ManpowerGroup Inc

NYSE:MAN

Earnings Call Transcript 2018-Q4

[Operator]

Welcome to ManpowerGroup Fourth Quarter Earnings Results Conference Call. At this time, all participants are in a listen-only mode until the Q&A session of today's conference. This call will be recorded, if you have any objections, please disconnect at this point.

And now, I turn the meeting over to ManpowerGroup Chairman and CEO, Jonas Prising. You may begin.

[Jonas Prising, Chairman and CEO]

Good morning. Welcome to the year-end 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 fourth quarter and full year, 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 first quarter of 2019. Then I will follow 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. We assume no obligation to update or revise any forward-looking statements. Slide two of our earnings release presentation includes important information regarding previous SEC filings and reconciliation of non-GAAP measures.

[Jonas Prising, Chairman and CEO]

Thanks, Jack. Revenue in the fourth quarter came in at $5.4 billion, a decrease of 1% in constant currency. On a same-day basis, our underlying organic constant currency revenue decreased by 3%. The weaker revenue performance is primarily attributable to our businesses in Europe, which continued to slow through the fourth quarter, partially offsetting revenues decline in Europe with strong revenue growth in APME and within portions of the Americas, specifically in Latin America and Canada.

Operating profit for the fourth quarter was $218 million, down 4% in constant currency. Operating profit margin came in at 4%, down 20 basis points from the prior year. Our performance in the quarter reflects stronger-than-expected gross profit margin of 16.3%, which represents a 30 basis points decrease from the prior year. We continued to manage SG&A well in the quarter and continued to take appropriate management actions in view of the softer revenue trends.

Earnings per share for the quarter was $2.54. This was a decrease of 18% in constant currency year-over-year, but it actually reflected 25% growth in constant currency compared to the prior year if you exclude the U.S. tax reform-related gains that we experienced in the prior year period.

Turning to the full year results for a few moments. Earnings per share for the year was $8.56, this represented a constant currency increase of 5% over the prior year and an increase of 22% in constant currency, excluding the one-time benefit of tax reform in the prior year. Revenues for the year increased 2% in constant currency to $22 billion and operating profit was $797 million, which was flat to the prior year on a constant currency basis.

Our fourth quarter results continue to reflect the more challenging market environment, especially in Europe. We experienced declining revenue trends across a number of our European businesses, notably in France, Italy and Germany among our larger businesses. We're applying strong pricing discipline and are very focused on improved productivity and executing cost mitigation actions in countries experiencing a softening environment. At the same time, we continue to add resources in markets that provide us with opportunities for profitable growth and invest in our technology initiatives in various countries across the world.

We participated in the World Economic Forum in Davos last week. And as you can imagine, the outlook for the European economy was a prominent topic of discussion, as was the topic of access to human capital and skills. We led many discussions on workforce trends and the impact of AI and technology on the workforce. We also shared our latest thought leadership research, which generated significant discussion. This included the latest research in Skills Revolution series, providing a real-time view of the impact of technology on job growth called Humans Wanted: Robots Need You. Contrary to media headlines, this research shows that organizations that are automating tasks are hiring more people, creating more jobs and upskilling their people to perform new and complementary roles to those done by machines, augmenting human capability more than replacing it.

We also launched ManpowerGroup Solutions total workforce index at Davos, sharing our new digital evolution pathway assessment tool and promoting experience Tech Academy alongside other workforce solutions. For me, the biggest takeaway from Davos is that despite concerns around lower growth outlook in some parts of the world, the importance of the workforce strategy and access to skilled talent is top of mind for most companies. Our strong ManpowerGroup value proposition remains highly relevant in this environment as we can support companies execution of the business strategies with our leading global workforce solutions wherever they are. We know the Skills Revolution is in full flow, and we have an important opportunity and role to play in solving the talent shortage for companies by upskilling and reskilling people for them to stay employable today and in the future.

Turning back to our digital transformation. We have previously discussed many of the technology initiatives we have implemented over the past years and continue to advance. Our investments in technology is core to our strategy of maintaining our leadership and workforce solutions and enabling our teams to help clients and candidates win through better data, insights and innovative delivery models. 2018 was a year of significant investment and progress in advancing our digital capabilities. 2019 will be no different, as we continue implementing world-class front office systems, cloud-based and mobile applications, as well as other enhancements to our global technology infrastructure across a number of our markets. We're also investing in the digitalization of our workforce solutions offerings to ensure our clients have access to the best class workforce analytics and tools.

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

[Jack McGinnis, CFO]

Thanks, Jonas. Turning back to fourth quarter results, as Jonas as mentioned, we experienced a challenging revenue environment in the fourth quarter. Operating profit declined 4% on a constant currency basis. This performance resulted in an operating profit margin of 4%, which exceeded our guidance range. A revenue decline of 1% in constant currency came in at the lower end of our constant currency guidance range.

Our gross profit margin declined 30 basis points year-over-year, which also exceeded our guidance range as we experienced favorable direct cost accrual adjustments, particularly in France during the quarter. Our SG&A was well managed during the quarter and included a benefit from a gain on disposition of a non-core business, which I'll cover in more detail.

Breaking our revenue trend down into a bit more detail, our reported revenue decline of 4% includes the negative currency impact. On a constant currency basis, our revenue decline was 1%. Acquisitions contributed about 20 basis points to our growth rate in the quarter. And as we had an extra billing day, the organic constant currency days adjusted revenue decline was 2%. The revenue decline was primarily driven by various businesses in Europe, most notably in France, Germany and the Netherlands. I will discuss this further in the segment review's.

