Adecco Group AG

SIX:ADEN

Earnings Call Analysis

Adecco's Q2 2024 Performance and Outlook

In Q2 2024, Adecco reported revenues of EUR 5.8 billion, a 2% decline organically. The gross margin stood at 19.4%, 70 basis points lower year-over-year. However, the company achieved EUR 162 million in G&A savings, surpassing the targeted EUR 150 million, contributing to an EBITA of EUR 179 million and a 3.1% margin. Free cash flow also improved by EUR 100 million year-on-year to EUR 128 million. Notably, the company’s net zero emission goals for 2030 and 2050 have been approved. Looking ahead, Adecco expects Q3 revenue to mirror Q2 levels and anticipates a 40-50 basis point sequential improvement in gross margins.

Introduction

During the latest earnings call, Olo's leadership discussed the company's performance in Q2 2024, noting significant improvements and strategic investments. Despite operating in challenging markets, the company managed to outperform many of its competitors.

Revenue Performance

Olo reported revenues of EUR 5.8 billion for the quarter, which was 2% lower on an organic 20 days adjusted basis. Although this was a decline, the company continued to gain market share, growing 375 basis points ahead of its key competitors. The performance in Southern Europe and APAC was particularly strong, contributing significantly to the overall revenue.

Gross Margin Trends

The gross margin for the quarter stood at 19.4%, 70 basis points lower year-on-year. This decline reflects the current business mix and pricing strategies. The leadership emphasized that the pricing remains firm and there are no structural issues affecting the margin—it's largely a matter of geographic mix and business portfolio.

Operational Efficiency

Olo achieved an above-target EUR 162 million in G&A savings, contributing to a 19% reduction in G&A expenses compared to the 2022 baseline. This operational efficiency supported an EBITA of EUR 179 million, maintaining an EBITA margin of 3.1%. The company also reduced its G&A headcount by 12%, further enhancing its operational lean-ness.

Geographic Performance

Different regions showed varied performance. Southern Europe and APAC led the way with exceptional growth, whereas Northern Europe and North America faced challenges. For example, revenue in North America was down by 14%, dragged by slower demand in the IT sector.

Strategic Investments

Strategic investments were a key highlight. The company has focused on adding capacity to capture growth opportunities in dynamic regions like APAC and Southern Europe. They are also investing in next-gen technologies such as AI-assisted coaching, which is expected to drive competitive advantage in the future.

Financial Metrics

The company's balance sheet remains strong with a sound financial structure. Net debt-to-EBITDA ended the quarter at 3x, a 0.2x reduction from the previous year. Cash performance also improved, with cash from operations at plus EUR 162 million, bettering last year's figure by EUR 82 million. The cash conversion ratio rose to 84%.

Future Outlook

Looking ahead, Olo is guiding towards similar revenue development in Q3 2024. The company expects the gross margin to improve sequentially by 40-50 basis points. Expected SG&A savings are pegged between EUR 15 million to EUR 20 million. The company remains committed to continuing its strategy of 'Simplify, Execute and Grow,' aiming to sustain G&A expenses below 3.5% of revenues.

Conclusion

Olo's leadership expressed confidence in the company’s strategic direction and operational efficiency. Despite a challenging market, the firm expects to continue outperforming its competitors, backed by a disciplined execution of its 'Simplify, Execute and Grow' plan.

Earnings Call Transcript 2024-Q2

[Operator]

Ladies and gentlemen, welcome to the Adecco Q2 Results 2024 Conference Call and Live Webcast. [Operator Instructions] The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Benita Barretto, Head of Investor Relations. Please go ahead, madam.

[Benita Barretto, executive]

Good morning, and thank you for joining the Adecco Group's conference call today. I'm Benita Barretto, the group's Head of Investor Relations. And with me are the Adecco Group CEO, Denis Machuel; and CFO, Coram Williams. Before we begin, we want to draw your attention to the disclaimer on Slide 2. Today's presentation will reference GAAP and non-GAAP financial results and operating metrics. 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 and the results report.

[Denis Machuel, executive]

Thank you, Benita, and a warm welcome to all of you who joined the call today. Let's turn to Slide 3, which provides an overview of the quarter. All -- the group delivered EUR 5.8 billion in revenues, 2% lower on an organic 20 days adjusted basis. We delivered another quarter of strong share gains and clear outperformance in challenging markets. The group grew 375 basis points ahead of its key competitors on top of 775 basis points in the Q2 period last year. The gross margin of 19.4% were 70 basis points lower year-on-year, it is a robust result that reflects the current business mix and firm pricing. We've delivered an above target EUR 162 million of G&A savings run rate.

And in Q2, G&A expenses were 19% lower than the '22 baseline supporting the group's EBITA of EUR 179 million and 3.1% margin. Adjusted EPS was EUR 0.64, 1% lower year-on-year on a constant currency basis. Net debt to EBITDA ended the quarter at 3x, a 0.2x reduction compared to the prior year's period. Cash performance improved, driven by good working capital management. Cash flow from operations was plus EUR 162 million, better by EUR 82 million year-on-year and a cash conversion ratio was 84%. As part of the group's ongoing commitment to sustainable growth, we are pleased to announce that the science based targets initiative has approved our 2030 and 2050 net zero emission targets, including detailed year-on-year reduction path.

Let's now move to Slide 4 in our strategic progress. We've consistently delivered against the Simplify, Execute and Grow plan, which was established to drive better, faster execution and improved financial performance. So to highlight a few achievements. The group has made significant strategic investments over the last two years, gaining substantial market share and positioning itself close to leading the market in revenue terms. These investments include, for example, adding capacity to consistently capture growth opportunities in Adecco APAC or Southern Europe as well as the latest technologies such as AI-assisted coaching in EZRA. We've also protected capacity in more challenged markets where appropriate, ensuring we are well positioned to capitalize swiftly on a future recovery. By simplifying the way we work with strong execution, we have delivered EUR 162 million in G&A savings, net and in run rate terms above the EUR 150 million target.

