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Manpower Inc. (NYSE:MAN)

Q4 2008 Earnings Call

February 3, 2009 8:30 am ET

Executives

Jeffrey Joerres – CEO

Michael Van Handel - CFO

Analysts

Mark Marcon – Robert W. Baird

Andrew Fones – UBS

[Phil Stiller] – Citigroup

Andrew Steinerman – JPMorgan

Kevin McVeigh – Credit Suisse

Gary Bisbee – Barclays Capital

Vance Edelson – Morgan Stanley

Jeff Silber – BMO Capital Markets

Unidentified Analyst – ING

Operator

Welcome to Manpower’s fourth quarter and full year 2008 earnings release conference call. (Operator Instructions) I will now turn the meeting over to Mr. Jeffrey Joerres.

Jeffrey Joerres

Good morning and welcome to the fourth quarter and full year conference call for 2008. With me is our Chief Financial Officer, Michael Van Handel. Together we’ll go through the fourth quarter results. I’ll spend some time reviewing the dynamics of the market, where we see some of the trouble spots and then we’ll get into a little bit more detail on the segments.

Michael will discuss the items that have affected our balance sheet as well as any cash flow items. Before I move into the call, Michael if you could read the Safe Harbor language.

Michael Van Handel

Good morning everyone. This conference call includes forward-looking statements which are subject to risks and uncertainties. Actual results might differ materially from those projected in the forward-looking statements.

Additional information concerning factors that could cause actual results to materially differ from those in the forward-looking statements can be found in the company’s Annual Report on Form 10-K and in the other Securities and Exchange Commission filings of the company, which information is incorporated herein by reference.

Jeffrey Joerres

Thanks Michael, the fourth quarter ended about as we anticipated during our December conference call. We did see large amounts of plant shutdowns that dramatically effected the outcome of the quarter. In addition we continued to see eroding markets, reduced industrial production, as well as reduced consumer confidence and business confidence and of course, the shakiness in the banking systems.

All of these are weighing heavily on our business, however, as you would expect our current transition business is going gangbusters. On an additional positive note our brand is the strongest its ever been and we are getting great feedback from our clients and prospects regarding our offerings.

In fact we have recently won two significant tenders at the right price. The discussions we are engaging with with several large global and national companies are far more then what we had just two months ago and in fact we see this as a real advantage.

Much of this is based on our network, our trustworthiness, and our experience. Clients are asking for more sophisticated offerings and we can deliver that. As difficult as this period may be and while we do have some adjustments that we will be needing to make, we will not dismantle our organization.

We are actually excited in some ways about the opportunities that this environment can bring us. In the fourth quarter however we did experience deleveraging based on the declining revenue line as we progressed throughout the quarter. And we have taken action, however we are not going to take action that would have a high risk of deteriorating our network to the point of degrading any kind of service or value that we offer our clients.

In the fourth quarter of 2008 we achieved revenue of $4.6 billion, up 18% in US dollars, 10% in constant currency. We experienced some of the largest declines in revenue in France, Italy, and Spain. Our gross profit was $954 million or 20.8%.

This resulted in an operating profit of $149 million or 3.2%. Net earnings were $79 million or $1.01 per share. Adjusting for several one-time items our operating unit profit was 2.7%, right in the middle of the guidance range we gave earlier. And underlying earnings were $0.89 per share which includes $0.10 of unfavorable currency impact.

The fourth quarter did have a few items that were unusual in nature and I thought it might be best to highlight those right now. It involved the reorganization charge of $37 million or $0.35 per share, which included the consolidation and closing of approximately 200 offices of our 4500 offices. The spread of those offices were across several geographies. No one geography was injured because of this reduction in network.

We have rationalized our footprint without impacting access to our offices for our candidates or presence in a market where a client would want us to be in and also with an eye on maintaining this valuable asset of our network which will benefit us immensely on the other side of this downturn.

In addition to the offices we reduced our staff costs throughout the organization. We removed almost 1700 people from the organization. In addition to the restructuring charge we had a positive impact from a business tax refund in France of $48 million which had a favorable impact on earnings of $0.36.

We also had a positive impact from recoverable 2005 payroll taxes in France of $15 million or $0.11 per share. On a full year basis we had record revenues. As you recall in the first half of the year we still had momentum in our European segment, our largest segment, which helped us drive a razor thin increase of 0.5% in constant currency or 5% in US dollars to $21.6 billion. System wide sales which include sales of our franchise offices came in at $22.7 billion. Our gross profit for the year increased by 2% in constant currency to over $4 billion, $480 million of that came purely from permanent recruitment gross profit which improved our overall gross profit percent on an annual operating profit which was impacted by a number of one-time items.

It declined 38% to $509 million, down 43% in constant currency. Our earnings per share declined 52% to $2.75. If we exclude the one-time items of reorganization costs, recoverable 2005 payroll taxes, the business tax refund, the impairment charge, and legal reserve, our underlying earnings are $4.75 which includes $0.37 of favorable currency impact for the year.

Given the difficulty of the economy and what we’ve experienced our mix of business which is improved but still skewed towards industrial and some of our largest clients in France being automotive OEMs the declines are right in line with what we were anticipating.

