Q4 2020 ManpowerGroup Inc Earnings Call
Yeah.
Okay.
[music].
Welcome to manpower group's fourth quarter earnings results conference call. At this time, all participants are in a listen only mode until the Q&A session of today's conference. This call will be recorded if you have any objections. Please disconnect at this time and now I will turn the call over to me.
Non powered group chairman and CEO Jonas Prising, Sir you may begin.
Thanks for joining us today for the fourth quarter conference call for 2020 on the call with me today is our Chief Financial Officer, Jack Mcginnis from.
For convenience we've included our prepared remarks within the Investor Relations section on our website at manpower group Dotcom will start by going through some of the highlights of the quarter. Then Jack will go through the operating results from the segments, our balance sheet and cash flow and guidance for the first quarter I will then share some concluding thoughts before we start our Q&A session, but 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 the COVID-19, pandemic, which are subject to known and unknown risks and uncertainties.
Payments 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 statements considerations and important information regarding previous SEC filings and reconciliation of non-GAAP measures.
Jack.
During our earnings call in October we talked about signs of recovery in the third quarter pleased to say, we saw this trend of slow and steady recovery continuing into the fourth quarter. Despite experiencing a series of new COVID-19 related restrictions around the world our results reflect a stronger market environment than we had anticipated with revenue growth and new.
Attunity is in select markets.
We're now seeing clear signs of vaca shaped to speed recovery. The bifurcation is evident between industries able to adjust to the uncertain environment and others like travel hospitality and entertainment industries being significantly impacted by the Lockdowns. This is also reflected in the labor market divide where demand for workers has improved.
In some industries and in all those remained stalled with high unemployment rates organs.
Organizations investing in Digitization and automation are already emerging stronger and that is driving an acceleration on the polarization of the work force between the skills on the on skilled creating a risk of continued post pandemic skills based polarization of labor markets in many countries.
This is also captured in our recent skills Revolution thought leadership series renew Reskill and redeployed conducted across 26000 employers in 40 plus countries.
Those companies are planned to speed up the Digitization plans as a result of the pandemic on maintaining or increasing their head count in contrast to others, who have put their plans on hold.
Many of the trends, we've been predicting have accelerated significantly.
Adversity can often be a force for society to change at an accelerated pace come.
Companies are digitized debt of speed and scale. They could never have imagined and we expect these actions will continue into 'twenty and 'twenty one.
With that context, I would now like to turn to our financial results.
In the fourth quarter revenue was $5.1 billion down 6% year over year in constant currency, a significant improvement from the 14% decline on the third quarter on the same basis.
On a reported basis, we recorded an operating profit for the quarter of $138 million, excluding restructuring charges operating profit was $151 million down 24% in constant currency.
Reported operating profit margin was two 7% down 100 basis points from the prior year and after excluding restructuring operating profit margin was 3% down 70 basis points from the prior year.
Reported earnings per diluted share of $1.33 reflects the impact of restructuring charges, excluding the restructuring charges our earnings per diluted share was $1.48 for the quarter, representing a decrease of 39% in constant currency.
Turning to the full year results for a moment.
Reported earnings per share for the year was 41 cents, excluding restructuring charges on the special items earnings per share was $3 on 67 cents.
It represented a constant currency decrease of 53% year over year.
Revenues for the year decreased 14% in constant currency to $18 billion and reported operating profit was $188 million, excluding restructuring and special items operating profit was $377 million, which represented a 48% constant currency decline.
Year over year.
Although 2020 was one of the most challenging years in recent history, we were able to reduce the operational SG&A to significantly offset gross profit declines while remaining committed to our strategic investments for digitization diversification and innovation.
In our manpower business logistics demand was strong in the fourth quarter driven by the shift in how consumers are buying and then extended holiday delivery peak.
While we are seeing increases increase in cases of COVID-19 in several places. We're also seeing strong safety protocols increased testing advanced by technology, allowing companies to avoid full shutdowns manage plant productivity by segregating production lines, all reducing the infection risks and ensuring a safe work.
Environment.
And experience, our I T and Resourcing, our solutions business, we're seeing positive trends in many industries and there continues to be good demand for a range of ideas skills in a number of markets. Many organizations that put investments on hold on made cuts in 'twenty and 'twenty are beginning to rebuild and reinvest others are seeking the offerings of our talent solutions business.
They look to optimize their supplier management and delivery solutions and shift more to full service HR providers with the tools and tech across markets to build just in case resilience and flexibility.
I'd now like to turn it over to Jack to take you through the financials and country performance details.
Thanks, Jonas going back to the quarterly results on slide three revenues in the fourth quarter came in above our constant currency guidance range.
Our gross profit margin came in at the low end of our guidance range on a reported basis, our operating profit was 138 million.
Excluding restructuring charges, our operating profit was $151 million, representing a decline of 21% or a decline of 24% on a constant currency basis.
This resulted in an operating profit margin of 3% before restructuring charges, which was above the high end of our guidance.
Breaking our revenue trend down into a bit more detail after adjusting for the positive impact of currency of about 4% constant currency revenue declined about six 5%, which rounds to 6% on a single digit percentage basis.
As acquisition and billing days had no net effect the organic days adjusted revenue decline was also about six 5%.
This represented an improvement from the third quarter revenue decline of 15% on a similar basis and two consecutive quarters of significant improvement from the second quarter of 2020.
Turning to the EPS bridge on slide five on a reported basis earnings per share was $1 33, which included the restructuring charges of $12 million, which including related tax impacts represented a negative 15 cents.
Excluding the restructuring charges earnings per share was $1 48, which exceeded our guidance range.
Included within this result was improved operational performance of 38 cents.
Better than expected foreign currency exchange rates, which added three.
A lower weighted average share count from share repurchases that at a two cents.
Net by higher other expenses that had a negative impact of five cents.
Looking at our gross profit margin in detail our gross margin came in at 15, 8%.
Underlying staffing margin contributed to a 40 basis point reduction.
