Randstad NV

AEX:RAND

Earnings Call Analysis

Randstad Navigates Tough Q4; Aims for Growth

Randstad faced a tough fourth quarter with an 8.6% revenue decrease, reflecting challenging global market conditions, particularly in Northern Europe and North America. Despite this, the firm's gross margin stood strong at 20.7%, and cost control measures led to a solid EBITA margin of 4.3% for the quarter and 4.2% for the full year. The company achieved a record free cash flow, up 19%, and plans to return €632 million to shareholders. Randstad will focus on market repositioning and invest in its 'partner for talent' strategy to drive growth. This involves implementing a specialization framework across markets, some of which will follow in 2024.

Navigating Through Market Changes: A Year of Resilience

In an environment where macroeconomic conditions exerted global pressure, the company faced an 8.6% revenue decline, reflecting market variability across different regions. Notably, Northern Europe and North America experienced steeper contractions while others, like Southern Europe, LatAm, and APAC, faced modest declines. Despite these challenges, the company managed to maintain a solid gross margin of 20.7% and record an EBITA of EUR 265 million for the quarter. For the full year, revenues amounted to EUR 25.4 billion, 6% lower year-over-year, with an EBITA margin of 4.3% and total EBITA close to EUR 1.1 billion.

Strategic Adaptations and Shareholder Satisfaction

In response to the tough macroeconomic conditions, the company's strategy centers on sustaining growth capacity and adapting costs to maintain a lean operation. Significant focus was placed on their 'Partner for Talent' strategy, aiming to refine the company's specialization framework, expand into new market segments such as Healthcare and Finance, and enhance talent delivery centers across key markets. Amid these strategic efforts, shareholders were rewarded with a EUR 632 million capital return, instilling confidence amidst a period of uncertainty.

Preliminary Insights and Recovery Ratio

With Q3 and Q4 of 2022 being exceptionally strong in the company's history, the comparison period posed a challenge. Nevertheless, the diversification and adaptability strategies implemented in 2023 paid dividends. The company's recovery ratio—a measure of the ability to recoup gross profit losses—stood at over 75%, indicating resilience and operational strength in an otherwise constrained market.

Specific Segments and Profit Strategies

The Global Businesses segment faced an 18% decline year-over-year, with mixed results across the board. While Monster's revenues stabilized, RPO business saw a significant decline. However, through strategic reductions and capacity adjustments, the company managed to recover a substantial part of the gross profit decline. With a strong pipeline for global deals and successful outplacement services through RiseSmart, the company views these as platforms for future growth.

Prudent Financial Management in Tough Times

The company demonstrated robust cash flow generation, with a quarter free cash flow of EUR 291 million and a full-year free cash flow of EUR 883 million. Operational expenses were kept in check, resulting in a full-year recovery ratio of 48%, indicating disciplined cost management that aligns with the company's adaptability targets. Moreover, the company maintains a stable long-term investment grade rating from Moody's, with a stable outlook of Baa1.

Outlook: Caution and Exploration of Opportunities

Looking ahead, the company anticipates seasonal impacts to persist in Q1 with continued challenges in revenue growth trends. Operating expenses are expected to marginally rise due to yearly price adjustments and merit increases. Despite these challenges, the company remains aware of growth opportunities and is prepared to scale capacity and invest in areas likely to yield dividends in the long term. Transparency and adaptability are key themes as they brave the anticipation of market recovery, and shareholders can expect a gross margin adjustment and a cautious yet strategic approach to operating expenses in the coming quarters.

Earnings Call Transcript 2023-Q4

[Operator]

Hello, and welcome to the Randstad Fourth Quarter and Annual Results 2023. My name is Caroline, and I'll be your coordinator for today's event. Please note, this call is being recorded. [Operator Instructions]I will now hand over the call to your host, Jorge Vazquez, the CFO, to begin today's conference. Thank you.

[Alexander van't Noordende, executive]

