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

Executives

Jeff Joerres - Chairman and CEO

Mike Van Handel - Chief Financial Officer

Analysts

James Janesky - Stifel Nicolaus

Ashwin Shirvaikar - Citigroup Investment

Andrew Fones - UBS

T.C. Robillard - Banc of America Securities

Steven Hill - First Investors

Mark Marcon - Robert W. Baird

Gary Bisbee - Lehman Brothers

[Matt Detillio] - Rhinehart Partners

Andrew Steinerman - Bear, Stearns & Co.

Manpower Inc. (MAN) Q1 2008 Earnings Call April 18, 2008 8:30 AM ET

Operator

Welcome and thank you for standing by. (Operator Instructions) Now I'd like to turn the call over to Chairman and CEO, Mr. Jeff Joerres.

Thank you, sir, you may begin.

Jeff Joerres

Thank you. Good morning and welcome to the first quarter conference call for 2008.

With me this morning as usual is Mike Van Handel, our Chief Financial Officer. Together we'll go through the first quarter results. I'll discuss the overall results of the quarter, go into a little of the segment detail. Mike will then discuss the items affecting the balance sheet and cash flow and also spend some time on the second quarter outlook for 2008.

Mike, before we move into that could you go through the safe harbor language?

Mike Van Handel

Yes. Good morning.

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 10K and in the other Securities and Exchange Commission filings of the company, which information is incorporated herein by reference.

Jeff Joerres

Thanks Mike.

First quarter of 2008 was a solid quarter for Manpower. We entered the quarter anticipating growth in many of our key markets and that's exactly what happened. Two of our large segments - Other EMEA, who has been just hitting the cover off the ball for quarter after quarter, and Italy, the same way - had some very outstanding performances.

Additionally, we had some very good profit performance from Other Operations, which you've seen over the years and quarters our investments in the Other Operations segment, and we started to see some outstanding performances coming out of Asia Pacific and Latin America.

U.S., no surprise, continued to be sluggish. We also saw our French operation experience some growth at the lower end of our estimates on revenue; however the operating profit for France was quite good.

Our revenue for the quarter was $5.4 billion, up 19% U.S. dollars, 8% constant currency. And as I mentioned earlier, this is really coming from the growth that we're seeing in Other EMEA, Italy and the other segments.

Gross margin, a great story there, was up 33 basis points to 18%, a very strong performance reflecting again the output of our strategies, which is continued growth in our higher value offerings.

Operating profit was up 28% in U.S. dollars, 11% in constant currency, to $132 million U.S.

Operating margin was 20 basis points over last year to 2.5%, and our earnings per share came in at a strong increase of 36% in U.S. dollars and a very strong constant currency growth rate of 16%.

The current environment, no surprise, is fragile, yet we see several areas of continued growth. These growth areas we believe will help offset the sluggishness in the U.S. market and the French market. Based on these trends and mix of business, we're anticipating the second quarter earnings per share to be between $1.47 and $1.51. We will be aided by about $0.20 of currency in the quarter.

Let me break down that gross margin a bit. As you can see, we've continued to have good strength in this area. Our consolidated gross profit margin was 18%. In the first quarter we continued strong growth in Permanent Recruitment, which was up 32% in constant currency. This contributed to 33 basis points in that gross margin line.

Our business mix was favorable with some higher margin countries like Germany, Italy and Sweden performing very well. We did lose, however, 26 basis points on gross margin due to relatively lower growth from our specialty businesses. Jefferson Wells went through some contraction, and while we had nice growth at Right Management, it didn't keep up with the pace really of our core business.

Overall, it resulted in a solid gross profit margin. This improved gross profit margin along with good expense management, the operating efficiencies we've been working on for some time, continued to drive through the business all yielded and operating profit of $132 million U.S.

Moving on to the U.S., the U.S. segment declined slightly more than what we had anticipated. Revenues came in at $472 million, a decline of 2%. This was aided somewhat by acquisitions. The organic growth rate was minus 11%.

Based on the five quarters down in the U.S. market, we are experiencing some deleveraging. Our gross profit margin, however, is not part of that deleveraging as we've been able to actually increase our gross margin percent by 20 basis points.

However, with that softer revenue line and also our commitment of not ripping the U.S. organization apart, it resulted in a $7 million operating unit profit or 1.5% operating unit profit margin, down 38% on a year-over-year basis.

The U.S. market condition in the first quarter in some ways was very similar to what we saw in the fourth. As we stated, it got just slightly worse than we anticipated, but we still have not yet felt any dramatic or drastic reduction in business across geographies and business lines. When we go into the regions and look specifically at the regions and specifically at accounts, we are seeing certain accounts that - particularly the very large accounts  that we are  you know, they're slowing their business down, ones that you would recognize. And as a result, where they may have more business with us, we are feeling a little of that pain.

But none of these trends seem to be alarming to us, and we are currently able to deal with them. Clearly, this market can change and the market will change or could change on a very fast basis. But as we speak to our clients and look closely at our book of business, we feel comfortable that the U.S. operations are not getting any worse as we move into the second quarter, and in fact our most recent weekly numbers would say we are not seeing a worsening in our numbers. If not, we're - in actuality; we're actually somewhat of a plateauing.

Our Manpower Professional business continued to grow nicely in the first quarter, and our bill rates continue to move up as we are placing higher level skills.

Also, our Permanent Recruitment business is flat from prior year; however the productivity of the recruiters continues to improve. We've seen some slight softening in the demand for permanent recruitment, so we will continue to monitor and watch closely before we add any new consultants into our business.

Our U.S. operation added some very good firepower to our Recruitment Process Outsourcing business with the acquisition of CRI in California. This acquisition occurred in April. This acquisition places our U.S. organization in a very strong position, blending our current RPO business with one of the leading RPO firms. And in fact, if we were to consolidate all of our RPO business throughout the world, we clearly become number one provider on a worldwide basis in RPO, which is a growing trend and a trend within the HR industry that we believe is here to last.

