ManpowerGroup Inc
NYSE:MAN
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ManpowerGroup Inc
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Welcome to the ManpowerGroup Fourth Quarter Earnings Results Conference Call. [Operator Instructions] This call will be recorded. If you have any objections, please disconnect at this time. And now I would like to turn the call over to ManpowerGroup Chairman and CEO, Jonas Prising. Sir, you may begin.
Good morning. Welcome to the year-end conference call for 2017. 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 fourth quarter and full year, and then Jack will go through the operating results, the impact of US tax reform and the segments, our balance sheet and cash flow, as well as comments on our outlook for the first quarter of 2018. And as we promised last quarter, I will then follow with a discussion of our strategy and Jack will discuss the resulting new financial targets before our Q&A session. As we have a busy call ahead of us, we may go beyond our normal ending time if needed to cover your questions.
Before we go any further into our call, Jack will now read the safe harbor language.
Good morning, everyone. This conference call includes forward-looking statements, which are subject to known and unknown risks and uncertainties. These statements are based on management's current expectations or beliefs. Actual results might differ materially from those projected in the forward-looking statements. 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 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.
Thanks, Jack. We're very pleased with our strong performance in the fourth quarter. Revenue came in at $5.6 billion, an increase of 7% in constant currency, which is on the high-end of our guidance range. On a same-day basis, our underlying organic constant currency growth was 7%, an acceleration from the 5% in the third quarter partly due to strong growth in December.
We saw very strong revenue growth in our Southern Europe segment, double-digit growth in France, Italy and Spain. However, we continued to see revenue weakness in the UK and US, although improved from last quarter.
Operating profit for the quarter was $239 million, up 6% in constant currency. Operating profit margin came in at 4.2%, a decrease of 10 basis points from the prior year, in line with our guidance. You'll recall that the fourth quarter of last year included a $7.5 million insurance settlement. Excluding that benefit from the prior year, our operating profit growth was 10% in constant currency with a 10 basis point expansion in margin. We continued to see gross profit margin contraction offset by our continued SG&A productivity improvements and good cost leverage.
Earnings per share for the quarter was $3.22, including $1.10 per share from the one-time benefits of the new tax reform. Excluding these impacts, earnings per share was $2.12, an increase of 8% in constant currency, or an increase of 12% excluding the insurance settlement from last year.
Earnings per share for the year was $8.04, an increase of 27% in constant currency or up 33% in constant currency excluding the restructuring charges in the first half of the year. Excluding the one-time benefit of tax reform, earnings per share was $6.95 for the year, a constant currency increase of 9% over the prior year. Revenues increased 6% in constant currency to $21 billion, and operating profit expanded to $788 million, an increase of 3% in constant currency or 8% excluding the restructuring charges earlier this year.
We are pleased with our strong performance as we have continued to see the improving revenue growth of operating profit expansion. The global economy continues to show favorable trends, particularly across Europe. We also see improvement in the labor market outlook in many countries, which was also reflected in our most recent ManpowerGroup employment outlook survey.
And with that, I'd like to turn it over to Jack to provide additional financial information and a review of our segment results and our first quarter outlook.
Thanks, Jonas. Turning back to fourth quarter results, as Jonas mentioned, we had a very strong fourth quarter performance with earnings per share up 67% in constant currency, including the $74 million benefit of tax reform. Excluding this benefit, earnings per share was up 8% in constant currency on 7% constant currency revenue growth. Revenue growth in the quarter met the top-end of our guidance range.
The operating profit margin was 4.2% at the midpoint of our guidance, which was an increase of 10 basis points over the prior year after excluding the prior year insurance settlement. Our gross profit margin declined 40 basis points compared to the prior year, which also represented the midpoint of our guidance. And our SG&A costs once again improved as a percentage of revenue.
Breaking our revenue growth down into a bit more detail, currency positively impacted revenues by 7% and acquisitions contributed about 30 basis points to our growth rate in the quarter. Therefore, while revenues were up 14% on a reported basis, our organic constant currency revenue growth in the quarter was 7%, which also represented the billings days adjusted growth rate as the impact of days was not as significant this quarter.
This is a 2% acceleration compared to the third quarter growth rate on a billings days adjusted basis. About half of this additional growth was attributed to a very strong December, which included increased holiday related staffing volumes. I mentioned our revenue growth met the top-end of our guidance range. This was largely driven by better than expected revenue growth in France and Italy and many of our major markets.
Earnings per share of $3.22 exceeded the midpoint of our guidance range by $1.17. As we mentioned, the enactment of the Tax Cuts and Jobs Act in the fourth quarter resulted in discrete benefits that increased earnings per share by $1.10. Excluding the discrete tax items, the remaining outperformance is attributable to the stronger performance of our operations with $0.07 coming from operations as we saw higher revenue growth and better expense leverage than expected.
A slightly lower effective tax rate, excluding tax reform, added $0.02, which was offset by a less favorable currency impact than expected and slightly higher other expense. Next we provide more detail on how tax reform impacted the fourth quarter results. As I mentioned, excluding discrete tax items our effective tax rate of 36.4% was slightly better than our guidance for the fourth quarter. Discrete items include a net reduction of our deferred tax liabilities, which provided a non-cash benefit of $248 million due to the move to a territorial tax regime and the lower US tax rate is part of the new US Tax Act.
Adoption of the US Tax Act also resulted in a discrete tax expense of $170 million for deemed repatriations related to foreign earnings. This amount was recorded in the fourth quarter and will be paid over eight years. And when considering the elimination of tax on future repatriations of foreign earnings, we expect the impact to be net cash flow positive over the period.
We also had a $4 million reduction in deferred tax assets related to France’s tax reform, which lowers the income tax rate in France in future years. This resulted in a fourth quarter global effective tax rate of 3.4%. The same adjustments lowered our annual effective rate from 36% to 26%. As you look at our effective tax rate, I would like to remind you that although the French business tax does not represent a formal component of the France corporate income tax framework, since 2010 US GAAP requires this expense to be reported as income taxes. This represented 6.5% of our effective tax rate in 2017. I will discuss tax rate expectations for 2018 and beyond later as part of the first quarter outlook.
