ManpowerGroup Inc (MAN) 2004 Q3 法說會逐字稿

Good morning.

Thank you for standing by.

Welcome to the Manpower's 3rd quarter earnings conference call.

At this time, all participants are in a listen-only mode.

Following the presentation, we will conduct a question and answer session.

To ask a question, please press star, one.

Today's conference is being recorded.

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

Now I'll turn the meeting over to Mr. Jeff Joerres, Chairman and Chief Executive Officer.

Sir, you may begin.

Good morning.

And welcome to the 3rd quarter conference call for 2004.

I am Jeff Joerres, Chairman and CEO of Manpower.

With me this morning is Mike Van Handel, our Chief Financial Officer.

I'll go through, as we've done in the past, the general business overview, the results and then move into the segment detail.

After I have completed the segments, Mike will cover a little bit more of the financial items, some of the assumptions, how we're looking at the business and what the balance of 2004, the 4th quarter, would look like.

Before we move into that, Mike, could you go over the Safe Harbor language?

Yes.

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 on form 10-K and in the other Securities and Exchange Commission filings of the company, which information is incorporated here in by reference.

Thanks, Mike.

The 3rd quarter results of 89 cents versus last year of 56 cents was extremely strong, needless to say.

Our revenue exceeded 3.9 billion with a year-over-year constant currency rate of 14.1%.

Important to note, it's an 11.4% on a constant currency basis.

Actually organic constant currency basis.

On a sequential basis, year-over-year growth was similar to last year and revenue was 700 million higher than it was last year for the quarter.

Clearly, many parts of the business did very well.

Resulting in the 89 cents.

When you see the breakdown of the organization, it's clear that we have a few exceptional performances.

Germany, Italy, Elan and Jefferson Wells.

We remain disciplined and we are executing the strategies.

Our SG&A and pricing philosophies remain unchanged and they are resulting in enhanced leverage and increased profits.

We have not -- we achieved a 3.3% operating profit margin compared to 2.5% last year.

There are several of the units that contributed to the overall profit on a percent basis as well as dollars.

The U.S. performed in line with our expectation.

Amea led the way with a 20% top line growth rate in constant currency, 31.4% growth rate in U.S. dollars, and as I mentioned we were seeing continued strength from Germany, Italy and Elan.

Jefferson Wells is clearly benefiting dramatically from a very solid management team, a very sound business model, also there were positively impacted by the increased Sarbanes-Oxley-related work.

Our gross profit finished the quarter at 18.7%, 10 basis points down on a sequential basis, due to seasonal factors and 150 basis points above last year. 70 basis points above last year excluding acquisitions.

This follows year-over-year gains in the 1st and 2nd quarter of 10 basis points and 30 basis points respectively.

The leverage in the business is coming through to the bottom line as we generate add 3.3% operating profit.

Our SG&A was 15.4% as a percent of revenue and more importantly, 82.6% of gross profit.

As we move into higher value services, the percent of gross profit is a much more indicative number.

All the units demonstrated very good expense management.

It's important that I spend just a few sentences breaking down that 89 cents.

The 89 cents in earnings including 8 million, or 8 cents reversal of tax reserve, which we disclosed in the 2nd quarter 10-Q.

Additionally the 89 cents including the dilution of 2 cents from the convertible bond and the anticipated positive impact of 4 cents from currency.

It was a very strong quarter, good performance from the entire team.

U.S. organization managed expenses superbly.

Amea, strong top line without deteriorating top margin.

France did exactly what we had anticipated on the top line, however, they really did a better job of managing some of the expenses.

With this as a backdrop, we anticipate constant currency revenue growth for the 4th quarter to be similar to that of the 3rd quarter.

We anticipate our earnings per share to be between 69-73 cents.

This includes a positive impact of currency of 2 cents and the dilution from the convertible bonds of 3 cents.

Mike will cover some of the dilution of the convertible bonds when he gets to his section.

Now, on to the segment detail.

The U.S. revenue for the quarter was 531,800,000, up 6.2% from a year ago.

That is, however, a bit misleading, as we have divested ourselves so that of a division called trans personnel, which is a short and long-haul semi driver business.

We no longer felt as though it was relevant and it really wasn't the right fit for our strategy.

If you were to look at our sales without the impact of trans personnel, we would have achieved a top line sales revenue growth now of 8.3% in the U.S., which is a slight acceleration on a sequential basis over, of course, last quarter.

This generated an operating profit of 2.9%.

It really is substantial progress for us as we work very hard at managing expenses and holding the line on pricing.

The sales from the franchise network which added to the revenue of the branch network totals nearly $844 million for the U.S. for the quarter, a good quarter in growth and a very good quarter in operating profit.

Our experience in the 3rd quarter is similar to what we experienced in the general market.

The various information that came out indicated that many, on many different fronts that there was a choppiness in the market that happened throughout the quarter and we experienced that as well.

We did not experience, as you can see from the top line number, any type of hockey stick revenue growth.

However, we would characterize the quarter as stable, with the past three weeks showing a little stronger growth than what we had seen prior to that.

A recurring theme from previous quarters is the mix of business.

Our light industrial segment of the business continues to lead with growth rates in the low 20s for most of the quarter, and September being a bit lower.

Paralleling the general economic views that we have seen, you would see this really does juxtapose with what kind of overall the different reports are that have been out there.

The office segment of our business continues to be slightly down compared to prior year.

The mix of business between large account and retail is similar to what we have seen in the 2nd quarter, however, we now starting to see retail pick up a bit faster than a large account business, so that's an indicative sign that what we are seeing is that the labor recovery, if you will, is going further down into the economy in the U.S. marketplace.

