ManpowerGroup Inc (MAN) 2022 Q4 法說會逐字稿

Welcome to ManpowerGroup Fourth Quarter Earnings Results Conference Call. (Operator Instructions) This call will be recorded. If you have any objections, please disconnect at this time. And now I'll turn the call over to ManpowerGroup Chairman and CEO, Jonas Prising. Sir, you may begin.

Welcome to the fourth quarter conference call for 2022. Our Chief Financial Officer, Jack McGinnis is with me today. For your convenience, we have included our prepared remarks within the Investor Relations section of our website at manpowergroup.com. I'll start by going through some of the highlights of the quarter, and Jack will go through the fourth quarter results and guidance for the first quarter of 2023. I'll then share some concluding thoughts before we start our Q&A session.

Jack will now cover the safe harbor language.

Good morning, everyone. This conference call includes forward-looking statements, including statements concerning economic and geopolitical uncertainty, 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. We assume no obligation to update or revise any forward-looking statements.

Slide 2 of our earnings release presentation further identifies forward-looking statements made in this call and factors that may cause our actual results to differ materially and information regarding reconciliation of non-GAAP measures.

Thanks, Jack. Over the last three weeks, I spent time with our leadership teams across the world for annual strategic road shows as well as with clients in Europe before attending the World Economic Forum Annual Meeting in Davos, Switzerland. From these conversations with our teams, our clients and global leaders, we get insights on the current environment and near-term outlook. This complements our own real-time business data on the current environment and forward-looking research.

The economic headwinds and increased caution by employers due to an uncertain economic outlook are resulting in softening hiring behaviors. We see this through extended recruiting and sales cycles and softer order flow with employees in certain sectors as they are exercising more caution in their demand for contingent and permanent recruitment of talent. That said, they're also focused on holding on to business-critical talent while adding headcount for in-demand skills whether that is supply chain workers or highly skilled professional talent. And as a result, labor markets remain strong overall, and we still see good order flow and opportunities in various markets and brands.

Turning to our financial results. In the fourth quarter, revenue was $4.8 billion, down 1% year-over-year in constant currency. Our reported EBITDA for the quarter was $110 million. Adjusting for the U.S. acquisition integration costs, restructuring costs and other special items, which we will cover in the financial review, EBITDA was $167 million. representing a flat trend in constant currency year-over-year. Reported EBITDA margin was 2.3% and adjusted EBITDA margin was 3.5%.

Earnings per diluted share was $0.95 on a reported basis and $2.08 on an adjusted basis. Adjusted earnings per share increased 8% year-over-year in constant currency.

Turning to the full year results for a few moments. Reported earnings per share for the year was $7.08. As adjusted, earnings per share was $8.52 and represented a constant currency increase of 31%. Revenues for the year increased 5% in constant currency to $19.8 billion and reported EBITDA was $619 million. As adjusted, EBITDA was $698 million, which represented a 22% constant currency increase year-over-year.

In the fourth quarter, we experienced softening in demand in some sectors and markets, especially in the U.S. and Europe. Our own quarterly forward-looking ManpowerGroup Employment Outlook Survey of approximately 40,000 employers in more than 40 countries, which was conducted in November, indicates that good hiring momentum is expected to continue for Q1 2023, especially in IT, finance, Energy and Life Sciences.

With softening hiring intent emerging in Europe and, to a lesser extent, in the U.S., both weaker in hiring intent quarter-over-quarter and year-over-year. And while the headlines may be dominated by tech company layoffs, we see this more as a recalibration of their workforces as a result of bullish hiring post-pandemic.

In the wider spectrum of all industries, we're seeing more companies begin to tap the brakes while others had their foot hovering above the brake pedal. And even in this more cautious environment, there remain areas of good demand for our services, such as IT skills within our Experis business, higher-margin skills with our Manpower business RPO, MSP and Right Management, and we're focused on delivering into these market opportunities. I'll now turn it over to Jack to take you through the results.

Thanks, Jonas. Going back to the quarterly results on Slide 3, revenues in the fourth quarter came in at the low-end of our constant currency guidance range. Gross profit margin came in at the mid-point of our guidance range. As adjusted, EBITA was $167 million, flat in constant currency compared to the Prior year period. As adjusted, EBITA margin was 3.5% and came in just Below our guidance range and was flat year over year.

Due to the strengthening of the dollar, year over year foreign currency Movements continued to have a significant impact on our results. It is Important to note that our businesses operate in local currencies and, as a Result, foreign currency translation does not impact cash flow activity within Our businesses and is largely an accounting item based on reporting Translation into U.S. dollars. Foreign currency translation drove a 10% swing Between the U.S. dollar reported revenue trend and the constant currency related growth rate .

After adjusting for the negative impact of foreign Exchange rates, our constant currency revenue decreased 1%. Due to the Impact of net dispositions decreasing revenue about 0.5% and fewer Billing days, organic days-adjusted revenue was flat in the quarter compared To our guidance of plus 2% at the midpoint. The lower revenue trend reflected A deteriorating environment during the fourth quarter particularly across Europe and North America.

Turning to the EPS bridge on Slide 5. Reported earnings per share was $0.95, which included $1.13 related to restructuring costs. Final integration costs from U.S. Experis acquisition and other special items consisting of a loss on the sale of our Hungary business and noncash charges consisting of goodwill impairment and pension settlement costs. Excluding the restructuring costs and other special items, adjusted EPS was $2.08.

