Adecco Group AG

SIX:ADEN

Earnings Call Transcript 2020-Q3

[Operator]

Ladies and gentlemen, welcome to the Q3 Results 2020 Analyst Conference Call and Live Webcast. I am Sandra, the Chorus Call operator. [Operator Instructions] The conference is being recorded. [Operator Instructions]. At this time, it's my pleasure to hand over to Nicholas de la Grense, Head of Investor Relations. Please go ahead, sir.

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

Good morning, and welcome to the Adecco Group's Q3 2020 Earnings Call. With me today are Alain Dehaze, Group CEO; and Coram Williams, Group CFO. As usual, before we start, please view the disclaimer regarding forward-looking statements on Page 2. Coming to the agenda on Slide 3. Alain will begin with an update on how we're navigating the crisis and a summary of the key highlights from Q3. Coram will then review the financial performance and provide some outlook commentary. After which, Alain will offer some concluding messages before we open the lines for your questions. Alain, over to you.

[Alain Dehaze, Member of Executive Committee & CEO]

Thank you, Nick, and good morning, ladies and gentlemen. Welcome to our Q3 results analyst and investor call. Similar to previous quarters, let's begin with an update on how we are navigating the COVID crisis. Q3 was a challenging quarter, but I'm pleased by our performance in these circumstances. Our main focus since day 1 of the crisis has been on supporting clients, candidates and all colleagues in returning to work. Since the trough in April, we have now been able to reemploy almost 150,000 associates. And then when we say that, it doesn't mean that the jobs being created are exactly the same ones that existed pre-crisis. In fact, there are big changes under the surface, with tens of thousands of jobs being created in sectors that have been winners in the crisis, such as e-commerce and logistics and many fewer jobs in aerospace, automotive and hospitality, for example. All colleagues have done a fantastic job to pivot the business to meet the new demand and to help candidates and associates make these transitions. It confirms the important role we play in the effective functioning of labor markets and explains why we are recognized as an essential industry. And we believe that this crisis has further confirmed the need for flexible human resources solutions. While we have been managing this huge change, we have been laser-focused on protecting the business from the sharp renewal decline. And I'm pleased to say that through a combination of agile cost management, discipline on pricing and business mix as well as our portfolio diversity, we achieved a sector-leading EBITDA margin performance in Q3. Given the revenue decline, it is really an impressive result. Next, our leading carrier transition business, LHH, is delivering excellent results, supporting clients and candidates to a very difficult time. That's a good business for us, also with a great track record of positive outcomes for the companies and individuals we support. The LHH pipeline suggests growth will continue to accelerate from here. Finally, I will reiterate a point I made last quarter. During the crisis, clients have realized the importance of partnering with large and well-capitalized suppliers. Continued investment in our digital capabilities and our strong balance sheet are clear differentiators, and we expect that to drive market share opportunity in both the short and the medium term. Let's now look at how this translated into our financial performance. As economies reopened and the third quarter progressed, we saw a widespread improvement in the year-on-year revenue trend during the third quarter, improving to minus 15% from minus 28% in the second quarter. Our gross margin was strong, up 40 basis points organically, supported by out-performance in LHH, positive price and mix effect and reduced costs related to COVID. This is the tenth quarter of out-performance relative to the peer group. We also managed our cost base with agility. EBITA margin was strong at 4.5%. And our strong focus on collections resulted in very good cash flow with DSO down 2 days and cash conversion of 153%. The crisis accelerated the implementation of new systems, processes and training. We continue to roll out our integrated front office system in France, now expanding it to Eastern Europe. You will see that we also announced a significant restructuring in the third quarter linked to the transformation of the group operations in Germany and real estate rationalization. Coram will explain more on that in a moment. And we continue to innovate. Adia, whose traditional hospitality and events business has completely stopped is pivoting into new segments in the U.S., and we are leveraging its technology in the Adecco business. Innovation is not limited to our digital businesses. In France, we recently launched a new long-term employment contract that incorporates a training component, the so-called CDI or the CDI learning. Adecco Analytics identified 400,000 open vacancies between March and September related to 17 scarce skill sets. We will now recruit employ and train individuals in these skill sets before placing them with our clients. In doing so, we help meet the talent needs of our clients while building employability for individuals, all of which we expect to drive revenue growth for the Adecco Group. We plan to recruit and train 15,000 people over the course of the next 3 years in this contract. I would now like to hand over to Coram to discuss the financial performance in more detail.

