ManpowerGroup's (MAN) CEO Jonas Prising on Q4 2016 Results - Earnings Call Transcript

| About: ManpowerGroup Inc. (MAN)

ManpowerGroup Inc. (NYSE:MAN)

Q4 2016 Earnings Conference Call

January 31, 2016 08:30 AM ET

Executives

Jonas Prising - Chairman and Chief Executive Officer

Jack McGinnis - Chief Financial Officer

Mike Van Handel - Senior Executive Vice President, Investor Relations

Analysts

Manav Patnaik - Barclays

Andrew Steinerman - JPMorgan

Hamzah Mazari - Macquarie Capital

Anj Singh - Credit Suisse

Kevin McVeigh - Deutsche Bank

Mark Marcon - R.W. Baird

Tobey Sommer - SunTrust

Tim McHugh - William Blair

Gary Bisbee - RBC Capital Markets

Operator

Welcome to the ManpowerGroup Fourth Quarter Earnings Results Conference Call. [Operator Instructions] This call is being recorded. If you have any objections, you may disconnect at this time. I would like to turn the call over to ManpowerGroup’s Chairman and CEO, Mr. Jonas Prising. Sir, you may begin.

Jonas Prising

Good morning, and welcome to the fourth quarter conference call for 2016. With me today is our Chief Financial Officer, Jack McGinnis along with our Senior Executive Vice President in charge of Investor Relations, Mike Van Handel.

I will start our call by going through some of the highlights in the fourth quarter, then ask Jack to go through the operating results of the segments for the quarter as well as our balance sheet and cash flow. Finally, Jack will give some comments regarding our outlook for the first quarter of 2017 and then I will follow along with some final thoughts before our Q&A session. But before we go any further into our call, Mike will now read the Safe Harbor language.

Mike Van Handel

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

Any forward-looking statement in today’s call speaks only as of the date of which it is made, and we assume no obligation to update or revise any forward-looking statements. During our call today, we will reference certain non-GAAP financial measures, which we believe provide useful information for investors. We include a reconciliation of those measures, where appropriate, to GAAP on the Investor Relations section of our website at manpowergroup.com.

Jonas Prising

Thanks Mike. We are very pleased with our performance in the fourth quarter. Revenue came in at $5 billion, an increase of 3% in constant currency, which is at the high end of our forecasted range.

On a same-day basis, our underlying organic constant currency growth rate was 4%, an acceleration from 2% in the third quarter. Operating profit in the quarter was $212 million, a strong increase of 21% in constant currency, and up 11% in constant currency if you exclude the prior year restructuring charge. Our operating profit margin came in at 4.3%, an increase of 30 basis points, excluding prior-year restructuring charges and 40 basis points above the midpoint of our guidance range. The strong performance was driven by a gross margin at the high-end of our range combined with SG&A productivity improvements, partially driven by good SG&A leveraging on higher than expected revenue growth. Earnings per share for the quarter was $1.87. If you exclude the prior year restructuring charge this represents an increase of 11% over the prior year or 15% in constant currency.

Stepping back, I'm looking at the full year. I also believe we had a very solid performance in an uneven and slow growth economic environment. Earnings per share for the year was $6.27, an increase of 16% or 90% on a constant currency basis. Revenue grew 4% in constant currency to $19.7 billion, and operating profit expanded to $751 million, 11% increase in constant currency, or 9% excluding the prior year restructuring.

I believe the solid performance can be attributed to our market strategy featuring strong and connected brands, a diversified portfolio of leading services and solutions delivered by our global network. Our clients are aware that access to skilled and flexible talent solutions is what they need to be successful in an ever-changing world of technological change and certain uncertainty.

Through our four brand offerings, Manpower, Experis, ManpowerGroup Solutions, and Right Management we are able to offer a variety of workforce solutions to address their most complex talent challenges. Our geographic diversification also played out well during the year as we saw less choppiness and a better growth trajectory in Europe as [Indiscernible] through the year.

Our European organic constant currency revenue growth trends on a same-day basis started the year modestly positive, up 1% in the first quarter, followed by flat in the second quarter and an acceleration to 2% in the third quarter and 7% in the fourth quarter. As we have mentioned on many occasions, we believe many of the markets in Europe are at the earlier stages of their economic and labor market recovery, and as their economies continue to heal and start to gain traction, our flexible workforce solutions are a key component of our client’s desire to remain agile.

As we look to the European markets, France is a good example of where we had experienced choppy and volatile growth earlier in the year, followed by more stable and improving trends, delivering 8% revenue growth in constant currency on a same-day basis in the fourth quarter.

And with that, I would like to turn the call over to Jack to provide additional financial information and a review of our segment results.

Jack McGinnis

Thanks, Jonas. As Jonas mentioned, we had a very strong fourth quarter performance with earnings per share up 70% in constant currency, 15% excluding the restructuring charges last year, and 3% constant currency revenue growth. Revenue growth met the top-end of our guidance range and operating profit and earnings per share exceeded our guidance range. The operating profit margin was 4.3%, and increase of 30 basis points over the prior year after excluding prior-year nonrecurring items and 40 basis points above the midpoint of our guidance. Although our gross profit margin declined 20 basis points compared to the prior year, our SG&A costs improved as a percentage of revenue providing for increased operating profit margin year-over-year.

Breaking our revenue growth down into a bit more detail, currency negatively impacted revenues by 3% and acquisitions contributed about 50 basis points to our growth rate in the quarter. Therefore, while revenues were flat on a reported basis, our organic constant currency revenue growth in the quarter was 2.5%, which after adjusting for billing days represents a 4% growth rate. This is a 2% acceleration compared to the third quarter growth rate after adjusting for billing days. I mentioned our revenue growth met the top-end of our guidance range. This was largely driven by better than expected revenue growth in Northern and Southern Europe.

