ManpowerGroup

Welcome to Manpower Group Fourth Quarter Earnings Result Conference Call. At this time, all participants are in listening 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'll turn it all over to Manpower Group Chairman and CEO, Jonas Priessing. Sir, you may begin.

Welcome to the Fourth Quarter Conference Call for 2022. Our Chief Financial Officer, Jack McInnis, is with me today. And for your convenience, we have included our prepared remarks within the investor relations section of our website at manpowergroup.com. I'll start by going through some of the highlights of the quarter, then Jack will go through the fourth quarter results and guidance for the first quarter of 2023. I'll then share some concluding thoughts before we start our Q&A session. Jack will now cover the safe harbor language.

Good morning, everyone. This conference call includes forward-looking statements, including statements concerning economic and geopolitical uncertainty which are subject to known and unknown risks and uncertainties. These statements are based on management's current expectations or beliefs. Actual results might differ materially from those projected in the forward-looking statements. We assume no obligation to update or revise any forward-looking statements. Slide 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.

Thanks, Jack. Over the last three weeks, I spent time with our leadership teams across the world for our annual strategic roadshows as well as with clients in Europe before attending the World Economic Forum annual meeting in Davos, Switzerland. From these conversations with our teams, our clients, and global leaders, we get insights on the current environment and near-term outlook. This complements our own real-time business data on the current environment and forward-looking research. The economic headwinds and increased caution by employers due to an uncertain economic outlook are resulting in softening hiring behaviors. We see this through extended recruiting and sales cycles and softer order flow with employers in certain sectors as they are exercising more caution in their demand for contingent and permanent recruitment of talent. That said, they're also focused on holding on to business-critical talent while adding headcount for in-demand skills, whether that is supply chain workers or highly skilled professional talent. And as a result, labor markets remain strong overall, and we still see good order flow and opportunities in various markets and brands. Turning to our financial results, in the fourth quarter, revenue was $4.8 billion, down 1% year-over-year in constant currency. A reported EBITDA for the quarter was $110 million. Adjusting for the U.S. acquisition integration costs, restructuring costs, and other special items which we'll cover in the financial review, EBITDA was $167 million. representing a flat trend in constant currency year-over-year. Reported EBITDA margin was 2.3 percent, and adjusted EBITDA margin was 3.5 percent. Earnings per diluted share was 95 cents on a reported basis and $2.08 on an adjusted basis. Adjusted earnings per share increased 8 percent year-over-year in constant currency. Turning to the full year results for a few moments, reported earnings per share for the year was $7.08. As adjusted, earnings per share was $8.52 and represented a constant currency increase of 31 percent. Revenues for the year increased 5 percent in constant currency to $19.8 billion, and reported EBITDA was $619 million. As adjusted, EBITDA was $698 million, which represented a 22 percent constant currency increase year over year. In the fourth quarter, we experienced softening in demand in some sectors and markets, especially in the U.S. and Europe. Our own quarterly forward-looking Manpower Group Employment Outlook survey of approximately 40,000 employers in more than 40 countries, which was conducted in November, indicates that good hiring momentum is expected to continue for Q1 2023, especially in IT, finance, energy, and life sciences, with softening hiring intent emerging in Europe and to a lesser extent in the U.S., both weaker in hiring intent quarter over quarter and year over year. And while the headlines may be dominated by tech company layoffs, we see this more as a recalibration of their workforces as a result of bullish hiring post-pandemic. In the wider spectrum of all industries, we're seeing more companies begin to tap the brakes while others have their foot hovering above the brake pedal. And even in this more cautious environment, there remain areas of good demand for our services, such as IT skills within our experience business, higher margin skills with our manpower business, RPO, MSP, and right management, and we're focused on delivering into these market opportunities. I'll now turn it over to Jack to take you through the results.