Now, moving on to the French market, our French operation completed the 3rd quarter with 1.4 billion in revenue, an increase of 9.6% in dollars.

And a 1% increase in constant currency.

We were able to on a sequential basis improve our gross profit margin and effectively manage our costs, giving us what I consider to be an exceptional performance of a 4% operating profit margin at $55.6 million.

Our team in France has done an exceptional job of managing costs, maintaining the gross margin.

It's been a difficult environment as we have mentioned in the previous quarters and really continues to be a difficult environment when it comes to gross margins.

We're holding steadfast to our strategy on holding price, however, as the quarters move on without much assistance from the top line this, of course become as more difficult task.

Last quarter we talked about the anticipated 2nd half of the year to be slightly stronger on a GDP basis.

Last quarter we were anticipating somewhere between 2 to 2 1/2% GDP growth.

We now anticipate that to be a bit softer.

We're not being economists here, we're just taking the general consensus in the marketplace.

But the revised GDP numbers in France being 1.7 to 2% for the 2nd half of the year.

The quarter was also fairly choppy in France as July's revenue growth was weaker than June.

August growth was negative to that, but then September's growth accelerated to 3% on an average daily basis.

We saw continuation of this more positive trend, as I mentioned earlier, as we moved into the first few weeks of October.

Even with our steadfast philosophy on pricing, we believe that we have been able to maintain market share and over the last four months, increase market share slightly.

This is the very same scenario that we've seen in the past several years.

The see-saw effect based on the previous year's performance or comparables, if you will.

It's always best to look at the French market on a two-year basis of revenue growth as opposed to a single year when comparing movement in market share.

By all means, I don't want to take anything away from our performance of our organization, but we should be realistic about the market dynamics in the French market.

As we look to the last quarter of the year in France, we see constant currency revenue up slightly from the 3rd quarter.

As you probably have already seen in the numbers, the Amea segment, which is Europe minus France achieved top line growth of 31.4% in dollars and 19.9% in constant currency.

Based on the geographical mix of the revenue and the success of our permanent placement initiatives, we were able to increase our gross profit percent compared to a year ago.

We also experienced good leverage yielding at 2.6% operating profit margin.

Clearly what you are seeing in the case of Amea is leverage of the branch network and also extremely positive impact on the gross margin line and the operating profit line from our expansion in permanent placement.

Our team has done a very good job in expanding quickly the number of full-time permanent recruiters in the UK and across all of mainland Europe and we are seeing these exceptional results.

We believe that we are only at the beginning of the effects of this network that has been done over the last six to nine months.

And as we enter the 4th quarter and 2005, we anticipate further gains in our core gross margins based on the progress in permanent placement.

Both Italy and Germany had constant currency growth rates of 20%, while Belgium grew for the 3rd quarter in a row in excess of 25%.

Holland is also experiencing solid growth, with a constant currency increase of 16%.

Manpower UK had revenue growth of 13% in constant currency and far better growth on the bottom line.

This can be attributed to the the retail account sales, as well as the overall positive impact of permanent placement in the UK.

Brooks Street, which many of are you aware of, is very much money for permanent placement.

We continue to see good firm placement trends in the UK, which bodes well for the economy in general.

Another highlight is the continued pace at which we are gaining revenue at Elan with a growth rate of 39% or 24% in constant currency.

Across Amea, whether it be in the Nordics, central Europe or southern Europe we are seeing good trends and we firmly believe that based on what we have been doing in the area of sales and market penetration that we are gaining market share without compromising price.

The next segment is the new segment this quarter, and that is Jefferson Wells.

Now, we have decided to break out Jefferson Wells because of the strategic performance and the effect that its had on our profitability for this quarter, for this year, and also for the future.

Jefferson Wells more than tripled their revenue at $111 million versus 34 million last year.

We're seeing leverage effects of the offices that we opened throughout 2002 and 2003, resulting in operating profit of 25.1 million versus a loss last year of 3.6 million.

We have been able to manage costs, insuring that there is an appropriate amount of variable costs in the system, as well as insuring throughout this high growth period that we are maintaining the quality of our service.

It should be noted that we have intentionally managed very little increase in our bill rate.

We firmly believe that while the opportunity exists to dramatically increase our bill rate, it would be a long-term mistake.

We are committed to creating the number one brand and reputation in that marketplace.

We opened offices in London and Boston in the middle of September and we have plans to continue the expansion throughout Europe as well as the U.S.

We have the management team and the bandwidth to continue to expand and also to continue to service the customers with the kind of talent and quality that has been the hallmark for Jefferson Wells.

Our gross margin, needless to say, continues to move up as we see utilization rates move into the mid-90% range, which in fact we believe is not sustainable, particularly when you get into December, which Mike will talk about.

This higher gross margin has had an overall favorable effect on our consolidated gross margin, which has always been the overall plan, which relates back to our revenue strategy of making sure that there is the balance between the specialty business and the core part of the staffing business.

The contribution to the revenue line of Jefferson Wells is based on three service areas: controls, financial ratios, and tax.

The Sarbanes-Oxley work fixed squarely in the controlled part of the business, but there is more to the controls area than just Sarbanes.

We have seen substantial growth in construction audits, HIPAA audits, cosourcing and outsource of the internal audit function and then of course the controls work with Sarbanes.

Our sense is that the Sarbanes-Oxley cannot be compared to Y2K situation that we saw with IT.

Staffing.

We do not anticipate a cliff on January 1 for Sarbanes work.

We believe from the information and feedback that we are receiving that anywhere from 40 to 60% of the current Sarbanes work is a very good chance of rolling into 2005.

