Adecco Group AG

SIX:ADEN

Earnings Call Transcript 2023-Q2

[Benita Barretto, Head, IR]

Good morning, and thank you for joining the Adecco Group's Investor and Analyst Call. With me today, I have our CEO, Denis Machuel; and CFO, Coram Williams.

Before we begin, we want to draw your attention to the disclaimer on Slide 2. We will reference both GAAP and non-GAAP financial results and operating metrics on today's call. This conference call will include forward-looking statements. These statements are based on assumptions as of today and are therefore subject to risks and uncertainties.

Let me now hand over to Denis.

[Denis Machuel, CEO]

Thank you, Benita, and a warm welcome to all of you who have joined the call today. Let's turn to Slide 3, which provides highlights from the quarter. Our Simplify, Execute and Grow agenda to accelerate strategic implementation and improve the group's performance was announced in November last year. In Q2, we continued to deliver against this plan reporting strong revenue growth and further market share gains. The group has made good progress curtailing overheads costs in the quarter, and I will detail how we are effectively executing the G&A savings plan shortly.

In addition, following a robust global search, I'm pleased to announce the appointment of the group's new Chief Digital and IT Officer, and member of the Executive Committee, Caroline Basyn. Caroline is a seasoned international business and tech executive with over 30 years leadership experience in transformation and leveraging technology innovations. She is tasked with leading a strong combined digital and IT organization and driving growth through digital and AI.

Moving now to the GBUs. The Adecco business achieved relative revenue growth leadership of plus 800 basis points in Q2 as it focuses on expanding market leadership. On a year-on-year basis, revenues advanced across all regions with double-digit growth in APAC, LatAm, Germany, Iberia and EEMENA. Akkodis and LHH made vital contributions to the group. In Akkodis, revenues in the higher-margin consulting business were strong, growing 12%. At the same time, the GBU faced significant headwinds from the current downturn in tech sector activity and revenues for the GBU were 1% lower year-on-year. In LHH, career transition delivered a stellar performance with revenues rising 101% to a new record level. and the GBU EBITA margin returned to LHH's target corridor, benefiting from segment mix.

Let's now turn to Slide 4. The market for talent services was mixed this quarter. As the left side chart illustrates, the group performed well within this backdrop. Expanding relative revenue growth outperformance by 100 basis points sequentially. Customer centricity is critical, and the teams have made great strides. Sales intensity in Adecco improved by a very strong 15% year-on-year. The group remains focused on profitable growth and improving productivity. As the right side chart shows, in terms of gross profit per FTE, productivity increased by 3% year-on-year this Q2, and there is more to come. Looking ahead, while recognizing a challenging macroeconomic environment, we see positive momentum driven by the strength of our unique portfolio and our relentless focus on performance.

On Slide 5, let's look at the recent successes demonstrating how the group is winning by added value for clients. While we have multiple successes in Adecco for this slide, we focused on synergistic case studies. Walking from left to right. First, the Akkodis business was awarded a 5-year consulting contract in North America to deliver projects and software engineering expertise to modernize defense software systems. This significant contract was won because of Akkodis' deep domain expertise, know-how of the latest AI innovations and specialized project delivery capabilities.

Second, as proof of the group's ability to deliver multiple services across GBUs, LHH, Adecco and Akkodis have established an electric vehicle battery technology up and re-skilling program across Europe. This first of its kind program for global autos customer will support the transition of workers to emerging roles in electric mobility.

Third, a Fortune 100 company awarded LHH and Ezra, a significant contract to provide coaching key skill development and training to approximately 3,000 global leaders. The client recognized the ability to scale Ezra's coaching service in multiple territories and languages while maintaining the personalized approach. Finally, we highlight 1 of Akkodis' revenue synergies. In this example, Akkodis was the only vendor to present a scalable model that made the clients' needs for delivering staffing and engineering consulting experts with the technical skills required in the aerospace sector.

Let's move to Slide 6 now. Across the group, we continue to simplify the organization and drive rigorous cost discipline. Let's remind ourselves of how SG&A expenses have developed in the group from 2021 to 2022 with the chart on the left side. There are 4 main drivers of recent SG&A cost expansion. First, the group made significant investments in growth, mainly in sales headcount, particularly during the first half of 2022. The group has seen strong returns of this plan, evidenced by 4 consecutive quarters of growth outperformance compared to key competitors.

The group continues to manage its resources very granularly to improve productivity, scaling up or down investments according to local needs and exiting underperformance systematically. For example, the Adecco business improved gross profit per selling FTE by over 2% year-on-year in Q2. Second, more technical, the group was negatively impacted by changes in currency rate. Third, the acquisition of AKKA brought a significant additional level of SG&A. The group is now delivering well against AKKA synergy targets with a strong focus on driving revenue synergies. Finally, group overheads increased meaningfully. In 2021, G&A expenses were approximately 3.5% of revenue, rising to over 4% in 2022. To this end, in November last year, we announced the €150 million net G&A savings target. And in Q1, established a task force to support de-layering and to improve the speed of delivery.

Following a series of GBU, countries and functional workshops, the group has identified the actions required to deliver savings that will bring G&A expenses as a percentage of revenues to below 3.5%. Of the identify actions, approximately 75% come from implementing a streamlined operating model. We are eliminating overcapacity, duplication and reducing the number of organizational layers. A further 15% comes from optimizing shared functions, for example, by shifting administrative activities to shared services, mutualizing enabling functional resources across GBUs and leveraging near and offshore resources. And around 10% of savings come from consistently taking a highly frugal approach to expenses including travel and entertainment costs, real estate and outside services.

Delivery against the plan is firmly on track. We expect to achieve a G&A savings run rate of around €60 million by year-end with €150 million reached by mid-2024.

