Adecco improves gross margin despite weakening markets

Dieter Scheiff, CEO of the Adecco Group said: "The industry was confronted with an exceptionally challenging business environment, particularly during the fourth quarter. Nevertheless, we have remained price disciplined and raised the gross margin on an underlying basis by 30 bps to 18.1% in 2008. We have also acted quickly to reduce our cost base, and accelerated headcount reductions throughout the year. These actions together resulted in a good underlying EBITA margin of 4.2%, only down 20 bps compared to the prior year. Operating cash flow remains strong at over EUR 1 billion on par with last year."

FY 2008 FINANCIAL PERFORMANCE

Revenues Group revenues for 2008 were EUR 20.0 billion, a decline of 5% compared to the prior year. In constant currencies, revenues were down 3%, while on an organic basis, revenues declined by 5%. Permanent placement revenues were EUR 354 million, a decline of 4% in constant currency compared to 2007.

Gross Profit In 2008, the gross margin was 18.4% compared to 18.6% in 2007. When excluding the impact of the modified calculation of French social charges, the underlying gross margin improved by 30 bps to 18.1% compared to 2007. Acquisitions added 10 bps to the Group's gross margin.

Selling, General and Administrative Expenses (SG&A) SG&A declined by 3% in 2008 compared to the prior year. On an organic and underlying basis, SG&A declined by 2%, while SG&A as a percentage of revenues increased by 50 bps to 13.9%, compared to 2007. At year end 2008 the Adecco Group had over 34,000 FTE employees worldwide, while operating a network of over 6,600 offices. Compared to year end 2007, FTE employees were down 7% on an organic basis, while branches were reduced by 5% organically at year end 2008.

EBITA In 2008, EBITA amounted to EUR 908 million, a decline of 16% on a reported basis and down 11% organically and underlying compared to 2007. Excluding the positive impact of the modified calculation of French social charges in both 2008 and 2007, the EBITA margin was down 20 bps to 4.2% compared to the prior year.

Amortisation and Impairment of Goodwill and Intangible Assets Amortisation increased to EUR 44 million from EUR 27 million last year, mainly due to the acquisition of Tuja, which was consolidated as of August 2007. In addition the company recorded an impairment of EUR 116 million on goodwill and intangible assets in Q4 2008. EUR 58 million relates to an impairment of goodwill of the UK & Ireland operations and EUR 58 million relates to intangible assets mainly for the Tuja brand name.

Operating Income Operating income in 2008 was EUR 748 million, down 29% compared to 2007, impacted by the impairment charges on goodwill and intangible assets. Additionally, the benefit of the modified calculation of French social charges had a significantly higher impact on the operating income in 2007.

Interest Expense and Other Income / (Expenses), net Interest expense was EUR 58 million in the period under review, which compares to EUR 56 million in 2007. Other income / (expenses), net was EUR 19 million compared to EUR 30 million in 2007 mainly due to lower interest income.

Provision for Income Taxes The effective tax rate for 2008 was 30% compared to 28% in 2007. For 2009, the company expects an effective tax rate of approximately 30%.

Net Income and EPS In 2008, net income was down 33% to EUR 495 million (2007: EUR 735 million), corresponding to a net income margin of 2.5%. Basic EPS was EUR 2.82 (EUR 3.97 in 2007).

Balance Sheet, Cash-flow, and Net Debt[5] The Group generated EUR 1,054 million of operating cash flow in 2008 and invested EUR 160 million in various acquisitions. Additionally the Group spent EUR 105 million in capex, paid dividends of EUR 163 million and purchased treasury shares for EUR 279 million. The net debt position declined to EUR 617 million at the end of December 2008 compared to EUR 866 million at the year end of 2007. In 2008 DSO improved 1 day to 57 days compared with 2007.

Currency Impact Currency fluctuations had a negative impact of approximately 2% on revenues and 1% on operating income in 2008, mainly due to the weakness of the US dollar and the British pound, partly compensated by the stronger Japanese yen.

Q4 2008 FINANCIAL PERFORMANCE

Revenues Group revenues in Q4 2008 were down 14% to EUR 4.6 billion compared to Q4 2007. On a constant currency basis and organically, revenues declined by 15%. In the fourth quarter of 2008, permanent placement revenues declined by 24% in constant currency to EUR 70 million.

