Report of the Board of Management

Operational review

2004 has been a very successful year for Vedior. Much has been accomplished over the past 12 months in putting the Group’s finances in stron-ger shape. A major strategic review has strengthened confidence in our direction, focusing on Vedior’s leading position in professional/executive recruitment and tailoring brands to specific markets and specific business sectors. At the same time, we continue to see our focus on cost control and improved efficiency bearing fruit and directly benefiting Vedior’s bottom line.

After the longest downturn the recruitment industry has ever experienced, 2004 was a year when the long-awaited recovery in most recruitment markets became more firmly established. While sales increased, pricing pressure remained a feature of most markets although this began to ease somewhat over the latter half of the year.

The main drivers of Vedior’s growth in 2004 have been a continuing pick-up in professional/executive businesses in North America and an improving Dutch market supported by continuing strong trading conditions in the UK, Southern Europe and the Southern Hemisphere.

Vedior’s sales increased organically by 8% to €6,467 million in 2004 from €5,970 million in 2003. Organic growth is calculated by excluding currency translation effects and the impact of acquisitions/disposals and on a like-for-like basis for the number of business days in the first quarter. Compared to 2003, higher margin professional/ executive recruitment grew as a proportion of overall Group sales (33%) and profitability (51%).

One clear sign of a more positive recruitment environment was the improvement in permanent placement which increased 20% organically to 2.0% of sales compared to 1.8% of sales in 2003 led by increased demand in the US, UK and Australia.

Gross profit was €1,141 million in 2004, or 17.6% of sales, compared with €1,074 million in 2003, or 18.0% of sales. Vedior is profitable in markets and industry sectors representing 99% of total Group sales.

Vedior experienced pricing pressure in the first half of 2004 which eased in the second half. Increased pricing pressure is not unusual during the early stages of economic recovery as companies seek to gain market share. Changes to business mix also impacted our margins including a higher proportion of lower-margin large account business compared to higher-margin business from small and medium sized companies. On a like-for-like basis (excluding currency effects and changes in business mix), the Group’s gross margin was 0.45% lower with the temporary gross margin declining by 53 basis points.

Operating income before goodwill amortisation and excluding special items increased to €217 million. On an organic basis, operating income increased by 21%. The operating margin (operating income before amortisation of goodwill and excluding special items as a percentage
of sales) was 3.3%, up from 2.9% in 2003.

Improved operating efficiency lifted the Group’s conversion ratio (operating income before goodwill amortisation and excluding special items divided by gross profit) from 16.2% to 19.0%.

As sales grew, cost control continued to be a focus and this provided some leverage to the Group’s profitability. Given the effort made in protecting the Group’s infrastructure during the economic downturn, Vedior has not had to increase costs significantly in order to support growth arising from the improvement in trading conditions experienced in most markets during 2004. Costs reduction initiatives continue to be identified through brand rationalisation, back-office consolidation and ongoing aggregated purchasing initiatives. As a percentage of sales, costs improved to 14.3% in 2004 compared to 15.1% in 2003.