Welcome to ManpowerGroup's Second Quarter Earnings Results Conference Call. At this time, all participants are in a listen-only mode until the Q&A session of today's conference. This call will be recorded [Operator Instructions]. And now, I will turn the call over to ManpowerGroup's Chairman and CEO, Jonas Prising. Sir, you may begin.

Good morning. Welcome to the second quarter conference call for 2019. With me today is our Chief Financial Officer, Jack McGinnis. We'll start our call today by going through some of the highlights of the second quarter and Jack will go through the operating results and the segments, our balance sheet and cash flow, as well as comments on our outlook for the third quarter. I will then follow with some concluding thoughts before we start our Q&A session. Before we proceed, Jack will now cover 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. We assume no obligation to update or revise any forward-looking statements. Slide 2 of our earnings release presentation includes important information regarding previous SEC filings and reconciliations of non-GAAP measures.

Thanks, Jack. Our second quarter earnings represent a solid result in view of the current global environment. Revenue in the second quarter came in at $5.4 billion, flat year-over-year in constant currency. On a same day basis, our underlying organic constant currency revenue decrease was 1%, and this represents a stable trend from the 1% decrease on this same basis noted in the first quarter. Sequentially, although, Europe continued to experience revenue decreases, this was offset by constant currency revenue increases in the Americas, and APME. Right Management improved their revenue trend to a decrease of 1% in constant currency year-over-year. Operating profit for the quarter was $131 million, down 33% in constant currency. Our results included special items recorded in the quarter, consisting of a non-cash accounting gain related to our acquisition of the remaining interest in our ManPower Switzerland business and goodwill impairment charges, which Jack will discuss in more detail. Excluding these special items, operating profit was $196 million for the quarter, a decrease of 7% in constant currency. Operating profit margin came in at 2.4% down 130 basis points from the prior year. And after excluding the special items, operating profit margin rose 3.7%, down 30 basis points from the prior year after also excluding the restructuring costs and the prior year equal to the top-end of our guidance range. Earnings per share for the quarter was $2.11. Excluding the special items in the quarter, earnings per share was $2.05, a decrease of 8% in constant currency after also excluding restructuring costs in the prior year. Our businesses did not experience significant revenue trend changes in the second quarter from the previous quarter. This environment continued to be one of the sluggish trends in Europe and modest constant currency growth elsewhere. At the same time, labor…

Thanks Jonas. Revenues in the second quarter came in at the midpoint of our constant currency guidance range. Our gross profit margin was down 10 basis points year-over-year, and came in at the midpoint of our guidance range. Excluding special items and prior year restructuring charges, our second quarter performance resulted in operating profit decline of 12% or 7% on a constant currency basis on flat revenues in constant currency. We continued to experience the impact of operational deleveraging in the slower revenue environment. This, combined with favorable direct costs adjustments and strong SG&A management during the quarter, resulted in an operating profit margin at the top end of our guidance of 3.7% before special items. Breaking our revenue trends down into a bit more detail, after adjusting for the negative impact of currency of about 5% in the quarter, our constant currency revenue was flat. The Switzerland acquisition increased revenues by 2%, while fourth quarter of 2018 disposition contributed to 60 basis points of revenue decline in the quarter, resulting in a net impact from acquisitions of plus 1.4%. Slightly less billing days this year contributed to a slight revenue decline. Excluding the positive impact of acquisitions and the negative impact of less billing days, the organic constant currency days adjusted revenue decline was about 1% in the second quarter, as expected, which represented a continuation of the 1% decline in the first quarter on a similar basis. On a reported basis, earnings per share was $2.11, which included special items consisting of an $80 million accounting gain on the purchase of our remaining interest in our Manpower Switzerland business, which had a $1.32 positive impact and goodwill impairment and related tax and other charges, representing $64 million of goodwill impairment, $2 million of other charges, and $10 million…

