Adecco Group AG (OTCPK:AHEXF) Q2 2022 Earnings Conference Call August 4, 2022 3:30 AM ET
Company Participants
Benita Barretto – Head of Investor Relations
Denis Machuel – Chief Executive Officer
Coram Williams – Chief Financial Officer
Conference Call Participants
Paul Sullivan – Barclays
Anvesh Agrawal – Morgan Stanley
Sylvia Barker – JPMorgan
Rory McKenzie – UBS
Hans Pluijgers – Kepler Cheuvreux
Benita Barretto
Good morning. And thank you for joining the Adecco Group’s Analyst and Investor Call. With me today, I have our CEO, Denis Machuel; and our CFO, Coram Williams.
Before we begin, I would like to draw your attention to the information on slide two. On today’s call, we will be referencing both 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 Deni.
Denis Machuel
Thank you, Benita, and hello, everyone. I am delighted to be joining my first results call at the Adecco Group, having just completed my first month as CEO. I have always valued exchanges with investors and analysts, and I’m sure we will have good discussions in the future. On today’s call, Coram will review Q2 results and the group’s outlook, and after this, I will provide you with some of my initial impressions. Following this, of course, we will open the lines for questions.
So, Coram, over to you.
Coram Williams
Thank you, Deni, and a warm welcome to everyone on our call this morning.
Let’s now turn to slide three. Q2 results are solid, reflecting investments made to drive growth and market share. Revenues reached €5.9 billion, up 4% year-on-year on an organic trading days’ adjusted basis, and was higher in all three GBUs. Gross profits of €1.25 billion was 7% higher organically. Gross margin was very strong at 21.1%, 100 basis points higher. EBITA, excluding one-offs, was €205 million with a solid EBITA margin of 3.5%, 100 basis points lower, in line with management expectations, and modestly improved on a sequential basis. Adjusted EPS was €0.85, down 17% year-on-year, reflecting mainly lower EBITA levels. The cash conversion ratio was 58%, a healthy result given higher working capital absorption. And pro forma net debt-to-EBITDA ended the quarter at 2.6 times. This leverage is mainly due to acquiring AKKA Technologies over the period, and is in line with management expectations.
Let’s move to slide four, where we provide insights into current market trends. First, the experience of the pandemic has left its mark with workers who continue to re-evaluate their work-life balance and to prioritize well-being over work. 43% of workers say that they are likely to quit this year. The graph on the left of the slide shows these intentions on a country basis with employees in Australia and the U.S. most keen to make a change. 18% of workers intentionally left jobs in the past year on a global basis. And in the U.S., voluntary quit rates are 25% higher than pre-pandemic levels. Moreover, when employees quit, they do not necessarily return. 48% change industry and only 29% return to traditional full-time roles.
Second, and in conjunction, the skills needs of employers are evolving quickly. One in five skills requested most frequently by employers are entirely new since 2016. Consequently, employers are challenged in their hunt for talent. 78% of business leaders in EMEA say their firms are understaffed with nearly half saying they’ve lost customers because of staff shortages. And 59% of U.S. CEOs say that they can’t find enough people with the right skills. The Adecco Group has specialists in sourcing, attracting and developing talent at scale while providing our clients with an unrivaled array of solutions fit for a talent scarce landscape. We will continue to win both strategically and financially from this supportive trading environment.
Let’s now turn to slide five. And our ongoing focus on gaining market share in a decade. The business delivered encouraging incremental returns from its investment plan, driving overall relative revenue improvement of 400 basis points sequentially versus its key competitors. This is on top of the 400 basis point improvement that we saw in Q1. The largest tailwind for Adecco’s growth rate in Q2 was manufacturing with a 100 to 150 basis point positive impact. In terms of headwinds, the main drivers were: Firstly, the rebalancing of logistics, which lowered the achieved growth rate by 250 to 300 basis points; and secondly, Mexico’s regulatory change, which had a 100 to 150 basis point impact.
Aside from these end market drivers, the business has successfully nurtured its growth levers. It has added meaningful sales capacity with 1,500 more FTEs relative to Q1. Over 50% of hires were in APAC, Adecco’s strongest growth region. Adecco’s client base was up 5% relative to Q2 ’21, benefiting from a 26% improvement in sales intensity. High-value solutions activities were very strong with Perm up 44%, and Outsourcing up 33%. Adecco’s digital platforms, Adia and QAPA, advanced well with combined revenues up over 45% on a pro forma basis. And last but not least, pricing initiatives were supportive. Adecco’s investment plan has been implemented with agility and is driving improvement, but we recognize we have further to go. In H2, we will maintain our strong focus on the U.S. turnaround, and we will pivot from adding headcount to driving further productivity improvement from the investments that we’ve made.
