income and financial position analysis

Income statement

Revenue
In 2008, revenue amounted to € 14.0 billion, 53% more than the reported € 9.2 billion in 2007. The acquisition of Vedior, consolidated as of May 16, 2008, impacted this figure considerably. On a pro forma combined basis, revenue amounted to € 17.2 billion, 3% less than in 2007. The pro forma organic decrease amounted to 2%. We started the year positively, with 5% combined organic revenue growth in Q1 2008 and 4% in Q2. Revenue started to slip in the summer, leading to a 2% organic decline in Q3 and, due to the quickly changing economy, a steep 14% decline in Q4.

Until the summer we had observed many usual patterns. In Q4 2006 the commercial staffing market in the US had started to decline. This was followed by easing of growth rates across Europe, starting in blue collar staffing, followed by scarcity-related growth reduction in white collar staffing during 2007 and H1 2008, coinciding with continued growth in professionals and permanent placement. The financial crisis impacted all our end markets from September onwards however. Reduced consumer confidence, lower availability of credit and the need to reduce inventories have caused reduced demand among our industrial clients as well as in the white collar and professionals segments, including declines in staffing and permanent placement in many markets at the same time.

The fact that market contraction is now more concentrated than in the previous cycle does not imply that our strategy of diversification is not effective. We still observe significant differences. Within continental Europe, the Netherlands, due to the relatively high proportion of services in the gross domestic product, has held up relatively well when compared to France, Germany and Spain, which are more prone to swings in the capital goods, automotive and construction sectors. Growth was maintained in segments such as education and healthcare, which helped the North American and UK results in particular. The government sector also did well in several countries. Our presence in emerging markets such as Asia and Latin America was strengthened, and growth continued in these regions as well as in the Middle East.

Gross profit and gross margin
For the full year, gross profit amounted € 3.0 billion, compared to € 2.0 billion in 2007, with gross margin moving from 22.1% to 21.2%. The difference is largely explained by the Vedior consolidation. Due to the geographic mix, with a significant part of revenue from France, Vedior’s gross margin was lower than that of Randstad, which had been dominated by high Dutch and German gross margins. On a pro forma basis, gross profit amounted to € 3,540 million, with the gross margin flat at 20.6%. The underlying gross margin increased somewhat in the first half of the year, based on strong pricing and continued growth in permanent placement fees. Permanent placement fees started to come down in the second half (by 11% compared to H2 2007), with a negative effect on gross margin. For the full year, permanent placement fees amounted to 2.4% of revenue and 11.8% of gross profit, about the same as in 2007. Permanent placement fees declined first in banking and finance, but engineering and IT also suffered lower demand towards the end of the year. In the Netherlands and Germany, where we have candidates on our own payroll, idle time increased somewhat at the end of the year, which had a slightly negative impact on gross profit.

Gross margin is not a strategic target as such, as it is influenced by factors such as segment and geographic mix. We steer on conversion of gross profit into EBITA, in order to realize our EBITA margin targets.

Operating expenses
Reported operating expenses include non-cash amortization for the capitalized Vedior client and candidate databases, as well as non-cash impairments of € 585 million related to the Vedior goodwill (€ 500 million) and our Dutch payroll business (€ 85 million). Reported operating expenses also include integration costs (€ 61.9 million) and reorganization costs (€ 31.0 million).

For a meaningful analysis of underlying operating expenses we look at the costs excluding these items. We swiftly adjusted our cost structure in reaction to decelerating markets. In the first half, operating expenses grew in line with increased volumes. Underlying operating expenses for the full year amounted to € 2,705.6 million pro forma however, 1% lower than in 2007, as costs were reduced in the second half. In Q4 2008 the underlying operating expenses amounted to € 641 million, 9% lower than in Q4 2007 and 4% lower than in Q3 2008. While we continued to invest for too long in the previous cycle, operating expenses were reduced this time as of Q3 2008, exactly in the quarter when revenue started to contract. This demonstrates the improved focus gained from our ‘managing through the cycle’ approach ( click here for details).

We ended the year with 5,233 outlets, 3% fewer than at the end of 2007 and 7% fewer than at June 30, 2008. During Q4 2008, we employed 34,000 FTEs on average, 5% fewer than during Q4 2007. Given our average staff turnover rate of above 20%, it was possible to achieve the greater part of this downward cost adjustment by making use of natural attrition. However, with the significant reduction in H2 2008 in FTEs and offices, we also cut back in management and back office personnel through forced redundancies. In some cases, such as in the Netherlands, the UK and Belgium, this was already part of the integration plans. In other countries, such as Germany, France and the US, this has been done, or is planned to be done, through restructuring. Related costs are one-off in nature and excluded from underlying operating expenses. Bonus payments are another important cost component. Especially in those operating companies that have relatively large permanent placement businesses, bonus payments have been reduced. Cost synergies from the merger came in ahead of schedule and amounted to € 22 million for the full year, with the annualized target of € 90 million to be reached already by Q3 2009.

