ManpowerGroup Inc (MAN) 2013 Q3 法說會逐字稿

Welcome and thank you for joining the ManpowerGroup third-quarter earnings conference call.

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

(Operator Instructions)

Now, I will turn the meeting over to Mr. Jeff Joerres, Chairman and CEO.

Sir, you may begin.

Good morning and welcome to the third-quarter 2013 conference call.

With me, as usual, is our Chief Financial Officer, Mike Van Handel.

I'll kick the call off going through a few of the high-level results for the quarter.

And then Mike will go through the details of the segments as well as anything regarding the balance sheet and our forward-looking items for the fourth quarter.

I will then talk a bit more about our progress in the simplification and recalibration efforts.

Before moving into the call, I'd like to have Mike read the Safe Harbor language.

Good morning, everyone.

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

These statements are based on management's current expectations or beliefs.

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.

Any forward-looking statement in today's call speaks only as of the date on which it is made.

And we assume no obligation to update or revise any forward-looking statements.

During our call today we will reference certain non-GAAP financial measures which we believe provide useful information for investors.

We include a reconciliation of those measures, where appropriate, to GAAP on the Investor Relations section of our website at Manpowergroup.com.

Thanks, Mike.

We had a very good third quarter, as many of the initiatives we had started regarding simplification and recalibration came through higher than our expectations.

Assisting the quarter was also an increasingly better revenues throughout the quarter across almost all geographies.

Those two elements gave us an increase in operating earnings before restructuring of 44% over the last year, and well over our anticipated results.

We see this as extremely favorable, as this will allow us to enter the fourth quarter with even more optimism to finish the year strong.

While the economies throughout the world have not improved dramatically we were able to generate some operational leverage and improved productivity as a result of our simplification plan.

Our revenue for the quarter was $5.2 billion, flat with last year.

This is the first time in six quarters that we've been able to get to the point that we are flat over the prior quarter and prior year.

Clearly, this is not the goal but it is showing that we are trending in the right direction.

As I stated, this less-than-expected revenue decline, or slightly better revenue results, is true across the board, with only Asia-Pac, Middle East, coming in below the bottom end of our original guidance, and Right Management coming in at the midpoint.

Other than that, we were able to exceed all of our guidance and revenue which clearly helped the third quarter results.

Even with slightly better revenues we continue to maintain our price discipline.

And we are seeing the results of that come through in a leveling of gross profit, particularly on the staffing side.

We still have a long way to go as there are several of our large markets that continue to be under pressure.

But the pressure is no greater than what we had experienced in the past.

Our gross margin came in at the low end of expectations, which is somewhat understandable as we look into the details.

Our permanent recruitment business continues to be sluggish in Europe and Asia, which is contributing to some of the downward pressure in gross profit.

Also, our Experis brand on a European basis is not growing or expanding the way we were anticipating, as the market remains tepid.

Having said that, action has been taken which is giving us a very strong showing.

And what we're able to do, and able to do with our expenses, resulted in a very good operating profit for the quarter.

Operating profit for the quarter was $162 million, up 36%, as reported in constant currency, and up 43% excluding restructuring.

This yielding a 3.3% operating profit margin, up 100 basis points excluding restructuring.

Truly a strong performance by the team.

And, as you will hear from Mike, our recalibration efforts continued to yield results, as well as our drive towards a healthier business mix.

Now for additional information regarding the quarter and the segments, I'd like to turn it over to Mike.

Thanks, Jeff.

As Jeff discussed, our performance in the third quarter was much stronger than forecasted.

Earnings per share was $1.18, up 49%, or before restructuring was $1.26, up 59%.

This compares to the mid point of our guidance range of $1.06.

Of this $0.20 outperformance, $0.17 relates to operational performance.

This operational outperformance was due to higher revenue than expected and lower SG&A expenses due to our cost recalibration efforts.

Revenue in the quarter was flat with the prior year on a reported basis in US dollars and in constant currency compared to a forecasted decline of 1% to 3%.

On an average daily basis, revenue was down 2% in the quarter, an improvement from the 4% average daily decline we saw in the first and second quarters.

Revenue in both Southern and Northern Europe was better than our guidance range, as we experienced some growth in a few markets and an improvement in the year-on-year contraction rate in other markets.

Our SG&A expenses in the quarter were down 7% in constant currency, or down 8% excluding restructuring, reflecting strong execution on our simplification plan.

Our earnings per share were $0.02 above forecast, due to gains on sales of investment securities, $0.01 better as the impact of foreign currencies were neutral in the quarter compared to a forecast of an unfavorable $0.01.

A slightly lower tax rate also added $0.01.

Our weighted average shares negatively impacted earnings per share by $0.01, as the average shares outstanding were higher than forecast due to the increased dilution from equity plans as a result of a higher share price.

This all resulted in earnings per share before restructuring charges of $1.26.

Restructuring charges in the quarter were $8.1 million, or $0.08 per share, which was within our forecasted range.

Restructuring charges in the quarter relate to the simplification plan we put in place last fall.

The $8.1 million of charges was incurred across all five of our reporting segments.

The nature of these charges relates primarily to severance and lease costs.

Later in the call I will review the performance of the operating segments, which includes these restructuring charges.

Our gross profit margin for the quarter came in at 16.5%, down slightly from the prior year and previous quarter which were at 16.6%.

Looking at the components of our gross profit margin, temporary recruitment was stable overall with Manpower's gross margin flat and Experis up 10 basis points.

Within Manpower, the French gross margin improved primarily as a result of the CICE tax credits.

On the Experis side, we saw good gross margin expansion in the US as a result of focused price initiatives, and in Sweden as a result of improved bench utilization.

We continue to see some price pressure in several of our markets as a result of soft demand for our services.

