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Randstad reports organic growth up as it publishes its Q2 2014 results

“Our markets continued their gradual recovery” says Jacques van den Broek, CEO of Randstad. “The Inhouse and Sourceright businesses in particular enjoyed good growth. Both are good examples of solutions that help our clients with their total talent architecture. Our people did very well in growing our business in US staffing, Poland, Italy, Switzerland, and in China. The combination of their diligent execution and entrepreneurship pays off. We have also made good progress in the Netherlands where we returned to growth. Our strategic focus on permanent placements returned the highest level of fees since Q4 2008. With a continued focus on efficiency improvements, and a keen eye for growth opportunities and innovation, we face the future with confidence.”

Revenue

The gradual recovery has continued. Organic revenue per working day grew by 4.5% in Q2 compared to 3.6% in Q1. The number of working days had a negative impact of 0.5%. The net effect of consolidation of the USG activities and some disposals added around 2.5%. This was offset by negative currency effects of 2.3%, which lowered our revenue by about &euro 94 million. As a result, reported revenue was 4.2% above Q2 2013.

Revenue growth went from 5.3% in April to 3.6% in June. The growth rate throughout the quarter was challenged by the comparison base, as last year the growth rate went from -/-5.2% in April to -/-2.6% in June.

In North America, revenue per working day was up 2% (Q1: -/-1%). In June, it was 3% ahead of last year, driven by a good performance of the US. In Europe, revenue per working day grew by 4% (Q1 2014: 4%), with an improving performance in nearly all countries except for Germany and France. In the Rest of the world, revenue per working day was up 13% (Q1 2014: 13%), and we achieved good performance in Japan and China, while Australia started to improve.

As a result of our strategic focus, perm fees grew by 13% (Q1 2014: 9%), making this the strongest quarter since Q4 2008. In North America and Europe, perm fees grew by 2% and 17% respectively. In Asia, demand for permanent placements strengthened further. Growth was led by China, up 78%. In Australia, perm fees remained volatile throughout Q2, but the quarter ended with double-digit fee growth in June. Perm fees made up 1.9% of revenue and 10.0% of gross profit (Q2 2013: 9.7%). The share of perm fees was impacted by negative currency effects.

Gross profit

In Q2 2014, gross profit amounted to &euro 786.7 million. The organic change was 6% (Q1 2014: 6%). Currency effects had a negative impact on gross profit of &euro 17.5 million when compared to Q2 2013.

North America, gross margin continued to increase. In Europe and in the Rest of the world, mix effects had a positive impact on our gross margin. Perm fees added 0.1% to the gross margin which was offset by a negative mix impact from HR Solutions.

Operating expenses

Operating expenses increased sequentially by &euro 18.3 million, which included an increase of &euro 1.4 million due to currency mix effects. Marketing costs increased by &euro 4.8 million as a result of normal seasonal effects in our investments. Personnel expenses increased as a result of investments in headcount in countries or segments where growth continued, and due to annual wage increases in a few countries. Overall we maintained strong cost control.

Average headcount (in FTE) amounted to 28,550 for the quarter, 1% higher than in Q1 2014. Across North America, we allowed for limited investments in the US, while we further streamlined the organization in Canada. In Europe, headcount increased by

158 FTEs as we added headcount in those countries and segments where growth continued, such as in the professionals business in Spain and in Poland. In the Netherlands, headcount increased mainly due to seasonality. In the Rest of the world, the additions to headcount were predominantly in Japan, China and Singapore. Productivity (measured as gross profit per FTE) was 2.7% higher than last year on a pro forma basis. We operated a network of 4,419 outlets (Q1 2014: 4,429). We continued to close smaller branches in France, but this effect was largely offset by new inhouse locations in North America and across Europe.

The integration of USG activities has been completed, and we achieved pre-tax synergies of &euro 4.0 million per quarter, up from &euro 2.9 million in Q1 2014. On an annualized basis, synergies are within our targeted range of &euro 15-20 million. Integration costs were &euro 0.9 million. Since the start of the integration, we have incurred &euro 16 million. We have also identified non-recurring tax synergies of at least &euro 10 million, which will be used to offset future profits of the combined businesses.

