Adecco Group AG

SIX:ADEN

Earnings Call Transcript 2020-Q4

[Operator]

Ladies and gentlemen, welcome to the Q4 results 2020 analyst call and webcast. I am Moira, the Chorus Call operator. [Operator Instructions] And the conference has been recorded. The presentation will be followed by a Q&A session. [Operator Instructions] The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Nicholas de la Grense, Head of Investor Relations. Please go ahead, sir.

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

Good morning, and welcome to Adecco Group's Q4 2020 Results Call. With me today are Alain Dehaze, Group CEO; and Coram Williams, Group CFO. As usual, before we begin, please review the disclaimer regarding forward-looking statements on Page 2. Coming to the agenda on Slide 3. Alain will begin with the key highlights from Q4. Coram will then review the financial performance and provide some commentary on the outlook. Alain will then give a brief summary of what we announced at our recent Capital Markets Day and finally, offer some concluding messages before we open the lines for your questions. Alain, over to you.

[Alain Dehaze, Member of Executive Committee & CEO]

Thank you, Nick, and good morning, ladies and gentlemen. Welcome to our fourth quarter results analyst and investor call. Let's begin with an update on how we are navigating the COVID crisis and with the key highlights from the quarter. While market conditions in the fourth quarter remained challenging, we delivered another strong performance. Our primary focus remains on supporting clients, candidates and our colleagues to safely return to work. In many cases, this means facilitating job creation in sectors that are witnessing growth linked to the crisis, for example, in e-commerce, logistics, and health care. And I would like to thank all colleagues for the excellent job they are doing, finding and capitalizing on those pockets of growth, which often leverage our leading digital capabilities and on-site solutions. Indeed, we are seeing a continued broad-based revenue recovery, and we are outperforming the pace of market recovery in many regions. Despite the continued revenue decline, our profitability remained resilient. Through a combination of agile cost management, discipline on pricing and business mix as well as our portfolio diversity, we achieved a sector-leading EBITA margin in the fourth quarter and for the full year. Speaking of portfolio diversity, LHH delivered further double-digit revenue growth in Q4. As a global leader in career transition and redeployment, LHH is well positioned to continue to support clients and individuals through the workforce transformations that the COVID crisis is accelerating. Something else that I believe we can be proud of is the strength of our financial position throughout the crisis. It allowed us to continue to invest in our digital agenda and to maintain our strategic focus. It also allowed us to uphold our dividend commitment last year and to propose a stable dividend this year. The actions we took precrisis to ensure a sound financing structure and liquidity proved invaluable. As economic conditions and our business performance has improved, we now believe it is appropriate to also resume the share buyback that was posed at the onset of the crisis. Coram will provide more details on that. Let's now look at how this has translated into our financial performance. The improvement in the year-on-year revenue trend continued. Revenues declined by 5% in Q4 from minus 15% in the third quarter. Gross margin was strong, up 50 basis points organically, supported by outperformance in LHH, positive impact of COVID-19 employment support schemes and pricing discipline. We are consistently outperforming related to the peer group. We also managed our cost base with agility. EBITA margin was strong at 4.8%, up 10 basis points organically. And our strong focus on collections resulted in very good cash flow with DSO down 3 days and cash conversion of 123%. We concluded the GrowTogether program in the fourth quarter with the key initiatives being integrated into the new Future@Work strategy. And I am pleased to say that GrowTogether, in the end, delivered EUR 240 million of benefits in 2020, almost reaching the EUR 250 million target set in 2017 despite the volume declines in 2020. And we continue to innovate. In France, we recently launched a new long-term contract that combines employment with training. The so-called CDI apprenants or CDI learning. Based on data science, we identified the most acute skill shortages in the French market and have developed programs to recruit, employee and train individuals in these skill sets. Already in Q4, we employed more than 2,000 individuals on these new contracts, well on our way to the target of 15,000 within 3 years. Lastly, in November, we acquired Hired. The crisis presented us with an opportunity to combine Hired with Vettery to create the largest artificial intelligence-driven recruitment marketplace in the world. I would now like to hand over to Coram to discuss the financial performance in more detail.

[Coram Williams, Member of Executive Committee & CFO]

