ManpowerGroup Inc (MAN) 2006 Q1 法說會逐字稿

Good morning and welcome to Manpower's 2006 first quarter earnings conference call. [OPERATOR INSTRUCTIONS] Today's conference is being recorded.

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

Now I will turn the meeting over to your host, Mr. Jeff Joerres, Chairman and CEO.

Sir, you may begin.

All right, thank you, and good morning.

Welcome to the first quarter conference call for 2006.

As usual, I'm here with Mike Van Handel this morning, our Chief Financial Officer.

We'll go through the results in general and then discuss the segments in more detail.

We've got a few more items in this quarter, so I want to make sure that Mike then gives some color on those as well as on the income statement and anything that affected the balance sheet.

And then also we'll give you a look at what our outlook would be for the second quarter of 2006.

Before we move into the 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 on Form 10-K and in the other Securities and Exchange Commission filings of the Company which information is incorporated herein by reference.

Jeff.

Thanks, Mike.

This quarter is going to be fun to talk about.

It really was a good first quarter 2006 for Manpower.

It's the first time, actually, in several years that we're seeing all the cylinders of the organization beginning to fire.

And given the work that we've done over the last several years that we've been talking to all of you about on our efforts on margin, on expenses, what's happening is more cylinders are firing, the leverage really becomes much greater.

Many of the geographies continued their trend that we saw at the end of 2005.

I would also like to point out, as I will a few times, I'm sure Mike will during the call that we were aided this quarter by a few extra days, depending on which geography you're in, compared to last year, because of the way and where Easter fell.

Last year at this time we were explaining why the first quarter was down a little, and this year I guess we're explaining why there's a piece of it that's up.

Clearly it's much more than just the shift of Easter, and we'll get into that a little bit more.

We finished with revenue of nearly $4 billion in the first quarter.

This is a record revenue for the first quarter.

The first quarter is traditionally a seasonally small quarter for us, so reaching 4 billion shows that we really are achieving some solid growth throughout the organization.

Our revenue was up 11% in constant currency over 2005, 5% in U.S. dollars.

We estimated that about 2% of that growth was due to the timing of the Easter holidays.

Our gross profit has increased nicely, 12 basis points, to 18.3%.

That was aided by several factors that I'll get into in a little more depth on later.

The operating profit for the quarter was 60 million, down 5% in U.S. dollars and up 5% in constant currency.

Of course, this needs to be dissected a bit.

The operating profit was impacted by a few one-time items.

We had a reorganization charge that we announced our intention to do in the fourth quarter, and that's primarily in the U.K. operations.

And we did that in the first quarter.

That totaled $9 million.

Additionally, we've been working for some time now, well over a year, on a very involved project within the organization on a global basis to take a hard and sophisticated look at recalibrating our cost.

We've done this through a very systematic approach.

Basically every line item in the business.

This project, which is named Titan, is focused on nonpersonnel costs.

That doesn't mean that we're not working on efficiencies that involve people, but this specific project Titan is related to the recalibration of nonpersonnel costs.

The one-time charge associated with this project is $9 million and we took that in this first quarter.

If you exclude those two one-time items operating profit would be up 25%, or 35% in constant currency.

With an operating profit margin of 2%, which is up 30 basis points from 2005.

You should also keep in mind that the first quarter also includes a cost of stock options and stock purchase plans for the first time under the new accounting rules.

This reduced our operating profit by 3.4 million, earnings per share impact was $0.03.

Our earnings per share ended up at $0.59, which includes the previously disclosed sale of our Swedish payroll business of $0.27, the one-time cost of $0.16 regarding the reorganization, and project Titan that I previously mentioned.

Excluding these items, earnings per share would have come in at $0.48, which includes a negative impact of $0.06 compared to our previous estimate of a minus $0.03.

This represents an increase in earnings per share of 37%, or 51% in constant currency.

In addition to what we've done in the operational side, to have a very good quarter, we also did this with the backdrop of rebranding the entire organization.

The rebranding project, which we've been working on for over 24 months, makes sure that the internal side of behavior, as well as the external side, the image, as well as our brand projection, take on all of the best attributes of Manpower and our aspirational attributes.

We've increased our ad spending, we redid all of our materials, we're replacing all of our signage.

And as you can see, we've done all of this without any negative impact to our first quarter numbers.

The brand launch was extremely successful.

It is well received by our clients, very well received internally and giving us a tremendous amount of momentum and energy that we believe will allow us to take market share and do it at a slight premium price based on the service that we deliver to our clients.

The branding is all about Manpower being the leader in contemporary working, about what's now and what's next in the world of work.

You can see it displayed in the new image as well as the massive advertising that we've done throughout the world.

All in all, when you take all of those things into consideration, we have extremely positive signs for the Company.

We are working effectively on the growth line, the expense line, and the margin line, and the hard work and institutionalization of these techniques are paying off for us handsomely.

Based on the trends that we are seeing in the marketplace as well as the confidence we have in our ability to execute, we anticipate the second quarter to be between $0.76 and $0.80 of earnings with a negative currency impact of $0.03.

I'd like to give you a bit more color on the consolidated gross margin.

What is generating the increases and how we're pursuing the market.

As mentioned earlier our gross profit increased 12 basis points year-over-year to 18.3%.

This marks the first time in the last five quarters that we have seen a year-over-year gross margin improvement.