Looking at our gross profit margin in detail, our gross margin came in at 16.6%, a 40 basis point decrease from the prior year, or a 30 basis points decrease excluding currency. Staffing interim gross margin declined 60 basis points, which had a 50 basis points unfavorable impact on the overall gross margin, which was primarily driven by business mix, as discussed in recent quarters as well as the expected CICE decrease in France, which negatively impacted December for payroll paid in January.
Permanent recruitment gross profit represented a very strong 17% increase year-over-year, and contributed 20 basis points to our overall gross profit margin. Strong performance in Solutions offset reduced contribution from Right Management year-over-year. I will discuss Right Management further as part of the segment review.
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%. ManpowerGroup Solutions comprised 13% and Right Management 4%. Our strongest growth was once again achieved by higher value Solutions offering within ManpowerGroup Solutions.
During the quarter, our Manpower brand reported a constant currency gross profit increase of 5%, representing a 1% improvement from the third 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 growth from light industrial skills increased 6% in the fourth quarter, representing an increase from the 5% growth in the third quarter. This improvement was partially offset by some slowing in office and clerical skills.
Gross profit in our Experis brand increased 5% in constant currency during the fourth quarter, representing a significant increase from the 4% decline experienced in the third quarter. This improvement was driven by positive gross profit growth in the US, as well as a lower rate of decline in the UK.
ManpowerGroup 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 17% in constant currency, up from the 9% growth in the third quarter, with very strong growth in our RPO, MSP and Proservia solutions offerings. Right Management experienced a decline in gross profit of 10% in constant currency during the quarter. This reflects continued declines in career outplacement activity.
Our reported SG&A expense in the quarter was $696 million, an increase of $67 million from the prior year, which includes an increase of $34 million from changes in currency, as well as $3 million related to acquisitions. The operational impact represented an increase of $30 million, which includes the non-recurrence of the prior year insurance settlement of $7.5 million.
On an organic basis in constant currency, SG&A expenses increased 5% compared to the prior year, or 3.6% excluding the insurance settlement as we had a cost in some countries to support the strong revenue growth. SG&A expenses as a percentage of revenue in the quarter improved 40 basis points to 12.3%, driven by continued focus on operational efficiency across our businesses.
Next I will discuss the operational performance of each of the segments. The Americas segment comprised 20% of consolidated revenue. Revenue in the quarter was $1.1 billion, flat in constant currency. Profitability improved with OUP up $58 million or 8% in constant currency above the prior year level, with OUP margin up 40 basis points driven by strong performance from Mexico, as well as other Americas.
Permanent recruitment, up 10% in constant currency over the prior year and strong performance in our higher-margin Solutions offerings partially offset the flat growth in staffing services. Additionally, we continue to effectively manage SG&A expenses, which were down against the prior year. The US is the largest country in the Americas segment, comprising 63% of segment revenues. Revenues in the US were $666 million, down 3% compared to the prior year. This represents an improvement from the 9% decline on a day’s adjusted basis in the third quarter. Although this improvement came primarily from the Manpower business, the Experis business also experienced improving trends in the quarter.
During the fourth quarter, OUP in the US declined 3% to $38 million driven by reduced leverage on lower revenues, as well as increased cost and investment in select areas. OUP margin was 5.7%, stable from the prior year. Within the US, the Manpower brand comprises approximately 43% of gross profit. Revenue for the Manpower brand in the US was down 1% in the quarter, an improvement from the 8% decline in the third quarter, which included a 1% decline from the impact of hurricanes.
The industrial business grew 5% in the fourth quarter, an improvement from the 3% decline in the third quarter, while the office and clerical business continued to see declines.
The Experis brand in the US comprised approximately 34% of gross profit in the quarter. Within Experis in the US, IT skills comprised approximately 70% of revenues. During the fourth quarter, our Experis revenues declined 5% from the prior year compared to the 9% billing days adjusted decline experienced in the third quarter. Experis revenues from IT skills were also down 5% from the prior year, representing an improvement from the 10% decline in the third quarter.
We expect mid-to high single digit revenue declines in US Experis revenues in the first quarter due to reduced volumes related to two clients, but we expect this to improve into the second quarter.
ManpowerGroup Solutions in the US contributed 23% of gross profit and experienced a revenue decline of 8% in the quarter, which improved from the 11% decline in the third quarter. The overall decline in the quarter was driven by the non-recurrence of certain low-margin MSP related business, which resulted in an improvement in gross profit margin in this business during the quarter. Our RPO business in the US experienced strong revenue growth of 9% in the quarter. We continue to see strong demand by our clients for our higher-value RPO and MSP solutions.
Our Mexico operation had revenue growth in the quarter of 10% in constant currency, a decline from the 15% growth in the third quarter. Although the revenue trend decelerated from the very strong third-quarter, the business in Mexico performed well as expected in the fourth quarter, and we expect good growth into the first quarter.
Revenue in Argentina was up 12% in constant currency, which continues to reflect the impact of inflation. We continue to focus on margin and payment terms improvement given the highly inflationary environment.
Revenue growth in the other countries within Americas was up 3% in constant currency. This included good growth in Brazil, Peru and Central America. Southern Europe revenue comprised 41% of consolidated revenue in the quarter. Revenue in Southern Europe came in at $2.4 billion, an increase of 15% in constant currency.
OUP was $133 million, an increase of 20% from the prior year in constant currency, and OUP margin was 5.5%, up 20 basis points from the prior year, as efficiency improvements more than offset gross profit margin declines.
Permanent recruitment growth was extremely strong at 28% in constant currency, representing a further increase from the 17% growth in the third quarter. France revenue comprised 63% of the Southern Europe segment in the quarter and was up 12% over the prior year in constant currency, a continuation of the days adjusted growth of 12% in the third quarter. We are seeing continued strong growth rates through January in the high-single digits reflecting higher comparable growth rates in the prior year.
We mentioned last quarter we were seeing stabilization in staffing margins and that continued into the fourth quarter. However, as previously discussed, the scheduled CICE rate decrease from 7% to 6% of eligible wages effective with payroll paid beginning January 1, 2018 impacted our December results, reducing gross profit by 3 million.