Thank you, Alain, and good morning, everybody. Let's start by looking at the revenue trends in Q4. Revenues in the fourth quarter were down 5% on a trading-days-adjusted basis compared to a decline of 15% in the third quarter. That is an exceptionally strong performance in the circumstances. At the start of the quarter, we were somewhat cautious given new lockdowns were being imposed. Also, some clients in manufacturing sectors were indicating that they may shut down for longer than usual over the Christmas period. In the end, the impact of lockdowns was modest and demand in December was robust. The improvement was broad-based by region, as you can see here. In Europe, the decline reduced to minus 7% from minus 19% in Q3, showing real resilience despite the reintroduction of lockdown measures. In North America, the improvement was not quite as pronounced but was still significant. Revenues were down 9% from minus 17% in the previous quarter. The rest of the world outside these 2 regions returned to growth and was up 2%. While Japan slowed somewhat, this was more than offset by a return to strong growth in Latin America and Eastern Europe. Looking at the country revenue results in more detail on Slide 9. In France, our largest market, the revenue decline improved to minus 10% from minus 18% in Q3. Performance remained resilient despite stringent lockdown measures. But it's worth noting that France was a bit of an outlier in Q4. Where most markets saw continuous improvement through the quarter, the French market recovery stalled in November and December as lockdown was reimposed. As a result, the revenue trend is not quite as strong as elsewhere, which weighs on group performance given the size of our French business. Despite that, our performance in France was ahead of the market. In North America and U.K. General Staffing, we returned to growth of 6% driven by the U.K. North America was down 5%, broadly in line with the market trend, with the decline led by lower demand from clients in the manufacturing and financial service sectors. In the U.K., revenues significantly improved, with 32% growth driven by strong demand from e-commerce clients. In North America and U.K. Professional Staffing, sales were down 22% in the quarter. The trend in North America improved by around 7 percentage points to minus 14%, with strong improvement in our professional recruitment businesses. U.K. professional declined by 34% as it continues to be impacted by the IR35 regulation and the COVID crisis. In Germany, Austria and Switzerland, the rate of revenue decline improved to 11%. In Italy and Iberia, we saw a strong rebound and outperformance against the market, led by the manufacturing and logistics industries. Growth was 9% and 6% in Italy and Iberia, respectively. In Japan, revenues were flat, slowing versus the prior quarters. Contract renewals remain high, but lower new orders linked to the COVID uncertainty have impacted growth. In the Rest of World, we had some very strong performances, in Latin America, up 23%; and Eastern Europe, Middle East and North Africa, up 7%. And in Career Transition and Talent Development, LHH performed strongly, accelerating to 16% growth from 14% in Q3 driven by the countercyclical career transition business, which was up 22% year-on-year. Turning now to the gross margin on Slide 10. Overall, gross margin performance was strong, up 30 basis points in reported terms and up 50 basis points organically. The strength and breadth of our portfolio continue to play an important role. Temporary staffing had a positive impact of 70 basis points. Approximately 40 basis points came because we recognized the full year benefit of COVID employment support schemes in North America, U.K. & Ireland General Staffing, all in the fourth quarter. Across the year, it would be a more modest impact. It's also unusual because COVID-supporting gross margin is generally a pure pass-through to associates' wages, whereas in this case, it is not. This underlying price/mix trend remains positive, supported by disciplined pricing and our continued approach to selectively exit some of our lower-margin activities. Permanent placement had a 40 basis point negative impact. As is usual, perm growth is recovering less quickly than temp, which means it continues to drag on gross margin mix because it is a fee business with close to 100% gross margin. Mostly offsetting the decline in perm was career transition, which added 30 basis points, providing a natural hedge to the perm business. Overall, this was a very healthy gross margin development in the quarter. Let's now look at the EBITA margin. The margin was 4.8% in Q4 2020, down 10 basis points on a reported basis or up 10 basis points organically. This continued the trend of improvement since the trough in Q2. And in light of the revenue decline, it is a strong performance. In addition to the robust gross margin trend, we continue to be very disciplined in terms of SG&A and managing FTE productivity as revenues come back. Recall that the gap between the organic and the reported margin relates to the divestment of Soliant Health at the end of Q4 2019. That impact goes away from Q1 2021. Looking more in detail at the profitability by market. In general, we continue to see improvement in the trends across most regions, so I will focus on just a few of the key regions. In France, the EBITA margin was relatively resilient despite the revenue declines due to strong cost management. North America and U.K. General Staffing margin was up 200 basis points year-on-year, benefiting from the COVID support impact that I described earlier. Excluding that, the margin would have been down slightly. Germany, Austria and Switzerland achieved a strong improvement in the EBITA margin, benefiting from the restructuring of the business started in the third quarter and also higher bench utilization. In North America and U.K. Professional Staffing, the majority of the decline relates to the Soliant divestment. And finally, in Career Transition and Talent Development, the continued improvement is coming from strong operating performance in LHH. On Slide 13, we see the SG&A development relative to sales and gross profit. Overall, we continue to manage our SG&A well, with costs down 2% organically year-on-year. Looking at the breakdown of the SG&A movement, FTEs were down 10% and personnel costs by 8% organically. As activity picks up, we're bringing back many of our colleagues who've been on short-term -- short-time work. With that, the impact of COVID employment support on SG&A has now diminished significantly with a benefit of around EUR 6 million in Q4. On the other hand, the good performance in Q4 meant that bonus and commission accruals were up year-on-year and particularly versus the third quarter. Within Corporate, we also had some additional costs relating to higher IT and digital expenses and the start-up costs linked to the Future@Work strategy. Overall, we achieved an organic recovery ratio of 75% in the quarter. That was significantly flattered by the onetime gross margin benefit that I talked about previously. Excluding that benefit, our recovery ratio was in line with guidance at around 50%. Mathematically, when the gross profit decline is only slightly negative year-on-year as was the case in Q4, the recovery ratio becomes sensitive to small changes in gross profit and SG&A. Looking at 2020 as a whole, the organic recovery ratio was strong at 47%. That reflects a low recovery ratio in Q1 when the crisis first hit, followed by good performances in the last 3 quarters of the year. Turning to the cash flow and the balance sheet on Slide 14. Cash flow was strong with cash conversion at 123%. Operating cash flow was EUR 159 million compared to EUR 382 million in Q4 2019. The lower operating cash flow was primarily driven by investments in working capital, reflecting higher levels of business activity. DSO was down 3 days year-on-year. Net debt-to-EBITDA was at 0.4x, slightly improved compared to September. The balance sheet remains very robust with EUR 1.5 billion of cash on hand and an undrawn credit facility of EUR 600 million and no material refinancing requirements in the near term. As Alain already mentioned, this strong financial position allows us to propose a stable dividend for 2020 of CHF 2.5 per share. We also announced today that we will resume the EUR 600 million share buyback that was announced with the full year results last year and subsequently paused due to COVID. The worst-case outcomes of the crisis have clearly not materialized, and we, therefore, believe it is appropriate to start the buyback. We will do so cautiously at first, given the high degree of economic uncertainty that prevails linked to COVID as well as the working capital requirements that a return to growth brings. Coming to the outlook. The revenue trend improved consistently through the fourth quarter, with December down only 2% trading days adjusted. Lockdown measures in early 2021 became considerably more restrictive, approaching the situation of last spring in some countries. These measures have not materially impacted demand to date, although they have led to a pause in the revenue recovery trend. January revenues were in line with December, down 2%. February is looking similar based on the volume trends. As we've said previously, the recovery is likely to be nonlinear and bumpy in nature. On the cost side, we will remain agile to protect profitability while investing in our transformation and areas of growth. For Q1, it's difficult to give meaningful recovery ratio guidance because it is sensitive to small changes in growth, as I explained before. The rule of thumb, however, of a 50% recovery ratio when revenues are declining and a 50% incremental conversion ratio when we first return to growth is the right way to think about SG&A development. Before handing back to Alain, I'd like to remind you that since January 1, 2021, we've been operating under the new group management structure, as outlined at the Capital Markets Day. The Q1 2020 results in May will be the first quarter presented under the new structure, and we will be sharing with you comparable historical data ahead of that time to help you rebuild your models. We recognize that this is an investment of time for you all. And we really appreciate your efforts and your understanding. And with that, I'll hand back to Alain.

