Adecco Group AG

SIX:ADEN

Earnings Call Transcript 2018-Q4

[Operator]

Ladies and gentlemen, welcome to the Q4 2018 analyst conference call and live webcast. I'm Mirona, the Chorus Call operator. [Operator Instructions] And 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 Mr. Nicholas de la Grense, Head of Investor Relations, accompanied by Mr. Alain Dehaze, CEO; and Mr. Hans Ploos van Amstel, CFO of the Adecco Group. Please go ahead, gentlemen.

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

Good morning, and welcome to Adecco Group's Fourth Quarter and Full Year 2018 Results Conference Call. I'm joined today by Alain Dehaze, group CEO; and Hans van Amstel, group CFO. As usual, before we begin, please review the disclaimer on Page 2 regarding any 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. And we'll then open the lines for questions and answers. So with that, Alain, I hand over to you.

[Alain Dehaze, Group Chief Executive Officer]

Thank you, Nick, and good morning, ladies and gentlemen. Welcome to fourth quarter and full year 2018 results investors call. I will start on the Slide 5 with the key highlights. Looking first at the fourth quarter 2018, we see that operationally, we had a good quarter, building on the momentum of the third quarter. Especially permanent recruitment continued to grow strongly, up 18% on top of the 18% growth achieved in the previous year. And underlying profitability further improved. Our EBITDA margin was up 20 basis points year-on-year with a positive impact of around 45 basis points coming from GrowTogether, positive pricing trends and the mix. Nevertheless, the external environment became more challenging. Revenue growth slowed further in Q4, turning slightly negative at minus 1% on a trading days adjusted basis. Like in the third quarter, the slowdown was driven by Europe and in particular, France, Germany and in Italy, all in line with the macroeconomic and market trends. Outside of Europe, we saw more positive trends, particularly in U.S. General Staffing and Japan. But with 2/3 of our business in Europe, the market slowdown there has a significant impact. You will also see that we took a goodwill impairment in Germany in the fourth quarter. As you know, we are in the middle of the transformation of our German General Staffing business. The impact of new regulations and the market slowdown has made this process more challenging. And based on this, it was necessary to make the impairment. We have also announced changes to the leadership of the Northern Europe region. Mark De Smedt will leave the company. And I would like to thank him for his 15 years of contributions. Christophe Catoir, Regional Head France, will expand his responsibilities to Northern Europe. For 2018, the Board of Directors will propose a stable dividend of CHF 2.50, which corresponds to a payout ratio of 48%. Recall, we are committed to paying at least a stable dividend every year, supported by the group's strong through-the-cycle cash flow generation. And with this, I hand over to Hans for more insights on the financial performance and the outlook.

[Hans Ploos van Amstel, Chief Financial Officer]