Turning now from simplification to execution. Over the last few months, we've received many questions from investors on generative AI. Let me outline our approach to innovation on Slide 7. We have built a highly experienced AI and data science team over the last 2 years. The group is selectively developing its in-house AI-enabled digital products to support high priority use cases. integrating Adecco Group data, and we are working closely with leading vendors to understand and assess their road maps. We've set out one use case on the slide, Adecco's Career Assistant. This AI-enabled Chatbot allows recruiters to simultaneously engage with thousands of candidates, learning from interactions and proposing next steps based on predefined intent.

In the first 4 months of 2023 alone, Adecco Career Assistant sent around 21 million messages. It is live in 36 countries and scores a good plus 28 NPS with candidates. The prototype Career Assistant using generative AI improves the Chatbot. It delivers more relevant and human-like conversations within a risk control environment. Outcomes are promising: A 5% increase in completed conversations, a 10% rise in candidate applications and significantly improved productivity for the recruiter.

Overall, we see great potential for generative AI to improve the candidate experience and reduce time to market.

With this, I hand over to you, Coram, for a more detailed review of the Q2 results.

[Coram Williams, CFO]

Thank you, Denis, and good morning, everyone. Let's start with Slide 8, which provides a snapshot of Q2's financial performance. Revenues were €6 billion, up 1% in reported terms and up 4% year-on-year on an organic trading days adjusted basis. Gross profit of €1.2 billion was 1% higher organically year-on-year. At 20.7%, the gross margin was healthy. With the current business mix, both in terms of GBUs and sector mix within Adecco driving an organic differential of 50 basis points year-on-year. excluding one-offs, was €184 million. The EBITA margin, excluding one-offs, at 3.1% was robust. The 40 basis point differential year-on-year reflects lower gross margin and timing of FESCO JV income, partly mitigated by good cost management and productivity improvement.

In underlying terms, margin progressed 30 basis points sequentially. Adjusted EPS was €0.67, 21% lower year-on-year. Net debt-to-EBITDA ended the period at 3.2x, in line with management expectations and reflecting a seasonal peak due to the dividend distribution. Cash flow from operating activities was positive €80 million in the quarter, up €161 million year-on-year. And the rolling last 4 quarter cash conversion ratio was 66%, up sequentially and a robust result during a period of growth and transformation.

Let me give you the context within each GBU, beginning with Adecco on Slide 9. Adecco's revenues reached €4.6 billion, a strong increase of 5% year-on-year on an organic trading day adjusted basis. Adecco continued to firmly deliver on its ambition to gain market share with relative revenue growth of 800 basis points in Q2, the fourth consecutive quarter of outperformance versus peers.

Growth was driven by resilience in flexible placement with revenues up 4% and solid growth in higher-value solutions. Permanent placement was up 8% and outsourcing up 6%. Growth was led by global customers with particular strength in autos and health care. Manufacturing was robust, while logistics stabilized in the quarter. Gross margin was healthy, albeit weighed by the current business and solutions mix. Pricing was good, underpinned by continued talent scarcity across markets. The 3.5% EBITA margin includes the impact of the timing of FESCO JV income. Excluding this impact, the EBITA margin improved year-on-year, supported by agile cost management. Productivity in terms of gross profit per FTE improved 4% year-on-year and 3% sequentially, while FTEs reduced 3% year-on-year and 2% sequentially.

Moving to Slide 10, which shows Adecco at the segment level. France delivered moderate growth of 1% in the quarter, reflecting a more challenging market backdrop. Growth was led by autos and health care, while logistics, construction and retail were soft. In Northern Europe, revenues were up 3%. Revenues from U.K. and Ireland were up 7%, while revenues in both Benelux and the Nordics were 1% lower. The region's growth outpaced the market, benefiting from autos and public sector demand. The DACH region's performance was strong with revenues up 8%. Revenues in Germany were up 11%, outperforming the market.

In Switzerland and Austria, revenues were 1% higher, with Switzerland impacted by a challenging market backdrop. Growth was generated mainly by autos, logistics and professional services. The EBITA margin, which is typically lowest in the second quarter, was down year-on-year, primarily because of one less working day. Excluding this, the EBITA margin was only 15 basis points lower.

Adecco's Southern Europe and EEMENA's growth rate was 9% with Italy up 5%, Iberia up 11% and EEMENA up 19%. Permanent placement and outsourcing activities were very strong. with flexible placement improving sequentially. In sector terms, autos, retail and logistics developed favorably while manufacturing was robust. Overall, the region's growth clearly outpaced the market, while the EBITA margin expanded 70 basis points.

In the Americas, revenues increased 1% year-on-year. Latin America revenues grew by an excellent 22%. In North America, revenues were 7% lower, impacted by a more challenging macroeconomic environment. In Adecco U.S., revenues improved 2% sequentially and significantly outperformed the market. In operational terms, Adecco U.S. is seeing positive momentum from its recently implemented regional focus, branch improvement and sales training plans. While still impacted by lower volumes, the EBITA margin improved by 70 basis points year-on-year, driven by agile cost management, including headcount and other G&A cost savings initiatives.

Turning to APAC. Revenues grew 10%. Revenues were 12% higher in Japan, up 10% in Asia and up 20% in India. Revenues in Australia and New Zealand were flat, weighed by the end of a large government contract. Both flexible placement and permanent placement activities were very strong. End market growth was broad-based with IT, retail, manufacturing and consulting all performing well. The EBITA margin includes the impact of the FESCO joint venture, driven by the timing of government payments, which moved into Q1 this year. The margin further reflects the wind down of vaccination contracts and changes in social charges in Japan. Management is taking action to offset the additional costs incurred in future quarters.

Turning to Akkodis on Slide 11. Akkodis' revenues were 1% lower year-on-year on an organic trading day adjusted basis, reflecting a sharp downturn in tech sector activity. Staffing revenues were 25% lower, while higher-margin consulting revenues were strong, growing 12%. North EMEA revenues rose 7% with Germany up 8% and data response up 6%. Data responses revenues reached record levels despite fewer working days. South EMEA revenues were 3% lower. Revenues in France were 2% lower, with growth held back by talent scarcity and the reclassification of a handful of contracts. On an underlying basis, revenues were up 4%.

