ManpowerGroup Inc. (NYSE:MAN) Q3 2023 Earnings Call Transcript

ManpowerGroup Inc. (NYSE:MAN) Q3 2023 Earnings Call Transcript October 19, 2023

ManpowerGroup Inc. beats earnings expectations. Reported EPS is $1.38, expectations were $1.34.

Operator: Welcome to ManpowerGroup’s Third Quarter Earnings Results Conference Call. You’ll be put in listen-only mode until the question-and-answer time begins. This call is being recorded. If you care to drop off now, please do so. I would now like to turn the call over to ManpowerGroup’s Chairman and CEO, Mr. Jonas Prising. Sir, you may begin.

Jonas Prising: Welcome to the third quarter conference call for 2023. Our Chief Financial Officer, Jack McGinnis, is with me today. For your convenience, we have included our prepared remarks within the Investor Relations section of our website at manpowergroup.com. I will start by going through some of the highlights of the quarter, then Jack will go through the third quarter results and guidance for the fourth quarter of 2023. I will then share some concluding thoughts before we start our Q&A session. Jack will now cover the Safe Harbor language.

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Jack McGinnis: Good morning, everyone. This conference call includes forward-looking statements, including statements concerning economic and geopolitical uncertainty, 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 2 of our earnings release presentation further identifies forward-looking statements made in this call and factors that may cause our actual results to differ materially and information regarding reconciliation of non-GAAP measures.

Jonas Prising: Thanks, Jack. I’d like to open by sharing our sadness at the devastating terrorist attacks on Israel and the unfolding conflict. ManpowerGroup has operated in Israel for over 60 years. I have just spoken with our Israeli colleagues this morning to express our heartfelt support and thank them for working tirelessly to help those impacted and still run the day-to-day operations. Amid the suffering that is ongoing, I am in awe of their resilience and dedication to take care of each other, their families, our clients and associates during these extremely challenging times. Turning to the broader environment, in recent weeks I have spent time with our teams and clients in Europe and North America. The topic at the forefront of many of my discussions with clients and business leaders is the global economic outlook, how things are looking now, how they may evolve, and how this is impacting labor markets and their hiring plans.

Many echo a sentiment of manageable headwinds in the short term, yet confirm their limited visibility on how this will evolve, which is resulting in increasing cost reduction initiatives, hiring slowdowns and project start postponements. This sentiment tracks with the trends and data we see as well. Last quarter, we shared that broader economic pressures were building, particularly in North America and Europe. Over the last few months, we have seen these pressures increase, with declining outputs in global manufacturing; slowing activity in services; and subdued hiring across some industries as companies pause new hiring and spending following a period of bullish hiring and investment post pandemic. Just last week, I joined many global CEOs across every sector for the Conference Board Business Council meeting in Denver, where most reported reduced optimism compared to three months ago and the general consensus was that economic slowing will continue in the short term.

Yet there are bright spots. The business environment in Latin America and Asia Pac remains solid. And even in the regions most impacted by economic slowing, North America and Europe, consumer spending is holding; employment rates are strong and workers continue to earn more and move up; and core inflation is easing, albeit slowly. In this uneven and uncertain environment, we saw organizations act the way they have done in past periods of increased uncertainty and economic headwinds: holding on to their existing permanent workforce and pulling back on staffing and permanent recruitment services in North America and Europe. Moving on to our financial results. In the third quarter, revenue was $4.7 billion, down 5% year-over-year in constant currency.

Our reported EBITA for the quarter was $78 million. Adjusting for restructuring, Argentina hyperinflationary foreign exchange charges and a small loss on sale, EBITA was $117 million, representing a 36% decrease in constant currency year-over-year. Reported EBITA margin was 1.7%, and adjusted EBITA margin was 2.5%. Earnings per diluted share was $0.60 on a reported basis and $1.38 on an adjusted basis. Adjusted earnings per share were down 39% year-over-year in constant currency. Although the timing of a recovery is always hard to predict, decades of experience tell us that we must adjust to the existing reality while being ready to pivot quickly when the situation improves. Our industry is at the leading edge, by this we mean it is often the first to feel the impact going into an economic downturn, and the first to benefit from improving outlooks on the other side.

Though today we are clearly in a slowing environment, labor markets overall are holding steady and transformation agendas continue, though at a more moderate pace. Companies are reluctant to reduce their workforce or pause on initiatives to upskill and develop their people and we see this evidenced in the demand for Experis Academy and Manpower MyPath offerings which help people learn in-demand skills at scale and speed. In uncertain times, people and companies need trusted partners to show them a path to navigate the uncertainty. Our value proposition to clients and candidates has never been more relevant, and our business model helps them absorb some of the pressures they are feeling today, and prepare to accelerate out of the downturn once the economic recovery begins again.

Employers value the insight and data-led guidance on developing and executing an agile workforce strategy. We remain confident that our clear plan to profitably grow the business by diversifying, digitizing and innovating is how we help our clients and candidates prepare for the future and be competitive for the long-term, while managing the headwinds today. With that, over to Jack to take you through the financials.

Jack McGinnis: Thanks, Jonas. Revenues in the third quarter came in at the midpoint of our constant currency guidance range. Gross profit margin came in above our guidance range. As adjusted, EBITA was $117 million, representing a 36% decrease in constant currency compared to the prior-year period. As adjusted, EBITA margin was 2.5% and came in at the midpoint of our guidance range, representing 120 basis points of decline year-over-year. During the quarter, year-over-year foreign currency movements had an impact on our results. Foreign currency translation drove about a 3% favorable impact to the U.S. dollar reported revenue trend compared to the constant currency decrease of 5%. Organic days-adjusted revenue decreased 4% in the quarter.

