ManpowerGroup Inc (MAN) 2009 Q2 法說會逐字稿

Welcome to Manpower's second-quarter 2009 earnings conference call.

All lines have been placed in a listen-only mode until the question-and-answer session.

Today's call is being recorded.

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

I would now like to turn the call over to Mr.

Jeff Joerres, Chairman and CEO.

Sir, you may begin.

Good morning and welcome to the second-quarter conference call for 2009.

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

Together we will go through the second-quarter results.

I will spend some time on the over review of the business, as well as some of the economic indicators and trends and then discuss in a little bit more detail of course when we get into the segments.

Mike will then discuss the balance sheet, as well as cash flow and the minor reorganization that occurred during the quarter.

Before we move into the call, I would like to have Mike read the Safe Harbor language.

Good morning, everyone.

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

Actual results may 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 here and by reference.

Thanks, Mike.

The second quarter for 2009 was for the most part as we expected.

It was a difficult quarter, but one that showed some signs of further stability in a few markets, yet some declines in other markets.

The most noteworthy news is that our three largest operations, U.S., France and Italy, we experienced stabilization in the rate of year-over-year revenue contraction.

In fact, in the case of France and the U.S., we experienced marginal improvements in the year-over-year trends in the last several weeks.

As we continue to experience year-over-year declines in revenue, we continue to see the pressure on our overall earnings.

The actions that we have taken last year to adjust our infrastructure and expense base have turned out to be appropriate, allowing us to achieve the results that we have this quarter.

At the same time, we do not believe the sky is falling.

And as a result, we have not taken Draconian measures in our Company.

We have been very disciplined and measured, but at the same time, we have taken out 16% of our cost.

We continue to keep a close watch on how we emerge in the various economies to determine if we need to take additional measures; however, we will do this very carefully as to not short circuit our recovery.

We believe that while this will be a protracted recovery, we are well-positioned.

We will continue to monitor that position based on what unfolds and many of you have heard me say that I think September and October are going to be important months to see what kind of recovery may be in store for us for the -- as we exit 2009 and enter 2010.

Our revenue for the second quarter was on the higher side of our forecast at $3.8 billion, down 28% -- I'm sorry, down 27% in constant currency, 36% in U.S.

dollars.

Our gross margin declined 122 basis points to 18.3%.

91 basis points of that decline should be taken out to exclude the nonrecurring impact of the French payroll tax recovery that we saw in 2008.

I will give you a little bit more detail on the remaining 31 basis-point decline when we discuss the gross margin number.

Operating profit for the quarter came in at $22 million, down 88% in constant currency and about the same in U.S.

dollars.

This includes the reorganization charges of $13.1 million.

Our operating profit margin was 0.6%, right at the midpoint of our guidance.

Excluding the reorganization charges, our operating profit margin exceeded our guidance range at 0.9%.

Earnings per share was $0.25, higher than what we had anticipated, primarily because it includes a favorable tax rate for the quarter.

Mike will spend some time detailing that tax effect.

Taking out the favorable tax impact and reorganization cost, we would have earned $0.17 per share.

As I mentioned earlier, we have started to see revenue in some major markets stabilize.

Throughout the quarter we experienced our French revenue trends moving from approximately 39% down entering the quarter to now about 32% down.

We're also experiencing some seasonal improvement with revenue on a sequential basis up in France 10% from the first quarter.

Our French organization has been closing the gap with market growth, as they have taken the opportunity to upgrade their sales force.

In the U.S.

market, we have not seen that dramatic of an improvement, but we have seen stabilization with average daily staffing revenues down 24% in April, 23% in May, and 21% in June.

Italy also seems to have found a bottom and is showing slight signs of improvement with average daily revenue down 43% in April, 38% in May, and 39% in June.

Another positive sign from a financial and capability perspective is our performance of Right Management.

Right Management performed exceptionally with revenues up 47% in constant currency and profits more than tripling to $42 million for the quarter.

Let me turn my attention to the gross margin.

In 2008, our gross margin of 19.54% was aided by 91 basis points from the recovery of French payroll taxes.

Adjusting for this item, our gross margin in the second quarter declined 31 basis points to 18.32%.

The decline in temporary recruitment margin impacted our overall gross margin by 74 basis points.

This is an area that we are watching carefully.

Much of this can be explained as a mix issue as our higher margin SMB, small, medium-sized businesses, is going down faster than our key account business.

At the same time, we are also seeing the impact of pricing pressures come through here.

The market has become more price competitive during the quarter and we have been working hard on defending our market share while maintaining strong price discipline.

The small, medium-sized businesses are under the greatest amount of pressure and where we often have the opportunity to manage pay rates down as well, so it balances off a bit more.

Since the SMB market are more casual users, if you will, we are confident that we will be able to sunset the pricing reductions when the economy does improve.

Our permanent recruitment business experienced further weakening during the quarter in most markets and was down 56% in constant currency.

This reduced our overall gross margin 76 basis points in the quarter.

Our gross margin was favorably impacted almost a full percentage due to the strong growth of our higher margin Right Management business.

This continues to be a difficult environment, though clearly bottoming and stabilizing is occurring.

We are hearing from our clients and are having more and more meetings with our clients about future plans and clearly their optimism has improved.

This is not a statement of U.S.

clients alone, but clients for the most part across the world.

We are seeing positive signs and we continue to see encouragement; however, it is still too early to anticipate when we will move into a more solid recovery phase and that the incline of the trajectory begins to improve more dramatically.

We are and will continue to evaluate our infrastructure and make adjustments as appropriate.

The team around the world has done a very good job in expense management and we will continue to look at expense management and infrastructure cost as the balance of the year unfolds.

We expected to remain profitable in the second quarter and we were able to achieve that.

We would look for the third quarter to also be profitable, with improving revenues and profits in the Americas, France and EMEA segments somewhat offset by the lower seasonal revenues and profits at Right Management.

Now I would like to move into the segment detail starting with the Americas.

The Americas segment revenue came in at $593 million, down 19% in constant currency, 24% in U.S.

dollars.

While we were able to maintain our staffing gross margin fairly well across the region, our permanent recruitment business was down 64% in constant currency.

