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ManpowerGroup (NYSE:MAN)

Q2 2011 Earnings Call

July 21, 2011 8:30 am ET

Executives

Jeff Joerres - Chairman, President and CEO

Mike Van Handel - CFO and EVP

Analysts

Sara Gubins - Bank of America/Merrill Lynch

Andrew Steinerman - J.P. Morgan

Gary Bisbee - Barclays Capital

Kelly Flynn - Credit Suisse First Boston

Paul Ginocchio - Deutsche Bank

Paul Condra - BMOCM - U.S.

Tim McHugh - William Blair & Company

Mark Marcon - Robert W. Baird

Kevin McVeigh - Macquarie Capital

Jane Sanford

Operator

[Abrupt Start]

Jeff Joerres

…91% in U.S. dollars, 67% in constant currency. This generated a 100 basis point increase in our operating profit margin to 2.7% and an earning share increase in U.S. Dollars of 118% or 90% in constant currency to $0.87. We were aided a bit by currency but also exceeded what we anticipated in constant currency.

We have experienced a slight plateauing of our revenue in some geographies. This did not happen in all markets. In fact some of the markets didn’t experience any plateauing. The emerging markets of Asia-Pacific remained on a steady trajectory and a very positive trajectory. These markets are experiencing solid, sequential, month-over-month growth trends.

With that, I would like to turn it over to Mike.

Mike Van Handel

Okay. Thanks Jeff. As usual, I will begin making some overall comments on the quarter, followed by a discussion of our segments, a review of our balance sheet and cash flow, then finally our outlook for the third quarter. As Jeff noted our earnings per share for the quarter came in at $0.87 per share or $0.09 better than the midpoint of our guidance.

Currency in the quarter was a favorable impact of $0.11 per share or $0.03 better than our guidance anticipated and acquisitions added $0.01. The remaining $0.05 of out-performance was operational and related specifically to good expense leveraging as we were able to improve productivity and drive more volume through our branch network.

As Jeff mentioned, revenue and gross profit margin was inline with expectations and our effective tax rate of 47.7% is very close to our 48% projection. Our reported incremental operating profit margin was 6.6% in the quarter or more importantly a shade above 10% on a constant currency basis. This drove a 100 basis point year-on-year improvement in operating profit margin for the quarter. For the first half of the year, our operating profit margin is up 90 basis points as we continue to focus on margin expansion, with improved efficiency and productivity.

Our gross profit came in at 17% or 17.1% on an organic basis right inline with forecast. Our gross profit margin continues to be negatively impacted year-on-year from the shift in business mix as our higher margin outplacement business continues to decline from the prior year.

This impact however is moderating as the impact was a negative 30 basis points in the second quarter, compared to a negative 50 basis points in the first quarter. Our temporary staffing business had a favorable impact on overall gross margin of 10 basis points as we have experienced price stability in most markets. While pricing remains extremely competitive, we have found some opportunity for price improvement and have been more selective in tendering for new business.

Our permanent recruitment business was up 40% in the quarter or 25% in constant currency. We realized good growth in permanent recruitment across all segments and it’s now approaching 13% of our overall gross profit margin. Permanent recruitment had a favorable impact on our overall gross margin of 10 basis points.

Now let’s turn to the operating segments. Revenue in the Americas came in at $1.2 billion, an increase of 13% or 12% in constant currency. Operating unit profit came in at $40 million, an increase of 67% in constant currency. The operating unit profit margin improved nicely, up 110 basis points to 3.4% on an improved gross margin as well as improved operating leverage, resulting from tight cost controls.

Our U.S. operation, which represents about two-thirds of the Americas, came in with revenue of $792 million, up 9% over the prior year. Operating unit profit was $27 million, an increase of 85%, while our OUP margin was up significantly to 3.4% from 2% in the prior year. This improvement came from a higher staffing gross margin and a 59% increase in permanent recruitment fees.

Additionally, expenses were well controlled driving good operating leverage. 40% of our businesses comprised of Experis professional business, which was up 10% for the quarter. Within Experis our IT business was up 10% and our finance business was up 3%. Our U.S. Solutions business, which includes RPO and MSP under TAPFIN, was up 29% in the quarter. We continue to see relatively stronger demand for our higher value Experis end solution offerings. U.S. is one of the markets that we did see demand for our services moderate throughout the quarter.

We began the quarter with 11% revenue growth in April, which moderated to 4% growth in June. We are expecting to see this growth rate improve later in the year along with the improved forecast for a stronger economy in the second half.

Revenue growth in Mexico remained strong in the quarter up 19% in constant currency with operating unit profit growth in excess of 20%. Argentina also experienced strong revenue growth of 30% in constant currency. However, this was primarily due to inflation as volumes were flat year-on-year.

Revenues in Southern Europe exceeded expectations coming in at $2.2 billion, an increase of 30% or 15% in constant currency. This resulted in almost a doubling of operating unit profit to $50 million and an operating unit profit margin of 2.3% up 80 basis points over the prior year. This margin expansion was due to strong operating leverage as we were able to manage the expanding revenue growth with only a small increase in operating personnel.

Within Southern Europe, France is the largest operating unit representing 75% of the segment. French revenues exceeded expectations coming in at $1.6 billion, an increase of 31% or 15% in constant currency. French revenue growth was strong in the quarter despite more difficult comparisons over the prior year. We did however see growth moderate a bit during the quarter with revenue growth in June coming in at 10% in constant currency.