Turning to the EPS bridge. Reported earnings per share was $0.60 and included $0.78 of charges related to restructuring, a non-cash foreign currency loss related to the translation of our hyperinflationary Argentina business and a small loss on sale of our Philippines business. Argentina is required to be treated as a hyperinflationary economy and the non-cash currency translation losses reflect the devaluation of the Argentine peso during the quarter. This is a non-cash accounting charge as our Argentina business operates in their local currency. Excluding these charges, adjusted EPS was $1.38. Walking from our guidance mid-point, our results included a slightly better operational performance of $0.01, a lower weighted average share count due to share repurchases in the quarter which had a positive impact of $0.01, a lower effective tax rate which had a positive impact of $0.02, a foreign currency impact that was $0.04 worse than our guidance due to the weakening of the Euro and the pound during the second half of the quarter, and interest and other expenses which had a positive $0.01 impact.

Next, let’s review our revenue by business line. Year-over-year, on an organic constant currency basis, the Manpower brand reported a revenue decline of 3%, the Experis brand declined by 10%, and the Talent Solutions brand declined by 14%. The Experis decline represented lower activity from both enterprise and convenience customer segments. Demand from enterprise technology clients continued to be weak. Within Talent Solutions, we saw a significant year-over-year revenue decline in RPO as well as an expected sequential softening of activity from the second quarter. Our MSP business saw revenue declines in the quarter as we reduced certain lower margin activity, while Right Management experienced significant year-over-year revenue growth on higher outplacement volumes in the quarter, with revenue levels fairly steady from the second quarter.

Looking at our gross profit margin in detail. Our gross margin came in at 17.6%. Staffing margin contributed to a 10 basis point reduction due to mix shifts as pricing remained strong. Permanent recruitment, including Talent Solutions RPO, contributed a 70 basis point GP margin reduction as permanent hiring demand continued to soften. Right Management career transition within Talent Solutions contributed 30 basis points of improvement as outplacement activity reflected strong year-over-year growth with gross profit steady from the second quarter level. Other items resulted in a 20 basis point margin decrease. Moving onto the gross profit by business line. During the quarter, the Manpower brand comprised 59% of gross profit, our Experis professional business comprised 25%, and Talent Solutions comprised 16%.

During the quarter, our consolidated gross profit decreased 9% on an organic constant currency basis year-over-year. Our Manpower brand reported an organic gross profit decrease of 5% in constant currency year-over-year. Organic gross profit in our Experis brand decreased 14% in constant currency year-over-year. Permanent recruitment and other services within Experis drove the higher rate of overall GP decrease for the brand. Organic gross profit in Talent Solutions decreased 15% in constant currency year-over-year. This was mainly driven by declines in RPO as permanent recruitment continued to weaken during the quarter. This was partially offset by Right Management on increased outplacement activity. MSP experienced a very slight decrease in gross profit in the quarter.

Reported SG&A expense in the quarter was $752 million. Excluding restructuring costs, SG&A decreased 2.2% year-over-year on an organic constant currency basis, representing a sequential decrease from the flat level in the second quarter on this same basis. This reflects significant cost actions during the quarter resulting in a quarterly headcount reduction of 4% sequentially and a reduction of 7% year-over-year, which will result in further cost reductions into the fourth quarter. At the same time, we continue to invest in transformation programs included in corporate expense. These are strategic investments, expected to drive medium- and long-term productivity and efficiency enhancements across our technology and finance functions worldwide.

The underlying SG&A decreases largely consisted of operational costs of $16 million, offset by currency changes of $19 million. Adjusted SG&A expenses as a percentage of revenue represented 15.3% in constant currency in the third quarter, reflecting lowered operational leverage on the revenue decline. Restructuring costs totaled $38 million. The Americas segment comprised 24% of consolidated revenue. Revenue in the quarter was $1.1 billion, representing a decrease of 7% compared to the prior-year period on a constant currency basis. Reported OUP was $38 million and includes $6 million of restructuring costs. As adjusted, OUP was $44 million and OUP margin was 4.0%. The majority of the restructuring costs related to North America with the balance recorded in Latin America.

The U.S. is the largest country in the Americas segment, comprising 68% of segment revenues. Revenue in the U.S. was $753 million during the quarter, representing an 14% days-adjusted decrease compared to the prior year. As adjusted to exclude restructuring costs, OUP for our U.S. business was $29 million in the quarter, representing a decrease of 52% from the prior year. As adjusted, OUP margin was 3.8%. Within the U.S., the Manpower brand comprised 25% of gross profit during the quarter. Revenue for the Manpower brand in the U.S. decreased 16% on a days-adjusted basis during the quarter, representing an improvement from the 19% decrease in the second quarter. The Experis brand in the U.S. comprised 46% of gross profit in the quarter. Within Experis in the U.S., IT skills comprised approximately 90% of revenues.

On a days-adjusted basis, Experis U.S. revenue decreased 15% as we anniversaried significant 2022 organic growth of 16%. As referenced earlier, the year-ago period reflected significant growth from enterprise clients who have had weak demand in the current year. Talent Solutions in the U.S. contributed 29% of gross profit and experienced revenue decline of 18% in the quarter. This was driven by a decrease in RPO revenues in the U.S. as permanent hiring programs continued at lower levels in the third quarter. The U.S. MSP business saw revenue decline as we reduced some lower margin activity, while outplacement activity within our Right Management business drove strong revenue increases. In the U.S., RPO, MSP and Right Management all experienced relatively steady revenue levels from the second quarter.

In the fourth quarter of 2023, for our U.S. businesses overall, we expect a slightly improved rate of year-over-year decline in revenues as compared to the third quarter. Southern Europe revenue comprised 45% of consolidated revenue in the quarter. Revenue in Southern Europe came in at $2.1 billion, representing a 3% decrease in organic constant currency. Reported OUP was $84 million and includes $4 million of restructuring costs. As adjusted, OUP was $88 million and OUP margin was 4.2%. The majority of the restructuring charges related to reductions in the Southern Europe Regional Head Office team. France revenue comprised 57% of the Southern Europe segment and revenue equaled $1.2 billion in the quarter, down 2% on a days-adjusted constant currency basis.