More important, we expect this trend to continue over the next few quarters.

There have been some positive signs and things that are happening across the markets.

Overall we continue to see price pressures stabilize in many markets, including France.

In some markets, such as the U.S., we are seeing improving gross margins as our direct costs, such as Workers' Compensation and SUTA, are declining.

Additionally, we are seeing positive impact from our investment and permanent recruitment.

We continue to add recruiters globally which has helped drive growth and permanent recruitment fees over 40% in constant currency.

Additionally, the pricing discipline we implemented in Japan and the U.K. are also paying dividends on the margin line.

I'd like now to move into the segment detail beginning with the U.S.

The first quarter of the United -- for the U.S. was a very strong quarter.

Sales increased 7%, U.S. achieved an operating profit margin of $9 million, or nearly doubling of an operating profit and operating margin.

Please remember that the 7% has an estimated impact of about 1% for Easter.

So if you were to take a better view of this and look at the trend line, it would probably be best to look at average daily sales.

And average daily sales in the U.S. for the quarter was 6%.

Now, we are seeing many of the same trends that we were seeing in the fourth quarter, which is continued growth in office skills, which is up 12% for us.

We are seeing an expansion in large account as our large accounts are seeing the value that we're bringing, and they're actually consolidating their spend with us much more rapidly than we had anticipated, which is giving us very good leverage.

The operating profit in the U.S. nearly doubled to 9 million.

This operating profit is generated from, of course, the leverage that you see from the growth rate associated with 7%, good expense management, but also an increasing gross margin line due to right terms, right clients, but also we're starting to see a trend toward lower direct costs such as Workers' Compensation and SUTA.

This improvement is typical for the stage of the economic cycle that we're in.

Also a positive development, we are seeing gross profit margin expansion due to the growth in permanent recruitment fees which in the U.S. were up 46%.

It's still off too small of a base for us to get overly excited about, but we are continuing to drive that business and believe that we have good growth potential in that business across the U.S., as well as other geographies.

In fact, if we were to take all of the geographies and add them together, in the first quarter of 2005, our gross profit, permanent placement as a percent of gross profit was 7.3.

So we had 7.3% gross profit up last year first quarter.

This year, it's 9.1%.

So we were able to improve fairly dramatically the first quarter of '05, 7.3, first quarter of '06 to 9.1.

And you can see that's the work that we've put into it.

Our French operation also did quite well.

Revenues were up in constant currency 10% to 1.3 billion, up 1% in U.S. dollars.

Operating profit was up 18% in constant currency to 30 million, with the operating profit margin improving 20 basis points to 2.4%.

It should be noted that this is the first time since the first quarter in 2001 that our daily sales growth, if you take out the Easter effect, is over 7%.

Therefore, we are starting to get some good leverage and momentum as we see our business start to expand in the French area.

Additionally, we are able to maintain our pricing.

The pricing pressures in France still exist but we've gotten -- but have not gotten any worse.

In fact, we are starting to see some behavior in France that would indicate not only has the capacity filled in from the previous branch openings over the last few years but there's also, at least for now, been a bit more of a understanding of the sensitivity and logic behind good pricing discipline.

The operating profit margins improvement to 2.4% represents the first time in five quarters that we did not see a year-over-year decline in our operating profit margin.

Many of you may have followed the labor law changes that were attempted in France regarding the youth labor law, or what would be called CPE.

This was introduced and then repealed by the government.

We felt as though that if did it go through it would have little effect.

The fact that it it hasn't gone through actually, I guess, you could say on the margin would be very slightly positive.

But we didn't see is it having a major effect if it did go through.

And, in fact, it did not have an effect or disruption in our business, as many of the people that were protesting about the CPE were not employed by us, they were students.

Based on what we're seeing in the marketplace, we would anticipate that our growth rates for the second quarter would be similar to what we've seen in the average daily sales in the first.

We are starting to see a slight tick-up as we move into the second quarter in France.

Europe, Middle East, and Africa, except France, was our largest producer in revenue in the first quarter, which is a trend that we've seen for some time.

As we've grown, many of the markets in that segment.

Growth was a little over 15% in constant currency, 6% in U.S. dollars.

If you were to exclude the Easter impact it would be about 11% growth coming from this segment in constant currency.

This reflects the continuation of strong growth trends that we've experienced in the fourth quarter.

We clearly are getting the effect of both secular demand and cyclical demand as we are seeing production across the majority of the countries improve, and as a result, usage of all levels of our service from light industrial to office are increasing.

We were able to increase our gross profit percent in the first quarter, primarily due to the positive effects from permanent placement, EMEA is our largest region currently for permanent placement recruitment, and we are clearly seeing the positive effects in this mix of business.

Operating profits were up 69% in constant currency and 54% in U.S. dollars to 23 million.

With an operating profit margin of 1.6% up 50 basis points.

Operating profits for the first quarter include the $8 million reorganization charge associated with the U.K.

We talked about this in previous quarters.

We felt that it was the right thing to do to adjust our cost basis as well as some of the placement of our offices in the U.K., so we took the action.

If you were to exclude these reorganization costs in the U.K., operating profits more than doubled to $31 million.

Like the other parts of the world, we are able to do this while investing in the branding campaign that we initiated on February 21.

The number of office signage changes and advertisements were much higher in EMEA than almost any other parts of the Manpower world, and as a result we believe that we will have very good inroads but we still did not have to impact our profitability in the first quarter.

