ManpowerGroup Inc (MAN) 2016 Q1 法說會逐字稿

Welcome to ManpowerGroup's first-quarter earnings results conference call.

(Operator Instructions)

This call is being recorded, if you have any objections you may disconnect at this time.

I'll turn the meeting over to your host, Manpower Chairman and CEO, Jonas Prising.

Sir, you may begin.

Good morning, and welcome to the first quarter 2016 conference call.

With me today is our Chief Financial Officer, Jack McGinnis, along with our Senior Executive Vice President and former CFO, Mike Van Handel.

I will start our call by going through some of the highlights for the first quarter, and Mike will go through the operational results of the segments for the quarter, and Jack will cover our balance sheet, cash flow, and the outlook for the second quarter.

I'll then come back for some final thoughts before we start our Q&A session.

Before we go any further into our call, Mike will now 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 date of 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 started the year with a good performance in the first quarter, with earnings per share growth of 22% in constant currency to $0.98 on revenue growth of 5% in constant currency to $4.6 billion.

Our operating profit grew 11% in constant currency to $132 million, and our operating profit margin improved 20 basis points to 2.9%, driven by slightly higher gross profit margin and improved SG&A productivity.

As we have discussed in our recent earnings calls, the market environment continues to be choppy around the world, with different countries within regions moving at a different economic pace.

This, of course, impacts the demand for our services in these markets.

Overall, our revenue trends this quarter were fairly stable with the fourth quarter, with some markets doing slightly better, and other markets doing slightly worse.

The one exception to that is Italy, with a very strong growth we saw in 2015, flattened out in the first quarter due to a combination of stronger prior year comparable growth rates, the impact of hiring stimulus, and a slow economy.

Mike will discuss this further in the first quarter segment results.

As you can tell, currency fluctuations were less of a factor this quarter, as we anniversary significant movements in the euro that occurred in early 2015.

But as many of you already know very well, it is mainly a translation effect for us, as our cost and revenues are matched in each country where we do business.

Looking back over the past quarters, our view of the external environment is not significantly different.

We are operating in a global economy that appears to have become slightly softer for a variety of the reasons over the past 12 months, but with continued good growth opportunities in a number of markets.

We believe that the global economy will continue to be uneven.

And that is the environment that we are prepared for, both operationally and strategically.

Our belief is that Europe overall is still early in its economic cycle, and although it may be bumpy over the near term in some markets, we should still be able to see good growth opportunities as we move through the economic cycle.

We believe the US economy should continue in its slow growth mode as well.

Some industries are experiencing slow growth, but others are doing well, which will give us opportunities for growth in our different lines of business, as evidenced in our continued good growth in our permanent recruiting business, as well as our solutions business.

Despite the difficulties for many countries in Asia/ Pacific and Latin America, we had good performances also in those regions, which show companies need flexibility to absorb market fluctuations in their respective businesses and industries, also when they are operating in a more difficult market.

As we have said before, this choppiness in many markets is not ideal, and we believe it is a kind of environment that can still present us with good opportunities for profitable growth.

Speaking to companies in many parts of the world, and my recent travels in the US, Europe, and Asia, they are seeing the volatility in many of their own industries, but also seem to accept that this is something they may have to live with for quite some time, and that they need to improve their performance despite these sometimes adverse and choppy conditions.

An uncertain slow growth environment can present us with excellent opportunities for our brands to help companies achieve their business strategies by providing world-class workforce solutions.

As we mentioned on our last call, at this time we don't see any signs of a broad-based global downturn.

In fact, many companies expressed difficulties finding the right talent, as evidenced by the findings of our 2015 talent shortage survey published late last year.

We are focused on generating profitable revenue growth, underpinned by disciplined pricing and strong productivity management, so that we can drive operational performance improvement even if global market conditions continue to be patchy and uneven.

In regions with a slow growth environment, where unemployment is still high, such as Europe, many employers hesitate to add to their permanent workforce, and that gives us good opportunities to help them with the needed flexibility to adapt their workforce strategies as the marketplace ebbs and flows, as well as make them more focused on their core business by providing market-leading workforce solutions that support their workforce strategies.

Conversely, in markets with low unemployment, our strength in permanent recruitment and solutions expertise will help them find the needed skilled talent wherever they operate.

An increasing number of companies are seeing ManpowerGroup as a great partner, to find resources they aren't able to find themselves, which has led us to a record level of perm fees for the full-year 2015, and, to a new record fee level of 15.2% of GP this quarter.

Our diversification within and between brand is providing many client companies with a global partner across multiple talent capabilities and disciplines they are increasingly looking for, and we are confident that we can provide them with a value proposition they are looking for today as well as in the future.

We're off to a good start to the year, thanks to the hard work and efforts of our teams in our 80 countries.

And we look forward to building on this progress as the year continues.

With that, I'd like to turn it over to Mike for some additional information and detail on the segments for the first quarter.

Thanks, Jonas.

As Jonas mentioned, we started the year off with a good performance, with earnings per share up 22% in constant currency, and 5% constant currency revenue growth.

Revenue growth was at the lower end of our guidance range, but operating profits and earnings per share exceeded our expectations.

The operating profit margin was 2.9%, up 20 basis points over the prior year, and up 20 basis points from the midpoint of our guidance.

Compared to the prior year, our gross profit margin is 10 basis points higher, and SG&A costs were 10 basis points lower, both driving the expansion in operating profit margin.

Dissecting our revenue growth into a bit more detail, on average, we had the same number of billing days in the quarter this year compared to prior year.

