ManpowerGroup Inc (MAN) 2011 Q3 法說會逐字稿

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

At this time, all lines have been placed on a listen-only mode.

(Operator Instructions)

I would now like to turn the call over to your Chairman and CEO, Mr.

Jeff Joerres.

Sir, you may begin.

Good morning, and welcome to the third quarter 2011 conference call.

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

I'll go through the high level results for the third quarter.

Mike will then spend time on the segment detail, as well as the balance sheet, and the outlook for the fourth quarter and full year.

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

Good morning, everyone.

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

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

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

Thanks, Mike.

The third quarter was a very solid quarter for us.

We expected to earn between $0.90 and $1, and we had earnings per share of $0.97.

Given the uneven economic environment that we experienced during the third quarter, the team around the world did a very nice job to achieve this result.

Our revenue for the quarter was $5.8 billion, a 16% increase in US dollars and a 9% in constant currency, at the midpoint of our guidance.

Our gross margin was 16.5%, which was in our guidance range.

We were able to substantially leverage the 9% revenue growth, and our increased operating profit went to $158 million, a 34% increase in constant currency which yielded a 2.7% operating profit margin, or a 50 basis point improvement over a year ago.

Our net earnings for the quarter was $80 million and our earnings per share was $0.97.

With that overview, I would like to turn it over to Mike to delve into the details.

Mike?

Okay.

Thanks, Jeff.

I'll begin today by making comments on the quarter, followed by a discussion of each of our segments, and then a review of our balance sheet and cash flow.

Finally, I'll have a comment on the outlook for the fourth quarter and give some initial thoughts for the first quarter of next year.

As Jeff noted our earnings per share for the quarter came in at $0.97 just above the midpoint of our guidance.

This included and $0.08 favorable currency impact which is slightly below our $0.10 estimate.

While the average euro rate for the quarter was as expected, some of the other European currencies such as the pound were weaker than expected.

Our constant currency revenue was up 9%, right in line with expectations, with each operating segment falling within the range of expectations with the exception of Right Management, which was slightly weaker than expectations.

Our second quarter acquisitions in China and India added about 1% to our growth rate, so our organic constant currency growth rate was 8%.

Our operating profit margin was up 50 basis points to 2.7%, also in line with expectations, as we were able to tightly control costs and drive productivity throughout our office network.

That resulted in very strong incremental operating profit margin of 9% on a constant currency basis, or 6% on a reported basis.

Included in interest and other expense in the quarter is a $1.7 million charge for foreign exchange losses, primarily related to inter-company balances.

This was a result of the significant movement in currency exchange rates during the quarter.

The income tax rate for the quarter came in at 45.9% just slightly below our estimate.

As a reminder this now includes the business tax in France.

Excluding the business tax, our tax rate was at 36.1%.

Our gross profit margin came in at 16.5% compared to 16.9% in the prior year.

Our overall gross profit margin continues to be impacted by the decline in the higher margin outplacement business which negatively impacted our gross margin by 20 basis points in the quarter.

While the impact was negative in the quarter, it is becoming less as we see the outplacement business stabilize on a year-on-year basis.

Our staffing GP margin declined by 30 basis points year-on-year due to a number of factors.

In the US, we had payroll tax credits related to the HIRE Act last year.

This accounted for almost 10 basis points of the decline.

In the French market, we have been raising prices to offset the impact of lower payroll tax subsidies.

While this has been successful, we have not yet fully recovered all lost subsidies.

This also negatively impacted our gross margin in the quarter by 10 basis points.

Additionally, we are seeing stronger growth from our lower gross margin light industrial key accounts at this stage in the cycle.

Overall, we are finding the pricing environment to be stable and we are keenly focused on improving gross margin.

In some markets, we are exiting some lower gross margin business and replacing it with higher gross margin business.

Our permanent recruitment business favorably impacted gross margin by 20 basis points.

In the quarter, we achieved a constant currency increase of 21% in permanent recruitment fees.

While the year-on-year growth rate has moderated some from the second quarter, which is up 25% in constant currency, this is primarily attributable to more difficult prior year comparable numbers.

Overall, we are still seeing good activity in the permanent recruitment market.

For the quarter, our permanent recruitment gross profit was 12% of the overall gross profit.

Now, let's review the operating segments.

Starting with the Americas, revenue came in at $1.2 billion, an increase of 9%, or 8% in constant currency.

Operating unit profit increased 25% in constant currency to $43 million.

The OUP margin expanded 40 basis points, which is due to strong growth in permanent recruitment, up 61% in constant currency and strong SG&A leveraging.

Our US operation, which comprises just over two-thirds of the Americas segment achieved revenues of $829 million, up 4%, and OUP of $32 million, up 24%.

Within the US we saw year-on-year revenue in each month of the quarter, with average daily staffing revenue in July up 5% and average daily staffing revenue in September up 2%.

Among our product offerings, we saw the greatest growth within our higher value professional and solutions offerings, which now represent 45% of our US revenues.

Our experienced professional business, which is comprised of IT, engineering, and finance, was up 7%, and our solutions business grew by 19%.

Our US gross profit margin was above prior year, even though the prior year gross margin benefited from the HIRE Act credits and lower state unemployment taxes.

This is due to successful price increases and in some cases, disengaging from lower margin business.

The gross margin also benefited from strong growth in permanent recruitment fees, which were up 57% in constant currency.

The RPO component for these fees was up 69%.

Expansion of the gross profit margin, along with strong expense management resulted in an operating unit profit increase of 24% to $32 million.

This represents an OUP margin expansion of 70 basis points to 3.9%.

Our Mexico operation continues to deliver a very strong performance with revenues up 19% and operating unit profit up 20% in constant currency.