When you look to the outstanding performances within the group, you can see that with the exception of Manpower U.K., we are getting very good growth rates.

Elan grew at 20%, Italy 23, Germany 28, Holland 30, Belgium over 30, Nordics up over 23.

Of course, all of this in constant currency.

These revenue performance translated into strong operating performance because of the leverage and the work that we've done in those countries.

I'd like to give you just a little bit more color in the U.K. since it is the one that didn't grow in the EMEA region.

In fact, saw revenue drop.

Along with the reorganization we have taken a number of pricing actions, and this has, unfortunately, resulted in a loss of a few customers.

We do believe this is the right thing to do and is in the best interest and long-term health of the business.

As I explained before, in the fourth quarter we may be able -- we may have to get a little smaller on the top line to become more profitable in the U.K.

I have a great deal of confidence in the management team in the U.K., the actions they are taking and feeling very confident that we will be able to move this market back to be closer in line with the performances of the rest of the EMEA segment.

While we are seeing some very strong growth in the first quarter in EMEA, we expect these to continue into the second quarter.

That said, you have to discount the Easter, where it falls.

As a result, we would see our revenue growth for this first quarter being more in the range of 7 to 9%.

Jefferson Wells, switching to them, increased their revenue by 3% to 96 million.

Operating profit of 6 million was down from the first quarter of '05 primarily due to the below normal utilization of our professionals in January and February.

We are confident that this is a short-term phenomena.

As we're able to improve utilization with the improved growth of the business in March our March revenues were up 10% over the prior year, and utilization was back to an acceptable level.

This bodes well for improving both growth rates and margin trends in the second quarter.

While we could have managed utilization more aggressively, we were reluctant to take any more action with our professionals as we are very keen to be the kind of employer that can attract a talent that is clearly in short supply in the U.S. markets, and for that matter across Europe.

Our business mix continued to improve.

Sarbanes-Oxley now accounts for about a third of our business while the tax work and tax preparation now accounts for nearly 10% of the business, which is good recurring revenue.

Finance and accounting staff augmentation continues to grow as does our sourcing projects and IT audits, construction audits, and other project-based work.

Our expansion into the international markets is also going well.

The London office is profitable and up and running at a very swift pace, and we've already established in Amsterdam and we will soon be in Paris, Milan, and Frankfurt.

There is much more of an understanding now of the impact of Sarbanes-Oxley and how it will tail off or how it has tailed off, as we do believe that it is approaching a new low-watermark, and is about to stabilize there.

We are now into much more project mode as opposed to emergency mode with our clients, and therefore we're confident of how we are able to build our business going forward.

Currently our pipeline for business is very strong.

In fact, it's some of the strongest sales pipeline we've seen in the business if we were to discount the abnormally high demand in previous periods because of Sarbanes-Oxley.

Switching to Right Management's revenue, which was down 4% in constant currency and down 8% in U.S. dollars, however we are starting to see the positive effects of the M&A activity as well as our market penetration strategies.

We have seen significant improvement in monthly billings with March being much stronger than January, and we are seeing our deferred revenue in that business continue to increase.

We have done several corrections within the business, ranging from appropriately sizing our offices in Japan, across Europe, and in some cases the U.S.

We have done this over the last year and as a result our cost basis now is extremely competitive.

Our operating profit margin came in at $4 million which includes a $1 million reorganization charge.

While we are seeing a decline in our operating profit margin, it is as we have anticipated and expected, and with our more robust business backlog, we are feeling quite optimistic that we are at the inflection point with the Right Management business.

As I stated earlier, the M&A activity has picked up substantially, and being the industry leader we are participating in the majority of those mergers and acquisitions, and as a result the downsizing that comes along with those mergers and acquisitions.

The other operation segment continued to do well.

We're expanding in many markets and seeing a robust demand for our services.

Constant currency growth was 14%, bringing the revenue for our other operation segment to $555 million, operating unit profit of 18 million is an increase of 52% in constant currency, yielding an operating profit margin of 3.2% for the segment.

There are several strong performances within the segment.

Mexico was up 31% in constant currency, Argentina 39%, Brazil over 50%, and we had other very good performances within the region as well, our segment, I should say.

Japan's operating unit profit expanded by 65% in constant currency.

We were able to expand our operating unit profit by 140 basis points.

As we talked about earlier, we focused on Japan now for several quarters, the team is doing a very nice job of executing and clawing back our rightful place in the market.

Now that we have our pricing and cost basis in line in Japan, we are very much focusing on top line, as the Japanese market continues to be a robust market for us and for the industry in general.

We were able to substantially grow India and China off of a relatively small base, but it was a doubling or more, much more in some cases, for those areas.

In the case of India, we were able to gain a leading market position with our joint venture with ABC Consultants, a highly reputable direct hire firm in the fourth quarter.

And this joint venture is going extremely well, and we continue to secure new business based on both organizations, but also largely on the global reach that we have as Manpower.

As I stated earlier, we anticipate the second quarter being a strong quarter for Manpower with earnings between $0.76 and $0.80.

With that, for a little bit more detail I'd like to turn it over to Mike.

Thank you, Jeff.

I'd like to begin by making a few comments on the earnings statement.

