ManpowerGroup Inc (MAN) 2002 Q3 法說會逐字稿

Hello and welcome to the Manpower third quarter earnings release.

Today's conference is being recorded at the request of the company.

If anyone has any objections, you may disconnect at this time.

I would now like to introduce today's conference host, Chairman and Chief Executive Officer of Manpower, Mr. Jeff Joerres.

Sir, you may begin.

Thank you.

Good morning and welcome to the call for third quarter for 2002.

Mike Van Handel, Chief Financial Officer, is with me today.

We'll go over the results in general as we have in the past, and discuss it then some of the detailed segments.

Also, Mike will cover some of the financial items that have effected in the third quarter and give you a little bit more insight into some of the items that might affect us on a full-year basis.

Before we move into the call though, Mike, if you could go over the Safe Harbor language.

Good morning everyone.

This conference call includes forward-looking statements which are subject to risks and uncertainties.

Actual results might differ materially from those projected in the forward-looking statements.

Additional information concerning factors that could cause actual results to materially differ from those in the forward-looking statements can be found in the company's annual report on Form 10-K and in the other Securities and Exchange Commission filings of the Company which information is incorporated herein by reference.

Thanks, Mike.

We had a strong performance in the third quarter 2002.

Given the amount of instability and doubt in the economy throughout the entire world, we went into the quarter anticipating earnings per share of somewhere between 43 and 47.

Also, what we put into that was about 4-5 cents impact from currency.

We exceeded those estimates at a conclusion of the quarter at 52 cents.

Impact from the foreign currency translation was 7 cents, so we got a little bit more assistance out of there.

But even if you factor the 7 cents off the 52, you can see that our operations -- operational profit was able to exceed our expectations.

System-wide sales for the quarter were 3.2 billion with revenues of 2.9 billion, up nearly 8% -- 7.9% over prior year.

The revenue number was slightly stronger than we had anticipated in all of the geographies.

Overall, it was up 1.3% in constant currency versus our forecast that we talked about in our last call, which was a flat revenue projection.

Acquisitions, which are primarily US franchises, added less than 1%, so it was not much at all to the revenue in the quarter.

We ended the quarter with a little over 77 million in operating profit, representing a 13.1% increase.

Even after the adjustment for the treatment of goodwill, we increased 6%.

Also, we added slightly more than $40 million on the net income line.

This resulted in our operating margin of 2.7%, which is the same as we had last year.

This is the first quarter of no decline in operating profit margins since the first quarter of 2001.

As we mentioned in our last conference call, we felt that the second quarter was the inflection point regarding leverage in the business.

The third quarter proved that it was, and we will talk about later whether we think it will stay that way, but when you compare second to third quarter, it definitely was the inflection point.

Let me add just a few more comments regarding the overall results.

Gross margin percentage, it came in at 17.8% versus last quarter of 18%, reduction of 20 basis points from the second quarter.

No new news to you, this is due to the factors that we have been outlining for several quarters, which is pricing pressures and business mix.

In many ways I considered it a small victory in a tough environment.

We have worked very hard at holding onto our gross profits, and this quarter our slippage, I think, is minimal compared to the pressures that we are seeing out in the marketplace.

The pricing pressures really have not subsided.

We are in that protracted part of the recession -- or the tail end of the recession in many of the countries.

Therefore we are seeing very aggressive pricing from some of our competition and special deals, upfront payments, and things like that in order to keep their offices open and protect their market share.

We do not anticipate significant further declines in gross margin percentage for the fourth quarter of 2002; however, we know that the pricing pressures will take sometime to subside as the industry attempts to make its way through this recession.

Also, a part of the decline in gross margin does relate to the mix of business.

Businesses like Empower and Jefferson Wells were more severely hurt by the downturn and having much greater portion of impact on our gross margin since those operate generally in the neighborhood between the high 30s' and low 40s' for their gross margin.

Also, the area that is growing most quickly across the world is Light Manufacturing as well as some of the larger accounts, and they tend to be a slightly lower gross profit than the other segments in the business.

Another area I would like to call to your attention is the expense line.

Our SG&A was down 5% in constant currency after excluding the goodwill amortization in 2001, so despite top line growth we were able to manage the expense line throughout the world which kept us with the improvements of the gross profit --- or the decline in the gross profits, it really kept us very much in the game producing the profits that we did.

SG&A as a percent of revenue was down a 100 basis points from prior year to 15.1 after excluding goodwill from 2001.

This is a cumulative effect with tremendous amount of effort by the management teams throughout the world to hold down to and to reduce costs.

We are not doing this at the expense of future growth.

We've talked about that for several quarters, but we continue to be vigilant on that line.

Those efforts are going to continue, so I don't anticipate any major issue regarding our expense increases as a percent of sale or gross margin over the next few quarters, other than the usual seasonal effects, which does affect a bit on our gross margin line.

In our forecast for the fourth quarter, we expect to have continued improvement in year-over-year revenue growth but at a modest pace.

While major parts of our business are slowly increasing, like the US and France operations, other parts of Europe are still seeing sideways environment regarding their top line and in some cases still are -- are declining.

Given the economic environment, we are estimating year-over-year revenue growth of 9-10% based on a current exchange rate or approximately 3-4% in constant currency.

This leads us to our fourth quarter estimate of between $0.43 and $0.47 a share; within that estimate we are including $0.04 for the benefit of currency.

Shifting gears a bit, I'd now like to move on to the segment detail starting with the U.S.

Our U.S. operations, revenues were approximately 513 million up 6.3%.

