ManpowerGroup Inc

NYSE:MAN

Earnings Call Transcript 2018-Q2

[Operator]

Welcome to ManpowerGroup Second Quarter Earnings Results Conference Call. At this time, all participants are in a listen-only mode until the Q&A session of today’s conference. This call is being recorded. If you have any objections, please disconnect at this time.

And now, I will turn the call over to ManpowerGroup Chairman and CEO, Jonas Prising. Sir, you may begin.

[Jonas Prising, Chairman and CEO]

Good morning. Welcome to the second quarter conference call for 2018. With me today is our Chief Financial Officer, Jack McGinnis. I will start the call today by going through some of the highlights of the second quarter, then Jack will go through the operating results and the segments, our balance sheet and cash flow, as well as comments on our outlook for the third quarter, and then I will follow up with some final thoughts before our Q&A session.

Before we go any further into our call, Jack will now read the Safe Harbor language.

[Jack McGinnis, CFO]

Good morning, everyone. This conference call includes forward-looking statements, which are subject to known and unknown risks and uncertainties. These statements are based on management’s current expectations or beliefs. Actual results might differ materially from those projected in the forward-looking statements. Additional information concerning factors that could cause actual results to materially differ from those in the forward-looking statements can be found in the Company’s annual report on Form 10-K and in the other Securities and Exchange Commission filings of the Company, which information is incorporated herein by reference.

Any forward-looking statement in today’s call speaks only as of the date of which it is made, and we assume no obligation to update or revise any forward-looking statements.

During our call today, we will reference certain non-GAAP financial measures, which we believe provide useful information for investors. We include a reconciliation of those measures where appropriate to GAAP on the Investor Relations section of our website at manpowergroup.com.

[Jonas Prising, Chairman and CEO]

Thanks, Jack. We have made good progress during the first half of 2018 and delivered solid second quarter results. Revenue in the second quarter came in at $5.7 billion, an increase of 4% in constant currency. On a same-day basis, our underlying organic constant currency revenue growth rate was 3%. This reflects a lower growth rate than we expected at the beginning of the quarter.

The lower revenue growth rate is primarily attributed to some of our Manpower business in Europe and most notably in France. Partially offsetting the softer revenue growth trend in some countries were better than expected revenue trends in the U.K., throughout Asia Pacific and various businesses within the Americas. Specific to the U.S. this April, we’ve experienced a steadily improved billing days adjusted revenue trend.

Operating profit for the second quarter was $208 million, up 2% in constant currency. As we announced on our last call, we did incur restructuring charges of this quarter, which Jack will discuss in more detail later in the call.

Excluding these restructuring charges from both years, operating profit was $224 million for the quarter, an increase of 4% in constant currency. Operating profit margin came in at 3.7% down 10 basis points from the prior year and after excluding the restructuring charges operating profit margin was 4% which was flat to the prior year and represented the midpoint of our guidance.

Our performance in the quarter also reflects gross profit margin contraction which has improved from recent quarters, offset by further SG&A productivity improvements.

Earnings per share for the quarter was $2.17, excluding the restructuring charge in the quarter, earnings per share was $2.35 an increase of 24% in constant currency.

During the quarter, we continued to see strong growth in our market-leading solutions businesses, particular in RPO, which produced double-digit revenue and gross profit growth year-over-year.

Additionally, our Proservia business continued to strengthen year-over-year in Europe and most notably in France. Although we typically discuss our largest operations during our quarterly commentary, today I would like to acknowledge some of the other businesses in key markets the demonstrated very strong performances during the second quarter, and these include Canada, Peru, the Czech Republic, Poland, Greater China and India.

Great operation such as these, as well as many others that I haven’t mentioned, evidence our superior geographic diversification. Having the largest global footprint in our industry, we can seamlessly provide innovative workforce solutions to our clients in all corners of the world.

We have previously discussed the importance of technology as part of our strategic priorities. And in addition to our investments and technology to leverage digital capabilities to improve our candidate attraction, client satisfaction and employee productivity, we provide thought leadership on the impact of technology on the workforce.

This was recently demonstrated to our role as the HR partner of the Viva Technology Conference in Paris. Viva Tech attracts more than 80,000 attendees and we have partnered with the organizer since its launch three years ago to support startups and accelerate technology adoption.

This year, we showcased our latest HR technology innovations. These included augmented reality, virtual-reality, and digital predictive performance tools. And as part of the event, I also hosted a CEO discussion on how to upskill and reskill your workforce for the digital age, which we believe is the defining challenge of our time for companies and nations alike.

And with that, I would like to turn it over to Jack to provide additional financial information, and review of our segment results and our second quarter outlook.

[Jack McGinnis, CFO]

Thanks, Jonas. As Jonas mentioned, we had a solid second quarter performance with operating profit growth excluding restructuring costs of 9% or 4% growth on a constant currency basis.

This performance resulted in an operating profit margin of 4%, excluding restructuring costs which was at the midpoint of our guidance range.

As Jonas discussed, revenue growth of 4% in constant currency came in slightly below our constant currency guidance range. On a reported basis, our gross profit margin declined 40 basis points which represented the midpoint of our guidance range.

Currency translation represented 10 basis points of the 40 basis point decline and on a constant currency basis the gross profit margin decline was 30 basis points, which represented a 10 basis point improvement from the first quarter trend.

Although our gross profit margin declined compared to the prior year, this impact was offset by our SG&A costs, which once again improved as percent of revenue driving the operating profit margin result before restructuring costs.

