Adecco Q2 2005 Quarterly Report

August 17, 2005
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Adecco Q2 2005 Quarterly Report

Adecco increases Sales and Profit in Q2
Net Income grows to EUR 100 million

Q2 2005 Highlights (Q2 05 vs. Q2 04):
  • Revenues of EUR 4.5 billion, up 6% (8% in constant currency)
  • Operating income of EUR 157 million, up 38% (11% on an underlying basis[1])
  • Net income of EUR 100 million, up 5%; EPS of EUR 0.54 (2004: EUR 0.51)
  • Gross margin decrease of 10 bps at Adecco Group, stable on an underlying basis;                 
  • Branch openings in growth markets, e.g. Germany and Japan; +370 over 1 year to over 6,500
  • Permanent placement revenues increase by 23%
  • Altedia and Humangroup acquisitions completed
H1 2005 Highlights (H1 05 vs. H1 04):
  • Revenues of EUR 8.6 billion up 7% (8% in constant currency)
  • Gross margins stable at 16.7% at group level
  • Operating income margin up to 3.1% (H1 2004: 2.1%)
  • Net income of EUR 163 million, up 31% (H1 2004: EUR 125 million)
  • Tax rate down to 30% from 36%
Chéserex, Switzerland- August 17, 2005: The Adecco Group, the worldwide leader in Human Resource services, today announces results for the second quarter 2005.
Jérôme Caille, Adecco Group Chief Executive Officer, said: "In this quarter, we have delivered worldwide sales growth in line with the general staffing market, although in the US we have consciously decided to focus on profitability rather than revenue growth. We are pleased with our performance in finance professional staffing services as well as in some key countries, including UK, Japan, Switzerland, and Nordics where we grew significantly faster than the market. Our slightly lower gross margin in comparison to last year mainly resulted from a provision release in France in 2004. The underlying gross margin was stable, supported by our achievements at Adecco US, continued growth in our permanent placement business, and the Altedia acquisition."
"We delivered EUR 157 million operating income despite absorbing higher costs from our SOX compliance activities, while investing in the future with 2,800 additional colleagues and the opening of 370 new offices. Our global program is underway to enhance gross and operating margins, based on pricing and cost discipline, improved balance of global contracts and local accounts, investments in permanent placement capabilities, and further focus on client demand for specialist staff. The acquisitions of Altedia and Humangroup were important strategic steps in this direction, adding to our HR consulting and outsourcing portfolio", said Caille.
Sales and Gross Margin
Group sales for the second quarter of 2005 were EUR 4.5 billion, an 8% increase in constant currency compared to the second quarter of 2004. Excluding the impact of currency and the acquisitions, Altedia and Humangroup, revenues grew 7%. Gross margin for the quarter was at 16.7%. This compares to 16.5% excluding provision releases in France in the same period last year. Gross margins improved in both key business divisions in constant currency: Adecco Staffing added, on an underlying basis, 10 bps (14.8% vs. 14.7%), and Ajilon 20 bps (24.8% vs. 24.6%). The negative business mix effect of lower Career Services division revenues was compensated by the Altedia acquisition, which added 20 bps to the group's gross margin.
Operating Costs
Operating costs as a percentage of sales were reduced to 13.3% (2004: 14.1%) in the second quarter principally due to elimination of costs associated with the financial reporting delay (2004: EUR 41 million). On an underlying basis, Q2 2005 operating costs increased by 6%, which is 10 bps below last year as a percentage of sales, as 6% of offices were added to the network and 2,800 additional staff (10%) were hired to support the growing demand in permanent placement and to develop the business with local accounts. In addition, Altedia and Humangroup added 170 offices and 1,300 staff.
Operating Income
Operating income for the second quarter of 2005 was EUR 157 million, an increase of 38% compared to the second quarter of 2004. Operating income margin improved by 80 bps to 3.4% in the second quarter (2004: 2.6%). Last year's operating income was impacted by the costs of the 2003 financial reporting delay as well as provisions released in France.  On an underlying basis, operating income improved by 11% in constant currency. This is equivalent to a 10 bps year-on-year operating margin enhancement.
Interest and Other expenses
Interest and other expenses were EUR 16 million in the second quarter, EUR 4 million more than in the same quarter last year. The quarter was negatively impacted by increased USD hedging costs. The successful renegotiation of the revolving credit facility is expected to lower interest expense by EUR 1 million per annum going forward. Combined with lower hedging costs, the group now anticipates interest and other expenses of EUR 58 million for the full year 2005.
Provision for Income Taxes
The effective tax rate for the second quarter was 28% compared with 36% last year. This decrease in the second quarter 2005 effective tax rate mainly reflected the absence of expenses associated with the 2003 financial reporting delay, which received a lower tax benefit. Additionally, during the second quarter, the group had a EUR 4 million benefit resulting from successful tax audit closures. For the full year, Adecco expects an effective tax rate of 31%.
Net Income and EPS
Net income was up 5% to EUR 100 million (2004: EUR 95 million) in the second quarter 2005. In 2004 the costs of the 2003 financial reporting delay and the income from the disposal of jobpilot approximately offset each other. Basic EPS was EUR 0.54 for 2005 (EUR 0.51 for 2004).
Balance Sheet, Cash-flow, and Net Debt[2]
The group generated EUR 66 million of operating cash flow in the first six months of the year, compared with EUR 33 million in the same period last year. The additional week at year end of fiscal year 2004 had a negative impact on operating cash flow in the first half of 2005. Net debt increased by EUR 307 million to EUR 606 million at the end of the first half year mainly because of the following: purchase of Altedia for EUR 88 million (net of cash acquired) in the first quarter and of Humangroup in the second quarter for EUR 57 million (net of cash acquired); dividend payments of EUR 79 million; and purchase of Adecco shares for a total of EUR 59 million.
Currency Impact[3]
Currency fluctuations in the second quarter reduced reported sales growth by 2% and operating income growth by 4%, principally due to the strengthening of the Euro against US Dollar and Japanese Yen.