As we move into the first quarter we continue to see the impact of the deterioration in the fourth quarter spilling into the first quarter and most likely beyond. As you know the first quarter for us is a seasonally weak quarter and we will be doubly difficult because of the dramatic drop in the economy and its impact on the labor market.

Let me spend just a few minutes on our gross margin for the quarter which was as I mentioned earlier 20.8%, more then 200 basis points improvement over 2007. This was positively effected by our pricing and geographical diversity as temporary gross profit margins were us 72 basis points.

Additionally we are seeing a positive effect from the stronger growth and increase in gross margins in right management which is doing extremely well in this market. The balance of the increase was comprised of the two non-recurring tax items in France.

Throughout the quarter we continued to see deterioration in many of our markets and stabilization in some. Some of the largest deteriorations came in France, Germany, and Italy. We saw some stabilization in Japan and the Netherlands. The US also took a step down in the quarter partially because of the softness around the holiday time but as well as this continued weakness in manufacturing.

As we look at the current trends in revenue we project a difficult first quarter. First quarter revenues are even more difficult to predict because of the shutdowns and the slowness in bringing those closed facilities back therefore we see revenues down in excess of 15% in constant currency. We’re in excess of 20% on a reported basis based on our current exchange rates.

Given the current environment this is the best information we can give you and we believe it would be cavalier of us to use such a limited visibility to guide to an earnings per share range, therefore we will not be giving you an earnings per share guidance for the first quarter.

Moving on to our US business, the US business continued to be challenged in this difficult environment. This is the 10th quarter of negative organic revenue growth which creates a strain on the operating and the profits because of the deleveraging. While we’ve made some adjustments to our network, our network remains strong and we will continue to be creative in maintaining this valuable asset.

We are anticipating our fourth quarter revenues were to be down about 2% to 4% and they came in slightly weaker then that at minus 5%. On an organic basis revenues were down 15% in the quarter which is weaker then the 10% down we saw in the third quarter. Our operating unit profit was down 97% due to the deleveraging impact with a small profit if you exclude the $2.4 million of reorganization costs.

Our permanent recruitment business was flat with prior year but down sequentially 22%. We are still seeing activity in permanent recruitment but as you can imagine it is much slower and sporadic as our clients are trying to adjust their workforces to the current environment.

January is off to a slow start. Year-on-year weekly revenue growth trends improved as we made it through the first month but we are currently running about 17% behind prior year. Permanent recruitment is also running down in excess of 50% on an organic basis, therefore we are not disillusioned that the first quarter will be a trying quarter for our US operations.

Manpower professional in the US continued to see relatively better trends compared to the core staffing part of the business. Revenues were down 3% and we secured some very substantial wins in the quarter therefore while we will still see some draining off of the IT and engineering in many areas of our large accounts, there is a chance that some of that can be substituted with the new business at good margins therefore stemming the tide in Manpower professional that we’ve seen over the last 90 to 120 days.

Our French operations revenue came in at $1.4 billion, down 28% in US dollars, 21% in constant currency. Our gross profit percentage was up on a year-over-year basis as our pricing is strong, in fact maybe slightly too strong. Demand for our services declined substantially since 70% of our business is associated with industrial production.

As you may industrial production in France has been declining dramatically over the last few several months. Additionally we lost almost all of our contract employees at Peugeot and Renault in the fourth quarter which put additional strain on the revenue and profitability numbers for the quarter. Our operating unit profit was down 28% in constant currency after excluding the non-recurring items in both years.

The French market is a difficult environment and given the precipitous drop in revenue and our current outlook we expect to see further pressure on our operating unit profit margins. We are consolidating offices in France particularly in the Paris region where we’ve had several offices within site line of one another.

We are able to consolidate several of these offices and specialize them by skills like IT or sales and marketing making it less confusing for our candidate and more efficient for us. We were on the path to do this regardless of the difficult environment but of course we accelerated our plans given this environment.

We have not seen any improvement really in January, in fact the market has deteriorated slightly further with revenue being down about 30% in January. Our permanent recruitment business in France was also effected. The market in France is still a relatively good market for permanent recruitment. Though if the consumer confidence and business confidence continues in this direction we would of course see further pressure on the permanent recruitment business as well as our core staffing business.

We are having several conversations with key clients regarding innovative ways to help them in this downturn and some of the discussions are focused on our Manpower business solutions business which is very exciting for us. As you may have seen in a press release yesterday the competition counsel in France has decided to levy a fine against us and our competitors for anti competitive conduct in 2003 and 2004.

Based on the facts in the case we believe the fine is unwarranted and we plan to appeal with vigor this decision. In the meantime we will be required to pay the fine of 42 million Euros. This amount has been fully accrued for with reserve taken this year and in the fourth quarter of last year.

Our other EMEA segment revenues declined 4% in constant currency, 19% in US dollars, a dramatic slowing compared to the 8% constant currency growth we experienced in the third quarter. On a full year basis revenue was up 8% in constant currency to a record $7.4 billion for the other EMEA segment. As you will recall in the first half of the year in constant currency growth we grew 16% so its been a very rapid decline in the fourth quarter.

