report of the executive board

Financial developments

In 2010 our organisation was once again able to fully focus on growth and profitability. The sharp contraction in 2008 and 2009 gradually made way for robust recovery.

The first cautious signs of recovery which we witnessed at the end of 2009 got stronger and more wide-spread in the course of 2010. Exports were a particularly important driver of growth in the industrial and transport sectors. The recovery of staffing markets was somewhat fragmented in Europe. Industrial countries like Germany, Austria and France led the way while recovery in the Netherlands was slower to get underway. The Dutch staffing market consists largely of administrative staff employed in the services sector. Employment in the services sector tends to pick up at a later stage in the cycle and recovery is more gradual than, for example, in the manufacturing sector. The positive trend continued throughout the year and growth was posted in all the countries in which USG People operates in the final months of the year.

In 2010 no acquisitions were made and no material business units were divested. A number of companies were merged in the course of the year. In the Netherlands Content and Unique merged and the StarJob operations were combined with Secretary Plus. In Germany all existing local brands were transferred to Unique and Technicum. Consolidations reduced our branch network by 82 branches. The headcount was cut by 120 FTEs in 2010. At the end of 2010 total group headcount was 7,228 FTEs and there were 1,354 branches.

In 2010 USG People generated revenue of € 3.1 billion, up 3% compared to 2009. The rise in revenue was organic and primarily driven by a recovery in demand for temporary employees. When production starts to grow following a period of crisis, companies tend to be cautious about attracting permanent staff and temporary staffing is the first to pick up when economic recovery sets in.

Revenue trends

Revenue started to grow again at the start of the second quarter compared to a year earlier. Growth continued to rise in the quarters that followed and was even double-digit in the final quarter. For the whole of 2010 revenue grew in every country, except in the Netherlands. Due to the late-cyclical nature of the Dutch market the Netherlands lags somewhat behind other countries and recovery is more gradual. The Netherlands started posting growth again in the final quarter of 2010. Recovery was exceptionally strong in countries where temporary staffing is predominantly focused on the industrial sector.

Austria and Poland performed best with a year-on-year growth of 57%, followed by Germany where revenue was up 28%. Growth was even around 40% in Germany in the second half of the year. France – the third-largest country for USG People in terms of revenue – achieved a growth of 17%, while revenue in Italy and Switzerland was up more than 20%. Recovery was more subdued in the more mature markets of the Netherlands and Belgium, due in part to the fact that a large part of the activities are focused on the services sector and small and medium-sized enterprises. As a result USG People’s activities in these countries react somewhat slower to cyclical developments. Belgium achieved growth of 3% and in the Netherlands revenue for the year was still 8% below the year-earlier level. Spain is the only exception to these positive developments and its employment market showed no material improvement yet again in 2010.

A breakdown of activity shows that recovery was most pronounced in General Staffing, completely in line with the traditional pattern in times of recovery. The cyclical development of these activities was the greatest due to their ties to the industrial sector. The General Staffing activities are strongly linked to industrial production, particularly in countries outside the Benelux. This results in greater volatility in the cycle. In 2010 General Staffing revenue was up 10% compared to 2009. Specialist Staffing and Professionals posted a drop in revenue of 8% for the year. The turning point to growth was reached in the final few months of the year. These activities started recovering later in the Netherlands while in Belgium growth was achieved earlier in the year.

Gross profit

In 2010 gross profit equalled € 676 million compared to € 674 million in 2009. Underlying gross profit amounted to € 680 million as a non-recurring amount of € 4 million was recognised as cost in 2010.

The underlying gross margin as a percentage of revenue was virtually stable at around 22% in 2010 with a somewhat lower margin in the third quarter due to traditional seasonal effects in the summer holidays.

The gross margin as a percentage of revenue was slightly lower than the year before as a result of mix effects. The fact that General Staffing is the growth leader is resulting in a lower gross profit margin as gross margins at Specialist Staffing and Professionals are generally higher than at General Staffing. This will have a positive effect on these activities once recovery sets in.

