Q3 2019 Earnings Call
Welcome to Manpowergroup third quarter earnings results Conference call. At this time, all participants are going to listen only mode until the question answer session cities.
This call will be recorded.
Objections. Please disconnect at this time.
<unk> Chairman and CEO , you want to crushing Sir you may begin.
Good morning.
Welcome to the third quarter conference call for 2019 with me today, It's our Chief Financial Officer, Jack My goodness.
We will start our call today by going through some of the highlights of the third quarter. Jack will go through the operating results and the segments, our balance sheet and cash flow as well as comment on our outlook for the fourth quarter.
I will then follow with some concluding thoughts before we start our kunaev 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 may differ materially from those projected in the forward looking statements, we assume no obligation to update or revise any forward looking statements.
By two of our earnings release presentation includes important information regarding previous FCC filings and reconciliation of non-GAAP measures.
Thanks Jack.
Third quarter performance and earnings reflect a continuation of many of the same trends we experienced in the second quarter.
The backdrop of slowing economic growth globally, and continued tight labor markets in many countries.
Revenue in the third quarter came in at $5.2 billion flat year over year in constant currency on a same day basis, our underlying organic constant currency revenue was also flat.
This represents a very slight improvement from the one per cent decrease on the same bases in the second quarter.
Overall, although many of our businesses experienced slightly improved trends from the second quarter. It was offset by incremental market slowing in some of the northern European countries, particularly Germany.
The allowance and Sweden as one as a slight decrease in France, which has now stabilized.
We benefited from incremental growth in the U.S. and the UK lesser degree improved revenue trends in Spain and Italy.
I'd also like to call out the very strong continued performance of Japan, Norway, and Canada for their strong revenue growth in the third quarter.
Since our last calls I spent time with our teams in Australia, Japan, Singapore last week I was in Europe , where they had the opportunity to discuss the business environment and outlook with many of our clients.
They are impacted by increased volatility and uncertainty with expectations of slowing economic growth, but at the same time struggling to find the required skills within healthy labor markets.
In the UK, despite the pending Brexit or clients continue to experience a shortage of talent and we have seen increased demand for services, there and I also heard those from claims in Poland and Japan.
In countries like Germany, and Sweden, we continue to experience reduced manufacturing related demand a trend also reflected in September as manufacturing PMI.
According to our clients there caution around trade and tariff uncertainties. The main driver of the slowing environment.
And just guessing business trends for the U.S. clients were still hearing of solid demand in many sectors, but U.S. manufacturing clients have recently reduced demand driven by trade related uncertainty.
Moving from the top line trends to the bottom line operating profit for the quarter was $217 million, which includes a one time $30 million net gain related to the accounting for the greater China, JV public offering that I announced on the previous quarterly earnings call.
Excluding the special item operating profit was $187 million, which was down 11% in constant currency.
Operating profit margin came in at 4.1% and excluding the special item was 3.6% down 40 basis points from the prior year and at the midpoint of our guidance range.
We managed SGN, a well in the quarter and continue to actively manage costs and the businesses impacted by weakening demand.
Earnings per share for the quarter was $2.42. Excluding the special item earnings per share was $1.92 cents, a decrease of 18% in constant currency, which incorporates a significantly higher effective tax rate year over year.
In this mixed economic environments, our teams have mitigated the lower revenue impact in Europe through strong pricing discipline and diligent cost control elsewhere environment remained stable with opportunities for growth and we're pleased with how several markets improve their performance in the third quarter.
I would now like to turn it over to Jack to provide additional financial information a review of our segment results and our fourth quarter outlook.
Thanks, Jonas revenues in the third quarter came in between the low end in the midpoint of our constant currency guidance range.
Our gross profit margin reflected recent acquisition and deconsolidation activity. It was down 40 basis points year over year and came in at the midpoint of our guidance range.
Including a special item consisting of a onetime noncash accounting gain on the greater China JV public offerings.
Our third quarter performance resulted in an operating profit declined 14% or 11% on a constant currency basis on flat revenues.
We continue to experience the impact of operational deleveraging in the slower revenue environment.
This resulted in an operating profit margin at the midpoint of our guidance of 3.6% before the special item.
Breaking out revenue trend into a bit more detail after adjusting for the negative impact of currency of about 3% in the quarter, our constant currency revenue was flat.
The impact of acquisitions, and dispositions and de consolidations offset each other at the consolidated level.
Slightly more billing days this year contributed to a slight revenue increase.
Excluding the positive impact of slightly more billing days the organic constant currency days adjusted revenue decline was about flat in the third quarter, which represented a very slight improvement from the 1% decline in the second quarter on a similar basis.
On a reported basis earnings per share was $2.42, which included the special item of 30 million, which had a 50 cent positive impact.
Excluding this item.
Earnings per share was $1.92, which equaled the midpoint of our guidance range.
Included within this result was a lower operational performance of three cents on northern Europe , three cents on worse than expected foreign currency exchange rates offset by positive variance of six cents on the slightly better effective tax rate and one cent on a lower weighted average share count due to the impact of repurchases during the quarter.
On a loss of one cents from an additional foreign currency translation related to the hyper inflationary treatment of our Argentina operations.
Looking our gross profit margin in detail our gross margin came in at 16%.
The staffing interim margin continues reflect an underlying stable trends from the prior quarter of down 10 basis points.
Many of our largest markets continue to see tight labor market conditions and this has contributed to stronger underlying staffing margins in many markets based on our ongoing initiatives, particularly in France, the U.S. in Japan.
Lower contribution from permanent recruitment contributed to 10 basis point reduction and the lower contribution from our Proservia and talent based outsourcing businesses contributed to about 20 basis points of reduction.
