Adecco (SIX:ADEN) Group, a global leader in human resource solutions, has reported a successful financial year for 2023, with a 3% increase in revenues, reaching nearly €24 billion. The company's earnings before interest, taxes, and amortization (EBITA) also saw an 8% increase, excluding one-offs, totaling €867 million.
Despite a challenging macroeconomic environment, Adecco Group has demonstrated resilience with improvements in customer focus, market share, and profitability. The company is set to continue its growth strategy while managing costs and leveraging new technologies like generative AI to enhance productivity.
Key Takeaways
- Adecco Group's revenues rose by 3% for the full year of 2023, hitting nearly €24 billion.
- EBITA, excluding one-offs, increased by 8% to €867 million, with an EBITA margin of 3.6%.
- Gross profit saw a 1% increase, reaching €5 billion, with a gross margin of 20.7%.
- Adjusted earnings per share (EPS) decreased by 9% to €2.99.
- Net debt to EBITDA ratio remained at 2.5x, with strong liquidity at €2 billion.
- The company placed over 470,000 people in temporary assignments daily and employs approximately 180,000 full-time staff.
- Adecco Group is focusing on growth through optimizing service centers, executing on their 2024 incentive plan, and leveraging generative AI technology.
Company Outlook
- Adecco Group anticipates capturing market share in a difficult macroeconomic climate in Q1 2024.
- The company expects a similar development in gross margin and SG&A expenses as in Q4 2023.
- Focus for 2024 includes simplification, execution, and growth, with an effective tax rate of around 30%.
Bearish Highlights
- Akkodis, part of the Adecco Group, saw a 1% decline in revenues due to the tech sector's downturn.
- LHH's revenues were stable overall but faced challenging market conditions in the US Recruitment Solutions segment.
- Adjusted EPS decreased by 9% to €2.99, reflecting a challenging year despite revenue growth.
Bullish Highlights
- Adecco-led growth with a 4% increase in revenues and strong performance in flexible placement and outsourcing.
- Akkodis' EBITA margin expanded significantly, with strong synergy delivery and cost mitigation.
- LHH's career transition and Pontoon segments showed revenue growth.
- Adecco Group's Q4 financial performance included a 20% increase in EBITA.
Misses
- A decrease in gross profit by 2% in Q4, with a gross margin of 20.2%.
- The overall gross margin was down 70 basis points on an organic basis, although it remained healthy.
Q&A Highlights
- The company addressed the impact of Red Sea (NYSE:SE) disruptions and the performance of Adecco Americas.
- Adecco Group discussed the decline in gross profit margin and provided SG&A guidance.
- They also covered topics such as client and candidate confidence, one-off costs, and the performance of their operations in Germany.
Adecco Group (ADEN:SW), with its robust financial performance and strategic initiatives, is well-positioned to navigate the complexities of the global labor market. The company's commitment to leveraging technology, such as generative AI, and its focus on cost management and productivity improvements, indicate a forward-looking approach to sustaining growth and profitability. Adecco's emphasis on executing its growth agenda, including investments in Ezra and expansion in Managed Service Provider (MSP) solutions, demonstrates its adaptability and readiness to meet the evolving demands of the workforce solutions industry.
InvestingPro Insights
Adecco Group (AHEXY (OTC:AHEXY)) has shown a robust financial performance in the past year, and insights from InvestingPro can provide investors with a deeper understanding of the company's stock characteristics and financial health. With a market capitalization of $6.65 billion, Adecco stands as a significant entity in the professional services industry.
InvestingPro Data reveals that the company has maintained a steady P/E ratio, at 19.14, reflecting investor sentiment about its earnings capacity. The adjusted P/E ratio for the last twelve months as of Q3 2023 is even more attractive at 13.91, suggesting that the stock may be undervalued relative to its earnings. Moreover, Adecco's revenue growth remains positive with a 4.96% increase during the same period, showcasing the company's ability to expand its financial top line in a competitive market.
Two key InvestingPro Tips for Adecco Group are particularly noteworthy:
1. Adecco pays a significant dividend to shareholders, with a yield of 4.94% as of the latest data, which is attractive for income-focused investors.
2. The stock generally trades with low price volatility, which may appeal to investors seeking stability in their portfolios.
Moreover, Adecco has been a prominent player in the Professional Services industry and has a remarkable track record of maintaining dividend payments for 28 consecutive years, highlighting its commitment to shareholder returns.
For investors looking for comprehensive analysis and additional insights, there are more InvestingPro Tips available at https://www.investing.com/pro/AHEXY. Utilize the coupon code PRONEWS24 to receive an additional 10% off a yearly or biyearly Pro and Pro+ subscription, and gain access to a wealth of information to inform your investment decisions. With six more InvestingPro Tips listed for Adecco Group, investors can delve into a deeper analysis to better understand the company's prospects and performance.