In gross terms, this is an absolute reduction in spending of over EUR 200 million and over 20%. The organization has been rightsized the move to shared service centers accelerated and procurement policies tightened. Within strengthened group guardrails, we've empowered decision-making and accountability by those closer to customers at the GBU and local levels. We have activated a value-driving tech road map with clear architecture, project prioritization and balance between global and local needs. With this, we plan to simplify the group's system landscape and increase capacity for innovation and disruptive technologies, harnessing data and AI to enhance our competitive edge. Last but not least, in HR, we are driving a group-wide values and culture initiative to support a collaborative, transparent and high-performance culture with an absolute focus on clients and candidates.

Moving now to Slide 5 and more color on the G&A savings program. Since announcing the EUR 150 million net target in Q4 2022, the group has methodically worked to achieve it. Supported by the task force, which has worked with the GBUs countries and functions to identify actions and improve the speed of delivery. This disciplined execution has enabled us to overachieve. As of mid-2024, we've delivered EUR 162 million in savings, net and in run rate terms versus the 2022 baseline.

EUR 109 million of savings have come from simplifying and consolidating corporate and enabling functions, including by shifting administrative tasks to offshore shared service centers for finance and HR. EUR 53 million of savings have been delivered from GBU and country structures, mainly by eliminating duplication and reducing the number of organizational layers. G&A headcount has decreased by 12%, while nonpersonnel cost cuts have driven EUR 66 million of savings. For the Q2 period, G&A savings represent a 19% reduction versus the 2022 baseline, bringing G&A expenses to 3.4% of revenues. Looking forward, we have a clear plan to sustain G&A expenses below 3.5% of revenues per annum.

Let me now hand over to Coram, who will provide details on the Q2 results.

[Coram Williams, executive]

Thank you, Denis, and good morning to everyone. Let's discuss the context within each GBU, beginning with Adecco on Slide 6. Adecco has demonstrated resilience in challenging markets and delivered a solid performance. It took further market share with relative revenue growth of 220 basis points in the period at a market-leading profitability level. Revenues were EUR 4.5 billion, 2% lower year-on-year on an organic trading days adjusted basis. Flexible and permanent placement revenues were both 2% lower while outsourcing activities were up 15%. On a sector basis, growth was strong in retail and solid in logistics. However, demand was weak across the auto manufacturing and IT tech sectors. Gross margin was healthy with pricing firm. Gross profit per selling FTE rose 2%, while selling FTEs reduced 4%, reflecting the agility with which we manage the business. The EBITA margin at 3.4% was 10 basis points lower, reflecting lower volumes, geographic and solutions mix substantially offset by better productivity, G&A savings and the favorable timing of FESCO JV income.

Slide 7 shows Adecco at the segment level. In France, revenues were 8% lower in a challenging market. The decline was broad-based with notable softness in manufacturing and logistics. France's EBITA margin mainly reflects negative operating leverage. Management remains focused on improving sales intensity and rightsizing to drive performance improvement. Revenues were 11% lower in Northern Europe, including 12% lower in the U.K. and Ireland, 13% lower in the Nordics and 1% higher in Belux. The region performed well compared to competitors in sector terms, autos, consulting and manufacturing were subdued. DACH's performance was robust with revenues growing 1%. Germany was up 1%, reflecting a tougher market environment while strongly outperforming competitors. Logistics, IT tech and retail were strong, while autos was slightly lower mainly due to base effects.

In Southern Europe and EEMENA, revenues grew 4% ahead of competitors. Iberia was up 10%, EEMENA was up 7% and Italy was flat. Logistics, food and beverage and retail were strong. In the Americas, revenues were 5% lower. LatAm was up 13%, led by Colombia. In North America, revenues were 14% lower, reflecting continued market headwinds in flexible placement with lower demand from large enterprises. On a sector basis, retail was strong, while IT tech and autos were notably weak. The region's EBITA margin reflects lower volumes, rightsizing efforts and calibrated investment in the U.S. network to drive future growth. In APAC, revenue growth was strong up 14% and firmly ahead of the market. Japan was up 11%; India, up 13% and Asia up 7%.

In Australia and New Zealand, revenues were 41% higher, boosted by a significant government contract that started in Q3 '23. The EBITA margin of 6.6% includes an impact from the favorable timing of the industry support fund at FESCO. On an underlying basis, the margin improved 10 basis points mainly reflecting higher volumes, the current business mix and disciplined cost management.

Let's move to Akkodis on Slide 8. Akkodis' revenues were 2% lower year-on-year on an organic trading days adjusted basis. Staffing revenues were 17% lower, challenged by the ongoing tech staffing market downturn. Consulting revenues were solid, up 4% year-on-year. EMEA was robust, if mixed. Revenues in South EMEA were up 5%, with France up 5%, reflecting good auto activity and strength in Spain and Italy. In North EMEA, revenues were 6% lower. Akkodis NXT formerly DataRespons was 7% lower, reflecting weaker demand for software development expertise. Germany was 3% lower due to more challenging market conditions, particularly in autos. North America revenues were 14% lower, weighed by the continued downturn in tech staffing. Solutions revenues rose 30% organically.

APAC revenues rose 9% with Japan up 7%, led by tech staffing. Australia rose 9% with consulting up 34% organically. The EBITA margin at 4.9% was 30 basis points lower year-on-year. This result mainly reflects seasonality and market challenges in the U.S. and Germany, partially offset by disciplined cost management. By service line, staffing margins were under pressure, while consulting margins were broadly stable year-on-year.

Let's turn to Slide 9 in LHH. Revenues in LHH were 7% lower year-on-year on an organic trading days adjusted basis. Recruitment Solutions revenues were 13% lower, with the segment continuing to face market headwinds. Gross profits were 13% lower and U.S. gross profits were 17% lower, both modestly improving sequentially. Productivity improved with FTAs reduced by 8% year-on-year as management exited low performers. At the same time, the team is protecting capacity and selectively hiring experienced consultants to capture a future rebound in market activity. Career transition was healthy in a strong comparison period with revenues 10% lower and good growth in Canada and France. It continues to take share with over 2,000 new clients year-to-date, and its pipeline remains solid.