While leap year added an additional billing day, this was offset by Easter moving into the first quarter this year.

That, of course, will help in the second quarter.

I should also note that, while on average, there was no impact from billing days, some of our countries were impacted, and therefore you will hear me reference revenue growth per billing day when discussing country results later in the call.

As expected, acquisitions contributed about 3% to our 5% constant currency growth rate in the quarter.

Therefore, our organic constant currency revenue growth in the quarter was 2%, about 1% lower than the fourth-quarter growth rate, after adjusting for billing days.

This 1% deceleration in growth rate can be attributed to slower growth in Italy.

As Jonas mentioned, growth in most of the other markets was fairly stable, and segment revenue growth outside of southern Europe was about as expected.

Earnings per share of $0.98 exceeded the midpoint of our guidance range by $0.07.

This out-performance is mostly attributable to the stronger performance of our operation, with $0.05 coming from operations.

Currency negatively impacted revenues by 4%, and earnings per share by $0.03, $0.01 less than expected.

We also picked up a penny on a lower weighted average share count due to the share repurchase during the quarter.

Looking at our gross profit margin in detail, our gross margin came in at 16.9%, compared to 16.8% prior year.

On a reported constant currency basis, our staffing gross margin was down 10 basis points.

Organically, the staffing gross margin had 20 basis points unfavorable impact on margin, which was primarily driven by direct cost increases, such as the introduction of complementary healthcare costs for our staffing associates in France, as well as changes in business mix.

I'll discuss this later as a part of the segment review.

Growth in permanent recruitment fees remained solid, up 9% in constant currency, adding 10 basis points to the gross profit margin.

Permanent recruitment fees, as a percentage of gross profit, reached record levels, improving to 15.2% in the quarter from 14.7% in the prior year.

Lastly, the impact of currency on changes in business mix added 10 basis points to the gross profit margin.

Next, let's review our gross profit by business line.

During the quarter, the Manpower brand comprised 62% of gross profit.

Our Experis professional business comprised 21%.

ManpowerGroup Solutions comprised 12%, and Right Management 5%.

Consistent with the last several quarters, our strongest growth was achieved by our higher value solutions offering, within ManpowerGroup Solutions, and our higher skilled professional staff, in Experis.

During the quarter, our Manpower brand reported constant currency gross profit growth of 2%.

In our Manpower brand, approximately 60% of the gross profit is derived from light industrial skills, and 40% is derived from office and clerical skills.

Gross profit growth from light industrial skills declined slightly to 3%, compared to a 7% increase in the fourth quarter of the prior year, primarily as a result of the increased and direct costs related to complementary healthcare in France.

Gross profit growth and office clerical skills was up 1%, an improvement from a 7% decline in the fourth quarter.

Gross profit in our Experis brand grew by 13% in constant currency; on an organic basis, gross profit growth was up 1% in constant currency.

Our Experis business line contribution continues to be very strong, up 19% in constant currency, as a result of continued productivity enhancements, strong expense management, and acquisition.

Our ManpowerGroup solutions includes our global market leading RPO and MSP offerings, as well as our talent-based outsourcing solutions, including our Proservia and technology support business.

Gross profit growth in the quarter was up 7% in constant currency, with good growth in each of our solutions offerings.

Right Management also contributed nicely to the quarter, with gross profit up 5% in constant currency.

I'll discuss this further in my segment reviews.

Our reported SG&A expenses were about in line with the prior year, at $642 million.

SG&A expenses favorably impacted $22 million from currencies, which was slightly more than offset by more than additional SG&A costs coming from acquisitions of $27 million.

On an organic basis, in constant currency, SG&A expenses were down $3 million, compared to the prior year.

SG&A expenses as a percentage of revenue in the quarter improved 10 basis points to 14%.

On a constant currency basis, SG&A expenses as a percentage of revenue improved by 20 basis points from 13.9%.

We continue to be keenly focused on driving productivity and efficiency throughout our business model.

I would next like to discuss the operational performance of each of the segments.

The Americas segment comprised 23% of consolidated revenue.

Revenue in the quarter was $1 billion, an improvement of 4% in constant currency.

Profitability was quite strong, with OUP of $34 million, up 23% in constant currency.

OUP margin improved 50 basis points, to 3.3%.

While acquisitions slightly boosted results, organic profit performance was quite strong, up 14%, on organic revenue growth just over 1%.

The OUP margin expansion was driven by continued strong growth in permanent recruitment, up 11% in constant currency over the prior year, and strong performance in our higher margin solutions offerings.

Additionally, SG&A expenses were very well controlled, down slightly against the prior year on an organic basis.

The US is the largest country in the Americas segment, comprising 67% of segment revenue.

Revenue in the US was $703 million, a contraction of 3% compared to the prior year.

As we had mentioned in the last few quarters, we have seen weakness in the manufacturing side of the US economy impact demand for our services.

Encouragingly, this trend seems to have stabilized, with the ISM Manufacturing Index back up above 50 last month for the first time since September.

While our business is still down in the first quarter, it reflects an improvement from the 5% decline we reported in the fourth quarter.

OUP growth was very strong in the US, improving 31% in constant currency to $23 million.

OUP margin was up 80 basis points to 3.2%.

Contributing to the strong margin expansion was an expanding gross profit margin, combined with good expense control.

Our staffing gross profit margin improved due to strong price discipline and effective management state unemployment taxes.

Permanent recruitment also remained strong, with fees up 12%, similar to the increase we saw in the fourth quarter.

In the US, the Manpower brand comprises approximately 40% of gross profit.

