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Manpower Inc. (NYSE:MAN)

Q4 2007 Earnings Call

February 1, 2008, 8:30am ET

Executives

Jeff Joerres - Chairman and CEO

Mike Van Handel - Chief Financial Officer

Analysts

Mark Marcon – RW Baird

Brandt Sakakeeny – Deutsche Bank

Kelly Flynn – Credit Suisse

Michel Morin – Merrill Lynch

Allen Zwickler – First Manhattan

Brian McGuire – Lehman Brothers

Jeff Silber – BMO Capital Markets

Operator

Welcome to the Manpower Fourth Quarter and Full Year Earnings Results Conference Call. [Operator Instructions] Now I’ll turn the meeting over to your host for the today Mr. Jeff Joerres, Chairman and CEO.

Jeff Joerres

Good morning to all for our Fourth Quarter Conference Call and Full Year Conference Call for 2007. As usual with me this morning is Mike Van Handel our Chief Financial Officer. I’ll go through the results in general, discuss the segments in a bit more detail. Mike will go through a better understanding of the income statement, balance sheet and a lot of the items that affected the fourth quarter. Additionally I will spend some time looking at not only the fourth quarter and full year but some of the first quarter of ’08 so Mike before we do that could you read the safe harbor language.

Mike Van Handel

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 here by reference.

Jeff Joerres

Fourth quarter 2007 was another string of very solid quarters for Manpower. Our revenue of $5.6 billion was up 20% in US Dollars 9%. The revenue achievement for the most art came from continued strength in Europe, strong performance in Asia, so congratulations to the Asian team I know a lot of work has been done there. Then strong performance in Right Management as they also have done a lot of things in working their footprint and some of the product offerings.

However we continue to see softness as you’ll see in the US market. Our gross margin 18.6 to 26 basis point improvement continues to be positively affected by our geographical diversity and spread of business. Our operating profit $223 million up 32% in US Dollars and 18% in Constant Currency. I’ll have to break that down a little, this includes a $23.3 million favorable adjustment for the French payroll tax, it also includes a $15 million legal reserve that we put in place related to the French competition case, also a $4 million restructuring charge for Jefferson Wells. Stripping all that out kind of netting it all down a $219 million operating profit of really impressive performance for the organization.

Our operating profit margin was up 40 basis points to 4%, great performance. This resulted in earnings per share increase of 42% to $1.63, 27% increase in Constant Currency. We continue to see positive trends in the majority and major business units and geographies, clearly we are going to be vigilant and continue to monitor any of the trends to ensure that we pull the appropriate levers at the right time if there are any further slow downs.

However we also believe, and those of you that have been with us for a while we know that this some opportunity time also. We’ll continue to invest where appropriately in emerging markets and continue to expand there. Our revenue of $20.5 billion is record breaking, our total system wide sales of $21.9 billion, 15% increase over our system wide sales in 2006. We finished the year with operating profit of $825 million slightly over our 4% margin; let’s take out that French subsidy that brings it to earnings of $676 million a margin of 3.3%.

Our earnings per share came in at $5.73 an increase of 65% in US Dollars, 53% in Constant Currency, excluding the French subsidy our earnings per share was $4.68 up 27% Dollars, 17% Constant Currency. The organization has done a great job across all the units where there’s growth we are taking advantage of it and where there’s slowing we are managing it very effectively. As we look to the current trends into the first quarter we see our revenue growth between 15% and 17% that would give us a range of earnings per share about $0.78 to $0.82 with an $0.08 positive impact.

Our gross margin as I mentioned earlier continues to make good progress, the improved gross margin came from several different areas. We saw slight improvement, positive of course, from the French payroll tax so we look at that as a short term. Core temporary help business, the recruit business actually experienced an increase of 8 basis points. Improvement came from good solid pricing as well as a good mix in geographic presences. Many of our fastest growing operations are our highest gross profit margin operations.

We also continue to see a good strong impact from our Permanent Recruitment Business. Our Permanent Recruitment Business is up 42% over last year, 29% in Constant Currency. We are still feeling the negative effects of our gross profit margin from declining revenue at Jefferson Wells however. If we were to move on the US, the US is still seeing a challenged and potentially difficult environment. An environment that’s not necessarily gotten weaker and I’d like to underscore that, but at the same time we can’t say that there’s any kind of ‘U’ shaped curve here because it’s not getting any stronger.

We entered the quarter actually expecting revenues to be down about 3% to 5% when in fact they were actually down about 8% with revenues of $488 million. December, which is always a difficult month to predict was down a bit more than we had anticipated however, we actually started to come back in the first three weeks of January. I’d also like to put the same caveat on that which is January was also a difficult time to predict because its hard to tell how organizations are bringing their staff back or not bringing their staff back.

The fact that we’ve seen a little bit of stabilization to slightly up in January at least give us some confidence we’re not really dropping off of any kind of cliff if you will. Gross margin from the US business was up slightly on a year over year basis primarily because of the lower direct costs which is workers compensation and state unemployment tax. Costs are being managed as you would anticipate but we are seeing some de-leveraging on our expense base. The margin for the quarter finished at 3.8% still a healthy margin for the drop in top line that we’ve seen over the last five quarters, including the fourth quarter of 2007.

