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Manpower Inc. (NYSE:MAN)

Q2 2010 Earnings Call

July 29, 2010 4:00 pm ET

Executives

Jeff Joerres - Chairman and CEO

Mike Van Handel - CFO

Analysts

Kevin McVeigh - Macquarie

Gary Bisbee - Barclays Capital

Tim McHugh - William Blair & Company

Paul Ginocchio - Deutsche Bank

Andrew Steinerman - JPMorgan

Kelly Flynn - Credit Suisse

T.C. Robillard - Signal Hill

Sara Gubins - Bank of America-Merrill Lynch

Jeff Silber - BMO Capital Markets

Vance Edelson - Morgan Stanley

Operator

Welcome to Manpower's second quarter earnings results conference call. (Operator Instructions) I would now like to turn the call over to Mr. Jeff Joerres, Chairman and CEO.

Jeff Joerres

Good morning and welcome to the second quarter conference call of 2010. With me this morning is our Chief Financial Officer, Mike Van Handel. Together we'll go through the results of the second quarter. I'll spend some time overviewing the business and giving an update on our economic indicators, and then Mike will cover the segment detail and financial side of the business as well as any implications of these trends.

This is a little different than what we have done in the past, as I covered the segment detail, but we're trying to be more effective and be as clear as possible. So we've decided on using this new format.

Before we get into that new format, Mike, could you read the Safe Harbor language?

Mike Van Handel

Good morning, everyone. This conference call includes forward-looking statements, which are subject to risks and uncertainties. Actual results may 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.

Jeff Joerres

Thanks, Mike. The second quarter was a very good quarter for us. We knew there was a potential for upside. As the quarter folded, our revenue growth continued to build. And in fact, to date, they're showing no signs of slowing.

Growth rates in the quarter, for example: U.S. 35% up, excluding COMSYS, up 83% with COMSYS; nearly 23% for France; 18% for EMEA; and 15% for Asia; very strong performances.

We are clearly seeing the benefits of the decisions we made in 2009. In almost all geographies, we are taking market share. Additionally, as you will hear later from Mike, our gross margin in the temporary staffing business is showing signs of improvement, as we are clawing back some of the lost gross margin.

The decision to keep more of our infrastructure is allowing us to take advantage of this rapid growth, and we believe this will continue for some time. We know that our competitors are beginning to reopen offices that they had closed, whereas we are not compelled to have to reopen offices because we took a longer-term view in our office closures during 2009.

A real profitability shining star is the EMEA segment. The EMEA segment across all the major locations is doing well. We are getting very good growth in some of the higher gross margin geographies, which is assisting our overall gross margin percent.

We are also seeing exceptional growth rates in the Americas. The U.S. growth rate is being led by light industrial, but office and professional are also quite healthy. The integration of COMSYS is going extremely well. And in fact, we are ahead of schedule, and our revenue is exceeding our projections. Great job really done by that team.

We anticipated a minus-$0.10 impact in the second quarter because of the amortization and integration cost. And in fact, it turned out to be minus-$0.03 for the quarter. Operating results are coming in stronger and integration costs are less. We anticipate the COMSYS acquisition will be neutral for this year.

In summary, our first quarter revenues were very strong, coming in at $4.6 billion, up almost 24% in constant currency, 21% in U.S. dollars, stronger than we had anticipated.

Our gross margin declined to 17.4%, a 90 basis point reduction primarily due to less outplacement revenue coming from Right Management. Our operating profit was $79 million with a net income of $32.7 million and an earnings per share of $0.40.

We continued the momentum of the first quarter and actually are accelerating that as you can see in the second quarter. Having said that, there are potential concerns as we look at what might be the sustainability of Europe and for that matter the United States, but we are not seeing any evidence of that in conversations with our clients. Yes, it's talked about, but the demand at those client locations is still at a pace that is more than enough for continued growth for that organization and for our organization. We believe that demand plus uncertainty is driving secular acceleration.

With that, Mike is going to spend some time on the segments starting with the gross margin.

Mike Van Handel

Great. Thanks, Jeff. We'll begin discussing gross margin this morning, followed by results of operations for each of our segments, then a discussion of the balance sheet and cash flows and then finally a look at the outlook for the third quarter.

The gross margin for the quarter came in at 17.4% compared to 18.3% in the prior year. This is slightly below expectations, primarily because our higher-margin outplacement business declined more than expected, thus impacting margin mix. In total, the outplacement business reduced our gross margin by 130 basis points. Temporary recruitment had a modest negative impact on our overall gross margin of 20 basis points.

We continue to see stable pricing in most markets, although we are feeling the impact of changing business mix as more of our growth is coming from lower-margin industrial business and from our key accounts.

We continue to maintain strong price discipline, and the revenue growth in the marketplace is allowing us to exit some of our lower-margin business, and we'll be more selective of our new business.

But that said, we are still seeing instances of aggressive price behavior by our competitors, and I should note that in those cases where we exit business based on low margin, other competitors quickly pick it up at the lower price. Included in the temporary recruitment margin is the favorable impact of including the higher-margin COMSYS business, let's say, of about 30 basis points.

Permanent recruitment had a favorable impact on gross margin during the quarter of 20 basis points. This business was up 48% in constant currency in the quarter, and represents 10% of our total gross profit.

Permanent recruitment fees improved nicely across most countries, primarily in the area of temp to perm conversion fees, where we are also seeing more direct hire activity. RPO is yet to kick in, in a serious way, but we have invested in this area and are well positioned for what we believe will be great opportunities as the economic recovery unfolds.

Our work recruiting for the Australian Defense Force and our contract with Pôle emploi also contributed nicely to recruitment fees in the quarter. The last settlement impacting our gross margin, you will recall from the first quarter. As we discussed last quarter beginning this year, the French business tax is now classified as part of our tax provision.

This clarification has a favorable impact on gross margin of 40 basis points. As a reminder, this change in clarification has no impact on net earnings.