Jack Faulkner Thanks, Jonas. Going back to the quarterly results on slide three, revenues in the fourth quarter came in at the low end of our constant currency guidance range. Gross profit margin came in at the midpoint of our guidance range. As adjusted, EBITDA was 167 million, flat and constant currency compared to the prior year period. As adjusted, EBITDA margin was 3.5 percent and came in just below our guidance range and was flat year over year. Due to the strengthening of the dollar, year over year foreign currency movements continue to have a significant impact on our results. It is important to note that our businesses operate in local currencies, and as a result, foreign currency translation does not impact cash flow activity within our businesses and is largely an accounting item based on reporting translation into U.S. dollars. Foreign currency translation drove a 10 percent swing between the U.S. dollar reported revenue trend and the constant currency related growth rate. After adjusting for the negative impact of foreign exchange rates, our constant currency revenue decreased 1 percent. Due to the impact of net dispositions decreasing revenue about half a percent in fewer billing days, organic days adjusted revenue was flat in the quarter compared to our guidance of plus 2 percent at the midpoint. The lower revenue trend reflected a deteriorating environment during the fourth quarter, particularly across Europe and North America. Turning to the EPS bridge on slide five, reported earnings per share was 95 cents. which included $1.13 related to restructuring costs, final integration costs from the U.S. experience acquisition, and other special items consisting of a loss on the sale of our hungry business and non-cash charges consisting of goodwill impairment and pension settlement costs. Excluding the restructuring costs and other special items, adjusted EPS was $2.08. Walking from our guidance midpoint, our results included a softer operational performance of 19 cents, slightly lower weighted average shares due to share purchases in the quarter, which had a positive impact of one cent, a lower effective tax rate, which had a positive impact of two cents, a foreign currency impact that was eight cents better than our guidance due to the strengthening of the euro and the pound during the quarter, and other expenses had a positive one cent impact. Next, let's review our revenue by business line. Year over year, on an organic constant currency basis, The Manpower brand reported revenue decline of 1 percent. The Experience brand was flat, and the Talent Solutions brand reported revenue growth of 7 percent. Within Talent Solutions, we continue to see year-over-year revenue growth in RPO as permanent hiring trends remain solid across our key markets during the quarter. Our MSP business saw a modest revenue decline in the quarter as we reduced certain lower margin activity. while right management experienced a double-digit percentage revenue increase on higher outplacement volumes in the quarter compared to the extremely low levels in the prior year. Looking at our gross profit margin in detail, our gross margin came in at 18.2 percent. Staffing margin contributed a 30 basis point increase driven by our manpower businesses. Permanent recruitment, including Talent Solutions RPO, contributed 20 basis point GP margin improvement as hiring activity contributed to high single-digit increases in gross profit year-over-year. Project and other solutions-related services within Xperis resulted in a 20 basis point margin increase. Bright Management Career Transition and MSP within Talent Solutions contributed 20 basis points of improvement, and other items represented a positive 10 basis points. Moving on to our gross profit by business line, during the quarter, the Manpower brand comprised 57 percent of gross profit. Our experience professional business comprised 26 percent, and talent solutions comprised 17 percent. During the quarter, our consolidated gross profit grew by 3 percent on an organic constant currency basis year over year. Our Manpower brand reported an organic gross profit increase of 2 percent in constant currency year over year. Organic gross profit in our experience brand increased 3 percent in constant currency year-over-year. This reflects strong growth in higher margin solutions, as well as growth in permanent recruitment. Organic gross profit in talent solutions increased 11 percent in constant currency year-over-year. This was driven by double-digit GP percentage growth in both RPO and right management. MSP experienced solid GP growth and significant margin improvement as we improved the mix of business during the quarter. Reported SG&A expense in the quarter was $775 million. Excluding restructuring costs and other special items, SG&A was 4 percent higher year-over-year on an organic constant currency basis, which is down from the 9 percent growth in the third quarter on the same basis. This reflects a balance of cost reductions in areas of slowing demand while we continue to invest in growth opportunities, most notably in experience, talent solutions, and specialty skills and manpower. The underlying increases consisted of operational costs of $31 million, incremental costs related to net acquisitions and dispositions of businesses of $2 million, offset by currency changes of $62 million. Adjusted SG&A expenses as a percentage of revenue represented 14.6 percent in constant currency in the fourth quarter. I'll discuss goodwill impairment as part of the Northern Europe segment review. Integration costs, a small loss on sale, and modest restructuring costs totaled $7 million. The Americas segment comprised 25 percent of consolidated revenue. Revenue in the quarter was $1.2 billion. flat compared to the prior year period on a constant currency basis. Reported OUP was $58 million and includes $4 million in final acquisition integration costs on the completion of the U.S. acquisition integration, as well as some small restructuring costs. As adjusted, OUP was $62 million, and OUP margin was 5.3 percent. The U.S. is the largest country in the Americas segment, comprising 69 percent of segment revenues. Revenue in the U.S. was $819 million during the quarter, representing a 3% days-adjusted decrease compared to the prior year. As adjusted to exclude acquisition, integration, and restructuring costs, OUP for our U.S. business was $45 million in the quarter, representing a decrease of 15%. As adjusted, OUP margin was 5.5%. Within the U.S., the Manpower brand comprised 25 percent of gross profit during the quarter. Revenue for the Manpower brand in the U.S. decreased 8 percent on a days-adjusted basis during the quarter, representing a decline from the 3 percent growth rate in the third quarter. Manufacturing PMI in the U.S. steadily decreased during the fourth quarter from above 50 in October to the 48 range in December. our U.S. manpower business experienced a progressive pullback in demand during the course of the quarter. The Xperis brand in the U.S. comprised 46 percent of gross profit in the quarter. Within Xperis in the U.S., IT skills comprised approximately 90 percent of revenues. Xperis U.S. revenue growth on a days-adjusted basis represented 1 percent as we anniversary very strong growth in the year-ago period. The integration activities for our acquired U.S. experience business were successfully completed during the quarter. Account solutions in the U.S. contributed 29 percent to gross profit and experienced a revenue decline of 4 percent in the quarter. This was driven by a decrease in RPO revenues in the U.S. as permanent hiring programs softened in the fourth quarter and we anniversary dramatic growth in the prior year. Although RPO programs are slowing in the current environment, fourth quarter RPO revenues were well above pre-pandemic levels. The U.S. MSP business saw a modest revenue decline as we reduced some lower margin activity, while outplacement activity within our right management business drove significant revenue increases. In the first quarter of 2023, we expect a slightly higher rate of year-over-year revenue decline as compared to the fourth quarter trend in the U.S. which reflects the current environment and represents some further softening across manpower, experience, and RPO. Southern Europe revenue comprised 43 percent of consolidated revenue in the quarter. Revenue in Southern Europe came in at 2.1 billion, representing a 2 percent decrease in organic constant currency. Reported OUP for the Southern Europe business was 106 million in the quarter. As adjusted, OUP margin was 5.1 percent. France revenue comprised 57 percent of the Southern Europe segment in the quarter and increased 2 percent in days adjusted organic constant currency. As adjusted, OUP for our France business was 59 million in the quarter, representing an organic increase of 3 percent. As adjusted, OUP margin was 4.9 percent. The business in France continues to operate in a very low-growth environment based on supply chain impacts from the ongoing Russia-Ukraine war and broader inflationary pressures. Activity in January 2023 indicates further softening. We are estimating the year-over-year constant currency revenue growth rate in the first quarter for France to be slight growth to flat based on January activity trends. Revenue in Italy equaled $413 million in the quarter, reflecting an increase of 1 percent on a days-adjusted constant currency basis. OUP equaled $29 million, and OUP margin was 7.1 percent. As we continue to anniversary significant revenue growth in the prior year period, we estimate that Italy will have a slightly lower constant currency year-over-year revenue trend in the first quarter compared to the fourth quarter. Our Northern Europe segment comprised 20 percent of consolidated revenue in the quarter. Revenue of $973 million represented a 3 percent decline in organic constant currency. OUP represented 16 million, and adjusted OUP margin was 1.7 percent. The largest market in the Northern Europe segment is the U.K., which represented 36 percent of segment revenues in the quarter. During the quarter, U.K. revenues decreased 6 percent on a day's adjusted constant currency basis. This reflects a slightly higher rate of decline from the third quarter trend. We expect a similar year-over-year revenue trend in the first quarter compared to the fourth quarter. In Germany, revenues decreased 3 percent in days adjusted constant currency in the fourth quarter, a significant improvement from the third quarter trend. We continue to take actions to improve our Germany business and then progress various initiatives focused on business mix and operational improvements. Overall, in the first quarter, we are expecting a slightly improved year-over-year revenue trend compared to the fourth quarter trend. The Netherlands is one of our smaller businesses in Northern Europe. The revenue decrease in the fourth quarter of 5% days adjusted constant currency was a slight improvement from the third quarter trend on the same basis. Based on the prolonged decline in revenues in the Netherlands, increased interest rates, and the worsening economic conditions, we updated our goodwill impairment assessment at year end, which concluded in a non-cash impairment charge of $50 million. Having said that, we have taken various actions in the Netherlands which have recently improved profitability, and we expect further improvement in 2023. The Asia Pacific Middle East segment comprises 12 percent of the total company revenue. In the quarter, revenue grew 8 percent in constant currency to $579 million. OUP was 23 million, and OUP margin, as adjusted, was 4 percent. Our largest market in APME segment is Japan, which represented 46 percent of segment revenues in the quarter. Revenue in Japan grew 11 percent in constant currency, or 12 percent on a days adjusted basis. We remain very pleased with the consistent performance of our Japan business, and we expect continued strong revenue growth in the first quarter. I'll now turn to cash flow and balance sheet. In full year 2022, free cash flow equaled $348 million compared to $581 million in the prior year. In the fourth quarter, free cash flow represented $115 million compared to $238 million in the prior year. At year end, day sales outstanding increased about half a day to 56 days. During the fourth quarter, capital expenditures represented $20 million. During the fourth quarter, we repurchased 376,000 shares of stock for $25 million. As of December 31st, we have 2 million shares remaining for a purchase under the share program approved in August of 2021. Our balance sheet ended the quarter with cash of $639 million and total debt of $987 million. Net debt equaled $348 million at quarter end. Our debt ratios at quarter end reflect total adjusted gross debt to trailing 12 months adjusted EBITDA of 1.32 and total debt to total capitalization at 29 percent. Our debt and credit facilities remain unchanged during the quarter. After successfully lengthening our debt duration profile with the Euro note executed in mid-2022, we entered 2023 with a very strong balance sheet. Next, I'll review our outlook for the first quarter of 2023. Based on trends in the fourth quarter and January activity to date, our forecast is cautious and anticipates that the challenging environment will continue through the first quarter. We are forecasting underlying earnings per share for the first quarter to be in the range of $1.61 to $1.71, which includes an unfavorable foreign currency impact of 15 cents per share. We have disclosed our foreign currency translation rate estimates at the bottom of the guidance slide. Our constant currency revenue guidance ranges between a decrease of 3 percent and an increase of 1 percent, and at the midpoint represents a 1 percent decrease. There's no meaningful impact for acquisitions and dispositions, but there is an increase in billing days year over year, bringing the days-adjusted constant currency decrease to 2.5 percent at the midpoint. This represents a decrease from the flat fourth quarter revenue trend on this same basis. We expect our EBITDA margin during the first quarter to be down 30 basis points at the midpoint compared to the prior year. We estimate that the effective tax rate for the first quarter to be 29.5%, and for the full year of 2023 to be 29%. This reflects the enacted decrease in the French business tax that I mentioned last quarter and our latest estimate of mix of country earnings. As usual, our guidance does not incorporate restructuring charges or additional share repurchases, and we estimate our weighted average shares to be 51.5 million. I will now turn it back to Jonas. Thank you, Jack.

