Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Manpower Inc. (NYSE:MAN)

Q3 2007 Earnings Call

October 17, 2007, 08:30 AM ET

Executives

Jeffrey A. Joerres - Chairman, CEO, and President

Mike Van Handel - EVP and CFO

Analysts

Christopher Gutek - Morgan Stanley

Michael Fox - JP Morgan

Andrew Fones - UBS

Michel Morin - Merrill Lynch

Andrew Steinerman - Bear Stearns

Gary Bisbee - Lehman Brothers

Thomas Robillard - Banc of America Securities

Mark Marcon - Robert. W. Baird & Company

Jeffrey Silber - BMO Capital Market

Presentation

Operator

Good morning and welcome to Manpower’s 2007 Third Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions].

Today’s conference is being recorded, if you have any objections you may disconnect at this time. Now I will turn the meeting over to your host, Mr. Jeff Joerres, Chairman and CEO. Sir, you may begin.

Jeffrey A Joerres – Chairman, Chief Executive Officer, and President

Thank you and good morning to all that are on the call this morning. Welcome to the third quarter conference call. With me, this morning is Mike Van Handel, our Chief Financial Officer and I must say we are doing this from our new headquarters building so and we would be proud of the fact that we have this new building and we're able to produce for our shareholders some very good results. What we’ll do as usual is go through the third quarter conference call. I’ll discuss some of the segment details and then Mike will add some information to the numbers on the income statement, balance sheet and look at what we're doing, when it comes to the fourth quarter forecast. But before we move into the body of the call Mike, if you could just cover the Safe Harbor language.

Mike Van Handel - Executive Vice President and Chief Financial Officer

Okay. Thank you, Jeff. Good morning all. Now 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 other Securities and Exchange Commission filings of the company which information is incorporated here in by reference.

Jeffrey A Joerres – Chairman, Chief Executive Officer, and President

Thanks Mike. The third quarter and I say this in several different ways, but by any measures a very good quarter for Manpower. We did experience as expected a few softness in some, in a few of the units, no surprise in the U.S. However across almost all the units in the world we performed very well. Our profit targets were exceeded and we experienced some softness in revenue but while we experienced softness in revenue, we also were able to achieve good profit. Major drivers of profit, no surprise Europe. My heroes are in Europe and they’re really doing a great job. Many of our European operations performed even better in the third quarter than they did in the second quarter, and the second quarter was a very solid quarter. The U.S. suffered with persistent softness on the top-line and as we had anticipated Right Management to be remember or go back to the call we talked about how we felt though the book of business at Right Management was good coming into the third quarter and it was so the third quarter, it seems like a weak but at the same time we are able to, to put in a very good performance with profits up substantially.

Our earnings once again for the quarter were positively impacted by the French payroll tax. The impact of this tax was about $27 million for our operating profit, or $0.19 in earnings per share, while the $27 million impact to French payroll was nicely which we’d like to have that. We didn’t need it to produce a very solid quarter. And I think that’s the key.

Our revenue for the quarter was $5.3 billion up 15% in U.S. dollars, 8% constant currency. As we've seen before we continue to experience the benefits of our investment in geographical diversity and I can’t underscore that enough. We have got a very good portfolio of services and a portfolio when it comes to the geographical diversity. Several markets remain quite strong with both secular trends in those markets but also secular trends.

Europe of course stands out on top. Elan, our IT staffing company did extremely well, Germany, Netherlands, all performing with revenue up in the ranges of 15% to 40%. Profit increases from 40% to 60%, outstanding performances. In France we outpaced the market marginally but we outpaced the market and we have solid gross profit margin percentages.

Gross margin for Manpower as a group of company was 18.4%, up 88 basis points yielding an operating profit of $222 million, a 35% increase in U.S. dollars and 26% increase in constant currency. The result is a 4.2% operating profit margin, up 60 basis points. Take out the French payroll tax and our operating profit was $195 million, up 19% in U.S. dollars with an operating profit margin of 3.7% or up10 basis points. I could break down the gross margin a little how we obtained this 88 basis points increase.

Third quarter of 2006, gross profit margin was 17.52. Sizeable impact by the French payroll tax, which was 57 basis points, which will go away in the fourth quarter. Our temporary recruitment gross profit margin, which we continue to do well in added 25 basis points. As four out of our five staffing segments improved their temporary recruitment gross margin, if you will, the core part of the business.

Temporary recruitment gross margin is also benefiting from a more favorable mix as some of the higher gross profit margin countries like Netherlands, Germany and Sweden are growing faster actually than some of the profit margins or the lower gross profit margin countries in the network.

No surprise either, we are seeing a positive impact from our permanent recruitment business, 36 basis points improved on that gross profit line because of the work we have done in permanent recruitment. Throughout the quarter we continue to add recruiters to our network bringing out total number of recruiters to 3500 worldwide. With this investment, we are able to drive growth in permanent placement services of the 48% in U.S. dollars and 37% in constant currency.

Our mix-specialty business actually hurt our gross profit margin by 30 basis points primarily because the lack of growth that we are seeing in Jefferson Wells compared to what it was last year. That brings us to the 18.4% for 2007 a nice improvement and improvement that really were affected by a lot of the strategic investments.

We continue to see positive revenue trends in most places though in some places like the U.S, we are seeing softness. However, we don’t see this impacting our fourth quarter. Europe and Asia should continue to do well and based on this trend, we are currently seeing in our business we anticipate the fourth quarter earnings per shares to be at $1.50 to $1.54 with $0.10 currency and a positive $0.10.

But most of U.S revenues were slightly above 500 million. Revenues were down 7% a little less than we experienced in the second quarter, however, we made a substantial franchise acquisition which would impact our revenue almost 3%.

We are anticipating the U.S…we were anticipating the U.S to be down about 6% to 8% in the third quarter which is actually down in the lower end of that range and slightly more to factor up the franchise acquisition. If you look closely at the quarter, we didn’t see any dramatic deterioration during the quarter. We also really didn’t give a lot of encouragement. And I guess I could put that as good news because we are not seeing it really slide any more. We have first few weeks that we start out in the quarter were slow as we anticipated, but we didn’t see that typical seasonal pick up that we would be getting in September and October.

