ManpowerGroup Inc (MAN) 2008 Q2 法說會逐字稿

Good morning.

Welcome to the Manpower 2008 second quarter earnings call.

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

After the presentation, we will conduct a question-and-answer session.

(OPERATOR INSTRUCTIONS).

Today's conference is being recorded.

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

I would like to introduce your host for today's conference, Mr.

Jeff Joerres, Chairman and CEO of Manpower.

You may begin.

Good morning and welcome to the second quarter conference call for 2008.

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

Together, we will go through the second quarter results.

I will discuss the overall results of the call, and then get into some segment detail.

Mike will then discuss the items affecting the balance sheet and the cash flow.

Mike will also spend some time covering the outlook for the third quarter of 2008.

Mike, before I move into that, could you read the Safe Harbor language?

Yes.

Good morning.

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

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

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

Thanks, Mike.

The second quarter of 2008 was a good quarter for Manpower.

I will spend some time talking about some of the weakening that occurred in the second quarter, but even with the intraquarter weakening we achieved solid performance.

Our largest segment, Other EMEA was up 30% in U.S.

dollars, and 18% in constant currency.

Right Management and Italy both did well, and overall our financial results were as we anticipated.

The second quarter results were solid.

However, we did see softening which impacts our outlook for the balance of the year.

A softer outlook is based on several different factors.

One is our largest single unit, France, has been experiencing softening in the second quarter.

That softening will clearly affect our third quarter.

The second is we are not seeing the U.S.

getting any strength in the near future.

Also, a few of the countries in Europe, Germany and Italy for example, are beginning to show some slower growth.

At the same time, we have a large number of high forming units.

Unfortunately, the units are not sizable enough to contribute in any scale, but they are contributing in a healthy blend.

Countries like China, India, Argentina and Poland just to name a few, are really growing at rapid rates.

As you review our second quarter earnings, it is important to consider two non-recurring items impacting results.

The first item is a change in the French payroll tax calculation, which favorably impacted operating profit by $53.7 million in 2008, and $99.3 million in 2007.

Second item is a $54.1 million legal provision for the exposure related to the French competition case, that we recorded in the second quarter of 2008.

The net of these two items reduced our 2008 earnings by $0.18.

The payroll tax item favorably impacted our 2007 earnings by $0.66.

Mike will discuss both of these matters in a little bit more detail once we get further into the call.

Our revenue in the second quarter was $5.9 billion, up 17% in U.S.

dollars, and 5% in constant currency.

This was achieved from solid growth from Other EMEA, Italy, and our other operations segment.

Our gross margin excluding the non-recurring items increased 49 basis points.

Our expenses were well-managed, though we are in some geographies experiencing some deleveraging.

Even in an environment like that, our operating profit was up 17%, excluding non-recurring items, or 2% in constant currency.

We were able to maintain our operating profit margin of 3.5%, resulting in a total earnings per share, excluding the impact of the non-recurring items of $1.52.

This represents an increase of 27% in U.S.

dollars, and 9% in constant currency.

While we had a solid second quarter, we did experience some intraquarter softening, particularly in the French market.

We believe that our balanced business, both in service lines as well as geography, will help minimize some of the softening, but based on the trends that we are seeing, we anticipate the third quarter earnings per share to be between $1.45 and $1.49, which includes $0.17 from currency.

The gross margin was down 80 basis points.

The truer picture is to eliminate the impact of the payroll tax change from both years.

Excluding the payroll tax change, our gross margin improved 55 basis points.

Part of that is the mix of the business, the other is through disciplined pricing.

We were able to improve our temporary recruitment gross profit margin, resulting in a positive 47 basis points impact to the overall gross margin.

We are still seeing the impact of a healthy permanent recruitment environment, with an increase in permanent recruitment fees of 26%.

This favorably impacted our gross margin 28 basis points.

The staffing business outpaced the growth at Jefferson Wells, yielding a reduction based on mix in our gross margin of 20 basis points.

I would like now to spend some time in the U.S.

segment.

The U.S.

segment had revenue growth of 1%.

Excluding acquisitions, revenue growth was down 9%.

Revenue overall came in at $492 million, and OUP of 15 million was down 43% including acquisitions, yielding a 3% operating unit profit margin.

The U.S.

market continues to languish with mixed news.

We are not seeing however, any further declines and in fact, one could look at it as some slight improvements.

Excluding acquisitions revenue was up 3.7% sequentially from the first quarter, and the rate of year-over-year contraction moderated from 11% in the first quarter, to 9% in the second quarter.

The clients continued to be cautious, but other than specific industries, they seem not to be making any real dramatic moves.

Our Manpower professional business continued solid growth in the second quarter, up 17% with franchise acquisitions, and 5% on an organic basis.

Our permanent recruitment business was up 12% from prior year.

Based on what we are seeing in our RPO business and some of of our large scale recruitment, we are getting very good productivity and therefore solid contribution to the bottom line.

The U.S.

revenues as I spoke about earlier were relatively stable during the quarter, and we believe that as we look into the third quarter, we would not see any further deterioration in our U.S.

business.

The French operation had revenues of $2 billion, up 10% in U.S.

dollars, down 5% in constant currency, which is at the lower end of our expectations.

Our French team did a superb job managing expenses, and therefore they were able to maintain their 3.6% operating unit profit margin, despite the top line decline.

Excluding the non-recurring items, our OUP increased 9% in U.S.

dollars, down 6% in constant currency.

We have seen further softening in the demand in the French market, which began in May and continues through today.

