ManpowerGroup Inc (MAN) 2009 Q3 法說會逐字稿

Welcome to Manpower's third-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 third-quarter conference call for 2009.

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

Together, we will go through the third-quarter results.

I will review the business as well as take a good look at some of the trends that we've seen within the quarter, and also some of the trends of our largest geographies and segments, and then discuss in a bit more detail some of the segments.

Mike will go through the balance sheet, cash flow and some unusual items that occurred during the quarter.

Now, before I move into the call, Mike, if you could, read the Safe Harbor language.

Thanks, Jeff.

Good morning, everyone.

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

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

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

Thanks, Mike.

We exceeded our expectation for the third quarter, which was primarily driven from slightly better revenues and the continuation of good expense management.

During the quarter we continued to see clear stabilization and in some instances an improvement in our year-over-year revenue growth rates, which generated slightly better-than-anticipated operating profitability.

Additionally, we experienced continued strong demand for our career-transition services, Right Management, which generated $21 million in profit.

We continued to experience year-over-year declines in revenue with revenue down 26% to $4.2 billion, or 22% in constant currency.

We are comfortable that the actions we've taken to address our expense base, which aided the performance in the quarter, have been at the correct level and we've made decisions not to take any further dramatic actions and we believe this has allowed us to take market share because we are able to maintain our infrastructure at the appropriate level while upgrading the skills of our sales team.

We will continue to closely monitor the economies across the world as well as closely gauging our client demand, but at this time, we believe our infrastructure is appropriate.

(technical difficulty)

I stated in the previous conference call that September and October is an important time for us to determine whether any action should be taken -- further actions should be taken actually on our infrastructure.

Given the results of September and October to date, we are going to move forward into 2010 with our current infrastructure.

To recap our third quarter, revenue, as I mentioned earlier, was slightly higher than forecast, coming in at $4.2 billion, down 26% in US dollars and 22% in constant currency.

Our gross margin declined 1.2% to 16.9%.

I will talk a little bit about that more in some detail in just a few minutes.

During the quarter, we did take a nonrecurring charge which totaled $71 million or $0.90.

The bulk of the charge was an impairment charge for Jefferson Wells.

Mike will detail that for you in his comments.

Excluding this, our operating profit for the quarter was $42 million, on a like-for-like basis down 76% in constant currency.

Our operating profit margin, excluding the nonrecurring charges, was 1%, exceeding the high end of our guidance range by 10 basis points.

This yielded an earnings per share of minus $0.64, as reported, and $0.26 excluding the nonrecurring charges, $0.12 higher than the midpoint of our guidance range, primarily from the higher revenue and, as I said before, the good expense control.

Currency actually negatively impacted our earnings per share by $0.02, $0.01 more than what we had anticipated.

Our gross margin for the quarter was 16.9%, a decline of 1.2% compared to the prior year.

The largest contributor to the decline is the gross margin of our temporary recruitment business, which impacted our overall gross margin by 1.3%.

Our permanent recruitment business was down 59%, or 56% in constant currency, and showed actually some signs of stabilization over the quarter.

This year-over-year decline impacted our gross margin by 0.7%, similar to the second quarter.

We had a positive effect because of the strong performance of the higher-margin Right Management business, which added 0.7% to our gross margin.

This yielded the 16.9% third-quarter gross margin.

The gross margin percent is an area of concern and we will continue to manage this with discipline.

Some of this can be explained through a mix of business, as we are seeing our higher SMB business decline at a faster rate than our key account business.

However, you can see the impact of pricing in some of the national and global accounts that are now entering into deployment and as a result are affecting the overall gross margin for the Company.

We have action plans in place and escalation processes in the organization to ensure we are being strategic regarding which accounts we decide to pursue and which we decide not to pursue.

As I mentioned, we are seeing some leveling off in our permanent recruitment business, but we are seeing no more year-over-year weaknesses.

I'm sorry, we are seeing some additional year-over-year weaknesses as well.

It's our view, though, that it will be some time before this business comes back to really being an overall contributor to our gross margin.

(technical difficulty) we are keeping the core of our infrastructure in place and we are securing business in the recruitment process outsourcing area.

These new wins will reap benefits as the economy gets back to a more robust hiring mode.

We continue, clearly, to see some signs of stability, and in some cases improvements in the numbers.

We are seeing a healthy trajectory in Asia, minus Japan, that is relatively robust.

However, the emerging countries are only a small part of our overall revenue.

In the fourth quarter we look for continuation in improving revenue trends and therefore stability in operating profit.

We expect the earnings per share to be between $0.17 and $0.27.

Moving on to the Americas, revenue was $653 million, down 20% in US dollars, 14% in constant currency.

We were actually able to drive an increase in revenue in Mexico, up 6% in constant currency, in a relatively difficult environment.

Another large operation for our Americas region is Argentina, which was down 14% in constant currency.

Central America, which we are continuing to invest in, was up 18% in constant currency.

The largest component of the region of course is the US.

The US was down 21% in revenue or 24% on an organic basis.

This compared to a 31% organic revenue decline in the second quarter.

We are experiencing improvement throughout the quarter in average daily billable hours.

This improving trend has continued into the first weeks of October.

This improvement is slow and one that is not giving us the leverage required in order to reach profitability at this point.

However, we are improving.

The improvement is coming for the most part from the light industrial area, although we are also seeing signs of improvement in Manpower Professional.

Operating unit profits for the segment was $5 million with an operating unit profit margin of 0.7%.

Operating unit profit for the US was a loss of less than $1 million.

We are seeing margin pressure as well in the Americas but actually less so in the US than we are seeing in France or EMEA.

The US permanent recruitment business has slowed and, as you would expect, down 65% compared to prior year.

However, as I mentioned in the last quarter and earlier in this call, we are seeing an increased demand for our RPO offering.

