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Executives

Jeffrey Joerres – Chairman, CEO and President

Michael Van Handel – EVP and CFO

Analysts

Sara Gubins – Merrill Lynch

T. C. Robillard – Signal Hill Capital Group

Jeffrey Silber – BMO Capital Markets

Vance Edelson – Morgan Stanley

Mark Marcon – Robert W. Baird & Co.

Andrew Steinerman – JP Morgan

Kevin McVeigh – Macquarie Research

Manpower Inc. (MAN) Q1 2010 Earnings Call Transcript April 29, 2010 3:00 PM ET

Operator

Welcome to Manpower’s first quarter earnings results conference call. All lines will be placed in a listen-only mode, until the question-and-answer session. Today’s conference is being recorded. If anyone has any objection you may disconnect at this time. I would now like to turn the call over to Mr. Jeff Joerres, Chairman and CEO. Sir, you may begin.

Jeffrey Joerres

Good morning and welcome to first quarter 2010 conference call. With me is our Chief Financial Officer, Michael Van Handel. Together we’ll go through the results for the first quarter. I’ll spend some time overviewing the business, economic indicators that we are seeing and experiencing, and then I will cover the segments in a bit more detail.

Michael with then cover the financial side of the business, as well as any implications of the trends that I spoke about earlier. Before we move into the call, Mike I would like you to read the Safe Harbor language.

Michael Van Handel

Thank you Jeff, and 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 Mike, the first quarter was a very good quarter for us. We entered the quarter with positive trends, but the year end always has noise because of the holiday time. So, it was difficult for us to get a sense of the trajectory, as we were going into 2010. From the outset of the year, we were experiencing almost in all locations a trajectory that was more pronounced than what we were experiencing in the beginning of December.

It has been a long time since I have been able to say in a conference call that by far away the US is leading our revenue growth, far greater than any of our major geographies. Our major European entities with the exception of Nordics and Netherlands are showing improving year-on-year growth. In the Nordics and the Netherlands the markets appear to be improving, but they really haven't reached that year-on-year growth level.

The cost reductions that we implemented are paying off, and in fact we are very selective in reducing our field network, and we're yielding the returns from that, and we are confident that our office network is actually rewarding us now with higher revenue and market share gains with less competition for some of those offices right now.

The first quarter is seasonally soft as many of you know. Nevertheless, we saw initial signs of strong operational leverage across our staffing business, and we expect further leverage throughout the year, as we fill in the revenue capacity of our network.

Our first quarter revenue was $4.1 billion, up 13% in US dollars, 5% in constant currency, quite a bit stronger than the expectations, as trends improved throughout the quarter. Give how seasonally slow the first quarter is we're quite pleased with the top line growth. As expected, we continue to see our year-over-year gross margin percent decline, which it did to 17.1%, a 120 basis point on a year-over-year basis.

We are continuing to see lower margin business feather in without the support of our career transition business, or for that matter a permanent recruitment business. Our operating profit was $33 million, a nice effort from our entire team in all geographies and all businesses. Operating profit was helped by a $13.7 million reclassification of the results of the French business tax from cost of services to provision for income taxes.

Mike, of course, will discuss this a little bit later in the call. Operating profit, before this reclassification was $19 million, far exceeding our expectations of a break even quarter on our operating profit line. Our operating profit margin was 0.8%, up 80 basis points compared to the prior year. Our earnings per share was $0.04, which included a positive impact from currency of $0.03.

So we're off to a good start. Each week is getting better than the previous week. We were able to outperform our revenue expectations in the first quarter, and we continue to see improving revenues, which give us much more confidence as we move into the second quarter.

Our gross margin percent declined 120 basis points. This is based on several factors. One of the largest is the reduction of our Right Management outplacement business, which in 2009 had a substantial contribution to our gross margin because of the counter cyclical nature of the business. This reduced our gross margin by 80 basis points. Permanent recruitment is up slightly year-over-year, as we're starting to see a rebound. Our permanent recruitment business is up 1%, basically flat in constant currency from prior year, and is up 25% sequentially. This includes our (inaudible) business, which is really growing quite rapidly, and which is aided by the Australian Defense Force contract that we spoke about last quarter.

The gross margin percent dropped 70 basis points, related to our temporary recruitment business, which is right in line with our forecast for the first quarter. Overall, we have experienced stabilizing staffing gross margins, and in a few cases improvement. However, we are still feeling the impact of pricing pressures from the second half of the year that won’t actually be anniversaried until later this year.

There are other factors including business mix as well as geographical mix that are all contributing to the decline. The fastest growing part of our business right now is light industrial and major accounts. Light industrial business is traditionally at a lower gross margin. We will continue to close the gap with prior year based on easier comparables, but more importantly in the efforts that were putting in place right now in the marketplace.

We are selective regarding price and offerings. We are moving into the second quarter feeling that we have reached the inflection point and are reversing the erosion in the temporary staffing part of our business. We will continue to be challenged this year because of the reduction in the higher gross margin like Right Management business. At the same time, we're starting to feel a slight pickup on the permanent recruitment business. We believe over time the permanent recruitment business will far offset the impact from Right Management.

Our gross margin was favorably impacted 30 basis points in the quarter related to the reclass of the French business tax from cost of services. Again, Mike will discuss this in few minutes.

The America segment, America revenues came in at $737 million, up 20% in constant currency, 24% in US dollars. There are no acquisitions impacting our first quarter. So all of this is organic growth. We have suffered revenue declined for the last few years in the US as a result. We are still digging our way back to profitability.

We have continued to see substantially improving revenue trends across the Americas. The US is up 18% in US dollars, Mexico up 50%. Argentina down slightly and all other countries combined were up 48% in US dollars. As you can see, we continue to make great strides on the revenue side, and balance this out with the stronger performance exiting the first quarter gross margin than we had entered it.