The U.S. revenues, as I mentioned earlier, were relatively stable during the quarter, with March Staffing business being really pretty much the same. It was slightly stronger, in fact, than January and February, and as we look to the second quarter, we're anticipating a slight revenue improvement of 1% to 3%.

Moving on to our French operation, revenues of $1.7 billion U.S., up 16% in U.S. dollars, 2% in constant currency. This came in actually at the lower end of our range as we saw March a littler softer than January and February.

While overall market growth has softened, we also or currently believe that we're below market rate right now in France and believe this is part of the fact that we outgrew the market in 2006 and 2007, as well as we did some pretty large organizational changes within our French operation.

As many of you know, we've been going through changes of refocusing our business to ensure that our strategic large accounts have separate sales and delivery from our small, medium size business accounts. We executed this in the first quarter in our French operation, and I'm confident this will be a success. It was a success in many other countries that we've implemented it in, but anytime you have an organizational change of this magnitude; it does take a little wind out of sails.

We are experiencing a slowing market in France, however I do not believe - I'm sorry, I do believe that some of the organizational distractions that we had in the first quarter will actually smooth out and we will start to get a little bit better performance from ourselves in the second quarter, which will definitely help.

Same as the U.S., our gross margin profit improved in the first quarter in France. We managed expenses effectively, which gave us an operating unit profit of $54 million, a 23% increase in U.S. dollars, 7% in constant currency. Our operating unit profit margin of 3.1% actually came in 20 basis points higher than a year ago in 2007.

We continue to see very positive momentum in the Permanent Recruitment business in the French marketplace. In fact, our Permanent Recruitment business has more than doubled over the last prior year. And the marketplace is very receptive to our offering, and management on our French team has done a great job of focusing and adding the appropriate resources. So believe that this marketplace is very receptive to our offering.

However, while our revenue gains are dramatic, we are also building out the infrastructure, and therefore this business should be a larger profit contribution as we move into the future.

Moving on to the so-called superstars within our organization, the highlight of the quarter was what we were able to do in Other EMEA segment.

Revenue in Other EMEA was up 26% U.S. dollars, 15% constant currency, to nearly $2 billion U.S.

Operating unit profit was up 17% in constant currency to $48 million U.S., while operating unit profit margin was able to increase to 2.6. We're starting to really get some of that leverage coming through the operation.

Our largest engines in the Other EMEA segment showed consistent growth and extraordinary leverage from a profitability perspective, Nordics operation up 20% in U.S. dollars, 6% constant currency. This was clearly led by the Swedish operation, with revenue up 12% in constant currency and profitability up dramatically over that.

Elan - and you need to look at this number closely - revenue was up 43% in constant currency. The scope and breadth of our Elan business continues to increase substantially. We are winning business throughout mainland Europe and are confident we will continue to build a very strong business.

Manpower U.K. was up 4% in constant currency, with some very strong profitability. The U.K. operations have experienced stable conditions within the marketplace, however not robust by any stretch of the imagination.

Our German operation did very well, with a 22% increase in revenue in constant currency, 40% increase in U.S. dollars. We continue to see a very strong German market and a very good secular trend. Our German team has performed very well. They are focused on the marketplace, they are not distracted with anything in the market, and they really feel comfortable about how we're going to be able to improve our market position in Germany on an organic basis.

Our Netherlands operation throughout 2007 posted some very strong year-over-year growth, so we were up against some difficult comparables. Even given that, we are up 6% in that marketplace in the first quarter on the revenue line, which we believe is above marketplace. And because of our mix of business and focus on Permanent Recruitment, our profitability was up substantially over the top line.

Also our Belgium operation came in very strong, with a 15% constant currency growth in revenue.

As we announced in March, we are also excited to welcome Vitae to the Manpower group. Vitae has a strong reputation in the Dutch market, providing specialist skills in the finance and engineering areas. The acquisition of Vitae is right in line with our strategy of broadening out our portfolio's specialized services within our Manpower Professional brand. This acquisition closed in early April, so we will begin reporting their results as part of the EMEA segment in the second quarter.

One of the weaker markets, however, in Other EMEA is Spain. Revenue was down 14% in constant currency and deleveraging has occurred, which drove profitability weaker than the top-line.

Within our Eastern European operations, however, we did see some very strong growth as we continued to invest in these developing markets.

Moving into just another part of Europe - and up until a little while ago was part of the EMEA segment - and that's Manpower Italy, which had a bang-up quarter. Revenue was up 32% in U.S. dollars, 15% in constant currency, to over $400 million in revenue.

Even better was our operating unit profit, up 55% in constant currency to nearly $30 million U.S. This created an operating unit profit margin of 7.2%, up an impressive 180 basis points.

The Italian market continues to see secular increases while at the same time our entire Italian team is doing an excellent job of really taking the market, staying focused on the market, and outperforming the competition. Italy's performance was very key to our overall performance in the first quarter.

Jefferson Wells - Jefferson Wells was slightly softer than what we had anticipated. We entered the quarter thinking Jefferson Wells would be about flat with the prior year and in fact revenues were actually down 5%. Because of the shortage in revenue, gross profit gross profit deteriorated to a lower utilization, which impacted profitability, causing the loss of $2.6 million for the quarter.

We are consistently seeing many projects accepted. Our backlog of projects is quite strong, however; yet, the engagements are being delayed in many of our U.S. clients as they're hoping to delay costs to see what this uncertain U.S. market really has to bring to them. We believe that we will keep our pipeline strong, stay in front of these clients, and as we start to get a bit of a break in the economy, we're hoping that those backlogs of projects will be a bit unleashed.

Despite the difficult environment, we are confident in this marketplace over a longer period of time. We continue to invest in the key areas while taking out costs in other areas in Jefferson Wells. We're investing in Europe and we're building out some of our service lines, namely in the area of tax and construction audits.