So we are now waiting for the recovery so that, when companies do start hiring, you will see this higher-margin business start to really kick in.

Our French operations, they came in with revenues of $1.3 billion, down 27% in constant currency, 31% in US dollars, achieving an $11 million operating unit profit, down 83% in constant currency and nearly the same in US dollars -- this yielding a 0.8% operating margin, down 270 basis points.

Much like we've talked about in the last quarter, we continue to see and experience improving revenue trends.

Revenues declined bottom -- right around the April timeframe, down 39%, and we closed out September down 24%.

While you can see there is improvement, our clients remain cautious as they move through a quite difficult market.

The costs that we've taken out have benefited us, as well as the consolidation and closures of offices.

While being difficult, we believe we have absolutely not shortstopped our revenue.

Pricing is difficult in France.

In fact, it is actually one of the more difficult places, as we are seeing a lot of pressure in large account business.

We will continue to manage this effectively.

We have put in place a very robust process in France, and for that matter in other regions of the world, to ensure that we are strategic about our pricing decisions.

As we move into the first few weeks of the fourth quarter, we continue to see improving year-over-year revenue trends, but still at a fairly modest at this point.

EMEA -- the EMEA segment came in at $1.6 billion, down 24% in constant currency, 31% in US dollars.

Our operating unit profit was $26 million, down 74% in constant currency and 76% in US dollars.

To put a little bit more detail behind the makeup of those numbers, Italy did improve throughout the quarter, down 35% in constant currency.

Profitability for Italy was still relatively strong at $9 million, down 68% in constant currency, 70% in US dollars.

Our Italian team has done an outstanding job in this tough environment.

We are taking market share and in fact, according to publicly available data, we have the number one position in that market now in Italy, the first time since that market has opened.

We believe this has been possible and has been occurring over the last two to three years based on our exceptional service delivery and our very strong branch network.

In the Nordics, revenue trends are also improving with revenues down 28% in constant currency, 36% in US dollars.

Profitability is much more difficult, particularly in Sweden, due to the union agreements and the bench model.

Our UK business has not suffered as much as many of the other European operations, down 17% in constant currency and a nice improvement from the 25% decline we saw in the second quarter.

From a profitability perspective, there was also relatively good performance, down 48% in our UK operations, so some very good management.

We continue to see the benefits of the reorganization and the realignment that we made several years ago in the UK.

The Dutch and German markets are a bit more difficult than the UK market with the Dutch market down 20% in constant currency, while the German market was down 30%, about the same as we saw last quarter for both markets.

We believe we are also gaining market share in both of those markets.

Our Elan business, which was really the only major European entity that showed some worsening year-over-year revenue trends for the second quarter, was a revenue decline of 28% in constant currency.

This is fairly typical to see the IT professional market lag the recovery of some of the more traditional skills.

Our Asia-Pacific segment generated revenue of $428 million, down 10% in constant currency, 6% in US dollars, generating a $4 million operating unit profit, down 61% in constant currency and 51% in US dollars.

The operating profit margin of 0.9% is down 90 basis points on a year-over-year basis.

Japan, the largest part of that segment, was down 15% in constant currency and 3% in US dollars.

We had expected our Japanese organization to be slightly worse than what we had in the previous quarter, which was down 12%.

Primarily, this is because of the way some of the contracts with our associates come to an end and therefore we had anticipated this slight reduction.

We also saw modest improvements in year-over-year revenue trends in August and September.

As with other markets in Japan, we are outperforming on a market basis, primarily because of our network and the changes that we made in our Japanese organization several quarters ago, which was at the management level but also at the salesforce level and a go-to-market strategy.

In India, we experienced growth in constant currency of 7% and were able to turn the corner from a profitability perspective to where we are now at a breakeven point for India, for the quarter.

Australia, which accounts for 20% of the region, was down 12% in constant currency and 17% in US dollars.

We are seeing the Asia-Pacific market and the Middle East be a bit more buoyant minus Japan.

However, based on the fact it is an emerging market, it doesn't really have the size that would make enough of a dent in our overall revenue model for Manpower.

Right Management performed well again.

The third quarter is typically a seasonally slow period but that was hardly noticeable as career transition billings remain strong.

Revenue was $136 million, up 29% in constant currency, 25% in US dollars, generating an operating profit of $21 million, almost tripling last year's level.

The operating margins were quite strong at 15.6%, down from the second quarter, due to the seasonally lower revenue level.

We did see slightly better performance, as we had anticipated, coming out of Europe for Right Management.

While US carrier transition billings peaked earlier this year, Europe is now reaching record levels.

We are also seeing an uptick in our talent-management practice, which is under the organizational consulting side of the business.

We are also very keen and prepared to adjust our costs appropriately as we see the candidate flow from the outplacement billings level off and decline.

Jefferson Wells made progress in the quarter while continuing to face a difficult environment.

Revenues were $48 million, down 35% on a year-over-year basis, and generated a $1 million operating loss.

However, on a sequential basis, our operating unit profit as well as our revenue improved.

Our model has been shifted and we made that shift about two quarters ago, and it is paying off nicely.

We've been able to generate a better gross margin based on the variable workforce pay model and a shift of our bench from 60/40 to 30/70.

We will continue to refine this model but the actions that we made in the second quarter have created an environment where we are much more confident on the profitability.

Given that we are seeing sequential revenue flat to slightly up in the Quarter Two to Question Three gives us some confidence as we move into the fourth quarter.

Having said that, the fourth quarter will be a seasonally slow quarter for Jefferson Wells as we have holiday time, which will probably be a bit more prolonged as the same as we saw last year.

In summary, the third quarter was a bit better than what we had anticipated.

Revenue gains were slightly higher and we were able to manage our expenses effectively.

We did see gross margin decline, but it is an area that we will continue to focus on and remain price-disciplined.