The US finished the year at 4.1% operating profit margins similar to the prior year so a strong performance given the deceleration of revenue. We are seeing in Manpower Professional and experiencing positive trends, revenue was up 9% on a year over year basis in the quarter and we continue to see solid growth. Part of that is our focus however, it’s more than just the focus in general it’s true that is a healthier part of the labor economy right now.

Moving on to France, French operation had a very good quarter, revenue was up 5% in Constant Currency which is about the middle of the range of what we had anticipated, 18% increase in US Dollars to nearly $2 billion in revenue for the quarter. Operating profit of $82 million is up 34% in US Dollars and 20% in Constant Currency. This includes adjustment related to the French payroll tax adjustment and the legal reserve that I mentioned earlier.

When combined, these items there’s a net positive impact of a little over $8 million on the French OUP about a 50 basis point impact on our 4.4% operating unit profit margin which was up 50 basis points from last year. Netting all those out our operating unit profit margin was flat on the year over year basis while our operating unit profit was up 20% in US Dollars and 7% in Constant Currency. We have seen a slower start than the beginning of the year but we continue to see positive revenue gains in France.

We continue to monitor the effects of any changes in the 35 hour work week as well as the potential liberalization of employment law was in France. The movement of the numbers though have been so minor so that it’s currently difficult to discern any effects from the change in the 35 hour work week. Clearly we’ll keep you updated if we do see any. We did record, as mentioned earlier $15 million legal reserve which is associated with the dialogue that we’ve had recently with the competition council within France.

This goes back to an investigation initiated by the government in 2004 while we’ve only had initial discussions there has been enough of a definitive assessment on our part and not tremendously definitive so we’ll continue to take a look at that but nevertheless we believe that based on the information that we have now to be fiscally prudent to put the reserve on our balance sheet. However we’re not sure of the time frame of when this may be pursued more and when there may be any kind of final resolution.

We continue to be cautiously optimistic about the French market, our Permanent Recruitment business is up 72%, our work is beginning in earnest and we are capturing also more of the small, medium size business market place if you will in France, a strategy for the entire company. In that market in our French market in 2007 we are up 15% in small/medium size businesses so we are showing that we can expand our client set and we believe there’s more to be done in 2008.

Moving on to EMEA, EMEA clearly was the highlight of the quarter. The EMEA segment the revenue was $2 billion up 33% in US Dollars, 20% in Constant Currency. We are seeing very good leverage within the region and many of our largest operations continue to produce very good revenue results. Operating unit profit of $90 million is up 40% in US Dollars and 25% in Constant Currency. This resulted in operating unit profit margin of 4.6% a 20 basis point improvement.

We continue to see strong performances from many of the same operations we’ve had performing well over time, Nordics 38% up with Sweden leading the group up nearly 50% in US Dollars, 35% in Constant Currency. We continue to see good results from Norway; revenue was up 29% in Dollars, 9% in Constant Currency. Elan our IT staffing company performed very well with revenue up 49% in US Dollars, 38% in Constant Currency.

If you’ll recall the last conference call and the conference call before that we talked about what we had in the pipeline and felt confident that what was in the pipeline in Elan would start to really show its effects in the turnover line and clearly it’s done that. We are also seeing margin expansion and good leverage within Elan because of that revenue expansion. Similar to what we’ve seen in the US the Profession Services area in this case primarily IT continues to show strong growth so Elan we believe continues to do quite well.

Shifting to our UK operations, they also performed well; revenues were up 21% in US Dollars and 14% in Constant Currency a marked improvement over year ago. We’ve done a lot of work in the UK market and we believe that what we have done over the course of 2007 has really been important work for us while the UK still has a lower operating unit profit percent than the balance of Europe our management there has done a tremendous job and we continue to see a nice growth in the UK market.

Germany as all of you know one of our major operations grew at 41% in US Dollars 25% in Constant Currency. While we have seen some moderation in our German growth rates over the last several weeks we are still experiencing good growth on an annual basis revenue grew at 40% in 2007 in US Dollars and 28% in Constant Currency.

Netherlands a shining star within the organization is up 25% US Dollars 11% Constant Currency. In Eastern Europe we are experiencing growth rates ranging from 20% to 100% in US Dollars and we will continue to invest in these operations and we’ve also become much more active in a program we’ve put in place called Cross Border Connections, which is facilitating skilled labor in moving within the Euro zone of course primarily from Eastern Europe into Western Europe. We believe that not only in 2008 but well beyond this will be an important offering for Manpower.

Italy is doing very well, revenue up 26% in US Dollars 12% in Constant Currency. Operating unit profit is quite substantial at $34 million up 84% in Constant Currency and 108% in US Dollars. Italy finished the year very strong with total revenue of $1.4 billion up 23% in Dollars and 13% in Constant Currency. Operating unit profit for 2007 came in at $104 million and a margin of 7.4% for the entire year a tremendous performance and a performance that actually got better in the fourth quarter with operating unit profit margin of 8.3%. It’s a very solid margin for our Italian operation.