The anniversary of the incremental fee on subsidies in France in October and the mix of higher seasonal year end enterprise activity within the manpower brand drove the overall additional year over year staffing margin decline from the third quarter result is down 20 basis points year over year.
A lower contribution from permanent recruitment also contributed 30 basis points of GP margin reduction.
10 basis points of increased gross profit margin from career transition growth within right management was offset by a 10 basis point decline driven by a higher mix of seasonal other non staffing activity.
Next let's review our gross profit by business line during the quarter. The manpower brand comprised 65 per cent of gross profit our experienced professional business comprised 20% and talent solutions brand comprised 15%.
During the quarter, our manpower brand reported an organic constant currency gross profit decrease of 11%. This was an improvement from the 17% decline in the third quarter.
Gross profit in our experience brand declined 14% year over year during the quarter on an organic constant currency basis, which represented an improvement from the 19% decline in the third quarter.
The lower contribution from Perm gross profit drove the more significant gross profit declined compared to the revenue decline and experience it.
<unk> solutions includes our global market, leading our Po MSP and right management offerings are.
Organic gross profit cross back over to growth in the quarter at 1% in constant currency year over year, which is an improvement from the 2% decline in the third quarter.
This was primarily driven by our MSP business, which had a very strong fourth quarter with double digit GP growth and increase year over year career transition activity within our right management business.
Our <unk> business experienced a significant improvement in the rate of decline during the fourth quarter from the third quarter, reaching single digit percentage declines in the fourth quarter.
Our reported SG&A expense in the quarter was 661 million, including the restructuring charges of $12 million.
Excluding the restructuring charges SG&A of $649 million represented a decrease of $19 million from the prior year.
This underlying decrease was driven by $40 million of operational cost reductions a decrease of $2 million from net dispositions, partially offset by an increase of $22 million from currency changes.
On an organic constant currency basis, excluding restructuring.
SG&A expenses decreased 6% year over year, which represented a very strong recovery against the 10% gross profit decline.
SG&A expenses as a percentage of revenue continued to improve sequentially and represented 12, 8% in the fourth quarter excluding restructuring.
The Americas segment comprised 20% of consolidated revenue.
Revenue in the quarter was 1 billion a decrease of 3% in constant currency OUP was $48 million and OUP margin was four 7%.
The U S is the largest country in the Americas segment, comprising 61% of segment revenues revenues in the U S was 622 million, representing a decrease of 4% compared to the prior year adjusted.
Adjusting for franchise acquisitions. This represented a 5% decrease which is a significant improvement from the 16% decline in the third quarter.
During the quarter OUP for our U S business decreased 11% to $30 million or.
OUP margin was four 8%.
The U S continued to benefit from higher margin career transition activity within right management year over year, but at a reduced level from the third quarter.
Within the U S. The manpower brand comprised 36% of gross profit during the quarter.
Revenue for the manpower brand in the U S was down 2% when adjusted for days and franchise acquisitions, which reflects a material improvement from the 21% decline in the third quarter.
We expect the manpower business to crossover to growth on a quarterly basis in Q1.
The experience brand in the U S comprised 27% of gross profit in the quarter with an experienced in the U S. I T skills comprise approximately 80% of revenues.
Revenues within our I T vertical with an experienced U S declined 13% during the quarter and total experienced U S revenues declined 14% as the financing engineering verticals experienced greater decreases.
This trend reflects a slight improvement from the third quarter year over year rate of revenue decline.
Talent solutions in the U S contributed 37% of gross profit and experienced revenue growth of 6% in the quarter.
Within right management in the U S revenues increased 8% year over year, driven by career transition activity during the quarter.
S. MSP business continues to perform very well on the current environment and again experienced year over year increase revenues during the fourth quarter.
U S <unk> business cross back over to revenue growth during the fourth quarter moving to a low double digit revenue increase driven by RPM client wins as well as additional projects during the fourth quarter.
Provided there are no significant business restrictions impacting our clients across the U S. In the first quarter, we expect ongoing improvement and an overall rate of decline in the very low single digits for the quarter overall.
Our Mexico operation experienced a revenue decline of 6% in constant currency in the quarter, representing an improvement from the 9% decline in the third quarter.
During the fourth quarter, the president of Mexico introduced a labor proposal that would prohibit certain types of temporary staffing outside of specialized services.
Acted we expect this could significantly restrict our activity in Mexico.
The Bill is still under development in the Mexican legislator and could be finalized in March or April.
We will provide an update during the first quarter earnings call at which time, we expect to have greater clarity on the likelihood of adoption and the specific restrictions as they would apply to us.
Mexico represented between two five and 3% of our global revenues in 2020.
Revenue in Canada declined 10% in constant currency during the quarter.
This represented a slight improvement from the third quarter billing days adjusted revenue decline of 11%.
Revenue in the other countries within Americas cross back over to growth with a 4% increase in constant currency, reflecting a significant improvement from the 6% decline in the third quarter.
This was driven by significant revenue growth in Argentina, Brazil and Chile.
Southern Europe revenue comprised 46% of consolidated revenue in the quarter revenue in Southern Europe came in at $2 3 billion a decrease of 7% in constant currency. This was a significant improvement from the third quarter trend driven by France, Italy, and Spain on.
P, including restructuring costs equaled 100 million, excluding restructuring costs OUP decreased 25% from the prior year on constant currency and OUP margin was down 100 basis points.
The 4 million on restructuring costs represented France real estate optimization.
France revenue comprised 56% of the southern Europe segment in the quarter and was down 11% from the prior year in constant currency.
This reflects a steady rate of improvement over the course of the quarter on.
OUP, including restructuring costs was $62 million in the quarter.
<unk> restructuring costs, OUP was $66 million and OUP margin was 5%.
Although on per Bill was steady in France. During the fourth quarter January has experienced a softening in the revenue trend as COVID-19 concerns have increased and the government has imposed more restrictions.
