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Executives

Jeff Joerres – Chairman and CEO

Mike Van Handel – CFO

Analysts

Tim McHugh – William Blair

Mark Marcon – RW Baird

Kelly Flynn – Credit Suisse

Paul Ginocchio – Deutsche Bank

Sara Gubins – BofA Merrill Lynch

Randle Reece – Avondale Partners

James Samford – Citigroup

Gary Bisbee – Barclays Capital

Paul Condra – BMO Capital Markets

Molly McGarrett – J.P. Morgan

ManpowerGroup (MAN) Q3 2011 Earnings Conference Call October 21, 2011 9:30 AM ET

Operator

Welcome to ManpowerGroup’s Third Quarter Earnings Conference Call.

At this time, all lines have been placed on a listen-only mode. (Operator Instructions).

I’d now like to turn the call over to your Chairman and CEO, Mr. Jeff Joerres. Sir, you may begin.

Jeff Joerres

Good morning and welcome to the third quarter 2011 conference call. With me this morning is Mike Van Handel, our Chief Financial Officer. I’ll go through the high-level results of the third quarter. Mike will then spend some time on the segment detail as well as the balance sheet and the outlook for the fourth quarter and full year.

Before we move into the call, I’d like to have Mike 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 might differ materially from those projected in the forward-looking statements. Additional information concerning factors that could cause actual results to materially differ from those in the forward-looking statements can be found in the company's annual report on Form 10-K and in the other Securities and Exchange Commission filings of the company, which information is incorporated herein by reference.

Jeff Joerres

Thanks Mike. The third quarter was a very solid quarter for us. We expected to earn between $0.90 and $1, we had earnings per share of $0.97. Given the uneven economic environment that we experienced during the third quarter, the team around the world did a very nice job to achieve this result.

Our revenue for the quarter was $5.8 billion, a 16% increase in US dollars and a 9% in constant currency at the midpoint of our guidance. Our gross margin was 16.5%, which was in our guidance range. We were able to substantially leverage the 9% revenue growth. And our increased operating profit went to a $158 million, a 34% increase in constant currency, which yielded a 2.7% operating profit margin or a 50-basis point improvement over a year-ago. Our net earnings for the quarter was $80 million and our earnings per share was $0.97.

With that overview, I’d like to turn over to Mike to delve into the details. Mike.

Mike Van Handel

Okay, thanks Jeff. I will begin today by making some comments on the quarter, followed by a discussion of our segments, and then a review of our balance sheet and cash flow. Finally, I’ll have a comment on our outlook for the fourth quarter and give some initial thoughts for the first quarter of next year.

As Jeff noted, our earnings per share for the quarter came in at $0.97, just above the midpoint of our guidance. This included an $0.08 favorable currency impact which is slightly below our $0.10 estimate. While the average Euro rate for the quarter was as expected, some of the other European currencies such as the pound were weaker than expected.

Our constant currency revenue was up 9%, right in line with expectations, with each operating segment falling within the range of expectations with the exception of Right Management, which was slightly weaker than expectations. Our second quarter acquisitions in China and India added about 1% to our growth rates. So our organic constant currency growth was 8%.

Our operating profit margin was up 50 basis points to 2.7%, also in line with expectations as we were able to tie the control cost and drive productivity throughout our office network. That resulted in very strong incremental operating profit margin of 9% on a constant currency basis or 6% on a reported basis. Included in interest and other expenses in the quarter is a $1.7 million charge for foreign exchange losses primarily related to intercompany balances. This was a result of a significant movement in currency exchange rates during the quarter.

Our income tax rate for the quarter came in at 45.9% to slightly below our estimates. As a reminder, this now includes the business tax in France. Excluding the business tax, our tax rate was at 36.1%.

Our gross profit margin came in at 16.5% compared to 16.9% in the prior year. Our overall gross profit margin continues to be impacted by the decline in the higher margin outplacement business which negatively impacted our gross margin by 20 basis points in the quarter. While the impact was negative in the quarter is becoming less as we see the outplacement business stabilized on a year-on-year basis.

Our staffing GP margin declined by 30 basis points year-on-year due to a number of factors: in the US, we had payroll tax credits related to Hire Act last year. This accounted for almost 10 basis points to the decline.

In the French market, we have raising prices to offset the impact of lower payroll tax subsidies. While this has been successful, we have not yet fully recovered all of our subsidiaries. This also negatively impacted our gross margin in the quarter by 10 basis points. Additionally, we are seeing stronger growth from our lower gross margin light industrial key accounts at this stage of the cycle. Overall, we are finding the pricing environment to be stable and we are keenly focused on improving gross margin. In some markets we are exiting some lower gross margin business; we’re replacing it with higher gross margin business.

Our permanent recruitment business favorably impacted gross margin by 20 basis points. In the quarter, we achieved a constant currency increase of 21% in permanent recruitment fees. While the year-on-year growth rate has moderated some from the second quarter which was up 25% in constant currency, this is primarily attributable to more difficult prior-year comparable numbers. Overall, we are still seeing good activity in the permanent recruitment market. For the quarter, our permanent recruitment gross profit was 12% of the overall gross profit.

Now, let’s review the operating segments. Starting with the Americas, revenue came in at $1.2 billion, an increase of 9% or 8% in constant currency. Operating unit profit increased 25% in constant currency to $43 million. The OUP margin expanded 40 basis points which was due to strong growth in permanent recruitment, up 61% in constant currency and strong SG&A leveraging.

Our US operation which comprises just over two-thirds of the Americas segment, achieved revenues of $829 million, up 4%, and OUP of $32 million, up 24%. Within in the US, we saw a year-on-year revenue growth in each month of the quarter with averaged daily staffing revenue in July of 5% and average daily staffing revenue in September up 2%.

Among our product offerings we saw the greatest growth within our higher value professional and solutions offerings, which now represents 45% of our US revenues. Our experienced professional business which is comprised of IT, engineering and finance was up 7%, and our solutions business grew by 19%.

