Adecco Group AG

SIX:ADEN

Q1-2025 Earnings Call

[Operator]

Good morning, ladies and gentlemen, and thank you for standing by. My name is Kelvin and I will be your conference operator today. At this time, I would like to welcome everyone to the Adecco Group First Quarter 2025 Results. [Operator Instructions]

I would now like to turn the call over to Benita Barretto, the Adecco Group Head of Investor Relations. Please go ahead.

[Benita Barretto, executive]

Good morning. Thank you for joining the Adecco Group's conference call today. I'm Benita Barretto, the group's Head of Investor Relations. Denis Machuel, the Adecco Group's CEO; and Coram Williams, the CFO, are with me today. Before we begin, we want to draw your attention to disclaimer on Slide 2. Today's presentation will reference GAAP and non-GAAP financial results and operating metrics. This conference call will include forward-looking statements. These statements are based on assumptions as of today and are therefore subject to risks and uncertainties.

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

[Denis Machuel, executive]

Thank you, Benita, and a warm welcome to all of you who joined the call today. Starting with Slide 3, which provides an overview of the Q1 results. The consistent and rigorous execution of our strategy is paying off. In the first quarter, we gained further market share with solid margin performance. The Adecco GBU was 130 basis points ahead of key competitors this quarter.

Revenues were EUR 5.6 billion, 2% lower year-on-year on an organic trading days adjusted basis and 3% higher sequentially. The group saw flex volumes improving through Q1, and we are pleased to see Adecco U.S. return to growth. The gross margin of 19.4% was healthy, 40 basis points lower year-on-year, reflecting current business mix and firm pricing. EBITA, excluding one-offs, was EUR 132 million, driving a margin of 2.4%, 20 basis points lower year-on-year. The margin evidences agile capacity management and strong cost control in addition to the favorable timing of fiscal income.

Adjusted EPS was EUR 0.48, 20% lower year-on-year, mainly reflecting lower business income. Cash flow from operating activities was minus EUR 144 million, while the cash conversion ratio was strong at 105%.

Let's turn to Slide 4, where we look at some key wins driving market share gain, which was 30 basis points positive at the group level this quarter on top of the 200 basis points delivered in 2024. First, close collaboration between Akkodis and Adecco resulted in a significant win with a German IT services provider. The client wanted project management and software development capabilities to support digital transformation.

The client value the group's coordinated delivery model with a single point of contact. Moreover, the client value, the high level of technical expertise offered combined with our ability to scale and support during high workload periods. Second, the U.S. LHH and Pontoon teams secured a major contract with a leading market research company thanks to a referral from Adecco. The client required strategic workforce planning and talent management capabilities. They show value in LHH's global reach and end-to-end service offering as they needed offshore recruitment, HR sourcing and outplacement services across multiple geographies.

Moving to Slide 5, which highlights recent developments in the group's strategy to adopt AI solutions at pace to accelerate profitable growth. As an example, we've launched prescreening agents in Adecco U.K. accelerating our Agentic AI deployment and leveraging the Salesforce partnership and the Agentforce platform. The new agents enable a 24/7 exchange for candidates. They allow recruiters to quickly receive a high-quality list of candidates that can then be considered for the interview stage and reduce the need for recruiters to make prescreening calls to candidates. They also ensure higher quality automated data capture. This is very positive, and we are very confident in its scaling potential, which will improve customer experience and reduce cost to serve.

And Akkodis Germany has launched new capabilities as part of its modular AI core platform suite which numerous customers have used for over 10 years. The suite helps companies build AI models using low or no code with ready-to-use plug-in and agents. The new tools include a virtual assistant for brain storming, intelligent analysis of documents and contracts, as well as cogeneration support and analysis. It is proven to deliver efficiency gains, cost savings and faster project completion.

Another important development this quarter has been the launch of our potential, this is an exciting new technology venture backed by investments from Adecco Group, the majority owner and sales force. Our potential is uniquely positioned to support companies. It will leverage AI and agentic technology to help clients optimize workforce configurations and better distributed tasks between humans and digital workers, harnessing insights from the Adecco Group's rich labor data. We are convinced that our potential will deliver pioneering innovation at the speed and scale required in the world of Agentic AI, and we look forward to updating you on its progress later this year.

Let's turn to Slide 6, highlighting how the group navigates current macroeconomic uncertainty. To be clear, we are not directly impacted by shifting trade policy, and we have not seen an impact from trade policies on our trading activities to date. The top left chart shows Adecco's flexible placement volumes in our largest countries from Q4 2024 to April this year in percentage year-on-year terms. Volumes improved through Q1 and modest positive momentum continues.

When we talk to clients, most do not mention a direct impact, although we have seen some slowdown in client decision-making, particularly in permanent placement. We will continue to monitor developments very closely and adjust our operations accordingly.

Let me now hand over to Coram, who will discuss the results in more detail.

[Coram Williams, executive]

Thank you, Denis, and good morning, everybody. To follow up on Denis remarks, changing trade policies have not impacted the business to date. Our business model is resilient, and we are committed to maintaining the 3% EBITA margin floor annually. The group has a countercyclical cash flow profile and robust financial structure, which gives confidence in our ability to weather economic storms. Importantly, the group's cost base is highly flexible.

