ManpowerGroup Inc (MAN) 2006 Q3 法說會逐字稿

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

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

Sir, you may begin.

Thank you.

Good morning and welcome to the third quarter conference call for 2006.

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

I'll go through the results at a high level, discuss the segments in a bit more detail, and then Mike will talk about the numbers from a P&L perspective as well as a balance sheet.

Mike will also spend some time covering the outlook beyond what I do in the general comments, so we'll take a good look at the balance of 2006.

Before we move into the main body of the call, Mike, if you could read the Safe Harbor language.

Thank you, Jeff.

Good morning, everyone.

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-Q and in the other Securities and Exchange Commission filings of the Company, which information is incorporated herein by reference.

Thanks, Mike.

Also for those of you who have been here for some time know that we have this up on the web.

So if you haven't had the chance to sign on to the web you can do that and follow along.

It's also in full replay.

The third quarter was a very good quarter for us, extremely successful quarter.

We were able to achieve the revenue targets we had anticipated and surpassed our profit expectations through continued improvement and efficiency and gross margin growth in Manpower's core business.

We're continuing to see the vast majority of our Manpower operations, but not all of them around the world really perform at a very high level, both from a revenue and profit perspective and when you get both of those things really in synch, you yield some very good results.

Revenue for the third quarter came in at $4.6 billion, up 12% in U.S. dollars, 9% in constant currency.

Revenue was very well balanced across the entire network with growth coming from nearly all the areas.

The leader in growth from a major segment perspective was EMEA which is Europe, Middle East, and Africa minus France with 19% growth in U.S. dollars, 14% growth in constant currency.

We continue to see the European economies and our team perform very well.

Gross margin for the quarter was 18.2 at the lower end of the range of what we expected but I'll talk about that a little bit later.

There's actually very solid performance behind that 18.2%.

We continue to see our core staffing business grow and the gross margin percentage grow with that.

Our pricing discipline, permanent recruitment presence is paying off.

Our operating profit for the quarter was 169, almost $170 million, a 28% increase in U.S. dollars, 24% in constant currency.

The Manpower team did an extraordinary job at efficiency and expense management, growing the top line 9% and the bottom line 24%.

You can see the great leverage in there.

This resulted in our operating profit margin of 3.6%, an increase of 40 basis points on a year-over-year basis resulting in $1.16 earnings per share, up 33% in U.S. dollars, 29% in constant currency.

You are clearly seeing some of the benefits that we worked on for some time in the area of efficiency, sales culture, mix of business, all of those items that we've been working on over the last few years.

On a year-over-year basis, our gross profit percentage did decrease 10 basis points.

What you are seeing is more of a mix issue than gross profit erosion.

The core part of our business, the temporary recruitment business is actually up 12 basis points.

The impact of our permanent recruitment increase is another 25 basis points.

What we're seeing is continued improvement in our pricing discipline as well as margin improvement based on managing worker's compensation very well, continued -- and continued growth in Manpower Professional.

Permanent recruitment now comprises 8% of our gross profit dollars and our growth for the quarter in permanent recruitment is 41% over 2005.

Jefferson Wells and Right which both had a relative -- both have relatively higher gross margins experienced decreased revenue from last year which in turn negatively affected our gross margin percentage by 44 basis points.

This resulted in an 18.18% gross profit for the third quarter of '06.

A great performance by the business and very good momentum as we move into the fourth quarter and really for that matter as we look at it, as we move into 2007.

When we look at the fourth quarter, we feel as though the economies across the world will continue the path that they have presented themselves in the third quarter; therefore, based on the momentum we are seeing in the areas of revenue, gross profit, and expense management, we anticipate our fourth quarter earnings to be $1.14 -- between $1.14 and $1.18.

In that estimation we would anticipate about $0.04 of currency.

I would like now to move into the U.S. segment to give you a little bit more color of what's happening in the U.S. marketplace.

Revenue for the U.S. was 542 million, up 2% which is right in-line with the guidance of what we had given you last quarter.

And we expressed in our last conference call that we were seeing revenue trends in June soften a bit from where they were in April and May.

These trends were then stable through August and then softened a bit more in December to 2% on an average daily basis.

As a result, we are anticipating no major shocks in the U.S. market.

Continued revenue growth at about the 2% range.

We are not seeing any clients euphoric about hiring and I think that goes unsaid.

But at the same time, we're not seeing any cliffs, if you will, in the usage of our services.

We are seeing good growth in Manpower Professional.

Manpower Professional revenue is up 12% for the quarter.

Our light industrial was up slightly and our office was down slightly.

Therefore, we believe that we're well on our way to finishing out the year in a mid-single digit growth for the U.S., which is about what we had anticipated.

Our gross margin was up a full percentage point as a result of strong growth in permanent recruitment fees, strong management, as I mentioned earlier and worker's compensation.

This generated a $29 million operating unit profit, up 27% over the third quarter of 2005.

And an OUP margin of 5.3%, a number we have not seen for ten years in the U.S. business.