Turning to the EPF bridge, on a reported basis, earnings per share was $2.54. Starting with our guidance, EPS midpoint of $2.19 improved operational performance, contributed $0.12, driven by France. We sold our non-core language translation business in the Netherlands during the quarter, which resulted in a gain of $8 million, which contributed $0.10. The other income expenses contributed $0.9 as equity pickup losses on investments related to our past ownership interests in our Switzerland franchise, we're more than offset by other foreign currency adjustments and non-controlling interest income related to our China joint venture. Foreign currency translation impact was $0.06 worse than the estimated in guidance. A lower effective tax rate contributed $0.04 and lower weighted average shares resulting from repurchases during the quarter contributed $0.06.

Looking at our gross profit margin in detail, our gross margin came in at 16.3%. Staffing interim margin declines drove the 30 basis points reduction in the overall gross margin year-over-year. Although we experienced a loss of CICE subsidy in France for the month of December as expected, which represented 30 basis points of margin at the consolidated level, this was largely offset by favorable direct cost adjustments in France. The remaining 30 basis point decline represented the underlying gross profit margin trend in the fourth quarter.

Next, let's review our gross profit by business line. During the quarter, the Manpower Brand comprised 63% of gross profit. Our experienced professional business comprised 20%, ManpowerGroup solutions comprise 14% and Right Management 3%. During the quarter, our Manpower Brand reported a 4% decrease in gross profit on a constant currency basis. This represents a decrease from the 1% constant currency growth rate in the third quarter. This was driven by declines in Germany, the UK, the U.S., the Netherlands, Sweden, Italy and Spain among our larger countries. 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 light industrial skills decreased during the quarter, while office in clerical skills experienced a slight increase in the rate of growth in the quarter. Gross profit in our experienced brand decrease 1% on a constant currency basis year-over-year. This represented a decrease from the flat constant currency growth rate achieved in the third quarter.

The decrease was primarily driven by the Netherlands, Sweden and Australia. ManpowerGroup solutions includes our global market leading RPO and MSP offerings as well as talent-based outsourcing solutions, including Proservia, our European IT infrastructure and end-user support business.

Gross profit growth in the quarter was up 2% in constant currency, which represents a decrease from the 8% constant currency growth rate achieved in the third quarter driven by lower RPO and Proservia activity ,which was partially offset by strong MSP activity in the quarter. Our pipeline for RPO and MSP opportunities is strong into 2019. While management experienced a decline in gross profit of 5% in constant currency during the quarter as our outplacement activity continued to decline. This represents an improvement from the 8% constant currency decline experienced in the third quarter. I will comment further on Right Management in my segment review.

SG&A expense was $662 million, a decrease of $35 million from the prior year. This included a year-over-year reduction of $22 million from currency changes, $1 million increase from acquisitions, a $5 million decrease from operations and a decrease of $8 million related to the gain on the sale of our language translation business in the Netherlands.

SG&A expenses as a percentage of revenue in the quarter represented 12.3% and after excluding the gain on sale it represented 12.4%. This result reflects our focus on operational efficiency across our businesses during a challenging revenue environment, while we continue to implement new technology across a number of operations globally. The Americas segment comprise 19% of consolidated revenue. Revenue in the quarter was 1 billion, representing 2% growth year-over-year in constant currency. OUP of $53 million represented a decrease of 3% in constant currency driven by the U.S. which I will discuss next.

Similarly, OUP margin decreased by 30 basis points year-over-year. The U.S. is the largest country in the Americas segment comprising 61% of segment revenues. Revenue in the U.S. was $632 million, down 5% compared to the prior year. This represented a slight decline from the 4% decrease in the third quarter. During the quarter, OUP for our U.S. business decreased 13% to 33 million and OUP margin was 5.2%, a reduction of 50 basis points from the prior year driven by the Manpower business which I will discuss next.

Within the U.S. the Manpower brand comprise 42% of gross profit during the quarter. Revenue for the Manpower brand in the U.S. was down 70% in the quarter which represented a decline from the third quarter trend largely due to the non recurrence of seasonal holiday activity associated with select clients. Although the U.S. Manpower business experience decreased holiday activity in the fourth quarter, we expect to see improvement in the trend in the first quarter due to new business wins and improved trends. The Experis brand in the U.S. comprise 35% of gross profit in the quarter, with in Experis in the U.S. IT skills comprise approximately 70% percent of the revenues. During the quarter our Experis revenues declined 6% from the prior year compared to the 8% decline experienced in the third quarter. Experis U.S. has been very focused on profitable business and this resulted in gross profit margin expansion during the quarter. Experis U.S. experienced an improved December and we expect to see continued improvement in the revenue trend in the first quarter.

ManpowerGroup Solutions in the U.S. contributed 23% of gross profit and experienced 9% revenue growth in the quarter, which was an improvement from the 5% growth in the third quarter. We continue to see good opportunities for growth in both our higher value MSP and our RPO solutions in the U.S.

Our Mexico operation had 9% constant currency revenue growth in the quarter. The business in Mexico continue to perform well in the quarter and we expect good growth into the first quarter. Revenue in Argentina was up 14% in constant currency, which continues to reflect the impact of inflation. We are operating in Argentina in a disciplined and cautious manner in view of the hyper inflationary environment. As a result billable hours were down 16% year-over-year in the fourth quarter as we continue to focus on margin and payment terms improvement. Due to the extended duration of the high inflationary environment, we have been reducing billable hours for many quarters in Argentina and the business has become less significant to the region. As a result beginning in the first quarter of 2019, we will replace the separate revenue trend reporting for Argentina business with our Canada business, which is now larger than our Argentina business.