During past periods of significant pressure, such as the global financial crisis and COVID-19, the group responded effectively, taking out SG&A expenses to deliver recovery ratios of 37% and 51%, respectively. Most recently, we've been managing the business in a more granular way than during COVID, selectively protecting capacity, where we continue to see opportunities to gain market share while delivering a sensible 43% recovery ratio.

We're ensuring proximity and support to clients and looking for growth opportunities from strengthening MSP, statement of work engagement and outsourcing activities. We're lowering cost to serve by centralizing tasks in hubs through digital delivery, automation and the deployment of Agentic AI. We're focused on delivering Akkodis Germany's turnaround and driving free cash flow with strict DSA management.

We will remain agile with frontline capacity driving productivity. Around 10% of recruiters are themselves on flexible placement contracts and there is a 20% attrition rate for that population. This means we can move quickly to lower the largest area of expenditure in the business. Put simply, we are ready to adapt to changing circumstances if we see this.

Let's look at Q1's results for each GBU, beginning with Adecco on Slide 7. Adecco's revenues reached EUR 4.4 billion, 1% lower year-on-year on an organic trading days adjusted basis and 3% higher sequentially with all segments improved. Adecco gained strong market share with relative revenue growth 130 basis points above key competitors.

Flexible placement revenues were 2.6% lower organically with volumes improving through the period. Outsourcing remains solid, up 6% organically, while permanent placement revenues were 12% lower organically. Enterprise revenues remained soft, while SME revenues were robust, rising 3% organically.

On a sector basis, retail and food and beverage growth was strong. Autos and manufacturing were weak, while logistics was soft. Gross margin is healthy, reflecting lower permanent placement volumes and firm pricing. The EBITA margin was solid at 3.1% and up 10 basis points year-on-year. The result reflects G&A savings, agile capacity management and the favorable timing of FESCO income.

Gross profit per selling FTE rose 2%, while selling FTEs reduced 4%. We're rightsizing in tougher territories such as France, Germany and the U.K., and we're protecting or adding capacity where we see continued opportunity, such as in Spain, LatAm and APAC.

Moving to Slide 8 with Adecco's new segment structure. Adecco's European operations performed well given challenging markets. In France, revenues were 9% lower, reflecting continued and broad-based market headwinds. Pressure from a handful of large clients impacted revenue developments by approximately 350 basis points. Logistics and autos were challenged, while manufacturing and health care were weak.

The EBITA margin of 1.9%, 60 basis points lower year-on-year mainly reflects lower volumes. Headcount was reduced 6% year-on-year. Stabilizing client impact, a strong pipeline and restructuring actions will support future profitability. In EMEA, excluding France, revenues were 2% lower with market share gains in most territories.

Turning to the largest geographies. Revenues in Italy were 1% lower, with autos and manufacturing weak, while logistics was strong. Revenues in Iberia rose 5%, driven by strength in food and beverages and consumer goods. In Germany and Austria, revenues were 8% lower, reflecting ongoing headwinds in manufacturing and logistics. Autos were soft, but the business remains well positioned relative to competitors.

In the U.K. and Ireland, revenues declined by 9% with headwinds in consulting and construction. Recent large client wins are expected to drive stronger revenue momentum in the coming periods. The segment EBITA margin of 3% was 50 basis points lower year-on-year due to the current business mix and lower volumes, partly offset by SG&A savings.

Moving to Slide 9. Adecco Americas revenues were 4% higher, and performance in North America significantly improved. Revenues were 2% lower in the quarter, driven by new large clients and robust SME growth and the exit rate was strong at plus 4%.

On a sector basis, consumer goods and manufacturing were strong, while autos were weak. In Latin America, revenues grew 14%, led by Argentina, Colombia and Brazil, although Mexico was subdued. By sector, retail, food and beverages and logistics were all strong. Adecco America's EBITA margin at 1.1% was 50 basis points higher year-on-year, reflecting higher volumes, good cost discipline in LatAm and ongoing optimization of cost to serve in North America with FTEs down 17% year-on-year.

Adecco APAC saw continued strong growth and share gain, with revenues up 11%. Within the segment, Japan's revenues were up 10%, Asia is up 24% and India is up 16%. On a sector basis, growth was led by retail and consulting, while manufacturing was robust. In Australia and New Zealand, revenues were 9% lower, reflecting softness in logistics. The EBITA margin at 7.4% and 260 basis points higher year-on-year benefited from the timing of FESCO income. Excluding FESCO, the EBITA margin was up 10 basis points, reflecting higher volumes and G&A savings.

Let's look at Slide 10 on Akkodis. Akkodis' revenues were 8% lower year-on-year on an organic constant currency basis. Consulting revenues were 5% lower and staffing revenues 13% lower. By segment, EMEA revenues were 9% lower, reflecting increased pressure in Germany, where revenues were 15% lower, impacted by weaker demand in autos. Revenues in France were 6% lower, with autos and telecom soft. Southern Europe performed well with revenues in Italy, up 5%, and in Iberia, up 13%, reflecting strength in Life Sciences and Aerospace and Defense.