Our year-over-year revenue growth did improve gradually each month, and for that matter, each week throughout the quarter, with September being up nearly 8%.

It's a very similar story what we've seen in the second quarter with light manufacturing and professional staffing continue to move forward with the office category still lagging.

It's starting to catch up but lagging compared to manufacturing and Professional.

Light Industrial business for the quarter was up 12.5%.

We also experienced an increase of 13.7% in professional staffing.

During the quarter in Professional staffing, we saw a fairly dramatic improvement.

The beginning of the quarter started off with a single digit, and we ended September with a 24% increase in professional staffing.

So, I'm not prepared to call it a trend, but it's definitely a positive sign.

Much of that professional staffing is coming from the engineering portion of our business, which we have done extremely well.

But also we are seeing similar pick up in the IT contracting.

Our core gross margin in the US was stable sequentially but continues to be below prior year, again due to this mix of business.

Our large accounts are moving up more quickly than the retail business, and we're also seeing some pressure from our increased medical and unemployment costs, which are pretty difficult to recover during this period of time.

We anticipate next year we would be able to do a little bit better job on that, but those are some difficult parts of the expense line to recover.

The U.S., as you can see from the financials, did a tremendous job in controlling costs, which were flat from the second quarter, while we had sequential increase of revenue of $38 million.

So we were able to use that over- capacity that we've been talking about in the last five or six conference calls, based on our strategy of not aggressively closing offices, or for that matter, closing [many] at all.

The U.S. has followed the disciplines that we've set forth for the company in reducing our costs, which means ensuring that we're taking the appropriate action but not taking the actions that are going to stub the future growth of our organization.

I would really like to congratulate the US team for job well done.

This is not easy work; it's a lot of fortitude, and takes a lot of -- communication in order to make it happen the right way, and I'm looking forward to seeing the same controls in the fourth quarter as well as through all of 2003.

Moving on to the French market, we improved modestly on the revenue line up 11.3% in US dollars and 0.5% so positive category in Euros.

On the revenue line, we were seeing steady improvement throughout the quarter.

The improvement is, however, extremely slight, so you could almost look at it as if we've gone sideways, but if you look closely, in fact it is going up week-by-week and month-by-month.

In the weekly numbers we get, we have not been able to determine any other trend, but slightly up.

There has been no [dip], and there is no accelerations; it's just slightly up.

We will continue to monitor this, and we believe that we can effectively manage our expenses during this period of modest growth, which is what we would anticipate for the balance of the fourth quarter.

The gross margin percentage was also stable sequentially but down year-over-year, which is the same situation that we had in the second quarter.

France was also seeing increased pricing pressure, but we believed that, that they had stabilized some of the decline.

Doesn't mean the work is over with it - it's still a lot of work to be done in the fourth quarter and 2003.

Once again a great story on expense management in our French operation, they were able to reduce their expenses an absolute amount by 5% year-over-year in constant currency despite that modest revenue increase that I talked about.

We believe we will able to also continue this management, as we've said before, which leads us to the confidence in the number that we have put forth for the fourth quarter.

Moving on to the UK, revenues were down 10% in constant currency.

I mentioned on my last conference call that we lost a few very large accounts that we passed on because of low pricing and feel better than ever that we were able to do that.

In addition, we lost a very large call center that went bankrupt that affected our top line.

Barring those unusual events, our top line of minus 10%, in constant currency, is somewhat encouraging when you look beneath that one number.

We continue to see improvement in traditional business, both Manpower and Brook Street, and they're actually starting to see a slight recovery in the permanent placement side, particularly in Brook Street.

We're still struggling in the IT business with Elan down 7% in US dollars and 15% in constant currency.

We've have secured several accounts that will positively affect our future but until those accounts kick in, and more specifically until the industry really picks up in a much more sustainable way, we believe that the growth of the IT business may be slow for some period of time into the future.

Our gross margin in the UK: stable sequentially -- kind of the recurring theme here -- but again down year-over-year due to mix of business, more affected in the UK by permanent placement fees which are down almost 25%, which does have a major impact on the GP.

Our expenses as well as the other parts of the operation are under control and giving us a high degree of confidence.

Other Europe showed positive growth in the quarter with revenue increased to 1.5%.

Very mixed picture within Europe -- I'll talk about that a little bit later -- but in 1.5% down of constant currency and up 12.3% in U.S. dollars.

Southern Europe showed the best growth, with Italy being up 15% and Spain up over 28% in local currency.

A great story.

I think that you might recall that a few years ago we changed our strategy in Spain by walking away from the tremendous amount of low gross profit business, more strategically opening our offices, and the strategy is really paying off, and our management there has done an exceptional job with the difficult strategy that looked very contrary at the time.

Central and northern Europe continued to see downward pressure, with Germany being down about 5% for the commercial staffing part of the business in local currency, which is an improvement from what we saw last quarter.

Sweden and Norway, they're still suffering from the some of the economic turmoil both related to telecom as well as oil.

They're showing mid-single low to low-double digit declines in revenue.

We are maintaining our gross profit margins, and we feel confident that we'll be able to continue to do that for the balance of 2002.

Our expense is similar to what happened in the US.

They were down in constant currency by 7.3% year-over-year.

Our expenses were essentially flat sequentially from the second quarter and yet we added $43 million more in the quarter [onto] the top line.

So again, you can see that we've done a lot of work in our European organization to manage these expenses in the difficult time, and I would also like to congratulate them.

It's not easy, and in fact it's exponentially difficult based on some of the labor legislation that we operate in within the European segment.