We remain focused on price discipline and are selective on new market opportunities to insure they meet our return on investment targets.

Our permanent recruitment business was a drag on the overall gross margin by 10 basis points, as our permanent business contracted by 5% in constant currency during the quarter.

While permanent recruitment remains sluggish in many of our markets, we are seeing strong interest from our clients in our high value recruitment process outsourcing offering.

During the quarter we picked up several new clients, which positions us well for an economic recovery when hiring should become more robust.

Now let's turn to gross profit by business line.

Our Manpower gross profit, which represents traditional staffing and recruitment services in the office and industrial verticals, comprised two-thirds of our gross profit in the quarter.

Manpower's gross profit has been improving the last few quarters and was flat with the prior year this quarter.

Our Experis business comprised 18% of gross profit in the quarter.

Approximately 70% of Experis' gross profit comes from IT services, 10% from engineering, 10% from accounting and finance, and 10% from other professional services.

Our Experis gross profit declined by 4% in constant currency in the quarter, as a result of weakness in Europe and the Asia-Pacific, Middle East segment.

In the Americas, which accounts for almost 50% of Experis gross profit, we saw gross profit growth of 5% in constant currency.

Our ManpowerGroup Solutions business represented 9% of gross profit in the quarter and consisted of recruitment process outsourcing, MSP, Talent Based Outsourcing, Borderless Talent Solutions, and Strategic Workforce Consulting.

Our gross profit growth was flat in the quarter as good growth in our MSP business was slightly offset by modest declines in the Talent Based Outsourcing.

Our Right Management business comprised 6% of gross profit in the quarter and declined by 4% in constant currency, which I will discuss later in the call.

Our SG&A expense in the quarter was $691 million, which includes $8 million of restructuring charges.

As a result, our SG&A costs before restructuring charges was $683 million, a decline of 7.7% in constant currency.

We saw a strong increase in productivity in the quarter as SG&A as a percentage of revenue improved to 13.2%, from 14.3% the prior year.

This was a result of tight cost controls and strong execution around our cost recalibration plan.

On a year-to-date basis, our SG&A costs before restructuring are down $157 million in constant currency, or 6.9%, to $2.1 billion.

This reflects a 60 basis point improvement in productivity, with SG&A as a percentage of revenue improving to 13.8% from 14.4% the prior year.

These productivity gains are coming from all segments of the business.

SG&A expenses are down between 3% and 10% in constant currency on a year-to-date business for all of our operating segments.

As discussed last quarter, our cost recalibration plan is well ahead of our initial target announced in the first quarter of this year.

Our initial target was to reduce our SG&A cost run rate by $125 million this year, based upon a recalibration of costs in four areas -- organization, programs, technology, and delivery.

Our current estimate is a run rate reduction of $180 million, with a current year P&L savings of $150 million.

So we can plan on an incremental $30 million savings in 2014 based on the expected run rate.

So far this year, we have taken restructuring charges of $63 million.

And we expect total restructuring charges this year of $75 million to $80 million.

This, combined with our fourth quarter charge last year of $27 million, will result in total restructuring charges for the program between $102 million and $107 million.

It is important to remember that this is a recalibration program focused on 2013.

This is about recalibrating our costs and doing our business in a different way to simplify our organization and processes so we can focus on what is most important, which is selling high-value employment solutions to our clients.

With a new organization and new processes, we do not expect much of these costs to come back in.

In addition to the cost recalibration plan, we are targeting additional cost reductions in 2013 in excess of $50 million, resulting in a total SG&A reduction of more than $200 million in the 2013 P&L.

This additional $50 million of cost reduction is more closely linked to the revenue declines in the current year.

As we look to 2014, we will continue to drive more efficient delivery channels in our continuous improvement effort to enhance productivity.

We have not specifically quantified the impact of these changes but expect they will allow us to drive higher incremental margins on future revenue growth as we continue our journey to our 4% EBITDA target.

Next I'd like to discuss the performance of our operating segments.

Revenue in the Americas was at the high end of our guidance range, coming in at $1.1 billion, an increase of 1% in constant currency, or flat on a dollar reported basis.

OUP in the quarter was $46 million, or $47 million before restructuring charges, an increase of 33% in constant currency.

The OUP margin before restructuring charges was 4.1%, an increase of 100 basis points.

The strong profit performance was primarily attributable to SG&A cost reductions related to the recalibration plan.

Permanent recruitment fees remained strong in the quarter, up 12% in constant currency.

Our US business comprised two-thirds of the Americas segment revenue in the quarter.

Revenue came in slightly stronger than expected at $762 million, which was in line with the prior year.

US OUP was very strong in the quarter, coming in at $34 million, an increase of 40% from the prior year.

The OUP margin was up 130 basis points to 4.5%.

Our US business continues to intensely focus on price discipline.

And has been selective with new opportunities with rigorous assessment of client economic value-added.

Staffing margins were up slightly year over year in the quarter.

And permanent recruitment was up 7%.

This, combined with an SG&A reduction of 6%, fueled the strong OUP growth.

In the US, our Manpower business represents almost 60% of revenue.

Manpower revenue was down 1% year over year, a slight improvement from last quarter.

Similar to last quarter, revenues were negatively impacted by 2% from a large project that was completed for one of our clients in the first quarter.

We've also been negatively impacted by a few other large clients who have reduced their needs.

On the professional side, our Experis business represents 37% of revenue, and was down 1% in the quarter.

This decline is an improvement from last quarter which was down 5% year on year.

As we discussed last quarter, we continue to focus on pricing and margin improvements in the Experis business.

This has been quite effective as gross margins improved more than 100 basis points in the quarter.

And the business line contribution improved by 29%.

Our ManpowerGroup Solutions in the US also did very well, with revenue up 18%, and business line contribution up 34%.

