Adecco Group AG

SIX:ADEN

Earnings Call Transcript 2017-Q4

[Operator]

Ladies and gentlemen, good morning. Welcome to the Adecco Q4 and Full Year 2017 Results Analyst Conference Call. I'm [indiscernible], the Chorus Call operator. [Operator Instructions] The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Mr. Nicholas de la Grense, Head of Investor Relations, accompanied by Mr. Alain Dehaze, CEO, and Mr. Hans Ploos van Amstel, CFO of Adecco Group. Please go ahead.

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

Good morning, everyone, and welcome to the Adecco Group's Q4 and Full Year 2017 Results Conference Call. To present you today, I'm joined by Alain Dehaze, Group CEO, and Hans Ploos van Amstel, Group CFO. Before we start, please have a look at the disclaimer regarding forward-looking statements in this presentation. Let me give you a quick overview of today's agenda. Alain will first briefly present the highlights of the quarter. Hans will take over to review the financial performance and comment on the outlook. Alain will then discuss our strategic and operational progress and initiatives. We'll then open the lines for your questions. And with that, Alain, I hand over to you.

[Alain Dehaze, Chief Executive Officer]

Thank you, Nick. Good morning, ladies and gentlemen, and welcome to our fourth quarter and full year 2017 results investors call. I will start on Slide 5 with the key highlights. Looking at the fourth quarter, revenue momentum has accelerated, 7% organically and trading days adjusted and this despite the 3% tougher comparison base. We see that the growth was mainly driven by France, Italy, Spain, the Benelux and the Nordics.Also to be noted for this fourth quarter, it is our solid performance in the perm business, 18% growth. The EBITA margin, excluding one-offs, was 4.6%, in fact a good underlying operating leverage with the 3% FTE increase to support 7% revenue growth. We did also in this quarter, strategic investment in digital and IT for 25 basis points.The underlying gross margin trend remained unchanged. Reported gross margin was impacted by the timing of bank holidays and impact of year-end accruals, which were positive in the fourth quarter 2016, but negative in the fourth quarter 2017. Now looking at the full year 2017, we show an improvement in revenue growth to 6% organically, up from 4% in 2016. The profitability leadership was maintained with an EBITA margin at 4.9%, down 10 basis points year-on-year including strategic investment.In 2017, we made significant progress with the implementation of our strategic initiatives, which grow together, we are transforming to core of our business to provide a better service in a more efficient way. And we are also adding new digital [ first ] solutions to expand into attractive adjacent market. After the launching of Adia and YOSS, both digital marketplaces co-created with Infosys and Microsoft respectively. We have announced last week, the acquisition of Vettery, a digital professional recruitment platform. With Vettery, we are adding valuable talent and technology to the Adecco Group and gaining a strong platform to grow our market share in professional recruitments.We will talk about Vettery more, later on the call. For 2017, the Board of Directors would propose to the general assembly to increase the dividend by 4% to CHF 2.50, which corresponds to a payout ratio of 46%. We remained committed to paying at least a stable dividend every year, supported by the group's strong through the cycle cash flow. And for 2017, the Board will also propose a new share buyback of EUR 150 million. Coming to the outlook, revenues in January and February were up 5% organically and adjusted for trading days. In 2018, we will continue to drive our strategic agenda. As a leader in our industry and as you can see, we continued to perform and we invest to transform and innovate. And with this, I hand over to Hans for more insight on the financial performance.

[Hans Ploos van Amstel, Chief Financial Officer]

