Release Date: August 06, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Adecco Group AG (AHEXF, Financial) delivered EUR5.8 billion in revenues, outperforming key competitors by 375 basis points.
- The company achieved EUR162 million in G&A savings, surpassing the EUR150 million target.
- Cash flow from operations improved significantly, with a positive EUR162 million, up EUR82 million year-on-year.
- The company has been approved for its 2030 and 2050 net zero emission targets by the science-based target initiative.
- Adecco Group AG (AHEXF) has consistently delivered against its Simplify, Execute, and Grow plan, driving better execution and financial performance.
Negative Points
- Revenues were 2% lower year-on-year on an organic trading days adjusted basis.
- Gross margin decreased by 70 basis points year-on-year to 19.4%.
- Adjusted EPS was EUR0.64, 1% lower year-on-year on a constant currency basis.
- Net debt to EBITDA ended the quarter at 3x, reflecting a seasonal peak and only a 0.2x reduction compared to the prior year.
- The company faces challenging market conditions in Northern Europe and North America, with revenues down 11% and 14% respectively.
Q & A Highlights
Q: When you think about the original guidance on gross margins for 2Q that you gave with the 1Q results in May, it was supposed to be broadly in line with the 1Q levels of 19.8% versus where you actually landed up, which was 40 basis points lower. Can you maybe discuss what changed versus your original expectations and degree of confidence you have on the gross profit guidance for the next quarter?
A: On gross margin in Q2, we did guide for broadly in line and obviously came in a little bit lower than that on 19.4%. We think that is a healthy result and probably the two things that were slightly lower than we'd expected were perm where it was down 30 basis points and we'd guided towards 10 basis points, and Flex, which was down 20 basis points when we'd guided towards being down 10 basis points. So these are not major movements. The key point about gross margin is that it's really all about the current business mix right now. It's about the pressures that we continue to see in perm. It's the geographic mix in Adecco with the lower gross margin countries growing faster than the higher gross margin countries. But there is nothing structural happening in our gross margin. It's all about mix. Our pricing is firm. The spread between bill rate and pay rate was up again year on year in Q2. And as I mentioned in my script, the Adecco gross margin was down by the same amount as the revenue line, again, signifier that our pricing is firm and we're using dynamic pricing where it's appropriate to capture the value of the services that we bring. So I have good confidence that we will improve sequentially in the way that we've described for Q3.
Q: In July, your credit rating on your debt was changed, Outlook, I think was changed from negative to stable, and this raised some concerns, I think, among your credit investors. So do you have any plans to accelerate the deleveraging process on the balance sheet to allay some of those concerns there?
A: On the S&P change, I mean, let's be clear. We still have a very high investment grade credit rating. It is triple B+ BAA1. The only thing that S&P moved was the outlook and as is clear from their report, the reason that they did that was not about the execution of the business, which actually they commended. It's about the macroeconomic challenges that we continue to face. Our balance sheet is strong. We've got no financial covenants, no outstanding commercial paper, strong liquidity. And as I outlined in my remarks, we've got a very clear plan for deleveraging. And we do that through productivity improvements, the flow through of the G&A savings, which we've delivered above target, lower one-offs, now that we're largely through our G&A cost reduction and lower CapEx. And there's tangible progress that you're seeing in the Q2 numbers because our operating cash flow is up over EUR80 million, our free cash flow is up EUR100 million and our leverage has actually come down year on year in a seasonally high leverage quarter.
Q: DSOs improved during the quarter. To what extent do you think that improvement is sustainable? Or is that further to go on that metric?
A: We're really pleased with our DSO performance. We've had a real focus, as you know, on cash flow. You're seeing the tangible results of that in the Q2, and one of the levers that we've got is obviously around the assets. And a half day improvement in DSO for the Group is worth somewhere between EUR35 million and EUR40 million of cash. So this is a real focus for us. And you can see for the market and the industry as a whole, actually DSOs going the other way. And so I think our focus is paying off. We will continue to really home in on this to make sure that we drive further benefits in operating cash flow. We've incentivized on operating cash flow as a metric, which means that management is really homing in on it, and we believe it's sustainable.
Q: Given some of the macro uncertainties, it's around us, are there any signs of a change in behavior from your clients, either positive or negative in recent weeks?
A: As we said in our Outlook, we don't see any major changes in the Q3. We said that our revenue development will be more or less in line in Q2. So we expect the regions that have been performing and there are several in this past quarter to continue. I think we have good traction in APAC, good traction in Latin America, good traction in Southern Europe, Eastern Europe. So we have been, we have some signs that there are some supportive economies around. Of course, there are places where markets are more challenging, and we adapt our capacity to that. So I think what -- we are very agile in making sure that we adjust our resources. One thing that could, that interesting to look at is the trends in recruitment solutions at HH, particularly in the US and also the tech staffing in the US. What we've seen -- I mean, these are difficult markets. As you could see year-on-year, we're down. But sequentially, we've seen signs of stabilization. And so, on these things, we believe that we are at a trough. Let's be clear. We haven't seen an inflection yet, but we don't think it's going to get worse, and we are positioning ourselves for the rebound. That's what Coram mentioned in his remarks as well. We are protecting capacity. We've recruited some good people, particularly in that HH to make sure that we are ready to accelerate as soon as the markets restart.
Q: On gross profit margins, you had indicated that it will be sequentially up with the normal seasonality pattern. So the plus 40 basis points, 50 basis points quarter over quarter. If you can please explain how comfortable you are with that, especially in the context where your main competitors are actually being a little bit more conservative and indicating only like a small improvement of up to 20 basis points?
A: As I mentioned, we are confident that we will see the sequential improvement in line with seasonality. Clearly, that implies there's no major change in trends, and that's very consistent I think with our revenue guidance. And I can't comment obviously on what competitors are guiding towards, but I would say we have a slightly different mix. So we are confident in our view on gross margin. And I think it is consistent with what we're saying about the trends that we see in the market.
Q: On the reduction in G&A of EUR15 million to EUR20 million, how much of that is related to temporary adjustments in capacity and how much more it will be sustainable in starting the medium term?
A: The EUR15 million to EUR20 million reduction, obviously part of that is the flow through of the additional run rate, the over-delivery
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
