Manpower Inc. Q3 2008 Earnings Call Transcript

| About: ManpowerGroup Inc. (MAN)
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Manpower Inc. (NYSE:MAN) Q3 2008 Earnings Call October 21, 2008 8:30 AM ET


Jeffrey A. Joerres – Chairman, Chief Executive Officer

Michael J. Van Handel – Chief Financial Officer


James Janesky – Stifel, Nicolaus & Co.

Mark Marcon – Robert W. Baird & Co., Inc.

Kelly Flynn – Credit Suisse First Boston

Michael Morin – Merrill Lynch

Paul Dinoko – Deutsche Bank

Gary Bisbee – Barclay’s Capital

Vance Edelson – Morgan Stanley

T. C. Robillard – Banc of America Securities


Welcome to Manpower’s third quarter earnings release conference call. (Operator Instructions) I will now turn the meeting over to Mr. Jeff Joerres. Mr. Joerres you may begin.

Jeffrey A. Joerres

Good morning and welcome to the third quarter conference call for 2008. With me this morning is our Chief Financial Officer, Mike Van Handel. Together we’ll go through the third quarter results. I’ll spend a little time on the overview on what’s happening in the markets and then discuss a little bit more in the detail segments. Mike will discuss some items that have affected our balance sheet as well as cash flow. Mike will cover the outlook of the fourth quarter for 2008 as well. Before we move into the call, Mike, if you could read the safe harbor language.

Michael J. Van Handel

Thanks Jeff. Good morning everyone. This conference call includes forward-looking statements which are subject to risks and uncertainties. Actual results might differ materially from those projected in the forward-looking statements. Additional information concerning factors that could cause actual results to materially differ from those in the forward-looking statements can be found in the company’s annual report on Form 10-K and the other Securities and Exchange Commission filings of the company, which information is incorporated herein by reference.

Jeffrey A. Joerres

Thanks Mike. The third quarter of 2008 in many ways was what we anticipated, at least from a revenue perspective. What we didn’t anticipate however was the speed the revenue declines in Europe during the quarter. While this has resulted in de-leveraging, we were able to achieve our expected operating profit margin and I will speak a little bit more about this in detail as we get into some of the acceleration of the downward trends we were seeing in France and Europe.

The third quarter had a few items that put stress on our reported numbers. The first and largest was the goodwill impairment charge that we took for Right Management, an acquisition we made for $631 million in 2004. We’re committed to the marketplace of crew transition and organizational consulting and in fact have continued to see our business accelerate while we’ve been re-footprinting the business in order to align ourself with what are more typical trends in the outplacement business.

Having said that, based on the evaluation by an external firm, we’ve decided to take a write down of $163.1 million before income taxes, or $1.97 per share. Mike will go through it in more depth in his section on this.

This is also the first quarter for several quarters that we’ve experienced a dramatic downturn in currency. The strengthening of the dollar during the quarter reduced our earnings by $0.06 from what we had anticipated.

Removing these two items, we were in line with our earnings per share estimate as of a quarter ago. Mike will put a little bit more color on this, but I just wanted to dissect some of the numbers on the reported basis.

The third quarter started out if you will normal. We were seeing mild deceleration as we had anticipated, particularly in the European markets and continued to see some stability in the U.S. market, albeit at a very low watermark. After a quieter August holiday in Europe there was a dramatic lack of energy coming into September. France, our largest single operating unit, decelerated quite quickly. Some of the hastened downturn can be attributed to our automotive client base, but in general we are seeing weakening throughout the French market.

This is without much comfort very much in line with the reduction of the GDP growth in France. Particularly in France our business is much more correlated to GDP growth than we experience in almost any of our other markets.

However, it wasn’t just France. We’re experiencing deceleration in Italy, Germany, UK, and Dutch markets. Overall, other EMEA for us, our largest reporting segment, finished the quarter at 12% growth or 8% in constant currency. Italy finished the quarter at 2% constant currency growth. These softening trends took place throughout the quarter but turned weaker in September and we continue to see many of the same trends as we move into October.

We are seeing, though, that there are areas of good growth within our network. Elan, which had a very good book of IT business, grew at 26% in constant currency and our smaller core operations of Eastern Europe and the Middle East continued with solid growth rates. However, these operations do not comprise enough of our revenue to counterbalance some of the larger operations. Overall, we finished the quarter at $5.7 billion in revenue, up 7% in U.S. dollars, 1% in constant currency.

Our gross profit margin moved up 30 basis points on a year-over-year basis to 18.1% if we excluded prior year one time items. I’ll spend a little bit more time giving you a sequential look at the gross profit in just a few minutes.

When taking in the $154.6 million of goodwill impairment, net of taxes, it created a loss of

$43.2 million. Stripping away the one time goodwill impairment, we were able to generate

$184 million of operating profit, a margin of 3.2%, a 40 basis point drop from a year ago, primarily based of course on the de-leveraging that occurred from the revenue shortfalls within the quarter.

The third quarter was a difficult quarter for us, particularly because of the dramatic drop in revenue. We have a very experienced and capable team. Therefore, while we do believe the severity of the global financial crisis has not been completely revealed, particularly in Europe we are confident that we will be able to manage through this effectively by being able to take and make the appropriate expense reductions while still positioning ourselves for long term secular growth.

Based on what we experienced in September and the beginning of October, particularly with the softening in the French market, we anticipate the fourth quarter earnings per share to be between $0.97 and $1.01, which includes $0.06 from currency. Let me spend a few minutes on gross profit margin.