The cost base in Q2 2013 was adjusted for acquisition-related costs of &euro 1.8 million, restructuring costs of &euro1.6 million in the Netherlands and integration costs of &euro1.3 million.

EBITA

Underlying EBITA increased organically by 21% to &euro 174.1 million. Currency effects had a negative impact of &euro 2.8 million. The EBITA margin reached 4.1%, up from 3.6% in Q2 2013. We achieved an incremental conversion ratio (ICR) of 70%. On a pro forma basis, the ICR would have been 110%. This reflects our ability to achieve solid profitability improvements in the first phase of a recovery. Based on the last four quarters, EBITA margin improved from 3.4% to 3.8%.

In North America, organic revenue per working day was 2% above last year (Q1 2014: -/-1%). Reported revenue was 4% below

Q2 2013, due to negative currency effects. Our combined US businesses grew 3% (Q1 2014: 0%), while Canada remained under pressure. Our focus is on gross profit growth (3%) and profitability. The gross margin continued to increase, due to strong discipline and continued growth in perm fees. In June 2014, revenue growth was 3% for the region and greater than 4% for the US, reflecting that the initiatives to improve our performance are starting to pay off.

In Q2 2014, our combined US Staffing and Inhouse businesses grew by 6% per working day (Q1 2014: 1%), driven by strong performance in the manufacturing and logistics segments. Overall gross profit grew by 10% (Q1 2014: 6%), mainly due to growth in perm fees of 33% (Q1 2014: 12%), as well as our focus on revenue quality and profitability.

Our US Professionals businesses contracted by 2% (Q1 2014: -/-2%), while the revenue development in June was flat. Recent investments in our IT business continued to pay off, and after a return to growth in March, we also saw improved performance throughout Q2. Our Pharma and Engineering businesses strengthened further. Good cost control was maintained to offset a slightly lower gross profit. Perm fees were down 6% in Q2 (Q1 2014: 8%), mainly as a result of a decline in Finance and Engineering.

Randstad Sourceright achieved a good performance, especially in managed services and payrolling. Our spend under management grew by 43% and we added 3 new MSP programs.

In Canada, revenue decreased by 4% (Q1 2014: -/-5%), mainly caused by lower temp revenue. Market conditions remained challenging but the revenue decline eased during the quarter (June -/-3.4% compared to -/-5.5% in April). Our Staffing and Inhouse business was 7% lower than Q2 2013 (Q1 2014: -/- 7%). Revenue in Professionals was stable compared to last year, which was also the case for Perm fees. In line with the trend in our business, we reduced headcount by 4% compared to Q1 2014.

The EBITA margin for the region remained stable at 5.0%. The underlying profitability of the combined US businesses improved, but was offset by lower profitability in Canada.

In France, revenue contracted by 1% (Q1 2014: -/-2%), while it was down 3% in June. Perm fees were up 5% compared to last year (Q1 2014: -/-4%). Market circumstances remained challenging.

Revenue of our combined Staffing and Inhouse businesses was 1% below last year (Q1 2014: -/-2%). Growth continued in the industrial and automotive segments, but this was offset by lower demand in logistics, finance, IT and the public sector. Revenue of Inhouse Services grew by 25%, following a number of client wins and continued transfers from Staffing (Q1 2014: 27%). Staffing was 6% below last year (Q1 2014: -/-6%). We have improved our performance in the SME segment, though in our large accounts business we lost some volume as we remain focused on profitability. Our Professionals business was stable (Q1 2014: -/-7%). Our Healthcare business returned to growth and outperformed the market, while demand in IT remained weak.

Gross margin in France increased by 60 bps, mainly as a result of the implementation of the Tax Credit and Competitive Employment Act (CICE). The positive effect of these tax credits was partially offset by additional wage taxes, which were recently implemented by the government. In Q1 2013, we recognized only 50% of the tax credits, which was revised upwards in retrospect in Q2 2013. This year, the tax credits increased, as the premium rose from 4% to 6%. Tax credits are included in EBITA, but based on the law and our current tax position, we will receive these benefits only after three years.

