ManpowerGroup Inc (MAN) 2006 Q2 法說會逐字稿

Good morning and welcome to Manpower's 2006 second 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.

Thank you and good morning.

Welcome to the second quarter conference call for 2006.

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

We'll go through the results, discuss the segments in a bit more detail, and then Mike will add more color to the numbers on the income statement as well as anything that's affected the balance sheet.

Mike will also spend some time covering the outlook beyond what I do in the general comments for the third quarter of 2006.

But before we move into the body of the call I'd like to have Mike just go over the Safe Harbor language.

Thank you, Jeff.

Good morning all.

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

Actual results might differ materially from those projected in the forward-looking statements.

Additional information concerning factors that could cause actual results to materially differ from those in the forward-looking statements can be found in the Company's annual report on Form 10-K and in the other Securities and Exchange Commission filings of the Company which information is incorporate herein by reference.

Great.

Thanks, Mike.

You know, in many ways I couldn't be more pleased with the accomplishments of the Manpower organization, the entire organization, the group of companies, for the performance in the second quarter 2006.

The first quarter of 2006 was really the first time in several years that we were seeing all cylinders in the organization beginning to fire.

What we're now seeing is the pace in which those cylinders are firing is really accelerating and gaining some momentum.

This means that we're in the sweet spot for generating operational leverage.

Those of you who know our company well enough know that once you get to a point where we're able to work on the efficiencies of the Company, you get some top line, it really drives down quickly into the bottom line.

Most geographies in all business units improved over 2005, and almost without exception, improved even on a sequential basis.

As mentioned in our first quarter conference call our revenue was negatively impacted in the second quarter because of the timing of the Easter holiday.

In general revenue was up 10% in constant currency, 10% in U.S. dollars, as currency had really no effect on the quarter.

Revenue, $4.4 billion.

A very healthy second quarter for us.

The revenue increase that we experienced was spread for the most part across all units with our European operations leading the way with EMEA revenues increasing 12% in constant currency, and France revenues up 10%.

Our gross profit improved nicely, up 15 basis points to 18.4%.

There are many items that contributed to this.

I'll cover them in a bit more depth, but what I'd like to do is to just give you right now two highlights.

One is, really it's the pay off that we're seeing in permanent placement, the recruitment that we're doing.

And also, the consistent theory of pricing discipline.

Pricing discipline is a constant theme that we've had had for many years.

It's not something you can turn on quickly but clearly you can turn off quickly.

So we are very vigilant to make sure that we do not lose our discipline in that pricing side.

That discipline that we have had over several years is paying off on the gross margin line.

Operating profit for the quarter is $139 million, up 27% in U.S. dollars and constant currency.

A tremendous accomplishment for the organization.

Showing that we are on a very consistent path to improve our operating profit margin.

Our operating profit margin came in at 3.1%, 40 basis points above prior year.

A good sign for things to come in the future as we will continue to experience leverage as we move into the second half of the year.

Net income generated a little over $80 million, up 29%.

Earnings came in at $0.91, up 30%.

And again, last time you'll probably hear me say it, but currency had no effect on the earnings in this quarter.

We continue to drive our strategies.

Our strategies have now been in place for several years.

We are consistently improving our specialty business.

We're driving our operating efficiency.

We're very disciplined in our pricing, and we're achieving all of this with the best talent in the industry across the world.

The execution of our strategies has culminated in the launch of the Refresh brand, which occurred last quarter, first quarter of 2006, we continued our efforts to the second quarter.

We've nearly completed all of our 4400 locations and rebranding and continue to receive extremely positive feedback from our clients and candidates.

Additional revenue is also coming to us as I believe we are taking market share in many of the markets and we're doing this at the right price.

From an internal perspective, the energy is high.

The branding project has very much energized the team.

People across the world, our people, understand where we're going and how we're delivering unique services to the marketplace that others can't compete with us on.

This has allowed us to capture revenue on a joint basis between the Manpower group of companies.

We're continuing to gain momentum in this area, and I would say that we're really in its infancy in pulling together some really solid value propositions that our clients are looking for today.

Our gross profit has grown.

As I had mentioned earlier, we're getting it from two major areas, both of them building upon things that we've done in the past.

The first is that our core staff gross profit percent is growing.

This is based on a couple of things.

One of them what you're seeing in the U.S. with state unemployment tax and Workers' Compensation both being managed much more effectively.

Another is what we're able to do in the key account segment, particularly the middle market, selling the value proposition of Manpower, having our clients realize that it really is, which I think many have forgotten, it really is still about the match of the skills and the productivity of the workers that we're putting in place that makes a world of difference in the real cost of this service.

Also, we're committed to permanent recruitment.

We added over 100 permanent recruiters last quarter.

We are driving permanent recruitment in a very effective way.

And this reaches both for the retail and large account businesses.

We have established a very large presence not only here in the U.S. but across the world in recruitment process outsourcing.

Very large companies have given us very large-scale opportunities to help them win in the market to bring recruitment and people into their businesses as talent is getting harder to acquire.

This is an immensely efficient way of doing it for our clients and very beneficial to both of us.

We did experience some reduction in our gross margin percentage from the mix of business.

Right Management had a slight decline on the top line which had an effect on the overall gross profit percent.

Overall, though, it was good gross profit performance.

We will continue to work on margin expansion for the balance of the year and get the positive effects from that.

From a trends perspective, we're seeing positive trends.

The majority of this momentum is coming from Europe and Asia.

We continue to see growth in the U.S.

We do not see the same stability of momentum -- we see the same stability of momentum.

We just don't see the same acceleration that we would be seeing in Europe and Asia.