North American revenues were 11% lower, impacted by the continued downturn in tech staffing and despite of 12% in consulting. APAC revenues rose 3% with Japan up 2%. This reflects robust growth in consulting, supported by high utilization rates. Australia was 3% lower, but up 2%, including the recently acquired Barhead Solutions business.

The GBU EBITA margin of 3.5% was lower year-on-year, reflecting lower volumes. There is meaningful pressure in Germany coming from challenges in autos with projects either stopped earlier than originally planned or where the planned start is per spend. The GBU's new President, Jo Debecker is now firmly in rolled. Management is executing a turnaround plan in Germany to bring the unit back to profitability swiftly. Given current market dynamics, management will also continue to optimize operations in France and the U.S.

Moving to Slide 11 and LHH. Revenues in LHH were sequentially stable and 5% lower year-on-year on an organic constant currency basis. Professional recruitment solutions revenues were 7% lower, sequentially better and outperforming a tough market. Both placement activities and RPO remained soft. Gross profit was 5% lower, with gross profit in permanent placement 6% lower. Productivity rose 2% with billing FTEs down 9%.

Career Transition and mobilities revenues were flat, a strong result given the very high comparison base. U.S. revenues were resilient, and the business grew well in France and the U.K. and its global pipeline has improved. Coaching and skilling revenues were 4% lower weighed by the progressive exit of general assemblies B2C activities. However, B2B grew 45% with a strong pipeline, mostly related to AI upskilling programs. EZRA revenues were up 5% organically with a strong exit rate and record pipeline set to reaccelerate growth in upcoming quarters.

LHH's EBITA margin was healthy at 7.7%, reflecting geographic mix, lower volumes and G&A savings. Management is focused on delayering and rightsizing recruitment solutions while continuing to drive growth in general assemblies B2B business and in EZRA.

Let's return to the group results on Slide 12 and review the group's gross profit bridge. In Q1, on a year-on-year basis, currency translation had a positive impact of 5 basis points. Flexible placement had a negative impact of 10 basis points, reflecting ongoing country mix. Permanent placement had a 15 basis point negative impact, primarily reflecting lower volumes in a decade.

Career transition had a 5 basis point positive impact and outsourcing consulting and other had a 25 basis point negative impact primarily due to challenges in Akkodis Germany. In total, the gross margin was 40 basis points lower at 19.4%, a healthy result given the current business mix.

Moving now to Slide 13 and the group's EBITA bridge. The EBITA margin, excluding one-offs, was 2.4%, 40 basis points lower year-on-year. This solid result in spite of uncertain markets reflect a 45 basis point negative impact from organic gross margin developments, a 30 basis point negative impact from operating leverage with SG&A expenses down 1% year-on-year due to agile capacity management and good cost discipline, and a 30 basis point positive impact from the timing of FESCO JV income. This relates to the industry support fund from which we receive payments every year, although the timing does move between quarters. We remain confident in the performance of FESCO, and we anticipate a full year contribution of approximately EUR 30 million, the majority of which we've received in the first quarter.

Let's turn to Slide 14 and the group's robust financial structure. The cash conversion ratio was strong at 105%. DSO was best-in-class at 52.5 days, a half day lower year-on-year. Cash flow from operating activities was in line with normal seasonality at minus EUR 144 million and EUR 77 million below the prior year period. On an underlying basis, approximately 2/3 of the year-on-year differential was driven by working capital absorption for growth, with the remainder reflecting lower business income.

End Q1 net debt was EUR 2.7 billion. The net debt-to-EBITDA ratio, excluding one-offs, was 3.2x, weighed by lower EBITDA. We remain firmly committed to bringing the net debt-to-EBITDA ratio to 1.5x or below by the end of 2027, absent any macroeconomic or geopolitical disruption. The group has strong liquidity resources, including an undrawn EUR 750 million revolving credit facility and low interest expenses. It has fixed interest rates on 80% of its outstanding gross debt, no financial covenants on any of its outstanding debt and a well-balanced bond maturity profile.

Moving to Slide 15 and the group's outlook. Volumes improved through Q1 and modest positive momentum continues in Q2. For Q2, the group expects gross margin to be lower sequentially, reflecting normal seasonality. It expects SG&A expenses, excluding one-offs, to be modestly lower sequentially. Management is focused on managing capacity with agility to balance share gain and productivity in uncertain markets, in addition to securing G&A savings.

Back to you, Denis.

[Denis Machuel, executive]

Thank you, Coram. And let me finish today's presentation with Slide 16 and today's key takeaways. First, we have delivered a further market share gain with solid margins in the first quarter. Second, we've delivered on our commitment to return Adecco U.S. to growth during H1 2025, and we are swiftly executing a turnaround plan in Akkodis, Germany. And third, we have been and will continue to take a granular approach to operating expenses through agile capacity management and strict cost control to protect profitability.

And with that, we'd like to thank you for your attention and to open the lines for Q&A. Thank you. Operator, up to you.

[Operator]

[Operator Instructions] Your first question comes from the line of Suhasini Varanasi of Goldman Sachs.