We continue to see positive trends in all major locations across the Americas, particularly in the US. I and spoken about this before that in the fourth quarter, after such a protracted initial recovery, it now feels as though we are in a classic recovery. Light industrial leading the way. US light industrial business for the quarter was up 31%, and that continues to grow with average growth over the last four weeks of over 55%.

What we are experiencing in the US is similar to what we are seeing in other parts of the Americas, just more accentuated. Part of it is of course the comparables as we've suffered so much for so many years in the US. On a billable hour basis, we are still well below where we want to be, but we are continuing to build and the numbers look like this, will allow us to climb out actually quite rapidly.

Part of the story that is yet to unfold is what we have been able to do with gross margin. Our target for pass through of SUTA, the state unemployment tax, previously was about two thirds of our clients. We have been able to increase that to above 70%. On a full-year basis, we are estimating the impact of the unrecovered SUTA increase on US GP to be about 20 basis points.

The first quarter impact was 50 basis points, as the impact is front end loaded due to the SUTA wage threshold, and of course the timing of the agreements with our clients. Additionally, we are continuing to see slight improvements in permanent recruitment, with our US business up 5% sequentially from the fourth quarter, but still down 21% from the prior year. I spoke a little bit about our light industrial business is growing at a rapid pace.

To give you a bit more of a break down, our office business grew at about 10% for the quarter and our professional staffing was flat from prior year.

In early April, we completed the acquisition of COMSYS, which is going quite smoothly. The integration team during the last quarter has done an exceptional job. So on day one of the completion of the transaction, we have designated the new management team, as well as all the properties to be consolidated. We are also implementing strategies for front office systems and back-office systems as well as what we're doing in approaching our clients, which so far has received it quite well.

With the addition of COMSYS into Manpower Professional, our combined US professional business, which will now be run by Mike Barker. Mike Barker, the COO from COMSYS, is nearly $1 billion. Our clients on both sides received the acquisition very well, and therefore we are looking at driving revenue synergies, which was not in our financial justification for the acquisition.

The COMSYS acquisition closed on April 5 and therefore the financial impact on the first quarter is limited to $1.1 million of acquisition costs included in the Americas segment.

Our French revenues have reached 1.1 billion, up 9% in constant currency, 16% in US dollars. The revenue growth was spread across almost all geographies within France, which is a nice healthy sign. We do believe that there is, as would be true in the United States, some level of inventory replenishment, but there also appears to be underlying demand growth to be driving this. Our growth compared to the industry is favorable, which is reflective of our efforts to reduce the cost reduction in the strategy part, and really introduce our strategy during the recession.

While our gross profit margin was down compared to prior year, we saw some signs of improvement within the quarter, as we were very disciplined in our pricing. Our French team did an extraordinary job in managing the first quarter and setting us up for the very nice second quarter. Operating unit profit from France was slightly positive compared to a loss of $2.2 million the previous year, before nonrecurring items.

Included in the first quarter SG&A is a charge of $3.3 million related to the move of our French headquarters to a more cost-effective location on the perimeter of Paris. The revenue increases that we are experiencing continued into April. On a weekly basis, we have seen very solid improving trends. Our French average daily revenue turned positive in January, and from that point on we have seen our revenue improve.

We exited the quarter with year-on-year average daily revenue increase of 15% in March. We continue to expand our permanent recruitment business with our permanent recruitment business up 70% in constant currency on a year-over-year basis and 64% sequentially. (inaudible) employee business is doing well, in which we were able to have 6500 people enter the program in the quarter generating additional gross margin, which is now dropping to the bottom line.

The EMEA segment had revenues of $1.6 billion, up just slightly in constant currency or 9% in US dollars. It generated an impressive operating unit profit of $24 million, and an operating unit profit margin of 1.5%. The top performers from a revenue perspective were Manpower UK and Germany, Manpower UK up 1%, Germany up 6% in constant currency.

We're also seeing good revenue performance in Italy. Performance across all European geographies have been improving. We also continue to see improvement trends in Belgium, the Netherlands and the Nordics. We're also seeing much higher growth rates in eastern Europe.

Our IT business, Elan, which has been lagging light industrial and office business is very typical at this point of the recovery. Elan is down 13% on a year-over-year basis in constant currency, a nice improvement from the 25% decline in the fourth quarter. Overall, for EMEA trends are positive. Revenue growth is higher than anticipated. Our largest countries have experienced a better second half of the first quarter, better first half. Our permanent recruitment business is starting to experience a comeback. I say this with caution, as we still believe it will take longer for permanent recruitment to recover than in previous recoveries.

Asia Pacific revenues came in at 497 million, up 17% in US dollars, 5% in constant currency, generating an impressive operating unit profit of 13 million, and an operating unit profit margin of 2.5%. This represents a 32% constant currency increase in operating unit profit, if we exclude nonrecurring items from the prior year.

The Japanese market, while showing some signs of improvement continued to be challenged with revenues down 9%. However, this was offset by our performance in Australia, which is largely up from the contribution of the Australian Defense Force RPO [ph] project. We will continue to benefit from this for the balance of the year.

We are experiencing solid growth from the emerging markets, China and Taiwan were up 22%, and India up 25%, all in constant currency. And our Asian locations are up over 50% in constant currency. We have been able to stabilize our gross margin and be very disciplined with our expenses. As I mentioned in the past, we have put in a very strong network that is paying off. We have a management team that is extremely focused, and we believe we have really got ourselves much closer to a full run in the Asia marketplace, and are looking forward to the balance of the year.

Japan will continue to be challenging as it is a difficult economy, coupled with some upheaval from a legislative perspective. The new administration in Japan is forcing adherence to the 26 job categories that are legally allowed for temporary staff under Japanese labor law. The DPJ has proposed a legislation that would reverse the liberalization, which actually eliminated the adherence to those 26 job categories for one year in 2001, and three years in 2004.

