ManpowerGroup Inc (MAN) 2007 Q3 法說會逐字稿

Good morning and welcome to Manpower's 2007 third 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 to all that are on the call this morning.

Welcome to the third quarter conference call.

With me this morning is Mike Van Handel, our Chief Financial Officer, and I must say we are doing this from the new headquarters building, and we are proud of the fact that we have this new building, and we are able to produce for shareholders some very good results.

What we will do as usual is go through the third quarter conference call.

I will discuss some of the segment detail, and then Mike will add some information to the numbers on the income statement, balance sheet, and look at what we are doing when it comes to the fourth quarter forecast.

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

Thank you, Jeff.

Good morning, all.

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

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

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

Thanks, Mike.

The third quarter, and I say this several different ways, but by any measure, is a very good quarter for Manpower.

We did experience as expected a few softness in a few of the units, no surprise in the U.S.

However, across almost all the units in the world we performed very well.

Our profit targets were exceeded, and we experienced some softness in revenue, but where we experienced softness in revenue, we also were able to achieve good profit.

Major driver for profit, no surprise, Europe.

My heros are in Europe, and they are really doing a great job.

Many of our European operations performed even better in the third quarter than they did in the second quarter, and the second quarter was a very solid quarter.

The U.S.

suffered with persistent softness on the top line, and as we had anticipated Right Management, if you remember, or go back to the call we talked about how we felt as though the book of business at Right Management was good coming into the third quarter, and it was, so the third quarter is seasonally weak, but at the same time we were able to put in a very good performance with profits up substantially.

Our earnings once again for the quarter were positively impacted by the French payroll tax.

The impact of this tax was about $27 million for our operating profit, or $0.19 in earnings per share.

While the $27 million impact to French payroll was nice, we like to have that, we didn't need it to produce a very solid quarter, and I think that is key.

Revenue for the quarter was $5.3 billion, up 15% in U.S.

dollars, 8% constant currency.

As we have seen before, we continue to experience the benefits of our investment in geographical diversity, and I can't underscore that enough.

We have got a very good portfolio of services, and a portfolio when it comes to the geographical diversity.

Several markets remain quite strong, with both secular trends in those markets, but also cyclical trends.

Europe of course stands out on top, Elan, our IT staffing company, did extremely well, Germany, Netherlands, all performing with revenue up in the ranges of 15 to 40%, and profit increases from 40 to 60%, outstanding performances.

In France, we outpaced the market marginally, but we outpaced the market, and we have solid gross profit margin percentages.

Gross margin for Manpower as a group, a company, was 18.4%, up 88 basis points, yielding an operating profit of $222 million, a 35% increase in U.S.

dollars, and 26% increase in constant currency.

The result is a 4.2% operating unit profit margin, up 60 basis points.

Take out the French payroll tax, and our operating profit was $195 million, up 19% in U.S.

dollars, with an operating profit margin of 3.7%, or up 10 basis points.

I would like it break down the gross margin a little, how we obtained this 88 basis point increase.

Third quarter of 2006 gross profit margin was 17.52.

Sizable impact by the French payroll tax which was 57 basis points, which will go away in the fourth quarter.

Our temporary recruitment gross profit margin, which we continue to do well in added 25 basis points, as four out of our five staffing segments improved their temporary recruitment gross margin.

If you will, the core part of the business.

Temporary recruitment gross margin is also benefiting from a more favorable mix, as some of the higher gross profit countries, margin countries like Netherlands, Germany and Sweden, are growing faster actually, than some of the profit margins, or the lower gross profit margin countries in the network.

No surprise either we are seeing a positive impact from our permanent recruitment business.

36 basis points improved on that gross profit line, because of the work that we have done in permanent recruitment.

Throughout the quarter we continued to add recruiters to our network, bringing our total number of recruiters to 3,500 worldwide.

With this investment, we are able to drive growth in permanent placement fees of 48% in U.S.

dollars, and 37% in constant currency.

Our mix of specialty business actually hurt our gross profit margin by 30 basis points, primarily because of the lack of growth that we are seeing in Jefferson Wells compared to what it was last year.

That brings us to the 18.4% for 2007, a nice improvement, and improvements that really were affected by a lot of the strategic investments.

We continue to see positive revenue trends in most places, though in some places like the U.S.

we are seeing softness.

However, we don't see this impacting our fourth quarter.

Europe and Asia should continue to do well, and based on these trends we are currently seeing in our business we anticipate the fourth quarter earnings per share to be $1.50 to $1.54, with $0.10 of currency in there, positive $0.10.

We move to the U.S., revenues were slightly above $500 million, revenues were down 7%, a little less than we experienced in the second quarter.

However, we made a substantial franchise acquisition, which would impact our revenue almost 3%.

We were anticipating the U.S.

to be down about 6 to 8% in the third quarter, it is actually down in the lower end of that range, and slightly more if you factor out the franchise acquisition.

If you look closely at the quarter we didn't see any dramatic deterioration during the quarter.

We also really didn't get a lot of encouragement.

I guess I could put that as good news, because we are not seeing it really slide any more.

We had a first few weeks that we started out in the quarter were slow as we anticipated, but we didn't see that typical seasonal pick-up that we would be getting in September and October.

Our clients aren't desperate, but there is a high level of cautiousness.

