USG People will report 1Q12 results on Friday 27 April at 7am, followed by a conference call at 9.30am CET. At the end of March, management said that revenue growth per working day was -11% in Jan. and Feb. We anticipate 1Q12 sales of € 706m (-10% y/y), with consensus counting on a slightly more optimistic € 713m level. Our forecasts imply a gross margin of 21.2% (in line with consensus) as gross profit should reach € 150m. The anticipated 21.1% gross margin combines a 40bps negative impact from mix effects, a 30bps positive effect from more working days and a 10bps positive impact from the perm business. Adding underlying operating costs (€ 128m) and depreciations (€ 6.5m) to the equation sets our REBITA forecast at € 15.2m, a tad north of consensus. Despite 1Q12 sales could drop 10% y/y, our € 15.2m REBITA estimate situates north of the year-earlier level of € 14.7m, as we expect an unchanged gross margin y/y but a sharply reduced underlying operating cost base. The latter stood at € 144m in 1Q11 before dropping to € 134m in 4Q11 and potentially falling further to an estimated € 128m in 1Q12. Hence, the REBITA margin is set to improve from 1.9% in 1Q11 to 2.2%, driven by the Dutch business where the restructuring’s knife cut deepest. We expect net result to be negative at € 1.8m.
We expect USG to continue its underperformance in the Dutch market. We bank on a 8% sales drop y/y in 1Q12, versus -6% in 4Q11. Thanks tothe ongoing restructurings, however, the Dutch REBITA margin is expected to improve by 110bps y/y to 3.7%. Focussing on client profitability, we anticipate sub-par 1Q12 sales growth in Belgium: we count on 13% in 1Q12. While profitability is typically lower in the first quarter of the fiscal year, we are looking for a 4.5% margin, down from 4.9% in 1Q11. Sales growth in France is forecast to end up in negative territory, moving from 0% in 4Q11 to -12% in 1Q12 on the back of slower demand and difficult comparables. Since the cancellation of the low wage subsidy system, profitability is under pressure in France. We count on a REBITA margin of 1.4%, down 20bps y/y. In Germany, sales could contract 6%, mimicking the 7% drop in 4Q11. We expect the REBITA margin to reach 3.0%, down 20bps y/y
Outlook.We expect the tone of the outlook statement to be quite negative and cautious, pointing to further contraction of the growth rates. In our view, macro-economic challenges are ample and in any way fail to supply thebricks and mortar for constructing a scenario that stools on improving business conditions in the coming months. Hence, our 2Q12 outlook is gloomy indeed, as reflected in an anticipated 12% sales decline.
Investment case. Our Accumulate rating and € 11.0 TP is unchanged ahead of the publication. Management is working on improving the profitability in all markets apart from Belgium and an array of recently announced cost cutting measures should allow USG to have kept its operating profit stable in 1Q12. But we expect sales trends to continue reflecting the on-going turmoil in Europe, which upon continuation might culminate in a fresh bout of restructurings. Hence, although valuation looks undemanding, a clear improvement in overall sentiment is a prerequisite for the inherently cyclical stock to regain its momentum.