Next let's review our gross profit by business line.
During the quarter manpower brand comprised 63% of gross profit our experience professional business COVID-19% Manpowergroup solutions comprised 14% right management, 4%.
During the quarter, our manpower brand reported and organic constant currency gross profit decrease of 3%. This was equal to the rate of decline in second 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 in our Experis brand increased 4% on an organic constant currency basis during the quarter an improvement from the 3% decline experienced in the second quarter. This was driven primarily by the U.S. into a much lesser degree the UK in Japan.
Manpowergroup solutions includes our global market, leading RPL and MSP offerings as well as talent based outsourcing solutions, including Proservia alrighty infrastructure and end user support business.
Organic gross profit growth in the quarter was flat in constant currency year over year, which is slightly less than the 1% growth in the second quarter driven by our Proservia business.
Right management experienced an increase in gross profit of 2% on an organic constant currency basis during the quarter, which was a significant improvement from the 5% decline in the second quarter driven by higher career management activity.
Well also comment on right management My segment review.
That's seen a expense was 623 million and includes a gain of 30 million related to the greater China JV public offering.
Excluding this item SDMA of 654 million represented a decrease of 20 million from the prior year.
This decrease was driven by 21 million from currency changes 8 million from net dispositions, which were offset by 9 million of operational costs.
On an organic constant currency basis, excluding special items.
As gene a expense increased 1% year over year.
<unk> expenses as a percentage of revenue in the quarter represented 12.5%, which reflected strong cost management, despite the impact of lower revenues year over year.
The Americas segment comprised 20% of consolidated revenue.
Revenue in the quarter was 1.1 billion, an increase of 6% in constant currency.
Oh, you P equals 55 million and represented an increase of 9% in constant currency from the prior year and O U P margin improvement of 20 basis points year over year driven by the U.S.
The U.S. is the largest country in the Americas segment, comprising 60% of segment revenues.
Revenue in the U.S. was 646 million representing growth of 2% compared to the prior year or.
The U.S. completed the acquisition of three small manpower franchises, which slightly increased the revenue growth rate.
Excluding the additional revenues from newly acquired franchises and adjusting for billing days. The U.S. had an underlying growth rate of 1% in the third quarter, which was an improvement from the 1% decline on a similar basis in the second quarter.
This marks the third consecutive quarter of revenue improvement in the U.S. and a crossover back to growth during the quarter.
During the quarter all U P for our U.S. business increased 8% to 36 million Oh, you P. margin was 5.5% an increase of 30 basis points from the prior year.
Gross profit margin increase year over year as a pricing environment reflects the scarcity of talent in the U.S.
Within the U.S. the manpower brand comprised 41% of gross profit during the quarter revenue for the manpower brand in the U.S. was flat in the quarter or down 1% when adjusting for billing days and franchise acquisitions, reflecting a slight decrease on the days adjusted flat growth in second quarter.
The slight decrease in the U.S. manpower business was driven by reduced manufacturing activity, which was more than offset by increased experis activity.
The Experis brand in the U.S. comprise 36% of gross profit in the quarter.
During the quarter, our Experis revenues grew 3% from the prior year, which was the same after adjusting for billing days.
This represents a significant improvement from the 3% decline experienced in the second quarter as we experienced increased activity driven by our convenience clients.
Crossing over to positive growth is a major milestone for our U.S. experience business and reflects significant progress.
Manpowergroup solutions in the U.S. contributed 23% of gross profit and experienced 4% revenue growth in the quarter slightly lower than the 5% growth rate in the second quarter. We continue to see strong demand by our clients for higher value RPL and MSP solutions and recent large RPL wins are expected to flow through future quarters.
As I mentioned over the course of the third quarter, our manpower business experienced decreasing activity for manufacturing clients. We expect this current trend to continue into the fourth quarter, resulting in slightly weaker revenue trends for the U.S. manpower business in the fourth quarter.
Conversely, our U.S. Experis business is experiencing steady revenue trends into the fourth quarter, which should partially offset the manpower decline for an overall use flat revenue trend year over year in the fourth quarter.
Our Mexico operation had revenue growth in the quarter of 1% in constant currency or flat after adjusting for billing days.
Revenue in Canada was up 21% in constant currency or 19% after adjusting for billing days.
We're very pleased with the performance of our Canada business as they continue to generate market leading growth.
We expect Canada, they have very strong performance again in the fourth quarter.
Revenue growth and the other countries within Americas was up 15% in constant currency. This growth was driven primarily by strong revenue growth in Central America, Peru, Colombia and Chile.
Southern Europe revenue comprised 45% of consolidated revenue in the quarter revenue in Southern Europe came in at 2.4 billion, an increase of 5% in constant currency.
Adjusting for the manpower, Switzerland acquisition and billing days. This represented the revenue decrease of 1% year over year, a slight decrease from the flat trend experienced in the second quarter on the same basis driven by France.
Oh, you P. equaled 117 million and was flat to the prior year in constant currency or a decrease of 4% and organic constant currency after accounting for manpower, Switzerland.
Oh, you P. margin of 5% represented a decrease of 20 basis points year over year permanent recruitment growth was 9% in constant currency or 4% on an organic constant currency basis.
France revenue comprised 59% of the southern Europe segment in the quarter. It was down 1% from the prior year in constant currency.
And after adjusting for billing days represented a 2% decrease from the prior year.
This represented a decrease from the flat days adjusted revenue results in the second quarter on lower activity levels in August and September .
Oh, you pay was 70 million a decrease of 6% in constant currency and all you P. margin was down 30 basis points in constant currency at 5.1%.