Our clients are desperate but there is a high level of cautiousness and when they read the same news papers we all read and therefore it’s trickling into a little bit of their hiring intentions in the U.S.

Our permanent placement business is not affected however by this potential softness. Our revenues in permanent recruitment in the U.S were up 33%, which clearly help to drive our gross profit margin. Our costs were well managed. And our operating unit profit decline 50 basis points, but it came in a 4.8% an impressive number those of you are shareholder have been with us a while, you can see we are managing the business extremely well, but there is a de-leveraged that occurred a bit with the contracting top-line. U.S team is doing a great job managing in a difficult environment. And then we will continue to look at efficiencies that we are not going to do it in spite of some investments like hiring recruiters and opening some Manpower Professional Officers.

A little different picture, if you look at the French operation. In French, we achieved revenue growth of 5% in constant currency, 13% U.S dollars with the total of nearly $2 billion for the quarter. Looking at the monthly trends those of you who followed that, we saw some growth weaker in August, little bit of a rebound in September. And in fact, the growth trends in the last several weeks have been thoroughly stable which is a good sign for us. Our operating profit was $101 million up 63% or 51% in constant currency. Take out that $27 million impact for the French payroll tax, our operating profit was $74 million, still an impressive number up 10% in constant currency, 19% in U.S dollars. This resulted in a 3.9% operating unit profit. Result of the French operations was nice the payroll subsidy was strong and increase in operating unit profit by 20 basis points on year-over-year basis.

We then continue to monitor whatever impact that may be regarding some of the changes within the French marketplace currently the Sarkozy administration has changed 35 hour of work with overtime charges not the actual legislation but the overtime charges. This basically allows us an individual group to work overtime beyond 35 hours and not have a tax impact. The same impact is for companies; however, we believe it should be and could be a very slight negative for us but it will be very marginal we think and it is actually too early to tell before it really work through the system. So, it probably be a little clear picture for us as we move into the middle of the fourth quarter. It might even have to wait all the way for the first quarter before we can really understand the ramifications of that. On the other hand, there are some really positive signs with unemployment going down and us positioned in the permanent recruitment business so therefore we are taking advantage of this stimulus of the Sarkozy administration is putting into the economy and therefore effecting our permanent recruitment.

Overall, we would anticipate actually in the fourth quarter, a slightly pick up in revenue in France on a year-over-year basis. The real superstar as I move to the next segment is other EMEA, previously EMEA but we took out Italy because of how big they are now and to use our U.S. expression there really hitting the ball hard. Across the board, we are continuing to see good secular growth as well as cyclical growth we’re managing the business well. We’re keeping our gross profit margins at the right level and we are managing expense.

Revenue is $1.7 billion U.S. up 29%, up 19% in constant currency. Because of the leverage effect as we are filling in this network and continuing to expand revenue at a rapid pace. Our operating profit came in at $74 million of 51% U.S. dollars, 41% constant currency. Again, team is doing a great job across the board.

Our gross profit margin improved as well to mix of business as well as improving permanent recruitment business. Our other EMEA segment is leading the way of permanent recruiters and got off to a head start probably almost three-four years ago and because of that and all the hard work that has been done since, we now have ever over 1800 permanent recruiters and we are now at 15% of our overall gross profit and other EMEA segment is being drive from the permanent recruitment business.

Operating unit profit margin up 70 basis points came in at 4.3%. So you can see the leverage that we have been talking about for sometime as we fill that network and drive back the revenue with the appropriate revenue having a right margin on it and a right mix of business.

There are few usual standouts in this segment in order to perform well with revenue growth and constant currency at 28%, Sweden 43%. Elan, Our IT staffing company growth accelerated as we expected if you go back to the call last quarter we said that. We had a solid book of business and it came true with revenue up 41% in U.S dollar, 31% in constant currency. Germany 36% up in constant currency, 46% up in revenue in U.S dollars. But we are also seeing and you can tell from the overall pictures that these countries are growing their bottom line much faster than their top-line.

Another country that I normally don’t mention but I want to mention is, which has very good growth rate in Israel given the backdrop and some of the challenge that you all know we’d use Israel for us to achieve a growth rate of 21% per revenue and higher growth rate in bottom line. I just wanted to use this opportunity to say congratulations to the team there. They are doing a great job.

Eastern Europe we continue to invest, our growth rates are up 17%. We are continuing to invest not only Eastern Europe but open offices in Elan and we’ll continue to hire permanent recruiters. In all of these areas we see continued growth and we’ll continue to invest.

Going to the other segment which is Italy, Italy’s revenues were $335 million, up 21%, 12% in euros. Gross profit margin improved year-over-year. We experienced strong leverage giving us an operating unit profit of $25 million, up 35% in constant currency. Our operating unit profit margin for Italy is 7.3%, up 120 basis points, great performance by Italian team in a market we believe still has a lot of expansion left there.

Jefferson Wells, little different story, we came in about as expected down 9% with revenues at $86 million. Operating profit was impacted by $3 million charge related to moving to the new headquarters that will settle out, you won’t see that, in fact, you’ll see a positive result as we move forward. But these resulted in operating unit profit of loss of $2 million. Of course, over the quarter and we were able to see… over the course of the quarter, we’re able to see stabilization in our SOX revenue and increase in our non-SOX revenue, which gave a sequential revenue growth over the second quarter of 2007, which is important for us and a measure we look at closely.

We continued to be confident. We sound a bit, given the loss but we, Mike, and others and the team there will continually feel bad. What’s happening in the cost associated with what’s happening and we are investing in new offices, and we are investing in new offices, because we feel confident about the long-term view of the business. We are opening offices overseas and these offices create a trend on our profitability. However, when we look at the new offices that we’ve historically been able to achieve and put in, we have very good solid return on invested capital and it’s something that we believe. When we can get that kind of return on invested capital, our shareholders would like to see us investing in that. It’s also important for us to invest on this because of the number of large clients we have and they are asking us to go to these areas and actually in some ways funding our opening of those offices.