Our Canada business represented 7% of the segment revenues during the quarter and experienced a constant currency revenue growth rate of 17% in the quarter capping off a year of very strong performance. Revenue growth in the other countries within Americas was up 17% in constant currency or 12% on an organic basis. This growth was driven primarily by the very strong revenue growth in Canada, which I just referenced as well as solid growth in Colombia, Brazil and Peru.

Southern Europe revenue comprise 43% of consolidated revenue in the quarter. Revenue in southern Europe came in at $2.3 billion, a decrease of 1% in constant currency. This represented a decline from the 2% constant currency revenue growth rate in the third quarter, driven by revenue declines in France, Italy and Spain. OUP decreased 2% in the prior year in constant currency and OUP margin decreased 10 basis points, which was driven by Italy.

Italy had strong performance, but was running against very high 31% percent days adjusted growth rate in the prior year period. France experienced better than expected profitability which I will discuss next. France revenue comprised 62% of the Southern Europe segment in the quarter and declined 2% from the prior year in constant currency. On the billing days adjusted constant currency basis revenues declined 3%. In the first three weeks of January, we continue to see activity levels that reflected 2% to 3% revenue decline year-over-year. As discussed on the previous quarter's earnings call, transition from CIC program at the end of 2018 to the new subsidy program in January of 2019 resulted in the loss of the December CIC subsidy as expected. The CICE related gross profit loss in the fourth quarter was offset by favorable direct cost to cool adjustments in the quarter. This drove a better than expected level of profit in France and OUP was $81 million, an increase of 3% in constant currency and OUP margin was up 30 basis points in constant currency to 5.7%.

Permanent recruitment growth was 5% percent in constant currency during the quarter. We have incorporated the current trend of a 3% day's adjusted decline into our first quarter revenue guidance. During the previous quarter's earnings call, I provided a detailed description of the anticipated impact of the new subsidy program on our France gross profit in 2019. The preliminary budget was passed as expected in December and as a result our guidance remains unchanged.

In summary this item is expected to result in a reduction of our GDP margin in France of about 50 basis points in the first three quarters of 2019 and beginning in the fourth quarter after the incremental fee own subsidies are received the reduction would then represent about 15 basis points going forward. Similar to our successful effort in 2019 to offset a large part of the scheduled CICE decrease we will again strive to offset the net impact in 2019 with ongoing initiatives.

Revenue in Italy decreased 3% in constant currency to 404 million. On a billing days adjusted constant currency basis, revenues declined 5%. Italy also experienced a non-recurrence of select client holiday related activity in the fourth quarter that contributed to the revenue decline. We saw another consecutive quarter of sequential improvement in the staffing gross profit margin trend in Italy during the fourth quarter.

Permanent recruitment represented 6% growth in the quarter. OUP margin represented 7%. Our Italy business is performing well in a more challenging economic environment. As we continue to anniversary very high growth, we expect a low to mid single digit percentage revenue decline into the first quarter. We continue to believe that the dignity decree legislation in Italy is manageable and we do not expect this legislation to influence our revenue trend significantly.

In Spain revenues also decreased 3% in constant currency or 5% on a billing days adjusted basis. We expect Spain will have a similar level of revenue performance in the first quarter. Our Northern Europe segment comprise 24% of consolidated revenue in the quarter. Revenue was down 7% in constant currency to 1.3 billion. This represents a decrease from the 4% constant currency decline in the third quarter primarily driven by Germany, the Netherlands and the UK. OUP decreased 6% in constant currency and OUP margin was flat to the prior year. Included within OUP is the previously referenced onetime gain of 8 million related to the sale of our language translation business in the Netherlands. The underlying decrease in OUP was driven by Germany and to a lesser extent the Netherlands.

As discussed last quarter, in addition to the declining market environment, our Germany business has also experienced reduced revenues and incremental costs associated with technology and operational improvement initiatives. Our largest market in Northern Europe segment is the UK, which represented 31% of segment revenue in the quarter. UK revenues decreased 3% in constant currency and represented a 4% decrease on a billing days adjusted constant currency basis. This represents a decline from the flat growth in the third quarter.

Our Manpower business in the UK experienced a 13% constant currency revenue decline in the fourth quarter, which included reductions in production from large automotive clients, as mentioned last quarter. Conversely, our Experis business experience another quarter of revenue improvement and improved their constant currency revenue growth rate to 16% in the fourth quarter. We expect the overall revenue trend for the UK business to experience a high single-digit percentage decline in revenue in the first quarter due to the reduced volume in the large automotive client and to a lesser degree, reduced activity in a few other select clients.

Revenue in Germany declined 18% on a constant currency basis in the fourth quarter or 21% on a billing days adjusted basis. This represented a further decline from the 14% constant currency decrease in the third quarter. Although we made progress during the quarter advancing key initiatives, which will strengthen our business in Germany, we continued to experience further declines in the fourth quarter. Market activity in Germany has been very difficult to estimate and as a result, our revenue guidance for the first quarter is being set at the January today trends, which approximate our fourth quarter rate of decline.

In the Nordics, we experienced the 1% constant currency revenue growth during the fourth quarter or adjusted for billing days, a 2% growth rate. This represents an improvement from the 3% decline in the third quarter. Norway has been the driver of the improved revenue growth. We expect Norway to continue to perform well in the first quarter, which will offset the soft revenue environment in Sweden. For the Nordics, overall, we expect to see a similar rate of revenue growth in the first quarter.

