ManpowerGroup Inc (MAN) 2012 Q1 法說會逐字稿

Welcome.

Thank you very much for standing by.

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

(Operator Instructions) I would like to turn the meeting over to Mr.

Jeff Joerres.

Sir, you may begin.

Good morning and welcome to the first-quarter 2012 conference call.

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

I will go through the high-level results for the quarter; Mike will then spend some time on the segment detail, as well as the balance sheet and our outlook for the second quarter.

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

Hey, good morning, everyone.

This 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 first quarter was much better than what we had anticipated.

It was primarily driven by the higher than anticipated revenue line.

Going into the quarter we were seeing some trepidation, as we continued to, but it turned out to be much less than anticipated.

We were anticipating constant currency revenue growth of zero to 2%, and we achieved 3% for the quarter.

Revenue growth in US dollars was flat, but also above expectation as our guidance called for a contraction between 1% and 3%.

The higher than anticipated revenue was achieved across the board as the Americas, Southern Europe, Northern Europe, Asia Pacific, and Right Management all exceeded expectations.

We expected to earn between $0.30 and $0.38, with a negative impact of $0.02 for currency.

In fact, we earned $0.50 with a negative impact of $0.02 for currency.

Given the choppy economic environment, our success in the first quarter is a tribute to the team, as well as a lot of hard work that had taken place prior to the quarter.

It is also important to note, as you can see, that while our growth is below normal levels for this time of the recovery, we were able to achieve leverage given even modest increase in revenue.

Our operating earnings increased 14% in constant currency, with our earnings per share increasing 21% over the last year in constant currency.

We were able to maintain a much better hold on gross margin and continued our path towards diversifying our business and differentiating ourselves within the brands under ManpowerGroup.

With that overview, I'd like to turn it over to Mike to discuss the details.

Okay.

Thanks, Jeff.

I will follow my typical format with some overall comments on the quarter, followed by a discussion of each of our operating segments, a review of our cash flow and balance sheet, and finally our outlook for the second quarter of 2012.

As Jeff mentioned, the first quarter was a strong start to the year.

Revenue growth exceeded expectations, up 3% in constant currency.

Revenue benefited approximately 1% from acquisitions and about 1% due to an extra billing day compared to the prior year in some of our countries.

Earnings per share of $0.50 exceeded the midpoint of our guidance by $0.16 per share, which was all driven by superior operational performance.

Our SG&A expense was in line with expectations, despite the stronger revenue growth, and as a result the incremental gross profit on the additional revenue growth fell straight to the bottom line.

This resulted in an operating profit margin of 1.8% which is 30 basis points better than expectations, and 10 basis points better than prior year.

Our reported tax rate of 51% was slightly below expectations, which is simply due to the fact that the French business tax component of our provision is not impacted by higher pretax earnings.

The underlying effective income tax rate excluding the French business tax was 38%, which is right in line with expectations.

The currency impact on the quarter was a negative $0.02, right in line with expectations.

While the year was slightly stronger than expected, the overall earnings per share impact fell in line with expectations, as more euro-based earnings were generated than anticipated.

Our gross profit margin came in about as expected at 16.6%.

This is 30 basis points below the prior year and primarily relates to a lower staffing gross profit margin impact of 20 basis points.

Staffing gross margins are stable in most markets, but margins have been negatively impacted by slightly higher unbillable bench times and stronger growth from a few lower gross margin key accounts.

We have also experienced some price pressure in the contracting Italian and Dutch markets.

Additionally, our gross margin was impacted about 10 basis points from our China acquisition last year, which will anniversary this month.

Growth in our permanent recruitment business remains positive in the quarter, up 5% over the prior year in constant currency.

We experienced strong growth in recruitment fees in the Americas and Southern Europe, with modest contraction in Northern Europe and Asia Pacific Middle East segments.

Permanent recruitment fees as a percent of overall gross profit expanded 60 basis points to 13.5%.

SG&A costs decreased from $772 million in the first quarter of last year to $754 million this year.

Of this reduction, $16 million dollars relates to the change in exchange rates between periods, and $8 million relates to cost savings from the reorganizational plan we put in place in the fourth quarter of last year.

As you will recall, we took a charge of $20.5 million in the fourth quarter.

We are already exceeding the savings expected under that plan.

Prior-year acquisitions added about $7 million to our SG&A costs, leaving a decrease in operational SG&A costs of just over $1 million.

This decrease not only reflects rigorous cost controls but also the productivity improvement resulting from a number of productivity initiatives across the organization.

Our SG&A as a percentage of GP is always higher in the seasonally smaller first quarter; but more importantly we saw an improvement of 110 basis points from 90% to 88.9%.

Finally, before I turn to the performance of the operating segments I would like to review our business line gross profit.

As you would expect, our business lines coincide with the new branding we rolled out last year.

Our overall business strategy calls for investment and accelerated growth in our higher value service offerings of professional personnel and solutions.

These offerings have increased to 35% of our mix, while our more traditional staffing and recruitment services under Manpower account for 65% of our mix.

Our gross profit growth for Manpower was a decline of 1% in constant currency in the quarter as a result of sluggish demand in many markets, given the current weak economic environment.

We believe our Manpower business has very good growth prospects as the economy improves, but also from a secular standpoint as many of our clients are looking to add greater flexibility to their workforce.

Under our Experis brand we provide professional interim and permanent recruitment services, primarily in the IT, engineering, and accounting and finance verticals.

This business represents almost 20% of our gross profit and grew 1% in the quarter.

Our ManpowerGroup Solutions business comprises 10% of gross profit and consists of RPO, MSP, Talent Based Outsourcing, Borderless Talent Solutions, and Strategic Workforce Consulting offerings.

This business saw exceptional growth of 18% in the quarter.

Lastly, our Right Management business offers outplacement services and talent management solutions and comprises 6% of our gross profit.

Right's gross profit was flat with the prior year, and I will further discuss this later in the call.