We are cautiously estimating ongoing sequential improvement in the revenue trend and are estimating a constant currency decline in revenues in the mid single digit percentage range in the first quarter overall.
Revenue in Italy, equaled $423 million in the quarter as Italy cross back over to growth revenue.
Revenues increased 3% in constant currency during the quarter, which was a significant improvement from the 12% days adjusted decline in the third quarter.
This reflects the progressive improvement over the course of the quarter and a particularly strong December driven by large year end seasonal logistics activity from enterprise clients on.
OUP declined 25% year over year on constant currency to $24 million and OUP margin decreased 200 basis points to five 6%.
We estimate that Italy will have low single digit year over year revenue growth in the first quarter.
Revenue in Spain also crossed over to significant revenue growth in the fourth quarter also driven by enterprise seasonal activity.
Revenue increased 18% on a days adjusted constant currency basis from the prior year in the quarter.
This represented a significant improvement from the 6% decrease from the third quarter, considering the drop off of the year and seasonal activity. We estimate that Spain will have revenue growth in the mid single digit constant currency range in the first quarter.
Revenue in Switzerland decreased 14% on a days adjusted constant currency basis from the prior year in the quarter.
This represents a slight decline from the 13% decrease from the third quarter as our Switzerland business did not experience the year end seasonal increases that the other large markets in southern Europe experienced.
Our northern Europe segment comprised 22% of consolidated revenue in the quarter revenue declined 11% in constant currency to $1 1 billion, representing a significant improvement from the 22% decline in the third quarter driven by the U K and the Netherlands.
OUP, including restructuring costs represented 9 million, excluding restructuring costs OUP was $18 million and OUP margin was one 6%.
The 9 million of restructuring costs relates to Germany, where we restructured a majority owned venture with a third party partner.
Our largest market in northern Europe segment is the UK, which represented 36% of segment revenue in the quarter.
During the quarter UK revenues decreased 7% in constant currency, which represented a significant improvement from the 22% decline in the third quarter.
The improvement was driven by significant year end public sector activity, particularly in December.
We are cautious in our outlook for the UK business and estimate a rate of constant currency revenue decline in the high single digits range during the first quarter, representing the non recurrence of certain year end activity.
In Germany revenues declined 31% in constant currency adjusted for billing days in the fourth quarter, which did not represent a significant change from the 32% decline in the third quarter.
We remain very cautious on our Germany business in the near term and expect improvement in the revenue trend in the first quarter.
In the Nordics revenues declined 6% on a days adjusted constant currency basis to two primary businesses in the Nordics, our Norway and Sweden.
On a days adjusted constant currency basis, Norway experienced a decline of 6% in Sweden declined 4%.
Both countries experienced a significant improvement in the rate of decline from the third quarter trend.
Revenues in the Netherlands decreased 12% on a days adjusted constant currency basis, which represents a significant improvement from the third quarter a decline of 23%.
Belgium experienced a days adjusted revenue decline of 25% in constant currency during the quarter, which also reflects improvement from the third quarter trend on.
Other markets in northern Europe crossed over to growth in the quarter.
Revenue increased 9% in constant currency, which represents a significant improvement from the third quarter, a decrease of 5% in constant currency.
This was driven by strong revenue growth in Poland, Russia and Ireland.
The Asia Pacific Middle East segment comprises 12% of total company revenue.
In the quarter revenue decreased 1% in constant currency to $617 million.
OUP represented $18 million and OUP margin decreased 70 basis points year over year.
Revenue growth in Japan was up 5% on a constant currency basis, which represents a slight decrease from the 6% growth rate in the third quarter, our Japan business continues to perform very well and we expect constant currency revenue trend of low single digit growth in the first quarter.
Revenues in Australia declined 2% in constant currency on a days adjusted basis. This represents an improvement from the 7% decline in the third quarter.
Revenue in other markets in Asia Pacific Middle East declined 7% in constant currency also representing an improving trend from the third quarter.
I'll now turn to cash flow and balance sheet free cash flow equaled $886 million for the year during the fourth quarter free cash flow equaled $201 million compared to $302 million in the prior year quarter.
At quarter end day sales outstanding decreased by about three and a half days to 54 days.
Our businesses have displayed outstanding collection and cash management practices throughout this crisis.
Capital expenditures represented $51 million during 2020.
During the fourth quarter, we purchased $2 5 million shares of stock for 201 million.
Our purchases for the full year totaled $3 4 million shares for $265 million.
As of December 31st we have three 4 million shares remaining for repurchase under the 6 million share program approved in August of 2019.
As previously announced we also increased the semiannual dividend paid in December 2020 by seven 3%.
Our balance sheet was strong at quarter end with cash of $1 $5 7 billion and total debt of 1.12 billion, resulting in a net cash position of $443 million.
Our debt ratios remain comfortable at quarter end with total gross debt to trailing 12 months adjusted EBITDA of 2.48, and total debt to total capitalization at 31%.
Our debt and credit facilities did not change in the quarter and the earliest euro note maturity is not until September of 2022. In addition, our revolving credit facility for $600 million remained unused.
Next I'll review our outlook for the first quarter of 2021.
Our guidance continues to assume no material additional lockdowns are business restrictions impacting our clients and any of our largest markets beyond those that exist today.
On that basis, we are cautiously forecasting earnings per share for the first quarter to be in the range of 64 to 72 cents, which includes a favorable impact from foreign currency of <unk> seven per share.
Our constant currency revenue guidance range is between a decline of 4% to a decline of 6%.
The midpoint of our constant currency guidance is a decline of 5% on a days adjusted basis. We note. There is about one less billing day in Q1, which would improve the days adjusted rate of revenue decline.
This was offset slightly by the impact of net dispositions.
At the midpoint this would yield an organic days adjusted rate of revenue decline of 3% for the first quarter, representing an ongoing improvement from the six 5% decline in Q4.
We expect our operating profit margin during the first quarter to be down 50 basis points compared to the prior year, reflecting a third consecutive quarter of sequential improvement in the year over year rate of adjusted operating margin decline.