Our year-over-year reported basis we were down 27 basis points. The primary reason for the decline is because of the non-recurring favorable change in the French payroll taxes of last year. If we exclude this amount, our gross profit margin was up 30 basis points. Our permanent recruitment business was up 16%, which added 14 basis points to our overall gross profit margin.

Meanwhile, we are continuing to manage our pricing effectively and therefore we are not currently seeing pricing deterioration in our staffing business. In fact, the improvement in temporary gross profit margin added 28 basis points to the overall gross profit margin. Jefferson Wells negatively affected our gross profit margin by 12 basis points. This is primarily from a mix perspective.

Now let’s move onto the U.S. segment. We were anticipating revenue up 7 to 9% and we came in at about 4% increase in revenue to $520 million. The 4% includes franchise acquisitions, so if you were to exclude those acquisitions, growth was minus 12% on an average daily basis, only slightly weaker than the 10% down in the second quarter. We did see a bit of further deterioration as we made our way through the quarter, but this trend actually seems to have sort of stabilized in October.

We are anticipating though that based on the health of the economy and what we’re seeing, we could see further deterioration in the top line. Our Manpower professional business grew in the third quarter, up 6% which was aided by acquisitions. Our permanent recruitment business was down 7% or down 32% excluding acquisitions. While we still feel the need for permanent recruitment, it is an area that has been slowing. As a result, we are insuring that the balance between the right number of recruiters and in fact, what we’re really doing is working much more on the productivity increases of our current recruiter base.

Our French operations, revenues came in at almost $2 billion, $1.9 billion, a little over 1% growth in U.S. dollars, down 8% in local currency, right in line with our expectations. We were able to main good gross profit margin and have been very good at cost control. However, we still see de-leveraging happening slightly, resulting in a reduction of our operating profit by 18%, excluding non-recurring items, yielding a 3.5% operating unit profit margin.

Our exposure in French is the light industrial area which is an area that has been harder hit in the French market than most. We do have large clients in the automotive area which almost literally have ceased the use of any temporary staffing at all. As I said earlier, we saw weaker activity after the August holiday. September revenue was down 13% on an average daily basis. And the first few weeks of October are down a bit more than that.

Our permanent recruiting business on the other hand in France is holding up at least for now, growing 92% on a year-over-year basis. We are watching this very carefully as we believe the pressures in the French marketplace will whipple into the permanent recruitment side. However, there is still a talent shortage in many areas and therefore if a person is qualified and appropriate, we are still seeing some hiring activity.

Legislation that I think many of you may be aware of has been passed in France, allowing for the use of temporary workers in the public sector. This clearly is a good development for us and will be positive. We believe it will take well into 2010 before you could see any material effect on our overall French business.

Other EMEA really did suffer most of the speedy downturn. We were anticipating other EMEA to be up 11 to 13% in constant currency. Instead other EMEA grew at 8% in constant currency. While the decline wasn’t felt across every single entity within other EMEA, clearly slowing down was prevalent in most of the major markets. We finished the quarter at 3.9% OUP margin or $76 million, 2% down from last year.

Our gross profit margin was very much in line with last year and given the speed of the reduction in revenue we were able to only somewhat adjust our expenses. The UK operation revenue was flat with prior year with Brookstreet up 10% in constant currency. Elan put in a very good performance of 26% up in constant currency for revenue growth. That’s down from last quarter as we were anniversaring a very large client win in the third quarter of 2007.

In Germany, we saw year-over-year revenue growth move from 19% in the second quarter to 7% in the third quarter. And as I mentioned earlier, many of the Eastern European countries continued to do well, however, they don’t make up the size large enough to offset the decreases that I had just referenced.

From an operating unit perspective, we are seeing very good growth coming out of the UK, even though their sales were flat. However, profit declines in Germany, Spain and Norway all are hurting us. We’re also seeing good profit growth come out of Sweden, though with some of the recent announcements regarding the downsizing of major companies, we would anticipate the fourth quarter to be more difficult than the third quarter.

I believe our other EMEA segments have yet to feel the major impact of what we’ve been hearing about in the financial world and the economies in general. Much of what we were seeing in October points to a further downturn than what we were experiencing in September. We are looking at all of the expenses as you can imagine. We will take action swiftly on expenses, but as I said earlier we will continue to position ourselves for secular and cyclical growth in the future.

Italy went the way of other EMEA. We are growing, but it is at a lower rate. We finished the quarter at $376 million of revenue, up 12% in dollars, 2% in constant currency. This is lower than what we had anticipated and lower than the second quarter growth of 8%. Our growth trend in Italy weakened as we made our way through the quarter. Profitability still remains good at

$29 million with a margin of 7.8%, up 50 basis points from prior year.

So it is being well managed, though we would expect some de-leveraging to happen as we anticipate the revenue to continue to decline in the fourth quarter, therefore making an operating profit in the 7% range much more difficult based on that de-leveraging.

For the third quarter, Jefferson Wells came in at revenue of $74 million, down on a year-over-year basis of 13%. We continue to manage expenses while still maintaining the appropriate professional staff, which yielded a loss of $1.6 million, about where we were last year. We are consistently seeing a backlog of business that is continually being pushed off or cancelled, as clients and prospects are getting nervous about the future.

While there are many projects that we do do that are not discretionary, if you will, there are many more that can be put off or delayed until there is more visibility in this volatile marketplace. We are seeing even within an environment like this, good performances in a few key cities within Jefferson Wells and we are starting to see improvement in our European operations, which bodes well for our future.