Our US gross profit margin was above prior year, even though the prior year gross margin benefited from the Hire Act credits and lower state unemployment taxes. This is due to successful price increases and in some cases disengaging from low emerging business. The gross margin also benefited from strong growth in permanent recruitment fees which were up 57% in constant currency. The RPO component of these fees was up 69%.

The expansion of the gross profit margin, along with strong expense management resulted in an operating unit profit increase of 24% to $32 million. This represents an OUP margin expansion of 70 basis points to 2.9%.

Our Mexico operation continues to deliver a very strong performance with revenues up 19% and operating unit profit up 20% in constant currency. During the quarter, we saw Mexico’s averaged daily revenue growth improve in July, however moderated in September to 14%.

Revenue growth in Argentina also remained strong at 27% on a constant currency basis. This is primarily due to inflation, as our early volume was slightly down against prior year.

Revenue in Southern Europe came in about as expected at $2.2 billion, an increase of 19% in constant currency or 9% in US dollars. Operating unit profit grew 27% or 17% in constant currency to $50 million. This represents an improvement in OUP margin of 20 basis points to 2.3%. The operating profit margin expansion was due to strong expense leveraging as the gross profit margin was down in the prior year due to change in business mix and lower payroll tax subsidies.

In Southern Europe, France represents about three quarters of a segment. Revenue in France was up 18% or 8% in constant currency to $1.7 billion. Average daily staffing revenue growth for France was fairly stable throughout the quarter. However, weekly growth trends have moderated to the mid single digits in recent weeks.

Our French gross margin was down from the prior year due to stronger growth from our lower margin key accounts and lower payroll tax subsidies. Our efforts to pass on the impact of the lower payroll tax subsidies through price increases continues to be successful and we believe we will pass on the majority by the end of the year. As part of our efforts to continue to improve gross margin and operating unit profit margins of France, we intend to continue conversations with our clients to better align pricing with the value of our services. This likely will result in us exiting some lower margin business over the next several quarters which we look to replace with higher margin business.

Permanent recruitment fees in France were down slightly from the prior year primarily as a result of the winding down of the full employee contract. Excluding the impact of full employee, permanent recruitment fees showed growth of 14%, but not quite as strong as a 24% we saw in the second quarter. SG&A expenses were well controlled and increased only 1% over the prior year. This SG&A leveraging offset the decline in the gross profit margin resulting in OUP growth in the quarter.

Our Italian operation continues to perform quite well despite all the negative headline news. Revenues in the quarter came in at $321 million, an increase of 25% or 14% in constant currency. Gross margins were stable and expenses were tightly controlled, resulting in very good operating unit profit margin expansion of a 150 basis points to 5.9%.

Revenue growth in Northern Europe was in line with expectations growing 17% or 9% in constant currency to $1.6 billion. Operating unit profit was very strong, up 58% or 47% in constant currency at $63 million. This represents an OUP margin of 3.9% or an increase of 100 basis points. This margin expansion was entirely attributable to exceptional cost control and SG&A leveraging as expenses were slightly below the prior year in constant currency. Permanent recruitment fees remained strong in the quarter, up 33% or up 23% in constant currency.

Our revenue growth was healthy across Northern Europe segment. We did see some moderation in the revenue growth trend from the second quarter in most of our markets. This moderating growth trend continued into the first few weeks of the fourth quarter. Within North Europe, the Nordic continues to be one of the stronger markets with Sweden and Norway delivering constant currency growth of 12% and 11%.

We also saw a slightly higher growth in the Manpower UK business, which was up 15% in constant currency. While the UK market remains difficult and is somewhat impacted by cuts in the public sector, we’ve been able to pickup market share through strong execution. Our UK operating unit profit margin continues to expand with operating unit profit growth of 31% in the quarter. Growth in our Elan IT business was 7% in constant currency, which reflects growth of 2% in the UK and stronger growth across mainly in Europe of 14%.

Germany, Netherlands and Belgium, all grew in the low-to-mid single digits, but delivered very strong operating unit profit growth are in good price discipline and SG&A leverage. Operating unit profit margin increased a 170 basis points in both Germany and the Netherlands.

Our Asia Pacific and Middle East segment had a very strong revenue and profit performance in the quarter. Revenues were up 26% or 15% in constant currency to $701 million. This revenue growth includes acquisitions made in the second quarter in both China and in India. Excluding the acquisitions, revenues were up 6% on an organic constant currency basis. Operating unit profit in the segment came in at $22 million, an increase of 64% or 51% in constant currency. This represents an operating profit margin improvement of 70 basis points to 3.1%. This improvement was driven by higher organic gross profit margins and good expense leveraging. The operating unit profit margin was not impacted by the acquisitions.

For the Asia Pacific and Middle East segment, Japan is our largest operation with 43% of the revenue in the quarter. Our Japan revenue was flat in constant currency, but up 10% in US dollars through the strength of the Yen. Similar to last quarter, we continue to see some contraction in the staffing market in Japan. We were able to offset this contraction with strong growth in our higher value ManpowerGroup Solutions business. Our Japan team has done an excellent job working with our clients to identify progressive solutions to the complex human resource needs. Our solutions business in Japan represents over 20% of the overall mix and grew 34% in the quarter.

We saw growth in the Australian markets moderate to 10% in the quarter, following the strong growth of 20% in the second quarter. The balance of this segment reported constant currency growth of 50% or 14% on an organic constant currency basis, similar to what we saw in the second quarter. We have seen the strongest growth in China and India, where China is growing over 70% organically and India is growing about 10% organically.

Revenue of Right Management came in at $77 million, which is down 9% or down 14% in constant currency. This decline was due to slowing in the outplacement business which was down 22% in constant currency. Right’s talent management business which currently represents almost 40% of the mix continues to see growth since revenue is up 4% in constant currency. The third quarter is always Right’s seasonally low quarter which resulted in a $2 million loss. We are currently in the process of realigning our delivery networking cost structure with the current revenue levels. We expect this will result in reorganization charges in the fourth quarter which I’ll discuss in a few minutes.

