ManpowerGroup Inc (MAN) 2010 Q3 法說會逐字稿

Welcome to Manpower's third quarter earnings results conference call.

(Operator Instructions) 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 2010.

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

We'll go through the third quarter results together.

I'll spend some time overviewing the business and giving an update on a few of the indicators.

Mike will then get into details of the segments -- the segment details, as well as, the financial side of the business and some implications on a going forward basis.

Then I will cover a few more of the strategic issues.

Before we get into that, Mike, why don't you read the Safe Harbor language.

Okay, thanks, 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 10-K and in the other Securities and Exchange Commission filings of the Company, which information is incorporated here by reference.

Thanks, Mike.

The third quarter was a very solid quarter for us.

We knew we had good momentum going into the quarter.

We just weren't quite sure if we were able to sustain or not.

In fact, not only did we sustain it, we were actually able to squeak out slightly faster growth by a hair in the third quarter, than we did in the second quarter.

It is, needless to say, interesting times that we're in.

As the quarter unfolded, we were still receiving some very mixed messages, throughout the global economies.

And, yet at the same time, we're looking at our trends of the business and finding they were equal to, if not greater than, what we'd seen in the past.

As I've stated before, as early as a year ago, we believed that the, slow but steady, demand for our clients' goods and services, coupled with uncertainty and a will to change the flexibility of their workforce, is creating sustainable positive secular trends for us.

The growth we experienced in September, and to date in October, is also very important.

As we stated in the past, the ability to see growth after the August break in Europe and the Labor Day break in the US was an extremely important indicator for us, for the health for the rest of the year.

For the most part, we picked up where we left off, with growth rates across all geographies quite strong.

We're continuing to see the benefits of strong momentum, as we moved into the third quarter.

Across all areas our infrastructure is intact and we are quickly filling in the capacity.

As you would suspect, not all areas are filling in at the same pace.

So, even with excess capacity,we had to increase our staff in areas, adding just over 600 people in the third quarter.

We are committed to getting very good leverage.

And, we had a very good start at that with overall operating profit percent of 2.2%, up 125 basis points, excluding prior year nonrecurring items.

We are confident we will continue to experience good leverage, as we fill in our infrastructure and work to restore our gross margin.

Profitability -- it came from many places.

Many different places in fact.

The EMEA region hit the ball out of the park, by having good growth in general and very good growth at higher margin countries like Germany and Sweden.

Additionally, there was some very strong expense management, yielding an operating unit profit of 3%.

The US continues also to be on a roll with very strong growth and a better mix of business, as the US operations has integrated COMSYS for all intents and purposes.

We continue to feel strong downward pressure on crew transition business, which plunged revenues in Right Management nearly 37% and profits 100%.

The third quarter is seasonally the weakest quarter.

However, we anticipate a difficult fourth quarter, as well.

Jefferson Wells revenue was up sequentially by about $4 million, nearly 10%.

But, that wasn't quite enough and we were looking for a little bit more.

However, the business is strong and we continue to be confident about where the business is going.

Effective today, we will be placing Jefferson Wells under the management structure of the North American Professional Staffing unit, which allows us to reduce the infrastructure costs.

And, still approach the market aggressively, which we have every intention of doing.

In summary, our third quarter numbers are strong across the board with revenue of nearly $5 billion and system-wide sales of $5.2 billion.

Revenue increased 19% in US dollars, 24% in constant currency.

Gross profit also was up 24% in constant currency to $841 million.

Our operating profit was a $109 million, resulting in earnings per share of $0.62.

Now, for more detail regarding the segments I'll turn it over to Mike.

Mike?

Thanks, Jeff.

I'll begin this morning by discussing our gross margin.

Followed by the results of operations for each of our segments, a discussion of the balance sheet and cash flows.

And, then the outlook for the fourth quarter.

Our gross margin for the quarter was right in line with expectations of 16.9%.

This compares to 16.8% for the prior year.

Our temporary recruitment gross margin favorably impacted our overall gross margin by 30 basis points.

This improvement is primarily due to the COMSYS acquisition, as our organic staff in gross margin was flat with the prior year.

As we mentioned on last quarter's call, our staffing gross margin has stabilized across most markets.

And, we are beginning to see some early signs of traction in gross margin recovery.

While the staffing markets remain competitive from a pricing standpoint.

We continue to maintain strong pricing discipline and have become more selective on new opportunities, given the current growth environment.

Our permanent recruitment fees showed excellent growth in the quarter, up 57% from the prior year or 63% in constant currency.

The growth in permanent recruitment gross profit added favorably to our consolidated gross margin by 30 basis points.

For the quarter, permanent recruitment gross profit represented just over 9% of our total gross profit compared to 7% the prior year.

We've seen good growth in permanent recruitment across all regions.

And, we have seen heightened interest in our recruitment process outsourcing solutions on a global basis, as companies are reluctant to rebuild this capability internally, after cutting it during the recession.

We're confident that we are well-positioned to take advantage of what we see is a significant growth opportunity during this next cycle.

We're targeting permanent recruitment gross profit to exceed 15% of total gross profit in the coming years.

Our higher gross margin outplacement business was down significantly in the quarter, as expected, declining 48%.

Due to the higher-margin characteristics of this business, this decline negatively impacted our overall gross margin by 100 basis points or 1%.

Finally, as we discussed in the previous quarter's, the reclassification of French business tax, from direct cost to the income tax provision, favorably impacted our gross margin by 40 basis points on a year-over-year basis.

Next, let's review the segments.

Before I get into the detail of the segments, I want to mention that in the third quarter, we redefined operating unit profit to exclude intangible asset amortization.

