ManpowerGroup Inc (MAN) 2007 Q2 法說會逐字稿

Good morning and welcome to Manpower's 2007 Second Quarter Earnings Conference Call.

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

(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 it was a very good second quarter and today we are going to go over it.

Mike Van Handel our Chief Financial Officer is with me today.

Together we will go through the results of the second quarter.

I'll discuss the second quarter as well as the segment detail and clearly we got some extraordinary items so we are going to want to go through the segment detail closely.

Mike will add a bit more color to the numbers of the income statement, as well as anything that affected the balance sheet.

We will spend a little time then on the third quarter outlook.

As usual before we move into the call if I could have Mike just go through the Safe Harbor language.

Good morning everyone.

This conference call includes forward-looking statements which are subject to risk and uncertainties, actual results might differ material from those projected in the forward-looking statements.

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

Thank, Mike.

Second quarter was truly an outstanding quarter across the world.

Many of the segments performed exceptionally.

Kind of a repeat of what we saw in the first quarter.

We were either taking a very good market and making it better or taking a difficult environment and showing some very good improvement in creating opportunities for us in the future.

As we experienced in the first quarter of 2007, EMEA and France just continued to hit the ball very hard.

They are major contributors to the overall profitability of the Company.

Additionally, the U.S.

while having a soft topline had good profit performance which is important.

During the second quarter, we also began to see some of the work that you have been hearing us talk about with right management in creating the appropriate footprint, how we were approaching the business and then also introducing some innovative offerings that contributed to that revenue and profitability you are seeing, though small it really is starting to create an effect for us.

Our earnings per share more than doubled in the quarter to $1.86, of this amount $0.66 is attributable to this impact of the change of the French payroll tax calculation for 2006.

And we will cover that because it covers 2006 and the first half of 2007.

As many of you aware, we filed this 8-K in late April discussing the change in the tax subsidy which was retroactive to January 1, 2006.

Therefore the second quarter not only benefits from the lower tax rate but also accumulative catch-up amount from the previous five quarters.

You have the actual running that is what we would now call operational gross margin in the second quarter and then the previous five quarters.

The impact of this change for the six quarters was substantial, $0.66 per share this quarter, gross profit by-- increase gross profit by $113.9 million and operating profit by $99.3 million.

We will isolate this and talk about it.

A revenue for the quarter exceeded $5 billion, up 15%.

U.S.

dollars 9% constant currency as you seen in previous quarters we are performing well throughout the manpower world.

Not great in some areas.

We have weak spots and we will talk about that.

This geographic presence, the lines of service we offer are really a true major asset to be continued in our success in expanding this revenue and expanding our profitability.

Europe once again topped the list in performance.

We continue to see very good performance from many of the major entities.

Germany, Holland, Sweden, Belgium, Norway, just outstanding performances.

And they actually have a good opportunity to continue that bright outlook as we look into the third and fourth quarter.

Italy also performed well, with revenue up 13% and profit up 28% in constant currency.

We had a solid quarter from France which was furthered enhanced by this increase in the payroll tax subsidies.

The U.S., much as we anticipated is still struggling with some revenue because of that mix of business and vigilance on pricing and expenses profits were up over 16%.

On a consolidated basis excluding the impact of the French subsidy, gross profit was up 30 basis points from a year ago showing good progress and a good mix of business, adding in the impact of the French subsidy, gross margin was up 20.3%, a 250 basis point improvement over 2006.

We ended the quarter with an operating profit of $277 million, more than double the prior year in U.S.

dollars and up 89% in constant currency.

A 5.5 operating profit margin.

An increase over last year of 240 basis points.

This, of course is including the French subsidy change.

If you exclude that French subsidy change, operating profit was $178 million with an operating profit margin of 3.6% up 40 basis points over last year.

While you can see the impact of the French subsidy is substantial.

What I do not want anyone to lose here is that we had a great performance without that.

And we were above our own expectations for the quarter.

This quarter also included a higher tax rate which Mike will discuss a little bit later in the call.

Let me spend a few minutes talking about gross margin.

As I mentioned earlier, we had a nice increase in our gross margin excluding that subsidy in France and even better increase including the French subsidy.

Permanent recruitment continues to positively impact our gross profit margins.

We are gaining in strength, adding recruiters, becoming much more efficient and taking market share in this area.

Our permanent placement consultants increased by 10% in the quarter and our mix of business changed slightly now with permanent recruitment making up about 10% of our gross profit dollars.

If you recall, we like to be in the neighborhood of about 15% for the overall companies gross profit dollars which we think is a good target for us to capture the market we are interested in, create the brand we are interested in creating and yet at the same time keeping the business in balance.

Our gross profit margin was negatively impacted once again by the shift in mix as our higher gross margin specialty businesses did not grow at the same pace of other businesses.

You are seeing good growth out of Asia and good growth out of Europe and that's really what's affecting it.

Looking forward, we do continue to see positive revenue trends.

We are seeing a slight softening in the French market and manufacturing and construction.

Though we believe we will achieve adequate growth as we look throughout the balance of the year.

The U.S.

we believe will continue to be sluggish for sometime, but we will be able to continue to generate good profitability.

Any upside on the top line based on what we are anticipating is truly an upside.

Europe and Asia will continue to be firing on all cylinders based on these trends and what we are currently seeing in our business, we anticipate the third quarter earnings per share being between $1.39 and $1.43.

This includes a positive $0.08 from currency.