Now let's turn to the segments. Revenue growth in the Americas exceeded expectations, coming in at $992 million, an increase of 67% over the prior year or 64% in constant currency. Included in the quarter is COMSYS revenue of $182 million. On an organic basis, the Americas revenue was up 36% or 33% in constant currency.

Operating unit profit for the quarter swung from a loss of $2 million last year to a profit of $18 million this year. This reflects a significant operating leverage we were able to achieve as costs remained under tight control, as we fill in branch capacity within the network.

Revenue growth was very strong across all the Americas markets. The U.S. saw a growth of 83%, including COMSYS, or 35% on an organic basis. This growth was a strong acceleration from the 18% growth we experienced in the first quarter. The growth in the U.S. continues to be led by the light industrial market, where we saw organic growth of 54% in the quarter.

We also saw improving trends in our office business and our professional business. Manpower professional, before the impact of COMSYS was up 24%. As Jeff mentioned, the integration of COMSYS has gone extremely well, and operationally it far exceeds our expectations.

During the quarter they reached an all-time record with over 5,000 consultants out on assignment. COMSYS revenue was $182 million, an average daily sales increase of 33% from the prior year. They contributed $11 million of operating unit profit before intangible amortization of $6.9 million, and integration costs of $4.7 million, resulting in OUP margin of 5.9% before these items.

Currently there is considerable momentum and demand in the marketplace for project based IT assignments. Companies are investing in IT solutions, which drive efficiency and productivity across their operations.

We have completed evaluation of intangibles during the quarter, and our estimated amortization costs for 2010 is in line with our earlier estimate of $21 million. For 2011, we also expect amortization of $21 million, or just over $5 million per quarter. Demand for our services in the U.S. remain solid throughout the quarter, with very strong secular trends as companies are addressing their increased demand with flexible labor solutions and remain cautious on permanent hiring.

That being said, we did see a nice improvement in permanent recruitment fees, which doubled from the prior year, saw the greatest amount of activity in temporary to permanent conversions.

Our Mexico operation continues their strong performance with revenues up 32% in constant currency and profits up over 50%. Revenue growth in Argentina also accelerated, up 30% over the prior year in constant currency, compared to 7% growth in the first quarter.

Revenue growth showed strong improvement in the French segment reaching $1.3 billion, an increase of 23% in constant currency. Revenue trends accelerated in April and May and then plateaued later in June as the prior year comparable numbers became more difficult.

Our operating unit profit came in at $10 million and the margin increased 40 basis points to $0.8%. During the quarter, we were able to achieve significant operating leverage, but these gains were somewhat offset by a lower gross profit margin compared to the prior year.

While pricing is stable overall in France, the environment remains extremely competitive, and we have not yet anniversaried the impact of pricing declines we experienced in the second half of 2009. We have implemented a number of initiatives to improve pricing in France, but the market remains difficult. We are also feeling the mix impact of more growth from our large key accounts in the industrial segment.

Permanent recruitment fees were strong, almost doubling primarily as a result of the Pôle emploi contract. While French market has shown a strong recovery, it still lags the 2007 peak revenue year by more than 25%. Our French operation has excess capacity in the branch network, which will allow for further operating leverage gains with the growth of our business.

The EMEA segment had a terrific performance in the second quarter, with revenues growing by 18% in constant currency to $1.7 billion. The EMEA team was able to keep a tight rein on costs, resulting in significant operating leverage to the bottom line. Operating unit profit swung from a breakeven prior year to $43 million this year for an OUP margin of 2.5%.

Looking across the EMEA region in the second quarter, we experienced improving revenue growth in all of our major markets with exceptional constant currency revenue growth of 33% in Germany, 21% in Italy and 16% in the U.K. In the Nordics, we saw year-over-year revenue growth turn positive in both Norway and Sweden, with Sweden's revenue growth coming in at 22% in the quarter, and accelerating above 40% in recent weeks.

On the IT side, we saw our Elan business also turn positive in constant currency as the market for IT skills across Europe is also strengthening. Our near gross profit margin was up slightly from the first quarter, but down modestly against the prior year, this modest decline is due to mix as we're seeing stable pricing overall. We continue to focus on optimizing our gross margin and we are beginning to see positive signs as gross profit margins has improved year-over-year in some markets.

Revenue in the Asia-Pacific also exceeded expectations coming in at $506 million, an increase of 25% or 15% in constant currency. Operating year profit more than tripled to $12 million resulting in an OEP margin of 2.3%, an increase of 140 basis points over the prior year. Our Asia-Pac team is maintaining a keen focus on leveraging existing capacity in driving productivity, while at the same time driving topline revenue growth.

Our gross profit margin improved 70 basis points over the prior year, reflecting the impact of a higher permanent recruitment fees primarily from the Australia Defense Force contract.

Revenue trends across the region improved relative to the first quarter, however, revenue growth in Japan remains muted down 4% year-over-year in constant currency. Revenue growth in Australia, China and our Asian countries continues to accelerate with each market growing more than 50%. India also continues to grow nicely with revenue growth of 28%.

As you noted on our last conference call, the DPJ government in Japan has proposed legislation which would place further restrictions on Jap categories we can supply. While this legislation has not been passed, in May the Labor Minister announced a new policy that more narrowly defines the nature of work allowed within the 26 approved Jap categories, this will result in reclassifying jobs from the 26 job types into the liberized category which has a three year time limit on assignments. This policy will have some impact on our business and could impact the growth of Japan's staffing market going forward.

Our management team continues to work with the government to ensure the labor market remains as flexible as possible as this will be critical to future economic growth in Japan. With our staffing operating accelerating much more than expected in the quarter, not surprisingly, our Right Management business decelerated more than expected. Right's revenue in the quarter was $99 million which was down 38%, despite this rapid drop in revenue growth, our Right business was able to deliver $8 million of operating unit profit for an OEP margin of 7.9%.

While we are experiencing a fair amount of de-leveraging on the decline, our management team has worked diligently to ensure that our cost structure is as flexible as possible. Given the rate of revenue declines, we will be implementing further cost reductions in the second half of the year. For the quarter, our crew management of outplacement business represented 72% of Right's revenues. The declines in the outplacement business were broad based as we saw the U.S. decline by 50% and Europe decline by 30%.