[Coram Williams, Member of Executive Committee & CFO]

Thank you, Alain, and good morning, everybody. Let's start by looking at the revenue trends in Q3. Revenues in the third quarter were down 15% on a trading days adjusted basis. The improvement was broad-based and followed a pretty consistent trend of week-on-week and month-on-month improvement through the quarter and into October. Europe was the area most impacted by lockdowns in Q2. Hence, with the reopening of economies over the summer, it was the region showing the strongest rebound. The decline reduced to minus 19% in Q3 from minus 35% in Q2. In North America, where the trough was shallower and later, the bounce back was slightly less strong. The decline was minus 17% from minus 27% in the previous quarter. The rest of the world outside these 2 regions remained more resilient and was down 2% with continued growth and strong performance in Japan. Looking at the country revenue results in more detail on Slide 9. France, our largest market, saw a strong rebound from the deep trough experienced in Q2, recovering to minus 18% from minus 44%. Demand remained weak in the manufacturing, automotive and construction sectors, while logistics was more resilient. Revenues performed in line with the market. In North America and U.K. General Staffing, revenues were down 12%. North America was down 14%, broadly in line with the market trend with the decline led by lower demand from clients in the manufacturing sector. In the U.K., revenues were more resilient and outperformed the market with a decline of 5% supported by growing demand from retail and e-commerce clients. In North America and U.K. Professional Staffing, sales were down 28% in the quarter with the continuation of a few key trends from Q2. Our North America Professional business declined 21%. We have strong professional businesses in finance, office, legal and engineering. But IT has clearly been the out-performer during the crisis, and we are underweight in that sector compared to our large global competitors. U.K. Professional continues to be impacted by a perfect storm of the COVID crisis, IR35 regulation and Brexit-related uncertainty. In Germany, Austria and Switzerland, the rate of revenue decline was at 22%. Both Germany and Switzerland continued to be impacted by lower demand in the automotive, aerospace and manufacturing sectors. Accelerated by the crisis, we took the decision to restructure our German business towards the end of Q3, and I'll provide more color on that in a moment. In Benelux and the Nordics, the decline was 26%. We were impacted by our higher exposure to blue-collar profiles and particularly in Sweden, by lower demand from a few large manufacturing clients. In Italy and Iberia, similar to France, we saw a robust rebound after sharp contraction in Q2. The revenues declined by 8% and 17% in Italy and Iberia, respectively. Japan continues to show very strong performance led by professional solutions, albeit the pace of growth is moderating slightly. In the rest of world, performance was mixed. In India, the decline was driven by exiting certain low-margin business, while Asia continued to be impacted by COVID disruption. Australia and New Zealand was slightly negative. Eastern Europe and Latin America were relatively resilient and achieved growth. In career transition and talent development, LHH performed strongly, up 14%, driven by the countercyclical career transition business, which was up 23% year-on-year. As companies start to make permanent workforce adjustments in response to the crisis, we expect the growth rate to accelerate further in Q4. General assembly declined by 6%, impacted by the temporary closure of our campuses linked to COVID. While we can deliver the full curriculum of immersive full-time courses remotely and demand has been growing for those, the short courses and events that are reliant on our campuses have stopped and enterprise clients are postponing some training. Structurally, GA will emerge strongly from the crisis as digitalization trends accelerate in the education sector. Turning now to the gross margin on Slide 10. It was a very strong gross margin performance, up 20 basis points in reported terms and up 40 basis points organically. As in the last quarter, you can see the strength and breadth of our portfolio, playing an important role. Temporary staffing had a positive impact of 30 basis points. Half of that came from positive price and mix impact, including our continuing approach to selectively exit some of our lower-margin activities. The remaining half came from employment support schemes in Benelux and Nordics. While the level of support is similar to Q2, in the prior quarter, this was offset by crisis-related costs. In Q3, these costs reduced, and there was a net-positive impact. Permanent placement had a 60 basis point negative impact. That's a fee business with close to 100% gross margin. So it has a disproportionate impact on gross margin when it declines. Offsetting this decline in perm was Korea transition, which added 60 basis points, providing a natural hedge to the perm business. We also had a positive contribution from outsourcing and other activities, which proved resilient and added 10 basis points to gross margin. Overall, this was a very healthy gross margin development in the quarter. Let's now look at EBITA margin. You can see that we protected our margin well given the decline in revenues. The margin was 4.5%, down 40 basis points or 30 basis points organically. Negative operating leverage was much reduced compared to Q2 as we continued to strictly manage our cost base as revenues came back. We actually over-delivered on our recovery ratio target, with a ratio of 64% as revenues came back somewhat faster, and gross margin was a little stronger than we anticipated at the start of the quarter. Even as we cut costs, however, we've not cut back on transformation investments, which are underpinning good progress and grow together and laying important foundations for the next strategy cycle. Looking more in detail at the profitability by market. Profitability in most markets continue to be impacted by the revenue declines. Nevertheless, we saw sequential improvement in the trend in every market, except Japan, as operating leverage reduced and COVID related costs eased. I'd like to call out a couple of countries in particular. In France, the margin improved substantially compared to the prior quarter. This was driven by lower COVID-related expenses, favorable business mix and strong cost control. There was a further 30 basis point year-on-year help from lower bad debt provisioning due to strong collections. North America and U.K. General Staffing achieved margin expansion year-on-year, thanks to business mix improvement and very strong headcount productivity. Benelux and Nordics benefited from the gross margin dynamics that I explained earlier, complementing a solid underlying performance. Germany continues to be affected by lower bench utilization as a result of the crisis, although the impact was much less pronounced than in the second quarter. Even though we see some improvement in the situation in Germany in Q3, the COVID crisis has accentuated existing challenges in the market. We have, therefore, decided to make structural changes to both our cost base and our business mix to put Germany on a path to a sustainable, appropriate level of profitability. You'll see that we booked a EUR 61 million restructuring charge in Q3. Half of that relates to a roughly 20% reduction in internal FTEs and the real estate rationalization. The remaining half relates to a reduction in the bench of around 2,000 associates. We're exiting certain parts of the aerospace and automotive sectors due to structural changes in demand and profitability dynamics that we expect to persist. Aerospace, where we're exposed to longer production cycles, we expect the current high [ ATM ] activity to extend into the medium term. In automotive, we see structurally lower demand as OEMs scale back production of certain models and focus on EVs that typically use less labor in their production process. As we believe the demand in these sectors has been structurally impaired, we felt it inappropriate to keep workers in Kurzarbeit indefinitely, knowing that these jobs will not return. Most of the restructuring happened right at the end of the quarter, so the impact in Q3 itself was minimal. In Japan, we delivered strong profitability driven by business mix, pricing and productivity improvements. Finally, in career transition and talent development, the continued improvement is coming from the strong operating performance at LHH. On Slide 13, we see the SG&A development relative to sales and gross profit. Overall, we managed our SG&A with agility, reducing costs by 11% organically. This came primarily through lower personnel costs and a significant reduction in discretionary spend whilst continuing our strategic investments. The use of employment support schemes reduced SG&A by around EUR 13 million in the quarter or 1.5%. Overall, we achieved an organic recovery ratio of 64% in the quarter, ahead of target, mainly due to the faster revenue rebound. Turning to the cash flow and the balance sheet on Slide 14. Cash flow was strong with cash conversion at 153%. And Operating cash flow was EUR 150 million, even after accelerating the repayment of EUR 75 million of tax and social security payments that have been deferred during Q1 and Q2 2020. We have now fully cleared the balance of deferred payments from the early days of the crisis. DSO was down 2 days year-on-year on a headline basis, and 2.9 days on an unrounded basis. Of this, 0.9 days related to the mechanical effect of the revenue decline and the underlying improvement was 2 days. Overall, a strong underlying performance, which is testament to the focus of our colleagues around the world on collecting our receivables on time and in full. Net debt-to-EBITDA was at 0.5x, slightly improved compared to the half year. Remember that we paid a EUR 380 million dividend in April, and we also still have the remaining CSA receivable of around EUR 180 million on our balance sheet. The balance sheet remains very robust with EUR 1.5 billion of cash on hand and an undrawn credit facility of EUR 600 million, and no material refinancing requirements in the near term. Coming now to the outlook. The revenue trend improved consistently through the third quarter, with September down 14 days, trading days adjusted. The social lockdowns imposed in September and early October have had a limited impact on our business, and October volumes showed further gradual improvement. Nevertheless, we recognize that the lockdown measures implemented by governments in Europe over the last week are likely to impact the pace of revenue recoveries.As we said last quarter, the recovery is likely to be non-linear in nature. On the cost side, we will remain agile to protect profitability while investing in the transformation and areas of growth. We expect a more normalized organic recovery ratio of around 50% in Q4 as utilization of government support schemes is further reduced and FDAs are calibrated to the sales recovery. With that, I'll hand back to Alain.