This reflects continued strong underlying cost actions within the businesses.
And higher corporate expenses year over year based on increased technology investment.
Regarding the effective tax rate the government of France finalize their budget with the expected 50% reduction in the French business tax and a continuation of the corporate income tax reductions.
Combined this serves to reduce our underlying effective tax rate by about 4%. However, we will continue to have an elevated tax rate until we are closer to pre crisis levels of pre tax earnings and are estimating a full year of 2021 effective tax rate on.
Approximately 35%.
The effective tax rate in the first quarter will be slightly lower at 34% based on the inclusion of certain discrete items.
As usual our guidance does not incorporate restructuring charges or additional share repurchases and we estimate our weighted average shares to be $56 2 million.
I will now turn it back to you on us Thank you Jack.
Well positioned to be able to provide the strategic and operational work force expertise and flexibility our clients and candidates are looking for sourcing and developing in demand talent across the globe and delivering new work models across the HR solutions spectrum.
We strengthened our brand portfolio during 2020 on launch talent solutions as a separate brand to include our <unk> MSP and right management offerings.
This accelerates our diversification strategy by focusing on higher margin high growth market segments and all brands.
We also remain laser focused on delivering our digitization plans without power suite technology and continued this investment even during the pandemic we.
We have already implemented power suite on our front office and businesses across 17 countries are in the process of implementation in another wave all of the businesses across 17 more countries based on this progress we expect to have the majority of our businesses on our new power suites front office by the end of this year.
Our power suite front office is improving efficiency and productivity enabled by technology by cloud mobile and analytics. We also continue to rollout our new web platform for candidates.
Our b to C digital investments build off the success of more manpower or French associate App, which has had more than one 3 million downloads. The most downloaded on the most highly rated in the French market.
In France, one third of our applicants are sourced via the App with an average of 150000 active users a month enjoying a full portfolio of <unk> services, including on demand access to current targeted assignments opportunities time management and payroll technology and other services, including online car pooling.
The success of this market, leading tool is helping us to scale and expand our beaches seat technology elsewhere as well.
We continue to invest in and advance on analytics capability laying strong foundations for the creation of our data Lake and would be our data science on Databased decision, making that will continue to create new value, helping clients better predict performance on supporting candidates. So they know more about their skills and potential.
These together we're on investments in next Gen infrastructure programs will continue to be critical enablers for the next step of our process transformation and growth and.
And what we knew all along has been confirmed as well. It is the combination of tech and our people first approach talent the skills and dedication of our teams with last mile delivery capability that allows us to confidently manage uncertainty volatility and collaborate remotely to deliver the solutions on talent organization.
<unk> need while being more agile than we ever believed possible.
As we execute our strategic priorities, we remain committed to our values and BARDA purpose that meaningful sustainable employment has the power to change the world.
As a member of the International business Council, we are committed to the <unk>, new stakeholder capitalism metrics developed by the Big four global accounting firms focused on people planet prosperity on governance.
This important framework will enable our organization and others to be more explicit on our commitments on progress, we're making to create long term value to shareholders and operated a sustainable business model that addresses the long term imperatives of society.
Our social impact report that we released in December is the demonstration of the critical enrolled we already play in being part of the solution case in point in 2020, we were recognized as a catalyst for change among 70, plus company is outpacing our global peers and advancing women, particularly women of color along with being placed on the <unk>.
Dow Jones sustainability index for the 12 year.
Helping people and companies respond then reset redeploying reskill on this skills Revolution remains the defining challenge over time and it is what our clients candidates and employees expect us to help them with today and even more so in the future.
Finally, I'm very proud and grateful for the landless resilience and commitment of our people to support and deliver to each of our stakeholders. During these challenging times.
Our employees associates clients shareholders and the communities in which we operate.
As Digitization continues at pace, we're confident that our strategies of them, even more relevant or structural changes take hold on a post pandemic world and as we continue to execute our strategy to diversify digitize and innovate. It is positioning manpower group for greater success improved returns and profitable growth.
Both in the future.
I'd now like to open the call for Q&A operator.
Thank you we will now begin the question and answer session to ask a question. Please press star one please on weaker Sterling and record your name clearly and company name slowly once prompted to cancel your request you May press Star two one moment, please as really quick questions to queue up.
Our first question came from the line of Andrew Steinman of Jpmorgan. Your line is now open.
Got it from Jack I wanted to focus on non manpower U S brand. Obviously, you already said that revenues were down only 2% in the fourth quarter on habit to growth in the first quarter. This is kind of a huge mungus improvement from a minus 21% from the third quarter. So I thought you just might take some time to help us understand.
And do you know how much of this is kind of market improvement versus manpower specific success and if you could also make a comment on how January this January 'twenty, one I started for the manpower brand.
Good morning, Andrew and thank you Yeah, no. We're very pleased with the progress we've seen in the U S manpower business and it's difficult to say at this point, how much is us and how much is market, but I would say that we've seen a continued at or above market performance from the manpower business all the way through our none.
Number of quarters, now and what we could observe is that clients are really looking for the flexibility that the manpower offering provides them across a number of sectors and we expect to continue to see good evolution here on the manpower side going into the first quarter as well.
And I would add to that Andrew to your point about January trends. So what we saw from manpower was good steady improvement the entire quarter in the fourth quarter. So starting mid single digits days adjusted and then December we did have higher volumes of logistics activity, which.
So December two.
Growth overall for the month, while we see for January is that some of that logistics activity is seasonal and falls off still good underlying improvement into the month of January demand continues to be very strong and increasing so we see that continuing and as we've said for the first quarter overall.
We see that trend continuing for the next three months great. Thank you.
Thank you and the next question came from the line of Mark Mark <unk> of Baird. Your line is now open.
Good morning, Thanks for taking my question.
Wondering if you could give on overall comment with regards to.
Perm placement in terms of what you ended up seeing globally.