In effect, OUP, as we define it, is now comparable to EBITA number.

This had a minimal impact on our segment reporting in the quarter, with the exception of the Americas.

For the third quarter the Americas had amortization of $8.4 million, primarily related to COMSYS.

The tangible asset amortization is now classified below OUP, but included in our operating profit.

You can see this on the operating unit results page of our financial statements accompanying the press release.

Intangible asset amortization expense in the quarter was $11.6 million, compared to $6.4 million in the prior year.

The increase primarily relates to COMSYS.

We've revised prior year segment financial results to be consistent with this presentation.

Revised segment financial results are included in the earnings presentation posted on our website.

Revenue in the Americas exceeded our estimates, coming in at $1.1 billion, for an increase of 64%, or 62% in constant currency.

On an organic basis, America's revenue increased 31% in constant currency, only slightly down from the 33% constant currency growth we saw in the second quarter.

The Americas gross margin improved over the prior year, partly due to the COMSYS acquisition and partly due to more permanent recruitment fees.

Our permanent recruitment fees more than doubled on an organic basis.

Our SG&A expenses were tightly controlled, resulting in excellent operating leverage, with an operating unit profit of $36 million and a margin expansion to 3.3%.

Within the Americas, the US delivered revenue growth of 84% or $752 million in the quarter.

On an organic basis, US revenue was up 35%, right in line with organic revenue growth achieved in the second quarter.

In the US we saw organic average daily revenue growth peak in July at 38%.

Followed by slightly moderating growth, as the prior year comparable numbers became more difficult.

Nevertheless, organic growth remains very strong, currently running just over 30%.

Within the US skill verticals, our light industrial business remains the strongest.

However, we experienced improving strength in our office and professional business.

The staffing gross profit margin improved over the prior year on an organic basis, due to lower FICA taxes, as a result of Hire Act credits and focused margin improvement initiatives.

Permanent recruitment gross profit in the US was up 75% organically, compared to the prior year and was up 29% sequentially from the second quarter.

We are seeing good growth on both direct hire and conversions from temporary to permanent.

Operating unit profit for the US was $27 million with a margin of 3.6%.

The COMSYS business, which we acquired in April this year, continues to perform extraordinarily well.

We have fully completed the operational front office integration with our US professional business.

And, are working on the back office integration.

COMSYS revenues in the quarter were $193 million, up 28% over the prior year and 6% sequentially.

Operating unit profits for the quarter was $9 million, which includes integration costs of $3 million.

The operating unit profit margin before integration cost was 6.3%.

Growth in our Mexico operation remains strong also in the third quarter, growing 26% in constant currency.

Growth in Argentina improved further in the quarter, up 37% in constant currency.

In the French market, revenues came in at $1.4 billion, an increase of 19% in constant currency.

This growth exceeded our expectations by about 4%, as demand for our services remained quite strong throughout the quarter.

Similar to the US, improving prior year revenue trends, resulted in moderating growth through the quarter.

But, we still exited the quarter with a solid 16% growth rate.

Our overall gross margin percent was in line with last year, as a slightly lower staffing gross margin, was offset by almost a doubling of permanent recruitment fees.

While, the French market remains extremely price competitive, we believe that overall pricing is stable.

We continue to maintain strong price discipline.

But, opportunities to increase pricing are difficult.

Additionally, the staffing gross margin is seeing some pressure, due to a shift in business mix, with higher growth in large industrial key accounts.

We maintain tight expense control, with SG&A costs down slightly from the second quarter.

This resulted in operating unit profit of $25 million.

And, more than a doubling of the operating unit profit margin to 1.8%.

While, we've had success leveraging our network capacity and driving expansion in our OUP margin.

We still have more work to do to get our margin back above historical levels and this is a key focus our French team.

On the regulatory front, the French government is discussing a change to the calculation of payroll tax subsidies for low-wage workers in 2011.

If this change is implemented, the amount of payroll tax subsidies for eligible workers will be reduced and our direct costs will increase.

Our plan will be to pass on such cost increases to our clients.

But, our ability to do so will be somewhat dependent on whether our competitors take similar action.

Our EMEA segment, also performed well above expectations with revenue of $1.8 billion, up 20% in constant currency.

As a region we saw the EMEA revenue growth peak at 25% in June.

And, moderate throughout each of the months in the third quarter, exiting the quarter with 18% growth in September.

Our overall gross margin improved year-over-year.

And, our staffing gross margin improved both sequentially and year-over-year.

We're seeing evidence of several of our gross profit recovery initiatives taking hold within the EMEA market.

Permanent recruitment, which represents 10% of EMEA gross profit, showed nice improvement, up 31% in constant currency.

Expenses were well controlled, as we continue to leverage our existing network capacity, resulting in operating unit profit of $54 million, or a doubling of the operating unit profit margin to 3%.

Strong revenue growth in the EMEA region was broad-based.

Germany led the region with revenue growth of 37% in constant currency.

As demand for our services was fueled by the strengthening export markets.

Italy was also able to maintain their strong growth rate, up 23% in the quarter.

We also saw Elan growth improved nicely to 18% in constant currency, compared to 3% constant currency in the second quarter.

We're seeing an improving demand for IT contractors, across most of our markets in Europe, with the strongest growth coming out of the Nordic region, where our Elan IT business is up over 25% over the prior year.

Growth in our Manpower UK business, remained steady in the quarter, up 17% in constant currency, with operating unit profits almost double the prior year level.

As we look to the fourth quarter and next year.

