Commenting on the results Jérôme Caille, Adecco Group Chief Executive Officer, said:
"We are pleased with the acceleration of sales growth across the globe, reflecting the quality of our client relationships and the commitment of our people. This has been achieved together with gross margin stabilisation and we are encouraged by the improving performance of the US business. We are moving into the second half of the year with confidence."
Group sales for the second quarter rose 6% in Euro, and 8% in constant currency, representing a doubling of sales growth over the first quarter.
Gross margin at group level showed a sequential improvement of 30bp
from 16.5% in Q1 2004 to 16.8% in Q2 2004. Year on year, gross margin declined 20bp from 17.0% in Q2 2003 to 16.8% in Q2 2004. Revenue decline in the LHH Career Services division in Q2 2004 led to a negative impact of 40bp in the Group gross margin. Thus, excluding the LHH Career Services division, gross margin improved 20bp this quarter compared to last year's second quarter. This gross margin performance reflects a wide variety of margin experience globally. Solid margin improvements were achieved in Adecco Staffing and in Ajilon Professional. In Adecco Staffing North America, gross margin improved 50bp in Q2 2004 compared to Q1 2004, reflecting the early results of initiatives aimed at restoring prices and profitability.
In the second quarter, operating costs rose 5% at constant rates in response to further sales acceleration. This excludes costs associated with the 2003 financial reporting delay of EUR 41 million. Taking into account these costs, operating costs increased 12% at constant rates. As a percentage of sales the operational cost ratio dropped a further 50bp to 13.2%, excluding costs associated with the 2003 financial reporting delay.
Operating Income before Amortisation
In the second quarter, operating income before amortisation, excluding costs associated with the 2003 financial reporting delay of EUR 41 million, was up 15% at EUR 155 million. Taking into account costs associated with the 2003 financial reporting delay, operating income before amortisation declined by 16%. Operating margin before amortisation and costs associated with the 2003 financial reporting delay increased by 20bp to 3.6% in Q2 2004 from 3.4% in Q2 2003.
Net income was up 11% to EUR 95 million in the second quarter, a basic EPS of EUR 0.51 for Q2 2004 compared to EUR 0.46 for the second quarter last year. In the first half, net income was down 17% to EUR 125 million. Basic EPS for the first half was EUR 0.68 compared to EUR 0.80 for the first half of last year. Net income and basic EPS figures for both first half and second quarter 2004 include EUR 30 million gain on sale of jobpilot in April 2004.
EPS: Earnings per share
Cash Flow and Net Debt
Cash flow from operations was EUR 33 million in the first six months, which represents a decrease of EUR 151 million compared with the same period last year. This decrease reflects primarily cash outflow of EUR 57 million associated with the 2003 financial reporting delay; cancellation of UK securitisation program of EUR 50 million and additional working capital needed to support growth.
Net debt was further reduced by EUR 132 million in the first half to EUR 792 million.
Currency fluctuations reduced reported sales by 2% and operating income before amortization by 1% in the second quarter. In the first half, the negative currency impact was 3% and 1% for sales and operating income before amortisation, respectively.
US GAAP Results
For the first six months ended June 27, 2004, the Adecco Group reported under US Generally Accepted Accounting Principles (US GAAP) revenues of EUR 8.1 billion, operating income of EUR 173 million, which includes EUR 1 million amortisation of intangibles, income from continuing operations of EUR 95 million and a net income of EUR 125 million, which includes EUR 30 million gain from the sale of jobpilot.
Adecco Staffing Division
Adecco Staffing is the number 1 in the world, ranked number 1or 2 in 11 of the 13 largest staffing markets. In this quarter, the division accounted for 89% of group revenue and 85% of total contribution generated by operating units. The quarter saw a year on year increase in sales of 8% in constant currency to EUR 3.8 billion, with all regions delivering sales growth. This represents a strong acceleration against a first quarter revenue growth of 5% in constant currency. Operating income before amortisation in this quarter grew 22% in constant currency to EUR 155 million, resulting in a 50bp contribution margin increase compared to the second quarter of 2003.
* Adecco France sales grew 5% in the quarter and we again gained market share in a flat market. Provisions of EUR 12 million were released at gross margin level in Q2 2004. A similar amount of these provisions had been released at gross margin level in Q2 2003.
* Adecco North America sales rose 8% in constant currency, a healthy improvement on the first quarter, when revenues grew 3% in constant currency. In the second quarter, Adecco North America increased its contribution compared to Q2 2003.
* Adecco UK sales grew 5% in constant currency, supported by an active branch opening program.
* Adecco Japan grew by 11%, supporting regional Asia Pacific sales growth of 12%, both in constant currency. We are on track to open our 50 planned new branches for this year.
* Adecco Italy sales grew by 19% compared with 12% in Q1 2004. We anticipate that Italy will remain the highest growth country of our major European markets this year.
* Adecco Germany grew sales by 15% up from a 2% decline in Q1 2004, reflecting market conditions and measures taken by our German management team.
* Adecco Iberia delivered sales growth of 3% with a continued extension of our service offering.
* Adecco Benelux achieved strong sequential sales improvement from being flat in Q1 2004 to being up 14% in Q2 2004 with excellent operational gearing.
Ajilon Professional Division
Ajilon Professional is ranked number 3 in the global professional staffing market.
In the Ajilon Professional Services Division, which represented 10% of group revenues, sales for the quarter were up 8% in Euro and 9% in constant currency to EUR 448 million, growing for the first time faster than the group. Operating income before amortisation was up 22% in Euro and 24% in constant currency to EUR 22 million, a 4.9% return on sales, representing a 60bp improvement in margins over the second quarter of 2003.
Amongst the major business units, Ajilon UK Consulting delivered strong sales growth of over 20% in Q2 2004, its highest sales growth in nine quarters, together with 30bp gross margin increase. Enhancement in the temp-perm business mix, particularly in the Office and Finance segments, also helped margin increase.
LHH Career Services Division
Lee Hecht Harrison (LHH) is ranked number 2 in the world outplacement and career services market.
In the LHH Career Services Division, which represented 1% of group sales and 3% of contribution generated by operating units, revenues fell by 30% in Euro and 25% in constant currency to EUR 39 million, due to continuing cyclical deceleration in demand. Contribution declined by 63% (down 60% in constant currency) to EUR 6 million. Revenue growth in this counter-cyclical business is positioned to resume as M&A activity picks up.
As previously announced the sale of jobpilot was completed in April 2004. A book profit of EUR 30 million, including a favourable currency impact, has been realised in the second quarter.
Controls and compliance
As previously announced Adecco's Audit Committee commissioned, in 2003, an independent investigation by US and Swiss independent counsel and overseen by an independent monitor. This investigation is now fully complete and did not find anything financially material to the Adecco Group.
Adecco is working to strengthen its internal controls in areas identified during the 2003 audit.
Adecco is committed to maintaining the highest standards of ethical business conduct. To further strengthen group practices in this area, Adecco has today announced the appointment of a full-time Chief Compliance and Business Ethics Officer to oversee worldwide compliance practices and business ethics within the group reporting to the Board.
As we said in Q1, worldwide demand for temporary staffing continued to grow and Adecco expects it to further strengthen into 2005. The strengthening business environment underpins the recent stabilisation in gross margin and we are committed to improving margins further as market conditions allow. Profitability will be less impacted by the costs related to the 2003 financial reporting delay in the second half of the year.
Adecco remains confident about the medium term profitability outlook due to the increase in the number of permanent placements, the recovery of the professional staffing sector and the accelerated growth in countries undergoing favourable regulatory changes.