[Alain Dehaze, Member of Executive Committee & CEO]

Thank you, Coram. Before we conclude, I would like to remind you of the updated strategic direction of the group. The Future@Work strategy builds on the achievements of the Perform, Transform and Innovate cycle with some important changes. To help accelerate our transformation and to improve the focus of our businesses, we have shifted from a country-centric to a brand-led organization with 3 global business units: Adecco, Talent Solutions and Modis. This new structure will enhance focus, reduce complexity, improve resource allocation and allow client and candidate strategy to account for differences in end markets. For Adecco, focus is on market share and cost leadership through a digitized omnichannel strategy and superior client and candidate experience. In Talent Solutions, we will drive growth by addressing the end-to-end skill transformation needs of our customers, bringing together the complementary strengths of the various brands. With Modis, we are building a market leader in technology consulting focused on smart industry. And central to the entire strategy is a clear common social purpose to make the future work for everyone. Underpinning the strategies of all 3 business units is a group-wide focus on customer experience, differentiation and digitalization, the 3 key enablers of Future@Work. Customer experience is a continuation of the customer-centricity of the prior cycle, with a focus on consistent, high-quality experience through standardization at scale. Differentiation means leveraging the breadth of the group to deliver 360-degree solutions and elevate our services above that of the competition. Digital and data underpins everything we do. It drives up economies of scale and will reinforce differentiation and customer experience. We firmly believe that Future@Work will create more value for all our stakeholders and a strong financial performance for our shareholders. Revenue growth will improve, supported by a dual growth strategy of market share gains in the Adecco brand and growing exposure to the higher-growth Talent Solutions and Modis segments. We also commit to lifting the EBITA margin over time, moving from a historical range of 2.5% to 5% to 3% to 6%. This will be driven by continued cost savings and productivity, augmented by a mix shift towards the higher-margin part of the portfolio. And we will continue to generate strong cash flow. This provides capacity to invest to grow our market share as well as provide attractive returns to our shareholders. Coming now to the concluding messages. We continue to successfully navigate the COVID crisis during this fourth quarter. The revenue trend improved, with sales down 5% in the quarter and down 2% in December. We are performing ahead of the market recovery in many markets. We are successfully pivoting towards growth areas whilst also supporting more challenged sectors, helping economies to adapt to the new normal. Meanwhile, our profitability is resilient, thanks to ongoing progress on gross margin and agile cost management. Our strong balance sheet provides capacity to fund both strategic and working capital investments and capital return to shareholders in the form of the dividend and share buyback. Throughout the crisis, we have remained strategically focused. The GrowTogether program was successfully concluded in 2020 and was within touching distance of the original benefits target of EUR 250 million despite lower business activity. With Future@Work, we will further accelerate the transformation and digitalization of the group. And we have to continue to innovate. I'm excited by what we are doing in the ventures with Vettery, Hired and Adia to disrupt the permanent and flexible placement markets. And I'm just as excited about how they act as an innovation factory, originating scalable innovations that flow to the core business through our digital products team. Finally, before we open line for the questions, I would like to give a heartfelt thanks to our employees and associates for their continued hard work and commitment and also to our clients for their ongoing trust. With this, I candidly hand over to the operator for the Q&A.