Currently, our French revenues are running about 8% below the prior year, which has been the case for the last several weeks.

So at least we have seen some stabilization in the rate of contraction.

We believe that we are running slightly below the market, which can be attributed to our disciplined pricing, and our mix of business being skewed more towards the industrial side.

That segment is hit more severely in the French marketplace right now than others.

We are also still working through some of the separation of our business that we did last quarter, regarding our small, medium sized business focus, and our strategic client focus and how we split those two parts of the business.

This has affected the organization, though we are confident that this will be a very positive move for us, as we get through some of these changes that are now occurring in the organization.

Our permanent recruitment business in the French marketplace continues to grow well, in fact, extremely well.

Our permanent revenue, permanent recruitment revenue is up 73% over 2007, and up 12% on a sequential basis.

Both very good signs as to what this market can do for us, and how we are performing in a new service like permanent recruitment.

We completed the acquisition of Spirit, a firm focused on IT and financial permanent recruitment.

The acquisition was quite small, but it really intended to give us the management from that company and a jump start into Manpower Professional.

We did the name change from Spirit to Manpower Professional, and we are now working aggressively in the market, and confident you will see gains over this in the next 12 months.

Other EMEA did quite well in the second quarter, with revenue of $2.1 billion, up 30% in U.S.

dollars, and 18% in constant currency.

We are experiencing very good leverage with good gross margin expansion, yielding an operating unit profit of $85 million.

Up 53% in U.S.

dollars, 36% in constant currency, giving us an operating unit profit of 4.2%, an outstanding performance.

The Nordics revenue growth was up 7% in constant currency.

Elan had a great performance, which is a continuation of several quarters growing in excess of 30%, with revenue growth up 42%.

At Manpower U.K.

we continue to see a stable market at an increase of 10%.

Germany, 19%.

Netherlands, 31%.

Taking out the Vitae acquisition, up 5%.

And the Vitae acquisition, by the way, is yielding some very good results for us.

Spain, clearly our challenges that we saw in the first quarter persisting into the second quarter.

The Spanish market looks very similar to the U.S.

market, in that between housing and oil prices, it has really put a damper on the economic conditions in Spain.

We are getting good growth out of several of the smaller units in our other EMEA.

Belgium up 17%, Israel up 14%, Austria up 30%.

While we have seen some softening, and we do believe we will see further softening in Europe in the third quarter, there are still some very strong performances, therefore giving us a much better glide path, as we go into a potentially slower period.

Once again, Manpower Italy put up some very strong numbers.

Revenue up 25% in U.S.

dollars, 8% in constant currency.

A great bottom line of OUP of $38 million, up 12% in constant currency.

A very strong operating unit profit margin of 8.5%.

The Italian market continues to do well, though, like we are seeing in other parts of EMEA, there is a bit of slowing that is occurring, and therefore it does give us some reason for pause and for some caution.

However, at the same time, there continues to be some good secular trends that are in our favor, and therefore we would continue to see, and plan on seeing a good performance out of Italy in the third quarter.

Jefferson Wells, revenue of $76 million, down 10%, weaker than what we had anticipated.

We were anticipating Jefferson Wells would be down 3 to 5%, as we expected to see our sequential growth coming out of the first quarter.

As in the first quarter, we continue to see clients delaying several projects.

At the same time, we are seeing a persistent if not nagging softening in organizations moving forward with financial projects.

The reason we say that is our backlog is strong, our pipeline is healthy, but it just continues to be strung out.

We will be continuing to be vigilant about cost and pricing, but at the same time we wanted to ensure that we were positioning ourselves for growth, as we believe this is a very good market for us in the U.S., as well as abroad.

However, the timing of course is not good for these types of services that we are currently selling.

Moving on to Right Management, Right Management had a good and strong second quarter.

The second quarter is seasonally one of our stronger quarters.

Revenue was up 4% in constant currency to $116 million.

We had good operating unit profit margin at 11.5%, yielding an operating unit profit of $13 million.

As strong as the second quarter was for Right Management, we still have yet to see any massive downsizing.

Clearly, there is some industry specific downsizing, as we are starting to hear more hallway chatter, if you will, regarding downsizings but we have yet to see it in any large numbers.

This I guess bodes well in many ways or views about how companies have dealt where their employment situations, and how bloated or not bloated some of these companies may be.

We continue to expand rapidly in our organizational consulting practice within Right, which our primary focus is assessment and then training and coaching.

That is now 30% of Right's business.

As you can see, and as you would imagine by reading the newspapers and trade publications, this will continue to be strong, and a more important driver for us in business as we become more involved with our clients regarding their strategic direction of talent.

Our Other operations segment had a nice quarter, up 21% in U.S.

dollars, 10% in constant currency, to $772 million.

Operating profit was $17 million.

We are still seeing the effects of our investments in emerging markets, yielding an operating unit profit margin of 2.1%.

As last quarter, we continue to see good growth in Japan, up 21% in U.S.

dollars, 5% in constant currency.

China, Taiwan, Hong Kong, all over 20%, and India in excess of 50% growth in revenue.

Also, stand-outs in the Other operations segment is Argentina, up 47%, and Mexico, up 10%.

All in constant currency, showing that there are areas, as I mentioned before, that are growing nicely, and continue to grow nicely within our global operations.

We have been notified by The Australian government that they will not be renewing our contract for The Australian Defense Force recruitment.

There will be a winddown period in this contract, therefore it will affect us mostly in 2009.

