Annual Report 2013

Review of main markets

Market overview
France is a key market for staffing, with an approximate share of 6% [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 around 28% [1].

France is our largest market, generating 24% of our total revenues in 2013. Approximately 90% of revenues stemmed from the General Staffing business, the majority of which is blue-collar industrial staffing. Professional Staffing still represents a minor part of our business in France, but is clearly a structural growth area for the future.

At the end of 2012 the Government introduced a tax relief programme known as CICE (tax credit for competitiveness and employment) for all companies operating in France. For 2013, this provided employers with a tax credit of 4% on employee salaries up to 2.5 times the minimum wage; for 2014, the amount of credit increases to 6%. This credit must be used, amongst other purposes, to fund training and investment in research and development. Separately, new regulations came into effect in July 2013 increasing unemployment social charges on short-term contracts with a limited duration (CDD contracts). These new social charges do not apply to temporary staffing contracts, but in return the temporary staffing industry committed to employ a certain number of flexible workers on unlimited duration contracts (CDI contracts).

Over the last two years Adecco has implemented significant measures to further increase the efficiency of the French operations. In 2012, we combined the Adecco and Adia branded businesses under the single Adecco brand, resulting in significant reductions in headcount and branch footprint. In 2013, further cost reduction measures were taken to continue to align the cost base with the negative revenue development.

Performance in 2013
The weak economic backdrop in France led to a further decline in the French staffing market of 7% [1] in 2013. As a result of our continued focus on profitability, Adecco’s revenues decreased by 8% organically for the year as a whole. This was slightly more than the market, but by the second half of the year we had closed the gap to our major peers. The revenue decline was driven primarily by weakness in the Industrial business (-9%).

EBITA was EUR 224 million and the EBITA margin was 4.7%. EBITA excluding restructuring costs was EUR 243 million, up 48% compared to 2012. The EBITA margin excluding restructuring costs increased to 5.1%, the leading performance in the market. This margin increased by 190 bps compared to the prior year driven by our cost reduction measures, price discipline and the effect of CICE.

Priorities for 2014
A priority for the management in France in 2014 will be the on-going segmentation of our business, with dedicated branch networks and distinct operating models by segment. Further developing our permanent placement business is another area of focus. We will also be implementing a bench model in which a number of our associates will receive unlimited duration contracts (CDI contracts) as part of a broader industry initiative agreed by all major staffing companies. This is a new model in France but the Adecco Group can draw on its experience of similar systems in Germany and Sweden. As the market leader, we will also focus on maintaining price discipline as the market begins to recover.

Market overview
The US market, which represents 34% [1] of the global staffing market, is the largest worldwide. It is highly fragmented, and while we are the second-largest player, our market share is only about 4% [1]. From a regulatory perspective, this market is amongst the most liberalised in our industry. The share of revenues generated in the Professional Staffing business is also amongst the highest when compared with other markets.

North America represented 19% of the Group’s total revenues in 2013. From a business line perspective, Professional Staffing and Solutions revenues were roughly 50% of total revenues while 50% stemmed from General Staffing.

In the USA, demand for temporary jobs was healthy in 2013 and increased faster than permanent employment. Approximately 900,000 temporary staffing jobs were lost during the recession in 2008 and 2009, but by the end of 2013 over 1,000,000 had been recovered while total employment in the USA is still 0.5% [4] below the 2007 peak. As a result, the penetration rate (the number of temporary employees as a percentage of the overall workforce) increased from the trough of 1.4% [4] in 2009 to 2.0% [4] in 2013, equal to the peak reached in the year 2000. Recent regulatory and structural trends point to this peak being surpassed in the future. One driver is healthcare reform, which could spur further demand for temporary staffing.

Performance in 2013
Overall, revenues in the region amounted to EUR 3,726 million, up 3% organically. General Staffing grew 2% with good growth in Industrial of 7%, somewhat offset by a decline in Office of 3%, all in constant currency. Professional Staffing was up 3% organically, with our two largest segments, IT and Engineering & Technical, performing well. In our permanent placement business we had a strong year, with revenues up 15% in constant currency.

EBITA was EUR 168 million and the EBITA margin was 4.5%. EBITA excluding restructuring costs was EUR 174 million, up 8% in constant currency. The EBITA margin excluding restructuring costs was 4.7%, up 30 bps compared to 2012. Restructuring costs incurred for the consolidation of several data centres amounted to EUR 6 million in 2013 and EUR 6 million in 2012.

Priorities for 2014
In North America, our revenue growth rate was steady throughout 2013 in constant currency. For 2014, economic forecasts point to accelerating GDP growth and we will focus on driving strong commercial activity levels in order to benefit from this improvement. In addition, we will continue to grow our leading operations in Business Process Outsourcing through our Pontoon business for MSP and RPO and our Beeline business for VMS. A key priority for management is to leverage further our cost base and the previous investments we have made, especially in our IT staffing business. In 2014 we will also move to a single headquarters for the Adecco Group in North America, in order to realise further overhead savings.