The mix of our business is extremely important to our gross margin with the geography from where it comes from as well as the mix of the business within that geography.

We are building Manpower Professional at a faster and much higher rate, as well as building infrastructure for our recruitment process outsourcing offering.

Coupled with some of our higher-margin lines like Jefferson Wells and Right Management, we are well-positioned to recapture gross margin.

We believe the fourth quarter will be a difficult quarter where we will see revenues increase primarily based on better comparables on a year-over-year basis.

We are still anticipating that some of our clients, particularly in Europe, will potentially use extended shutdowns as a way of saving money in 2009.

With that, I would now like to turn it over to Mike to discuss some of the financial details.

Okay, thanks, Jeff.

I would like to begin today by discussing a few elements in our earnings statement, followed by a discussion of cash flow, our balance sheet, and then 1finally our outlook for the fourth quarter.

Included in our selling and administrative expenses is a non-cash goodwill impairment charge of $61 million related to Jefferson Wells.

This compares to an impairment charge of $163 million in the previous year.

Excluding these impairment charges, our selling and administrative expenses were down 21%, or 17% on a constant-currency basis.

This expense reduction primarily relates to 7000 less full-time equivalent employees, or a workforce reduction of 20%, and a reduction in our branch network, primarily through office consolidations of 500 offices or 11%.

On a sequential basis, our SG&A expenses, excluding the impairment charges and reorganization costs in the second quarter, are down 2% on a constant currency basis.

Our full-time equivalents are down by 550 employees since the end of the second quarter and our branch network was reduced by 60 offices during the quarter.

While we continued to (technical difficulty) prune expenses where possible during the quarter, we elected not to make any significant further workforce reductions or branch closures.

As Jeff mentioned earlier, we have been very careful with our expense reductions to ensure that we are well-positioned to fully serve our clients as the economy recovers and optimize the sales opportunity.

Included in the interest and other expense line is a $10.3 million loss on the sale of our interest in an equity investment.

On an after-tax basis, this loss was $5.3 million or $0.06 per share.

Subsequent to quarter end, we amended our revolving credit facility and elected to repay EUR100 million borrowings under this agreement.

In connection with this paydown, we terminated the related interest rate swap agreements, resulting in a charge of $7.5 million before tax, or $4.6 million after tax, which is $0.06 per share.

As Jeff noted earlier, excluding these nonrecurring items from our earnings statement, the results are net earnings of $20.5 million or $0.26 per share.

Impact from currency was a negative $0.02, slightly more than expected despite the fact that the euro strengthened relative to the dollar during the quarter.

This is due to a slightly different mix in geographical earnings and changes in other currencies.

Free cash flow, defined as cash from operations less capital expenditures, has been very strong this year, coming in at $385 million through the nine-month period, up slightly from the prior year.

Free cash flow has benefited from a seven-day reduction in day sales outstanding compared (technical difficulty) prior year.

This reduction in DSO is due to a heightened focus on cash managements and collections and a change in legislation in the French market.

The legislative change (technical difficulty) added $165 million of free cash through the third quarter but more importantly will result in less capital investment required on a go-forward basis.

Free cash flow in the quarter was also positive at $23 million despite the higher level of seasonal revenues in the third quarter.

Taking a look at our balance sheet, you can see that overall liquidity improved with total cash at quarter end of (technical difficulty) $1.2 billion.

Our net cash position at quarter end improved by $59 million to $292 million.

Our total debt to total capitalization at quarter end was stable at 26%.

As I mentioned earlier, shortly after quarter end, we retired the EUR100 million borrowing under our revolving credit facility.

As a result, our total outstanding debt would be $146 million less than reported, or $763 million, and total debt to capitalization would be 23%.

Next, I'd like to spend a moment discussing our credit facilities.

As I mentioned earlier, our total borrowings outstanding at quarter end were $909 million, and our total available borrowings were $850 million.

The two primary components of our debt structure are the EUR300 million notes which come due in 2012 and the EUR200 million notes coming due in 2013.

Both of these notes have fixed interest rates below 5% and neither of them have specific financial covenants.

As I said (technical difficulty) our revolving credit facility was amended on October 16 to give us more flexibility under its two financial covenants.

In connection with this amendment, we reduced the amount of the facility from $625 million to $400 million, given our strong cash liquidity.

Borrowing costs under the amended facility will be at LIBOR plus 3%.

Finally, let me discuss our outlook for the fourth quarter and make a few comments regarding the first quarter of next year as we look forward to 2010.

Before I begin, I should remind you forecasting revenue trends and earnings continues to be extremely difficult in this challenging economic environment.

Nevertheless, I will give you our current thoughts based upon what we are seeing in the business today.

As we look to the fourth quarter, we expect to see continued improvement in year-over-year revenue trends.

Currently, we expect revenues to be down between 9% and 11% from the prior year, which is down between 16% and 19% -- or excuse me, 16% and 18% in constant currency.

On an operating segment basis, we expect improvement in year-over-year trends in all of the segments with the exception of Right Management.

For Right, we expect growth between 5% and 7%, or 1% to 3% in constant currency.

While Right's career transition billings remain strong, they are coming off of the peak season in the first half of the year, clearly a good sign of the overall health of the economy and labor market.

We are forecasting our gross profit margin to range between 17.4% and 17.6%, an improvement sequentially reflective of the seasonal change in the mix of business.

The gross profit margin is down year-over-year due to (technical difficulty) temporary staffing margin and lower permanent recruitment fees similar to the third quarter.

I should also note that our gross margin in the fourth quarter of 2008 was favorably impacted 1.4% due to some nonrecurring items in France.

We will continue to manage our SG&A expenses tightly in the fourth quarter, but we do expect our corporate expense to increase sequentially and be in the range of last year's amount.