During the quarter, we saw Mexico's average daily revenue growth improve in July, however it moderated in September to 14%.

Revenue growth in Argentina also remains strong at 27% on a constant currency basis.

This is primarily due to inflation, as our early volume was slightly down against prior year.

Revenue in Southern Europe came in about as expected, at $2.2 billion, an increase of 19% in constant currency, or 9% in US dollars.

Operating unit profit grew 27%, or 17% in constant currency to $50 million.

This represents an improvement in OUP margin of 20 basis points to 2.3%.

The operating profit margin expansion was due to strong expense leveraging as the gross profit margin was down in the prior year due to change in business mix and lower payroll tax subsidies.

In Southern Europe, France represents about three quarters of the segment.

Revenue in France was up 18%, or 8% in constant currency to $1.7 billion.

Average daily staffing revenue growth for France was fairly stable throughout the quarter, however, weekly growth trends have moderated to the mid single digits in recent weeks.

Our French gross margin was down from the prior year due to stronger growth from our lower margin key accounts and lower payroll tax subsidies.

Our efforts to pass on the impact of the lower payroll tax subsidies through price increases continues to be successful and we believe we will pass on the majority by the end of the year.

As part of our efforts to continue to improve gross margin and operating unit profit margins in France, we intend to continue conversations with our clients to better align pricing with the value of our services.

This likely will result in us exiting lower margin business over the next several quarters, which we look to replace with higher margin business.

Permanent recruitment fees in France were down slightly from the prior year primarily as a result of the winding down of the Pole Emploi contract.

Excluding the impact of Pole Emploi, permanent recruitment fees showed growth of 14%, but not quite as strong as the 24% we saw in the second quarter.

SG&A expenses were well controlled and increased only 1% over the prior year.

This SG&A leveraging offset the decline in the gross profit margin, resulting in OUP growth in the quarter.

Our Italian operation continues to perform quite well, despite all the negative headline news.

Revenues in the quarter came in at $321 million, an increase of 25%, or 14% in constant currency.

Gross margins were stable and expenses were tightly controlled, resulting in very good operating unit profit margin expansion of 150 basis points to 5.9%.

Revenue growth in Northern Europe was in line with expectations, growing 17%, or 9% in constant currency to $1.6 billion.

Operating unit profit was very strong, up 58%, or 47% in constant currency at $63 million.

This represents an OUP margin of 3.9% for an increase of 100 basis points.

This margin expansion was entirely attributable to exceptional cost control and SG&A leveraging as expenses were slightly below the prior year in constant currency.

Permanent recruitment fees remain strong in the quarter, up 33%, or up 23% in constant currency.

Our revenue growth was healthy across Northern Europe segment.

We did see some moderation in the revenue growth trend from the second quarter in most of our markets.

This moderating growth trend continued into the first few weeks of the fourth quarter.

Within Northern Europe, the Nordics continues to be one of the stronger markets with Sweden and Norway delivering constant currency growth of 12% and 11%.

We also saw slightly higher growth in the Manpower UK business, which was up 15% in constant currency.

While the UK market remains difficult and is somewhat impacted by cuts in the public sector, we have been able to pick up market share through strong execution.

Our UK operating unit profit margin continues to expand, with operating unit profit growth of 31% in the quarter.

Growth in our Elan IT business was 7% in constant currency, which reflects growth of 2% in the UK and stronger growth across mainland Europe of 14%.

Germany, Netherlands, and Belgium all grew in the low-to-mid single digits, but delivered very strong operating unit profit growth on good price discipline and SG&A leverage.

Operating unit profit margin increased 170 basis points in both Germany and the Netherlands.

Our Asia-Pacific/Middle East segment had a very strong revenue and profit performance in the quarter.

Revenues were up 26%, or 15% in constant currency, to $701 million.

This revenue growth includes acquisitions made in the second quarter in both China and India.

Excluding the acquisitions, revenues were up 6% on an organic constant currency basis.

Operating unit profit in the segment came in at $22 million, an increase of 64%, or 51% to constant currency.

This represents an operating profit margin improvement of 70 basis points to 3.1%.

This improvement was driven by higher organic gross profit margins and good expense leveraging.

The operating unit profit margin was not impacted by the acquisitions.

In the Asia-Pacific/Middle East segment, Japan is our largest operation with 43% of the revenue in the quarter.

Our Japan revenue was flat in constant currency, but up 10% in US dollars due to the strength of the yen.

Similar to last quarter, we continue to see contraction in the staffing market in Japan.

We were able to offset this contraction with strong growth in our higher value Manpower Group solutions business.

Our Japan team has done an excellent job working with our clients to identify progressive solutions to their complex human resource needs.

Our solutions business in Japan represents over 20% of the overall mix and grew 34% in the quarter.

We saw growth in the Australian market moderate to 10% in the quarter following strong growth of 20% in the second quarter.

The balance of this segment reported constant currency growth of 50%, or 14% on an organic constant currency basis, similar to what we saw in the second quarter.

We've seen the strongest growth in China and India, where China is growing over 70% organically and India is growing about 10% organically.

Revenue for Right Management came in at $77 million, which is down 9%, or down 14% in constant currency.

This decline was due to slowing in the outplacement business, which was down 22% in constant currency.

Right's talent management business, which currently represents almost 40% of the mix continues to see growth with revenues up 4% in constant currency.

The third quarter is always Right's seasonally low quarter, which resulted in a $2 million loss.

We are currently in the process of realigning our delivery network and cost structure with the current revenue levels.

We expect this will result in reorganization charges in the fourth quarter, which I'll discuss in a few minutes.

Now, let's turn to the cash flow and balance sheet.

Free cash flow, defined as cash from operations plus capital expenditures, for the quarter was a positive $100 million compared to a slight use the prior year.