We believe that the work that's been done over the last several quarters and years for that matter will continue to pay off at that operating unit profit margin line.

Switching to France, our French operation also did extremely well.

Revenue was up 12% in U.S. dollars, 7% in constant currency to 1.7 billion.

In France, we are experiencing good growth and we believe we will continue to see that going forward into the fourth quarter.

Our gross margins are stable, while of course in that market pricing is all competitive, but we see it as much more intelligent and therefore we believe it's a good environment for us as we've been practicing at price discipline now for several years.

Our expenses were well managed, therefore our operating unit profit was up 22% in U.S. dollars, 17% in constant currency to 62 million U.S. with a 3.7% operating unit margin, up 30 basis points.

An impressive quarter for our French operation given that we're not getting as much leverage from the top line as we would be seeing in many of our other countries.

Our French management is doing an outstanding job in driving the efficiency in the organization while also achieving a profitable solid topline growth.

The real story of course is EMEA.

Europe, Middle East, Africa minus France.

They did a spectacular job and is now our largest operating unit in revenue and profitability.

Revenue for the quarter was 1.7 billion, up 19% in U.S. dollars, 14% in constant currency.

Good margin expansion and very good expense controls yielded a 71 million operating unit profit, up 54% in U.S. dollars and 47% in constant currency.

Just spectacular performance.

To break that down a little, this was led by many of the operation's topline sales.

Italy was up in constant currency, 26%, Holland, 25%.

Same with Sweden.

Elan and Norway all between 16 and 21%.

So we had very good performances, and as you can imagine with the leverage we've been receiving, all those countries did much better on the bottom line than I just described on the topline.

Our Manpower business in the U.K. performed as we had forecasted.

We are shrinking the business slightly to create a stronger platform.

We're seeing the benefits already.

The profitability in the U.K. was nearly four times what we were seeing last year.

We are on track to get the U.K. much more in line with mainland Europe.

Also in the U.K., Brook Street grew nicely, the bottom line and top line.

With permanent recruitment continuing to be a big part of the business at Brook Street.

Permanent recruitment is strongest throughout our European operations.

We now have 10% of our gross profit in permanent placement and consistent currency growth over 2005 is 30% in the quarter -- I'm sorry, constant currency growth is 30% in the quarter.

Very good growth off of particularly such a large base.

We continue to see robust growth in this area and are now expanding rapidly into the recruitment process outsourcing area, which we are very successful at in the U.S. and now moving that on to a European basis.

We would expect EMEA to have another very good fourth quarter which will total into an exceptional 2006 for the EMEA operation.

Jefferson Wells had good performance in the quarter, however, there are a number of elements which complicate the revenue picture.

First of all, our SOX-related controls business which represents about one-third of our business mix continues to decline on a year-over-year basis as companies continue to bring more business inhouse while the rate of contraction has been declining over the last several quarters, we expect that we'll experience some further contraction as we go into next year.

Also complicating the revenue picture are two large clients, one which is primarily a SOX engagement and one which is a nonrecurring work related to hurricane Katrina.

Together these two clients totaled $21 million of revenue in the second quarter and 10 million in the third.

Excluding these two clients, revenue increased 6 million sequentially in the third quarter or 9% on an average daily revenue basis.

Excluding these two clients, our SOX business grew 24% year-over-year growth in the third quarter.

This strong revenue growth, which is all organic reflects our office expansion in the U.S. and Europe along with our expanding client base and product offering.

Our newest product line is tax compliant, which continues to gain good traction as clients see a tremendous value we can bring to this area.

Our gross profit fell short of the prior year due to the impact of the lower margin Katrina business.

This resulted in the 50 basis point decline in profit operating margin.

Switching to Right Management, this third quarter was about as we had anticipated.

For those of you who are either just following us or are new to the Right Management story, the third quarter is a seasonally very slow quarter for Right.

We're looking at revenues down about 1 to 3% and in actuality, they came down a little bit more than that with revenues down 5% to 91 million.

This has a dramatic affect on our operating unit profit as revenue almost drops right to the bottom line based on where our cost structure is.

This resulted in a $2 million operating unit profit for an operating profit margin of 2%.

Again, this is a seasonal slow time and when we look at our book of business which really falls into two categories, the traditional career transition business and the organizational consulting business, we anticipate both to perform better in the fourth quarter as we are seeing the usual seasonal improvement in the business.

I'm sure we all continue to read about companies downsizing.

While it is still not at the great magnitude that would have happened during -- that happens during a downturn, we are seeing it in certain sectors, namely automotive and in come cases the chip manufacturer.

Being the size that we are and the presence that we have, not only here in the U.S. but across the geographies, we are involved in many, if not all, of the major downsizing that is occurring.

Therefore, we continue to have a good backlog of candidates who are going through our career transition program.

At the same time, we are seeing our coaching leadership, which is one of the flagship offerings of the organizational consulting portion of Right continue to increase as companies are convinced of the talent shortage and are now looking at how to get the most out of what they currently have.

