Adecco Group Ag Unsp/Adr

Good morning. Thank you for joining the ADECA Group's conference call today. I'm Benita Barreto, the Group's Head of Investor Relations. With me today are the ADECA Group's CEO, Denny Machuel, and CFO, Coram Williams. Before we begin, we want to draw your attention to the disclaimer on slide two. 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 Denny and the results report.

Thank you, Benita, and a warm welcome to all of you who've joined the call today. Let's turn to slide three, which provides an overview of the quarter. The group delivered 5.7 billion euros in revenue, flat year on year, on an organic training days adjusted basis. We are pleased to have delivered another quarter of strong share gains and clear outperformance in tough markets, many of which are contracting. The gross margin of 19.8% was 20 basis points higher sequentially and 100 basis points lower year on year. It is a healthy result that reflects the current business mix and firm pricing. Excluding one-offs was 157 million euros with a resilient margin of 0.8%. When excluding the impact of the timing of fiscal JV income, the margin is 10 basis points lower year-on-year. Adjusted EPS was 59 cents, 18% lower year-on-year, mainly reflecting lower business income. Net debt to EBITDA ended the quarter at 2.7 times, in line with management expectations. And cash performance improved, with free cash flow of minus 93 million euros, better by 72 million euros year on year, and a cash conversion ratio of 73%. Overall, the group demonstrated strong operational progress in the first quarter. Moving now to slide four. and an update on the G&A savings program. The group has committed to cutting G&A expenses by 150 million euros net, equivalent to a 15% reduction and sustaining costs at or below 3.5% of revenues per annum after that. In the first quarter, the group delivered 26 million euros in net savings versus the 2022 baseline a 13% reduction. As the right chart shows, savings have been delivered by the three global business units, corporate and across the groups shared functions this Q1. We will continue to execute methodically to capture further savings as we progress through the second quarter. We announced a new organizational structure to streamline leadership roles and group functions this March and it will be fully operational by mid-year. Further, local level optimization, particularly in continental Europe, is underway. We've also taken a couple of portfolio actions to support savings generation. We will incorporate Hired into LHH recruitment solutions, providing customers full access to LHH's more comprehensive integrated offering. In ADECO France, management has exited specific outsourcing contracts which were not reaching our profitability targets. We remain on track to deliver the group savings target of around 150 million euros net and in run rate terms by mid 2024. Let's turn to side five and digital developments. Since launching our own Spark AI initiative last year, the group's efforts to harness the transformative power of generative AI have been accelerating. In 2023, the group created many AI-powered initiatives centered on improving productivity and efficiency, such as CVMaker. Out of this, in 2024, we focus on scaling 20 initiatives that offer significant long-term potential. Let me cover three of these now. For largest clients, we're developing our global talent supply chain solution to drive consistent delivery and a better customer experience. Using GenAI, we aim to improve fill rates and recruiter productivity by double-digit percentage. For candidates, in partnership with Microsoft, we are developing an AI-powered career co-pilot. This platform is a career companion that transforms how candidates identify options for their career. It is in a beta phase in two US states with both active candidates from our database and via social media. We learned from live feedback before launching an expanded pilot later this year. Finally, the group is working on a recruiter co-pilot, which aims to automate a significant proportion of the recruitment process. We've completed three proof of concept tests and this quarter plan to run a more robust version of the tool in the US and in the UK. While in early stages, We believe that these types of products have exciting potential to drive efficiencies and to make the group's talented technology solutions offering unbeatable in the market. Let's turn to slide six and the grow agenda. The left side shows that the group has achieved relative revenue growth ahead of its key competitors for several consecutive quarters. This performance has been underpinned by cultural change in the group, including a relentless focus on customer satisfaction, rigorous performance management, and line incentives. The right side highlights two recent client wins. The U.S. ADECO team leveraged an existing professional services relationship with a major U.S. medical device manufacturer to upsell Pontoon's MSP offering. The client particularly valued our expertise in onsite models, our robust processes, and the opportunity to optimize their supply chain and better align contractual terms. Second, the U.S. ADECO and ACODIS teams successfully collaborated to present a unique integrated driver onboarding and support services solution to a large mobility company. The group's HR services know-how at scale and in-house technical expertise were key to winning this contract. Let me now hand over to Coram, who will provide details on the Q1 results.