Another one of our specialty businesses, Right Management, had a very good quarter. Revenue was just over $100 million, up 5% in constant currency, 10% in U.S. dollars. This produced a $7 million operating unit profit, up nearly 10% in both U.S. dollars and constant currency. Our operating unit profit margin was flat at 6.5%.

We continue to see strong revenue increases in our Organizational Consulting business, up 17% on a year-over-year basis or 10% in constant currency. We've actually yet to see any strong uptick in the classic outplacement business. We are not seeing any large-scale downsizings that we would normally associate with an economic downturn of this kind. We have seen, as we've experienced in the last few quarters, industry specific downsizings, namely in the automotive industry, pharmaceutical industry, and selected finance industries.

Our European operations at Right also did very well, as did our emerging markets, namely China, as we are seeing the Organizational Consulting practice gain some very good momentum.

Moving on to another good performance in the quarter and that is our Other Operations segment. They had a very healthy quarter, with revenues of $745 million, up 12% in constant currency, 24% in U.S. dollars.

Our operating unit profit increased 68% in dollars, 49% in constant currency, to $21 million. This yielded a 2.9% operating unit profit for the segment.

The improvement in this area is really coming from market growth as these markets are in growth mode, and we have some very good management in our Other Operations team.

Within Asia Pacific, our Japanese operation grew at 8% in constant currency, a very solid growth profitability and we suspect above market.

Our Australian-New Zealand operations are down 1%, but our profitability increased substantially as our mix of business in Permanent Recruitment and Recruitment Process Outsourcing did very well in the first quarter.

Additionally, while we have seen some softness in previous quarters in Mexico, Mexico was able to achieve 10% increase in top line and a very solid bottom line.

Additionally, we experienced good revenue and profit gains in Argentina and Colombia. This contributed nicely to the overall success in the Other Operations segment.

Overall, we had a very solid quarter. This first quarter is typically a difficult quarter because of the leverage or lack of leverage we get from many of our operations because of the seasonality. As I mentioned earlier, we are experiencing, however, good top-line growth and we are achieving impressive operating leverage. The team did a great job executing in all elements in the first quarter, whether it be in sluggish marketplaces - which we do have those now and are adding a few more to that category - or in more robust marketplaces, our teams are performing well. Although we face some uncertain economic conditions in some of our markets, in other markets we are experiencing good growth without real economic concern other than possibly some clouds off into the distance.

With this as a backdrop, we are anticipating our second quarter to be in the range of $1.47 to $1.51, with an impact of $0.20 in currency. This would represent the constant currency increase of earnings of 8% at the midpoint of the range if we exclude the impact of the change in payroll tax calculated in, of course, 2007 for France.

With that as the segment detail, I'd now like to turn it over to Mike for a few of the details on financials.

Mike Van Handel

Okay. Thanks, Jeff.

I'll begin today by talking about the balance sheet, then give you some detail on the cash flow and then some color, a little bit more color, on our outlook for the second quarter.

Our balance sheet remained strong at the end of the quarter with total cash of $641 million and total debt of $999 million, which results in a net debt position of $358 million, which is a modest decrease since the end of 2007.

Our total debt to total capitalization remained stable in the quarter at 26%.

Accounts receivable were $4.7 billion, an increase of $246 million from the end of 2007. This increase is due to changes in foreign currencies as accounts receivable would have declined $36 million on a constant currency basis.

Our day’s sales outstanding or DSO increased by one day compared to the first quarter of 2007. This increase reflects slightly longer collection periods in a few of our operations which I expect will get back on track in the next quarter.

Okay, our free cash flow - which we define as cash from operations less capital expenditures - was slightly lower at $82 million compared with $86 million in the prior year. This lower free cash is attributable to higher capital expenditure payments in the quarter which were the result of investments made at the end of 2007 but were paid for in early 2008.

During the quarter we used cash of $53 million for share repurchases. Of this amount, $11.5 million relates to shares bought at the end of 2007 and $41 million relates to 752,000 shares which we bought in the first quarter of 2008. As of the end of the quarter, we had 2.5 million shares remaining available under our share repurchase authorization.

Next I'll take a look at the outlook for the second quarter.

On a consolidated basis, we are expecting revenue growth between 18% and 20% in U.S. dollars. Our constant currency revenue growth rate is expected to range between 6% and 8%. So as you can see, currency continues to have a strong favorable impact in the second quarter as well.

As in the first quarter, we expect the majority of our growth to be driven from Europe, where we anticipate our Other EMEA segment revenues to be up between 17% and 19% in constant currency, or 29% to 31% in U.S. dollars. Included in this growth is the acquisition of Vitae in the Netherlands, which should add slightly more than 2% to this segment's growth rate.

Italy should also see strong growth, ranging from 12% to 14% in constant currency.

We expect our U.S. business to grow between 1% and 3%, which includes some growth from acquisitions. Excluding acquisitions, our U.S. business will continue to contract, albeit at a slightly lesser rate than what we saw in the first quarter on that same basis.

As Jeff indicated earlier, we saw our France growth rate decline as we made our way through the first quarter and into early April. Our estimate for the second quarter is for revenue to be down between 3% and 5% in Euro, which reflects the level of contraction we are currently experiencing.

We expect our Jefferson Wells business to improve 3% to 5% on a sequential basis; however this still will be a decline on a year-over-year basis of between 3% and 5%.

Revenue growth at Right Management should be in the low to mid single digits in constant currency.

And revenue at our Other segment should continue between 11% and 13% in constant currency.

Our gross profit margin should range between 18.3% and 18.5%. This improvement continues to reflect the higher growth of Permanent Recruitment business and the improving higher-value business mix.

Our operating profit margin is expected to range from 3.3% to 3.5%, very close to last year's 3.5% if we exclude the impact of the French payroll tax change from last year's numbers.