In addition to the backlog of business we are securing new business and we continue to have takeaways and wins in the industry.

Much of this is fueled by the relationship of Manpower and the synergistic selling nature of being able to have both the staffing, permanent recruitment, and transition side all come together with a very compelling value proposition to our client.

We continue to challenge ourselves and the industry to find better ways to deliver this career transition services, which will rely more on technology and less on footprint.

We've done a tremendous amount of refootprinting across the globe and we'll continue to look at this as we come up with new offerings for the industry.

Moving on to other operations, the other operation segment did very well with revenue up 12% in U.S. dollars, 13% in constant currency reaching a $595 million top line.

Our operating unit profit improved slightly to $17 million while our operating unit profit margin declined by 30 basis points.

This is due to the heavy investments that we continue to make, primarily in China and industry where we have the market leadership positions in both and continued to expand in personnel and office count.

We continue to be bullish on the entire segment, which includes Japan, India, China, Asianne, Australia, Argentina, Mexico, and Canada, all major contributors to the overall success of Manpower.

As we look to the fourth quarter and for that matter closing out the full year, we believe that this will be a very successful year with earnings per share for the fourth quarter coming in between $1.14 and $1.18, which would have us finishing the year somewhere between $3.80 and $3.84.

A very good performance by the organization showing our ability to execute and stay on the rails of our strategy, which has proven to be extremely successful.

With that and for a little bit more detail on the financials, I would like to turn it over to Mike.

Thanks, Jeff.

I'll begin by discussing our balance sheet and our cash flow followed by specific comments on our third quarter earnings and then concluding with comments on our outlook for the fourth quarter.

Our balance sheet remains strong at the end of the quarter with total cash of $485 million and total debt of $788 million bringing our net debt to $303 million.

Our total debt to total capitalization was 26% at the end of the quarter, similar to where we were at the end of 2005.

Free cash flow, defined as cash from operations, less capital expenditures is very good through the first nine months totaling $184 million compared to $119 million the prior year.

This 55% increase in free cash is a result of higher earnings along with good working capital management.

Our accounts receivable at the end of the quarter were $3.8 billion, an increase of 564 million from December of 2005.

This increase primarily relates to the current revenue growth as well as changes in foreign currency exchange rates, which added $195 million to the accounts receivable balance.

Our number of days sales outstanding increased by two days over the prior year.

This reflects a timing issue with customer payments and is not a fundamental shift in our collection experience.

We continue to aggressively manage accounts receivable collections and are driving efficiency improvements in our order to cash cycle.

In the third quarter of this year, we completed our October 2005 share repurchase authorization.

Under this authorization we repurchased 4,272,600 shares of common stock for $250 million.

Of this amount, 300,000 shares were repurchased in the fourth quarter of 2005 for $14.1 million.

As is normally the case, our Board of Directors will consider a new share repurchase authorization at our Board meeting later this month.

With regards to the earnings statement, please be aware that we began expensing the costs of equity-based compensation in January of this year in accordance with statement 123R.

Accordingly, the earnings charge for the third quarter of this year was $0.03 per share bringing the charge for the first nine months of the year to $0.08 per share.

We implemented this statement on a prospective basis and therefore we have not restated the prior year quarters for this expense.

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

Lastly, I would like to talk about our fourth quarter forecast.

We expect to see a continuation of good revenue growth with consolidated revenues up between 12 and 14% in U.S. dollars or 8 to 10% in constant currency.

In making our forecast for the individual operating units, we have assumed that recent growth trends will continue throughout the fourth quarter.

As a result, we estimate that revenue growth in the U.S. will range between 1 and 3%.

While this is similar to the third quarter growth rate of 2%, I should remind you that average daily growth in the U.S. was approximately 4% in the third quarter.

Therefore, this modestly lower growth rate reflects the softening trends we experienced during the third quarter.

Revenue in France is expected to be between 7 and 9% in constant currency consistent with the recent stable growth trends we've experienced.

Our revenue growth in EMEA is expected to be between 11 and 13% in constant currency, just slightly below the 13.9% we experienced in the third quarter.

After adjusting for differences in billable days in a number of countries and a few large clients in the prior year, our growth rate is similar to the third quarter.

We have not experienced a downward fundamental shift in customer demand across the EMEA region.

Revenue at Jefferson Wells is expected to be down 7 to 9% from prior year.

As Jeff mentioned earlier, revenue trends are significantly impacted by our SOX work and two large clients.

They're also impacted by two less billing days in the fourth quarter compared to the third quarter.

Excluding these two accounts, our non-SOX business is expected to grow sequentially by 8%.

Also important to note is that our total business excluding these two accounts but including SOX is expected to be flat year on year.

It's important to note that in the fourth quarter the growth of our non-SOX business will offset the contraction in the SOX business.

I would anticipate this to also be the case as we move into 2007.

Our Right business is expected to be flat in U.S. dollar terms and slightly down on a constant currency basis.

