Adecco Group AG

SIX:ADEN

Earnings Call Transcript 2018-Q1

[Operator]

Ladies and gentlemen, good morning. Welcome to the Q1 results 2018 analyst conference call. I'm Iruna, the Chorus Call operator. [Operator Instructions]. The conference must not be recorded for publication or broadcast.At this time, it's my pleasure to hand over to Mr. Nicholas de la Grense, Head of Investor Relations, accompanied by Mr. Alain Dehaze, CEO; and Mr. Hans Ploos van Amstel, CFO of the Adecco Group. Please go ahead, gentlemen.

[Nicholas Edward de la Grense, Head of Investor Relations]

Good morning, and welcome to Adecco Group's Q1 2018 Results Conference Call. To present to you today, I'm joined by Alain Dehaze, Group CEO; and Hans Ploos van Amstel, Group CFO. Before we start, please take a look at the disclaimer regarding forward-looking statements in this presentation. Let me give you a quick summary of today's agenda. Alain will first briefly present the highlights of the quarter. Hans will take over to review the financial performance and comment on the outlook. Alain will then discuss our strategic and operational progress and initiatives. We'll then open the lines for your questions. And with that, Alain, I hand over to you.

[Alain Dehaze, Chief Executive Officer]

Thank you, Nick, and good morning, ladies and gentlemen. Welcome to our first quarter 2018 results investor call. I will immediately start with the slide on the key highlights. In the first quarter, our positive revenue momentum has continued, with growth of 6% organically and trading days adjusted. To be noted is that, in France, the growth improved to 10%, and we closed the gap to the market, as we committed to, last year. Also, another very solid performance in permanent recruitment, with 18% growth.Gross margin was 18.1%, down 60 basis points organically, impacted by several non-underlying items, such as the timing of bank holidays, the higher sickness rate and strikes in Germany, and the lower CICE subsidies in France.EBITDA margin, excluding one-offs, was 3.8%, down 100 basis points due to the lower gross margin, as I just mentioned it but also investments in search and recruiters and strategic investments in digital and IT, which had a 25 basis point impact.It is important to note that the margin trends will improve from the second quarter. As bank holiday timing is favorable, the year-on-year impact of investments reduces and/or productivity improves.We are on the right track with our investments in the innovation and the transformation agenda. We made good progress with GrowTogether, which is transforming the way we interact with our customers to create more value at a lower cost to serve. And GrowTogether will deliver the first EUR 50 million productivity savings in 2018. And we strengthened our solutions portfolio with the acquisitions of General Assembly 2 weeks ago and Vettery in February.And with this, I hand over to Hans for more insight on the financial performance.

[Hans Ploos van Amstel, Chief Financial Officer]