You may recall we had a $2 million favorable benefit in the prior year quarter resulting in a $5 million year-over-year change. As we mentioned in our third-quarter call, we estimate that the reduction in CICE will reduce 2018 gross profit by €28 million, and we are focused on offsetting the effects of this change to the greatest extent possible through various initiatives.
Permanent recruitment growth in France was very strong at 21% in constant currency during the fourth quarter, and January activity continues to be very strong. OUP was 81 million, an increase of 10% in constant currency, while OUP margin declined 10 basis points to 5.4%. This OUP margin decline of 10 basis points was an improvement from the 20 basis point decline in the third quarter despite the unfavorable year-over-year impact from the changes in CICE. We do expect that a full quarter impact of the CICE rate reduction will reduce French OUP margin year-over-year in the first quarter.
Revenue in Italy increased 28% in constant currency to $429 million. This represented our third consecutive quarter of 20%-plus revenue growth. Similar to recent quarters, business mix changes associated with the growth have resulted in reduced staffing margins year-over-year. However, the trend of year-over-year staffing margin declines improved slightly over the last three quarters. Permanent recruitment growth was very strong at 27% in constant currency.
OUP growth was up 45% in constant currency to $35 million. During the quarter, the OUP margin in Italy increased by 90 basis points to 8% as gross profit margin declines were more than offset by improved operating leverage and strong SG&A cost management. We continue to be very pleased with the strong performance of our Italy business and expect it to continue to perform very well in the first quarter.
Revenue growth in Spain was up 22% over the prior year in constant currency, partially reflecting the impact of the IT professional services acquisition earlier in the year, and strong organic growth. On an organic basis, revenue growth was 12% in constant currency, which was an increase from the 6% days adjusted growth in the third quarter. OUP and OUP margin were up significantly during the fourth quarter. We expect Spain will continue to have very strong performance into the first 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 a billing days adjusted organic constant currency basis, Northern Europe had a 3% constant currency growth rate, which represented a continuation of the third quarter growth rate.
As we discussed last quarter, the lower level of revenue growth is primarily driven by the higher growth in the year ago period. OUP decreased 10% in constant currency to $47 million and OUP margin of 3.3% was down 50 basis points. The decrease in profitability is in line with the previous quarter and was primarily attributable to the U.K. reflecting less operating leverage on revenue declines and margin pressure in Germany due to the business and exchanges as well as additional cost.
Our largest market in Northern Europe segment is the U.K. which represented 30% of segment revenue in the quarter. U.K. revenues were down 3% in constant currency, an improvement from the billing day's adjusted 7% decline in the third quarter. Following several quarters of revenue declines, our Manpower business in the U.K. experienced 1% constant currency growth in the quarter.
Conversely, our Experis business although improving, continues to experience reduced demand within our largest accounts which drove an 8% constant currency revenue decline in the fourth quarter. We expect the revenue trend for the U.K. to continue to gradually improve into the first quarter.
Revenue growth in Germany was up 5% on a constant currency basis in the fourth quarter or up 8% on an average billing day's basis. This is down from the 11% billing day's adjusted growth in the third quarter driven by the anniversary of a large client addition in the prior year.
Germany is experienced debt and margin declines on client business mix changes, however this has been partly offset with strong growth profit performance from our Proservia businesses. Revenue growth in the Nordics was up 1% in constant currency in the quarter and represented 2% growth on an average billing day's adjusted basis.
This represents a deceleration from the 8% organic constant currency day's adjusted growth in the third quarter, primarily due to higher comparable growth rates in the prior year. Norway and Sweden are currently experiencing solid revenue trends and we expect to see mid-single-digit revenue growth on an average billing day's adjusted basis in the first quarter.
Revenue growth in both the Netherlands and Belgium increased 6% and 1% respectively in constant currency on a billing day's adjusted basis. Both country is experiencing anniversary a very high comparable growth beginning in the third quarter and the Netherlands had slightly higher growth in the fourth quarter than expected.
Other markets in Northern Europe had a revenue increase of a 11% in constant currency driven by the very strong growth in both Poland and Russia. The Asia Pacific Middle East segment comprises 13% of total company revenue. In the quarter, revenue was up 9% in constant currency to $695 million, representing an increase from the 4% constant currency growth in the third quarter.
This growth was primarily driven by greater China and other APME countries. Permanent recruitment growth was also very strong in APME up 20% in constant currency. OUP was $28 million in the quarter representing a 30% increase in constant currency and OUP margin increased 60 basis points to 4%.
The OUP and OUP margin increases were driven by improved year-over-year performance in Japan, Australia, Greater China, India and Korea. Revenue growth in Japan was up 7% on a constant currency basis and adjusting for billing days represented a 3% growth consistent with the third quarter.
Staffing and permanent recruitment growth combine with strong SG&A cost management to of an OUP increase of 13% on a constant currency basis. Revenues in Australia and New Zealand increased 1% in constant currency which represented the return to growth following revenue declines in the second and third quarters.
Australia has experienced depressed demand within various industrial sectors which is expected to continue into the first quarter. Revenue in other markets in Asia Pacific Middle East continue to be strong, up 15% in constant currency. This was the result of the double digit growth in several markets including Greater China, India, Thailand, Malaysia, Singapore and the Middle East.
Our Right Management business continue to slow in the fourth quarter. During the quarter, revenues were down 12% in constant currency to $53 million which represented an improved rate of decline from the 20% decline in the third quarter. However, this rate of decline was greater than expected based on reduced our placement activity.
OUP decreased 30% on a constant currency basis to a $11 million and OUP margin was 19.9%, representing a decrease of 40 basis points. We expect our placement activity to continue to be down and expect a similar trend into the first quarter. I'll now turn to cash flow and balance sheet.
Free cash flow defined as cash from operations less capital expenditures were $346 million for the year compared to $543 million in the prior year. The year-over-year change reflects a strong growth of our business in 2017, as during strong growth periods receivables typically grow at a faster pace in cash collections.
The fourth quarter experience positive free cash flow of $99 million which compared to a $183 million in the year ago period based on the stronger growth in the quarter. At quarter end, day sales outstanding increased by two days and we continue to execute on initiatives to improve the trend of DSL.