Earnings per share of $1.87 exceeded the midpoint of our guidance range by $0.18.

The majority of the outperformance is attributable to the stronger performance of our operations with $0.15 coming from operations as we saw higher revenue growth and better expense leverage than expected.

During the quarter we received an insurance settlement of $7.5 million recorded within corporate expenses, which improved EPS by $0.07. A slightly lower effective tax rate added $0.02. Earnings per share in corporates and negative currency impact of $0.07, $0.05 more than expected based on further strengthening of the dollar during the quarter.

Looking at our gross profit margin in detail, our gross margin came in at 17, a 20 basis point decrease from the prior year. Organically, the staffing interim gross margin had a 20 basis points unfavorable impact on gross margin, which was primarily driven by business mix as well as direct cost increases in countries such as France. I will cover this later as part of the segment review. Right Management contributed less to gross profit this year and this mix change reduced margin by 10 basis points. I will cover Right Management later in the segment results. Currency impacts on our overall business mix had a favorable impact of 10 basis points.

Next, let’s review our gross profit by business line. During the quarter, the Manpower brand comprised 64% of gross profit. Our Experis Professional business comprised 20%; ManpowerGroup Solutions comprised 12%; and Right Management, 4%. Our strongest growth was achieved by our higher value solutions offerings within ManpowerGroup Solutions.

During the quarter, our Manpower brand reported a constant currency gross profit increase of 2%. This represents an improvement from the 1% decline experienced in the third quarter. Within our Manpower brand, approximately 60% of the gross profit is derived from light industrial skills and 40% is derived from office and clerical skills. Gross profit growth from light industrial skills was flat in the fourth quarter, representing a deceleration from the third quarter that was more than offset by increases in office and clerical skills.

Gross profit in our Experis brand was flat in constant currency or down 3% on an organic basis. Excluding the US, Experis experienced 5% growth in the fourth quarter in line with the third quarter and strong increases in many of our European and APME businesses.

ManpowerGroup Solutions includes our global market leading RPO and MSP offerings, as well as talent based outsourcing solutions, including Proservia, our IT infrastructure and end user support business. Gross profit growth in the quarter was up 11% in constant currency with very strong growth in our RPO and MSP solutions offerings. Right Management experienced a decline in gross profit of 19% in constant currency during the quarter. This was primarily driven by the non-recurrence of the prior year energy sector related career transition activity in the US. I will also comment on this in my segment review.

Our reported SG&A expense in the quarter was $629 million, a decrease of $25 million from prior year, excluding the restructuring costs last year, which includes a favorable impact of $17 million from changes in currency, partly offset by $4 million from acquisitions. A favorable operational impact of $12 million includes the insurance settlement of $7.5 million.

On an organic basis in constant currency, SG&A expenses were down 2% compared to recurring expenses in the prior year. Recurring SG&A expenses as a percentage of revenue in the quarter improved 50 basis points to 12.7%, driven by continued focus on operational efficiency across our businesses and the insurance settlement.

Next, I will discuss the operational performance of each of the segments. The Americas segment comprised 21% of consolidated revenue. Revenue in the quarter was $1.1 billion, a decrease of 3% in constant currency. Profitability was lower with OUP of $53 million, 5% in constant currency below the prior year level, excluding 2015 restructuring charges, driven by declines in the US. On the same basis OUP margin declined by 20 basis points year-over-year. Permanent recruitment, up 5% in constant currency over the prior year and strong performance in our higher margin solutions offerings partially offset the softness in staffing services. Additionally, we continue to effectively manage SG&A expenses, which were down against the prior year, excluding prior year restructuring charges.

The US is the largest country in the Americas segment, comprising 64% of segment revenues. Revenue in the US was $685 million, down 9% compared to the prior year. As we have mentioned previously, the prolonged weakness in the manufacturing side of the US economy has impacted demand for our services over the past number of quarters and the rate of decline in professional services has increased in recent quarters. This further decline from the previous quarter came primarily from the Experis business.

During the fourth quarter, excluding prior year restructuring costs, OUP declined 7% to $39 million. OUP margin was 5.7%, up 10 basis points from the prior year, primarily due to direct cost management and strong SG&A cost controls. Within the US, the Manpower brand comprises approximately 45% of gross profit. Revenue for the Manpower brand in the US was down 8% in the quarter, a very slight decline from third quarter. The industrial and office and clerical businesses have declined for several quarters in the US, and the fourth quarter trend was stable to the average rate of decline for 2016.

The Experis brand in the US comprised approximately 33% of gross profit in the quarter. Within Experis in the US, IT skills comprised approximately 70% of revenues. During the fourth quarter, our Experis revenues declined 14% from the prior year compared to 8% decline experienced in the third quarter. Experis revenues from IT skills were also down 14% from the prior year due to the anniversarying of new business in 2015 and reduced demand at several large clients particularly in the financial services sector.

ManpowerGroup Solutions in the US contributed 22% of gross profit and continues to see strong revenue growth of 11% in the quarter. This growth was driven by continued strong demand by our clients for our higher value RPO and MSP Solutions. Our Mexico operation had revenue growth in the quarter of 8% in constant currency, a 3% improvement from the 5% growth in the third quarter. The business in Mexico performed well in the fourth quarter and we expect good growth into the first quarter.