Thanks, Alain. Let's now look at the financial performance in more detail, starting with the revenue. In the fourth quarter, the revenues declined 1% organically and trading days adjusted, driven by a further slowdown in the European economy. We saw that trend continue in January with revenues down 2%. The volume trend in February indicates a further but small deceleration. Looking at the individual regions. The slowdown was very much market-driven. Our growth was ahead or in line with the peers in most regions with the exceptions being Germany and the Benelux. In France, we remained ahead of the market, confirming the strength of our strategy. In North America, U.K., Ireland General Staffing, our revenues accelerated to 4%. North America was up 6%, driven by new client wins and strong seasonal demand. The U.K. declined 1%, reflecting generally soft market conditions. Remember also that last year, we benefited from new client wins delivering strong growth. Professional Staffing in North America, U.K. and Ireland declined 2%. Important to note here is that our U.S. regional business continues to perform well. The total results were held back by our IT enterprise business. The U.K. business was up 2%. In Germany, Austria and Switzerland, our revenues declined 9%, which was driven by the decline in Germany. Austria and Switzerland delivered solid growth. There are a number of changes impacting Germany. So we would like to explain this a bit further and why we took the goodwill impairment in Q4. The new regulations that limit the temporary staffing maximum assignment duration at 18% -- 18 months became effective in October of 2018. It meant that associates with a tenure longer than 18 months either need to be hired by the client directly or redeployed to other clients. As a result, we're seeing a high level of conversion to permanent employees at our customers. This is more than we had anticipated. We also see that redeployment is lower because of a mismatch in both skills and salary levels. Lastly, we see sickness rates increasing as the 18-month limit approaches, which impacts the bench cost. This means that the new regulations has relevant implications. We expect this to continue for the remainder of 2019. On top of the regulatory changes, there is a structural slowdown in the automotive sector, which represents around 30% of our business. And the Germany economy continues to grow below the European average. Finally, we're in the middle of consolidating our General Staffing brands, Adecco and Tuja. So all in all, it's a challenging picture in Germany in the short term. Looking at the other regions. We see that in the Benelux, growth slowed due to softer market conditions and reduced demand at a few large customers. Italy decelerated following a period of strong growth. And our relative performance versus the market remained good. Japan continued to achieve great performance in both top and bottom line. Iberia slowed with the market trends. Lee Hecht Harrison, which is a countercyclical business, was down 1% in the quarter and continues to outperform peers and gain market share. And between LHH and General Assembly, multiple cost brand initiatives are underway. Turning to the EBITDA margin. The margin was up 20 basis points in total. The benefits of our GrowTogether program, combined with a favorable price trend, underpins the underlying margin improvement. Looking at the margin in more detail, it shows that the investments in the New Ventures had a 25 basis points impact. The German transformation also impacted the results by 20 basis points. We had some nonrecurring items in the fourth quarter, which had a positive impact of 20 basis points, including favorable year-end accruals and timing of bank holidays, partly offset by the lower CICE in France. This leaves the true 45 basis point positive EBITDA margin improvement in the balance of the business, as mentioned, driven by the GrowTogether productivity savings and the positive mix and pricing development. Looking at the profitability at a country level. We saw continued strong profitability in France, where the margin was up 110 basis points year-on-year, and as well we had most of the nonrecurring items in Q4. These helped the margin by 70 basis points, which is more than offsetting the negative impact of CICE. It's a big impact because this reflect true-ups for the full year realized in the fourth quarter. The largest piece related to a change in training fund contributions in Q4, which is not specific to Adecco that benefited the whole industry. This was worth 120 basis points in France and 30 basis points for the group. Adjusting for the positive nonrecurring items, the underlying margin improved by 40 basis points in France, even if we continue to invest. GrowTogether is driving excellent productivity growth. Pricing contributed positively as well as business mix. North America, U.K. and Ireland General Staffing also delivered a very strong improvement in the profitability. The new front-office platform and automated candidate outreach tools, which are part of the GrowTogether program, drove a significant increase in consultant productivity. Pricing and mix also contributed to the margin improvement. North America, U.K. and Ireland Professional Staffing improved the margin by 30 basis points, benefiting from pricing and mix and the GrowTogether productivity improvements, which are more than offsetting the investments in Vettery. In Germany, Austria and Switzerland, we had 150 basis points margin declined, driven by Germany, where the lower productivity, higher bench costs and the negatives on the new regulation are impacting the profitability. In Italy, an improvement in the temporary staffing gross margin and strong growth in permanent recruiting resulted in 110 basis points margin increase. Lastly, the Career Transition and Talent Development margin was impacted by the consolidation of General Assembly, which is still in an investment phase. LHH maintains its strong margin leadership in Career Transition. Let's now look at gross margin and SG&A, starting with the gross margin. The reported gross margin is up 120 basis points. M&A had a positive effect of 30 basis points, driven by Vettery and General Assembly. Both are high-value, high gross margin businesses. Currency had a positive effect of 10 basis points. As a result, the organic gross margin was up 80 basis points. Permanent recruiting had a 30 basis points positive impact. Career Transition and other changes had a combined negative 20 basis points impact. The temp gross margin increased 10 basis points. CICE had a negative 30 basis points impact. This was offset by the favorable year-end accruals of 60 basis points. Bank holiday timings had a positive 10 basis points impact. This leaves a 30 basis points positive impact from pricing and mix, confirming we continue to strengthen the temporary gross margin. On SG&A, organic cost growth was up 4%. Headcount was down 1%, confirming our strong productivity focus. The SG&A increase was driven by higher permanent recruiting commissions, the investments and impacts of less favorable accruals. The organic conversion rate continues to be very strong at 26.5% and is up 100 basis points year-on-year even with the German situation.Turning to cash flow. The cash conversion was 84%, improving from 78% last quarter. Accounts receivable or days sales outstanding was 53 days, up 1 day year-on-year but down a day versus last quarter. Net debt-to-EBITDA, excluding one-offs, was 1x at the end of December compared to 1.1x at the end of Q3. In line with our capital allocation policy with net debt-to-EBITDA at 1x at year-end, there will be a no additional cash return above the ordinary dividend of CHF 2.5. Turning to the outlook. Revenues in January were down 2% organically and adjusted for trading days. Our volume growth in February suggests further slight deterioration. As we said before, we need to remember that we saw a very strong recovery in France and Southern Europe over the same period last year. We will continue to invest to strengthen our business to deliver sustained higher performance through the cycle. Clearly, it becomes more challenging to improve the margins in a more negative growth environment, so delivering GrowTogether productivity savings becomes even more relevant. We delivered the first benefits in Q3 and Q4 already, improving both the customer value, improved Net Promoter Score and reducing our cost-to-serve. Note that the New Ventures investment have a neutral year-on-year impact on the full year 2019 margin but will be dilutive in the first half, as we did not have General Assembly and Vettery into the numbers last year. With that, I hand back to Alain to talk about our strategic and operational progress and give some concluding comments.

