ManpowerGroup Inc. (MAN) Q2 2017 Earnings Report, Transcript and Summary

Welcome everyone to the Second Quarter Earnings Call and thank you for standing by. At this time, all participants are in a listen-only mode until the question-and-answer session of today’s conference. [Operator Instructions] Today’s conference is being recorded. If you have any objections, you may disconnect at this moment. I would now turn the conference to your host, CEO, Jonas Prising. Sir, you may begin.

Good morning. Welcome to the second quarter conference call for 2017. With me today is our Chief Financial Officer, Jack McGinnis. I will start the call by going through some of the highlights of the second quarter, and then Jack will go through the operating results and the segments, our balance sheet and cash flow and some comments regarding our outlook for the third quarter. Then I’ll follow up with some final thoughts before our Q&A session. But before we go any further into our call, Jack will now read the Safe Harbor language.

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 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.

Thanks, Jack. We are pleased with our strong performance in the second quarter. Revenue came in at $5.2 billion, an increase of 6% in constant currency, which is above the high-end of our guidance range due primarily to stronger growth in Southern Europe. On a same-day basis, our underlying organic constant currency growth rate was 7%, reflecting additional acceleration from what we saw in the first quarter. Operating profit in the quarter was $195 million, up 1% in constant currency. As we mentioned on our last call, we did had additional restructuring charges this quarter which Jack will cover later. Excluding these charges, operating profit was $205 million, an increase of 7% in constant currency. Our operating profit margin came in at 3.8%, a decrease of 10 basis points from the prior year, but excluding the restructuring charges we saw margin expansion of 10 basis points in line with the midpoint of our guidance range. We continued to see some gross profit margin contraction combined with SG&A productivity improvements partially driven by good SG&A leverage on our higher revenue growth. Earnings per share for the quarter was $1.72 an increase of 9% in constant currency or 16% after excluding the restructuring charges. We saw some very strong business performance in a number of our markets during the second quarter, most notably in France, Italy, Mexico and Poland. I am very encouraged by our strong performance in the second quarter from a number of perspectives. The overall global economy seems to be on a trajectory of gradual improvements in many parts of the world, particularly noticeable in Europe. European economy is improving with many data points indicating the potential for stronger economic growth. While we continue to be cautious on the UK and as they prepare to exit the EU, we are optimistic about the overall outlook for Europe and the favorable impact that it could have on demand for our services and solutions. We also see some improvement in the labor market outlook with a great deal of optimism in France, as President Macron has a clear mandate for reforms including labor market reform which should benefit that economy and stimulate better employment growth. We recently published our third quarter, ManpowerGroup employment outlook survey tracking forward-looking quarterly changes in employer sentiment and that survey is showing a similar trend of slowly improving employer hiring intent both in Europe as well as globally. These signs of improvement are still in the context of a slow growth environment in many parts of the world with some continued political uncertainty, but it indicates an overall market improvement from what we saw late last year. I was recently with our businesses throughout Europe and I met with many of our clients. Not surprisingly, their view of the environment is well aligned with ours as their need for our services is starting to increase. This is in the context of increasing reports of skill shortages and difficult in finding people with the right work-ready skill. The future work is unfolding rapidly and despite still high unemployment levels in many parts of the world, organizations are unable to find the skills they need to be even more competitive, agile and successful. The improving demand for our services and our increased involvement in helping create talent in addition to finding skilled talent is the sign of the increasing capabilities we can bring our clients and also the increasing and important role we have to help individuals become more employable and successful in their careers. Companies will need to evolve their business model to take advantage of the continuing digital disruption and to be ready with the skilled workforce to execute their strategies. And our capabilities are aimed at helping them achieve their objectives. We recently celebrated our first Global Learnability Week promoting the need for continuous skill development to help people stay employed for the long-term and ensuring that organizations have access to the skills that they need to thrive. Much of our progress in innovation, efficiency and new service offerings will be enabled by leveraging technology and strengthening our digital capabilities. We have been investing in these areas and we will continue to do so as we see opportunities to further improve our delivery models and enhance our candidate attraction, client satisfaction and productivity. And with that, I would like to turn it over to Jack to provide additional financial information and a review of our segment results and our third quarter outlook.