Thanks, Alain. Let's starts with sales. Sales growth improved to 7% and this is on the back of 6% growth in the fourth quarter of 2016. France accelerated to 9% and we're closing the gap to the market in January. In North America and UK general staffing, we see continued challenging conditions in North America. This was offset by strong growth from the client wins we made at the beginning of the year in the UK. As discussed before, we're working to drive the sales growth in North America by implementing ARPU in segmentation strategy. Professional staffing in North America delivered solid growth with continued outperformance versus the PS. The UK market remains more difficult and challenging. Turning to Germany, Austria, and Switzerland; we see continued strong results in professional staffing and permanent recruiting. In general staffing, the integration of Adecco and Tuja is on track and as we communicated before, we expect to return to market growth in the second half of 2018.We're pleased with the continued growth momentum in southern Europe. EBITA margin is down 50 basis points in Q4; 40 basis points is explained by the timing of bank holidays and favorable accrual releases in Q4 of 2016 versus higher accruals in Q4 2017. Adjusting for those 2 items, this leaves a net 10 basis points decrease, 30 basis points coming from pricing and mix, partly offset by a 20 basis point improvement in SG&A. Strong operating leverage, even after making the investments for the future. Important to note that when you cut through the noise of the holidays and the accruals in the fourth quarter, the full year 2017 EBITA margin was broadly stable year-on-year organically, even while we invested an additional 25 basis points in our strategic initiatives.A couple of remarks on the country level. As mentioned before, Q4 was impacted by bank holidays and changes in accruals. Second, the strategic investments are impacting the country profitability. France, North America, the U.K. and Japan are impacted by the strategic investments in IT and driving the goal to agenda. In North America general staffing, we also had the favorable accrual release in Q4 2016. The EBITA margin in Germany, Austria and Switzerland would have shown an increase when adjusting for the [ bench ] costs due to the less favorable bank holidays in Q4.Benelux is also impacted by the working days plus we had a negative impact on subsidies and accruals. Italy remains strong while the business mix was a little less favorable in the fourth quarter. Let's look at our gross margin and SG&A productivity in more detail. Starting with the gross margin, the divestiture of Beeline negatively impacted the gross margin but had a positive impact on the EBIT margin.Currencies had a negative impact of 10 basis points, temporary staff and gross margin was down 70 basis points; 40 basis points of the decrease is due to the timing of bank holidays, and the changes in accruals in the 2016 to 2017 comparison for the fourth quarter. The balance is explained by pricing and mix. Our strong growth in permanent recruiting is helping the gross margin by 20 basis points. This is offset by lower sales in LHH, as you know this business is countercyclical. We are pleased with the market share gains and the improvement in profitability at LHH.We continue to drive strong productivity while investing for the future; 3% increase in headcount delivering 7% sales growth. SG&A increased 5% organically including 2% home investments in Grow Together, IT and the digital ventures. We remain on track to deliver EUR 50 million in productivity with Grow Together in 2018 and are on our way to EUR 250 million annual productivity savings by 2020.Cash conversion remained strong, DSO is stable at 52 days. Conversion was solid at 80%. The cash conversion reflects strong revenue growth and consequent working capital investment following the same pattern as we've seen in previous years of growth acceleration. We have already repurchased EUR 279 million (sic) [ EUR 297 million ] from the EUR 300 million share buyback program, which will complete in March this year.Net debt stands at 0.8x EBITA at the end of 2018 or 0.8x adjusted for the recent acquisition for Vettery. This brings me to the capital allocation for 2017. We proposed a dividend of CHF 2.50 per share. This is a 4% increase versus last year and a payout ratio of 46%. We remain committed to the progressive dividend policy and will provide a stable dividend even in a recession. For 2017, we proposed a new EUR 150 million share buyback to return the excess cash to our shareholders in line with our capital allocation policy.Turning to the outlook, January, February combined show 5% sales growth, so notes from the margin for the first quarter.The gross margin in Q1 will be impacted by the timing of bank holidays because that's less favorable in Q1 2018. This will have a 30 basis point negative impact. Also for your [ models ], remember that CICE has gone from 7% to 6%, which has about a 15 basis points impact at the group level. Currency impacts also continue in Q1. Back to Alain to talk about our strategic and operational progress.

[Alain Dehaze, Chief Executive Officer]