Our gross profit margin in France was down against the prior year primarily as a result of the reduction in payroll tax subsidies, which was effective January of this year. As you will recall from our last quarter’s call this subsidy reduction negatively impacted our French gross margin by about 90 basis points on a gross basis.

Beginning with the first quarter we began putting a number of pricing initiatives in place focused on recovering this loss payroll tax subsidy through higher bill rates to our clients. These initiatives have been effective in reducing the impact of the subsidy change. In the second quarter we recovered over three-fourths of the lost subsidy and continue to expect to recover all of the impact to the payroll tax subsidy change by the fourth quarter of this year.

Our Italian operations also saw good growth in the quarter, up 33% or up 18% in constant currency. The gross margin in the quarter was stable and expenses were well controlled resulting in strong operating unit profit margin expansion of 120 basis points to 6.5%.

Revenue in Northern Europe was $1.6 billion, an increase of 24% or 9% in constant currency. Operating unit profit in the quarter was $56 million, double as of the prior year, up 72% in constant currency. Operating unit profit margin expense was very good, up 130 basis points to 3.6%. This was the result of improved gross margin with higher staffing gross margin as well as a 25% increase in permanent recruitment fees. Expenses also entirely controlled delivering good operating leverage to bottom-line.

Revenue growth in Northern Europe moderated through the quarter as prior year comparable numbers became more difficult, while we still experienced good growth of 10% to 13% in constant currency across most geographies including the Nordics, the UK and Germany that growth rate was a decline from what we saw on the first quarter. The Netherlands continues to be a difficult market with revenue growth of 3% in constant currency.

Revenue in our Asia-Pacific Middle-East segment grew 31% or 16% in constant currency to $663 million. This included acquisitions in China and India which contributed to our overall growth rate. On an organic constant currency basis revenue was up 9%. Operating unit profit for the quarter was $90 million, up 59% or 42% in constant currency.

Our OUP margin grew 50 basis points to 2.8%. This margin expansion was primarily due to operating leverage as we were able to improve productivity and tight expense controls. The operating unit profit margin was not significantly impacted by the acquisitions.

The Asia-Pacific Middle-East, Japan represents over 40% of revenue. Our Japan business contracted 1% in constant currency and recovered extraordinarily well from the tragic events in March. Our Japan team continues to drive higher value solutions business which grew 40% in the quarter and now represents almost 20% of the Japanese business. This growth in higher value solutions business drove an increase in operating unit profit margin of 100 basis points in the quarter.

Australia is the second, Australia is the second largest operation in this segment representing over one-fourth of segment revenues. Australia’s revenue growth remained strong in the quarter, up 20% in constant currency. Growth across emerging markets in the region also remained strong with China and India leading the way. Revenue of Right Management came in at $85 million down 14% or down 20% in constant currency.

Despite this decline Right was able to produce an operating unit profit $3 million for a margin of 3.3%. This revenue decline of Right was due to further declines in the countercyclical Outplacement business which was down 32% compared to the prior year. While we seem to be approaching the bottom for Outplacement fees, we still saw a modest sequential decline from the first quarter of 5%.

With the further declines we have seen in the Outplacement business we will be reducing our cost structure to better align with revenue levels. Right, Talent and Management business which represents a third of all revenues within Right continues to experience good demand with revenues of 14% in constant currency in the quarter.

Now let’s turn to the cash flow and balance sheet. Free cash flow defined as cash from operations less capital expenditures for the first half of the year was a use of $220 million compared to a use of $94 million in the prior year. Of this usage $171 million relates to the first quarter and $49 million relates to the second quarter.

In the first half of the year, we added $323 million of networking capital to the balance sheet. This increase primarily relates to an increase in accounts receivable since year-end due to higher revenues and a slightly higher DSO resulting from shifts in geographical and business mix. Tax payments and incentive payments are also higher in the first half of this year compared to the prior year.

During the quarter we repurchased 306,000 shares of common stock for $18.8 million leaving us 2.9 million shares authorized for repurchase under our current program. Our cash balance at quarter-end was $544 million and total debt was $759 million resulting in net debt of $215 million.

The balance sheet remains strong throughout the quarter with total debt as a percentage of total capitalization of 23% at quarter-end. At quarter-end our outstanding debt was primarily comprised of $300 million Euro note due in June 2012 and a 200 million Euro note due June of 2013. There were no borrowings outstanding under a $400 million revolving credit agreement.

The last thing I would like to review is our third quarter outlook. As you know changes in the economy can have a significant impact on demand for our services with the direction of the economy in question is so much challenging to provide a forecast for the third quarter. Rather than speculate on where the economic may be headed, we have taken the view that economic activity will be similar to what we experienced in June and the first part of July.

With this as the backdrop, we are estimating constant currency revenue growth of 8% to 10%. Based upon foreign exchange rates this would imply reported dollar revenue growth of 16% to 18%.

From a segment standpoint we expect each of our geographies to achieve organic growth similar to our consolidated growth range with the Americas being touch-softer and Southern Europe being a touch-stronger. In the case of Asia-Pacific Middle East, the second quarter acquisitions will add about 7% growth to the third quarter brining their overall growth to the mid-teens.