[Suhasini Varanasi, analyst]

Slide 6 showed a pretty interesting trend. I was wondering if you could give some more color by the different GBUs on how the trends have evolved over March and in the second quarter to date? And at the group level, does this mean that you've maybe reached a breakeven on growth or potential for that in the second quarter? That would be my first question.

Second question is generally on defense. I think earlier, I think around the full year results, you did talk about how there was incremental growth potential or you were seeing some increased interest from your clients. How has that basically trended through the quarter, please?

[Denis Machuel, executive]

I think Coram will take the first one, and I'll take the second one.

[Coram Williams, executive]

Thank you, Suhasini. Okay. So in terms of trends on volumes, I mean, you're right, the chart does show the modest positive momentum that we've seen that -- we saw that all the way through Q1. It continued after we did the call with you for the full year. And as you can see, it has continued into Q2. These are obviously flex volumes in the Adecco business, but that's a big driver of our revenues. And it's been very broad-based.

So we have seen consistent modest improvement across all of our major territories. That's continued in April and Q2 to date. And there's been no major shifts in those trends. The one very positive thing that I'll call out and reinforce is that, obviously, our North American business has now returned to growth.

To your question about whether or not this means we're close to breakeven on volumes, yes, it does mean we're close to breakeven. So it gives you a sense of the positive momentum that we see. Volumes in the other businesses vary. It's very dependent on which parts of the business that you're seeing. We continue to see good momentum in career transition. Perm is under pressure as we know, in a number of our different business units, although our competitive performance in LHH has been very effective. And in Akkodis, there's more pressure in IT staffing. Consulting & Solutions is very dependent on where you look in terms of geographies. So we've got growth in Asia Pacific, got growth in the U.S. consulting business. Italy and Spain are strong. And as we mentioned, some pressure in Germany and France. So hopefully, that gives you a sense of what we're seeing in terms of volumes.

[Suhasini Varanasi, analyst]

Yes, sir. Very helpful.

[Denis Machuel, executive]

So with regards to the defense sector, it's going to be definitely one of the tailwinds that we can have for our business and particularly for Akkodis. At the moment, our defense represent approximately 5% of the group revenue. And of course, the majority of it is in Akkodis. So we are really positive about the outlook. However, we are yet to see the full impact of that. We hear that things are going to come in Germany, particularly once the stimulus package is underway. I think there's going to be momentum we don't see yet the full impact.

The good news is we've renewed in France, where we also do quite a lot there. We've renewed 100% of our framework agreements with our -- with the major defense players, and that's good. We've won also a significant contract in Japan, which will give us also momentum. I think we are in a good place. Our space in defense has grown 2% in Q1, so that's good. And there's much more to come. We are in a great place to serve the defense sector because we have great reference with very strong clients. We also believe, particularly in Germany, and the discussions that we have with major defense clients or they want to see -- they want to change the way they operate. And actually, the strong footprint that we have in auto is going to help us bring methods and technologies and know-how into the defense sector. They have -- the Defense sector has to think differently in the way they design the products and the systems and all the knowledge that we have, particularly in Germany in autos is transferable with high added value to the defense sector. So much more to come on that, but we haven't seen yet, of course, an impact in Q1.

[Operator]

Your next question comes from the line of Andy Grobler, BNP Paribas.

[Andrew Grobler, analyst]

Can I start with Akkodis, please, in Germany, that had a pretty rough ride over the past couple of years. How do you recover that business and get it back to profitability? And can you just kind of talk through the competitive dynamics in that market at this point?

[Denis Machuel, executive]

Thank you, Andy. Well, yes, Akkodis Germany has been not the easiest ride of the past quarters, 2 things here. The business had a shift to be done from more of a legacy technology into more the digital and smart industry business and a high exposure to the auto sector. And on this one, we're definitely suffering from the difficulties in the auto sector. The auto is almost 40% of the revenue, so that's of our business. So that has impacted us significantly. We still have strong relationship with all major OEMs. But of course, given where they are, we see projects that are postponed, delayed, downsized, and that has an impact on our bench profitability. We have a low utilization rate around 85%. So that's -- we have pressure points here.

I would say, overall, to your question versus competition, we are more or less in the same relative position, everybody is suffering in Germany. We have, of course, our bigger exposure to autos impact us probably a bit more. We have and are executing a very strong action plan and turnaround plan. And I am very confident, just like we've been able to turn around and we are turning Adecco the U.S., we will turn around Akkodis, Germany. What are we doing?

First, strong portfolio management. So there's going to be some business disposals on noncore assets. So that's one. Second, we have a restructuring plan underway, and it's being executed and it's going to help us rightsize the business. We have a real estate optimization project that's going to help us on cost. We are accelerating our offshoring to make sure that we are more competitive, and that's also what our clients are asking, of course, particularly the carmakers.

And we're also diversifying our business. As I mentioned, the defense sector is promising. It's today around 10% of the business, but we believe that there is very good momentum. So I think this is -- this plan is going to deliver. We ensure -- we will ensure that we deliver profitable exit rate by the end of the year, it is absolutely feasible. And I am really confident in the way the team is focused on that. And the auto sector moving forward is going to be again a growth sector.