Thank you, Hans, and indeed, now let's have a look. Now let's look at our strategic and operational progress during the fourth quarter. As we discussed during our Capital Markets Day last September, we are aiming at combining performance and transformation and innovation to accelerate our growth and enhance our margin. And during the fourth quarter, we made further progress with this agenda. First, the transformation of IT infrastructure continued and our new integrated front office system is in the process of being rolled out in France, Spain, the U.K. and the U.S. The so-called InFO for integrated front office will enhance productivity, customer engagement and deliver a differentiated service in the quarters to come, supporting our target of EUR 50 million of savings in 2018.As part of the innovation agenda, we have launched in Switzerland in May 2017, Adia. An online Staffing marketplace and in the meantime, Adia has expanded in the U.K. and now Germany and we will launch in another country during the first half of this year. YOSS, marketplace for freelancers completed its successful beta phase and went live in France as planned in early February.And finally last week, we announced the acquisition of Vettery, a digital platform for online professional recruitment. So you see, we are building a portfolio of digital solutions and at our recent Capital Markets Day, we updated you on how much opportunity the changing world of work is offering us. Thanks to the megatrends and our multiple competitive assets. We talked about capturing growth opportunities in new frontiers, providing solutions and services that are complementary to our existing portfolio and where we can build real competitive advantage. If last year we added to our portfolio, Adia and YOSS, we also highlighted in the Capital Markets Day in London, the gaps in our portfolio including in digital professional recruitment.I'm very pleased that at the very beginning of 2018, we filled that gap with the acquisition of Vettery, let's now zoom in on Vettery. The EUR 25 billion professional permanent recruitment market is today highly fragmented. In these markets, we have a less than 1% market share. The current professional recruitment process is highly transactional, allowing artificial intelligence to leverage productivity and efficiency. This is the rationale behind the acquisition of Vettery, a company which has been created in 2012 by 2 entrepreneurs in New York, Brett Adcock and Adam Goldstein. And in the meantime, Vettery is growing fast and has already expanded in 7 U.S. Cities. And together with Adam and Brett, we will continue to expand in 2018, first in the U.S., and then in the U.K. So we now have best-in-class platforms in online staffing, freelance and [ now ] permanent recruitments.Coming to the concluding messages. We are on track to make the word work for everyone. With the recent acquisition and ongoing strategic progress, we have the building blocks in place for successful 2018. In the fourth quarter 2017, we made significant progress on our strategic agenda to perform, transform and innovate through the Grow Together initiative and the investment in our digital portfolio. We continue to perform with positive gross momentum and another quarter of strong productivity. And in January and February, growth continued with 5% organic growth.Finally, I would like to thank more than 34,000 colleagues for their hard work and dedication during 2017. And I take the opportunity also to welcome into the Adecco Group family, our new colleagues from Vettery.I thank you for your attention, and now I would like to open the line for the questions.

[Operator]

[Operator Instructions] Your first question comes from Anvesh Agrawal from Morgan Stanley.

[Anvesh Agrawal, Research Associate]

I have a couple, but first, can I ask in continuation to your rationale for Vettery. And if you think about the end markets that could be disrupted or will change the way they are served because of the technology. Is the lower volume professional per market will be among the earlier ones to be disrupted? And second, can you just give some color on the expected operational leverage in FY '18, now you have CICE which is negative, the pricing probably still remains challenge, but you've got some savings coming in through your plan. So is it fair to assume some margin expansion in FY '18 or a more realistic number would be flat year-on-year?

[Alain Dehaze, Chief Executive Officer]

Good. On Vettery, you have seen that this EUR 25 billion market is highly fragmented, we have 1% market share that the market leader has 2.5% market share. So it is for us a huge opportunity. On your specific questions regarding disruptions and so on, you know that technology, yes, it is making its inroad that gives also a lot of new opportunities. So we see the 2 models continuing in. Vettery today is concentrated on mainly IT with some profile in sales and finance. So we are in 7 U.S. Cities, we will now expand into other U.S. Cities and then in the U.K. For sure, Vettery is one of the leading -- brand leading organization in this digital professional recruitment platform. I don't see a disruption; on the contrary, I see a huge opportunity to expand in this market, big market share and expand also for customers having still an [ insole ] solution.

[Anvesh Agrawal, Research Associate]

So just with that -- what I mean by disruption is essentially, it's very clear that the way these end markets are served by agencies is going to change. So do you see the perm professional market being the first one to be in that line or is it going to happen parallelly across all end markets, that's the question?

[Alain Dehaze, Chief Executive Officer]

No, I see professional recruitment as one being indeed first leveraged by technology, why? Because it is a -- that's what I said in my comment, it is a very transactional business, it is a lot of processes and you see that, thanks to artificial intelligence, thanks to deep learning, you can automate this process of candidates curation that you can automate in a better way, the matching between curated CV and the needs of the customers. So for sure, that's where we see technology making first its inroad.

[Anvesh Agrawal, Research Associate]

Okay, and on operational leverage, please?

[Alain Dehaze, Chief Executive Officer]

Yes, on the CICE, 2 things. I will start and then Hans will continue. So first of all the CICE is going this year from 7% to 6%, and this has to be -- it has been communicated. For us, it means EUR 30 million impact in France. Now with all the measures we have in place being pricing discipline, being also expanding in value-add services, such as [ CGI ITT ], the segmentation, apprenticeship, we are doing our best to mitigate these EUR 30 million.