They read the same newspapers we all read, and therefore it is trickling into a little bit of their hiring intentions in the U.S.

Our permanent placement business was not affected, however, by this potential softness.

Our revenues and permanent recruitment in the U.S.

were up 33%, which clearly helped drive our gross profit margin.

Our costs were well managed and our operating profit declined 50 basis points, but it came in at 4.8%, an impressive number, and those of you, our shareholders who have been with us a while, you can see we are managing the business extremely well, but there is a deleverage that occurred a bit with the contracting top line.

U.S.

team doing a great job managing and in a difficult environment, and they and we will continue to look at efficiencies, but we are not going to do it in spite of some investments, like hiring recruiters and opening some Manpower professional offices.

It is a little different picture if you look at the French operation.

In France, we achieved revenue growth of 5% in constant currency, 13% U.S.

dollars, with a total of nearly $2 billion for the quarter.

Looking at the monthly trends those of you who follow that, we saw some growth weaker in August, a little bit of a rebound in September, and in fact the growth trends over the last seven weeks have been fairly stable which is a good sign for us.

Our operating profit was 101 million in dollars, up 63%, or 51% in constant currency.

Take out that $27 million impact for the French payroll tax, our operating profit was 74 million, still an impressive number, up 10% in constant currency, 19% in U.S.

dollars.

This resulted in a 3.9% operating unit profit.

The result of the French operations minus the payroll subsidy was strong, and increasing the operating unit profit by 20 basis points on a year-over-year basis.

We're going to continue to monitor whatever impacts there may be, regarding some of the changes within the French marketplace.

Currently the Sarkozy administration has changed the 35 hour work week overtime charges, not the actual legislation, but the overtime charges.

This basically allows us, an individual, to work overtime beyond 35 hours, and not have a tax impact, the same incentive as for companies.

However, we believe it should be and could be a very slight negative for us, but it will be very marginal, we think, and it is actually too early to tell for it to really work through the system.

It probably will be a little clearer picture for us, as we move into the middle of the fourth quarter.

It might even have to wait all the way to the first quarter, before we could really understand the ramifications of that.

On the other hand there are some really positive signs, with unemployment going down and us positioned in the permanent recruitment business, so therefore we are taking advantage of the stimulus that the Sarkozy administration is putting into the economy, and therefore affecting our permanent recruitment.

Overall we would anticipate actually in the fourth quarter a slight tick-up in revenue in France on a year-over-year basis.

The real super star as I move to the next segment is other EMEA, previously EMEA, but we took out Italy because of how big they are now, and to use a U.S.

expression, they are really hitting the ball hard.

Across the board we are continuing to see good secular growth, as well as cyclical growth.

We are managing the business well, we are keeping our gross profit margins at the right level, and we are managing expenses.

Revenue is $1.7 billion U.S.

up 29%, up 19% in constant currency.

Because of the leverage effect as we are filling in this network and continuing to expand revenue at a rapid pace, our operating profit came in at $74 million, up 51% U.S.

dollars, 41% constant currency.

Again, the team is doing a great job across the board.

Our gross profit margin improved as well through a good mix of business, as well as improving permanent recruitment business.

Our other EMEA segment is leading the way in permanent recruiters and got off to a head start probably, almost three, four years ago, and because of that and all the hard work that has been done since, we now have over 1,800 permanent recruiters, and we are now at 15% of our overall gross profit in other EMEA segment is being derived from the permanent recruitment business.

Operating unit profit margin up 70 basis points came in at 4.3%.

You can see the leverage that we have been talking about for some time, as we fill in that network, and drive that revenue with the appropriate revenue, having the right margin on it, and the right mix of business.

There are a few usual standouts in this segment, the Nordics performed well with revenue growth and constant currency at 28%, Sweden 43%, Elan, our IT staffing company, growth accelerated as we expected.

If you go back to the call last quarter, we said that we had a solid book of business, and it came true, with revenue up 41% in U.S.

dollars, 31% in constant currency.

Germany, 36% up in constant currency, 46% up in revenue in U.S.

dollars.

But we are also seeing as you can tell from the overall picture is these countries are growing their bottom line much faster than the top line.

Another country that I normally don't mention, but I want to mention is very good growth rates in Israel.

Given the back drop and some of the challenge that you all know exists in Israel, for us to achieve a growth rate for 21% in revenue, and a higher growth rate in bottom line, I just wanted to use this opportunity to say congratulations to the team there.

They are doing a great job.

Eastern Europe we continue to invest.

Our growth rates are up 70%.

We are continuing to invest not only in eastern Europe, but open offices in Elan, and will continue to hire permanent recruiters.

In all of these areas we see continued growth and will continue to invest.

Going through the other segment which is Italy, Italy's revenues were $335 million, up 21%, 12% in Euros.

Our gross profit margin improved year-over-year, and we experienced strong leverage giving us an operating unit profit of $25 million, up 35% in constant currency.

Our operating unit profit margin for Italy is 7.3%, up 120 basis points.

Great performance by the Italian team, and a market that that we believe still has a lot of expansion left in it.

Jefferson Wells, a little different story.

We came in about as expected, down 9% with revenues at $86 million.

Operating profit was impacted by a $3 million charge, related to moving to the new headquarters that will settle out.

You won't see that.

In fact, you will see a positive result as we move forward.

This resulted in an operating unit profit loss of $2 million.