North American revenues were 8% lower, impacted by the sharp slowdown in staffing activity for tech talent, particularly in permanent placement. Consulting was excellent with revenues up over 70%. Akkodis' APAC revenues rose 3% with Japan up 10%. Akkodis EBITA margin was 130 basis points lower year-on-year, mainly reflecting lower tank staffing volumes. On a sequential basis, the margin improvement was driven by consulting. Management continues to adapt staffing orientated operations to mitigate the business cycle and is focused on delivering a 50% recovery ratio for the full year.

For example, the U.S. business reduced headcount in the quarter by approximately 15%, and further savings initiatives are underway. At the same time, management is focused on the strategic consulting business to drive future growth. The merger integration remains on track. In EBITA terms, total synergies secured for 2023 are projected at approximately €57 million, which compares favorably to targeted in-year synergies of €50 million to €55 million. Looking forward, we expect Akkodis' margin to benefit in the second half of the year from further synergies and favorable seasonality.

Let's turn to Slide 12 and LHH. Revenues in LHH were flat year-on-year. Recruitment Solutions revenues were 20% lower against a tough comparison period. Permanent and flexible professional placement activities were subdued, particularly in the U.S. and the U.K. The segment saw lower levels of both candidate and client confidence. The permanent placement net fees were 25% lower than the prior year quarter and flat sequentially.

Performance in countercyclical career transition was excellent. Revenues rose 101% driven by positive momentum globally and across multiple sectors. Supported by more systematic cross-sell between recruitment solutions and career transition, new logo wins were very strong, accounting for nearly 20% of business activity in the quarter. The segment continued gaining market share, particularly among SMEs and achieved record revenue levels. Its pipeline is solid.

Learning and Development revenues were 21% lower with general assembly and talent development subdued. Ezra performed very well, with revenues up 36%. Ezra's pipeline is strong. In Pontoon and other, the U.S. tech sector downturn challenged both Pontoon where revenues were flat and hired. The EBITA margin benefited from segment mix, mainly higher volumes in career transition, partly mitigated by continued investment in Ezra.

Let's turn to Slide 13. I Here, we review the drivers of the group's gross margin and EBITA on a year-on-year basis, starting with Q2's gross margin. Currency translation effects and M&A had a net positive impact of 5 basis points each. Flexible placement had a negative impact of 90 basis points. Approximately half of the effect reflects lower volumes in LHH and Akkodis, which impacts the group mix. Of the roughly 45 basis points impact remaining, Adecco's current sector mix contributed around 20 basis points with social charges in Japan and fewer working days in the quarter also weighing.

Permanent placement had a 40 basis point negative impact. Career transition had a 110 basis point positive impact. Outsourcing, consulting and other was 20 basis points negative, mainly due to the ramp down of vaccination contracts, particularly in Japan. And training up and re-skilling was 10 basis points negative. In total, the gross margin was 50 basis points lower on an organic basis and 40 basis points lower on a reported basis at a healthy 20.7%. The EBITA margin at 3.1% was robust, driven by a 40 basis point unfavorable gross margin contribution and a 10 basis point adverse impact from the timing of FESCO JV income. This was partly mitigated by a 10 basis point positive contribution from good cost management with SG&A expenses, excluding one-offs, reducing to 17.7% of revenues and by €24 million sequentially. Excluding the impact of FESCO JV income, the EBITA margin improved by 30 basis points sequentially.

Moving to Slide 14 and starting with cash flow. The rolling last 4 quarters' cash conversion ratio was 66%, improved from 47% in Q1. Cash flow from operating activities was €80 million in the quarter, up by €161 million year-on-year. And DSO was 53 days, flat versus the prior year period. On a year-on-year basis, cash flow was positively impacted by the timing of working capital. Around half of the benefit stems from the absence of the cyber incident, which disrupted AKKA's operations last year. The other half is driven by favorable development in payables and better customer collections.

As the chart on the slide shows, the group's cash generation has seasonality and is heavily H2 weighted. Further, the business absorbs working capital in line with its growth rate. On a full year basis, the group expects good cash generation supported by disciplined working capital management. Net debt was €3,078 million at the end of Q2 2023. The net debt-to-EBITDA ratio, excluding one-offs, was 3.2x, in line with management expectations and reflecting Q2's dividend distribution. We expect to deleverage steadily during H2, so that by year-end, the net debt-to-EBITDA ratio will be around last year's level.

Looking further ahead, we are committed to deleveraging as we drive further productivity improvements, G&A cost reductions and reduce the level of one-offs substantially upon successful delivery of our savings program. Importantly, our financing structure is very solid. Leverage is not constraining the business' ability to invest organically in growth and pay dividends. The group's interest costs are very serviceable with 75% of net debt fixed at attractively low rates, no financial covenants on any outstanding debts and an undrawn €750 million revolving credit facility.

Let's turn to Slide 15 and the group's outlook. The group exited the quarter with growth in line with Q2 levels and volumes in July were resilient. While macroeconomic conditions remain challenging, the diversity of the group's activities and geographic footprint provides continued opportunity for profitable growth and market share gain. In both this quarter and prior quarters, we have reduced FTEs in weaker markets while adding resource in growing markets. Equally, for the group as a whole, you've seen us reduce headcount by 2% as we recalibrate capacity from mixed market dynamics. We intend to continue to manage the business in this way to maximize market share gain and productivity. Looking to Q3, the gross margin is expected to be around Q2 '23 levels. while SG&A expenses should be slightly lower on a sequential basis. And with that, I'll hand back to Denis.