Thanks, Jonas. As Jonas mentioned, we had a strong second quarter performance with constant currency operating profit growth of 7%, excluding restructuring charges on 6% constant currency revenue growth. Excluding restructuring charges, this performance represented operating profit margin expansion of 10 basis points over the prior year and at the midpoint of our guidance. Revenue growth exceeded our constant currency guidance range. Although, our gross profit margin declined 40 basis points, compared to the prior year, our SG&A costs once again improved as a percentage of revenue, driving the increased operating profit margin year-over-year before restructuring charges. Looking at our revenue growth more closely, currency negatively impacted revenues by 3% and acquisitions contributed about 60 basis points to our growth rate in the quarter. Therefore, while revenues were up 3% on a reported basis, our organic constant currency revenue growth in the quarter was 5%, which after adjusting for billing days represents a 7% growth rate, reflecting a strong acceleration from the first quarter billing days adjusted organic constant currency growth rate of 4%. I mentioned, our revenue growth exceeded our guidance range. This was largely driven by revenue growth in Southern Europe, which more than offset continued year-over-year declines in the U.S. and the UK. On a reported basis, earnings per share of $1.72 was $0.01 above the midpoint of our guidance range. The restructuring charges had a $0.10 negative impact on earnings per share, and excluding these charges, earnings per share would have been $1.82. The drivers of this result include $0.03 attributable to better operational performance than expected, $0.02 attributable to lower other expenses, $0.02 from lower tax rate than expected, and $0.04 from higher foreign currency rates. The better operational performance was driven by higher revenue growth particularly in Europe. Looking at our gross profit margin in detail, our gross margin came in at 16.7%, a 40 basis point decrease from the prior year. The staffing gross margin had a 30 basis point unfavorable impact on overall gross margin, which was primarily driven by business mix, particularly in France, Italy, and the UK. I will cover this later as part of the segment review. Consistent with the previous quarter, Right Management contributed less to gross profit in the second quarter and this mix change reduced margin by 10 basis points. Similar to the previous quarter, our Franch Proservia, IT infrastructure, and end-user support business experienced reduced GP margin and this contributed to an additional 10 basis points of reduced consolidated GP margin. Currency changes on GP mix provided an offsetting 10 basis points of favorability. I will discuss gross profit trends further in the segment results. Next, let’s review the gross profit by business line. During the quarter, the Manpower brand comprised 63% of gross profit. Our Experis Professional business comprised 20%; ManpowerGroup Solutions comprised 13%; and Right Management, 4%. Our higher value solutions offerings within ManpowerGroup Solutions, provided the highest level of growth during the quarter. During the quarter, our Manpower brand reported a constant currency gross profit increase of 4% representing a stable growth trend from first 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 increased 5% during the quarter, representing acceleration from the first quarter that was partially offset by a 2% decrease in office and clerical skills. Gross profit in our Experis brand increased 2% in constant currency, representing a deceleration from the 6% growth experienced in the first quarter. Although the revenue growth rate slowed within Experis largely due to the UK, GP margin expanded year-over-year. ManpowerGroup Solutions includes our global market leading RPO and MSP offerings, as well as talent-based outsource solutions, including Proservia, our IT infrastructure and end-user support business. Gross profit growth in the quarter was up 6% in constant currency, reflecting a decline from the 12% growth in the first quarter primarily driven by the U.S. Right Management experienced a decline in gross profit of 22% in constant currency during the quarter. Right Management declined more than we expected as career outplacement activity continues to trend down significantly from the prior year. Our reported SG&A expense in the quarter was $667 million, including the expected $11 million of restructuring costs we announced on the previous earnings call. Excluding these costs, SG&A expense was $657 million, a decrease of $8 million from the prior year. Currency changes resulted in a decrease of $16 million, which was partially offset by $6 million of spend from acquisitions and $2 million from operations. Excluding the restructuring costs, SG&A expenses as a percentage of revenue in the quarter improved 50 basis points to 12.7% driven by improved operational leverage on higher revenue growth and a continued focus on operational efficiency across our businesses. As we mentioned in the last quarter, we expect to recover the restructuring charges of $11 million as well as a $24 million recorded in the first quarter through cost savings over the next 12 months. The Americas segment, comprise 20% of consolidated revenue. Revenue in the quarter was $1.1 billion, a decrease of 1% in constant currency. OUP came in at $58 million in the quarter or $64 million before restructuring costs. Excluding restructuring charges, OUP increased 19% in constant currency above the prior year level driven by improvement in the U.S. and OUP margin improved by 100 basis points year-over-year. The OUP increase was driven by continued strong cost management with SG&A expenses decreasing year-over-year. The $6 million of restructuring charges in the quarter primarily related to the U.S. back office optimization as announced last quarter. The U.S. is the largest country in Americas segment, comprising 64% of segment revenues. Revenues in the U.S. was $671 million, down 7% compared to the prior year, which on a billing days adjusted basis represents a stable trend from the first quarter. As we have mentioned previously, the prolonged weakness in the manufacturing side of the U.S. economy has impacted the demand for our services over the past several quarters, and in recent quarters, our Professional Services has also experienced revenue declines. During the quarter, excluding the restructuring charges, OUP for our U.S. business increased 22% to $49 million. Excluding the restructuring charges, OUP margin was 7.3%, up 180 basis points from the prior year, primarily due to strong SG&A cost management and to a lesser extent lower direct costs in the quarter based on periodic updates of certain costs including workers compensation and healthcare. It’s important to note that despite challenging revenue trends, our gross profit margin improved and the U.S. business continues to focus on strong pricing discipline and overall operational efficiency. Within the U.S., the Manpower brand comprised 43% of gross profit during the quarter. Revenue for the Manpower brand in the U.S. was down 6% in the quarter, and adjusting for billing days represented a slight improvement from the decline in the first quarter. The Manpower business has declined for several quarters in the U.S., however, on an average daily basis, we have seen slight improvements in the rate of decline during the last two quarters. The Experis brand in the U.S. comprised 36% of gross profit in the quarter. Within Experis in the U.S., IT skills comprised 72% of revenues. During the quarter, our Experis revenues declined 8% from the prior year, and on a billing days adjusted basis, represented a 2% improvement from the rate of decline experienced in the first quarter. Experis revenues from IT skills on a billing days adjusted basis were down 8% from the prior year, which represented an improvement from the 9% decline in the first quarter. The Experis business has seen improvements in the rate of decline during the last two quarters. ManpowerGroup Solutions in the U.S. contributed 21% of gross profit and experienced a revenue decline of 12% in the quarter related to a specific client loss and the roll-off of certain project works. We continue to see strong demand by our clients for our higher value RPO and MSP Solutions and expect the revenue trend to improve into this third quarter. Our Mexico operation had revenue growth in the quarter of 14% in constant currency. The business in Mexico is performing very well and continues to be the leader in the market. Revenue in Argentina was up 20% in constant currency, which continues to reflect the impact of inflation. 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 6% in constant currency. This again included strong growth in Canada with constant currency revenue growth of 7%. We also saw strong revenue growth in Central America, and Peru. Southern Europe revenue comprised 41% of consolidated revenue in the quarter. Revenue in Southern Europe came in at $2.1 billion, an increase of 13% in constant currency. On an average billing days basis, this represented a revenue growth rate of 14%, up from the 9% average billing days basis growth rate in the first quarter. OUP was $110 million, an increase of 10% from the prior year in constant currency and OUP margin was 5.2%, down 10 basis points from the prior year, as gross profit margin declines exceeded our efficiency improvements and operating leverage. Permanent recruitment growth was very strong at 14% in constant currency, an increase from the 12% growth in the first quarter. France revenue comprised 64% of the Southern Europe segment in the quarter and was up 11% over the prior year in constant currency. This represented a 2% increase from the 9% growth rate in the first quarter and represents four consecutive quarters of increased growth. France’s gross margin has declined year-over-year in both Staffing and the Solutions Proservia business. The reduction in Staffing margins is driven by business mix, as we have seen strong growth in large accounts, as well as a competitive pricing environment, which was partially offset by the CICE increase for 2017 that we discussed last quarter. Proservia represents our IT infrastructure and End-User Support business, which is experiencing reduced gross profit margins from the year ago period. Permanent recruitment growth was 4% in constant currency during the quarter, which was an increase from the 2% growth rate in the first quarter. OUP was $70 million, an increase of 6% in constant currency and OUP margin was down 20 basis points year-over-year at 5.2%. The OUP margin trend reflects the gross margin declines which have been partially offset by improved operating leverage on strong revenue growth and disciplined SG&A cost management. As we exited the quarter, gross margin trends began to improve in France, which could provide for an improved GP margin trend into this third quarter. Revenue in Italy increased 25% in constant currency to $367 million. This