Right Management had a good third quarter, even though we took the impairment charge write off this quarter. Revenue for the quarter was $108 million, up 8% in constant currency. Our gross profit moved up slightly and our profits were up 39% in constant currency to $8 million. This is a seasonally weak quarter for Right, their weakest quarter from a usage perspective, so we are seeing the outplacement continue to improve.

Many of our major clients are in industries that they have announced downsizing and we are working with these clients to help them come out with that. The Right Management business continues to be very strategic for us. We are combining the group resources to approach many of our strategic clients and key accounts with joint Manpower and Right offerings, which is being very well received. In fact, much of the business that we are getting in the strategic account area is based on these combined offerings.

Though clearly we are disappointed that we had to take an impairment charge, we are convinced that the long term value of having a career transition business, organizational consulting business and staffing business combined, particularly for our key accounts, is a very important long term asset. Our other operation segments slowed slightly but still grew on a year-over-year basis to

$747 million, up 13% in dollars, 6% in constant currency. We also improved slightly our gross profit margin. However, our profitability went down in constant currency by 32%. This primarily relates to de-leveraging in some of the contracting markets, such as Australia and Canada.

Our Japanese business was up 5% in constant currency, which we believe is above market. And our emerging markets like China, Taiwan, Hong Kong and India are all going up dramatically, but very similar to what we see in Eastern Europe, they are not of the size that would allow us to balance off the sluggish revenue that we saw in Australia, New Zealand, Mexico and Canada.

Overall, the other operations segment has been less contaminated, if you will, by some of the global downturn. However, we do believe that this is a downturn that will work its way through the globe. It will also affect the Japanese market, as we are starting to see some initial signs of that. And will also affect the emerging markets, primarily China and India, albeit at a much slower rate.

The third quarter was difficult. The management team tier has been through difficult times like this, and we are expecting the times to even get more difficult. We will use the opportunities to reduce expenses structurally, at the same time insuring we do not cut so deep that we injure the brand or our ability to grow in the future. Having said that, we do anticipate that this will have a little bit longer downturn than what we’ve seen in the past. So we will be looking at expenses in a very critical way.

I could speak very confidently at the strength and depth of our management team that has never been better than what we are now. And as a result, I am confident we will maximize this opportunity. With that, I’d like to turn it over to Mike to cover some more financial details.

Michael J. Van Handel

Thanks Jeff. I’d like to start today by discussing some of the unique items in the earning statement, followed by a discussion of the balance sheet and cash flow, then concluding with our outlook for the fourth quarter.

During the third quarter of each year, we do our annual impairment review of goodwill and intangible assets. This year, given the current market environment, we decided it would be appropriate to get an external third party evaluation of the Right Management’s goodwill and intangible assets. In performing these evaluations, we considered anticipated future cash flows, the company’s current cost of capital, and comparable current market valuations.

Based upon this review, we determined an impairment charge of $163.1 million was appropriate. Related to this charge is the tax benefit of $8.5 million, resulting in an after tax charge of

$154.6 million or $1.97 per share in the quarter. I should note that while technical accounting rules require this write-off, it does not diminish in any way the strategic value that Right Management brings to Manpower’s group of companies. Nor does it diminish in any way the marketing leading reputation that Right Management has in outplacement services and organizational consulting.

When we acquired Right Management in 2004, they were the recognized leader in outplacement services and that reputation has been further enhanced through high quality, innovative services. I also expect to give an account of the cyclical nature of Right’s outplacement business that we will see stronger near term financial performance, due to the recessionary basis of this cycle.

Also included in selling and administrative expenses are corporate expenses, which decreased to

$16.6 million in the quarter from $21.4 million the previous year. This reduction almost entirely relates to the reversal of long term percentage accruals of $6.4 million that were accrued for our performance share plan. This plan was tied directly to financial performance and the expansion of the operating profit margin. Accordingly, this accrual was adjusted to reflect our current outlook.

Interest and other expenses increased $4.3 million to $13.4 million. This increase was primarily comprised of increases in net interest expense of $2.5 million, and an increase in net [related] expense of $2.3 million. Net interest expense increased due to the unfavorable currency impact on our euro borrowings and lower interest income due to lower investment yields.

Miscellaneous expense primarily increased due to an increase in the net expense related to minority interest investments. Our reported provision for income tax was unusually high relative to pre-tax earnings as we did not record a tax benefit on much of the impairment charge. If we exclude the impact of the impairment from our earnings statement, our effective income tax rate is 34.7%. This rate is slightly lower than anticipated as we adjusted our accrual for unrecognized tax benefits as a result of a foreign tax audit completed in the quarter.

Next why don’t we turn to our balance sheet? Our balance sheet remains strong with total cash of $632 million and total debt outstanding of $972 million, resulting in net debt of $340 million, a reduction of $113 million during the quarter. Our total debt to total capitalization was a comfortable 27% at quarter end, increasing only slightly from the previous quarter as a result of currency changes.

Given the current credit environment we are in, I thought I’d spend a few minutes discussing our debt facilities and our overall liquidity. Given our expected future cash flow on the credit facilities we have in place, I believe the company is well positioned to fully meet all of its obligations and navigate through the current choppiness in the credit markets.