Now let's review our operating segments.

Revenue in the Americas exceeded expectations, coming in at $1.1 billion, an increase of 2% on a reported basis or 4% in constant currency.

Our gross profit margin was stable, and SG&A expenses were well controlled, resulting in $22 million of OUP, an increase of 7% in constant currency.

OUP margin increased 10 basis points to 2%.

Our US business, which represents 65% of revenues, saw revenues contract 2% to $736 million.

Our US gross profit margin was stable with the prior year, and SG&A expenses were 1% below the prior year.

This resulted in operating unit profit of $7 million, a decline of 21% from the prior year.

Our Manpower business, which represents 55% of US revenue, was flat with the prior year.

The Manpower gross margin was up 10 basis points, as the US continues to maintain rigorous price discipline despite general pricing pressure in the market.

Increases in 2012 state unemployment taxes were fully passed on to our clients, and therefore this direct cost increase did not negatively impact margins.

As we have discussed on our previous calls, we have traded some market share in the US for higher-margin business.

Our Experis business represents 40% of US revenues and declined 4% in the quarter.

As was the case last quarter, our US Experis business continues to be impacted by revenue declines in a few large accounts.

One of these accounts was in the financial services area, and we saw the project wind down in the third quarter of last year.

The other account made the decision to bring their decision business in-house.

Without the impact of these accounts, revenue growth was positive which relates to good growth in the SMB business, partially offset by contraction in some of the larger key accounts.

Overall pricing in the Experis business was stable; however, gross margin was down 130 basis points from the prior year due to an increase in unbillable bench time and adjustments to client rebate accruals.

Both were addressed and resolved in the first quarter, and therefore we expect an improving gross margin in the second quarter.

Our permanent recruitment business had a strong first quarter, up 31% over the prior year.

We continue to benefit from a secular shift as our clients are moving to outsource more of the permanent recruitment function.

Our US Recruitment Process Outsourcing business continues to make great strides with a revenue increase of 23% in the quarter.

Our operations in Mexico, Argentina, and Canada delivered strong revenue performance with revenue growth of 16%, 24%, and 13% in constant currency, respectively.

These strong top-line performances resulted in strong profit performances, with OUP growing in the double digits for each country.

Revenue in Southern Europe was slightly stronger than expected, coming in at $1.8 billion, an increase of 1% in constant currency or a decline of 4% in US dollars.

Our gross profit margin was down slightly, and SG&A expense was up slightly due to acquisitions, resulting in OUP of $23 million, a decrease of 9% in constant currency.

OUP margin was off slightly, a decrease of 20 basis points to 1.3%.

Revenue in France was flat with the prior year in constant currency at $1.3 billion.

Revenues benefited from an additional billing day in the quarter, and therefore revenues were down 3% on an average daily basis.

France revenues also include the favorable impact of the Proservia acquisition in the fourth quarter of 2011, which added about 1.5% to their growth rate in the quarter.

While France revenues softened in the first quarter, the level of contraction stabilized in March and held in April.

So while we continue to see year-over-year contraction, the rate of decline is not increasing at this point.

Gross margins were up slightly in the quarter, primarily as a result of the favorable impact of the acquisition.

Additionally, we continue to implement our previously announced price improvement initiatives.

While this has been successful, we continue to see some aggressive pricing behavior from some of the smaller players in the market.

SG&A expenses were up 4% in constant currency, of which more than half of the expense increase relates to the acquisition.

This resulted in OUP of $5 million in the quarter.

Revenue in Italy showed gradual weakening during the quarter, resulting in a 2% contraction in constant currency.

This includes the benefit of two additional billing days; and therefore on an average daily basis, revenues were down 7%.

Gross profit margins in Italy were up slightly as an increase in permanent recruitment fees offset the deterioration in staffing gross margins.

SG&A expenses were down on the prior year, resulting in OUP improving to $15 million, an increase of 18% in constant currency.

While the Spanish market continues to be difficult, we were able to achieve growth of 2% in constant currency.

Revenue in Northern Europe also exceeded expectations, coming in at $1.4 billion, an increase of 3% in constant currency or a decline of 1% in US dollars.

Within Northern Europe our gross profit margin declined by 70 basis points primarily due to the mix impact of stronger growth from lower gross margin clients.

Our team did a nice job reducing expenses in the quarter, resulting in OUP of $44 million, an 8% increase in constant currency or 5% in US dollars.

This reflects an expansion of OUP margin by 10 basis points to 3%.

Within Northern Europe the UK was the star performer, with revenue growth of 14% in constant currency.

This revenue growth was fueled by growth in one large key account which came on in the second quarter of last year.

Growth in the Nordics slowed to 1% in constant currency primarily as a result of the softening market in Sweden, where we saw revenues contract year-over-year.

Our team in Norway had an excellent performance, where revenue growth was stable in the upper single digits and OUP was up in excess of 40%.

Revenue in Germany was flat with the prior year, but gross profit was up as we were able to improve pricing on staffing services.

This combined with tight control in SG&A resulted in an expansion of OUP margin and OUP growth of 13% in constant currency.

Revenue growth in the Netherlands and Belgium also weakened further in the quarter, with the Netherlands declining by 4% in constant currency and Belgium flat with the prior year.

Our Asia Pacific Middle East segment reported the strongest performance, with revenue up 10% in constant currency and OUP up 16% in constant currency, both exceeding our expectations.

Included in the revenue growth are second-quarter 2011 acquisitions in China and India, which add about 7% to our growth rate.

Our expenses were tightly controlled in the quarter, resulting in OUP margin expansion of 20 basis points to 2.9%.

Revenue growth outside of the emerging markets in Asia Pacific Middle East remains modest, with Japan flat on prior year and Australia up 2% in constant currency.

Organic revenue growth in China moderated during the quarter but remained strong, about 30% over the prior year.

We are seeing strong demand from both multinational and local clients, as we are recognized as the market leader in providing higher-quality recruitment services and solutions.