[Denis Machuel, CEO]

Thank you, Coram. And let me conclude with Slide 16. The group has delivered effectively against plan this Q2, outperforming the market. We strengthened the GBUs and are driving cost savings and group-wide synergies. Our priorities for accelerating performance improvement to the remainder of 2023 are unchanged. We will be focused on profitable growth and improved productivity. We expect underperforming units to improve continuously, and we will accelerate momentum in digital and AI. We will also realize the targeted year 2 synergies from AKKA. As we advance the Simplify, Execute and Grow agenda, we will create a simpler organizational structure, maintain a relentless focus on performance and expect to deliver G&A cost savings of approximately €60 million in run rate terms by this year-end. We look forward to meeting all of you to discuss the group's priorities and progress at our Capital Markets Day on the 7th of November in London.

Thank you for your attention, and let's now open the lines for Q&A.

[Operator]

Your first question comes from the line of Catherine Walker with Redburn.

[Catherine Walker, Redburn]

On LHH, could you remind us of the timing on winning contracts versus delivering services and comment on what the rate of layoff is looking like currently?

[Coram Williams, CFO]

Let me take that, Catherine. So in terms of timing of winning contracts versus delivery of services, typically, we have good visibility for a couple of quarters. So when we win a contract, we move relatively quickly than to move into execution mode. It's obviously somewhat dependent at the speed at which the client moves. But we then start delivering within the subsequent quarter and the quarter after that. So that probably gives you a sense of sort of what the pipeline visibility is and how long it takes.

In terms of sort of layoffs, what are we seeing? Well, the pipeline is pretty solid. We saw in Q2 that it was broad-based. So I think in Q1, it had been pretty tech-focused. But in Q2, it broadened, not just in the U.S. but actually globally. And I think you'll see us delivering those over the next couple of quarters. So I hope that gives you a sense of what we're seeing.

[Operator]

The next question comes from the line of Andy Grobler with BNP Paribas Exane.

[Andy Grobler, BNP Paribas Exane]

Three, if I may. Firstly, just on wage growth. What were you seeing through Q2? And what are your expectations for the second half of the year. Just as some of the wage inflation, particularly in the U.S. comes down.

Secondly, on savings, you talked about the expectations. Could you just talk through how the kind of the visibility on where those savings are going to come from has hardened through Q2? And how much of that $150 million can have full visibility upon?

And then thirdly, just a slightly more niche question, if I may, on training. The group was down 1%, but within the [indiscernible] was down 21%. Can you just talk through kind of the moving parts of training and upskilling? And also, again, what are your expectations for this kind of historically quite cyclical business into the second half of the year?

[Coram Williams, CFO]

Thanks, Andy. I'll take all of those, and I'm sure Denis will add to it as we go through. I mean on wage growth in Q2 and expectations for H2. Wage growth is really driven by talent scarcity and talent scarcity is clearly still present and likely to stay. In terms of what we've seen in Q2. It's been low to mid-single digits across all of the businesses. and it's clearly still a driver of growth. We've been very effective at pricing dynamically to capture that wage growth. And I think it's important to note, for example, in Adecco that the spreads between bill rate and pay rate are actually up 2%. So not only are we capturing it in the growth, but we are then translating that down into the P&L.

In terms of what we expect to see going forward, I think the key point is talent scarcity is here for a while. And I think that will continue to drive wage growth, wage inflation, which we will capture versus pricing.

And on your point about the U.S. slowing down, I think it probably has slowed down a little bit, but the U.S. and the U.K. being some of the less regulated markets that we've got are still pretty strong. So I hope that gives you a sense on wage growth.

In terms of the visibility on the savings program. I think Denis outlined roughly where we expect to get the €150 million. So 75% of it is about simplifying the organization, removing layers, de-duplicating and we've got very good visibility now on where we will get that. 15% of the €150 million comes from really mutualizing some of our back office, so driving shared services in HR, driving shared services in finance and we've got very clear plans for how we do that. And the remaining 10% is coming from really strict cost management in some of our areas of discretionary expenditure, for example, travel, entertainment, those kinds of things.

So we've been working hard on pulling those plans together. And I think we've got very good visibility on where we will get them. And it's why we're confident that we'll have delivered €60 million in run rate terms by the end of the year, and we'll be at €150 million in run rate by the middle of 2024.

[Denis Machuel, CEO]

And I must say that I'm very pleased with the traction that I see in the company on that. We're evolving the culture. I want to move the company versus a more frugal approach of the way we manage our spend. So this is flowing through in the company. I am pleased, by the way, people in the country on the ground are really welcoming. Of course, the fact that we are reducing our overhead cost, our global cost, which they couldn't see a high value of in the past years. So I mean, that traction is getting exciting in the company. And we know that, that helps us also on our competitiveness.

Also it has 2 effects. Of course it improve the profitability, but it helps us also be very relevant and competitive on the market. So yes, as Coram said, I think we are very confident in delivering this €150 million. And the year-end is trading into the right direction.

As far as training is concerned, and I would say it's mainly linked to a particular general assembly and particularly the B2C business which is, at the moment, I mean that market is definitely slowing down. We see some interesting traction in GA on this diversification that we're doing in hire, train and deploy, which is a good sign of that talent scarcity, which leads companies into saying together ensure that we get the talent that we need through particular training, particular up and re-skilling program.

So we are positive on the long term, even though at the moment, particularly G&A -- GA is slowing down. However, we see great traction in Ezra. Ezra is growing at 36%, and that's very encouraging. We see really large clients appreciating that scale coaching programs. And in Akkodis, we see also great traction in Akkodis Academy. So I think I would support it more something that happens at the moment in the circumstance. But I think on the mid, long term, this is a trend that we're going to serve on.

[Operator]

The next question comes from the line of Suhasini Varanasi with Goldman Sachs.

[Suhasini Varanasi, Goldman Sachs]

Just a couple for me, please. Maybe just starting with Slide 15. Apologies if I missed it. I see that you've given the detail on end of Q2 momentum, but I just wanted to understand what the different green colors were, apologies if I missed that. I'll take it 1 by 1 if that's okay, questions.

