ManpowerGroup Inc (MAN) 2003 Q3 法說會逐字稿

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The conference is about to begin.

Hello and welcome to the Manpower third quarter earnings results tele conference.

Following the presentation, there will be a formal question-and-answer session.

And instructions will be given at that time.

At the request of the company, this conference is being recorded, for instant replay purposes.

And now I would like to turn the conference over to the Chairman and CEO, Mr. Jeff Joerres.

Sir, you may begin.

Thank you.

Good morning.

And welcome to the third quarter conference call for 2003.

As I've done in the past I'm joined by Mike Van Handel, our Executive Vice President and Chief Financial Officer.

I'll go over the results in general and then discuss the segments in more detail.

Mike will spend some time going over the financial results and items that affected the quarter, as well as any future items that will affect the fourth quarter.

Before we move into the main part of the conference call, I'd like to have Mike read 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 & Exchange Commission filings of the company, which information is incorporated herein by reference.

For a reconciliation of the non GAAP financial measures mentioned in this conference call to the most comparable financial measures calculated in accordance with GAAP please see our Website at www.investor.manpower.com.

Thanks Mike.

Mike's fighting a cold so during the call, if you hear a cough or a sneeze, no need to worry, he's just fighting a cold.

The third quarter was an example of the leverage that Manpower can achieve.

We entered the quarter cautiously based on the recent trends that we were seeing regarding our top line.

As it turned out in all areas we were fairly close but when we -- are positioned at the leverage point small top line effects up or down have a sizable impact on earnings.

And in fact we had several small events that made the quarter a much stronger quarter than we had anticipated.

Because there were small, it doesn't mean that they were not difficult.

And I want to underscore that.

The Manpower team was able to perform extremely well operationally in managing costs, working with clients to explain the value of Manpower.

And as a result we were able to exit the quarter with a good result.

We entered the third quarter as I mentioned earlier concerned about revenue trends, and we are still somewhat concerned about the sustainability of the trends that we are seeing but they are slightly more positive in general than when we had exited the second quarter.

We anticipated the earnings for the third quarter to be between 42 and 46 cents a share with a four cent impact for the currency.

In fact the quarter ended at 56 cents a sharewith a 7 cent currency impact.

France and EMEA were slightly higher in revenue than anticipated and the entire organization was able to control costs and manage gross margin which allowed us to achieve seven cents more in earnings than we anticipated.

Additional, we picked up two cents, as you may have noticed on the income tax line as our estimated tax for the year was lowered to 38% from 39%.

There were several different areas that contributed to the performance in the quarter.

I'd like to talk about those when we get to the segments however they were at the top line if you will, France, Japan, Jefferson Wells, Elan, Mexico, Canada and a few others.

Our revenue for the quarter in dollars was $3.2 billion up 11% in U.S. dollars or more importantly 1.8% in constant currency.

Our system wide sales were $3.5 billion in U.S. dollars.

Acquisitions once again had a negligible effect of probably around .2% maybe a little less of revenue.

A closely watched area for the organization is our gross profit line which remains stable on a sequential basis.

As we anticipated our gross profit margin of 17.2% declined only ten basis points from the second quarter, reflecting normal seasonal changes in the business mix.

France is a larger component to the third quarter earnings and therefore when you mix that together you get a little bit of a seasonal effect on our GP.

Not unlike previous quarters, we should highlight that pricing pressures are intense across all geographies as our customers and prospects are pressured to hold their pricing for products and services and in some cases actually decrease price.

This in turn is making our job all the more difficult to hold onto our pricing but as I've said, we've been able to do that.

We continue to manage expenses very effectively.

I want to underscore that managing it more effectively is more difficult than ever before, because we continue to see mixed signals in the marketplace.

Some weeks are up, some weeks are down, some markets continue -- we see continuing to go down.

While others we're seeing a trend of acceleration.

What this means is that our entire team across the world must stay focused on the strategies that we have in place.

A strategy of increasing the efficiency and productivity regardless of what's happening in the marketplace.

While at the same time, not reducing our infrastructure.

We've been able to maintain our infrastructure and in many places including this quarter we actually increased our footprint which positions us well for the future.

From a secular perspective, we have to say that we're more optimistic than ever, as companies intentions to use flexible staffing is actually going up.

When we've talked to clients and customers, they really see their ability to use Manpower and firms like ours as an integral part of their future plans.

But in the meantime we must and have to continue to increase our productivity and efficiency and hold down costs while continually improving the Manpower brand.

In fact in many ways we've actually increased our presence.

We've won awards in fact this morning we are with secretary Khao in the U.S. receiving awards in some of the work we've done with the disabled in putting them to work.

Our brand has become stronger and more powerful over the year.

Overall, the market is working in a saw tooth manner up and down up and down with no break through or upward trend to really speak of.

It should also be understood that at this time last year we were experiencing sizable growth in the U.S.

In September of 2002 our industrial sales were up nearly 20%.

And our light industrial sales were up over 10%.

Even with this more difficult comparables we are beginning to see some encouraging signs.

The activity that we're seeing in the U.S., this saw-toothing which is happening in all markets, France, EMEA as well as Asia Pacific, leads us to believe that we are closer than ever to a recovery.

But we are unable to call an end to the challenges in the labor market.

While we might be seeing recoveries in the economy or stock markets or other things, we are seeing that the labor market and the impact of productivity on other things is still holding back what we would call a break-through.

Which means as we look to the fourth quarter, we also must approach it with some caution.

Based on the trends that have outlined in the overall economic trends we are anticipating the fourth quarter to be in the range of 49 to 53 cents, with an impact of seven cents for currency.

This would bring the full year earnings to the range of $1.61 to $1.65.

Now I'd like to move into the segment detail.

I'll start with the U.S.

The U.S. finished the quarter with revenues slightly down at minus 2.4%.

As I stated earlier, we are up against some hefty comparables from last year.

In a softer labor market.

And therefore I would put it in the category of good performance.

Our team in the U.S. has taken the pricing discipline to heart, and are passing on some accounts in order for us to maintain our profitability, and actually maintain our stature within the industry of delivering real value to our customers.

Revenue finished just over $500 million with system wide sales at $756 million.

We also saw year over year billable hour trends during the quarter get slightly more positive.

As you know one of the numbers we continue to look at is the activity in the industrial and light industrial area.

The light industrial activity looks like it bottomed out in July.

And since then, there's been a steady come back that's been happening.

This is similar to the pattern, though not quite as strong as we had experienced in 2002.

Our office business has continued to languish.

I think that's where companies are just saying no to any improvement or I should say increase in labor.

So we really see no visible signs of improvements in the office business at this time.

Our costs were well controlled in the U.S. and our pricing remains stabilized which gives us a operating unit of $11 million, EBIT of 2.2, up 10 basis points from last quarter however down from last year by 20 basis points.

The U.S. is a good example of a leverage that exists within the organization.

As we start to see more of the top line with the infrastructure in place, we can drive profitability.

And I want to put that in perspective.

While we were down 2.4% in sales from the prior year, we were actually able to achieve more operating profit than we were in the second quarter.

And again, this is primarily because we're really filling in existing infrastructure in the U.S., and as a result, more drops to the bottom line.

So you can see the kind of earnings power that we have in an environment where we start to increase our billable hours.

Moving on to really the super star within the family is the Manpower France operation who once again did an outstanding job.

In an environment that is very much in a steady state.

And what I mean by that is we've not really seen growth over an extended period of time.

In fact it's been declining slightly in the last few weeks.

Having said that, we've been able to grow our top line in the third quarter of 15.9% in U.S. dollars and 1.3% in local currency.

We've maintained strong pricing discipline also in France and our costs are extremely well controlled.

This yielded just a tremendous 4% operating unit profit up 40 basis points from last quarter and 30 basis points from a year ago.

It was strong performance across the board.

As I mentioned, we are seeing the overall economy in France be very much in a precarious spot.

Not moving forward, but really not moving backward.

So I would probably describe it best as somewhat directionless right now.

Really seeing what the economy is going to do, but in the meantime, we're going to ignore the economy and continue to execute in the superb fashion that our French organization has.

We suspect that we might be losing a little market share which is not alarming to us in France.

We've been outpacing the market now for the last 18 months so not only have we anniversaried that but we are disciplined in our pricing.

As a result we might be seeing a little slight decline in our top line relative to the marketplace.

As we discussed many times our strategy is to grow our business.

But only at acceptable levels of profitability and return to you, our shareholders.

The EMEA segment which includes Europe minus France was up .1% in constant currency, 10% in U.S. dollars bringing the total to nearly $1 billion in sales for the third quarter.

Some of the highlights within the quarter was continued good performance by Germany which is up nearly double digit top line growth in constant currency and Italy which continues to move forward despite more of a difficult operating environment.

Sweden and Norway continue to have challenges both on top lines and bottom lines.

We work very hard to make the appropriate adjustments in both geographies and were continuing to exceed the performance of our competitors but it is a difficult marketplace and will probably take a little bit longer to come back than a few of the other European countries.

The United Kingdom which represents Manpower and Brook Street primarily is still challenged, particularly the Manpower brand in the U.K.

As the large accounts continue to put pricing pressure on the industry, the local business which is primarily Brook Street business was up on the top line in mid single digits.

We continue to invest in Brook Street offices, as we are committed to expanding our, if you will, local or noncontract retail business.

And Brook Street is a great vehicle to do that in the U.K.

Overall, for EMEA, our sense is that the fourth quarter will not see a major change in our year-over-year trends from the third quarter on the top line as if overall marketplace continues to be a bit of a struggle The other operations segment produced very good returns for us with operating unit profit of 1.8%.

Compared to last year at .8%.

This primarily is a good example of where small increases can make a substantial difference in the overall picture.

Japan, Australia, Jefferson Wells, Mexico and Canada all produced nice top line as well as even better line bottom line results.

We're continuing to see good activity and growth in the Japanese market.

Which is up nearly 10% in revenue and substantially more in profit.

We are now just going through our final plans in preparation for the Japanese market to open its laws to allow temporary companies to place industrial and light industrial workers.

If you recall that will not have any substantial effect on us this year, it will only come until next year.

We do believe that there will be investments of course in new office locations as well as additional personnel but they will have very good returns.

We will do this organically and the new office openings will take a few months to be profitable or more and you'll see those plans rolling out next quarter and into the beginning of next year.

Jefferson Wells started to feel slight revenue momentum within the quarter.

However like other businesses we are operating it is a bit premature any to call a few months in a row any kind of sustainable trend.

We are optimistic regarding what we're seeing and we do believe we can roll into the fourth quarter and beyond with some momentum.

Jefferson Wells is extremely well positioned with an expansive office network, and absolutely expert staff.

We are continuing to win large Sarbanes-Oxley engagements which is improving our brand and strength monthly.

The third quarter results are now well behind us.

We achieved a tremendous amount when you consider the consistent head wins that wind that we've been dealing with.

As I talked about we continue to focus on our strategies and continue to be diligent about the costs which leads us to an environment in which very small but collectively very substantial changes can make a great deal of impact to our earnings and our shareholders.

We continue to work diligently on all of our strategies that we've outlined for sometime.

I'll just highlight a few.

Under the technology strategy we've improved our technology dramatically over the past several years.

Implementing systems that have improved our productivity, winning awards in CIO Magazine as well as other places.

Our technology and the way we face customers as well as the way we create efficiencies within our organization is critical now, and it will be critical in the future.

This morning we announced the next version of our top selling alter source product.

The product will now be powered by PeopleSoft.

For many quarters we have talked about how we're not a software house nor do we want to be a software house.

But we have been producing and supporting the best product in the marketplace, operating in more countries, with more customers and having more business running through our E-Commerce system than any other product in the industry.

But now we believe it's time to turn our expertise, our domain knowledge, if you will, and the industry knowledge, over to PeopleSoft, who is by far most powerful and well respected organization in the area of HR.

And for that matter, procurement of HR-related services.

We also believe this model is very healthy for the industry at large.

The new product will be a software license model as opposed to a percent per transaction.

Or a percent per person placed.

Which the latter is not the healthiest model for our customers as they do not see the benefits from the software.

As with all of our efforts, Manpower superior services at the core of our offerings and during the conversion from alter source 02 to the new Ultra Source no customer who is currently using Ultra Source, whether it be in Japan, Netherlands Sweden, any place in Europe, or the multiple companies in the U.S. will be left behind, The migration will be smooth, and in some cases maybe slower than what we would do if we were not so sensitive to our customers needs on a global basis.

We are very excited about the alter source impact on the market and are looking forward to having alter source powered by PeopleSoft.

We'll continue to implement systems that create efficiency, we're nearly halfway through the implementation of our new back office in the U.S. and it is already having positive implications for efficiency and productivity.

Regarding the revenue strategy, which is a very key one at this time, you can clearly see that our strategy of working with the right prospects and customers and by focusing on the balance between local and major accounts, is, and also ensuring that our specialty business is contributing to the overall business, actually return quite nicely this quarter.

We've been able to stabilize our overall gross profit and that was not without a tremendous amount of effort from our team across the world.

It's focused, it's disciplined and we execute our strategies every day.

That's the overview of our strategic initiatives and our geographies.

What I'd like to do now is to turn it over to Mike for discussion of the financials.

Mike.

Okay.

Let me begin today by talking -- by taking a look at our balance sheet.

Our balance sheet was strong at the end of the quarter and improved slightly from the second quarter as a result of good cash flow performance.

Cash improved $35.4 million during the quarter to $287.5 million.

Total debt at the end of the quarter was $802.2 million a reduction of $26.7 million during the quarter.

With the higher earnings level and lower debt levels we have also seen an improvement in many of our credit ratios.

Our net interest coverage ratio remains above 7.5 times on a trailing 12 month basis.

Our total debt to total cap also improved during the year and currently stands at 40% compared to 45% at the end of last year.

Our accounts receivable increased $138.5 million during the quarter of which $35 million represents the impact of changing currencies and the balance primarily relates to the usual seasonal increase in business that we see in the third quarter.

Accounts receivable days sales outstanding continues to be managed well but has increased by one day over the prior year.

Roughly half of that one day increase relates to business mix given the impact from currencies and the other half relates to a slight slowing of collections in a few of our smaller markets.

Our free cash flow defined as cash from operating activities less capital expenditures was strong for the quarter at $62.9 million compared to $22.8 million a year ago.

This brings our September year to date free cash flow to a total of $56.8 million.

Our capital expenditures are in line with last year just under $40 million.

A portion of this capital expenditure has funded the investment in 120 new offices so far this year, while we have been careful in selecting our new office investments we continue to see opportunity in the market for further openings.

Next let me provide more detail on our guidance for the fourth quarter.

Earnings per share range of 49 to 53 cents reflects the continuation of revenue trends that we saw late in the third quarter and in the beginning of the fourth quarter.

Overall on a consolidated basis we expect slight year-over-year revenue growth in constant currency similar to that that we saw in the second and third quarter.

Based upon current exchange rates this would imply a U.S. dollar reported revenue growth in the low double digit range.

We expect year-over-year revenue growth to be down slightly in the U.S. and we expect revenue in France and the EMEA region to range between slightly negative to slightly positive on a constant currency basis.

We continue to expect a strong performance from our other operations segment with revenue growth in the low double digit range in constant currency.

We expect our overall gross margin to experience the usual seasonal pickup from the third to the fourth quarter, but also expect that it will continue to lag the prior year as it has for the past few quarters.

We have lowered our estimated in income tax rate from the year from 39% to 38% based upon our forecasted mix of profits from various geographies and some effective tax planning.

As Jeff mentioned earlier our earnings estimate inclusion anticipate currency effect of 7 cents, euro exchange rate in the range of $1.16 to $1.17, roughly 16% ahead of where it was last year.

Lastly as a reminder, we account for stock option under APB No. 125, as we expense these options under statement 123 the earnings charge per quarter would have been two cents a share.

Jeff.

Okay thank you Mike with that we'll open it up to questions.

Before I do that I'm going to try this again to limit it to one question, so that way there we can get more people involved and maybe get a more diverse section of questions.

So with that let's open it up to questions.

Thank you.

If anyone would like to ask a question at this time simply press star one on your touch tone phone.

To cancel your question please press star two.

Star 1 to ask a question and star 2 to cancel.

Thank you and our first question comes from Andrew Steinerman of Bear Stearns.

Good morning gentlemen.

My question is could you just give us a little more detail about gross margin?

It sounds like you guys are optimistic that we've bottomed out here, we were slipping earlier this year.

If you could just give us sort of comments, sort of maybe country by country.

You know, sort of where directionally we stand and what gives us the confidence that sort of gross margin should see a normal seasonal up tick in the fourth quarter?

Sure, let me start and then I'll let Jeff maybe add a little more color to it.

In terms of overall gross margins we did see it go from 17.3 down to 17.2 during the quarter.

And I'll stress what Jeff mentioned, that really was nothing more than the seasonal impact that we ordinarily see as France has their largest seasonal revenue quarter in the third quarter.

That pushes the mix a little bit differently.

But really as you go market by market, as you look underneath, we really would see a stable trend from an overall gross profit margin.

As Jeff said, our operations are working extremely hard to hold onto the margin level and really without exception, we're holding the line on the overall gross margin overall.

Certainly, relative to last year, you know, we've had a couple of challenges in terms of increases in cost.

We haven't fully been able to pass those cost increases on which is part of reason why our gross margins still lag from where we were a year ago but I think we've done exceptionally well given the environment.

Gross margins in the U.S. were sequentially up or flat?

Gross margins in the U.S. sequentially were down slightly.

But that's typical.

We have one more holiday in the second quarter, so taking the impact of that holiday, it would have been sequentially flat.

Okay, thanks for the clarification.

Thank you.

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

Good morning.

I was wondering if you could talk a little bit about the experience that you're seeing in the U.S.

You know, we've clearly gotten some labor market data that would suggest that things are starting to pick up, you know, the economy looks like its on track for four-plus percent GDP growth and yet you're down, you know, 2% year-over-year in the U.S., you know you mentioned it was primarily clerical and industrial starting to pick up.

Wondering if you could talk a little bit about the monthly trends that you are seeing in detail and then you know, what you think some of those -- you know, when things should start turning around, particularly given your comments about you know, the secular trend towards flexible staffing is certainly alive and well and that your clients are saying they're going to start picking up their usage of temp staffing.

All right.

It is a very important question, because when we look at the quarter, which was a solid quarter, you see the U.S. down 2.5%.

And we had anticipated some of that when we exited the second quarter, the trends were really starting to get soft.

So we went into the third quarter with some pretty difficult numbers that were showing, you know, overall something like on the top line between five and 6% down in the month of July.

We started to see that move up through the quarter.

But what we are clearly seeing is that our customers and our prospects are very much using staffing, whether it be their own staffing, our staffing, part-time work, or independent contractors, in a very judicious way.

There is still some productivity impacts that are happening.

There is still just not enough confidence in the demand for products for them to really start to see any robust hiring.

Our survey, which surveys the Manpower survey surveys full-time staffing as well as temporary requirements up for 16,000 companies, is showing that companies are being a little bit more optimistic but optimistic and cautious can still work together.

And that's what we're seeing.

We're also seeing a bit of a decoupling at least for now between GDP growth and labor growth.

And that can only be described by productivity.

And I believe productivity, as well as just, you know, doing more with less, which might be one way of getting the productivity, is having the most substantial effect, as opposed to any kind of off shoring.

We hear about off shoring.

We've experienced it in some areas.

But we really see that more -- much more of an ascent.

And as a result, it is not affecting us immediately, it would have more of an impact at us in the future.

So the U.S. is not out of the woods if you will.

We've seen European countries be a bit more flat, didn't come down as hard, and start to level out a little bit more.

The U.S. has been hurt now, it's over three years.

We started to see the downturn in October of 2000, September-October of 2000.

So we're just coming on three years.

And as a result it's going to take a little while for us to pull out of this.

I mean, but the monthly trends are getting a little bit better?

The monthly trends are getting better.

They're getting better in the industrial and light industrial, office is pretty much the same.

So you know, we went -- we basically have gone from a mid single digit minus in light industrial and industrial at the beginning, to about flat at the end of the quarter.

So we've got some work to do.

But mid digits to flat is a trend that we'll have to see if it continues into the fourth quarter.

And the clients are saying that when business truly picks up and they need more staff they're turning more to temps?

That's absolutely what we're hearing.

They're going to hold their staff down.

They want to remain flexible, and as a result the secular trends we feel very optimistic about.

Great job on the quarter.

Thank you.

Thank you.

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

Good morning Jeff and Mike and good job managing the business in this environment.

Last quarter you seemed more concerned about EMEA than you appeared today.

I know it is a diverse group of areas but could you walk you us through the changes that occurred during the third quarter, either changes you made, changes specific to the environment that might be making you a little bit more optimistic today?

Well, I think, you know, we have seen some slight signs in a few of the countries there that they've -- they certainly have touched bottom and seem to be just starting to turn the corner a bit.

In fact in the case of Germany, we've seen a strong performance now for the last several quarters, approaching double-digit type growth.

So there we have actually seen quite a good performance.

We've seen a few other countries turn up just a little bit.

Italy looks slightly stronger this quarter.

But again, you've got to look fairly closely.

You know certainly last quarter, we discussed a little bit some of our challenges on the GP side within the Dutch market.

And while those challenges are still there, we're certainly working and trying to manage the business the best we can in a market that still is contracting a bit.

So you know, are we slightly more optimistic in the EMEA market, I would say yes.

But just slightly.

There still is a lot of work in some of those countries, until we start to see the other side.

And would you characterize the Netherlands at this point as stable, or you know, is it still sort of moving downward?

I would call it stable from a GP standpoint.

Stable to perhaps maybe clawing a little bit of it back.

From an overall revenue standpoint, it's still contracting toward the double-digit range in terms of contraction.

But that has stabilized.

It is not getting worse.

It is perhaps getting a little bit better.

The rate of contraction is getting a little bit better so I would say the trend line is certainly stable to slightly improving from a year over year revenue standpoint.

Thank you very much.

I appreciate it.

Thank you.

Thank you.

Our next question comes from Kelly Flynn of UBS.

Thanks.

Try to wrap this all into one question.

The question is related to France.

Hoping you could give the month to month trends there and then maybe shed some light on or little bit more light on why the margin extended sequentially and what happened with gross profit versus SG&A and maybe in the context of that maybe touch on the minimum wage and the Social Security situation.

Thanks.

Okay.

Why don't I start with the trends, and maybe Jeff will pick up with some of the other.

That was a long question.

Right.

Sorry about that.

You get it in one question, that's very good.

In terms of trends, as Jeff said we did see a little bit of weakening during the quarter.

In fact, July had shown some strength relative to May and June, and we had seen average daily revenue growth in July just under 3%, and we exited the quarter in France just under 1% growth.

So you can see, it has weakened a little bit.

I would say while the trend appears to be declining, it seems to have gone a bit side ways.

I would say it's a bit choppy right now and that's why as we look forward to the fourth quarter, our guidance is, it could be a little bit -- slightly negative to slightly positive because it's bouncing around a little bit at this stage in terms of overall revenue trend.

Well -- and I also wand to add to that that we've been talking about for several quarters now that we've been outpacing as much as one to 3.5%, the marketplace.

And the French marketplace is a very tight marketplace, with the top three staffing companies having a very large percent of market share.

So it moves back and forth a little.

We have introduced some additional pricing disciplines within the market, and as a result, we might be a little less than the overall trend.

But what we are seeing is that GDP which will probably come in I think somewhere around .5 something like that for the fourth quarter, and we do see our business correlate more closely with GDP growth in France than it is in the U.S. right now.

So as a result, we would see sideways more than anything else at this time.

But we don't have enough experience is what happens at the end of December with the impact of 35-hour work week, how many people take extended holidays or shut down, some of those things.

We experienced it last year, we just haven't experienced it the year before that.

Which leads me to the Social Security side of it.

You know, we've got that pretty much behind us.

The new consolidation of minimum wages, there has been some -- just a little conversation about what should we do about the 35-hour work week, should we enforce it in small businesses, large businesses are currently doing it, and we don't see right now any effect on anything that is being talked about.

And it is only being talked about.

So we see no real imminent, impending changes related to Social Security law. 35-hour work week law or minimum wage law.

Okay.

What about the margin side?

Oh, I missed that.

Yeah, sorry.

Mike, you want to cover that.

Margins in France have been stable.

Overall.

They continue to do a very nice job on the pricing side, so you know, we're looking at sequentially, stable margins in year over year we're about where we were a year ago as well.

So they've done a very nice job just maintaining the margin and managing all the elements that go into that in their business there.

Okay.

Thanks a lot.

Thank you.

Our next question comes from Greg Cappelli of CSFB.

Good morning, guys it's Greg and Josh.

Hi Greg.

Jeff, you definitely seem to emphasize pricing a little bit more it seemed like on this call and we were just curious.

Is it the usual, the usual suspects on the pricing front, you're seeing new players, are there any other reasons you know for the perhaps even you know up tick in pricing pressure?

Well, I'm not sure if there's an up tick.

I'm not sure how much more pressure you can get.

You can always get more.

But the reason I emphasized it is as I've said before, the longer we kind of go into this protracted elongated recovery, the more difficult it is, as pricing pressures really persist, and companies have a hard time looking at value, and they just go to a provider who provides low-end value, and will have a price commensurate to that.

So I'm not sure if pricing pressures are increasing.

Last quarter they were pretty intense.

What we're hearing from our field across almost all geographies is that it is intense.

And as a result, we've had to pass on some accounts that have actually said, all you need to do is to go one or two points above this bid leer and you can have the business.

But even one or two points above that isn't acceptable to us.

So we have had to unfortunately walk away from some of those.

But we feel as if there is still enough other business out there that in constant currency our overall growth rate of 1.3% is still very good considering the discipline on pricing.

So overall, pricing pressures not that much different than second quarter.

It's just that they're constant and they're intense.

And we see some firms just wanting to, you know, get people out on assignment regardless of whether they're making change in the process or making money.

Okay, and given that, you still think the sustainable margin in the U.S. can be 3.5 to 4%?

I think that was your previous --

Yeah, we're talking about over a period of time no doubt.

With mix of business of where we're going, mixed with local, mixed with specialty, how we're moving rapidly into some of the direct hire and permanent placement business.

So you know, it's not without its challenges.

But that's not something I lay awake at night thinking about.

Thanks a lot.

Appreciate the answers.

All right.

Thank you.

Our next question comes from Adam Waldo, Lehman Brothers.

I'm Adam Waldo, Lehman Brothers, I'm a man and I haven't lost my spouse yet.

That's got to be the all-time best.

You know you guys do a nice jobobviously managing SG&A expense end of quarter France.

But was there anything else on a consolidated SG&A expense line, that caused really, you know, a flat constant currency, SG&A line in the quarter on 2% revenue growth?

Clearly that's where you outperformed our expectations.

There wasn't anything out of the ordinary to be honest Adam.

If you go through geography by geography, the U.S. effectively held on to their costs where they were.

Very little tick-up sequentially despite the seasonality as Jeff mentioned earlier and they're running cost below where they were prior years so I think the U.S. has really done an exceptional job holding on to costs and improving productivity where they need to.

France as well.

You know, we have some seasonal pickup in France but in that market, while costs have gone up a little bit sequentially, you know, they've been able to do that, still below where expenses were on a prior-year basis.

So they've been able to put on more volume compared to last year and they're still running expenses a couple percent below.

So nothing out of the ordinary.

But really, just good execution.

I want to add to that before you continue with some of the other markets, when I comes to France, what you're really seeing is a very good effort in productivity and efficiency.

You're seeing the ability to, even during a seasonal upturn in business, to be able to manage it with relatively the same staff.

And they're doing that by one, working really hard, and by two, by -- there's been some system changes over the period of the last year that has given them the ability to actually do more business with less people.

So you know, hopefully that will continue, and hopefully, that model which we are using as an example, for many other countries, is a way on a going-forward basis, we'll be able to achieve higher earnings, with one of the reasons being more productivity, not cutting cost.

How confident are you in the ability to sustain those SG&A relationships, implicitly as you look to the fourth quarter, and more importantly as you contemplate the level of office investment in light industrial, stand-alone branches in Japan going into 2004?

Yes, as we look to the fourth quarter, certainly costs will be well controlled.

We'll get the usual, you know, seasonal the leverage if you will because of the third quarter is the big quarter, we get the best leverage in the third quarter.

So just from a percentage standpoint, our per cents will go up as a percentage of revenue but in terms of overall cost I don't expect a substantial increase sequentially at all from a cost standpoint.

In fact, I think our expenses likely will go down slightly on a constant currency basis sequentially.

When you look at you know, sustainability, you know, clearly, we have markets that we have capacity in, some more than others.

So we do have upside leverage opportunity that clearly is sustainable, you know.

A market like the U.S. that has come off from its highs by more than 30%, while we've taken cost out we are still not running productivity measures there that we think are suitable for the business.

Now, that's where we're making the difficult decisions of markets we want to be in, we're going to be there.

Regardless of where we're getting the productivity we need today because we're going to keep that investment there, and be well-positioned for future growth.

And that's where you'll see some real good leverage, once we get into a good recovery.

Michael J. Van Handel : In terms -- you mentioned in terns of next year, certainly, you know, we'll continue to invest in new offices.

You know, we will be investing more in Japan.

We'll Will that have some impact?

Sure.

You know, I'm not prepared today to quantify that on an overall basis.

But you know, while it's going to be an important investment for the Japanese market, relative to the overall consolidated picture, I don't think you're going to see a very -- you know, a real significant impact.

Thanks a lot guys.

Thank you.

Thank you.

And our next question comes from Jeff Silber of Harris Nesbitt Gerard.

Good morning.

Two part question one is a quick follow-up from Adam's question.

Based on that I'm wondering what kind of operating margin assumptions you're using for your guidance in the fourth quarter and secondarily you had mentioned at the beginning of the call regarding the new arrangement with Ultrasource and PeopleSoft.

Would there be any revenue recognition moving from a software license model and what would that be?

Thanks.

I'll take the first and leave Jeff with the second.

In terms of overall operating margin guidance, looking at the company as a whole, you know, typically the third quarter is our peak operating margin, just given the seasonality of our business.

And given what we're looking at, from a top-line trend standpoint, I would think we could tick down a little bit from the 2.5% that we saw in the third quarter from an operating margin standpoint.

You know, if, in fact, the top line got more positive, than what we're forecasting at this point, sure, there would be opportunity for leverage and opportunity for a little bit stronger operating margin.

But given what we're seeing for top line right now, I would think we're going to -- we could see a slight sequential decline on the overall operating margin.

Regarding the PeopleSoft, no, it would be negligible at best.

There currently is transaction fees associated with some of our clients with Ultrasource and we switch more a to a license fee, it really would be not anything to really count.

And what we're attempting to do with this is to really say to our customers, and prospects, that you have access to a tool that is much more easily integrated because integration for a tool like this is what drives most of the efficiency and productivity, that it can be used for, you know, many different suppliers other than Manpower.

And as a result, what we're really looking at is to try to get ourselves out of the predicament of having to have charges to subcontractors and some of our partnerships that we have within the industry.

Which I really believe will be a welcome relief to the industry, and a situation and a model that is much more solidly based on the way the industry operates.

Okay, great, thanks.

Uh-huh.

Thank you.

Our next question comes from Fred McCrea of Thomas Weisel Partners.

Hi, Jeff, good morning.

Hello Fred.

Quick question in terms of the U.S. and I wanted to just follow up there on a couple of previous questions, given the base book report this morning and also on what we seen and BLS data and growth in overall temps, is that going to more smaller and middle market type shops, just given your view, your exposure of Fortune 1000, is that what you think is creating that between the BLS data and what you guys are seeing in the U.S. market right now?

I don't think so.

I like to look at all those numbers but they're driving me crazy.

Understandable.

Because you know, when I talk I talk to a lot of, you know, staffing companies that are in the smaller markets.

And since they're not publicly traded, they have no reason not to tell me what's going on.

And I don't hear anything coming out of that.

So I think we need to really look hard at the whole BLS situation.

Because actually a year ago, we, you know, as a company, Manpower, we were up several points over what the BLS was saying.

And now we're down from where the BLS is saying.

So I'm north quite sure.

I think it becomes a data point and you can look at some potential trends.

We'd like to get some clarification from the new NAIS-CS, you know, calculations which we're working on.

But you know, there's been some talk that job creation is happening in small business, and not large business.

But that goes a little against what you really see that -- at the beginning of the cycle it's larger businesses that have stripped out a lot more people, and they tend to come back.

So if you looked at our book of business, the large account business actually comes back a little faster than the retail business, because they add 50 people.

In one order.

So I don't have a good answer.

I, like others, are looking very hard at it.

And we're trying to do our own calculations so we can use that for ourselves and frankly to use that for all of you to have a better look at it.

So I think it will take a bit more time for us to disseminate and calculate what's really going on.

Given that is your large account business right now, how is it stacking up compared to the retail business in the U.S.?

It's up compared to retail business.

Thanks so much.

Okay.

Thank you.

Our next question comes from Jim Janesky of Janney Montgomery Scott.

Yes, Good Morning.

I have a question turning to Jefferson Wells.

Jeff, you made a comment about the Sarbanes work coming in strong.

Is that, you know, despite the fact that we pushed out Sarbanes a year, are companies trying to get ahead of the curve, could you classify, coming in stronger than you had expected after the delay?

Well, of course when we heard the delay we thought that maybe there would be this impending event that stops and have it now dribble out.

When in fact what we've seen.

Companies are taking Sarbanes very seriously and they know that 404 is not something that you can do quickly.

So the engagements that we are winning are large companies, multidivisional companies, and they know that they have a challenge and they want to do this right.

So we've actually been gaining a little bit momentum over the last period and winning some very nice, sizable accounts that require a fair amount of sophistication and also maximize the fact that we have the largest footprint and the most number of people of anybody doing this business other than the big four.

And I think that's what's coming through is that, you know, our office expansion which was pretty tough during last year but our office expansion now with 30-some offices and 1500 CPAs make a big difference, and we're gaining some momentum.

And these are some sizable accounts that we see 404 work, if we can do that well, we can do other things well also and as a result we really see it as a good entree to other things in those accounts.

Okay, thank you.

Thank you.

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

Hi Marta.

Hi there, How you doing?

Good.

I was wondering you've addressed a lot of the other markets.

But, I'm curious if you could talk a bit about Germany.

It seems to still be a bit of a conundrum,in the sense , that a lot of the headlines data coming out of there is weak economy and weak labor market and yet you guys have had very strong performance in the the last several quarters.

I think you talked a little bit about some of the legislative changes there, but, can you give us an update on why it is you think that continues to be healthy?

I think you really hit it.

It's legislative as well as behavioral.

And what I mean by that is legislative of course there have been some signals particularly from the SPD about, you know, we should be able to do and be more flexible.

Some of the unions are also saying that, you know, we need to have some collective bargaining agreements.

But we realize that this should be part of how to make our economy more and our labor market more fluid.

So I would say the majority of that is coming from legislative.

The second half of behavioral, which is, if you go back in history in Germany, Germany and the staffing market was considered very low-end, not the kind of work that you would want to do, and not the kind of company you would want to be involved in.

And that has really changed as the multinationals have gone in and the use by multinational companies of staffing company has really changed some of the behavior.

So the candidates are more qualified, coupling that with some of the legislation, you start to see some good secular trend.

I also might add that while I might be a little off on this and Mike can help but probably the last five quarters we've been in very good shape, up some pretty sizable amounts.

That is not true for the rest of the industry.

So we've been out-performing the industry which has actually been negative while we've been in many cases eight, nine, ten, 12% up.

So I'd like to hand a little bit of credit to our team there who we've done some moving around of the team, if you recall, two, two and a half years ago we were ahead of the curve and we opened 50 offices.

Those sorts of things are now coming through, and our management team is doing a nice job there.

If I can stretch my luck and ask a second question.

You said early in the call that pricing pressure is still intense.

Can you just talk about maybe from a big picture perspective where you think it's most intense sort of geographically and vertically?

We've talked about the specific markets but when you think about it from the overall company's perspective where is it most difficult for you?

I run the risk of upsetting those Manpower people on the call that are in one country that are saying I'm dying over here and I say another country is actually having it worse.

But you know, vertically I would say what we're really seeing is, it's the larger to mid-size accounts, that have concentration of temporary staff, that is where you are seeing some absolutely ridiculous gross margin bids.

And it is in the U.K., it definitely is in the U.S., it is in the south in the U.S., so while the whole U.S. has it, it really is the Southeast where we are just sees just tremendous pressures that we've not seen before.

France has lived in a difficult environment for a long time.

But they tend to have adjusted to it and it doesn't seem to be dropping more than it has in the past, whereas over the last two quarters in the U.S., the U.K., there are more intense pressures.

Okay, great, thank you.

Yep.

Our last question please.

Thank you.

And our last question comes from Chris Gutek of Morgan Stanley.

Chris Gutek Thanks, good morning Jeff and Mike.

Chris Gutek of Morgan Stanley.

How are you?

Chris Gutek Great thanks.

Similar question focusing on one country, this time Japan.

Could you give us a little more information on where you are currently in terms of reveune, and at what margins, look like margins are improving and giving the deregulation and office plans going forward what are you looking for in margin expansion for next year in rough terms?

Yeah, in terms of overall size of our structure in Japan, we have now well over 100 offices.

Some of you that have been with you for a while will recall about two years ago we more than doubled our network there.

So we do have a very good footprint across Japan right now.

And overall it represents roughly, in round numbers, about 6% of our overall revenue.

In terms of as we think about the industrial side of the business, while we do have very good coverage, those will be different offices in different markets within Japan.

So we will certainly be adding to that overall marketplace.

You know, Japan is a market that, you know, historically has had you know very good secular growth.

We are running about three years straight over 20% growth before this last economic downturn, and even in this difficult cycle, you know, you can still see, you know, 90% growth which is certainly quite good.

So we're feeling very good about the secular opportunities there in Japan, and it is a market that, you know, does deliver good operating profit.

Overall we have been able to improve our gross margin there and that's been dropping to the bottom line.

So you know, that certainly has helped our other operations segment and added a little bit of juice to the bottom line in that segment as well.

Chris Gutek Can you give us just a rough sense of where the operating margin is and as you open offices is that going to go up or down in shorter term combined with the revenue growth?

We're still recovering from some infrastructure, that we put on in terms of investments.Today it would be above the company average but historically in the future I would think the Japanese market should be a market with operating margins in the four to 5% range.

Near term, next year, that could -- you know, our current operating margin, let's call it, in the 3% range, that could settle in a little bit.

As we do some investing.

But you know it's going to depend a little bit on what's happening at the same time in the top line.

Because you know, we might -- if we're able to get a little more top line, little bit of leverage, those investments may not show up quite as much.

Thanks Mike.

Thank you all for joining us for the call.

As usual, we have all of this posted on the Website as well as the replay, and if any other further questions, just give us a call.

Thank you.

And thank you for participating in today's conference.

And have a great day.