On a 9 month year-to-date basis, free cash flow was a usage of $119 million compared to $98 million the prior year.

This greater use of cash for the 9 month period primarily relates to higher income tax payments and a slightly higher DSO compared to the prior year.

Our DSO for the third quarter was 61 days compared to 59 days the prior year, for an increase of 2 days.

This increase primarily reflects the stronger growth in the larger key accounts that typically have longer payment terms.

During the quarter, we also repurchased 618,000 shares for $24 million, bringing our year-to-date repurchases to 923,000 shares for $43 million.

As of quarter end, we have 2.3 million shares authorized for repurchase under our current program.

Our balance sheet at quarter end was very strong, with good liquidity.

Our cash balance at quarter end was $563 million and our total debt was $703 million, bringing our net debt balance to $140 million, or $75 million less than the prior quarter.

This resulted in a total debt to capitalization of 22%.

As of quarter end, our outstanding debt balance of $703 million was primarily comprised of 2 euro notes, totaling EUR500 million or [$668 million].

The first of these euro notes becomes due in June of 2012 and we intend to refinance in the public debt markets or through our revolving credit agreement.

In early October, we replaced our $400 million revolving credit agreement with a new $800 million 5 year credit facility.

Under the new facility, borrowings are at LIBOR plus 150 basis points, or under 2%, given current LIBOR rates.

The new revolver also requires us to comply with certain financial covenants.

However, the covenants under the new facility provide us with greater flexibility than under the old facility.

The last thing I would like to cover is our outlook for the fourth quarter and provide some initial thoughts on the first quarter of next year.

As we have been discussing, our clients are cautious in this weaker macroeconomic environment, but we are still seeing growth over the prior year in demand for our services.

In the fourth quarter, we anticipate constant currency revenue growth to range from 5% to 7%, which would imply reported dollar revenue growth of 7% to 9%.

We expect to see continued growth in the Americas and Europe, with constant currency revenue growth in the mid single digits.

Revenue growth in Asia-Pacific/Middle East is expected to be in the low double digits in constant currency.

However, this includes the acquisitions made earlier in the year, so on an organic basis, we are expecting growth in the low-to-mid single digits due to the stagnant market in Japan.

Our Right Management business is expected to be up sequentially, but still down on prior year, between 8% to 10%.

We expect our gross profit margin to improve sequentially by about 50 basis points, which is the typical seasonal uplift.

This would result in gross profit margin ranging from 16.9% to 17.1%.

Our operating profit margin is expected to range between 2.5% to 2.7%, reflecting an expansion of about 40 basis points on the prior year after adjusting the prior year numbers for non-recurring items.

While we are still getting good operating margin expansion in the fourth quarter, it is somewhat less than the year-to-date expansion of 60 basis points as a result of less opportunity for operating leverage with the lower revenue growth rate.

We are estimating our tax rate to be 46%, resulting in earnings per share before reorganization costs of $0.85 to $0.95 per share, which includes a favorable currency impact of $0.03 per share.

During the fourth quarter, we are anticipating a charge for reorganization costs of between $16 million and $22 million before income tax benefit.

This will range between $0.15 and $0.20 on a per share basis.

The reorganization costs primarily relate to office closure costs and severance payments as we look to realign our cost structure within the Right Management business and optimize our delivery of professional services as we certify our offices on the Experis brand.

As we look to the first quarter of next year, we anticipate a continuation of the current soft economic environment which will likely result in revenue and gross profit growth in the low-to-mid single digits.

We are focused on tight cost controls, which should result in some expansion of operating profit margins.

With that, let me turn things back to Jeff.

Thank you, Mike.

We did have a very solid quarter, a quarter that has shown that in a difficult economy, we still have a lot of opportunity to create operating leverage.

Revenue growth of 9% and earnings per share growth of over 40% is a good indication that as we continue to grow, we will continue to create operational leverage.

Our clients across the world are clearly looking for more alternatives to increase agility and flexibility.

Our industry clearly is the answer, and the way we are organized and our offerings as well as what we are able to do in-country and globally make us the most attractive in the industry.

We've been able to substantially grow our solutions business with an annual run rate of over $1 billion.

We're the largest provider in MSP and RPO, and we have a large talent-based outsourcing business where we do outcome-based pricing.

It is becoming ever-more popular as companies look to us to take on more responsibility using our expertise and our suite of services to help them win, but also create more leverage and margin opportunity for us.

Our branding, as updated last quarter, continues to resonate and get stronger and stronger.

We continue to launch additional Experis certified countries, bringing us to nearly 20 by the end of this year.

We are focused on driving the market and growing Experis to over $5 billion in revenue over the next 3 years.

Our emerging markets continue to do well with China growing over 70% before acquisitions.

Our Borderless Talent Solution, which facilitates the movement of people from one country to another, is a great driver of gross margin and is a very well accepted and lead to service that we have within the emerging markets.

No doubt, the economies will continue to be choppy.

There are too many potholes yet to be filled in across the world, but as those are filled in or not, we are confident that our strategy is intact and that our execution is getting better and better.

We continue to address the gross margin in our core staffing business, through creating more value.

But also, by deselecting clients.

Year-to-date, we have walked away from in excess of $200 million on an annualized basis of existing business throughout the world that we determined the margin was too low.

This has been repeated and must be repeated as we get and secure more small-medium size businesses, and also secure more business in the Manpower Group solutions space.

We are taking share in many of our locations, but we're not doing it at the expense of price.

In fact, we're doing it because of the value we offer our clients.

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

(Operator Instructions)

Our first question comes from Tim McHugh.

Your line is open, and please state your company.

Yes, hi, William Blair.

First, I want to ask if you could talk a little bit more about the UK.