As Jeff has already mentioned, the earnings for the quarter were $0.59 but include a net favorable impact of $0.11 due to one-time items resulting in earnings of 0.48 per share, or a 37% increase on an adjusted basis.

This outperformance relative to our guidance range of $0.36 to $0.39 per share is entirely due to operational performance.

Our overall revenue performance was slightly stronger than expectations in most of our geographies and our cost control was superb.

The one-time items impact a few different lines on our earnings statement so I would like to take a moment to give you the details.

First, the gain on the sales of Swedish payroll processing business was $29.3 million before tax, and 23.7 million after tax.

The pretax gain of 29.3 million is included in miscellaneous income which is reported as interest and other income expense on the face of the earnings statement.

Second, the reorganization charges totaled $10.7 million before tax, or $7.6 million after tax.

Of the 10.7 million pretax charge, 9 million is included in selling and administrative expenses, and 1.7 million is included in miscellaneous expense, which is reported as interest and other income expense on the face of the earnings statement.

Lastly, project Titan's cost of $9.2 million before tax, or $5.8 million after tax, are included in corporate expenses and reported as selling and administrative expenses on the earnings statement.

Our income tax rate for the quarter was unusually low at 30.7%.

This is due to the varying tax rates associated with the one-time items.

After adjusting for these items, our normalized tax rate is 36.5%, right in line with our forecast.

Now I'd like to turn your attention to our balance sheet.

Total debt outstanding at quarter end was 754 million, an increase of 19 million from year end.

This increase was almost entirely due to the impact of changes in exchange rates on our euro-denominated borrowings.

Net debt improved markedly decreasing by $80 million to $200 million in the quarter, and our total debt to capitalization remains very strong at 25%, similar to where it was at the prior year end.

Our accounts receivable declined $46 million since year end, or $93 million excluding the impact of exchange rates.

This reflects the normal seasonal pattern as first quarter revenues are typically lower than the fourth quarter.

Our number of days sales outstanding was comparable to the prior year.

Free cash flow defined as cash from operations less capital expenditures was $62 million, which is strong for the seasonally slow first quarter.

Cash was favorably impacted $30 million from the sale of our Swedish business and $27 million from the exercise of stock options and shares purchased under our stock purchase plan.

We also used $30 million -- or $33 million of cash during the quarter to purchase 612,600 shares of the Company's stock.

Lastly I would like to discuss our expectations for the second quarter.

Overall we expect the solid revenue growth trends we experienced in the first quarter to continue into the second quarter.

Of course, the help we got from Easter in the first quarter will work against us in the second quarter.

As a result, our forecasted revenue growth is between 7 and 9% in constant currency or 4 to 6% in U.S. dollars.

Gross margins are expected to be up year-over-year about 30 basis points, reflecting anticipated gains in all segments.

Our operating profit margin is expected to expand year-over-year coming in between 2.8% and 3%.

In fact, we have the possibility of all segments showing year on year gains in operating margins.

We have not experienced such broad-based improvement in margins across all regions in over five years.

We estimate the tax rate for the quarter to be at 36.5%, resulting in earnings per share of $0.76 to $0.80, which includes negative currency impact of $0.03.

Jeff.

Thanks.

If we could now open it up for questions.

Thank you. [OPERATOR INSTRUCTIONS] Our first question comes from Mr. Mark Marcon of R. W. Baird.

Good morning and congratulations.

Wondering, obviously there was a lot in the news about the French elections coming up, and obviously all the disruptions that occurred over there.

It appears that based on your performance there wasn't that much of an impact.

I'm wondering if you can talk a little bit about how you see the elections playing out and what the potential impact could be in France over the -- not only this quarter coming up, but longer term and how you see things playing out over there?

Thanks.

Sure.

Well, the last thing I want to do is to state anything that's my opinion and have strikes out in front of our offices.

When you look at it, the CPE, or the youth employment, which for those that didn't follow it basically says if you're under 26, and you work for a job, a company can hire you and release you without all the large severance payments for up to two years.

This legislation actually passed and was put into law, and then it was repealed, based on the protests.

Having said that, the protests were isolated away from our businesses, did not impact our -- that we were able to tell, of any kind of size, impact at all our first quarter.

When we now look to the elections of next year, we think that, like most elections across Europe and in the United States as well and other places, it's about jobs.

That was a big platform that Merkel ran on in Germany, and we are starting to see the benefits of that.

We believe that in France that, too, will be a big focus, whether it be Sarcozi or Villepin or whoever else may be running.

We look at it right now as the next year as very stable, as that typically happens, leading up to an election.

We think there may be some moves made by the government to increase some subsidies to employers, which we would be one of them, in order to stimulate some growth in the labor market, but all of these are supposition.

So what we can say is the CPE had very little effect on us, and going forward we look at it as fairly -- a clean sheet, from a labor perspective, in the next year, year and a half.

After that depending on who gets into office, there will need to be some forms of changes within the labor market in order to make France more flexible.

Being very myopic, of course, we believe that our industry, Manpower and the industry is an already recognized vehicle that is regulated and has laws wrapped around it that we may be able to use more to get that flexibility.

So right now, quiet period, we believe, slight positive, if anything, and hopefully in the future they will be able to use us as an outlet, as opposed to passing pure flexibility, which doesn't seem to be acceptable to the French public.

Great.

I'm wondering if I could ask one follow-up.

