Adecco Group AG

SIX:ADEN

Earnings Call Transcript 2021-Q3

[Operator]

Ladies and gentlemen, welcome to the Q3 Results 2021 Analyst Call and Webcast. I'm Andre, the Chorus Call operator. [Operator Instructions] The conference is being recorded. [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.

[Benita Barretto, Head of Investor Relations]

Good morning, and thank you to all those who have joined us. With me today are Adecco's Group CEO, Alain Dehaze; and CFO, Coram Williams. We will review our Q3 results, and Alain will provide further insights around the group's strategic development. Following these prepared remarks, we will open the lines for your questions. Before we begin, I would like to draw your attention to the information on Slide 2. On today's call, we will be referencing both GAAP and non-GAAP financial results and operating metrics, this conference call will include forward-looking statements, and these statements are based on assumptions as of today and are therefore subject to risks and uncertainties.With this said, Alain, over to you.

[Alain Dehaze, Chief Executive Officer]

Thank you, Benita, and a warm welcome to everyone on our call. I will begin on Slide 3 with some highlights from the third quarter. The group delivered strong growth with revenues up 9% and gross profit up 60%. Gross profit margin reached a record level of 20.8%, up 110 basis points organically, driven by strategic actions to shift the portfolio, favorable mix and supportive pricing. The 4.8% EBITDA margin this quarter was again sector leading. In addition to achieving profitable growth, the group's 3 global business units, Adecco, LHH as Talent Solutions would be known going forward and Modis continued to progress our Future@Work strategy. Both organic and inorganic actions taken this quarter strengthen the group's ecosystem and firmly position us as a partner of choice for transformations underpinned by talent to customers worldwide. The group secured favorable financing for AKKA and firmly progressed integrations planned for this milestone acquisition. And we have now upskilled over 140,000 individuals this year which is an essential feature in our purpose to make the Future@Work for everyone in the evolving labor market landscape. We extend our thanks to our dedicated employees for their efforts this quarter. And I would now like to hand over to Coram to discuss the quarterly results.

[Coram Williams, Chief Financial Officer]

