Adecco Group AG (OTCPK:AHEXF) Q3 2022 Earnings Conference Call November 3, 2022 4:30 AM ET
Company Participants
Benita Barretto – Head of Investor Relations
Denis Machuel – Chief Executive Officer
Coram Williams – Chief Financial Officer
Conference Call Participants
Simona Sarli – Bank of America
Sylvia Barker – JPMorgan
Suhasini Varanasi – Goldman Sachs
Anvesh Agrawal – Morgan Stanley
Kean Marden – Jefferies
Paul Sullivan – Barclays
Michael Foeth – Tobel
Hans Pluijgers – Kepler Cheuvreaux
Benita Barretto
Good morning. Thank you for joining the Adecco Group’s Webcast today. I’m Benita Barretto, the group’s Head of Investor Relations, and with me, we have the Adecco Group CEO, Denis Machuel; and CFO, Coram Williams. Before we begin, we would like to draw your attention to the disclaimer on Slide 2. In today’s presentation, 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.
Turning to Slide 3, today’s agenda. We’ve set aside 40 minutes for Denis and Coram to review the Q3 results. After this, we will take a short 10-minute break. The webcast will restart at 10:20 with Denis and Coram providing a detailed update on the Adecco Group’s business today and going forward. And from 11, Denis and Coram will host a Q&A session. During the morning, you are invited to send your questions via the Q&A entry box on the website. We also have a dial-in for those who prefer to ask their questions directly from 11.
With time at a premium, let me now hand over to Denis and the Q3 results report.
Denis Machuel
Thank you, Benita, and welcome to all of you who have joined today’s event.
Let’s move to Slide 5, which provides a snapshot of this quarter’s financial performance. Revenues were €6 billion, up 16% in reported terms and up 6% year-on-year on an organic trading days adjusted basis. Gross profits of €1.27 billion were 5% higher organically. Gross margin was strong at 21%, 20 basis points higher. EBITA excluding one-offs was €215 million with a robust EBITA margin of 3.6%. Adjusted EPS was €0.90 down 17% year-on-year, reflecting mainly lower operating income. The cash conversion ratio was 46% due to normal working capital absorption and pro forma net debt over EBITDA ended the quarter at 2.6x. This leverage stems from the acquisition of AKKA and is in line with management expectations.
Turning to Slide 6 and some selected highlights from the quarter, many of which we will detail later. Since joining, I have implemented several quick win measures to drive performance and have begun to bear fruit this quarter. Adecco’s relative growth improved plus 500 basis points quarter-on-quarter, with the unit achieving market-leading growth versus its major competitors. In addition, Adecco’s profitability was solid with a 4.2% EBITA margin and productivity up 3% sequentially. And there is continued progress in the Adecco U.S. turnaround.
Moving to our global business units, LHH has revamped its plan to deliver its strategy and profitable growth. And in Akkodis, synergy capture with AKKA is firmly on track with around 60 projects wins secured since acquisition that will deliver over €40 million of revenue synergies in 2023.
Coram, over now to you to begin a more detailed review of financial performance in his GBU.
Coram Williams
Thank you, Denis, and a warm welcome to everyone on the webcast this morning. Let me begin with Slide 7 and Adecco’s solid Q3 performance. Revenues increased 6% year-on-year on an organic trading days adjusted basis. Flexible placement was 3% higher. Activity in high-value solutions was very strong with perm revenues up 45% and outsourcing up 28%. And Adecco’s gross margin benefited from positive solutions, business mix and dynamic pricing.
The EBITA margin was solid at 4.2%. On a year-on-year basis, margin development reflects recent investments in headcount, as well as lower benefit from special items, mainly in Adecco France.
Moving to Slide 8 which shows Adecco at the segment level, revenues were up in all regions, supported by the investment plan. In France, revenues grew 7%, consistently ahead of market trends underpinned by excellent performance in QAPA and Onsite. Manufacturing, autos and healthcare sectors were notably strong. In Northern Europe, revenues were up 4%, led by the U.K., in which revenues rose 10%. The U.K. benefited from strong growth in finance and education and better dynamics in logistics.
In the DACH region, performance was very strong, with revenues up 13%. Germany was up 11%, with strong returns on investment, supported by an upturn in autos and strength in logistics and manufacturing. Revenues in Southern Europe and EEMENA rose 5%. In both Italy and Iberia, revenues were 6% stronger. In EEMENA, revenues rose 1%. Growth in the region was driven by the manufacturing and consulting sectors, although logistics remained soft. In the Americas, revenues were 1% higher. Latin America revenues were 14% stronger led by Argentina and Brazil. And excluding Mexico, which was still weighed by the impact of regulatory change, LatAm was up nearly 30%. In North America, revenues were 4% lower. Adecco U.S. revenues improved 2% sequentially.
Last but not least, revenues in APAC grew 9%. Australia and New Zealand were 9% lower, reflecting a tough comparison period. Japan and Asia, however, were very strong, up 12% and 18%, respectively. IT tech and retail activities were notably healthy.
Let me now hand back to Denis to elaborate further on Adecco’s progress.
Denis Machuel
Thanks, Coram, and let’s move to Slide 9 and our ongoing focus on gaining market share in Adecco. The business has delivered growth, incremental returns from its recent investments with relative revenue improvement of 500 basis points sequentially versus its key competitors this quarter. Furthermore, Adecco has attained growth leadership this quarter versus its major competitors.
On an end market basis, the largest drivers of growth is Q3 were autos and manufacturing with 150 to 200 basis points and 50 to 100 basis points positive impact, respectively. Continued rebalancing in logistics, however, lowered achieved growth rate by around 200 basis points. Overall, the business has successfully nurtured its growth levers. Adecco’s sales intensity is up 26% year-on-year, supporting a 6% increase in the client base. High-value solutions activities were once again strong. Digital advanced well, with QAPA delivering over 70% growth. Pricing initiatives were supportive and productivity improved 3% on a sequential basis. We recognize we have more to do. We have revised incentive schemes to support our market share ambition more clearly. We are remaining agile optimizing investments according to market demand in select countries, and we are focused on driving productivity and performance improvement.
Turning to Slide 10 and the Adecco U.S. business, the U.S. turnaround is centered on 5 strategic initiatives, including a pivot toward higher growth end markets. I firmly believe we have the right strategy there, although the Q3 results was below where we would like it to be. On a positive note, there was further incremental evidence of improvements in key metrics this quarter. Revenues in Adecco U.S. were 2% better sequentially. Revenues in priority growth sectors were up 5% year-on-year and other operational metrics such as sales intensity, order fill rates, employee retention, continue to show green shoots.
And Coram, back to you for LHH financials.
Coram Williams
Moving to Slide 11. Revenues in LHH were flat. On a segment basis, recruitment Solutions revenues were flat, while gross profit was 7% higher, with fees from Perm up 14%. Career transition revenues were 11% lower year-on-year. Learning & Development grew 2%, led by Ezra, which grew revenues by 47%. And Pontoon and other delivered a solid 7% growth with Pontoon itself up 6% due to strength in MSP services and Hired up 22%.
The EBITA margin of 3.7% was 390 basis points lower on an organic basis with 2 main drivers. First, we’ve invested more in digital, mainly Ezra, as we work to scale the business and capture growth in the exciting digital coaching market. Second, contribution from recruitment solutions was lower. The business has seen market dynamics change during the quarter. In career transition, the pipeline picked up, particularly in the U.S., but conversion from pipeline to revenues in this high-margin business does take time. In Perm, buoyant markets have decelerated, again, particularly in the U.S., and more specifically, U.S. tech. In addition, however, the competitive performance of recruitment solutions was not as strong as it should have been, and productivity is too low.
Let me hand back to Denis to outline how we’re responding.