Our other operations are expected to grow between 13 and 15% in constant currency, similar to our third quarter growth rate.

Our gross profit margin is expected to range between 18.4% and 18.6 in the fourth quarter.

This is in line with the prior year after adjusting the prior year for a payroll tax revision reversal that we had.

Our operating profit margin is expected to range between 3.5 and 3.7%, reflecting a 40 basis point year-over-year improvement at the midpoint of this range.

This would result in an operating profit margin for the full year of 3%, or an improvement of 30 basis points for the full year.

If we exclude the first quarter reorganization and cost reduction initiative expenses, we could add another 10 basis points to the operating margin gain for the full year.

This leaves us with 90 basis points left to reach our 4% goal.

We continue to estimate our tax rate at 36.5%.

This results in our earnings per share range of $1.14 to $1.18, which again includes a positive currency estimate of $0.04 per share.

Thanks, Mike.

With that, we'd like to open it up to questions.

Thank you [OPERATOR INSTRUCTIONS] Mark Marcon, R.W. Baird.

Good morning and congratulations on the stellar results, particularly in the core business.

Wondering if you can talk a little bit about the operating margins and the trends, again, in EMEA from a longer-term perspective.

Clearly this quarter was absolutely terrific, but with the operating margins in EMEA now exceeding the 4% target, obviously you've done the same thing in the United States, wondering if you can talk about -- if we were to look out three to five years, how big EMEA could ultimately be and how you see the margins trending over time?

Thanks, Mark.

For those of you who have been with us now for some time, I think you can appreciate maybe a little bit more what I'm going to say.

That is, when we looked at this the five years ago, we said, clearly France is a large part of mainland Europe from our operational perspective.

And the last thing we were going to do was to turn down France.

France is a robust, great market.

That we were going to continue to grow.

But we also felt as though surrounding France was some markets that have yet to really hit the high growth and produce the kind of margins that we were expecting.

We put a lot of money into Italy, put a lot of money into Germany.

We reconstituted some of the things that we were doing in the Netherlands, we made some changes in Belgium, we made some strategic decisions in Spain, we did some things in the in the Nordics.

And when you do those things you're looking at growth rates, as I had outlined of some very major countries.

You look at a country like Italy and Germany and how they play in the role of GDP on an EU basis and they're very large, yet the percent of temporary help penetration into the work workforce is still yet very small, under 1%.

So you juxtaposition that with France which is at 2.7, 2.8%, depending on how you want to count it, we believe from a secular perspective the core part of the business that we still have some very solid growth ahead.

Additionally, the French market, which is a very mature market and has a very sophisticated -- what our industry would call key account contract relationships, we believe -- at least for now -- that that's a little different in Germany and in Italy, particularly Italy where you have many more mid-sized and smaller companies.

Therefore the volume aggregation and the leverage to bring pricing down may not be as great.

Mark, you asked me three to five years, so that gives me a little bit of license of not being perfectly accurate.

But we really look at Europe minus France to continue to to grow as a percent of our business.

What you're seeing now is just really the beginning of some of these heavy secular trends.

And as the economies get better, which they've just started to in Europe, we remain optimistic that that is the place where we're going to be reaping a lot of our profits.

Mark, if I could maybe just put that -- emphasize what Jeff said.

I think part of with we've been seeing in EMEA for the last couple of years is really the impact of the economy and while we continue to invest in that region during a more difficult economic time, we just over the last few quarters, have really started to see the economies start to improve there.

And right now, of course, what we're seeing is the benefit of that on the topline on the revenue side and really seeing the leverage coming through.

And while we're quite pleased to see the 100 basis point improvement in operating margin in EMEA for the quarter, clearly that's what we expect, that's what we've been working towards over the last couple of years.

We've done a lot of work to drive efficiency and improve efficiency across the world, but especially in EMEA and now we're starting to see the results of that.

As we look to this year, certainly the third and fourth quarter are seasonally the higher operating margin quarters for EMEA, so for the full year, we'll probably be looking towards the mid-3s in terms of an operating margin for the full year.

But as we then look out longer term and think about our overall company goal of 4%, we would look for the EMEA region to be in the 5% range as we see some of the markets there to have a slightly higher operating margin average than a few of the other markets that we operate in.

Terrific.

And then I was curious, you mentioned during the commentary that pricing in France, it sounds like it's a little bit more positive.

Can you talk a little bit about some of the market dynamics over there.

And obviously Adecco has gone through a management change.

It sounds like they're becoming -- or at least they're talking about becoming more disciplined.

Both from a pricing as well as from a DSO perspective.

And given the concentration of the market, what sort of implications that might mean for you?

Well, let's look at some more macro issues.

I think we are seeing some of the capacity of office openings in the entire market, the French market be filled in.

So as that has been filled in over the last 18 months, that creates a little bit more intelligent pricing.

What may balance a little of that off, if you will, on the negative side, is we are seeing a little bit of an automotive slowdown in France as well.

It's less than 8% of our business.

It's not a big part of our business, but it is of others in the industry.