Thanks, Alain. We will now discuss the financial performance in more detail, starting with our revenue growth. The underlying growth continued at 6%. We're pleased with the strong growth in France. We closed the gap to the market and improved the mix. And in Italy and Spain, we saw good growth momentum.In North America General Staffing, we're seeing the first improvements coming from the new segmentation approach. On the other hand, we had slower growth in the U.K., following the strong double-digit growth in Q1 of last year. Professional Staffing in North America was stable, and the U.K. results went down. The Brexit uncertainty remains. In Germany, our General Staffing results are impacted by the merger of our Adecco and Tuja brands. The integration will strengthen our business to become a strong #2. It is impacting the performance in the short term. Our German Professional Staffing and permanent recruiting continued to perform well, and in Switzerland, we also delivered solid growth into the quarter. LHH market share growth continues to be strong. Revenue is down, reflecting the countercyclical nature of the career transition business.Turning to the EBITDA margin, down 100 basis points in total, which included many elements, so it's important we go through all the details.First, we had a negative 35 basis points impact from the timing of bank holidays and the unusual level of sickness and strikes in the first quarter. The CICE reduction had a 15 basis point impact. Pricing and mix had a negative 10 basis point impact. This leaves a 40 basis point reduction in the EBITDA margin coming from higher cost. This is explained by, first, we continue to make the right investments in GrowTogether, IT technology and the digital advancements, which had a 25 basis point impact in Q1. This is in line with our guidance. The strategic investments will start to improve the profitability in the second half of this year. We will deliver the first GrowTogether benefits in the second half. The remainder 15 basis point margin reduction comes from lower productivity in the first quarter.Looking at the productivity in the first quarter, we had a challenging comparison base. Recall in Q1 of 2017, we delivered 6% growth, with only a 1% increase in headcount. Needless to say, we expect to improve the productivity. Driving strong underlying operating leverage is a key pillar of our Perform agenda, therefore, we remain very focused on driving the productivity to get the right balance between the Performance and the Transform agenda. Remember that the investments we're making today will drive productivity starting in the second half of this year. On the short term, implementing new systems and digital solutions has impacted our productivity in Q1. The investment will deliver higher profitability in the second half of 2018. Looking at the profitability at a country level. We're pleased with the underlying performance in France. The headcount investments delivered strong growth, with a good gross margin. The EBITDA margin was impacted by the CICE and the investments in IT and new digital solutions.In North America/U.K. General Staffing, we're building the foundation for profitable growth. This requires investments in capabilities and new front-end client-facing tools to support the segmentation strategy. This impacted the margin into the quarter.The German integration started. Half the margin decline comes from the less favorable bank holidays into the first quarter, the balance comes from the impact of higher sickness rates and strikes, the lower growth and double running cost during the integration. As you have seen, we took a EUR 19 million restructuring charge, mostly related to the German integration. This reflects the consolidation of the branch network and moving activities into the shared service center. Both will improve our profitability going forward.Benelux and Nordics was impacted by the bank holidays and client mix. The mix will improve in the quarters to come. We delivered strong profitable growth in Italy and Spain. Japan had a good quarter of profitable growth, while we're investing in new IT technology.Let's now look at gross margin. Reported gross margin is down 70 basis points. Acquisitions and divestitures had a positive impact of 10 basis points. Currency had a negative 20 basis point impact. This leaves a 60 basis point organic decline. Permanent recruiting had a 20 basis point positive impact. This is offset by the lower LHH mix of 20 basis points. This means a 60 basis point reduction in temporary staffing gross margin. 25 basis points is due to less favorable timings of bank holidays, which had a significant impact in Germany and other regions where we operate the bank's model. 10 basis points is due to higher sickness rates in the Benelux and Germany and the strikes in Germany. While this was in line with market, the impact was unusually high in Q1. CICE had a negative 15 basis points impact. So all together, this leaves the net 10 basis points comprising a mix. In summary, the underlying gross margin trend actually improved slightly.On SG&A, it's good to recap the key message. SG&A increased 8% organically year-on-year. Half the increase comes from the 4% headcount increase to support the growth. 2% of the 8% increase is explained by the strategic investments we're making in IT technology, GrowTogether and the digital agenda. The balance comes from wage rates inflation, higher bonus payments related to our permanent recruiting results and costs associated to the GDPR initiative.Cash flow. First quarter cash flow conversion was 75%. DSO were 53 days versus 51 days last year. The Easter timing and the growth mix impacted the average receivables. Timings of tax payments also impacted the first quarter cash flow. Turning to the outlook. The exit rate is 5% to 6%, timing of bank holidays will have a positive impact of around 15 basis points in Q2 versus last year, and we're on track to deliver the EUR 50 million GrowTogether benefits in the second half of this year.Back to Alain to talk about our strategic and operational progress.

[Alain Dehaze, Chief Executive Officer]