Denis Machuel
And let’s move to Slide 12, and how LHH would accelerate the implementation of its strategy to become a truly end-to-end human capital transformation partner. Given Q3’s results, we are squarely focused on driving productivity in recruitment solutions. Some rightsizing actions have already been taken, and we will continue to adapt as necessary. Alongside LHH will streamline SG&A and optimize the Centers of Excellence within its business model. Further, a new delivery model for smaller countries has been signed off. This will ensure cost savings while allowing LHHs to maintain its local presence in these territories. LHH will also continue to invest in digitalization of — and its digital platforms. And at General Assembly, management will pivot the B2C boot camp model to a hybrid-learning model, as well as focus on its B2B talent offering.
Coram, over to you now for Akkodis financial results.
Coram Williams
Turning to Akkodis on Slide 13. The business delivered another quarter of strong revenue growth, up 84% reported and 8% on an organic trading days adjusted basis. By region, Modis Americas grew 13%, with its consulting business performing notably well. Modis APAC rose 11%, led by tech talent, particularly in telecoms, manufacturing and electronic sectors. EMEA was flat with solid growth in France and Germany mitigated by a soft result in Eastern Europe. AKKA contributed €404 million of revenues in the period with excellent performance at data response. On a stand-alone basis, AKKA revenues were up in high single digits and margins were above pre-COVID levels.
Akkodis EBITA margin was 5.7%. The margin was held back mainly by approximately €4 million of IT infrastructure recovery costs related to Q2 cyber incident in AKKA. On an underlying basis, margins were around Q2 levels.
Denis Machuel
And with Slide 14, let’s spend the next moment on Akkodis Germany, which accounts for approximately 15% of Akkodis revenues. In the last couple of quarters, both Modis and AKKA have faced headwinds in Germany from a highly competitive talent market. With this in mind, as AKKA and Modis integrates, we are taking the opportunity to accelerate pivoting the business to smart industry to improve growth and profitability even in a talent-scarce market. And following a review of operations, key actions include a relentless focus on attracting talent with some green shoots in new hires during the latter part of Q3, adapting the location of branches and offices to sites that are more attractive to consultants and closer to innovation and tech centers, cultivating a more flexible cross-country delivery approach and shifting traditional mechanical engineering activities offshore.
On top, SG&A will be streamlined, including through optimization of existing centers of excellence, driving higher margins.
Now moving to Slide 15. The AKKA integration is firmly on track. A strong culture is being developed and plans for the combined organizational structure have been finalized. Further, part of AKKA’s U.S. operations with annual revenues of approximately $250 million will be transferred to Adecco U.S. from January 1, 2023. The assets being transferred are staffing activities such as this action strengthens the strategic focus of both Akkodis and Adecco. A handful of contracts in Germany with low profitability are also being reviewed at this juncture.
Turning to synergy delivery, revenue synergy capture has been very good. We have won above €40 million of revenue synergies for 2023 and around 60 projects since acquisition. Two of these wins are shown on the slide. First, a multiyear consulting contract for a large mobility sector player. Akkodis digital engineers will build cloud-native IoT solutions, providing actionable analytics to the customer, for example, analytics that predict and prevent failures and that enable better inventory management. Second, a multiyear partnership with a major OEM where Akkodis digital engineers will design an intelligent cockpit, integrating smart technologies with multiple driving functions, creating a more interactive and user-friendly driving experience.
In terms of total synergies, the vast majority of 2022 synergy target will be delivered this Q4. We expect year-end synergy run rate of over €40 million in EBITA terms, putting us firmly on track to deliver 2023’s target.
Let’s now return to the group results. Coram?
Coram Williams
On Slide 16, we consider the main drivers of gross margin on a year-on-year basis. Flexible placement had a 60 basis point negative impact, of which approximately 30 basis points impact comes from lower special items relative to the prior year period. Permanent placement had a 60 basis point positive impact, reflecting higher volumes and fee levels. Career transition was 20 basis points lower, while contribution from outsourcing, consulting and other was 10 basis points higher. In total, the gross margin was down 10 basis points on an organic basis, but up 20 basis points on an underlying basis. At 21%, it is a strong result.
Moving to the EBITA bridge on the right hand of the slide. On a reported basis, gross margin gains were fully mitigated by increases in SG&A. On an organic basis, SG&A expenses were 12% higher year-on-year, closely aligned to head count with FTEs also up 12%. There are 3 main drivers for the EBITA margin move from 4.8% to 3.6%. First, recent investments in sales capacity to accelerate growth, mainly in Adecco of about 40 basis points. The investment plan is now complete and headcount was broadly stable sequentially. Looking forward, investment will be highly selective.
Second, a lower contribution from LHH mainly from recruitment solutions as well as digital investments of around 30 basis points. And finally, lower benefit from special items.
Let’s move to Slide 17, which shows positive momentum in conversion ratios and productivity for the group. The left-hand chart shows the group’s Q3 conversion ratio at 17%, slightly higher relative to H1, and Adecco’s Q3 conversion ratio at a healthy 26%. The right-hand side shows the group’s productivity modestly improved led by Adecco up 3% sequentially. Looking forward, all else being equal, as employees become fully productive, growth will accelerate and margins improve.
Turning to Slide 18 and the near-term outlook. As the left-hand chart shows, 60% of the group in revenue terms exited Q3 growing over 6% year-on-year. The September exit rate for the group was 6%, indicating continued healthy demand for talent services. The group also saw marginally lower volumes in October, reflecting the current macroeconomic environment. In addition, we expect Q4 gross margin and SG&A expenses to trend around Q3 ’22s reported level.
Let’s move to Slide 19 and the current market context. We continue to live in uncertain times. Economic activity is slowing, but the depth and extent of any possible downturn is unknown. At the same time, the group has seen continued demand for talent amid ongoing tightness in labor markets. A recent U.S. survey expresses the dynamism of talent markets well. 38% of CEOs viewed talent acquisition and retention as a real challenge to their business, and 64% of companies are increasing wages. Meanwhile, 52% of companies surveyed are instituting hiring freezes, and half are reducing headcount. The Adecco Group is at the center of all these developments with its uniquely diversified portfolio of talent services. Furthermore, the business model has inherent strengths. With a highly flexible cost base, the group has a track record of delivering a 50% recovery ratio and an over 3% EBITA margin during highly challenging periods such as those seen during the COVID pandemic.
Our cash flow is countercyclical and our financial structure is robust and the business mix is less cyclical than previously. Moreover, we are ready to manage any possible economic slowdown to emerge stronger on the other side. As you would expect, we will remain agile with sales capacity and focused on productivity. We will tightly manage operating costs and work to lock in synergies from AKKA. We will also drive cash flow supported by strict DSO management.
Benita Barretto
Thank you, Coram. With that, let us conclude the first part of today’s presentation, and we invite you to take a break. We will return shortly to present the group’s plan to build on current performance.
Denis Machuel
Welcome back to all of you. Now we move to the second part of today’s session and the business update. And I will begin my assessment of where the group is positioned today, starting with Slide 23.
Over the last 100 days, I have immersed myself in the group’s operations, visiting our people, visiting clients in many countries. I’ve come away from these visits encouraged by the strength of our business. We operate in an exciting industry with an addressable market of €700 billion, growing around 5% each year. Our people are talented; they are highly committed and the culture is very entrepreneurial. The group is purpose-driven. And our purpose, to make the future work for everyone, inspires and connects all of us. We have a strong portfolio of innovative talent solutions and services, a very strong client base, and we have a world-leading business. Each of our GBUs is #1 or #2 in specialty, and each offers a compelling value proposition to customers. We also have the right strategy, Future@Work, which is ready to be accelerated.
Let’s turn to Slide 24. Since embarking on Future@Work, firm progress has been made. The group has implemented its brand-led approach and there are strong global business unit strategies in place. Over the last 9 months, we have delivered a significantly improved relative growth rate, particularly in Adecco. Growth in the group’s digital platforms, QAPA, Adia, Ezra and Hired, has been excellent. On a combined basis, our digital platforms grew Q3 revenues 45% year-on-year, reaching an annual revenue run rate of over €200 million.