Over the course of the quarter we were able to see stabilization in our Sox revenue, and increase in our non-Sox revenue, which gave us sequential revenue growth over the second quarter of 2007, which is important for us and a measure we look at closely.

We continue to be confident which sounds a bit odd given the loss, but we and Mike and others and the team there, will continually peel back what is happening and the costs associated with what's happening.

We are invest fling new offices, and we're investing in new offices, because we feel confident about the long-term view of the business.

We are opening offices overseas, and these offices create a drain on our profitability.

However, when we look at the new offices that we have historically been able to achieve and put in, they have a very good solid return on invested capital, and it is something that we believe when we can get that kind of return on invested capital, our shareholders would like to see us investing in that.

It is also important for us to invest in this because of the number of large clients we have, and they are asking us to go to these areas and actually in some ways funding our opening of those offices.

Moving to Right Management, a very solid quarter, revenue was nearly $100 million, up 9% in U.S.

dollars, 5% in constant currency.

As many of you know the third quarter is a seasonally weak quarter for the career transition business, but based on our backlog of business, and a very large amount of account wins over the last several months, we achieved a $6 million operating unit profit, more than double last year, a very good performance.

This sets up up nicely for the fourth quarter, and we are anticipating the operating unit profit will expand in the fourth quarter, as revenues will go up and we will continue to get this leverage.

Our new product offering Right Choice, as well as our refootprinting and substantial wins in the marketplace are giving us a good solid backlog of business, and positions us well for our additional services within Right, which is the organizational consulting business.

We have established a solid position in Right Management in India and China as well as other emerging markets, and we think this is a great opportunity for our coaching practice and our organizational consulting.

Our organizational consulting business grew at 25%, which is a nice balance to the career transition business.

In Right Management we saw the results in Japan and France in the career transition business, with both businesses being very difficult for us in the past year, really starting to find their feet and turn into profitability.

This has been accomplished by refootprinting the business and using some different tools in order to accomplish a higher level of service to our candidates.

Our Other operations segment also performed very well in the third quarter.

Revenues achieved were $663 million, up 11% in constant currency, 14% in U.S.

dollars.

Our operating unit profit of $19 million is an increase of 11% constant currency, 13% U.S.

dollars.

We continue to make progress in Japan which is our largest operating unit in this segment with revenues up 9% in constant currency.

Our operations in some of the emerging markets like China and India continue to proceed at a fast pace, and we continue to invest in office openings.

Many of you may have seen our press release last week announcing that we received a license for temporary staffing under the new labor legislation which will go into effect January 1.

We are the only multinational company to receive that license, and it is based on the hard work of our Chinese team, and the real essence of it was about what we have done with training people in China, putting people to work, and clearly exhibiting the highest levels of value as an organization.

We are optimistic about our prospects over the next five years, as you can imagine, given that we already have over 60 offices in China, and plan to continue to invest.

Argentina, Mexico, and Australia all did well in the quarter.

Argentina grew 35%.

Mexico 9, Australia 4, but actually did tremendous increase in profitability.

We continue to have a strong presence in South America, and we are seeing actually that entire operation do well.

Many of those countries are small, but when you add them together, and they are growing at 30% plus, both top and bottom line, the cumulative effect is actually quite positive for our shareholders.

All-in-all our third quarter was a solid quarter with substantial earnings increase, good revenue growth, and very good expense management.

We continue to see secular and cyclical trends in Europe.

While there are a few soft spots throughout the world, we believe our balanced portfolio of business, our market positions, will allow us to continue our strong operations profit growth.

We are anticipating achieving as I said before earnings per share of $1.50 to $1.54 for the fourth quarter, with a positive impact of $0.10.

What I would like now to do is turn it over to Mike, so that he can give us a little bit more details on the financials and the outlook for the fourth quarter.

Thank you, Jeff.

I would like to begin today by discussing our third quarter earnings, relative to our guidance for the quarter and analyst estimates.

Our revenue growth for the quarter was at the high-end of our guidance range, coming in at 8.5% in constant currency.

Our operating profit margin exceeded our guidance range at 4.2%.

This resulted in earnings per share significantly above our guidance range at $1.57, or $0.16 above the mid-point of our range.

The primary reason for our outperformance was due to strong operating results.

However, there are a few other items I would like to call to your attention.

Included in our guidance was an expected $0.14 per share favorable impact from the French payroll tax change.

The actual impact turned out to be a favorable $0.19 per share.

This favorable variance is due to higher than expected subsidies in the third quarter from the payroll tax change, as well as modest revisions to our earlier estimates of the payroll tax change which we reported in the second quarter.

Also included in our guidance was an estimate of a $0.02 per share charge related to one-time costs, associated with our moving to the new corporate offices with U.S.

and Jefferson Wells offices relocated as well into downtown Milwaukee.

The actual impact of this move ended up being $0.03 per share, so just slightly more than what we had anticipated.

Also not anticipated in our guidance was the impact of the share repurchases that we made in the third quarter, and these shares repurchases resulted in $0.02 of earnings accretion in the third quarter, again that was not in our anticipated guidance when we issued it.

I should also note that the currency impact was as expected at $0.08 per share.

While the dollar weakened relative to the Euro toward the end of the quarter, the average exchange rate throughout the quarter was about as expected.

Our performance relative to analyst estimates was also favorable.