This quarter as a percentage of revenue and what your your prognostication is for.
For improvement going forward, and then I've got a follow up.
Mark share of this is Jack so per.
I guess the way I would look at Perm is the progression over the last three quarters continues to improve so if I look at Perm gross profit dollars year over year.
In the third in the second quarter at the depth of the pandemic, we were down 43% that improved from <unk> in Q3, two down 27% year over year and here in Q4, we were down 18% year over year, So I'd say good steady improvement.
In terms of we measured as a percentage of total gross profit dollars and I'd say you probably remember we were running close to 16% pre crisis about $15 nine per full year 2019, as we ended the fourth quarter here worried about 13, 2% of our GP.
Contribution is from Perm, so the outlook for that as we continue to expect the same trends going forward. So that steady improvements in Perm will continue into the first quarter, we're expecting that to continue to see a reduced rate of decline year over year I would say as we look back to the fourth.
We saw some very strong perm trends emerging in Italy, which was great in the fourth quarter. Overall. So we are seeing some very some nice trends of perm picking up and I think in our prepared remarks, we also called out our <unk> in the U S was growth year over year, and so that's certainly contributing as well so there is certain.
Some very good signs that Perm is starting to return and were seeing good steady improvement into the first quarter.
Okay, and just a follow up.
To what extent is debt.
On the Perm part of the business driving the.
The operating profit margin guidance and when would you expect that to potentially inflect.
Yeah. So I would say if you look at what's happening on GP margin Perm that decline year over year has been a pretty steady drag in the margin. So we said in the fourth quarter about 30 basis points in the work.
That's in line with what we been experience I would expect Marc we will continue to have a drag until perm returns to growth again, and so we will continue to have a bit of a drag in the first quarter. I think if you look at the first quarter guide on GP margin.
Staffing is holding up very well. So you know staffing is basically we're projecting staffing margin to be flat year over year I think overall, it's down about 10 basis points in the guide and that's largely because perm still will not be back to growth, but it will continue to be improving so it will it will still be a drag it'll be less of a draw.
In the first quarter.
And every recovery is going to be a little bit different but assuming that we do have a recovery you know kind of a post pandemic environment in the second half.
Quickly do you think perm could end up bouncing back.
Yes, so I think I think once we get beyond the first quarter, we expect to see strong growth in perm beyond that as we start to anniversary the huge declines in 2020, I'd say, we would you know as we talk about that percentage of total GP I would.
Back that mark to steadily increase over the course of 2021.
Terrific. Thank you.
Thank you and the next question is from Jeff Silber with BMO capital markets. Please go ahead with your question.
Thanks, So much you gave a little bit of color on intra quarter trends in January trends for the U S. Can we get from similar color on some of your other major markets.
Sure, Jeff I guess, what I would say, maybe the back up and talk about the fourth quarter overall and that trend that that steady improvement trend. So we gave you the overall quarter in terms of the organic constant currency days adjusted decline of six half if you look at the monthly.
Trend October was down about 9% that improved in November to down about 7% and then December with that higher logistics activity that we called out improved to down about three 5%. So good improvement I'd say, we see.
Probably a more marked improvement in the month of December but that was due to that year end seasonal logistics work. So I think as we look forward to January and some of the trends we're seeing in some of our key markets I'd say a continuation of some of the underlying progress we saw in the fourth quarter, I'd say, probably with one <unk>.
<unk> I think as we called out in our prepared remarks.
France is experiencing some heightened restrictions.
So business is continuing so that's good but what we're saying is not too different than what we saw in November when France had some heightened restrictions that did slow down their progress in terms of the continued rate of progress on the recovery, we're seeing that in the month of January so.
Instead of ongoing improvement in January a trend more consistent with what we saw in the month of December and as we see those as we look forward and those restrictions are loosened, we'd expect to see a trend similar to what happened in the fourth quarter when when December had a bit of improvement after.
The restrictions were lifted so I'd say, that's the trends in the key markets. We we said that Italy is continuing to see very strong trends so growth.
Year over year in January we talked about the U S seeing good improvement, particularly on the manpower side and I'd say the other market as the U K. So it was great to see the UK really come out of.
The more of the sluggish returns we saw in the third quarter from a revenue perspective, so very good surge of revenue in the UK in the fourth quarter, which was great. We do expect a lot of that was year end logistics and some Brexit related work in the public sector. We do expect some of that to continue.
New into the first quarter, so I'd say the U K is continuing to perform at a good level as well.
Alright, Thats really helpful and as my follow up on your honest I guess this one's for you.
In your prepared remarks, you talked about your thought leadership piece that companies were planning on speeding up their digitization plans and those companies are either maintaining or increasing their head count I'm really curious can you give us some color in terms of where those head count.
Either maintenance or increases are coming as it is in technology jobs in that overall any color would be great.
Sure Jeff no the on the increase in employment actually cuts across many different skills categories, because it essentially indicates that their confidence in the future is high and that theyre looking to maintain or increase their level. So it is actually broad based across a number of them of course, there are going to be increases in.
In the skill sets within it but also within logistics and just the general operations. So this is in sales and.
That's an indication of their increased confidence in their business model their ability to adapt to this these accelerating changes in their belief that they will be able to take advantage of them.
Okay. That's really helpful. Thanks, so much.
Thanks, Jeff.
Thank you and the next question is from the line of Hamzah, Missouri of Jefferies. Your line is now open.
Hey, good morning.
My first question is just you know stepping back just just sort of a cycle question maybe.
Maybe if you could touch on you know how this recovery.
Is different than past cycles, you know coming out of a downturn I guess you have a potential vaccine benefit we haven't seen yet there's a lot of stimulus is sort of 2019 and not the right. Prior peak day Lockhart I guess, if we look at your prior peak 22 billion of revenue all time peak two.
From 19 was maybe 20.8 billion I guess you were in the middle of last cycle. When Covid hit so just any thoughts as you think about recovery.
