Adecco boosts operating profitability in Q3 2007

November 02, 2007
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Adecco boosts operating profitability in Q3 2007

Q3 HIGHLIGHTS (Q3 07 vs. Q3 06)
  • Revenues of EUR 5.4 billion, up 2% (2% organically[1]) 
  • Reported operating income of EUR 296 million, up 22%
  • Reported net income of EUR 230 million, up 40%
  • Underlying[2] gross margin improvement of 80 bps to 18.0%
  • Underlying[2] operating income margin improvement of 50 bps to 5.1%
  • Up to EUR 400 million share buy back
Q3 2007 KEY FIGURES (reported vs. underlying[2])

In EUR million
Q3 2007
Q3 2007
Q3 underlying[2]
organic growth
Gross profit
Operating income     
Net income
Zurich, Switzerland, November 2, 2007: The Adecco Group, the worldwide leader in Human Resource services, today announced results for the third quarter of 2007. For the third quarter net income increased by 40% to EUR 230 million compared to EUR 164 million a year earlier, positively impacted by EUR 12 million French social charge benefits and EUR 28 million lower income taxes. Revenues were up 2% organically to EUR 5.4 billion compared with EUR 5.3 billion in 2006. Underlying[2] operating income margin improved 50 bps to 5.1%.
Dieter Scheiff, Chief Executive Officer, Adecco Group said: "I'm pleased with the performance of Adecco in the third quarter. We are focused on shareholder value generation through profitable revenue growth, which has resulted in another strong underlying[2]  operating margin expansion of 50 bps to 5.1%. We maintained good pricing discipline particularly in our main markets, France and the US, while carefully managing cost efficiency. We are well on track to reach over 5% EBITA margin by 2009."
"We continue to see solid growth rates in the European and Asian staffing markets, while demand in the US remains weak. Given our value based management approach we expect to continue to see growth rates below the market in France."
Group revenues for Q3 2007 were EUR 5.4 billion, a 2% increase compared with Q3 2006. On an organic basis, when excluding the impact of currency and acquisitions, Adecco grew revenues by 2%. Permanent placement revenues were EUR 98 million in the quarter, which is an increase of 15% in constant currency compared to the same quarter last year.
Gross Profit
Gross margin improved 130 bps to 18.5% compared to the third quarter of 2006. On an underlying[2] basis, when excluding the modification of the calculation of French social charges, gross margin improved 80 bps to 18.0% as a result of higher gross margin in the temporary staffing business and the growing contribution of permanent placement. The acquisition of Tuja added 10 bps to the Group's gross margin. 
Selling, General and Administrative Expenses (SG&A)
SG&A increased 5% in the period under review. Underlying[2] organic SG&A grew 4%, reflecting an increase in SG&A as a percentage of revenues of 20 bps to 12.8%. Organically, Adecco grew the office network by 3% (+200 offices) and FTEs by 3% (+900 FTEs) compared to the same quarter last year. At the end of September 2007, Adecco had over 37,000 FTEs and over 7,000 offices.
Amortisation of Intangible Assets
Amortisation increased to EUR 8 million from EUR 4 million in the same quarter last year due to the acquisition of Tuja, which was consolidated as of August 2007. For the fourth quarter the amortisation is expected to be EUR 10 million.
Operating Income                     
Operating income for the third quarter 2007 was EUR 296 million, an increase of 22% (11% on an underlying2 organic basis) compared with Q3 2006. The modification of the calculation of French social charges added EUR 18 million to operating income. Operating margin improved to 5.4% versus 4.6% for the same period last year. Underlying[2] operating margin increased by 50 bps to 5.1%.
Interest Expense and Other Income / (Expenses), net
Interest expense was EUR 15 million in the period under review, which compares to EUR 14 million in Q3 2006. For the full year 2007, interest expense is expected to be approximately EUR 56 million. Other income / (expense), net was EUR 4 million (Q3 2006 EUR 5 million).
Provision for Income Taxes
The effective tax rate for the third quarter of 2007 was 18% compared with 29% in the same period last year. The current quarter includes a positive impact of EUR 28 million due to the German income tax rate change effective January 1, 2008, which led to a revaluation of the deferred tax liability mainly in connection with the Tuja acquisition. For the fourth quarter Adecco continues to expect an underlying effective tax rate of approximately 29%.
Net Income and EPS
Net income was up 40% to EUR 230 million in the third quarter of 2007 (Q3 2006: EUR 164 million), which represents a net income margin of 4.2%. Basic EPS was EUR 1.24 (EUR 0.88 for Q3 2006). The modified calculation of French social charges had a positive EPS impact of EUR 0.07. 
Balance Sheet, Cash-flow, and Net Debt[3]
The Group generated EUR 766 million of operating cash flow in the first nine months of 2007 and invested EUR 980 million in the acquisition of Tuja and the minority holdings in DIS AG. As a result the net debt position increased to EUR 951 million at the end of September 2007 compared to EUR 556 million at the year end of 2006. In the third quarter of 2007 DSO improved 1 day to 59 days compared with Q3 2006.
Currency Impact