Thank you, Denis, and good morning to everyone. Let's discuss the context within each GBU, beginning with ADECO on slide seven. ADECO's revenues reached 4.4 billion euros, 1% higher year on year on an organic trading days adjusted basis. ADECO gained further market share with relative revenue growth 600 basis points ahead of key competitors. Revenues were flat in flexible placement. In outsourcing, revenues rose 6%, while in permanent placement, revenues rose 1% organically. On a sector basis, growth was strongest in retail and logistics, led by large customers. Autos were robust, while manufacturing was weak. Gross margin was healthy, albeit weighed by current geographic mix, for example, EE MENA, Australia, and India. Sector mix, for example, logistics and autos, and solutions mix. Pricing was firm, supported by our dynamic pricing strategy. The EBIT A margin at 3% was 50 basis points lower year-on-year, reflecting current mix and a 25 basis point impact from the timing of FESCO JV income, which is influenced quarter-to-quarter by government payments. G&A savings and better productivity partially offset these impacts. Gross profit per selling FTE rose 2%, while selling FTEs reduced 4%. reflecting the agility with which we manage the business. Slide 8 shows a deco at the segment level. In France, revenues were 7% lower in a challenging market environment. Logistics, manufacturing, chemicals and retail were weak. France's EBIT A margin reflects lower volumes and the exit of specific outsourcing contracts. which were not reaching our profitability targets. Importantly, the exit of these contracts does not have a material impact on France's revenues, but costs associated with the exit were incurred in the quarter. Revenues were 6% lower in Northern Europe. Market conditions were tough, but the region performed well compared to competitors. Revenues from the UK and Ireland were 2% lower, and in Benelux, 1% lower. Revenues were 12% lower in the Nordics, weighed by the impact of regulatory change in the construction sector. In sector terms, financial services were weak and manufacturing was soft. The region's performance was strong, with revenues growing 7%. Germany's revenues rose 8%, strongly outperforming the markets. Logistics and autos were strong on a sector basis, and professional services were solid. The region's EBITDA margin was driven by fewer working days. In Southern Europe and IEMINA, revenue growth was strong, with Italy up 2%, Iberia up 17%, and IEMINA up 13%. The region continued to take share, with strong growth across logistics, autos, and food and beverages. In the Americas, revenues were 1% lower. LATAM was up 25%, led by Colombia and Brazil. North America was 12% lower, reflecting subdued demand for temp workers across many sectors, including IT tech and autos. Despite this headwind, the business outperformed its competitors, and management is staying on course with its turnaround plan. The region's EBITDA margin reflects operating leverage in LATAM and an ongoing focus on cost management in North America, partially offset by calibrated investment in the U.S. network to drive future growth. Turning to APAC, revenue growth was very strong, with Japan up 10%, India up 12%, and Asia up 4%. In Australia and New Zealand, revenues were 57% higher, boosted by a significant new government contract. The timing of FESCO JV income drove the EBITDA margin differential. Let's move now to ACODIS and slide 9. The CODIS's revenues were 2% lower year-on-year on an organic, trading days adjusted basis. Staffing revenues were 20% lower, challenged by the continued downturn in tech staffing activity. However, consulting revenues were solid, up 5% year-on-year. But by segment, Northamere revenues were 3% lower, weighed by weaker demand for software development expertise. Revenues in data response were 8% lower and in Germany, 3% lower. Germany's result was impacted by the repositioning of operations in the smart industry and elevated sickness rates. South EMEA revenues were up 1%. Revenues in France were 1% lower, with strength in autos and aerospace outweighed by easing demand in financial services and telecoms. Importantly, France's result reflects success in moving some activities to offshore delivery centres. North American revenues were 14% lower, reflecting the continued downturn in tech staffing, particularly in permanent placement. Consulting revenues grew 39%. APAC revenues rose 6%, with Japan up 8%. Growth in consulting and solutions and high utilization rates supported performance. Despite lower volumes, ACODIS' EBIT A margin expanded 100 basis points to 5.8%, reflecting services mix and synergies. We highlight that the quarter's consulting and solutions EBIT A margin was around 7%. Cost synergy delivery is substantially complete, so management is focused on revenue synergy capture to support the delivery of 2024 synergies of around €75 million. Let's turn to slide 10, an LHH. Revenues in LHH were down 5% year-on-year on an organic, trading days-adjusted basis. Recruitment solutions revenues were 16% 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 19% lower, with the U.S. 20% lower. That said, there were signs of stabilization in U.S. permanent professional recruitment activity sequentially. Career transitions revenues were up 9%, a very strong result given a demanding comparison period and reflecting further share gains. Canada, the UK, the US, and France all grew well, and the pipeline is solid. Learning and development revenues were 10% lower organically. General assembly and talent development were challenged by their end markets In Ezra, revenues were up 64% organically, and the business exited the quarter with a strong pipeline. Revenues in Pontoon were 8% higher, led by growth in direct sourcing activities. MSP and RPO continued to be challenged by the tech sector downturn. LHH's EBITDA margin was 50 basis points higher year-on-year, at 7.3%. with the impact of lower volumes fully mitigated by current segment mix and good cost discipline. Let's turn to slide 11 to review the group's gross margin drivers. In Q1, on a year-on-year basis and under the group's accounting policies effective from January 1, 2024, currency translation and M&A had a neutral impact. Flexible placement had a negative impact of 50 basis points. of which approximately 25 basis points reflect the ADECO GBU's current geographic and client mix and the remainder GBU mix. Permanent placement had a 40 basis point negative impact, reflecting lower volumes, while career transition had a 10 basis point positive impact. outsourcing, consulting, and other had a 20 basis point negative impact due to changes in ADECO outsourcing and lower volumes in pontoons, MSP, and RPO services. In total, the gross margin was 100 basis points lower on both an organic and reported basis. At 19.8%, it is a healthy result in challenging markets. Further, as the right side chart shows, The margin was slightly improved from Q4's reported 19.6% result under the group's new accounting policies. Moving to slide 12, and EBIT A drivers. On the left, we review the drivers of the group's EBIT A margin this quarter on a year-on-year basis. The 30 basis point differential reflects a 100 basis point negative impact from gross margin developments, 40 basis points positive impact from operating leverage, with gross profit per selling FTE down 2% versus a reduction in selling FTEs of 5%, a 50 basis point positive impact from G&A savings, with costs down 12% year-on-year, and a 20 basis point negative impact from the timing of FESCO JV income. Let's turn to slide 13. and the group's cash flow and financing structure. As you will recall, the group's cash flow generation is seasonal, with Q1 and H1 usually being cash-out periods and H2 being a cash-in period. On a year-on-year basis, cash performance improved this quarter. Operating cash flow was up 49 million euros year-on-year at minus 67 million euros. Networking capital was 74 million euros favourable year on year. Positive payables development was partly mitigated by unfavourable calendar impacts on VAT receivables and on DSA, which was 53 days, one day more than in the prior year period. CapEx was 26 million euros and free cash flow was minus 93 million euros, a 72 million euro favourable development year on year. The rolling cash conversion ratio of the last four quarters was 73%, which is a robust result. Let me now touch on the financing structure. Net debt to EBITDA was 2.7 times at the end of Q1, in line with management expectations. Leverage is not constraining the business's ability to invest organically in growth and pay dividends. 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 capital expenditure. Let's turn now to slide 14 and the group's outlook. Volumes in the quarter to date have been stable when compared to Q1 24 levels. You should also note that revenue developments in Q2 24 will reflect a slightly tougher comparison period. The group anticipates continued market share gain in a challenging macroeconomic environment. It is managing its resources with agility, focusing on productivity and G&A savings. In Q2 24, the group expect its gross margin to be broadly in line with Q1 24 levels. Despite seasonality, SG&A expenses, excluding one-offs as a percentage of revenues, are expected to improve modestly versus Q124. And with that, I'll hand back to Denis.