Based on these trends and what we're seeing in our gross profit mix of business as well as efficiency we anticipate third quarter earnings to be between $1 and $1.04.

As we can tell today it it would include a positive $0.02 from currency.

What I'd like to do now is to move into the segment detail.

The first segment we talk about is the U.S.

Revenue was up 6% to $535 million, which is a solid revenue growth.

Gross profit was also up year-over-year nearly 200 basis points, with costs well controlled.

We generated $22.5 million in operating profit, a 25% increase.

This yielded a 4.2% operating profit.

Very good performance from our U.S. organization.

The trends that we experienced in the first quarter really continued through much of the second quarter.

We continue to see year-over-year increase in billable hours in office and industrial, which contributed to the majority of the growth.

In our professional segment we are just about to anniversary some major contracts that expired.

We didn't lose the business but the services were no longer needed, which really bodes well for the future growth of professional, and we expect it to be a bit more robust in the third and fourth quarter.

Throughout the quarter we did see trends soften slightly.

In the U.S., with average daily revenue growth just above 4% in June.

However, when we look at the first few weeks of July, it's flattened out.

In other words, it's not declining any more than what we saw happening in June at the 4%.

So our outlook is still optimistic.

It's cautiously optimistic.

We read the press, too, but we're not hearing it from our clients.

So therefore we're confident we'll continue to see low double digit -- I'm sorry, low single-digit revenue growth in the U.S.

Operating profit was up $4.5 million over 2005 in the U.S.

The majority of this was really generated from the work that's been done on the gross profit margin.

Our permanent recruitment in the U.S. continues to do well.

We were up over 80% year on year, and we continue to build staff and gain momentum in the number of companies wanting to do business with us.

The U.S. team is focused, energized, and as a result, the prospects are quite good for us for really moving forward through the balance of 2006.

Moving on to our French operation, they're on a roll and it shows.

Revenue is up 10% in U.S. dollars, the same in constant currency.

That's 1.5 billion U.S. in revenue, or 1.2 billion in euros.

Our gross profit percent increased over last year.

Our costs were well controlled, and that all resulted in a $50 million operating unit profit, up over 18%, very solid performance for our French marketplace.

That ended all combined comes up with a 3.2% operating unit profit margin up 20 basis points.

Now, we continue to see these positive revenue trends when we look at the first few weeks of July.

The marketplace, like actually many others, is still challenging.

We're seeing a bit less in pricing competition as capacity has seemed to fill out for the industry.

We are seeing clients become a bit more frugal sometimes in their hiring expectation.

I would say the more difficult spot in the French market right now would be the automotive industry, which does affect us, but we had made a strategic decision five years ago to be very cautious with the amount of automotive that we take, and therefore it's worked well for us.

Our French market truly is solid, strong, continuing to see good up side, and we believe that we can continue to take market share and do it at the right price.

I did announce a few weeks ago a management change within the French organization.

Jean-Pierre Lemonnier is no longer with Manpower France.

Currently Jean-Francois Ferret will be acting as President of Manpower France.

Jean-Francois is immensely experienced in commercial business, has had a very successful, but short, albeit, but very successful uptake of Manpower in the last year.

I want to add also, when you have a $5.5 billion company you can imagine that the team is very strong, whether it be in the home office or the field.

So you can see from the results of the second quarter and the trend lines that we are very confident that we will continue to see solid results from Manpower France.

Moving on to our largest unit, EMEA, Europe, Middle East, and Africa, they did an outstanding job.

The growth is outstanding and the profit even more so.

Growth is up 11%, coming in at 1.6 billion.

Operating unit profit up 36% to 52 million.

A great performance, which resulted in 60 basis point improvement on our operating unit profit margin to 3.2%.

The results came from across the board.

Strong performances on top line and bottom line from many of the units within EMEA.

As you can see, Italy is up 25%, the Nordics 11.

Elan continues to do well, not only in the U.K. but more so even on a pan-European basis, up 14%.

Germany, very strong performance as well as Holland and many other countries within the region I should also note that some of these countries were the most impacted by the timing of Easter.

An extreme case is Germany where average daily revenue was up actually up 23% in constant currency for the second quarter.

What we're experiencing is an accelerated return on the profit line from growth.

So we're getting great leverage.

The entire continent is experiencing continued strength.

Moving off the continent a little, last quarter we announced the restructuring in the U.K.

That's been completed.

We are already seeing some favorable results from that restructuring.

It will take some time.

However, the management team there is focused, determined to improve their mix of business.

Their focus on permanent recruitment and is doing quite well.

In fact, while you see sales are down a bit, our profit is actually up year-over-year.

So it's following our strategy, which is we may need to shed some business, we may need to focus some more in order to generate the kind of profits that we're looking for.

Brook Street continued to do well.

Revenue up 7% in constant currency.

EMEA, as I mentioned earlier, is our largest segment, and by end of the year it will be by several million dollars, both revenue and profit.

This, if you were to go back, and those that have followed us for some time, is clearly a big part of our strategy.

France is an important part of our market but what we wanted to do was to grow France, but build around France and actually generate more from EMEA than what we have been from France, and that's absolutely occurring.

This is based on a lot of hard work and some very good growth in the market.

I've highlighted some growth -- some of the growth rates, and I really do want to tip my hat to one in particular, which is the Italian organization.

Just doing an outstanding job of gaining market share, exceeding in profit expectations, and keeping the brand quality, and really being the thought leader in the industry.

Tremendous drive for us, and when we look at the difference between the GDPs of France and Italy, we can see those two really becoming major major contributors to our European business.

Moving to another segment, Jefferson Wells.

Jefferson Wells revenue grew 6%, reaching nearly $100 million in revenue.

