Annual Report 2014

Investment story

We aim to present a clear and balanced view of our investment story – including our strategy and the drivers of our revenue growth, best-in-class margins, and strong cash generation – and to provide true, fair, and up-to-date information to all of our stakeholders.

Our investment story
The Adecco Group is the world’s leading provider of HR solutions, offering a wide variety of services including temporary staffing, permanent placement, career transition, talent development, and outsourcing. We operate in over 60 countries and territories through a network of around 5,100 branches. Every day our more than 31,000 FTE employees place over 650,000 associates at work. Every day we aim to satisfy their needs, along with those of our clients, candidates, and social partners, and in so doing create value for our shareholders.

The HR services industry benefits from positive secular trends offering good growth opportunities through-the-cycle. Our strategic vision helps us to capture these opportunities. At the same time, our experienced management team focuses closely on operational execution, underpinned by the Economic Value Added (EVA) concept (described in the chapter ’Our strategy’). As a result of our approach, we are the global leader in HR services by revenues, with the highest profitability amongst our major competitors and a strong track record of cash generation. We are confident that we are in good shape to further enhance our leadership position in the attractive HR services industry.

Revenue growth with structural and cyclical drivers
Cyclical drivers Our temporary staffing and permanent placement services, which constitute over 90% of our total revenues, are cyclical and dependent on the level of economic activity in the countries where we operate. Demand for these services expands during periods of economic growth (and contracts during recessions), with a highly leveraged effect – even modest levels of GDP growth can drive very strong growth in our temporary staffing and permanent placement revenues. On the other hand, career transition services are counter-cyclical, expanding during difficult economic periods and contracting during a recovery.

Structural drivers Importantly, for all our service lines we see structural growth drivers alongside the cyclical forces. Companies are increasingly using temporary staff as a core component of their workforces, allowing them to adapt faster and better to changes in demand and thereby to maintain their competitiveness. With this clear driver, we expect temporary staffing penetration rates to increase over the course of the cycle. This is not just true for lower-skill blue-collar and clerical workers but also for higher-qualified staff. We have significantly improved our Professional Staffing offering in the past years through acquisitions and organic initiatives, and today we are the largest player worldwide in the higher-growth, higher-margin professional staffing business.

For companies wanting to add permanent employees, structural skills shortages make our permanent placement services increasingly attractive. We have made significant investments in recent years, creating permanent placement ‘hubs’ and hiring experienced new colleagues. The results in 2014 have been encouraging.

Demand for career transition and talent development services is also expected to grow over the course of the cycle. The effects of technological change and disruptive innovation will see ongoing restructuring activities in traditional businesses. Our global footprint and innovative solutions allow us to offer even more effective support to companies and their employees undergoing such changes, helping us to capture further share in the growing career transition market. In talent development, skills shortages and companies’ increasing commitment to home-grown talent will continue to drive up demand. Our innovative service offerings also provide more affordable solutions for non-C-level executives, creating further growth opportunities.

Best-in-class operating margins and strong operating leverage
While revenue development hinges to a large degree on economic activity, we practise price discipline and continuously focus on our business mix in order to optimise gross profit. With our strategic mid-term priorities on Professional Staffing & Services including permanent placement, as well as Business Process Outsourcing solutions, we are clearly concentrating our investments in the growth of higher-margin businesses.

To maximise overall profitability in a cyclical business like ours, it is also very important to manage our cost base very strictly. Our approach is to be very proactive, to ensure that we deliver strong operating leverage and increasing returns in times of economic growth, while protecting profitability in downturns. Our strategy is focused on achieving leading profitability in all our markets.

Consistent cash generation and a shareholder-friendly approach to use of cash
Adecco requires limited capital investment for growth, helping to make the business highly cash-generative. By applying the EVA concept throughout the organisation, we incentivise our colleagues in the field to focus on the efficient use of capital in the operations, primarily by optimising our accounts receivable. This helps to maximise the operating cash flow of the business.

We seek to use our free cash flow in a shareholder-friendly manner. While our business offers operating leverage, we limit financial leverage and will always aim to maintain our investment grade credit rating. In 2012, as we had not planned any major acquisitions in the mid-term, we began a series of share buyback programmes using the excess cash that we generate. These programmes are on top of our regular dividend payments.

Dividend Since 2011, our policy is to maintain a dividend pay-out ratio in a range of 40–50% of adjusted net earnings. In addition, we are committed to pay at least a stable dividend compared to the previous year even if the pay-out range is temporarily exceeded, barring seriously adverse economic conditions. For 2013 Adecco paid a dividend of CHF 2.00 per share. At the next Annual General Meeting, the Board of Directors will propose a dividend of CHF 2.10 per share for 2014 for approval by shareholders. This amount represents an increase of 5% compared to the dividend paid for 2013 and is equivalent to a pay-out ratio of 49% of adjusted net earnings.

Share buyback programmes In 2012 we announced our first share buyback programme of EUR 400 million, which was completed in September 2013. A second share buyback programme of EUR 250 million was completed in November 2014 and we immediately launched a further programme of up to EUR 250 million.

Experienced Management focused on operational execution and longer-term strategic vision
The strategy and objectives of the Adecco Group are determined by the Board of Directors, while the day-to-day operation of the business is managed by the CEO and the Executive Committee. The Executive Committee is composed of the CEO, CFO, and regional and functional heads with a long history of service in Adecco and the HR services industry. Our management approach is to be very focused on operational execution and to monitor closely our key performance indicators. This is critical in a business where conditions can change very quickly. At the same time, we are working to a clear strategic vision, focused on our common purpose to help people to ‘better work, better life’ and expressed through our six mid-term strategic priorities: Engagement; Information Technology; Professional Staffing & Services; Segmentation; BPO solutions; and the Emerging Markets.