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spk01: Welcome to the Manpower Group Third 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 Manpower Group Chairman and CEO, Jonas Priesing. Sir, you may begin.
spk08: Welcome to the Third Quarter Conference Call for 2021. Our chief financial officer, Jack McGinnis, is on the call with me today. And for your convenience, we have included our prepared remarks within the investor relations section of our website at mampyregroup.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. And I'll then share some concluding thoughts before we start our Q&A session. But before we start, Jack will now cover the safe harbor language.
spk02: Good morning, everyone. This conference call includes forward-looking statements, including statements regarding the impact of the COVID-19 pandemic, which are subject to known and unknown risks and uncertainties. These statements are based on management's current expectations or beliefs. Actual results might differ materially from those projected in the forward-looking statements. We assume no obligation to update or revise any forward-looking statements. Slide two of our earnings release presentation 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.
spk08: Thanks, Jack. Following our announcement and special investor call in late August, we were very pleased to recently announce the successful and timely completion of the Attain Group acquisition. Attain was one of the largest privately held IT resourcing and services provider in North America and since October 1st is now operating as part of our experience business. In addition to expanding our IT services in the financial and healthcare sectors, this acquisition also improves our geographic diversification in the U.S. and increases our strength in the digital workspace and business transformation practice areas. I will talk more about the good progress of the diversification component of our DDI strategy. diversification, digitization, and innovation a little later in this call. Turning to our financial results, in the third quarter, revenue was $5.1 billion, up 11% year-over-year in constant currency. Our operating profit for the quarter was $151 million. Excluding Mexico restructuring and attained acquisition transaction costs, operating profit was $162 million. Operating profit was up significantly year-over-year as the pandemic had a significant financial impact in the prior year. Reported operating margin was 2.9%, and after excluding Mexico restructuring and acquisition costs, operating profit margin was 3.2%. Reported earnings per diluted share was $1.77 and $1.93 after excluding Mexico restructuring and acquisition costs. and both were significantly above the prior year. The global economic recovery continued in the third quarter. As vaccine rollouts progress in many countries and pandemic-related restrictions ease, we continue to see very strong hiring demand. This strong demand is again evident in our Q4 MAMPAR Group Employment Outlook Survey of more than 40,000 employers in 43 countries. All countries are reporting improved hiring intentions year on year. And in 14 of the 43 countries, employers are reporting hiring intentions at the highest levels in more than 10 years. That said, during the third quarter, we have also seen some leveling off in the rate of recovery in some markets. Concerns about the Delta variant contribute to parts of the workforce not coming back into the labor market and exacerbating worker shortages in many industries and markets. making it more difficult to meet the strong demand for workers. The impact related to supply chain challenges caused by the pandemic have also become a more visible factor impacting many manufacturers in various industries. As we discussed on our second quarter earnings call, we view supply chain challenges and the impact of the Delta variant as transitory factors. And we remain optimistic and confident in the demand outlook once the effects of the pandemic normalize. Companies all over the world need access to skilled human capital to meet their business objectives and fully participated in the economic global recovery. With our operational and strategic workforce solutions and services, we help them meet the strong demand for their goods and services today and into the future.
spk02: Thanks, Jonas. Revenues in the third quarter came in just below our constant currency guidance range, driven by a slowdown in the rate of improvement in France due to supply chain disruptions, notably in the automotive sector, and Delta variant disruptions. Gross profit margin came in well above our guidance range. As adjusted, operating profit was $162 million, representing a significant increase from the prior year period, which was heavily impacted by the pandemic. As adjusted, operating profit margin was 3.2%, which was at the top end of our guidance. Breaking our revenue trend down into a bit more detail, after adjusting for the positive impact of currency of about 1%, our constant currency revenue increased 11%. Due to the impact of net dispositions and slightly fewer billing days, the organic days adjusted revenue increase was 12%. Comparing the pre-pandemic levels, our third quarter revenues were below 2019 levels by 5% on an organic days adjusted constant currency basis, which is slightly lower than the second quarter trend on the same basis due to the impact of new regulations in Mexico and the exiting of a low margin arrangement in Australia. Turning to the EPS bridge on slide four, earnings per share was $1.77, which included 7 cents related to Mexico restructuring costs and $0.09 related to acquisition transaction costs. Excluding these costs, adjusted EPS was $1.93, which exceeded the midpoint of our guidance range. Walking from our guidance midpoint, our results included improved operational performance of $0.02, slightly lower than expected foreign currency exchange rates, which had a negative impact of $0.03, a slightly better than expected effective tax rate that added $0.02, and favorable other expenses, which added $0.02. Looking at our gross profit margin in detail, our gross margin came in at 16.6%. Underlying staffing margin contributed 20 basis point increase. Permanent recruitment contributed an 80 basis point GP margin improvement as hiring activity was strong across our largest markets. A lower mix of right management career transition business this year drove 30 basis points of GP margin reduction. Other in accrual adjustments included a 10 basis point margin improvement from our experience managed service business in Europe, and a 10 basis