Thank you, Coram. And let's go to slide 15. Management remains laser-focused on the elements within our control. Competitive outperformance, market share expansion, and discipline execution. The G&A Savings Program is on track, and at the same time, the group is preserving frontline resources where appropriate to ensure we can swiftly capitalize on the future market rebound. Thank you for your attention, and let's now open the lines for Q&A.

We now begin the question and answer session. Anyone wish to ask a question may press star 1 on their telephone. You will hear a tone to confirm that you've entered the queue. If you wish to remove yourself from the question queue, you may press star and two. Anyone with a question may press star and one at this time. The first question is from Varanasi Swazini with Goldman Sachs. Please go ahead.

Good morning. Thank you for taking my questions. I have two, please. You mentioned that you had incurred some costs relating to contract exits in France. Can you maybe share some color on how much these costs were, were they taken above the line or below the line? and how the margins are expected to look going into 2Q. Thank you. That's the first one.

Do you want to outline your second question, and then just say that we've got them both, and then we'll work out who answers them?

Sure. I think the second one is just on the revenues, please. I appreciate the macro is still challenging, but maybe can you share some color on whether you see green shoots anywhere, any color on verticals or countries? That would be really helpful. Thank you.

Okay, thank you. So I'll pick up the point on costs relating to French outsourcing contracts, and I'm sure that Denis will want to comment on green shoots. Actually, I'll pick up more generally on the French margin. So if we look at French margins, obviously they are down. year on year, the vast majority of that relates to the lower volumes that we've seen in France. There is, given what is happening in the market in France, there is negative operating margin, which is putting short-term pressure on the French margins. Within the quarter, we chose to exit a couple of outsourcing contracts. And we did that because they were not reaching our profitability targets and we could not see a path to get them there. In terms of the impact in the quarter, it was about 35 basis points on the French margin and we took those costs above the line. This is all part of our ongoing focus in making sure that we reduce one-offs and we're focused on driving the business through regular course of business. And to be clear, those 35 basis points are just the costs relating to the exit in the quarter. On a go-forwards basis, the revenue and profits relating to those are immaterial for France. So there's no further effect. And then I guess the other point on France is that we are focused in protecting profitability over time whilst positioning ourselves for the rebound. So it's not that I would expect us to see long-term pressure from the market, but you would expect us to offset that pressure over time by taking costs down to that business. I think Denis will now comment on the wider market conditions.