As we wrap up our reporting of 2022 and begin 2023, I'd like to provide an update on our DDI strategy, diversification, digitization, and innovation, and acceleration plans, which together with continued investments in our technology roadmap are strengthening our capabilities to capture higher margin opportunities and create long-term sustainable values. On diversification, we're making excellent progress shifting our mix to higher margin businesses within and across all of our brands, ensuring our clients have the talent and workforce strategy to adapt quickly to market shifts as they happen. We're also very pleased with the completion of our rapid and successful integration of Attain Acquisition into our experience business, and we are starting 2023 with a very strong position in the US IT professional resourcing and services markets. We also see strength in the Xperia's brand globally, positioning us to capitalize on the growing global professional IT resourcing market. Our industry leadership and star performance status in both Xperia's and Talent Solutions RPO and MSP offerings has also been recognized in 2022 by Everest Group, as discussed in the recent quarters. On digitization, we continue to make excellent industry-leading progress on our technology roadmap. Last year, I communicated that we had completed PowerSuite cloud-enabled front office implementations in 22 markets. I'm pleased to report that in 2022, we've implemented PowerSuite in 11 additional markets, are in flight with six more markets as we speak. By the end of 2023, we will have substantially all of our major businesses on this leading platform. During 2022, we have further strengthened our mobile app leadership position in France and advanced our associate app in various other key markets, with more countries being added in 2023. Our global enterprise data lake is in place for our top three markets, France, US, and Italy, further strengthening our business insights to clients and improving our candidate experience, all of which is critical to our B2C, business-to-candidate strategy at a time when talent shortages remain high. Our back-office cloud-enabled infrastructure projects are also driving efficiencies and improving our processes. On innovation, our engine for growth, we're making great progress on leveraging our PowerSuite technology stack here, too, and are accelerating the deployment and adoption of our AI-based recruitment tools and machine learning to enhance recruiter productivity. be more data and insight driven to find the best talent match quickly, and focus on activities that create the most value for candidates, associates, and clients. As we continue to differentiate our higher value services, we're increasingly focused on being creators of talent at scale by expanding our talent engine offerings across our brands and for our internal employees and associates. Our Talent Academy is recruiting and training our own and new talent to be experts in key skills and industry verticals, including IT. Our Experience Academy, now active across 14 markets, is providing intensive, role-ready tech training and coaching for our experienced consultants, especially in cloud and infrastructure, business transformation services, and digital workspace specialist skills, so we can find or create the best talent which our clients need. And our Manpower MyPath has boosted the employability of almost 200,000 temporary associates in 15 markets, increasing recruiter productivity, achieving higher reassignment rates, stronger net promoter scores, and driving higher GP margin across specializations. In addition to this, we engage in many more training initiatives at a local country level as well. We're also making excellent progress while working to change the world ESG plans, recognized in 2022 for our impact across planet, people, and prosperity and principles of governance. ESG is increasingly important to our clients, associates, and employees as they choose with whom to work or be associated with. We earned an A-minus rating in this year's carbon disclosure project survey, driven by our science-based target initiative validated emissions reduction targets. We maintained our industry-leading sustainability score were included on the Dow Jones Sustainability Index for the 14th year, recognized by Newsweek as one of America's most responsible companies for the fourth year, and ranked in the top half within the Wall Street Journal's top 250 best managed companies by the Drucker Institute, scoring highly for customer satisfaction, innovation, and social responsibility. All of which reinforces our reputation as a leading organization with strong performance in the areas of environment, social, and corporate governance, and our talented teams should be proud. In closing, we've seen the broader economic environment soften over the past months. This has translated into lower demand for our services in some markets, which we expect will continue. However, we still continue to see good demand for specific skills and industry verticals that support growth in our higher margin offerings. We are very confident in our ability to manage this dichotomy of market opportunity, as we have done many times in the past. And we will adjust our resources as we see the market evolve going forward. Longer term, we remain convinced that in this fast-changing post-pandemic landscape, our clients' workforce transformation needs will grow, the value of data and insights will increase, and building the right blend of people and tech will be even more critical. We're confident that our DDI strategies and excellent progress positions us to leverage these opportunities and more to accelerate profitable growth and value creation. Now I'd like to open the call to Q&A. Operator?