Another factor determining the gross margin is revenue from recruitment and selection. This was 1% of revenue in 2010, virtually the same as in 2009. Revenue from recruitment and selection generally accounts for between 1% and 2% of total group revenue. This revenue has a disproportionately large impact on the gross margin of the group because there are no direct costs associated with it.

Operating costs

Operating costs including depreciation amounted to € 600 million in 2010 compared to € 647 million in 2009. The figures for both 2010 and 2009 include non-recurring costs relating mainly to reorganisations. A non-recurring charge of € 13 million was included in 2010 and € 38 million in 2009. Excluding these non-recurring amounts underlying costs totalled € 587 million in 2010 compared to € 609 million in 2009. That meant that underlying costs were € 22 million lower in 2010, a drop of 4%.

In Spain, the Netherlands and Belgium costs fell further compared to 2009, while costs in Italy, France and Germany showed a relatively small increase in comparison with the strong rise in revenue. In Austria, Switzerland and Poland (Other countries) costs rose a combined 16%, the highest overall increase due to the exceptionally strong recovery. The combined revenue of these countries was up 47%. Costs remained low in Germany and Italy as overcapacity was utilised effectively with Germany also benefiting from the brand integration which improved the cost structure.

EBITA

Underlying EBITA totalled € 93 million in 2010, up 37% compared to 2009. Non-recurring costs were reported in both 2010 and 2009. In 2009 these non-recurring costs were mainly associated with reorganisations and restructurings in response to the crisis, while the costs incurred in 2010 were largely focused on further improving efficiency within the organisation. Reported EBITA amounted to € 76 million in 2010 compared to € 27 million in 2009.

Amortisation of acquisition-related intangible assets

Amortisation amounted to € 33 million in 2010, up from € 26 million in 2009. Due to the merger of brands in the Netherlands and Germany an additional sum of € 12 million was amortised in 2010 for brand rights. Regular amortisation amounted to € 21 million in 2010 compared to € 26 million in 2009. The amortisation relates to brand rights, client portfolios and candidate databases which are valued at the moment of acquisition and amortised over a fixed period of time.

Financial expenses

In 2010 financial expenses fell due to a lower debt burden. Financial expenses amounted to € 28 million in 2010 compared to € 37 million in 2009 and include unrealised changes to interest rate derivatives. These valuation changes had a positive impact of € 3 million on financial results in 2010 and a negative effect of € 5 million in 2009. Financial expenses excluding these unrealised changes amounted to € 31 million in 2010 against € 32 million in 2009.

Taxation

The tax burden was virtually zero in 2010 compared to a gain of € 5 million in 2009. A negative pre-tax result of € 36 million was reported in 2009 compared to a positive result of € 15 million in 2010. Consequently, result before tax was € 51 million higher than in 2009. A legislative amendment in France resulted in a change in reporting. In previous years tax on the value of assets was recognised as an operating expense in the result. Under new legislation tax is levied on the added value and as corporation tax. This increased both gross profit and the reported tax burden by € 6 million. On balance this change had no effect on net profit. In addition in 2010 a tax gain of € 9 million was recognised for the valuation of previously unrealised losses in Belgium. This was a result of a change in the legal structure in Belgium. The tax rate on the income statement was 3.4% in 2010.

This percentage presents a somewhat distorted picture because absolute gross profit is relatively low. That means that adjustments and permanent differences have a large impact on the percentage, as does the combination of profit and losses in the various countries at the various rates. The percentage therefore deviates from the average effective rates that apply in the countries in which USG People operates. The effective rates range from 19% (Poland) to 35% (Belgium).

Net result

The net result was affected by non-recurring costs and gains in both 2010 and 2009. Underlying net profit adjusted for these non-recurring results amounted to € 23 million in 2010. Reported net profit equalled € 15 million. In 2009 a net loss of € 31 million was reported. In 2010 net profit per share amounted to € 0.20.