So a fine job was done by all of our managers in Europe.

The other operation segments, Asia-Pacific and some of the other operating units, increased revenue by 9% in constant currency.

We continue to see Japan in positive territory, though it is slightly weakened with a low-single digit growth rate factoring out all of our acquisitions, which is giving you pure organic growth rate.

Jefferson Wells and Empowers revenues over the prior years are flat to slightly up.

This, of course, is a result of the company's waiting to control their expenses, and therefore, not proceeding with some of the project-based initiatives, which are the heart of Jefferson Wells and Empower.

Both organizations have taken the appropriate actions and will take further action to reduce expenses without eating away at the core of what they stand for and what we stand for, because it is all about the future with those businesses, as we are really banking and really feel confident that they will positively affect the future.

Gross margin in the Other Country category was also affected by Jefferson Wells and Empower since the utilization of consultants were down, which, as you know, that creates a drag on the gross margin number.

Canada and Mexico explained that, Canada, a couple of quarters ago with a loss of the telecom company that we moved away from.

Both have gone through a difficult period top line and they've been turn -- able to turn around.

Not only produce a good top line, but also turn around profits in a much more positive way.

Mexico continues to gain market share, and they do it in a very profitable way.

All in all, the third quarter, I believe, was a good quarter from an operational perspective.

At the same time we continue to look forward.

At Manpower we continue to increase our sales focus, manage our expense line, and do all of this by adding profitable business.

Our estimate of $0.43-0.47 a share is very much a continuation of what we accomplished in the third quarter -- sprinkled with a bit of caution because, we--we're just not sure which way the French economy will go, or for that matter, a few other economies.

So there is still some doubt and clouds on the horizon that we need to factor in.

Also, I might add, our French operation is in a seasonal downturn as their biggest part of the year, the third quarter, is behind us.

We continue, as we have stated several times, to focus and execute on the five strategies established for the company.

It's all about revenue, it's about profitable revenues, it's about efficiency, and the efficient use of capital -- Mike will talk about that in a little bit -- as well as the expense management and productivity gains.

Our technology strategy, which we continue to really invest in and lead the industry in, not only in e-commerce applications but now our new front office applications and back office applications which are being rolled out.

Our acquisitions are proving to be difficult, to be honest with you, during this period of time, but it doesn't take away from the strategic importance, which was the only reason we did these acquisitions.

And of course, our organization and culture is still intact, which is a key part in a service industry that requires so much passion to go out and sell.

We have highly motivated people that are servicing the customers in a superior fashion, compared to the industry, and as a result the quality of Manpower is proving to be a value that customers will pay for.

I have no other way to explain the current situation, other than to say we are in recovery mode.

Recovery is very slow on a global basis, but when looking at the numbers and the trends, it's easy to see we are increasing and in many cases have bottomed out in almost all of the geographies.

The increase is slower than what we had experienced before, and the bottoming is longer than what we have previously experienced.

So while we must remain cautious as we enter the fourth quarter and actually for the first few quarters of next year, we are quite optimistic about our prospects and the macro trends for the industry.

Tremendous efforts have been put into the organization to streamline and focus on the right kind of revenue growth.

Additionally, more than ever before, customers and prospects, more than three months ago, more than a month ago, are meeting with us to discuss how they can effectively use flexible staffing and our outsource services -- the assessment services, the training services -- so that they can ensure themselves a more profitable recovery.

So in many ways, while we're disappointed the economy is not moving as quickly as we would want, we still have reason to be extremely optimistic based on what we've been able to do.

So when we move into 2003, given some encouragement from the economy, we feel pretty good about our prospects.

With that, Mike, if you could cover some financial items.

Okay.

I'll start with a review of cash flows.

Free cash flows, which I define as cash from operating activities less capital expenditures, was strong for the quarter at $22.8 million.

This brings our year-to-date free cash flow to $29.9 million.

Our performance for the third quarter was particularly strong considering that working capital needs typically peak in this quarter, due to the higher seasonal revenue levels.

As of the end of the third quarter, net working capital was $10 million higher than as of the end of the second quarter, despite the additional $283 million of revenue that we've put through the quarter.

This achievement was a result of aggressive accounts receivable management across all geographies, which allowed us to slightly improve upon the DSO gains we've realized over the last year already.

Depreciation and amortization for the quarter was $16 million and capital expenditures were $9 million.

Capital expenditures were substantially lower than the prior year due to the limited number of office openings and our reduced investments in computer hardware and office furniture.

Cash at the end of the quarter was $237 million and total debt was $878 million, bringing our net debt position to $641 million.

That's a $29 million reduction from the end of June.

Net interest expense increased 1.3 million in the third quarter compared to the second quarter, which is due to the higher seasonal borrowing levels during the quarter, also due to the stronger Euro exchange rate, impacting our Euro denominated interest expense.

Our net interest coverage ratio on a trailing 12- month basis has remained stable with the second quarter at over 6 times coverage, and based on our projections should begin to improve with the fourth quarter of this year.

There no borrowings outstanding at the end of the quarter under the asset securitization program, however, there was $43 million outstanding at the end of the third quarter in the prior year.

And I am sure, you saw Standard and Poor's cut its rating on October 4th from BBB to BBB-, while maintaining a negative outlook.

The rating change was based on the declining earning levels we have witnessed over the last year and the associated weakening in our coverage ratios.

This rating change does not impact our liquidity but does have an impact on the cost of borrowing under our bank revolver.

We estimate that this rating change will result in additional financing costs of approximately $200,000 in the fourth quarter.