Walking from our guidance midpoint, our results included a softer operational performance of $0.19, slightly lower weighted average shares due to share repurchases in the quarter, which had a positive impact of $0.01; lower effective tax rate, which had a positive impact of $0.02; a foreign currency impact that was $0.08 better than our guidance due to the strengthening of the euro and the pound during the quarter; and other expenses had a positive $0.01 impact.

Next, let's review our revenue by business line. Year-over-year, on an organic constant currency basis, the Manpower brand reported revenue decline of 1%. The Experis brand was flat and the Talent Solutions brand reported revenue growth of 7%. Within Talent Solutions, we continue to see year-over-year revenue growth in RPO as permanent hiring trends remained solid across our key markets during the quarter. Our MSP business saw a modest revenue decline in the quarter as we reduced certain lower-margin activity while Right Management experienced a double-digit percentage revenue increase on higher outplacement volumes in the quarter compared to the extremely low levels in the prior year.

Looking at our gross profit margin in detail. Our gross margin came in at 18.2%; Staffing margin contributed 30 basis point increase driven by our Manpower businesses. Permanent recruitment, including Talent Solutions RPO, contributed 20 basis point GP margin improvement as hiring activity contributed to high single-digit increases in gross profit year-over-year. Project and other Solutions-related services within Experis resulted in a 20 basis point margin increase.

Right Management career transition in MSP within Talent Solutions contributed 20 basis points of improvement and other items represented a positive 10 basis points.

Moving on to our gross profit by business line. During the quarter, the Manpower brand comprised 57% of gross profit. Our Experis Professional business comprised 26% and Talent Solutions comprised 17%. During the quarter, our consolidated gross profit grew by 3% on an organic constant currency basis year-over-year. Our Manpower brand reported an organic gross profit increase of 2% in constant currency year-over-year.

Organic gross profit in our Experis brand increased 3% in constant currency year-over-year. This reflects strong growth in higher-margin solutions as well as growth in permanent recruitment.

Organic gross profit in Talent Solutions increased 11% in constant currency year-over-year. This was driven by double-digit GP percentage growth in both RPO and right management. MSP experienced solid GP growth and significant margin improvement as we improve the mix of business during the quarter.

Reported SG&A expense in the quarter was $775 million. Excluding restructuring costs and other special items, SG&A was 4% higher year-over-year on an organic constant currency basis which is down from the 9% growth in the third quarter on the same basis. This reflects the balance of cost reductions in areas of slowing demand while we continue to invest in growth opportunities, most notably in Experis, Talent Solutions and specialty skills in Manpower.

The underlying increases consisted of operational costs of $31 million incremental costs related to net acquisitions and dispositions of businesses of $2 million, offset by currency changes of $62 million. Adjusted SG&A expenses as a percentage of revenue represented 14.6% in constant currency in the fourth quarter. I'll discuss goodwill impairment as part of the Northern Europe segment review. Integration costs, a small loss on sale and modest restructuring costs totaled $7 million.

The Americas segment comprised 25% of consolidated revenue. Revenue in the quarter was $1.2 billion, flat compared to the prior year period on a constant currency basis. Reported OUP was $58 million and includes $4 million of final acquisition and integration costs on the completion of the U.S. acquisition integration as well as some small restructuring costs.

As adjusted, OUP was $62 million and OUP margin was 5.3%. U.S. is the largest country in the Americas segment, comprising 69% of segment revenues. Revenue in the U.S. was $819 million during the quarter, representing a 3% days-adjusted decrease compared to the prior year. As adjusted to exclude acquisition integration and restructuring costs, OUP for our U.S. business was $45 million in the quarter, representing a decrease of 15%.

As adjusted, OUP margin was 5.5%. Within the U.S., the Manpower brand comprised 25% of gross profit during the quarter. Revenue for the Manpower brand in the U.S. decreased 8% on a days-adjusted basis during the quarter, representing a decline from the 3% growth rate in the third quarter.

Manufacturing PMI in the U.S. steadily decreased during the fourth quarter from above 50 in October to the 48 range in December. Our U.S. Manpower business experienced a progressive pullback in demand during the course of the quarter. The Experis brand in the U.S. comprised 46% of gross profit in the quarter. Within Experis in the U.S., IT skills comprised approximately 90% of revenues. Experis U.S. revenue growth on a day-adjusted basis represented 1% as we anniversaried very strong growth in the year-ago period.

The integration activities for our acquired U.S. Experis business were successfully completed during the quarter. Talent Solutions in the U.S. contributed 29% of gross profit and experienced a revenue decline of 4% in the quarter. This was driven by a decrease in RPO revenues in the U.S. as permanent hiring program softened in the fourth quarter, and we anniversaried dramatic growth in the prior year. Although RPO programs are slowing in the current environment, fourth quarter RPO revenues were well above prepandemic levels.

The U.S. MSP business saw a modest revenue decline as we reduced some lower margin activity while all placement activity within our Right Management business drove significant revenue increases. In the first quarter of 2023, we expect a slightly higher rate of year-over-year revenue decline as compared to the fourth quarter trend in the U.S., which reflects the current environment and represents some further softening across Manpower, Experis and RPO.