Moving to Right Management, very solid quarter revenue was nearly $100 million up 9% in U.S dollars, 5% in constant currency. As many of you know, the third quarter is seasonally weak quarter for the career transition business, based on our backlog of business and a very large amount of account wins over the last several months, we achieved $6 million operating unit profit, more than double last year, a very good performance. This sets us up nicely for the fourth quarter and we are anticipating the operating unit profit will expand in the fourth quarter as revenues will go up and we will continue to get this leverage.

Our new product offering right choice as well as our recruit training and substantial wins in the marketplace are giving us a good solid backlog of business and positions us well for our additional services within right which is the organizational consulting business.

We’ve established a solid position in Right Management in India and China as well as other emerging markets. And we think this is a great opportunity for our coaching practice and our organizational consulting. Our organizational consulting business grew at 25% which is a nice balance to the career transition business.

In Right Management, we saw the result in Japan and France in the career transition business where both businesses being very difficult for us in the past year, really starting to find their feet entirely into profitability. This has been accomplished by re-foot printing the business and using some different tools in order to accomplish at higher level of service to our candidate.

Our other operation segment also performs very well in the third quarter. Revenues achieved were 663 million up 11% in constant currency, 14% in U.S dollars. Our operating unit profit of $90 million is in increase of 11%, constant currency 13% U.S dollars. We continue to make progress in Japan which is our largest operating unit in this segment with revenues up 9% in constant currency.

Our operations in some of the emerging markets like China and India continue to proceed at a fast pace and we continue to invest in office openings. Many of your may have seen our press release last week announcing that we receive the license for temporary staffing under the new labor legislation which will go into effect, January 1. We are the only multinational company to receive that license and it is based on the hard work of our Chinese team and the real essence of this was about what we have done with training people in China, putting people to work and clearly exhibiting the highest level of value as an organization. We are optimistic about our prospects over the next five years, as you can imagine given that we already have over 60 offices in China and find to continue to invest.

Argentina, Mexico, and Australia, all did well on the quarter. Argentina grew 35%, Mexico 9%, Australia 4% but actually did tremendous increase in profitability. We continue to have a strong presence in South America. We’re seeing actually that hiring operation do well. Many of those countries are small but when you add them together and they are growing at 30% plus both constant bottom line. The accumulated effect is actually quite positive for our shareholders.

So all in all, our third quarter was a solid quarter with substantial earnings increase, good revenue growth and very good expense management. We continue to see secular and cyclical trends in Europe, while there are few soft spots throughout the world. We believe our balance portfolio business, our market positions will allow us to continue our strong operations profit growth. We’re anticipating achieving as I said before earnings per share of $1.50 to $1. 54 for the fourth quarter with the positive impact of $0.10.

What I’d like now to do is turn it over to Mike so that he can give us a little bit more details on the financials and the outlook for the fourth quarter.

Mike Van Handel - Executive Vice President, and Chief Financial Officer

Thank you, Jeff. I’d like to begin today by discussing our third quarter earnings relative to our guidance for the quarter and then its estimates. Our revenue growth for the quarter was at the high-end of our guidance range coming at 8.5% in constant currency. Our operating profit margin exceeded our guidance range at 4.2%. This resulted in earnings per share significantly above our guidance range at a $1.57 or $0.16 above the midpoint of our range.

The primary reason for our out performance was due to strong operating results. However, there are a few other items I’d like to call to your attention. Included in our guidance was an expected $0.14 per share favorable impact from the French payroll tax change. The actual impact turned out to be a favorable $0.19 per share. This favorable variance is due to higher than expected subsidies in the third quarter from the payroll tax change as well as modest revisions for our earlier estimates of the payroll tax change which we reported in the second quarter. Also included in that guidance was an estimate of a $0.02 per share charge related to one-time cost associated with our moving to the new corporate offices and with U.S and Jefferson Wells offices relocated as well in the downtown, Milwaukee.

The actual impact to this move ended up in $0.03 per share so just slightly more than what we had anticipated. Also, not anticipated in our guidance was the impact of the share repurchase, the purchases that were made in the third quarter and these shares repurchases resulted in $0.02 of earnings decreasing in the third quarter. Again, that was not in our anticipated guidance when we issued it.

I should also note that the currency impact was as expected at $0.08 per share, so while the dollar weakens relative to the euro towards the end of the quarter, the average exchange rate throughout the quarter was about as expected.

The performance relative to analyst’s estimates was also favorable. However, you should be aware that some of the analysts included an estimate for the French Payroll Tax change in their earnings estimate and others excluded it, since it is a one time item. Therefore, if you're using any of the soft side models that are out there, you want to be sure to understand, how they treated the French Payroll Tax item.

Our balance sheet remained strong despite the $271 million of cash used for share repurchases in the quarter. Our net debt at quarter end was $367 million and our total debt to total capitalization was a comfortable 26% at the end of the quarter. Our accounts receivable are up $700 million or 18% since year-end. Of this amount, $433 million represents the impact from business growth and the higher seasonal volumes in the third quarter and $267 million represents the impact of currency. DSO for the quarter was one day better than a year ago.

Free cash flow, which we define as cash from operations less capital expenditures, was strong for the nine month period at $233 million, an increase of 30% from the prior year. During the quarter, we used $271 million of cash to purchase 3.7 million shares; this brings our total purchases for the year to 4.9 million shares as a total cost of $360 million. I should also note that during the quarter, we completed the $325 million October 2006 authorization and the Board of Directors authorized a new $400 million share authorization on August 27, of this year. We also used a $100 million of cash this year for acquisitions and this primarily relates to franchises and most of those occurred in the third quarter.

Next, I’d like to take a look at our fourth quarter outlook. Overall, we expect a continuation of the good revenue and strong earnings growth trends that we experienced in the first nine months of the year. We expect our total revenue to be up between 8% and 10% in constant currency terms, which should be between 14% and 16% in US dollars. The growth rates by segment are similar what we experienced in the third quarter. We are again expecting the strongest growth to come from Europe with the soft spot being the U.S. Our expectations for U.S revenue declined between 3% to 5% is somewhat better than the third quarter which primarily reflects the full quarter impact of acquisitions completed in the third quarter.