Revenue in Argentina was up 13% in constant currency, which continues to reflect the impact of inflation. Volumes in Argentina remained down year-over-year as we continue to focus on margin and payment terms improvement, given the highly inflationary environment. Revenue growth of the other countries within Americas was up 7% in constant currency. This included strong growth in Canada, with constant currency revenue growth of 6%. We also saw strong revenue growth in Peru, Colombia, Central America and Brazil.

Southern Europe revenue comprised 39% of consolidated revenues in the quarter. Revenue in Southern Europe came in at $1.9 billion, an increase of 5% in constant currency. OUP was $102 million, an increase of 7% from the prior year in constant currency and OUP margin was 5.3%, flat with the prior year, as efficiency improvements offset gross profit margin declines. Permanent recruitment growth remained healthy, up 9% in constant currency, but declining from the 17% growth level in the third quarter.

France revenue comprised 64% of the Southern Europe segment in the quarter and was up 6% over the prior year in constant currency. After adjusting for billing days, this represented an 8% growth rate, an increase from the 2% to 3% growth rate seen in the first three quarters. This fourth quarter rate of growth included a very strong December, which benefited from increased holiday activity this year.

We have seen continued strong growth rates through January in the mid-to-high single digits. Although France gross margin has been unfavorably impacted this year by direct cost increases, as discussed in previous quarters, business mix shift has also impacted the margin as we continue to focus on carefully regaining market growth rates, while demonstrating appropriate pricing discipline. Also impacting gross margin was the CICE rate increase from 6% to 7% of eligible wages effective with payroll beginning January 1, 2017. Permanent recruitment growth decelerated to 3% in constant currency during the fourth quarter, and based on January activity we expect this rate of growth to improve in the first quarter.

OUP was $67 million, an increase of 2% in constant currency and OUP margin declined 20 basis points to 5.5%. The OUP margin decrease of 20 basis points was an improvement from the 60 basis point decline in the third quarter.

Revenue in Italy declined 1% in constant currency to $306 million, but was up 3% in constant currency on an average daily basis. OUP growth was very strong, up 13% to $22 million. It’s important to note that the Milan Expo impacted the prior year revenues and excluding Expo, revenues increased 6% on an average daily basis. During the course of the quarter, we continue to see improving trends in Italy, and expect a strong first-quarter revenue growth.

During the fourth quarter, the OUP margin expanded by 80 basis points to 7.1% as gross margin improved and SG&A cost continued to be very well managed. Revenue growth in Spain was up 4% over the prior year in constant currency. This reflects good growth on an increasing larger base as the business has experienced significant growth over the last few years. OUP was up 7% in the quarter in constant currency and OUP margin expanded by 10 basis points.

Our Northern Europe segment comprised 26% of consolidated revenue in the quarter. Revenue was up 6% in constant currency to $1.3 billion. On a billing days adjusted organic constant currency basis northern Europe had a 6% constant currency growth rate, which represented an acceleration from the 2% organic constant currency growth rate in the third quarter. Contributing to this improved revenue performance were the Netherlands, Belgium, and the Nordics. OUP, excluding prior-year restructuring charges, increased 16% in constant currency to $49 million and OUP margin of 3.8% on the same basis was up 40 basis points. This increase in OUP margin was primarily attributable to improved gross profit margin and disciplined SG&A cost management.

Our largest market in the Northern Europe segment is the UK, which represented 31% of segment revenue in the quarter. UK revenues were down 2% in constant currency, a slight improvement to the trend experienced in the third quarter on a billing days adjusted basis.

As we mentioned in previous quarters, the market for our Manpower staffing business has weakened in 2016, especially across some of our larger accounts and within the public sector, although this level of decline has improved in the fourth quarter following a stable trend in the previous three quarters. Conversely, following growth in the Experis Professional brand in the previous three quarters. During the fourth quarter, we experienced a slight decline.

In the Nordics, following recent quarters of revenue declines the business returned to a strong revenue growth. Our reported growth rate reflects the acquisition in Norway at the end of the third quarter. Excluding this acquisition, organic constant currency growth adjusted for billing days for the Nordics equaled 7% and included strong growth in both Norway and Sweden. Revenue growth in Germany was up 5% on a constant currency basis in the fourth quarter. The Germany acquisition anniversary at the end of the third quarter and its growth rate after adjusting for billing days represents 9% which is a slight increase from the third quarter organic constant currency growth rate.

Germany's performance in the fourth quarter included increased revenues from our Proservia business line. Revenue in both the Netherlands and Belgium continue to be extremely strong at 25% and 22% respectively in organic constant currency adjusted for billing days. In the Netherlands, our reported growth rate reflects the acquisition earlier in the year. Other markets in Northern Europe had a revenue decline of 6% in constant currency as growth in Poland continued to be offset by declines in Russia and a few other markets.

The Asia Pacific Middle East segment comprises 30% of total company revenue. In the quarter, revenue was up 5% in constant currency to 630 million or 6% after adjusting for billing days, representing a 1% reduction from the 7% average daily growth in the third quarter. Permanent recruitment growth was 7% in constant currency. OUP was 22 million in the quarter, which after adjusting for prior year restructuring charges was down 2% in constant currency, and OUP margin decreased 30 basis points on that same basis to 3.4%.

The OUP margin decrease was driven by a decrease in staffing interim gross profit margin and higher SG&A on increased professional services costs. Revenue growth in Japan was up 4% on a constant currency basis, representing a slight acceleration from the growth of 3% during the third quarter. Permanent recruitment growth and strong SG&A cost management drove an OUP increase of 9% on a constant currency basis. Revenues in Australia and New Zealand were down 4% in constant currency, but adjusting for billing days is represented a 2% average daily revenue growth rate.