Companies are going to go through remediation, acquisitions, as well as launching of new products or divisions that will all require additional controls work.

Additionally, some of the non-calendar year end companies and smaller public companies are just starting Sarbanes work.

Therefore, while it would be unlikely that we wouldn't see some decline in revenue, we are confident based on the work being done in the controls area, the growth that we're seeing in the financial operations and in tax, coupled with the growth of customer base and office earnings that Jefferson Wells will continue to be a substantial part of the contribution to Manpower's overall profit.

As we look forward, we see this business with operating margins ranging between 10-15% depending on our expansion rate.

Naturally, as we move into next year, we will need to make further investments in our infrastructure to support these significantly higher levels of revenue.

On to the next segment, Right management was towards the weaker side of our estimates of revenue, though right in line with what we had anticipated.

The career transition business throughout the U.S. continued to drift downward, however we were able to adjust our expenses appropriately and therefore produce a good profit level.

Europe and Asia also experienced downward drift in revenue, however the pace at which we were able to adjust our cost has not kept up with the revenue deterioration.

The Right organizational consulting side of the business is moving quite nicely with revenue growth of 25%.

The integration of M-Power is now completed and any final costs associated with the integration are shown in this quarter.

We do not anticipate any more as we move into the 4th quarter and into 2005.

With the integration of M-Power, the organizational consulting business now comprises 32% of Right's revenue.

Revenue from Right management was 103 million, down 14.5 sequentially.

Operating profit was 3.2 million, resulting in 3.2 operating profit margin.

Managing our costs, as I said, is an area that we will continue to work on.

However, the effects of this work will be felt mostly in 2005.

We continue to strengthen the relationship between Manpower and our other brands, based on the combined strength of the organization.

The management team at Right has done a tremendous job in bringing forward opportunities that together we are working on.

Our efforts to integrate solutions and bring forward unique solutions to customers continued to be received well.

We are in the process of institutionalizing our offering and therefore are quite optimistic about setting new standards in the industry.

Now, moving on to the other operations segment, which now has Jefferson Wells pulled out, revenue, the other operations segment, which includes Australia, Japan, Southeast Asia, South America, Canada, Mexico and central America, was 449 million, a 13.7% increase in constant currency over 2003.

Our overall operating unit profit was 10.8 million for a margin of 2.4%.

The highlights in the other operations are that we continue to see good growth in profitability coming from Australia, Canada and Mexico.

Japan, the largest part of the segment, had low double-digit growth in top line, but we have had to pressure on the bottom line based on the social costs levied in the industry.

We believe that we will be able to mitigate this, therefore minimizing the effects as we move into 2005.

We continue to open offices in Japan to address the light industrial marketplace; however, it is at a measured pace.

The light industrial market from a customer perspective and a perspective - prospect perspective continues to be quite strong.

However, the candidate inflows into the office based on the shorter-term assignments by Japanese standards is a bit more tempered than what is required to fill the orders right now.

We have implemented additional recruiting strategies in advertising and therefore feel as though we will begin to pick up in that area of the business as we move into the 4th quarter in 2005.

The 3rd quarter by any measure is a strong quarter for Manpower.

We have demonstrated that the investments that we have made are paying off.

We have demonstrated that we are sticking to our strategies on pricing and expense discipline.

We have demonstrated that the diversification of our revenue is balancing our profits.

In total, we are encouraged by the platform that has been built and we are energized by our future prospects.

As stated earlier, we look to the 4th quarter.

We would anticipate earnings per share to be between the range of 69 to 73 cents based on the current trends and sentiments in the marketplaces.

So with that, to put a little bit more color and detail on some of the financials, I'd like to turn it over to Mike.

Thank you, Jeff.

I'll begin as usual, with a discussion on the balance sheet and cash flow and then go on to add more detail on our 3rd quarter earnings and finally our 4th quarter guidance.

Our balance sheet remains in great shape at quarter end with total cash of $415 million and total debts of $849 million.

Our net debt position then was $434 million, an increase of 35 million from last quarter.

Our credit ratios are also strong and improved during the quarter.

We closed the quarter with debt to total capitalization of 29%.

On October 8th, we enter into a five-year, $625 million bank revolver agreement.

This new agreement takes the place of our previous revolving credit agreement and our 364-day facility that we had.

This new agreement allows us to extend our maturities while taking advantage of lower borrowing costs and bank fees.

Our accounts receivable increased 7% from last quarter to $3.1 billion.

This increase reflects the typical seasonal increase in our business.

Overall, DSO improved slightly, picking up almost one full day compared to the prior year.

This is primarily due to changes in mix.

Free cash flow defined as cash from operations, less capital expenditures was $19.4 million for the nine-month period compared to 56.8 million in the prior year.

This lower cash generation reflects the increase in working capital necessary to support the higher rate of growth that we're currently experiencing.

As we look to the 4th quarter, we expect very strong cash flow as our seasonal needs for working capital decline.

Let's turn now to a few more detail items on the earnings statement.

Our tax rate for the quarter was 29.2%.

This rate is lower than the projected rate for the quarter due to the non-recurring tax adjustment that Jeff discussed earlier.

Without this adjustment, our tax rate would have been 36%, which continues to be our best estimate for the year after excluding the impact of the 1st and 3rd quarter non-recurring items.

Our earnings per share calculation includes the impact of dilution from our convertible debentures for a portion of the quarter as they were convertible through August 11th.

As a result of our share price reaching certain thresholds in the 2nd quarter.

In order to calculate the diluted earnings per share interest for a portion of the quarter from July 1 to August 11 needs to be added to net earnings and a pro rated number of shares needs to be added to our average weighted shares.