Organic revenue growth in India continues to be stable, up 8% over the prior year.

Revenue at Right Management was stronger than expected, coming in at $80 million for the quarter.

After several quarters of revenue declines at Right we are seeing revenue levels stabilize and contracting only 2% in constant currency in the quarter.

Our outplacement revenues were up 3% year-on-year, while our talent management revenues were down 13% year-on-year.

While we continue to see a high level of interest in our talent management services, the sales cycle has lengthened as clients are deferring more of this discretionary spend.

Right's OUP swung to a positive $2 million in the quarter as we are starting to see the impact of the reorganization we announced in the fourth quarter.

As indicated in the fourth quarter, we expect to see further reorganization charges related to Right in 2012 as we continue to implement the reorganization plan to achieve a more streamlined office infrastructure and management organization.

Now let's have a look at the cash flow and balance sheet.

Free cash flow, defined as cash flow from operations less capital expenditures was a use of $40 million in the quarter compared with a use of $171 million in the prior year.

The first quarter is typically a weaker quarter from a cash flow standpoint, as annual incentives are paid in the first quarter.

Our capital expenditures increased to $20 million from $11 million the prior year.

Most of this increase is attributable to office consolidations and realignments as well as leasehold improvements.

On a full-year basis we are currently estimating that capital expenditures will be up about 10% over the prior year.

Our accounts receivable DSO was 56 days in the quarter, up one day from the prior year, which primarily relates to the timing of quarter-end collections and a shift of revenue mix to larger key accounts with extended payment terms.

Our balance sheet at quarter-end remains in good shape, with total cash of $554 million and total debt of $722 million, bringing our net debt to $168 million.

Our total debt to total capitalization remains constant in the quarter at 22%.

Our $722 million of debt at quarter-end primarily relates to the EUR300 million notes coming due in June of 2012 and the EUR200 million notes coming due in June of 2013.

Our intention is to refinance the EUR300 million notes in the US or euro public markets.

We believe a new issue would be well received by either market at this time.

And the effective interest rate on a seven-year term note should be slightly lower than the 4.6% we are currently paying.

In the event that the public markets become challenged between now and June, we can easily refinance this note under our $800 million revolving credit facility.

Currently we have no borrowings under this facility, and therefore we have ample liquidity.

You may recall, in the fourth quarter we increased the size of our revolver from $400 million to $800 million to ensure sufficient liquidity during this period of refinancing.

Finally, I would like to comment on our second-quarter outlook.

As we look to revenues in the second quarter, we anticipate continued soft demand for our services given the current economic environment, especially in Europe.

Another factor to consider is one less billing day compared to the prior year in some of our markets, and this will negatively impact revenue growth by about 0.5%.

Additionally we will anniversary a few acquisitions that were made early in the second quarter of 2011.

This will negatively impact our growth rate by almost 1% as well.

Considering these factors, we expect our second-quarter consolidated revenue to be flat with the prior year to down 2% in constant currency.

Based upon where exchange rates are at the moment, our US dollar reported revenue will be about 6% less, or range from a decline of 6% to 8%.

Within our operating segments we expect the Americas, Asia Pacific, and Right Management to grow in the low to mid single digits in constant currency, and Southern Europe and Northern Europe to contract in the low to mid single digits in constant currency.

Our gross profit margin is expected to improve sequentially and be roughly in line with the prior year.

Our operating profit margin is expected to range between 2.3% and 2.5%.

This is a slight margin decline from the prior year, as we expect some operational deleveraging given the contraction of the top line.

Our income tax rate is expected to approximate 48% including the French business tax, or 37% if we exclude the French business tax.

Both amounts are in line with prior year.

This will result in earnings per share ranging from $0.68 to $0.76 per share, with a negative currency impact of $0.04.

As was the case in the first quarter, our earnings per share are very sensitive to revenue levels at this stage of the cycle.

Revenue gains or revenue declines leverage or deleverage quickly to the bottom line.

As a result our actual earnings per share can be significantly different than forecast if revenues vary only slightly from forecast.

With that, I will turn things back to Jeff.

Thanks, Mike.

The first quarter was a solid quarter.

We were able to achieve better than expected revenue growth.

And while it was a modest revenue growth, we showed good operating leverage.

The first quarter was an important quarter for us to get behind.

We were able to continue and expand many of our important programs that are leading to our revenue and profitability growth.

The areas of differentiation, diversification, and efficiency and productivity are key to our overall performance.

Each of those areas we have done quite well at.

Differentiation is extremely important, and we are clearly seeing this pay off.

Our branding strategy with the parent brand, ManpowerGroup, Manpower, Experis, Right Management, and ManpowerGroup Solutions continue to get more visibility and distinction within the industry.

The thought leadership as well as positions that we have taken across the world is bringing us leads and we believe will continue to do so.

That, coupled with our increased ability in our sales function and global footprint, will continue to enhance our differentiation.

Under diversification we continue to grow our Solutions business at what we believe is much faster than market.

Our growth in Solutions gross profit was 18% in constant currency, which included nearly 30 additional RPO wins as well as expansion in our Borderless Talent Solution, as we are seeing more clients interested in crossborder RPO work, as the talent mismatch accentuates the need for such a service.

Additionally, our Talent Based Outsourcing which is the outcome-based pricing Solutions business continues to grow.

That alone grew at 16%, and our pipeline is very solid.

So we would continue to anticipate good growth in the second quarter.

Our recruitment process outsourcing business also saw strong revenue growth of 27% increase in constant currency, as our clients continue to shift more of their recruiting to us as the experts, as they recognize our capabilities and the value we bring to the marketplace.

We have invested in a world-class RPO offering which has validated earlier this month by the Everest Group, who ranked us as the leader in global RPO and awarded us their Star Performance designation.

We continue to build strength and see some very strong secular trends that are in our favor, which will continue to benefit us.

Efficiency and productivity is critical.