[Operator]

[Operator Instructions] The first question is from Andy Grobler from Credit Suisse.

[Andrew Charles Grobler, Analyst]

Just -- I've got lots but just a couple, if I may. Logistics and e-commerce were clearly very strong through Q4 and the second half. Could you give some details on the proportion of revenues from those areas and the growth rates through Q4 and 2020 more broadly? And also your opinion on the sustainability of that demand through 2021 as markets open. And then secondly, in terms of cost, you talked about the EUR 240 million from GrowTogether. That would have been partly offset by digital investments. Can you tell us what it was on a net basis? And also how much of that is going to annualize into 2021?

[Alain Dehaze, Member of Executive Committee & CEO]

Very good. Thank you for your questions. I would like to elaborate a little bit perhaps broader than just the logistics and e. I think we have done indeed a very good job of devoting to where the growth is, and it is clear that the growth was among orders in e-commerce, in logistics and in health care, especially in France. Now when we look more specifically at transport and logistics, it is about 10% of our group sales. And the growth was 40% year-on-year in Q4. And we expect, let's say, this state of activity, I think, to be sustainable as a volume regarding the future because you see a shift from consumer behavior moving towards more and more online shopping. Just to give you 2 figures. If you look today at the e-commerce penetration in Europe, it is about 30%. If you look at the e-commerce penetration in U.K., it is about 45%. So you see that there is really a trend towards more e-commerce. We also know from our customers and especially the global one, that they will continue to expand their geographical presence in the various territories they are in today, also penetrating new geographies and this means for us a great growth or a great pocket of growth going forward.

[Coram Williams, Member of Executive Committee & CFO]

And picking up the question on GrowTogether. I think it's -- the delivery of the EUR 240 million is a real achievement, actually, given the environment in which we're operating. We've got very close to the original target that was set in 2017 despite significantly lower volumes as a result of the crisis. So I think it's clear that the team did a really good job of finding new initiatives and plugging the holes, if you like, that resulted from the lower volumes in the crisis. Not all of that has dropped through to the bottom line. There are a couple of reasons for that. Firstly, and probably the biggest driver, is that the revenues were significantly lower than we anticipated at the start of the cycle when we set the target. And clearly, a lot of that is about the COVID crisis in 2020 but we also saw economies turn down prior to that. Secondly, there were some pressures in specific countries that we've been dealing with. Germany, where, as we know, the market has gone through some fairly significant structural shifts, which we and the rest of the industry have had to respond to, and also the U.S., where performance has been challenging. And third, we rightly made some strategic decisions to invest in digital and the ventures, which were funded partly by the benefits of GrowTogether. Having said all of that, I think it's pretty clear, given that we've delivered a full year margin of 3.6% in an unprecedented year, that some of the benefits have dropped through to the bottom line. And we'll continue to support the bottom line going forward. And it's one of the reasons why we believe that, as part of the Future@Work strategic cycle, we're able to lift the corridor not just in the trough, but at the peak.

[Andrew Charles Grobler, Analyst]

And then can I just -- 2 follow-ups? One, a bit of a silly question but you talked about transport and logistics as 10% of sales. Was that at the end of the period or the beginning of the period, just so we know? And secondly, just on the savings. You mentioned some of it fell through to the bottom line. How much of that is kind of in the bank for -- to support profitability in 2021, just as the initiatives annualize?

[Coram Williams, Member of Executive Committee & CFO]

So I think the best way to think about the percentages that Alain mentioned is that it's through the quarter. That's the way we look at that. And in terms of the savings, I'm not going to get into the specifics of what was absorbed in the 3 dynamics that I described and what flows through to the bottom line. But I can think you can see, we are significantly above the trough in the previous crisis compared to where we are now. And that gives you a sense of obviously some of the benefits that have dropped through.

[Operator]

The next question is from Sylvia Barker from JPMorgan.

[Sylvia Pavlova Barker, Analyst]

Two questions, please. Maybe firstly on the -- just following up on the logistics and just that U.K. generalist growth of 32%. Is that a large logistics contract that you've won and you will continue to kind of benefit from this year? Or is there something else? Then secondly, the 40 basis points of gross profit held from the accruals. Could you just help us understand would you then unwind over the next few quarters? Or what is the exact impact? And is that basically EUR 20 million on gross profit in EBITA? And then finally, you talked about Hired and combining that with Vettery, but it looks like you've already impaired Hired this quarter. So could you just talk about why you have to impair it? And what are the initiatives exactly that you mentioned around AI marketplaces?