We expect Right Management to be down year-on-year although the rate of decline is moderating and should range between 9% and 11% in constant currency. We expect our gross profit margin to range between 16.5% and 16.7% down 40 basis points sequentially at the mid-point which is a typical impact on gross margins from seasonal changes in business mix during the summer months.

Our operating profit margin should range from 2.6% to 2.8% or an expansion of operating profit between 40 and 60 basis points. As a result of continued operating leverage and improved productivity. This assumes continued strong incremental margins above 8% in constant currency.

We are estimating our effective tax rate to be 46.5% which includes the French business tax similar to prior year. This results in earnings per share ranging from $0.90 to a $1 per share which includes a favorable impact from currency of $0.10.

With that I’ll now turn it back to Jeff.

Jeff Joerres

Thanks Mike. As you can tell we did have a very strong quarter. Our revenue was solid, profitability very good and we achieved solid operational leverage. Our team did extremely well in maximizing all three of those areas while at the same time continuing to drive the brand and positioning for us for an even stronger future.

I am confident that we are still in the early game regarding what we do and how we handle operational leverage and margin expansion. Additionally, we are just beginning to reap the benefits of our branding, professional resources and emerging markets initiatives.

Our new branding continues to be well received and in fact gaining momentum. ManpowerGroup is now identified clearly with our clients, press and within the organization which clearly identifies our commitment to the innovative workforce solutions and our suite of unique offerings.

Experis is well seeded where the countries have been certified and ManpowerGroup solutions have grown nicely. Our clients and [prospects] get it. They understand the simplicity of it, the fact that we’ve organized ourselves from a brand perspective and internally present to succeed. They are not confused with multiple brands and brands that are competing with each together or brands that are just local, that have nowhere else to go or not draw from a knowledge base that is well connected within a single entity. Our identification of the human age and our supporting insight has clearly positioned us as the far leader. This positioning is driving a much better level of conversations and we are prepared to respond with our unique suite of offerings.

This is aiding our financials and continues to solidify ManpowerGroup as the leader of innovative workforce solutions. Our gross profit mix is improving and we are confident as we continue down the path that this will continue to increase.

ManpowerGroup Solutions is growing nicely at 21% in constant currency, primarily driven by our success in recruitment process outsourcing where we added 31 additional contracts and continued success at MSP to tap them, where we are winning additional contracts which is substantially adding to our annualized dollar amount under management and an important component to the ManpowerGroup Solutions is our drive towards talent-based outsourcing, where there is a large component relying on human capital, the ability to access, retain and assess these employees, to deploy them is our expertise and it is based on outcome pricing. This service is going extremely well for us.

Experis is growing quite well also, with gross profit growth of 15%, with certification of an additional four countries to the Experis model, is being well received by both candidates and clients and resonating throughout the organization.

Additionally, we added strength to Experis in India with the acquisition of WDC. Our Right Management business continues to be challenged by the sluggishness of the outplacement business. We are feeling the result of companies having downsized as far as they can and there is not much excess talent. At the same time, as Mike mentioned, our talent management business grew at 14% in constant currency. The calling card to the entire ManpowerGroup is Manpower and it’s an exciting time for Manpower. We are seeing growth in all areas, in fact one third of our number of people out on assignment come from the emerging markets now which gives us great confidence as we move into the future.

As you may have seen we announced some acquisitions in China which further our position and expand our footprint. Additionally we are experiencing secular growth. Of course this is masked a bit by the soft patch or plateauing that we are going through right now, but in general terms secular growth is good and is strong.

We know from conversations with our clients that there is an intention to increase their percent of flexible workforce, to increase their agility and align their agility of one of their inputs with their talent input. This is happening throughout the world, not just in the mature markets.

This has been triangulated if you will from a different source which was recent, which is from a recent McKenzie study for the economy that works: Job creation and America’s future. McKenzie conducted a study of how company's work forces will change over the next five years. It is clear to see that companies of all sizes are focused on flexibility and different work models. In fact 57% of the companies interviewed said they would use more temporary and contract workers. We are confident that we will be able to continue to create operational leverage and profitability through this so called soft patch. With that we would like to open it up for questions.

Question-and-Answer-Session

Operator

Okay. At this time we do have a first question from Sarah Gubins, your line is open.

Sara Gubins – Bank of America/Merrill Lynch

A couple of questions, first could you talk a bit more about what you are seeing in pricing and how that varies by region and by line of service?

Jeff Joerres

Sure I’ll take that, Mike, you can add some cover to it. You know, pricing, you know, is as you pointed out is quite regional and even within regions there are some real pricing differences.

I would say for the most part, pricing has become stabilized. It’s still aggressive in some parts of Europe and then in certain accounts, so in the U.S., for example, our book of business in the U.S. in the second quarter on an annualized run rate business, we took out about $50 million to $70 million of business where we just didn’t renew it. We just said the price is too low. So there is still some of that.

But for the most part I would say our large accounts, our understanding that there’s not much lower, you can go in some of these if they want value and on the other side, which we’ve talked about previously, our SMB business, we are starting to see some pricing and in the U.S., we actually saw a bump-up in some of our gross margin and some of that contributed to from the SMB side.

Across Asia and in Europe I would say, a few European markets, France still remains to be competitive. UK is a difficult market, the team is doing well there. Asia, Japan is even with all of the discontinuity there from the natural disasters, pricing has been fairly reasonable as well. Mike, anything to add to that?