Our operating profit and operating profit margin should approximate third-quarter levels with an operating profit margin range of 0.9% to 1.1%.

We are estimating our tax rate to be 39%, but as I have stated on recent calls, the tax rate is a very rough estimate in this environment as it is very sensitive to earnings mix and the impact of nondeductible items.

This brings us to an earnings-per-share range of $0.17 to $0.27 with $0.03 favorable impact from currency.

This outlook in earnings-per-share range excludes the impact of any reorganization charges, which could be possible in the fourth quarter.

Before I turn things back to Jeff, I would like to share a few thoughts on the first quarter of next year's (technical difficulty).

As many of you know, our first quarter is a smaller seasonal quarter and of course, combined with the cyclical environment, makes modeling quite challenging.

As we look forward, we may have some markets turn positive in year-over-year revenue growth, but based upon current trends, we could still see revenue contraction in constant currency on a year-over-year basis.

Currencies, of course, will work in our favor as the euro is about 14% stronger today than the first-quarter average in 2009.

I would expect operating profits to be down year-over-year as we enter a period where Right's revenues and profits begin to decline due to the improving economy.

Better staffing and permanent recruitment business is not yet in full recovery mode.

With that, I'll turn things back to Jeff.

Thanks, Mike.

With that, we will open it up for questions.

(Operator Instructions).

Mark Marcon.

I was wondering if you could talk a little bit about what your expectations are for the fourth quarter as it relates to the comments that you made in terms of factories potentially shutting down in Europe and potentially in the US.

Obviously, last year was a very unusual environment with a lot of places just shutting down abruptly.

What are you hearing from your clients now and how do you expect that to unfold as you go into the fourth and first quarters?

Yes, as we had announced actually on this call last year, we had said we are expecting it, and we brought it up again a little on this call.

I would say we have not heard, to the same level of degree, that there will be shutdowns.

The conversations have been much more relaxed.

There is a sense that, while demand is not necessarily robust, there is demand.

So -- and if you look at it from a comparable perspective, last year we not only had the fourth quarter but I think, in Europe, we really didn't start until January 12, so we had some shutdowns into January.

So our hope right now is that, given the kind of conversations we're having and given the kind of environment where we are now seeing more of a slight uptick than a still down, is I'm hoping that we would actually come out of it a little bit better, but we still want to be cautious about it because I think the next three, four weeks as retail sales, more numbers of those come out, what happens after some of the Thanksgiving things, what happens -- I mean, I still think there is a little bit more to unfold.

So we are still going to watch it carefully, but our sense is it would be a little bit less than what we had last year.

Okay.

So is it fair to say that the guidance basically reflects a level of caution with regards to the possibility that these shutdowns could occur even though maybe you are not actually hearing about them quite yet, but you just (technical difficulty) err on the side of caution?

Yes, I think, Mark, as we looked at it, certainly we took that into consideration as we set our guidance (technical difficulty) quarter.

I'm not sure we've got a specific number that we would adjust for.

As Jeff said, it is a little bit uncertain right now.

But certainly as we look at fourth-quarter revenue trends, we really see the trends improving in all operating segments except for Right Management, as Jeff had alluded to earlier -- and Right Management only because it is countercyclical, of course.

But we will see how things play out.

But I think there is some consideration in our fourth-quarter estimates that things could get a little bit sluggish around the holidays.

Okay.

Great.

Then could you just talk a little bit about the gross margin trends that you are seeing, particularly in Europe and most notably in France?

Is this a carry-on from Q1/Q2 in terms of the contracts rolling over, or is it your expectation that pricing will get even tougher than what you have already experienced?

Yes, sure.

I'll take a look at that one, and then, Mark, we'll kind of move on after that question.

It is a good question, and it is one that we look at.

No doubt there are two things primarily.

Forget all the mix things, which you can understand.

But there are two things.

One is we are getting some SMB, small medium sized business, decline that is really pushing it down.

In rough numbers, that is about (technical difficulty) percent of our business, so that takes it down.

There is this effect that what you saw from last quarter, which is somewhere in the neighborhood of about a 0.7% decline coming from the temporary (inaudible) side to 1.3% decline coming from the temporary side of this quarter.

You are seeing the feathering-in of those contracts that were at a lower rate.

The majority of those contracts, because we track each one of those, are from existing businesses that went out to bid that we felt as though, with the sizable base and the potential opportunity, that we would be more aggressive on those than we would on out seeking new business.

So when you look at how these contracts roll out, I think it is fair to say that the pricing and the amount of businesses that went to tender and we're responding to, primarily from a pure price perspective, I think that stabilized.

That started to slow down.

We don't see that as much anymore.

However, you still have the lag effect of those accounts still coming in in the deployment phase.

So our view is, from the pure temporary staffing side when we go to the fourth quarter, our view is it's going to be weaker than it was in the third quarter because of some of those roll-ins.

Now, there are some other things that we might be able to do to mitigate some of that, but that would be our look at it.

But at the same time, we are seeing kind of a leveling off and a little bit of a (technical difficulty) stopper within this so that we now start to try to reverse some of that.

Just to follow up, Mark, as well, our fourth-quarter guidance would anticipate this continued feathering-in, as Jeff described it, and impacting the gross margin.

So as we looked at our gross margin for the fourth quarter, we did see a little bit more impact, and that's included in our outlook for the fourth quarter.

Tim McHugh, William Blair & Co.

I just wanted to follow up on that a little bit.

Can you talk about some of the things that you are doing to try and offset some of the pressure on the gross margin?

How long do you think that might take to kind of play through?

Sure.

There are several things.

One is that the (technical difficulty) country, a certain level of pricing has to go all the way up to the country manager and in some cases beyond that before we would approve it.

So that is kind of taking the current business and looking at it.