Revenue for the Manpower brand in the US was down 7% in the quarter, a slight improvement from the 9% decline we saw in the fourth quarter of last year.

This improvement was a result of revenue from industrial skills improving from a contraction of 9% in the fourth quarter of last year, to a decline a 5% in the first quarter.

Experis brand in the US comprised approximately 40% of gross profit in the quarter.

In Experis, in the US, IT skills comprised approximately 70% of revenues, with finance, engineering, and other professional skills comprising balance.

Similar to the fourth quarter, our Experis revenues were flat with the prior year.

Experis revenue from IT skills was also flat with the prior year.

Our ManpowerGroup solutions in the US contributed 20% of gross profit, and continued to see solid revenue growth of 9% for the quarter.

This solid growth was driven by continuous strong demand by our clients for our higher value RPO and MSP solutions.

Our Mexico operation continues to perform very well, with revenue growth in the quarter of 11% in constant currency, and an improved OUP margin.

Our gross margin is down, due to shifting business mix, but our operations were more than able to offset that decline with improvements in SG&A leverage.

Revenue in Argentina was up 31% in constant currency.

While revenues are impacted by inflation, the underlying fundamentals of the business continued to show growth, with volume growth up 2% in the quarter.

Revenue growth of the other countries within Americas was up 20% in constant currency, or 7% on an organic basis.

Contributing to this strong growth was double-digit organic constant currency revenue growth in Peru, Central America, and Brazil.

Growth in Canada was also strong, aided by the Veritaaq acquisition completed last September.

Southern Europe revenue comprised 37% of consolidated revenues in the quarter.

Revenue in southern Europe came in at $1.7 billion, an increase of 5% in constant currency.

OUP was $72 million, flat with the prior year in constant currency, and OUP margin was 4.3%, down 10 basis points from the prior year, resulting from the increase in healthcare costs in France.

Permanent recruitment growth was very strong in the quarter, up 14% in constant currency.

France revenue comprised 64% of the southern Europe segment in the quarter, and was up 6% over the prior year in constant currency, similar to the fourth quarter.

The first quarter, however, did benefit from an extra billing day in the quarter, so on an average daily revenue basis, growth was up about 4%.

While it appears there may be a slight deceleration revenue growth moving from fourth-quarter last year to the first quarter this year, it is important to note that the prior year comparable growth rates grew about 5%, more difficult in the first quarter of the year compared to the fourth quarter.

On a monthly basis, average daily revenue growth was strongest in January, and then stepped down to about 2% February and March.

More recently, we have seen growth slightly accelerate over the last few weeks.

OUP was $47 million, a decline of 5% in constant currency, and OUP margin declined 40 basis points to 4.4%.

While we have maintained our position of very strong price discipline in France, gross margin was unfavorably impacted by the introduction of complementary healthcare costs for our temporary associates, which was effective on January 1. This was partially offset by accelerating growth in permanent recruitment, which was up 17% in constant currency.

Additionally, SG&A leveraging had a favorable impact on margin, as we were able to drive increased productivity across the French network.

Revenue in Italy declined slightly in constant currency to $263 million, with strong OUP growth of 17% to $16 million.

OUP margin expanded by 90 basis points to 6.1%, primarily as a result of a strong staffing gross margin resulting from enhanced pricing subsidies and improving business.

Permanent recruitment was also a nice contributor in the quarter, up 25% over the prior year in constant currency.

While profit growth was very strong in the quarter for Italy, we did see reducing demand for our temporary services due to softer economic growth combined with more difficult prior year comparable growth rates, resulting in revenue growth which was much lower than we saw in the fourth quarter, or all of 2015 for that matter.

Revenue growth in Spain remained very strong, up 17% over the prior year in constant currency.

This organic growth rate is just slightly weaker than the fourth quarter; however, that can be attributed to slightly stronger prior year comparable growth rates.

Our operation continues to do a nice job in Spain, expanding their gross profit margin with an improving mix of business.

OUP was up 62% in the quarter in constant currency, and OUP margin expanded by 70 basis points.

Our Northern Europe segment comprised 26% of consolidated revenue in the quarter.

Revenue is up 4% in constant currency to $1.2 billion.

The 7S acquisition completed last September in Germany contributed to the revenue growth.

On an organic basis, revenues were down 4% in constant currency and were down 2% on an average daily basis, slightly stronger than the 3% decline in organic average daily revenue that we experienced in the fourth quarter.

OUP increased 11% in constant currency to $33 million, and OUP margin expanded 20 basis points to 2.7%.

Here, you see mixed performances across the Northern Europe segment, with some markets, like the Netherlands and Belgium, improving, while other markets, like the UK, softening slightly.

Our largest market in the Northern Europe segment is the UK, which represents 39% of segment revenue in the quarter.

UK revenues were down 6% in constant currency, or down 3% on an average daily basis, slightly better than the fourth quarter.

As noted in previous calls, this decline is primarily driven by lower demand from one of our very large clients.

Excluding the impact of this client, average daily revenues were flat year on year.

While we continue to see growth in the Experis professional brand, which is up 2% over the prior year, our market for our Manpower staffing business has weakened, especially across some of our larger accounts within the public sector.

Growth in permanent recruitment fees decelerated during the quarter, but remains healthy, up 10% in constant currency.

Revenue growth in Germany was up 52% in constant currency.

Excluding the impact of the 7S acquisition that closed in December 2015, organic revenue growth was solid, up 4% in constant currency, or 5% on an average daily basis.

Revenue in both the Netherlands and Belgium improved in the quarter up 3% and 4%, respectively, in organic constant currency on an average daily basis.