Let’s now look at the results at the GBU level, beginning with Adecco on slide six. The Adecco’s revenues increased by 3% year-on-year on an organic trading days adjusted basis. There was a divergence in momentum by region. APAC was very strong, Southern Europe and EEMENA and France were all solid. DACH was robust, while Northern Europe and the Americas were both soft, albeit sequentially improved. Flexible placement was flat year-on-year with strength in manufacturing, autos and hospitality and catering countered by continued headwinds from logistics and Mexico. Activity in high-value solutions was very strong. Adecco’s gross profit margin benefited from positive solutions and business mix and dynamic pricing. The EBITA margin was solid at 3.6%. The 110 basis point move reflects higher growth investments, primarily in headcount as well as fewer non-recurring benefits compared to the prior year period.
Moving to slide seven, which shows Adecco at the regional level, in France, revenues grew 4%. In sector terms, hospitality and catering, manufacturing and health care were strong, while logistics and construction were subdued. In Northern Europe, revenues were 5% lower. U.K. revenues were weighed by the tough comparison period in logistics, stemming from exceptional contract wins in the prior period. Excluding this impact, Northern European revenues were 4% higher.
In the DACH region, revenues increased 1%. Revenues from Germany were 4% lower due to a rebalancing of activity in both health care and logistics, while autos and manufacturing were strong. Revenues in Southern Europe and EEMENA rose 6%. In Italy, revenues were up 9%. And in Iberia, revenues were up 4%, with growth led by the manufacturing and food and beverage sectors. The EEMENA region was 8% lower, weighed by logistics. In the Americas region, revenues were 4% lower. Latin America revenues were 1% lower, weighed by Mexico. Excluding this, revenues in Latin America were up double digits. In North America, revenues were 5% lower.
Revenue momentum in Adecco U.S. improved for the second consecutive quarter, evidencing some traction in the U.S. turnaround plan. While we expect the turnaround to take time, the business observed continued improvement in key operational metrics such as client visits per FTE, order fill rates, and employee retention.
Last but not least, execution in APAC was very strong. Revenues were up 14% for the region. Japan was up 11%, while both Australia and New Zealand and India were up 12%. Flexible placement was strong, particularly in Australia and Japan, led by logistics, IT tech and consulting. And revenues were boosted by very strong growth in outsourcing and permanent placement services. Looking at Adecco as a whole, we’re encouraged to see positive momentum in market share across all regions on a sequential basis, although we recognize there is further to go.
Let’s turn now to slide eight and LHH. Revenues were up 3%. Recruitment Solutions performed very well, delivering good returns from prior investments in sales capacity. Gross profit for the segment was 25% higher with Perm fees up 38%. And the business continued to gain market share across Perm globally. Performance in Recruitment Solutions was somewhat mitigated by the countercyclical Career Transition business for whom revenues were 31% lower. Learning & Development grew well, and Ezra’s revenues were up 68%. Pontoon grew moderately and Hired’s revenues advanced 77%. The EBITA margin of 6.5% reflects lower contribution from legacy LHH in combination with higher investments in headcount and Recruitment Solutions, Ezra, and Hired.
Turning to Akkodis on slide nine, the business delivered another quarter of very strong revenue growth, up 14% on an organic trading day adjusted basis. By region, Modis Americas grew 18%, while EMEA was up 9% and APAC up 9%. Growth in the Americas and EMEA was driven by Talent Services. In APAC, the business benefited from its focus on consulting in Japan.
AKKA contributed €386 million of revenues in the period with growth led by data response and the Americas. Revenues were held back by a loss of working days in certain European activities following a cyber incident. Standalone and prior to this impact, the business was on track to deliver organic revenue growth in mid-single digit terms. Management responded swiftly and effectively to the incident and the costs incurred are largely recoverable. Akkodis’ EBITA margin eased by 20 basis points, primarily reflecting productivity constraints, driven by the cyber incident, particularly in Germany, which is also affected by a highly competitive talent market. Without the cyber incident, margins would have been above last year’s 6.5%. Overall Akkodis’ project pipeline remains strong.
