Ladies and gentlemen, welcome to the Q3 Results 2019 analyst call and live webcast. I am Sandra, the Chorus Call operator. I would like to remind you that all participants will be in listen-only mode, and the conference is being recorded. The presentation will be followed by a Q&A session. You can register for questions at any time by pressing Star and One on your telephone. For operator assistance, please press Star and Zero. The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Nicholas de la Grense, Head of Investor Relations. Please go ahead, sir.
Good morning, welcome to the Adecco Group's Q3 2019 results conference call. As usual, today I am 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 two. 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 open the lines for Q&A. With that, I hand over to Alain.
Thank you, Nick, 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 capital allocation, regularly evaluating whether we are the best owner 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 have entered into an agreement to sell our U.S. healthcare staffing business, Soliant, for around EUR 550 million, which is approximately 11.5 times 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 brands that can be deployed globally and where we can create superior 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 remains 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 continued to drive gross margin improvement, with gross profits 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. EBITDA 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 the continued transformation investments. On transform, we made excellent progress with the Grow Together program, which helped deliver another good productivity performance in the third quarter. We are confident that we will deliver the EUR 250 million productivity target in 2020, driving structural improvement in the margin and the customer value proposition. We also confirmed that the service excellence pillar of Grow Together 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. 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. You can really see the Perform, Transform, Innovate strategy is delivering a solid performance in Q3. I will hand over to Hans to take you through the financial performance in more detail.
Thanks, Alain. Let's start with 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 slower economic growth in most regions. Despite the easier comparison base, an improvement in Europe did not materialize. Europe was minus 6%, down one percentage point from previous quarter, which was driven by France and the U.K. The other European countries are starting to stabilize, the overall trend remains 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 remains strong, in the rest of world, we had lower growth in Australia. Looking at the country revenue results in more detail on slide nine. France growth slowed versus the second quarter as the market slowed.
We're 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 U.K. general staffing, revenues were down 5%. The U.K. is very much Brexit related. In North America, the decline is driven by the market slowdown, and in particular, by a high exposure towards the manufacturing sector. In North America and U.K. professional staffing, the trend was in line with the previous quarter. Our IT and legal businesses remain under pressure. We have talked about what we're doing there to improve the performance in previous calls. We're 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 U.K., we saw a slight decline, modestly outperforming the market. Again, the Brexit uncertainty is not helping the U.K. 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 Modis VSN business, growing double digits. Iberia at +6% also had a strong quarter, outperforming the market.
In the rest of 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 point impact. The growth in career transition added another 10 basis points in gross margin. Let's now look 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're taking the appropriate measures to correct this. In Q3, we had less benefits from Grow Together, with the benefits being more skewed to the first half of 2019, as we have mentioned in previous calls. We're 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 recover some of that margin in Q4 with the actions taken. In North America and U.K. 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, confirming that our actions are paying off.
The measures that we took to streamline the organization helped 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're 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 13. We broadly reduced the headcount with the 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, up 3% organically.
This is driven primarily by higher IT investments, wage rates inflation, and some discrete 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 one day at 53 days. Net debt to EBITDA is 1.1 times, 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 trend to Q3. Grow Together is delivering the incremental €70 million benefits for 2019. We are on track to deliver the total EUR 250 million Grow Together target for 2020, meaning that we are delivering on our commitments. With this, I hand back to Alain for the update on the transformation and innovation.
Thank you, Hans. Let's start indeed with transformation and more specifically, our Grow Together program. Grow Together is about strengthening the value proposition to drive sustained, profitable growth. It's 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 Grow Together during the quarter. First pillar, the service excellence one. You will remember that we have put in place a systematic tracking of our Net Promoter Score for our clients and candidates. 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 eight-point NPS increase for our clients and four points for the people we place into the jobs.
NPS is not the outcome 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 re-engineering our work processes. We continue to expand with our PERFORM method across the group, with around now 10,000 colleagues being trained. We continue to get proof points that it reduces inefficiency and provides 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. This is the backbone of accelerated transformation in all 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.
We are on track to deliver on our 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 upskilling and reskilling as an important growth area and differentiator in the human resource solution space. We identified two clear opportunities to generate synergies with Modis and LHH, 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 VSN in Japan. 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 up 50% in Q3. 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 with Grow Together, IT, and our new ventures. 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 Grow Together program with a focus on consultant tools and commercial solutions to deliver greater value to our clients and candidates. We are on track to deliver the EUR 250 million Grow Together target for 2020. With this, I would kindly ask the operator to open the line for the questions.