Our account management business is beginning to see more interest and a stronger pipeline with growth of 18% during the quarter. While we expect to see continued improvement in account management business, it is not large enough to offset the declines in the outplacement side. The higher end finance and accounting market remains challenging as companies continue to be reluctant to spend in discretionary projects.

Jefferson Wells's second quarter revenue came in at $41 million somewhere to the first quarter, and it reported loss of $3 million; while this loss is less than what we experienced a year ago or in the first quarter of this year, it clearly is not where we would like to be. We have made significant changes to the Jefferson Wells cost structure and we will continue to assess prudent ways to more efficiently deliver their high value services in this restrained market.

Coming to the cash flow, we saw use of free cash in the quarter of $43 million and use of $94 million for the first half of the year. Cash of $28 million was used for capital expenditures of which $10 million was used for office furniture and equipment as we moved our French headquarter to a less expensive location on the outskirts of Paris. We also used cash of $17 million related to the integration of COMSYS.

Working capital in the form of accounts receivable also increased as expected during this higher growth period. Accounts receivable dated sales outstanding were well controlled and improved by three days compared to the prior year. Cash related to acquisitions was $259 million of which $239 million was for the COMSYS acquisition. The COMSYS purchase price totaled $427 million dollars comprised of 3.2 million shares valued at $188 million. $192 million of cash paid to equity holders and $47 million of cash paid to retire debt.

Next let me turn to the balance sheet.

The balance sheet remains strong, at quarter end was total cash of $553 million and total debt of $648 million bringing our net debt position to $95 million. Began this move from a net cash position last quarter to a net debt position this quarter relates primarily to the $239 million of cash we used for the COMSYS acquisition. Our total debt to total capital ratio remains quite health at 20%.

Our borrowing at year end primarily consists of our €2 notes €300 million which comes due in June of 2012 and €200 million which comes due in June of 2013. Our revolver was left untapped at the quarter end with availability of $396 million.

Finally, let's discuss our outlook for the third quarter. As you might guess forecasting in this environment remains difficult. We're mindful of the fact that most economists are expecting global GDP growth to slow in the second half of the year. Nevertheless, they are still expecting economic growth which will be favorable for our industry.

Economic growth with continued macro uncertainty should further fuel the secular trends towards flexibility. In recent weeks we have witnessed the rate of year-on-year revenue growth stabilize and plateau in several of our markets.

Through last week, however, we have not seen a meaningful decline in growth rates in any of our markets. With this as the backdrop, we are forecasting revenue growth of 20% to 22% in constant currency. This is slightly less than the 24% constant currency growth we saw in the second quarter, primarily because the prior year comparable numbers become more difficult, especially as we move into September.

This is particularly the case in France, where we are calling for a year-on-year constant currency growth rate in the mid-teens. The Americas segment growth will continue to benefit from the COMSYS acquisition, and we are looking for a continuation of strong organic U.S. growth in the mid-30s.

The EMEA and Asia-Pac segments are also expected to maintain their second quarter growth rates into the third quarter, with constant currency growth in the mid-to-upper teens. Right Management should see a continuation of the decline in the countercyclical outplacement business as well as the typical seasonal slowing as we move into the third quarter with revenue in the $85 to $90 million range.

We should also expect Right's operating unit profit to drop sequentially, given the de-leveraging, but be modestly profitable for the quarter. Jefferson Wells is expected to see some seasonal revenue growth, but still be down against prior year.

Our gross profit margin is expected to be slightly up on prior year, as the impact of COMSYS and the business tax re-classification should more than offset the gross margin drag from the decline in the higher margin Right business.

Our operating profit margin should range from 1.8% to 2%, about double last year's 1% operating margin, excluding the prior year impairment charge. Tax rate is estimated to be 52% with the French business tax re-class, or 39% without it. Weighted average shares should be $83 million, resulting in earnings per share from $0.41 to $0.51.

Changes in foreign currency will negatively impact our results, as the euro is about 10% weaker than a year ago. Based upon the current rate, this will reduce our constant currency revenue growth rate by 7% and negatively impact earnings per share by $0.04.

With that I'll turn things back to Joe.

Jeff Joerres

Thanks Mike. As you can tell, we had a very solid second quarter. The team around the world did an outstanding job led by the accomplishments in Europe. And we were able to maximize the marketplace and position ourselves in 2009 for taking advantage of what comes to us in 2010.

You can see across the board that we were stepping it up on the revenue side, calling back our gross profit margin and really achieving some very good growth. And we are struggling a bit to recapture our gross margin in France. The team there has some very solid plans. And we believe we can improve our margin through balancing the business and maximizing some of the new market opportunities.

I'd like to finish with talking about three items. The first is to emphasize what I call the one-two punch. And we have the right infrastructure now, and at the same time we are seeing accelerating secular trends. Those two combined are having a tremendous and dramatic effect on us.

Company, by far, need to be more agile and are using more temporary and contract staff. This will be increasing throughout this recovery, because of the slower demand and uncertainty. We believe both of these are positive for our industry and even more positive for us, as we have repositioned ourselves, have a strong infrastructure, and have improved our sales force.

Secondly, throughout 2009 and now into 2010, we have focused our investments in four strategic areas, areas that allow us to leverage the future and take advantage of the opportunities when they present themselves ahead of the curve.

One is, enhancing what we call the Manpower experience, making sure the assessment tools, the intake process, the candidate experience, as well as the entire Manpower experience including the sales process really creates a monetary difference. That's one of the things we've been working on and we're seeing that that's coming through.

During this downturn and into 2010, we have also refined our branding and professional staffing space, as well as our go-to-market strategy. You'll be hearing more about this as we progress through the year, but you can see from our growth achievements in the U.S. where Manpower Professional grew organically at 24% that we're already seeing the benefits of the project that we've been working on.

More will be rolled out through 2010 and actually into 2011.

