ManpowerGroup Inc (MAN) 2003 Q2 法說會逐字稿

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The conference is about to begin.

Hello and welcome to the manpower second quarter earnings release results.

Following today's presentation there will be a formal question and answer session and instructions will be given at that time.

Until then all lines will remain in a listen-only mode.

At the request of the company, today's conference is being recorded.

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I would now like to cross today east conference chairman and chief executive officer Mr. Jeff Joerres.

Sir.

You may begin.

Thanks, and good morning and welcome to the second quarter conference call for 2003.

With me this morning as usual is Mike Van Handel our chief financial officer.

We'll go over the results generally and discuss the segments in more detail.

Also, Mike will spend some time going over the financial items that are most important for this quarter, but also there are a few items that may affect our third quarter.

Before we move into the main part of the conference call, as usual, I'd like to have Mike read the Safe Harbor language.

Thank you, Jeff.

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

Actual results my 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 files of the company which information is incorporated herein by reference.

For reconciliation of the non-GAAP financial measures mentioned in this conference call to the most [comfortable] financial measures calculated in accordance with GAAP please see our web site at www.investors.manpower.com.

Our performance in the second quarter 2003 in many ways is very similar to the way we per form in the first quarter of this year of '03.

Excellent performance from an operational perspective. managing costs, manage than and upholding gross margin as best as possible, but dealing with a head wind in our face for almost the entire quarter.

As we entered the second quarter some data suggested we might experience an upward trend and that would contribute to a more robust top line which, as you of those that follow us closely know that there is a tremendous difference in the profit from the profit perspective because of the way the company was in leverage mode when we get a little top line; however, we exited the first are the quarter with a few weeks that gave us pause, and we projected the second quarter based on those trends.

We anticipated in earning per share of between 31 to 36 cents with the currency impact approximate 6 cents, ended the quarter with earnings per share of 37 cents and the currency impact of 7 cents so with a penny more of currency than we had anticipated we ended up just above the range that we had estimated.

This can simply be explained by France having higher revenue than forecasted, and I'll get to it later.

Once again, France will a tremendous job for us.

The quarter however was not without its challenge since we didn't see a pickup in the U.S., and we till saw a slight fall-off in the European market which of course we will discuss also.

Balancing in the U.S.[emia] with continued strong performance from our French operation.

Strong performance if you look closely in our other countries' segment which includes Japan which had a very nice second quarter.

Our revenue came in at just over $3 billion at 3 billion point $13 million with our system wide sales coming in at $3.3 billion.

In U.S. dollars our receive new increase was 15.8% but more importantly in currency basis it was 1% higher than a year ago.

The acquisition impact on the revenues was very similar to previous quarters having a [neglible] effect of .2% than our gross profit line which held up as we had anticipated came in at about 17 -- it came in at 17.3%, ten basis points lower on a sequential basis.

It needs to be understood that we don't across all jog areas of to feel price pressures as well as the inability to capture or recapture some of the statutory burden in the U.S. at what I would call an acceptable pace.

They are being recaptured, and we are working with clients, but the delay in the pace is making a difference in what's happening in the GP,needless to say we're No. satisfied with 17.3% and it's not our long-term goal; however, given the our environmentand given our ability to stabilize the margin, we are considering it a victory.

We continue to drive our strategy which not next quarter or potentially the quarter after that but over the longer term, are confident we're going to see a shift in business mix and the ability is for you are us to capture higher level services which will be the catalyst to see our gross margin start to inch back, up as opposed to being maintained or going down slightly.

A slight decrease that we experienced than 10 basis points in gross profit was offset by a great effort and a difficult effort across the team on I a global basis in expense control.

We came at a15.4% of revenue which allowed us to achieve an operating profit of $57 million or 10% increase over the second quarter of 2002.

As I mentioned earlier, the various segments while act can generally as we anticipated did present a few different characteristics that are important to look at particularly as we look at the future of the third quarter.

Our U.S. revenue which drew grew at 1.9% is slightly above what we had anticipated, and what we haven't seen is any real kind of tick up in the last latter part of the quarter; therefore, we look at the third quarter with caution as it relates to the US market.

Also,[EMEA ]which is Europe, Africa and France some more negative trends particularly in Holland, Sweden and Norway.

Of course I'll get mere into that in the details but I think it's important that when you look at the big you can understand some of the trends that we are seeing and dealing with as we entered this third quarter.

Based on those trends and the continued economic challenges that confront us, we anticipated the third quarter earns to be in the range of 42 to 46 cents with a currency impact of 4 cents.

The estimate of 42 to 46 cents. extrapolates our most recent weeks which we believe as is appropriate given the uncertainty of our current market environment.

Of course, it may be likely that during the third quarter we actually see the inflection in demand, particularly in the U.S. or should I say, actually more so in the US.

Even though we say see that inflection in demand we don't believe it's appropriate to factor that inflection into our estimates, much like we looked at the second quarter estimates and iting the first quarter.

It goes without saying, and I hope you all understand, we and I continue to be optimistic in the secular trends for us throughout the world.

Japan and Germany are increasings their flexibility and we're performing well in both of those, and we're consistently hearing from our clients that their plan to be more flexible and to acquire the appropriate talentt a more timely way.

They've always said it bullet they've never expressed it in with the same kind of fortitude, desire and forward-looking plans than what we've seen now.

Now onto secular vends and our involvement in the trends have diminished.

What we do see as we look into the third quarter is that companies across the global continue to struggle in their own industries for demand of their products and services, and therefore are reluctant to bring on resources because the additional work is perceived at this time as not sustainable and therefore companies continue to proceed with caution.

What we see is companies will add staff for a short period of time, reduce if the staff.

Add 50 people, reduce the staff to 25 people.

So we feel we're on the cuff as we have for some time but we just haven't gained any traction.

The segment detail beginning with the U.S. our revenues as a mention Eler yes, sir $484 million up 1.9% over last year.

Franchise acquisitions actually added about 1% to U.S. growth in our system-wide sales total $730 million.

The disappointment in the quarter is what we saw happen to our customers' demand for light industrial workers.

Our light industrial sales growth as you recall from previous quarters that is been in the low teens for the last three quarters whereas this quarter we saw it move to a growth of plus one so we are clearly seeing manufacturing continue to try to manage out of the difficult environment.

We are at the same time hearing much more positive tones from our customers regarding their intention.

They are seeing demand in their bag log.

They're hesitant to fill inventory levels but they're starting to improve but it's not showing up yet in our numbers toe there is going to be a slight lag in that.

It goes to the theory that the third quarter does have the potential to be the inflection point but as I stated before it wouldn't be appropriate for us to guess at that inflection point.

It's much more appropriate for us to take the current trends and extrapolate them out.

While we saw the light industrial trend line trail off from where it was in the first quarter, we saw improvement in our office business and continued to see good results in our professional business which finished up the quarter, up a little over 7% in sales.

The U.S. operation as you can see from the I improving profit operating margin did a fine job have controlling costs which is very difficult but extremely necessary right now.

This resulted in operating profit of 10-point three million dollars or a 2.1% margin which is 26% above what we accomplish last year.

Our French operation once again steals the show with a fine performance given the difficult economic environment.

Our French operation was in positive territory, up .6% in receive flew to just over $1 billion Euro or up 24% in the U.S. dollars to $1.2 billion.

We were able to stablized our GP while control or costs which yielded an operating profit margin of 41.9 million and a improved operating profit margin of 3.6%, a very fine performance.

This was sccomplish with strong performance across the board.

We continued to see the mark as a challenge.

As the market in general, a little over the last four weeks

maybe five go, we saw a slight decline in the numbers.

That has plateaued off since then, but the market really continues to be a market on the cuff.

Similar to the U.S., we actually did the second quarter similar to the first quarter.

We're not seeing dramatic strength or weakness but rather some stagnant numbers, trends that did not give us confidence that we would be able to project strength coming from our French market on the top line but as said before, leverage works in such a way, a little bit down or a little bit up above our projections makes a sizable difference in the profit side.

We'll continue to stress and emphasize our pricing and France and we're going have to continue to maintain good price controls throughout the third quarter and expense controls.

In EMEA, Europe which includes France, Middle East and Africa will lead to a challenging third quarter.

While it was a difficult quarter for EMEA there are some success stories.

Italy continues to see positive growth on the top line contributing very solidly on the bottom line, as is true with Spain, additionally,[Elan] which has for some period been suffering with the along with the entire IT market and possibly a little less than the IT mark in general was able to improve their top line and see the trend actually start to move up and in turn on a relative basis put in a nice profit, and a profit like that we haven't seen for some time.

In addition to [Elan] brook street grew their business in the high single digits and is a nice contributor to the UK segment.

Conversely, we experienced challenges with the manpower brand in the UK.

Larger accounts and more of the large manufacturing and service accounts seem to be in a bit more trouble than some of the smaller retail local accounts, so that is putting a lot of stress on the manpower brand.

I also want to highlight that Holland is struggling.

In addition to the loss of a small subsidy that we had been receiving before, we're seeing tremendous price pressure in Dutch market.

With the contraction, therefore, on the top line.

Therefore, it's not contributed to the profit in this segment whereas last year it was a major contributor.

Looking for forward to the balance of the year we see the Dutch market continuing to struggle and therefore putting pressure on the entire segment of EMEA also as many of you know Sweden and Norway have been big contributors to this segment over until the past but over the last three or four quarter have been challenged and continue to be challenged as their economies, particularlly the temp help market have not really come back and given the labor laws and the structure of those labor laws it's much more difficult to ratchet back those costs quickly enough to effect the bottom line the way we'd like.

I do want to highlight our German operation.

It continues to do very well with top line growth of nearly 10% in local currency and a very solid bottom line.

This, needless to say, is not. because of a robust economy in Germany but rather Germany just in a progressive way is gaining in some of the secular trends.

The other operations segment produced good results.

The majority of those were based on our Japanese market.

I had an opportunity to meet with our managing director yesterday for a Japanese packet market and we are doing very well there, our sales are up 14.6% in yen, 9.5%, yielding a very good profit operating margin.

In addition to the Japanese market we continue to do well in other segments of the other operation, which would be Australia, Canada, and Mexico, all improving their profits from a year ago this quarter.

Both Jefferson wells international empower are seeing shrubish revenues though Jefferson is benefit frequent Sarbanes-Oxley, the in internal audit practice, is going at a very rapid rate where the Sarbanes [four o four] work would be done.

What we're not seeing yet is customers willing to spend what would be discretionary dollars, those larger projects that could definitely help keep our people out into the work force and drive up our gross profit, so we believe that we've got to see that come back before we could see some real strength coming from Jefferson wells.

All in all, it was a difficult quarter, and another quarter that I have to say I'm very proud of our organization, forging ahead on the top line, being diligent in discipline regarding expense and price, that produced a bottom line that of course while I'd like to see higher was fine work by the organization.

As we entered the third quarter, we will continue to keep our costs under control and we will continue to fight as much as we can to hold onto our pricing.

You can be assured that we will do all of the operational tasks that are required to do during a period like this.

But also be equally assured that we are going to continue down our strategic path.

The five strategic threads that were established in 1999 are as relevant today as they were back then.

We have grown markets and we've selectively opened offices top of date we've opened over 100 offices throughout our network in 2003.

We continue to invest in improving technology,.

An example would be in the U.S. where nearly 40% of our temporaries now submit their time slip electronically.

We are focused on the challenge at hand, and while we are committed and we are committed to our strategic track.

Today we are more optimistic and I can know I have absolutely more optimistic today regarding the trends in our industry.

When you look at what companies are going through, large or small, they are absolutely seeing the value of speed and flexibility that system prayer help and our other services offer.

Our range, which I said before is appropriate, given the trends that we are seeing, the estimates of between 42 and 46 cents, they do have an upside in it especially if we see the U.S. economy getting better.

The bettering of the U.S. economy, of course, will not effect EMEA immediately in the third quarter but I'm confident what we would then be able to see is relief soon coming to EMEA, and soon after the upturn in the U.S. marketplace we will start to see the replication of that upturn not only in Europe but I know Japan is keying off of that tremendously as well.

So with that as my comments I'd look to turn it over to Mike so he can add some more information on the financial side.

Thank you, Jeff.

Let me begin, as I usually doctor by making a few comments on the balance sheet and cash flow.

The balance sheet remains strong at the end of the quarter with $252 million of cash.

Total debts at the end of the quarter was about the same as last quarter at $829 million.

What we've paid wound $31 million of debt during the quarter was offset by the currency impact on our Euro denominated borrowings of these zero borrowings owes provide a hedge against their net asset in Europe.

The improved earnings level we have also seen an improvement in all of you're key credit ratios with net interest now above 7.5 times a trailing 12-month basis.

Our accounts receivable increased $300 million during the quarter of this of this increase $195 million reflects the usual seasonal wrap up in revenues and the $105 million is due to currency.

Our DSO improved nicely down almost one day against the prior year.

Similar to what we saw in first quarter.

Precash flow defined as cash from operations less capital expenditures for the first half of the year was $6 million.

This change reflects the usual increase in working capital needed to support the seasonal increase in revenue growth which begins to take place in June in many of our major markets.

Next let me provide a little more detail on our guidance for the third quarter.As Jeff mentioned, our range of 42 to 46 cents reflects a continuation of trends that we saw late in the second quarter.

Based on this, we anticipate company revenues to be slightly down year-over-year on a constant currency basis.

This implies revenue growth in U.S. dollars in the upper single digit range given the current exchange rates.

In terms of the segments, we expect revenue growth for the U.S., France, and the EMEA segment to all be down year over year in the low single digit range in constant currency.

For the other operations group we expect revenue growth approaching double digits before a modest flavorable currency impact.

As we've discussed previously, we account for stock options under APB No. 25 as we expense these open shops understatement 123 earnings charge for the quarter would have been 1 cent to share.

Jeff.

Thanks, Mike.

That completes the prepared remarks.

What we'd like to do now is to open it up for questions, so if we could give some directions and start rolling on the questions, that would be great.

Thank you, stir.

We will now begin if formal question and answer session using our Q&A poling feature.

If you wish to ask a question is it, simply press star 1 on your telephone touch pad.

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To cancel or withdraw your question simply press star 2.

Once again that's star 1 if you have a question.

And our first question comes from Adam Waldo with Lehman Brothers.You can ask your question.

Good morning, Jeff and Mike.

How are you?

Good morning.

Speaking about the second quarter results a little bit more, can you gives a little bit of a sense in terms of year over year variances in gross margin as to what proportion of the year over year variance was driven by skill mix shift which versus bill rate [pressure on] worldwide basis.

I know this is hard to do given mix but can you try to help us parse that apart as bill rate increases, direction cost increases, and makeshift toward lower margin skills?

There is a lot in the question, Adam, but if you look our gross margin, which is as Jeff said did go down ten basis points during the quarter, when you look at each of the major markets it actually was fairly stable.

When you -- starting with the U.S., we saw the usual seasonal tick up in gross margin that we ordinarily see, and overall gross margins were stable and pricing was stable.

Certainly we talked about in the first quarter the fact that some of our costs were going up, soon to be one of the significant costs, and we're trying to pass that onto customers.

We continue to work on recovering that.

We've had limited success there but we are continuing to work that is correct but effectively overall I would say pricing is stable on a sequential basis in the U.S. and we have seen some seasonal pickup.

Additionally in the French market where I would describe pricing as well stable, we saw the usual seasonal rampdown, if you will, on gross margin going from first quarter to second quarter, and that really offset some of the pickup that we got in the U.S., and the fact that France is growing in U.S. dollar terms by 24% in the quarter.

That's really the biggest shift in terms of geographical shift mix that we saw in the quarter.

Stepping into the EMEA market, there we actually saw pricing in a few of the markets step down a little bit more but that was generally offset by some improvement in the other operations segment, so that kind of givers you a flavor of what we're seeing in the different markets overall.

I would say, you know, pricing overall certainly is still quite competitive, but I think as Jeff mentioned earlier, I think our operations did a very good job holding on during the quarter and really defending the value that we provide.

So, Mike, would it be fair to say on a worldwide basis the direct cost pressures, particularly in the U.S., probably drove most if not all or possibly all of the gross margin year over year decline?

When you look at the sequential ten basis point decline, I would -- it really is one more of geographical mix than anything else.

Okay.

If you look at it year over year, if I dissect that a little bit, what you would see is where it's 17.3% versus 18%, so we're 70 basis points down on a year-over-year basis, 80 basis points down in the first quarter on a year over year basis.

If you die set the year over year what you would see is the EMEA t market contributing about 35% of basis points of that decline, and there we are seeing some pricing pressures, particularly in Holland as Jeff mentioned earlier and in the no, sir diction.

The U.S. would account for about 10 basis points that of decline, and that goes to some of the cost increases that you spoke of that I mentioned earlier that we're vying to recover, and the other 25 basis points in terms of year over year decline really is one, again, of geographical mix where because of the Euro the really driving the size of our French operation which has a lower gross margin than the average, it's impacting the overall mix of the company.

Okay.

Then finally, you had pretty good market share gains again in France this quarter in the U.S. a bit of a tossup at this point.

To what would you attribute the market share gains in France?

To what ex extent is it sustainable?

And particularly what kind of trends did you see in local currency growth in May and June?

Adam on the French marked as we had talk about for a few quarters, and I say this without taking anything away from our French organization who is doing a great job, I prefer to look at the market share gain more on a two-year basis because, you know, it's going up and down.

We're just about [anversializing] the gains that we've had in the mark which is up between 1 and 3%.

Our goal is, while that would be nice to maintain, our goal is more to make you're sure that we keep our pricing disciplines right, and if that means that we are at or 1% or a little bit more than that below the market, particularly since some of our competitors are now going the other way where they have been -- they were down last year and they have easier comparables, so my guess is, is that -- and I'm comfortable with saying that on a two-year rolling basis we will be showing that we will be slightly picking up market share, and that's more of an effect of the team doing a good sales effort.

It's not because we're up trying to grab market share.

Okay.

Then in terms of the monthly trends later in the quarter in France and the U.S. on what which you based what seems to be I think by everyone's admission cautious to conservative guidance for the third quarter.

You brought that conservative things two times in a row now.

Sorry.

You're pretty good at that.

Well, and Jeff said, we did look at recent trends in terms of our guidance for the third quarter, as -- we're not willing to call a turn just yet and we don't have anything in our data to call it that.

If it occurs, great.

Oh so we are look at recent trends and if you look at what we saw in the month and earlier in the quarter in both France and the U.S. there was a weakening of the trends as we made our way through if month -- or through the quarter.

Excuse me.

In the case of France, revenues were up on an average daily basis 3% in April, flatish in May, and then down by 1% in June, so certainly you see that things did seem to flattened out in terms of that trend line, steamed to splat end out and hit a trough as we got through June and into the first part of July.

In terms of the U.S. the monthly trends would look like this, 6% growth in April, 3% in May, and down 1-1/2% in June, and to be fair, the early part of June was stronger than the weaker part of June so we would have exited June with a little bit weaker top line than that, so that's what we're seeing in the months and that's what drove the revenue guidance that I gave you earlier for the third quarter.

Thanks very much.

Thank you.

And our next question comes from Windy Mill with Robert W. Baird.

Good morning, Jeff and Mike.

First I just wanted to ask a follow-up question on gross margins.

What is the expectations throughout the rest of the year just given the factors that you talked about, Mike?

Right now we're still looking for stability in core pricing.

What we would -- what we would expect to see is is we could see some slight sequential debt going from Q2 to Q3, and that's seasonal in nature, similar to what we saw last year, both the U.S. and France tend to dip just slightly seasonal, going from Q2 to Q3 of them there's one more holiday in the U.S. in the third quarter so it's not a dramatic dip, but the mix of work in France is a little bit different with the rampup, the seasonal rampup we get look slightly lower gross margin, not dramatically, so we might see a slight tip in gross margins, but I would say through the balance of the year right now we don't anticipate at a time anything, any further declines or at least substantial declines certainly from where we stand today, and hopefully when we start to see some firming on the revenue line that'll give us some opportunity to improve the mix of business and then we'll start to see some improvement from there.

Okay.

And on the EMEA segment, Jeff, you talked about the Netherland being a problem, I guess, partly from a structural standpoint.

How much of the rest of that region would you consider structural just versus cyclical?

It seems like the margin was significantly lower certainly than what we were expecting and I assume what you were looking for as well.

Well, you're right because both things are happening at the same time.

We have some -- it's a cyclical down turn which is putting a lot of pressure on the market, and at the same time there are some structural issues having to do with the way our industry works in the three-phase contract environment, and we see the three-phase contract environment is not positive for our industry, and I would suggest very strongly not net positive for the individuals.

So we have a little bit of that working, but if I were to try to balance it off, I think what we are seeing now is much more of an economic issue in the deterioration of gross margin, and the gross margin in net marketplace was one of the highest we've had throughout our network, so -- and because it has some more administration work associated with some of the new law changes with the three-phase contracts. the costs are a little bit higher.

So we're looking at the Dutch market for the balance of this years a challenge.

It doesn't mean that we're not going to try to do something about it.

But for us to move that market would be extremely difficult sense we are not a major player; we're a well-thought of player but not a major player there.

Okay.

And is it fair to say that we have seen the bottom in Elan and that that business will continue to improve?

It sure looks that way.

You know, elan has worked very hard, and as you know since we've done the purchase, we now have almost 40% of the turn over from outside of the UK which is actually where more of the business, the profitable business is coming from.

The IT thing is that it's still struggling but we've done a lot of structural thing in Elan.

We have secured some nice accounts.

So I'm hopeful that as we finish out the balance of this year we're going to actually see some momentum in Elan and therefore, you know, I'd like to say next quarter you're right, second quarter seems to be the inflection point but we we'll have to wait a little while.

Thank you.

I appreciate it.

If I could just mention, if each of the callers could try and keep to one question; then perhaps a follow-on question.

I just want to make sure we have an opportunity to get to everybody that would like to ask a question, so thank you.

Thank you.

And our next question comes from Andrew Steinerman is with Bear Sterns.

A little more color on Jefferson wells.

Obviously Jeff said the czar brains Oxley internal part of business is doing well.

The [discretionary] part isn't doing well.

If you could just give us a sense of what that mix is and utilization at utilization sat Jefferson wells going up at this point or is that also holding back overall gross margins?

Andrew, I think you've hit the area that is holding back what we would consider to be the real wild success we can have with Jefferson wells, and I'm still there, that the business model is very clever, good management.

So what we're seeing is, is that our than internal audit group is up over 25% in sales, and a lot of that is coming from [czar] Sarbanes-Oxley, but some of that higher end, I don't want to say discretionary, but project work, three-month work, a couple hundred thousand dollars, that is being suppressed and start our mar generals are being squeezed because the [utilization] is down a little.

It's up from where it was maybe a month ago.

We're starting to see a little tickup but one Robin doesn't make a spring, as they say, so I'm going to hold on and I'm confident, very confident in the management team there, and we are getting more than our fair share on Sarbanes work, and that's starting to grow nicely.

And how much of an impact do you think that's having on overall gross margin?

At this point on a year-over-year basis it's not really large enough to move the meter one direction or the other.

Thanks for your comments.

Thank you.

And our next question comes from Marta Nichols with Bank of America Securities.

You may ask your question.

Good morning, thanks.

I'm wondering if you guys may be taking a step back and look at how the shift in the manufacturing sector are having an I am impact on you, and specifically I'm interested in if you look at the BLS data it look like we've been losing jobs in manufacturing on a permanent basis or for close to three years.

Are you minding when you're talking to your clients and maybe talk to this in your individual segments that part of the reason you're suffering and not improving right now is because they're moving jobs into markets where they can hire permanent workers for significantly lower dollars and now it's becoming -- is that becoming at all a competition factor for you?

It's becoming a discussion topic.

We have not seen it as a competition factor yet.

What we have found is that the conversations center typically in accounts where we're doing business but not doing business in that area.

We are seeing much higher percentages that are moving offshore that are unionized, and we don't do business in unionized environments am we are hearing about it.

We've recently looked in and are looking at participating in a Gartner study where there is lots of conversation about going to India and Korea and Mexico and China, but I have to say, Margaret, while we hear about it, haven't felt it yet.

When we talk to our customers, I don't want to simplify it too much, but they just aren't seeing the demand for their product.

Right.

and they're not saying they're going to move offshore.

They're saying, stick with us.

We'd like to do -- you know, we'll be doing business with you but the demand isn't there.

So my guess is the movement offshore is going to happen.

It's something we are looking at all of the time.

We're looking at some studies and looking to how to combat it, but I see that as more of a three to seven-year, not an 18 month to 24 month effect for us.

That's great.

Thank you, In a related kind of big picture thought, have you seen any signs, it looks like the legislation as you announce earlier this quarter is less negative on a strictly financial base basis than you thought, but are you seeing any signs yet that employers are less willing to hire or being more cautious just generally about the level of your services that they want to using they might have been before the legislation was passed and implemented?

Right.

Yeah, that legislation which we did get a positive outcome, which was a change in the calculation to make sure that the inadvertent consequence that had have that it had on our industry was changed, that has not hit the customer set, so the customers never really felt that negotiation, and therefore since there is no change, it's business as usual and they're not asking anything about that combination of subsidies.

We're still continuing down the path, and it just becomes a calculation that's changed that has neutralized and basically is unchanged now.

Okay.

Thanks.

Thank you and we will take our next question from Jim Janeski with Jane Montgomery and Scott.

Yes, good morning.

Jeff, when you talk about Europe and the rest of the economies recovering after the United States, that's the normal historical pattern, with the way that you feel that you are better positioned now than you were, let's say, coming out of the last recession and into an employment recovery, could we expect that, you know, the positive margin impact in the rest of the world could happen more quickly?

I'm subscribing to that theory.

You know, what we have seen in the past was anywhere from a nine-mondays to 12-month lag between a sustainable recovery N U.S. than a sustainable recovery in Europe.

No doubt globalization of companies, products, services is going to collapse that a bit more, and my sense is the longer that we are down, which we're down for a loan time in the U.S., the other synchronized that becomes.

But I hesitate a little using the synchronize term does because that doesn't mean one day here and the next day there.

I'll give you a wild, and you'll all write it down but I won't say I said it, I'm looking more for something in the neighborhood of three to four months' lag as opposed to maybe before which was the nine-to-12-month add.

Mike, do you want to add anything to that?

No.

I agree.

and then as a follow-up, you know, the recent labor statistics that have come out have actually shown some strength in the United States temp numbers whereas you and it had exited the quarter a bit weak and are cautious, I think appropriately so, for the September quarter.

Can you just comment on that?

Well, we look at a lot of data, and we look at our own, we look at different sources, and not just this time but other times we have found, in fact, most of the time, that it's not really synchronized with us.

And the BLS numbers have been changed and [recalibrated] to hopefully see something that is more relevant.

I think overall at least in the data that I have look at, when you mix it all together, we are attracting about what you're seeing.

If you look at the BLF numbers sequentially we are tracking exactly, I shouldn’t say eaxactly we are actually ahead of the BLF numbers sequentially, but, you know, those are filled with so many different variables, and I still believe very confidently this our 12,000 -- our 1200 offices in the U.S. our sales programs, our initiations for new customers hasn't changed, and I believe that we're going to be with the market.

It wouldn't surprise me if in the U.S. we are slightly below some of the other markets because we're holding our price.

And we can count on more than one hand to count basically we have walk away from because we won't participate at that price.

That could affect our top line growth, but we're not in this to make change, if you will.

We're in this to make some money on it.

Okay.

Thank you.

Yep.

Thank you.

And our negligence question comes from Kelly Flynn with UBS.

Thanks.

Question on SG&A similar to what Adam asked about GP.

Can you tell us help us to understand how much of the increase there was driven by currency and maybe while doing that speak to just general trends in various countries, and then also help us out on the guidance there?

Thanks.

Sure.

If you look at overall SG&A in the quarter, we're at -- came at 15.4 percent revenue which compares to 16% last year.

So clearly you see, as we are able to pick up more revenue, we're able to get more leverage in the quarter, and that certainly could you be to the operating profit line.

When you look at it sequentially it is a little more difficult because you do have the currency playing in there, and I don't have a constant currency number right in front of me sent sequentially to tell you what to would do but when you look at it you can see from a percentage point sequentially we're in the first quarter at 16.2 and in the second quarter at 15.4 so clearly again you can see as ready revenue we're getting the type of leverage that we should get in this environment.

When you look at the specific markets overall, the U.S. would look a lot like the consolidated level where we are able to add revenue, and basically costs were held onto.

They ticked up just a little bit for a couple of seasonal reasons but very modestly.

In France as well we picked up leverage within that market.

Costs were up in France sequentially a couple of percent in constant currency, but given the sequential, seasonal rampup, very modest increase, so overall I felt costs were extremely well controlled in the quarter and certainly that is going to be a focus as we move forward into the third quarter.

As I look at the third quarter, I would anticipate, as, again, we get a little bit more revenue volume on seasonality, that we will see a little bit more leverage as well.

Last year we were in that 15.1%.

I would expect we're going to be in that same reigning in the third quarter of this year, something along those lines, and despite the fact that I'm anticipating top line going down a little bit, I do anticipate we're going to be able to hold onto that leverage that we had before, so I think costs will be controlled tightly, and while we're not going to see, you know, significant improvements in leverage year over year given the fact that top line is declining year over year or at least expected to at this point, we'll keep costs well in check.

Okay.

And just a follow-up.

Past couple of quarters you guys have indicated that you kind of want to hold steady with the infrastructure and as a result the general SG&A levels.

Has anything you've seen about the way the economic situation has played out changed that view at all?

I know you added offices, as you mentioned, but maybe just kind of a strategic update on that issue.

It's a good question because we have been, as you said, talking for several quarters that while we'll look at costs, and we should look at costs and become more efficient, we're more than reluctant to take out infrastructure, and that hasn't changed, so we are looking at our offices, are they in the right place, do they have the right management, can we do some things to make them more productive, but in the net -- or the macropart of it all, no, we're not going to be changing our infrastructure.

Main a year from now we need to be thinking about that, about the there are enough independent cases N U.S. and enough indications in other parts of the world that to have kept the infrastructure in place and grown it slightly in a strategic way, to now start taking it out is, I believe, some very short-term thinking, and we're not going to go there.

Okay.

Thanks a lot.

Yep.

Thank you.

And our next question comes from Fred McCrea with TWP.

You may ask your question.

Good morning, gentlemen.

Good morning, Fred.

Quick question on follow-up to actually Marta.

I think you talked a little bit at least domestically on the split you're seeing right now between the light industrial volumes and clerical volumes and then how that compared to the peak of the last cycle.

If you look at overall light industrial volumes, you'll know that we are talking about growth that had been growing in the 13% range over the last up couple of quarters anyway, and certainly that, as the U.S. business started to slow, that certainly is where we saw the slowing overall in our overall mix, so as we made our way through the quarter, we did see some growth in the quarter but certainly that was declining for the quarter overall I'll call it modest growth within that group, so certainly it's the manufacturing side of the economy that's seeing the weakening demand for our advises.

How does that stack up in terms of absolute numbers in term of the peak of the last cycle in the absolute mix between light industrial and clerical?

the other cycles which all acted a little differently, I rally feel as though we are past being able to compare this cycle to the '91 cycle.

That comparison looked very compelling in about June of '01 and very compelling in about September, October of '02.

They were reacting the same way.

If you were to zero out the recovery and saying having start the downturn and start the up turn and then take the '91 recession to this current recession with an index of zero at that starting point, you would clearly see on graphs, which we've done, that this has acted very differently.

So we are in some unchartered water, but at the same time the basics of what would happen in a recovery, which is light industrial starting to come back, office lagging that, we are seeing professional, particularly engineering and now a little IT starting to come back.

It has been coming back.

And my sense is what we've seen, I have not seen any data on this, but I would sense that we've seen some inventory depletion because what's happening is that manufacturers just aren't willing to fill those inventories as those inventories deplete, we going to see another burst or potentially another burst and then if it's sustainable we'll see a normal recovery l if not, we'll see in the pul back like we saw in June.

Thanks very much.

Thank you p and our next question comes from Jeff sill ber with Harris, Nesbit Gerard.

You can ask your question.

Good morning.

I know this is a relatively small region for you bust but I was curious about your comments in Canada.

From what we've been hearing economically the Canadian economy is probably moving in the wrong direction, and I think you said Canada did relatively well in the quarter.

If you can give as a little more color on that, I'd appreciate it.

It's hard for me to follow autopsy 64 countries, but actually Canada, as I understand, very recently hit a little bit of a couple of stumbles here or there, but actually it's been doing a little bit better from an economy perspective.

Didn't feel some of the things that the U.S.

As a result, if you were to compare our results and asked and answered Canada compared to the results in the U.S., they would be slightly better.

Also, we are working off some comparables that are a little different.

We had some major clients in Canada that over the last year, last year particularly, made some bold moves down.

So, yes, Canada is being managed very effectively.

We've reduced some costs, and we believe we are in positive territory and starting to move forward in that.

Mike can anything to add to that some.

No, I think that's right.

We've made some good structural changes there given the fact that the market really, really came down going back two years ago and now we're seeing some of the fruits of some of the terrific management up in Canada, frankly, and we're seeing some -- we're seeing growth in Canada.

Mid [single] digit type growth in the second quarter, slightly, slightly weaker than what we had seen in the prior two quarters but still good growth there and good profitability.

Okay.

Great.

One quick followup.

I'm just curious in terms of Holland what it represents as a percentage of your EMEA region.

If you look at it as a percent of that region, you'll be looking at something upper single digit range in percentage of EMEA overall on the revenue side.

From an overall profitability side last year, it would be significantly more than that, you'd be looking at something closer to start to push 25 to 30%.

That's helpful.

Thanks a lot.

Thank you and our next question comes from Greg Cappelli with Credit Suisse First Boston.

Just to follow up on the guidance that you offered for the quarter and basing that on where sort of the most recent trends, you gave the monthly trends that you'd seen in the U.S.

Could you offer us a little perspective on sort of where you exited the quarter in some of the other markets just to frame that guidance for us a little bit better?

Mike, why don't you talk maybe about France which is one of the drivers?

Yeah, I did hit on, I did hit on France as well earlier, which France we did -- we did exit the quarter being down 1% in June, and if you go to the other markets within Europe on a constant currency basis we were down almost 3% in the second quarter, and that was frankly pretty stable across the quarter.

So there wasn't a real change.

So as we looked to the third quarter, as I said, I would say we're not looking for a turn there, and we look for something similar to that.

Other -- the other region was up second quarter 9-1/2% in constant currency and, again, that was pretty stable performance throughout the quarter, so I'd be looking for something in that range in the third quarter as well.

Okay.

Thank you.

And just as a follow-up on the French margin, just sort of systemically here it's been higher than expectations for a while, and your ability to sustain the margin there for a longer period of time, at least as far as we expected relative to where it might have been last year, just some general thoughts on where that margin could be long-term and how sustainable we are at these levels here.

Well, as Jeff mentioned earlier, the focus is clearly on pricing, and I think our management team there has done an excellent job making sure that our services are properly valued.

Meanwhile, they've also done a very good job in controlling costs.

Overall last year our overall operating margin in France came in at 3.7%, which -- and we have seen some improvement there over the last couple of years.

We're always looking to improve, but I think there is a point in the French market where there's going to be a ceiling as well.

So we certainly, you know, would like to see a margin in France and in the 3-1/2 to 4% range, and we think in that Market that's a sensible range given the mix of business.

We we're always looking for ways to enhance that but given the existing mix today, that's the range that we think is sensible.

Thanks a lot, mike.

Thank you.

And our next question comes from Chris Gutek with Morgan Stanley.

Chris Gutek Good morning, Jeff and Mike.

Hello.

Jeff, if you could please elaborate more onJapan and Germany particularly if you could does close the revenue and margin in those two regions and in the context of regulatory changes, what you would expect the revenues to do going into next year. . .

Let's take Japan first.

Japan, what we're seeing now is part of a longer secular trend that had started when they opened up some additional job categories now almost three years ago.

And as well we are seeing some of the attitudes of businesses as well as individuals change, which is giving us some positive moving forwards.

When we look at the deregulation that would go into effect April 1st the end of March, which allows us to do light industrial, we see it as a great opportunity, but we see it as an opportunity that we really have to proceed with understanding the market very well.

And, you know, the phase 1 of the improvement of this allows for a temporary only to work at a company for one year, and in terms of Japanese, that is considered a short or shorter assignment.

So we will see some slight increase based on that.

You will see some expenses that we would incur on opening light manufacturing offices.

But until they move that duration of mission from one year to three year, which would be a year after that, only then would see what we think would be more robust growth.

Having said that, it's a good market for us now.

It's growing.

Our margins are actually improving.

Our gross margins are improving.

And our sales force is focused and we've added some feet on the street.

In Germany there has been just enough changes to give us a little win, but I suspect that what we've done is focused on certainly accounts and focus owed certain regions, and as a result, you know, our sense is we're doing a little bit better than the mark, and I don't see the German market right now having the -- they don't have as much positive wind at their back as the Japanese market would from asecular perspective because they are working against such a difficult economy right now.

So I look at both Germany and Japan for 2004, particularly if we could get a little bit better economy, it would really give those two countries a nice boost and right now both of them have been able to manage nicely with bringing down a nice operating profit.

and then -- thanks Jeff.

And just a quick question on the capital allocation strategy.

Mike mentioned the coverage rash I don't has continued to improve am I'm curious what you can see from a net growth perspective before you guys dividends from share repurchases.

I think our view would be in terms of capital and capital useages.

We're certainly comfortable with the balance sheet, as I mentioned earlier, it's strong.

I think you know, that being said, I think any near-term cash we use to retire still bring some of the leverage down off the balance sheet and just really give us more strength and a little bit more flexibility, so I think that would be the first priority.

Certainly we're always reviewing dividend policy but at this point in time I don't anticipate any change given our overall capital structure.

Thanks.

Last question, please.

Thank you.

Sir.

And our next question comes from Mark Marcon with Wachovia Securities.

You may ask your question.

Good morning, Jeff and Mike.

Two questions.

First of all, with regards to the U.S. and France, you know, you've done a great job in terms of getting the operating margins up without a lot of revenue growth here.

I'm wondering if things were to turn around cyclically, how much excess capacity do you have, how much the could margins go up to kind of that 3-1/2 to 4% range that you were talking about?

What sort of revenue growth would you need to get there?

And I've got a follow-up.

Yes.

That's a bit of an academic exercise.

Sure.

But it's an important question.

Certainly, there is a difference between the U.S. and France and you can see that just by the operating margins that both of them are currently at today, and really that's because in the U.S. market this recession hit a lot harder in terms of demand for our services and therefore revenue has fall than quite a bit, so there certainly is more capacity, if you will, much more capacity in the U.S. than there would be in the French market.

And as you look to the U.S., in taking our margins, our overall operating margins which were at 1-1/2% last year and we're starting to see some improvement this year, if we could see a two to three years of good double digit growth, you know, certainly 3-1/2% or better, we'd like to think better, would be in our sights.

The real question will be is this going to ramp up slowly and see 10 to 15% growth, let's say, or is it going to be like the last recession, which was a bit more dramatic.

You know, I'll be more on the cautious side and say,, you know, if we see lower double digit growth, I think even in a she-year period of time we can see those operating margins come back, back to more normalized state which would be no, more in the 3-1/2 to 4% range for the U.S.

and in France?

In the case of France, as I mentioned earlier, I think overall operating margins are close to where we would see that mark.

Certainly if we had some uptick, we would have in some initial leverage but there isn't a lot of capacity so, you know, on an uptick certainly we're going to have some leverage coming in and that would help drive operating margins but not all of that would be sustainable.

It isn't success significant excess capacity within that market.

They've been able to really leverage, because they haven't seen the decline, we've been able to bring costs down commensurately and don't have as much capacity there.

I might add, it would be difficult, I mean, they're coming in over the 3-5 threshold right now so it's difficult to move up from that, but as the market grows and if we can keep that at that level or move it up slightly, that's a victory because at the end of the day we want money, and a big are top line at 3.6 yields no, sir money for our shareholders, and if we can keep that in line, move EMEA, Asia pack and the U.S. to where they can be, we are as bullish on the story as we've been before.

Right.

And then in terms of what's happened in Holland, I think this is an important point, what are the differences there that would lead you to believe that you couldn't have the same sort of gross margin compression there in the rest of Europe, if Europe were to get weaker?

I think we've already seen some of that gross margin compression, and what we're doing now is to analyze what exactly is causing some of that, what of that is pricing, half that is just general market, some of the general mark trends so we can see how much of it will come back.

Needless to say perm placement and some of the other things that can affect that market are much more softer than before.

So we believe that the north, which has always had higher gross margins, will drop, and may not come back, and will not come back to where they were before but they're not going to drop to a level of France or not going to drop to a level of Italy over the next few years.

and one of the big drivers of the decline in gross margin in Holland is just the contract in the mark, and, you know, we're not seeing that in many of the other markets I will.

While we've maybe seen some weakness, we're not seeing that type of contraction, the overall market is down year over year in double digits, and, you know, this is the third year that that market has been declining.

So that is one of the factors that has put pressure on the Dutch market that I think is unique.

and those margins are significantly higher than where the rest of the -- rest of Europe is and so, therefore, probably don't have as much to get, right?

Certainly it's one of the higher if not the highest market in terms of overall gross margins and certainly there is, as a result, I guess a little bit more exposure for decline there.

Got it.

Great, thank you.

Okay.

Thank you.

All right.

Thank you, everyone.

I'd like to thank everyone for joining today's conference calm you may now disconnect from the audio portion.

Have a great day.