Thank you, Hans. Indeed, let's now look at our strategic and operational progress during Q1. First, an update on GrowTogether, which is at the heart of our transformation agenda. We made good progress in the quarter with the rollout of our new Integrated Front-Office tools. During the first quarter, we continue to deploy the InFO, or the Integrated Front-Office platform, which integrates seamlessly with new customer-facing portals.In France, our candidate mobile application is now used by 1/3 of our associates, and we expect half to be using it by year-end. So more online interactions and more efficient sales and recruiting processes will help drive consultant productivity and also improve the customer experience, which we measure with the Net Promoter Score.Another example is middle and back office process optimization. The time capture to cash collection process is being fully digitized. In the Netherlands, for example, this process will be completed by the end of 2018. This increases efficiency and reduces errors, which should also help DSO. During the quarter, we also continued building our portfolio of digital solutions with 2 acquisitions: Vettery, about which we talked at our Q4 results and General Assembly, which I would like to present to you now. The world in which we live today is shaped by an acceleration of technical -- technological rate change, impacted by megatrends such as automation, artificial intelligence and digitalization. It is already impacting our clients who tell us that there is not enough supply of talent with the right digital skills. And disruption will also mean that, at a global level, as many as 375 million workers will need to reskill and transition to new roles by 2030. General Assembly was founded in 2011 to solve this skills gap, providing training in high-demand digital skills like coding, data science, design and marketing.General Assembly, or GA, is no ordinary education provider. It is specifically focused on bridging the gap between education and employment. GA works with thousands of hiring partners to develop courses that deliver the skills they need most.The result is excellent, excellent outcomes for both students and for very satisfied enterprise clients, with a high NPS. And GA has been highly successful. In 2017, the company achieved revenues of USD 100 million, with 30% compound growth over 3 years, and another strong year of growth is anticipated in 2018. GA's solutions span both B2C and B2B segments, delivering training at its 20 global campuses at enterprise client side, online and also via a blended model. Its origins are in B2C, but the strongest growth potential is in B2B, where GA has developed highly innovative solutions for enterprise. For example, helping them to source and train new talent with its talent pipeline as a service model and also to assess and upskill existing employees.GA's focus on education to employment makes it a strong strategic fit with the Adecco Group. There is strong demand from our clients for upscaling and rescaling solutions, something we discussed at the Capital Market Day last year, and our clients are actively looking for partners to help overcome talent scarcity.In terms of specific revenue synergies, GE -- or GA will clearly enhance the value proposition of Lee Hecht Harrison. Career transition is evolving into workforce transformation. Working with General Assembly, LHH will have a unique value proposition.In Professional Staffing and Solutions, our brands will have access to high-demand talent, with potential to leverage General Assembly's talent pipeline as a service model to create pools of highly-skilled candidates to be deployed with clients. The General Assembly team also recognizes value to be part of the Adecco Group. GA will leverage our more than 100,000 enterprise client relationships, and we have already identified many opportunities. Access to our global infrastructure, data and comprehensive labor market knowledge will also further accelerate GA's development.Finally, the acquisition of General Assembly fits well with all criteria for merger and acquisition. General Assembly operates in a fast-growing market with attractive profitability, and it's adjacent to the services we currently offer. It is a natural fit with our existing solutions and allow us to leverage multiple workforce megatrends. It allows for the realization of significant revenue synergies. And with a very strong growth and margin potential, we expect the acquisition to be EVA positive by 2021, with very significant further value in the subsequent years.Coming now to the concluding messages. In Q1, we saw a continuation of the positive revenue trends of 2017, which also continues into Q2, with growth of 5%, 6% in March and April organically and adjusted for trading days. We closed the gap to the market in our largest country, France. And we have a clear strategy to improve the performance in General Staffing in the U.S. and Germany, where we are making steady progress.We continue to invest in the transformation and digitalization of the group. In our Transform agenda, GrowTogether is gaining momentum on its way to deliver EUR 50 million productivity savings this year and EUR 250 million in 2020. And our Innovate agenda will strengthen it with the acquisition of General Assembly, which will be a key differentiator for the Adecco Group.In the last 12 months, we have established businesses in a number of high-growth, high-value adjacent markets, including online staffing with Adia, and this cocreated with Infosys; in the freelance business with YOSS, cocreated with Microsoft; but also in the digital permanent recruitment with Vettery; and now, in the upscaling and rescaling with General Assembly.With these ventures, we are aiming to build high-margin businesses of scale within the group to complement our core operations. On the Perform side, we expect the margin trend to improve in Q2 and the second half, as one-offs reduce and we start to get the productivity payback from all strategic investments. To finish, I would like to thank our more than 34,000 worldwide colleagues for their commitment and engagement. And I thank you for your presence, your attention. And now I would like to open the line for the questions.

[Operator]

[Operator Instructions] The first question comes from Paul Sullivan from Barclays.

[Paul Sullivan, Director & Analyst]

Just a couple of related questions on margin trends. It looked like -- I mean, SG&A was clearly higher than expected in the first quarter. So what's the conclusion from that? Are you running a little bit behind schedule in terms of the cost and benefits from the various different programs? And how much visibility do you have on second half improvement? And maybe trying to look at that slightly differently, in terms of that organic growth rate in SG&A going forward, how should we expect that 8% in Q1 to evolve into Q2 and the second half? And then just finally, to wrap that all up and to cut to the chase, I mean, the market is expecting broadly flat adjusted operating profit margins for the full year on the base of mid-single-digit organic revenue growth. Do you still feel that is viable?

[Hans Ploos van Amstel, Chief Financial Officer]

Thanks. There's a lot into the questions, so let me give it in different slices. First, give you some more color on Q1, then give you where we see it going into the second half and how we will position Q2. I think, first, we're in a midst of a transformation. And what we are continuing to do is make the right investments to strengthen the future of the business. We're making good investments in IT, GrowTogether and the digital ventures, and we're really excited about that. What we have been doing well in 2017 is offsetting the investments with operating leverage, and that continues to be our goal. It is true that we did not do that in Q1, and I think there are a couple of reasons. One, the comparison base is strong. We delivered very high level of productivity in Q1 of last year, 6% revenue growth with 1% FTE growth. We're implementing new systems and new solutions for our people in the branches, that has impacted the productivity as well. And we saw also Germany, where we're in the midst of the integration. So there are a couple of things into the quarters. As I said in my introduction, we expect to do better. Our goal is to improve the productivity and the margin. So there are 2 things which are important in that. One, if we look at the second half, the good news is that the investments we're making will deliver the returns in the second half. The first GrowTogether benefits will be delivered in the second half. And what that means, there will be EUR 50 million of true productivity coming through the bottom line into the second half of next year, and that will come on top of the normal productivity and operating leverage. So we will expect the margin to improve into the second half. So in Q2, we want to do better because of -- Q1 had also a lot of one-offs. Now we're still in the investment phase in Q2. We will expect SG&A to be up a little less than that plus 8%. But I think the key message is the comparison base. We -- this is the first quarter led by the operating leverage. It was not to the level of '17, that we come back. But I think the real message is, in the second half, GrowTogether will deliver the benefits, and we will come back to a normal level of productivity.