point improvement from consulting and MSP services, partially offset by a 10 basis point reduction from lower direct cost adjustments in the current year, as favorable direct cost adjustments in Latin America were less than the prior year favorable adjustments in France. Next, let's review our gross profit by business line. During the quarter, the Manpower brand comprised 63% of gross profit. Our experienced professional business comprised 22%, and talent solutions comprised 15%. During the quarter, our Manpower brand reported an organic constant currency gross profit year-over-year growth of 15%. Compared to pre-pandemic levels, this represented a decrease of 4% from the third quarter of 2019 on an organic constant currency basis. Gross profit in our experience brand increased 24% on an organic constant currency basis year over year during the quarter. This represented a flat trend from the third quarter of 2019 on an organic constant currency basis. Talent Solutions includes our global market leading RPO, MSP, and right management offerings. Organic gross profit increased 16% in constant currency year over year. This represented an increase of 14 percent from the third quarter of 2019 on an organic constant currency basis. Our RPO business posted high double-digit GP growth during the quarter on significant hiring activity. Our MSP business, which has grown through the entire pandemic, continued to experience double-digit growth in gross profit in the quarter. As the recovery strengthens, our right management business continues to see significant runoff and outplacement activity. primarily in the U.S. and experienced a reduction in gross profit of 42 percent year-over-year. Our SG&A expense in the quarter was $703 million and represented a 6 percent increase on a reported basis from the prior year. Excluding Mexico restructuring charges and acquisition costs in the current year and restructuring charges and a loss from dispositions in the prior year, SG&A was 13 percent higher on a constant currency basis. This compares to an increase in gross profit of 17 percent in constant currency and reflects investment in incremental recruiters and sales talent based on increased market activity, as well as ongoing technology initiatives. The underlying increases consisted of operational costs of 78 million and currency changes of 6 million. SG&A expenses as a percentage of revenue, after excluding restructuring and acquisition costs, represented 13.4 percent in the third quarter. The Americas segment comprised 19 percent of consolidated revenue. Revenue in the quarter was $1 billion, an increase of 8 percent in constant currency. OUP was $41 million. Excluding Mexico restructuring costs and attained acquisition costs, OUP was $52 million and OUP margin was 5.2 percent. The U.S. is the largest country in the Americas segment, comprising 65 percent of segment revenues. Revenue in the U.S. was $645 million, representing an 11% increase compared to the prior year. Excluding attained acquisition costs in the current year and restructuring charges in the prior year, OUP for our U.S. business is flat year-over-year at $34 million in the quarter, as decreases from Wright Management's career placement runoff was offset by improvements across all other businesses. Excluding the acquisition costs, OUP margin was 5.3%. Within the U.S., the manpower brand comprised 33 percent of gross profit during the quarter. Revenue for the manpower brand in the U.S. increased 9 percent during the quarter. While the U.S. manpower business continues to recover, the labor shortage experienced in the second quarter continued into the third quarter through the summer months. The experience brand in the U.S. comprised 33 percent of gross profit in the quarter. Within experience in the U.S., IT skills comprised approximately 80 percent of revenues. Experience U.S. revenues grew 17 percent during the quarter, and we anticipate continued strong double-digit organic growth in the fourth quarter. We are encouraged by the current trends in our U.S. experience business and the recent acquisition of Attain, which significantly increases our presence in the convenience market for IT professional services. Talent Solutions in the U.S. contributed 34 percent of gross profit and experienced revenue growth of 9 percent in the quarter. This was driven by RPO, which experienced record revenue levels as hiring programs continue to strengthen. The US MSP business continued to perform well and experienced double-digit revenue growth in the quarter. Career transition activity continued to run off as the economy strengthens, which contributed to revenue reductions and right management in the US. In the fourth quarter, on an organic basis, we expect ongoing underlying improvement and revenue growth for the US. in the range of 1 percent to 5 percent year over year. This represents a 1 percent decline compared to 2019 levels using the midpoint of our guidance. Separately, we estimate attained revenues within a range of $175 million to $185 million in the fourth quarter. Our Mexico operation experienced a revenue decline of 46 percent in constant currency in the quarter. The decline was driven by the new labor legislation, which prohibits certain types of temporary staffing not considered specialized services. The actual reduction in demand from our clients from the regulation was more severe than originally anticipated. The restructuring actions we have taken in the third quarter have quickly right-sized this business for the impact of new regulations. Although this will result in significant revenue reductions over the next few quarters, We believe the mix shift towards more specialized staffing will improve the margin profile of our Mexican business over time. We also believe there may be additional revenue opportunities over time as clients adjust their workforce strategies. We estimate that fourth quarter revenues in Mexico will decrease by approximately 55% to 60% year over year. Mexico represented 2.8% of our 2020 revenues. Revenue in Canada increased 15 percent in constant currency during the quarter. Southern Europe revenue comprised 46 percent of consolidated revenue in the quarter. Revenue in Southern Europe came in at $2.4 billion, growing 12 percent in constant currency. OUP equaled $111 million, and OUP margin was 4.6 percent. France revenue comprised 55 percent of the Southern Europe segment in the quarter and increased 8 percent in constant currency. Compared to the same period in 2019, France revenues were down 10%. Automotive supply chain constraints and the Delta variant slowed the rate of