Moving on to Jefferson Wells, we actually did slightly better than we had anticipated on the revenue line. We were expecting a decline of 6% to 8% but in fact we were down 4% to $81 million. On a sequential basis we were down 5% which actually reflects the usual slow down in December. Within the operation we had decided to restructure in order to be more agile in the marketplace. What we are doing is we are moving many of the functions that were in the cities, territories to a regional territory.

This resulted in a charge of $4 million that we took in the fourth quarter and I’m confident that you’ll see a positive impact from this in 2008. On a full year basis Jefferson Wells came in at $332 million 11% down from last year and profit suffering as we continue to invest organically overseas. We continue to open offices overseas and add additional service line. We believe it is the right thing to do particularly given the balance of the business so it’s a good opportunity for us. We made this decision and thought it would be important given that we do have all this financial flexibility in the performance of other parts of Manpower. Those investments we are looking forward to start seeing kicking in, in 2008.

Right Management if we move to that segment had a very good fourth quarter, revenue of $111 million is up 13% in US Dollars 6% in Constant Currency. As you know we’ve done a lot of work on re-foot printing the organization and coming up with innovative breakthroughs, offerings like our Right Choice offering, which I mentioned for a few quarters now. With that and a great effort from the team we’ve been able to see our operating unit profit of $12 million for the quarter while operating unit profit margin of 10.5% is much closer to where we believe that percentage should be for Right Management.

We are especially pleased with the growth occurring within the area that we see strategically important to Right Management and to Manpower. Many organizations are challenged with the attraction and development of talent at almost all levels within the company. Right Management is focusing in serving those clients needs through our organizational consulting group within Right Management such as assessment leadership development and coaching which has fueled a 16% growth on a year over year basis.

Global Supply such as [Lenoval], French Telcom, P&G, Barkley’s have all looked to Right with the responsibility to work across their organizations globally in most cases on the critical area of talent development. These are substantial wins in and very much in line with our strategy within the Manpower group and Right Management of bringing these assets together and creating a much more compelling proposition for our clients to help them win. We continue and believe that we will continue to see a positive trend as we move into the first quarter.

Our Other Operations segment, they did quite well, revenue of $720 million is up 17% in US Dollars 10% in Constant Currency. Our operating unit profit of $27 million is up 28% in US Dollars yielding a 30 basis point improvement in our operating unit profit margin to 3.7%. Our Japanese organization grew at 12% in US Dollars and we are seeing continued growth in energy in that marketplace. We have become much more aggressive in that marketplace an office opening, securing candidates. We are looking forward to a successful 2008 in Japan.

Our other Asian operations, primarily if we were to call out India and China are still seeing very solid top line growth and we are looking to capitalize that top line growth and monetize some of that on the bottom line as we move into 2008. I thought I’d give you just a quick update on some of the new labor law situations in China which mandate a new minimum wage and legislated a form of a bench model for the staffing industry.

Actually as we sit here at the end of January, beginning of February it’s really yet to take any foothold within the marketplace as there’s more discussion happening and occurring with the government to see how this can be done without too much disruption to the system. We at Manpower and the Manpower team in China are fully ready to implement all aspect of what the Chinese government is asking for. We are well positioned with strong relationships with our clients there and a very solid relationship with the government regarding our licensing and that’s happened by really proving our capabilities in training and development for our candidates which is a key economic development piece for the Chinese labor market.

In the fourth quarter 2007 it was a record setting quarter, we did experience, as anticipated some chop in the water in some of the markets primarily in the US market. What we are seeing in the US market will not change dramatically over the next quarter and it’s difficult to imagine if you will how we could predict out into 2008 beyond the first quarter which we haven’t. We view what is happening in the US economy is different from what happened in 2000 and 2001. In 2001 there was more of a traditional affect on the labor market.

What I mean by that is there was a slowing of demand for goods and services by our clients and therefore we were very much part of being a leading indicator as labor and staff was being whittled out of businesses in order to adjust for the slowing demand. In the current environment which is really much more based on a slowing housing market and some challenges within the financial industry that means that there is not really an immediate effect or impact on the labor market.

It doesn’t mean there won’t be of course as it works through the system but it doesn’t have the immediacy as it did in 2000 and 2001. We are seeing cautious approaches from our clients as they read the press and are challenged potentially in some of their situations. On a global front we are seeing some signs in moderation in Germany and the Netherlands and slightly in Italy. However it’s not of a size that would indicate that we would modify our 2008 plan at this time.

I recognize it would be helpful to give more of a full year view however I really believe it would be trivializing the complexity of the global markets that we are in which is very different than where we were before. If you just go back to 2000 and 2001 we were making somewhere in the neighborhood of $20 million in profit maybe a little less in Italy and today we are making over $100 million so our balance in geography also is dramatically different.

We’ve always kept our hands on the appropriate levers during times like this and we will continue to do that whether it be what we do with office openings, discretionary spending or other SG&A elements. You can count on us to do the right things to maximize what we can do in 2008 but never short stop where we are going from a longer view perspective. We will continue to expand in emerging markets adding additional office in fact in these emerging markets are relatively easy since we have the majority of the assets already on the ground so it is a slight and marginal increase in expenses.