This resulted in a loss of $2 million for the Americas segment.

The U.S., which is a major component to the segment, was down 24%.

As I noted earlier we are seeing signs of revenue stabilization.

This is for the most part across all segments, office, industrial, and light industrial.

Declines in our professional business was also moderated as we were severely hit in Manpower Professional.

For the most part it came from our very large clients that reduced at a much faster rate many of their staff in the engineering and I.T.

area.

In the U.S.

our loss was $6 million versus a gain of $15 million in 2008.

So the U.S., while improved over the first quarter, still are experiencing difficult times.

Mexico, which was down about 7% in constant currency was able to actually improve profitability over last year through good expense management and stable margins.

Argentina revenue trends weakened as revenue was down 11% in constant currency in the quarter versus 6% in the first quarter.

The permanent recruitment business has slowed dramatically, down 68% in the U.S.; however, we are seeing an improving backlog and pipeline in our RPO business.

There are several more conversations happening, and in fact, a few key contracts have been won recently.

These contracts, of course, are not really fulfilling much as companies are yet to go into hiring mode.

We are positioning ourselves nicely and during this downturn, we are actually improving our capabilities substantially in RPO and continue to add resources and capability throughout the U.S.

organization and really for that matter on a global basis.

Moving on to the French operations.

Our revenues came in a little over $1 billion at $1.1 billion, down 36% in constant currency, 44% in U.S.

dollars.

We finished with slighter less revenue contraction in the first quarter, as we saw improving trends throughout the quarter.

I wouldn't want this statement to be misleading in that this would lead us to believe that we are in full recovery mode, because we do not see that.

It is just that we have seen on a week-over-week basis much improvement.

In fact during the last seven weeks, we have seen the number of associates out on assignment improve from minus 37% to minus 32% with a fairly straight line in between.

We have taken out a sizable amount of cost through the flexibility inherent in our work force, as well as through the appropriate consolidation of offices and closure of offices.

Our gross margin was down only slightly on a year-over-year basis and was impacted by a 47% decline in permanent recruitment fees.

Through effective cost management and strong price discipline, our French team was able to deliver an operating unit profit of $4 million despite the significant revenue contraction.

We continue to see the light industrial market affected by the economy, which is weighing heavily on our book of business.

We continue to maintain enough of the structure to be industry leader in permanent recruitment; however, we continue to look at the most effective way to deliver services while reducing cost where we can.

We have been able to improve our revenue number by maintaining price discipline through a more effective sales team, more focus on certain accounts, as well as just intensity of the sales process.

The EMEA segment had revenues of $1.5 billion, down 28% in constant currency, 40% in U.S.

dollars.

Our operating unit profit was $3 million, which includes a reorganization charge of $5.5 million.

To give you a little bit more of a breakdown, Italy finished the quarter with revenues of $230 million, down 48% in U.S.

dollars, 40% in constant currency with a profitability of $7 million.

Putting a little bit more detail on the entities within EMEA, Elan continues to do well compared to the marketplace and our competitors with revenue down 17% in constant currency.

The Nordics, Germany, Belgium have all fit into about the mid to low 30s down in revenue while the Netherlands are down 19%.

Our gross profit margin came under the most amount of pressure in the EMEA segment.

This reflects a combination of mix shift to proportionately less higher -- the higher margin business of SMB, which also contributed to the margin compression with the unassigned bench-time in Sweden and Germany, a 54% decline in permanent recruitment fees and of course some downward price pressures that we are feeling.

We are feeling a fair amount of squeeze when it comes to the expense line and we have been able to reduce our costs; however, we are still maintaining a structure and office network and we believe it is appropriate given the future opportunity in the European geographies.

Asia -- our Asia segment continues to do well given all of the circumstances.

Revenue was -- I am sorry $406 million, down 13% in constant currency, 14% in U.S.

dollars.

Our operating profit was $4 million, down 71% in constant currency yielding a operating unit profit margin of 1.1%.

Truly a job well-done by our Asia PAC region.

Breaking the Asia PAC down a bit more, Manpower Japan continues to outpace the marketplace, being down 12%.

In Australia, we have still not really anniversaried the entirety of the Defense Force contract, but that market is also relatively soft now.

And in many ways we are not at the level that we need to be from a sales and execution perspective to perform at the level we should be in Australia.

Our industry market is basically flat, while China is down almost 40%.

The Chinese market is primarily a permanent recruitment market and the majority of our clients are multinational, therefore we have been hit relatively hard in our Chinese marketplace.

A bright spot from a segment perspective, of course, is Right Management and a record quarter.

Revenues were up 46% in constant currency, 36% in U.S.

dollars achieving $158 million in revenue.

Our operating unit profit was $42 million, yielding and operating at a profit margin of 26.8%.

We had a robust quarter without placement revenue up 84%.

While we have seen our placement billings level off and decline slightly, they are still at a relatively high level.

The regions for Right Management performed fairly well across the board.

The U.S.

still leading where Europe has started to kick in a little bit more, as they were lagging in some of the downsizing that occurred in the U.S.

We are also seeing Japan start to pick up in more of a robust way.

We continue to invest in our organizational consulting business and talent management and change management, which are really our two largest service offerings within the organizational consulting business.

While our OC, or organizational consulting business, was down year-over-year, we did see improving demand in the second quarter and on a sequential revenue basis.

The third quarter is a seasonally very slow quarter for [crew] transition outplace on business and we anticipate the seasonality will affect us now.

We would still have some large growth rates on a year-over-year basis, but on a sequential basis, we would anticipate the summer months would still bring a slower period of time.

We are in a bit of unchartered water here; therefore, it is difficult to predict this environment of how much the seasonal slowdown will actually occur.

Jefferson Wells, if I want to move on to that, continued down a relatively difficult road.

Revenues were at $48 million, down 36% with an operating profit loss of $10 million after a $5.9 million reorganization charge.

We have adjusted our model bringing our costs down dramatically and also shifting more of the staff from bench to a contract professional model giving us more flexibility as we anticipate that revenue will still be a challenge as companies are looking at many of these projects from a discretionary perspective.