We have still not achieved our EBIT percent goal, and it is -- a clear way to accomplish this besides revenue and GP leverage is to continue to improve our efficiency and productivity.

Last year we improved our SG&A to gross profit by 400 basis points; and in the first quarter of this year we continued down that brigade with 88.9% SG&A to GP, a 110 basis point improvement over last year.

This is done through technology, process, and in many cases consolidations of functions out of our branches and into regionalized or centralized locations.

Secular trends, while not presenting themselves fully because of the depressed economic environment, are still alive and well.

The trends occur across all parts of our business.

I mentioned before the secular trends in our permanent recruitment business as companies are looking to abdicate that responsibility, which enhances their flexibility.

Therefore the mandates in permanent recruitment, whether they be classic volume, RPO, or temporary to permanent conversions, as more companies are using this as a way to bring people into their companies.

Also, we are seeing pure flexibility in the core part of our business, and Manpower improved that dramatically as companies must remain agile.

This is true for our largest geography, which is Europe.

While there are some very mature countries, there are other countries that still have a long way to go as a percent of workforce working as a temporary.

This is extremely healthy for the labor market as it creates a velocity and vitality, but also gives us a good secular traction.

Additionally, there are strong secular trends within Experis as we see IT, finance and accounting, and engineering becoming more project-based, if you will, where companies have been able to bite-size the projects and therefore sunset the talent more quickly as they ramp up the agility of their operations in these areas.

This is good for us, and we will continue to see this trend expand over the next three to five years.

The outlook is still difficult for us.

We are dealing with uncertainties in Europe; and the US economy is moving forward, but it does have its ups and downs.

Slow, if you will, choppy growth is a little bit difficult on a day-to-day basis.

But it is pointing in the right direction and, therefore, as we work through these uncertain economic times, we continue to gain momentum, add profitability to the organization, and position ourselves better for the future.

Thanks, and with that I would like to open it up for questions.

(Operator Instructions) Sara Gubins, Bank of America Merrill Lynch.

Hi.

Thanks.

Good morning.

You mentioned seeing some stabilization in France in terms of the declines in March and April so far.

The guidance for the second quarter of course suggests continued deceleration in your markets.

So I am just wondering what you are seeing in other key markets in April, and maybe how March turned out as well.

Well, when we talk about stabilization what we are really seeing is some of the markets have gone down, and you can go almost in all of them, with maybe a few exceptions.

But what we saw in drops in some of the November/December time frame really just kind of stayed the same.

I mean we had some choppy weeks in there where a few weeks were maybe a little bit weaker, and then it would come back a little bit more.

So when we are talking about stabilization we are really looking -- if you look at the eurozone, and there are some differences where the Netherlands maybe is dropping off a little bit more and Sweden, as Mike mentioned, dropping off a little bit more; but even that it is not dramatically.

So as we unfold, and as we talked about in the last conference call, we really didn't see this dropping off of the cliff in Europe.

In fact, as we looked at the first quarter there really wasn't.

It was pretty much just stabilized at a lower level.

There are some events, whether they be elections or consumer confidence, things that could jolt that.

But at this point we are really looking at, from almost all markets -- in Spain we actually grew a little.

So when we talk about stabilized, we are talking about stabilized at a lower level, as you can see from the forecast into the second quarter, without really a lot of turmoil happening other than the turmoil of what might be happening at the bank level.

Okay, great.

Then separately, last year you closed 2% of your Southern European offices, while Northern Europe was pretty much flat.

Would you consider closing additional offices in Europe in light of demand trends?

It's a good question.

What we had done last year and as we had done some in the previous was we really looked mostly at consolidation.

In fact there are some strategies that we have that will still be rolled out in Southern Europe as well as Northern Europe, where we may have multiple offices relatively close in a city center, we're looking at possibly consolidating those.

So we aren't closing offices as much as consolidating, and we are doing a few of those in Northern Europe.

Frankly, it is more driven on better service, better management.

And, of course, we will get a little bit of benefit from a reduced real estate.

But we really feel as though running a 3-to-4 person office is harder in the cities, the larger cities, than running a 9- or 10-person office.

We have much more flexibility and much more actual energy in some of those offices.

So you will see that in places like Berlin.

We have already done that in the Netherlands.

We are looking at a few other places in Northern Europe.

Sara, maybe just a little bit.

Two things.

Maybe first just a little bit more color on your question related to trends and maybe put a little bit more color on France.

We did see some decline in demand in France in the first quarter.

If you look at it by month on an average daily basis, January was pretty flat on prior year for us; then February dipped down a bit to about down about 5% or so year-on-year.

Then March came back up to down about 3% year-on-year.

February, there was some -- there was a cold-weather snap in Europe, you may recall.

I think that impacted the numbers a little bit.

So that could be a reason why February dipped.

Then when we look to April, we are seeing pretty much the same as what we saw in March.

Our view in our guidance was for the second quarter to be down between 3% and 5%.

So pretty much still looking at that same trajectory.

Maybe getting a touch weaker, but not -- I think it is pretty much in line with what we have been seeing overall.

So just a little bit of color there.

The second point, which I made in my call notes but I just wanted to maybe reemphasize it.

I caught your note earlier today.

Just in terms of the outperformance relative to expectations, I really would characterize it as all operational.

Our tax rate overall was lower than what we expected.

It came in at 51% versus 56%.

But the reason for that is because of the French business tax now is classified in our tax provision, and that was $17.4 million in the quarter, and about as expected.

As our pretax amount moves, that business tax does not.

That has an unusual impact.

It impacts that effective rate, if you will.

If you actually take that business tax out, our tax rate came in at 37.7%, and we were forecasting an underlying rate of 38%.

So just to make sure we are clear in terms of how we communicate that, we would see really the $0.16 of performance above our midpoint of guidance as being operational in nature, even though part of it looks like it shows up on the tax line.

Okay.

Thanks a lot.

Tim McHugh, William Blair.