Let’s move to slide 10, which provides an update on the AKKA and Modis integration efforts. Overall the integration is firmly on track despite some disruption in AKKA this quarter. During Q2, the Akkodis brand was successfully launched and management have made good progress with the creation of a new joint culture, focusing on people retention and finalizing the target structure for the combined organization. Synergy plans have developed particularly well. We’ve taken the actions required to secure an in-year P&L synergy contribution of €20 million, hitting our 2022 synergy target. By year-end we anticipate a synergy run rate of at least €40 million.
As the graph on the left-hand side of the slide illustrates, this places Akkodis firmly on the path to deliver 2023’s targeted synergies. I’m also pleased to report that post quarter end, Akkodis won a multi-year contract in the Americas with a large customer, where our engineers will be supporting software development for autonomous driving, evidencing ongoing capture of revenue synergies.
Let’s turn to the group results on slide 11. First, let’s consider the main drivers of gross margin on a year-on-year basis. Flexible Placement had a 50 basis point positive impact. Permanent Placement had a 100 basis point positive impact, reflecting higher volumes and fee levels. Career Transition was 60 basis points lower, while contribution from other services, including Training, Upskilling, and Outsourcing was 20 basis points lower. In total, the gross margin was up 70 basis points on an organic basis and up 100 basis points in reported terms, including 10 basis points of accretion from M&A. At 21.1%, it is another very strong quarter for the Adecco Group that showcases the improved quality of the group’s earnings, 45% of gross profit come from sectors outside of General Staffing.
Moving to the EBITA bridge on the right-hand of the slide. On a reported basis, gross margin gains were fully mitigated by SG&A. The 200 basis point movement in SG&A expenses reflects the acquisition of AKKA and a 5% impact on SG&A expenses due to currency movements. On an organic basis, SG&A expenses were 16% higher year-on-year, closely aligned to investment in headcount with FTEs also up 16%. There are several drivers for the EBITA margin move from 4.5% to 3.5%. Firstly, planned investments to accelerate growth, mainly in Adecco, which pushed group margin down by approximately 40 basis points; second, a lower contribution from legacy LHH of approximately 25 basis points; and finally, the absence of non-recurring benefits worth approximately 10 basis points.
Let’s move to slide 12. The group’s H1 conversion ratio was around 16%, and Adecco’s conversion ratio was 23%. Typically it takes approximately six months for new employees to become fully productive. We’re starting to see some improvement in Q2 with group productivity up 0.6% sequentially and on an organic basis. Looking forward, all else being equal, as employees become fully productive, growth will accelerate and margins will improve.
Turning to the group’s robust financial structure on slide 13, Q2 cash conversion was 58%, driven by normal working capital absorption as the business invests to grow. Days sales outstanding were 53 days, two days higher year-on-year and excluding AKKA due to unfavorable business mix. Cash flow from operating activities was negative by €81 million due to net working capital absorption and lower net income. The net debt-to-EBITDA ratio, excluding one-offs and adjusted for AKKA, was 2.6 times. The ratio, which is in line with management expectations, has increased year-on-year, mainly because of the acquisition of AKKA. Net debt was €2.8 billion at the end of June 2022. We are committed to deleveraging the balance sheet going forwards. The group benefits from strong liquidity and low interest expenses. Nearly 70% of outstanding debts are fixed and AKKA was financed with an average 0.54% coupon also fixed. In addition, the group has a very well-balanced and manageable bond maturity profile.
Let’s now turn to the outlook. The group’s trading momentum indicates continued healthy demand for Talent Services with a June exit rate of 4% and July volumes modestly above Q2 levels, whilst recognizing we’re operating in an uncertain macroeconomic environment. In Q3, the group expects to achieve solid revenue growth on a year-on-year basis. Gross margin is expected to trend around Q2 ’22’s reported level and SG&A expenses are expected to stabilize. Management expects to deliver productivity improvements in the third quarter. As a reminder, last year’s margin was flattered by special items in Adecco France, which impacted group margin by 25 basis points, which we highlighted at the time and which we do not expect to repeat.
With that, I’ll hand back to Deni.
Denis Machuel
Thank you, Coram. And let’s move to slide 15. Following a fruitful handover period with Alain, I have spent the last four weeks as the group CEO getting to know the business directly. I have spent time with a number of our operations in our major markets so as to review how we engage with customers, how the delivery model works, how the organization and its wider processes function, listening carefully to our people and meeting the teams in branches, in career centers, on-site and in regional headquarters. I have met with several clients to better understand their needs and discuss how we can optimize the services we provide. And I have made sure employees stay focused on near-term priorities, holding my first townhalls.