Now moving on from the segment detail, the U.S.

came in just under $500 million in revenue at $489 million.

Down 9%.

This is slightly lower than we had anticipated.

We were thinking the U.S.

might come in down about 5% when we entered the quarter.

What we were looking at the end of the first quarter was really a flattening of that current trend.

And some settling in the revenue.

When in fact what we experienced during the second quarter were slight further declines.

Profit was up $16 million -- I'm sorry, 16% to $26 million, a 5.3% OUP.

110 basis point improvement on the operating unit profit percent.

And this was primarily aided by this higher gross margin-- profit margin.

The increase in the gross profit and the profitability in the U.S.

was generated from several areas.

The first was the continued progress in permanent recruitment.

A theme you would be hearing across all of our geographies.

Also we are continuing to market aggressively in strongly to small and medium sized businesses.

And additionally we benefited from a lower state unemployment tax rate and workers compensation.

We implemented very aggressive initiatives.

We have hand held devices that now go out to our locations.

We have systems that track what we are doing for workers compensation.

And as a result of these initiatives and managing them aggressively, this has resulted in a much lower cost.

Based on the favorable experience and our actuary review we were able to reduce our reserve for outstanding claims by $4 million during the quarter.

Going forward, we expect to sustain these improvements.

However, of course, the year-over-year benefit will decrease as we anniversary these gains.

The U.S.

market continues to be as I said before a bit sluggish but we are not experienced any desperation in the market.

We were continuing to see some spots of energy and when we look at it from a regional perspective, some regions are up but those regions up would include maybe those that have more focus on some the light industrial business which we are starting to see just minor signs of some improvement out of that.

Overall, we were continuing to see office weaker than light industrial and Manpower Professional our engineering IT and finance areas outperform other service lines.

Give you a little bit more of an insight into the quarter, May was the weakest of the three months on an average daily basis followed by some modest improvements in June.

However, we really didn't see the second half of this year -- we don't see the second half of this year being anything that much dramatically different than the first two quarters of 2007.

Moving on to our French operation, we achieved $1.8 billion in sale, up 16%, 1.3 billion Euros, up 8.5% As we progressed through the quarter we were impacted by the timing of the May holidays a bit more than we actually anticipated because of where those holidays fell in the week.

Additionally, we experienced some softening and manufacturing in the construction industry which is a big part of staffing in France.

The construction industry less so.

As we look forward, we anticipate continued growth in France; however, not quite at the levels we were at the first quarter and the beginning of the second.

Therefore, we anticipate the third quarter revenues being more in the area of 4 to 6% growth rates of the top line.

I would like just to pause and remind everybody the size difference, if you will.

That is interesting and simple math.

France growing at 5% has the financial effect of the U.S.

growing at 15% because of the dramatic size difference in the countries.

In France gross profit margin excluding this additional subsidy was up and it is primarily up again to that-- because of that permanent recruitment business.

We are off to a slow start in the permanent recruitment business and now what we were seeing is some good momentum, good focus on it and as a result starting to affect our gross margin.

We are not seeing any extraordinary pricing pressures in that market that would give us any kind of pause.

Of course work this new subsidy coming in we will continue to watch that very carefully.

Excluding the impact of the French subsidy change, our operating profit was $64 million, up 29% or $48 million Euros.

Up 21% in constant currency.

When including the fixed quarter of subsidy impact our operating profit goes to 164.

So $164 million up 229% in U.S.

dollars or $122 million Euros up 209%.

Within the French market we are continuing to exercise ourselves.

Push ourselves to assure we are taking advantage of the opportunity within Manpower Professional.

Other specialty business and permanent recruitment.

In all three of these areas that we believe that there is a very good opportunity to expand within the market and as result improve our financial performance in the French segment.

Now moving on to EMEA which I think many of you know we have made some changes to it, it not only excludes France which is historically true, but also excludes Italy because of the size of Italy as a percent of the overall business it's now called out as a separate segment.

EMEA segment continues to perform extraordinarily well.

Markets are in favor and we are actually taking advantage of that much more than what we think we were seeing in the market in general.

We put in place several programs and we believe these programs have allowed us to outpace the market.

Revenues for the quarter came in at $1.6 billion, up 26%.

Or 17% up in constant currency.

Gross profit margin increased over 100 basis points which is due to very strong growth and permanent recruitment as well as the fact that some of our fastest growing geographies like Germany, Sweden and Norway also carry within the highest gross profit margins in the region.

Expenses were well managed which resulted in a $56 million operating unit profit, up 89% in U.S.

dollars, 78% in constant currency.

This resulted in an operating unit profit percent of 3.5%.

As you can see, as we continue to fill in the infrastructure which we talked about now for several years that we were in growth, we knew we were going to be in growth mode in Europe.

We invested in the offices and now as we fill these in we get very good leverage as a result.

Based on our growth projections, we have a great opportunity to even further enhance the leverage in this segment.

Break it down a little bit more of those performances, our U.K.

operations while not having a spectacular growth being in positive territory up 12% in U.S.

and 3% in local currency, which more important is our profitability in the U.K.

is up almost three times what it was the prior year.

Showing that the restructuring and the efforts of that turnaround that we did at the end of last year is proving actually to be quite successful.

Like the highlight of a few other organizations that grew extremely well, Elan continues to grow nicely with growth rates of 14%.

Germany 26, Netherlands at 23 which is truly spectacular performance considering they had these types of of growth rates a year ago which means that they are putting this type of growth on top of high growth rates in the past.