Capital expenditures represented $55 million during the year, relatively stable to the prior year. Cash user acquisitions year-to-date represented $46 million. During the quarter, we purchased 205,000 shares of stock for $26 million bringing total purchases for the year to 1.9 million shares for $204 million.
This represents just about 3% of outstanding shares since the beginning of the year. As of December 31st, we have 2.8 million shares remaining for repurchase under the 6 million share program approved in July of 2016. Our balance sheet was very strong at year end with cash of $689 million and total debt of $948 million bringing our net debt to $259 million.
Our debt ratio is a very comfortable at year end with total debt to trailing 12 months EBITDA of 1.1 and total debt to total capitalization at 25%. Our debt and credit facilities have not changed in the quarter. At year end, we have a €350 million note outstanding with an effective interest rate of 4.5% maturing in June of 2018 and a €400 million note with an effective interest rate of 1.9% maturing in September of 2022.
In addition, we had a revolving credit agreement for $600 million which remained unused. Next, I will view our outlook. First I'd like to address our expected effective tax rate for 2018 as well as 2019.
I previously discussed the impact of tax reform on our fourth quarter results and our tax rate estimate for 2018 incorporates the U.S. move to a territorial tax regime. As a result, we no longer need to record additional U.S. taxes for designated foreign operations; notably France.
Based on the significant tax benefit expected from CICE in France in 2018, combined with the lower U.S. corporate tax rate, we estimate a global effective tax rate of 27% to 28% for the year. The government of France has indicated that as part of their tax reform, in 2019 they plan on transitioning the tax exempt CICE payroll tax credit to a taxable reduction in social costs.
And if we assume a similar level of pre-tax benefit, this would significantly increase our corporate income tax in France and result in the global effective tax rate of 33% to 34% in 2019. Turning to the first quarter of 2018, we are forecasting earnings per share to be in the range of a $1.60 to a $1.68 which includes a positive impact of tax reform of approximately $0.20 and a positive impact from foreign currency of $0.15 per share.
Our constant currency revenue guidance ranges for growth between 4% and 6%. The impact of acquisitions is about 40 basis points of the growth rate in the first quarter. As there is one less day in the first quarter, year-over-year this represents an organic constant currency growth rate of 6%. We consider this a continuation of the underlying fourth quarter growth rate excluding the increased holiday activity in December.
From the segments standpoint, we expect constant currency revenue growth in the Americas to be flat to slightly down with Southern Europe growing in the low double digits range, Northern Europe growing the flat-to-low single-digit range and Asia Pacific Middle East growing in the low single-digit range.
We expect the revenue decline at right management in the low double-digits. As I mentioned, on a consolidated basis, there is approximately one less business day during the first quarter compared to the prior year. On a regional basis, this reduces our revenue growth rate in the Americas, Northern Europe and APME by about 2% and reduces Southern Europe by about 1%.
Our operating profit margin is expected to be down by about 10 basis points in the first quarter and lower gross profit margin partially offset by operating leverage. The prior year period had lowered cost largely due to timing of project spend and having one fewer day this year will negatively impact our operating leverage.
We expect our income tax rate to approximate 29% in the quarter. This reflects the benefit from tax reform mentioned earlier and the fact that our first quarter rate typically is our highest quarterly rate due to the impact of the French business tax. As usual, our guidance does not incorporate additional share repurchases or restructuring charges.
We estimate our weighted average shares to be 67.1 million reflecting share repurchases through the end of 2017. With that, I'd like to turn it back to Jonas.
Thanks, Jack. Our strategy and key priorities have supported our transformation into a leading global workforce solutions provider and had driven our successful financial performance over the past years.
As we look ahead, we're confident that our strategy will continue to address client and gather trends and further enhance our profitability going forward. We see strong fundamentals in the market place. Companies are looking for ways to build operational and strategic agility and partner with those that best meet their talent needs locally, regionally and globally.
Job seekers are not only interested in the next employment opportunity but also assist them to navigate a rapidly changing world of work getting career advice and developing new skills. Through our strong and connected brands, we provide successful workforce solutions to address even our clients most complex challenges.
Our brand strategy is critical to our success than it hasn’t changed. We continue to focus on profitable growth of our core Manpower brand while diversifying into our higher margin businesses experience a market leading RPO and MSP solutions as well as right management.
Through this, we have seen a shift of our business mix over the past few years contributing to our overall margin expansion and we expect to see further diversification as we take advantage of future market opportunities.
Our objective of profitable growth is driven by creating value for our clients, our candidates and our employees. For our clients, we find the most skilled talent that meets their need on a temporary, permanent or project basis which gives them the operational and strategic flexibility to execute their business strategy.
Through our strong and connected brands, we're able to tailor solutions for each of our clients regardless of their science, industry or complexity. In this one size fits one approach, we're able to segment our client needs while leveraging our scale and extend support for all your workforce solutions.
For candidates, we provide them the best opportunities to meet their employment and development goals, whether by accessing their learnability or helping them to upskill their talents in new assignments, we provide what they need to be successful in the changing world of work.
And in doing so, we help to bridge the gap between the supplying demand for in demand skills at a global scale. Our associating candidate apps are key to enabling our candidate experience of scale, improving the engagement of our associates and candidates while also improving our own productivity in meeting our client needs for skill talent.
Our strong culture of collaboration and diversity supports our passionate and highly skilled employees allowing them to go the extra mile to meet the needs of our clients and candidates. We've enhanced our global cloud based collaboration tools and upgraded our CRM tool to a fully integrated enterprise-wide cloud based tool which is helping to drive self-sufficiency across the organization.
Through our digital investments, we're enabling our operations to be increasingly high tech and high touch and more relationship focused while driving productivity and process improvements. We will continue to invest in technology solutions, digital capabilities and process improvements to enhance the candidate experience and client satisfaction.
Our intent is to automate and digitize transactional activities so we focus our resources on building deeper client and candidate relationships. We're leveraging technology to better meet evolving client segments and preferences; improving our delivery models; and increasing employee productivity.
You will recognize a lot of what is here in terms of our traditional value creation chain about how we operationalize this is changing rapidly, thanks to our digital tools and enhanced processes. Our Manpower group digital ecosystem powers our front office capabilities improving our interactions of clients and candidates and allowing our employees to find and match our best talents for our clients and with the best career opportunities for our candidates.