This was driven by very good growth in our MSP and RPO businesses.

Revenue in Mexico was flat in constant currency, a slight improvement from the 1% decline we saw in the second quarter.

Overall demand for our services in Mexico has been a bit weaker the last few quarters, given the weaker economic environment.

Mexico was able to achieve a higher gross margin due to a better mix of higher value solutions business.

In Argentina, revenue was up 16% in constant currency on a billable hour decline of 13%.

The decline in billable hours improved from the prior quarter.

However, the overall environment remains fairly chaotic.

Our gross margin was up in the quarter, resulting in a nice improvement in profitability.

Revenue in Southern Europe came in at $1.9 billion, a reported increase of 5%, or a constant currency decline of 1%.

Revenue in this segment continues to exceed forecast as the declines in France continue to moderate further.

And we are beginning to see year-on-year growth in both Italy and Spain.

OUP in the quarter was $73 million, an increase of 45% in constant currency before restructuring.

And the OUP margin expanded nicely by 120 basis points to 3.9%.

This strong expansion was driven by an improved gross margin and strong SG&A reduction.

Our business in France comprised 74% of Southern Europe's segment revenue in the quarter.

Revenue in France came in at $1.4 billion, a decline of 4% in constant currency, but 4% better than our forecast.

During the quarter, we have seen a continued narrowing of the year-on-year gap with the prior year which began in the second quarter this year.

No doubt, prior comparables are easier and account for some of this improvement, but it's encouraging to see an improving trend.

Our operating unit profit in France came in at $58 million, for a margin of 4.1%, an improvement of 150 basis points over the prior year.

This strong profit growth resulted from an expansion of the gross profit margin primarily attributable to the CICE payroll tax credits, as well as vigorous cost controls and effective SG&A reduction.

Our revenue in Italy came in at $270 million, an increase of 3% over the prior year in constant currency.

As I mentioned last quarter, we seem to have hit the bottom earlier this year in Italy with revenue now turning positive for the first time in the last seven quarters.

While the Italian economy is still struggling to gain momentum, they're turning to our services to satisfy much of the nascent demand.

OUP in Italy came in at $11 million, an increase of 9% over the prior year excluding restructuring.

The OUP margin expanded 30 basis points to 4.1%, as a result of strong price discipline and improved productivity.

Revenue trends in Spain also showed an improving trend in the quarter.

Revenue was up 12% in constant currency which includes the acquisition of some clients from a local competitor.

On an organic basis, revenue in Spain was up 3%, a remarkable improvement given the last five quarters of decline.

Profitability was also up nicely in Spain as we were able to leverage the increased client volumes on a lower expense base.

Revenue in Northern Europe came in above our forecast range and was flat with the prior year in constant currency at $1.4 billion.

This is the first quarter in the last six quarters in Northern Europe where we didn't see a constant currency revenue decline.

We saw several markets, including Germany, Netherlands and Belgium, go from year-on-year constant currency declines last quarter to year-on-year growth this quarter.

Our gross profit margin was down year on year, as expected, but stable with the prior quarter.

Our gross profit from permanent recruitment fees was down 6% in constant currency, reflecting a slight improvement from the 7% decline we saw in the second quarter.

Permanent recruitment has been improving in Northern Europe as the year-over-year declines have moderated since the fourth quarter of last year.

Our SG&A expenses were extremely well controlled.

And we are witnessing the impact of the cost recalibration plan as SG&A expenses declined by 10% excluding restructuring.

This resulted in reported OUP of $50 million, or $53 million before restructuring charges, an increase of 22% in constant currency and a margin improvement of 60 basis points to 3.6%.

Within Northern Europe, our Manpower business represented 76% of revenue, Experis represents [20%] (corrected by company after the call) of revenue, and ManpowerGroup Solutions represents 4% of revenue.

Revenue at Manpower was flat with the prior year.

Our Experis business was down 4% in constant currency, which was improvement from the 11% decline we saw last quarter.

Demand for our Experis services remains spotty but has been improving over the last few quarters.

Our ManpowerGroup Solutions business, which primarily consists of Talent Based Outsourcing in Northern Europe, was slightly down compared to the prior year.

Our UK operations comprised 31% of the Northern Europe segment, and experienced a 1% decline in constant currency revenue growth, compared to the prior year.

This decline was a result of the Olympics business included in the prior-year revenue.

Our SMB business, driven by the Brook Street brand in the UK, was quite strong in the quarter.

The overall staffing environment appears to be getting some traction in the UK, which should help drive more growth.

That said, our UK operation will face some headwinds the next few quarters as one of our large clients that has helped fuel good growth the last several quarters is reducing their staffing needs.

Our Nordic operation represents 22% of the Northern Europe segment, and saw a decline of 2% in constant currency, or 6% on an organic basis.

Within the Nordics we are seeing a slight year-over-year decline organically in the Norwegian market as demand has softened slightly.

In Sweden we are seeing year-over-year declines which have stabilized over the last few quarters.

Within Sweden we are seeing some market share grabs by small competitors through lower pricing.

At this point we are vigorously defending our pricing and being selective on new opportunities.

The German market represents 13% of Northern Europe revenue, and also appears to be gradually coming back.

In the quarter we saw constant currency revenue growth of 3%, the best growth we have seen since the second quarter of 2011.

The Netherlands, which represents 10% of segment revenue, also saw improving growth, with an increase of 2% in constant currency.

We are in the early phases of implementing our new market-focused delivery model, which has shown encouraging signs of success.

We've been able to simplify the business which has allowed us to gain market share while at the same time reduce our cost base.

The Belgium market also took a turn for the better with growth of 2% in constant currency.

This is a marked improvement from the 6% constant currency decline we saw last quarter.

