ManpowerGroup Inc (MAN) 2002 Q4 法說會逐字稿

Please stand by, today's tele-conference is about to begin.

Hello, and welcome to the year- year-end earnings conference call.

Following today's presentation, there will be a formal question and answer session.

At that time instructions will given.

Today's teleconference is being recorded for instant replay purposes.

If anyone has any objections, please disconnect at this time.

I'd like to turn the call over to your host, Mr. Jeff Joerres.

Sir, you may begin.

Thanks, good morning and welcome to the fourth quarter and full year conference call for 2002.

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

As usual, we'll go over the general results.

I'll do that and then we'll discuss in a little bit more detail the segments.

I've also added on this call a little bit of a conclusion.

So after Mike is done with some of the financial parts, I'll conclude it since it is a 2002 call.

Before we move into the main body of the conference call, I'm going to have Mike move to the safe harbor language.

Thank you Jeff, good morning, all.

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.

The fourth quarter of 2002 was a strong performance.

During the quarter we started to see the acceleration actually that we've been waiting for, for sometime.

Only for it to plateau out and begin to flatten as we progress through the quarter.

We anticipated an earnings per share between 43 and 47 cents with a currency benefit of 4 cents.

We finished the quarter at 52 cents with a currency benefit of 8 cents.

For the year we finished at $1.46, which was 19% down from 2001, which was $1.81 after adjusted for the good will.

Performance was strong relative to the economic conditions and it gave proof to the leverage that is attainable in our company, proving the work we've done over the last 18 months.

System wide sales for the quarter was approximately $3.1b with system wide sales for the year of $11.8b.

Revenue for the water was $2.8b up from almost 12% in dollars and 4.5% in constant currency.

Our year over year revenue growth rate improved sequentially with revenue in dollars up 8% and constant currency, 1.3% in the third quarter.

Acquisitions added less than 1% to the growth,with a quarter and on an annual basis added less than 2%.

Gross margins stabilized, which is very important in most markets.

We finished the quarter at 18.2% in gross profit up 40 basis points over the third quarter down slightly from a high last year of 18.9%.

Gross margin for year to was 18% .

While we lost a little ground in 2002, we made very good progress over the last two years.

When you look at how our gross profit has evolved compared to the industry, you can see that we're committed to really bringing the value that we really believe we have to our customers.

Therefore, we will continue to fight downward pricing pressure.

Our team across all of the countries are acutely aware of the requirement for us to continue to value what we do and, therefore price appropriately.

You've all heard it before it's very much of a mantra that we have within the organization.

We started to see good leverage and that's the key part of the story, really for this quarter.

Particularly at the beginning of the quarter.

Our SG&A for the quarter was 15.1% of revenue or 83% of gross profit.

This is a significant improvement over 2001 number of 16.5 for SG&A as a percent of revenue for the fourth quarter.

On a full year basis, we finished the year at 15.8% SG&A, versus 2001 of 16.2%.

Our operating profit was up nearly 50% at 47.2%, or 33% in constant currency.

Our margin improved by over 70 basis points to 3.1%.

Our first year over year improvement since the fourth quarter of 2000 and our highest margin since the fourth quarter of 2000.

Overall, the quarter was a strong quarter, given the economic conditions.

We were able to increase our GP-sequentially.

We were also able to hold our costs and leverage the additional gross profit dollars coming in that gave us an overall EBIT of 3.1% for the quarter.

Overall, in our two major geographies, France and the U.S., we started to see acceleration improvement in October and in the beginning of November.

At which time it started to flatten off and in some cases declined.

That leads us to be much more cautious about the first quarter 2003, then we would have been just three our four months ago.

The 15 analysts that cover us were looking at the trends moving as they could see it on a quarterly basis going into the fourth quarter.

And therefore, projected a stronger first quarter than we do at this time.

Our estimate for the first quarter of 2003 is in the range of 16 to 20 cents, with 5 cents currency impact on a positive way.

This is a doubling of our earnings per share over year over year, but is slightly weaker than what we had anticipated four months ago.

We're still seeing improvements on year over year basis in the majority of the geographies. .

It's acceleration that can make the big difference that we're not seeing.

Moving on now to the segments where I'd like to give you a little bit more detail.

In a sense you'll get a better sense as to why the 16 to 20 cents when you really look at the detail of the operation.

In the U.S., our revenue was up 9.7%, system wide sales totaled $743m.

That, of course, as we count it does not include Jefferson Wells and some of our other Empower activity in the U.S In total for U.S. geography, our sales in the quarter were approximately $800m.

Revenue growth minus impact of acquisition was an increase of 6.2% for the U.S. segment.

The most significant element of the quarter was the year over year growth during the quarter.

This is an important part of what I want to explain to you.

The best way to describe it is to give you the numbers.

The United States average daily billable sales in September were up 7.7%.

October, 9%, and November, 8.7%, and December, 4.7%.

December is a little bit misleading at 4.7 because Christmas and New Years fell on the worst possible day of the week for our industry, which is Wednesday.

But with that as an understanding, you can see that we started to see the peak.

It's tailed off a little.

We're not overly alarmed by the tail-off, but the reality is that's what we have as we're moving into the first quarter.

All lines of service improved in the third quarter.

Light industrial was up 15.1%

versus 12.5% in the third quarter.

Professional was up 20.8% versus 13.7% in the third quarter.

And office was down 4.8 versus down 6.7 in the third quarter.

We're also seeing our large account business coming back a little bit faster than our local or retail business.

That, of course, puts a little bit more pressure on our gross margin due to the mix.

The U.S. improved the SG&A leverage substantially.