It could potentially impact up to 10% of our business, however, the DPJ proposes a five-year grace period to give the labor markets sufficient time to adjust. All of the proposed legislation is yet to be defined. So it is too early to determine any impact. However, our team has run several scenarios, while it will impact us, we believe the impact will be fairly modest.

We will continue to work with the government. Our management team has taken an aggressive approach in working with companies and government to ensure that the flexibility of the labor market, which is needed for the economic growth in Japan stays intact as best as possible.

Revenues for the first quarter for Right Management were 103 million, down 24% in US dollars, 28% in constant currency. Operating profits were down 57% in US dollars to 13 million, generating an operating unit profit margin of 12.1%. Clearly, we are continuing to see the tail off of the large outplacement business opportunities, and we're starting to see this come down in the second quarter of last year in the US and there has been a continued reduction in the number of candidates coming through our doors.

At the same time, we have seen our European and Asian business go up slightly, and that too is now leveling off, and the suspect that that would start to turn down as we move throughout the year. We have done quite well at managing Right’s weight [ph], well at managing Right’s cost. On the way down, we were structured very differently in this downturn, and then the last downturn, both from a fiscal property and web capability, as well as the use of our consultants. This allowed us to be able to reduce our cost structure more in line with the reduction of revenue.

Because of the efficiencies in the career transition business, it is difficult to maintain such a high operating margin. However, we believe that we would be able to hit a low point of a high single digit, and then begin to work our way back as the talent management business begins to fill in.

We are securing large talent management engagements, which involve training, coaching

and consulting. Our goal is to have the talent management business be in excess of one third of the total revenue for Right Management. While career transition does drop off from its highs, it is still a large component to the revenues, companies will continue to change the talent within the organization, which drives on consistent basis opportunities for our career transition services.

At Jefferson Wells the market continued to be challenging. Revenue was down 23% to $41 million. We had an operating profit loss of $5 million. We are seeing our average daily revenue improve, but it is not at the level required as you can see. Our backlog is improving giving us a better outlook for the second quarter, and for the balance of the year.

Our first quarter was a better than anticipated quarter for revenue, and then of course profitability. Each of our staffing segments exceeded revenue and profit projections for the quarter. We continue to see strong week on week trends across all the major geographies.

As we talk to our clients, there is still no doubt a sense of trepidation as many of the economies still have issues to work through. However, as demand continues this is a very favorable environment for us as companies are looking at needing to get work done, yet having an uncertain future. We expect, given what we are hearing from our clients, that the second and third quarter will both continue to have strong revenue performances.

As this happens, we will have a more rapid fill in of our infrastructure, therefore creating very good leverage, which will generate a much higher level of flow through from the revenue to profitability. Improving revenue growth, our work on gross margins as well as the continued scrutiny of expenses will lead us to a second quarter earnings per share between $0.14 and $0.22, which includes the impact of the COMSYS acquisition, which we are projecting to have a negative $0.10.

With that, I would like to turn it over to Mike to cover some of the financials.

Michael Van Handel

Okay. I would like to begin today by discussing a few elements of our earnings statement, followed by a discussion of our cash flow and balance sheet. Finally conclude with detail on the COMSYS acquisition, followed by some comments on our second quarter outlook.

The first quarter operating results outperformed our forecast due to higher than expected revenue growth, while maintaining tight control on costs. While SG&A costs were down

year-on-year 5%, in constant currency were down 2% from the fourth quarter in constant currency. The organization remains keenly focused on cost containment, allowing a large part of the incremental gross profit to flow through to the bottom line.

Three unique items impacting our earnings statements in the quarter relate to a change in the calculation of business tax in France, which was effective January 1 of this year. While the amount of business tax did not change materially in the quarter, the classification of the tax did change under US GAAP. As a result of the new law, the calculation changed and business tax is now more appropriately included in our earnings statement as a provision for income taxes rather than as cost of services.

Consequently, our reported cost of services was $13.7 million less than what it would have been, and our income tax provision was 13.7 million higher. This change in classification had no impact on our net earnings for the period. This classification results in an unusually high income tax provision of 86% for the quarter. The income tax provision before this reclassification was 52%, still higher than normal given the relatively low level of pre-tax profit in the quarter.

While US GAAP requires the classification of business tax in our income tax provision, we view this tax as operational in nature, and therefore we have not changed the financial reporting of our France operating segment. For purposes of the French segment, business taxes will be included in cost of services as it had been previously. Therefore, in reconciling the operating profit of our segments to the consolidated operating profit will be necessary to add the business tax to the segment operating results to arrive at the company's consolidated operating profit.

This reconciling item is separately identified on the operating unit results page of our earnings release financial statements. The corporate expenses in the quarter were in line with expectations at 26.4 million, up 22% year-over-year. The year-over-year increase primarily relates to global IS costs that are now maintained at the centre rather than being allocated to the operating units, also additional marketing expenses and incentive costs.

Interest and other expenses in the quarter were 12.9 million, slightly higher than anticipated as it includes a 1.2 million translation charge related to the devaluation of the Venezuelan Bolivar in the quarter.

Free cash flow defined as cash from operations less capital expenditures was a use of $51 million of cash. This usage was the result of an increase in working capital necessary to support the higher revenue growth rate, particularly near quarter end.

Our accounts receivable, excluding the impact of foreign exchange rates, was up $127 million in the quarter. Accounts receivables increased despite the fact that our days sales outstanding in the quarter markedly by five days from the prior year.

Capital expenditures in the quarter were $8 million, which is about in line with the prior year.

Turning to the balance sheet, total cash at quarter end was $944 million, and total debt was $718 million, bringing our net cash balance to $226 million. Since quarter end, we used $239 million of cash related to the COMSYS acquisition which I will discuss in a moment. Our balance sheet remains strong a quarter end with total debt to total capitalization improving to 22%.

As of quarter end, our primary borrowings are 300 million euro note coming due in June 2012, and 200 million euro note coming due in June of 2013. Neither of these notes have specific financial covenants. As of quarter end, we do not have any borrowings outstanding under our $400 million revolving credit agreement.