Learning & Development revenues were 1% lower organically. EZRA performed very strongly, with revenues growing 45% organically and a strong pipeline. General Assembly continued to pivot towards B2B, while Talent Development was subdued. Revenues in Pontoon was 7% higher, led by growth in Direct Sourcing activities. LHH's EBITA margin of 7.5% was 10 basis points lower year-on-year. The margin reflects lower volumes and changing mix, substantially countered by organizational optimization and good G&A savings.

Let's turn to Slide 10. On the left, we review the group's gross margin drivers. In Q2, on a year-on-year basis and under the group's accounting policies effective January 1, 2024, currency translation and portfolio scope had a 5 basis point positive impact. Flexible placement had a negative impact of 20 basis points mainly driven by the Adecco GBU's current geographic mix. Permanent placement had a 30 basis point negative impact, reflecting lower volumes while career transition had a 10 basis point negative impact, reflecting a strong comparison period. Outsourcing, consulting and other had a 15 basis point negative impact mainly driven by lower volumes in Pontoons MSP and RPO services.

In total, the gross margin was 70 basis points lower on a reported basis. At 19.4%, it is a robust result, reflecting current mix and firm pricing as we can also see in gross profit developments year-on-year with the group down 5%, but Adecco only 2% lower, in line with its revenue development. On the right, we review the year-on-year drivers of the group's EBITA margin this quarter. At 3.1%, the EBITA margin was stable year-on-year. Gross margin developments were fully offset by a 5 basis point positive impact from productivity improvement, a 45 basis point positive impact from G&A savings with costs down 11% year-on-year and 20 basis points positive impact from favorable timing of FESCO JV income.

Let's turn to Slide 11 in the group's cash flow and financing structure. As you will recall, the group's cash flow generation is seasonal with H1 usually being a cash out and H2 usually being a cash-in period. Cash performance improved with cash conversion at 84% over the last 12 months, from 73% in Q1. Q2 operating cash flow was up EUR 82 million year-on-year at plus EUR 162 million. It benefited from favorable working capital development of EUR 116 million, supported by good working capital management. DSO improved by half a day year-on-year to 52.5 days, Free cash flow was EUR 100 million higher year-on-year at EUR 128 million, supported by lower capital expenditures.

Let me touch on the financing structure. Net debt-to-EBITDA was 3x at the end of Q2, reflecting a seasonal peak due to the dividend distribution and 0.2x lower year-on-year. The group has a solid financial structure with fixed interest rates on 81% of its outstanding gross debt, no financial covenants on any of its outstanding debt and strong liquidity resources, including an undrawn EUR 750 million revolving credit facility. The group remains firmly committed to deleveraging supported by productivity gains, G&A cost reductions, lower one-off charges now that we've delivered the savings program and lower capital expenditure.

Let's turn to Slide 12 in the group's outlook. Revenue developments in Q3 2024 are expected to be similar to those in Q2 '24 on a year-on-year trading days adjusted basis with market conditions likely to remain challenging. The group will focus on sustaining G&A savings whilst continuing to position capacity to capture growth opportunities and market share. In Q3 '24, the group expects its gross margin to improve sequentially in line with a normal seasonal movement of 40 to 50 basis points. The group expects a modest reduction in SG&A expenses in the region of EUR 15 million to EUR 20 million from the EUR 969 million reported this Q2 '24, excluding one-offs.

And with that, I'll hand back to Denis.

[Denis Machuel, executive]

Thank you, Coram. Let's turn to Slide 13. In Q2, the group continued to progress its strategy and execute in a methodical, disciplined way. The efforts have significantly strengthened the business. We've delivered strong share gains for eight consecutive quarters. We've over-delivered on savings, achieving EUR 162 million savings net in run rate terms. Looking forward, we will further progress to simplify, execute and grow agenda. We have a clear plan to sustain G&A expenses below 3.5% of revenues per annum. Moreover, we are determined to continue outperforming the sector and are managing frontline resources with agility to enable us to benefit swiftly when labor markets improve.

Thank you for your attention and let's now open the lines for Q&A. Operator, we are ready for the first question.

[Operator]

[Operator Instructions] Our first question comes from Suhasini Varanasi from Goldman Sachs.

[Suhasini Varanasi, analyst]

I have two, please. When you think about the original guidance on gross margins for 2Q that you gave with the 1Q results in May, it was supposed to be broadly in line with the 1Q levels of 19.8% versus where you actually landed up which was 40 basis points lower. Can you maybe discuss what changed versus your original expectations and the degree of confidence you have on the gross profit guidance for the next quarter?

Second question, in July, your credit rating on your debt was changed. The outlook, I think, has changed from negative to stable and this raised some concerns, I think, among your credit investors. So do you have any plans to accelerate the deleveraging process on the balance sheet to help at least some of those concerns there?

[Coram Williams, executive]

This is Coram. I'll cover both of those questions. On gross margin in Q2, we did guide for broadly in line and obviously came in a little bit lower than that on 19.4%. We think that is a healthy result. And probably the two things that were slightly lower than we'd expected were perm, where it was down 30 basis points and we guided towards 10% and flex, which was down 20% when we've guided towards being down 10%. So these are not major movements. And I think the key point about gross margin is that it's really all about the current business mix right now. It's about the pressures that we continue to see in perm. It's the geographic mix in Adecco with the lower gross margin countries growing faster than the higher gross margin countries, but there is nothing structural happening in our gross margin. It's all about mix. Our pricing is firm. The spread between bill rate and pay rate was up again year-on-year in Q2.

And as I mentioned in my script, the Adecco gross margin was down by the same amount as the revenue line. Again, that signify that our pricing is firm, and we're using dynamic pricing where it's appropriate to capture the value of the services that we bring. So I have good confidence that we will improve sequentially in the way that we've described for Q3. On the S&P change, I mean, let's be clear. We still have a very high investment-grade credit rating. It is BBB+, Baa1. The only thing that S&P moved was the outlook and as is clear from their report, the reason that they did that was not about the execution of the business, which actually they commended it's about the macroeconomic challenges that we continue to face.