Breaking our revenue growth down into a bit more detail, our reported growth rate of 9% includes a positive currency impact. On a constant currency basis, our revenue growth rate was 4%. Acquisitions contributed about 30 basis points to our growth rate in the quarter and organic constant currency revenue growth in the quarter was also 4%, which after adjusting for billing days represented a 3% growth rate.

The slower growth rate was primarily driven by a slower revenue growth than expected in France. Although we experience a softer revenue environment in France during the second quarter, we believe it is a market in which there continued to be very good opportunities for growth, particularly post the summer holiday season.

On a reported basis, earnings per share were $2.17, which included restructuring costs which had a $0.18 negative impact on earnings per share.

As I stated last quarter, our EPS guidance excluded restructuring costs. Excluding these costs, earnings per share was $2.35, which exceeded the midpoint of our guidance after considering the lower impact of foreign currency.

More specifically, starting with our guidance EPS midpoint of $2.37 lower operational performance on lower revenues contributed to a $0.02 reduction and lower foreign currency translation represented an $0.08 reduction.

These were partially offset by positive adjustments including $0.04 attributable to a lower effective tax rate, $0.02 from lower weighted-average shares from our purchases during the quarter, and $0.02 from favorable other expenses driven by earnings pickup related to our partial ownership interest in our Switzerland franchise.

Looking at our gross profit margin in detail, our gross margin came in at 16.3% on a reported basis, primarily driven by a staffing interim decline of 30 basis points.

A gross profit margin increase of 10 basis points from higher permit recruitment was offset by lower contribution from Right Management in the quarter.

As I mentioned earlier, currency negatively impacted the gross profit margin by 10 basis points. Half of the staffing interim margin decline is attributable to the reduced rate in 2018 of the CICE payroll tax credits in France. We have seen improvement in the trend of the staffing interim margin decrease as the client mix of large accounts has begun to stabilize, notably in Italy and we were not impacted by sickness to the same degree as in the first quarter.

Next, let’s review our gross profit by business line. During the quarter, the Manpower brand comprised 63% of gross profit, our Experis Professional business comprised 20%, Manpower Group Solutions comprised 13% and Right Management 4%.

Our strongest growth was once again achieved by a higher value solutions offerings within Manpower Group Solutions. During the quarter, our Manpower brand reported a constant currency gross profit increase of 3%, this represents a slight decrease from the 4% growth rate in the first quarter.

Within our Manpower brand, approximately 60% of the gross profit is derived from light industrial skills, and 40% is derived from office and clerical skills.

Gross profit from staffing within both light industrial skills and office and clerical skills experienced a similar rate of growth in the quarter. Gross profit in our Experis brand experienced a 2% constant currency growth rate in the quarter, reflecting an increase from the flat growth experienced in the first quarter.

This was driven by strong performance throughout the Nordics, Asia Pacific, Middle East, Canada and improvement in the U.S. and the U.K. Manpower Group Solutions includes our global market leading RPO and MSP offerings, as well as talent based outsourcing solutions, including Proservia, our IT infrastructure and end-user support business.

Gross profit growth in the quarter was up 9% in constant currency, with double-digit growth in our RPO and Proservia businesses during the quarter.

Right Management experienced a decline in gross profit of 10% in constant currency during the quarter as outplacement activity continued to decline. I will comment further on Right Management in my segment review.

Our reported SG&A expense in the quarter was $714 million, including $15 million of restructuring costs. We experienced the restructuring actions within our U.K. business during the quarter which drove the additional $5 million of restructuring costs above our previous estimate for the quarter. I will discuss restructuring cost further as part of the segment review.

SG&A expense was $699 million, an increase of $43 million from the prior year after excluding restructuring costs from both years. The increase was driven by $27 million from currency changes, $3 million from acquisitions and $13 million from operations.

On an organic basis in constant currency, excluding restructuring costs, SG&A expenses were up 2% compared to the prior year. Excluding the restructuring costs, SG&A expenses as a percentage of revenue in the quarter improved 30 basis points to 12.4%, driven by the benefits of previous restructuring actions and a continued focus on operational efficiency across our businesses. We expect to recover the restructuring cost of $15 million through cost savings over the next 12 months.

I will discuss the operating performance of the segment’s next and will provide the breakout of the restructuring cost by segment. The Americas segment comprised 18% of the consolidated revenue.

Revenue in the quarter was $1.1 billion, an increase of 2% in constant currency. OUP of $57 million represented a decrease of 9% in constant currency excluding restructuring costs in the prior year, driven by the U.S. which I will discuss next. Similarly, OUP margin decreased by 60 basis points year-over-year excluding restructuring costs in the prior year.

The U.S. is the largest country in the Americas segment comprising 61% of segment revenues. Revenue in the U.S. was $640 million down 5% compared to the prior year.

Although on an overall quarter basis, this represented a slight improvement from the 6% average daily revenue decline in the first quarter, we experienced steady improvement in the average daily trend in the U.S. since April. In the month of June, we exited the quarter on an average daily revenue decline of 2%.

During the quarter, OUP for our U.S. business decreased 22% to $38 million excluding restructuring costs in the prior year. OUP margin was 6% a reduction of 130 basis points from the prior year, excluding restructuring costs in the prior year period.

A decrease in OUP dollars and margin were expected and were the result of two main items. Additional spend on front office technology in the U.S. and the non-recurrence of prior direct cost reductions including Worker’s Compensation and healthcare adjustments as discussed last year.

Within the U.S. the Manpower brand comprised 42% of gross profit during the quarter. Revenue for the Manpower brand in the U.S. was down 4% in the quarter and we experienced steady improvement in the average daily revenue trend from April through June.