The Adecco DACH business has been turned into a high-growth, high-profit business and the U.S. turnaround is progressing. The group has clearly benefited from introducing a dynamic pricing strategy and gross margins have stepped up as the portfolio mix shifts towards higher-margin activities. And AKKA’s integration and synergy capture is on track.
Moving to Slide 25, while recognizing the significant accomplishments, the group’s financial performance has been mixed. The chart on the left hand maps the group segments, assessing gross margin growth and EBITA margins in each unit at present. We can see that a large proportion, 60% of the group is in a strong position growing above market rate with solid margin contribution. However, we have 20% of the group where we must work to improve the growth and/or margin performance. We have 10% of the group in turnaround, namely Adecco U.S. and 10% is in integration of startup mode. There is a substantial value creation opportunity embedded in the portfolio that we must and will unlock.
Let’s turn to Slide 26. During my first 100 days, I’ve been able to assess what is working and what is not. And before we can fully deliver, we need to address 5 problem areas across the group that are weighing on our performance, and let me spend a few moments on each.
First, organizational complexity. In the past, countries would manage their businesses independently, but that’s not how we can operate in today’s world because clients who demand a global service make up more than 20% of the group revenues. Therefore, the group introduced the GBU structure, which is a good one. However, as we transformed, we have made the organization too complex with too much remote decision-making, duplication of layers and roles, and most of all, a too broad transformation effort that has lessened our customer focus and created disruption within the business.
Second, performance management has been both complex and lacking in consistent KPIs to drive the business. Third, the business has been overly focused on the EBITA percentage when profitability needs to be reached through the correct balance of revenue growth and profit growth. Fourth, the sales standards and processes can be too rigid and pipeline management as well as customer retention is not as strong as it should be. And fifth, the business is working with a lot of legacy IT systems, and digital product management is not yet fully matured. And while we have promising digital platforms, they are not yet fully scaled.
Having identified these 5 common areas, the executive team and I have enacted several quick wins this Q3 to improve agility, enhance focus and begin to simplify. However, it is clear that we have more to do. So let me detail our plan on how we will reach our full potential, which we call Future@Work Reloaded. Future@Work Reloaded because we keep Future@Work as our strategy, which we reload and adjust to address the challenges the businesses has been facing.
Let’s turn to Slide 28. We have begun a group-wide program to drive change centered on 3 levers: Simplify, Execute, and Grow. These levers address the common challenges and will supercharge the group’s performance.
So moving to Slide 29 and our first lever, Simplify. The group will improve organizational effectiveness by simplifying the way it works. The organization will be right-sized and transformation initiatives simplified. Among the measures actioned to date, we implemented a hiring freeze in October, and we have launched a systematic review of operations to eliminate redundancies and duplication.
Going forward, we will streamline the group’s operating model. We will also materially reduce the group’s transformation workload and shift transformation efforts from group to GBUs at local level, giving priority to projects according to local and customer needs. Simplification will enable the group to lower general and administrative expenses or G&A. And today, we are announcing a target to deliver €150 million G&A cost savings.
Coram Williams
Let’s look at this target more closely on Slide 30. €150 million of savings requires cutting total G&A by over 15% from current levels. Savings will be generated by eliminating duplication and redundancies and improving internal processes across the company. We will right-size the organization, optimize procurement and significantly cut services from external providers. And there is scope to optimize our footprint in the new work from home and flexible working environment. The program will be implemented at all levels across the group, and we will track progress to ensure the reduction in overheads is both real and sustainable. We expect to deliver these €150 million of savings in run rate terms by mid-2024.
Denis Machuel
Let’s move to Slide 31, and our second lever, Execute. The group will empower decision-making by those closest to customers at the GBU and local level to improve execution. We have introduced a more systematic and rigorous performance management framework to drive efficiency and accountability, accompanied by the introduction of standardized operational KPIs to increase transparency.
Looking forward the GBU strategies as outlined when the group announced Future@Work are unchanged. However, we will adjust the group’s operating model, allowing for stronger local empowerment within strengthened group guardrails. In addition, IT and digital functions will be redesigned to deliver speed, better utilization and value at stable investment levels of approximately 2% of group revenues. We will also improve customer delivery in all the GBUs by reinforcing delivery discipline and improving the systems the group’s delivery teams rely on. Moreover, we will invest to develop our people, building a collaborative, transparent and a high-performance culture with absolute focus on clients and candidates.
Our third lever, Grow, is shown on Slide 32. The group will prioritize ways to grow market share, balancing a revenue and EBITA growth focus. We have already adjusted H2 sales incentives to drive growth. In a similar way, 2023 incentive plans for the group will focus on profitable growth with fewer and simpler targets. Looking forward, management of the group’s largest clients will be refined with global teams concentrating on a few premium strategic accounts to drive growth and innovation at scale. Customer retention will have a greater emphasis with new training programs used to improve sales standards.
In addition, accompanying the redesign of IT and digital functions, the group will prioritize digital products development that improves the candidate and client experience and overall customer satisfaction. Alongside, we will aggressively scale our innovative digital platforms by combining its online coaching platform, Ezra, with LHH’s traditional coating activities, and we will add growth to the GBUs by accelerating the deployment of Pontoon’s market leadership MSP offering in a smarter way.
Turning to Slide 33, let me be clear: The GBUs remain at the core of the group, each with a clear and differentiated strategy and now armed with the tools to accelerate execution as you see on the slide. At the same time, each GBU draws strong benefit from being within the Adecco Group and with the group’s roles clarified today. The group sets strategy and targets and enforces group wide governance, policies and processes. It allocates capital and talent, drives performance and orchestrates the ecosystem. The group supports shared services at scale and provides a common purpose, values and vision uniting all of us.
Let’s move now to Slide 34 to explore how the group is orchestrating the ecosystem to drive synergies from its strategic accounts. The group has a global strategic enterprise team that is focused on customers that draw on services from across the group. Over the last 12 months, the sales pipeline for this team has improved 34%. In Q3, revenues from these strategic customers were up high single digit with gross profits up double digit. And over 45% of these strategic clients have increased relative exposure to LHH and/or Akkodis so far this year.
In particular, we recently won a landmark contract value at AUD1 billion over 6 years as the recruitment partner for the Australian Defense Force from the Australian Government. This mandate is Adecco decorated and was powered by our ability to offer tech and AI knowledge with Akkodis. In short, there is a very encouraging momentum in our strategic accounts.
Let’s move to Slide 35. We intend to implement the vast majority of the actions we have outlined by mid-2023. Several quick wins are in place to support H2 ’22 performance while clear delivery milestones for the next 3 quarters have been set. Each action is accompanied by targets and KPIs so that we can closely track progress and ensure delivery. And we look forward to updating you on progress in the quarters ahead.
Let me now hand over to Coram for the financial perspective.
Coram Williams
Thank you, Denis. Moving to Slide 36 and the group’s financial and sustainability goals. The Simplify, Execute, and Grow levers will deliver improved execution and market leadership. We are confident that this plan can deliver an underlying improvement in the profitability of the business. Consequently, we are reinforcing the group’s financial goals with a target to achieve an EBITA margin of around 6%.
Slide 37 shows the path to around 6% from our current margin levels. The group has already significantly shifted its mix into higher-margin activities. Here on, we focus on securing €150 million of G&A cost savings from across the group, and in addition, improving delivery in each GBU. In Adecco, we expect more operating leverage and productivity gains, as well as an improvement in weaker units such as Adecco U.S. to deliver margins in the mid-5% territory.
In LHH, we expect margins to move towards the upper end of its corridor, driven by productivity gains, particularly in recruitment solutions, but also in career transition. We further expect the business to successfully scale its high-growth digital platforms. In Akkodis, we will integrate AKKA and Modis successfully and deliver AKKA synergies as well as capturing the growth opportunity in smart industry consulting. As with LHH, we expect Akkodis to deliver margins close to the upper end of its corridor. We recognize that the current macroeconomic environment is uncertain and that the business is not immune from the economic cycle. Should we enter a downturn as the actions we are taking gather momentum, we should be in better shape to weather the storm. And in a supportive economic environment, the group will reach the 6% level.