Thank you very much, Caroline, for this introduction, and this is Sander, the CEO of Randstad. So good morning, everyone. I'm here with Jorge, Steph and [indiscernible] from Investor Relations, and I'm pleased to share our Q4 and our full year 2023 results with you.In the fourth quarter, revenue decreased by 8.6% as market conditions continued to affect our performance across the globe. Growth rate is different across regions. Southern Europe, LatAm and APAC showed modest declines, whereas Northern Europe and our North American businesses contracted more significantly. Against this backdrop, we delivered a robust gross margin of 20.7% with around 15% of gross [ pro ] generated from our perm and RPO businesses.Due to our continued focus on cost, we have delivered an EBITA of EUR 265 million, with a solid EBITA margin of 4.3% for the quarter. In full year 2023, we delivered revenues of EUR 25.4 billion, 6% lower year-over-year and an EBITA just shy of EUR 1.1 billion, a solid EBITA margin of 4.2%. Free cash flow was particularly strong, growing by 19% to EUR 883 million, a record for Randstad.But overall, I'm absolutely pleased with how our teams navigated the challenging conditions in their markets during the year, showcasing once again that adaptability is an integral part of our DNA. And as you know, we're always balancing supply and demand to make sure we have the right teams and the right cost structures for the demand we are serving.Based on our performance and our solid balance sheet at the end of 2023, we're proud that this year we will be returning around EUR 632 million of capital to our shareholders. We believe this proposal strikes the right balance between confidence in our business, the ability to execute our strategy and attractive capital returns for our shareholders.Looking ahead to Q1, we remain vigilant about the macroeconomic situation in our markets. Our January organic revenue decline was in line with Q4. However, I'm confident that our deep and long-term relationships with [indiscernible] clients, our market insights and our adaptability, of course, position us well to navigate the current environment.In the coming year, we will, first of all, focus on making sure we have sufficient capacity in the market to get back to growth. But at the same time, we will continue to streamline our indirect cost base, because this will enable us to continue to invest in our partner for talent strategy that we launched during our Capital Markets Day in October. The world of work is changing and with partner for talent, we now have a clear strategy for the future with a new growth algorithm to drive higher growth and profit at the scale that only Randstad can do in this industry.And I'm pleased to say that in the past months, we've made some great strides. First of all, we're implementing our specialization framework by organizing ourselves around operational, professional, digital and enterprise talent solutions.Last year, we introduced digital and enterprise, and today, over half our markets have already implemented the specialization framework around operational and professional with the remaining markets following in 2024. Secondly, we launched initiatives in the key growth segments in our markets. For Healthcare, we will launch in 6 markets and for Finance in 10 markets in the first half of this year.Thirdly, delivery excellence. The rollout of our talent and delivery centers is already ongoing in 6 out of our top 10 markets, and they'll be started in 9 more markets this quarter.Finally, our global delivery capability in digital has doubled to 1,000 people over the last 5 months. So we're on our way, and I look forward to providing further updates in due course.Let me now hand over to Jorge to present the results in more detail.

[Jorge Vazquez, executive]