represents very strong revenue acceleration from the 16% constant currency growth rate in the first quarter. Business mix changes associated with the growth have resulted in reduced staffing margins, which have been partially offset by continued strong permanent recruitment growth. Specifically, permanent recruitment fees increased 25% on a constant currency basis over the prior year. OUP growth was up 24% in constant currency to $28 million. During the quarter, the OUP margin declined by 10 basis points to 7.5%, as gross profit margin declines were largely offset by improved operating leverage and strong SG&A cost management. We’re very pleased with the strong performance of our Italy business and expect it to continue to perform very well in the third quarter. Revenue growth in Spain was up 9% over the prior year in constant currency and reflects the first quarter acquisition which expands our Experis capabilities in that market. On an organic constant currency basis, the revenue growth rate was 1% and adjusting for average billing days, this growth rate was 5% in the quarter. This reflects an improvement from the first quarter billing days adjusted organic constant currency decline of 1% and we expect further growth in the second half of the year. Our Northern Europe segment comprised 25% of consolidated revenue in the quarter. Revenue was up 2% in constant currency to $1.3 billion. On a billing days adjusted organic constant currency basis, Northern Europe had a 5% constant currency growth rate, which represented an improvement from the 3% organic constant currency growth in the first quarter. The increased rate of revenue growth was primarily driven by Germany and the Nordics. OUP came in at $33 million in the quarter or $34 million before restructuring costs. OUP was down 6% in constant currency and OUP margin was down 20 basis points before the restructuring charges. The $1 million of restructuring charges in the quarter relate to balance of The Netherlands charges announced last quarter. Our largest market in Northern Europe segment is the UK, which represented 30% of segment revenue in the quarter. UK revenues were down 10% in constant currency and down 8% on a billing days adjusted basis, representing a slight decline from the 7% decrease in the first quarter. Permanent Recruitment fees also decreased during the quarter, down 4% year-over-year in constant currency. In recent quarters, we have seen year-over-year declines in both the Manpower Experis businesses in the UK as we are experiencing some reduced demand within our largest accounts, as our clients are focused on optimizing operational cost expenditures. We saw slightly improving trends in our Manpower brand in the second quarter but saw further declines in Experis. We expect the overall level of average daily revenue decline to improve slightly into the third quarter. Staffing gross profit margin decreased in the UK due to business mix in the Manpower business. This was more than offset by gross profit margin expansion in both the Experis and Solutions businesses resulting in 20 basis points of gross profit margin expansion year-over-year in the UK. Revenue growth in Germany was up 10% on a constant currency basis in the second quarter, or up 16% on an average billing days basis, which represents an increase from the 11% growth in the first quarter. The increased growth in Germany is being driven by revenues from our Proservia business line, following significant new business in the third quarter of 2016. In the Nordics, revenue trends continued to improve. The constant currency revenue growth rate of 7% in the quarter represented 16% growth on an average daily basis. Organically, the constant currency average daily revenue growth was 14%, which was an improvement from the 2% growth rate in the first quarter. Norway and Sweden are currently performing well and we expect to see continued solid revenue growth in the third quarter. Revenue in both the Netherlands and Belgium continue to be strong at 20% and 7%, growth respectively, and constant currency adjusted for billing days. The Netherlands growth on an organic basis was 12% adjusting for billing days. Other markets in Northern Europe had a revenue increase of 7% in constant currency, as growth in Poland and Ireland more than offset declines in Russia and a few other markets. The Asia-Pacific Middle East segment comprises 13% of total company revenue. In the quarter, revenue was up 5% in constant currency to $643 million, or 7% after adjusting for billing days, in line with the average daily growth in the first quarter. Permanent recruitment growth was 5% in constant currency. OUP was $23 million in the quarter representing an increase of 6% in constant currency and OUP margin was stable at 3.6%. Revenue growth in Japan adjusted for billing days was up 3% on a constant currency basis, in line with the first quarter growth rate. Permanent Recruitment growth was 3% in constant currency. OUP was up 5% on a constant currency basis and OUP margin was flat year-over-year. Revenues in Australia and New Zealand were down 2% in constant currency adjusting for billing days, and this represented a decrease from the 2% average daily revenue growth rate experienced in the first quarter as our Manpower Solutions businesses experienced a slowing of new business. Revenue in other markets in Asia-Pacific, Middle East continued to be strong, up 12% in constant currency. This was a result of the strong double-digit growth in a number of markets including India, Hong Kong, Taiwan, Thailand, and Singapore. Our Right Management business continued to slow significantly in the second quarter based on the slowdown of outplacement activity. During the quarter, revenues were down 20% in constant currency to $57 million, following a 11% decline in the first quarter. OUP decreased 41% on a constant currency basis to $8 million, and OUP margin was 14.8%. As we announced last quarter, the restructuring charges of $2 million within Right Management are primarily comprised of delivery model optimization activities. Excluding restructuring charges, OUP was $11 million and decreased 27% on a constant currency basis and OUP margin decreased 140 basis points to 18.4% as SG&A reductions helped to offset the impact of revenue reductions. We do not expect outplacement trends to change significantly in the third quarter and revenues will continue to decline year-over-year. I’ll now turn to cash flow and balance sheet. Free cash flow, defined as cash from operations less capital expenditures was $122 million for the first six months of the year. As mentioned in the last quarter, this includes the sale of the 2016 France CICE tax credit in March for a $144 million. Excluding CICE sales in both years, free cash flow represented an outflow of $22 million in 2017, compared to an inflow of $88 million in the prior year. The year-over-year change reflects the strong growth of our business in 2017 as during strong growth periods receivables typically grow at a faster pace than cash collections. At quarter-end, days sales outstanding increased over the prior year level by one day. Capital expenditures represented $26 million during the first half, which was down $5 million from the prior year, primarily due to our investment in recruiting centers in the year-ago period. Cash used for acquisitions in year-to-date represented $34 million. During the quarter, we purchased 566,000 shares of stock for $59 million bringing total purchases for the six month period to $1.1 million shares for $116 million. As of June 30, we have 3.6 million shares remaining for repurchase under the 6 million share program approved in July of 2016. Our balance sheet was very strong at quarter end, with cash of $573 million and total debt of $891 million, bringing our net debt to $318 million. Our debt ratio is a very comfortable at quarter end with total debt-to-trailing 12 months EBITDA of 1.1 and total debt-to-total capitalization at 26%. Our debt and credit facilities have not changed in the quarter. At quarter end, we had a €350 million note outstanding with an effective interest rate of 4.5% maturing in June of 2018, and a €400 million note with an effective interest rate of 1.9% maturing in September of 2022. In addition, we have a revolving credit arrangement for 600 million, which remain unused. Next, I’ll review our outlook for the third quarter of 2017. We are forecasting earnings per share to be in the range of $1.90 to $1.98, which includes a positive impact from foreign currency of $0.02 per share. Our constant currency revenue guidance range is for growth between 4% and 6%. The impact of acquisitions represents only 30basis points of the growth rate in the third quarter. As there is about one less day in the third quarter, year-over-year, our guidance for the third quarter represents a billing days adjusted organic constant currency growth rate of 6% at the midpoint. This represents a continuation of the second quarter underlying growth rate when you consider the third quarter includes a tougher comparable 2016 period that included increased revenues from the Rio Olympics and other Americas, new Proservia business in Germany and significant revenue growth in various other countries such as The Netherlands. As always in the third quarter, in Europe and in particularly in France and Italy, there will be important to see quickly companies ramp back up following the summer vacation period. From a segment standpoint, we expect a constant currency revenue decline in the Americas in the low single-digits, which includes the non-occurrence of the Rio Olympics business. With constant currency revenue in Southern Europe growing in the low double-digit range, benefiting about 60 basis points from acquisitions, Northern Europe growing in the low single-digit range, and Asia Pacific Middle East growing in the mid single-digit range. We expect a revenue decline at Right Management in the 16% to 18% range. On a regional basis, the difference in billing days will have an unfavorable impact on revenue growth of about 1% in the Americas, 2% in Southern Europe, and 1% in Northern Europe. Conversely, we have a favorable billing days impact in APME of about 1%. After adjusting for the non-recurrence one-time items in the third quarter of 2016, which represented $8 million of SG&A reductions on pension and property gains, our operating profit margin should be up slightly compared to the prior year reflecting improved revenue growth and operating leverage which will offset lower gross margin. Our corporate expenses continue to be – continue to include spend in technology and workforce solutions initiatives and we expect that corporate expense trend in the third quarter in line to slightly higher than the amount in the second quarter. We expect our income tax rate to approximate 37%. As usual, our guidance does not incorporate additional share repurchases or restructuring charges and we estimate our weighted average shares to be 67.8 million, reflecting share repurchases through June 30. With that, I’d like to turn the call back to Jonas.