Before I turn to the second quarter outlook, I would like to discuss the acquisition of COMSYS IT Partners, which closed on April 5. COMSYS is the third largest IT staffing managed solutions company with 52 branches across the US. The total purchase price for COMSYS shares was $380 million, of which $192 million was paid in cash, and 3.2 million shares were paid in Manpower stock valued at $188 million on the date of close.

Additionally, we retired $47 million of COMSYS debt outstanding at the close of the transaction. As we discussed on the last call, we expect synergies totaling $20 million annually by 2011. We will also get the benefit of a $35 million income tax shelter, which will be utilized over the next 10 years. Integration costs are expected to be $25 million of which $14 million will be incurred in 2010, $8 million of which will fall in the second quarter.

In process of evaluating the intangible assets and goodwill related to the transaction, based upon our preliminary analysis, intangible asset amortization will approximate 21 million this year $7 million per quarter. For the second quarter, we expect COMSYS $0.10 dilutive. This is primarily due to transaction and integration costs incurred in the first quarter of ownership. As we look to the second half of the year, COMSYS is expected to be EPS mutual, which includes the impact of intangible asset amortization.

We expect second half EBITDA margins to be above 7% as we begin to realize the synergy benefits of the integration. As we complete the integration of COMSYS, we became aware that under Manpower’s accounting policies, we will be treating revenue related to some of the subcontractor contracts as net versus gross. This will result in a somewhat lower reported revenue for COMSYS, but will have no impact on operating profits.

Now let us turn to the outlook for the second quarter. Overall, we expect improving revenue trends in all operating segments with the exception of the counter cyclical Right Management business. We are projecting our consolidated revenue to range between 16% and 18% in constant currency. Foreign currencies will have little impact on the quarter based upon where rates are today, but could add about 1% to our consolidated revenue.

Included in revenue outlook is the positive impact from the COMSYS acquisition, which is approximately 4%. Revenue growth in the Americas is expected to 28% and 30% in constant currency before COMSYS, or 52% or 54% including COMSYS.

We expect the French market to continue its strong showing with constant currency growth of 14% to 16%. EMEA will also show improving growth in the quarter between 10% and 12%, and Asia-Pacific should grow between 9% and 11%, following constant currency.

Right Management will see some growth sequentially from the first quarter, but is expected to be down from prior year about 30% on a constant currency basis. Likewise growth at Jefferson Wells should improve sequentially, but will still be down against prior year between 11% and 13%. Our gross profit margin is expected to improve 40 to 60 basis points on a sequential basis, but will be down against prior year due to the strong performance of the higher gross margin Right Management business in the second quarter of 2009, and the slightly lower staffing gross profit margin compared to the prior year.

Our operating profit margin is expected to range from 1.1% to 1.3%, or between 1.4% and 1.6% if we exclude the impact of the COMSYS acquisition. Our income tax rate for the quarter is expected to be 63%. This higher rate reflects the inclusion of approximately 16 million of French business tax in the tax provision. If we exclude this item our income tax rate would be 40%.

Earnings per share for the quarter is expected to range from $0.24 to $0.32 per share before the COMSYS acquisition, or $0.14 to $0.22 per share if we include COMSYS. This assumes weighted average shares outstanding of 38.3 million, which includes the shares issued for the COMSYS purchase.

It is important to note that in reviewing our guidance for the second quarter, many of the published analyst estimates do not include the impact of COMSYS, as they were waiting for a better indication of the intangible amortization before updating their estimates.

In reviewing our second quarter operating profit forecast compared to the prior year, there are few things worth noting. First, Right Management had a record quarter a year ago reporting operating unit profits of 42 million. Given the falloff of the counter cyclical outplacement business, I expect profits of about one third of that this year in the quarter.

So still a good performance at this stage of the recovery, and about in line with the second quarter of 2008. Additionally, corporate expense was unusually low last year at 19 million due to the reversal of some long-term incentive approvals. This year we expect corporate expense to range between $26 million and $28 million which is more in line with our current run rate.

Both of these items masked the strong operating leverage that we expect from our staffing business in the second quarter. In fact the combined operating unit profit margin of our four staffing segments, the Americas, France, EMEA, and Asia-Pacific is expected to be up over 100 basis points over the prior year.

One of the key elements we monitor closely in the recovery cycle is incremental margins to ensure that we are utilizing our network capacity and getting strong operating leverage. Based upon our second quarter forecast, we expect incremental year-over-year operating profit margins of 8%, excluding Right Management, COMSYS and the impact of 2009 nonrecurring items.

Looking ahead on an sequential basis, we expect over 75% of the incremental growth in gross profits from the first quarter to the second quarter to flow through to operating profits. Again, this excludes the impact of Right Management and COMSYS as well. On both measures, we're given strong operating leverage in the early stages of recovery.

So, with that now let me turn things back to Jeff.

Jeffrey Joerres

Thanks Mike, and with that we will open it up for questions.

Question-and-Answer Session

Operator

(Operator instructions) Our first question is from Sara Gubins with Merrill Lynch.

Sara Gubins – Merrill Lynch

Hi, thank you. Good morning. I was hoping you could talk a bit about bill and pay rate trends. Your comments sounded somewhat more optimistic about what you would expect for bill rate trends. And I am wondering how those discussions with clients are going?

Jeffrey Joerres

Sara, I think we are kind of out of the environment where everything is a rebid and a retender with the squeeze on. It doesn't mean that the pricing hasn't remained difficult, it is. I mean it's still a difficult environment, but I really think when we look at what we've done in the first quarter how we've been able to maybe extract some business out of the portfolio that just didn't have that right pay bill gap, and then when we see some of the new tenders coming in, they're very difficult, but I think less difficult.

So I'm not saying that we're out of the woods in this. This is still you know, we still got some you know, some challenges when it comes to pricing, but it is really not something that is the number one conversation in the meeting. The number one conversations in the meetings internally is you know, how do we swap some of that business out, where are we going, what are some of the things we can be doing in the small and medium-size businesses to try to offset some of that key account pricing.

