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Strong operating margin performance in Q2 2007

The Adecco Group, the worldwide leader in Human Resource services, today announced results for the second quarter of 2007. For the second quarter net income increased by 64% to EUR 222 million compared to EUR 135 million a year earlier, positively impacted by EUR 66 million French social charge benefits. Revenues were up 5% organically to EUR 5.3 billion compared with EUR 5.1 billion in 2006. Underlying[2] operating margin improved 30 bps to 4.2%.

Zürich, Switzerland, Aug 10, 2007 

Q2 HIGHLIGHTS (Q2 07 vs. Q2 06)
  • Revenues of EUR 5.3 billion, up 3% (5% organically[1]) 
  • Reported operating income of EUR 322 million, up 59%
  • Reported net income of EUR 222 million, up 64%
  • Underlying[2] gross margin improvement of 40 bps to 17.6%
  • Underlying[2] operating margin improvement of 30 bps to 4.2%
  • Successful close of Tuja acquisition
Dieter Scheiff, Chief Executive Officer, Adecco Group said: "I'm pleased with the performance of Adecco in the second quarter. We continued to expand our underlying[2] operating margin to 4.2%. It's good to see that our value oriented management approach has triggered good pricing discipline, which, combined with efficient cost management, led to encouraging earnings growth. The result of the second quarter is another step towards our goal of reaching over 5% operating margin by 2009."
"While we maintain our focus on shareholder value, we continue to see good demand in Europe and Asia, which more than compensates for a still weak US market."
Group revenues for Q2 2007 were EUR 5.3 billion, a 3% increase compared with Q2 2006. On an organic basis, when excluding the impact of currency and acquisitions, Adecco grew revenues by 5%.
Gross Profit 
Gross margin improved 310 bps to 20.3% compared to the second quarter of 2006. On an underlying[2] basis, when excluding the modification of the calculation of French social charges, gross margin improved 40 bps to 17.6% as a result of higher gross margins in the temporary staffing business and the growing contribution of permanent placement.
Selling, General and Administrative Expenses (SG&A)
SG&A increased 10% in the period under review. Underlying[2] SG&A grew 7% in constant currency, reflecting an underlying[2] SG&A as a percentage of revenues increase of 10 bps to 13.3%. Organically, Adecco grew the office network by 4% (+300 offices) and FTEs by 3% (+1,000 FTEs) compared to the same quarter last year. At the end of June 2007, Adecco had over 36,000 FTEs and over 7,000 offices.
Operating Income                    
Operating income for the second quarter 2007 was EUR 322 million, an increase of 59% (12% on an underlying[2] basis in constant currency) compared with Q2 2006. Operating margin improved to 6.1% versus 3.9% for the same period last year. Underlying[2] operating margin increased by 30 bps to 4.2%.
Interest Expense and Other Income / (Expenses), net
Interest expense was EUR 13 million in the period, which compares to EUR 12 million in Q2
2006. For the full year 2007, interest expense is expected to be approximately EUR 56 million.
Other income / (expenses), net increased to EUR 10 million (Q2 2006: EUR 3 million),
due to a higher interest income on a higher cash position.
Provision for Income Taxes
The effective tax rate for the second quarter of 2007 was 29.6% compared with 29.2% in the same period last year. For the remaining quarters of 2007, Adecco continues to expect an effective tax rate of approximately 29%.
Net Income and EPS
Net income was up 64% to EUR 222 million in the second quarter of 2007 (Q2 2006: EUR 135 million), which represents a net income margin of 4.2%. Basic EPS was EUR 1.20 (EUR 0.72 for Q2 2006). The modified calculation of French social charges had a positive impact on Q2 2007 EPS of EUR 0.36 (EUR 0.30 for the period 2006 and Q1 2007 and EUR 0.06 for the period Q2 2007). 
Balance Sheet, Cash-flow, and Net Debt[3] 
The Group generated EUR 394 million of operating cash flow in the first half of 2007 and paid dividends of EUR 135 million, which reduced the net debt position to EUR 310 million at the end of June 2007 compared to EUR 556 million at the year end of 2006. In the second quarter of 2007 DSO improved 1 day to 58 days compared with Q2 2006.
Currency Impact 
Currency fluctuations had a negative impact of 2% on revenues and 4% on operating income in the second quarter of 2007, mainly due to the weakness of the US dollar and the Japanese yen. 
In France, Adecco increased revenues by 3% to EUR 1.8 billion in the second quarter of 2007. Operating income grew 196% to EUR 179 million, which reflects an operating margin improvement of 650 bps to 10.0%. Underlying[2] gross margin improved 70 bps, while underlying[2] operating margin expanded by 80 bps to 4.3%. Disciplined pricing and higher permanent placement revenues combined with a continued focus on cost efficiency are the reasons behind this underlying[2] improvement.
For Q3 2007 Adecco expects to benefit from approximately EUR 10 million higher operating income based on lower social charges due to the still modified calculation of social charges for the months of July and August. Currently there is no benefit anticipated for the periods thereafter as the French Parliament passed an amendment to the social security legislation which would eliminate the change in calculation made in April 2007.
In USA & Canada, Adecco's revenues declined by 6% in constant currency to EUR 0.8 billion in Q2 2007, continuing the development seen in the first quarter of 2007. The decline was most significant in the Industrial business, while only moderate in the Office business. In particular, a better customer mix led to a 40 bps improvement in gross margin, which combined with a decline in SG&A resulted in an operating income growth of 8% in constant currency. Operating margin increased by 60 bps to 4.7%.
In the second quarter of 2007, revenues in the UK & Ireland increased 6% in constant currency mainly driven by good demand in the Office and Industrial businesses as well as in Finance & Legal. Operating income declined 10% in constant currency. Operating margin was 2.7%.