So if we now move to slide 16. I want to say that these last few weeks have really reinforced my reasons for joining the group. There is so much we can build on. I am excited by the growth presented by the industry in which we operate at a time where the world is truly reimagining the way we work. Each of our GBUs has a strong value proposition for its customers. We offer a compelling purpose to our employees. The more we grow, the more people we support through their career journey and the greater our social impact is. This is truly motivating and I have been struck by how dedicated our people are.
At the same time, this quarter’s results show the group continues to face challenges. And it’s clear that over the long-term, the group has not delivered the growth expected of it, nor good total returns to shareholders. I have joined the group with a mandate to improve growth, sharpen execution, and accelerate progress. I am energized by this mission and laser focused on working to identify the levers and executing on them to realize the group’s full potential. In the immediate term, management will focus on delivering returns on the investments we’ve made and growing our market share by being the partner of choice to our clients and the talent we serve. My commitment to you is to come back in early November and give details on how the executive team and I will deliver on my mandate. We will hold this business update alongside Q3 results on the 3rd of November.
With this said, thanks a lot for your time, and let’s now open the lines for Q&A. So, Operator, we are ready for the first Q2 results questions, please.
Question-and-Answer Session
Operator
The first question comes from Paul Sullivan from Barclays. Please go ahead.
Paul Sullivan
Yes. Good morning, everyone. Just firstly, I mean, to state the obvious, accelerating SG&A and slowing revenues is sort of killing your margins at the moment, and it’s potentially likely to get worse before it gets better. So, what triggers an about turn, and do the old sort of industry norms in terms of recovery ratio still apply in the event of revenue decline? And then, just following on from that, is flat sequential SG&A guidance in absolute organic terms for Q3 is clearly FX is having an impact.
Secondly, on free cash flow, can you help us sort of unpick the moving parts? And give us some color on your conversion guidance for Q3 and then thoughts on below-the-line costs through the second-half?
And then finally, Deni, can you share what you think needs to change? I know it’s early days, but in your view, does the strategy need in axe or a scalpel?
Coram Williams
Thank you, Paul. And quite a few questions in there, I’ll take the majority of them, and then, obviously, hand over to Deni for your final point. On margins, I mean, I think if you think about our guidance, we’ve been pretty clear in terms of the parameters. So, we’re guiding towards solid growth on the revenues. That will be helped by productivity improvements. And remember also that the headwind on logistics does reduce somewhat in Q3. So, it was a 300 basis point headwind in Q2. We’d expect that roughly to half in Q3. So, that’s about 150 basis points. We’ve also given you a clear steer in terms of gross margin. So, we’d expect that to be very similar sequentially to Q2. And on SG&A, just to be clear, the guidance for stabilization is for absolute terms. So, we’ve got SG&A of roughly 1060, and we would expect it to be roughly in line with that going forward. And I think that’s the key point because the shape of the year is exactly the way that we have discussed it previously. In the first-half, it was about implementing the investment plan. You’ve seen SG&A rise on the back of that, but you’ve also seen a significant improvement in our relative growth performance, 400 basis points in Q1, another 400 basis points in Q2, and we have overtaken manpower in terms of growth rate in Q2.
The second-half is about driving productivity. And that will help growth, it will help margin. But the only thing to have in mind when you’re building your models is obviously, there is the absence of the special item that we had in Q3 of last year in France, which is worth 25 basis points at a group level. So, our focus in H2 is on driving productivity from the investments and that will benefit underlying profitability of the business as well as growth. On free cash flow, I mean it is, as we know, the cash conversion and the operating cash is down. There are really three reasons for that. Firstly, we have had lower EBITA as we’ve been investing in the business. And we’ve also had significant one-off costs driven by the integration of AKKA, which is very much trending in line with what we’d expect. We’ve guided towards €90 million previously for the full-year, we’re on track for that. Clearly, those are cash out and that does have an impact on cash flow.
The second driver is higher net working capital outflow, which is completely normal when you are driving the growth in the business because it obviously adds to accounts receivable, but that has an impact on cash flow. And the third aspect is really the phasing of AKKA because typically, AKKA has a softer cash generation in H1 and a stronger cash generation in H2. So, there’s a seasonal pattern to that. DSOs are also impacted slightly by the mix of business because the logistics business, which has been a bit of a headwind for us in Q2 is typically quite swift payment terms. So, when you put all of that together, actually, the 58% cash conversion that we’ve generated, we think is completely in line with where we’d expect it to be. And clearly, as we focus on productivity and we focus on driving further growth, there will be further net working capital outflows. But I think the EBITA and the phasing of AKKA will mean that you would expect to see an improved cash conversion in the second-half. That’s the cash point in terms of the drivers of it in H2. And I’ll hand over to Denis for his views on the strategy.