Thank you, Sander, and good morning, everyone. Let me start by saying in Q4, we delivered good numbers in a challenging macroeconomic environment. Seasonal trends remained intact, but on the low end of the previous years. We did see a slow finish to the year. And as you will see later, it has continued into January, as Sander already highlighted, with a slower ramp-up after the holiday period. In many markets, manufacturing PMIs and industrial production remain at very low levels.Financially, as we will see, Q3 and Q4 are actually quite similar in many key indicators such as revenue, gross profit and EBITA. Under the [ hood ] though, the impact of a very sudden slowdown in December in permanent business was offset by temporary business and seasonality, pretty much the picture of the year. Our adaptability and more diversified portfolio continued to pay off in 2023.One point of caution, Q3 and Q4 in 2022, as we discussed before, were the strongest in Randstad's history. We continue still to [ lap ] an extremely tough comparables period. And in many parts of our business, this is still the second-best year in history. Overall, and more on it later, we remain confident and ready to benefit from the recovery when it comes.Let's break it down and let me now discuss the performance of our key regions, starting with North America. Our new leadership team led by Marc-Etienne is driving the direction of our operations. We have the new specialization framework, Sander just alluded to it, digital marketplace to roll out, as we discussed in our Capital Markets Day, and a push to free up investment capacity. We are on our way.The U.S. economy appears strong, still hiring is concentrated in a few sectors, health care, government and hospitality. And as you know, Randstad historically has less presence, making it a little bit more challenging for us. If we look into the quarter, North American revenue dropped by 16%, stable with Q3, with perm declining 31%, whereas in Q3 was 40%.Bringing it down for more detail, U.S. staffing and inhouse declined by 17%, again, lower demand across almost all sectors, but slightly better than Q3, and we did have this consecutively growing since June, July. Professionals revenue was down 12% and faced challenging market conditions in line with the rest of the market, affecting the IT service sector. The EBITA margin was still a solid at 5.1% as we continued to adapt our operations.Moving on to North Europe's slide on Slide 8. Our Northern European countries operated also in a challenging business environment. We did see the typical seasonal trends in a few key markets, but in others, we saw an increased slowdown. And it is one of the regions with more renewed headwinds as we enter 2024.At the same time, in line with the rest of the year, despite the slowdown in manufacturing where we are so present, we projected EBITA margin at 4.6%, still delivering some EUR 93 million this quarter alone.Breaking it down per country, starting with the Netherlands, revenue was down 8% year-over-year. Remember, again, and here I have to remind you, impacted by reduced COVID-related business. We were the red hot in the Netherlands last year, the highest quarters ever. So this number needs to put into that perspective.We did see a softened decline across all sectors, except primarily the public and automotive industries and the gradual easing towards the end of the year. Perm was down 28% year-over-year. EBITA margin came in again at a robust 6.4%. In Germany, revenue was down 18%, reflecting a very challenging market. Portfolio choices in the year also play a role here. But also last year, remember, we were growing from Q3 to Q4. The profitability of Germany was, in particular, also impacted by a sudden reduction in perm and sickness rates particularly high this quarter.But let me break it down for concepts. Our combined staffing and inhouse services business was down 20%. Again, firms suddenly declined 29% in the quarter, even more in December, slipping from earlier growth in Q1, Q2 and Q3. In addition, we experienced, as I said, the highest sickness rate ever. The quarter's EBITA margin was 1.9%.In Belgium, revenue declined 6%, which is broadly stable sequentially, as we've been seeing throughout the year. Belgium is one of our long established #1 markets with good portfolio diversification and has shown good adaptability. EBITA margin again came in at a solid 5.8%.Other Northern European countries, I'll break it down, reflect a little bit of mixed performance. Nordics was down 18%, Switzerland was down 11%, and our Polish operation was up 8% year-after-year, concluding once again, a very strong year. EBITA margin came in at 2.7% for these countries.Moving on to slightly different image, Southern Europe, U.K. and LatAm on Slide 9. Our Southern European business have experienced very growth trends and shown adaptability. To put it into perspective, we achieved an EBITA only on this quarter of EUR 137 million, a margin of 6.3% for the region. It has also shown resilience, and we are increasing capacity already selectively in some units to enable the standard ramp-up period in 2024.For us this revenue was down 5% yearly, impacted by [ softening ] demand across most sectors over the quarter, with only public sector again and automotive going up. Professionals delivered again solid growth of 3%, but a decline in staffing and inhouse and perm offset is increased. France ended the quarter with a solid EBITA margin of 6%. The latest market data confirmed a slow start of the year, partly affected by the recent strikes and supply chain issues.Turning East, slightly to Italy. So Italy's revenue decreased by 2% compared to previous year, but remained stable compared to the last quarter. Moreover, the company returned to growth in December, which is encouraging. Perm again continued to experience growth of 9% quarter-over-quarter, again, increasing, despite already having a very high base last year. Italy finished the quarter with a remarkable profitability of 8.1%.Looking at Spain and Portugal to Iberia, revenue remained unchanged in the fourth quarter, as you can see, which is an improvement compared to the previous quarters. In December, we were actually back to growth in Spain as well. The staffing and inhouse businesses remained stable, while the perm decreased 2% compared to last year. On the other hand, Professional business continued to grow this time by 5%.Additionally, remember, we acquired Grupo CTC at the end of October, further strengthening our position in the outsourcing space for the years to come. Across the other countries in the region, revenue and profit performance were mixed. The U.K. was down 17% and reflecting primarily portfolio choices and challenging market conditions. On the other hand, by contrast, Latin America is up 11%, with Brazil and Chile particularly growing significantly, which shows our ability to drive growth in profitable segments.And now moving on and (indiscernible) further is to Asia Pacific on Slide 10. The Asia Pacific region also shows a mixed growth trend with more challenging macroeconomic conditions, especially in the second half of the year. Nevertheless, Japan continued to show structurally good performance with 4% growth and sound profitability. We still have significant opportunities in the second largest staffing market in the world, and we continue to take them.Our digital business recorded constant double-digit growth throughout the year, plus 20% in full year 2023. Australia and New Zealand, though, saw continued softening in demand, mainly impacted by the holiday period. Its revenue declined by 9% in quarter 4. Despite the challenging market conditions, though, the health care business, which we are investing in, continues to grow throughout the year, grew every single quarter.India grew 1%, showing resilience and continued focus on our portfolio. And overall, the EBITA margin for the region was at a sound 4.6% in this quarter, which brings me to our global business slides on Slide 11.The Global Businesses segment declined 18% year-over-year. Remember, last year, we were still growing in Global Businesses. Our EBITA margin for Global Business came in at a negative 0.7% in the fourth quarter, though it is a mix of different realities.Monster's revenues stabilized sequentially, but is still down 12%, similar to Q3 and pretty much in line with the broader job board market. The RPO business has experienced a decline of 34% compared to the record high in 2022 and a very strong Q4 of the previous year. We have reduced our programs, though, responsibly, reconfirming our ability to ramp up and down when necessary.To put it into perspective, we recovered more than 75% of the gross profit decline in this year, meaning a recovery ratio well above the 50% of the remaining business. Despite this, it is still the second-best year for our recruitment process outsourcing. We have established ourselves as a leader. Our RPO service is also where we recovered the profits with our clients, and the leading position established is not the basis for future growth. We have a significant pipeline of global deals, the largest ever with a shifting dominance from MSP programs to RPO deals.Also, on a very different dynamic, our outplacement business, RiseSmart, continued to do very well, growing and scaling significantly with heavy digital