Sweden grew very nicely at 38% in constant currency.

Belgium 21 and Norway 29%.

All of these has you can see are very strong performances and we have no reason to believe as we move into the third quarter and for that matter the fourth quarter that we wouldn't continue to is see a strong market from a secular perspective and are doing what we would like to think is more than our fair share in taking those opportunities in that marketplace.

Italy segment performed well.

Revenues for the quarter were $354 million, up 21% in constant currency.

I'm sorry, up 21% in dollars and 13% in constant currency.

Gross profit was stable, expenses were controlled.

And this generated an operating unit profit of $29 million up 37% over last year.

In constant currency up 28%.

Operating unit profit margin was very strong, up 90 basis points to 8.2%.

Our Italian organization continues to drive permanent recruitment business.

The selling to local businesses and we continue to open offices.

Moving on to Jefferson Wells, revenue came in at $84 million, down 15% which was slightly better than our projections.

On a sequential basis revenues improved 3%.

Gross profit margin was down slightly, primarily because of the utilization of professionals.

Operating unit profit margin came in as we expected just over $1 million.

As we discussed on previous calls, our revenue is down from prior year due to two large accounts giving us a substantial amount of nonrecurring business in '06, 2006 and the lower level of SOX business in the marketplace compared to a year ago.

If we exclude the impact of the two large accounts our revenue was up 3% over the prior year, we further exclude the impact of the SOX business and our non-SOX business actually grew 20% year-over-year or 5% sequentially.

Our SOX business was stable sequentially and currently represents just under 20% of our business.

While we are in a transitional stage moving from a few very large clients in some of the SOX works, I feel good about what Jefferson Wells brands represents in the market and our opportunities in that market.

We continue to invest in new offices, both internationally and domestically which we believe will set us up nice, a future in a marketplace that we believe has a very, very good and bright future.

Right Management continues to build good momentum.

I spoke last quarter about a new service offering that we had put in place.

Very positive effect right now for the overall Right business.

Our wins are really racking up substantially across the board.

Revenues were up 3% over last year, gross profit was stable, expenses managed very nicely with profitability coming in at $11 million with an operating profit percent over 10%.

Our new product offering actually is now being rolled out in other parts of the world so the effect you seeing is really primarily the U.S.

We recently moved it into the U.K.

and we will move it across the continent over the next several months.

We were driving our organizational consulting practice to show continued growth across all geographies.

We are winning large engagements in training and coaching.

And these opportunities are all over the world.

And as I mentioned earlier with our new service offering, right choice, we really have a nice combination selling which is making a big difference to us.

It's therefore creating a good backlog of deferred revenue that should help us in the third quarter.

Those of you who have followed us for sometime know that the third quarter is an extremely seasonally weak quarter for career transition.

Therefore, it is also our seasonally slowest quarter for revenue and profitability.

Moving on to the other operation segment, they also performed very well.

Our revenues were at $635 million, up 13% in U.S.

dollars and 11% in constant currency.

Our gross profit margin was slightly lower due to a changing business mix but expenses were well managed which produced a $15 million operating unit profit, up 2% over a prior year.

What you are seeing in the other segment or other operations -- I'm sorry, is that we were continuing to invest in markets that we see particularly China, India and some parts of South America that will be very important vehicles for us into the future.

Now the largest unit in this segment is of course is the Manpower Japan, where revenue growth improved 9% in constant currency.

Gross profit in operating unit profit margins are lower as we have had a difficult time passing on some direct costs increases through higher bill rates.

We were also seeing really that the Japanese market is a good market for us right now.

I believe we were under performing a bit and part of the reason is that labor market is very tight.

In the first quarter we put in several million dollars into the market to generate some candidate leads.

We were seeing some of the results of that, but we have a little more time and probably a lot more effort for us to really generate the kind of candidate flow in a tight labor market that we need to produce the kind of revenue growth that we are looking for.

Also in the segment Argentina, so very important contributor.

They were up 36% in constant currency and did an even better job on the bottom line.

Overall, the other operation segment is able to produce good profit for us while continuing to invest in the future.

We see this as a major area for us a few years out from now.

During the quarter, Darrell Green joined us as President of Asia/Pacific.

Darrell comes to us with a very impressive track record having most recently lived in India and prior to that spending many, many years in Japan and being a fluent Japanese speaker will definitely help us in that marketplace.

Second quarter, was a very good quarter for Manpower.

I appreciate the fact that it had some extraordinary items in there, but you have to peel that back and realize that from an operational perspective a very, very strong performance.

Our operational performance continues to leverage very, very nicely with the EMEA leading the way.

Second quarter of 2007 was again a record setting quarter for us.

And we feel optimistic as we look toward the third quarter.

Third quarter of course is not without challenge as we see the U.S.

continuing to be sluggish and France slightly lower rate of growth than what we might have been anticipating a quarter ago.

Despite these challenges, we are looking for a strong earnings growth in the third quarter.

We are anticipating coming in between the $1.39 and $1.43 per share with a positive currency impact of $0.08.

This represents an increase in earnings of over 22% at the midpoint of our range.

A strong quarter and what we believe to be is a good solid outlook into the third quarter.

With that, I would like Mike to break down some the details of this and give us a little understanding more about the third quarter.

Mike?

Okay.

Thank you, Jeff.

I thought I would start by discussing our second quarter earnings compared to our forecast last quarter as there were several elements impacting earnings per share to arrive at the reported $1.86 per share that you see.