Of the $972 million of debt, $703 million is comprised of two euro notes which will mature in 2012 and 2013. These notes have fixed interest rates until maturity that are below 5%. Our revolving credit facility allows for $625 million of total borrowings, of which $141 million was drawn as of quarter end, leaving an additional $480 million of availability. This draw down reflects the $100 million euro borrowing which has been swapped to a fixed interest rate at 5.71% until July of 2010. This facility matures in October of 2012.

We also have an accounts receivable securitization facility of $100 million, of which we currently have $73 million drawn. Interest rate under this facility is variable, and is set at the time of each issuance. In addition, we have $55 million outstanding under various uncommitted and overdraft facilities that are subsidiaries. This leaves $312 million available under these credit lines. These facilities are at various interest rates and various maturity dates.

Our revolving credit facility has two primary covenants; a debt to EBITDA ratio and a fixed charge ratio. Under the first ratio, we are required to maintain a debt to EBITDA ratio of less than 3.25 times. We currently have significant room under this covenant as the ratio is 1.1 times at the end of the third quarter. Our fixed charge ratio requires us to cover rent and interest expense by 2 times or more. Again we have significant room under this covenant as our ratio is currently at 3.6 times.

In summary, we have a strong financial position which gives us confidence that we’ll be able to navigate through the current market turbulence and take advantage of market opportunities. I should also note that pre-cash flow initially improves during the early phase of a downturn as our accounts receivable liquidate.

Now let’s turn to cash flows. Pre-cash flow is defined as cash from operations plus capital expenditures with $379 million for the nine month period, compared to $233 million in the previous year, representing an increase of 62%. This increase is primarily due to the liquidating of accounts receivable due to the slowing revenue growth trends we are experiencing in several markets. Our DSO increased slightly by two days over the prior year. This reflects specific timing issues within certain countries and not an overall shift in payment practices from our clients.

Our free cash flow of $379 million was primarily used for share repurchases and acquisitions. During the nine month period we’ve repurchased 2.2 million shares for $113 million. Of this amount, 1.5 million shares were repurchased in the third quarter. This leaves 1 million shares available for repurchase under our current authorization.

However, we discontinued purchasing shares in the middle of September as credit markets began to tighten. We have not repurchased any shares so far in the fourth quarter, nor do I anticipate that we will in the current credit environment.

So far this year we have used cash of $224 million for acquisitions, of which $120 million was used for [Vtay], a specialty professional services firm in the Netherlands and the balance primarily for franchise acquisitions.

Finally, let me discuss our outlook for the fourth quarter. As you can imagine, forecasting in the current environment is quite difficult. Nevertheless, I thought it would be helpful to issue our normal quarterly guidance to give you our current view on the fourth quarter.

Overall, we expect the softening revenue trends that we saw in the third quarter to continue into the fourth quarter. On a consolidated basis, we expect revenue to be down between 5 and 7% in constant currency or 9 to 11% on a reported basis. This anticipates further weakening from the 4% contraction in average daily revenue we experienced in September.

On an individual segment basis, we expect revenue trends in all segments to be weaker than the third quarter with the exception of Right Management, given the counter-cyclical nature of its outplacement business. Our gross profit margin is expected to be up over the prior year by 20 to 40 basis points, excluding the one time [print] subsidy impact in the prior year as we remain focused on price discipline within all the markets.

Our pre-profit margins is expected to range between 2.6 and 2.8% which is lower than the prior year as we expect to see de-leveraging of our fixed cost base in connection with the contraction in revenue. Our income tax rate should be in the range of 36.5% resulting in an earnings per share range of $0.97 to $1.01. This estimate includes a negative impact from currency of $0.06 as the dollar is now stronger relative to the euro and several other currencies than it was a year ago.

As in the past recessionary environments we are adjusting and re-balancing our cost basis to properly align with lower revenue levels. As we reduce our expenses, we are mindful that we do not want to cut too deep into the muscle which could result in damaging the strength of our network or the strength of the Manpower brand. Our management team has successfully managed recession before and I am confident we will successfully manage this one as well.

As we examine our expense base, we are not ruling out a one time restructuring charge. Such costs have not been included in our fourth quarter guidance as it would be premature to estimate at this point. Jeff.

Jeffrey A. Joerres

Thanks Mike. With that we will open it up for questions.

Question-and-Answer Session


(Operator Instructions) Your first question comes from James Janesky – Stifel, Nicolaus & Co.

James Janesky – Stifel, Nicolaus & Co.

Just a couple of questions on operating margins. I know it’s really difficult to predict in this environment but you did make a comment about that this could be a longer type of downturn. Can you put any timeframe around that? And then if it does go as long as you expect where you think operating margins could kind of fall to, keeping in mind that you’re going to really keep an eye on expenses?

Jeffrey A. Joerres

Yes. I mean that really is the question, right? And I want to make sure that we all put this in the context of me not having any better forecast than those that are a lot smarter and do this every day. But we look at it a little differently. What we try to do is really look at what are our clients saying? What is the client usage doing out there? And how are they using our services? And what are they telling us?

And there are many, many clients and it can be in the U.S., it can be in France, in can be in any country we operate in. When I visit them and when our staff visits them, there still is a sense of you know except specific industries there’s still a sense that says you know, it’s not terrible out here. It’s not the greatest I’ve seen, but it’s not terrible. But I am getting nervous.

And therefore what we have done from a budgeting perspective and from a, if you will, a psyche perspective is really spent some time thinking about how do the things that are currently happening now going to affect the labor market and when would that happen? Because in this environment because it is so much based on the financial markets and the housing market has more of a lag environment than it would if it were a pure CapEx sort of downturn that we’ve seen in some of the other downturns, primarily in ’90 which was more of a CapEx kind of environment.

