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Manpower Inc. (NYSE:MAN)

Q4 2012 Earnings Call

January 30, 2013 8:30 am ET

Executives

Jeffrey A. Joerres – Chairman and Chief Executive Officer

Michael J. van Handel – Executive Vice President and Chief Financial Officer

Analysts

Kevin D. Mcveigh – Macquarie Research Equities

Kelly A. Flynn – Credit Suisse Securities

Sara Gubins – Bank of America/Merrill Lynch

Paul Ginocchio – Deutsche Bank Securities

Gary E. Bisbee – Barclays Capital, Inc.

James Samford – Citigroup

Andrew C. Steinerman – JPMorgan Securities LLC

John Healy – Research Holdings, LLC

Mark S. Marcon – Robert W. Baird & Co.

Operator

Welcome and thank you for standing by. At this time, all participants are in a listen-only mode until the question-and-answer session. (Operator Instructions) Now, I will turn the call over to your host Mr. Jeff Joerres.

Mr. Joerres, you may begin?

Jeffrey A. Joerres

Good morning and welcome to the fourth quarter 2012 conference call, as well as the full year. With me is our Chief Financial Officer, Mike Van Handel. I’ll go through the high level results for the quarter and the full year. Mike will then spend time going through the detail of the segments, as well as the forward-looking items for the first quarter, and any implications at all to the balance sheet and cash flow as well as the reorganization that we did in the fourth quarter, and more that we will be doing in the first quarter and possibly beyond.

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

Michael J. van Handel

Good morning, everyone and welcome to today’s call. This conference call includes forward-looking statements, which are subject to known and unknown risks and uncertainties. Actual results might differ materially from those projected in the forward-looking statements. Additional information concerning factors that could cause actual results to materially differ from those in the forward-looking statements can be found in the Company's Annual Report on Form 10-K and in the other Securities and Exchange Commission filings of the company, which information is incorporated herein by reference.

During our call today, we will reference certain non-GAAP financial measures, which we believe provide useful information for investors. We include reconciliation of those measures where appropriate GAAP on the investor relation section of our website at manpowergroup.com.

Jeffrey A. Joerres

Thanks Mike. Despite the difficult headwinds, the fourth quarter was a relatively strong quarter for us. We continued to drive forward with our cost initiatives, resetting our cost basis, as well as bringing on the appropriate revenue, in other words, profitable revenue. We continue to be more selective regarding the type of client and pricing, particularly in the U.S. and Europe.

We were able to significantly exceed our expectations of profitability, primarily because of the slightly better revenue performance and lower expenses than we had anticipated. In U.S. dollar, we came in at $5.2 billion for the quarter and $20.7 billion for the full year. On a quarterly basis, our revenue decline was 5.1% in dollars and a minus 3.5% in constant currency. For the year, we came in at 6% decline in U.S. dollar and 1.4% decline in constant currency.

We were able to somewhat stabilize our gross profit margin and came in at the high end of the expected range of 16.9%. We’ve experienced stabilization in the staffing side, particularly in the U.S. and France. While we have seen declines in some of the Northern European countries that have most recently been hit by more fledgling economies. Our operating earnings at $105 million, was down 17% in constant currency or 11% before the reorganization charges.

Earnings per share was $0.68 in the quarter or $0.91 excluding reorganization costs, a 7% decline in constant currency. For the full year, we came in at $412 million, down 17% or 9% down before reorganization charges. We executed well in the fourth quarter, however we have set the bar high for ourselves to continue to maintain the profitable revenue growth, as well as drive down our cost base.

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

Michael J. van Handel

Thanks Jeff. As Jeff mentioned, our earnings per share in the quarter came in significantly stronger than expected at $0.91 per share before reorganization costs, compared to our guidance midpoint of $0.76 per share. Of this $0.15 outperformance, $0.13 came from the operations, $0.01 came from other expense and $0.01 came from lower weighted average shares due to share repurchases in the quarter.

Our income tax rate came in at 31% before French business tax just as expected and currency was a negative one penny impact as expected. From an operational stand point, revenues were down 3.5% in constant currency, slightly better than expected.

Our gross profit margin came in at the set of our range at 16.9%. SG&A expenses were tightly controlled and we are starting to realize the benefits of the second quarter restructuring, resulting in a year-on-year SG&A decline of 3.7% in constant currency. The combination of better gross profit margin and lower SG&A resulted in operating profit margin of 2.5% before restructuring which exceeded the top-end of our guidance.

Our reorganization costs in the quarter were $26.6 million or $18.3 million after tax. This brings our total reorganization cost for the year to $45.4 million or $32.1 million after tax, earnings per share impact of $0.40. This combined with the legal provision in the second quarter of $0.08 per share brings our total nonrecurring items for the year to $0.48.

Reorganization charges this quarter related to the simplification plan, we discussed on last quarter’s conference call. We’ll be executing this plan throughout 2013 and therefore I expect further charges in subsequent quarters.

We’re estimating at this stage that these restructuring actions will result in a reduction in our SG&A run rate in excess of $125 million by the time we exit the fourth quarter of this year. We expect this simplification plan to impact all segments of our operations as well as our global functions. The plan will be focused around four broad areas, organization design, programs, delivery models and technology.

Reorganization charge in the fourth quarter was comprised of $11.5 million in Northern Europe, $2.8 million in Southern Europe, $1 million in the Americas, $0.5 million in Right and $0.4 million in Asia-Pacific Middle East.

In addition, a charge of $10.4 million is included in corporate expense in the quarter. This $26.6 million total charge will result in annual run rate savings of $52 million of which I expect to realize $30 million in the first quarter of this year. Our gross profit margin in the quarter decreased to 16.9% from 17.1% a year ago.

The temporary recruitment business contributed 30 basis points to this decline, while our permanent recruitment contributed 10 basis points to the decline. This was offset by relatively stronger growth in our higher margin Manpower Group solutions and out placement business, both of which favorably contributed 10 basis points. Of the 30 basis points decline on the temporary recruitment side, about 20 basis points relates to one-time higher act credits in the U.S. in the prior year. Remaining 10 basis points decline primarily relates to our Manpower business in Germany and Sweden due to higher unbillable vacation and bench time.

