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Adecco Group AG's (AHEXF) CEO Alain Dehaze on Q3 2019 Results - Earnings Call Transcript

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About: Adecco Group AG (AHEXF)
by: SA Transcripts

Adecco Group AG (OTC:AHEXF) Q3 2019 Results Earnings Conference Call November 5, 2019 5:00 AM ET

Company Participants

Nicholas de la Grense - Head of Investor Relations

Alain Dehaze - Chief Executive Officer

Hans Ploos van Amstel - Chief Financial Officer

Conference Call Participants

Paul Sullivan - Barclays

Anvesh Agrawal - Morgan Stanley

Bilal Aziz - UBS

Matthew Lloyd - HSBC

Hans Pluijgers - Kepler Cheuvreux

Alain-Sebastian Oberhuber - MainFirst

Tom Sykes - Deutsche Bank

Kean Marden - Jefferies

Nicholas de la Grense

Good morning and welcome to Adecco Group's Q3 2019 Results Conference Call. As usual, today, I'm joined by Alain Dehaze, Group CEO; and Hans Ploos van Amstel, Group CFO.

Before we begin, please review the disclaimer regarding forward-looking statements on Page 2.

Coming to today's agenda, first, Alain will briefly discuss the highlights of the quarter, Hans will then review our financial performance, after which Alain will describe some of the progress being made on our transformation and innovation agendas. We'll then open the lines for Q&A.

And with that, I hand over to Alain.

Alain Dehaze

Thank you, Nick, and good morning, ladies and gentlemen. Welcome to our third quarter results investor call. Before I begin with the key highlights from the quarter, let me first give a few comments on the divestment of Soliant Health which we announced this morning.

As you know, we actively manage our portfolio to ensure optimal capsule allocation, regularly evaluating whether we are the best owners of each business in the Adecco Group. In the last two years we divested Beeline and also increased capital deployed to new ventures. This morning we announced that we had entered into an agreement to sell our U.S. Healthcare Staffing business, Soliant for around $550 million which is approximately 11.5x the last 12 months EBITDA.

We believe this represents good value for our shareholders. It is also consistent with our portfolio strategy to focus on our brand that can be deployed globally and where we can create separate value for clients and candidates by leveraging our ecosystem. We expect the Soliant transaction to close by the first quarter 2020, and we will provide an update on the use of proceeds with the full-year results at the end of February in line with our capital allocation policy which remained unchanged.

Now, coming back to the third quarter with the key highlights. The third quarter demonstrated a solid performance in an uncertain environment. While revenue growth moderated slightly to minus 4% trading days adjusted we continue to drive gross margin improvement with gross profit stable organically year-on-year. Our focus on value-based pricing and delivering more value to our customers through digital tools and solutions is having a positive impact also helped by talent scarcity.

EBITA margin excluding one-offs was down 10 basis points year-on-year showing that we managed to offset almost all of the impact of the lower revenue growth and continued transformation investments. On transform we made excellent progress with the GrowTogether program which helped deliver another good productivity performance in the third quarter. We are confident that we will deliver the €250 million productivity target in 2020, driving structural improvement in the margin and the customer value proposition.

And we also confirmed that the service actions speed of GrowTogether is having a positive impact with improvement in both our client and associate Net Promoter Score. On our innovate agenda, we are pleased with positive results we have seen at General Assembly this quarter with organic growth of 31% year-on-year. And the collaboration between Lee Hecht Harrison and General Assembly stepped up with further client wins and many more opportunities in the pipeline, confirming the strength of the combined value proposition.

So, you can really see the perform, transform, innovate strategy is delivering a solid performance in Q3.

Now, I will hand over to Hans to take you through the financial performance in more detail.

Hans Ploos van Amstel

Thanks Alain. Let's start with the revenue. Revenue was down 4% on a trading days adjusted basis. This is slightly below the 3% decline we saw in the second quarter and reflects slow economic growth in most regions. Despite the easier comparison base and improvement an Europe did not to materialize. Europe was minus 6%, down 1 percentage point from previous quarter which is driven by France and the UK. The other European countries are starting to stabilize, but the overall trend remained soft, especially in the automotive and manufacturing sectors.

In North America, we saw a slowdown to minus 6% driven by a slowdown in the general staffing market. Japan remained strong and in the rest of the world we had lower growth in Australia. Looking at the country revenue results in more detail on slide 9, France growth slowed versus the second quarter as the marked slowed. We are slightly behind the market, but remember that in Q3 of last year we were strongly outperforming.

While revenues were down in France, we grew our gross profit confirming that we're improving the quality of the mix as we continue to focus on higher value services. In North America and UK General Staffing, revenues were down 5%. The UK is very much Brexit related, in North America the decline is because of and by the market slowdown and in particular by a high exposure towards the manufacturing sector.