As you just heard, our third quarter guidance incorporates recent changes in our business. During the last few quarters, you've seen us execute on various strategic initiatives, which include the Swiss Franchise acquisition, the IPO of the Greater China business, as well as certain dispositions of Manpower operations in different countries. We are making these portfolio adjustments in line with our strategic priorities to drive sustainable profitable growth and achieve our stated financial targets. Along with our investments in technology and our innovation initiatives, we will continue to evolve our global portfolio and footprint overtime as we execute our business strategies and focus on creating more value for all of our stakeholders. Turning back to the immediate outlook, although, we see some slight changes in certain markets, we expect the overall theme of trend consistency from the first half of the year to continue into the third quarter. We are expecting European trends to continue to be largely offset by organic constant currency revenue increases in the Americas and in APME. In this uneven global environment, demand for our extensive portfolio workforce solutions and services across our global footprint continues to provide us with opportunities for profitable growth in many markets and brands. Specifically, employers around the world are increasingly looking for technical and stock skills and are struggling to fill temporary and permanent positions. Across all industries, there is a increasing focus on the need to up-skill people in short cycles at speed and at scale, to ensure businesses have the talent they need when they need it. This ongoing demand for people with the right skills is why up-scaling and rescaling the workforce is part of our strategic evolution and plan, so that we can provide our clients with the best talent while we develop and retain the…

Thank you. We will now begin the question-and-answer session [Operator Instructions]. Our first question is from the line of Andrew Steinerman of JPMorgan. Your line is now open.

Jonas, if you include the third quarter guide, Manpower has been in a flat to slightly down revenue situation now for four quarters if you include the third quarter. What needs to change for Manpower's top line to return to sustainable growth?

And I would say what we take from the second quarter and also as you look into the third quarter is that stability in Europe is something that is a good starting point. And actually, if you look at the second quarter, we saw improved performances in the UK, in the Nordics, as well as in Spain; France, slightly lower but still manage the operating profit margins very well; Italy, stable at a lower level but also with excellent operating profit. So, I would say the environment is truly uneven. And of course, what we would be looking for is a greater degree of the business confidence and to see some of the manufacturing indicators move in the right direction. But as you can tell from our comments, it is an uneven environment. You have some countries that are heading in the right direction. Others that are going that are stable. And a few that have gotten slightly worse but not very much worse. So, we're hopeful that we could see some improvements with of course the difficulties of determining when that would occur.

And just to make a comment on France. You said so after June and July, our economists are still looking for 1.3% real GDP growth in France. Do you think that'd be a conducive environment for temporary help?

I think that if growth comes back, because that's what would has to happen to get to that average 1.3% growth number, we would certainly see a pickup in the French business. But we haven't seen it yet. But that growth number is supposed to be realized then we would see it for sure.

Thank you. Our next question is from the line of Jeff Silber of the BMO Capital Markets. Your line is now open.

I just wanted to follow up on France. I think about a month ago or so, the French government proposed, I guess what they're calling Act II of the French labor reform. I know nothing is set in stone yet. But if something like this goes into effect, how do you think that would impact your business?

In short, we think the changes, as we understand them today and of course there are other things that we need to understand better. We think those changes are entirely manageable by our business. And in fact, it might be an opportunity for us, because we have a very strong workforce management program in place. We also have a bench model. And both of those could help offset some of the changes that are occurring. And of course, the changes are aimed at managing the perceived views over short term flexible contract, so one day contract. It's very similar to what you've seen in the UK and the debates around zero hour contracts or the dignity decree in Italy. So, it's targeted the two certain sectors, seven industry sectors across France that are making extensive use of short-term contracts. And that is something that we believe we can manage, both because of our exposure being reasonably limited, although, we're certainly present in those sectors but also because of the nature of all of our business and the length of assignments that we have. So we think we can actually benefit from this. But without knowing all the details, at least we can tell at this point it is entirely manageable in our current assessment.

If I could shift over to Germany, I'm just curious why would you take the goodwill impairment this quarter? Was there something that's changed compared to prior quarters?