Our business activities generates significant amounts of valuable data which allows us to provide insights based on data and analytics to enable client's candidates and employees to make a better data driven decisions. As I'd mentioned, we've implemented a number of global applications to support our collaborative culture and enhance employee productivity.
Over the recent years, we have also centralized our global data centers to improve our overall efficiency and enhance our cyber security profile. We've invested in technology and expect to continue to do so in ways that most effectively support our strategy, generating opportunities for profitable growth, enhance productivity and greater efficiency.
And with that, I will turn it over to Jack to walk through our new financial targets.
Thanks, Jonas. That strategy overview now brings us to the update of our financial targets. Starting with revenues in key markets, our target is to exceed or maintain market levels of revenue growth. Our main goal is to grow revenues above market levels.
But we may choose to maintain market levels at growth in certain markets, if incremental growth is significantly detrimental to gross profit or operating profit margin. We will do with continued pricing discipline and we'll continue to focus on improving client mix to benefit gross profit margin.
After hitting our longstanding EBITDA margin target of 4% last year, we're updating our EBITDA profit margin target to 4.5% to 5%. This will be driven by continued focus on gross profit margin and continued progress on cost through efficiency and productivity enhancements.
This does not require our new special program but rather represents a continuation of the programs that have already been in place which have allowed us to expand EBITDA margin again in 2017 excluding restructuring cost as well as in recent previous years.
The owners matching the impact of technology, enablement of technology has increased our front office productivity and we expect this progress to continue. Similarly, we discussed during 2017 enablement of technologies part of our back office optimization activities that were performed in certain markets and we plan to continue these activities across other key businesses.
We are providing a range since there are many variables, including factors such as regulatory changes; business mix; and geographic mix, which could impact the EBITDA margin as well as our timing to achieve it. We are not providing a specific timeline for the same reasons.
We believe the expansion of EBITDA margin in recent years provides the evidence that we can achieve the target range through continued profitable growth and disciplined execution into future periods and that is what we are committed to doing.
Lastly, our financial target for return on invested capital is to exceed 15%. This continues to represent a return well above our cost of capital. We continue to be very focused on disciplined capital allocation and return on invested capital is inherent in the performance objectives of executive management as well as our worldwide management team.
Something that's been core to our value creation principle for nearly 20 years. I would now like to turn it back to Jonas.
Thanks, Jack. We're excited about our future and the opportunities for further value creation ahead. We're confident that our strategy will continue to deliver profitable growth and achieve the new financial targets.
Our entire teams committed to be the leading workforce solutions company globally creating value for all of our stakeholders and providing meaningful and sustainable employment for many millions of people globally every year.
I want to take this opportunity to thank the entire ManpowerGroup team for their great engagement than operational execution in 2017. We look forward to building on that progress in 2018 and beyond. And with that, I would now like to open the call for Q&A. Operator?
Thank you. [Operator Instructions] Our first question is coming from Andrew Steinerman of JPMorgan. Your line is now open.
Hi, I wanted to jump into France, which is pretty amazing to see continued double-digit growth. And you mentioned Southern Europe would be 10% to 12% constant currency growth in the first quarter. I'm wondering if that includes double-digit growth from France.
And just give us some color of where you think we are in terms of the cycle with Macron in place of his kind of changed the way we think about cycles in France.
Well, thanks Andrew. Yes, no, France has done an exceptional job here in during 2017 frankly and it's great to see that momentum continues. And I think you want to think about France again the backdrop both improving business confidence. And as you know, France has been very slow in terms of economic growth and seeing labor markets improve.
And we feel at this point if you monitor, the business confidence is moving up, economic growth outlook is looking up and employment markets has yet haven’t materially improved but we think that that will follow from the employment market. So, clearly though, in all of this, flexibility and agility is still really important.
So, while France, we consider France to be early in their economic recovery and just now getting ready to start. We think that this need for flexibility is still going to be very strong and I think you see that reflected in the outlook. And maybe Jack, you want to give some more color on the first part of Andrew's question.
Sure. So Andrew, as you noted our 12% growth in the fourth quarter was very strong. And what we're seeing in January is continued very strong growth in the very high single-digits. And when you consider the higher growth that happened from Q4 to Q1 a year ago, that really shows that on underlying basis we continue to see very strong volumes into the first quarter.
So, we feel good about what we're seeing in France in January and that's part of our guidance in that very high single digit range into Q1.
Perfect, thank you.
Thank you. Our next question is coming from Jeffrey Silber of BMO Capital Market. Your line is now open.
Thanks, so much. I wanted to go back to your financial targets. If you look over the past number of years, you've seen except for the CICE impact on gross margins. For the most part, gross margins have been under pressure. And I'm wondering if you expect that to continue and if so, how do you think you'll get to the EBITDA margin targets that you have on.
Thanks Jeff, this is Jack. So, as we pointed out on the slide, we think part of a big part of our ongoing growth will be looking at gross profit margin particularly. And so as we've noted we see gross profit improvement as part of the trajectory into the future.
And as we've talked about in the past, 2017 although we've seen more significant staffing margin declines in the prior periods. A lot of that was driven by the higher growth of larger accounts during 2017. As we noted in the third quarter, we actually started to see that stabilize in France and that continued into the fourth quarter.
So, we do that as positive. And Italy is the other country that had very strong growth and we actually started to see improvement in their staffing margin as well. As that looks like it's starting to stabilize from that front as well.
So, we will continue strategies to offset staffing margin pressure and as we've talked about you should expect that our ManpowerGroup solutions business and our permanent recruitment will be a good offset to the staffing margin pressure going forward.
We actually saw that in the fourth quarter. We weren’t seeing that in the first half of the year as we noted that we were actually in the process of making some adjustments of our Proservia business in France. But now we're seeing the benefits of that, and that actually was a contributor plus contributor going forward.
So, we would expect to continue those strategies going forward and we would expect the non-staffing businesses to offset. What we'll likely continue to be some staffing margin pressure going forward.
Okay, great. That's helpful. And then sticking with the financial target theme, if I focus on the first one about revenue growth, at or within market growth. If you look at the U.S. you haven’t been following that trajectory for a number of years.