Our balance sheet is strong. We've got no financial covenants, no outstanding commercial paper, strong liquidity. And as I outlined in my remarks, we've got a very clear plan for deleveraging, and we do that through productivity improvements, the flow-through of the G&A savings, which we've delivered above target, lower one-offs now that we're largely through our G&A cost reduction and lower CapEx. And there's tangible progress that you're seeing in the Q2 numbers because our operating cash flow is up over EUR 80 million. Our free cash flow is up EUR 100 million, and our leverage has actually come down year-on-year in a seasonally high leverage quarter.

[Operator]

The next question comes from Andy Grobler from BNP Paribas.

[Andrew Grobler, analyst]

Two from me as well, if I may. Firstly, just sticking with cash flow. DSOs improved during the quarter. To what extent do you think that improvement is sustainable? Or is there further to go on that metric? And then secondly, just from a demand perspective, given some of the macro uncertainties that surround us, are there any signs of a change in behavior from your clients, either positive or negative in recent weeks?

[Coram Williams, executive]

I'll take the first one, and Denis will pick up on the second one. We're really pleased with our DSO performance. We've had a real focus, as you know, on cash flow. You're seeing the tangible results of that in the Q2. And one of the levers that we've got is obviously around DSO and a half day improvement in DSO for the group is worth somewhere between EUR 35 million and EUR 40 million of cash. So this is a real focus for us. And you can see for the market and the industry as a whole, actually, DSO is going the other way. So I think our focus is paying off. We will continue to really home in on this to make sure that we drive further benefits in operating cash flow. We've incentivized on operating cash flow as a metric, which means that management is really homing in on it, and we believe it's sustainable.

[Denis Machuel, executive]

And on the demand, as we said in our outlook, we don't see any major changes. In the Q3, we said that our revenue development will be more or less in line in Q2. So we expect the regions that have been performing and there are several -- in this past quarter to continue. I think we have good traction in APAC, good traction in Latin America, good traction in Southern Europe, Eastern Europe. So having -- we have some signs that there are some supportive economies around. Of course, there are places where markets are more challenging and we adapt our capacity to that. So I think what we are very agile in making sure that we adjust our resources.

One thing that could -- that's interesting to look at is the trends in recruitment solutions, LHH, particularly in the U.S. and also the tech staffing in the U.S. What we've seen I mean these are difficult markets. As you could see year-on-year, we're down. But sequentially, we've seen signs of stabilization. And so on these things, we believe that we are at a trough, let's be clear. We haven't seen an inflection yet, but we don't think it's going to get worse. And we are positioning ourselves for the rebound. That's what Coram mentioned in his remarks as well. We are protecting capacity, we've recruited some good people, particularly in LHH, to make sure that we are ready to accelerate as soon as the markets restart.

[Operator]

Next question comes from Simona Sarli from Bank of America.

[Simona Sarli, analyst]

So on -- first of all, on gross profit margin, you have indicated that it will be sequentially up with the normal seasonality patterns, so the plus 40, 50 basis points quarter-over-quarter. If you can please explain how comfortable you are with that, especially in the context where your main competitors are actually being a little bit more conservative and indicating only like a small improvement of up to 20 basis points. Secondly, on the reduction in G&A of EUR 15 million to EUR 20 million, how much of that is related to temporarily the adjustments in capacity and how much more it will be sustainable in study in the medium term? And lastly, on your CapEx guidance for 2024, you are cutting that from EUR 180 million to EUR 150 million. So part of that is, of course, related to Q2, but for the balance of that, what is guiding this reduction?

[Coram Williams, executive]

I will take all three of those questions. On gross margin, as I mentioned, we are confident that we will see the sequential improvement in line with seasonality. Clearly, that implies there's no major change in trends and that's very consistent I think, with our revenue guidance. And I can't comment obviously on what competitors are guiding towards, but I would say we have a slightly different mix. So we are confident in our view on gross margin, and I think it is consistent with what we're saying about the trends that we see in the market. On SG&A, the EUR 15 million to EUR 20 million reduction, obviously, the part of that is the flow-through of the additional run rate, the over-delivery on G&A savings that we've seen at the end of Q2 and that will flow through in Q3 and Q4. But there's a small amount of it where we're expecting to adjust capacity.

To be clear, you've seen us do this all the way through the last few quarters, where there are opportunities for investment to drive growth and to take share, then we will increase our selling capacity and where we find markets that are challenged obviously, we reduced selling capacity. We have flexibility in that part of the cost base. but as Denis mentioned, we also protect capacity to make sure that we can really capture rebound. You've got to be a bit careful because the base moves around. So there'll probably be a little less G&A savings in Q3 and a little bit more in Q4. And then finally on CapEx.

I mean, a big driver of this is obviously that Q1 and Q2 were lower than we had been anticipating and certainly lower than this time last year. Part of that is because we had elevated CapEx levels in 2023 because of the contract that we won in Australia, the big government outsourcing contract. But it also reflects, I think, the focus that we've got on making sure that all aspects of our cash flow are managed effectively and that we're being disciplined in the way that we manage our CapEx spend. It doesn't mean we're slowing down the investment that we need. That's not the case, but it is about being disciplined and making sure that we are spending what is appropriate.

[Simona Sarli, analyst]

And can you please help just a clarification on the gross profit margin because clearly, in Q2, it came in a little bit softer than expected in term and also flat in order to deliver this 40 to 50 basis points of sequential improvement, are you therefore assuming that there are going to be an improvement in both impairment flex?

[Coram Williams, executive]

No. There's no -- so I think you've got to distinguish between the sequential improvement, which is effectively in line with seasonality, but that obviously would put us 50-or-so basis points down year-on-year. And just to clarify where that's coming from, probably about 15 bps on career transition because obviously, while that business is still at pretty high levels. We can't sustain given the comps that we've got in the second half of last year. A little bit of downside around 10 basis points on OCS, Outsourcing and Consulting, largely because of the mix in Pontoon and a 20 to 30 basis point year-on-year decline in flex because of the geographic mix in Adecco. So but please just be careful about distinguishing what we're saying on sequential and what that means year-on-year.