We have participated in some states on the stimulus program and we will continue to pursue these opportunities on audit functions and reconciliation functions.

We see this as a very good opportunity for us over the next several months.

In summary, the second quarter was about as we had expected, which had some slight upticks in it, but it is still a very difficult environment.

We are still considering the economy fragile.

And while it is clear that we are at the bottom in many of our markets, it is not so clear at the pace in which we will pull ourselves off of that bottom.

The various markets are reacting in a very conservative way, as we continue to see governments try to stimulate the economy but not seeing the real effect of any of this stimulus yet.

As we believe the balance of this year will be relatively muted from a revenue perspective, we will continue to look at our infrastructure and decide whether our infrastructure is appropriate for the trajectory of this recovery.

We will continue to monitor our market share to ensure that it is appropriate, but we will not become the aggressor on pricing.

With that I would like to turn to Mike for some more details on the financials.

Thanks, Jeff.

I would like to begin by discussing a few elements included in our earnings statement followed by a discussion of cash flow, our balance sheet and finally our outlook for the third quarter.

Selling and administrative expenses in the quarter were $673 million, a reduction of 29% from the prior year or 20% in constant currency.

Adjusting for reorganization costs included in 2009 and the legal provision recorded in 2008, the underlying expense reduction was 16% in constant currency.

On a sequential basis, selling and administrative expenses were flat after adjusting for reorganization cost; however, if you do that on a constant currency basis, they were down 3%.

During the quarter we were able to find further opportunity for cost reduction while being careful to preserve the strength of our global office network.

During the quarter we closed 66 offices, primarily as a result of office consolidations within the European markets.

This brings our office count to 4100, approximately 400 less than a year ago.

In addition we reduced the number of full-time equivalent personnel in the quarter by 1900 people, primarily through attrition.

As a result, our full-time equivalent personnel are down by 19% compared to the prior year.

Related to these costs, reductions of the reorganization charge of $13.1 million.

Of that amount, $5.9 million relates to Jefferson Wells, $5.5 million relates to EMEA segment, and $1.5 million relates to the Asia-Pacific segment.

This reorganization charge is included in the SG&A expenses I mentioned earlier and represent $0.11 on an earnings per share basis.

Our provision for income taxes also requires some explanation.

During the quarter we recorded an income tax credit of $8 million on pretax earnings of $11 million.

This income tax credit includes the impact of a discreet tax item that reduced the amount of deferred tax recorded related to the future repatriation of French earnings.

Excluding this item, the income tax provision would have been $7.2 million or 63.8%.

This is much higher than our normal tax rate as we did not record a tax benefit on certain net operating losses in the quarter and because various nondeductible items are having a disproportional impact on the tax rate given the unusually low pretax earnings.

Free cash flow, defined as cash from operations less capital expenditures, was very strong in the quarter and the first half of the year.

For the first six months, free cash was $362 million, an increase of 69% over the prior year.

Our cash flow this year was positively impacted by a reduction in days sales outstanding of six days compared to the prior year.

This reduction in DSO has added over $250 million of free cash this year.

Of this amount $110 million relates to legislative changes to record payment terms in France.

In addition, we have been aggressively managing credit extension with a continued sharp focus on maximizing economic profit.

While we have felt some pressure in the marketplace on payment term extension and have witnessed some competitors giving ground in this area, we believe it is important that Manpower and the industry hold a hard line in this environment so we don't become the financing arm for Company's payroll.

Another element positively impacting free cash flow in the first half of the year was our transition of our temporary staff in France from weekly payroll to monthly payroll.

This process began in the first quarter and was concluded in the second quarter.

In total, this change resulted in less investment in working capital and $85 million of free cash flow.

It is important to note that the legislative change in France payment terms and with change to monthly payroll, which totals $195 million are sustainable and will have an even greater impact as our business expands with an improving economy.

Our capital expenditures in the first half were $17 million compared to $52 million in the prior year.

This lower amount of investment reflects our focus on maximizing cash flow in the current challenging economic environment.

I'd expect the amount of investment will increase modestly in the second half of the year.

Now let's take a look at our balance sheet.

Our balance sheet liquidity improved during the quarter with cash of $1.1 billion and total debt of $874 million, improving our net cash position to $233 million from $147 million the previous quarter.

Our overall debt-to-capitalization remains stable at 26%.

As a result, I believe our overall capital structure remains very solid and very well positioned to withstand the current, weak economic environment.

Next I would like to spend a minute reviewing our credit facilities at the end of the quarter.

As I mentioned we had total debt outstanding of $874 million at quarter end, with remaining available committed and uncommitted facilities of $842 million.

Overall, our credit facilities saw very little change during the quarter.

Of the $874 million outstanding, $700 million is composed of a 300 million Euro note maturing in 2012 and a 200 million Euro note maturing in 2013.

Both of these notes have fixed interest rates that are below 5%.

Our revolving credit facility, which matures in November of 2012, allows for $625 million of multi-currency borrowing.

As of quarter end, we had EUR100 million or $140 million outstanding.

This amount has been swapped to a fixed interest rate until July 2010.

While we had the cash and flexibility to pay this bond at any time, we will continue to assess the cost effectiveness of doing so.

Our Euro notes are not restricted by financial covenants;, however, our revolving credit facility has two primary covenants, a debt to EBITDA ratio and a fixed charge ratio.

Under the first ratio we are required to maintain a debt to EBITDA ratio of less than 3.25 times on a trailing 12 month basis.

We are currently in compliance as our ratio is 1.9 times at the end of the second quarter.

The fixed charge coverage ratio requires us to cover rent and interest expense by two times or more, again on a trailing 12 month basis.

As of the second quarter we were in compliance with a ratio of 2.5 times.

As we look to the second half of 2009, we expect both of these ratios will come under pressure.

As a result, we may amend our revolver agreement, which would provide us relief under these covenants.

Such an amendment would result in additional bank fees and would also impact the cost of future borrowings.

I should note that given our current cash position we could pay off the outstanding balance on the revolver and retire the facility; however, we do believe that the added financial flexibility is worthwhile if we can achieve it at a reasonable cost.