[Alain Dehaze, Group Chief Executive Officer]

Thank you, Hans. And before we move to Q&A, I would like to provide 2 quick examples of the how the Perform, Transform and Innovate strategy is now supporting the results in practice. The first example is North America General Staffing. Remember, almost 2 years ago, we said that the business was capable of delivering more growth in a more sustainable way. We changed the management in Q2 2017 and began to roll out the commercial strategy, segmentation, customer and candidate portfolio management, focused on perm and pricing. On the technology side, we also during 2018 implemented a new advanced front-office platform and rolled out an artificial intelligence chatbot at more than 100 large clients. By following our proven commercial processes and giving our people the right tools, it has had a clear positive impact on the performance in full year 2018. We returned to revenue growth for the first time since 2015. Productivity was up 6% organically. EBITA margin improved 20 basis points, even including the cost of investments. And very importantly, we improved our client NPS by 14 points, which is key for driving sustainable growth. The second example is France. Already, we had a business with leading profitability and efficiency, driven by strong execution of our commercial strategy. And to take it to the next level required transformation and innovation. The French team has focused on 2 key pillars: the one being growth and value; and the second one being technology. The growth and value strategy means expanding outside of the core temporary staffing business, expanding our bench model temp business or apprenticeship solution and the perm, all high-value and high gross margin activities. At the same time, France is embracing technology to improve efficiency in the core business. The Adecco & Moi candidate app is now being used by more than 150,000 associates every month. A new client portal to allow customers to place orders is now functioning 24/7. Digitization of documents to reduce paper documents have already saved EUR 7 million cumulatively during 2017 and 2018. And the results are proving this success. Revenue growth ahead of the market in 2018, perm growth at 20%. EBITA margin was down 10 basis points for the full year 2018, almost fully offsetting the headwind from CICE changes and strategic investments. As you can see, our strategy is starting to drive the financial performance and will support relative growth and margin improvement going forward, which is even more important in a challenging external environment. Now coming to the concluding messages. Looking back on 2018, there is a lot for our colleagues around the world to be proud of. Significant progress was made on the Perform, Transform and Innovate strategic agenda. GrowTogether is moving out of the investment phase and has already delivered its first benefits in the second half and will continue to support the results in 2019. On the innovate agenda, we are very excited with our complete portfolio, adding new value-added services for our customers. And in this context, I'm proud that General Assembly was recently announced as one of the top 10 Most Innovative Companies in Education for 2019 by Fast Company magazine. On the perform agenda, we continue to perform strongly and strengthen our business in France and the U.S. Germany is impacting results in the short term but is an opportunity to improve the performance going forward. It is important for me to highlight that this progress is only possible because of the hard work and strong commitment of our colleagues around the world. So I would like to thank them for making us both the global leader and also a great place to work. And with this, I would kindly ask the operator to open the line for the questions.

[Operator]

[Operator Instructions] The first question from the phone comes from Paul Sullivan with Barclays.