We expect our tax rate to continue in the range of 37.5%, which results, then, in the forecasted earnings per share of $1.47 to $1.51, which, again, includes a positive impact of $0.20 currency. The midpoint of this guidance range represents growth in earnings per share of 8% in constant currency, again, excluding the impact of the French payroll tax change in the prior year.

Jeff?

Jeff Joerres

Thanks Mike.

Again, overall I think it was - I'm confident it was a very solid quarter. When we look to the second quarter, we are seeing some modest weakening in a few locations, but as we said, in the U.S. we're seeing a bit of stabilization if not slightly increasing.

So with that we would like to open it up for questions.

Questions-and-Answer Session

Operator

Thank you. (Operator Instructions)

Our first question comes from Jim Janesky. Your line is open, and please state your company name.

James Janesky - Stifel Nicolaus

Yes. Hi, it's Jim Janesky from Stifel Nicolaus.

Jeff and Mike, can you talk about permanent placement trends, both in the U.S. and abroad? As we move through the second quarter - I'm sorry, through the first quarter and into the second quarter - did they tend to strengthen or weaken, and, you know, how is that as we're entering 2Q?

Jeff Joerres

It's a great question and it's one that all of us would look to, at some type of indicators, and I think that there is some real reality to the fact that this can be an indicator.

We get a little challenged because we have entered the market and in some markets in a new way and are creating markets, so it gets a little bit difficult to put it into kind of a formula. As I stated in the prepared remarks, the U.S. saw some flattening in Permanent Recruitment, but not in all areas.

And we divide our Permanent Recruitment up into three different areas, kind of the classic one offs, some more of the large-scale ones, and then more in the RPO category and also some in conversion. And two of those continue to grow; one of them are not growing, so we're seeing some of the large-scale ones maybe not grow as quickly.

So we'll continue to monitor it. Where we go over to Europe, where actually you have a little bit more of an exposure because it's not as - you can't be as agile with the work force there, we're seeing just a little bit of plateauing, but not a lot. And if I took out - if I included France, you'd see France - that we'd doubled it. But that's more of a secular issue than an economic issue.

So overall I think to be fair I would say that we're not seeing Permanent Recruitment on steroids. We are seeing more of Permanent Recruitment in kind of an okay mode. We are going to watch it. We are going to watch what we add to recruiters, but we've not seen it drop off the cliff.

James Janesky - Stifel Nicolaus

Okay, thanks. And within the U.S., do you expect growth in the second quarter? I know maybe it's just you're up against easier comps. Certainly it's not in - that would not be in line with overall market trends. Do you think you're taking share?

Mike Van Handel

I'm not sure if we're taking share, but I think we're - if you look closely, I think we're seeing some slight improvement, certainly our Professional business continues to gain traction as we continue to focus on that business and invest there. We do have a few large accounts that always play into our mix, and part of what we're seeing as we go from the first quarter to the second quarter, we had - and the second half of last year, we had one larger account that took their business in house, and so the anniversary impact of that is a little bit less on a yearonyear basis in the second quarter.

So I'd say things for us, as we look at our business mix, we expect it to get slightly better, but, again, still contracting as we do have acquisitions in the mix overall in the U.S. that we made in the fourth quarter and then in the RPO business that closed just in early April.

Jeff Joerres

You know, and Jim, I might add, the U.S. team has done over the last 12 to 18 months some very intensive things.

We've done the split in about 19 to 20 cities. We've increased the footprint in Manpower Professional. Our metrics are much better.

So kind of stay tuned, but I'm hoping some of it is us. And also I feel pretty confident that from a market perspective, the market doesn't seem to be draining out faster, so it's stabilized a little. So if we can get a slight stabilization and better performance from us, we can squeak out a few things that would be positive for us.

James Janesky - Stifel Nicolaus

Okay, thanks. And just one quick thing. Was France expectation for the second quarter down 3% to 5% in constant currency, was that correct?

Mike Van Handel

That's correct.

James Janesky - Stifel Nicolaus

Okay. Thank you.

Jeff Joerres

Thank you.

Operator

Our next question comes from Ashwin Shirvaikar. Your line is open. Please state your company name.

Ashwin Shirvaikar - Citigroup Investment

Citigroup. Thanks, guys, and nice quarter.

Jeff Joerres

Thank you.

Ashwin Shirvaikar - Citigroup Investment

The question I have is, again, going back to France, if you could sort of break out company specific versus macro, if it's possible at all, because the outlook, down 3% to 5% constant currency seemed a little unexpected there. I thought you guys were actually gaining share somewhat against one of your large competitors.

Jeff Joerres

Yes. It is a good question, and we had been gaining share for almost two years. Those of you who follow the industry, basically three players have 75%, maybe a little bit more, so some of that moves around a little, and I think we did a good job of doing that.

As I mentioned - and I don't want to put overemphasis on it, but I want to be as transparent as possible  we did some sizeable changes within the organization. The management team there did some phenomenonal work during that process, but we probably lost a little attention on the marketplace. So I'd probably throw up - maybe 1%, maybe 2% of that might be our own doing.

But frankly, I think when we look at the [Prism] datum which will be out -

Mike Van Handel

Early May for April.

Jeff Joerres

Early May, I'd guess you'd probably see a little bit of a decline from the last data Prism data that came out.

But again, it's nothing dramatic. It's just on the margin as some of these industries there. And there's a lot of political things that are happening that are just creating some hesitation from businesses.

Ashwin Shirvaikar - Citigroup Investment

Okay. And on the positive side, Elan, you guys seem to have really lit a fire under them. Can you explain what you meant when you said increase the scope and breadth, if you could go into that a little more?

Jeff Joerres

Yeah. I mean, anytime you get a billion dollar organization being able to grow at 43%, things are doing not badly.