The Manpower business had a strong pipeline of new activity and we expect positive growth during the third quarter. The Experis brand in the U.S. comprised 36% of gross profit in the quarter. Within Experis in the U.S; IT skills comprise approximately 70% of revenues.

During the quarter, our Experis revenues declined 6% from the prior year, compared to the 11% decline experienced in the first quarter. Experis been very focused on profitable business and this again led to another quarter of very strong gross profit margin in the U.S. during the quarter.

Manpower Group Solutions in the U.S. contributed 22% of gross profit and experienced a 3% revenue decline in the quarter compared to a 9% decline in the first quarter.

As we previously mentioned, the revenue trend includes a non-recurrence of certain low-margin MSP related business, in addition the U.S. RPO business has been experiencing a reduction in hiring the one large client, which is in the process of being offset with incremental new business.

We see good opportunities for growth in both our higher value MSP and RPO solutions. Our Mexico operation had revenue growth in the quarter of 9% in constant currency. The business in Mexico performed very well in the quarter and we expect good growth also into the third quarter.

Revenue in Argentina was up 19% in constant currency, which continues to reflect the impact of inflation. We continued to focus on margin and payment terms improvement given the inflationary environment.

Beginning July 1, we will be accounting for investment in Argentina as a highly inflationary economy and as a result will experience earnings volatility within other expense as certain foreign currency related changes will be recorded within earnings instead of the currency translation adjustments within shareholders equity.

Based on the size of our Argentina business, we expect such volatility to be modest, and we’ll specifically discuss any significant impacts on earnings going forward.

Revenue growth in the other countries within the Americas was up 15% in constant currency or 10% on an organic basis. This growth was driven primarily by strong revenue growth in Colombia and Brazil.

Southern Europe revenue comprised 43% of consolidated revenue in the quarter. Revenue in Southern Europe came in at $2.4 billion, an increase of 6% in constant currency or 5% adjusted for billing days. This represented a deceleration from the 12% average daily revenue growth rate in the first quarter, driven by France.

Excluding restructuring costs, OUP increased 4% from the prior year in constant currency, and OUP margin was down 10 basis points from the prior year. CICE reductions negatively impacting gross profit margin in France were partially offset by improved performance in Spain and the countries comprising other Southern Europe.

Permanent recruitment growth was strong at 13% in constant currency. Restructuring cost of $2.3 million primarily relate to front office centralization and back-office optimization activities in Italy and Spain.

France revenue comprised 62% of Southern Europe segment in the quarter and was up 3% over the prior year in constant currency. This represented a slowing from the 9% growth rate in the first quarter.

We observed a more significant slowing than expected during the quarter, which is in line with the external market indicators in France. As I previously discussed, the CICE rate decrease impacted our second quarter results reducing gross profit.

OUP was $73 million, a decrease of 4% in constant currency and OUP margin was down 40 basis points in constant currency at 4.8%. Excluding the impact of CICE, we once again experienced improvement in the underlying staffing margin trend through the second quarter in France reflecting ongoing pricing discipline.

Permanent recruitment was strong at 9% growth in constant currency during the quarter. The underlying improvement in staffing margin trend and permanent recruitment fees have helped to offset the impact of the CICE rate reduction in 2018.

Early results in July have indicated a continuation of the slowing revenue trend. As a result, our third quarter guidance incorporates a lower rate of revenue growth from the second quarter.

Revenue in Italy increased 12% in constant currency to $443 million, and represented a growth rate of 11% in constant currency on an average daily basis.

We previously discussed the impact business mix changes have had on our staffing gross profit margin in Italy from the very strong growth in recent quarters.

We have seen stabilization of the impact of this large client mix, which resulted in improvement in the gross profit margin trend from the first quarter to the second quarter.

Permanent recruitment growth has also helped gross profit margin, specifically permanent recruitment fees increased 9% on the comps currency basis over the prior year.

Excluding restructuring costs, OUP growth was up 11% in constant currency to $33 million and OUP margin of 7.5% match the very strong prior-year result as SG&A cost management and operating leverage again offset gross profit margin declines.

Our Italy business continues to perform very well. We expect growth to continue in the high single digits in the third quarter. Revenue growth in Spain was strong, up 9% over the prior year in constant currency. On an organic constant currency basis, the revenue growth rate was 8%.

Adjusted for billing days, the organic constant currency growth rate was 6% in the quarter. We expect Spain will continue to have strong performance into the third quarter.

Our Northern Europe segment comprised 25% of consolidated revenue in the quarter. Revenue was up 2% in constant currency to $1.4 billion.

On the billings days adjusted constant currency basis, Northern Europe grew 1% which represents a decrease from the 3% rate in the first quarter, primarily driven by Germany and the Netherlands, which were partially offset by improvement in the U.K. which reached positive growth during the quarter.

Excluding restructuring costs, OUP increased 5% in constant currency and OUP margin was flat year-over-year. We are very focused on improving the profitability of our Northern Europe operations. As I mentioned earlier, we expanded our restructuring activities beyond our previous estimate during the quarter.

Total restructuring cost for Northern Europe during the second quarter equaled $13.2 million and approximately half of this related to the U.K. The restructuring actions in the U.K. include the optimization of branch locations, office consolidations as well as other front and back-office efficiency activities that continued from the first quarter.

The remaining restructuring costs in the quarter primarily relate to Germany and the Netherlands and include the continuation of delivery model and other front office centralization initiatives as well as back-office optimization activities.

Our largest market in Northern Europe segment is the U.K; which represented 30% of segment revenue in the quarter. U.K. revenues were up 3% in constant currency and were up 2% on a billing days adjusted basis improving from the flat result in the first quarter.

