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Adecco SA: improving results for the third quarter 2004

: The Adecco Group announced today results for the third quarter of 2004, which include revenues of EUR 4.5 billion and net income of EUR 102 million. For the nine months the Adecco Group reported revenues of EUR 12.5 billion and net income of EUR 227 million.

Chéserex, Suisse, Nov 24, 2004 

Q3 2004 Highlights (Q3 2004 vs Q3 2003[1]):
  • Revenues up 5% at EUR 4.5 billion (up 7% in constant currency)
  • Gross margin stabilized at 16.6% in Q3 2004
  • Operating income margin at 3.9% in Q3 2004
  • Operating income up 7% at EUR 174 million
  • Net income down 2% to EUR 102 million
  • EPS of EUR 0.55 for the third quarter compared to EUR 0.56 for the same period last year
  • Adecco Staffing grew revenues by 5% and contribution by 16%
  • Ajilon Professional converted a 10% revenue growth into a 48% contribution increase
  • LHH Career Services revenues and contribution declined by 24% and 68%, respectively, reflecting the market cycle
Nine Months Highlights (9 months 2004 vs 9 months 2003):
  • Revenues up 4% at EUR 12.5 billion
  • Operating income down 15% at EUR 347 million, but up 5% at EUR 428 million excluding costs of EUR 81 million associated with the 2003 financial reporting delay
  • Net income down 11% to EUR 227 million
  • EPS of EUR 1.21 for the nine months compared to EUR 1.36 for the same period last year
  • Net debt further reduced to EUR 767 million
[1] Unless stated otherwise
Commenting on the results, Jérôme Caille, Adecco Group Chief Executive Officer, said:
"These are solid results. Gross margin has stabilized and operating income margin is at the highest level since 2001. Adecco Staffing is recovering well and continues to demonstrate operational gearing, while Ajilon Professional's sales growth further accelerated and its operating income margin increased. The increase in permanent placement and temp gross margin offset the gross margin decline resulting from the deceleration in LHH. We are cautiously optimistic about our prospects for 2005."
Group sales for the third quarter rose 5% to EUR 4.5 billion, a 7% increase in constant currency compared to the same period last year. This represents a 1% decline in the growth rate compared with Q2, which is due to a lower number of business hours in Q3 compared to Q2. On a like-for-like basis, the sales growth rate was maintained in Q3 2004.
Gross Margin
Year on year gross margin at group level remained stable at 16.6% in Q3 2004. Excluding the LHH Career Services division, gross margin improved 30bp this quarter compared to last year's third quarter. Ajilon Professional reported solid gross margin improvements in Q3 2004 compared to Q3 2003. Adecco Staffing USA remains focused on efforts to increase gross margin, and achieved a solid margin increase in the third quarter compared to the same period a year ago.
Operating Costs
As a percentage of sales the operating cost ratio remained stable at 12.7% in the third quarter, excluding costs associated with the 2003 financial reporting delay of EUR 3 million. Operating costs rose 7% in constant currency in Q3 2004 compared to Q3 2003, primarily due to investments in branch expansion and new hires in fast growth geographies. Stock options expensing and higher Sarbanes-Oxley and compliance costs accounted for 2% of this increase, while costs associated with the 2003 financial reporting delay accounted for 1% of the increase.
Operating Income
Operating margin improved by 10bp to 3.9% in the third quarter compared to the same quarter last year. Operating income was up 7% at EUR 174 million.
Net Income and EPS[2]
Net income was down 2% to EUR 102 million in the third quarter, a basic EPS of EUR 0.55 for Q3 2004 compared to EUR 0.56 for the third quarter last year, principally as a result of an increase in the effective tax rate from 27% in Q3 2003 to 36% in Q3 2004 relating to treatment of the reporting delay costs. For the nine months, net income was down 11% to EUR 227 million. Basic EPS for the nine months was EUR 1.21 compared to EUR 1.36 for last year's nine months.
[2] EPS: Earnings per share
Cash Flow and Net Debt
Cash flow from operations was EUR 163 million in the nine months, which represents a decrease of EUR 126 million compared with the same period last year. This decrease reflects primarily cash disbursements relating to the financial reporting delay, an increase in accounts receivable due to the cancellation of the UK securitisation program, and an increase in working capital to support sales growth.
Net debt was further reduced by EUR 157 million in the nine months to EUR 767 million.
Currency Impact
Currency fluctuations reduced reported sales by 2% and operating income by 1% in the third quarter. In the nine months, the negative currency impact was 3% and 1% for sales and operating income, respectively.
Adecco Staffing Division
In this quarter, the division accounted for 89% of group revenue and 87% of total contribution generated by operating units. The quarter saw a year on year increase in sales of 7% in constant currency to EUR 4 billion, with all regions delivering positive sales growth in constant currency.  Contribution in this quarter grew 16% in constant currency to EUR 186 million, resulting in a 40bp contribution margin increase compared to the third quarter of 2003.
  • Adecco France grew sales by 2% in the quarter. Contribution progressed in line with sales as a result of strong cost controls and stable margins.
  • Adecco North America sales rose 4% in constant currency in the third quarter. Despite some sales growth deceleration, efforts to restore gross margin led to encouraging gross margin enhancement in Q3 2004 compared to the same quarter last year.