The third area of strategic investments has been our digital infrastructure, both internally and externally. We are rolling out front office systems that offer much higher productivity ratios, as well as more digital access points through social networking sites as well as our website.

Direct Talent, our own system has been implemented in 24 of our countries and now currently has over 3.6 million people registered, which has reduced job board expense and has reduced the work of our recruiters, as the people entering into our systems are actually more qualified, looking for specific jobs that we have.

The fourth area is new sectors and services, things like RPO, MSP, task-based outsourcing, as well as the government sector and healthcare and our cross-border talent mobility. All of these initiatives are gaining traction and are growing at a fast pace.

In the second quarter, you can see the impact of these initiatives, and we are confident you'll be seeing more of the impact as we move these strategic priorities as we enter the second half of 2010 and roll into 2011.

The third area I want to talk about is our investments in emerging markets. We are currently operating in more countries than any of our competitors with 20 more countries than the closest one. In almost all cases, the countries are at break-even or making money and several are quite profitable.

More importantly, it is setting us up for accelerated future growth. Countries like China, India, Vietnam, Middle-East, Poland, Czech Republic, Romania, Brazil and several other emerging countries have substantial revenue and profit potential.

You can't just enter these countries when you want to, it requires sophisticated licensing agreements. Additionally, the presence on the ground is paying off for us allowing us deeper relationships with governments and better brand presence than our competition.

In summary, we believe the use of our combined Manpower Inc assets, the tested and proven management team and our ability to have the right infrastructure and the right investment priorities make us unique in this industry. We are working diligently and with a sense of urgency to continue to increase the delta between us and our competitors.

You can see some of that in the results for the second quarter and as we move forward into the balance of the year and into 2011, we are confident given that the economy continues to move forward that we will be maximizing any and all of these opportunities.

Thank you and with that we will open it up for questions.

Question-and-Answer Session

Operator

(Operator instructions) Our first question is from Kevin McVeigh with Macquarie.

Kevin McVeigh - Macquarie

Hey Jeff, I wanted to talk a little bit about secular growth here, I mean it definitely seems like the acceleration's been much, much quicker particularly given the uncertain outlook. And I just wanted to understand given that, is the business poised to grow or grow stronger even in a more subdued TDP environment like it seems like we're heading into now, because it seems like you're not seeing much of a slowdown at all when the business has not continued acceleration at this point?

Jeff Joerres

Kevin, I mean we are a little bit in some uncharted water. But I think when we talk to clients and you see what's happening and we and Mike and I have been talking about this for sometime that when we were coming into this upturn, the client had said, "Look, if we were at 5% of our workforce, it's now going to be 15." So in essence that has some flavor of secular trend.

What typically happens is when they kind of got to the ten or 11, the economy was already robust and up and everybody pulled it back into, "Well, we're going to have a hard time finding talent, so what we're going to do is to start hiring."

What we're seeing is, is that they are still committed to that five going to 20 or five now going to 25. And because there is this start-stop, they have really become much more comfortable and sophisticated in using contract labor. So as a percent of the work force, the penetration of the temporary or contract worker, we do believe given this environment's going to go up.

Now when you slow down GDP, there is a couple of things that I look at in there, is what is slowing down GDP. Is it some of the areas actually that aren't affecting our industry, or is it good old fashion industrial production, getting work done, call centers, transaction processing centers, and our view is that that will be slightly less effective as the consumer still is hanging in there a bit, unemployment still an issue.

So what we're saying is that even with a slowing GDP, given the makeup of the GDP within there is we believe that this secular growth will still happen. So we would be disproportionately benefiting from a slower growth environment, and we're seeing it actually in Europe. I mean Germany is up 33% and has been for some time. Now, we've known that Germany wanted to have a more flexible labor force. So they were trying to move from something like one or less than 1% of the workforce working as a temporary to maybe something like two. While this just may happen faster as a result of this uncertainty.

Kevin McVeigh - Macquarie

Frankly, it definitely seems like they are outperforming the market, pretty healthy, is that, do you think, attributable to the tenure of the sales force you have onboard now, or is it client specific?

Jeff Joerres

I feel you could get a little client specific. I don't think we're blasting the market out of the water. It's marginally better and we're proud of that. We kept our infrastructure, didn't do a social plan, our two major competitors do the social plan and cut a lot of their offices out.

We consolidated some that frankly, we probably should have done before. So what we're running with in France is somewhere in the neighborhood of, still nearly a 1,000 offices, a little less than a 1,000 offices. And I think that's making a difference right now.

Operator

Gary Bisbee with Barclays Capital, you may ask your question.

Gary Bisbee - Barclays Capital

You've talked in the past about business sentiment indicators, or surveys, being one of the things you can use to get a sense how things are trending. It seems like a lot of those in the major European countries have pulled back a bit, I guess in the US as well. What's maybe different now than what you've seen in the past, and can you give us the flavor of what the dialogue with the customers is like that allows to you give such strong guidance?

Jeff Joerres

A couple of things, one is we're seeing a bit of a disconnect and there is some choppiness. I mean industrial production in Europe for the most of the quarter was pretty good. If you slowed down a little towards the end, what we have is still an environment where the indicators that were looking at are mixed, but they seem not to be affecting some of the core business. And I'm not saying and nor are we saying they won't be.

We're not putting our head in the sand here. We get guidance that actually had a little bit more over spread to it, which was able to take our current up to yesterday kind of figures that we are getting from multiple countries where we are not seeing any slowdown. And in some cases, actually there was a slight pop-up and saying, okay, if that's true and we can make it through the summer holiday period, we should be in a pretty good shape. But there is a risk to that. There is no doubt about it.

Our clients, there seems to be a bifurcation of what's happening out there. Everybody is reading the paper and there is sovereign debt and there is housing issues, and all these are very real issues. Now when you talk to the core of our client, they are saying our backlog is actually still pretty good. We are still projecting being up 10%, 15%, 20%.

Well, what's happening is, is again I'll go back to the fact that from a secular perspective, we are getting a disproportionate amount. If they are growing at 10%, we might be growing at 20% or 30% within that account because of what they need to do with the workforce.