Full transcript - Adecco SA (AHEXY) Q4 2023:
Benita Barretto: Good morning. Thank you for joining the Adecco 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: Thank you, Benita, and a warm welcome to all of you who've joined our call today. Let's turn to Slide 3, which provides highlights from the full year. Revenues improved by 3% year-on-year on an organic trading days adjusted basis and reached nearly €24 billion, a record level. Supported by simplify, execute and grow levels, the group is building strong operational momentum amid tougher markets. Gross profit of €5 billion was 1% higher organically year-on-year. Gross margin was 30 basis points lower at 20.7%, a healthy result supported by the group's well-diversified portfolio and firm pricing. EBITA, excluding one-offs, was €867 million, 8% higher organically. The EBITA margin at 3.6% expanded 10 basis points year-on-year, a robust result driven by improved productivity and G&A savings which were €92 million in run rate terms at year-end, in line with the target. Adjusted EPS was €2.99, 9% lower year-on-year, mainly reflecting a higher tax rate and lowered the net income result. Net debt to EBITDA ended the period at 2.5x, in line with management expectations. Cash flow from operating activities was solid at €563 million, €20 million higher than the prior year. Considering the group's operational performance in 2023 and cash flow generation capabilities, the Board will propose a dividend per share of CHF 2.50 to the AGM, in line with our dividend policy. Moving to Slide 4 and 2023 results by GBU. Adecco-led growth with revenues up 4% year-on-year on an organic trading days adjusted basis. The business gained significant market share in every quarter. Productivity in terms of gross profit per selling FTE was above 2021 levels in the second half of the year. EBITA, excluding one-offs, was 2% higher and the EBITA margin at 3.7% was 10 basis points lower year-on-year, a robust result. In Akkodis, revenues were 1% lower year-on-year on an organic trading days adjusted basis. The tech sector's downturn impacted staffing activities. However, consulting activities were strong growing 9%. Supported by synergies, Akkodis EBITA was stable year-on-year, while the EBITA margin decreased 30 basis points to 6.3%. Revenues in LHH were stable year-on-year on an organic trading days adjusted basis. Challenging market conditions impacted several of LHH's segments. That said, 2023 was a record year for career transition, with revenues up 71% and Ezra performed very well with revenues up 42%. LHH's EBITA, excluding one-offs, rose 24% year-on-year. At 7.4%, the EBITA margin expanded 160 basis points and was within the 7% to 10% target margin corridor. Let's turn to Slide 5 which provides several KPIs that evidence how the group delivers on its simplify, execute and grow plan. We are improving customer focus, as shown on the left hand. For the Adecco GBU, client NPS rose 4 points and candidate NPS rose 3 points, cementing a multiyear improvement trajectory. The group's NPS also rose 3 points year-on-year. We have firmly delivered on our ambition to gain market share. The middle chart shows that the group has grown its revenues ahead of its key competitors for 6 consecutive quarters. Further, we continue to improve profitability. Productivity increased 3.5% year-on-year and the conversion ratio expanded 70 basis points, supported by significant adjustments to the group's SG&A expenses and recalibration of headcount. Reflecting this effort in the H2 period, the group EBITA margin expanded 50 basis points year-on-year. Let's turn to Slide 6 now to look more closely at how we've been executing the grow agenda outlined in the left side box with some recent examples of success from across the business. First, we'll continue to invest to scale Ezra, LHH's digital coaching business. Ezra recently announced a strategic partnership with Headspace, the global industry leader in mental health support and well-being. Second, the group's ambition to expand in MSP enjoyed multiple successes. For example, Adecco leveraged its long-standing staffing relationship with a global beverages company to cross-sell Pontoon's MSP services, increasing the group's share of wallet by 30%. The group particularly valued Pontoon's digital analytics capabilities. Finally, illustrating Akkodis' strategic focus on global deals. The team extended a multiyear contract with a prominent aerospace client. The contract explains Akkodis' presence in outsourced logistical services, utilizing its predictive maintenance and robotics know-how. Let me now hand over to Coram, who will provide details on the Q4 results.
Coram Williams: Thank you, Denis, and good morning, everyone. There are a few moving parts to today's results, and we want to provide transparency on the drivers. So let me take the time to walk you through the key topics, starting with Slide 7 and Q4's financial performance. Revenues were €6.1 billion, up 1% year-on-year on an organic trading days adjusted basis. Gross profit of €1.2 billion was 2% lower year-on-year on an organic basis. At 20.2%, the gross margin was 70 basis points lower on an organic basis, a healthy result in this macroeconomic environment. EBITA, excluding one-offs, was €264 million, up 20% year-on-year. The EBITA margin was strong at 4.3% and up 60 basis points year-on-year, driven by productivity gains and G&A savings. SG&A expenses, excluding one-offs, were €968 million, 8% lower year-on-year and representing 15.9% of revenues. Adjusted EPS was $0.75, 1% lower year-on-year. Cash flow from operating activities was €317 million, bringing the cash conversion to 63%, a solid result during a period of growth and transformation. Let's explore the context within each GBU, beginning with Adecco on Slide 8. Adecco's revenues reached €4.75 billion, 3% higher year-on-year on an organic trading days adjusted basis. Adecco continued to firmly deliver on its ambition to gain market share with relative revenue growth 830 basis points ahead in Q4. On an organic basis, revenues were 2% higher in flexible placement, reflecting resilient volumes and a good peak season. In outsourcing, revenues rose 6%. While in permanent placement, revenues were 2% lower. On a sector basis, growth was strongest in logistics and autos, led by global customers. Health care and retail demand was solid, while manufacturing and food and beverages were soft. Gross margin was healthy with the current sector and solutions mix, partly offset by firm pricing, which continues to be supported by our dynamic pricing strategy. Productivity improved. Gross profit per selling FTE rose 5%, while selling FTEs reduced 5%, reflecting the agility with which we manage the business. The GBU also delivered a good level of G&A savings. Consequently, the EBITA margin was robust at 3.8% and up 30 basis points year-on-year. Slide 9 shows Adecco at the segment level. In France, revenues were 5% lower, weighed by slowing demand, particularly in retail, manufacturing, food and beverages and logistics. In Northern Europe, revenues from U.K. and Ireland were up 1% and in Belux, up 2%, a robust result in tough markets. Revenues were 11% lower in the Nordics, impacted by new regulations in the construction sector. The DACH regions performance was strong with revenues up 9%. Revenues in Germany were up 12%, reflecting strong logistics and