Thanks, Jack. So Jack explained the restructuring charges that we recorded this quarter. Consistent with last quarter, these charges relate to integration activity from acquisitions, as well as back office and delivery model optimizations as we leverage technology enhancements. These actions, along with our constant focus on productivity improvements will further support our global objective of profitable growth and overall efficiency while allowing us to invest in the digital applications needed to meet the needs of our clients, candidates and employees. We believe it is important to understand the rapidly evolving technological landscape and new business models. So last month, we were one of the main summit partners at the VIVA Technology Conference in Paris. Many established companies and digital disruptors had the opportunity to learn and collaborate together during the conference and we saw this as an excellent forum to join other game-changers helping companies in some of the world’s fastest moving industries to grow their business by finding highly skilled diverse talent and explore new digitally-enabled business models in many different industries. We are very well placed to help both clients and candidates prepare for the future work on a global basis leveraging our leading global footprint and strong brands. Our scope of services and workforce solutions help companies remain agile and flexible while finding the necessary skill talent where and when they need them and we provide candidates with valuable employment opportunities either as contingence staff or as a permanent hire as well as the ability to assess the learnability and up skill their talents to help them bridge the gap between the supply and demand for skills. We are creating value to both sides of this equation benefiting from the increase in demand for more and better flexibility in many countries around the world, which should provide us with good opportunities for future growth. In summary, we are pleased with the results the team delivered in the second quarter and we are well positioned to continue our strong financial performance as we head into the second half of the year. And with that, I would now like to open the call for Q&A. Operator?

