Q3 2020 ManpowerGroup Inc Earnings Call
Welcome to Manpowergroup third quarter earnings results Conference call. At this time, all participants are in a listen only mode until the Q any session of today's conference. This call will be recorded if you have any objections. Please disconnect at this time and now I will turn the call over to Manpowergroup.
Chairman and CEO.
Sir you may begin.
Good morning.
Welcome to the third quarter conference call for 2020.
On the call with me today is our Chief Financial Officer, Jack Mcginnis.
For your convenience we have included our prepared remarks within the Investor Relations section of our website at Manpowergroup Dot com.
We will start by going through some of the highlights of the third quarter. Then Jack will go through the operating results in the segments, our balance sheet and cash flow and guidance for the fourth quarter.
I will then share some concluding thoughts before we start our Q and a session before.
Before we proceed Jack will now cover the Safe Harbor language.
Good morning, everyone. This conference call includes forward looking statements, including statements regarding the impact of Cobot, 19, pandemic, 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 two of our earnings release presentation includes additional forward looking statement considerations and important information regarding previous SEC filings reconciliation of non-GAAP measures.
Thanks Jack.
So our last earnings call in July much has happened in the world and I'm pleased to say, but we see the early shoots over global recovery, taking hold and during the third quarter and our results reflect a stronger market environment than we anticipated a few months ago.
As a result of the COVID-19 pandemic, we're seeing some of the fastest changes to the global economy with industries like retail hospitality and education previously more resilient than others impacted in ways never seen before.
Other industries, such as Tech E Commerce, and logistics are benefiting from new ways of working a new consumer preferences.
At the same time.
Job protection initiatives have been implemented worldwide and have helped support jobs livelihoods and households.
Around the world governments are mindful of the need to bring confidence back while also managing pressures on health and social services.
As a result of the learnings from the first waves or the pandemic, we do not anticipate a repeat of the wide scale and southern shutdowns that we saw in the first phase.
However, recent increases in COVID-19 cases in many parts of the World will force countries to implement new restrictions to mitigate the spread of COVID-19.
This time more targeted and localized them prior lock stones.
These factors will make the recovery uneven and our experienced management team is prepared to confidently manage the volatility as circumstances dictate.
Fact, we're leveraging the opportunity in this rapidly changing environment to reaffirm our commitment to our strategy of growth through diversification Digitization and innovation and are continuing to fund investments in these areas.
At the same time, we continue to exercise cost controls and drive it further efficiency through restructuring actions.
We're also continuing to adjust our geographic footprint, we're proud of our transformative shift during this crisis and are now even more ambitious about the speed of our future transformation given the lessons we have learned that your independently.
In the third quarter revenue was $4.6 billion down 14.5% year over year in constant currency on.
On a same day organic basis, our underlying constant currency revenue decreased 15% a significant improvement from the 27% decline in the second quarter on the same basis.
On a reported basis, we recorded an operating profit for the quarter of $62 million.
Excluding restructuring charges and a special item consisting of impact from divesting select small country operations operating profit was $117 million down 38% in constant currency, excluding the probably your special item.
Reported operating profit margins was 1.3% down 280 basis points from the prior year and after excluding the restructuring and other special items operating profit margin was 2.6% down 100 basis points from the prior year.
Reported earnings per diluted share of 18 cents reflects the impact of restructuring charges philosophy on dispositions and a discrete tax item.
Excluding the restructuring and special items, our earnings per diluted share was $1.20 cents for the quarter, representing a decrease of 39% in constant currency.
Based on the many conversations I'm, having with our clients and insights from our thought leadership impropriety data I will take a few minutes to share my perspective on what is happening in the labor markets right now and as we look ahead in the near term.
Earlier this year, we asked more than 30000 employers across 40 plus countries when they predicted hiring would return to pre pandemic levels.
At that point, most were anticipating sharp shock and a swift return to normal the V shaped recovery.
The same survey we conducted three months later shows that 60% now think people take even longer towards the end of 21, the much talked about U shaped recovery.
With our global perspective across industries, we see more of a two speed recovery. So.
Some industries and in demand rolls bouncing back faster than others like technology, So manufacturing professional services and construction, well, others, including aviation travel and hospitality impacted for the medium to long term.
For example, we're seeing manufacturing ramp up again, yet shipping imports still causing a lag and light manufacturing, especially related to health care and PV products demand for staff is at a peak.
In retail we wouldn't be usually expecting the traditional seasonal holiday demand, but with restrictions on shutdowns retailers are taking a wait and see approach to shopper behavior. This season.
Auto dish to explains plan to grow as E. Commerce retail growth continues apace and the demand for cyber security data analytics and cloud native software developers is consistently <unk>.
Looking at Labor demand, we believe we'll see a two speed recovery also here with a higher skilled workforce recovering quicker than the lower an unskilled workforce exacerbated by the impact of COVID-19 pandemic has had on some industries that employ lower skilled service workers.
We are seeing an accelerated pace of transformation and the trends we have anticipated for some time are happening at a scale and speed we might not have previously thought possible.
Clients in all industries are continuing to deal with this current crisis responding right now to shifting demand and challenging supply chains together with technology transformation at rates that they were not prepared for all while planning for 2021, we.
We believe employers will look for operational and strategic flexibility in an uneven economic recovery and the policymakers will be focused on measures encouraging jobs markets to rebound as quickly as possible.
In this current climate, especially we are confident that our strategy of Digitization diversification and innovation is the right one.
Our investment to grow Experis professional resourcing and I T expertise sets us up for even stronger growth following the pandemic as companies continue to accelerate technology investments.