Thank you so much. We will now begin the Q&A session. For participants, if you would like to ask a question, please press star followed by the number one. Please unmute your phone and record your name slowly and clearly when prompted. Your name is required to introduce your question. To cancel the request, you may press star and then the number 2. Our first question for today is from Andrew Steinerman of JP Morgan. Your line is open.

Andrew Steinerman Hi, everybody. I wanted to look back at slide 7, and despite the softening demand environment, fourth quarter interim staffing gross margins were still up 30 basis points. So, Jack, I just was hoping you could talk a little bit about what's driving that. Is there a mixed factor? How are bill pay spreads doing? And how is that same figure likely to trend into the first quarter?

Thank you, Andrew. Yeah, I'd be happy to talk to that. So I'd say the big item is staffing margin. So you can see staffing margin having the biggest contribution to the year-over-year plus 100 basis points. And despite the volumes and the pressure on volumes that we talked about on the call, pricing continues to hold up very well. And we see that across all of our large markets. So I'd say there is a component of that that is mixed as well on the staffing side. We've been talking about the adjustments we have been making to the overall portfolio. You've seen us talk about some of the dispositions of some of the countries that were not at hurdle rates. And you saw us in this release talk about another move we've made there in terms of divesting of one of our businesses in Europe. So mix is part of it, but I'd say the bigger part of it is just the continued strong pricing environment. That is reflected in what we've been talking about in terms of the labor markets and the demand for talent. On an overall basis, staffing margins continue to perform very well. The other part of it is the mix as well in terms of the brand mix, and experience and talent solutions continue to be at record levels of percentage of the overall business, and that's having an impact as well. I'd say in terms of spreads on an overall basis, holding fairly steady. from, you know, sequentially from the third quarter to the fourth quarter. We're not really seeing a big change in terms of bill pay spreads and so forth. So, again, in line with solid pricing. And then you can see PERM, although we have noted that PERM is starting to slow off record levels, still having a very positive impact with year-over-year growth. And we talked about that in the prepared remarks as well. at very high single-digit growth in PERM overall year-over-year, contributing to that GP margin improvement. The other item, experience we've called out, you can see from the services side, so the non-resourcing side, very good activity there, and you can see the 20 basis points in solution, statement of work, other services. And lastly, I'd say, Andrew, MSP contributed year-over-year to margin improvement And we did see right management outplacement activity start to rebound from record lows in the prior year, and that had a positive impact on margin as well.

