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Edited Transcript of ADEN.VX earnings conference call or presentation 8-Aug-19 9:00am GMT

Q2 2019 Adecco Group AG Earnings Call

Glattbrugg Aug 16, 2019 (Thomson StreetEvents) -- Edited Transcript of Adecco Group AG earnings conference call or presentation Thursday, August 8, 2019 at 9:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Alain Dehaze

Adecco Group AG - Group CEO

* Hans Ploos van Amstel

Adecco Group AG - CFO

* Nicholas Edward de la Grense

Adecco Group AG - Head of IR

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Conference Call Participants

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* Alain-Sebastian Oberhuber

MainFirst Bank AG, Research Division - Head of Equity Research Switzerland & MD

* Andrew Charles Grobler

Crédit Suisse AG, Research Division - Analyst

* Anvesh Agrawal

Morgan Stanley, Research Division - Research Associate

* Bilal Aziz

UBS Investment Bank, Research Division - Associate Director and Equity Research Analyst

* George Nicholas Gregory

Exane BNP Paribas, Research Division - Research Analyst

* Paul Daniel Alexander Sullivan

Barclays Bank PLC, Research Division - Director & Analyst

* Suhasini Varanasi

Goldman Sachs Group Inc., Research Division - Equity Analyst

* Thomas Richard Sykes

Deutsche Bank AG, Research Division - Head of Business Svcs Co. Research & Industry & Leisure & Transport Research

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Presentation

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Operator [1]

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Ladies and gentlemen, welcome to the Q2 results 2019 analysts call and webcast.

I'm Alessandro, the Chorus Call operator. (Operator Instructions) The conference is being recorded. (Operator Instructions) The conference must not be recorded for publication or broadcast.

At this time, it's my pleasure to hand over to Mr. Nicholas de la Grense, Head of Investor Relations, accompanied by Mr. Alain Dehaze, CEO; and Mr. Hans Ploos van Amstel, CFO of the Adecco Group. Please go ahead, gentlemen.

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Nicholas Edward de la Grense, Adecco Group AG - Head of IR [2]

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Good morning and welcome to Adecco Group's Q2 2019 Results Conference Call.

As usual, today, I am joined by Alain Dehaze, group CEO; and Hans Ploos van Amstel, group CFO.

Before we begin, please review the disclaimer regarding forward-looking statements on Page 2.

Looking at today's agenda. First, Alain will briefly review the highlights of the quarter. Hans will then provide some additional color on our financial performance, after which Alain will describe some of the progress being made on our transformation and innovation agendas. We'll then open the lines for Q&A.

And with that, I hand over to Alain.

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Alain Dehaze, Adecco Group AG - Group CEO [3]

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Thank you, Nick. And good morning, ladies and gentlemen. Welcome to our second quarter results investor call.

And I will start on Slide 5 with the key highlights. The second quarter demonstrated strong execution of our strategy, driving a structural improvement in performance in an uncertain environment. Indeed, gross margin increased by 70 basis points and by 40 basis points organically. This shows that the new digital tools and solutions are appreciated by our clients and that our focus on value-based pricing is having a positive impact also helped by talent scarcity. What is more, despite revenues declining by 3% trading days adjusted in the second quarter, we kept our EBITA margin, excluding one-offs, stable. That represent a 20 basis point underlying improvement after considering the impact of the bank holiday timing, investments in the New Ventures and the fact that Germany still has an unfavorable impact. Excluding these items, EBITA margin was up 20 basis points, which is the fourth consecutive quarter of improvement.

The GrowTogether program is a key driver of our improved productivity and our structural margin improvement. During the second quarter, we made further progress in expanding various initiatives, and I will discuss some examples later. Once more, I can confirm we are on track to deliver the additional EUR 70 million savings that we targeted in 2019.

On our innovate agenda, we continue to make good progress. We have talked before about how the acquisition of General Assembly last year would strengthen the group ecosystem, adding value to all the brands. During the second quarter, we saw that in action with the launch of the Modis Academy in the United States. And we also saw the first wins from collaborations with Lee Hecht Harrison, the global leader in career transition.

So you can really see the Perform, Transform and Innovate strategy is delivering results in Q2; and we expect that to continue in the coming quarters. With that, I would like to thank all of our colleagues worldwide for their commitment and hard work.

And now I hand over to Hans.

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Hans Ploos van Amstel, Adecco Group AG - CFO [4]

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Thanks, Alain.

We will now discuss the Q2 financial performance in more detail, starting with revenue.

Revenue was down 3% on a trading days-adjusted basis. This is slightly below the minus 2% we reported in the first quarter and reflects the slow economic growth.

Europe was minus 5%, with lower growth in most European countries consistent with more difficult market conditions. Remember that, in Q2 of last year, we still had very strong growth in Europe at plus 6%, so the slowdown comes after the period of strong growth last year. It's clear that there has been a further slowdown in automotive and the manufacturing sectors of the economy. In North America we saw a slight slowdown to minus 4%. This is partly driven by the markets and partly due to the fact that we still have some challenges in our professional business. In Japan we saw an acceleration of growth. And in the rest of world, the growth remained positive.

Looking at the country revenue results in more detail on Slide 8.