We maintained strong cost control witnessed by the 7% FTEs drop compared to last year. On a sequential basis headcount was stable. The branch rationalization was nearing completion at the end of Q2. As a result of the above, our EBITA margin increased to 5.4% compared to 4.7% in Q2 2013.

In France, revenue contracted by 1% (Q1 2014: -/-2%), while it was down 3% in June. Perm fees were up 5% compared to last year (Q1 2014: -/-4%). Market circumstances remained challenging.

Revenue of our combined Staffing and Inhouse businesses was 1% below last year (Q1 2014: -/-2%). Growth continued in the industrial and automotive segments, but this was offset by lower demand in logistics, finance, IT and the public sector. Revenue of Inhouse Services grew by 25%, following a number of client wins and continued transfers from Staffing (Q1 2014: 27%). Staffing was 6% below last year (Q1 2014: -/-6%). We have improved our performance in the SME segment, though in our large accounts business we lost some volume as we remain focused on profitability. Our Professionals business was stable (Q1 2014: -/-7%). Our Healthcare business returned to growth and outperformed the market, while demand in IT remained weak.

Gross margin in France increased by 60 bps, mainly as a result of the implementation of the Tax Credit and Competitive Employment Act (CICE). The positive effect of these tax credits was partially offset by additional wage taxes, which were recently implemented by the government. In Q1 2013, we recognized only 50% of the tax credits, which was revised upwards in retrospect in Q2 2013. This year, the tax credits increased, as the premium rose from 4% to 6%. Tax credits are included in EBITA, but based on the law and our current tax position, we will receive these benefits only after three years.

We maintained strong cost control witnessed by the 7% FTEs drop compared to last year. On a sequential basis headcount was stable. The branch rationalization was nearing completion at the end of Q2. As a result of the above, our EBITA margin increased to 5.4% compared to 4.7% in Q2 2013.

In Germany, revenue per working day grew by 5% (Q1 2014: 11%). The impact of CLA-related price increases and equal pay fell gradually from 9% in Q1 to 7% in Q2. The wage cost increases and other regulatory changes over the last two years have impacted demand for temporary labor. As a result, the German market is recovering at a slower pace than expected. Perm fees grew by 37% in Q2 (Q1 2014: 1%).

Inhouse Services grew by 25% (Q1 2014: 28%), mainly based on transfers from Staffing. Revenue growth in Staffing was down 8% (Q1 2014: 2%). Our focus is on better execution based on our field steering model, on growing our market share in the SME segment and in perm fees, while also implementing the right delivery models for our clients. Professionals revenue grew by 5%

(Q1 2014: 15%). IT grew by 20% (Q1 2014: 26%). Our Engineering business remained under pressure.

The number of FTEs was stable compared to the level of Q1 2014. Underlying operating expenses increased moderately on a sequential basis due to a slight increase in marketing costs. The underlying German EBITA margin improved to 4.8% (Q1 2013:

4.6%), partially benefiting from some favorable payroll-related items.

In Belgium and Luxembourg, revenue per working day grew by 5% (Q1 2014: 4%).

Revenue in Inhouse Services grew by 11% (Q1 2014: 3%), while Staffing grew by 2% (Q1 2014: 3%). Randstad was close to the market in the administrative segment, while growth in the industrial segment continued to improve. Professionals grew by 10%

(Q1 2014: 4%). Overall, perm fees were 2% behind last year (Q1 2014: -/-8%).

Gross margin was stable compared to last year. Underlying operating expenses were stable sequentially, but significantly down compared to last year.

The EBITA margin improved to 5.2%, which was mainly attributable to the restructuring program implemented in Q4 2013. In addition, EBITA included some favorable payroll-related items, which were partially related to previous years.

Revenue in the UK grew by 3% (Q1 2014: 5%). Reported revenue was up 6%, reflecting the impact of positive currency effects.

More importantly, gross profit grew 7% (Q1 2014: 8%).

Growth was led by MSP & RPO and Construction/Engineering, predominantly through temporary staffing. Perm fees grew by 13% compared to the same period last year (Q1 2014: 2%).

In Q2 2014, Professionals grew by 8% (Q1 2014: 4%). Education grew by 2% (Q1 2014: 4%), while our Construction/Engineering business continued to perform well and grew by over 20%. Our Finance business remained under pressure, mainly as a result of continued low demand in perm.