Denis Machuel
The first thing I want to say is I strongly believe that we have the right strategy. We have a unique positioning with our three complementary GBUs that can bring a lot of value to our clients. Actually, the main focus is how we better execute on our strategy. It’s been now two months, one month as a CEO in the group. And I must say that I have seen that very good things and very strong assets in the group. We have a very solid client base, I have seen — discussing with clients — I’ve seen the trust that we have with our clients. We have very solid positions in several key geographies. Our teams are fantastically dedicated to their mission and to delivering the proper services to our clients. We have promising digital assets. So, I’ve seen a lot of good things, and we can be proud of that.
We also clearly have areas of underperformance. And of course, the U.S. for Adecco being one of them, and we will strongly focus on that. We will — and I will call a spade a spade in these areas in order to ensure that people really understand what is expected on them and that we turn the situation around. All this will be presented to you in more details, the plan that we’re going to put in place to ensure that we better execute our strategy. All this will be presented on November 3 with a proper level of details. But I want to reassure you that in the meantime, we are not standing still. And I’m, of course, fully focused on ensuring that we deliver our Q3 results, that we deliver on our productivity improvement, that we ensured that we continue the proper integration of AKKA, that we focus on growth, focus on gaining market share and, of course, all the work on our areas of underperformance, so, looking forward to interacting with you and everyone on November 3.
Coram Williams
And, Paul, I realize I touched on integration costs and talked about the €90 million that will — that we’re on track to spend to integrate AKKA. By the way, the integration is going very well, as you see from the synergies. But if you’re looking for further guidance on some of the below-the-line costs, you’ll find it in Slide 20 of the appendix. We try to give you a very clear guidance.
Paul Sullivan
Thank you. Can I just follow-up? And in terms of the recovery ratios, I mean, does the old sort of message of 50% still apply if revenue starts to go backwards?
Coram Williams
Absolutely. So, we’ve spoken about this before. We very much focus on the recovery ratio if we face a downturn. It is still the right way to think about protection of the business in challenging times, and it’s helpful in the early stages of a recovery. But actually, if you — once you are through that first stage, then recovery ratios and drop-down ratios start to converge with conversion rates. And that’s why I’ve highlighted the healthy conversion rate in Adecco in Q2, and we would expect to see improvements of that going forward, so, yes.
Paul Sullivan
Wonderful, thank you.
Operator
The next question comes from Anvesh Agrawal from Morgan Stanley. Please go ahead.
Anvesh Agrawal
Hi, good morning. I got three questions as well. First, just on the gross margin, I mean, quite clearly strong year-on-year, but flat sequentially with about €230 million of higher contribution from AKKA, which is a higher gross margin business, and it seems like pricing and Perm has remained quite solid anyways. So, just wondering, is there any seasonal impact on why the gross margin hasn’t improved sequentially despite AKKA? Second, just on the exceptional integration costs, it seems like the integration cost will be about €20 million higher than the guided Q1 and the CapEx guidance has also ramped up. Just wondering what’s driving that? And then just finally, on the U.S., specifically, if you can like just — what is your time line to sort of catch up on that given the investments you’re making? Thank you.
Coram Williams
Sure. Thank you, Anvesh. So, in terms of the gross margin, I mean, if we think about the moving parts going forward, I think scope would be roughly flat. We obviously have benefited in Q2 from AKKA. That’s — and we’ve called that out. And we’d expect to continue to benefit modestly on that. FX, I think, would be 20 to 30 basis points because there are some tailwinds there. So, that’s a positive. We expect to continue to see benefits in the gross margin on Perm of 70 basis points. On Career Transition, it is a business that’s stabilizing, but clearly, it has stabilized at a lower level to what we’ve seen in the exceptional times last year. So, that’s a modest drag of about 30 basis points.
And on Flexible Placement, we do have that one-off that I mentioned in Q3 does impact the comp. So, we’d expect Flex to be down just modestly year-on-year by 20 basis points. If you put all of that together, organically, that’s a 40 to 50 basis point improvement year-on-year sequentially in line because a lot of the factors that I’ve just discussed, we have been benefiting from in Q2. And I think you should also recognize that it is an exceptionally strong gross margin. We’re very pleased with it. We believe we can maintain it. But I think to have sequential improvement on top of that would be very significant.