We have seen this for the most part across the board with the largest declines coming from Spain down 34%, the UK 12% down in constant currency. Élan continued to grow in constant currency up 3% and Élan finished up 26% at $1.3 billion of revenue. Brook Street was also up at 7% for the quarter and finished up 10% for the year. Sweden was down 11% in revenue and more then that in profitability, it is a country where we have some [tail] of responsibility to our contractors if they are let go of a contract prior to the agreed termination.

The German market was down 8%, the Dutch market was up 19%. On an organic basis the Dutch revenues were down 6%. As we look to the first quarter for our other EMEA segment we will see further weakness as we not sensed any stabilization. Recently we have heard slightly more positive news coming out of Germany because of the stimulus package that has been put in place.

Our sense is that the sentiment will soon reverse back into a more realistic view until the stimulus package has time to filter through the system. Gross profit in other EMEA was slightly up over the prior year primarily as a result of some social security tax credits in Holland. Permanent recruitment business is down 19% in constant currency but so far we’ve been able to maintain our pricing.

Our view is that we will keep our price discipline but we suspect that we will be feeling more market pressure as we move throughout the year. In Italy our revenue was down 26% in US dollars, 18% in constant currency to $301 million. Italy finished the year up 9% in dollars and 1% in constant currency. The gross profit was well maintained and in fact increased slightly though we are anticipating some pressure in pricing with Italy as we’ve seen in other countries.

In Italy we are making minor changes to our footprint, our operating unit profit was down 28% in US dollars and 21% in constant currency to $24 million and operating profit margin of 8.1%. We finished the year with operating unit profit of $120 million and a 7.9% operating unit profit margin, a very good year despite the weakening market conditions.

Italy is primarily made up of small, medium sized businesses and much of them manufacturing. We are seeing the slowdown in the Italian marketplace however because of the nature of the small, medium sized businesses we are hopeful that we may not see too much more deterioration in that marketplace. However in these uncertain times we would not be baking stability into our current forecast but are anticipating some leveling off at a slightly lower level over the next two quarters.

Jefferson Wells continued to see revenue decline, down 22%. Much of this is based on companies not wanting to do anything that is considered discretionary in this economy. Revenues were at $64 million and have put tremendous pressure on our operating leverage which resulted in a loss of $14 million. We have made several changes at Jefferson Wells and will continue to monitor those changes to see their effect on the cost basis as well as on revenue.

We will also continue to explore our model to ensure that it is relevant given the current economic environment. Moving on to a bright spot, its right management with revenues up 20% in constant currency to $123 million and profitability up 50% in constant currency to $17 million. Our gross profit margins continue to increase. Our deferred revenue and backlog continue to increase and our market share continues to increase.

The decisions we made and the moves we made regarding right choice, a new offering in the marketplace [re-foot printing] to a downsized much more realistic real estate footprint is paying off handsomely and will continue to pay off in greater numbers as we move into the first and second quarter.

We are also continuing to focus on our organizational consulting services. Clearly the assessment, leadership, development, and coaching is under more pressure given the current environment however we are still getting positive feedback from the market. Several companies are having initial conversations about positioning themselves for the other side as they have stripped out so much of their capabilities within the organization.

We believe it gives us a very good opportunity to leverage the organizational consulting portion of right in a very positive light. Our other operation segment, revenues were up 1% in constant currency to $710 million. However because of the deleveraging in several markets and investments in emerging markets has put pressures on this segment. Operating unit profit was only $2 million for the quarter.

Revenue was stable in Japan but gross profit and operating unit profit were down primarily due to the increases in social security costs for our associates that we were unable to pass on to our clients in the current market environment. Currently there is a tremendous amount of public pressure on the contracting business in Japan as there has been some tragedies within the temporary contractors, exclusively really in the day labor market which we are not in.

This has caused the Japanese market to pause regarding their enthusiasm for the contingent staffing industry. Our team there led by Darryl Green has done an outstanding job being the voice of the industry and we believe that Japan holds some very good long-term secular trends for us. And in fact the stabilization that we’ve seen in the last few weeks would say that the first quarter could show some signs of stabilization in the Japanese market.

We saw a decline in China of 18% and a growth in India of 31%. We will continue to monitor these emerging markets and have added a new emerging market, Vietnam as we just received the appropriate licensing and are eager to participate in that market. Our Middle East operations are feeling the pinch as well particularly Dubai from the real estate market and the lack of liquidity.

We are as optimistic as ever about how we will be able to approach this market. We are trimming some of our investment plans just to make sure that they are in sync with the marketplace and until we have some more visibility on the marketplace.

The fourth quarter of 2008 was a difficult quarter for us. I do not say this lightly but we are undaunted and confident about what we are able to do in the future. That does not mean that we are not making difficult decisions and that this isn’t a difficult time. It is and it will become more difficult. However our balance sheet is an important part of our confidence as we continue to grow our cash position and have a very secure lines of debt, our pricing continues to hold and our team of 33000 around the world is the best they’ve ever been.

They’ve managed through recessionary times before and they will view this environment as an opportunity to further strengthen the Manpower brand and take market share from our weaker competitors. With that I’d like to turn it over to Michael to give a bit more color on the financials.

Michael Van Handel

Thanks Jeffrey, I’d like to begin today by discussing cash flow. As I’ve discussed previously on these calls while earnings may come under pressure in a weakening economic environment our cash flow is expected to be strong due to the liquidation of accounts receivable.