France growth slowed versus the first quarter and was slightly below the market. Remember that, in Q2 of last year, we were growing a solid 4 percentage points ahead of the market. While our revenue was slightly down, we actually grew gross profit year-over-year. This confirms that we're improving the quality of the mix and we continue to focus on higher-value services.

In North America and U.K. General Staffing, revenues were slightly down. In the U.K. that's very much Brexit related. In North America the markets softened a little, and we also saw a few of our large customers reducing their volumes. This was partly offset by good growth in permanent recruiting. In North America and U.K. Professional Staffing, revenue was mixed: continued strong growth in our Soliant health care business and in finance and Office. The legal business was significantly lower due to a few large contracts that ended in Q1, which we talked about before. This will continue to be a drag for the balance of the year. Our U.S. IT business continued to decline, but we're making good progress in building the new capabilities with the launch of our offshore recruiting center during Q2 and the Modis Academy leveraging General Assembly.

In the U.K. we saw modest growth overall, while our special recruiting businesses were soft. Again, the Brexit uncertainty is not helping the U.K.

In Germany, Austria and Switzerland the decline was broadly in line with the market. Germany continues to be a very tough market impacted by a slowdown in the automotive sector and by the regulatory changes that were introduced in Q4 of last year. We made good operational progress in the quarter. The retail business is stabilizing, and we saw a positive gross margin development. We have become much more proactive in passing-through the increased costs related to the regulatory changes. On the large clients’ side, we see the key account pipeline growing, which is promising. In Italy revenue growth was slightly below Q1. Remember also that we were growing at 11% in Q2 of last year.

We're seeing strong growth in Japan. We continued to build the market share. The VSN professional staffing business continues to perform very strongly, which is supported by its differentiated offering. Iberia grew 4%, reversing the trend of prior quarters. Career transition revenues remained slightly negative. While not seeing any pickup in our placement activity, we're pleased with the continued growth in talent development.

Turning to the gross margin. Reported gross margin increased by 70 basis points. M&A had a positive 20 basis points impact driven by General Assembly which is a high-value business that strengthens our customer offering. Currency had a positive 10 basis point impact. That means that the organic gross margin was up 40 basis points. Permanent recruiting had a positive 10 basis point impact. Career transition and other activity had a neutral impact. This leaves a 30 basis points improvement in the temp gross margin.

Within the 30 basis point increase in the temp gross margin, there was a 10 basis points negative impact from unfavorable timings of bank holidays, mainly in Germany. That leaves a 40 basis points positive impact from pricing and mix, confirming that our actions to strengthen the temp gross margin are paying off. We continue to focus on value-based pricing, and this is supported by our new tools.

Let's now look at the EBITA margin. Our EBITA margin was flat year-on-year. The investments in the New Ventures had a negative 5 basis point impact. Germany impacts the group by 5 basis points negatively. The bank holiday impact is another 10 basis points negative. If we take those factors into accounts, the underlying improvement in the EBITDA (sic) [EBITA] margin was 20 basis points. That is slightly below the previous quarter but a strong result in a declining revenue environment. It confirms that GrowTogether continues to fuel the margin and the work on value pricing and mix is paying off.

Looking at the profitability by country on Slide 11, we will now provide some further perspective for the key markets.

France margin strengthened further by 30 basis points to 6.2%. The improvement was driven by a combination of our pricing actions, diversifying the business mix and the improvements from the GrowTogether initiative.

The North America, U.K. & Ireland General Staffing business was flat year-over-year in margin. There were some negative discrete items in the quarter which disguised an otherwise good development in both gross margin and productivity. In North America and U.K. Professional Staffing, the margin was down 60 basis points. We continue to invest in Vettery. And we also have some investments in building up the offshore delivery capabilities for the U.S. Professional Staffing business, as well as negative operating leverage.

The EBITA margin in Germany, Austria and Switzerland was down 220 basis points year-on-year. About half of that is due to the unfavorable bank holidays. The rest is negative operating leverage and higher bench costs in Germany. Note that we took further actions in the quarter to streamline the organization in Germany and to drive the competitiveness. We continued to strengthen the front-end capabilities while we streamlined the management layers and are driving efficiencies in the middle and back office.

For Career Transition and Talent Development, the margin decline is driven by the investments in General Assembly, which was only in the base for 1 month in Q2 of last year. The underlying LHH margin remains strong.

Let's look at SG&A in more detail on Slide 12. In an environment where sales are declining, it's important that we adapt our cost base to offset. SG&A was down 1% organically, driven by a 2% reduction in the number of FTEs. The SG&A reduction matches the decline in gross profit which was also minus 1%. The FTE productivity was slightly up in the quarter, while sales declined. It confirms that the GrowTogether initiatives continued to drive the margin, this while we also continued to invest in new IT technology while we're driving the GrowTogether benefits to the bottom line.

Turning to cash flow and balance sheet on Slide 13.

Cash flow was strong in the quarter. Note that, as we indicated before, the CICE change this year had a negative impact on cash flow in the quarter. The net impact versus Q2 of 2018 was around almost EUR 70 million. For the full year, the CICE change is roughly neutral because we got a benefit in Q2, and again we'll get them in Q3 and Q4.