Our gross profit margin is expected to remain stable in most markets ranging between 18.2% and 18.4% on a consolidated basis. Operating profit margin is expected to be between 3.7% and 3.9%, which represents an increase of 20 basis points over the prior year at the mid-point. Our tax rate is expected to come down slightly from the third quarter to 36.5%. This will result in our earnings estimate of $1.50 to $1.54, which is based on an estimated weighted average share account of $82.4 million shares.

The currency impact in the quarter is estimated to be $0.10 per share as the euro is currently about 9% stronger than the average from a year ago. At the $1.52 mid-point of earnings guidance, we are forecasting a 32% increase in earnings per share from continuing operations or 23% in constant currency. I would like to conclude my comments today by stepping back and taking a look at our full year forecast for 2007 followed by a few comments on the first quarter of 2008.

Based upon the fourth quarter guidance, we expect revenue for the year to be $20.3 billion, an increase of 15% in U.S. dollars or 9% in constant currency. Earnings per share, is forecasted to be $5.61 per share, an increase of 61% in U.S dollars or 53% in constant currency.

It’s important as you look at the performance for the year to adjust for unique items impacting both the current year and the prior year. In 2007, the French payroll tax changed favorably impacted operating profit by $126 million or $0.86 per share. As we have stated previously this favorable impact on the second and third quarter of this year is not expected to continue beyond the third quarter.

Included in the 2006 results, there is a charge of $0.22 per share which relates to non-recurring reorganization costs and expenses incurred from our global cost reduction initiative that took place last year. If we adjust for these items in both years our earnings would be up 28% in U.S dollars or 21% in constant currency, certainly a strong operating performance for the year. I should also note that the $4.75 of earnings per share excluding the subsidy impact in 2007 represents the underlying earnings base from which we will grow next year.

As you look at our earnings estimate for next year, I would provide a few comments related to the first quarter as I do every time at this year. The first quarter of the year is seasonally slower revenue quarter. Its lower revenue based results in seasonally lower operating profit margins as there is less leverage of our fixed cost base. Furthermore, given the expense leverage characteristics of the first quarter, our earnings are much more sensitive to both positive and negative changes in revenue growth trends.

In addition, you should be aware that Easter, thus fall into the first quarter of 2008 versus the second quarter of 2007 and this was a negative impact on the number of billing days. This is somewhat mitigated, however, by the fact that 2008 is a leap year so pick up that extra day there.

So with that, I’ll turn it back to Jeff.

Jeffrey A Joerres – Chairman, Chief Executive Officer, and President

Thanks Mike. As you are getting Easter in leap year for us so with that, Jane if you could open it up for questions.

Question and Answer

Operator

[Operator Instructions]. Our first question comes from Chris Gutek, Morgan Stanley. Your line is open.

Christopher Gutek – Morgan Stanley

Thanks. Good morning, guys.

Mike Van Handel – Executive Vice President, and Chief Financial Officer

Hi, Chris.

Jeffrey A Joerres – Chairman, Chief Executive Officer, and President

Hi, Chris.

Christopher Gutek – Morgan Stanley

Just want to ask the question on France to what extent do you guys expect additional Labor Market Reform and do you have an opinion on what specifically might change and therefore, what’s the impact would be on demand for temporary staff beyond the changes that have already been implemented?

Jeffrey A Joerres – Chairman, Chief Executive Officer, and President

There really hasn’t been a lot of discussion beyond the changes that have been implemented. At the beginning of Sarkozy administration there were some discussion about what’s call the single contract and a few other things, but most of those have not really been brought forward, what we would see is just really it will stimulus in the marketplace, so I am not sure if we would have good visibility because there has been fairly quietness on the horizon regarding really direct labor law changes that would have an impact on our industry other than what we’ve talked about which is the overtime and remember you can’t in the new overtime reprieve if you will in France, you still can only work up to 40 hours. So, it’s not you can’t work another 20-30 hours a week on that. So, we are looking at right now is we are going to continue to monitor the effects of that overtime charge change and continue to work with the administration, but there is really nothing right on the horizon right now that we will be able to point too.

Christopher Gutek – Morgan Stanley

I’ve got the follow-up on… mostly on a domestic business, if somewhat surprisingly has the franchise acquisition fees [inaudible 34:44] up somewhat surprisingly the business experiencing a little bit more weakness given that, this also in the financial market over the last several months. How concerned are you that, so that the business might drop up over the next couple of months with a bit more lag and maybe haven’t seen that lag effect say ten years and in that context is there any intention to sellback some of the investment from the capital spending not just domestically but potentially globally given the less clear macro outlook?

Jeffrey A Joerres – Chairman, Chief Executive Officer, and President

You know, clearly each… clearly it’s less clear, I am sorry about that. But, I think the financial market wanted we have seen and our customer said. We deal with hundreds of thousands of clients. We are talking about less than 1% is affected by that. So how does that ripple into the economy in general, I’ll let a lot smarter people try to figure that out, but our client base really isn’t talking about that. And in fact many of our financial institutions that we do business with our business is up in those because there are many financial institution particularly in the central parts of the United States that don’t have some of those credit in some prime issues that we talked about. So, you know it is a very difficult environment to take a look at. So, what we try to do is to continue to take a look at it from a pragmatic perspective, what are we hearing and what can we see. As far as we can see, what does it mean for middle and end of 2008? We just can’t go there because it’s not something we have good data on or good information.

Christopher Gutek – Morgan Stanley

Thanks, Jeff.

Jeffrey A Joerres – Chairman, Chief Executive Officer, and President

Yes.

Operator

Our next question comes from Mike Fox, JP Morgan. Your line is open.

Michael Fox - JP Morgan

Thanks. Good morning, guys and congratulation on a strong quarter.

Jeffrey A Joerres – Chairman, Chief Executive Officer, and President

Thanks.

Michael Fox - JP Morgan

Please, give me the paramount as a percent of total gross margin for the total company.