Jeff, I'd say, when we looked at the goodwill impairment for Germany, I think coming off of the first quarter where we talked about the restructuring charges that we took in the country we continue to analyze the performance of Germany. And I'd say stepping back from it looking at the current market conditions would continue to soften into the second quarter. And continuing to analyze the regulatory impact, and we talked about that in the prepared remarks. We are seeing, as result of the labor regulation, a higher degree of conversions of our temps to permanent by our clients. And we're not anticipating that that trend is going to change dramatically in the short-term. So, we will continue to look at that. But all of that resulted in just taking a more cautious outlook on the business going forward. And that's what really resulted in the accounting goodwill impairment.

Thank you. And the next question is form the line of Tim McHugh of William Blair and Company. Please go ahead with our question.

Just wanted to ask, I guess, how you're thinking more medium term in this environment about the pace of expense growth that you want? And I guess how aggressive are you going to be with getting I guess further expense reductions as we look at a choppy macro environment? Or are you more in the view that you want to continue to invest, because you believe this is just temporary and is going to come back?

Tim, this is Jack. I guess I'd answer that. It's really more of a regional view when we think about that, to Jonas's comments in some of the prepared remarks. We are investing in regions that are continuing to grow. So if I step back and Andrew asked the question about the overall composition of the group and what will move us going forward to more positive growth. At the moment, as you can see from the second quarter results, Northern Europe had a 10% constant currency decline. So we see as really the rest of the world making up for that, getting close to flat or minus 1% organic days adjusted and we move to flat in Q3. And so, I'd say it depends on the region. And so to your point, you saw us do some pretty significant restructuring in the first quarter, a lot of that was aimed at Northern Europe. So we are taking out costs. And if you look at Northern Europe during the second quarter, there was close to 10%, 11% cost reduction year-over-year in Northern Europe. So we are making those moves. They are improving the underlying run rate in Northern Europe, particularly in Q2 from Q1. So it really is a regional view. And so that is happening in the markets where we need to do that but at the same time, in markets that are growing and making up for Northern Europe we continue to invest. And we said in the prepared remarks, technology is part of that as well. And we continue to invest in technology during the course of that as well.

And then on the tax rate. The impact of France, I know you said that it's retroactive somewhat to the law that's being signed. So I guess this tax rate in the third quarter. Are we catching up in terms of some of the tax accruals? And I'm just trying to understand what we should think about go forward from here beyond the third quarter into the impact?

Yes, it's really a year-to-date catch up for the French legislation. So as part of tax original -- France's original tax reform, the rate was scheduled to step down this year. And that's what was enacted and that's what we were booking to. So just over 2% decrease in the corporate rate in France was part of their tax reform. And this recent legislation basically cancels that out. So it reverts back to the original rate from the prior year. So that's an increase just over 2%. And based on the size of France's operations that results in an increase of about 1.7% in that effective rate in the third quarter. So that's a nine month catch up that's all happening in the third quarter, because that tax rate goes back to beginning of the year. If you take that out, Tim, our tax rate is about 33.8% in the third quarter, so in line with what we had guided for. And what I would say is for the full year tax rate, our previous guidance was 34% for the full year. I did say that if France did cancel their tax reduction that would basically add about 50 basis points in the consolidated rate. And so that's what we're currently looking at about 34.5%.

Thank you. The next question is from the line of Mark Marcon of Baird. Please go ahead with your question.

With regards to Germany. Can you talk a little bit about just how we should think about the progression of that regulatory change and how it ends up impacting the trends there? And then how dividends are impacting the economics of the business there?

We've seen these legislative changes really come into play in Germany during a time when the later markets are very tight. So the impact that we're seeing right now is that we, although, it's hard to judge exactly what is legislation and what is the market downturn, we have seen an increased level of conversions, we have seen an increased level of sickness pay. So those, I think that we're of course monitoring and adjusting ourselves to ensure that we mitigate those impacts to the greatest degree possible. We're still feeling good about the German market. It is the biggest economy in Europe, 90 million people, a power house where it's very important for us to have a good footprint. And we're optimistic in the long term outlook to Germany. But in the meantime, of course, we're adjusting to these legislative changes and to what we believe is the probably worst performing market right now in the world and certainly in Europe in terms of the industry dynamics due to the downturn in German manufacturing. So it's a difficult -- the market conditions are difficult and certainly, the legislative changes are not helping us turn it around, but we still have a good outlook as far as Germany is concerned. I think it's an important market for us.