Having said that, we haven't seen any kind of back splashing to create bids that are ridiculously priced.

So the word I used was more intelligent pricing.

It is a competitive marketplace and every one that we are in is competitive.

But we are not seeing ones where when we would calculate it after we might have lost the business and we tried to calculate what it was, we were in some situations where we couldn't find a way to have made money on that account, let alone make a lot of money and we're seeing less of that.

So I believe that that marketplace is very important marketplace for us and a few of our competitors.

So I'm hoping their strategies that they've stated are ones that they would follow because I think it would be healthy to create an environment where all of the things that we do as an industry are valued as opposed to just shoveling bodies around, which is not a game that Manpower plays very well.

Terrific, thanks.

I'll follow-up offline.

Congratulations.

Mike Fox with JP Morgan.

Good morning, guys, and congratulations on a strong quarter.

I was wondering if you can just talk to -- when you talk to your U.S. clients, can you talk about their confidence level on hiring on both the temporary and the permanent side and how far that goes out on the confidence side and whether they think their business is still strong enough to hire -- when you look out to 2007 and possibly beyond.

Thanks.

Well, it's a bit anecdotal.

There are a few things that you can triangulate it with as I'm sure most of you have.

We have our own employment outlook survey that shows for the fourth quarter some of the same strength that we were seeing in the third quarter.

From more of an anecdotal perspective, when we listen to and talk to our clients, we've got no client that is hitting the panic button and saying, we've got to pull some people out of here because the floor is dropping out on us.

What they're saying in some cases is there is this softness and you've got this ripple effect within the suppliers of the automotive which are feeling it, but we have equally those that are now improving some of their transaction processing and call center activities as they are having more of a dual strategy offshore and onshore.

We've got accounts that are looking at 2007 from a planning perspective that is similar to 2006.

And what I mean by that is, yes, it's going to be a hard year, every year is going to be a hard year.

We're going to increase head count, but we're going to be very sophisticated about it.

So I think the sophistication and the way that companies have gotten into the situation that they're at now is very very for the economy because there hasn't been overhiring.

Now if you were to put that in the context of a talent shortage, you'd be seeing a few things.

Kind of entry-level, mid-level positions in office, clerical and light industrial, we're not seeing much wage inflation if at all.

When you get into more of the specialty jobs, the engineering, IT, higher end office, you are seeing some wage inflation and you're seeing companies want to take those people on because they know that there's a talent shortage and they can't just wait until the last minute.

So there's a fair amount of contention within the system, but the contention is a healthy contention of keeping themselves in line from a staffing perspective, yet bringing the talent on that they need in order to continue to do well.

Many of the U.S. clients are doing business in Europe as we are, which is going extremely well.

They've got to be able to support the business that's growing there while in the U.S. it may be growing, but growing softly.

So overall I think that they're constructing their '07 plans similar to air '06 plans.

Great.

Just one quick follow-up.

On the perm placement side, it's obviously pretty strong for you guys.

Is the higher-end perm placement jobs doing better than the clerical type jobs or relative to your expectations?

I would say that some of the more specialty jobs as it sits with what I have just said is where more of the hiring is taking place.

In the U.S. market, and as I had mentioned, we're moving rapidly into the European market is that our recruitment process outsourcing is a big business.

Therefore, we're hiring all sorts of jobs from entry level to high level.

When we look at -- when we put that business aside and look at one-off permanent recruitment, we would see a much easier job placing the mid-level to higher-level than entry-level.

Okay.

And then along that same line, is there any sectors or industries where it's getting difficult to find people to fill openings?

I'm not sure if it's as much of a sector as it is skill-based.

When you look at salespeople, engineers, technicians, higher-level technicians, pharma, some other things in pharmaceutical those would be the toughest jobs, almost regardless of industry whether it be an engineer needed in the software world, the IT world, or the manufacturing world.

Okay, great.

Thanks a lot.

Jim Janesky with Ryan Beck & Co.

Yes, Jeff and Mike, good morning.

Can you comment on how permanent trends occurred month by month throughout the quarter, both in the U.S. and in Europe.

And then, what is October in the short period of time off to?

What type of start in perm?

I'm not going to get into the monthly, that's shaving it a little closer than what we would like.

What you saw was for the quarter, we were up 41% and the first month of the quarter we weren't up 41%, how's that?

Okay.

And, Jim, to some extent, for us, it's still a relatively small piece of our mix and we're investing quite rapidly.

As you look at monthly trends, it's probably not that good of an indicator of how the market is moving.

I think what it is is perhaps a good indicator of how we're executing against our strategy.

As Jeff said, we're up 40% -- 41% overall in perm recruitment in the quarter.

So far this year, we've added over 500 recruiters.

We've added about 25% to our base of dedicated recruiters out there.

And that really comes across most geographies overall.

So overall, I think it would be good for us to say we're clearly seeing that market to be healthy and remain healthy at this point.

And shifting to Jefferson Wells, you talked about the Sarbanes-Oxley business coming down.