In the Netherlands, we're closing the gap compared to market growth, as we are now anniversarying some account losses in early 2015 that were exited due to lower pricing.

Other markets in northern Europe had a revenue decline of 3% in constant currency.

The very strong growth in Poland was offset by significant declines in Russian and declines in a few other markets.

Asia/Pacific/ Middle East segment comprises 13% of total Company revenue.

Quarter revenue was up 12% in constant currency to $576 million.

On an organic basis, including the Greythorn acquisition, revenue was up 6% in constant currency.

OUP was $19 million in the quarter, an increase of 6% in constant currency.

OUP margin declined 20 basis points, to 3.3%.

The OUP margin decline was driven by a decline in staffing gross margin, resulting from direct cost increases in certain markets and changes in business mixes.

This is partially offset by improved SG&A leveraging and tight expense controls.

Revenue growth in Japan was up 4% on a constant currency basis, and 2% on an average daily basis, a slight improvement from the fourth quarter growth.

OUP margins improved in the quarter as a result of productivity improvements and expense leveraging.

Revenues in Australia and New Zealand were up 30% in constant currency, or 3% on an organic average daily basis, excluding the Greythorn acquisition.

While demand in Australia is fairly stable, it remains at a depressed level, given the economic challenges of the market.

Revenue in the other markets in Asia/Pacific/Middle East was solid, up 10% in constant currency, as a result of good double-digit growth in a number of markets, including India, Korea, and the Philippines.

Our Right Management business had a very good performance in the quarter, with revenues up 2% in constant currency to $64 million, and OUP up 71% to $10 million.

OUP margin expanded 610 basis points to14.9%.

Driving this strong margin performance was primarily SG&A expense productions and SG&A leveraging.

Additionally, GP margin expanded due to a shift in business mix.

In Right Management, our strongest growth came from outplacement fees in the Americas region.

This growth was primarily driven by strong sales execution in the United States and completed outplacement opportunities in the energy sector.

I would like to have Jack discuss our balance sheet, cash flow, and outlook for the second quarter.

Thanks, Mike.

First, I will cover cash flow and balance sheet.

Free cash flow, defined as cash from operations less capital expenditures, was very strong in the quarter at $148 million.

This includes the sale of the 2015 French CICE tax credit in March for $143 million.

Including this CICE sale, free cash flow was still positive for the quarter at $5 million, compared to $12 million in the prior year.

During the quarter, days sales outstanding increased one day, due partly to the quarter-end timing effect of Easter and business mix changes associated with large clients.

Capital expenditures represented $17 million during the quarter, which was up slightly, primarily due to our investment in recruiting centers in the first quarter.

During the quarter, we purchased 1.5 million shares of stock for $118 million.

At the end of the quarter, we have 3.8 million shares remaining for repurchase under the 6 million share program approved in October 2015.

Our balance sheet was very strong at quarter-end, with cash of $748 million and total debt of $880 million, bringing our net debt to $132 million.

Our debt ratios are very comfortable at quarter-end, with total debt-to-trailing 12 month EBITDA of 1.2, and total debt-to-total capitalization at 25%.

Our debt and credit facilities did not change in the quarter.

At quarter-end, we had a 350 million euro note outstanding, with an effective interest rate of 4.5% occurring in June 2018, and a 400 million euro note, with an effective interest rate of 1.9%, occurring in September 2022.

In addition, we have a revolving credit agreement for $600 million, which remained untapped.

Next, I'd like to review our outlook for the second quarter of 2016.

We are forecasting earnings per share to be in the range of $1.47 to $1.55, which includes a negative impact from foreign currency of $0.02 per share.

At the midpoint of our guidance, we are forecasting $1.53 per share in constant currency, up 15% over the prior year on a constant currency revenue growth of 6%.

Our constant currency revenue guidance range for growth is between 5% and 7%.

Our revenue growth in the second quarter should be favorably impacted, almost 2%, as a result of an additional billing day, on average, compared to the prior year.

Our revenue guidance also includes 3% growth from acquisitions, similar to the first quarter.

On an organic constant currency basis, the midpoint of our second quarter revenue guidance is similar to our growth rate in March.

During the first few weeks of April, revenue trends were similar to March levels, with the exception of France, where we have seen a slight acceleration in revenue growth.

In Italy, we expect revenues to track further against prior year, due to the benefit of the Milan Expo that began in the second quarter of 2015 and continued into the fourth quarter of 2015.

From a segment standpoint, we expect constant currency revenue growth in the Americas and Southern Europe to be the mid-single digit range, with Northern Europe and Asia/ Pacific/ Middle East growing in the upper single-digit range, with Northern Europe benefiting about 7% from acquisitions, and Asia/ Pacific/ Middle East benefiting approximately 4%.

We expect revenue growth at Right Management to be in the lower single digits.

Our operating profit margin should be in line with prior year, or slightly exceed prior year, as we remain focused on margin expansion.

We expect our income tax rate to approximate 38%, and we estimate our weighted average shares to be $73 million, reflecting share repurchases through the end of the first quarter.

With that, I'd like to turn it back to Jonas.

Thanks, Jack.

The first quarter 2016 was a good quarter for us.

We showed our ability to execute and deliver good results, despite the uneven market conditions in some countries.

All our brands and offerings made progress in the quarter.

We saw solid growth in Manpower, and managed the balance between revenue growth and discipline pricing well, a continuing challenge that becomes even more important as demand fluctuates in some countries.

We remain focused on pricing discipline and profitable growth, reflecting the commitment to outstanding service quality for our clients and candidates.