However, you should be aware that some of the analysts included in estimates for the French payroll tax change in the earnings estimate, and others excluded it since it is a one-time item.

Therefore if you are using any of the sell-side models that are out there, you want to be sure to understand how they treated the French payroll tax item.

Our balance sheet remains strong, despite the $271 million of cash used for share repurchases in the quarter.

Our net debt at quarter end was $367 million, and our total debt to total capitalization was a comfortable 26% at the end of the quarter.

Our accounts receivable are up $700 million, or 18% since year end.

Of this amount, $433 million represents the impact from business growth in the higher seasonal volumes in the third quarter, and $267 million represents the impact of currency.

DSO for the quarter was one day better than a year ago.

Free cash flow which we define as cash from operations less capital expenditures was strong for the nine-month period at $233 million, an increase of 30% from the prior year.

During the quarter we used $271 million of cash to purchase 3.7 million shares.

This brings our total purchases for the year to 4.9 million shares at a total cost of $360 million.

I should also note that during the quarter, we completed the $325 million October 2006 authorization, and the Board of Directors authorized a new $400 million share authorization on August 27th of this year.

We also used $100 million of cash this year for acquisitions, and this primarily relates to franchises, and most of those occurred in the third quarter.

Next I would like to take a look at our fourth quarter outlook.

Overall we expect a continuation of the good revenue and strong earnings growth trends we experienced in the first nine months of the year.

We expect our total revenue to be up between 8 and 10% in constant currency terms, which should be between 14 and 16% in U.S.

dollars.

The growth rates by segment are similar to what we experienced in the third quarter.

We are again expecting the strongest growth to come from Europe with the soft spot being the U.S.

Our expectation for U.S.

revenue declined between 3 to 5% is somewhat better than the third quarter, which primarily reflects the full quarter impact of acquisitions completed in the third quarter.

Our gross profit margin is expected to remain stable in most markets ranging between 18.2% and 18.4% on a consolidated basis.

Our operating profit margin is expected to be between 3.7 and 3.9%, which represents an increase of 20 basis points over the prior year at the mid-point.

Our tax rate is expected to come down slightly from the third quarter to 36.5%.

This will result in our earnings estimate of $1.50 to $1.54, which is based on an estimated weighted average share count of 82.4 million shares.

The currency impact in the quarter is estimated to be $0.10 per share, as the Euro is currently about 9% stronger than the average from a year ago.

At the $1.52 midpoint of earnings guidance we are forecasting a 32% increase in earnings per share from continuing operations, or 23% in constant currency.

I would like to conclude my comments today by stepping back and taking a look at our full year forecast for 2007, followed by a few comments on the first quarter of 2008.

Based upon the fourth quarter guidance, we expect revenue for the year to be $20.3 billion, an increase of 15% in U.S.

dollars, or 9% in constant currency.

Earnings per share is forecasted to be $5.61 per share, an increase of 61% in U.S.

dollars, or 53% in constant currency.

It is important as you look at the performance for the year, to adjust for unique items impacting both the current year and the prior year.

In 2007 the French payroll tax change favorably impacted operating profit by $126 million, or $0.86 per share.

As we have stated previously, this favorable impact on the second and third quarter of this year, is not expected to continue beyond the third quarter.

Included in the 2006 results is a charge of $0.22 per share, which relates to nonrecurring reorganization costs, and expenses incurred from our global cost reduction initiative that took place last year.

If we adjust for these items in both years, our earnings would be up 28% in U.S.

dollars, or 21% in constant currency.

Certainly a strong operating performance for the year.

I should also note the $4.75 of earnings per share excluding the subsidy impact in 2007, represents the underlying earnings base from which we will grow next year.

As you look at our earnings estimate for next year, I would provide a few comments related to the first quarter, as I do every time at this year.

The first quarter of the years are seasonally our slower revenue quarter.

Its lower revenue base results in seasonally lower operating profit margins, as there is less leverage of our fixed cost base.

Furthermore given the expense leverage characteristics of the first quarter, our earnings are much more sensitive to positive and negative changes in revenue growth trends.

In addition, you should be aware that Easter does fall into the first quarter of 2008 versus the second quarter of 2007, and this will have a negative impact on the number of billing days.

This is somewhat mitigated, however, by the fact that 2008 is a leap year, so we will pick up that extra day there.

So with that I will turn it back to Jeff.

Thanks, Mike.

On educating Easter and leap year for us.

So with that, Jane if you could open it up for questions.

Thank you.

(OPERATOR INSTRUCTIONS) Our first quarter comes from Chris Gutek, Morgan Stanley.

Your line is open.

Thanks.

Good morning, guys.

Hi, Chris.

Just wanted to start with a question on France.

To what extent do you expect additional labor market reforms, and what specifically might change and therefore what the impact would be on demand for temporary staff, beyond the changes that have already been implemented?

There really hasn't been a lot of discussion beyond the changes that have been complemented.

At the beginning of the Sarkozy administration there were some discussions about what was called a single contract and a few other things, but most of those have not really been brought forward.

What we would see is just really a real stimulus in the marketplace, so I am not sure if we would have good visibility because there has been fairly quietness on the horizon, regarding really direct labor law changes that would have an impact on our industry, other than what we talked about which is the overtime, and remember you can't, in the new overtime reprieve, if you will, in France you still can only work up to 40 hours, so it is not that you can't work another 20 or 30 hours a week on that, so we are looking at it right now as we are going to continue to monitor the effects of that overtime charge change, and continue to work with the administration, but there is really nothing right on the horizon right now that we would be able to point to.

