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Chief Executive’s report
Despite tougher overall trading conditions, the Adcorp Group once again produced a solid financial performance for the year ended 28 February 2009. In this regard, diluted core headline earnings for the year of 389,4 cents per share (2008: 327,4 cents per share) were some 19% ahead of comparable diluted core headline earnings per share for the prior year. This result has been achieved due to the relatively strong positioning of the Group with regard to the relevance of its product and service offerings as well as the efficiency of its operations in relatively challenging economic times. “Despite tougher overall trading conditions, the Adcorp Group once again produced a solid financial performance for the year ended 28 February 2009”. The strong blue-collar bias of the flexible staffing operations, the ongoing skills shortage, the sustainably differentiating value-adding product and service offerings, the blue-chip client base, selective industry exposure, proactive leadership focused on continuous productivity and efficiency improvement initiatives coupled with certain recent quality acquisitions, have all contributed to a financial performance that has been far more robust than general South African economic and employment data would suggest. In this regard, the blue-collar flexible staffing, permanent recruitment and business process outsourcing (BPO) operations of the Group continued to perform well and to deliver strong earnings growth. The financial performance of the white-collar flexible staffing businesses, however, was negatively affected by sustained volume and margin pressure emanating principally from the retail banking sector. In response, these businesses implemented timely downsizing and cost-cutting initiatives in order to limit the negative impact on Group profitability. The EBITDA margin improved to an average 6,7% compared to the prior year average of 6,5%. This has been achieved by way of a sustained focus on improving operating margins as well as an improved mix of business, despite the adverse margin impact of the white-collar flexible staffing businesses. Debtors' days outstanding slipped to an average 35 days outstanding compared to the previous year-end level of 30 days outstanding due primarily to late payment by three large public sector clients, which skewed the result. Subsequent to the year-end, two of these overdue amounts outstanding have now been collected. Given the deteriorating economic conditions experienced in the South African economy, the collection of debtors has definitely become more difficult as businesses try to conserve their cash resources by stretching credit terms. As such, the urgency to pay particular attention to managing the cash-to-cash cycle of the business is now more important than ever and enjoys a prominent role on management's strategic agenda. FINANCIAL TARGETING Strategically, the Group adopted a philosophy of financial targeting in the 2002 financial year. The key financial return criteria focused on by the Group's management team is return on assets managed ("ROAM"), which is benchmarked against a target to ensure the achievement of superior financial returns to shareholders well in excess of the firm's weighted average cost of capital ("WACC"). The WACC, in turn, is calculated with reference to an optimal capital structure introducing an ideal mix of debt and equity as reflected by the Group's gearing target. In this regard, the Group once again exceeded its targets delivering a return on assets managed of 43,8% against a target of 33,0%. In achieving this result, the return on sales ("ROS") or operating margin achieved was 6,2% versus a target of 5,5%, whilst the asset turnover ("ATO") ratio was 7,1 times versus a target of 6,0 times. The philosophy of the Group has been to place major emphasis on the cash-generating potential of the operations. As such, a cash conversion target of 90% is the stated objective of management whereby the Group strives to convert 90% of its operating profit into cash. In this regard, the Group fell marginally short of its target whereby 81% of operating profit was converted into cash due to a deterioration in debtors days outstanding to 35 days versus a target of 33 days as previously mentioned. Whilst remaining within the confines of the Group's financial yearend targeted gearing level of 47% versus an actual gearing level of 38%, the Group was able to declare a final dividend of 160 cents per share (2008 final dividend: 160 cents per share). Combined with the interim dividend declared of 62 cents per share, this brought the total dividends declared for the year under review to 222 cents per share (2008: 215 cents per share), which represents a 3% increase in dividends. The performance of the Group against stated financial targets for the year ended 28 February 2009 was as follows:
MACRO-ENVIRONMENT Given the recent slowdown of the global economy and the resultant contraction in economic growth in South Africa, the priority remains not only to create more jobs in the economy but also to protect existing jobs in an environment where unemployment runs at unacceptably high levels. Compounding this problem is the lack of reliable, objective and comprehensive statistics with regard to the employment market. In order to assist in addressing this problem and to provide a "dip-stick" view of the state of the overall employment market in South Africa, Adcorp recently initiated an "Adcorp Employment IndexTM" which was first published in March 2009. It is the intention to publish this index on a quarterly basis thus facilitating a better, holistic understanding of the complex South African employment environment. As employment can take on many different forms, this comprehensive index encompasses statistics around permanent, temporary, fixed-term contracts, flexible staffing, and seasonal employment. Adcorp’s Employment IndexTM charts more than just the supply and demand of skills, it also covers the macroeconomic implications as well as the remuneration dynamics impacting the industry. This approach allows for a holistic, scientifically validated and crossreferenced index. The index uses the 2005 calendar year as the base year indexed at an average 100 points. The latest published index in respect of the first quarter of 2009 reflects an index value of 87,7, which represented a quarter-onquarter decline of 12,9% indicating that the overall environment for employment in South Africa has become much more negative and is expected to remain so until well into 2010. What is evident, however, is that certain industry sectors have performed better than others with the construction, logistics and warehousing, communications and information technology, government and personal services sectors remaining relatively robust and showing net employment growth. The sectors that are under substantial strain and show employment losses are mining, manufacturing, retail and wholesale trade as well as finance, real estate and business services. The index also reflects that certain skills sets remain in high demand, particularly in the financial services, engineering, natural and physical sciences, medical and health, education as well as information and communication technology sectors. In terms of demand for priority skills, certain industrial sectors, such as mining, automotive and retail banking, show a stronger negative bias whereas sectors such as construction, wholesale and retail trade, transport and communications remain relatively robust in terms of employment prospects. In addition, the skills shortage with regard to certain trades, such as engineers, artisans, construction workers, information and communication technology professionals, certain financial skills, general management and drivers, remain in relatively high demand. Given the Adcorp Group's focus in the area of scarce skills as well as the Group's specific exposure to more robust industrial sectors, the performance of the Group should continue to outperform the performance of the average Adcorp Employment IndexTM as has historically been the case. The graph below depicts the revenue exposure of the Group to each constituent individual economic sector of the South African economy as plotted against 2008 employment growth for each of those industrial sectors. ADCORP SALES SECTOR EXPOSURE VS SA SECTOR EMPLOYMENT GROWTH
As can be seen, the Group has limited exposure to sectors such as mining and agriculture where employment trends have been particularly negative but is well disposed to sectors such as Community (Public Sector) and Personal Services as well as Transport and Communication where employment trends remain relatively buoyant. The Group also derives a high proportion of its revenues from the manufacturing sector which, although particular areas within the manufacturing sector are in decline, Adcorp has limited exposure to the weaker areas such as the manufacture of non-ferrous metals, petrochemicals and the automotive sector. The Group's ability to outperform the average employment trends of the economy are therefore largely related to the selective industry exposure the Group operations have, the defensive nature of the dominant blue-collar operations which tend to demonstrate an element of counter-cyclicality in tough economic times as businesses seek to build flexibility into their cost and overhead structures through the use of contract labour, the market-leading position the Group enjoys, which generally provides for access to a better quality of business, proactive management in terms of driving internal efficiencies and the quality acquisitions the Group has recently made. Whilst the expectation is that the economic cycle is unlikely to recover any time soon, this relatively defensive positioning of the Group should stand it in good stead to deal with these adverse economic conditions and to outperform the general economy. Recently, the South African Government announced an initiative to create 500 000 public works programme jobs in an attempt to alleviate unemployment with a view to expanding this number by up to four million additional jobs by 2014. Whilst the initiative is initially focused on creating temporary public works assignments, the objective is to ultimately transition these posts into permanent positions. These initiatives will require specialised recruitment and assessment interventions, substantial skills development and training as well as payrolling and supervision which Adcorp could play a substantial role in if so required. What is most encouraging about these initiatives is that it demonstrates a continued commitment by Government to job creation and skills development, which should positively impact the operations of the Adcorp Group in the medium to long-term. In this regard, Adcorp is currently a major initiator of learnerships in terms of the Skills Development Act. INDUSTRY DEVELOPMENTS There has been much public debate recently, emanating principally from the trade union movement, with regard to the prospect of further regulation governing the a-typical, contract labour or temporary employment services (TES) market. The debate has primarily focused on the need to eradicate certain exploitative labour-broking practices carried on by various operatives within the industry as well as the entrenchment of the principle of "decent work" as defined by the International Labour Organisation (ILO). According