Mike Van Handel

Yeah I think all I would say is from an overall perspective, I look at the quarters being favorable from a staffing gross profit margin perspective. Overall, we’re up 10 basis points organically on staffing gross margin or I should say that staffing gross margin improvement helped the overall gross margin by 10 basis points. So I think that’s positive and when you go across the markets as Jeff did, a number of markets are showing improvements, U.S. on the staffing gross margin as to our number of markets within Northern Europe.

Southern Europe is down a little bit from a staffing gross margin, but that really has to do with the French payroll tax subsidy that we’ve been working to pass on and we’ve had some good success with that, but we are not fully recovered a 100%, so that’s putting some overall pressure on so. I think from an overall perspective, I feel pretty good about where pricing is generally, certainly still competitive, no question about it. But we are seeing some signs where we are able to move a little bit more positively on.

Sara Gubins – Bank of America/Merrill Lynch

Mike, if I am running the numbers right, but when we plug in the revenue in EBIT forecast guidance, we come out a little bit lower then what the guidance range is, so I am wondering are you assuming any share repurchases or something else that maybe below the line?

Mike Van Handel

I am not assuming any share repurchases at all, I suppose that certainly my model works from top to bottom, so some, yes sure, maybe offline we can go through it. I can, may be we can figure out where some of the differences are, but we should be, it should fall all the way through.

Sara Gubins – Bank of America/Merrill Lynch

Okay. Then just very last quick question. Jeff there was an interview with you in The Wall Street Journal earlier this week and at the end, in the article there was a quote from you saying that every recovery from this point on will be a jobless recovery. Could you give us some more contacts and color on that comment?

Jeff Joerres

Sure, there is some pretty compelling data that goes back, probably somewhere in the neighborhood of 40 years of how many month it is taken to get back the lost jobs, we still haven’t done that. And if you just extrapolate out, it will be the longer than the one before. There is some rationale behind that. One of them is us meaning that our amount of services are used more in a flexible, still counted in the BLF numbers, but you end up doing what we’ve seen over the last few which is some very high months for staffing and some lower ones as it goes up and down.

The primary reason forward is very quite, is quite simple. Companies are very sophisticated now and demand proceeds hiring whereas before in previous recoveries, hiring was done in an anticipated way. This is part of what’s driving the secular trend. Demand higher, see the demand go down, you can turn the volume down which is what we were seeing in the end of June. There were listening news all the volume plateauing a little, they turn it down but they can turn it up just as quickly. So I think it is all part of the bigger picture of how secular trends are, are positive to us but may be little shaky and harder for economist to figure out in total.

Sara Gubins – Bank of America/Merrill Lynch

Thank you.

Operator

Our next question comes from Andrew Steinerman. Your line is open.

Andrew Steinerman - J.P. Morgan

Hi Mike and Jeff. My question is about the rational levels of real GDP growth. Let’s talk about the U.S. and temporary help. My feeling actually were historically if you do the correlation, you need about 2.75% real GDP growth, which we didn’t have in the U.S. in the first half of the year but still temporary help growth and manpower in the market was pretty good. What you guys make of it? Has threshold levels of necessary real GDP growth to drive temporary health growth in the U.S. and that Manpower changed?

Jeff Joerres

Yes. Well, there is a couple of things in you being a scientist that you are. You may have squared just a little differently than we have but over a period of time we looked at GDP in the U.S. not to be as good of a correlation to our business as you would see for example in France, where it has a lot of light industrial component to manufacturing component.

I also think within what you are seeing is that we are seeing some subtle shifts in what makes up the drivers of GDP and where our business is focused in it. So, so as a result and how companies are using us, so you have a lot of factors that are being pushed into that number and creating a lot of noise in any kind correlation that is determined.

But the most interesting is that when you look at and here from our client and talk about their demand, and most of them are fairly confident that demand is going to be jagged but on an overall basis across a six-month period or a year period and the jaggedness is still a left to right upward trend.

Mike Van Handel

And I think Andrew which you well know, I think it also depends on where you are in the cycle when you get we can grow at a higher rate on a lower GDP early in the cycle just because we are just coming out and that growth is being fed by flexible labor versus permanent labor as well. So, I think that the other component that influences somewhat which I know you are aware off.

Andrew Steinerman - J.P. Morgan

Well Mike I agree with that in the first case but we have already anniversaried the first year of temporary health growth in U.S..

Mike Van Handel

Right. So we have slowest recovery ever. So what is happening is when people are saying and I heard this views of baseball analogy, wow, it looks like you guys are in sixth or seventh inning. And keep saying that we are closer to the second inning which has taken a long time. There is a lot of hits and foul balls and strikes and balls being thrown. It’s a long innings and therefore it will be a little choppier but we are really at the beginning of this still, just based on how we see this unfold. How much longer perm need kicked in and ticked in, not in the 6th or 9th month and closer to 18th month after some of the recovery.

Andrew Steinerman - J.P. Morgan

Perfect thank you so much.

Operator

Thank you. Our next question comes from the line of Gary Bisbee. Your line is open.

Jeff Joerres

Hi Gary.

Gary Bisbee - Barclays Capital

Hi guys. Good morning. I have noticed the number, I have guess that’s a flurry of press releases since the last time we spoke of regarding China and India. Can you just give us an update on what the footprint looks like now per forma for all these deals?