  • Adecco UK grew sales by 5% in constant currency, but with contribution dilution as a result of a change in the methodology for accruing vacation expense, as disclosed in Q2.
  • Adecco Japan grew sales by 15% in constant currency. Investments in branch expansion and additional costs for social charges limited the contribution growth to 3%.
  • Adecco Italy grew sales by 13%. Combined with effective cost management, this increase led to 140bp improvement in return on sales in Q3 2004 compared to the same period last year.
  • Adecco Germany grew sales by 19%, accelerating from a 2% decline posted in Q1 2004 and an increase of 15% in Q2 2004. This performance was achieved together with strong profitability. Developments in Germany continue to reflect the very positive market conditions following the labour market deregulation.
  • Adecco Iberia delivered sales growth of 7% and continued to improve gross margins and profitability as a result of the extension of its service offering into HR solutions.
  • Adecco Benelux sales continued to accelerate with a 17% sales increase in Q3 2004 and excellent operational gearing.
Ajilon Professional Division
In the Ajilon Professional Services Division, which represented 10% of group revenues, sales for the quarter were up 10% in Euro and 12% in constant currency to EUR 454 million, as the division continued to build momentum.  Contribution was up 48% in Euro and 53% in constant currency to EUR 23 million, a 5.1% return on sales, representing a 140bp improvement over the third quarter of 2003.
Amongst the major business units, Ajilon UK Consulting continued sales acceleration to 29% at constant currency in Q3 2004 together with 70bp gross margin increase.
LHH Career Services Division
In the LHH Career Services Division, which represented 1% of group sales and 2% of contribution generated by operating units, revenues fell by 24% in Euro and 19% in constant currency to EUR 35 million, due to continuing cyclical deceleration in demand. Contribution declined by 68% (down 66% in constant currency) to EUR 4 million. Despite cyclical deceleration, LHH continued to deliver the highest profitability rate in the Group. Revenue growth in this counter-cyclical business is positioned to resume as M&A activity picks up.
Class Action Litigation
Adecco is defending this action vigorously and recently filed a motion to dismiss the consolidated class action complaint.  At this stage, the Adecco Group cannot predict when the class action litigation will be resolved or whether the ultimate resolution of this matter will have a material adverse effect on the Adecco Group's consolidated financial position, results of operations or cash flows.
U.S. State Unemployment Tax Reviews
As previously disclosed in the half-year report 2004, some states have advised Adecco US and other companies that they are reviewing the unemployment tax rates applied as a result of some past business reorganizations in the U.S. As of this date, Adecco US has not yet received any assessments from any state. Liability, if any, will depend on the resolution of future assessments and cannot be reasonably estimated at this time but may be material to the Adecco Group's consolidated financial position, results of operations or cash flows. Adecco US is cooperating with the authorities and intends to evaluate and, as appropriate, defend any such assessments.
We expect positive sales growth to continue this year in line with market developments and we are cautiously optimistic about our prospects for 2005.
Our focus on margin enhancement will remain strong, supported by expansion of permanent placement activity and professional staffing. Our aspiration is to further improve gross margin at Group level through price discipline and management of the business mix. 
Adecco S.A. is a Forbes 500 company and the global leader in HR Solutions.  The Adecco Group network connects up to 700,000 associates with business clients each day through its network of 29,000 employees and 6,000 offices in 71 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 corporate clients and qualified associates.
The Adecco Group comprises three Divisions: Adecco StaffingAjilon Professional and LHH Career Services.  In Adecco Staffing, the Adecco network focuses on flexible staffing solutions for global industries in transition, including automotive, banking, electronics, logistics and telecommunications; Ajilon Professional offers an unrivalled range of specialised branded businesses; LHH Career Services encompasses our portfolio of outplacement and coaching consultancy busineses.
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 Marche (EURONEXT: ADE).
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: the outcome of investigations by governmental agencies or stock exchanges; the assertion and resolution of US unemployment tax assessments; the pace of economic recovery in various regions and the demand for temporary staffing; the impact and result of any litigation (including US class action litigation); any adverse developments in existing commercial relationships, disputes or legal proceedings; volatility of the Company's stock price; intense competition in the markets in which the Company competes; and negative reactions from the Company's shareholders, creditors or vendors with respect to any of the foregoing matters.
The 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 Annual Report on Form 20-F for the year ended December 28, 2003, and other reports filed with or submitted to the U.S. Securities and Exchange Commission from time to time, for a further discussion of the factors and risks associated with our business.
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Q304 report

Nov 24, 2004