Sara Gubins – Merrill Lynch

Okay, great, thanks. Turning to Europe, could you talk a bit about where you are seeing strength in terms of the type of business. And also, is there any concern about the impact from the recent travel issues in Europe?

Jeffrey Joerres

So, you know, we would be seeing the recovery happen very similar to what we would be seeing in the US, which primarily is coming from some form of light industrial or industrial where you actually are you know, kind of part of putting together this product either assembling it, shipping it, you know, the logistics part. So what we're seeing in Germany, what we're seeing in the UK primarily would go around there, and then France when you look at 75% of the business there is really in that category, you're seeing a lot of things driving out of there.

When it comes to the ash that is dropping in Europe, I would say it's too soon to tell and what I mean by that is if the sky start to open up and flights are now flying into De Gaulle, still held up in Heathrow, the most recent thing and update that I've got, and this is going to have very minimal impact if at all if it were to clear up now. If this goes on for a period of time yet, now it would start to have an impact, but frankly when you look at our business mostly indigenous you know, in place business I would say slight hiccup, but probably not noticeable but if there is another plume that comes out or some more news that comes out the end of this week and into next week then I think it will start affecting the business.

Sara Gubins – Merrill Lynch

Okay, great. And then just last quick question. I just wanted to make sure that I understood in the details of the 2Q outlook, the reclassification related to the VAT tax that is now in taxes, that's been excluded from your gross profit margin and your operating margin forecasts. Is that correct?

Michael Van Handel

So the way we did the outlook was to do it under the new reporting. So effectively that, the tax itself which is roughly, if you look at it and for those of you that I know are probably going to be trying to model this throughout the day, it's roughly, if you take 85% of the French revenue and then take that times 1.5%, you'll get a pretty close estimate to the tax. So based upon our guidance for the French market in the second quarter, we be looking at something on the order of about 60 million of business tax in the quarter. So in terms of the guidance that is we did effectively take that business tax out of GP, which we would do under the new reporting and then include it down in the tax provision, and on the $60 million that is in US dollars, as well, just to be clear.

Sara Gubins – Merrill Lynch

Thanks very much.

Operator

Our next question is from T. C. Robillard with Signal Hill Capital Group.

T. C. Robillard – Signal Hill Capital Group

Great, thank you. Good morning, guys. Just a quick point of reference, Mike, can you give us a sense of just how much perm revenue was in the quarter, whether you want to talk about a percent of GP or percent of revenues? And if you could kind of put that into context how it's been relative to the last couple quarters?

Michael Van Handel

Sure, sure, happy to T.C. You know, we're running just slightly above 10% of GP right now. If you go back the last couple of quarters, we would be sitting in the upper 7s, low 8% range. So it's starting to pick up a little bit, it's just set on the call. We are seeing some signs of some slight improvement in the number of markets. We did get some help in the quarter from the Australian Defense Force, which Jeff referred to on the call earlier, and then the (inaudible) employee business in France as well. So as I look out to the second quarter I would anticipate something on that order as well around 10% of overall GP.

T. C. Robillard – Signal Hill Capital Group

Okay, and it is – so with that recovery – I mean, I am just trying to triangulate with the comments you've made that – Jeff specifically, is this type of a progression, is this a little bit slower than what you've seen coming our of kind of prior downturns?

Michael Van Handel

(inaudible) There is a couple of things. You got to pull out that ABS, you got to put out that ABS and the Pol [ph] employee. When you look at that, yes, there is some okay growth I think. The best proxy is the US and the US is slower than what we would have seen before. I think it makes sense as you would to look at the BLS numbers and see less permanent hiring and job growth in some of those categories.

So our view is that there is permanent hiring happening. It is increasing, it is doing it at a very cautious rate and it all makes sense given the backdrop of uncertainty and is it inventory replenishment or is it really pull through consumer demand. So I think it's good news that we're going to – that we can see companies and clients using our service instead of hiring their own recruiters, but at the same time I think it's still going to be a bit slower.

Jeffrey Joerres

And I think, yes, just to emphasize T.C. I think you know, that’s always expected. At this stage of recovery, you know, there is uncertainty for permanent job hiring. So no surprise to us at all. We certainly expected the economy improves here, but this is going to accelerate and, you know, be quite a nice push for us in the upcoming cycle, but you know, it's behaving above what we would expect at this stage.

T. C. Robillard – Signal Hill Capital Group

Okay, that's great context, thank you. And then just lastly, last quarter you mentioned that you had various programs in place, that you were looking to capture or recapture some lost margin, on the gross margin side. And obviously, you saw stable gross margin quarter-to-quarter, which is really solid performance, given the seasonal trends. Can you just give us a sense as to what some of those programs are, and maybe kind of a time line as to when you would expect to see that recapture?

Jeffrey Joerres

Well, you know, each country has a little bit of different levers to pull. So in the US it's working a little harder, for example. On SUTA, in France it might be working on some of the components between that pay and bill rate that you can actually make some differences on. When you get to the basics of it by country, we know what are the lowest 10%, the lowest GP what that GP is, where the contract is, should we move on, how do we augment a lower price contract with higher-level services as we introduce rights management or Jefferson Wells, and we review that on a monthly basis in a very intense way.

So we're looking at our portfolio, we are being now more selective in the ones that we are taking, and we're walking away from more accounts in the first quarter by far than we did in the fourth quarter. So it's a program that is typical during this period of time. We are also looking which will have a longer payback on things like RPO and MBS, the tax-based outsourcing, some of the things that we're doing in the professional staffing area, which will augment the total, but we're really focusing on is that one segment, which Mike came in at how many basis points down in the temporary staffing, 90?

Michael Van Handel

Yes.

Jeffrey Joerres

You know, that's really what we're looking at right there. How do we start to reverse some of that and that's a longer road, but one that is all profit once we start to reverse some of that.