recovery in the third quarter for our French business. OUP was 62 million in the quarter, and OUP margin was 4.7%. As we begin the fourth quarter, we are estimating a year-over-year constant currency increase in revenues for France in the range of 2% to 6%. Comparing estimated fourth quarter revenues to pre-crisis levels in constant currency, this represents an 8 percent decline compared to 2019 levels in the fourth quarter, using the midpoint of our guidance. Revenue in Italy equaled $456 million in the quarter, reflecting an increase of 28 percent in days adjusted constant currency. Through the third quarter, revenues in Italy continued to exceed 2019 levels. OUP equaled 31 million and OUP margin was 6.7%. We estimate that Italy will continue to perform very well in the fourth quarter with year over year constant currency revenue growth in the range of 7 to 11%. Revenue in Spain increased 1% in days adjusted constant currency from the prior year and revenue in Switzerland increased 21% in days adjusted constant currency. Our Northern Europe segment comprised 23% of consolidated revenue in the quarter. Revenue increased 19% in constant currency to 1.2 billion, driven by all major markets. OUP represented 17 million, and OUP margin was 1.4%. Our largest market in Northern Europe segment is the UK, which represented 37% of segment revenues in the quarter. During the quarter, UK revenues grew 26% in constant currency. We expect continued growth in the 4% to 8% constant currency range year over year in the fourth quarter. In Germany, revenues increased 13% in days adjusted constant currency in the third quarter. We expect to see ongoing revenue improvement in Germany in the fourth quarter. In the Nordics, revenues grew 19% in constant currency. Revenue in the Netherlands increased 5% in constant currency. Belgium experienced days-adjusted revenue growth of 10 percent in constant currency during the quarter. The Asia Pacific Middle East segment comprises 12 percent of total company revenue. In the quarter, revenue grew 4 percent in constant currency to $611 million. OUP was $23 million, and OUP margin was 3.7 percent. Revenue in Japan grew 13 percent in constant currency, which represents an improvement from the 10 percent growth rate in the second quarter. Our Japan business continues to lead the market in revenue growth, and we expect ongoing high single-digit revenue growth in the fourth quarter. Revenues in Australia were down 29 percent in constant currency, reflecting the exit of a low-margin client arrangement during the second quarter. I'll now turn to cash flow and balance sheet. During the first nine months of the year, free cash flow equaled $343 million compared to $685 million in the prior year, reflecting significant accounts receivable declines in the prior year period. Our third quarter free cash flow of 172 million exceeded the prior year free cash flow of 108 million, representing strong current period cash collections. At quarter end, day sales outstanding was flat year over year at 58 days. Capital expenditures represented 40 million for the nine-month period and 15 million during the third quarter. During the third quarter, we did not have any share repurchases. Our year-to-date purchases stand at 1.5 million shares of stock for $150 million. As of September 30th, we have 1.9 million shares remaining for a purchase under the 2019 share program and 4 million shares remaining under the share program approved in August of 2021. Our balance sheet was strong in quarter end with cash of $1.61 billion and total debt of $1.07 billion. resulting in a net cash position of $547 million. On October 1st, we utilized $800 million of cash to fund the acquisition of Attain. Our debt ratios at quarter end reflect total gross debt to trailing 12 months adjusted EBITDA of 1.63 and total debt to total capitalization at 30%. Our debt and credit facilities did not change in the quarter. Although our revolving credit facility for $600 million remained unused at September 30th, we did draw $150 million on October 1st in conjunction with the funding of the ATTAIN acquisition. As we previously indicated, we intend to pay this down over the next 12 months. Next, I'll review our outlook for the fourth quarter of 2021. Our guidance continues to assume no material additional COVID-19 related difficulties beyond those that exist today, including incremental supply chain disruptions, additional variants, and the emergence of adverse trends impacting our clients in any of our largest markets. On that basis, we are forecasting earnings per share in the fourth quarter to be in the range of $1.99 to $2.07, which includes an unfavorable foreign currency impact of 4 cents per share and a positive 13 cents impact from Attain. This does not include the impact of acquisition transaction costs of approximately 9 million, or integration costs of $4 to $6 million, which will be broken out separately from ongoing operations. Our constant currency revenue guidance growth range is between 5% and 9%. And after adjusting for attain, our organic constant currency growth range is estimated between 2% and 6%. The midpoint of our constant currency guidance is 7%. A minor decrease in billing days in the fourth quarter and the impact of net acquisitions driven by attain impact the growth rate, resulting in an outlook for organic days adjusted revenue growth of 4% at the midpoint. This would represent a fourth quarter organic constant currency decline in the range of minus 2% to minus 4% compared to 2019 revenues, representing an improvement from our third quarter trend. Although final purchase accounting for the attained acquisition will be finalized in the months ahead, we currently estimate that intangible asset amortization will be approximately 24 million annually. Since amortization will be more significant going forward, we are also disclosing operating profit before amortization or EBITDA to help assess underlying financial performance. We estimate that EBITDA margin during the fourth quarter will be up 30 basis points at the midpoint compared to the prior year with a 10 contributing 20 basis points of the improvements. We expect our operating profit margin during the fourth quarter to be up 20 basis points at the midpoint compared to the prior year with a 10 contributing 10 basis points of the improvement. We estimate that the effective tax rate in the fourth quarter will be 32 percent. As usual, our guidance does not incorporate restructuring charges or additional share purchases and we estimate our weighted average shares to be 55.3 million. I will now turn it back to Jonas.
