Jonas Prising - Chairman and CEO Jack McGinnis - CFO.

Michael Cho - JP Morgan Jeff Silber - BMO Capital George Tong - Goldman Sachs Mark Marcon - R.W. Baird Hamzah Mazari - Macquarie Capital Tobey Sommer - SunTrust Ryan Leonard - Barclays.

Welcome to ManpowerGroup First Quarter Earnings Results Conference Call. At this time, all participants are in a listen-only mode until the Q&A session of today’s conference. This call will be recorded. If you have any objections, please disconnect at this time. And now, I will turn the call over to ManpowerGroup Chairman and CEO, Jonas Prising.

Sir, you may begin..

Good morning. Welcome to the first quarter conference call for 2018. And 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 first quarter and 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 second quarter, and 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..

Good morning, everyone. This conference call includes forward-looking statements, which are subject to known and unknown risks and uncertainties. These statements are based on management’s current expectations or beliefs. Actual results might differ materially from those projected in the forward-looking statements.

Additional information concerning factors that could cause actual results to materially differ from those in the forward-looking statements can be found in the Company’s annual report on Form 10-K and in the other Securities and Exchange Commission filings of the Company, which information is incorporated herein by reference.

Any forward-looking statement in today’s call speaks only as of the date of which it is made, and we assume no obligation to update or revise any forward-looking statements. During our call today, we will reference certain non-GAAP financial measures, which we believe provide useful information for investors.

We include a reconciliation of those measures where appropriate to GAAP on the Investor Relations section of our website at manpowergroup.com..

Thanks, Jack. We are very pleased with our strong start to the year. Revenue in the quarter came in at $5.5 billion, an increase of 5% in constant currency. On a same-day basis, our underlying organic constant currency revenue growth rate was 6%.

We continue to see strong revenue growth in our Southern Europe segment, with 9% growth in France and strong double-digit in Italy and Spain. We also see improving trends in the UK and certain other European markets, and saw strong same-day basis double-digit growth in our APME segment.

Operating profit for the quarter was a $154 million, up 8% in constant currency. During both the first quarter of this year and the prior year, we had restructuring charges, which Jack will discuss in more detail, later in the call.

Excluding these restructuring charges from both years, operating profit was $178 million for the quarter, an increase of 5% in constant currency. Operating profit margin came in at 2.8%, up 10 basis points over the prior year.

And after excluding the restructuring charges, operating profit margin was flat to the prior year and at the high end of our guidance range. Our performance in the quarter also reflects some gross profit margin contraction offset by further SG&A productivity improvement and good cost leverage.

Earnings per share for the quarter was $1.45; and excluding the restructuring charges in the quarter, earnings per share was $1.72, an increase of 12% in constant currency. We are encouraged by strong start to the year with continued solid revenue and operating profit growth and a global economy that shows favorable trends and stronger labor markets.

The continued strength of the global labor markets was confirmed by our second quarter ManpowerGroup employment outlook survey which showed favorable hiring intent in 43 of 44 countries surveyed with 17 countries showing stronger hiring intentions than in Q1.

Access to human capital is key in this environment, and we are very well-positioned to provide the necessary skill talent to meet the needs of our clients through our market-leading global footprint and extensive portfolio of services and solutions.

We continue to see strong growth in our solutions business, and we’re recognized once again as a global leader in our RPO offering by independent analysts for the eighth year in a row. And with that, I would like to turn it over to Jack to provide additional financial information and review of our segment results and our second quarter outlook..

Thanks, Jonas. As Jonas mentioned, we had a strong first quarter performance with operating profit growth excluding restructuring costs of 17% or 5% on a constant currency basis on 5% constant currency revenue growth.

This performance resulted in an operating profit margin of 3.2% excluding restructuring costs, which was at the top end of our guidance range. Revenue growth was slightly above the midpoint of our constant currency guidance range.

On a constant currency basis, our gross profit margin declined 40 basis points, which is at the low end of our guidance range. Currency translation had a bigger impact than usual on our gross profit margin this quarter, adding a further 20 basis points of decline for reported decline of 60 basis points.

Although our gross profit margin declined 40 basis points on a constant currency basis compared to the prior year, our SG&A costs once again improved as a percentage of revenue, driving the strong operating profit margin result before restructuring costs.

Breaking our revenue growth down into a bit more detail, currency positively impacted revenues by 11% and acquisitions contributed about 50 basis points to our growth rate in the quarter.

While revenues were up 16% on a reported basis, our organic constant currency revenue growth in the quarter was 5%, which after adjusting for billing days, represents a 6% growth rate. On a reported basis, earnings per share was $1.45, which includes restructuring costs which had $0.27 negative impact on earnings per share.

As I stated last quarter, our guidance excluded restructuring costs. Excluding these costs, earnings per share was $1.72, $0.08 above the midpoint of our guidance range.

The drivers of this result include $0.09 attributable to better operational performance than expected, $0.02 from higher foreign currency translation, partially offset by $0.03 attributable to additional other expenses comprised of costs related to previous acquisitions and market value adjustments on available-for-sale investments under the new accounting requirements.

The impact of the investments, market value adjustments are recorded as part of our earnings pickup related to our partial ownership interest in our Switzerland franchise. The operational performance was driven by higher revenue growth and improved expense leverage. Looking at our gross profit margin in detail.

Our gross margin came in at 16% on a reported basis, primarily driven by a staffing interim decline of 0.5%. Our gross profit margin increase of 10 basis points from higher permanent recruitment was offset by lower contribution from Right Management in the quarter.