I know that the markets are growing fast but where are you in terms of the build out of your footprint? What services you are offering? How many markets you cover? Or any type of data on that will be helpful.

Jeff Joerres

Sure I will give you some. But without being overly coy, I will be straightforward. We consider it to be a competitive advantage on that, I am not going to give you everything we got.

Gary Bisbee - Barclays Capital

Okay.

Jeff Joerres

But the fact is the press releases that came up in China can actually be summarized in a very succinct way. One was to really aid in our movement and where we see a lot of business, which is in the western part of China. We did not have a footprint and no one has a footprint other than local people.

We have the ability to have national licensing. We are the only ones that can do that. So we can move into the western part where there is a lot of government detention in moving business into those so-called Tier-II cities, those small ones around five million people. So that was one of the ones that we have done.

The other one moved us into Guangdong, Guangzhou City, Guangdong Province, which has really put us into a very heavy way in light manufacturing and grey color and in the Chinese economy, great color, quality shirts managers, higher level skilled CAD operators, TLC shop or control-unit operators, they are making more money than four-year graduated engineers. And as a result, we saw that as important and added almost a 100,000 people daily on assignment through that acquisition.

The third one was a relationship that we establish with one of the largest ministries, which is the Ministry of Industry and Information Technology, MIIT and then we set up a separate underneath called [Mind Tap], which is a talent exchange, over bringing in higher level talent from around the world to supplement, to grow primarily in the northern part of China.

When you couple that with our search, which we had been the largest search provider and it goes all the way to high-end CFO, all the way into kind of manager level. It really gives us a complete footprints of over a 100 locations spread across China with a good foundation for us to move forward.

India, little different, we've already had it, India, is we still have some more work to do in India but the acquisition we made there with an organization called MBC, WDC. WDC is a high end IP contracting firm located in five different cities across India, it gives us a good footprint and also helps us in as we move into in a stronger way into countries like Malaysia, Thailand and even potentially Indonesia by using WDC as a mechanism to move in that area.

We still have a little bit more work to do in all of those, we are very bullish on our emerging market footprint including other countries and believe just on math alone wage inflation and the number of people we have OUP is a good deal. I would also add that all of our relationships that we have, we have 100% management control.

In other words we are not doing this as a junior partner where somebody else is calling the shots, we own or manage all of these entities that we got involved in.

Gary Bisbee - Barclays Capital

And then I guess just the follow-up to that is you know obviously I think we all understand the top line growth there, how do you think longer term about the potential profitability about these businesses, can they be the same, can they be higher or lower wages going to beat them being lower over time?

Jeff Joerres

Well you have to really look at it in a couple of different ways. From a profitability perspective, we are very bullish on profitability. Would you have to and do we have to accept in some cases a lower EBITDA percent?

The answer is yes, but at the end of the day while we have some goals out there and we are firm on those goals, we are in this to make money and make money over the long run and they all make money. China churned in the month of June some very serious profit.

If you just look at that regional loan understanding what’s happening in Japan, you can see the numbers are being driven by those emerging markets in a profitable way. So if you consider wage inflation between 12% and 17%, multiply that out plus getting some margin expansion on the pricing side, it’s a pretty impressive story.

Gary Bisbee - Barclays Capital

Great, thank you.

Operator

Thank you. And our next question comes from Kelly Flynn. Your line is open.

Kelly Flynn - Credit Suisse First Boston

Thanks. So my question relates to what you said about your U.S. growth. I think you said it was 4% in June; what is the Americas constant currency guidance imply for Q3 U.S. growth?

Mike Van Handel

Yeah, we’ve been looking for mid single-digit within the U.S. in the third quarter right now.

Kelly Flynn - Credit Suisse First Boston

Okay.

Mike Van Handel

So we’re just taking kind of what we saw in June and part of really July and extrapolating and not trying to make any prediction that the economy is coming back which of course some economist expect to -- we will see an improve to the quarter, but also not of course expecting it to further trend downward as well.

Kelly Flynn - Credit Suisse First Boston

All right. And I guess I wanted you to elaborate on that point because I think you did say in the comments that you’re expecting an improvement in the second half and I mean I think you even mentioned kind of some of the economic projections. So you guys usually don’t kind of parting off okay like that so I guess if you could just elaborate on what you’re seeing may be what you saw on July which you just mentioned or you know what are you seeing out there that makes you think it’s not going to decelerate further?

Jeffrey Joerres

So let me answer that in two ways. One is, we’ve been quite consistent in and I think it works well for us which is when it comes to how we put out our guidance for the next quarter we try not to be an economist and say half way through we are going to start to see this.

We basically take a trend line that we’ve been seeing in the last three-four weeks and say, alright let’s use that instead of some consensus numbers coming out from economists. So that’s how we’re looking at our estimates.

The comments we made is when we talk to our clients, look at what got it into where we are right now in this soft patch which is nothing overly systemic and then doing a lot of research on our own it says that there is a quite good opportunity and absolute general consensus that this is going to play out a little differently as we move into the latter part of the year.

So that was clearly more of as a total comment as opposed to a guidance comment that we actually believe that, we’re not banking on it, because we’ll run our business that way and we are not estimating our consensus or our next quarter that way.

Kelly Flynn - Credit Suisse First Boston

But you – I mean you saw 4% in June, you are looking for mid single-digit. Can you tell us what you have seen or what you will -- I guess what you have seen so far in July, it must have accelerated?