Lastly, we continue to account for stock options and our stock purchase plans under APB number 25.

As we accounted for the cost of these plans under SFAS number 123, the earnings charge for the quarter would have been 1 cent and for the nine month period it would have been 3 cents.

We will continue to monitor the developments on the stock option accounting and will revise our treatment if appropriate.

In the meantime, we will, of course, fully disclose the pro forma P&L impact of expensing options in our quarterly 10-Qs.

Jeff.

Thanks, Mike.

With that we will open it up for questions, and we will keep it to an hour, which would give us about 30 minutes to 35 minutes for questions.

So, questions please.

Thank you, sir.

At this time we will begin the question and answer session.

If you [have] a question, simply press '*' '1' on your telephone touch pad.

And if are using speaker equipment, you may need to lift handsets prior to pressing '*' '1'.

Should you wish to cancel your question or if your question has already been answered, simply press '*' '2'.

Once again that was '*' '1' to ask your question and '*' '2' to cancel.

One moment while the question is registered.

Okay, I am showing our first question comes from Andrew Steinerman from Bear Stearns.

Hi!

Andrew Steinerman from Bear Stearns.

Congratulations guys!

My question is on France.

Obviously you guys have already been pretty articulate about, you know, what you're seeing is slight improvement, but could you just review with us, sort of, the correlation between GDP growth and temporary help growth.

I mean definitely you've seen a lot of economists be real pessimistic about, kind of, you know, business sentiment in France.

You know, why do you think that your business is still moving forward even though, you know, the economists are sort of wavering out there?

First of all, let's preface this that I am not an economist.

Neither am I.

Okay.

So then we can -- we an talk about anything we want and somebody can chew holes in it, but there is no doubt of correlation between GDP and our business.

The correlation has diminished over the last, probably 8-9 months.

And what I mean by that is as consumer spending in many -- in the U.S. and in France, which has a very similar environment -- was holding up GDP.

And it really wasn't coming from any of the segments that would generate business for us.

We are looking more at CAPEX expenditures in France to look at it.

We have seen some of the preliminary, there was an article this morning in the [Les Echoes] that talked about a range of about 1.2-2%, I believe, for GDP growth.

And when we factor that into 2003, which -- that was the number we were using, it would show some fairly modest growth as we move forward.

So the GDP isn't completely correlated.

There are some correlations.

It depends what the automotives do.

We've got 3-4% in automotive.

We are doing a fair amount of work based on demand that's happening out in the marketplace, when you have inventory depletions.

So, I would say that our view of France right now is cautious.

We are seeing increases; they have been slight.

You have to have a larger graduation, if you will, to show some of the increases.

But you can see by the final number that we are getting increases; we're approaching France cautiously; we're looking at the GDP numbers; and we'll be finalizing our budget probably in the next 30 days or so.

Sure.

And obviously the easy comps help as well?

Yes, no doubt.

The -- we are coming up against easier comps to -- to frankly lay it out there -- a basically a breakeven in sales now is still slightly down in headcount from the year before.

Just because of the comps so that we can -- everybody can understand the position that we and basically the rest of the industry is in.

Okay.

Thanks for the comments.

All right, thanks Andrew.

Sure.

Our next question comes from David [Cohen] with [Value Line].

Yes, could you please touch on U.S.

Allied Industry [Workers] -- [inaudible] and how that has been ramping up, because I believe in the second quarter it improved and I'm just wondering if it improved again in the third quarter?

It did improve -- improve again in the third quarter.

And we are starting to see a mixed bag.

David, if I could make sure I answer your question right, it's really -- I think your question is who is using us?

Is that correct?

Yeah.

Well, actually you have already answered that question.

I mean basically, that's the only answer I was looking for.

If I might be permitted, what are, at the present time, the best office opening opportunities in Europe in the coming year or so?

What countries?

Well, I mean we will look at those that continue to move.

We still have some opportunities to open in Italy.

We have some opportunities to open in Spain.

We have opened -- we will open a few offices in France.

It's a bigger question, though, when you look at office openings.

We have our office openings list for the fourth quarter and for the balance of 2003.

We are going to hold on to those until we see economies move up because if we normally have a breakeven of "x" number of months, we now know if we put it in, that breakeven is going to be another 4, 5, 6 months.

And to do it now, it's not an effective use of shareholder's money.

At the same time, we are opening more and more onsites;

I know some of our competitors count onsites as offices.

We don't do that.

We consider it a great location for us, but that is an efficient way to open offices, and we have got probably a 1000 or so of those around the world as well.

Thank you very much.

Okay.

Our next question comes from Adam Waldo from Lehman Brothers.

Good morning, Jeff and Mike.

Let me add my congratulations on a really a strong management effort across the organization in a tough environment.

If we could turn to the S&P ratings downgrade for a moment, I really want to ask two things.

Obviously, Mike, in your prepared remarks you clarified very well for us the impact on financing cost, but I wondered, Jeff and Mike, if you can address for us any constraints that the rating downgrade may play surround your potential borrowing capacity early in the cycle upturn to be able to support working capital growth, to be able to grow the top line in comp store sales at a fast rate.

Right.

When you look at, if we can think optimistically for a moment which, of course, I like to do, and talk about the recovery side, which is, of course, one of the things that we prepare for, and as business ramps up we would aspect some additional working capital usage.

As we think about that, certainly we do have available cash in the balance sheet that we could put to use, something in the order of $75-100 million.

So really the first real need for working capital will be funded with our balance sheet, and then we will from there go into our credit facilities.