As I mentioned earlier, currency negatively impacted the gross profit margin by 20 basis points from the prior year.

The staffing interim margin decline was impacted as expected by the reduced CICE payroll tax credits in France for payrolls paid effective January 1, 2018, client mix of large accounts in Italy, and higher sickness rates impacting our staffing businesses in Germany, the Netherlands and Belgium. Next, let’s review our gross profit by business line.

During the quarter, the Manpower brand comprised 62% of gross profit. Our experienced professional business comprised 20%, ManpowerGroup Solutions comprised 14%, and Right Management 4%. Our strongest growth was once again achieved by our higher value solutions offerings within ManpowerGroup Solutions.

During the quarter, our Manpower brand reported a constant currency gross profit increase of 4%. This represents a slight decrease from the 5% growth rate in the fourth quarter. Within our Manpower brand, approximately 60% of the gross profit is derived from light industrial skills and 40% is derived from office and clerical skills.

Gross profit growth from light industrial skills increased 5% during the quarter, representing a slight deceleration from the fourth quarter. Office and clerical skills experienced a slight decline in the quarter. Gross profit in our Experis brand was flat in constant currency, a decrease from the 5% growth experienced in the fourth quarter.

This was driven by declines in the U.S. and the UK. ManpowerGroup Solutions includes our global market-leading RPO and MSP offerings, as well as talent-based outsourcing solutions including Proservia, our IT, infrastructure and end-user support business.

Gross profit growth in the quarter was up 9% in constant currency with good growth in our RPO, MSP and Proservia businesses during the quarter. Right Management experienced a decline in gross profit of 17% in constant currency during the quarter, as outplacement activity continued to decline.

I will also comment on Right Management in my segment review. Our reported SG&A expense in the quarter was $732 million, including the $24 million of restructuring costs. SG&A expense was $708 million, an increase of $72 million from the prior year after excluding restructuring costs from both years.

This increase was driven by $57 million from currency changes, $4 million from acquisitions and $11 million from operations. On an organic basis in constant currency, excluding restructuring costs, SG&A expenses were up 2% compared to the prior year.

Excluding the restructuring costs, SG&A expenses as a percentage of revenue in the quarter improved 60 basis points to 12.8%, driven by improved operational leverage on higher revenue growth and a continued focus on operational efficiency across our businesses.

We expect to recover the restructuring cost of $24 million through cost savings over the next 12 months. I will discuss the operating performance of the segments next, and as part of that, will break out the restructuring cost by segment. The Americas segment comprised 18% of consolidated revenue.

Revenue in the quarter was $1 billion, a decrease of 1% in constant currency. Profitability increased with OUP of $43 million, up 12% in constant currency above the prior year level excluding restructuring costs, driven by improvement in the US. OUP margin improved by 40 basis points year-over-year.

Restructuring costs were minor for the Americas and represented centralization initiatives in Argentina. The OUP increase was driven by strong cost management with SG&A expenses decreasing year-over-year. The U.S. is the largest country in the Americas segment, comprising 60% of segment revenues. Revenue in the U.S.

was $616 million, down 7% compared to the prior year. Adjusting for billing days, this represented a 6% decrease compared to a 3% decline in the fourth quarter. This incremental slowing was expected based on reduced volumes in the quarter with certain isolated accounts and we expect overall revenue trend improvement in the second quarter.

During the quarter, OUP for our U.S. business increased 1% to $27 million. OUP margin was 4.3%, an expansion of 30 basis points from the prior year, primarily due to strong SG&A cost management. Despite challenging revenue trends, our gross profit margin in the U.S.

once again improved as the business continues to focus on strong pricing discipline and overall operational efficiency as evidenced by the strong OUP margin expansion in the quarter. Within the U.S., the Manpower brand comprised 41% of gross profit during the quarter. Revenue for the Manpower brand in the U.S.

was down 4% in the quarter or down 3% when adjusting for billing days, a decline from the 1% decrease in the fourth quarter. The Manpower business has a strong pipeline of new activity which we expect will provide a trend of positive growth towards the end of the second quarter. The Experis brand in the U.S.

comprised 37% of gross profit in the quarter. Within Experis in the U.S., IT skills comprised approximately 70% of revenues. During the quarter, our Experis revenues declined 11% from the prior year compared to the 5% decline experienced in the fourth quarter.

We expected a further decline in the Experis business in the first quarter associated with reduced demand from isolated clients. And as we explained last quarter, we expect this trend to improve into the second quarter.

Experis has been very focused on profitable business and this again led to another quarter of gross profit margin expansion in the U.S., during the quarter. ManpowerGroup Solutions in the U.S. contributed 23% of gross profit and experienced a 9% revenue decline in the quarter compared to the 8% decline in the fourth quarter.

The decline in the quarter continued to be driven by the non-recurrence of certain low margin MSP-related business, which resulted in improved gross profit margin in this business during the quarter. We continue to see strong demand by our clients for our higher value RPO and MSP solutions.

Our Mexico operation had revenue growth in the quarter of 11% in constant currency. The business in Mexico performed well in the quarter, and we also expect good growth into the second quarter. Revenue in Argentina was up 14% in constant currency, which continues to reflect the impact of inflation.

We continue to focus on margin and payment terms improvement given the inflationary environment. Revenue growth in the other countries within Americas was up 10% in constant currency or 5% on an organic basis. This growth was driven primarily by strong revenue growth in Peru, Brazil, and Columbia.