Yes, thanks.

Just wanted to ask.

You mentioned in the UK that you have had a large key account program that has helped you during the last year.

Is that significant?

Should we model or think about as to the latter half of this year, is growth likely to slow there?

Or is there enough momentum going on in the UK that you can continue to kind of outperform the market there?

Just to give a little history on the UK, we have done a very nice job of mixing the business, where we actually were skewed in many cases in our book of businesses too much towards key accounts.

We have done a nice balancing of that.

We now have -- it's actually one account, and kind of one-and-a-half if you will that have really added, because of increased demand of their product, a fair amount.

We see that demand continuing through the second quarter; could potentially go into the third quarter.

It starts to anniversary a little at that point, so then you would see that kind of come down.

So the market itself, if you were to take that out, which we still have some good pipeline, you would probably -- I don't know, Mike, what, maybe take out -- maybe get it to about 3%, 4% top-line growth without that account in it.

Maybe just a little bit stronger, probably in the mid single digits.

So I think overall, my sense would be that we are still outperforming in the UK market.

The market data is a little bit hard to come by in the UK, but my sense is we are still outperforming despite that account, and that account has added a little bit on the top, which has been good.

But I think -- I don't want to lose sight of the fact -- I think the UK organization really has done a nice job performing across the board in getting new business and really delivering good profit performance on the business they've been getting.

So I think it is a -- things are moving well in the UK now.

Okay.

Then just in the US, the profit margin -- you said the gross margin for the traditional Manpower business was up.

So the margin there being down year-over-year, was that just negative leverage from some of the key accounts that you talked about that pulled some work in and the large projects that stopped?

Or are there any other factors hitting the US margin there?

Yes, I think what you are seeing there really is just the delevering.

With the contraction on the top line, we were able to pull our SG&A costs down a little bit, but not to the same level that we were able -- that revenue and GP dropped.

So it is effectively some delevering that is coming through.

And the first-quarter numbers are fairly small.

So the percentages tend to look a little bit bigger.

So no real secrets in there other than some delevering that came through.

And I think you will see that increase in profitability as we move it into the second quarter because it's a larger quarter and you get to get actually more leverage out of the expense actions that we're taking, and by the improved gross margin which our goal is to take that improved gross margin and have it drop to the bottom line.

While we're on that topic, I would say the same thing in the French market.

We have -- I think our team has done quite a nice job working around pricing and managing the GP well.

Overall in the French market our GP margin went up a little bit on prior year.

So that was a good success there.

But top line was a little bit weak, and we had the acquisitions coming through, which added a little bit to the SG&A line.

So effectively we did see some delevering as, if you will, the organic business contracted; and while we did take some of that expense out, not enough that we still are seeing some delevering in the first quarter in the French market as well, despite what I think was some pretty good performance on the GP line where we did see some improvement there.

Okay, great.

Thank you.

Andrew Steinerman, JPMorgan.

Hi there, Mike and Jeff.

Mike, when you say GP line for France, do you mean gross margins or gross profit dollars?

And I think you're outperforming the market in terms of revenue growth.

I remember last quarter you thought you would look to potentially purge accounts in France in order to stay price disciplined.

Did that happen?

And so how are you outperforming the market and having gross margin trends fare well at the same time?

Sure, I will take the first part of that, Andrew.

I meant to say our gross profit margin was up slightly year-on-year.

Gross profit dollars would as well be, but I think the point of what I was trying to say was the gross profit margin percent was up year-on-year.

I will let Jeff comment on the second part of your question.

Yes, on the second part, it is about 18 to 24 months of work within the network that you are starting to see.

And it is really in three different areas where we would be getting that growth.

We have the Prism data, so we feel pretty confident that we are outperforming the market, which in a market that is that large with large players it is difficult to do.

Those three areas are focus.

We have really been able to focus our branch offices on who to be approaching, who to sell to, what are the appropriate margins, and what are the indicators that we are doing well on that.

We have done a lot better on that.

Secondly, the SMB market is growing better than the key account market.

And we've had a very concerted effort on the SMB market, and that is now starting to come through.

It takes a long time.

It took us almost a full 18 months before we could start to see the traction in the SMB.

Then I mentioned a little about this last quarter, but it is even more so now.

And that is, in the French market where you may have three or four companies that are sharing the business, what we are starting to see -- and I really want to emphasize this point -- is we talk about efficiencies and growth and all those others.

And frankly a lot of industry players have forgotten it is still about the quality match, and now it is coming back to hurt them.

Without the quality match and doing things for a low price, lower than what we would be doing, we are taking business from other large competitors who are being, if you will, asked to leave the account because they are just not matching in a quality way.

All throughout that process we have been able to take about 80 million of euros and take that business away.

So similar to the US, we are taking business out on the bottom end and still being able to outgrow the market.

So it's our goal to do that in the US.

We're on that path, but you are seeing a little bit of a balance issue in the US.

Where at least right now in France, between us delivering good-quality SMB, we have been able to eliminate on an annualized basis about $80 million worth of business.

I'm sorry, EUR80 million worth of business.

.

That's awesome, Jeff, you did mention.

Is there any need, has M&A need for purging in France similar to the US to stay price disciplined?

Well, you know, we are being selective.

We have unfortunately had to walk away from some what we would have thought could have delivered some really good service to them.

But the market is competitive.

We are seeing the market become very competitive, as Mike mentioned, from the second group or the second tier, the midsize regionals are extremely competitive.

Interestingly enough, there has been about 100 offices opened this year alone in France, all by midsized players.

So market is competitive; we're going to continue to see the competition in pricing.

However, with that GP percent improvement, our SMB focus, and our quality focus we feel as though we are going to be able to maintain an industry lead for a bit here.

Nice job.

Thanks.

Jeff Silber, BMO Capital.

Thanks so much.

Just wanted to continue the discussion on France.

Jeff, in your remarks you just alluded to the elections, and it looks like we may have a change in party.