This is the 2% decline from the third quarter days adjusted growth rate, reflecting continued depressed demand in Australia as challenging economic conditions impact various industrial sectors. Revenue in other markets in Asia Pacific Middle East continued to be strong, up an 11% in constant currency. This was the result of good double-digit growth in a number of markets, including India, Korea, Hong Kong, and Taiwan. Buying a strong first half of 2016, our right management business continued to slow in the second half of the year.

Fourth quarter revenues were down 14% in constant currency to 59 million following a 4% decline in the third quarter. OUP increased 7% on a constant currency basis to 12 million on SG&A reductions. OUP margin increased 390 basis points to 20.3%. Right managements revenue declined were driven by lower outplacement business, primarily in the US, due to nonrecurrents of the prior year energy, industry, outplacement activity.

I'll now turn to cash flow on balance sheet. Free cash flow, defined as cash from operations less capital expenditures was very strong for the year at 453 million. At quarter end, day sales outstanding was slightly better than the prior year level. Capital expenditures represent a 57 million during the year which was up year-over-year primarily due to our investment recruiting centers early in the year. Cash use for acquisitions year-to-date represented 58 million. During the quarter, we purchased 237,000 shares of stock for $20 million bringing total purchases for the year to 6.6 million shares for $482 million.

This represents just about 9% of outstanding shares since beginning of the year. As of December 31st, we are 4.8 million shares remaining for repurchase under the 6 million share program approved in July of 2016. Our balance sheet was very strong at year-end with cash of $598 million and total debt of $825 million, bringing out net debt to $227 million. Our debt ratio is a very comfortable at year end with total debt to trailing 12 month EBITDA of 1.0 and total debt to total capitalization at 25%.

Our debt and credit facility should not change in the quarter. At year-end, we had a 350 million euro note outstanding with an effective interest rate of 4.5% maturing in June of 2018, and a 400 million euro note with an effective interest rate of 1.9% maturing at September 2022. In addition, we have a revolving credit agreement for $600 million which remained unused. Next, I'll review our outlook for the first quarter of 2017. We are forecasting earnings per share to be in the range of a $6 to a $14, which includes a negative impact from foreign currency of $0.05 per share.

Our constant currency revenue guidance range is for growth between 5% and 7%. The impact of acquisitions is about 0.5% of the growth rate in the first quarter, making our organic constant currency growth 5.5% at the midpoint. As there is one more day in the first quarter, year-over-year, this represents an organic constant currency growth rate of 4%. A continuation of the underlying growth rate experience in the fourth quarter. From a segment standpoint, we expect constant currency revenue growth in the America's decline in the lower single-digit range.

With Southern Europe growing in the high single-digit range, Northern Europe also growing in the high single-digit range benefitting about 2% from acquisitions and Asia Pacific Middle East growing in the mid-single-digit range. We expect a revenue decline at right management in the high single-digits to low double-digits. On a consolidated basis, there is approximately one more business one more business day during the first quarter compared to the prior year. On a regional basis, this adds about 2% to our revenue growth rate in the America's and 1% in Southern Europe, Northern Europe and APME.

Our operating profit margin should be flat compared to the prior year, reflecting a slightly lower gross margin. We expect our income tax rate to approximate 40%. As usual, our guidance does not incorporate additional share repurchases of restructuring charges and we estimate our weighted average shares to be 68.5 million, reflecting share repurchases through the end of 2016. With that I'd like to turn it back to you Jonas.

Jonas Prising

Thanks, Jack. We finished out the unit very strong note and delivered an overall strong performance in 2016, reaching an all-time record earnings per share result and achieving our long standing EBITDA target of 4%. This has been a multi-year effort and who better than Mike to give you an update on the journey to meet the commitment we made a number of years ago. So, over to you, Mike.

Mike Van Handel

Thanks, Jonas. Hope that those of you that have done following us for some time, that we stand a 4% EBITDA target for our company several years ago. We reaffirmed that 4% target following the great recession in February of 2013, that our company sponsored investor event in New York. I know many of you were with us on that occasion. Taking back a few years, we closed our 2012 with a margin of 2.4% and laid out a roadmap of how we would reach our 4% goal. And we did not put a timeframe for reaching that goal, we indicated that we would need roughly 15% organic constant currency revenue growth over the 2012 level to meet our target.

I'm happy to report that we met our 4% target in 2016, after adding about half the growth, we had originally expected. This was due to very strong and effective cost reductions and productivity enhancements. Through our 2013 cost recalibration and simplification plan, we were able to achieve greater cost reductions than anticipated and our tireless efforts around fine tuning our network and enhancing our global delivery model since then has provided significant efficiencies. We are clearly pleased to have met this milestone in 2016 and will turn things back to Jonas so that he can discuss the opportunities that lie ahead.

Jonas Prising

Thanks Mike. We're very pleased that we have met our commitment and met it with a lower level of revenue growth than originally expected and we have also stated that 4% was not the end game but an important milestone on our journey of being the leading global workforce solutions company. Having just returned from Davos and the World Economic Forum, it is very clear to me companies are increasingly focused on finding skill talent to take advantage of technological progress, building agile organizations that can navigate the potentially unpredictable economic and political environment.

These companies can successfully advance these initiatives with a partner like ManpowerGroup that has both capabilities in terms of breadth of offerings as well as geographic reach. Strengthening these capabilities is what we have been focused on. Providing valuable services for our clients with workforce flexibility offerings through our contingent staff in Manpower and experience, while building our permanent recruitment capabilities under those brands as well. As we're increasingly seen as a way to acquire talent regardless of timeframe.