In North America and UK Professionals Staffing, the trend was in line with the previous quarter. Our IT and legal businesses remained under pressure. We have talked about what we're doing there to improve the performance in previous calls. We are making progress with the turnarounds and should expect to see a gradual improvement in the quarters to come.

On the other hand, we had continued good growth in Finance and Office Engineering and Healthcare. In the UK we saw a slight decline modestly outperforming the market again the Brexit uncertainly is not helping the UK. In Germany, Austria and Switzerland, the decline was in line with the market. Germany continues to be a very tough market impacted by a slowdown in automotive and by the regulatory changes that were introduced in Q4 of last year.

We're seeing an improvement in the trend in Benelux and Nordics. Italy was down 6% in the slowing market. Remember that we were growing at 6% in Q3 of last year. Another quarter of good performance in Japan, growing market share supported by a strong margin, Professional Staffing including the modest fee VSN business growing double-digits.

Iberia, plus 6% also had a strong quarter outperforming the market. In the rest of the world the slowdown is mostly driven by Australia where we made the decision to exit some low margin business. Career Transition and Talent development saw a strong acceleration in growth. First, Lee Hecht Harrison is back to growth at 5%, second General Assembly is now included in the organic growth rate and delivered 31% growth in the quarter.

Turning to the gross margin, the reported gross margin increased by 70 basis points. Currency had a positive 10 basis point impact. The organic gross margin was up 60 basis points. Temporary staffing contributed 40 basis points, driven by a value-based pricing and proactively shifting the mix. Permanent recruiting had a positive 10 basis points impact. The growth in career transition added to another 10 basis points in gross margin.

Let's now lot at the EBITDA margin. The margin excluding one offs was down 10 basis points. Our productivity benefits were offset by the sales decline and the investments in IT technology. The revenue slowdown impacted the productivity. We are taking the appropriate measures to practice. In Q3 we had less benefits from GrowTogether with the benefits being more skewed to the first half of 2019 as we have mentioned in previous calls.

We are also investing in Q3 with the implementation of our new integrated home office solutions and rolling out the candidate apps to North America and Germany. Looking at the profitability by country on slide 12, we will now provide some further perspective for the key markets. Gross margin strengthened further by 30 basis points to 6.8%. The improvement was driven by a combination of our value strategy, diversifying the business mix and the benefits from GrowTogether.

The North America and UK General Staffing margin declined by 70 basis points year-over-year in reported terms. The revenue slowdown impacted the productivity. We expect to recover some of that margin in Q4 with the actions taken. In North America and UK Professional Staffing, the margin was down 20 basis points mainly due to lower revenue.

The EBITDA margin in Germany, Austria and Switzerland improved by 20 basis points conforming that our actions are paying off. The measures that we took to streamline the organization helps protect the profitability despite the negative revenue. In the Benelux and Nordics our margin improvement comes from the focus on higher value customer portfolio. In Italy we are investing in IT and headcount to further strengthen our market position. Finally, in Career Transition and Talent Development, the improvement is coming from reduced losses at General Assembly confirming that the growth is improving the profitability.

Let's look at SG&A in more detail on slide 30. We broadly reduced the headcount with a revenue decline, but need to recognize that the revenue shortfall impacted the productivity. We did increase the gross profit per FTE by 2% in the quarter as we continue to focus on improving the gross margin. SG&A growth was higher than the first half of 3% organically. This is driven primarily by higher IT investments, wage rate inflation and some of the [indiscernible] items. We expect the SG&A growth to come back down in Q4.

Turning to the cash flow and the balance sheet on slide 14. Cash flow was strong in the quarter. Days of sales outstanding are down 1 day at 53 days, net debt to EBITDA is 1.1x confirming the strength of the balance sheet.

Coming to the outlook, revenues in September and October combined were down 4% trading days adjusted showing the similar trends to Q3. GrowTogether is delivering the incremental €70 million benefits for 2019. We are on track to deliver the total €250 million GrowTogether target for 2020, meaning that we are delivering on our commitments.

And with this, I hand back to Alain for the update on the transformation and innovation.

Alain Dehaze

Thank you, Hans. And let's start indeed with transformation and more specifically on GrowTogether program. GrowTogether is about strengthening the value proposition to drive sustained profitable growth. It is about increasing productivity while also improving the quality of service we provide to our candidates and clients.