Our Asia-Pacific, Middle East segment represents 12% of revenue and was down 1% in constant currency.

While our top-line revenue was somewhat softer than expected, SG&A costs were reduced by 5% excluding restructuring.

This resulted in an OUP gain of 11% in constant currency and an OUP margin of 3.4%, an increase of 40 basis points excluding restructuring charges.

Our Japan business represents 38% of segment revenue and saw constant currency decline of 2% in the quarter.

Despite the thawing economic environment in Japan, we have not seen an increase in demand for our services to this point.

Our business in Australia has seen stabilizing trends with revenue down 5% in constant currency.

Growth in our other markets in Asia was mixed, with strong growth in India and Malaysia, and slight contraction in Taiwan and Thailand.

Revenue in China was slightly down in the quarter as a result of an amendment to their temporary labor laws.

Effective July of this year, the government has put in place some restrictions on temporary help, similar to what we see in several other markets, such as length of assignment, parity pay and penetration limits.

While this has had an initial impact on our existing assignments, it has not significantly impacted our profitability.

Given the size of the China labor market and low staffing penetration overall we continue s to see good opportunity.

The final segment is Right Management.

Right's revenue was in line with our forecast, coming in at $77 million, a decline of 2% in constant currency.

Within Right, two-thirds of our revenue relates to career management or outplacement services, which was flat in the quarter.

While have seen volumes in career management improve on a year-over-year basis, we are seeing clients opt for shorter duration programs, which ultimately impacts the revenue produced.

Our talent management business is down 6% compared to last year, similar to the prior quarter as companies are still being careful with discretionary spend.

Our Right team has done a good job of recalibrating our cost base, resulting in strong earnings growth in the quarter before restructuring items of 36% in constant currency.

This represents an OUP margin improvement of 2.5% to 9.5% before restructuring.

Next I'd like to review the cash flow and balance sheet.

Free cash flow, defined as cash from operations less capital expenditures, was very strong in the quarter at $175 million.

This was somewhat expected as cash flow in the second quarter was lower than normal, as the second quarter ended on a weekend, which resulted in a delay in our cash collections.

On a year-to-date basis, free cash flow was $78 million, an improve improvement from the $63 million used in the prior year.

Our days sales outstanding improved by 1 day in the quarter to 56 days.

This was primarily due to the timing of the quarter end cutoffs as the underlying DSO was stable with the prior year.

Capital expenditures were $34 million year-to-date, compared to $48 million in the prior year.

Capital expenditures are being prudently invested this year as we evolve our network strategy and our new delivery channels.

The balance sheet remains well positioned at quarter end, with total cash of $488 million, and total debt of $516 million, resulting in net debt of $28 million.

Overall borrowings remain stable with the previous quarter.

And our total debt to total capitalization improved slightly to 16%.

The $516 million of total borrowings consists of $473 million outstanding under a fixed term euro note due in June of 2018, and $43 million of other borrowings.

We also have our revolving credit agreement available for borrowing, which we amended effective October 15 to reduce the size from $800 million to $600 million, based upon our anticipated needs.

We also extended the tenure by two years to an October 2018 maturity date.

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

We expect a strong profit performance again in the fourth quarter.

We expect revenue and operating profit to be similar to the third quarter.

But earnings per share of slightly less than the third quarter as the third quarter included a $0.02 gain on the sale of securities.

And weighted average shares are expected to be higher at 81.3 million, which will also have a negative $0.02 impact relative to the third quarter.

Weighted average shares are expected to be higher in the fourth quarter as outstanding equity grants will be more dilutive as a result of the higher share price.

We expect revenue to be flat with the prior year in constant currency.

This is an improvement from the third quarter as the third quarter revenue was down 2% in constant currency on an average daily basis.

In the fourth quarter, the number of billing days are the same this year compared to the prior year.

Currencies will have a slight negative impact overall in revenues.

So on a US dollar basis we expect revenue to be flat to down 2%.

We expect revenue in the Americas and Southern Europe to be flat to up 2% in constant currency.

Northern Europe to be flat to down 2% in constant currency.

And Asia-Pacific, Middle East and Right Management to be down between 1% and 3% in constant currency.

We expect the gross profit margin to range between 16.5% and 16.7%, a slight improvement sequentially but down slightly on a year-over-year basis.

We expect the operating profit margin to range between 3.2% and 3.4%.

We are forecasting our tax rate to be in the range of 38% to 39%.

And we are forecasting our earnings per share before restructuring charges to be $1.18 to $1.26, which includes an unfavorable currency impact of $0.01.

We are forecasting restructuring charges to range from $12 million to $17 million before income tax effect.

Lastly, while we don't give formal guidance beyond the current quarter, I'll offer a few thoughts to consider for those of you modeling the first quarter of next year.

As many of you know, the first quarter of the year is the weakest quarter from a seasonal perspective, and therefore revenue always declines sequentially going from the fourth quarter to the first quarter.

While SG&A expenses also typically decline from the fourth quarter into the first quarter, they do not flex proportionately.

And, therefore, there is operational deleveraging resulting in a lower operating profit margin in the first quarter compared to the fourth quarter.

Additionally, burden rates in some countries reset in the first quarter, which results in a slightly lower gross profit margin on a sequential basis.

And also impacts the operating profit margin.

Furthermore, you may recall that in the first quarter this year our tax rate had the benefit of the full 2012 year WOTC tax credit in the quarter.

This obviously won't happen again this year.

Therefore, I would assume an effective income tax rate in the upper 40% range for the first quarter next year.

Again, the tax rate in the first quarter tends to be higher than other quarters as the French business taxes have a disproportionately larger impact on the first-quarter effective rate due to the seasonally lower pretax earnings.

You'll also want to be sure to use the higher weighted average share count that I discussed earlier.