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

While we have seen improvement in year-over-year revenue trends in many of our markets over the last few months, our guidance is cautious at this stage and does not extrapolate improvement beyond what we are seeing today.

On a consolidated basis we are expecting revenues to decline year on year between 29% and 31% in reported dollars, or 24% to 26% in constant currency.

While still a significant decline, the rate of contraction is expected to improve slightly from the second quarter.

We also expect revenues to improve sequentially as we begin to feel the seasonal uptick in many of our markets.

Likewise when we look at the segments we expect the Americas, France, EMEA and Asia-Pacific to be down against prior year, but the rate of contraction should be slightly less than what we saw in the second quarter.

Our Right Management business will continue with strong growth, which we are estimating between 29% and 31% in constant currency.

The market projected for Jefferson Wells will remain difficult and we are expecting revenues to decline 38% to 40%.

Our risk profit margin is expected to range between 17.5% and 17.7%, or about 50 basis points below prior year, reflecting continued significant declines in permanent recruitment fees and some price pressure on staffing margins.

Our SG&A expenses are expected to be slightly down sequentially on a constant currency basis and down year-over-year in the mid-teens similar to the second quarter.

This should result in our operating profit margin ranging from 0.7% to 0.9%.

For modeling purposes, I am suggesting a tax rate of 37%; however, as I mentioned on the first quarter call, the tax rate percent is very volatile when pretax earnings are low and can be impacted dramatically by net operating losses, permanent nondeductible items and tax planning implementation.

Therefore it is difficult to give you any precise guidance on taxes this early in the quarter.

Our earnings per share are expected to be in the range of $0.07 and $0.21 and anticipate the negative currency impact of $0.01.

Similar to the first quarter, our guidance range on earnings per share is relatively wide given the impact that incremental revenue and gross profit can have on the bottom-line due to the excess capacity we currently -- can currently leverage in the business.

For those of you maintaining models, you will note that the third quarter operating profit at the midpoint of our guidance is slightly lower than the second quarter after adjusting for reorganization costs.

Typically the third quarter is a stronger profit quarter for us than the second quarter and in fact we are expecting that to be the case in all of our operating segments except Right Management.

In the case of Right, the third quarter is typically a slower seasonal quarter and therefore, while we expect good profitability for Right, we expect it to be much lower than the record profits we delivered in the second quarter.

With that I will turn it back over to Jeff.

Thanks, Mike.

We are in unique times, clearly.

Yet we are extremely well-positioned and we truly do feel that way.

The timbers that our Company is built on, from the culture, the commitment of our people, the experience of management, and the strategies are truly the best in the industry.

We recognize this unique time is a true opportunity and we will not waste it.

We are not fearful, rather we have a relentless urgency to get this to pay off.

We are pulling away from our competition and we have confidence we will continue to do so.

Our combined assets, which are unique, and our strong discipline in executing our strategy gives our entire organization confidence.

We recognize this is difficult and who knows, it may even get more difficult, but with our balance sheet, people and diverse service offering, I can tell you with a degree of confidence we will not only weather this unique time in history, we will absolutely capitalize on it.

With that, I would like to open it up for questions.

(Operator Instructions) Our first question comes from Andrew Steinerman, JPMorgan.

Good morning, gentlemen.

I want to talk about the Italian market more.

You know this is a relatively younger market.

They have never seen a downturn like this before.

Could you just tell us about how you view operations.

Would you say the same thing about Manpower Italy that you said about the overall organization of how they are handling the downside of a recession and the competitive landscape, noting that this is also one of the kind of favorable markets from a margin standpoint and do you kind of have confidence as you look out over the next five years that this will be both a high growth and high margin region.

Just where do you think we stand in sort of the Italian temporary help market for Manpower and overall?

Good question, Andrew.

No doubt, when you go through the first cycle and then the cycle is as difficult as this, because you'll recall the last time we went through the cycle, the secular trends kind of powered through the cycle, so we really didn't feel it.

We continued to open offices.

As a result, it was a good producer for us.

What we are seeing is that we are and have been for the last probably seven quarters, maybe eight, taken significant market share, moved up and we've done that through price discipline and good office positioning.

Some -- some of Mike, if not maybe the majority of those office consolidations and closures that you announced just a few minutes ago really existed in Italy where we were trimming out some of the smaller locations.

As those of you who follow Italy, the prime part of where we get Italy and revenue and profit from Italy is northern Italy where you see a lot of small, mid-sized manufacturers.

There was a sense early on, let's say September, October of last year, that because they weren't as global, because they were smaller, more mid sizes, maybe they wouldn't feel the crunch as much.

They are.

Our -- our numbers are down fairly dramatically; however, what the team has done in expense, what we have done with branding and what we have done in actually taking additional market share says that unless this is truly Armageddon and it doesn't come back, we are just as confident as we have been that there is no reason that Italy over a period of time looks like France.

Labor laws are the same, GDP, of course, is a bit smaller, size of commercial entities are smaller, but we would see this as still secular growth coming out on the other side.

The percent of temporary staff as a percent to the workforce is still well below what you would see in France and other more mature European markets.

So clearly a hiccup, clearly some adjustments we have had to make.

Help me, Mike, I think -- what we came in about $7 million in profit in Italy.

So we have been able to manage with a big infrastructure of the profit.

Team has done a good job.

With some of the reorganizations we have done where we haven't cut out a big part of the structure, we're still -- we would still look at that, once we get to the other side of this, as one of our true growth stars in Europe and for that matter on a worldwide basis.

Would you say margins star also?

Yes, what you are getting out of this -- when you say margin I always like to kind of make sure we manage that correctly, because in our Company we always talk of two margins.

So at the gross margin line, they have done a good job.

At the net margin line, which is what you are talking about, they have really banged it up.

And there has been no structural changes in that marketplace that we have seen that wouldn't allow us to create, which we have done, is a good homogenous system, which really creates down -- reduces our SG&A.

They have one of the best SG&A percents of GP in our entire network and that is because of the way the work is conducted in that market and we have not heard, seen or felt tha that has changed.