Our permanent recruitment business represents 11.7% of gross profit in the quarter and was down 7% in constant currency. While we saw declines in permanent recruitment in Manpower and Experis, our market leading RPO offering under Manpower Group solutions was up 24% in the quarter.

Now, I would like to take a look at our gross profit growth by business line. Our Manpower business which represents traditional staffing and recruitment services in the office and industrial verticals represents about two-thirds of the Company’s gross profit. During the quarter, Manpower’s gross profit was down 7% in constant currency, similar to the third quarter.

Our Experis business was 17% of gross profit and is roughly comprised of 70% IT services, 10% accounting and finance, 10% engineering, and 10% other professional services.

Our Experis gross profit was down 10% in constant currency with the decline of 6% in interim staffing and 24% in permanent recruitment. Interim staffing was down 5% in IT and engineering, 3% in finance and 18% in other skills.

Manpower Group Solutions represents 11% of gross profit and consist of recruitment process outsourcing, MSP, Talent Based Outsourcing, Borderless Talent Solutions and strategic workforce consulting. Demand for our market leading solutions offerings continues to be very strong with growth in the second quarter of 7% in constant currency.

This brings our total Manpower Group Solutions business to 1.1 billion for the year. We believe our solutions business provides us with the unique offering in the market and we are excited for the future growth opportunity.

Right Management represents 6% of gross profit in the quarter and it was up 12% in constant currency as a result of strong outplacement growth. I will discuss Right Management later in the segment review.

Our SG&A expense declined from $805 million last year to $772 million this year. Both periods were impacted by reorganization charges as well as currency. Excluding these items, SG&A expense was down $28.5 million compared to the prior year, which is a decline of 3.7% in constant currency year-over-year. We have maintained tight cost control in our growing operations and have been able to reduce the expenses in our contracting operations.

We are focused on optimizing our office footprint in the year, which stands at 3453 offices at year-end, which is 8% below the prior year. As part of our simplification plan, we believe there is further opportunity to optimize our delivery footprint. Our permanent headcount at year-end stands at 27,800, which is a reduction from the prior year of about 4%.

Now let’s turn to the performance of our operating segments. Revenue in the Americas came in slightly better than expected at $1.2 billion which was flat with the prior in constant currency and US dollars. Operating profits in the quarter was $36 million which was down 11% in constant currency, if you exclude non-recurring items in both years. This resulted in an OEP margin of 3.1% or 3.2% before reorganization charges, down 30 basis points from the prior year.

The gross profit margin in the Americas was up year-on-year primarily as a result of the 15% growth in permanent recruitment. Our US business which represents 65% of the Americas segment had revenues of $751 million in the quarter, down 2% from the prior year. Our revenues remain below the prior year, we’re assuming the gap begin to narrow as we began to anniversary business that was purged last year due to over pricing.

Our gross profit margin was up over the prior year despite some non-recurring HIRE Act credits in the prior year due to better pricing and 8% growth in permanent recruitment. Operating profit was $22.2 million before $500,000 of reorganization charges representing a decrease of 20% compared to the prior year. Within the US, our Manpower business represents 57% of revenue.

Manpower revenues were flat with the prior year in the quarter. Average daily revenue growth in our small medium business improved to 8% in the quarter or as our larger key accounts declined 8%. This decline in our key accounts is moderating as we are anniversarying revenue loss from pricing decisions we took last year. Our Manpower gross profit margin was up 50 basis points excluding the prior year HIRE Act credits, reflecting strong price discipline.

Our Experis business represents 37% of US revenues. Experis revenues were down 7% in the quarter, an improvement from the 12% year-on-year decline we saw in the third quarter.

Within Experis, our small, medium business accounts improved to 2% growth and our larger key accounts declined 11%. As we mentioned last quarter, we are seeing reduced demand from some of our larger key accounts as some of their IT projects wind down. Our gross profit margin on Experis improved during the quarter, as we have a number of initiatives focusing on widening the pay bill gap.

Approximately 70% of our Experis revenues are in the IT area. IT revenues were down 3% due to the lower demand from our larger strategic clients. IT revenue from our small medium business was up 7%. Demand for our accounting and finance skills remained soft in the quarter, down 23%.

Our US Manpower Group Solutions had an exceptional quarter with gross profit growth of 17%. Our MSP business grew 26% and recruitment process outsourcing grew 7%.

Our Mexico operation contributed positive constant currency growth of 2% in the quarter with the resulting 8% growth in OEP and expanding OEP margin.

Growth in Argentina remains challenged, as we did not see the usual seasonal ramp in business in the quarter. Revenues were down 5% in constant currency or 16% on a reported basis. We also saw good growth in Canada and Brazil during the quarter.

Revenue in Southern Europe was slightly weaker than expected, coming in at $1.8 billion, a decline of 8% in constant currency or 12% on a reported basis. The gross profit margin was slightly up in the quarter and expenses were down year-on-year, but we continue to experience operating deleveraging with operating profit of $28 million, a decline of 31% in constant currency or 24% excluding reorganization charges. This represents 30 basis points decline in OEP margin, excluding non-recurring items.

Our French operation represents about three-fourths of Southern Europe segment. During the quarter, we experienced further softening of demand for our services in the French market. French revenues came in at $1.3 billion, a decline of 9% in constant currency or 10% in organic constant currency. The French market continues to be price competitive, but we remained disciplined in our approach to pricing.

Our staffing gross profit margin in the quarter was stable with the prior year. Our permanent recruitment fees was stable with the third quarter, but down 31% year-on-year. If we exclude the Pôle emploi contract from the prior year, permanent recruitment fees were down 10% from the prior year. We continue to work to reduce the cost base in France with SG&A down 6% compared to the prior year. We look to further reduce expenses through office consolidation and attrition as we look to enhance our OEP margin by better aligning our cost base with our lower revenue levels.

Revenue in Italy was down 8% in constant currency or 12% in reported U.S. dollars. Revenue contraction in Italy has stabilized as revenue on an average daily basis was down 11% in the fourth quarter, similar to the third quarter. Profitability in Italy was impacted in the quarter, as we took a specific bad debt provision of $3 million for a client that declared bankruptcy.