After that I will discuss our balance sheet and cash flow and finish with our third quarter outlook.

Earnings guidance for the second quarter was $1.12 to $1.16 which included an estimated favorable currency impact of $0.06 per share.

If I start with the mid point of our guidance or $1.14 per share I'll reconcile that to the reported earnings for the quarter of 1.86.

First and foremost, we did have a strong operational performance in the quarter which resulted in an additional $0.10 per share above our forecast.

Jeff previously discussed the operating results of the individual segments and majority of this outperformance comes from the other EMEA segment.

Interest and other expense contributed an additional $0.02 as interest income was slightly higher than forecast.

Our income tax rate on earnings before the payroll tax subsidy impact was 39.2%, compared to our forecasted rate of 36.5%.

This higher rate in the quarter relates to the prior year as we determined in preparing our tax returns we will not be able to utilize as much of the foreign tax credits as we anticipated in our 2006 income tax provision.

With effective income tax planning we should be able to utilize these foreign tax credits in our 2007 tax return and therefore we will recoup most of this benefit in the second half of 2007.

This change in our estimated 2006 provision resulted in a reduction in the second quarter earnings per share of $0.05 and, again, I expect that we going to get this back in the second half of this year.

We forecasted currency benefit of $0.06 in the quarter but actual impact was $0.05 positive.

While the Euro was slightly higher than anticipated, the mix of the other currency resulted in slightly less benefit than forecasted.

Total of these items we arrive at $1.20 per share which is our earnings prior to the impact of the change in French payroll tax legislation.

As Jeff discussed earlier, the change in the French payroll tax was retroactive to January 1, 2006.

Under the accounting rules, this is considered a change in estimate and therefore the retroactive impact of this change is recorded in the quarter in which we became aware of the change which was the second quarter.

The impact of this change was $0.45 related to 2006 and $0.10 related to the first quarter of 2007 and $0.11 related to the second quarter of 2007.

What you are seeing here is the true retroactive impact is $0.55 and then there is a $0.11 that is really operational related to the second quarter and should be considered as part of our second quarter earnings.

On an operating unit profit basis the impact on 2006 was $66.7 million, the first quarter of 2007 was $15.5 million and second quarter of 2007 was $17.1 million.

Turning to the balance sheet, our balance sheet remains strong at the end of quarter with total debt of $848 million and net debt of $137 million.

Our total debt-to- total capitalization improved slightly to 24%.

Our debt covenant ratios remain in very comfortable range and we received a credit rating upgrade to BAA2 from Moody's Investors Services during the quarter.

Our accounts receivable increased $378 million since year end of which $85 million represents a change in the exchange rates and $293 million represents the seasonal impact of higher business volumes.

Our DSO moved up one day in the quarter but this relates to the timing of the quarter end following a weekend and now the change in collection activity.

We will get that back right as we get into the early stages of the first -- of the third quarter.

Cash from operations was $141 million compared to $136 million in the prior year.

Cash from operations would have been higher again had the quarter end not landed on the weekend as I just mentioned.

This additional cash flow again will flow into the third quarter as we collect that cash early in the month of July.

The cash related to the retroactive payroll tax adjustment will be likely collected in the fourth quarter.

Free cash flow of $89 million was used for share repurchases of 1.2 million shares in the first half of the year.

This leaves a remaining authorization under our share repurchase program of 3.8 million shares.

Next I would like to turn to our third quarter outlook.

Overall we expect to continuation of good revenue growth ranging from 13 to 15% in U.S.

dollars or 7 to 9% in constant currency.

We expect our recent growth trends to carry through the third quarter.

In U.S.

we expect the continuation of the sluggish market with revenues down between 6 and 8%.

In France we expect revenue to be up between 11 and 13% or between 4 and 6% in constant currency.

This reflects a slightly softer growth we witnessed in the latter part of the second quarter and early stages of the third quarter.

The other EMEA region continues with exceptional growth ranging between 24% and 26% in U.S.

dollars, or 16 to 18% in constant currency.

Our Italian operation will also continue with strong growth ranging from 21 to 23% in U.S.

dollars.

Or 13 to 15% in constant currency.

Our Jefferson Wells operation will continue see a year-over-year decline in revenues with revenues contracting 7 to 9% as we continue to transition the business from two large clients from the two large clients we discussed earlier.

On a sequential basis, we expect to be up 3% and we expect our SOX business to be stable to slightly higher on a sequential basis.

We expect the seasonally slow quarter of Right Management up 4 to 5% and slightly up on a constant currency basis.

Our other operations also will experience good growth of 12 to 14% in U.S.

dollars or 10 to 12% in constant currency.

Our gross profit margin is forecasted to be between 18.1 and 18.3% reflecting a strong improvement over the prior year.

This improvement reflects good pricing discipline on the staffing business that continued expansion of our permanent recruitment business and the impact of the increase of the payroll tax subsidy in France.

Our operating profit margins should expand nicely to 3.9 to 4.1% from 3.6% in the prior year.

Estimate income tax rate is 38% which is slightly higher than the 36.5% that we reported in the previous year.

This results in our earnings per share range of $1.39 to $1.43 which includes a positive currency impact of $0.08 per share.

I should also note that included in our earnings estimate for the third quarter is a $0.02 one-time charge related to the relocation of our global and U.S.

headquarters operations.

We expect to move into our newly leased building in downtown Milwaukee in September and are pleased to say the the annual occupancy cost of the new facility will be similar to our current occupancy costs.

Thanks, Mike.