Now, let’s turn to the cash flow and balance sheet. Free cash flow defined as cash from operations less capital expenditures for the quarter was a positive $100 million compared to a slight use in the prior year. On a nine-month year-to-date basis, the free cash flow was a usage of a $119 million compared to $98 million in the prior year. This greater use of cash for the nine months period primarily relates to higher income tax payments and a slightly higher DSO compared to the prior year.

Our DSO for the third quarter was 61 days compared to 59 days the prior year for an increase of two days. This increase primarily reflects the stronger growth in the larger key accounts that typically have longer payment terms.

During the quarter we also repurchased 618,000 shares for $24 million, bringing our year-to-date repurchases to 923,000 shares for $43 million. As of quarter-end, we have 2.3 million shares authorized for repurchase under our current program.

Our balance sheet at quarter-end was very strong with good liquidity. Our cash balance at quarter-end was $563 million and our total debt was $703 million, bringing our net debt balance to $140 million or $75 million less than the prior quarter. This resulted in a total debt to capitalization of 22%.

As of quarter-end, our outstanding debt balance of $703 million was primarily comprised of two Euro notes totaling EUR500 million or $668 million. The first of these Euro notes becomes due in June of 2012 and we intend to refinance in the public debt markets or through our revolving credit agreement.

In early October, we replaced our $400 million revolving credit agreement with a new $800 million five-year credit facility. Under the new facility, borrowings are at LIBOR plus a 150 basis points or under 2% given the current LIBOR rates. The new revolver also requires us to comply with certain financial covenants over the covenants under the new facility provide us with greater flexibility than under the old facility.

The last thing I’d like to cover is our outlook for the fourth quarter and provide some initial thoughts on the first quarter of next year. As we have been discussing our clients are cautious in this weaker macroeconomic environment, but we are still seeing growth over the prior year and demand for our services.

For the fourth quarter, we anticipate constant currency revenue growth to range from 5% to 7%, which would imply a reported dollar revenue growth of 7% to 9%. We expect to see continued growth in the Americas and Europe with constant currency revenue growth in the mid single digits. Revenue growth in Asia Pacific and Middle East is expected to be in the low double digits in constant currency. However, this includes the acquisitions made earlier in the year. So on an organic basis, we are expecting growth in the low-to-mid single digits due to the stagnate market in Japan.

Our Right Management business is expected to be up sequentially but still down than prior year between 8% to 10%.

We expect our gross profit margin to improve sequentially by about 50 basis points, which is the typical seasonal uplift. This would result in a gross profit margin ranging from 16.9% to 17.1%. Our operating profit margin is expected to range between 2.5% to 2.7%, reflecting in an expansion of above 40 basis points on the prior year after adjusting the prior year numbers for nonrecurring items. While we are still getting good operating margin expansion in the fourth quarter is somewhat in the year-to-date expansion of 60 basis points as a result of less opportunity for operating leverage with the lower revenue growth rate.

We are estimating our tax rate to be 46%, resulting in earnings per share before our reorganization cost of $0.85 to $0.95 per share, which includes a favorable currency impact of $0.03 per share.

During the fourth quarter, we are anticipating a charge for reorganization cost of between $16 million and $22 million before income tax benefit. This will range between $0.15 and $0.20 on a per share basis. The reorganization cost primarily relate to office closure costs and severance payments as we look to realign our cost structure within the Right Management business and optimize our delivery of professional services as we certify our offices on the Experis brand.

As we look to the first quarter of next year, we anticipate a continuation of the current soft economic environment, which will likely result in revenue and gross profit growth in the low-to-mid single digits. We are focused on tight cost controls, which should result in some expansion of operating profit margins.

With that, let me turn things back to Jeff.

Jeff Joerres

Thank you, Mike. We did have a very solid quarter. A quarter that has shown that in a difficult economy, we still have a lot of opportunity to create operating leverage. Revenue growth of 9% and earnings per share growth of over 40% is a good indication that as we continue to grow, we will continue to create operational leverage. Our clients across the world are clearly looking for more alternatives, increased agility and flexibility. Our industry clearly is the answer in the way we are organized and our offerings as well as what we are able to do in country and globally make us the most attractive in the industry.

We’ve been able to substantially grow our solutions business with an annual run rate of over $1 billion. We’re the largest provider at NSP and RPO, and we have a large talent based outsourcing business where we do outcome based pricing. It is becoming ever more popular this company has looked to us to take on more responsibility, using our expertise and our suite of services to help them win but also create more leverage and margin opportunity for us. Our branding as updated last quarter continues to resonate and gets stronger and stronger.

We continued to launch additional Experis certified countries, bringing us to nearly 20 by the end of this year. We are focused on driving the market and growing Experis to over $5 billion in revenue over the next three years. Our emerging markets continue to do well with China growing over 70% before acquisitions. Our Borderless Talent Solution which facilitates the movement of people from one country to another is a great driver of gross margin and is a very well accepted and lead service that we have within the emerging markets.

No doubt the economies will continue to be choppy. There are too many potholes yet to be filled in across the world, but as those are filled in or not, we are confident that our strategy is intact and that our execution is getting better and better. We continue to address the gross margin in our core staffing business through creating more value. But also ID selecting clients.

Year-to-date we have walked away from in excess of $200 million on an annualized basis of existing business throughout the world that we determined the margin was too low. This has then been repeated and must be repeated as we get and secure more small, medium-size businesses. And also, secure more business in the ManpowerGroup Solution space. We are taking share in many of our locations, but we are not doing it at the expense of price. In fact, we are doing it because of the value we offer our clients.

With that, we’d like to open it up for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). Our first question comes from Tim McHugh. Your line is open. And please state your company.

Tim McHugh – William Blair

Yes. William Blair. First I wanted to ask if you can talk a little bit more about the UK. You talked about strong execution there, but the growth was much stronger than I would have expected. Can you just elaborate a little bit more on what you’re doing there to grow faster than the market?

Jeff Joerres

Hi Tim, Jeff. Yes, of course. It’s actually been a continued story. So if you were to look back about – probably almost two years now, where we’ve been outperforming that market. And those who follow very closely know that it’s quite a difficult market from a margin perspective, and then as you mentioned most recently from a revenue or a turnover perspective.