The total interest on the debenture was $1.9 million during the quarter, therefore $864,000 or $553,000 after tax needs to be added back to net earnings.

The debentures are convertible into 6.1 million shares of stock and therefore 2.8 million shares needs to be add to the weighted average shares.

This results in adjusted net earnings of $83.9 million divided by 93.9 million shares to arrive at the 89 cents of diluted earnings per share in the quarter.

Under the recently issued PITF bulletin, our debentures will be included in the dilution calculation going forward and these tests will no longer apply.

Therefore we've included the 3 cent dilution in our 4th quarter guidance.

We'll also be required to restate previous quarters assuming dilution.

This will result in an additional 2 cent dilution in both the 1st and the 3rd quarters and an additional 5 cents dilution on a year-to-date basis.

This is obviously a technical area and therefore we posted more information on the accounting treatment of our debentures on our website.

You can find that at www.investor.Manpower.com under the financial information section.

Also on the earnings per share accounting front 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 number 123, our earnings charge for the quarter and year would have been 2 cents and 7 cents respectively.

We will begin expensing the costs of these plans when the proposed standard is finalized, which currently appears to be in the 3rd quarter of 2005.

Next, let me summarize our 4th quarter guidance.

As Jeff mentioned, we are currently expecting 69 to 73 cents of diluted earnings per share.

This includes a positive 2 cents of currency impact and 3 cents debenture dilution.

Based on current operating trends we anticipate a continuation of the solid constant currency revenue growth which we have seen in the last two quarters.

Our reported dollar base growth rate is expected to be lower than the last few quarters, as currency, while positive in the 4th quarter, will be less of a factor.

Based upon current exchange rates, I am estimating that currency that favorable impact 4th quarter revenue by about 2%.

In terms of the segments, we expect continuation of the solid year-over-year revenue growth in the U.S.

Based upon the improving first weeks in the quarter in France, we expect constant currency year-over-year revenue growth of 2 to 4%.

The Amea segment should continue to achieve year-over-year constant currency revenue growth in the upper teens.

Assuming the current Euro exchange rate, currency should add slightly more than 3% to the French and Amea segment growth rates.

Both Right and Jefferson Wells revenue should grow 3 to 5% sequentially and our other operations segment should see growth in the 10% range in both U.S. dollars and constant currency.

For those of you modeling the 4th quarter, let me remind you that last year we had a non-recurring net gain of $10.5 million, which was comprised of a $16.1 million favorable subsidy adjustment in France and a $5.6 million charge for office closure cost in Amea.

The subsidy adjustment favorably impacted our gross margin while the closure costs increased SG&A.

Without these non-recurring items last year, our French operating margin would have been 3.9% and our consolidated operating margin would have been 2.4%.

After normalizing the prior year operating margin for these items, we expect a year-over-year expansion in the operating margin similar to the 70 basis points we have seen so far this year.

This adjusts an overall operating margin in the 3% range for the 4th quarter.

This operating margin expansion will be the result of continued gains on the gross margin line as well as enhanced operating leverage.

Our 4th quarter forecasted operating margin is below the 3.3% we reported in the 3rd quarter, but this reflects normal seasonal trends, especially from France and Jefferson Wells.

In the case of France, the 3rd quarter is typically the highest sales in operating margin quarter.

In the case of Jefferson Wells, the 4th quarter typically brings higher vacation levels and lower utilization, which has a dampening effect on the gross profit and operating profit margins.

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

Thanks, Mike.

Elaine, if you could now open it up for questions.

Thank you.

At this time, we are ready to begin the formal question and answer.

If you would like to ask a question, please press star, one.

You will be announced prior to asking your question.

To withdraw your question, you may press star, two.

Once again, to ask a question, please press star, one.

One moment, please.

Our first question comes from Kelli Flynn from UBS.

You may ask your question.

Hi, Kelly.

Hi.

This is Andrew for Kelly.

Okay.

I just wanted to ask, on France, if you could just kind of drill down into the seasonality there and, you know, kind of your-- the guidance you gave for Q4, looks like you're expecting, you know, slight acceleration in revenue growth, but you said that overall GDP may be slightly weaker than people were previously expecting.

Yeah, I'll cover just kind of the top line and then I would ask Mike to fill in a little of that.

We had been, and still look at GDP a little bit more closely in France than we do in the U.S., as we think there is some correlation still, though it might be moving away.

You know, similar to what we're seeing in the U.S.

What we had, and what's difficult to really look at in France is August over the last two years has been much more of a disruptive month in work patterns, based on the 35-hour work week, the ability to bank holidays, things like that.

So we clearly saw a little bit of softening there.

We saw September starting to come back and we get data every week.

So we have been able to see the last four weeks be slightly stronger, in line with what we were seeing in September, maybe just a hair better.

So we really are going on that more so than the GDP.

We're not economists.

I put that out as some information for some triangulation, if you will, but we're really looking at our numbers, our momentum, what our customers are saying, and that's really how we came up with the forecast for that.

All right.

Yeah, so, I think Jeff handled most of your question.

So really the only other question is one of seasonality and, you know, typically our peak in France is always the month of July, which you see is a real ramp-up before the typical vacation period in August.

So our business peaks in July, comes back down, falls off a bit in August and then September firms up fairly well after that and things then stay fairly constant till December.

Then weakens up a bit.

So we get -- it's the normal seasonal pattern and we would expect to see the norm that, we have seen the normal seasonal pattern this year and as we then move into the 4th quarter so.

I think we're just following the normal trends in France.