Our world leading solutions offerings have addressed the increased need for specialization and expertise and this is the quarter, the 11th quarter of double-digit growth in those offerings. And finally, right management has made some good progress as the world's leading career expert during 2016 helping those displace from organizations assess, deploy and enhance their skills in new opportunities.

So, in summary, we're well positioned to continue our progress in 2017 and beyond. As we think about margin expansion going forward, we also believe it is important to balance that with a revenue growth. We know shareholder value comes from driving operating profit growth and maximizing return on investment capital, with operating margin, a good yard stick for overall context and performance assessment. We introduced these economic profit principles into our business a number of years ago and they have served us well ensuring that we are taking on the right business at the right margin resulting in the greatest value creation.

And these principles will continue to be a key part of our strategy going forward and the bottom line is that we are focused on maximizing shareholder value. We made good progress during the past year and are well positioned for further progress in 2017. Our strong results in 2016 would not be possible without our people and I would like to thank our very talented team for the tenacious efforts in delivering highly valued workforce solutions to our clients every day in our 80 countries.

The commitment to our global strategies and driving execution combined with their passion for our company values is what drives performance and contributes to making millions of people's life better to meaningful and sustainable employment opportunities. Now, before we conclude this part of the call, I would like to once again recognize Mike of what is his last earnings call before you retires next month.

Thank you Mike for 28 years of tremendous service to the company, providing both strategic and operational leadership while driving improved financial performance and creating shareholder value. And thanks also for co-creating a very well planned transition process which resulted in the appointment of Jack as our new CFO which we announced one year ago. I am pleased to say the Jack's integration into the company has gone extremely well both internally as well as externally for our shareholders. And with that I would now like to open the call for Q&A.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] The first question comes from Manav Patnaik with Barclays. Your line is now open.

Manav Patnaik

Good morning, gentleman. And I would also like to congratulate and thank Mike all who has helped over the years. My first question, the 4% organic growth guiding for the first quarter seems like a pretty good setup for the rest of the year and in the context of your comments around operating margins being the yardstick to improvement, I guess it sounds like you are not ready for the next margin target, but assuming you maintain that sort of organic growth what should be the yardstick that we hold you guys to?

Jack McGinnis

Well thanks Manav. We are pleased that we reached our 4% target as we always said, that's not be the end of the road but rather we intend to continue our journey from there. We've just concluded the year when we reached that milestones. So, I think we'll take some time now to think about what the right target is going forward and as I mentioned in my prepared remarks it's going to be a question of driving profitable growth, maintaining our pricing discipline, making sure that we stay with the market growth and that we then understand what appropriate targets are because as you all know there is of course a very good yard stick with operating margin but at the same time you can see some very nice operating profit growth at the margins that might be slightly below. So it's always the balance in terms of what we are doing and how we think about the business.

But overall, we are optimistic that we can continue to make progress also in ‘17 and beyond and we will come back to the question of when the time is right to talk about any new targets and what those would be.

Manav Patnaik

Got it. And then just a question broadly obviously there seems like there is a lot of political risk, elections coming up in Europe obviously, [indiscernible] will be triggered pretty soon so on and so forth. I mean there is a lot of noise out there. We are just hoping we could help to the extent possible simplified in terms of what changes the positive outlook that it sounds like you guys are giving today like any of that really impact the business here?

Jonas Prising

Well, I think as it relates to the political uncertainties in those various countries that have elections, you will know as much about that as I do and it's of course not possible to predict what the outcomes are and as a business we are prepared to go either way and can adapt to any of those circumstances.

But I would say this if you look at the economic growth outlook noise aside, I think many sources have cited a slight improvement in particular in Europe. The unemployment numbers for Europe came out earlier today and they show the lowest level of unemployment in Europe since 2009, but of course still significantly higher than what we have in many other markets. The EU unemployment came in the Euro area I should say came in at 9.6%. So down 90 basis points compared to year ago. So the labor markets are slowly healing. And I think that's part of our cause for cautious optimism as we look ahead but as you said there is always political uncertainties I could derail it, but we remain with what we see and how the conversations are with the employers and for now those conversations are constructed.

Manav Patnaik

Okay, got it. Thanks a lot guys.

Jonas Prising

Thanks Mark.

Operator

The next question comes from Andrew Steinerman with JPMorgan. Your line is now open.

Andrew Steinerman

Hi, it's Andrew, congratulations Mike. We appreciate everything you have done here. My question has to do with France. I heard we want to re-balance to get back to market. Have we done that, like do you sent your fourth quarter revenue growth is back to market and then when thinking about the operating margins for France we begin the year here. Are there any puts and takes to think about for France for operating margins for 2017?

Jonas Prising

Thanks Andrew. So maybe I will start on the market growth side and I think we have made some good progress on closing the gap. I don't know that we are fully there yet in terms of market growth but the team has done a very good job of balancing growth and pricing discipline and what is really a low growth environment and managing expenses in what is still a difficult environment for many of our client companies. So we saw some good improvements in Q3 and also in Q4 and we are hopeful that will carry on also into this quarter but maybe Jack you can add some color to that and also to the operating margin question.

Jack McGinnis

Sure. So Andrew in terms of, when you look at France in terms of where we are now we have talked about the GP margin decreases. We see that holding into the first quarter. I would say in terms of some of the puts and takes when you are looking at operating unit profit you should expect that GP margin decrease generally will have some impact on that OUP margins so that might be down slightly in the first quarter I think in terms of some of the components. Certainly we have the CICE increase that we talked about earlier in our comments.