Spanish market continues to remain soft in the quarter, as revenues down 9% in constant currency. On an average daily basis, revenues were down 10%, similar to the third quarter. Revenues in Northern Europe was slightly better than expected, $1.5 billion, a decrease of 3% in U.S. dollars and constant currency. The gross profit margin was down from the prior year as pricing remains competitive.

Additionally, we were impacted by higher vacation and lower bench utilization in Germany and Sweden, which also negatively impacted the gross margins. Our permanent recruitment business remains soft down 13% from the prior year, but were up slightly from the third quarter.

SG&A expenses were well controlled in the quarter and declined 6% in constant currency excluding reorganization charges. This resulted in operating unit profit of $34 million, a decrease of 28% in constant currency before non-recurring items.

The operating unit profit margin came in at 2.3%, a decline of 100 basis points from the prior year before reorganization charges, as a result of the gross margin decline and operational deleveraging.

Within Northern Europe, Manpower comprised 76% of revenue and Experis 21% of revenue. Manpower is up 2% in constant currency primarily as a result of positive growth in the UK and Norway. Our Experis business was down 20% in constant currency, as we experienced softening demand for IT skills across most markets in Northern Europe.

Within Northern Europe, UK has the largest operation, representing 26% of revenue. Revenue in the UK was up 4% in constant currency just a touch weaker than what we saw in the third quarter. Our Nordics operation represents 24% of Northern Europe and net revenue decline of 5% in constant currency.

We continue to see soft demand within the Swedish market that continued positive growth in Norway. Revenues in Germany were down 6% in constant currency, about in line with the third quarter on an average daily basis. Revenue in the Netherlands remained soft on 10% in constant currency, also similar to what we saw in the third quarter. Revenue in Belgium also remains weak with the decline of 7% in constant currency.

Our Asia-Pacific, Middle East segment had a very strong fourth quarter. Revenues in the quarter came in at $698 million, an increase of 1% in constant currency. This drove very strong operating unit profit growth of $28 million, an increase of 33% in constant currency. The strong performance was a result of significant expense reductions. The quarter was also aided by the reversal of a $4 million contract termination provision, which was no longer deemed necessary.

Japan experienced modest growth of 1% in constant currency in the quarter. The demand for traditional staffing services under the MAN program continues to contract, but we continue to find good opportunity in the professional and solutions market. The economy in Australia continues to languish resulting in the soft demand for our services. Revenues in the quarter were down 7% in constant currency, but our profitability remains strong.

Revenue growth in the other emerging markets in the segment remains solid, up 10% in constant currency. Our business in China and India continue to grow nicely and contribute to the bottom line.

Right Management had another good quarter with revenue of $85 million up 7% in constant currency. Some of the last quarter growth was driven by increase in demand in our outplacement business which was up 16% in the quarter.

Account Management business continues to run slightly behind prior year, as companies continue to hold back on discretionary spend. Operating profit for the quarter came in at $8 million for a margin of 9.7%. This represents a significant improvement from the prior year as we’ve successful aligned our cost infrastructure with the revenue levels.

Now, let’s turn to the cash flow and balance sheet. Free cash flow, defined as cash from operations less capital expenditures was very strong in the fourth quarter resulting in free cash flow for the year of $260 million. The strong cash flow on the fourth quarter was somewhat due to the timing of cash received at the end of the third quarter, which has travelled quarter-end and resulted in weak third quarter cash flows. You may recall that discussion from our last quarter call. Improved collections also favorably impacted free cash flow. There DSO improved by one day to 53 days.

Capital expenditures for the year came in at $72 million and really primarily to office moves and re-provisions of our branch network.

During the year, we repurchased 3.6 million shares of stock for a total of $138 million. This represents approximately 5% of the shares outstanding and for the two year period of 2011 and 2012, repurchased 8% of the shares outstanding. During the fourth quarter, we purchased 2 million shares for $77 million. As of year-end we had 8 million shares authorized and available for repurchase.

The balance sheet remains strong at year-end with very good liquidity. Total cash at year-end was $648 million and total debt was $770 million, resulting in a net debt of $122 million. Total debt to total capitalization was 24% in the quarter. Our net debt to trailing 12 months EBITDA was less than one times.

Our total debt of $770 million at quarter-end was comprised of 350 million euro notes. With the fixed interest rate of 4.5% maturing in June of 2018, and 200 million euro notes for the fixed interest rate of 4.86% maturing in June of this year.

Our $800 million revolving credit agreement remains untapped at year-end, and we will likely use this facility along with available cash to retire the 200 million euro notes in June.

Finally, I’d like to review our outlook for the first quarter of this year. As you can see the revenue for the first quarter, it is important to keep in mind that most of our markets have one to two less billing dates this year compared to the prior year, which resulted in 1.5 less billing dates on a consolidated basis. This results in about 2.5% less revenue in the first quarter on a reported basis compared to revenue on an average daily basis.

We’re forecasting first quarter reported revenue to decline between 6% and 8% which is very similar to the decline we saw in the fourth quarter on an average daily basis. Currency rates on an average are not significantly different from where they were a year-ago and therefore we’re forecasting our constant currency revenue decline to be similar to the reported revenue decline.

We expect revenues in the Americas and Asia-Pacific, Middle-East to be flat to slightly up on an average daily basis and we expect Right to have growth in the low single digits. We expect most markets in Europe to continue their declines, but we do not see the rate of decline increasing significantly from what we experienced in the fourth quarter.

We expect to continue to see positive average daily revenue increases in the UK and Norway. We expect the grow margin to range from 16.6% to 16.8%. This is a slight increase over the prior year, but slightly down from the fourth quarter due to the typical seasonal dip.

Our operating profit margin before reorganization charges is expected to range from 1.4% to 1.6%. This is slightly lower than the 1.8% from the previous year and yes, de-leveraging is primarily the impact of having lower than normal revenue due to the lower number of billing days this year.

We’re estimating out tax rate in the first quarter to be 41%, which includes the French business tax. Our tax rate will be favorably impacted in the first quarter, as we will be recording the 2012 US Watsi tax credit. This credit is recognized in January of 2013 as the tax bill is not signed until 2013 even though it was retroactive till January of 2012.