Great job on the pricing and we've also been able to get slightly higher gross margin which resulted in the operating profit of 2.7.

Still not something to write home about.

Our sites are set much higher than that, but they are the high highest we've seen since the fourth quarter of 2000.

Now moving on to our super star organization, the French operation.

They put in an incredible performance.

We were able to achieve 2.2% increase in revenue and 5.8% increase in operating profit for the year, finishing the year at 3.7% operating margin, those of you who know our target overall, they are past our target right now.

Fourth quarter drove much of that success finishing the quarter at 4.6% operating profit with revenue increase of 16.6 U.S. or more appropriately, actually 4.3 in euro.

The revenue across the quarter was fairly stable with October increasing almost 3%.

November and December 5% on average daily sales.

Expenses, of course, were well controlled down 4.5% versus prior year in euro.

We did hold back some planned promotion and advertising feeling as though we would rather put that back into 2003 because we would have more of a market impact than it would have in 2002 since the economy was not quite ready to come back.

Pulling back some of that promotion and advertising gave us just a bit more profit increase than we had originally anticipated.

We're continuing to see price pressures in France, and we've dealt with them quite nicely.

Our gross profit has not eroded on a sequential basis, though it remains a few points below prior years as we've mentioned in the last couple of conference calls.

On a separate issue, I'd like to to -- we continue to work with the French government to explain the negative effects of recently passed legislation on the labor market.

I think this is important for you all to know.

We have talked about this for the last two quarters.

We've positioned it as potentially positive or potentially negative.

We weren't quite sure because the information was just coming out.

We now have more solid information and in fact this legislation will affect our industry.

We've determined that the worst possible effect to Manpower is reduction of 10m euro in gross profit in the second half of this year and 10m euro in the first half of 2004.

In the second half of 2004 it becomes neutral and actually in 2005 it turns positive.

It becomes a positive generator for additional GP.

The 10m euro assumes no change in the government's position and assumes no price increase that we're able to pass on.

We believe there is a potential to do both, some combination of both.

The law goes into effect July 1.

We continue to work with the government as we believe this will have a negative impact on the ability for people to get jobs and therefore, it lessens the ability for job creation.

The UK operations which include Manpower Brook Street and Elan, total revenues equaling $373m 3.4% in U.S. dollars, local currency down 5.3%.

We experienced improvement throughout the quarter for traditional staffing.

Manpower and Brook Street both improved sequentially when looking at year over year growth rates.

Elan and the I.T.market still continues to be lagging then anybody else in the recovery, except, of course, those in their market

space, which we are beating those that are our competitors.

Year over year growth rates are showing a decline and the fourth quarter was similar to the third quarter.

That's more than just the impact of the UK economy, because we actually have 35% of our business now that's coming from mainland Europe through the Elan brand.

Overall, we are seeing a soft I.T. sector.

We have secured accounts and should start to see the effect on that, but we have to remain cautious on the I.T. market through all of 2003.

Our gross profit finished down slightly due to the mix of business, light industrial, of course, moving up a little bit more and perm placement still difficult in the UK.

Although Europe put in great results for us.

The revenue for the quarter finished up at 16% in U.S. dollars, constant currency were up 3.3%, which is higher than what we had forecasted when we entered the quarter.

That primarily was driven by outstanding performances by Italy and Spain once again as they continue to make large inroads into the marketplaces.

Results of the fourth quarter are very similar to what we're seeing in the third.

Our Spanish operation was up 35% in constant currency.

Italy was up 20%.

We also saw a bit of positive news in Germany, underscore a bit of positive news.

We moved from minus 11% in the third quarter for minus 3% in the fourth.

We're still seeing Germany as a difficult market to operate in, but there has been some positive signs, so I thought I would mention them as it's moving -- in the right direction.

Our European operation is a big driver for our growth profit growth overall in the company because many of the countries operate with higher GP's.

Discipline pricing is a primary reason for the stabilized GP and we're slightly below prior year which is caused by the extraordinary growth in Spain and Italy.

Spain and Italy's lower gross

Margins, countries than what you would see in the north.

We improved our SG&A leverage in the European segment.

You can clearly see that as in other geographies we are really prepared for takeoff from an expense perspective.

We've had substantial progress made throughout Europe and its ability to increase the productivity in the offices.

Moving on to the other operation segment, revenue increased by 9.9% in constant currency, which is about the same level we experienced in the third quarter.

We are seeing continued growth, but not accelerated growth.

We're expecting a little bit of seasonal decline, so it's slightly higher than we were expecting.

We had modest year over year growth in Japan at just over 2%.

Mexico and Canada continuing to gain some momentum with solid double digit growth on the top line and both are producing some solid growth on the bottom line.

Jefferson Wells continues to secure business, particularly in the field of independents.

We were sequentially flat.

We secure business, but we find that possibly those that have been using us before are using us less or continuing to try to delay, if you will, some of the expenses.

Due to the holidays in December, we have a full-time staff model, which we believe is absolutely the appropriate model.

It really makes the last two weeks of December a drain on revenue and also gross profit profits.

As we mentioned, we will continue to invest in Jefferson Wells.

Now more so in the practice area than in the expansion of offices .

And we'll do that again in 2003 as we see great potential for this company to secure a business in both medium size and large companies.

This part of our operations, like all others, we improved our expense ratios.

The other operation segment finished at 1.1% operating profit up from a year ago, and up from a quarter ago.

We did finish the year with a little less than we did in 2001, primarily do to the investments in Jefferson Wells, where we improved the footprint by over 50%.