Market overview
Representing 11% [1] of the global staffing market, 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. From a business mix perspective, roughly two-thirds of our revenues stemmed from Professional Staffing, while one-third was generated in General Staffing. The UK & Ireland represented 10% of the Group's total revenues in 2013. In line with the recovering UK economy, the UK staffing market showed an improving growth trend during 2013.

Performance in 2013
Our revenues amounted to EUR 1,907 million, up 3% in constant currency. Revenues were flat in General Staffing, while Professional Staffing was up 4%, both in constant currency.

EBITA was EUR 37 million, and the EBITA margin was 1.9%. EBITA excluding restructuring costs was EUR 40 million in 2013, up 28% in constant currency. The EBITA margin excluding restructuring costs was 2.1%, an increase of 50 bps compared to the prior year. In 2013, restructuring costs amounted to EUR 3 million. It should be noted that 2012 was affected by the London Summer Olympics, with a benefit to revenues but a negative impact on profitability due to sponsorship costs.

Priorities for 2014
In 2014, we will continue to focus on leveraging our market-leading position, with high levels of commercial activity in order to benefit from an improving economy. A top priority remains further increasing our profitability, by focusing on appropriate service delivery models, strengthening our presence in the permanent placement business and leveraging the opportunities offered by Business Process Outsourcing solutions (MSP/RPO/VMS).

Market overview
Germany is a key market for staffing with a roughly 6% [1] share of the global market, and we continue to view it as one of the most attractive markets. We generated 8% of the Group’s revenues in 2013 in Germany & Austria. In Germany our market share is 9% [1], making us the second-largest player.

The comparatively higher profitability in Germany is attributable to the fact that temporary agency workers 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 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.

At the end of 2012 and during 2013, new collective wage agreements for temporary staffing came into effect in various industries, reflecting better alignment in terms of compensation between temporary and permanent jobs as stipulated by the Equal Pay provisions in the European Directive on Temporary Agency Work. For instance, IG Metall, the largest Union in Germany 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. At the end of 2013, the new Government announced a coalition agreement which also affects temporary work.

In 2013, the penetration of temporary staff as a proportion of the overall workforce was 2.2% [1] in Germany, the same as the prior year. In the medium 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 even 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.

Performance in 2013
In 2013, our revenues in Germany & Austria increased by 2% to EUR 1,620 million. From a business line perspective, Professional Staffing revenues represented 16% of our revenues in Germany & Austria, while General Staffing contributed 84%. In 2013, revenues grew by 2% in General Staffing and declined by 1% in Professional Staffing.

EBITA was EUR 88 million in 2013 compared to EUR 90 million in the prior year. Restructuring costs in 2012 amounted to EUR 10 million. In 2013, the EBITA margin was 5.5%, down 80 bps compared to the EBITA margin excluding restructuring costs in 2012.

Priorities for 2014
In Germany & Austria, revenue growth clearly improved from a decline of 7% in Q1 2013 to growth of 10% in Q4 2013. In 2014, we will focus on capturing further growth from this recovering trend, which was led by the Industrial business, and on expanding our business with small and medium-sized companies. As the leader in Professional Staffing, we are also well positioned to benefit from the structural growth potential in higher-skill areas.

Market overview
The Japanese market is the second-largest staffing market in the world, representing roughly 13% [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 regional and local staffing firms. Adecco is currently the fourth-largest player in the Japanese market. In 2013, Japan represented 6% of the Group’s revenues.

In 2013, the new Government announced a planned structural change of the temporary staffing and worker dispatch laws. The new legislation would eliminate restrictions based on specific job categories and also change contract periods for non-permanent workers. These regulatory changes are expected to be considered for legislative approval in 2014 and to take effect in late 2015.

Performance in 2013
Our revenues in Japan decreased 10% in constant currency to EUR 1,118 million. This reflects in part the fact that approximately 75% of our revenues are generated in the late-cyclical Office business, which is yet to see the benefit of expansionist economic policies. In addition, we still suffered early in 2013 from the fact that large outsourcing contracts from 2011–2012 were successfully completed and did not recur. However, by Q4 2013 revenues were only down 3% in constant currency due to the already lower base. Professional Staffing now represents around 20% of revenues while approximately 80% are generated in General Staffing.

EBITA decreased by 9% in constant currency to EUR 66 million. The EBITA margin was 5.9% in 2013, up 10 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.

Priorities for 2014
In Japan our business is heavily exposed to the late-cyclical Office business and as such has yet to see the clear benefits of the improving economy, although growth did accelerate during 2013 in our smaller IT and Engineering & Technical businesses. In 2014 we aim to drive organic growth for the overall business through focusing on opportunities in temporary staffing, permanent placement, professional staffing and outsourcing. Maintaining our strong profitability in Japan continues to be a key priority for management.

 

[1]Adecco estimate.

[2]As of January 2013, Morocco and Tunisia, previously within France, are reported under Emerging Markets. The 2012 Information has been restated to conform to the current year presentation.

[3]In constant currency.

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