spk08: Thank you, Jack. The acceleration of digitization and investment in technology by companies during the pandemic means organizations are requiring new skills and capabilities for the future. While hiring intentions are at some of the highest levels we have seen in years, it is unlikely employers will be able to fulfill all these intentions as a result of the labor market shortages for many skills. Our most recent global talent shortage survey found that shortages are at a 15-year high for the second consecutive quarter, with 69% of employers stating they cannot find the talent they need. In response, Organizations are looking ahead, focusing on strengthening workforce and reskilling, upskilling, and building the capabilities to ensure their existing and future workforce has the skills to remain competitive. We believe this is an opportunity for us. And through our diversification strategy, we are sourcing the talent they are looking for through the offerings in our manpower, experience, and talent solutions brands. We're also investing in innovations. to create the talent pools with skills and capabilities at scale. Our successful MAMPAR MyPath program has impacted over 129,000 lives to date and is a great example of this. Through MyPath, we're building the talent pool of the future and providing clients access to our high potential associates. Another recent example of innovation is our experience career accelerator. launched at the Global VivaTech Conference in Paris earlier this year, and now active in six markets. Xperia's Career Accelerator is our AI-driven platform, developed in partnership with FutureFit AI. Using machine learning and dynamic data to scan the market, it can match our Xperia's consultants to IT learning pathways and in-demand roles. We are attracting, developing, upskilling our consulting by providing curated learning and technical training content from the world's leading tech clients and accredited learning partners, and preparing our people with the skills tech employers need most. Machine learning is also helping us grow our own people's expertise, so they're even better at assessing and predicting performance to provide a better job match than either humans or machines could do on their own. That's an example of how we continue to innovate in our brands to invest in our capability to both find and create the best talent pipeline in the market for the benefit of the organizations we work with and for the benefit of the individuals for whom we provide sustainable and meaningful careers and employment. This investment in our people skills is also reflected in our recent internal annual people survey, where we are pleased to see higher employee engagement levels year over year despite the challenges experienced by many of them during the pandemic. We are proud and very grateful for the strong culture of organization, and we see this as a competitive advantage with opportunities for even further improvement, positioning us very well for future growth. I'd now like to open the call for Q&A. Operator?
spk01: Thank you. We will now begin the question and answer session. If you would like to ask a question, please press star followed by the number one. Please make sure that your line is unmuted and record your name after the prompt. To cancel your request, please press star two. Our first question is coming from the line of Andrew Steinerman from JPMorgan Chase. Your line is open.
spk04: Hi, Eunice. It's Andrew. You're very clear in your final comment to how Manpower will continue to help companies during this ongoing and really medium-term skill shortage. sort of regardless of the near term. But my question really is about the near term, and it's about U.S. labor supply. Do you feel the U.S. labor supply at the lower wage levels will improve near term? And if so, why and when?
spk08: Good morning, Andrew. And the answer is yes, we do feel that the labor supply will improve. Now, when you say near term, it's, of course, very hard to judge what near term is, but we clearly feel that these are transitory effects of the pandemic. And you can see that the lack of talent that we see across industries, you know, is really reflected on, you know, hesitations around the COVID-19 and the Delta variant surges that we've seen. the child care, school issues, so people can't get back to the workforce, and in some cases choose not to get back because they are still in the phase of being able to use some of the government support programs that were implemented during the pandemic. Having said that, we're pleased to see that from September onwards, we've seen actually an improvement week over week over week now into the middle of October where the improvement in associates has been gradual and that we take that as a promising sign that the labor market is slowly coming back to a normalized supply situation with regards to workers.
spk04: And how much is that assumed in the fourth quarter guide for the U.S. about U.S. labor supply?
spk02: Yeah, so we assume a gradual improvement during the fourth quarter, Andrew. So I'd say on the manpower side, gradual improvement to Jonas's point. So we have been encouraged by the step up in recent weeks. We have estimated that continuing through the fourth quarter. I think the other part of the U.S. business that we addressed in our prepared remarks was the experience business. and very, very strong growth in the third quarter, and we anticipate very good double-digit growth into the fourth quarter as well.
spk04: That's really encouraging. Thank you.
spk08: Thanks, Andrew.