Thank you, Alain, and good morning, everybody. Before I begin, I should explain that I'm recovering from a cold. So you may have to forgive me the occasional sneeze during the presentation. Let's start with Slide 5, where we provide insights into current market dynamics. The industry faces an unusual moment in its history. A significant rebalancing in the demand and supply of labor is underway. Adecco Group's recent survey of nearly 15,000 workers provided clear insight into what is happening. As the graph on the left shows employees are reassessing careers with 41% looking to move to a more flexible role. Generation Z and millennials are most likely to be reevaluating their choices. The mismatch is most acute in the U.S. Labor force participation has been at its lowest rate in 4 decades over the summer in contrast to a record number of unfilled jobs as the U.S. economy rebounded. The graph in the middle provides detail at a sector level. There are discrepancies between sectors but the broad dynamic remains, there is a lack of available workers. 2 million more people than predicted have retired during the pandemic. 73% of employers currently report a struggle to hire and retain workers. Staying with the U.S. market.In Q3, all Adecco Group businesses saw a strong rebound in demand. As the graph on the right shows in flexible placement, which is centered in Adecco U.S., temporary roles paying less than $18 per hour had few job applicants. Those over $18 per hour attracted more candidates, if not always enough to meet their demand. In permanent placement, we saw better demand match to supply aided by the viability of remote work and meaningful wage inflation. Looking forward, talent scarcity for temporary roles will lessen as savings from support schemes are depleted. Yet with so many workers reviewing prospects on top of retirement patterns, labor supply is set to remain tight. In turn, wage inflation, which is clearly present in some sectors, is likely to expand to most sectors in the economy.At the Adecco Group, we're at the center of these developments, and we're likely to benefit from them over time. Our purpose to make the Future@Work for everyone has never been more relevant.Let's turn now to Slide 6 and the Q3 financials. The group delivered strong revenue growth of 9% year-on-year on an organic trading days adjusted basis, which is approximately 5% below 2019 on an underlying basis. Gross profits were up 16% year-on-year on an organic basis. The gross margin was a record 20.8%, up 110 basis points year-on-year organically. The group also delivered an industry-leading EBITA margin of 4.8%. Basic EPS was EUR 0.83, up 67% year-on-year. As we ended the quarter, and we ended the quarter with a strong cash flow development and balance sheet.Let's now look at the results at the GBU level, beginning with Slide 7. Adecco's revenues were up 8% on an organic trading days adjusted basis. Gross profit rose by 18% organically. Revenues are now above or well above 2019 levels in APAC, Southern Europe and EEMENA, Latin America and Canada. The strategic focus of Adecco on higher-value activities continued to deliver. Permanent placement and other services such as outsourcing, grew well. In flexible placement, logistics, financial services and manufacturing all rose double digits. The sequential improvement was, however, not as we had hoped, weighed by headwinds from supply chain shortages in automotive and electronics. There were also pockets of talent scarcity in select sectors such as catering and transport and in lower wage rate roles, EBITA excluding one-offs, was EUR 226 million, with a margin of 5.4%, up 90 basis points year-on-year. Margins were supported by services and country mix as well as pricing actions. Adecco also added sales capacity for the second quarter in a row, taking a balanced approach to drive profitable growth. Looking forward, Adecco will continue to invest in a disciplined way to further leverage the recovery.Moving now to Slide 8, which shows Adecco at a regional level. Overall, it was a mixed performance. In France, revenues grew 10% year-on-year. The business has pivoted sales efforts towards more dynamic sectors, including logistics, incrementally improving performance versus the market. Growth was held back by automotive and talent scarcity in hotel, catering and tourism. The sector-leading EBITA margin of 7% was 150 basis points higher year-on-year, including around 100 basis points benefit due to a favorable reassessment of social security obligations which may not repeat. In Northern Europe, revenues were 1% lower. Revenues in Benelux and the Nordics rose 5% and 16%, respectively. U.K. revenues were 12% lower on a tough comparison. Several logistics contracts that the business took over from a distressed supplier in Q3 last year have now ended. Underlying growth in the U.K. was up double digits.In the DACH region, revenues for Germany were up 13%, accompanied by strong margin development. Strong performance in Southern Europe and EEMENA continued this quarter. Margins of 6% were 100 basis points higher, reflecting better mix, pricing actions and good cost discipline. In the Americas, revenues were 3% lower. Latin America was strong, up 13% despite headwinds from Mexico where new legislation has prohibited temporary staffing. North America revenues moved 9% lower. Performance in Adecco U.S. was disappointing. Legacy issues such as adverse sector mix were further affected by talent scarcity for the lowest paid flexible placement roles. But results were also impacted by the scale of the transformation we are undertaking in Adecco U.S. The business has recently introduced a new sales delivery model. Opened a career center to provide centralized services to large customers and invested to expand its sales capacity. With hindsight, we underestimated the disruptive nature of these changes. But our actions to date, coupled with our learnings from the last few months mean we remain confident in the potential of this business and its operating model. Finally, APAC delivered another strong quarter with revenues up 9%, Japan up 6% and notable strength in Australia.Let's turn to Slide 9. We and the new LHH business unit, which comprises our existing LHH, general assembly, professional recruitment and Pontoon brands. Revenues were up 9%. Revenues were up 26% in U.S. professional recruitment and 28% in global professional recruitment with both segments leveraging strong market demand for permanent placement. Combined, gross profits were up around 50% year-on-year. In Pontoon, revenues grew 9%, led by MSP and RXO. Career transition and talent development revenues were 19% lower. In the U.S., talent scarcity has contributed to the lowest level of job cuts in 20 years. curtailing demand for career transition. At General Assembly, revenues were 12% lower. B2B performance was outweighed by lower B2C activities. LHH's digital platforms, Ezra and Hired, both performed strongly during the quarter. Margins of 8.7% were 150 basis points lower year-on-year a good result given the slowdown in Korea transition and the levels of digital investment that we're making.Moving now to Modis, our Technology Solutions business on Slide 10. Revenues in Q3 were up 14% year-on-year. Tech Consulting grew 11% with good project wins in France, the U.K. and Japan validating Modis industry and technology focus. Tech Talent Services rose 14%. On a regional basis, the Americas were up 22%, with strongest demand from financial services and mobility customers. Revenues in EMEA were up 13% and APAC was up 5%. Modis' top line has now moved above 2019 levels, aided by exciting wins in the consumer products and technology space that were secured through the group ecosystem. The EBITA margin of 6.3% was 20 basis points higher year-on-year, benefiting from positive pricing and mix.Let's return to the group results on Slide 11. First, let's consider the main drivers of the gross margin on a year-on-year basis. Flexible placement had a positive impact of 100 basis points due to favorable mix and pricing. Permanent placement had a 100 basis point positive impact reflecting higher volumes and fee levels. Strength in perm was dampened by Career Transition, which had an 80 basis points negative impact. Overall, the gross margins were up 120 basis points in reported terms and up 110 basis points organically. At 20.8%, we are pleased to report this result as a record high for the group.Now let's move to the right hand of the slide and the EBITA bridge. Gross margin expansion was somewhat countered by higher SG&A. In sum, we managed costs in a disciplined way, allocating incremental investment to sales capacity and digital while delivering 30 basis points year-on-year margin expansion.Moving to Slide 12. We consider the group's productivity. The organic drop-down ratio, meaning incremental gross profit converted into incremental EBITA was 54% for the last 12 months. Adecco was above the group level as it focused on sustainable, profitable growth. In Q3, the group's drop-down ratio was lower at 23% as we had expected. The drop-down ratio has proven itself a good way of navigating the crisis to secure agile cost management. But as we recover, the measure becomes less helpful and the conversion ratio and other productivity metrics are more meaningful. The group's conversion ratio was a healthy 23% this quarter. As the graph in the middle shows, the group has improved its conversion ratio year-to-date and year-on-year. On the right-hand side, we look at productivity on a gross profit per employee basis. improvement is visible in all businesses. Furthermore, with a 3% rise in productivity and FTEs up 12% year-on-year, the business is well positioned to drive top line growth in the coming quarters.Turning to cash and debt developments on Slide 13. The Q3 cash conversion ratio was 69%, driven by normal working capital absorption as the business grows. Days sales outstanding were 51 days, flat year-on-year. And cash flow from operating activities was solid at EUR 224 million. The net debt-to-EBITDA ratio was 0.2x. Of note, the group issued 3 tranches of debt to fund the AKKA transaction and locked in approximately EUR 10 million of financing synergies. After the transaction is closed, the group's net debt-to-EBITDA ratio is expected to be in the region of 1.3x, which is only slightly above the mid-2019 leverage. We remind you that the group intends to delever towards its 1x target, including the repayment of outstanding debt as they mature.Moving to the final slide of my section and the outlook. The group expects Q4 revenues to grow modestly on a sequential basis and to deliver a drop-down ratio of approximately 50% for the full year 2021. Healthy demand is currently impacted by issues created by the global pandemic including supply chain shortages and talent scarcity. This makes the path to recovery somewhat uneven in the months ahead. At the same time, management has clearly targeted priorities and actions underway to drive profitable growth in all business units. The group remains confident in its outlook as the headwinds diminish. With that, I'll hand back to Alain.