This certainly was the case in the fourth quarter. On a full year basis free cash flow defined as cash from operations less capital expenditures was $699 million which is more then double the prior year free cash flow. Our free cash flow for the fourth quarter alone was $320 million which is almost three times the prior year amount.

This increase in free cash flow is primarily attributable to the liquidating of accounts receivable due to slowing revenue trends. During the quarter our accounts receivable decreased by $660 million to $3.6 billion. Some of this reduction is seasonal and some is due to currency but a big part results from slowing revenue trends.

Our company wide DSO remains in good shape and is down four days from the third quarter. On an aggregate basis our accounts receivable portfolio is well diversified and of good quality. Our bad debt provision for the year is $23.4 million which is up only 5% over the prior year in constant currency and is only 0.1% of revenues.

Also benefiting fourth quarter cash flows was the business tax refund that Jeffrey discussed. We have cash of $125 million for share repurchases that were completed in the first nine months of the year. We currently have one million shares available for repurchase under our current authorization however we discontinued purchasing shares in September as we are focused on maintaining strong liquidity.

Cash used for acquisitions was $242 million, most of which came in the first nine months of the year. Of this amount $120 million was used to acquire [Vitae] a specialty professional services firm in the Netherlands and the balance was used primarily for US franchise acquisitions.

Now let’s turn to the balance sheet, given our strong cash flows, cash increased to $874 million at quarter end. Our total debt decreased to $953 million bringing our net debt down to only $79 million. While our balance sheet and liquidity remain strong in this environment, I thought I’d spend a few minutes reviewing the detail of our credit facilities.

Of the $953 million of total debt, $697 million was comprised of two Euro notes which mature in 2012 and 2013. These notes have fixed interest rates until maturity that are below 5%. Our revolving credit facility allows for $625 million of total borrowings of which $140 million was drawn as of quarter end leaving an additional $482 million of availability.

The amount drawn reflects a 100 million Euro borrowing which has been swapped into a fixed interest rate of 5.71% until 2010. This facility matures in November of 2012. It has two financial covenants, a debt to EBITDA ratio and a fixed charge ratio. Under the first ratio we are required to maintain a debt to EBITDA ratio of less then 3.25x on a trailing 12-month basis. We currently have significant room under this covenant as our ratio is 1.2x at the end of the fourth quarter.

The fixed charge ratio requires us to cover rent and net interest expense by 2x or more. We also have room under this covenant as our ratio is currently at 3.4x. We also have a one-year accounts receivable securitization program which matures in July of 2009. We currently have $64 million drawn on this facility. The interest rate under this facility is variable and its set at the time of each issuance. In addition we have $52 million outstanding under various uncommitted credit and overdraft facilities that are at our subsidiaries.

These facilities are at various interest rates and various maturity dates. Currently there is an additional $325 million available under these lines however our total borrowings under these lines are limited to $300 million. As you can see our capital structure remains solid and I believe we have the financial strength and liquidity to effectively manage through the economic turbulence.

This gives us a unique competitive advantage as many of our smaller competitors could go out of business creating market opportunities for us. Additionally in times like these our clients are looking to partner with someone they know has the strength to provide services for the long-term. That also is a real advantage for us.

Now let me take a few minutes to recap the year, as you heard throughout the call there were a number of unusual items impacting our reported results. If you take a step back and look at our underlying earnings and cash flows I believe the company had a solid performance during the year especially when considering the weak economic environment in the second half. Earnings per share without non-recurring items was $4.75, a decrease of 3% on revenue growth of 5% to $21.6 billion.

Our liquidity increased markedly with free cash flow of almost $700 million for the year. Normally at this stage of the call I would give you detailed revenue guidance by segment and overall earnings guidance. Given the extreme difficulty in forecasting client demand for our services in this environment we have decided to temporarily suspend that practice.

As Jeffrey mentioned earlier given the December trends and the trends we’ve seen so far in January we do believe revenues will be down in excess of 15% in constant currency in the first quarter. While we have taken several actions and expect to take further actions to line our cost base with the demand for our services, you can expect that our operating profit margin will come under pressure due to the deleveraging of our fixed costs.

With that deleveraging along with the first quarter being seasonally the slowest quarter of the year it is likely that we will report a loss for the first quarter, again depending upon revenue trends on a market-by-market basis. At this point however I would expect that we would return to profitability in the seasonally stronger second quarter.

I should also note that I expect free cash flow to be positive in the first quarter before considering the 42 million Euro payment for the French competition case. The last thing I’d like to mention is that we anticipate a realignment of our reporting segments starting with the first quarter of 2009. Given the organizational changes in management responsibility we expect components of the other segment to be combined with the US to comprise an Americas segment and the remaining components will be reported as Asia Pacific.

Naturally we will reclassify the historical data when we report our first quarter so that those who are maintaining models can update them accordingly. With that I’ll turn things back to Jeffrey.

Jeffrey Joerres

Thanks Michael, and we will now open it up for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Mark Marcon – Robert W. Baird

Mark Marcon – Robert W. Baird

I was wondering if you could give some clarification with regards to the expectation for a loss in Q1, is that inclusive or exclusive of any charges or are you just talking about that as an operating loss.