Jeffrey Joerres

Look July, with the big problems you have then in July and August it appears so much noise in there. You get the 4th of July, you’ve got other things; what we saw so far in July does not make us feel as though what we have delivered from a guidance perspective is incorrect.

Kelly Flynn - Credit Suisse First Boston

Okay. That’s fair. You guys have done a good job with guidance. So alright thanks a lot, I appreciate it.

Operator

Thank you. Our next question comes from Paul Ginocchio. Your line is open.

Paul Ginocchio - Deutsche Bank

Thank you. The key to start about what are you seeing and maybe in U.S. auto and maybe other markets where auto came off of [boil] and is that in your guidance to pick up an auto or are you still expecting someone to do it. And then just can you remind us again what’s in the U.S. where the Hire Act is in the back half of the year, your guidance was on the gross margin it’s a little bit below of what I thought, may be I was looking at kind of Hire Act. Thanks.

Jeffrey Joerres

Okay, Paul. On the auto one, the auto as we have described before and I think we still feel pretty comfortable with where that it is in the U.S. are clearly some effect, less effect than what we would have seen in France, Sweden and Southern Germany. We do believe and I think there is some pretty good data out there that the manufacturing ability coming out of Japan is improving.

The immediate effect did not occur. There was kind of a mid effect where it occurred more and now many of the supply chain seems to be getting back online. We see that as potential upside, but in the U.S. that upside is still on the margin, because we don’t do a lot of business in that area. It should have more of a positive effect in Sweden, Southern Germany where we do have a fair amount of auto and then in France as well where PSA and Renault are still clients of ours. Mike if you want to handle the Hire Act?

Mike Van Handel

So in terms of Hire Act if you allow me the liberty to round a little bit; in the second quarter the U.S. a year ago had $1 million benefit, third quarter $2.5 million and fourth quarter $3.5 million. So about a $7 million benefit for the year and of course Paul as you know that benefit went away going into this year. So we are up against that from a comparable standpoint.

That has a little bit of impact in terms of year-on-year gross margins, but also just point out typically we get a seasonable dip in overall gross margins, just given the mix of business because similar lower margin, lower gross margin business has a bigger third quarter such as France whereas some of the other higher margin businesses particularly in Europe a little bit slower third quarter and so the mix overall shifts and that does bring it down a little bit usually from a sequential standpoint so I think that’s part of what you are seeing as well.

Paul Ginocchio - Deutsche Bank

Okay thanks Mike. If Jeff I can go back to the auto, have you – so in your guidance you forecast a pick up in auto if you kind of left that as upside?

Jeffrey Joerres

I would like to say there is a – and it would be too much of refinement for us to put in so you could call it upside but I think if you look at our numbers it might take it from 0.5 to 0.7 so its more of a rounding up on opportunity than a full movement of anything substantial.

Paul Ginocchio - Deutsche Bank

Thank you.

Operator

Thanks you. Our next question comes from Jeffrey Silber. Your line is open.

Jeffrey Joerres

Hey, Jeff.

Paul Condra - BMOCM - U.S.

Hey it’s actually Paul Condra for Jeff. I just wanted to ask about the market you talked they were plateauing; I wonder if you could just talk about which was more specifically and may be what your strategy is addressing those markets in terms of adding headcount and looking at acquisitions and things like that? Thanks.

Jeffrey Joerres

Well from a plateauing market perspective, you know you have seen some public data out there we will update in the U.S. and the Dutch market is not so much plateauing as it’s just not still kind of performing at the level it has in the past and the French numbers are kind of evening out.

We look at all of those and I think we look more closely at you know what is our sales strategy, how are we managing our efficiency and productivity. I would say acquisitions do not enter in as a way to solve or look at any of the plateauing issues. Those plateaus are ones that as we have talked about we believe are kind of plateaus are stepped, they are not a rollover opportunity, and again we are not economist, but hearing from our clients and most of them are kind of hitting the pause button a bit and just waiting to see what will happen with so many of the forces that’s on their businesses right now. So, some of our larger markets are in that kind of plateau mode, if you will and the data that you are reading would be generally transferable to us, with the exception of the dramatic differences between us and the BLF at this point, I mean those numbers are a bit confusing to us.

Paul Condra - BMOCM - U.S.

And just in terms of headcount?

Jeff Joerres

Headcount, we adjust the best we can as things move up and down. We, like other companies, are expert users in temporary help. So we know how to do that and we can flex up and down but for the most part, those cost of the plateauing is one or two months. You can very unproductive by pulling people out and in. We will continue to monitor it. We will look at making sure that if we had hiring in the near future in some of those plateauing areas, we would probably delay that, again, like other companies.

Paul Condra - BMOCM - U.S.

If I can just ask one more, I just wondered about your perm trend in the U.S., how do those look intra-quarter and then can you give us anymore detail about the current quarter?

Mike Van Handel

In terms of overall, U.S. perm business was quite good up, perm GP was up 59%. So, I call it almost 60% in the quarter, so, quite strong all the way through. First quarter more than doubled on the perm side, a part of that, we had a little bit of that coming through on some of COMPSYS business that we had as well, but overall, it was strong. I would say strong throughout the quarter, it tends to be choppy, a little bit choppy month-to-month, so I will refrain from giving individual months.

Jeff Joerres

And there is seasonality to perm too.