Southern Europe revenue comprised 42% of the consolidated revenue in the quarter. Revenue in Southern Europe came in at $2.3 billion, an increase of 11% in constant currency. On an average billing days basis, this represented a revenue growth rate of 12%, a deceleration from the 15% growth rate in the fourth quarter.

Excluding restructuring costs, OUP increased 8% from the prior year in constant currency and OUP margin was down 10 basis points from the prior year. At CICE, reductions negatively impacting gross profit margin in France were partially offset by improved operating leverage in Italy.

Permanent recruitment growth was very strong at 22% in constant currency. Restructuring costs of $3.1 million primarily relate to front office centralization and back office optimization activities in Spain and Italy. France revenue comprised 62% of the Southern Europe segment in the quarter and was up 9% over the prior year in constant currency.

This represented the expected slowing from the 12% growth rate in the fourth quarter, primarily due to the high growth rate in the prior year. As previously discussed, the CICE rate decrease from 7% to 6% of eligible wages effective with payroll paid beginning January 1, 2018, impacted our first quarter results, reducing gross profit.

Permanent recruitment was very strong at 16% growth in constant currency during the quarter. OUP was $58 million, a decrease of 1% in constant currency; and OUP margin was down 40 basis points in constant currency at 4%. Permanent recruitment growth helped partially offset the CICE related staffing margin decline during the quarter.

Excluding the impact of CICE, we continue to see improvement in the underlying staffing margin trends through the first quarter in France. Revenue in Italy increased 22% in constant currency to $414 million and represented a growth rate of 23% in constant currency on an average daily basis.

This represented our fourth consecutive quarter of 20% plus revenue growth. Business mix changes associated with the growth has resulted in reduced staffing margins, which have been partially offset by very strong permanent recruitment growth. Specifically, permanent recruitment fees increased 14% on a constant currency basis over the prior year.

Excluding restructuring costs, OUP growth was up 24% in constant currency to $26 million and OUP margin expanded by 10 basis points to 6.3% as strong SG&A cost management and operating leverage offset gross profit margin declines. We are very pleased with the strong performance of our Italy business.

Based on our very high growth rates in the second quarter last year, we expect growth to continue into the lower double digits in the second quarter. Revenue growth in Spain was very strong, up 17% over the prior year in constant currency. On an organic constant currency basis, the revenue growth rate was 9%.

Adjusting for average billing days, the organic constant currency growth rate was 12% in the quarter and represents a slight improvement from the fourth quarter growth rate. We expect Spain will continue to have a very strong performance into the second quarter. Our Northern Europe comprised 26% of consolidated revenue in the quarter.

Revenue was up 1% in constant currency to $1.4 billion. On a billing days adjusted organic constant currency basis, Northern Europe grew 3% which represents a continuation of the improvement we saw in the fourth quarter. Before restructuring costs, OUP declined 6% in constant currency and OUP margin was down 20 basis points.

The decline was driven by Germany and the UK, which experienced staffing margin declines and increased technology and other costs.

The restructuring costs in the quarter primarily related to delivery model and other front office centralization initiatives as well back office optimization activities in the UK, Germany, the Netherlands, Norway and Belgium. Our largest market in Northern Europe segment is the UK, which represented 30% of segment revenue in the quarter.

UK revenues were down 1% in constant currency and were flat on a billing days adjusted basis, improving from the 3% decline in the fourth quarter. This represents three consecutive quarters of improvement in the revenue trend. Permanent recruitment fees increased during the quarter at a 7% constant currency growth rate.

Our Manpower business in the UK experienced flat constant currency growth in the quarter which represented a slight deceleration from the 1% growth in the fourth quarter. After several quarters of revenue declines, our Experis business improved to 1% constant currency revenue growth in the first quarter.

We expect the revenue trend for the UK overall to remain relatively stable into the second quarter.

Revenue growth in Germany was up 1% on a constant currency basis in the first quarter or up 4% on an average billing days basis, which represents an expected deceleration from the 8% growth in the fourth quarter, based on the anniversary of very high growth rates in the year ago period.

In the Nordics, we continued to grow revenues into the first quarter on an average daily basis. The flat constant currency revenue growth in the quarter represented 5% growth on an average yearly basis, which was an increase from the 2% growth on the same basis in the fourth quarter.

We expect to see slightly slower revenue growth into the second quarter. Revenue in the Netherlands and Belgium increased 5% and 4% respectively in constant currency on a billing days adjusted basis.

Both countries experienced very high comparable growth in the prior period and performed within expectations in the quarter, and we expect similar levels of revenue growth in the second quarter. Other markets in Northern Europe had a revenue increase of 8% in constant currency, driven by the strong growth in Poland, Finland and Russia.

The Asia Pacific Middle East segment comprised 13% of total Company revenue. In the quarter, revenue was up 8% in constant currency to $720 million or 12% after adjusting for billing days, representing an increase from the 10% average daily growth in the fourth quarter. The higher than expected growth was driven by Australia, Japan and China.

Permanent recruitment growth was strong at 14% in constant currency. OUP was $26 million in the quarter, representing a 14% increase in constant currency, excluding restructuring costs in the prior year; and OUP margin increased 20 basis points on that same basis, driven by strong SG&A cost management.

Revenue growth in Japan was up 2% on a constant currency basis and adjusting for billing days, this represented 5% average daily revenue growth, which was an increase from the 3% growth in the fourth quarter on the same basis. Permanent recruitment growth was very strong at 20% in constant currency.