[Hans Ploos van Amstel, Chief Financial Officer]

Yes, Hans here. Just on your question on the margin. First, if we look back at this year at the full fiscal year, we have seen continuation of that around 30 basis point of gross margin and we have also said that about with operating leverage even after making the 25 basis points of investments, we're in a period where we're making investments to strengthen the core of our business and into the digital ventures that will continue into next year. The good news is that next year with Grow Together, we'll start to deliver EUR 50 million of true savings, so we're coming out of the investment period of Grow Together, and next year we'll invest more and Vettery is one example into the digital venture. So we'll deliver operating leverage, but we are also in a period where we see we need to transform and innovate, and with the transform and innovative advancements, we are making the right relevant investments, so that we position our business for profitable growth in the future.

[Anvesh Agrawal, Research Associate]

Can I just have one follow on the CICE for next year, we know the form is going to change and it remains difficult to assess the financial impact of that, but is it fair to assume that it could accelerate the pricing pressure in France because right now you received the subsidy on a deferred basis, but with the change in the form, you're going to receive it in year one itself. So could the large clients can demand more discount or the smaller player become aggressive?

[Alain Dehaze, Chief Executive Officer]

No, I wouldn't say so because in the end, next year it goes from 7% to 6%, so we would give them less reason --

[Anvesh Agrawal, Research Associate]

I mean I'm saying for FY '19 when the form changes.

[Alain Dehaze, Chief Executive Officer]

If you look at '19, I think that's farther away, things are still -- there is a lot of change, so -- but I would not blow your conclusions from that.

[Operator]

The next question comes from Konrad Zomer of ABN AMRO.

[Konrad Zomer, Equity Research Analyst]

If you look at all the digital ventures that you've started in the last few years, particularly talking about yours Adia online, but also now Vettery. What's the percentage of your overall sales that you think will be impacted by these digital changes that you're putting through, once it's all settled? And my second question is, can you comment anything on the underlying market trends that you're seeing in the U.S. professionals business at the moment?

[Alain Dehaze, Chief Executive Officer]

Now coming to the digital ventures, I would like to, first of all, to make it clear that, yes, all these initiatives are less than 1-year old. We launched Adia in May 2017, as I said YOSS is now since February with the first version, after the beta version, up and running in France, and we have both [ lance ] and Vettery. So the point is for sure, we are at the beginning of our journey. We're convinced that digital human resources solutions will be important going forward. And looking at the future, we would love to build the kind of new LHH with all these solutions being in online [ job processing ], being in professional recruitment or being in the freelance business, there is a huge market in this.

[Hans Ploos van Amstel, Chief Financial Officer]

And if you look at --

[Konrad Zomer, Equity Research Analyst]

No. Please go ahead.

[Hans Ploos van Amstel, Chief Financial Officer]

No, I think -- to couple on that, I think they're all relatively early in the development and we are pleased with the progress, but really the objective is that we adds that -- like the yellow tapes. Our ambition is to add relevant and meaningful profitable businesses. We would also and [ let's get to this ] business with a higher gross margin structure because these type of businesses are having a good margin structure, they didn't need extra space and I'm also very pleased to what we did with Vettery, because these type of -- we know it's when you talk to candidates and clients that you can fill orders faster for clients. So this is very exciting. It's early, but it's exciting. If we look at professional staffing in the U.S., we see 3% growth there, [ this model's ] growth, we were ahead of the peer group. We're pleased with performance, we have a good segmented approach with our professional staffing portfolio and we're investing also there with new forms and tools to strengthen our sales ability to drive the growth continuously.

[Operator]

The next question comes from Tom Sykes from Deutsche Bank.

[Thomas Richard Sykes]

Firstly, just on the, the Onsite business, could you -- you had, if I remember, a very fast growth at the beginning of last year and in the end of the previous year from Onsite. So I'm just wondering how much the annualization of some of that high growth is a factor in both the margin move, because it's presumably as a mix in the 30 basis points. And then on the, on the great step down at the beginning of this year, please? And then maybe could you make some comments on when we should expect to launch restructuring charges to start coming through again? Please. And just could you remind us, is there any front office staff you're expecting to let go or with this launch [ lease ] -- or is this just back office staff, please?

[Alain Dehaze, Chief Executive Officer]

Okay, there are numerous questions, so I will share them with Hans. Now regarding the Onsite business, yes, we are pleased with the development of the Onsite business, if I take the fourth quarter. We had a growth of 25% in this business. You know that we have a segmented approach on this Onsite business -- of the growth of this Onsite business was indeed much higher than the small and the medium. Now I think your second question was about the growth, now in January, February, if I understood well.