Talent solutions the brand we launched in January combining our higher value global market, leading offerings, our PEO right management and TAPFIN MSP continues to help clients with customize workforce solutions in this downturn, what prepare them for future growth.
We are proud of our global leadership in this space in August our TAPFIN MSP offering was the only company our industry to be recognized by the Everest group as both a star performer and global leader in its contingent workforce management index, scoring highly for decisions that energy and innovation. This.
This impressive accolade also recognizes captains analytics platform until they reach part of member groups Best in class takes that powers suite, which offers advanced data analytics and benchmarking to provide clients with talent attraction retention and development for both contingent and permanent talent.
Our manpower brand market, leading footprint will enable many organizations to leverage operational and strategic workforce flexibility as they navigate the short and long term effects of the pandemic well.
We're also continuing to make good progress on our technology roadmap and the scaling it speed of our top down and bottom up innovation initiatives one.
One of our main innovation initiatives is our might pass program, which is now scaling to 14 markets. This year and next across both our manpower and Experis brands.
Data and learnings to date on how to identify adjacent skills assess cogent upskill have allowed us to shift and we skilled people that speed from declining the high demand sectors. During this pandemic. We've also upskill more than 2000 of our own talent agents to be expert in assessment than data driven recruit.
And and continue to improve and we assignment rates improved utilization rates and increased satisfaction levels with those clients and candidates that engage in my best.
We also continue to invest in our center of excellence and people analytics and assessments led by our chief talent than data scientist and a 40 plus strong global innovation team we.
We are accelerating the deepening whitening and we finding about proprietary data.
We know data on its own does not bring value. We also know that our vast access to people workers clients jobs together with our aggregate data around interactions experiences and approach combined with our meaningful Limpert durations are what create the insights and actions that can bring data driven changes in behavior.
This is how we are accelerating our progress around AI, driven recruitment and scaling up to ensure recruiters can use data based decision, making for the best match to help clients better predict performance and to support a candidate its by knowing more about their skills and potential.
I would now like to turn it over to Jack to take you through the financials and country performance details.
Thanks, Jonas revenues in the third quarter came in above our constant currency guidance range. Our gross profit margin also came in above our guidance range.
Reported basis, our operating profit was 62 million.
Tuning special items, consisting of restructuring charges and a loss on dispositions operating profit was 117 million representing a decline of 37%.
For a decline of 38% on a constant currency basis.
This resulted in an operating profit margin of 2.6% before restructuring charges and other special items, which was above the high end of our guidance.
I will cover the restructuring charges and dispositions in more detail by segment.
Breaking our revenue trend down into a bit more detail after adjusting for the positive impact of currency of about 2% our constant currency revenue declined 14.5%.
The impact of acquisitions and billing days were minor, resulting in organic days adjusted revenue decrease of 15%.
This represented a significant improvement from the second quarter revenue decline of 27% on a similar basis.
This also represents five consecutive months of improvement beginning in May when governments began lifting countrywide lockdown requirements.
On a reported basis earnings per share was 18 cents, which included the restructuring charge, the 50 million, which represented a negative 72 cents.
Certain discrete tax charges of 12 million and a loss from dispositions of $6 million, which combined had a 30 cents negative impact.
Excluding the restructuring and other special items earnings per share was $1.20, which is.
Which exceeded our guidance range and put it.
Included within this result was improved operational performance and 47 cents three.
Three cents on better than expected foreign currency exchange rates before restructuring and other special items.
Four cents on an improved effective tax rate and three cents on improved interest and other expenses.
Looking at our gross profit margin in detail our gross margin came in at 15.8%.
Underlying staffing margin contributed to a 20 basis points reduction and a lower contribution from permanent recruitment contributed to a 30 basis point reduction.
This was offset by 20 basis points of increase gross profit margin from career transition growth within right management.
Other an accrual adjustments include about 20 basis points of favorable direct cost adjustments in France, partially offset by decreased margin in our Proservia managed services business.
Next I'll review, our gross profit by business line during.
During the quarter the manpower brand comprised 65% of gross profit.
Experis professional business comprised 20% and talent solutions brand comprise 15%.
During the quarter, our manpower brand reported an organic constant currency gross profit decrease of 17%.
This was a significant improvement from the 37% decline in the second quarter.
Gross profit in our Experis brand declined 19% year over year during the quarter on an organic constant currency basis, which represented a slight improvement from the 20% decline in the second quarter.
Although experis revenues were only down in the very low double digits percentage range during the quarter. The lower contribution from Perm gross profit combined with a higher mix shift to enterprise clients and lower utilization of consultants within our Germany I T end user support business drove a more significant gross profit decline.
Sales solutions includes our global market, leading RPL, MSP and right management offerings.
Organic gross profit growth in the quarter decreased 2% in constant currency year over year, which is a significant improvement from the 12% decline in the second quarter.
This was primarily driven by our career transition activity within our right management business, which increased double digit percentages year over year during the quarter and our MSP business, which grew mid single digit percentages, while our RPL business improve the rate of revenue declined significantly during the third quarter from the second quarter trend.
Our reported yesterday and the expense in the quarter was 664 million, including the restructuring charges of $50 million and Watson dispositions of 6 million.
Excluding special items, SG and they have 608 million, representing a decrease of 46 million from the prior year after excluding the prior year gain on the China IPO.
This underlying decrease was driven by $60 million of operational cost reductions offset by an increase of 12 million from currency changes and $2 million from acquisitions.
On an organic constant currency basis, excluding special items associated expenses decreased 9% year over year.
Assuming a expenses as a percentage of revenue in the quarter represented 13.3% excuse.