So there should be no reason why they wouldn't be still a really high net profit percent producer.

Excellent.

And Mike, just verify if you already told us this during the prepared remarks.

What was the EPS impact on the reported tax rate vers, in the second quarter, versus the 37% previously guided.

Yeah -- yeah, I am not sure -- I am not sure that I did break that out.

We did have a -- a one-time tax credit that impacted by $0.19, Andrew.

And -- and excluding that item, our tax rate, our effective tax rate would have been about 68%.

I know I have got the other calculated number.

If it is 37% somewhere here, but maybe in a minute I can get that one back to you.

Okay, later in the call would be great, thank you so much.

Our next question comes from and drew Phones of UBS.

Yes, thank you.

I was wondering if you could just explain the reason for the significant sequential decline in the gross margin in your guidance for Q3 from Q2.

And I know you mentioned Right Management, but I was just wondering if you could, perhaps, touch on pricing trends.

Any other things impacting that?

Thanks.

Sure, Andrew.

I certainly can cover that.

You have covered the major element of that.

So just to put it into context our overall gross margin was 18.3% in the second quarter.

The midpoint of our guidance for the third quarter is 17.6%.

So sequentially down.

The primary reason is Right Management and the seasonally lower quarter in the third quarter.

And understand that gross margins at Right Management are north of 70%.

So -- so clearly that has -- has quite the impact when you look at it sequentially.

Additionally, some of our markets are impacted seasonally on the gross margin line.

When you look at the U.S.

market, they have an additional holiday in there that -- that has some impact on us.

In the French market, the French market the third quarter is a seasonally larger market and some of that is because of the summer work that we take on that in that market places lower-priced work and that had some impact on our gross margin.

And we've been doing that for years.

Yeah.

That has been in place for quite some time.

From a pricing standpoint, the guidance would anticipate really a continuation of what we saw in the second quarter.

We don't anticipate significant further deterioration on gross margin for pricing, but we do certainly look to see things continue in terms of what we've felt in the second quarter.

Then perhaps lastly, we will -- we will certainly be impacted on the gross margin line from perm recruitment, but I would -- I would expect a similar impact in Q3 as we have seen in Q2 in from the perm recruitment side.

Thanks.

And just kind of following up on the Right Management seasonality and thanks for the details there, but could you just kind of help us understand the typical length of a contract and, therefore, perhaps how those contracts typically roll off over the summer and the types of kind of lower margin business that you do during the summer.

Thanks.

Well, the Right contracts, typically what you would do is you would secure for a long period of time.

They would easily go three-year contracts.

Now, of course, the contract itself is a -- is a right to do the business depending on what is -- the client then decides to do in outplacing people.

Once the person is outplaced there is a second stage, which is they are typically given the option of whether they would then take up this opportunity or not.

And one of the things that you -- you see from a seasonal perspective is is that they have the option.

The option typically doesn't expire for a while and when it is summer months, they will maybe lag a little before they -- they begin, which is really when our revenues start.

Then the length of the contract if you would -- if I could interpret it maybe another way, is based on what the Company has -- has decided to do with their staff There are some programs that can last several months and there are some programs for different level people that -- that don't last as long.

So -- so our -- our uptake or uptick of -- of those that are eligible to become a candidate for our outplacement business on a percent basis has gone up and I think it is fairly logical it has gone up as is a difficult market and, therefore, more people are looking for whatever kind of assistance they can have in trying to find the new job.

So -- so we would be signing long-term contracts in Right.

Even as the economy gets better, what we find is is that there is a fairly large percent that is still outplaced and the reason is is companies are going to be moving their talent around even during good times.

Was I able to answer the question that you were looking for?

Yes, thanks.

It was more the second part of your answer.

And it sounds as though once somebody is laid off and you start recognizing revenue in helping them that you will recognize revenue for perhaps between maybe a couple of months and several months depending on the seniority?

Yes, it basically is -- it is a deferred revenue scheme and our auditors look at it, we look at it, but I can tell you the clock doesn't start or revenue doesn't tick until they raise their hands and say now I am part of the deal.

Yes, thanks.

Okay

While we are between questions here, maybe just an answer to Andrew Steinerman's earlier question.

Andrew, I think where you are after was, we reported without the tax benefit, one-time tax benefit and the restructuring $0.17 at the tax rate that came through, if we would have used what would be maybe more normalized tax rate of 37%, we would have been at $0.19 or about $0.02 higher as a result.

I think that answers Andrew Steinerman's previous question.

Thank you, operator.

Thank you.

Our next question comes from Jim Janesky, Stifel Nicolaus.

Yes, hi.

Hi, Jim.

Going back to the gross profit margins.

Do you think that as we move forward beyond the September quarter that those gross profit margins are going to fluctuate almost purely because of Right Management and perm placement.

Can you talk to the -- and, of course, volume.

Can you -- can you talk to any structural changes one way or the other that we should expect in the -- in the -- in the gross profit margins.

Is pricing, do you think, under pressure permanently or will that snap back.

I would like to get your thoughts there.

Yeah.

It is a really good question, because those of you who follow us closely know that when you get into gross margin on an 82-country basis, there is a lot of complication in it.

Having said that, there are some relatively simple things that drive that.

No doubt the mix of the business and where the countries are going and what is going up or down and where we have a bench model that is pulled out of gross margin.

So the bench model affects that.

On the case of Sweden and Germany and the case of Jefferson Wells, that clearly effects gross margin.

Additionally there are some things that might come in in certain countries having to do with statutory.

So where does Worker's Comp, where does [SUDA], where do some of those things fit in and those change sometimes during these period of time.

I think to the crux of the issue is we will continue to look at mix from a service line perspective that will affect our GP.

We will look at mix from a geography perspective that will effect our GP and pricing is affecting our GP.

So I want to spend just a minute on pricing.

We analyze pricing very carefully and we track pricing.

And each entity it must -- it has an escalation process.

You are not allowed in the field to do something crazy on pricing unless you get an exception and we will do a few things where we have to surgically, possibly, do it.