[Operator]

The next question comes from Remi Grenu from Morgan Stanley.

[Remi Grenu, analyst]

I've got a few. The first one is that there seems to be a clear divergence in performance between Southern Europe and Northern Europe and North America on the other side, which have been weaker. So if you could give us more flavor on what's driving that? And if you have any discussion with clients, which would give an idea of what are the underlying drivers of that divergence? That's the first question. The second one is on what's your view on the outlook in the U.S. in the context of what we've seen in some of data, the labor markets were loosening and your comment on temp activity in that country being subdued.

So yes, it would be interesting to have a view on the outlook there? And then the last question relates to the working capital improvements. My understanding was that this divergence in performance was driving between Southern and Northern Europe was also driving a negative working capital effect because in Southern Europe, the working capital might be a little bit higher than in Northern Europe. So just correct me if I'm wrong on that. And if that's the case, I think it would be interesting to have a bit better view on what's driving that improvement in DSO? And if it has offset that kind of potential negative mix effect in Europe.

[Coram Williams, executive]

Denis will take the first two, and I'll pick up on the working capital piece, Remi.

[Denis Machuel, executive]

So first of all, on the geographies, definitely, I mean I would say the major factor for the difference is the macros in these countries. We definitely have good dynamic in Southern Europe, Italy is flat versus the Northern Europe down. We have Spain, which is growing strongly. We have other parts of the world, as I mentioned earlier, that are quite solid. So I think it's mainly macros. And clients are -- there's no major difference in the client conversations than what we had before. They adapt to their own markets. So North America is a market where there has been -- post COVID, there was a lot of recruitment after the great resignation, there was a lot of recruitment and companies are sort of staying at the level of improvement that they had just after this big effort that they made in 2022 to recruit.

So at the moment, it's more or less stable, the temp market in the U.S. is at historic low. The temp penetration is quite low, and it's across the whole temp industry. So yes, we hear the increase in unemployment in the U.S. labor market it's difficult to anticipate what's going to happen in the next quarters. Of course, the political uncertainty creates economic uncertainty that doesn't help. What we know is the plan that we have in the U.S. is delivering, and that's what matters to us. As you know, we have a turnaround plan that is underway, and it is delivering results. So we believe that quarter after quarter, we are in a good place to capture any type of rebound. Now it's too early to say whether this -- when this is going to come.

[Coram Williams, executive]

And let me pick up on the working capital point. I mean, Remi, you're right that when a business is growing, it absorbs working capital and when a business is declining, then it tends to release. So all other things being equal, you'd have very modest absorption of working capital in Southern Europe and a modest release of working capital in Northern Europe. And obviously, if I step back, that's true for the group as a whole. So our sales line is down slightly. Obviously, a very strong competitive performance, but that does mean that there has been a modest release of working capital. But -- and this is really important that DSO management, the 0.5-day improvement is a big driver of our operating cash flow, it's worth EUR 35 million to EUR 40 million of the EUR 80 or so million upside. And then on top of that, at the free cash flow level, you've got the CapEx benefits. So I think it's really important to recognize, yes, there are working capital characteristics at play here, but we've done a very good job of managing that. And improved DSO in challenging markets.

[Remi Grenu, analyst]

If I can just follow up on the environment in the U.S. and that comment around temp penetration being at a low level there. Is it something that you would consider as normal given where we are in the cycle and the current environment? Or is there any structural reason which explains the decline in penetration or any other drivers?

[Denis Machuel, executive]

I don't think it's structural. It's -- we are in a cyclical business. Again, there were some good momentum some years ago. And then post-COVID, as I said, company have reopened the doors. There was an inflow of people and now it's more -- so we had a historic high if I go back two, three years ago, and then now we are -- companies are recalibrating. The political uncertainty doesn't help. So that's what explains where the industry is at the moment.

[Operator]

The next question comes from Rory McKenzie from UBS.

[Rory Mckenzie, analyst]

It's Rory here. Three questions, please. And firstly, on this point on the market share gains. I know you focus on the recent year-over-year growth trends. But I think your organic revenue itself declined sequentially in Q2 pretty similar to peers and is now back below the 2019 level. So it's hard for us to really see any gains this cycle overall. Are you trying to tell us that you've won more contracts or more wallet share and that will be more visible should market that actually turn?

And then secondly, on capacity, again, you talk about protecting capacity, but I think your organic head count is also now back below the 2019 level, and you're suggesting small further cuts in Q3. Whereas some peers have kept headcount at much higher levels. So how confident are you that you can capture a rebound overall? And also, are you still confident in the usual recovery drop-through rate? I guess the concern would be that a lot of costs money to go back in to support a recovery. And then just finally, a quick one on the FESCO JV that subsidy received in Q2, was that all cash in this quarter? And also what's the outlook for Q3 and Q4 JV income?

[Coram Williams, executive]

Denis will take the first and the second, and then I'll pick up on FESCO JV.

[Denis Machuel, executive]

Okay. So definitely when you look at the growth rates of main competitors when you look at the market dynamic, we are gaining share. This is it. We are -- yes, our revenue is declining. It's obvious. You've seen it, minus 2% in Adecco, particularly -- but our relative revenue growth is plus 120 basis points. So our markets are fragmented. So even though our revenue is declining, we are taking a big share of the market. This is it. So we are for the eighth consecutive quarter, the growth pillar of our strategy of our simplified [ equity ] plan is delivering. So we -- there and you highlighted the two elements of us gaining market share. Yes, with clients, we increased our share of wallet because we are more efficient in the way we deliver our service, particularly in the temp business, speed is of the essence.