If I can ask a follow-up focusing on the domestic business, it is somewhat surprising I know you had the franchise acquisitions so you can strip that out, but it is somewhat surprising that the business isn't experiencing a little bit more weakness, given the volatility in the financial market over the last several months, how concerned are you the business might drop off over the next couple months with a bit more lag, and you maybe haven't seen the lag effect kick in yet, and in that context is there any intention to dial back some of the investments and the capital spending, not just domestically but potentially globally given the less clear macro outlook?

Clearly it is less clear.

Sorry about that, but I think the financial market ones, as we have seen in our customer set, we deal with hundreds of thousands of clients.

We are talking about less than 1% that is affected by that.

How does that ripple into the economy in general?

I will let a lot smarter people try to figure that out, but our client base really isn't talking about that, and in fact many of our financial institutions that we do business with, our business is up in those because there are many financial institutions, particularly in the central parts of the United States, that don't have some of those credit and subprime issues that were talked about, so it is a very difficult environment to take a look at, so what we try to do is continue to take a look at it from a pragmatic perspective, what are we hearing and what can we see as far as we can see?

What does it mean for the middle and end of 2008?

We just can't go there, because it is not something we have good data on or good information.

Right.

Thanks, Jeff.

Yes.

Our next question comes from Mike Fox, JPMorgan.

Your line is open.

Thanks.

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

Thanks.

Can you just give me the Perm as a percent of total gross margin for the total company?

We are running just over 9%, Mike.

And how does that compare to the prior year?

Prior year we would be just over 7%, so clearly it is growing faster than the overall GP, and we have seen for the quarter our Perm business grow 37%, so you can see our investments are paying off.

We continue to add permanent recruiters across the world, and we are really seeing strength on that line of business in all of the geographies we are operating in, including the U.S.

market.

Okay.

That brings me to my next question, when you look at the U.S.

business, you mention strength in Perm, and Jeff mentioned strength in some of the financial institutions you work with.

Can you talk about where else you're seeing strength despite the overall softness?

Well, I guess maybe just one clarification.

We are not seeing strength on the financial side that we are working with.

I think Jeff's point was it is still a small piece of our overall customer base.

I think when you look at the U.S.

staffing business generally, we are seeing some softness really straight across all of our staffing business, from the office and clerical, to the light industrial and industrial business, so it seems to be fairly broad, which is really just a continuation I think of what we have seen for some time, but despite that fact, the overall labor market is still healthy, and there is still some growth, and certainly given our investments and our focus on the permanent recruitment side, we have been able to drive some growth on that side of the business.

And I would just want to add that I am not sure if you could use the word strength with the U.S.

right now.

There are pockets like permanent recruitment, which we think it is because of us as a new entry to that part of delivering that service, but if you look across the board, some regions are stronger than others.

Some of them have clients that their business is actually growing, but we would really put the the U.S.

in the category of stable, stable at a lower level, and we are starting to have seen it stable in the last five to seven weeks, but we wouldn't put it in the strength category.

Okay.

And then did you notice any change in sentiment following the most recent jobs report when we had a large revision, a positive revision?

The only sentiment I see is when I talk to some sell-side analysts.

Our clients don't look at those numbers, and we look at them, but our field really doesn't do much with those.

When the numbers first came out in August, we said that is not what we are seeing, so when they were revised in September, we said, okay, that makes more sense to us.

I think that is how we took the news here.

Okay.

Great.

Thanks a lot.

We have a question from Andrew Fones, UBS.

Your line is open.

Hi, guys.

Thanks.

Can you quantify how much of the revenue acceleration at Right was from some of the initiatives you have undertaken, geographic footprint change and delivery method, versus a pickup in layoffs generally?

It is a good question.

Clearly there are some areas within the U.S.

primarily, where a few industries have gone through some tumultuous times, and whether it be in the automotive industry or in the financial services industry, those tend to be large clients of ours, so we get some of that, but without getting into too much detail, the real difference in this quarter versus many other quarters is that our new product offering, our new service offering really allows much easier and robust access by the individual, so the individual is more motivated to be using some of our services, which is when the revenue starts, so whereas before if they didn't see a value in it, the Company was willing to pay and wanted to to help out that individual, but they could go do things on their own.

What we are seeing is that much more are participating in the programs because they see value in our offerings, and we track that very closely, which would be called the take-up rate, and that rate has been a substantial part of the increase in the revenue.

Okay.

Thanks.

If I could have one other, on Jefferson Wells, the acceleration there that you are kind of guiding to, or at least less of a decline I should say, can you quantify how much of that is due to pickup in business or just underlying strength, versus the annualizing of a couple of large contracts that you lost last year?

Thanks.

Sure.

We didn't lose the contracts.

Yes, in terms of, it wasn't a loss of contracts.

It really was a completion of contracts if you will.

It was some project business that was for a designated amount of time, and the time went out, so certainly that was two larger contracts we were really getting to the tail of those.

They had some impact on the third quarter of 2006, and kind of wound down if you will in the fourth quarter of 2006.