However, offsetting that we also have some additional direct cost related to the complimentary healthcare, there is an additional increase for that in 2017 and we additionally have some additional pension cost which will offset a portion of that CICE increase. So I think with that generally speaking we would expect operating unit profit to come in slightly below where we have been tracking.

Andrew Steinerman

Okay. Thank you.

Operator

The next question comes from Hamzah Mazari with Macquarie Capital. Your line is now open.

Hamzah Mazari

Good morning. Thank you. Just was hoping if you could share a little more color on the Experis brand. Specifically you had mentioned your anniversaried some business. There is lower demand in the financial sector. Just curious if there is anything structurally that's different in the marketplace within that specific brand or is this just sort of prior year comps and anniversaring low business, anniversaring new business, excuse me?

Jonas Prising

I think overall, if we exclude the U.S., we made some good progress with Experis and you have heard Jack talk about 5% organic growth in constant currency earlier on. So I think we are pleased with where we are, what we are doing with the Experis. Now clearly, in Experis U.S. we started the year out heading in a better direction, but we are not satisfied with the progress we made in 2016 in the U.S.

I’m clear that the market has softened and talent is very short. It's when we have big projects that come off it's harder to back fill that with the demand that we are still seeing in the U.S., so I think this is much more an Experis U.S. issue than it is a market issue. So we are very focused on turning the business around and it has all of our focus to make sure that that happens when we close the gap to market.

Hamzah Mazari

Great and just a follow-up question. On capital allocation some of your European peers have been much more aggressive on M&A and just curious to see how you are thinking about M&A going forward or is sort of return of cash more of a priority?

Jonas Prising

Well we always prefer organic growth as a strategy and as we have talked about in the past we may decide to have some M&A activity within the Experis business or the solutions business or the high margin businesses. But it's going to be question of the right sit, the right culture, the right price, the right geography, so we don't anticipate to drive growth through M&A. We don't think that that's a good growth strategy. But we may well complement and strengthen specially our professional and our solutions businesses with M&A as those conditions and that fit strategic fit is there but so the great news is we don't feel that we have to make acquisitions. We have a clear strategy and we are very disciplined in our approach to what it is that we do in terms of M&A in this industry.

Hamzah Mazari

Great. Mike congrats on your retirement. I will turn it over. Thank you.

Operator

The next question comes from Anj Singh with Credit Suisse. Your line is now open.

Anj Singh

Hi, good morning. Thanks for taking my questions. Mike congrats again, wish you the best of luck. My first question I was hoping you could just speak to the comparative environment in France, are you starting to see the dynamics there change at all with sort of the mid-single-digit or high single-digit growth that you are starting to see and is pricing environment is about the same, is it getting healthier? It seems like you are still being disciplined on price. So I just wanted to get your thoughts there longer term at the strength sustainable?

Jonas Prising

Well, I would categorize the market and the pricing environment in France is stable compared to prior quarters but France is a very competitive market. So we have and we intend to continue to apply strong pricing discipline so that we get good profitable growth. And from that perspective I don't really see any change this quarter compared to past quarters both from a pricing pressure as well as our intent in the market and I really foresee that to change also going forward.

Anj Singh

Okay, got it. And on the weakness on the manufacturing side of things in the U.S. I realize that's been a multi quarter trend. As it relates to sort of early Q1 trends are you seeing further deterioration? Is it stable? And I realize you guys covered this earlier with regards to the noise and visibility issues selection but are you seeing any more optimism amongst your client post-election or is that sentiment still out the same?

Jonas Prising

So to answer your first question I would say that we saw a stable between quarters more or less. So the manufacturing sector especially if you are a large multinational focused one exports you are going to have a tougher time but the strong dollar and the dollar has been strengthening. So we project that maybe to carry on but the stability was what we saw between Q3 and Q4. And in terms of optimism I think we hear optimism but in terms of employers actions and conversations I wouldn't say that that stated optimism is translated into anything different on the ground at this point and while we are hopeful that might change for now we look at the situations as it is and we plan accordingly.

So, I am hopeful that some of the optimism translates into more robust economic growth and more opportunities for growth in the US but for now I think we are steady as it goes and we will just live in and operating in that kind of environment.

Anj Singh

Okay, understood. One quick one from me. The lower demand in Experis within financial services are you seeing those clients just cut products in spending, do they bring it in house? Are they going to competitors? And any sense of what Experis would have done ex that financial services impact? Thank you.

Jonas Prising

It's probably hard to quantify what we would have done without it, but I think a lot of the financial services institutions have been cutting cost, have been trying to leverage technology to manage the volumes that they have and they have been under pressure in terms of regulatory burdens and things like that. So it's probably sector specific I would say overall the demand in the U.S. is still healthy.

So, I think we are somewhat more exposed to financial services sector maybe than others and that's of course what we are working on to re-balance that customer segmentation.

Anj Singh

Appreciate all the color. Thank you.

Operator

The next question comes from Kevin McVeigh with Deutsche Bank. Your line is now open.

Kevin McVeigh

Great. Thanks again Mike. Hey just one question at a high level I mean, it's amazing difference between the growth in France versus U.S. on the manufacturing side and kind of relatively similar macro environments. Any thoughts what's driving that I mean just the dollar that's putting so much pressure on the manufacturing or just can we use France as a blueprint for what we should expect kind of in the U.S. from a purely organic perspective?

Mike Van Handel

Well I would say Kevin that France, the starting point in France and U.S. is completely different. U.S. has seen growth for number of years and it's been slow growth and we benefited from the weaker dollar for many years. We had a strong rebound, came out strongest rebound I should say on average our growth was long and protective and coming back out of the recession was slow process which I think actually can give us more opportunity length and for opportunity here in the U.S.