The facilities -- we do have availability under existing facilities just under $800 million at the present time.

Now, of course, what will happen as business picks up, our credit ratios will improve as well and given the rate, even at the rating we are at, there are no limitations in terms of borrowing under those facilities.

Of course we can't -- I've got to be careful here -- we couldn't borrow all $800 million if our business wasn't improving, and we wouldn't, of course, need to borrow that even if it was improving.

I mean, I would think with a very strong recovery you might be thinking about tapping in another $100 million or so of borrowings, and with that, our credit ratios would be improving as our earnings would be going along with that.

So, I am very comfortable about our capital structure going forward in terms of supporting the growth of the business.

I think we are well situated from that standpoint.

So, Mike, is it fair to say that, in the moderate pace recovery that Jeff and you have envisioned, you're fine funding growth working capital through surplus cash, and to the extent that the recovery ends up being of high velocity, do you think you can fund that under your revolver?

Yes.

That's a good summary.

Okay.

Turning to the issue of gross margin that Jeff spoke about in his prepared remarks.

Obviously, I think we are all slightly disappointed with gross margin in the third quarter, but not materially so, but as you look to the fourth quarter and next year, can you maybe get under the hood of gross margin in the third quarter little bit?

Give us a sense for year-over-year changes in global bill rates, if you can?

Or give us a sense for the number of basis points by which the revenue mix shifted globally to the light industrial business, which is low in margin.

Yeah.

I think, as we look forward, and you have to look market-to-market to really make sense of it all.

We are going to continue to see pressure in the major markets until we -- business starts to really pick up, and even then, even in the early stages of the recovery we are not going to see real opportunities for what I will call true price increases that could help drop down to the gross profit line.

So, there is going to be a little bit of a lag, but I would say that, given where we are in the US cycle, I don't anticipate significant deterioration in gross profit margin.

I do anticipate continued pressure for awhile until we see the other side.

When we do see the other side, I think, there are some real pluses that can come in to place.

One of those is sourcing fees: permanent, temp-to-perm conversion, and permanent placement fees.

So, I think that adds a real element.

Certainly, utilization on Jefferson Wells and Empower will improve, so I think that will help boost our margins as well.

So I think, going out while we -- near term in this cycle I don't see dramatic drop in gross profit margins, but I do see continued pressure.

It will be -- I want to get on the other side and then we'll start to see things move forward.

Okay.

Roughly by what number of basis points year-over-year did your revenue mix shift during the third quarter to the light industrial business globally?

If you could just estimate that for us?

I don't have a number for you off the top, but I have to do something back of the envelope for you, Adam.

But certainly the -- within the US organization light industrial was, as Jeff mentioned in his earlier remarks, was much stronger.

But in terms of an absolute shift in market share I think it will be pretty marginal -- pretty slight on the margin but I'd have to do a quick calculation on it.

Okay, maybe, if possible, we can come back to that late in the call.

Thanks.

Our next question comes from Chris Gutek from Morgan Stanley.

Thanks.

Good morning Jeff and Mike.

I want to focus on the G&A and the cost cutting effort, if I could.

The G&A percent of revenues year-over-year was down by 120 basis points.

I am curious regarding this mix shift issue which had a negative impact on the gross margin.

I'm curious what portion of the reduction in G&A was because of that same mix shift issue towards the light industrial globally, and then to the extent that there was significant cost-cutting in addition to the mix shift.

Could you guys go into a bit more detail with some of the specific things you are doing to cut costs, and what more things you could do if the macro outlook for '03 continues to soften a bit?

Well, let me just talk in some general terms on some of the efforts that we have going on in cost reduction.

We challenge all of our organization, some of the discretionary cost, to make sure that we are positioning the difference between investment and expenses or nice-to-have, so we have gotten very stringent upon discretionary cost.

In addition to that, we have been able to implement some systems, we have been able to implement some new processes that are permanent takeouts out of the business and we are seeing that.

We are also seeing, which you have been seeing for several quarters, there is a portion of our business, which is variable.

If you had four people in our office, you can now be doing that with two.

While we have those two people in the office, we are looking at how to make them more efficient.

So when we go into 2003, we are not going to be looking at taking out cost as much as we are looking at trying to grow the business without adding costs by adding some of those efficiency elements and cutting out some bureaucracy, cutting out paperwork.

We have worked very hard, actually for three years, I mean, this was the strategy we put in place three years [ago], and we have been working very, very hard down that path.

So there are lots of elements and what we do in Japan is different than what we are doing in France, which is different than what we are doing in Sweden.

So overall the strategies are clear; the management teams are executing on them; and we are very solid on our ability not to take out, if you will, opportunity for us to grow in the future.

So, what you saw in us being able to keep our expenses flat while growing our business in both Europe and the US -- it was according to strategy we established [and put in place] almost a year ago.

So that on the other side of this, we would be able to take advantage of the market hopefully better than our competitors.

Okay.

And any sense for how much the mix shift has had its impact on the [SG&A] as a percent of revenues?

Yeah.

I don't think it's been substantial, Chris.

And being, kind of, the second question along these lines, I think I should clarify.

While certainly in the US organization we're seeing light industrial pickup more quickly than some of the office business.

You know, that's the main market where we see that shift and keep in mind that that's, you know, that's about 20% of revenues.

So while we're seeing a relative shift within that market, on a global basis in terms of overall mix shift of having that much for a play on the dynamics on, from a global perspective, it wouldn't be that significant.

So, I don't think there would be that much of an impact just from mix shift on the overall SG&A as well.

Okay. [Great].

Thank you.

