Manpower Inc. (MAN)

Q2 2010 Earnings Call

July 29, 2010 4:00 pm ET

Executives

Jeff Joerres - Chairman and CEO

Mike Van Handel - CFO

Analysts

Kevin McVeigh - Macquarie

Gary Bisbee - Barclays Capital

Tim McHugh - William Blair & Company

Paul Ginocchio - Deutsche Bank

Andrew Steinerman - JPMorgan

Kelly Flynn - Credit Suisse

T.C. Robillard - Signal Hill

Sara Gubins - Bank of America-Merrill Lynch

Jeff Silber - BMO Capital Markets

Vance Edelson - Morgan Stanley

Presentation

Operator

Welcome to Manpower's second quarter earnings results conference call. (Operator Instructions) I would now like to turn the call over to Mr. Jeff Joerres, Chairman and CEO.

Jeff Joerres

Good morning and welcome to the second quarter conference call of 2010. With me this morning is our Chief Financial Officer, Mike Van Handel. Together we'll go through the results of the second quarter. I'll spend some time overviewing the business and giving an update on our economic indicators, and then Mike will cover the segment detail and financial side of the business as well as any implications of these trends.

This is a little different than what we have done in the past, as I covered the segment detail, but we're trying to be more effective and be as clear as possible. So we've decided on using this new format.

Before we get into that new format, Mike, could you read the Safe Harbor language?

Mike Van Handel

Good morning, everyone. This conference call includes forward-looking statements, which are subject to risks and uncertainties. Actual results may 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.

Jeff Joerres

Thanks, Mike. The second quarter was a very good quarter for us. We knew there was a potential for upside. As the quarter folded, our revenue growth continued to build. And in fact, to date, they're showing no signs of slowing.

Growth rates in the quarter, for example: U.S. 35% up, excluding COMSYS, up 83% with COMSYS; nearly 23% for France; 18% for EMEA; and 15% for Asia; very strong performances.

We are clearly seeing the benefits of the decisions we made in 2009. In almost all geographies, we are taking market share. Additionally, as you will hear later from Mike, our gross margin in the temporary staffing business is showing signs of improvement, as we are clawing back some of the lost gross margin.

The decision to keep more of our infrastructure is allowing us to take advantage of this rapid growth, and we believe this will continue for some time. We know that our competitors are beginning to reopen offices that they had closed, whereas we are not compelled to have to reopen offices because we took a longer-term view in our office closures during 2009.

A real profitability shining star is the EMEA segment. The EMEA segment across all the major locations is doing well. We are getting very good growth in some of the higher gross margin geographies, which is assisting our overall gross margin percent.

We are also seeing exceptional growth rates in the Americas. The U.S. growth rate is being led by light industrial, but office and professional are also quite healthy. The integration of COMSYS is going extremely well. And in fact, we are ahead of schedule, and our revenue is exceeding our projections. Great job really done by that team.

We anticipated a minus-$0.10 impact in the second quarter because of the amortization and integration cost. And in fact, it turned out to be minus-$0.03 for the quarter. Operating results are coming in stronger and integration costs are less. We anticipate the COMSYS acquisition will be neutral for this year.

In summary, our first quarter revenues were very strong, coming in at $4.6 billion, up almost 24% in constant currency, 21% in U.S. dollars, stronger than we had anticipated.

Our gross margin declined to 17.4%, a 90 basis point reduction primarily due to less outplacement revenue coming from Right Management. Our operating profit was $79 million with a net income of $32.7 million and an earnings per share of $0.40.

We continued the momentum of the first quarter and actually are accelerating that as you can see in the second quarter. Having said that, there are potential concerns as we look at what might be the sustainability of Europe and for that matter the United States, but we are not seeing any evidence of that in conversations with our clients. Yes, it's talked about, but the demand at those client locations is still at a pace that is more than enough for continued growth for that organization and for our organization. We believe that demand plus uncertainty is driving secular acceleration.

With that, Mike is going to spend some time on the segments starting with the gross margin.

Mike Van Handel

Great. Thanks, Jeff. We'll begin discussing gross margin this morning, followed by results of operations for each of our segments, then a discussion of the balance sheet and cash flows and then finally a look at the outlook for the third quarter.

The gross margin for the quarter came in at 17.4% compared to 18.3% in the prior year. This is slightly below expectations, primarily because our higher-margin outplacement business declined more than expected, thus impacting margin mix. In total, the outplacement business reduced our gross margin by 130 basis points. Temporary recruitment had a modest negative impact on our overall gross margin of 20 basis points.

We continue to see stable pricing in most markets, although we are feeling the impact of changing business mix as more of our growth is coming from lower-margin industrial business and from our key accounts.

We continue to maintain strong price discipline, and the revenue growth in the marketplace is allowing us to exit some of our lower-margin business, and we'll be more selective of our new business.

But that said, we are still seeing instances of aggressive price behavior by our competitors, and I should note that in those cases where we exit business based on low margin, other competitors quickly pick it up at the lower price. Included in the temporary recruitment margin is the favorable impact of including the higher-margin COMSYS business, let's say, of about 30 basis points.

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