Excluding the French Business Tax and the Watsi tax credit, our underlying income tax rate is estimated to be 36% in the first quarter and that is also our best estimate for the full year of 2013. We are forecasting our earnings per share before the reorganization charges to range from $0.40 to $0.48. The currency impact will be negligible if rates where they currently are. We expect to incur additional reorganization charges in the first quarter related to our simplification plans. We expect those charges will range between $20 million and $25 million before income taxes…

With that I’ll like to turn things back to Jeff.

Jeffrey A. Joerres

Thanks Mike. The fourth quarter was a good quarter for us. We achieved a bit better revenue than we had anticipated and good expense management, which gave us a significantly better operating profit than we had anticipated. We clearly had some economic wins in our phase. However despite that we were able to achieve revenue of $20.7 billion for the year, down 1% in constant currency, and as Mike talked about, our Expense Management contributed nicely to our fourth quarter results.

Additionally, we took action in the fourth quarter, which resulted in a reorganization charge. The charge will allow us to go into 2013 with some of our work in the cost area completed. We have much more work to do and we will continue to take swift action to reset our cost bases throughout the world.

During the fourth quarter, there were some real success stories; Canada, UK, particularly Brook Street, Norway, China, India, all had very strong top line growth and solid profitability. Australia, which is in a very difficult marketplace, was actually able to achieve very strong bottom line.

And Right Management did quite well producing top line growth of 6.5% in constant currency and an operating unit profit of 9.7%, much more inline with where we are taking the business and we are confident as we move forward that we will be able to maintain that level, even in a slower career management or outplacement environment.

Clearly, we are in a challenging environment, but we however at this time do not see it worsening. We’ve been able to stabilize gross profit with the U.S. and France core staffing business. As Mike mentioned, we have a lot of work to do in this area, but the stabilization of those two markets at least at this time gives us the ability to continue to drive in the right direction.

We are challenged in Northern Europe from a gross margin perspective, as some of those markets have a much higher gross margin and we’re still experiencing a slight downward pressure.

Our Solutions business continue to move nicely with some great wins in RPO where we have been able to capture 120 new engagements this year, and we have nearly $7.7 billion of annual spend under management in our managed service offering or both MSP and center management.

With our increased RPO wins and over 125 wins last year, the secondary trends in the area, permanent recruitment and RPO and our performance position us well for the recovery.

Right Management has done very well in reducing cost, putting our real estate, but more importantly becoming a leading offering in the virtual as well as call center approach to out placement. Information week awarded us for great technology in the area of the virtual space that we call right choice. We’ve also been able to increase our cross selling with other parts of the organization in all geographies. We’ve been able to do quite well against the competition and we have a very high takeaway rate and have every intention of continuing to do that.

We’re looking forward to continuing to find good cost synergies between all the brands which will allows us again to recaliberate our cost basis. We believe if there has been some stabilization across almost all of the geographies particularly Europe and may prove to be [misleading], but we believe over the year 2013, we will be able to see a modest recovery in many of the market places.

Clearly the patience is not of the recovery table yet, but continuing to have better vital science. Last quarter I spoke about four areas that we were focusing on. One, the correct revenue, the revenue with the right profitability is the right kind of business mix in geographies as well as the right client characteristic. Two, was to continue strong growth in the solutions area, which in the fourth quarter revenue and gross profit increased by 7%.

Three aggressively simplifying many parts of the organization, create the right agility and speed that would allows us to move forward regardless of economic challenges. And four to drive much more where we can in the right countries efficient delivery models.

All of these activities were acted upon in the fourth quarter and as a result, you are seeing some of the reorganization costs. In many areas, we still have more to do. We are confident our execution and focusing these four areas will give us the ability to have much more time to sell and drive the value from the assets that we’ve created as well as return much more to the shareholders.

The first element that we acted upon was to reduce our global headquarters and create an environment where many of the assets and the brand and the brands that were put in place moves into run mode; in other words, push closer to the client into the geographies. This will drive much more accountability down into the field level which will not only drive the value from the assets, but will also reduce the cost and support.

As Mike mentioned, we will be taking additional actions which will result in some first quarter restructuring.

In the area of simplification, we are taking action in four different areas; simplification of the organization, delivery, programs, and our IT structure. All these areas have plans around them and as a result, we are moving very quickly. Our goal is to have the majority of the work done by the first half of the year. It is important for us to do this as we are continuing as I mentioned to experience an economic headwind.

At the same time, we are seeing some strong secular trends. Secular trends in the area of Manpower, Experis, Right, Manpower Group Solutions, and emerging markets are all there. In many cases, the voice of these positive secular trends have been ground out by the cyclical nature of what is occurring, particularly in Europe, but it cannot be underestimated. The conversations we’re having with our clients and prospects for the need for agility is translating to much more of an outcome based solutions environment as well as the use of temporary staff to create the agility that is required within many of the countries and companies that we are doing business with.

On a legislative front, we have seen for the most part, positive legislative front, we have seen for the most part positive legislation, whether it be in France, Italy, a change in government in Japan or what we’re even seeing in the US. The German environment we believe will sort itself out.

Two of the new union CLAs were effective November 1. It is still through early days, but so far what we have not seen is any kind of significant volume decrease from our clients as we pass on to higher wage cost through the increased bill rates. We are looking forward to executing even in a more finely tuned way in 2013 and are confident about our ability to deliver solid shareholders returns.

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

Question-and-Answer Session

Operator

(Operator Instructions) The first question comes from Mr. Kevin Mcveigh. Sir, your line is now open.

Kevin D. Mcveigh – Macquarie Research Equities

Great, thanks. Jeff, Mike, really nice job in obviously a tough environment. Wanted to just get a sense of – you’re really doing a great job in France kind of holding a lot of margin. How much of that is kind of price discipline versus cost management, as we think about the business in Q4 and then into Q1 as well.

Jeffrey A. Joerres

Thanks Kevin. A large part of it is the price discipline and some of the things that we are doing on the accounts that we don’t want to take. Additionally I would say, what I’ve been most pleased is that as we’re able to on the margin, if you will do a little bit better on the revenue line, we’re not doing it through taking on bad business, which is still out there. At the same time, there is that balance meaning that while we’re talking on good business and we’re making sure that we are getting what we can out of the contracts, we’re also reducing expense.