Experis was our fastest growing brand, with improved strength globally in the IT skills segment, which remains an area where many of our clients are expressing continued talent need, and we are increasingly well-positioned and recognized in many markets globally for our IT skills and solutions capabilities.

As I mentioned earlier in the call, our permanent recruitment offering continued to grow and reached a new record high as a percentage of GP this quarter, as we are now seeing as a provider of choice, not only for contingent positions across our brands, but also for permanent positions on a global basis.

We been building our permanent recruitment capabilities in both developed and emerging markets, and this continues to be a source of growth and opportunity going forward.

Despite many labor markets being mostly stable or improving, our Right Management business has found strength and opportunities in the industries that are experiencing a slowdown.

Honing the offering, and matching it to the needs of both client companies and candidates, and in many cases further enabled by our proprietary technology platform RightEverywhere.

Finally, our solutions business continued to grow at a double-digit pace, and in light of the changes we see occurring in companies, as they evaluate core versus non-core activities, we should be very well-positioned with our industry-leading offerings in RPO, MSP, and Proservia to provide more of those services to our clients worldwide also in the future.

Many companies have a workforce pyramid that is reflecting the skills that they needed in the past, as opposed to the ones they need in the future.

They are increasingly seeing our workforce solutions as the way for them to transform a legacy workforce into a competitive strength, providing them with the needed talent and organizational agility as they are faced with disruptive forces in their respective businesses.

Our long track record of double-digit revenue growth and our world-leading solutions businesses shows our solutions are meeting this increasing demand.

As you can tell from our near-term overall outlook, we anticipate overall stability globally, with continued uneven conditions in a number of markets.

Europe should have a good chance of seeing modest economic growth, which is projected to be slightly better in 2016 than in 2015, according to the latest IMF report of last week, and the report also foresees continuation of the slow growth environment we have seen for many years in the US.

From what we hear from our clients right now, we believe we are seeing economic growth expectations softening in a number of markets, but in many cases still progressing compared to the prior year, both in terms of economic growth and with expectations of a modestly improving labor market in many parts of Europe and North America, as well as parts of Asia and Latin America.

In this environment, we should see continued growth opportunities, and we will stay focused driving operational performance improvement even if global market conditions continue to be patchy and uneven, always ready to change our stance should the outlook change in either direction.

Our strategies are intended to support our client companies operating in this kind of environment, and we should be very well-placed to take advantage of the opportunities that come from companies that are looking for operational flexibility and strategic agility in their work forces.

In summary, we are pleased with a good start to the year and our first-quarter results, and are committed to seizing profitable growth opportunities aligned with our strategies for the remainder of the year.

With that, we have now come to the end of our prepared remarks, and I'd like the operator to begin the Q&A session.

Thank you.

We will now begin the question-and-answer.

Tobey Sommer, SunTrust.

This is Kwan Kim on for Tobey.

Thank you for taking my question.

On the RPO business, how would you characterize the growth among the different regions and what you are seeing in terms of new adoptions?

If you could give us some color on the IT business in the US, what you are seeing in the current market (inaudible) environment?

Thank you.

Good morning Kwan.

The RPO business is relatively mature here in the US.

It is the biggest market globally, and I would characterize Europe being less mature but growing rapidly, and the emerging markets in Latin America and in Asia Pacific really being at the very early stages of the introductions of RPO and our other solutions offerings.

As it relates to the US IT environment, in terms of our own performance, you could see that we saw some stability between Q4 and Q1.

I would describe the demand for IT skills to still be healthy, maybe slightly softer.

This is also then impacted by the increasing difficulty and tightness of the labor markets for those skills.

We have made some good progress, and as you saw, as you heard from Mike's report, we had some good growth in our gross profit margins, some very good bill rates improvement and things like that, but we'd still like to see some further growth in our own business, because we still think there's good opportunities for us here in the US market for IT skills.

Got it.

Thank you.

Anj Singh, Credit Suisse.

Good morning.

Thanks for taking my questions.

I was hoping you could discuss France a little bit.

How much do think your focus on price discipline is impacting you, versus what's going on in, let's say, the overall market.

Just wondering how much of the lower growth on a billing day basis at 1Q is due to price discipline versus just market trends, and how would you contrast or characterize the environment versus, say, a year ago when the French temp market was just inflecting positive on a competitive dynamics perspective?

Thank you.

Thanks Anj.

We would characterize our -- our objective is to be able to drive operational performance, and we do that through pricing discipline.

When we look at the French market, and as you heard Mike talk about early on in our call, we saw stability between the fourth quarter and the first quarter.

What's happening in France is that there are a number of segments, first of all, which are growing faster, where we are not as strongly represented, such as logistics, such as construction.

So those are some of the segments that are growing.

The market might be growing a little bit faster in areas where we are not very strong.

We've also then applied strong operational and pricing discipline when we look at the market, because we believe that it will continue to be stable going forward as well, and that we had an impact with the health insurance increase as far as direct cost increases concern.

We want to make sure we are very, very disciplined in the French market, so that we derive the value for the service, the quality service that we provide to our clients.

So we continue to believe that France is on a recovery trajectory.

It is an environment that is uneven in France, and you can see that although the economic growth is improving, it is improving from a very low level to frankly a reasonably modest level, at least according to the IMF forecast.

Our anticipation is that the market in France continues on its path of recovery.

When we look at this compared to a year ago, we see some improvement, but really stability is what we are anticipating, and stability in our case means a slow growth environment, and that's the kind of environment we are prepared for.

