Annual Report 2011

Our results
Review of main markets

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 70% [1]. Adecco is the market leader in France, with a market share of 31% [1]. France is a key market for our Company, where we generated 30% of our total revenues in 2011. Since August, the Regional Head is Alain Dehaze who previously led Adecco’s operations in Benelux and the Nordics. 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 continues to deliver very solid revenue growth. Steady deregulation of the temporary staffing industry in France has opened up opportunities for our Company. Since 2005, permanent placements have been permitted, which has led to strong growth in that segment. 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. However, the public sector represents an attractive long-term opportunity for the industry. Apart from 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.

Adecco’s business in France experienced strong growth in the first six months in 2011. A tougher comparison base and the uncertainty related to the European debt crisis led to slower growth in the second half of the year. Revenues increased 10% compared with the previous year. Growth was driven by the Industrial segment, which increased 11%. EBITA increased by 10% to EUR 220 million. The EBITA margin was 3.6%, flat compared to the prior year. The flat EBITA margin development is mainly the result of higher growth in the lower-margin large account business, negatively impacting the client mix. Since January 2011, the subsidies for employees earning low wages have been reduced. To offset the negative impact on our gross profit, we needed to renegotiate the contracts with our clients and for the full year 2011, we managed to minimise the negative impact to less than 10 bps on the Gross Margin. Pricing remained rational in the market.

In order to further strengthen the Group’s position in France and to ensure sustainable profitability, Adecco is informing and consulting the French Works Councils on its plans to unite the networks of Adecco and Adia under the Adecco brand. Combining the expertise of both general staffing businesses under a single roof would facilitate an even better offering for clients, candidates and colleagues. At the same time, the cost base would be further optimised through the planned reduction of over 500 full-time equivalents (FTEs), further branch network consolidation and introducing the shared service centre concept. Adecco expects to invest approximately EUR 45 million, the majority of which would be incurred during the second half of 2012.

The US market, which represents 31% [1] of the global staffing market, is the largest worldwide. It is highly fragmented, and while we are the largest publicly listed player, our market share is only about 4% [1]. From a regulatory perspective, this market is amongst the most liberalised in our industry.

The region represented 18% of the Group’s total revenues in 2011. The share of revenues generated in the Professional Staffing segment 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 the General Staffing segment. The region’s growing demand for temporary jobs was in stark contrast to the slow progression in the creation of permanent positions and a persisting high level of unemployment. Of the approximately 900,000 temporary staffing jobs lost during the recession in 2008 and 2009, over 600,000 were recovered by the end of 2011. As a result, the penetration rate increased from the trough of 1.33% [2] in 2009 to 1.81% [2] at the end of 2011. Growth in 2011 was strongest in the Office business with 20% constant currency growth, but also the Industrial segment held up very well with 7% constant currency growth despite running against a tough comparison base in 2010. Professional Staffing was up 8% in constant currency or by 3% organically, held back by the IT segment. The integration of MPS was successfully completed during the first half of 2011 and the targeted synergies were clearly exceeded. In IT Professional Staffing, our revenue growth lagged behind the market in 2011. The main reasons were the intense focus on the MPS integration and insufficient internal resources to capture the market potential. Hiring of additional specialised consultants started in summer 2011 and is expected to show a positive contribution in 2012.

Overall, revenues in the region amounted to EUR 3,646 million, up 10% in constant currency, or 8% organically. EBITA increased by 20% to EUR 161 million, or 28% on a constant currency basis. The EBITA margin was 4.4%, 60 bps above the prior year. Integration costs related to MPS amounted to EUR 4 million in 2011 and EUR 20 million in 2010.

The focus in North America in 2012 will be on Professional Staffing, notably the IT segment, and closing the gap to the market in terms of growth, without sacrificing profitability. Furthermore, we will continue to expand our successful General Staffing business.

Representing 8% [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 8% [1] we are the market leader in the UK.

In 2011, our revenues amounted to EUR 1,707 million, up 6% in constant currency and up 5% organically. This represented 8% of the Group’s total revenues. From a business mix perspective, roughly 66% of our revenues stemmed from the Professional Staffing segment, while 34% were generated in General Staffing. EBITA increased by 46% to EUR 32 million. In constant currency, EBITA increased by 50%. The EBITA margin was 1.9% in 2011, up 50 bps compared with the prior year. Integration costs related to MPS amounted to EUR 2 million in 2011 and EUR 13 million in 2010 (for Spring and MPS).