You know should we be looking at all time prior peak revenue to judge sort of when you get back to a recovery revenue base and any sort of thoughts there would be great.
Well hamzah.
The year 2020 gets to contain all kinds of things it gets to contain the deepest decline we've ever seen in the history of the company and almost 75 years and also the fastest recovery all of this happening in in one year and it sort of broth to eight.
Economic expansion cycle to an end a pretty abruptly in a in March as we are all familiar with but as we're looking at the recovery now I think what our thesis has always been is in times of uncertainty and volatility or human capital is going to make the difference for companies when they are.
Execute their business strategies the services the brands that we had respond extremely well to that demand and that's what we've been positioning the company for all the way through the prior cycle and that's what we continue to position the company for and as we mentioned in our prepared remarks, despite the <unk>.
<unk>, we continued to invest in Digitization, we continue to prepare for the diversification on the markets, where we saw good opportunities and we also continued to drive innovation through our Mike path program and analytics and insights across a number of our brands. So I think we're very well positioned as we come into this new economic cycle.
How it's gonna look exactly is of course, not not something that we that we would know but I would say that we're very confident that we're very well positioned in the us the time of the pandemic to try and come out of this recessionary environment stronger than we were coming in and by and large I feel very good about the work that we've done that during 2012.
To achieve exactly that.
Yes.
Hamzah I would just add to that to your question about what's different. This time. So I think the one item that is very different is just how margin has held up staffing margin has held up fairly well, we have not seen a big change in pricing and in some actually some markets, we've actually seen improvement in pricing so.
I'd say, that's a big difference and you bring up a very good point about pre crisis 2019 remember for US 2019 was a year, where we really were still on our manufacturing slump in most of Europe. We were on revenue decline for the full year of 1% in constant currency.
I would actually go back.
Prior to that really in the beginning in the middle of 2018 is when a lot of the manufacturing really started to decline in Europe. So I'd say more of the mid point of 2018 is what I would consider more kind of the peak cycle and even 2017, we had good.
No.
Or mid single digit revenue growth in constant currency. So so I think it's a very good point.
Reflecting on the fact that 2019, even though it was technically pre crisis was still a year of decline for us on an overall basis based on what was happening in manufacturing and that is our opportunity going forward. Its manufacturing comes back in the recovery.
That's.
Very very helpful color and just my follow up question is just on the diversification strategy you know higher solutions mix higher professional services I guess, you bake that into your long term margin target of I guess close to 5% do you have to do a lot of acquisitions to get there or.
This largely sort of organic.
Growth, where you see that shift in mix over time.
Our growth strategy Hasnt changed so we can do all of what we want to do organically, but as we've mentioned in the past. If we were to look at acquisitions. It would be within the experience side of the business or in parts of the talent solutions business as well so those would be the two areas, where we could cause.
Complete acquisitions, but we don't need to make an acquisition we have strong organic growth plans, we prefer organic growth because it provides a better return to our to our shareholders as we execute that but it's possible that there could be opportunities that have to fill all of our filters of cultural fit business fit and and.
Geographic mix, so that we could accelerate even faster, but we don't we don't have to do that to get to the objectives of diversifying the business.
Great. Thank you so much.
Thanks Hamzah.
And the next question comes from the line of my NAV.
Of Barclays. Your line is now open.
Thank you.
I apologize if I missed it that Jack could you just talk about why the margin guidance from the first quarter.
Is it gets lower than what we had thought maybe there's some moving pieces that im missing there.
Yeah, Hi.
Manav I would say the first quarter really there isn't it's actually pretty straightforward it's on.
The thing to remember about the first quarter, it's typically our lowest quarter for revenues and profitability. Overall, so we typically start at a bit of a lower base in Q1, So I think the.
The key item is.
We're seeing.
Gross profit margin down only 10 basis points in the first quarter. So that's an improvement from the trend we have been experiencing.
And included in that as I was referring to earlier.
Still a bit of a drag on perm contribution so perm will continue to improve but still not back to growth in Q1, and thats, having a slight impact on the margin overall, so I'd say staffing margin. If you look at year over year, we're expecting that to be pretty much in line with where we were in the year ago Pierre.
Yet.
I think in the Gulf period, our margin was up 10 basis points overall, so generally in line. It's just that the first quarter tends to be a bit.
Due to the lower revenue and profitability.
Got it and are you on this maybe in terms of just long term changes that perhaps the pandemic has brought on to your industry I mean, it sounds more like things that just got an accelerated in terms of digitization and so forth debt have you seen any new on the school.
The changes that you guys might have to put into it.
We're still in the midst of the pandemic, especially in the in Europe, but our view is that a lot of the change that's occurring is index.
<unk> is an acceleration to your point Manav, all that preexisting trends that existed before the pandemic.
And that's really what we're seeing now an increase in Digitization and increase on the focus on the importance of skilled human capital, helping businesses execute on their strategies at speed.
Evolution of new business models within within businesses and how they go to market. So a lot of transformative work a lot of the change as it relates to technology in both of those lead to a lot of change in the need for skills.
And that's why we feel very good about our strategies because we had projected that these structural trends, we're going to be impacting will continue to impact both labor markets and organizations and in fact, the pandemic is accelerating many of these underlying structural trends and we don't really see the emergence of any.
New structural trends following the pandemic at this point it may of course come later on but all of this to say that we think whatever is what is happening in labor markets and in organizations is really matching up very well with the strategies that we're pursuing globally.
Alright, Thank you very much.
Thank you. Our next question is from Kevin Mcveigh of Credit Suisse. Please.
Please go ahead with your question.
Great. Thanks, so much okay.
On a fair amount of time talking about Digitization.
And truly translated even more leverage on the SG&A line is there any way to think about share more leverage on SG&A.
That manifest itself from higher margin or mix hardly get offset on the GPU on just how should we think about that because it seems like clearly you're getting more leverage.
And on a dollar per center.
Yeah.