Southern Europe revenue comprised 43% of consolidated revenue in the quarter. Revenue in Southern Europe came in at $2.1 billion, representing a 2% decrease in organic constant currency. Reported OUP for the Southern Europe business was $106 million in the quarter. As adjusted, OUP margin was 5.1%.

France revenue comprised 57% of the Southern Europe segment in the quarter and increased 2% in days adjusted organic constant currency. As adjusted, OUP for our France business was $59 million in the quarter, representing an organic increase of 3%. As adjusted, OUP margin was 4.9%. The business in France continues to operate in a very low growth environment based on supply chain impacts from the ongoing Russia-Ukraine war and broader inflationary pressures. Activity in January 2023 indicates further softening. We are estimating the year-over-year constant currency revenue growth rate in the first quarter for France to be slight growth to flat based on January activity trends.

Revenue in Italy equaled $413 million in the quarter, reflecting an increase of 1% on a days adjusted constant currency basis. OUP equaled $29 million and OUP margin was 7.1%. As we continue to anniversary significant revenue growth in the prior year period, we estimate that Italy will have a slightly lower constant currency year-over-year revenue trend in the first quarter compared to the fourth quarter.

Our Northern Europe segment comprised 20% of consolidated revenue in the quarter. Revenue of $973 million represented a 3% decline in organic constant currency. OUP represented $16 million and adjusted OUP margin was 1.7%. Our largest market in Northern Europe segment is the U.K., which represented 36% of segment revenues in the quarter.

During the quarter, U.K. revenues decreased 6% on a day-adjusted constant currency basis. This reflects a slightly higher rate of decline from the third quarter trend. We expect a similar year-over-year revenue trend in the first quarter compared to the fourth quarter.

In Germany, revenues decreased 3% in days-adjusted constant currency in the fourth quarter, a significant improvement from the third quarter trend. We continue to take actions to improve our Germany business and have progressed various initiatives focused on business mix and operational improvements.

Overall, in the first quarter, we are expecting a slightly improved year-over-year revenue trend compared to the fourth quarter trend.

The Netherlands is one of our smaller businesses in Northern Europe. The revenue decrease in the fourth quarter of 5% days-adjusted constant currency was a slight improvement from the third quarter trend on this same basis. Based on the prolonged decline in revenues in the Netherlands, increased interest rates and the worsening economic conditions, we updated our goodwill impairment assessment at year-end which concluded in a noncash impairment charge of $50 million.

Having said that, we have taken various actions in the Netherlands, which have recently improved profitability, and we expect further improvement in 2023. The Asia Pacific Middle East segment comprises 12% of total company revenue. In the quarter, revenue grew 8% in constant currency to $579 million. OUP was $23 million and OUP margin as adjusted was 4%. Our largest market in the APME segment is Japan, which represented 46% of segment revenues in the quarter. Revenue in Japan grew 11% in constant currency or 12% on a days-adjusted basis. We remain very pleased with the consistent performance of our Japan business, and we expect continued strong revenue growth in the first quarter. I'll now turn to cash flow and balance sheet. In full year 2022, free cash flow equaled $348 million compared to $581 million in the prior year. In the fourth quarter, free cash flow represented $115 million compared to $238 million in the prior year. At year-end, days sales outstanding increased about half a day to 56 days.

During the fourth quarter, capital expenditures represented $20 million. During the fourth quarter, we repurchased 376,000 shares of stock for $25 million. As of December 31, we have 2 million shares remaining for repurchase under the share program approved in August of 2021. Our balance sheet ended the quarter with cash of $639 million and total debt of $987 million. Net debt equaled $348 million at quarter end. Our debt ratios at quarter end reflect total adjusted gross debt to trailing 12 months adjusted EBITDA of $1.32 and total debt to total capitalization at 29%.

Our debt and credit facilities remain unchanged during the quarter. After successfully lengthening our debt duration profile with the Euro note executed in mid-2022, we entered 2023 with a very strong balance sheet.

Next, I'll review our outlook for the first quarter of 2023. Based on trends in the fourth quarter and January activity to date, our forecast is cautious and anticipates that the challenging environment will continue through the first quarter. We are forecasting underlying earnings per share for the first quarter to be in the range of $1.61 to $1.71 which includes an unfavorable foreign currency impact of $0.15 per share. We have disclosed our foreign currency translation rate estimates at the bottom of the guidance slide. Our constant currency revenue guidance range is between a decrease of 3% and an increase of 1% and at the midpoint represents a 1% decrease. There's no meaningful impact for acquisitions and dispositions but there is an increase in billing days year-over-year, bringing the days-adjusted constant currency decrease to 2.5% at the midpoint. This represents a decrease from the flat fourth quarter revenue trend on this same basis.

We expect our EBITDA margin during the first quarter to be down 30 basis points at the midpoint compared to the prior year. We estimate that the effective tax rate for the first quarter to be 29.5% and the full year of 2023 to be 29%. This reflects the enacted decrease in the French business tax that I mentioned last quarter and our latest estimate of mix of country earnings.

As usual, our guidance does not incorporate restructuring charges or additional share repurchases, and we estimate our weighted average shares to be $51.5 million. I will now turn it back to Jonas.

R

Thank you, Jack. As we wrap up our reporting of 2022 and begin 2023, I'd like to provide an update on our DDI strategy: diversification; digitization; and innovation and acceleration plans, which together with continued investments in our technology roadmap are strengthening our capabilities to capture higher margin opportunities and create long-term sustainable value. .