The major carmakers are doing very strong restructuring time on their side, and they're telling us they will need more outsourcing. They need more flexibility, and they are telling us that we have to keep the knowhow, because they will need it. Once they have done their own restructuring, they will need the flexibility and the competitiveness that we make. So in a nutshell, yes, we impacted more or less in line with competition, probably more exposed to autos. We have a very strong action plan. We will exit Q4 in a profitable way, the German market.

[Coram Williams, executive]

And maybe just to complement very briefly. Autos is a pressure point for Akkodis, but it is still a resilient sector for us with good prospects, as Denis mentioned. Across Akkodis, it's down about 5%. So I want to give you a sense of the scale. And whilst Germany is a challenge, we have a very clear turnaround plan and the margins for Akkodis, excluding Germany, would be above 6%. Now obviously, we recognize we have to fix Germany...

[Denis Machuel, executive]

And we will.

[Coram Williams, executive]

Which we will, but we just want to give you a sense of how the rest of the GBU is doing.

[Operator]

Your next question comes from the line of Simona Sarli of Bank of America.

[Simona Sarli, analyst]

So first of all, a couple of follow-ups on Akkodis and specifically the reorganization in Germany. Can you talk a little bit more about the exit rate of Akkodis in this region, in March? And also, how should we think about overall the organic growth trajectory for the rest of the year?

Secondly, quick question on the one-off. I remember that [indiscernible] guiding for one-off for the year at EUR 30 million. Are you still happy with that? And also for your guidance going into Q2, can you quantify a little bit what you mean with a sequentially lower SG&A?

[Coram Williams, executive]

Sure. I'll take those. I mean on the exit rate in Germany, it was pretty consistent through Q1. And we are very focused on turning that business around with the restructuring plan that Denis talked about. But we don't see an immediate improvement in that. The challenges in German auto will persist for a little bit of time.

On the one-offs, I think you'll notice, if you look at the back of the deck on the financial framework that we have increased our expectations for one-off costs modestly for the full year. We were at EUR 30 million at the -- when we spoke in Q4, we're at EUR 50 million is our expectation for the full year now. And that really does reflect our initial estimates on the cost of the German restructuring.

We are being very disciplined around one-off costs. We brought them down considerably from where we were a couple of years ago. And we intend to continue that discipline, putting things above the line when we believe that they are simply straightforward capacity adjustments. So a small increase in our expectations for one-offs to EUR 50 million, but it's still well below the levels that we've been at previously.

[Denis Machuel, executive]

Yes. And you heard me say that and say it again on these one-offs. It's also a management mindset that we are installing. We -- there has been probably in the past too much of this magic money perception which we now stopping. And when the business is impacted by maybe not so good decisions, then they take it on the P&L. And I think that message percolates well in the company now. We make people accountable for their decisions.

[Coram Williams, executive]

And then to pick up on your question around SG&A, I just want to step back for a moment and talk about what happened on SG&A in Q1. So our SG&A was down 1% year-on-year. You've seen that from the numbers. Our FTEs were down 6%, and that reflects the ongoing drive to make sure that our G&A costs are kept firmly under control as well as the way in which we are managing our sales and delivery capacity. And I tried to give you some flavor as we were talking through the regions, there are areas where we've gone further than that because the markets are under pressure. There are areas where we've held capacity, and there are areas where we have invested because we see opportunities for growth and share gain.

The differential between that headcount reduction of 6% and the SG&A being down 1%, there's a big driver, which is obviously the merit rises, the wage inflation that we give to our own teams at the beginning of the year. It varies by country. We peg it to inflation, but you should assume that it's running at about 3%, happens at the start of every year. So it does create a differential in the first quarter between FTE movements and the SG&A number. But we also had a couple of minor timing and one-off expenses in SG&A in Q1.

On the corporate side, timing of insurance charges, but also we did, as you've seen a couple of small M&A deals, we had some fees relating to those which came through in Q1. And because we've been so effective at managing G&A because we brought that base down even relatively small amounts, create a bit of a swing in percentage terms.

And then on the selling side, again, picking up on the point that both Denis and I made about restructuring. We had some modest restructuring charges go through our selling expenses above the line. And costs are firmly under control. So G&A remains tightly controlled. There are a couple of areas where we will continue to look for further G&A savings. We've spoken about France and the U.S. And we're managing selling costs with agility.

In terms of the reduction that we'd expect from Q1 to Q2, it's really the absence of those onetime items. And you should work on the basis it's high single-digit millions of euros. So hopefully, that gives you a steer.

[Operator]

Your next question comes from the line of Remi Grenu of Morgan Stanley.

[Remi Grenu, analyst]

Two on my side. So if you could make a little bit of an update on how the restructuring is progressing in France and how much cost savings you expect to generate from that? And what would be the timing there? And the second is to come back on that SG&A comment. I just want to understand the kind of EUR 25 million bridge between your initial guidance, which was kind of going to EUR 950 million and where you got surely the 3% inflation was an assumption that you've had to make for that EUR 950 million. So trying to understand what's -- this one-off you're referring to? Is that the entirety of the EUR 25 million? And if so, should we expect that to completely revert next quarter?