But having said that, what we have allowed strategically, and I think appropriately, is a little bit of a down in pricing in our small, medium-sized business because we are competing against local firms, who really don't care and have never tracked an operating unit profit percent.

They don't know that.

They are just trying to keep the bank off their back and create some volume.

So we will compete there because we can actually restart that.

Now when you look at some of the large key accounts where you really can't do that and that is what I would call, and I don't want this taken out of context in the write-ups, but key account mark -- pricing is where you do see more of the remargining of the industry.

And in that case, we have been very careful.

I don't think some of our competitors have been as careful, but having said that, these are still not ridiculous.

There are some that are ridiculous and we think they will come back, because you can't possibly do it at something that is lower than your SG&A, which is what has happened in a few of those.

But I think what we are seeing actually is the very large accounts, in fact our pipeline is the largest it has ever been, is that they want to go global and they want to maximize their footprint.

They have more courage with their own organization to say we are going to go to one supplier and to us that is right in our wheel house.

We have the largest footprint in the world by over 20 counties.

We have the most developed global account management process.

Our systems inside can track every single account, what they are doing, what the activities are and feed that back to the client.

So we view this as a good opportunity for us, but we are concerned about gross margin percent, because it tends to lag what you are seeing now.

The contract we signed yesterday really doesn't hit our gross margin for another two, three quarters or two, three months.

So we are watching it carefully.

It is on the board up in my office and in other places.

So we are going to be disciplined, but there are some -- some pressure in all of those areas I just spoke about.

Okay.

And as a follow-up, if I can, with respect to France, how would you classify the improvement in the market there, both on pricing and on volume.

I mean is it -- is it companies just kind of catching their breath from just how bad things were over the last two quarters?

Or are they really feeling better about their businesses in France?

Well, there's two questions you had in there and I would like to say, one, I don't think we have seen any improvement in pricing.

You had mentioned that there is some improvement in pricing.

There isn't.

I think the French market is there are some bad things happening in that market.

We participated in a few, but we backed away from more than one.

To answer the bigger question about what is really happening.

I do believe their stimulus package is a real stimulus package and it is working.

I do believe when you look at some of the things coming out of France from consumer confidence and others, they are picking up a bit.

And then I do think that there is some, if you look at what I had stated in my prepared remarks, there is a Manpower effect also.

I think we are exceeding the market in our rate right now because we fell behind because we were doing some shifting in our sales team, how we are approaching the market and that put a little hitch in our step.

Now that we are through that and I think the team did a great job there, we are -- we are in pretty good stead.

So when you look at the prism data, you will see something similar, but I think you would see us slightly ahead of the market.

Okay.

Thanks a lot, Jeff.

Yes

Our next question comes from the line of Gary Bisbee, Barclays Capital.

Hi, guys, good morning.

I guess in terms of Right, I understand that you -- that you have got a seasonally weaker period, but given -- given what you are seeing, is it fair to say you have got confidence that the business would bounce back later in the year and the sustainability, at least of revenue at a pretty healthy rate, is likely to continue over several quarter period?

Or is it -- or is it the type of thing where it is just -- it has been great, but it is tough to know how sustainable will that be.

Well, okay.

So I think we have to break it down in a few things, which is almost by region.

So if you look at U.S., Europe and Asia, they are all acting a little differently.

So it takes a little bit harder for that candidate to want to pursue an outplacement business -- opportunity in Europe because their severance packages are so long, they can live for five, six, seven months before they get to be concerned about anything.

So we see a longer lag time between that.

Also, when we sign a contract with a client to when they are actually able to then reduce their staff is also longer, as they have to go through the works council process and social plans and some of those cases.

So the reason I say that is -- is if you were to take the unemployment claims, which are going down, that is an indicator of what would be happening in the U.S.

market, because that is what feeds our business in the U.S.

Still very strong on a -- on a year-over-year basis, but on a sequential basis, we are seeing it come down slightly, which is actually good news for the other side our business.

In Europe, we are actually seeing the last three months it has picked up.

And that, again, is -- is fairly logical; however, you will take a hiatus in the month of August in -- in Europe.

So then we would see the end of the third quarter, beginning of the fourth quarter be stronger from an EMEA perspective and when we look at our back log, we would anticipate that.

Asia.

Asia is a little different.

It is primarily a Japanese market because of what -- what is going on versus India, China, and some of the others which aren't quite the same in outplacement.

Asia is now just starting to feel it.

So there are some waves in there.

But when you take the U.S.

business and see that flattening a little bit more, which is 60%, 70% of the business.

Yeah, 60ish.

60ish.

So you can see that that -- that will turn our revenue down a little.

But also having said that, after the summer break we get back in the fourth quarter, we will still see year-over-year very good performance when we are Right within the U.S.

as well.

Mike, do you have anything to add to that?

Nope, I think that summarizes it.

Gary, did that cover what you wanted.

Yep, definitely.

Second question, just on the cash flows with the two things in France, your payroll change and also the legislative change there, do you have an estimate at this point what sort of annualized cash flow benefit was.

I guess maybe you have seen it all in terms of your payroll change if you are done with that, but is that going to continue in the next six months to add on a year-over-year basis substantially.

Right.

So -- so far through the first half, the two changes added about $195 million of free cash flow.

So really a very positive, favorable impact.

Of that $110 million is for accounts receivable and change in payment terms and $85 million in terms of the conversion to monthly payroll.

We certainly have seen all of it on the payroll side and I would say on the accounts receivable side, we have seen the lion's share impact.

We may get a little bit further impact dribble in through the second half of the year, but I think we have seen most of that.

As we look to the second half of the year, free cash flow from this standpoint would be generated from future earnings.

Okay.

And then -- and then just following up on that --on the cash flow.

So you have obviously had the big benefit from your accounts receivable coming down in the negative revenue environment.

I assume that that starts to wear off and if we don't have a real rebound at some point, free cash flow next year would likely be substantially less than what you are generating now.

Is that -- is that a fair assumption?

I think that is a fair assumption.

You are right.

As business slows, you get that inflection.

And where receivables are being collected faster than new billings, if you will.