With that I'd like to turn things back to Jeff.

Thanks, Mike.

The third quarter was a strong quarter.

We were able to execute in several of the areas that we had committed to.

And as a result you are seeing improved profitability.

We are starting to see a slightly better pace for revenue, which is critical for us to enjoy the operational leverage that will drive additional earning power.

The fact that we are beginning to see improved revenue trajectory across many of the geographies, particularly Europe, gives us all the more sense of urgency to continue our work in our four areas of simplification and cost recalibration, to position ourselves for any enhanced revenue, to drop more of that to the bottom line.

Our business mix, however, still needs to be improved.

We are seeing our permanent recruitment business fall off slightly in Europe which is driving down a bit of our GP percent, but also profitability.

Also, we are not seeing the growth that we were expecting within Experis, particularly Europe.

While our revenue growth for Experis US has not been up to market, we have been very price disciplined.

And as a result our gross profit percent for Experis US has improved dramatically.

We will continue to drive revenue across all geographies.

So, our business mix will continue to have a favorable impact on our overall profitability.

Our cost recalibration associated with the simplification process within the organization is paying tremendous dividends, as Mike spoke about.

We continue to reap more benefits than we had anticipated, as we are driving in all of the areas of the organization with a tremendous amount of engagement from our managers across the world.

As a result of this engagement of our teams across the world, we are overturning new ideas for us to drive efficiency and productivity on a permanent basis.

Clearly, not all of our cost reductions are permanent.

But, by far, the vast majority of them are expected to be.

This gives us additional confidence to continue an improvement on our operational leverage.

As we spoke about on our last call, we remain cautious regarding the lack of clarity with economic challenges throughout the Eurozone.

Europe is a major driver of the business, as it makes up a large percent of our overall revenue.

However, there is a difference between last quarter's conference call and this call.

One is you can start to see a modest improvement in the numbers.

And we continue to have more positive conversations with our clients based in Europe.

We believe there is still a ways to go before we start to see a dramatic improvement in our revenue picture, but we are moving in the right direction.

In the second quarter, Europe, which makes up 65% of our business, was down 6% in average daily sales in constant currency.

The same was true for the first quarter.

The third quarter, this 65% of our business was down 2%, a very nice improvement as we continue to drive good market growth where there is the potential.

Clearly, however, there is more work to do.

We continue to do well in Solutions.

The revenue growth rate of 5% is disproportionately affected by our Talent Based Outsourcing.

Our Talent Based Outsourcing, which makes up nearly two-thirds of our Solutions business, is where we price our business on an outcome basis rather than on a markup over pay.

The majority of this business is in Experis and Manpower and is tangential to the core resourcing or staffing business.

And, as a result, we are seeing some of our clients tailing back some of their usage in this area to maintain flexibility and agility, and to reflect the sluggish demand environment for their products or services.

If we were to exclude the TBO business, our Solutions business would be up 17% in constant currency.

A prime driver behind this growth is the RPO business, or Recruitment Process Outsourcing, and our MSP business.

Both of them are continuing to do well.

We continue to average and slightly increase our number of wins in the RPO space and the MSP space.

Additionally, we are seeing a nice uptick in our Borderless Talent Solutions, which is maximizing our presence across the world.

But primarily sourcing several candidates from India that are then placed in various parts around the world, with the US being one of the larger recipients.

In addition to our Solutions business, moving along nicely, as I mentioned, we are seeing better revenue trends in our core business.

A few countries to highlight in this are Italy, France and the US.

While in the US, we are still slightly behind market, we are working through ensuring that we are taking the right business.

A few of our US regions are up over 25%.

And, therefore, you can see that where we are not pruning some business, we are getting some very good growth.

In addition to Italy, France and the US, where we've seen better, we've also seen better trends in Germany and the Netherlands.

All of this is positive in our major markets for us.

As Mike has addressed in his prepared remarks the cost recalibration is going well.

We continue to focus on all four areas of our organization, programs, technology, and delivery.

Each of these areas have unearthed more opportunity for us and we will continue to work in these areas.

The two largest areas left is technology and delivery.

In the area of technology we continue to focus our efforts on being as efficient as we can in the back office and front office, while investing appropriately in tools for our field and additional tools for recruiting, sourcing and associate care.

Our delivery systems, where we are driving multiple delivery channels on a strategic basis, is going well.

We have piloted this in the United States in a few of the regions.

And we are continuing to work out a few of the details before we roll it out in more of a full scale.

Other countries, the UK and the Netherlands, are further ahead.

And, as the results are quite positive, we are yielding above average returns for the business in those marketplaces.

As we look forward to the fourth quarter, we are confident that our teams across the world will continue to drive effectively with the recalibration process, and enhance our ability to drive revenue that would be available given the marketplaces.

We still have unsure marketplaces and we stand on guard for any certain uncertainties that arise.

However, at this point, we do see a bit of clearer skies, though we have many uncertainties to work through.

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

(Operator Instructions)

Sara Gubins with Bank of America-Merrill Lynch.

Hi.

Thank you.

Good morning.

You talked about cost reductions being largely permanent, although not entirely.

If we start to think about growth on the top line next year, I'm wondering how we should think about the variability of SG&A as some of it presumably would return.

Yes.

As we look at our recalibration plan overall, as I mentioned in my prepared remarks, but I think it's probably worth summarizing, we're looking overall to get $180 million out of the SG&A run rate this year as part of that program.

Of that, $150 million will hit the P&L this year.

And in total, SG&A for the year we expect a reduction of over $200 million in constant currency.

So that additional $50 million-plus is more variable in nature.

So, as revenue comes back, some of that I would expect will make its way in to the expense basis.

Certainly as we see growth in certain markets, we'll need to invest and put staff in place to support that growth as revenue comes in.