In the U.K., you obviously went through some disruptions over there, and yet EMEA was able to perform on the whole tremendously well.

I'm wondering, how long do you think it will take on the U.K. side to kind of go through all of the restructuring, reset your clients, and then start building back up?

That's a good question.

A couple advantages that we would have in the U.K., is one, we have a very good management team.

Two, you can move quite rapidly when it comes to reorganization.

You can close offices, move the people into different offices, or move the people out of the Company rapidly, compared to what we have gone through in France, of course, last year.

So we think that you will start to see the effects of what we did in the first quarter already this year, probably in the third quarter primarily.

When it comes to clawing back our rightful place in the market, paring away a few of the clients, focusing a little bit more on a different client set that will take a little longer.

You'd probably start to see that by the fourth quarter, but I think you'd see more of those effects in 2007 than you would in 2006.

Terrific.

Congratulations on a great job.

Thanks, Mark.

The next question comes from Ms. Leone Young of Citigroup.

You may ask your question.

Yes, good morning and congratulations.

Maybe asking that question on the U.K. and the EMEA margins a different way, you had mentioned, of course that the EMEA margins were impacted by the 8 million, and adding that back is the 31, would you then consider that a sustainable margin performance?

Or is there going to be continued drag from the U.K.?

Well, I think in terms of adding back that 8 million, so that is a one-time, so that would get us, Leone, to a 2.2% operating margin.

In that 2.2 operating margin is the U.K., which would be today at a substantially lower operating margin than the group overall.

So while I don't anticipate further one-time items at this point going forward, within that region, I think, you know, the U.K., given the fact that it is below the group, will drag the overall EMEA margin, but I think as we look to improve the U.K., while it's going to be a drag on the average I think therein lies an opportunity for improvement as well as we go forward.

So I'm encouraged that through the second half of this year we'll see the U.K. improve and into next year, and that should overall help the EMEA margin.

The other thing that I think is a positive for the EMEA region in general is just the high growth we've been getting out of some of the relatively higher margin regions like Germany, Italy, the Nordics, so really the other thing that we have occurring here is a positive mix influence on both gross margin and operating margin.

So I think that also bodes well for future operating margin expansion in that region.

Great.

And just a quick follow-up.

Stripping out, again, the one-time items out of corporate, should that be considered a pretty good run rate going forward?

Yes, if you strip out the one-time items in corporate you end up with 18.1 million as the expense in the first quarter.

And as I look through the balance of the year, I think that is in that range seems to be a range we're in.

We have a number of elements included therein as we're doing more centralized IT work.

We have a little bit higher costs related to IT that is no longer sitting in the region that is somewhat at the center, a little bit of branding costs given some of the initiatives we have on the branding side.

So, yes, I think something on the order of 18 to 19 million just for corporate expense stand-alone.

That excludes the amortization, to make sure I'm clear on that, would be a sensible range.

Perfect.

Thank you.

Our next question comes from Ms. Kelly Flynn of UBS.

You may ask your question.

Thanks.

I have a couple of questions.

First of all, on the gross profit margin, Jeff, you kind of touched on some of the regions, but I was hoping one of you could give more detail on what caused that increase.

You can go by country and give us as much color as possible on kind of what the year-over-year trends were or kind of the contribution to the increase, like you did last time.

I'll give some high level, and, Mike, you can add as much color as you feel comfortable adding.

I get the easy part.

I'll just do the high-level stuff.

When you look at it there's a couple drivers in this.

One is you look at the size of the U.S. and you do get benefit out of the trending down and some of those costs of SUTA and Workers' Comp.

Secondly, on a worldwide basis you now have 9% of the GP, a little over 9% of the GP coming from perm placement, which is the clear impact of GP.

Third, what you have, as Mike just mentioned, you get some very high growth and higher margin countries, so you get a geographical mix, not just a product mix or service mix, if you look at perm placement.

And then fourth, if you were to look at some of the actions that we have taken in pricing, in going after the local and retail business, that would have a marginal effect but very small, probably not major.

So you're really looking at mix of business, some declining costs on the service line, and perm placement being the big hit on that -- or the big upswing on that.

Okay.

I don't think I have a whole lot more to add to that, Kelly.

I think that was a good summary.

I think as perhaps you saw on the slide chart on the webcast, the only negative that we had in the quarter in terms of gross margin was the fact that with Right, which had the higher gross margin, becoming a smaller percentage of the business we actually have a negative mix impact coming out of Right.

I think one of the most encouraging things as I look across the business, which as well was on our slide, is the, when you look at our temporary recruitment business, our regular staffing business overall company-wide, we saw some improvement on that gross margin, which I think is a real plus, and that reflects some of the things that Jeff mentioned.

The natural cyclical decline in state unemployment taxes and Workers' Compensation, it's fairly typical at this stage of the cycle.

We've been talking about it now for several quarters, and now we're starting to see those direct costs decrease, and we're starting to feel the advantage of that coming through the gross margin line.

So I think that pretty much summarizes where things are at.

Okay.

And what about France?

You mentioned the inflection point kind of in the operating margin maybe pricing stabilizing.

Are we at a point where we're starting to see potentially an inflection point in gross margin, or is there any other color you could give us on France there?

Sure.

I think overall we see pricing having stabilized.