And man -- Empower where we're Also been investing and we've opened offices in burgeonening countries that we believe will benefit the shareholders in the longer term.

Overall, I'm proud of what the organization has been able to do do.

They've worked hard.

They've worked extremely hard to post a very good quarter.

The challenge continues that we're not seeing the acceleration.

It doesn't dampen our spirits at all.

We're prepared to do this for a long period of time, because we

know it will eventually turn around.

We are seeing growth, but based on what we are currently seeing, we feel fairly secure on the 16 to 20 cents.

So with that, there were some things that you noticed in the sheet that we sent out that need a little bit more explanation.

I'd like Mike to go through some of those financial items.

Mike?

Okay.

I'd like to begin by highlighting a few of the elements in our earnings statement, included as part of interests and other expenses are a few unique items.

First is a charge of $5.1m dollars related to a write-down of equity securities.

Under the guidelines of FAS115, we concluded that the decline in the fair value of these securities was other than temporary and therefore the proper accounting treatment was to charge the P&L.

The net impact of that write-down on earnings was a reduction of 4 cents.

Also included in other expense are fixed asset write-offs totaling $2.8m or 2 cents per share.

This is comprised of a variety of assets in several geographies, including assets in a call center that were not deemed fully recoverable.

The effect of tax rate for the quarter was 42%, which resulted in a rate for the year of 39.8%.

This was higher than our projected rate of 38.5% because we were unable to fully utilize foreign tax credits as we anticipated.

This higher than projected tax rate resulted in a reduction in earnings for the quarter of 3 cents.

We're starting the year of 2003 with an estimated tax rate of 39%.

Now let's take a look at the balance sheet.

The balance sheet was strong at year end and further strengthen during the quarter as a result of excellent cash flows.

Total cash increased $47m in the quarter bringing it to $284m.

Total debt decrease to $822m from $878m at September 30th.

That brings our net debt position to $538m and improvement of $133m dollars in the quarter.

Likewise, our credit ratio has Improved.

Our debt to total capitalization improved to 45% from 51% a year ago.

Our net interest coverage ratio improved to 7 times on a trailing 12-month basis.

Similarly, our debt covenant Ratios on our bank facilities also improved during the quarter and remained in a very comfortable range.

Our accounts receivable decreased $35m to $2.214b at the end of the quarter.

However, after adjusting for changes in currency, the actual decrease was approximately $120m dollars.

This reflects a fairly normal seasonal pattern.

DSO in December showed one day improvement over the prior year, which brings the average improvement for the entire year to 1.3 days.

This follows a 1.5 day average improvement for all of 2001.

Consistent with the end of last year, there were no borrowings outstanding under our accounts receivable securitization facility.

Now let's take a look at the cash flow.

Net cash provided by operating activities was very strong in the fourth quarter at $157.8m bringing the total for the year to $227.9m.

Cash flow was helped by the improvement in DSO, as I discussed above, but also was stronger than expected since we didn't see the continued acceleration in revenue growth in December as Jeff discussed earlier.

Our capital expenditures for the year were $58.5m, which was down 33% from 2001, due to lower office openings.

Capital expenditures for 2003 are difficult to estimate as our office opening plans will be somewhat dependent on the economy.

Currently, I'm estimating a capital expenditures will be in the $75m to $85m range, similar to fixed asset depreciation.

Depreciation for 2002 was $65.4m.

We continue to account for stock options and our stock purchase plan under APB25.

As we accounted for these plans under FAS123, the earnings charged for the year would have been about 6 cents per share.

We continue to monitor the developments around the option accounting and will revise our treatment in the future if appropriate.

You may have noticed that included with our press release were a set of supplemental schedules which restate segment results from 5 to 4 reporting segments.

Essentially what we've done is combined the results of our UK and other Europe segment into one segment, called ELAN(ph).

Additionally, we reclassified some costs included in corporate expenses that are solely attributed to the ELAN segment into this reporting segment unit as well.

This re-statement better reflects our internal management reporting and is in accordance with accounting guidelines under FAS 131.

We'll begin this new presentation on our 2000 annual report and on the first quarter of 2003.

Lastly, I would like to talk a little bit about guidance.

The leverage characteristics at this stage of the cycle are such that a small difference in revenue, positive or negative, can have a big impact on earnings.

In the case of a modest positive surprise in revenues, the gross profit drops quickly to the bottom line as we hold the line on expenses.

This in fact was the case for the last three quarters along with exceptional expense control, which is why we exceeded our earnings guidance, even without the help of the positive currency surprises.

I must, however caution that the reverse can be true at this stage of the cycle.

Any modest shortfall in revenue from expectations can also fall quickly to the bottom line and have a negative impact as we do not believe that significant further cost reductions are prudent at this stage of the cycle.

If this is the backdrop we have estimated first quarter earnings of 16 to 20 cents, as Jeff mentioned.

This assumes overall year over year revenue growth in the upper teens in U.S. dollars or low single digits on a constant currency basis.

That is, we expect revenue growth to be somewhat below the fourth quarter rate of 4.5% in constant currency.

This reflects a stable, but not accelerating year over year growth pattern in the U.S. and also reflects the fact that we anniversary a fairly large U.S. franchise acquisition, which was completed January 1 of 2002.

This also reflects a positive, but slightly more modest year over year growth rate in France, compared to Q4 as Q1 of 2002 included a surge in business related to the euro implementation.

With that, I'll turn things back to Jeff.

Thanks, Mike.

As I mentioned in the intro, I wanted to conclude, which is a little unusual for our forum, but because it's the end of the year, I think it's appropriate and in addition to that, it was a pretty strange year and unique year.