But I think what's important is really leveraging that growth.

What we're looking to do is try to drive the productivity efficiency, which comes down to part of what we're doing with some of our delivery models and our channel strategy overall.

And so, as a result of that, we should get much higher incremental margins.

I guess that's a long way of saying, yes, with growth some expenses will come in.

We don't expect those expenses to be proportional with the growth in SG&A and GP, as we think we will get some very good leverage coming from that growth, and good incremental margins as a result of that.

And what we're trying to do with that is, as we had talked about the largest area that we have to still work on is delivery, so, clearly, as we can get some of the new areas that we're doing with our multiple delivery channels out into the field; do it carefully because that's where all of our revenue and profitability is made.

And the hope is we can maybe get out ahead of that so we can add less cost than we would normally because we're much more efficient because of how we're managing these channels.

Okay.

Thank you.

And then separately, any thoughts about share repurchase as dilution starts to hit the share count?

Historically we've certainly been active in the share repurchase program.

The last two years we bought back a little bit more than 8% of the overall outstandings.

So we have been fairly active.

We do have an authorization in place right now for 10 million shares.

And we look at that subject to our overall capital structure and how we're positioned overall.

Today, we don't have -- while the balance sheet is strong, we do like to leave some capacity for opportunities that might present themselves through the acquisition side.

But we don't have a significant amount of excess cash on the balance sheet today.

To the extent that that accumulates, we certainly will consider repurchases if that makes sense at some point down the road.

Overall, we're looking to manage the overall leverage about where we are today.

We do look to maintain an overall investment grade rating from the rating agencies.

We think that's a good place for the Company to be from an overall perspective.

And, so, yes, it is certainly something we'll consider going forward, but nothing in the immediate plans given our overall balance sheet structure today.

Thank you.

Tim McHugh with William Blair.

Yes, thank you.

Congrats, guys.

Just can you give us any more color on, you talked about demand trends improved as you went through the quarter.

Was there a notable difference between the start of the quarter and where you sit today?

Just any color there.

Yes, sure, Tim.

If I look overall as the quarter progressed, actually, just looking at year-on-year trends, August was actually quite an improvement on a consolidated basis relative to where we saw July.

And then September looked a lot like August.

So it wasn't a continuous trajectory.

And typically in these type of scenarios, when business is recovering somewhat, you don't just see a solid line.

Sometimes you get a little bit of a sawtooth on the way up.

And so I think we're seeing a little bit of that.

And I'm talking about average daily, as well.

I should be clear on that because we did have an extra day in September.

So if you just look at average daily constant currency, we saw improvements August.

September looked pretty much like August.

And when you look at country by country, you'd see in some cases September was better, was an improvement relative to August, and in other countries September was, on an average daily basis, slightly worse than what we saw in August.

We're seeing a little bit of choppiness but certainly overall, the overall trend continues to at least be moving in the right direction and we're closing that gap with the prior year.

Okay.

And then on Experis you talked about how in some of the markets the growth not hitting what you'd like.

And I believe you said you've taken some actions and made some changes.

I think you touched on a few of them but just elaborate a little bit more on what you'd like to do to change that going forward.

Each of the major geographies have a little different characteristic to them, so we're not just applying one solution to it.

I would say, if you were to try to categorize it in a bigger area, what we've done is to increase our focus on the IT part of Experis.

We know that's the largest part of the market and the market that we are most successful in, currently.

About 70% of our total Experis business is coming out of the IT area.

So we're really working with our operations to make sure we focus on that.

A little aside, the finance and accounting side in the US had a very good quarter so we are seeing some growth in there.

But it's still not as large.

Secondly, what we're doing is making sure that, while we are increasing in a lot of our geographies, our gross margin, and as a result getting very good bottom line, we're taking a real hard look at the price inelasticity side and say -- Okay, if we were to do a few things differently on the gross margin line, would we be able to bring on X additional business versus not.

And we're doing that on a market-by-market analysis.

And we'll be making a decision on how much we want to be able to take on that might be a little off our targets but we believe would still yield a very good gross margin but improve our revenue picture in a much more dramatic way.

While I have you, Tim, as well, I was made aware that I did misspeak in my prepared remarks.

I said Experis comprised 40% of Northern Europe.

It actually comprises 20% of Northern Europe.

So I'll get that correction made, as well, please.

Okay.

And then one last one.

Mike, just the impact of the extra day in Q3, just in terms of the revenue growth, how much did that add at the end of the day?

That would have added about 2%.

1.6%, I think, technically.

So, call it about 2%.

Okay.

Thanks.

Andrew Steinerman with JPMC.

Hi, Mike.

It's a question about France.

On an average day basis, the minus 4%, what would that translate to?

And my sense is that Manpower's gaining share in France.

Is that your assessment, as well?

When you look at on an average daily basis in the quarter for France was down 5% overall.

So, right around 5%.

I think we were probably picking up just a little bit of market share.

Certain geographies are a little bit stronger than others.

So I think we probably are picking up just a little bit of share overall.

But when you look at France, we've seen a fairly steady improvement across the quarter and into the early stages of the fourth quarter.

Fairly gradual but continuous closing the gap relative to the prior year.

So as we look forward to the fourth quarter, we see that trend continue.

And what's implied in the Southern Europe guidance for France in the fourth quarter?

In the fourth quarter, specific to France, we'd be looking for down 2% to down 4% year on year on an average daily basis.

And days are the same in the fourth quarter, so effectively that's the same.

Got it.

Thanks.

Tobey Sommer with SunTrust.

Thank you.

I wanted to ask you a question about the SG&A expenses that would be needed to accompany revenue growth going forward.

Is there greater sensitivity to the SG&A accompanying revenue growth, depending on in which segment you experience the revenue growth?

