Adecco maintains solid profitability in Q2 2012Download this Document
Adecco maintains solid profitability in Q2 2012
Gross margin up 80 bps to 17.7% and a solid EBITA margin
Second quarter 2012 HIGHLIGHTS
- Revenues of EUR 5.2 billion, up 1% (-4% organically1)
- Gross margin at 17.7%, up 80 bps year-on-year (+30 bps organically)
- SG&A slightly below the prior year, organically and before integration and restructuring costs
- EBITA2 before integration and restructuring costs at EUR 194 million
- EBITA margin at 3.7%, down 20 bps year-on-year before integration and restructuring costs
- Net income of EUR 113 million, down 20%
- Operating cash flow of EUR 81 million in H1 2012 (EUR -30 million in H1 2011)
Key figures Q2 2012
in EUR millions
EBITA before integration and restructuring costs
Zurich, Switzerland, August 9, 2012: Adecco Group, the world’s leading provider of Human Resources solutions, today announced results for the second quarter of 2012. Revenues were up 1% or down 4% organically, to EUR 5.2 billion. The gross margin was 17.7%, an increase of 80 bps versus the prior year and up 30 bps organically. Continued strong cost control resulted in slightly lower SG&A, on an organic basis and before integration and restructuring costs. The Q2 2012 EBITA margin before integration and restructuring costs was 3.7%, down 20 bps compared to the same quarter last year. Net income was down 20% to EUR 113 million. The Group generated operating cash flow of EUR 81 million in the first half of 2012.
Patrick De Maeseneire, CEO of the Adecco Group said: “I am pleased that our price discipline is paying off, leading to a 30 bps organic increase in the gross margin to 17.7%. At the same time, the cost base continued to be a key priority. SG&A was slightly down, on an organic basis and before restructuring and integration costs. And we achieved a solid EBITA margin of 3.7%, down 20 bps year-on-year before one-off costs. In terms of revenues, Q2 2012 was again characterised by a diverging picture geographically. Revenue growth in North America slightly accelerated to 2%. The UK also held up well as did the Emerging Markets, where we continued to see double-digit revenue growth. Our focus on profitability and optimisation of the business in France, coupled with more challenging market conditions, impacted revenue growth. Demand slowed in Germany and also further in Italy. In Japan, due to the completion of some large projects, organic growth was in negative territory. On the other hand, our outplacement and talent development business LHH returned to growth of 2% organically. We have a strong global platform for organic growth and a good business mix. Price discipline and the continued focus on cost optimisation remain key priorities for us and we are committed to our EBITA margin target of above 5.5% midterm.”
Q2 2012 FINANCIAL PERFORMANCE
Group revenues in Q2 2012 were EUR 5.2 billion, up 1% or down 3% in constant currency. Organically, revenues were down 4%. Permanent placement revenues amounted to EUR 91 million, a decrease of 3% organically, while revenues from the counter-cyclical outplacement business totalled EUR 67 million, flat organically.
In Q2 2012, gross profit amounted to EUR 917 million and the gross margin was 17.7%, up 80 bps compared to the prior year’s second quarter. Organically the gross margin was up 30 bps in the quarter under review. Temporary staffing had a positive impact on the gross margin of 10 bps in Q2 2012 (flat organically). Permanent placement had an impact on the Q2 2012 gross margin of +10 bps (flat organically), whereas the impact was +40 bps from outplacement (+10 bps when excluding the acquired DBM business) and +20 bps from other activities.
Selling, General and Administrative Expenses (SG&A)
SG&A in Q2 2012 amounted to EUR 732 million, an increase of 8% or 3% in constant currency compared to Q2 2011. Given weaker revenue developments, management proactively reduced SG&A in Europe by 4% organically and before restructuring costs. This was partly offset by investments in the Emerging Markets and Professional Staffing in North America. SG&A for the Group was slightly lower year-on-year on an organic basis and before one-off costs. Integration costs amounted to EUR 2 million and restructuring costs for various European countries and Japan were EUR 7 million in the quarter under review. Sequentially, SG&A was flat on an organic basis and when excluding integration and restructuring costs. Organically, FTE employees decreased by 1% (-350) compared to the second quarter of 2011. Sequentially, FTE employees were down 1% organically. The branch network, on an organic basis, decreased by 2% (-120 branches) compared with the second quarter of 2011. At the end of the second quarter of 2012, the Adecco Group had over 33,000 FTE employees and operated a network of over 5,500 branches.
In the period under review, EBITA was EUR 185 million compared with EUR 199 million reported in the second quarter of 2011. The Q2 2012 EBITA margin was 3.6% compared to 3.9% in Q2 2011. EBITA before integration and restructuring costs was EUR 194 million in Q2 2012 and the margin was 3.7%, down 20 bps compared to the Q2 2011 EBITA margin of 3.9% before integration costs.
Amortisation of Intangible Assets
Amortisation in Q2 2012 was EUR 13 million, unchanged compared to Q2 2011.
In Q2 2012, operating income was EUR 172 million. This compares to EUR 186 million in the second quarter of 2011.