[Alain Dehaze, Chief Executive Officer]

Thank you, Coram. And we will now turn to our strategic progress, starting with Slide 16. As you may recall, at the core of the Future@Work is the shift to 3 global business units: Adecco, LHH and AKKA Modis aimed at enhancing focus, reducing complexity, improving resource allocation and aligning with end markets. With Future@Work, we fortify our ecosystem of world-class assets, bound together by our purpose and a common denominator, the talent. In financial terms, Future@Work increases exposure to structural growth and high-value tech-led activities, improving earnings quality to the benefit of our stakeholders.On Slide 17, we show the strong progress made with Future@Work by the 3 businesses. First, looking at organic steps, Adecco has opened carrier centers in the U.K., U.S., France and Germany driving efficiency. For example, in the U.K., the time to hire has been cut by approximately 1/3. Digital adoptions continue to progress. with the latest upgrade version of our front office productivity tool, InFO rolled out now in France. Talent Solutions will become LHH from January operating through solutions-based business lines to amplify growth and profitability. And Modis has successfully expanded its academies with revenues up over 150% year-on-year this third quarter. Our businesses also made significant inorganic moves, Adecco acquired QAPA providing France with a state-of-the-art 100% online staffing solution. LHH acquired BPI Group, strengthening its HR advisory capabilities in France. And we announced the merger of Modis with AKKA. Combined, these actions are in full alignment with our strategy and provide increased confidence in the group's financial ambitions, including delivering an EBITDA margin in the 3% to 6% range through cycle. Let's bring Future@Work to life through some examples. On Slide 18, you see a case study of a European-based financial services customer. By taking a consultative and data-driven approach in Adecco, this team was able to open the doors to our 360-degree ecosystem. The customer came with a clear challenge. They needed to strengthen their employer branding and talent strategy in order to hire a large pool of young talents. Adecco designed an effective approach using data to map and analyze geographically to better tap greenfield talent. Combining traditional and digital strategies, a multichannel campaign was then launched to source candidates. AI-enabled screening and matching tools were used to enhance our ability to process the large number of candidates. Having built strong customer understanding, the Adecco team identified other areas of need beyond temporary staffing and apprenticeships, lacking internal capability the customers added upskilling services to strengthen their pipeline, deploying both Adecco-led training and modest academies. In addition, the opportunity to provide IT talent through LHH professional recruitment and Modis was secured.As an ecosystem, the group will impact over 500 talents, moreover, the revenue opportunity is now 3x greater than before. Slide 19 provides the case study of a European-based automotive company. LHH had a long-standing relationship with the customers, which was looking to upskill current employees for the transition to e-money. And to address client needs, an integrated solution was put together across LHH, Pontoon, Modis and Adecco. And the impact is meaningful, with the group set to upskill over 30,000 employees as e-mobility experts and reskill 700 talents as system engineers. Again, by maximizing the potential of our ecosystem, the revenue opportunity is now 6x greater.Let's now turn to Slide 20 and digital. One of the 3 enablers for Future@Work. LHH has 2 digital platforms, Ezra and Hired. In Hired, our AI-driven recruitment platform for tech talent, strong progress has been made with the virtually hired integration and rebranding completed in the second quarter, contributing to strong development. The business reached an all-time high for marketplace activity milestone in the third quarter, and revenues were up over 350% year-on-year. Hired annualized revenue run rate is now around EUR 30 million. At Ezra, our professional digital coaching platform, customer growth of over 400%, on an annualized basis, fueled revenue growth of over 350% in the third quarter. Ezra annualized revenue rate is now around EUR 30 million. Both platforms are differentiated and positioned well in their respective markets. They are able to benefit from the group's extensive customer network to drive growth and the group benefits from their technological development. We are excited for the future.Turning swiftly to Slide 22. Let's remind ourselves of the rationale for AKKA. The acquisition represents a major development in the execution of Future@Work, delivering on our ambition to truly differentiate. By merging AKKA with Modis, we create the global #2 player in the engineering, research and development services market and a powerful platform from which the business can drive future smart industry leadership. The transaction provides a compelling value creation opportunity for investors, being growth, margin and EPS enhancing in year one and EVA accretive in year three. Slide 23 provides an update on transaction progress to date. The regulatory approval process is firmly on track, financing is complete,and an integration team of over 40 people has been mobilized. Already, we have a clear view on day 1 operating model that reflects the market potential and customer requirements as well as the heritage of AKKA and Modis. The team is working to actively mitigate key risks, for example, by reading talent retention programs. Looking to 2022, we expect to acquire AKKA early in the year and have established the key milestone thereafter. With regard to synergies, we have a joint clean team organized into several distant work streams so that synergies opportunities can be realized in a highly structured way. The graph shows version 1.0 of the synergy plan, providing an estimated breakdown where synergies will be delivered. Encouragingly, the team has good line of sight on approximately EUR 10 million of 2022 integration savings from the work undertaken so far, which is in addition to the around EUR 10 million financing synergies that we have referenced earlier.To conclude on Slide 24. The group has achieved profitable growth this quarter. Revenues are up 9% and gross profit, 16%. Gross profit margin reached a record level of 20.8%, driven by portfolio, mix and pricing actions while the 4.8% EBITDA margin was sector-leading. We are committed to driving value creation and have clear priorities as a management team. First, in Adecco, we will sharpen our focus on sustainable growth and build momentum in the Adecco U.S. turnaround. Second, we will drive benefit from the new LHH operating model and its one-stop shop HR solution offering. Third, we will focus on smoothly onboarding AKKA with Modis, through detailed day 1 readiness plans, supported by clear integration milestones to deliver the returns per mile. Of course, we will continue to progress the group's digital initiatives. With that, we are ready now to move to the Q&A session, and I will ask operator to take the first question, please.