But France has barely made out of the starting box as it relates to coming out over the recession both from an economic perspective as well as from a labor market perspective. So France is really on the spectrum very much in the early phases of economic recovery and we are hopeful that what we are seeing now is the start of that. We expect it to be similar in the sense that it's slow growth and uneven also in France. But the work that France needs to do or the progress France needs to make to get back to where they were before the recession is still substantial.

So they are still way off their unemployment levels that they had before the recession, our industry, the penetration rate in our industry is still well below of where it was at its prior peak before the recession so France is really at the starting block. So, I wouldn't compare them in that sense. They are two very different – in two very different situations I would say.

Kevin McVeigh

Got it. It's helpful and just one thought and I think I just turned it right, the CICE credit that's stepped up, I had always thought that helped the operating margin but is there some impact on the gross margin or any thoughts around that?

Jack McGinnis

Yes so Kevin this is Jack. You got it right. It stepped up. It steps up effective with payrolls in January of 2017. So, there will be a benefit to gross margin as I mentioned earlier though you do have to also consider the other increases in direct cost that are scheduled to happen in France in 2017. So we do see another step up in the complementary healthcare insurance cost, not quite at the same level of 2016 a little more than half of the level of the increase in 2016 is going to come in 2017 and then we have some additional pension cost that are scheduled to be phased in as well in 2017. So those offset that benefit to a degree. So that's part of the equation.

Kevin McVeigh

Got it, thank you very much.

Operator

The next question comes from Mark Marcon with R.W. Baird. Your line is now open.

Mark Marcon

Good morning. Let me add Mike, congratulations Mike great ride and congrats on to you and onus on hitting the 4% as well as Jack so great job there. I was wondering if you could just talk a little bit about how you are thinking about the incremental margins in southern Europe and Northern Europe broadly speaking when we think about this upper single-digit level of constant currency revenue growth. Are there any things that aside from what you mentioned in France would detract from the normal level of incremental margins that we should expect?

Jack McGinnis

So what I would say Mark is yes, what we saw on the fourth quarter we see a continuation from in terms of northern and southern Europe into the first quarter. So to that end we continue to see strong growth in France. We commented that based on January progress we see that growth continuing into the first quarter. We also commented that we see Italy coming in very strong in terms of growth but now that we no longer have the drag of the expo and based on some of the changes that the initiated in 2016. I think we are going to hit 2017 with good grow.

So I would say we would expect to see that growth translate into good operating leverage. If you look at the first quarter forecast we do continue to see GP margin pressure and that's the 20 basis points down. That's been fairly constant. We don't see that getting worse. But at the same point we don't see that improving and I think that revenue growth is going to be what allows to get that operating leverage to offset that GP margin compression to basically hold the OUP margin stable in the first quarter. So that's how we are looking at and to your point Europe is the big driver of that growth.

Mark Marcon

Great. And just GP margin compression in terms of geographies where that would be concentrated in? How should we think about it in terms of order priority?

Jack McGinnis

Yes I would say the areas where we are seeing it really hasn't changed dramatically over the last couple of quarters. I would say we have talked a lot about France over the last couple of quarters. I would say the U.K. continues to be a market that we see pressure in. And I would say broadly speaking probably less so in some of the other areas but certainly Netherlands is continue to see some GP margin pressures well just to call out a few of the bigger ones.

Mark Marcon

Great. And just on the balance sheet real quick. Obviously buyback is much stock just because of the share price but how should we think about kind of a comfortable or targeted level of leverage because the balance is quite strong.

Jack McGinnis

I would say we agree and I think in our earlier comments we acknowledged that as well the balance sheet is quite strong. I would say in terms of our usage of cash and how we look at the balance sheet overall we are going to go forward here into Q1 and continue to look at our cash flow. I would say overall I think we feel pretty good about the level that the balance sheet is at currently. It's fairly strong but it's not dramatically different than the level which has been in the last few quarters.

And in terms of how we use our cash to your point I think we continue to think that share repurchases are great avenue to return cash to our shareholders but to your point based on the run up in the share price in the fourth quarter we decided to slow the pace a bit but as always we don't have a set amount that we target. We do continue to do it opportunistically and we will continue to take a fresh look at that as we go forward.

Mark Marcon

Great, Thank you.

Operator

The next question comes from Tobey Sommer, with the SunTrust. Your line is now open.

Tobey Sommer

Thank you. Could you comment on the workforce solutions expectations here early in 2017 specifically whatever kind of changing growth you might expect in recruitment process outsourcing? Thank you.

Mike Van Handel

Thanks Tobey. Yes as you heard us remark earlier the solutions business in the fourth quarter made it 11 quarters of consecutive of double-digit revenue growth. So the solutions business has done extremely well over an extended period of time and as far as RPO goes in the fourth quarter the growth was 18% in GP term. So also very strong growth in RPO and as we have talked about in prior calls, the demand from our clients is still good and we foresee that we can still see some good growth on the RPO side as well as overall on the solution side at some point having that many years of double-digit growth is going to make the comparables harder, but overall the maturity in particular in Europe is still lower than what it is in the US.

Companies are becoming increasingly sophisticated in terms of deciding what's core and non-core to their operations and our strength and expertise in helping them recruit skilled talents not only in a specific country but across regions and in many cases also across the world, is really being recognized by our clients and external analysts alike. So, we're very optimistic in terms of the outlook for solutions in general and also for our RPO going forward.