Mike Van Handel - Executive Vice President and Chief Financial Officer

Yes. We are running just over 9%, Mike.

Michael Fox - JP Morgan

Okay. And how is that compared to the prior year?

Mike Van Handel - Executive Vice President and Chief Financial Officer

Yes. Prior year we’d be just over 7%. So clearly, it is growing faster than the overall GP. And we have seen for the quarter our firm business grow 37%, so you can see our investments within that area are paying off. We continue to add our permanent recruiters across the world. And we’re really seeing strength on that line of business in all of the geographies we are operating in, including the U.S. market.

Michael Fox - JP Morgan

Okay. And to the next question. When you look at the U.S. business you mention strength in firm and Jeff mentioned strength in some of the financial institutions you work with? Can you talk about where else you are seeing strength despite the overall softness?

Mike Van Handel - Executive Vice President and Chief Financial Officer

Well, I guess maybe just one clarification. We are not seeing strength on the financial side that we are working with. I think, Jeff’s point was it’s still a small piece of our overall customer base. I think when you look at the U.S. staffing business generally we’re seeing some softness really straight across all of our staffing business from the office and clerical to the light industrial and industrial business. So, it seems to be fairly broad, which is really just a continuation, I think, of what we have seen for sometime, but despite that fact, you know the overall labor market is still healthy and there is still some growth and certainly given our investments and our focus on the permanent recruitment side that has been, we’ve been able to drive, drive some growth on that side of the business.

Jeffrey A. Joerres - Chairman, Chief Executive Officer, and President

Yes, and I would just want to add that, I am not sure if you could use the word strength with the U.S. right now. There are pockets like permanent recruitment which we think it is because of offices, a new entry to that part of delivering that service but if you look across the board, some regions are stronger than others, some of them have clients that their business is actually growing but we would really put the U.S. under category of stable, stable at a lower level and we are starting to seeing it stable in the last five to seven weeks. But we wouldn’t put in the strength category.

Michael Fox - JP Morgan

Okay and then, do you notice any change sentiment following the most recent charge report when we had a large revision, a positive revision?

Jeffrey A. Joerres - Chairman, Chief Executive Officer, and President

The only sentiment I see when I talk to some self side analyst our client will look at those numbers and we don’t… we look at them but our field really doesn’t do much with those, so what when the numbers first came out in August, we said that’s not what we are seeing so when they were revised in September, we said okay that makes more sense to us, so I think that’s how we took the news here.

Michael Fox - JP Morgan

Okay, great. Thanks a lot.

Operator

We have a question from Andrew Fones, UBS. Your line is open.

Andrew Fones - UBS

Yes. Hi, thanks. Can you quantify how much of the revenue acceleration that arrived was from geographic footprint change in delivering that bit just to pick and kind of lay offs generally?

Jeffrey A. Joerres - Chairman, Chief Executive Officer, and President

Yes, it is a good question. Clearly, there are some areas within the U.S primarily where few industries have gone through some multiple times and whether it would be in the automotive industry or in the financial services industry, those tend to be a large client of ours. So we get some of that but without getting into too much detail, the real difference in this quarter versus many other quarters is a new product offering, a new service offering, really allows much easier and robust access by the individuals. So the individual is more motivated to be using some of our services which is when the revenue starts. So whereas before if they didn’t see a value in it, the company was willing to pay and wanted to help out that individual but they could go do things on their own. What we’re seeing is as much more participating in the programs because they see value in our offerings. And we track that very closely which would be called take-up rate and that rate has been a substantial part of the increase in the revenue.

Andrew Fones – UBS

Okay, thanks. Let me pack it up one of that on Jefferson Wells, the acceleration there that you are trying to guiding to or at least kind of less of a decline, I should say, can you quantify how much of that is due to pick or pin in business or just underlying strength versus the annualizing of a couple of large contracts that you lost last year? Thanks.

Jeffrey A. Joerres - Chairman, Chief Executive Officer, and President

Sure.

Mike Van Handel - Executive Vice President and Chief Financial Officer

We didn’t lose the contracts so if you may want to change…

Jeffrey A. Joerres - Chairman, Chief Executive Officer, and President

Yes. In terms of, it wasn’t a loss of contracts, really was a completion of the contracts if you will I believe was some project business that was designated amount of time and the time went out. So, certainly that was a… two larger contracts were really getting to the tail of those, they had some impact on the third quarter of 2006 and kind of around down, if you will, in the fourth quarter of 2006. As we look to the, to the fourth quarter, we've seen a little bit of pick up in our average daily revenue for Jefferson Wells toward the end of the third quarter and into the fourth quarter. Typically, our seasonal peak comes around this time of year so, which is why we're looking for the sequential decline as well as near the holiday time, there’s more vacation time. So you're seeing the sequential decline there. But overall I would say, the business is healthy when you look at, at the, at this non-SOX business. We had a little bit of sequential pick up from the second quarter to the third quarter. We had a little bit of sequential pick up on the SOX business from the second quarter to the third quarter. So it’s pretty much, I would say, slightly better than stable. It’s showing some signs of improvement. Certainly, we're working hard within that market. We see some great opportunity. We continue to invest in offices overseas. So, we certainly look for an improving profit picture as we move into next year as well. Next question please.

Operator

We have a question from Michel Morin, Merrill Lynch. Your line is open.

Michel Morin - Merrill Lynch

Good morning, guys. I just want to drill a bit further down into the acquisition and the impact in the U.S. I think you said that added about 3% point to the growth rate. What was the timing, because I think you said it was not a full quarter impact?

Mike Van Handel - Executive Vice President and Chief Financial Officer

Yes. That’s correct. It was in the August time period that is when we picked that up, so a little bit less than half of a quarter.

Michel Morin - Merrill Lynch

Okay. And was there an impact on margins?

Mike Van Handel - Executive Vice President and Chief Financial Officer

Not material. The business is running margins that were not that different from our overall business. So, it did not have any materially impact on margins, so.