Having said what I had just talked about with the market we are looking for earnings per share in the range of $0.78 to $0.82 with an $0.08 positive impact from currency in the first quarter of 2008. That completes my segment detail and kind of general run down. What I’d like to do now is have Mike talk in a little bit more depth on the financials.

Mike Van Handel

I’d like to begin today by giving you a little bit more detail on our fourth quarter performance relative to our previously issued guidance back in October. Fourth quarter revenue growth in Constant Currency terms was 9.4% which is toward the higher side of our guidance and a bit stronger than the 8.5% growth we reported in the third quarter. Our operating profit margin came in at 4% which included a benefit of 10 basis points from non-recurring items. If you include these non-recurring items our operating profit margin was 3.9% which is also at the high end of our guidance range.

Our strong operating profit margin performance was due to strong margin expansion in EMEA, Asia/Pac and Right Management. Earnings per share for the quarter was $1.63 significantly exceeding our guidance of $1.50 to $1.54 while much of this performance comes from strong operational results there are a number of non-operating items to consider. The currency impact on the quarter was $0.17 favorable that compares to our earlier estimate of $0.10 as the Euro became stronger relative to the Dollar during the quarter.

Additionally, as Jeff discussed earlier there were a number of non-recurring items including a favorable adjustment related to the French payroll tax change of $0.18 a charge for a legal reserve for the French competition case of $0.18 and then a restructuring charge related to Jefferson Wells of $0.03. You’ll note that the two French items had a net positive impact on operating profit of $8.3 million but the net impact on earnings per share was zero. This is because we did not record the tax benefit on the legal reserve but we did tax effect the payroll tax adjustment. Therefore on an after tax basis these two items netted each other out.

Reviewing our earnings statement detail you’ll also note that our corporate expense was $30.5 million compared to $23.2 million in the prior year. This increase was the result of our decision to accelerate the pace of investments in several global strategic initiatives given the strength of our underlying operations in the fourth quarter. Our net interest expense in the quarter came in at $6.8 million compared to $8.2 million in the prior year. This lower net expense was the result of higher interest income which is due to higher cash balances and higher interest rates earned on those cash balances.

In summary our reported earnings per share of $1.63 was $0.11 above the mid point of our guidance of this amount $0.04 relates to the non-recurring items and currency just discussed and the remaining $0.07 relates primarily to favorable operational results and lower net interest expense.

Next let me turn to the balance sheet, the balance sheet continues to remain in good shape at year end with $538 million of cash and $950 million of borrowings resulting in net debt of $377 million. Our total debt to total capitalization remained stable during the quarter at 26%; our accounts receivable at year end are $4.5 billion which represents an increase of $642 million over the prior year. Of this increase $322 million represents higher business volumes and $320 million represents changes in currencies between years.

Our day sales outstanding improved one day compared to the prior year which is consistent with the third quarter improvement. Free cash flow defined as cash from operations less capital expenditures was $341 million for the year an increase of 22% over the prior year. Capital expenditures for the year were $92 million which includes the cost of new branch openings as well as normal refurbishments to our network of 4,500 offices.

Share repurchases for the year totaled 6.1 million shares for a total purchase price of $430.5 million of this amount we paid $419 million in 2007 and $11.5 million was paid in early 2008. In the fourth quarter we purchased 1.2 million shares for $71.2 million. As of year end we had 3.3 million shares available for repurchase under the latest Board authorization. Cash used for acquisitions during the year totaled $123 million which primarily relates to the acquisition of US franchises, of this amount $23 million occurred in the fourth quarter.

Next I’d like to turn to our outlook for the first quarter of 2008 based upon current trends we are expecting a continuation of good revenue growth in the first quarter ranging from 15% to 17% in Dollars or 7% to 9% in Constant Currency. We expect our strongest growth to come out of Europe with our EMEA segment growing between 14% and 16% in Constant Currency and Italy growing between 9% and 11% in Constant Currency.

Expect our US business to be in line with prior year which is aided by acquisitions which were completed in the second half of 2007 but also increasing business from a few large accounts. Expect revenue in France to be in the range of 2% to 4% in Constant Currency which is slightly below the 5% growth rate in the second half of 2007 as 2008 has started out a little bit slower.

Jefferson Wells’s revenue is expected to be in line with prior year and on a sequential basis. We are finally getting to the point where growth in the non-socks business at Jefferson Wells is beginning to overtake the declines in our Socks business. We expect a continuation of growth in both Right and the Other segment with Right growing between 4% and 6% and the Other segment growing between 8% and 10% in Constant Currency.

We expect our gross profit margin to improve slightly over the prior year ranging from 17.7% to 17.9% reflecting our continued efforts towards higher value business mix. Our operating profit margin is expected to rage between 2.1% and 2.3% and our tax rate is estimated to be 37.5%. This results in earnings per share rage of $0.78 to $0.82 with an estimated $0.08 of positive currency impact. This assumes weighted average shares outstanding of $81 million in the first quarter.