Whereas the UK recovery was lagging behind other countries in 2010, the market returned to low single-digit growth in 2011. Austerity measures in the UK meant reduced government spending in temporary staffing. This led to a strong double-digit decline in our revenues generated in the public sector, which represented approximately 10% of our total UK & Ireland revenues in the last quarter of 2011. After strong growth in the permanent placement business in 2010, the good momentum continued in 2011 with revenues up 22% in constant currency, but we are still clearly below prior peaks.

In a challenging business environment we successfully completed the integration of MPS in 2011 and slightly exceeded the targeted synergies. Going forward, we will continue to focus on leveraging our market-leading position and enhancing our profitability. Top priorities remain the continuing improvement of service delivery models and a systematic approach to client attraction and retention.

The Japanese market is the second-largest staffing market in the world, representing roughly 17% [1] of the global market. This market has had robust growth since the beginning of liberalisation in 1996. Fragmentation is high, with the five largest players representing less than 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 2011 the Japanese market remained in negative territory. Adecco has a high exposure to late-cyclical office and clerical business and approximately 90% of our total Japanese revenues are generated in this segment. The demand for temporary staffing services in Japan was still negatively impacted by an uncertain regulatory environment. Since early 2010, the Japanese government had considered revising the regulations on temporary staffing. At the beginning of March 2012, a draft legislation was passed in the House of Representatives and is expected to be passed in the House of Councilors. The enforcement is expected several months after the completion of further necessary legislative steps. Anticipated changes could include a minimum assignment length. In addition, the Labour Ministry will be ordered to clarify the rules for the 26 pre-defined skill categories where temporary staffing will be allowed, as well as providing clarity on outsourcing services. It is anticipated that customer hesitancy to use temporary agencies will diminish over time as regulatory uncertainties are removed. The impact on Adecco is expected to be limited and manageable. In 2011, thanks to outsourcing contracts won at the end of 2010 and during 2011, we more than compensated declining trends in the temporary staffing business. The earthquake and tsunami had only a very limited impact on our business, since our exposure to the affected industries is very minor.

Against a still declining market in Japan, our revenues for the full year 2011 increased 4% in constant currency, to EUR 1,406 million. Management continued to excel in terms of cost control and execution. While EBITA increased by 16% to EUR 80 million or 12% in constant currency, the EBITA margin was 5.7% in 2011, up 40 bps compared to the previous year. 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, approximately 9% of our revenues stem from the Professional Staffing segment, while roughly 91% are generated in General Staffing.

The outlook for the Japanese staffing market is expected to remain muted due to the still unclear situation with regards to the proposed regulatory changes for temporary staffing services. Adecco, however, believes that the structural growth potential is unchanged. The acquisition of VSN Inc. in January 2012 will double the contribution of Professional Staffing to the company’s revenues in Japan and reinforce the strong market position.

Globally and within Europe, Germany is a key market for staffing, with a roughly 7% [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. In 2011, the German economy witnessed good economic growth and withstood the European debt crisis. The prior peak penetration rate (the number of temporary employees as a percentage of the overall workforce) of 1.9% [3], reached in 2008, was surpassed during 2011 and it is a reflection of the strong cyclical recovery and 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 Directive requires the lifting of all restrictions on temporary agency work. This offers additional revenue potential for our industry. What’s more, 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 2011, our revenues in Germany & Austria increased by 25% to EUR 1,544 million. The improvement in revenue growth in Germany & Austria was the highest within the Adecco Group. From a business line perspective, Professional Staffing revenues represented approximately 16% of our revenues in Germany & Austria, while General Staffing contributed 84%. Compared with 2010, EBITA increased by 34% to EUR 110 million. This resulted in an EBITA margin of 7.1%, up 40 bps compared with the prior year.

The comparatively higher profitability in Germany is attributable to the fact that temporary employees are on our own payroll – a regulation particular 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.

In 2012, our focus will be on further developing our business with small and medium enterprises. We aim to achieve this through better segmentation and with an optimised delivery model. We are the leader in Professinal Staffing and our organisation is well positioned to benefit from both the structural and cyclical growth potential in the German market. At the same time, we will further work on increasing our profitability, through strict price discipline and strong cost control.

Further information on countries and regions can be found in the Financial Review.

 

[1]Adecco estimate.

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

[3]Source: Ciett (International Confederation of Private Employment Agencies).