After adjusting for modest restructuring charges, adjusted OUP for our France business was $49 million in the quarter, representing a decrease of 20% in constant currency. Adjusted OUP margin was 4%. We are estimating the year-over-year constant currency revenue trend in the fourth quarter for France to represent a modest further decline from the third quarter trend based on October activity to date. Revenue in Italy equaled $414 million in the quarter and was down 2% on a days-adjusted constant currency basis. OUP equaled $27 million and OUP margin was 6.5%. We expect a similar rate of constant currency revenue decline in the fourth quarter compared to the third quarter. Our Northern Europe segment comprised 19% of consolidated revenue in the quarter.

Revenue of $914 million represented a 10% decline in constant currency. After excluding restructuring costs of $28 million, adjusted OUP was negative $3 million and OUP margin was negative 0.4%. The restructuring charges represented $15 million in Germany, largely related to head office rightsizing and related activities in view of the ongoing Proservia wind down; $7 million in the Nordics, mainly related to workforce optimization within the businesses; and modest additional charges in the UK, the Netherlands and Belgium. Our largest market in the Northern Europe segment is the U.K., which represented 35% of segment revenues in the quarter. During the quarter, U.K. revenues decreased 15% on a days-adjusted constant currency basis. This reflects an additional decline from the 12% decrease in the second quarter on this same basis.

We expect a similar rate of constant currency revenue decline in the fourth quarter compared to the third quarter. In Germany, revenues increased 4% in days-adjusted constant currency in the quarter, representing three consecutive quarters of growth driven by our Manpower business, particularly due to strength in the automotive sector. The previously announced wind down of our Proservia managed services business in Germany is advancing with significant progress with the workers councils and impacted clients during the quarter. We are tracking to conclude all wind down related actions by the end of the year with some remaining transition activity concluding through the first half of 2024, which we will carve out separately. We anticipate additional restructuring charges related to the wind down in the fourth quarter and will provide a further update when we announce our fourth quarter earnings.

Proservia business has been a significant drag on our Germany operations and the completion of the wind-down activity will improve profitability going forward. Overall, in the fourth quarter, we are expecting a slightly lower rate of constant currency revenue growth compared to the third quarter trend. In the Netherlands, revenue decreased 5% on a days-adjusted constant currency basis and this represented a slightly improved rate of decline from the second quarter on this same basis. The Asia Pacific Middle East segment comprises 12% of total company revenue. In the quarter, revenue was down 2% in constant currency to $565 million. After excluding modest restructuring costs related to our Australia business, adjusted OUP was $25 million and OUP margin was 4.4%.

Our largest market in the APME segment is Japan, which represented 49% of segment revenues in the quarter. Revenue in Japan grew 10% in days-adjusted constant currency. We remain very pleased with the consistent performance of our Japan business, and we expect continued strong revenue growth in the fourth quarter. We also completed the sale of our Philippines business during the quarter, which transitions into a Manpower franchise going forward. I’ll now turn to cash flow and balance sheet. In the third quarter, free cash flow represented $245 million compared to $254 million in the prior year. At the end of the third quarter, days sales outstanding were flat at 59 days. During the third quarter, capital expenditures represented $21 million.

During the third quarter, we repurchased 636,000 shares of stock for $50 million. As of September 30, we have 293,000 shares remaining for repurchase under the share program approved in August of 2021 and an additional 5 million shares remaining for repurchase under the share program approved in August of 2023. Our balance sheet ended the quarter with cash of $571 million and total debt of $962 million. Net debt equaled $391 million at quarter-end. Our debt ratios at quarter-end reflect total adjusted gross debt to trailing twelve months adjusted EBITDA of 1.41 and total debt to total capitalization at 29%. Our debt and credit facilities remained unchanged during the quarter. Next, I’ll review our outlook for the fourth quarter of 2023. Based on trends in the third quarter and October activity to date, our forecast is cautious and anticipates that the fourth quarter will continue to be challenging with further declines in our Manpower businesses in Europe.

Our forecast also anticipates a significant reduction in activity in our Israel business due to the current conflict. Our forecast also anticipates ongoing slowing of permanent recruitment activity and further offsets by cost actions being taken. We are forecasting underlying earnings per share for the fourth quarter to be in the range of $1.17 to $1.27, which includes an unfavorable foreign currency impact of $0.01 per share. We have disclosed our foreign currency translation rate estimates at the bottom of the guidance slide. Our constant currency revenue guidance range is between a decrease of 4% and 8% and at the mid-point represents a 6% decrease. The impact of net dispositions and less working days contributes to an organic days-adjusted constant currency revenue trend of about a 5.5% decrease at the mid-point.

This represents an additional 1% decrease from the third quarter trend, ignoring rounding, on this same basis. We expect our EBITA margin during the fourth quarter to be down 110 basis points at the mid-point compared to the prior year. We estimate that the effective tax rate for the fourth quarter will be 32.5%, which reflects the mix effect of lower earnings from lower tax geographies in the current environment with minimal expected offsetting tax items. Compared to our previous estimate of a 30% tax rate before the worsening conditions, this update represents a $0.05 reduction in our fourth quarter EPS. When business in our lower rate geographies begins to improve, the tax rate will begin to return to the lower rate. As we consider other tax related matters for 2024, I wanted to provide a brief update on the reduction of the French business tax, known as CVAE, based on recent developments.

Previously, the French government had announced their intention to fully abolish the remaining component of the French business tax in 2024. The preliminary French budget was publicized in late September and instead announced that the remaining component of the French business tax would now be abolished on a pro-rata basis over the next four years. As a result, the additional 1.5% improvement in our global effective tax rate from the abolishment of CVAE will be spread over the next four years with an anticipated reduction of about 35 basis points in 2024. We will continue to monitor any developments on the France budget as it is reviewed by the parliament through year-end. As usual, our guidance does not incorporate restructuring charges or additional share repurchases and we estimate our weighted average shares to be 49.9 million.

As I mentioned, we do expect to have additional restructuring charges associated with the wind down of our Proservia managed services business in Germany and we will disclose those and any additional restructuring charges separately when we report our fourth quarter earnings. Our guidance also does not include the impact of the non-cash currency translation adjustment for our hyperinflationary Argentina business and we will also report that separately. I will now turn it back to Jonas.