It still is a difficult market, and I think always will be a difficult market, but we certainly seem to see pricing stabilizing there for the first quarter overall gross margins were slightly below the previous year, but the year on year gap has been closing, and as we look forward to the second quarter, I would anticipate right now that second quarter gross margins in France should be slightly higher, the same as or slightly higher than what we saw prior year.

So I think that's positive in terms of overall direction of the French market.

Okay.

And then, Mike, I know you have this on the slide, but I just want to confirm.

You're saying that the $0.48 adjusts for not only the charges but also the tax impact.

So $0.48 is with a normalized tax rate?

That's exactly right.

Then just one more.

On the U.K., I think you mentioned a couple times obviously that that's weaker than the rest of Europe.

Did you quantify that?

I think you had last quarter.

Could you just give any numbers there, if possible, as far as the year-over-year trend?

Well, we gave some sales trends.

If you were to be looking at OUP, as we would call it, with it coming in 1.6% of the charges, or, Mike, what around 2% without the charge of the U.K.?

Right.

You would see that the U.K. would be probably slightly less than the average.

So they are driving that down on the operating profit margin.

Okay.

From a trend standpoint, Kelly, for the fourth quarter constant currency, U.K. was down 7% versus 12% in the first quarter.

So a little bit more contraction, and really that reflects some of the actions we've taken from a pricing standpoint and the business impact of that.

Okay.

Great.

Thank you very much.

Your next question comes from TC Robillard, Banc of America Securities.

I actually just wanted to get a little more color on the strength in the EMEA region on the operating profit line.

I know you made some comments about nice shift in country mix.

Could you give a little color maybe around improvement from the permanent placement business helping drive that?

Just try to kind of balance that versus the geographic mix.

Yes.

If you look at permanent recruitment within that market, it was up 32% overall.

That's the strongest region for permanent recruitment for us.

They're well north of 10% of gross profit is in the permanent recruitment side.

So clearly that has had a positive impact overall in gross margins.

So we saw a good gross margin gain as a result of permanent recruitment there, and really when you look -- when you look overall at the operating margin, which was adjusted at 2.2% that gain really, what is that, about 110 basis points.

About roughly half of that is coming off of -- a little bit better than half of that is coming off of the GP line, and roughly half of that is coming off of SG&A leverage.

So really I think in EMEA we've got a combination of leveraging our cost base as well as having some good activity and good investment coming through on the GP line, and part of that leveraging story is something that I know many of you are probably tired of me talking about.

I've been talking about it for the last three or four years as we've been going into a recession in Europe and now we're finally starting to see ourselves come out.

We're starting to enjoy the leverage as we build that capacity back up in a number of markets, or I should say fill that capacity back up in a number of markets and start to leverage that cost base.

Great.

Thanks.

Then just kind of one quick question on Jefferson Wells.

What is going to be the big driver to kind of get the profit margin back up into kind of the double-digit range?

Is that just strictly kind of a utilization metric that is kind of the key lever there, and maybe if you can kind of put some parameters around some timing on that, that would be great.

Thank you.

Sure.

I think, for Jefferson Wells I think the key thing clearly is utilization, and as Jeff said earlier in the call, we have taken some action in the first quarter to shape that up as well as see some -- along with some increasing volumes that have come through, so we anticipate utilization to be really back where it needs to be in the second quarter.

So I think we'll see our overall operating margins in Jefferson Wells to move back up into the lower double digits.

As we get into some of the stronger seasonal periods, which is the second and third quarter, that's where we're going to see stronger operating margin.

So I think it's clearly about utilization, it's about managing the bench and we've got a great management team there.

I think they're managing the business flows quite well, and, so I anticipate we're going to see improved -- much improved operating margins as we look to the next couple of quarters.

Great.

Thanks a lot.

Our next question comes from Mr. Jeff Silber of Harris Nesbitt.

Thanks.

On EMEA my congratulations as well.

I was wondering if I can get a little bit more color on project Titan and if you can give us some examples about what the Company implemented and what do you expect this project to save the Company over the long term?

Well, it is a project that we just didn't decide to do in a whim.

We've been working on this for some time.

Would it involved is a group of about 150 or so people across the world that went into their business and their colleagues' business and said is there a way to recalibrate this, can we reduce the spend through aggregating, that's one, but we find that to be of the lowest impact.

The largest impact, of course, would be to reduce demand on certain things.

So a small but you can imagine, with 30,000 people in the Company, we found out that many of the people in the Company have two mobile devices, an e-mail-type device and a voice device.

You take that out and you're looking at hundreds and hundreds of thousands of dollars of savings.

So those are the things that we are doing.

We used a firm who is an expert in this, in this methodology, which is really a grounds up ideas coming up through the field of how we can recalibrate our expenses.

As tough of a project is like this it's been actually energizing for the Company to see that we can take some of these dollars, redirect them into branding, and then take the others and redirect them right back to our shareholders.

So these typically have no longer than an 18-month horizon on the savings.

Many of them are immediate, and some of them are further out.

And we are going to be in the implementation phase of those starting in, what, another 30 days or so.

So in terms of trying to quantify that for us, is that something you're comfortable doing?

No.

Okay.

You mentioned the rebranding cost.

That was my second question.

Roughly how much did you spend in the first quarter?

Is that in corporate expenses?

And is there going to be any more spending on that going forward?

Well, you did see some in corporate expenses, because what we did is we launched a brand center.

You can now go in, in the field, and pull down any type of advertisement you want, change the words locally.