France continued to execute well on GP margin initiatives, which served to offset a significant portion of the lower year over year subsidies that replaced the C. I see.
With the scheduled introduction of the additional fee owned subsidies beginning in October the year over year impact on gross profit margin improves from a decrease of 50 basis points in the third quarter two a decrease of 15 basis points in the fourth quarter.
Activity levels in France continues to be uneven the month of September trend was slightly weaker than the beginning of the quarter trend.
We expect a fourth quarter revenue decreased similar to the rate of decrease for the third quarter.
Revenue in Italy, equaled 377 million, representing a decrease of 4% in constant currency.
This was inline with expectations and represented a 5% decline on the billing days adjusted basis.
This represents a slight improvement from the 6% decrease on the same basis in the second quarter.
Oh, you p. decreased by 5% in constant currency, while O U P margin was flat at 6.2% as a business executed strong management of costs.
Our Italy business is performing well a difficult environment and we expect an improved revenue trend in the fourth quarter, which should result in a slight year over year growth.
Revenue in Spain increased 13% in constant currency from the prior year and represented 10% increase on the days adjusted basis. This reflects the significant improvement from the 4% days adjusted constant currency growth in second quarter.
We expect Spain have another strong revenue result in the fourth quarter.
As previously mentioned, we acquired the remaining interest in our manpower, Switzerland franchise in early April this business represented 5% of southern Europe's revenues and performed well in the quarter.
Our northern Europe segment comprised 22% of consolidated revenue in the quarter revenue declined 5% in constant currency to 1.2 billion.
Organic days adjusted basis. This represented a 6% decline, which was an improvement from the 8% decline in the second quarter on the same basis.
Oh, your P. equaled 21 million Oh, you P. declined 44% in constant currency Upi margin was down 130 basis points. The decline was driven by Germany, the Netherlands in Sweden.
Our largest market in northern Europe segment is the UK, which represented 33% of segment revenue in the quarter.
UK revenues were up 4% in constant currency or up 3% after adjusting for billing days.
This represents a significant improvement from the 1% decline on a billing days adjusted basis in the second quarter. This was a better than expected result.
In Germany revenues declined 17% on a constant currency basis in the third quarter or decline of 19% on a day's adjusted basis, which represented an improvement from the days adjusted decline of 24% in the second quarter.
Germany remains a very challenging market driven by lower manufacturing activity as evidenced by the further decline in manufacturing PMI in September .
Although the market has continued to weaken in Germany, we anticipate further improvement in the revenue trend during the fourth quarter as we continue to anniversary declines in the prior year.
In the Nordics revenues decreased 4% on the days adjusted constant currency basis, driven by Sweden. This represented a decline from the 3% days adjusted gross in the second quarter.
Sweden business has experienced a double digit revenue decline on decrease manufacturing activity, Sweden also experienced a significant decline in manufacturing PMI in the month of September .
Norway continues the strong revenue growth in low double digits during the third quarter and offset a significant portion of the Sweden decline.
As Norway against anniversary very high growth in the fourth quarter combined with decreased demand in Sweden for manufacturing clients. We expect the nordics to experience the revenue declined in the mid to high single digit percentage range in the fourth quarter.
Revenue in the Netherlands decreased 21% on the days adjusted constant currency basis during the third quarter.
Adjusting for the disposition of our language translation business last year. This represent an 18% days adjusted revenue decline, which is a slight improvement from the 19% days adjusted decline in the second quarter.
This continues to reflect the impact of a weaker manufacturing market in the exit of select clients at the end of 2018, largely due to pricing decisions.
Although market activity has weakened in the Netherlands, we expect to slightly improved trend into the fourth quarter as we anniversary prior year declines.
Beginning in the first quarter of 2020, the Netherlands is implementing new regulations, which impacts the staffing industry.
The regulation includes increased pay and related provisions for temporary workers, we're actively working with our clients and candidates to plan for these changes and it is possible. This could result in some reduced demand as clients adjust to the new rules.
Belgium experienced revenue decline of 4% in constant currency or decline of 5% on the days adjusted basis during the third quarter.
This represented an improvement from the 8% days adjusted constant currency decrease in the second quarter.
We expect a similar to slightly improved revenue trend in the fourth quarter.
Other markets in Northern Europe had a revenue increase of 9% in constant currency driven by the growth in Russia, Poland and Ireland.
The Asia Pacific Middle East segment comprised of 12% of total company revenue in the quarter revenue was down 13% in constant currency, the 622 million, reflecting the deconsolidation of the greater China JV following its public offering in early July .
Organically APN may grew revenues by 5% year over year in constant currency or 4% on the billing days adjusted basis.
Excluding the greater China IPO gain.
Equaled 23 million in the quarter.
As adjusted this represented a 29% decrease in constant currency year over year or a decrease of 6% on organic basis.
Oh, you P. margin decreased 80 basis points and on an organic basis decreased 40 basis points.
Revenue growth in Japan was up 8% on a constant currency basis and adjusting for billing days. This represented a 9% growth rate, which was a slight decrease from the 10% growth in the second quarter on the same basis.
Permanent recruitment fees were up 8% year over year.
Our Japan business continues to perform very well and we expect strong revenue trends into the fourth quarter.
Revenues in Australia declined 26% in constant currency. This represented an expected further declined from the 16% decline in the second quarter driven by the exiting of certain low margin business in Australia to improve our profitability.
We continue to expect revenue declines in the next couple of quarters in the double digits percentage range.
Revenues in other markets in Asia Pacific Middle East were down 20% in constant currency as a result of the deconsolidation of China inorganic days adjusted revenue growth was 21%.