[Alain Dehaze, Member of Executive Committee & CEO]

Okay. Thank you for your question, Sylvia. Regarding logistics or regarding the results of U.K., you are perfectly right. It is -- you know the state of our industry in the U.K. and we have made a clear difference, thanks to the logistics contracts we have over there and where we have gained a significant market position, by the way, also thanks to some local competitors who had, in this COVID, difficulty to assure their services, which also means that when you are a strong capitalized company, globally present, you have also a competitive advantage. And you see exactly in the U.K., the benefit of it.

[Coram Williams, Member of Executive Committee & CFO]

I'll take the other 2 questions. On your first one, around the 40 basis point benefit. Let me just explain where that's come from. That is employment support schemes in North America, U.K. & Ireland General Staffing. We recognized the full year benefit of those support schemes, all in the last quarter. So you have a disproportionate impact in Q4 of 40 basis points. Over the full year, it's around 10 basis points. Now the reason we've called it out is that this is clearly an exception. So we're very transparent around the impact of employment support schemes on our SG&A, and that's about EUR 50 million for the full year.But on the cost of goods sold, as I mentioned in the script, the majority of them are simply straight pass-throughs between government and associates, and we're acting as the conduit. In this case, it's slightly different because it's not a full pass-through due to the nature of the scheme. And therefore, we've highlighted it. It is a one-off, though, in Q4. And obviously, I don't know what is likely to happen in 2021 around employment support. But if we see something similar, then obviously we would call it out. But it is a one-off impact in Q4. And then on your third question, the impairment, the modest impairment that's gone through was relating to software in Vettery. The reason for this, we acquired Hired and there are really 2 aspects of Hired that make it attractive. Firstly, it has a strong technology platform, which we are migrating our Vettery business onto, and it has strong customer lists. And therefore, we took that small impairment to reflect the write-down of the Vettery software on our books.

[Operator]

The next question is from Paul Sullivan from Barclays.

[Paul Daniel Alexander Sullivan, Director & Analyst]

Yes. Just a few for me. Firstly, I mean, you seem to be closing the gap to your peers. I mean how confident are you that you can sustain that momentum as we go through this year? And do you think there's scope for you to grow ahead of your peer group, mix permitting, and particularly in those troubled areas, thinking about the U.S. in particular? Second, usual question about gross margin moving parts in the first quarter. And I don't know if you can provide any -- just a little bit more color on SG&A organic guidance for Q1, that would be helpful. And then finally, on the buyback, I mean what would be the trigger for you to accelerate the timing? I mean is it just going to be organic revenue growth or should we just -- should we see that timing of sort of set in stone? Because it does feel quite cautious given your leverage. Or should we be braced for a sort of a bigger reversal in working capital? Just as it surprised on the way up, will it surprise on the -- as outflows as you return to growth?

[Alain Dehaze, Member of Executive Committee & CEO]

Thank you, Paul. I will start on your closing the gap question. Indeed, I would say that we are pleased by the performance of the fourth quarter. We are pleased for different reasons because, first, we have seen that the teams have leveraged sometimes also the data science we have in order to really focus our activities towards market with gross pocket. And you have heard, for example, the figures I've given to you regarding e-commerce, logistics, health care. And we will continue to do this. And yes, we want to lead the pack not only on the bottom line with the profitability. And you have seen, we have, again, a leading profitability in the quarter and in the year, but we want also to close the gap.I would say we have done a great job towards many of the peers during the year. We have still a little bit work to do, and we will continue. But be reassured that we want to do that in a structurally profitable way. So that's why we are very structured. We keep our pricing discipline. You have seen, again, our gross margin increasing because we want to leverage pricing discipline or mix of activities and really focus on the pocket of growth with also some structural opportunities going forward. We didn't talk about the new economy, but we see that this platform economy is very positive for us because we are the best partner for human resources management. We didn't speak about the gig economy, but we see also midterm, a great opportunity for us to expand in this gig economy. And finally, upscaling and rescaling, in which we have strong assets, there is a really big opportunity for us to upskill and reskill the employees of our customers going forward.

[Coram Williams, Member of Executive Committee & CFO]