[Paul Daniel Alexander Sullivan, Director & Analyst]

Just firstly -- are you prepared to put any numbers behind YOSS and Adia at the moment in terms of revenue contribution and losses? And in terms of General Assembly, it looks like that loss is running at about EUR 15 million a quarter. How should we see that moving through 2019? That's the first question on sort of the New Ventures. And then secondly, usual question about moving parts in terms of gross margin and any guidance on SG&A for -- at least Q1 or for the rest of the year.

[Hans Ploos van Amstel, Chief Financial Officer]

Yes, maybe I'll start. What we have the New Ventures and they are early in their development but doing well. What we are committed to is that we stay within the 25 basis points investments into the New Ventures. And we will manage all the ventures along those lines. And a large part of that is in between General Assembly and Vettery. I think what's more important -- so yes, we're making good progress on the General Assembly with LHH, the cost selling is moving, the growth trajectory continues. But for us, it's important, while we have these New Ventures, that we stay within the commitment we set as the 25 basis points. And around 20 of that is General Assembly and Vettery. So those are a big part, as you mentioned. I think on your other question is the outlook. Needless to say, we have some visibility. But I think to help you for Q1, we can give you some things. And I want to give a little bit color to the year as well. Gross margin M&A will continue at a plus 30 basis points. Exchange rates, we expect at the same level as the fourth quarter, around 10 basis points. Bank holidays will be favorable by around 10 basis points as well in Q1. Then you have to make your usual assumptions for LHH, the perm business and our temporary gross margin, which was positive in Q4. I think we are entering a positive period. I wouldn't take the Q4 and just extrapolate it. Without helping you too much, I can give you one tip. If you add these all up, sequentially you come to a little bit below Q4. So that's a good check and you fill all the details that gross margin would be. SG&A, sequentially we expect stable to slightly down. Remember, the M&A impacts are about plus 4% on SG&A. The exchange rates, which is a benefit in gross margin, goes the other way in the exchange rates. So that's around 1 percentage point on SG&A. I think that gives you some color on Q1. And as we said, the Vettery and the GA, the ventures will be dilutive in the first half. Our objective remains, needless to say, to improve our profitability for the year. We don't have a crystal ball on the sales. But we are delivering the first benefits of GrowTogether and are on track to deliver the commitments we laid out in the Investor Day. So that's the good news. The digital ventures, as I said, the investments are staying within the commitment and they're driving us good growth. And in Germany, like in the first half, we need to be cautious about while we make some improvements.

[Paul Daniel Alexander Sullivan, Director & Analyst]

Okay. And just to be clear, given the run rate of revenue decline going through the first quarter, down 1%, 2% -- 2%, 3% is not inconsistent with margin improvement for the full year, given the savings?

[Hans Ploos van Amstel, Chief Financial Officer]

But the disclaimer is obviously, Paul, I don't have a crystal ball. But the first half, you could see more dilutive because of, one, you see some contraction in Q1. You see Germany still being difficult because Germany became more difficult in the second half. And that the digital ventures are now in full swing, which they weren't in Q1 and Q2 last year. And the positive one is GrowTogether. But you see that balance between first and second half. But the prediction on the economy, needless to say, I can't give.

[Paul Daniel Alexander Sullivan, Director & Analyst]

And any revenues behind Adia and YOSS at the moment?

[Hans Ploos van Amstel, Chief Financial Officer]

No, I think what we can say -- and I apologize -- I think for us it's important that we come through on our commitments on the margin structure, which we are. But we're pleased with the ventures. If we look at Adia -- and I don't know, Alain, if you want to give some color. It's still small but good growth. And some of the learnings we're reapplying in GrowTogether. So I don't think Adia is just a stand-alone thing. Some of the candidate learnings we have reapplied in the GrowTogether initiative. GA and Vettery continue to drive very strong growth momentum. And also the reactions and -- like Vettery did, what do you call it, a subscription model? So customer stickiness is very strong.