If the Socialists do take over, do you see any major regulatory changes coming?

Thanks.

Yes, thanks, Jeff.

We talked about that when we were together in France, and there is a view of what a socialist means that maybe outside of France is a little different.

No doubt history would say that possibly the other party, Sarkozy party, would be a little bit better for us.

But frankly it is hard to tell right now.

When you look at some of the issues or platforms that Holland has been on, there are some positive things for us, like maybe stopping some overtime, which would give us additional business; increasing the allocation to the training fund; maybe taxing some short-term contracts other than in the staffing business.

So right now, we are looking at it as both candidates have some puts and calls on what might be positive or negative.

But at this point, we could almost call it a push.

I would also say that the rhetoric, like in all countries, has been ramped up a lot.

So there is hard to discern between what is said pre-election and what is actually done postelection, so we will have to wait.

But right now it is -- it wouldn't spell at all a disaster for us.

In fact, there could be some positives on both sides.

Sarkozy has some other things, like looking at the social VAT, which will be redirecting the tax off of the work and helping us, and maybe some competitive agreements.

And he too is interested in increasing the training fund.

So there are some puts and takes, and right now we are relatively sanguine on which one would win or lose.

Okay.

That's helpful.

You also talked a little bit about the pricing pressure specifically in Italy and your Dutch market.

I am wondering if you see this creeping into other markets, where you are seeing trends unfortunately move in the wrong direction.

You know, Northern Europe in general is maybe feeling a little bit more pressure on pricing where maybe they haven't had that before.

But as Mike mentioned, our German operation was able to increase their gross profit percent.

So we are still able to do that.

The Dutch market never really came out of the downturn, and as a result I think that there is some more intensity in some of the pricing.

So that is a pretty tough market.

In Italy, the major players other than the locally domiciled player have actually been fairly disciplined.

We also have a good Solutions business and permanent recruitment business, and our Experis business is growing well there.

So there is a good mix.

But I would say pricing pressures are there, but at this point other than maybe the Dutch market and a few key regions within certain countries, it is competitive but not ridiculous; not like what we were seeing in 2009.

Okay, great.

That's helpful.

Thanks so much.

Mark Marcon, R.W.

Baird.

Good morning and congratulations on the good results.

Wondering if you can talk a little bit more about the gross margin trends more broadly, given your changing mix with Solutions and Experis becoming bigger, as well as France and the US in terms of core temp stabilizing.

How should we think about gross profit longer-term?

And then I've got a follow-up with regards to SG&A.

Sure, Mark.

I think when you step back and look at gross margins, a couple of things that I think showed positive.

One of the positives is we've gotten stable with the Right Management side, so that is no longer dragging overall.

So I think now we're at a point of building on where we are and moving things from here.

And when you look at what we are doing on the Solutions side, that is higher gross margin business.

And right now the Solutions and Specialty side of our business is 35% of the overall mix.

So as we continue to drive that, I do see opportunity for further enhancement of gross margin going forward.

The other thing that we have talked a little bit about is just the opportunity for perm recruitment in this market.

We are really reaching peak levels of perm recruitment already, peak historical levels.

And we are obviously still in the early innings from a labor market recovery standpoint.

So we see that as really a good opportunity.

Clients are thinking about using us differently and using us -- using more of our services on that side than they ever have before rather than building them in-house.

And we ourselves have built out the capability over the last -- if you go back to the 2004, 2005, 2006 period, that's really when we built up the capability for perm recruitment.

So we've got that capability now that we haven't had in the last cycle.

And of course the French market is now open for perm recruitment, which happened in 2005.

So I think there are a number of positives on that front.

When you look at the core staffing side, I think that will remain a bit choppy for a while.

I think we're going to continue to see a little bit of pressure in some of the markets until we start to see some growth and until that supply/demand equation changes a little bit.

That is what will start to change the dynamic overall.

And on the other side, also within the professional side you certainly have Experis s as well, and as we continue to drive that mix upward I think that is going to help our overall mix of GP.

So I think there are a number of positive things.

I think there is going to be a little bit of choppiness if we see some contraction in markets.

I think it is logical to expect some near-term contraction.

But I think as the markets start to improve, I feel pretty good about the opportunity there.

And if some gains on the gross profit margin continue to push and drive the SG&A leverage and drive our productivity metrics, that is what is going to get us to our overall goal on the operating margin of 4%.

So it is those two elements combined.

Great, and then could you just talk a little bit more about the SG&A?

The $8 million in savings that you achieved this quarter was greater than what you'd hinted at during the last conference call.

Are you still expecting roughly around $30 million in savings or could it be greater than that?

What, besides the restructuring, what inning are you in with regards to driving the efficiencies across the overall franchise?

Yes, so from a restructuring standpoint -- so we did take a $20.5 million charge in the fourth quarter, primarily related to our realignment of the professional business with Elan and Experis in Europe; and then also related to a plan we introduced with Right Management.

The Right Management plan, we still expect further restructuring charges to probably land either in the second quarter or third quarter.

But that plan is going quite well.

We did say $30 million for the year.

We did get $8 million in the first quarter, so my guess is we will be a little bit above that $30 million.

But also I would say most of the changes we have made are fully online already, so it is not like it is ramping dramatically from where we are in the first quarter.

But obviously, you can do the straight math on that and say we will probably top up a little bit ahead of that $30 million.

Beyond some of the reorganization and realignment work, we are always driving overall initiatives within the organization to drive productivity across our field network so that they can handle more volumes and deliver better service to our clients.

So that is a never-ending process.

There is never one silver bullet on that.

That is a long list of initiatives that we are driving and tracking on a monthly and quarterly basis with the operations.

A lot of that has to do with standardizing processes, but also introducing new technology, and centralizing and using more shared services across all of our processes.

So I think good opportunity there, and of course with top-line growth you get the scale advantage as well.

So I see that coming on.

What I have been quite pleased with is the fact that we have been able to really keep a tight hold on costs.