T. C. Robillard – Signal Hill Capital Group

Got it, great. Thank you.

Operator

Jeffrey Silber with BMO Capital Markets.

Jeffrey Silber – BMO Capital Markets

Thanks so much. I wanted to focus on the US a bit. The numbers you put up were extremely impressive, especially in regards to the context of how the market is growing. I know the comps were somewhat easy. But if you can give us a little bit more color what is going on, are you being a little bit more aggressive in certain areas than some other companies?

Jeffrey Joerres

No, I have a hard time saying it. I think we're doing well. You don't just turn on a spigot of a sales team. We carry the sales team. If go back three conference calls, each conference call I talked about switching out sales. We implemented a global sales program. We trained our people. We have our own process called strategic client management. We have technology involved in it and we're beaten hard on the marketplace, so – and with an office structure that is a more robust office structure, some of those officers are saying this is a really nice because I don't have as much competition as I had before.

So we're hitting it hard. We still have a lot of work to do, but I think across the board when you look at those sales increases and some are more dramatic than others depending on the country, my hats off is to the sales teams and the management that have kept their wits during this downturn, and this is where you make a difference on the kind of decisions you made during that difficult, you know, dark days of 2009.

Jeffrey Silber – BMO Capital Markets

All right, that's great to hear. Just a couple of follow-ups on some recent regulatory changes in the US, are you seeing or do you expect to see any impact from the HIRE Act on your business? And also, if you can tell generally over the long haul, what you think the impact from health care reform will be? Thanks.

Michael Van Handel

Sure, I think the first part of that one Jeff. So on the HIRE Act, it's where we would employ employees that haven't been working for 60 days and not pay the FICA tax for that this year. We do see some benefits. We will have some employees that certainly will fall into that category. Of course, you know, you always look to in some cases that savings will be passed on to our clients as well.

Also we get a Work Force Opportunity Tax Credit, the WOTC credit, and to the extent that you're getting the higher credit, you no longer get the WOTC credit. So, you got to play those two off each other. So do expect some favorable impact to the US operation this year but you know, I would say relatively modest it would be, you know, a few million perhaps something of that magnitude.

Jeffrey Joerres

Yes, in our health care, you know, the story is yet to unwind. We’ve been able to take the bill as other companies have been trying to sit through and sort through what it would mean to us. It is a fairly substantial number. We really look at this as one of the more easier ones to pass through because they are in the same position. We still offer flexibility, so we look at it. There is a higher cost to it. I think it levels the playing field in the staffing industry, which is helpful.

We had one of the most robust health insurance plans. So we were paying for something that our competitors were not. This is now leveled the playing field. In addition to that, we believed that we would be able to have many more people be attracted to us as an industry, because they don't have that concern. And then thirdly we got till 2014 to still lobby undo, redo, and really understand the ramifications. So right now pretty heavy cost, one that would be passed through with some positives, and then there is a lot of road to be traveled between now and the time it starts to be interactive.

Jeffrey Silber – BMO Capital Markets

Okay, great. Thanks.

Jeffrey Joerres

Thanks Jeff.

Operator

Vance Edelson with Morgan Stanley. You may ask your question.

Vance Edelson – Morgan Stanley

Hi, thanks a lot. Regarding the upcoming cycle, before the downturn you had some long term guidance out there regarding operating margins, which I think you were correct to quickly pull, when things took a turn for the worse. Any thoughts now given the COMSYS acquisition and other changes to the business in the past year or so, on what a new operating margin target might be on a consolidated basis down the road?

Jeffrey Joerres

Sure, Vance. You know, our longer term operating target, EBIT target, has been 4%. And in fact, we didn't retract that, although we – was a bit on hiatus.

Michael Van Handel

We took a vacation from it.

Jeffrey Joerres

As business started to fall off, but we still have conviction around that 4%. We still think that that is an achievable goal for us, certainly the mix of business will be a little bit different when you look at what we’re doing with sort of more professional and specialty businesses, our Manpower business solutions, some of the perm recruitment. So I think that mix of business will be a little bit different as we get to that 4% range, but certainly we see that in our sites.

You know, in terms of COMSYS that certainly you know, they do have certainly a higher EBIT margin but with a goodwill that that is bringing with it at least in the near term, it will might be additive to our operating profit margin synthesis and EBIT target, not an EBITA target. So it's how we view that today.

Vance Edelson – Morgan Stanley

Okay.

Michael Van Handel

I would also say, I think it's important to add a little on it, and we've said this before and we're not backing down from it. What we really do believe is we're building something that once we get the 4% and how we’ve now done our mix of business, what you see happening in India and China which is almost you know, a large part of it is permanent recruitment. Our view is once we get the 4%, we will then explain how we are going to go beyond that, but until we get to 4%, it all is conjecture hypothesis and things that I were you would look at with some level of skepticism. So we’ll get to 4% and then we’ll tell you where we're going to go next.

Vance Edelson – Morgan Stanley

Okay, that sounds good. And then, you mentioned some market share gains, there is less competition out there now. Does that competition come back easily in your view, or would you say a lot of other players out there were dealt a bit of a knock out punch from which you might benefit for years?

Michael Van Handel

Well, I think you do benefit for years. So if you just logistically, okay now I want to go back in, you're looking at six to nine months before you back in. You've already secured it. So now I have to take companies away from you and business away from you, which is then you know, one, two, three years beyond that and our view is we're going to get very aggressive in those markets, where we know we have less present [ph] in those markets, where we know we have less competition.

So we increase our market share, increase our reputation which then means it's harder to take it away from us. So we're going to work really hard in those areas. We've identified those offices where we think we've got a little bit more of a green field from a competition. Local companies can set up a little bit faster. So this is not, you know, just an easy walk through the park, far from it, but we are seeing in many locations without naming them, because I don't need to go through that that we've got some uplift because of that network, and because we've got people on the ground ready to go and knowing and have been cultivating that territory, and knowing how to go get that business.

