Adecco Group AG

SIX:ADEN

Earnings Call Transcript 2022-Q4

[Benita Barretto, Head of Investor Relations]

Thank you, and good morning. Thank you for joining the group's conference call today. I'm Benita Barretto, the group's Head of Investor Relations. And with me, we have the Adecco Group CEO, Denis Machuel; and CFO, Coram Williams.

Before we begin, we want to draw your attention to the disclaimer on Slide 2. Today's presentation will reference GAAP and non-GAAP financial results and operating metrics. This conference call will include forward-looking statements. These statements are based on assumptions as of today and are therefore subject to risks and uncertainties.

Let me now hand over to Denis and the results report.

[Denis Machuel, Chief Executive Officer]

Thank you, Benita, and a warm welcome to all of you who have joined today's call. Let's turn to Slide 3, which provides highlights from the quarter. Our simplified, execute and grow agenda was announced in November last year. It will accelerate strategic implementation and improve the operational and financial performance of the group. We are encouraged by the organization's responsiveness to the plan and can already see positive momentum from recent initiatives. Group productivity improved by 2% quarter-on-quarter, and we are very confident we will achieve the planned reduction of €150 million in G&A costs.

The fourth quarter saw the group clearly winning market share. The Adecco business achieved relative growth leadership of 550 basis points in Q4, delivering 1,500 basis points improvement on a full year basis. Customer satisfaction has risen. Our clients and our candidates Net Promoter Scores were up 7 and 1 points, respectively.

We thank our colleagues in Adecco for their hard work and dedication that has driven these significant achievements. In LHH, career transition shown it was the dominant industry player in this quarter, winning multiple projects from global tech players in the U.S., mainly on an exclusive basis. And ESRA, our digital coaching business grew revenues by an excellent 40%.

Finally, in [indiscernible], the ACA integration is firmly on track with management realizing €25 million of synergies in 2022. The ACA transaction has delivered EBITA margin and mid-single-digit EPS accretion in year 1 meeting management's financial targets for this important transaction. We will return to some of these highlights in more detail later.

Let's move to Slide 4, which provides a snapshot of Q4's financial performance. Revenues were €6.2 billion, up 13% in reported terms and up 5% year-on-year on an organic trading day adjusted basis. Gross profit of €1.3 billion was 2% higher organically year-on-year. Gross margin was very strong at 21%, 30 basis points higher in reported terms year-on-year.

EBITA, excluding one-offs, was €228 million with a robust margin of 3.7%. Adjusted EPS was $0.76, down 38% year-on-year, reflecting mainly lower operating income. Pro forma net debt over EBITDA ended the period at 2.5x. This leverage stems from the acquisition of AKKA and is in line with management expectations. And the cash conversion ratio was 70%, a healthy result in an investment year.

Moving to Slide 5 and the full year. Revenues were €23.6 billion, up 13% in reported terms and up 5% year-on-year on an organic 20 days adjusted basis. Gross profits of €5 billion were 6% higher organically. Gross margin for the year was also very strong at 21%. 60 basis higher in reported terms year-on-year.

EBITA, excluding one-offs, was €833 million with a robust EBITDA margin of 3.5%. Adjusted EPS was €3.28, down 22% year-on-year, reflecting mainly lower operating income. Operating free cash flow was solid at €543 million. Considering the group's performance, its solid cash position and confidence in the company's prospects, the Board has proposed a dividend per share of CHF 2.5, stable year-on-year and in line with our stated policy.

Coram, over to you for a more detailed review of the Q4 results.

[Coram Williams, Chief Financial Officer]

Thank you, Denis, and good morning to everyone on the call. The demand for talent services was healthy this quarter, and the group was well positioned to capitalize on the market's many substantial growth opportunities. This said, talent markets were dynamic with a wide variation in momentum by region and service line. Flex remained robust, while demand in perm and outplacement is normalizing following post-pandemic extremes.

Let me give you the context within each of the GBUs, beginning with Adecco on Slide 6. Adecco's revenues reached €4.7 billion, a strong increase of 6% year-on-year on an organic trading day adjusted basis. Flexible placement rose 2%, perm, 24% and outsourcing 22%. The business delivered clear market share gain and enjoyed strong top line momentum, with revenues accelerating in December.

The gross margin was healthy, supported by favorable solutions mix and dynamic pricing. The robust EBITA margin of 3.5% was 170 basis points lower year-on-year, mainly reflecting lower benefit from special items that flattered the prior year period.

Specifically, these items are a rebate for trade association fees in Germany, housing fees in France and the impact of COVID support schemes, particularly in the Netherlands and Canada. In addition, the margin was weighed by growth investment and lower contribution from Adecco U.S. Management is focused on growing Adecco's market share while improving productivity.

Moving to Slide 7, which shows Adecco at the segment level. As we have just covered the key drivers of the healthy gross margin and robust EBITA margin this quarter, our segment commentary will focus on revenue developments. France, DACH, APAC and LatAm, all outperformed clearly gaining market share.

In France, revenues grew 6%, consistently ahead of the market, boosted by excellent performance in QAPA and Onsite. Manufacturing, autos and health care sectors were strong, while logistics was soft. In Northern Europe, revenues were up 3%. The U.K. and Ireland rose 3% year-on-year, driven by finance and public services growth. Benelux was also 3% higher, while the Nordics rose 2%. The DAC region's performance was very strong, with revenues up 19%.

