Annual Report 2012

Review of main markets

Within Europe, France is a key market for staffing, with an approximate share of 7% [1] of the global market. While the staffing industry in general shows a high degree of fragmentation, the French market is significantly concentrated: the three major players hold a total market share of around 70% [1]. Adecco is the market leader in France, with a market share of 28% [1]. France is also a key market for our Company, where we generated 25% of our total revenues in 2012. Approximately 90% of revenues stemmed from the General Staffing business, the largest part of which comprises blue-collar industrial staffing. Professional Staffing still represents a minor part of our business in France, but represents a structural growth area for the future. Steady deregulation of the temporary staffing industry in France has opened up opportunities for our Company. Since 2005, staffing companies are permitted to facilitate permanent placements. In 2009, the French parliament voted in favour of opening up the public sector to temporary staffing services, paving the way for temporary staffing in hospitals, as well as in state and local administrations. Until now, given the rigid structure of the public sector, using private agencies for temporary staffing has evolved only slowly. In addition to the increased need of companies for a more flexible workforce, the opening of the public sector to temporary staffing is seen as a driver for higher peak penetration rates in the French market.

In order to further increase the efficiency of our French operations, in early March 2012 we announced our intention to combine the Adecco and Adia branded businesses under the single Adecco brand. The aim was to further strengthen the Group’s position in France and to ensure sustainable profitability. Combining the expertise of both General Staffing businesses under a single roof facilitates an even better offering for clients, candidates and colleagues. At the same time the cost base was addressed with the planned reduction of over 500 FTE employees and further branch network and shared service centre consolidation. After the mandatory legal talks with the French Works Councils, we were able to kick off the implementation of our plans during August. By year end 2012, the implementation of most planned actions was nearly complete. More than 500 FTE employees had left the Company and the number of branches was around 10% lower year-on-year. Given the deteriorating market conditions in France throughout 2012, the move to further optimise the business and to reduce the cost base were absolutely the right steps to take.

The uncertainty related to the European debt crisis and the consequent recession in the region led to a declining French staffing market. Revenues decreased by 14% when compared with the previous year. The decline was driven by Industrial staffing, which decreased by 15%. Adecco focused on preserving profitability through strict price discipline. Although our revenue development underperformed the market, we were able to improve our gross margin. Costs related to the combination of the Adecco and Adia branded businesses under the single brand of Adecco amounted to EUR 60 million in 2012. Excluding these costs, SG&A declined by 6%. EBITA amounted to 103 million in 2012. Excluding the restructuring costs, EBITA was EUR 163 million and the margin was 3.1%, down 50 bps compared to the prior year.

Recent regulatory developments should provide some tailwinds for the French economy and for Adecco’s operations in France. The French Government has pushed through a EUR 20 billion tax relief programme for companies, in proportion to the total amount of salaries below a certain threshold (intended to cover low and medium salaries). Additionally, in January 2013, employers and unions agreed on more relaxed labour regulations. One of the concessions, which the employers’ representatives had to make, was on increased taxation on short-term contracts with a limited duration (CDD contracts). However, since this additional taxation increase does not apply to temporary contracts, our industry should benefit. At the beginning of 2013, since the restructuring is close to completion and the new organisation is in place, commercial activity picked up. A major priority for the management in France in 2013 will be the on-going improvement in segmenting the business, with dedicated branch networks and distinct operating models by segment. We will also work on further optimising our support processes after the combination of the Adecco and Adia branded businesses. And, additional measures will be taken to align the cost base to revenue developments.

The US market, which represents 32% [1] of the global staffing market, is the largest worldwide. It is highly fragmented, and while we are the third-largest player, our market share is only about 4% [1]. From a regulatory perspective, this market is amongst the most liberalised in our industry.

North America [2] represented 18% of the Group’s total revenues in 2012. Since May 1, 2012, the region is led by Robert P. (Bob) Crouch. He was previously Chief Financial Officer of the MPS Group and had played a key role in developing MPS into a leading provider of Professional Staffing services in North America. The share of revenues generated in the Professional Staffing business is amongst the highest when compared with our other markets. Professional Staffing and Solutions revenues were roughly 50% of total revenues while 50% stemmed from General Staffing. The region’s demand for temporary jobs was healthy in 2012 and in stark contrast to the continuing high level of unemployment. Of the approximately 900,000 temporary staffing jobs lost during the recession in 2008 and 2009, over 800,000 had been recovered by the end of 2012. As a result, the penetration rate (the number of temporary employees as a percentage of the overall workforce) increased from the trough of 1.33% [3] in 2009 to 1.90% [3] at the end of 2012, close to the peak of 2.0% [3], reached in the year 2000. Recent regulatory and structural trends point to this peak being surpassed in the future. One driver is the healthcare reform, which could spur further demand for temporary staffing. Since the variability of assignments may afford staffing companies the ability to offer temporary workers a variety of healthcare coverage options, our industry is seen to offer advantages both from a cost and flexibility point of view.