As we look to the fourth quarter, we have seen a little bit of pickup in our average daily revenue for Jefferson Wells toward the end of the third quarter, and into the fourth quarter.

Typically our seasonal peak comes around this time of year, so which is why we are looking for the sequential decline, as well as near the holiday time there is more vacation time, so you are seeing the sequential decline there, but overall I would say the business is healthy.

When you look at the non-Sox business we had a little bit of sequential pickup from the second quarter to the third quarter.

We had a little bit of sequential pickup on the Sox business from the second quarter to the third quarter, so it is pretty much, I would say, slightly better than stable.

It is showing some signs of improvement, certainly we are working hard within that market.

We see some great opportunity.

We continue to invest in offices overseas, so we certainly look for an improving profit picture as we move into next year as well.

Next question, please.

We have a question from Michel Morin, Merrill Lynch.

Your line is open.

Good morning, guys.

Just wanted to drill a bit further down into the acquisition and the impact in the U.S.

I think you said that added about 3 percentage points to the growth rate.

What was the timing?

I think you said it was not a full quarter impact?

That is correct.

That is correct.

It was in the August time period is when we picked that up, so a little bit less than half of a quarter.

Okay.

Was there an impact on margins?

Not material.

The business is running margins that were not that different from our overall business, so it did not have a material impact on margins itself.

And I might have missed it, but what was the explanation for the margin decline in the U.S.?

Is it continued investment in the perm capability, or what is driving the 50 basis point reduction there, or is that the relocation costs that were included there?

That is a good question, Michel.

There were some modest amount of relocation costs in there.

I think what you are seeing within the U.S.

market is in previous quarters, we had substantial gains on the gross margin line.

This quarter we still had gains on the gross margin line, but not quite enough to offset the natural deleveraging that you feel when the top line is contracting, so the decline in operating margin that you are seeing really is the fact that our overall cost base isn't coming down quite at the same rate as the top line, which is fairly natural given some of the fixed costs components of our expense base here, so that is what you are seeing.

You would have seen some delevering in the first half of the year as well.

It is just that our gross margin with the number of factors in addition to the perm recruitment, we also had some favorable year-on-year gains in workers comp and state unemployment taxes.

Those gains while there this quarter, are much more modest than they were in the first half of the year.

We still have the gains on the gross margin line from our permanent recruitment business.

That is really, really helpful.

Finally on perm in the the U.S.

you said it was very strong, can we actually put some numbers around that, in terms of how much it grew, and was it stable throughout the quarter, and I guess the question would be, was there any noticeable impact specifically following the credit crunch?

Overall growth in the quarter was 33%.

Our perm business moves around a little bit week to week, so it is a little bit more difficult to look at weekly or monthly trends and come with a meaningful conclusion, but rest assured it was fairly stable throughout the entire quarter.

We didn't see any dramatic swings, and no dramatic swings relative to the credit crunch at all.

Great.

Thanks very much.

We have a question from Andrew Steinerman, Bear Stearns.

Your line is open.

Hi.

When you look at the margin expansion that happened in the third quarter, looks like it was more driven by gross margins year-over-year.

In the fourth quarter of this year, I think we have a tougher gross margin compared to the year ago, but you are still seeing a margin expansion story.

Could you sort of explain what is happening underneath that on the SG&A line to enable a continued margin expansion story?

Sure, sure.

We continue to drive efficiency across the organization, Andrew, as you know, and we are still picking up some benefits from our project Titan, which was an efficiency program initiative that we began last year, looking at all of our non-personnel costs, so we still have some of those benefits coming through, but again as you know one of our key strategies is to continue to drive efficiency, and that is what we are doing, and continue to do throughout the organization, and I certainly see opportunity for that as we look into next year.

I think the third quarter was, while we had less gains from SG&A standpoint, it is really, you really have to look at the components of our businesses, and how they reacted as opposed to a generalization that we weren't getting SG&A leverage, certainly in some countries we are doing quite well from an efficiency and leverage standpoint, again as I commented earlier the U.S., given the top line contraction picking up SG&A gains there is a bit difficult.

And some of the SG&A would be driven by your perm buildout, the recruiter buildout, right?

That is true.

As you think about SG&A, that is a good point.

Thank you.

As you think about SG&A, as we add perm recruiters, that is adding to our GP, but of course it is adding to our SG&A costs as well, and if you think about SG&A as a percentage of revenue, when we do that, our SG&A as a percentage of revenue in fact goes up, but our SG&A as a percentage of GP will go down, because those recruiters are paying for themselves fairly quickly, so the normal relationship on SG&A to revenue becomes a bit distorted when we are investing on the perm recruitment side.

Right, but it is still very much right now an operating margin enhancement when you look at the contribution from perm, as well as the investment in perm?

Yes, yes.

When you look at overall operating margins from perm, the investment is positive.

I think again just to clarify, it is helping the gross margin, but it is adding a little bit more to the SG&A costs as a percentage of revenue, but net/net on the operating profit margin, there is a gain from that.

Thanks a lot guys, thank you so much.

Our next question is from Gary Bisbee, Lehman Brothers.

Your line is open.

Good morning, guys.

I guess a couple of questions.

First of all, did you get the cash from the retroactive benefit from the France tax change yet?

Yes, good question.