And I would just add to that, Mark that, although, we have seen a higher rate of conversions, we have been able to replenish that. So we have seen stability in the associates on assignment in Germany, which is great to see. And it's becoming easier to forecast for us at this stage. So, that stability in the associates on assignment has been coming through the last couple months. And if we hold on to that, we'll see an improvement in the rate of revenue decline into the third quarter. So the rate of conversions are basically preventing additional growth, because we would have just added those additional associates on. But so far, it's been helping us. We've been replenishing that conversion rate, and that's enabled to keep us stable on associates on assignment.

And the comps in Germany get a lot easier in Q3 and Q4, in particular. Do you think, given the way that trends are going -- I'm just -- I'm trying to judge like how recent the impact is with regards to the regulatory change in terms of the impact, or whether by the time we get out to the fourth quarter and the first quarter, assuming the macro environment doesn't worsen any further that we should start seeing the stability?

We should, Mark. I think, we'll see some improvement in the third quarter. And to your point, we had a pretty sharp decline a year ago in the third quarter and that decline much further in the fourth quarter. So we'll see improvement. If we can hold the associates on assignment, which is the trend we've been seeing the last couple months. As we walk into the third quarter and fourth quarter, we will we will start to see an improving revenue trend.

And then in France, the operating margin was a really nice improvement year-over-year despite the fact that we're not getting the CICE anymore. Can you talk a little bit about what's going on over there and how the outlook for margins are in France?

Yes, regarding France, I guess the point I'd make is we did point out that we have some direct cost adjustments in the quarter. So that helps that helped that bottom line results in terms of the improvement year-over-year and they're operating unit profit margin. But even putting that aside, we've been making very good progress in the underlying staffing margin. And so that has been a trend we've been seeing for the last couple of quarters. That's helped us offset that subsidy change that we've talked about. And we feel good about that. We feel good about that continuing. The one item I would say, though, regarding the third quarter is due to the fact that we've had some of those direct costs adjustments that's helped us more than offset that pressure from the subsidy change. So we're estimating anticipating [Technical Difficulty] estimating at this time into third quarter, Mark.

And then those direct cost adjustments ended up positively impacting the margin difference by how much?

We said that overall it helped that gross profit about 10 basis points, Mark. So that probably get to what you need.

Thank you. Next is Gary Bisbee from Bank of America. Your line is now open.

Jack, in the second commentary, almost every segment you talked about expectations for some sequential improvement in the Q3 growth rate. Obviously, a lot of the business that comes look a lot easier. I guess, I just wondered in comments. Are there some markets where you feel like in absolute dollar terms we're seeing improvement? Or is the concept of the year-to-year comps improving a lot really the bigger driver of that commentary you provided about pretty consistent sequential improvements.

Gary, I'd say comp certainly are a big part of it. But if I look at the overall guidance in the regions in the key countries within those regions, I'd say going back to the U.S., I'd the U.S. is an area where we've seen steady improvements. We've seen that for the last couple of quarters here. And so a very significant milestone, Manpower getting to flat in Q2, which was great to see, and we see that continuing to improve into the third quarter. So I would definitely put the U.S. -- and U.S. has a slightly harder comp going into the third quarter, and we still see improvement. So I would put the U.S. in the camp of steady improvement anticipated consistent with what we've been seeing. I would also, I think when we look at Southern Europe we have talked a little bit already about France. But I'd say France as we guided we did see a little softening trend as we exited the quarter and into July. Italy will improve our largely due to the comps, but good steady underlying activity. And I think Italy, we've had very good comp trends, and we see that continuing into the third quarter. And I see Spain improving. So Spain has good improvement in the second quarter and we see that improving into the third quarter and that will be positive. And I'd say that's positive for the business on an ongoing basis as well. And I guess as we look in Northern Europe and that's where we have seen the most pressure over the last few quarters. The UK has been improving. And so the UK improvement came in better than we expected in the second quarter, getting to 1% decline in constant currency. And we see them continuing to improve into the third quarter as well. So, I'd say those are the main contributors. I think in APME, we have guided to the fact that we are exiting some of that low margin business in Australia, that's the reason Australia has been a steeper negative decline as expected. And certainly, we have the impact of the deconsolidation of China on an overall basis, which we talked about. But I would say that that's a little bit of the lay of the land for the Q3 guide.