Let’s move to Slide 38. The group’s capital allocation policies are unchanged. Firstly, funding organic growth. Secondly, the commitment to a progressive dividend policy and to distribute a dividend per share at least in line with the prior year. If we have surplus cash, we will consider either M&A or returning excess cash to shareholders. In terms of M&A, we will consider potential acquisitions where they accelerate the strategy realization; we’re a better owner, in other words, we can deliver cost and revenue synergies; we can achieve positive EVA within 3 years; and we have management capacity for integration. And as we said at the Capital Markets Day, we’re focused on smaller scale bolt-on bolt-off deals.
Denis, back to you.
Denis Machuel
Thanks, Coram. Future@Work Reloaded. Today, we’ve set out a number of impactful actions that will unlock the group’s potential and create value for all stakeholders. The group has a clear go-to-market strategies for each business unit, which are complementary to each other, and we are unified by a common purpose. Looking forward, we will be a globally brand-led and customer-centric organization using an operating model that empowers decision making at the local level to ensure greater accountability and speed.
Let me now conclude on Slide 40. Above all, the Executive Committee and myself are committed to improving the group’s financial performance. We will build on our current resilient performance despite macroeconomic challenges. The Simplify, Execute and Grow levers will deliver improved execution and market leadership, and simplification will secure €150 million of G&A cost savings in run rate terms by mid-2024. Successful implementation of our plan, we positioned the Adecco Group as a talent powerhouse with the anticipated performance improvement expressed through the group’s strengthened EBITA margin commitment to achieve 6%.
Thank you for your time, and let’s now open the lines for Q&A.
Benita Barretto
Operator, we are ready for the first question, please.
Question-and-Answer Session
Operator
The first question comes from Simona Sarli from Bank of America.
Simona Sarli
One question, first of all, on North America. You mentioned that you made some progress with the turnaround. However, if I look at organic revenue index to 2019, there is actually a sequential deceleration, and we saw also margins moving into negative territory. Could you please explain what was the driver behind that, and if we should expect margins to return back to a positive territory in Q4. The second question is regarding cash conversion. So still quite soft in Q3. And if I look also at days of sales outstanding, it looks like it is sequentially increasing. So if you could also explain and elaborate a little bit more on that.
Denis Machuel
I’ll take the first one, Coram, you’ll take the second one. Regarding North America, North America is a very important market for the group, and of course, for Adecco in particular. Akkodis is doing well, and we have some work to do in Adecco. We are — all hands on deck on that. I just want to be absolutely clear. It’s on my top priority list. We have been there several times since I joined, and we have a solid action plan. We see our operational actions delivering results. Operational KPIs are improving. Sales intensity, number of visits per FTE have improved. Retention of our staff has improved, order fill rate has improved. We have a, as you know, particular program to develop growth in particular sectors and our growth sectors. We are delivering 5% growth in those sectors, and if I exclude COVID-related contracts that have been ending, we have an underlying growth in these sectors of 15%. So the trend is good, we are breakeven, and we’ve done a sequential improvement of 2% Q3 over Q2.
Are we there where we want to be? No, and it’s still going to take time. But we are — I’m absolutely committed to turn this around. And if I take the example of what we’ve done in Germany, we were in a situation, we’re in a tough situation a couple of years ago, we now have Germany at 11% growth. So I mean, this demonstrates that we can turn situation around, and we will. It’s going to take time, but we have all hands on deck.
Coram Williams
Let me pick up now on the DSO and the cash conversion. On the DSO, there has been a small increase sequentially on DSO. There are 2 drivers of that. The first is the mix of business, and in particular, the logistics business, which, as you know, has been a source of growth for us, but is now the only sector that’s actually been declining in Q3 that has very rapid payment terms. So there’s a mixed effect that is happening there.
And the second aspect on DSO is the residual effect of the AKKA cyberattack. So we were very clear when we were responding to that cyberattack that we were prioritizing getting consultants back up and running, driving the utilization rate back up, making sure they could work for our clients. And we’ve taken a little longer to get the invoicing and the collection processes back up to speed. They’re now fixed, so I would expect an improvement in that in Q4. But it’s a combination of the mix and the residual effect from AKKA.
On cash, DSO is part of the reason for a slightly lower cash conversion sequentially. But by far, the biggest effect is the working capital absorption that comes because of the growth that we’re generating. You know that in this business, particularly when Adecco is growing, it tends to absorb working capital and that brings our cash conversion down. Obviously, when the business is stable, then the cash conversion starts to rise. And if we find ourselves in a downturn, then the cash conversion is very high. But it’s normal working capital absorption. And remember that the third quarter is our strongest quarter of growth this year, both for the group as a whole and for Adecco. So there is a significant working capital effect.
And the third piece of cash conversion again, much smaller than the working capital impact is the integration costs that we’re incurring to drive the synergy realization in AKKA. They are below the line. Obviously, they are cash out of the door. So that impacts the conversion. I want to be very clear, though, there is no structural issue. This is the impact of the working capital. It’s the temporary impact of the AKKA, the residual effects of the AKKA cyberattack and the ongoing integration costs.
Operator
The next question comes from Sylvia Barker from JPMorgan.
Sylvia Barker
I’ll take the questions one by one, if that’s okay. Firstly, on Americas, so within that Americas number, can you split out the North America losses? And then now that you’re moving the AKKA to $150 million into that business, can you give us the profit for that business? And can you be — can you just make it clear whether that will be included in organic or excluded in the beginning of next year?
Coram Williams
Let me pick up on those, and we don’t break out the profitability within the different parts of the Americas. Overall, as you’ve seen, it’s breakeven. That means a modest loss in the U.S. business. But to Denis’ point, the key here is to continue with the delivery of the plan to drive top line growth, which will turn into operating leverage and profitability. And I really think Germany example is a very good example of what we can do, because if you look at it, we’re now at 11% growth in Germany with a very healthy profit margin. So staying the course, accelerating the delivery of the plan and driving growth and share gain will improve the profitability in that business.
On the €250 million transfer of the business from AKKA to Adecco, this is a business which sits much more effectively with Adecco. We strongly believe we will benefit from the strategic focus that Adecco can bring to it, and that will drive synergies over time. I’m not going to give an exact profit number on that €250 million, but I think you should assume that the margin is around the Adecco GBU average. So it is decently profitable business. And obviously, we will show you — to the third part of your question, the movement as a portfolio movement within the results so that you can isolate underlying growth and the impact of the transfer.
Sylvia Barker
And then second point, on the €150 million of savings and then on the German program as well, can you just give us an idea of the timing of achieving these savings? And then what we pencil in for the cost of this? And when should we include these costs in our models, please?
Denis Machuel
Let me give an overview of what we’re doing in Germany, and then Coram, you can concentrate on the overall cost savings program. I think Germany is a country of importance. And I would say that when we highlighted the topic for Akkodis, Akkodis overall is a great business, and we have a specific situation here in Germany. Three topics were on the table. First, we’ve been faced with a little bit of headwinds on linked to talent scarcity. Attrition and recruitment have been a bit tough, and we’re really, really working hard on this one. Second, we had some legacy projects, particularly around engineering that we thought we’re not fully optimized, and we are now reviewing this portfolio and moving to offshore, some the — delivery of some of those projects.
Typically to give you an example, we have body-in-white, mechanic and engineering projects that would be a much better housed and delivered from a more cost-effective location. So we’re moving this offshore. And at the same time, we are ramping up the smart industry business. And we are also reviewing a few of our projects, a handful of contracts, which are not at the profitability level that we want. And my first priority is to turn them around. I’m asking the team to really do negotiate adjust the scope so that we return them to profitability. So that’s for the specific situation of Germany.