Both OUP and OUP margin improved on the stronger revenues and SG&A efficiency in the quarter. Revenues in Australia and New Zealand were up 1% in constant currency, but adjusting for billing days, this represented a 7% average daily revenue growth rate, representing significant improvement from the 1% growth in the fourth quarter.

Revenue in other markets in Asia Pacific Middle East continued to be very strong, up 18% in constant currency. This was a result of strong double-digit growth in the number of markets including India, China, Taiwan, Malaysia and Singapore. Our Right Management business continued to slow in the first quarter, based on reduced outplacement activity.

During the quarter, revenues were down 15% in constant currency to $50 million following a 12% decline in the fourth quarter. Excluding restructuring costs, OUP decreased 23% on a constant currency basis, as SG&A reductions helped to partially offset the impact of revenue reductions.

Excluding restructuring costs, OUP margin decreased 190 basis points. Restructuring costs of $0.5 million, represented centralization initiatives within our Right Management businesses, in the Nordics. I’ll now turn to cash flow and balance sheet.

Free cash flow, defined as cash from operations less capital expenditures represented a cash outflow during the quarter of $71 million. One significant item impacting the year-over-year variance for free cash flow relates to the sale of the France CICE tax credit. In the prior year period, we sold 2016 French CICE tax credit in March for $143 million.

However, we did not sell the 2017 French CICE tax credit in the first quarter of this year. Excluding the CICE sale, the prior year free cash flow was $36 million. The first quarter is typically one of our lightest cash flow quarters from ongoing operations.

The current quarter cash outflow position is driven by two main factors, the first being the timing of liability payments; the second factor relates to the cash flow classification for acquisitions. In the quarter, we paid $24 million of excess contingent consideration, which is classified as operating cash flows.

We did sell substantially all of the 2017 French CICE tax credit during April 2018 for approximately €191 million, which will be reflected in our second quarter free cash flow. At quarter-end, days sales outstanding increased by 2.5 days with a portion of the increase driven by the timing of quarter-end, which included Good Friday.

Consistent with the prior quarters, changes in our business mix is driving some of the overall DSO increase as we are seeing faster revenue growth in Southern Europe countries, which tend to have longer payment cycles. We continue to execute on initiatives to improve the trend of DSO. Capital expenditures represented $13 million during the quarter.

During the quarter, we purchased 421,000 shares of stock for $50 million. As of March 31st, we have 2.4 million shares remaining for repurchase under the 6 million share program approved in July of 2016. Our balance sheet was strong at quarter-end with cash of $552 million and total debt of $970 million, bringing our net debt to $418 million.

Our debt ratios are very comfortable at quarter-end with total debt to trailing 12 months EBITDA of 1.1 and total debt to total capitalization at 25%. Our debt and credit facilities did not change in the quarter.

At quarter-end, we had a €350 million note outstanding with an effective interest rate of 4.5% maturing in June of 2018 and a €400 million note with an effective interest rate of 1.9%, maturing in September of 2022. In addition, we have a revolving credit agreement for 600 million, which remained unused.

Next, I will review our outlook for the second quarter of 2018. Excluding restructuring costs, we are forecasting earnings per share to be in the range of $2.33 to $2.41, which includes a positive impact from foreign currency of $0.18 per share. Our constant currency revenue guidance range is for growth between 5% and 7%.

The impact of acquisitions represents 40 basis points of our growth rate projection for the second quarter. There’s about half a day more in the second quarter year-over-year.

This represents a billing days adjusted organic constant currency growth rate of 5%, which is a slight decrease from the 6% organic days adjusted constant currency growth in the first quarter, primarily due to the anniversary of very high growth rates in Italy and France in the year-ago period.

We feel very good about the revenue outlook and the opportunity for increased revenue growth in Europe, the Americas and APME.

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

We expect the revenue decline at Right Management in the high single-digits. On a regional basis, the difference in billing days will have a favorable impact on revenue growth of about 1% in the Americas and Northern Europe and an unfavorable impact of about 1% in APME.

Our operating profit margin during the second quarter should be flat compared to the prior year quarter, reflecting solid revenue growth and operating leverage which will offset lower gross margin. We expect to continue to invest in additional resources and technology during the second quarter and this is incorporated into our guidance.

We expect our income tax rate in the second quarter to approximate 28.5%. As usual, our guidance does not incorporate additional share repurchases, and we estimate our weighted average shares to be 66.8 million, reflecting share repurchases through March 31st.

In addition to the restructuring costs we recorded in the first quarter, we will have additional restructuring costs in the second quarter of approximately $5 million to $10 million. This primarily relates to a continuation of the front office centralization and back office optimization activities in Germany, the Netherlands, the UK and Italy.

We are not currently planning any additional restructuring costs during the balance of 2018. Lastly, effective January 1, 2018, we adopted the new accounting for the presentation of certain pension and post retirement benefit costs.

The impact of this new accounting serves to record certain pension-related costs, previously recorded in SG&A, as interest and other expenses. The impact of this change on operating profits is relatively small.

We have restated the 2016 and 2017 quarterly and annual figures on the same basis, and included that information with our Form 8-K furnished this morning. With that, I would like to turn it back to Jonas..

Thanks, Jack. Jack explained the restructuring charges that we recorded in the first quarter and are expecting to record for the second quarter. These actions relate primarily to back office process transformation and technology-driven delivery model initiatives, which include branch optimizations.