Adecco plans to restructure this business in order to improve customer mix and cost efficiency, which will cause an additional expense of approximately EUR 5 million in the second half of 2007.
In Japan, revenues in constant currency grew 9% in the second quarter of 2007. The general shortage of candidates combined with strong demand for permanent placements led to a 60 bps gross margin improvement, while operating margin expanded to 7.5% from 6.4% in the same period last year.
Revenue growth in Germany was 24% in the second quarter of 2007. The healthy economic environment combined with higher acceptance levels of temporary staffing are the main drivers behind this growth, particularly for the Industrial business. Adecco Germany experienced 31% revenue growth, while DIS grew 15% in the period under review. Combined operating income grew 64% compared to Q2 2006, reflecting an operating margin improvement of 220 bps to 9.2%.
Nordics' revenues increased by 25% in constant currency (21% organically). Italy, Iberia and Benelux grew revenues by 8%, 6% and 6% respectively in Q2 2007. In the Emerging Markets revenues increased 13% in constant currency.
Q2 2007 Revenues in percent
Q2 2007 Underlying[2] gross profit in percent
(The pie charts are visable in the PDF version of the report)
Adecco grew revenues of the Office and Industrial businesses by 4% in constant currency to EUR 4.1 billion in Q2 2007 and raised gross margin by 390 bps to 19.4%. Underlying[2] gross margin improved 40 bps to 15.9%. The Industrial business, which increased revenues by 4% in constant currency, has been driven by strong demand in Italy and Germany. France added 3% to revenues, while demand in USA & Canada continued to be soft, where revenues declined 11% in constant currency. In the Office business, the increase in revenues was 5% in constant currency (4% organically) with business remaining very solid in Japan, Nordics and in UK & Ireland.
In the second quarter of 2007, revenues in the Professional Business[4] grew 7% in constant currency and 5% on an organic basis. Gross margin in the Professional Business increased 30 bps to 26.2%.
In Information Technology (IT), Adecco achieved revenue growth of 4% in constant currency (2% organically). In UK & Ireland the focus on value based management led to a growth deceleration, while in USA & Canada revenues declined, both in constant currency.
In the second quarter, Adecco's Engineering & Technical (E&T) business grew revenues by 8% in constant currency (6% organically). In USA & Canada as well as UK & Ireland Adecco increased revenues in single digit growth rates in constant currency, while demand in Germany continued to be strong.
In Finance & Legal (F&L), Adecco increased revenues by 5% in constant currency in the second quarter of 2007. The declining business in USA & Canada was compensated by good revenue growth in UK & Ireland.
In the second quarter of 2007, revenues in Human Capital Solutions (HCS) were flat in constant currency. In Sales, Marketing & Events (SM&E) and Medical & Science (M&S) revenues grew 16% and 14% (11% organically) in constant currency, respectively.
The key indicators for the global staffing services market continue to point to a favourable growth for the industry. The Group remains committed to its objective of revenue growth of at least 7-9% per annum on average for the coming years, providing no material changes to the macroeconomic environment. At the same time management continues to be confident that the focus on value based management and professional and specialized business fields will allow Adecco to continuously improve 2009 operating margin to over 5% and 2009 return on capital employed (ROCE) to above 25%, which compares to 20.3% in 2006.
In the shorter term, management expects to grow slightly below the market in France as the focus on shareholder value and profitable growth continues. USA & Canada is anticipated to see a similar development as in Q2 2007, while strong growth in Germany and ongoing good demand in Japan should continue.
The Commission of European Communities approved the takeover of Tuja Group on July 25, 2007 without any conditions and obligations pursuant to the European Merger Control Regulation. Adecco will consolidate Tuja Group as of August 2007. The transaction was mainly financed in cash.
Financial Agenda 2007 and 2008
  •          Q3 2007 results
November 2, 2007
  •          Q4 & FY 2007 results
March 4, 2008
  •          Q1 2008 results
May 5, 2008
  •          Annual general meeting      
May 6, 2008
  •          Q2 2008 results
August 12, 2008
  •          Q3 2008 results
November 4, 2008
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. as of the date of this release, and we assume no duty to update any such forward-looking statements. 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. 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 the French anti-trust investigation and the resolution of the US class action; and any adverse developments in existing commercial relationships, disputes or legal and tax proceedings.
There will be an audiocast of the media conference at 9 am CET as well as a webcast of the analyst presentation at 11 am CET, details of which can be found at our Investor Relations section at .


[1] Organic growth is a non US GAAP measure and excludes the impact of currency and acquisitions.
[2] Underlying is a non US GAAP measure and excludes the impact of the modified calculation of French social charges for the periods 2006 and H1 2007, which fully positively impacted Q2 2007 with EUR 144 million on gross profit, EUR 101 million on operating income and EUR 66 million on net income. The calculation was modified in April 2007 with retroactive effect to January 2006 and is expected to cease as of October 2007. For further analysis see page 11.
[3] Net debt is a non-US GAAP measure and comprises short-term and long-term debt less cash and cash equivalents and short-term investments
[4] Professional business refers to Adecco's Information Technology, Engineering & Technical, Finance & Legal, Medical & Science, Sales, Marketing & Events and Human Capital Solutions businesses.
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