Let's have a look at what we have delivered across the three pillars of GrowTogether during the quarter. First pillar the service excellence one. You will remember that we have put in place a systematic tracking for Net Promoter Score for our clients and candidates, and also activations plans to continuously improve our services based on the feedback we receive. We have just got the 2019 annual results which confirms an 8 points NPS increase for our clients and 4 points for the people we placed into the jobs. And this is not the outcomes itself, but it offers an important insight into how we are doing with our customers, which is a key driver for our long-term success.

The second pillar is reengineering our work processes. And we continue to expand with our performed metrics across the group with around now 10,000 colleagues being trained. We continue to get proof points that introduces inefficiency and provide a strong foundation on which to deploy new technology.

Lastly, we made significant progress with our technology roadmap in the third quarter. We launched an enhanced version of our integrated front office solution in France and Spain and this is the backbone of accelerated transformation in our branches in 2020 and beyond. We also expanded the global candidate mobile app to the U.S. and Germany leveraging the experience from our market-leading tool in France. So we are on track to deliver on all commitments with a strong foundation to accelerate transformation in the years to come.

Now, a quick update on progress on the final part of our strategic agenda innovate. We acquired General Assembly last year because we saw at upskilling and rescheming as an important growth area and differentiator in the human resource solution space. We identified two clear opportunities to generate synergies with Modis and Lee Hecht Harrison and we mentioned it on the last call that we had some first successes. I am pleased to say that the new business activity continued in Q3 with further wins resulting from the combined GA and LHH value proposition.

We also expanded the Modis Academy concept with another class of recruits, reapplying our proven model from Modis in Japan. And General Assembly organic expansion has also continued, 31% organic revenue growth in Q3, nine new markets opened in the last six months very strong demand for its differentiated online immersive offerings and enterprise bookings at 50% in Q3, so we are really pleased with the performance at GA.

And in particular with the collaboration with all the group brands, leveraging the ecosystem to deliver for our clients and candidates. Coming now to the concluding messages, the third quarter was a quarter of good execution and solid performance in a challenging market environment. We continue to invest in our digital transformation to fundamentally strengthen the business, which GrowTogether, IT and our New Ventures.

And our innovative and differentiated new business models continued to gain traction with clients. As we look to the fourth quarter, we are continuing to build the next layer of the GrowTogether program with a focus on consultant tools and commercial solutions to deliver greater value to our clients and candidates. And we are on track to deliver the €250 million GrowTogether target for 2020.

With this I would kindly ask the operator to open the lines for the questions.

Question-and-Answer Session

Operator

[Operator Instructions] The first question comes from Paul Sullivan from Barclays. Please go ahead.

Paul Sullivan

Yes, good morning everybody just a few from me. Firstly on the disposal do we - is there a clean – is the price you've given us today is that a clean price we get any leakage from tax or anything else like that. And is there any reason why we shouldn't expect the dilution to be offset by share buybacks I know the Board makes the decision but in your view – is your recommendation or – what's your view in terms of returning the excess cash to shareholders that's the first question.

Secondly on the digital ventures the sort of 65 million any update there in terms of how that's progressing, any update in terms of organic from the other parts of the new ventures, ex-GA that would be helpful. And then finally, could you just give us or give us a bit more color on your gross margin and SG&A expectations for the fourth quarter? Thank you very much.

Hans Ploos van Amstel

Maybe shall I start with the divestiture, so we're pleased with the price, because I think we've got a good price for Soliant. We will be making profit on that and that will be taxed in the U.S. where you will see in your words some dilution to that we are still working on how to structure and optimize that. So we propose to give the full disclosure on that amount at the end of Q4, because we still need to execute that. We have a very clear capital discipline and allocation, which we report at the end of the year where we have a clear process for returning our excess cash.

And that we will announce at the end of Q4. Before coming to divestiture maybe some color on Q4 to help you a little bit further. On the gross margin, we expect exchange rates to be positive by 10 basis points. France we will get a benefit of 40 basis points, then that splits between the new regulation around 10 and 30 because last year recall, we had one month of no CCA at five months. But you also have to remember that we had a reversal of accruals last year of around 50 basis points. So that is a lot of things, but in the end come through in that zero.

You can add for the perm and let's say it's in the temp around 30 bps I would say in total. I would say 3 times temp, remember the temp gross margin started to improve we're going to in Q4 of last year. So I would not be taking what we had this quarter but 3 times temp. SG&A will be slightly up because of currency impact, because if we get that in the gross margin. The currency will also in the SG&A around 2%, but organically we will be down around 1% I think that gives you some indication to mobile your fourth quarter.

Alain Dehaze

On the ventures not only the digital ventures but all the ventures. And overall we are pleased we are really pleased with the progress we are doing. You have heard our performance with General Assembly, which is growing strongly, and we are working together with LHH and Modis to develop that kind of ecosystem and unique offering. I've mentioned some significant business wins with LHH, but also the combination of the capability of GA with Modis – is at the basis of the Modis Academy, we have now launched in the U.S.