[Operator]

[Operator Instructions] The first question comes from the line of Anvesh Agrawal from Morgan Stanley.

[Anvesh Agrawal, Equity Analyst]

I got a few questions. So first, on the logistics business in the U.K., I mean, clearly, it's unwinding now, but I think initial expectation was the logistic growth is a bit more structural. So what happened there? I mean -- and if this unwind continues for how long we should expect the impact? And you said that the contract has been ended. Is it because the work has been taken in-house by the client, or the work has gone to the competition piece. Second, in the U.S., you're obviously sort of putting in a new operating model in place. Can you tell us sort of any SG&A or exceptional costs when you think about from that model? And what is your sort of internal time line before we can see the benefits on the top line from that new operating model? And then finally, just a maintenance question. If you can give some guidance around the gross margin and SG&A development in Q4.

[Alain Dehaze, Chief Executive Officer]

Yes. Thank you for your question, Anvesh. I will start with the topic regarding the logistics. So first, about the development of e-commerce and related logistics and transportation. It is clear that during the last quarters, since the COVID, we had very strong growth, 40% per quarter. And it was last year 40% and Q4 last year was also 40%. Now what we see is a slight development of the consumer behavior because with the opening back of the boutiques and the malls and so on, you see that people are rebalancing their consumption between e-commerce and classical retail. And this has also an impact on the business. Nevertheless, you see that we are still growing, I would say, low double digit in this field. But let's say, the growth path is slowing down because of this rebalancing of behavior.More specifically on U.K. now. Yes, the contract ended. And you remember, we have communicated about that. We jumped to support one of our customers for which one of the supplier was at the edge of bankruptcy. We took over on a temporary base, this contract. And in the meantime, the -- our customers has rebalanced the -- this contract between order external suppliers to diversify its sources but also partly in sourcing. So when we take away this, let's say, discreet impact we are still growing double digit in U.K. The impact will be also in Q4. I think that's also important to be noted.