We did some major changes in our organization about four years ago and we’re still reaping the benefits of that. So our ability to have a better suite of solutions but also a better mix of clients has really improved our performance there. And we believe that we know we’re well above the market and have a sense that for some time we will be. We also have another proxy within the UK market, which would be our Brook Street brand. And our Brook Street brand is probably following a bit more of the market and we’re looking at making sure that we make the appropriate changes there so that we can get the same growth that what we are getting out of the Manpower brand in the UK. But I would chalk it up to reorganization done a while ago, good execution, and a great balance book of business. Mike do you have anything to add to that?

Mike Van Handel

No. That’s right. We’ve got a strong team there and they’re executing very well.

Tim McHugh – William Blair

Okay. And then, Mike, you gave a little bit of comments about Q1 and the revenue growth, but your – I wanted to ask about the second part of your comment, which was, you said you think you can still expand margins a little bit even with kind of low single digit to mid single digit growth beyond just Q1. But I guess if we thought about 2012 and 2013, how should we think about margin expansion relative to revenue growth if it’s in the mid single digits versus low single digits or high single digits, kind of what type of expansion can you achieve?

Mike Van Handel

Sure. Well, that clearly is always the objective is trying to continue – continuing getting our operating profit margins up and towards our overall target of 4%. So that’s what we’re focused on. Clearly, it gets more difficult if the top line growth comes down. But yes, as I said in my comments, we would still look to achieve some operating margin expansion if we’re in the mid single digits. Clearly not what we’ve seen – this last quarter, we picked up 50 basis points and in the fourth quarter we’re looking to pickup something like 40 basis points. So we certainly have seen good expansion this year.

I think if we see a little bit slower growth next year, we’re not going to see quite that operating margin expansion, but we will see – do look to see some. It will depend a little bit upon what’s happening underneath and by that I mean if you have some countries are putting up some growth, but then you have got other countries that are actually contracting that delevering and some of the countries could impact the overall margin expansion picture. So it will depend a little bit about how things come, but we’re focused on that, and we’re thinking we’re likely going to be in a slower growth period. So we’re careful on costs and at the same time we are doing a lot of work as you’ve heard in terms of remixing our business, getting more professional, more solutions business within that mix, that should also help the overall margin profile as well.

Tim McHugh – William Blair

Okay, great. Thank you.

Operator

Our next question comes from Mark Marcon. Your line is open. And please state your company name.

Mark Marcon – RW Baird

RW Baird. Good morning, Mike and Jeff. I was wondering could you just give a little bit more color with regards to the monthly trends in four major markets, the US, France, Germany, and Italy.

Mike Van Handel

Sure Mark, we can certainly do that. I guess it’s – as you look at the US, I would say things were fairly stable on a year-on-year growth rate in July and August, and then we also – we saw a little bit of tail-off a little bit in September. As we got into October, we saw a little bit for their slowing as well, but we’re still seeing positive growth within the US market. I think one of the important factors within the US market is, we are trading out some revenue growth for some margin at this stage, so we couldn’t in fact be running a little bit behind market, but that’s a constant decision. We are looking to replace some of our lower margin business with some higher margin business.

Jeff Joerres

And I would add to that that this is the most aggressive we’ve been in the last two quarters and particularly this quarter, because we’ve been able to mix the business with some of the solutions business, so we’ve gotten much more aggressive in going to clients who would prefer to have as clients, but have said, “You know what, we’re just not going to do it at this rate, how can we make sure that we do the right thing to get it out at a better rate or to move on.” So this quarter we were quite aggressive on that as well. So that affected the trends a bit, but you also then see the US came in at 3.9% operating margins for the quarter, which you’re going to start to see some of the effects of that kind of trade up. Sorry Mike.

Mike Van Handel

Yes, yes. No, good. In the case of France, July and September were both up in terms of average daily revenue about 9%. August stepped down a little bit to 7%. I wouldn’t make too much of that just because of the August holiday period there and how that can move the numbers around a little bit. But we did see the last few weeks – early October, we did see things tail-off a little bit within the French market as well in terms of year-on-year growth. In the case of Italy, which is – really did quite nicely in the quarter, up 14% overall revenue wise, we saw about 13% growth in July, that’s one up a little bit in August and then it came down a little bit to about 12% in September, and we are seeing the first few weeks in October a little bit weaker but still good growth.

Jeff Joerres

Still double digits.

Mike Van Handel

And then in the case of Germany, there we saw revenue started a little bit stronger in July, up about 6% in July and then tail-off a little bit as we made our ways through the quarter to bring in the full quarter growth of, I think it was about 4% overall for the quarter. Actually, and I guess, it was 3%, I’m sorry.

Jeff Joerres

I think the general theme is we had a little bit of a choppy July which falls in a lot of what you’ve seen in the external market. August even though season low got a little bit better. September started to plateau. While we’ve seen recently is just that plateauing with a little bit more of – has come of nothing dramatic. But I think you can now just look at those four countries and where we have guided as we get into the fourth quarter and why we have guided the fourth quarter the way we have.

Mark Marcon – RW Baird

In terms of Germany, do you sense it’s more of being selective, because Jeff I’m hearing you – it sounds like a recurring theme in terms of really focusing on selecting the right clients and offering the right solutions and positioning yourself for the clients that truly value all of the services and the higher value-added services that you provide. Is that what’s going on in Germany, or is the German market also slowing?

Jeff Joerres

I think that the answer is a bit more of a multipart to that for us. We are maintaining and have a pretty solid view of what we want from a gross margin perspective. We’ve seen that come down slightly, but we’ve been able to hold that up. The German market also is suffering dramatically from the lack of skills and talent. It probably has the most dramatic effect.

In fact, there has been some recent writings in the just last two weeks and have talked about the industry being governed down a bit by being able to not to find the right talent to put on to an assignment. And then the third area is we have more work to do as a company there. At the end of the day, we’re not as sharp as we need to be. I’m very confident with the team we have there, but we’ve got some work to do. So I would say all three of those factors kind of end up with the result that Mike talked about in the trend. I think it’s a little different within what you would see in the Dutch market.