Now, our current plan is to not go through a social plan within France, but continue to work through attrition and making sure that we have all the right performers in the right spot. So as a result you might see a few things going through the P&L instead of through restructuring, but we actually think that that’s much better for what we are plans out in that market. So we’re going to be very disciplined on expenses, disciplined on pricing and then also a few of our acquisitions, those small have added incrementally a positive on the margin side, very small, I mean, really is the other two actions that were prime drivers behind it. But it’s kind of a lot of little things in a market like that make a big difference, because of its size.

Kevin D. Mcveigh – Macquarie Research Equities

Understood. And then, hi, Mike not to get too deep into 2013, but SG&A on a total level for 2013, how should we think about that relative to 2012 given the cost actions? I mean it sounds like we’re going to take about $125 million annualized by Q4, but what does that mean for kind of full year if we were to think about just SG&A progression?

Michael J. van Handel

Yeah. So as I said the restructuring we’ve done already so far, which we’ve have taken a charge of $26 million in the first quarter, that will give us about $52 million out of SG&A for the full year in 2013 and that really starts up in the first quarter. So, about a fourth of that $52 million, $13 million will come in the first quarter.

So then, as you look out – so that’s $52 million if you will, the $125 million that we expect to get by the time we exit the year. So there is another $70 million that we will be working on through the course of the year and certainly that obviously that’s not going to come all Q1, it will come through the course of the year. So you will see that phased in, the remaining $70 million phased in.

So that’s how I think about how that restructuring is going to work through the balance of the year and no doubt, we’re going to continue to be managing cost tightly, and we will see where the revenue line goes, if there is some revenue opportunities that we need to invest in. We of course will invest in those markets and those specific areas, but it will be with precision as we need to support the business.

On the other hand, if we find the top line weakening further, you can expect that. We will more aggressively go after expense as well. But the whole simplification plan really is about – we’ve invested in our brands last year, we have invested in our solutions, in Experis in the professional side. Really now its about executing and really driving the overall business and driving performance and giving out of our way a little bit some of the other overheads and really just pushing things forward.

Kevin D. Mcveigh – Macquarie Research Equities

Understood, thanks.

Operator

Thank you. The next question comes from Ms. Kelly Flynn. Ma’am, your line is now open.

Kelly A. Flynn – Credit Suisse Securities

Thanks. You got me this time Mike. Thank you. I had a couple of questions; one about France. So first of all, you obviously spoke many times to stabilization, but the results themselves really didn’t show stabilization and I am wondering if you could just kind of explain why you’re saying its stable and then what constant currency and same day growth is implied in the Q1 guidance? Thanks, just for France.

Michael J. van Handel

Sure. Yeah, I think when we look at France overall, France is one of the – from the revenue perspective, France is one of the markets in the fourth quarter that did get a little bit weaker on a year-on-year basis compared to where it was in the third quarter. So overall average daily revenue in France was down about 10% in the fourth quarter, was down about 5% or so in the third quarter.

So we did see that market get little bit weaker as we got through the quarter. As we start out the first quarter, it seems to be trending about where it was in the fourth quarter. So in terms of our first quarter guidance at this point, we’re not expecting it to get dramatically weaker, at least that’s not what’s assumed in the guidance. We’ll se where things actually go in the market, but at this point we’re not anticipating it to get dramatically worse.

As opposed to some of the other markets across Northern Europe, there actually fourth quarter looked a lot like the third quarter, when you actually put it on an average daily sales basis. So France is one of the few markets that actually in Europe looked a little bit worse and so that’s why overall, I would still say things are stabilizing. When you look at our first quarter guidance overall, on a year-on-year basis the decline is on an average daily sales basis, the decline in the first quarter guidance is similar to the decline that we’ve seen in the fourth quarter. That’s the first time that you would have seen our guidance not get incrementally worse on a year-on-year basis, when we go from one quarter to the next quarter, you have to go back to – somewhere in 2010.

So I think it’s too early to call a bottom, but certainly I think in terms of things getting a lot worse I think that is the case. And then when you look at gross margin, I think there is a positive there, as well as we’ve seen in many other markets, some stabilization. We’ve anniversaried some of the declines and it’s still a competitive market, don’t get me wrong. I think there still is pressure out there, but I think it’s easing just a bit in most of the markets. The two markets we called out on the prepared remarks really had more to do with bench issues and utilization issues given the declines in the market. And that’s certainly what can bring some pressure overall on margins as well as we still see some volume declines. You get a lot of competitors scrambling for whatever business that’s out there, so that is not over yet, but I think it’s easing a little bit.

Kelly A. Flynn – Credit Suisse Securities

Okay, thank you. And then just a similar question on Italy to what I asked on France. Is it fair to say, it really didn’t improve in the quarter that the improvement was of from days impact and then for Q1, you are kind of assuming a stable decline. Is that fair for Italy too?

Michael J. van Handel

Yeah, that’s fair for Italy too. Yeah, if you take Italy on an average daily basis, both Q3 and Q4 was down about 11% in constant currency terms, average daily. So it’s about the same and as we look to Q1, I am assuming we’re going to continue to run at that same year-on-year decline.

Kelly A. Flynn – Credit Suisse Securities

Okay, perfect. Thank you very much.

Operator

Thank you. The next question comes from Ms. Sara Gubins and your line is now open.

Sara Gubins – Bank of America/Merrill Lynch

Hi, thank you. Could you talk about how you are thinking about gross margins for the year? It’s nice to see that you’re expecting the potential for some improvement in the first quarter and I am wondering if you think will see that continue throughout the rest of the year?

Jeffrey A. Joerres

Sure. And I think it’s – obviously when you look at our gross margins, there are a number of factors that are playing in and I think there is some opportunity for some improvement, but at this stage, I am thinking that when you break the pieces apart, you look at perm recruitment right now. It’s running little bit behind prior year, about 7% in the fourth quarter. If we start to see some pickup in the economy, I would expect that to turn and therefore perm may not way on the overall gross margin as it has been in the last few quarters and perhaps could add little bit incrementally.

I think when you get to the overall staffing gross margin itself, you got a couple of elements that are playing in there, that are not really pricing, but when you look at for instance the German Collective Labor Agreements. As we pass those incremental wage costs on effectively, we keep the same dollar gross margin if you will, but our margin percentage goes down and so there is some factors like that that will play in little bit negatively. So, I think from an overall, just the staffing gross margin, I would be thinking about flattish, it might be slightly up, it might be slightly down, but I don’t see a dramatic move.