Okay, and then if I could ask a follow-up, I think you mentioned that Right management is quite seasonal, usually has a slow Q3.

Could you kind of talk to the seasonal pickup you might expect there in Q4?

Yeah, typically Q3 is the seasonally slower quarter, as you might imagine, through the summer months, number of layoffs certainly start to dampen a little bit.

As we then move into the 4th quarter that activity resumes back to more normalized levels, hence our guidance for some pickup of 3 to 5% on the top line and we are seeing a little bit more activity within both the career transition side and the organizational consulting side.

So that's what we would expect, is a little bit more activity in the 3rd quarter starting, or the 4th quarter starting to pickup a little bit more after a soft 3rd quarter.

Okay.

Thanks, guys.

Our next question comes from Andrew Steinerman from Bear Stearns.

You may ask your question.

Hi, gentlemen.

When looking at U.S. gross margins, obviously without Jefferson Wells could you just highlight again where we are, year-over-year, sequentially, are we passing the [inaudible], through, are we seeing wage inflation, are we able to get bill rate inflation for that, just talk in general where we are, where we're going with U.S. gross margins.

Mike, why don't you take that.

Okay.

Okay.

As you look at the quarter overall, again, revenues on the top line were up 8.3% once we pull out trans personnel, which I think is an important thing to note.

So we did see little bit of acceleration in the quarter on the top line, on the top line side.

I characterize gross margins overall as being stable.

Certainly things do remain competitive within the U.S.

When you look at our U.S. gross margin sequentially, it's down just slightly, which is typically what happens going from Q2 to Q3.

We do have an extra holiday there with both the 4th of July and Labor Day.

So we tend to see that drop just slightly and then it picks back up a little bit going into the 4th quarter.

In terms of what we're seeing on a year-over-year basis, Andrew, we're still running a bit behind prior year, similar to what we have seen in the 2nd quarter, so I would say the lag behind prior year is about the same.

Overall, again, you'll recall that it's more of a cost issue as opposed to a bill rate issue.

Our costs have gone up.

As you mentioned, both on the state unemployment tax side and the workers' comp side, those costs have increased at the beginning of this year.

We've had some success passing, passing those costs on through.

You know, I think we're -- in terms of getting further gains, I think -- I think we've passed on as much as we're going to be able to pass on.

We'll have the natural decline in, particularly in state unemployment taxes as we get into the 4th quarter here as we meet the certain earnings thresholds.

So that will naturally occur.

So that's where I would characterize the U.S.

Hopefully I touched on most of your question there.

Just to finish off, any signs of wage inflation and client willingness to be responsive and bill rates relative to wage inflation?

We would typically see more of that in the retail market and we are seeing the retail market pick up slightly.

The retail market is more sensitive to getting the right person in there right now.

Some of the rates are not predetermined.

So we are seeing just a little bit of wage inflation coming in, but not enough to really measure.

We are clearly seeing that companies are, are looking at, you know, what we have to offer in the flexibility and what they want to do in being measured as now moving down in size of company.

It was primarily in the beginning of this recovery just large companies.

Now we're seeing some of the mid-sized and small start to use our services more.

And Mike, just to finish it off, anything happen with clerical staffing that would have an implication on gross margins because obviously clerical staffing has higher gross margins than light industrial staffing in the U.S.

Yeah, it's running pretty much the same.

We haven't seen a real change in mix.

Our light industrial business certainly has been running much stronger.

The clerical side is still running a touch behind prior year, so no significant shift yet on that front.

Thank you so much.

Thanks.

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

Hi, guys, Greg and Josh.

Hi.

I wanted to follow up on Andrew's question first off.

Mike, or excuse me, Jeff, is your message then still that, you know, you're going continue to hold the line in terms of the margin or I guess pricing with a willingness to pass a lower margin business as have you in the past?

That's correct.

No change in strategy.

Okay.

In fact, I think our strategy is starting to come through as you look at the profitability, the leverage you're seeing.

And at 8.3% in the U.S., we're talking, I'm comfortable with that growth rate.

We'll have to see what the rest of the market's like, but we don't focus a lot on that.

When you cover that in France, we're still holding a line and our 20% growth rate in constant currency in Amea, we're still seeing good, holding on of margins.

I want to emphasize that it's easy for me to say, but our field has to work very hard at doing it.

This is tough work.

Okay.

Okay, great.

And then I wanted to go back.

You mentioned that, I think you said you would expect 40 to 60% of the Sarbanes-related assignments continue into '05 or the work in general to continue into '05.

Would that mean, given that you have permanent employees in that area, would that mean you'll be trimming head count by, you know, 40 to 50% if that's the case, or did you mean something else?

Well, we didn't mean that, but I can answer that question.

Thanks.

You know, the 40 to 60% is kind of the, what we're hearing out on the street.

And frankly that's the way we're looking at it internally in our own Sarbanes work.

So in that, one of the legs of the stool for Jefferson Wells, which is controls where Sarbanes would fit, as I mentioned, there's many other parts to that that we believe will still continue to grow.

Now when we look specifically at Sarbanes, what we are really saying is that as that trims down we will be able to adjust many of our costs.

What we've done in this last three, maybe two-and-a-half quarters is to actually use a bit more on the contractor side.

Okay.

So that we have some flexibility in there in the variable costs.

So if this does not drop off the cliff, which I don't expect it to happen, we think we'll be able to manage down pretty effectively.

If I could just add to that, Greg, you know, we don't know where some of the Sarbanes work will go for next year, but I think, you know, couple things to keep mind, of course, is some of the smaller companies, the non-accelerating filters are just starting their work on the Sarbanes front.