In the Dutch market, we are seeing more – a bit more of a slowdown. Some there would say that it’s just a matter of time before the government announces they’ve dipped into a recession. And the Dutch market for us we’re back on market and maybe a little bit above market. But it’s a market that’s a little sluggish right now and never really got on its feet coming out of this little brief period we had coming out of 2009 and into 2010. That market I would say is the one that feels more squishy actually than Germany right now.

Mark Marcon – RW Baird

Right. And then can you just – just last question. Can you talk a little bit about the expected savings on the Right Management charges?

Mike Van Handel

Mark, I think I’m going to just hold-off on that till next quarter. I mean certainly we have some ballpark figures and some ideas in terms of where that’s going to go and how that should play out. But in terms of specifics, I think it’d be probably be best for me to wait until we actually release that next quarter and how that’s going to lay in. But suffice it to say, we do expect we are going to get savings next year and some of the restructuring charges that we take in the fourth quarter, no question.

Jeff Joerres

And I want to add a little to that. The savings are something that we had in mind for a long time and much of those savings actually move around and with our brand strategy as we at ManpowerGroup we’re trying to make sure we consolidate some back offices, do the right things from being client facing, look at our real estate footprint where the brands now have a much closer look together, some of them can be co-domiciled and it has still maintained very strong brand presence. So all of these things – it’s – I should say not all, but so many of them were actually in place prior to any kind of sluggishness that we’re seeing. So we’ve got a very robust plan to make sure that those brands get stronger and stronger, but at the same time kind of non-client phasing expenses if you will, become much more efficient.

Mark Marcon – RW Baird

Great. Thank you very much.

Operator

Our next question comes from Kelly Flynn. Your line is open. Please state your company.

Kelly Flynn - Credit Suisse

Thanks. I’m from Credit Suisse and thank you. My question relates to the comments you made about light industrial I think in the early part of the call about that slowing. Can you get into more detail on that? Specifically is that comment applied with the US relative to other verticals in the US, or is that more reflective of, I guess the kind of mix shift in your business relating to other regions?

Mike Van Handel

I think, Kelly, when you look at light industrial, it’s – clearly in our industry follows pretty close to PMI and where the overall production and manufacturing is going. And as I know you follow pretty closely, the US is hanging just above 50 and Europe is bouncing around right below 50. So clearly we – demand for our services has been impacted by that.

When you look at the different verticals and sectors that we’re in, the French market is more of a light industrial market and that one held pretty good, up pretty good through September and it’s still holding okay in October, despite more I guess a little bit weaker macro trends overall. But we were seeing it come off a little bit. In the US, what we’ve seen is, we’re still seeing some growth in light industrial business overall. That said, in and office business is actually a little bit weaker than light industrial, but it has been coming off a little bit as that PMI data has weakened a little bit as well. So that’s kind of the overall picture.

Jeff Joerres

And I would also say that what we’re seeing which is no surprise, in light industrial, they have gotten quick. So – and what I mean by that is the agility that companies have as they see their backlog maybe climbing or they see some additional data, they’re trimming off relatively quickly. That doesn’t mean we’re losing assignments or people out on assignments, we’re seeing a little bit slower growth. We’re also seeing shorter assignments.

And the reason that organizations or companies want shorter assignments and that’s not just an US phenomenon, that’s across the Western Europe as well is it just hedges their best. So we’re seeing good secular trend, more positive trends that we’ve seen in the past in light industrial. And if we can get any kind of relief and actually get any kind of pull again with product, we’re going to see that bounce back pretty quickly, because most of our companies we’re dealing with they’re running it as thin as they can run it right now, and they’re just waiting for a little bit more demand that come through the system.

Kelly Flynn - Credit Suisse

Okay. Can you just sort of the same question for professionals in particular IT versus financial in the US as well as Northern Europe kind of pick out – pick a part that trends there a little bit.

Jeff Joerres

The trends actually have been relatively consistent. What we have been seeing for the last three quarters is that, IT has more energy behind it as companies continue to drive application development to increase efficiency and productivity within their organizations. We in the US is just a little kind of in a side, our numbers actually look quite positive and we continue to do quite well. We’ve had a couple of large banks that have trimmed a few of their projects. So even with that, we’re showing some good growth.

But I would say, IT whether it’d be in China and India, Japan, UK, Germany, those would be the main ones, Sweden, actually are by the far the biggest drivers and continue to have good outlooks. But recurring theme is we’re also seeing a bit more churn in the professional. So you clearly finish your assignment that you’re on or your engagement, but the ones that we’re getting now instead of maybe being six months or three months and it’s an agility strategy by the clients.

Engineering did start to feel some life in the middle of the quarter and that just has to do maybe with more of our book of business than the others. And then on the finance area, we’ve now integrated the finance into Experis and it’s going quite well. Our largest finance really comes in US market as well as the UK market. Both of those have a little bit more positive to them than they’ve had before, but they’re lagging the other two verticals.

Kelly Flynn - Credit Suisse

Okay. Can I just ask one more – I was struck by what you said about Italy, I think you said despite the headlines you’re seeing strength and then you’ve got into some detail. Jeff, could you just make kind of a high-level comment on that? I mean do you think that the slowdown in your business is lagging the headlines, are you implying that the headlines are over blowing the weakness?

Jeff Joerres

Well, clearly the headlines are over blowing the weakness. But I would also say that the headlines are extremely macro in nature. And I think this is the biggest thing that we’re challenged with as an industry, as a company, and maybe I don’t want to get into suicidal issues, but it’s a pretty big deal. And that is, we’re talking about sovereign debt and focusing on Greece and looking at what’s going to come out on the Sunday meeting, and then extrapolating into Italy and Spain. These are issues that maybe depending on the economist a year away, 18 months away, two years away. So they’re talking about if we continue down this path, this is what will eventually happen and it’s clearly affecting the banks and it’s clearly taking a lot of attention as it should be, but that is not affecting buying habits on the ground today.