Michael Van Handel

That really is just looking at it as an operating loss as we look at trends as we see them. Today of course those trends can change but we don’t see any dramatic change coming over the next couple of months so as you know the first quarter is quite a seasonally low quarter for us so there’s only so much we can do with our expense base.

I clearly expect expenses to be down sequentially from the fourth quarter into the first quarter and I also expect expenses to be down given some of the reorganizational moves we have made on a year on year basis but just given the low seasonal quarter I think that will result in a loss in the quarter.

As I said I do expect to return to profitability in the second quarter as typically the second quarter of course seasonally things pick up and our gross profit contribution will go up sequentially in the second quarter and we will not have to add really too many more expenses to support that higher gross profit.

Jeffrey Joerres

As I think you can appreciate one of the challenges in looking at this is where revenue may be off a little bit more depends a lot on how it creates and OUP ripple effect because where we have countries that have already deleveraged quite a bit we’ve taken out cost. If those countries tend to lose a bit more revenue there’s not as much you do to do that. What we do is as those stabilize a bit more and some of the others do it, then we are in a different category but we wanted to make sure that all of you understood that in an environment like this when you look at some of the deleveraging that’s already happened we are very comfortable that we’re keeping our network.

We’ve made some changes to it but we want to keep our network in place and not worry too much about the seasonally low quarter to try to manage that to profitability when we’d rather be looking at two, three and fourth quarter.

Mark Marcon – Robert W. Baird

Can you talk a bit about the charges that you took in other EMEA and Jefferson Wells and what the anticipated benefits of those could be or exactly what the restructurings did and what the expense savings would ultimately end up being so that we could get a sense for how much revenue could decline and you could still go back to generating a reasonable level of profit.

Jeffrey Joerres

We looked at the restructuring in a focused way and we said, okay there are some offices and others that we have to take care of in order to make sure that our presence is there. And then we actually went and looked on a location-by-location basis across the 80 countries and 4500 locations and said what we want to do is do some legitimate consolidation. As I mentioned the best example would be in Paris where you might have some literally in site line of another’s and we think we can operate more efficiently in an office of eight to 10 people instead of maybe two or three offices with two to three people.

We then said let’s take a look at this and see how we can do this without having one country suffer a massive blow to the network because we believe in the network so that was the premise of it.

Michael Van Handel

Our overall restructuring charge in the quarter was $37 million and as we mentioned it did impact each of the segments to some extent. Of that $37 million about $20 million of that relates to severance costs and about $17 million relates to office closures which were slightly in excess of 200 offices or about 5% of the overall network.

When you look at cost savings certainly we will more then exceed this from a run rate basis very quickly in terms of savings so that return will come back to us and very quickly as savings, as we go out through the year. I think the other important thing is there are certainly other cost moves we’re making as well both just on each of the non-personnel costs of you will as well as attrition and we’re not necessarily, in many cases, we’re not replacing people as they are leaving the organization so we are able to adjust our cost base without associated restructuring costs.

So while we do have some restructuring costs in the quarter and that will result in substantial savings going forward there are other moves we are making as well.

Operator

Your next question comes from the line of Andrew Fones – UBS

Andrew Fones – UBS

I was wondering what the annualized cost savings were from the restructuring you took in the fourth quarter and how much of those savings you actually saw during the fourth quarter.

Michael Van Handel

I think we covered the first part of the question with what Mark had to say, in terms of the that saving coming through in the fourth quarter really minimal savings specific to that restructuring really the fourth quarter was about making the reductions and getting alignment and to some extent not all of the savings will come immediately in the first quarter in some of our markets, certainly European markets, it takes a bit longer on the people side to get things in place.

Andrew Fones – UBS

And then the 70 basis points increase in the growth margin, I think you mentioned in the Dutch market you saw a social security tax credit, should we expect that trend to continue our would you expect the gross profit to revert to prior levels.

Michael Van Handel

Certainly those credits did help the overall gross margin year-over-year, certainly not to the full 70 basis points that you identified on the schedule. I think even when we take those credits out we still are seeing overall positive increase on our temporary on the gross margin line. Certain markets we’re seeing stability on pricing and there are certain markets where we’re actually seeing some improvement based upon some of the mix and some of the initiatives we continue to drive but there are some markets where we are starting to see a bit of pressure on the overall gross margin as well, just at the beginning stages which would not be unusual in this type of marketplace.

Jeffrey Joerres

We’ve been very disciplined in our pricing. I think if you look at our year over year gross margin percentage you can see that kind of discipline even taking out some of the one times. At a time like this it’s the balance that’s just right. A real good example is we have a very good understanding of for example the French market, market share within the French market and we are trailing market share right now in France and I think it really has to do with two things.

We’ve held onto price in a much more stingy way then our competition and we’re probably losing a little share. In addition to that we have a very large contract and number of people, or used to have a large number of people, at some of the automotive.

So we’re going to review our pricing but I don’t want that taken out of context. We are not reviewing it to start diving, we’re reviewing it to just make sure that we have it right in balance and are staying relevant and if you will surgically take the right opportunities. So we’re talking about that but we’re talking about it with the cautiousness of making sure that we don’t remargin the industry even though in France there’s a major competitor who is getting very price aggressive then in the US.