The non-calendar year ends are just starting their work, and you also have a number of financial-related projects that have been put on the shelf because all of the focus for corporate America has been on Sarbanes.

So as Jeff said, I don't think there's going to fall off a cliff.

Certainly there will be portions of the Sarbanes work that will tail off somewhat, but there will be other work coming on as well.

So it's a bit difficult to really forecast where that will go going forward, but I do think we've left a lot of flexibility in the model that we can bring our costs in as necessary if we in fact need to.

So we'll see how, we'll see how things move forward, but I think we're well positioned and I think the great thing about the ramp-up of work we have is we've been able to build a strong infrastructure and a strong brand on the back of this Sarbanes work and really have broadened a lot of the relationships with CFO's and controllers just over the last year.

Yeah.

Have you actually seen, or do you have examples of clients that maybe came in, you know, hiring to you do Sarbanes and have since come back, you know, finished that and come back and stayed, you know, to your point, Mike, stayed with you for other types of high-end finance and accounting work?

Clearly, and our ability to do tax work and some of the other audits, as well as some of the other financial operations for our largest customers, we are actually holding planning sessions now, talking about the kind of work that we might jointly do in 2005.

So we've been able to move the relationship up within accounts.

We have 450 Sarbanes accounts.

So we've got a lot of penetration.

The credibility is high, and as I said, you know, our bill rates, we really haven't moved.

We moved maybe a little because of the pay rate associated with it, but we're sticking to a bill rate because we're really in this for the long haul.

Got it.

Just one last quick one.

Mike, you mentioned the free cash flow.

Given your guidance of the 4th quarter, would you still expect to be, you know, above 100 million in free cash for the year?

Yeah, for the overall year, yeah.

I would expect to clearly be above that level.

You know, free cash is always a bit difficult for us because depending on how revenue is treading in the last couple of months of the year, it can move the meter a little bit, but right now I don't -- I can't envision a scenario that wouldn't leave us with at least 100 million of free cash and right now I would by looking for something north of that.

Okay.

Very helpful, guys.

Thanks.

Thanks.

Our next question question comes from Craig Peckham from Jeffries & Company.

Good afternoon.

Terrific quarter.

You mentioned, Jeff, that there are about 450 Sarbanes accounts.

Is it possible to hazard a guess there in terms of how much revenue in Jefferson Wells is coming from such work?

Yeah, actually if I could-- if I had the number I'd tell you, and we have good reporting systems, but what's happening is there is such a graying of lines between internal audit sorts of functions which we do, some other controls function which is we do, and Sarbanes, and as companies get closer to these deadlines, there's more and more of the muddling between those.

So, you know, that's why, you know, we look at it and say that, you know, there is, you know, out of those three lines of business the controls by far is the largest part, probably, you know, some 60% of the business and Sarbanes makes up, you know, a good part of that.

The real question is how much of it is really Sarbanes down, heads down documentation, tier one, tier two.

It's just hard for to us get there.

So you know in, round numbers, it would even be misleading, you know, as you look at the revenue for the quarter of $111 million, you can do some math and kind of get in the general ball park of how much dollars that really is.

Okay, it's fair to say there really is no staffing revenue that's coming out of Sarbanes, right?

Depends on how you define staffing revenue.

I mean, are there five people unassigned to an account that are doing Sarbanes work?

The answer is yes.

Okay.

If I can switch gears over to France, you sound pretty sanguine, at least relative to prior quarters about the environment there.

Can you give a little bit more detail about perhaps any changes you saw on the competitive dynamics and the -- I guess how rational is the competitive landscape?

In France.

Right.

The landscape is still tough.

I mean we're still, you know, in a market that has a little bit of overcapacity, particularly in the small and midsized.

We still have some large competitors who are looking for some market share gain.

So as I said in the prepared part of it, the fight is still on.

We're putting up the good fight.

If we see some revenue growth, a little bit more than what we saw the last quarter, that gives a little bit of relief in there.

Okay.

Thank you.

Yep.

Our next question comes from Mr. Randy Mills from Robert W. Baird.

You may ask your question.

Hi, good morning, Jeff and Mike, and performance again.

It's nice to have a company where we're always having to pull out these extra benefits.

I wanted to follow up on a couple of questions asked earlier.

First of all, in France, very good margin in the quarter, especially given the top line trends.

First of all, I guess what was the source of that?

Jeff, you had mentioned there had were some efficiencies.

Was there something else that contributed to that?

It's a good question.

You know, and maybe I'll read a little into the something else.

You know, in an organization that does, you know, nearly a billion and a half dollars in a quarter there could always be something else.

In this case, there was nothing else.

It was just a little here, a little there, blocking, tackling, expense management, a little bit on the margin line to make sure we hold it there, and what came out is what you see.

So that is a number in there that has nothing in it except good expense management, not the kind of expense management that logs out large parts of our infrastructure, but just clearly looking at how we're moving forward.

And we are not stopping investment.

We started a national ad campaign the middle of last week so we are investing in the brand and the ad campaign so far is going over very well.

It's a widespread ad campaign across all of France.

So you're seeing good investment, but just, it's superb management right now.

Okay.

So if revenues were to remain at the levels that they were in '04 in '05, I mean would you be able to hold to pretty consistent margin, you know, whatever that ends up being, 3, 4, 3.4, 3.5, whatever?

It gets more difficult because you, you, when you ride on that cusp all the time of that, you know, 01, minus 1, 01, what happens in there is that the -- you can't continue to take some of those costs out if you see a little bit of a margin erosion.

So if it were identical, it's going to be more difficult and you would see that slide down.

If you see a little top line growth, you're going see some relief on that and be able to reach the margins we had in 2004.