I'd like to put a little bit of perspective on that.

And make sure we look at it from a little bit longer term point of view. 2002, it's pretty easy to say it was a difficult year from a financial perspective.

It was a year that we had -- we actually did make some significant non-financial progress within the organization.

For several years, we've talked about the strategies that are driving the organization.

The execution that we're injecting throughout the entire organization.

And we're making progress on all of these and we made substantial progress on these in 2000.

Under the revenue area, we're able to do in many major markets markets, actually pick up market share, which was not our intention.

Our intention is to make profitable business.

We've picked up market share and we did it by turning away on profitable business.

In 2002, across the world we expanded our base of clients, particularly in the retail and local accounts, an area that has been a focus of ours for some time.

While many other clients may not be using those services now, we know when it breaks, when the economy breaks, when the economy moves forward, we're better positioned now to spring forward and create much more of a catapult affect than ever before.

Additionally, we increased the footprint of Jefferson Wells in 2002 by 50%.

Also in 2002, we made successful broadening of Elan across Europe Europe, 35% of the turnover now comes from outside of the UK.

We've also enhanced the credibility and growth in Manpower professional in U.S., securing major contracts in engineering and I.T.

Throughout 2002, we continue to make progress on the efficiency.

We reduce DSO again by one day.

We improve the efficiency and productivity of our offices through technology.

We are piloting and implementing in many places.

In addition to that, we've institutionalized T metrics throughout the organization, under what we call the cost containment program.

That will continue to enhance the productivity of the organization.

We didn't stop investing.

We invested in technology to enhance the value to our customer, which is at the end of the day is extremely and most important to us, and to return the efficiencies to us.

We developed state of the art E-commerce applications.

We continue to look to expand those opportunities, as well as look at options that is might be outside of what we've already created to satisfy the vast array of clients and internal leads when it comes to E-commerce.

We introduced 120 new web sites throughout 2002, bringing the brand together across all 61 countries.

We've also expanded and introduced a new front office system in Europe that will be expanding throughout 2003.

From an organization and culture perspective, which is such a key to what drives Manpower because we're passionate about what we do.

We improve the thought leadership of us in the industry.

It's the strongest its ever been been.

It continues to go down that road.

We continue to make inroads in new countries, we continue inroads in countries that are currently serve to raise the value and raise the positioning of the staffing industry and how -- and the staffing industry can positively affect the economy.

During 2002 , we brought in 9 new country managers, 7 promoted from within inside.

We've established a new position in HR.

We've recently established a new position as a global CIO to drive more efficiency and innovation to our clients.

Rick Davidson, who joined us just a few months ago has made substantial impact.

We've made it through these troughs like this before and we're more confident than ever that our strategies and our ability to execute is the strongest and most relevant it'sever been in our history.

When you couple what we've done in 2002, with the long term prospects of the industry, it gives us a great sense of confidence and optimism about the future of the company.

When you look at some of the trends that are happening, companies all over the world from Japan, western Europe, UK, the Americas have reduced their staffs over the last two years.

We know this is a macro economic trend that positions us very positively for growth.

Beginning of every recovery, companies squeeze as much productivity as possible, which fuels the notion of the jobless recovery.

That can only last so long.

In fact, the longer it lasts, the more penned up dEland there is for our services when the economies do break and the world becomes more driven through businesses.

Companies have also reduced their HR staff becoming much more open to Manpower doing a larger array of services within their organizations.

We have hundreds of examples throughout the world, where we're doing assessment, selection, on-boarding and sourcing.

All of these services are now being done in many of the countries during the period when a time when the activities actually muted as we look to the future of this activity, we are well positioned to take advantage, expand the brand and make more money.

And also not significant at all is the large trend across many countries in the recognition that temporary help is a positive element for job creation, and a positive force to reduce unemployment.

As a result, many of the countries that we're in, that are well established, have a great brand recognition still have a working population of less than 1% working as a temporary.

Changes in laws in Japan and Norway, expansion of laws in other countries and other parts of the world give us, again, great optimism.

Imagine a country where you have less than 1% of the population working as a temporary, and they evolve to look like France or the U.S. or UK where it's 2-1/2% or above.

When we, as an organization, reflect on what we're able to accomplish in 2002 and what it means for the future, we are optimistic.

We're optimistic that we can perform in a very superior fashion for our shareholders.

That to me, is the best way to sum up 2002.

So with that, we will open it up for questions.

Thank you.

At this time, if you would like to ask a question, simply press star 1 on your touchtone phone.

If you are using speaker equipment, please lift your handset prior to pressing star 1.

To cancel your question is star 2.

Once again, star 1 to ask a question and star 2 to cancel.

Our first question comes from Andrew Steinerman with Bear, Stearns and Co.

Good morning and thank you for profiling the operating margin leverage.

That's key to the story.

My question focuses in on gross margin, fourth quarter, first quarter and in the future.

Obviously, there was some great success in improving gross margin sequentially, 40 bips(ph).

Some of that I know is seasonally, fourth quarter is usually up from third quarter, but my sense is you also got some bill rate, pay rate spread improved.

Could you talk about that into the fourth quarter, what you had and also the seasonal effect that we'll see in the first quarter?

Sure, sure.

If you look at our gross margin, we're at 18.2% in the fourth quarter, following up on 17.8% in the third quarter.

But you're right, Andrew, seasonally, the fourth quarter is always a stronger quarter in terms of gross profit margin.

You didn't see that last year, effectively fourth quarter looked the same as third quarter quarter, as you may recall last year, we talked a little bit about some margin slippage in the U.S. market.

That was last year.