[Denis Machuel, executive]

So regarding France, I think the restructuring is well underway, and we are -- it's been -- it's mostly behind us. So that's good. We, of course, continue to adjust to the market dynamics. Our domain in France reflects mainly the lower volumes that we had and even though the market is not that good at the moment. We are improving our performance relatively to the market.

So we're reducing the gap. As you know, we've been a bit lagging behind for some time. We're now reducing the gap, and I'm quite positive that as we progress in the year, we will be above the market in terms of growth. So that's positive. We -- we have -- we also put a new leader in Adecco in France is put in place -- is an improvement plan. We really focus on client efficiency on continue to digitize our delivery platform. We're improving fill rates. We're focusing on new sectors, construction, nuclear, we secured some large contracts, which makes me positive in the outlook of France moving forward. And of course, we're really adjusting selling FTEs because the market in France is not the strongest one at the moment. So we are, again, adjusting capacity in a very granular way. So that's where we are.

[Coram Williams, executive]

And just picking up then on the follow-up question on SG&A. I mean, obviously, the wage inflation was built into our guidance. That's something that we do every year. The one-offs we were not anticipating these are small items, timing, as I mentioned, of insurance, advisory and some modest restructuring charges. And as I said, assume it's around EUR 10 million, and that we would not expect those to repeat in Q2. So it doesn't explain all of the difference. The rest is really about the way in which we're managing the business. So we are very tightly controlling G&A, the savings that we've secured last year continue to flow through the P&L. But we do have some modest positive momentum in the business, and we are adjusting selling capacity on a very dynamic and very granular way to make sure that we balance productivity and share gains. And you can see the benefits of that in terms of the sequential improvement on the growth rate from Q4 to Q1 and the ongoing share gains that we're delivering. So it's all about the agility with which we're managing capacity, and we're responding to the momentum that we see and the market conditions that we're facing.

To be very clear, we are firmly committed to our 3% EBITA margin floor on an annual basis. So we recognize it doesn't happen every quarter because of the seasonality of the business. But even in a difficult environment, we are absolutely clear that we can secure that 3% floor. And you can get there by in 2 ways, get thereby continuing to see momentum and capitalizing on it, and getting operating leverage as a result, or if market conditions or the momentum starts to soften, then we will adjust ourselves and delivery capacity. And we will do so quickly.

I mentioned in my remarks, we have flexibility built into the cost base. We have 10% of our sales and delivery capacity on flexible contracts. We have attrition rates of around 20%. We can adjust very rapidly if the momentum that we see right now starts to soften or store.

[Denis Machuel, executive]

And we are following very closely volumes on a weekly basis at a very granular level. in each country, in each area of the country and nobody is really briefed about that clear and granular understanding of what's happening in the market. It's so fluid that you need the people to be on it and to understand where it's moving, where it's stopping, where are the opportunities, where should we adjust. So it's -- everybody is really, really briefed on that surgical way of looking at the business.

[Operator]

Your next question comes from the line of Will Kirkness, Bernstein. .

[William Kirkness, analyst]

Two questions, please. Firstly, just coming back to that 3% floor. I think if the first half sort of ends up in the 2.4%, 2.5% area, that implies a decent pickup in the second half. I think last year, maybe this is about 30 basis points. So is that just a factor that last year, things are deteriorating in this year, things are looking better. So it's a function of the top line.

And then the second question was just coming back to the comment on the 350 basis points of pressure from large clients in Adecco Europe. I just wondered if that's sort of volume thing or if it's price led and whether you could then talk a bit more about kind of fee rates versus wage growth more broadly?

[Coram Williams, executive]

So I'll pick up on the first question and Denis will pick up on the 350 basis points for large clients in France. Well, to your point, yes, it's absolutely a function of the top line. So as you rightly pointed out, last year, the trajectory worked against us through the year, which meant there was less of a seasonal pickup in the second half margins versus the first half.

As we've said, we are seeing positive momentum in the business. You saw the graph on Slide 6 on flex volumes. It shows what happened in Q1, and it shows that, that momentum of a modest nature, but nevertheless, there and broad-based has continued into Q2, and we are managing the business to make sure that we capitalize on that, and we take market share. If that continues, then that would obviously give us operating leverage and create stronger second half margins.

Obviously, if we face a situation where the volumes start to soften, then we will take action very rapidly on our sales and delivery capacity. And as I've already said, the business is flexible in terms of its cost base, and we're managing this in a very granular way. So I hope that gives you a sense. There are several ways in which we can get stronger margins in the second half, and we're fully committed to that 3% EBITA margin flow.

[Denis Machuel, executive]

Absolutely. And with regards to your second question, the 350 basis points that you referred to is linked to France and some large clients impact. If you remember well, we mentioned also in Q4 that we have 3 clients having intrinsically negative impact because of their own business. I'll say a few words on pricing first. Pricing is solid. Pricing is firm. Of course, we are in competitive markets across the board, but overall, our pricing is really solid.

We have -- we, of course, follow bill rate versus pay rate and the spread there is still slightly positive that demonstrate that we hold in on pricing. And they said the solid gross margin demonstrates that.