Interest Expense and Other Income / (Expenses), net
The interest expense amounted to EUR 19 million in the period under review, EUR 2 million higher than in Q2 2011. Other income / (expenses), net was an expense of EUR 14 million in Q2 2012, negatively impacted by the sale of a business in North America at the end of June 2012. This compares to an expense of EUR 10 million in the second quarter of 2011, which was impacted by a EUR 11 million loss recognised in connection with the bond tender completed in April 2011. Interest expense is expected to be around EUR 80 million for the full year 2012.
Provision for Income Taxes
The effective tax rate in the period under review was 19% compared to 11% in Q2 2011. In both years, the tax rate was impacted by the successful resolution of prior years’ audits and tax disputes and the expiration of the statute of limitations in several jurisdictions.
Net Income / Net Income attributable to Adecco shareholders and EPS
In the period under review, net income / net income attributable to Adecco shareholders were EUR 113 million and EUR 112 million respectively. This compares to EUR 141 million in Q2 2011. Basic EPS in Q2 2012 was EUR 0.59 (Q2 2011: EUR 0.74).
Cash flow, Net Debt3 and DSO
Cash generated from operating activities amounted to EUR 81 million in the first half of 2012 compared to cash used in operating activities of EUR 30 million in the same period last year. The Group paid dividends of EUR 256 million and capital expenditure amounted to EUR 48 million in the first half of 2012. Net debt at the end of June 2012 was EUR 1,244 million compared to EUR 892 million at year end 2011. DSO was 54 days in the second quarter of 2012, a decrease of 1 day compared to the same period last year.
In Q2 2012, currency fluctuations had a positive impact on revenues of approximately 4%.
Revenues in France amounted to EUR 1.4 billion, down 13% organically compared to Q2 2011. Permanent placement revenues were down 13%. In the quarter under review, EBITA was EUR 41 million compared to EUR 57 million in Q2 2011. The EBITA margin was 2.9% in Q2 2012, down 70 bps compared to the prior year’s second quarter. Mandatory legal talks with the French Works Councils have been finalised and the implementation of the plans in France was kicked-off at the beginning of August. Excluding EUR 5 million restructuring costs incurred in Q2 2012, the adjusted EBITA margin was at a solid 3.3%, compared to 3.6% a year ago.
In North America, Adecco’s revenues increased by 2% in constant currency to EUR 967 million in Q2 2012. General and Professional Staffing revenues both grew by 2% in constant currency. The US IT Professional Staffing segment grew 2% year-on-year in constant currency in Q2 2012. Revenues developed solidly in Finance & Legal and Medical & Science, up 9% and 21% respectively year-on-year, both in constant currency. The Engineering & Technical segment was down 2% in constant currency. Permanent placement revenues continued to develop strongly, up 15% in constant currency. Profitability in Q2 2012 was solid. EBITA increased 14% in constant currency to EUR 44 million and the EBITA margin was 4.5%, up 50 bps compared to Q2 2011. Integration costs related to MPS amounted to EUR 2 million in Q2 2011.
In the UK & Ireland, revenues were up 7% in constant currency to EUR 470 million, also driven by the Olympics where Adecco is the official supplier of temporary employees. Permanent placement revenues were down 21% in constant currency, compared with a strong second quarter in 2011. EBITA was EUR 3 million in Q2 2012, and the EBITA margin was 0.7%, down 100 bps compared to Q2 2011. In the quarter under review profitability was impacted by the sponsorship costs for the London Summer Olympics. Profitability will also be impacted in Q3 2012. Integration costs related to MPS amounted to EUR 1 million in Q2 2011.
In Germany & Austria, Q2 2012 revenue development continued to be ahead of the market. Revenues increased by 1% to EUR 386 million. Organically revenues declined by 1%, compared with a very strong base last year (Q2 2011: +31% year-on-year revenue growth). Demand from automotive remained strong, but was weaker in manufacturing. EBITA amounted to EUR 13 million and the EBITA margin was 3.5% compared to the Q2 2011 EBITA margin of 5.1%, also reflecting one additional bank holiday compared to the prior year.
In Japan, revenues were flat in constant currency at EUR 379 million. Organically revenues were down 10% and were impacted by the completion of several outsourcing projects. Despite the revenue decline, profitability remained strong. EBITA was EUR 23 million and the EBITA margin was 6.0%, down 30 bps compared to the second quarter of 2011. The acquired company VSN Inc. continued to develop well. VSN added 40 bps to the EBITA margin in Japan in Q2 2012.
Revenues in Italy declined by 13% in Q2 2012. Demand slowed considerably due to the economic uncertainties in the country, however, the comparison base of Q2 last year was very high (Q2 2011: +35% year-on-year revenue growth). Italy achieved a strong EBITA margin of 5.5% in Q2 2012, down 190 bps year-on-year.
In Q2 2012, revenues in Benelux decreased by 5%. Revenue development was in line with the market in the Netherlands, but ahead of the market in Belgium.
Revenues in the Nordics were up 3% in constant currency. Revenues in Sweden were slightly down year-on-year in Q2 2012, but solidly increased in all other Nordic countries. The EBITA margin in Q2 2012 was 4.2%. Q2 2011 had been impacted by EUR 6 million related to exiting the nursing home outsourcing business in Norway.
