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Adecco Says Market Conditions have Improved

Adecco Says Market Conditions have Improved

Adecco Group, the worldwide leader in Human Resource services, has announced its results for Q3 2009. Revenues declined by 28% in constant currency to EUR 3.7 billion. The gross margin declined by 60 bps to 17.4% on an adjusted basis. SG&A was reduced by 22% adjusted and in constant currency, resulting in an adjusted EBITA margin of 3.4%, up 100 bps sequentially. DSO improved by 6 days to 53 days in the third quarter.

Patrick De Maeseneire, Chief Executive Officer of the Adecco Group, said: "Market conditions have improved during the third quarter, especially in general staffing, and we have seen a gradual improvement of the revenue trend for the Adecco Group. Our efforts to structurally optimise our operations have led to a clearly lower SG&A base. The positive revenue trend and the reduction in costs have resulted in an adjusted EBITA margin of 3.4%, a material sequential increase of 100 basis points. As in the past, we will act in a highly disciplined way with regards to pricing and further optimise our underlying cost base".

Q3 2009 FINANCIAL PERFORMANCE

Revenues
Group revenues in Q3 2009 were down 27% to EUR 3.7 billion compared to Q3 2008, or by 28% on a constant currency basis and organically[3]. Permanent placement revenues amounted to EUR 40 million in Q3 2009, a decline of 54% and outplacement revenues totalled EUR 65 million, an increase of 31%, both in constant currency.

Gross Profit
The gross margin in Q3 2009 was at 17.7%, a decline of 30 bps compared to the prior year. On an adjusted basis, the gross margin amounted to 17.4%, a decline of 60 bps versus Q3 2008. The negative impact on gross margin from the temporary staffing business and the weak permanent placement business was partially compensated by the positive contribution of the outplacement business. As expected in this phase of the economic cycle, the pricing environment in the temporary staffing business became more challenging during the quarter under review. Adecco could limit the decrease in the temporary staffing gross margin in Q3 2009 to 90 bps compared to the prior year.

Selling, General and Administrative Expenses (SG&A)
In Q3 2009, SG&A was reduced by 21% compared to Q3 2008. On an adjusted basis and in constant currency, SG&A declined by 22% compared to the prior year's period. Sequentially, SG&A declined by 6% adjusted and in constant currency. Restructuring costs amounted to EUR 1 million in Q3 2009 (EUR 4 million for various countries, partly offset by EUR 3 million reversal of restructuring costs in France). FTE employees were reduced by 21% (-7,600) compared to Q3 2008, while the branch network was reduced by 15% (-1,000 branches). At the end of the third quarter of 2009, the Adecco Group operated a network of more than 5,700 offices and had over 28,000 FTE employees. FTE employees at the end of Q3 2009 declined by 4% compared to the end of the second quarter of 2009.

EBITA
In the period under review, EBITA declined by 47% to EUR 135 million, resulting in an EBITA margin of 3.6%, compared to 5.0% in the prior year. The adjusted EBITA was EUR 125 million in the quarter under review, a decline of 52% in constant currency. The adjusted EBITA margin was 3.4% in Q3 2009, up 100 bps sequentially. The contribution of the counter-cyclical US Human Capital Solutions business to Adecco Group's adjusted EBITA amounted to 12% in the third quarter, compared to 27% in Q2 2009.

Amortisation of Intangible Assets
Amortisation of intangible assets amounted to EUR 8 million in the third quarter of 2009 compared to EUR 10 million in Q3 2008.

Operating Income
In Q3 2009, the Adecco Group reported operating income of EUR 127 million, which compares to EUR 244 million in Q3 2008.

Interest Expense and Other Income / (Expenses), net
The interest expense in the period under review amounted to EUR 17 million, EUR 2 million higher than in Q3 2008. Other income / (expenses), net was an expense of EUR 1 million in Q3 2009 compared to income of EUR 2 million in the third quarter of 2008. Interest expense is expected to be slightly below EUR 60 million for the full year 2009.

Provision for Income Taxes
The effective tax rate in Q3 2009 was 18% compared to 27% in Q3 2008. The effective tax rate in Q3 2009 was positively impacted by a change in the mix of earnings.