So that’s why we would say it’ll take a quarter or two before we get to the bottom. The real question is is that who gets there and how do they get there? And that’s why it’s hard to look at our own financials and say well, Germany gets there versus France or if Japan stays more buoyant than others all of these kinds of variables have a huge impact to our bottom line. So I think you know us well enough that if we could give you a good answer we would. But I think the challenge is where is it coming from and how will it go?

So what we’re trying to do is make sure that we set to you our best thinking that says A, and I don’t want this lost though I know that it’s hard to keep in this, we love the secular opportunities here and in fact we believe the deeper it goes the better the secular opportunities coming out. The second is that large entities are not all built the same. The Italian market is made up of small, medium sized companies which will react very differently than the UK market which is made up of many MNC’s, multi-national corporations.

So our view is it’ll take a little while for our labor market domino to get hit. When it does, it’ll probably plateau at some level and then because it will have some depth to it, we’re saying we think we’d come out of here faster than what we would have come out in the ‘90s for sure, possibly even the ‘80s. It might look more like the ‘70s. Mike, do you want to add anything from a financial perspective?

Michael J. Van Handel

I think that’s it and your question around the operating margin of course is a good one, and I think that’s the difficulty is exactly how do things slow and how quickly. And we’re going to be quick to bring back expenses wherever we can, but yet be quite prudent to make sure that we don’t cut off the growth opportunities on the other side. But rest assured we’re looking at all expenses in this environment and taking appropriate action.

James Janesky – Stifel, Nicolaus & Co.

Jeff you said that you’ve been a proponent that companies on the margin have been managing their workforces much better in the past upturn. Are you still kind of a believer in that and that that may cushion the bottom somewhat? Or kind of all bets off?

Jeffrey A. Joerres

Well no doubt I think what we have seen is that it is cushioning the bottom. And what I mean by that, it’s already taking place for companies and you can see it in our Right business. There’s not this man overboard at every chance, because companies have not bloated themselves. Having said that, you’ve got to get to page 20 in the paper before you get to any good news and that’s really scaring them.

We were at a company just a few days ago that said, “My business is great but I’m going to shut it down just because I’m worried that somebody else knows something that I don’t know.” So I think it is cushioning it and I think it will cushion it. Also what you see, and this is more of a U.S. phenomenon is you saw much more over the last year of the people being put out to work that’s reported in the BLF numbers is really coming from the staffing industry as opposed to the permanent roles.

So companies have been more sophisticated. But I’m thinking it’s the depth of this which will determine how rapid companies start to let people go because they’ve been reluctant to do it so far.


Your next question comes from Mark Marcon – Robert W. Baird & Co., Inc.

Mark Marcon – Robert W. Baird & Co., Inc.

I was wondering if you could talk using France as one example of what you’re seeing. Could you talk a little bit about just purely the monthly trends that you saw there as the quarter unfolded? What you saw going into October? What’s going into your thoughts with regards to the guidance for this quarter? And how deep of a drop could we sustain from a revenue perspective, where you could still maintain some level of profitability?

And I know that that’s obviously very difficult to say but as you mentioned, you do have to get to page 20 before you see any good news. It’s probably safer to assume that things are going to be difficult for at least the next year rather than improve. So with that as kind of a backdrop how are you seeing things or are you thinking about things?

Michael J. Van Handel

Yes I think Mark overall in Europe I think the news which Jeff mentioned in his comments is I think that the pace of slowing that we saw throughout the quarter was quite rapid. The U.S. for the last year has been, labor markets have been declining, the staffing markets been declining but at a fairly contained pace. And the gap between Europe and the U.S. in terms of time was quite large. I think Europe is catching up quite quickly this quarter.

When you look at overall trends in France, what we had seen in the first on an average daily basis we had seen revenues down in the first couple of months of the quarter in the 8 to 9% range. When we got to September, on an average daily basis revenues were down about 13% year on year and moving into October we’re now seeing revenues down about 15% year on year. Hence our guidance for fourth quarter revenues to be down in the 15 to 17% range overall.

So clearly we’re seeing a bit of a pace of slowing. To maybe put that in a bit of context in relative to the last recession back in 2001, 2002 the weakest quarter we saw in France was down 14% year on year. So it looks like we’re trimming a little bit weaker. As we look at those declines, we’re certainly looking at expenses. We’re going to see some natural de-leveraging but certainly we’ve got a long way to go before we would actually get into a loss position.

The only recent historical reference would be 2001, 2002 in which case overall our revenues were down about 2% in 2002 and a trailing 12 month basis from peak to trough. Our operating profit margin was down about 100 basis points, which is about 33%. So clearly this recession is different and we’ll see different characteristics but I hope that gives you a little bit of context in terms of what we saw last time and certainly what we could be seeing this time going forward.

Mark Marcon – Robert W. Baird & Co., Inc.

Does that mean that if we go to say a negative 25% - I guess what I’m trying to figure out is what the almost the breakeven level is in terms of health, if things progress as rapidly as they have been, if we go to like a negative 25% is that your breakeven point? How do you think of the breakeven point or how do you and to what extent are you able to make adjustments in France? Obviously the laws are different there. We saw what Adecco did. Just curious how quickly you can make adjustments and what point does profitability become challenging?