We will now begin the question and answer session. Anyone who wishes to ask a question may press Star and One on the touch-tone telephone. You will hear a tone to confirm that you have entered the queue. If you wish to remove yourself from the question queue, you may press Star and Two. Participants are requested to use only handsets while asking a question. Anyone who has a question may press Star and One at this time. The first question comes from Paul Sullivan from Barclays. Please go ahead.
Yeah. Morning, everybody. Just a few from me. On the disposal, is the price you've given us today, is that a clean price? Will we get any leakage from tax or anything else like that? Is there any reason why we shouldn't expect the dilution to be offset by share buybacks? I know the board makes the decision, 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. On the digital ventures, the sort of EUR 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. Finally, could you just give us a bit more color on your gross margin and SG&A expectations for the fourth quarter?
Thank you very much.
Maybe shall I start with the divestiture. We're pleased with the price, because I think we got a good price for Soliant. We will be making profit on that, and that will be taxed in the U.S. You will see, in your words, some dilution to that. We're still working on how to structure and optimize that. 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 the ventures, 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. Branch, we will get a benefit of 40 basis points. That splits between the new regulation around 10 and 30, because last year, you call, we had one month of no CCA, that white month. You also have to remember that we had a reversal of accruals last year of around 50 basis points. That is a lot of things, but in the end, come to a net zero. You can add for the perm, LHH and the temp, around 30 bits, I would say in total. I would say three times 10. Remember, the temp gross margin started to improve already in Q4 of last year, I would not be taking what we had this quarter, but three times 10.
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 give you some indication to model your fourth quarter.
On the ventures, not only the digital ventures, but all the ventures, 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. 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, as is at the basis of the Modis Academy we have now launched in the U.S. 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. 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.
Thank you. Just to follow up on 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?
I think 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 Grow Together, and we also continue to invest in growing our ventures. While we do that, we have delivered a very strong conversion ratio 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. The first one we confirm is we're putting the actions in place this quarter and next quarter to deliver the EUR 250 million Grow Together benefits. I end, and then I come to 2020, that we have a very strong margin, but I also call it an opportunity-rich margin. Why do I say that?
We are delivering a very strong margin into the quarter with all these investments in. Our objective for 2020 is to structurally improve the profitability and Grow Together, we are very confident with what we're doing. We're 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, how much we invest for the growth. The good news is the growth, you saw that on the General Assembly, is reducing the losses. We're opening in all the markets. That trade-off we will make.
We'll probably give you a little bit more color on that when we ended the year. 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. Our goal is to structurally improve the profitability next year.
Thank you, Paul.
Very much.
The next question comes from Anvesh Agrawal from Morgan Stanley. Please go ahead.
Hi, good morning. I got a few questions. The first just on the working capital. Given where the growth is, we would have hoped for a net positive influence on the working capital, but it was dragged down the payables. Maybe if you can just clarify, is it just a timing issue, and should we expect some reversal come Q4, assuming the growth remained in, -4% kind of a range? 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 U.K., and any sort of early discussion that would mean some sort of negative impact going forward. Thank you.
I'll start with the working capital. I think we had a strong cash, if you look at the DSO. The DSO was down, you would indeed, with the revenue we have seen, normally see a little bit higher cash conversion. There are two things which were in the quarter. One, the way the CCA changed in France is having still year to date a negative impact, and some of that will come in Q4. If you correct for that, we're running at 90. The 83 becomes a 90. Then like you have spotted very well is that the payables, the timing of some of the social securities pulled a little unfortunate into the quarter, but over the year washes through. We're running well above that 90 if you adjust for CCA and some timings of payments, which confirms strong DSO and cash management.
On the automotive, it is clear that when we look at this quarter, automotive is weak almost everywhere. According to what we see beginning to stabilize against easier comparables. If you look at our top line this quarter, overall, autos explain 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, car sharing, and so on, as well as the trade war and the threat of the U.S. tariffs. This is on auto, but also in manufacturing. In general, we have seen a soft environment, which slows 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. As a conclusion, the slowdown is quite broad-based.
Sure, auto and manufacturing were the most impacted.