spk01: Thank you. Our next question is from the line of Jeff Silber of BMO Capital Markets. Your line is open.
spk07: Thank you so much. As a follow-up to Andrew's question, I wanted to talk about wage inflation. I know it may differ in every country, but generally, can you talk about what the wage inflation trends have been and how easy or difficult has that been to pass through to your clients?
spk08: Morning, Jeff. Yes, as you've seen, we've been able to increase and improve our gross profit margins quite significantly on the staffing side. And as such, we've been able to provide the value of our capabilities of finding the people to our clients. And wage inflation has been strong, and in particular, strong in the U.S., less so in Europe, although it is robust there as well. And we've been able to pass those wage inflation trends on to our customers. And as we've mentioned in prior calls, wage inflation generally for us is a – good thing because we are able to price that in and to pass it on to our customers.
spk02: And I would just add to that, Jeff, one of the best indicators is what's happening on the staffing margin side in terms of our ability to pass that through. And so you saw in our overall bridge, we said that underlying staffing margin was up 20 basis points. But to give you a little flavor of what we're seeing in our largest markets, so the U.S. was up significantly year over year. The U.K., was up in staffing margin. Germany was up as we saw the anniversary of some of the bench utilization issues. Sweden was up as well. So it is, we're seeing some good broad-based improvement on the staffing margin side, and that indicates that we are able to pass that wage inflation through to our clients.
spk07: All right, that's great to hear. You would also mention in your procurement remarks about increase in investment in recruiters and sales talent. Are there any specific countries where you're making those investments relative to others? And is that sort of, I guess, front-running expected continued demand in those countries?
spk08: Overall, Jeff, we feel good about the global recovery. And, you know, we're clear that some of the recovery in a number of markets is delayed. due to these effects of the COVID-19 pandemic effects, as well as the supply chain issues. But we feel very good about the global recovery, and as such, our investments in recruiters and salespeople is pretty broad-based, because most of the markets still have opportunity to grow, and we know demand is going to continue to be strong into 2022, and we want to be ready and take advantage of those growth opportunities. You know, clearly we feel very good about the major markets, be they the U.S., France, Italy, the U.K., as well as Japan. So those are the biggest markets where we feel good. But I would say, generally speaking, we are confident and optimistic looking ahead, and that's why we're making sure that we have the talent in place to take advantage of those opportunities. All right. That's great to hear. Thanks so much.
spk01: Thank you. Our next question is from the line of Hamza Mazari of Jefferies. Your line is open.
spk06: Good morning. My question is just on the supply chain issues. I know you mentioned automotive in France. Any other areas that you would call out in terms of your customers seeing supply chain issues? I know you mentioned it's transitory. Any thoughts as to when that normalizes for you?
spk08: Thanks, Hamza. It's hard to tell, of course, when the supply chain issues will sort themselves out. You know, in terms of chip shortages, clearly that's impacting automotive manufacturers, but also a lot of other industries. And I think the main issue around this is that the pandemic caused a surge of demand, and that's why we're seeing the supply chain issues. So overall, it's a positive indicator of economic growth. It's just that the supply chains got overloaded with the big surge in demand. So this will take some time to work itself through, and I'm sure it will be different for different industries as well as different products. But over time, we expect this to normalize, and that's exactly what we're preparing for in terms of
spk02: business and being able to take advantage of the opportunities that come from that and you know I would just add to that Hamza if you look at our industry verticals we've updated that in the last page of our earnings release you can see you know auto has come down a bit based on what we've been saying in this trend so you can see that on overall about five percent of our revenues and as we've talked about in the past some of the markets where You know, auto is a bigger percentage, of course, Germany, but France, as we've mentioned in our prepared remarks. But I'd say if you look at the other manufacturing verticals and some of the bigger ones like pharma, and you can see construction broken out separately, we haven't seen those same issues from a supply chain at this stage. So I'd say predominantly focused on the automotive sector, and we continue to watch it.
spk06: Very helpful. And just my follow-up question is just if you're seeing any changes in the competitive dynamic out there, and the only reason I ask is it looks like one of your European peers has much higher growth relative to yourself and your other European peer. I guess you have two. And so I'm just curious if there's anything to read into there or you're not really seeing any changes in the competitive dynamic out there.
spk08: We're not really seeing any changes in the competitive dynamic. It's all related to, you know, the business mix both geographically as well as within industries or in industries within a country. But overall, you know, competition as always in our industries is intense but rational, and we're not seeing any major changes.
spk02: The only thing I would add to that is, you know, I would look at the mix from some of our competitors, and that could be a driver. You know, specifically logistics, some competitors may be a bit overweighted compared to us on logistics side. That could explain some of the near-term differences. But with that being said, you know, what we're very focused on is GP margin opportunities. So we're very careful regarding how much low margin work we want to take on as well.
spk06: Got it. Thank you. Very helpful. Thank you.
spk09: Thanks, Hamza.
spk01: Thank you. Our next question is from the line of Kevin McVey of Credit Suisse. Your line is open.