Absolutely. And thanks for your question. Overall, what do we see? We see stability. The breadth of our services gives us a great perspective on what's going to happen. So we have stable volumes that reflects how solid we are. Of course, we have areas of pressure in several places, and you've seen that. We also have areas of growth, and we are strongly convinced that they will continue, particularly in APAC, particularly in LATAM, and in a few other areas. We have areas where we see And that's interesting. Signs of stabilization. Professional recruitment solutions in the U.S. is demonstrating signs of stabilization. This is very encouraging. ADECO overall is stable. Tech staffing in the U.S., we see early signs of a possible stabilization, even though I wouldn't call it a bottom yet. But what we see is encouraging. So overall, stable position, signs of stabilization here and there. Of course, ahead of a still, of course, challenging market, but we are positioning ourselves for a rebound. We will continue to outperform markets. It's a strong conviction. And again, day after day puts us closer to the rebound that is going to come.

Thank you very much.

The next question is from Andy Grobler with BNP Paribas. Please go ahead.

Hi, good morning. Three from me, if I may. Firstly, Denny, potentially one for you. Just following up on the previous answer, you said in technology you saw signs of potential stabilization, which seems kind of a couple of steps before stabilization. Could you just talk through what those early signs are? Secondly, just on FESCO, it's Profitability has moved around a fair bit on a quarterly basis. What is the run rate we should expect going forward? And then thirdly, on training, again, pretty weak during the quarter. What are you seeing in terms of pipeline? And I suppose what I'm getting to there is our clients beginning to think about upping their training spend and quotas given shortages of labor continue and the need to adapt. into the future. Thank you very much.

Thanks, Andy. So with regards to the tech piece, the tech staffing piece, yeah, it's, again, I'm cautious because we're still down, the market is still down in the U.S., and, you know, this is where we have our biggest base for tech staffing. However, we've seen here and there some clients starting to rethink their, you know, their access to tech staffing. And so, again, too early to call it the bottom, but the mood that we hear from our clients is slightly more positive in several places. There's also, which is also a good sign, you know, our consulting business is, you know, 39%, delivering 49% growth This quarter in the U.S., overall, our consulting business is growing 5%. So that's pretty good. We also believe that the AI demand on which Aquadis is very well positioned is going to fuel future demand. So again, very difficult to say, but I'm more positive on this one than I was a couple of quarters ago. Again, too early to call it a rebound, but more positive, I would say.

Let me pick up on Fesco, and then I suspect Denny will come back on training and the pipeline. Before we get into the moving parts, I think it's really important to recognize that the Fesco JV is a really good business. This is a market with significant opportunities. We see very good growth in that business over a long period of time. And because of our positioning with a partner, we actually have a much stronger position than any of the other international players. So our exposure to that market is, I think, a real positive. Like a lot of countries, China does incentivize employment. And we do benefit from payments relating to that. In the past, they've been pretty steady in terms of coming through in Q2. They started to move around a bit last year. They actually came in in Q1. And you saw that we saw 16 million last year, whereas it was more like 5 million this year. That gives you a sense of the differential here. And I would expect those payments to come through later in the year. So more back end loaded. You could build them into your forecasts towards the end of the year. So I hope that gives you a sense of the impact. And please do remember the importance of that market and the strength of our position because it is a really good business.

And with regards to training, it's true that overall, at the moment, our revenues are flat. However, what do we see? First of all, of course, the macros do not help companies to heavily invest in training. However, we see good traction, exactly to your point, on profiles that are short on the market. And we are accompanying our clients on that. I'm talking about, for example, what we put in place with several car makers around training their people for the electric vehicle transition. We see more and more traction on AI, and we've been actually advocating a lot. We recently did a survey. around 2,000 executives around their approach to Gen AI, and many of the executives say, we're going to recruit on the market. Well, they won't find the people. So that's why we're extremely active with General Assembly, with Acodis Academy to train, and we have quite a good pipeline on that to train people on Gen AI. So Again, macros do not help, but we believe that we can have better traction in the coming quarter on these specific welders, for example, forklift truck drivers. We have created our own truck drivers academy to support that. So there are places here and there where we can have traction. Okay. Thank you very much.

Sure. The next question is from Simona Sarri with Bank of America. Please go ahead.

Yes, good morning and thanks for taking my question. I have three. So one is indeed a follow-up related to the survey that you published in April. And in this survey you mentioned that 41% of business leaders believe that within five years they will employ fewer people because of artificial intelligence problems. So if you can please elaborate on the potential net impact that you see for the industry, so both opportunities in trainings, but also potentially lower people overall being employed, and also what it could be in the medium term, the SG&A savings for you. The second question is related to DSO and free cash flow evolution in Q2 and through the year. If you could please elaborate a little bit more what we should expect on that front, and also if the increase in DSO in Q1 was purely related to the timing that you mentioned around some receivables and payables. And then lastly, on exceptionals, which were lower than expected in Q1, how should we think about one-offs for Q2, and if anything changes in terms of guidance for the full year? Thank you.