[Operator]

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

[Anvesh Agrawal, Research Associate]

I've just got two questions. First, obviously we have seen a change in trend in the price and mix, up 30 basis points. I just wanted to check whether it has come at the cost of some growth or you have seen some broad-based improvement into the market. And second, on Germany, I mean, when I look at the impairment you have taken of EUR 270 million, that is almost like 40% of the carrying amount of goodwill, which is quite significant. So just assuming the market conditions stay where they are, when can we expect some sort of improvement in the growth rate? And how should we think about that?

[Alain Dehaze, Group Chief Executive Officer]

First, I can start with the Germany and explaining the 3 reasons behind the background of the impairment. The first one is the regulation. And you have seen that since the 1 October, the maximum duration of temping has been limited to 18 months. We have explained that also in our call, in our presentation. This had impact not only with us but with the whole industry. So this is, one, structural, let's say, going forward, difference for the German market, which remain the biggest market in the world, very attractive. But it is clear that is a first change. The second change structural is also automotive. And every day, you see that the new technology, and especially the electrification of this industry, is changing a lot. The manufacturing of electrified cars are requesting less labor force. And this has long term an impact on the country, Germany, but also on our business as we have 30% of our business in the automotive sector. And then the third reason is this near-term slowdown of the economy, the German economy, where we have seen that during the last 7 quarters out of the last 8, the German economy has performed at a lower level than the average European. So this is explaining the German impairment beside the fact that, yes, we are integrating Tuja within Adecco. We would have loved to be further in this integration. But we are also facing some headwinds, as I described the context in which we are in.

[Anvesh Agrawal, Research Associate]

Yes. But before you move on to the next question, sorry, I mean, the thing is like assuming there is no further deceleration of the macroeconomic environment and the automotive industry remains where it is, can we expect some sort of improvement in net growth rate into the second half or not versus what you're doing currently?

[Alain Dehaze, Group Chief Executive Officer]

Yes. We said we will have a -- we will continue to have a drag on the first half. But it should start to improve in the second half.

[Anvesh Agrawal, Research Associate]

Okay. And price and mix, please?

[Alain Dehaze, Group Chief Executive Officer]

Yes, on the pricing, yes, we have been very happy to see the structural improvement coming from all the work we have done and we are doing, still doing with the pricing. For sure, the degree of sophistication in pricing management depends of the country and the maturity of organization. But it all started with the segmentation. Because when you do the segmentation, then you can start to differentiate it -- to differentiate your pricing according to the segment you are active, being small, medium, large or on-site. But then on top of that, we have developed tools that we have rolled out into branches. We have started also to leverage big data in combination with analytics, allowing us to really have dynamic pricing in some markets, where we have enough data to put that in place, meaning that the pricing is adapted to the current, let's say, offer-demand situation, the timing of the demand, because seasons play an important role in our business and so on and so on.

[Hans Ploos van Amstel, Chief Financial Officer]

Yes, I think -- so we saw that positive pricing. And I think if I look at the growth trajectory we delivered in Q4, we had a good growth trajectory in a slowing market. Again, Germany was a little bit the standout, as we said, so -- which is a reaffirmation that, as Alain said, it's better pricing tools. And I think a little bit of the candidate market is helping here. So healthy environment is obviously a little better. So that's a good. And I think on the German impairment, Alain laid out where we're at. We are going to improve it. But this year, the margin in Germany is lower and is impacting the company margin. So we need to recover. And that relates to the effect.

[Operator]

The next question comes from Matthew Lloyd, HSBC.

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

Well done on the gross margin, that's a nice thing to see. A couple of questions just to get my head around it. How much of that is mix in terms of -- I know you won't know a hard answer. But is some of that industrially is worth, then white collar and therefore there's a bit of lift in the temp gross margin from that? And then just a follow-up question, just with the sort of the new tools, the dynamic pricing, do you think that you've got a better grasp on pricing for scarce labor than you've had in recent years?

[Alain Dehaze, Group Chief Executive Officer]

Regarding the new tools and so on, I would say definitely, we are definitely more mature in pricing management. I would say -- I said it has started with the segmentation. Because when you have your segmentation in place, then you can also work out a better pricing policy according to the segment because you don't price in the same way in the small segment as in the medium and the large. And if you have not segmented your portfolio, your cost-to-serve and so on, it's much more difficult to really fine-tune your pricing strategy. So we did the segmentation in place. And then we started to develop the tooling, which for sure, will continue to have a positive impact on this. On the mix, I will pass to Hans.