Summary of net result

Cash flow

Cash and cash equivalents fell by € 9 million in 2010 after declining € 57 million in 2009. The operating cash flow amounted to € 106 million and was lower than the year before when it equalled € 226 million. In 2009 the operating cash flow was exceptionally high due to a € 190 million drop in working capital. This drop was supported by the sale of trade receivables. At the end of 2009 an amount of € 110 million of outstanding trade receivables was sold (2010: € 125 million). In 2010 the operating cash flow was driven more by the operating result. Working capital was reduced by a further € 52 million in 2010 and the contribution from gross profit was € 96 million. Investments were up in 2010 after a period of extremely cautious investment policy in 2008 and 2009 in response to uncertain market conditions during the crisis. The proceeds from the equity offering in March reduced the debt position by € 85 million. A total debt repayment of € 147 million was made in 2010.

Condensed cash flow statement

Balance sheet

In 2010 the balance sheet total rose by € 33 million due to an increase in trade receivables and short-term liabilities as a result of higher revenue. Adversely, the value of the fixed assets fell due to depriciation and amortisation, including accelerated depriciation relating to integration in 2010. Shareholders’ equity increased due to the inclusion of the 2010 result and the equity offering in March. The positive results and equity offering brought down the net bank debt to € 93 million.

Condensed balance sheet

In 2010 the capital structure improved compared to 2009. The net balance sheet value of the debt amounted to € 248 million at the end of 2010 compared to € 376 million at the end of 2009. Shareholders’ equity increased to € 741 million in 2010. The rise in shareholders’ equity led to an improvement in the solvency ratio to 44% from 39% in 2009.

Capital structure

Goodwill

Goodwill on the balance sheet remained virtually unchanged in 2010. No material acquisitions were made in 2010 and no business units were divested or discontinued.

Investments

In 2010 investments totalled € 30 million in 2010 compared to € 20 million in 2009. The level of investment was exceptionally low in 2009 as a result of a cautious investment policy in light of uncertain market conditions. In 2010 the level of investment had returned to a normal level of around 1% of revenue.

Shareholders’ equity

Shareholders’ equity increased by € 102 million to € 741 million in 2010. The rise was the result of an equity offering in March, which increased shareholders’ equity by € 85 million, and the inclusion of profit for the 2010 financial year. No dividend was distributed in 2010.

Financing

No bonds were offered for conversion out of the subordinated convertible bond in 2010, meaning that the nominal value of the loan remained unchanged at € 115 million. The balance sheet value of the bond rose by € 4 million as a result of credited amortised costs. The subordinated private loan decreased by € 2 million as a € 6 million repayment offset credited interest of € 4 million. The terms and conditions of the loan stipulate that this interest is paid at the end of the term of the loan. The remaining balance of the loan is € 48 million. The net debt to financial institutions declined by € 130 million, from € 223 million to € 93 million at the end of 2010.

Net debt stayed well within the permissible limits set by the banking covenants. The senior leverage ratio (net bank debt / underlying EBITDA) was 0.8 (maximum limit: 2.5) at the end of 2010 and the interest coverage ratio (underlying EBITDA / interest expenses) was 5.1 (minimum requirement: 4.0).

Provisions

Provisions fell by € 9 million in 2010, from € 33 million to € 24 million. The greatest changes were in the reorganisation provision. The reorganisation provision fell by € 5 million on balance, while € 7 million was added during the year. The other provisions were reduced by € 4 million. These mainly concern a pension provision and a provision to cover legal claims.

Dividend

The multi-year dividend policy is based on a dividend distribution equalling one-third of the net result before amortisation and adjusted for the effects of unrealised value adjustments on interest rate derivatives. As this result was € 37 million in 2010 it is proposed that a dividend of € 0.16 per share be distributed either in cash or ordinary shares, in accordance with the multi-year policy.