This year, a good share of that sequential improvement is in fact seasonal, but there is in a few markets, we were able to just enhance the gross margin just by a slight amount.

Over all, I would characterize the pricing environment in most of the markets we're in as being stable.

Of course it's always a competitive market, but overall, quite stable.

As we look to the third quarter or the first quarter, sorry -- of 2003, certainly I would expect

somewhat of a sequential decline, which, again, is typical as we start our clocks out on some of the payroll taxes and things that normally occur.

So I would expect that we're going to see a little bit of a seasonal decline, which a year ago in the first quarter we were at 18.2%.

I would expect us to be somewhat below that, not the 70 basis points below that we were in the fourth quarter, where we were 70 basis points below prior year in the fourth quarter.

I don't think we'll see that much of an impact or a difference between years, but certainly I would expect it to be slightly below.

So, does that sum it up?

Yeah, but Jeff, just to conclude on the future of gross margin and past gross margin cycles, we've lost permanent gross margin as we left '89 and went into the recession.

It seems pretty clear from where we are here, we aren't going to lose permanent gross margin as we sink into the future, right?

I really do think that -- let's state our goal.

That is the goal.

And it comes from disciplined pricing and it comes from mix of business, retail, large accounts , specialty business, and Andrew, you know, we stated it in New York in November of '99.

That's what we're still executing on.

I would like to think that the stabilization that you're seeing is what we can achieve within the industry.

As we know, the industry can only go so low in price.

You've got pay and you've got taxes.

You can't keep going lower on gross margin.

I'd like to think we've reached some stabilization.

Pricing pressure is still there as it should be.

It's a competitive marketplace. - But, I think our teams around the world have identified what accounts should go to the competitors and what accounts should be ours.

That's helped in some of the stabilization.

Thanks for stating the costs.

Yes.

Thank you.

Our next question comes from Adam Waldo with Lehman Brothers.

Yes, good morning, Jeff and Mike, how are you?

Good, how are you?

Well, thanks.

Another solid quarter.

I guess given your conservatism of forecasting in the last three quarters, , certainly you want to continue that track record into that first quarter.

I wanted to get a sense for implicitly what you are thinking about sustainability of market share gains into the first quarter relative to the second half of 2002.

As you know, you gained quite a lot of market share without sacrificing margins in the big three markets , U.S., France and UK.

As you think about the underpinnings of your first quarter '03 guidance, could you give us a sense for your thought process as to sequential diminution of market share gains gains?

You had one question, but in there you had a statement that I'm going to respond to.

Fair enough, Jeff.

We do not put our estimates hoping that we beat them.

We put out our estimates based on the trends.

In this quarter, when you take away some of the unusual items, we had a phenomenal quarter.

We are not looking to try to keep putting out estimates that we beat.

We put out estimates based on trends, but there are at this point of the cycle, and Adam, you've been following us for years, you know how sensitive top line is and what can generate it, particularly with the leveraging we've done over the last 18 months.

Absolutely.

So, I mean, your write up yesterday, I was wondering if you knew somebody in here because you hit the 16 to 20, congratulations on that.

It's the number that in fact when you look at where the trends are going, U.S. and France are the major drivers.

It's a very realistic number.

Because of the sensitivities, it can slip down or slip up.

To get to your question on some of the market share, we have been gaining some market share, particularly in France, and we've been able to do it by holding margin.

We're gaining slight market share in the US, particularly in the professional side and the light industrial side, some of the major drivers.

And we've been able to hold the pricing up.

We think that there can be some of that, that continues, but we're in a very tenuous time based on the uncertainties around.

Our game is not market share.

Our game is market growth and our game is profitability.

It's a bonus when we get to do both.

I love going around the world and shaking hands to our people who have been able to do both.

France, I'll be totally transparent.

The best way to look at France is look at that on a two-year basis, not a one-year basis.

We're down, somebody else is up.

Now we're up, somebody else is down.

You've got a comparable issue.

I'm not taking anything away from our French operation.

They do an awesome job, but in the spirit of transparency it's best to look at two years, particularly in a knife-fighting competitive environment like France.

Can we keep it going?

That's what the objectives are for the team, but, you know, and we're confident we've got ourselves on board and some traction but it's a tough fight out there.

Switching gears if I may, Mike, could you give us a sense of where the audit committee may be with respect to working with the outside auditors on the annual good will impairment test with respect to Elan and Jefferson Wells?

Certainly.

That's something we've reviewed with our auditors and I have reviewed it with the audit committee as well, and they are fairly large investments.

As you all know, we bought those at a time where the economies shortly thereafter became weak.

Certainly the I.T. market indicates Elan has become weaker as well.

As we look at the business, however, we feel very good about the strategies for Elan.

How we're looking at the footprint expanding in Europe and other markets, the strategy is working quite well.

Certainly in the case of Jefferson Wells, we feel very good about the prospects.

We've done exceptionally well expanding the footprint in the U.S That really is a matter of when that -- when the economy comes back and the markets come back.

So we feel very good about the acquisitions.

No doubt from an impairment view we still need to look at forecasting future revenues and profits and how those come back in and certainly one of the assumptions is that -- in that calculation is how do the economies come back, and how do our profits rebound as a result of that.

So those are some of the elements that go into the assessment.

At this point in time, we have not concluded that an impairment write down would be necessary, but it is something that we will be looking at on an annual basis , and I'll be monitoring going forward.

Have you completed this year's test, Mike?

Yes, we have.

Thank you.

Thanks very much.

Thank you.

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

Good morning Jeff and Mike, congratulations on another strong quarter here.