You talked about strong execution there, but the growth was much stronger than I would have expected.

Can you just elaborate a little bit more on what you're doing there to grow faster than the market?

Hi, Tim.

Jeff.

Yes, of course.

It's actually been a continued story.

So if you were to look back, it's probably almost 2 years now, where we've been outperforming that market and those who follow very closely know that, that's quite a difficult market from a margin perspective, and then, as you mentioned most recently from a revenue or turnover perspective.

We did some major changes in our organization about 4 years ago and we're still reaping the benefits of that.

So, our ability to have a better suite of solutions, but also a better mix of clients has really improved our performance there, and we believe that -- we know we're well above the market and have a sense that for some time we will be.

We also have another proxy within the UK market, which would be our Brooks Street brand.

And our Brook Street brand, and our Brook Street brand is probably following a bit more of the market, and we're looking at making sure we make the appropriate changes there so that we can get the same growth at what we're getting out of the Manpower brand in the UK.

But I would chalk it up to a reorganization done a while ago, good execution, and a great balanced book of business.

Mike, do you have anything to add to that?

No, that's right.

We've got a strong team there and they're executing very well.

Okay, and then, Mike, you gave a little bit of comments about Q1 and the revenue growth.

But I wanted to ask about the second part of your comment, which was you said you think you can still expand margins a little bit, even with low single digit to mid single digit growth.

Beyond just Q1, but I guess as we thought about 2012 and 2013, how should we think about margin expansion relative to revenue growth, if it's in the mid single digits versus low single digits or high single digits?

What type of expansion can you achieve?

Clearly, as always, the objective is trying to continue continuing getting our operating profit margin up and towards our overall target of 4%.

So, that's what we're focused on.

Clearly, it gets more difficult if the top line growth comes down.

But as I said in my comments, we would still look to achieve some operating margin expansion if we're in the mid single digits.

Clearly not what we've seen.

This last quarter, we picked up 50 basis points, and the fourth quarter, we're looking to pick up something like 40 basis points.

We certainly have seen good expansion this year.

I think if we see a little bit slower growth next year, we're not going to see quite that operating margin expansion, but we will see -- do look to see some.

It will depend a little bit upon what's happening underneath.

And by that, I mean if you have some countries that are putting up some growth, but then you've got other countries that are actually contracting.

That delevering in some of the countries could impact the overall margin expansion picture.

So, it will depend a little bit about how things come.

But we're focused on that, and we're thinking we're likely going to be in a slower growth period.

We're careful on costs and at the same time, we're doing a lot of work, as you've heard, in terms of remixing our business, getting more professional, more solutions business within that mix.

That should also help the overall margin profile as well.

Okay, great.

Thank you.

Our next question comes from Mark Marcon.

Your line is open, and please state your company name.

R.W.

Baird.

Good morning, Mike and Jeff.

I was wondering, could you just give a little bit more color with regards to the monthly trends in 4 major markets, the US, France, Germany, and Italy?

Sure, Mark, we can certainly do that.

As you look at the US, I would say things were fairly stable on a year-on-year growth rate in July and August and then we also saw a little bit of tail-up a little bit in September.

As we got into October, we saw a little bit further slowing as well, but we're still seeing positive growth within the US market.

I think 1 of the important factors within the US market is, we are trading out some revenue growth for some margin at this stage.

We could in fact be running a little bit behind market, but that's a conscious decision.

We're looking to replace some of our lower margin business with some higher margin business.

And I would add to that, this is the most aggressive we've been in the last 2 quarters and particularly this quarter, because we've been able to mix the business with some of the solutions business.

So, we've gotten much more aggressive in going to clients who would prefer to have as clients, but have said, you know what, we're just not going to do it at this rate, how can we make sure that we do the right thing to get it at a better rate or to move on?

So, this quarter, we were quite aggressive on that as well.

That affected the trends a bit, but you also then see, the US came in at 3.9% operating margin for the quarter, which you can start to see some of the effects of that trade-up.

Sorry, Mike.

Yes, good.

In the case of France, July and September were both up in terms of average daily revenue, about 9%.

August dipped down a little bit to 7%.

I wouldn't make too much out of that just because of the August holiday period there, and how that can move the numbers around a little bit.

But we did see the last few weeks, early October, we did see things tail off a little bit within the French market as well in terms of year-on-year growth.

In the case of Italy, which really did quite nicely in the quarter, up 14% overall revenue wise, we saw about 13% growth in July.

That went up a little bit in August and then came down a little bit to about 12% in September and we're seeing the first few weeks in October a little bit weaker, but still good growth.

Still double digits.

And then in the case of Germany, there we saw revenues start out a little bit stronger in July, up about 6% in July, and then tail off a little bit as we made our way through the quarter to bring in the full quarter growth of, I think it was about 4% overall for the quarter.

Actually, no I guess it was 3%, sorry.

I think the general theme is, we had a little bit of a choppy July, which falls in a lot of what you see in the external market.

August, even though it was seasonally low, got a little bit better.

September started to plateau.

What we've seen recently is just that plateauing with a little bit more of a come-off.

Nothing dramatic, but I think you can now just look at those 4 countries and see where we've guided as we get into the fourth quarter and why we've guided the fourth quarter the way we have.

In terms of Germany, do you sense it's more of being selected?

Because Jeff, I'm hearing you -- it sounds like a recurring theme in terms of really focusing on selecting the right clients and offering the right solutions and positioning yourself for the clients that truly value all of the services and the higher value-added services that you provide.

Is that's what's going on in Germany, or is the German market also slowing?

Well, I think the answer is a bit more of a multi-part to that for us.

We are maintaining and have a pretty solid view of what we want from a gross margin perspective.

We've seen that come down slightly, but we've been able to hold that up.