Thank you, Simona. So on your questions on Gen AI, yes, I think the survey is quite interesting in terms of how leaders envisage the transformation. I think nobody has a crystal ball on what's going to happen. We know that Gen AI will improve productivity and then possibly have an impact on people. At the same time, we know that new profiles will be created, new jobs will be created. Some employers will reduce their staff, but it will create a new industry, just like the digital revolution has created new companies, new industries, new jobs, massively. Where will the balance land? It's hard to say at the moment and nobody really knows. We believe that more or less things will be balanced. But we see for us a big opportunity. If I look externally in terms of the opportunities, there's going to be, as I was mentioning earlier, the massive need to train people, to have people ready. And this is what we do for a living. We prepare people for the future uh we are anchored in the employability and uh you know we have a massive uh, in, uh, uh, action in terms of transferring people from one sector to another, taking skills, you know, we, we move from a job based economy to a skills based economy. And, uh, and that's, uh, you know, uh, w we can play a massive role. So for us, accompanying our clients in this transition is a massive opportunity to us for us externally. Now, internally, we also very positive in terms of what it can bring to our business. We have a very structured and deliberate approach to GenAI. We have a clear vision on where and why we are investing. We know that we can improve client experience. We know we can improve candidate experience. We know that we can improve recruiter productivity, and we have use cases that we can scale. And the positive results that we see on the several use cases show that we can have a double-digit percentage improvement in terms of productivity and efficiency. So it's too early to really model the impact at scale, but we are embarking very positively. And part of our path to our 6% margin target is going to be fed by this GenAI productivity improvement. So very positive on this.

Let me pick up on your second and third question, Simona. So on cash, I mean, I want to be clear. We're very pleased with the cash performance in Q1. We saw improvements in operating cash flow driven by a 70 million improvement in working capital. And we saw further improvements in free cash flow because of the lower capex. And to your point, that improvement in operating cash flow was achieved despite a calendar which worked against us, because as we know, the Easter fell on the quarter end, which always has an impact on the timing and the volume of collections. So to be delivering working capital improvements, even with a calendar that worked against us, is a good outcome. In terms of DSO specifically, the majority of that one day movement is purely calendar related. And I will also flag that in Q2, we'll probably see something similar because actually, again, the quarter end falls on a weekend. But there is nothing structural happening to our DSO. We have real focus on working capital and cash flow. We've put incentives in place to drive that, which we've talked about previously. And if I think about the shape of the year in terms of leverage, 2.7 times that we've delivered in q1 is exactly in line with our expectations obviously we pay the dividend in q2 so that that number will notch up but we always have a good h2 i mentioned in my script that it's the cash in period for us and i think you can see that we are really focused on delivering additional operating cash flows so The clear plan to deleverage is supported by productivity improvements, G&A savings, as that really flows through in the second half, lower one-offs, and lower capex. And we're absolutely committed to deleveraging organically.

Thank you. And then there was... Yeah, just on one-offs.

Laurie, I was so focused on my deleveraging points. So just to pick up on the one-offs, we've given you very clear guidance in the back of the slide deck for 40 million of one-off costs in Q2. That's, as we've talked about before, the shape of our G&A savings program is very much that the last set of actions that we are taking are weighted towards the back end of Q2. So you'll see that 40 million come through, and then you'll see us achieve the run rate of 150 million by the mid-year, and we will see real further year-on-year benefits in G&A savings in Q3 and Q4.

Thank you. The next question is from Afonso Zorio with Barclays. Please go ahead.

Hi, everyone. Thanks for taking my questions. I have two, please. The first one in Germany. Can you expand a little bit on the differences between, you know, the trading in ADECO business versus the ACOTUS? Because ADECO, I see you're growing at plus eight in Germany, and the ACOTUS business is declining minus three. Is this mostly attributed to the changes in strategy, perhaps, and sickness rate, or is there something else going on here? I just thought that if Alto continues to be Italian, for example, at the DECO, that would be, you know, a positive for CODIS as well, since, you know, some of the end markets are the same. So any thoughts here are appreciated. And then secondly, in France, and to build on to Hazini's question, can you expand a little bit on the decision to exit those outsourcing contracts? My question is usually, why now? And I appreciate that you're not going to disclose the actual target to set internally for these businesses, but were these contracts loss-making perhaps? And if so, for how long were those, you know, loss-making or below target? Let's put it that way. So those are my two questions, please.