Revenue in the Netherlands decreased 15% in constant currency on a billing days adjusted basis during the fourth quarter. This representative declined from the 4% decrease in the third quarter. We had anticipated a further decline in the fourth quarter. As our language translation business was a fee-based business, the sale in December 2018 will have a modest impact on the revenue trend in the Netherlands going forward. We expect the first quarter revenue trend will be similar to the fourth quarter trend.

Belgium experienced revenue growth of 1% in constant currency during the fourth quarter. This represented an improvement from the billing days adjusted 1% constant currency decline in the third quarter. Our Belgium business has been performing as expected, and we expect a similar revenue trend in the first quarter.

Other markets in Northern Europe had a revenue decline of 1% in constant currency. The Asia Pacific Middle East segment comprises 13% of consolidated revenue in the quarter. Revenue was up 9% in constant currency to $732 million, representing a decrease from the 10% growth rate in the third quarter. Permanent recruitment growth was 3% in constant currency. OUP was $27 million in the quarter, representing flat growth in constant currency, and OUP margin decreased 30 basis points, driven by gross profit margin mix as staffing gross profit increased at a greater rate than permanent recruitment fees.

Revenue growth in Japan was up 4% on a constant currency basis or 2% adjusting for billing days and represented a slight decrease in the rate of growth in the third quarter. Japan experienced gross profit margin expansion year-over-year as a result of underlying improvement in staffing margin. OUP and OUP margin improved once again during the fourth quarter in Japan. We expect a similar revenue trend in the first quarter on the billing days adjusted basis.

Revenues in Australia and New Zealand decreased 1% in constant currency, which represented a decline from the 6% revenue growth in the third quarter. This was driven by the timing of certain client volumes, and we expect a similar revenue trend in the first quarter. Revenue in other markets in Asia Pacific Middle East continued to be very strong, up 17% in constant currency, and represents a continuation of the third quarter revenue trend. This was a result of strong double digit growth in a number of markets, including operations in India, Greater China, Thailand, Malaysia and Vietnam. Our Greater China business, which is operated through a joint venture, owned a majority stake in a China-based payrolling firm, with the minority stake held by the founder.

As this activity was no longer considered core, we sold the majority ownership stake to its founder in December 2018 and since then, no longer consolidate the results of this business. The impact of the disposition on OUP was not significant in the fourth quarter and due to the low margin nature of this business, it's not expected to significantly impact future OUP trends in the APME region. However, the revenue trend will be impacted. As a result, our first quarter revenue guidance for APME will provide an additional organic constant currency growth rate to exclude the impact of this disposition.

Separately, our China joint venture, in which we own a controlling interest, continues to perform very well. It has become a leader in China for higher margin workforce solutions and permanent recruitment. We are pleased with our progress in China and are working closely with our JV partner on future market expansion opportunities.

Our Right Management business experienced a 4% constant currency revenue decline in the fourth quarter. This was driven by reduced outplacement activity. The rate of revenue decline represents an improvement from the 7% constant currency decline in the third quarter and represents three consecutive quarters of improvement. Lower gross profits driven OUP decreased 10% on a constant currency basis and the OUP margin declined by 130 basis points.

I'll now turn to cash flow and balance sheet. Free cash flow, defined as cash from operations less capital expenditures, was 418 million for the full year compared to 346 million in the prior year. The fourth quarter experienced positive free cash flow of 156 million, which compared to 99 million in the year ago period. At quarter end, day sales outstanding increased by two days. Consistent with prior quarters, changes in our business mix have driven some of the overall DSO increase. We continue to execute our initiatives to improve the trend of DSO.

Capital expenditures represented 65 million during 2018. During the quarter, we purchased 2.6 million shares of stock for 202 million, bringing total purchases for the year to 5.7 million shares for 501 million. As of December 31st, we have 3.1 million shares remaining for repurchase under the 6 million share program approved in August of 2018. Our balance sheet was strong at quarter end with cash of 592 million and total debt of 1.08 billion, bringing our net debt to 483 million. Our debt ratios are very comfortable at quarter end with total debt to trailing 12 months adjusted EBITDA of 1.2 and total debt to total capitalization at 28%. Our debt and credit facilities did not change in the quarter. At quarter end, we had a 500 million euro note outstanding with an effective interest rate of 1.8% maturing in June of 2026 and the 400 million euro note with an effective interest rate of 1.9% maturing in September of 2022. In addition, we have a revolving credit agreement for 600 million, which remained unused.

Next, I'll review our outlook for the first quarter of 2019. We are forecasting earnings per share to be in the range of $1.30 to $1.38, which includes a negative impact from foreign currency of $0.13 per share. Our constant currency revenue guidance range is a decline between 3% and 5%. The impact of dispositions represents 50 basis points of our decline in the first quarter. There are slightly fewer billing days in the first quarter. As a result, this represents a billing days adjusted organic constant currency revenue decline of 3% at the midpoint.

This represents the current trends in key markets, particularly Europe and the anniversary of higher growth rates in various markets. From a segment standpoint, we expect constant currency revenue growth in the Americas to be in the flat to low single digits with declines in Southern Europe in the low to mid-single digits. We expect a revenue decline in Northern Europe in the high-single digit range with about 70 basis points of the decline representing the recent disposition in the Netherlands. We expect organic revenue growth in Asia Pacific Middle East in the low single digits. As the impact of the China-related disposition decreases first quarter revenues by about 4%, we expect the constant currency revenue decline for the APME region in the first quarter in the low single digits. We expect a revenue decline in Right Management in the low single digits. Our operating profit margin during the first quarter should be down 30 basis points, which includes an incremental 10 basis points of increased costs and global technology related initiatives compared to the year-ago period.