This was a result of the strong growth in a number of markets, including Korea, Thailand, Vietnam Middle East and Singapore.
All right management business crossed over to growth in the third quarter with 48 million in revenues, representing 5% constant currency growth year over year.
This represents an increase from the 1% constant currency declined in the second quarter.
So you P. equaled 8 million, an increase of 60% on a constant currency basis.
Oh, you P. margin increased a 150 basis points to 15.5%.
I'll now turn to cash loan balance sheet free cash flow defined as cash from operations less capital expenditures was $459 million for the first nine months of the year compared to 262 million in the prior year period.
The third quarter experienced positive cash flow of 206 million, which compared to 113 million in the year ago period.
At quarter end day sales outstanding decreased by about one day.
Capital expenditures represented $12 million during the quarter.
During the quarter, we purchased 610000 shares of stock for 51 million.
As of September Thirtyth, we have 1.3 million shares remaining for repurchase under the 6 million share program approved in August of 2018.
Our board approves the incremental 6 million share program in August of 2019, which remains unused.
Our balance sheet was strong at quarter end with cash of 807 million and total debt of 1.3 billion, bringing our net debt to 223 million our debt ratios are very comfortable at quarter end with total debt to trailing 12 months EBITDA of 1.25, and total debt to total capitalization at 27%.
Our debt in credit facilities did not change in the quarter at quarter end, we had a 500 million Euro note outstanding with an effective interest rate of 1.8% maturing in June of 2026, and a 400 million Euro note with an effective interest rate of 1.9% maturing in September of 2022.
In addition, we had a revolving credit agreement for 600 million, which remained unused.
Next I'll review, our outlook for the fourth quarter of 2019.
We are forecasting earnings per share in the fourth quarter to be in the range of $2 to $2, an eight cents, which includes the negative impact from foreign currency of seven cents per share.
Our constant currency revenue guidance range is between a decrease of 2% to flat.
Walking from the midpoint of a constant currency decrease of 1% the impact of the net dispositions in excess of acquisitions is about a 1% decline and after adjusting for that our organic constant currency revenue trend is flat year over year.
Billing days are largely the same year over year in the fourth quarter do not impact the trend.
Sequentially. This represents a continuation of the third quarter organic days adjusted flat revenue growth year over year.
We expect constant currency revenue growth in the Americas to be in the low to mid single digits.
With southern Europe growing in the mid single digits with about 4% of this increase driven from the Switzerland acquisition, resulting in organic constant currency growth rate for southern Europe of 1% at the midpoint.
Northern Europe decreasing in the mid single digits with about 100 basis points of the reduction related to dispositions.
And Asia Pacific Middle East decreasing in the double digit teens range with about 19% of this decrease due to the deconsolidation of greater China and the previous disposition in late 2018, resulting in organic constant currency growth rate for eight P.M. me of about 2% at the midpoint.
We expect the revenue trend for right management in the flat to slightly up range.
Our operating profit margin during the fourth quarter is expected to be down 30 basis points compared to the prior year quarter, reflecting a slight improvement from the down 40 basis points trend experienced in the third quarter, excluding the special accounting gain.
We expect our income tax rate in the fourth quarter to approximate 33%.
The fourth quarter impact of the increased French tax rate increase is about half a percent after recording the year to date increase in the third quarter.
As usual our guidance does not incorporate restructuring charges or additional share repurchases and we estimate our weighted average shares to be 59.9 million.
With that I'd like to turn it back to you on us.
Thanks, Jack in this mixed global environment demand for our extensive portfolio staffing services and workforce solutions continues to provide us with opportunities for profitable growth in many markets and brands.
We have a very experienced leadership team that has been through these kinds of conditions in the past and we're managing our global business with great confidence and our ability to adjust our operations as needed whichever direction a specific market takes.
We continue to make the necessary investments to diversify our business mix digitized all aspects of our operations and continuously innovate to create new value.
Our market, leading geographic diversification and our leadership in innovative workforce solutions continues to set us apart from our competitors and we're very proud that our managed service providers Tappin has been recognized by the Everest group as a global leader for the six consecutive year.
Equally important is how we conduct our business, which continues to be recognized and we have recently been awarded two more gold ratings from Ecovadis. The world leader in the evaluation of supplier sustainability, taking our count to 20 countries and we have been included in the Dow Jones sustainability Index in North America.
As well as the foot see for good for the 11th year.
According to our Manpowergroup annual talent shortage survey the largest human capital study of its tight labor market currently shows the highest ever level of talent shortages more than 54% of employees globally are experiencing a shortage versus 30% a decade ago.
We also know from our proprietary research the companies know they need to train talent and their intend to do so has increased from 20% to 80% over just the last seven years, we have unique insights into how to help them bridge their talent needs not only by finding the best talent in the market, but increasingly.
Also by creating the best talent scalable upscaling and re skilling initiatives.
We look forward to sharing more on this opportunity as well as a more detailed update on our digital strategic initiatives in our next Q4 call.
In summary, overall global demand for our services and workforce solutions remains stable.
The need for strategic and operational flexibility remains crucial due to the environments and we are focused on driving profitable growth wherever we see the opportunities.
I would like to thank our global teams for the daily focus on delivering on our brand promise and working hard every day to better serve the needs of both clients and candidates, we remain optimistic but the future work and the future for workers is bright and that this will provide us with opportunities for profitable growth.
I'd now like to open the call for acuity.
Operator.
Thank you.
Begin your question and answers.
I'd like to ask a question you mean.
Hi, New record your name and.
You mean.