Okay.

Got it.

One quick one on the US.

Could you talk about the OUP margins there?

How much of this is just a better mix, say from solutions as well as let's say perm, just trying to get a better sense of how sustainable this is.

It seems like it's the strongest we have seen in a long time, 1998, I think, if my model is correct.

So just hoping for some more color there.

Thank you.

Clearly our diversification in terms of our business mix has a very strong impact on our ability to drive better profitability in the US.

You combine that with a very strong pricing discipline, our ability to recover some of the cost increases either through [SOODA] or ACA-related costs, the teams are doing a very good job.

Clearly, we have seen some very good continued growth on the perm side, as well as on the solution side.

Those are the higher-margin parts of the businesses that are growing.

We have managed this very well.

To that, we of course continue to drive efficiency and productivity.

We are really looking at this in a two-prong way: driving higher-margin businesses, continue to make sure that we are pricing disciplined, then at the same time drive efficiencies in any area that we think we have opportunities.

That's helpful.

Thank you.

Hansa Mazzarri, Sterne Agee.

Good morning.

Thank you.

The first question was around your footprint and branch efficiency and consolidation.

Is most of the low-hanging fruit on the cost side behind you post the large restructuring you guys did a few years ago?

I'm trying to just get a sense of how much further room there is maybe on the branch efficiency side?

In order to see maybe greater operating leverage in the model?

Sure.

Good morning Hansa.

I think as you rightly pointed out, we went through a very major cost recalibration program in 2013 and took almost $200 million out of the business.

As part of that program, there were four prongs, as I'm sure you will well remember, one of them be delivery.

Our delivery models in driving productivity and efficiency.

That is something that we are very in attuned to and are working very hard on.

I wouldn't expect to see a step change in terms of cost reduction, like you saw in 2013, but we are going to continue to drive efficiency and productivity.

I think that is part of what you just saw in the US margin in the first quarter, and for the last several quarters.

You are starting to see some of the efficiency come through.

Albeit gradually.

This is not a one-time project.

This is a long-term project, where we are driving our efficiency model.

We are doing a better job of segmenting our clients, so as we can service more from a centralized basis.

Those that prefer to be served more through our branch network, and as a result, getting more efficiencies overall.

As you know we have been reducing our overall branch footprint over the years, and I think there still is a ways to go on that as well, in some of the more developed markets.

It's a continued journey.

I think there still opportunity there, and that is something we work on every day.

That is very helpful.

Just a follow-up on the a Experis business.

Could you maybe talk about some of their delivery model changes you've done in the US, and maybe talk about the exposure to large accounts versus small business?

Has that changed at all?

Any sense of that?

Thank you.

The Experis business is delivering skill sets and solutions that are very suitable to centralized delivery.

As you know, not only for our Experis business, but also for our Manpower business, we skew towards larger organizations, as opposed to smaller organizations.

They also are becoming more amenable and used to new delivery models.

We have seen a good evolution in Experis in the US in terms of having more centralized delivery for a number of our large client relationships.

Just as Mike says, we expect that to continue.

Having said that, we also know that there is a local market.

There are clients who prefer to have deliveries that are closer to them geographically, and we are not ignoring that, and we are making sure that we are strengthening that part of the network as well with recruiters as well as salespeople.

It is really a two-pronged approach.

It really talks about the increased segmentation of the market, and the clients are really having the ability to choose which kind of engagement model and delivery model works best for them in their business.

We continue to see opportunities here to hone our delivery models, and do that, and we really anticipate doing that going forward as well.

Thank you very much.

Tim McHugh, William Blair.

Thanks.

I just wanted to ask if you could elaborate a little bit more on what you are hearing in Italy.

We watch the data a little bit.

I guess the magnitude of the slowdown is a little surprising, relative to the economic data, I guess.

You talked about a slower economy.

I recognize you -- kind of the acceleration you saw last year was faster than any of us thought based on the data that we saw then, at that same time.

Any more color there on what you are seeing, and how we can interpret that?

We think there are a couple of factors.

We had the seasonal -- after the seasonal downturn at year end, our comeback in terms of the ramp was slower than what we had expected.

We think that in part has to do with a slow economy.

We also think there might be an impact of the hiring stimulus that the government implemented late last year, which really favored, which really acted as a hiring incentive for permanent hires in Italy.

Now it is hard to gauge to what degree that had an impact, but we note, and you have seen, and you heard from us earlier that our permanent placement business grew at a very healthy 25%, so very strong growth there.

We also, of course, have quite tough comparables from the prior year.

Having said all of that, the Italian market is still a growth market, and when we look at the opportunity in Italy, and you think about the market penetration of slightly more than 1% and just to get to the average market penetration in Europe, there is still going to be some good growth.

We are still very optimistic that we will see some growth.

In the near term, this is going to be a little bit slower than we expected, certainly for the first quarter.

You can see that we expect that to continue somewhat also into the second quarter, when our comparables are getting even tougher.

All right.

Okay, thanks.

I know you got asked about the US margin and sustainability.

I guess more specifically, as a competitor you talked about in the US about wage pressure impacting the gross margin.

Obviously, it does not show in the numbers for you.

What are you seeing with regard to wage rates and being able to pass that through in terms of price increases to clients in the US?

It is a very competitive market in the US.

We have been, as you know, very price disciplined across our brands, both in Experis as well as in Manpower.

On the Manpower side, we did see the softening in the manufacturing sector during the course of last year, and as you heard us talk about earlier, we have now seen some stability with maybe some slight improvement.