Michel Morin - Merrill Lynch

Okay. And what was, I might have missed it though. What was the explanation for the margin decline in the U.S., is it continued investment in the firm capability or what’s driving the 50 basis point reduction there or is that certainly the relocation costs that were included there?

Mike Van Handel - Executive Vice President and Chief Financial Officer

Well. Yes, that’s a good question, Michel. There was some modest amount of relocation costs in there. I think what you are seeing within the U.S. market is in previous quarters we had substantial gains on the gross margin line. This quarter we still have gains on the gross margin line but not quite enough to offset the natural de-leveraging that you feel when the top-line is contracting. So, the decline in operating margin you are seeing really is the fact that our overall cost base isn’t coming down quite at the same rate as the top-line which is fairly natural given some of the fixed cost components of our expense base here, so that’s what you are seeing. You would have seen some de-leveraging in the first half of the year as well, it’s just that our gross margin with a number of factors. In addition to the permanent recruitment we also had some favorable year-on-year gains and workers compensate on employment taxes. Those gains allow there this quarter much more modest than they were in the first half of the year. We still have the gains on the gross margin line from permanent recruitment business.

Michel Morin - Merrill Lynch

Okay, that’s really, really helpful and then just finally on firm in the U.S, you said it was very strong. Can we actually put some numbers around that and how much that grew and was it stable throughout the quarter and I guess the question would be was there any noticeable impact specifically following the credit crunch?

Mike Van Handel - Executive Vice President and Chief Financial Officer

Overall, our growth in the quarter was 33%. Our firm business moves around a little bit week to week so it’s a little bit more difficult to look at weekly or monthly trends and come with a meaningful conclusion. But rest assured it was fairly stable throughout the entire quarter we didn’t see any dramatic swings and no dramatic swings relative to the credit crunch at all.

Michel Morin - Merrill Lynch

Great. Thanks very much.

Operator

We have a question from Andrew Steinerman, Bear Stearns. Your line is open.

Andrew Steinerman - Bear Stearns

Hi. It’s Andy Steinerman, Bear Stearns. When you look at the margin expansion and that happened in the third quarter, it looks like it was more driven by gross margins year-over-year. In the fourth quarter of this year, I think we have a tougher gross margin compared to the year ago but you are still seeing a margin expansion story. Could you sort of explain what is happening underneath that on the SG&A line to enable continued margin expansion story?

Jeffrey A. Joerres - Chairman, Chief Executive Officer, and President

Sure, sure. We continue to drive efficiency across the organization Andrew as you know and we are still picking up some benefits from our project Titan which was an efficiency program initiative that we began last year looking at all of our non-personnel cost. So, we still have some of those benefits coming through, but again as you know one of our key strategies is to continue to drive the efficiency and that’s what we are doing and continue to do throughout the organization. And I certainly see opportunity for that as we look in the next year. I think, the third quarter was… well, we have less gains from an SG&A standpoint is really… you really have to look at the components of our businesses on how they reacted I suppose to a generalization that we weren’t getting SG&A leverage. Certainly in some countries we’re doing quite well from the efficiency and leverage standpoint. Again, as I commented earlier, the U.S. given the top-line contraction, picking up SG&A gain is a bit difficult.

Andrew Steinerman - Bear Stearns

And so some of the SG&A would be driven by your firm build out, the recruiter build out, right?

Jeffrey A. Joerres - Chairman, Chief Executive Officer, and President

Well, that’s true. As you look, as you think about SG&A, that’s a good point thank you. As you think what SG&A as we add firm recruiters, that is adding to our GP but of course, it’s adding to an SG&A cost as well. And if you think about SG&A as a percentage of revenue, when we do that our SG&A as a percentage of revenue in fact goes up but our SG&A as percentage of GP will go down because those recruiters are paying for themselves fairly quickly, so the normal relationship on SG&A to revenue becomes a bit distorted when we are investing on permanent recruitment side.

Andrew Steinerman - Bear Stearns

Right. But it still very much right now in operating margin have therefore you look at the contribution from firm as well as the investment in firm?

Jeffrey A. Joerres - Chairman, Chief Executive Officer, and President

Yes. So when you look at overall operating margins from firm the investment is positive I think again just to clarify it’s helping the gross margin but it’s adding a little bit more to the SG&A cost of percentage of revenue but net on the operating profit margin there is a gain from that.

Andrew Steinerman - Bear Stearns

Thanks a lot, Jeff. Thank you so much.

Jeffrey A. Joerres - Chairman, Chief Executive Officer, and President

Thanks.

Operator

Our next question comes from Gary Bisbee, Lehman Brothers. Your line is open.

Gary Bisbee - Lehman Brothers

Hi. Good morning, guys. I got couple of question. First of all, did you get the cash from the retroactive benefits from the French Tax change, yet?

Jeffrey A. Joerres - Chairman, Chief Executive Officer, and President

Yes, good question. We did get much of that cash as we… once the rules went into effect which was in the middle of April, than our subsequent filings for those changes, we were able to effectively take the enhanced subsidy if you will, just automatically reduce it from our payments due into government. But we still have to do is get the cash from 2006 and we file the appropriate paperwork with the multiple agencies that were required to do that with. And that will be coming, we might see some of that coming into the forth quarter, but I think more likely next year by the time it gets processed by the government.

Gary Bisbee - Lehman Brothers

And around how much approximately… how much you are expecting with that?

Jeffrey A. Joerres - Chairman, Chief Executive Officer, and President

I don’t have an exact number for you, here on that maybe we get little bit more clarity as we get through the forth quarter. But, surprise to say it will be several million dollars.

Mike Van Handel - Executive Vice President and Chief Financial Officer

Couple tens of millions.

Jeffrey A. Joerres - Chairman, Chief Executive Officer, and President

Yes.

Gary Bisbee - Lehman Brothers

Okay. And you know in U.S. you did a great job over the last year’s growth slow that continuing to get the margin improvement. If we would to think about some of your businesses in Europe seeing somewhat slower growth trend, just trying to gauge your confidence and ability to continue to get margin gains in the phase of the scenario in which you had positive, but somewhat slower revenue growth. Do you still feel pretty good, looking-forward over the next few quarters by your ability to get margin?