[Alain Dehaze, Member of Executive Committee & CEO]

Thank you, Coram. Coming now to the concluding messages. We continue to successfully navigate the COVID crisis during the third quarter. We achieved sector-leading profitability, thanks to agile cost management, pricing discipline, business mix improvement and our balanced portfolio. Revenues recovered in line or ahead of the market in most regions. We successfully pivoted towards growth areas, whilst also supporting more challenged sectors, helping economies to adapt to the new normal. At the same time, we have maintained our strategic focus, investing in our transformation with continued rollout of new digital tools in the third quarter. And our balance sheet remains very strong with low leverage and exceptionally strong liquidity even after paying our dividend.Although we don't yet see disruption to our business from increased lockdown measures, we recognize that the recovery will not be linear and that we need to remain agile. We have proven our adaptability and the resilience of our business during the second and the third quarter, and we are well prepared for the future. The diversity of our portfolio is a clear strength, with carrier transition delivering strong growth and outsourcing and up-skilling and re-skilling proving resilience. Midterm, we expect the crisis to drive even greater demand for flexible HR solutions and for digitalization of the business to drive market share gains for the Adecco Group. Finally, I would like to express my thanks to our many valued customers who are placing their trust in us to support them through this time and also share my gratitude to our employees and associates for their continued hard work, endurance and tenacity. With this, I would kindly ask the operator to open the line for the questions.

