humble opinion, as it expresses a lack of trust among employers in the endurance of the economic growth.

Gross result rose by 3% y-o-y in Q1 and amounted to €116.5 million (2013Q1 result: €113.4 million). The gross margin was 21.5%, against an underlying gross margin of 21.6% in 2013Q1.

Ultimately, the gross margin dropped by 0.1% y-o-y, due to a change in the sales mix and price effects. The change in sales mix had a negative effect on the margin. The growth in comparison with last year was the largest at large customers, where the demand for efficient solutions, like outsourcing and in-house concepts did also increase. 

Due to the lower expense level, these solutions can be delivered to our customers at a relatively low sales price. Also the lower sales at the call-centres, reintegration and recruitment had a negative effect on the gross margin.

My comments: Although the result of USG People rose by a decent 3% y-o-y, the gross margin dropped slightly. The large customers, which brought most growth for USG People, are still fully aiming at reduction of their expenses. 

USG made this possible by offering cheaper alternatives to their customers and by radically diminishing its number of employees with more than 400 FTE's year on year (read: their overhead level).This brought their general expenses down.

Number of FTE's during the last four consecutive years
Data courtesy of: USG People
Click to enlarge

The fact that activities, like call-centres, reintegration of workers and recruitment did not show positive results in 2014Q1, is again a statement about the cautiousness of the current economic growth in The Netherlands and abroad. It is there, but it should not be overrated.

The operational expenses dropped with €4.9 million y-o-y to €98.3 from €103.2. Quarter on quarter the operational expenses remained nearly equal.

In Q1, the EBITA (earnings before interest, taxes and amortization) rose to€14.7 mln from €6.4 mln in 2013Q1. The sales increase and simultaneous cost reduction caused a strong leverage effect, causing the EBITA to rise by 130% y-o-y, with a sales growth of 4%.

The Q1 net result amounted to € 6.8 million, against -/- €2.1 mln last year.

My comments: Due to the substantial cost reduction, the EBITA and the Q1 net result of USG People could rise substantially. However, there comes an end to the possibilities of cost reduction and this is the moment when the autonomous growth acceleration should kick in. 

I have some worries, however, whether this will indeed happen in time for USG People, as the main characteristic of this crisis seems to be that is lasts for a very long time.

As long as the large companies try to cut their expenses and the growth for most SME companies is virtually non-existent, the results of USG People might not improve too impressively. I suspect that this will be the situation in the next three or four years.

General Staffing (Start People)

[Click here for a description of the different brand labels of the USG People group – EL]

General Staffing realized revenues of €316.2 mln during Q1 (2013Q1: €309.9). The revenues per working day rose by 2%, in comparison with last year. In The Netherlands, revenues per working day dropped by 0.6%. This was mainly caused by the weak demand for medical staff. When medical staff is excluded, the revenues per working day rose slightly. Start People has a relatively high rate of medical staff, in comparison with the industry.

A drop in revenues at the call-centers and USG Restart, both with 100% gross margin, had a negative impact on margin percentage. Operational expenses have further diminished at General Staffing, due to a pooling of brands under the label Start People.

My comments: The drop in demand for medical staff in The Netherlands will probably continue, now that an important part of the national healthcare and elderly care execution has been transferred from the national government to the local governments (i.e. the cities and municipalities). The snag in this changed set-up is that the local governments have to deliver their healthcare and elderly care services with a much lower budget than the central government did: a so-called task-based budget.

Already a substantial number of nursing homes either has been shut down already or is on the list for being shut down soon. Many other institutions, like physical and mental health hospitals, have to considerably cut their expenses in order to survive the coming years. This will have definitely impact on the future results of General Staffing.

I stated earlier in this article that the disappointing growth at the call-centre and reintegration activities of USG People is a warning signal on the current state of the Dutch and other European economies.

Specialist staffing (Unique, Secretary Plus)

Specialist staffing achieved revenues to the tune of €187.5 million in Q1 (2013Q1: €175.3 mln). The revenues per working day rose by 7% y-o-y. Specialist staffing achieved a strong growth of 16% y-o-y; especially within the label Unique. Demand lagged at Secretary Plus.

The EBITA improved to €7.6 mln from €5.6 mln in 2013Q1. Also the EBITA-margin improved to 4.1% of sales (2013Q1: 3.2%).

The gross result rose year-on-year, due to a rise in revenues. As a percentage of sales, the gross margin fell, due to a negative mix and price effects. Operational expenses were reduced, due to the pooling of brands.

My comments: Except for the disappointing secretary staffing, these are very decent growth figures in this particular line of business, which focuses on commercial, administrative and financial services. However, the dropping gross margin (see red and bold text) proves that USG is still involved in a battle for less expensive services, lower hourly rates and consequently less margin.

Professionals (USG Professionals)

Professionals realized revenues to the tune of € 39,1 mln (2013Q1: €39.2 mln). The revenues per working day remained virtually equal to last year’s Q1 results. Since February, new growth was achieved. Revenues rose by 9% in the Legal segment. Engineering showed revenues of -/-3% y-o-y. Demand was weak at Finance and ICT.

The EBITA amounted to €0.7 mln( 2013Q1: €1.1 mln). The gross margin dropped, due to lower revenues from recruitment, a higher deployment level of freelance professionals and general pressure on prices. Underlying costs were nearly equal to last year’s.

My comments: In good times this department should be one of the cash-cows for USG People. Currently, it clearly isn’t. The Legal department showed positive growth results for its revenues. However, the remainder of professional services showed obviously very disappointing results for traditional strong lines of business, like engineering (building and construction and civil engineering), Finance and ICT (see first red and bold text).

This makes sense: only now the building and construction industry shows some cautious improvements after years and years of decline in residential and commercial construction and civil engineering. 

And although most banks and insurers in Europe have solved their urgent financial problems since the beginning of the credit crisis or the euro-crisis, the ECB stress tests and the current discussions about the (un)weighed capital ratios still hang above their heads, like Damocles’ sword. 

Besides that, the trend in the financial industry is clearly aimed towards webbased solutions, which the customer can use himself, 24x7, thus diminishing the human interactions at the bank and insurance offices. This happens at the expense of the number of bank / insurance offices and the number of employees.

This has a huge impact on the number of available jobs in both Finance and ICT, as banks and insurers are among the most important employers in these lines of business. Although the increasing number of webbased solutions at banks and insurers should lead to an increase in ICT projects and assignments, many of these projects are delivered by specialized teams from domestic or foreign service providers.

Also here, growth will remain very cautious for the months to come.

And there is one more thing with the presented data here: an EBITA of only €0.7 million against €39.1 million (see second red and bold paragraph) in revenues is really very, very weak indeed. This result is less than 1.8% of sales revenues, even before the a number of important expenses have been deducted.

This means practically that Professional Services is currently a bleeder for USG People; something that the current management is probably fully aware of.

Outlook

The positive trend that has prevailed since mid-2013 persisted in the early months of 2014, enabling USG People to achieve growth in all key countries. We expect this positive development to continue.

My comments: USG People showed fine results and I think that the management did a good job after all. However, I am not that optimistic about the outlook for the near future of this company. 

Besides that, I think that the possibilities at USG People for further cutting costs might have exhausted at this moment, after four years of considerable personnel reduction. This means that when the autonomous growth in the European economies does not accelerate from this moment on and does not spur further demand for temporary labour, reintegration and secondments, the next quarterly results of USG People could be disappointing.

This is something to be taken into consideration, when looking at this data of USG People.