delivery.And this concludes the performance of our key geographies.So now let us walk us through our group financial performance on Slide 13. Starting with revenue. The group's revenue for the fourth quarter was EUR 6.2 billion, which is a decrease of 8.6% year-over-year. As discussed earlier, the year ended slowly and most sectors experienced weakness, except for public health, education and automotive. There was a regular seasonal impact in Northern and Southern Europe, but Germany, APAC and our digital businesses experienced a deceleration.We will cover gross margin and OpEx later, but the quarter's EBITA was EUR 265 million, with a solid margin of 4.3%. The integration and going down so to net income, integration and one-offs were EUR 45 million this quarter. Of this, EUR 9 million are related to regular M&A integration costs. The remaining EUR 36 million is restructuring expenses, reflecting structural adjustments in our operations.Remember, we operate with a rule of 1-year payback period at max. This quarter, intangible assets, amortization and impairment totaled EUR 58 million. Of this, EUR 45 million is related to goodwill impairment in the U.K. and China. The remainder is just the [ regular ] -- associated with the regular amortization of intangible assets. Net finance costs in quarter 4 were EUR 22 million, primarily reflecting higher net interest rate expenses and a higher net debt level compared to last year.Foreign currency and other effects also negatively impacted us this quarter by EUR 10 million and primarily related to weakness of the U.S. dollar this quarter. The effective tax rate for 2023 was 18.3% due to a tax benefit of EUR 62 million in Q4 related to reassessing the valuation of tax loss carryforward position in Luxembourg. Last year, there was a similar benefit, remember, of EUR 97 million. The projected effective tax rate, and is important for next year for '24, is between 25% and 27%.Having said that, let's turn the page and look at our gross margin dynamics on Slide 14. The fourth quarter gross margin was robust, 20.7%. Our temp margin contributed 50 basis points to the overall gross margin. Despite the decline, our 10 businesses are more resilient than our perm and fee HRS services. The temp margin once again reflects that resilience, but also our discipline in value-based pricing. That price and volume effect combined means that our temp business has shown more resilience in our overall gross profit.As highlighted before, perm revenue decelerated sharply towards the end of the quarter, falling by 26% in Q4, in line with Q3, EUR 223 million. This leads to a negative gross margin impact also of 40 basis points.And again, as you heard, we saw a similar trend with RPO. This year, normalizing our labor market has impacted, which again declined our RPO business by 34%. Perm and RPO jointly represent today 15% of the group's gross profit in the fourth quarter, which brings us now to the OpEx bridge on Slide 15.One important point, this one is sequential. Overall, happy. Adaptability is crucial to be well-positioned for recovery. In our industry, if we get it right in 1 quarter or 1 year, we must ensure it is also right, again, precisely in the following quarter or year. That's how we operate at Randstad.Q3, as we discussed, had some impacts, as it typically does from holidays and other incidentals. But again, the cost discipline is structural. Agility and adaptability puts us in a stronger position for the future. That's why we do it. We can make the right choices, find the correct balances.In Q1, to put it into perspective, we had an OpEx level of EUR 1.1 million -- EUR 1.1 billion. In the fourth quarter, OpEx was EUR 1.016 billion, and pretty much flat sequentially versus Q3. This represents an outstanding adjustment in an inflationary year.For the full year, we achieved a recovery ratio of 48%, well in line and on the high end of always our adaptability targets, for which I'm grateful to our teams and prepare us for a stronger options in 2024 and onwards. This emphasized our field steering model and our business model's adaptability.With that in mind, let's move on to Slide 16, which contains our cash flow and balance sheet remarks. Our free cash flow for the quarter came in at EUR 291 million, pretty much in line with last year. On a full year basis, we have generated a free cash flow of EUR 883 million, which is EUR 144 million higher than in the same period last year than 2022.As discussed in our Capital Markets Day, when we look at our projections and different economic models, we come back to the same conclusion. Our cash flow is much more resilient and predictable than it could be expected. DSO, a metric important for us, was 53.3 days, 0.1 days or pretty much flat year-over-year, again, [ year ] perhaps waving the flag to our finance teams. Our overdues continue to improve, and we are proud to remain in control and apply strict capital discipline.Yesterday as well, we announced the credit rating for Moody's. Randstad has received a solid long-term investment grade rating with a stable outlook of Baa1. The rating will simply allow us to diversify our funding sources going forward.That brings me to the outlook on Slide 17. And let me start first with the activity momentum. We talked about the seasonality before. We anticipate the usual seasonal impact on our business in Q1. The industry is normalizing to the normal seasonal trends. The uncertainty around macroeconomic conditions we faced in Q4 did result in a slow finish to the year, but also with our clients hiring fewer people.Even though January is not the best month to base our analysis on, and you know pretty much why, it is a strange month in terms of recovering from holidays with a slower -- we did see a slow ramp-up than usual, also impacted by holiday strikes and increasing supply chain disruptions. We are being cautious and expect Q1 to be challenging, with revenue growth trends in line with Q4 continuing into Q1 2024.The Q1 2024 gross margin is expected to be modestly lower sequentially due to seasonality. Q4 -- Q1 '24 operating expenses are also expected to be marginally higher, reflecting yearly price adjustments and merit increases. This is our base case, but again, we will continue to work with scenario planning and adaptability. We remain, one, vigilant, like Sander said, two, cautious, but also, three, ready. While we continue to adapt, we are assessing or preparing investments to ensure we are outperforming in the future recovery.We are in a position of strength, as I mentioned before. And in our industry, the one relationship that works is the relationship between headcount and gross profit. Please note there will be a negative 0 point working day impact in Q1 2024 as well.But before I go into my last slide, just to bring us back to the Capital Markets Day and our partner for talent strategy. As a reminder, we will be making changes to our reporting before publishing Q1 2024 results.Our primary segmentation will be based on geography, while secondary segmentation will provide further detail on our specialization strategy. We will provide '23 quarterly numbers already restated in advance of the publication of Q1 2023.And as we close 2023, let's also return, or let's also turn now to our proposed return of capital to shareholders on Slide 18. In line with our capital allocation policy reconfirmed during our Capital Markets Day, we proposed, subject to shareholder approval, a regular dividend per ordinary share of EUR 2.28 per share and an additional cash return per ordinary share of EUR 1.27. This brings the total dividend amount to around EUR 632 million or 78% of our adjusted net income at EUR 814 million.The regular dividend payout reflects the [ regular ] 50% of our adjusted net income. The additional cash return stems from the strength of our balance sheet, which has a net debt of EUR 306 million at year-end and the leverage ratio of 0.3, excluding leases. We have still a share buyback program of EUR 400 million. Today, we announced a [ third ] tranche to repurchase up to 1.6 million ordinary shares. Update on this program will follow as we look.And let me conclude with just 1 or 2 reflections on the entire year as it is Q4 and we wrap up the year. After 2 years of impressive growth, we experienced a decrease in our industry business activity with our significant markets accelerating and the winding down and partially natural winding down of pandemic-related business and projects.Our #1 priority was protecting our margins, and we successfully reduced cost by almost EUR 250 million within 1 year. Despite the challenges we faced, we did achieve a 48% recovery rate for the entire year. More importantly, we protected the investments we want to prioritize, like Sander highlighted, which is a testament to our team's resilience and agility. We call it the best team in the industry. Sander mentioned it in Q3 results and called during our Capital Markets Day.We balanced [ core ] value and delivered a strong year in pricing and cash flow, ensuring we are in a strong position today. And precisely from the acquisition of [ strength ], with the same discipline as always, we can now choose to invest and prepare for growth in recovery. We are more diversified than ever. We are focused on our clients and talent, and we can ramp up capacity where we feel logical. Thank you.