So the question is, is does the macro meet the micro, and the way it does that as if nothing gets done. And I don’t have high hopes for Sunday, and it’s not because they’re not working, you can’t solve this one little get together. So I think this will be solved in pieces. So when you’re seeing and we see double-digit growth in Italy, it actually makes sense to me, because on the ground there is some concern on the macro issues, but business is happening, midsize manufacturers would dominate Northern Italy still continued to hang in there. The question is, is as we get closer to the macro meeting the micro are some of these problem solved. And if so, I think we continue to feel pretty good in Italy. If not, then Italy would be affected and more along the lines of the headlines as opposed to what you’re seeing now.

Kelly Flynn - Credit Suisse

Okay. Thank you so much.

Jeff Joerres

Yes.

Operator

Our next question comes from Paul Ginocchio. Your line is open. And please state your company.

Paul Ginocchio – Deutsche Bank

Hi, it’s Deutsche Bank. Your perm growth both in the US and Europe seems like it’s very stable. I think it was 59% in the second quarter, 57% in the third for the US. I think you had said it’s 25% in the second and 23% in constant currency in the third. Almost no deceleration. Could you maybe talk to – is that share gains, is the actual perm market in both markets still that strong or is it something else going on that we’re missing. Thanks.

Jeff Joerres

Thanks Paul. Yes, I do believe it’s some share gains. We came into existence from any kind of serious position in perm at about 2002 and we exited the last cycle somewhere around $500 million of GP in perm worldwide, and we’re already at that. So we have much better base. Our RPO business is quite strong. But I would also add that perm is just a bigger pie. Companies are doing business differently. They are no longer having recruiters in-house, they are no longer doing some of these things themselves.

So I think as an industry – and we’ve talked about this for sometime, as an industry, we are now having a new adjunct to the core part of our business which in some cases depending on country might go all the way to contingent search and in other cases it’s an attempt to perm, which we still see very good attempt to perm in the US. So you’re still seeing some confidence by the companies out there. We have – we continue to put emphasis, we continue to hire recruiters, and recruiters in many of our locations are maxed out according to our productivity KPI, so we’re looking at adding a few more but being judicious based on what we are also seeing in the economy. So I would say we’re doing well and it’s off of the share of a bigger pie, because the clients are doing business differently.

Paul Ginocchio – Deutsche Bank

And from your answers, it sounds like you haven’t seen any recent sort of weakness in perm that sort of worries to.

Jeff Joerres

No, if you – if we look at our weekly numbers, our weekly numbers feel good. But we’ve been in this business a long time, so that one doesn’t give you a whole lot of glide path. If things get bad, they turn the button off. But we have not seen that at all, not even close to that.

Paul Ginocchio – Deutsche Bank

Thanks very much.

Jeff Joerres

Yes.

Operator

Our next question comes from Sara Gubins. Your line is open. And please state your company.

Sara Gubins – BofA Merrill Lynch

Hi, thank you. BofA Merrill Lynch. Thinking to next year, if we’re in an environment of a very minimal GDP growth next year in Europe, particularly in France, do you think it would be reasonable to expect top line growth in those markets?

Jeff Joerres

It’s really hard to tell. You pick a country where actually GDP growth historically has had a better correlation to growth in our business where some of the other countries may not be as correlated. I still would say in the case of the French market, if you’re getting 1% to 1.5% GDP growth, I still feel confident we would be able to get growth. But I also think that GDP growth is still not all created equal. Next year we have an additional complication in France, which is an election. So we’ve got election happening in May.

It will be a very interesting election if you’re from the outside looking in. And I think that that can affect some of the GDP growth that may not translate into jobs or jobs in our industry as much. But we’re still running about 70%, 75% of our businesses. In light industrial, we see construction has trimmed off of a bit in France. But I would say if we’re going to get of over a 1%, closer to a 1.5%, we have a good chance of being in this kind of single digit, low single digit growth for our top line.

Sara Gubins – BofA Merrill Lynch

Okay, great. And then thinking about pricing also to next year, are you starting to think about trying to push pricing higher in the US due to continued increases in SUTA?

Jeff Joerres

No doubt. I think – forget about the increases in SUTA, I’ll get back to that. We’re going to push prices higher anyway. We’re doing it now. In our small medium size business in the US, we are putting price increases through that have nothing to do with SUTA and that – and we’re trading out some of the business last year, or we’ll say it a different way, this year our SUTA increases, the recovery was nearly a 100%. In fact, if some would argue it was 104%, because we priced that we weren’t going to get it all, we ended up getting more than that. We went back to those clients who did not allow us to pass through SUTA and those were the first ones that we paired off the list, because my – our sense was if they wouldn’t allow us to pass through SUTA in 2011, we knew another increase was coming in 2012, we wouldn’t get that either and would only further deteriorate the gross margin. Our team is already setup. We are sitting here on close to November.

Our teams in the US are already setup for their pricing increase strategy based on increased SUTAs coming from the various states. Will it be difficult? Yes, I would suspect it would be difficult. Would we do as well as we did last year? I’d like to think so. And many of the clients understand this is truly a pass-through cost. So we’re optimistic, but I think it will also depend upon as we are doing those price increases for SUTA what’s the context around that, what’s the environment around that. And if it gets extremely difficult, we would probably get more push back. If it stays where it is now, I think it would be more well accepted as yes, we should be doing that.

Sara Gubins – BofA Merrill Lynch

Great. Thanks a lot.

Operator

Our next question comes from Randle Reece. Your line is open. And please state your company.

Randle Reece – Avondale Partners

Avondale Partners. I had a couple of questions. First of all, I was just looking at the balance sheet and there is a significant and sequential decrease in your property and equipment. Is that just the currency recognizing a difference in currency translation or did you do some cutting during the quarter?

Mike Van Handel

I think that’s primarily currency as the Euro rates came off a little bit. We didn’t do any significant reductions overall. If you look at our overall office footprint, we did – we did open a few offices in some of the emerging markets, but we did – we’re able to consolidate from backing a few others. So I think our overall office count is down about 30 offices from last quarters. I think what you’re seeing there was primarily a currency issue.