Now part of that is - what we are seeing is Pan European contracts, where we're able to do RPO business on a large scale. We're also seeing some good work - even in the U.K. market, which has been a little bit more difficult  in just pure IT staffing. So overall, I think our mix of business is good. We have secured some large contracts, and we're starting to see the effect of that. We announced that on a conference call two quarters ago. Saw a little of that effect in the fourth quarter and you're continuing to see that effect in the first quarter.

So, Elan, we're adding staff, we're adding locations, and there seems to be a good appetite for a Pan European highly professional IT contracting firm.

Ashwin Shirvaikar - Citigroup Investment

Okay. If I can sneak in one last question, RPO, you mentioned, and I agree with you on these trends of RPOs. At the New York HR show recently, this week, and everyone there claimed to be an RPO. Can you put some specific numbers on how big you are globally? And I do believe the profit - I believe [the] RPO is significantly higher. Would you comment on that?

Jeff Joerres

Yes, that's true. RPO is one of those confusing things that, anytime you put O somewhere in an acronym, it's left for a lot of interpretation because outsourcing is a nice buzzword so people throw it around like candy.

We define RPO very tightly, which is where you would have RPO of taking on the responsibility of large-scale hiring across many geographies over a period of time that would include assessment, on-boarding and a lot of conversations with managers. One of our largest opportunities and one we've had for some time is the Australian Defense, which we recruit in that way, including doing all the advertising for the entire military operations within Australia.

When you pull these together, we are well into the hundreds of millions of dollars of us doing RPO. We secured some good contracts in Germany. We've just secured contracts in the U.K. It's one of the larger growth engines of Elan.

So you'll be seeing some more information come out as we benchmark us against what we think is the industry. The challenge with the industry is many companies put all Permanent Recruitment in RPO. We separate Permanent Recruitment - one off, five off - from RPO. RPO is truly a co-sourcing or outsourcing environment in our definition of that added value at a different level and adds a different margin because we're adding that value.

Ashwin Shirvaikar - Citigroup Investment

(Inaudible) couple hundreds of millions of dollars, then you're clearly number one, I think.

Jeff Joerres

Our teams have done the calculations and said even if we're off by some; we're still well ahead of everyone else.

Ashwin Shirvaikar - Citigroup Investment

Yeah. Okay. Congratulations and great quarter.

Jeff Joerres

Thank you.

Operator

Our next question comes from Andrew Fones. Your line is open. Please state your company name.

Andrew Fones - UBS

Yeah, it's Andrew Fones from UBS.

I was wondering if you could tell us approximately what the impact of the RPO acquisition is expected to be in the U.S. in Q2, please?

Mike Van Handel

Sure, sure. In terms of the U.S. market itself, so it's going to be - we'll be picking it up right in early April, and we'd be looking at something that will be - what's it going to be - a couple of percent impact on the growth rate overall. So not too significant, but certainly a good addition to the overall business within the U.S. and certainly strategically important. But it'll be something less than 2% to the overall growth in revenue.

Jeff Joerres

And the way that business would work, you'll get a little bit more growth on the bottom line because it doesn't have that high revenue component. It has a bit higher gross margin component. We also - which has already been done - consolidated it into our operation, changed their name, and I've already started to add clients to it.

So as Mike said, it's a good strategic acquisition. We had a good size RPO business in the U.S. We didn't have a good reputation. We didn't do our branding job, and now we're doing that with this acquisition.

Andrew Fones - UBS

Okay, thanks. And then can you confirm, is the franchisee - franchise offices you bought - are they adding about 7%? Does that sound right?

Mike Van Handel

Yeah. Well, as we said, our overall U.S. business was down about 2% and on an organic basis we're down about 11%. So you have about a 9% impact on growth from the franchise acquisitions.

Andrew Fones - UBS

Okay, thanks. And then finally, in terms of Jefferson Wells, you mentioned that you have a good pipeline of work there, but there's been some kind of delays in making decisions to move forward. Can you kind of help us understand kind of what is in that pipeline and what kind of gives you the conference that that work is going to start kind of coming through? Thanks.

Jeff Joerres

Yeah. Well, there is good interest and good activity out there, and I think our pipeline reflects that. And I think there's - the brand Jefferson Wells is very well respected. I think what we're seeing is - particularly on the more discretionary project work - is where we've been talking with clients and they're ready to start projects, and then what we would hear is well, we're going to delay that project for another two weeks, four weeks, whatever.

So that's a little bit of what we're seeing and a little bit - and part of the reason why we're a little bit short of our revenue estimate in the quarter. But yeah, the more recurring work that we have continues on at a normal pace, and we're seeing that continue to grow.

But it's typical in a slowing environment where you start to see discretionary spend on projects start to slow a little bit as companies are trying to figure out exactly where they are. We're seeing that particularly in the retail business as some of the retail numbers have been getting weaker, some of our retail clients are pausing a bit.

So that's what's happening overall within that business but, as I said, still good growth prospects. But I think we could still, until we get through particularly in the U.S., this softer economy, it could take a little bit longer than we'd like to realize some of that revenue.

Andrew Fones - UBS

Okay. Thank you.

Operator

We have a question from T.C. Robillard. Your line is open, and please state your company name.

T.C. Robillard - Banc of America Securities

Thank you. It's Banc of America Securities. Good morning, guys.

Mike, can you give us a sense as to how we should think about margins in France? Is down 3% to 5% in constant currency, will you start to see some delevering there or do you get an offset and a benefit from kind of the mix shift that you guys are seeing?

Mike Van Handel

Yeah, good question. There are a number of good things going on. There's certainly - our Perm Recruitment business continues to grow quite nicely, and that should help the overall gross margin. And overall we've been seeing a fairly stable pricing environment and stable gross margin on the Staffing business. So from that perspective, things are in pretty good shape on the GP line.

When you get to the operating margin line, if we do see the type of decline in the 3% to 5% on the revenue side that we're looking for, we'll probably see a little bit of pressure on the operating margin. There certainly are some costs that we will look at and may be able to take out, but there's also some investing going on as we continue to build out the Manpower Professional line within France.