And for sure this will take a little bit longer, but it is a truly innovative solution that we know from Modis VSN in Japan. For the digital ventures, Vettery, Adia, YOSS all of them are continuing to make progress. At this stage, we continue to invest around 5% of our profitability in these Ventures, which it is absolutely the right thing to do. And I think it is important that as a company we are performing on today's business, while we also invest for the future, especially in these ventures.

Paul Sullivan

And thank you. And just a follow-up and that 5% of profitability you sort of laid out your expectations or how you thought that was going to evolve over the next sort of couple of years – has your thinking changed today?

Hans Ploos van Amstel

I think if I maybe I'll give you two answers to that. I think if I look first at our current quarter, where we continue to invest in the IT agenda to set ourselves up for GrowTogether. And we'll also continue to invest in growing our ventures, and while we do that we have delivered a very strong conversion rate so of 25 basis points and confirming our margin strength with the opportunity to improve it by delivering – the returns on the investments we're making. And the first one we confirmed is we're putting the actions in place this quarter and next quarter to deliver the $250 million GrowTogether benefits.

So – and then I come to 2020 that we have a very strong margin, but I also call it an opportunity rates margin. And why do I say that, we are delivering a very strong margin into the quarter with all these investments. Our objective for 2020 is clearly is to structurally improve the profitability and GrowTogether we have a very confident with what we're doing. We are also having a better mix of business you see our gross margin and our value creation of that. On the Ventures, we will need to make the decision, right how much we invest for the growth.

The good news is the growth you saw that on the General Assembly is reducing the losses for opening in all the market so that trade-off we will make we will probably give you a little bit more color on that when we ended the year. But always with the objective to structurally improve the profitability like we're doing this year because this year if you look at the first three quarters we’re structurally improving the profitability in a more challenging trading environment and our goal is to structurally improve the profitability next year.

Nicholas de la Grense

Thank you. Paul.

Paul Sullivan

Thank you very much.

Operator

The next question comes from Anvesh Agrawal from Morgan Stanley. Please go ahead.

Anvesh Agrawal

Hi good running I had few questions. The first, just on the working capital given where the growth is, we would always hope for a net positive inflow on the working capital, but it was drive down the payable, so maybe if you can just clarify, is it just a timing issue. And should we expect some reversal from Q4 assuming the growth remained in minus 4% kind of range. And the second one is recently we had two kind of major auto players announcing a merger.

I'm wondering if you can probably give some comment on your exposure there, especially in the UK in any sort of kind of full discussion that would mean some sort of negative by going forward? Thank you.

Hans Ploos van Amstel

So I'll start with the working capital. And so, I think we had a strong cash if you look at the DSO the DSO was down, but you would indeed with the revenue, we have seen normally you see a little bit higher cash conversion. There are two things which were in the quarter one, the way this CCA change their funds. Is having still year-to-date the negative impacts and some of that will come in Q4, so that if you correct for that we're running at 90.

So 183 becomes a 90 and then like you have spotted very well, is that the tables the timing of some of the social securities or the little unfortunate into the quarter but over the year washes true. So we're running well above that 90 if you were just for CCA and some timings of payments, which confirms strong DSO and cash management.

Alain Dehaze

Then on the automotive, it is clear that when we look at this quarter, automotive is weak almost everywhere but according to what we see beginning to stabilize against easier comparables. And if you look at all – our topline this quarter overall autos expand around – one percentage point of the revenue decline. We don't anticipate near-term improvement in auto, especially because of the structural trend hitting the sector electrification, dieselgate sharing in some, as well as the trade war and – the trade of the U.S. tariffs this is on auto.

But also in manufacturing, in general, we have seen a soft environment, which slowed further in the third quarter. So far when we look at the Q3, we see that the service side of the economy has held up better, but is also negative year-on-year. So – as a conclusion, the slowdown is quite broad based so auto and manufacturing were the most impacted.

Anvesh Agrawal

Maybe just a follow-up, can you just give us what's your overall manufacturing exposure in Europe is. And just on the earlier question on SG&A, when you said organically, down 1% is that sequential or year-on-year? Thank you.

Hans Ploos van Amstel

So our total exposure to manufacturing is around 20%, 25% in the Group and that includes the automotive sector. And then I said its year-over-year.

Anvesh Agrawal

Okay, that's clear. Thank you.

Hans Ploos van Amstel

You are welcome.

Operator

The next question comes from Bilal Aziz from UBS. Please go ahead.