Let me pick up your other 2 questions, Paul. So starting with gross margin. I mean you can see in the bridge for Q4 that the moving parts in gross margin continue to be volatile, which makes it difficult to give firm guidance. But I will try and give you just a couple of pointers, which I think will help you work through it. On M&A, as I mentioned in the script, the Soliant impact drops out. So that will be a broadly neutral impact, so 0 basis points. I think secondly, FX is likely to be similar to Q4. So a modest drag of perhaps 10 basis points. And thirdly, the negative perm impact, as we saw in Q4, was slightly outweighed the positive career transition impact. And I think it's probably reasonable to assume a similar dynamic in Q1. And then fourth, I would expect temp to continue to be positive based on the pricing discipline that both Alain and I have referred to but not as much as in Q4 because you have to remember that North American, U.K. & Ireland employment support impact. So hopefully, that gives you a sense of what the moving parts might be. On SG&A, I think the most helpful way to continue to think about it is the rule of thumb by which we've been managing the business. So a 50% recovery ratio when the business is declining and a 50% incremental conversion ratio when we are back to growth. In Q1, it's likely to be around flat in terms of growth, which makes the recovery ratio quite sensitive to small changes. And therefore, I can't give you a precise guide on it. But I think if you use that, those rules of thumb in terms of the recovery ratio of 50% in the down and the conversion ratio of 50% in the up, that should work well. And in terms of the SG&A growth year-on-year, as activity comes back, productivity will clearly drive some of the incremental conversion ratio in the early phase of the recovery, but headcount will also need to increase. And remember that the impact of government support schemes will only be a couple of million in Q1. And I should clarify, I'm not giving guidance for the Q1 revenues, but I'm just highlighting that it's likely to be around that area. And finally, on the buyback, I think it's really important that we recognize that we have a capital allocation policy that we reiterated at the Capital Markets Day where we return cash to shareholders where appropriate. We've got a strong balance sheet, net debt-to-EBITDA of 0.4x, a significant cash reserves and we think it is appropriate for us to return or resume the buyback, which is ultimately about returning the proceeds from the disposal of Soliant. But in the current environment, we do have to balance the needs of all of our stakeholders. There continues to be some uncertainty in terms of the economic environment. And as you mentioned, we would expect there to be a working capital requirement as we come back to growth, not disproportionate, but just the normal kind of working capital that we require to fund the growth. And on that basis, we are being cautious and starting slowly. I think if the situation changed, either better or worse, in terms of the outlook for working capital requirements, then clearly, we would review our approach. But at the moment, we think it's right to start in a cautious way.

[Operator]

The next question is from Anvesh Agrawal from Morgan Stanley.

[Anvesh Agrawal, Equity Analyst]

A couple of question and just one clarification. So first, I mean, you have talked about e-commerce and the tailwinds. But going forward, if you think about, is that something that can -- that will just sort of offset the pressure that you're likely to see in the traditional retail business? Or that is something that you see as an add-on to your growth going forward? Because if more e-commerce, means there is obviously pressure in the traditional sectors. And then in this statement, you have sort of reversed the provision that you had taken in Germany of EUR 23 million. So should we assume that you're kind of pretty close to fixing the issues in German business and the cost-saving plan or the transformation plan is sort of running better than what you originally thought? And then just to clarify what you just said, Coram, like when you said the growth is likely to be flat, do you mean that on the gross profit or at the revenue level?

[Alain Dehaze, Member of Executive Committee & CEO]

Good. Starting with your question regarding e-commerce. I think there are 2 structural trends with e-commerce, which are positive for us. First of all is the market penetration of the solution. And I have given 2 figures. Europe, 30% market penetration, U.K. 45%. So it means just at the constant scope, there is at least 50% growth potential in Europe outside U.K. So that's the first perspective. And we expect this growth to continue. We see our customers expanding geographically in the different countries. They are continuing to open a distribution center. We see also new solution coming in, new platform solution coming in. And each time, this solution are outsourcing their human resource management to companies like ours. So this is very positive. Second, it is clear that if we look at our market share in this e-commerce solution versus our market share in traditional retail, we have a much higher penetration rate in e-commerce solutions than we have in traditional retail. So this is also, let's say, a double structural impact we anticipate going forward.

[Coram Williams, Member of Executive Committee & CFO]

Let me pick up on Germany and also my comment on the gross margin. In terms of Germany, in Q4, we saw some good signs of progress in terms of the turnaround of that business. The rate of revenue decline improved to 10%, which we believe is ahead of the market. And that was partially because we captured some growth in logistics. But also, as I mentioned in my script, the manufacturing shutdowns which we thought might come in December were shorter than we'd anticipated. The gross margin trend was also positive, and that's partly about higher bench utilization, but also the way in which we're managing pricing and profitability of our largest clients. And SG&A was down 10% organically, linked to the restructuring actions. So I think you can see in terms of better-than-market performance, good gross margin progression and seeing -- starting to see the benefits of the restructuring in the SG&A that there has been progress made in Germany. On the restructuring itself, the reason those costs came in slightly lower than we'd anticipated in Q3 was simply because we've made better progress at a lower cost than we expected on those one-offs. And that's partly greater use of natural turnover, but also achieving similar benefits at lower cost on some of our other restructuring actions. So I think we're pleased with progress. But let's be clear, there is still more to do. It is early stages of the recovery in Germany but positive initial signs. In terms of my comments on gross margin, I want to be absolutely clear. I'm not giving a guide on either gross margin or revenue. The point I'm making is that when the revenue line is close to flat, it distorts the recovery ratio. And therefore, for me to give you a firm percentage on recovery ratio is difficult in Q1 because, as you can see, in January, we're at minus 2%. And in February, we're at minus 2%. So it's just I want to highlight the distortions that come as a result of the calculation. That's all.