This represents the fourth consecutive quarter of improvement in the revenue trend and a return to growth for the U.K. Permanent recruitment fees increased during the quarter at a 7% constant currency growth rate.

Our Manpower business in the U.K. experienced flat constant currency growth in the quarter, which represented a continuation from the flat growth in the first quarter.

Our Experis business experienced another quarter of improvement and reach double digit constant currency revenue growth in the second quarter. We expect the revenue trend for the U.K. overall to remain relatively stable into the third quarter.

Revenue growth in Germany was flat on a constant currency basis in the second quarter or down 2% on an average billing days basis, which represents a deceleration from the 4% growth in the first quarter, driven by a slowing of the industrial Manpower business and the anniversary of high growth rates in the year ago period.

We expect to see a continuation in this overall flat to slightly down revenue trend in Germany in the third quarter. In the Nordics, we also experienced flat revenues during the second quarter on an average daily basis year-over-year as mid single digit revenue growth in Norway offset a revenue decline in Sweden. This represented deceleration from the average daily growth rate experience in the first quarter.

We expect to see steady growth from Norway and a return to growth for Sweden in the third quarter. Revenue in the Netherlands and Belgium decreased 1% and increased 4% respectively in constant currency on a billing days adjusted basis. This represented a slowing of revenues in the Netherlands in both the Manpower and Experis businesses and stable performance in Belgium from the first quarter.

The Netherlands also continues to anniversary very high comparable growth from the prior year period. We expect slightly improving revenue growth for these businesses in the third quarter.

Other markets in Northern Europe had a revenue increase of 9% in constant currency, driven by strong growth in Poland and Russia. The Asia-Pacific Middle East segment comprises 13% of consolidated revenue in the quarter.

Revenue was up 10% in constant currency to $725 million representing a decrease from the 12% average daily growth in the first quarter. This represented higher-than-expected growth, which was driven by Australia and China.

Permanent recruitment growth was very strong at 16% in constant currency. OUP was $29 million in the quarter, representing a 23% increase in constant currency and OUP margin increased 50 basis points driven by gross profit margin improvements.

Revenue growth in Japan was up 3% on a constant currency basis, and adjustment for billing days, this represented a slight decrease from the 5% growth in the first quarter.

Permanent recruitment growth was once again very strong at 27% in constant currency. Both OUP and OUP margin again improved under stronger revenues in the quarter.

Revenues in Australia and New Zealand were up 8% in constant currency, and adjusted for billing days, this represented a 5% revenue growth rate representing a decrease from the 7% growth in the first quarter.

Our Australia business has seen an increase in new business and we expect continued improvement in revenue growth in the third quarter. Revenue and other markets in Asia-Pacific, Middle East continues to be very strong, up 17% in constant currency.

This was a result of strong double-digit growth in the number of markets, including operations in India, Greater China, Thailand, Malaysia, Singapore and Vietnam.

Our Right Management business was slower during the second quarter, based on reduced outplacement activity. During the quarter, revenues were down 10% in constant currency to $52 million following a 15% decline in the first quarter.

Considering restructuring cost impact in both years, OUP decreased 5% on a constant currency basis as SG&A reductions help to partially offset the impact of revenue reductions.

Excluding restructuring costs, OUP margin increased 100 basis points reflecting improved efficiency within this business.

Now I’ll turn to cash flow and balance sheet. Free cash flow defined as cash from operations less capital expenditures was $149 million for the first six months of the year. As I mentioned last quarter, this includes the sale of the France CICE tax credit in April 2018 of €191 million representing US$234 million.

Excluding the CICE sale in both years, free cash flow represented an outflow of $86 million in 2018 compared to an outflow of $22 million in 2017.

This reflects higher growth of receivables in certain geographies and tiny changes in certain payables. We expect strong positive cash flows in the second half of the year.

At quarter end, days sales outstanding increased by two and a half days. Consistent with prior quarters, changes in our business mix is driving some of the overall DSO increase. We continue to execute on initiatives to improve the trend of DSO.

Capital expenditures represented $27 million during the first six months of 2018. During the quarter, we purchased 653,000 shares of stock for $63 million, bringing total purchases for the six-month period to 1.1 million shares $113 million.

As of June 30, we have 1.8 million shares remaining for a purchase under the 6 million share program approved in July of 2016. Our balance sheet was strong at quarter end with cash of $768 million and total debt of $1.09 billion bringing our net debt to $321 million. Our debt ratios are very comfortable at quarter end with total debt to trailing 12-month EBITDA of 1.2 and total debt to total capitalization at 28%.

Our debt and credit facilities at June 30 reflect the maturity of the previous €350 million note at an effective interest rate of 4.5% during June. We replaced this facility with an eight year duration, €500 million note at an effective interest rate of 1.8%.

During June, we also updated our revolving credit agreement by replacing it with a new agreement for a five-year term at the same borrowing capacity of $600 million. The revolving credit agreement remains unused. There was no change to the €400 million note with an effective interest rate of 1.9% maturing in September of 2022.

Next, I’ll review our outlook for the third quarter of 2018. We are forecasting earnings per share to be in the range of $2.37 to $2.45, which includes a negative impact from foreign currency of $0.05 per share. Our constant currency revenue guidance range is for growth between 4% and 6%.

The impact of acquisitions represents 20 basis points of our growth rate projection for the third quarter. These are relatively flat year-over-year and only represent a very slight improvement. As a result, this represents billing days adjusted organic constant currency growth rate of 4% at the midpoint, which would represent an increase from the 3% organic days adjusted constant currency growth in the second quarter, primarily due to anticipated improvement in the Americas, Northern Europe and APME.