I know there's been some issues in terms of weaning yourself off up the low margin business. But do you expect to at least get back to market growth in the U.S. and again how would you do that?
We would definitely expect to get back to market growth. But we want to do it in the right and sustainable way. So, as you've seen in this quarter, we made some good progress and we feel that we're on the right track. But we want to continue to apply the pricing discipline and making sure that we build a book of business that is providing us with good profitable growth.
And that's what we're working on. We made some progress, we still have more work to do, encouraged by what we saw in the fourth quarter. It's not going to be a linear progression but we feel we're on the right track and we're targeting to get back to market growth also in the U.S.
Okay, great. Thanks, so much.
Thank you. Our next question is coming from Tim McHugh of William Blair & Company. Your line is now open.
Hi, thanks. Just want to follow-up on the strength at the end of December. Was it France particular thing and you mentioned those holiday related, so I don’t know if there's retail sales but trying to think about the I guess what was the underlying activity and whether it could recur in three two years or not?
Thanks, Tim. Regarding the fourth quarter, yes, December was the strongest month and as we pointed out that is due to that seasonal increase that we saw. And in terms of the drivers for that I'd say Italy really was the outperformer. In the month of December, they performed very strong on a day suggested basis.
And that was a big driver of that retail related volumes going up to the holiday period. So, I'd say that's probably the one that's most notable. As we talked about France, I think during the quarter, continued to be very strong on an overall basis. So, France came in, continued strong growth in December.
And as we said we did see in terms of Jonas' earlier point on some other markets where we've had revenue declines, we actually saw improvement in those rate of declines in the fourth quarter. And then talking on the quarter overall now, and that certainly was the U.S. and the U.K. so, it was very good to see that rate of decline improving to the fourth quarter.
Okay, great. And a bit of a numbers question in the weeks. But the given currencies been, is it kind of moving around quite a bit just year-to-date here. I guess, what was the approach that you assumed and if you're willing to say kind of the Pound and the Euro, just so we know was kind of embedded into the Q1 guidance here?
Sure. So, for the Euro and you're right, the Euro has been accelerating very significantly in the month of January. We use 122 for estimate and on the Pound we use 140.
Alright, thank you.
Thank you. Our next question is coming from Kevin McVeigh of Deutsche Bank. Your line is now open.
Great. Thank you, hey. And congratulations on the target. Hey Jack, is there any way that or Jonas is there any way to think about what type of revenue was embedded and come to that 4.5% to 5% on the EBITDA and kind of what the mix would look like. Just broad strokes?
Yes. No. Sure Kevin, I think in terms of revenue, as we've indicated on the slide. We're assuming a stable economic environment and consistent revenue growth.
So, I think that kind of get you what you're looking for. We are not establishing a new revenue target in terms of a gross number of dollars we have to achieve as you saw based on what we've done in the past that we were able to based on ongoing cost efficiencies reach our 4% target, before we had reached what we had previously is a revenue grow some target.
So, what we're really focused on is continued consistent economic environment, consistent growth, and then I would just look back to what you've seen in recent periods as you think about that.
Got it. That's helpful. And then just, Jack, are we starting to see kind of some signs of this wage inflation just overall. And as we think about that, is there a way to capture that from both the GP perspective and then ultimately operating margins as well. Just give an -- you know, you're starting to see, it looks I know it's early but any sense of wage inflation just given where we are.
It's something that we haven’t seen about much of through this cycle. Yes. But are you starting to see signs of that and then how do we leverage that?
Yes. So, as we've said in the past, wage inflation is good for us, obviously and that improves our GP margin on an overall basis. In terms of trending on that, we haven’t seen dramatic change in the fourth quarter. We've talked in the past that generally speaking and using the U.S. for an example, we've been in the 2% to 2.5% range for wage inflation.
So, we probably are getting towards the higher end of that range but it's not dramatically different. But I think looking forward, we are optimistic that based on the tightness in the labor market that we've talked about in some key markets, there is certainly an opportunity for that to improve going into the future.
So, based on that, we haven’t quite seen it yet in a significant way but based on that outlook, I think we're expecting that that should happen at some point in the future.
Great, thank you.
Thank you. Our next question is coming from Gary Bisbee of RBC Capital Markets. Your line is now open.
Hi, good morning. So Jack, I guess I have a question about the margin target in tax. So, the CICE benefit in France has clearly helped the France segment margin meaningfully in the last five years and yet in this longer term tax guidance you gave, you seem to imply the tax rate goes up from that.
I would think the France segment margin would go down and make it difficult to hit this higher margin targets. So, what am I misunderstanding or can you help me understand why it's been helping margin now, it looks like it's going against you on the tax line?
Yes. So, in terms of the target, the targets the EBITDA margin target that we've been talking about. So, ignoring tax. So, and when we look at that and we look at that outlook, that's the way to think about it not specifically in terms of what the tax related changes are going to impact that.
But on your point about the tax changes that we've talked about in the estimates going forward Gary, what we are trying to say about 2018 is we move into this territorial tax regime we no longer need to top up the France tax result to the U.S. the previous U,S. statutory rates.
So, that was a significant increase and that came through in the past in our income tax line. In 2018, the CICE program will be continuing and that provides a tax exempt benefit and that tax exempt benefit translates into an improvement and then to a very favorable tax result for France overall.
That, the government of France has said at the end of 2017 at the end of December, that it's part of their tax reform, they are going to be transitioning that to a non-taxable or a taxable subsidy representing a reduction on social cost into 2019. So, as a result of that, we expect taxes to increase in France and that's really what's happening.
We're really moving from a very significant tax benefit today in France under CICE to a more taxable situation of pre-tax income into 2019 and that's driving that tax rate change of 27% to 28% to 33% to 34% in 2019. And I would think of that 33% to 34% is a more normalized rate because the CICE benefit really is unique.
Okay, thanks. And just to clarify, so what does this mean for France segment margins in terms of what tax flows in there versus does not. So, I guess the 6.5% that you'd had in your tax line but that really was some form of payroll tax in France, is not longer in the tax line? Is that what you are saying?
Yes. So, on that specific point and we did highlight that to remind people that going back to 2010, that French business tax which is also referred to CVAE, that is under U.S. GAAP required to be recorded an income taxes and previous to 2010 it was viewed as a direct cost.