to the International Labour Organisation, "decent work" involves creating opportunities for work that is productive and delivers a fair income, security in the workplace and social protection for families, better prospects for personal development and social integration, freedom for people to express their concerns, organise and participate in the decisions that affect their lives and equality of opportunity and treatment for all women and men. Adcorp has taken an active role in these deliberations and is generally supportive of certain of the recommendations which, if dealt with appropriately, could be positive for the staffing industry as a whole. The staffing industry plays a leading role in the South African economy in terms of job creation by way of introducing a significant number of first-time job seekers into the formal job market as well as by playing a leading role in the upskilling of thousands of employees through the formal learnership process. Whilst the debate relating to this issue has spilled into the public domain, there have been many positive aspects to this in that it has enabled the industry as represented by the Confederation of Associations in the Private Employment Sector (CAPES) to showcase the positive role it plays in terms of facilitating job creation and skills development in the South African environment and has also substantially elevated the profile of Adcorp which has taken a leading role in forging opinion around this issue. ACQUISITIONS As previously reported to shareholders, the acquisition of Staff-UNeed became unconditional in August 2008. Given the specific focus of the business providing skilled and semi-skilled workers to the power-generation and engineering industries, it is expected to be an important contributor to the Group in the future. The business has integrated well into the Adcorp Group and is performing in line with expectations. Other relatively recent acquisitions of the past two years, namely Capital Outsourcing Group and FMS Marketing Solutions, are performing well and according to expectations. Employ-Rite, which focuses on the automotive industry, had a difficult year due to the severe downturn in that industry. The impact of this on the Group was, however, limited due to its relatively small contribution to Group profits. NORMALISED EARNINGS The financial figures presented for the year ended 28 February 2009 have been significantly impacted by certain non-cash and mostly non-recurring adjustments required in compliance with International Financial Reporting Standards (IFRS). These adjustments are substantial and grossly misrepresent the true commercial and economic reality of the Group's trading performance for the period under review. The impact of these adjustments on HEPS (headline earnings per share) is as follows:
Excluding the impact of these IFRS adjustments, the normalised, abridged income statement for the year ended 28 February 2009 is as follows:
ERP SYSTEM IMPLEMENTATION The implementation of the new Microsoft Dynamics AX ERP system has been successful with the majority of Group companies having now gone live on the system. The system will contribute positively to the quality, extent and relevance of management information as well as to operating efficiencies. HUMAN RESOURCES Being a people-intensive business, the need for sound human resource policies and procedures is of paramount importance. The key focus of this function is around the attraction and retention of top talent in the Group. In this regard, the Group remains committed to upholding a best practice human resource management approach ensuring that the management of human resources is effective, efficient and that there is fair treatment of all employees. In terms of this best practice approach, particular emphasis is given to the following areas:
In addition, the Group human resources function is the custodian of the Group's social investment activities which are primarily focused on the development of human potential by way of extending a bursary scheme to disadvantaged individuals and communities as well as on the support of vegetable garden projects in disadvantaged communities. OUTLOOK The extent and duration of the recent, extreme turbulence in the world’s major economies and its likely impact on the South African economy remain unclear. The strategy of the Group during these uncertain times is to protect top-line business as far as possible, realise the full potential of a number of promising internal productivity and efficiency initiatives, focus on cash generation, retain our top people talent, positively influence industry regulation and seek out quality acquisitions. Despite a troubled global and local economic outlook for the foreseeable future, certain mitigating factors should position the Group relatively well to weather the storm. The defensive nature of the Group portfolio with its overweight exposure to blue-collar flexible staffing, the sizeable ongoing infrastructural spend in the country which consumes these workers, the persistent skills shortage, internal productivity projects and certain potentially lucrative market opportunities should all combine to stand the Adcorp Group in relatively good stead. In addition, these conditions provide a unique opportunity to build a more robust, sustainable, market leading and dominant business model positioned advantageously for an economic upswing. APPRECIATION As Adcorp’s strength has always been its outstanding people, I would like to thank the directors, management and staff of the Adcorp Group for their valued contribution over the past financial period and look forward to their continued support in the future. RL Pike
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