Yes questions in queue. The first one is coming from the line of.
From JP Morgan you May proceed.
Andrew I wanted to ask about the U.S. perform it's great to see experienced that you could you just tell us what has changed.
I think it's sustainable and then again on the Gls manpower glad it's sort of hard to tell because of the manufacturing overhead overhead.
Our operation are at a good position to capture growth if the trade up kind of pressures resolved.
Hi, Good morning, Andrew Yes, we're very pleased to the overall performance of the of our business here in the U.S. I think we've seen that continued progress over a number of quarters ended this quarter, we saw really that experis. The investments on the progress we've made operationally starting to pay off of we're pleased to the progress but.
We still we have we still think we haven't what works to do on the manpower aside.
I think we're performing markets clearly, we're starting to see some of the same headwinds here in the manufacturing sector as we see globally.
But we feel good about where we are positioned and we feel coming to market.
We have more opportunities here still so we feel good about the use of business as a whole.
We realized that we still have more work and more opportunities to capture here in the U.S.
But the progress has been good and solid.
Okay got you budgets your remarks.
Could you be of almost specific on Experis said, you've made the investments are paying off is that on the recruiters.
Sales development side, just one more specific about what's working that express.
Well, we've spoken about this in past calls so we see the US is still at market, where we have opportunities for growth. So that's a market where we've been investing in recruiters in sales resources as well as in driving operational improvements in operational excellence initiatives and we're starting to see that comes to very nice.
Finally in terms of the billable hours it rolls build wage growth. The team also as applied some very nice pricing discipline of what's been very pleasing, especially in this quarter's to see that the growth is coming primarily from convenience clients. So smaller clients. So our sales teams are doing a good job locally manner.
Turning to to drive some very strong growth in those in those areas demand for key skills. In particular remains strong in the U.S. and I think it's more a question to find the talent. That's it's clearly a talent constrained market.
But the teams have been executing well and we're pleased to see the progress we've made so far.
Thanks I appreciate it.
Our next question is coming from the line.
From BMO capital markets.
Yeah.
Thanks, So much wanted to focus on the regulatory environment a little base.
I know we've had some proposals.
France up from the current government regarding labor reform can you just give us an update where that stands and where you think.
Could be some impact on your business going forward. Thanks.
I'm wondering just yet I think you're referring to the discussions and the implementation of legislation that is really trying to reflect and manage.
The direct costs for shorter term contracts and so the French government is implementing this in in seven sectors, a seven industry sectors and they're aim is to try and limit the use of the very short term contracts and.
This is still in progress we're still trying to understand the exact mechanics of how this is going to be implemented.
The idea is for the data collection to start around these contracts in 2020.
The first.
First stab at this will be implemented in January of 21, and then every year for the next three years they'll continue to measure the data so that they have a good benchmark and the three your average in terms of the industries that should have the increased direct cost because they are extensive use.
As a short term contracts and Conversely.
The lower direct cost for those industries that have less the use of these short term contracts from our perspective, we think this entirely manageable at this point for number of reasons, we have the ability to upskill and re skilled workforce at scale, there, which is one of the things that drives more direct cost.
For ourselves, but also as more importantly for our clients.
So we think at this point. This is something that is not going to be a truly disruptive for us in may actually provide us with some opportunities in France.
Okay really appreciate the detail as new units and Jack in your prepared remarks, you talked about a new regulation coming in in the Netherlands, and the first quarter next year can you just give us a little bit more color. On then we think the impact on your business maybe there. Thanks.
Yes, Jeff the the Dutch regulation is really related to the temp industry overall, and it's basically increasing.
The employment taxes for temp workers, so the cost of temp workers will go up.
And so this will be effective January onest, we're working through that with our clients. Currently there is other parts of the provisions that relate to pay rolling on payroll is not a big part of our business in the Netherlands. So that that's not going to be a major factor and theres other components regarding transition allowances for temporary.
Workers and those type of things I think that the probably the most significant is going just to be the higher higher costs for temp workers. So we're working through that with our clients.
We have been spending a lot of time planning for that with them currently to some other details around more stringent planning requirements in terms of advance notice for changes to temporary workers, but.
With all that being said the Netherlands is about 3% of our global revenues. So we'll keep you updated on it but it shouldn't have a major impact on the consolidated revenue trend.
And Jeff Jeff just add that to your question there to say that in the Netherlands. We have strong delivery models also there with a focus on upscaling and re skilling and redeployment of talent. So that would help us extend assignments and also sophisticated scheduled model. So I think we're well placed to help our clients adjusted the changes evolving.
Scheduling and planning for that for the is when it when it happens but to jacks point, we're still in the in the early stages. So we'll see how the stands out as it gets implemented.
Okay. Thanks appreciate the detail.
The next question is coming from the line of Seth Weber from RBC capital markets. Your line is now open.
Hi, good morning.
I wanted to just go back and clarify anything.
Two different comments about the France market unison in your prepared remarks, I think I heard you say that France was stabilized.
But then Jack when you talked about sort of the cadence through the quarter. It sounded like August and September were softer.
I'm just trying to.
Hi, those two comments together thanks.
Yes, sure sure Seth.
Really what we were saying was we did see a bit of a decrease from what we initially estimated at the end of the second quarter. So you know that additional step down really came through in the months of August and September from from July So from a quarter overall perspective.
We were down from the flat results in the second quarter. So when we're talking about the stabilization as we exited the quarter and now that we're into October we're seeing a stable level of that decline that we saw step down in August and September So that's really the takeaway there.
And you know as I talked about in my guidance. We're currently expecting France in the fourth quarter to be the level overall equal to the rate of decline in the third quarter.