[Coram Williams, CFO]

Sorry, Suhasini, we're struggling a little bit to understand the question. Do you think you could repeat that, please?

[Suhasini Varanasi, Goldman Sachs]

Sure, sure. On slide 15, where you talk about the near-term outlook. There's a circle there end of Q2 momentum?

[Coram Williams, CFO]

Yes. Okay. So I mean, what that's really telling you is the growth rate at the end of Q2. So a chunk of our business was running above 6%, about a little bit more than 1/4 was running between 1% to 6% and a little bit less than half was running at not or below. And hopefully, what we were trying to do is to just give you a sense of what the momentum looks like across the business. It is mixed, but despite that, and I think this is the really important point, we grew 4% overall, we saw Adecco grew 5%. We saw an 800 basis point gap between us and the competition. And in quite a mixed market, we are delivering share gains and driving those forward. And I think maybe the one other point I would say is that on July, we saw resilient volumes. So it was very consistent through the quarter, and we've seen trading continue to be consistent.

[Denis Machuel, CEO]

And it's very aligned with what we've put in place in November and particularly the grow pillar. What -- as you know, what I've said is no matter what macroeconomics we have, we can take market share, we can outperform competition because our markets are very fragmented. So that trend that we see despite some mixed signals from the market really demonstrates that people get it. That the growth mindset that we have ignited within the company is delivering.

[Suhasini Varanasi, Goldman Sachs]

I was just trying to understand if you could give some color on the different business lines, Adecco, Akkodis, LHH. Whether you saw any differences between the Q2 growth versus the end of Q2 momentum.

[Coram Williams, CFO]

No, it's very consistent. I think it's a really important point. If we look at sort of trading within the quarter, very consistent at a group level and very consistent with the various GBUs. And as we moved into July, again, resilient volumes and consistency with what we've seen before. I think the -- probably the one area which was a little bit softer in Q2 than we were anticipating was staffing in Akkodis. As you know, that's down 25%. But I think it's stabilized towards the end of the quarter. So hopefully, that gives you some color.

[Suhasini Varanasi, Goldman Sachs]

Yes, that's helpful. And my second question is on SG&A, please. You expect it to be sequentially lower Q-on-Q. Can you give us some color on the magnitude of the change? Because, obviously, you had earlier guided for sequentially stable SG&A for 2Q, but it came in lower. Should we use that magnitude of difference for Q3 as well?

[Coram Williams, CFO]

Yes. So I mean, let me just touch on SG&A generally, and then I'll talk a little bit about the Q3 guidance. I mean we are, I think, very pleased with the progression that we've seen. And as you mentioned, we guided at the beginning of the quarter to stable SG&A on a sequential basis. In fact, cost savings program is up and running, and it is delivering savings. Year-on-year, we delivered about €15 million reduction in G&A. And sequentially for SG&A as a whole, it was down €24 million. And that means that when you look at SG&A as a percentage of sales, we're at 17.7%. That's actually down year-on-year and it is down sequentially.

So I think we're pleased with the development of SG&A. We would expect it to come down again sequentially. We've described that as modest. I'm not going to put a firm figure on it. because there is an element of volatility between quarters on SG&A. But I think you should work on the basis that you reduce it again sequentially by a modest amount, and you'll get to roughly the right place.

[Suhasini Varanasi, Goldman Sachs]

And the last question is on Perm business, please. It has been incrementally weaker in Q2 and it has affected your gross margins as well. And it's similar to what we've seen at peers. But from every indication, it seems like maybe it got a little bit worse towards the end of the quarter rather than through the quarter? Can you clarify that? And therefore, when you're thinking about around the same gross margin levels in Q3 as Q2, is there a risk that maybe there should be some incremental sequential impact from Perm there.

[Coram Williams, CFO]

Again, when we unpack the revenue developments by quarter within the businesses, I made the point that things have been very consistent. And that's -- I mean, I think we probably saw slightly tougher per market during the quarter than we were expecting. And that applies to both the Akkodis staffing and also professional recruitment solutions in LHH, but it didn't notably worsened during the quarter. It was pretty consistent.

In terms of the sort of gross margin in Q3. I mean we do expect Perm to be a headwind we think probably around 50 basis points. The signals -- eventually, that business will recover, but I don't think we'll see that in Q3. We'd expect that to be offset by a career transition, where, as I've said, we've got a solid pipeline, we expect to continue to see strong growth. Probably not quite at the levels we've seen in Q2 because that was pretty exceptional. But that would be about a 60 basis point positive on gross margin.

And then we're left with Flex. And I'm just for a moment going to unpack what happened in Q2 because I think it's helpful in understanding what we think will happen in Q3. On Flex, in Q2, half of the 90 basis point impact came from the mix of GBUs at a group level. So Adecco growing 5%, the other business is broadly flat. That has a mechanical impact on gross margin. The remaining half was within Adecco. We saw, as I mentioned in the script, the mix of sectors. So we got growth from our large client base, which is good to see and growth -- significant growth from autos. Both of those are profitable businesses, but they are slightly lower gross margin. And so about half of that remaining half, so call it 20 bps came from that mix in Adecco. And then the rest was pretty one-off in nature. So the social charges in Japan, probably worth about 25 bps and fewer working days primarily affected Germany and a little bit in Italy, which is about 10 bps.

Now, why have I gone into that detail because if you think about Q3 gross margin, we would expect that group mix issue to continue at least for the short term. But the mix in Adecco, we feel will stabilize, and we wouldn't expect to see a repeat of the one-offs. So that means a downside on Flex of about 30 basis points driven by that group mix point. That's how you get to 20.7%, so sequentially stable. And I'll make one final point, which is, that is still a healthy gross margin for this business.

[Operator]

Your next question comes from the line of Rory McKenzie with UBS.