German growth was an excellent 24% with strength across the autos, logistics and manufacturing sectors. That EBITA margin was soft in the fourth quarter, due primarily to the absence of the trade association rebate that I mentioned earlier as well as a more modest impact from higher sickness rates and the timing of incentive accruals.

The DACH regions H2 margin of 3.1% is more illustrative of the underlying health of this business. Revenues in Southern Europe and EMENA rose 3%. In Italy, revenues were 2% higher on a tough comparison period. In Iberia, revenues rose 5%, and EMENA revenues rose 7%. Manufacturing, food and beverages and consulting were healthy, while logistics was soft.

In the Americas, revenues decreased by 3% year-on-year. Latin America revenues were 21% higher, led by Argentina and Mexico. In North America, revenues were 13% lower. The Adecco U.S. business faced headwinds this quarter from a shorter duration and lower volume peak season.

Encouragingly, versus the market, relative performance improved once more this Q4 and operational metrics have strengthened. Among these, the business is delivering improved sales intensity and fill rates and less voluntary turnover.

Turning to APAC. Revenues were up 14%. Japan, Asia and India recorded tremendous revenue growth, 20% in Japan and 19% in Asia and India. End market growth was broad-based, led by the tech and retail industry. In Australia and New Zealand, revenues were 11% lower, reflecting a tough comparison period.

Let's turn now to Slide 8 and LHH. Revenues in LHH grew 1% year-on-year. On a segment basis, Recruitment Solutions revenues decreased 7% year-on-year, with fees from perm 2% lower on a tough comparison period. The segment faced headwinds in the U.S. with client and candidate confidence weakening. While recruitment Solutions gross profit was 7% lower, excluding the U.S., gross profit was up 4%.

Moving to the countercyclical career transition unit. Revenues were 19% higher. The business delivered substantial market share gain in the U.S., securing multiple significant wins from the tech sector. Learning and Development revenues were flat. ESRA grew revenues by 40%. And Pontoon and Other delivered 8% growth, led by MSP and RPO services, which combined rose 14%.

Hyatt's revenues were tempered by retrenchment in the U.S. tech sector. LHH's EBITA margin of 5.6% was 70 basis points lower year-on-year. The positive impact of Korea transition was outweighed by lower contribution in recruitment solutions and investment to scale ESRA as it combines with LHH coaching.

On a sequential basis, the EBITA margin was 190 basis points higher, benefiting from career transition and cost actions taken in the quarter. Management is focused on continued rightsizing and productivity improvement in recruitment solutions.

Turning to Codes on Slide 9. The business delivered another strong quarter, with revenues up 6% on an organic trading day adjusted basis. By region, Modis APAC rose 9%, driven by an expansion in engineers and very high utilization levels.

Modis Americas grew 7%, with consulting performing notably well. Given a tough comparison period and a slower staffing market, we consider this a strong result. Modis EMEA grew 3%.

Growth in France and Germany was solid. That said, the German business is being repositioned to improve its growth trajectory and margin in a market that is impacted by talent scarcity and where major customers are going through their own significant transformations.

Consequently, the unit recorded approximately €29 million of onetime restructuring charges below the line. As part of its improvement plan, management would optimize Germany's organizational structure, adapting office locations and centers of excellence.

In addition, they're firmly committed to attracting and upskilling talent and developing offshore resources. [indiscernible] contributed €437 million of revenues in the period with growth led by data response and France. On a stand-alone basis, AKKA revenues grew in line with Modis and its margin was above 2019 levels. [indiscernible] EBITA margin was 7.1%, up 10 basis points year-on-year, benefiting from strong synergy delivery and high utilization rates.

Let's turn to Slide 10. The AKKA integration has progressed well. In 2022, approximately €25 million of synergies were realized, mainly from reduced overheads such as real estate and including over €5 million of EBITDA synergies from project wins. At year-end, the total synergy run rate in EBITDA terms is approximately €45 million compared to targeted synergies of €50 million to €55 million for 2023.

To date, Akkodis has secured revenue synergies with a total contract value of approximately €90 million. Revenue synergies are projects secured mainly from cross-selling initiatives between AKKA and Modis. We have a few recent wins highlighted on this slide, and they all benefit from the combination of engineering and digital expertise that codes offers.

They demonstrate the strategic logic of the transaction and underpin our confidence in the business' ability to deliver on its €200 million revenue synergy target. Finally, -- from the group perspective, AKKA has delivered on year 1 financial targets with EBITA margin and mid-single-digit EPS accretion.

Let's turn to Slide 11. Here, we review the drivers of the group's gross margin and EBITA on a year-on-year basis, starting with Q4's gross margin. Currency translation effects had a net positive impact of 30 basis points, and M&A activities had a positive effect of 20 basis points.

The lower contribution from the special items I outlined previously had a negative impact of 50 basis points. Flexible placement, including the impact of special items was flat year-on-year. The permanent placement had a 10 basis point positive impact and career transition was 20 basis points positive.

In total, the gross margin was down 20 basis points on an organic basis and up 30 basis points on a reported basis. At 21%, it is a strong result. Regarding EBITA, the 100 basis point year-on-year differential was driven by lower benefit from the special items outlined previously, which flattered the prior year period by approximately 60 basis points.

Investment in growth, mainly in head count, which weighed by around 30 basis points, a moderated contribution from LHH recruitment solutions and Adecco U.S. combined of approximately 50 basis points. Going the other way, AKKA was approximately 40 basis points margin accretive in the quarter and the margin benefited from around 20 basis points from LHH career transition.