Vance Edelson – Morgan Stanley

Okay, that's good to hear. And then, just one last question, how would you characterize the difference in mood, if there is a difference, between the small and large businesses, there's been some talk that smaller businesses are still a bit more on the pessimistic side about the economic recovery. Are you seeing anything similar?

Michael Van Handel

I think so. I think it's a little different in that. You know, some of the very large companies can look at it from a global demand perspective, and maybe get a little bit more of a pickup because of what's happening in the Asian market, both in market for them but also the export market, but they also reduce possibly a little bit more. When we do talk to the small medium sized businesses, there is some good demand happening out there. They are very demand focused. They are not going to be in any kind of anticipatory hiring, but there is more trepidation about and around what could happen to me.

I don't have many levers to pull. So if certain things happen with health care or taxes or whatever, it is going to make a difference. Now some of the new tax abatements happening in the US that might help out. When you get to the small businesses overseas particularly in Italy, they are still cautious and banks are cautious to lending them money. So I think that SMB market is lagging a bit, still very important but there is probably a good four or five months before they start to pick some confidence up.

Vance Edelson – Morgan Stanley

Okay, got it. I'll leave it there. Thanks a lot, guys.

Michael Van Handel

Yes. Thanks Vance.

Operator

Mark Marcon with Robert W. Baird.

Mark Marcon – Robert W. Baird & Co.

Good morning, Jeff and Mike.

Michael Van Handel

Hi Mark.

Jeffrey Joerres

Hi Mark.

Mark Marcon – Robert W. Baird & Co.

I wanted to ask, first of all, a big picture question, clearly the cyclical environment is improving on a global basis, and I'm wondering if you can talk a bit more about some of the secular trends and some of the bigger strategic changes that you've made, that would impact how you're thinking about how this cycle may unfold, assuming that we don't have a double dip, and that we do have some continuation here with regards to the macro global pickup.

Michael Van Handel

Okay. So, you know, it's a little difficult because I'm talking to the man who has every number in his head right now. So I’ll take a CEO approach at it and I alluded to it, and I don't know if you picked it up, but I alluded to it in the press release.

Mark Marcon – Robert W. Baird & Co.

I did.

Michael Van Handel

I did not discuss it in the conference call, but in the press release I said something that I feel strongly about it that we are getting a cyclical pickup, but more importantly we're getting a secular and improved secular pickup. And if you do some very simple math and use the US as a proxy and look at the BLS number, the number of jobs growing in the BLS versus number of jobs growing in the temporary help industry, it is extremely disproportionate from previous cycles.

So what you're really seeing is that companies – maybe it is the trepidation but we also, as I've stated in previous conference calls, companies who had 5% strategy for flexible labor are now at 15 or 20, and we're actually starting to see that unfold. So what is happening is because of how we entered this recovery there is this appetite and a satisfaction of recruiting high quality people, being able to have the agility and being able to know that I have some flexibility along the way. So I actually think we are getting more growth when you look at industrial output in the US, industrial output in Germany and industrial output in France, and then compare that to what is happening within the temporary staffing industry.

I think you might actually be getting a little bit more win from a secular trend than a cyclical trend and that does not happen very often. So it may change, it may reverse itself, but I think that we've got ourselves a spot where you would see the percent penetration of a temporary worker to the workforce has a very good chance of going up in this cycle in almost all geographies.

Mark Marcon – Robert W. Baird & Co.

That is what we are seeing as well, and I just wanted to confirm that. And then, can you talk a little bit about your strategic changes? Because you – some people think of you still as just being a traditional temp staffing provider, and maybe not having the strategic relationships that you may be developing to a greater extent with some of your clients.

Michael Van Handel

So if you were to look closely at our annual report, I outlined our four strategic priorities each of those four strategic priorities move us beyond that. Our GP that is coming as a percent from solutions base is growing. Our new sectors and services, whether it be RPO what we're doing in healthcare, what we're doing in government services, what we're doing with government affairs and how we're managing our digital strategy and now the number of people that we are entertaining and working down a virtual work strategy, what we're doing in actually a digital backbone from my path to others, and then of course how we're wrapping that with the experience in the professional staffing side.

So we really are seeing that so many of our major clients, one client we have a relatively modest GP percent per core staffing. We were reluctant to sign that. Since we have signed that, we have won over 15 contracts for sophisticated solutions that are running between 25% and 50 % gross profit. So we're definitely driving in that area. We're resourcing in that area. During the downturn on a worldwide basis we have hired over 200 people in that specific area alone and we're going to continue to push that.

Mark Marcon – Robert W. Baird & Co.

Great, and then a couple of quick questions. COMSYS, what – the expectations with regards to accretion for the first full-year, and what exactly the charge is for?

Jeffrey Joerres

Sure, yes. So overall for this year we expect it to be $0.10 dilutive. So, basically for the three quarters and you saw that $0.10 of dilution coming in this quarter. So the second half of the year we look at been at break even. So I think the important point under that Mark is with that I'm using some estimates for goodwill, which I'm estimating right now about $7 million per quarter. So $21 million for this year and that’s still preliminary estimate.

We're still just finalizing some of our evaluation work and so that's in place, and then I mentioned earlier, in terms of integration costs, we're looking at a total between now and over the next three years of about $25 million, most of that comes this year and next year, but overall about $14 million of that is this year, and of that $14, $8 actually happens to be in the second quarter. And that would be things as you might imagine given some of the synergies, we have some severance costs included in there, some costs related to integrating back-offices and systems in that type of –

Michael Van Handel

Properties.

Jeffrey Joerres

Yes, property closures, and those type of things. So the normal stuff. So, but so far you know, the businesses you know, when you look at the business, the business is on track. They are doing extremely well. You know, first-quarter revenue growth was strong and things are moving quite positively. So from the business standpoint, it's moving well and a little bit better than expected, and from the other expense side things are on track. So, no surprises at this point in time.