[Paul Sullivan, Director & Analyst]

And you sort of alluded to second half margins up year-on-year. So do we infer from that, that the sort of full year expectation of flat on the basis of current revenue trends is still feasible?

[Hans Ploos van Amstel, Chief Financial Officer]

I cannot give you a margin outlook, given the nature of our business because there's a lot going on. I think what I can give you as hard line is that we will deliver EUR 50 million, which equates in the second half to 40 basis points of true productivity on top of the normal operating leverage. There are other elements into the mix as well. The CICE, the pricing environment is a little better in Q1, but that's where I would let you make the outlook. But I think the solid line is that what we did not do in Q1, we will do into the second half, plus the GrowTogether benefits.

[Operator]

The next question comes from Tom Sykes from Deutsche Bank.

[Thomas Richard Sykes]

But just -- you mentioned the other elements of the SG&A increase in Q1 building up to the 8%. And I just wondered whether you could go through some of those, please. Because obviously, as you mentioned, your FTEs were up by 4%, but the SG&A up by 8%. You mentioned GDPR. Could you maybe just break down what was -- what staff costs were doing versus non-staff costs, please? And then I've got some questions on the on-site business. You should be annualizing, I think, a lot of the on-site growth, so that was clearly very fast in Q1 last year. But what I don't quite understand is that your branch network was said to be up 1% in Q1 and then up 4% in Q -- sorry, 1% in Q4 and then up 4% in Q1. So was there any delayed increase in SG&A in taking on some of those on-site clients at all which would affect your conversion? And when I look at that on-site business in totality, is it above or below group level profitability at the moment, please?

[Hans Ploos van Amstel, Chief Financial Officer]

I'll maybe start with your first question. So SG&A was up 8%. As you say, half of that 4% was the headcount increase. 2% out of the 8% were the strategic investments, which was in line with the guidance, which splits between GrowTogether, IT and the digital advances. The remaining 2% was wage rates inflation, the bonus payments for Perm business, which was up 18% and some initiatives like the GDPR. I think the wage rates inflation was around, [ perhaps ], a good 1%. So the personnel costs, that -- without all the -- we'd be up 5% behind the 4%.

[Alain Dehaze, Chief Executive Officer]

Now on your question regarding the on-site business, there were a couple of questions. So first of all, we had a strong performance of the on-site, a 31% growth in the first quarter. And this growth level is coming from, let's say, 3 growth drivers: first, migration; second, increase of share of wallet; and third, winning new clients. What you see in our figure regarding the branch network is that we consider a new on-site as also a new -- let's say, a new location. So that's what you see in these figures. And that's why it is difficult to read exactly what is coming from outside, what is coming from the branch network reduction and so on. Now regarding the second part of your question regarding the profitability, the on-site margin is above the average gross margin we have in the large, so that's why it is so interesting for us to migrate, but it is below the group average.

[Thomas Richard Sykes]

Okay. And if you look at your conversion and whether there were any set-up costs and how the profitability is in the first -- because there's obviously been quite a substantial amount of growth. I mean, I think you're up 20% in Q1 last year, so you must be up roughly 50% in the on-site business over the last 2 years in Q1, and that doesn't seem to have had a positive impact on your profitability or at least it's difficult for us to disaggregate that from everything else that's going on. And it's the major driver for your sales growth and say -- or one of them, and say, therefore, is that generating the profitability that is expected or rather maybe one-off costs in setting up the on-site and that on-site growth that are themselves are going to fall away in the second half of this year, please.

[Hans Ploos van Amstel, Chief Financial Officer]

It's good because I think your question is because of [ why ] -- because of where we are on our costs. That's not coming from the on-site business. The on-site business continues to drive in line with expectation. I think why the productivity was a little less than we normally would expect were the 3 things we said. We had a very tough comparison base in Q1. We are implementing new front-end solutions in our branches as we speak as part of the Transform agenda that impacted our productivity. Germany, the integration of Adecco and Tuja. In the U.S., we're building capabilities on the segmentation. So those are more where -- between the normal conversion operating levels that are below where we want to expect, that we're coming back to in Q2. So for the second half, we will come back to the normal level of conversion productivity, plus the GrowTogether of EUR 50 million. That was the noise into the quarter but not related to the on-site.