So I just want to make sure that everybody understands we are not walking into the third quarter thinking this a rose garden. This is still some pretty tough stuff with a lot of uncertainty and bear traps set all over that place.

So we are really looking at making sure that we stay agile. But at the same time, we are looking at the numbers of all our major locations. As they are not slowing down yet, we are giving you the benefit of the doubt. That's what happened. We project kind of on the high side of that and on the low side some of the slowdown. Mike, you are the master on this. Do you want to add any more to that?

Mike Van Handel

No, I think that's right. Given the fact that we're not seeing slowing in our businesses yet, we are not trying to speculate and forecast a real decline in our forward guidance. But yet, we are certainly worried that there are clouds out on the horizon and we've got be aware of those and, as Jeff said, be as agile as possible. So that was kind of the backdrop of how we looked at the third quarter.

Jeff Joerres

We are using a fair amount of temporaries in our business right now.

Gary Bisbee - Barclays Capital

I guess you alluded to this as well, but are you hearing from customers that they plan to keep that at a higher than historical typical level for an extended period, or do you think part of it is just that there is so much uncertainty about the economic outlook that companies just continue to be really hesitant to make full-time hires? I'm trying to put that together with it. It sounded like your perm business actually did pretty well in several areas.

Jeff Joerres

Yes, no doubt. I mean there are still activities going on. What we're seeing is that I don't think there's any massive permanency to this. I think there is just going to be a new watermark which is actually fairly typical from peak-to-peak. You would see a new watermark of penetration of the temporary workforce. We just think it will probably be a little bit higher than anticipated.

We'll still go back to perm. Our perm is up over 50%. Conversions are very strong. Companies who have been now in their ninth month of the expansion and you've got somebody out there whether it be a quality assurance manager or somebody, they are still nervous about losing some of the talent. So they're going to do some hiring.

I think the point that we are making is, is that we think that the staffing part of it, the temporary help part of it will last longer, as evidenced by what is already occurring right now. And based on our lack of visibility and everybody else's lack of visibility for the balance of 2010 and may be into 2011, we think that this trend will continue. Permanent hiring is still there, but a more comfortable and mandatory use of a flexible staffing as a result.

Gary Bisbee - Barclays Capital

And then I guess just one last quick one from me. In terms of the balance sheet, obviously really strong right now. I know you've talked about focusing on the credit ratings in the past. As your profitability seems likely to keep improving here, do you think about getting a little more aggressive with the cash or are you pretty comfortable where things are today?

Mike Van Handel

Clearly, the balance sheet is strong. And as you suggest, we are keenly focused on maintaining our investment-grade rating, which given the recent trends currently that is quite secure I think at this point. But to the extent that we feel we have excess cash at some point, we may look at dividends and share buybacks to get that back to shareholders.

But at this point time, it's not burning a hole in our pocket. We want to make sure we keep our powder if any needs may come up as we go into the future. We also have a debt maturity coming up in 2012 when we may use some of that cash to retire some of that debt and not refinance the whole thing as well.

So that's how we are thinking about it, but we don't have any view that we need to urgently do something with the cash on the balance sheet. I should say that while we're carrying about $553 million of cash, a fair amount of that is structural in nature. So we probably have something like $100 million to $150 million of what I would call Class 5's more available cash.

Operator

Tim McHugh with William Blair & Company, you may ask your question.

Tim McHugh - William Blair & Company

Yes, I wanted to ask about two pieces of the other EMEA section. First Elan, if could you give just a little more color. You said you're starting to see improving trends, but still doesn't seem as strong as the rest of the European sector. And then Germany, given the strength you are seeing there recently, would you consider getting more aggressive in opening more offices or accelerating investments in the region either organically or acquisition-wise?

Jeff Joerres

What we're seeing in Elan is just a lag. In fact, we saw it in the U.S. where Elan actually was putting up some pretty good numbers the first half of last year. So now, we're running against a little of that. We've got a fairly high engineering component in some of those, professional businesses, and we've lost a little of that and some of their major accounts.

Clearly, we're concerned about a number as low as that. But I think as we're looking at the forecast for the balance of the year, we're going to start seeing the corner turn a little on that. But it's something we're paying very close attention to because of the lower growth.

Germany, we are seeing very good. We've got a very good management team there. We actually now have and have for sometime a strong office network, a network that covers both West and East and moved into East early on. We're sitting at about 180 offices. And we think that we have more capacity in those offices. And there may be a little bit more ways to get business done outside than just an office. Would we add a few more here or there, we think that might be illogical.

Acquisitions in Germany, a lot of the companies are public. It's a very expensive proposition even in this part of the cycle. The multiples are 10-plus in many cases. We have decided, as you all know, over the last five years not to participate in that, and that brought down our market share. But I think it's really benefiting us right now. And frankly, return on invested capital may not be as important to you guys as it is to us.

But we are still concerned about that. And when you're paying 10, 12, 14 times, I don't know how we get a good return on that. So we are going to be very cautious and probably not do something in that market from that perspective.

Tim McHugh - William Blair & Company

And then, Mike, can you update us on the integration expenses for COMSYS? I know they came in lower this quarter? Are you pretty much done there or what should we expect for the remainder of the year?

Mike Van Handel

That will continue. Just to summarize, we had about just under $5 million of integration and a little bit of transaction cost come through in the quarter. And amortization of intangibles was $6.9 million. So if we take that out, COMSYS did almost $11 million of EBIT before those items. So really quite a good quarter. We look forward to the second half of the year and we look at the amortization continuing at about a $7 million clip per quarter.

And then the integration cost, I would expect that's going to run about $3.5 million per quarter. And I would expect operationally, they will do a little bit better in each of the quarters in the second half as well. So that really positions them quite well.

We'd be looking at EBIT after all of the integration and amortization costs to be positive in both the third and fourth quarter right now. And as Jeff said earlier, we'd expect COMSYS on a full year basis to be basically EPS-neutral despite $21 million of amortization and integration costs, including all-in. So it's going quite well.