The other is that our efforts that we had actually begun and for all of the right reasons before the downturn are ones that we are still managing.

We are still improving our Manpower Professional.

Our specialty business is -- we are still putting resources into that.

The RPO business, which we now, depending on how you count it because different people count it different way, but when you look at our RPO business on a global basis, we would be, if not the largest, right at the largest.

We are winning several accounts in a very consistent way.

We believe that helps offset over time some of the gross margin.

It doesn't have the immediate impact.

The other thing that happens, and not only from a profitability but from a gross margin percentage perspective, is Right is dropping faster than the staffing business can pick up.

So you get a little bit of that.

In addition to that, we have not taken out our permanent recruitment capability because we think that is very key.

We continue to work down what we call the Manpower Business Solutions, which is more outcome or output-based pricing which tends to have a higher gross margin on it as well.

Now, we will be and have been -- so these are not new initiatives, which makes us more comfortable.

These are initiatives that we have had in place for some time not only to balance our business, which is interesting, but more importantly it is what our clients are looking for, for us to offer.

So as I mentioned in my prepared remarks, this is something that is concerning, and we will continue to look at it.

But we have a fair amount of mitigating projects in place to try to offset that.

It is just that the timing of those will not sync up perfectly so that you see a smooth curve.

Tim, I might just add that the other thing that of course we are always focused on, I will put it in the category of basic blocking and tackling, is just managing the paid bill gap on our SMB business.

That is something where, as we are feeling pressure on pay rates, we are certainly (technical difficulty) to do (technical difficulty) bill rates, excuse me -- we are still (technical difficulty) to market rates on pay rates to see if those should be adjusted as well.

So we are trying to manage that as aggressively as we can.

Of course, there's a little bit more opportunity to do that in the US market than there might be in some of the European markets, but that is something we are always managing as well.

Is the pressure you are feeling in any way -- are you more likely to walk away business -- away from business at this point, or is that not part of the response here at all.

You want -- at this point in the cycle, you want to grab as much of that business as you can?

No, we are not doing that.

We have walked away from more business than we have ever walked away from before.

But as I said, it's more difficult -- and I will just pick a fictitious number -- we have a $15 million current run rate of revenue from an account.

There is an additional $5 million they put out to bid.

And then you get squeezed on pricing.

Now, we can get more efficient where we already have the account, marketing costs are paid for.

So we will get a little bit more aggressive, but just the ones that I've seen, we are passing on two to three deals a day in the US (technical difficulty) even responding to the bid because the price is too low.

Tim, I would also add when we look at profitability for these key accounts, we do of course P&Ls on these accounts beforehand.

That includes full cost of capital.

We are taking in the payment terms on the DSO as well to make sure that not only are they profitable and incrementally profitable at the operating profit line, but also on a return-on-capital basis.

So we are not taking deals that are going to perform at a loss.

We are making sure that they are [EVA] positive on the bottom line.

Okay.

Great.

Thank you.

Vance Edelson, Morgan Stanley.

Given Adecco's interest in MPS, what are the opportunities, in your mind, to take advantage of any disruption that might cause and take share?

Is that a potential positive?

Well, I think it is.

I would like to comment on that a little.

We have seen that we have been able to take share in Germany and in other places where acquisitions have been made by our competition and now there is a lot of integration issues.

Clearly, we have known MPS and they are very good company.

I think you would be disappointed not to think that we weren't involved in that whole due diligence process, because we were.

Our view on MPS is a very good company, but a company that does not fit with us.

The reason is they have seven major brands and 30 sub-brands.

When you look at how we run our business, which is really focused on delivering more value to our client as opposed to a financial portfolio of operating profit producing percent kind of environment, we felt as though that very good company but not a company that would add value to our clients.

So we will go after, especially where MPS has three or four brands in the same account that is now owned by Adecco, we are going to go after all of those accounts and explain that is the same company.

We should be getting those off the list.

So we are going to go after it aggressively.

Okay, that makes sense.

Then given your own strong free cash flow, could you update us on your own interest in M&A?

It sounds like, at least in the US, competitors are cutting prices, maybe getting a bit desperate.

Are there any opportunities there, and what does the (technical difficulty) look like?

Sure.

It is not just the US.

We have a list, and this list is reviewed with the Board, of all potential acquisitions that would fit with us strategically across the world.

We monitor that list.

We continue to talk to people.

I think it is fairly consistent -- not fairly consistent (technical difficulty) been very consistent that we are interested in the specialty business.

We (technical difficulty) landmark that Manpower Professional in the professional services businesses six years ago is where we were going.

We were able to improve our gross margin -- our gross profit dollars from 11% to almost 30% generated by the specialty business.

We did that with the Elan acquisition.

We've done well with the Vitae acquisition, and we have done quite well with the Right Management acquisition.

So now (technical difficulty) it's got to fit some criterias.

It's got to be at the (technical difficulty).

It's got to be in the right culture.

It's got to be able to be folded in to help our clients.

We are not looking for a portfolio effect of buying and trading companies like a holding company.

We are looking at value to delivery of service.

There are some of those opportunities.

We will continue to talk to them.

If it is appropriate and meets all those criteria, we would definitely consider it and have been considering it.

Okay, that sounds good.

Thanks a lot.

Jeff Silber, BMO.

Last quarter, you talked a little bit about your public sector business, specifically in France and some of the help regarding the stimulus package.

Can you talk generally what is going on in the public sector in France and Europe, how much work you are doing there, etc.?

I think we should move it actually beyond just France.

During the quarter, we announced the wholly-owned entity, which is (technical difficulty) for public sector and now a separate office with separate charter in Washington, DC.

We are participating in different schedules and have currently already won accounts and business.

So we think that is a very good opportunity for us.

I think the US, both at the state level and the federal level, are doing quite well.