We did get much of that cash as we, once the rules went into effect which was in the middle of April, then our subsequent filings for those changes, we were able to effectively take the enhanced subsidies if you will, and just automatically reduce it from our payments due into the government.

What we still have to do is get the cash from 2006, and we have filed the appropriate paperwork with the multiple agencies that we were required to do that with, and that will be coming.

We might see some of that come into the fourth quarter, but I think more likely next year by the time it gets processed by the government.

And around how much, approximately how much are you expecting to get back?

I don't have an exact number for you here on that.

I will have a little bit more clarity as we get through the fourth quarter, but suffice it to say it will be several million dollars.

Several tens of millions.

Yes.

Okay.

And in the U.S.

you did a great job over the last year as growth slowed, of continuing to get the margin improvement.

If we were to think about some of your businesses in Europe seeing somewhat slower growth trends, just trying to gauge your confidence and ability to continue to get margin gains in the face of the scenario in which you had positive but somewhat slower revenue growth?

Do you still feel pretty good looking forward over the next few quarters about your ability to get margins?

There are a couple of questions in there.

One is we haven't seen slower growth in Europe, growth from second quarter to third quarter increased, and we see it, let's call it about flat, maybe just marginally down on revenue, so when you are in the mid- and upper teens, we won't be seeing any kind of deleveraging.

Having said that, when you look at the components and what we have done in efficiencies and systems, there is no reason for us to believe that we will not be able to manage that down, and those of you who have been with us for a long time, whether it was in 2000 or 2001, we have got an organization, we have got something in the organization called a cost containment program that kicks in at various different levels based on performance, and we feel confident we will be able to manage through that.

What happens is there does come a point when that top line either persistently has been slow or slows in the dramatic way, that you do get deleveraging and started to see that a bit in the U.S., but when we look at the fourth quarter, and you can tell by the guidance, we are not seeing that affect us, and we would see it a little too early to really give a good prediction on first quarter.

Okay.

Lastly, you obviously stepped up the buyback dramatically this quarter with the stock still down quite a bit off its highs.

How do you think about that on a going-forward basis?

Are you likely to remain at a pretty rapid rate was was there something in particular that led you to do it so aggressively this quarter?

Thanks a lot.

On the share repurchase how be think about and have historically is as we have free cash flow, we will use that free cash flow that repurchase shares if we don't have any other immediate uses for it, because we don't like excess cash on the balance sheet.

We would like to get that back to the shareholders in an effective way.

As we have been going through this year, we have been accumulating cash, certainly had a sufficient amount of cash on our balance sheet, and as we saw the shares retract a bit, we certainly did get more aggressive on the buyback program.

I think as we look forward, we will continue to look at share repurchases as a way again to efficiently get back excess cash to shareholders, so that will be somewhat of a function of free cash flow, and our outlook on free cash flow and other needs for cash in the business, so that is how we think about it going forward.

Great.

Thanks a lot.

We have a question from T.C.

Robillard, Banc of America Securities.

Your line is open.

Great.

Thank you.

Just to follow-up on the share buyback side, can you give us what the actual diluted shares outstanding were at the end of the quarter?

I don't have the end of the quarter number.

I have got the average for the third quarter number which was 84.1, but I don't have the number as of the end of the quarter right here, and the expectation for the fourth quarter is for diluted weighted average shares of 82.4 million.

And then is my math correct if I assume that of the new authorization you guys have already bought back 500,000 shares for roughly 35 million?

Yes, slightly above 500,000 for slightly less than 35 million.

Your math is correct.

Great.

Thanks.

Lastly on France, obviously been a deceleration in terms of the revenue growth looking at it on a constant currency basis, but if you look at the continued margin improvement, and this excluding all the payroll tax benefits that you got just on a core operations issue, you are still able to show year-on-year and even sequential improvements in the operating margin.

Can you talk to what else is driving that?

Clearly it is not a revenue acceleration that you are just getting some leverage on the fixed assets.

What else are you guys able to do there that are showing continued margin improvement in that market?

Your point is a good one.

We have improved by the French market by 20 basis points on operating margin when you strip out all of the subsidy in the third quarter, which was followed by about 40 basis points in the first half of the year, so if you look at the components of that, what you will see is our gross margin on the temporary side of the business is quite stable.

We are getting a little bit more higher gross margin overall because of the permanent recruitment business we are doing there, but really what it comes down to is driving efficiency within the overall operation itself, and our French organization are masters at efficiency, and they are always looking for continuous improvement, and I think they have done an impressive job in a market that while it has seen some growth, you are right, it is not phenomenal growth, yet they are able to continue to chip away at a number of efficiency initiatives to keep driving that, so I think it is a good performance.

I don't think there is any one thing that I would point to, but it is a continuation of looking at our field operations, and our head office operations, and finding opportunities to keep getting better.

And is it fair to assume that there is continued efficiencies to be gotten out, as well as kind of the gross margin mix, that that could continue to help improve that irrespective of just pure revenue leverage?

We as an organization have that list fairly well compiled, not only for France but every single location and every single entity, of what over the next three to four years, whether it be shared support centers, or anything else that we're working on or have already done, so we believe that we have a lot of opportunity in that area, but we like to move at a pace that is appropriate, because it is about the client and the candidate, and you do something a little bit too rugged too fast, and you don't pay a temporary.

That is basic brand damage right there, so we have got the list.

There is more in France.

There is much more in France.