We anticipate less demand from the public sector in the UK, given the cost cutting measures being put in place by the government.

The Dutch market continues to move further into positive territory with constant currency revenue growth of 7% for the quarter, which accelerated to 9% in September.

The Asia-Pacific segment was also above forecast with revenue coming in at $556 million, up 30% or 21% in constant currency.

Operating unit profit for the region was $13 million, or more than three times the prior year amount, with a margin of 2.4%.

The gross profit margin increased over the prior year, primarily as a result of an increase in permanent recruitment fees, which doubled over the prior year.

This increase is largely attributable to the RPO contract with the Australian Defense Force, which we won in the first quarter of this year.

We continue to maintain tight control over expenses, while balancing that with exciting investment opportunities in the emerging markets.

Revenue across the Asia-Pacific region was strong with the exception of the Japan market.

We did see revenue growth turn positive in Japan for the first time in seven quarters, with constant currency growth up 1%.

While Japan's revenue growth was positive in the quarter, we did see average daily revenue turn negative in September, contracting 2%, primarily as a result of the impact of the legislative changes to our industry.

As you may recall from our second quarter conference call, the Labor Minister announced a new policy in May that redefines the nature of the work allowed within the 26 approved job categories.

This has resulted in reclassifying jobs previously allowed in the 26 job types into the liberalized category, which has greater restrictions and a three-year time limit on assignments.

While this has resulted in a reduction of the market opportunities, our Japan team is working diligently to replace this business with other allowed job categories.

Outside of Japan, the Australian market and other emerging markets in the region continue to grow rapidly, with Australia up 66% in constant currency, China doubling, and India showing growth above 40% in constant currency.

As expected with the improving economy, our revenue from the counter-cyclical Right Management business declined significantly by 37% to $86 million.

The outplacement portion of Right's business, which now comprises 67% of revenue, was down 48%.

The Town Management portion of the business has seen improving demand, and grew 17% in the third quarter.

Right's operations were essentially breakeven for the quarter.

The third quarter is typically the smallest seasonal quarter.

And, therefore, operating profits are impacted by both cyclical and seasonal deleveraging.

While we supported the increase in Right's revenue growth last year with variable expenses, we will need to go beyond our variable expense reduction.

And, realign our office infrastructure, given the anticipated lower revenue levels over the next several quarters.

This will result in reorganization charges in the fourth quarter, which will be comprised of office closures and severance costs.

Our Jefferson Wells business did slightly better than anticipated, with revenues up 11% sequentially.

While, our clients continue to be reluctant to spend on discretionary projects.

We're starting to see increased demand in the financial services sectors.

And, we are getting more requests to backfill finance staff working on large system implementation projects.

As Jeff discussed earlier, we are realigning Jefferson Wells with our finance and accounting vertical within our North America Professional Services business.

This will allow for an improved client experience, while bringing cost synergies to the combined organization.

We anticipate that we will incur reorganization costs in the fourth quarter, related to this realignment.

Looking at the cash flow, free cash flow defined as cash from operations less capital expenditures, was a use of $4 million for the quarter, resulting in a cash use of $98 million for the nine month period.

Working capital in the form of accounts receivable increased in the first nine months, as is typical given the underlying growth of the business.

While, accounts receivable are up by $820 million since December 31, cash collections are being well-managed with days sales outstanding, two days below the prior year.

Our capital expenditures for the nine-month period were $42 million, compared to $27 million the previous year.

Most of this increase was for office furniture and equipment related to the move of our French headquarters earlier in the year.

Cash used for acquisitions with $261 million and primarily relates to the COMSYS acquisition in the second quarter.

During the third quarter we used approximately $35 million of cash to purchase 800,000 shares of our common stock.

Our balance sheet at quarter end remains healthy with total cash of $598 million, and total debt of $706 million, bringing our net debt position to $108 million.

The slight increase in total debt outstanding from the end of last quarter, relates to changes in currency rates on our Euro denominated borrowings.

Our total debt to total capitalization remains low at 20%.

Our borrowings at quarter end primarily relate to a EUR300 million note coming due in 2012, and a EUR200 million note coming due in 2013.

There were no borrowings under our revolving credit agreement at quarter end and availability was at $396 million.

Now let's take a look at our fourth quarter outlook.

Our staffing markets continue to see strong cyclical and secular growth through the third quarter and the start of the fourth quarter.

Since it was about this time last year that we began to see meaningful revenue improvement in many of our markets.

The prior-year comparable numbers, could result in a moderation of year-on-year growth.

Nevertheless, we expect good growth in the fourth quarter.

And, remain focused on utilizing available capacity in our network, resulting in strong incremental operating profit margins.

For the fourth quarter, we are expecting consolidated revenue growth to range between 19% and 21% in constant currency, which will result in reported dollar revenue growth of 16% to 18%, based upon current exchange rates.

We expect revenue growth in the Americas to be in the upper 40s on a reported basis and low to mid 20s on an organic basis.

This compares to organic growth in the third quarter of 31% in constant currency, which reflects the more difficult prior-year comparable numbers in the fourth quarter.

Similarly, we expect growth to moderate slightly in France, EMEA, and Asia-Pacific segments.

But, are still looking for strong organic growth in the mid to upper teens across these geographies.

.

We expect our Right Management revenues to be similar to the third quarter revenue levels, reflecting a decrease from the prior year in the low 30% range.

With the realignment of Jefferson Wells with our professional business in the Americas, it will no longer be reported as a separate segment beginning in the fourth quarter.

However, we expect revenues will be similar to the prior year.