[Hans Ploos van Amstel, Chief Financial Officer]

Yes. No, the good news is that most of it is really driven by the pricing action plans. So there's some mix in there, which you always see because you also grow small or medium. But the majority is driven by -- well, Alain said, I think, we're much more precise on the pricing now. And I think the market is helping. So I don't think -- but within that market environment, having these new tools is driving that positive development.

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

Ask one more question like all analysts always do. Have you addressed or thought about or changed any of the remuneration structures or KPIs along the lines with the segmentation? Is there a scope for sort of paying people to chase the money rather than the volume?

[Hans Ploos van Amstel, Chief Financial Officer]

One thing we have changed and strengthened is that we have a very good -- in the old days, it was, this is before we came here, all EVA. But then people could compromise one over the other because you let them make the tradeoff. So we have changed 2 things. One, we care about relative growth. We care about the margin structure and the DSO. Let's never forget that the quality of the received is important. But we review all 3. So we make sure people don't make the wrong tradeoff. What we also have improved, which we have introduced, is we have branch scorecards, which we really deeply integrated, which measures small, medium, large, on-site. So we can go to a level of granularity that we can know both on the pricing the growth that we're really making and that our people are making the right tradeoffs. And I think the keyword here is always granularity, and not everybody has. And we review that quite rigorously. I think that tone is important so that people know. To your point, that tradeoff is making us to sustain the right way to drive profitable growth.

[Operator]

The next question from the phone comes from Tom Sykes with Deutsche Bank.

[Thomas Richard Sykes]

Just on the permanent revenue growth and then how that's related to the SG&A growth. You picked out the 1.5% extra from SG&A growth due to the high payout ratio in perm. But can you just explain, is that something that ratchets up sort of over the course of the year and as you hit targets in the discrete year? Or should we expect that the payout ratio is lower as a run rate on perm now? Or if you did hit the same level of perm revenues, for argument's sake, in Q1, would we expect a higher payout from perm in Q1? And then just on the SG&A, what level of wage inflation are you expecting for your own staff this year? And what's the view on headcount growth, please?

[Alain Dehaze, Group Chief Executive Officer]

Okay. I would say on our own staff, the inflation is quite limited. You see what kind of inflation our associates have. You have inflation just in some parts of the world. But I would say, on our side, wage inflation is also very limited. You have seen that in the fourth quarter, we had a minus 1% on the SPE number. And I would say the inflation is in the range of 1% to 2%. Now to your second question, perm, yes, we had -- first of all, we had strong performance because you have to put the 18% growth of the Q4 2018 in relation with also 18% growth in the fourth quarter 2017, so very strong growth. And this growth is also broad-based. We had it in the U.S., I think really above -- largely above 20% in Professional Staffing perm in the U.S., France, 22%. So it was really broad-based. And at such a level of performance, it is clear that you have a payout on commission and bonus, which is significant.

[Hans Ploos van Amstel, Chief Financial Officer]

Which makes, Tom, to your question, Q4 is relatively higher because it's a little bit -- because some people have actually have an annual bonus and you have a very strong Q4, you get a little bit of true-up for the year.

[Thomas Richard Sykes]

Okay. So are we expecting, therefore, we should get a higher level of conversion out of perm at the beginning of the year? But also how sustainable is the 18%, given that we're obviously seeing some weakness elsewhere? France at plus 20% does seem pretty high compared to negative temp growth.

[Hans Ploos van Amstel, Chief Financial Officer]

That's why we are having certain visibility. I think there are 2 different questions here. One is that because of the strength of the perm business in Q4, ahead of expectations, we had some true-up in the SG&A, which is an impact to Q4, which is Q4-only and won't have an impact in Q1. Two, because every year, you reset the clock. I will specifically talk to perm business that I think what we've signaled is that in gen staff, we saw some slowing. But I also think we need to realize that, that is on the back of very strong recovery in Southern Europe and France over the same period last year.

[Operator]

The next question comes from Michael Foeth from Vontobel.