That makes sense, Jack. Thank you so much.

Thank you. Our next question is from Jeff Silber of BMO Capital Markets. Your line is open.

Thank you so much. You talked in your prepared remarks about doing cost reduction in areas of slower demand. I was wondering if we can get a little bit more color on that in terms of where that was. Are these cost reductions expected to continue? And if not, what are you looking for before holding off on that?

Yeah, Jeff, I'd be happy to talk to that. So I guess the way I'd say it, as we've talked about in the prepared remarks, it is still a bit of a balance. We are still investing for growth and good opportunities. and experience and perm in certain markets is still holding up fairly well. So there are areas where we continue to invest, but we are pulling back in areas where we are seeing softness. So when I look at, we talked a lot about SG&A year over year being up in the fourth quarter. That's largely due to the momentum of the growth earlier in the year when you look at year over year. But when we look at FTEs and headcount sequentially were actually down from the end of the third quarter. So our headcount is down. And if you look across the markets where we've made some adjustments, you can see North America would be part of that based on the trends that we're seeing. The U.S. and Canada both down in headcount slightly. Across Europe, you would see, we've talked about this before, some adjustments. in Germany as well, in Norway as well. So reacting to some of those sectors where we've seen softness, like in construction in Europe, you would expect that we're making adjustments in those parts of the business. But on an overall basis, I'd say if you think about the quarter overall, we still grew GP dollars across all brands. And so that indicates that the environment still, although it's choppy and a bit uneven, and we're certainly seeing more pressure on the manpower side, there continues to be very good opportunity in pockets, even in manpower in pockets. And we've talked about the investment in specialty. But where there has been slowing, we are making those adjustments. And as to your point about going forward, you should expect that we're going to continue to do that. And we'll do that based on the trends that we're seeing in the key markets. And we'll continue to make those adjustments as we go forward. I did announce in the quarter that we did some slight restructuring. We did, you know, the restructuring dollars were very small on an overall basis. And that would reflect, you know, some very small right sizing in the U.S. Latin America, in Mexico, as you would expect, we've done some small right-sizing there as well. In Northern Europe, in Germany and Norway, as I mentioned earlier, some slight adjustments. And in France, we've made some small adjustments as well. So that would capture the small restructuring we took in the quarter. And we'll continue to monitor those trends going forward in terms of overall activity levels.

All right, that was really helpful, Jack. I appreciate it. And moving on to everybody's favorite topic, which is taxes. I know you gave us an update on the impact of the French business tax. Is that something that we should use? I know you're not talking about 2024, but is that a good number to use at 29% going forward?

Yeah, great point. So the government of France did pass the French business tax reduction as part of the budget for 2023. So That's locked in, so that will take us, we did say the 29% for the full year 2023. That does have that benefit, which is about 1.5% or so. We've also updated the mix of country earnings, which is part of the equation as well, which takes it to 29%. We'll see if that ends up maybe being a tad conservative. But when we go to 2024, currently, They are projecting to remove the final part of the French business tax. If that gets passed, and the final confirmation of that will be in the 2024 budget when it's approved at the end of 23, that would be another 1.5% decrease, which would take us down further to about 27, 27.5% for 24. We'll continue to update that. We'll watch that when the preliminary budget comes out in the fall, and certainly in the fourth quarter we'll have greater certainty around that. But that would be very good if that got passed as intended.

Okay, great. Thanks so much.

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

Hi, good morning. This is actually Ronan Kennedy. I'm from Manav. Thank you for taking my questions. Last quarter, if I'm not mistaken, the commentary was very, it was indicative of seeing solid demand, little to no signs of deterioration while increasing risks and uncertainty were acknowledged. It was, you know, the commentary was indicative of that solid demand, but now it's broader economic softening, lower demand for services in some, not all markets, the uncertain economic outlook. How did that, happen can you assess you know what happened in the quarter versus your expectations even from a timing standpoint and with regards to your visibility uh and you know how we should expect first quarter and the remainder of the year to play out in consideration of that sure ron good morning well when the risks and uncertainty we we talked about in the in the prior call to some degree came came to pass for the first first three quarters of the year especially after the ukraine

war we started to see Europe soften but the US held on and q4 was really the time when we started to see the US demand softening broadly across the brands but clearly more pronounced for the manpower brand and that shouldn't have come as much as a surprise as you know for the manpower brand PMI is a good indicator both across Europe during the year and in the U.S. at this time, PMIs are all below 50, and we really could see that softening demand occurring in the MAMPA brand in particularly. So at this point, as Jack has just spoken about, it is clearly visible across all of our brands, but having said that, we see growth. big differentiation between the softening but talent solutions still leading the way in terms of growth of the GP in the fourth quarter. The same is true for experience holding up well and really it's the manpower brand that we're seeing having more of an impact due to the slowdown in industrial activity and across various sectors.