Then you’ve got perm playing in there and you’ve got the right outplacement business depending upon where the economies are. So assuming the economies don’t get much worse, it might start to turn a little bit here, that’s how we look at the picture and if we get – things get a lot better or get incrementally worse, I think there clearly is impact on the gross margin as a result.

Sara Gubins – Bank of America/Merrill Lynch

Okay, thank you. So there are lot of moving parts in the potential French legislative changes, can you give us an update on where we stand on these and when you are expecting to get some more definite news on what changes we might see this year? Thank you.

Jeffrey A. Joerres

Well, you are right. There are a lot of moving parts in there and when you get down to it and we’re really looking at the end of the first quarter, where we might be able to get some better sense of what’s really in and what’s really out. Right now there is some great benefits to employees, really more transportability from one position to another. There is the ability for companies to negotiate some working time and wages. And then there is the taxation that is put on what would be called short-term CDI contracts less than three months, not to be confused with temporary contracts. So we see that as a positive. We have a lot of training dollars, protection dollars, holiday pay already in our contract, so I think this is a way to try to get more security into the workers hands that have less kind of short-term contracts, without that and possibly some more temporary ones.

And there is some taxation things that, what level of eligible wages will be used, how much, when will it be paid back, how will it be paid, how does this work with the bench model, those things right now are all kind of in pencil as opposed to pen and we should be able to get at this a much better understanding by the beginning of the second quarter, hopefully by the end of the first quarter.

Sara Gubins – Bank of America/Merrill Lynch

Okay, thank you.

Michael J. van Handel

Yeah.

Operator

Thank you. The next question comes from Mr. Paul Ginocchio. Sir your line is now open.

Paul Ginocchio – Deutsche Bank Securities

Thank you, just for clarification; can you just give me what the midpoint of your guidance is on a same day organic or a same day constant currency basis for the first quarter and how that compares to the fourth and what that fourth quarter number was? Thanks.

And then second on the tax rate, what do you have, just maybe some more clarity on the first quarter, is there any benefit from the changes in the bench labor market in that tax rate and how do we think about the difference between the reported tax rate and the underlying tax rate beyond the first quarter? Thanks.

Michael J. van Handel

Okay. Paul, you’ve got a lot in there. So average daily sales, midpoint of guidance in constant currency would be about 4.5% down in the first quarter, which if you did the same math for the fourth quarter, we would see something similar. So as I said, we’re expecting about the same type of revenue decline going from Q4 to Q1, which is as I said earlier, first time we didn’t see it incrementally worse going from one quarter to second quarter and we’ll see how that plays out obviously right now, so it’s just a forecast, we’ll all see how that plays out overall.

Now when you look at our tax rate overall, our underlying rate of 36% as I said in my prepared remarks excludes the French business tax and then the U.S. workers opportunity, tax credit related to 2012. So, effectively our all in tax rate, we are estimating at 41% in the first quarter.

So without that, U.S. worker opportunity tax credit would probably be in the low 50s would be typical in the first quarter and that’s what I would expect. And I think as you look at a full year tax rate, again you get to the some underlying tax rate of without the French business tax, I think that’s going to be somewhere in that 36% range for this year, and then you have the French business tax on top of that. And I pull a French business tax out separately because that number does not move with pre-tax. So as pre-tax either goes up or goes down, it impacts the effective rate, so I think its better to pull it out and think about it separately. So that’s the way I would think about it. The business tax, of course runs about 1.3% of overall revenue.

I think your second – I think implying your question Paul was I think what you’re giving out was the tax refund that’s been discussed in France, what they refer to as the CICE tax refund, which is really a refund related to social taxes. That amounts to in 2013 about 4% of eligible wages. And eligible wages are from the minimum wage rate, which is referred to as (inaudible) 2.5 times would be eligible wages and most of our employees would and associates would qualify in that band.

So, that’s the type of tax credit that’s being discussed, haven’t been finally approved yet, the details are still being worked on and discussed and therefore we don’t have pure clarity on how that works. It looks like its going to be a refund that could be offset against taxes paid. However for us, depending upon how that works, that refund could actually be several years out before we actually get the cash.

And so that’s something that’s being looked at. The whole idea with the refund is to reinvest into further employment and reduce labor costs. So clearly, yeah we will be looking at that. How we do that effectively. At this point, we do not see this is something that would be reflected in lower bill rates declines.

Clearly, we will see what happens in the marketplace, but our view is, this is really about managing the overall workforce and improving on the workforce, improving on the quality of service. There is some provision in the bill that would allow us to develop a bench model for some of the workers in France and that would be where some of these investment dollars would go to. So, at this point, there is still a lot to be figured out in terms of what this means.

There isn’t anything that specifically impacts our tax rate per se within the first quarter. There are some assumptions in terms of how it impacts other elements within the first quarter, but there is no impact on the tax rate per se.

Paul Ginocchio – Deutsche Bank Securities

Hey, thanks Mike.

Operator

Thank you. The next question comes from Mr. Gary Bisbee. Sir, your line is now open.

Gary E. Bisbee – Barclays Capital, Inc.

Hi guys, good morning. Hey Jeff, you’ve talked the last couple of quarters about thinking about a slower long-term growth rate or at least next few years growth rate in Europe and ways that drive profitability despite that and I think that’s really all these efficiency efforts you talked, but can you give us maybe a couple of tangible examples of the types of things you’re thinking about and where you are in the process of implementing these changes to allow that?

Jeffrey A. Joerres

Sure. The first changes we took were in headquarters and will be in the regional locations where we really had many programs that have great value to the company and great returns to the share holders, but what we were doing was probably keeping that support system across the Board and placed too long and not driving in into what we internally call run mode in the company.

So the way I’ve kind of described it in the company is, we had a lot of support systems in here and what we need now to do is, we’ve been doing this long enough, so lets take those out, put them into the field and turn it more into revenue giving as opposed to support. So that affected a fair amount of the programs that we are trying to simplify, because now we’re looking at the programs and saying, okay, what do we really need, how do we do that, and how we make them simpler.