[Operator]

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

[Paul Daniel Alexander Sullivan, Director & Analyst]

Just 3 for me. Firstly, just can you, Coram, just give us a bit of color on the -- on gross margin, sort of, expectations into Q4 and the unusual question about moving parts there, particularly on the sustainability of the underlying gross margin improvement? Then secondly, could you just, sort of, elaborate on your expectation for the restructuring contribution to margin or SG&A reduction going into Q4? And then in terms of the revenue impact, just to clarify, the 2,000 bench reduction that you're seeing in Germany is essentially that -- should we just assume that's non-revenue generating currently, so there's no real impact on revenues going forward? I -- just that revenue just won't come back?And then finally, in terms of the outlook, I mean, lots of uncertainty, clearly, but how would you contrast what we're seeing today, what you're seeing on the ground today versus previously?

[Alain Dehaze, Member of Executive Committee & CEO]

Thank you, Paul, for your questions. Perhaps briefly on the 2,000 associates. Yes, these 2,000 associates are today mainly -- or they were mainly active in the automotive and aerospace. And as you -- as we have elaborated in the presentation, these are 2 sectors, let's say, heavily and structurally impacted in Germany. Aerospace because demand went down. And we don't anticipate any recovery of the demand before at least 2 years. So we decided to take a decision on this.And for the automotive or auto, it's a little bit of the same. There, there is a combination of the slowdown of the -- for fire driven engine. And the coming up of the electrified vehicle, which requests less labor cost. So that's why we have taken this 2,000 -- or we are taking this 2,000 associates out of, I would say, the bench. Now on the outlook. I think it's good to -- first, to start to look at what happened during the third quarter. And in the third quarter, we saw a consistent improvement in the rate of revenue decline. And I can give you some color by month. July was at minus 19%, August, minus 14%, and September was also minus 14%. But I think it is important to adjust these figures because of the distortion of the large working days adjustment in August and September. So the underlying trend would have been for July minus 19%, August, minus 15% and September minus 13%. And what we have told you and also written to you is that the volume trends in October has indicated further gradual improvement.So from, I would say, the past and the recent past, and from the hard data, you can see that this kind of soft lockdowns or social lockdowns implemented in September and October did not impact the business materially. And this makes sense because these social lockdowns have mainly impacted sectors such as hospitality, travel and so on, where our exposure is extremely low.Now let's look perhaps at what is happening today. And of course, in the last few days, we have seen more extensive lockdowns being reimposed or will be reimposed. It's difficult for us to already assess in detail the impact on our business. But what we think is that it is reasonable to assume that they will have some impact on the economic growth and thus by extension on the demand for all services.Now we see that the kind of lockdown being now rolled out are quite different. That's the one we saw in the first wave. First of all, people are really motivated to go to work. This is -- to go to work or to work in a remote way. That's point one. Second, schools are remaining open, which is extremely important, let's say, for the state of the economy.And as we were telling you, we are considered to be active in essential service, which is really good news for us because our customers are really counting on us to sometimes replace ill people or -- yes, mainly on that or in some areas to cope with the peak they have. Also, in the meantime, our customers have learned how to operate safely for social distancing. So production lines have been reorganized so that they can work in a safe way, protective individual equipment have been given and are available. And what we see also is that some sectors which have been closed during the first wave are now stayed open. And especially I look at construction in France, for example, but also some other, I would say, non-essential manufacturing activities are still open today. Now I would say whatever the type of lockdown, I think we have demonstrated agility. And you can see that in our last 2 quarters. You can see how adaptable and resilient our business is. And we can combine this with our strong balance sheets. So that puts us really in a position to not only weather the storm but really emerge stronger from it.And we are convinced that in the medium term, this crisis will drive increased demand for flexible human resources solutions, which is really a positive factor for our business.

[Coram Williams, Member of Executive Committee & CFO]