Sequentially up 3.5%.

Expenses and gross margins were well in line yielding a 10 million operating unit profit.

An operating profit unit margin of 10.2%.

Exceeding last year and following the anticipated pace that we had discussed in the first quarter of this year.

The business mix continues to be healthy.

We are seeing Sarbanes-Oxley become less of the business.

That doesn't mean it's less important but as companies get themselves more under control we are seeing it become less of a business.

Also, the second quarter benefited from a large municipal contract we had related to hurricane Katrina.

This accounted for 13% of our second quarter revenue and is expected to conclude sometime during the third quarter.

Having said that, our business mix continues to be strong, and, therefore, we anticipate our top line on a sequential basis for Jefferson Wells to be down just 2%.

We continued expansion with new client acquisitions, feel very comfortable that our model, which is the combination of the bench professionals and augmented professionals is really paying off, as our clients are telling us they like the consistency of the professionals, yet we're able to have some flexibility based on the changing skill requirements that the market is looking for.

We opened three offices in the second quarter, another in the U.S., then two additional in Europe, Paris, and Milan.

We consider our European expansion which right now will be primarily organic, to be immensely important as we look out over the next two, three, four, and five years.

Right Management had a very good quarter.

Revenues were down 4% to 104 million, but operating profit was up 19% in U.S. dollars. 18% in constant currency, which yields an $11 million profit.

We talked about this for a few quarters now when we really felt as though we were able to be at the inflection point after rebuilding much of the infrastructure and changing some of the footprint.

We continue to see the benefits of Right Management in two major areas.

One is the operational efficiency that the organization has taken on which includes really different ways of taking in candidates into our place of business and helping them through their career transition.

Additionally though, we're seeing an acceleration of the teaming of the Manpower units to bring forward unique offerings to our clients.

We've had several wins which was somewhat unusual historically in the industry where we have taken it away from the competitors, and it's really -- we're taking it away on a different value proposition.

The best service, which we are noted for, is the best quality service in the industry, but combine that with some of the other things and offerings we have, it really does allow us to take business from our competitors at a higher value.

One of them, for example, is we can go into a client and say that we can work at reducing your severance pay, not just getting them out of the business, but when you work closely with Manpower and Right Management together you can optimize that talent and therefore reduce your severance pay.

This and others are really allowing our clients to win when they use our business offerings.

We are confident that we're taking market share across the world in the career transition business.

Based on the strength of Right Management, the superior talent, and the unique offerings that I talked about earlier.

We are seeing a good backlog in deferred revenue, which is a positive sign that we're building up a strong book of business.

Many of the announcements you've heard, either in mergers and acquisitions or right-sizing companies, should fuel our growth over the next few quarters.

Being the industry leader we are involved in the majority of those transactions.

Remember, though, that the third quarter is always a seasonally weak quarter for Right Management.

We would expect to surpass what we did last third quarter, but it clearly cannot be, based on history and the way the candidates flow into our offices, as strong as the second quarter.

The Right Management team has done a very nice job across the world at staying focused and addressing some of the changing marketplace and at the same time doing just a superlative job in client satisfaction and candidate satisfaction.

The other operation segment, they also did quite well.

A theme that we have here is all of our cylinders are firing.

They're up 14% in constant currency, 11% in U.S. dollars, reaching $577 million in revenue.

Our operating profit was up 18% in constant currency, 13% in U.S. dollars.

Coming to $15 million.

We were able to increase our operating unit profit to 2.6%, up 10 basis points.

It's a bit harder in this segment to gain some of the very strong leverage, except for Japan, because many of the markets are smaller.

And we are continuing to be bullish on China and India, which means we're investing heavily and feel very confident that that is the right thing to do, particularly since in both of those markets we have very strong management teams.

Big profit producers in this segment for the second quarter, Australia, Japan increased their profit by 32% or more in constant currency, and Mexico with an increase of 20% in profitability.

We've made a management change in this segment as well.

We are promoting Varina Nissen who is the Managing Director of Australia and New Zealand operations, she's being promoted to Senior Vice President of Marketing and Branding.

Varina will be moving to Milwaukee in this promotion.

Then we are promoting Scott McLachlan, who is our Finance Director in Australia and New Zealand and he will be promoted to Managing Director.

Varina brings a tremendous amount of talent and experience in running a very innovative part of our operation..

The move will be effective September 1, and I extend my congratulations to both Scott and Varina on their promotions.

The Manpower team, they did a great job of executing in the second quarter this is an exciting time for us.

Things are coming together and converging in a nice way very quickly.

We achieved earnings of $0.91.

It's a very strong accomplishment of the group.

When we look forward to the quarter we feel optimistic.

The trends in our business throughout most of the parts of the world.

Remember, 85% of our business is outside the U.S.

And as I mentioned earlier the U.S., while they're seeing a bit of softening, it still is far too early to say it really has softened.

What it was was just a bit of a tail-off in the second quarter, and now it seems to be flattening and with good trends moving forward, which means that we would anticipate coming in between $1 and $1.04 for our earnings per share in the third quarter of 2006.

And now for a bit more detail on the financials I'll turn it over to Mike.

Okay, thank you, Jeff.

I'll begin today by discussing our balance sheet and cash flow, then follow that up with specific comments on our earnings statement, then finally concluding with comments on our outlook for the third quarter of this year.

Our balance sheet remains in great shape at the end of the quarter.

However, total debt did increase 293 million in the quarter to just over $1 billion as we are in the middle of refinancing our 200 million euro notes due at the end of July of this year.

On June 14, we issued 200 million euro notes with a seven-year maturity and a coupon of 4.75%.