[Michael Foeth, Head of Industrials Team]

Two questions from my side. First of all, those pricing tools, which helped you in the mix and pricing on the gross margin, in which areas or which regions do you apply that? And what's the scope of expanding the advantage that you got from that further geographically? And the second question is the accruals, which helped the gross margin by 60 basis points. And how far is that a one-off? Or will any of that or such accruals recur in 2019?

[Hans Ploos van Amstel, Chief Financial Officer]

No, I think the 60 basis points we called out as nonrecurring are special for Q4. So they won't have an impact next year. They relate to a number of things, the normal year-end things, where things for the year got trued-up in Q4. We have the impact of the French training fund, which was a one-time impact, which is about half of this 60 basis points. But they are called out for the reason that they are discrete so that they are having a positive impact. And as we said, the reason why we do it, so you understand how that impacts the margin, but it's not performance. Our underlying performance was stronger with that 45 basis points. But this is just a one-time element. On the pricing tools, we have rolled those out with our initiatives in the larger markets. Head markets like France, markets like the U.S. were more into that because these analytics work the best in the bigger markets first. And we have piloted them there. So that -- and then the scarcity, let's not forget the market is helping as well. The tools are coming in combination with the markets. And I think that's important to mention.

[Operator]

The next question from the phone comes from Konrad Zomer, ABN AMRO.

[Konrad Zomer, Equity Research Analyst]

I have two questions on Germany, please. The first one is that you reported an operating loss in the fourth quarter. And I was wondering, is that because the slowdown, maybe particularly in automotive, developed a bit quicker than you anticipated? Or are you keeping a lot of your FTE onboard to benefit from an expected recovery this year? And my second question is the integration of Adecco and Tuja has been going on for the best part of 2 years now. And I understand that you have lots of different things happening at the same time in Germany. But I would have thought that to integrate those 2 businesses could actually benefit from a market slowdown and not lead to a further delay. So I'm slightly puzzled why you would not be able to integrate those businesses a bit quicker probably at the expense of more FTE.

[Alain Dehaze, Group Chief Executive Officer]

Regarding the integration of Adecco and Tuja, the official date and the legal date on which we have operationally started the integration was on May -- 1st of May 2018. So 2 years, but it's about a little bit than 7, 8 months in the meantime. I think this is important to acknowledge. Looking at this integration, I would say, yes, we would have loved and we would love to go faster and be in accelerated way. But unfortunately, and this explains also the second part of your question, we are also in an external context, which is not the easiest. You have -- and we have explained that. You have the slowdown of the German economy. Second, you have the auto, which is transforming itself. But besides the transformation, recall all this emission control mechanism reinforced, which has blocked the manufacturing. You have also the trade war impact and so on. And for us, it's 30% of our business. So it's a major important one. And the third one, which expect -- which explains this decrease of activity, not only at our company but also at our colleagues, is that the impact of the new legislation, yes, I would say large part of our attempts were taken over by our customers. Some of them, we weren't able to redeploy. We had 2 issues. We had the sickness rates of people coming to the 18 months rising. And it means for us more cost. And second, we had also profile of people with capabilities, with skills and salary levels that we were not able to replace. So that's why we had this impact. And for sure, I can assure you, the turnaround is a clear priority for us, and not only for us but also for me. And I will take direct oversight on Germany.

[Konrad Zomer, Equity Research Analyst]

Right. But maybe I didn't ask the question in the right way. Because if the German market would have been great, you would have had a much bigger discussion with maybe the unions to integrate 2 successful companies into one because it will undoubtedly lead to lower FTE. Now that the market is quite difficult, I would have thought that to integrate those 2 businesses would be slightly easier.

[Hans Ploos van Amstel, Chief Financial Officer]

Yes, I think that's a good question. I think that 2 points which made it a little bit more complex. One, I think we have to accept that Tuja was an acquisition which has been with Adecco for a longer period. And I think the cultural differences between the original management, I would say, in the company and Adecco weren't as aligned, so we lost a little bit more there because of the connectivity. I think that's now behind us. But with that, we lost some business. I think the second thing which is making it a little bit more painful is that we have the new regulation coming on top, which is quite complex to implement. But Alain gave some reasons for that. So while you changed all these changes and then the new regulation came a little bit difficult. And I think it's a good and a bad news story. The bad news story is that it is impacting our margin negatively by 20 basis points in the year-on-year comparison, which confirms that the balance of the business is performing strongly. And now as Alain said, the regulation is now clear. We have integrated Adecco and Tuja. We're running the business over Adecco, which makes us, from a market position, a strong #2. And now we need to diversify away from automotive with the commercial strategies in place, which are working across all the other businesses because that wasn't done at Tuja in the past. That's why we remained too alive on automotive. So you could draw your conclusion. It's all a little later than you hope, yes. That's, I think, clear, fair and we all can agree to. But with Alain's direct oversight, applying the new recipes, which we do in the other markets, we will make the progress we all would like to see.