Our gross profit margin is expected to fall between 17% and 17.2%, slightly up from the third quarter and in line with the prior year.

Our operating profit margin should fall between 2% and 2.2%, an increase of over 100 basis points on the prior year.

This is before reorganization charges related to Right Management and Jefferson Wells, which are estimated to range between $20 million and $25 million.

Our income tax provision, which includes the French business tax, is estimated to be to 51%.

Excluding the impact of the French business tax, our tax rate is estimated to be 39%.

This results in earnings per share between $0.

54 and $0.62 per share, with a negative currency impact of $0.02.

This again is before consideration of the reorganization charges, which we estimate between $0.15 and $0.20 per share.

With that, I'll turn things back to

Thanks, Mike.

As you can see it was quite a stroke quarter for us.

The team did a very nice job in maximizing the opportunity, in an improving marketplace.

While, there is slight uncertainty from a macro perspective, which is creating some hesitation, it is proving to be a very good secular trend catalyst for us and our industry.

We continue to see the expanded use of flexible labor in all economies, as a critical component not only to deal with the uncertainty.

But, also the compressed product life cycles, where you need talent for shorter periods of time.

So, while it could be considered precarious, from one vantage point, from ours it is beneficial.

Having said that, no doubt a faster paced economy would also be positive for us.

As companies have very little excess capacity in their talent and therefore would need us to help fill in those needs.

In that scenario we would experience stronger growth in a more concentrated period of time.

Also, our permanent recruitment business, which is already performing well, would be much more accentuated in that type of environment.

Last quarter I talked about four strategic priorities.

Our digital strategy, the adherence and expansion of Manpower Experience, developing new sectors and services at higher margin businesses, and expanding our professional staffing area.

All four of those strategic priorities continue to be funded and developed nicely.

For example, in the Manpower Experience, which is a structured experience for all of our offices to execute, to enhance the intake and assignment of a candidate, has been validated.

In the United States, for example, Career Builder just announced the net promoter scores, a way of evaluating how much you would have the hearts and minds, if you will, of the candidates, for our industry.

And, we finished in the top 1% for candidate care in all of the industry.

This type of performance is not by accident.

It's fueled of course, by our culture.

But, it's also fueled by a defined process, which we follow.

We are also getting solid traction in the area of workforce solutions, which allows us to operate at many different levels within an organization.

Our suite of offerings, based on our combined assets is unique within the industry.

Other companies may have the various lines of offerings that we do.

But, they're not approaching the client in the same cohesive way, with an engagement management team.

And, the ability to apply the expertise across the lines of business to create a workforce solution.

We are slowly but surely changing the book of our business and our mix, evolving towards more solutions.

Solutions to our staffing organization, our professional services and staffing organization, as well as Right Management.

As we progress in 2011 we will be sharpening our brand, to reflect innovative workforce solutions.

Differentiating Manpower Inc.

from the working brands.

And, having a more cohesive strategy regarding the brands in professional staffing will also be part of our plan in 2011.

All of these projects are underway and on track.

And, as we roll into 2011, we are confident we will be differentiating ourselves even more, which will have a positive operational and a market impact to our organization immediately.

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

Thank you.

We will now begin the question and answer session.

(Operator Instructions).

We have a question from Andrew Steinerman with JPMorgan.

Good morning, gentlemen, great job.

I want to talk about Manpower US operating margins.

Obviously this is a quarter were incremental operating margins have kicked in even though revenue growth has been strong all year long.

Why is the third quarter where it really kicks in?

Is there anything, let's say one office not sustainable, or do we expect strong incremental operating margins in the US in the fourth quarter as well?

Thanks, Andrew.

Overall, we're in an environment where we're really looking to utilize that capacity in the network and I think what we're able to do is do a good job of that in the third quarter.

So that, as you know, that's been the strategy, that's what we've been working hard to do, and so we were able to drive that incremental margin down to the bottom line.

Nothing too unique in the numbers, or one time-ish.

I did make a reference to some help on the gross margin line related to the Hire Act which is a program that the US has in place to reduce Social Security charges related to individuals that have not been employed for some time.

So that was a benefit and that added a few million to the gross margin line.

I would expect some benefit in the fourth quarter, as well.

But I would say I think the US is executing quite while, doing a great job trying to work back that gross margin.

Still have a long way to go there yet but in the meantime really filling in the capacity in the network.

Mike, could you just round out, America's up 47% to 49% constant currency in the fourth quarter guidance, what would be the organic number in that, in the fourth quarter guidance for America's revenue?

For the Americas revenue would be organically, the US market is in the low 20s.

I think the Americas revenue organically is going to be in the mid- to upper 20s.

I can take a look at that, Andrew, to get the exact number, I don't have that exactly right here.

Perfect, thank you so much.

Next is Gary Bisbee with Barclays Capital.

Hi guys, congratulations on the quarter.

Maybe I'll start, Jeff, with your last comment on branding.

Adecco recently cited studies they've done that purchasing managers, their view towards the core Adecco brand hurt them in professional, and they rebranded a lot of that under the MPS brand they recently acquired.

I know you've talked a lot about Manpower Professional, and branding that as a unique entity.

But have you given any thought to a broader branding strategy within professional?

No doubt.

We've been working on where we're going on our go to market strategy for about 15 months right now.

So we have the research.

It will be rolled out in a way that allows us to capture the margin but yet still have the power of a Fortune 120 company behind it.

So I think what you would find in there is that it's going to give, and in some ways I don't really care about the purchasing manager in what were talking about here, I'm caring more about the CIO, the CFO, the engineering manager.