And, if so, which one is more closely tied?

Thanks.

Sure, Tobey.

I don't think, when we look at opportunities to leverage SG&A with top-line growth, I think we're sitting pretty well in all markets.

Meaning that I would expect, with some revenue growth, we'll have some fairly good operating leverage in all markets.

And it's difficult for me to put one above the other.

I think we've got a little bit of capacity in many of the markets that we're in.

And I think, as we look forward, and we look at what we're doing from a delivery strategy and a channel strategy, we expect we're going to be driving efficiencies in many of the markets.

So I don't think I would point to one more than the other.

Certainly what I think is maybe going to be more important is exactly where that growth happens within a market.

So, if you get into certain geographies within country may have excess capacity within an office, whereas other offices might be completely full in terms of productivity.

So if the growth comes in markets that are already booming, clearly we're not going to get quite the leverage that we would get if the growth came in a market that happened to be down and still on a recovery standpoint.

So, I think that's probably going to be the more important fact overall in terms of where that growth may come and how that leverage might play out.

But I do think each of our segments has good upside from an operating leverage standpoint.

Thank you.

And then just if you could comment on the momentum you're seeing in the MSP and RPO markets, to what extent that is new work coming to market versus displacing competition.

Thanks.

In the RPO space, it still is more new work, though we have made full circle on a couple of the large contracts that we have.

And we've done a good job in securing those second time around.

But I would say this is particularly more so in South America and in Asia, where we're seeing good growth.

A lot of this is new opportunity.

These are secular changes that really allow us to expand what we're doing without having to get into taking it from somebody else, if you will.

On a run rate basis, we are ahead of what we were the last two quarters in the number of wins and the RPO space.

When it comes to MSP, there is still some aggregation going on within the US.

So, some of that is taking business from smaller MSP providers, or aggregating them all into one across the world, or expanding a successful MSP program into other geographies, is what we're seeing.

And in some other geographies it makes it more difficult because of some laws, as well as maybe skewed market shares within there, where we may have, in a couple countries, 30%, 40%, 50% market share and MSP doesn't seem to make as much sense.

But those are opening up to us, as well.

So, both of those have strong pipelines and we're comfortable with those pipelines, as we're getting some momentum in the area.

I would also comment that the actual hiring occurring within the RPO businesses that we are winning or have won in the past is still on the slow side.

So there's still a lot of opportunity.

If we can get some demand in the marketplace, you're going to see those RPO contracts flow through a lot more hiring, and as a result generate a lot more profitability.

Thank you very much.

Mark Marcon with RW Baird.

Good morning.

Congratulations.

I have a couple of questions.

One, with regards to France, how much of the CICE are you able to keep?

What's your sense in terms of the market as we think about the rest of this year and going into next year?

I think in terms of the CICE, just to level set overall, that's a tax credit that we're receiving as part of the overall French stimulus program, and it amounts to 4% of employee wages.

So it's all employees.

Not just temporary employees, but all employees.

And that increases to 6% next year.

And the intent of that subsidy is to go to the employers and also to be reinvested in training and employment programs, which we, in fact, are doing.

So, from our perspective, this is a credit that does stay with the employer.

And our view has been from the start that that should stay with us and not be passed on in bill rates.

And, of course, we've been monitoring the market to see exactly how the market itself and how our competitors play with that, as well.

From our perspective, as we look forward we'll continue to monitor it.

I think it's logical that some of it will move into the marketplace.

We may be already seeing some of that move into the SMB part of the margin itself.

So I think it's one of those, Mark, where we're still just seeing how that plays out.

As we move into next year, the credit goes up a little bit more and we'll see what happens and how that takes place going forward.

I think it's not fully played out yet but I think, for the most part, the market does not seem to be giving the credit or passing the credit back on down.

I think they're looking at it as a credit that should stay with the employer and as funds that will be invested, or at least partially invested, in new worker programs.

Do you feel like, generally speaking, the market's retaining about two-thirds of it?

I'm not prepared to put a number on that because I'm not sure.

Particularly on the SMB business, it's really hard to decipher how much of that is actually making it into the marketplace and how that is moving through.

So it's pretty difficult to actually say exactly what the percentage is in terms of what is making its way there.

On the large account side, we have had quite good successes in retaining it, through some conversations we've had with them.

At the same time, we would expect, as Mike noted, it goes up when we move into 2014.

That may be another point of conversation at that point with the larger clients, saying -- Now that it's moved up can we have this discussion.

Even though the intent hasn't changed, which is it's supposed to stay with the employer, but that may be another opportunity for some negotiation.

On the larger account side, it seems to be going pretty well.

On the SMB side it's harder because also we are dealing with many more competitors on the SMB side.

Great.

Then can you talk a little bit about -- I was a little unclear with regards to the cost savings.

Just trying to decipher whether there's relative to the $180 million in annualized cost savings that were originally targeted, it sounded like potentially you're saying that the cost savings are going to be greater on an annualized basis.

But I wasn't completely sure about that.

Sure.

Let me clarify.

The original amount was $125 million, so we--.

Right, and then last quarter we went to $180 million.

Last quarter we went to $180 million.

So, as you look at that $180 million, that is what we see as part of our recalibration program.

Of that $180 million, $150 million will go through the earnings statement next year, and the other $30 million will come through.

We'll have $180 million by the time we exit the year on a run rate basis but the incremental $30 million impact will show up next year.

The other point I was --.

You mean in 2015?

In 2014.

So, again, of the $180 million, $150 million impacts 2013 earnings statement.

The incremental $30 million will impact 2014, to get to the full $180 million out related to the simplification program.

Okay.

The other point I was trying to make is, as you look at our SG&A overall, clearly the reduction for this year will be more than $150 million.