So let me pick up. Paul, you asked about the payback on the German restructuring, so I'll just pick that 1 up briefly, and then we'll turn to gross margin. As I mentioned in my remarks, roughly half of the restructuring was for the 2,000 associates that were -- that operate in the automotive and aerospace sectors. And to be clear, those are non-revenue generating right now. There isn't an immediate payback because obviously, they are supported by Kurzarbeit, but we're clear that those jobs are not coming back, and therefore, it helps us to avoid cost in the future. The other half relates to the real estate rationalization and a 20% reduction in internal FTEs, and that has a roughly 12-month payback period to it. So that has a strong payback. Now from that, you can work out if we undertook this at the end of Q3 with some actions moving into the beginning of Q4, then you're going to get a single-digit million benefit euros in Q4. So it's not a huge number, but it will help Q4 a little bit.In terms of gross margin, we are very pleased with the development that we've seen. That means that 9 out of the last 10 quarters, we have seen positive gross margin development. And the only one where we didn't was Q2, which was clearly an absolutely unprecedented quarter. There are quite a few moving parts to what happened in Q3. So let me just run you through that and then talk about what we'd expect to happen in Q4. In terms of Q3, career transition, as you heard, continues to be a positive, and it offset the downsides in perm for us. LHH is a great asset. It's a differentiator for us. And that portfolio helped to balance the gross margin pressures that we're seeing in perm. On the temp margin, which was positive by 30 basis points this quarter, there are a couple of reasons for that. So firstly, we saw lower bench costs in our bench markets, particularly Germany, but also the Netherlands and the Nordics. We saw lower COVID-related costs. So in Q2, there were a number of very specific costs to dealing with the crisis, for example, bonuses that were paid to associates who were having to work in difficult times and didn't come with any margin attached to them understandably. There was also a mix benefit because the small and medium enterprises have come back somewhat in Q3.And as both Alain and I mentioned, we've seen pricing discipline and stability. All of that has helped to drive the underlying improvement in temp margin. There's also, as I mentioned in my remarks, a benefit from the employment support schemes in the Benelux, which is about half of that 30 basis points, so about 15 basis points. That's what's happened in Q3. We look to Q4, clearly, it's a volatile environment, but let me try and give you some pointers. I think on M&A, on the Soliant divestiture, that's about 20 basis points negative. FX, we're clearly seeing weaker U.S. dollar. That's about minus 10 basis points. I think it's reasonable to assume that, that offset between career transition and the perm negative will continue so that those 2 balance each other out. And the positive progression that we've seen in the temp margin of 30 basis points, as you can hear from the way I described it in Q3, I think, should continue into Q4. So you should see similar positive movement there. If you step back, what's happening is that the balance of our portfolio is helping in terms of the mix. And I think we're also doing a very good job of protecting gross margin and making sure that we see progression. So I hope that gives you a sense of how to think about it.

[Operator]

The next question comes from Sylvia Barker from JPMorgan.

[Sylvia Pavlova Barker, Analyst]

Going back to the restructuring, could you maybe just check on the real estate kind of how many branches is that? And then just any additional cost -- cash cost going into Q4 and P&L costs? Then on -- I guess, on your comments around the Nordics and Benelux, obviously very strong margin, as you described in Q3. What was the level of, I guess, bonuses and pay in Q3? Are there any -- as you mentioned some bonuses around employees that have to work under difficult conditions during the crisis. But if we think overall in that region and maybe wider for the group, are you in a position now where you will be paying more kind of bonuses or increasing salaries maybe back to kind of where they were precrisis, if you have taken any of these measures during the COVID crisis, which might mean higher cost in Q4? And then finally, on LHH. Obviously, that's one business that has a pipeline. You seem to be quite bullish into Q4. Can you maybe talk a little bit around what you're seeing there from customers and the momentum that you see in the pipeline?

[Alain Dehaze, Member of Executive Committee & CEO]

Yes. Regarding LHH, I think the trend is confirming what we already told you during the Q2. And It's normal because company starts first to take decisions regarding restructuring and then they decide to operationalize their restructuring. And you see the revenue of LHH once the companies are operationalizing the restructuring. So that's when you will see the pickup of the revenues. And that's exactly what we described. We said in the previous quarter that, yes, it was 10%, developing. Now we are at 20%, and the pipeline is strong. And we anticipate LHH to continue to accelerate in the fourth quarter.

[Coram Williams, Member of Executive Committee & CFO]

And let me pick up the questions around branch reduction, gross margin and, sort of, SG&A more generally. In terms of the reduction in branch footprint, we highlighted in the press release, we've seen a 6% reduction on an organic basis. I think we should be clear this is an acceleration of a strategy that we've been pursuing for a while, as the nature of the branch changes. But clearly, the COVID crisis has presented an opportunity for us to rethink some of the ways in which we work. And that, in turn, has had an impact on the number of branches that we need. There will be some cash costs in Q4, but I don't think it would be material. And I think you've seen, based on the Q3 numbers, just how effective we've been collecting our cash, managing our DSO and ensuring that we have very strong liquidity. On the question around bonuses, I should be clear, this is a very specific point, and it relates to Q2 because in Q2 we did, in some cases, some of our customers chose to pay bonuses to associates or temps who were working in conditions, which were, because of the crisis, challenging. Now in those cases, we would simply have passed them through. We wouldn't have made a margin on them. And it's one of the many reasons why gross margin has improved from Q2 to Q3. So I don't want you to think that there is a significant volume of bonus payments in these numbers. It's more about the move from Q2 to Q3. In terms of costs, we set our -- SG&As down 11% in the quarter. Let me just touch on the components because I think it will help you understand how we've generated those savings. They split really between permanent cost savings, some temporary ones and savings, which effectively are driven by the revenue line. So on the permanent side, about 5% of that 11% was driven by FTE reductions in real estate rationalization. So 5% of the 11% is permanent. 4% of the 11% is variable. So those are bonuses, marketing costs, bad debt expenses where they move in line with sales. And as revenues come back, they will go back into the P&L. Albeit potentially at different rates, particularly when you think about something like travel. And then the rest, 2% is temporary savings, which is largely the 1.5% from the employment support schemes. That gives you a sense of how we've done it. And I think it also gives you a sense of the broad mix of savings that we made. We're not over reliant on one particular thing, and it's sustainable in terms of the way that managed it.