And we've done research on there for names and what it will be called and are quite comfortable with where we're going right now.

So you'll be seeing that as we move into 2011.

And inside it's causing quite excitement and energy because we do believe we're going to be able to take market because of where we're going with this.

Another high-level question, what has the growth in use of these vendor management systems by big corporate users of staffing done to gross margins of the business over the last couple of years?

And do you have any sense of where we are in the adoption cycle?

Is this going to continue to be a big headwind for you over the next couple of years?

And the second part of the question, are you seeing any volume benefit or has there been any share gains as vendor lists consolidate a little bit under the use of those systems?

It's a good question.

One of the things is there's pretty intense differences in definitions.

So when you look at MSP in general, there is multiple versions of MSP.

A recent report came out that we are the largest global MSP provider in the vendor neutral space throughout the whole world, and that just came out through an SI publication.

Our view is that we think there is some downside on MSP.

I think that some of the clients are not benefiting from having a close enough relationship with those that are supplying the talent.

Having said that, we have a very defined and outstanding team in our MSP world and what we are finding is that, while you will see, in some cases, some depressed margin at the supplier side, in some ways, because of our size in MSP we're making it up because of the margin we're making on the fee.

So from our perspective with our size and strategy it becomes a neutral because we're playing both sides.

And those groups are completely separate.

We keep separate companies in separate names so that we really are having the best interest of the client in mind.

To give you some statistics, we would see that over the last three or four years within the US market we're growing to in excess of 60% of our tenders, or our bids coming in in the US market involve some form of MSP.

On a global basis it's starting to roll out, but quite slow.

And in some global markets it's actually illegal so you can't do it in that way.

But we have the ability to help the client navigate with that.

From a volume benefit perspective, there is some volume benefit and my guess is that we're picking up some of that.

We think that this will have a life cycle to it.

And two years from now, when the talent is in shorter supply and you're sending out in a neutral environment without a first right to fill accountability, I think some of our clients will be disappointed in the ability for them to get the people when they want.

And we think the model may have a little bit of a change at the time.

But right now we have a great MSP organization.

It's balancing off our margins.

And what we're seeing is we're satisfying clients and we've been able to integrate the multiple MSP systems to our front offices which makes it more efficient, as well.

And just one question on the current fundamentals.

It sounds like your perm is incredibly strong given what lackluster total payroll growth in the US and the major markets in Europe are.

How do you explain that?

And is there any risk that that really decelerates or is there some sense of just significant churning within the employee bases of your customers, and there might be some leg to that?

I think what you're seeing is just a different way in which companies are hiring.

So you're right, the BLS numbers are still on the poor side.

But basically if you look at the numbers in the private sector in BLS that are being hired, because of how companies have shifted the way they're doing hiring, we're getting more than our fair share on that.

In the past that would have been a very small inconsequential percent.

Right now because of the temporary to conversion fees, as well as our presence within the permanent recruitment market, we're actually being a larger percent of that hiring.

We do believe, and are seeing from our clients as we get further into it, some 12 to 15 months right now into the recovery, is that perm is, as Mike said, it's got some very good numbers to it.

And we think it's just begun.

Normally you would see a little bit more robustness coming out at this time in the cycle.

But it's muted because of the slower demand.

We think that when we get into 2011 we're going to start picking that up even more than where we are now.

Mike, anything to add to that?

No, I think that's a good summary.

Before we take the next call or maybe just to refine my answer to Andrew's earlier question on the America's organic growth rate, I would expect it to fall somewhere between 22% and 24%.

So just to clarify that a little bit further.

Next question please.

Next is Mark Marcon with RW Baird.

Next question please.

Next is Vance Edelson with Morgan Stanley.

Hi guys, thanks for taking the questions.

Do you have the sense that you're taking market share in the various geographies?

And if so to what extent, and would you chalk it up to keeping the platform intact as you say during the downturn, or are there any pricing dynamics involved to take share by leveraging your pricing advantages to any extent?

It's hard to tell.

We're one of the first that are coming out so from a this quarter perspective, we don't know.

We do know when we look at some of our larger competitors over the last six quarters, anywhere between 4% and 6% every quarter we have outgrown them from a revenue perspective.

I've said it in a few of the different conference calls as well as some individual investor meetings, I really believe it's two things that are driving that.

One is we have kept our office structure in place and we now are starting to hear that our competitors are adding back that office structure that they closed less than 10, 12 months ago.

But in addition to that, so we've got the office structure, but in addition to that we're in the third year, maybe three-and-a-half years of a program that is a very organized sales program.

We have sales force.com, we have sales training, we have engagement manager, client lead team managers.

They must pass tests and take sales courses on a global basis, we have sales forums.

So I think our sales prowess, our sales ability, our sales ability at higher level, our sales ability to create a unique offering and have a discussion at a higher level within the company has all improved exponentially and that's driving some of this.

When you look at pricing in the US we're dropping off bottom pricing, so what you're seeing in growth in the US is including us walking away from tens of millions of dollars in just this year alone.

And we're doing that in 'other places, as well.

There are times where we've had to sharpen our pencil more than what we want.

But the analysis we do is every one of those accounts are reviewed by our executive team and we are not giving on price unless we have a certain account where we just can't give that up because of what it might do to that geography.

My view is it's not pricing, it's the office structure and our sales ability.

That's great, thanks for that.

Mike, on the cash deployment plans, it sounds like you remain inclined to return capital to shareholders if the compelling growth of m&A opportunities don't present themselves.

Could you just share with us your current thinking on how you'll balance growth with return on capital going forward?

As you look at that, clearly funding growth and growth opportunities is going to be important for us.