spk06: Kevin?
spk00: Jonas, I'm sorry. I was on mute. I apologize for that. Hey, thanks so much for the question. Is there any way to think about what level of wage would help draw some of the kind of supply constraints that you're seeing from a labor perspective, or is it more just the runoff of the benefits? Because obviously there's been a lot of debate around rising wages in the U.S., things like that. Jonas, is there any way to think about what level of wage you think helps free up some of that incremental labor supply?
spk08: Kevin, I think it really depends on where you are in the world and where you are in the U.S., and it's very... local in terms of what other competing industries are you trying to track talent from. And so I don't think it's very practical to think about a certain wage level. If you recall, for instance, the idea that $15 of minimum wage was needing to be legislated, and you look at where pay rates are today, Fast forward, you know, just two years or three years from that discussion, you can see that the market has adjusted. I think the transparency around wages is very high. So, workers know exactly what they're being paid today and what opportunities they have nearby that would pay more. And that's why you see this increase in quit rates because workers are looking at the opportunities. They know the labor market is good and they're changing jobs and getting paid higher wages somewhere else. Now, we know that some of this is driven by the supply or the talent shortages that we are seeing in many labor markets. And we expect that this effect and this surge in wage increases as well will be a transitory effect and that wage increases will normalize you know, as we go forward and the labor supply increases more than what we've seen over the last quarters. And as we mentioned in our prepared remarks, we fully anticipate that this pandemic effect over time and with the runoff of the unemployment benefits in many states will make it easier, but there are still going to be the concerns around child care, elder care, and people's own health that will delay this somewhat. But over time we think that the millions of people that are still on the sidelines will come back into the workforce and help ease the shortages that we're seeing right now.
spk00: It's very helpful. And then just real quick, Jack, I don't think you bought any stock in the quarter. Was that because of Attain or just anything else? Any thoughts on capital allocation?
spk02: No, that's exactly why, Kevin. Because of the Attain acquisition, we pulled back on share of purchases in anticipation of the acquisition. And as we said at that time, we did tap the revolver for about $150 million. Our priority from a capital allocation perspective will be to pay down that incremental debt. We feel really good about that. We said we plan on doing that over the next 12 months. And I did say that we do plan on covering dilution through share repurchases in early 2022. But beyond that, I think our focus will be on paying down the incremental debt. And then I think you should assume that we'll resume a more traditional capital allocation strategy.
spk00: Thank you.
spk01: Thank you. Our next question is from the line of Mark Marcon of Baird. Your line is open.
spk10: Good morning, Jonas and Jack. I wanted to talk a little bit more about IT services. Obviously, Xperis looks like it's doing a lot better, which is very encouraging. Wondering if you can just talk a little bit, first of all, with regards to Attain. You gave us the revenue figures for this coming quarter in the 175 to 185 million. Can you give us the gross and operating margins associated with that? And then how should we think about that over the course of the year And what is the plan for integrating Attain within Xperis? How will those meld together? How will that improve your competitive position within the growing IT services market?
spk02: Thanks, Mark. This is Jack. I'll start with that one, and then I'll let Jonas talk a little bit in terms of the Xperis brand overall. But In terms of getting a little bit more color, so that guide for attained revenues, basically 180 million at the midpoint. As we said before, their GP margin is in the range of between 20 and 25%. And basically that equates to an EBITDA of about 17 million. We did update the amortization impact, so that's lower than we originally anticipated, which is good. So all of that equates to an operating profit of about $11 million. So that would put that in line with what we announced at the deal announcement of about a 9.5% approaching 10% EBITDA margin on an overall basis. So that's kind of the rundown in the numbers. We feel really good about the business. It's early days, just a few weeks, but we've had some great integration opportunities uh, meeting so far with the business and we're off to a great start. I'll, uh, I'll let Jonas comment a little bit further.
spk08: Yeah. Thanks Jack. And, um, Mark, it's been good to see the, the improvement with experience, our experience business globally over a number of, uh, quarters. And, uh, you know, we think the opportunity in many markets is still very significant. And of course, as you've seen, it has a very good impact on improving our mix in terms of staffing margin and, um, As it regards the U.S. business, I had the opportunity just last week to meet the new combined leadership team of our One Experience team, and it's really exciting to see, as we talked about in our special investor call a number of weeks ago. We feel very good about how the Attain acquisition fits in with our overall experience strategy. how there's very limited overlap, both in terms of clients, how Attain brings great strength in a number of industry segments as well as in our practices, and of course also that they are very strong on convenience. And as you know, that is one of the areas that we are now also on our organic experience business seeing some very strong progress just as we did before the pandemic. And that's what's coming through into the numbers. So we feel very good about the acquisition so far and the combined experience business here in the US and frankly, globally as well. Great.
spk10: And then just a numbers question with regards to the fourth quarter guide. What's the impact, the incremental impact with regards to Mexico relative to if it had just, you know, performed in a constant manner without any sort of legislative change? Just, you know, what would you ballpark that at?