Operator

Paul Ginocchio with Deutsche Bank, you may ask your question.

Paul Ginocchio - Deutsche Bank

If I missed it, just asking about COMSYS gross margins and the availability of staff. Are you seeing any scarcity?

Jeff Joerres

Well, the COMSYS gross margin is kind of tweaking up a little as the market is giving us some more opportunities. We have yet to hit to where we really have a scarcity issue. We put a lot of work into some systems, both digital as well as kind of in the office to make sure that the candidate and the one that we want continue those assignments laid out, are treated in a certain way and are shown a great deal of respect, which we think is paying off.

So we haven't hit any of that crunch yet. Paul, I would suggest that we're probably looking somewhere in the beginning of 2011 is when we're going to have to really make sure that our systems, both digital and office, are finally tuned a bit more than what they are now, because we're going to start soaking up some of that talent pretty quickly.

Paul Ginocchio - Deutsche Bank

If I could sneak one more about Spain and the regulatory changes there, I know it's not a top 10 market for you. But what the opportunity is now with the changes?

Jeff Joerres

Spain is one that we made a decision about seven years ago to do a little less. We still have a very good footprint there, a footprint that is really a national footprint, one of the larger ones we have in Europe in over 100 offices in there.

I think that there has been some legislation that is going back and forth and one that's trying to give a little bit more flexibility to do some things. Our growth rates actually are up massively in Spain. But for full transparency, we're able to win a fairly large account.

So our Spanish operation is probably feeling tons better now today than it did last year in what we were able to do in keeping the infrastructure and then winning some business.

Paul Ginocchio - Deutsche Bank

So, is the full system, the legalization, is not fully in place yet?

Jeff Joerres

That's correct. And we are not quite sure how much of a positive effect that's going to have on us.

Operator

Andrew Steinerman with JPMorgan, you may ask your question.

Andrew Steinerman - JPMorgan

I wanted to ask about the Dutch temporary out market, which shows your flat growth constant currency for Manpower, but that's a big turnaround. This was the last European market of size to go from negative to flat, and the sector numbers have turned positive in the most recent couple of months. And if you just kind of jump into the Netherlands, why did it take so long? Do you think it has legs to it?

Jeff Joerres

Yes, I mean the Dutch market was a little bit more complex in some ways. The way it got hit so hard, I mean as we all know it's a relative small GDP kind of environment and I think it's just based on products and services got hit harder, took a while longer.

I think our team right now is feeling pretty good, and we're making some changes in our office structure that would allow for more visibility and some other things to make that market even more positive for us. We've been looking at that market and have been doing actually quite well in that market for almost a year and half, two years.

Last year we had a very good year in there. And our view is, we had a real focused mission in there. And some of the other players were doing some other things at that time. Our view is that that kind of part is up. We're just going to be good hand-to-hand combat and we think the market is for the balance of this year going to improving on a steady basis.

Operator

Kelly Flynn with Credit Suisse, you may ask your question.

Kelly Flynn - Credit Suisse

Couple questions about Manpower Professional and COMSYS. First on Professional, you said 24% growth. Is that the global number?

Jeff Joerres

No, that was the U.S. number actually.

Kelly Flynn - Credit Suisse

Do you know what it was in Q1?

Jeff Joerres

Q1? It was sitting around at 9% or 10%. I'm going to be off a little but that's about right.

Kelly Flynn - Credit Suisse

Can you go into a little more detail there about kind of what verticals you're seeing strong and acceleration in and any verticals that are lagging?

Jeff Joerres

Sure, so if you look at our focus areas there is three verticals. The verticals would be IT, engineering, finance and accounting. And if you look at the combined organization of MPP, COMSYS as we folded COMSYS into MPP, you're running somewhere in the neighborhood on an annualized basis of 550, some number like that. And IT about 250, 300 maybe a little bit more. 350 in engineering and then a balance of small amount in finance and accounting.

MPP, Manpower Professional actually has a disproportion amount in engineering. And if you recall back a year ago, we were saying some of our very large engineering clients took a big down in the engineers that we were supplying. That's now starting to come back.

So when you look at the overall growth rates, you look at a 24% growth rate in COMSYS that is almost exclusively coming from IT. And you look at basically a low 20's growth rate in Manpower Professional that basically coming from engineering. And finance and accounting is still lagging.

So that's how we would look at it. And we think that if you have got some legs on it for both of those, integration is done, those are now called verticals within the organization. Most of the realistic integration has been done and all of the management positions and who's in what chair is all done.

I think we should be able to have a nice solid year for the rest of year on both those verticals with finance and accounting probably lagging a bit more, just based on what's happening in the industry.

Kelly Flynn - Credit Suisse

And then, just on COMSYS, the prior guidance, I think you said $0.10 accretive pre-amortization, and today you're speaking to basically EPS neutral, post amortization. I just wanted to make sure, has anything changed there as far as your accretion assumptions? Or you're just talking about a different basis?

Jeff Joerres

Yes, I could run the map and do the pre. But clearly I think the fact that we were thinking that it would be $0.10 dilutive all in, now it's basically going to be a push. So effectively, we picked up that $0.10 through the balance of the year. A good part of that is operational in nature, a little bit of that is a little bit lower integration cost.

So when you step back and think about it, one of the things, it actually is doing better than that in some ways in that, what's happening is when we have did the initial dilution, accretion calculation, we weren't accepting our Manpower business outside of COMSYS to be as strong. So with more profits generated outside of COMSYS, now I've got a larger number of shares that I've got to take that business over; so net COMSYS is doing quite well. And we are quite pleased that with all costs in, we're going to be running basically a neutral for the year.

And I would expect, if I just take their EBIT overall for the year which would be the three quarters that we've had them before any of the amortization costs, we'll be running probably some where just north of 6% EBIT before amortization and integration costs.

Kelly Flynn - Credit Suisse

You mentioned I think several key markets where growth was plateauing, and I think you delved into France. But what are the other key markets where you're really seeing that?

Mike Van Handel

I think in a go through, you probably run through most of them. France, as you mentioned. We see things plateauing in the U.S. Germany would be the case as well. Italy would be the case. The U.K.