Moving to Slide 12. The group's 12-month cash flow conversion ratio was 70%, up from 46% in Q3, a healthy result during a period of increased growth investment and one-off integration expenses. DSO was 53 days in the full year from 51 days in the prior year, reflecting a shift in sector mix, primarily the decline in logistics and the impact of AKKA's cyber incident. Cash flow from operating activities was €459 million in the quarter.

In addition to growth investment, integration and other one-off costs impacted the group's full year cash flow. The bottom left chart shows that on a like-for-like basis, cash flow from operations was around €675 million in 2022, which is broadly in line with both 2020 and 2021 results.

Last but not least, our financial structure is sound. The net debt-to-EBITDA ratio was 2.5x at quarter end, in line with management expectations. The group is firmly committed to deleveraging going forward.

Let's turn to Slide 13 and the group's outlook. As the left-hand chart shows, in revenue terms, nearly 50% of the group exited Q4 growing above 6% year-on-year. While volumes in January softened, the market for talent services remains dynamic.

The group is well positioned to capture market share opportunities in a rapid and agile manner. In Q1, the group expects both gross margin and SG&A expenses, excluding one-offs, to be broadly in line with Q4 '22 levels in a seasonally lower margin quarter. And with that, I'll hand back to Denis.

[Denis Machuel, Chief Executive Officer]

Thank you, Coram. The group is progressing well with its future at work reloaded strategy to improve performance with a plan centered on 3 levels: simplifying, execute and grow. These levers address several areas that have to date hindered performance across the group with a series of critical actions that will enable faster and better delivery of the future network strategy.

First, simplify. The group will improve its organizational effectiveness by simplifying the way it operates. Second, execute. The group will empower decision-making by those closest to customers at the GBU and local level to improve execution.

And finally, growth, the group will prioritize ways to grow market share, pivoting from an EBITA percentage focus to a balanced revenue and EBITA growth focus.

Let's move to Slide 15. And as just said, -- the group is driving positive momentum by implementing the Simplify, Execute and grow agenda. Let me focus on 3 aspects of our action plan. First, the group's global sales organization has been restructured. 2/3 of resources are being moved to the local level to improve customer delivery.

Second, the group has appointed Ian Lee as President, geographic regions. This creates this newly created role ensures local perspectives are represented at the Executive Committee level. Third, the group is very confident in achieving its €150 million cost reduction target, with a task force established to support local, regional and GBU efforts to delayer and improve speed.

Next steps to be taken include adjusting the IT and digital function to make it significantly more efficient and ensuring the group's MSP's go-to-market model operates effectively across GBUs and Pontoon to boost growth. The Simplify execution grow agenda has clear KPIs, enabling the group to track progress and drive a strong execution mindset.

Slide 16 shows the performance of select indicators in the fourth quarter. First, incentives. The 2023 group plan has been set to drive improved financial performance. The planned KPIs for our teams have been cut in half to 4 revenues, margin and profitability and DSO.

For the Executive Committee, the weighting of financial KPIs has increased by 10 percentage points, while nonfinancial KPIs have been focused on improving gender parity and lowering voluntary turnover. And the 2023 plan was communicated before the start of 2023 rather than previously in mid-Q1.

Turning to customer satisfaction and efforts to improve client retention. The Net Promoter Scores in Adecco have risen. Specifically, the client NPS reached a record high of 37 percentage points, 7 points higher year-on-year, affirming a multiyear improvement trajectory.

Regarding the group's operating efficiency, the conversion ratio for the second half of 2022 was 100 basis points better than in the first half, and productivity improved by 2% quarter-on-quarter. So while further improvement is needed, the group has made some encouraging progress.

And let me conclude with Slide 17, looking ahead to 2023. We will prioritize growth and market share expansion in all GBUs. We will focus on profitable growth and improve productivity. We expect underperforming units to continuously improve, and we will accelerate momentum in digital.

We will also realize the targeted year 2 synergies from AKKA. The entire group is set to advance the Simplify, Execute and grow agenda firmly. This includes bringing into reality a simpler organizational structure, a relentless focus on performance with empowerment and accountability at the local level and the delivery of our first tranche of G&A cost savings. And we look forward to updating you on our progress as we go through the year.

Thank you for your attention, and let's now open the lines for Q&A.

[Benita Barretto, Head of Investor Relations]

Operator, we're ready for the first question, please.

[Operator]

We will now begin the question-and-answer session. [Operator Instructions] First question is from Andy Grobler from BNP Paribas.

[Andy Grobler, BNP Paribas]

Three questions for me, if I may. Firstly, just on working capital. There was quite a big inflow in Q4 from accounts payable and accrued expenses as well as other assets. Could you just talk through the moving parts there, please?

Secondly, and a bit short term. But in January, you said growth rates have slowed. Can you give a bit more granularity on what you mean by slowed? And also in that environment, why you're not looking to reduce some of your SG&A cost?

And then thirdly, in France, where growth was good, you called out QAPA's performing strongly. Again, could you give a bit more detail about what you -- how strong is QAPA? And is there a sense of a bit of a market shift within the French market towards tech-only solutions.

[Coram Williams, Chief Financial Officer]

Andy, its Coram. I think I'll pick up your first 2 questions. So on working capital and January, and then Denis will touch on France. So in terms of the cash collection, the working capital inflow in Q4, I think we touched on this in Q3 and said we were anticipating that it would be strong. It is typically a seasonally strong cash conversion towards the year -- towards the end of the year.