The notes are priced to yield an effective interest rate of 4.86%.

The proceeds of these notes will be used to redeem the 200 million euro notes coming due at the end of this month, which have an effective interest rate of 5.63%.

So with this refinancing we will achieve a lower effective interest rate as well as an improved debt maturity profile.

Because the proceeds of the issuance are currently invested in short-term instruments, our cash balance also increased significantly to $768 million, bringing our net debt to $280 million, similar to the prior year end.

Our debt-to-capital ratio increased because we are in the midst of this refinancing, but I expect it to return to the mid-20s after we conclude the financing later this month.

Free cash flow, defined as cash from operations less capital expenditures, was very strong at $101 million, compared to $63 million in the prior year.

This increase in free cash flow is primarily attributable to the higher earnings this year compared to the prior year.

Capital expenditures have been stable between years at 35 million for the six months of this year compared to $36 million for the prior year.

Accounts receivable are up 403 million compared to December year end, reflecting higher revenue activity and changes in exchange rates which added $200 million.

Our number of days sales outstanding for the quarter improved one day from the first quarter of this year and was stable with the second quarter of 2005.

We continue to aggressively manage our accounts receivable portfolio looking for ways to optimize DSO through process improvements and better collections management.

So far this year we've repurchased approximately 2 million shares of common stock for 119 million, of which 1.4 million shares were repurchased in the second quarter for $86 million.

This leaves 2.7 million shares available for repurchase with a total purchase price not to exceed $117 million under the current authorized program.

With regards to the earnings statement I would like to remind you that we began expensing the cost of equity-based compensation on January 1, of this year in accordance with statement 123R.

Accordingly the earnings charge for the second quarter of this year was $0.03 per share bringing the charge for the first half of the year to $0.06 per share.

These costs are recorded in each of the operating segments as well as in corporate expenses.

I'd also like to call your attention that we have made a minor reclassification within our operating segments between France and EMEA.

This reclassification involved moving five of our eastern European operating units from the France segment to the EMEA segment.

Revenue from these reclassified units in the quarter was $23 million, and operating unit profit was negligible.

The reason for the reclassification was a change in managerial responsibilities for these units, and in accordance with the accounting rules we have made the appropriate classification and have restated the prior period segment results accordingly for consistency purposes.

Included in the appendix to our slide show and also filed in today's Form 8-K are the restated segment amounts for 2004, 2005, and the first quarter of 2006.

Finally, I'd like to talk about our third quarter forecast.

Overall we expect good growth in the third quarter in the range of 8 to 10% in constant currency, or 10 to 12% on a reported basis.

It's important to note that many of our operations have one less billing day in the quarter which will have a slight adverse effect on our growth rate.

In reviewing the individual operating units we have assumed a continuation of recent revenue growth trends throughout the third quarter.

As a result we estimate revenue growth in the range of 1 to 3% in the U.S. segment, or 4% on an average daily basis, consistent with what we saw in June.

Revenue growth in France and EMEA is expected to be in the range of second quarter growth after adjusting for the number of billable days.

Jefferson Wells is expected to be down 6 to 8% compared to the prior year as a result of the tail-off in SOX business which has occurred over the last year.

On a sequential basis Jefferson Wells is expected to be down about 2% as a result of the completion of the large contract Jeff previously discussed.

Excluding the impact of this contract we expect sequential growth in the mid single digits.

Right Management is expected to have its usual weak seasonal quarter in the third quarter and is expected to modestly contract compared to the prior year as it has for the first half of this year.

The other operation segment is expected to grow between 14 and 16% in constant currency, also similar to second quarter trends.

Our gross profit margin is expected to be in the range of the prior year.

We expect year-over-year improvements in the U.S., EMEA, and other operations segments.

Changes in business mix will likely offset these improvements.

In the case of France we expect a stable gross margin year on year as we anniversary the last of the social tax law changes which occurred on July 1, of 2005.

We expect continued improvement in our overall operating profit margin which we are forecasting to be in the range of 3.2 to 3.4%.

Estimated tax rate for the third quarter is 36.5%, similar to the second quarter, and this brings our earnings per share range to $1 to $1.04, which includes the positive currency impact of $0.02.

Jeff.

That's it for the prepared comments, so what I'd like to do is to open it up for questions.

So if you could give them directions on how to ask questions.

Thank you. [OPERATOR INSTRUCTIONS] Our first question comes from Michael Fox of JP Morgan.

Can you talk about -- you talked about strength in your specialty business, can you talk about how big that is as a percent of either revenue or gross margin?

Then what in particular are you seeing strength in?

Then also if you can talk about the availability of quality candidates for positions?

Thanks a lot.

I'll just give you a high level, and Mike can maybe give you a percent basis.

When we look at the specialty business, we would take Manpower Professional, Jefferson Wells, Elan, and Right Management, group those together, and look at where that business is going.

Manpower Professional across the world is growing nicely.

We are getting higher bill rates, and the higher bill rates are because we are moving up in skill sets consistently.

Elan, as you can see from the growth charts, at 13, 14% growth is actually outstanding growth, because if you go back the last year they were in the high 20s, if not 30s in many cases.

And then Right Management we feel quite good about, and Jefferson Wells, if you take out some of the noise in there is still doing well.

So that's kind of the overall picture.

When it comes to the candidate flow, I would say that for the most part we will have to continue to focus on the candidates.

Would I say it's getting very hard to find people?

No.

Is it getting harder?

Yes.

But I would say that our team out there is not spending more money or distressed about it, and I think that this is where the new branding project really has worked well for us as we are out in either on the ground floor, the high street offices in France and in Italy and other parts, or where we don't have high street offices, we're really using the brand to attract good candidates.