[Coram Williams, Chief Financial Officer]

Let me pick up on the question around costs in the U.S. and also pick up on the gross margin and the SG&A guidance in the U.S. As you rightly mentioned, we are moving to a new operating model, and we're very much bedding that down. There are no exceptional costs going forward on this. We have invested in the U.S. over the last couple of quarters, and you can see that in the margins in Q3, primarily because we put FTEs into the business in order to make the most of the recovery. But that investment phase is now largely over. And as the business recovers, we'd expect to get good operating leverage in the United States. So no exceptional costs that you should consider modeling going forward. It's all about the recovery in the top line.On gross margin and SG&A, obviously, providing gross margin guidance is always a little challenging because of the diverse performance of the different service lines. And you should remember that Q4 profitability on gross margin is usually a little lower than Q3 levels, simply because there are fewer working days as a result of the Christmas break. But let me try and give you a few pointers as I usually do on these calls.Firstly, on M&A, there's a number of sort of smaller movement the disposal of Vendor Pass, the disposal of the Legal Solutions business, but also then the acquisition of QAPA and BPI. Overall, on a net basis, I think you should assume that's broadly neutral for the gross margin. The way that FX is trending at the moment would also be broadly neutral. I think you should assume that the perm business would be similar to Q3. So around 100 basis points of positive improvement. I think we'd expect a modest improvement in career transition. So slightly better than Q3, but still down. So maybe assume around 70 basis points of negative pressure there. And flexible placement will definitely remain positive year-on-year on an underlying basis but you have to remember there were some exceptional gross margin benefits in Q4 of 2020, which were around 40 bps of benefit. So maybe assume a small negative on flexible placement of 10 bps, but overall positive on an underlying basis. And if you step back and put all of that together, then you'd expect another improvement in gross margin year-on-year, and it would be reasonable to assume 50 to 60 bps. On SG&A, as we've highlighted, we have been investing selectively to drive profitable growth. You should expect that to continue, obviously, as the recovery continues. If you take my steer on gross margin, then I think you should assume that SG&A will rise, but probably a bit less than gross margin, just to demonstrate the ongoing discipline that we apply to our cost base.

[Operator]

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

[Oscar Val Mas, Analyst]

I have a few questions as well. So the first 1 is just on organic. For Q4, you mentioned sequential improvement. Can you comment on the exit rate in October or what visibility you have on some of these supply chain shortages easing into Q4? Then the second question is a bit more thematic. Looking at your Adecco Global survey, could you comment on, I guess, the risk that companies are converting temporal into permanent if there isn't enough supply in particular in the U.S. And then the third question is on QAPA. So your acquisition a few months ago. Could you comment on how QAPA fits with the other business that you've been developing, the Adia app? And what QAPA gives you that Adia didn't?

[Coram Williams, Chief Financial Officer]

Let me pick up on the what we're seeing in October and the sequential growth. And then maybe Alain will comment briefly on the question around temp to perm and how QAPA fits with Adia. In terms of what we've seen in October, volumes have modestly improved on a sequential basis. Now clearly, within Adecco, there are some pressure points, notably the U.K. because of the tough comp and North America, which is still in turnaround. But remember, there are also areas of the business, which are performing strongly. And so in October, we have seen a modest improvement in volumes on a sequential basis. If I then sort of step back and say, what does that mean for Q4?I think the key point is we expect that to continue, and we would expect revenues to show modest sequential growth. And there's really sort of 3 components to that. So the first piece is we anticipate continued momentum from the businesses that are performing well or have performed well in Q3 and continued to do so, including the strength of professional recruitment and perm placement, the strength of Modis, which, as I mentioned, is now above 2019 levels and the parts of Adecco, which are performing strongly, such as Southern Europe. Now that will be partly offset by the headwinds that we've described in Adecco U.S. as we continue the turnaround effort. The tough comp in the U.K., which is likely to be impacted in Q4 as it was in Q3 and career transition, which is behaving strongly compared to the market but clearly, activities will remain subdued because of the strength of the recovery, particularly in the U.S.And then I think the third piece is, obviously, we expect to get increased productivity from the colleagues and the associates that we've been bringing into the business over the last couple of quarters. It typically takes a little bit of time for them to ramp up, and we'd expect to see some benefit from that in Q4. So overall, modest sequential growth I think in terms of your point around supply chain shortages and the such like, we've obviously flagged that in the outlook because it is a part of the context in which we're operating. Automotive, which is the segment which is most impacted by this is now about 5% of our revenues within Adecco. And we anticipate that those pressures will continue. But overall, when you put it together, modest sequential growth in Q4 is our expectation.