Gross Profit In Q4 2008, the gross margin was 18.2% (adjusted 18.0%), compared to 17.8% reported in the same period last year. The gross margin in the temporary staffing business was 10 bps lower in Q4 2008 compared to Q4 2007. The decline of the permanent placement business had a negative impact on gross margin, but was more than compensated by the growing contribution of the outplacement business.

Selling, General and Administrative Expenses (SG&A) SG&A in Q4 2008 was up 3% compared to the same period last year. Organically and adjusted SG&A declined by 6%. As a percentage of revenues, adjusted SG&A increased by 140 bps to 14.4% compared to Q4 2007. FTE employees, on an organic basis, declined by 6% (-2,300) when comparing to the same quarter last year, while the branch network was reduced by 3% (-240 branches). The impact of the restructuring costs affecting the quarter under review, will be evident in an even more pronounced reduction of FTE employees in H1 2009.

EBITA In the period under review, EBITA was EUR 123 million, a decrease of 52% or 37% organically and adjusted. The resulting adjusted EBITA margin was 3.6% in Q4 2008. This compares to an EBITA margin of 4.8% in the prior year.

Amortisation and Impairment of Goodwill and Intangible Assets Amortisation in Q4 2008 was EUR 12 million compared to EUR 11 million in the same quarter last year. In Q4 2008, the company recorded an impairment charge on certain goodwill and intangible assets of EUR 116 million. EUR 58 million relates to an impairment of goodwill of the UK & Ireland operations and EUR 58 million relates to intangible assets mainly for the Tuja brand name.

Operating Income Primarily as a result of the impairment charges to goodwill and intangible assets of EUR 116 million, the company recorded an operating loss of EUR 5 million in Q4 2008. This compares to an operating income of EUR 246 million in the same quarter last year.

Interest Expense and Other Income / (Expenses), net The interest expense amounted to EUR 13 million in the period under review, EUR 2 million less than in Q4 2007. For the full year 2009, the interest expense is expected to amount to approximately EUR 40 million. Other income / (expenses), net was EUR 8 million in Q4 2008 compared to EUR 7 million in the fourth quarter of 2007.

Net Income and EPS Primarily due to the impairment charges, the company posted a net loss in the fourth quarter of 2008 of EUR 22 million which compares to a net income of EUR 150 million in the prior year. The basic loss per share was EUR 0.12 (EUR 0.81 basic EPS per share in Q4 2007).

Currency Impact In Q4 2008, currency fluctuations had a positive impact of approximately 1% on revenues and 0% on operating income.

GEOGRAPHICAL PERFORMANCE

(The pie charts are visable in the PDF version of the report)

Compared to Q4 2007, revenues in France declined by 17% to EUR 1.4 billion in Q4 2008. Adecco remained price disciplined and focused on adapting costs to trading conditions. EBITA, declined by 70% to EUR 22 million compared to Q4 2007. When adjusting for the French social charges benefit, the legal provision associated with the French antitrust procedure and costs linked to headcount reductions and branch optimization, the EBITA margin declined by 70 bps to 3.4%, compared to 4.1% a year ago.

In the USA & Canada, Adecco's revenues declined by 16% in constant currency to EUR 678 million in Q4 2008. Organically, revenues were down 15%. In the Office and Industrial businesses, the decline in revenues was most pronounced, while revenues in Human Capital Solutions continued to grow strongly. EBITA declined by 36% in constant currency, while the EBITA margin was lower by 120 bps to 3.8%. Investments to structurally improve customer mix and efficiency amounted to EUR 3 million in the quarter.

In Japan, fourth quarter revenues declined by 6% in constant currency to EUR 414 million. Excellent cost management resulted in an EBITA margin of 7.1%, down 10 bps compared to the prior year.

In Germany, revenues were down 13%, to EUR 342 million in the period under review. EBITA, in Germany, declined by 39% compared to Q4 2007, corresponding to an EBITA margin of 6.5% (Q4 2007: 9.2%). The decline in the profitability is a combination of a lower utilisation and negative operating leverage.

In the UK & Ireland, revenues in Q4 2008 declined by 19% in constant currency. At the EBITA level the region reported a loss of EUR 8 million. The unsatisfactory results are partly caused by weak permanent placement business.

In Italy, revenues declined by 25% in Q4 2008, and in the Benelux by 6% (-9% organically). In the Nordics, revenues were down by 19% in constant currency, while in Iberia revenues declined by 30%.

Emerging Markets revenues continued to show healthy growth of 12% in constant currency and 11% organically, mainly driven by Latin & Central America. The corresponding EBITA margin was 4.0% in the period under review.

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