Our next question comes from Jeff [Silfer] from Gerard Klauer Mattison.

Good morning.

If we can just shift gears a little bit and talk about the regulatory environment.

I was wondering if you guys can give us an update regarding the potential directive in the EU to sort of equate some of the benefits for your temp employees along with fulltime employees.

And also if you can give us a little bit of color on what's going on specifically in Germany with the [Hartz] commission?

Well, that could take several hours.

How about a condensed version?

I'll give you the abridged Clif Note version.

The EU directive is still going through some modifications.

We and other industry participants are close to that.

No doubt in kind of the high level you would see a bit more of a restricted market in the UK and a much better, more flexible market across Europe with not much change under the current guidelines in France, Italy, and Spain.

Our view is that there are some very key elements within the EU directive that we must stand for, and that is, we must be the employer.

We must be able to act like an employer because it's key to the future of our industry.

I do not see the EU directive being a hugely negative, if negative at all.

I think it's more of a positive.

The issue is how much more positive can it be?

The [Hartz] commission is really a spring-off from EU directives with a little bit more of political charge in it to try to make sure that the issue of unemployment is addressed.

The [Hartz] commission is -- it still needs some conversation around it.

The [Hartz] Commission does not really allow as much flexibility even that the EU directive would allow.

Though it allows more, it opens up the market a little bit more, it tries to put some of the permanent placement business replacing under-worked or people not at work into jobs, and we believe that there is a much more bigger picture that should be looked at.

So, I would say, all in all, between that and maybe some of the issues that are happening with a 35-hour work week in France which has an opportunity for it to be positive for us.

Also has an opportunity to be neutral for us.

We are going to continue to monitor.

None of them are major threats; all of them have the general theme behind them, which is flexibility is what is required to reduce unemployment, and that's something that's on our side.

Great.

Do you have any indication on the timing of any of these initiatives?

The EU directive goes through another Commission session.

It has been delayed; some votes were delayed just a week ago, delayed almost a month, based on some changes that were in.

Then it goes -- has to go to the full Parliament.

So, we are probably a good three, four, five months away yet before anything definitive comes out.

Could be more.

Please don't write that down and quote it.

European -- my European colleagues would be better at that than me.

We won't call you on that.

If I can just ask one quick follow-up.

I'm just curious about the impact of the dock worker strike and if you have seen any impact so far?

What you think the impact going to be this quarter in the US business?

Well, actually if saw the impact of the dock workers strike that would be positive for us because our numbers week-over-week in the US had been going up, which means the only effect it would have would have been to hold down how much it went up.

So, we have not seen any.

Of course, we don't operate directly in that environment, though we might operate several layers down in the chain.

But week-on-week on-week the US numbers have gone up, and if the dock worker effect did take place, then we would see maybe a bigger spring in the next few weeks.

Okay.

Great thanks.

Our next question comes from Kelly [Flynn] from UBS Warburg.

Great, thanks.

On the guidance for Q4, can you just drill down into the regions and, you know, maybe give us constant currency revenue guidance?

And then as well, you know, we have spoken about SG&A about -- perhaps percentage of revenue targets for Q4?

Thanks.

Sure, Kelly.

Yes.

Looking out, what Jeff had said earlier in terms of constant currency, we are estimating overall revenue consolidated to be in the 3-4% positive range.

Within the major segments, the US market, I would anticipate falling somewhere in the 11-13% range in terms of revenue growth year-over-year.

In France, on a constant currency basis, we would be looking for something in the 4.0-5.5% range constant currency in Euros growth.

UK, which was down 10% constant currency in Q3; in Q4 I would anticipate being down in the mid-to-upper single digits still down year-over-year.

Europe, I would expect it to look fairly close to the third quarter; third quarter in constant currency was up 1.5%.

I would expect it to be in that range, year-over-year in the fourth quarter as well.

And then the rest of the operations, rest-of-the-world segments for us I would expect in the mid single-digit growth range.

Okay.

And then how about SG&A?

I mean you say you are continuing to look at expenses.

What about percentage of revenue target there?

Right.

When you look at where we are, year-over-year, a year ago SG&A as percentage revenue was 16.5%, and I would say we are probably looking at that to be in the mid 15's.

So may be 80-90 basis points less than where we were a year ago and which is not -- which is fairly similar to where we were in Q3.

Q3, we were a 100 basis points below where we were in the prior year.

So, I would expect some good leverage to continue into the fourth quarter.

There is -- because of the seasonality of the third quarter, we always hit our leverage peak from a seasonal standpoint in the third quarter, but you can see, if you look at a year-over-year basis, we anticipate continued our SG&A leveraging going into the fourth quarter.

Okay great.

And then one quick one;

I am not sure if you have the answer to this.

But, can you tell me what the employee count was at the end of the quarter, and how that compared with the end of the last quarter?

It wouldn't have moved substantially.

I don't have the exact number right here in front of me, but we didn't make significant changes from the employee base standpoint.

Okay, Great.

Thanks a lot guys.

Our next question comes from Randy Mehl from Robert W Baird.

Yeah.

Good morning and congratulations, Jeff and Mike, on a very good job here.

If you just backup over the follow-up question on the legislative effects.

What would you -- what's your gut feel on the affects in France of what's already happened in this quarter?

And then, you know, what's your view on possibility of minimum wage conversion and a potential impact for next year or is it just, you know, too early to talk about that?

Well, there's just so much going on right now in the conversation.