Coram Williams
Thanks, Denis. Let me cover the wider question on the G&A cost savings, €150 million of savings to be achieved in run rate terms by the middle of 2024, which represents a little bit more than 15% of our total G&A — of our G&A cost base. In terms of where they’re coming from, a couple of things. As we’ve moved to the GBU structure, which is absolutely the right structure in terms of how we manage the business, how we respond to clients, how we focus on that needs.
There has been some duplication of cost. It’s inevitable when you make that kind of move. Secondly, we’ve been going through a functional transformation, particularly in our back office. In some cases, that leads to dual running costs. It leads to costs to get, for example, shared service centers up and running. But also there are other areas in which we can make savings, for example, procurement the use of third-party providers. And indeed, even our footprint in terms of the — sort of the offices that we have and the space we use, particularly because ways of working have changed post COVID. In terms of how we’re going to get at that, there are really 2 phases to it. So the first is a little bit more tactical getting on with that right now where we can find areas where the duplication or the dual running costs, we can reduce quickly or even make some procurement savings, step back our use of third-party providers.
The second part of this is a bit more involved, and it goes back to the points that Denis was making in terms of simplification of really looking at our operating model, really looking at what is being done where and doing it in a very granular way to make sure that we can action sustainable efficiencies and savings. And that second phase is going to take a bit longer. It’s not something that you or should do in a rush. For that reason, the savings will be a little bit more back-end loaded. So you will see benefits during 2023, but it is a bit more back-end loaded. I’m going to put a precise split on this at the moment because I think we have to work through that second phase. But clearly, we will communicate more as we go.
And in terms of one-off costs. Again, I think we really need to get through that second phase to give you a precise steer, but generally, a good rule of thumb is one for one. So roughly €150 million of one-off costs to generate those savings. We will obviously try and bring it in for less than that, but I think that’s probably a good placeholder. And whilst that will also be phased over ’23 in the first half of ’24, they tend to happen a little bit faster than the savings. It’s just the nature of this kind of program.
So I hope that gives you a sense of how to think about it. And obviously, we’ll talk more as we go over the coming quarters.
Sylvia Barker
And anything additional for the German program specifically that we need to pencil in as one-offs?
Coram Williams
I think there will be some one-offs. Obviously, not at the same scale that we’ve just talked about for the general program. I think we have to work through that over the coming months, and we’ll give you a sense. But there will be some one-offs.
Sylvia Barker
And just final very quick one. Just on net debt to EBITDA, so again, 2.6x, I guess Simona asked about the cash conversion. Can you just remind us a little bit, what’s the guidance now on net debt to EBITDA and how that develops over the next few quarters? And can you maybe just talk about the working capital impact of AKKA specifically? Kind of where does the factoring sit? What was their working capital dynamic over the last couple of quarters.
Coram Williams
Let me cover AKKA first, and then I’ll talk more generally about the balance sheet and the deleveraging. I mean, on AKKA to be clear, what I was referencing in terms of DSO was a short-term residual impact of the cyberattack. And you know it was significant in Q2. We had to shut down the systems in the AKKA Europe in order to respond to it. I think we responded very effectively. I mentioned in my script that we delivered 7% or sort of high — mid-to-high single digits growth on a stand-alone basis in AKKA and margins of AKKA back above pre-COVID levels. So it gives you a sense that, that business has recovered but there is a residual effect on DSO, because it’s taken us longer to get the billing systems and the collections back up to speed. That is not a structural problem. And I would expect the AKKA DSO to come back down to the kind of levels that we’ve seen in the group. It doesn’t have a materially different cash or working capital profile. Cash conversion in that business is more second half-weighted than first half-weighted, but I don’t think it fundamentally changes the way that you should think about modeling the group’s cash and working capital.
On the balance sheet, leverage at 2.6x net debt-to-EBITDA is exactly where we would expect it to be at this point. As you know, it’s driven by the AKKA acquisition. And whilst it’s higher than it’s been in the past, we are comfortable in terms of managing that balance sheet. The balance sheet is robust. 70% of the debt is fixed at very attractive interest rates, rates that we would not get now. We have, as you know, no covenants on the debt, we have a very nicely balanced bond maturity profile, and we have very strong liquidity because we have — the business generates cash. And as I’ve said, that will improve over time when we get pass the working capital impact of the growth, and we have an untapped €900 million revolving credit facility. So I think the balance sheet is in robust health. We are committed to deleveraging.
Our longer-term target is 1x net debt to EBITDA. I think you will see us systematically deleverage over the coming quarters. It will probably take 18 to 24 months to get to a point where we’re back down to that 1x net debt to EBITDA target. But we’re committed to it, and we don’t see any impediments to it. And in the meantime, cash conversion on the business is good and no structural issues. And to be clear, we will absolutely be able to pay the dividend. I think there’s one other question — I’m sorry, this is a very long answer, but there were a few questions in that. On AKKA, I think you also mentioned factoring. We are — we do continue to factor in AKKA. That program is about €150 million to €200 million. It’s been in place for a very time active part of how they manage, those factoring programs are now back up and running, and that will be part of helping us to collect the cash. But it’s a relatively modest part of the overall Adecco group balance sheet.
Operator
The next question comes from Suhasini Varanasi from Goldman Sachs.
Suhasini Varanasi
Just a couple from me, please. You mentioned that the volume softened a little bit in November. Would you call out — is it possible to give some color on any verticals or countries that you would probably highlight or was it a general softening overall. And secondly, when it comes to the G&A savings program, I also noticed that you are investing in IT. So is it possible to give some sense on how much of these savings will need to be reinvested, either in IT or other parts of your organization? How much will actually stick and drive higher margins?
Coram Williams
I’ll cover both. Yes, so in terms of the October volumes, as you know, we don’t typically break them out by country or by sector because it’s very much something that we’re seeing on a real-time basis. Our exit rate coming out of September was 6%. The October volumes are marginally lower. Now to be clear, they’re still — in revenue terms, it’s still growing year-on-year. So this is not that we’ve tipped from growth into decline. We are still seeing growth, but they’re marginally lower than that 6% exit rate. And we felt it was important just to highlight that to you. I think it’s a reflection of the macroeconomic uncertainty. But remember, that’s not uniform. So in one of the features I think of the current environment, is that there is good growth, strong growth in plenty of territories, plenty of sectors. And Denis, I think, has described this, I’ve touched on it, there is talent scarcity and a very dynamic labor market.
In terms of the G&A savings, I want to be really clear, they will drop through to the bottom line. So this is a net saving number. And we’re very determined to deliver that because we feel that whilst the drivers of the cost increase that we’ve seen over the past couple of years were necessary and valid to drive the business forward, there is simplification. We can take out duplication and there are a number of areas where we can generate savings and efficiencies that we want to see in the bottom line. The business has plenty of investment. We’re not having to starve that investment, but equally, we don’t need to drive it through reinvestment of those savings, it’s a saving that will drop through to the bottom line.
And you mentioned IT. I want to pick up on a point that Denis made in his script. We invest just over 2% of our revenues into IT and digital. We think that’s about the right level. There may need to be some recalibration within that as to where the investment goes, but it is the right level, and therefore, the savings are coming from elsewhere in G&A.
Denis Machuel
Yes, to complement what you said, I’m very committed to ensuring that tech is an integral part of how we move forward. I mean with those 2 pillars, the IT systems and of course, the digital agility, all this and the redesign that I was talking about earlier, being really meant at prioritizing the way we approach our customers and our candidates because that’s where we can create high value and much better stickiness. So now for the next question, I suggest that we take some questions from the online platform, Benita.
Benita Barretto
We do have quite a few. Some have been covered already. I’ll just do 2 for now, and then we’ll go back to the dial-in mode. First question, the hybrid strategy. Do we plan on issuing further hybrids as part of the capital structure? And second question, would a recession not make paying a dividend of €400 million, that would be the total cash distribution difficult?
Coram Williams
I think those are probably both for me.