Tobey Sommer

Thanks. I had a follow-up question on your lower domain in the financial services sector. Is that specifically something you think is a market issue or is that also Experis US specific because the banks stocks themselves seem to be reflecting in expectation for better profitability as interest rates rise and maybe they get some regulatory relief. Thanks.

Jonas Prising

Yes, it's hard to tell but I would say our assumption in terms of how we are acting and thinking about getting back to market and improve performance for Experis to US is that this is a client segmentation issue that relates to us. We think the opportunity in the US is still good and we have to do better in terms of addressing that opportunity and such I think we have a strong concentration in financial services but for now I would definitely think that this is something that we need to work on more than a sector that is in decline.

Tobey Sommer

Thanks for the color.

Operator

Thank you. The next question comes from Tim McHugh with William Blair. Your line is now open.

Tim McHugh

Thanks. Jonah, I've noted, were you guys perform better lately, is that energy related, I guess from a macro perspective or I guess anything from the ground level that you could tell us that kind of talk about this strength you seen might be there?

Jonas Prising

Well, I think the Norwegian economy has bottomed out and this is maybe starting to stabilize after the decline in energy prices. So, it's good to see that we stabilized and we are now starting to move forward from that perspective both from economic growth perspective as well as from a labor market perspective and the team in Norway is doing excellent job there as is the team in Sweden because I think those economies have also started to pick up, unemployment is coming down and our workforce solutions in both of those markets are seen as very valuable across all of our brands really. So, we're pleased to see that those markets are coming back with some strength. So, we're pleased to see that.

Jack McGinnis

Yes. And I would add, Jonas, in Norway we saw some good Experis growth in the fourth quarter in the public sector. So, I think that was a driver there and we expect that to continue into the first quarter.

Tim McHugh

I guess, maybe a follow-up more probably in Europe, to what extent in and of this is kind of high level, but have you seen a change and I guess how clients are engaging temporary workers versus honestly ISM indexes and other indicators suggest a more favorable kind of GDP environment. There I guess how much is macro versus I guess maybe structural use of contingent labor that you may be seeing lately.

Jonas Prising

Well, we've always maintained the same evolution in terms of secular demand. In a world of uncertain uncertainty and the need for flexibility, our offerings are going to be very attractive for many clients globally and also in Europe. And Europe being in the early stages of the recovery on average, now of course markets that are well matured into the economic cycle, but many others that are significantly below where they were, we see upside both from a perspective of getting back to prior peak, but our belief is that just that we saw see in the US, we'll go beyond prior peak, because the need for flexibility and environment that is volatile in a low growth in economic environment is still going to be very good.

So, that's where our geographic diversification makes it favorable to us because we have 65% of our business in Europe and we consider Europe to be on average mid cycle with still some good growth room, both from the cyclical prospective getting back to prior peak and then getting above that because of the secular drivers that we see for our industry.

Tim McHugh

Okay, great. And then. One last one Jack, is it the second quarter where we get a difference in the billing days I guess in offset direction or can you remind us how the billing days play out across 2017 in terms of the impact?

Jack McGinnis

So, we talked about the first quarter billing days. The second quarter, there is basically one less day in the second quarter in 2017, in the third quarter basically one less day as well and in the fourth quarter it's basically flat.

Tim McHugh

Okay, alright, thank you.

Operator

Our last question comes Gary Bisbee with RBC Capital Markets. Your line is now open.

Gary Bisbee

Thanks a lot, let me sneak in at the end here. I guess two questions, the first one on margins. The company has historically talked about 4% organic or constant currency revenue growth being a level that would make it lot easier to deliver consistent operating leverage. I guess is that, I realize there is variability in your segments, so it's now it's easy to fill it one statement across the company, but is that still a good bogie for us to think about as you think about your margins moving forward?

Jack McGinnis

Yes. So Gary, this is jack. What I'd say, we have consistently said mid-single digit, organic constant currency growth and 4% is probably at the lower-end of that mid-single digit. We'd like to see a bit more to get some real operating leverage, but I'd say generally speaking, yes that range mid-single digit is still holding and certainly you've seen us do some of that already in the fourth quarter and we expect to continue to do that in the first quarter.

Gary Bisbee

Great. And then, in the follow-up, I realized not a whole lot of your profit is from the US, but your tax rates are pretty high, if we do get US corporate tax from I guess two part question 1) can you give us a sense, how much you think you'd benefit, number one. 2) Is a good portion of your cash, off shore, such that if there was some sort of tax holiday and repartition or a change in the law there, would that be an opportunity to potentially use that cash, in another way? Thank you.

Jack McGinnis

Yes. So, I would say definitely US tax reform corporate tax form would benefit us Gary to your point. I think we do have and when we look at our global footprint, there are many companies that we deem not be permanently reinvested and as a result of that we apply US tax rate even on various foreign operations. So, clearly there would be a benefit to us.

I think at this point, we're going to wait till we see a bit more of a formal of structure on what their corporate reform is going to look like before we guide to what that benefit could be, but clearly there would be benefit to us. And to my earlier point because we don't permanently reinvest in some of the foreign operations, we have the flexibility on that cash. So, when it comes to whether a one-time repatriation would be layered in as part of the proposal, but then we'd have to do some math and what that rate is versus what we've accrued at historically, but again generally speaking I think it will be positive to us.

Gary Bisbee

Great, thank you.

Jonas Prising

Thanks, Gary.

Jonas Prising

And with that, we come to the end of our fourth quarter earnings call. And we look forward to speaking with you again during our first quarter earnings call. Thanks, everyone.

Operator

Thank you. That concludes today’s conference. Thank you for your participation. You may now disconnect.

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