[Alain Dehaze, Chief Executive Officer]

On your second question, Oscar, I'm more than 20 years in this industry, and I've seen different downturn and recovery. I think this was big one. And what is specific this time is that the speed of the recovery of perm is much higher than it was in previous downturn. And it is, I would say, almost simultaneous with the temporary staffing recovery. And by the way, you see that also in our figures. So customers facing talent scarcity that prefer to be -- in order to be attractive to go in a lot of cases, directly to perm. And for us, it's also a plus. If you see our figures and your point was particularly on the U.S. you see that we have been able to grow in the U.S. or professional recruitment activities win with 26%, really a leading performance in the sectors. But it has been also very strong outside the U.S., global professional recruitment outside the U.S. and also into the brand Adecco. So yes, we see this huge opportunity. And at this stage, we see enough supply because from the survey Coram has presented, you have seen that 4 out of 10 employees is open for change. And so this means that there is a very fluid market. Coming to your questions about Adia and QAPA and the acquisition of QAPA, remember our philosophy. We have always said that we should look at acquisition opportunity provided it accelerate our strategy and that we are a better owner. And that was exactly what was the case with QAPA. The acquisition of QAPA gives us the opportunity to really accelerate the deployment of our digital capability and our omnichannel strategy in France. QAPA is really a 100% digital workforce solutions. And it allows us now to approach some of the key customers requesting a fully digital solutions in this country.So it's really allowing us to propose this omnichannel solutions. On top of this, it allows us to attract really a very good team, various tech guys, they have more than 16 engineers, which have done really a great job also putting AI at work in the data selections in the matching -- very strong matching tool that we can now leverage with all customers and with all candidates in France. So all in all, very positive. Relating to Adia, Adia is mainly now active in the U.S. So it is very complementary to what we are doing with Adia, which is also a fully end-to-end digital platform.

[Operator]

The next question comes from the line of Michael Foeth from Vontobel.

[Michael Foeth, Head of Swiss Industrial Research]

A few questions from my side also. Coram, you mentioned that the conversion ratio is probably a better way of looking at the business or steering it post pandemic now. So I was wondering if you can guide us on sort of the target conversion ratios for the fourth quarter and next year eventually. The second question would be referring to the U.S. You mentioned those legacy issues. Could you just explain not so much the transformation there, but what the legacy issues were. And the third question would be regarding the pricing trends, which are very favorable, if you can tell us how sustainable you believe they are, and how they will impact gross margin going forward? Yes, so that would be the third question.

[Coram Williams, Chief Financial Officer]

Okay. Thank you, Michael. I'll take the conversion ratio, then I'll hand over to Alain for the U.S., and then I'll pick up on the question of sort of pricing and maybe also give a little color on wage inflation because obviously, the 2 are linked. On the question of sort of conversion ratio versus drop-down ratio, it's really important to me that we spend a moment on why we are highlighting these other metrics because at the end of the day, the drop-down ratio is a very helpful short-term tool for managing a crisis and the crisis that we've had obviously, the drop in revenues was very severe and very swift and then the recovery has also been swift.And in those sorts of uncertain times, it's useful to have a benchmark to thinking about how to manage the protection of gross margin and also the drop-down in the initial stages. Obviously, over time, the 2 converge because you simply cannot keep driving the business to a 50% incremental drop-down ratio, even with productivity improvements, the conversion ratio is the more meaningful way of looking at it. And so that's why I think we're flagging both the conversion ratio and also the gross profit per FTE because they are more meaningful long-term views of the productivity of the business.Now the good news, as you can see on both of those is that every single business has moved forward. And whilst I won't put a specific guide in terms of the improvements that we expect in Q4 or the improvements over time, I think we're very clear that we believe we can achieve further productivity benefits through the investments that we've made and the disciplined approach to investment. And therefore, you'd expect to see improvements in those metrics. And that's part of what underpins the long-term commitment to a higher margin corridor. Obviously, along with the growth that we're going to see in both the LHH business and the combined Modis and AKKA business. Maybe I'll hand over now to Alain for the U.S. and then come back on pricing.

[Alain Dehaze, Chief Executive Officer]

I think, Michael, that first of all, it is important to distinguish the different businesses that we have in the U.S., when we speak about legacies because we are extremely satisfied with the performance of professional recruitment. We are very satisfied with the performance of LHH because even if the career transition is suffering, we are doing almost 100% growth in the talent development. And we are very satisfied also with the Modis U.S. business, where we have 22% growth. So overall, professional and tech-focused U.S. business is performing very well.Now when we speak about the legacy, we speak about U.S., Adecco U.S. And there, this is clear that the growth was below the market and our peers. And first, we explained this because our mix is unfavorable, we are very exposed to manufacturing, to automotive and to retail. And these are sectors impacted either by -- either and/or the semiconductor situation, but also the workforce shortage, and we are underexposed to high-growth sectors such as logistics, government, technology, as example.But we also acknowledge that our performance was not good enough. So that's why we have taken steps. We have invested, first of all, in sales teams. And these sales teams is focusing on high-growth sectors because we need to rebalance our portfolio, and we are leveraging our data, our data analytics to really drive better sector mix. Second, we are implementing a so-called omnichannel operating model. I was just referring to that also in -- for France. We have, for example, put in place, a central recruitment center. We call that Career Center. You have seen that. We have put in place also digital channel, and we are aiming at really pushing all the big customers into this type of recruitment and delivery. That's hard among orders, the big steps we are taking, we are reinforcing the performance management also in these countries so that we can improve rapidly the situation over there in the quarters to come.