Some draft documents have been written, gone to one of the Houses of Parliament, and issues with the reviews and additions, subtractions by the end of October, goes to other House of Parliament for the end of November, you know, we really look at it as a little bit too much of a moving picture now to determine what effect it will have.

If you look at what the government is attempting to do: conceptually, it is a positive thing for us.

They are attempting to get more people to work; they are attempting to -- to streamline some of the administration.

So instead of five categories of minimum wage, we would consolidate those things into -- to one or two.

So we're closely monitoring; we are meeting with the labor minister, in fact, today in France.

So, you know, it's just a little too speculative.

We've done the calculations this way, that way, and this way.

Overall we're going to have to wait to see how it comes out because what you have to do is you have to compare what is written to the population which we are putting to work, because that is the way you really have to look at it.

We have a very good track record of optimizing what comes out and making sure we explain right.

So, I'd like to remain optimistic, but I also have to tell you there -- there are downside opportunities if things come out the wrong way.

So we're going to have to continue to monitor.

And was it your sense that [the move at the] beginning of the year, I guess, away from [CDDs], is that a contributor to this quarter, is that part of an offset to what would otherwise be weaker economic conditions in France?

May be.

I mean, we are seeing conversions from CDDs since they changed the tax structure between temporary services and CDDs.

So they are moving some over; that is a slower process as we had mentioned, but that is a positive secular movement within the industry.

I haven't gotten the CDD count.

We get that normally monthly, and we're showing consistent shift-over.

It won't go zero CDD and all into flexible staffing, but there is some movement going on, and it could, if showed some of the differences in the growth while the economy is flat-to-down, we are flat-to-up, if you will.

Also we seem to be fairing well against the industry while holding our margin.

So a great effort by the French team to be able to beat industry growth rate and still hold margin.

And on the professional side, seems like there is a contrast between your trends in the U.S. versus the U.K. and Europe, and I am just wondering what specifically is accounting for that, given that there doesn't seem to be the same divergence in overall economic activity.

Yeah.

It's a good question because we are seeing a much more optimistic view in the U.S. professional side.

Now, as I mentioned, a lot of that is coming from engineering, and while we'll do some of that in Europe primarily and in the case of Elan, it's 100% IT, then and IT is lagging a bit.

I also think that -- you're just seeing the differences in cycles where the companies are now saying "I need new product, I need engineering, I need some IT network administrators as well as programmers and project leaders."

It is not robust; it is in positive territory, whereas what we're seeing in Europe is it's negative territory, and I would venture to say with only speculation, not true fact, that when it comes to the U.K. market, Elan is on top of market from how it's approaching it and how it's winning business.

So, if you recall on my prepared comments, I said it may be several quarters for IT to be coming back in the U.K. and mainland Europe, where I believe we're actually in the middle of some of that here in the U.S.

Thank you very much.

I appreciate it.

Yeah.

Our next question comes from Greg Cappelli with Credit Suisse First Boston.

Hi Guys, it's Greg and Josh.

Nice job.

You know, Jeff, you guys have focused a lot on capital efficiency over the past year, and I know you brought that up initially.

With competition and price [a minor], I guess, gross margin, you know, are you willing or can you comment on your willingness to give, you know, some on price in some of the environment [in which you] talked about in the different regions?

If you can negotiate, you know, better collections and can just kind of rank the importance of, sort of, you know, these areas when you are negotiating contracts?

Yeah, if it's to me, I don't care because it all comes down to the bottom line the same way.

Very simple way, 30 days is one more percent on GP.

So if you want give me 10 more percent on GP, I'll do the longer pay.

It's a very simple calculation.

Now, most aren't willing to do that, so what we really want to do is to do that tradeoff.

You typically get in between that 30 and 60 day.

People would like to go to 60 and we want to stay at 30, and we're negotiating that extra percent and -- you know, if it's 60 with an extra percent to gross margin, the bottom line on return on invested capital washes out and at the end, that's all that matters for the shareholders.

So our teams are aware of that.

Mike has spent a fair amount of time educating as head of the Financial Directors in the various countries.

Having said that, we're becoming very hawkish on the over 60 days [that's] out there because that's not an issue of contract; that's just an issue of either they're not willing to pay or we've got some resolutions we need to come up with, and as we tighten that up and as we're rolling out new back office systems, we should be able to move some of that in which will definitely help our return on capital.

Okay.

I guess just following on that, maybe just -- maybe a little color on the DSO trends by market, if they differed substantially.

Yeah, actually, in all of the major markets, we saw improvements.

In France we witnessed a three-day improvement over prior year.

In the U.S. we had a two day improvement.

So those are, that's probably 75% of our receivables, so those markets we did see some good improvement.

In Europe, it was a little bit more mixed: some markets we saw improvements, some others may have slipped a little bit, but [then] on a consolidated basis which I am always a little bit careful of because mix can always impact it a little bit, but on a consolidated basis, we saw a three-day improvement year-over-year which compares to, you know, last quarter we saw one-day improvement year-over-year.

So, I was quite pleased, I think.

It's an area we're working hard on.

It's going to continue to need attention.

You know, I don't think we can sustain a three-day improvement, but certainly we're going to be working hard to try and keep the numbers where they are on a go-forward basis.

Okay, thanks a lot.

Our next question comes from Marta K. Nichols from Banc of America Securities.

Good morning.

Thanks.

I'd like to add my congratulations as well.

I am wondering if -- I think by now we're probably all familiar with the ideas that inflexion points, in particular, generate a lot of incremental pricing pressure.

I am wondering if you can perhaps compare the pricing environment that you're seeing right now to that of the last recovery, and whether you feel that things are staying more aggressive or less aggressive or about the same as what you might have anticipated at this point of the cycle?