On diversification, we're making excellent progress shifting our mix to higher-margin businesses within and across all of our brands, ensuring our clients have the talent and workforce strategy to adapt quickly to market shifts as they happen. We're also very pleased with the completion of our rapid and successful integration of our ettain acquisition into our Experis business, and we are starting 2023 with a very strong position in the U.S. IT professional resourcing and services market.

We also see strength in the Experis brand globally, positioning us to capitalize on the growing global professional IT resourcing market. Our industry leadership and star performer status in both Experis and Talent Solutions RPO and MSP offerings has also been recognized in 2022 by Everest Group as discussed in the recent quarters.

On digitization, we continue to make excellent industry-leading progress on our technology roadmap. Last year, I communicated that we had completed PowerSuite cloud-enabled front office implementations in 22 markets. I'm pleased to report that in 2022, we've implemented PowerSuite in 11 additional markets and are in-flight with 6 more markets as we speak. By the end of 2023, we will have substantially all of our major businesses on this leading platform.

During 2022, we have further strengthened our mobile app leadership position in France and advanced our Associate app in various other key markets with more countries being added in 2023. Our global enterprise data lake is in place for our top 3 markets: France; U.S.; and Italy, further strengthening our business insights to clients and improving our candidate experience, all of which is a critical to our B2C, business to candidate, strategy at a time when talent shortages remain high.

Our back-office cloud-enabled infrastructure projects are also driving efficiencies and improving our processes. On innovation, our engine for growth, we're making great progress on leveraging our PowerSuite technology stack here, too, and are accelerating the deployment and adoption of our AI-based recruitment tools and machine learning to enhance recruiter productivity,to be more data and insight driven to find the best talent match quickly and focus on activities that create the most value for candidates, associates and clients.

As we continue to differentiate our higher-value services, we're increasingly focused on being creators of talent at scale by expanding our talent engine offerings across our brands and for our internal employees and associates. Our Talent Academy is recruiting and training our own new talent to be experts in key skills and industry verticals, including IT.

Our Experis Academy, now active across 14 markets, is providing intensive role-ready tech training and coaching for our Experis consultants, especially in cloud and infrastructure, Business Transformation Services and Digital Workspace specialist skills, so we can find or create the best talent which our clients need. And our Manpower MyPath has boosted the employability of almost 200,000 temporary associates in 15 markets. increasing recruiter productivity, achieving higher reassignment rates, stronger Net Promoter Scores and driving higher GP margin across specializations.

In addition to this, we engaged in many more training initiatives at a local country level as well. We're also making excellent progress are working to change the World ESG plans, recognized in 2022 for our impact across planet, people and prosperity and principles of governance. ESG is increasingly important to our clients, associates and employees as they choose with whom to work or be associated with.

We earned an A minus rating in this year's carbon disclosure project survey, driven by our science-based target initiative validated emissions reduction targets. We maintained our industry-leading Sustainalytics score. We're included in the Dow Jones Sustainability Index for the 14th year recognized by Newsweek as one of America's most responsible companies for the fourth year and ranked in the top half within the Wall Street Journal's top 250 best-managed companies by the Drucker Institute, scoring highly for customer satisfaction, innovation and social responsibility, all of which reinforces our reputation as a leading organization with strong performance in the areas of environment, social and corporate governance and our talented teams should be proud.

In closing, we've seen the broader economic environment softened over the past months. This has translated into lower demand for our services in some markets, which we expect will continue. However, we still continue to see good demand for specific skills and industry verticals that support growth in our higher-margin offerings. We are very confident in our ability to manage this dichotomy of market opportunity as we have done many times in the past, and we will adjust our resources as we see the market evolve going forward.

Longer term, we remain convinced that in this fast-changing post-pandemic landscape, our clients' workforce transformation needs will grow. The value of data and insights will increase and building the right blend of people and tech will be even more critical. We're confident that our DDI strategies and excellent progress positions us to leverage these opportunities and more to accelerate profitable growth and value creation.

Now I'd like to open the call to Q&A. Operator?

(Operator Instructions) Our first question for today is from Andrew Steinerman of JPMorgan.

I wanted to look back at Slide 7. And despite the softening demand environment fourth quarter in terms of staffing, gross margins were still up 30 basis points. So Jack, I just was hoping you could talk a little bit about what's driving that? Is there a mix factor? How are bill pay spreads doing? And how is that same figure likely the trend is the first quarter?

Thank you, Andrew. Yes, I'd be happy to talk to that. So I'd say the big item is staffing margin. So you can see staffing margin having the biggest contribution to the year-over-year plus 100 basis points. And despite the volumes and the pressure on volumes that we talked about on the call, Pricing continues to hold up very well. And we see that across all of our large markets.

So I'd say there is a component of that, that is mix as well on the staffing side. We've been talking about the adjustments we have been making to the overall portfolio. You've seen us talk about some of the dispositions of some of the countries that were not at hurdle rates, and you saw us in this release talk about another move we've made there in terms of divesting of one of our businesses in Europe.

So mix is part of it, but I'd say the bigger part of it is just the continued strong pricing environment. That is reflected in what we've been talking about in terms of the labor markets and the demand for talent. On an overall basis, staffing margins continue to perform very well. The other part of it is the mix as well in terms of the brand mix and Experis and Talent Solutions continuing to be at record levels of percentage of the overall business, and that's having an impact as well.