autos demand. The region's EBITA margin was 70 basis points lower, driven by the impact of fewer working days in the period. In Southern Europe and EEMENA, revenue growth was strong, with Italy up 10%, Iberia up 13% and EEMENA up 9%. In sector terms, logistics and autos were strong, while manufacturing was soft. In the Americas, revenues were flat. Lat Am was up 32%, led by Brazil and Colombia. In North America, revenues were 13% lower, outperforming competitors in a challenging market. The region faced continued and broad-based weakness in demand. Despite these headwinds, management continued to progress the business' turnaround. Reflecting this, the Americas' EBITA margin improved 290 basis points to 3.1%. Turning to APAC. Revenue growth was strong across the region, with Japan up 8%, India up 11% and Asia up 7%. In Australia and New Zealand, revenues were 65% higher, boosted by a significant government contract. Let's move now to Akkodis on Slide 10. Akkodis' revenues were 5% lower year-on-year on an organic trading days adjusted basis. Staffing revenues were 14% lower, challenged by a continued downturn in tech sector activity. While consulting revenues were resilient, growing 3% year-on-year. By segment, North EMEA revenues were 5% lower, mainly due to Germany, which was impacted by the repositioning of operations in the smart industry and elevated sickness rates. South EMEA revenues were up 10%. Revenues in France were up 5%, supported by an increased consultant base and strong demand from aerospace and autos. North American revenues was 17% lower, reflecting headwinds in staffing. APAC revenues rose 6%, led by Japan, up 11%. Favorable pricing dynamics and strong utilization rates supported Japan's performance. Akkodis' EBITA margin expanded 160 basis points to 8.9%, reflecting strong synergy delivery and good cost mitigation, particularly in North America, which delivered a 57% recovery ratio. In addition, Q4's margin benefited from balance sheet true-ups. These onetime items lowered Akkodis' SG&A expenses by a low double-digit million euro amount. Moving to Slide 11, which shows how the group is delivering on AKKA transaction commitments. The AKKA integration continued to progress well. 2023 synergies are ahead of target at over €60 million in EBITA terms, including €11 million from revenue synergies. Of the approximately €50 million of cost synergies secured, footprint and HQ-related actions account for around €20 million with other efficiencies, mainly reduced overheads and real estate actions contributing the remainder. Looking at revenue synergies, the business has secured to date a total contract value of approximately €150 million. AKKA has now delivered on year 1 and year 2 financial targets, with EBITA margin and mid- to high single-digit EPS accretion in year 1 and double-digit EPS accretion in year 2. The bottom right chart shows the EBITA margin development of AKKA through recent periods. In H2 2023, the business delivered high single-digit EBITA margins and the transaction is on track to deliver the promised value creation in year 3. Let's turn to Slide 12 and LHH. Revenues in LHH were down 2% year-on-year on an organic trading days adjusted basis. Recruitment Solutions revenues were 18% lower with the segment continuing to face challenging market conditions, particularly in the U.S. across both permanent and flexible professional placement. Gross profit was 21% lower and 15% lower, excluding the U.S. Management is strengthening operational discipline and positioning the business to capture a future rebound in market activity. Performance in career transition was excellent, led by the U.S., U.K. and Australia. Continued market share gains drove revenue growth of 46%. Revenues in Learning and Development was 17% lower. End market headwinds impacted both General Assembly and Talent Development. Ezra, however, performed well. Revenues were up 54%, and the business exited the quarter with a solid pipeline. Revenues in Pontoon were 2% higher with MSP and RPO activities weighed by the tech sector downturn. LHH's EBITA margin was 140 basis points higher year-on-year at 7%, benefiting from its current segment mix. Now let's turn to Slide 13. On this chart, we review the drivers of the group's gross margin in Q4 on a year-on-year basis. Currency translation effects had a negative impact of 10 basis points. Flexible placement had a negative impact of 40 basis points, of which approximately 20 basis points reflect the current GBU mix and a further 20 basis points reflect Adecco's current client and sector mix. Permanent placement had a 50 basis point negative impact, but career transition had a 70 basis point positive impact. Outsourcing, consulting and other was 40 basis points negative, mainly due to mix in Adecco's outsourcing activities and lower volumes in Pontoons, MSP and RPO services and training, upskilling and reskilling had a 10 basis point negative impact. In total, the gross margin was down 70 basis points on an organic basis and 80 basis points on a reported basis. At 20.2%, it is a healthy result in this macroeconomic environment. Moving to Slide 14 and EBITA drivers. The left-hand provides an update on G&A savings. In H1 2023, savings actions delivered a P&L benefit of €20 million year-on-year. In H2, the group delivered a further €39 million in savings year-on-year bringing the cumulative in-year savings to €59 million. We're pleased with our progress with the savings plan. As the middle chart shows, the group delivered a year-end savings run rate of €92 million, in line with guidance. We remain confident that the group can deliver the €150 million run rate by mid-2024, which means €150 million of actual benefit in the P&L in 2025. Turning to the right-hand, we review the drivers of the group's EBITA margin in Q4 on a year-on-year basis. The 60 basis point improvement mainly reflects a 70 basis point negative impact from organic gross margin developments, a 75 basis point positive impact from improved operating leverage, a 40 basis point impact from G&A savings of €23 million year-on-year and a 20 basis point impact from favorable onetime items, partly offset by the lower FESCO JV contribution. The group's gross profit per selling FTE rose 4% versus a reduction in selling FTEs of 6%. In addition, SG&A expenses, excluding one-offs, were 8% lower or 6% lower when excluding onetime items on a year-on-year basis. Let's turn to Slide 15. As part of the simplification effort, as of January 1, 2024, management has introduced 2 new reporting policies that will support the group's ongoing improvements in operational performance. First, the group has introduced an intercompany revenue allocation policy that creates a new elimination disclosure in revenues when the group reports on a segmental basis. The policy does not impact the group's revenues but will facilitate cross GBU collaboration and amplify revenue synergy potential. Second, the group has decided to reclassify delivery costs in legacy LHH that historically were within SG&A expenses. This step improves internal transparency and performance management allowing the group to more tightly manage costs driven by changes in demand in career transition. The change will result in lower gross margin levels of approximately 50 to 60 basis points and lower SG&A expenses, leading to an improved conversion ratio for the group. To be clear, this