But you saw the branding costs really spread across all of the countries.

We have had them now for about a year work on getting rid of all of their inventory, knowing that this new stuff was coming, and also take pieces from other parts of their business and make sure that we were spending enough on branding.

We do not see branding going forward having any bubble in our financials.

We have a very strict plan.

We have pulled out costs in other areas to keep the advertising going, to make sure that all of the signages and the 4500 offices gets changed, and we are well on our way to that.

But I don't think you would be seeing any big bubble.

We have got this baked in.

That's also part of project Titan, is to take some of that money that is being spent in nonrevenue and marketing areas and redirect some of that to branding.

I'm sorry, roughly how much was spent in the first quarter?

You can't -- it's hard to find it, because it's baked in all over the place.

I'm not quite sure how many ads Columbia ran, for example.

Out of the corporate expense, you're looking at a pretty small number, let's say $1 million.

Okay, great.

Because we've actually been expensing, as we're doing the project, it's been in there for the last 12 months.

You have felt it but maybe you didn't know it the last couple of quarters, where we've been executing against the plan.

All right.

Thanks for the clarification.

Your next question comes from Mr. Jim Janesky of Ryan Beck & Company.

Good morning.

Couple of questions.

What do you think that perm overall, Jeff, can get as a percentage of gross profit as we move throughout the employment recovery?

Well, it could get really high, but our strategy is not to let that happen.

Right now we kind of have a self-imposed governor, if you will, that we would see that we'd like to get it to about 15% of the GP coming from perm.

We think if you get over that, you're highly susceptible to falling off of a cliff when that turns.

And we're really looking for a very good sustainable part of our portfolio.

That doesn't mean that you wouldn't see a couple quarters maybe pop over that, as we continue to add recruiters and actually take on several what we would call -- process outsourcing, where we take on thousands of assignments in a centralized way.

But right now internally we're saying about 15%.

Mike, you said Europe is about 13 right now?

Right.

So if you look at that contribution, and what it does, they've got another couple percent, but as our business grows, of course, the perm can continue to grow.

It's not like we stopped growing it at that, because we continue to see the core part of our business grow.

So we would see 15 as kind of the benchmark that we want to shoot for, not get too much above that, and then make sure that it's fitting in nicely into our portfolio of services.

Okay.

Great.

That's helpful.

Shifting to the U.S., have any of your customers at all, in the very recent past, let's say over the last two to four weeks, have they at all become concerned about growth due to just significant escalation in energy costs?

Are you seeing anyone getting nervous about that quite yet?

That's a good question, and the fact is, is we haven't.

I think it's one of those phenomena where they're saying my business is good but maybe somebody elses isn't good.

The only place where we're starting to feel a little skittishness is in conversation is in the home market.

Mostly residential, not commercial.

And we hear a little bit about it, but they -- it's more of a we've got to watch this, and then they place an order for eight people.

So the demand is still there, but there is a real watch out there for the housing market right now.

Okay.

Thank you.

The next question comes from Mr. Greg Cappelli of Credit Suisse.

You may ask your question.

Hi, guys.

Back to the perm number for a second, I'm sorry if I missed this I cut out for a little bit, but did you mention the perm business in France, is that actually big enough to be having an impact on that gross margin?

And can you let us know about how many consultants you now have in that market versus say, maybe, EMEA?

Sure.

Is it having an impact?

It's still early days in France, and obviously there's a big -- there's a big staffing business there, so in terms of impact, is it helping a little bit, I'd say a very little bit at this stage.

But the market is coming along.

We continue to invest in recruiters there, and dedicated recruiters, and we'll continue to invest throughout the year.

I don't know that we're going to disclose an exact number, but we're in the neighborhood of 200 recruiters at this point in time within the French market, and that would be a fraction of where we would be within the EMEA market.

Overall the Company would have well over 2,000 permanent recruiters every day filling orders.

So that gives you some perspective of the size but I think we'll -- the French market will continue to grow, but it will take awhile for that market to get up to 5%, 10% of overall gross margin, that's going to be a number of years to get to that level for them.

Okay.

That's helpful, Mike.

Then two more quick ones.

On the Jefferson Wells business, Jeff, you talked about the utilization beginning to improve.

If that business begins to eventually click on all cylinders again, what's the margin expectation you think they can -- what would be the normalized margin you would expect, if it performs well?

Well, we look at that business as right around a 40% gross margin business, and a low to middle teens operating margin business.

And based on what we've done with utilization, what we look at our backlog, what we saw with March sales, we disclosed it was 10%, right?

Yes.

So we saw some good March sales.

We believe that by next quarter you'll start to see the low double digits, and then we kind of build from there based on the book of business and demand.

Okay.

Great.

I think we'll always see -- Jefferson Wells is going to have some seasonal impact in the fourth quarter, and which will trail into the first quarter, and that's a bit of what we saw last year, so we'll always see weaker operating margins in Q4 and Q1 overall, and part of that just has to do with managing the bench and the utilization side of things, but I think that's where we'd end up being overall, is we'd be looking for low double-digit type margins on a full-year basis.

Got it.

Just one final one, kind of bigger picture, Jeff.

I guess -- have your thoughts changed at all with respect to your long-term operating margin goals, not only for the U.S., but globally?

For a long time you talked about that sort of 4% goal, and I just want to see if there's been any update there.