So our systems, the digitization that we've put in our business, the way we interact with our associates, with our candidates the faster, the better we are able to interact with them, the better we are able to provide the clients with the necessary people. So that's how we gain share of wallet, particularly with the large accounts. The on-site business is getting traction. That's also a way to gain share. So -- and on top of that, we have focused our teams on prospects, on reaching out to new clients, and we've won also more contracts. So those two things are definitely levers that explain why we've gained share. And the omnichannel that we have implemented in several countries being the digital channel, the branch and the way we serve our large clients with career centers, all that helps us be better than our competitors.

[Coram Williams, executive]

On the -- Sorry, this is Coram. Let me pick up on this point and add to Denis' answer on the sort of protecting capacity. I think I understand the point that you're making, but I think it's really important to recognize, if I compare Q2 '24 gross profit with Q2 '19 gross profit, it's not down, it's actually slightly up. And we are being very dynamic in the way that we manage capacity. So we added headcount in Q2 in Southern Europe. We added into APAC. We added into Lat Am, and you can see that we're fueling the growth. And where there are pressures in the market, obviously, we are reducing head count, but we are being very cognizant of the need to protect capacity and not cut to the bone. And there was a data point that I gave you in my script, which is if you look at recruitment solutions, particularly in the U.S., which is down mid-teens, our head count down 8%.

So we have been very careful to make sure that whilst we are managing to the recovery ratio, we are not cutting capacity that will prevent us from being well positioned to capture the recovery. That is a very clear part of our strategy. And we manage according to the gross profit per FTE. And just on that data point, it's also up. So if I look at Q2 '24 we're at 32.2. If I look at Q2 '19, we're at 28.4. So there's been a productivity gain as well during that period. So understand the challenge, but we are being very careful in terms of the way that we're managing this. We're driving productivity, and we're protecting capacity to make sure that we continue to gain share, particularly when the recovery comes.

On FESCO, I want to just be clear on this one. The industry support fund is something that happens every year. It is a way of incentivizing employment in China. We have a very good business in China. It's growing nicely. It's got good profitability characteristics even without the industry support fund. But we never quite know when in the year that subsidy is going to come. It came in Q1 of last year, Q2 of this year so we would not expect further subsidies in Q3 or Q4, and that means you should work on a contribution from the FESCO JV of around EUR 5 million per quarter in Q3 and Q4. The cash has been received in FESCO, but obviously, we received a dividend from FESCO later in the year. So I hope that helps.

[Rory Mckenzie, analyst]

Yes, that does. Just to come back on that point you made on the capacity point, Coram. Obviously, we're struggling to deal with the aggregate metrics and you have the sub-details, which maybe help more -- I guess most profit going from Q2 '19 to Q2 '24 have seen a very large acquisition contribution and the unique inflation cycle. So I guess it's hard for us to pick out from that, there's any real structural expansion or rebound potential in the group, if you see what I mean. But maybe you can follow it up at a different time.

[Coram Williams, executive]

No problem. Look at the data points that we're providing in terms of -- and because I think Recruitment Solutions is the best example of this. We could have cut that capacity further. We could have driven a higher short-term margin, but we have very deliberately chosen not to leave all capacity but to focus on performance management to exit weaker performers and to retain a strong sales base, which will really allow us to grow when that market comes back, which it will.

[Operator]

The next question comes from Afonso Osorio from Barclays.

[Afonso Osorio, analyst]

I have just a few last questions if I may. Firstly, on growth, just wondering if how you finished the quarter if it was probably the same April, May and June. So the exit in June would be interesting to know. And then what you've seen so far this quarter for July and the beginning of August. And then secondly, on the pricing environment, I think you touched briefly earlier in Suhasini's question. If you can just expand a little bit on your spread in Q2? And you said it was quite strong in Q2. So I was just wondering if region by region, that was broadly the same or if there's like weakness or a strong performances in specific countries.

And then finally on the exceptional charges, I note the EUR 58 million so far this year. You're still guiding for the EUR 19 million for the full year. So just wondering if you -- what's left to do here in the second half on the exceptional point? Is it a function of the further reduction in the sales force? And if so, where are you making these adjustments? And then just lastly, if I may, on the regional growth dynamics. I noticed like Italy, which has been super strong for you recently, now flat growth and also U.K. deteriorating a little bit as well in Q2. So if you can comment a little bit on those two2 countries and what do you expect for the second half?

[Coram Williams, executive]

Afonso, I'll take the first three, and then I think Denis will comment on Italy and the U.K. On sales in the quarter and into July, there are, as you know, some really big trading day adjustment on a month-by-month basis because of the timing of Easter, because of the timing of public holidays, et cetera, in Q2. So it's actually really difficult to talk about the phasing of the months within the quarter. In July itself is not a particularly important month because it's the lead into the summer vacation. So I think the key point on revenue is that we've seen some pretty consistent trends, some areas of growth, some areas of pressure. And as Denis has described, some of those key areas such as Recruitment Solutions and tech staffing, we have seen stabilization and very modest sequential improvement on a quarter-by-quarter basis. So it's why we are guiding towards similar revenue development in Q3.

On pricing, I think we've demonstrated that we've been very effective on this over a number of quarters. We are very focused on dynamic pricing to capture the value of scarcity where we see it. The spread between bill rate and pay rate in Q3 was up 3% for the G12 countries, which is a good result. And in terms of are there big movements within the countries? No, it's pretty consistent because this is an area of focus for us, and there's real discipline in terms of the way that we're managing pricing. On the one-offs, absolutely, we are sticking to the EUR 90 million of guidance for the full year. The reason we're running slightly ahead of guidance at the half year is obviously that we actually took extra actions to deliver the EUR 162 million of run rate savings versus the EUR 150 million target.

So this is one area where us being slightly above our guidance actually, I think, is a good sign in terms of the actions that we've taken. There's always a little bit more that we can do on G&A., it won't be of the same order of magnitude that you've seen. We are now largely done with our G&A savings program. So any further one-offs will be about the adjustments to capacity that we will make we are sticking to the EUR 90 million of guidance for the full year.