action has no impact on the commitment of the G&A savings program. Furthermore, we highlight that there is no impact on the group's EBITA or EBITA margin. Moving to Slide 16 and net income drivers in the fourth quarter. EBITA, excluding one-offs, was €264 million. One-offs were €55 million, of which €34 million was driven by actions taken to secure the G&A savings program and €21 million incurred to secure the AKKA integration. In addition, the amortization of intangible assets was €22 million in the quarter. Operating income or reported EBIT was €187 million. Further down the P&L, interest expenses were €23 million, mainly reflecting interest costs and fees from outstanding debts. Other income and expenses were negative €33 million, and included a negative FX mark-to-market impact of €11 million related to high-inflation countries. The provision for income taxes was €63 million with an unusually high effective tax rate of 50%. This result mainly reflects changes in deferred taxes, tax legislation changes in Germany on the treatment of royalties and current geographic mix with higher growth coming from higher tax jurisdictions. Added together, the group's net income for Q4 was €68 million, up 6% year-on-year. Looking forward, the group expects an effective tax rate of around 30% in 2024. Further guidance on below the line items can be found on Slide 24 of the presentation. Let's turn now to Slide 17, which shows the group's full year cash flow generation. The rolling last 4 quarters cash conversion ratio was 63%, a robust result as we continue to grow and transform the business. DSO was 53 days, stable year-on-year. Cash flow from operating activities was solid at €563 million, up €20 million year-on-year. The result reflects higher business income, lower one-off charges and an unfavorable net working capital movement of €44 million year-on-year. In particular, customer collections were positive but were outweighed by an outflow in payables driven by timing differentials. The right-hand shows the cash flow from operating activities from 2020 to 2023. Adjusted for items impacting comparability, namely one-off charges, the group's cash flow generation has proved resilient at €675 million to €700 million each year. For 2024, the group expects strong free cash flow supported by disciplined working capital management, lower one-offs and lower CapEx. Let's focus on the group's financing structure on Slide 18. Net debt to EBITDA was 2.5x at the end of 2023, in line with guidance. The group remains firmly committed to deleveraging, supported by productivity gains, G&A cost reductions, lower one-off charges upon successfully delivering our savings program and lower CapEx. Our financing structure is solid. Net debt was €2.59 billion and gross debt was €3.15 billion at year-end. Gross debt were reduced by €91 million in 2023, supported by a partial buyback of the group's €500 million bond that matures in late 2024. Leverage is not constraining the business' ability to invest organically in growth and pay dividends. Liquidity levels are very strong at €2 billion, including an undrawn €750 million RCF. The group has 79% of gross debt fixed at attractively low interest rates. No commercial paper outstanding at year-end and no financial covenants on any outstanding debts. Let's turn to Slide 19 and the group's outlook. The group's volumes year-to-date have been marginally below Q4 2023 levels. We expect to continue to capture market share in a challenging macroeconomic environment in Q1 2024 while managing resources with agility, focused on productivity and G&A savings. In Q4 '23, the gross margin was 80 basis points lower year-on-year, and SG&A expenses, excluding one-offs and onetime items, was 6% lower year-on-year. In Q1 2024, the group anticipates a similar year-on-year development in gross margin and SG&A expenses on a like-for-like basis. As a reminder, Q1 is a seasonally lower EBITA margin quarter. Furthermore, in Q1 2023, the EBITA margin benefited from the timing of FESCO JV income which may not recur. And with that, I'll hand back to Denis.
Denis Machuel: Thanks, Coram. And let's turn to Slide 20. In 2023, the group achieved a lot with its simplify, execute and grow agenda. Over 2024, management will remain focused on methodically executing against the plan. First, simplify. We will take cost-savings actions and tighten procurement policies where the group has around €2 billion per annum of spend to optimize. In addition, we will accelerate the group's shift to offshore shared service centers. Second, execute. We've defined 2024's incentive plan with operating cash flow replacing DSO as a key metric to support a more holistic approach to cash management. We will continue to reinforce delivery discipline, improve systems and processes, finalize a new tech road map and embed our refreshed values to create a winning culture. Last, but not least, grow. We will continue to focus on improving contract conversion, customer retention and customer satisfaction levels, scaling digital and with traditional assets and expanding in MSP. In short, management will take action to deliver better, faster execution with a relentless focus on market share gain and improved profitability. Hand in hand, as Slide 21 demonstrates the group is also leading its purpose to make the future work for everyone. Let's look at a few statistics from this slide. In 2023, we placed over 470,000 people on temporary assignment every day. Placed over 165,000 people into new common roles and trained and coached over 880,000 people. The group has around 180,000 full-time employees, including our tech experts and bench associates. Further, the engagement score for the group's 38,000 company-based employees was 34 in 2023, 2 points above benchmark. The Adecco Group is proud of its meaningful social impact and position as an employer of choice in the market. Let me express my sincere thanks to all our incredible teams and colleagues, tech experts and associates worldwide for a strong 2023. Thank you for your attention, and let's now open the lines for Q&A.
Operator: [Operator Instructions] The first question comes from the line of Sarli Simona with Bank of America (NYSE:BAC).
Simona Sarli: So I have 3 of them please. So the first one, if you could talk a little bit about if you have seen from your clients any impact from the Red Sea disruptions and consequently, how that has impacted Adecco as well? Second question is related to North America, which on a sequential basis has deteriorated in terms of organic revenue growth but margin overall for Americas has improved significantly. So how much of this margin improvement was related to the €92 million G&A run-rate reduction versus some potential productivity gains? And the third question is related to gross profit margin, which sequentially seems to have deteriorated quite a bit also in relative terms to your main competitor. So maybe if you could provide an update on what is driving that in terms of pricing dynamics and if you're seeing overall like a competition on the pricing front being higher?
Denis Machuel: Thank you, Simona, and thanks for your question. So on your first question regarding Red Sea disruption, we haven't seen any major disruption related to that. We see an overall uncertain environment, as you know. And there's volatility, but nothing significant coming from the Red Sea area.