Jonas Prising: Thanks, Jack. On our last call, I shared that we are adapting to the current market environment and will not shy away from taking decisive actions that deliver on our strategy to simplify our operations and maximize return on our investments. In the third quarter, we continued to execute against this plan. Our experienced leadership team is using a fine-point pen versus a broad brush to manage costs and invest for growth and we are confident that our actions will preserve margin in the current environment ready for the rebound when it occurs and be more efficient in the long term. We have been executing a transformation agenda in support of our Diversification, Digitization and Innovation strategy for several years.

We are now doubling down on centralized systems and global standardized processes to drive economic benefit across our Finance and Global Technology functions. By leveraging leading global platforms and driving their adoption, we will enable country teams to focus on strategic and operational decision-making so we can execute in the market at speed and increase market share. We are excited about the opportunity to leverage our global IT and Finance infrastructure to automate non-value-added tasks, to drive recruiter productivity and generate valuable client and candidate insights. Our Diversification plan is how we accelerate growth of higher-margin business across all our brands. For Manpower, this means building loyalty with skilled candidates so we can deliver best-in-class talent in both permanent and temporary staffing in labor markets we believe will structurally be more constrained due to demographics and shifting skills needs.

Our own research and data tell us that people want to work for companies they trust and believe in, and who will guide them to move up and earn more. I am delighted that our new Manpower campaign huManpower launches in many of our key markets this week, strengthening our positioning for candidates as an employer of choice with the data, expertise and talented teams to guide them to achieve their potential as they progress their career journey. Our message to workers is clear, Manpower values you, we are committed to your development, and we are by your side to build your skills and offer great career opportunities. This campaign is just one example of our role in preparing people for a future of work and one that is also more green and more digital.

The global green energy transition creates demand for millions of skilled workers to fill new roles in renewable energy, electrification, battery technology, hydrogen and more. We are committed to preparing people for these new opportunities and recently announced our partnership with Innoenergy and the European Battery Alliance to upskill as many as 800,000 workers for jobs in the green battery value chain by 2025. Our reputation as strategic partners to guide companies through transformation is recognized by industry analysts too. Experis has been named a Leader and Star Performer in Everest Group’s PEAK Matrix assessment of U.S. contingent staffing services, scoring highly for its AI enabled capabilities in IT staffing, project solutions, and managed services.

And our Manpower brand has been recognized in the UK as a leader in Contingent Talent and Strategic Solutions, scoring highly for its strong emphasis on associate experience and investment in upskilling and reskilling services, including our MyPath program, associate academies and candidate facing mobile app. Employers now understand that there is no path to growth without people and the ability to hire, train and develop human capital is critical to success on every time horizon. I would like to close by thanking our teams around the world for their engagement and contributions, which is how we are able to consistently deliver to our clients, our people, our partners and our communities. I would now like to open the line for Q&A. Operator?

Operator: Thank you. [Operator Instructions] Our first question comes from Mark Marcon with Baird. Your line is open.

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Q&A Session

Mark Marcon: Good morning, Jonas and Jack. Appreciate the opportunity to ask some questions. A couple of really quick number questions and then one philosophical question. With regards to the exit rates in the U.S., France and Italy, can you give us an update in terms of where the exit rates were for each of those three major markets as we exited the quarter?

Jack McGinnis: Sure, Mark. I’d be happy to start with that. So, as we look at the U.S. and we exited the quarter, I’d say, it was slightly better than the full quarter rate on an overall basis on a days-adjusted basis. So, when you look at the total for the quarter overall for the U.S. at the minus 14 days-adjusted, I’d say slightly better in September. And as we guided to the fourth quarter, we did expect stable to slightly better, and that’s kind of what we’re seeing into the fourth quarter. I think the other thing to remember is there was a significant drop off from the third quarter to the fourth quarter in the year-ago period, so that’s part of the consideration. If I move to France, I would say, we ended the quarter at about minus 3% in the month — on a days-adjusted basis in the month of September.

And you can see that comparing to the minus 2% for the quarter overall. I think, the PRISM data certainly came out during — for the industry data. And I’d say that showed that August was a bit steeper in terms of the decrease, and that improved slightly into September. But I guess more relevant to our guidance for Q4, we did indicate that we did see some additional softening into October. And that’s why our guide at about minus 5% at the midpoint is showing some additional decreases into the fourth quarter for France. And I’d say, Italy came in at the end of the quarter, pretty similar to where they were trending. The quarter overall on a days-adjusted basis was about minus 2%, and I’d say they ended the quarter at about that same minus 2% rate.

And as we look at the guide for the fourth quarter for Italy, we see a similar level of days-adjusted revenue trend into the fourth quarter. So that’s a little color on the large — on the three largest businesses, Mark.

Mark Marcon: Great. Thanks, Jack. And then, Jack, you always wonder if I’m going to ask this question, so I’ll ask it this time. Perm as a percentage of GP, how is that sitting right now?

Jack McGinnis: Yeah. So, we did talk about the fact that we expected perm to continue to come off into the third quarter. That was the big development during the second quarter, where we saw perm step down quite a bit. And as we said, it came in as we expected, pretty much spot on with our expectations that it would step down further. That takes perm to about 16.5% of total GP and not too far away of where we were, you’ll remember, Mark, pre-pandemic, we were in that 16.2% range. So, perm as a mix of GP is — has normalized quite a bit.

Mark Marcon: Great. And then, a philosophical question. Wondering, Jonas, Jack, how — and obviously, it varies by country and you’re doing restructuring across the organization. But I’m wondering at present levels, how much excess capacity do you have at this point? And then, how do you think about like the trends that we’re seeing in the U.S. relative to, say, the Atlanta Fed’s GDP now projecting like a 5% GDP increase here in the third quarter. Just kind of interesting just in terms of thinking about overall — a lot of discussion around the soft landing and yet staffing has clearly been in a recessionary environment. And I’m just wondering how you think about that.