Now that -- once you get into a -- into a steady state where business is not falling off any faster, then -- then you really can only accelerate that working capital through a reduction in DSO, which even outside of -- of what we did in France, we're able to get -- pick up a couple of days in DSO in the first half the year, which was helpful as well.

But, yes, but your -- the premise is right.

Once you -- once that revenue stabilizes you no longer get the benefit from the rollover of receivables and liquidation receivables.

And then just one last cleanup one.

Could you tell us of the charge in EMEA, what was in Italy versus other EMEA, of the restructuring.

Roughly half of that related to Italy.

Great, thank you.

Thank you.

Our next question comes from Kelly Flynn, Credit Suisse.

Thanks.

Kind of a macro question.

Fair amounts have been written about the [CSIS] employment situation in the U.S.

may recover a lot more slowly than it has in prior recessions in part because of the underemployment concept, more people are working less than they want to be, people working fewer hours overall.

I appreciate all the color you have given, but I am wondering if you have any view on that particular perspective and specifically as it relates to temp.

Is there any -- any credibility to the thought that underemployment, the underemployment issue could lead temp not to lead as much as it typically does out of the downturn?

Well, it is a pretty hard one to answer and there has been some writings, as I am sure you looked at, that have kind of circled the wagons on that one.

Our perspective is is that companies in almost all industries will probably come out of this much more cautious than they have come out before, which means that they are going to kind of do more with less and really use that theme a lot, which would also mean people.

Now when you put that into how the recovery works, it really does all come down to demand.

So the numbers we are looking at are where is the demand, the sort of ISM sort of numbers.

The PMI numbers.

Those sorts of things are important to us.

I might add that I think that what we are also hearing from our clients is is that because there is such a form of trepidation.

At least in the initial conversations, they are saying we are not adding any permanent.

We are only going to be adding contract staffing, because we are nervous that this -- this is shaky and maybe the first phase of recovery is inventory replenishment recovery and as a result we are going to want to continue to adjust our staff.

So I think that we will have a -- clearly there will be a slower trajectory out because of how painful and how widespread things are now.

But I do think what will happen is that the contract temporary staffing market has -- has the ability to maybe fill in some of the slack.

I think the permanent recruitment market can be hurt very badly over a longer period of time because they are just going to be reluctance of people hiring that and my suspicion is is they are going to try to hire more from the temporary ranks and do a conversion than they are outright permanent recruitment.

So that is kind of how we are looking at the business right now and that's why I think September, October is really important to just see what happens with some of those inventory replenishment type seasons, which is what September, October is, to see if it gives us any further indications.

Okay.

That was really helpful.

Just a follow-up to Jim's question about gross margin.

Can you talk a little bit about Worker's Comp and state unemployment insurance and kind of how we should be thinking about that.

Assuming pricing is stable next year, what impact does that have on the gross margin in the U.S.?

Yeah.

Worker's Compensation -- you know that experience doesn't move quite as much as state unemployment tax might move in terms of where the economy is going.

Right now our worker's comp experience in the U.S.

is -- has been quite favorable and a little bit better than last year.

We have been doing a number of things -- initiatives to focus on risks and managing risk within the network and that has actually improved our overall experience rate.

And as I look into next year, I don't see that changing dramatically.

I think we will be able to maintain a tight control of our overall Worker's Comp risk and hence our overall Worker's Comp costs overall.

State unemployment taxes.

Those, of course, will move as the states adjust their rates and the states adjust their rates as unemployment goes up and their own local funds are drained down.

Fortunately for this year, we have felt very little impact from hikes in -- in state unemployment tax rate increases.

I was expecting a few more than we frankly have seen.

As we look to next year, clearly I would expect we are going to see some rates.

We are already starting to hear from some of the states.

And so, we will definitely start to see some -- some increases across the board.

When it gets to -- from a pricing perspective, our contracts clearly allow us to pass those costs on to our clients and certainly that would be our intention.

Based upon our history in the last cycle, we were quite successful in a number of cases, but -- but there always is a bit of a lag and some negotiation and ultimately it is difficult in -- in what's likely still going to be a weak demand environment to fully pass that on.

So I would expect we are going to see within our U.S.

business some pressure on overall gross margin for some of the state unemployment taxes that we may not be able to fully pass on to our clients.

Okay.

So great.

Thank you very much.

Our next question comes from the line of Sara Gubins, Bank of America-Merrill Lynch.

Hi, thank you.

Good morning.

Could you talk a bit about, from a macro perspective, why you think revenues are stabilizing in France, but you continue to see an accelerating decline in other European countries.

Are trends across the region really varying by country?

I think there are some variances by country and I think what you are seeing is how countries are made up of with what they produce and how they produce it, as well as where government stimulus is kicking in or not kicking in.

So -- so France, which in our industry, we just talk about our industry, is some 75% of it is in the light industrial area and that was hit further and harder, whereas in our dutch market and German market, it is much more of a mix.

So there is a lag effect on that.

On the recovery side, I thinking what happened was France went very, very quickly, very hard, reduced a lot of the footprint, reduced a lot of the people and really went very hard and fast on inventory reduction.

In fact much faster than what we would be seeing in the U.S.

As a result I think you are seeing a bit of this comeback in our industry alone is somewhat of an inventory replenishment.

The other is is if you look at consumer confidence in others and if you just look at their own how it is done, their disposable income is based on -- on severance packages or redundancy packages really keeps disposable income higher than what you would see in other countries, definitely U.S., but even more so -- even equally in Europe and, therefore, while it has been very dramatic, it might be muted just a bit because of how the country functions.

Great.

Thank you.

And then second question.

Do you have any visibility on a return to region breakeven in Jefferson Wells?

Well, as -- as you would have caught, I am sure, Sara, we did do some restructuring and some reorganization.

I think at this point in time our cost structure is such that we are at about a breakeven level.

If revenues would go further down from here, which, of course, is possible, we would have to look to see if -- what other further actions we would want to take at that point in time, but -- but right now, we have taken appropriate action to at least get us to a breakeven level given the volumes that we are running and the demand in the marketplace that we are seeing.

I think some of the actions we have taken, from moving our staff from a bench staff to a more of a flexible contract professional staff.

We have done that early on.