Days of sales outstanding are down 1 day at 52 days.

Net debt-to-EBITDA is 1.2x at the end of Q2. Q2 is always seasonally the highest because we pay the dividend. Compared to last year, net debt-to-EBITDA improved by 0.2x, confirming the strength of the cash flow and balance sheet.

As we stated at Q1, the lease accounting changes impact us differently to some of the European peers because we report under U.S. GAAP. With U.S. GAAP, there is no impact on the income statement from the new lease accounting standard, nor does it impact net debt or the leverage ratio. It also means we do not see any change to our EBITDA margin from the lease accounting changes, unlike IFRS reporters, who do get a benefit.

Coming to the outlook.

Revenues in June were down 3% trading day adjusted, in line with the Q2 results. In July, volumes indicate a continuation of the June trend. The negative impact on cash conversion in Q2 2019 from the replacement of CICE in France will reverse in the second half of 2019 and will be broadly neutral for the full year. We're on track to deliver the targeted incremental EUR 70 million savings from GrowTogether in 2019.

And with this, I hand back to Alain for an update on the transformation and innovation.

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Alain Dehaze, Adecco Group AG - Group CEO [5]

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Thank you, Hans.

And indeed let's start with transformation and more specifically our GrowTogether program.

GrowTogether is about strengthening the value proposition to drive sustained profitable growth. It is about increasing productivity while also improving the quality of service we provide to our candidates and clients.

We talked last quarter about the 3 pillars on which GrowTogether is built. The first one is service excellence, putting our customers at the heart of all our activities. The second pillar is reengineering our work processes across all branches and shared service centers through the PERFORM method to reduce inefficiency and provide a strong foundation on which to deploy new technology. And the third pillar is about leveraging technology. Leveraging technology so that all colleagues can focus on what they are passionate about, helping more candidates to find jobs and develop their careers. In these 3 pillars, we have delivered several initiatives over the course of the last quarter. Let's take a look at some examples of the progress from this second quarter.

We have a net candidate app in France called the Adecco & Moi, "Adecco and me." And this candidate app has been a great success. We now have more than 200,000 unique monthly active users. It is the eighth most popular business app in France. And we keep upgrading the functionality so that associates and candidates can self-service for a great number of activities. And this improved the experience of dealing with Adecco, and it reduced the number of administrative tasks that our consultants in our branches have to manage. It is really a career win-win. Building on the success of this candidate app in France, we have begun the rollout of the global app. And we aim to gradually roll it out across the group, including to some of the other largest countries later this year.

On process optimization, we continue to train our teams in the PERFORM methodology, which applies a lean manufacturing concept to our business. After the U.K., the U.S., Netherlands and Japan, we further rolled it out in Italy, Spain and Northern Europe. Finally, on technology, we launched our advanced planning and scheduling tool in North America, Italy and Belgium focused on our onsite business. And the tool significantly speeds up scheduling, freeing up more than 20% of time for our onsite consultants. And it also improves order fill rates and candidates redeployment. This resulted in improved clients and candidate satisfactions and clearly also improved productivity.

Now a quick review on -- of the progress on the final part of our strategic agenda, innovate. When we talk about innovation, one of the key opportunities for the group is to leverage the strengths of our various brands to create differentiated solutions for clients. When we acquired General Assembly last year, we identified 2 clear opportunities to generate synergies with Modis and with Lee Hecht Harrison, and I am pleased to say that we made progress on both sides during the second quarter. Modis launched the Modis Academy in the U.S., a collaboration with General Assembly that offers talented candidates sponsorship to train in software engineering before being placed with Modis clients. It is a model that is similar to what we already do in Japan. It takes the recruiting model to the next level because we help to build a pipeline of talent in areas of skill scarcity. And this is also a trend that we think will become increasingly important and where we have a lead, thanks to General Assembly.

A second example of the ecosystem at work is the integration of GA business model with Lee Hecht Harrison in the U.S. Since the first quarter, LHH has added online digital assessment and learning tools from GA into its Active Placement platform and integrated reskilling into its client value standard proposition. This enables outplaced candidates to be better prepared to find a new job faster. And it strengthens the traditional career transition offering, shifting the conversation to one about workforce transformation and really differentiating LHH from competitors. And that has paid out in Q2 with the first related business win, and we expect it to be the first of many.

Coming now to the concluding messages. The second quarter was a quarter of strong execution of our strategy despite an uncertain economic environment. We achieved a fourth quarter of underlying improvement in EBITA margin supported by GrowTogether and progress we are making on improving our mix and with our pricing strategy. We continue to invest in our digital transformation and in our innovative New Ventures. And we are strengthening the group ecosystem, driving synergies from the combined strengths of our brands as a source of real competitive advantage.

And with this, I would kindly ask the operator to open the lines for the questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from Bilal Aziz with UBS.

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Bilal Aziz, UBS Investment Bank, Research Division - Associate Director and Equity Research Analyst [2]

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Three questions from my side, please. On gross margins, can you perhaps indicate for 3Q how you expect the bridge to look like, particularly with your expectation for the sustainability of the temp margin? Secondly, I appreciate you do not give revenues on a monthly basis, but can you perhaps remind us how the shape of the third quarter looked like last year by month so we can get a sense of how and when the [comparatives deviate somewhat]? And lastly, in France, some of the proposed regulatory changes are related to short-term contracts. I know it's very early days, but how do you think that may impact your business across the 7 sectors?

