ManpowerGroup (MAN)

Q3 2011 Earnings Conference Call

October 21, 2011 8:30 AM EST


Jeff Joerres – Chairman and CEO

Mike Van Handel – CFO


Tim McHugh – William Blair

Mark Marcon – RW Baird

Kelly Flynn – Credit Suisse

Paul Ginocchio – Deutsche Bank

Sara Gubins – BofA Merrill Lynch

Randle Reece – Avondale Partners

James Samford – Citigroup

Gary Bisbee – Barclays Capital

Paul Condra – BMO Capital Markets

Molly McGarrett – J.P. Morgan



Welcome to ManpowerGroup’s Third Quarter Earnings Conference Call.

At this time, all lines have been placed on a listen-only mode. (Operator Instructions).

I’d now like to turn the call over to your Chairman and CEO, Mr. Jeff Joerres. Sir, you may begin.

Jeff Joerres

Good morning and welcome to the third quarter 2011 conference call. With me this morning is Mike Van Handel, our Chief Financial Officer. I’ll go through the high-level results of the third quarter. Mike will then spend some time on the segment detail as well as the balance sheet and the outlook for the fourth quarter and full year.

Before we move into the call, I’d like to have Mike 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 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.

Jeff Joerres

Thanks Mike. The third quarter was a very solid quarter for us. We expected to earn between $0.90 and $1, we had earnings per share of $0.97. Given the uneven economic environment that we experienced during the third quarter, the team around the world did a very nice job to achieve this result.

Our revenue for the quarter was $5.8 billion, a 16% increase in US dollars and a 9% in constant currency at the midpoint of our guidance. Our gross margin was 16.5%, which was in our guidance range. We were able to substantially leverage the 9% revenue growth. And our increased operating profit went to a $158 million, a 34% increase in constant currency, which yielded a 2.7% operating profit margin or a 50-basis point improvement over a year-ago. Our net earnings for the quarter was $80 million and our earnings per share was $0.97.

With that overview, I’d like to turn over to Mike to delve into the details. Mike.

Mike Van Handel

Okay, thanks Jeff. I will begin today by making some comments on the quarter, followed by a discussion of our segments, and then a review of our balance sheet and cash flow. Finally, I’ll have a comment on our outlook for the fourth quarter and give some initial thoughts for the first quarter of next year.

As Jeff noted, our earnings per share for the quarter came in at $0.97, just above the midpoint of our guidance. This included an $0.08 favorable currency impact which is slightly below our $0.10 estimate. While the average Euro rate for the quarter was as expected, some of the other European currencies such as the pound were weaker than expected.

Our constant currency revenue was up 9%, right in line with expectations, with each operating segment falling within the range of expectations with the exception of Right Management, which was slightly weaker than expectations. Our second quarter acquisitions in China and India added about 1% to our growth rates. So our organic constant currency growth was 8%.

Our operating profit margin was up 50 basis points to 2.7%, also in line with expectations as we were able to tie the control cost and drive productivity throughout our office network. That resulted in very strong incremental operating profit margin of 9% on a constant currency basis or 6% on a reported basis. Included in interest and other expenses in the quarter is a $1.7 million charge for foreign exchange losses primarily related to intercompany balances. This was a result of a significant movement in currency exchange rates during the quarter.

Our income tax rate for the quarter came in at 45.9% to slightly below our estimates. As a reminder, this now includes the business tax in France. Excluding the business tax, our tax rate was at 36.1%.

Our gross profit margin came in at 16.5% compared to 16.9% in the prior year. Our overall gross profit margin continues to be impacted by the decline in the higher margin outplacement business which negatively impacted our gross margin by 20 basis points in the quarter. While the impact was negative in the quarter is becoming less as we see the outplacement business stabilized on a year-on-year basis.

Our staffing GP margin declined by 30 basis points year-on-year due to a number of factors: in the US, we had payroll tax credits related to Hire Act last year. This accounted for almost 10 basis points to the decline.

In the French market, we have raising prices to offset the impact of lower payroll tax subsidies. While this has been successful, we have not yet fully recovered all of our subsidiaries. This also negatively impacted our gross margin in the quarter by 10 basis points. Additionally, we are seeing stronger growth from our lower gross margin light industrial key accounts at this stage of the cycle. Overall, we are finding the pricing environment to be stable and we are keenly focused on improving gross margin. In some markets we are exiting some lower gross margin business; we’re replacing it with higher gross margin business.

Our permanent recruitment business favorably impacted gross margin by 20 basis points. In the quarter, we achieved a constant currency increase of 21% in permanent recruitment fees. While the year-on-year growth rate has moderated some from the second quarter which was up 25% in constant currency, this is primarily attributable to more difficult prior-year comparable numbers. Overall, we are still seeing good activity in the permanent recruitment market. For the quarter, our permanent recruitment gross profit was 12% of the overall gross profit.

Now, let’s review the operating segments. Starting with the Americas, revenue came in at $1.2 billion, an increase of 9% or 8% in constant currency. Operating unit profit increased 25% in constant currency to $43 million. The OUP margin expanded 40 basis points which was due to strong growth in permanent recruitment, up 61% in constant currency and strong SG&A leveraging.

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