With that we would like to open it up to questions.

Thank you.

(OPERATOR INSTRUCTIONS) Our first question comes from Andrew Steinerman of Bear Stearns.

I wanted to dive into the French payroll benefit, the $0.11, you termed in operational.

Does that mean that you think it's sustainable?

Do you think you will have that level of benefits in the next couple of quarters?

Is there anything on the competitive front that suggests that you won't?

It's a good question.

The way this works is this is right now positioned as a change to a calculation which has not contemplated being short-term, but if you will, out for until they change the legislation of the law.

Which would mean that the kind of affect you saw in the second quarter of approximately $11 million or $0.11 is what you would see in a round number, depending on what kind of people we have out on assignment and what the volume of it is per quarter.

So we look at it now as just part of gross margin, part of our operating unit profit.

And have to manage that appropriately.

So there is no reason for us to believe that this isn't just business as usual with a new water mark that's been set.

We believe also that this industry in France has been undervalued by the client, by all of the work that we have done and wet down a path over the last 50 some years.

This gives us a chance to say this is really what the industry is worth.

Right.

Having said that I would be remiss to say that there is a new government within France and there could be some changes.

This is not been talked about.

Has not been mentioned and we have no plans to see it being changed at all.

Right.

And from a competitive landscape, Manpower France as well us a all of the major three players have changed their local leadership in France.

Is it possible to make a comment on kind of collectively how the management of the major staffing firms seems now versus a year ago?

Well, I think -- that's important and I wouldn't want to minimize that.

I think what's of equal importance is that we have different senior management at those companies.

And those senior managers are now looking at plans that talk about economic profit.

That talk about deriving a value back to the shareholders.

When you DSO like you would see in the French market, let's call them 75 days, you have to be generating higher gross margins.

I think what you are seeing is senior management saying this is where it needs to go and local frank French management being changed and hopefully entering a much higher level of sophistication.

I have gotten more optimism than ever we will be approaching the market in an intelligent way and in a way that will describe why these are the appropriate levels of price.

Right.

And then just to wrap that same point up, is there is any recognition from the client that the vendors taking this stance makes sense?

Well, what's most interesting, is we have not gotten in a lot of conversations yet with the client.

So the clients are maybe digesting this right now.

But I don't think the clients -- they don't see this in their pricing.

We didn't increase their pricing.

Which makes a big difference.

Increase their pricing it would make a difference.

What we have done is increased our margin.

This is business as unusual.

It's on your side.

Thank you for clarification.

Next question, Mike Fox, JPMorgan.

Good morning and congratulations on another strong quarter.

With regard to the U.S.

it continues to be somewhat sluggish, could you talk about whether you think it's-- it doesn't seem like the overall employment market is necessarily sluggish .

Do you think where we are in the cycle temporary workers are not as strong demand because it seems like the perm is still pretty strong for you guys.

And also can you talk about the availability of workers both in the U.S.

as well as EMEA and

Sure.

If you look at the U.S.

and if you try to take our numbers or for that matter go out on a limb and say even our competitors numbers and extrapolate that into the BLS numbers it does get a little hard.

If you take a good hard look at the BLS numbers, you see a lot of growth being driven in the marketplace through the retail, construction, not so much recently but prior to that.

And health care.

You are seeing at least half of them fall into that category .

That is not a category that the staffing industry plays in.

If you look at what's happening in manufacturing and other levels of service, you are starting -- you see something that is more equal into this.

So while I think there is good permanent placement energy, I don't think it's permanent recruitment energy because of replacement of temporary staffing as much as I believe companies are now saying it's harder for know find talent.

I have already downsized my HR staff.

I will let an outsider do that.

I think you seeing a structural change in the market as opposed to a cyclical picture.

Having said that we are seeing a market in the U.S.

that is a bit stagnant right now.

It's not going down precipitously or up in any ecstatic way.

We are battening the hatch here to say how do we make sure we expand our professional, sell to retail, small, medium sized businesses, keep our key accounts squarely in focus because we will be at this kind of a level for the balance of 2007.

Now, switching to your second question, availability of talent, you see it in the U.S.

It's difficult.

But manageable.

I think when you get into Japan, Germany, Northern Italy, the U.K.

for some specialized skills, some of the places that you would see in Germany is starting to hit (Inaudible- background noise) --And as a result we have to work harder.

Actually, I prefer that because that shows our value to the client as opposed to having to pick from 25 different people that are perfectly

Great.

Thanks a lot.

Yes.

Next question, Jim Janesky, Stifel Nicolaus.

Yes, hi.

Good morning.

Two questions.

Within France do you have any more qualitative more comments about why you think the manufacturing and construction markets are slowing down and the expectation for how long that could last?

Qualitative, so that help me.

Well a couple things and we asked a lot of questions on this.

If you look at the end of the fourth quarter and the first quarter, there was a little bit of a construction building boom leading up to the election.

So there was a lot of activity.

There was a lot of buoyancy.

The government that was going to be moved out knew they were going to be moved out so as a result they continued on certain programs.

So I think that's one piece of it.

That does not really account for as much of what we would be seeing from the industrial as it may be called there had or manufacturing.

We see that slight slow down really more attributed to France going through a few of its changes right now to be competitive on a Pan European basis because we are not seeing that slow down in Germany, far from it.

So I think you are seeing that GDP anticipation of that GDP going down slightly in the second half.

Recognition that there is a little bit of a bit more change and transformation that needs to happen in France for them to be at the competitive levels of some of their other countries within Europe.