Finally I’d like to briefly summarize the year which was a very strong performance for the company by many measures. Revenue for the year was $20.5 billion an increase of 17%, earnings per share for the year was $5.73 and increase of 65% over the prior year. If we exclude the impact of the French payroll tax change and legal reserve on 2007 and the impact of reorganization costs in both years our pro-forma earnings per share would be $4.89 compared to $3.70 the prior year which reflects a 32% increase in Dollars with a 23% increase in Constant Currency.

Now let me turn it back over to Jeff.

Jeff Joerres

Operator if you could open it up for questions.

Question & Answer Session

Operator

[Operator Instructions] Our first question comes from Mr. Mark Marcon, RW Baird.

Mark Marcon – RW Baird

I was wondering with regards to France can you give us a little more color on a couple of elements. One element would be it looks like we’ve had at least the preliminary approval with regards to the changes in terms of some of the contracts that would inject more flexibility into the overall labor market. What do you think that impact is going to be? The other question is what do you think the impact is going to be with regard to [Ronstot] acquiring [Videor], does that create some dislocations that would increase the opportunity for you to gain share and in addition to that would you suspect that the pricing environment could get even more favorable?

Jeff Joerres

The first one which I addressed slightly in some of my opening comment is a little hard to ascertain so those of you who may not follow it as closely what basically has happened now for a few months is that individuals and companies are not penalized if you will for working more than 35 hours. In fact there is some relief when it comes to any of the social charges. We are looking at that very closely and we are hearing some clients that would say that they are increasing some of the work and individuals are increasing some of the work that they are performing.

However when I look at trends and I actually take a trend over all of ’07 and I can do that weekly, so if I take a weekly trend over ’07 and a weekly trend so far into ’08 its pretty hard to see any kind of bump in there that would says its caused by that. However, I want to make sure that people know that I would suspect and I’ve said it before there could be some push down in our revenue based on that but there’s actually some other things going on in the marketplace right now which is there is some caution I the marketplace so we are getting it in some clients conversations regarding using staffing a bit more.

There could be some waiting and what we are going to do is every week we look at that and spend a fair amount of time looking at the implications of it but so far it’s really been on the margin and I say that only because I can’t see it. Mike, anything to add to that?

Mike Van Handel

I would agree entirely and maybe just a bit more clarifying on my comment. We did start the year out a bit slower in France and in fact the number of temps out on assignment starting out the year was below the prior year in the first couple of weeks but that trend has been improving through the month and now we are back at about the rate we were in the fourth quarter in terms of number of temps out on assignment.

The trend, it’s only four weeks into the year so it’s hard to see what the trend is but again even though we started the year out a little bit slower that certainly doesn’t seem to relate to any changes per se that we are seeing from a regulatory standpoint.

Mark Marcon – RW Baird

What I was referring to was more the change in terms of the regulations as it relates to the liberalization.

Jeff Joerres

CDI and the CDD. I guess I could bring it down to say it’s still much of the same. The CDD is something that actually could work to our advantage as we are looking CDD’s because the CDD is about twice the size the market is contract staffing or temporary staffing. Again, we just have not been able to ascertain, we are having conversations with clients, we are hearing about some of these things but the fact is we really haven’t felt much at all.

Mark Marcon – RW Baird

Did they change anything that would positively or negatively impact the staffing industry? Was there any change with regards to vacation allocations or anything along those lines?

Jeff Joerres

Not that I’m aware of and any changes they make interestingly also will help us on the SG&A side because we employ 5,000 – 6,000 people in France as well. Right now the best answer I can give is we are not seeing it but we think there could be something there but it seems to be pretty minor right now.

Mark Marcon – RW Baird

The clients aren’t saying, “Oh, this is going to change how we conduct our business.”

Jeff Joerres

That’s correct, we are not hearing, now we’ve got a strategy change to the right because of this, we are not hearing that.

On the [Ronstat] deal, [Ronstat] is a very, very small player in France so its really about beauty or beast and we view this as we frankly do in most of the territories as an opportunity while there is some challenge in bringing organizations together to talk about our focus, our culture, our strategy. We are looking towards trying to pick up some market share. We are not going to do that on pricing and I think that in general [Ronstat] has stronger pricing policies than would [Videor] so it could be a positive but there’s still just a lot of noise in the channel, a lot of noise in the street without much activity because it actually hasn’t even been approved by the EU.

Mark Marcon – RW Baird

But historically when we’ve seen mergers like this when [Ideon]/Echo got together initially or Olsten Adecco historically picked up share is that not correct?

Jeff Joerres

Rights, because it’s pretty hard if you have two office right next to each other and you combine them one plus one does not equal two in the staffing business. We are aware of that, we’ve got our list, we know where everything exists and we are going to go after getting more business.

Operator

Brandt Sakakeeny, Deutsche Bank.

Brandt Sakakeeny – Deutsche Bank

A question on Right now, we’ve seen a couple of quarters of very good performance for first quarter, guidance also looks good. Can you just add a little color, was it management changes that occurred there earlier or is it sort of a softening of the economy helping to give you a tail wind there?