Excluding restructuring and other special items, which continue to reflect the significant deleveraging on the material drop in revenues year over year.
As a result of strong cost management actions across all of our businesses.
In fact of revenue and gross profit declines was significantly offset by SGN a decreases.
The Americas segment comprised 20% of consolidated revenue.
Revenue in the quarter was 929 million a decrease of 11% in constant currency.
Including restructuring costs or U P. Equaled 32 million I know you've seen margin was 3.4%.
Excluding restructuring costs or U.P. was 48 million I know you P. margin was 5.2%.
Of the $17 million of restructuring costs 15 million related to the U.S., primarily representing the closure of real estate as we eliminate fixed costs based on accelerated digitization activities.
The balance of the restructuring costs related to Canada and were real estate related.
You asked is the largest country in the Americas segment, comprising 62% of segment revenues rose.
Revenue in the U.S. was 579 million, representing a decrease of 13% compared to the prior year.
Adjusting for billing days and franchise acquisitions. This represented a 16% decrease which is an improvement from the 23% decline in the second quarter.
During the quarter or U P for our us business decreased 14% to 34 million excluding restructuring charges.
Oh, your P. margin was 5.9%, excluding restructuring charges and reflected the benefit of higher margin career transition activity within right management.
Within the U.S. the manpower brand comprised 33% of gross profit during the quarter.
Revenue for the manpower brand in the U.S. was down 21% when adjusted for days and franchise acquisitions.
The Experis brand in the U.S. comprised 30% of gross profit in the quarter.
Within Experis in the U.S. I T skills comprised approximately 80% of revenues.
Revenues within our IC vertical within Experis U.S. declined 15% during the quarter and total Experis U.S. revenues declined 16.5% as the finance and engineering verticals experienced more significant decreases.
Sound solutions in the U.S. contributed 37% of gross profit and experienced revenue growth of 7% in the quarter.
Within right management in the U.S. revenues increased 30% year over year, driven by significant career transition activity during the quarter.
The U.S. MSP business continues to perform very well in the current environment and again experienced year over year increase revenues during the third quarter.
The U.S. RPL business experienced a significant improvement in the rate of revenue decline during the third quarter moving to low double digit declines in the third quarter and also recently added new RPL clients, which we expect will drive further improvement in future periods.
Provided there are no significant reversals of reopening activities across the us in the fourth quarter, we expect ongoing improvement and an overall rate of decline in the U.S. of minus 8% to minus 13%.
Our Mexico operation experienced a revenue decline of 9% in constant currency in the quarter, representing a slight improvement from the 10% decline in the second quarter.
Business environment in Mexico continues to be challenging as a result of the COVID-19 crisis.
Revenue in Canada declined 10% in constant currency during the quarter adjusting for billing days. This represented an 11% decrease which was a further decrease from the second quarter.
Did the exit of certain lower margin enterprise clients during the quarter.
Revenue in the other countries within Americas declined 6% in constant currency.
Southern Europe revenue comprised 46% of consolidated revenue in the quarter right.
Revenue in Southern Europe came in at 2.1 billion a decrease of 15% in constant currency. This is a significant improvement from the second quarter trend driven by France and Italy.
Oh, you p., including restructuring costs and the loss on dispositions equaled 72 million sooner.
Excluding restructuring costs and loss on dispositions O U P decreased 30% from the prior year in constant currency no U.P. margin was down 90 basis points.
The dispositions represent the sale of our Serbia, Slovenia, Bulgaria, and Croatia businesses to a franchisee, which should be beneficial for the profit margin of the region going forward.
Of the $8 million of restructuring cost in the region, just under half relates to Spain for real estate optimization and streamlining of operations about.
About a quarter relates to Italy for real estate optimization.
About 20% relates to Switzerland for real estate optimization, and the small remaining balance related to streamlining and other southern Europe countries.
France revenue comprised 57% of the southern Europe segment in the quarter. It was down 17% from the prior year in constant currency.
This reflects the progressive improvement over the course of the quarter.
Oh, you P. was $51 million in the quarter I know you P. margin represented 4.3%.
As I mentioned earlier, France benefited from direct cost accrual adjustments in the quarter, which improve their all U.P. by approximately $10 million.
Although improvement has been steady in France the rate of improvement in the revenue trend has slowed in recent weeks.
We are cautiously estimating a gradual improvement in the rate of decline for the fourth quarter of between minus 10% to minus 15% on a constant currency basis.
Revenue in Italy, equaled $351 million in the quarter, representing a decrease of 12% in constant currency after adjusting for billing days.
This reflects a progressive improvement over the course of the quarter, excluding restructuring charges. So you Pete declined 29% year over year in constant currency to 17 million I know you P. margin decreased 130 basis points to 4.9%.
We estimate that Italy will continue to see gradual improvement in the rate of revenue decline during the fourth quarter with the decline within a range of minus 7% to minus 12%.
Revenue in Spain decreased 6% on a days adjusted constant currency basis from the prior year in the quarter.
This represents a significant improvement from the 13% decrease in the second quarter.
New and Switzerland decreased 13% on a days adjusted constant currency basis from the prior year in the quarter.
This represents a significant improvement from the 19% decrease in the second quarter.
Our market, leading Swiss business has been performing well in a challenging environment.
Our northern Europe segment comprised 21% of consolidated revenue in the quarter revenue.
Revenue declined 22% in constant currency to 948 million.
Oh, you p., including restructuring costs represented a loss of 23 million.
Excluding restructuring cost.
Was $2 million in all European margin was 20 basis points.