It will be in excess of $200 million.

And that additional reduction has to do with just other cost reduction measures that we've been taking.

And there are some more variable expenses in there that may come back in as revenue ticks up.

So that was the distinction I was trying to make there.

Got it.

Great.

And then just in terms of thinking about the target that you had set back in February in terms of the 4% EBITDA margin, that basically implied 10% incremental margin.

Do you still think that's reasonable over the next $3 billion in revenue, roughly speaking?

Yes, I think so.

I think that is, as we look at those incremental margins, effectively we think we can deliver on that.

So, as you look at how that road map was developed, there is 70 basis points related to that.

I still think that's sensible.

And of course the SG&A reduction we had listed as 60 basis points helped.

It's turning out to be 90 basis points so we're ahead of the game there.

I would say on the GP side we're looking for 30 basis points improvement from GP mix overall, with the underlying staffing margin to be stable.

I would say, as we're further into it, I would say the underlying staffing margin may see a little bit more pressure than what we had anticipated.

So if there's a little bit of risk in that, I would say there's a little bit of risk on the GP margin expansion of 30 basis points.

We'll exceed the SG&A side of it.

And I still feel good about the last piece, which is the 70 basis points on the incremental revenue.

You would think you'd get some GP improvement if in fact the overall environment improves, just not the 30.

Yes, I still think, from a mix standpoint, I still very much feel we'll get the mix benefit that we had spoken about.

It's just that we may see a little bit of deterioration on the underlying core staffing margin which may take that 30 down a little bit.

But I still think on a net basis we'll see some benefit coming in on the GP margin.

Great.

Thank you.

Paul Ginocchio with Deutsche Bank.

Great.

Thanks.

Mike, just on the commentary around the first quarter, it does look like consensus has got a 5% Q-on-Q decrease in revenues, a 40 basis point decline in gross margin, 100 basis point decline in operating margin.

I'm just trying to understand your commentary in relation to that.

Is that not enough?

Or what were your 1Q comments trying to imply?

Thanks.

Paul, I wasn't trying to guide any more specific than that, just as we look at that.

The first quarter always is a little bit tricky, just from a leverage and a deleverage standpoint.

So I wasn't trying to comment as to how I felt about what was out there, either favorably or unfavorably.

But just give, as people I know start to refine next year, look at it more carefully, just give a few thoughts on that in terms of what they look at for the year.

I think from a revenue perspective, given the trend that we're seeing, third quarter down 2% in constant currency and then fourth quarter down flat in constant currency, given what we're seeing today I think it would be unusual to see a 5% down in constant currency.

I think that's what you said.

Q on Q.

Oh, that was Q on Q. Okay, I got you.

But I think you could just take the year-on-year trends and look at that and do some reasonable extrapolation.

The number of days in the first quarter overall seems to be about the same this year compared to prior year.

We've got a couple markets that have an extra day, a few markets that are about the same, so we might pick up a portion of a day when you look at revenue going into the first quarter.

Easter this year fell right at the very end of the first quarter.

Next year it's in April.

So Easter will have less of an impact.

So I think I would take that and those would be the comments I would have on the first quarter.

That's perfect.

And, Jeff, if I could sneak one more in.

Did the US government shutdown have any impact at all?

Thanks.

Not that we've been able to tell.

When we look at our weekly numbers, it really hasn't.

We have some in the federal government, particularly out of Washington and a few other processing centers, so I'm sure there will be a little bit of a nick but not noticeable.

Thank you.

Kevin McVeigh with Macquarie.

Great, thanks.

And great job.

Jeff or Mike, I know this may be hard to quantify, but as you think about the discipline on the revenue line, how much have you walked away from in terms of where the revenue would have been but for you just didn't think the margin was where it should have been from a profitability perspective?

Is there any region that you've been more aggressive in terms of price discipline than others?

We always try to put some numbers on that.

We've got to be careful because we want to make sure that when we hear we lost because of price it really was price and not just poor marketing and sales on our part, because that does happen.

But where we can really have discrete, large opportunities where we've either had it, the business, which is a lot of that, and just at re-upping time or renegotiation time we in fact did, if you will, pleasantly walk away, nicely walk away, professionally walk away, from that business.

That probably falls into about the 2% range.

And a few large clients because of completion is about another 2% in there.

That's how we've looked at it in the US side.

When you look at the regions that are outperforming some of the others because there isn't an even spread, what we find is that a lot of times they're outperforming because of the same thing, which is a few large accounts that we've been able to pick up.

But also why a region is down is maybe because, in many cases, of that one account or two accounts.

So, when we look at it across the board, we feel pretty good about it.

We want to make sure that we're not becoming overly disciplined, meaning it goes back to the conversation we had regarding Experis, as well, which is where is that price inelasticity or elasticity, and how do we get into that zone.

And we're trying to do a lot of work on that and we're going to continue to do the work on that.

We do not see this as a long-term trend that we think is what we want to do.

So don't be confused that we're thinking three years of this is what we want.

We're looking for some bottoming out.

We're trying to make sure that we also work on our efficiency and productivity, so that in some cases we'd be able to eke out a little bit more operating profit off of a lower price.

So there's a lot of work being done in this and the teams know, particularly in the US, is let's make sure we sell aggressively, keep the price discipline, and really look at the contribution on a per account basis by maybe delivering some less services.

Which is difficult for us because we like to keep our services at a high level.

But those are the kinds of discussion that's are happening throughout the Company right now.

Got it.

And then in terms of the CICE in 2014 going from 4% to 6%, does it go 4 to 6 automatically?

Is there some type of step function?

Or is it just 1/1 of 2014 that credit goes up to 6% and then holds there?

That's set by law that it goes up automatically to 6%.

Okay, super.

Thank you.

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