Coram Williams: And let me pick up on the other 2 questions. In terms of the Adecco Americas growth and margin, I mean you're right, sequentially and year-on-year, the business has slowed. It's a tough market in the U.S. But we should remind ourselves that actually we're ahead of competition in terms of mitigating that decline. And I think it's the fourth quarter that we've seen that. We are very, very focused on the turnaround plan. And what we've been focusing on there is cost reductions, headcount and G&A. And it is one of the territories where actually sequentially, our headcount came down from Q3 to Q4, but we have also been driving productivity by making sure that our sales resources are exactly where they need to be. It's part of Geno's focus on the geographic alignment of the business. And I don't know whether there's anything that Denis wants to talk on America...
Denis Machuel: Yes, absolutely. I must say that we are quite encouraged by what we see in the field in the U.S. As you know, we've started this performance improvement plan over the past year and the good news is Q4 EBITA was positive in North America, and that's very encouraging. You mentioned the outperforming with fourth quarter in August versus competition, even though we declined less than our key competitors. We also see an improvement in our -- the profitability of our branches, and that's very much a very granular operations-driven improvement. We see GP per selling FTE up 15%. And in Q3, it was up 12%. We see fill rate improving. In November, for example, was very close to an all-time high for the year. You also see a lower staff turnover. So all these are concrete operational indicators that tell us that we are heading in the right direction in the U.S. far from being fully satisfied, we have still a long way to go, but the trend is very encouraging.
Coram Williams: And now let me pick up on the gross margin question. And I think it’s really, really important, Q4 is always slightly softer in terms of gross margin than Q3 just because of the nature of the business and because of the bench aspect in certain territories. If I look at it on a year-on-year basis, there are 3 key drivers of the decline in gross margin. First, the mix of clients and sectors in Adecco. So we’ve seen a little bit more growth in large and on-site than we have in small and medium enterprises. And we’ve seen strength in logistics and automotive, which are both good businesses for us, but come at a slightly lower gross margin. So that’s the first factor. Second piece is the mix of GBU growth in across the group. And we have seen this before. But the highest growing part of the group, obviously, was Adecco. It has the lower gross margin out of the 3 GBUs and that has a mix effect for the group as a whole. And then the third piece is consistent with what we’ve seen in prior quarters, which is the pressure in perm across the group. And obviously, that is a higher-margin business. It is an area where we’ve seen challenging markets, and that is impacting gross margin as well. I want to be really clear though on this point about pricing because the spread between our pay rate and our bill rate has continued to grow in Q4. So we are not sacrificing gross margin in order to drive share, and we are maximizing the benefits of our pricing strategy and the way in which we dynamically price for the market conditions.
Operator: The next question is from Andrew Grobler with BNP Paribas (OTC:BNPQY).
Andrew Grobler: Just a couple from me, if I may. Firstly, one for Coram. On the SG&A guidance, could you just clarify exactly which numbers we should use as the base and kind of in terms of change? And if I put some numbers on that, and you can tell me which ones have got wrong. Last year in Q1 was €1.086 billion. You said it would be down about 6% organically to about €1.015 billion or so. And then currencies, that would be down about 1.5%. So are you guiding to pre-associate income of about €1 billion of SG&A for next year? The first one. And then secondly, just in terms of client and candidate confidence. It was a bit weaker at the end of last year, particularly in December. It seems to be the message from most. What are you seeing in early 2024 from both the client and the candidate perspective? And how does that change or vary across your major markets?
Coram Williams: Thank you, Andy. I'll take the first, as you suggested, and then Denis will pick up on the second one. So you are picking up on the right numbers. So SG&A in Q1 '23 was €1.085 billion. We are saying 6% down on that year-on-year. I think it's right to flow through the FX. So you're getting to the right place. Then, and this is important because you also then have to flex for the reporting changes and just to help you out on that, effectively, there is €30 million moving out of SG&A and into cost of goods sold. So if you continue your calculation and reduce it by a further €30 million, you'll get to roughly where you need to be.
Denis Machuel: And yes, regarding your question, Andy, fundamentally, yes, we see an overall trend where perm is not in its best shape, I would say, and clients being more cautious and candidates also sometimes stepping out of a recruitment process with a lot uncertainty, et cetera. This being said, we still see good dynamics in Lat Am and in APAC across the board. So I would say, definitely in Europe, we see a slowdown. We have a little bit of an exception. We have perm in France growing 11%, so that’s in a market that is strongly declining in temp. Sometimes it’s a bit difficult to read. But overall, we don’t expect and the beginning of the year it’s pretty much in line with Q4 for what we see. So we don’t expect a massive pickup, particularly on the perm side. However, we know that at this stage, moment will -- this market will rebound. We are really doing the hard work, particularly in the U.S., as you know, we had been lagging behind, and we’re doing the hard work to be ready for the rebound. But I couldn’t say anything about the timing of it.
Operator: The next question comes from the line of Varanasi Suhasini with Goldman Sachs (NYSE:GS).
Suhasini Varanasi: Sorry, I've 2, but I wanted to clarify, why are you changing the accounting for gross margin and SG&A please? And the €30 million, what does it refer to in particular? And secondly, if we think about your SG&A view, even adjusting for the one-offs, it came in a bit better than your original guidance. So what drove the improvement there versus your original expectations?
Coram Williams: I’ll take both of those. I want to be really clear on the reporting changes. So up until now, we have had delivery costs for career transition sitting in SG&A. Now accounting policies allow you to put these pretty much where you like on the P&L. So this isn’t something that’s driven by a particular accounting regulation. However, those costs do move very, very closely in line with volumes. And as we’ve gone through the work to really clarify and drill into SG&A to drive our G&A savings program, we felt that, that was masking some of what was happening on the underlying cost base. So we’re moving it into cost of goods sold, and it is €30 million, and it is effectively a simple transfer from SG&A into COGS, doesn’t change EBITA, obviously. In terms of SG&A coming in better than our guidance, it was a little bit stronger. I think what it shows you is the momentum that we have on the G&A savings plan. We’re slightly above the run rate that we were expecting to be. And as you know, SG&A can be a little bit lumpy quarter-on-quarter. But we’re very happy with the progress that we’re making, and it’s pretty broad-based.