So we're not completely pulling in our horns on our strategy. We still see a good market there, and we still want to continue to invest in what we think are some important platform. So all in all, I would expect perhaps a little bit of pressure on operating margins at that level but not significant.

T.C. Robillard - Banc of America Securities

Now would that be a little bit of pressure on a yearonyear basis or sequentially.

Mike Van Handel

Yeah, I'm sorry, on a yearonyear basis. Seasonally, the second quarter strengthens for France relative to the first quarter, so I would expect on a season basis we'd see some type of improvement.

T.C. Robillard - Banc of America Securities

Okay. And then just lastly, have you guys gotten the cash from the retro tax payments from the French government yet?

Mike Van Handel

Good question. We've collected most of that. We still have a few of the agencies that we're still working with to collect that, but we're getting pretty close to having fully collected that.

T.C. Robillard - Banc of America Securities

And how much is outstanding roughly? I mean, I'm not going to pin you down to a specific. I mean, is it material or are we only talking less than $10 million now?

Mike Van Handel

It's in that ballpark.

T.C. Robillard - Banc of America Securities

Okay. Good. Thanks for the color.

Mike Van Handel

Yep.

Operator

We have a question from Steven Hill. Your line is open, and please state your company name.

Steven Hill - First Investors

Hi. First Investors. Great job, Jeff and Mike. I'm tickled pink with the performance.

It was definitely a surprise on the upside, though, and it looks like I missed a few things and I'm wondering if you could comment on them. Italy is much stronger than I thought it would be in this environment. Second of all, I notice your share repurchase in the first quarter appears to be lower than it was in the fourth quarter, even though it looks like the first quarter you would have gotten a better deal. And then finally, I think I overestimated actually your foreign currency benefit that would be realized by - had a few pennies higher. Maybe you did some hedging there or maybe I just did the math wrong. Thanks.

Jeff Joerres

Mike, do you want that one? I mean, I'll cover a little bit about Italy. Italy is doing extremely well and has been. Italy has a couple things going in their direction, one, very good management team, two a strong footprint, and three, a large percentage of their business - 80%, 85% of their business - is small and medium-sized businesses, just a function of the Italian market, and as a result we're able to do - add a lot of value to our clients, but do it in a kind of homogeneous way which allows you to take a good gross margin but actually bring a fairly high net to gross calculation to the end of the quarter. Additionally, there's been some acceleration in some of the training that we're doing. We have a good-sized training company.

So we've got some things going in Italy, and I do believe we are still going through secular growth within Italy. And therefore, while cycles will affect it, they'll be a bit more immune to cycles because there's still some secular growth.

Mike, you want to add anything to that?

Mike Van Handel

Nope.

Jeff Joerres

Okay.

Mike Van Handel

That's good. That's good.

The other comment on the share repurchase, we did purchase over 700,000 shares in the quarter and we'll look to continue to do that. And our view on share repurchase is to really average in over a period of time. Clearly at these levels we see the share price as good value, but of course you'd expect me to say that.

But we're really just looking at averaging in through the course of the year, and I would expect we'll continue to do that. When we look at cash flow, we're looking at how much free cash we have coming in, what we're using for acquisitions, and clearly to the extent we have more acquisitions laid in, that may impact the timing and the amount of our share repurchases as well as we look at our uses for cash across the board.

Steven Hill - First Investors

So Mike, can I read into that that the slower pace indicates that you might have something in the pipeline?

Mike Van Handel

Well, we already bought a few.

Jeff Joerres

Yeah, we did. Yeah. So we had the two that we announced that closed in April, so Vitae and CRI closed in April.

Mike Van Handel

And a small one in France, which was announced this morning I believe, called Spirit, which is in the finance area. That would also fit into Manpower Professional and our expansion in France.

Steven Hill - First Investors

Okay. And then on the foreign currency.

Mike Van Handel

Yeah, on the foreign currency, we didn't - we do hedge specific movements of cash when we're going to - when we know we're going to move from overseas once we make the decision, but we don't hedge the translation impact at all. So in terms of where we ended up versus what you have, I'm not sure why the difference, but no particular hedging. But if there's something specific there that you have that you want to walk through, feel free to give me a call. I'd be happy to do that.

Steven Hill - First Investors

Sounds great, Mike. Good work, guys.

Jeff Joerres

Thanks.

Mike Van Handel

Thank you.

Operator

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

Mark Marcon - Robert W. Baird

R.W. Baird. Let me add my congratulations to a terrific performance.

Other Operations are doing extremely well, and particularly - you're starting to see some leverage there, and I was just wondering if you could expand a little bit in terms of where you're seeing the leverage and how much more may come because you have been making a lot of investments there and it has been keeping the margins down for people who aren't aware of all the investments that you've been making. It's been quite significant and now we're starting to see some leverage, so I'm wondering where it could go.

Jeff Joerres

Well, we really look at Asia as something - Asia Pacific - as something that can generate some nice little addons throughout 2008. But we're really looking at Asia Pacific for '09 and '10 and '11. Now, there still is kind of an imbalance within Asia. Japan is the largest unit, and what we are able to do in Japan is really reformulate some of our approach to the market, have gotten much more aggressive in how we're looking at our sales. And that doesn’t mean aggressive on price, because we actually implemented a price increase in the Japanese marketplace. And I think our management there has got a real bounce in their step, so a big part of what you were seeing from the profitability increases was some good profitability out of Japan.

The rest of it when you get into [Asian] and others or China, where we have added a lot of investment, we are starting to see that they're not draining us because they're now able to invest with their own dollars and grow that. But I would say that you're not going to really start to see some of that come into place until 2009 where some of those get larger.

But a little country not on the radar screen, you've got somebody like Malaysia, they're popping in a million some dollars a quarter. That starts to add up. And before they weren't anything like that.