And Ronan, I would just add to that. I think when we released our third quarter results on October 20th, we just had, you know, a couple weeks of activity in October at that point. I think if you look at some of the labor market data, particularly in the U.S., on what happened from October through December, you'll see, you know, significant trend change in terms of, you know, what was happening with temporary workers. in November and December as they ended the quarter. And certainly in France as well, you would have seen the industry data there step down in the month of November and December. And actually, our business held up fairly well compared to that industry data that went negative year over year in November and December. But clearly, the environment changed. When we went out on October 20th, we did say that we anticipated a stable environment, to your point.

and uh what what happened in november and december actually moved away from that that's very helpful thank you and then um margins were touched on in response to to andrew's question but just for guidance for the first quarter overall i mean obviously it is a function of the the top line and the potential declines there but what are the other kind of puts and takes to upside or downside um to the margins as well, and then ultimately earnings.

Yeah, no, happy to talk to that. I think for the first quarter for GP margin is still holding up very well, I'd say. So you can see at the midpoint, we're at 18.1%. That's still up 70 basis points year over year. So I think, you know, based on the earlier question we had, on GP margins, still anticipating and seeing good staffing margin, still solid pricing environment. And we don't see that changing. And, you know, although PERM is coming off record lows and slowing on a year-over-year basis in terms of growth trend sequentially, there is still good PERM activity in various markets. So we still see that contributing to the GP margin. I think on the bottom line, it's actually pretty straightforward. We are seeing a decrease in operational leverage with the revenue trends. So I mentioned in the first quarter, we ended up on a flat organic days adjusted basis. We stepped down in the first quarter. So although at the midpoint in constant currency, it's at minus one, as I mentioned. We have more days in the first quarter, so when you adjust for days, that takes it down to about minus 2.5%. So it's really the lower volumes that are translating into lower GP dollars, which are falling down. We are making adjustments, but that is contributing to the EBITDA margin of the minus 30 basis points here over here in the first quarter, really driven by the volumes here.

Thank you, appreciate it.

Thank you. Our next question is from . Your line is open.

Good morning, and thanks for taking my questions. Jack, RPO, where is that as a percentage of GP?

So, Mark, we like to talk PERM overall, so that includes RPO, but also includes the PERM activity that's happening in the staffing brands as well as Manpower and Experience. So on an overall basis in the fourth quarter, our PERM as a percentage of total GP is at about 18.6%. And we've talked about that in the past. You'll see that coming down from the record levels of PERM that we had in the second quarter. And we expected that to happen. So at that point, it was just slightly above 20%. And so now it's coming down just below 19% now. And we would expect that to continue to settle in at more historical levels, somewhere in that range, maybe even a little bit lower as we go forward, as expected.

Yeah. And you mentioned that RPO is continuing to grow during the fourth quarter, although it It declined in the U.S. Where are you seeing the growth on the RPO side? And as you talked about it, you know, settling in a little bit more as a percentage, what range would you expect it to go to if the economy softens a little bit further on a worldwide basis, if there's more caution?

Sure. I'd be happy to talk about that. So the U.K. had very, very strong RPO growth in the fourth quarter. We saw very – Poland is a great operation for us in terms of supporting our global RPO. They had very strong growth as well. Japan had strong RPO growth, and France had strong RPO growth as well. So those are all some of our larger markets that did very well in RPO, which took us to overall growth despite the U.S., being down in the fourth quarter. Overall, RPO was up double digits in revenues. And so that would be the main drivers. I think to your point in terms of the outlook, I mean, we would expect that, you know, the year-over-year growth rates for PERM would continue to come down as we move forward, again, as we get further away from some of the record levels of activity. And we anniversary very, very high rates in the prior year. But I'd say as we continue, it's hard to say. In this environment, PERM's been holding up better than anyone would have ever imagined if we would have went back a number of quarters. And it's still holding up fairly well, despite some of the pressure we're seeing in staffing volumes and some of the markets. So will that growth rate continue to edge down? Yes, but It's hard to say if it will come down into negative territory anytime soon. We'll just have to monitor those trends. But so far, we're very encouraged by the fact that it's holding up in many of our key markets.

That's great. And Jonas, you were just in Europe. You were at Davos. Can you talk a little bit about what you're hearing from clients and just generally speaking with regards to in the key markets, France, UK, Italy, Germany, what you're hearing with regards to areas that seem to be holding up a little bit better than what we here on this side of the ponder would imagine as it relates to Europe and what areas of caution are there? How are you thinking about things, not just for the next three months, but over the course of the year, broadly speaking?