They know about it.

They are talking about it, and there is much more all over the world, and we are going at it in a sensible way, and in a way that is quite sustainable.

Okay.

Great, Jeff, thanks for the extra color.

Thank you.

We have a question from Mark Marcon, R.W.

Baird.

Your line is open.

Good morning and congratulations.

I was wondering, nine years ago Italy legalized temporary staffing for the first time, and now it is generating more operating profits than your U.S.

operations.

Last week we got this announcement about China, and you are the only non-Chinese company thus far that is able to provide temporary staffing services over there.

What I am wondering is when we think about that from a longer-term perspective, how do you think about that, Jeff?

I know you have been meeting with the Chinese Minister of Labor.

What are the prospects over there from a longer term perspective when we think about the next ten years?

To us between China and India, we see these as a really potential to dwarf what great accomplishments have happened in Italy.

The reason we say that is that clearly size does have its advantage here.

The labor arbitrage which has been a key driver for moving a lot of businesses there, is actually starting to be minimized a bit, so it is not unusual for us to be putting engineers to work at Chinese companies, or at multinationals at 30,000 to 50,000 to $60,000 a year, so we have got some 61 I think right now, maybe 62 offices in China, and about the same in India.

We believe that this is a very big opportunity for us.

We are moving towards these opportunities with the right speed, that it is not about press releases, and we were reluctant to even put this one out, because we want our approach to the Chinese market in a sensible way.

We worked very hard with the government and have done a lot of training with our Shanghai International Partnership office, that has been established for almost four years now, so we really look at these as great opportunities.

It comes down to timing.

If someone were to say is this going to be a big impact on us next year or the year after?

It will be a marginal impact.

It will help a little, but the big impact isn't really until a four or five-year out, which is like a snap of a finger sometimes, so these are big opportunities, big geographies, we are moving into Tier 2 cities in China in 2008, and a Tier 2 city can be as much as 25 million people, so there is a lot of opportunity.

We have got good management there.

We are excited about the prospects.

Great.

Then when we think about Italy, you had 120 basis point improvement in your operating margins over there.

How much higher can the margins go?

You are at 7.3%.

I am never satisfied, but having said that, we really will depend on their mix of business.

There are two things when you look at the market is how much permanent recruitment can we get, and how does that improve the mix, and then what is our balance of business between small and medium-sized businesses and large key accounts, and then what is the evolution of a marketplace, so those are the things we look at, because there is a basic evolution of a marketplace that would probably drive down some margin.

However, we believe that because there is a large content of small companies within Italy which is a little different than other European countries, particularly in northern Italy, and they are really seeing the value of the service, we think we can probably inch that up a little, but to see that dramatically improve is out of the question, but my view is inch it up a little and you are still a hero, because that is a good margin for our business.

Absolutely.

And then the broader question, we have got Merkel in Germany, Sarkozy in France.

What are your European colleagues telling you about the longer-term point of view about continental Europe?

I would say the sentiment is they believe it is their time in the batter's box.

There is a lot of buoyancy there that there is a strength, there is a seriousness of the EU.

There are leaders within the EU now that are talking about growth, and talking about involvement on the world scene, and this is creating a sense of confidence, and then it is being backed up with an economy that is continuing to be strong.

One of the real questions will be what do they do with their currency, and they will work that out.

If you were to talk to our people, they really feel as though it is their turn, if you will, to be a real economic force on a worldwide basis.

Congratulations and obviously it bodes well for you.

Thanks.

One last question, please.

Our final question comes from Jeff Silber, BMO Capital.

Your line is open.

Thanks for letting me sneak in.

We knew it was you, Jeff.

Can you tell us what were the strategic reasons behind that, and is that something we should expect going forward?

The strategic reasons behind?

Behind the franchise repurchase in the U.S.

Any time there is a franchise, that we either would want to purchase, or wants to be purchased, we will buy it.

It is an accretive acquisition.

They carry all of the same brands, wouldn't be unusual for us in any given year to pick up three, four franchises.

This one just happens to be a very large franchise, so it kind of moves the needle a little bit more, but you will see some smaller acquisitions happening in the fourth quarter.

We do these, and they are very easy, because they follow the same brand, they follow the systems, the culture, it sometimes has to do with estate planning, and some of those issues.

Great.

On capital expenditures, Mike, I was wondering if you can tell us what we should expect in the fourth quarter, and I know you are not giving 2008 guidance, but sort of directionally where should we see CapEx going next year relative to '07?

Yes.

We will finish this year up in the 90 million range.

As we look into next year, I would foresee continued new office openings, continued refurbishments of branches as we normally would, so I would expect what I will call somewhat of a normal increase in the 10% range, certainly we haven't developed all of our plans.

We are in the midst of that right now, so I will say that is not any official guidance, but I would say I wouldn't expect anything too far out of the ordinary at this stage.

And the bulk of the CapEx relating to your new headquarters, was that last year or this year?

Really related to new headquarters, very limited if any CapEx overall.

I mean, the new offices are at least premises over a 17-year lease, and some of the, so it is new effectively, and even some of the furniture and fixtures were, came in as part of that lease as well.

No significant impact from the new headquarters.

Great.

Thanks again.

Thank you all for attending the third quarter conference call, and we will look forward to the fourth quarter and full year in January.

Thank you.

That concludes today's conference.

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