Okay. That's helpful. Thanks, Jack and then.
Just another clarification you called out some acquisitions that helped.
The U.S. revenue and was that a benefit to to margin as well I mean, the margin was surprisingly strong some destroying it.
Got it make sure there's nothing unusual in that margin strength. Thanks, Yes, no good clarification Seth.
Those were manpower franchises in the U.S. there were three of them they happen relatively late in the quarter. So they didn't really have a big impact on the revenue trend, but with that being said, they're not going to have a big impact on.
You pay margin so that is not one of the reasons or European margin was up in the U.S. I think the main drivers were really what you want us was referring to in the operational improvements on the Experis side.
And.
That was really what was happening there so the franchises and maybe just a little more color on the franchise acquisitions. There were three franchise acquisitions and on an annual basis, it's about 50 million in revenues and that happened at the very end of August so not a big impact on Q3, it will have a small impact on Q4 and that's why.
We call out the organic results and we'll continue to do that as we anniversary those.
Very helpful. Thank you very much guys.
Your next question is coming from the line of George.
You May proceed.
Hi, Thanks. Good morning, you mentioned that the markets are slowing in northern Europe , specifically, Germany, Netherlands, and Sweden can you discuss how Brexit factors into your outlook and which markets showed the most risk of further deceleration.
Well the markets in Germany, Netherlands, and Sweden in particular, our markets that are open economies and they seem to be the markets of the most affected by the uncertainty around the trade and terrorists and.
These those kinds of issues as it relates to Brexit that is something that we're now waiting for the.
Pending Brexit to occur that appears to have cost some of it.
Reduction in investments if you read external reports in the UK. Just this morning, you saw report that estimate that the impact of the potentially up to 1% of the GDP growth already so companies are holding back now having said that from our perspective, our team in the UK is really doing an excellent job mitigating that weakness.
And then looking for new opportunities in the areas in which we just business and it's been it's been great to see how we manage to uncover those growth opportunities doesn't take advantage of all of them. So that we increasing both our topline as well as our bottom line in a market that is quite difficult.
Got it and then can you discuss the pricing environment in France, and how much belief pricing and partially or fully offset the fringe subsidy headwinds to gross margins over the next several quarters.
I would say overall, Georgia, the pricing environment remains rational and it's always competitive.
And as you've seen our teams in France has done an excellent job applying pricing discipline for the quality of service and skills that we were able to provide to all of our clients in France. So so far we've done a very very good job.
Around that and the labor market is quite tight on the labor market on the unemployment rate in in France has come down quite significantly in 2019, and I would just add to that George the subsidy rates improves in the fourth quarter. So our France business has done a great job offsetting that subsidy headwinds of 50 basis points and.
France for the first nine months. So that's a big reason we saw.
Improvements in the GP margin and we expect the pricing.
The the good progress they've made in that regard to continue into the fourth quarter based on actions taken at the beginning of the year and the subsidy level improves was if you own subsidies. So that headwind gets reduced only 15 basis points in the fourth quarter. So we expect price that is the actions to France team have taken to continue.
To help on that you see margin.
Trend.
Very helpful. Thank you.
Next question is coming from the line of Mark Mark of Baird. You May proceed.
Good morning I.
I was wondering if you could talk a little bit about.
Sure, meaning in terms of the outlook going further beyond this current.
Quarter looks like you know, we're going to anniversary some.
We're anniversarying, some really tough comps and so were easy comps and so it seems like.
Things stabilize a little bit we should get a little bit of improvement just wondering how we should think about that and then if you could if you could outline gerrick any any sort of special considerations.
As we model out first quarter in the beginning of next year that we should take into consideration.
Aside from the Netherlands, which you mentioned just anything else that we should we should really keep up to speed on.
Okay Mark.
Maybe first on your Germany question I'd say.
Very good point, we did see the 5% improvement this quarter on a steeper decline in the year ago period and that rate of decrease so we went from that 24% days adjusted decrease down to 19%.
In the onus mentioned that that's what we're seeing a lot of pressure in the manufacturing.
Sector and candidly, we expect that pressure to continue from an external perspective. So we are expecting continued improvement you know to your point, we do anniversary.
Some some even steeper declines in the fourth quarter. So we do expect to improve the rate the revenue trend into the fourth quarter I think beyond that then then we continue to run at an anniversary and so I'd expect.
To see a bit more stable performance in 2020, as we move beyond the fourth quarter and we've fully.
Anniversary some of those very large declines I think it's going to really depend on our ability to hold the associates on assignment stable and as I mentioned last quarter, we've actually been the business has been doing a very nice job of holding associates on assignment stable in Germany. Despite the higher conversions from temp to perm by some of the clients.
And it's really going to depend on the manufacturing industry or the sector overall in Germany being able to.
Continue to hold at a stable level and hopefully improve in the future, but what we've seen lately is further step down so I think thats going to be.
Part of what we continue to monitor in Germany, but we will see improvement as we go forward just based on those anniversaries I think in terms of your second question on the outlook for 2020 in any other factors. So we've talked already about the Dutch regulation.
There is also as we mentioned last quarter some regulation in Japan, that's going to be coming in in the second quarter.
Relating to some equal pay provisions for temp workers as well a bit too early to tell what what the impact of that's going to be we're working closely with our business planning for that as well. We think that's manageable at this stage and I'd say the last item would probably just be the tax rate overall.
All in I'll, certainly give updates on on these items at year end as part of our fourth quarter results, but the tax rate the only big change in the tax rate is France, we expected, France to come down 2% in their corporate tax rate this year.