You folks and a lot of other companies out there have talked about this pretty consistently that as the years go on, certainly don't expect a big growth in Sarbanes-Oxley work, but do you think that companies are pulling more in-house than you originally expected as 2006 went on?

I think that what you're seeing in Sarbanes-Oxley is in some way is a pretty natural curve.

When it first game out, there is a tremendous amount of confusion as some of the rules were coming out halfway through the process.

As a result, there was so much new learnings that you needed to really augment it with as much outside staff as possible.

Now that it has become somewhat more quieted down, companies now know what that path is.

They can map out the kind of -- their own man hours they would need and now they do a cost benefit analysis of can I get them in-house or should I augment it with outside.

And as that process occurs, I think many of the items in Sarbanes are fairly routine and can be done pretty well inside.

That doesn't mean that they won't use outside, but not at the pace that they were before, they just needed people to make sure they got their signoff from their auditors.

Now it's calmed down much more than that.

It clearly doesn't go to zero, because we've got outsourced and cosourced internal audit departments and controls departments.

I just think that as companies try to bring it in-house, which is probably the right thing to do, we'll see a little bit more of a tail-off.

The important message within Jefferson Wells, is we've been able to build a business underneath that so that if we were to kind of take that out, we still have good growth rates, and solid double-digit kinds of growth rates.

Okay, great, thank you.

Brandt Sakakeeny with Deutsche Bank.

Hi, Mike and Jeff.

Question for you -- first, congratulations on the quarter.

Mike or Jeff, in your 4% goal, does that -- is there some implicit perm target as a percentage of gross profit dollars that's in that goal?

I'm not sure if it's in the 4% goal, I guess you could bake it in there.

What we have stated is that from a company perspective, not an individual location perspective, but a company perspective, we feel as though about 15% of our GP dollars coming from perm is about right.

That doesn't mean it wouldn't get to 16 or 17, but clearly we don't want it to be 30% as a company.

Because it drops off during the other downturn pretty quickly.

Now, what we have done, of course, is to look at what contribution that can make as we continue to move up our operating profit percent.

And we tend to look at it, while we have the detail, we look at it in a pretty macro way of how much of that increase comes from GP and how much of that increase comes from a decreased SG&A.

We work at it from that level and then parse it out and clearly perm is going to be part of that GP expansion.

Got it.

What I would say is while perm is clearly part of the GP expansion we're looking at to get to 4%, we do not need to hit the 15% overall perm target in order to reach our 4% target, if that helps clarify that a little bit.

That's helpful.

Just a couple quick housekeeping items.

Mike, I think you said the option expense was $0.03.

Do you have the absolute dollars?

I don't have it here right in front of me, but I could probably figure that out pretty quickly.

Great.

Then I guess just two other quick questions.

Jeff, I think I heard you say that the U.S. was up 2% this year, but your forecast for the fourth quarter was down a little bit.

And then I thought I heard you say it was up 4% in actual days.

Were there two fewer days this quarter and is that the differential, or did I mishear that?

Let me recap that, Brandt.

The second quarter U.S. revenue was up 2% and on an average daily basis, it was up about roughly 4%.

There's a day or a day and a half difference in billable days this year compared to last year.

Average daily, again, 4% in Q3.

As we look to Q4, we've got the same number of days this year compared to last year and we're looking for 1 to 3% growth or 2% at the midpoint.

Average daily again then would be consistent with that around 2% as well.

Okay, great.

And finally, just, in the Japan market, it was up 3%.

Anything in particular going on in that market?

Are you starting to see -- obviously the economy is getting better there and I guess I'm a little surprised it's not, the growth in constant currency isn't a tad better than that.

Is there anything in particular?

I would say in Japan the market is a good market.

It's not euphoric, but a good market.

I would say we've got some work to do internally to capture a little bit more of the growth in the market right now and we're working on that.

Okay, great.

Congratulations on a nice quarter.

Chris Gutek with Morgan Stanley.

Thanks, good morning, guys.

Jeff, if you could put your economist hat on just for a minute here, if you look at some of the economist forecasts going to Europe for 2007, there's a wide range of forecast, but the consensus seems to be the GP growth could slow maybe moderately, maybe more than moderately, but you guys by contrast are still seeing very strong demand trends pretty broadly across the board in Europe.

I'm curious again if you put your economist hat on if you have any thoughts on what seems to be a bit of a disconnect on the outlook?

I'm grabbing for the hat, I'm not sure if I have one of those.

It was not one of my most stellar performances in college.

But I'll give you what I have, and that is, less than 50% of those people who are economists are right.

We look at it a little bit closer in.

Also, what we are seeing is a secular trend with inside a cyclical trend.

So you can't do a good correlation between GDP growth and growth in contingent or temporary staff.

So when we look at our clients and we're not going out as far as all of '07.

It's a little hard for us to look at that.

What we're looking at is when we talk to the clients, when we look at our book of business, it's a very stable book of business, as it has been for the last 18 months to two years.