Divisional performance
General Staffing
During the quarter the division contributed EUR 4.0 billion or 88% of group revenues and 83% of total operating income generated by operating units. The 10 geographical regions discussed below account for over 90% of the division's revenues. Overall, Adecco Staffing achieved revenue growth in constant currency of 7% for the quarter. The division's operating income rose 1% at constant currency, which represents an operating margin of 3.9%.
Q2 2005 sales and sales growth at constant currency rates ('CR') for key Adecco Staffing business units were as follows:
Adecco Staffing continued with its investment program in new offices, leading with key expanding markets such as Germany, Japan, and the UK. The acquisition of Humangroup was completed in the quarter, expanding Adecco's outsourcing capabilities in Iberia.
In the US, the division continued its focus on profitable accounts which lowered revenues by 6% in constant currency, however this was offset by strong gross margin improvement of 80 bps year-on-year. In France, Adecco Staffing grew in line with the market and kept gross margins flat on an underlying basis. Initial contributions from the permanent placement business compensated for a continued tough pricing environment.
Professional Staffing
Ajilon increased sales at constant currency for the quarter by 14% to EUR 0.5 billion with a 24% increase in operating income reflecting improving gross margins and operational gearing. Ajilon represents 11% of group revenues and 14% of total operating income generated by operating units.
Q2 2005 sales and sales growth in constant currency rates ('CR') for key professional staffing business units were as follows:
Career Services
LHH, which represents 1% of group sales and 3% of total operating income generated by operating units, increased revenues by 36% in constant currency including two months of Altedia. On an underlying basis, the division experienced a further revenue and contribution decline of respectively 8% and 42% in the quarter reflecting general market conditions in the outplacement market. Operating margins at 12.4% remained the highest in the group, though they suffered year-on-year due to continuing lower consultant utilization. The integration of Altedia in France and Spain is proceeding in line with expectations.

Litigation and Regulatory matters
After the pending consolidated class action complaint filed against the company and certain of its directors and officers in the United States District Court for the Southern District of California was dismissed without prejudice, the plaintiffs filed an amended complaint. The company continues to believe that there is no merit to the allegations and will continue to defend itself vigorously. The previously announced US state unemployment tax reviews and French antitrust investigation are also ongoing. As previously stated, there can be no assurance that the resolution of these matters will not, individually or in the aggregate, have a material adverse effect on Adecco's consolidated financial position, results of operations, or cash flows.
The key indicators for the global staffing services market are likely to remain favourable for this year. We are committed to our objective of growth, at or above market rates. With the ongoing investment program in the business worldwide, we are confident that we can further improve margins over the medium term.
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. (the "company") as of the date of this release, and we assume no duty to update any such forward-looking statements. 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 US state unemployment tax reviews; the resolution of a French anti-trust investigation; the resolution of the US class action litigation; and any adverse developments in existing commercial relationships, disputes or legal proceedings.
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. Please refer to the company's most recent Annual Report on
Form 20-F and other reports filed with or submitted to the United States Securities and Exchange Commission from time to time, for a further discussion of the factors and risks associated with our business.
About Adecco
Adecco S.A. is a Fortune Global 500 company and the global leader in HR services.  The Adecco Group network connects up to 700,000 associates with business clients each day through its network of over 32,000 employees and over 6,500 offices in 70 countries andterritories 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 corporate clients and qualified associates.
The Adecco Group comprises three Divisions: Adecco Staffing, Ajilon Professional and LHH Career Services.  In Adecco Staffing, the Adecco network focuses on flexible staffing solutions for global industries, including automotive, banking, electronics, logistics and telecommunications; Ajilon Professional offers an unrivalled range of specialised branded businesses; and LHH Career Services encompasses our portfolio of outplacement and coaching consultancy businesses.
Adecco S.A. is registered in Switzerland (ISIN: CH0012138605) and listed on the Swiss Stock Exchange with trading on Virt-x (SWX/VIRT-X:ADEN), the New York Stock Exchange (NYSE:ADO) and Euronext Paris - Premier Marché (EURONEXT: ADE).
Adecco Corporate Investor Relations or +41 (0) 44 878 8924
Adecco Corporate Press Office                                   or +41 (0) 44 878 8832      
Cubitt Consulting or +44 (0) 207 367 5100    
There will be an audio webcast of the analyst teleconference at 1000 CET, details of which can be found at our Investor Relations section at

[1] Underlying figures are adjusted in 2004 for change in estimate of French payroll liability provisions, one-time items associated with the 2003 financial reporting and for currency; in 2005 for acquisitions.
[2] Net debt is a non-US GAAP measure and comprises short-term and long-term debt as well as off balance sheet debt less cash and cash equivalents and short-term investments. The off balance sheet debt relates to the sale of receivables from Humangroup (EUR 14 million).
[3] All percentage comparisons are expressed in Euro unless stated otherwise
[4] Includes Humangroup one month sales of EUR 23 million