So, you know, in this case because we're so close to that line, the difference between a 1% growth rate and 3 1/2% growth rate is a big deal when it comes to the bottom line.

Okay.

All right.

Thank you.

That's helpful.

And just one last question.

On Right management, you know, usually low margin in the quarter, it sounds like you may have taken some action.

You know, what have been the steps that you've taken at Right?

Maybe you could talk about since the beginning of the year, the major steps, but then particularly in the 3rd quarter.

Well, throughout the -- since we made the acquisition in January, we have integrated M-Power and have taken out several of the M-Power costs associated with office structure, management, accounting systems, things like that.

So that's a group in there.

We continue to take out people and in the case of Europe, as we take out people to respond to the downward drift in revenue, the way it's set up and the way we're operating there is that we don't take one time on that.

We are paying them through their period that they are allowed to work.

So you're seeing some of that downward pressure but frankly, what you're seeing is the traditional seasonal effect and we're lower on the revenue line than we wanted to be.

As Mike said, we gave a range between 10 to15 and we came in at 14 1/2 or somewhere close to that.

So we've got to be looking at the revenue line.

The organizational consulting part of the business is moving nicely, but we need to get some of the career transition business moving and we frankly don't have a lot of control over that.

As companies announce it and we win the business, if they don't start executing, we can't claim any of that revenue.

Okay.

Thank you very much.

It's been helpful.

And again, great job.

Thank you.

Our next question comes from Brandt Sakakeeny from Deutsche Bank.

You may ask your question.

Hi, thanks.

Good morning.

Couple questions.

Actually just first for Mike, did you give the D&A for the quarter?

I perhaps did not, Brandt, but we would be looking at total D&A for the quarter of 21.2 million.

Great, and do you have the split?

Yeah, the, the A part is 3.3.

Okay.

Perfect.

And then what should we assume for your full year tax rate?

Yeah, so I think probably -- boy, I don't have it calculated with the one time, but if you take the non-recurring items out, we're right now estimating 36%.

And so the non-recurring items, you'll go back to the 1st quarter and see one item which had a different tax effect on it and then you'll see the 8 million coming through in the 3rd quarter.

So as you go back and look at that, Brandt, if have you any questions, just give me a call and I can parse that out for you.

But effectively, we're still on track for basically a 36% normalized rate and it's just these one-time things that move it around a little bit.

Okay.

Great.

And just any thoughts either for you both Mike and Jeff, with respect to either share repurchase or dividends?

Obviously, you know, good free cash flow generation and with the volatility in share price, especially when it hits the low 40s, any appetite for doing something like that?

Well, I think we've said for, you know, a period of time is that we are not in this business to hold our cash.

We want to make sure that as the business goes up, which we have some signs that it is, is that we have enough for working capital.

Mike talked about our renegotiation of the revolver.

We'll look at some CAPAX.

And as we look at what's left after that, our view is that if we can return it efficiently without creating any kind of distress from the debt to cap side of the business, that it's something we would look at.

So we do not need to have large sums of cash sitting on the, on our books because we have no acquisitions that would require that on the table or in mind to do.

So we'll evaluate it and make sure that we're doing the right things for you, the shareholder.

Okay.

If I could add one point to that, Brandt, as you do look at our balance sheet, there is a certain amount of structural cash that we carry.

And by that, what I mean is when we close month-end, the cash is there, but almost immediately, you know, the next day it's gone and we're using it for payroll or what have you, and so as we look at, you know, our 400 million plus of cash, there is probably a little bit better than 100 million of what I would call of available cash.

We carry somewhere between 275 to 300 million of what I would call structural ongoing working capital cash.

Okay.

Okay, great.

And-- great.

That's perfect.

That's all I have.

Thanks.

Thank you.

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

You may ask your question.

Good morning.

Thanks.

I had to step away for part of the call, so I apologize if you answered this, but I'm wondering if you can just address your anticipated SG&A growth going forward.

If revenue is continuing to grow at a reasonably healthy clip, how fast should we anticipate SG&A growth on a relative basis?

It's a good question, Marta, and it clearly is something we spend a lot of time on internally and measuring within our overall cost containment program that we have cascaded across the organization.

It's a good question, but it's a difficult question to answer because the answer would be different depending upon where the growth is and where it's coming from.

You know, clearly markets like France, which have not declined as much through the recession, we don't have the excess capacity like we might in other markets like the U.S., which have, which has been more adversely effected.

So there is more capacity in markets like the U.S. than France.

Certainly we're seeing today very good growth in Europe outside of France and they are having very good leverage there off of that growth.

You know, if I, if I try and summarize and put it into context, certainly, you know, if we get what I have said and I think you've heard me say in the past, if we get 12 to15% top line growth, you know, we would be looking for our expense growth to maybe in year one of recovery to be half to two-thirds of that growth rate and then as we go further into the recovery stage, you know, that expense growth rate is going to catch up a little bit closer to where, to where the revenue and GP growth rate is, but that's kind after rule of thumb and that's how we get to our overall operating margin goals in the leverage that we're looking to get back in the business and get back to the productivity metrics that we're looking to achieve.

That's really helpful.

Thanks.

And then just a couple of follow-ups on the Sarbanes-Oxley and Jefferson Wells.

You mentioned I think 450 stocks accounts.

Do you know how many accounts have you there in total?

I don't have that number right in front of me, so I'm going pass on that.

I have no problem giving that number.

I'll have it available at the next conference call.

Okay.

But it's-- you know, it's double what you're seeing in the 450.

It's more than double, I know that for sure.

Okay.