Now, we are doing quite well in the UK in the public sector in the (inaudible) which is the (technical difficulty) one, we are implementing it.

The implementation of that -- of those seven regions or prefects or how ever you want to call it are going as we would expect.

Actually, as we look at our fourth-quarter numbers, there is gross margin in the fourth-quarter numbers in France coming from those activities.

We are working very well in Japan right now with some things with the government there where we are actually leading in what we are doing with the government work there.

So it is a focus of ours because we believe (technical difficulty) of all of our CSR programs, how we interact with the under and unemployed, that this is our business.

This is the kind of business we should be having, and we are very good at it.

So we are going to continue to expand it.

By the way, when you look at it, most of it comes with very logical and fair gross margins (technical difficulty).

Okay, great.

Just to follow up on some of your comments regarding Right, you had mentioned that business is dropping faster than the staffing business is picking up.

Are you seeing that globally in Right, or are you seeing that just in specific geographies?

Yes, one is I think you want to kind of look at it from a continuity perspective.

In the second-quarter conference call, we said, look, we are starting to see a plateau and a slight decline in the US and just starting to see a little pickup in Europe.

If you look (technical difficulty) this call, what we said is we are seeing more of a decline of candidates is what we would call them, inflow of people who have been outplaced or downsized coming into our office.

A little of that is seasonal, but even if you take out the seasonal effect of that, you haven't seen any major announcements recently.

So that is starting to tail off, whereas in Europe right now, we are reaching a peak.

The difference is that the Europe (technical difficulty) are different than the US peak, so one doesn't offset the other.

So that is what you are seeing.

I don't know if you could kind of mentally draw an S-curve regarding our gross margin and makeup of the gross margin loss from Right.

It's kind of like you climbed up this S-curve with the gross margin of Right; you can't just lump -- jump Right over to the next curve.

You drop, get onto the staffing curve.

Then when you start getting the perm, the RPO business, you then build it back and your mix starts to work for you.

But there is a lag in there that is not a structural lag.

It is just an industry lag of how recoveries actually return and operate.

All right, great.

Thanks so much.

Andrew Fones, UBS.

I was wondering if you could talk about some of the puts and takes within SG&A expense as implied by your Q4 guidance.

I guess currency will have a negative impact; it will increase your expense.

It looks like there's going to be a flow through of some of the cost cutting, though, that you did in the third quarter and then perhaps if you could touch on Right or any other impacts, that would be helpful.

Sure, Andrew, will do.

As we said earlier in the year, we have really been working hard to reduce SG&A expenses overall, and we have made some more structural changes earlier in the year.

Of late, it has been more pruning around the margin, if you will, a little bit.

This quarter, the third quarter, overall SG&A expenses were down 2% on a constant-currency basis sequentially, so certainly continued to make some gains or some reductions, if you will, on that.

As we look to the fourth quarter, we are still looking to hold the line, if you will, on our overall SG&A expense.

You do have, as you rightly pointed out, you do have the currency impact.

So there is some natural currency coming through that we are going to see.

So when you actually look our fourth-quarter dollars, we would expect, in terms of reported dollars, that SG&A will be up.

On a constant currency basis, it may be up slightly.

That will have a little bit to do with some of the investments that we are planning in the fourth quarter.

(technical difficulty) around some of the things that Jeff talked about -- Manpower Professional, Manpower Business Solutions, some of our higher value offerings that we continue to invest in because we think they are going to be very important as we come out of the recovery and we are seeing good things there already or improving things already.

So I think, as we look to the fourth quarter, certainly again to recap, (technical difficulty) slight increase on a reported dollar basis, perhaps a slight increase on a constant-currency basis.

But that increase really would be focused on where we have decided to make some strategic investments in the overall business.

Okay, thanks.

Paul Ginocchio, Deutsche Bank.

Thanks for taking my question.

Looking at your third-quarter gross margin, it was a little bit below what you thought it was going to be when you guided at the end of the second-quarter call.

Can you just talk about what was maybe the big change versus what your expectations were three months ago?

Thanks.

Sure, Paul, happy to do it.

It really does come down to the staffing gross margin part of it.

When you look at the elements that impact our gross margin, the overall perm recruitment was pretty much as we expected, down about 56% year-on-year.

Right Management had about the impact we expected.

So in terms of the overall gross margin, it was in the -- on the staffing, temporary staffing side itself.

I think that is just one of the things that, as you know, I caveat my outlook in this environment.

I think that is one of the things that is difficult.

It is not only trying to forecast the overall revenue growth, but also what is happening in those marketplaces from an overall gross margin standpoint.

So, it really is in that area and it really was no specific geography.

I would say every geography was just a little bit weaker on the temporary gross margin than what we had anticipated.

Great.

I am also hearing the Netherlands is a pretty tough pricing environment.

Is that right?

Would that be (technical difficulty) in Europe?

Well, there are some -- France is difficult, but when you really look at it overall, Europe minus France, it is really under a lot of pressure.

In The Netherlands, because of the small (technical difficulty) and the amount of the number of larger accounts in there, you do get some pretty sizable pressure.

So there's two or three that I can (technical difficulty) think of that were pretty intense.

I might add also one of our competitors added something that we think is not good and probably doesn't really last very long, and that was massive prebates.

You paid millions of dollars just to get the business.

When we did the math on that, you couldn't even make it back minus the cost of capital.

So there are some aggressive things that have happened there, but if you look at our gross margin compared to the industry there, we have been able to take size (technical difficulty) share without having to do some of it, but we are seeing a slight drop in our gross margin.

Much of that just has to do with the acquisitions that we have been able to kind of stay focused where some of our competitors may not be.

Thanks very much.

Gary Bisbee, Barclays Capital.

One of the things I guess in the Wall Street world we see a lot of is (technical difficulty) so we are real bullish on economic growth.