All of that while making sure that we maintain the strength in the balance sheet, as well.

I think one of the things that served us quite well in this downturn is our balance sheet was rock solid.

We were able to make some moves during the downturn without having to worry about having debt payments staring us in the face.

Clearly our view is to maintain a strong balance sheet, maintain an investment grade rating which we've held throughout the downturn, and then it will be a matter of whether there are acquisition opportunities that really fit the specialty strategy that we're after.

They'd have to fit that window.

And short of that, if we're accumulating cash we may look to get some of that out to the shareholders.

This last quarter, we did repurchase a small amount of shares, 800,000 shares, which averaged about $44 a share.

And some of the thought on that was that we were buying back some of the shares that we had issued out on the COMSYS deal, which we issued out 3.2 million shares at an average price of around $58.

So this just gave us an opportunity to bring some of those shares back in that we did in the acquisition.

Keep up the good work, guys, thanks.

And next is Mark Marcon with RW Baird.

Good morning and congratulations.

Can you talk a little bit more about France in terms of how you're thinking about things over the next year?

What's embedded in the guidance in terms of thinking about the strikes as well as the potential payroll tax change?

I'll let Mike cover some of the payroll tax change.

He addressed it in some of his prepared comments.

But we've got some experience, recent experience, on the strikes.

And what I mean by that is we're getting weekly numbers.

So the strikes that have been occurring over the last three weeks, one of them was on a Saturday, so it didn't have any effect at all.

The ones that were not, we have not seen it in our numbers, so it has not shown up.

When we're looking at a fourth quarter forecast, we right now are not factoring in that much of a disruption.

Of course, as the situation may get a little bit more tense, you could see more weekday shutdowns that affect more of the commercial side of France.

But our view is that there is workarounds and the people there are understanding what's going on and plan accordingly and work in different ways.

To answer a broader question as we look at the next year, we do think that there are, and will continue to be, a lot of heavy lifting in France, primarily in two areas.

One is clawing back some of the margin on the core staffing, and the other is to improve the mix of business.

And improving that mix of business, which we will do, there is no doubt, and we're already doing that.

The challenge is that the one side of the business, that classic side that we've had for the last 55 years, is so very large it's difficult to make that switch quickly enough to have it show up into the bottom line.

But you can be assured that's where the team there is working on it and we have some very good plans on it.

Mike, do you want to take some of the subsidy questions?

Sure.

On the payroll tax subsidy, which I think many of you know, part of the way the payroll taxes work in France there is a credit, if you will, or payroll tax subsidy for employing low wage workers as they're defined in France, Not only in our industry but really across the whole market.

There's discussion right now that they would change the mechanics of that calculation from a monthly calculation to an annual calculation.

Needless to say, the calculation is fairly complex but the net result of that would be less payroll tax subsidy or an increase in our payroll tax costs, if you will, as a result.

It's not final yet, so in terms of the exact impact it's difficult to assess the exact impact at this point in time, but we do think that it's likely that there will be some change going into next year.

I think maybe the analogy maybe in the US is state unemployment taxes.

As you see those go up, it's a bit of a similar situation where our contracts allow us to pass those on to our clients, for the most part, but yet it still can be a negotiation.

So you begin the discussions with the clients, and our full intention is to pass this on to clients but there could be some delays with some of the discussions, some of the negotiations and that's what we're going to be working on.

Our, really, our intent is to get that passed on.

But similar to state unemployment tax it's somewhat also dependent upon what the marketplace does and what our competitors do.

Clearly our view is that this is a cost that should be passed on and otherwise we're just further commoditizing our industry.

So our intent is to fully pass this on to our clients.

In terms of impact for fourth quarter guidance, there's a moderate impact, considered as the last payroll of the year happens actually in early January, so there's a modest impact, but very modest at that.

So it sounds like on the strike front, no big change from what we've experienced over the past 16 to 17 years in terms of magnitude.

We've gone through them before, we'll go through them again.

It shouldn't impact the value of the Company, just given a one, two day type impact.

And then from the payroll tax perspective, nothing like what we ended up seeing back a few years ago in terms of the big change.

It sounds like this, at most, may end up being 20 to 50 bips max for a couple quarters.

Is that about right?

I don't know that I want to put a number around it.

In terms of, again it's premature.

I think the overall increase could be a little bit north of 50 basis points overall, but I think it is a little bit early, and then it's a matter of how much we can get back and when we get it back.

But this will get clarity through the fourth quarter and so I'm sure we will be discussing that as we have a little bit more clarity on it.

Two completely separate areas.

Germany obviously seems to be doing extremely well, and given the size of that economy it looks like it has tremendous long-term potential.

Can you talk a little bit about that?

And then also can you talk a little bit about what you're planning to do with Jefferson Wells and your accounting business, just a little more color there.

You're right, Germany is doing quite well.

And I had an opportunity last week or the week before to spend three days in Germany in our German organization.

It is going extremely well.

Our clients are looking for two things.

You've got two nice pistons firing there.

One is that they have good growth in their economy.

And second is that because of the talent shortage, and more of the talent shortage, their need for flexible labor and how you bring in flexible labor is very much appreciated.

Much more than in the past.

So as a percent penetration of our industry we're going to see that continue to move up.

We are already seeing it move up.

The German economy therefore is strong.

It fits.

A lot of it is into mid-sized manufacturing which is a very good spot for us to be in.

And because of our national footprint across both Eastern and West Germany, my confidence on the team is we're going to continue to do very well.

On Jefferson Wells, Jefferson Wells we are as excited about it as the day we bought it.