We are still up in the neighborhood of 60% of our candidates coming in through referral, which is a very good number for us.

Mike, do you want to add any financial color to that?

Yes.

I think the only other thing I would add, to complete your question, in terms of mix, roughly about 30% of our gross profit margin comes from those specialty businesses.

Can you talk about the perm placement as a percent of gross profit?

Yes.

As a percentage of gross profit in the second quarter it was just below, just a fraction below 9% and up overall gross profit and just about -- which compares to a number right around 7%, just a slight hair above 7% a year ago.

So you can see that investment that we're making in permanent recruitment clearly is paying off.

We've added over 15% more recruiters this year, and that continues to drive very good revenue growth.

Overall our permanent recruitment fees on a consolidated basis in the quarter were up 37%.

So clearly some of the strategic decisions to make that investment, which we've been doing over the last 18 months, clearly is having some good results.

I just want to add a bit to that.

You can see that we're getting much better at getting better in that area, because when you add 15% more perm recruiters and you grow the business over 30% you can see that we're starting to really get much more placements per week or day or month, however you want to look at it, and that's positive news for us.

Thanks a lot.

Congratulations on a strong quarter.

Thank you.

Thank you.

Our next question comes from Greg Cappelli of Credit Suisse.

Hi, guys.

Greg and Jeremy.

I know you've said that the permanent affected the overall margin by I think it was 27 basis points.

Was it -- can you just give us a little color on how that differed from the U.S., France, and Europe at this point?

Yes.

One of the things you have to look at is the size of our permanent recruitment business, and clearly in Europe, particularly within the EMEA segment, that's where we have the largest volume, so we've got a larger base there, albeit we still had very good growth there, but a little bit more than half of our overall business is right within that EMEA segment.

So that segment itself grew about 21% in recruitment fees.

In the U.S. we didn't quite double it, where we were from last year, and in the French segment, we about tripled it, but I'm not sure that -- it's off of a fairly small base, but a base which continues to grow quite nicely.

So I would say that the strength is very broad-based.

And I guess the other piece I didn't talk about was the other operations segment, which includes Canada and South America and Asia Pac, and that also saw some very good growth within the permanent recruitment, and as we continue to expand in China and India, permanent recruitment is also a very important part of our strategy, and we're seeing very good growth filling out in those geographies as well.

I think you had mentioned last quarter or the quarter before that sort of the ceiling for you guys would be around 15% that you would not want to get over as a percentage in the perm business.

Is that still the case?

That's kind of a marker that we've put out there, and I think we still use that as a gauge.

When we get there, we'll decide, but I think we see that today as a good balance for our business overall.

We're not quite there in any of the segments, although EMEA is getting closer to that, but I think that still is a good bogey and a sensible target.

I also might add that the placement market is getting to our advantage actually quite complex.

You've got retail mid market large account and then you have recruitment process outsourcing.

And when you look at recruitment process outsourcing, where we may be given 3,000 people to find in 15 different countries, we're keeping those separate.

We report them to you as the same, but we're keeping them separate.

The reason I bring that up is if RPO takes off as we think, it may drive us a little over 15, but we feel confident because that is mostly centralized recruitment.

Therefore, we are able to much better modulate our costs.

If we were to hit a downturn, which has always been the issue.

So there's a few complexities in there that might say, and we'll give you more color as the quarters move on, but R PO could be tens of millions of dollars for us, and that is a different process than putting in 2 people in every one of our 4,000 offices.

That's actually very helpful, Jeff.

Back to France for a second, and I don't expect to you to comment on their business, but Adecco also recently made some positive statements about France and also thought or suggested they could be taking some market share.

Is it possible you guys could both be doing this at the same time in the same market without impacting price at all?

Well, margin was stable to slightly up.

So I guess that tells you that we're not going down and taking it hard.

I can't comment on where Adecco falls.

We and others look at some of the set numbers, and that gives us the indication that we're above market.

The way we have approached that is very disciplined and good negotiations at the key account level, but a heavy, heavy focus on feet on the street, retail business, and that is -- that allows you to get growth without the margin deterioration.

Okay.

And there's just one quick last one on Jefferson Wells, just a clarification.

That's three, by the way, Greg, just so you know.

Okay.

Can you just clarify, you had mentioned a little bit of softness.

You expect this contract to anniversary, and then you're expecting to see some pickup in growth in that business even with the amount that companies have spent on professional services over the last couple of years.

Meaning you don't expect them to be pulling in their horns at all going forward over the next couple of years?

No, we're not really seeing that.

And, of course, we're also opening offices, which also will add to the growth rate, but we still see this as a very good market, and an area where we've got a very strong value proposition, competing with the big four.

So we feel really good about the market.

I think what we're clearly seeing is a tail-off in some of the SOX business that's occurred over the last year.

That seems to have stabilized in the second quarter.

In fact, our SOX business seemed to tick up just a bit in June.

So I think we're probably getting close to kind of a normal level, if you will.

And then you have to sort through a little bit, some of the -- this one large contract.

You take that out, and we are expecting to see some sequential growth in the third quarter.

So we're -- we feel very good about the market, feel very good about how Jefferson Wells is positioned in the market.

I think we've had some good fortune of having this contract, which actually has helped offset some of the tail-off in the SOS business, so I think that's been a positive.

We're maybe feeling a little bit of that pain now as a result of it rolling off in Q3, but overall things are moving quite positively within Jefferson Wells.

Thanks.

Great job, guys.

Thank you.

Our next question is from Kelly Flynn of UBS.

Thanks.

I have a couple of questions that are sort of follow-up.