And then also, while there was some in Asia Pacific, Argentina and Mexico, Colombia, these guys are - Argentina has just - their GDP growth has been 5.5% plus for the last five years, and we're really starting to - we have almost 40%, maybe a little bit north of 40% market share in Argentina, and as a result we're starting to really get some good profitability.

So I really think it is that story of balance and where it comes from and how these different economies really can contribute to us.

Mike Van Handel

Let me also add on that, Mark, the other one that came in quite strong in the quarter was Australia and added to the leverage as well because, as you saw in the earlier slide, probably, from a revenue perspective they were down slightly, but they just nailed it on the Perm Recruitment side. It did quite well, and that really did a nice job of bringing some good profitability and overall leverage to that segment in the quarter as well.

Mark Marcon - Robert W. Baird

Is the Perm strength in Australia due to something that you're doing specifically or is that kind of a market strength? I know the unemployment rate there is quite low.

Jeff Joerres

It would be more company specific in terms of a couple of clients that we are executing quite well with, doing a really nice job of overall service delivery on a very broad scale.

Mark Marcon - Robert W. Baird

Okay. And then you mentioned in the U.S. that you've done the split in 19 to 20 markets. What are you seeing out of that or is it too early to tell?

Jeff Joerres

Well, in some of our pilot markets its gone well, but the split that we're now going through, I don't think you'll see the effect of that. You might see some energy and effect, maybe, on the margin as we kind of [portray] a little bit in the second quarter. But it's primarily third quarter and fourth quarter is where we'd start to see possibly a little bit of a bump because of that.

Mark Marcon - Robert W. Baird

Okay. And just to be clear, for the U.S. and for France, the organic revenue growth rate that you're expecting for the U.S. for the second quarter is?

Mike Van Handel

Yeah, we'd expect about 9% on acquisitions, again, something in that order. So we'd be looking for something around negative 7% organically in the U.S.

And in the case of France, the acquisitions are so small I wouldn't even read anything into that at all in terms of their growth rate.

Mark Marcon - Robert W. Baird

And the French organic growth rate is that consistent with what you saw in March or are you anticipating that things get worse?

Jeff Joerres

What we would - it would be consistent with what we saw late March and into early April. And so it's a  we don't have a lot of data points, but it does look like the market has taken a bit of a step down in late March and now the first couple weeks in April have pretty much stayed there. So not getting worse, if you will, but albeit with only a few data points. But as we normally do, if we don't see any reason to change what we're currently seeing, we just kind of extrapolate that out in terms of the forecast. Certainly we would hope that we're going to see that start to turn up a little bit. The comparables get a little bit easier in the second quarter, but we'll see how that plays out.

Mark Marcon - Robert W. Baird

Okay. And lastly, any clarity or any more feel for regulatory changes in France or is it still kind of steady state?

Mike Van Handel

Nothing new on that front. I mean, there's always discussion certainly with the new Sarkozy government, but nothing that we see in the headlights for our industry that should have a significant impact.

Mark Marcon - Robert W. Baird

Great. Thank you very much.

Operator

We have a question from Gary Bisbee. Your line is open. Please state your company name.

Gary Bisbee - Lehman Brothers

Hi, guys. Lehman Brothers.

Can you give a little more color on the RPO market? And I'm wondering just sort of some things like do you put people on site for some of these big contracts? What would be the term or the length of the average contract there, the long-term contracts? And you mentioned the margins are better, but some sense of how the economics stack up in terms of what you're collecting revenue for, how you're able to get the better margins. Thanks.

Jeff Joerres

Right. Yeah. Good question.

It's a combination of a few things. Primarily what we do is set up centers, kind of regional centers, that are recruitment centers, and then we would put recruiters within the client as well. And then the recruiters within the client works with the centers to create a much more efficient process.

As a result, I think the flow-through of candidates and then the kind of vetting of those candidates are done in a very efficient way because we have some technology that's able to do that as well as the different centers.

So you would see a client giving us the opportunity to do their hiring in X number of classifications or categories on a yearly basis, so clearly that moves around as the economy moves around.

The other thing that we're seeing is those that are quite receptive to this are larger companies, mid-size to larger companies, and many times they have a footprint outside of the U.S. So that's where our global reach comes in of why do it one way in the U.S. when we can then drive it as a single process, better reporting, much more efficiency, drive some of the cultural training induction processes upfront?

So we're going to really be maximizing our global footprint. And in a short period of time, in just the last two weeks, we have picked up two or three global deals just based on what CRI was doing and what we were doing, putting it together, and then talking about the global footprint.

So we're optimistic about it. We also know that RPO is about permanent hiring and if things start to drop off a cliff, permanent hiring's going to go down a little. And I think where we have larger centers, it probably helps. You can flex a little bit more, but it would cause a little bit of a challenge. But right now that RPO market seems to still be moving because it's a fresh market, it's not a mature market, and I think that will help us right now.

Gary Bisbee - Lehman Brothers

Okay. And I get with the bigger customers; it's always been a challenge on the margins for you. They've pressed you more on pricing. I guess they're acknowledging with this model at least to date that there's more value adds that they're willing to let you earn higher -

Jeff Joerres

Absolutely. It's about value add, and I think that's the way we manage that. They look at how much they were spending and the kinds of time from request to order they're spending, and we're able to dramatically reduce that. So this is true value pricing.

And at the same time we don't see ourselves as a boutique. And what I mean by that is as we get scale, we'll be able to pass along savings to clients so they feel as though they're getting a fair price based on the value, not a boutique price that is based on what the boutique wants to do to pull money out of the pockets of the client.

Gary Bisbee - Lehman Brothers

Okay. And then it would seem like today's environment and moving forward would be sort of the perfect environment for the older core Right Management business. You said that hasn't really picked up yet. Any sense as to why, and I guess, how do you think about that moving forward?