As we mentioned last year, our global effective tax rate increases in 2019 due to the discontinuation of the tax exempt CICE program in France. We expect our global effective tax rate to approximate 34% for 2019. We expect our income tax rate in the first quarter to approximate 37%. There have been reports that the government of France is considering deferring the scheduled 2% decrease in their corporate tax rate in 2019. As this has not been enacted, we have not incorporated this into our guidance. Should France enact this change, it would increase our global effective tax rate by 50 basis points.

As usual, our guidance does not incorporate additional share repurchases, and we estimate our weighted average shares to be 61.5 million, reflecting share repurchases through December 31st. Our guidance also does not include any restructuring charges or estimate for hyperinflationary accounting-related foreign currency gains or losses related to our Argentina business.

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

[Jonas Prising, Chairman and CEO]

Thanks, Jack. We see our Q1 trends essentially similar to what we saw at the end of 2018. We don't know how long the current slowdown in some European markets will continue. Having said that, we know permanent recruitment demand remains strong in many markets and companies looking for more operational and strategic flexibility in a more uneven, uncertain environment will be looking for skills that our Manpower business provides. As companies invest in new digital infrastructure, it creates demand for the technology skills that Experis provides.

And finally, we continue to see good opportunities to deliver our market-leading ManpowerGroup solutions offerings in many European markets and support people transition to new careers with our Right Management offerings. We also believe the U.S. market will provide us with opportunities for revenue improvement in 2019.

In addition, our emerging market footprints continues to provide a solid growth outlook. Our diversified geographic footprint and business mix should provide us with opportunities to generate new business in growth markets against slowing business in some markets experiencing headwinds. We will balance our investments in those markets that provide us with growth opportunities and always look for operational excellence, cost optimization and productivity initiatives, especially where we are experiencing softening demand.

Lastly, I want to take this opportunity to thank the entire ManpowerGroup team for their great engagement and disciplined execution in 2018, and we look forward to building on that progress in 2019 and beyond. Our people are the reason we were recently named one of Fortune Magazine's 2019 world's most admired companies for the 17th time, also receiving top scores for social responsibility and global competitiveness. This accolade is a testament to our people who are delivering on our commitment to help our clients win in the changing world of work, while connecting millions of people to meaningful and sustainable employment every year.

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

[Operator]

[Operator Instructions] Our first question is from the line of Andrew Steinerman from JPMorgan. Your line is now open.

[Andrew Steinerman, JPMorgan]

Jonas, you mentioned that you don't know when you'll see stability in Europe. Instead of giving kind of the timing of when, could you give us a sense of sort of what has to happen for you to see stability in Europe? And then another comment that caught my ear in your final remarks was that you saw opportunity for growth in Manpower U.S., which has been a segment of turnaround for you. Did you mean that -- kind of give us a timeline of when you think that segment could grow?

[Jonas Prising, Chairman and CEO]

Hey, morning, Andrew. This is the headquarters of the polar vortex. So we're looking out at some very cold weather here. And your first question on the outlook for Europe and the timing, of course, that's difficult. Now, we're in two consecutive quarters. You might have seen the numbers from the eurozone growth at 0.2 for both of those quarters. So it's all going to be a question of resolving some of the uncertainties that are related to trade, Brexit and some of the political issues that might be in some of the European countries.

But overall, I would say, to give you a sense of what our conversations with clients are like, this still feels very much like a slowdown and not the beginning of the downturn, because by the same token of looking back at the past quarters with lower economic growth in the eurozone, you're looking at labor markets that are now at a 10 year low in terms of unemployment. So that's positive, that's why we think we will have opportunities in a number of our brands in countries across Europe. And also when you look at the projected outlook for growth for the year, it is significantly higher than what the current run rate is. So if that were to happen, there should be some good opportunities for a pickup. And the question is, of course, when that would happen. But our conversations with our clients still feel very much like a slowdown and not a downturn.

Related to the question in the U.S., we still think of the U.S. as a good market for revenue improvement for us, and we believe that we'll see some revenue improvements. In the Manpower business, we were very pleased to see that Experis continued to improve also in the fourth quarter. So we think this is one of the markets where we'll have some good opportunities, and we're adding recruiters here in the U.S. because we think the market will be good here in the U.S.

[Operator]

And our next question is from the line of Jeff Silber from BMO Capital Markets. Your line is now open.

[Jeff Silber, BMO Capital Markets]

I wanted to start actually focusing on Right Management. Can you just remind us what percentage of that business comes from Europe and is the European business growing there, would we expect that to be growing considering what's going on in that environment?

[Jack McGinnis, CFO]

Yes. Jeff, I would say the biggest parts of the business are in U.S. We have seen good progress in Europe, and it has been an opportunity for us. The UK is a market where we have some concentration as well. So I'd say still trends -- overall trends are still being driven by the U.S. predominantly, but we've actually seen very good opportunities in Europe, and we continue to see that as an area of opportunity, particularly in 2019, as we look at the pipeline.

[Jonas Prising, Chairman and CEO]

And even in 2018, Jeff, the Europe is the best performing business in our Right Management business globally. So you are seeing a reflection of some of this environment come through in the performance of that business.

[Jeff Silber, BMO Capital Markets]

And then shifting over to just your capital allocation strategy, given what's going on, are there any major changes here over the next few quarters, are you going to hold back on M&A repurchasing stock? Is that something you might be accelerating? Your thoughts would be really appreciated.