[Alexander van't Noordende, executive]

Thank you very much, Jorge. We will indeed continue to invest in our partner for talent strategy because we can. But before we wrap up our prepared remarks for today, I would like to point everyone's attention to our annual report that we're launching today.Because as the world's leading talent company, our ambition is always to contribute to the communities we operate in by promoting fair labor markets and fostering equity at work. And promoting equity isn't just the right thing to do. It's also a business impact. We deliver the best talent to our clients, we need to consider all talent pools, especially in the talents cash flow.And we're proud to say that in 2023, Randstad was involved in more than 100 social innovation programs with the aim of improving employability and promoting equal opportunities for underrepresented talent. This company is made by people, for people. And with our new partner for talent strategy, we reinforce our equity ambition that would encourage everyone to read the annual report and learn about what makes Randstad [ tick ].Let me conclude by expressing my gratitude to all of our more than 640,000 Randstad talent and people around the globe for all their hard work for their clients over the past year.Caroline, let's open it up for some questions.

[Operator]

[Operator Instructions] We will take the first question from line Simona Sarli from Bank of America.

[Simona Sarli, analyst]

A couple of questions from my side. So first of all, when you talked about the trends on a geographic basis, can you tell us if you're seeing any impact from the Red Sea disruptions across your business? And then secondly, regarding the guidance for Q1 comps, are a little bit easier, and North America seems to have stabilized. So how should we think about the current quarter? And if there is any big difference in terms of month-over-month comps?

[Alexander van't Noordende, executive]

Thank you, Simon, for that question. Let me comment on the Red Sea. Yes, that is impacting our clients' business, of course, primarily in -- here in Western Europe, so in Germany and France. The exact impact of that is frankly hard to say. But it's one of the things that our clients mention when we discuss activity levels with them.

[Jorge Vazquez, executive]

Yes, Simon, let me take the second one. So on the outlook, I would say, actually, there is kind of a welcoming back of regular seasonality in the industry, obviously, after the strange effects [ at ] [ '20 to '21 and '22 ] ahead. So we saw it in Q3 to Q4 with many of our countries showing the ramp-up in line with seasonality, others not, [ as we ] discussed it. But also now, we expect in Q1 the regular, let's say, seasonal behavior from Q4 into Q1. The comparables question, I think if you look at our numbers in particular, and again, heavily impacted by [ '22 ] you saw that last year we had a decline from Q1, which is unique into Q4, basically, as we were winding down a lot of the revenue we had specifically on COVID-related projects. Now I expect that to actually have a bigger impact towards the end of the year. So more we go into the year, the more the comparable effects will [ happen ].

[Operator]

We will take the next question from line Suhasini Varanasi from Goldman Sachs.

[Suhasini Varanasi, analyst]

Two for me, please. Your temp gross margin has actually been very strong in 2023 despite the declines that you've seen on the volumes. Can you share some color on what's been driving the strength and if that can continue into 2024? I'll follow-up with a second question after the answer.

[Jorge Vazquez, executive]

Thank you, Suhasini. So, I mean, our temp margin is in practice relationship or the result of 2 big pushes we have in organization. One is, like Sander mentioned before, a careful [ value ] discussion in Randstad, so make sure that we balance well value and -- or volume and price, and that has had consequences, and positive consequences in terms of temp margin and ultimately value for Randstad. But the second and coming a little bit from a talent scarce market, but as you remember, at the beginning of the year a high inflationary environment, a lot of discipline in making sure we passed on wage inflation and everything that was right for Randstad to pass to our clients. That discipline translated into pricing practices, and we now see the impact of it again in this quarter.