But we also obviously improved DSO sequentially, i.e., between Q3 and Q4. And if you remember, we also had a bit of a hangover from the impact in Akkodis of the cyber-attack in Q2 and Q3. So when you put all of that together, that's why we had a positive cash conversion, and it was what we were expecting. And it helps us, as you know, to drive good cash flow and therefore, continue to deliver.

On January, we had a strong exit rate for December, talked about 6%. January has softened, but -- and these are the important points, we are still growing modestly in terms of revenues, and we are taking share. And so from our perspective, we are well positioned to continue to do that, and we're therefore maintaining our levels of SG&A because the lion's share of that is selling expenses, which allows us to capitalize on the momentum that we've got.

As you know, longer term through the year and into 2024, we do have a plan to deliver G&A savings. But right now, we're focused on gaining share and driving productivity.

[Denis Machuel, Chief Executive Officer]

Yes. And with regards to – Andy, this is Denis here. So with regards to France, we – first, we are very happy with the growth in France at 6%. So it’s a good dynamic, much better than the market. QAPA contributed to that. Of course, we’re like pretty much in the same range as Q3. So we are like between 50% and 70%, so which is very satisfactory, and we see great momentum. And that offer of service really fits many clients.

Yes, there is an acceleration of tech platforms into this business. I wouldn’t say that it’s a full market shift. It’s – what we hear from clients is the need – the combination of 3 main aspects. Of course, the branch network that’s still quite active the on-site business, which has also delivered good growth and the combination with the full digital low-touch platform, great portal for clients and super easy to interact for associates.

So there’s definitely great momentum here. It’s not a universal offer because it cannot cover all the needs of the clients, but it’s very complementary to the rest of our channels. So we’re very pleased with what we’re seeing with QAPA and scaling up as fast as we can at the moment.

[Operator]

The next question is from Simona Sarli from Bank of America.

[Simona Sarli, Bank of America]

Yes. So first of all, a follow-up question on the very strong cash flow generation and the working capital inflow. If you could kindly comment on the use of factoring and how does it compare versus last year? That's the first point.

Second point is related to exceptional that as you mentioned, they have increased quite significantly in Q4. Could you please comment and provide a little bit more granularity on the main contributing factors to that? And how should we think about the next quarter and 2023.

Then third question on corporate costs. They were substantially lower in Q4. Is that sustainable -- and secondly, if that is purely related to the fact that as you were mentioning, you are reallocating capacity from holding levels to regional level?

[Coram Williams, Chief Financial Officer]

So Simona, its Coram. I'll pick up on each of those. So on the cash flow generation, as I mentioned in my answer to Andy, that the big driver of that was really the improvement in DSO quarter-on-quarter. It is a seasonally strong quarter for us in terms of cash. And obviously, we got an inflow as the reverse came through on the AKKA cyber-attack.

On factoring, it was stable. So no significant movement year-on-year. That factoring program, as we've talked about before, we think is effective. It's contained within the legacy AKKA business, and we think it's priced well. But we haven't increased the use of factoring, which I think is an important point.

In terms of the exceptional in Q4, it was GBP 73 million, just over $20 million of that related to integration expenses for AKKA and was part of the guidance that I think we'd given at the beginning of the year. We then had, as I mentioned in my script, GBP 29 million relating to Akkodis Germany. And I'll just pause on that for a minute because I think this is really important.

Akkodis Germany had a solid quarter. It's a well-positioned business, but that market has talent scarcity and it's also got a series of sectors which are going through quite a lot of change. And so what we're doing here is positioning this business from a good position so that we can really take advantage of the opportunities that we see in that market.

So we're reorganizing locations, centers of excellence. We're upskilling and reskilling people, and we are moving more work offshore. And that drove GBP29 million, and we think it will really power the German business forward. The remainder of the one-offs were really kind of small pieces here or there relating to real estate and a couple of other changes. There is no major charge in there for the GBP 150 million G&A savings plan. That is something that we are looking at going forward.

You've seen our guidance in terms of 2023 for the one-off costs, lower than we've seen in 2022. We've got about 30 left to come on the AKKA integration, and the majority of the rest of it is really about driving the G&A savings plan and will come later in the year. And the total of that we're guiding towards about GBP 100 million.

On corporate costs, they can be a bit lumpy quarter-on-quarter. So typically, IT charges come in at different points. There are some incentive accruals, et cetera. So you can't really extrapolate from a quarter what's going to happen. It's been running at about -- on an annual basis at about 0.8% of the group's sales. We would expect that to come down.

Part of our GBP 150 million G&A savings program is about looking at what gets done where. It's about removing duplication and delayering and it's really about driving G&A costs down across the group. So corporate within the GBUs and locally within the countries. So I would expect it to come down, but obviously that will take time as we work through that program.

[Simona Sarli, Bank of America]

Can I just squeeze one very quick one? It's on interest expense on expectations for 2023, please?

[Coram Williams, Chief Financial Officer]

Well, I think we've given you the guidance for Q1. So we talked a little bit about what we're seeing in January, where revenues are still modestly growing. SG&A will be flat. Gross margin will be flat. I think that gets you what you need for Q1. We obviously don't give formal guidance for the rest of the year. But I think you can see that what we're focused on is really building on the momentum of the top line continuing to gain share that will drive operational leverage, which will help profitability.

Secondly, we're focused on reducing G&A. That's an important component of what we're doing. And then we're focused on fixing the pressure points that Denis touched on in his script.

Now whatever economic environment we face, we will deal with in an agile and flexible manner. You've seen that the business is capable of driving growth. We've delivered that ahead of the competition in Q4. If we find ourselves in a tougher market, then obviously, we will moderate costs because they're very flexible. But that's what we're focused on for the rest of the year.