From segment standpoint, we expect constant currency revenue growth in the Americas to be in the mid single-digits, Southern Europe to be in the low to mid single-digits, Northern Europe growing in the low single-digit range and Asia Pacific, Middle East growing in the high single to low double-digit range. We expect a revenue decline at Right Management in the mid single-digits.

Our operating profit margin during the third quarter should be down 10 basis points compared to the prior year quarter reflecting continued technology investment and reduced operating leverage in certain countries where we expect reduce growth.

We expect our income tax rate in the third quarter to approximate 27%, as usual our guidance does not incorporate additional share purchases and we estimate our weighted average shares to be 66 million reflecting share purchases through June 30.

With that, I'd like to turn it back to Jonas.

[Jonas Prising, Chairman and CEO]

Thank Jack. Reflecting on the second quarter revenue trend, although our revenue growth was softer than the expected, we believe we have opportunities to improve profitable growth in the future. This optimism is evident in our conversations with our clients, indicating resilience of employer confidence.

The continued strength of the global labor markets was also confirmed for our Q3 ManpowerGroup Employment Outlook Survey which again showed favorable hiring intent in 43 out of 44 countries surveyed.

And in addition our recent Global Talent Shortage Survey confirmed that labor markets are getting tighter as our Talent Shortage Index reached its highest level in 12 year with 45% of employers indicating difficulties in finding the talent they need.

In summary, in the current environment access to human capital continues to be of critical importance for employers across the world, and we are well placed to take advantage of that demand with our strong and connected brands, our extensive portfolio services and our unrivaled global footprint.

To conclude our prepared remarks, I would like to thank our employees throughout the 80 countries and territories in which we operate. We are very grateful for the commitment and dedication that they devote to helping power the success of our clients around the world, and for finding meaningful and sustainable employment for people across a wide range of skills and industries. Thank you for everything you do to make us successful.

And with that, I would now like to open the call for Q&A. Operator?

[Operator]

Thank you. [Operator Instructions]. Our first question is coming Andrew Steinerman of JPMorgan. Your line is now open.

[Andrew Steinerman, JPMorgan]

Jonas, I want to know what you think is causing the deceleration in French temporary help. Is it the labor strikes? Is it something broader? Our economists are still suggesting favorable real GDP. Do you feel like there might be an economic pause in France? And why are you optimistic about the French temporary help business kind of post the summer?

[Jonas Prising, Chairman and CEO]

Yes. Thanks Andrew. When we speak to our clients what they say is that, the French economy is growing very quickly and their manufacturing output and activity was very high at the end of 2017 and coming into 2018. But as they saw a little bit of a slowdown and if you look at the PMI date, and you look at other things, the French National Bank yesterday came up with the report confirming that whilst the economic outlook was positive and they expected to continue to do well, they did note the slowdown right now, but that they expected to see a pickup towards the end of the year.

So, in our conversations with our clients they say that they came in a little bit ahead of their skis at the beginning. They're working off their inventory and I think that's what we're seeing from our manufacturing clients. We haven't seen an impact on the strikes directly, but of course there can be a derivative effect of that with our clients, but I would say our optimism is really founded on the understanding of the fundamentals which continue to look good for France.

Our conversations with our clients, our own surveys which indicate that France should be able to see some better growth after the summer; we don't know exactly when that would be. But clearly the return in September is going to be important for us to understand and then going forward from there. So, as Jack said in our prepared remarks, we're optimistic about our opportunity to see some improved growth in France towards the end of the year.

[Andrew Steinerman, JPMorgan]

Okay. Thank you.

[Operator]

Thank you. Our next question is coming from Hamzah Mazari of Macquarie Group. Your line is now open.

[Hamzah Mazari, Macquarie Group]

Good morning. Thank you. The first question is just if you could maybe just touch on how investors should think about any tariff impact on your business. I know you have exposure to industrial staffing. Maybe just highlight for us any direct impact, any indirect impact. Are you concerned? I know visibility is low because it's early days, but just sort of any comments there?

[Jonas Prising, Chairman and CEO]

Yes. Good morning, Hamzah. I would say more broadly that we keep monitoring effects of -- potential effects of the trade wars or to tariff disputes, the impact of the new legislation potentially introduced by populist governments that come in. The effects of a hard and soft Brexit and things like that on a continuing basis. And of course we think that that could have an impact, but I would say in general and in specific to your question around tariffs we have not seen any impact at this point. And should that change? Of course we'll take that into account. But so far we've not seen any impact from those tariff discussions at this point.

[Hamzah Mazari, Macquarie Group]

Okay. And then just maybe for Jack. Maybe if you could just talk about how you're thinking about the buyback. I know it's not in guidance. The stock has derated significantly. If you we look at historically at your buybacks you stepped it up a lot in 2015 when we were sort of an industrial recession around that time. Maybe just frame for us how do we think about capital allocation going forward?

[Jack McGinnis, CFO]

Sure, Hamzah. I guess I'll start by saying our capital allocation strategy remains consistent, so we haven't changed our allocation strategy. And to your point what you've seen is a good track record of us returning cash to our shareholders through share purchases and that continued through the second quarter. Our approach will continue to be opportunistic. We don't have said amounts that we announced, so we do have an opportunistic approach. And as we've said before in terms of capital allocation overall, if we are not allocating cash to acquisitions we will certainly continue to do share purchases. And I would say you should expect that share purchases would continue into the third quarter.

[Hamzah Mazari, Macquarie Group]

Okay. Thank you.