Staffing revenue contracted by 6% as a number of contracts were terminated (Q1 2014: -/-9%). Our Inhouse business declined as we shed some unprofitable contracts. Randstad Sourceright achieved good growth in MSP and RPO, thanks to a number of client wins.

Operating expenses increased slightly compared to Q1, due to higher bonus and commission costs. The EBITA margin increased to 1.8% (Q2 2013: 1.0%).

Growth in Iberia continued. Revenue per working day grew by 12% (Q1 2014: 5%).

Revenue in Spain grew by 11% (Q1 2014: 4%). Revenue growth was somewhat hampered by lower volumes in harbors and agriculture, while we achieved good performance in automotive and manufacturing This was also reflected by strong performance in Inhouse. We continued to focus on client profitability, which resulted in the termination of some outsourcing contracts. Our focus on perm fees and Professionals continued to result in solid growth. The integration process of the USG activities has been completed. The number of FTEs increased by 3% sequentially to invest in future growth.

In Portugal, revenue grew by 14% (Q1 2014: 8%). Growth was led by a good performance in the manufacturing and automotive segments. Profitability was impacted by an increase of the provision for trade receivables.

The EBITA margin improved to 2.9% in Q2 2014, and the incremental conversion ratio was 95% on a pro forma basis. Last year's EBITA margin would have been 2.5%, had the USG activities been included in the consolidation.

Across other European countries, revenue per working day grew by 20% (Q1 2014: 19%), driven by good performance in Italy, Poland, and Austria.

In Italy, revenue grew by 15% (Q1 2014: 14%). Growth was led by the industrial segment, and our focus on specialties, professionals and permanent placements paid off. Our Inhouse business grew by 55%, as we transferred business from Staffing to ensure we can offer clients the right delivery model. The competitive environment remained challenging. The integration of USG has been completed in Q2 2014.

Revenue in our Swiss business grew by 12% (Q1 2014: 6%). Strong performance was maintained in Inhouse. In Austria, revenue grew by 48% (Q1 2014: 46%). In Poland, revenue grew by 27% (Q1 2014: 23%). Operational leverage remained strong and we continued to invest in growth. In the Nordics, revenue grew by 28% (Q1 2014: 48%). Our revenue in the Czech Republic grew by 55% and Turkey was up 27%.

Operating expenses were adjusted for integration costs of &euro 0.7 million. Profitability improved across most countries. As a result of the aforementioned trends, the EBITA margin for the region reached 3.5% (Q2 2013: 2.6%). Last year's EBITA margin would have been 2.2%, had the USG activities been included in the consolidation.

Overall revenue in the Rest of the world grew by 13% organically (Q1 2014: 13%). Reported revenue was 3% lower due to negative currency effects. Growth held up in Asia and Australia, while Latin America accelerated.

In Japan, revenue grew by 10% (Q1 2014: 11%). Growth was led by good performance in logistics and retail, while growth in the administrative segment continued.

Revenue in Australia grew by 13% (Q1 2014: 15%). Temp revenue was solid in Business Support, but the Industrial segment slowed. Perm fees were down 6% in the quarter, while we achieved good growth in June. In Professionals, demand in Banking & Finance picked up, as did Construction/Engineering. The focus is on improving our performance through field steering.

China grew by 67% (Q1 2014: 83%), based on strong performance across all segments. Growth in permanent placements gained further momentum and almost doubled compared to a year ago. Investments in headcount continued, and we now employ close to 600 FTEs. Profitability further improved on the back of good productivity improvements. Our business in India, where the focus is on improving efficiency, grew by 3% (Q1 2014: 8%).

In Latin America, our Argentinean business grew by 11% (Q1 2014: 6%), while market conditions remained challenging. Our focus in Argentina is on implementing field steering and achieving greater efficiencies. We achieved good gross profit growth in Brazil, Mexico, and Chile, where we are focusing on improving our business mix and capturing productivity improvements.

Second quarter results 2014 – Randstad Holding nv13 EBITA for the region remained unsatisfactory, although we continue to invest in future growth. Our focus is on improving performance, based on our field steering model and on capturing benefits from our recent investments.

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