Are you going to let me bring it down?

Hopefully not.

No.

It's unchanged.

Just to put some history behind that our goal is 3.5%.

I rounded up.

No, no, it was 3.5%, then when we bought Right, because of the high-margin business, we said, you know what, we're not doing this just as our way to make 3.5, we'll show you that we can get to 4.0.

Now, Right has slid a little, so we're making it up in other areas.

Having said that, the team is committed on it.

If you look at the compensation of the team, including myself, we implemented performance shares, and the performance shares are built on hitting that operating profit.

So, no, we're not backing down from it.

We're not going to do anything bad to the Company to get there.

We're going to make sure that it's the good building blocks.

When we look at a quarter like this and the improvement on the basis points on the bottom line, extrapolated out, get some economies behind us, we're still on the hunt for that 4%.

Okay.

Thanks a lot.

Okay.

Your next question comes from Mr. Mark Marcon of R. W. Baird.

You may ask your question.

I had a follow-up.

With regard to the U.S. you mentioned that office was up about 12%.

What's driving that Jeff?

Is that basically a recovery in the market, or are you gaining share, and also can you tell us how light industrial is doing?

Well, it's a little hard to tell.

We haven't seen some of the numbers from the competition, and the industry doesn't break it out that well.

I'd say we probably might be picking up slight on the office side, but to be honest, we were lagging on the office side to begin with because we had our hands full with light industrial, where light industrial was up 15, 18, 20% for a while, that's now come down to a little under 10.

So we've got light industrial, or industrial under 10.

We are still lagging where we would like to be on Manpower Professional, primarily the engineering side, and much of that is really based on some projects and large clients that have come to an end, and as a result we had to move those out.

So it's not an industry issue as much as it is a book of business issue.

So we think the 12% in office, we've worked on that.

We've put some focus on it, and we think that there's more left in that area as well.

We also think that because of our book of business, which has some 50% from very large clients, they were able to stave off office a little bit more harshly and longer, but now there's that latent demand has built up, and we're starting to see that mix of business shift in our largest clients as well.

Are you seeing much of a pickup in terms of your retail demand?

Yes, we are seeing a bit of a pickup in retail, but it's still being dwarfed by large account, because what's happening is as we do more and more to help our large accounts really win in their business.

They're gaining more and more confidence and giving us more pieces of their business.

So we're going to continue to work on the mix, we're going to continue to take only the account business that really is good long-term business, the larger account business.

Retail is growing, but not as a percent, because the larger accounts are growing much faster.

Great.

And then in Japan you mentioned that the pricing has gotten better over there.

Is this just the first quarter of the improvement on pricing, or how far along are we in that?

Yes, just to clarify, I think the pricing in Japan has been okay.

I don't think we did the job ourselves in reacting to a law change associated with some health costs.

We implemented that pricing for the most part the middle of last year, and started to implement it through the third and fourth quarter.

We also are much more disciplined in our expenses.

So what you're seeing is the combination of the pricing really happening coming through and the expense management, which is why we're getting the big operating profit improvement.

Super.

Thank you.

Okay.

Last question.

The next question comes from Chris Gutek of Morgan Stanley.

You may ask your question.

Thanks, Jeff.

Kind of a big picture question for you focusing on continental Europe.

It does seem as if the macro environment there is modestly improving.

How would you characterize your level of confidence and optimism that that improvement will continue and based on that current trajectory and trends and based on past cycles the Company has been through what do you think a reasonable expectation is for growth over, let's say, the next 12 or 18 months in the continental Europe in aggregate?

Well, when we look at continental Europe, we're really just seeing the beginning of the up.

We were seeing a little of it in spotty markets last year, and we were talking about how we felt as though Europe was starting to gain some momentum.

Now we see the first quarter where Germany and Italy and Belgium and the list goes on, including France, seems to do better.

So -- are doing better.

So what we're really looking at is this is the beginning.

And while there are some elections coming up, some of that actually helps us because it will quiet down and let some of the market work itself.

So when we look at the projection, we're not economists, but I would feel quite comfortable over the balance of this year that we're going to see mainland Europe continue to do well relative to what they've done in the past.

Now, you get beyond that you get into 2007, I'm not going there, because anything can happen between now and then.

Fair enough.

Just a quick follow-up on Greg's earlier question about the 4% operating margin target.

Presumably with the better revenue growth almost across the board and with these cost cutting initiatives on top of that your visibility on ultimately achieving that target should be improving.

Any rough time frame for when you should get to that target?

Is it still a couple years away or could it be sooner?

Yes, we'll get to the 4% after we get to 3.8.

So when you get into time frames on something like that and you look at things that we don't have any control over, oil prices and this and that, clearly we've modeled it out multiple ways, as all of you can, it's a pretty big difference if you run this at a 10% growth versus a 5%, versus a 15, so the team is working hard at it, and you can see the path that we're on.

Now it's a matter of can we keep on that path, accelerate it, or does somebody throw a wrench into our spokes.

So I'm not trying to be elusive on it.

I just think that it would be trivializing something that's quite complex to be able to say, yes, we're going to be able to get there in X number of years when we just can't do that with a good sense of really saying this is why.

It would just be trying to hype the stock or something.

Makes sense.

Thanks, Jeff.

Okay.

Thanks, everyone.

This concludes today's call.

Thank you for participating.