From a business line perspective, the Office business grew 5% in constant currency, while Industrial grew 2% in constant currency. Overall, General Staffing grew 3% in constant currency. Professional Staffing was flat in constant currency or up by 4% organically, as business in IT staffing progressively accelerated during 2012 and we were able to close the gap to the market. IT Professional Staffing was down 7% in constant currency or up 2% organically. While Finance & Legal and Medical & Science grew solidly during the year, at rates of 7% and 19% respectively, in constant currency, Engineering & Technical was flat, with demand from the Government sector held back by the uncertainty on the level of public spending.

Overall, revenues in the region amounted to EUR 3,800 million, up 2% in constant currency or up 3% organically. EBITA increased by 2% on a constant currency basis to EUR 161 million. The EBITA margin was 4.2%, flat compared to the prior year. Organically and before restructuring and integration costs, EBITA increased 3%. The EBITA margin before restructuring costs was 4.4%, the same as in the prior year when excluding integration costs. Restructuring costs incurred for the consolidation of several data centres amounted to EUR 6 million in 2012. Integration costs related to MPS amounted to EUR 4 million in 2011. The focus in North America in 2013 will be on further organically growing the Professional Staffing business, best leveraging the opportunities arising with Business Process Outsourcing solutions (MSP/RPO/VMS), further developing permanent placements and the delivery models offered by new social media, web and mobile tools. At the same time, we will continue to expand our successful General Staffing business.

Representing 11% [1] of global staffing revenues, the UK is the third-largest market in the industry worldwide. As in the USA, the UK staffing market is highly fragmented and the labour market is fairly liberalised. With a market share of 6% [1] we are the market leader in the UK.

In 2012, our revenues amounted to EUR 1,936 million, up 6% in constant currency. This represented 9% of the Group’s total revenues. From a business mix perspective, roughly two-thirds of our revenues stemmed from the Professional Staffing line, while one-third was generated in General Staffing. In constant currency, EBITA decreased by 9% to EUR 32 million. The EBITA margin was 1.6% in 2012, down 30 bps compared with the prior year and down 40 bps, when excluding integration costs in 2011. In the year under review, profitability was impacted by the sponsorship costs for the London Summer Olympics, where Adecco was the official recruitment provider. The EBITA margin would have shown an increase when excluding these costs from the 2012 results and when compared to the 2011 results excluding integration costs. Integration costs related to MPS amounted to EUR 2 million in 2011.

The UK market showed moderate growth in 2012, after a weak recovery in 2011. New client wins and our leading role in providing HR solutions for the Summer Olympics helped us gain market share during the year, despite the difficult business environment. Revenues grew 7% in General Staffing, while Professional Staffing was up 5%, all in constant currency.

We will continue to focus on leveraging our market-leading position, strengthening our presence in permanent placements and enhancing our profitability. Top priorities remain the further improvement of service delivery models, leveraging the opportunities offered by the Business Process Outsourcing solutions (MSP/RPO/VMS) and a systematic approach to client attraction and retention.

Globally and within Europe, Germany is a key market for staffing, with a roughly 6% [1] share of the total global market. Our market share, in what we continue to view as one of the most attractive markets, is 9% [1], making us the number two in Germany. During 2012 the German economy slowed, but was more resilient than most other European countries. The penetration rate of 2.0% [1] was in-line with the peak level achieved during 2011 and it is a reflection of the structural growth the German temporary staffing market offers. Also mid-term, Germany remains an attractive structural growth market in our view, as greater acceptance of temporary staffing and the need for flexibility will result in higher penetration rates. Companies strive to further increase their flexible workforce and the European Agency Work Directive requires the lifting of all restrictions on temporary agency work. This offers additional revenue potential for our industry. Moreover, in the German construction sector, which today is still closed to temporary labour, restrictions should eventually be lifted.

Germany’s exposure to export-oriented sectors such as the capital goods industry and the automotive sector, coupled with resilient domestic consumption, resulted in above-average GDP growth in a European context. In 2012, our revenues in Germany & Austria increased by 3% or 1% organically to EUR 1,591 million. With this we clearly outperformed the market and gained market share. From a business line perspective, Professional Staffing revenues represented 17% of our revenues in Germany & Austria, while General Staffing contributed 83%. Compared with 2011, EBITA decreased by 18% to EUR 90 million. The EBITA margin was 5.6%, down 150 bps compared to the prior year. On an organic basis and when excluding restructuring costs, EBITA decreased by 12%. The EBITA margin before restructuring costs of EUR 10 million in 2012 amounted to 6.3%, down 80 bps compared to 2011.