Yeah, maybe just to follow up, can you just give us what your overall manufacturing exposure in Europe is? Just on the earlier question on APAC, when you said organically down 1%, is that sequential or year-on-year? Thank you.
Our total exposure to manufacturing is around 20%-25% in the group, and that includes the automotive sector.
Okay.
I said it's year-over-year.
Okay. That's clear. Thank you.
You're welcome.
The next question comes from Bilal Aziz from UBS. Please go ahead.
Good morning, everyone. Just a few from my side, please. Can you please identify if there was a working day benefit in the temp gross margin, and if so, how much it was? Separately, I guess more on the underlying trends in the temp margin. You've had four consecutive quarters of an improvement on that side. I guess, as the weakening top line trends continue, are you seeing any signs of price aggression from some of your competitors? 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 investment going into that business, or do you expect to be profitable? Thank you.
Let me start with the gross margin. It only has a benefit in terms of change in bank holidays, not in working days. There's no meaningful impact on the gross margins from the working days into the quarter.
Regarding your questions 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. I would say that's also no real impact from holidays in the third quarter. That's in a nutshell.
I lost your other question because we answered the first one. I apologize.
No worries. It was just on pricing and how you think that it is sustaining in the current demand environment.
Yes. I think we're pleased to report that on the pricing, that we're becoming, I would say, more sophisticated on the price discipline. We're also adding better value services to the customer. I think our Grow Together initiative and our Net Promoters activation is playing into that, so that if we bring a better candidate faster to our client, that improves the pricing, but also on the value solutions we are providing is that we are working on the pricing. In some markets like Germany, we're happy that the new regulation, which is adding some cost, is also being passed on into pricing. 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.
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 a small positive area. We should see that as a positive development from the value we create. We're pleased with that.
Okay. Thank you, Bilal.
The next question comes from Matthew Lloyd from HSBC. Please go ahead.
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 a spreadsheet answer, 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? Does it mean something that you can hold the sorts of margins that you're at in a more growthy period? That's the sort of first question. I suppose I'm thinking about sort of SG&A per person or per consultant, I suppose.
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. You've done it in Japan. There's FDM in the U.K. I just wondered if you've got a sort of size of that market or its potential.
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 reskill and upskill 370 million, so 370 million workers by 2030, which is approximately 14% of the global workforce. This is 1 type of, let's say, I would say 1 type of activity is the reskilling of existing staff in companies. Besides this, you have the 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. The model we are doing at VSN, we know that there is a huge scarcity of such a profile, but I don't have a precise idea of figures.
I know, for example, that Europe is missing around 600,000 IT people because not trained. We are participating now to that kind of new markets.
Great. Thank you.
Your Grow Together question. It helps on the downside because you have a better productivity. 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 salespeople to go much targeted to the right clients. The whole digitalization of the administrative process means that if you grow the business, that gets more automated. We were quite a linear business model.
With that, we become a more scalable business model on the growth, and the PERFORM method will help to do that. Growing the business, you will be more productive going forward. That's the structural change.
It's a dangerous question, so I fully expect you to avoid it. 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? Are you going to avoid that question?
No, I won't, because we measure that, because otherwise we wouldn't come to our Grow Together. First, PERFORM alone will, 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 control our EUR 250 million. We know initiative by initiative, market by market. We do time studies, like manufacturing. 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. These things don't go overnight. This will be a structural improvement in the productivity, and we measure that project by project, initiative by initiative.
That's very important because we're scaling now certain parts of Grow Together from one market to the other, we can also then tell the market what benefit we expect to be delivered when we bring the technology.
Great. Thank you very much.
You're welcome, Matthew.
The next question comes from Hans Pluijgers from Kepler Cheuvreux. Please go ahead.
Yes, good morning, gentlemen. A few questions from my side. First of all, on France. Slow down in your top line. Could you maybe give some indication what's happening, let's say, by segment in France? Are there any specific segments in France that really you see slowing down faster than the others? 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 than initially thought, despite the fact that maybe the sales decline is slightly more than maybe a little bit expected at the beginning of the quarter? On Soliant, more, let's say, conceptual for the longer term. First of all, how much was the business growing under your Adecco operations?
Secondly, is it something that you would expect more going forward, that businesses which are more, let's say, focused on certain countries and which are not that global, you would maybe look for divestment? Is this something you could more expect on? Lastly, on the whole Grow Together productivity savings you're just mentioning. Yeah, it's quite significant improvement in productivity you're seeing, but is it not also a part, let's say, to offset the longer term pricing pressure you see in the general staffing market? Or do you really expect that the productivity could benefit your bottom line in the long term when growth picks up again?