These activities along with our business as usual productivity improvement focus will further enhance our overall efficiency and market reach. These actions align with our strategic priorities focused on driving profitable growth and leveraging our technology and transformation investment initiatives to further enhance our performance going forward.

We are committed to being the leading global workforce solutions company, providing value for our clients and meaningful and sustainable employment for millions of people globally each year. Our priority is on profitable growth, enhanced productivity, and greater efficiency, leveraging our assets and capabilities across our global operations.

To do this, we continue to invest in and leverage digital capabilities to improve our candidate attraction, client satisfaction and employee productivity.

We utilize global applications that support our revenue growth initiatives, facilitate our collaborative culture, as well as front office applications that enhance the candidate and client experience. We are making good progress so far and are committed to continuing to execute our digital strategy, which enables the overall business strategy.

To conclude our prepared remarks, we are confident that what we offer our clients and candidates is very relevant to them as they navigate the changing world of work. Looking ahead, we feel very good about our opportunities for continued profitable growth, leveraging our global footprint and portfolio of workforce solutions.

We’re not only pleased with our progress in what we do to improve our performance, but also very proud to have been recognized for how we conduct our business, being the only company in our industry to again this year be named as both a Fortune most admired companies and for Ethisphere world’s most ethical companies for the ninth time, a result of the passion and commitment of our great people across the world.

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

Operator?.

[Operator Instructions] Our first question is coming from Andrew Steinerman of JP Morgan. Your line is now open..

Hi. This is Michael Cho in for Andrew. My first question is around the U.S. trends commentary. You mentioned the second quarter revenue trends would improve.

Does it feel like the first quarter Manpower is passing a trough?.

Yes. I think, the evolution that we saw in the U.S in the first quarter really met what we had expected and talked about in our prior earnings calls. We expected the first quarter to see a bit of a down dip. And as you’ve heard from our prepared remarks, we are expecting to see an improvement in the second quarter.

Notably, we’re looking for Manpower to turn positive towards the end of the quarter and also to see improvements in Experis. So, we think we are on track. We’re not pleased with the speed of the progress, but we’re confident that we’re heading in the right direction..

And I would just add to that Mike. The pressure we saw in the first quarter, as Jonas said, was anticipated and was really isolated to very few accounts that had forecasted reduction in volume. So, that really was what we saw in the first quarter.

And we knew that was happening, which is why we also mentioned that we expected that second quarter growth, improvement in the rate of decline into the second quarter from there..

Understood, thanks. If I could just squeeze one more in on the SG&A efficiencies or initiatives that’s been ongoing. There was a lot of commentary on the prepared remarks about the SG&A efficiencies.

What do you think is a reasonable expectation for SG&A as a percentage of revenues in the near term?.

Yes. I guess, Mike, what I’d say there is what you’ve seen a trend from us in recent quarters is steady improvement in that ratio as we look at SG&A as a percentage of revenue, SG&A as a percentage of GP. And you saw us do that again this quarter.

And when you look at the nature of the restructuring items, this really goes back to the conversation that we had at year0end regarding our new financial targets. And some of the levers that we had in terms of accomplishing those expanded operating profit margins are continued efficiencies.

And what you are seeing this quarter is the actions related to that. We talked about that last year and some of the back office optimization activities we were performing in the U.S. You see many examples of that where we are doing that in Europe currently.

And that’s what we are going to continue to do as we continue to look at expanding operating profit margin.

And some element of that is as you’ve seen day-in and day-out for us, quarter-in quarter-out in terms of ongoing improvement and what you’re seeing now are some of the more significant actions we are taking as well that will help in that regard.

So, I think that’s what I’d say and I’d say you should continue to expect to see that improvement going forward..

Thank you. Our next question is coming from Jeff Silber, BMO Capital. Your line is now open..

Thanks so much. I wanted to focus on gross margins. You highlighted the fact that from a staffing interim perspective, gross margins were down about 50 basis points.

I am just wondering if you can parse out what the CICE impact of that was? And if you can give a little bit more color on the rest of the gross margin decline and if you expect those trends to continue going forward? Thanks..

Okay. I’d be happy to talk to that, Jeff. So, in terms of the -- so, it was 50 basis points in terms of the weighting of the impact the staffing margin had on the gross profit margin overall. But staffing in isolation was down 60 basis points. And that was steady to the trend that we saw in the fourth quarter.

Fourth quarter was down 60 basis points as well in staffing. And to your point on the CICE, in the first quarter, now we have the full quarter effect of that step down in the CICE subsidy coming down from 7% to 6%, and that full quarter impact is roughly about 15 basis points of that 60 basis points decline on a consolidated basis.

And that was as expected as we telegraphed, and we did provide that annual impact of about €28 million in previous quarters as well for 2018. So, that certainly is part of the pressure. I would say, the other item that we highlighted in the prepared remarks was sickness.

So, sickness was elevated in Germany, Netherlands and Belgium, and that had an impact roughly of about 10 basis points in the quarter. And I’d say, those are two primary items. We talked about some of the puts and takes in some of the countries. We did talk about Italy had a bit more pressure on the staffing margin and that was due to client mix.

So, as we’ve talked about the very high growth, in Italy, more recently, that growth has been weighted on large accounts and that actually came through in the first quarter with a bit more pressure on the staffing margin. So, as we mentioned earlier, there were areas where we’re actually able to offset that and expand staffing margin.

And I think the U.S. is a good example on GP margin overall where we’ve been doing a very nice job of expanding GP margin, despite some of the revenue trends there. .