[Operator Instructions] Our first question is coming from Mr. Andrew Steinerman. Andrew, your line is now open.

Good morning. I was intrigued by the comment of exiting second quarter gross margin start to improve in France. My question is that, in an environment, where Continental Europe demand volume is on the rise, why is there still lingering pressure on gross margin or do you think that’s a timing difference?

Well, Jack can talk more specifically about the GP evolution in France, Andrew, but as you could hear from our prepared remarks, a lot of that pressure comes from the shift in business mix and you would expect when some of these markets are coming back and are really increasing employment, some of the big companies are increasing them and that’s where we see the shift in business mix and that’s part of – a large part of what is causing this shift in margin when we think about France.

Again I would say, Andrew, the improvement at the end of the quarter, what was in the month of June as we exited the quarter and we are watching that, probably too early to tell whether that’s going to be a new trend, but we are going to watch that closely and see if that holds up throughout the majority of the third quarter.

Right. But just give it to me philosophically, you feel like things are normal and that gross margin should improve on a delayed basis after volume, right?

Yes, we think that the environment is normal, the pricing is competitive, but rational.

Okay, thank you.

Our next question is coming from Mr. Kevin McVeigh. Kevin, your line is now open.

Great, thank you. Hey, just to follow-up on that, if you think about kind of the margin trajectory, is it primarily kind of client mix or is it also service mix that’s kind of causing some of the lower margin as we think about Q3 and should you see some seasonal lead step-up as we get into Q4 as you typically anniversary should have caused some things like that?

Kevin, this is Jack. I’d say it’s a mix of both, actually. So when we look at the staffing margin, what you saw from Q1 to Q2 was an additional ten basis points of pressure. So we saw that 30 points down in the GP margin walk. And that’s being fueled by the strong growth in – the stronger growth in France during the second quarter, but also Italy which grew very strong and they saw business mix shift on that as well. So, I’d say, that’s the business mix side of that. I think we did see some offsets to that in the U.S. where our GP margins actually expanded, but generally speaking that’s the business mix side. And then I’d say, in terms of the businesses, I think to our earlier points with Right Management and Proservia in France, they have been a bit of a drag in the second quarter and we saw that in the first quarter as well. So I’d say that that held fairly constant, but to your point, we do see that’s starting to shift in the second half of the year. The France Proservia business will start to anniversary some of that GP decline and they’ve been working on rebalancing that portfolio and we should see some of the benefits of that comes through in the fourth quarter. So we do see some of that easing into the fourth quarter.

Very helpful and then just real quick, can you remind us that the mix in Right Management today in terms of outplacement versus the other?

The significant majority, Kevin, is outplacement, more than two-thirds.

Super. Thanks, Jonas.

Thanks.

Our next question is coming from Mr. Jeff Silber. Jeff, your line is now open.

Thanks so much. I just wanted to go back to France. You mentioned some of the positive aspects or potential positive aspects of some of the labor reform policy initiatives with the new President. Is there any talk about any changes to the CICE?

Yes, Jeff, on the CICE, so the Prime Minister came out on July 4 and said that, they plan – they do not plan on changing the CICE for 2018, but they are looking to change it for 2019. So, at this stage, we know that it’s not going to be changed in the next year. Addition to that was the economy – the Minister of the Economy came out just prior to those comments and said they are going to study the CICE very closely and they are going to be in discussions with corporates regarding the CICE. So, what that means is, in terms of the 2019 changes, I think they are going to be very careful about that. I think they are going to study it closely and it’s likely we really won’t see the impacts until the budget setting process for 2019, which will really start next summer – in the summer of 2018 if things hold as they’ve guided. So at this stage, it’s too early to tell whether those changes are going to be neutral, positive or negative.

All right. That’s really helpful, Jack. I appreciate it. And Jonas, in your prepared remarks you mentioned, I think you used the word cautious about the UK. What are you hearing from your clients? I know that revenues have been a bit under pressure. Are things going to be getting worse? Is there is still a lot of uncertainty? I am just curious what the tone is there? Thanks.

Well, Jeff, as you’d expect in an environment where businesses are operating under a large degree of uncertainty, because they don’t know what the impact of Brexit and what the trade rules are going to be and the immigration rules are going to be. We have all, all along said that we would expect that it’s not to be the Brexit, not to be beneficial to the UK economy. Just as we said last quarter, we think it’s too early to call whether our weakness in the UK is related to Brexit. We actually saw a bit of an improvement in the Manpower business during the second quarter, but we saw a number of large clients in the UK. On the Experis side, pull back. So, too early to call whether these are early signs, but as you know well, when employers are operating under uncertainty and they have to make decisions they are going to be cautious on making investments in the UK based on the uncertainty and that’s something that we expect to see happen and we just don’t know when.

Okay, appreciate the color. Thanks so much.

Thanks, Jeff.