[Jack McGinnis, CFO]

Yes. Jeff, in terms of capital allocation, I guess I'd start by saying we really haven't changed our strategy at all, it remains the same. If there is acquisition activity that goes first, that will be a use of free cash flow. To your point, there hasn't been. And if there isn't, then we're going to continue to look at share repurchases as a vehicle to return cash to our shareholders. And you saw what we did in the fourth quarter. And with share repurchases, we do continue to do that opportunistically. So we don't have a set amount that we declare that we have to do each quarter, and we'll continue that approach going forward.

[Operator]

Thank you. And our next question is from the line of Kevin McVeigh from Credit Suisse. Your line is now open.

[Kevin McVeigh, Credit Suisse]

Could you just remind us what the -- it sounds like there is a bit of an offset of an accrual against CCIE headwind. What was that and should we expect that kind of sensitivity over the course of 2019?

[Jack McGinnis, CFO]

Yes. Kevin, regarding the gross profit margin impacts, what we anticipated was the loss of the December CICE in France, and we called out that we expect that, that would be about a 30 basis point drag in the fourth quarter. What we effectively had were direct cost adjustments that pretty much canceled that out. So on an underlying basis, we're really where the reported amount is, about 30 basis points down. The majority of those direct cost adjustments came out of France. There's always direct cost adjustments as part of the normal process. But there was one larger one in France related to training fund accruals, which was one of the bigger items. But I would characterize it as more of a one-off, I wouldn't anticipate that that's going to be a trend that continues into future periods.

[Kevin McVeigh, Credit Suisse]

And then just -- as this CICE runs off, how have the pricing conversations gone with clients around kind of the headwind on that or just any thoughts on pricing in general?

[Jack McGinnis, CFO]

So I would say in France, particularly one of the items we've seen in recent quarters, if you put the CICE decrease aside in 2018, we've actually seen good underlying improvement. So our objective is to try and offset the regulatory impacts, and we did that in 2018 in a very successful way, and we're continuing to see progress there for 2019. So I called out the change to the new subsidy, the headwind that, that will create of about 50 basis points. And we're optimistic that we're going to continue to be able to offset part of that pressure as well doing the same things we've been doing. So I'd say from that perspective, it continues to be a good labor market. And in view of the regulatory changes, we are actually having good progress on bill pay spreads on an overall basis.

So that is an opportunity for us, and I'd say that it's not just unique to France, we've actually seen -- I called out the fact that we saw improvement in Italy in our staffing margin during the quarter as well. And we've been actually making progress in the U.S. as well. And I've talked about Experis. Experis saw an expansion in their gross profit margin during the quarter as well. So there definitely is opportunity for us when we look at pricing going forward, and we're starting to see that come through. And that's actually part of what's happening in terms of our outlook into the first quarter on GP margin as well.

[Jonas Prising, Chairman and CEO]

And Kevin, just to add on your question on pricing, what it looks like, pricing remains rational overall, it's as usual a competitive environment, but pricing pressures have not changed. And to Jack's point, we've seen some positive evolution of our ability to be able to compensate for any direct cost increases through our pricing in a number of markets.

[Operator]

And our next question is from the line of Hamzah Mazari from Macquarie Capital. Your line is now open.

[Hamzah Mazari, Macquarie Capital]

My question is around the cost side. Maybe just any thoughts as to how much more room you have on the cost side, either through technology or consolidation of back office in Europe? I think U.S. is behind you. And the reason I ask is because you had this big restructuring about five years ago. I think you took out 180 million of costs. So, just as you look at the portfolio, is there any incremental room on the cost side?

[Jonas Prising, Chairman and CEO]

Yes. Hamzah, I'd say yes, there definitely is. I'd really go back to our financial targets and when we talked about our EBITDA margin expansion goals, one of the key levers that we continue to pull are ongoing efficiencies, particularly in our back office processes. So you referenced the U.S. We did a lot in the U.S., and we are seeing that as an underlying improvement in our cost structure there that's helping fund the technology investments that we're making, and we're looking at that in a very similar way in our other large businesses around the world. We did some of that last year in Europe, and we expect we'll continue to be making advancements in our back office optimization in those key markets. And that will continue to be an opportunity for us.

So in the current environment where we've seen some deleveraging due to the revenue pressure that we've seen, you can't see that coming out as strongly as it was before, but it is happening and it will continue to be an area that gives us some ability to continue to improve the bottom line and fund our technology investments.

[Hamzah Mazari, Macquarie Capital]

And then just a follow-up question. On the Experis side, I know you've touched on it, but any further color as to what's driving the improvement? Is that just a market? Is that just better execution, your back-filling projects? Because I know that business had not issues, but it was slow relative to what you're seeing now in terms of improvement. So just any further color there.

[Jonas Prising, Chairman and CEO]

I think it's just a continuation of our improvement in terms of our execution. As we've said before, we want to improve the business, we want to get to where the market is. But we want to get there in the right way. So we're gradually executing, we're adding recruiters in the areas where we see good demand and overall I think in the U.S., in particular, we have continued to see very good demand. So it's just a continued progress from improvements in execution.

[Jack McGinnis, CFO]

And the one item I would just go back to that we've emphasized in the past as in the U.S., particularly we've been very focused on growing the right way and growing profitably, and we have been emphasizing the expansion of gross profit margin in the Experis business in U.S.. So we saw a 2% improvement in the rate of decline in the fourth quarter, and we are making progress to Jonas's point, but we're doing it while very focused on GP margin, and we expanded that again in the fourth quarter. And as I said, we do continue to see improvement into the first quarter for Experis as well.