Currency fluctuations had a negative impact of 2% on revenues and 1% on operating income in the third quarter of 2007, mainly due to the weakness of the US dollar and the Japanese yen. 
In France, due to Adecco's focus on value generation revenues decreased by 2% to EUR 1.8 billion in the third quarter of 2007. Operating income grew 30% to EUR 98 million, which reflects an operating margin improvement of 140 bps to 5.5%. Underlying[2] gross margin improved 60 bps, while underlying2 operating margin expanded by 40 bps to 4.5%. Good pricing discipline in temporary staffing is the main reason behind this underlying2 improvement.
In Germany revenue growth was 54% in the third quarter of 2007 and 14% organically. Tuja has been consolidated as of August 2007. Adecco Germany experienced 17% revenue growth, while DIS grew 12% in the period under review. Operating income grew 51% compared to Q3 2006, corresponding to an operating margin of 13.6% versus 13.9% in the same period last year. Compared to Q3 2006 there were 1% fewer trading days in the period under review, which had a negative impact on profitability.
In USA & Canada, Adecco's revenues declined by 8% in constant currency to EUR 0.8 billion in Q3 2007. The decline was most significant in the Industrial business, while only moderate in the Office business. Favourable workers' compensation development, a better customer mix and the recovery of the outplacement business led to a 90 bps improvement in gross margin, which, combined with a decline in SG&A, resulted in an operating income growth of 2% in constant currency. Operating margin increased by 50 bps to 4.9%.
In the UK & Ireland, revenues remained flat in constant currency. Rigorous restructuring, particularly in the Industrial and Information Technology business lines, led to a declining business, which was compensated by good revenue growth in Finance & Legal. As expected operating income declined 23% in constant currency mainly due to a EUR 2 million restructuring charge. Operating margin was 2.8%.
In Japan, revenues in constant currency grew 7% in the third quarter of 2007. A more favourable customer mix and a healthy pricing environment led to a 120 bps gross margin improvement, while operating margin expanded to 7.2% from 5.8% in the same period last year.
Nordics' revenues increased by 16% in constant currency. Italy, Iberia and Benelux grew revenues by 9%, 7% and 1% respectively in Q3 2007. In the Emerging Markets revenues increased 20% in constant currency, organically 15%.
Q2 2007 Revenues in percent
Q2 2007 Underlying[2] gross profit in percent
(The pie charts are visable in the PDF version of the report)
Adecco grew revenues of the Office and Industrial businesses by 3% in constant currency to
EUR 4.2 billion in Q3 2007 (0% organically) and increased gross margin by 160 bps to 17.2%. Underlying[2] gross margin improved 90 bps to 16.5%. The Industrial business increased revenues by 3% in constant currency (0% organically) driven by strong demand in Italy and Germany. France's revenues declined 1%, USA & Canada decreased 15% in constant currency. In the Office business, the increase in revenues was 2% in constant currency with solid revenue additions in Japan and Nordics, while declining in France in the USA & Canada
In the third quarter of 2007, revenues in the Professional Business[4] grew 5% in constant currency and 4% on an organic basis. Gross margin in the Professional Business increased 20 bps to 25.8%.
In Information Technology (IT), Adecco's revenues remained flat in constant currency and declined 2% on an organic basis. Continued focus on value based management led to a sales decrease in the UK & Ireland, while revenues in the USA & Canada further declined due to general market conditions.
Adecco's Engineering & Technical (E&T) business grew revenues by 2% in constant currency. In USA & Canada, Adecco increased revenues in single digit growth rates in constant currency, while revenues in the UK & Ireland declined slightly. Demand in Germany continued to be strong.
In Finance & Legal (F&L), Adecco increased revenues by 12% in constant currency in the third quarter of 2007. The declining business in USA & Canada was compensated by strong revenue growth in UK & Ireland.
In the third quarter of 2007, revenues in Human Capital Solutions (HCS) increased 12% in constant currency. In Sales, Marketing & Events (SM&E) and Medical & Science (M&S) revenues grew 11% and 10% (8% organically) in constant currency, respectively.
The Group remains committed to its objective of revenue growth of at least 7-9% per annum on average for the coming years, providing no material changes to the macroeconomic environment. At the same time management continues to be confident that the focus on value based management and professional and specialized business fields will allow Adecco to continuously improve 2009 operating margin to over 5% and 2009 return on capital employed (ROCE) to above 25%, which compares to 20.3% in 2006.
For the remainder of the year management continues to expect below market growth in France as the focus on shareholder value and profitable growth continues. The market in the USA & Canada is anticipated to remain weak, while solid growth in Europe and ongoing good demand in Japan should continue.
Adecco's Board of Directors decided to purchase Adecco shares for up to EUR 400 million by the end of 2008. The shares are intended to be used for future acquisitions or to minimize potential dilution related to the outstanding convertible bond.
Financial Agenda 2007 and 2008