[Operator]

The next question comes from Kean Marden with Jefferies.

[Kean Marden, Equity Analyst]

Can I come back to, I think, a comment that you made earlier that you'd seen a slowdown in perm growth in January and early February? So is that correct, Alain? And if so, I wonder if you could share what the degree of the moderation has been. And then a second question, just if you can provide us with a bit of background, please, on the EUR 16 million software impairment. So I recall a couple of years ago that obviously there was a substantial write-down of some legacy IT platforms. Just wondering what that relates to.

[Hans Ploos van Amstel, Chief Financial Officer]

Yes, let me take those two questions, starting with the latter. Yes, we have made -- it's relatively modest, but it's still a relevant demand, some software impairment of legacy software while we are accelerating on the GrowTogether new initiatives. When we came, we did some impairments of software and we had hoped certain tools we could maybe still use. But we identified now with our new suppliers much better, much productive tools. And it's a small price to pay to get to the new world. So that's one. When I made the comment about the slowdown on January, Feb, I might have confused you. I did not talk about the perm business. I talked that in the total business, we saw a slowdown. We saw a little bit of a slowdown in the perm as well. But I think the key message we wanted to flag that, while we enter into the quarter, that we saw overall in the business, we're not normally giving in the exit rate, the details because we're still into the month of February, that the businesses has slowed a little. But given what we saw last year, we can understand that.

[Alain Dehaze, Group Chief Executive Officer]

And everything is taking place in the context where we had a very strong first half, let's not forget, also on the perm side.

[Operator]

The next question from the phone comes from Simona Sarli with Bank of America.

[Simona Sarli, Research Analyst]

Just a very quick follow-up in terms of pricing dynamics. Apart from the benefit that you saw from the implementation of your pricing tools, can you maybe comment on what you are seeing on a country-by-country basis? And how much of this pricing improvement is being driven by wage inflation?

[Alain Dehaze, Group Chief Executive Officer]

So starting with the wage inflation, we see wage inflation, first of all, where there is real scarcity of candidates and there's low unemployment figures. So we speak about countries like the U.S., Germany, Japan and in the range of 2% to 4%. And then in the other countries, we have a kind of low single-digit inflation rate across -- over the board, I would say, or across all the markets. Now regarding the pricing, I think it's not only a question of tools, it's also a question, as I said, of segmentation and the governance. We have also hired in some markets a pricing manager to make sure that not only the tools were deployed but also that there was governance, disciplined reporting on this with the results you have seen. We don't provide specific guidance by country. But out of the segment reporting, you can see how it develops.

[Operator]

The next question comes from George Gregory with Exane.

[George Nicholas Gregory, Research Analyst]

Apologies, I got briefly caught up, so apologies if this one has already been dealt with. But just going back to Germany, I was hoping to get a bit more color on the impact of the regulations. Specifically, what proportion of your temp base have a tenure of longer than 18 months in Germany? And roughly, what proportion of those are currently converting to perm, please?

[Hans Ploos van Amstel, Chief Financial Officer]

Yes, so around 10% is impacted by the regulation of the business on that longer assignment of temp. And some of the business, we lost about half. Half of that is also linked to this temp to perm. So you have like, if you take Germany, we lost 14% business. About half, we say, is linked to the regulation. 10% of our people is in that temp. And of that half, half is temp to perm. So there, companies took our temps and made them permanent in place.

[Operator]

Gentlemen, that was the last question.

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

Okay. Well, as there are no further questions, thank you, everyone, for dialing in today and asking your questions. We look forward to meeting many of you during the roadshow over the next few days, and after that, with the Q1 results in May. Thank you very much. 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 disconnect your lines. Goodbye.