There are some in a few other markets so we’re going to hold onto that but we’re also going to make sure that we take the right approach to it so our gross margin I think has helped in this quarter. We’d like to see maybe, we’d take a slightly less gross margin in a bit more revenue but we’re going to be working on that over the next probably two to three quarters.

Operator

Your next question comes from the line of [Phil Stiller] – Citigroup

[Phil Stiller] – Citigroup

I just wanted to clarify that the 15% guideline for the first quarter that’s a year over year number?

Michael Van Handel

Yes, and just to let me clarify in the prepared comments we said that we would expect revenue to be at least 15% down in the first quarter and I would maybe add that likely in constant currency it could move closer towards 20%. If you look at what we saw December clearly fell off, our overall contraction on an average daily basis in constant currency in December was down about 15% which is why we did the call right before Christmas.

Certainly what we saw was a further deterioration in many of our markets come through in January so things did step down a bit. That said we’re seeing at least at the moment, the last several weeks in many of markets some stability in the contraction rate meaning that the contraction rate over the last few weeks hasn’t become worse. So there are some signs of stability, whether it steps down from here only time will tell, or whether we start to see some improvement.

But at least for the moment things seem to be settling in a bit. So my sense would be we haven’t rolled up January yet, its still early days in February. My sense would be we’re going to see overall constant currency revenue growth for January probably approaching 20% down year on year, something of that order and when you put that into dollar reported terms, we’re probably looking at something like 7% to 9% worse then that just because of where the Euro and the pound have been trading.

The Euro right now is trading about 14% off of where it was a year ago and the pound is even worse then that so we’re getting, we’ll have the currency impact as well that will impact the first quarter.

Jeffrey Joerres

And January has just been a very difficult month to look at trends because there were a lot of slow start-ups in Italy, many of the manufacturing companies didn’t come back until the 9th or 10th. Some of the same in France, the US was extending it, so we really think that for us to get a bit better read on the first quarter we’d really like to look at the first two weeks of February which is a bit more of a truer picture. That will give us a better picture but right now we’re looking for it in a range that Michael suggested.

[Phil Stiller] – Citigroup

Moving to cash flow could you talk about what your expectations are for seasonality of cash flow and then CapEx expectations for 2009.

Michael Van Handel

As I said in slower revenue times certainly cash flow becomes more positive. The first quarter and first half of the year tends to be a bit stronger cash flow for us just because of seasonality and somewhat of the seasonal liquidation of receivables coming out of the stronger second half of the year. Then as you get into the third quarter business seasonally continues to pick up which will tighten a bit on the cash flow side and then come back in a bit, or off a bit in the fourth quarter.

I do expect at least as this point that we would see positive free cash flow throughout the year but there will be some seasonal impact. From a CapEx standpoint, we’re looking at that. We haven’t issued any direct guidance but I would expect that CapEx will be below 2008 levels overall which as you saw earlier came in on the order of $93 million.

Operator

Your next question comes from the line of Andrew Steinerman – JPMorgan

Andrew Steinerman – JPMorgan

Could you just talk about just directionally where you think gross margins will end up year over year in the first quarter including mix, including temp.

Jeffrey Joerres

There’s a couple of things in the first quarter that when you look at the break down of the gross margins it comes in a few different areas. One is just the core improvement that we’ve seen in our staffing business and I think we will continue to see that but it will be a smaller amount. The other is the permanent recruitment fees that are generating in the gross margin.

First quarter we think is going to be a much slower quarter. We’ve been seeing some numbers in the neighborhood of sequentially reduction in permanent recruitment a bit more then 30%--

Michael Van Handel

Yes, and year over year we would be looking for something in that magnitude, maybe a bit more, closer to 50% down on the perm recruitment side. A couple of factors that I need to mention there, one is the Australian defense force which is a key contract that we no longer have going into the first quarter of this year, we did have it last quarter so that’s impacting our numbers.

But overall in general we’re seeing a drop in all of our markets on the perm recruitment side which you’d expect in a market like this. So certainly that will have some impact on our gross profit margin. Without the perm impact I don’t expect that we’ll see all in with all of the other components of mix excluding perm, I don’t think we will see a dramatic change year on year in terms of where our temp gross margin is.

Andrew Steinerman – JPMorgan

Overall including the other segments and obviously particularly thinking about right, do you think gross margins will again be up year over year?

Jeffrey Joerres

Clearly right is, their book of business is the strongest its been and as that book of business increases you get a very serious leverage effect on the gross margin and operating profits. Fourth quarter came in a little over 13% for right management and we would see that continuing to increase as the volumes come in and we’re actually more efficient in our delivery vehicle. So right management came in at about $17 million of profit in the fourth quarter and I think we can see some good quarters in the future.

Andrew Steinerman – JPMorgan

So overall gross margin in the first quarter year over year should still be up?

Michael Van Handel

If you put it all together given what I said about the perm business I think we could see year on year to be slightly down, the drag from perm, but at this point I would say slightly.

Andrew Steinerman – JPMorgan

Could you just remind us in the fourth quarter of the year how much perm was either as a percentage of gross profit dollars or any other way you want to talk about it.

Jeffrey Joerres

It was $460 million of gross profit dollars for the year.