Yes, Kevin. Thank you I guess on what I would say you were breaking up a little there, but I think I caught most of your question basically digitization is helping us with our efficiency on an overall basis and that clearly is a continuing trend.
So we continue to leverage automation and Digitization and Jonas has talked a lot about our technology roadmap and and that will continue I would say the way. We're looking at that is we are experiencing some increased spend on technology I called that out in terms of our corporate expense.
<unk> for the first quarter.
But our goal is to offset that as much as possible with ongoing productivity and we're seeing that we talked about the <unk>.
Businesses throughout 17 countries, we've already implemented our new front office system, we are getting increased productivity, where we have implemented the technology and we continue to have a very good rollout here in 2020 wanted cross.
17 countries as well so those that progress will continue to increase our productivity going forward and that helps US fund some of this increasing increased investment I would say, though.
We still will probably still have a little bit more of investment as we continue through the recovery.
And that should ease as we move forward, but on an overall basis absolutely. The investment in technology is improving our efficiency on an overall basis and that is helping fund the increased costs.
And Kevin the only thing I would add to that is the productivity on the efficiency gains are going to be very well come on you've seen how we've leveraged the technology in terms of reducing our physical footprint very significantly over a number of years, but the great news with these technology investments is that they also provided us opportunities.
For growth.
Easier for us to move and to move towards candidates and have interactions with candidates on an ongoing basis, increasing reassignment rates and increasing referrals, which help us grow fill orders faster.
It also provides us with new offerings around analytics, where for instance in <unk> talent solutions businesses, we can provide a lot more insight and advice to our clients. So they run their businesses more efficiently, which gives us more growth opportunities. So its really on both sides. It's runs our business better.
And more efficiently, which is what we're always aiming to do but at the same time. It helps increase both existing growth opportunities within our brands as well as open up new opportunities for future growth.
In new offerings as well.
Yeah. It makes a lot of sense and then just real quick on the Mexican legislation.
Would you expect to the extent that those two that you would see an increase in perm placement or are there any puts and takes as you think about the impact of that over the course of 'twenty one.
Well, if I step back of it Kevin and give you just an idea on what the proposal is all about so the president of Mexico has been concerned about certain employment practices in Mexico and in terms of outsourcing.
And he has introduced a very broad.
Proposal to address those frankly illegal practices.
And you know clearly which is not related to our industry specifically, but the issue is that the proposal is so broad so as drafted it could have a significant impact on restricting various.
Outsourcing arrangements, including the staffing industry.
And we believe that the legislation should be more targeted to address this issue and we along with our industry Association and the broader business community has been providing that feedback to this extent and.
This should play out over the next couple of months and we're monitoring this closely and I think by the next earnings call. We should be able to provide you some more detail on what specifically has been impacted so right now the impact could be pretty broad although difficult to quantify.
Can you talk next I believe we should know more of the details and understand you know what it would be impacted.
And how we would mitigate it and how we would adjust our business in Mexico.
Thank you.
Thank you. The next question is from Tobey Sommer of true list. Your line is now open.
Thank you could you elaborate on what's driving the growth in your solutions business, particularly our P. O in may.
And maybe comment on.
The drivers at the customer level on what you're hearing from them.
And the prospects for that in this expansion. Thank you.
Sure Tobey I'll be I'll be happy to well over a number of years, we've seen that our talent solutions offerings that really responded to the company need to focus on what they do best and then work with strong global partners to help them navigate human capital related.
Solutions, and we're really well placed in all of our global offerings within our P O or within MSP taps in as well as right management to respond to those demands and what's been very interesting to see Tobey is that during the pandemic. Despite the headwinds that are.
A lot of companies had first of all our MSP tappin business as a whole grew during 2020 of this pandemic year. So you know the idea that we would be able to provide a solution that reduces the risk reduces the cost and has really come through very very strongly for our clients.
And we are very optimistic on our <unk> business. Our appeal was of course, a business that was hit very hard right at the beginning.
The uncertainty was at its highest but we've seen a very quick return and recovery in our win rate in the fourth quarter coming into the first and the second quarter is looking very strong and I think that's an indication of companies thinking about what it is and how they want to deal with recruitment.
And working with partners that can help them find great talent and integrate great talent at scale on a national regional or a global basis, and then take it forward as part of their overall human capital strategy of how they want to attract and retain the best and the right talent to run.
<unk> business. So I think both of our offerings, they're really respond to the to the strategic need for companies to do.
Run their business in different ways focus on what they are doing really well and then work with world class partners, such as manpower group talent solutions, and let us handle that part and we expect that this trend.
Carries on as we go through this economic cycle, because its really seen a tremendous boost even during the pandemic. Despite the very deep downturn.
In the second quarter.
Thank you my follow up could you refresh us on your.
Balance sheet management strategy and your leverage goal and maybe the most likely path for you to get there.
Debt Tobey I'd say from a balance sheet perspective.
You saw the details in the release slides very very comfortable so we are a net continue to have a net cash position.
You did see what we did in the fourth quarter from a capital allocation perspective. So you know with the balance sheet as strong as it was and and with the outlook continuing to improve.
We definitely allocated.
More capital to share repurchases in the fourth quarter. So I guess, what I would say from a leverage perspective, our ratios are.
Are are very comfortable at the moment, we will continue to see improvements as profitability continues to improve as we look at trailing 12 months EBITDA. So I'd say the outlook is.
It continues to be improving on on overall basis. So we feel very well positioned from that perspective, and it was also great from a capital allocation to increase the dividend again in the fourth quarter. So.
Let's say.
The outlook is very very stable improving trends and we look for that to continue.
Thank you and the next question is from the line of Gary Bisbee of Bank of America. Your line is now open.
Hey, guys good morning.
So when I look back at past recessions that there's frequently a couple of years of elevated revenue growth as the business bounces back and benefits from stronger economic growth coming out of these types of things.
When I think about today, obviously, you've got easy comps.
And Dan.
Seeing improvement sequentially on a on a month to month basis pretty strong in the last six months on the other hand, when we look at GDP forecast pretty anemic recovery Thats being forecast for Europe at least relative to the U S.