So I'm not the economist but I think if you look at their production output, it goes across the board clearly you see it up in the north and in the non--diary area where where you have more of the food processing.

Some of those areas.

You see it in the northeast where you would have a little bit more of the light industrial work.

It's just a little bit of trimming.

Then, of course, affected rippling through the country is the effect of the slowing automotive which also going to the supplier base.

Okay.

Thanks.

And within Jefferson Wells you said you expect Sarbanes-Oxley work to be stable to up in the third quarter.

Are those -- is that coming from orders that you have in hand?

Or what your clients are telling you.

What are the expectations that you think for the third and into the fourth quarter for Sarbanes-Oxley spending.

You have a little bit of seasonal effect and Mike knows more about that than I do.

Mike, you may want to cover that.

Ordinarily there is more testing of controls in the third quarter and into the first part of the fourth quarter.

Typically we would see a seasonal ramp-up on some of the SOX business.

So I think we do have an expectation of that.

We have a couple of other forces that are happening here.

One being the fact that with the SEC giving a little bit better guidance than the BCOB in terms of how to measure risk and how to view SOX.

There is more clarity around that.

So I think most companies actually are looking at testing less controls this year than they tested last year.

So there will be a little less of that type of work generally.

But then on top of that you have the smaller companies, the so-called non-accelerated filers which are starting to gear up to be in compliance.

So based upon some of the discussions we have we are expecting more business from that group.

You put all of that together, we were expecting a little bit more business in the third quarter than with a we had in the second quarter.

Okay, thanks, Mike.

Next question, T.C.

Robillard, Banc of America securities.

Great, thank you.

Mike, I want to make sure I'm understanding how to look at your earnings going forward here with the French payroll tax subsidy.

I wanted to look on an apples to apples basis sequentially, would I be comparing your earnings guidance to $1.31 as opposed to kind of the pro forma $1.20?

Just trying to adjust what's in the third quarter number with respect to that subsidy versus the second quarter.

Right, adjust the second quarter to be $1.31, that's correct.

And secondly, could you give us a sense as to where you think margins can get to in France and if you could include the new tax subsidies we will be looking at it comparatively going forward.

What's the goal here for the next 18 months or so?

We would be a little reluctant to give that.

And the reason is a couple things.

One is we would like to and are in the process of formulating a bigger kind of plan of where those margins may go with France being a part of that.

I know you know that we have been take being 4% as a company, and we are tapping on that shoulder right now.

As a result, we were spending some time really looking at what are some of the things we put in place that would drive some additional operating margin.

And France is no exception.

What we are doing with Manpower Professional, permanent recruitment, there are some things within the Sarkozy element that he is talking about that may actually improve our permanent recruitment ability.

And then the small, medium sized business we are marketing to.

Clearly we are not looking at where we are now sitting on top of the right number for operating profit margin.

We would see that expanding.

And France would be part of it.

But other parts of the Manpower world would also be key parts of it.

I think you could be looking at the French number.

Same as you would be looking at it from a macro, permanent recruitment will drive it which permanent recruitment in France guessing is not good but will be low single-digits as a percent of gross margin.

So they have a long way to go to get to that 15% or at least double-digit which would have pretty dramatic affects to their profitability and their operating profit margins.

Little reluctant to give you an answer just in France because I think it's better to lay out where we think the whole company may be going.

And Jeff, when can we expect that timing for you guys to deliver that to us?

When we feel comfortable that we have the analysis done right.

Okay, fair enough.

Thank you for the color.

Yes.

Next question, Michel Morin, Merrill Lynch.

Good morning, guys.

Don't want to gloat on this too, too much.

To understand what's baked into your third quarter assumptions for French payroll taxes.

Given that you just in the second quarter the amount you spelled out for us was $17 million.

It sounds from what you are saying, Jeff, that we should not expect that number to be coming down too quickly and I would assume that's what's baked into your third quarter assumption?

I would have no reason to think that that number would come down.

That numbers based on a population we put out on assignment that is in a certain kind of wage ban and a calculation.

If that goes up or down or of market in general goes up or down, the number would change.

But that is a number in a range.

If you say 15 to 18, 15 to 19, whatever range, Mike might have a better one than that, that is it.

This is just new gross margin, new way of doing business from now until we hear something different if we ever do from the government.

So it basically sounds like that 17 just roughly looks like it's about 90 [BPS] or so, so kind of towards the upper end of what you had originally expected would be the pickup.

Yes, Michel I think our 8K said we were looking in the range of 100 basis points on the French operating margin.

So we are right in that ballpark overall and maybe just add a little bit more to Jeff's comment.

I think going forward on the next quarter, you won't hear us talking about how much is the payroll tax subsidy.

As Jeff said this is a new water market.

We will be talking generally about pricing and gross profit and operating profit margin as we always do in France.

But we don't see it being relevant to break this out as a separate component going forward.

Great.

That's really helpful.

And if I may, just on the U.S., you mentioned a few different things there and in particular you mentioned your effort regarding small business.

Could you give us a sense of how significant that is now for you in the U.S., and also what were the trends on the specialty side?

You might have said it, I think I probably missed it.

Yes.

I clearly talked about it done in the U.S.

If you were to go back and take a look at the notes, I think you would see it is a common theme across the Company.

It's a major initiative we have in the Company for us to really focus on small medium sized.

But also better focus on what we would call global accounts and therefore we are really refocusing the organization by splitting them.

