Revenues were up by +1% from 104.4 million Pounds in H1 2010 to 105.2 million Pounds in H1 2011 at Empresaria Group Plc (EMR:LSE), the international staffing and management services group. Gross profit was unchanged at 22.4 million Pounds in H1 2011 when compared with H1 2010.

Interim results for the six months ended 30 June 2011 reveal that operating profit, before exceptional items and intangible amortisation, was down from 3.1 million Pounds in H1 2010 to 1.7 million Pounds in H1 2011.

Operating profit was down from 2.9 million Pounds in H1 2010 to a loss of -1.4 million Pounds in H1 2011, mainly due to an exceptional provision for potential retrospective claims from temporary employees as well as the German government with regard to the payment of social security premiums (see below).

Profit for the period was down from 1.7 million Pounds in H1 2010 to a loss of -1.6 million Pounds in H1 2011.

In the UK revenues decreased by -13% to 32.5 million Pounds in the period (2010: 37.3 million Pounds) but net fee income rose by +7% to 7.8 million Pounds (2010: 7.3 million Pounds). This apparent dichotomy is explained by the decision to move away from lower margin contracts and re-focus infrastructure and construction operations on business where there is greater added value and consequently higher gross margins. In addition, Empresaria has seen increased demand for permanent staff, particularly in the Financial Services sector, which has altered the mix between permanent and temporary revenue contribution.

In Continental Europe revenues increased by +7% to 50.1 million Pounds in the period (2010: 47 million Pounds) although net fee income declined by -14% to 9 million Pounds (2010: 10.4 million Pounds). Within Continental Europe, the group's operations are primarily temporary staffing and outsourced HR services and approximately 90% of the region's net fee income is generated in Germany.

The decline in net fee income in the period can be directly attributed to the need to change pay tariffs for temporary workers in Germany following the legal ruling relating to certain collective labour agreements at the end of 2010. Many temporary workers have received an increase in pay which has taken longer to pass on to clients than initially anticipated. The financial impact of this disruption amounted to -1.7 million Pounds in lost net fee income and unplanned legal costs in the period.

Gross margins in Germany have improved in recent months, although they are still running behind 2010 levels. The German operations were additionally affected by the widely reported e-coli food scare, which resulted in a drop in revenues within the logistics division. Both of these operational challenges have been addressed and the group is expecting a materially improved financial performance in the second half.

In December 2010 the German federal labour court ruled that the CGZP union is not entitled to conclude a collective labour agreement. This ruling was published on 25 February 2011. As a result the collective labour agreement concluded by CGZP is not valid at this time. In May 2011 the court in Berlin ruled that this collective labour agreement was invalid with retroactive effect. A court ruling is expected in November 2011 which will rule on whether staffing agencies can rely on a defence of acting in "good-faith". A number of operating companies within the Headway group applied this collective labour agreement until early or mid-2010. From January 2011 these operating companies have changed to BZA (the German Association of Private Employment Agencies, now merged as BAP together with AMP), which has not been the subject of legal challenge.

A provision of 3 million Pounds has been made against potential claims and represents the board's best estimate of the liability based on the information currently available.

Operational challenges in Germany have been offset by growth within the healthcare staffing business based in Finland, Estonia and Lithuania.    

In the Rest of the World revenues increased by +12% to 22.6 million Pounds in the period (2010: 20.1 million Pounds) and Net fee income increased by +19% to 5.6 million Pounds (2010: 4.7 million Pounds). This region, which includes Asia Pacific and South America, has the highest proportion of permanent revenue contribution, at 60% of total regional Net fee income, and this increased by +34% over the prior year to 3.3 million Pounds. Revenue from temporary recruitment also increased by +9% to 18.5 million Pounds. 

The three main markets of Japan, Chile and South East Asia account for approximately 84% of regional net fee income. The largest of these markets, Japan, was badly affected by the earthquake, tsunami and subsequent radiation scare. Both of the businesses in Japan suffered a short-term financial impact with temporary staff unable to work. In addition, temporary numbers have dropped as an indirect consequence of the earthquake, with foreign workers leaving the country and with clients opting to take temporary workers on permanent contracts to secure key skills. The South East Asia market remains buoyant. The group has invested significant resources in new Singapore operations during the period with five separate specialist brands now operating in the territory.

Operations in Chile continue to grow revenues and to improve gross margin.

Chief Executive, Miles Hunt, commented "overall, group performance in the period did not meet our expectations. Although we grew revenue slightly, net fee income was flat during the period, albeit with strong performances from individual companies, particularly within the Asia region. Investments in new start ups and office openings in Asia and Australia did impact on profitability during the period, as planned, but are all developing positively."

"The group faced unexpected challenges in the period, particularly the impact of the earthquake and tsunami in Japan and, of greater short-term financial consequence, the adoption of new collective labour agreements in Germany following court rulings, which required us to increase pay rates to temporary workers as well as incur substantial one-off legal costs."

"The resultant gross margin reduction experienced in Germany over the period, caused by the need to move to new collective labour agreements, is being partially reversed through price increases and further compensated for by cost reductions, although it is taking longer to fix than initially anticipated. Whilst we are expecting a stronger trading performance from our German operations in the second half, the group's full year profits before exceptional provision are expected to be lower than current market forecasts." 

"The trading environment remains stable, with strong demand in certain overseas markets offset by softer market conditions in the UK. Our focus in the second half remains on driving improved performance in our German operations as well as continuing to strengthen our other businesses both in terms of management and service capability and to identify areas for further expansion." 

Miles Hunt has informed the board of his intention to leave the group after over 15 years as Chief Executive in order to pursue other opportunities. 

Hunt will facilitate a smooth transition of responsibilities to Joost Kreulen who will take over the role of Chief Executive and be appointed to the Empresaria board from 1 January 2012. Hunt will remain on the board as a non-executive director until the end of March 2012. Joost Kreulen has been appointed as the group's Chief Operating Officer with immediate effect.

Kreulen has been with the group since 2008, initially responsible for its Asian operations and more recently also for a number of the group's UK-based businesses. Prior to joining Empresaria, Kreulen was head of specialist staffing operations for Vedior in the Netherlands as well as being responsible for business development within Northern Europe and Germany.

In early trading Empresaria's shares were down by -25.53% to 26.06 Pence.