When you see our revenue and GP coming through, the incremental margin that is coming to the bottom line is quite nice.

What that says is a lot of those initiatives we have been working on are really showing themselves now, because we are not required to add on that cost quite as quickly as what we normally might be able to.

So we have got some things that maybe haven't fully exposed themselves yet but that will as top line starts to pick up.

Great.

Can I ask one more?

Just with regards to the last quarter you basically -- Jeff, you mentioned that you were looking at a few opportunities in terms of some big account wins that could potentially come down from some RFPs.

Any progress report there?

Yes, those are of sizable nature and as a result, they take a little bit longer to work through the pipeline.

But all of those are still there and, in fact, we've added a few more to the pipeline.

What I was referring to last time was that our Solutions business was moving along nicely, and those really are in the areas of the Solution business.

So it is very good for us because what we've been able to see is that we are not really competing with the same companies because our offering is a bit different.

So they take a little bit longer, but we are still quite optimistic that our win ratio should be pretty good on those because of the work we have been able to do in Solutions.

So those large Solution wins are still in the pipeline and we are hoping to realize those yet this year.

Great, thank you.

Paul Ginocchio, Deutsche Bank.

Thanks.

Just getting back to the US, you talked about shedding some contracts.

Can you quantify that?

And then also looking at Experis, if you could sort of, I don't know, clean it up for some of these larger contracts.

Can you talk about what is going on there?

It looks like you're underperforming the market.

I just want to get a little more color.

Thanks.

Sure.

Well, what we had talked about last time was somewhere in the neighborhood, I think we said last quarter some $50 million, maybe a little bit more that we had taken out of the US, particularly out of the Manpower side.

And then it's a little bit harder to quantify of the new business opportunities coming in that we normally would be much -- I shouldn't say much more aggressive -- we might be a bit more aggressive on.

We have decided through a really good analysis, a pro forma P&L, before we even go into the bid process.

We continue to update the pro forma P&L.

And at certain times we decide to write a very nice letter saying we really want your business but not at this level, because we think that you're not going to be receiving the quality.

So I think that is throttling some of our growth in the US.

And as I mentioned, also we want to be able to find that balance.

That balance isn't easy to find about what you pursue all the way to the end where it's a brass knuckle fight in the alley at the end; and then what are the ones that you say no, we're just not going to go down that path.

And we might be being a little too selective at this point, but I think it's a good organizational behavior to do that.

On the Experis side, I would say that the market is not an easy market to determine if we're underperforming.

But your statement is a very logical one, and I too can see how you would say that.

And I have said that more than once inside the organization.

But when you really break it down, and we have spent a lot of time doing that, we had some large accounts and we have got some large account business that rolled off.

If you look at our replacement business, where we are and what we've been able to do, I would say we are competing well in that.

Where we would be not keeping up with the market is when you would be comparing us to a company who has much more skewed towards SMB market.

The SMB market, in particularly the IP part of Experis, is outperforming the large account market where some of the large accounts are now coming off of some very major projects.

We had two very large bank integrations that we were doing, and those have rolled off.

Those were great opportunities for us.

We performed very well.

So one of the ways that I look at it is kind of doing a two-year look at what is happening with market share and how it is going.

And on a two-year kind of rolling basis, we are doing well.

The integration has gone extremely well.

Good morale, great engagement.

And I would tell you that we are after the SMB business, and we have got a good pipeline also on the key accounts.

So we've probably, as we also mentioned, squeezed out a little bit too much recruiter productivity; and coming into the end of 2011, we were a little cautious in not wanting to add too many recruiters because we were nervous that 2012 might tail off a little, when in fact in the SMB market it didn't.

So we are adding our recruiters to make sure, because it is all not selling; some of it is delivery.

We just can't find some of the candidates.

So overall, probably a little off market, a team that understands that, and I have a high degree of confidence in the team.

They are going to get back on market and above market.

And on a two-year basis we feel good where we are right now.

Thanks.

Mike, just real quick, what is your percent of perm including RPO as a percent of GP?

Yes, we came in at 13.5% in the quarter, so we're up 60 basis points over the prior year.

Thank you.

Thomas Allen, Morgan Stanley.

Hi, guys.

Going back to Europe a little, I wanted to talk about Germany and Italy, Germany, you've been making some changes over the past couple of years to improve profitability.

Do you think you can trend up to top-line growth now, now that you have made those changes?

Then Italy, it seemed like you did pretty well this quarter.

How should we think about that market going forward, above what you said about the pricing change -- or the pricing impact?

And then how should we think about the labor reforms going on there?

Thank you.

In Germany, you're right, the team has really done a nice job and continues the work to be done on what would be the back-office and getting some profitability.

In fact, we increased our profitability substantially again year-on-year in Germany, though our top line was basically flat or zero.

So we are now moving more in an external facing way.

Again, we have a good team there, so I am confident in that.

We made a conscious decision which was let's get our house in order, then let's go to the outside.

So now we are going to the outside, and we feel with the propositions we have, we are going to do well, though it takes a little while.

So my sense is the second quarter you will see a little bit more of the same, and then you'll start to see some of the growth coming out in the third and fourth quarter.

Now, we also are seeing in general the market in Germany is going down a bit.

So it is not just our performance against the market.

The market in general for temporary staffing is just trimming down a little.

Some of that has to do with the very low unemployment rates, and it's very hard to find people.

So that is a little bit of a governor on that.

Italy, we think that we will continue to see some pricing pressure.

The team there is doing extremely well.

There are lots of labor reform conversation.

There is something called Article 18, which is an extremely robust discussion and has a lot of courage associated right now.

Article 18 really has two major components to it.

One is to reduce the restriction for entry of people into companies.

Particularly where you would see the big push in there would be the entrepreneurial federation or what we would more classically call the SMB, to try to get that small/medium-sized business to be able to bring employees on in a much faster way without all of the restrictions.

Then of course the notion of exit flexibility.