Overall company impact will not be material, however for the region and particularly Australia, it will have an impact.

In many ways I feel uncomfortable saying we had a solid quarter because of the backdrop of sour news that we are all hearing.

But in fact we did have a solid second quarter.

We did see some softening intraquarter which mirrors that which is happening in the global economy, and we continue to make appropriate investments, while being cautious not to invest too far ahead of the market.

All geographies, all units have done a very nice job of managing sluggish markets, and taking advantage of strong markets.

No doubt, we will be in choppy waters, but we have a team that knows how to manage expenses, and equally important, knows how to invest cleverly during this time, so that we can rocket out the other side.

Although we face softer economic conditions in many of our markets, others are still experiencing good growth and solid secular trends.

Given all of that, we are anticipating the third quarter to be in the range of $1.45 to $1.49, with a favorable impact of $0.17 in currency.

With that as the segment detail, what I would like to do now is to turn it over to Mike for some financial details.

Thanks, Jeff.

I would like to start today by discussing the non-recurring items that Jeff mentioned earlier in the call.

The first item relates to a change in the French payroll tax calculation that many of you will recall from last year.

In April of last year we were notified by the French Social Security office, that the calculation for payroll taxes was modified, resulting in a reduction of payroll taxes owed for 2006 and 2007.

Through discussions with the Staffing Industry Association in France in the second quarter of 2008, it became apparent that we could also file a claim for a portion of payroll taxes paid in 2005.

As a result, we recorded an estimate of the recoverable 2005 payroll taxes of $53.7 million, which favorably impacted the gross margin and operating unit profit margin in France.

On an after tax basis, the net earnings impact was $35.2 million, or $0.44 per share.

As we disclosed a year ago, this item favorably impacted net earnings in the second quarter of 2007 by $57.2 million, or $0.66 per share.

The second item relates to the French competition investigation that was announced in November of 2004.

Through the second quarter we received a report from the case handler of the French Competition Council, who rejected our defense arguments.

The report alleges that the damage to the economy could be up to 76 million Euro, or $120 million.

We continue to reject the accusations contained in the report, and to defend our position.

While we are unable to predict the outcome of these proceedings or the ultimate exposure, we understand that any fine levied by the Council, will be based on its assessment of damage to the economy.

In view of the report and our assessments of the circumstances, we recorded a charge of $54.1 million in the quarter.

This brings our total reserve related to this matter up to 45 million Euro, or $70 million.

The net earnings impact of this charge was $50 million, or $0.62 per share.

As you can see, there is not a full income tax benefit recorded on this charge, as any ultimate fine payable will not be deductible for French income tax purposes.

While the first item is recorded on the gross profit line, the second item on the S&A line, the net impact is only a charge of $400,000.

On an after tax basis however, the net charge is $14.8 million, or $0.18 per share, as a result of the tax treatment I mentioned earlier.

Turning to the balance sheet, our balance sheet remains strong at quarter end, with total debt just over $1 billion, and net debt of $453 million.

Our total debt to total capitalization remains stable during the quarter at 26%.

Net debt increased $95 million during the quarter, as available cash was used to fund acquisitions.

During the quarter, we used $194 million of cash to acquire U.S.

franchises and specialty staffing businesses, which included Vitae in Holland, and CRI in the U.S.

Accounts Receivable were $4.9 billion at the end of the quarter, an increase of $133 million during the quarter.

Our Accounts Receivable collection activity was strong during the quarter, resulting in a 1 day improvement in DSO.

Free cash flow, defined as cash from operations less capital expenditures, was $213 million in the first half of the year, compared to $100 million in the prior year.

This stronger free cash flow represents effective working capital management, as well as less working capital required due to the lower growth rates this year.

Capital expenditures were $51 million in the first half of the year, compared to $42 million in the prior year.

This increase is partially impacted by the change in currency rates, but also reflects our continued investment in growing and maintaining our branch network.

Cash used for share repurchases for the first half of the year was $53 million, and relates to purchases in the first quarter.

In the second quarter of the year, our free cash was directed towards the acquisitions previously discussed.

Lastly, I would like to discuss our outlook for the third quarter.

As Jeff discussed earlier, we have seen softening demand in a number of markets, as we made our way through the second quarter.

Therefore, we are assuming slower growth in the third quarter, similar to where we exited the second quarter.

Our guidance does not contemplate further significant slowing from where we are today.

With that in mind, we expect revenue growth between 2 to 4% in constant currency, which compares to the 5% achieved in the second quarter.

For the U.S., we are looking for revenue growth ranging between 7 and 9%, which includes the impact of acquisitions.

Excluding acquisitions, we expect a contraction in revenue growth, albeit at a slightly lower rate that we experienced in the second quarter.

In France we are expecting revenue contraction of 7 to 9% in constant currency.

This contraction is representative of what we have seen over the last several weeks.

While we are hopeful we might see some improvement, we don't see any signs of an improving economic environment at this point.

We expect to see good growth in Other EMEA, ranging from 11 to 13% in constant currency.

While this growth rate is lower than what we had experienced in the second quarter, it is important to note that the second quarter growth includes an estimated 3% favorable impact, due to the timing of the Easter holidays.

Additionally, in late June we began to anniversary a large customer contract in our Elan business.

In Italy, we expect continued growth in the 6 to 8% range.

While these EMEA growth rates reflect some slight moderation from what we experienced in the second quarter, at this point we do not see a dramatic downturn in growth across all of our EMEA businesses.

Jefferson Wells is expected to contract as it had in the second quarter, and Right Management should see growth similar to the second quarter.