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Alain Dehaze, Adecco Group AG - Group CEO [3]

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Yes. Thank you for your questions. And I will start immediately with your point on France and the so-called bonus-malus framework. First of all, we see that there are multiple elements, some positive and some negative, but let me first explain what is the bonus-malus about. First, it is a framework that will apply to companies from January 2021. This is where it will start to influence the -- I would say, the P&L of the companies, but the -- to -- and this bonus-malus framework will be based on a standard social insurance rate of 4%. But depending on how you are consuming this, I would say, social insurance for unemployment and how many people you are sending back to the unemployment agency, your standard rate can vary from 3% to 5%, again the standard rate being the 4%. So what does it mean? It means that, starting from January 2020, which is the -- which will be the reference year, companies in 7 sectors because it is limited to 7 sectors, will really pay attention on the way they are consuming temporary staffing but even more the short-term contract of duration. I will come back in a minute to that. Because especially these 2 type of contract will have influence on your future rate.

So for the temporary staffing, it means that, if they send back the and we send back the temporary staff to the unemployment agency, it will start -- it will have influence on the rate you will pay. So our job in -- even more will have to permanently redeploy our temps. And as we are, I will say, the largest player in France, we see there an opportunity. We see even more opportunity with the CDD. And as you know, the CDD contract is 4x bigger than the temporary staff contract; and especially the so-called [CDD desires], which is the very short-term contract of definite duration. And there this type of contract, starting from the 1st of January 2021, will get an additional fee of EUR 10 per contract. And you can imagine for companies doing today a lot of 3 hours contract what this EUR 10 will mean as cost increase. So to summarize: There will -- there are some positive elements and some negative elements, but for us it is clearly an opportunity by redeploying our temps; also by continuing to push the so-called CDITT because this contract will not be impacted by the new regulation; and for sure, substitute the CDD by the CDITT or the temporary staffs that we will redeploy. This was on your third question, and I leave now the floor to Hans for your first and second questions, yes.

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Hans Ploos van Amstel, Adecco Group AG - CFO [4]

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So to give you a little bit more guidance for the Q3 gross margin. Next quarter, we don't have the bank holiday impact, so that will be neutral. M&A will also not have an impact anymore because it's fully into the numbers. I would expect foreign exchange to be around having that same 10 basis points impact. Then we need to consider all the dynamics of the permanent recruiting, career transition and the temp pricing mix. I think perm continues to be slightly positive. And the temp pricing mix should also be a positive, maybe a little lower because -- or slowly, yes, comparing to a better period. And altogether, gross margin should be up around 40 basis points year-on-year in Q3. If you -- your second question is related to the monthly phasing of the sales. The slowdown happens in the late summer. So that is a little bit giving you the answer but not probably giving you the answer because, if you look, have we saw the July trends in line with June. But the slowdown really last time happened after we had the earnings call in the late summer and going into September, which makes the comparison base better in the second half. But that uncertainty really started to hit us after the summer period, in the late summer and going into September.

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Operator [5]

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The next question comes from Paul Sullivan with Barclays.

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Paul Daniel Alexander Sullivan, Barclays Bank PLC, Research Division - Director & Analyst [6]

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Yes. Firstly, could you perhaps elaborate a little bit more on the restructuring and plans in Germany through the second half in light of structural challenges there? And how do you think you're containing the losses going through the second half? And what does that mean for restructuring charges more broadly across the group over the next 6 months? That's the first question. Secondly, could you give us any more color on the revenue contribution or performance from the digital ventures including General Assembly? And then -- and that's -- I think that's it for now. That's fine.

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Hans Ploos van Amstel, Adecco Group AG - CFO [7]

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Okay. Hans here, Paul. I'll start with talking about Germany. We had a relatively -- yes, a large reorganization cost into the quarter related to Germany. What we're doing in Germany is a couple of points. One, with that revenue decline which you saw in the quarter, we have to adjust the cost base to manage the margin. So there was, one part, an adjustment, but more important than that, we are strengthening the front-end of the business. We have optimized management layer structure in Germany, which makes also the organization more agile and effective. And we're optimizing, supported by some of the GrowTogether tools, the productivity in the back and the middle office. So you talked about the loss: We have to take into account that we have the trading days, if you look over the first half, yes, together. Because we have the plus and the minus, we're still in the small plus, but the actions we're taking are structurally helping the productivity in the second half. And we see it's early because the German market is challenging at the moment not only because of automotive but because also the new regulation comes at a time when the candidate market is scarce. But we see in the retail network first improvements, and the sales pipeline is getting stronger. So yes, a large restructuring, we have to adjust the cost base, but some of it is also structurally driving the positives in the second half. And we see some, I would say, early indications of improvements and -- we're pleased with, but the trading environment in Germany is obviously challenging.