spk02: Yeah, Mark, I'd say, you know, we did say that we see the revenue trend year over year down about 55 to 60%. I think, you know, as we mentioned earlier, Mexico is a lower margin country for us. So the impact on the bottom line is not as significant as it is on the top line for us. So I'd say it's manageable. I'd say in the low-digit millions of dollars. So quite manageable on an overall basis. So not that significant of a headwind from an operating profit perspective.
spk10: Great. Thank you.
spk02: Thank you, Mark.
spk01: Thank you. Our next question is from the line of Toby Sommer of Truviz. Your line is open.
spk09: Thanks. I thought I'd ask a question about your... MSP and RPO businesses. Is there an opportunity for you to deploy capital and acquire businesses to further that growth? And could you comment about what you're hearing from clients that's driving double digit growth in those lines of businesses and kind of what you expect growth to look like in the future over time? Thanks.
spk08: Thanks, Toby. Well, as you've seen, we continue a really strong run with our talent solutions business and within RPO and MSP continued strength. And MSP, of course, if you recall, actually didn't dip during the pandemic year and just continues to grow. And we've seen a very strong surge in demand for our RPO solutions. And really what's driving that in conversations with clients is is their need to find talent across the world in various markets. And that's, of course, the strength of our RPO business, being able to serve our clients not only here in the U.S. and in Europe, but really everywhere in the world with a common offering. And that's really resonating with our clients. And the team has been very good as well in terms of improving their productivity and efficiency and also leveraging the data insights that we have in both MSP and RPO so that we're able to play back the data insights to our clients and suggest improved ways of running their business. So it's been great to see the progress of RPO. And as we mentioned in prior calls, we have a very strong pipeline of wins as well as implementations. And that's really what you're seeing reflected in the growth numbers that we have. And that's why we're also optimistic looking ahead because we think The operational and strategic capability that our RPO and MSP offerings provide our clients is very important today, but also going into the future. So we expect to see continued good progress and growth in both of these offerings.
spk09: As a follow-up, could I ask, does the wage inflation outlook and environment, as well as the short labor supply, particularly in the U.S., Are those influential factors in the outlook for RPO and MSP?
spk08: They're driving some inflation in terms of our fees because some of them are dependent on the wages that are being paid. But frankly, part of the reason that we are such an attractive solution to our clients is that through the use of RPO and MSP, you do mitigate the impact of wage inflation because we have such scale and visibility across the market that that is part of the value that we provide to our clients to mitigate in as much as it's possible and to still guarantee the supply, the wage inflationary effects of the wages for our clients. Thank you very much.
spk01: Thank you. Our next question is from the line of Gary Beasby of Bank of America Securities. Your line is open.
spk05: Hey, guys. Good morning. So, you know, you called out France for the slight revenue miss versus your prior outlook. But, you know, when I look at it versus those prior expectations, it looked broader than that. Most of the segments were a bit shy of the ranges you expected. And I guess, can you help us understand a little bit better what's driving that. What I'm really interested in is, you know, so how much or where and how significant is labor shortages pressuring that like 3% delta on revenue? How much was supply chain? And are there any other, I guess Mexico is a little worse, any other major factors that are worth calling out in just any color on how those same factors are impacting the outlook for Q4? Thank you.
spk02: Gary, this is Jack. No, I would say France definitely was a driving force. I'd say definitely about half of the difference from the guide. I think specific to France, the story really is with the loosening of the curfews and the restrictions at the end of Q2, we anticipated a more robust recovery into Q3. And the reality is it just didn't materialize at the pace we anticipated. And as our prepared remarks said, the supply chain issues became much more visible, became a bigger factor. Now, with all that being said, France did improve from Q2 to Q3. So we did see underlying improvement versus 2019. They were running minus 12% in Q2. They improved to minus 10%. And to your question about the guide, we see that ongoing improvement continuing into Q4. So, we see France moving to down 8 percent versus 2019 levels. So, steady, gradual improvement. I think the main change is we just pulled back the pace a little bit due to the disruption we're seeing at the moment. And we're using that based on trends we're seeing in October with activity levels, you know, continuing through the end of the year. As Jonas said, we do anticipate that some of this is temporary and will work itself out. We still are very optimistic on the recovery in France beyond the next quarter. So that would be one. I think getting back to the guide, though, definitely Mexico, as I mentioned, was more severe than we originally anticipated. You know, really the story there is our early conversations with clients is what we guided our original guidance on. Once the implementation took effect, we just saw a more cautious approach from our clients than was originally communicated to us in terms of their demand. And so that came through. I'd say those are probably the two bigger ones. You know, as we mentioned on the manpower side, a little softer, but I would say just a little softer. We saw some of that pressure as we ended Q2 in the U.S. manpower side. And as Jonas mentioned, we saw that improving in mid-September into October in terms of associates on assignments gradually increasing. And we're incorporating that into our guidance to Q4, as I mentioned earlier. And I'd say the other one may be, you know, to some degree, the manpower business in the U.K. was a little bit softer than we would have anticipated. A lot of that was offset by good strength on the experience business in the U.K. So I'd say those are the main drivers when I consider the revenue trends overall.