Okay. That’s helpful. If I could shift back to France for my follow-up, I know there has been some initiatives and some proposals in terms of labor market reforms. I’m wondering if you’re seeing any impact in terms of demand for your business because of that, and any expectations going forward would be appreciated..

Jeff, we’ve seen as you as you may recall changes in the legislation on for a couple of years. And I would say that by and large in many of those changes have been positive for our business, extending the fixed term temporary contracts all the way to 36 months, being able to renew the contracts of temporary staff twice during an 18-month period.

So, they have been positive. But, I would say, as far as a direct impact to our industry of the latest changes, I don’t think that we’ve seen that.

But, I would say that the overall -- the overall feeling and business confidence that we see in France with the different forms -- reform that are coming in is really an improvement in the climate in France. And I think you’ve seen that in last year and that continues into this year as well.

So, whilst they may not have had a direct impact on our business, just a general business confidence improvement in France and beliefs and also the improved growth rates, economic growth rate has certainly helped the business do well and make it a more fertile environment..

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

I’d like to revisit the gross margin performance in the quarter. Thanks for the color on the impact from CICE and sickness. Part of the remaining impact, it sounds like is coming from pricing and mix.

Can you discuss the pricing environment, maybe a little more detail in your various markets and how you expect pricing and bill pay spreads to evolve over the next two to four quarters?.

Yes. Maybe I will start this. From an overall perspective, George, we would say that the pricing environment remains rational but competitive. And that’s something that we would continue to expect going forward as well.

Having said that, a lot of the pressure that we’re seeing is coming from fast-growing countries of size and scale, such as Italy that are growing faster with bigger accounts. And that’s where you see a lot of it coming through the business mix as opposed to price pressure.

The fact that the labor markets are improving means access to talent is getting more difficult, which means, although I wouldn’t describe it as pricing power, I would describe it as a relative form of pricing stability if nothing else.

And it gives us the ability to really focus on driving profitable growth and making sure that we maintain the pricing discipline that we need to make sure that we can deliver the services at the right value for us and for our clients. Jack, maybe go through some of the detail in some other countries..

Sure. George, I guess, in terms of the ongoing trends, I think a few items to consider. We’ve talked about France stabilizing. And so, we started to highlight that in the second half of last year. So, very high growth in large accounts, and we saw that pressure in France on the mix and the large clients impacting staffing margin.

And we did see that start to stabilize at the end of the year, and in line with the prepared remarks I made. In terms of first quarter that continued into the first quarter which is really good to see as we are absorbing that CICE impact in the first quarter here. So that’s an improvement.

And I’d use that as a correlation to what we are looking at in Italy at the moment. So, Italy, very, very high growth, and you should expect that based on that growth and that mix of larger accounts, similar to what happened in France, at some stage that should start to stabilize as well.

And France has had higher growth and it’s been more recent in their growth. And so, they are a bit further behind in that stabilization but that should happen over time. So, I would say from an ongoing perspective I would consider as well.

And as I mentioned earlier, this quarter is a bit unique with a bit of the sickness element that we were dealing with in some of the European businesses but we did have good GP margin increases in the U.S., Australia, Belgium, Japan, Sweden.

So, there’s some really good examples where we are expanding gross profit margin and what -- I’d say predominantly what we are dealing with is a client mix issue in some of our European countries..

Got it, very helpful. And just as a follow-up.

Can you provide a quick update on what you are seeing with temp penetration rates in your various markets and any notable markets to call out?.

Well, I think the opportunity that we have is still in European markets, which we would consider to mid cycle and still recovering and now improving. So, we think that the penetration rates are still below their prior peak in the places like France and also in Spain.

Italy of course is a fast growing market and there the penetration rates are coming up, but since it’s the least mature of the major European markets, we still think that to get to where the average European penetration rate is that there’s still some very nice room for us to grow. So, I would say there is still room to go in Europe.

Of course emerging markets in many cases are less mature and there the penetration rates still have a long way to go to get to what you would consider maybe a global average. So, really, it’s only the U.S. that is hovering around a historical high. But, based on the progress in the U.S.

economy, we still think that we have some very good opportunities for growth here. And of course for us, when we get back to markets, that for us specifically provides an opportunity for additional growth..

Thank you. Next question is coming from Mark Marcon of R.W. Baird. Your line is now open..

Good morning. Thanks for taking my question.

First, I’ve kind of missed it, but what was perm as a percentage of total gross profit?.

So, Mark, perm as a percentage of total GP was 16% -- just about 17%, 16.8%..

16.8%.

And what level would you feel comfortable going up to?.

We said that we wanted to have a share somewhere between 15% and 20% is what we think would be good. And of course it’s been a great success story as our clients are seeing us as a provider of skilled talent, not only on temporary basis but also on a permanent basis. And I think that’s now been a success story for many, many years.

And our growth of 12% in the first quarter, although slightly lower than the 17%, very strong growth in the fourth quarter of last year, is still a solid double-digit growth. And we feel very good about our perm capabilities so far but also feel that there are still opportunities for growth and continued opportunity as we look ahead.

So, it is an important component for us to continue to diversify the business..

And then, with regards to the CICE in France, what was the impact of that 7 to 6% change as it relates just the gross margin, the temp gross margin in France..

Yes. So, Mark, on an overall basis, I guess, the way to think about it is, we -- the annual estimate was that €28 million of the step down in CICE rates and in terms of the impact on the consolidated gross margin for the gross profit margin for the Company overall is about 15 basis points this quarter..

Yes. I was just trying to figure it out just for France..