[Thomas Richard Sykes]

Yeah, I was just -- you had very strong growth in Onsite I thought in Q1 2017 and just how much of the step down in growth from the sort of 7% to the 5% run rate now? Is it due to an annualization of that Onsite or is it due to other factors?

[Alain Dehaze, Chief Executive Officer]

I shouldn't -- I think it's much too premature to read something from there in the 5%, we have communicated. No, it's too premature [indiscernible] the 5% reflects the January and you know the January never easy to read and then part of February, we see all the macro trends being confirmed, we see also from a weekly that the momentum is also continuing, but for sure, we had last year, a very strong first quarter with 7% organic growth, so that's also can give some more color on the 5%.

[Hans Ploos van Amstel, Chief Financial Officer]

On your question on the restructuring, first and foremost the objective of Grow Together is to drive more productivity across the organization. And that will be in sales, in recruiting, but also in the back offices. With that, we'll provide better technologies to equip our people and as well as reorganization for the downside, it should give people more options to drive for profitable growth and drive market share wins. On the reorganization, when we had the capital market base we set, the whole Grow Together, we announced in the month of around EUR 200 million that will have a good payout because we'll deliver annually almost EUR 50 million of savings. We're not in the position to give forward-looking statements on this because every time when we implement a piece, this work to be done and it's the logical work we need to do in these areas because it relates to people, but you will be reassured that we will have a productive use of money there to make sure we drive the savings and the growth, I wouldn't forget the growth element.

[Thomas Richard Sykes]

So just importantly on that you are expecting that to have zero negative impacts on growth when those occur and if anything you're expecting those type of positive impact in the year [ those occur? ]

[Hans Ploos van Amstel, Chief Financial Officer]

Yes, that's the objective. That's why we call the initiative Grow Together because that now is important that it's not a restructuring and that we -- and that's why we do this in a phased approach, because -- yes, I think in any business like in our business, we have seen people -- if you do that. And it's the -- we're bringing better technology and tools for a successful sales drive and some of the pilots we're doing are confirming that. So we're pleased with the progress -- to comment yet, because some are in pilot phase, but you see that we will also implementing new front office solution. So that should give us towards 2018, maybe a little bit more in the second half, some good momentum.

[Operator]

The next question comes from Alain Oberhuber from MainFirst.

[Alain-Sebastian Oberhuber]

I have 2 questions. The first is just to come back again to gross margins. You guys gave it a drive, that Hans said he is expecting an impact of 50 basis points. Obviously, it is EUR 30 million is minus 70 basis points, but you can recuperate [ EUR 20 million ], so it's minus 50 basis points. And then on the top of that, if we expect that gross margins remain on pressure of this 30 basis points throughout the year, so cutting [ each year ] that we could see a decline of gross margins of 80 basis points for the year and the second question is regarding price pressure, do you currently see in any of your larger market any price pressure?

[Alain Dehaze, Chief Executive Officer]

On price pressure, what we have just said is and I confirm that is that the underlying price pressure we had in the previous quarter, is -- let's say, stabilize at the level we have seen in the previous quarter, which is 30 basis point impact from price pressure and mix and this in all the big geographies and all the geographies, not really a -- the change of pattern in one direction or the other.

[Hans Ploos van Amstel, Chief Financial Officer]

If we'll turn more specifically to the numbers we gave some color for the first quarter. As we said the bank holidays is impacting in the first quarter, have a negative impact, but not for the fiscal year. So bank holidays next year will not have a negative impact for the fiscal year. CICE is around 15 basis points at the group level and we're looking to find the offsets. And the reason why we launch Grow Together is that, this is a competitive market. The pricing we have seen over the years, we have offset an operating leverage and we've Grow Together by adding new tools to drive -- new ways to drive that operating leverage so that we have a positive margin development. All we would see a continued competitive industry and if I look this year again versus the industry, you look at the numbers, but we're in line with what you see and this is consistent that we also with our new businesses, want to mitigate that, driving more segmentation into the mix, adding our digital ventures, higher margin businesses. So [ bring those ] as well, but I think the key with Grow Together will find the right place to drive the operating leverage going forward.

[Alain-Sebastian Oberhuber]

Okay, so you said 50, 5-0 or 1-5?

[Hans Ploos van Amstel, Chief Financial Officer]

15, sorry.