I'd say in terms of spreads on an overall basis, holding fairly steady from -- sequentially from the third quarter to the fourth quarter. We're not really seeing a big change in terms of bill pay spreads and so forth. So again, in line with solid pricing. And then you can see Perm, although we have noted that Perm is starting to slow off-record levels, still having a very positive impact with year-over-year growth, and we talked about that in the prepared remarks as well at very high single-digit growth in Perm overall year-over-year, contributing to that GP margin improvement.

The other item, Experis we've called out, you can see from the services side, so the non-resourcing side, very good activity there, and you can see the 20 basis points in solution statement of work, other services.

And lastly, I'd say, Andrew, MSP contributed year-over-year to margin improvement. And we did see right management outplacement activity start to rebound from record lows in the prior year and that had a positive impact on margin as well.

Our next question is from Jeff Silber of BMO Capital Markets.

You talked in your prepared remarks about doing cost reduction in areas of slower demand. I was wondering if we can get a little bit more color on that in terms of where that was? Are these cost reductions expected to continue? And if not, what are you looking for before holding off on that?

Yes. Jeff, I'd be happy to talk to that. So I guess the way I'd say that, as we've talked about in the prepared remarks, it is still a bit of a balance. We are still investing for growth and good opportunities. And Experis and Perm in certain markets is still holding up fairly well. So there are areas where we continue to invest, but we are pulling back in areas where we are seeing softness. So when I look at -- we talked a lot about SG&A year-over-year being up in the fourth quarter. That's largely due to the momentum of the growth earlier in the year when you look at year-over-year. But when we look at FTEs and headcount sequentially were actually down from the end of the third quarter.

So our headcount is down. And if you look across the markets where we've made some adjustments, you can see North America would be part of that based on the trends that we're seeing. The U.S. and Canada both down and head count slightly. Across Europe, you would see, and we've talked about this before, some adjustments in Germany as well in Norway as well. So reacting to some of those sectors where we've seen softness like in construction in Europe, you would expect that we're making adjustments in those parts of the business.

But on an overall basis, I'd say if you think about the quarter overall, we still grew GP dollars across all brands. And so that indicates that the environment is still, although it's choppy and a bit uneven, and we're certainly seeing more pressure on the manpower side, there continues to be very good opportunity in pockets even in manpower in pockets, and we've talked about the investment in specialty. But where there has been slowing, we are making those adjustments.

And as to your point about going forward, you should expect that we're going to continue to do that. And we'll do that based on the trends that we're seeing in the key markets. and we'll continue to make those adjustments as we go forward. I did announce in the quarter that we did some slight restructuring. We did -- the restructuring dollars were very small on an overall basis. And that would reflect some very small rightsizing in the U.S., Latin America, in Mexico, as you would expect, we've done some small rightsizing there as well. in Northern Europe, in Germany and Norway, as I mentioned earlier, some slight adjustments. And in France, we made some small adjustments as well. So that would capture the small restructuring we took in the quarter. And we'll continue to monitor those trends going forward in terms of overall activity levels.

All right. That was really helpful, Jack. I appreciate it. And moving on to everybody's favorite topic was just taxes. I know you gave us an update on the impact of the French business tax, is that something that we should use? I know you're not talking about 2024, but is that a good number to use, that 29%, going forward?

Yes. Great point. So the government of France did pass the French business tax reduction as part of the budget for 2023. So that's locked in. So that will take us. We did say that 29% for the full year 2023 that does have that benefit, which is about 1.5% or so. We've also updated the mix of country earnings, which is part of the equation as well, which takes it to 29%. We'll see if that ends up maybe being a tad conservative.

But when we go to 2024, currently, they are projecting to remove the final part of the French business tax if that gets passed,and the final confirmation of that will be in the 2024 budget when it's approved at the end of '23. That would be another 1.5% decrease, which would take us down further to about 27%, 27.5% for '24. So we'll continue to update that. We'll watch that when the preliminary budget comes out in the fall. And certainly, in the fourth quarter, we'll have greater certainty around that, but that would be very good if that got passed as intended.

Our next question is from Manav Patnaik of Barclays.

This is actually Ronan Kennedy on for Manav. Last quarter, if I'm not mistaken, the commentary was very -- it was indicative of seeing solid demand, a little to no signs of deterioration, while increasing risks and uncertainty were acknowledged, it was -- the commentary was indicative of that solid demand. But now it's broader economic softening, lower demand for services in some, not all markets, the uncertain economic outlook. How did that happen. Can you assess what happened in the quarter versus your expectations even from a timing standpoint and with regards to your visibility? And how we should expect first quarter and the remainder of the year to play out in consideration of that.

Sure, Ron. Well, the risks and uncertainty we talked about in the prior call, to some degree, came to pass. For the first 3 quarters of the year, especially after the Ukraine war, we started to see Europe soften, but the U.S. held on and Q4 was really the time when we started to see the U.S. demand softening broadly across the brands, but clearly more pronounced for the Manpower brand and that shouldn't have come as much as of a surprise. As you know, for the Manpower brand, PMI is a good indicator, both across Europe during the year. And in the U.S., at this time, PMIs are all below 50, and we really could see that softening demand occurring in the Manpower brand in particularly.