Yes. I would say, generally speaking, in France, it’s probably in the 60 basis points range..

And then with regards to some of the restructuring initiatives, how much should we think about in terms of the savings that are going to come from those? Both for ones that you mentioned in the first quarter and the ones that you’re going to take into second..

Sure. So, I think the savings are just over 1 for 1, say -- call it 1.1 is the savings on those restructuring costs. And we should see those on what we’ve done in the second quarter coming through at a full run rate, beginning in the third quarter, probably 75% of that will come through in the second quarter on a full run rate basis.

And then, on the second quarter, still a little early to talk about that but I would say the second quarter actions should be somewhere in about the 1.5 times savings, based on the costs. And we will provide an update on those costs in the second quarter. We gave the range of the 5 million to 10 million, Mark.

But, we would expect those start to come through in the fourth quarter on a full run rate basis..

Terrific, and then, one last one if I could squeeze it in. You don’t usually talk about some of the smaller countries in Asia Pacific, but you saw tremendous growth in a number that you highlighted. Is it just a cyclical factor that’s driving that or there has been some secular tailwinds as well.

But, I’m wondering if you can parse between the two, because it sounds like there is some really strong growth that’s occurring..

Yes. Thanks, Mark. We feel very good overall of our presence in emerging markets. And as you know, in terms of the number of associates that we have out working with us at our clients, it’s almost -- it’s more than 40% of our population that works in those markets. And you have really two effects.

One is that the penetration rates in those markets are very low compared to global standards. So, you will have an opportunity for secular growth. And what’s driving that we believe is that to compete in the global markets, the companies based in emerging markets have to have similar skill sets that we need here in developed markets as well.

So, wage inflation is going up and the access to that skill talent is hard to come by. And so, therefore, both permanent recruitment activities, as well as our contingent services are really seeing some very good demand in many of these emerging markets.

So, we feel very good about where and how we are positioned in emerging markets and that we should see some good growth there going forward as well..

And I’d just add one item to that as a good example. So, in India -- we don’t talk a lot about India, but in India, they really have seen some really good Experis business expansion and we talked about the bolt-on acquisition that we did there last year. And that’s actually driving higher margins and higher growth rates in India.

So, that’s been working very well..

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

Hey. Good morning. Thank you. You touched on digital and a little bit on your delivery model.

I was hoping maybe you could speak to automation and potentially technology initiatives you have internally as a potential tailwind to your business?.

Well, thanks, Hamzah. Well, as you would expect, we invest in technology and digital to improve our current business. And you can really think about it in three specific areas.

Number one, to create value for our clients and candidates, and of course taking that data that we collect and being able to apply artificial intelligence and make everything that we do more sticky and closer connected to what the objectives are for both our clients as well as for our candidates.

We can of course also see in part of this quarter as many quarters prior to this when you’ve seen the effect and the ability that we have to leverage digital tools to become more productive and more efficient.

And it’s a little bit of an ampersand because we can become more efficient but at the same we can also increase our reach and improve our productivity.

So, that’s been something that we’ve seen and that we continue to expect going forward because the evolution of technology is still very rapid and gives us a lot of opportunities to continue to drive a high-tech, high-touch approach within our business.

And then of course, things in technologies that help us do our business better and makes it easier for employees to do their business better.

And you can think of it as us trying to automate as much of the transactional activity that our employees are doing, so that we can focus our time of our people on the relationship aspect as far as them interacting with clients and candidates which in the end of course also helps us create value and drive growth.

So, those are three buckets that you can think of as it relates to our digital investments. And we’ve made some very good progress but we still think that we have many more opportunities. We’ve now been really deploying in a number of countries chatbots for screening.

We leverage global collaboration tools so that we can move information much faster between our various geographies. We are starting to deploy and have deployed cloud-based front office systems that are very sophisticated in terms of predicting performance; and then, of course, candidates and associates facing mobile apps in a number of markets.

And that is really where we see the future and continue to deploy technologies in that way that help our clients and candidates, help our employees and also help us drive greater efficiency and being more productive..

Great. Very helpful. And then, just second question. Maybe you could share with us what inning in do you think we are in the U.S. employment cycle? And specifically, do you think -- are you hearing from your customers that tax reform is going to lead to more temp hiring? Any color as to how you think about the U.S.

employment cycle and impact of tax reform from a customer perspective on temp hiring? Thank you..

We think that the U.S is clearly in the later cycles but still has room to progress from here. And part of the reason for that is that we -- as far as our clients are concerned, they are bullish about the future, the economic outlook is positive, and tax reform has helped create that positive outlook.

I would not say that there are clients that have said because of tax reform, we are looking to hire more people at this stage. It might be a little bit too early for that to have come through yet. But, I think overall, our view, although it is in the later cycles, there are still some good opportunities for growth in the U.S.

We see a very high demand, and frankly it’s a very tight labor market in the U.S. And wage inflation is starting to increase but very modestly so far, which of course is a positive from our perspective.

And also as I mentioned, for us, in the market that is growing and where have room to improve, that will for us specifically give us some good opportunities for continued -- for growth here in the U.S. So, we feel good about where the U.S. is right now and also from the current outlook and from what we hear from our clients..

Great. Just a follow-up, I will turn it over. Is there anything different between your bill pay rates and wage inflation in terms of the gap there this cycle versus prior cycles, specifically in the U.S.? Just wondering if there’s anything different between those two metrics in your U.S. business. Thank you..