[Sylvia Pavlova Barker, Analyst]

Okay. So out of that, I guess, your variable pay, that is something which will be coming back in Q4, but that already accounted for the 50% recovery?

[Coram Williams, Member of Executive Committee & CFO]

Yes. And the -- I mean, let me touch on the recovery ratio because it's probably helpful here. I mean, you're right, it will come back, but clearly, that's dependent on the rate of revenue recovery. I think, when you're thinking about how the cost base moves in line with revenues, that 50% recovery ratio is very important because there are things that drive it. The way in which, for example, we adjust our headcount to the sales line. The government support is going to come down further in Q4 and some of those variable costs will go back in. But we're confident that 50% is the right way to think about the recovery ratio in Q4 and indeed in the longer term.

[Operator]

Next question comes from Hans Pluijgers from Kepler Cheuvreux.

[Hans Pluijgers, Head of Research of Benelux]

A few questions still for me remaining. First, coming back on the gross profit especially the price/mix impact. You indicated that mix was driven by SME, but could you maybe a little bit elaborate what's happening on the in-house side? Is that growing ahead of the company average? And secondly, you also see some price improvements, little bit elaborate where you are seeing that? Then looking at the development in France, There, you say 15,000 employees, you will train and provide these jobs in the coming 3 years. But what's the revenue model on that, especially initially -- especially looking on the training? Is there, let's say, a fee on that? Or is it just you earn back when you have placed those personnel? And maybe a little bit more for the longer term. How do you see, let's say, after now 6 months experience with this crisis and talking to customers, how do you see demands changing going forward? Do you see a further drive of your customers to flexibility? And maybe you can give some feeling on how you have seen the average length of contract developed over, let's say, last 6 months. Is that increasing or maybe even reducing so people becoming more flexible for the very short term? Can you give us some feeling on that?

[Alain Dehaze, Member of Executive Committee & CEO]

Yes. So I will start with France and then take also your last questions regarding demand. And then Coram will take the other one. On France, this is a combination of 2 models we know in different areas. So it's a combination of, what we call, the contract of indefinite duration. And remember, about, I think, 7 years ago. We launched that type of new contract in France, a little bit like in the Netherlands, it's further -- say, Hans, you do -- to make you the link. So we -- it for -- now a part of our temps, we allow them to take them on contract of indefinite duration, which allows us to also invest in training and so on. And so, based on that type of contract, we have identified among the 400,000 open vacancies, 17 scarce skills and capabilities and rules. And now we are hiring people to whom will give this contract of indefinite duration, allowing us to invest in training them in this 17 capabilities missing on the market. And so we take the responsibility to train them and then to put them at work. But they remain really our employees like we have today with this contract of indefinite duration. So very positive. Also, it is an accretive model for us. And in the meantime, we have about 15% of our external labor force in France on such a contract. Now regarding the -- yes, the last 6 months, demand changing and how it can go further. Basically, I would say that we see 3 type of categories regarding the sectors. You see, yes, unfortunately, sectors and industries, which will remain closed, especially hospitality, tourism, airlines, yes, catering too. But for us, I would say it is a very small part of our revenues. It's less than 1% of our revenues. But we anticipate that these sectors will continue to be impacted for -- yes, for the near term. Then you have what we call the essential industries. And you see the health care, you see logistics and especially the logistics connected to an e-commerce platform. You see essential retail, you see utilities. There, we expect that the demand will continue. And even more, we see that logistic related to e-commerce is really going again to a new peak, which partly answered your question regarding on-site and so on. And then we see also sectors that have been impacted in the first wave and the first wave of lockdown. But will -- but that would be and will be less impacted this time. And I'm clearly thinking about construction. We saw some countries closing down the construction in the first wave. And in the second wave, it will remain open, which is good. Also manufacturing, not only the manufacturing of essential goods, but I think broadly, manufacturing -- car manufacturing, for example, was closed in the first wave in many countries. We don't anticipate these segments to be closed in the second wave. So that's in a nutshell.