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Alain Dehaze, Adecco Group AG - Group CEO [8]

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Then on your questions regarding the ventures and starting with General Assembly. You'll remember we had a good first quarter, a growth of around 20%. The revenue growth in Q2 was a little bit lower mid-single digits, especially because the comparison base was impacted by a contract, a B2B contract mobilization that we had in the second quarter 2018. But when we look -- and we looked at the booking, and the booking growth is strong. We have a very good momentum in the so-called B2C. Because we are B2B and B2C. B2C business is also very good. So we expect the growth in the second half of this year to be back above 20% organically. And again like I was mentioning in my presentation, we are very pleased with the synergies with the rest of the group. I gave you 2 examples, referrals with LHH and Modis and the tools of GA under Active Placement platform, but we are also playing now the synergy with Vettery. For example, in New York all the GA graduates are now generating their profile on the Vettery platform. We have launched also in Italy a 3 1-week full-time course in Milan. So the synergies are really in development.

Now regarding the other ventures. We have Vettery. And in Vettery we have a triple-digit growth in the first half and a strong renewals of the subscriptions, so we are very pleased with that. Adia, the 2 major points are Switzerland. In Switzerland we have a strong growth above 50%. And further good progress also in the U.S., as we are building this 0-touch solution, growth above 50%. Not only we are growing with Adia, but we are taking the learning we are doing with Adia into the -- what we call the legacy. One of the examples is the candidate app we were mentioning. We are taking this candidate -- the app we have developed for Adia. We are putting that in our core business based on the experience we have done in France, the successful experience. That's, I would say, the 3 main ventures we have. I would say in a nutshell or in summary we are investing around 5% of our EBITA in the New Ventures, which we are convinced is the absolutely right thing to do. And important that as a company we can perform on the -- today's business but also at the same time invest for the future.

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Paul Daniel Alexander Sullivan, Barclays Bank PLC, Research Division - Director & Analyst [9]

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Great. And can I just -- I mean following up from that. So when you look at next year and the big step-up in cost savings that were factored into the original plan, how confident are you on the delivery of those as we approach 2020?

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Hans Ploos van Amstel, Adecco Group AG - CFO [10]

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Yes, I think 2 things for you. I think we have delivered 2 quarters of solid margin improvement fueled by the GrowTogether initiative. The first half was up 25 bps. There's still a lot of investments in there because we also continue to invest in IT while we're investing fully into Digital Ventures. You asked some questions on Germany. That's still a drag and the margins should improve. So we see going forward that, I think, we fundamentally with the Perform, Transform and Innovate agenda have a good strategy to strengthen the margin structurally. And on GrowTogether, we are delivering on our objectives this year, like we did last year. Our objective is to also do that for next year, so we will do that. Now the disclaimer: So my first message is we have a clear strategy to structurally strengthen our margin structure while we're investing for the future, and I think that is the positive matter. If we look at next year specifically, I have no crystal ball on the economy, neither do I have crystal balls on the quarters and the uncertainty with there, so let's (inaudible) specifics on a quarter and a year, just report quarter by quarter how we're delivering. But we're on the right track and we have a strategy on which we are delivering as we speak.

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Operator [11]

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The next question comes from Alain Oberhuber with MainFirst.

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Alain-Sebastian Oberhuber, MainFirst Bank AG, Research Division - Head of Equity Research Switzerland & MD [12]

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Alain Oberhuber of MainFirst. I have 2 questions. The first is again regarding Germany. Is there any risk that there could be a further impairment on intangible assets and goodwill at the current moment? And also on Germany, have you already seen the light at the end of the tunnel, or not yet? The second question is North America. And could we -- I mean it looks like that there is some deceleration in the General Staffing business. Do you expect that to continue? Or was that just an issue because of the high base; and the lower base in Q3 should help you again, that North America could grow? i.e., sequentially did you decline in Q2 as well?

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Hans Ploos van Amstel, Adecco Group AG - CFO [13]

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So let me start with Germany. Our objective is not to do another impairment in Germany. Our objective is to structurally bring the business back to where it needs to go. We have had some unfortunes things with the integration of Adecco and Tuja, which is now behind us. I think you see now also in the peers that both the market and this implementation of the new regulation, on the short term, is giving us some challenges, but I'll give you -- so we are on a mission to get the business where we want it to be. There are some first lights at the end of the tunnel. The retail business is stabilizing. Our sales pipeline is improving. And we're bringing structural productivity in with the new management approach, where we delayered the management teams and drove real sustained benefits in the back and middle office, helped with some technologies. So there's some light.

I think on the General Staffing you said some of it already. I think you -- I think, General Staffing, yes, the quarterly compare is in place, but I see where the General Staffing business and -- is in the U.S. It's hovering around stability. Sometimes, we have quarters which are up. Now the [quarterly] was slightly down, but I don't see that as a change in the trend line of a market where perhaps unemployment rates are very low. And it's a variation around stability.

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Alain Dehaze, Adecco Group AG - Group CEO [14]

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If you look into more details, Alain. Specifically on the General Staffing, we see that the decline is concentrated with a few large clients. And so it -- the results of Q2 was impacted by a more difficult base, yes. That's clearly. So market trends are a little bit softer in Q2, but it's in line with all major competitors. I think the good news there is the perm, the perm in General Staffing but the perm also in Professional Staffing. In perm General Staffing, we had 11% growth, which is very good. And total perm in the U.S. was 9% if we take also Professional Staffing into consideration.