Denis Machuel
Yes.
Coram Williams
So in terms of the hybrid, as you know, we did issue a hybrid as part of the balanced financing package that we issued in order to fund AKKA. We felt it was an important component of that. But to be clear, we don’t have any plans to issue further hybrids. And as I’ve touched on, I think we’re comfortable that the balance sheet is robust. But clearly, we are going to deleverage overtime to get back to our 1x net debt-to-EBITDA target ratio.
On the question of recession and a dividend, I think it’s really important that I remind us that we were the only one of our peers that paid a dividend during the COVID. And we had made clear that our dividend was recession-proof and that we underpin it with a commitment to pay at least in line with what we paid in the previous year. And we delivered on that in 2020. We’re absolutely confident we can do that again should we face a downturn, and there are a couple of reasons for that. One, the portfolio in the business, some of it is procyclical, but some of it is also countercyclical. So our career transition business example, does very well in downturns. And our Akkodis business is later cycle than the rest. So there is an inherent hedge within some of the portfolio.
Secondly, and I touched on this in my answer to the cash conversion question, when we are growing, it tends to bring cash conversion down because we absorb working capital. But actually, in a recession or a downturn, with the business, particularly in Adecco, releases working capital. And that means our cash conversion rates become very, very strong. And we saw this in 2020 and early 2021. We had cash conversion rates of 150%, 160%. So that countercyclical cash flow is very, very helpful.
And thirdly, we’ve touched on this in our remarks, this is a business which is agile and flexible. And if we need to, we can manage the cost base in a very agile way in the COVID downturn, which was very steep and very rapid, we achieved a recovery ratio of 50%. In other words, for every lost euro of gross profit, we saved €0.50 or more on the bottom line, and we delivered a margin in the trough of 3.6%. So I think we’ve proved the resilience of the business for a number of reasons, and we’re, therefore, confident about our ability to pay the dividend.
Denis Machuel
All right. So let’s now go back to the conference call.
Operator
The next question comes from Anvesh Agrawal from Morgan Stanley.
Anvesh Agrawal
I got 2 questions, both sort of — one is SG&A related and the cost saving program. So first, just on the SG&A guide of flat sequentially in Q4 versus Q3, and within that, you got savings coming in from AKKA of around €20 million because all of them are back-end loaded, which essentially means your underlying SG&A goes up. And then there’s a hiring freeze as we understand. So I was wondering what’s the moving part there? Maybe if you want to take that first?
Coram Williams
So in terms of the SG&A, I remember, not all of the AKKA synergy benefit comes from SG&A. There’s also a revenue component to this. So I’m not sure you can just apply the €20 million to the SG&A base. There’s obviously a small amount there. And the hiring freeze does have an impact. But I think what we’re trying to give you a sense of, is that the investment plan has now — is now largely complete. Our headcount is stable on a sequential basis. We saw that from Q2 to Q3. And therefore, when you’re modeling this, just assume it’s broadly stable. There are some ins and outs, but I think it’s the right way to think about the P&L.
Anvesh Agrawal
Then on the cost saving program, one of the issues historically has been the underinvestment and then sort of focus on margins overgrowth. And this year, you sort of embarked on this journey of sort of investing in the headcount and we’ve seen the SG&A picking up. And now you sort of go into another cost-saving program. So Denis, more of a question for you, really, like how do you balance and you don’t overdo the cost saving? And then when we come out of the other side of the downturn and we find a business that is, again, sort of grappling for growth and investment. So just wondering how do you balance that? And what are your thoughts there?
Denis Machuel
Anvesh, I absolutely understand your question. I think we’re — let’s be clear. We are not in a high-margin business, right, which means we absolutely need to have competitiveness embedded in how we are structured. A big chunk of the cost savings program is about rightsizing the organization and ensuring that we put the resources at the right place. We mutualize what we can, and we put the resources as close to the business as close to the customer as possible. So it’s really being fit in the way we operate from a G&A perspective. And this is something that we will keep doing because those — I mean, those costs have to be constantly under watch.
Now and we’ll do that at pace because that will help us remain competitive no matter what happens on the market. Now on the sales part, on the, I would say, the muscle, the development muscle that we have, we will be extremely careful and we have plans across the Board, across the countries and the GBUs to adjust according to market conditions. Typically, at the moment, we continue to invest in regions where we have a strong dynamic. I mean Japan is growing a double digit. Germany is growing 11%. U.K. is growing 10%. LatAm is if you exclude Mexico, it’s at 30%. So in these regions, we continue to invest, but we very carefully watch the market trends. I mean, week-to-week, we look at how things are going, how sectors are moving. And we will adjust if we have headwinds, we will adjust. But I don’t want to cut muscle across the Board, which exactly to your point, would prevent us from rebouncing when — on the other side of a possible economic downturn. So we will be, I would say, super surgical in the way we adjust the cost base on the sales part to ensure that we’re still in a good shape, no matter what.
I just want to highlight one thing. In terms of downturn, we can also gain market share. And I’ve been very clear with the teams. There is what we control and there is what we don’t control. We don’t control macroeconomic environment, but we control the way we compete with our competitors. We control the way we address our clients. We control the way we retain our clients. We control the way we attract our candidates. So this is how we can even in, let’s say, more difficult times, still win on the market and still outperform our competitor, which is the best way to show that you are in the best possible shape.
Anvesh Agrawal
Can I just ask as a follow-up, sorry? So you have this margin corridor of 3% to 6% and 50% recovery ratio. Will you be sort of prepared to go below that 3% range in a recession this time to start investing early and capture the market share on the way or sort of you effectively manage the business at 3% floor and 50% recovery ratio which then can sometimes lead to sort of, I mean, more puts than needed for perhaps.
Denis Machuel
So I’ll start, and then Coram, you can complement. First, I think that we have a portfolio of services and business units, which has evolved since COVID. We have now Akkodis which weighs €4 billion with higher margins that we have brought fundamental better resilience with that acquisition and a diversified portfolio. Coram mentioned the sort of cyclical and countercyclical nature combined of LHH as well. So I think we’re in — again, in a much better place. And with, again, the very strict management of our muscle, of our sales investments, I think we’re — we can — I’m quite positive in the way we can face a possible downturn. But if you’re going to go more into the corridor.
Coram Williams
So let me add 2 points to that and then let me sort of touch on the corridor and the commitment to 6%. I mean, for me, in addition to the points that Denis made, the €150 million is focused on the G&A component of SG&A, and we need to be really clear about this because that is the area where, because of the move to the new structure, we’ve incurred extra costs because of the transformation in some of our back office functions, we have incurred dual running costs and there are things that we can do with procurement and real estate. So we’re very focused that G&A. And that will not impact our ability to seize any recovery. If anything, it will help because it’s about simplifying the business.
The other point I would make is that if we look at what happened in the depths of COVID and then the recovery, it wasn’t that we cut too deep, it was that we were too slow to reinvest — and I — so managing that balance and understanding capacity that’s required and when to increase it, I think, is key. And I think Denis and the executive team’s focus now on growth and share and really making the most of all of our businesses will help on that. So I think we can clearly manage within the corridor that we’ve described.
And once we’re on the other side of that corridor, you’re hearing a very clear commitment to get to 6%. And that’s because we think that the simplify, execute and grow plan will put the business in better shape to deliver growth and profitability. It’s about enhancing the way that our GBUs are delivering and performing. So getting operational leverage on the share gains and the growth in Adecco, making sure that the U.S. is performing the way that it should do, driving productivity and scale the digital businesses in LHH, delivering the synergies on Akkodis and delivering the €150 million of cost savings. So in a supportive economic environment, we are confident we can do that.
Operator
The next question comes from Kean Marden from Jefferies.