[Rory McKenzie, UBS]

It's Rory here. I have three, please. Firstly, I really appreciate that detail on the gross margin, Coram, that's helpful. I guess what you're trying to point out is that there's no evidence of pricing pressure or fee rate declines on a like-for-like basis with intent. Can you maybe talk about, especially in the larger clients, if there are any discussions around fee rates going forward? I guess lots of people are under cost pressure. And increasingly, we're finding clients in for savings in all areas. So I appreciate you've outlined how there's no price pressure today. Is there anything that makes you worried about price pressure coming next?

And then secondly, just on headcount, should we assume a similar kind of 2% sequential reduction in headcount for Q3, I've seen in Q2 and Q1? Or will the head count reduction start to accelerate as you push towards the savings targets. And again, just to try to understand the source of savings. And then finally, I have a question about the AI tool. So maybe we'll take the 2 on numbers first.

[Coram Williams, CFO]

Okay. Well, why don't I answer the 2 on numbers? And I suspect the AI question maybe for my boss. So we'll come back to that, Rory. Thank you for the 2 questions. On pricing pressure, these are always competitive markets. So there is always a push and a pull on pricing. I think the current environment, as I mentioned earlier, talent scarcity drives wage inflation, which allows us to price accordingly and to do so in a dynamic way. And I come back to the point I made earlier about the spreads between pay rate and bill rate being up 2% in Adecco. We consistently have seen that, and we are using dynamic pricing in a way that really allows us to resist any pressure that there might be out there. It's not getting worse right now. I think clients understand that this is a talent scarce market. And they are really looking to make sure that they fulfill their talent needs.

So I think we would expect that to continue. And obviously, that spread is a positive for gross margin. So to your point in the question, that's exactly what we expect to happen.

On the headcount, we manage headcount in a very agile way. And as I mentioned, when I was talking about the outlook we will continue to reduce G&A costs. The majority of that comes from headcount, but we will manage our commercial and our selling teams in a very dynamic way, where we see opportunities, we'll invest modestly and where we see markets that are under pressure, we will reduce headcount. And I think you're seeing that in the productivity metrics because the gross profit per FTE is up 3% year-on-year. It's improved sequentially. It shows that we're managing. But you should certainly expect headcount in G&A to continue to come down because that is the way that we drive the savings.

[Rory McKenzie, UBS]

Perfect. That's very helpful. And then on the AI comments you made on your Slide 7. I actually wanted to ask what those numbers actually mean. Is this 10% more candidate applications and 80% less time to screen candidates compared to just the previous generation of Chatbot? Or is that compared to recruiters and markets not using the technology? I guess what we are trying to get to is what actually is the gross profit per head productivity uplift that you should think about or targets with these new tools. So maybe you could also comment on how we frame user technologies or productivity improvement overall.

[Denis Machuel, CEO]

Sure. So first of all, fundamentally, we see opportunities and threats with generative AI. And we're quite really quite positive in what we see already in the adoption in the company, of course, within the absolute data products and security framework that we've clearly highlighted. So the numbers that we show are the performance improvement between the AI-powered career assistant and the generative AI powered. So it's an improvement versus the previous system that we had, which is good. okay? Because it creates better candidate experience and more efficiency on our side. There are multiple cases that we are now experiencing in the group. I am -- we are all very active. It's a focus that I drive personally on even on a weekly basis to ensure that we embark on generative AI at scale with the right use cases and, of course, the right usage of it.

So that will help us, of course, focus our teams on more added value tasks that will bring definitely efficiency. How much is that going to bring in terms of productivity, et cetera. I think it's hard to fully model. So I don't want to make any promise. We will keep you updated as we embark into more and more use cases and more than that as we scale them. The interesting case that we have with Career Assistant is because it's already deployed in 36 countries, we can really immediately scale the efficiencies with generative AI.

So I think it's very promising. It's going to be bringing both efficiency in our teams, but also much better experience for our clients and candidates. So more to come on this. We believe also that generative AI will bring opportunities with our clients in terms of upskilling and re-skilling. Lots of CHR are coming to us now this issue, how am I going to embark on this? What should I do? And with the knowledge that we have with Akkodis being also at the forefront of AI, I think we have strong assets to leverage in the near future.

[Operator]

Next question comes from the line of Gian-Marco Werro with ZKB.

[Gian-Marco Werro, ZKB]

Three questions from my side, please. First one is just on the one-off costs came in now a bit higher than I think we expected. Is there still a €135 million range valid for one-off costs for the full year? And for next year, I mean you already mentioned that you want to bring down them significantly. So is there some potential to cut them in half for next year?

Then second question is the subdued growth that we see in the whole LHH business for upskilling and re-skilling. How do you think will the environment in the second half change? And can you give a bit more details why the demand there for upscaling and rescaling is so subdued, please?

And then third question, just on the synergies with AKKA. You are now targeting, I mean, overall for €100 million synergies for this year. Now you slightly increased your guidance to €57 million. But can you give us maybe already some visibility of your targeted synergies for next year?

[Coram Williams, CFO]

Let me -- so thank you, Gian-Marco. Let me take the first one and the third one, and I think Denis will comment on LHH growth. So on one-offs, the €135 million for the full year 2023 is still valid. If you look at one-offs in the quarter, they were slightly higher than we anticipated at the beginning of the quarter. That was because we've been moving quickly the savings program. And you see the flip side to that in the fact that our SG&A has come down faster than we were originally expecting.

So I see this as a positive sign. It shows you that we've got traction on the G&A savings plan, and we're already seeing the benefits with SG&A as a percentage of sales coming down year-on-year and quarter-on-quarter. It's too early to give you a firm guide on 2024 one-offs, but we have said that actually, we would expect sort of one-for-one costs versus savings. So roughly €150 million in total. Obviously, if we think we can bring that in lower than that, then we will do. And once we have completed the G&A savings plan, it is a firm commitment from both Denis and me to substantially reduce level of one-offs in this business going forward. Because we think we will have a healthy business, well positioned to capture growth with significant savings delivered within the G&A plan.