Of the $24 million of restructuring costs, two thirds relates to Germany, where we have streamlined our operations, notably within our Proservia business and have taken additional actions to reduce finance and shared services back office costs about.
About a quarter related to the Netherlands, where we have streamlined our operations and the balance relates to the UK in Sweden, where we've also streamlined operations.
Our largest market in northern Europe segment is the UK, which represented 34% of segment revenue in the quarter.
During the quarter UK revenues decreased 22% in constant currency, which was unchanged from the second quarter trend.
We're cautious in our outlook for the UK business and estimate a slight improvement in the rate of revenue decline in the fourth quarter.
In Germany revenues declined 32% on a constant currency adjusted for billing days basis in the third quarter, which was unchanged from the second quarter trend through.
The restructuring actions, we took in the third quarter will improve the profitability of this business in future periods.
We remain very cautious on our Germany business in the near term and only expect very slight improvement in the revenue trend in the fourth quarter.
In the Nordics revenues declined 15% on a days adjusted constant currency basis.
The two primary businesses in the Nordics, our Norway and Sweden.
On a days adjusted constant currency basis, Norway experienced a decline of 11% in Sweden declined 21%.
Both countries experienced a significant improvement in the rate of decline from the second quarter trend.
Revenue in the Netherlands decreased 23% in constant currency, which represents a very slight improvement from the second quarter trend on a days adjusted basis.
Belgium experienced a days adjusted revenue decline of 29% in constant currency during the quarter, which reflects significant improvement from the second quarter trend.
Other markets in Northern Europe had a revenue decrease of 5% in constant currency.
This reflects significant improvement from the second quarter.
The Asia Pacific Middle East segment comprises 13% of total company revenue.
In the quarter revenue decreased 6% in constant currency to 596 million.
EMEA region continues to perform relatively well during this crisis.
Excluding restructuring charges in prior year gain on the China, IPO, Oh European margin decreased 90 basis points all of it.
All of the $1.5 million of restructuring costs involve Australia, where we continue to simplify the business after exiting certain low margin staffing clients.
Revenue growth in Japan was up 5% on a constant currency basis and after adjusting for billing days. This represented a 6% growth rate, which was equal to the growth rate in the second quarter.
Our Japan business continues to perform very well and we expect the revenue trend of flat to low single digit growth in the fourth quarter.
Revenues in Australia declined 7% in constant currency on the days adjusted basis. This.
This represented a significant improvement from the 21% decline in the second quarter as we anniversary the exiting of certain low margin business.
Revenue and other markets in Asia Pacific Middle East declined 10% in constant currency.
I'll now turn to cash flow and balance sheet free cash flow equaled $685 million for the first nine months of the year.
This compared to underlying free cash flow in the prior year of $356 million after excluding the sale of the France see I see receivable.
During the third quarter free cash flow equaled $108 million compared to $206 million in the prior year quarter.
At quarter end days sales outstanding decreased by about three days collect.
Collection activities continued to be one of our top priorities capital expenditures represented $31 million during the first nine months of the year.
We did not purchase any shares of stock during the third quarter and our year to date purchases stand at 871000 shares of stock for 64 million.
As of September Thirtyth, we have 5.9 million shares remaining for repurchase under the 6 million share program approved in August of 2019.
Our balance sheet was strong at quarter end with cash of 1.59 billion and total debt of 1.09 billion, resulting in a net cash position of 500 million.
Our debt ratios remain comfortable at quarter end with gross debt to trailing 12 months EBITDA of 2.21, and total debt to total capitalization at 29%.
Our debt and credit facility did not change in the quarter and the earliest euro note maturity is not until September of 2022. In addition.
In addition, our revolving credit facility for 600 million remained unused.
Next I'll review, our outlook for the fourth quarter of 2020.
Our guidance continues to assume no material lockdowns impacting economic activity in any of our largest markets on that basis. We are forecasting earnings per share for the fourth quarter to be in the range of $1.60 to $1.14, which includes a favorable impact from foreign currency of three cents per share.
Our constant currency revenue guidance range is between a decline of 10% to a decline of 12%.
The midpoint of our constant currency guidance a decline of 11% also reflects the organic days adjusted rate of decline as billing days for Q4 are only very slightly higher year over year and the impact of net dispositions is also very slight.
This represents an improvement of about 4% from the organic days adjusted constant currency decline of 15% in the third quarter.
We expect our operating profit margin during the fourth quarter to be down 130 basis points compared to the prior year the surface.
This reflects continued strong cost actions, but at lower levels of year over year, SGN, a reductions as activity levels progressively increase.
We expect our income tax rate in the fourth quarter to approximate 39%, which continues to reflect an outsized impact of the French business tax effect that I discussed in previous quarters.
Late September the government of France issued their preliminary budget for 2021.
France is planning to reduce the French business tax known as CV AG Bye.
By 50% in 2021.
If the budget is approved as drafted this would improve our pre crisis level global effective tax rate by 3% to 3.5%.
This improvement in the effective tax rate would be partially offset by higher compensation costs attributed to profit sharing schemes in France.
Additionally, France has indicated that they continue with their multi year corporate tax reform schedule, which is expected to separately reduced the France corporate tax rate by about 3% next year and.
And the impact to the consolidated effective tax rate is a reduction between 50 and 75 basis points.
I will give a further update on the anticipated impacts from these items at our fourth quarter earnings call. After the French budget is formally approved by the government.
As usual our guidance does not incorporate restructuring charges or additional share repurchases and we estimate our weighted average shares to be 58.6 million.
I will now turn it back to you on us.
Thank you Jack we're very well positioned to leverage to lasting legacy of the pandemic new work models with more flexible remote work more focus on health and wellbeing greater use of technology and fast changing skills shifts and the need for strategic and operational workforce transformation at scale and.