[Coram Williams, Chief Financial Officer]

And let me now just pick up on your final question about pricing. And I'm going to touch on wage inflation as well because, obviously, the 2 are linked. I mean, just on wage inflation, I think it's very clear. that this has accelerated since Q2. We're definitely seeing wage inflation in our professional businesses. So for example, the professional recruitment business in the U.S. and Modis. And I think that is obviously contributing to the strong growth in those businesses, along with the trends that Alain described about the number of people who are moving roles and the way in which companies are aiming to recruit. I think in a decade, the picture is a little bit more mixed. We continue to see high levels of wage inflation in our emerging markets businesses. But in our larger markets, wage inflation at the moment is modest. It's mostly in the low single digits because remember that most of our European markets collective labor agreements determine the pace of wage inflation. So there's a lag between the pressures in the labor market and the way in which that flows through to wages and obviously, the P&L.Remember, wage inflation is generally a positive for us. So over 2/3 of our revenues are based on a multiplier of associate wages, which means it gets passed through. But -- and I think this is -- this goes to the heart of your question around price, we can also price dynamically to capture scarcity in our bill rates. So where there is clear cases of talent scarcity, we're able to flex pricing to reflect that. And I think that, combined with the mix of value-added services that we are increasingly focusing on in the Adecco business will help us. So to sum up, we will continue to benefit from the inflation that we're seeing. We're applying dynamic pricing techniques where we see talent scarcity, and I think the mix will help as well.

[Operator]

[Operator Instructions] The next question comes from the line of Konrad Zomer from ODDO.

[Konrad Zomer, Analyst]

My first question is on your group organic growth, the -- you referred to it as a high level of growth, but it is clearly below what your main peers have reported on Q3. My question on that is, how much do you think that is the direct result from company-specific decisions? Like maybe business mix differences or walking away from contracts where margins are considered too low. Because you did do very well on the margin expansion and how much is simply the direct result of you may be underexposed to areas like e-commerce, for example, or just the tough comps you face in the U.K. So my second question is on the social security contribution, the reassessment that you talked about in France, the 100 basis point addition to the margin. Is that a reassessment that the company does based on provisions you might have taken in the past? Or is that a reassessment that the government does or maybe I don't know, an accountant or some other institution. Do you expect this to reoccur in Q4 or maybe in any other quarters that you already know right now?

[Alain Dehaze, Chief Executive Officer]

Okay. Good. Coming to the first question. When we look at our growth, 9%, we see that in many businesses, we are really either in the market or really already above 2019. Modis is the best example with Modis, we are already above 2019. Professional recruitment, also, especially in the margin we're at the level of really comparable with the peer group and even better performing than the peer group in this specific peer group. Also in many countries, we are really performing well, LatAm and especially Mexico or Canada or Italy, Southern Europe, Eastern European countries. When we look at our, let's say, pocket of underperformance, they are basically for. First was Adecco France. And in second quarter, we were 200 basis points behind the market, and we have been working to close, and we want to close the gap with the market. But as always, we want to do it in a profitable way. And you will notice that, again, in France, we have reduced the gap. Now we're at 150 basis points, and we will continue to reduce the gap. But we want to keep a higher level of EBITDA margin. It was 7% EBITDA margin in Q3. So really top performance.Then we come to Northern Europe and in Northern Europe, in fact, let's say, the low growth and the revenue declined by 1% year-on-year is really coming from this very tough comparison in the U.K. And I've told you, this is mainly because of these contracts. But if you -- we exclude the impact of this contract, we have a double-digit growth in the U.K. And so going forward, we will continue to have this growth at the major e-commerce companies, but it is clear that there is a kind of rebalancing in the consumption behavior. And we are growing on top of the 40% of the last year. So that's why we said we cannot continue at this level of 40% going forward. But this is the second explanation which, in comparison with the peer group, explains why we are at this level.And the third one is North America, and I've just explained what was going because it is really specific to North America, and you have heard what I've just told regarding the lack of traction because of our exposure to, let's say, weak growing segment, and we are in the rebalancing work. And the fourth pocket, let's say, of negative growth is LHH. And I think it's -- LHH's strong assets during downturn with the carrier transition, and it has helped us a lot in this period. But when the upturn is coming, this is clearly a negative, and you see that the decline in talent transition in Q3 was 34%. Now this is counterbalanced by talent development. We had 92% growth in talent development, but this counter balancing cannot -- of talent development is not at the level of career transition today, but we continue to work on this.

[Coram Williams, Chief Financial Officer]

Let me pick up on France. As you know, the EBITA margin in France was sector-leading at 7%, and that's up 150 basis points year-on-year. And I think a good chunk of that is because of the discipline that the French team has been applying to the way in which they've been closing the gap and driving that business. As I mentioned in my script, the margin did benefit by around 100 bps from a favorable reassessment of social security costs. Now to your question, these are technical items. They are highly complex calculations, particularly in the current environment, where there's significant movement in terms of number and nature of FTEs. And this is a reassessment that we undertake. And it's -- it is part of business as usual. So we're trying to be transparent here insofar as there is clearly a benefit. But I do not think it is a strict one-off because it's about the way in which we do business. And I don't want you to take it all out of your models. So don't assume it repeats in Q4, but don't remove it all and discount it because there is -- it is simply part of doing business in France. We just want to be transparent.