On the exceptional costs, we have guided, as I mentioned, towards €90 million of integration costs for the full-year for AKKA. The phasing of that, actually, we are probably getting there a little bit faster, but you see that in terms of the benefits that we’re driving on the synergies. So, we’ve secured the €20 million. That means a run rate going into 2023 of €40 million. We have slightly higher exceptional costs in the rest of the business than we might have anticipated at the beginning of the year. Actually, what’s driving that is that we’ve made some property changes in general assembly, which is part of moving the GA business to a more hybrid digital first model so that we can really capture the benefits of the way that that market is moving. But no significant movements on exceptional costs beyond what we’ve guided towards.
On the U.S., I think it’s worth just recapping what we’re doing in that business because Q2, we — there is talent scarcity in that market. It is a challenging market in which to operate. I think everybody acknowledges that. But we also have a legacy sector mix, which we have to adjust. We’re making progress. So, you can see that there is sequential improvement for another quarter on the top line. Q1 was better than Q4. Q2 is better than Q1. And our operational metrics, so things like fill rate, things like gross profit per FTE, the retention of staff in the business are all heading in the right direction. So, we see some encouraging signs on the turnaround but it will take time. This is not something that happens overnight and in one or two quarters.
And maybe, Deni, would like to add something to this.
Denis Machuel
Yes. Just I want to say that if we look at the overall business we have with Akkodis and LHH, we have some strong assets that are delivering good performance. And I think it’s important to mention. On the Adecco side — I’ve already been three times in the U.S. because I felt very important to re-understand the situation. And exactly as Coram you said, it’s, of course, going to take time. But what we’ve seen — what I’ve seen from the plan that has been put in place by the new management shows encouraging signs of operational improvements, as you mentioned. Some of the operational KPIs we see improvement coming in, it’s not yet at scale, and it’s going to take time, but also be assured that this is very, very high on my agenda, and of course, on Coram’s as well.
Anvesh Agrawal
Thank you.
Operator
The next question comes from Sylvia Barker from JPMorgan. Please go ahead.
Sylvia Barker
Yes, hi, good morning, everyone. And a few from me as well; firstly, Coram, just on that SG&A guidance, so you said it’s in line with what you had previously talked about, but I mean it’s very different, I would say, from the previous guidance of margins, broadly flat year-on-year at the Adecco GBU and for the group. So, if we — as we plug in the €1.060 billion, clearly, we get a shortfall of about €200 million there. So, what has changed? Can you bridge what is in that €200 million, please? Because that’s clearly not what the previous guidance was implying. And then on leverage, I mean, I will say it’s a bit higher than we expected. Can you update us on your guidance for the leverage for Q3 and the full-year, please? And then on — just on that — so I guess the performance is probably a bit better in auto than we expected, but the margin is still quite weak. Can you maybe just talk about the forward-looking guidance on that region specifically? Thank you.
Coram Williams
Sure. Thanks, Sylvia. So, I’ll pick up on the question around SG&A guidance. And I think you’re actually asking two separate questions, which is what happened in Q2 and then where are we for the full-year? On Q2, we guided — we saw a 15% increase in SG&A in Q1, and we guided, I think, to a very modest reduction in that growth rate of about one percentage point. We actually came in at 16%. So, we were only two points off the guidance. And as you can see, the 16% SG&A increase was very much in line with the 16% headcount increase. The difference is that there were some recruitment costs and some marketing costs as we ramped up staff very quickly. But we were pretty close to our indicative guidance in Q2 on SG&A.
In terms of the full-year, the shape of the year is very clear and is very consistent with what we’ve described before. So, H1 has been about investment. You’ve seen 720 FTEs go into the business in Q1, 1,500 in Q2. That investment plan is largely complete now in terms of the additional FTEs. And the second-half is all about bedding those FTEs down and driving productivity. And that’s the way that we’ve shaped it previously. And as I mentioned earlier in one of my responses, that will drive — that productivity improvement will drive growth and it will drive underlying profitability, although you have to remember the one-off in Q3. I think mathematically, if you look at what we’ve delivered in H1, a margin of 3.5%, for us to be neutral for the full-year at 5% would require a second-half margin of 6.5% or more. And I — that’s going to be very, very challenging to achieve, particularly given the one-offs that we’ve highlighted in Q3. But to be clear, we are very focused on productivity, and we’re very focused on driving both growth and underlying profitability.