[Alain Dehaze, Chief Executive Officer]

15.

[Operator]

[Operator Instructions] The next question comes from Matthew Lloyd from HSBC.

[Matthew Lloyd, Head of United Kingdom Small and Mid]

I too, I'm going to rather boringly return to the gross margin questions. I wondered if you could give, if not numbers, a feel for how much of that 30 bps of underlying gross margin pressure in [ temp ], you think is mix, industrial has been growing faster, you seem to be doing well in that sector as well. And how much you think is underlying pricing pressure because I think the 2 things seem to get rather blurred. And then sort of a follow-up question in straighter way. A number of your peers have talked about sort of stabilization in gross margin trends and they've also done quite a lot of work on sort of dynamic pricing, giving salesman a clue as to what different skill sets can be charged at in terms of gross margin or markup. And that seems to be the sort of the hottest subject in -- amongst the IT vendors to your industry at the moment. Have you made any progress on dynamic pricing? I mean in the old days a salesman, just place the candidate where he get the biggest commission check which was normally where they got paid the most and where he got the biggest markup, but that's a bit harder these days. So are you doing anything on dynamic pricing?

[Alain Dehaze, Chief Executive Officer]

We are. We had -- without going into the details, also for competitive reasons, we have already since many years because I started dynamic pricing, I think in 2004, 4 or 5 years ago, really dynamic pricing based on artificial intelligence, so meaning that we are treating every week millions of data to see at what kind of pricing we have concluded transaction the week before by roll -- by region. For sure, you cannot apply dynamic pricing everywhere, why? Because you need sufficient amount of data, always the same issue with artificial intelligence. So we are applying dynamic pricing in big geographies that not in small geography because we don't have enough data to be -- to have an effective model. Now regarding the question of the 30 bps, and yes, it is a mix of a lot of influences being the regions where we are growing fast, the type of business we are growing fast or less fast, and Hans can give more color on that.

[Hans Ploos van Amstel, Chief Financial Officer]

Sure. I think on the gross margin, I want to a make a couple of points. First, I think we have always been more transparent about that, and the reason why we have because that shows that we know what's going on and that was the foundation of our Grow Together initiative, to drive more operating leverage in new ways to drive operating leverage, grow our margin, well, that's going on. When I think at the industry and I think it's better to look at the year because the quarter always have, quarter 4, as a year-end quarter, there is always some things into that. Our gross margin trend is similar to the industry, not like. So we're bringing like as Alain said, similar tools to the market to improve our pricing and I think we're doing that. If I look at Onsite, yes, Onsite plays, I wouldn't want to give you a precise number on that because if we give you the volume and the pricing, then you see, but that is in that 30 basis points, a [ relevant point ]. So it's not just pricing, the move to Onsite which we offset with cost leverage, plays into that 30 basis points, I think so, and I will leave the conclusion that, that's normal pricing is also that mix and that mix plays.

[Alain-Sebastian Oberhuber]

Just one other question, just people seemed to be a little concerned about I think Tom called it as sort of fall off in growth or something suitably dramatic. When you're looking at numbers in the middle of February, presumably, you don't have very much perm in that mix because that tends to be very heavily March, and that's been growing faster. Would that be accurate to say that any perm growth is likely to hit a bit later?

[Alain Dehaze, Chief Executive Officer]

A good question, I must say without giving figures that I was very pleased by the perm development in January.

[Operator]

We have a follow-up question from Tom Sykes from Deutsche Bank.

[Thomas Richard Sykes]

I'm trying to be quick. But just on the Italy business, and growth outlook there and the outlook for leverage. And then also just on LHH shows your growth was down, but your margin was up a lot. And can you just remind us, you were going through some integration in Q4 last year, but would you expect to be able to hold your margin if margins are a little bit -- growth is a little bit weaker in LHH, please?

[Alain Dehaze, Chief Executive Officer]

On LHH, you know that this business is counter-cyclical and career transition and placement. So when we look at all figures where the high single-digits decrease, you'll see that it's published. But when you benchmark with -- or figures with some of order listed peers, you will see that we can be very pleased with this performance. We are gaining market share and the decrease of the business is typical from the current economic environment in which we are in. So on the top line, we are pleased with the performance of LHH. You see also that on the bottom line, thanks to our business model, we are able to adapt very rapidly our cost structure, we have a variable cost structure and that's what we have done and that's why you see the profitability we have delivered in Q4. On Italy, I didn't catch the point on Italy --

[Thomas Richard Sykes]

No, it's just that you're growing quite rapidly, but you said the mix was slightly negative to you, for your operating margin and leverage. And so therefore, I was just wondering what the outlook for whether we would get operational leverage in 2018, if you continue to grow, whether that would happen if you continue to grow at quite a strong rate in Italy.