Kean Marden
I’ve got 3. Just first of all, starting with headcount, there’s quite a few results this morning. So apologies if this number is [indiscernible]. Have you disclosed the weighted average headcount for the third quarter? I can see that you mentioned up 12% year-on-year. And if that’s correct, then it looks like you possibly have reduced headcount by about 2,000 sequentially in the third quarter, which doesn’t quite chime, I think, with the narrative that you mentioned earlier on. So I thought I would check. Secondly, Denis, I wonder if you can just expand further on some of the incentivization changes that you referenced in your prepared remarks earlier on. So just what specifically have you changed to try and sort of readdress that balance. And then thirdly, again for Denis as well, potentially given your experience at Altran in the past? How would a business like AKKA and Altran normally perform during a recession?
Denis Machuel
So take the first one, Corman. I’ll take the other 2.
Coram Williams
So just to be clear, the — so 12% increase in FTEs year-on-year. sequentially, we were broadly flat. It was actually just up 1%, and that was because of seasonal variations. So we haven’t taken 2,000 heads out, Kean, it’s sequentially flat Q3 — Q2 to Q3.
Kean Marden
Is that a number that you’re going to continue to report quarterly because it is quite an important lead indicator for our list of investors, and it looks like you’ve disclosed that for quite a few quarters, but maybe not today. Is that correct?
Coram Williams
I think we’re trying to be very clear in terms of the movements on SG&A and the movements on FTEs, both year-on-year and sequentially. So we understand how important it is, and we’ll keep disclosing the numbers that you need.
Benita Barretto
And if I may add, the employee FTE number, you will find in the press release when we go through the group. So the group FTE is there when you take another look.
Denis Machuel
All right. And regarding your second question, Kean. In broad terms, what have we done and what are we planning to do for 2023. First thing is to simplify. It turns out that some of our teams had incentives with 7, 8 or 9 targets. And they told me, as I was visiting the teams in the countries, they told me, we don’t understand how we judge on our performance. And so there was this big need to simplify the message, back to Simplify, Execute and Grow. Actually, we’ve reshaped the incentives with this in mind. I’d say fundamentally, there were also incentives that were skewed towards almost like only the profitability, which has led us to — in some parts of the world, to only do like the cost cutting or even contract cutting exercise just to get to the — like year-end profitability target. And that has created, I mean, I’d say, wrong behaviors. As I’ve been very clear to the team, I want to achieve the profitability through the top line. Of course, you cannot sell. You’ve got to be careful when you sell, but you got to have that top line dynamic to ensure that the profit really comes from that. We will be cost conscious. I talked about that. But — so we rebalanced in the — typically in the incentives, the part that is generated by the top line and the part that is generated by the profitability.
Now on the recession from an Akkodis perspective, I think and — Adecco can be a very cyclical business, as you know, even though we are also doing diversifying the Adecco business with outsourcing, which is less cyclical, actually. Akkodis is intrinsically a bit less cyclical. Typically, if I would say, no, no, most companies do not cut the projects of the future. They do not cut the R&D projects. They can sometimes they’re a little bit resized them, but the fundamental trend and a big chunk of the Akkodis projects are based on the digital transformation of our clients. And these things, no matter what happens in the macroeconomic environment, clients will have to invest on these. So we bring, I think, with Akkodis now, I would say, a more recession-proof business. Of course, it can be impacted here and there.
The other thing that I would say is because Akkodis codes is quite diversified across a series of industries that do not react to macroeconomic environments at the same — with the same pattern, some are impacted earlier some later, which helps us also move consultants from one industry to another. And that’s a big strength of Akkodis’ positioning is to be across and to have as a priority, as you know, 7 industries and several technical practices, and that helps really move people around, which is another, I would say, security when we face possible downturns.
Kean Marden
And is that a big change in terms of mix and your point there, Denis, from 2009, because I guess if we look at historic data back as EBIT margin, broadly half and Altran went from about an 8% EBIT margin to about a 3% EBIT margin, so they’re very different shape to those businesses now than they were during that 2008, 2009 downturn?
Denis Machuel
Yes. Let’s be clear. there’s no company that is immune for a recession, let’s be clear, okay? Now the fact that in the portfolio of projects probably compared to 2009, the outsourcing part of projects is of greater importance than the pure, I would say, almost staffing type business brings a little more solidity because outsourcing brings efficiency to our clients. And it’s — the staffing is more reactive. The outsourcing is more resilient and with better margins.
Operator
The next question comes from Paul Sullivan from Barclays.
Paul Sullivan
Just firstly, on gross margin. Can you talk about pricing and gross margin movement within Temp in Q3, ex one-offs? And on what basis is your flat fourth quarter gross margin assumption based. Secondly, are you seeing sort of wage inflation and accelerate going through sort of September and October. And then, Denis, are you happy with the current shape of the portfolio? Did you look and did you look at disposals as part of your sort of strategy refresh?
Denis Machuel
Coram, take the first 2 ones.
Coram Williams
I’ll take the first ones on those. So Paul, in terms of the gross margin in Q3 in Temp, you’ll have seen, I think it was 60 bps down, but a good chunk of that, more than half of that came from the one-offs, particularly in France. You’ll remember there was a significant release in Q3 of 2021, which we highlighted at the time, which we highlighted in our guidance for Q3. So the underlying movement in gross margin in flex is actually pretty small. And as you know, it’s very strong. And I think it’s driven by the mix of solutions and it’s driven by good pricing discipline. We continue to really focus on that.
In terms of wage inflation, that is very much still a feature of the market. So we’re seeing wage inflation that in Q3 has probably slowed a little bit on average versus Q2, but we’re still in mid-single digits of wage inflation across the group. And what’s interesting is that some of the territories where this was stronger in the early parts, like Latin America, U.S. and U.K. have slowed a little, whereas Continental Europe has increased a little. And I think when we’ve talked about wage inflation in the past, that’s what we predicted would happen because obviously, the collective labor agreements that you see in Continental Europe tend to hold wage inflation back initially, but we are seeing it come through. So it’s very much a feature of that.
In terms of the gross margin guidance for Q4, you know there are a number of moving parts to this. So let me try and break them down. On M&A, it’s likely to be roughly flat on FX. It’s pretty helpful at the moment, so I assume that’s about a plus 30 basis points on the gross margin. We’d expect an ongoing benefit from Perm probably a little bit lower than we’ve seen previously. So let’s assume about 30 bps. Career transition will continue to be a negative, albeit reduced because as we’ve said we’re seeing change in trajectory in career transition. And I think Flex will be down a little bit, so probably 20 to 30 bps just because it’s a tough comp in Q4.
If you put all of that together, you’ll get to our guidance of sort of broadly stable gross margin on an organic basis and plus 30 to 40 on a reported basis. So I hope that helps.
Denis Machuel
And with regards to the portfolio, thank you for your question, Paul. I’d say, yes, of course, as you can imagine, I’ve done a portfolio review. I’d say, overall, I’m happy with the portfolio that we have. I think with the — again, with the acquisition of AKKA, we have added another significant — it’s a good acquisition. We’ve added a strong capacity, there’s nothing that I’ve seen that would — of a material size that would require to be disposed. Are we — do we have here and there are a few things that we might look at, possibly, but there would be — there would be nothing material. We are adjusting the portfolio as you know, we’re trying to have places.
Typically, we talked about the Akkodis — part of the Akkodis U.S. moving to Adecco. So because we believe Adecco would be a better custodian of that business. We’ve worked on a smaller country operating model for LHH, better anchored into Adecco. I mean those are, I’d say, portfolio adjustments, nothing that justifies any disposals. Do we have areas where we underperform? Yes, we have, and I mentioned that earlier. Are we all hands on deck on that, because I think that we can turn them around? Yes. So I would say nothing major on the disposal front.
Paul Sullivan
And just to follow-up. I mean when you talked about the review of contracts with low profitability at AKKA, how much revenue are you talking about there?