I should also point out that the third quarter is a seasonally slower quarter for Right Management, therefore we would expect a sequential dip in the operating unit profit margin, similar to last year.

We expect growth to moderate slightly in our our other operations segment, ranging from 5 to 7% in constant currency.

Our gross profit margin should range between 18.3 and 18.5%, an increase of about 50 basis points over the prior year, after excluding prior year non-recurring items.

This reflects continued strong growth in permanent recruitment, and strong price discipline.

Our operating profit margin is expected to contract slightly compared to the prior year, and range between 3.2% and 3.4%, reflecting expense deleveraging, primarily in those declining markets.

Our tax rate is expected to be in the range of 36%, resulting in earnings per share of $1.45 to $1.49, which includes a favorable currency impact of $0.17.

With that, I will turn it back to Jeff.

Thanks Mike.

With that, we will open it up for questions.

Thank you.

At this time we are ready to begin a question-and-answer session.

(OPERATOR INSTRUCTIONS).

One moment, please.

Our first question comes from Mark Marcon.

Good morning, Mike and Jeff.

Hi, Mark.

I was wondering, with regards to France, what do you think led to, it went pretty much as you projected, but the pace of the deceleration was interesting, but it looks like you are not anticipating that it is going to decelerate any further.

What gives you the confidence that things will stabilize here and not get worse, given some of the macro headwinds that are out there?

Yes, it is a good question, Mark.

I will take a little of it.

I think Mike can maybe add a little color to it.

A couple things is that we have some insight into the first few weeks of July and what was happening at the end of June, and any time you are doing some type of forward projection as we are for the third quarter, in an economic condition that could be a little bit more slippery, or maybe not as slippery, without knowing those things what we have done is said all right, we have got three weeks of data, we have got a lot of information on the ground, what has been happening in those three weeks?

Are we seeing it getting worse?

Better?

The same?

Ask what we have been seeing is kind of more of the same.

When we dig into the client side, much of the industrial client, construction client, I am not saying all of that has drained out, because clearly it hasn't, but a lot of that on the fringe has drained out.

So from a current environment looking forward, that is why we would get some level of comfort with that.

Clearly, I think underlining your question is correct, and that is, something else could fall over there, and consumer spending right now is at a pretty long-time low within France, which is a big part of the French economy, and therefore some other things could happen.

But we based it basically on the last three weeks, and talking to clients and talking to our staff.

Mike, anything?

Yes, maybe just add a little bit more color on the trends during the month.

Clearly, we saw a step down in demand in May, and it was a little unclear at the time how much had to do with the timing of holidays, which May is a big holiday month in France, but then clearly June looked a lot like May.

Both months being down between 7.5 and 8% revenue year-on-year.

And as Jeff mentioned, as we moved into July, we effectively saw the same.

So there has been a fairly stable pattern of contraction, and clearly we don't have good insight as to where the economy is going to go from here, and so we aren't going to speculate but we didn't see anything, again on the ground, that would suggest that things are going to turn more positively or more negatively at this point.

So that was the basis for our guidance for the third quarter.

Okay.

And along those lines, can you talk a little bit about, you do have a higher mix of perm business than you used to.

Typically that tends to be more cyclically sensitive.

Should conditions remain at current levels, or deteriorate a little bit further in Europe, can you talk a little bit about what the margin implications might be when we look at France and some of the major markets in EMEA?

It is a good question, and some of those markets we can speak a little bit more from experience, particularly the U.K.

Other markets like France, which is brand-new, it is a little bit harder.

So right now what we would be seeing in France as we announced in the prepared remarks, was that we are still seeing good growth.

In fact, we are still seeing some good growth across the globe in perm.

But we also know that when things get quite dire, that is one of the things that really falls down hard, and therefore we will continue to watch that.

We monitor each country's percent of permanent recruitment to the staffing business, to make sure that it doesn't get out of line, so that we have the right levers to pull.

We are looking at redeployment plans, because in Europe it is very difficult to do any kind of redundancy in a quick matter for that staff, so therefore we are looking at how do we get them maybe into SMB marketing and branch sales.

But right now, we feel as though what we are going to be doing is adding selectively permanent consultants, but spending more of our time working on the productivity of the current ones that we have, and slowing down hiring, so that we can brace for something that might be a little bit sharper than what is in front of us right now.

Terrific.

And so that being the case, and as we compare this downcycle to prior downcycles, what would your anticipation be, as this ultimately plays out, assuming it ends up being like prior downcycles, do you think the margin implications would be similar to what we have experienced in the past, or better or worse?

Yes, that is a good question, Mark, and probably the one that everyone is trying to get their arms around.

The question is exactly how does the cycle come, and across what geographies and how fast and how deep?

On the plus side, I think our geographical diversification is much stronger than it was in the last cycle.

We have got larger contribution coming from strong markets like Italy and Germany, and those markets certainly have a secular wind behind them, that certainly will help in a cyclical downturn.

So I think the mix of business is broader based.

Certainly since the last cycle, we have Right Management in the mix, which about 70% of their business is outplacement business, which is counter-cyclical so that certainly helps.

But certainly the points you made on the perm recruitment side, that does tend to be a little bit more on the cyclical side, and so if we do see a slower downturn, we might get hit a little bit harder from the perm side.

So there are a lot of variables there, so it is pretty hard to say.

I think as I look at it certainly in a slowing environment, we would expect to see compression on the operating margin.

Looking back at the last cycle from the peak to the trough, we lost about 90 basis points when you look at it on a full year basis.