Operator: The next question is from Kean Marden with Jefferies.
Kean Marden: I had 2, and I've had 2 clients asking me to ask 2 other questions as well. So real apologies. So just the 2 from me. So other income line was pretty much 0 before 2020, but it's now a pretty consistent negative in the P&L. Can you just help us, Coram, just understand the nature of the other income line and why are we seeing that change emerge over the last 4 years? Then secondly, on the one-off guidance for fiscal '24, I think the narrative sort of last summer was the intention to bring these down quite considerably. In my notes, I've got a number that was potentially about €15 million penciled in for fiscal '24. So the €90 million in the slides today, it looks like you're maybe struggling to bring that number down. Can you just help us understand why that is, please and the composition of the €90 million for fiscal '24? And then the 2 client questions are big on the SG&A, more than no sequential improvement on cost savings for the G&A savings. So you delivered, I think, €24 million in the third quarter and €23 million in the fourth quarter. So wouldn't we see the G&A savings sequentially improve? And then a question just on Germany, just how that's traded during the quarter. People are picking up some quite large redundancy programs and layoffs at the moment in Germany. I'm just wondering about momentum there.
Coram Williams: Thank you, Kean. I'll take the first 3 and Denis will cover Germany. Just on other income and expense, we've got a number of things that flow through that line, and it does move up and down, to be fair. We've got earn-outs for some of our digital ventures there, which is the appropriate place to classify them. We've got the contributions to the Adecco foundation. We've got some FX movements. And as we've highlighted in Q4, the big driver of the year-on-year increase is actually an FX mark-to-market adjustment relating to high-inflation countries. I think you all have seen from the guidance that we've given for fiscal '24 that we expect that number to come down. So hopefully, that gives you a bit of color as to what's there. In terms of one-off guidance, I want to be really clear on me. It is exactly where we would expect it to be, and we are committed to bringing this number down. Let me try and unpack what's in there. So in 2023, we spent approximately €130 million on one-offs, €90 million of that related to the G&A program and about €40 million of it related to the remaining piece of AKKA integration. Going forward, the €90 million in 2024 includes €60 million for G&A and an assumption about what the underlying level of one-offs is across the group on a year-by-year basis, which is about €30 million. Now let me just pick up on those 2 things. When we step forward with the G&A savings program, we said one for one in terms of the one-off costs versus the benefit. So you can see that we are still expecting to spend €150 million, €90 million in '23 and €60 million in '24 and the €30 million represents our ambition and what we believe the normal course of one-off run rates will be going forward. Will we spend all of that in 2024? I doubt it. But we're trying to send you a signal as to what we think will happen after the G&A program and that is considerably lower than the one-offs have been historically. So we're aiming for €30 million once we're done with the G&A program. And then on the SG&A, on the point about sequential improvement, this is lumpy. So as you know, we take actions in the business. We deliver savings. If you look at what's happening in the first half of 2024, the benefits will come from areas which take a little bit longer to unlock, either because they're reliant on us continuing to ramp up some of our back-office infrastructure like the shared service centers or because the savings are coming from territories where you have to go through social plans, and it takes longer. So I think the remainder of the savings, incremental savings in terms of run rate will come in Q2. It doesn't imply anything about where we are in the program. We're confident about delivering the €150 million, but the timing is a little bit lumpy, and you should build the next incremental wave in towards the end of Q2. And Denis will cover Germany.
Denis Machuel: Yes. For Germany, and thanks for your question, Kean, I think we still see a good momentum, particularly in Adecco, you've seen that 9% growth. I think it's been very supported at the moment by logistics and automotive, where we still see some good dynamics. So autos and logistics are supportive. We see manufacturing going down. We see retail going down. So we see signs of more headwinds ahead of us in Germany than the tailwinds that we've profited from recently. However, the current market is still solid. We don't see any major impact of redundancy plans at the moment. And as you know, with CT, we're well positioned. It's not massive yet. But I would say, I expect Germany to slow down. And we had a surprising negative impact of sickness in Germany towards the end of the year. It was not linked -- particularly in Akkodis, it was not linked to us, it's -- the whole country seems to have been sick. So that impacted our utilization rate. So overall, still quite a bit supportive, more headwinds ahead.
Operator: The next question is from Rory McKenzie with UBS.
Rory McKenzie: Three questions, please. Firstly, Coram, you referred to the 8% headline constant currency reduction in SG&A and then the 6% underlying reduction, which is a gap of about €22 million. Is all of that relating to the onetime provision release in Akkodis? And why wasn't that treated as an exceptional income? And secondly, headcount was down 1% in the quarter. I take your point that shows good agility within the businesses. Do you now plan to do some more kind of active top-down cost management, given the weakening volumes you've seen so far? And so what should we expect for headcount in Q1? And then finally, can you just clarify your gross margin guidance in the context of the accounting change? Your press release pointed to Q1 '24 to see a similar 80 bps reduction year-over-year, as you've seen in Q4. But I don't think you mentioned as accounting switch. So basically, does that include the 50, 60 bps accounting change? Or is it in addition to that trend?
Coram Williams: Sure. I'll pick up all of those. So on the SG&A, the headline of 8% does include the provision releases. The majority of that is in Akkodis, and I did mention in the script that it's low double-digit millions, but you are still seeing a positive development on SG&A on the 6% underlying reduction. I want to be clear on what these releases actually are. There are 2 things here. We've reduced legal reserves, and we have adjusted the receivable relating to insurance for the cyber attack in Akkodis in 2022. Those are operational impacts. Now we're calling them out because they don't repeat every quarter but they are not one-offs in the sense that they do not relate to the ongoing operations of the business. If we're able to reduce legal reserves, it's because we're managing that risk well. And on the cyber receivable, we are progressing with our insurance claim, and we are confident that we will achieve what we need to achieve. So we're trying to be transparent by calling them out, but they are operating items. In terms of top-down cost management, I think if you recall from previous discussions as to how we're managing this, it is both top down and bottom up. So it's a very organic process. We are simplifying the business. You've seen that quarter after quarter with the reduction in SG&A, and that's helping us to reduce headcount in G&A and I would expect that to continue. However, on the S side, we manage in an agile way. We manage according to the market conditions. So you can see from the productivity increases that we've had in Q4 that we're being effective on that, but the headcount will move in line with what we see in the market. So we'll manage that. And I think Denis wants to add something on that one.