[Anvesh Agrawal, Equity Analyst]

Okay. And just to be clear on that, when you say for the -- like not just Q1 but overall 50% conversion ratio. Within that, you are baking in all the planned savings and the cost movements that you have in 2021?

[Coram Williams, Member of Executive Committee & CFO]

Yes. So the rule of thumb, as I've said, is 50% in the down. So that's what we recover. And in early stages of the recovery, the conversion ratio of the incremental gross profit is around 50%. And that's the way we're managing the business. And I think you can see we delivered a 47% recovery ratio in the full year, and that includes Q1 when the crisis struck right at the end, and therefore, it was difficult for us to respond quickly. So I think we -- you can take some confidence that the way that we managed in the down is the way that we will manage in the up.

[Operator]

Next question is from Alain Oberhuber from Stifel.

[Alain-Sebastian Oberhuber]

I have 3 questions. The first is regarding permanent placement. I would like to get a little bit the sensitivity, how you see it at the moment with the different structures here, more in the e-commerce. If we see a gradual improvement now of the economy, when do you think could we see, again, the perm being positive? Will that be clearly by the end of the year or already in Q3? The second question is regarding your Future@Work. Could you give us a little bit more color regarding the divestments you have announced in Denmark, Slovakia and Croatia? Are there more to come at the moment? And what are the KPIs do you have for the portfolio? Which of the businesses may leave the portfolio regarding KPIs? And the third question is, just to come back to the DSO, what could we expect, given the recent recovery in the business? Obviously, you mentioned that you expect working capital to go up. Would be a fair assumption for the DSO year-over-year to be up again by 3 days versus Q4, i.e., flat year-over-year?

[Alain Dehaze, Member of Executive Committee & CEO]

Okay. Good. As you know, you have been many years in this industry, Alain, like me. Perm tend to be always -- to lag by 6 to 9 months the recovery in the temporary staffing. And when you look at our performance this quarter, you'll see that we have not started -- we absolutely not started the recovery in the perm. And you need 2 things to start the recovery. First, you need visibility and trust of the employer, visibility regarding the order book, the level of activity going on and trust in the future. And at this stage, there is such a level of uncertainty in the various markets that companies are not yet at the point of starting to hire again. This is on the side of the employer. On the side of the candidate, as long as there is no clarity and if you have a job, especially if you have a good job and you are in secure environment, you don't want to jump into uncertainty. So it's also very difficult to move candidates from companies to the others. So that's -- I would say that, yes, it's here -- this situation is here to stay a certain period of time. And as soon as the staffing recovery will be there, yes, we anticipate 6 to 9 months later to see also the perm starting to recover too.

[Coram Williams, Member of Executive Committee & CFO]

And let me pick up on your second and your third question. In terms of the majority exits from Denmark, Slovakia and Croatia, this is, as you rightly highlight, part of our Future@Work strategy. It's about making sure that we are focused in the markets and the businesses where we believe we can deploy the best returns on our capital. And so in terms of the KPIs that we look at, obviously profitability is a key piece but also the return on invested capital. I should highlight these are small businesses, though. In 2019, i.e., precrisis, the combined sales was slightly less than EUR 100 million, and they just about broke even. So this is not a material change to our financials, but it's about making sure that we're really focusing where we need to in order to make the most of the structural growth opportunities that we see in our businesses. In terms of DSO, I think we're very pleased, as you would expect, with our performance, not just in Q4, but through the year. On a full year basis, we are stronger than 2019, which I think, given the environment in which we're operating, is a real achievement. We will continue to be disciplined and focused on cash collection. But for obvious reasons, I'm not going to put a number or give guidance on it, but I think you can be assured that we will continue to remain disciplined around DSO.

[Operator]

The next question is from Matthew Lloyd from HSBC.

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

You're very popular this morning. I pressed the star 1 before the conference started, and I'm this low in the queue. So you must be...

[Alain Dehaze, Member of Executive Committee & CEO]

Thank you, Matthew.

[Coram Williams, Member of Executive Committee & CFO]

We promise we're not deprioritizing you, Matthew. We're taking it in order.

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

I'm sure that's true, though, I should probably sulk anyway. Silliness aside, a couple of questions. Everyone is sort of obviously trying to focus on the 50% recovery ratio this year. How should we think about that if this year recovers and next year? So I suppose where I'm going is what's the journey for the sort of between 3% and 6%? Is 6% attainable or 5% attainable in '22, '23 with a decent following wind? Or is that something we should think about as the last year of the cycle as some sort of mythical creature?

[Coram Williams, Member of Executive Committee & CFO]

Let me take that. I think we're giving you a sense of how we manage the business in the current environment. In other words, when it's declining, you have a recovery ratio of 50%. And obviously, in the early stages of a recovery, we have a conversion ratio of 50%. Although at the end of the day, we do have to put cost back in to match the activity. I think longer term, in terms of the margin target and the upper end of the range, in the short term, which is why we give you the rules of thumb, it's about positioning ourselves effectively for the recovery, whilst maintaining margin leadership. Longer term, we get to the upper end of the range obviously partly through the cyclical recovery that we're anticipating; but also by driving the digitization of Adecco, which in turn helps us gain share; and investing in the structural growth opportunities in Talent Solutions and Modis. And so in the midterm, we're clear we can get to the top end of that range. But I think you'll understand, given the uncertainty of the economic environment, that I won't put a time frame on that.