Now if I go back to France, we had this 350 basis points impact of a few large clients, a handful. And we also had a negative impact on health care due to a change in legislation in France. So that has impacted. Manufacturing autos logistics remain weak, but we have some better momentum in Food & Beverages and retail. We also won some significantly large contracts in France towards the end of the past year and the beginning of this year. That makes me very confident that, again, as I said earlier, that we're going to catch up on the market. And we've already reduced the gap versus market in Q1 versus Q4. And I am very confident that as we progress in the year, we will be above the market -- comparative terms at some point in the year.

[Coram Williams, executive]

Maybe if I can just complement that by touching on your question about the relationship between fee rates and wage growth more broadly, there is a pretty much 100% correlation in the Adecco business because we take the wage rates and we apply a multiplier to get to the bill rate. As Denis mentioned, the spread between bill rate and pay rate has been modestly positive again. The multiplier is stable in a decade despite the country mix working slightly against us, which means we are seeing the benefits of modest wage inflation that's out there in the global economy flowing through in the top line.

[Operator]

Your next question comes from the line of Simon LeChipre of Jefferies.

[Simon LeChipre, analyst]

First of all, the U.S. kind of 2-part question. So sorry, in which extent the improvement is driven by easier comps and new business wins as opposed to some underlying volume improvement? And second part, in the U.S., you mentioned strong performance of consumer goods. Just wondering if this is driven by any pull forward of demand from U.S. consumer ahead of tariffs?

Secondly, you mentioned that you have not seen any tariff impact overall, but you kept mentioning manufacturing and also looking with -- so yes, just trying to reconcile this. And also, we see Germany is very weak. So we do not seem to show any improvement. And lastly, just quickly on was the driver for the nice optical organic growth in APAC in Q1 as opposed to Q4.

[Denis Machuel, executive]

So on the U.S., -- and I think the main thing to the US is the turnaround in Adecco is delivering results, the delivering results, still on the temp market, there's still a pretty low penetration rate at 1.59% in April. The U.S. market temp volumes are still negative, April was minus 4.6%. Our March was a bit worse at minus 5.1%. So I mean, the market is not fantastic. We -- our performance, our absolute performance is one of -- that demonstrates improvement. We had minus 12% in Q4. We are at minus 2% in Q1 and an exit rate at plus 4%, and it's a result of several things.

We had, and we mentioned in the past that we had some large client losses and they are behind us. But on top of that, we had some very nice large client wins. So it's not only a comp base. It's also that we win some very large clients. That explains that in Q3 last year, we went at minus 16% on large accounts. We are now at plus 1% in Q1. The SME business is also getting traction in Q3 last year, we were at minus 5 in Q1. This year, we are plus 3, and it's linked to the branch revitalization program that is well underway. So there is momentum. We also have a good traction with MSPs. The volumes that the Adecco business delivers through Pontoon, our MSP is also improving. So there's a lot of things that we're doing and executing rigorously that put us in this situation. So I think it's really promising. And I'm quite positive what's going to happen in Q2 and Q3.

On the business side and the customer goals that you mentioned, actually, we have a very strong dynamic in retail. We grew 40% retail, 11% in manufacturing. Auto is soft, is negative. And all that, back to your question on tariffs. We -- as we -- as Coram said, we don't see -- of course, we are not directly impacted at tariffs, but we don't see so far any visible impact on tariffs. It's quite early, and clients are more in a wait-and-see mode than anything.

A few days after Liberation Day, we went really out to talk so many clients, and we reach out to our top 100 clients to see where they were. And of course, there was a variety of situations, some depending upon where they make their revenue, where they manufacture, they are depending upon their dependency on supply chain, but more or less, the uncertainty makes such that they're more waiting to see what's going to happen. So yes, uncertainty, it's in everybody's mind.

The only impact that we see so far from tariffs is the slowdown in permanent recruitment, because, of course, when you're uncertain, you don't necessarily bet on recruiting more people. On the other side, it brings some momentum, I believe, in the flex labor because even though you have some work to do, you can -- you flex your workforce. I don't think weakness in manufacturing and automotive sectors are linked to tariffs because they were already weak towards the end of this year. And if I look particularly in the automotive sector, it's broad-based, and particularly linked to this -- the -- particularly the German carmakers that are -- that have to do their own adjournment to be ready for the quarters to come.

[Coram Williams, executive]

And if I pick up on APAC. Revenues in our Adecco APAC business were up 11% with good share gains. It's very broad-based. So if I look at it on a territorial basis, Japan was up 10%, Asia up 24%; India, up 16%. The only area of pressure was Australia or it was down 9%. Australia is quite a tough market for the industry right now, and logistics is soft. But it's very broad-based in terms of territories. SME growth was very strong enterprise was also good. And if we look at sectors, retail, IT, tech, manufacturing, consulting, they all showed good growth. I think the key point about APAC is we are very well positioned there, and this is structural growth. And it's the same if you look at LATAM as well, we see very good growth, and we have a very good competitive position in those areas, and they are helping to drive the overall Adecco group growth.

[Denis Machuel, executive]

Well, like in these 2 regions is they are not only do they grow, but they also improve their margins, which means we are able to improve the margins as well as continue to be a bit -- to fuel this growth with strong capacity. So I think that's -- and it's now -- now represents a significant piece of our revenue. So that portfolio, that geographic portfolio that we have puts us in a very strong position for the future.