Okay. I will start with France. When we look at the top line of France, we see that there are two key drivers of the relative growth gap. The first one is that the comparable base, last year we had quite a strong third quarter. We were growing 6% faster than the competition. When you look at the two quarters today, I think it explains also why we had a kind of slowdown. Second, the business mix. We do around 90% of our revenues in temporary staffing in France, we have a smaller weighting in professional staffing, which, 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.
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 value-adding services, such as the contract of indefinite duration for temporary staffing, apprenticeship, and so on. Grow Together. Grow Together is one of the country at the forefront of the program. We had very good results supported by the PERFORM methodology, our productivity improved by 6%, and gross profit per FTE. We continue to lead the profitability field while we are doing, at the same time, significant investment in the digital transformation.
We expect this gap to market to narrow as the comparison base will become easier.
Yes. Let me start with Soliant and then come to the SG&A, because there's a link with Grow Together. Soliant was growing mid-high single digits. 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 headcount, 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 not 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 Grow Together next year. This puts us on track to do that.
You have to recognize that's also versus the guidance. We had a little bit of higher gross margin, and some of the mix in the gross margin is margin accretive, but it's not one-on-one dropping to the bottom line. LHH and the Perm business are examples of that. If you have higher gross margin, there's also a little bit SG&A, but again, margin accretive. If you add it all up with the conversion ratio in the quarter of 25%, which is very strong, while we put 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. As I said, and that brings me to next year on Grow Together, this is why I call it an opportunity-rich, strong margin.
We are making the investments, and we will, on Grow Together, come through on our productivity targets in 2020.
To finish your question, Alain, regarding portfolio and the decision we are taking on sometimes to divest activities, I would like to answer it in a broader context. We actively, and you have seen that during the last two years, we actively manage our portfolio to ensure optimal capital allocation. We are looking for investing in brands 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 propose to our customers and candidates unique service offerings. The example of GA and Modis for Modis Academies is one. The other example is GA with LHH is another one. That's why for Soliant, there was very limited synergies with the other brands and also, no real, let's say, rationale behind expanding this brand internationally.
No real global international customer, very locally regulated industry. That's why we took the decision. We see that we have, and you see that we have already some of our global brands, Adecco, Modis, LHH, Carison, General Assembly, and some. We have also some very, what we call local hero brands, which are very good business, and we continue to invest in their growth. We see also that some of the local hero brands have the potential to be geographically expanded in keeping with our strategy. Again, portfolio management is a continuous process, and objective is to create more value for our shareholders by, in this case, for Soliant, by selling to a better owner.
Okay, thanks.
Thank you, Alain.
The next question comes from Alain Oberholzer, MainFirst. Please go ahead.
Good morning, Alain, Hans, and Nick. Alain Oberholzer, 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. What could we expect? You are cautious for Q4, but could we expect H1 next year an improvement in Germany? The second question is regarding North America, and specifically in the professional staffing business. Obviously, it looks like that IT is still negative for you. You lost some market share, also now in finance and legal, it's down. When do you think you have reached the bottom that we could see an improvement, in particular, again in IT? 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?
Obviously the rest will be in 2020. Thank you.
Okay, I will start with Germany. Yes, you are right, Alain. The new regulation regarding this Arbeitnehmerüberlassungsgesetz has now its first year anniversary. What we see is that, in the way we operate, the situation has normalized. At the very beginning, we had a lot of negative impact because we had a lot of people beyond the maximum term. We had to handle this and so on. 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 the results and so on, but you see that we have improved the profitability, that the top line is in line with the peer group. We continue to, let's say to put 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 roll out of the manufacturing chain. The bottleneck in the car emission control institute is also starting slowly to be regulated and to be normalized. That's how we look at Germany.
On North America, I think the key driver is the IT business, because we were down on legal, because we were anniversarying on some big contracts last year, so we had some big wins, and finance is positive. 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. We're making good traction on 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 fill 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 EUR 200 million in total over the period, 2018, 2019, 2020. We have spent EUR 100 million of that already, Germany has been a relevant part of that. That means we still have EUR 100 left of that EUR 200 million, We will announce quarter by quarter because these things are sensitive because of legislation and there's planning for it and also because it impacts employees. We are staying within the total amount we always communicated.