In addition to that, we had a fair amount of Rogue IT systems, which sometimes works really well, we’re trying to and have put up a lot of governance on that, so we’re going to be able to reduce the cost in there. So when you look at that simplification in the four areas of organization programs delivery at IT, we’re going through systematically all of those and really looking at how we can make this a much faster agile, so you can move up an move down, I mean it’s what we’re telling our clients and what we need to do is to make sure that given this potentially longer or prolonged slow growth as opposed to re-bounding up catapulting growth, we’ve got to be set forth.

So when Mike talks about the $125 million that we’re really kind of taking out, almost all of that fits into those four programs.

Gary E. Bisbee – Barclays Capital, Inc.

Okay, thanks. And then the follow-up, what’s causing the U.S. Experis business to continue to lag the way it is and I guess I’m referring specifically to the key accounts. Is part of that the fiscal cliff and now does it mean – is it the ongoing uncertainties or deficit reduction. Is that having an impact on your customers, because there is so many positive things we hear about, different trends and technology. The thing sort of add that it would just be bunch of projects and so now we got to keep going until we lap that and that’s going to be a drag. How big an impact is this?

Michael J. van Handel

Well, there is some hesitation out there. So it’s not as robust as what we would see as it was last year. And last year, we did pick some accounts out, some accounts just wound down that were major – lots of contractors out on assignment in the finance industry, some in the pharmaceutical industry. We are starting to pull those back. So you are going to see us get back that, not only as we anniversary it.

I would say that it’s probably not as positive as it was out there last year, but still there is a lot of opportunity and we’re bit behind in where we want to be. Confidence in the team, how they are driving it, the actions we have put in place. So it’s going to take us a little time to claw some of those back, but our backlog looks good and our pipeline is solid. So we are optimistic to get that back.

Jeffrey A. Joerres

Hey, Gary, your point is right. I mean it really is more on the key accounts that SMB side, and Experis on the IT and the U.S. was up 7% year-on-year. So that’s running pretty well, but we do have these clients that have wound down and it is specific to our client mix, but yeah we can’t use that as an excuse. We got to get out there, we got to chase it and find new business to fill that up and that’s what the team is trying to do.

Gary E. Bisbee – Barclays Capital, Inc.

Great. And then just one last quick one, I saw you release the other day of contract in Norway that was healthcare, I think it was nurses or doctors, is that a new area of focus or is that just a pretty small thing that’s specific to that or a couple of other markets?

Jeffrey A. Joerres

We do have healthcare as one of the verticals within Experis, but we do it in a very limited way and most of it is outside the U.S. So the healthcare that we have, whether it’d be nurses, higher end physician assistants, are all outside the U.S. and we’re more comfortable in that, because of the way the liabilities and laws work.

So we do have that, we have it in probably in eight to 10 countries between Europe and Asia; we’re looking closely at it. We’ve got some work in the U.S., but it’s such a small amount, it’s not worth mentioning, but it’s on our radar screen to see when we want to get into that and at what levels we want to get into it.

Gary E. Bisbee – Barclays Capital, Inc.

Great, thank you.

Operator

Thank you. The next question comes from Mr. James Samford. Sir, your line is now open.

James Samford – Citigroup

Great, thank you. Just a couple of questions on domestic policy and then particularly focusing on the Affordable Care Act and want to talk about the secular trend towards more terms as clients look at that transitioning some of that permanent side few times or just focusing on recruiting temp, instead of perm, how are you thinking about that and the implications of your business?

Then second question would be on just sort of general manufacturing Renaissance trends, is that really a zero sum game if U.S. really to starts to pull from the other regions and that’s how you would participate in that? Thanks.

Jeffrey A. Joerres

On the healthcare, there are still some things to be worked out. What we have determined was that, as it sits right now and as we would implement it particularly with the 12-month look back, it will affect our temporary workforce, but not yet anyone near is dramatic as what it could have been with of course a three month look back, so we’re in pretty good shape on that.

We are having a lot of conversations with clients about their work with what would be called contract work, short-term contract, supplemental work, internal work, those sorts of things and saying maybe we can recap that, maybe you can allow us to have a more flexible labor model where we have a fair amount of those workers particularly in transactions centers, call centers, that might be working 29 hours a week which would be under the 30 hour, that would kick-in some of the cost associated with those healthcare.

So right now we are going through the analysis of that. I would say, if you just take the headlines of it, this is the opportunity for us, its opportunity for us in lot of their clients that we deal with that might have large staffs that are currently contracted after they no longer want to be trying to understand all of the intricacies of this and let us do that. As well as, the savings of now not having to recruit those people, manage those people all of that. So on net, I would say, we definitely look at it as positive.

On the manufacturing Renaissance, we are participating in that and I don’t believe is, we’ve heard most of the clients talk that it is a zero sum game; what it is, what they have done in other parts of the world, whether it would be India or Philippines or for that matter, anywhere else. They are really looking at opening another facility back into the U.S., so the facility that is in the historically labor arbitraged environment is really being the strategy is to use that for domestic use or to stop the growth of that and have the balance of the growth here. Now that the wages have some closure to parity and there is a sense in many clients minds that we think it’s the right thing to do.

We have maxed that out, we would like to see the opportunity coming to the U.S., so manufacturing call centers, transaction processing centers, they are coming back. Renaissance, I think if it’s the Renaissance, it’s a burgeoning Renaissance. I mean it’s going to take a little bit of time here. This isn’t going to be wholesale 1000 person centers being setup. Again setup the new one, the core part of it and then let it expand from there and we are participating in that.

James Samford – Citigroup

And just a quick question on, would you see the affordable care activities that you are doing, would you see that in incremental activity on the Right Management side. Is that where you did or in terms of the conversations and potentially helping clients think of staffing?

Jeffrey A. Joerres

Well, clearly it goes to one of our offerings with strategic workforce consulting. What you are really doing with this workforce? But the majority of the opportunity from a revenue perspective falls into manpower, where we have the ability to manage a 29 hour workforce, do flexible staffing, different kind of shifts environments, many shifts, crossover shifts. Things that can really maximize that labor market and the talents that’s in the labor market.

So from a revenue perspective, it falls mostly on Manpower from a Manpower Group and how we can continue to assist our clients in figuring out this changing world of work, how did they win in that. That really falls into the Manpower Group Solutions, which is outcome based pricing, as well as our consulting offering to say how you really do this over the next three to five years.