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Operator [15]

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The next question comes from Tom Sykes with Deutsche Bank.

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Thomas Richard Sykes, Deutsche Bank AG, Research Division - Head of Business Svcs Co. Research & Industry & Leisure & Transport Research [16]

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Yes. Just to focus a bit more, to begin with, on France, please. You say -- I think in your annual report you say that 25% of your gross profit in France is coming from nontraditional temporary staffing. And I just wondered if you could perhaps break down that 25% and maybe just say what the growth of that is relative to the growth of the gross profit in your traditional temping model, please. And I guess there's perm in there but also just the growth out of things like apprenticeships and whether the bench model is improving as well in traditional -- in the temporary staffing comp, please. And then I've got some others to follow on.

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Alain Dehaze, Adecco Group AG - Group CEO [17]

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Okay. Yes, you are right. And you are right. When we say nontraditional temp staffing, we are including in these figures the perm recruitment. And you -- when you see the development through the years of the perm in France, it has been substantial. What has been also substantial is the development of the CDITT. We are -- I had the pleasure to start that also, I think, 6 or 7 years ago. In the meantime, it is between 15% and 20% of our headcount, so it's -- and it is clearly accretive for us. So that's -- again, it is we call that a nontraditional temp staffing, but it is good. And apprenticeship also. I would say that, according to my knowledge, we don't break out the -- by type of, let's say, contract or activity or gross profit, but it is clear, a clear sign that our strategy to develop high-value mixed-service offering is paying off.

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Thomas Richard Sykes, Deutsche Bank AG, Research Division - Head of Business Svcs Co. Research & Industry & Leisure & Transport Research [18]

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Okay. And specifically, I mean, is it possible to say how big the apprenticeships business is now for you? I think you've got 9,000 in France and about 11,000 globally, but I'm just trying to think about how important that is to gross profit and particularly whether you've put prices up in that area, please, or got more fees from government. And do -- indeed do you book that in the temp gross margin?

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Alain Dehaze, Adecco Group AG - Group CEO [19]

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And what I can tell you is what we have said publicly. And publicly, we have taken the commitment to raise the number of apprentice managed by us to 10,000 by the end of next year. So it was a 36 months plan. And I would say that we are really on track. We are now in the second year and we are on track to deliver this. And again on the figure, we don't give clarity regarding the exact level of gross margin, but it is accretive and it is booked, yes. It is booked into gross margin staffing.

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Thomas Richard Sykes, Deutsche Bank AG, Research Division - Head of Business Svcs Co. Research & Industry & Leisure & Transport Research [20]

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Okay. And then just on perm. I think, I mean, you're about 14% perm as a proportion of your gross profit. And I know there's the offset of outplacement, maybe with a lag to perm if things slow down, but how high are you prepared to let that go given what we know about the cyclicality of perm businesses when things slow down? I don't think you've ever been higher as a group. So how high are you prepared to let that go, please?

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Alain Dehaze, Adecco Group AG - Group CEO [21]

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Well, I think there are different aspects. First of all, you see that in vast majority of countries you have to split the perm coming from, let's say, the blue collar activities from Adecco. And in a lot of cases we can embed this in our traditional activity, though. So should, let's say, a slowdown coming, I think we can absorb that with our organization, and it's not a problem. And then we have the brands', let's say, blue collar or blue -- white skilled collar, where we have developed during the last years these dedicated brands. And there we see that our gross -- first of all, our gross margin is very limited. So whatever the market trends -- or market share is limited. And there is scarcity of such a profile in a lot of countries, so I say we will -- time will tell, but scarcity, according to us, is there to stay, even in slowdown of some market. We see that, for example, in markets like Japan. And some scarcity is there to stay, and it is good for these temp Professional Staffing type activities.

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Thomas Richard Sykes, Deutsche Bank AG, Research Division - Head of Business Svcs Co. Research & Industry & Leisure & Transport Research [22]

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Okay. And I suppose, sorry, final quick one was -- just, I guess, related to that is that Italy looks -- is at a new peak margin. Japan is getting back to peak margin. How important has perm been? I mean given you obviously put the perm growth rate for Italy in there, but perm and business mix changes. And how sustainable are those peak margins, please?

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Hans Ploos van Amstel, Adecco Group AG - CFO [23]

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I think what you see in those markets is that we have broad-based growth, between (inaudible) diversified mix on the customer base and perm recruiting. So it just confirms that, when we have a broad-based margin, it's driven that we -- our business is very diversified. So I think continuing to diversify the growth mix across the different sectors of the economy as well as between perm and temporary staffing is a good strategy.

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Operator [24]

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The next question comes from Suhasini Varanasi with Goldman Sachs.

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Suhasini Varanasi, Goldman Sachs Group Inc., Research Division - Equity Analyst [25]

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Just a couple for me, please. In Germany, obviously, we know about the auto weakness and how that's affecting the demand there, but can you tell us a little more about the trends that you're seeing? Are you seeing the weakness in Germany autos spreading to general industrial in Europe, for one? And secondly, if we think about the medium term, as these automakers invest in hybrid and EV new factories, how do you see the temp demand evolving in these new factories, please?