That doesn't seem out of range when I think about it, but I think it is pretty hard to put any specifics around it, because it really depends upon how the economic cycle plays out across the world.

Okay.

Terrific.

Thanks, Mike.

Thanks, Mark.

Next question.

Our next question is from Andrew Steinerman of JPMorgan.

Hi there, Mike, could you just review for us the acquisition effect in the U.S.

there was 10 points in the quarter.

Just remind us how that is going to affect the next quarter, third quarter, and given that revenues are going to be down less on an organic basis, what does that imply for margin year-over-year, U.S.?

Yes, right, so just to recap the second quarter, the U.S.

was up about 1% on a reported basis including acquisitions, down 9% on an organic basis.

Looking to the third quarter, our guidance was for growth of 7 to 9% including acquisitions.

The acquisitions are adding about, will be adding about 14% to our growth rate.

So on an organic basis, we expect to contract between 6 and 7%, so effectively that is going to be the impact, so we are again looking for a year-on-year contraction to be slightly better as we go into the third quarter.

Part of that has to do with some business we see in the pipeline, part of that has to do with the comparables being slightly better, and so there is a very modest improvement there.

From a margin standpoint, the acquisitions are adding a little bit to overall operating margin, but just very slightly at this point, given the size and as we move into the third quarter, I would expect that we are going to see, we are going to still see some of the deleveraging that we saw in the second quarter continue to occur in the third quarter.

So I would expect the operating margin to be below prior year, maybe more in-line with what you saw in the second quarter.

Okay.

Thank you very much.

Our next question is from T.C.

Robillard of Banc of America Securities.

Thank you.

Good morning, guys.

Good morning.

Mike or Jeff, could you just give us a little more granularity, in terms of just flushing out the deleveraging effect that you had highlighted early in your remarks?

I am assuming that we are talking France being at your biggest segment, and we have seen some declines there, but I am just trying to get a sense as to where there is other sensitivity with respect to deleveraging in the model?

Yes.

That is right.

When you look at overall in the second quarter, we're able to maintain our operating margin at 3.5%, when you strip out the non-recurring items in both years.

So in fact, with the combination of some markets deleveraging, but some markets still seeing some good margin expansion, in balance things were, we are able to maintain our overall operating margin.

When you move to the third quarter which speaks to our guidance, and more directly to your question, what we would expect to see is in some respects a bit of a continuation of the deleveraging we saw in the U.S.

market, given the contraction on the top line, but probably the main element that changes here is the French market, I would expect to see a little bit more deleveraging in the third quarter.

The second quarter they did a terrific job holding onto their operating margin in what was becoming a tough environment.

I think as we move into the third quarter, we are going to see a little bit of a slip on their operating margin, with the contraction of 7 to 9% that we are calling for on the top line.

They have been doing a nice job, maintaining pricing.

As Jeff said earlier, the perm recruitment business is still doing quite nicely, but it is difficult to cut costs that quickly along with the top line movement.

So we will see a little bit more, a little bit of compression there.

I would also expect within our other operations group, our growth rate is slowing a little bit there, so we are going to see a little bit of compression on the operating margin there as well.

Those are the markets that I would say we will see a little bit more than what we saw in the second quarter.

This is Jeff.

I just want to add a bit to it.

This comes down to somewhat of a strategic decision.

You can deleverage less by closing offices because that is your, if you will, fixed cost to staff the offices, have the real estate, all of the systems in it.

And while we will take some underperforming offices, offices that maybe we frankly didn't have the courage to close before, we probably do now.

But what we are not going to do is to manage that so tightly that on the other side of this, when you give up a location, a city, a part of a town, you can't come back in there.

So we are going to look at discretionary things, while trying to keep our offices intact, so that we can keep the brand strong, and come out with increased market share.

One more comment T.C., on just the mechanics of quarter.

The second quarter, our other EMEA region showed really good operating leverage expansion there, with about 70 basis points, and as we move into the third quarter I think we will still see some expansion, but not to the same degree that we saw in the second quarter.

So that is also playing into our expectation for the third quarter.

And if I could just follow on to that, if we are looking, Jeff, off of your comments, I completely understand that you guys don't want to make some near term changes.

This is a cyclical business.

You have got to manage through a cycle.

If we were to assume France maintains the current level, so probably looking at another eight months or so of similar type of contraction, with the levers that you can pull versus just maintaining your current infrastructure as is, where do you guys think margins could kind of stabilize at?

Is this a situation where they could get down to 2%, or do you think kind of the 2.5 to 3% range under that scenario is achievable?

I think if we were to see a continuation of 8% contraction, since you laid it out there, the 2.5 to 3, I might say it would be more in that range.

I would certainly hope we could manage toward the higher end of that range, rather than the lower end of that range.

But that is something that we are working through, and we are looking at.

We have got different contingency plans that we are working through, to see what the opportunity might be, so I am not prepared today to give you any specifics around that.

Last year we came in with an operating margin of 3.4%, certainly from what we see this year we would look for that to be north of 3 for sure, at least given what we are seeing so far in the economy, and we will be looking and working on plans, based upon where the economy goes from here.

Okay.

Great.

Thanks, guys.

Thank you.

Next question is from Andrew Fones of UBS Securities.

Yes, thank you.

I have a question on SG&A.

I was wondering if you could tell us what number of offices you had at the end of last year, kind of where you stand now, where you may stand kind of at the end of this year, and what proportion of SG&A expense, office lease costs, and so forth, make up relative to recruiters and other expense?