So at this point, as Jack has just spoken about, it is clearly visible across all of our brands. But having said that, we see big differentiation between the softening the Talent solutions still leading the way in terms of growth of GP in the fourth quarter. The same is true for Experis holding up well. And really, it's the Manpower brand that we're seeing having more of an impact due to the slowdown in industrial activity and across various sectors.

And Ron, I would just add to that. I think when we released our third quarter results on October 20, we just had a couple of weeks of activity in October at that point. I think if you look at some of the labor market data, particularly in the U.S. on what happened from October through December, you'll see a significant trend change in terms of what was happening with temporary workers in November and December as they ended the quarter. And certainly, in France as well, you would have seen the industry data there step down in the month of November and December. And actually, our business held up fairly well compared to that industry data that went negative year-over-year in November and December.

But clearly, the environment changed when we went out on October 20, we did say that we anticipated a stable environment, to your point. And what happened in November and December actually moved away from that.

That's very helpful. And then margins were touched on in response to Andrew's question, but just for guidance for the first quarter overall, I mean, obviously, it is a function of the top line and the potential declines there. But what are the other kind of puts and takes to upside or downside to the margins as well and then ultimately earnings.

Yes. No. Happy to talk to that. I think for the first quarter for GP margin, still holding up very well, I'd say. So you can see at the midpoint, we're at 18.1%. That's still up 70 basis points year-over-year. So I think based on the earlier question we had on GP margins, still anticipating and seeing good staffing margin, still solid pricing environment. And we don't see that changing. And although Perm is coming off record lows and slowing on a year-over-year basis in terms of growth trends sequentially, there is still good Perm activity in various markets. So we still see that contributing to the GP margin.

I think on the bottom line, it's actually pretty straightforward. We are seeing a decrease in operational leverage with the revenue trends. So I mentioned in the first quarter, we ended up on a flat organic days adjusted basis. We stepped down in the first quarter. So although at the midpoint in constant currency, it's at minus 1, as I mentioned, we have more days in the first quarter. So when you adjust for days, that takes it down to about minus 2.5%.

So it's really the lower volumes that are translating into lower GP dollars, which are falling down. We are making adjustments, but that is contributing to the EBITDA margin of the minus 30 basis points year-over-year in the first quarter, really driven by the volumes.

Our next question is from Mark Marcon of Baird.

Jack, RPO, where is that as a percentage of GP?

So Mark, we'd like to talk Perm overall. So that includes RPO, but also includes the Perm activity that's happening in the staffing brands as well as Manpower and Experis. So on an overall basis, in the fourth quarter, our Perm as a percentage of total GP is at about 18.6%. So -- and we've talked about that in the past. You see that coming down from the record levels of Perm that we had in the second quarter, and we expected that to happen. So at that point, it was above -- just slightly above 20%.

And so now it's coming down just below 19% now. And we would expect that to continue to settle in at more historical levels somewhere in that range, maybe even a little bit lower as we go forward as expected.

Yes. And you mentioned that RPO is continuing to grow during the fourth quarter, although it declined in the U.S. Where are you seeing the growth on the RPO side. And as you talked about it settling in a little bit more as a percentage, what range would you expect it to go to if the economy softens a little bit further on a worldwide basis if there's more caution.

Sure. I'd be happy to talk about that. So the U.K. had very, very strong RPO growth in the fourth quarter. We saw very -- Poland is a great operation for us in terms of supporting our global RPO. They had very strong growth as well. Japan had strong RPO growth and France had strong RPO growth as well. So those are all some of our larger markets that did very well in RPO, which took us to overall growth despite the U.S. being down in the fourth quarter. Overall, RPO was up double digits in revenues. And so that would be the main drivers.

I think to your point in terms of the outlook, I mean we would expect that the year-over-year growth rates for Perm would continue to come down. as we move forward, again, as we get further away from some of the record levels of activity, and we anniversary very, very high rates in the prior year. But I'd say as we continue, it's hard to say. In this environment, Perm's been holding up better than anyone would have ever imagined if we would have went back a number of quarters. And it's still holding up fairly well despite some of the pressure we're seeing in staffing volumes in some of the markets.

So will that growth rate continue to edge down? Yes. But it's hard to say if it will come down into negative territory anytime soon. We'll just have to monitor those trends. But so far, we're very encouraged by the fact that it's holding up in many of our key markets.

That's great. And Jonas, you were just in Europe, you were at Davos. Can you talk a little bit about what you're hearing from clients and just generally speaking, with regards to -- in the key markets, France, U.K., Italy, Germany, what you're hearing with regards to areas that seem to be holding up a little bit better than what we hear on this side of the pond or would imagine as it relates to Europe and what areas of caution are there? How are you thinking about things not just for the next 3 months but over the course of the year, broadly speaking?

Sure, Mark. The conclusions of discussions with clients is, clearly, their hiring intent is softening somewhat. But despite what you read in the papers in terms of both big tech companies pulling down and other larger corporations also having workforce reductions, most of our clients are continuing to hire. They may not hire the same skill set, so they take longer to hire. The sales cycles are a bit longer. Recruitment times are going up. And they're very specific about the skills that they feel they're going to be needing heading into the year, but they are continuing to hire.

And that speaks exactly to this dichotomy in terms of demand. So on the one side, we feel that some of the skill sets, notably in logistics are becoming softer. Construction has been softer due to the interest rate environment. You have others as financial services and tech companies where demand is still holding on really in Europe as well as globally.