[Thomas Richard Sykes]

Okay. Perfect. And just one final question. On Vettery, what are the revenue and profit expectations for full year '18, please?

[Alain Dehaze, Chief Executive Officer]

At this stage, we don't have -- we don't give a precise guidance. As you know, we have now started to expand Vettery first in the U.S. There were first in 9 cities in the U.S. We are expanding them. We will also start in U.K. So we are still at an early phase to provide the guidance on this.

[Thomas Richard Sykes]

But would you be able to say what annualized run rate of revenue that actually generates them? Is it EUR 80 million that you spent on it? So just wondering what kind of revenues that actually generates.

[Hans Ploos van Amstel, Chief Financial Officer]

I think we will, going forward over time, provide more disclosure to all our digital advances. I think where you can be reassured on that is we had a call within -- we're on track to the targets we need to deliver, to deliver the returns out of that investment. So Vettery is the first thing we already did on the profitability, which they were very happy with. We integrate finance and the legal, which given them immediate savings. So on the integration, we leave them alone on the front end. But on the back end, we're making already the integration, that is giving us savings already. And in the call, the management, they thanked us for doing it. So that's good. So they're pleased with where we're integrating and where they can grow alone. And also, if I look at their growth booklet, it's in line with the economics set when we bought the business to deliver the targets we committed to.

[Operator]

The next question comes from Alain Oberhuber from MainFirst.

[Alain-Sebastian Oberhuber]

Two questions from my side. First is regarding the investments. I mean, you mentioned all these investments. Is it also because the market is getting tougher, i.e. do you sense some price pressure in some of the markets? And the second question is more housekeeping, is regarding the tax rate, what we could expect for this year. And maybe also, what we could expect from the DSO for the year, given that it increased 53 in Q1.

[Alain Dehaze, Chief Executive Officer]

Okay. Now regarding the price pressure, I would say that, in Q1, we saw the same pricing trends with large clients as in the previous quarters. As you know, this market remains a competitive market. But yes, there was a slightly improved pricing environment in the small and medium segment. You have heard the figures Hans quoted. There are indeed, let's say -- there is a slight improvement versus the previous quarter, but I would say that it is too early to call this a trend. And we see this price pressure release, especially in a number of countries where you have already a talent scarcity.

[Hans Ploos van Amstel, Chief Financial Officer]

And what we also see from the investments, which is good, that's why we're very confident on the benefits we will deliver in the second half. We get good traction on the tools we're rolling out. An example, [indiscernible] what we're doing in the digital space with the candidates in France at the moment is not only getting us higher productivity, but also on the candidate engagements, the matchings. We can, what I always say, fill the order faster and better with these tools, which should give us good growth and is also good for long-term pricing, so that's good. On your point on the tax rate in the quarter, it came down with some discrete events. We get the benefits from the U.S. tax rate. For the fiscal year, we expect the tax rate of around that 27%. DSO was slightly up into the quarter. Timing's played a little, but what's important for us is 3 things. I think there's always pressure from large customers. And with our continued focus on EVA in the branches, we'll make sure we're very disciplined on it because large customers. But what's very important is the quality of the receivables. So sometimes it's 1 day up if you have large customers because the quality of the receivable is the most important thing. We have no overdues, [ had ] we really [ checked ] that. So it was a little higher, but I want you to be reassured that the oversight and quality of the receivable remains. Q1 of last year was also a little bit low because it ranges between 51, 52, 53 days, so it's hard to put -- give a precise answer. But Q1 was a little bit impact by Easter, so we hope to drive that down.

[Operator]

The next question comes from Hans Pluijgers from Kepler Cheuvreux.

[Hans Pluijgers, Head of Research of Benelux]

One question from my side left. Looking at the post savings, the first measure have been taken in Q1, where you indicated a big part related to Germany. But could you give somewhat more detail where, let's say, those savings are, let's say, those investments and restructuring charge have been spent on? So what kind of savings are you also then looking for going forward? Is it mainly coming from -- purely from back office or marketing? Could you give some indication? First of all, where will you spend it on and where do you, let's say, expect it will come from, say, on the saving side?

[Hans Ploos van Amstel, Chief Financial Officer]

Yes. So in Germany, we are doing 2 things. We are integrating the branch network. We have Adecco and Tuja, so we're eliminating some of the overlap. And with that, we can also put the segmentation strategy better to work, so that should give us growth going forward. The second thing we're doing is, with the integration of Tuja, we're also moving activities into our shared service center of Adecco. Tuja was run relatively standalone, and now it's getting integrated at the front and the back. Therefore, we had a relatively large -- with this merger, a large restructuring cost. That will have a payout of around 24 months. Germany is a little bit more expensive. Where will we get the savings? First, from the integration of the branch offices, a more effective and efficient branch network, and we'll get savings on the shared service center. But at the moment, have a little bit double cost because while we're building up the capabilities in the shared service centers, we hire people. That will fall off in Q3, so we're in the midst of this integration, so we're building up the capabilities, and we will let that go. So Q3, the margin in Germany will improve. And I don't know what -- Alain, whether the [ new addition because of ] the growth or how we integrate back Tuja. It strengthens the business because we now go to market with one connected commercial strategy over the app, Adecco [ app ].