Speed.
Let me also say how incredibly proud I am of the critical work our talented teams have provided by helping people and companies around the world respond and reset following these unprecedented crises.
From redeploying and re skilling catering and hospitality workers to new roles in end demand sectors like logistics virtual customer service and pharmaceuticals to redeploying financial programmers to install them program cobot testing robots and providing the skilled I T talent lab technicians and skilled workers for PDP production.
We have remained steadfast in our purpose and committed to providing our clients candidates and our communities around the world of skilled panels and meaningful employment.
All with health and safety at the center.
And I, thank all of our people for their expertise professionalism and dedication when so many of them are managing their own personal challenges in these unprecedented times.
We can be certain to helping people adapt from declining industries and jobs growth sectors and future proof roles will be critical in this next normal.
And they will be the responsibility of business government and educators to support people with Swift targeted upscaling programs. So that value creation is shared with them. Many not just with a few for the benefit of us all.
At Manpowergroup, we're fully committed to being part of the solution and the actions, we're taking to digitize diversifying and innovate will position our company for further success in 2021 and beyond.
I would now like to open the call for acuity.
Operator.
Thank you we will.
Now begin the question and answer session.
Ask a question please press star one.
Please unmute your phone and record your name.
Record your name clearly.
Yes.
Yes.
Your request.
One moment please for our first.
Yes.
Our first question came from the line.
Your line is now.
Hi, It's Andrew I'm, hoping this isn't an end play question, but Ah So Jack when you.
Jack when you started talking about fourth quarter Guide you said no material locked down impacting economic activities is your assumption and so my question is what did you mean by that did you mean that the lock down just don't get worse or that the current lockdowns aren't having a meaningful impact on economic activity.
Like for example, our our French economists expecting zero.
Oh GDP in France in the fourth quarter, you know how to how does that square with the assumption that you're making I assume and getting worse locked down or in a car locked out there not having an impact.
Yes, Thank you Andrew and good morning, I would say what really it's the latter the current Lockdowns. We are obviously talking with our French business and analyzing the impact of the current locked down but on our business specifically the current lockdowns are not having a significant impact so our businesses content.
Selling they're adopting to the new restrictions in place and it's not currently having an impact in terms of the way we're looking at the current trends and the way we've done our guidance. So it's I'd say, it's been factored in what we're really trying to say is we're not seeing any additional.
Changes beyond that really were getting at you know the more towards the risk of more country wide Lockdowns and that's that's the risks that we don't have incorporated into our guidance, but it is incorporating the current restrictions that we are operating well.
Within our countries today, that's that's super clear enough I'd just add on when you when you talk about fourth quarter, France being down 10% to 15% for the fourth quarter guide is that what you're already seeing in October.
Ah Yes, a trend reflects what we're seeing in October I think what you know Andrew in terms of our analysis of France. You know, we did indicate great improvement in the third quarter, but the rate is slowing down. So we are seeing a slowing rate in our guidance and incorporates the.
That will continue to improve but but at at the level now which is a slower rate of improvement, but that's what we're anticipating in October reflects you know us.
A slightly better trend than we saw in September perfect. Thank you.
Thank you.
Next question comes from the line.
Please your line is now.
Thank you I just had a broad question you know I think.
Stuff, but.
And I mean.
Flexible option for an uneven recovery I was just wondering in terms of new that fine line. This uncertainty like what are you hearing from your employer's right now.
In terms of bag and scaling up are you just waiting it out too I don't know another year or so.
Good morning, Matt.
What we're hearing from our clients today is that they are seeing their activities return, but their horizon in terms of how long a durable and to what degree that improvement is likely continue means that they are very interested in operational flexibility and I think thats exactly reflected.
In our Q3 results, which was a faster recovery than we had anticipated and as Jeff just as indicated of course looking ahead, we expect that rate of improvement to continue although at a slightly slower rate and that is very consistent with what we tend to see in recoveries.
After recessions where service.
Services and solutions are.
And as the operations are improving the demand is improving but there is a degree.
Degree of uncertainty that means that employers are really favoring our services and to that I would add what was very encouraging also in the Q3 is to see they weren't significant improvements in our permanent recruitment numbers that moved up quite significantly down.
Quite significantly down from a from a minus 43% in Q2 up to a minus 27% in Q3 and we saw that reflected also in our fuel operations, so helping us airlaid clearly not only looking for contingent of staff to help them, but also.
Starting to one to employ so some people also on a permanent basis and we think that that's a trend that will also continue going into the fourth quarter.
Got it that's helpful and throughout the call there was a lot of real estate optimization I guess.
You've done a lot of that you've done this over the past years as well was this current leads more.
More a factor of works from home or lack of activity or maybe asked another way how much of this is permanent and how much do you need to ramp up and things get back to normal.
Well you could hurt you hear me say in the prepared remarks that we've had some learnings from the pandemic and I would say our confidence in our strategy around real estate optimization that you've seen us do over many years now is really reaffirmed by what we're seeing and living under here during the pandemic.
We can operate and run our business very effectively on a relative basis was we don't anticipate that we will be going fully resolved and we believe the there is great value in our last mile delivery capabilities through our office network. What is also clear is that with the help of process change supported by.
<unk> technology, we can do all the work in different ways, and we anticipate that that will accelerate in terms of what our candidates are accepting and wanting to see as a lot of what our clients are expecting and wanting to see which will give us further opportunities for real estate reviews, and you're seeing some of the early signs of that.
In the third quarter.
All right. Thanks, guys appreciate it.