Jeff Joerres

Well, one is a lot of the U.S. companies have been run relatively lean and thin so I think it needs to get a little bit harsher and deeper from a downturn before they would lay off people.

Only in the last couple weeks have we maybe started to see 100 people here, 500, 700, 1,000, other than, of course, as I said, in pharmaceutical, where they may have a backlog or a pipeline of drug issues, or in the finance industry or in the automotive industry.

But when you compare this to 2000 or 2001, it doesn't even scratch the surface. In 2000, 2001 it wouldn't be unusual to be seeing 35%, 40% growth rates in that business, and we're still sitting at 5%, 6% growth rates in CT, or career transition.

Gary Bisbee - Lehman Brothers

Okay, great. And then just I guess one last one. You mentioned - and I guess you've talked about this before  but splitting how you service or sell into small customers versus large customers in a couple markets. Can you give a little more color on that strategy, how its working and sort of what the outlook should be?

Jeff Joerres

Yeah. We're very excited about the strategy. We've been implementing this in Europe, where we did it first in the Netherlands, and the results have been very good. We're able to change compensation plans based on if you are a postal code or zip code salesperson versus a large account salesperson. We're able to, because we have such an intense service culture in our company, if there's a large order for a client to come in, it's all hands on deck and we serve that client.

What happens is there's been the small, medium-sized businesses may not get the attention they need. Now that they are actually physically in most cases different offices, what we are finding is we are picking up business in the high teens in most places, which is above our overall growth rate in the small, medium-sized business.

So we think this is a great opportunity for us. It makes sense. It's always been the industry conundrum of how do you not have a large account take all of the energy out of your office, and we basically said we have enough offices that we don't have to really increase our footprint, we'll just swizzle stick the offices around. And if we add five offices, two of them are now large account strategic clients and the other three are small, medium-sized business. And we'll need to hire some different people or move some different people, but we will be much more focused. And I believe that for years we've abdicated some of that market to local players, and we're not going to do that anymore. We're going to go get them.

Gary Bisbee - Lehman Brothers

Great. Thanks.

Jeff Joerres

Yep.

Operator

You have a question from [Matt Detillio]. Your line is open. Please state your company name.

Matt Detillio - Rhinehart Partners

Yeah, Rhinehart Partners. Great quarter, guys.

A real quick question here. Given all the reinvestment of petro dollars, particularly in the Middle East, maybe you guys can talk about what you're doing to take advantage of those dollars.

Jeff Joerres

Yep. In the Middle East we made a very key acquisition of Clarendon Parker. We've worked with Clarendon Parker for two years. I had an opportunity a couple weeks ago to spend three, four days in Dubai. I think we're able to a) work with the large multinationals, which Clarendon Parker maybe did not or could not. There's a high degree of trust with the Manpower brand and Manpower Professional brand.

But most important is our operations in Malaysia, Philippines, Thailand, India are huge sources because with the work force being 90% an ex pat work force, we now have a global strategy of being able to bring workers into the marketplace and do it in a dignified and proper way.

So we've actually implemented a program called Cross Border Connections. It's been used in Europe, between Eastern Europe and Western Europe. So we see this as major opportunities. We're looking at potentially key joint ventures within the Emirates, and I believe while we're not going to see instant results on it because we like to build things the right way, it really is the last growth engine in kind of organized labor markets. And having said that, it's one of the most restrictive regions having to do with licensing in our industry, and we have all of the licensing in eight different countries that we need.

So we feel as though we're in pretty good shape.

Matt Detillio - Rhinehart Partners

Great. Thank you.

Jeff Joerres

All right, last question please.

Operator

We have a question from Andrew Steinerman. Your line is open. Please state your company name.

Andrew Steinerman - Bear, Stearns & Co.

Thanks for sneaking me in. Italy, 7.2% operating margins - Jeff, I heard you speak about the efficiencies there, how the company is run with a focus on small and medium-sized businesses - but Mike, just correct me if I'm wrong. I mean, first quarter for Italy, like a lot of your markets, is the skinniest quarter of the year for operating margins. And so with a start like this, doesn't it provide kind of a robust outlook for second quarter operating margins in Italy? And anything else around Italy operating margin.

Mike Van Handel

Yeah. I think what we really - Italy has just been on a strong path from a leverage and operating margin standpoint. The growth has been good. They've been driving some great productivity and efficiency, really for the last several quarters. And I think that's what we've seen really carried into the first quarter of this year.

And you're right, there is some seasonal impact in that at 7.2% that falls off of our 8.3% in the fourth quarter, so it did get down a little bit seasonally, but frankly was quite strong for the first quarter. In Italy what you see is a little bit of a smaller first quarter, which we get in most operations, but in fact the third quarter is a little bit tougher in Italy because of just the timing of holidays and some things like that.

But I think they're setting themselves up for another good year. We had some strong seasonal training business come in, a little bit more than usual. But it was seasonally strong, and so I think that's helped us, helped the first quarter out a little bit. Hopefully we can sustain some of that as we get into the other quarters.

But from what we're seeing now, still good revenue growth and good operating margin outlook for the year.

Andrew Steinerman - Bear, Stearns & Co.

Right. And one more quick question on pricing, the pricing environment in Italy.

Mike Van Handel

The pricing environment in Italy still continues to be quite stable. And it's a very good market from a pricing standpoint. We continue to expand out on the Professional, Manpower Professional services, as well as the Perm Recruiting. So as we continue to build that out, that's been helping gross margin while the more traditional Staffing gross margin has been quite stable.

So I think things are moving there quite positively as well.

Andrew Steinerman - Bear, Stearns & Co.

Good. Thank you. All the best.

Jeff Joerres

All right. Thanks all for attending. As usual, if there are any questions you can refer to information on our website or call Mike, and we will try to give you the best information we can. So thanks again, and everyone have a very good weekend.

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. 1Q08 (Qtr End 3/31/08) Earnings Call Transcript
This Transcript
All Transcripts