Mark Marcon – Robert W. Baird & Co.

And they still have to file their Q, right?

Michael Van Handel

Yes.

Jeffrey Joerres

Yes, right they would because we actually acquired them – closed on the 5th. So I'm quite certain that that would be the case.

Mark Marcon – Robert W. Baird & Co.

What was the Q1 revenue?

Jeffrey Joerres

Q1 revenue growth, I don't have final numbers for disclosure purposes, but I would expect the revenue to come in up year-over-year about 8%.

Mark Marcon – Robert W. Baird & Co.

Great, and then last question, France, GP on an apples-for-apples basis, how should we think about pricing trends in France? And what are you seeing out of Adecco and Randstad?

Michael Van Handel

I think from a pricing perspective it's still a difficult environment, probably a little bit harder to reverse the course there, though we are doing some of that. I think we – you know, we're also looking at some of the other things, as mentioned the permanent recruitment is offsetting some of that but if we just go to the core staffing, we still have ways to go in there, but I think we've got a very good plan, the management team there has a very in-depth understanding of what's between pay and what's between the bill rate, and how we might be able to maximize that a little bit more, but I think from a French perspective, I think you'll see some leveling out from an industry, meaning the pricing is stabilizing on a going forward basis. You probably won't see much more deterioration other than a few feathering in here and there.

Mark Marcon – Robert W. Baird & Co.

Great. Thank you very much.

Michael Van Handel

Yes.

Operator

Andrew Steinerman of JP Morgan.

Andrew Steinerman – JP Morgan

Hi, there. With the whole concept of disengaging low margin contracts as revenues pick up, do you think this is a Manpower unique strategy? Or do you think this is kind of rationale, kind of marketplace activity?

Jeffrey Joerres

You know, I think in general it happens. I think we might be out a little bit earlier. I get a list of doing that, a list of those that have happened around the world where we've done that. It's in the tens and tens of millions of dollars. I can't say. As soon as we disengage, within 2.3 seconds somebody else picked it up for the exact same price. So it is something we are very careful about because you don't disengage from a client easily because you're going to be in business for another 60 years.

So you've got to do it carefully, and you have to do it with the respect of our employees there, but it is something that is part of our program in each of our operators are asked which one, how, and how are we going to do it or how are we going to renegotiate it, and we review that on a monthly basis.

Andrew Steinerman – JP Morgan

Right, and, Mike, idle time is a key gross margin driver in certain segments. Could you just talk about idle time in general, how is it trending, how is it affecting gross margins in those kind of key regions?

Michael Van Handel

Yes, overall, I mean the two regions that would impact us most dramatically would be Sweden and Germany, and then of course the Jefferson Wells business, but we're back to normal times now that the business is on the other side and we are starting to see you know, good growth in Germany and things certainly have stabilized in better trends in Sweden, and we're back to what I will call normal utilization.

So that is one of the things as we look to the EMEA gross margin in 2010. As we look forward, we will have that advantage compared to prior years. So that is going to be a net positive force as we make our way through the year, and then Jefferson Wells, you know, we've done a lot of reorganization and restructuring as well. So we've done some good work there to reduce the bench. So it's about where it should be. Maybe it could be a trim back a little bit, but we're right about where we want to be from a utilization standpoint there as well.

Andrew Steinerman – JP Morgan

Perfect, thank you so much.

Jeffrey Joerres

All right. Last question please.

Operator

Thank you. Kevin McVeigh with Macquarie, you may ask your question.

Kevin McVeigh – Macquarie Research

Great, thank you very much. Hey, Jeff, Mike, nice job?

Michael Van Handel

Thanks.

Kevin McVeigh – Macquarie Research

Could you talk about the tenure of your sales force coming out of this cycle relative to the last couple of cycles? I'm just trying to get a sense of how much more experience you have heading into this upturn, as opposed to the last couple of upturns?

Jeffrey Joerres

Yes, it's dramatically different not only, you know, the people who have been here. I think it is the training we put, and this has been about a four year process on how we have trained our people, certification to do it. The technology we go, how they are expected to have leads on a global basis, and we have a very organized global account and strategic account across all countries. We know what they're doing in every one. We know bids that are happening instantaneously, the teams that have meetings and we approach it in a concerted way, and when we go into a presentation, one of the biggest comments we get is that is completely different than anything I've ever seen.

You guys really do know what's going on across the world. And we've had to augment with some new people. We had to move some people around. There are some people who have been in this company for 20 years, and have gone through multiple cycles but are much better prepared using our automated CRM system down at the laptop before they go in briefing reports are done in a different way.

Price margin, how we're managing the margins. Each one is responsible for generating a pro forma that gets approved on whether that is the kind of profitability, and then they are evaluated on their ability to have estimated that pro forma correctly or not. So we still have a ways to go. It is still a major effort in the company. We're introducing some new things right now in our CRM tools, particularly to approach the SMB market, which we believe has to be a slightly different strategy than a classic kind of knock on some doors and give away a coffee mug. And we're really going after that hard as well. So we are in a very different spot than we were in 2001 and 2002, I mean it is dramatically different.

Kevin McVeigh – Macquarie Research

That's super helpful. And then just real quick Mike, the $0.10 dilution for COMSYS, does that include the goodwill amortization, or is that excluding it?

Michael Van Handel

Yes, that includes goodwill amortization, and I think on the last call we disclosed that overall accretion without goodwill, we anticipate to be about $0.10 per share this year. So that would be after integration cost, but before goodwill about $0.10 accretive and I think that's still a pretty good number.

Kevin McVeigh – Macquarie Research

Great. Thank you very much.

Jeffrey Joerres

All right. Thanks everybody. As usual we will be here for questions. So thanks a lot.

Operator

Thank you for your participation. Today's call has concluded. Please disconnect at this time.

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Source: Manpower Inc. Q1 2010 Earnings Call Transcript
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