[Suhasini Varanasi, analyst]

My second question is on the green shoots and the potential for investments. I did get some of the verticals like health care, government, hospitality, et cetera. But the regions that you want to invest in, is that U.S. and maybe some countries in Europe? Is it possible to share some color there?

[Alexander van't Noordende, executive]

Yes, let me say -- maybe a little bit more elaborate because, I guess there are lots of questions out there along the same lines. So what do we hear from our clients, Suhasini, first of all, the global economic backdrop is still uncertain. And obviously, everything that's happening in the geopolitics doesn't help. The Ukraine, we just talked about the Middle East. And, of course, not only in the U.S., but in many of our markets, it's an election year. So clients are cautious. They take it one step at a time. And it's almost like -- I say '23 was the year of the recession that never came, except in some parts of Europe, and even there it was mild. But it was generally the mindset of our clients. [ Yet ] we take it one step at a time.At the same time, we are hearing what I would say, emerging optimism. And that means destocking is coming to an end. Inventory levels are plateauing. Some countries show higher industrial orders. We see significant demand for RPO and MSP as well as for BPO in the talent acquisition space. That means clients are preparing for the uptick in activity. And in technology we hear digitization is not yet ready. And now with AI, there's even more work to do.And all of this sort of against the backdrop of some indicators that are moving in the right direction, inflation coming down, PMI is creeping up, et cetera. The long haul in the temp, of course, is what the [ Fed ] and the ECB are going to do and how much confidence that will give our clients to go back hiring, go back invest. So these are all, I would say, bright spots that give us, I would say, cause for optimism that things get -- will get better over the course of '24.Then to your question, what do we do -- and we do pretty much all of this in all our markets. We -- at the Capital Markets Day, we have identified our growth segments, skilled trade, finance, health care, life sciences, digital skills, and we're investing in those across our markets and, of course, in enterprise and digital as well.How do we do that? I mean, we go through our portfolio of business week in, week out, and we decide to invest, and this is with an articulate [ precision ] to invest in those parts of the business, and this can be in one city, in one industry, in one country that are performing well so that we can get more growth out of that part, out of the business. So we reallocate people or we add people there where we think there's opportunity. So this year is all going to be about making sure we have enough capacity in all our markets to get growth in the tank and where we speak of adaptability. And Jorge mentioned to work a couple of times, it's now increasingly focused on our indirect costs.In terms of delivery excellence, we've invested in delivery centers and talent centers. And this is delivery, but it's also growth because if we deliver well and we use talent centers, we can increase our fulfillment rate, which gives a better client experience and, of course, also a better talent experience. We're investing in digital talent centers that we -- where we have doubled our capacity, and this is people working for our clients. It's not people doing bench work, so to speak.In North America, we're rolling out our digital marketplace. We discussed that also during our Capital Markets Day. We now have a plan to roll that out to the whole of North America over the course of 2024, again, to enhance client and talent experience and to increase fill rates and talent utilization, which helps in growth.In enterprise, there's a lot of demand for BPO services around the talent acquisition processes. Think interview scheduling. And in those spaces, we just closed some very significant contracts with some of the large tech companies.And then, last but not least, we're chasing a strong pipeline in RPO and MSP. So just to give you more color, clients are still cautious. However, we see opportunity for growth, and we make sure we have capacity in the market to make that all happen -- involve our main markets.

[Operator]

We will take the next question from line Rory McKenzie from UBS.

[Rory Mckenzie, analyst]

Three questions, please. Firstly, permanent hiring sounds like it worsened a lot across the industry in December and has started this year more slowly than I hoped as well. How does that tally with your comments around seeing some optimism from clients? Do you think this is one more adjustment down before recovery? So your thoughts on the different segments of the market you see doing well? And then secondly, and related to that, on gross margin, that lower permanent volume, of course, impacted Q4 for only 1 month. Are you therefore expecting a greater year-over-year headwinds to gross margin from the permanent contribution in Q1?And then finally, I saw you restated your Q3 gross margin bridge with these results, which gives us a slightly different perspective on the temp versus perm contributions. What was behind that restatement or reclassification and will [ if you ] change in the business?

[Alexander van't Noordende, executive]

Let me say a couple of words about perm hiring, Rory, because your question was, what does it mean for our clients. I talked about some bright spots. I mean, these bright spots are bright spots, but they're not yet changing, or they have not yet changed actual buying behavior of our clients to date, I would say. But again, we're optimistic that over the course of the year, things will improve and get better. Handing over to Jorge to make a few comments on the gross margin.