[Operator]

Our next question is coming from Mark Marcon of Baird. Your line is now open.

[Mark Marcon, Baird]

Good morning. Thanks for taking my question. I was just wondering if you could give us bit of an update with regards to what you're hearing as it relates to the CICE, both in terms of the way that your competitors are potentially reacting. And how we should think about pricing? And then in addition to that, any latest developments with regards to the subsidies that are going to replace the CICE?

[Jack McGinnis, CFO]

Mark, this is Jack. Yes. I guess I'd say, the short story is, there really hasn't been any significant developments, so I think in line with our previous comments. All along we've expected that we probably won't get more detail, more specific detail that will help us give more guidance on this topic until the preliminary budget comes out from the government in late September. So there hasn't been anything formal happening on that. I do know that this continues to be an area that there's a lot of discussion around just within corporate France in general, but as of right now there really hasn't been anything significant to talk about since our last call.

In terms of your point on the subsidies what we do know is part of the very general framework that they put out previously as we would expect subsidies to increase particularly in the class of workers in the one times to 1.6 times minimum wage. Their preliminary guidance talked about that going up an incremental 3.9% versus the previous levels and also talked about the continuation of the 6% subsidy for CICE today continuing in a new form into 2019.

But as we said before the -- that some of the details that we really need to be able to give a more precise guidance on this is exactly how profit-sharing will work on that benefit and we don't expect to have more detail on that until the preliminary budget.

[Mark Marcon, Baird]

And when do you think the preliminary budget will come out now? Is it still September?

[Jack McGinnis, CFO]

Yes, typically the very end of September.

[Mark Marcon, Baird]

Okay. And you may have given it and I missed it, but the -- what were the revenue trends by month in France and how is July looking early on?

[Jack McGinnis, CFO]

Yes. So I'd say this quarter the revenue trends by month for France aren't as helpful because of the holiday impact for both April and May. So I think generally speaking if you look at April it was a mid-single digit increase, May was closer to flattish based on the significant impact of holidays, lot of holidays falling on Tuesdays and Thursdays, and June came back to stronger growth more in line with what we saw in April. But I think the trend that we saw specific to July was a step down and that's – to Jonas earlier point that's what we've used for our guidance.

We're seeing what the trend is in July, so it's below the third quarter -- the second quarter trend overall, so the second quarter overall for France as we talked about was about 3% growth. We're saying that reduced from that level in early July, so think of it as low single-digits. And that's what we're seeing now and that's what we're using for the guidance. But to Jonas's point it really depends on how France comes back after the summer holidays. And if they come back strong in production then certainly we'll see some upside from there.

[Mark Marcon, Baird]

And then one last follow-up, just the monthly trends in the U.S. between ManpowerGroup and Experis and do you expect Experis to be up year-over-year in the U.S. in the third quarter?

[Jonas Prising, Chairman and CEO]

I'll get Jack to give you some of the details between the various brands, but overall what we said it was going to happen in the second quarter roughly played out and that way we saw improvement for Manpower and Experis as well as solutions for that matter and we're continuing on our path to see that business come back. So while we're - it still not where we want to be. We did see the improvement that we were expecting and we're expecting also going into the third quarter to see continued improvement. So whilst we still have some more work to do. We're on the right track as far as the U.S. business is concerned.

[Jack McGinnis, CFO]

I think, Mark, in terms of the trend that you ask for on the Manpower brand in the U.S. we saw steady improvement as we talked about for the U.S. overall, that was driven by the Manpower brand during the quarter. So, think of it is mid single-digits decline in April and May improving too low single-digits in June and on the Experis side when you look at that average rate for the quarter of that mid single-digits that was improved through the end of June, we saw an improvement similar, steady improvement but off a higher level of decline, so steady improvement on the Experis side through the end of June ending in the mid-single digits.

[Mark Marcon, Baird]

Great. Thank you.

[Jack McGinnis, CFO]

Thanks Mark.

[Operator]

Thank you. Our next question is coming from Tim McHugh of William Blair Company. Your line is now open.

[Tim McHugh, William Blair Company]

Thanks. As we see growth, I guess kind of becoming stronger in Latin America, Asia, I guess some of the smaller countries that we don't talk about as much. How do we think about the margin impact of that in terms of the revenue, and I guess mix shift to certain degree. Are those higher margin, lower margin countries relative to the company average?

[Jonas Prising, Chairman and CEO]

I would say – and Jack can come back to the margin impact, but I would say as you correctly observed and as I mentioned in our prepared remarks, this quarter is a nice illustration of having a very strong and the largest global footprint in our industry as far as our coverage is concerned and how we could see some of the emerging markets in Latin America and Asia Pacific really making a very strong contribution and an acceleration. So that was really good to see.

And as you may recall from our investor materials, although those markets don't at this time represent as much in revenue. They represent almost 40% in terms of our volume, so we feel really good about our footprint in those markets. And I thinking in this quarter you saw a number of them stepping up and really contributing also to the growth level.

[Jack McGinnis, CFO]

Yes. I would just add on to that. I think specific, Tim, to the margins, as Jonas said, typically they run at a lower margin. You can see that when you look at the APME segment overall at their OUP margin will be below what you'll see in some of the other areas. But I think the key point is the improvement during the quarter. So significant improvement, APME up 50 basis points than OUP margin, and a lot of that is being driven by those countries that we mentioned, so very, very strong performance by India, Greater China, lot of the other countries that we mention in our prepared remarks, and improving trend in terms of gross profit margin as well.