The comparatively higher profitability in Germany is attributable to the fact that temporary employees are on our own payroll – a regulation peculiar to the German and Swedish markets, where temporary employees are effectively permanent employees of the staffing firm. Employing associates on a permanent basis is in stark contrast to most other European countries, where the employment contract signed with temporary staff is limited to the duration of a certain assignment at the client. While having the temporary associates on our own payroll is to some extent a liability during economically difficult times, it also allows for premium pricing to factor in this risk, resulting in higher overall operating margins.

During 2012, driven by the implementation of the Equal Pay provision as per the European Agency Work Directive, new collective wage agreements for temporary staffing were negotiated between Unions and employers in various industries, reflecting better alignment in terms of compensation between temporary and permanent jobs. For instance, IG Metall, the largest Union in Germany representing around 25% of the market, negotiated progressive wage increases on top of the base rate as follows – an increase of 15% after six weeks, 30% after five months, 45% after seven months and 50% after nine months. The wage increases are based on the length of the assignment at the same client company. Other Unions followed suit, with similar structures. At Adecco, we have been supportive of this development as this will help enhance the image of the staffing industry and will drive higher penetration rates in Germany.

In 2013, our focus will be on developing our business with small and medium enterprises. We aim to achieve this through better segmentation and with an optimised delivery model. As the leader in Professional Staffing we are well positioned to benefit from the structural growth potential in the German market. At the same time, we will further work on improving our profitability, through strict price discipline and tight cost control.

The Japanese market is the second-largest staffing market in the world, representing roughly 17% [1] of the global market. This market has seen robust growth since the beginning of liberalisation in 1996. Fragmentation is high, with the five largest players representing only around 20% [1] of the market, while the remainder is dominated by numerous small regional staffing firms. Adecco is currently the fourth-largest player in the Japanese market.

In 2012 the Japanese market continued to contract. Adecco has a high exposure to late-cyclical office and clerical business and approximately 80% of our total Japanese revenues are generated in this line. Demand for temporary staffing services in Japan was still negatively impacted by an uncertain regulatory and economic environment. Since early 2010, the Japanese government had considered revising the regulations on temporary staffing and a new temporary worker ‘dispatch’ law came into effect as of October 1, 2012. The Government defined 26 categories where temporary staffing is still allowed. Although some implementation steps are still pending, it is expected that customer hesitancy to use temporary agencies will diminish over time, as regulatory uncertainties are removed. In addition, with the new liberal government taking office, temporary labour might gain more support from a political perspective than under the previous socialist government. This evidently would be a positive for our industry and would spur demand.

At the end of the first quarter 2012, we successfully completed a few large outsourcing contracts, which had benefited our growth in 2011. At the same time, we saw a clear slowdown in business from the Insurance sector, which had driven demand due to the tsunami and earthquake in the previous year. Revenues for the full year 2012 increased 1% in constant currency to EUR 1,550 million. On an organic basis revenues decreased by 10%. EBITA increased by 3% in constant currency to EUR 91 million or was down 14% organically and when excluding restructuring costs. The EBITA margin was 5.8% in 2012, up 10 bps compared to the previous year. The EBITA margin excluding restructuring costs was 5.9%, up 20 bps compared to 2011. The acquired Professional Staffing company VSN Inc., which has been included in our results since January 2012, had a positive impact on the EBITA margin of 40 bps. We continued to be the cost leader in the market, delivering the highest profitability compared with our mainly local peers.

Our efficient service model is the main differentiating factor in the Japanese market. We have modified our traditional branch model, mainly in major urban areas, by separating the sales and recruitment processes. The aim was to attract a higher number of candidates in a market characterised by supply shortage as well as to improve client service. Our presence at high-traffic locations enables us to funnel a large number of candidates into an efficient screening process. The sales process, on the other hand, is centralised in contact centres in various cities, while a comprehensive database hosting client and candidate information forms the link between the job and the contact centres. In terms of the business mix between Professional and General Staffing, the acquisition of VSN in January 2012 doubled the share of Professional Staffing to revenues bringing it to approximately 20%, while approximately 80% are generated in General Staffing.

As of January 1, 2013, Christophe Duchatellier has taken on the extended role of Regional Head of Asia and Japan. Upon joining Adecco, Christophe initially managed the Professional Staffing business in France and at the beginning of 2012 was appointed Regional Head of Asia.

The short-term outlook for the Japanese staffing market is expected to remain muted as the economy stagnates. Adecco, however, believes that the structural growth potential is unchanged and will focus on opportunities in the temporary staffing, permanent placement and outsourcing markets to generate organic revenue growth.

 

[1]Adecco estimate.

[2]In 2012, Mexico, previously reported within North America, is reported under Emerging Markets.
The 2011 information has been restated to conform to the current year presentation.

[3]Source: Bureau of Labor Statistics (BLS).