Denis Machuel: Yes. Just highlighting again that, for example, in Q4, our GP per selling FTE to our productivity was plus 5%, but our FTE was minus 5%. In LHH recruitment solutions, our GP per selling FTE, to your point Coram, was plus 11%. So we are very actively and very granularly managing our resources and adapt them to market conditions and opportunities.
Coram Williams: And then on gross margin, I want to be clear that the 80 basis points year-on-year reduction is before the accounting reclassification. It’s because we are seeing very similar trends in Q1 to the ones that we saw in Q4. So pressure in perm, some mix effect in Adecco, offset by upside in career transition. And then in addition to the 80 basis points of year-on-year reduction, you would then have to take 50 to 60 basis points off that number for the accounting change. Remember that gross margin in Q1 2023 was sequentially higher so you’re starting from 21.3, reduction of 80 and then a further reduction of 50 to 60.
Operator: The next question is from Michael Foeth with Vontobel.
Michael Foeth: Two questions from my side. The trajectory on the balance sheet leverage towards 1.5, have you given any indication when you expect to get there and what progress you expect for 2024? And then on the -- you mentioned generative AI innovation. My question is, what are you planning to use that for exactly? And do you have all the infrastructure and tools that you need? Or is there anything holding you back there? And what sort of productivity gains you're expecting from that?
Coram Williams: So let me pick up the first point and then Denis will cover generative AI. Want to be really clear, we are absolutely committed to deleveraging. We recognize that whilst the financial structure of the business is solid, we've got plenty of liquidity. A lot of our balance sheet is locked in at attractive rates. We do want to bring that leverage down to 1.5x. We hit our guidance this year. So you can see that we are managing this and it is moving in the way that we expect it to. There are a couple of things that will help us improve free cash flow and, therefore, drive that leverage down over time. The first is that we believe there are still improvements that we can go after in terms of margin which will be driven by productivity benefits and in particular, the delivery of the rest of the G&A cost-savings program. Remember in terms of what's dropped through to the P&L in 2023, it's just over €60 million. So there's quite a lot more to come in terms of what flows through to P&L and cash. And then there are 2 other levers that we are very focused on. One is lowering one-off costs. And you heard my answer to Kean earlier, once we're through with the G&A savings program, we'd expect to be spending around €30 million a year. It's a much lower amount than we have seen historically, and we believe we can manage to that. That helps free cash flow. And the third piece is CapEx and CapEx ran just over €200 million in 2023. Some of that was driven by capital expenditures relating to big government contract that we won in Australia. We're expecting that to come down to €180 million in 2024 and stay at that level. So we've got levers that can improve the free cash flow, particularly post the delivery of the G&A savings program, and we're very committed to getting back down to 1.5x. For obvious reasons, we're not putting a firm time line on it, but you can see the progress we're making.
Denis Machuel: And we are super, super committed to this. We have -- on Gen AI, we have done a lot since we started working on it. So of course, we put in place all the responsible AI framework to make sure that we would do things in the right way. We’ve massively trained our teams. We’ve encouraged as also local initiatives to get this momentum as close to the clients and the markets as possible. We’ve also done some partnering with big tech, particularly Microsoft (NASDAQ:MSFT), to leverage their power. We’re now focusing our efforts on what we see as most important. The cost to serve, the recruiter efficiency and the candidate interaction. So those are the 3 things on which we really focus our efforts to scale whatever we’re building. Scale, for example, the CV maker, which is an AI-powered tool for candidates. We have tens of thousands of people using it. We have, of course, the typical job ad automations and things like this that are -- that we’ve embedded. So now, we want to scale what we have to refocus on what will be in productivity improvement. Can I tell you already what productivity gains we expect, too early to say. We have some very encouraging numbers, but they are not at full scale. So I don’t want to promise something that I cannot deliver, but it’s -- we’re quite positive about what we are building. Do we have the infrastructure and tools? It’s work in progress. Do we have perfect data set? Not yet. I don’t know so many companies that are super clear on that. But we’re doing the hard work on this and Gen AI helps us really accelerate, cleaning our data, doing all these fuzzy matching and things like this that help us go fast. On the infrastructure, we believe that we’re moving invest up cost in legacy systems into Gen AI. So our priority is to decommission old systems quickly to find the space for additional Gen AI investments. We believe that the overall envelope that we have in tech is good to help us progress on that.
Operator: The next question is from Konrad Zomer with ODDO.
Konrad Zomer: I've got two. The first one is on your performance in North America. Can you maybe share with us a bit more granularity on the margin progression, not in combination with Lat Am, but just on the North American business? What you see in terms of wage inflation, the gross margin development there and where you think the trajectory of your EBITA margin might go to in North America? And my second question is, obviously, there is a staffing business within Akkodis as well. And some of the growth rates in Akkodis staffing are quite significantly different from the growth rates in Adecco staffing. How much flexibility do you have in terms of your reporting as to choose where to book these specific revenues? Is that based on the job classification? Or is that based on the end client?