[Alain Dehaze, Chief Executive Officer]

Absolutely.

[Hans Ploos van Amstel, Chief Financial Officer]

So those were 2 businesses, and now it's one business also at the front bank.

[Alain Dehaze, Chief Executive Officer]

Since the 1st May, we are operationally merged. So there is always a legal process in Germany where you have to agree with the workers' council and the unions about this merge process. This has been done and no [ take back ]. Technically, operationally, since the 1st May, we're up working and acting as one company, Adecco in Germany. And with all what we are doing, putting the segmentation in place and merging the number 6 and the number 7, we are building the #2 on the German market.

[Hans Ploos van Amstel, Chief Financial Officer]

Yes. And maybe -- [ go ahead ].

[Hans Pluijgers, Head of Research of Benelux]

Are those costs mainly now related to people or also, let's say, to lease -- write-down on lease cost and on the brand name? Or how should I see that?

[Hans Ploos van Amstel, Chief Financial Officer]

No impact on the brand name. It's -- majority is people-related costs.

[Alain Dehaze, Chief Executive Officer]

Yes.

[Hans Ploos van Amstel, Chief Financial Officer]

And recall, when you do this -- you won't always want to hear this. But when you make such a transformation, you will really strengthen the business, but we need to also build new capabilities. So the change is a little bit more than a net change because you are strengthening the commercial ability, you move things into the shared service center. But we will deliver better margin in Germany in Q3 because the first hard benefits from the cost savings will come. It's predominantly people-related costs. I think it's good, while we're in Germany, to emphasize that our professional business is doing well and also in permanent recruiting, we're doing well. So this is really assumed to Adecco-Tuja. The balance of our business in Germany is delivering solid results.

[Hans Pluijgers, Head of Research of Benelux]

And also, going forward, you should mainly, let's say, assume that the savings will be people-related?

[Hans Ploos van Amstel, Chief Financial Officer]

Yes.

[Alain Dehaze, Chief Executive Officer]

Yes. Yes.

[Hans Ploos van Amstel, Chief Financial Officer]

Yes. Better productivity and conversion rates are coming from Germany. And you see that in the margin, we need to get the margin back.

[Operator]

The next question comes from Konrad Zomer for ABN AMRO.

[Konrad Zomer, Equity Research Analyst]

Two questions, please. The first one on the targeted EUR 50 million of efficiency savings for the second half of this year. Can you share with us how we are going to see those efficiencies coming through? I mean, how specific will you be in telling us where you achieve these savings? And my second question is on the U.S. You mentioned in the press release that the growth in IT recruitment in the U.S. was negatively impacted by market developments. Can you share with us if that's particularly related to the West Coast, or is that a nationwide decline?

[Alain Dehaze, Chief Executive Officer]

I can start with the U.S. But what you see in the U.S. and in IT is that, yes, you have the shift of technology. And a shift of technology -- and sometimes, both shift of technology and shift of geography. One of the typical example is when you move from data center on-premise to cloud, you need all the type of capabilities, or customers are reducing their capabilities in typical data center expert, and they are going to cloud. The question is, where do they go to cloud? Not, per se, in the U.S. This is a typical example of technological inroad, and that's what we see in the U.S. It's not really a question of West Coast or East Coast, it is really a change in technology and, thus, in the needs of profile of talents.

[Hans Ploos van Amstel, Chief Financial Officer]

On delivering, obviously, the targeted EUR 50 million. I think the key line towards is that the SG&A as a percent of sales is coming down and that the conversion ratio goes up beyond the normal operating leverage, so that you deliver EUR 50 million [ real ] savings on top of normal operating assets. That I think is the real line we will make very clear, so that you see the results from the EUR 50 million coming to the bottom line. Now what do we do internally to make sure we realize that? Needless to say, we have a very targeted headcount tracking by function, by country with GrowTogether. With a more customer-focused and candidate-focused matrix, we're driving the productivity through the new tools we're bringing to the business. And with digitalization, bringing new front-office solutions, we're setting clear productivity targets and are putting that into people's budgets. So when we get new tools for digital time sheets, we know how much productivity we get, and we adjust the headcount. So we internally track it at that level of specificity, by function, by country. And then also becoming more customer-centric for driving down the indirect spend, any function which is not customer facing that, that gets optimized. But really, the outcome should be that you see EUR 50 million real savings on top of normal operating levels. And we'll make sure that we report that, that you can really see we deliver better profitability with it.