So we have viewed Europe now for almost two years as where we would see the growth at about this time because of some of the things that they didn't go down as deep as the U.S. did, but it was going to take a little bit longer to come through.

So I'm not sure if there's a great correlation that we've been able to figure out.

There's clearly a directional correlation between GDP growth, but those are being moved around a lot.

France just improved theirs and then they decreased it while Italy increased theirs.

But if you look at it, they're all pretty solid, 2%, 2.5, 3% growth which is pretty good GDP growth for European countries.

If we switch to the U.S., Jeff, I'm curious for your opinion there as well, because industry wide for the temporary staffing industry, not just for the Company, the temporary strafing growth domestically seems pretty moderate in the context of a still fairly low penetration within the overall labor force.

One could argue that this point in the macro cycle with some uncertainty going forward, that companies would be fairly eager to add more flexibility to the labor cost structure and would be hiring temps more aggressively relative to full-time people.

Again, in the big picture context of only 2% penetration of temp workers, why do you think the U.S. market isn't performing better and do you think that has any implications for the longer term growth potential of that domestic market?

Well, there are some pretty substantial differences.

One is that you can hire somebody and fire them pretty easily in the U.S., which then says that you're looking for true flexibility, agility, talent, and some of those things in the U.S. market, whereas in some of the European markets, it's really your only way to get flexibility.

We are seeing that number go up on a percent basis, slowly.

We believe that the U.S. will penetrate above 2% over time.

But I think what you're seeing is if you were to look at the BLS numbers and go back into the mid-90s, it looks more like the mid-90s where there's some hesitation and some evaluation about how much I want to bring on.

I think you also have this demographic issue and talent issue, so now what you're getting is companies torn between -- if I find the right person, should I hire them because we do have a talent issue.

But I think from a secular perspective, staffing and temporary staffing is still alive and well and I think the best way to look at that is our major accounts strategy is close to between 10 and 20% of their staff.

So it's really the mid-sized and smaller companies who have not embraced it as much and as things get more competitive, we believe that that which is the largest part of the sector market will start to embrace more flexibility as have the larger accounts.

Great, thanks, Jeff.

Michel Morin with Merrill Lynch.

Two quick questions.

First, I think you mentioned that Manpower Professional in the U.S. had revenue growth of about 12% and I know that you had a new strategy in place.

I was wondering if you can update us on the traction that you're having there given that over the past few years that's been an area of disappointment.

And then secondly, on France, I know that you're -- I believe you're still looking for a new leader for that country, so was wondering if you can update us on the progress there?

Thanks.

Manpower Professional has been for some time a key part of our strategy.

If you look at the revenue strategy, the mix of business and how we are moving to specialty business is nothing new that was stated about six years ago.

We've had some misstarts in Manpower Professional in the U.S. and as we had mentioned on a call a while back, we recruited some different people, we've changed the models in how we are opening our offices and how we're doing recruitment.

And as a result, we're really gaining some traction.

Masking some of that traction earlier this year and the end of last year was really some sun setting of some very large accounts in the engineering area.

So while from your perspective it didn't look like we were gaining traction, we were able to exclude that and see what was really happening underneath.

Now that those have been anniversaried, we can see that we are growing well.

In addition to that, we are moving up substantially of the bill rate ladder, if you will.

The skill set that we are placing is a much higher skill set, so you get more leverage out of the hour, which is where your expense is.

So you can actually generate some more profit.

So that's really what we are seeing in Manpower Professional is some very solid good performance that is based on a well thought-out strategic plan that we are keeping close to and looking at the progress and we're seeing some good progress right now.

The question on France?

Yes, that was -- the leadership change there?

-- a great French team.

Jean-Francois Ferret is doing a great job as interim President.

I'm not overly anxious to find somebody to fill the spot.

It needs to be the right person, the organization through and through from the six regional managers, the home office staff, and the nearly thousand officers, they know what they are doing.

We are interviewing, we are talking to people, been very receptive and encouraged.

We are the third largest multi-national company in France with huge recognition.

So we are getting some very qualified candidates and we'll pick the one that has the right skill and cultural mix and we'll do that when we find the right person.

And, Jeff, on France, the revenue growth of 7% in constant currency I think was just a tad shy of your original target of 8 to 10.

Was there anything in particular that impacted you there?

Well, I think part of what you're seeing, is we've been well above the market on a monthly basis for over a year.

And when you start to consistently anniversary those, it gets a little harder.

We've had a very good strategy of what we would call retail where we were growing that in double digit, and that's been anniversaried.

When we look at the growth, we feel good.

It's right in line with the market and we're not going to give up our pricing discipline just to squeeze out another one or two percentage points.

I don't think there's really a big story underneath there.

And is perm starting to contribute in a more meaningful way?

Did it contribute at all to the margin expansion we saw there?

Yes.

We're still seeing good growth there.

We continue to add permanent recruiters.

I think that market is coming along well.

It's going to be, given the size of France, it will be a few years before we really see it impact in a meaningful way our overall mix, but it clearly is showing good progress overall.