[Jorge Vazquez, executive]

Yes. So the gross margin -- Yes. So in Q1, I think, again, I also mentioned before, we would like to see the normal seasonality impacts. And that means our Q1 gross margin most likely we're guiding now will be slightly lower. And that has to do, as you probably remember, often with social burdens at the beginning of the year, bench management, typically] also sometimes sickness and [ carnival ] related impacts. So that is just the beginning of the year. Furthermore, indeed, there is -- there continues to be a mix impact from perm and RPO, obviously, bringing the overall margin down. Again, these businesses, all contribute differently. So I think ultimately, I always like to say, our gross margin tends to work with our OpEx in terms of adaptability. So even in the context of what Sander just mentioned in terms of investments, we still know and our teams always manage very clearly where we want to be in terms of adaptability per quarter. So for Q1, we continue -- we can do that as a [ frame ]. You're right. So we restated a bridge on Q3. And it's just basically correcting it for something that was elapsed in the Q3 publication.

[Rory Mckenzie, analyst]

And just a follow-up on the gross margin. Did Q4 have any negative impact of the higher sickness rates that you called out in Germany, for example? Anything you'd quantify and point to? Or is it just a seasonal pattern that we're now observing again?

[Jorge Vazquez, executive]

Yes. [ It ] was the seasonal -- it was a slight -- I mean, I would say, in Germany, of course, our gross margins have been increasing. So it's a mix effect. The net impact, probably you don't see it. That has indeed been an impact of sickness rates and the impact of that in margin in Germany. But again, we see that into Q1 as well. So I prefer to be guiding for a lower Q1 margin than we had in Q4.

[Alexander van't Noordende, executive]

So we wish all sick people in Germany all the best for a swift recovery.

[Operator]

[Operator Instructions] We will take the next question from line Andy Grobler from BNP Paribas.

[Andrew Grobler, analyst]

Just a couple for me, if I may. Firstly, on wage inflation. Could you just talk through what you saw in Q4 and kind of expectations for the beginning of this year, both from an external perspective and also from your own internal cost base? And then secondly, on one-off costs, a bit lower than they were last year in Q4, but still above trend. Can you just talk through why that's the case? And also, when you expect those to normalize back to historic levels? Is that this year or are we going to have to wait a bit longer?

[Alexander van't Noordende, executive]

Thank you, Andy, for those questions. On wage inflation, there's still wage inflation out there. It's now lower in the U.S. than in parts of Europe. In the U.S., it's around 3%, 4% and some -- around 4%, I should say. In Northwest Europe, it's more in the zone of 6%, 7%. France, Italy -- So in the Latin countries, it's a little lower, more around 4%. So there's still wage inflation out there. In terms of the effect of which inflation on our business, we have sort of seen that normalize over the course of 2023 and that's pretty much where we were in Q4.

[Jorge Vazquez, executive]

Andy, let me take the second question. So on the one-offs, yes, still a significant number. Again, here, the policy is simple. I mean, we are looking for structural adjustments. Most of that number, or a large part of that number comes from Germany and North America. So it's not surprising given, let's say, what we see in those markets. We are likely to actually pursue -- over the course of 2023, we actually appointed, let's say, one of our most senior leaders to start pushing to a more [ structural ] [ revisit ] of our footprint or at least our workplace strategy. But as it stands, these were structural adjustments, payback time less than 1 year, with most of the amounts in Germany and North America. They tend to be -- shed a little bit more color for you to kind of reflect a little bit on either managerial layers or at least, as we already highlighted, not necessarily [ field ] or client-facing activities.I mean, if you look at our productivity at the moment and also pointing a little bit towards why we want to start back into early cyclical investments if the context is there, our productivity is actually holding up quite well and even slightly up in many metrics. So in a way, we've done our homework in making the company fit enough to now be ready to prepare and ramp up for the recovery to come. And in a way, that's what we're doing, and we continue to do that every quarter as needed.

[Andrew Grobler, analyst]

So if I could just follow-up on that -- just that ongoing review of the footprint, does that mean that one-off charges through the year are going to be similar in '24 to '23? Is that a decent [ banking ] point?

[Jorge Vazquez, executive]

Yes…

[Andrew Grobler, analyst]

And then on internal wage inflation, what are your expectations for this year for your own costs?

[Jorge Vazquez, executive]

Yes. So I mean, on the first one, I mean, by nature they are called one-offs. So it is hard to now put a number into it. But again, to put [ things ] into perspective, we spend approximately EUR 200 million in accommodation costs a year. So I mean, I don't -- it's hard to say it will be a massive number or low number. I mean, first, let's review it. We don't take likely closing branches and offices. So this is first and foremost a review and making adjustments when necessary and logical, just to point you to what we [ were ] doing and not necessarily the numbers yet. The second question was, sorry, Andy? [ On the ] internal wage…?

[Andrew Grobler, analyst]

Just in terms of internal wage?

[Jorge Vazquez, executive]

Internal wage, yes, it is stabilizing, as you probably have been reading in most countries. I mean the industry, and in general, the world has had over the last 10, 15 years a normal 2% to 3%, which is seen stabilizing. But again, it's very clear to our teams. I mean the results we present here are the group results, but it's the combination of all our teams working. Whatever increases we have in our operations, they need to be accommodated either in terms of pricing or through more efficiency to always have an adaptability target in mind with what we define good. So from that perspective, I think stabilizing back to normal levels and just part of business as well.

[Operator]

We will take the next question from line Kean Marden from Jefferson.