The German market also is suffering dramatically from the lack of skills and talent.

It probably has the most dramatic effect and in fact, there's been some recent writings in just the last 2 weeks that it talked about the industry being governed down a bit by not being able to find the right talent to put onto an assignment.

And then the third area is we have more work to do as a company there.

At the end of the day, we're not as sharp as we need to be.

I'm very confident with the team we have there, but we've got some work to do.

So, I would say all 3 of those factors kind of end up with the result that Mike talked about in the trend.

I think it's a little different than what you would see in the Dutch market.

The Dutch market, we are seeing a bit more of a slowdown.

Some there would say that it's just matter of time before the government announces they dipped into a recession.

And the Dutch market for us, we're back on market and maybe a little bit above market.

But it's a market that's a little sluggish right now, and never really got on its feet coming out of the, this little brief period we had coming out of 2009 into 2010.

That market, I would say, is the 1 that feels more squishy actually than Germany right now.

Right, and can you just -- this last question, can you talk a little bit about the expected savings on the Right Management charges?

Mark, I think I'm going to just hold off on that until next quarter.

Certainly we have some ball park figures and some ideas in terms of where that's going to go and how that should play out.

But in terms of specifics, I think it would probably be best for me to wait until we actually release that next quarter and how that's going to lay in.

But suffice it to say, we do expect we're going to get savings next year on some of the restructuring charges that we take in the fourth quarter, no question.

I want to add a little to that.

The savings are something that we've had in mind for a long time, and much of those savings actually move around and with our brand strategy, as we have ManpowerGroup, we're trying to make sure we consolidate some back offices, do the right things from being client facing, look at our real estate footprint where the brands now have a much closer look together.

Some of them can be co-domiciled and still maintain very strong brand presence.

So, all of these things -- I should say not all, but so many of them are actually in place prior to any kind of sluggishness that we're seeing.

So, we've got a very robust plan to make sure that those brands get stronger and stronger.

But at the same time, the non-client facing expenses, if you will, become much more efficient.

Great, thank you very much.

Our next question comes from Kelly Flynn.

Your line is open.

Please state your company.

Thanks.

I'm from Credit Suisse.

Thank you.

My question relates to the comments you made about light industrial I think in the early part of the call about that slowing.

Can you get into more detail on that, specifically does that comment apply to the US, relative to other verticals in the US, or is that more reflective of the mix shift in your business related to other regions?

I think, Kelly, when you look at light industrial, clearly in our industry follows pretty close to PMI and where the overall production and manufacturing is going.

And, as I know you follow pretty closely, the US is hanging just above 50 and Europe is bouncing around right below 50.

So, clearly, demand for our services has been impacted by that.

When you look at the different verticals and sectors that we're in, the French market is more of a light industrial market and that 1 held pretty good, up pretty good through September and it's still holding okay in October, despite more -- a little bit weaker macro trends overall.

But we're seeing it come off a little bit.

In the US, what we've seen is, we're still seeing some growth in light industrial business overall.

That said, and our office business is actually a little bit weaker than light industrial, but it has been coming off a little bit of that.

PMI data has weakened a little bit as well.

So that's the overall picture.

And I would also say that what we're seeing, which is no surprise, in light industrial, they have gotten very quick.

What I mean by that is, the agility the companies have, as they see their backlog maybe climbing or they see some additional data, they are trimming off relatively quickly.

That doesn't mean we're losing assignments or people out on assignments.

We're seeing a little bit slower growth.

We're also seeing shorter assignments.

And the reason that organizations or companies want shorter assignments, and that's not just a US phenomenon, that's across Western Europe as well, is it just hedges their bet.

So, we're seeing good secular trend, more positive trends than we've seen in the past in light industrial, and if we can get any kind of relief and actually get any kind of pull again with product, we're going to see that bounce back pretty quickly, because most of our companies we're dealing with, they're running it as thin as they can run it right now.

And they're just waiting for a little bit more demand to come through the system.

Okay.

Can you address sort of the same question for professional, in particular, IT versus financial, and US, as well as Northern Europe, kind of pick out -- pick apart the trends there a little bit?

The trends actually have been relatively consistent.

What we have been seeing for the last 3 quarters is that IT has more energy behind it as companies continue to drive application development to increase efficiency and productivity within their organizations.

We, in the US, just a little kind of an aside, our numbers actually look quite positive and we continue to do quite well.

We've had a couple large banks that have trimmed a few of their projects.

So, even with that, we're showing some good growth.

But I would say IT, whether it be in China, in India, Japan, UK, Germany, those would be the main ones, Sweden actually, are by far the biggest drivers and continue to have good outlooks.

But a recurring theme is we're also seeing a bit more churn in the professional.

So, you clearly finish your assignment that you're on or your engagement, but the ones that we're getting now, instead of maybe being 6 months are 3 months.

And it's an agility strategy by the client.

Engineering did start to feel some life in the middle of the quarter, and that just has to do maybe with more of our book of business than the others.

And then in the finance area, we've now integrated the finance into Experis and it's going quite well.

Our largest finance, really, comes in the US market, as well as the UK market.

Both of those have a little bit more positive to them than they have had before, but they're lagging the other 2 verticals.

Okay.

Could I just ask 1 more?

I was struck by what you said about Italy.

I think you said despite the headlines, you're seeing strength, and then you got into some detail.

Jeff, could you just make a high level comment on that?

Do you think that the slowdown in your business is lagging the headlines, or are you implying that the headlines are overblowing the weakness?

Well, clearly the headlines are overblowing the weakness.

But, I would also say that the headlines are extremely macro in nature, and I think this is the biggest thing that we're challenged with as an industry, as a Company, and maybe -- I don't want to get into societal issues, but it's a pretty big deal.