Thank you.
Thank you very much.
The next question comes from Tom Sykes from Deutsche Bank. Please go ahead.
Yeah. Morning, everybody.
Morning, Tom.
First question, please, is on your gross profit split. Given the changes in subsidies, the fact you put the apprentices and the temp gross margin, et cetera, how much of the gross profit is coming from industrial now? Because in this quarter it's 52% of revenues, but presumably that's lower gross margin. Just to ballpark whether you could say what proportion of gross profit is coming from industrial. Presumably, that's lower gross margin. Also just on your variable pricing, are you able to push up prices in industrial when the volumes are down? If not, then where are the prices being pushed up? Obviously you referenced Germany there on the legislation that may be 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?
Finally, just on the front office systems and the new IT systems that you're rolling out, could you maybe just clarify again how much of that is proprietary systems that are yours, excuse me, and how much are off-the-shelf systems that you've tailored to your own specifications, please?
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 customer relationship management and the other one which is the candidate relationship management. We have, let's say, coupled the two system in an integrated front office, but both of them are standard off-the-shelf cloud-based. On the variable pricing, I think there are different elements because it depends according to the segment 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 and dynamic pricing has mainly its impact on the small and the medium impact because that's where you can really manage-
Yeah
Leverage the data and the knowledge of the data. That's where, including by the way in Germany, we have made good progress. For your large and international customers, it's all about negotiation, and also internal discipline because all these large and international contracts are driven by a tender negotiation, Tom, not really by, let's say, on the spot pricing. 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. We are quite focused on this.
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? After the pricing improvements, it's obviously difficult to tell vis-a-vis a couple of years ago, but is that skew between SME and say large accounts, is that a bit bigger than it has been before now because of growth in SME and pricing? Is that fair to say?
I think there is still opportunity there because there, I think we are still early in our Grow Together program. We're bringing on some more technology there. That is still a very fragmented market. Through technology also in that segment, you can fill the order faster with a better candidate. The technology there will help us going forward. On the gross margin, I try to answer your first question. It's not as easy as it looks on the surface. If you look, blue collar is in on-site staff for sure, the gross margin is lower. Also the cost to serve. It's not that across the markets that call it industrial type of labor versus call it office labor, has a different margin structure. In many countries for unqualified labor, the Social Security and some of the subsidies are also a little better.
It's not by definition that blue collar has a lower gross margin than office. That's something, the on-site solution, yes, but outside the on-site solution because of, and this is different market by market. On your pricing, I think the pricing is linked to the value we deliver, 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 customers is our net sales. We make around a five margin on that because they would also have those recruiting. If you pay 105 or 106 and you get the best candidate and the on-site solutions are working, that place, you should not forget this is a people business.
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 in the market of tomorrow.
I'm looking at the time, and we will pick the last question.
Thank you very much.
You are welcome, Tom.
The next question comes from Kean Marden from Jefferies. Please go ahead.
Thanks, guys, for putting me on. My line dropped out about 10 minutes ago. It's appreciated. A few quick questions. On the career transition business growth, is that growing in the U.S., France, or both? Secondly, coming back to the Soliant capital gains. It might be helpful if you could possibly share with us the book value of that asset in your accounts, as of December 2018. We can make our own assumptions around that. Finally, just a quick modeling question. There's a nine percentage point gap between the organic and the reported growth rate in Japan for Q3. Forgive me, I didn't think the FX was quite that substantial. Is there a small bolt-on acquisition in there? Thanks.
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.
Okay. Thank you.
What we see that's also interesting to note, is that the growth is very linked to transformation program of customers. By the way, you see that in the media. Many industries, many companies are in transformation, and we are participating to the transformation with LHH.
Yeah. On Soliant, we will give you the full numbers in Q4 because I prefer that we give you the precise numbers because we're also looking at how we optimize that transaction, which is linked how you allocate some of the assets. Could give you a number, but it still wouldn't give you the answer. On Japan, it is related to the trading days impact and the FX. I can come back with Nick to give you some more specifics after the call. The precise impact on the trading days. That is not a global acquisition.
Okay. Thank you.
You are welcome.
Thank you everyone for joining the call today and for your questions. Looking forward to meeting some of you on the roadshow. Otherwise, we look forward to speaking to you again with the Q4 results on the 26th of February next year. Thank you.
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