One thing I should mention, Michel, in the case of France, we did have a difference in billable days, with less billable days, so as we look at it on an average daily basis, Q3 overall revenue on an average daily was up about 9.5%.

So in fact, pretty much in-line with where we were in the second quarter if not just slightly stronger.

So since I'm the one that does the forecast, perhaps we fell slightly short because I was a bit optimistic on the forecast overall, but I think overall it was a pretty good -- well, not a pretty good, I think it was a very good performance and we continue to see good growth in that market.

Great.

Thanks very much for the clarification.

Kelly Flynn from UBS.

Thanks.

A couple of follow-up questions.

On this average daily sales issue, I know you just said what France was, but is it one to one and a half days kind of for every region, is that the way we should look at how it impacted Q3, or did it differ significantly across regions?

And if it did, can you tell us what the impact was by region?

Yes.

In the U.S., there would have been that same level of impact.

When you get into EMEA, the countries really move around a bit.

Some a bit negatively, some a bit positively.

It all depends upon where holidays and how the holidays are falling.

So EMEA overall was slightly positively impacted in the quarter, but only slightly overall from an average daily sales perspective, and then the other operations really no significant impact from number of days in the other operation segment.

You said slightly positively impacted?

Pardon me?

In the third quarter?

Pardon me?

You said positively impacted in the third quarter?

In the EMEA region, I said, only very slightly positively impacted.

And what about Q2, I know we talked about this a little bit last time, but is it fair to say it was about a day in Q2, the impact of the days issue?

Overall, correct.

There's a negative impact because of the timing of Easter in Q2.

So Q2 had a negative impact and it probably was about a day.

I would have to go back to see exactly what we had said at that point in time.

I think it was a percent or so negative impact as a result of the timing of Easter there.

Then a different question on regional margin guidance for the fourth quarter, I know you touched on it a little bit in your guidance comments, but last quarter you were pretty helpful on that, can you give any more color on what type of operating margin expansion or deterioration you're looking at by region and division year-over-year in Q4?

Well, I think as we look out to Q4, I would anticipate we'll continue to see good operating margin expansion in the case of the U.S. and EMEA as we had seen in the third quarter.

I think that story will continue.

When you look to both Jefferson Wells and Right, both of them in the prior year had slightly lower operating margins than we typically would expect in the fourth quarter, so I would anticipate expansion there as well.

In the case of France, I think we're certainly looking at operating margins in the same range if not slightly higher than where we were last year.

So that gives you a little bit more color.

Okay.

And what was the payroll tax reversal that you mentioned?

Can you just tell us exactly what impact that had last year?

Sure.

Last year, if you go back and look, you'll see that we had a Social Security tax audit conclude and as a result, we had reversed an overall provision.

The net effect of that on operating profit in France was roughly about a $2 million pickup because we had that credit coming through, but then we also had some restructuring costs coming through.

So again, a net on the operating profit line was a net positive 2 million overall.

We also had restructuring in Right Management last year in the fourth quarter of roughly $2 million, which effectively offset that credit for 2 million.

So you look at the quarter overall last year, the non-recurring items netted to about zero, but there are a few pieces, particularly when you look at the gross margin impact, part of the credit in France came on the gross margin line and the expense came on the SG&A side.

It impacts different areas of the statement, but net impact is fairly negligible in terms of the quarter.

Last question, please.

The last question will come from Jeff Silber with BMO Capital Markets.

Thanks for letting me sneak in.

Mike, I think you had mentioned that you had added about 500 permanent recruiters this year; was that correct?

Correct.

I know you're not going to give out some budget information for next year, but should we expect something similar in '07, or are we going to hope that these folks get a little bit more productive and maybe we don't hire as much next year?

Well, I certainly think that --.

We want both.

We expect them to get more productive.

That is part of, as we ramp up, there is a learning curve here: but we would expect to continue on this pace.

We think there's enough opportunity out in the marketplace that we continue to add at this pace as we go through next year.

Any specific geographies you're going to be focusing on?

Frankly, I think they'll be the same.

Certainly the U.S. has a lot of opportunity, as does France, but even in some of the EMEA markets, we still see ourselves just in early days in some of the key markets in EMEA as well.

So really across the board.

In terms of office openings, how many offices have you opened this year, roughly?

In terms of number of offices, we would have opened just over 100, albeit there have been some consolidations in a few markets where we have been able to consolidate to drive some efficiency as well.

So on a net basis, the office openings are fairly negligible, but we continue to see some good opportunities in eastern Europe, in Asia-Pac, and then in some of the other more developed markets and more of the specialty side.

There are still office growth opportunities as well.

And again, you think you'll see about 100 or so new offices open next year as well?

Yes.

I think -- we're just putting our plans together for next year, but I think that would certainly be reasonable given what we're seeing now that we'd at least be on that page for next year.

Okay.

Great.

Thanks again.

Thanks all.

Appreciate it.

That concludes today's conference.

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