I would say that at this rate of unemployment, one could have expected wage inflation to be stronger than what it is. And it is in our view an effect of our customers or organizations being extremely aware of their demands. So, they hire just in time, they know exactly what skills they need and what cost they can afford.

And they also have more alternatives. So, we think that has a dampening effect on wage inflation.

And we don’t -- while we expect wage inflation to increase, we don’t think it’s going to increase very rapidly or for that matter, reach levels that we have seen in the past, despite a much lower unemployment rate than we’ve seen in a very long period of time. As far as the bill pay spreads, I think they are from our perspective, stable.

They’re not shifting very much. They are a reflection of course, depending on the skill sets. As you’ve heard us talk about in some of our businesses, we are able to expand those; but for many of our skill sets, they are they are stables. So, we’re not seeing a major shift there.

And I don’t think that we’re really seeing any different in that respect compared to what we have seen in the past..

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

With respect to your longer term EBITDA margin target, what sort of gross margin do you assume, just kind of curious how the recent gross margin declines square against that aspirational bottom line margin?.

Tobey, what I would say is when we talked about the financial targets, we did say that gross profit is certainly going to be one of the main paths to expanding our EBITDA margin going forward. But, it’s a combination of the gross profit and the SG&A efficiency so I think we have talked a lot about the SG&A efficiencies.

I think on the gross profit side, it’s really going to be a continuation of looking at the segmentation, continuing to focus on the SMB and our segmentation of the larger clients as well. And that’s going to be an ongoing process for us. So, clearly, we are doing very well on the cost side.

And what I would say in terms of the gross profit, to your point in terms of the recent declines, as we’ve kind of laid out, a lot of that has been client mix driven. It certainly in recent quarters has been larger than what we’ve seen in the past in terms of the pressure and that was on a lot of the large account growth.

So, I would say going forward, I wouldn’t anticipate that that is a new phenomenon that will continue. I think going to my earlier comments about we should expect to see stabilization and that trends eventually as some of those big accounts start to anniversary and that mix shift starts to anniversary.

And then, I think we would see what you’ve seen in the past. Staffing margin pressure will likely continue but you would see that subside and be at more rational rates compared to what we’ve seen in the past, but importantly offset by perm recruitment fees as well as our solutions businesses.

And that should offset the staffing margin pressures in a normalized cycle as we see some of that business mix stabilize. So, that’s how I’d guide to that question..

Okay, thanks.

In the U.S., how long until we’re kind of past some of the grow over and the margin and pricing discipline and maybe able to see the top-line start to stabilize or grow?.

Well, as we mentioned in our prepared remarks, we are thinking that Manpower should see return to growth towards the end of the quarter. And we are hopeful that Experis would be somewhere a couple of quarters behind that.

And then of course we have our solutions business that is doing well, although we had an MSP that’s still frankly very good for our gross profit margin and the overall profitability. So, we would expect to see some good progress there.

It’s been -- it’s taking us longer than we would like but I think overall the balance between the profitable growth initiative, pricing discipline and SG&A, and the transformation efforts has really enabled us to do that and transform the business and still continue to deliver some great bottom-line results.

But as far as the top-line is concerned, we would expect to see some more progress as the year comes on. And as I said for Manpower, we would expect that the end of June to turn positive and then Experis a couple of quarters or something like that going -- coming after that..

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

Hi. This is Ryan Leonard on for Manav. Just a question on some of the restructuring and the tech investments, I guess.

Is this a function of kind of needing to keep up with the market in order to kind of create delivery models that make sense or is there any chance that these could be positive revenue or margin effects just from speeding delivery or shortening times it takes to fill roles?.

Well, as I mentioned earlier, it’s really both of them, because the ability to deploy delivery models that are enabled by technology, on the one hand gives us the opportunity to reduce our physical infrastructure in terms of branches but on the other hand, it also gives us much greater market reach.

So, we can actually drive revenue growth while improving our productivity and our efficiency in many of these instances. And of course, it’s also tremendously helpful in terms of making sure that we manage our SG&A.

And as you’ve seen this has been a strong theme in terms of improve process, deploying technology and bringing SG&A as a percentage of GP down over many years, while still being able to continue to grow in the business.

We think that the technology provides us with some tremendous opportunities for growth, but also for great opportunities to make sure that we improve our efficiency and productivity..

Got it, thanks. And I guess taking a step back, looking at the market more broadly, there have been some interesting acquisitions in terms of the European staffing names, and some of the more digital and I guess longer tail pieces of the market.

Is that something you guys would be interested in or would your capital allocation be more towards organic opportunities or expanding geographic footprint?.

I would say that our view on technology is that the evolution is accelerating and it won’t be slower than what it is today. So, we feel that the best strategy for us is to ensure that we can drive time to value. And that is the important strategic vector, more than technology ownership. We’re very clear that we’re not a technology company.

And for us to be able to fund the R&D and the continuous investment to keep pace with the rapidly evolving market is difficult. And therefore, working with partners, leveraging the cloud, leveraging mobile is -- and then creating value at a higher speed is really what’s going to make a difference.

So, that would be our principled approach on technology.

So, you’re unlikely to see us make major investments in technology itself, but you are very likely to see us deploy the best technology across our global operations at greater speed and then upgrade whenever there’s new technology and there is new evolutions and new tools there, and then upgrade and deploy new tools as those come to market..

Got it. Thank you..

Operator:.

And with that, we come to the end of our first quarter 2018 earnings call. Thank you very much. And we look forward to speaking with you on our next earnings call for the second quarter. Thanks, everyone..

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