One of the things or one of the arguments of a lot of them have made is that companies, particularly in the US but in Europe also, have cut back so aggressively that temp employment may turn up more quickly than has happened the last recovery or two and it's been a little moderate just because companies cut too far.

Are you seeing any signs or hearing when you talk to customers that they are not certain about full-time hiring, but (technical difficulty) they cut too much and they're going to have to hire people to get through the year-end process or whatever it is?

Yes.

So we all know, those of us on this call know how it works, and that is the best period of time for us is the beginning of a recovery.

It is because they don't have the people to do the work, and there's a large amount of uncertainty, which says that I probably (technical difficulty) be hiring in regular full-time staff.

Because of the potential prolonged uncertainty and because of how difficult it was, multiple waves that companies had to take people out -- it wasn't just one wave -- it was maybe four or five waves.

The conversations we are having now with our clients, one that came to mind very recently, they had a strategy that it was under 10% of their workforce across the company would be with us.

Right now, they're moving out to 25% as they move out of the downturn.

Now, what we need (technical difficulty) so logical, but it is so true -- is you need demand.

Without the demand for the products and services, there is no demand for labor.

Our view is, once you start getting that demand and there are still some uncertainties, whether they be the commercial real estate, what is happening with inflation, lots of other forces (technical difficulty) in the world create enough uncertainty.

And particularly with us, we feel as though the quality of our match and the skills of our people, we actually do see, not only in Europe -- and these conversations are happening all over the world -- in US, in Europe, is that companies are looking at their strategy and thinking about moving the percent of their workforce up into more contingent and flexible.

We do believe that will happen.

Okay.

You wanted to clarify the early read comment on 1Q '10.

I believe that you said that operating profit would likely be down.

You were referring to versus the fourth quarter and not versus the basically breakeven ex charges in first quarter of 2009?

Is that correct?

Thanks for the question, Gary.

Actually, I was referring to relative to the first quarter of 2009.

So when we look at it -- and one of the things that Jeff will look at is Right Management for instance had an outstanding quarter in the first (technical difficulty) 2009.

They had operating profit of $29 million.

If I compare that to a more normalized (technical difficulty) quarter of 2008, if you will, they had operating profit of $7 million.

So I don't think we are going to be back to the $7 million level in the first quarter of 2010, but I clearly don't see us at the $29 million level.

So I think, as you break that apart, I think Right Management's operating profit I would expect will be quite a bit lower than a year ago.

Then I think, as we look at some of the individual operating units, we likely will see in some of them revenue (technical difficulty) year-on-year.

Perhaps some will have revenues up year-on-year.

I think it will depend upon the trajectory of the revenue growth.

I think that is the real difficulty right now, looking at it, is exactly what does that trajectory look like coming out of the fourth quarter and into the first quarter.

So that could have a fairly significant impact on how the operating profit plays for the other units.

But right now, I would probably just want to be more on the cautious side in terms of how we are going to make our way through the fourth quarter and into the first quarter of next year and so we'll see how that plays out with a little bit of time.

Okay.

I guess just to play devil's advocate with that, I understand you are cautious and it's a far-out view, but the US lost almost $15 million in Q1 of '09, but only $1 million this quarter.

You had big profits in France this quarter versus a loss in Q1.

I guess outside of Right and understanding that Right could be down quite a bit, I guess I struggle to get to an operating profit number that is not quite a bit higher, potentially, just based on some of the staffing business, is maybe not rebounding but 1Q '09 was a pretty difficult quarter.

Yes, it was.

But I think the thing you have to think about when you go sequentially is also the seasonality in the first quarter.

The first quarter seasonally is a much lighter quarter and of course we can't -- we won't -- right now our plan is not to put our expenses out.

So as that revenue drops and GP dollars drop sequentially, we are not looking to take further expenses out.

So that is part of -- when you look from fourth quarter into what is happening in the first quarter, it is that lighter seasonal first-quarter trend.

The other thing, as we have been talking about a fair amount on the call, is the temporary staffing gross profit margin has been deteriorating as we have made our way through the year.

So as I go into the first quarter of 2010, I am up against tougher comparables on my staffing gross margin.

And so that needs to play out as well, of course.

Thank you for the color.

Ashwin Shirvaikar, Citigroup.

My question is on the (technical difficulty) side of things.

Jeff, you mentioned that sort of waiting for this RPO business, the higher margin RPO business to kick in.

My question really is why do believe that is a higher-margin business?

What level of margins are you talking about?

So what happens is, for example, in just the last four months, we -- in the last four weeks we won six major accounts, all names you would have heard of, all global, all massive.

I will exaggerate; they hired one person this month.

So what you have is you don't really have any revenue coming through there.

As the economy gets better and they need the demand, that goes up dramatically.

The way we have priced RPO and the way RPO is priced in the industry is basically, when you are looking at permanent recruitment, that is all gross margin.

So in our business, permanent recruitment drops right to the gross margin line.

RPO for the most part has a little (technical difficulty) some cost in it, but drops almost all to the gross margin and we have priced it because you offer more value.

You are actually doing working with the hiring managers.

You are doing the induction.

We view RPO differently than the way others count it.

Many competitors count volume recruitment as part of RPO.

We think it is a disservice for value and you are not really explaining correctly what the client is getting.

So if you were to say permanent recruitment volume, permanent recruitments is generating ex-gross margin, our RPO because of the amount of value we offer in it all the way from using our own -- our software products within it, you actually generate a higher gross margin as a result.

What kind of eventual gross margin target do you have?

Well, what happens in there (technical difficulty) so much of it drops right into the gross margin line, you are almost looking at it as 100%.

So in our business, it's a little different.

If you were to look at it from a net profit perspective in kind of a normal run rate, our net profit projection on RPO would be somewhere in the neighborhood of probably 30% to 50% higher than it would be in permanent recruitment.