On leverage, it is in line with our expectations. I should be clear, this is the peak point in our leverage because it is the quarter in which we have completed the mandatory tender offer and the squeeze out. And as you know, in Q2, we always pay the dividend. So, it does drive a higher net debt number than you will see during the rest of the year. We are absolutely committed to deleveraging. And so you should see improvements by the end of the year, and you’ll see further deleveraging during 2023. In the meantime, the financial position is robust. As I mentioned in my remarks, we have good liquidity, we have an undrawn €900 million RCF facility. Our debt has 70% of its interest rate fixed at very attractive rates with no covenants on the debt, and our bond profile is very well balanced with limited maturities in the next couple of years. So, that, combined with a business which generates good cash, solid cash, I think tells you that we’re in a robust financial position.
And then on DACH, a couple of things, in terms of the growth rate of the business, it is impacted by two things; one, this time last year, we had significant vaccination business related to COVID, and we’ve also seen a rebalancing of logistics across Europe, and that impact DACH this year. So, it’s slightly softer than it’s been in prior quarters, but there is a very good pipeline of projects and work. And as you mentioned, the auto business is a highlight, and that’s consistent across the group. We are seeing 14% growth in the auto sector.
On profitability, clearly, the absence of the vaccination business does impact the year-on-year comparative slightly because it was good margin business. But actually, DACH always has a lower margin in Q2 because it is a quarter when we have very significant public holidays across Europe, particularly in Germany. And remember that Germany is a bench model. So, therefore, we’re incurring the costs and not generating as much revenue. So, there is a year-on-year comparative effect from the absence of the vaccination business. But seasonally, Q2 in DACH is always lower margin. And I think we feel pretty confident about DACH’s underlying position, good pipeline. Those sectors like auto are coming back, and we’ve taken significant actions over the last year, or so to trim the cost base and drive profitability. So, it will improve over the next couple of quarters.
Operator
The next question comes from Rory McKenzie from UBS. Please go ahead.
Rory Mckenzie
Good morning, it’s Rory. Just coming back to the EBIT margin outlook, it was only back in March at the CMD that you said you had line of sight to the 6% margin target. At the time, you had about 33,000 employees, making a 4.5% margin, excluding one-offs. Since then you’ve added higher margin AKKA and clearly about 5,000 organically are diluting that at the moment. So, firstly, Coram, can you explain when your financial plan would see that new head count in total get back to previous productivity, all else equal and so ignoring the cycle for the moment?
And then secondly, Denis, actually, could you just outline your thoughts on running a cyclical business and how you think company should approach their cost base as we go through this potentially difficult patch ahead? And then finally, just a quick one, could you split your 4% organic growth into volume and price mix? Obviously, with wage inflation running at 4% to 5%, it looks like your volumes are currently declining. Thank you.
Coram Williams
Thank you, Rory. I’ll take the first one. Obviously, Denis will take the second, and then I’ll come back on the volume and price point. To be clear, at the Capital Markets Day, I described the shape of the year. And that shape of the year is that the first-half was very much focused on the investment. We have seen, as you can already see in the numbers and in our relative growth performance, a benefit in terms of top line from that investment. But the second-half is about focusing on productivity, which will benefit growth further and will also drive underlying profitability of the business. The shape of that hasn’t changed. And we know that the rough rule of thumb on our FTE investments is that in the first quarter, they’re roughly 25% productive, but then actually subsequently the productivity improves. And by month 6, typically, they are sort of up to 100% productivity. And we performance manage that very, very closely, as you know.
Our margin target is absolutely clear, and we are completely committed to it. The 3% to 6% is through the cycle. Clearly, to get to the top end of that on Adecco, we will need to be generating productivity, and we will also need to have a supportive cycle. That is important. You can’t separate the 2. But it’s also driven by the other GBUs. So, LHH, which, as we’ve said, is capable of generating margins towards the top end of the 7% to 10% range and Akkodis, which once we’ve delivered the synergies will also be at the top end of a similar range. So, the line of sight on the Capital Markets Day margin target comes from growth in Adecco, productivity, which we’re now driving, and it comes from further growth in the higher-margin, higher value businesses that we have in the portfolio and that are showing encouraging signs of improvement.
I’ll let Deni pick up on your second question, and then I’ll come back on volume and price.
Denis Machuel
Yes. Thanks, Corem, and thanks Rory for your question. First thing is this is not the first time that I run a cyclical business. So, in my past lives, I have been faced with crisis and businesses that were also cyclical. So, I know what it is. I know how fast sometimes we need to adjust to these external circumstances. And it’s all about agility. And it’s also about empowerment and accountability and very much — we have a business which is very local in its delivery. And I strongly believe in making people accountable, and it’s because people in the field are able to react quickly because they are empowered to do so that we can really adjust the way we work, adjust our resources to what we are facing. But I must say, yes, there are possibly some uncertainties ahead of us. But what I must say is what I’ve seen is we are in a, I’d say, much better shape now than we were probably a few quarters ago as we enter maybe this current period.