[Operator]

The next question comes from George Gregory from Exane.

[George Nicholas Gregory, Research Analyst]

Can we possibly go back to the Slide 8 where you showed the EBITA margin evolution for the quarter, and you helpfully identified the various buckets? Could we just use that as a purpose of discussion for the duration of this year? Obviously, the non-underlying effects you've explained on the sickness and bank holidays, and we have guidance for the remainder of the year. The 25 basis points of underlying, which is made up of CICE and base effects, how would you expect that to evolve for the duration of the year? And similarly, on the final bucket, the minus 15 bps which you attributed to reduced productivity, how should we think about that for the duration of the year, please? So really it's the minus 25 bps organic underlying and the minus 15 bps, please.

[Hans Ploos van Amstel, Chief Financial Officer]

Yes. Maybe I'll give some more color already for the second quarter. The bank holidays will be favorable in the second quarter by 15 basis points, so that will be a positive. CICE, we expect to continue at that same level of around 15 basis points. What's not in here is that one I'll just be disclosing. Currency, we expect to continue also at the similar level of Q1 and M&A. So -- and pricing and mix, our goal is to hope that we can keep that momentum we're getting into Q1, and that will take the gross margin for Q2 down by around 20 basis points all-inclusive. If we look at SG&A, 2 things. In Q3, Q4, as we said, we get back to normal productivity. The GrowTogether savings will come on top. In Q2, we still have the effect of a very lean base. We have very strong productivity also in Q2 of 2017. We're still in that investment base on the strategic initiatives, so it's fair to assume SG&A will be slightly below the Q1 level organically. But we're still, in Q2, have a little bit in the investment base. And then in Q3, Q4, we will really come back to the productivity. So that minus 15 points should be a plus of GrowTogether and normal operating leverage, and we'll show that with that transparency.

[George Nicholas Gregory, Research Analyst]

And sorry, just going back to the gross margin dynamics. The plus 10 net on M&A and FX. The M&A, is that the line, or what's the plus 10 bps on M&A?

[Hans Ploos van Amstel, Chief Financial Officer]

That is Vettery -- I'm sorry, Mullin -- no, Mullin. Sorry, I apologize. That is Mullin. We bought Mullin last year, which is in the LHH business. I'm sorry.

[George Nicholas Gregory, Research Analyst]

Okay. And sorry, your -- I understand the minus 25th bps -- 25 bps on strategic initiatives. But the minus 15 bps, the other, would you expect that -- it sounds like you expect a similar -- a headwind perhaps not quite as big in Q2. What happens to that minus 15 bps as we go into the second half, the other?

[Hans Ploos van Amstel, Chief Financial Officer]

When we go into the second half, that's become a positive again. So what you will see in the second half is that the operating leverage from the growth will be positive plus EUR 50 million of GrowTogether savings.

[George Nicholas Gregory, Research Analyst]

Sorry. And on the very -- the final, the third bucket, where you had a -- you'd suffered 15 basis points in the first quarter, the SG&A revenues Other, that will be a positive in the second half.

[Hans Ploos van Amstel, Chief Financial Officer]

Yes. Because that was a little bit -- the outlier into the quarter is that what we have been doing in the past and then the full year of '17 is the minus 25 of investments we always offset with operating leverage, that we didn't do for the reasons we discussed in Q1. Our expectation in the second half is that we will do that, plus deliver the GrowTogether benefits.

[Operator]

The next question comes from Rajesh Kumar from HSBC.

[Rajesh Kumar, Analyst]

Just on the productivity piece. Could you give us some color on the difference between volume productivity and value productivity? And then I appreciate you talking about revenue per head. But if you were looking at it from the lens of placements per head or number of temp man-hours managed per head, how is that shaping up? And do you see any difference in the rate of wage inflation your temps are getting versus your staff are getting? And the second one is, when you talk about 6% organic growth, that's a net figure of churn. But was there any difference in the growth churn levels or the duration of contracts temps have in the quarter compared to previous years?

[Alain Dehaze, Chief Executive Officer]

So on your question regarding the productivity, for sure, we are measuring those, and we are looking at both. Because as we are in different businesses, we have different kind of metrics to measure this productivity. If you take the biggest business, the temporary staffing, yes, for sure, we look at the gross profit per FTE. But for sure, we look also at the number of temps per FTE to make sure we don't take into account, especially in some countries where you have some inflation, that we don't fool ourselves in the target due to the inflation. So we look really at the temps per FTE. In the Perm business, it will be different. In the Perm business, it will be more on the gross profit per FTE. So I think it gives you color how we are doing it and how we exclude inflation from all metrics. Now to your second question, Hans will take this one.