Our next question is coming from Mr. Hamzah Mazari. Hamzah, your line is now open.

Good morning. Thank you. Just a first question for Jack. Maybe just update us on how you are thinking about free cash flow for this year, whether you think it’s going to be down year-over-year given the strong receivable growth versus cash collection? Or you think maybe there is a catch-up as you get into Q3, Q4?

Hamzah, as we pointed out, what we saw in the second quarter was the impact of the additional strong growth. And so, during those periods of strong growth what you will see is the AR will grow at a faster rate than cash collections. I think based on that, on a full year basis, based on the continued strong growth that we are projecting into the third quarter, it would be reasonable to expect that it would be down a bit as that trend stabilizes. But I’d say going into the third quarter, the third quarter and the fourth quarter are two of our strongest quarters from a cash flow perspective and we would expect that those will be positive.

Great. And then just on the U.S. business, you mentioned prolonged manufacturing weakness impacting staffing revenues, but if you look more recently, U.S. manufacturing is starting to ramp up whether you look at public companies, revenue guidance and you look at U.S. IT growth, is there a lag from when you see sort of end-markets getting better to when staffing revenues get better or is there some sort of a constraint around labor supply in the U.S. that we should be thinking about?

Well, Hamzah, we think that, when we had the ramp down, the ramp unoccurred with some of the larger clients on the manufacturing side under the Manpower brand and as we try to make those volumes back up, as you can see we are making progress both on Manpower and on the Experis, but it’s just very slow. And part of the reason why it’s slow is that it’s difficult for us to find ample supply of candidates to fill that. So, I think the outlook is actually stable and it’s not likely improving in the areas that where we’ve seen weakness on the Manpower side for us in the UK – I mean, in the U.S. and the progress is directionally good, but the speed is not that what we would like of course. So, we are going to keep on working on it, but I do think that we have opportunities to continue to see improvements going forward for both Manpower and for Experis in the U.S.

And I would just point out, in line with the prepared remarks, we did see very slight improvement in the rate of decline in both Manpower and Experis in the U.S. and we expect trend to continue into Q3.

Great. Just last question, I’ll turn it over. Jonas, you made some recent management changes in ManpowerGroup North America and maybe some other shuffling in Europe. Maybe if you want to just comment there for investors. Thank you.

Well, we make management changes and changes of resources and capabilities wherever we think they are needed to improve our performance and these are – this is something that we are doing on an ongoing basis across all of our global operations and we are very pleased with the talent that we now have in place both in the U.S. and the further agility and the capabilities we have added in Europe as well. So these are the kinds of things that you would expect us to do to address the areas where we believe we could do better as a business and as part of that, management changes sometimes are necessary and that’s what’s you’ve seen us do.

Great. Thank you.

Our next question is coming from Anjaneya Singh. Anjaneya, your line is now open.

Thanks for taking my questions. Good morning. I was wondering if you can touch on Experis’ growth in Americas. I know you said that in the earlier question and you are seeing a slight improvement there in the trends quarter-over-quarter. But it still continues to be under pressure and it’s weaker business for you folks for some time. So if you could just give us a sense of what’s working? Where you are seeing more difficulties in penetrating or capturing market share?

A little back to Hamzah’s question, so we saw some of the declines in both Manpower and Experis specifically occur with some of our larger clients and while demand for our Services and Solutions is good in the U.S., backfilling large volume declines is just going to take some time. So we are pleased that we manage to make the progress that we have and although our revenue performance have clearly been weak in the U.S. for a number of quarters, as I am sure you’ve seen, our GP performance has been very strong and our operating profit performance has also been very strong. So, add to that in a market where talent is scarce, a very large degree of pricing discipline where we really want to make sure that we place the talent that we have with clients who are really valuing the quality and the skills and the capabilities of that talent. So we’ve been exercising a degree of price control which has been very beneficial to us from a U.S. perspective. So, it’s clear that we are not where we want to be with Experis in the U.S. as far as the top-line growth is concerned, we are pleased that we are making progress and as you have seen, our GP dollars performance and our operating profit performance has been very strong. So we will keep working on this and make sure that we get to where we want to be also on the revenue side.

Okay, got it. That’s helpful. I guess, with regards to your commentary on GP performance and OUP margin performance in the U.S. and Americas, could you speak to how much more room there maybe for improvement? Clearly, very strong, especially with the revenue trajectory, but how much of the contribution is coming from permanent solutions mix this quarter? Just trying to get a sense of how much the restructuring is helping here versus mix, versus cost controls? And if you could just elaborate on what you are seeing for trends spreads for your temp business in the U.S.?

So, Anjaneya I’d say, in terms of the spreads on the temp business, I’d say, things are, generally speaking, in terms of getting at wage inflation, that’s sort of holding in line with what we’ve reported on in previous quarters. So, not seeing dramatic change. So that’s still running at about 2.5% year-over-year. In terms of the businesses overall, I think as we’ve mentioned in the past, for the Solutions, a big part of the Solutions business is in the U.S. So it’s a largest part of the Solutions business overall. And that does have an impact when you are looking at margins for the U.S. business and explains why they tend to run a bit higher based on that higher margin business there. So, in terms of the Q2 performance, I’d say, to Jonas’ earlier point, we were able to do well with the expanding gross profit margins on the Experis side and that was a driver for that as part of the business and we also did that on the Manpower side, we’re able to expand margins during the quarter as well. And as we mentioned, although revenues have been down, the business has been doing a very good job of cost management and we mentioned the restructuring charges, we recorded in the second quarter, we see that reducing expenses going forward and we saw a little bit of that starts to take place as we exited the second quarter. So that will have an impact going forward.