Bilal Aziz

Good morning, everyone and just a few from my side, please. And can you please identify if there was a working day benefit in the temp gross margin and if so, how much it was. And separately, I guess more on the underlying trends in the temp margin you've had four consecutive quarters of an improvement on that side. And I guess, as a weakening top line trends continue, are you seeing any signs of price aggression from some of your competitors.

And finally on General Assembly, I think this year guidance was slightly loss making, when we look ahead to 2020 just trying to get the message clear. Do you expect more level of investment going into that business or do you expect to be profitable? Thank you.

Hans Ploos van Amstel

Let me start with the gross margin, we had no because it's only has a benefit if there was a change in bank holidays not in working days. So there is no meaningful impact on the gross margins from the working days into the quarter.

Alain Dehaze

Then regarding your question of the potential gross margin benefit in the quarter because of additional working days in this quarter, we had no meaningful impact on the gross margin from the working days. And I would say that's also no real impact from holidays in the third quarter, so that's in a nutshell.

Hans Ploos van Amstel

Could you – I lost your other question, because we answered the first one, I apologize.

Bilal Aziz

No, no, I was just on pricing, and how you think that is sustaining in the current demand environment?

Hans Ploos van Amstel

Yes so, I think we're pleased to report that on the pricing that we are becoming I would say more sophisticated on the price discipline. We are also adding better value services to the customer. And I think our GrowTogether initiative and our net promoters activation is playing into that so that we - if we bring a better candidate faster to our clients right. That that improves the pricing, but also on the value solutions we are providing is that we are working on the pricing. And in some markets like Germany, we're happy that the new regulation, which is adding some cost is also being passed on into pricing.

So we're pleased with that. Now where we need to be careful in Q4 is that – and that's why I gave a little bit a lower outlook for the fourth quarter is that we already saw that improvement. So we need to be careful right. I think what is really great for the industry we came out of a negative area. We came into a stable area we're now into the small positive area. So we should see that as a positive development on the value we create. So we're pleased with that.

Nicholas de la Grense

Good thank you Bilal.

Operator

The next question comes from Matthew Lloyd from HSBC. Please go ahead.

Matthew Lloyd

Good morning, gentlemen. Couple of questions from me, really just in terms of the cost savings and the sort of productivity gains that you're making, perhaps I'd just be interested and I don't want to spreadsheet and so just where you think you might be able to go more broadly. But what does that mean if you start to get volume come back. Does that mean you don't have to put in as much additional cost to sustain any growth if we're not sliding into a recession if this is a slowdown and we're stabilizing or does it mean something that you can hold the thoughts as margins that you're at in a more growthly period that's the first question.

So I suppose I'm thinking about sort of SG&A per person I think all consultants I suppose. And then the second thing is how big a market is it for using General Assembly to equip people with skills that are scarce and then placing them. There are a lot of very small players trying to do that. And you've done it in Japan the FDM in the UK, but I just wondered if you've got the size of that market or is potential?

Hans Ploos van Amstel

Perhaps I can start with the last one. Matthew. There are some figures for example, I can quote McKinsey. McKinsey has said that there is a need to re-skill and up-skilled 370 million so 370, 370 million workers by 2013, which is approximately 14% of the global workforce. And this is one type of let's say, I would say one type of activity the reskilling of existing staff in company. Beside this, you have to example, we have taken of the Modis Academy where we take people without the capabilities companies are looking for.

And we skill them it can be in system engineering, it can be in Python, in Java and so on and so on. The model, we are doing at VSN, we know that there is a huge scarcity of such a profile, and but I don't have a precise idea or figures. I know for example that Europe is missing around 600,000 IT people, because no trade. And we are participating now to that kind of new markets.

Matthew Lloyd

Great, thank you.

Hans Ploos van Amstel

On your GrowTogether question, so it helps on the downside, because we have a better productivity. But like you say as usual it works even better when the business is growing, because these tools we're giving to our people will make them more productive, which means that with adding less people you can drive more growth. The candidate apps we have in France really are driving productivity and better candidate engagements. The new integrated sales solutions we’re rolling out in Spain and France will drive higher sales productivity, because they help our sales people to go much targeted to the right clients.

And then the whole digitalization of the administrative process means that if you grow the business side that gets more automated. So you don't need to – we were quite a linear business model with that we become – a more scalable business model on the growth and the perform methods will help to do that. So growing the business, you will do more productive going forward. So that's a structural change.

Matthew Lloyd

It's a dangerous question, so I fully expect you to avoid it, but do you have any numbers in terms of you think it makes a consultant somewhere between 10% and 15% more efficient in a growing market or are you going to avoid that question?