They canceled that reduction, but it does start up again next year and that should get us back to some improvement in the effective tax rate by about 50 basis points on overall basis year over year.
I'd say those those are probably the main items to think about it this time and I'll give a further update on those topics at year end.
Great and then units I was wondering if I could ask you something.
Given all of your travels around the globe.
These cycles.
As we take a look at the international markets, particularly.
In markets.
Downturns before what inning of the current European softness do you think we're in.
Do you think were.
Early stages or stages in terms of the softness that we're seeing and what are you hearing from your from your people in your clients in terms of how they're thinking about next year developing as the year on pool.
Views Brexit.
Okay settled.
And maybe some stabilization.
Trade issues.
That's a great question, Mark and I would say.
Conversations with clients.
But what you should be somewhat unclear in terms of why they felt a little bit less confidence and why they saw some weakness asking them. The same question today, it's very clear.
The slowing growth environment is heavily driven by the concerns around the trade wars and terrorists to be implemented are having been implemented in many parts of the world and that clearly is the main driver of the slowing of the manufacturing sector, which in turn is driving the slowing or.
Global growth.
It's a little bit different from other down or slow slow slowing environment than we've seen in the past because it's so clearly driven by actions taken by policy makers that are affecting global growth and is now coming through to all parts of the world, including the you less no in looking at Europe and stepping.
In a way, which we would still think that Europe shouldn't be in the middle innings of their economic cycle now being disrupted by this by this.
Certainty around trade and terrorists, having said that the construction of the come conversations we have with our clients are still constructed the labor markets are tight the need for talent in all industries remains very strong and that we can see opportunities.
In many parts of Europe , where the economy overall, the slowing but we can still see up very strong opportunities for Perm growth for instance, Italy, and Spain, and France to name a few had very strong performance, even Germany on on the permanent recruitment side, so there's still opportunities for growth.
And the the key is going to be when these trade rislund the policymakers to site to settle this ongoing tension and then I believe we can move forward in the in an even more constructive way, but from all of my conversations with our clients and in all of the various markets.
That I've traveled to over the last seven or eight months. This is very much feels like a slower growth environment and it does not feel like an acceleration into a more broad based recession.
There are some industries that have troubles, but the service ICANN part of the economy in many countries are still performing well and the consumer is still involved in driving growth. So it it looks like a slow growth environment truly uneven but.
But not an acceleration into a recession at least at this point.
Really appreciate the comments thank you.
Hey, Mark.
The next question is coming from the line is Kevin Mcveigh from Credit Suisse. Your line is now open.
Great and it's just a follow up on Mark's question around that you've got the uncertainty in terms of the open market to Germany and things like that does that trickle into the close markets and you talk about the potential stabilization is that a function of just easier comps for the macro a macro stabilizing or just a function of.
Overall, you're seeing some easier compares and then ultimately.
The macro the stabilization.
You know does that.
Get worse based on tariffs from kind of the the larger countries, Germany leaking into the other shirt or how should we think about that.
Well I think you can see across the.
Many countries that somebody some various on the fixed or the overall slow growth environment. As you would expect as their export clients and recipient markets are are slowing down. So it clearly illustrates that we live in a connected world where the idea that in isolation, you can implement certain policies and hope.
I hope that it doesn't boomerang and come back to you.
It is really not working out in that way, having said that in conversations with our clients at least.
In markets that are that are doing well and even in markets that haven't been doing so well, but are now improving our feeling is that the stabilization is is really happening in many in many of those markets, which is reflected in our own performance now whether we had last that is of course a question that's very good.
To answer depending on.
What other measures policymakers may may take and good or bad.
But we feel that the stabilization we see in some markets is underlying and structural and of course. This is the beginning of the wind of the time when we saw the downturn occur last year being a leading indicator of some of this impact. So of course the comps are also somewhat.
Helpful in some markets, but it appears that some of the stabilization we're seeing at a lower level appears to be more.
More structural than just based on comps.
Thats Super helpful. And then just Jack given where you are.
How do you think about kind of the cost component of it I know you continually look to optimize the margin profile that business should we expect any more restructuring or are you kind of where you are or just any thoughts around that as well.
Yeah, well I'd say from the restructuring we did earlier in the air we are getting that run rate savings that I talked about earlier. So we expected about 10 million a quarter that is coming through based on the actions we took.
And if I look back into the actions, we took where in some of the markets, where we're seeing a lot of the pressure that we talked about earlier in terms of some of the trends in northern Europe , I'd say going forward, we don't pre announced restructuring.
And so what you should expect from US is we'll continue to look at our operations and identify any additional areas for.
Optimization I think from a broader perspective from a cost basis. There's a lot we're doing that doesn't qualify as restructuring we continue to implement.
Great programs to reduce lot of our back office costs and finance accounting shared services. Our technology managed services. So we are getting run rate savings for the actions we've taken in that regard in the past and we continue to implement.
Those actions across the globe and we'll we'll be doing more of that work in Europe .
Our at the moment will continue to be doing that as well. So I think we feel pretty good about our ability to continue to take costs out in the organization and we'll be giving further updates on that in future calls.
Thank you.
Your next question is coming from the line of money.
From Barclays. Your line is now.
Hey, this is Ryan on for Mark.
Just a question on France in terms of some of the new against the data measuring period and is there any risk similar to the Netherlands as this rolls out that there's some hesitancy from clients, who maybe don't want to be known as in the early stages of measurement being heavy users of of agency labor.
Well Thanks line the.
The measure is aimed at all it short term contracts, which incorporates.
Fixed term contracts and other forms of contracts other than temporary staff contracts.