[Konrad Zomer, Analyst]

Yes, no, thanks very much for that explanation. Just as a follow-up, do you reassess on a quarterly basis? Or do you reassess when you think the impact might be big enough to disclose it?

[Coram Williams, Chief Financial Officer]

We keep an eye on all of our major provisions as the year progresses. So we reassess when we believe we should.

[Konrad Zomer, Analyst]

Right, right. Okay. Well, I mean, just as a small side comment, if you really want to be transparent, and I do believe that you really want to be transparent then I guess it would have helped us to mention the amount in the press release.

[Alain Dehaze, Chief Executive Officer]

Thank you. We move to the next. We'll take a few minutes more than planned for -- to make sure that all the questions are answered.

[Operator]

The next question comes from the line of George Gregory from Exane.

[George Nicholas Gregory, Research Analyst]

Alain, Coram, thanks for the presentation. I had one quick follow-up, please, if I could, in relation to the acquisition of QAPA. I'm just wondering what does the acquisition of QAPA actually mean for the existing Adia platform that you had sort of realigned for digital staffing? Is it now -- will it now be replaced by the QAPA platform? Or will the 2 platforms somehow be combined?

[Alain Dehaze, Chief Executive Officer]

No, because I would say that they will coexist because Adia today is really focused on the U.S., and we don't want to defocus them and QAPA is focused on France. So it means that, for sure, we will learn from each other and especially on the tech side and so on, but we will work and develop them in a separate way. And we will see on the longer term how we -- if there is convergence and so on. But first of all, is to continue to capture the growth and learn from them.

[Operator]

The last question is from Kean Marden from Jefferies.

[Kean Marden, Head of Business Services Equity Research]

Two quick ones from me. Just first, if we look at the 2-year stack maps for the third quarter, then that gets us to minus 7%. You quoted minus 5% in the release. Is that gap due to working days again? So the sort of conversation we had a quarter ago? Or is that 2 percentage point gap a realistic sort of snapshot of the sort of the below margin contract shedding that might be taking place at the moment? And then secondly, on AKKA. So we can see from Bloomberg that it reported in early September, it looks like consensus estimates for this year came down a bit. It looks like the aerospace division has obviously got some quite slow momentum in it at the moment. Can we just get a confirmation from you that, that business is performing as per plan when you put the business case together prior to the acquisition, please?

[Coram Williams, Chief Financial Officer]

Thank you, Kean. Let me take both of those. On the 5% underlying growth versus 2019, remember, and we've talked about this in previous quarters, there are strategic choices that we have made over the last couple of years. So we have exited a number of low-margin contracts. That's absolutely sensible thing to do to make sure that we can continue to drive profitable growth. And there have also been some contracts which have changed in nature and therefore, moved from a gross revenue recognition to a net revenue recognition basis. They're largely sort of payroll services-type contracts. We've touched on them before, and that accounts for the 2% difference. So when you -- when we compare to '19, we think it's important to exclude those because those are sensible strategic decisions, which we've made over the past couple of years.

[Kean Marden, Head of Business Services Equity Research]

And just to follow up very briefly on that. So for people who are monitoring the 2 years back very closely, what is likely to happen to that 2 percentage point gap over the next few quarters? Because presumably, the accounting phase and then your strategy regarding shedding low-margin business may or may not change. So how do we expect that gap to evolve?

[Coram Williams, Chief Financial Officer]

Yes. I mean a lot of this happened in 2019. So as we come out of the 2019 comp, I think you should assume that the majority of that adjustment falls away. And I think as we've said previously, the period where we were exiting contracts is now largely complete. So it's something to bear in mind when you look at versus 2019, it's much less of an effect when you look at 2020. On AKKA, obviously, we remain confident in the future prospects for the business and that includes our views on what's going to happen in terms of the recovery in Aeronautics, but also automotive. I obviously can't comment on current trading. I believe they have a release, which is coming out tomorrow night and the call on Thursday, which obviously is something to look at in terms of how they're doing right now. And the other thing I would say, the consensus, the population for AKKA is very small. So I would not read too much into movements in consensus. It was always thin, it's now even thinner given the deal.

[Alain Dehaze, Chief Executive Officer]

Thank you, everybody, for your questions. Before we close, I'm very -- and we are very pleased to announce that we will be hosting a Capital Markets Day on the 29th of March 2022. So we are currently asking you to save the date in your dairy accordingly. Thank you for your presence, and have a great day. Bye-bye.

[Operator]

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