There is great opportunity in finance and accounting.

Right now it is going through a lull, and if you look at the research and what's going on in the marketplace, the project that were considered non- discretionary our discretionary, and CFOs like ours are holding down some of that.

And there's less variables, the controls, the SOX work, things like that are more well understood.

This strategy we have had in mind for some time.

And that is to have very very strong vertical strategies.

Experts selling to experts and experts delivering to experts.

So what you're seeing in Jefferson Wells is really twofold.

One, the reality is that we think there is some good opportunity to make sure that we're leveraging our infrastructure and selling across the board.

And the second is more of a longer-term strategy of having well-known, top-shelf, top class verticals that when you talk about a vertical within the Manpower group of companies, that vertical is the best you're going to find in the marketplace.

And that's what we're doing with Jefferson Wells.

Thank you for the color.

The next question comes from Jeff Silber with BMO Capital Markets.

Thanks so much.

I just wanted to return to France for a second.

If you look at the underlying reason for the strikes, it's dealing with proposals for pension reform in the country, including raising the minimum retirement age.

I'm just wondering over the long term what impact that might have on your business?

It's interesting.

I feel badly being an American and making any comments on French politics because it is very complicated.

You're right, the strikes on the street are really taking a stand from moving from 60 to 62 which is all part of what really precipitated from spring which was some forms of austerity measures to make sure your debt from a country level and GDP percent is below a certain level in order to be within the EU guidelines.

So that's what you're seeing happening.

Having said that, additional two years -- France right now is in such a very difficult environment when it comes to demographics anyway.

The ability to move from 60 to 62, in other words, create 24 months more of working, it would be on the margin to affect us.

We believe there is such a tremendous amount of opportunity.

Secondly, this still will not take away the legs that were given to us three, four years ago that said that we could, by law now, be able to sell within the public sector.

And remember, what we are primarily talking about here in 60 to 62 is public sector workers.

So really what we've got here is on the margins a slight change.

Over the period of time and our ability to penetrate within the public sector, we still would view that as a longer-term play, meaning it will take a while to get some traction but still holding very good opportunity for us.

And my belief is, whatever it's worth, Sarkozy will and needs to push this through so it will go through, and you would not see an effect on our business.

That's helpful, thanks so much.

Mike, I think in your remarks when you were talking about the perm business in the US you specifically cited some of the conversion fees.

Are you seeing that kind of pickup in conversions across the world, as well?

Definitely.

It's a pretty broad-based trend that we're seeing.

Great.

And just a quick follow-up.

You mentioned some of the weakness, or potential weakness, in the UK public sector.

Roughly what percentage of your businesses is that?

It's roughly about a third.

Thanks so much.

And I want to quality on that public sector.

More than 50% of that third is sitting down at what would be considered the county level which is in less of a difficult situation, in some cases.

Still will have an affect on the business but I just want you to know it's not all at the federal level.

Next question.

Next is Paul Ginocchio with Deutsche Bank.

Could you just talk about the cost savings from the restructuring?

And then also second, Jefferson Wells, can they get involved in this mortgage mess in the US?

Is there any demand there?

Thanks.

I'll do the mortgage mess question, and then Mike you can do the restructuring.

We are involved, so we've got a public sector unit in Washington DC.

We are working and working with FDIC, and working with Fannie and Freddie.

And there are some conversations going on and we have currently been awarded some of that business.

So Jefferson Wells within that area does quite well.

In addition to that what we're seeing is some continued good growth in some of the controls and audit things like HIPAA and healthcare.

So when we look at it, and as Mike mentioned and I mentioned, we had 11% sequential growth in that business.

It's just that the baseline of it is not sizable enough.

So we are going to continue to run after all of that, and we think that the mortgage issue is also playing a greater role in the unemployment rate, without getting too complicated on that.

We think the lack of mobility within housing is creating a lack of mobility in the job market.

Which is creating an unusually high unemployment rate.

And we have made proposals to the government on how we think we can solve both sides at one time.

Jeff, as a follow up to that, is it mostly we need a lot more hours worked at the banks themselves instead of the FDIC?

Isn't that where most of the demand will come from?

Yes, but it will be directed through some of what's going on at the FDIC into the banks.

The second part of that question which relates to the reorganization charges that we're anticipating in the fourth quarter, which we think are in the ballpark of $20 million to $25 million.

We're still working through the specific plans in terms of what we'll be doing, both with Right Management and Jefferson Wells.

And needless to say, in our business it's primarily severance costs and office closure costs.

So in terms of payback on that, Paul, it would be premature to give you anything specific.

I think on the people side generally that payback would be less than a year, but on the office closure side it could be a little bit longer than a year.

So because we're not fully through the plans I think it would be best not to give specifics but I would anticipate, I would be surprised if we wouldn't see something like a one-year payback on that, maybe a little bit better than that.

Thank you.

The next question comes from Ashwin Shirvaikar with Citigroup.

Thanks, congratulations on the quarter.

The first question I have is with regards to operating leverage.

Is there a way you could perhaps quantify the excess capacity in the network and maybe incremental margins, some comments there?

Sure.

Excess capacity is always a bit of a challenge.

And, as you know, you never get demand exactly where you have the capacity.

But certainly were very key.

We look at it market by market.

We run metrics to understand exactly how much capacity we have branch by branch and within each market.

We've got quite a good view in terms of how far we need to go before we add people in the specific markets.

So that's how we look at it, that's how we monitor it.

When you back it up and say on an overall basis is there capacity of 10% to 15%, something like that, that's probably the range in terms of where we are now.