[Hans Ploos van Amstel, Chief Financial Officer]

There is no real difference there. So if you look at the underlying growth, which continued at around that 6%, it's very consistent with the investments from France delivering us good growth. Good growth momentum in Southern Europe. Germany, we're going a little bit with the period because of the [ integrate ]. So we didn't see anything changing in that. Despite of the [ landscape ] on the productivity, we have very targeted targets which correct for inflation but also take into account the investments we will make between small, the earlier question on on-sites. That goes through that level of granularity to make sure we really set a targeted productivity at the level you can manage the business.

[Rajesh Kumar, Analyst]

Appreciate that. On the first answer, I understand the process that you do look at temp per head and growth profit per head for the Perm side. The question was, do you see any meaningful differences in that productivity measure compared to the nominal measures you discussed in the slides earlier?

[Hans Ploos van Amstel, Chief Financial Officer]

No, what we -- if you look at our productivity in Q1, if that's the question, we saw a very tough comparison base. We're implementing some systems which impacted our productivity in Germany. That's not something -- our Productivity in the Perm business continues to be good. So it's for the reason we discussed. And then the second half will improve, as we said.

[Operator]

The next question is a follow-up question from Hans Pluijgers from Kepler Cheuvreux.

[Hans Pluijgers, Head of Research of Benelux]

Yes, Hans Pluijgers again. You mentioned that, in H2, you will see EUR 50 million on top of the normalized operational leverage. Could you give us some feeling what you see as normalized operational leverage, let's say, with the current growth of between 5% to 6%.? Are you talking about 2% to 3% OpEx growth? Or can you give some feeling on that?

[Hans Ploos van Amstel, Chief Financial Officer]

Yes. I think I will take it back to our Investor Day, what we committed to. We, in '17, said we would offset the investments, which are constant at that, around -- at 25 basis points with operating leverage. That we haven't done in Q1. Our goal is to do that in the second half so that the investments are not impacting the margin negatively. And then on top, to improve the margin, the GrowTogether benefits will improve the margin structure by that 50 basis points. But that's all things equal because this CICE, there are elements, but you will see a true improvement in the SG&A line.

[Hans Pluijgers, Head of Research of Benelux]

Yes. Okay. But of course, that all depends, of course, on which level of growth you are talking about. So -- but give some, let's say, more of detail -- feeling, are you talking about, let's say, underlying growth in costs should be, let's say, half or less than half or more than half of, let's say, the current growth in top line? So the 5%, 6%? Or can you give some feeling on that? Because it all depends, of course, a little bit on the level of growth.

[Hans Ploos van Amstel, Chief Financial Officer]

Yes. So we would see a 5% growth in operating leverage of around 20...

[Alain Dehaze, Chief Executive Officer]

20 points.

[Hans Ploos van Amstel, Chief Financial Officer]

20 basis points.

[Operator]

The next question comes from Andy Grobler from Crédit Suisse.

[Andrew Charles Grobler, Analyst]

Just one from me, if I may. One-off costs in the quarter were around EUR 20 million. I guess you've had one-off costs most quarters for the past several years. I mean, what are your expectations for that line through the rest of this year and into next year, please?

[Hans Ploos van Amstel, Chief Financial Officer]

Yes. Again, those you can only discuss because of regulation when you announce it, like Germany has to go through the workers council. If you look what we announced in the Investor Day, we said, to get to the total transformation program, we need around EUR 200 million fill over the next couple of years. I think that depends a little bit how positive the economy is. Because if we can reorganize on growth, we could do a little better. If you get to a period where the growth is tighter, you would probably need more restructuring. But we will stay within that EUR 200 million. That includes that EUR 19 million or EUR 20 million we make into the quarter for the year. I expect around EUR 60 million, which includes already that EUR 19 million for Q1.

[Andrew Charles Grobler, Analyst]

So EUR 60 million for this year and then the remainder of the EUR 100-plus million next year, is that the right way to think about it?

[Hans Ploos van Amstel, Chief Financial Officer]

Yes. Sorry, I wasn't maybe clear. EUR 60 million for this year, and then the total of what we said is in the Investor Day, we stay within that amount.

[Nicholas Edward de la Grense, Head of Investor Relations]

So that will draw the call to a close. And thank you very much, everyone, for joining and for your questions. And we look forward to seeing some of you at the road show. And otherwise, we look forward to speaking to the rest of you on our Q2 report on the 9th [ of August ]. Thanks very much.

[Alain Dehaze, Chief Executive Officer]

Thanks very much. Bye.

[Operator]

Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call, and thank you for participating in the conference. You may now disconnect your lines. Goodbye.