Michael J. Van Handel

Well we will always look at profitability with the eye of how long do we think, once we get to a certain stage, we have before it gets to be better. In France we already did a major reduction and we did that last year. So we already went through that to, if you will, right size ourselves. Given the current environment in France we could contemplate something like that, but right now we think that the network is a pretty good network based on where we think the business could go.

We have as you would expect can play around with worst case scenarios. The real challenge is where does it come from? So if Italy holds up and the Netherlands holds up it makes a big difference versus if another one goes down. So in our business, the only way to really get deep into the expense line is to close lots of offices. Not just 10 or 15 or 20, but lots of them. And while we will look at offices that are inappropriately located or are in areas that have really been decimated by a certain industry, we’re reluctant at this point to say that that is the strategy that we want to employ.

Because even if, and I’m using your words not mine, even if it lasts all of next year what happens is is that by middle of next year you actually start to see the other side, even though you’re down. And that’s when the office network starts to kick in. So my view is six months or nine months in the state of a company that plans on being here for decades yet, we want to be careful but yet thoughtful about what we’re doing with expenses.


Your next question comes from Kelly Flynn – Credit Suisse First Boston.

Kelly Flynn – Credit Suisse First Boston

With respect to the guidance for the fourth quarter, the margin guidance is actually pretty solid considering what you’re assuming for revenue. Could you help us with a little more detail on first of all what you’re expecting for corporate and then possibly a little bit more regional detail on what you’re expecting?

Jeffrey A. Joerres

I could give a little bit of color. I think as you drill down into each of the segment it maybe gets a little bit harder because there are moving pieces and while we certainly roll it out, sometimes it’s a little tougher to get each of the individual pieces right. But when you look at the overall operating margins across the businesses, no question with the exception of Right and Jefferson Wells, we would expect a decline in overall operating profit margins.

So as you look at operating profit margins against prior year, I think your expectation should be a decline in all of those markets except for perhaps Right and Jefferson Wells. Corporate expenses overall will go up. We are at $16.6 million in this quarter. We would expect those to go back to more of a normal range next quarter, probably in the $25 to $27 million range in the fourth quarter. That would still be down on prior year by about 10%.

But of course as we said earlier, we had some reductions in long term incentive comp and we also had some reductions in our annual bonus incentives which favorably impacted the third quarter and those wouldn’t repeat again in the fourth quarter. Hopefully that gives you a little bit of color overall. We are, if you look at overall SG&A expense our growth rate and constant currency terms in the third quarter was about 7% and we’re certainly looking to bring that growth rate down in the fourth quarter.

And as you would expect that growth rate is going to be more like flat to slightly up, which is a little bit meaningless really when you roll it all up. Because you have to look at it on a country by country basis. Some countries are de-levering and cutting expenses. We still have other countries which are still growing and we still are carefully investing to support that growth. I’ll underscore carefully, but we need to make sure that we’re not missing growth opportunities that are still out there in some of the markets.

Kelly Flynn – Credit Suisse First Boston

And for Right and Jefferson Wells just to be clear you expect year-over-year margin to improve for each of those?

Jeffrey A. Joerres

Yes. I would expect in the case of Right Management, given the pace of business, we would expect some improvement year on year. In the case of Jefferson Wells we did have a loss last year in the fourth quarter. I would expect we’d also have a loss again this year in the fourth quarter, so maybe the margin will be slightly less negative, if you will.

Kelly Flynn – Credit Suisse First Boston

One final one on the permanent placement business. You mentioned the strength in France in particular. That’s great but it begs to question where is that going to go? I think you’ve acknowledged that that could get worse. But what do you assume in your guidance? Are you assuming a significant deterioration in perm in the fourth quarter in France and then if it’s relevant anywhere else?

Michael J. Van Handel

Yes, on a consolidated basis in the third quarter overall perm recruitment was up 16%. I would expect in the fourth quarter we’re going to see growth probably something like the upper single digits. I would expect in the case of France that we still will see very good growth. We almost in the third quarter our perm recruitment business almost doubled where it was prior year. I don’t expect we’ll see quite that in the fourth quarter, but part of that also is the law of larger numbers.

As you know this business was new in 2005 and we’re still ramping it up and so as we’re growing at a fairly rapid pace the year on year comparable numbers get a little bit tougher as the base of the business gets larger.


Your next question comes from Michael Morin – Merrill Lynch.

Michael Morin – Merrill Lynch

I just wanted to follow up on Kelly’s question regarding perm. Can you walk us through a little bit what’s happened to perm in other EMEA? And also in the U.S. I just want to confirm I got the number right. Did you say you were down on an organic basis 32% in the quarter?

Michael J. Van Handel

The case of the U.S. that certainly is correct we did certainly see that, the perm on an organic basis fall off through the quarter. In the case of other EMEA, we still did see growth in the mid to upper single digits in the third quarter. As we look forward to the fourth quarter, I think we’ll see some markets that will still have growth and I think we’ll have other markets that will see contraction. On a combined basis I would expect that we could be flattish, maybe slightly up or maybe slightly down on a year on year basis.

Michael Morin – Merrill Lynch

Mike you made a comment in your prepared remarks about cash flow picking up as growth slows. What are you – given that you’ve put the buyback on hold, what are you planning to do with the cash as it piles up?

Michael J. Van Handel

I think the view would be right now, obviously the credit markets are in a state of flux and I think right now we’re not overly anxious to spend the cash. To the extent we accumulate it we’ll invest it and continue to look for acquisition opportunities. But right now we’re more in a mode of see what opportunities are out there, but more focused on liquidity at the moment. Once credit markets go back to normal I think we will reconsider our acquisition strategy as well as our share repurchase strategy.