Jonas Prising: Well, Mark, good morning, and thank you. Yeah, I’m really happy I’m not an economist that has to sort of predict and explain how we could have a 5% GDP growth in the third quarter, but let me tell you about our business and what we’re seeing, and how we’re thinking about this. As you correctly point out, notwithstanding GDP growth numbers both in Europe as well as in the U.S., which are still positive, our industry is operating under recessionary-like conditions. So, we’re negative here in the U.S., in Canada, across most of the European countries as well. So, the way we think about managing the business at this time is, as we’ve mentioned in our prepared remarks, really using a fine-point pen as opposed to a broad brush.

We are maintaining our sales strength, driving for market share growth, seeing our pipeline increase in all of our brands, but seeing time to conclusion and value realization extend. We are managing to the slowing demand through our delivery capabilities, and that’s what you see us adjusting in terms of how we’re bringing cost down overall. Clearly, we’re postponing projects that we don’t think have a short-term return. So, this is a pausing activity, not an elimination activity. And doubling down on transformation projects like the one we spoke about in our prepared remarks around centralizing finance and technology to drive greater productivity and efficiency for the organization as a whole, as well as recruiters with our global technology platforms.

So that’s how we’re managing through it. And at this stage, clearly, there is still slack and we plan it as such so that we have time to bring in the people when we start to see the business stabilize and we start to see the upturn coming on the other side, so that we have time to bring in new recruiters and meet the increased demand at that point in time.

Mark Marcon: Great. Thank you very much.

Jonas Prising: Thanks, Mark.

Operator: Thank you. Our next question comes from Jeff Silber with BMO Capital Markets. Your line is open.

Jeff Silber: Thanks so much. You mentioned the cost actions. I was wondering if we could just get a little bit more color where they were. And what do you need to see before saying that’s enough cost actions or we need to do more?

Jack McGinnis: Thanks, Jeff. Yeah, I’m happy to talk to that question. So, as we’ve said, we did take significant cost actions in the third quarter, and we teed that up when we released the second quarter results that we would be leaning more heavily into that. As — and this is a bit of a continuation of the previous discussion we were just having. So, as you look at where our businesses are seeing the most pressure, you should expect that that’s where we’ve made some of the biggest adjustments, right? So — and to Jonas’ point, we’re doing that in a very careful way. We’re preserving sales. We want to be well prepared on the sales activity and the opportunity to take market share when we start to see improving trends. We’re being extremely careful on the sales side.

But we are otherwise adjusting producers based on the existing demand. So, where would that be? The U.S. is one of the biggest areas where we’ve made some pretty significant adjustments. We talked about being down year-over-year, 7% in our headcount. The U.S. is definitely well above that in terms of decreases. I would say another key market, we talked about Germany and some of the rightsizing we’re doing there. We’ll have more to say about Proservia in the fourth quarter, but as a result of that, we’re making changes to our head office structure in Germany to adapt to the business going forward, which will be largely a Manpower business. And we made some big adjustments in the UK as well, and you can see the more significant decreases in that market from the enterprise clients.

Other markets where we’ve made some big adjustments, the Nordics. You saw in our trends, the Nordics came down quite a bit from Q2 to Q3. So, we’ve made some pretty significant reductions in Norway and Sweden as part of that. I’d say those are the bigger ones. We continue to make adjustments in France as well, but I’d say, in terms of the numbers that we’re driving the bigger decreases, those would be the markets that I would highlight.

Jeff Silber: Okay. That’s really helpful. Maybe we can shift gears to the pricing environment. If we can talk about how both pay rates and bill rates are going? And are you seeing any pushback either from clients or maybe more competitive pressure?

Jonas Prising: Well, just the pricing environment remains competitive but rational. And I would say, based on the strength of the labor markets broadly, the pricing environment remains solid. And you can see that in our staffing margins, the decline that we saw of 10 basis points was really all driven by mix between various countries, not by pricing concessions. We remain very disciplined in our pricing. And the constraints on the labor markets means that the demand we have for the talent is seen as extremely valuable by our client companies, and we make sure that we are positioned in the right way with the skillsets that we provide so that we can maintain that pricing discipline. So, overall, it is rational, it is, of course, competitive, but it is still a solid and positive pricing environment for us.

Jeff Silber: Okay, thanks so much for the color.

Jonas Prising: Thanks, Jeff.

Operator: Thank you. Our next question comes from Josh Chan with UBS. Your line is open.

Josh Chan: Hi. Good morning, Jonas and Jack. Thanks for taking my questions. I was wondering if you could comment on the U.S. trend. I guess, your macro-oriented commentary seems, I guess, relatively subdued. But I guess the U.S. business saw a relatively improving trend in Q3 and you’re forecasting another improvement into Q4. So, I’m just wondering how you’re thinking about the trajectory of that business and how you feel about the U.S. business from a trend perspective.

Jonas Prising: Yeah, thanks. It’s a great question. And I’ll start maybe and then Jack can give a little bit more specificity. So, stepping back from what we’re seeing into the fourth quarter, really the change that we are observing is softening in Europe, primarily at the Manpower brand, primarily in France, and some other countries, to a lesser degree, Italy. So that’s the change as you look at the outlook. So, from a geo perspective, as you’ve noted, we see sequential stability in the third quarter heading into the fourth quarter for the U.S. And largely, that is true for all three brands. And if you step out and you look at this from a global perspective, Talent Solutions and Experis globally are sequentially stable going into the fourth quarter, and the weakness comes in Manpower. And as I just mentioned, that weakness primarily relates to weakness in Europe. But maybe, Jack, you could give a little bit more specificity on some of the U.S. business trends.

Jack McGinnis: Sure. I’d be happy to. So, Josh, I would say on the U.S. and the Manpower side, we did see slight improvement. So talking days-adjusted, I think let’s remember the days-adjusted decrease for Manpower in Q2 was minus 19%. So, quite a significant drop at that point. And that improved to minus 16% in the Q3. And we expect that to see some slight improvement in that trend. So that being said, still a pretty difficult operating environment, right? And then on Experis, very, very similar. So, in Q2, days-adjusted, we talked about being down minus 17%. That improved slightly to the minus 15% days-adjusted into Q3. And our outlook there is slight improvement into Q4. And similar to what Jonas said, what that really means is when you consider the year-ago period, we’re seeing kind of stable levels of activity going into the fourth quarter.