Thanks, Mike.
Thank you our next question from the line.
Jefferies. Your line is now open.
Hey, good morning.
You'll notice I think you talked about a two speed recovery in your prepared comments could you maybe talk about how much of your business is lever do you don't faster growth versus industries that may take a while to recover travel leisure et cetera.
Thanks, Hamzah, yes, our exposure to the most heavily negatively impacted industries is very low.
Because we're not really represented in the hospitality industry aside from from some countries. So at large I would say, we're better positioned on the faster growing industries.
Other than those most heavily impacted by the end of it.
And I would just add on to that Hamzah I think you know maybe a little bit more detail in terms of the sectors. So I would say manufacturing to the onus is comments is about core manufacturing is probably about 40% of our business today within that we've talked about auto being in the range of around 7%.
And currently food and beverage has been very strong that's about 7%.
Pharma within within that is about 6% manufacturing of computers electronics about 6%. So you know all other manufacturing about 14% of that 40, I'd say logistics transportation and storage is about 8% that's been very very strong.
Construction is about 5%. So it gives you a little bit of flavor on some of the manufacturing.
Sectors I think on the communications Thats been very strong for us that's about 10% financial services insurance is about 5% to 10% for us as well. So it gives us a bit of a feel and you know and as you know that said the our exposure to hospitality.
And tourism is very very small.
Very extremely helpful and just my follow up question I'll turn it over.
Could you maybe talk about the four low our dynamic this employment cycle and then how you see that impacting growth you know historically your business coming out of a downturn recovered as quickly really as it went down and so it just any thoughts high level as to you know the furlough dynamic I know you provided.
For guidance, but sort of just a longer term question on this dynamic. Thank you.
We think the furlough dynamic that we've seen during this pandemic has you know a short term positive effect in terms of keeping people on the payroll and frankly from our perspective, it's something that we've been able to use as well to maintain a productivity levels as high as possible.
As activity went down the Middle then of course also provides us with the opportunity to ramp up quickly. Once we saw demand pick up again, so from that aspect. It's been positive in terms of structural change long term compared to other recessions. We don't really think that this will play in any significant way.
Have a timing effect or companies are bringing back for a lot of workers first but if so we think it's going to be just a lag effect in some countries and frankly, we have not seen that so far be a factor in the speed of recovery matching the pickup of demand.
And with our clients.
Got it thank you so much.
Thank you.
Question is from the line.
Okay.
Your line is now open.
Thanks, So much you unless you just touched upon my question a little bit in your answer, but I wanted to drill down a little bit further.
You talked before about how your customers are dealing with their own staffing requirements in terms of the rebound can you talk about your own internal staff, where that stands now relative to pre pandemic and are you expecting to increase that over the next few quarters.
Well I'll, let Jeff talk about some of the numbers, but specifically in terms of government assistance furlough programs by enlarge we're now out of the usage all of those.
In most countries with the exception of Germany, but we expect to fade out of those programs over the next two quarters and as I mentioned in my response to Hamzah. What we've done is really use those programs to mitigate the drop in demand during the depth of the pandemic, but then very quickly bring people back on.
On to our roles and we saw productivity.
Okay, and then move up so we could meet the demand, but just maybe give you a few more aspects to that yet Jeff I'd be happy to give you a little more detail around that so at the end of September if you look at our F. T. He is year over year were down about 11%.
And I would say to put that in context that you know that is lower than it was at the end of June at the end of June we were down about 18%. So as I talked about when I talked to the trends in our SGN, a we have been bringing people back based on the increased demand that we've been seeing in our business.
Is and our guidance in Q4 continues to anticipate that now with that being said if if there is a you know any changes to the trajectory well make adjustments accordingly, but but we are continuing to manage our ft. Very carefully I think you know separately we talked through.
The restructuring actions, we've taken this quarter that will reduce so our FTC permanently based on that we've talked a lot about the real estate actions we've.
Actions, we've taken as well that will go a long way, reducing some of our fixed cost as well, but hopefully that gives you a bit of a flavor on where we are enough to use yeah.
Yeah, that's actually extremely helpful and for a follow up also in your prepared remarks, you talked a bit about what was happening towards the end of the quarter and the beginning of this quarter in France.
Are there any other major trends that you can highlight some of your larger countries in terms of how you ended threeq and Fourq has begun.
[noise], Yeah I sure.
Sure I would say that the trends in France is pretty similar to what we've seen in I'd say, our top three countries U.S., we saw nice steady improvement over the pace of the third quarter were seeing that improvement continue here into early October, but I'd say the comments about.
Slowing that up.
That applies to the U.S. as well so great improvement during the third quarter, but that trend of improvement, continuing but slowing and and that's factored into our overall guidance I would say the same for Italy, you know very very strong improvement and we see trends in October that indicate continued improvement into the fourth quarter.
Order I would say on the UK, it's been a bit more sluggish or the UK is not seeing the same level of improvement.
I don't think that's I don't think that's a surprise based on some of the data on the UK and some of the uncertainty in that market. Currently and then I would say the other large country wouldn't be Japan, which is you know continuing to see phenomenal growth in a very difficult environment. So I'm very pleased.
Pleased with their growth in Q3, and we anticipate.
Good performance in the fourth quarter as well, although slowing a little bit, but we will still anticipating closer to flat to very slight Japan. So that's what I would say in terms of the top five countries.
Okay. That's really helpful. Thanks, so much.
Our next question is from the line of Mark.
Your line is now open.
Hi, Good morning, Yonah subject I was wondering if you could drill down a little bit.
Yes in terms of our coming off of a bottom.
Comparing and contrasting.