Certainly from an acquisition standpoint at this stage of the cycle, we would expect that there could be better values out there and so we’ll continue to look at those. But clearly we would only look at things that are going to strategically sit in with the organization and which really focuses on adding to our specialty in professional business.

Michael Morin – Merrill Lynch

So the write down at Right Management doesn’t necessarily reduce your appetite for acquisition? That’s what I’m hearing.

Michael J. Van Handel

No it doesn’t.


Your next question comes from [Paul Dinoko] – Deutsche Bank.

Paul Dinoko – Deutsche Bank

Jeff I wasn’t sure by your comments about this downturn lasting longer than in the past. Is that because of how long it’s taken to get here or because how long you think it’ll take to get out from where we are today?

Jeffrey A. Joerres

Yes Paul I actually think it’s a combination of both. One is the downturn is coming from lots of different areas from financial to housing in some cases and now because of financials and the credit liquidity side it’s getting so tight. And I also believe it has to do with timing. It’s coming into the holiday season and people really kind of closed their wallets up. It takes a little while for that to work through the system, if you will. That’s why I think it would be in there a little bit longer.

If you look at some of the past ones you’d be looking at six months or somewhere in that time frame. One could argue from a staffing perspective in the U.S. we’re already going into 12 to 13 months. So I think that’s how we would look at it. We do believe and have the opportunity, if you will, and I underscore that is that there does seem to now be, if you take out some of the financial headline news, much more of a synchronized environment.

Therefore, we think that there’s a good opportunity on the other side of this that the global economy, if you will, synchronizes its pick up, which is something that is very appealing to us. So that’s also why we want to make sure that, while we make the appropriate expense cuts, we’re not doing it in a way that doesn’t allow us to get the pick up on the other side.

Paul Dinoko – Deutsche Bank

There’s no press release about the UK OFT. Would I assume that you guys are free and clear on that?

Jeffrey A. Joerres


Michael J. Van Handel

Yes, we are not involved in that investigation at all.


Your next question comes from Gary Bisbee – Barclay’s Capital.

Gary Bisbee – Barclay’s Capital

Can you give us just a general sense as to how much currency translation has benefited margins over the last year, the last few quarters? I guess I’m trying to understand as we look forward, the currency’s turned against you what just the translation hit the margins is likely to be as we get into the first half of ’09.

Michael J. Van Handel

In fact because translation isn’t impacting every one of the income statement lines throughout revenue GP and SG&A, actual margin impact from the currency changes really is negligible. Sometimes you may get a timing impact in terms of when the expenses come in and when the GP comes in. But it’s really negligible from a margin percent standpoint. So really when we look at the effects impact, it really is more in absolute dollar terms in terms of what’s being translated down at the operating profit line.

Gary Bisbee – Barclay’s Capital

You talked about some of the emerging market areas, they’re still doing well in the Middle East and in China, India and stuff like that. Can you give us just an updated sense, a ballpark figure how much of the mix of the business now is in those areas?

Jeffrey A. Joerres

I would say in total we’re looking at $200 million.

Michael J. Van Handel

Yes, one of the important factors remember a lot of those markets are permanent recruitment markets primarily. So from a revenue standpoint in fact they have a little bit more impact than they might suggest from a revenue standpoint, albeit in terms of the overall mix of business of

$22 billion or $4 billion of GP they’re still relatively small at this stage.

Gary Bisbee – Barclay’s Capital

You mentioned earlier that you had done the cost right sizing move last year in France. Can you just give us a sense sort of how many of the markets do you feel like you’ve already taken a lot of the obvious cost out? I’m just trying to understand how much room there is to cushion the margin fall if revenues do fall from further cost cuts. So where else have you already done it versus where are there opportunities?

Jeffrey A. Joerres

I would say when you look at the markets that have been the weakest over the last year, those have been where we would have had the most activity in terms of cost reduction. So the U.S. and Jefferson Wells, which of course is primarily operating in the U.S. So those operations would have seen the greatest cost reduction. In terms of outside of that, we’re always tuned in to expenses so I don’t think we’re running fat and happy anyway, that there’s a lot of low hanging fruit.

But there’s always opportunity when you have to sharpen things up and so as we look at Europe we do see opportunity for cost reductions. But in the end it will come down to offices and where we may want to close offices and where we may be able to reduce headcount as a result of just slower business volumes. And one of the things I should mention in terms of headcount reductions our business does tend to be a higher turnover type business, so a lot of times we can effectively reduce headcount by just not filling new openings. And that’s very effective for us.


Your next question comes from Vance Edelson – Morgan Stanley.

Vance Edelson – Morgan Stanley

A follow up on one of Gary’s questions, can you give an indication as to how you arrived at the estimated $0.06 negative currency impact for the fourth quarter? Does that assume additional dollar strength from here or that rates just hold close to where they are on October 21?

Michael J. Van Handel

Typically when we do our currency view we just extrapolate currencies at a point of where they are at the end of the quarter or near the time of our call. So for instance I’ve used in this case a euro exchange rate of $1.35. I think this morning it’s trading at $1.33 and change. So perhaps there’s a little bit more there. But given that it bounces around I think we’re okay at this stage of the game. But effectively we try not to currency forecast and we just extrapolate the latest rates that we have.