So, that amount comes through in the consolidated income tax line from ManpowerGroup. That amount is not in France's OUP. So, France's OUP margins and that amount really hasn't changed in recent years.
The calculation has been the same and that's not part of what's changing under the income tax reform in France going forward. So, that amount will continue to be in our income tax line that adds about 6.5% to our effective rate as we pointed out on the slide. And that's not in the France OUP margins.
So, then thanks. Sorry to keep beating on this, I just want to make sure I understand it. So, 2019 versus 2018 based on the expectations you're setting up here, is the France segment margin going to be impacted because of these changes or is it flowing through the tax line?
No, you won't see an impact on the France OUP margins as a result of the tax changes.
Okay, great. And then just one follow-up. How much of the longer term new margin target should we think of is mix shift to things like perm or solutions versus your expectation that there is further efficiency gains on a like-for-like basis with the new businesses? Thank you.
I would say that that is both and all of those elements that you talked about there are going to be part of it.
So, we aim to continue to grow the Manpower core business of course because we think that we have some great opportunities in many of our markets but we also continue to drive solutions business which has been a stellar performer over many years in double-digit growth and higher margins and higher profitability along with experiences as well as right management on the higher margin side.
And as you've seen, we've been able to drive significant efficiencies and productivity improvements because we've improved our processes and we've leveraged technology extensively.
So, I think within our target set we have announced today, you have all of those that we've used in the past as levers to improve our financial performance as you've seen and we'll continue to do exactly that also going forward.
Gary, I just want to come back to one more item on France is I talked about the change in the tax exempt nature of CICE to a taxable subsidy in 2019. So, just as that I know that topic comes up quite a bit on CICE and what we're thinking in terms of 2019 on an overall basis not just the tax impact.
And at this stage, we don't really have an update on that. So, it's clear that the government has as part of their tax reform indicated that that tax exempt subsidy will not be recurring into 2019 and in to 2019 it will be taxable. But we still don't believe we have enough precision in what the government of France has said about that transition.
We don't expect we'll see that likely until the September budget comes out for 2019. At that point we'll be able to see what the pre-tax impact is of that change and what that might mean to OUP margins. But for right now we haven't made any assumptions of that changing at this point.
That's very helpful, thank you.
Thank you. Our next question is coming from Mark Marcon of Baird. Your line is now open.
Alright, good morning. Congratulations on a terrific '17 and on several years of strong performance. I was wondering two lines of questioning. First just following on our Jack's last comment. And you want to see we're just over doubles.
Method is still basically lobbying for smooth transition as it relates to CICE, are they not?
Yes, absolutely. And I think that's exactly what Jack was referring to. There are still a lot of discussion on the details and how and what and the overall position of the French government is that they still want their labor markets to become more competitive.
Alright.
So, lower cost of labor, more flexibility and driving that as a way of attracting companies in France to expand the employment as well as to attract foreign investment. Then you might have seen that Macron had an event in Versailles which I was invited that was exactly intended to do that very thing.
So, overall they are off of the business. They want to be more competitive. So, they have moved it into and they want and they've decided to move the tax of the tax free subsidy for CICE into a taxable subsidy and that's the conversation you heard Jack detail earlier.
But beyond that we don't know and there is still a lot of negotiations and discussion going on because MEDEF which is the French employment organization views this as a very important component to keep lowering the cost of labor in France.
I knew about that Versailles meeting and assumed you were there and we're probably able to provide input. So, from that perspective I mean do you sense that there is a little bit of a change or a greater level of appreciation for the absolute need to improve the productivity and competitiveness?
I think based on the conversation that we had in general with when the meetings with the French government and frankly also given the access that I was given and our French President was given to Macron, to the Labor Minister, to the Prime Minister.
It is clear that they have the intent of making their labor markets more competitive and they actually see the kind of flexibility that we provide as a very good way of providing flexibility while at the same time providing employer obligations such as training and taxes and things like that.
So, we feel very good about France as a country for future growth from an economic perspective and also from our own perspective.
Okay and so the 6% to 10% taxable subsidy is up to 2.5 times make that's still look like it's going to occur.
Yes, the French business tax mark, yes that?
No, I'm talking about the subsidy to replace CICE.
Yes. So, at this stage, all we've assumed is that it's going to move from tax exempt to taxable but we haven't made an estimate of exactly what that subsidy turns into. The government has indicated to your point Mark, that there will a gross up for people closer to the minimum wage.
Alright.
And that will reduce as you get to 2.5 times minimum wage but we have not seen the level of detail to really allows us to model that at this stage.
And there was an update at the end of December on the tax aspects but we still are lacking the precision to be able to model that. So, it's likely we may not get that level of detail until the preliminary budget comes out in September.
Got it. And then, this you made so much progress over the year with regards to reducing your SG&A as a percentage of revenue.
I'm wondering just two lines of questioning on that. One is just as you think about getting to 4.5% to 5%. How are you thinking about the incremental margins, assuming that we continue to have market growth which I'm assuming is in the neighborhood of what we've been doing on a constant currency same business date basis lately.
So, I think that's a great observation, Mark. And as we pointed out in the fourth quarter, we again had a very good reduction year-over-year in that SG&A as percentage of revenue again hitting a 40 basis point reduction in that 12.3%.
And as we look forward, thinking of a consistent revenue environment, I really would just look to the past as a way to think about what the potential is for us the recent past where we've been able even in an environment where gross profit margin is down 40 basis points in 2017 on an overall basis.
We still have the ability to expand operating profit margin excluding the restructuring charges we took it earlier in the year. So, I think we've demonstrated that the ongoing work that we're doing and this is quarter-ending quarter-out as we said in our prepared remarks.
We feel good about that and we feel good about the opportunity to continue that going forward. So, that's how I would respond to that question.
Great. And then just lastly, as we think preliminarily for 2018, how are you thinking about headcount and offices and if you could give us a flavor for where we ended the year in 2017 relative to 2016 on that front?
Well, a number of markets were, we have a lot of strong growth where of course we're expanding headcount for places like Mexico and France and Italy and a number of other markets that are in growth mode and along with markets where we are make investments and feathering resources to be able to continue to drive a profitable growth.