So we're in this time where we are balancing between customers that are tapping the brakes, they're not hitting the brake, they're tapping the brakes. Some have their foot over the break and thinking about what they would do if they see the environment deteriorate further to many clients saying that they're working through the pandemic supply chain issues, and they have a big order a book that they need to fulfill during 2023. So it's quite uneven, but at the same time, quite encouraging because you can tell, all of this is reflected in still very strong labor markets. And what's not unusual, as you well know, is that our industry leads the way in a softening economy but it has yet to translate into the broader labor market.

And we don't know to what degree it will. We note, of course, the reduction in demand for some places with manpower skills, in particular, as we see industrial outlooks come down. But overall, it's still a constructive environment, but it is difficult to predict where it's going, most companies we spoke with and are speaking with still are looking to bring on talent because they have the memory of the pandemic, very, very fresh. And you think back over past recessions, and this may be the most preannounced recession that we've ever experienced, be it technical or otherwise, employers in the past really absorbed most of the slowdown in reduced productivity because they wanted to hold on to the workers.

And that means we may well, as Jack has alluded to, still see reasonably good Perm activity, some parts of the business feeling more of the softening and others still see very good demand. But it's hard to predict, but we're ready to manage this whichever way it goes. And as you can tell, we feel really good about our diversified business mix where we feel that we have some good resilience in higher skill sets and developing more resilience in also Manpower higher skill sets. So we'll manage it as it evolves based on the trends that we're seeing. But I'd say the tone in Davos was more optimistic than I had expected.

Our next question is from Kartik Mehta of Northcoast Research.

Jack, you talked a little bit about competition and pricing holding up. I'm wondering, is that across all brands? Or is maybe the Manpower brand seeing some additional competition because of some of the pressures and the other brands are holding up, so -- where your comments kind of overall pricing is holding up. I'm just wondering if you look at kind of the brands, what do you think about competition currently?

Yes. Thanks, Kartik. Actually, it's a very good point, and I should have clarified that actually Manpower had very good staffing margin improvement in the fourth quarter. So I could understand why there would be a question if they're seeing the most pressure on volumes, are they starting to see some pressure on margin, on staffing margin. And it actually is not the case.

So despite volumes being down, pricing is holding up very well on the Manpower side. And when we look at that 30 basis points for staffing margin, Manpower was a big contributor to that. So no, it's holding up quite well. And I'd say on the Experis side, margins are holding up very well as well. I think in line with the trends that we've talked about in recent quarters. But I think the good news is despite some of the pressure we're seeing in some of the slowing environment, that is not translating into pressure on margins on the manpower side.

And then, Jack and Jonas, just all the conversations you've had with your clients and maybe your trip to Davos and Europe and, Jack, just you're looking at business and the statistics, Would you anticipate for wage inflation? It seems like it's coming down a little bit. but it's probably mid-single digits, if that's correct. And I'm wondering kind of your outlook for the year and what you would anticipate for that?

As many we've been clearly looking at wage inflation. And just as a reminder, from our perspective, wage inflation is actually a positive effect because it translates into our business through higher bill rates. So we -- our business model is not negatively impacted by the direct inflation or wage inflation that actually benefits from it. Obviously, from an economic perspective, high inflationary pressures are not good.

And to your question, we expect wage inflation to continue to come down as you've seen over the last 6 months. Although the pace of those decline -- that decline is hard to gauge. But I would say this, if you speak and we speak obviously to employers at large, their expectation is for wage inflation to come down. which is why the wage increases on average are still quite contained.

So they are not responding on average to these wage demands. They are trying to manage it through onetime bonuses, hiring incentives, all kinds of onetime effects because their assumption is that wages are going to be coming down over time, and they want to remain competitive in the market in their business. So we would expect wage inflation to continue to come down. But based on the gradual and slow decline that we've seen certainly over the last 9 months, we think there's still -- it's still going to take a while. But overall, our wage inflation expectations are for it to moderate.

Our next question is from Tobey Sommer of Truist Securities.

This is Jasper Bibb on for Tobey. The gross margin guidance for the first quarter looks really strong despite some of the headwinds we talked about. And I think historically, that's usually been the weakest margin quarter for the company. How should we think about the seasonal pattern of margins over the balance of the year? Or any impact that some of your permanent placement business is declining might have on margins over the course of the year?

Thanks, Jasper. Yes, you're right. I think traditionally, we do typically see some pressure. I think the counter to that, though, is we have stepped up margin pretty progressively sequentially over the last number of quarters, and we take that into the first quarter. So the rate of increase is slowing. We were up 100 basis points in Q4 year-over-year, it's 70 basis points. And that's just the comps starting to catch up a bit.

But no, I would say, at the moment, we feel pretty good in terms of, as I mentioned earlier, in terms of pricing, staffing margin, Perm continuing to contribute and based on mix of the business as well, right? So as we look out, we typically don't talk about future quarters, but I think it is fair to say that, generally, the second half of the year, we typically see a bit higher GP margins. I think this year in 2023, the item that we'll definitely keep a close eye on is Perm and the contribution of Perm to overall market, as we mentioned earlier. If Perm slows more dramatically, then that will have an impact and we'll start to see that come down.

I think the good news is we're already seeing the contribution of Perm as we talked about in previous questions, kind of start to get back to more traditional levels as a percentage of GP. And as that continues to stabilize, that should have less volatility on GP margin as we go forward. So that's what I'd say, Jasper.