As we split them physically or by compensation plans and other things we are seeing good growth.

And the best example and the one furthest ahead is the Netherlands.

And you can see the Netherlands came in this quarter at 23% growth and I believe second quarter was probably equally as high.

And a lot of that is well above market and you are seeing it because of that split.

The U.S.

has not benefited from that to that extent yet because they are early in that cycle.

Italy is ahead of them.

Belgium is ahead of it.

Germany is ahead of the U.S.

And the U.K.

is now starting to move.

It's a major initiative we have within the Company and we believe there is some very good margin and very good sales in that area.

Regarding professional, what I did say in the comments is that light industrial was better than office and professional was better than both of them.

So we are seeing the professional and we would describe that in our words it really is primarily IT engineering, finance and some scientific.

It's outperforming those other two, down a little from the first quarter primarily because of some key accounts, not losing them but just not needing the same level of hundreds of engineers which can make an effect.

Because Manpower Professional is still relatively small to the multi-billion dollars of the other part of the business.

And what was the change in the gross margin in the U.S.?

The change in gross margin in the U.S.

you are seeing from permanent recruitment and seeing from the workmen's comp we talked about and you may want to see we cover that appropriately.

Those are the key things.

Workers comp, state unemployment taxes and then permanent recruitment help drive the expansion of gross margin there.

Great.

Thanks very much, guys.

Next question Andrew Fones, UBS.

Yes, hi.

I have a question on other EMEA and I think you touched on it a bit in your last answer.

Could you walk us through the different programs you have there and kind of help us understand what drove the margin improvement year-over-year?

Thanks.

We get the margin improvement in many ways.

And let's talk about the two different kind of margin, gross margin improvement and then operating margin improvement.

Operating margin improvement is all about leverage.

The other EMEA is doing a very nice job on managing expenses.

And at the same time doing investments.

But really filling in an infrastructure we put in place the last five years.

And those of you who followed us for sometime, we were running EMEA at 2% operating margins, 1.5% operating margins and what we were saying is while we aren't happy with this, we really feel as though this is the right thing to do by building out some of that infrastructure particularly in Germany, in eastern Europe, in Italy and in some places where we were doing much more work in Belgium and a few others.

So we filled out, we put that infrastructure in place and now what you are seeing is the operational leverage coming from that.

Now, in additionally what we mentioned was our fastest growing countries within that segment also happen to have the highest gross margin percents and that's generating a lot.

And then also EMEA is leading the way for the Company in how to do permanent recruitment.

I would say right now, Mike, about two-thirds or maybe more of all of the recruiters we have worldwide is sitting in the other Europe segment.

And as a result, you are seeing some good margin and profitability expansion out of there.

They are also the ones that are furthest ahead how we were splitting and making sure we focus on the small/medium sized business and giving better service to the key accounts and that's generating growth as well as market expansion.

If I could follow up on that if you could kind of just detail those kind of points you mentioned, the infrastructure, the fastest growing countries and perm and so forth, if you had to benchmark it, how would you break that out in terms of margin improvement?

It's a big question because you do it on size as well.

There is weighted averages in there.

When you look at the fastest growing, you would see Sweden and Norway be way up on top of the list, in the high 20s and low 30s.

And then you would see Germany, Belgium, some of those.

Still doing very well and then Italy a little bit lower than that.

So it's really the core part of our geography is doing well.

I wouldn't want to exclude the fact that when you go from barely keeping your head above water from a profitability perspective in the U.K., to turning that around and creating three times the profitability we did last year, it really has a nice buoyant effect to the overall number and we see that only getting better as the U.K.

is gaining some momentum on it.

Thanks a lot.

Yes.

Next question, Jeff Silber, BMO capital market.

I want to go back to one more French question and I won't ask about the subsidy.

The journal had an article this morning about the strong Euro impacting some of the manufacturing industries, specifically in France and not necessarily in other countries in Europe.

Do you think that has something to do with the slowing growth in your business there?

That's too hard of a question for me to answer maybe we can talk to an economist.

The number that I stayed focus on is somewhere in the neighborhood and somebody has this number better than I do but somewhere in the neighborhood, little or plus 80% of the business of export stays within the European community.

So because of the strong Euro, it doesn't affect the export of Germany going to Italy and Italy going to France and so on.

So I think that's a big part of it.

I do think that we are getting a bit of posturing as that is one of Sarkozy's biggest elements is the Euro is too strong and he sees that as an issue within France.

I wouldn't have any other better comment than things you could maybe read in the FT or in others.

Our team would say they not really seen the effect of that.

They are just seeing on the margin some cautiousness, not any kind of left turn here when it comes to manufacturers in France.

That's fair.

And switching to gears to Italy, I know it's a relatively new market.

At least compared to France and other areas you were for awhile, but the margins are phenomenal there.

How much long do you think that's sustainable and where should we see margins normalize in that area?

Clearly, those are some impressive margins.

But it's an impressive organization.

If you look at their IT systems.

If you look at how they have focussed their offices and in general a market that has really appreciated the value of what we bring to the client set, I would say those margins should be sticking around for sometime.

Any time you enterer a market you have margin pressure on there.

But I would not see that in '07 and I'm not sure if I see it in '08.

Maybe when we see it is if at sometime Europe turns down and it gets a little more pressure we might see some remargining then, but I don't see it then.

Mike, do you have any comments than?

I think what I would say and we don't break out any of the other EMEA countries but Italy is not an outlier compared to some of the other strong performers of that EMEA group.