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Alain Dehaze, Adecco Group AG - Group CEO [26]

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Yes. I will take these questions, Suhasini. It is clear that, when -- first if we look and focus first at Germany. We have clearly see a slowdown of the auto sectors, which is linked to 4 different, I would say, reasons. And the first one is the trade war. I don't know if it is the most important one, but the trade war has affected the export of cars. Also the Brexit. This is the first reason. Second reason is the emission, the new emission policy rule obliging the car manufacturers to specify every single model. And this has also caused a bottleneck at the certification institute. This is the second bottleneck. The third -- and then we are coming into more the structural things, what you were saying. Yes, there is a migration towards electric and hybrid cars. And this implies not only change of model but change also of production line, and again this has caused, let's say, a slowdown in this activity. And the fourth one is the overall economy which has slowed down in Germany.

Now auto is not only the reason of the slowdown, our slowdown in Germany. Also manufacturing broad-based has slowed down. And we see that this manufacturing and auto slowdown has -- I don't know if it is spread. Because a lot of companies, a lot of countries are also supplying the German car manufacturers, but the slowdown is Europe and broad-based, I would say, now since the second quarter, with one exception being Spain. Now medium term, I think we are convinced that the model, the productivity model, of the future is a combination of technology, robotics, automation, with flexible human resources. And so that's why we see the opportunity for our industry and for our company. Beside this, there are also new services being developed around electric charger to be installed, to be maintained, coach around driverless car. So we see that we are developing quite a lot of new activities around mobility and especially e-mobility, and this is a very attractive new segment also for us.

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Suhasini Varanasi, Goldman Sachs Group Inc., Research Division - Equity Analyst [27]

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Okay. That's very clear. And just one more on SG&A, please. Can you -- I know you've given the outlook for gross margins in Q3, but do you have an SG&A outlook as well? Will there be the seasonal slowdown as expected?

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Hans Ploos van Amstel, Adecco Group AG - CFO [28]

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So to give you some color beyond the gross margin to the SG&A for Q3. A couple of points which I think are important is that we will continue to invest in our digital transformation, which includes GrowTogether and the New Ventures. GrowTogether will have a net positive impact also in the second half, but we need to remember that we delivered most of the GrowTogether benefits in the second half of last year, so this year, they will be more skewed towards the first half of the year. So we will delivery exactly on the commitments for the year, but in SG&A [we will have] there's more benefits in the first half than the second half. The New Ventures will be a slight drag on the margin again in Q3. And if you look and add that all up for SG&A, I think we will be up around 3%. Half of that, 1.5%, will be exchange rates related, and about 1.5% up -- organic. And organic includes now the New Ventures and General assembly because all the M&A is in the organic numbers.

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Suhasini Varanasi, Goldman Sachs Group Inc., Research Division - Equity Analyst [29]

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Got it. So 3% year-over-year, right? Just to be clear.

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Hans Ploos van Amstel, Adecco Group AG - CFO [30]

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Yes.

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Suhasini Varanasi, Goldman Sachs Group Inc., Research Division - Equity Analyst [31]

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Yes, noted.

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Operator [32]

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The next question comes from Anvesh Agrawal with Morgan Stanley.

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Anvesh Agrawal, Morgan Stanley, Research Division - Research Associate [33]

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I got 3 questions, maybe if we can take them one by one, please. The first one, if I just look at the drop-through of the price and mix improvement of 40 basis point to the operating profit level. Now given the underlying improvement in operating profit is only 20, can you just comment the drop-through of price and mix? Because if within that 20 you have the benefit from GrowTogether, then it means that it's not really dropping through a lot at the operating profit level. Or are there any investment that are kind of in there in the underlying improvement?

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Alain Dehaze, Adecco Group AG - Group CEO [34]

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Yes. And your 2 other questions, Anvesh?

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Anvesh Agrawal, Morgan Stanley, Research Division - Research Associate [35]

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Okay. Yes. The second one is just you've obviously seen an improvement in the growth rate in Iberia, but I just wanted to check if that's wage inflation related. Or have you seen a volume improvement there as well? And then finally, I think on you flagged in the presentation earlier a win that you had in the LHH and GA business combined. Just wondering. Do we need to think of any tailwinds to the growth rate from that in Q3 and Q4?

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Alain Dehaze, Adecco Group AG - Group CEO [36]

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Yes.

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Hans Ploos van Amstel, Adecco Group AG - CFO [37]

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Let me start with the margin. If you look in the quarter, the underlying margin was up 20 basis points. We get the benefits on the temp, but we should not forget Germany, where the trading days impact in the quarter and that year-over-year hurt from CCA is also a negative. So that's why we're giving the bridge. And then the revenue was down as well. So we didn't have operating leverage. So if I look at our productivity in the quarter and we have the Digital Ventures, then a stable margin in the quarter includes continued investments, increased investment into Digital Ventures; includes that the impact of the trading days was negative in the quarter; and a combination of positive mix on the temp margin and the productivity from GrowTogether.

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Alain Dehaze, Adecco Group AG - Group CEO [38]

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Regarding -- okay. Yes?