consolidated income statement in millions of €		2008		2007
Revenue		14,038.4		9,197.0
Cost of services		11,066.1		7,167.3
Gross profit		2,972.3		2,029.7
Selling expenses		1,602.9		1,036.3
General and administrative expenses		1,404.1		453,8
Total operating expenses		3,007.0		1,490.1
Operating loss/profit		-34.7		539.6
Dividend preferred shares		-		-7.2
Financial income and expenses		-71.7		5.1
Net finance costs		-71.7		-2.1
Share of profit of associates		3.8		2.0
Income before taxes		-102.6		539.5
Taxes on income		121.0		-154.6
Net income		18.4		384.9
Pro forma
Revenue		17,177.4		17,625.2
Gross profit		3,540.0		3,637.1
Operating expenses		2,705.6		2,730.0
EBITA 1		834.4		907.1
EBITDA 2		933.6		997.3
Earnings per share (€)
Basic earnings per ordinary share (€)		0.07		3.31
Diluted earnings per ordinary share (€)		0.07		3.30
Normalized diluted (3)		3.21		3.47

(1) EBITA: operating profit before amortization and impairment acquisition-related intangible assets and goodwill.
(2) EBITDA: operating profit before depreciation, amortization and impairments.
(3) Normalized diluted: diluted before amortization and impairment acquisition-related intangible assets (€ 85.7 million), impairment goodwill (€ 555.8 million), integration costs (€ 44.7 million), other one-offs in operating profit (€ 6.5 million) and one-off tax gains (- € 226.1 million). All amounts after tax.

Net finance costs
For the full year, net finance costs amounted to € 71.7 million, compared to € 2.1 million in 2007. This increase results from the 5-year syndicated loan (see balance sheet) we obtained for the partial debt financing of the Vedior acquisition. While the full year financing costs have increased, they trended down as the year progressed. In Q4 2008, net finance costs amounted to € 19.0 million, which was some 40% lower than in Q3 2008, amongst others based on a reduction in net debt and certainly also because of the reduction in interest rates. Our policy of using floating rates as a natural hedge, paying EURIBOR plus a fixed spread, has started to pay off. The dividend on the preferred financing shares, which was stable at € 7.2 million, is no longer part of the net finance costs as, following an amendment to the Articles of Association, the preferred shares are again classified as equity.

Taxes on income
In 2008, the effective tax rate amounted to 23.2% (excluding impairment goodwill in the amount of € 555.8 million and one-offs in deferred taxes in the amount of € 226.1 million) compared to 28.7% in 2007.

The underlying effective tax rate amounted to approximately 27%, in line with our tax planning. The reported effective tax rate of 23.2% was influenced by tax synergies of approximately € 15 million. The structure to create tax synergies from the merger has been implemented successfully and we expect to reach the full amount of approximately € 40 million in 2009.

In Q4 2008, the merger and subsequent legal and operational integration impacted our tax position. Randstad US and Vedior US were legally combined in October 2008. As a consequence, all future US taxable profits (including those of the more profitable Vedior assets) can be used to offset the existing tax loss carry forward position of Randstad US. This resulted in a recognition of € 40 million in respect of deferred tax assets in relation to tax losses carry-forward in the US, which is recorded as a net gain.

Furthermore, following legal and operational restructuring after the merger, the recapture obligation that resulted out of US losses that have been deducted from Dutch fiscal profits were re-assessed. Payback now depends on eventual dividends from the US operations being received in the Netherlands, rather than on US profits. This reassessment of which it is considered highly unlikely that this obligation has to be repaid in the foreseeable future, resulted in a one-off release, or net gain, of € 186 million.

Consolidated balance sheet at december 31 in millions of €		2008		2007
Assets
Property, plant and equipment		190.5		135.7
Intangible assets		3,315.2		433.3
Deferred income tax assets		422.0		282.5
Financial assets		74.0		10.2
Associates		2.0		480.9
Non-current assets		4,003.7		1,342.6
Current receivables		2,888.1		1,590.5
Cash and cash equivalents		831.0		384.1
Current assets		3,719.1		1,974.6
Total assets		7,722.8		3,317.2
Equity and liabilities
Shareholders’ equity		2,416.9		1,021.6
Minority interests		4.0		0.8
Group equity		2,420.9		1,022.4
Non-current liabilities		2,937.3		959.8
Current liabilities		2,364.6		1,355.0
Liabilities		5,301.9		2,294.8
Total equity and liabilities		7,722.8		3,317.2