And that is, when we're talking about sovereign debt and focusing on Greece, and looking at what's going to come out on the Sunday meeting, and then extrapolating it to Italy and Spain, these are issues that maybe, depending on the economist, a year away, 18 months away, 2 years away.

So, they're talking about if we continue down this path, this is what will eventually happen.

And it's clearly affecting the banks and it's taking a lot of attention as it should be.

But, that is not affecting buying habits on the ground today.

So, the question is, does the macro meet the micro?

And the way it does that is if nothing gets done, and I don't have high hopes for Sunday, and it's not because they are not working hard.

You can't solve this in 1 little get together.

I think this will be solved in pieces.

So, when you're seeing and we see double-digit growth in Italy, it actually makes sense to me.

Because on the ground, there is some concern on the macro issues, but business is happening.

Midsize manufacturers would dominate Northern Italy, still continue to hang in there.

The question is, as we get closer to the macro meeting the micro, are some of these problems solved?

And if so, I think we continue to feel pretty good in Italy.

If not, then Italy would be affected more along the lines of the headlines, as opposed to what you're seeing right now.

Okay.

Thank you so much.

Our next question comes from Paul Ginocchio.

Your line is open, and please state your company.

Hi, it's Deutsche Bank.

Your program growth both in the US and Europe seems like it was very stable.

I think 59% in the second quarter, 57% in the third for the US.

I think you said it's 25% in the second and 23% constant currency in the third.

Again, that's almost no deceleration.

Can you maybe talk to, is that share gains?

Is the actual perm market in both markets still that strong, or is there something else going on that we're missing?

Thanks.

Thanks, Paul.

I do believe it's some share gains.

We came into existence from any kind of serious position in perm in about 2002 and we exited the last cycle somewhere around $500 million in GDP in perm worldwide, and we're already at that.

So, we have much better base.

Our RPO business is quite strong.

But I would also add that perm is just a bigger pie.

Companies are doing business differently.

They are no longer having recruiters in-house.

They are no longer doing some of these things themselves.

I think as an industry, and we've talked about this for sometime, as an industry, we are now having a new adjunct to the core part of our business, which in some cases depending on country might go all the way to contingent search, and in other cases, it's temp to perm, which we see very good temp to perm in the US.

So you're still seeing some confidence by the companies out there.

We continue to put emphasis.

We continue to hire recruiters.

My recruiters in many of our locations are maxed out according to our productivity KPIs.

So, we're looking at adding a few more, but being judicious based on what we're also seeing in the economy.

So, I would say we're doing well, and it's off of a share of a bigger pie because the clients are doing business differently.

And from your answer, it sounds like you haven't seen any sort of weakness in perm that worries you?

No, if we look at our weekly numbers, our weekly numbers feel good.

But we've been in this business a long time.

So, that 1 doesn't give you a whole lot of glide path.

If things get bad, they turn the button off.

But we have not seen that at all, not even close to that.

Thanks very much.

Our next question comes from Sarah Gubins.

Your line is open, and please state your company.

Hi, thank you.

BofA Merrill Lynch.

Thinking to next year, if we're in an environment of very minimal GDP growth next year in Europe, particularly in France, do you think it would be reasonable to expect top line growth in those markets?

It's really hard to tell.

You pick the country where actually GDP growth historically has had a better correlation to growth in our business, where some of the other countries may not be as correlated.

I still would say in the case of the French market, if you're getting 1% to 1.5% GDP growth, I still feel confident we would be able to get growth, but I also think that GDP growth is still not all created equal.

Next year we have an additional complication in France, which is an election.

We've got an election happening in May.

It will be a very interesting election, if you're from the outside looking in.

And I think that, that can affect some of the GDP growth that may not translate into jobs or jobs in our industry as much.

But, we're still running about 70%, 75% of our business is in light industrial.

We see construction has trimmed off a bit in France.

But, I would say if we can get over a 1%, closer to 1.5%, we have a good chance of being in kind of single digit -- low single digit growth for our top line.

Okay, great.

And then thinking about pricing also to next year, are you starting to think about trying to push pricing higher in the US due to continued increases in SUTA.

No doubt.

I think forget about the increases in SUTA, I'll get back to that.

We're going to push prices higher anyway.

We're doing it now.

In our small-medium size business in the US, we are putting price increases through that have nothing to do with SUTA, and we're trading out some of the business.

Last year, or said a different way, this year, our SUTA increases, the recovery was nearly 100%.

In fact, if, some would argue it was 104% because we priced that we weren't going to get it all and we ended up getting the more than not.

We went back to those clients who did not allow us to pass through SUTA and those were the first ones that we paired of the list, because our sense was if they wouldn't allow us to pass through SUTA in 2011, we knew another increase was coming in 2012, we wouldn't get that either and it would only further deteriorate the gross margin.

Our team is already set up.

We're sitting here close to November.

Our teams in the US are already set up for their pricing increase strategy based on increased SUTAs coming from the various states.

Will it be difficult?

Yes, I would suspect it would be difficult.

Would we do as well as we did last year?

I would like to think so, and many of the clients understand this is truly a pass-through cost.

So, we're optimistic, but I think it will also depend upon, as we're doing those price increases for SUTA, what's the context around us?

What's the environment around us?

And if it gets extremely difficult, we would probably get more pushback.

If it stays where it is now, I think it would be more well accepted as yes, we should be doing that.

Great.

Thanks a lot.

Our next question comes from Randal Reese.

Your line is open, and please state your company.

Avondale Partners.

I had a couple of questions.

First of all, I was just looking at the balance sheet, and there's a significant sequential decrease in your property and equipment.

Is that just currency recognizing a difference in currency translation, or did you do some cutting during the quarter?

Yes, I think that's primarily currency, as the euro rates came off a little bit.