Thanks.

Sure.

Yes, we closed out the year last year at about 4,500 offices, and we are so far through this year, we have opened about 30 net offices, if you will.

That includes a combination of closing some offices in certain markets, and opening in others.

And consolidating.

And some consolidation.

So we continue to invest in the faster growing markets, the emerging markets in Asia, in Eastern Europe, still seeing opportunities in some of the German markets, and we continue to expand our Elan brand across Europe.

We still do see investment opportunities, and to the extent that those are there and show a good return, we will continue to invest there.

In terms of the overall mix of expense from a leased cost standpoint, our primary SG&A expenses is people.

That is going to be over half of our expense within our overall expense base.

The network itself is going to be more in the neighborhood of 15%.

I don't have the exact number in front of me, but it is going to be something in that ballpark.

So hopefully that gives you a feel, anyway, a sense of direction.

Yes, thank you.

And then just if you don't mind, on the Netherlands, I think you saw some nice acceleration there, about 6% constant currency growth in Q1, to 31% in Q2.

It appeared to us that the industry had been slowing a little in the second quarter, so can you comment on that?

Thanks.

That had to do with the Vitae acquisition that we made in Holland.

That really was the cause of the acceleration.

If we pull that acquisition out, we are showing 5% year-on-year growth in constant currency there.

Okay.

Thanks.

Our next question comes from Vance Edelson, Morgan Stanley.

Hi, thanks for taking the questions.

Could you comment on how you would characterize your current appetite for acquisitions, and in this environment would you say that prices or valuations have come off a bit, which might make for some more attractive opportunities?

Thanks.

Yes.

We would put acquisitions into two categories, because in the U.S.

we have a small number of franchises, and we will continue to acquire those.

Those are acquisitions that are very easy acquisitions.

They run our systems, brand, the people stay.

So we will continue to do that as that is appropriate.

Then there are acquisitions that those of you who have followed us for some time, we would not deviate from the strategy, which is as we move into more specialty businesses and specialty services, we will look at those acquisitions.

Some of those companies might be public.

Some of those companies might be private.

Our view is is we are in the business of strengthening that side of our business.

We will look at some, but frankly, and maybe some of these cases if you will, the price of those companies may not be seasoned enough down at that level.

So we are not overly anxious, but we are going to always have good conversations to keep our strategy going, our balance sheet is strong.

So it gives us some good opportunities.

Okay.

That is helpful.

And then as a follow-up, given the European M&A that has already taken place amongst some of your peers, does that give you any opportunities to take advantage of any disarray that there might be out there and maybe take some share?

Thanks.

Well, I mean, on face value it does.

And we are a company who is interested in having more clients experience the best service in the industry.

So as a result, we are going to be more aggressive where there are companies who might be going through some confusion, and may not be giving the client the best service.

So we think there is opportunity.

Our view, to go back to your acquisition question, for us to be looking at any large staffing company and combining forces, we have no appetite for that.

We don't think that that works well, because we have such great geographic presence now, and a culture that is a very unique culture in the industry, so we are going to go after any kind of soft spots throughout the world, and aggressively market to those clients.

Okay.

Great.

And finally, could you just remind us on the current buyback authorization, the amounts, if there is any expiration, and kind of what the prospects are for seeing some repurchase activity going forward?

Thanks.

Yes, so we bought a little less than 800,000 shares in the first quarter.

I don't have right at my fingertips what is left under the authorization.

I think it is about 2.5 million.

Perhaps I will be able to find that number, and get back later in the call as to what's left.

But there is not an expiration on that, per se.

Okay.

That is helpful.

Thanks, guys.

The next question is from Kelly Flynn, Credit Suisse.

Thanks.

Couple of questions.

First on Italy, similar to what Mark Marcon asked on France, the guidance doesn't imply much deceleration.

I think you touched on why a bit.

Could you get into that more, given the dramatic deceleration you saw in the second quarter, I would have thought maybe you would have guided a little lower.

So what is going on there?

Okay.

Mike, you can cover it.

But I would view the dramatic deceleration really being more so in France than any other country, and that is kind of a segue into Mike a little talk about Italy, and what we are seeing in Italy.

Yes, while the growth has slowed, I think it's a tougher economic environment so we are still seeing some good secular trend there, despite what is one of the tougher economies in Europe overall.

We did see a slowdown and frankly in Italy that slowdown really started earlier in the quarter toward mid-April, and carried it's way through the balance of the quarter.

So we have been running at the current guidance range of 7.5% or so, pretty much throughout the quarter in terms of revenue growth.

So we are not at this point seeing any further slowing, so our view is we are not going to try and speculate as to where things would go from here.

We are not seeing any signs from our clients that things are necessarily going to get worse at this point in time.

But we will have to see how things play out.

And then a couple more quick ones.

On the charges, charges and gains related to France, can you just clarify which was in gross margin, and which was in G&A?

I imagine the payroll thing was in gross, but could you just confirm that?

Yes.

So the French payroll tax change, that was a $53.7 million credit, and that came on the gross profit line.

And then the provision for the legal matter we took on the SG&A line, which was $54.1 million.

Okay.

And then finally, on the corporate expense, where should we expect that will be in Q3?

Yes, corporate expense, if I exclude amortization, that was at $25 million in the second quarter.

It dipped down a bit from where we were in the first quarter, part of that had to do with a reduction in some of the incentive costs, as our view on the year is, profitability is running a little bit below original expectations.

So that adjusted.