Jeffrey A. Joerres - Chairman, Chief Executive Officer, and President

There is a couple of question in there. One, is our... we haven’t seen slower growth in Europe growth from second quarter to third quarter increase. And we see it let’s called it about flat maybe just marginally down on revenue. So, when you are in the mid upper teens we won’t be seeing any kind of de-leveraging. Now, having said that when you look at the component and what we’ve done in efficiencies and system there is no reason for us to believe that we will not be able to manage that down and those of you have been with us for a long time whether it been in 2000 or 2001. We’ve got an organization. We’ve got something in the organization called the cost containment program that kicks in a various different levels based on performance. And we feel confident we’ll be able to manage through that. What happen is there does come a point when that top-line either persistently has been slow or slows in a dramatic way that, then you do get the de-leveraging you started to see that up bit in the U.S., but when we look at the fourth quarter and you can tell by the guidance, we are not seeing that effect us and we would see it is too early to really give a good prediction on first quarter.

Gary Bisbee - Lehman Brothers

Okay. And then just lastly, you know you obviously step up the buyback dramatically in this quarter with the SOX, still down quite a bit of it buyback. How do you think about that on a going forward basis I mean likely to remain at pretty rapid rate or is there something in particular you’re ready to do it, contractually this quarter? Thanks a lot.

Jeffrey A. Joerres - Chairman, Chief Executive Officer, and President

I think on the share repurchase the way we think about and I thought about it historically, it’s has been, as we have free cash flow, we will use that free cash flow that repurchase shares. If we don’t have any other immediate uses for, because we don’t like access cash under balance sheet. We like to get that back to the shareholders in an effective way so, as we’ve been going through this year, we’ve been accumulating cash certainly I had a sufficient amount of cash on our balance sheet. And as we saw the shares retract a bit. We certainly did get more aggressive on the buyback program. I think, as we look forward we will continue to look at share repurchases as a way again to efficiently to get back access cash to shareholders, so there will be somewhat of function of free cash flow and in our outlook free cash flow and other needs for cash in the business. So that’s how we think about it going forward.

Gary Bisbee - Lehman Brothers

Great. Thanks a lot.

Operator

We have a question from T.C. Robillard, Banc of America Securities. Your line is open.

Thomas Robillard - Banc of America Securities

Well, great. Thank you. Just a follow-up on the share buyback slightly. Can you, first with the actual diluted shares outstanding were at the end of the quarter?

Jeffrey A. Joerres - Chairman, Chief Executive Officer, and President

I don’t know if I have… I don’t have the end of the quarter number, I have got the average for the third quarter number which is 84.1, but I don’t have the number as of the end of the quarter right here. And the expectation for the fourth quarter is for diluted weighted average shares of 82.4 million.

Thomas Robillard - Banc of America Securities

Okay. And then, is my math correct if I assume that… of the new authorization you guys have already brought back 500,000 shares for roughly 35 million?

Jeffrey A. Joerres - Chairman, Chief Executive Officer, and President

Yes. Slightly, above 500,000 for slightly less than 35 million, your math is correct.

Thomas Robillard - Banc of America Securities

Okay, great thanks. And then just lastly on France, obviously been a deceleration in terms of the revenue growth if you are looking at on a constant currency basis, but if you look at the continued margin improvement and this excludes, excluding all the payroll tax benefits that you got just on, kind of, core operation. Are you still able to show year-on-year and even sequential improvements in the operating margin? Can you talk to what else has done, I think it’s clearly it’s not a revenue acceleration that you are just getting, kind of, some leverage on the fixed assets, what else are you guys able to do there that are showing continued margin improvement in that market?

Jeffrey A. Joerres - Chairman, Chief Executive Officer, and President

Yes. Your point is a good one. We’ve improved by the French market by 20 basis points in operating margin, when you stripped out all of the subsidy in the third quarter, which is followed by about 40 basis points in the first half of the year. So, if you look at the components of that what you will see is our gross margin on the temporary side of the business is quite stable. We are getting a little bit more gross, higher gross margin overall because of the permanent recruitment business we are doing there, but really when it comes down to is driving the efficiency within the overall operation itself. And our French organization, our masters add efficiency and they are always looking for continuous improvement and I think they have done an impressive job in the market that, well that seems some growth. You are right, its not phenomenal growth, yes we are able to continue to chip away at number of efficiency initiatives to keep driving that. So, I think it’s a good performance, I don’t think there’s anyone thing that I would point to but it’s a continuation of looking at our field operations and our head office operations and finding opportunities to keep getting better.

Thomas Robillard - Banc of America Securities

And is it fair to assume that there are… there is continued efficiencies to be guide out as well as, kind of a gross margin mix that could continue to help improve that irrespective of just pure revenue leverage.

Jeffrey A. Joerres - Chairman, Chief Executive Officer, and President

We, as an organization have that list fairly well compiled not only for France, but for every single location and every single entity of what over the next three to four years, whether it would be shared support centers or anything else that we’re working on, I have already done. So, we believe that we have a lot of opportunity in that area, but we’d like to move at a pace that is appropriate because it’s about the client and the candidate you do something a little bit too rugged or too fast and you don’t pay it temporary that’s the basic brand damage right there. So, we’ve got the list, there is more in France, there is much more in France. They know about it, they’re talking about it. And there is much more all over the world and we are just going at it in a sensible way and in a way that is quite sustainable.

Thomas Robillard - Banc of America Securities

Okay, great, Jeff. Thanks for the extra comment.

Jeffrey A. Joerres - Chairman, Chief Executive Officer, and President

Thank you.

Operator

We have a question from Mark Marcon, R. W. Baird. Your line is open.

Mark Marcon - Robert. W. Baird & Company

Good morning and congratulations. Just wondering on, nine years ago, Italy legalized temporary staffing for the first time and now it’s generating more operating profits than our U.S. operations. Last week, we got this announcement about China and you’re the only non-Chinese company as far it’s able to provide temporary staffing services over there. And what I’m wondering is when we think about that from a longer term perspective. How do you think about that job? I know you’ve been meeting with the Chinese Minister of Labor. What are the prospects over there for the longer term perspective, when do you think about the next ten years of Manpower.