Should we think about sort of the need for economic growth.
First is just the cadence of the business normalizing in a in a more normal environment post the recession or post the pandemic does this feel.
Like you're set up for.
A good period of recovery like you've seen in the past or or could a weak economic recovery have some impact on that and obviously I'm asking beyond Q1, just thinking out.
Over the next couple of years.
So we feel really good about the overall outlook on how we're positioned in terms of this recovery.
When you look at the economic recovery, although there is greater uncertainty on when it really starts to kick in.
A lot of the World Asia.
North America.
Parts of Latin America should see some really good improved growth. This morning, you might've seen the GDP in the fourth quarter for Europe. So Europe is clearly lagging behind in that growth, but having said that adjusted when we came out of the last.
Rate recession, we could see some very good growth, even though GDP growth was lower and the driver of that growth. We believe came from the need for companies both to transform their workforce and the degree of uncertainty that we're facing so unwilling to take on per.
A minute head counts to some degree and preferring the flexibility of our work force solutions across all of our skill sets and we think that that's going on at play out John.
Just as just as much if not more going forward as well and just as we had said on the last economic cycle debt.
We thought the penetration rates of the market share of our overall offerings as an industry would surpass the prior peak that would still be our belief also coming into this new cycle that we would see greater use of flexible work force solutions, great to use of permanent workforce solutions as well as.
Of course, the offerings of talent solutions that we have which should should be able to help us have a good a good.
A good run based even if the GDP recovery is a little bit slower in Europe.
Great. Thanks, and one follow up on just the tax rate commentary Jackie.
Said that based on the French tax situation, you would expect the tax rate to be down.
<unk>, 4%, but but not this year because profits are down and I understand that dynamic but of those two things you called out I assume those are temporary right. So should we see that think that the tax rate.
Fall in 'twenty, two or could the payroll tax on the corporate tax changes in France sort of go back to the pre pandemic levels beyond this year, just do you have any insight or color on how that could play out. Thank you.
Yeah. So Gary there is two parts of that.
So we have the French business tax, which is the bigger part so that's about three 5% of the minus 4%.
Yeah. That's a fair question to be determined we're hoping that's permanent we know president mccrone has been very focused on the French business taxes uncompetitive for France. So although technically you know theres only a one year budget going forward.
We're hoping that that reduction continues into future years, so to be determined.
Yeah.
But as of right now I think a lot of the press on that is hopeful that that reduction will continue into future years, but we'll keep you posted on that the second part of it is just our overall corporate tax reform in France on on their corporate rates and that is that is permanent so that steps down again this.
Year to 27, 5% from 31% last year and it steps down again in 2022 down to 25%. So we'll see additional improvement next year as that occurs. So that's the landscape are currently and we'll keep you posted on the French business tax going forward as well. Thank you.
Oh, great. Thanks, Gerry and units this will be the last question coming up.
Thank you it came from the line of George Tong with Goldman Sachs. Your line is now open.
Hi, Thanks, good morning.
Gross margins contracted 70 bps year over year in the quarter, you mentioned a negative impact of about 40 bps from temp staffing and 30 bps from Perm placement can you talk a little bit about which areas contributed to the negative surprises on gross margins and <unk> and how those areas Mike evolve heading into <unk>.
Sure George.
I'd say just quickly we came in within our guidance. So we did come in within the range. It was just.
Slightly below the midpoint at the lower end, so I would say on an overall pretty much in line with expectations.
Sept that we did call out that we did have more.
Logistics manpower business seasonal year end work.
That was a bit of a mix issue that took the margin down slightly I would say that that's probably the main item that took us down slightly below the midpoint of that GP margin I think on on overall basis as I mentioned earlier staffing pricing is holding up very very well.
If you look at staffing margin in the fourth quarter versus the third quarter. It was a little bit more of a decrease of 40 basis points, but largely due to that enterprise mix of logistics that I mentioned that debt contributed a little bit more the other 10 basis points was really the anniversary of some subsidies and frac.
We had the sea on subsidies that came in in October of 2019, So as we lap those that was about 10 basis points of the.
The pressure as well, but overall I would say we feel pretty good on that really feeds into our guide for the first quarter, where on an underlying basis, we see staffing pretty close to flat year over year overall, GP margin still down about 10 basis points, largely because perm still recovering.
Got it that makes sense and then as a follow up you talked about January trends in France softening as Covid concerns there have increased and the government imposed restrictions.
<unk> can you elaborate just broadly on the labor market conditions in France, and how long, perhaps you expect the lockdowns will be in police force.
It's difficult to project, how long the lockdowns will be in place for in France or for that matter across Europe, I think our caution as we look into the first quarter. It really is related to the evolution in Europe and that has to do with the impact of the virus appears to be still very strong.
Long and the governments across Europe, including France, I've put in lockdown measures to prevent the spread and the second component is the slow speed of the vaccine rollout.
As soon as we start to see an improvement in the health situation across Europe, and in France, as well as the speeds of vaccinations pickup. Then then we think we'll see some good evolution can also and in France and in Europe, I had the opportunity to be in France, just a couple of weeks ago on soy.
Was there to review the business and see for myself on the Lockdown measures were doing and it's clear that both you know government is interested or not impact on the economy too much the public knows how to behave and tried to reduce the spread of the virus and finally the companies are much better at navigating the effect of the.
Section risks within their production facilities as well as within their office environment and of course most of the office environment is has done remotely at this point to reduce the risk of infections. So overall George I think we feel good about where this is going eventually the outlook is.
A little bit more cautious based on the near term prospects in particular on Europe.
Very helpful. Thank you.
Thank you George and with that we come to the end of our fourth quarter 2020 earnings call. We look forward to speaking with you in our next quarterly earnings call. Thanks, So much have a good rest of the week.
Thank you and this does conclude today's conference call. Thank you all for participating you may now disconnect.
Yeah.