We didn't do any significant reductions overall.

If you look at our overall office footprint, we did open a few offices in some of the emerging markets, but we were able to consolidate and trim back in a few others.

I think our overall office count is down about 30 offices from last quarter.

I think what you're seeing there is primarily a currency issue.

Okay.

Also, when you look at your capacity for permanent placement, and just compare the capacity that you have in the field this year versus last year in RPO and in the rest of the business and in different geographic markets, have you adjusted the growth rate?

And how much is just additional presence adding to the growth rate of your permanent placement revenue?

There's a little bit of geography differences across the world.

France I think still has a little bit of capacity, though they have been running quite well.

The US, from a recruiter perspective, has some capacity on the Manpower side, less capacity on the Experis side.

So, we've been able to get some pretty good flow-through from GP to net because of that.

As I mentioned, some of our recruiters, again, depending on the geography, are a little bit maxed out.

So, we are looking at and are currently adding recruiters, but we will be doing that judiciously to make sure we keep up with our KPIs and how we manage the recruiter.

I would say in China and India, we still have some capacity because we've done quite well there.

We've basically started both those organizations as perm recruitment and search firms.

So, it's a little different, but I would say on a global basis, if we were to continue out on this kind of growth rate, we would still have some pretty good flow-through to net, probably not as good as what we've had in the last 2 quarters.

The percentage of gross profit that you gave coming from perm was down sequentially.

How much of that is normal seasonal?

They're probably seeing a seasonal impact there as well.

We're running about 12% last quarter, it was about 12.5%.

So, it depends a little bit upon the businesses and where things are coming from a business perspective overall.

The French business, some of the European businesses fall off particularly in the middle of summer and that's what you're seeing in terms of that percentage fall-off a little bit.

I would expect you're going to see it probably move up a little bit as we get into the fourth quarter.

All right, thank you very much.

Our next question comes from James Sanford.

Your line is open, and please state your company.

CitiGroup.

Thank you.

Just you mentioned that you're looking for more growth in small to medium business.

I was wondering if you could dig into that a little bit more in terms of details of maybe where are you in terms of mix today?

And is that statement regarding global focus on small to medium business?

It's a strategy we have stated for some time, and it's pretty difficult.

We were well on our way in 2006 and 2007.

We actually opened offices, went after the small, medium size business.

One, we absolutely believe we can offer more value than local competitors.

We think that market should be ours.

We think the footprint that we have also lends itself to that.

That is where we took, from strategic perspective, a bit more hit on our gross margin because those didn't have long-term contracts associated with them during the downturn.

We're now getting very serious about getting back into increasing some of the pricing with SMB to be much more value pricing and mixing the business.

Each country has a little different strategy depending on the makeup of that country.

But, for an example in the US, we're working very hard in our metro market strategy in that medium size business.

And I would stress it's really more of that midsize, lower midsize.

We're not talking about small business.

Those assignments are too short.

So, we're increasing our gross margin in those areas and we're increasing our relevance in those areas.

We think that we have a pretty long journey to get where we want to go.

But, as we move along that journey, each time we increment it, it helps our mix.

Having said that, some of our largest clients, our top 50 clients are getting extremely interested in expanding business.

So, you can add 10 million onto a large 1 -- from a large 1 in 1 order, implement that probably over a period of 6 months to 9 months, and that's a lot of SMB business to kind of balance that off.

So, Mike, I don't know if you want to talk, kind of splits and percentages on that.

Yes, I think the last point was quite relevant.

I think as we have been going through this recovery the last couple years, the key account, that part of the market has been growing more rapidly.

But, we are certainly seeing some life in the SMB business overall.

It depends a little bit upon market in terms of our overall mix.

We're probably on the staffing side in most markets.

We're running about 50/50 in terms of key accounts.

Some a little bit more towards key accounts and a little bit less SMB, but it would be in that ballpark.

But, we're clearly still at that point where we're seeing a little bit better growth on the key accounts.

But, as we get further through the cycle, our strategy clearly is to continue to penetrate and drive after some of that SMB business that we think will be there.

Just a really quick small 1.

What impact might the Olympics have, as far as quarterly shift next year in the UK?

A little.

We have some.

We've decided, because we've tested the Olympic-type games for a long time of supplying volunteers.

It's a nice program for internal energy.

It's a drain for profitability.

So, we actually have commercial clients associated with it.

We've been doing some of the large networks that we follow from city to city.

I would say incrementally it's going to by a positive, but the UK market's a big market for us.

So, you're not going to see much of it pump up.

Slight positive, but not something that you would want to put into your model, if you will.

Got it, thanks.

Our next question comes from Gary Bisbee.

Your line is open.

Please state your company name.

Barclays Capital.

Good morning, guys.

First question, can you give us a sense where the operating margin levels are in the professional and solutions and perm business today?

I guess what I'm wondering is if those continue to grow somewhat faster than the core Manpower business, I'm trying to figure out how much that could add to margins, even in an overall weak top line environment.

Yes, sure, Gary.

Clearly the operating margins on the professional side are going to be higher, as well as the perm margins.

When you think about perm, a lot of that perm business is incremental, meaning that we can -- we don't have to add additional infrastructure and management.

We do have to add maybe direct hire recruiters, but the incremental margin, we get growth there.

It certainly drives overall margins and better margin performance.

So, we would look -- we would certainly be looking on perm business for double digit type of growth.

I think when you go on the professional side, it depends a little bit upon which market you get it from.

Certainly, the US market, where we've got a very good book of IT business.

We get very good mid-to-upper single digit type EBITDA margins out of that market.

You go to Europe, markets like Sweden, Netherlands, Germany, we would be talking similar type higher margins, as well, there.