There has been several iterations with the government and hearings.

And Article 18 looks like it has a very good chance of moving nicely through, of course, with some real angst with it.

But there is a commitment to by middle of the year that this has a chance of being moved through.

There are some parts in there that could be more positive than negative for the staffing industry.

But it is too early to tell if those walk through.

Okay, thank you.

Kevin McVeigh, Macquarie.

Great.

Thanks.

Jeff or Mike, any thoughts on the length of assignment?

In terms of as contracts come back up are they being extended?

Or just any thoughts on that would be helpful.

Great question, Kevin.

In fact, one of the challenges we would be having right now, to be very honest, in Experis US is that the assignments are shorter.

As a result, you do a lot more work potentially for the same amount, which is what is impacting some of our recruiter productivity.

Also, assignments tend to be shorter in small and medium-size businesses, which is where some of the growth is right now.

I think it is really just a function of the uncertainty in companies.

As we talked about, we think overall that is actually -- in general tends to be a positive secular trend for us, as companies are using more project-based, and by definition they are shorter, and therefore using more of us.

The assignments in France, Italy, the UK, for the most part, in Manpower as well, they tend to have shortened slightly, just as companies are looking at their visibility and wanting to ensure that they keep themselves as agile as possible.

So we think as the uncertainty starts to lift, which would be throughout this year, that those assignment lengths will probably go back to more of a normalized time frame.

Got it.

Then without being too theoretical, does that help from a pricing perspective, Jeff?

Because if you've got a shorter duration, when the price resets does that help recapture some margin that may have gone out to sea during the downturn?

Well, in the SMB business you have a chance to do that.

But frankly, to be real honest, what it does is it puts more pressure on efficiency and productivity.

Because you are generating that many more interviews, that many more paychecks, that many more invoices, that many more customer reports.

So it puts a little stress on the efficiency part of the business, but you definitely have the opportunity to have more conversations about price and how labor markets are tighter in some cases.

So now that that rolls off, the next one is going to have to be at a little bit higher.

So we clearly are using that as an opportunity.

Super, thanks.

Great job.

Last question?

Gary Bisbee, Barclays Capital.

Hi, just another question on the US Experis business.

Can you give us a sense how concentrated that is in the large customer versus the SMB market?

What is the current mix today of IT versus finance and accounting or engineering or other?

Mike, why don't you take that one?

Sure, sure.

When you look at from a large account mix versus SMB, we are looking right now at about a 60/40 split with 60% being the larger accounts.

Maybe it is 65%, something like that.

So we have got more work to do around SMB.

Our historical Manpower professional business that moved over to Experis, that was more the large account business.

And COMSYS brought some very good SMB business, but we want to move that mix to a little bit more SMB.

So we are working hard on that.

When it gets to the verticals right now, we are more IT focused.

About 70%, just under 70% is on the IT vertical.

Then engineering has just over 10%.

Finance has just over 10%.

And then healthcare and other professional skills would be the remaining 10%.

So that is how it breaks out.

Great, and then just the follow-up.

Can you give us an example of maybe what a typical RPO contract would look like?

Or if there are a wide range of them what the range of things you are doing?

I feel like a lot of people are saying they are doing RPO, but it seems like there's an awful lot of different things going on there.

Where is your business now?

Yes, I'm glad you asked that because we take pride in the fact that when we talk about RPO, it is real RPO.

And what we mean by that is RPO is a managed co-sourced in some -- in most instances recruitment function.

So that means in order for us to say RPO, our 30 wins in the RPO in this quarter, you have to be part of building the job description; working with the managers; doing the interviewing; doing the onboarding; all of the reporting out as if you were the HR staff.

Then there is volume procurement -- volume recruitment, which many organizations say, well, the company gave us a mandate for 100, so that is an RPO.

That is in our recruitment.

We do not count that in an RPO win.

RPO wins in almost all cases have a monthly fee with them, and they have staff on-site.

We have a very strict definition in order to count RPO, because we think RPO should be priced appropriately.

And if you mix volume, permanent recruitment, with RPO you're actually doing the entire industry a disservice and you are degrading your own service, because those are two separate ways.

Now, in fact, for the same account we might be doing RPO, volume procurement, and add volume recruitment and ad hoc recruitment.

But those are all designated in our accounting systems and our GL very differently and are priced differently.

Just one last one on that point.

Is this an offering that is more attractive to a large company like in an overseas market where they might have a smaller staff, or are you seeing these all over the place?

Are they doing them in the US, for example, where they would presumably have the scale to do this in-house but they have decided you are offering them a better or more efficient solution?

Yes, it's a good question.

It is across-the-board.

The fact is that they may have the scale, but they lack agility then.

So what this is, is just another form of creating good flexibility.

So theoretically if you have 100 recruiters in your company, and now you have hit a little soft patch, what you say is we don't need to hire anybody.

Well, you've got 100 recruiters twiddling their thumbs.

What they want to do is give us the 100 recruiters and then they can flex up and down, or maybe half of those recruiters so they can flex up and down.

When that company may not be hiring, another company is hiring and we can turn some of that -- those recruiting staffs to be working on another organization.

Also what we are seeing is large organizations that have large networks, want to have better discipline of hiring.

So that if you have one plant site, yes, we do that; but if you have 30 or 40 or 50 locations, we typically can drive more discipline and better hires through that.

Also what I would say is that the Asian market, the emerging market, is one of our leading RPO markets.

Part of it is we've got a great team; second part of it is they are lacking that as a core competency and know that we have it.

So they are leapfrogging what we are seeing in Europe and in the US and going right to the state-of-the-art recruiting techniques by using us in those markets.

So probably half those wins, a little bit more than half the wins.

Last year we racked up about 130 RPO wins, this first quarter about 30.

You would see half or a little bit more than half of those sitting in the Asian market.

Thank you.

Thank you, everyone, for your participation.

Conference now is concluded.

All lines may please disconnect.