spk05: Okay, great. And then I just wanted to clarify on the amortization aspect, from the acquisition. You said $24 million is now your expectation for the annualized expense there. And I guess as part of that, is the $4 or $5 million that has been running before that, does that continue so the new number is more like high 20s? Is that fair? Thank you.
spk02: Yeah, so on the amortization, the new rate is $24 million annually based on our preliminary purchase accounting. We will finalize this and in the months ahead, but right now we think that's a pretty good number. So basically $6 million a quarter if you want to straight line it on an ongoing basis. And that is an improvement from our initial guide where we were closer to about $9 million a quarter or so. So yes, you can use that as your ongoing modeling for 2022 from an amortization perspective. And I'd say generally the other metrics I gave about Attain are basically holding in line with our original announcement as well.
spk05: Okay, so the $6 million includes both the acquisition and what you had previously. That's the total number.
spk02: No, no, no, I'm sorry. The $6 million is just the Attain amortization, and then our previous run rate, we'll continue as well. So that was more modest. So if you look at our amortization in Q3, it was $4 million. So anticipate that with the TAIN, so our total amortization in Q4 will be, you know, about $9.5 million, $10 million. Got it. All right. Perfect. Thank you.
spk01: Thank you. Our last question is coming from the line of George Tong of Goldman Sachs. Your line is open.
spk11: Hi, thanks. Good morning. I guess I wanted to dive into the supply chain dynamics that you're seeing. The supply chain shortage is certainly nothing new. But what was it that happened in the quarter that you would say was the tipping point that caused the trends to manifest more evidently in your results? And when would you expect the recovery to play out over in terms of just what And how many quarters do you think this impact, these headwinds could last? And how would you expect the shape of the recovery to look?
spk02: George, this is Jack. Thanks for the question. I would say, really, I think the story on the supply chain is you're right. It wasn't new. But I would say in prior quarters, it was really masked by the the performance of, you know, the overperformance of all the other sectors that were doing so well based on the increased demand. So, when we got to the third quarter, and as we were anniversaring the very, you know, the large recoveries from the prior year, it just became much clearer the impact that the supply chain was having, particularly in the automotive sector. And so, I'd say that that's what we meant when we said it became a more visible part. It just stood out much clearer. because as we were starting to anniversary some very significant growth rates from a year ago, it just became, you know, much easier to see the impact it was having. And, you know, as it continued, it was starting to have a more pronounced impact as well. So I'd say those are the, you know, that's really the main factors, which is why we gave it a little bit more prominence in our prepared remarks. In terms of the timeline, well, you know, that's really hard to say. I think, you know, a lot of economists have different views on when the supply chain issues will ease up. I think our view in our discussions with customers is we do expect that they are transitory, and as Jonas said, they are a reflection of the increased demand that is there. So, from an underlying basis, the demand is very strong. But we'll continue to work with our clients who are very close to these issues, and we'll just see how that timeline evolves over the next quarter or two.
spk08: And I would just add, George, that in all of our conversations with the clients, they see this as a delay and not a reduction in their demand or their outlook. So they remain very optimistic, and they are very intent on keeping us engaged because their comment to us is, look, we don't know when it's coming, but we know it's coming, so you have to be ready. And that is, in part, what's driving our confidence and optimism as we look ahead, because the elements of a traditional recovery are all there, and we think there are some pauses in some key markets that will eventually play themselves out in a very strong way for us as we go forward. And as it happens, in some of those markets, we are very, very strong, such as France and and manpower in the U.S. as well, and the U.K. continuing. So it's something that we are managing well, but also from the client conversations we have, feel quite good about, even though there is a delay and the rate of recovery is slowing somewhat. We feel very good about the future opportunities.
spk11: Got it. Very helpful. In Australia, you mentioned that revenues declined due in part to the exit of a lower margin client arrangement. Do you perhaps discuss what the characteristics of that loss was and if there are any patterns that you notice with that customer loss that could potentially be seen elsewhere in the business?
spk02: Thanks, George. Yeah, no, on that one, that one's actually pretty straightforward. We had an arrangement with a client. that we were able to renegotiate with a new contract that had improved terms. And as a result of that, we moved to a net fee arrangement. So it's a continuing client, very good business for us. And with that change, we were able to improve the margin. But that did result in a net treatment in terms of net fees as opposed to a gross up, which it would have shown previously. So I wouldn't say that that's indicative of, you know, any other trends or anything like that. It really was a bit of a one-off with that one client. And, you know, it's really straightforward.
spk11: Got it. Very helpful. Thank you.
spk08: Thanks, everyone. And that brings us to the end of our third quarter earnings call. Thank you for joining us today. And we look forward to speaking with you next on February 1st, 2022, which will be our fourth quarter earnings call. Until then, thank you and look forward to speaking with you soon.
spk01: Thank you for participating in today's conference. You may now disconnect.
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