I'm going to let Denis pick up on LHH growth, and then I'll come back on AKKA synergies.

[Denis Machuel, CEO]

Right. First, if we look at the overall market of upskilling, re-skilling, let's not forget that upskilling and re-skilling is not only done by LHH. And we have some good traction in Adecco on that. And we have, particularly also with Akkodis Academy, we see a very good traction in tech upskilling, re-skilling. So this is pretty good.

As I said earlier, I think the main headwinds that we see is linked to general assembly, particularly the B2C business, the bootcamp business, which is very competitive. And definitely, people -- because it's a B2C business, people are, at the moment, a bit less being in full -- still in full employment despite a little bit of uncertain macroeconomics, people are a bit less keen in investing for themselves. But I see some good traction in the hire and train and deploy the offer that G&A is developing. And I'd say, overall, even though at the moment, some companies also are -- because of the uncertainty, investing a bit less. They all realize -- and we have a lot of conversations with our clients and that they all realize that within next few quarters, they will need to reinvest in up and re-skilling.

So I think it's -- and again, we still see good traction. We are mentioning the upskilling and re-skilling that we are doing for the electric vehicle. We believe that the digital transition and the green transition will be some really supportive elements of that business moving forward.

[Coram Williams, CFO]

And on your third question on AKKA synergies, if I just remind us of the original deal guidance about synergies. We said we would take out €55 million or generate synergies of €55 million on costs and revenues of €165 million and that, that would mean a total P&L bottom line benefit of around €90 million. We also said that, that was a 5-year program, but that the majority of that would be delivered by the end of year 3.

Now just stepping back, we are very pleased with the way that the integration has gone. In terms of the synergies we delivered in year 1, we came in higher than our target, as you'll remember, €28 million versus €20 million target. And obviously, in year 2, we continue that with now expecting at €57 million for the full year versus a target of €50 million to €55 million. So we're feeling good about the way in which the integration is progressing. I think you can see we're delivering the revenue and the cost synergies. And also importantly, I think we made a lot of progress in bringing the 2 businesses together culturally and creating a strong sense of what Akkodis is about. And you see the benefits of that on the top line because that consulting business is up 12% year-on-year, and that's the higher value, higher margin business.

[Operator]

The next question comes from the line of Oscar Val with JPMorgan.

[Oscar Val, JPMorgan]

Denis and Coram, 2 questions from my side. The first one, I guess, going back to Akkodis. It was weak in Q1, got weaker in Q2 on the staffing side. Could you just give us some more color on what you expect for the second half on this kind of IT staffing part of the business? How big is it of the group? What trends have you seen in at the end of the quarter. That's really the first question.

And then the second question is on the gross margin bridge. You've helpfully given us the moving parts. You haven't talked about Akkodis on the gross margin bridge. So what's the impact from Akkodis on gross margins?

[Denis Machuel, CEO]

Oscar, so regarding the staffing part of Akkodis, I think the market is definitely, particularly in the U.S., we're also leaving this in Australia. It's -- the market is very, very soft. The good news is we are -- relatively to our competitors are doing slightly better. That's -- so that's pretty encouraging. It says also that we have some good connections with our clients. So I don't see anything really changing radically in the next couple of quarters. The U.S. tech sector will still be soft probably for the remaining of the year. So -- and our priority is really to continue to develop the consulting business.

As you know, we grew that business 12% this quarter. In the U.S., we grew the consulting part, 70%, 7-0. This is very, very encouraging. It confirms the thesis that we had when we did the AKKA acquisitions. This is bringing a lot of good -- very good pipeline. And if we won that business in the U.S., it's thanks to the expertise that we have in the consulting business coming from Europe. So that's trending super well. And hopefully, as we grow that business, it will offset for some time, the sort of difficult market that we see in tech staffing.

[Coram Williams, CFO]

And in terms of the impact from Akkodis on the gross margin bridge, I mean we look at it by service line because they do have different gross margin characteristics. Remember how we're describing what we've seen in Q2 in Akkodis. So the staffing business that Denis just described, down 25%, but the consulting business, which is the higher margin, higher value business up 12%. If you unpick that, effectively, what's happening is that it's impacting the Flex business mix because that's where the staffing piece of a Akkodis shows up.

There's also obviously the group impact that I talked about in terms of the mechanical effect of the growth being higher in Adecco right now than it is in the other 2. The consulting margin is very healthy and is benefiting from the growth that we're seeing. You don't see that in the group bridge because, as I mentioned in my script, that outsourcing consulting and other services is being held back the wind-down of vaccination contracts in Japan, but the Akkodis consulting gross margin looks very healthy.

[Denis Machuel, CEO]

And I would add maybe one thing which is to be taken into account. If you look at the way consulting and staffing were resist to headwinds, definitely consulting is more resilient. Tech staffing, you can adjust tech staffing very quickly. That's why it's used for by our clients. We -- it's obvious looking at our numbers that, of course, we have a good development dynamic, but even the consulting projects haven't been stopped by the clients because they are absolutely critical. They are R&D projects. They are the ones where we're involved in the development of the future products for our clients. And that makes those higher-margin projects because we bring higher value but also more resilient in terms of, let's say, headwinds from a macroeconomic perspective.

[Oscar Val, JPMorgan]

Great. And maybe just a follow-up. That was all very clear. Just on the restatements you've done between Akkodis and Adecco U.S., just to be clear, you've moved some staffing revenues across, those are not IT -- those are not tech staffing -- they are other types of staffing. So tech staffing is still in Akkodis in North America.

[Coram Williams, CFO]

Yes. So you've still got -- tech staffing is the lion share of the U.S. Akkodis business. And I think in the past, we've told you consulting is about Akkodis and staffing is about 30%. The piece that was transferred and reclassified at the beginning of the year is a business called PDS, which is largely a blue collar staffing business. So it fitted better within Adecco. And if you want to see the impact of it, it's at the back of the deck.