[Hans Ploos van Amstel, Chief Financial Officer]

Yes, Hans here. We did drive good operating leverage into Italy and we always have it, it's good -- It's a very healthy margin to start with, but you also have seen the mix of business shifting a little bit with the level of [ closeup ] and you have a little bit still coming out of the [indiscernible] subsidies and all that has helped in the past also the margins. So that compares, made also a little bit impact how some of these subsidies that played over the last years. We're continuously pleased in Italy with the growth momentum, strong margin leadership and we're driving operating margin with a strong -- strong margin volumes, you see some shifts of mix is underway, these subsidies are playing into the mix.

[Thomas Richard Sykes]

Okay, but does that mean you'd expect your operating margin up in Italy in 2018 when you take into account the mix and subsidy?

[Hans Ploos van Amstel, Chief Financial Officer]

We're here to drive profitable growth, but we report every quarter how we do and that's the statistic.

[Thomas Richard Sykes]

Okay, fine. And then actually one short of follow-up on the tax side. I believe you put Mya into your launch retail I think in Q4 or the contracts you had with launch retailers in Q4, I think you mentioned at the time, something like 12 of your largest retail accounts in North America in Q4. I just wondered if you could give us some of your experiences with Mya as you've rolled it out, please.

[Alain Dehaze, Chief Executive Officer]

Yes, we have in the meantime, we are working with 11 customers in the U.S., so we have extended the first pilot phase to another one, quite promising. And we see that, for example, with one large client we're able to reduce the number of piece of FTE on the account by 3% and improve the fill rates by 1%. So we see good potential to roll out more widely for high volume client. And what you see also Mya is an example of how we are putting artificial intelligence deep learning at work. We are applying artificial intelligence now in various business, Vettery will be another example where we will put artificial intelligence at work to do the curation of the candidates, but also we've been InFo that we have developed together with Salesforce.com. We are also looking at putting into artificial intelligence at work to increase the efficiency, automate repetitive transaction, so that we can focus on candidates and customers that you add and increase your productivity.

[Operator]

The next question comes from Hans Pluijgers, Kepler Cheuvreux.

[Hans Pluijgers, Head of Research of Benelux]

Two questions from my side. First of all, going back on the gross margin and SG&A leverage. So you indicated one side is a quite significant impact of that 30 basis points, but in principle, it should be logical that the impact on the gross margins should be offset by the same amount or same impacts on the SG&A. So making a quick calculation, I come to 20 basis points of course also the SG&A should have positive impact of 20 basis points. So the inline leverage is quite limited, is it at the fair junction? And secondly on free cash flow generation besides of course the increase in growth, but also some of the timing impacts in the cash generation in Q4, could you give some feeling on that?

[Hans Ploos van Amstel, Chief Financial Officer]

Yes, I think what you take as Onsite into the mix is probably a little bit more optimistic than what I would see. So -- but you're right that Onsite to gross margin reduction should come one-on-one out of the SG&A because Onsite is -- has a better delivery model. If you look at our operating leverage this year, we held the margin about stable, but we're making 25 basis points of investments, so we are driving operating leverage well, we have 30 basis points adds into the gross margin, but we're also going through a period of investing. We're investing in home purposes, we're investing in our digital tools, so we have a period of investment. If I look at the FTEs versus the sales growth, we did 3% -- 7%. So yes, the Onsite plays, but not to the amounts when I say relevant probably is not as relevant that you did the calculation. If I look at the cash flow, for the year, we had strong cash flow ahead of the profitability. So it's ahead of the EBIT, so we continue to derive a very good operating metrics there. DSO was stable. If you look in the last quarter, you had from Q3 to Q4, last year we drove down the receivables and this year they're stable. So we had a more favorable Q4 last year than this year because receivables quarter-over-quarter was down last year by this year. But if I look back at the fiscal year, this was a better fiscal year cash flow than last year.

[Alain Dehaze, Chief Executive Officer]

And if you are asking about the impact of having the 31st of December on the Sunday, yes, it's -- to have the last day of the quarter and a weekend is never favorable.