And I said the same thing for a lot of the Latin America countries. I think if you look at Mexico, very, very strong OUP margin improvements year-over-year in the second quarter for us and that goes as well as for a lot of the countries in the other Americas as well, so a very positive trend.

[Jonas Prising, Chairman and CEO]

And I would say the advantage of being so strong in a lot of these emerging markets is that we can diversify the business both from an Experis perspective, our solutions business as well as our perm, very early in their evolution and that's part of the reason why you are seeing also the positive evolution from a margin perspective.

[Tim McHugh, William Blair Company]

Great. And follow-up just, I guess maybe more broadly margin, I guess you're still growing at mid single-digits, but I guess some of the technology investments that you described I guess are limiting margins or is that would've thought that would've been a fast enough pace of growth that kind of see expansion still. So are we at a period where you're going to continue to step up that technology investment for a while? And we shouldn't be expecting margin expansion for a little bit here? I guess, can you just update thoughts on – I guess the path over the next year or 18-month?

[Jonas Prising, Chairman and CEO]

Tim, I'd say, you're right, we call that out specifically as an item that's impacting the third quarter outlook. But I would say, the impact of that has been has been something that we've been dealing with for a number of quarters. So we have been progressively doing technology enhancements and technology spend. So, I think it's not going to be in exact straight line. I think in the third quarter there's a bit more happening which has a little bit more of an impact, but that combined with some of the lower growth and some of the countries where we been having very good operating leverage is driving some of that pressure.

And I think specifically France has been an area where we had very good operating leverage based on that stronger growth. So I wouldn't say that you should expect that to see an outsized trend of that technology investment over the next few quarters having a bigger and bigger impact. I'd say, we've been doing a very good job of having that spend come in while we're able to fund it with good SG&A efficiencies, and I think you should expect to see that. So I wouldn't read too much into the trend into the third quarter.

[Tim McHugh, William Blair Company]

Thank you.

[Operator]

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

[George Tong, Goldman Sachs]

Hi. Thanks. Good morning. I like to dig a little bit deeper into France. Can you discuss how your competitive position is evolving with the recent slowdown? And what your view is and how production is likely to perform after the summer holidays based on your conversations with the customers?

[Jonas Prising, Chairman and CEO]

Our position in the French market is a little bit more skewed towards manufacturing, so we're not surprised to see that that when that slows down a bit that we would see some of those effects. And having said that, I think there is very clearly enough external market indications that the market has slowed down, be it at a macro level or at an industry level from our perspective. So we think this is the general trend and we feel good about our positioning within that trend and we believe that given our mix that we are moving with the market.

And we are hopeful as we've said that that this is a lull and that we start to see some more activity based on an improved environment later on in the year. And September will be an important month for us, but it could happen a bit later, but overall we remain optimistic that we'll have growth opportunities in France. And at this point we consider this a lull, we don't know how long it will last and we'll manage it either way, but we still feel good about the prospect of France. It's a country that's really just recently seen some better growth in 2017. 2018 growth has come down a little bit in terms of its projections from where it was before, but it still improving from a year-over-year perspective.

And we think that the reforms that France is undergoing will also make it more competitive and thus more conducive for growth from our perspective. So, overall we feel good about the prospect in France, although we of course are managing through this softer environment at this time.

[Jack McGinnis, CFO]

And I – George, I would just add to that in terms of what's actually happening in the underlying trend. So despite the revenue trend and the slowing that we saw, still very good underlying progress in the staffing margin and we've seen that for a number of quarters now and that improved again into the second quarter. So when you think about it we've talked about the fact that we've had to absorb that 60 basis point decrease in staffing margins based on the CICE rate reduction. And as a result of continued strong pricing discipline we continued to narrow that gap again in the second quarter. So that was very positive.

The other item that we talked a lot about in terms of France a year ago was are the turnaround we were doing in the Proservia business there and that's actually worked very well. And so that actually is contributing to our gross profit margin in France this year. So it's a lift as oppose to a drag from a year ago and so that's been not very good progress as well. So we'll continue – to Jonas's point, we'll continue to execute on those strategies and I think I'm on an underlying basis we see good opportunity continue to improve the efficiency.

[George Tong, Goldman Sachs]

Yes. Very helpful. And I guess related to your point on margins, in the quarter margins obviously contracted gross margins about 40 bps year-over-year, can you elaborate on wage inflation trends you're seeing in your various Northern and Southern European markets and what bill pay spread assumptions you're factoring into your 3Q guidance?

[Jack McGinnis, CFO]

Yes. I'd say no significant changes there, George, I think the trend that we've talked about in recent quarters is we're still seeing fairly muted levels of wage inflation and that continues into the second quarter. So we're not seeing a dramatic change. I'd say on a general overall basis, certainly there will be pockets where we'll see that in terms of the more in demand skill sets that we'll see wage inflation around. But generally speaking we haven't seen a dramatic shift. I think using the U.S. as an example we haven't seen a dramatic -- in our data we haven't seen a dramatic change from what the BLS data has published on an overall basis. So still in the mid 2% to 3% range of wage inflation and we're not projecting that's going to change dramatically into the third quarter.

I think on margins – on gross margins overall to your point though I think that trend in the second quarter of down 40 basis points. We were really encouraged by the progress we made during the second quarter. And you'll remember in the first quarter and the fourth quarter we were looking at 60 basis point declines year-over-year and we did note that FX was part of that last quarter and we had sickness as part of that as well. So it was encouraging to see on a constant currency basis, decline in GP margin was only 30 basis points.