[Operator]

Thank you. And our next question is from the line of Mark Marcon from RW Baird. Your line is now open.

[Mark Marcon, RW Baird]

With regards to France, can you just talk a little bit about what you're seeing in terms of the ongoing impact from the yellow vest protest and to what extent do you think that potentially the fee-on changes that are currently scheduled for the fourth quarter could potentially change? And then I have a follow-up with regards to Germany.

[Jonas Prising, Chairman and CEO]

Yes. No, I was in France last week. And -- so I was of course very interested in hearing what the impact was as it relates to the yellow vest. And the impact that has been noted is primarily in the retail sector, around the seasonal shopping as well as hospitality. I mean, those are the two sectors that have been hit quite hard at the end of the year. But at this point, the protests seem to be well contained. They're predictable, which means people work around them. They don't disrupt working life. And President Macron has instituted a number of initiatives that, at least for now, appears to have calmed the situation quite a lot. So I would say that this is now manageable from the French government's perspective, and they have instituted a number of different initiatives to try and placate the part of the population that feels that they've been left behind.

We don't know whether any change would happen, but I would say, the initiatives that the government put in to reduce the pressure on budget did not include any change on the fee-on -- subsidies the way they've been projected to kick in on the 1st of October. And, of course, I'm sure that, that was part of the consideration when they looked at how to bridge a budget gap as they made some other changes. But at least for now what they have said is that no, this is going to happen and the date is the 1st of October. And that's as recent as last week with the meetings that I had with government ministers. So we feel pretty good about them sticking to that commitment because in the end, it is a commitment to make France more competitive by reducing the cost of labor and enabling companies to invest and grow their workforce in France. So I don't think that it's likely that it will change, at least at this point.

[Mark Marcon, RW Baird]

And then with regards to Germany, can you just shed a little bit more color with regards to what is the major driver behind the decline? I mean I know there's multiple factors, including the auto industry and the emissions changes. But how would you characterize it? And when do you think that we may end up inflicting or is there any light at the end of the tunnel as it relates to Germany?

[Jack McGinnis, CFO]

Mark, it's Jack. I'd say, on Germany, going back to what we talked about in the third quarter, we highlighted the disruption we saw from some of the systems in delivery model changes. But we did make progress in the fourth quarter, advancing initiatives around that. So these are all changes that are going to make our Germany business stronger going forward. But the reality is we're still working through some of that, and we saw some of that trend in the third quarter continue into the fourth quarter in terms of some of that disruption.

At the same time in the fourth quarter, the market deteriorated. And that really goes to your point about the auto sector. We certainly have a -- we're very manufacturing focused in Germany, the auto sector is a big part of our business there. With that being said, we actually have seen stabilization if we look in 2019 in the first few weeks of January here, it stabilized. So as I said in my outlook, what we're holding right now for the first quarter guidance is what we're seeing as we exit the fourth quarter. So a trend similar to the fourth quarter, but it is encouraging that we, in January, have seen stabilization now, and I think it's going to be dependent on what happens in the market activity going forward.

[Mark Marcon, RW Baird]

I guess what I'm wondering is from your field people and from your client conversations, are you hearing anything about when they think they're basically going to run through the inventory? I'm specifically talking about the auto factoring and when that potentially ends up turning?

[Jonas Prising, Chairman and CEO]

Well, I think you have Germany, their economic growth has come down pretty sharply and the projections for '19 the growth rate is projected to be much lower than it was in 2018. The flip side of that is there's -- the labor markets are still very strong, unemployment is at 3.3%. So again, in Germany, the feeling is certainly not of a discussion around a downturn, it is more of a slowdown, but it's hard to predict when companies are going to feel better. I think it hangs together with the overall outlook for Europe and global trade with China, trade wars potentially with the U.S. being settled. So I think that could be an inflection point when that gets resolved.

[Operator]

And our next question is from the line of Gary Bisbee from Bank of America Merrill Lynch. Your line is now open.

[Gary Bisbee, Bank of America Merrill Lynch]

I guess the first question, so I want to go back to the capital allocation and just get any incremental color you can provide on your appetite for share repurchases, and I ask against the context of obviously in 2008, 2009, a much more difficult environment, but the Company basically went two years and halted buybacks and then in 2013, when there was a mild double dip recession in parts of Europe, there was 18 months without any buybacks, both times moving to a net cash position on the balance sheet. How do you think about -- like at what level do you think about moving to that more of a safety mode or is there something different today in how you think about the liquidity, the business, the balance sheet strength, et cetera, that might make you act differently if we do see some further weakening?

[Jack McGinnis, CFO]

Gary, I'd say as you refer, we have a very strong balance sheet currently. So when we look at capital allocation, as I mentioned before, we continue to think share repurchases are a great way to return cash to our shareholders. We do that opportunistically, and you've seen what we've done in the last two quarters to your point. In terms of how we think of that going forward, I'd go back to what Jonas said in terms of his overall points about Europe. So we continue to think this is a slowdown. We don't think we're currently approaching a recessionary environment, we're in a recessionary environment in Europe at the moment. And as a result, that's how we think about our balance sheet. Now with that being said, one of our goals is to continue to have a very strong balance sheet. And you've seen us be prudent in the past in the way we look at our overall balance sheet, and we'll continue to do that. But at the moment, we feel very good about our capacity. And you saw what we did in the fourth quarter, and I'd say we'll continue to look at that very opportunistically going forward.