Hans Ploos van Amstel

No, I won't because we measure that, because otherwise we wouldn't come through on our GrowTogether but first pro-forma loan when it's fully rolled out and people are really mastering that gives already 10% productivity. We know also from the candidate apps we have a process, what we call value realization to make sure we really come true on that $250 million and we know initiative-by-initiatives market-by-market. We do time studies like manufacturing. So we really make a structural shift in the productivity.

Again, we're in the midst still of rolling this out, we have a lot of people show these things. Don't go overnight, but this will be a structural improvement in the productivity and we measure that project-by-project, initiative-by-initiative and that's very important because we're scaling now certain parts of GrowTogether from one market to the other. So we can also then tell the market what benefit we expect to be delivered when we bring the technology.

Matthew Lloyd

Great, thank you very much.

Alain Dehaze

You're welcome, Matthew

Operator

The next question comes from Hans Pluijgers from Kepler Cheuvreux. Please go ahead.

Hans Pluijgers

Yes good morning gentlemen a few questions from my side first of all on France yeah slowdown in your topline. Could you – maybe give some indication what's happening. Let's say by segment in France are there any specific segments in France but where do you see slowdown – fast on the others. And then on coming back on SG&A, it was slightly higher than you initially guided for what was the drivers of that somewhat higher growth in SG&A initially thought despite the fact that may be sales decline is slightly more than a little bit maybe expect at the beginning of the quarter.

And then on Soliant and more or less a conceptual – for the longer term first of all, how much was this business growing in your – in the Adecco operations. And secondly, is there something that you would could expect more going forward that business which I more let's say focused on certain countries and which were not let – that global you would maybe look for divestments, is it something let’s say more you could more expect on.

And lastly on the whole GrowTogether productivity savings you just mentioning. Yes, quite significant improvement in productivity you're seeing – but is it not also a part let's say, to offset, let's say, the longer-term pricing pressure you see in the General Staffing market. Or do you really expect that for the productivity could benefit your bottom line in the long-term when growth picks up again?

Alain Dehaze

Okay Hans. I will start with France and when we look at the top-line of France. We see that there are two key drivers of the relative growth GAAP. The first one is that the comparable base. And last year we had quite a strong third quarter, we were growing 6% faster than the competition. So when you look at the two quarters today, I see it explain also – why we had a kind of slowdown. Second, the business mix and we do around 90% of our revenues in temporary staffing in France. And so we have a smaller waiting in Professional Staffing, which is by the way is growing faster.

If you look at our France professional business, we had growth of 11% in the third quarter. This explain also when you look at the mix we have quite a sizable exposure to large manufacturing customers including auto and you see that's where temp growth has been the weakest. Now on the other side, we are very pleased with the overall performance in France, very solid, you see that the gross profit is flat year-on-year despite the revenue decline, which is a good proof point that we have a strong pricing discipline that we are driving value strategy. We are deploying really a value adding services such as the contract of in definitive duration for temporary staffing, apprenticeship and so on and so on.

Also GrowTogether, GrowTogether is – one of the country at the forefront of the program. We had a very good results, supported by the perform methodology our productivity improved by 6% and gross profit per FTE. And we continue to lead the profitability field, while we are doing at the same time significant investment in the digital transformation. And we expect this gap to market to narrow, as the comparison base will become easier.

Hans Ploos van Amstel

Yes, let me start with Soliant and then come to the SG&A, because there is a link with GrowTogether. Soliant was growing mid-high-single digit, given the absolute size it doesn't really have on the company level a material impact on our organic growth rate. On SG&A which was up and indeed, a little bit higher than we guided for I, think a couple of points. First, we adjusted the headcounts, but we have to recognize that the revenue shortfall we saw had an impact on the productivity into the quarter.

What is important to mention is we continue to invest, we did no compromise on the investments, we continue to invest in the digital ventures. And in bringing the IT tools in the business to make sure we come through on our commitment on GrowTogether next year. So this puts us on track to do that. You have to recognize that also versus the guidance we had a little bit a higher gross margin and some of the mix in the gross margin is margin accretive that is not one on one dropping to the bottom line and Alain states and the perm business are examples of that.

So if you have higher gross margin is also a little bit SG&A, but again margin accretive. If you added all up with the conversion rates so in the quarter of 25% which is very strong, while we have but a little put back on some of the productivity with the slowdown in sales and continued investments with less sales we think we have a strong productivity while this happens. And as I said and that brings me to next year on GrowTogether this is why I call it an opportunity rich strong margin. We are making the investments, and we will on GrowTogether come through on our productivity targets in 2020.

Alain Dehaze

Now and to finish, your question Hans regarding portfolio and the decision, we are taking on sometimes to divest activities. I would like to answer it in a broader context. So, we actively and we are seeing that during the last two years we actively manage our portfolio to ensure optimal capital allocation. And we are looking for investing in – France in order to globalize them on one hand.