The recovery in terms of manpower brand.
Versus experience.
The trends have unfolded and and what you're seeing now is how do you think.
Plays out over the coming quarter, and then I have a follow up thank you.
Good morning, Mark Yeah, we saw a good recovery in Q3.
With with really a quick improvements from the minus 35% decline in manpower. So we as Jack just indicate that you expect to see continued improvement into Q4, but at a slower rate talent solutions can really came back very soon.
Oh, and then you heard us talk in our prepared remarks about the strength and rights management firm enough placement perspective from an MSP perspective continued good growth in a very very strong rebound from our appeal that that now is at a much better position with a very strong pipeline that we expect to.
Continued to perform very well for us into the coming quarters, and then Experis you know as we had expected could still see some overhang from some enterprise clients and projects and we talked about this in the end of Q2, but overall performing to our expectations with more opportunity as we look ahead, there as well.
Okay.
To be honest can you can you talk a little bit more about experis just in terms of how the monthly trends are going to hold it and.
Have you have you kind of hit a bottom there and it's starting to bounce back or.
Should it stay at these levels and to what extent is that.
Primarily driven by specific clients that you have exposure to relative to what you would anticipate you know the overall industry is doing in terms of whether its ice year after that.
Hey, Mark I can add a little more detail on that so I'd say looking at Experis. We went from minus 12% in Q2 to minus 16.5% constant currency in Q3. So what we said at the end of Q2 as we were starting to see select enterprise clients. There there was some.
Slowdown mainly due to some projects that were expiring some of that was actually COVID-19 related projects and then we saw that as we exited the second quarter and we anticipated that that would run through the third quarter and pull the rate down a bit so that was anticipated I would say it really.
Is a CPA select clients I would say that that work was a lower margin in the scheme of things a experienced U.S. actually expanded their GP margin in the third quarter year over year, which was great to see so margin is holding up very very well in the experis business and I would say, what we're seeing now going.
The into the fourth quarter is it it's holding pretty steady and so I think you know our and our anticipated.
Guidance for the U.S. for the fourth quarter is steady improvement and we're expecting a slight improvement in experis as well.
Great and then from a longer term perspective can you talk a little bit about.
You know the anticipation in terms of the you mentioned the lockdown activities in France is it your general expectation.
Qatar, there's lockdowns will be targeted across all of Europe in the same manner and.
And how you're thinking about that and then specifically in France Jack.
Jack can you talk a little bit more about the French tax rate in 21, because that seems like a real positive.
Mark what we're seeing across Europe are different forms of lockdowns, depending on the country, you've seen Ireland, just implement a pretty significant lockdown posture for the next two weeks, but overall, we believe that the governance.
Our trying to.
Targeted a social distancing lockdown measures today to avoid having to resort to the more wholesale material lock down that way.
That we saw in the spring because they were very damaging to the economy and based on what we've seen and I just came back from a long trip in Europe visiting all of our major markets. All governments have indicated that there is their desire is not to return and their intent is to do everything possible.
Well not to a return to the whole say locked down approach that they had in the spring, but rather the effect the spread of the virus by controlling you know the socializing aspects that appears to be the main source of the spread of the disease by shutting Dar.
Ours, reducing hours when people socialize outside of their home and things like that so that's really what we're expecting and I think it is reasonable unless things taken dramatic turn for the worse across the continent that that's what we'll see in most major European economies.
And mark on the CV or the French business facts, you know I think I guess the way I would.
Phrase that is it's it's easier to put it in perspective, when you think about our pre crisis effective tax rate and so we've talked about a pre crisis effective tax rate around 34% that was our original guide for 2020 before the crisis and know that the French business tax has an outsized impact and we've been obviously above that rate.
But if you think about that 34%, we've always said the French business taxes about 6% to 7% of the 34%. It really it really has a significant impact on our global effective tax rate and the free.
The French governments indication that they're looking to reduce that by 50%. So think of that 6% to 7% will really be reduced by about 3% to 3.5% and so that's a that's a good way to think of it I think as we are operating here in 2020 at reduced levels of profitability that.
Lunch business tax has temporarily had an outsized impact so that's been much greater than the six or 7%. This year that we talked about in previous quarters, although it is improving so.
So as we go forward I would think that reduction is going to help that outsized impact and it will lower our effective tax rate. If it's if it's approved as currently drafted.
Terrific. Thank you.
Thanks, Mike.
Thank you next question.
It's from the line of Kevin.
Yes.
Your line is now open.
Great. Thanks.
Checker units.
Since it's the trends in the gross margin.
It seems like it professionals and stronger than than maybe some of the let's just skills.
Seems like the margins year on year, so still some pressure there maybe help us understand what's driving that.
Yeah, Yeah, Yeah, Kevin I'd be happy to I actually wouldn't say that I would say that margin has held up fairly well overall.
This year and that actually has been a a positive due to you know what we've been seeing in terms of the staffing margin in our businesses and you can see on the GP bridge that staffing margins actually held up quite well and we've seen we've seen that pretty consistently over the last couple of quarters, we did call out.
We did have a positive benefit from some direct cost accrual adjustments and we put that to the side.
Our GP margin walk, but I would say on both the manpower and the Experis business, we've actually seen pretty stable margin from we've acknowledged the the shift to the enterprise client, but I think in the scheme of things. If you look at our staffing margin itself.
Actually held up very well year over year. So I would say you know and when we look at our some of our largest countries.
The U.S. a margin has gone up year over year GP margin, Japan has gone up year over year, Canada, France has gone up year over year. So we're seeing actually pretty stable conditions from a you know in terms of the trend that we're seeing going into the fourth quarter on some of the staffing margin.