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

Okay. As expected. A couple of just more sort of your opinion kind of questions, really. A number of your competitors are talking about there being less competition from smaller players. I know in the U.K., Companies House suggests that 6% of temp firms have gone bust. Now that might be in part IR35. But other firms are saying perhaps there's some -- bigger players are doing better. I wondered whether you felt that, that was true across other markets. And then secondly, there's a number of surveys out suggesting that people are prepared to hire staff from a much wider catchment area given the probability of work from home being at least more acceptable. Have you seen any trend in that? Probably Modis, I would imagine, is where you'd see it, if at all.

[Alain Dehaze, Member of Executive Committee & CEO]

Yes. Coming to your first question regarding small player, market share and so on. Again, you have seen our performance in that our performance was quite good, ahead of the market in many countries, France, Italy, Spain, U.K. and it relates to 2 things. First of all, having the knowledge, and it is also about data, to really identify very fast the pockets of growth and it means technology, investment in technology, that makes a difference. And second, to focus on sectors and customers with -- who will be, let's say, the winner who will come -- or which will come stronger after the crisis. And combining these 2, technology and focus on these customers, we are convinced that, thanks to our investment in tech, thanks to our digital solution, we have the ability to sustainably grow our market share. Now on the point regarding work from home. Again, if my memory serve me well, we had in the Q2, we had 30,000 people, internal people working from home. And we had 40,000 associates, partly from Modis and from some other brands, but largely from Modis working in a remote way. So there is a trend. Now I think it's a little bit too early to really understand the impact of -- at this stage, but yes, intuitively, there is a logic to it. I think we will continue to see that. And for sure, our investment we have done and will do will allow us to really work -- our people and our associates to work from everywhere. I think that's very important going forward, to be able to work from everywhere.

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

We're going a little bit over, so we'll just take one more question, please, from the lines.

[Operator]

The next question is from Suhasini Varanasi from Goldman Sachs.

[Suhasini Varanasi, Equity Analyst]

Just one from me, please. You gave very interesting color on the growth potential that you see in areas like e-commerce, logistics, health care, et cetera. Can you maybe comment on whether you're considering further exits from areas that have less growth potential medium term just to improve the revenue trends versus some of your peers and maybe similar to what you have done in 2019, for example? Can you maybe comment on that?

[Alain Dehaze, Member of Executive Committee & CEO]

So yes, you have seen that, yes, we are managing in a dynamic and strategic way our portfolio. And we -- when we speak about portfolio, it takes the different dimension. You have the geographic dimension, and you have heard what Coram has said regarding some of the geographies, which for us was not really, let's say, strategic, and we could find a solution to serve our international customers without the obligation to be, ourselves, present. And so we are -- we will continue to analyze where it makes sense for us to be directly present or to have partners with which we can work. That's on the geographic aspect. Again, industries, again, you have seen, we have put -- we have pivoted towards the sectors with growth pocket. And thanks also to the data science, we will continue to really identify, focus the industries and the customers where we need to be active to really make sure we leverage the growth potential. And eventually also have less efforts, activities in some others. The good thing is that the sectors which are really structurally under pressure because of the COVID and because of the tech acceleration, we are not really exposed. When you take hotel industry, hospitality, this is a very, very limited activity of us. And then the third is the type of services. And you have seen the move we have done with upskilling and reskilling. This is an example of service extension, which is -- which demonstrates, let's say, our strategic insight, because we think it is important going forward strategically to offer that kind of service of our customers. So we are looking at our portfolio in these 3 dimensions in a dynamic and strategic way. And we take the conclusion we -- or an action we think we need to do. Thank you for your question, yes. And I'm looking at the time, and I think it is now the right moment to close this call. And I would like to give you just a short closing statement. And first of all, to thank everyone for having joined this call and for your questions. You have seen that we have delivered an exceptionally strong performance in 2020 despite the unprecedented circumstances. You have seen that we have successfully, and we are successfully leveraging growth opportunities where they exist, supporting individuals back to work and our clients to adapt to the still rapidly changing environment. Meanwhile, the strength and balance of our portfolio as well as our price discipline and agile cost management has allowed us to deliver resilient margin in the Q4 and for the full year 2020.Indeed, last year has proven the strength of our business model and that we are able to deliver resilient earnings and cash flow performance even in a challenging market environment. And that allowed us to maintain our dividend commitment last year, but again in 2021, and it also supports the resumption of the share buyback. Now looking ahead, we are prepared for the recovery to be bumpy, but we will continue to manage the short-term with agility while maintaining our strategic focus, continuing to invest in our strategic priorities to ensure that the group emerge stronger from the crisis. Talk to you soon, and thank you.

[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.