Randle Reece – Avondale Partners

Okay. Also, when you look at your capacity for permanent placement and just compare the capacity that you have in the field this year versus last year in RPO and then in the rest of the business and in different geographic markets, have you adjusted the growth rate and how much is just additional presence adding to the growth rate of your permanent placement revenue?

Jeff Joerres

There is a little bit of geography differences across the world. France, I think still has a little bit of capacity, though they’ve been running quite well. The US, from a recruiter perspective has some capacity on the manpower side, less capacity on the Experis side. So we’ve been able to get some pretty good flow through from GP to that.

Because of that, as I mentioned, some of our recruiters again depending on that geography are a little bit maxed out, so we’re looking at and are currently adding the recruiters, but we will be doing that judiciously to make sure that we keep up with our KPI’s and how we manage the recruiter.

I would say in China and India we still have some capacity, because we’ve done quite well there, we’re basically started built those organizations as perm recruitment and search firm. So it’s a little different. But I would say on a global basis if we were to continue out on this kind of growth rate, we would still have some pretty good flow through to net probably not as good as what we’ve add in the last two quarters.

Randle Reece – Avondale Partners

The 8% of gross profit that you gave coming from perm was down sequentially. How much of that is normal seasonal?

Jeff Joerres

Yes, you probably see in the seasonal impact there as well. I mean we’re running about 12%. Last quarter is about 12.5%, so it depends a little bit upon the businesses and where things are coming from a business perspective. Overall, the French business, some of the European falloff, particularly in the middle of summer and I think that’s what you’re seeing in terms of that percentage falloff a little bit. I would expect you’re going to see it probably be – move up a little bit as we’re getting into the fourth quarter.

Randle Reece – Avondale Partners

All right. Thank you very much.

Operator

Our next question comes from James Samford. Your line is open. And please state your company.

James Samford – Citigroup

Citigroup, thank you. Just you mentioned that you’re looking for more growth in small and medium business, I was wondering if you could dig into that a little bit more in terms of the details on maybe where you are in terms of mix today, and is that statement regarding global sort of focus on small and medium business.

Jeff Joerres

It’s a strategy we have set for sometime and it’s pretty difficult. We were well on our way in 2006 and 2007. We actually opened offices one after the small and medium size business. One, we absolutely believe we can offer more value than local competitors. We think that market should be ours. What we think that the footprint that we have also lends itself to that. That is where we took from strategic perspective a bit more hit on our gross margin, because those didn’t have long-term contracts associated with them during the downturn. We are now getting very serious about getting back into increasing some of the pricing with the SMB to be to much more value pricing and mixing the business.

Each country has a little different strategy depending on the makeup of that country. But for an example, in the US, we’re working very hard in our metro market strategy in that medium size business and I would stress it’s really more of that, mid size, lower mid size. We’re not talking about small business, those assignments are too short. So we’re increasing our gross margin in those areas and we’re increasing our relevance in those areas.

We think that we have a pretty long journey to get where we want to go. But as we move along that journey, each time we increment it, it helps our mix. Having said that, some of our largest clients, our top 50 clients are getting extremely interested in expanding business. So you can add 10 million on to a large one from a large one in one order, implement that probably over a period of six months to nine months and that’s a lot of SMB business to kind of balance that off. So Mike, I don’t know if you want to talk to kind of splits and percentages on that, but –

Mike Van Handel

Yes, I think the last point was quite relevant. I think as we’ve been going through this recovery the last couple of years, the key accounts, that part of the market has been growing more rapidly. So – but we are certainly seeing some life in the SMB business overall. It depends a little bit upon market in terms of our overall mix or probably on the staffing side in most markets we’re running about 50-50 in terms of key accounts in SMB. Some a little bit more towards key accounts and a little bit less SMB. But it’ll be in that ballpark. But we’re clearly still at that point. We’re seeing a little bit better growth on the key accounts. But as we get further through this cycle, our strategy clearly is to continue to penetrate and drive after some of that SMB business that we think will be there.

James Samford – Citigroup

Right. Just a really quick small one. What impact might the Olympics have as far as sort of quarterly shifts next year in the UK?

Jeff Joerres

A little we have some, we’ve decided, because we’ve tested the Olympic type games for a long time. Supplying volunteers is a nice program for internal energy; it’s a drain for profitability. So we actually have commercial clients associated with it. We’ve been doing some of the large networks that we follow from city to city. I would say incrementally is going to be a positive, but the UK market is a big market for us. So you’re not going to see much of it pump up. Slight positive, but not something that you would want to kind of put into your model if you will.

James Samford – Citigroup

Okay, thanks.

Operator

Our next question comes from Gary Bisbee. Your line is open. Please state your company name.

Gary Bisbee – Barclays Capital

Barclays Capital. Good morning, guys. First question, I guess, can you give us a sense where the operating margin levels are in the professional and solutions and perm business today. And, I guess, what I’m wondering is that those continue to grow somewhat faster than the core Manpower business. I’m trying to figure out how much that could add to margins even in an overall sort of weak top line environment.

Mike Van Handel

Yes, sure, Gary. Clearly the operating margins on the professional side are going to be higher as well as the perm margins. When you think about perm, a lot of that perm businesses is incremental. Meaning that we can – we don’t have to add additional infrastructure and management. We do have to add maybe direct our recruiters, but – so the – but the incremental margin we get growth there certainly drives overall margins and better margin performance. So we would look – we’d certainly be looking on perm business for double-digit type of growth. I think when you go in the professional side, it depends a little bit upon which market you get it from.

Certainly the US market where we’ve got a very good book of IT business, we get very good mid-to-upper single-digit type EBITDA margins on to that market. If you go to Europe markets like Sweden, Netherlands, Germany, we would be talking somewhere type higher margins as well there. The UK which you’re probably aware, that’s a market where we’ve got a good presence there through the Elan brand there which is now transitioning towards Experis. And – but the UK IT market is not a premium margin market relative to general staffing, it’s somewhere to general staffing overall, so there would be more closely linked to company averages.