Okay, it's a good question because there have been some changes in the industries since '91-'92.

One, that recession wasn't deep for us as an industry, and two, what happened in '93 was the beginning of the aggregation of spend or vendor consolidation.

So, fast forward now, eight years after some vendor consolidation, and what you see is that, instead of a large account, the very largest accounts being 8 or 10 million, they might be 100 or 200 million.

And that kind of leverage from a company during a downtime has created more pressure, and the stakes are larger.

So, rather than taking a price reduction on 10 million, the issue is taking a price reduction on a 100 million.

So, that would probably be the biggest change.

Companies have worked very hard in the '90s to put in ERP systems, so they can quickly see total expenses by region, by country, by the world, and we as an industry pop up high on that list.

The difference is -- and what we as an industry need to continue to articulate -- is that nearly 90% of that is pay and taxes.

So you can't keep taking stuff out of there.

You've got to be looking at value.

That has been our line; that's what we are working with our clients on; and it is the more sophisticated process with teams of people from the other organizations really trying to get that large spend, whether it be 20 million or whether it be 300 million, down by X%.

And so far, I think we've done pretty well in explaining that.

It's not really what is in their best interest, and that's our path on it.

So, I would say that's the biggest challenge -- is that individually, the companies are probably applying the same pressure.

They just are able to carry a bigger hammer in this one than they did in '92.

Okay.

That's helpful.

Thanks.

Secondly, I was kind of -- maybe [inaudible] building on that.

Wondering, now that we can talk in some real way about visibility on [inaudible] the top line and taking into account some of that market pricing pressure, it seems like we've put off the discussion of what long-term margins targets now, are, for probably close to 2 years, as you're kind of struggling with the top line.

But if we can come back to that discussion and kind of think about what the right operating margin targets for the company are going forward, and maybe assuming that this modest piece of recovery continues for the next, say, you know, 18 months or so?

Where you think you actually get to the target margins?

How long you think it takes get those back?

Primarily in the operating line as oppose to gross margin.

Our published target margins are etched into the minds of every [operator] in our company, and I've branded it on Mike's forearm.

So, we are not giving up on those, but we are going to be reasonable.

When we said, when we would get to those targets is that it would be sustainable.

We are not going to get there in a fake way.

The delay in top-line has created some difficulty, no doubt.

So, rather than speculate about what the economy would do, it's fairly easy to model that, if we have a goal of cost containment on that SG&A line and if you grow at X% and you keep that SG&A at, let's call it 40-60% of that, the math kind of works out.

That all says that we have to keep our gross margin in line.

We've seen some deterioration, but we have also seen the ability to take out a little bit more on the expense.

Also as we ramp up permanent placement, Jefferson Wells, Empower, some of the more specialty lines of what we were doing in Manpower professional also kick in, so we can see some recovery from that off the current gross margin line.

Slight.

Hard work.

But the plan is: let's get that GP where we need to go, keep that expense in that, you know, 15% of sales, and then the math works out.

Mike, anything to add?

No.

All right.

And maybe a final question specifically on your comments behind the growth in engineering.

You mentioned that companies may be coming back to product cycles because they haven't invested enough.

So are you seeing, do you have enough exposure, for example, to increased defense spending for that to be a material driver of your engineering business?

It is making a difference in our U.S. operations.

Okay.

Great.

Thanks.

Last question.

Our last question comes from David Riedel with Salomon Smith Barney.

Good morning gentleman, couple of questions if I could please.

First of all, about the light industrial in US.

You started to say something about where that's trending and sort what types of customers you are seeing there.

Can you finish that comment, please?

In terms of training it's still showing a positive growth trend.

You know, I think, Jeff mentioned in his prepared remarks that we are seeing growth in the [teens] area, and we did see a good strong growth throughout the quarter.

It did -- in the light industrial piece of it -- we did see things, the acceleration tail off a little bit, but the more industrial side of that business actually continued on a pretty strong path.

So we are still seeing good growth there, and it really had been improving throughout the overall quarter.

What was the second part of that, David?

I just, what sort customers you are seeing showing up on that side of the business.

It really is an encouraging part of it because it's some large accounts asking for 100 people or 150 people, and our strategy of penetrating many, many more accounts is also helping.

So we're seeing clients in small mid-size firms.

Small and mid-size firms typically have inventory cut much more tighter, so that if demand does start to come back they need inventory right away.

So it is a mix of business with the mid-size firms using us a lot, and we have just started to see in the last, probably, sixty days some of our larger current clients asking for additional people, and some of them are fairly large requests.

A final -- final question, if I could please.

You had some positive comments about your outsourcing services and some people, customers and prospects showing interest in that.

Could you give us a little bit more color on that?

Yes we've got some very sophisticated services having to do with assessments or permanent staff hiring, on boarding, and training and very large companies now with their HR departments a bit in a different spot, and they evaluating how they are doing business, really look at how Manpower, for so many years, has led the industry in our own assessment tests, our relationship with [SHL], our equity position in [brain bench], our equity position in [clear] harmony, is all coming together to be able to offer a service to clients, not only here in the U.S. but all over the world as part of an extension of what we do.

And we are finding more and more attraction to that, and we are positioned better than anyone else to go get that.

Thank you very much.

Congratulations again.

Okay.

Thank you all for attending the call.

As usual, if there is any detailed question or more that need to be answered, Mike is available.

Thanks.

This concludes today's Manpower call.

Thanks for attending it.

Have a great day.