I would mostly characterize the manufacturing sector and our skills in that sector being stable.

We've continued with our pricing discipline, making very sure that we work with engagements when we are able to either become more efficient delivering our services and making sure we work within client segments that see the value of our services.

That is something that we anticipate doing also going forward.

The team has done a great job in selecting the segments where we can be successful, where we can make sure we demonstrate the quality of service that we have, and have been so far able to manage both wage increases and other direct cost pressures quite well.

Tim, I might add to that as well.

I think given the demographic of our workforce, we really don't have workers at minimum wage.

As minimum wages are moving up, that's not having a direct impact on our base wage as well, and of course most of our larger contracts are priced on a multiple of pay, as opposed to a spot rate, per se.

That may explain some of the differences as well.

Okay.

Thanks.

Just one numbers question.

There's a change, it seems, if I look at prior year versus what you have reported before between, I think, Southern Europe and Northern Europe, some revenue moved.

Can you clarify what that is?

Sure.

Yes, we mentioned that, Tim on our last call.

I think the detail is out there in one of our SEC filings, probably last quarter.

But basically, we have just realigned from a management standpoint a few of the countries into -- out of the Northern European region into the Southern European region.

I will give you a few examples.

Austria was in there somewhere, our Switzerland franchise business was in there, some of the other Eastern European businesses we moved from Northern Europe down to Southern Europe.

Relatively small overall, but I know it creates a little bit of a hassle with your models.

You should be able to find the history out there filed, if not just give me a ring, and I'd be happy to send it off to you.

All right.

Thanks.

George Tong, Piper Jaffray

Thanks.

Good morning.

You are able to achieve 20 BPS of operating margin expansion even with just 2% organic average daily revenue growth in the quarter.

What would you need to see in organic average daily revenue growth for the remainder of the year to achieve 20 BIPS of EBITDA margin expansion for the full year?

That is a good question, George.

That is something that we are always trying to drive that operating margin expansion.

In the first quarter we got a little bit of SG&A efficiency, and then a little bit coming off of the GP line as well.

As I mentioned in the past, and it's more of a generality, but when we get toward mid single-digit organic growth, you can start to see that operating margin in SG&A leverage come through, and when you get to the lower single digits, it can be quite difficult.

Certainly, we are focused on driving efficiency throughout the markets; as you will recall, we did take a restructuring charge of the fourth quarter.

That certainly is helping us take some of the cost out of the business, where appropriate, while still investing in other areas where we see opportunity.

That is certainly something that we are driving forward to.

I don't have an exact number for you in terms of what that 20 basis points would require, but certainly I'd be -- we got a little bit stronger organic growth than we're seeing today, I would be more comfortable with that as we look out to the balance of the year.

Great.

Thank you.

Sara Gubins, Bank of America Merrill Lynch

I want to make sure that I am understanding the growth in the first quarter versus the expectations for the second quarter.

If we look at the guidance for the second quarter, if you take out the extra billing day and M&A I think you are forecasting 0% to 2% organic growth in the second quarter.

Does that compared to the 2% that you saw in the first quarter, and if that's right, does it suggest that you saw slowing growth in March versus January and February?

Yes, Sara, this is Jack.

That is right.

As Mike laid out previously, that was effectively a 2% organic growth in the first quarter.

After you adjust for the billing days in the second quarter, that takes us to just about a 1% organic growth, adjusted.

That is right.

You have that right.

As we have said, that is aligned with what we saw in the month of March.

That outlook is aligned with what we saw at the end of the quarter.

Okay.

Great.

And then I'm hoping we can get some more color on Northern Europe.

It sounds like the guidance would suggest about a little bit of an improvement on an organic basis versus the 2% average daily declines that you saw in the first quarter.

Could you help us understand a little bit more about what you are seeing across the region?

I think if you look at Northern Europe, that is where you probably have the most mix.

I think there is some improving news within both the Netherlands and Belgium, both of those markets, we are seeing better growth there in our business.

You'll recall that in the Netherlands in particular, we had stepped away from some business last year.

We are starting to anniversary that.

So our growth rates now are approaching market levels there.

We are seeing improvement there, overall.

The business in Germany for us is fairly stable overall.

In the UK, while it's stepped down a little bit, it has been fairly stable.

I would characterize it as being flattish, overall, in the marketplace, and that is about what we're seeing in our business.

We have one client that is pulling back, reducing the level of demand, which is putting us in the low negative single-digit range, little bit of contraction there.

I don't see a lot of shift, and frankly, not a lot of shift overall.

If I take a look, with the average daily billing days and with some of the impact of acquisitions, actually our second-quarter guidance is fairly close to what the first quarter is.

I would say we are looking at something that's fairly similar in Northern Europe when you strip out billing day impact and you strip out acquisition impact.

Okay.

Great.

Last quick questions, do you have the billing days for the third quarter and the fourth quarter, just a [we] level set on that?

I don't know if you have it, but the impact in the back half of the year from M&A that you've already completed, could you help us think through that?

Thanks.

Sure.

In terms of billing days overall, in the third quarter we are flat with it.

We got the same number of days, at right around 65 days both periods.

Then in the fourth quarter -- 65 -- and then the fourth quarter, we actually lose a day.

We are at about 63 versus about 64 in the prior year.

So it was the impact from days.

On the last part of your question, I'm trying to remember --

Around M&A impact from what you've already done.

Right, right.

For the first half of the year, most of our M&A last year happened.

We had Greythorne in June.

But then, September, we had Veritaaq in Canada, and of course 7S right toward the end of September.

Effectively, you will see about 3% impact in each of the quarters in the first half of the year.