So, we expect to see stabilization in that client mix shift and that's exactly what we saw in Italy and we saw improvement in their staffing margin trend during the second quarter, and as I mentioned earlier, good solid improvement in France as well. So the outlook for the third quarter is you'll see that gross profit margin at 30 basis points, so continuing and holding on to that progress that we saw in the second quarter of narrowing that gap to 30 basis points and taking that into the third quarter.

[George Tong, Goldman Sachs]

Very helpful. Thank you.

[Operator]

Thank you. Our next question is coming from Manav Patnaik of Barclays, Your line is now open.

[Unidentified Analyst]

Hi. This is Ryan on for Manav. Just a question on the U.S, I mean, can you help us understand some of the improvement there? How much that was just kind of catching up to the market and how much of that was driven by some of the internal changes that you made?

[Jonas Prising, Chairman and CEO]

Well, we think, the teams are executing well and in an environment that is good, so we have opportunities, we had demand for services and solutions in all of our brands here in the U.S. We're very mindful of making sure that we apply pricing discipline. We think financial talent is high in the U.S. and we want to make sure that we get the right kind of growth. And I think the team is starting to make good progress there. I still think that we have more work to do and until we get to where we need to be, but we're pleased with the progress that we've seen so far.

[Unidentified Analyst]

Got it. And then in Italy obviously there's been some proposals on the on the temp labor side. I know its pretty early, but any thoughts there on some of those early proposals? And how you guys think of that?

[Jonas Prising, Chairman and CEO]

I would say regarding the decree in Italy, it's very early days. This is all very recent. So this was initially announced on July 2, so during this month it was published July 13. And so -- from that date it basically has a 60-day period in which the parliament reviews it, determines whether they're going to make changes and amendments. And that process is underway currently. So the parliament is reviewing it. There is some discussion that that could be finalized, reviewed through the end of the month. So later in July there could be some developments regarding amendments to the proposed decree. And we'll just continue to watch it.

We know this is a big issue in the industry overall, so broader than the staffing industry. This relates to fixed term contracts as well. So this is an issue for all of corporate Italy. And this will be an issue that we know currently there's a lot of discussion happening in Italy regarding the decree and we'll be watching that closely. At this stage it's really too early to tell, but we'll certainly provide updates on that in the future going forward.

[Unidentified Analyst]

Got it. Understand. Thank you.

[Operator]

Thank you. Our next question is coming from Tobey Sommer of SunTrust. Your line is now open.

[Tobey Sommer, SunTrust]

Thanks. I was hoping you could give us a little bit of color on the Experis business in the U.S. and in particular IT made some progress and expect further progress with respect to kind of your pricing discipline, but I'm curious about the pricing that you are seeing in the market overall whether there's any change there or anything that you would expect versus kind of pricing that you already commented on for the U.S. as a whole?

[Jonas Prising, Chairman and CEO]

Well, Tobey. I think the overall wage environment in the U.S. in terms of wage inflation is still reasonably muted, I mean it somewhere between 2%and 3%. Now within the area of IT skills of course the demand for those skills means that its -- and the scarcity of resources means that we have opportunities to exercise pricing discipline and ensure that we get great -- good value for the great talent that are Experis team are finding for our clients. And I would say that the team is been very good at making sure that we look at that and we are getting the right amount of bill rates as well as improved spread and it's part of why our margins in the U.S. have been improving and on the Experis side in particular.

And this is some of the trade-off, yes, it's hard to find the talent but you are able to get a little bit better bill pay spreads as well as better bill rates for scarce talents. There's not that many of them. So this pace of progress might be a little bit slower, but we're pleased with how the team is approaching it and the gradual approach of continuing to make this improvement and as you heard us say in our prepared remarks we expect further improvement for both Experis as well as for Manpower into the third quarter.

[Jack McGinnis, CFO]

And the item I'd add to that, Jonas, is Experis did well in the second quarter in terms of perm improvement, so that doesn't always drive a big revenue trend in terms of the staffing revenues that come through the revenue line. But they saw very good improvement in perm recruitment fees in the quarter as well, so another good sign that we're seeing strengthen in pockets of the business.

[Tobey Sommer, SunTrust]

Thanks. Can I get your perspective also on the H1B visa activities that the administration is taking, whether that impacting the IT staffing market in the U.S.? And then I'm also curious about your perspective on statement of work growth there in the company's competitive positions, you compete and execute that kind of work?

[Jonas Prising, Chairman and CEO]

Well, I think more broadly speaking access to talent and skill talent is going to be a crucial competitive lever for the United States. And to achieve that we believe that immigration and access to that skill talent wherever it may be is going to be a crucial advantage that we need to exploit and need to have that movement of talent into the market. So and as far as restricting skill talent from coming to the U.S. it may have an impact of course on the H1B visas you saw how quickly the visas ran out once they were released, so the demand for that kind of talent not surprisingly is still very high.

As regards to our own business, we are not that dependant on H1B visas ourselves, although we have activities also where we are able to leverage our global footprint and make sure we access some of that talent through our operations in particular in India and in other places.

But my view on that would generally be – restricting access there is not going to be good for the country, nor is it going to be good necessarily for the industry as a whole because there’s a lot of demand for those kinds of skills.

As it relates to statement of work, this is an area that we’ve seen evolve nicely in terms of our own business here in the U.S. and I think that could be a good growth opportunity and good opportunity for some progress with the number of our clients as well.

[Tobey Sommer, SunTrust]

Thank you.

[Jonas Prising, Chairman and CEO]

Okay, with that, we’ve completed all calls in the queue and we’d like to thank you for joining the call today.

[Operator]

And that concludes today’s conference. Thank you for your participation. You may now disconnect.