[Gary Bisbee, Bank of America Merrill Lynch]

Then a quick follow-up on the French margin, just how they're trending the 50 basis points for the change in the regulatory environment you've talked about. But before that and excluding the accrual adjustments, should we think that on top of that 50 basis points drag, there's beginning to be some more meaningful, just deleveraging from the weaker revenue or is some of the price discipline stuff you talked about really limiting that? And I guess I'm thinking more forward-looking than what happened in Q4?

[Jack McGinnis, CFO]

Yes. I'd say we don't really do a lot in terms of OUP margin guidance by specific country, Gary, but what I would say to kind of get to your question is we feel pretty good about the ability to make up some of that pressure we're going to see from the switchover to the new subsidies. And France continues to be a pretty efficiently run organization for us. So I think we feel good about the opportunity going forward. Revenue has been -- the trends we've seen in revenue certainly over the last couple of quarters has been declining. But with that being said, we've seen stabilization in January. So we will continue to look at our efficiency on an overall basis. I think as we move forward, if we were to see more severe revenue declines, then as Jonas said in his comments, we're very, very good at looking at our cost structure and making adjustments as needed to protect the OUP margin. And we would -- we certainly would consider that if the environment dictated that going forward.

[Operator]

Thank you. And our next question is from the line of Tim McHugh from William Blair. Your line is now open.

[Tim McHugh, William Blair]

Just a question I guess related to spending, but the sales force, I recognize you're kind of cutting broadly expenses as you try and drive efficiency, but as you see a downturn like this, how are you managing kind of your sales resources, are you keeping capacity in the hopes this is just a temporary kind of slowdown and not a downturn?

[Jonas Prising, Chairman and CEO]

So first of all, we saw some great performance in growth in Latin America, Asia Pacific, parts of the Americas. So clearly, in those countries, we're adding resources and feel that we have good growth opportunities, and we do the same in the U.S. When -- then it comes to countries where we have a slowdown that we can see is a reduction in demand, we manage it very carefully because we know that things can change, but of course, we are very good at managing productivity and operational excellence as we make sure that we have an expense base that supports the business in the state that it's in. And as you could see in the fourth quarter, we're actually quite agile in terms of how we can do that and adjust. And clearly, as we were managing this with our thoughts around it being a slowdown, we manage it prudently because we also don't want to miss opportunities in markets even though they might be slowing down now, they could come back, and also we have opportunities due to the tight labor markets in many of those countries.

So, [indiscernible] could be a good opportunity for us despite the slowing, Manpower business in some cases, as Experis and others. So it is really the experience of the management, been through many different cycles over many years of their tenure in the business that enables us to optimize those management actions.

[Tim McHugh, William Blair]

And then just can you elaborate on Italy that you made the comment, the dignity degree is not having an impact, I guess, it's more market weakness that you attribute to declines too, but I guess what do you [indiscernible] for that?

[Jonas Prising, Chairman and CEO]

Yes, that's right, Tim. So, first of all, of course, last year, we were coming up against extremely high growth rates. So that will be the first observation I would make. And then the second observation as you may might have seen this morning, Italy is now technically in a recession, the fourth quarter was in negative territory. So the economy is not very good. But we feel very good about our business in Italy. It's well managed. Our outlook for the first quarter remains positive, although with a little bit of a weaker revenue outlook. Our profitability and our ability to manage our staffing margins is strong. So we still feel good about our Italian business.

[Operator]

And our next question is from the line of George Tong from Goldman Sachs. Your line is now open.

[George Tong, Goldman Sachs]

Operating margins came in at 4% this quarter, which was ahead of guidance. Part of the improvement came from direct cost adjustments on the gain on sale from your language translation business. Can you unpack the remainder of the upside drivers this quarter and how these may carry over to 1Q margin performance?

[Jack McGinnis, CFO]

Yes. George, what I'd say is you're right, there are a couple of different moving parts there, but I guess on the overlying basis what I'd say is in the current revenue environment, think of it as the underlying running of about 20 basis points down year-over-year considering the year-ago period where we had very strong growth. And as we look into the first quarter, really I'd say that trend's going to continue about 20 basis points down. And we did call out that the first quarter is our latest quarter in terms of revenues and as a result of that, our technology spend in the first quarter has another 10 basis points of an impact. So think of it that way, think of it as an underlying 20 basis points and then the additional technology spend is another 10 in the first quarter.

[George Tong, Goldman Sachs]

In France, you indicated that you're seeing evidence of good underlying improvement in the labor market that's helping to offset the regulatory impact. Can you lay out the timeline over the rest of this year for how you expect regulatory changes to impact growth and margins in basis points and how effectively the underlying environment will offset these headwinds?

[Jack McGinnis, CFO]

George, I was referring to the ability to have discussions with clients regarding bill pay spreads and the opportunity in view of what's happening with the regulatory environment with the changes in the subsidy programs, which are additional headwind. So that was what I was referring to. I think if we look at the outlook for 2019 from a regulatory standpoint, I think we know the major components at this stage. I think it's going to be the transition of the CIC program. We have a pretty good handle on that. And what -- I just go back to the point that we have a good opportunity to make up that headwind in France due to ongoing discussions with clients, and we're seeing that momentum in the current quarter, and we see that trend continuing.

[Jonas Prising, Chairman and CEO]

Okay. We have reached the end of our allotted time, and that will conclude our call.

[Operator]

Thank you, everyone. And that concludes today's conference. Thank you for joining, and you may now disconnect.