Back to the permanent placement as a percentage of gross profit, could you tell us, where has that peaked historically?

Is the 9% the all-time peak, or did it ever get higher than that during kind of the really hot employment market five or six years ago?

Then I have a follow-up on France.

Well, in many ways, every month is a new peak for us.

Okay.

Because, this is not a game that we have played in.

When we look at the clients, and we look at where we need to take the business and how we're driving the overall branding strategy, perm recruitment has really come up as something we need to be doing.

So we're probably not the best to ask of how this, from a macro perspective. 9% is our peak, because we've never put in 3,000 recruiters across the world, like we have now.

Where we came up with 15% was purely some hard mathematics of what's driving, what GP, where it's coming from, where it's coming from in the countries, and how do we make sure that we're not getting addicted to something that can hurt our recurring revenue stream, which is the temporary business.

So that's how we've come up with the 15, and we're monitoring it closely just to make sure that we're doing the best to keep our mix of business correct.

Okay.

Fair enough.

Then on to France.

Even with one fewer days in the quarter, you are basically looking for kind of flattish constant currency revenue growth.

You also made some comments, Jeff, about maybe some cautious managers in France, particularly in auto.

Are you meaning to imply that you really don't expect the acceleration going forward there that you've seen over the past couple of quarters?

Could you just put those comments in perspective?

And with that, any color on the World Cup?

Some other companies have mentioned that that could hurt a bit.

What are you seeing on that front in Europe probably?

Thanks.

Well, let me first answer the World Cup.

France made it to the finals, so they're happy.

They're more productive, and we don't see any effect on our numbers in France.

Germany, the whole country has benefited from it, so we're seeing buoyancy come from it, not any less billable hours.

When you look at the terms acceleration and some of the other things, we clearly don't want to confuse anyone, so let's try to break that down.

When we look at France, and we get numbers weekly, so we have a good sense of what's happening weekly, what we say is that if we looked at our current trends, forget any reading of newspapers, which can be extremely dangerous, or watching 24-hour news, which is even more dangerous, and just look at what we've done in these last few weeks, we can say, look this is what we're looking at, is 8 to 10, in a constant currency basis.

We do lose a day in the third quarter.

So that elevates that more.

So we're actually up over, if you will, like for like where we were in the second quarter.

What I'm saying is that there is some -- this is not a Katie bar the door, these numbers are going to get blown out.

The French companies are like the U.S. companies.

They're more sophisticated in their hiring practices.

You do see a drag from an auto perspective, though it doesn't affect us as much because only about 5 or 6% of our business comes from auto.

So I'm just trying to give you a bit of a mosaic that says solid GDP trends in growth, good billable hour growth, a bit of an acceleration but acceleration might be an overused word, and then some sophistication in the market, particularly being generated from what's coming out of the auto industry.

Kelly, if I maybe just add a little bit more precision to what Jeff said as well, which if you look at the last couple of quarters in France, the first quarter we reported 9.1% constant currency growth, and on an average daily basis that was just about 6%.

In the second quarter, where we report 9.8% constant currency growth, that really -- while there was some Easter effect, the way the holidays fell really we're on a same-days basis.

So we reported in the second quarter roughly about a 10% growth rate.

And then when you take the fact in the third quarter that we're looking at about a 9% with one less day, what that says is we're really looking for slightly above 10% in terms of the French growth rate.

So I think, again, to echo what Jeff said, we clearly have seen improvement throughout the year.

It's not a hockey stick, but clearly we're seeing some improvement, and in no way are we looking for any type of slowing at this point in the third quarter in the growth trend in France.

Okay.

That's very helpful.

Thanks, guys.

Thank you.

Thank you.

Our next question is from Chris Gutek of Morgan Stanley.

Jeff, if I could follow up on Kelly's question by maybe taking a little bit of a longer term forward-looking view and then if we could ask you to put your economist hat on which I know you're always reluctant to do, but in the context of your own third quarter hiring survey for Europe which seemed to be showing a little bit of moderation in Europe, in the context of rising interest rates, geopolitical concerns, and higher energy prices.

When you look out a couple quarters, how confident are you, and if you are, what does give you the confidence that the healthy supportive environment especially in Europe, and to a lesser extent in the U.S., will continue?

I would have no idea.

It really is hard, because you are asking me to put on an economist hat that puts in lots of factors which can make a difference.

I think the biggest variable in there is those factors that you had mentioned and many others, kind of ebb and flow on a daily basis, so they don't seem to have a trajectory in and of themselves.

What we are talking about, and the way we answered Kelly's question is, is we're trying not to be an economist and say here's what happened in the first, second, and this is what we see in the first few weeks of July, here's what we're hearing from our clients, here's what we're hearing from our offices.

When we put that together we can feel and anticipate some type of trajectory going into the third quarter with an understanding that if you have that there's an opportunity for it to continue into the fourth.

When we get into 2007, I have no idea.

Election year starts kicking in, in France, there's lots of issues that could be helping on a positive side, because during an election time you tend to -- particularly in France, one of the things is is that you see unemployment start to be driven down to try to get under that safe 1% and maybe get down to 9.7.

So you'll have to ask your Steven Roche to see what he thinks.

Just as a follow-up to that, not to push too hard Jeff, but in terms of planning and opening new offices and hiring and in terms of just planning your budgets over the next few quarters, again, looking into '07 is there any shift in your strategy based on the changing macro environment or is it still steady as she goes over the last couple of quarters and going forward?

I would say that there is absolutely no change in our office opening.

Our office opening strategy is, is to open offices in emerging markets, eastern Europe, China, India, some in South America, a few more in Asianne.