Second, we are looking to invest in brands, where we have synergies between the brands, so that we can develop and proposed to our customer and candidate’s unique service offering. The example of GA and Modis for Modis Academy is one. The other example is GA with LHH is another one, and that's why for Soliant there was – very limited synergies with the other brands and also no real let's say rationale behind expanding these brand internationally. No real global international customer very locally regulated industry so that's why we took the decision.

We see that we have and you see that we have already some of our global brand Adecco, Modis, Lee Hecht Harrison, General Assembly and some, but we have also some very, what we call local euro brands, which are very good business and we continue to invest in their growth. And we see also that some of the local euro brands have the potential to be geographically expanded in keeping with our strategy. So again portfolio management is a continuous process and objective is to create more value for our shareholders in this case for Soliant by selling to a better owner.

Hans Pluijgers

Okay, thanks. Thank you, Alain.

Operator

The next question comes from Alain Oberhuber, MainFirst. Please go ahead.

Alain-Sebastian Oberhuber

Good morning. Alain-Sebastian Oberhuber, MainFirst. I have also three questions. First, could you elaborate a little bit more on Germany, obviously the introduction of the new regulatory in last year is now going through. But what could we expect you’re cautious for Q4, but could we expect H1 next year improvement in Germany. The second question is regarding North America and this particularly in professional staffing business. Obviously, it looks like that IT is still negative for you, you lost some market share, but also now in finance simply it's down and when do you think you have reached the bottom that we could see an improvement in particular again in IT. And the last question I have, regarding the restructuring costs of this year. Could you guide us how much we could expect for the last quarter and then obviously the rest will be in 2020? Thank you.

Alain Dehaze

Okay I will start with Germany and yes you are right Alain, the new regulation regarding this [indiscernible] its first year anniversary. What we see is that in the way we operate this situation as normalized at the very beginning we had a lot of negative impact, because we had a lot of people beyond the maximum term. So we had to handle [indiscernible], but now I would say it's almost business as usual regarding managing the duration of the contract of the temporary staffing. What you have seen also in Q3 is we should not celebrate [indiscernible] but you see that we have improved the profitability that the topline is in line with the peer group.

And we continue to, let's say to puts operation excellence at work with the first results. When you look also at auto, there was yesterday the launching of the new fully electrified car from Volkswagen. We expect also there a kind of slow stabilization because new models will start to rollout of the manufacturing chain. The bottleneck in the carrying emission control institute is also starting slowly to be regulated and to be a normalized. So that's how we look at Germany.

Hans Ploos van Amstel

On North America I think the key driver – is the IT business because we were a little down legal because we will anniversary sizing on some big contracts last year. So we had some big wins and finance is positive. So I think between the two it's not really the driver the IT is the driver as we discussed in previous calls. What we're doing on the Modis U.S. business I think is quite transformative because of the changes we're making and we're making good traction and the changes, so that we see gradual improvements to come. We now built the offshore capabilities in India.

So that's open and is starting to feel the positions. We started the Modis Academy and the retail business under the new leadership while it's still small is starting to grow. On the restructuring we said that we would spend 200 million in total. Over the period 2018, 2019, 2020 we have spent a small 100 million of that already. And Germany has been a relevant part of that that means we still have homework left of that 200 million. And we will announce quarter-by-quarter because these things are sensitive because of legislation and their planning for us and also with because it impacts employees but we are staying within the total amount we always communicated.

Alain-Sebastian Oberhuber

Thank a lot.

Operator

The next question comes from Tom Sykes from Deutsche Bank. Please go ahead.

Tom Sykes

Yes, good morning, everybody.

Alain Dehaze

Good morning Tom.

Tom Sykes

First question please, is on your gross profit split given the changes in subsidies, the fact you put the apprentices in the temp gross margin, et cetera. How much of the gross profit is coming from industrial now. In this quarter it's 52% of revenues, but presumably that's lower gross margin so just ballpark, whether you could say what proportion is coming from – gross profit is coming from industrial I am presuming that's lower gross margin.

Then also just on your variable pricing, are you able to push up prices in industrial when the volumes are down and if not, then where are the prices being pushed out. And obviously, you referenced Germany there on the legislation that maybe a special case but if you could sort of say where the value-based pricing is actually having a positive effect. And are you able to do anything in Industrial.

And finally just on the front-office systems in the new IT systems that you're rolling out, could you maybe just clarify again how much of that is proprietary systems that is yours - excuse me and how much off the shelf systems that you tailored your own specifications please?