[Kean Marden, analyst]

Apologies that [indiscernible] areas to earlier, but it sounds just to -- thoughtful sort of additional points. So on the OpEx [indiscernible] for the first quarter, can you just confirm that [indiscernible] due to [ wage ] increases and promotions? So just wondering what you will [indiscernible] increase to eventually.

[Alexander van't Noordende, executive]

Kean, this is Sander, and we cannot really hear you, unfortunately. So maybe if you have a question, you can put it in some of the boxes here, and we'll take it from there. So Caroline, let's maybe go to the next person.

[Jorge Vazquez, executive]

We can't understand anything. I'm sorry.

[Operator]

We will take the next question from Marc Zwartsenburg from ING.

[Marc Zwartsenburg, analyst]

A couple of questions. First, on Germany, quite a markdown there in your top line performance. And Jorge, I think you mentioned that part of it is related to portfolio reshuffling. Can you indicate the proportion of the impact of that reshuffling? Or is it really the market getting quite a bit worse due to Rea Sea impacts, automotive, what have you? Maybe a bit more color on Germany, please?

[Jorge Vazquez, executive]

Yes. Marc, I would say -- I mean, obviously, the market is getting worse. So if I would have to put a number, probably outside towards half. I mean part of the portfolio choices we've made, you've seen the positive impact of this throughout the year. I mean our Germany -- our German results have been consecutively increasing quarter-over-quarter, quite profitable businesses. So that has an impact, for sure, because we analyzed the -- or we actually know the loss of it or the impact on revenue. But what we did see in Germany, and that has nothing to do with portfolio, is a sharp deceleration in the market from Q3 into Q4.I mean, in my time here, Marc, I mean, and you've been following us for many times, I've never seen such a long run of low PMIs and especially, manufacturing PMIs in Germany. And if we actually look at output, so industrial output, it's actually the lowest point in many, many, many years in history. So it is a dire moment at the moment. At the same time, as Sander said, there are, how do you call, bright spots. There are signs of potentially order book starting to improve. We are here -- as I said, we are leaner and fitter than we've ever been. But Q4 was one impacted by market.

[Marc Zwartsenburg, analyst]

Then maybe a question on your OpEx guidance. You expect it to be a little bit up. How do you see on the [ FTE ] side, if you're down year-over-year double-digit? Also, wage impact is getting a bit less. And I guess Sander was also saying, well, the focus will be more on the indirect cost, bringing that down, while investing on the growth -- to get the growth in the tank. But then still, is it fair to assume that -- your guidance that on the OpEx is still a bit cautious that will turn out a little bit better than what you're guiding?

[Jorge Vazquez, executive]

Yes…

[Marc Zwartsenburg, analyst]

But the risk is a little [indiscernible], so to speak?

[Jorge Vazquez, executive]

I mean, I wouldn't say [ cost ], but I'm saying we're keeping options in a sense that -- I mean, it is a net impact of merit increases. I mean it is still -- wage inflation are stabilizing, but they're still there. So it's merit increases. Indeed, partially, we start with lower FTE, but we're also talking about investments, right? So -- and I think if we look at the total of that, it is likely that we have a slightly higher OpEx level, again, always within a frame of adaptability year-over-year. So I mean, we guided continually for 40% to 50% recovery ratio, again, one of the sharpest decline in revenue. We delivered fully 48%, if I'm not mistaken. So there's nothing -- and the teams know what to do. We're keeping room and adaptability either to invest or if necessary to go down further. I mean, we only had 1 month, Marc -- it is very difficult to start anticipating a quarter in the year based in the month of January. It is losing some hair because of that.

[Marc Zwartsenburg, analyst]

And can I squeeze in a quick one on the FX impact, was the [ impact ] not quite significant in Q4.

[Jorge Vazquez, executive]

Yes.

[Marc Zwartsenburg, analyst]

Do you see that going forward because --something that...

[Jorge Vazquez, executive]

We hope we had the other way around. I mean, yes, it is -- it was large. I mean you saw the weakening of the U.S. dollar versus the strengthening of the euro and I guess many currencies. Let's hope [ next ] time it turns our way. I mean, we manage the company market by market, and everyone knows what we get [ for ] -- yes. It's just the reality of being exposed to many currencies and in many places in the world.

[Marc Zwartsenburg, analyst]

Yes. Also the Argentina pesos in there doesn't have a large impact that you…

[Jorge Vazquez, executive]

Yes. That has obviously -- that's true that the hyperinflation [ is ] the [ correction ] of Argentinian peso. That's a good point. Yes.

[Alexander van't Noordende, executive]

And it should get less, the [ ARS 3.11 ] [indiscernible]…?

[Jorge Vazquez, executive]

Yes. Also for everyone in Argentina, that should get less, yes.

[Operator]

There's no further questions at this time in the queue. Thank you.

[Alexander van't Noordende, executive]

On that note, Caroline -- Thanks, everyone, for joining the call today. And let me thank again all of our 640,000 talent and people around the globe for their extremely hard work over the year of 2023 and also into Q1, we truly appreciate it. Thanks a lot.

[Jorge Vazquez, executive]

Thank you, everyone.

[Operator]

Thank you for joining today's call. You may now disconnect.