Adecco Conference Call Notes – AKKA Takeover – Merger with Modis – Value Accretive – Automotive Sector Coming Back – Execution Risk – Underlying Long Cycle Business – Wage Inflation

The following Adecco CEO and CFO comments were taken from the conf call response to a Barcalys analyst.

Value Accretive – Detailed Due Diligence

I would like to say first that the acquisition of AKKA is exactly the profile of acquisition we were looking for and that we have acquired or we will be acquiring this asset at a price that is really materially value accretive. And you have heard the figures from Coram. 
Now coming to your questions. Definitely we have we have done homework with very detailed due diligence, not only a financial, legal but also commercial due diligence, so true analysis. And by the way we have started immediately in the due diligence, the integration process because we are convinced that the most successful integration are the ones that are starting long before, I would say, the closing and deciding and that's exactly what we have done with already a team framework of governance regarding this integration. Now we have seen also through the due diligence that the two companies are very complementary on the geographical scope with strong presence in europe, for AKKA strong presence in automotive and aerospace and engineering especially engineering and automotive, and Modis strong presence in the USA, strong presence in Japan, in Australia and APAC less present in europe and strong capabilities in IT. 

Smart Industry – Convergence of Engineering into Integrated Solution

And as I was mentioning in the presentation, the smart industry is about the convergence of IT engineering into integrated solutions. So combining both territories and capabilities makes us really a very strong asset and as I said we will have the 50,000 engineers and digital experts and we will become the number two in this market, smart industry which is growing fast. 

Execution Risk – Integration Risk

CEO: Again on the execution risk before I leave, the source of current for some elaboration. Execution risk is about really plunged structuring, preparing and anticipating the integration and I must say the work has started from today. We have six months to wait, probably 3-6 months to wait, before we can start really to implement all the actions we have planned. But we are starting today to make sure that we deliver best in class integration.

CFO: And I'll say a word or two in addition on that second point and then pick up on this piece around long cycle and de risking. We've obviously as Alan said, done a lot of diligence on this and we think the intrinsic value of the company is not reflected in the share price. You're right, there has been restructuring, I think that has been in response to exceptional circumstances that they faced during the crisis and there's also relatively high leverage. Clearly when you go beneath that and we look at our plans, we look at the synergies, at the way in which we plan to integrate the businesses, then actually in financial terms, this is very strong. It gives us access to structural growth, its margin enhancing from year one, its EPS enhancing mid to high single digits in year one, double digits, year two and EVA  acreative in year three. So you know, we think this is as we've explained strategic operationally and financially strong.

Underlying Long Cycle Business

CFO: On the question of long cycle and the de risking. I think you have to say that 2020 was an exceptional confluence of events particularly in aerospace, it is highly, highly unlikely that that would occur again. And the underlying nature of the business is long cycle. It's about long term project customers investing in R&D, particularly as they undertake the kind of transformation that they're currently undertaking in the automotive space, but also will have to do in the same way in the aerospace space. And that makes it resilient. And that is what we've seen in our Modis business. And we believe through a more conventional type of recession, that's exactly what you'd see in this business as well. 

CEO: And to close this question on the deal, I would say that not only the Adecco group sees a great opportunity in this combination, but also the two founders of this company, the two Ricci Brothers have really put skin in the game. You have seen that part of the proceeds will be in shares. So they are convinced that this will create value and not only convinced, but they will also support us to realize this value, both in the role. The one as the chairman of the customer advisory board and the other one has the special adviser to myself to make sure that this integration is a great success. 

Turning Cars into Connected Smart Vehicles

CFO: I think there might also be a sub question, Paul, about the automotive sector within your questions. I think what's clear there is that sector is coming back. We've actually seen it in our own Adecco numbers where it is up strongly, there are short term production and supply chain challenges around chips, but the underlying demand is coming back. And I think as we talked about in the presentation, the key point about this sector is the level of transformation that it is having to undergo itself, particularly in the type of products that it produces. And that's exactly the opportunity that we see for the combined AKKA and Modis business. It's about turning cars into connected smart vehicles and that is exactly where the expertise of this business sits. It's what drives our confidence in the 6-8% growth in the sector. And it's why we think that our own growth will be at the top end of our previous guidance.

Audio source of quotes above

The following comments were in response to questions from an HSBC analyst.

Wage Inflation – Scarcity of Talent but also due to Government Support Schemes

First we see some wage inflation not everywhere, but in specific territories and especially for example in the US and we see this wage inflation in territories where you have two components, you have a strong economic recovery, strong economic rebound and you have still at work the governmental subsidy schemes which prevent some part of the labor force to go back into the workforce. And and my comment was to say yes, I think that there is today this wage inflation because you have tension, you have scarcity of talent but also induced by by the governmental support scheme. But we expect this support scheme to go down and and this will will put more and more people back into the workforce and will release this pressure on the wages.
I would say today we see a little bit of pressure everywhere. I think there will be some wage inflation but it will remain mid term limited and for sure that there is more pressure on the highly skilled people than on the blue color even if you have different dynamics, especially what we see in the permanent recruitment. The fact for example that in the new way of work people can work remote and especially skilled and highly skilled people can work remote. It is disrupting the market because then people can decide not to live anymore in high costly cities but remote and a cheaper way so that they can accept, let's say to be perhaps a little bit pay less but having a better quality of life and especially a lower cost structure so that at the end they think that it's a winning formula.

Audio source of quotes above

Combined AKKA Modis Entity

CFO: We do expect in the short term that it [ combined AKKA Modis entity] will grow towards the top end of our 3 to 6% range. And you're absolutely right: That is slightly lower than the overall growth rate for E. R&D of 6 to 8%. I think that's because you have to think of it in terms of a couple of key sectors and there is a slide in the deck which gives you a sense of what we're expecting for the major sectors, but for example automotive would be 6-8%. As I mentioned that business is coming back strong. Demand for the kind of services that AKKA provides, particularly in the automotive industry, goes through its own transformation on the product side. We expect the smart industry piece to grow substantially. I think we've mentioned High Teens 18%.
CFO: But the reason why the upper end of 3-6 is slightly lower than 6-8 is because of aerospace and in the short term, we're being cautious in this sector and we are not expecting any major growth there for the next couple of years. Because clearly what has happened in that sector recently has been pretty unprecedented. The key point here though is that that is short to medium term because that is a sector where demand for travel, demand for aircraft will come back and there is a real need to adapt the technology and change the nature of the product, particularly to focus on sustainability. Both Boeing and Airbus have committed to sustainable engines and sustainable aircraft in the near future, and that will drive demand for the services longer term. So we're being cautious in the short term, assuming it will be flat, but we do think it will be a driver of growth later on.

Audio source of quotes above

Using Python to transcribe Conf Calls, Webcasts

The above audio was uploaded to an S3 Amazon Bucket, then was fed via a Python script to Amazon Transcribe service which resulted in a raw transcript. That raw transcript was then used for the quotes above. By default Amazon Transcribe does not seperate speakers, has difficulty with abbreviations or names like “AKKA”, which will be transcribed as “aka” or “aca”. What is also striking: How many fillers speakers use, e.g. “um”, etc. (which I edited out). Also: The British CFO was somewhat easier to understand for the transcription service, than the French speaking CEO, it seems.

For more on transcription see this article: Link

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