[Coram Williams, Member of Executive Committee & CFO]

So let me pick up on your points about price discipline and mix. In terms of price discipline, I think, it's clear from our gross margin that we have maintained that discipline. And the reason for that is that clearly, it's a focus of ours during this challenging period. But also because I think it's a reflection of the value that we deliver. We have helped our clients to really respond to the crisis to keep running to scale up and down in line with demand. And I think that means the equation is more about value than it is about pricing. So you've seen that discipline in Q3. In terms of the mix, as you know, from comments that we made both in this quarter and in Q2, the larger clients were more resilient in the initial stages of the crisis, and small and medium enterprises were hit harder. That means, by definition, they've come from a lower base and therefore, recovered and that has margin implications for us because they are -- they have a stronger gross margin. Our on-site is the most resilient of the big types of customer. And that -- we've seen that trend continue through the quarter. But that's really the mix effect that you see happening in gross margin. And I think there's a final point, which is you heard both Alain and I referenced during our comments, that we are being more selective about the business that we take on. It is more important than ever in this kind of environment that we are focused on profitability and sustainability. And therefore, we are saying no to some low-margin business and making sure that we really protect that margin.

[Operator]

The next question comes from Alain Oberhuber from MainFirst.

[Alain-Sebastian Oberhuber]

I have 2 questions. The first is more about these ventures you have. Obviously, they were also down more than I was expecting. Could you elaborate a little bit more on that? And then regarding the professional offering. You highlighted that you were underexposed in IT in the U.S. But you also had a weak performance in Badenoch & Clark and the Spring Professional. Could you also elaborate why was that the reason? I guess you lost some market share. And when do you expect to recover? And maybe also a question regarding the change of head of the U.S. business. Have you already seen material improvement in some areas?

[Alain Dehaze, Member of Executive Committee & CEO]

So partly the first and the second questions are related. So regarding the ventures, you know that Adia was mainly active in the hospitality event and catering area both in Switzerland and in the U.S. And as you know, these are the sectors which have been heavily impacted by the current situation, the COVID situation. And so Adia has been impacted. Now they pivoted. They pivoted towards new type of activities and with today quite good results, especially in the U.S., positioning ourselves on the AB5 solutions. So that's for Adia. We are also continuing to learn from the technology and the practices we are deploying at Adia in the traditional business. Now regarding the professional staffing, Badenoch & Clark and Spring -- no, sorry. And then the second venture is Vettery. And Vettery is in the recruitment -- permanent recruitment. Which, like for Badenoch & Clark and Spring, but done in a traditional way, a consultant based way. Permanent recruitment has been really hit by this situation because many companies have frozen their recruitment and candidates are not really free to travel to meetings and they are not keen to change and so on. So we have not absolutely not lost market share, but it is just the segment permanent recruitment, which is impacted by the situation. So not really an explanation regarding the IT of professional staffing in the U.S. And then finally, about the change of head in the U.S., it is on the brand Adecco. And I'm very pleased with all the actions and decisions that have been taken. You have to give COVID and ourselves a little bit of time, but I'm convinced that we will demonstrate very shortly the progress we are making there.

[Operator]

The next question comes from Suhasini Varanasi, Goldman Sachs.

[Suhasini Varanasi, Equity Analyst]

Just a couple for me, please. I think you mentioned very clearly how you have been investing in your digital abilities through the crisis. Can you probably give some examples about how this has helped you win market share versus competition? And how it has helped you differentiate versus the peers? And the second question I have is on Germany. Clearly, you're taking the right call, exiting some of the verticals in aerospace and automotive. Can you maybe give some color on where you see the growth coming from in Germany? And what -- how would you like to position yourself in that country in the medium term?

[Alain Dehaze, Member of Executive Committee & CEO]

Yes. Regarding the gain of market share in this situation. I can give you 2 examples. Perhaps I remember a few months ago, some of our competitors, small and medium, but also medium companies have declared that they were stopping activities. And they were stopping activities because their IT infrastructure was not allowing them to function out of premise. And I would say, thanks to our investment we have done in our digital and network and infrastructure we have been able to function normally with 30,000 people out of 34,000 working in a remote way. But this had impact on many companies not being able to do this. This is one example. The other example is what we had in the U.K. One of our very, very large customer worldwide, faced one of its suppliers at the range -- at the edge of bankruptcy, came to us. And I think that in a period of 5 or 6 weeks' time, we had to take over thousands of associates because our customer was fearing the bankruptcy of these companies. And we are now clearly benefiting from this situation with quite strong results in the U.K. linked to this takeover of this workforce. That's 2 examples I can give you. And there are many others, I would say, at a lower scales, but these were 2 large examples.