[Operator]

The next question comes from the line of Anvesh Agrawal with Morgan Stanley.

[Anvesh Agrawal, Morgan Stanley]

I just got one question left really. You have very helpfully given the breakdown of the G&A as a percentage of revenue on Slide 6. That would mean the sales part or the S part is around 13.5% of the group revenue, and certainly used to be lower than that pre-pandemic. So what's the scope there to manage that in future or with the mix of the business, the gross margin sort of also moving up maybe it remains at around 13.5% as a percentage of revenue?

[Coram Williams, CFO]

So Anvesh, from my perspective, we look at G&A as a percentage of sales. And I think we've been clear that we want to bring that down below 3.5%. You've seen us make good progress in Q2, removing €15 million of costs year-on-year. You've also seen the overall SG&A as a percentage of sales come down, down to 17.7%. That's both year-on-year and sequentially.

The way that we think about the sales resource is really about driving the productivity. It's why we're so focused on gross profit per FTE and actually 1 click lower gross profit per selling FTE. And overall, those are up 3% for the business year-on-year. Now I'm not going to put a firm figure on where we can get to, but we do believe there's more to come. We operate in fragmented markets. We are still gaining share. You can see that actually the fourth consecutive quarter where we've delivered those share gains. And therefore, we believe there is more productivity to go after, and we can keep driving gross profit per FTE up.

[Denis Machuel, CEO]

And at the core of the way we manage the company now, it's all about empowerment because we give very clear guidelines. But at the same time, people -- we have this granular way of managing things because that helps us to re-adapt even in 1 -- the same country, you have regions that have different dynamics. So that's the very granular way of managing resources, managing productivity super sharply, but also making sure that we adapt to headwinds here and tailwinds there that makes us, I think, efficient and makes me very positive moving forward.

[Operator]

The next question comes from the line of Konrad Zomer with ABS AMRO ODDO.

[Konrad Zomer, ABS AMRO ODDO]

I've got 2 questions. Firstly, I'm very pleased with the improvement in productivity with 4% organic revenue growth with 2% fewer people. If organic growth was to remain positive in the next few quarters, would you still be able to reduce headcount going forward? And how much of that would be needed to get to the cost savings planned by end of the first half next year.

And my second question, I wasn't particularly happy with the year-on-year increase in your leverage ratio. I understand the dividend distribution, but that was the same last year. What makes you so confident you can reduce that from 3.2% at the end of the first half to about 2.5% when we get to the end of this year. with earnings slightly to remain under pressure?

[Coram Williams, CFO]

No problem. Thank you, Konrad. I'll take both of those. So I mean thank you for the compliment on productivity. And may I just say that actually, we are also very pleased with our productivity improvement. I think we've made very clear over the last couple of quarters that we are focused on driving the productivity on our sales resource, and you've seen us do that systematically, 3% up in Q2 whilst reducing G&A because ultimately, you do have to look at SG&A as 2 different buckets. There's 1 which is clearly linked to the top line and where we're focused on driving that productivity. And we feel there is more that we can do and G&A, where we need to reduce to get to that -- below that 3.5% target.

Now in terms of the headcount, as you've heard me describe, on the sales side, we will manage it according to the market conditions we see. And I think we've been effective at doing that over the last few quarters. G&A headcount will come down because the majority of the costs in the business are headcount and, therefore, to deliver on the €150 million run rate saving by mid-2024, we do have to reduce headcount. So I can't make a prediction about the way in which markets will develop, but you will certainly see further reductions in our G&A headcount and we'll manage the rest of the headcount according to the environment that we see.

On the leverage ratio, 3.2x is in line with our expectations. As you mentioned and as I mentioned, it is a seasonal peak in Q2 because of the dividend distribution. Typically, H2 is strong in terms of cash generation. We've seen that in prior second halves. I think you can take confidence from the fact that our operating cash flow in Q2 saw a significant underlying benefit. I mentioned that of the €161 million year-on-year improvement Half of that came from favorability in payables and better collections, and we expect to continue to be very disciplined in the way we manage working capital. And the second reason, I think, for confidence is that we do believe we can continue to take share in fragmented markets, 4 consecutive quarters of market share gains and relative revenue outperformance. That drives the productivity that we were just touching on. It drives operating leverage. And that, combined with the reduction in G&A will drive margin in the second half.

Now obviously, I have to caveat that and say that, that assumes that we will see similar market conditions to what we've seen so far. But if we do, we are confident of a margin improvement on the back of productivity, share gain and G&A cost reduction. I hope that gives you some confidence as to why we think we can get to 2.5x. And I'm going to say 1 more thing, which is longer term, the reason that we can really steadily delever is because we will drive further productivity, will get more of that €150 million reduction in G&A savings. And as I mentioned earlier in an answer to a question, you will see our one-off substantially reduced once we have delivered on the G&A savings program, and that's where the commitment to delevering post year-end comes from.

[Operator]

Ladies and gentlemen, that was the last question. I will hand over back to Adecco. Please go ahead.

[Denis Machuel, CEO]

Thank you very much. Thanks to all of you for having listened to this call and for your questions. We really appreciate that. I think I won't add anything else to what Coram summarized at the end, I think it's very clear. We are driving top line growth to get operating leverage. We are very rigorously managing our costs and we will see profitability improving progressively. I look forward to -- of course, our exchanging with you on our Q3 results and particularly at the Capital Markets Day. We will have a deep dive on several aspects of our business, of course on the strength of Akkodis value proposition. We will explain we are going to do and what we are currently expecting from the power of generative AI.

We will detail or so the plan in -- the way we turn around -- we are turning around the U.S., which where I see some really positive operational signs. So all that, I think will give you more and more insight into a business, which I believe is very well placed to continue to gain share, to regain leadership and to be at the forefront of 2 critical aspects that our clients are -- that are core to our clients' issues, which is talent and technology.

So, thank you very much for your time and looking forward to our next exchange.