Jeff Joerres

It’s a really good question and we’ve worked now for about three years and I think there are two things that make a big difference. One there has been a real structural shift within that business of a lot less people coming into our offices and getting, if you will, full service career transition business which has left us with a tremendous amount of overcapacity in real estate and potentially in some cases consultants. Over 2006 and 2007 and may even look back to ’05 what we’ve done is we’ve re-foot printed the business and we also introduced a new product offering that allow you to do things either in our office or in home or in a coffee shop called Right Choice.

Those two elements, having a better SG&A foot print as well as an innovative offering has really brought forward the profitability and in many cases the revenue enhancement. When we look at preliminary industry reports in the US the reports which will come out more finalized in the next week or so we are looking at 1%, 2% growth in that market. We are not seeing the whole sale of thousands of people coming out.

Clearly it’s nice that we have some segments or sectors that are in a little bit more of a strain so we are servicing them but I don’t think that this is, we are not getting inundated with tens of thousands of sessions at hotels taking people out of businesses it just isn’t the environment right now.

Brandt Sakakeeny – Deutsche Bank

Mike can I just get a couple quick modeling questions? Option expense for the quarter?

Mike Van Handel

Actually I don’t have a detailed number here Brandt I will send that to you.

Brandt Sakakeeny – Deutsche Bank

Does interest expense for the first quarter and maybe can I get it for the full year, your view?

Mike Van Handel

In terms of 2008, clearly it will depend upon cash flow and I think the overall net interest we’d be looking the range in the first quarter of $9 to $10 million, something like that for net interest expense. As we go on through the quarter it will depend a lot upon acquisition activity, share repurchases but you probably could use something of that nature at least for your preliminary modeling across the board and then we’ll see how it moves from there.

Brandt Sakakeeny – Deutsche Bank

What is the share count at the end of the year?

Mike Van Handel

The weighted average shares for next year is $81 million, the actual count in shares at year end I will send that number to you as well.

Operator

Kelly Flynn, Credit Suisse

Kelly Flynn – Credit Suisse

A couple of questions, back to Europe I guess in France specifically, can you give a little more detail on, you said you are seeing some signs of caution there, to clarify, is that economic related do you think or do you think its related to some of the secular scenes that you mentioned? Can you just call out certain countries in Europe where you might be seeing more signs of caution on the economy? Any color there would be helpful, and then I have a follow up.

Jeffrey Joerres

When we talk about a little bit of caution or softness when we look at the French market we are really saying more about economically. What we are earning from our clients there is we are going to be cautious. Now that Sarkozy is settled in there’s a little bit of reality about what is happening in durable goods growth, what is happening in potential GDP growth, those are softening slightly.

When we look at our businesses nicely laid out for you in December, beginning of January and then the end of January and as of last week. We are starting to see that come back closer to the 2007 levels; we are basically saying caution just because we are right on the margin. You don’t say caution if you are going from 15% growth to 13% but when you are at 5% and you are looking at 3% or where we guided down just a few percentage points we just wanted to put some caution in there.

Mike, do you want to cover some of the EMEA locations where we are seeing a bit more challenge? We talked about a little bit in Germany, the Netherlands and some in Italy.

Mike Van Handel

I think overall when you look at EMEA within out businesses we are seeing very good growth really almost across the board in the quarter and would expect such going into next quarter. When you look underneath and look at some of the specific markets and the market rate of growth we are seeing a little bit of slowing in those markets in some of those markets like Germany. For instance, third quarter we were grew 36% in Constant Currency, this quarter we grew 25% so you can see the market is slowing a bit.

The Netherlands would be similar where in the third quarter we were up 17% this quarter we are up 11%. Both those cases I think we are taking some market share, we are executing very well in those markets but while we are still taking some share we are slowing down as the market is slowing down a little bit as well. I would say we are coming off some extremely good growth rates and those are moderating a little bit but we are still seeing some good growth in the EMEA market overall.

Jeff Joerres

I want to add also, we are anniversaring some pretty big numbers. Germany popped in a few quarters, help me Mike, they were in the high 30s low 40s so yes, there is some slowing in there, we want to really dig underneath the covers and see how much are we anniversaring, how much is this difficult and how much is really happening in the economy.

Kelly Flynn – Credit Suisse

A follow up on the US economy, you probably saw during the call the payrolls are down 17. I appreciate what you said about this down turn being different, being more driven by mortgage and the financial more broadly but to the extent payrolls are a glimpse of the overall economy it would seem that the weakness has brought in. How would you position that versus your company? Would you say Manpower has less exposure to financials and sub prime read through and the overall economy does or do you think its just tough to read the payroll numbers given revisions, etcetera?

Jeff Joerres

Clearly revisions are tough and it’s also tough to read the payroll data since I don’t have it in front of me. Given what you’ve said I think it’s really interesting because we can do just a position of that number which is based on December and our December. We didn’t see very much difference between December and November if you took out some of the noise of the holidays in there. I think our view would be, as I said in my comments this clearly can affect the labor market and it is. It’s just that it’s coming from a little different perspective so we are more of a collateral as opposed to a leading in this situation.

We are still not hearing from a core part of our clients which is still a lot of manufacturing, light industrial, office within the manufacturing. No one is pulling the rip cord yet that we’ve heard other than those in a few targeted segments and we do not have a lot in the financial services area, particularly in that part of the financial services area. We do have call center work in mortgage companies but that activity actually tends to be fairly stable right now.