Sure, Mark. The conclusions of discussions with clients is clearly their hiring intent is softening somewhat. But despite what you read in the papers in terms of both big tech companies pulling down and other larger corporations also having workforce reductions, most of our clients are continuing to hire. They may not hire the same skill set, so they take longer to hire. The sales cycles are a bit longer. Recruitment times are going up, and they're very specific about the skills that they feel they're going to be needing heading into the year, but they are continuing to hire, and that speaks exactly to this dichotomy in terms of demand. So on the one side, we feel that some of the skill sets notably in logistics are becoming softer. Construction has been softer due to the interest rate environment. You have others as financial services and tech companies where demand is still holding on really in Europe as well as globally. So we're in this time where we're balancing between customers that are tapping the brake. They're not hitting the brake. They're tapping the brake. Some have you know, their foot over the brake and thinking about what they would do if they see the environment deteriorate further, to many clients saying that they're working through the pandemic supply chain issues and they have a big order book that they need to fulfill during 2023. So it's quite uneven, but at the same time quite encouraging because you can tell that All of this is reflected in still very strong labor markets. And what's not unusual, as you all know, is that our industry leads the way in a softening economy, but it hasn't yet to translate into the broader labor market. And we don't know to what degree it will. We note, of course, the reduction in demand for some places with manpower skills in particular, as we see industrial outlooks come down. But overall, it's still a constructive environment, but it is difficult to predict where it's going. But most companies we spoke with and are speaking with still are looking to bring on talent because they have the memory of the pandemic very, very fresh. And you think back over past recessions, and this may be the most pre-announced recession that we've ever experienced, be it technical or otherwise. employers in the past really absorbed most of the slowdown in reduced productivity because they wanted to hold on to the workers. And that means we may well, as Jack has alluded to, still see reasonably good perm activity. Some parts of the business feeling more of the softening and others still see very good demand. But, you know, it's hard to predict, but we're ready to manage this whichever way it goes. And as you can tell, you know, we feel really good about our diversified business mix where we feel that we have some good resilience in higher skill sets and developing more resilience in also manpower higher skill sets. So, you know, we'll manage it as it evolves based on the trends that we're seeing. But I'd say the tone in Davos was more optimistic than I had expected.

That's good to hear. Thank you.

Thank you. Our next question is from Kartik Mehta of North Coast Research. Your line is open.

Thank you. Jack, you talked a little bit about competition and pricing holding up. I'm wondering, is that across all brands, or is maybe the manpower brand seeing some additional competition because of some of the pressures and the other brands are holding up? So were your comments kind of overall pricing is holding up? I'm just wondering if you look at kind of the brands, What do you think about competition currently?

Yeah, thanks, Karthik. You know, actually, it's a very good point, and I should have clarified that actually manpower had very good staffing margin improvement in the fourth quarter. So I could understand why there would be a question if they're seeing the most pressure on volumes, are they starting to see some pressure on margin, on staffing margin? And it actually is not the case. So despite volumes being down, pricing's holding up very well on the manpower side. And when we look at that 30 basis points for staffing margin, manpower was a big contributor to that. So, no, it's holding up quite well. And I'd say on the experience side, margins are holding up very well as well, I think, in line with the trends that we've talked about in recent quarters. But I think the good news is, despite some of the pressure we're seeing in some of the slowing environment, that is not translating into pressure on margins on the manpower side.

And then, Jack and Jonas, just all the conversations you've had with your clients and maybe your trip to Davos and Europe. And, Jack, just you're looking at business and the statistics. What would you anticipate for wage inflation? It seems like it's come down a little bit. but it's probably mid-single digits, if that's correct. And I'm wondering kind of your outlook for the year and what you would anticipate for that.

You know, as many, we've been clearly looking at wage inflation. And just as a reminder, from our perspective, wage inflation is actually a positive effect because it translates into our business through higher bill rates. So You know, our business model is not negatively impacted by the direct inflation or wage inflation. It actually benefits from it. Obviously, from an economic perspective, high inflationary pressures are not good. And to your question, we expect wage inflation to continue to come down, as you've seen over the last six months, although the pace of that decline is hard to gauge. But I would say this, if you speak and we speak obviously to employers at large, their expectation is for wage inflation to come down, which is why their wage increases on average are still quite contained. So they are not responding on average to these wage demands. They are trying to manage it through one-time bonuses, hiring incentives, all kinds of one-time effects because their assumption is that wages are going to be coming down over time, and they want to remain competitive in the market in their business. So we would expect wage inflation to continue to come down, but based on the gradual and slow decline that we've seen, certainly over the last nine months, we think it's still going to take a while, but overall, our wage inflation expectations are for it to moderate.

Thank you very much. I really appreciate it.

Thank you. Our next question is from Toby Summer of Truist Securities. Your line is open.

Hey, good morning. This is Jasper Vibon for Toby. The gross margin guidance for the first quarter looks really strong despite some of the headwinds we talked about. And I think historically that's easily been the weakest margin quarter for the company. How should we think about the seasonal pattern of margins over the balance of the year and any impact that some of your permanent placement businesses declining might have on margins over the course of the year?

Thanks, Jasper. Yeah, you're right. I think traditionally we do typically see some pressure. I think the counter to that, though, is you know, we have stepped up margin pretty progressively, sequentially over the last number of quarters, and we take that into the first quarter. So, you know, the rate of increase is slowing. We were up 100 basis points in Q4 year over year. It's 70 basis points. And that's just, you know, the comps starting to catch up a bit. But, No, I would say, you know, at the moment, we feel pretty good in terms of, as I mentioned earlier, in terms of pricing, staffing margin, perm continuing to contribute, and based on mix of the business as well, right? So as we look out, we typically don't talk about future quarters, but I think it is fair to say that generally, The second half of the year, we typically see a bit higher GP margins. I think this year in 2023, the item that we'll definitely keep a close eye on is PERM and the contribution of PERM to overall market as we mentioned earlier. If PERM slows more dramatically, then that will have an impact and we'll start to see that come down. I think the good news is, you know, we're already seeing the contribution of PERM as we talked about in previous questions. kind of start to get back to more traditional levels as a percentage of GP. And as that continues to stabilize, you know, that should have less volatility on GP margin as we go forward. So that's what I'd say, Jasper.