Great. Thank you, Alfonso. So with regards to Germany, In ADECO, we've been very supported by logistics and autos. And this is particularly because on the manufacturing side, you know, they had to produce a lot of cars. And then we've been supported by, you know, this massive production of cars that is still the consequence of COVID and COVID. you know, the chips crisis, and then there had so many, there had a big backlog. So we have been really surfing on that, which also tells us that you can anticipate more softness on this part, you know, in Germany for ADECO. At CODIS, on the other side, yes, we have a, you know, we have a shift, as we explained before, into... the repositioning into smart industry, which has had an impact. ACODIS is also more in early stage of the R&D development of cars. And at this moment in Germany, There is a really sort of a reflection on how they're going to adjust to particularly the competition of Chinese cars. So they are a little bit of hold position in terms of how do they adjust the design of their future cars. So they are a little bit on hold on this side, which has an impact on the ACODIS activities. We also had a higher sickness rate that impacted I caught it in Q1, and it's a general phenomena in Germany. So that's two different types of businesses explain the difference in performance. If I look a little bit ahead, we can anticipate a bit more of a softness for ADECO. And of course, as R&D investments restart, particularly in the auto industry, you know, in the next few quarters, then I could pick up again.

And on the French decision to exit the outsourcing contract, I don't want us to overstate this. This is an ongoing review of portfolio, which we undertake across all of our businesses. And where we have contracts that are not reaching our targets, we act decisively. That's the way that we operate. We're calling them out simply to give you transparency of the impact of the exit costs on the margin. But in terms of the impact on the business, on revenues and profitability going forwards, they're immaterial. Got it. Thank you very much.

The next question is from Remy Green with Morgan Stanley. Please go ahead.

Good morning, and thanks for taking my question. The first one is on the 50 basis points decline in the temp placing growth margin. I understand you're flagging that due to a mixed effect, but any more flavor on that would be appreciated to understand. Also, if you are experiencing any pocket of pricing pressure in any country, so a discussion around that. The second question is on... the evolution of headcount, I think it was down 6% in Q1, and just trying to understand, given what you're seeing today, how would you expect that to evolve over Q2, or what would be the policy in terms of headcount, keeping it stable, given you're seeing some early signs of stabilization, as you were saying? That's the second question, and the third one is probably a little bit more long-term and strategy. I mean, Just picking up on the AI project that you've presented in the slides, I'm just wondering if you started to discuss that with clients and what's been the answer from their side, both in terms of what could it mean for ADECO in terms of market share gains, but also in terms of pricing, if it has changed anything in the discussion or the negotiation with clients. Thanks.

No problem, Remy. I'll take the first two and then Denis will pick up on the AI question. On the gross margin, we were very clear in our guidance for Q1 that we would see similar trends to Q4. And in fact, overall, we were up 20 basis points sequentially. And we think the 19.8% is a healthy level of gross margin in this particular environment. In the short term, there is a mix effect. And as you mentioned, 50 basis points of that is in flex. It's largely about the mix within a deco. So geography, sector, and the type of client. And let me just, I gave a few examples in the script, but let me unpick that a little bit. In terms of geography, the areas of growth that we're seeing like Iemina, LATAM, somewhere like Spain, typically have slightly lower gross margins, whereas the businesses that that are not growing as fast typically have slightly higher gross margins. We are gaining share across the board. So it's not that we're winning business in places where we've got lower gross margin. It's just the particular mix of growth. In terms of sectors, I think we flagged for a number of quarters that we've seen good growth in logistics, up 8% in Q1. We've also seen good growth again in autos, slightly slower, but still up 3%. And those, again, are slightly lower gross margin sectors. They're still good business for us. And the skew in terms of clients is that we've seen a bit more growth in large and on-site than we have in SMEs. So this is all about the particular snapshot of the mix of business that we have right now. There is no structural challenge to the gross margin. And to your point about pricing, pricing is firm. And again, the data point that I think is really important here is the spread between bill rate and pay rate, which was up 3% in the ADECO G7. So we are still getting the benefits of our dynamic pricing strategy. There's also obviously a mix effect at the GBU level, particularly given what's happening in ACODIS and LHH on the flex and the staffing sides, given that they're typically higher gross margin. So there's lots of different effects, but it is all about the snapshot of the business that we have right now. On headcount, I think you can see we've had a very granular approach to the way that we manage this for a number of quarters. We adjust our selling headcount according to what we see in terms of the prospects, the growth that we can drive, and we're very dynamic in terms of the way that we do that. And you see it because our gross profit per selling FT in ADECO is up again this quarter. I think it's difficult for that reason to generalize on what's going to happen to headcount. I would expect us to continue to manage selling headcount dynamically. The area that I would expect headcount to continue to decline is on G&A, because obviously there are more actions that we're going to take. I mentioned that we're going to see the further G&A actions get taken towards the end of Q2 relating to the reorganizations that Denis described in his introduction. that will drive a reduction in G&A. Denis?