Mike Van Handel

And there's a little bit of seasonality as well. But as we look to third quarter, our outlook for perm businesses is good in the U.S. as well, so the comparable start to get a little bit higher. So the growth rate may dip a little bit, but not substantially and still looking for quite good performance from a perm perspective in the U.S. in Q3.

Jeff Joerres

And rolled into how we present to the Street is that we include RPO within our perm numbers and that as I said is going quite well, it’s in our Solutions business, but we are securing a large number on a quarterly basis and those don't have when you secure them, they don't have immediate effects. You set the business up and it rolls into the future, so Mike you may want to just comment a bit. I know you've talked about it before, but kind of where we were in last peak on perm and its percent in GP and where we are now and where we see that going.

Mike Van Handle

Sure, sure. So last peak in 2008, our overall perm as a percentage of GP was just under 13% and we were close to that level already today and as Jeff did mention part of that has to do with the RPO line of business that we brought on which has been quite successful.

And so as we look through this cycle, we do think there's more opportunity to grow that perm business and part of that is the opportunity in the market, but also part of it is the capability that we've built up over the last recovery cycle.

If you go back to 2002, 2001 the last recession, other than a few markets we are doing very little perm recruitment business. Well during the last recovery phase, we really built that capability up globally. It was legalized in France in 2005, so really are much better positioned coming out of this recession to capitalize on that opportunity. So our view is in this cycle we would likely see perm as a percentage of the overall mix, probably move up into the upper teens area as a percentage of the overall mix would be our estimate at this point in time.

Operator

Thank you. Our next question comes from Tim McHugh.

Tim McHugh - William Blair & Company

First, I want to ask about Germany. If you can give a little more color there, the growth seems to have slowed quite a bit. Is that market driven or are you seeing anything specific out there?

Jeff Joerres

Yeah, I would say in general terms it is not market driven. We are performing right now below market from a topline perspective in Germany. We’ve looked at that, we’re taking a hard look at our pricing because if you look underneath the covers, our gross margin is actually going up or very steady.

So we have to make sure that while we’re trading a beautiful percent of – increased percent on the EBITDA line, we have to make sure that we are also approaching the market in the appropriate way. So we’ve been looking at that for sometime. Our German team is very capable, well aware of this, but I would say that that is not a market trend that’s awesome. We may have to be a little less selective to actually grow the business and make more on the bottom because those margins in Germany, gross margins and that margins are pretty large. So we have some wiggle room in there.

Tim McHugh - William Blair & Company

Okay, and then your color about the plateauing, is there a soft patch? Are you seeing clients pullback or pull in temporary staffing in all or is it simply that there’s someone pausing activity growth relative to what you might have otherwise seen?

Jeff Joerres

Yes, it’s more of a pause. It’s instead of sequentially adding, it’s staying the same, maybe letting in, in some cases a little run out – they’ll try to delay an extra week or so or two weeks before they add someone on.

So this isn’t a, you know we had a 1000 people added location, that went down to 500, but what we were seeing was month on month or sequential where they had 500, they added another 50, then they added another 60. They are more into of a plateau mode and part of it, that more than a part a large part of it is they are seeing their demand plateau a bit. They are reading the same newspapers and they just don’t want to get out ahead of their skis.

Tim McHugh - William Blair & Company

And is it any different by service line, the plateauing you saw late in the quarter, is it more an industrial versus grey collar or white collar?

Jeff Joerres

Yeah. Absolutely, you would see light industrial has the ability to dial up, dial down a little bit faster. On the professional re-sourcing side, IT, Engineering and the others, they are in a project typically, so that has a longer leg time if you will to adjust from an organization perspective.

So we didn’t really see that in the professional re-sourcing business anywhere near the amount that we saw in light industrial or in segments of our office. Other segments of our office have good growth, but where you are doing back office operation, call centers, those are some form if you will of light industrial in a way and then it is based on demand and they ebb and flow with the demand.

Operator

Our next question comes from Mark Marcon. Your line is open.

Mark Marcon - Robert W. Baird

I would like to ask a few questions. First on Italy, what are you seeing there Mike in just in terms of you know the feedback from the field, the given the recency of the Sovereign Debt Crisis and now the austerity measures that are coming through and how are you thinking about that?

Mike Van Handle

Yeah, I’ll start and I am sure Jeff will add, I mean overall revenue growth continues to be quite good, 18% in the quarter So, I think what we are seeing at street level, we are really not seeing an impact at this point at all. So I think the economy certainly is still trying to churn its way out and move out of its funk a little bit in a little way.

So we certainly have ways to go but over the last several quarters, we continue to see some good growth on the staffing side and that continues to evolve and develop and we have been able to drive that with some good operating leverage on to the bottom line with some good margins as well. So, so I think despite all the headline news, I think at least at street level today it has worked its way into what we are seeing in the business.

Mark Marcon - Robert W. Baird

Great. And that’s, that’s been ongoing. So seems like there is not much of a relationship between GDP growth and what you are posting over there just due to the strong secular trends?

Jeff Joerres

Yeah. The only relationship ends up, being, they crash into the wall, then it will trickle down pretty fast but business is occurring and then there is stuff happening up there with depth in social programs. It’s causing angst but some of that angst is actually driving, that uncertainty is driving business to our industry.

Mark Marcon - Robert W. Baird

Right. Then can you talk a little bit about the IT business in the U.S. and you know, the impacts that you are seeing in terms of the change in the brand name and how that’s going to evolve in terms of the positioning and how you are thinking about the growth there?