Could you comment on the January trends in particularly in France , the U.S. and UK?

It seems like you lost momentum towards the end of the year, but there were some holiday impact.

I know that the first quarter is not in particular, January is not significant to the year, but I'm just interested in maybe quantifying some of those trends trends.

Mike, do you want to go through some of that?

Sure, sure.

Start with the U.S., one of the things that does occur, we do anniversary a franchise acquisition that happened January 1 of 2002-.

So when we look at growth rates going from Q4 to Q1 in the U.S., you certainly need to take that into consideration.

On an organic basis, our U.S. was up about 6.5% in Q4 and as we move into the first quarter, we're seeing about that level of year over year growth as well.

So we're not really seeing any acceleration.

I suppose you could say a little bit of acceleration from December, but December was impacted by, you know, where the holidays fell, but the weeks have looked fairly stable in that range as we made our way through the month of January.

In the case of France, again, we were up 4.3% in constant currency in Q4, and I mentioned that given the way the year is starting out, we're expecting to be -- still see year over year growth but slightly less than what we put up in the fourth quarter.

The first quarter, we have volume has started slightly be below prior years.

Some of that is due to the fact that you may recall the euro conversion last year, we did a real nice job of optimizing business in terms of some of that conversion work and so we had a lot of office staff out the first part of next year, and I think we're seeing some of that in our comparable numbers.

So we're starting the year out a little bit weaker in January in the French market.

The UK market, really, I don't think there is significant change in patterns.

We have seen some gradual year over year improvement within our UK traditional staffing business , but I would say it's pretty much continued down the same path.

Okay.

So did I hear that France was down slightly to begin the year on a year-over-year basis?

Yeah, down in volume year over year about 2%, which would put us on a revenue basis, perhaps not quite flat, but flattish year over year revenue lines.

Okay.

And then just on the French legislation, maybe you could just elaborate a little bit on why you expect the $10m second half impact and, you know , I guess how certain you are that would be the case?

Well, I'm not sure if I'm expecting a $10 million impact.

What I wanted to do is lay out the worst case scenario of a $10m impact.

There are many different elements that goes into social costs associated with the French business.

And there are some calculations having to do with the different tiers of minimum wage, which I believe they have collapsed the number of minimum wages, which has impacted the calculations for us.

If you were to calculate it out given our current book of business, the way the law is written as we can decipher it, the worst case, business as usual, would be $10 million over that six month period of time.

As I said, we're still working with the government to say that there was probably an h inadvertent consequence here because the law they put in place, the legislation they put in place was not to do this.

It was to do something else.

So this was an unintended consequence.

We're looking to see if we can get a calculation changed or modified.

That's what it looks like.

Because it's a three-year law, that's why you get negative effect one year, the beginning of the next year negative effect , neutral to then positive , and, you know, we will at the next conference call give you the next update based on our work with the government and based on our understanding with the customer set that if this goes through, what is our opportunity to raise prices, because it's a very legitimate reason to raise pricing.

Ok, but just trying to understand why it would go from negative to positive.

Like why you would expect it to go based on what you know right now, I know there is still...

Negative meaning positive in 2005?

Right.

The calculation changes, based on the way the government wrote the law.

So you're not anticipating being able to pass through higher prices by then, you are not billing any of that into --

No, the positive to 2005 is not because of higher pricing, but it is because the calculation modifies.

Thank you very much.

I appreciate it.

Thank you.

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

Hi guys, it's Greg and Josh.

Nice job, tough environment.

The magnitude, Jeff, of moving the French margin, to touch on that one more time, obviously dramatic.

We were wondering, can you just briefly review what your sector exposure is in France?

Did that shift it all in the quarter?

Did that have anything to do with the margin as well?

Maybe just a little bit more color there.

Sure, Greg, in terms of sector exposure, there wasn't a real push or a real shift, I should say.

I think I would certainly expenses, they did quite a nice job on expenses.

Expenses over all SG&A expenses were down 4.5% over prior year which they are down 4.8% over prior year in the third quarter.

So they really continued on a similar trend, but when you back up from that, and I look at, you know, how did we accomplish it?

I think we had a couple of things, a couple of elements that I think they did quite a nice job on.

Jeff did refer to one.

There were some promotional costs that we decided to defer into the second part of the year or into next year and that certainly has saved a little bit.

The other element that I think they managed quite well is, as you know, seasonally, the third quarter is quite a big quarter for France and so we ramp up a little bit with staff to support the increasing volume and then bring it back down as we go into the fourth quarter.

I think the management did an exceptional job bringing that level of support cost down, if you will, very quickly, sequentially.

I think that really helped drive some of the performance as well.

I think there are a number of elements and -- but really, it was overall good execution, I think in really just managing the business.

Okay.

That makes sense.

Mike, is that SG&A decrease likely to sustain or I guess given what you said, should we expect to see that maybe tick up going into this quarter here?

Yeah, as we go into this quarter, you know, I think the first quarter of last year was the first quarter we saw a big decline in SG&A expense.

So the comparable is going to get tougher, if you will.

I will anticipate that sequentially, you know, from Q4 to Q1 in France, we'll see costs overall decrease modestly, although we are at a level here that we're not going to go too much further down from here, even with seasonality.

There is not a whole lot we can do.

So while there is a slight reduction in costs going Q4 to Q1, it won't be too dramatic.

Additionally, we will see year- year-over improved operating leverage in France, but when you look at it sequentially it will actually go a little bit the other way.

As you know, the first quarter is a weaker seasonal quarter.

From a leverage standpoint, expenses as a percentage of revenue will actually go up.