When you get to some of the solutions business, there you’d be looking at – we are looking to drive that into the upper single digit, low double-digit type levels in terms of operating margins overall. So that’s a good mix of business between talent based outsourcing, our RPO business and our MSP offering. So it’s a good mix of business there. It’s over $1 billion on an annual run rate basis and it’s showing some good growth rate now.

Gary Bisbee – Barclays Capital

And so you’re driving to that, but is it safe to say that it’s at least moderately above the general staffing today in terms of –

Jeff Joerres

Yes, that’s a good – we’re not driving there. We’re there. Thanks for the clarification. We’re driving to hire than what we are which is in the kind of the more higher single digit, we think that some of those should be double digit. But we’re also adding capacity. So we’re still in growth mode on that. I would say, out of there, we’re still in growth mode in RPO, where RPO was more of a – like higher single digit than double digit, where MSP has a little its infrastructure is actually running closer to the double digits.

Gary Bisbee – Barclays Capital

Okay, that’s real helpful. The second question; on Right, is – would it be reasonable to expect any list in the career transition business, just given we’ve seen at least in the US some increase in layoffs if you look at the data and I assume that it’s likely to happen elsewhere or is it not big enough activity really to move the needle on that business.

Jeff Joerres

You bring up a really good point. We are hearing more about it, but we’re actually not seeing it come out the other end. So what we mean by that is that, we’re seeing some pretty big announcements, but with no offence to anyone the announcement seems to directed more towards you guys, because it’s over five years and it’s attrition and it’s less hiring and it’s contract workers, and it’s those sorts of things. So we will see a slightly lift, but based on what has been announced currently, that is not enough to kind of fuel any kind of big leverage coming out of the career transition business for Right Management. It will assist it, but it won’t fuel it into anything like you’re seeing in 2009.

Gary Bisbee – Barclays Capital

Okay. And then just one last one, you made a – it was really small, but an acquisition in France that, from what I could read about it, looks almost more or like a technology solutions type business. Was that a one-off or is there a sort of a sense within professional that you want to get more into maybe program management or solution as opposed to just sort of the core staffing is concerned?

Jeff Joerres

Yes. I mean clearly we’re driving toward solutions, but we are not going to lose our identity. We are not going to be doing – we do not want to compete against Accenture, IBM, Capgemini, Hewlett-Packard, that’s not our strategy. Our strategy is when we can do some statement of work level with a huge or a very, very large human capital component that requires a lot of recruitment training and movement, that’s what we’re in. And for Proservia fits that model, where it’s kind of desk side support, lot of training, make sure their turnover is right, that’s really the good model for us so. All right, next question.

Gary Bisbee – Barclays Capital

Okay.

Operator

Our next question comes from Paul Condra. Your line is open. Please state your company.

Paul Condra – BMO Capital Markets

Hi, thanks. It’s BMO Capital Markets. Just going back to the RPO business, what’s – I wondered if you could talk a little bit about what type of clients are most interested in that business, are there any verticals particular where you see more demand?

Jeff Joerres

I would say the RPO business, right now, we can kind of split it into kind of three major groups. One is – one is you have large Asian businesses that are more single location or just a few locations, but really want the expertise of hiring talent, because finding the right talent and assessing the right talent in Asia is absolutely the name of the game. So they’re skipping steps over the US. The US companies that have only a few locations. They still think they should be doing it themselves. Asia is saying, “No way. You guys are much better at it.” The US, the prime clients are really highly disbursed clients, where you have a lot of hiring to do in multiple locations where we can offer a much better systems associated with it. And Europe is a little bit of a hybrid in there.

Paul Condra – BMO Capital Markets

And are there any verticals in particular or any types of business that –

Jeff Joerres

It runs across the board. Clearly, you can get some retail at high distribution. I would say for the most part they are larger clients, because they can leverage more. But actually when you think of a mid-sized client, call it $1 billion in revenue kind of clients, those are the ones who can use us the most, because we can add a lot more sophistication, but I’m not going to be sell you on that. I’ll save my energy for the marketplace on that.

Paul Condra – BMO Capital Markets

Next question, I just wanted to ask on the federal unemployment loan, so I saw some news reports about the states having to pay these assessments, because the interest on these loans is coming due. Do you see any impacts from that or do you expect anything from that future?

Jeff Joerres

I think there we see a lot of moving parts right now. We think there might be some puts and takes on, is there a Hire Act 2, are there some of those things. We do know states will be under pressure. Our state government businesses are under a little pressure, we don’t do a lot there. But we’re actually starting to see business down at the county level as they’re trying to be better business people and balance some of their books. Last question, please.

Operator

We have a question from Andrew Steinerman. Your line is open. And please state your company.

Molly McGarrett – J.P. Morgan

J.P. Morgan. Hi, this is Molly McGarrett for Andrew. Just one quick one on GDP, you mentioned that the election in France would be kind of noise and not important. Are there areas or components of GDP that you see as real drivers of your business?

Jeff Joerres

Well, I didn’t say it wouldn’t be noise, I mean I think there will be – what happens is more of a little bit stability. You’re not going to be able to implement social plans during an election, those sorts of things. Mike, you may want to talk a little bit about the auto industry, where we’re positioned on that, because that is a big driver of the French – one of the large drivers of the French economy.

Mike Van Handel

Yes, the automotive mix overall in the industry, it is a good size, good piece of the overall print staffing market. For us it’s roughly about 5% of our overall business mix. And we’re still seeing good activity there. There has been some new models being introduced and that’s driving some growth, but we are seeing that drop-off a little bit. So I think when you think about GDP, it depends a little bit. It does depend upon where it comes from. And I think the areas that don’t help us too much are overall infrastructure. When you hear about roads and schools and bridges and that type of thing, those type of government plans don’t drive a lot of our business overall. But when you hear a good old manufacturing and you watch the – some of the PMI data, that usually captures the type of work that is going to drive a demand for our services overall and really bring back healthy economy.

Molly McGarrett – J.P. Morgan

Okay, great. Thanks.

Jeff Joerres

All right, thanks all.

Operator

That does conclude today’s conference. Thank you for participating. You may disconnect at this time.

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