[Operator]

The next question comes from George Gregory from Exane BNP Paribas.

[George Nicholas Gregory, Research Analyst]

Just following up on that, that last question, just to sort of clarify some of the points. So the 25 basis points investment which you explained at your Capital Markets Day, year-on-year in '18 should be neutralized by the gains, I think you suggested maybe 15 basis points or so of operating leverage, there is a 15 basis points drag from CICE which you'll try to offset. Pulling all that together, should we, therefore, be expecting margins to be flat up based on the fact that bank holidays are neutral or are there any other moving parts that we should be accounting for? Based on operating margins?

[Hans Ploos van Amstel, Chief Financial Officer]

No, I think I'd like to add up the individual components. But what we said and we continue to say is that goal to get us coming out of the investment phase, we're delivering EUR 50 million of true savings which will offset some of the investments we're making in this strategic IT agenda. So that's coming out of an investment phase, most of the investment this year was [ involved ] together. Next year digital and possibly investment phase of the 25 basis points. And then we have the CICE, we need to offset always that have many things, but yeah, I think you summarize the key components and how quarter-by-quarter pan out, that's what we report, but I think you've got to just profit.

[Operator]

We have a follow-up question from Matthew Lloyd, HSBC.

[Matthew Lloyd, Head of United Kingdom Small and Mid]

Just 2 questions really. One, I just wanted to understand in France, has the CICE enabled more price competition from smaller players, because if they've got that cash inflow, can they afford to be future on gross margins, is there a potential pricing pressure offset as CICE reduces? And then second question there is a lovely Harvard business review, an article pointing out just how many people work in call centers pretending to be Chatbox in Bangalore and in Indonesia. And can you confirm that you don't employ lots of people pretending to be Mya, pretending to be people?

[Alain Dehaze, Chief Executive Officer]

This is a very creative question. No, when we -- and I was mentioning that people we have been able to -- for efficiency, we have been able to safe then also, the Chatbox, we had our real Chatbox and I can tell you we are looking at that, the same with Vettery and so on. So it's really technology at work. We looked into details, various companies, various technology and that's why we choose for example Vettery in this field. So it's real Chatbox. And then -- and they are based in New York. So now regarding France, the point is, if try to -- if I have understood well your question is, yes, this should for the company who have given away in the past the CICE to the customer in a way or another. For sure, they have been impacted and they are impacted especially as this should, there is no order compensation from the 7% to the 6% in 2019. We will get social charges decrease in some, we don't know the details yet, but that's the situation today.

[Hans Ploos van Amstel, Chief Financial Officer]

Yes. But I think for 2018, that definitely is from that perspective on pricing I think. There is no reason to say because you get less CICE that could potentially be an offset to the last CICE. Your question on the people who work for us can be replaced by, we also I think get new customers, which I wanted to add, which ask us to do flexible labor solutions in new businesses. I give you an example, for one company in the car industry, which does e-cars, reinstalled at home all their [ charts ]. And I can continue. We do new store staff solutions for customers. So yes, this will happen, I think that's a good change for us because companies structurally will use and that will more flexible labor. But we also see newer businesses they're coming to us for new solutions. So I think we'll see both.

[Matthew Lloyd, Head of United Kingdom Small and Mid]

And one follow-up question because my colleague will kill me if I don't ask you. Your GDPR costs, are they-- how much is it costing you to become GDPR compliant?

[Hans Ploos van Amstel, Chief Financial Officer]

I know that, I might not tell you. But in our cost of business and I think it's good, also cost of increasing compliance. One thing you see and it's not just GDPR. Cyber security is more and more cost -- and those are not in the 25 basis points of us. We just see those need to be offset with other savings, but we are having very solid programs on GDPR. We have them in cyber security and those are good for us because smaller players going forward might not be able to have -- or going a little bit to a period of transition as industry, but I keep telling you the investment is -- this will drive true growth for us because with Grow Together we can access data better than the smaller players, we can scale technology better and just for our customers the reassurance based on cyber security, global data protection. We're now in an investment phase, but I think these are all good investments to strengthen the cash flow profile of the business.

[Operator]

Gentlemen, there are no further questions.

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

Thank you, everyone, for joining the call today. I appreciate it's very busy results morning for a lot of you, and thank you for your questions. Also, we look forward to speaking to you again either during the roadshow or otherwise when we report our Q1 results on 8th of May. Thank you.

[Alain Dehaze, Chief Executive Officer]

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.