And then just following up quickly on the China deconsolidation. Is it right that that has limited, to think that that has limited EPS impact? I realize revenue profit and margin shift to the below the operating line minority interest or other income, but shouldn't have a big impact in EPS. Or is there some reason that it actually would have a meaningful impact?

Gary, I think you're thinking it the right way. We don't carve out results but you're definitely thinking it the right way. I think that's been a business on a quarterly basis that's given us consolidated operating profit dollars in the mid to high single-digit millions quarterly. And doing the math on that, we've owned 51% previously. So part of that goes away due to the minority interest claims. And then going forward, what we'll have is below -- all of it will be picked up below the line now instead of the net 51% will be the net -- 38% net of taxes. So, I think you are thinking of it the right way in terms of the overall impact.

Thank you. The next question is from the line of Tobey Sommer of SunTrust. Your line is now open.

Thank you. In the context of your experience globally in riding out cycles in accelerations and decelerations in growth. Is the cadence that regulatory and tax changes in your markets tend to lessen as you have periods of softness here? Because I know France and some of your other major markets tend to tweak things with some regularity. So based on your experience, should we expect more or less of that at this juncture do you think?

The rate of the legislative proposals of various kinds has frankly been reasonably evenly distributed over a number of years. So I don't know that I would tie it to any specific economic cycles as much as possibly tying it to ideological views of whether labor market flexibility is good, or whether labor market flexibility is bad. And if you have a change in government and policy makers have a more ideological view, we might see a flurry of activities that is aimed at regulating our industry and/or the use of flexibility generally in that market. I would say though that so far fortunately those changes, while sometimes difficult to adjust to, in the end have mostly been manageable for us, because everyone understands the benefit that the economy has and the labor markets have for employment or flexibility of the kind that we provide on the global basis in over 80 countries. So, so far the changes that have occurred have been manageable for the most part. There are some legislation that we're seeing and clearly that one we spoke about earlier with Germany has made it more difficult to navigate, because frankly we don't think seeing that Germany has a bench model. So that means all of our employees, all of the associates we have, are our full time employees to then add to that a temporary staffing legislation that would contravene the notion that they are firm and full time employee of ours makes no sense from our perspective. And that has been more difficult to manage, but we are adjusting to that change. But I wouldn't tie regulatory changes really to anything related to economic cycles, but mostly ideological views of what is good for the labor markets when the governments change.

With respect to your RPO and MSP business, what is growth then? And is there any change in composition of the drivers at that growth, new business versus expanding relationships with existing customers?

I'd say that the RPO business that we saw some improvement in the second quarter, which is good. So our MSP business improved as well and our Proservia business is moving forward well, as well for our regional business in Europe. So where we saw some weakness in our solutions business was really the other what we call talent based outsourcing business, and that is something that we can see fluctuate from time-to-time. But our global offerings are continuing to make good progress. I'd say that some of the hesitation maybe we've seen from some clients in terms of committing to larger RPO contracts could be related to -- in some markets, could be related to their desire maybe to control the inflow of candidates themselves. But having said that, we have a very strong pipeline and good win. So we would expect to see the RPO business continue to pickup pace as we move forward. So no major gist in our business composition, and still is very good outlook for our solutions business, going forward.

We do have a question that came from the line of Kevin McVeigh of Credit Suisse. Your line is now open.

Jack, you guys have done a overall nice job restructuring the business? How do we think about -- like what level of absolute dollar of revenue do you need to expand the margins? Because it looks like -- and it looks like, it sounds like it's a little bit of Asia Pacific. But the gross margins, the operating margin a little bit de de-leveraging. What's the breakeven point from an absolute dollar perspective of reported revenue where the margin starts to flex back up?