Thanks. That makes sense. And then your PMI has been contracting month over month for most of the second half of 22, but your organic revenue guidance for Europe is still roughly flat year over year in the first quarter. Could you speak to any differences in how managers are using temp labor in this environment, and are they more, I guess, reticent to let people go given the shortages we've seen in the past two years?

I'd say that they are definitely careful about letting their talent go, and the uncertainty and the volatility in terms of the outlook and the economic conditions also means that that they prefer to have a more flexible workforce, which is helping us offset some of the demand weakness we may see. So employers use this workforce solutions that we provide through manpower and to a lesser degree in terms of economic cycle on the experience side and talent solution side, to create some flexibility in their outlook and be able to quickly respond to either increases in activity or decreases in activity. And I think that's what we see. But they have definitely and continue to be influenced by the difficulties in finding talent. And they are increasingly looking to us to help them provide that talent. And as you've heard from our prepared remarks, They are also very pleased with our increasing capabilities of upskilling and reskilling talent that isn't available in the market. We see this as a tremendous opportunity, both from a manpower perspective as well as from an experience perspective. As the demographic trends in Europe and in North America are clearly getting tougher over time with lower birth rates, the ability to tap into talent pools and to create skills that are missing in the market, we think, is going to be a great competitive advantage for both manpower and experience at scale.

And Jasper, just a technical item. I think your point that constant currency guidance is relatively flat compared to the minus 1% in Q4 to minus 1% in Q1. But there are more days. And days are a bigger issue than usual in the first quarter of 23. So it's about 1.5% difference due to the more days. So when you adjust for days, we are down sequentially. So that takes it down to about 2.5% on an overall basis. So in Europe, in some of those markets, we are seeing when you adjust for days, we are seeing a slight step down in France and in Italy, as we mentioned in the prepared remarks. So that's just the only thing to keep in mind as you think about that.

Appreciate the detail there. Thanks for taking the questions, guys.

Thank you. Our next question is from George Tong of Goldman Sachs. Your line is open.

Hi, thanks. Good morning. You mentioned customers are exercising more caution in their demand for both contingent and perm recruitment. Can you compare how quickly contingent trends are changing relative to perm placement trends, particularly exiting the quarter?

You can see that we are still holding on to perm and that manpower staffing is coming down significantly. quicker than perm so it is connected to a very strong labor market and some of the volatility you see in certain industry verticals in some in some countries so perm at this point is holding up better than um uh contingent staffing especially for manpower great

You indicated that activity in France in January points to further softening from a growth perspective. Can you elaborate on what you're seeing in France in terms of order flows, sales cycles, and various end market performance?

Well, I would say that we're tracking well to market. You've seen some of the prison data soften over the last couple of months, and then you saw it as well So France is continuing and actually is still holding steady, but at a low level. It is one of the countries, one of the few countries where we, as well as the industry, never came back to pre-pandemic levels. So I would say the same phenomena that we're seeing in other markets where there is a slowdown, longer sales cycles, longer times to close recruitment cycles, but still an environment that is, you know, constructive to our higher value offerings, our higher skill sets within manpower, and also some very good opportunities on workforce transformation as it relates to talent solutions. So all of this indicates a slight step down, as Jack talked about, but still something that is manageable from our perspective.

Great. Thank you.

Thank you. Our next question is from Heather Balsky of Bank of America. Your line is open.

Hi. Thank you for taking my question. I thought that you could talk a little bit about Germany. You mentioned in the prepared remarks about some of the initiatives you're taking there to turn that business. I was hoping you could elaborate on that. And then I'm curious about the underlying environment you're seeing in that market. You didn't call that out as one where you're seeing some slowing, but just curious what you're seeing in some of those end markets. Thanks.

Well, I think the overall market is still holding steady. Unemployment rates are still low, and there is a lot of work that we're doing to make sure that our business is competing the way it should. We were pleased to see an improvement sequentially between the third quarter and the fourth quarter. We expect to continue to see an improvement. As we've talked about in prior calls, our exposure to the automotive sector in Germany is the highest that we have across all of our countries, and that's really giving us a lot of work to do to diversify our business into segments that are holding up a bit better. So even if the market, you know, could go softer also in Germany in the first quarter, I think we have initiatives in place where we're hoping to see continued improvement in our own business as we move forward. And, you know, we have a proservia business that is also working to recover some of the lost ground. But overall, we're pleased to see signs of improvement, but we still have a lot of work to do, Heather, to make sure that we're competing at the right level in the German markets.

Thank you. And then another question, just China reopening. I know, you know, if we go back a couple of calls, there was potential risk of disruption with some of the lockdowns. I'm just curious if there's any benefit with China reopening or if all of that has just kind of been non-material to your business.

Well, as you know, our Chinese business is managed through a listed company in Hong Kong that is covering the Chinese market. But overall, I would expect that when Chinese demand improves, it will have the benefit of creating demand for products and services for the rest of the world, which will be positive. And it will probably also increase pressure in terms of demand for resources and energy costs might go up. But overall, a growing China should be beneficial for the world economy. And as such, we would benefit from that evolution. And certainly on the manpower side, that might mean that PMIs start to turn the other way and go in the right positive direction again. But from our own business perspective, not an impact, but as opposed to there might be a secondary effect of an improving economic environment to which China's growth contributes.

Got it. Thank you very much.

Thanks, everyone. That brings us to the end of our fourth quarter earnings call, and we look forward to speaking with you again when we catch up in April. Thanks, everyone. Have a good rest of the week.

Thank you for your participation. You may disconnect now.