Okay.

Then how big -- this is the last question on this -- how big do you expect RPO to get relative to the rest of your operation?

Sure.

So when you look at it -- and some of it is hard to tell because these are kind of seeds that have been planted.

If one of these companies really say they are going to hire 5000 people and they end up doing it, then of course it gets pretty big.

Now, when we aggregate our RPO business -- we just won a substantial in Vietnam -- we won a very large one in Japan.

We are about to win, hopefully, a very large one in Australia.

Those, as well as the ones that we have counted right now -- and the way we count it is we are either number one or number two on a global one consistent RPO model basis.

So we think it can generate a fair amount of profitability for us over the next two to three years because we also said, based on the uncertainty of this recovery, that we think permanent recruitment, which RPO would fit into that to a certain extent, is probably a little bit later cycle (technical difficulty) because of the uncertainty that we are seeing right now in the economies.

Got it.

One housekeeping question -- Mike mentioned the $10.3 million impact in other income.

Can you shed some light on what exactly that was for?

Sure.

That was an investment that we had, a minority investment in a company in Japan that we made several years ago.

The timing was right where it just didn't fit with our overall strategy.

So we sold it this quarter.

So overall, it was an investment with a basis of about $23 million, and we sold it for about $13 million.

Jim Janesky, Stifel Nicolaus.

Jeff, you commented on a previous question about the possibility of an increased use of temps in the next cycle.

Can you comment on some other structural changes that you might expect that are I guess abnormal versus past cycles?

So for example, do companies plan on bringing back their own people first before they turn to staffing providers for either temporary or permanent hiring?

And then what are your thoughts on permanent hiring overall in the next cycle?

Well, I think it depends on the company.

There are some companies who do legitimate furloughs and layoffs, and I think those people would come back first.

But as to what we (technical difficulty) is the kind of layoff and furloughs were very early on in the cycle.

Most of those people are kind of washed out of the system, if you will.

So we do see them coming back with our staff first, and they have described it that way.

Because of the uncertainty and because of the amount of pain, the multiple layoffs, the multiple downsizings, have said we've got to do this differently.

Let's have a better workforce strategy that is connected to our business strategy, and where are we using the right kind of talent.

We are creating some offerings in there.

So this isn't just use more temporary staffing.

It's use it more strategically; use it aligned with your business strategy.

With our combination of Right Management and Manpower, no one else can do that in the industry.

We have lots of conversations regarding that.

That is why we are getting some good information on it.

Now, when we ask about permanent recruitment, there will be permanent recruitment; there is no doubt about it.

Companies are still looking for people who really need to be on their payroll that add a certain amount of specificity in their skills that are critical to the success of that company.

We think that it will be later-cycle only because of these uncertainties that persist.

It then turns more into -- in some of the larger situations we think that it turns more possibly to an RPO solution because they get the best of both worlds.

In an RPO solution, it is maybe our 20 recruiters at this one account (technical difficulty) still flex their internal recruiting capability, but then bringing on some permanent recruitment.

So we think permanent recruitment is healthy.

We just think it will be a little bit later-cycle, and we think that some of the larger permanent recruitment deals are probably turning more towards RPO deals just because it is more appealing to a company.

Okay.

Thank you.

Andrew Steinerman, JPMorgan.

Mike, I just thought it might be helpful to kind of more square-in on Right Management operating margin outlook, if you will, and to be a little more specific.

There was a number of questions on your guidance and what is temp, what is Right Management.

So if you could just kind of say, at the revenue expectations that you have in the fourth-quarter guidance up 1% to 3% on a constant-currency all-in for Right, what type of operating margin expectation -- that yield within the fourth-quarter guidance, if you could make any first-quarter operating margin comments about Right, that would be helpful as well.

Sure, I would be happy to, Andrew.

I think that is a good question because, as we put revenue on from Right, it leverages very well incrementally down to the operating margin.

I think you certainly have seen this over the last year or so.

I think typical operating margins for Right would be upper single digits, low double-digit type of range.

Of course, we saw them peak in the second quarter at almost 27%.

So you can just see how much leverage came into the model as a result of that.

Now of course, we are on the other side of that with operating margins in the third quarter at about 16%.

We are looking at the fourth quarter to also be in that midteens area, 15% to 17%, probably something in that range.

As we look to next year, I think the expectation would be that we are going to continue to move down toward what will be more normalized operating margins.

So I think what we'll see is just a gradual trend now going from call it midteens to (technical difficulty) lower double digits type of format.

Right.

Could you also call out the seasonality of Right Management operating margins?

How does the first quarter versus fourth quarter usually look in kind of a normal period for operating margins at Right?

Yes, usually, the first quarter (technical difficulty) may just a touch lighter, but typically a typical operating margin would look fairly similar, first quarter to the fourth quarter, perhaps just a little bit lighter in the first quarter.

Then you move up a little bit more in the second quarter and then typically third quarter will drop off because of seasonality, which is a little bit harder to see this year just because we had so much momentum going into the third quarter.

So certainly, as we look to fourth quarter of this year into first quarter of next year, we've got maybe normal seasonality, which would suggest a little bit lower, but then you also have the -- what I would expect is a continued decline in revenue level going into the first quarter.

That will put a little bit more -- that will reduce the operating margin a little bit more overall.

So while that all sounded fairly negative, I guess I do have to make (technical difficulty) emphasis that is the countercyclical business.

So this is all expected to happen and I think a very good sign in terms of the fact that the labor market is improving out there.

It may be gradual, but is improving.

But we just have a little bit of a timing gap between when -- as Right winds down and when some of the other business starts to pick up.

Excellent.

That sounds all right to me.

Thank you.

Thank you all.

We look forward to any questions that you might have, and we will talk to you in a quarter from now.

Thanks.

This does conclude today's conference call.

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