Third quarter is going to get a slightly less impact, a little bit more than 2%.

By the time we get to the fourth quarter, very nominal impact from acquisitions.

Great.

Thank you so much.

You bet.

Jeff Silber, BMO Capital Markets.

I just wanted to go back to an earlier question on wage inflation.

I think we were just talking about the US.

Are you seeing any impact in any of your major segments across the world in the areas we are seeing labor supply tightness?

As Mike mentioned earlier, we are primarily working with larger organizations, and we use multiples of pay and wage increases, then applying those multiples means that we pass those increases on and through to our client billing.

We are not seeing a margin compression issue, by and large, in the US or anywhere else for that matter.

There are some countries where you will have an additional impact, aside from the regular wage increase, such as Germany, which has the fourth phase of their new labor agreement kicking in June at 3.5%.

That is going to be for us to work on and make sure that we can also include that in our regular pricing increases.

We may see some pressure downwards on margins from that particular one.

We've been able to mitigate that well in the past.

That is something that we continue to be very focused on.

And then you had mentioned the impact of the complementary healthcare costs in France hurting gross margin.

Is there anything else going on specifically in France?

I know they have been trying to do a lot of labor law reform, and I know there has been some pushback, but anything on the horizon that you see that could either help or hurt your business?

Thanks.

You've heard a lot of stuff coming out of France lately, you've seen demonstrations as the government has really tried to modernize the labor market further, and most of those are things related to companies being able to negotiate directly with union, set their working hours directly, some reduction in severance pays, or at least an understanding of what they will be.

All of this though will have, at this point, from our estimate, no impact on our business in France.

It is an evolving market in France.

It is clear that the French government wants to make the market more competitive, wants to make it better from a labor perspective, and they made changes over the last three or four years, some of which of course have been beneficial to us.

We overall see this evolution in the French market as positive, because it is going to make them more competitive, which will help the economy grow better, and that should provide us with even better opportunities in France.

Great.

Thanks so much.

Thanks Jeff.

Mark Marcon, Baird.

Good morning, and thanks for taking my question.

With regards to the restructuring charge that you took in the fourth quarter, how much of that benefit from the savings did we ended up seeing in the first quarter, or are we going to see even more savings in the second quarter and the back half of the year?

Good question, Mark.

It came fairly quickly.

We saw about $7 million in the first quarter, maybe just a touch more than that.

As we get into the other quarters of the year, we're going to be looking at about $8 million per quarter.

You won't see an incrementally a significant shift, just a little bit more coming through the second quarter and the balance of the year.

Great.

And with regards to France, in April, aren't we supposed to start seeing a little bit of a help from a subsidy to help offset a little bit of the health cost that came through?

As part of the Responsibility Pact, they increased the subsidy related to the Family Welfare Program.

As a result, we will get some benefit coming in the second quarter, which should help mitigate some of the cost increase from the complementary healthcare, that's right.

It won't fully mitigate it, but it will help in offsetting some of that cost increase.

Great.

And then a bigger, strategic, long-term question.

With perm hitting an all-time record as a percentage of gross profit, how are you thinking about that from a long-term perspective in terms of how comfortable, or what size are you comfortable with perm reaching as a percentage of gross profit?

Do you think the environment has changed where some companies are basically going to view you as being a permanent, a really truly permanent component, quarter in, quarter out, in terms of the recruiting infrastructure?

Great question, Mark.

We believe that companies are already increasingly seeing us as the go-to Company for work force solutions in general.

As you've seen, our diversification over the years has really taken root.

Permanent placement is an important component of that.

We have been investing in that over the years, and really increasing our capabilities.

This is something we think companies will continue to use us for, and we have been working very hard to make sure that they can see the capabilities that we have, both in developed and emerging markets.

As it relates to what proportion we're comfortable with, we have really big contingent staffing businesses already in Manpower, as well as in Experis.

We think they still have some good growth opportunities going forward for us, also the Solutions business in itself.

We don't have a fixed target, I should start by saying that.

I would estimate that this could increase over time to something north of the15%, where we are maybe getting closer to, 20% if it's really successful, and you know I don't know that I would think about it going much further than that.

That sort of seems to be a place where it would already be [baked in], and with the number of placements that we make, we are bigger then almost anyone in the world today, making permanent recruitment.

The outlook for our perm growth is still very good, and we still have a long way to go.

I think that would be the range which you could think about as you model what kind of contributions we think the diversification can have for us.

Terrific.

Thank you.

This will be the last question.

Andrew Steinerman, JPMorgan.

I'd like just a little bit of a clarification on the Italian margins and the sustainability of Italian margins, the revenue did dip suddenly but the operating margins were better than we had modeled.

I heard the perm comment being strong.

Is there anything more to that kind of healthy margin?

It is a combination of different things.

Good cost controls, steady drive for continued efficiency and productivity, good pricing discipline.

There are probably deals that we could have in Italy, but they are at pricings or in sectors with skills that we might not be that interested in growing as fast.

Continue driving and establishing ourselves really as the leading perm provider in Italy, which is the position that we hold today, and building on that strength, between those I think those are the things that have added up to that really strong margin performance, both gross margin as well as operating margin performance.

Great.

Thank you so much.

Excellent.

This concludes our conference call for the first quarter.

Thanks for joining us.

As always, Mike will be available to answer any follow-on investor questions that we did not have time to answer in our call today.

We look forward to speaking with you again on our next earnings call.

Thanks, everyone.

That concludes today's conference.

Thank you for your participation.

You may now disconnect.