So, I would say still cautious. We are a bit cautious that the traditional ramp that you typically see in October and November may not materialize this year just based on continuation of the sluggish trends we’ve seen in the enterprise sector earlier in the year. But with that being said, as we anniversary the prior period, I think the rate will show some slight improvement on a year-over-year basis. And as Jonas said, I think on the Talent Solutions side, which is the biggest — Talent Solutions has the biggest impact globally in the U.S., we saw stability in RPO MSP and Right Management in the U.S. from Q2 to Q3. I talked about a bit of the normalization of perm. We do expect perm to continue to come off a bit, but it won’t come off at the same degree that it came off more significantly in the previous quarters.

So, we see the kind of stability in that at those lower levels into the fourth quarter.

Josh Chan: That’s really good color. Thank you for that. And kind of piggybacking on your last comment, Jack, on the perm coming off, I guess, obviously, that’s impacting your gross margin now, but it does sound like that there could be some sequential stability. So, I guess, how are you thinking about perm going forward? And then specifically, does that 70 basis points of gross margin headwind become kind of a peak impact or a maximum impact, if you will, going forward? How are you thinking about that?

Jack McGinnis: Yeah. I’d say it’s a fair question. It really is hard to say whether that 70 is going to be kind of the peak. I will tell you sequentially Q3 to Q4 we’re looking at GP margin going from 17.6% to 17.4% at the midpoint, so fairly close. We are starting to anniversary some of the drop in perm that we saw in the second half of last year. So I’d say, it will be — you should expect that it will likely be a lower impact on the year-over-year change as we start to anniversary those lower levels and we’ll just have to see how that continues. But I would say, it does feel like we’ve normalized quite a bit recently and we’re anticipating that into the fourth quarter guide with GP margins still holding up fairly good sequentially.

Josh Chan: Great. Thank you both for your time.

Operator: Thank you. Our next question comes from George Tong with Goldman Sachs. Your line is open.

George Tong: Hi, thanks. Good morning. You noted demand from enterprise technology clients continued to be subdued in the quarter. Can you elaborate on where you’re seeing the weakness in tech and how tech staffing trends performed over the course of the quarter and in October to date?

Jonas Prising: Overall, George, I’d say that the demand continued to be quite weak, both in the U.S. and in Europe. And I think it’s — in terms of industry verticals that are big, especially for Experis globally and also here in the U.S., it was the tech and the communications industries that they were — the telcos, they are the ones that have seen the biggest drops. I would say, as you heard from our prior remarks here, we think things have stabilized sequentially, but at a low level, and they seem to be holding steady at least for now. And so, that’s what we’re seeing. And we have the strength in other verticals, but they are the ones that are driving the significant declines for all of our brands, but in particular for Experis at a global and at a U.S. level.

Jack McGinnis: George, I guess I would just add, I know you like to know about a little color on some of the other verticals and some of the others on the call as well. So, maybe this is a good time to maybe talk a little bit about that. So, to Jonas’ point, enterprise tech has been some of the more significant — the sector, probably, with the most significant pressure during the year on an overall basis. I would say other areas on the weaker side, we’ve talked about logistics being soft. Most of the year, that continues. I’d say, on the manufacturing side, outside of auto and food, manufacturing continues to be very sluggish. You can see that. We talked about that in terms of manufacturing PMIs in our prepared remarks. And then, I’d say construction, which is really more relevant to our European business in Norway and France has been weaker as well.

And I would say, more recently, we’ve seen banking. So, banking was strong, was relatively flattish, and I’m talking more of the U.S. market now in the first half of the year. And we’re starting to see banks pull back a bit more now as we end the third quarter. So, we see banks kind of reacting to the current environment currently. I’d say on the flip side, auto continues to be strong. You certainly see that in our Germany numbers. That is an area of strength that continues in France and Sweden as well. I mentioned food and I would say the public sector has generally been more resilient on an overall basis, although that has softened a little bit in the UK in the third quarter. So, a little more color in terms of what we’re seeing in terms of the industry verticals on an overall basis.

George Tong: That’s very helpful. Thank you. And then to follow up, every cycle, as you know, has its own unique characteristics in terms of the way down and the way up. How do you expect the current macro slowdown and subsequent recovery to compare with prior cycles in terms of depth and also in terms of duration?

Jonas Prising: Well, George, I think if I knew the depth, then it’d be easy, but we don’t. So, we manage through the uncertainty like everybody else. But I would say largely, this — the way this economic slowdown is playing out in our industry is roughly what we have seen in prior economic cycles with the difference being some delays and some sequencing. We talked about the step down of perm in the second quarter coming into the third quarter, where that is normally something we would see a little bit earlier. We would see maybe commercial staffing start to decline a little bit earlier and that IT staffing and professional staffing would hold on a little bit longer due to the length of the projects and the higher skill sets.

And that’s been a little bit reversed. But a lot of these differences in timings, we think, can be largely explained by pandemic and post-pandemic anomalies, frankly, that are as we go through this economic cycle, seem to be coming back towards trend. So, overall, we would expect this to play out in a recovery in the same way that we’ve seen in the past. Companies will get some confidence into the future, but not enough to really start their permanent hiring in a significant way. That means, we’ll see commercial staffing start to pick up. IT projects and others for Experis pick up. RPO and perm start to pick up, because a lot of the talent acquisition activities have been changed in the client companies, and then we would see it start like that.