Then if we are looking at office openings in western Europe, U.S., Canada, or some of the more mature markets, what you would be seeing is reconfiguring of offices or specialty offices being opened.

That strategy has not changed, and we believe that when you look at what Mike had said about CapEx and others we're very much in line with where we were last year and we would anticipate following that for the balance of the year.

We have not changed our office opening plans based on any kind of 24-hour news station.

One more, just a quick follow-up for Mike, if I could.

The operating margin in the French business is improving nicely in the last few quarters on a year-over-year basis, but if you go back to 2003 the operating margin for the full year was about 4% and I'm curious, it looks like you guys are a little bit more focused on growth, especially with the middle market, and therefore maybe a little bit less focused on margin.

Is that a correct interpretation, or if not do you still think you can get back to like a 4% annual margin in France over the next year or two?

No, I would say that is not a correct interpretation.

Clearly margin is a primary focus of ours in France.

Growth is always important, and as Jeff said earlier, we're hitting the sales initiative side very hard, especially on the retail side, but our margin continues, and pricing continues to be of high focus.

What you're seeing there is from that peak of 4% in 2003, there was a lot of capacity added to the marketplace, and the overall market pricing dynamics did change and we tried to defend as best we could, and I think we frankly did a very good job in a tough market defending that, so we saw a number -- starting in 2003, for six or seven quarters, some decline in gross margin.

We did hit the inflection point coming out of the fourth quarter of last year, now into this year, where we're actually are seeing a little bit of improvement in year on year gross margin and for the six months year to date our gross margin in France is slightly up over the prior year.

So what you're seeing there really is some pressure on the gross margin which came down onto the operation line.

Now we're looking to move that back up and start to see some improvement in operating margin, which we have so far this year in France, and I think there's opportunity to see some for the full -- on a full year basis, see some improvement in operating margin, and hopefully we're back on the path to get back where we should be in operating margin in France, which I think is clearly above 3.5, and closer to 4%, and that's what we're working towards.

Great.

Thanks a lot.

Thank you.

Our next question is from Mark Marcon of R. W. Baird.

Good morning.

Congratulations on the excellent results.

I was wondering, -- over the years that I've followed you I've heard more emphasis with regards to market share gains on this call than I have previously.

And in the press release, there's a reference to improving your efficiency through speed and quality, producing superior results.

I'm wondering if you can shed a little bit more color on that in terms of the markets where you've got different programs.

What's changed, and what's -- and how you're achieving the market share gains?

It's a great question, and I'm glad you brought it up, because there should be no confusion.

Our strategy stated on November 11, 1999, said we would attempt to grow at market or greater.

Then we dropped into some strategies that said, and here's what we want to do on our revenue mix and here's what we want to do on our efficiency and here's what we want to do in specialty business.

What we've been able to do over a period of time, through office opening, investments, sales programs, sales training, and bifurcating the market and even our offices, between retail and key accounts, is allowing us to take market share at the same gross margin.

So in this industry, there's been a bit of a binary discussion.

Market share, lower margins.

Less than market share, higher margins.

What we're seeing is growth in market share and growth in margins, albeit pretty marginal on the gross margin percent growth, but whether it be what we are trying to do in France, which is we're seeing gross margin move up.

The U.S., our gross margin moved up 200 basis points, yet we believe that while we may not gain market share in the U.S., we're close to getting in the market.

Germany, Italy, Sweden, Belgium, these are countries that we've worked very hard to say this is the way you define the game.

So I'd like to say that what we are is really in this sweet spot of knowing what we're selling, how we're selling.

Now if you look at our strategy in kind of repair environment have not changed.

You see the U.K. lose market share.

We were negative in the first quarter, negative in the second quarter, but we're now starting to see profits exceed what they were a year ago, and if we can follow this out, our plans on the U.K. would be maybe a few more -- one more quarter of some negative results on top, more on bottom, then we get our momentum, we get our team put in place, and we start to take market share at the margin we want.

If we can't take market share, so be it.

We have our margin.

The market share is not a strategy.

It is a byproduct of activity, is the way I would like to say it.

Great.

In the U.K., your profits were actually up.

That's correct.

Excellent.

I was wondering, in terms of the markets where you did have an improvement in terms of your temp margins, which markets are you seeing prices increase?

Well, we've seen some price increases in Japan, so we've been able to implement some of that.

We've seen some price increases in a few of the countries in Europe.

But I wouldn't want to mislead that -- this is not -- I wish I could say we have pricing power and we're going to just keep doing it.

This is on the margin, and I think that the key part for our business, and I know there's a lot of Manpower people that listen to this call, they hear me say it a hundred times this is a pennies business.

A little bit more on the bill rate, a little less on the pay rate, a little over here, and when you add it up, when you're doing 4.5 million people out on assignment it comes up to some pretty big numbers and that's really what you're seeing.

So we're seeing some price increases.

In the U.S. you're basically seeing SUDA, and a tremendous job by our U.S. organization managing Workers' Comp that returns millions to us, and that, in essence, is a pricing increase.

Great.

Then one final question.

Obviously the growth forecast in your temp markets in France, EMEA, and other are all well above the U.S., and while the U.S. is slowing very slightly on a same-day basis, you're not projecting that slowdown will occur in these other markets.

Wonder if you can talk a little bit about some of the secular differences that would insulate some of those market relative to maybe perhaps a slowdown in the U.S. economy.

Well, the U.S. economy is -- uses our services a bit differently than would be in Europe.

And as you see in GDP growth, there's a bit more of a correlation between GDP growth in Europe and our business than it is in the U.S.

And what we are seeing is we are still seeing kind of the double hit here in a positive way.

We're still seeing secular growth while we're getting a little cyclical win.