Jeffrey A. Joerres - Chairman, Chief Executive Officer, and President

Well, to us between China and India, we see these as the real potential to dwarf what great accomplishments have happened in Italy. And the reason we say that is that you know, clearly, sorry it does have this advantage here. And the labor arbitrage, which is being a key driver for moving a lot of businesses there, is actually starting to be minimized a bit. So, it’s not unusual for us to be putting engineers to work at Chinese companies or at multinationals at $30,000 to $50,000 to $60,000 a year. So, we’ve got some 61, I think right now. Maybe, 62 offices in China and about the same in India. We believe that this is a very big opportunity for us. We are moving towards these opportunities with the right speed that is not about press releases and we were reluctant even put this one out because we want to approach the Chinese market in a very sensible way. We’ve worked very hard with the government and we’ve done a lot of training with our Shanghai International partnership office that has been established for almost four years now. So, we really look at these as great opportunities, it comes down to timing. If someone were to say, is this going to be a big impact on us next year or the year after? Yes, it’ll be a marginal impact it will help a little, but the big impact isn’t really until, you know, kind of a four-five year out, which is like a snap of a finger sometimes. So these are big opportunities, big geographies, we’re moving into tier two cities in China in 2008 and a tier two city can be as much as 25 million people. So, there is a lot of opportunity, we’ve got a good management there and we’re excited about the prospects.

Mark Marcon - Robert. W. Baird & Company

Great. And then, when we think about Italy… you had a 120 basis point improvement in your operating margins over there. How much higher in the margins go in your 7.3%?

Jeffrey A. Joerres - Chairman, Chief Executive Officer, and President

I’m never satisfied, but having said that it will really will depend upon their mix of business. Its two things when you look at that market is, how much permanent recruitment can we get? And how does that improve the mix? And then what is our balance of business between small medium-sized businesses and large-key accounts. And then what is the evolution of the market place? So those are the things we look at. Because there is a basic evolution of the market place that would probably drive down some margin. However, we believe that because there is a large content of small companies within Italy, which is a little different than other European countries, particularly in Northern Italy. And they are really seeing the value of the service. We think, we can probably inch that up a little bit, but to see that dramatically improve is out of the question. But my view is, inch it up a little and you’re still a hero because that’s a good margin for our business.

Mark Marcon - Robert W. Baird & Company

Absolutely. And then, the broader question, we’ve got Merkel in Germany, we’ve got Sarkozy in France. What are your European colleagues telling you about, kind of the longer term point of view about Continental and Europe?

Jeffrey A. Joerres - Chairman, Chief Executive Officer, and President

I would say the sentiment is they believe it’s their time in the batter’s box. There’s a lot of buoyancy there that there is a strength, there is a seriousness of the EU. There are leaders within the EU now that are talking about growth and talking about involvement on an overall scene. And this is creating a sense of confidence and then is being backed up with an economy that is continuing to be strong and one of the real questions will be what they do with their currency and they worked that out, but if you would have talked to our people they really feel is though, it’s their turn if you will to be a real economic force on a worldwide basis.

Mark Marcon - Robert. W. Baird & Company

Well, congratulations and obviously boards well for you.

Jeffrey A. Joerres - Chairman, Chief Executive Officer, and President

Thanks. One last question please.

Operator

Our final question comes from Jeff Silber, BMO Capital. Your line is open.

Jeffrey Silber - BMO Capital Market

Great. Thanks a lot to let me sneak in. On the franchise… can you just tell us what were the strategic reasons behind that and that’s something we should expect going forward.

Jeffrey A. Joerres - Chairman, Chief Executive Officer, and President

The strategic reason behind …

Jeffery Silber - BMO Capital Market

Behind the franchise or purchase in the U.S.

Jeffrey A. Joerres - Chairman, Chief Executive Officer, and President

Anytime there is franchise that is… that we either with once to purchase or wants to be purchase, we will buy, it is in a creative acquisition. They carry all of the same brands, wouldn’t be unusual for us in any given year to pick up three, four franchises. This one just happens to be a very large franchise, so it’s kind of, moved in and need a little bit more, but you’ll see some smaller acquisitions happening in the forth quarter. We do these and they are very easy because they follow the same brand, they follows the system, the culture. It’s sometimes have to do with the state planning and some of those issues.

Jeffery Silber - BMO Capital Market

Right, great. And on capital expenditures, Mike or one of you can tell what we should expect in the forth quarter. And I know you are not giving 2008 guidance, but sort of, directionally where should we see CapEx going next year relative to 07?

Mike Van Handel – Executive Vice President, and Chief Financial Officer

Yes. So, we’ll finish this year up in the $90 million range as we look into next year, we’d proceed, continued new office opening, continue refurbishments of branches as we normally would. So, now we would expect what I call some of a normal increase in the 10% range, certainly we haven’t developed all of our plans, we are in the midst of that right now. So, I’ll say that, that is not only official guidance, but I would say, I wouldn’t expect anything too far out of the ordinary at this stage.

Jeffery Silber - BMO Capital Market

In the bulk of the CapEx relating to your new headquarters, was that last year or this year?

Jeffrey A. Joerres - Chairman, Chief Executive Officer, and President

All, CapEx were on.

Mike Van Handel - Executive Vice President and Chief Financial Officer

Really, related to new headquarters, very limited if any CapEx overall, I mean it’s the new offices are leased premises are over 17 years lease and some of the… so it’s new effectively and even some of the furniture and fixtures that were came in as part of that lease as well, so no significant impact from the new headquarters.

Jeffery Silber - BMO Capital Market

Okay. Great, thanks again.

Jeffrey A. Joerres - Chairman, Chief Executive Officer, and President

Well, thank you all for attending the third quarter conference call. And we look forward fourth quarter and full year one in January. Thank you.

Operator

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

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Manpower Inc. Q3 2007 Earnings Call Transcript
This Transcript
All Transcripts