The one thing, George, that I think we will have to get used to, which in our terms is a positive effect in terms of demand is more structurally constrained labor markets overall in many, many skillsets and not just the highest skillsets. But also broadly due to the changing demographics and aging population, we think access to human capital is going to become more difficult, which means, customers and companies will rely more on us and all of our brands to attract and retain the talent both on a contingent, as well as on a permanent basis. And we look at our staffing margins that we have today across the board and how well they’re holding up and that is different from what we’ve seen in other cycles, and we would hope that based on the structural trends that we’re seeing demographically, and the demand for new skillsets driven by technological changes at all skill levels, frankly, but that will give us further support for some good margin evolution, staffing margin and total margin as a whole.

George Tong: Very helpful. Thank you.

Jonas Prising: Thanks, George.

Operator: Thank you. Our next question comes from Kartik Mehta with Northcoast Research. Your line is open. Kartik Mehta, your line is open.

Jonas Prising: You are on mute, Kartik.

Jack McGinnis: Maybe we’ll come back to Kartik. He might be having difficulty.

Operator: Our next question comes from Manav Patnaik with Barclays. Your line is open.

Princy Thomas: Hi, Jack. Hi, Jonas. This is Princy Thomas on for Manav. Last quarter, you mentioned some mix-related changes around rebalancing your client mix, specifically in India and Australia, and that you were seeing good profitability levels in those markets. Can you give us an update and expand on your progress there? And how this impacts your exposures and revenue margin impact from these mix changes?

Jack McGinnis: Sure, Princy. I think the main takeaway is there wasn’t really a lot of dramatic changes in Q3. I think you’re right. That’s been an ongoing adjustment we’ve been making in certain key markets. India certainly is a very important market for us, but it’s a tough margin market. So, as a result of that, we want to make sure we’re taking on the right business that’s accretive to the organization overall. And we’re making really good progress in that regard. So, the business has been doing a really nice job repositioning the business this year, and we feel good about that. And I’d say that continued on in Q3 as expected. I’d say, the other country that we’ve talked a lot about in the past has been the UK and another tough margin market on an overall basis.

We have a lot of tremendous experience operating in that market, and we’ve done a really nice job repositioning the margin profile of that business as well. So, despite the very difficult conditions and you saw the trends for the UK, so definitely on the higher side of pressure that we’ve seen, they’re actually operating quite well in that environment and doing a really nice job preserving operating unit profit margin. So, I’d say those are two examples that we probably have talked a little bit more about and, I’d say, continued on good progress into the third quarter on both of those. Thanks.

Princy Thomas: Got it. Thank you. And as my follow-up, you mentioned in your prepared remarks that you expect significant reduction of activity in your Israel business. Can you quantify your Israel exposure for us?

Jonas Prising: Yes, thanks for that question. And as I mentioned in my prepared remarks just this morning, I’ve spoken to our Israeli colleagues. And the Israel business is a business that has been in the — is the market leader, and we’ve been in Israel for over 60 years. We have about — we have more than 10,000 employees and associates in Israel, and it’s roughly a $400 million operation. And as you can imagine, in this war time in Israel, many of our employees are being called off to serve. Unfortunately, we have had families — members missing, as also impacted fatally. So, it is a tough time for our operation in Israel. We are providing them all the support we can, of course, as ManpowerGroup, and I am in awe at their resilience and their ability to manage a very uncertain and volatile and difficult environment, both professionally and personally, and still support our thousands and thousands of associates, as well as client companies in Israel.

So, I am very impressed, and I’m sad by the terrorist attacks and all the resulting difficulties in the region, but it is going to be tough to estimate the impact medium-term for Israel. But from what we can tell, at least in the short-term, this is having a significant operational impact to us in Israel.

Princy Thomas: Appreciate the color. Thank you.

Operator: Thank you. Our next question comes from Tobey Sommer with Truist Securities. Your line is open.

Jasper Bibb: Hey, good morning. This is Jasper Bibb on for Tobey. Just wanted to follow up on the restructuring actions and what that might mean for your branch network. Like I know total branches have come down quite a bit over the past decade, but curious how you see the future of the branch footprint with the recent portfolio changes.

Jonas Prising: We’ve been very cautious. As you pointed out, we’ve really leveraged our digital platforms to bring down our physical branch footprint very significantly over the last decade, which, of course, helps us because it becomes less fixed cost, more variable. But at this point, I think, at least for now, we are going to remain relatively stable in our branch network. We had some slight adjustments sequentially here, but nothing strategic and not really in reaction to the slowdowns that we’re seeing. So, we largely intend to keep our physical footprint exactly where it is today in all of our brands and manage the demand decline through other ways, centralizing delivery in low-cost areas and things like that so that we have more flexibility.

And that’s really the evolution that we’ve had between the last-mile delivery capability that we have in our countries, also augmenting that centralized delivery capabilities in all geos, be that from Latin America, in India, and in the U.S. and in Europe, making sure that we have excess delivery capabilities centrally so that we can flex those first and be able to adjust to the demand in a very dynamic way, which, of course, also helps us as we ramp up for a coming rebound when that occurs. So that is sort of how we’re thinking about our physical footprint right now.

Jasper Bibb: Thanks for that. And then just had a quick one on preliminary expectations for the tax rate in ’24. I guess, the fourth quarter is going to be a bit higher at 32.5%, but you also mentioned some CVAE benefit next year. So, on a blended basis, would that imply about 32% for ’24, or would that be too high?

Jack McGinnis: Yeah. No, Jasper. I think, it’s a fair question. It’s a little hard to say at this time for the full year of ’24 because it’s going to be heavily driven by the mix of earnings from the countries. But what I would say is you’re absolutely right, the CVAE will be an improvement in — all things being considered equal, will be an improvement in a reduction in the rate somewhere, as we said, to the tune of about 35 basis points. We guided to the 32.5% in the fourth quarter. For now, if you wanted to apply that to that 32.5% and say it’s going to be somewhere in the neighborhood of 32%, as of right now, I think that’s a reasonable estimate. I’ll certainly give an update on that at year-end. I’ll give our updated view on whether that should change for estimate purposes. But I think for now, using the fourth quarter rate reduced somewhat is reasonable. Thanks.

Jasper Bibb: Fair enough. Thanks for taking the questions, guys.