Operator

Michel Morin, Merrill Lynch

Michel Morin – Merrill Lynch

On Italy can your margins go any higher in ’08?

Jeff Joerres

I asked the question to Charlie in Operations differently I said when will they go higher. There is some opportunity but that is a well performing organization. The opportunity would come from some blend in business, maybe a little permanent to some Manpower professional that we would be putting in there. When you get a margin at that level we have some countries of course performing slightly above that within the EMEA region. I would hate to put ourselves in a position that says there’s a lot of expansion left in that number. Put the company at that number and I’d be happy.

Michel Morin – Merrill Lynch

Two very quick ones, in EMEA it looked like a lot of the upside came from the UK and I know you mentioned it briefly in your prepared remarks, I was just wondering if there was anything specific that happened? You went from 1% growth to 14% in the quarter. On the US I was wondering if you could quantify the impact of the contribution from the franchises ideally on both but certainly on the top line if possible.

Jeff Joerres

The UK they are executing well and we simplified the business, we restructured it we brought some offices in line, the management team has done a great job in communicating so the market data there is not out yet but we really think that we are on top of the market. We think that we are going to continue to do that for some time. I would say in our UK operation some of it is the energy and the focus that we have in there. We also just have not really heard from that client set or our management team there about slowing business.

As we moved into January and had discussions with them their feeling as though it’s still pretty good, not robust but still pretty good. The UK market is doing a great job there, we are a little bit lower in OUP so we’ve got to be working on some pricing and balance of business there increasing Manpower professional those are the areas we are working on there. Mike do you want to talk about the affects?

Mike Van Handel

The US business was down about 8% on a reported basis, if I remove the franchise acquisitions we’d be down about 14% on an organic basis. One element in that 14% we did have one large account that moved its business in house if you will, we didn’t lose the business to a competitor but they moved their business in house and if I take that out we are down about 10% year on year on an organic basis. So it’s probably a bit more the realistic number. If I look at a comparable number for third quarter we are down about 9% year on year. Effectively the fourth quarter looked a lot like the third quarter just from a trend standpoint.

Michel Morin – Merrill Lynch

These moving items affect the operating profit line? I’m just noticing a margin being down quite a bit.

Mike Van Handel

In terms of the operating profit side from a profit standpoint there really was very little impact at all and also from a margin standpoint. What you are seeing in the US effectively is the operations fundamentally are strong, what we are seeing is a bit of what I’ll call normal de-leveraging with some of the top line contraction. In effectively that was occurring through the course of the year it just didn’t show up at the operating line because we had fairly significant gains in the first three quarters of the year on the gross margin line.

As you certainly will recall we are picking up very good gains from state unemployment tax and workers compensation and those gains came on the gross margin line. We are starting to anniversary those in the fourth quarter. In the fourth quarter gross margin line we are only picking up a little bit from workers comp and state unemployment and therefore its not offsetting some of the de-levering that is occurring on the overall expense base.

Certainly the US business is managing expenses very carefully; they are driving productivity very hard but when you have this level of contraction there is an amount of de-levering of the business because we’re not going to go out an do a wholesale close down of offices or anything like that. That’s what you are seeing there.

Operator

Allen Zwickler, First Manhattan

Allen Zwickler – First Manhattan

What is your mix of business today in US? Maybe it’s appropriate given what’s gone on to just maybe spend a moment or two just to understand what that mix is and whether some of the clients in the US you are getting some big international business you know offsets the fact that you have to be in the US. If you wouldn’t mind maybe just giving us a little color on that because that might help the overall picture.

Jeffrey Joerres

There’s a couple different ways to look at mix and I think that’s for Mike to handle some of that but we look at mix in kind of two different dimensions. One is the types of services that we are providing with Manpower Professional and some of the Manpower Business Solutions side of it. Then we look at the classic part of the business and then the other mix we look at is what is being skued or what skuing do we have if any regarding what we would call strategic clients and then small/medium sized businesses. Mike if you could put some color on some of that?

Mike Van Handel

In terms of strategic clients we probably have about 55% in that group and about 45% which would be more the small/medium businesses. That has stayed fairly consistent over the last year; the growth rates in both those kind of bobbed and weaved a little bit but no dramatic change. When you look at the mix of our traditional business we have from roughly 20% would be on the professional specialty size within the US market 35% would be more traditional office/clerical and about 45% would be industrial and light industrial business. That’s how the mix overall changes, that’s covering the staffing side of it.

The other point that I would make is on the permanent recruitment of course has been much more of a core strategy to the US business as it has been for the company overall and today about 8% of our business mix is on permanent recruitment. I should say 8% of gross profit margin in the case of permanent recruitment.

Allen Zwickler – First Manhattan

Just one other quick item, and I may have missed this. What did you say your growth rate was in Asia in general and Japan, I think you said it but maybe you mid-westerns talk a little too fast for me.

Jeff Joerres

We had 12% growth in US Dollars in our Japanese organization that converts to 8% in Constant Currency. We had 10% Constant Currency growth for the segment and 17% US Dollar growth for that segment as well.