Still, again, a little bit better than the prior year.

Understand.

One more quick one.

On sort of geographic basis, in the light industrial space, did things kind of level off across all geographies or were there any specifics that got hit harder than others?

Are you talking about geographies within the U.S. or the world?

Sorry, yes, within the U.S

We're seeing the south and Midwest still continue to perform a little bit better on the light manufacturing.

West was coming back.

So they are kind of playing catch-up mode and northeast is a little bit weaker.

Overall, there are not huge differences.

I'm not sure if we can point too much to regional differences.

Mike, one more quick one.

Are you assuming in the guidance that the euro stays where it is, flat?

Yeah, it's a bit of a moving target, of course.

But effectively, I'm assuming 1. 1.05 or $1.05 on the euro.

We'll see where things go from here.

It's certainly been on a terror so we'll see whether it keeps going or starts to come back in.

That's what I'm assuming.

Okay.

Thanks, guys.

Our next question comes from Kelly Flynn with UBS Warburg.

Thanks, just a couple of questions.

You mention, I think, in the U.S. that professional was up about 20% year over year.

Can you speak to whether that is attributable to easy comparisons or whether you actually saw sequential improvement and maybe drill down on some of the segments there.

Also along the same lines, we did the gross profit improvement have anything to do with any change in conversions as well?

Thanks.

Kelly on conversion, you mean temp to perm?

Exactly.

Under professional in the U.S., the 20%, we're are up against some comparables that are slightly easier, but not tremendously easier.

We never dropped off much in the professional area.

We have 5, 6, 7 accounts that are very large, are very in tune with what we have to offer and therefore, we've seen some of the engineering work primarily get very strong, concentrated in four, five accounts, and that continues to grow.

And because they are so substantial in size, it actually can move the needle up.

So we are seeing some comebacks in IT.

With the 20%, if you will, is a very true number.

It's not just the comparables.

It's good growth in that area.

We're seeing it across the board board, but more so in some of the larger accounts.

The GP-on the conversion, we do see some of that.

Permanent placement, we are working on. sourcing fees and others as I mentioned in my prepared remarks .

But it's still not really large enough to move the meters.

It's a focus.

We're looking at it, but we're slicing basis points to talk about GP-regarding temp-to-perm conversions.

One final one.

You guys didn't really talk much about unemployment insurance rising relative to what you said about growth margins in Q1.

Could you speak to that and maybe compare your experience to, perhaps what some of your competitors might be seeing because they've been talking about margin pressure there.

Thanks.

Sure, as many of you may know, the states typically adjust their unemployment tax rates in the first part of the year, and it's usually based upon their look back of what the experience has been over the prior year.

So as companies, of course, are downsizing and unemployment goes up, it's very typical that our unemployment taxes themselves would go up.

So certainly we do expect to see some slight increase in unemployment tax.

We're looking to manage that effect as effectively as we can and try and pass as much of that on as we can.

We also have other elements within our overall GP-structure that we're trying to manage as well.

So now we don't anticipate a big issue with unemployment taxes going up, it's certainly going to be one of those things we'll have to manage, but overall, you know, if you look at the mix of overall direct costs I don't anticipate any significant issue there.

Okay.

Thanks a lot, guys.

Next question?

Thank you, our next question comes from Jeff Silber with Gerard Klauer.

Good morning and let me give you my congratulations as well.

You touched a little bit on the impact of the regulatory change in France.

I was wondering if you could generally tell us what the regulatory environment is in Europe these days, I know you talked about this in other calls and if you could also talk about what's going on in Japan as well?

Well, there are some things that are in a state of flux and there are things that have been solidified, but may be able to be modified.

The hart's commission in Germany, that is enacted. .

While that is positive for us as an industry, it falls well short of offering what we can offer to the economy in Germany, and consequently, what could be as a benefit to us.

We will start to work on that.

We will start to participate in it.

It will assist the German market , but I think we have a ways to go.

Potentially, the German market is looking at possibly being usurped, if you will, by the EU directive which continues to move down a path, parity pay being part of it, length of mission, things like that.

That will be coming forward, and Europe is very much split.

When you look at parity pay and some of the other issues, you've got France, Italy and Spain which are very comfortable with that.

You've got the northern parts of Europe, which are less comfortable with that, and then you have the UK that it would have the biggest impact.

If it were to pass as it is presented now, which we believe we still have some opportunity to make some modification or possibly, actually have it not pass based on two large country, two small countries voting, but if it were to pass, overall, it's going to be generally positive in Europe.

With the wild card being what will it really effect in the UK and does UK give dispensation for this from a period of time so they can adjust.

And there's been some conversation that it might be as long as 5 years.

So it's still up in the air.

We're still working on it as an industry and as individual companies, and we'll continue to try to really emphasize this is about job creation and our industry does a fine job of that.

Anything new in Japan?

In Japan, I think we're still on track.

It looks like we will get a December vote for light industrial.

It's passed through the diet and continues to head down the path.

We are preparing ourselves for that opportunity.

You know, we would be looking at our office locations, our talent, our Japanese organization at many different levels have been trained already in the U.S. and France on how to sell, implement and select light industrial workers so that we can offer the service we offer in this country and others, which is far superior to our competitors as it relates to the match and do the same in Japan.

So we're kind of spring-loaded, if you will, for that opportunity in Japan.

Thank you.

If I could ask one more quick one.

If you look at the trends in the UK over the quarter, they seem to diverge a little bit from what was going on in France and the rest of Europe.

I was wondering, first of all, did you have a big impact last year due to the euro conversion in the UK, did that help your business at all?