And then Mike, one of your last comments, I think you mentioned that Jefferson Wells should still have a lower GP and operating profit in the 4th quarter, given kind of typical seasonal holidays, but also given the fact that we're seeing the, many of the deadlines for calendar year end companies for example, will be hitting.

Does it make sense that you might not see that kind of a seasonal falloff or will most companies essentially be done or should most companies be done at the point at which we hit the typical holiday lull?

Yeah, good question.

I think our view would be that, and put it in a category of just a view because it's difficult to predict what will happen.

We've seen a continuous ramp-up really over the last several weeks, but our sense is things are starting to stabilize now at a fairly high level.

I think we could probably maintain levels that we've seen in September through October and November, and perhaps partly into December and then some slowing with the holidays, but my sense for activity out there are companies are finding this to be a lot more work and taking a lot longer than they anticipated, so deadlines are clearly moving back and there -- I anticipate there is going to be a very high level of activity through the year end and well into the 1st quarter and probably, you know, even for the calendar year companies right up until their filing deadlines at the end of February.

So that's the way I would see it.

Okay.

That's really helpful.

Thanks.

Our next question comes from Mark Marcon from Wachovia Securities.

Good morning.

And congratulations, Jeff and Mike.

Thanks, Mark.

So Mike, with the comment you just made, I mean should we see a little bit better than 3% sequential growth on Jefferson Wells?

That's a wash.

Yea, it is.

I mean effectively what I'm looking for, if you just take our September run rate and put that over October and November and then assume some type of drop from that, you would get 3 to 5%, probably closer to 5 than 3, but that's about what you would come out with.

You know, the question in my mind will be how it, how does December play out.

Yeah.

And what's the mix now between permanent versus contracted professionals?

Yeah, as Jeff mentioned, that mix has been changing.

It used to be about 80/20.

And now that shift is getting closer to more like a 60/40.

So we've got a fair amount of flexibility and that really has driven really just in the last quarter, that business has been ramping up.

We've just been tweaking the model a little bit to give us a little bit more flexibility.

We're still very careful to anybody we're bringing on, still has the experience, you know, as you know, Jefferson Wells typically they have 10 to12 years experience, CPA's, sometimes MBA's.

We're still getting the right experience, but we're hiring a little bit more on a part-time or temporary basis, if you will.

Okay.

Great.

And then Amea, congratulations on the results there. it's obviously become bigger and bigger part of the business.

Could you talk about two things, one, what are you seeing in terms of secular versus cyclical influences that's driving the strong local currency growth and then secondly, can you expand or give a little bit more color with regards to the perm initiative over there and how much is that contributing?

Well, what we are seeing, I believe, is mostly secular, though the cyclical part is at least calm, if you will.

If you look at the biggest markets that we're growing in where you would see Germany and Italy, that's secular growth.

We continue to open offices, some of our newer offices are making profit pretty quickly.

The UK is not secular growth.

That's growing, though, at 9% so it's at a lower level.

That's just good old fashioned slugging it out kind of growth.

You get into Holland at 16% and Belgium of over 25%.

Holland is a bit more of a recovery, so that's a little bit more cyclical, whereas Belgium is a bit more secular.

So if I were to kind of, you know, put percentages on it, I think the growth that you would be seeing in total Amea is, you know, over 50% of that is just good secular growth, with, you know, with Germany being the prime example because the economy is not doing that well.

From a perm placement, we have put in a lot of money and a lot of consultants, hundreds of consultants across and that is having an effect and it's still early in the game.

So we still have people that are relatively new to the organization or have been retrained to the organization.

So I think you'll see a little bit more of a positive benefit for that provided we get some assistance from the economy, a little bit more benefit of that in the 4th quarter of 2005.

How big is perm now in Amea?

It's getting bigger.

Is it one or two?

You're talking as a percentage of GP?

Percentage of revs.

Yeah, it's probably what, 2, maybe a little higher.

Yeah, it's probably, we like to look at it as a percentage of GP.

Right.

Mark, which as a percentage of GP, we would be other 5% with the Amea group.

Great.

Then last question, given the strong success that you were having outside of the U.S. and France, can you talk a little bit about expansion plans for next year, preliminary thoughts there.

We're just going through our three-year plans right now.

I think you would see, you know, in some of the logical areas, Germany and Italy, a little bit more expansion in the UK, some expansion on the Elan side, so that's where you would see it.

You would still see expansion in Japan, and probably in India and China.

So that's really where we would go.

If you're actually looking at what kind of percent of growth in offices, the little bit earlier, you know, we try to get, try to think up the right measures around 3 to5%, but it's a little early to give you a good indication on that.

Okay.

Great.

Thanks very much.

Last question, please.

Our last question comes from Leone Young from Smith Barney.

Yes, good morning and congratulations.

Just a quick clarification.

I appreciate you pulled out the divestiture on the U.S., so if I understood you correctly though, given that's ongoing, for the 4th quarter your outlook is for similar growth rates than to the 3rd quarter?

Yeah, similar growth rates to the 3rd quarter, Leon, so we would have, we would have a similar type of impact, you know, meaning, again, just to refresh the 3rd quarter was up just over 6%.

Once you adjust that for the trans personnel, we're up 8.3%, so I would anticipate something, some similar type of numbers in the 4th quarter as well.

Terrific.

Thank you.

Yep.

Thank you all.

As usual, if there's any questions at all, feel free to give us a call.

I also would encourage to you sign onto the website regarding the memo that Mike put out on the convertible dilution.

I think that's an important memo and will help with you your models.

Thank you.

This concludes today's conference call.

Thank you for participating.

You may disconnect at this time.