Yeah, so as I said, you know, we are very very positive in what you can bring to our business and you talk about market share gains and pricing. So, you know pricing is linked to the value that you create and we believe that you know, we can create more value and I'll tell you why. And this is going to help us also win market share. So if I take each of the GBUs in a deco, GenAI will help us being more efficient, more productive, more, you know, relevant to our clients, improve field rates. We've seen that whenever we use GenAI, you know, we've been able to improve our field rate in the use cases that we've put in place. And so that provides us a lot of capacity to be more efficient than deliver better to our clients and hence gaining share. In ACODES, we have an excellent traction thanks to our AI. We have a dedicated team in several places in the world that sees delivering AI expertise to clients. So, of course, we're really discussing with our clients, and we are involved in several AI projects, high-value projects, where our experts are, I would say, priced at a very good rate on the projects that we embark with our clients on. And in LHH, we have embedded our AI in career transition. We have a platform that's called Career Canvas that brings a lot of good insights for people who are transitioning their career. And the faster we provide insights and guidance, the faster they go back to work, the better the margins for us. And in Ezra, we've embedded AI also called CHI in our Ezra platform, in our coaching platform, and this enhances the value that we bring to the people we coach together with efficiency, of course, in a way we coach. So this is also bringing differentiation and efficiency. And of course, in recruitment solutions, just like in ADECO, when recruiters are more productive, The clients see the impact because we are providing the people faster. We're providing better people faster. So all these elements make us very confident that we can sustain our pricing by higher value and gain share because we are more efficient.

Okay, great. Thanks.

The next question is from Conrad Zomer with ABN Amro Oddo BHF. Please go ahead.

Hi, good morning. Thanks for taking my questions. I have two, please. The first one is on your growth margin development. Can you confirm that off the 100 basis point decline year-on-year, 50 to 60 was because of the migration of certain costs from SG&A to cost of goods sold? And the second question, I'd like to come back on the comments you made on leverage, Coram. I know that the firm is firmly committed to further deleverage, and I think your operational performance in Q1 was actually quite good. And it makes me think if you're going to see improving markets, you're going to have a slightly higher working capital requirement. Carpex might nudge up. Q2 is not necessarily going to be better than Q1. I struggle to see why leverage will actually come down this year, particularly because in Q1 it went up versus the year end. So I could really be helped with a few more comments to encourage us to believe that leverage will come down this year. Thank you.

No problem. Let me take both of those, Conrad. Just to be clear, on the gross margin, the 100 basis points is on a restated basis. So it is the underlying movement year on year. So it's not that half of it is because of the new accounting policies. And just to remind you, I mean, obviously there is the bridge and there is a recap in the slides. But we've basically seen, of that 100 bps, flex minus 50 because of the mix in ADECO and also at GBU level, perm minus 40 because of the ongoing market challenges, and outsourcing minus 20 largely because of MSP and RPO and because of those ADECO contract exits. So just to frame it, And to be clear on Q2, we would expect our gross margin to be broadly in line with Q1. So very similar trends. And remember that last year's Q2 was when we started to see the mix impact on gross margin. So whilst we'd expect it to be broadly in line with the 19.8%, that means a much smaller year-on-year movement. Okay?

So that's gross margin.

On leverage, we are pleased with the operational performance in Q1. It was the point I made that despite a calendar which was impacted by Easter, we still see working capital improvements, and we also see a free cash flow improvement driven by CapEx. To give you confidence, I do understand the point, but Typically Q2 does rise so we would expect leverage to go up in Q2 because of the dividend payment but we would then expect a substantial improvement in leverage by year-end sequentially because you get cash in in H2, it's typically our cash generative half, we would have pulled all of the levers on the gna savings by the end of that quarter two so that means you're you're for the first time seeing the full run rate of the 150 million in h2 our one-offs come down because we're exit because we're finishing the gna program and capex actually you can already see is trending lower Sure, there'll be a working capital impact if growth is there, but equally that will drive operating leverage. So we are confident that we can de-lever over time.

And just in case there was any doubt, the whole company, the whole management is focused on cash. 15% of the executive committee incentive is based on operating cash flow. And in countries, the country president and the head of the businesses are incentivized on, you know, cash. And so there is a full alignment. And I can tell you that Coram and I keep, you know, we make sure that everybody is focused on the different levers, you know, on CapEx, on DSO, on payment terms. And this is really very, very high in everybody's agenda across the board.

Thanks for that extensive answer. I mean, I understand the focus and I understand the commitment. The trend of the actual leverage is going the other way. And I understand that it's a seasonal impact, Q1, etc., But maybe, I mean, last year for the whole year, you ended at 2.5, only just. Do you think that based on what you see now that your leverage for the full year 2024 will be lower than that level in 2023?

We are really focused on making sure that we deleverage over time. And, you know, to the points that I made, productivity savings, G&A reductions, lower one-offs, lower capex, it all helps. And that is the clear plan that we've got. And to your point about Q2, yes, the leverage will rise, but that is the pattern of the business. And we're very focused on making sure that we demonstrate that the clear plan for deleveraging comes through in the second half.