[Remi Grenu, analyst]

A quick follow-up on LatAm. I think it was up 14% in Q1. Is there any higher inflation impact in this 14%?

[Coram Williams, executive]

No. I mean, a very modest amount in Argentina, but even if you were to exclude that, you'd still have strong double-digit growth. So it is competitive positioning, making sure that we're capitalizing on the growth opportunities in a number of territories and driving share.

[Denis Machuel, executive]

And we have a very strong team there.

[Operator]

Your next question comes from the line of Konrad Zomer of ABN AMRO.

[Konrad Zomer, analyst]

I've got one question. It's about your ongoing improving momentum throughout Q1 and Q2 to date. Are you willing to share with us if that improving momentum also applies to your businesses in Italy, France and Germany, please?

[Coram Williams, executive]

So yes, we are willing to share. And yes, it does apply to all of the businesses that you've mentioned.

[Operator]

Your next question comes from the line of James Rowland Clark of Barclays.

[James Clark, analyst]

I've just got one question, please. I'm just intrigued by your comments about managing costs and capacity against your desire to take share. It seems like in your presentation that you're taking share in really most of your markets or at least you've got plans to take share. Is it therefore fair to say that you're carrying a few more consultants than the market average relative to your market positions, therefore, do you need -- or do you not need to add lots of capacity should the market improve? And then a follow-up to that would be, what does that mean for your gross profit to EBIT conversion ratio from here, even when the group returns to growth in the near future?

[Denis Machuel, executive]

So let me take the market share gains dynamic, and then Coram will be super happy to talk about EBITA conversion ratio. First of all, it's a mindset. Market share gain is a mindset, and that's what we've indicated our teams is you win because when you prove at your relevant with your clients and you create a better future. We do that by selectively protecting capacity. And really, as I said earlier, is we are super, super granular. We add more FTEs where we see the opportunity. And even though we've gained share, we've also improved productivity. We've improved productivity in Adecco, we've improved productivity in LHH. So -- and then we've reduced FTEs, so we gained share, but we also reduced FTEs in absolute numbers, not massively 1% from Q4 to Q1.

So this is really a lot of -- as I said, very surgical implementation of the plan to make sure that we capture everything that we have. That's one thing. The second thing is it's also about the efficiency with our clients, the time to fill, the fill rate, the way we implement technology to be the first one to respond to have the best profile in contracts where it's the fastest that replies that wins is critical. That's also how you gain share within contracts. We've also put specific incentives that balance nicely this growth mindset with profitability and we talked about the pricing, we're not sacrificing pricing. It's just more -- it's the energy, it's the mindset and the competitiveness that make us win this market share.

And if market improves, yes, we will add capacity. That's what we do. We will -- we will -- with the same granularity. It's not going to be across the board. It's not decided in Zurich, but they know and you see that in APAC and LatAm. APAC will add a few more people, not many because we still have some productivity to gain. But of course, we are ready to capture every single positive opportunity.

[Coram Williams, executive]

And if I can complement that and pick up on the point about drop-down ratios. So as Denis described, we're being very granular and very forensic in the way that we're managing capacity. It's not that we have a blanket approach to this. It's not that headcount is going part everywhere or down everywhere. We are literally adjusting it country by country, sector by sector. We have protected capacity where we see opportunities. That's absolutely clear.

Our recovery ratio, as I mentioned in the script, in 2024 was 43%. That's a little bit lower than the 50% that we stared to particularly, for example, in COVID. And that means that in the early stages of a recovery, we don't need to add capacity. We can drive the productivity. And that means that the drop-down ratio would definitely be around 50%. It may even be just a little bit higher. It doesn't last forever, but it gives you a sense of how we're managing it.

And the other aspect maybe to pick up on is you can see in our gross profit bridge where the pressure points are. A lot of it is about mix. Obviously, if we continue to see momentum, then you would expect to see some of those mix pressures alleviate and the gross margin improve.

[Denis Machuel, executive]

And definitely, if there is a market pickup, we believe that clients will again go more into permanent recruitment. We are well positioned for that. And as you know, permanent recruitment has very nice gross margins.

[Operator]

There are no further questions at this time. With that, I will turn the call back over to Denis Machuel, Chief Executive Officer, for closing remarks. Please go ahead.

[Denis Machuel, executive]

Thank you, and thank you for listening to us, and thank you for the exchange that we had today. Just a few things to keep in mind. Yes, there is uncertainty, but as you could see, it hasn't impacted our business so far. We are continuing to gain market share. We are executing our strategy with rigorous mindset, and we are able to prove that when we -- when there is an area of focus with the turnaround plan we deliver on the turnaround plan. This is what's happening in the U.S. This is what we're going to do, in Akkodis, Germany, which is, I would say, a pressure point at the moment. Overall, we'll do everything to capture every single opportunity. And as we said, we are super agile. If headwinds come we will adjust. And if there is a positive perspective, we will inject capacity to continue to outperform. So thanks a lot for this exchange, and we look forward to changing again with you in Q2. Thank you very much, and have a great day.