Forward-looking statements
Information in this release may involve guidance, expectations, beliefs, plans, intentions or strategies regarding the future. These forward-looking statements involve risks and uncertainties. All forward-looking statements included in this release are based on information available to Adecco S.A. as of the date of this release, and we assume no duty to update any such forward-looking statements. The forward-looking statements in this release are not guarantees of future performance and actual results could differ materially from our current expectations. Numerous factors could cause or contribute to such differences. Factors that could affect the Company's forward-looking statements include, among other things: global GDP trends and the demand for temporary work; changes in regulation of temporary work; intense competition in the markets in which the Company competes; changes in the Company's ability to attract and retain qualified temporary personnel; the resolution of the French anti-trust investigation and the resolution of the US class action; and any adverse developments in existing commercial relationships, disputes or legal and tax proceedings.
About Adecco
Adecco S.A. is a Fortune Global 500 company and the global leader in HR services. The Adecco Group network connects over 700,000 associates with clients each day through its network of over 37,000 employees (FTEs) and over 7,000 offices in over 60 countries and territories around the world. Registered in Switzerland, and managed by a multinational team with expertise in markets spanning the globe, the Adecco Group delivers an unparalleled range of flexible staffing and career resources to clients and associates.
Adecco S.A. is registered in Switzerland (ISIN: CH001213860) and listed on the Swiss Stock Exchange with trading on Virt-x (SWX/VIRT-X: ADEN) and the Eurolist of Euronext Paris (EURONEXT: ADE).

There will be an audiocast of the media conference at 9 am CET as well as a webcast of the analyst presentation at 11 am CET, details of which can be found at our Investor Relations section at
[1] Organic growth is a non US GAAP measure and excludes the impact of currency and acquisitions.
[2] Underlying is a non US GAAP measure and excludes the impact of the modified calculation of French social charges as announced by the French government for the period Q3 2007 of EUR 26 million on gross profit, EUR 18 million on operating income and EUR 12 million on net income.
[3] Net debt is a non-US GAAP measure and comprises short-term and long-term debt less cash and cash equivalents and short-term investments
[4] Professional business refers to Adecco's Information Technology, Engineering & Technical, Finance & Legal, Medical & Science, Sales, Marketing & Events and Human Capital Solutions businesses.
The full press release in English including tables can be downloaded from the following link: