ManpowerGroup Inc (MAN) 2004 Q2 法說會逐字稿

Good morning and welcome to the Manpower second quarter earnings conference call.

All participants will be able to listen only until the question and answer session.

At that time, to ask a question, please press star, 1.

Today's conference is being recorded.

If you have any objections, you may disconnect at this time.

Now I'd like to turn this meeting over to Mr. Jeff Joerres, Chairman and CEO.

Sir, you may begin.

Thanks, Samantha.

Good morning and welcome to the second quarter conference call for 2004.

As is our normal format, Mike Van Handel, the Chief Financial Officer, is with me today.

I will go over the business in general by giving you an overview of how we see the business, what happened in the quarter, and then move into some of the more detail in the segments.

I think there are some very good stories and revealing stories in that segment detail.

After I complete the segments, Mike will cover the finance items, as well as some of the assumptions of how we're looking at the business as we move into the third quarter.

As usual, before we move into the full conference call, I'd like to have Mike read the Safe Harbor language.

Good morning.

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, Form 10K, and in the other Securities and Exchange Commission filings of the Company, which information is incorporated here and by reference.

Thanks, Mike.

The results of the second quarter were quite strong.

Our revenue exceeded $3.6 billion, which is a constant currency growth rate of 14.3 or 10.5 on an organic basis, taking out Right.

More importantly, we saw the continuation of the leverage in the business, moving from a 1.9% operating profit margin last year to 2.6% operating margin for the second quarter of this year.

The success of the quarter was not centered on one unit.

It was spread across several units, highlighting, once again, our strength of our geographic and business mix and business model when you look at what we were able to do in maintaining our GP and on an overwide -- overall company basis, even excluding Right, increasing the GP.

We continue to see strong trends in Jefferson Wells.

We talked about that last quarter, at it really accelerated this quarter.

I'll talk a little bit about more of that in detail later.

We also saw strong trends in many of the European markets, Italy, Germany leading the way.

We've also seen, for the first time in several years, a sizeable quarter over quarter growth in the U.S.

So, for our U.S. organization, no doubt, it's something to applaud about, go -- seeing that kind of growth sequentially.

Our gross profit percent for the quarter was 18.8%, slightly stronger than we had anticipated. 150 basis points above last year, 30 basis points above last year if you take out Right Management.

Our expenses were in line.

Including Right, it was at 16.1% of revenue.

Without Right, it was at 15.2% of revenue.

That's where your starting to see some of the leverage that we've talked about.

From an SG&A perspective, we're well managed.

Yet at the same time, we've continued to put investments into the Company, whether it be in our technology, commerce, or on -- or office openings in some of the key areas like Jefferson Wells and locations in EMEA.

The diluted earnings per share for the second quarter, which for the first time includes the dilution of the convertible bonds, was 56 cents, more than a 50% increase over last year.

Contributing to the 56 cents was 2 cents of currency.

It was a strong quarter for us.

A quarter that -- very proud of the organization, and I feel very good about.

A quarter that we have seen the U.S. achieve a stronger top line, more so than what we have seen in any time in the last three years.

We were also able to achieve solid growth in EMEA with a top line growth of 26.4% or 17.8% in constant currency.

The EMEA result was balanced across the board, led by some of the usual contributors.

Germany had 18% top line.

Italy 20%.

And Elan, which I'll spend just a little bit more time talking about, increased top line by 14% in local currency.

Also contributing to the success of the quarter was Jefferson Wells, had top line growth of over 130% and extremely strong bottom line results.

Our business in France, very much in line with what we had anticipated.

Top line at 2.9% in constant currency and a little over 9% in U.S. dollars.

We continue to see market pressure in France.

Both large and midterm companies, in my opinion, are acting a bit irrationally when it comes to price.

However, we're not following that game.

We've been able to do much better than the market in retaining our gross margin.

The second quarter was encouraging in many areas.

U.S, Elan, Jefferson Wells, EMEA, to name a few.

We anticipation the continuation of strong revenue and earnings growth into the third quarter.

Given these factors, we anticipate that the third quarter will be between 63 and 67 cents in diluted earnings per share.

This includes a positive currency impact of 4% and the dilution from the convertible bonds of 3%, which were in this quarter but, again, were not calculated into the first quarter of 2004.

I'd like to move into the segment portion.

Moving into the U.S. segment, as I mentioned earlier, this was the first time in many quarters that we have seen the U.S. have such solid growth.

In the first quarter of 2004, we saw growth in revenue at 2.4%.

This quarter, the U.S. operations were at 6.9%, with revenue coming in a little over $517 million.

In addition, sales from out U.S. franchise network were $290 million.

Up 16.6% over prior year, combining, giving both, if you were to count both a number of over 10% in combined, or what we would call system-wide sales.

We continued to exercise diligence in the gross margin area, and through hard work with the U.S. team, we were able to reduce the decline in gross margin percent compared to a prior year.

The GP percent improved sequentially, as we had anticipated.

SG&A was extremely well controlled, coming in under 15% of revenue in the U.S.

The U.S. was able to achieve significant leverage, adding more than $33 million of business compared to our prior year, with no increase in cost.

This resulted in operating profit of $14.1 million, and an improving margin to 2.7%.

We entered the second quarter with good trends.

We continued to see those trends occur throughout the entire second quarter.

We did not experience substantial acceleration during the second quarter, however.

We did see the continuation of the solid growth into the first few weeks of the third quarter.

So, what we were seeing was good growth in May, a little bit of a breather in June, and then we saw July start to come back a little bit more than what we have seen in June, but looking a lot more like May.

Leading the way, as was true last quarter, was the industrial segment of the business.

And we have not seen that slow down at all.

Light industrial and industrial business grew, in the second quarter in the U.S., from the low 20s during -- at the beginning of the quarter, to the mid 20 growth rate at the end of the quarter.

We are seeing slightly down, still, in the office staffing, compared to a prior year, but that too has become better as we look through the trends throughout the entire second quarter.

As is typical, large account volume is driving a lot of the growth, though we have started to see some pick up now in local and retail business, primarily in the last 30 days.

This is typical, at this point of the recovery, and therefore, we would anticipate a stronger retail environment in the next few quarters, as well as a strong recovery, or stronger recovery I should say, in the office side of the business.

Moving on to the French market, our French team did not experience the same kind of growth that we've seen in the U.S. market.

However, we were able to achieve our anticipated top line growth.

The gross margin percent continued to be mildly challenged, as it was in the first quarter, contributing to the modest decline in operating profit margin to 3.1%.

Costs were very much in line, resulting in an operating unit profit of $39.4 million.

And while in euro it was 11% below where we were the second quarter of 2003, but very much in line with what we had expected going into the quarter.

We have yet to see, really, the strong hiring indications in the French market, though the anticipation is, is that there will be a 2 to 2.5% GDP growth, which is higher than what was earlier stated of around 1.7%.

GDP, as we've mentioned before, is much more correlated to the temporary help work force in France than it is the U.S.

Therefore, if that GDP forecast holds true, we could see stronger revenue growth rates in the second half than what we have seen in the first.

The EMEA segment, which is Europe minus France, performed extraordinarily well.

Just a great performance.

Revenue up 26.4% in dollars and a very healthy 17.8% in constant currency.

The revenue exceeded 1.2 billion.

It was backed up by a consistent and strong performance on the gross profit line, and expenses were well managed, driving the profit for EMEA to $26.2 million or 2.2%.

Several of the countries in EMEA are performing well.

The main drivers are similar to the past quarters.

Germany, growth rate at 18%.

Of course, this is in constant currency.

Italy was over 20%.

Additionally, we are seeing good growth in the Nordics, Belgium, Spain, and Holland.

Additionally, the EMEA team has done quite well in permanent placement.

The infrastructure has been put in place in many countries, and we're seeing the result.

This infrastructure is not a small incidental amount of investment.

It's an investment we have been making over the six months, and it is paying off.

The permanent placement increases that we're seeing in EMEA are well beyond the traditional increases we have been seeing in Brook Street.

We now have several countries focused in EMEA on permanent placement and executing very well.

The U.K. was up over 9%, so we're starting to see the Manpower brand do better in the U.K.

Brook Street continued to move nicely with solid growth in revenue, aided by some of the work have -- being done in permanent placement.

I said earlier I would highlight Elan.

Elan did exceptionally well, and with revenues up over 25%, or 14% in constant currency.

This is spread across several countries.

As many of you know, nearly half of our revenues now are coming from outside the U.K.

Very much a strategy we've had, particularly, when you looked at some of the margin pressures in the U.K., and also the opportunities for IT contracting on mainland Europe.

Of course, all of this is done under the Elan brand, and we are seeing this fairly consistent across the board.

Good growth, with major accounts fueling the majority of the growth right now.

We are seeing growth in excess of the market, much of which can be contributed to the very successful sales program.

And, of course, the articulation of what makes Manpower different, which is what we continue to pound the table on, is that -- and sometimes we all look the same.

But when we cut through it and prove to our customers there is definitely a difference in the Manpower services.

The next segment is Right Management.

This is the first full quarter with Right as a Manpower company.

The Empower integration, for the most part, is complete.

You see a little -- you see a little in the numbers reported of some severance and a few more office closings, but we are extremely satisfied with the integration of Empower.

And we have been able to retain our revenue, for the most part, in Empower while reducing the overhead costs.

Revenues for Right Management were $120 million, with operating profit of 12.6 million or a percent of 10.4%.

This includes a modest amount of restructuring costs, as I had mentioned, with the Empower integration.

Operating and profit, actually, was slightly lower than we had anticipated going into the quarter, due to the costs associated with Right, particularly in Europe.

And then, of course, the difficulty in taking some of those expenses out in a timely way.

The team is working on that and definitely have their goals set for the second half of the year.

No doubt, we continue to gain market share in the career transition business.

To -- though the industry is in a very soft period of time, we continue to be out in the marketplace.

We've got a compelling story and selling features, particularly with the addition of Manpower Company behind them.

Right is the leader provider -- leading provider in career transition services for many of the big mergers you've read about, and acquisitions you've read about.

So when you look at some of the bank mergers, insurance mergers, telecom mergers, these are customers of ours that are set to use us, and now it's a matter of what's scheduled.

Many of those career transition individual contracts will kick in.

The organizational consulting portion of the business is a unique offering.

No one else has that kind of offering.

And we're continuing to grow and see more and more companies that deal with these sorts of issues willing to spend these discretionary dollars, as they are very much looking at the difficult task of managing their talent.

There are a number of examples where Manpower and Right are working together and achieving increased sales and market penetration.

In addition to cross selling, we are getting a favorable response to our proposal and reticulation to manage the total talent process for an organization.

The management of having employees and contractors come into the company.

So in other words, our assessment services, in perm placement services, in core staffing services.

As well as, at the same time, people leaving the business, based on the skill mix changes as companies continually evolve.

This sort of concept, particularly with our largest customers, is resonating very well, and we will be looking over the next few quarters to take advantage of this unique offering by, if you will, having a compelling offering that no one else can do and secure that business at a fair price.

The Right team is focused on making the appropriate moves in expenses.

At the same time, they know that some of the challenge is expanding the top line.

So, we're seeing that Right Management is contributing beneficially to so many other parts of Manpower, whether it be Elan, Jefferson Wells, the ability to set up client meetings.

And the meetings, as I said before, very receptive, with good conversation.

These are contributing some good cash flows and profitability into the business.

The third quarter, though, we are moving into a seasonally weak period for career transition business in the third quarter.

Therefore, we will continue to look at the expense line.

Now I'd like to move on to the other operations segment.

They performed extremely well.

The performance was led by Jefferson Wells, Canada, Australia, and Japan.

The entire segment finished the quarter at $505 million, up 29.6% in dollars or 24.9% in constant currency.

We've been able to see the gross profit continue to move up, primarily based on the mix of business, with the larger component coming from Jefferson Wells.

Expenses were as expected, which contributed to an operating profit of 20.7 million and an operating unit percent of 4.1.

We continue to see solid trends in Japan, with average daily revenue up 10%.

The light industrial market, which we are now into the fourth month, has seen a good pickup in responsiveness from our clients, particularly in the larger companies.

We're continuing to open offices, but in a measured way, as we believe, as we've explained before, the market in the light industrial area needs a little bit more additional time to mature before it becomes what we would call robust.

The major contributor to the entire segment was Jefferson Wells.

Revenue was up over 130%, and we continued to see the expansion in the top line.

Expansion in the office structure that we implemented over the last 2 years, while painful at that time, is now assisting in our ability to grow rapidly, respond to customers' need, and not -- and I repeat, not degrade the quality of service we have, the minimum level of experience in our CPAs, which is unparalleled type of quality and response that we have in the industry from the competitors.

Of course the demands for Sarbanes-Oxley compliance is contributing to the top line.

However, we are seeing other parts of the business grow rapidly.

Tax, as well as finance and accounting services, all of of these are growing at rates much faster than what we had experienced before.

The breadth and depth of what we've been able to achieve at Jefferson Wells is remarkable.

Nearly half of the Fortune 500 use Jefferson Wells in some fashion. 25% of the customers use it in multiple areas, so more than just one service.

And we have over 700 new clients in the past 12 months, and only a third of these clients are Sarbanes-Oxley engagements.

The success of Jefferson Wells is built on a solid ground.

The management team and professionals have done an exceptional job.

This management team is capable of a much larger top line, much larger office structure, and that's where we see it driving.

On an annualized run rate, for revenue, we're in excess of 300 million, with a double-digit operating margin.

Additionally, we've seen very strong sequential growth, adding $26 million of revenue just from the first quarter revenues, or a 52% increase sequentially.

We do see the growth rates and profit contribution from Jefferson Wells continuing into the second half of the year.

As we look into 2005, we still see many Sarbanes-Oxley engagements from noncalendar year companies and for additional remediation work.

Additionally, we continue to experience opportunity in other areas, such as internal audit, finance, and accounting and tax.

This gives us the good sense that Jefferson Wells has a strong long-term positioning.

No doubt, we'll experience a slowdown in SOX work in 2005, however, we currently are not expecting a severe drop in revenue, given the breadth of services we provide.

The second quarter, by any yardstick we would use, was a very solid quarter with breakthrough performances.

We started to see the U.S. grow at rates we haven't seen for some time.

The growth, however, is steady as opposed to very aggressive acceleration.

EMEA has been able to outgrow the marketplace but not give up any gross margin percent, while the French market is very stable and fighting every day to make sure that we maintain our position as the premium service at a slightly higher cost.

Pricing continues to be under pressure, but we've been able to react to that from the expense line and hold our margin better than anyone else we have seen from the competition.

So, overall, a good quarter.

A quarter that I personally am excited about and proud about, as we have been able to really see how our business model can be endorsed.

How our business mix and our lines of business contribute to shareholder value.

The quarter -- that will lead to a solid third quarter as we estimate to be between 63 and 67 cents with a positive currency effect of 4 cents.

So, that's my overview and the segment wrapup.

What I'd like to do now is to turn it over to Mike to discuss the financials in a bit more depth.

Thanks, Jeff.

I'd like to start as I usually do discussing the balance sheet and cash flow for the quarter and then discuss our third quarter guidance in a bit more detail.

The balance sheet remained strong during the quarter with cash of $440 million at quarter end.

That was down slightly from the previous quarter at $840 million, improving our net debt total by 40 million to just under 400 million.

All of our key credit ratios improved during the quarter, including our debt to capital, which now stands at 30%, and our net interest coverage ratio, which is just under 9 times.

As you may be aware, our zero coupon convertible debentures have a put date on the three-year anniversary, which is on August 17th.

Based upon our current share price and other factors, we do not anticipate any of the bonds will be put to us.

We should also note that beginning August 17th, the bonds become callable by us for their remaining life.

We are currently assessing our alternatives, but if we were to call, the bondholders would likely elect to convert to equity.

Since we are already including our bonds in our calculation of diluted earnings per share, any conversion would not have a further impact on dilution.

We are including the bonds in our earnings per share, so this would not have an impact on dilution.

Accounts receivable increased 9% to $2.9 billion in the quarter, reflecting the normal seasonal pickup in business from the first quarter to the second quarter.

Our days sales outstanding were stable against the prior year, despite the relatively faster growth in large accounts, which typically have longer payment terms.

Free cash flow, defined as cash from operations less capital expenditures, was $41 million for the first half, compared to a usage of $6 million in the prior year.

The majority of this improvement was operational.

However, this amount also includes $12 million for tax benefits on stock option exercises, primarily coming from the former Right optionees.

Naturally, I would expect free cash to expand further as we get into the seasonally higher earnings of the second half.

Capital expenditures for the first half were slightly ahead of prior year at $27 million.

We continue to capitalize on good investment opportunities in a number of geographies and anticipate more aggressive expansion as we move further into this economic recovery.

Now let's turn to our quarterly guidance.

As Jeff mentioned, we are currently expecting diluted earnings of 63 to 67 cents per share.

This includes an estimated currency benefit of 4 cents and assumes the convertible bonds are included in our EPS calculation, which results in 3 cents dilution.

Currently, we anticipate consolidated revenue growth in the mid-teens on a constant currency basis, which implies reported U.S. dollar revenue growth just above 20%, using current exchange rates.

While this forecasted constant currency growth rate is similar to what we reported for the second quarter, it actually reflects an improving growth rate as France and some of our companies in EMEA benefited from an extra billing day in the second quarter.

Within the segments, we anticipate modestly improving revenue growth in both the U.S. and France, and we expect to maintain the very strong constant currency growth rates we experienced in the second quarter for both the EMEA and other operation segments.

Within our Right segment, we are entering the slowest seasonal quarter of the year and, therefore, expect revenues to be 10 to 15% lower than they were in the second quarter.

Our consolidated gross margin percent, including Right, will decline sequentially, primarily due to seasonal changes in mix coming from the higher gross margin Right business.

On a year over year basis, the gross margin percent will be significantly higher, due to the addition of the Right business.

Perhaps more importantly, when you exclude Right, we expect a continued year over year increase in gross margin percent similar to the first and second quarters where we picked up 10 basis points and 30 basis points, respectively.

Our consolidated SG&A will show improving leverage sequentially as we gain both seasonal and growth operating leverage in a number of countries.

Excluding the impact of Right, I expect improved year over year SG&A leverage similar to the gains we saw in the first and second quarter.

Considering the above factors, I expect our operating profit margin to improve, both sequentially and on a year over year basis in the third quarter.

Our estimated tax rate for the year continues to be 36%, which we will use in the third quarter as well.

As we noted in prior quarters, we continue to follow the provisions of APB number 25 and are not expensing the cost of equity-based pay.

Had we expensed these costs, under statement 123, our earnings charge for the quarter would have been 3 cents, and for the 6-month period it would have been 4 cents.

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

Thanks, Mike.

Samantha, if we open it up for questions now, please.

Thank you.

We will now begin the question and answer session.

[OPERATOR INSTRUCTIONS]

Our first question comes from Brandt Sakakeeny of Deutsche Bank.

Sir, you may ask your question.

Thanks.

Good morning, Mike and Jeff.

Question for you on Eastern Europe and just, in general, the European expansion.

Can you just comment to the opportunities there?

And also, with respect to Italy, given the issues in the economy there, can you comment on the outlook there?

And also, the impact from the -- from the issues in Japan in terms of the liberalization of the staffing laws?

Thanks.

That was one question?

Yeah, that was.

Okay.

From the top.

Eastern Europe, we all know, the enlargement took place.

Eastern Europe does hold some very good potential.

However, we view it not as explosive potential.

Of the countries that we're most interested in, we believe that Poland offers us the best availability for skilled labor and, if you will, more of a rational labor market.

Romania, which many companies will be going to, has extremely low pay rates.

And while we are there, and we're currently there now, we don't see it as much of a focus as Poland.

The old Czech E. we would also be moving into.

So we've got a very solid strategy of office openings.

We have been in all of those countries.

They are growing well for us.

But I think when we looked at some of the issues with pay and the pay parity versus the current, or older, members of the European union, I think there will be a little challenge.

We have looked at some surveys that we've done.

Right now, there are still many more companies interested in going to China if they're going to move, though Eastern Europe falls #2 right now in the Europe -- I'm sorry, #2 in the flow of businesses going to another country to arbitrage, if you will, a bit of the labor rates.

When it comes to Italy, the Italian market, we still see some good growth.

A lot of it is attributed to our articulation of what we're all about.

We have not closed offices in Italy, while a -- a few of the other major players have.

And right now, we don't see any legislation that is a concern for us in Italy.

In fact, we would see potentially some of the perm placement laws loosening up a bit, which would allow us to move into that.

Japan, I touched briefly on what's happened in that area with light industrial.

We are now four months into it.

We have opened several offices, and we have gotten a very good reception from companies.

The challenge is a bit more finding the candidates, because it is a new way of operating.

One of of our competitors, if you will, in that area, would be, as Japan would call it, the contract manufacturing services.

But that type of business doesn't offer the kind of flexibility that temporary help would.

So we are as optimistic as we were before.

We had stated a -- that we would anticipate a slow but steady start.

That's what we're seeing.

We're building offices.

We're attempting to attract the candidates.

And as a result, the business is growing, and we would see more growth coming in 2005, really, than in 2004.

There was one change in legislation on health care in Japan.

And Mike, maybe you can just put just a little color on what we as an industry have to do now.

Yeah.

Well, health care is just, in terms of providing the candidates, they've required us to -- required the industry to offer health care to candidates, and more of the candidates are signing up.

That has put a little bit of pressure on from a margin standpoint, but certainly, we're looking to recover that from our customers in Japan.

Just to maybe add a bit more color on Italy, which, as we look at the quarter, and so far this year, we have seen a number of our investments really start to pay off.

Italy, clearly, is one of those cases of geography where we've opened around 40 offices last year, and we continue to open offices this year.

And part of what we're seeing on the sales growth line are those offices filling in.

So, it has been rewarding to see the success that the management team has had in Italy.

Great.

Thank you.

Yep.

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

You may ask your question.

Yeah, good morning, and congratulations on great results in the quarter.

Good progress.

I wanted to pursue France a little bit here.

First of all, you had mentioned, Jeff, that gross margins were challenged.

Did you see a decline in gross margin year over year?

Also, were there any special items, either in the direct costs or the operating costs, the SG&A in France in the corner -- quarter?

And then, there's been some chatter about expanded work week.

And I'm wondering if we could get your thoughts on that.

Okay.

There has been some decline in the gross margin, though it is slight.

We were hoping to maintain it, you know, year over year maintain.

We weren't able to do that.

But it was slight.

We're talking just a few basis points here or there.

So, yep.

There's a challenge there.

As I had said in some of the prepared remarks, I'm a bit disappointed, because there is a whole host of competitors that are acting, in my opinion, and in our French team's opinion, not as rational as we would like them to be.

Because the math is pretty simple that when you get down to that kind of GP, you can't be running an SG&A that can support any kind of service.

So we think that will level off, hopefully in the second quarter -- I mean in the second half, we'll start to see that level off if we were to start to get some demand.

So there might be a little less pricing pressure if we can get demand for some of the services.

There's really no special items.

Mike, are there some special items in France that we may want to share?

No, I don't think there's anything in particular.

Every quarter we're always looking at our accruals for subsidy and for social security costs.

And clearly we make adjustments within quarter, but there is nothing in there that would be -- that I would consider out of the ordinary from a materiality standpoint.

And the expansion of the 35-hour work week, it has been talked a lot about.

There is a lot of news in the press regarding that.

And the sense is, is that there may be some receptiveness from a few of the unions there.

However, we do not see this as something that we believe will happen in the near term, meaning next quarter or even the balance of this year.

It's too difficult of a political topic, given where France is in some of their politics.

If it were to happen, and let's say it moves from 35 to 37 or something like that, it would be hard to really quantify the impact on us.

Just like it was hard to quantify how much that meant when they moved from 39 to 35.

Mathematically, that should mean 11% more work that needed to get done.

It didn't quite work out that way.

And also during that time when that shift was made, the industry was growing very rapidly.

So it was difficult to really dissect what the movement -- what positive there was from 39 to 35, so it would be difficult for us to project what negative, if you will, would be from 35 to 37.

So we're going to keep a close eye on it, but right now we're not concerned that that's actually going to happen.

Okay.

And in the guidance as it relates to France, we assume that that margin on a year over year basis deteriorates in the second half as well?

In terms of overall operating margin?

Yes.

Yeah, I think -- you know, you've seen --

-- excluding the one-time benefit that you got in the fourth quarter last year.

Yeah, correct.

Excluding that one-time benefit, I would anticipate we could see a little bit of slippage in the second half similar to what we've seen in the first half.

At this point, I wouldn't anticipate any further slippage, but perhaps we could see something on the order of what we've seen in the first half of the year.

Thank you very much.

I appreciate it.

Thanks, Randy.

Our next question comes from Chris Gutek of Morgan Stanley.

You may ask your question.

Thanks.

Good morning, Jeff and Mike.

Good morning, Chris.

Just to dig a little bit deeper into the U.S. market, we've seen a nice pickup in Manpower's U.S. business.

But when I look at both Q1 and Q2, the PLS data and some of the industry trade association data for Q1 and even Kelly's commercial staffing results here in Q2, it looks as if Manpower's U.S. business is growing maybe about 5 percentage points lower than the market.

Would you agree with that?

And if so, is it a function of Manpower's price discipline or lower marketing spending or some other factors?

I would say that clearly, if we are below the market, it's because we refuse to take business that's going to lose money.

And I think if you look at profit contribution of our U.S. organization versus some of our competitors, there is a sizeable difference, $10 million, in some cases, or higher.

So I think that's part of it.

The other part is, it's difficult based on some SEC rulings, so we can't put it in, but if you combine the systemwide sales with franchises, we're actually over 10%.

So from a total Manpower brand, I feel as though we're well in line.

We're more disciplined on pricing, and I'm really not concerned about our growth rate, where we are right now.

Okay.

And then as a qualitative followup to that, when you talk to your customers, again focusing on the U.S., on one hand, economists can argue there's pent-up demand for labor, but on the other hand, there's no shortage of uncertainty from the global macro perspective when they restrained corporate hiring.

What exactly are you hearing from your customers, and what do you think it would take to get customers to be less reluctant to start hiring more aggressively?

It's a good question, because when we talk to the customers, they are talking about hiring more.

They have plans to hire more.

But they are still being cautious because of the amount of uncertainty surrounded, whether it be interest rates or oil prices or conflicts overseas, whatever they may be, there is some uncertainty.

But there is also the practicality of people needed to do the work.

So I'm not sure whether the third quarter gives us the proverbial hockey stick.

And, in fact, our guidance would tell you is we're not seeing that as the -- what's going to happen in the third quarter.

What we think is going to happen is that there is still good, solid growth.

Maybe we see some inflection point in there.

If not, it still holds the potential of being a good quarter for us.

Yeah.

Thanks, Jeff.

Yep.

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

You may ask your question.

Hi, good morning.

Thanks.

Jeff, I was wondering if you could talk a little bit about what you're seeing in France?

I was intrigued by your comment that you're seeing more optimism about French GDP growth.

What's driving that optimism, and are you feeling any of that yet in your business trends there?

Yeah.

What I was referring to was that the economic -- or the economists' consensus earlier in the first half was looking at a second half GDP growth of about 1.5 to 1.7.

They have revised that GDP outlook to be somewhere between like 2.1, 2.3, something like that.

One might have been as high as 2.5.

But call it -- call it 2.2, 2.3.

There is clearly, what we have been able to see, more of a correlation between GDP growth and the growth in the labor market.

But when we talk to customers, they too are anticipating that they would be hiring more, but they haven't seen the demand for their products and services kick in enough to really increase any kind of hiring trends.

We will probably have to wait to -- you know, July could prove to be an okay month.

August, as you know, from a seasonal perspective, is relatively slow.

And then we'll see what happens in September and the beginning of October.

So that when we talk to you on the next call, I think we'd have a much better idea that, A, it's just stabilized, not doing much, or B, we are starting to see the growth and we are starting to see the hiring.

And just like in other parts of the world, you'll be seeing it first from the temporary help companies.

Okay.

And if I could just follow up on a comment that you made about the U.S., and maybe some more color on gross margin.

You said that you're being very diligent about managing gross margin, and I think you mentioned reducing the decline in the gross margin percent versus the prior year.

Can you just clarify what you mean by that?

Are gross margins actually down, or are you narrowing the decline in gross margin?

Kind of where are we relative to history and where you want to be?

Sure.

If you look at gross margin against prior year in the U.S., we are -- we are running down against prior year.

And the comment was in terms of the second quarter, we aren't running down as much as we were in the first quarter.

You know, and, you know, we're -- you know, we're not talking 100 basis points, we're talking something less than that, but we're closing the gap.

And as you know, we've been working -- the U.S. organization has been working hard on recovering [SUDA] and some of the increases in workers' comp and trying to offset that through some pricing.

And they've had -- and they have had some success through those efforts.

And that's part of what we're seeing here.

So we're clearly closing -- closing that gap.

I think, as we look in the U.S. organization for the balance of the year, I think we -- I would anticipate we'll likely maintain a gap unless we start to see some greater acceleration on the perm placement side, which we're starting to see that pick up a little bit more.

That could -- that could then certainly close the gap as we get through the second half of the year.

But -- but I don't -- I think that the comment is, overall, I think, from a gross margin standpoint in the U.S., it certainly is stable to improving at this point.

Okay.

And then maybe just a follow-up to one other comment that you both made.

You mentioned that things sort of slowed down a little bit at the end of June.

We saw that across a lot of different industries, not just in staffing.

I'm wondering if you can address any comments that you heard from your customers about what caused that?

And then also discuss how confident are you that the acceleration -- reacceleration that you've seen in the early part of July is sustainable?

Well, it's hard when you take 2 weeks in July with one of those weeks being the 4th of July week --

Right.

-- and make a real prediction.

However, it was noticeable enough that when you averaged those two weeks, we're back on a growth path that was above what we were seeing in the end of June.

Our customers were looking at the end of June without much concern or worry.

It was just more of a little bit of leakage, if you will, a little bit of maybe plateauing, but it lasted so short that I don't think any alarm buttons were pushed.

And as we now move into July, it seems like we're back on some good, steady growth.

Nothing accelerated, but good, steady growth.

Okay.

Thanks.

Alright.

Thank you.

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

You may ask your question.

Hi, guys.

Hey, Greg.

I just wanted to go on one more question on France.

Do you think some of the reason maybe hiring hasn't picked up more at this time is because of, you know, the possibility of accelerated outsourcing for plant and equipment to places like China?

Can you give us your latest thoughts on that, and do you continue to factor that in, going forward?

Well, I think we have to factor it in.

I just don't know what factor to use.

So, you know, if you read the press, the world is coming to an end.

We have never subscribed to that.

We have done a few studies, and there'll be some more coming out.

There are some French companies that are moving, particularly to Eastern Europe, but it's a handful, and it's not lock, stock, and barrel.

They're not picking everything up and moving it.

So, I really don't see offshoring as one of the governors on the growth in France at this time.

I think it's just a -- the economy is not strong enough to create jobs.

Okay.

And then your comments, maybe just moving over to -- back to Right for a second.

If I summarize, you're basically -- basically saying, well things aren't coming in quite on plan, cost-wise as well.

That the impact that it's having on the rest of your business is more than making up for that?

Is that -- ?

Well, I mean, you know that -- you took the inference in a nice, positive way, which we were trying to be clever how we wrote it.

But that worked.

Yeah, the fact is, expenses are a little higher, not because they increased expenses, because we knew that business was going down.

And this is -- this is really a European challenge of being able to either take costs out fast or to even absorb the cost of taking people out, because it costs more.

So that's happening.

A little bit more, we weren't able to take the costs out maybe as quickly as we had anticipated.

Therefore, we were a little off on our estimates.

On the other side of the equation, the amount of companies that I personally have visited, and other senior managers have visited, in talking about being able to look at the total talent of an organization, contract, full-time, part-time, coming in, going out, and having that discussion about how we have a process with currently codified tools to do a better job of that, has been extremely well received.

Those will take a little bit longer to bake, if you will, to gestate.

The other ones, which are some of the pure cross-selling, where Right has some very good contacts at senior and HR levels, we've already won business where we were not either invited to the bid or were not looked at as favorably.

And with the credibility of Right, they were allowed -- the customer or prospect at that time, looked at us more seriously and really saw something they were intrigued with.

So as a result, we have won several millions of dollars just based on that, and we're only five months into -- into the Right acquisition.

Okay, and thanks for the clarification.

Yep.

Just, final question, wrapping up.

For -- on Jefferson Wells, you mentioned, I think, 300 of -- or a third of the 700 companies --

Yep.

-- were Sarbanes.

Yep.

Of the 130% growth, are you able to -- can you quantify for us how much of that was Sarbanes growth related?

If I actually had the number that I felt very good about, I would give it to you.

Here's the challenge.

Under the entire controls part of how we track the business, which would include internal audit, normal control work, noncompliance controls work, and Sarbanes, that is a large growth area.

When we look at it and say, all right, is that counted in Sarbanes?

Is it just a Sarbanes issue?

Then it gets a little bit to be a bit of voodoo math.

So Sarbanes, as I said, is driving the business.

Sarbanes is our best advertising and credibility builder.

When they experience Jefferson Wells, which is 5 to 7 years minimum experience as a CPA, a completely different model than our competitors, they see the quality of work, we are seeing more and more engagements expand beyond Sarbanes.

Sarbanes will affect us in 2005, but from the modeling that the team has been able to do and that we have been able to do, it currently looks like it may not be dramatic.

It will affect us, but not dramatically.

I think it's quite clear, there's clearly a sea change of course in corporate governance and how companies are looking at internal controls, monitoring internal controls, and staffing internal audit departments.

I don't know.

There isn't a CFO I don't talk to that isn't expanding their internal audit department.

And part of what we have with Jefferson Wells is we're helping with that expansion effort.

Right now those people might be working on Sarbanes-type work, but as Sarbanes tails off some of the initial documentation and testing, there's still -- those people are still going to be there in may cases, either keeping that documentation up to date, doing other internal control work.

You know, if there's M&A work, of course they need to get the controls back in order in accordance with Sarbanes.

So I think there clearly is some lift just from Sarbanes, but I think there -- what also you see is a fundamental change in how companies are viewing controls and how they are staffing internal audit departments.

Okay.

Thanks, Jeff and Mike.

Yep.

Yeah, thank you.

Our next question comes from Mark Marcon of Wachovia Securities.

You may ask your question.

Good morning and congratulations on the good results.

Thanks.

I'm wondering, looks to me like you're potentially growing a little bit faster in EMEA than some of your competitors, and I'm wondering what would you attribute that to?

And then secondly, as it relates to EMEA, you know, the margins for this quarter, which aren't the seasonally high point in terms of margins for EMEA, were higher than any point you had last year.

Is there a potential that we could start getting back to the margins that you expanded -- that you experienced, say, 4 years ago in EMEA?

Okay.

The EMEA growth, we do feel as though, on an EMEA-wide basis, we are growing faster than the market, based on what we've been able to see.

It's a vast market with many companies.

It really is focused on a major initiative that we have as a company, but no doubt, EMEA has emphasized and has executed better than any other parts of the organization.

And that is a new sales process and sales culture which allows us to identify prospects, get more aggressive in going out into the marketplace, and selling the service that we have.

We saw a little of that effect in the first quarter when they were at 12.4% top line growth.

Now they have moved to 17.8%.

And we really believe it's about a better sales process and a very excited team.

Now when it comes to the margins, are they higher, one of the things that -- that you're seeing in there is a real concerted effort to get into perm placement.

Several hundred dedicated recruiters have been put into not only the U.K., but mainland Europe to do nothing but perm placement.

And we are seeing that market come back a bit stronger, not real robust, but a bit stronger, and that is buoying up some of those margins.

Now when you look back at margins several years ago, one of the things you have to factor in is four years ago, you saw Sweden, Holland, Norway, doing exceptionally well on the top line and the bottom line, and those 3 countries, at that time, had gross margins that were maybe anywhere from 5 to 7 points higher than the rest of Europe.

You also saw Italy have a higher margin at that time, because the market was new.

So could we get back there?

Every fiber we have working in our bodies saying we're getting back there.

We may get back there a slightly different way than how we achieved it 4 years ago, though.

In other words, having a little bit more perm or something?

That's correct.

Okay, great.

And then, I'm wondering if you can comment, in the U.S. what you're seeing in terms of -- and this is going out towards '05, but if you were putting on your crystal -- now looking at your crystal ball in terms of looking at, you know, [FUDA, SUDA], and workers' comp, what do you -- what do you think that's going to look like in '05?

Do we get some relief at that point, or are we still ramping up?

We may get a slight relief, but the relief would be less of an increase.

If it follows as normal, you get increases for about 3 years, and then you start to get the decreases after that.

A lot of it will depend on growth rate of the employment market.

So, you know, as more people enter the jobs, the proverbial [SUDA] kitties in each state gets filled up a little bit more or faster.

Right.

But I think we'd still see some states be increasing their [SUDA] It would be possibly smaller amounts, and therefore, it would be the third year we'd be going back to customers with the attempt to recover it in a smaller amount.

So I'm hopeful that we would cover a little bit more of it than we did in this year or last year.

If I put my optimistic hat on, Mark, hopefully, you know, we'll see continued increasing demand, so the environment for us to go back for those price increases is going to be improving as well.

Which, you know, that's been certainly a challenge this year, and even more so the year before.

You know, in a weak market, going back to get those cost increases is particularly difficult.

You know, given the type of growth we're seeing, hopefully we'll, you know, have a more receptive market, and we'll be more successful as well.

Thank you.

Thanks, Mark.

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

You may ask your question.

Morning, gentlemen.

Hello.

A quick follow-up in terms of Jefferson Wells.

You had mentioned the 700 new customers, and just 30% in SB work.

If you could just walk us through the next 3 or 4 top assignments you've been receiving in those areas -- in the Jefferson Wells business from your new customers.

We would see a lot of co-sourcing on internal audit or complete outsourcing on internal audit.

We are seeing a propensity to move to the tax area, though still small, as the PCA, AOB would be looking at, you know, not having some of your external auditors do any tax work.

Some of that has been laid out there, so we're seeing some tax go.

A big driver, for example, right now, in a few of the cities is construction audits.

A very important part of our business.

So we would see that happening.

And then the general finance and accounting area, if you will.

More of the project-based staff augmentation, looking at some of the gaps that might have been found in the Sarbanes work, now actually having to fill that out with some work.

We see that growing.

I believe that's up over 20, 25% growth rate in that segment alone.

So that's how we split the organization.

Our team there knows that a balanced book of business is extremely important for long-term sustainability.

No one in our Jefferson Wells team is worried that this drops off a cliff.

The business is more sustainable than that.

And then maybe just following up on Greg's question, thinking about the -- that 30% of -- in terms of the overall revenue mix, is there a way to break that down?

Just -- yeah, I think we talked a little bit.

I think, it's difficult breaking down what is SOX and what is internal control work.

And I think that's where the -- that's where the challenge is.

You know, if you look at all of our control work, which would include the SOX work, you would be talking about two-thirds of our business.

But how much of that is pure SOX, I think that's, as Jeff said earlier, if we had a clear number that we thought was meaningful, we'd share that.

But I think we're a little bit cautious as to how we interpret that information.

Just given the fact there's other services bundled into those contracts?

That's it.

Exactly.

Okay, great.

Thanks so much.

I'll pass it on.

Our next question comes from Robert Harris of DRKW.

You may ask your question.

Yeah, morning, gentleman.

Good morning.

I wonder -- I wonder if you -- in the past you've been -- you've been good enough to -- to show how the quarter developed sequentially in your bigger territories, the States and France.

I wonder if you'd do that for the second quarter.

And also in relation to France, in light of the -- what looked like pretty weak volume data for June, I'm just interested to hear that you -- I mean, on the face of it, you seem to be suggesting that you anticipate the French business perking up a little bit in the second half.

I mean, is it, other than some hanging your hats onto economists' forecasts, I mean, are you actually seeing anything a little more tangible than that at this stage?

I mean, could we quite conceivably be looking at a scenario where the French market deteriorates a little bit further the second half?

Anything's possible in any of the markets.

The last 3, 4 weeks in France would give us an indication that there is a chance that this is starting to move up slightly after -- after a bit of down.

Slightly needs to be underlined.

So we're not looking at France and betting on economists' prediction of GDP only.

That's one element we're taking.

Then we're looking at our current book of business, where our -- what our customers are telling us.

And that's why we're saying we would be seeing some real modest growth as we move into the third quarter.

Mike, do you want to -- you want to cover the other portion?

Yeah.

Yeah, other markets, well, I think we spoke a little bit on the U.S.

We did see -- we did see some improvement in the U.S. as we made our way through the quarter.

June did slow a little bit in terms of growth rate, but still saw growth.

And as Jeff mentioned, we saw that come back a little bit in the early stages in July.

Within the EMEA segment, we did see some improvement in Germany and Italy as we made our way through the quarter.

Again, that wasn't rapid acceleration, but I would, again, put it in the category of modest improvement as we made our way through the quarter.

Right.

And then can you give me the -- give us an explicit run rate for the U.K. and how that developed during the quarter?

It would be about the same as EMEA where we were seeing June a bit stronger than May, and the beginning of July is more of what we were seeing in June.

Nothing robust, but some fairly decent growth.

Okay.

Thank you ever so much.

Yep.

Last question?

Our last question comes from Adam Waldo of Lehman Brothers.

You may ask your question.

Good morning, gentlemen.

Thanks for the time.

Just drilling down a bit more here on Jefferson Wells, obviously, thank you for highlighting the financial results of that business and the current run rates.

I wonder, obviously, you all have been -- been noticing some of the public market values of independent high end finance and accounting staffing and consulting firms in recent quarters.

And I wonder if that's given you any occasion to think about ways to more concretely monetize the value of the Jefferson Wells business, other than obviously continuing to highlight its good progress to the market?

Well -- well, yes, we have looked at that.

That basically -- you can basically say that Jefferson Wells, in an outside world, would be about 25% of our market cap.

Based on --

I was guessing that.

Yes.

But, we as a management team, ourselves, including Jefferson Wells, are running businesses for the long term.

And we see it as a key part of where we go with international expansion.

A key part where we bring some of our services together.

We will highlight it more.

We have been silent on it.

We have been giving you enough information.

We've been telling you that we have invested heavily into it, and now you're seeing the results of it.

But to do something from a financial perspective that would put it out on its own or do something in the way of some kind of tracking stock, those are things that I don't think about, and if someone asked me to think about, I'd ask them to leave the office so we could talk about something more important.

Fair enough.

Switching gears, just one quick followup.

I know it's early to be thinking about 2005, especially with a number of moving parts here in the third quarter, but I wonder, on a preliminary basis, Mike, what are your thoughts around, you know, the current system-wide capacity utilization of the existing office network, and what we might think about in terms of 2005, target office space, growth rates, on a worldwide basis?

Yeah, Well, that is -- that is a big question, Adam.

And I think as you looked at each market, you would see capacity in different ranges by market.

Certainly the U.S. market revenue has come off more dramatically in this recession than it has in any other markets.

Hence, they would have more capacity and leverage opportunity on the up side.

As would many other markets, or at least a -- several other markets within the EMEA region.

France, on the other hand, from a capacity standpoint, they're running very good productivity metrics.

And part of the reason is they didn't experience the dramatic drop in top line that some of the other regions did.

But as we then look forward to 2005, you know, 2005, assuming we continue to see trends and improving trends like we've been seeing the last two quarters, certainly we would look for positive things in 2005, and we would be looking to, you know, at what I would call a very good level of investment in terms of new office openings for us.

In -- a normal level for us, might be somewhere like 5 to 7% of our office space.

And given what I'm seeing right now, I think that would be reasonable to assume at this stage.

As you said, it's very early to start making a call on 2005.

But in the context of what we're seeing today, that would be my thoughts preliminarily.

Very helpful.

Thank you.

Okay.

Well, thanks, everyone, for attending the conference call.

As normal, if there's any kinds of questions that are required, you can contact Mike.

And as we get more information throughout the quarter, as we have typically done, that are economically driven, not just Manpower-types of information, we will try to highlight those and share.

So thanks again, and we appreciate your attendance on the call.