[Simona Sarli, Bank of America]

Sorry, I was referring to financial cost, net interest charges.

[Coram Williams, Chief Financial Officer]

Net interest charges. I think we've given you a guide of GBP 55 million Sorry, I had misunderstood -- but it's very helpful to talk about our focus areas...

[Denis Machuel, Chief Executive Officer]

Absolutely.

[Operator]

Next question is from Anvesh Agrawal from Morgan Stanley.

[Anvesh Agrawal, Morgan Stanley]

I'll continue the tradition last 3 as well. The first is on the SG&A. I mean, you obviously got big saving plans from G&A, and then there are some synergies that come from AKKA. But given your focus on driving growth and the sales investment, do you, at any point, expect the run rate on the AN on an absolute basis to come down? Or we are looking at a scenario where the sales investment typically offset the G&A savings.

The second one is around the strong firm growth within the Adecco GBU. Is that really temp-to-perm conversion or that is like new perm growth? And if it is stem to perm conversion, can you just talk a little bit about the margins on that?

And then finally, you obviously maintained the dividend, but we are now at a level where the payout ratio is close to 75% and the reported EPS is below the BPS that it limits gearing on the absolute basis. So any more thoughts around the capital allocation and how would you sort of de-gear in this tough environment when profitability is under pressure.

[Denis Machuel, Chief Executive Officer]

Thank you, Anvesh. Thank you for your questions. So I'm going to take the first 2 and then Coram will take the third one. So regarding SG&A, there are 2 parts of it. Of course, on the S part, there is a clear focus on productivity, that's one, and on putting the resources where we have a good dynamic and adjusting downwards when there is a slowdown. And this is very granular.

So there's -- when we ask local management to do is to be super focused on the trends in the market, focusing on the sectors that are the most dynamic. We are adjusting resources in a very agile way. So we will adjust the S part according to the market. And on the G&A side, and Coram mentioned it, we will -- we have a relentless focus on streamlining our organization, ensuring that we have no duplication to reduce the number of layers being very strict on what we spend, reduce inefficient inefficiencies and slower processes.

So this is going to help us overall decrease our ratio of SG&A over revenue and we said that the G&A savings will be net one. So absolutely determined and there is a big, big focus on organization on that. On the overall performance of Adecco, as you know, I mean, definitely, the growth plan has delivered results. We are outperforming competition, 550 basis points ahead of competition this quarter.

Very pleased about that term has contributed to it, particularly also on the margin. It's -- I wouldn't say that it's balanced between 10 to perm, which is not massive, but foment a good perm business with very solid double-digit growth and very solid gross margin.

So pricing, you talked about the fees. I think pricing is solid. All our pricing initiatives are delivering results, which is -- which enables us to have a very solid gross margin for this quarter. So we are able to combine both gaining market share and a solid gross margin. So we're very satisfied with that.

[Coram Williams, Chief Financial Officer]

And let me pick up on the point about dividend and capital allocation. To be clear, the capital allocation policies of the group are unchanged, and the dividend is a very important part of the way in which we distribute capital.

It is underpinned by our confidence in the future, and it’s underpinned by the cash generation of the business. And you saw in Q4, we had good cash conversion. The free cash flow in the short term has been impacted by the growth in working capital and the integration expenses that we have been incurring in AKKA.

But as I mentioned during my script, on an underlying basis, we’re in line with 2020 and 2021. So there’s nothing fundamentally wrong with the cash conversion of the business. And we think we can manage to distribute and deliver over time, particularly because in an uptick, we can drive further growth, further share gain and further productivity. And if we find ourselves in a tougher recession than we’re seeing right now, then the cash flow becomes countercyclical.

And so I think it’s important that you see the dividend as a sign both of the underlying health of the business and also our confidence in the future.

[Operator]

The next question is from Sylvia Barker from JPMorgan.

[Sylvia Barker, JPMorgan]

Question number one, just going back to the organic comment in January. So based on what we've seen out in the industry and trying to adjust for your trends, are we in the right ballpark thinking about kind of 2%, 3% the adjusted growth in January? And then can you comment on working days as well.

Secondly, on the €150 million of cost savings. So you said €100 million to be incurred as costs later on in '23. So should we assume not much of a benefit from those €150 million in 2023, please?

And then finally, just a quick question. Your Head of Regions role that you've created. How is that different from Head of the equity view? And if you're simplifying costs by adding another position, kind of what's the balance there, please?

[Coram Williams, Chief Financial Officer]

Thank you, Sylvia. This is Coram. I'll take the first 2. So in terms of growth in January, I won't put a firm figure on it at this stage. Obviously, we'll come back to at the end of the quarter with where we landed. But I think you should assume that we are modestly up. And I think that is stronger than we're hearing from the competition, particularly because all of our data indicates that we are continuing to take share.

And by the way, when I think about us being modestly up in January on a revenue basis, then that's obviously adjusting for trading days. So it's on an organic TDA adjusted basis. On the GBP 150 million, I think we've talked before about the shape of this. So we -- there's really 2 phases to the way that we're tackling, lowering G&A. The first is around quick wins, which have largely been implemented.

So we're getting savings in terms of procurement. We're getting savings in terms of what we spend with third parties. It's sort of adjusting our cost base in the short term, and that will come through during the year. And then secondly, and this is the more involved aspect of what we're doing, we're really working to review every aspect of what our organization does and where it does it. We're streamlining it. We're removing duplication, and we have a task force that's already been established in order to really get under the skin of that.