And generally what's going on in the UK visa vi everybody else in the area?

We did have a euro conversion in the UK because the British love their pound.

So we didn't do anything there.

However, what we really have seen with some of the banks rates and the central bank of England, and how they are handling it, they had not experienced the recession to the same depth that Europe did.

It stabilized a little, we are starting to see it come back.

We've had some systemic challenges that are not necessarily industry-related challenges that we've talked about before, how we're trying to recreate some things within the UK operation.

So, it is not acting like mainland Europe from an economic perspective.

The city of London is much more hurt by the economies because of what's happening in the banking industry and the finance industry than what you would see in the mid-lands, which is more the manufacturing, both smaller and mid-size.

The UK is operating right now a bit independent of what you're seeing from economic trends in Europe.

Okay, great, thanks.

Thank you.

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

Good morning, thanks.

I had a couple of questions.

First of all, you mentioned how the gross margins in Italy and Spain are significantly different for you than some of the other countries in Europe, that they are much lower.

Can you give us a difference of the -- some sense of what the magnitude is, how low are Italy and Spain at this point and how do they compare to France, which might be more normalized or some of your higher margin countries like Sweden?

You can almost go as far as saying it's common to see something anywhere between 10 and 12-point difference in gross profit between Sweden and Spain.

That's how dramatic it is.

Okay.

And therefore, you can see, as you're getting faster growth in one, versus slight decline or slow growth in the other, what it can do to the mix of business , and a lot of that is really based on cultural and based on how they view the industry and how they view service.

Okay.

And I think -- I mean, you've talked around this a little bit, but I'm specifically interested in the margin leverage that you talked about.

You mentioned very small changes in revenue at this point in the cycle, positive or negative can have a significant bottom line impact.

I'm wondering if you can put any further thoughts around sort of what does that mean in terms of the magnitude of margin changes at current revenue levels?

Have you looked at, for example, you know, where you're at on revenue today, what it would mean to you to have $50m upside or downside in revenue relative to what you're hoping for or does it depend so much on mix and geography that it's impossible to say what the bottom line impact of that might be?

I don't know if it's impossible, but you took my opening line.

It really does depend a lot upon geography because as you know, the U.S. has fallen in this recession much steeper than the rest of Europe and therefore, there is more capacity there and more ability to really drive profitability to the bottom line or at least more so there than perhaps some of the European countries.

Overall, in many of the countries, there is excess capacity that we need to fill and that's going to drive the overall leverage up.

For the year, we came in with an overall SG&A of 15.8% of revenue and certainly we're looking to bring that down more towards the 15% range, get our GP-back up where we've seen it recently towards 18.5 and that's how you get to the 3.5% target that we've been talking about.

When does that happen, how does that happen, certainly we'd be looking for a recovery in the economies and recovery in the markets to do that, so that we can really grow into that capacity.

At this point in time, we're not looking at taking out capacity out of the organization.

We don't think that's the prudent thing to do at this stage, but we will be looking at it and as business grows, we should be able to really, really get that leverage, again, more so in the U.S., but also in Europe and that will drive and if we're able to put double digit type of growth on the top line, with something, you know, in the mid-to-upper single digits on the SG&A line, we're going to drop operating profit quickly and see good leverage to the bottom line.

That's great.

Thank you very much.

Last question, please.

Thank you, our final question comes from Brant Sakakeeny with Deutsche Bank.

This is Brandt Sakakeeny from Detusche Bank.

Actually, just a couple quick modeling questions for you, Mike.

You said the DNA -- or CAPEX would be 75 to 85 in line with D&A, but your D & A was only 65ish in '02, so given the lack of CAPEX, why would we see a material step up in the D&A line for '03?

Thanks.

I'm factoring in the currency effect.

When you look at the 65 from this year, certainly a good portion of that comes out of Europe and where we have translation.

So effectively, we probably would see something on the order of 5% to 6% perhaps in constant currency increase in D&A and the rest would be more currency.

So you know, probably D&A in the

75 to 80 range but there is a lot of currency impact on that, as well as currency impact on the CAPEX line as well.

Again, fairly difficult to get a good handle on CAPEX, but I think if you assume CAPEX and D&A are pretty close, you'll at least have a good starting point for your cash flow model.

Okay.

And just the next sort of modeling question.

You had said earlier what was in that interest expense and other expense line.

Can you go over that again and give us a sense of where you think interest expense will be, a run rate and finally just the target, long term debt numbers by the end of the year?

Yeah, in terms of what we had in the fourth quarter, we had $5.1m was related to equity securities which we wrote down.

That was 4 cents per share.

And then there was $2.8m or 2 cents of fixed asset write downs included within that line.

As we look out to 2003, you know, the first part of the year year, I think we'll continue along the same trend, if you back out some of those unusual items, we've been running in the $10m to $11m range on that line, a little bit higher in the second half of the year with seasonality, and I would anticipate, you know, at this early stage, something along those lines.

In terms of year-end debt levels, I'm reluctant to look out that far.

Frankly, I would anticipate that we'll have some reduction in debt levels in the first half of the year.

I think the second -- it's going to depend a lot upon the second half of the year's cash flow, which will depend on the economy.

If things go well, you know, the economy will improve and we'll be adding a little bit of working capital to support that and therefore we may not have any free cash to pay down debt at that point in time.

We'll see how things play out from there.

Okay, great.

Thank you very much.

Congratulations on a good quarter.

Thanks all for attending.

As usual, if there is any follow-up questions, you have Mike's number.

Thanks.

Thank you.

This concludes today's teleconference.

Thank you for your participation and have a great day.

You may disconnect at this time.