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Anvesh Agrawal, Morgan Stanley, Research Division - Research Associate [39]

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Sorry. Before you proceed, can I just follow up on that? I -- but if you take all that out, then the underlying improvement is 20. And the price/mix improvement was plus 40, so I was just wondering what -- at what rate this is dropping through to the EBITDA level. Because in the bridge that you've shown for the operating margins, you separate out the investment, German impact and bank holiday, anyway. So ...

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Hans Ploos van Amstel, Adecco Group AG - CFO [40]

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Yes, so which leaves a plus 20 basis points real improvement in the margin when the sales was down and some of the things that are in the mix as well, but the strength of the margin is there while the revenue was down.

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Alain Dehaze, Adecco Group AG - Group CEO [41]

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Then regarding Iberia, Anvesh. So it is really volume related. And I would say it is also specially a strong performance in the small segments because, when I look at the different segments, that's where we have really made a great job increasing our client base. So I'm very pleased also by the way we realized this growth. And now regarding LHH and the collaboration and the synergies with LHH and your questions regarding the impact on the gross margin, I think at this stage it's still quite limited, that it will become more and more material. But at -- the materiality today is limited and should not be taken into account for Q3 and Q4 in your calculation.

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Operator [42]

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Next question comes from Andy Grobler with Crédit Suisse.

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Andrew Charles Grobler, Crédit Suisse AG, Research Division - Analyst [43]

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Just a few quick ones, if I may. Firstly, just a follow-up: On gross margin you mentioned that working day would be neutral. Do you not have extra working days in Q3? Secondly, there was a question earlier about savings delivery into 2020. And quite rightly, you pointed out that there's little visibility around the macro, but I wondered whether, that aside, you still think you can produce the gross savings. Whatever the net is, we'll wait and see. Third, just on autos. Clearly that's been weak. Can you give a bit more granularity about just how big a drag that has been on the business? And then lastly, in terms of U.S. clients, you talked a little about that earlier. With that, some of the headwinds there, is that due to kind of the macro environment or the segments those clients sit within? Or are they taking a slightly different approach to managing their own contingent labor?

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Alain Dehaze, Adecco Group AG - Group CEO [44]

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I will start with auto and the U.S. and be quite brief. I'm -- because I am looking at the time. Regarding the U.S., again we see there is -- we don't see any major change in the behavior of the market and the customer behavior. Sure, at the maturity of the cycle, we are growing since 10 years, it is clear that the candidates have the opportunity between temps -- temporary staffing and perm. They are choosing for perm. That's why we are growing 9% in the U.S. in Q2. So clearly demonstrating the strengthening of the market. As we said, the slowdown in Professional Staffing is mainly due to our IT activities, where we have a -- we had some customer -- big customers loss that we have to regain or new customers to regain. We have also adapted our value proposition and -- but it is really related to this. If I look at our Soliant activities, health care, education, double-digit growth. If I'm looking at finance and Office, also growing activities. And I've already given some comment on the General Staffing. So no specific headwinds, absolutely not. Regarding autos: Autos is part of our business. It's less than 10% of our total revenues. And to give you precise figures: It explain about 1/3 of the deceleration.

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Hans Ploos van Amstel, Adecco Group AG - CFO [45]

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Then on, yes, we have more working days, but what's important, we don't have more bank holidays because, when we have that hit on the temp gross margins is -- where we have the bench model is when we have more bank holidays. So the working days doesn't impact on that.

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Operator [46]

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The last question comes from the line of George Gregory from Exane.

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George Nicholas Gregory, Exane BNP Paribas, Research Division - Research Analyst [47]

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I just had one quick question. In terms of the GrowTogether benefits, you helpfully gave with the effect of New Ventures for the second quarter. I wonder whether you could just give us what's GrowTogether delivered in the second quarter, please.

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Hans Ploos van Amstel, Adecco Group AG - CFO [48]

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Yes. And I'll keep it to the key headlines, but we're bringing new tools into the business across our activity system. Our activity system has 3 core components: one, the engagement with the candidates. And the new candidate tools we're bringing into the French market are really working very well in, yes, better optimizing the matching and the engagements with candidates, which drives the productivity but also helps us to find them. That, we are in the future also bringing to other markets. So that's completely helping already the business. The second part of our business, once we have employed a temp, is the time capture and time interpretation, which we're digitalizing across a multiple of markets. And that is already fueling productivity also into the quarters. And last but not least are our new enhanced sales tools, which drives the productivity in the sales organization. So that gives you some examples behind the numbers we're quoting. And you see it coming through in the margin because, if you look in the productivity in the U.S., where we have the sales tools in General Staffing, productivity has gone up. You've seen it in France. And all the key markets where GrowTogether is, productivity is coming through.

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George Nicholas Gregory, Exane BNP Paribas, Research Division - Research Analyst [49]

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Can you actually give the absolute impact on the margins from GrowTogether, Hans?

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Hans Ploos van Amstel, Adecco Group AG - CFO [50]

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That is around 30, 40 basis points.

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Nicholas Edward de la Grense, Adecco Group AG - Head of IR [51]

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So thank you very much, everyone, for joining the call today. We'll see some of you on the road show. And for everyone else, we look forward to speaking again with the Q3 results in November.

Thank you very much.

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Operator [52]

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Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call, and thank you for participating in the conference. You may now disconnect your lines. Goodbye.