Now that will take a little bit of time. So we've talked about working our way through that over the first half and then starting to see costs and benefits coming through in the second half. So there will be some benefit from 150 million in 2023, but it will be back-end loaded.

[Denis Machuel, Chief Executive Officer]

And regarding the nomination of Ian Lee as Head of Regions, the Executive Committee, I wanted to have more voices from the business in the executive committee. That's one. And second, the voice of the business coming directly from the regions, from the geographies.

There is no -- we are not creating roles Ian Lee will double hat, where he's head of Adecco in APAC and all we are orchestrating the role of a country president in the countries and people who dabble had with their existing operational role, whatever it is and ensuring the proper orchestration of all the GBUs versus our clients, versus our various stakeholders, and also ensuring that the cost reduction is activated at a local level, reducing duplications between -- among the GBUs at local level...

[Sylvia Barker, JPMorgan]

Okay. Sorry, just a boring follow-up on the first one. So will there be any working day impact in Q1?

[Coram Williams, Chief Financial Officer]

We expect a modest one.

[Sylvia Barker, JPMorgan]

Which direction so...

[Coram Williams, Chief Financial Officer]

It’s a small positive. So just a little bit around 1.5%, I would say, 1.5%...

[Operator]

Your next question is from Rory McKenzie from UBS.

[Rory McKenzie, UBS]

Three from me, please. Can you tell us how the 5% organic growth splits into kind of volume and other contributions? And do your January comments suggest that volumes are now declining about maybe 3% to 4% year-over-year or something like that? And then Dennis, can you talk about the challenges in incentivizing the sales force when you're facing these weakening markets. And I would be interested to know if you've piloted the new incentive programs at all in the group or how you think they might help your teams steer through what could be tricky markets ahead?

And then finally, just a follow-up on the exceptional costs, Coram. Slide 20 shows you have that GBP 35 million charge back of this year and €100 million of other one-off costs. But did you say that there might be more charges on top of that relating to the €150 million savings program, just to be clear, what's not included in those numbers so far?

[Coram Williams, Chief Financial Officer]

Sure. Let me pick up on the volume and sort of value growth point. And then quickly on the one-off costs in 2023. So I have to step back a little bit here because obviously, there's a -- the question really is how much wage inflation are we getting in Q4?

And the sort of best way to think about this because it does vary depending on which territory you're looking at. Best way to think about it is that overall wage inflation was low to mid-single digits in Q4. That means there was a little bit of volume growth in our numbers.

In Q1, and again, I'm not going to talk specific numbers because it's only a portion of the quarter that we've got. If we're seeing modest volume growth, and we're working on the basis, there is still some wage inflation within that because the underlying drivers of wage inflation are still present, sort of mismatch between supply and demand of labor, then I think you're right in assuming that there is a modest decline in volumes in Q1.

And then on the one-offs, I just want to clarify, AKKA.

We talked about GBP 120 million of total integration costs at the time of the deal. We've spent about GBP 85 million of that in 2022, and we've got a little bit more than 30 still to go. And that's how you get to the numbers that we've given in the back of the deck for 2023...

[Denis Machuel, Chief Executive Officer]

And with regard to the incentives program. Sorry, what we've done. First, on the time part, we've set all the incentives before the end of the year so that people could really hit the ground running on day on January 1, knowing exactly what they had to do.

Second, we also simplified drastically the incentives. When I arrived, I heard that there were lots of incentive schemes that were complex and people will not fully understand all the aspects of -- they had like 8 or 9 sometimes KPIs and it was too complex. So we are really simplified and nailed the things to what's fundamental, which is the growth in revenue, which is the margin both in volume and profitability.

And we have a component in DSO to ensure that we focus on cash collection. So big focus also a lot of accountability. That means there's -- the KPIs are set on everyone's remit and not on the collective aspect of things just to reinforce accountability.

And schemes can vary from one GBU to another. But to give you an example, in some businesses that are relevant for that with people just get a percentage of the profit, of course, with a threshold on profitability, but that means the more they grow, the more they make, right?

So this is typically the so simple scheme that we've implemented to ensure that we drive performance according to the direction of trouble that we set for the group. And I must say, it's been pretty well received. It's been pretty well received by the teams.

[Rory McKenzie, UBS]

That's helpful. Maybe just tying together 2 of my questions. So obviously, with staffing companies not really having seen wage inflation for candidates for much of the past decade. We all kind of expected productivity to maybe be higher than it is at the moment in the industry.

As you're looking into this year and with that balance of decline in volumes in Q1, but still positive wage inflation, has that allowed you to approach the sales force or the plans in a slightly different way maybe. Just trying to think about how that drop-through on wage inflation could kind of help your aims to improve profitability at a group level?

[Denis Machuel, Chief Executive Officer]

So first, let me say that we have a hyper focus on productivity. We follow it, we track it at local level, at the global level, per GBU per region. I mean, we track that very, very carefully. And we adjust our sales force according to, as I said, market dynamic, very -- in a very agile way. So if we see lower volumes, we will adjust, but we keep -- we have a good momentum.

So we've adjusted our FTEs -- we've slowed down our investment plan in Q3 and in Q4 because we saw a little bit of a slowdown, but we're still impacting -- we're still adding people where we have a great dynamic. So -- and again, very agile in the way we manage our sales force.

[Coram Williams, Chief Financial Officer]

And just to add from my perspective, I mean we – to Denise’s point, we are laser-focused on productivity. You saw it improve quarter-on-quarter. It was up 2%. We’re driving it across the business. And we will continue to focus on that, taking share as we have done in Q4, which in turn drives leverage and helps us drive productivity and also reducing the G&A costs over time. So we’re very clear on the fact that there is more to go for on productivity.