Denis Machuel
I think we’re not talking anything major, but — so it’s just more roll up our sleeves, because it’s part of having low profitability contract is not what we want to have. And — and I insist on that, and I’m going to say it again, a low-margin contract is to be turned around by the teams, either by typically in the Akkodis business, typically by reviewing the scope with the clients or by negotiating terms. And that’s the first priority. So I don’t want to see contract exiting as an easy path for our teams. They’ve got to roll up their sleeves and get things done.
Paul Sullivan
So we shouldn’t expect a significant organic drag from that?
Denis Machuel
No.
Paul Sullivan
And then just finally for me. Just to be crystal clear, when you — if we sort of go through the scenario of revenue decline going into next year or going through at some point next year, you’ve got the recovery ratio. You are being very clear that we’ll have to be AKKA savings on top of that, and we will also have the beginnings of this €150 million plan. So I mean, the reported recovery ratio in terms of SG&A reduction in a downturn will be quite substantial. Is that what we should expect?
Coram Williams
I think as you know, Paul, it’s very difficult to get into the ins and outs of recovery ratios. The reason we highlight it is because that’s the way that we manage the business. And we’ve done it with agility. You saw us manage it in 2020. And the actions that we’re taking around bringing the Akkodis business together, driving the €150 million of savings, that’s all about making sure that this is an even healthier business that is able to weather any storms that are coming.
Operator
The next question comes from Michael Foeth is from Tobel.
Michael Foeth
Three questions. The first one is I want to come back on dividends. You were very clear about your commitment to the dividend policy. And I was just wondering if there is any scenario where you would deviate from that policy at all? That’s the first question. The second one is, I guess you’re tilting, if I understand correctly, tilting your priorities slightly from margins towards growth. And I just wanted to — if you could remind us on the management incentive alignment with that strategy. if you could say a few words on that. And then finally, did I understand correctly that you’re removing the 3% floor from your EBITDA margin corridor, or is it still in place?
Denis Machuel
Let me take the second one, and then Coram, you take the first and the third, right? So let’s be very clear. Margins are important. Profit is important. It feeds, it helps us give a dividend, by the way. And it is also what helps us invest in the future. So I don’t want to compromise on margin. I want to refocus people by margins that are generated by the topline and not by — sorry, sometimes excessive cost savings on the wrong things or stopping contracts just for the sake of just getting a short-term improvement in profitability. So this is its topline and margin. And this is precisely how management incentives are being set. You will see for 2023 in the next report. But this is — it’s just a balance of both, right? And with the ambition that we’ve set to be at 6% in a supportive economic environment, I think it’s the — we’re very clear that it’s still a big focus for us, through a super dynamic top line, winning market share, growing on all the opportunities that we have ahead of us.
Coram Williams
And let me now pick up on the other 2 questions. In terms of dividend, I just want to go back to what I’ve said before. There are a number of features of the business that underpin our commitment to the dividend. It’s the countercyclicality of parts of the portfolio, it’s the countercyclicality of cash. That is very, very important in the way that this business operates. And it’s the agility and flexibility that we have in terms of managing the cost base. And we paid that dividend in 2020, and we did so in an environment, and I remember it well because it was just when I arrived in the role, where we were 40% down in Q2. So the dividend has been stress tested and our commitment underpinning that dividend and paying it is clear.
On that margin corridor, I want to be clear. We are not indicating to you that we will go lower in terms of profitability in a downturn. So the resilience of this business is clear. The actions that we are taking underpin the profitability of this business in a downturn, the agility with which we can manage the cost base. And again, using 2020 as a reference, remember the margin that we delivered and the recovery ratios. So I don’t want you to think that somehow we’re indicating that we will tank profitability in a downturn.
Just to be clear, though, it is a cyclical business, and we can’t escape that. There are aspects of the business and the way in which the working capital dynamics work that help us. We’ve proved the resilience and agility. And I think Denis and I and the management team are very committed to managing in that way through any downturn we might do — that we might experience. The 6% margin target is a statement of intent. It signals our confidence in the portfolio, the actions that Denis has outlined, the businesses that we’ve got and their potential and the benefit of the cost savings. And on the other side of a downturn, we’re very committed to getting to that target.
Michael Foeth
So that’s why you rephrased the EBITDA margin target for that last reason.
Denis Machuel
Yes, exactly.
Coram Williams
We’ve demonstrated the resilience at the bottom, and we’re signaling a statement of intent around the top.
Operator
The last question for today comes from Hans Pluijgers from Kepler Cheuvreaux.
Hans Pluijgers
Yes, two questions from my side. First of all, coming back onto the execute part of the business update, you indicated that you will empower decision-making close to the customers and GBU in local level. Could you give maybe some examples? How do you expect that — how do you want to implement that? And secondly, on that, at the same time, I understood correct, or I think I understood correctly that during your 100 days review, one of the things you saw is that the whole business was a little bit too complex, amongst others due to the fact that there was too much decision making on local level. Did I correct that correctly?
And secondly, on that, how can I match those two remarks? And then coming back on the, let’s say, the one-off costs relating to the cost savings, so about one-to-one, so about €150 million. Is there a material part related to a write-down on the legacy IT systems? Could you give maybe some feeling on that?
Denis Machuel
Okay, I’ll take the first 2, and Coram, take your third one. First, a typical example. So when I visited the countries we — sorry, as we transform the group from a very decentralized and I’d say, a patchwork of countries into something which is more organized and able to serve particularly global clients and able to also deploy at a faster pace, some digital assets, some fundamental offers that are linked to value creation for our clients, as we did that, we put a governance that are more, I would say, more centralized and actually globalized. So which means that for a country sometimes to decide on how to address a client, how to make an offer, we would have to go like 5, 6 layers because the GBUs wanted to really govern what they had to do. As we organized — reorganized at our HR function more global, we also had some decisions that went actually too high in the organization. So you — you’ll slow down your decision-making process because things have to go up, up, up and then down, down, down.
So we are now in a much better place and learn from that to re-empower to give now clear guidelines from the top, I would say, a framework. But within that framework, we leave — and we empower the countries and the business units within the countries to operate. So it’s not to decide at the top. The top is to give principles and global directions. And it’s now within these global directions down to the countries to operate with their local context. To give you an example, and particularly, for example, for — in IT, we had a development that had to take like several months to get approval whereas it could have been developed very quickly locally. So those things we are redesigning, taking the learnings over the past 2, 3 years, getting what is centralized to remain centralized, and for all the rest, giving principles to the business and letting the business make the decisions as close to customers as possible. So this is how we operate. So what I was talking about remote decision-making is because some decisions were taken by people who are too remote from the business. We are adjusting that to be more efficient.
Coram Williams
And then on the charges for the one-off costs, remember what I said, there’s 2 phases to this. So the first is tactical about reducing some of our procurement spend in our third-party suppliers. The second is a bit more involved in terms of looking at the operating model and what gets done where and really simplifying and streamlining it. So we haven’t got a final breakdown because we need to complete that second phase of work.
There may be some write-downs on legacy IT systems. Again, when we’ve worked through it, I think we’ll have a clearer picture, but it won’t be the majority because at the end of the day, the biggest cost in our business is people. So there will be some severance costs. There will also be some costs, for example, in terms of changing our real estate footprint and indeed exiting from procurement contracts that we may want to faster. So yes, there may be some IT write-downs, but I wouldn’t assume it’s the majority of what we’re talking about.
Hans Pluijgers
And as I understand then correctly, a big part or majority is also the cash out in the end work.
Coram Williams
Yes, majority of it will be cash out.
Denis Machuel
All right. Thanks, Hans. And as a few words of conclusion, I want to thank everyone for attending this call. Just want you to have clearly in mind that we’ve done a great Q3, 16% reported, 6% organic growth. We are winning market share, particularly in the Adecco, who has now regained growth leadership. We have a solid strategy. We’re focused — we are focused on executing it with Simplify, Execute and Grow levers that will put us in a good place to navigate the future, continue to grow market share, continue to win in the market. And we are very confident in how the future looks like for our group.
So, thank you very much for having been with us, and looking forward to exchanging with you for the next quarter. Thank you.
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