In Iberia revenues declined by 11% as economic conditions in the region remained challenging. Revenues in Australia & New Zealand declined 1% in constant currency in Q2 2012 with an EBITA margin of 3.7%, up 80 bps compared to Q2 2011. In Switzerland, revenues declined by 12% in constant currency in Q2 2012, while profitability remained solid with an EBITA margin of 8.1%.
The Emerging Markets maintained double-digit revenue growth of 12% in constant currency. The EBITA margin was 3.4%, down 70 bps when compared to the same period last year, as Adecco continues to invest in the region.
Revenues of Lee Hecht Harrison (LHH), Adecco’s career transition and talent development business were EUR 79 million, up 42% in constant currency and up 2% organically compared to Q2 2011. EBITA was EUR 21 million and profitability remained strong, as the EBITA margin increased to 27.7% from 19.2% in Q2 2011. Integration related costs for DBM amounted to EUR 2 million in Q2 2012. The targeted EUR 20 million synergies will be exceeded and fully realised by the end of 2012.
BUSINESS LINE PERFORMANCE
Adecco’s revenues in the General Staffing business (Office & Industrial) decreased by 6% in constant currency to EUR 3.9 billion. Revenues in the Industrial business were down 8% in constant currency. In France, revenues declined by 13% in Q2 2012 and in Italy by 14%. Germany & Austria was down 2% organically year-on-year. In constant currency, revenues in Industrial in North America were flat in Q2 2012. In the Office business, revenues were down 2% in constant currency. In North America revenues were up 5%, whereas revenues in Japan were down 11%, in the UK & Ireland down 3% and in the Nordics down 2%, all in constant currency. Revenues in France declined by 15% organically.
Professional Staffing4 revenues increased 5% in constant currency (2% organically). Revenues in North America were up 2% in constant currency, while revenues in France were down 10%. In the UK & Ireland revenues were up 11% in constant currency.
In Information Technology (IT), revenues increased 7% in constant currency (4% organically). In North America, revenues declined by 1% in constant currency, but the US IT Professional Staffing segment is back to growth of 2% in constant currency. Revenues in the UK & Ireland continued to develop strongly, increasing double-digit in constant currency.
Adecco’s Engineering & Technical (E&T) business was up 7% in constant currency (1% organically). In Germany & Austria revenues grew 6%, while in France revenues were flat. In North America revenues declined by 2% in constant currency, compared to a solid Q2 last year, when revenues increased by 12% in constant currency.
In Finance & Legal (F&L), revenues were down 1% in constant currency. Revenues in North America increased 9%, while business in the UK & Ireland remained difficult, with revenues declining by 14% in Q2 2012, all in constant currency.
In Q2 2012, revenues in Medical & Science (M&S) were up 5% in constant currency (3% organically). While revenues in North America were up double-digit, revenues in the Nordics declined by 2%, both in constant currency. Revenues in France were down 11% in the quarter under review.
In the second quarter of 2012, revenues in Solutions5 were up 32% in constant currency or up 3% organically, held back by the counter-cyclical outplacement business. Revenue growth in MSP (Managed Service Programmes) and VMS (Vendor Management System) continued to be double-digit in constant currency.
In June, Adecco Group’s revenues declined by 3% organically and adjusted for business days. While the revenue decline rate during Q2 2012 was relatively stable, revenue development in July was slightly weaker, mainly driven by France and Japan. Geographically, developments continue to be diverse. Europe is weakening further. On the other hand, business in North America is accelerating, also driven by the IT Professional Staffing business. In the Emerging Markets, revenue growth continues to be healthy.
Given these diverging economic trends, price discipline and a proactive approach to cost management are key. The gross margin improvement in Q2 2012 reflects management’s focus on profitability and value creation. In Q3 2012, SG&A is expected to remain approximately in line with Q2 2012, on an organic basis and before restructuring costs. In the second half of 2012 management plans to invest approximately EUR 10 million related to the full consolidation of several data centres in North and South America. Our plans in France, to merge the networks of Adecco and Adia under the single Adecco brand, are fully on track. We are convinced that our total expected investments of EUR 45 million in France will result in an even better offering for our customers and will ensure sustainable and leading profitability.
Building on our strategic priorities, we continue to focus our efforts on constantly improving our HR solutions, delivery models and the cost base, and we remain convinced that we will achieve an EBITA margin of over 5.5% midterm.
Update on the share buyback programme and bond issuance announced in June 2012
In June 2012, the Company launched a share buyback programme of up to EUR 400 million on a second trading line with the aim of subsequently cancelling the shares and reducing the share capital. The share buyback commenced in mid-July 2012. To date, the Company has acquired 280,000 shares for a total consideration of EUR 10 million under this programme.
On July 18, 2012, Adecco S.A. issued a CHF 250 million long 5-year bond with a coupon of 1.875% and a CHF 125 million long 8-year bond with a coupon of 2.625%, due on December 18, 2017 and December 18, 2020, respectively. The bonds were issued within the framework of the Medium-Term Note Programme. The proceeds will be used to fund the planned share buyback programme described above.