[Operator]

The next question is from Paul Sullivan from Barclays.

[Paul Sullivan, Barclays]

Just to come back on one-offs and restructuring. Just to be clear, the GBP 100 million of other one-off costs you're guiding to for 2023, that all relates to 150 million G&A savings. And would we expect another dollar of restructuring charges to follow through in 2024. Is that program sort of builds for the $150 million of savings in sort of in aggregate? And then in terms of the German restructuring of additional German restructuring, are there any cost savings associated with that?

And just sort of bigger picture, do you think there's an argument to be taking some of this sort of business as usual restructuring above the line? And then -- could you talk about the relative performance between the GBUs and what you're seeing year-to-date and where the variances are, that would be very helpful. And then finally, in terms of the shape of this year and the margin progression, it looks like Q1, well, well, do you think -- how comoderatQ1 will be the trough in margin? Because it looks like it's going to be a difficult sort of margin quarter and over seasonal factors.

And then in terms of keeping the full year above 3%, given revenue deterioration, again, how much sort of confidence do you have in achieving that given the sort of the SG&A dynamics that you've been talking about?

[Coram Williams, Chief Financial Officer]

I'll pick up on those, Paul. So let me just -- because I think there's a need to just clarify exactly what we're saying on one-offs. So there is 35 remaining to come relating to the AKKA integration. And then there is 100 in addition to that, the lion's share of which will be for G&A. There's probably a little bit more coming for Akkodis Germany, but we've taken the lion's share of that in Q4.

And we're trying to be very clear with you about expectations on one-off costs so that you can model them. In terms of is there more to come on G&A in 2024, I think in November, when we touched on this, -- we said we'd expect one-for-one, so GBP 150 million of savings generally costs GBP 150 million to extract. So there probably is more to come in 2024. But at this stage, we're still working through the actions that we need to take. And we will obviously do our best to bring it in under $150 million. So to minimize any additional one-off costs in 2024.

On Akkodis Germany, it's more about positioning the business to really fire on all cylinders. So we had a solid Q4 in that business. It's well positioned, but there's a lot of change going on in its end customers, particularly in automotive, which means they're looking at different challenges to solve. It means we've got to upskill and reskill the people that we have as well as drive more offshoring.

So it's really about reorganizing the business from a position of strength. And I think the benefits you will see will come through on an acceleration of top line over time, which in turn will drive productivity and operating leverage. But it's not so much of cost savings. I think Denis wants to add.

[Denis Machuel, Chief Executive Officer]

Yes. And I must say that we are -- as Coram mentioned, we are pleased with the overall performance. We are very pleased with the client portfolio that we have and particularly the one that we we've gotten from AKKA. We had a very good client retention. So we have very solid assets.

We are anticipating the move of certain clients into smart industry. And in doing so, we've got to accelerate the transition, and hence this restructuring. But I must say I'm very confident in the value that Germany -- Akkodis Germany will deliver moving forward.

[Coram Williams, Chief Financial Officer]

And then just picking up on -- actually, maybe I'll add one more point on restructuring because, Paul, you asked about sort of whether or not we should put these above the line. I think the point over the last couple of years is that we've had a couple of really major programs where it makes sense to exclude those costs from the underlying operating performance of the business. The integration of AKKA was a major acquisition.

It's going very well. You've seen that we're ahead on the synergies in 2022, and we're well positioned going forward into 2023, but it's a significant one-off cost. And I think the G&A program falls into the same category. We would expect our levels of one-offs after those 2 programs are complete to come down considerably. And I think that's the way that we're repositioning the business.

And then just on the point about sort of margins and Q1 and the shape of the year. Q1 typically, as you know, is a seasonally lower margin for us. It's the lightest quarter in the business, typically means we have a lower margin. And obviously, we're holding SG&A flat because we want to drive more share gain and more growth, and we've got a flat gross margin, which is very strong.

So I think you're right that it will be the trough. If we step back, looking at the rest of the year, we're very focused on driving productivity and we get that through further share gain and operating leverage. We're focused on taking G&A costs out. So over the course of the year, you would expect the G&A component of SG&A to come down.

And that's the way that we drive margin. If we find ourselves in a tougher year, we find ourselves in a heavy recession, then we will obviously take a different stance. And we will adapt the cost base. We will manage SG&A accordingly. And you've seen us do that in a number of downturns previously, and the business is very flexible.

So we're confident that 3% for the full year is the floor.

[Denis Machuel, Chief Executive Officer]

And to ask your question – to answer your question around relative performance, I must say that we’re very pleased to hit what we’ve achieved in Q3 and Q4, we’re now significantly ahead of competition, 550 basis points versus market in Q4, particularly in Adecco. And if I look at the various geographies, there is – the topics where we are not at market speed is the U.S. and particularly in Adecco and recruitment solutions in the U.S. But for the rest, we are way ahead of our competitors.

So that strategy to really gain share in fragmented markets, I believe, is the right one, and we are delivering on it.

[Operator]

The next question is from Michael from Vontobel.

[Michael Foeth, Vontobel]

Just one left for me. Could you comment a bit more on the transition of the IT and digital functions? You said that both a Chief Digital Office information offices are stepping down, seems quite disruptive. How are you making sure that you have the right people there in place and your continuity?