Jeff Joerres

Well, it’s gone very well. And U.S. was the first one to go through the rebranding and clients as I stated in my prepared remarks really appreciated and as a result we are getting much more conversation and the global footprints makes a big difference where they wanted to do business in three, four countries as well as here in the U.S. to be able to talk about the consistency that we can deliver is critical. Everything has to do with the book of business in some ways and our Experis, some IT business has and some banking end of it. So the banking has been a little bit of [wobble]. They are still using us quite a bit but I’d say that took a little bit of normal, normal growth then we would see which would be exceeding our man power or commercial staffing side of it.

And we are starting to see what Mike talked about growth in Experis finance which is old if you will Jefferson Wells and the ability for us to leverage that from an infrastructure perspective but more importantly leverage it from a sales perspective as we go in as a team and cover the waterfront much more.

So I would say that the business feels quite healthy right now. We had been running almost eighteen months now, well over market so we are anniversarying some harder numbers, which makes a little bit of difference to us. But we still feel confident that we will be at or above market.

Mark Marcon - Robert W. Baird

Okay great and then last question, we saw the news that Ranstadt and I’m also a fan. Wondering how you are thinking about that in terms of any sort of potential implications, strategically both on a global basis and then in particular in the U.S. are there potential to take advantage of may be some disruptions there?

Jeff Joerres

Our kind of statement on that is Spherion is a good company and Ranstadt’s a good company and we had to compete against two and now we have to compete against one that is going through disruption.

So we will be approaching the market very hard in that area, from a global footprint perspective mathematically no doubt launched out in closer foot print but having flags planted in countries is part of having a team kind of approach of a business in cohesive way with technology as well as virtual teams and therefore, we will continue to look at expanding our area in that, which we have all of that implemented and installed.

So, our view is we are competing with one less company right now.

Mark Marcon - Robert W. Baird

Great, thank you.

Operator

Thank you and our next question comes from Kevin McVeigh. Your line is open.

Kevin McVeigh - Macquarie Capital

Great, thanks. Hey, Jeff, you did a real nice job on the trailing GDP, and baseball analogy. As you think about where we are in the recovery right now, do you still think we are early or transitioning in kind of a mid-cycle right now, just to and obviously it’s been muted, but just kind of where do you think we are at this point in the cycle?

Jeff Joerres

I am hesitating a bit because you are asking a question that’s above my pay grade. Because there is a whole bunch of very serious economists that are looking at this and when you have a financial, when you have a crisis that is caused by a financial meltdown as we had in here and you go back in history and look at all the ones that have been caused on that, their recovery to get back to any sense of a normal recovery is at least two to two and half years.

So we are in the recovery now. We have been in one but we haven’t got into [sea] level yet to get the other parts of the recovery, mergers, acquisitions happening in a different way, new product inventions.

So, this slow-out was frustrating and whipsawing us back and forth. I think we are going to look back and say, hey it’s just what the doctor ordered and two, it makes this recovery longer, I mean, if you look at some of the housing data, we probably have still 18 to 24 months inventory. So, we move that out. We move some of our banking and finance issues out, you may find actually the recovery feels more normal 18 months to two years from now when consumers have increased, which they are doing, they are increasing their savings on a monthly basis.

So I am optimistic that this one is painful because it gives us so many head fix in so many different directions, but we as an economy, a U.S. economy is still in early parts of recovery particularly when you compare us to the recovery of job market recovery and there's some very good data on this.

And we are well behind the job market recovery of Germany and they did that through some different kind of incentives, well behind the UK. So our job recovery is lagging other countries and I believe it has to do with these additional weights that we have on, on our economy that once we shake will get into more of a second part of the recovery that looks more normal.

Operator

And our last question comes from [Jane Sanford].

Jane Sanford

Just sticking on that topic really quickly, I was curious with your comment about peak perm as a percentage of total getting to upper teens, is your take that there's sort of a pent-up demand right now for people interested in potentially moving jobs, is this really sort of a voluntary turnover build up that could drive that, is that how we should be thinking about that?

Jeff Joerres

I think it’s two things. One there is a massive secular change. If you look at companies wanting to be agile, part of agility is not having recruiters, because you can turn off your [stick in] for hiring, but you still have 30 or 40 or a 100 or 200 recruiters in your company. They want us to have that. So part of it is, is a secular trend where more of the recruiting, different forms from contingent to regular to RPO is shifting to us, so that's one.

The other is that is there a pent up demand, you bet there is a pent-up demand, there is just not enough demand for companies to be more robust in their hiring other than very selective industries, like healthcare which require a longer training cycle and has less of an opportunity pool of people.

My sense is that there is and Right Management did a survey that said 84% of all people working for companies right now, don’t like their current employer and will move at the first opportunity. The problem is that everybody said that.

So you’re not necessarily moving to a better environment and there’s more to less. We are seeing mobility start to be a little bit more accepted and we’re doing a fair amount of that within the perm, but my sense is, is the perm while we’re up you know nearly 60% in the U.S., perm has not hit its stride yet, as companies are still being pretty hesitant on hiring.

Okay. Thanks all, as usual, if there’s any more questions, Mike is available for any one-on-ones. Thank you.

Operator

Thank you and that concludes today’s conference call. You may all disconnect at this time.

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