I'd say definitely what we said historically is if we can get revenues in the mid-single digit revenue growth then we're starting to really see operating leverage. I would say we don't need to even see that on an overall consolidated basis. It really depends on the region. So you've seen us in the lower revenue environment actually continue to have an opportunity to expand margin when certain regions are doing really, really well. And so the great example of that would be France and Italy. So France and Italy, if they're seeing nice growth, although, we could still have other parts of the world that could be seeing decline, then we really start to get operating leverage in big parts of the business. And that falls through to the bottom line. But we do need some of our larger regions to have decent revenue growth, and I'd say mid-single digits. Now with that that being said, with our cost efficiency initiatives that we continue to execute that is providing additional cost savings in a much lower revenue environment for us as well. And that's -- we continue to work that in and that continues to be part of our strategy, going forward to create more room in a lower revenue environment to be able to get back to expanding margin. But we are going to need a bit more help on the revenue side.

And then just real quick, on the buyback, no stock in the quarter. Was that a function of that you're in the process of listing the Asia business? Or is it the business, the proceeds from allocation to the Swiss business, or just any thought as we think about the third quarter?

Kevin, I'd say we used cash in the quarter for the Switzerland acquisition. And as we've said before, when we look at excess cash, if there is an acquisition that gets first priority. And I'd tell you that that's really the story for the quarter overall. I wouldn't read anything into it more than that. We continue to think share repurchases are great vehicle for returning cash to our shareholders. We'll continue to do that opportunistically. So really that was the story in the second quarter.

Thank you. And the next question is from the line of George Tong of Goldman Sachs. Your line is now open.

Good morning. This is Blake on for George, thanks for taking my question. APME grew 1.3% constant currency slowing from high single digit low double digit growth throughout 2018, looks like there were tough comps this quarter. But do you see any idiosyncratic headwinds that may have weighed on growth in the region?

I guess I'd clarify that when we look at APME that they actually -- you have to remember that we did a disposition in the fourth quarter of 2018. So for that reason, it's really tricky that you have to really look at the organic underlying days' adjusted growth. And so, organically, they actually grew 7%. So APME has been performing very well. That 7% was in line with what we saw last quarter on an underlying basis adjusting for the disposition it was 7% as well. So APME is doing very well. And I'd say the big driver there is Japan. Japan came in at 10% days adjusted in the second quarter and that's a phenomenal result for our Japan business, which has been very steady and it's been really picking up the revenue growth recently. And we see Japan continuing to have a good third quarter outlook as well. So, I'd say we feel really good about APME. We are seeing, as I mentioned earlier, we are exiting some low margin business in Australia and New Zealand and that will have an impact a bit. But overall, that will be good for our profitability, going forward.

Looks like operating margins came down 30 bps to 3.7% this quarter and you're expecting another 40 basis point decline year-over-year in 3Q. Can you discuss progress made on recent technology investments, and when you expect to see margin tailwinds?

I guess, I'd say in terms of the margin walk overall. To your point, we guided to down 40 points in the second quarter. We came in at down 30 basis points. And as we look to the third quarter, the guide is down 40. Really the change there is the China deconsolidation as we pointed out. So the China consolidation, that was a higher margin business. As we deconsolidate that, that will have an impact in our operating profit margin. That's the main driver for why it's a little bit lower in the third quarter. I'd say technology just quickly that that really hasn't changed very much. I think we continue to invest in technology. We've talked about that. That's in run rate and that's not really a change from the second quarter to the third quarter. So that's somewhere in the range of 10 to 15 basis points of investment that we continue to make.

Great, very helpful. Thank you.

Thanks Blake. And that brings us to the end of our second quarter earnings call. We look forward to speaking with you on our next call discussing the third quarter earnings. And until then, we wish you a good rest of the summer and hope you have a great weekend. Thank you.

Thank you. And that conclude today's conference call. Thank you all for participating. You may disconnect now.