We talked about it many times.

Certainly our U.K.

operating margin is much below the average for that group at the moment.

But it's on the right track and improving.

But there are a number of good operating margin countries within that group.

So I don't look at Italy and think of it as being an outlier or anomaly that has a correction around the corner.

I think we have to continue providing the value and continue with our strategies there and I don't see any issue with maintaining a good operating margin.

That really is reflective of the value we are bringing to the market place there.

Okay.

Just a couple quick numbers question, tax rate guidance for the third quarter of 38%, is that with a we should use going forward beyond the third quarter?

I think what we will see is likely will dip back down a little bit as we go into the fourth quarter.

There are a number of moving parts as you can imagine with an organization our size.

There is a lot of complexity in estimating that tax rate.

And when you start thinking about repatriating earnings there are sometimes can be an additional cost to that.

The 38% right now I would say is a fairly rough estimate, if you will.

And probably a slightly on the conservative side.

But I think that's safe.

I would anticipate that for the fourth quarter.

It likely will head down a bit from that and as I look even beyond that, I would expect a rate that's probably going to be a bit below 38.

It might be higher than the 36 1/2 we have been targeting, but I think it's priced somewhere in that range.

And then finally you mentioned the cash from the payroll subsidy coming in the fourth quarter.

Any guesstimate how large that will be?

If you look at what we had for the retro amounts which was through the second quarter, $99.3 million.

That's around $100 million.

So -- yes, let's call it 100.

So that's what we would be looking to collect in the fourth quarter.

There is -- we approach we have to take does involve filing forms and so we are somewhat reliant in terms of timing of governmental offices and those types of things.

Right now we think fourth quarter timing we should see most of it but we will see how it plays outs.

Great, None of that came in in the second quarter, correct?

No.

Last question, please.

Last question, Mark Markcon, Baird.

Good morning.

Thanks.

With regards to the U.S., is there anyway you can give us a feel in terms of how much of the margin improvement was due to operational issues as opposed to any sort of retroactive changes in terms of a accruals for workers comp or things like [SUDA] it's impressive your margins improved despite the 8.6% decline in revenue.

So I'm trying to figure out how much of it is due to perm and retail initiatives and how much is due to the other factors.

Right, right.

As Jeff mentioned earlier, there are a couple of elements that have driven the overall gross margin and operating margin.

Certainly permanent recruitment is a key element to that and then workers compensation and state unemployment taxes.

I think as you look at state unemployment taxes and workers compensation, a lot of the work we have done particularly in workers compensation should be sustainable savings we get going forward.

One of the elements that does come through in the quarter is just given the positive experience that we had and some the success we had around workers compensation.

We were able to reduce our overall workers comp accrual in the quarter by about $4 million within quarters.

That certainly did help drive that operating margin overall.

But as we look forward we continue to see with this type of contraction, if you will on the top line it's very difficult to get operating margin improvement.

But given what we continue to see on the perm side as well as on what we see on the workers compensation side, we think we should be able to maintain the operating margin going forward, if not see a little bit of improvement in the U.S., which is I think pretty spectacular given the fact that the top line is still a bit sluggish.

Great.

With regards to J.W.

and the U.S., if you strip out the two big accounts, and we just look at what the remainder of the business is, with all of the changes with regards to going from AS2 to AS5, and the seasonal changes, if we strip out those two big companies, what are we roughly looking at for JW in terms of the back half in terms of improvement year-over-year?

I think if we take that up, Mark, I got this in a slightly different way.

Or however you have it.

Yes, I would look at the -- take those two accounts out and look at the non-SOX business which grew about 20% year-over-year in the second quarter, I would anticipate that as going to continue into the second half if you will.

Still seeing some very good growth among that business.

On the SOX business itself, the SOX business outside of those two clients as we said, I see a little bit of sequential growth that still will be down on a year-over-year basis.

I would have to take a look at that to see how that math works to exactly get at your question.

If I summarize all of that as we mentioned, a bit earlier we still see revenue for Jefferson Wells being down 7 to 9% in the third quarter, but we think with the growth of the underlying business by the time we get to the fourth quarter, we likely will be on board with prior year if not seeing a little bit of year-over-year improvement by the time we get to that stage.

Last question, just to be clear with regards to France and how we should look at it.

Particularly as it relates to this quarter, given that this is the payroll tax change is a permanent change which you obviously benefited from this quarter, if we were to look at it in terms of what's fundamentally occurring here, the French margins we obviously should exclude what the prior period benefits were, but we should include this current quarter's benefits.

Should we not and if that was the case did the margin in France basically equal about 4.6% roughly?

Right.

That's correct.

That's it.

Yes.

Okay.

Super.

And 3.6 if you take it all out just from equal.

So 3.6 without any in and then 4.6 with the appropriate one quarter of benefit from that subsidy.

You don't see any change to that so therefore --

No indication of that.

Yes, right.

Thank you.

Just one last comment before we sign off and that is that this French subsidy issue is important and is a nice benefit for the Company.

We are hoping we did the best we could to try to break it down for you.

And one of the things that I think is most important is it is not lost that underneath this was great operational performance in France in EMEA and other parts of the Manpower Organization.

So by clearly we like the benefit of it, but we also want to, to make sure that you take a close enough look at this and see that there is some very strong improvements operationally which is just a continuation of the efforts that we have been doing for the last several quarters.

Thank you for attending.

If there are any questions at all we are here to answer them throughout the day and the week.

Thank you

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