Okay, got it. One quick one if I may. Not sure if I missed this in your commentary, but what are you seeing for Perm growth in the U.S.?

So, Perm growth in the U.S. was just down low single-digits. And that’s coming off of a very strong growth in the year ago period. So that’s been holding. I think that’s in line with what we saw in Q1. But overall, good contribution in terms of Perm gross profit dollars from the U.S.

Okay, thanks so much.

Our next question is coming from Mr. Tim McHugh. Tim, your line is now open.

Thank you. Just want to follow-up on some of the earlier questions about France and the comments on gross margin towards the end of the quarter. I guess, can you elaborate on what or I guess, why it improved in June? Was it mix pricing, kind of what was the underlying factors that you saw towards the end of the quarter?

Tim, yes, I’d say, it’s a combination. The mix – we are starting to see the mix stabilize a bit. It’s been running at that – if we look at the 11% for the quarter overall, it was running at that level largely during the majority of the quarter. So I think we are starting to see some of that stabilization. It’s always hard on the larger customers to carve out the exact amount of mix and pricing, the larger customers tend to be very competitive when it comes to the pricing. So, I’d say, largely mix. But some of that may have been the continued stabilization based on extremely strong demand in the country as we start to see that – start to stabilize.

Okay, that’s helpful. And then, maybe just one other one on France. I guess, I understand that devil from the details and there is a lot we don’t know yet, but I thought some of the headlines in France kind of suggested if the CICE is changed, it would just go towards a general kind of payroll tax deduction to the extent maybe I guess, what you can elaborate what has been said, you probably understand it far better than me, but, if that were the case, if that turns out dollars what’s it’s going to be? What would the impact be in that scenario?

Yes, Tim, to your point what they have said was, in 2019, they expect it to be transform into a reduction of social costs. So, to your point, it would be a reduction of cost paid in the periods. I’d say, they haven’t given any additional details beyond that. So they haven’t given a quantum of what that would be like. Would be apples-for-apples the same amount of the CICE, which is a tax credit transformed into the social cost reduction, which would be a pretax change. So, really without the guidance, it’s hard to tell how they plan on transforming that. To my earlier point, their earlier comments by the Minister of the Economy that they are going to study this indicates that they are probably going to look at this pretty carefully in determining how they want to make the exact change. I think it’s the only change were to change it from the tax credit into a reduction in social charges and all things being equal, that would reduce the benefit to us. But it’s too early to tell whether that’s going to be the proposal.

Okay, thank you.

And our next question is coming from Mr. Mark Marcon. Mark, your line is now open.

Great, thank you. I’ve got a question for Jonas. I know you were in Europe recently. I was wondering if you could further elaborate on a few things that you may have observed, one would basically be just the more immediate impact of some of Macron’s proposals to the extent that it does through. What are you hearing? When do you think something might actually be enacted and actually was that having a real positive impact if things are already picking up in France? And then secondly, when we take a look at Northern Europe, Germany, Nordics, The Netherlands are all quite strong. Wondering if you think that those are going to continue to accelerate and if so, what sort of margin leverage could we get? Thank you.

So, Mark, on France, I think one of the notable changes that you may have seen as well is the improvement in the business confidence overall and in consumer confidence. So Macron’s election really gave the green light for France to return to action and just make some of the necessary changes, structure reforms that France has been needing for a long time. And we see that’s translating into some of the things you’ve now observed us doing in France certainly over this quarter where demand for our services and solutions is improving. The consultation around the labor market reform specifically in France is going to finish as far as the discussions are concerned, it finished on Friday of last week. Now it comes the time for the government to prepare a proposal which they will put forward and then they are intending to pass these measures in whatever form they decide to promote over – during the month of September. So these reforms could come in quite quickly. But we would say that some of this optimism is already feeding into the confidence that employers are the links. Now let’s make sure we understand it was in the context of a slow growth environment still. So it will make it a little bit better. So we would expect the impact of some of these reforms and some of the improved economic environments in terms of an improving growth rate to start to ease into this and continue to be visible as 2018 comes in. As it relates to the other countries in Europe, we feel good about the overall improvements, not being able to call out exactly what’s going to happen in each – and it be one of them, but we know that Germany has been strong for quite some time for us. Netherlands as well, so both of them are doing well and maybe Jack, maybe you could give some additional color on that Northern Europe.

Sure, specifically on Northern Europe, as you can see from our guidance, we are looking at continued growth, low single-digits and when thinking about that, keep in mind that that’s largely due to the comps, right. So, to Jonas’ point, Germany saw very large growth in the third quarter a year ago in our Proservia business. Some of that will start to anniversary. So just keep that in mind, Germany is still going to continue to do very strong, but more so in high single-digits to very low double-digits based on that anniversary. Belgium, we continue to see stable growth into the third quarter. I think on the Netherlands, again, keep in mind the comps they were running at 20% plus a year ago. So, considering that, you will see that come down a bit, but that’s really just on the comps continued very strong revenue growth in the country. And the Nordics continues to see good underlying growth, high single-digits to low double-digits. And lastly, the UK, which we’ve talked about being a decline. We see that rate of decline starting to improve slightly into the third quarter. So, I’d say those are the main components for Northern Europe, Mark.

Great, thank you very much.

Our next question is coming from Mr. Gary Bisbee. Gary, your line is now open.

Yes, hi, thanks. Good morning. I guess, I just wanted to ask about Southern Europe in particular, you’ve had incredibly good growth in France and accelerating and good growth in Italy for a long time. How do you think about the sustainability of that kind of growth in sub 2% GDP growth markets? I understand clearly there is optimism that economic growth will improve in France with the new government there. But it seems like, relative to the long-term historical relationship between GDP and Temp industry, your revenue that we are seeing just an outside benefit relative to the economic activity in a number of those key markets?