Alain Dehaze

Okay I will start with the last two, the front office and the variable pricing. On the front, the new so called integrated front office, we stick to our IT strategy we announced I think in 2016. It means that we focus on cloud-based off the shelf standard system, but that we in a certain sense package or develop to our own needs. If I take the example of the so called integrated front office, why do we speak about an integrated front office, because it is integrating two software.

One which is a Customer Relationship Management and the other one which is the candidate relationship management and we have, let's say coupled the two system in an integrated front office, but both of them are stand out of the shelf cloud-based. On the variable pricing, I think there are different elements, because it depends, according to the segments, you are in not only is it industrial service I don't know hospitality, food and so on and so on. But are you active in a small customer, medium customer, large customer, international customers and so on.

I must say the variable pricing is – and dynamic pricing is mainly has mainly its impact on the small and medium impact, because that's where you can really manage and leverage the data and the knowledge of the data. And that's where, including by the way in Germany, we have made a good progress. And then for your large and international customers, it's all about negotiation and also internal discipline, because all this large and international contracts are driven by tender negotiation and so on and not really by let's say by spot - on the spot pricing.

But there also we are – and we continue to be very disciplined. We are not afraid to turn down some tender if the pricing we request is not accepted. So we are quite focused on this.

Tom Sykes

Okay, thank you. Would it be fair to say that your SME profitability is excuse me, across the Group, is running at peak levels now, I mean after you did pricing improvements. I mean it's obviously difficult to tell vis-à-vis kind of couple of years ago, but is what is your SME, is that SKU between SME and say large account is that a bit bigger then it has been before now because of growth in SME and pricing, is that fair to say?

Alain Dehaze

I think there is still opportunity there because I think we are still early in our GrowTogether program and we'll bring also a lot of technology there. And that is still a very fragmented market and two technology also in that segment you can fill the order fast with a better candidate. So the technology there will help us going forward. On the gross margin I tried to answer your first question, but it's not as easy as it looks on the surface. If you look – blue collar is in home sites that for sure the gross margin is lower, but also the cost to serve.

But it's not that the cost to markets that call it industrial type of labor versus call it office labor has a different margin structure. Because in many countries for unqualified labor the social security and some of the subsidiary are also a little better, so it's not by definition that blue collar has a lower gross margin than office that something – the onsite solution yes, but outside the onsite solution because of – and this is different market-by-market.

On your pricing I think the pricing is linked to the value we deliver. So making sure we deliver for the customers and the value we create for sure we're in a very competitive business model. But you should never forget the total cost for our customer is our net sales and we make around the five margin on that, because they would also [indiscernible] if you pay 105, 106 and you get the best candidate and the onsite solutions are working that place you should not forget this is a people business.

So the value we add and linking that to the pricing we command to get not just the pricing discussion is a key part of that value-based pricing and is very important not only in the market of today, but more than the market of tomorrow.

Alain Dehaze

I'm looking at the time and we will pitch in the last question.

Operator

And thank you very much.

Alain Dehaze

You are welcome Tom.

Operator

The next question comes from Kean Marden from Jefferies. Please go ahead.

Kean Marden

Thanks guys for [indiscernible] my line dropped out about 10 minutes ago, so it's appreciated. A few quick questions on the career transition business growth, is that growing in the U.S., France or both. Then secondly coming back to the Soliant capital gains, it might be helpful if you could possibly share with us the book value of the assets in your accounts as of December 2018, and we can make our own assumptions around that. And then finally, just a quick modeling question, there is a nine percentage point gap between the organic and the reported growth rate in Japan for Q3. Forgive me, I didn't see the FX was quite that substantial, so is there a small bolt-on acquisition in that? Thanks.

Hans Ploos van Amstel

Okay. I will start with LHH, the growth of LHH is for sure coming from the U.S., we are growing everywhere, but in the U.S. not really France at this stage. And what we see that also interesting to note is that the growth is very linked to transformation program of customers and by the way, you see that in the media, many industries many companies are in transformation and we are participating to this transformation with LHH.

Alain Dehaze

Yeah, on Soliant we will give you the full numbers in Q4, because I would prefer that we give you the precise numbers, because we're also looking at how we maximize their transaction, which is linked how you allocate some of the assets. So to give you a number, but it's still wouldn’t give you the answer. On Japan it is related to the trading day’s impact and the FX and I can come back with Nick to give you some more specifics after the call. The size [indiscernible] it is not a global acquisition.

Kean Marden

Okay, thank you.

Alain Dehaze

You are welcome.

Nicholas de la Grense

Thank you everyone for joining the call today and for your questions. Looking forward to meeting some of you on the road show and otherwise, we look forward to speaking to you again with the Q4 results on 26th of February next year. Thank you.

Operator

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