[Denis Machuel, executive]

And on Italy and U.K., I think it's mainly a market trend. We've seen in the U.K., some of our large clients having some decline. We have lower volumes on our on-site clients in the U.K. We see perm also slowing down. So that's but it's more or less in line with the market. In Italy, same thing, I think we have a mixed situation, but it's more or less a slowdown on market. What's striking is the difference between Italy and Spain. Spain, the economy is good, and we have excellent performance. So -- but it's mainly linked to, I would say, market conditions.

[Operator]

The next question comes from Sylvia Barker from JPMorgan.

[Unknown Analyst]

Two questions from me, please. Firstly, just to understand the point around reaching a trough in parts of your end markets. So you mentioned Recruitment Solutions and IT staffing. I guess if you look at the numbers on perm, the decline was better in Q2 than Q1, but on a let's say, a 2-year stack basis, it was still a bit weaker. So what -- I guess, what end markets within that are you seeing reach a trough specifically? Then secondly, on Germany plus one can you just update us on the logistics contract that you won? And how much the contribution from larger contracts, the you have won and are transitioning and how much is the underlying decline within Germany, obviously, a much better performance than the end market overall? And then finally, U.S. temp volumes at all-time lows, that was a quite interesting place to be. If you look at your portfolio, can you just help us with some thoughts around what -- again, what markets and industries are driving that today?

[Denis Machuel, executive]

So yes, so on the Recruitment Solutions and tech staffing, definitely, we've seen stabilization in many countries. We've seen stabilization in the U.S., we've seen stabilization in France. So I think we are -- we believe that we've again, probably we are probably at a lower end of the cycle. Now as I said, it's difficult to anticipate that things are going to get better soon. But we mentioned in the past that some clients who are more cautious, some candidates were also more cautious. There were people dropping in the process in the past couple of quarters because of the -- probably the economic uncertainty that doesn't help and that has driven the decline. Now as we said, we see signs of stabilization. That's quite positive.

[Coram Williams, executive]

Let me pick up on the second and third question. So on Germany, I'm saying this with a small, but I'm not sure I quite accept that stripping out a contract win and market share it gets you to an underlying number because at the end of the day, that's how we run the business. We have to win it. And we're very pleased with our performance in Germany. Clearly, some of that came from logistics. But also, I think we saw an autos segment, which whilst it was down slightly, low to mid-single digits, that's on the back of a comp in '23, where we were up 34%. And I think others in the industry have found it much heavier going in auto. So I think the German business is actually doing a very good job of winning share, taking share.

And you can also see there is obviously an improvement in the margin in that business, which reflects the leverage -- the operating leverage and cost savings that we've driven there. I will step back though and say there will be some headwinds in Q3 for the group as a whole because of logistics. We have some very strong comps. We did win a lot of business, not just in Germany, in Q3 of last year, and it will be difficult for us to replicate those growth rates. And I think you should work on the basis that it's probably a headwind in the Adecco GBU of about 1 percentage point. So I hope that gives you a steer.

On the U.S. temp volumes, I mean Denis touched on the market environment which is clearly impacted by macroeconomic uncertainty. I think in terms of sectors that have done well, we've seen retail, which has been very positive. We've seen good traction in the small and medium enterprises. As both of us mentioned in our remarks, the larger enterprises have been a bit more subdued. And then IT tech has been soft and autos have been weak. So it's a bit of a mixed picture in terms of sectors. I think the key point on the U.S. is that we continue to drive the turnaround. So we're really focusing in difficult markets or making sure that we've got good sales intensity, that we've got really strong performance management, the right branch network, and we are positioned to capture the growth when the market comes back, which it will.

[Denis Machuel, executive]

And to give you -- to complement with some color on what Coram said, was talking about small and medium businesses. There is an overall market which is declining double digit. Our SME business is only minus 1% year-on-year, minus 1%. So that shows that there are places where, particularly if you put the right energy, if you revitalize the branches as we are doing, you can outperform the market.

[Operator]

The next question comes from Kean Marden from Jefferies.

[Unknown Analyst]

So I have two very quick ones for Coram, if I may. Just first of all, did your receivables factoring utilization remain unchanged in the second quarter, which I think to recall was about EUR 120 million? And then secondly, do you have any initiatives under consideration that likely to assist with deleverage in the second half over and both the normal working capital discipline. So in here, things maybe like asset disposals like a property or social security receivable books.

[Coram Williams, executive]

No major changes in factoring in Q2. The EUR 120 million is a full year number. It moves around a little bit, as you'd expect, in line with sales. But was not a big driver of the working capital benefits. As I mentioned, I think the key thing here is the way that we've been managing DSO and that 0.5-day improvement year-on-year. In terms of the initiatives to delever in H2 beyond working capital. I mean there's nothing that we're considering like a disposal or last year, you saw some small property sales, I'm not going to see anything like that. I don't think in H2. But I think the key point is if you think about our four components of our plan for deleveraging productivity, G&A cost savings, lower one-offs and lower CapEx. You will see more traction on a number of those in H2 than we've seen in H1. So G&A flow through increases in H2 because of the run rate. We see lower one-offs because we're now largely through the G&A initiative, and we continue to get the benefits of lower CapEx. So it's organic, but we're very confident in our plan.

[Operator]

The next question comes from Gian-Marco Werro from ZKB.

[Gian Werro, analyst]

Congrats to the strong operational improvements and walking the talk. And two questions from my side. The first one is on your business in France. We talked on many industries, but maybe you can also give us a bit more details and also your outlook for development in France. Recently, you mentioned that it might be relatively quiet now around Olympics, but after the Olympic Games, we might see some changes, of course, also from a political perspective, I would just wonder about your view here in this core market. Then on the other side, also for LHH, you mentioned that you are ready to accelerate the business. Is that mostly -- you are mostly referring here to the Recruitment Solution business where you see some improvements? Or do you also some triggers or operational improvements, maybe also in Learning & Development, General Assembly, for example, that we currently overlook where you are working on something to maybe also grow your business further.