Vance Edelson – Morgan Stanley

Can you comment on your current thinking on making small and medium size business a bit more of a focus going forward? To the extent that you’ve already done that and you have a mix of customers, can you distinguish for us the relative strengths or lack thereof between the large and the small business demand right now which would theoretically change your approach towards changing the mix going forward?

Jeffrey A. Joerres

As you point out, we have had an emphasis to make sure that we get into that small, medium size business marketplace. We’ve done some refocusing within the organization of physically splitting the two so we can have the appropriate focus. We are seeing in Europe that that still is paying off, particularly in the markets like the Netherlands and Germany and Italy. We are entering some of that in the U.S. particularly in the metro markets and we made the switch in France. So we do believe that this gives us a chance to inculcate that more into the organization.

And we think that the small, medium size businesses are also feeling this so it’s not going to be a big savior from the revenue. But what it does do is it gives us time to position ourselves, maybe soften the blow of the revenue decline, but really position ourselves for the other side more than it does help us in the next couple quarters.

Vance Edelson – Morgan Stanley

Okay. That’s great. Thanks guys.

Jeffrey A. Joerres

Okay. Last question please.


Your next question comes from T. C. Robillard – Banc of America Securities.

T. C. Robillard – Banc of America Securities

Jeff, can you give us a sense historically kind of through ’02 and ’03 what was the driver for that that pushed the margins down? And specifically Jeff where I’m going with that is you made an interesting point that trying to figure out peak to trough, trying to figure out the de-leveraging impact is really going to depend on kind of a segment by segment or country by country basis. Can you just remind me historically what were kind of the moving pieces that pushed your margins down to kind of sub 1% for a couple of quarters there?

Jeffrey A. Joerres

Yes. I don’t know that there’s anything magic I can tell you on this one, T.C. You know when we look across we really saw margin contraction across the board and it just really came as each of the individual countries started to slow. There is just a natural de-levering that does occur, which I think is probably somewhat logical. If you think about if our business is down 5% and our average office has maybe four people within that office, you can’t necessarily reduce from four to three because you’d be taking out about 25% of the capacity for a 5% reduction in business.

So really it is a bit of a natural de-levering. And we really saw the slowing start again last time in the U.S. and then make its way across Europe, the U.S. in 2001 and then in Europe really started later in ’01 but really more seriously in ’02. But really across the board you’d see some declines in operating profit margin on a year on year basis across all of the segments and within each of the geographies.

Michael J. Van Handel

I think also I want to add just something [inaudible]. Our business is dramatically different,

$10 billion different which has some good things to it and maybe some hazards if you will to it. And I just want to point out that during that time one of the things that we did benefit from and we have some of it but just not as large, is that we were seeing secular growth through a downturn in Europe, particularly in Italy and in Germany in ’01 and ’02. And I think that was giving us a little bit of a boost.

Now we did have to do some investments in office openings, but it did give us a little bit of a boost. When we look at what will give us that kind of booster if you will in this scenario, we still pick up Eastern Europe, we still pick up Asia and the Middle East. The challenge is those are not quite the size of what an Italy and Germany was producing at that time. So I think when you have something as many entities as we do, we’ve got a very good hold of each one, but it’s very hard to kind of roll it all up and say the average tells us this.

Our view is is that between our mix of business and what we’re doing in our management team is we are going to be able to manage this one as effectively though it has different components to it than we did the last one.

Jeffrey A. Joerres

One other thing maybe I’ll just add, looking back to ’01 and ’02 our lowest quarter from an operating profit margin standpoint was 2% outside of the first quarter of 2002. And the first quarter’s always seasonally a lower quarter so we always see a much lower operating profit margin. That’s the only quarter where we actually dipped below 1%. But outside of that quarter throughout that period we were 2% or better from an operating margin perspective.

T. C. Robillard – Banc of America Securities

So if we’re looking at just kind of the pace of deceleration, particularly in Europe per your comments and you just kind of look at the growth relative to kind of where your peak to trough was the last time, is that a situation where we should expect greater de-leveraging because of how fast this is moving off?

Or does it provide a earlier opportunity for you guys to manage expenses and Mike your example where if you’re only down 5% for revenues you’re not going to cut 25% of the staff, but if revenues are going down 15, 20% does that give you the ability to adjust that headcount quicker than maybe you did the last cycle?

Michael J. Van Handel

Logically yes. But we also want to make sure that we’re doing the right things for the brand and I would tell you that we’re not going to be soft on expenses but we are going to be looking at from a real longitudinal perspective. I think the depth if you will has more to do with how deep does it go. Because if it’s 13 and it moves something much less than that or down further than that, you end up chasing some things which can really do some damage to a retail brand which in many ways we are with 4,500 offices.

So because it has presented itself in a way where there are no mysteries this is a downturn, you’re right, it allows us and all of our operators who look very critically at costs there is no cloud of confusion in this one and therefore we would be able to act in a much more expeditious way. But I want to make sure that you all understand we’re not going to decimate the place to try to make a few quarters.

T. C. Robillard – Banc of America Securities

That makes sense. It sounds like from your comments that the most, kind of the biggest factor I guess would be as you guys are just trying to handicap how long the downturn is as opposed to how severe.

Michael J. Van Handel

That’s it. Because as I say to my people here is that an investment too early is an expense so let’s make sure that we hold off on some of this until some of the clouds clear a little to see how long will this go. So as a result we are trimming back on lots of things to just get a little more clarity on the situation.


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