Operator

Your next question comes from the line of Kevin McVeigh – Credit Suisse

Kevin McVeigh – Credit Suisse

Without belaboring the loss, could you frame out where you think a potential low to medium end of the range is and if not maybe just quantify what you would typically see in a normal seasonal sequential ramp in normal times, or what you’re seeing given the current macro outlook as you go from the first quarter to the second quarter.

Michael Van Handel

On the first part of your question in terms of giving a range, I think I would prefer not to do that because I think a lot of that has to do with which markets and we tried to give you as best of a view as we could in terms of what we think could happen on the revenue side but understand that’s on a consolidated basis and market by market there is a fair amount of uncertainty and it is quite difficult to forecast even a couple of months out on a market by market basis.

And depending upon where the declines come that can have a significant impact on operating profit just given the different delevering characteristics of each of the markets, where they are, how long they’ve been down already, etc. So I’m going to step by the question in terms of overall earnings and maybe go to in terms of sequential impact or trends and typically going from the first quarter to the second quarter we would see something on the order of 10% sequential pick up in gross profit.

That could be a bit less this year but as I said as we look at the seasonal ramp in our expenses if GP is going up by 10% we clearly at this stage have some capacity in the network we would not anticipate expenses going up much at all to support that additional GP.

Kevin McVeigh – Credit Suisse

In terms of France, it seems like even given the run off in revenue you’ve done a good job of maintaining the operating profit and it sounded like part of that was due to pricing, as you think about that in 2009 and sequentially do you think there’s going to be more of deleveraging effect then what you would typically see.

Jeffrey Joerres

I think the French team has done a phenomenal job of, if you look at the last three quarters and what we have seen in the last three quarters of adjusting expense and doing some consolidation and just doing the right things across the board without hurting the network too much. As that goes on like you’ve seen in the US which is in its 10th quarter of negative, what happens is the network, you either decide to dismantle your network or you decide to deleverage more.

I think you’ll start to see some of that in France, not as much in the first quarter but clearly much more then what you had seen in the first quarter and as we move into the second if we can start to see any kind of stabilization its not so bad but further deterioration, this comes down to keeping the network in place.

I want everybody to know that we think about this every day, we have different algorithms and ways of looking at this and sensitivities and it really comes down to our reluctance to pull out of [Talus] for example. Talus is going to be and is a very good market. We can’t pull out of there. So the French team has done a great job. We’ll continue to do some good work but clearly that the trends that we’re seeing coming out of the industry numbers which are quite accurate because there is such a skew towards the top number of players, I think you’ll start to see some real pressure on the OUP line over the next few quarters.

Operator

Your next question comes from the line of Gary Bisbee – Barclays Capital

Gary Bisbee – Barclays Capital

Just touching on France a bit further, perm seems to be holding up somewhat and with the cost savings initiatives underway how long do you think margins can be maintained at current levels if revenue continues to drop at these rates and could you briefly comment or provide and approximate range for the expected impact of FX translation within the first quarter.

Jeffrey Joerres

The gross margin, perm is holding up and its holding up partially because our team is doing outstanding work. We think we are now the largest from a market share perspective of permanent recruitment provider and we’re continuing to gain some momentum in process. Having said that as the economy continues to struggle we are seeing some of that tail off. So I think perm will still have a positive contribution to the gross margin line.

But its going to be minimized because the volume will be down. So I think that will help offset further deterioration down at the net income line, the operating profit line but I think the first quarter could still be pretty good.

Michael Van Handel

Clearly translation rates are moving around pretty quickly these days. I think I mentioned right now the Euro is down about 14% against our first quarter average a year ago, a year ago it was $1.50 and the Euro exchange rate and certainly the pound is a bit weaker. If I consolidate all the currencies on the revenue line right now I would expect the FX impact to be something on the order of 8% maybe 9%, something like that.

Of course that impacts our expenses in a similar way.

Operator

Your next question comes from the line of Vance Edelson – Morgan Stanley

Vance Edelson – Morgan Stanley

Just a strategic question how does the economic slowdown impact the pace at which you can shift the focus for the company more towards small and medium sized business, more towards specialized services, which I believe you want to accomplish to some extent over time, is there an opportunity now to accelerate that transition as your traditional large industrial customer base naturally shrinks due to economic conditions.

Jeffrey Joerres

It’s a key to what we’re trying to do and in our comments they weren’t just words. I write carefully into there and they’re lined up with what the strategy is that we’re using in the company and I’m saying without sounding inappropriate, we’re really pretty excited about this timeframe. That doesn’t mean we get in every day and say oh this is great, we’re having the time of our life.

This is hard work but if you look at how we’ve set our organization up in 2008, in 2007, what we’ve done for example in growth Élan almost on a 25 plus compounded growth rate over the last two to three years, what we’ve done with refooting a right management, how much more we’ve opened Manpower professional. I’ll give you a CEO number not a CFO number, Manpower professional grew somewhere in the neighborhood of about 15% this year. Now that’s off of a relatively smaller base and we had a higher growth in the first half.

So our specialty business and our growth in the specialty business can absolutely be helped in a couple of ways. One is we are building our infrastructure and we’re continuing to do that. It is one of the major projects that we’re spending money on in the company now. Secondly what we’re seeing is small boutique medium sized firms are running out of the ability to finance payroll and the large companies mid size and large companies want a trusted dependable player.