[Denis Machuel, executive]

So yes, on France, so the overall market is down. We are a little bit below the market trend, and I'm not happy about that. As you can imagine, it's for several quarters, several years, I would say, larger players have been more impacted than smaller ones. We are really -- we have a clear action plan to reduce the gap versus the market, we are adjusting, okay, to this downside market. So we're balancing capacity. We focused our cost base and our cost base as flexibility and we adjusted to market conditions. So our pricing -- so there are some good things in France. Our pricing plan is showing improvement. We've reduced the volume gap versus the market in Q2 versus Q1. We are a bit suffering from some of our large clients that have structural elements where they reduce their temp workers services.

So we are really focusing on improving the delivery to our large clients who are [ care ] centers, and this is getting good traction. And we are accelerating our on-site development. We've improved our sales efficiency on the SME segment between April, June. So there are things that give us some positive perspective. However, the French market is going to be still difficult for the quarters to come. Political uncertainty obviously doesn't help macros. The Olympics on our side won't have a big impact. We were not part of the big sponsors, which we felt it was too expensive. And so we'll have to look at whether -- let's be clear. We can look at after the Olympics, whether the business that's going to grow, is it going to be the CT business? Or is it going to be the recruitment solutions business.

In both cases, we are, I'd say, in a good place to capture whatever happens. We are really adjusting our cost to the situation at the moment. That's a big focus on I want to improve our margin in France in the coming quarters. We have a plan on that. We have some positive signs that this is going to happen. On LHH, yes, definitely, if I -- LHH and the big thing is, of course, the U.S., that's what has the biggest impact. As I said, the stabilization is happening in Recruitment Solutions. That's good. No signs of positive inflection yet, but it's -- I'd say it's a bit reassuring for the future. We have the career transition, even though it's minus 10% in the revenue, it's still at a very, very high level. The minus EUR 10 compares to a very, very high level last year when we had all the tech restructuring plans that we were accompanying and we had captured almost all of them. So that's good.

We are still winning business. And particularly in France, we have more traction in CT. So I'm still positive in terms of the overall level of activity that CT has. And as you know, that feeds our gross margin in a very nice way. I'm very pleased with what EZRA is doing. We're growing 45%. We have great traction, and that is going to continue. It really captures a lot of interest from clients that want to do a cultural change. They have to do so many transformation to do a positive. And then on GA, yes, we see operational improvements. We are shifting GA from a B2C business into a B2B business that has better margins, more sustainability. And so I believe that GA will really have a path to better results in the quarters to come.

[Operator]

The next question comes from Konrad Zomer from ABN Amro ODDO.

[Konrad Zomer, analyst]

The first one on the North American business. Can you share with us what percentage of your revenues is with the magnificent 7, please? The second question is on leverage. I think you've done a really good job in terms of getting the G&A savings in gaining market share. Your free cash flow was up significantly you've showed two investors that you're able to control your cost base very well. However, on a structural basis, your leverage has not really come down in the last few years despite the fact that you keep telling us that you are very adamant to bring it down. I'm just wondering with all the low-hanging fruit done and most of the G&A expense is now completed, do you not think it becomes more difficult to bring your leverage down going forward?

And then my last question, I'm sure you've heard the stories in the market, partly fueled by comments you may have made yourself about the dividend not necessarily being sacrosanct anymore. And obviously, we had the stories about potential disposals, particularly Akkodis. Is there anything on this platform that you would like to share with us on your view on these sort of stories, please?

[Coram Williams, executive]

So Denis will pick up number -- your first question, and then I'll touch on your second and third questions.

[Denis Machuel, executive]

So with regards to the magnitude 7, they are our clients. We don't -- obviously, we don't communicate on the numbers, but it's not massive. It's not material. Obviously, they are our clients because we have to play with them. I mean we're -- and as you know, the CT business has been really surfing on the magnificent 7 restructuring two years ago and one year ago. And we work with our three GBUs, actually. But there's nothing that is -- percentage is not massive.

[Coram Williams, executive]

And let me pick up on leverage, dividend under Akkodis. And Konrad, we appreciate your comments about what we've done on G&A and operating cash flow and free cash flow. It's been part of a very, very disciplined operational execution. And I think you can see that we have developed a track record for gaining share, lowering costs and driving cash -- operating cash and free cash flow. Leverage is actually down 0.2x in Q2. And I think that's important because it shows that this effort is starting to pay off. And we've been clear that we would accelerate our deleveraging in the second half of this year and into 2025. And there's a very clear reason for that, which is up until now, the G&A savings have not been at full flow.

We've been referring significant ones in order to access them. And as you know, CapEx has been running slightly above the natural level for the business. So I think what we're seeing is very consistent with the way that we've described our path for deleveraging. And we've always said that we get through the G&A program in order for all flow through cash along with the discipline on our working capital management. So we are confident we can delever. Our balance sheet is sound. And therefore, we believe we have the financial flexibility to delever and continue to pay dividends.

Denis, I think, is going to comment the market speculation on Akkodis.

[Denis Machuel, executive]

And well, actually, I'm not going to comment. As you know, we don't comment on rumors. What I can say very clearly is Akkodis' core to our strategy, the future at work strategy is based on three pillars, the three GBUs, Adecco, Akkodis and LHH that are complementary to each other and that provide our clients with an array of services that serves every type of need that they can have on talent and technology. This is what makes us unique, and that makes us super strong, and that makes us win market share. We are committed to our future at work strategy and Akkodis is core to it.

[Operator]

Ladies and gentlemen, that was the last question. I would now like to turn the conference back over to Denis Machuel for any closing remarks.

[Denis Machuel, executive]

Thank you very much, and thank you to all of you who attended the call. Just wanted to sum up where we are, I believe, again, that we have a solid strategy and this strategy resonates with our clients. Over the past two years, we have strengthened the company and we have strengthened our execution. We have a proven capacity to execute on our plan, simplify, execute and grow. We are -- as you know, we are adjusting our resources to market conditions. We have a positive view on the future, and we are ready to capture every single business opportunity that will be ahead of us. So we will -- we're ready, and I'm really positive to whatever can happen. In the future, we're solid. Thank you very much. for being with us today. Looking forward to our next [ exchange ]. Have a great day.

[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.