We paid the price for some of that.

We -- we have looked at what the -- the foot -- footprint is like and we have done some organization on that and, therefore, in many ways from a cost structure and a presence in the marketplace, I think the team has done a great job and in many cases I think we are ahead of where the competition is and, therefore, we are really looking for the third and fourth quarter to try to do a little bit of a break away from the competition because we are through all of this stuff.

We have already made the changes and now we can really focus on the marketplace.

Okay.

Thank you.

Our next question comes from the line of Jeff Silber, BMO Capital Markets.

Thanks so much.

We have been reading a bit about the impact of the cash for clunkers movement in Europe, spurring auto demand at least a little bit.

Are you seeing that translate down to the manufacturers and in turn any demand for your business?

We are seeing some of that.

As I said, I think the stimulus program is a little bit better there.

Their cash for clunkers is very different than the cash for clunker in the U.S., which if you actually do the calculation in the U.S.

At max they can maybe take out 250,000 cars in the U.S., you are running at a scrap rate at 11 million and build of 9.

So -- so it is really not doing much in the U.S., where if you do the same math in France, it actually is having more of an impact.

So I think it is that.

I think it is just overall there seems to be a little bit more of a sense of -- of it is really tough, it is going to be tough, but we are on a little bit better trajectory.

I think there is still some confusion in the U.S.

and I think that is holding back a lot of companies and consumers before they start boosting up the demand.

Great.

And just one quick question.

Just revisiting some of your comments regarding margining in some of -- margin, excuse me, and some of the pressure you are seeing.

Are you seeing it more from your customers, your competition, or is a combination of both.

And if there is any specific geography where that answer is different, I would appreciate that as well.

It always starts at the customer, it's just whether you participate with that or not.

The customer wants it free and then you negotiate from there.

So the problem is is when you get one of the competitors thinking free is actually a good idea.

So that is what is happening out there is we have got some that -- that are not filling their XL model out correctly or they are missing a zero somewhere and that is creating a little bit of a problem.

It has become spot that we see it, I would say right now.

I think our French team is doing a very good job because there is some very foolish pricing going on in the French market, in the European market.

It is mixed.

You will see some, which we do it also, there is some surgical moves in order to try to keep a certain client or a market, but -- but the clients know that they are there.

So if you have a three-year contract and you just signed it a year ago, they are putting it back out to bid because they are trying to chum in the water to see what the industry will do to give up a little bit more price.

I think the industry just has to be careful that price is more complicated than margin.

It's payment terms, as Mike talked about.

So DSO is extremely important.

It is giveaway of services.

It is the service total agreements that are becoming more difficult.

It is an environment that I think we have to be cautious on.

But, I think the interesting thing is when we look at our book of business in what we call key accounts and all forms of that, that margin, gross margin decline is much less than what we have seen in SMB and that was a strategic move that we had made.

Great.

And just one quick numbers question.

Mike, what share counts should we be using in the third quarter for your guidance?

Yeah, the 79.1 million shares would be a ballpark number for you.

Okay, great.

Thanks so much.

Last question.

Will come from Paul Ginocchio of Deutsche Bank.

Thanks for taking my question.

Paul, we do know how to pronounce your last name though.

Okay, thanks.

Just a question on France.

Can you just talk about the opening up of the public sector to temps and how you see that developing over the next couple of years.

Also about the, I guess, EUR300 million of contracts the government is about to hand out to help the unemployed get back to work with the temp agencies.

Are you involved in that?

And how many agencies will be involved?

Thanks.

All right, so it is two part.

One is those of you who know that the public sector has opened up the ability to use temporary staffing.

We think it is -- it is a sizable opportunity.

In fact the largest opportunity would really be the central government; however, the central government would probably be the most difficult one to break through.

Our analysis would say that there will be a little bit of a lift or a time for it to be a lift as demographics kick in and some of the -- the tender processes that we need to go through will take a little time.

Having said that, our own internal projections, which we are trying to keep relatively sane at this time, we'd say that there would be no reason to think that we couldn't get a couple hundred million Euros over the next three years just in the government work.

And that is net new sector, if you will.

And we are pursuing that quite hard.

On to the other one, which is the unemployed.

We are participating in that.

That is broken up into several different kind of counties, prefects, units, however you want to describe it.

I think it has been broken up into about 20 of those.

They are not going to give one provider all 20.

We have responded to all 20.

We feel quite comfortable that we will be securing business in that area.

It is in the bid process, so it is too early to tell.

We have had several discussions.

So we will win some of those.

It is just how much and I think we -- the team there has done a good job.

So I am pressing them to win more than anyone else.

I think it also should be said that that is low-margin business.

So it is something that the right thing to do and what Manpower stands for and what we do in our -- in our social responsibility, but it also is a good way to fill an infrastructure.

So -- so, depending on how much we win, and we have done the calculation, you could see slight gross margin and compression just based on that business, but it is measured and it really isn't industry gross margin.

It is just for a specific government contract that we have won.

So we are monitoring it very closely.

We should probably hear more in the next 30 days.

And I believe they will bring those public, Mike, I don't know if they -- if you have heard that or not, if they bring it public after we win or not.

I am not sure.

If they are, you will hear it from them.

We won't bring it publicly, we would just update you on the next conference call.

Great, thank you.

If I could sneak one more in.

I think Germany has seen a pickup in temps in the last six weeks.

I think I saw a headline somewhere.

You didn't talk about it in the call.

Is that true that Germany has seen some improvement over the last six weeks.

Well, we think the German market right now is vacillating quite a bit.

So I think it is who you talk to, what industry.

There is a lot of posturing.

There is some public companies that are -- are in staffing and those public companies are a little bit of a challenged, if you will.

So I think there is a lot of noise right now in that channel, so we kind of keep our fingers and our ears on that.

And we are going to be doing our own business in Germany.

Thank you.

All right, thank you all.

If there's any questions as usual, just give us a call and we will try to give you the best answer we can.

Thank you.

Thank you.

That does conclude your conference for today.

Please disconnect all remaining lines.

Once again, that has concluded the conference for today, please disconnect all remaining lines.