Well, Gary, if you look at the French market penetration, so where they are compared to where they’ve been in terms of prior peak end penetration. France still has room to grow just to get back to the prior cyclical peak. And so we think we still have some good opportunities for growth in France and Italy, although they are now just at their cyclical peak, their overall market share, their overall market penetration is significantly below the European average and what you would expect Italy to eventually end up having as a market penetration. So we believe that the growth opportunity in Italy is still going to be very significant for that reason. So, you are right. The teams have done a great job. We’ve had the ability to go for a number of years and we feel good about our opportunity to continue to see some growth from those two countries and frankly, also from Europe as a whole, because the outlook for Europe, if you compare our thoughts around Europe, maybe three quarters ago, that’s been – it’s been, that market environment has improved markedly. So we feel very good about our position in Europe and how we are situated in the various countries and the ability for Europe as a whole maybe with the UK as an exception to continue to be a good driver of growth for us going forward as well.

I just add on Southern Europe, Jonas, Spain actually, very strong growth, mid-single-digit growth in the second quarter days adjusted and we see that actually improving into the third quarter and IT services have been particularly hot in Spain lately. So, we see that as another good potential for continued growth for Southern Europe.

And just for Europe broadly, can you give us a sense whether it’s over the last five years or so, how is the mix change and how is mix impacting it? And specifically I am wondering about Experis, Proservia Solutions relative to just the core Manpower brand. Is that stuff contributing a lot more than it was five years ago and is that a part of the reason that you’ve had such strong growth in a pretty lackluster overall environment? Thank you.

Well, as you’ve seen we’ve done – as we’ve talked about over the last – over a number of years now, our solutions business has performed extremely well across Europe. So that clearly has helped whether it’s our world-leading RPO or MSP solutions or the very strong growth that we’ve had across Europe with Proservia in Germany notably and also in France. So we have seen very good growth from that perspective and the shift there and outside of the UK, our Experis business has also performed very well and up until recently I should say, also the UK business performed. So we’ve seen a shift in our mix to the higher value solutions. But having said all of that, Manpower branded business has been a very strong driver of performance as well coupled with the increasing use of our enhanced delivery models leveraging technology and things like that. So, it’s really been a tale of many of the brands coming together and doing some good – having some excellent performance. But the shifts has occurred in favor of Experis and in favor of solutions over that kind of timeframe.

Okay. And then just one last one from me. The gross profit growth in solutions was – I think the slowest, since you began reporting that many years ago. You talked about what’s going on in the U.S. and that’s probably the reason why. But just, a big picture question, how do we think about penetration of that portfolio of solutions today and do you still think that that being a leading grower in the portfolio for years to come is a reasonable expectation? Thanks.

Yes, I think you are now, Gary, is absolutely correct. We’ve had 13 quarters of double-digit revenue growth and very strong double-digit growth for most of the time also on GP. And the majority of those offerings in particular across Asia Pacific and Europe and Latin America is much lower than what it is in a more mature North American market. So we think that we can continue to expect good growth in our solutions business going forward as well. Maybe not as high as we’ve had. We’ve seen very, very high growth over the last, but certainly we believe we can continue to expect some good – some very good growth and probably the staff growth across our offering also going forward for the solutions business.

Thank you.

And with that, we have time for one more question.

Our next question is coming from Mr. Manav Patnaik. Manav, your line is now open.

Hey thanks, this is Ryan filling in for Manav. I guess, just quickly on the French market, I mean, if you look at last year versus some of the temp data, it seems like that business underperformed the market and now you are getting back up to at market or even above market growth. Is that, if I am looking at that, does that imply that maybe pricing was a little bit more irrational last year and now it’s kind of settled out? Or can you maybe just elaborate on the relationship there and why we are seeing such a pick up towards the market in the first half of this year?

Well, Ryan, if you were to go back a couple of years further, you would have seen that we outperformed the market at least two years prior to slowing down a bit in 2016 and now what we believe coming back to market. So I think with our size and our presence in the French market, that’s what we would expect, you could expect it to go move up and down a little bit, but I think we are very pleased with being, with seeing the acceleration that we’ve seen in the first quarter and we feel good about carrying on and staying with markets at this level. As you know well, we are always applying strong pricing discipline and we are very interested in profitable growth. So and that’s growth at any cost. So volume for the sake volume is not what we are looking for and the team has done a very good job managing that to market growth rate and coming back to that market growth rate in a very good way.

Great. And then I guess, just quickly, I mean, you talked about digital disruption and investing in delivery methods. I mean, is there any M&A perceptions out there for, you’ve seen some in the market of maybe more acquiring of digital assets. I mean, is there anything out there that you think would make sense of maybe a non-traditional staffing M&A that you guys are keeping the eye on if you look towards the future?

We really look at where we can create value and we are very clear that we are a business services company and in a world of cloud, software as a service, rapid changes in technology, we don’t really see ourselves as being able to invest in the rapidly – in technology at the pace that you’d be required to do to stay competitive and win in the market. We’d much rather spend our time leveraging the data that we have both from the clients as well as from a candidate perspective and then engaging with technology partners to drive the best performance at the fast as market speeds. So, I think it would be unlikely for us to look at anything in a technology space that we would be interested in, but we are always tracking the market and looking at what business models could be suitable for our business and for the innovation that we are trying to drive.

Great. Thank you.

And with that, thanks everyone and we look forward to speaking with all of you again in our conference call for the third quarter. Thanks everyone. Have a good week.

And that conclude today’s conference. Thank you all for your participation. You may disconnect at this moment.