And to be clear what I'm talking about, for instance, in Germany is plateauing has accelerated up to a 33% growth rate and now it's plateaued there. So it's not like 33% went down to 20%, but it's still sitting at that level; so still a very good growth. And in some cases, the comparable numbers are starting to get a little bit tougher, and we're still holding on to those growth rates which are good.

As we look into the third quarter, our view is that in some of these markets, it may be a little bit more difficult to hold on to these growth rates. We're seeing now as the comparables get a little bit more difficult. So we've considered that a little bit in our guidance, which is why the overall growth rate in Q3 is estimated to fall between 20% and 22%, a little bit lower than the second quarter growth rate. That's in constant currency just for that reason alone. So we are really seeing excellent growth at the moment across all of those geographies.

Operator

T.C. Robillard with Signal Hill, you may ask your question.

T.C. Robillard - Signal Hill

I just wanted to get a little more sense around France and understanding that the trends continue to be strong, and you guys obviously don't have a perfect crystal ball. Given the mix of your business there, where are you looking for signs that things may start to slow down? Are some of the issues and the fringes in Europe starting to impact where you guys have some strength? I'm just trying to get a sense as to where you're monitoring, where we should be monitoring to see if there is in fact any slowdown.

Jeff Joerres

75% of that industry is construction, light industrial. So we look at what's happening with the commercial construction, some of those things, and we're looking at industrial output. The slightly weakening euro definitely helps a little bit on the export basis, definitely helping in Germany.

So we look at those things. And then we get advantage over you, as we can look every week at what's happening inside of some of our largest clients that are using some of those services.

So France historically has been the one that had a fairly strong correlation to GDP. So with comparables and with GDP probably coming down a little in France, we can see that happening, no doubt about it. So we're going to be looking at that; but also how much of that can be made up with a secular trend, which is I'm going to be remaining more flexible, because I've got to worry about what might be next.

So France is I think on a top-line. No doubt it has some uncertainty, but we feel relatively good, especially since we've seen the first couple weeks of July, which has not shown any slowdown at all.

I would say, to change the topic slightly, my personal bigger concern is we got to get our gross margin back. At the end of the day, we need better flow-through. And that's really what we're focusing with the team on is some better flow-through. And that's a very difficult market to do that in, because no one has given up on that.

T.C. Robillard - Signal Hill

And actually that dovetails nicely into my next question, which is on gross margin, and kind of twofold there. One is, will you see gross margin down sequentially, just on a full reported basis? And then secondly, how do you get that up in France? I mean are there easy things to be done here, or is this a situation where you really need to just anniversary these price issues?

Jeff Joerres

Well, I'll let Mike handle the second one. But first one is France one. Anniversarying the price issues to me is Wall Street's peak. At the end of the day, I reset the business and I hate it. So I don't care about when it anniversaries. It just looks better. It still tastes the same.

So what we need to be doing is mixing our business a little differently. We're doing some very good solutions business. Our perm business in France is continuing to do well. We're getting into some of the more specialty professional staffing businesses. There are some law issues that we're going to be very sensitive to and make sure that we follow all of that.

So I think there's a mix issue, but it is a big beast. So you can't just mix with $10 million or $20 million or $100 million or $200 million. You got to get to some kind of scale on that. And the team is working feverishly to get that done. Mike, do you want to handle the other part?

Mike Van Handel

Sure. Your question in terms of sequentially are we expecting gross margin to go lower, and I think there is a little bit of complication with that question. I think first you really want to look at staffing gross margin is being this year, because you got the perm in there that is doing well and actually adding and maybe disguising a little bit what happens on the staffing GP margin.

But in general, we would see our staffing GP margin has been stable. It's not really getting worse at this point in time. What you do have is some seasonal impact. As you go from Q2 to Q3, there's a lot more lower-end student hiring in France. And so that brings the overall GP down a little bit sequentially. But that's really a seasonal issue and not a pricing issue.

So the pricing overall we would say is certainly stable and we're holding our staff and GP margin as it is. As a result, what we're not seeing yet is an improvement. And that's what we're looking is, is for an uptick in that. We've got a number of initiatives and plans in place in France to drive that, and we're working hard in what's a pretty tough market right now to move things up.

T.C. Robillard - Signal Hill

Just so I'm clear, in terms of a reported basis then, you said up slightly year-on-year, but I'm assuming that's just some normal seasonality sequentially on just the reported gross margin.

Mike Van Handel

Yes, T.C., when you're talking reported, just to be clear, you're talking about France specifically?

T.C. Robillard - Signal Hill

I'm talking about total Manpower.

Mike Van Handel

When you look at total link, we would expect overall gross margin to dip going from Q2 to Q3. Year-on-year, Q3 will be up slightly maybe 10 basis points or so. The dip from Q2 to Q3 is primarily due to the declines in Right Management. Again, not a pricing issue, but a seasonal issue. The third quarter is the weakest quarter for Right Management. So when you look on a reported basis, we were at 17.4% in Q2.

Our guidance right now is between 16.8% and 17% for the third quarter. But again, that decline is primarily looking at Right Management and the impact that Right has as a result of lower revenue in the third quarter. And part of that's just because the Right Management business has a much higher GP. So any movement in that can affect the overall reported gross margin.

Operator

Sara Gubins with Bank of America-Merrill Lynch, you may ask your question.

Sara Gubins - Bank of America-Merrill Lynch

Jeff, could you talk about how much visibility you think you might have into changes in the broader business dynamics? I'm just wondering how much of a lead time you get before companies decide to change their hiring decisions.

Jeff Joerres

I think at this point in the cycle, we could probably be looking at two to maybe five weeks. And what we would be seeing is where an account had 100 people and now they've brought it down to 90 and then the week after that they bring it down to 80. And we see that on a consistent basis than we can see that demand whether it be from inventory replenishment or whole host of reasons that gives us.