Understood. Thank you very much.

The next question is from Gianmarco Vero with ZKB. Please go ahead.

Good morning everyone. I have one question on the competition for LHH and then the second question on potential real estate disposals. The first one, you mentioned that you see a good pipeline regarding your offering also for training and upskilling in Lee & Harrison, but how do you currently assess also the competition especially for free courses and other competitive courses that are web-based and are offered currently to some of your potential B2C clients also. Then the real estate disposals there, I might remember correctly that you said that the ACA business came with several real estate assets also. We saw already some disposals recently, but Is there more to come in the next two quarters? And if so, what potential cash inflow do you expect from those real estate disposals?

Thank you. We see promising things, yet of course to be fully converted, but I think we see good pipeline. If I talk about general assembly, particularly where we see the best traction is in B2B and not in B2C. And we have some clients that are very interested by the higher training approach that we have in GA, and that's where we see the biggest potential. Let me be clear about all these free training courses, et cetera. This is not the market we operate in. We train for jobs, right? What we do is we provide a training when there's a job at hand. That's our positioning. So that's the unique value proposition that we have. We don't train for the sake of training. We train because then people are immediately activated and enrolled in a particular job. So that's where we don't compete at all with people that take a training course hoping that something is going to happen. That makes a significant difference in our value performance.

And then, Thierry and Marco, on the real estate disposals, ACCA did come with a number of properties and we have trimmed that portfolio. partly because of the synergies that we're able to achieve with the existing business. And I think we called out some relatively modest proceeds in the second half of last year. There's no major further real estate restructuring to come. Clearly, we'll keep an eye on the portfolio. If we see an opportunity, we'll take it. But at the moment, I wouldn't guide you to thinking that there's more to come.

Okay, thank you.

The last question comes from the line of Rory McKenzie with UBS. Please go ahead.

Good morning, all. Thanks for taking my questions. The first one is to just follow up on what you said on headcount. It's just quite hard to match your comments about early stabilization and dynamic adjustments with what looks like an increasing pace of cuts. I think there was a 4.5% reduction in headcount from December to March compared to only 1% to 2%. in each of the previous quarters. Could you just tell us what selling headcount is today and how that changed in the quarter and how you are positioning that for a rebound? And then secondly and more broadly on SG&A, G&A savings are ramping up, as you said, but total SG&A is only minus 6% year over year in line with the 6% reduction in average headcount. So what are the other offsetting cost inflation items and will they remain the same upwards pressures throughout this year? Thank you.

I'll take both of those, Rory. On the headcount, our headcount is down 6% year on year. Our G&A savings are down 12%. and within that, if you're looking for a steer on G&A versus selling, G&A would be higher than the 6% and selling would be lower than the 6%. I'm not breaking out all of the detail. I think the key point here is that the headcount is being driven by the G&A savings program and there is more There are more actions to take towards the end of the second quarter. That's when we complete the back office reorganization that Denis mentioned. And therefore, I would expect a continued downward trend on G&A headcount. I think, as we've mentioned, the selling piece will be more dynamic. It's very much going to depend what we see. And yes, there are areas where we are protecting capacity. So, for example, professional recruitment. And as I mentioned and Denis mentioned, we've seen signs of stabilization in the U.S. sequentially. We're also protecting capacity in ADECO U.S., and we've made a very modest targeted investment in the branch network. I'm not avoiding the question. It is just a very dynamic environment where we manage the headcount according to the situation that we see. And the kind of increased momentum on headcount for the group is being driven by the G&A savings program. In terms of SG&A, I think at this stage, it starts to make more sense to look at the movement versus 22. Because as we said, the 150 million target is versus the baseline. And the reason for that is that at this point last year, we started to take action. And so you don't see an accumulated trend on the growth rate versus last year, but you do see the trend versus 22. And that's why the minus 13% versus 22 on G&A is so important because it shows you that we're on track for our 15% reduction overall. And please also remember there is seasonality in our G&A cost base. So we do see a little bit more marketing spend in Q2. We do see a little bit more commissions simply because the volumes on the business rise and some of our merit increases go through in Q2. So there is seasonality, but focus on versus the baseline of 22 and the percentage of sales, the modest improvement that we're guiding to. We are very much on track with our 150 million.

Okay, thank you.

There are no more questions at this time.

All right. Well, thank you very much for having been with us. I must say that we are all very confident in our capacity to execute on top line and market share gains, on cost control, on profitability management, on cash generation and deleverage. We are rock solid with a clear positioning, with a unique portfolio of services, with highly motivated teams, and we're ready for the rebound when it comes and every day gets us closer to this rebound. So thanks again for having been with us and looking forward to our next interaction. Thank you. Bye.