So we've got a few major countries in Europe that are still less than 1% of the working population works as a temporary.

So you got Germany, and Italy, and even Sweden now coming out of some of the challenges they had with telecom really start to see some secular growth.

Then you put a little cyclical wind behind there and you get to see the numbers as we're talking about here.

Terrific.

Thank you.

Last question.

Last question is from T. C. Robillard, Banc of America Securities.

I guess what I'm having trouble reconciling here is, in listening to kind of your commentary about the business and the outlook it seems to be as balanced and slightly optimistic as it has been the last couple of quarters, but what we've obviously seen is really strong outperformance, both on the top line and the bottom line.

I'm just trying to reconcile the outlook going forward now.

Are you guys still just kind of being conservative, or are there some changes out there that you're a little bit more concerned about than you were in the first half of the year?

I'm just trying to kind of balance the strong performance in the first half relative to kind of what you guys are seeing for the second half.

Sure.

And, of course, we've only commented on the third quarter, which is I'm sure what you're referring to.

When you look at -- when you look at revenue and talk about direction there, clearly, as I said, and I want to make sure I'm clear on this, we really see a continuation of trends in the third quarter from what we've seen in the second quarter, in the case of Europe, both EMEA and France, really after adjusting for billable days, our forecast is similar in third quarter as it was for all of the second quarter.

In the case of the U.S. it's slightly different in that we're carrying forward our June number of 4% average daily into the third quarter, which is a little bit less than the 6% you saw overall, and then with Jefferson Wells with this contract coming off, we've got just slightly lower revenue growth.

But overall revenue is about at the same level.

When you look at -- then on the operating margin, and outperformance, that's probably getting to a little bit the heart of what you're focusing on.

We're looking for 40 basis points -- or we've picked up, I'm sorry, 40 basis points of improvement year on year in Q2, where as in Q3 we're looking for something more like 10 to 20 basis points of improvement, something on that order.

And as you look at -- you almost have to think about it segment buy segment.

Certainly we anticipate continued year on year improvement in operating margin in the U.S. and within the EMEA group, certainly other operations, and Right Management, the two, France being one of the large ones, we think we're probably going to be operating margin-wise about at the same level as last year.

Obviously France is a big unit.

And one of the reasons for that, is what I mentioned earlier, is we had -- we are anniversarying one of the social tax law changes that happened July 1, of last year.

Therefore, my sense is that overall operating margins will probably be about in the same range.

Perhaps they could be slightly up, but probably about in the same range.

Then with Jefferson Wells, last year there would have been a sequential pickup in business.

This year there's a sequential decline, given this large contract, so you really have to look at each of the segments and go through each piece to kind of put the whole story together, to see how it all ties together, but when you start on the revenue line, I think it really is a continuation, and I think still a very good quarter we're looking for with earnings per share up 16% year on year at the midpoint of the guidance range that we get.

That's very helpful.

I guess maybe if we -- you could just kind of take a look at your results from the first quarter and the second quarter relative to kind of where you guys were guiding the Street.

Where were the areas -- I mean, was there an area that has just significantly outperformed relative to kind of where you guys had thought?

I'm just trying to balance that out as to looking into the third quarter.

I mean, is there something that has consistently just surprised you guys to the up side which has resulted in such strong outperformance?

I think it's a good question, and I think that you really do have to take kind of a good hard look at how big this is.

So what happens is, you basically have $2 million as a $0.01 of profit.

And if Argentina does a little bit better and Japan does a little bit better, you get a little bit more out of Right, you get a little bit more out of here it adds up, all of a sudden you're at 10 million.

And you've got yourself at $0.07 more.

So that's really the dynamics of it.

This isn't a, wow, we're having a blowout in this segment.

This is a large organization.

And when we get that momentum going, we have the opportunity to do that.

So this isn't the conservative side as much as knowing that there are lots of gears to this.

We don't want to and will not take the best possible case, all stars aligned, in every 72 of our units and say that's what we're going to do, because what happens is, one is off a million, down another million, down another million, and now we're right at the midpoint.

So I think if you really look at the business, there's this great leverage story that if we're managing it right, that if we have some economies with us, and we're doing the right pricing, there tends to be great opportunity for up side.

On the opposite, you can hit the midpoint very simply without any issue within the Company.

It's just a million here, million there, and two million there.

No different.

It's just at the midpoint.

So that's what Mike and I talk about a lot, and that's how we look out and give you the guidance we've given you.

Just one last quick question.

Mike, with respect to the net impact from the increased cash and debt balance in the third quarter, how should we think about kind of the interest expense and interest income?

I mean, does that end up kind of being a wash?

I know it's only one month out of the quarter, but if you can just kind of comment on that.

Sure, you bet.

The good news is, our new debt is at a lower effective interest rate, so that clearly will help interest -- overall net interest, if you will, in August and September and the quarter, as we pay that -- the one euro note down at the end of July.

But the month of July will be higher than normal because the interest earnings on the 200 million we have invested is at a lower rate than what we're paying externally.

So the benefit coming out of August and September will offset the drag, if you will, on July, so I see interest -- the impact of the refinancing as kind of a neutral in the third quarter.

As a result, we'll see a little bit of uptick in interest expense sequentially, probably in the lines of where we were last year at about 10.5 million.

I would think it's going to be somewhere close to that range.

And then what I would expect, as we get into the fourth quarters, we'll see a drop-off in interest expense to reflect the refinancing, which should save us, in dollar terms, roughly about $2 million a year, or about $0.5 million a quarter.

Great.

That's helpful.

Thanks so much.

Thanks, all.

We appreciate you joining.

As usual, if there's any questions, give us a call.

Thanks.