I think as we move into the third quarter, I would expect that to move back up to a level that we saw in the first quarter, or if not a little bit higher.

We still do have some strategic investments that we are making on a global basis.

We are being very careful as to where we do invest and what the returns look like, but we do have a number of projects that were started in the year that are in mid-phase, that have a little bit more spending that comes through in the later half of the year.

So I would expect that line to move up a little bit from what you saw in the first half of the year.

Okay.

Thanks a lot.

Next question comes from David Feinberg at Goldman Sachs.

Good morning.

Hi, David.

Hi, how are you?

Most of my questions were answered.

You mentioned, and you talked extensively about how markets in Europe had slowed, but when we look at where your expectations were at the start of the quarter, versus where the constant currency numbers came in, it looks like the biggest change or disappointment was in Italy versus Other Europe.

You touched on this a little bit earlier, but can you talk about perhaps where your expectations were at the beginning of the quarter, where things changed the most drastically.

Was it region?

Was it by business?

And if in fact you see that type of disappointment spreading to other parts of Europe as well?

It is all yours, Mike.

I think in terms of, based upon where our guidance was going into the second quarter, I think the two markets that ended up being a little bit tougher than anticipated, primarily were the French market and Italy, within Europe.

When you look to the Other EMEA market, to put that into context, our growth in the second quarter was 17.6% in constant currency, and our guidance range was 17 to 19%.

So clearly, we were toward the lower end of the range within other EMEA, but clearly within the range.

I think when you look under the covers a little bit, we still saw some very good performances across many of those countries in Other EMEA, but also when you look at the impact of Easter within those countries and strip that out, you can see that there is some slowing across some of those geographies.

So while they came in about where expected, the trend still is a bit of a slowing trend in some of the markets like Germany that we mentioned earlier.

Okay.

Thank you very much.

Most of my other questions were answered.

Thanks.

Thank you.

Next question is from Jeff Silber, BMO Capital Markets.

Thanks so much.

I am going to go back to the perm business for a second.

I am not sure if you quantified the total impact on the Company, in terms of percentage of gross profit, and the year-over-year change, if you could just kind of review that, and just talk a little bit about what is going on in the RPO market as well?

Thanks.

In terms of overall growth in the perm side, we were up 26% overall in perm GP on a year-on-year basis in constant currency, so still very good growth.

That compares to first quarter, we were up about 32%.

And part of what you are seeing here is in markets like France, it is a law of large numbers, the business is growing and so you are not going to be able to keep quite the astronomical rates that we had been seeing, but overall, still good growth there.

For the quarter itself, we are running about 13% of our overall GP comes from the perm side.

The first half of the year is typically a little bit heavier perm business, just given what happens within Australia, and a few of our other markets that have heavier perm business.

So on a running 12 month basis we are probably closer to 11% as the overall mix of GP.

On the RPO side, the RPO side with the acquisition of CRI, it has really filled in some very nice things on the West Coast, our backlog is getting larger.

We have a very loud and confident goal of being the largest RPO provider in the world, and in many ways we already are.

So we are seeing RPO still being pursued.

Of course, the numbers when you secure an engagement are a little bit less, because hiring is a little bit less.

We are seeing RPO now, it's called something a little different, but RPO in India, and RPO in Europe, and RPO in the Middle East really starting to take on.

So we are putting a lot of muscle behind that.

We know that it is a little bit more of a slower time for RPO, but we see it as a very strong secular trend so that is one of the areas during this period of time that we are going to invest in, and we're going to drive because we think it is very complementary to what we are doing, and adds a tremendous amount of value to the clients and one of the values that we really stress heavily is the massive network we have, the ability to do this through centralized recruiting, but also tie the last bow up with local offices and local attention.

RPO right now, backlog is good, slowing down a little from volumes, understandably but we are still moving nicely on that.

Great.

And a follow-up on the perm side, besides Australia, can you just remind us what regions might be a little more heavily skewed towards the perm business?

China, India is almost all perm, Sweden has some heavy perm, the U.K.

particularly Brook Street has heavy perm, I think that probably covers the big perm markets right now.

Okay.

If I could just sneak one more in.

What kind of share count should we be looking for in the third quarter?

I don't see a significant change there.

Our weighted average shares were 80.3 million in the second quarter, so you know, I think that is a reasonable place to be as you look forward to the third quarter.

All right.

Great.

Thanks so much.

Thank you.

Next question is from Mark Marcon, R.W.

Baird.

A couple of follow-up questions.

Mark, that is pretty clever.

You got in twice.

Thanks.

(laughter)

I was just wondering, with regards to the increased reserve in France, do you foresee any change in behavior, from you or any of your competitors there on a go-forward basis, that would have any sort of implications for either growth or margins?

That is a very good question and without getting into massive amounts of detail, this goes all the way back to 1999, so this is some pretty old news.

And clearly, we are not in agreement with what is going on there.

We do believe that the market has changed dramatically in how practices are done, and what clients' expectations are, so right now, as far as we know, we would not anticipate anything coming out of this that would structurally, either in a minor way or a major way, change the way we would be able to operate.

So no big change.

You are not seeing any big changes either from legislation, either EU-wide or country-specific wide, that will change behavior any time in the near term, are you?

No, not in the near term.

There are always discussions and I think there will be continued discussions, particularly France now, of what we will be doing with the 35 hour workweek, would there be some more flexibility of, in my words banking hours, and moving them to other parts of the year.

We will watch that carefully, the implications of those are hard to understand, if they even happen.