[Denis Machuel, Chief Executive Officer]

Yes. Thanks, Michael. So first of all, to give a bigger picture than only the leadership, I’m pleased with the digital assets that we have, and we’re really focusing our efforts to scale them. That’s one thing.

And the way we accelerate our digital transformation. At the moment, we’ve put a big focus on everything which is client and associate facing in terms of application and systems I think we have done very good tools. We would just need to accelerate better adoption and the efficiency.

Now the reason for me to put IT and digital under one roof and one leadership, I must say, many companies are doing that now to ensure consistency in the way we look at tech and to simplify the interaction between tech and the business. That helps also accelerate our efforts on data because data sits in a way between IT and digital. So I think the direction of travel is clear.

The teams, even though we made a management change, it’s soft. The transition is doing super well. The search is underway, and I’m positive that we have some good candidates lined up. So – and we are an attractive company. So we’ve been very pleased in the traction that we got in the search.

So again, no particular disruption, prioritization of our efforts on what’s critical for our clients and our associates and the appointments of the CDI to come in times to come, but I’m confident on the fundamental assets that we have in this field.

[Operator]

Your next question is from Konrad Zomer from ODDO.

[Konrad Zomer, ODDO]

I've got a few questions. First of all, I think you did really well in various regions like Germany, France and parts of Asia. Does that make it more difficult to put a -- put more emphasis on cost control and get the cost savings in? Because I can imagine that locally, people are looking at growth instead of cost cuts.

My second question is on the performance of North America. Obviously, you've been struggling in that region. And I think that the sales decline year-on-year in Q4 was the heaviest from all 4 quarters. Is that mainly because the market worsened? Or is that because of internal issues you had?

And my last question is on leverage. You say that you're committed to further deleverage the balance sheet. Given your cash flow characteristics and the dividend and nobody is really concerned about it, but what sort of leverage would you feel comfortable with? And are you possibly considering bringing it all the way back down to close to 0...

[Denis Machuel, Chief Executive Officer]

Thanks, Konrad. So on your first question regarding cost control, let me put it this way. We need to be competitive. And I can tell you that people in the field are telling us that they want cost to be absolutely under control because that allows them to be competitive on the market. So there is -- and the inflation that we had on our global costs is not being seen necessarily positively from a local perspective.

So really, when I announced the plan, I got great support from people in the country. So we're also expecting them to make the savings locally, but they appreciate the direction that we've taken because they know that they will -- that will make them more competitive.

And we have a good traction there. Regarding -- and people understand that you can do both. And the way we manage the difference between the S and the DNA and the way we manage this whole pocket of cost is very well understood. Keeping the rest wherever we have dynamic and good market trends and adjusting elsewhere.

Regarding the U.S. Let's be clear. Yes, there are some headwinds on the market. We know that the U.S. market is slowing down, but most of it are internal topics that we are working on. We have sequential improvement. We're still lagging behind competition. However, we are reducing the gap in terms of how we perform versus competition.

Still, we're not there yet, and it's going to take time, but we know where the problems are. And we have a very clear plan to get the basics right, put the right people in the right place with the right incentives and ensuring that we have a better operational management, management closer to local operations.

We are sorting out the branches and ensuring operational efficiency, and we are accelerating on the growth sector. So -- we have the right leader who knows the industry and will help them -- helps us really improve month after month, week after week, day after day. This is a very hands-on back-to-basic type of plan, and it's delivering.

We see improvement in fill rate. We see improvement in sales intensity. We see improvement in voluntary turnover in the branches. We've improved the number of starts per recruiter. So I think, again, the operational KPIs are going into the right direction, but there is still a lot to do because we've been underperforming for some time.

So positive, confident in the future, but it's going to take time.

[Coram Williams, Chief Financial Officer]

And then to pick up on your final question, Conrad, about leverage. I mean, a couple of key points here. Firstly, as we've said, we are firmly committed to delevering. You've seen our net debt come down sequentially between Q3 and Q4 by GBP 300 million, and that's really underpinned by the cash profile of the business.

Yes, there is working capital that's been required to support the growth, and we have taken integration costs in cash terms relating to AKKA, but our cash profile allows us to continue to delever whilst managing the rest of our capital allocation priorities.

In terms of the level that we're aiming for, we have a mid- to long-term target of 1x net debt to EBITDA. We work on the basis that that's the right balance. – Longer-term for the business. Below that, we typically return capital.

But you asked me at which level, am I comfortable? I want to be clear that at 2.5x, we are not uncomfortable. The financial position of the business is strong. Our interest expenses are fixed, almost 80% is fixed at very attractive rates. We have no covenants. The bond maturity profile is well balanced and we've got good liquidity. So we will delever, but at no stage are we uncomfortable with leverage as it stands.

[Konrad Zomer, ODDO]

Yes. I understood. I probably used the wrong word. I didn’t mean to suggest you were uncomfortable, but these are encouraging words.

[Operator]

Ladies and gentlemen, that was the last question. I would now like to turn the conference back over to Denis Machuel for any closing remarks.

[Denis Machuel, Chief Executive Officer]

All right. Thank you very much, and thanks to all of you for attending the call. I just wanted to conclude by saying that we are very pleased on this quarter – on the great growth that we had. We have market-leading gross margin.

We are absolutely on track on our plan. And this year, we will focus on market share gains that will give us operating leverage, which will help us improve profit. We will reduce our SG&A, as Coram mentioned extensively today. And we will be laser focused on fixing the few pressure points that we have. I am very confident in the future in our future performance.

So thank you very much and looking forward to our next interaction in quarter to come. Thank you, and have a great day.