But at the same time, we're also trying to drive productivity improvements, as well, so it's not just about filling that capacity, it's also about continuing to drive productivity.

And as we look out at our overall margin targets and margin opportunity, that's an important part of what we're trying to do.

So that's where we're driving to and we think there is good opportunity to fill in that capacity as we move forward.

Broadly speaking heading into next year, if I said incremental margins were in the upper single digits, would that be a fair approximation?

If you look at incremental margins -- sorry, Ashwin, I forgot about the second part of your question -- in the third quarter our incremental operating margins were right around 11%.

If you take out the Right piece of the business, because that's going in a counter cyclical direction, it was just north of 8% with Right Management included.

If you look at our third quarter guidance, we'd be looking at incremental operating margins of something like 8%.

I think as we look at next year, assuming revenue growth continues on a good path, I think we'd still look at incremental margins that are going to be in the mid to upper single digit type range.

So I think there's still, obviously where we're coming in right now with an operating margin just north of 2%, clearly is not where we want to be.

We see a very good leverage from here and that's what we're going to be driving, as well as work on the GP side as well as driving that perm recruitment side which also will help our GP.

So we have a number of levers that we're working on and I'd expect we're going to continue to see good operating margin leverage through next year as long as the economy keeps moving along, which it seems to be right now.

Great.

Jeff, you mentioned one of your initiatives is new sectors and services.

Is there anything you can comment on today as to which direction you're headed towards, any particulars you can provide?

I mentioned a few.

One is that when you look at new services, the amount of money and investments we put into what we would call our business solutions area, and underneath that would be our recruitment process outsourcing which we are gaining momentum and continue to be one of the largest, if not the largest, on a worldwide basis.

What we're doing in the area of output -based pricing as well as what we're doing in the area of the MSP.

So that would be some of the new services that we're looking at.

Some of the new sectors is that more so in Europe than in the US we have a lot of concentration on healthcare.

In the EMEA group, Barb and her team have really been able to focus a lot on going after that business which has a higher margin business to it.

So those are the focus areas that we've laid out at the beginning of this year and we're executing well on those.

Great, thank you.

Next is Tim McHugh with William Blair & Company.

Thank you.

Two quick ones.

First, just on the operating margin guidance for fourth quarter, I think historically you tend to see flat to up.

Your guidance is flat to down.

I know it's not a big change but is that just you getting more aggressive on hiring or higher commissions for salespeople?

Any color on that.

And then second, you mentioned getting gross perm as a percentage of gross profit up to 15% hopefully over the cycle, given the growth you're seeing.

Can you update us where you are at this point?

In terms of operating margin and where that is going, it's a good question.

Sometimes we do see it flat to slightly up going Q3 to Q4.

The biggest difference here in this quarter is the fact that Right Management, we're expecting to look about the same in Q4 as it did in Q3.

Typically there is a seasonal uptick going into Q4 and that leverages profitability quite nicely down.

And right now we're looking for more of a breakeven type fourth quarter on the Right Management business.

So that's probably the biggest delta there.

A few other elements in terms of we have a few investments that are pushing, but nothing in a big way.

We're rolling out our front office in the US business.

We've got some work on the branding side that we talked about a little bit.

So there's a few other smaller investments but all in all I think that would be the big components.

And we're still looking at good year-on-year operating margin expansion overall so I think that's over a hundred basis points.

I think that's still working pretty good.

On the permanent recruitment side, as I mentioned earlier, right now we're at about 9% of our overall GP mix is perm recruitment.

Through the last cycle we peaked at about 12% overall, and so certainly to get to that 15% and beyond is probably into next year and beyond that.

But we really see, as we look at the opportunities and how the market is looking to us to provide regular direct hire but also recruitment process outsourcing solutions, we see good opportunity for that coming forward.

Our last question comes from Sara Gubins with Bank of America Merrill Lynch.

Hi, thanks for sticking me in.

Just a quick question on the restructuring costs.

Are you expecting that to be all done in the fourth quarter, or is there anything that would go into early next year?

Right now the expectation is that it would hit all in the fourth quarter and nothing would lag in.

But as you know the accounting rules are quite specific so I suppose there's a possibility that something could wiggle into the first quarter.

But in terms of magnitude right now I'd see that as the magnitude and right now we're really aiming for it all in the fourth quarter.

Okay.

On then on your temp help gross margins, by geography I'm wondering where you've seen the greatest erosion and potentially the greatest opportunity for those margins to improve over time?

I think when you back up from the overall staffing gross margins through the last cycle SMB was really hit the most dramatically relatively to key accounts.

We lost more ground on the SMB, the small medium market.

And really it was broad-based across all geographies.

The opportunity, of course, there is that as supply and demand comes back, we would expect the SMB market to come back as well, but that certainly will take time.

We'll have to get a little bit further into the cycle.

So I don't know that I would single out any one market as having more opportunity.

I think there is good opportunity and work that we need to continue to do and continue to focus on across almost all of our markets.

Are you starting to see anything on the SMB side, of it coming back?

I would say it's still a little early.

Certainly things have stabilized and we are seeing a few small signs here and there.

We have seen some traction in some of the markets in terms of what we've been able to do with mix of business within some of our larger clients.

And we've been able to sharpen up a little bit in terms of new pricing that is going out on new business coming through.

We've done some work in terms of some of the pricing grids that are in our offices and able to start raising that a little bit.

So I would say that it's still early times but certainly there are positive signs out there.

Okay, thanks so much.

Thank you all, thanks for joining us.

That concludes today's call.

Please disconnect your lines at this time.