Jonas Prising: Thank you.

Operator: Thank you. Our next question comes from Stephanie Moore with Jefferies. Your line is open.

Stephanie Moore: Hi, good morning. Thank you. I wanted to touch on a little bit — I’m just kind of parse through everything that was said on — in the Q&A in particular. And I think apart from France, you are calling for a bit of stability in the fourth quarter, particularly in the U.S., called UK a little bit. Given you’ve been, I guess, seeing the slowdown for almost a year, I guess, 4Q to 4Q, are you hearing through any of your clients that think maybe the worst is behind us? Or are they kind of talking about the potential that there could be another step-down? Or could you start to see trends improve from here? I’m just trying to triangulate what now our year-over-year comp, seasonality, which I guess, it sounds like you’re not really seeing 3Q to 4Q and then just the underlying macro trends. So, any help about — help you’re hearing from clients in terms of kind of when we should start to see any change maybe 4Q, first quarter or anything like that? Thanks.

Jonas Prising: The level of the declines that we’ve seen, Stephanie, and in our conversations with clients, really goes to answer it in the way that they don’t know. And they don’t know how long this will take, and they are uncertain, and that’s why I think they’re maintaining their own workforces, but they’re really flexing this fluctuation and slowing demand through our industry. So, just along the prepared remarks that we mentioned on our — the sentiment that we hear when we speak with our clients, they still say, look, this is still manageable. Thank you for helping us navigate through this environment. We see some slowing demand, which we’re adjusting to and primarily with your help. But as to the outlook, we have great plans, we need to drive transformation forward.

We have a lot of energy transition-related activities in manufacturing and other industries. We have transformation projects related to technology. All of those things are still things we need to do, but right now, we’re going to slow them down or pause them and that is really the sentiment that we get from our clients right now, which is not unusual when you think about where we are and everything that you read about. So, it is still for them a manageable environment and you can tell by seeing what they’re doing with their own workforce. They’re holding on to their own workforce by and large, and they’re flexing up and down with our workforce. And you can see the sequentially — sequential stability that we talked about both from the U.S. and in some areas also in Europe as a positive sign, as just as Jack said, some of that is, of course, maybe missing the seasonal uptick that we’re getting.

But on the whole, they remain optimistic, but uncertain on when they would need to accelerate their acquisition of talent to a larger degree. And for now, they’re a little bit in a waiting pattern to get some further clarity. That’s how I describe this, if that is of any help.

Stephanie Moore: No, actually, that’s super helpful, and I really appreciate the color. Maybe just as a — not a follow-up, my second, can you talk a little bit about the color you’re seeing in Asia Pacific? In the Middle East, or at least Asia Pacific, you called out, continues to be relatively resilient. So, if you could just provide a bit more there, that would be helpful. Thanks for all the color.

Jonas Prising: Yeah, Stephanie. Both of the regions, Asia Pac and Latin America are seeing very good trends. And especially in Asia Pac, we’ve talked about Japan being a very strong operation. This will be our 35th consecutive quarter of growth. We’re performing very well in Japan. And many of the other countries in the regions are also performing well. So, they are still holding up, and it really speaks to the strength of our geographic diversification. So, not only a brand diversification, but also geo diversification in times like this can be very helpful, because we see that business continuing to move forward. And there they are clearly benefiting still from the overall impact of growing — demographics still being very instrumental in the global supply chain. And that — for now, at least, that is what we’re seeing, and that’s what we’re hearing from those two regions. So it’s very — it’s good for us to see that progression.

Operator: Thank you. Our next question comes from Andrew Steinerman with JPMorgan. Your line is open.

Unidentified Analyst: Hi, good morning. This is Stephanie stepping in for Andrew. I heard your comment on how you’re centralizing the finance and technology systems. Can you give us an update on where you stand in rolling out your front office PowerSuite system?

Jack McGinnis: Sure, Stephanie. I’d say, as Jonas said, on the front office in terms of PowerSuite, we’re in very, very good shape. That’s been a multiyear journey where we’re towards the end of that with 75% of our businesses being on the new front office through the end of this year. So we’re very pleased about that and doing a lot of work as we speak to your point, on the back office, which is global technology and finance platforms, and making very good progress. So, we have a cloud-enabled industry-leading back-office platform. We’re live in five countries. We’re in flight and many more. Through the second half of 2024, I believe we’ll have over 50% of our revenues on the new cloud-enabled back office. And that’s quite significant for us, because what we’re also doing at the same time is now we have the infrastructure to do more and more standardization and centralization.

And we’re progressing that as we speak in Europe, and that’s a lot of significant work that we’re undertaking. And that’s what I referred to when I mentioned that we are taking SG&A down significantly, but one area where we’re continuing to invest is in this transformation. You can see that in our corporate expenses, and you’ll see that in a more significant way into the fourth quarter as well. So that is where we’re making some very significant progress. We’re very excited about that. And I think, Jonas, do you want to comment on that as well?

Jonas Prising: Yeah. I think, Stephanie, for us, this is a huge strategic move, and we think it’s a big differentiator for us to have common global front- and back-office technology platforms. And as you can imagine, the first phase, of course, is all about driving commonality and process alignment and generating productivity, but the add-ons that we can already see some progress on, but think yield great opportunities into the future applying AI to the data and the insights that we can generate and then replicate very quickly across all of our operations and all of our functions as well. So, it is a very heavy and labor-intensive and resource-intensive journey that we have been on now for the better part of three-and-a-half years, but we think this has the promise of really generating a lot of value for our clients, our candidates, and for the company looking into the future.

Unidentified Analyst: Okay. I really appreciate the color. Thank you. I’ll just leave it at that.

Jonas Prising: Thank you, Stephanie, and thanks, everyone. I think that brings us to the end of our earnings call for the third quarter. Thanks, everyone, for listening in and for your questions. We look forward to speaking with all of you again in our fourth and full year earnings call in January. Thanks so much.

Operator: Thank you for your participation. This concludes the program. You may now disconnect. Everyone, have a great day.