So, adjusting the cost base is, of course, the name of the game, but I would say, properly adjusting the cost base as we move forward. Flexibility is always something that I believe is important. So, yes, this is not the first time that I’m facing such kind of businesses.
Coram Williams
And just to pick up on your third point about price and volume, Rory. As you know, we typically don’t split the growth between the 2. But I’ll say a couple of comments on each. On pricing, we’ve got very good discipline as I think we’ve seen all the way through the last couple of years. Wage inflation is helpful to that. But remember that whilst it might be running mid- to high single digits in some territories, it actually, in our big territories of Central Europe, it is held back by collective labor agreements. So, it isn’t the only driver of growth. And I’ll make one other comment on that before I touch on volumes, which is the spread between the bill rate and the pay rate is helpful to us again this quarter. And I think that is a sign and evidence of discipline on our pricing.
So, it’s definitely part of the story. It’s not the only part of the story. And volumes are impacted in absolute terms by the Mexican legislative change. And we’ve got that as significant. If you strip that out, then we have volume growth as well. So, both are helping us, and I think stepping back, it’s a sign of the way that the investment plan is delivering.
Rory Mckenzie
Okay. Thank you, guys.
Operator
The last question for today comes from Hans Pluijgers from Kepler Cheuvreux. Please go ahead.
Hans Pluijgers
Yes, good morning, all. I’m Hans Pluijgers from Kepler Cheuvreux. Most of my questions have already been asked, but a few questions still remaining. First of all, on France, how do you see, let’s say, currently your performance compared to the market? I believe that still, let’s say, there’s a gap to the market and that has not really changed compared to Q1. Can you give maybe your feeling how you’re doing and where you believe you, let’s say, you are, let’s say, doing somewhat different compared to the market? And then on the cash flow, you indicated that the DSO went up despite the fact that growth, let’s say, is relatively stable compared to Q1. So, are you, let’s say, becoming a lot more relaxed on payment conditions also to attract some more business, or do you have some other things? Or are the, let’s say, impact from certain regions which impact the cash flow? Could you give maybe some feeling why the DSO went up by two days?
Coram Williams
Sure. Thank you, Hans. I’ll take both of those. On France, I actually — I don’t agree with your statement about the performance versus the market. We have seen over the last two quarters, a 250 basis point improvement in our performance versus the market. And for a number of weeks recently, we are consistently performing above the market. So, I think we feel good about our competitive performance in France. Q2 was slightly hindered in its early stages by the rebalancing of logistics, which has an impact in France. But we’ve seen strength in manufacturing, we’ve seen strength in autos. And France has been a recipient of our investment funds. It’s one of the — in terms of the 1,500 FTEs that have gone in, in Q2, half of them went into APAC, but a significant number went into France, and we continue to see the benefits. So, our competitive performance has improved. We’re above the market, and I think we’re feeling good about our position. And one other thing that I’ll mention on France is QAPA, which is the digital zero-touch business that we acquired last year. It’s performing really strongly. And that is another string to our bow in France. So, the French position is good.
In terms of DSO; absolutely not, it is not a question of us giving longer terms in order to secure business, that’s not what’s happening. There are two very specific drivers of our DSO. AKKA accounted for one of the three days, and that’s simply because of modest disruption as a result of the cyber incident in Q2. We’ve managed it very well, but we have to shut some of our systems down briefly, which impacted our collections. And then the two days of organic increase in DSO is all about the business mix. So, we have a very significant headwind in Logistics. I think I quantified it as 300 basis points at a group level on the top line in Q2. Logistics and e-commerce business tends to have very low DSOs. So, the payment terms are lower than the group average. And if you have that kind of headwind and that kind of reduction in the logistics sector, then it’s going to impact DSO mechanically. So, we’re very focused on collections. We remain diligent and it’s driven simply by a mix effect.
Hans Pluijgers
Okay, thanks.
Denis Machuel
All right, I want to thank everyone for your questions. Again, I look forward to the future exchanges that we will have. And next time, it’s going to be the Q3 results announcement. And at that time, I would also have the opportunity to present to you what we plan to do in the future. So, thank you so much for being with us today and looking forward to our future discussions. And in the meantime, have a great day.
Operator
Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call, and thank you for participating in the conference. You may now disconnect your lines. Goodbye.
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