[Coram Williams, Member of Executive Committee & CFO]

On Germany, let me pick that one up. I think we do feel that we've taken the right actions there. Clearly, this was partly about structural changes in the German economy, which are then accentuated by the COVID crisis. And historically, the German business has been overexposed to the automotive sector. And we know that there are a variety of trends going on in that sector, not least electrification, which changes the nature of the production process and reduces the labor that's required to build a car. So we are stepping back from that overexposure, trying to address the balance and really make sure that our -- in addition to that, our cost base is appropriate for the size of the business that we now believe we're going to have going forward. To be clear, Germany, like other European markets, there is growth, and it's coming from sectors which are benefiting from the crisis, such as logistics, such as e-commerce, such as pharma. And we are making sure that we are positioned in Germany accordingly. So I hope that gives you a sense of how we're repositioning the mix but also making sure that the cost base is appropriate.

[Operator]

The next question comes from Anvesh Agrawal from Morgan Stanley.

[Anvesh Agrawal, Equity Analyst]

I got a few as well. Just a couple of them on the regulatory side, really. In France, there is a proposal to sort of reduce the French business tax by 50% from 2021. And assuming sort of it could -- goes through when -- given your decent exposure in France, what's the impact you assume that could happen on the tax rate? And then second is beyond the cusp of the U.S. elections, and there are a couple of proposals from Joe Biden to, sort of, increase the tax rate and increase the minimum wages. Again, if you can sort of give comment on what sort of impact do you expect in your business from that? And then finally, Coram, you said that the balance sheet is really strong. The leverage is 0.5x. I mean, obviously, the recovery is not linear, but clearly, it is underway. So at what point would you sort of like to take the decision, what you decide to do with the additional cash that you have on hand? Should we expect the buybacks to return in the near term?

[Coram Williams, Member of Executive Committee & CFO]

So I'll take each of those. On the French business tax, you're right, the French government has obviously announced that the CVAE, the business tax will reduce by 50% in 2021. As you mentioned in your question, that is clearly subject to legislative approval, but that is clearly the direction of travel. If you were to look at the impact on our tax rate, not this year because of the challenges around COVID, but the French business tax in a normal year typically adds about 600 basis points to our tax rate. And therefore, in a normal year, this would reduce that effect in half. So it would have a 300 basis point positive impact on our tax rate. There's another aspect of this, though, that you have to think about, which is that it has an impact on French profit sharing, which is driven off a post-tax income base. And so, whilst it helps us, there is a negative in the EBITA, and therefore, the net income effect is positive, but it's not all of the 300 basis points. Now clearly, when we get to the full year and the Q4 results, we will give you clear guidance on the impact, but hopefully, that gives you a sense right now as to the direction of travel. On the U.S. election, it's clearly happening today. Therefore, very difficult to call the outcome. I think, this is a particularly unpredictable election, and so we'll all be watching closely. In terms of the legislative impact, I think it's very early to be able to predict what might happen. Clearly, tax rates can move in the event of a Biden presidency. And on the minimum wage, I think we have lots of states are already above the amount that Biden has suggested at $15. And I think we've proved ourselves adept and flexible at managing changes in that minimum wage when they come through. So we'll keep an eye on the situation, but we work with administrations on both sides. And then on the buyback, as you know, we paused this at the beginning of Q2. That was a prudent thing to do given the uncertainty of the environment. We did pay the dividend because we're clear that it's sustainable and recession-proof. We have an intention to complete the buyback, but only if it's sustainable. And I think there are 3 key questions that we have to ask. First, does the cash position support repurchases? And it's not just about the cash to run the business now. It's also as the recovery comes through, extra working capital is required. You know that our working capital profile is countercyclical. Secondly is our leverage ratio before our through-the-cycle target of 1x. And thirdly, do we have good visibility into a recovery? And those are the questions we have to answer before we recommence.

[Alain Dehaze, Member of Executive Committee & CEO]

You are welcome. So these are the final questions, and allow me now to give you a closing statement. Thank you, everyone, for joining the call and for your questions. While the economic environment remain challenging, we continue to navigate the COVID crisis well, showing relative resilience and agility in the third quarter. We have successfully pursued growth in the pockets where it exists, leveraging the strength and balance of our portfolio as a differentiator, and for example, with LHH and with our up-skilling and outsourcing solutions.Looking ahead, we are prepared for the recovery to be bumpy given the rapidly evolving COVID-19 situation, and we are confident in our ability to steer through these turbulent times. Indeed, we have proven in the second quarter and in the third quarter that we are able to deliver resilient earnings and cash flow performance even in a challenging market environment. We will continue to manage the short term with agility while maintaining our strategic focus, continuing to invest in our strategic priorities to ensure that the group emerge stronger from the crisis. Lastly, I want to remind you that we have a Capital Markets Day coming up on the 1st of December. It's a shame that we won't get to see you all in person, but I hope you will join us virtually as we will lay out our goals for the next strategic cycle and the next phase of the group's transformation. Thank you.

[Operator]

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