The agency worker directive and I know, Mark, you followed that from years ago or whatever, that has been in essence passed, and passed in a way that probably has little effect through the work that we have done, and others have done.

So it does involve some parity pay, but it gives some space between when you have to do that.

The other big one would be the working time directive, which I think is pretty far off in the future.

It is not on anyone's agenda right now.

Agency work directive, is that one going to follow kind of the U.K.

pattern, do you think?

No, it will follow a little bit more of the French pattern, in only that that parity pay is a big part of it.

But the waiting periods and opt-out times, make it such that it probably will not have much effect, if any, in the industry right now.

Great.

And then lastly, just on Australia, with the military contract that went away, is that being brought back in-house, or did it go to a competitor, or how should we view that and assess it in terms of your overall RPO strategy?

Yes.

It is a good question, and I will speak on the internal side, and then on the external side.

Internal side, I hate losing anything, and therefore I am not a happy person right now.

Having said that, when I dissect and look at what has happened, is they gave it to a very small Australian-owned staffing firm, who will have to have many partners, and the idea was kind of 'Buy Australian' was a big part of the decision.

So it is a little bit disappointing to us because of the superior results we had.

We will stay close to them.

We will see what we can do to help.

On a global basis it doesn't interrupt our RPO strategy.

It does interrupt our RPO capability, if you will, within the Australian marketplace.

One last thing, just when we take a look at the estimates that are out there for the year, and I know you are just giving guidance for one quarter out, but when we look at the estimates that are out there for the balance of this year and next year, from the way it sounds, it sounds like you are not anticipating any sort of big U-turn going back up any time soon, and so as we think about the balance of this year, and maybe even the first half of next year, wouldn't the way the cycles typically play out suggest that things will stay muted relatively, over say, the next six to nine months, before we could reasonably expect to see some upturn, and therefore, shouldn't the Consensus estimates, if somebody was being logical, say you know what, maybe they should come down, it certainly doesn't seem like the buy side believes the numbers that are out there, and there does seem to be a little bit of frustration among some clients that we have, that just seems like the numbers out there seem a little bit unrealistic?

I couldn't agree with you more.

You can read the FT this morning and yesterday and look at the little weather report in the FT that they had on economic gloom or doom, or bright spots or not bright spots.

I think at the end of the day, go out on the limb a little, I mean there was only one analyst who a couple months ago brought down the third quarter based on some of that, and I think what is happening is is that it would be very unusual, and I would see no catalytic effect that would be happening in the next 60 days, that would turn it around for the fourth quarter.

Having said that, we don't go out to the fourth quarter and say this is what we think it will be because the visibility isn't that good for us.

So we look at this and my internal memo that went out a half hour ago to 35,000 people said guys, we are going to work on our strategic things, but we have got to watch out what is happening, because we are probably in this for a couple quarters, because there is no reason for us to think that would come out any faster than that.

I think that is our view on it.

Seems like the reasonable view.

Thank you.

Before we take the next call, if I could maybe just confirm an answer I gave earlier on the share repurchases, and I will give you a little bit fuller answer.

In August of 2007, the Board of Directors authorized 5 million shares.

We repurchased 1.7 million of those shares in 2007.

And we purchased 752,000 in the first quarter of 2008.

So we have repurchased about 2.5 million under that authorization, and have about 2.5 million left to go, just confirming what I had mentioned earlier.

Again, once again, off the top of Mike's head, he had the number right.

So one last question, please.

The next question is from Gaurav Rege, JPMorgan.

Hi, this is Gaurav Rege from JPMorgan Cazenove in the U.K.

I just had the one question.

Can you tell me in your key markets, how much wage inflation you are seeing, both from your temp base and your own FTEs, and if you are seeing customers increasingly resisting price increases?

I am sorry, I just missed the part of what were you looking for?

What -- ?

How much wage inflation are you seeing from the temps-- ?

Got it.

It is quite interesting because we track wage inflation across many geographies, and this is probably the lowest wage inflation that we have seen.

Typically, where you have this little bit odd environment, where you have a talent shortage but a lot of people out of work, you would see some wage inflation in some of the higher skilled jobs.

Clearly, there is some of that, and particularly in certain exception jobs and exception marketplaces.

We are still seeing wage inflation between 15 to 17% in India, a little less than that in China.

But if we look at the more mature markets, we are seeing really some very disciplined wages.

So we are not really seeing wage inflation, and in the U.S.

when we compare our wage inflation to the general wage inflation through the BLS numbers, and what we get from the Fed Reserve, we would be right in line or actually a little bit less.

Right now, companies are holding tight, and therefore we are not seeing a lot of wage inflation.

Looking forward, is there a risk that if wage inflation does become more of an issue, and as economic growth sort of slows down, your customers might increasingly resist any price increase you try to pass through, is that a risk that is on your radar screen?

No, actually, we wouldn't view it that way, because a company needs a person and the wages are the prevailing market wages.

Whether they get from us or someone else, whether they have to pay and extra dollar, $5, or 50 pence, it is what has to be.

I guess I would answer it and maybe I'm just being the optimistic CEO, we are one of the few industries that wage inflation is actually fairly healthy for us.

Because it is based off of wage, a lot of our bill rates.

So we are not viewing it as a threat from a diminishing amount of usage of our services.

We would just be viewing it as a spot market pricing that we do every day, and we have to pass on to the client.

That is great.

Thanks.

All right.

Thank you for attending the call.

As usual, if there are any questions, Mike and I are available, so thanks a lot for attending.