And of course, they are more prevalently used by the industries that are that are really leveraging those kinds of contract. So in actual fact, we believed that there might there might be an opportunity for a shift from the shorter term contracts being used to temporary staffing contracts.
Because of our ability to manage re assignments and redeploy a talent in a scalable and structured way. So it doesn't it's not aimed at the temporary staffing industry per se is aimed at the use of flexible contracts of all kinds in France and in that.
Context, we think that we have a very very good for all that flexibility that that really stands a very strong in the light of these changes in providing good sustainable flexibility for companies as well as for our temporary associates. So it could be.
Opportunity from that perspective, and those short term contract. So two to three times the size of the temporary staffing.
Contract market, so we could it could be an opportunity for us.
Does add to that that what are the main themes around the new legislation is to basically.
Look at unemployment taxes and.
This is point, it's only on seven sectors. If we staffing is not one of the sector. So our cost for our associates won't go up it's it's going to be impacting our clients and.
It's about a third of our business today are the sectors that are impacted by the new regulation. The regulations effective in 2021 2020 will be the year. They do all the mapping of.
History, and the cost effectively.
We think we have a competitive advantage because we have very good reassignment rates of our temps Telus is point, so I think for our clients where staffing companies have the ability to have longer durations of their associates and reus higher reassignment rates for their associates.
They will have an advantage so we feel pretty good about that going into the new regulation in 2021.
Got it thanks very helpful. And then maybe can you talk about how you approach M&A in a market like this I would imagine that.
Multiples of probably come down, but theres, a large degree of uncertainty I mean would you try to take advantage of.
Some of the.
Call it uncertainty or fears around that and look to expand in any way and how should we think about how you approach it given the number of global headwinds that exists.
Strategy really hasn't changed we are very disciplined when it comes to M&A.
We look at many different factors and the areas of interest for us so primarily into higher margin professional skill sets as well as in the solutions there should we.
Go after some some targets, but we we keep on we keep on monitoring the market situation and the ups and downs it may or may not be a triggering factor for us as it relates to M&A.
Got it thank you.
Our next question is coming from the line of Gary.
Bank of America Merrill Lynch. Your line is now.
Hey, Thanks for squeezing me in at the end Jack just one question for you the equity earnings from the China business now that you're a minority owner of that where is that I didnt see you breakout like a new line or or or put that in.
The breakout of interest in other or anything like that so where is it in the piano and how much was it in the quarter.
Yes, I think we gave a bit of a preview on that last quarter. So thats below the line. So that comes in in other income other expense and if you look at the detailed financials in the press release, you'll see miscellaneous income as part of the other income other expense, that's where it's coming in and so.
As I mentioned before we owned 51% of the China JV previously we used to consolidated results came in all.
As part of our consolidated results.
Now that we still are the largest shareholder of the greater China operation, but now we are below 50%. We're at about 36% ownership and that's coming in as an investment in and that comes through the other income expense. So thats part of the reason you're seeing that net income increased year over.
A year in MS miscellaneous income and other income other expense.
It is there hasn't been any change in your expectation that it's like I don't know mid single digits, I guess pre tax that would be.
Millions of contribution quarterly.
Yes, I'd say.
Our expectations on the profitability of the business hasn't changed we feel really good about or greater China.
Business and.
It's performing very well and theres been no real change the expectation. So it will continue to be a good contributors for us It will just come below the line in our equity pickup perfect. Thank you.
Type of one more last question.
Last question is coming from the line.
From Suntrust. Your line is now open.
Thank you I was wondering if you could give us some color about the performance of your various solutions RPL MSP and in the countries that are in decline or are those lines of business tracking the declines in the in sort of the company were the country results or are they demonstrating a deferred.
Topline trend a little bit more resilient. Thanks.
Well, thanks, Toby yes, they are demonstrating more resiliency in actual fact, they're growing at nicely our global offerings MSP is as well as the RPL offerings are doing well, we feel very good about our pipeline in terms of them.
What we're seeing coming coming through in the next in the next quarter. So they are holding up and they're really driven to some different mechanisms.
They are more long term in nature and they are integrate the deeply into.
Our customers operations and I would just add told me just give you a little color, we don't really break out that that level of detail, but just directionally U.S. had good growth in solutions, and our PEO and tap in MSP during the quarter, so that contribute to overall growth in solutions for them in gross profit.
I'd say, France had good growth in the Proservia business in the third quarters wells that contributed to overall growth in solutions.
And.
And I'd say, Australia would be the other big one you know we have a very large RPL business in Australia and from a total solution standpoint, they had nice growth with strong MSP performance as well as a good stable ARPU business there as well.
So to the extent you were going to look at one of the softer geographic regions would would MSP and other in RPL with those actually be growing or we're just declining a little less significantly.
Yes, I'd say, the some of the softer regions.
Bigger RPL businesses for us so the it actually hasn't had a big impact on our solutions business overall like Germany would be good example, Germany. We do have a good sized proservia business and I'd say that is down a bit year over year, but that's really driven by some some isolated items I wouldn't say.
As a broad based trend for the business and I'd say the UK the other.
Big solutions business for us and they had good growth in MSP.
There are PEO was maybe a little softer on on a specific client or two type of reduction in activity, but I'd say that that's probably the story out I don't think there is.
A big change and based on the markets that are seeing a lot of weakness at the moment. Thank you.
Thank you very much and with that we come to the end of our third quarter earnings call. We look forward to.
Speaking with you again in our Q4 earnings call at the beginning of next year. Thank you another good weekend.
Thank you.
That concludes today's conference. Thank you all for joining you may disconnect at this time.
Once again.
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