That makes sense. And then Europe PMI has been contracting month over month for most of the second half of '22, but your organic revenue guidance for Europe is still roughly flat year-over-year in the first quarter. Could you speak to any differences in how managers are using temp labor in this environment? And are they more, I guess, reticent to let people go, given the shortages that we've seen in the past 2 years.

I'd say that they are definitely careful about letting their talent go. And the uncertainty and the volatility in terms of the outlook and the economic conditions also means that they prefer to have a more flexible workforce, which is helping us offset some of the demand weakness we may see.

So employers use this workforce solutions that we provide through Manpower and to a lesser degree in terms of economic cycle on the Experis side and Talent Solutions side to create some flexibility in their outlook and be able to quickly respond to either increases in activity or decreases in activity.

And I think that's what we see. But they have definitely and continued to be influenced by the difficulties in finding talent, and they are increasingly looking to us to help them provide that talent. And as you've heard from our prepared remarks, they are also very pleased with our increasing capabilities of upskilling and reskilling talent that isn't available in the market. We see this as a tremendous opportunity, both from a Manpower perspective as well as from an Experis perspective, as the demographic trends in Europe and in North America are clearly getting tougher over time with lower birth rates, the ability to tap into talent pools and to create skills that are missing in the market, we think, is going to be a great competitive advantage for both Manpower and Experis at scale.

And Jasper, just a technical item. I think your point that constant currency guidance is relatively flat compared to the minus 1% in Q4 to minus 1% in Q1. But there are more days. And days are a bigger issue than usual in the first quarter of '23. So it's about 1.5% difference due to the more days.

So when you adjust for days, we are down sequentially. So that takes it down to about 2.5% on an overall basis. So in Europe, in some of those markets, we are seeing -- when you adjust for days, we are seeing a slight step down in France and in Italy, as we mentioned in the prepared remarks. So that's just the only thing to keep in mind as you think about that.

Our next question is from George Tong of Goldman Sachs. .

You mentioned customers are exercising more caution in the demand for both contingent and Perm recruitment. Can you compare how quickly contingent trends are changing relative to Perm placement trends, particularly exiting the quarter? .

You can see that we are still holding on to Perm and that manpower staffing is coming down quicker than Perm. So it is connected to a very strong labor market and some of the volatility you see in certain industry verticals in some countries. So Perm at this point is holding up better than contingent staffing, especially for manpower.

Great. And you indicated that activity in France in January points to further softening from a growth perspective. Can you elaborate on what you're seeing in France in terms of order flow, sales cycles and various end market performance?

Well, I would say that we're tracking well to market. You've seen some of the Prism data soften over the last couple of months, and then you saw it as well recently. So France is continuing and actually is still holding steady, but at a low level. It is one of the countries -- one of the few countries where we, as well as the industry, never came back to pre-pandemic levels. So I would say the same phenomena that we're seeing in other markets where there is a slowdown, longer sales cycles, longer times to close recruitment cycles, but still an environment that is constructive to our higher-value offerings or higher skill sets within Manpower and also some very good opportunities on workforce transformation as it relates to Talent Solutions.

So all of this indicates a slight step down, as Jack talked about, but still something that is manageable from our perspective.

Our next question is from Heather Balsky of Bank of America.

I was hoping if you could talk a little bit about Germany, you mentioned in the prepared remarks about some of the initiatives you're taking there to turn that business. I was hoping you could elaborate on that. And then I'm curious about the underlying environment you're seeing in that market. You didn't call that out as one where you're seeing some slowing, but just curious what you're seeing in some of those end markets.

Well, I think the overall market is still -- holding steady unemployment rates are still low, and there is a lot of work that we're doing to make sure that our business is competing the way it should. We were pleased to see an improvement sequentially between the third quarter and the fourth quarter. We expect to continue to see an improvement. As we've talked about in prior calls, our exposure to the automotive sector in Germany is the highest that we have across all of our countries, and that's really giving us a lot of work to do to diversify our business into segments that are holding up a bit better. So even if the market could go softer also in Germany in the first quarter, I think we have initiatives in place where we're hoping to see continued improvement in our own business as we move forward. And we have a Proservia business that is also working to recover some of the lost ground.

But overall, we're pleased to see signs of improvement, but we still have a lot of work to do, Heather to make sure that we're competing at the right level in the German markets.

And then another question, just China reopening. I know if we go back a couple of calls, there's potential risk of disruption, some of the lockdowns. I'm just curious if there's any benefit with China reopening or if all of that has just kind of been not material to your business?

Well, as you know, our Chinese business is managed through a listed company in Hong Kong that is covering the Chinese market. But overall, I would expect that when Chinese demand improves, it will have the benefit of creating demand for products and services for the rest of the world, which will be positive, and it will probably also increase pressure in terms of demand for resources and energy costs might go up.

But overall, a growing China should be beneficial for the world economy and as such, we would benefit from that evolution. And certainly, on the Manpower side that might mean that PMI start to turn the other way and go in the right positive direction again. But from our own business perspective, not an impact, but as opposed to -- there might be a secondary effect of an improving economic environment to which China's growth contributes.

That brings us to the end of our fourth quarter earnings call, and we look forward to speaking with you again when we catch up in April. Thanks, everyone. Have a good rest of the week.

Thank you for your participation. You may disconnect now.