Net Income attributable to Adecco shareholders and EPS
Net income attributable to Adecco shareholders in Q3 2009 was down 46% to EUR 90 million compared to EUR 168 million in Q3 2008. Basic EPS was EUR 0.52 (EUR 0.96 for Q3 2008).

Cash flow, Net Debt[4] and DSO
The operating cash flow generated in the first nine months of 2009 amounted to EUR 349 million compared to EUR 669 million in the same period last year. The Company paid dividends of EUR 173 million, invested EUR 64 million in capital expenditure and deposited cash of EUR 128 million for the Spring Group acquisition in an escrow account. Net debt at the end of September 2009 was EUR 702 million compared to EUR 617 million at year end 2008. DSO improved by 6 days to 53 days in the third quarter of 2009.

Currency Impact
In Q3 2009, currency fluctuations had a positive impact of approximately 1% on revenues and EBITA.

GEOGRAPHICAL PERFORMANCE

(The pie charts are visible in the PDF version of the report)

In France, revenues declined by 27% to EUR 1.3 billion in Q3 2009, following a decline of 34% in Q2 2009. Throughout the quarter, the Company experienced an increase in demand in the automotive, chemical and transport sectors. EBITA declined by 33% to EUR 47 million and was positively impacted by EUR 14 million, primarily due to a reassessment of existing accruals and a reversal of restructuring costs. Adjusted EBITA declined by 53% to EUR 33 million in Q3 2009. The adjusted EBITA margin was 2.5% in Q3 2009, up 90 bps sequentially.

In the USA & Canada, revenues and EBITA declined by 25% in constant currency, resulting in an EBITA margin of 4.4% despite the slowing growth rates encountered in the Human Capital Solutions business. The Human Capital Solutions business contributed 67% to EBITA in USA & Canada in Q3 2009, compared to 80% in Q2 2009.

In Germany, Q3 2009 revenues decreased by 39% to EUR 247 million. On a sequential basis, the German business significantly improved profitability with an EBITA of EUR 20 million, corresponding to an EBITA margin of 8.1%. Better bench management and cost cutting measures positively contributed to this quarter's result.

In Q3 2009, revenues in Japan amounted to EUR 298 million, a decline of 28% in constant currency. EBITA declined by 36% in constant currency and the EBITA margin was 6.7%, down 80 bps compared to Q3 2008. Japan was the only region besides the Emerging Markets to experience a worsening in the revenue decline rate in the third quarter compared to the second quarter of this year, mainly due to our late cyclical clerical business. The efficient delivery model, strict cost management and price discipline again contributed to an excellent EBITA margin.

In the UK & Ireland, revenues in Q3 2009 were down 28% in constant currency. In terms of EBITA, the region was at break-even.

In Italy, revenues declined by 43% in the third quarter of 2009. Italy reported an EBITA of EUR 5 million, corresponding to an EBITA margin of 3.4%. Cost cutting measures initiated in previous quarters positively contributed to this result. Revenues in the Benelux declined by 18% or 24% organically, while in the Nordics, revenues declined by 35% in constant currency and in Iberia by 33%.

Emerging Markets continued to show resilience to the economic downturn as revenues declined only 4% in constant currency. The EBITA margin was 3.5% in Q3 2009, which resulted in an EBITA of EUR 10 million.

BUSINESS LINE PERFORMANCE

(The pie charts are visible in the PDF version of the report)

In Office & Industrial, Adecco's revenues in Q3 2009 were EUR 2.8 billion, a decline of 32% in constant currency. In the Industrial business, revenues declined by 34% in constant currency, following a 41% fall in Q2 2009. The most pronounced improvement in the year-on-year decline rate was experienced in Iberia, progressing from minus 50% in Q2 2009 to minus 36% in Q3 2009. France improved from minus 37% in Q2 2009 to minus 29% in Q3, whereas the USA & Canada improved from minus 41% in Q2 2009 to minus 33% in Q3 2009 in constant currency. In the Office business, revenues declined by 28% in constant currency, posting the same decline rate as in Q2 2009. Revenues in Japan declined by 28%, having fallen 24% in Q2 2009, while the decline rate improved in the USA & Canada with revenues down 20%, following 28% in Q2 2009, all in constant currency. In the UK & Ireland, revenues were down 29% in constant currency. In France, revenues declined by 33%.