The UK, which you're probably aware of, that's a market where we've got a good presence there through the Elan brand there, which is now transitioning toward Experis, but the UK IT market is not a premium margin market relative to general staffing.

It's similar to general staffing overall.

So, there would be more closely linked to company averages.

When you get to some of the solutions business, there we are looking to drive that into the upper single digit, low double digit-type level in terms of operating margins overall.

So, it's a good mix of business between talent-based outsourcing, our RPO business, and our MSP offering.

So it's a good, a good mix of business there.

It's over $1 billion on an annual run rate basis and it's showing some good growth right now.

So, you say you're driving to that.

But, is it safe to say that it's at least moderately above the general staffing business today in terms --.

Yes, that's a good --.

We're not driving there.

We are there.

Thanks for clarification.

We're driving to higher than where we are, which is in the more higher single digit.

We think some of those should be double digit, but we're also adding capacity.

So, we're still in growth mode on that.

I would say out of there, we're still in growth mode in RPO where RPO is more of a higher single digit than double digit, where MSP, which has a little less infrastructure, is actually running closer to the double digit side.

Okay, that's real helpful.

The second question, on Right, would it be reasonable to expect any lift in the career transition business, just given what we've seen at least in the US some increase in layoffs if you look at the data.

And I assume that's likely to happen elsewhere, or is it not big enough activity really to move the needle on that business?

You bring up a really good point.

We are hearing more about it, but we're actually not seeing it come out the other end.

So, what we mean by that is that we're seeing some pretty big announcements, but with no offense to anyone, the announcement seems to be directed more towards you guys, because it's over 5 years, and it's attrition, and it's less hiring, and it's contract workers, and it's those sorts of things.

So, we will see a slight lift, but based on what has been announced currently, that is not enough to kind of fuel any kind of big leverage coming out of the career transition business for Right Management.

It will assist it, but it won't fuel it into anything like you were seeing in 2009.

Okay, and then just 1 last 1, you made a -- it was really small, but an acquisition in France that, from what I could read about it, looked almost more like a technology solutions-type business.

Was that a 1-off, or is there sort of a sense within professional that you want to get more into maybe program management or solutions as opposed to just sort of the core staffing business?

Clearly we're driving towards solution, but we are not going to lose our identity.

We are not going to be doing -- we do not want to compete against Accenture, IBM, Capgemini, Hewlett Packard.

That's not our strategy.

Our strategy is, when we can do some statement of work level with a huge, or very, very large human capital component that requires a lot of recruitment training and movement, that's what we're in.

And Proservia fits that model, where it's kind of desk side support, a lot of training, make sure their turnover is right.

That's really the good model for us.

All right, next question?

Our next question comes from Paul Condra.

Your line is open.

Please state your company.

Hi, thanks.

It's BMO Capital Markets.

Just going back to the RPO business, I wonder if you could talk a little bit about what clients are most interested in that business.

Are there any verticals in particular where you're seeing more demand?

I would say the RPO business, right now, we can kind of split it into 3 major groups.

1 is you have large Asian businesses that are more single location or just a few locations, but really want the expertise of hiring talent because finding the right talent and assessing the right talent in Asia is absolutely the name of the game.

So, they're skipping steps over the US.

The US companies that have only a few locations, they still think they should be doing it themselves.

Asia is saying, No way, you guys are much better at it.

The US, the prime clients are really highly dispersed clients where you have a lot of hiring to do in multiple locations where we can offer a much better system associated with it, and Europe is a little bit of a hybrid in there.

And are there any verticals in particular or any types of business?

It runs across the board.

Clearly, you can get some retail at high distribution.

I would say for the most part they are larger clients, because they can leverage more.

But, actually when you think of a midsize client, call a billion dollar in revenue kind of client, those are the 1s we can use the most, because we can add a lot more sophistication.

But I'm not going to sell you on that.

I'll save my energy for the marketplace on that.

Next question, I just wanted to ask on the federal unemployment loan.

So, I saw some news reports about the states having to pay these assessments because the interest on these loans is coming due.

Have you seen any impact from that or do you expect anything from that in the future?

I think there's just a lot of moving parts right now.

We think there might be some puts and takes on, is there a Hire Act 2, are there some of those things.

We do know states will be under pressure.

Our state government business is under a little pressure.

We don't do a lot there, but we're actually starting to see business down at the county level, as they're trying to be better business people and balance some of their books.

Last question please.

We have a question from Andrew Steinerman.

Your line is open, and please state your company.

JPMorgan.

Hi, this is Mollie McGarrett for Andrew.

Just 1 quick 1 on GDP.

You mentioned that the election in France would be kind of noise and not important.

Are there areas or components of GDP that you see as real drivers of your business?

Well, I didn't say there wouldn't be noise.

I think there will be -- what happens is more of a little bit stability.

You're not going to be able to implement social plans during an election, those sorts of things.

Mike, you may want to talk a little about the auto industry, where we're positioned on that because that is a big driver -- 1 of the large drivers of the French economy.

Yes, the automotive mix overall in the industry, it is a good size, a good piece of the overall French staffing market.

For us, it's roughly about 5% of our overall business mix.

And we're still seeing good activity there.

There's some new models being introduced and that's driving some growth.

But we are seeing that drop off a little bit.

So, I think when you think about GDP, it depends a little bit.

It does depend upon where it comes from.

And I think the areas that don't help us too much are overall infrastructure.

When you hear about roads, schools, bridges, and that type of thing, those type of government plans don't drive a lot of our business overall.

But, when you hear good old manufacturing and you watch some of the PMI data, that usually captures the type of work that is going to drive demand for our services overall and really bring back the health of the economy.

Okay, great.

Thanks.

All right.

Thanks all.

That does conclude today's conference.

Thank you for participating.

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