So I'm really looking at visibility on a macro issue. We're not qualified to do that. So when we're looking at sovereign debt in the housing market, we read a lot about it, we talk a lot about it, but those guys can't even figure it out. What we would be looking at is really orders and our orders being up-ticked or down-ticked during the process, meaning within the two-week fulfillment of that order.

So it's not a lot of visibility. What I find most interesting is when we go to our manufacturing type clients or logistics type clients that have relatively sophisticated ERP systems; they are looking out with their backlog and feeling pretty good about the rest of the third quarter in general. So we use a lot of the input from them to understand what might be the effect of our business.

Sara Gubins - Bank of America-Merrill Lynch

And just one other on pricing. Typically, at what point do you think you could actually start to see pricing improve? And if you could give a little bit more detail about your initiatives in France to try to improve pricing.

Jeff Joerres

Well there's a couple of things; I mean we across the Board, and Mike alluded to it in the prepared remarks, tens of, tens of, tens of millions of dollars we have just let go out the backdoor. So we just said, these were too low. It was a little disappointing that by the time it hits the stairwell somebody else picked it up at that price, but that's the way it goes.

In addition to that, I think in France there is lot of sophistication associated with, when do you put someone out, how long do they go out, have they been out on mission before, you know just really looking and making sure that you are getting the most out of that gross margin. In addition to that we are still working on our SMB business strategy or midpoint strategy, and then mixing it with other services.

So there's going to be no silver bullet in this in France, and frankly there is no silver bullet in other places.

EMEA has put a Recapture GP program together. And it's just a lot of small, detail things that over time add up. And I think we are starting to see that. So when we are looking at pricing power, we have examples that I have up on the wall. But those examples are not big enough to move the needle where we've actually said. Based on changes of requirement, based on what's happening in the marketplace with Talent, we are going to need to be raising prices. We have got a little of that. I think that that would be still something that such a rounding error that shouldn't be counted.

I think it's our ability to whittle off that lower margin business that is just not returning, add additional services to current lower margin business and then maximize the difference between the paid bill, which has some margin capabilities in there, whether it has to do with statutory things or others, and we've just got to get a little bit better at that.

Operator

Jeff Silber with BMO Capital Markets, you may ask your question.

Jeff Silber - BMO Capital Markets

I know there's a lot of uncertainty still out there, but I'm going to ask a glass half/full question. Let's just say we stay in the current kind of environment. What do you need to see before you are going to be starting adding offices? How much excess capacity do you have?

Jeff Joerres

It's always a hard question, because it's, where do you add capacity? But my sense is that if we finish 2010 the way it feels right now, we would be adding offices very few in markets that we feel like should be. And there is another city in Vietnam we're looking at; there's some Western China's things that we were looking at; maybe a few metro markets in the U.S.; couple here or there in emerging markets in Europe. But none of these are offices that we had before. These would be kind of new markets where we might have missed.

But in a round number, I would be surprised that by the end of this year if it stayed the same if we added ten offices. I just don't see it.

Mike Van Handel

Yes, and maybe come at your question there a slightly different way as well, Jeff, I think as we look at office and our network, well, we've consolidated in the market. We really don't feel like we've exited markets that we need to be in. So as we look at the overall marketplace, we think we can run more volume through our existing offices.

Jeff Joerres

Real estate. Right.

Mike Van Handel

Real estate overall, and so as we look at that, as we get back to previous revenue levels we don't anticipate we are going to have the same number of offices. We'll have less offices to amass that level of revenue, as we put more hours through each of the offices.

Jeff Joerres

And why I said real estate, one of the strategies is, is where we had a 3-person office before, we feel as though we can now have a 5-person office and be covering a better geography and more flow of candidates through. So we worked pretty hard at that to make sure that that office is located correctly so that we could maybe add staff without adding real estate.

Operator

Vance Edelson with Morgan Stanley, you may ask your question.

Vance Edelson - Morgan Stanley

You mentioned you're generally taking share. Could you comment on the competitive environment by region? Are there any standout regions where the competition really rolled over during the downturn, and conversely, any regions where competition has remained especially intense?

Jeff Joerres

I don't know when our industry rolls over. If they roll over, they have a knife in their hand when they are rolling over. So it's a competitive environment and it hasn't stopped. As Mike said, there is some stability. I mean, you can only go so low. I mean, there is some crazy stuff out there that it's going to 6% GP. It's pretty hard to go to five, when you've already got yourself at six.

I would say we are concerned about where we are taking market share. And frankly, if we weren't public I wouldn't be announcing what we are doing because I think what happens is, is it just creates a competitive environment that is focused on some of the wrong things, which is market share as opposed to value and some of the pricing.

So we think it will get tough in some areas in Europe. I think in the U.S. there is some toughness, but I would not put it at the level of what we are seeing in some of the major geographies in Europe. Japan still seems to be fairly logical. And Mexico, Argentina are out largest operations down there. Yes, there's price pressure, but not anything great. So I would say, three four countries in Europe, there is a battle going on everyday and it seems to be focused very much on market share gain.

Vance Edelson - Morgan Stanley

And then just following up on an earlier question, some of the industry groups out there have said that small business in the U.S., they seemed to get particularly more pessimistic in June. You've given a good sense of where your customers are today, and that you're cautiously optimistic. Any difference in June, or for that matter July so far versus earlier in the quarter, or put another way, if we were having this call six weeks ago, how would your comments have been different?

Jeff Joerres

I think they'll be about the same. I mean our clients, but we have more than middle and large, not the SMB and I know a lot of SMB clients and they were running in numbers of 60% and 70% and 80% up because they were running their inventories down so far. So I think I would have said the same thing, and I think that data supported the same thing, the public data on ISS data or PMI data, they kind of supported that things were going well.

Now it looks like they're sliding down slightly and we're cognizant of that, but we think that slightly is still enough to push demand for our organization though not push enough demand to make healthier growth of make GDP. And I think that's how we're trying to differentiate it.

Jeff Joerres

Thank you all. As usual if there is any questions, fell free to contact us. Thanks.

Operator

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

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Source: Manpower Inc. Q2 2010 Earnings Call Transcript
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