In the Professional Business[5] segment, revenues in Q3 2009 declined by 17% in constant currency and by 20% on an organic basis. The gross margin increased by 10 bps to 27.8%, despite the weak permanent placement business.

In Information Technology (IT), Adecco's revenues decreased 14% in constant currency and by 21% organically. In the USA & Canada revenues in Q3 2009 were down 24% and in the UK & Ireland down 26%, both in constant currency. In France, revenues were flat.

Adecco's Engineering & Technical (E&T) business was down 25% in constant currency. The USA & Canada revenues declined by 22% in constant currency, while revenues in Germany declined by 24% in the third quarter of 2009.

In Finance & Legal (F&L), revenues declined by 33% in constant currency and by 36% on an organic basis. Weak demand in the USA & Canada, where revenues declined 41% in constant currency, was the main reason for the decline.

In Q3 2009, revenues in Medical & Science (M&S) declined by 13% and in Sales, Marketing & Events (SM&E) by 17%, whereas revenues in Human Capital Solutions (HCS) were up 20%, all in constant currency.

Management outlook
The Adecco Group has seen first signs of a demand pick-up in general staffing. In particular, the light industrial segment, noticeably in France and in the USA & Canada, improved during the third quarter compared to the low base of the second quarter.

The year-on-year revenue decline rate adjusted for business days improved over the course of the third quarter of 2009, and the trend continued in October with an expected decline rate of 22%. This is mainly driven by a lower comparable base, but also thanks to improving market conditions.

The management team continues to focus its efforts on further structurally optimising the cost base while sticking to its value-based strategy. The recently announced acquisitions will significantly increase Adecco's exposure to the attractive professional staffing market, thereby strengthening the Company's profitability profile in the mid-term.

Adecco expects to incur approximately EUR 35 million of restructuring costs in the fourth quarter of 2009 for various countries as part of the previously announced guidance of EUR 40 million for the second half of 2009.

Acquisition of MPS Group
On October 20, 2009, Adecco announced the acquisition of MPS Group, a leading provider of professional staffing services, for an enterprise value of EUR 782 million, or USD 13.80 per share. This acquisition will significantly enhance Adecco's position in the professional staffing business, particularly in the USA & Canada and the UK. Adecco expects the transaction to be accretive on an adjusted EPS[6] basis in the first year and EVA[7] positive within three years. The transaction is expected to close in the first quarter of 2010, subject to shareholder and regulatory approval.

Closing of the acquisition of Spring Group
Adecco announced the successful closing of the acquisition of Spring Group on October 20, 2009. The integration of Spring Group has recently been initiated. Adecco expects to achieve annual synergies of EUR 13 million from the integration of Spring Group within one year. Integration costs are expected to be equal to the targeted annual synergies and will be incurred in the first year following the closing of the acquisition.

Issuance of CHF 900 million mandatory convertible bond due 2012
On October 20, 2009, Adecco placed a 3-year CHF 900 million mandatory convertible bond with a coupon of 6.5%, issued by Adecco Investment (Bermuda) Ltd, a wholly-owned subsidiary of Adecco S.A. The net proceeds of the offering will increase Adecco's financial flexibility and strengthen its balance sheet in conjunction with the announced acquisition of MPS Group. The reference share price and initial minimum conversion price of the bond will be CHF 50.50 and the initial maximum conversion price will be CHF 60.60 (120% of the reference share price). On that basis the number of shares underlying the bond upon issue will be approximately in the range of 14.85 million to 17.82 million shares. The shares underlying the bond will be sourced from treasury shares and/or from conditional share capital of Adecco S.A, at Adecco's election. Settlement of the bond is expected to occur on November 26, 2009. The bond is intended to be listed and admitted to trading on the SIX Swiss Exchange (ISIN XS0460347080).

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