Coram Williams: Thank you, Konrad. I'll take the first one, and I think Denis will pick up on Akkodis and Adecco growth rates, and we might do a bit of a dual hat on reporting aspects of that. On the performance in North America, so to be clear, we did see profitability in Q4 slightly lower than the levels that you see for the overall segment of Americas. Wage inflation is part of that. So we are seeing across the group as a whole, low to mid-single digits of wage inflation. In the U.S., actually, it's running a little bit higher than that as it typically does and the U.S. is one of the areas where we are benefiting from the spread. So the GM development is actually heading in the right direction. And as I mentioned in response to a question earlier, we're also focused very much on reducing costs, where it makes sense in that business, and it's one of the areas where sequentially headcount came down. I think we're pleased with the progress that we're making but there is still a fair amount to do. The market is still difficult. And remember that in Q1, typically, it's a much lower margin seasonally than you've seen at the back end of the year. So we are making progress but I don't think you'll see that level of margin from the Americas in Q1. And maybe Denis will pick up on staffing in Akkodis.
Denis Machuel: Yes. I must say the Akkodis staffing business -- the tech staffing business has severely been impacted by the downturn in the tech sector overall. And on this one, yes, we're -- so both the Adecco staffing is also declining a bit less than a tech staffing in Akkodis. And -- but it's mainly linked to a sector mix. And in Akkodis, we are more or less middle of the pack with the competitors. So that's the idea. However, we see and we know that this business is very agile. And when the rebound comes, it can grow really fast. So that's where we see. Now in terms of how -- where we book our revenues, let's be clear, tech staffing has a different business model than the consulting business. In tech staffing, you're mostly working with freelancers and then you charge with a multiplier of the wage. When you are in consulting, you charge per day, per month a fix, you have a rate card and you charge your services according to sometimes time and materials, sometimes scope of work, but this is very defined. And it's not directly linked to freelancers being a new charge or multiplier of it. In consulting and overall, we work with our own employees, people who are coming on the employees with us. That's how we separate the two.
Coram Williams: And maybe I can just add from an accounting perspective, our primary segmental split is by GBU because that is the way that we manage the business. It’s the reason though why we give you on a secondary basis, the reporting by service line because it helps you to identify the pieces within the businesses that fit in the various service lines. But our primary reporting view is because of the way that we manage the business.
Operator: The last question is from Gian-Marco Werro with ZKB.
Gian-Marco Werro: Three from my side, please. So first one is on the €30 million that you see in the future as a normal run rate for one-off, and I would like that you might give us some more details there. Would do you really classify then ongoing one-off costs also in the future that would be really interesting for me to understand what you reclassified that as a reoccurring one-off? And then the second question is just the disposal of your real estate from the AKKA acquisition that positively affected your cash flow from investment activities. I just wanted to check if that -- or the revaluation of it had also potentially an impact on your P&L? And then the third question, again, Germany, the sickness of Akkodis and the employees in Germany affecting your revenues by tech magnitude, I would really understand this issue better. Do you have a lack of motivation of your employees? Or was there really a severe health issue among a big share of your employees?
Coram Williams: Thank you, Gian-Marco. I'll take the first 2, and I'm sure Denis will be delighted to comment on German sickness. On the €30 million normal run rate for one-offs. Let's be clear, this isn't about ongoing one-offs. There is a contradiction in that statement. The reason that the business requires a modest level of one-offs is because there are changes in terms of restructuring. There are changes in terms of business exits, which would distort the operational performance if we left them in the P&L. And the majority of the costs in the business are people. So the majority of what we're likely to charge on an ongoing basis would be the severance costs relating to those sorts of restructurings. €30 million is a lot lower than we have seen over the past couple of years. They have been good reasons, we have the restructuring related to COVID. We have the AKKA integration, and now we've got the G&A savings plan. But what you're hearing from us is a very clear commitment of the management team to really bring this down and €30 million is a very small proportion of our overall business and obviously of our EBITA. On AKKA property disposals, I think we were clear this was always part of the plan. The business did come with a series of properties and we have been working through and disposing of them where it makes sense. You will see that on the face of the cash flow statement under other acquisition, divestiture and investment activities. And there are a couple of properties in there, but probably the biggest one related to a property in Germany, which was owned by AKKA. There was no material impact on the P&L. So this is a cash flow item with no material impact on the P&L. And I'll hand over to Denis on Germany.
Denis Machuel: Yes. What's behind that? First of all, the impact, when you have like close to 10% of your employees are sick, it has an impact because it's a bench model. So you cannot charge when it's time and material, and you -- if it's not time and material, the scope of work, the projects do not progress as fast as you expect, and hence, you cannot invoice what you thought. Germany was having [indiscernible] as a whole. Was having, if I've not mistaken, something between 10% to 11% sickness rate as a country on the labor market. So it's not that we are -- our people are less motivated or just -- it's just that it's been a nationwide health issue, mainly related to COVID. There has been a wave in Germany, a big wave of COVID, and that's it. Normally, we do, of course, much better than that. So I must say we've been in line with what has happened in Germany. And as I said, in a bench model, it has an impact. but we'll recover. We believe that Germany is in a much better place than like a year ago, we're streamlining the business. We've made the choices to move into smart industry, move away from some of the low-margin businesses that we had. And we have very strong collaboration with top clients, particularly in automotive sector, which make me very confident on Germany in the future.
Operator: Ladies and gentlemen, that was the last question.
Denis Machuel: Okay. So let me give a few words of conclusion, and thank you again for having been with us today. We wanted to share a lot of information in this spirit of transparency that we are creating and show that we have a strong underlying performance in our numbers. When we look ahead, we might not have a very supportive macro environment, but so be it. We are able to execute our simplify, execute and grow plan with rigor. We will deliver the savings that we said we would deliver. We are operating on fragmented markets, which means we can gain share by leveraging the current momentum that we have and also protecting pricing. We will focus on productivity. We will adjust to market conditions as we said earlier, we are quite agile on that. We are focusing, of course, on cash generation, and we’re getting ready for the rebound in whatever place is at the moment a bit not in its best pace. So I’m extremely confident in the future. And we are building what we are building and in the momentum that we are creating on the market. Thank you very much and look forward to our next interaction. And until then, take care. Thank you. Bye.
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