That’s us, so we’re going to take market share and we’re going to do it in the right way so I think on the other side of this we will not only have built and infrastructure which we have been working on for several years but we’ll also be grabbing market share. I mentioned earlier that there were a few significant wins we’ve made, and we were not the low bidder and the majority of that win comes in the area of professional and specialty services.

So we’re looking at this as an opportunity and in fact we think that in some ways we wouldn’t mind it getting uglier and harder for a bit longer because its going to really put some stress on organizations with our balance sheet and with our infrastructure in place we think we can absorb some of that and really take advantage of it. So it’s a real push within the company, it’s the memo that went out to all of our employees today. I talked about that and the opportunities that we have so its not a strategy we just made up, it’s a strategy we’ve had in place for several years and I think now its going to pay off.

Operator

Your next question comes from the line of Jeff Silber – BMO Capital Markets

Jeff Silber – BMO Capital Markets

You had mentioned the temporary suspension of guidance, but what do you need to see in order to get a bit more comfortable to provide current quarter guidance in the future?

Jeffrey Joerres

I’m sitting in my office right looking out a window and I can see about 75 feet because its snowing, that’s the way it feels right now for us to do guidance. So we need a bit of visibility that says things that we look at, the PMI, the ISM, the consumer confidence, industrial production numbers, something that says the banking system isn’t just got a little blurp here. Clients who, one of the things we look at is if somebody asks for 25 contractors and the next day, they want five. That’s still meaning that there’s a lot of flux and a lot of flexibility in the system.

So once we start to see that and frankly once we start to see our operations give us a forecast and three weeks later have it be spot on, then we start to feel like we’ve got some stability in this. So to pick a timeframe, can’t do it. I think what we want to do is to say at the end of the first quarter what’s the world look like and do we feel as though we can do something that is actually helping you not hurting you.

If we could give you a forecast right now that we think would help you frame up what we’re doing we’d do it in a second. If we had to put a date on it, I would think it would be pretty unlikely that we would do it at the end of the first quarter and hopefully by the end of the second quarter into the third quarter we’ve got a bit more visibility.

Jeff Silber – BMO Capital Markets

If you do have an operating loss in the first quarter will there be a tax benefit associated with that and roughly what percentage should we be using for that quarter and for the rest of the year.

Michael Van Handel

It gets actually pretty complex as I think you know just given the 80 countries that we’re in and the different foreign tax credits and all of the elements that do work through. I would expect to see a tax benefit although its somewhat predicated on the amount of loss and where that comes from but right now my best information would be to say that there would be a tax benefit. I’m going to hold off on giving you a percentage because given the smaller amounts of percent sometimes can get a bit unwieldy.

Jeff Silber – BMO Capital Markets

Going back to the fourth quarter what was the change in revenues organically for the entire company?

Michael Van Handel

In terms of acquisitions they put in about 1% of revenues overall and that would be our specialty acquisition in the Netherlands as well as some of the US franchise acquisitions that we’ve made throughout the course of the year.

Operator

Your next question comes from the line of Unidentified Analyst – ING

Unidentified Analyst – ING

Could you give me the perm year on year trend in Q4 and also the start of this year.

Michael Van Handel

Year on year in the fourth quarter perm was down about 10% and as we get into the first quarter this year we did talk a bit about that. I think we could be, in many of our markets I think we’re going to be down in the 30% to 40% range on an aggregate basis, that could approach 50% because of the large amount of perm recruitment we did for the Australia defense force in 2008.

Unidentified Analyst – ING

Looking to the cost line it seems to be down 1% or 2% in the fourth quarter, organically in constant currency is that correct estimate and what will that be, what can we expect for Q1 in terms of year over year trend there.

Michael Van Handel

I think your numbers are in the ballpark. I would expect on a sequential basis and a year on year basis we will see further decrease in costs sequentially going into Q1 from Q4. I think you’re going to see something in the lower double-digit range in terms of sequential cost reduction but certainly that is something we are actively working on right now so that will work it’s way through the quarter.

Unidentified Analyst – ING

On Germany we still have an idle time risk there, are you already seeing some impact of idle time in Germany on your gross margins.

Jeffrey Joerres

Right now what we’ve seen in Germany, our top line while its gone down has not gone down real dramatic so as a result the idle time and the expense of that associated and the same with Sweden does impact us but right now its not a major element and actually what we’re seeing in Germany is not good news but not a continuous drop off a cliff either so we’re looking at the idle time not being a large cost component in the first quarter but we’ll continue to look at that.

Unidentified Analyst – ING

In the Netherlands you had a tax credit could you give us a feeling of how big the impact was on your gross margin from that tax credit there.

Jeffrey Joerres

In the ballpark of 30 basis points or so on the overall gross margin.

Unidentified Analyst – ING

You mentioned also on the Netherlands you managed to see some stabilization there in the trend but would you say that is a manpower trend or is it a market trend because I can’t imagine that you’re taking maybe some market share from [inaudible].

Jeffrey Joerres

I think we are taking some market share right there and I think our team has been doing some of that actually for about the last two years so when we talk about stabilization we’re not making a market comment, we’re looking at our own numbers.

Thank you all for joining us today.

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Source: Manpower Inc. Q4 2008 Earnings Call Transcript
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