Allen Zwickler – First Manhattan

Have you broken out how large Japan is at this point?

Jeff Joerres

Japan annually they would be running at about $800 million.

Michael Van Handel

They are roughly 5% of the company overall, just under.

Operator

Brian McGuire, Lehman Brothers.

Brian McGuire – Lehman Brothers

Just a couple of questions, on the Other operations, last quarter I think you talked about China and India having about 60 officers in each country. I was wondering if you could just update us on your progress filling out the infrastructure there.

Jeff Joerres

What we’ve done in both of those and those offices are right now marginally about the same, we are opening some in China and what would be called tier two cities. What we are really doing right now in China is adding to those offices. Adding staff and looking at productivity as you can imagine in China and India there really is a talent shortage for the population that we are looking at placing which is more of the skilled engineering, IT, managerial. We are filling in our foot print slightly but I think the bigger expansions that we are doing is with staff within the current foot print.

Brian McGuire – Lehman Brothers

On that note have you been able to make any progress with the, recently you got the authorization to provide temporary staffing services in China, can you give us an update on how the transition to that sort of business is going?

Jeff Joerres

We are interested in that business and we are expanding that part through those same offices. We are going to be careful so that we do not get into environments where the margins are so low because we would be competing against state owned companies. Yes, we think there is good opportunity, I mentioned in my comments that new law providing within the staffing industry is a little bit of a slow up take primarily because the benchmark model mandate we are ready to do the bench model mandate and actually endorse it. We are still seeing good growth in China and some very good prospects.

Brian McGuire – Lehman Brothers

Back on Italy, I think last quarter you mentioned the strong margins there that were largely the result of the mix of small clients versus large clients. Is that still the case for why the margins are strong again this quarter? If so, do you anticipate that mix thing pretty constant as it is now or do you see some shift back to large clients?

Jeff Joerres

We would see that mix being constant, that’s really a depiction of the Italian market which is filled with a lot of very strong medium sized businesses and maybe not as many large multi-nationals. We don’t really see that mix changing, that is our emphasis. In Italy also we have a very homogenous process and a much more of a refined process based on the client set and based on us which allow us to really leverage our gross margin dollars much more so our net to gross percentage is very high because we are able to have a very streamlined process in Italy.

Operator

Jeff Silber, BMO Capital Markets

Jeff Silber – BMO Capital Markets

The first question is on the US, you mentioned the impact of some of the acquisitions in the fourth quarter, and can you tell us what you are looking for in terms of first quarter guidance excluding acquisition? Do you think you’ll be repurchasing more franchises during the course of 2008?

Jeff Joerres

I’ll handle the repurchasing, I think that there are several of our franchises who we have been working with and will be doing acquisitions. We consider it to be the right thing to do for them and us, there are other franchises who are performing extremely well and we love them to death. I think you’ll see in 2008 additional franchise acquisitions.

Michael Van Handel

In terms of the first quarter I would expect a similar impact overall on the fourth quarter about 6%. I would anticipate that the acquisitions are going to add 6% or 7% so in our guidance which was flattish that would indicate that on an organic basis we look to be down roughly 7% year on year without the acquisitions. Slightly better than the fourth quarter, we do have a pipeline of some business that’s coming in that looks pretty strong with a few of our larger accounts so that’s how I characterize the first quarter.

Jeff Silber – BMO Capital Markets

Shifting back to the Perm side of the business I think you said it was about 8% in gross profit. Can you tell us what that is in France and are there any other regions where represent disproportionate amount of your business?

Mike Van Handel

France was legalized in 2005 so we are still on the early stages but it’s been growing quite nicely. As Jeff mentioned in his call for the year it’s been up 72% in Constant Currency. It’s getting some real traction there. As a percentage of gross profit in the fourth quarter we are just a hair over 5% overall. Compared to the others, Manpower on a consolidated basis in the fourth quarter was at 11%, Perm was 11% overall GP, EMEA would be a mid teens and our Other operations would be in the upper teens and that really has to do with two factors. Australia, we do the work for the Defense Force there which is a lot of Perm recruitment business and then also within China and India those today are more permanent recruitment type markets.

Jeff Silber – BMO Capital Markets

Are there any areas you think we are going to see that continue to increase as a sizeable percentage besides France?

Mike Van Handel

I think there’s good opportunity really across the company since we are still in the early stages here. Certainly the US market has a lot of continued potential. Overall we’ve said kind of a rough target or guideline for the company that we’d have about 15% of our gross margin would be coming from Perm recruitment business. That may not be 15% across each of the segments but that’s the overall target and generally we think there’s good opportunity across the marketplace for that level of business and certainly clients are looking to us to provide that value.

Jeff Joerres

I’d add to that the numbers are still coming in but I think it’d be safe to say that we’ll be slightly over 150,000 people that we placed in 2007 through our Permanent Recruitment business. It’s of size and we built it quickly and we are looking at that 150,000 and saying now we are much more relevant to our clients, we have a good balance of business and we definitely plan on continuing to grow that.

Thank you all for attending the fourth quarter full year conference call, as usual if there are any questions we are available.

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Source: Manpower Inc. Q4 2007 Earnings Call Transcript
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