James Samford – Citigroup

Thank you.

Jeffrey A. Joerres

All right.

Operator

Thank you. The next question comes from Mr. Andrew Steinerman. Sir, your line is now open.

Andrew C. Steinerman – JPMorgan Securities LLC

Hi gents. Looking at my global flexible staffing model, it looks like Manpower in France is still gaining share relative to the market, but and by not as big of a gap as the prior three quarters and the fourth quarter being still a again, but less than first to third, can you think any of the office consolidation that you are doing in France is infringing on the prior market share gains and how do you think about Manpower France’s position relative to the market?

Jeffrey A. Joerres

We really try to do a very robust, the deep analysis of consolidations and how much it affects revenue and return profitability. We don’t believe that much of that slowdown in market share gains would be coming from that. In many cases, we were consolidating in office that was maybe three, four blocks away and we still have the sales coverage which is what’s going to be generating the revenue.

I would say what’s happening is, is that we just continue to make sure we’re selective on that, some of what was happening was as one of our competitors was combining brands and more companies they have to get rid of one of them and we ended up getting a lot of that business, but some of that consolidation is done, so now it’s a different kind of opportunity we have going forward.

When we look at market share, we’re not focused on market share, we’re focused on sales activities, sales pipelines, sales leads. At the end of the quarter, however it comes out on market, it’s interesting, but we’re not, we have no market share conversations presence other than an analysis through our data people of what’s happening. We’re deriving it more by sales opportunities, pipelines, salesforce.com, where the industry is, how much onsite, all the things that really drive our profitability and then we’ll let the chips fall from there.

Andrew C. Steinerman – JPMorgan Securities LLC

Perfect. Thanks very much.

Jeffrey A. Joerres

All right, last question.

Operator

Thank you. The last question comes from Mr. John Healy. Sir, your line is now open.

John Healy – Research Holdings, LLC

Thank you. Just a couple of housekeeping questions; Mike, when you look at the cost reduction efforts for this year, should we think that the geographies that you are going to be focusing all those efforts on, would it be similar to how you allocated the spend throughout the fourth quarter going into the first quarter and then also I didn’t maybe hear this, but did you mention what capital spending might be for this year?

Michael J. van Handel

Yeah. In terms of savings and where they come from, we started at the headquarters, which is why you see the biggest piece of the $26 million, over $10 million of that coming on the corporate side, so that’s what you will see of that coming through the first quarter on corporate expense, you will see about $6 million or so coming through there.

And then as we go through the year, it is going to be across geographies and I think you will see Europe overall, but Northern Europe in particular we’ll see maybe a little bit more than what we might see in the Americas and Asia-Pacific, Middle East, but really it is across all geographies. But the one comment Jeff made earlier in this specific case of France, yeah, we don’t anticipate a social plan at this point, so we may not see as much restructuring, but we will see some office optimization and managing cost down to attrition as well. So I think we are going to expect it to come across most of those geographies.

And then in terms of CapEx for the year, I don’t envision any substantial change overall, but we came in this year at about $72 million overall. I think something in that $70 million-ish range I think is – now if you put a range of $65 million to $75 million around it, I think that will be a safe number for you for this year.

John Healy – Research Holdings, LLC

Thank you, guys.

Jeffrey A. Joerres

Thanks. That was a relatively short one. So if we have one more question that would work.

Operator

Okay. The next question comes from Mr. Mark Marcon. Sir, your line is now open.

Mark S. Marcon – Robert W. Baird & Co.

Thanks for squeezing me in. Obviously there have been a lot of organizational changes including leadership changes. I was wondering if you could give us a preliminary reflection on how those are going through, what’s the energy level, engagement level within the organization, positives, negatives, anything that need to change?

Jeffrey A. Joerres

That’s a good question and you and others on this call know that we have got a very engaged team from the top to the bottom, so anytime you make changes that some people are no maybe no longer participating in something that they believe to be, very important to how they live their lives and others, it becomes very difficult when you go through the discussion about what simplification means, where we need to take this, compress cycles, prolonged maybe more tepid growth and how we’ve laid it out from a communication side inside whether it would be my writings, some of the people reporting in the writings, videos that have gone out, face to face meetings.

I would have to say that, well, people may not appreciate or may not like that they may not be able to participate in our future success, they understand it, they get it and they are huge supporters of us. When you then take it down toward really where all of the money is made in 27,000 people in the field, they are energized, but what they are saying is that’s great, lets simplify this, let’s focus on selling, can I take out this and a message I just wrote this morning that went out to everybody, said look, if you think that you are doing something that’s too complicated not adding values, speak up to your manager, we’ll get it fixed for you.

So this is becoming energizing in the organization and at the same time, it has been difficulties for people that many of us have worked with for 20 years or more or 15 years, but it was done as you would imagine in a respectful way, the right way with good communication, so I would say difficult work through many of those difficulties and we’re on to it becoming energizing of us making real big strikes into the small incremental stuffs.

Mark S. Marcon – Robert W. Baird & Co.

Great. And then can you talk a little bit about the reorganization in terms of the cost cutting, is there any revenue pull that you would say could be negatively impacted by those changes.

Jeffrey A. Joerres

That’s a good question. So if you look at simplification, is what’ve talked about and you’ve heard that from the external market. Inside the organization, it’s two words not one. It’s not simplification, it’s simplification to sell. So what we were doing is looking at revenue producing jobs and actually putting more resources in there, trying to make sure the resources are given the kind of help that they need both in the field, in region as well as headquarter. So we did not do a let’s cut cost by 10%, we find that to be a completely useless exercise. The cost will find their way back in.

We are going through and saying what do we want to keep, what do we want to make trade offs and how we make sure that sales engine gets the support, the energy and the focus. So even my time, when I looked at a pie-chart of the time, I wasn’t selling enough so I committed to the organization x number of sales calls every quarter. I am going to be reporting on it with sales chatter and I got to make my quota as well. So inside the organization the message is simplify to sell, outside the organization, it’s really about simplification in those four areas.

Mark S. Marcon – Robert W. Baird & Co.

Great, I appreciate the color.

Jeffrey A. Joerres

Okay, thank you all.

Operator

Thank you. That concludes today’s conference call. Thank you for participating. You may now disconnect.

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