So, that's sort of how we think about it and just as we've done and as Jack detailed, the investments and technology that we've made and the changing behavior from candidates means that we don't really foresee an expansion of our footprint during 2018 because we've been able to serve our job our candidates as well as our clients with new delivery models leveraging new processes and technologies.
And we expect that that evolution will actually continue and at this point we don't see an acceleration but just a continuation of what we've seen over the last couple of years.
And I would add to that, Mark. So, in terms of office count specifically, what we've seen is and we've talked about, continued efficiencies in this regard. So, at the end of the year last year we were at about 2800 offices. End of the year this year we are at about 27; just below 2700 offices.
So, good continued improvement as we think about the opportunity to get more efficiencies from our office footprints. And then to your point about where we're increasing headcount. So, we're increasing headcount where you'd expect we would be based on our very strong growth.
So, that's going to be in France; that's going to be in Italy. And then as I have mentioned earlier in terms of back office processes, we continue to improve our headcount based on the activities we talked about in terms of optimizing our back office processes.
And some of this is technology enabled and that is definitely part of your path going forward is to continue to leverage that technology for more and more automation for efficiencies.
Terrific, thanks.
I'm not meaning that's a broader point because you know as you've heard me speak about the strategy you saw our view on technology and we've been really very encouraged by how our traditional value creation chain in itself hasn't changed very much but how we deliver value in the various components has changed significantly.
And it's providing better access for candidates in the way that they are looking to engage with us. The opportunity for us to drive more efficient and more segmented delivery models for our clients and then last but not least for employees moving them away from transactional activities that we intent to streamline with better processes and automate wherever we can so that they can spend all of their time at building deeper relationships with client and candidates.
And that's an evolution that we think will continue and that's very much also part of our strategy to take advantage of that evolution and make sure that we stay at the forefront of that evolution so that we continue to create more value for clients candidates as well as for our employees.
That's great. Thank you.
Thank you. Our next question is coming from Manav Patnaik of Barclays. Your line is now open.
Thank you. Good morning, gentlemen. My first question was just around the hesitancy to provide a timeframe around when you can achieve this target, the macro and even from all their survey suggest everything is going well.
And it sounds like the cost side is all under your control. So, what other variables in there avoid you from giving us some sort of a range of years at least?
Sure, Manav. So, as we talked about, there are various items out there that could change the time line; regulatory development certainly is one. I think we feel good about that though if you look at regulatory developments and how we've handle those in the past.
We have a good ability to adapt to those. But that could create a little bit of a speed bump in terms of the timeline if there are negative regulatory developments as we basically incorporate that into our business and move forward.
That's for the same reason we are giving a range is the same reason we think we don't prefer to give a timeline for those exact reasons due to those variables.
And Manav, I would add to that. That we, whilst we're diversifying the business, we are still working in labor markets that are affected by economic cycles. And whilst we feel very good about where we are and as you've seen from our outlook, we feel good about where Europe is and feel good about where the U.S. is right now, as well as other emerging markets.
So, it's really a synchronized global economic expansion at this point. There is no telling how long that will last and when it would change. So, we think it would be it's better for us to make sure that we indicate our long term financial targets which we are committed to and confident that we will achieve and if things stay the same it will go faster and if things happen in between it might be a bit slower.
But we will get to these financial targets.
Got it. So, maybe if I can just follow-up on that. So, it sounds like there are in terms of the regulatory development you called out I mean obviously we were all focused on France but does it sound like there is more stuff out there that could be negative that we should be tracking now?
No, I wouldn't. There isn't anything specific that we've trying to call out. What we're just saying more generally that regulatory developments are something that we dealt with in the past.
And that will added flow into the future but there is nothing specific way other than what we've already talked about is our some of the items that are out there. There is nothing specifically we are trying to highlight, Manav.
Got it. And then, just a last one in terms of trying to the comment around we'll try and grow above market but we'll pick and choose the right profitability. Just a quick comment if you can on any change in the competitive dynamics, do you anticipate more pricing pressures or was that just a general comment?
Yes, Manav. We continue to see a very competitive environment in all of the markets where we operate but no change really from what we've seen over the last year. So, it's competitive but it remains rational.
And as you've heard us talk about our drive to really ensure profitable growth, we're very disciplined in our pricing and we want to make sure we stay with or above the market as you have seen but in some markets at some points we pull back a bit to ensure that we have good sustainable and profitable growth and we do that on a case-by-case basis.
But there is no changes in market conditions and on price competition right now.
Got it. Thanks a lot, guys.
Thank you. Our next question is coming from Tobey Sommer of SunTrust. Your line is now open.
Thank you. In the solutions business, could you discuss which service lines are contributing the most in what is driving demand?
Sure. We've seen some really good growth in RPO of strong growth in the fourth quarter of 20%, which is great to see. MSP was a little bit lower but as Jack talked about in our prepared remarks, we pulled away from some of the lower margin pay rolling businesses there.
So, in actual fact, our GP and profitability performance has been excellent there as well. And then last but not least, our Proservia business in Europe and then particularly in France has improved as we had hoped. And I think that's where we are also looking for some continued progress.
So, that would be, those would be in order of contributions, the growth drivers of the solutions business.
Great. And then, did you sight a different level of growth specific to the U.S. in your prepared remarks and if so is that kind of keeping pace with the market rate of growth in your opinion?
We had a very good growth in '16 and we actually had a good performance in the U.S. at 9% growth. So, I think we've started to pick up again but I think we can still do better in the U.S. because I think the market is growing a little bit faster in the U.S. But overall, our performance for the RPO business and the overall demand is still very good.
So, we hope to see a continued growth across the board of the RPO offerings.
Yes. And I would just add to that. So, RPO specifically was very strong in the U.S. in the fourth quarter. As Jonas mentioned, MSP reflected the decrease in some lower margin business but on an overall basis gross profit growth was very good as well. And not specific to the U.S. but we've talked about Proservia did very well in Europe this quarter as well.
Okay. Thank you, very much.
Thank you. And thanks everyone for attending our fourth quarter conference call. We look forward to speaking with you again for our first quarter conference call later on this year. Thanks everybody.
And that concludes today's conference. Thank you for your participation. You may now disconnect.