Got it and then just check any thoughts on buyback I know youve caused quarter would you.
You feel comfortable kind of reengaged in or how you think.
[laughter].
Yeah, I guess, Kevin I'd say when it comes to capital allocation you know our strategy has not changed I think looking back at you know at the when we ended the last quarter. We were pretty open that we were still early on in the recovery.
And we're very focused on the balance sheet and balance sheet strength I think as we sit here today, a I would say we have a very very strong balance sheet.
We're very well positioned and you know, we don't Preannounce share repurchases, but you could expect that we'd be very focused on capital allocation in the fourth quarter and I'll leave it at that.
Great. Thank you.
Thanks.
Question is from the line of George.
Your line is now.
All right. Thanks. Good morning, you talked about seeing a relatively uneven recovery across businesses and geographies can you provide constant currency revenue trends by month during the quarter and in October the date for the overall company as well as your largest markets, France, Spain, the U.S. [noise].
Yeah, George this is Jack I guess.
I'll help you a little bit on that I think in terms of the monthly trends.
We did add some of that detail last time, but I guess with the improvement that we've seen and with the guidance. You know we did pull back on some of that just to limit.
Limit the time of our prepared remarks, well what I would say if you look at the quarterly trend during the course of the quarter. We would start on a consolidated basis July was probably about minus 19% organic sales adjusted.
August was August and September were both around minus 13% I think you know August is always a little bit of a funny month due to the holidays. So I wouldn't read anything into that trend I think the main trend as we started at minus 19% and we ended a closer to minus 13 minus.
13.5% on an 80 our base is so good underlying improvement over the course of the quarter overall I'd say in October on an overall basis I think we gave a we gave an indication of what we were seeing in our largest businesses as part of our prepared remarks, I guess, what I would say is you should expect that.
That minus 13.5% that we saw for the month of September well see slight improvement going into October and that's that gives you a pretty good idea of what we're looking at currently.
Got it that's helpful. And then on the margin side, you talked about funding investments while exercising cost controls can you elaborate on what your investment spending initiatives look like for for Q as well as what's already baked into your guide.
Yeah, George I'd say, you know first and.
First and foremost you've been very consistent in discussing our technology initiatives. So.
Initiatives. So we continue to spend on technology, we've talked in the past regarding.
Our power suite initiatives those are going very well, we're making a lot of progress. Those continued we have not slowed those down so that continues to be in our cost base.
I would say you know as we continue to look at where we're spending we are we are positioning ourselves for.
For the growth so in where we're seeing you know good increases in demands and kind of going back to my comments regarding ft east coming back into the business. We are investing in the business and specifically in terms of where we see the most demand we've talked about our experis business.
In the past, we continue to make those investments in those markets where.
Where there is strong demand and we're seeing good progress. So that is part of what is incorporated into our fourth quarter guidance as well and and I would say that would follow what you would expect in terms of the progress we're seeing in our largest markets. That's where you should expect that there is some incremental investment happening.
In those areas where skills are in demand.
Got it very helpful. Thank you.
Thank you.
Question is from the line of Seth Weber.
RBC capital markets. Your line is now open.
Hey, good morning, guys. He Jack just following up on that last answer and tying together a couple of your prior answers just on capital allocation.
A lot of discussion around building out the digital.
Capabilities as you're sitting here with a net cash balance sheet should we can we expect that there might be some more M&A on the.
On the digital side too.
You know enhance that part of the business is that an option that you're considering as well and that this in addition to repo.
Yes, I guess I would say that that's really what we were talking about what we are saying the strategy really hasn't changed I think we've been very open that we continue to look at our capital allocation strategy. We have a very good track record on share repurchases, but we.
Well. We also you know weve talked about the fact that as part of our diversification. We do keep you know we do keep an eye out for potential acquisitions, where they make sense now with that being said. We've also we always have been very careful in that regard and we were focused on the opportunities.
From a professional staffing side as well as from a solution side. So that's really unchanged and that is something that we continue to have as part of our overall strategy and capital allocation and if there isn't an acquisition then you should expect that we would continue to look at share.
Mrs as in vehicle to return cash to our shareholders.
Okay, and then just a follow up on the talent solutions sounds like there are some good good trends going on there is that all you asked are you starting to see I'm any more traction internationally on that side of the business.
Well, Seth we're certainly seeing it in the U.S., but we really seeing it also across the world maybe to a lesser degree at this stage, but we feel very good about the positioning as you heard in the prepared remarks, we've been recognized as the global leader in in the taps and and our pipeline looks strong on that side.
Appeal was coming back strong and of course right management has also had a very good quarter within especially the career transition offering. So we feel good about talent solutions as a whole in our positioning there and its really tying back to Jack just said around diversification and how we feel good about that.
That is you around diversification and that is that its really benefited us and it's come back strong here in the third quarter and we hope to continue to see some good improvement also into the fourth quarter. The only other color I'd give on that stuff is it right management. The majority of that increase was in the U.S. So the U.S.
It is the market, where we've seen the aisle placement activity that that has not transpired in Europe. So.
When we think about the increase in right management that we've talked to Jordi of that fell in the U.S. and that was part of that 30% increase in right management in the U.S. that I referred to earlier.
That's helpful guys. Thank you very much I appreciate it.
Yes.
My question.
Great. Thank you that brings us to the end of our Q3 earnings call. We look forward to speaking with all of you again for our fourth quarter earnings call in January.
Thanks, everyone and.
And have a good rest of the week.
Thanks.
This concludes today's conference call. Thank you.
Meeting.
[noise].