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

Good morning. Welcome to the year-end conference call for 2018. With me today is our Chief Financial Officer, Jack McGinnis. I will start the call today by going through some of the highlights of the fourth quarter and full year, then Jack will go through the operating results and the segments, our balance sheet and cash flow as well as comments on our outlook for the first quarter of 2019. Then I will follow with some final thoughts before our Q&A session. Before we go any further into our call, Jack will now read the safe harbor language.

Good morning, everyone. This conference call includes forward-looking statements, which are subject to known and unknown risks and uncertainties. These statements are based on management's current expectations or beliefs. Actual results might differ materially from those projected in the forward-looking statements. We assume no obligation to update or revise any forward-looking statements. Slide two of our earnings release presentation includes important information regarding previous SEC filings and reconciliation of non-GAAP measures.

Thanks, Jack. Revenue in the fourth quarter came in at $5.4 billion, a decrease of 1% in constant currency. On a same-day basis, our underlying organic constant currency revenue decreased by 3%. The weaker revenue performance is primarily attributable to our businesses in Europe, which continued to slow through the fourth quarter, partially offsetting revenues decline in Europe with strong revenue growth in APME and within portions of the Americas, specifically in Latin America and Canada. Operating profit for the fourth quarter was $218 million, down 4% in constant currency. Operating profit margin came in at 4%, down 20 basis points from the prior year. Our performance in the quarter reflects stronger-than-expected gross profit margin of 16.3%, which represents a 30 basis points decrease from the prior year. We continued to manage SG&A well in the quarter and continued to take appropriate management actions in view of the softer revenue trends. Earnings per share for the quarter was $2.54. This was a decrease of 18% in constant currency year-over-year, but it actually reflected 25% growth in constant currency compared to the prior year if you exclude the U.S. tax reform-related gains that we experienced in the prior year period. Turning to the full year results for a few moments. Earnings per share for the year was $8.56, this represented a constant currency increase of 5% over the prior year and an increase of 22% in constant currency, excluding the one-time benefit of tax reform in the prior year. Revenues for the year increased 2% in constant currency to $22 billion and operating profit was $797 million, which was flat to the prior year on a constant currency basis. Our fourth quarter results continue to reflect the more challenging market environment, especially in Europe. We experienced declining revenue trends across a…

Thanks, Jonas. Turning back to fourth quarter results, as Jonas as mentioned, we experienced a challenging revenue environment in the fourth quarter. Operating profit declined 4% on a constant currency basis. This performance resulted in an operating profit margin of 4%, which exceeded our guidance range. A revenue decline of 1% in constant currency came in at the lower end of our constant currency guidance range. Our gross profit margin declined 30 basis points year-over-year, which also exceeded our guidance range as we experienced favorable direct cost accrual adjustments, particularly in France during the quarter. Our SG&A was well managed during the quarter and included a benefit from a gain on disposition of a non-core business, which I'll cover in more detail. Breaking our revenue trend down into a bit more detail, our reported revenue decline of 4% includes the negative currency impact. On a constant currency basis, our revenue decline was 1%. Acquisitions contributed about 20 basis points to our growth rate in the quarter. And as we had an extra billing day, the organic constant currency days adjusted revenue decline was 2%. The revenue decline was primarily driven by various businesses in Europe, most notably in France, Germany and the Netherlands. I will discuss this further in the segment review's. Turning to the EPF bridge, on a reported basis, earnings per share was $2.54. Starting with our guidance, EPS midpoint of $2.19 improved operational performance, contributed $0.12, driven by France. We sold our non-core language translation business in the Netherlands during the quarter, which resulted in a gain of $8 million, which contributed $0.10. The other income expenses contributed $0.9 as equity pickup losses on investments related to our past ownership interests in our Switzerland franchise, we're more than offset by other foreign currency adjustments and non-controlling interest…

Thanks, Jack. We see our Q1 trends essentially similar to what we saw at the end of 2018. We don't know how long the current slowdown in some European markets will continue. Having said that, we know permanent recruitment demand remains strong in many markets and companies looking for more operational and strategic flexibility in a more uneven, uncertain environment will be looking for skills that our Manpower business provides. As companies invest in new digital infrastructure, it creates demand for the technology skills that Experis provides. And finally, we continue to see good opportunities to deliver our market-leading ManpowerGroup solutions offerings in many European markets and support people transition to new careers with our Right Management offerings. We also believe the U.S. market will provide us with opportunities for revenue improvement in 2019. In addition, our emerging market footprints continues to provide a solid growth outlook. Our diversified geographic footprint and business mix should provide us with opportunities to generate new business in growth markets against slowing business in some markets experiencing headwinds. We will balance our investments in those markets that provide us with growth opportunities and always look for operational excellence, cost optimization and productivity initiatives, especially where we are experiencing softening demand. Lastly, I want to take this opportunity to thank the entire ManpowerGroup team for their great engagement and disciplined execution in 2018, and we look forward to building on that progress in 2019 and beyond. Our people are the reason we were recently named one of Fortune Magazine's 2019 world's most admired companies for the 17th time, also receiving top scores for social responsibility and global competitiveness. This accolade is a testament to our people who are delivering on our commitment to help our clients win in the changing world of work, while connecting millions of people to meaningful and sustainable employment every year. And with that, I would now like to open the call for Q&A. Operator?

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

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

Hey, morning, Andrew. This is the headquarters of the polar vortex. So we're looking out at some very cold weather here. And your first question on the outlook for Europe and the timing, of course, that's difficult. Now, we're in two consecutive quarters. You might have seen the numbers from the eurozone growth at 0.2 for both of those quarters. So it's all going to be a question of resolving some of the uncertainties that are related to trade, Brexit and some of the political issues that might be in some of the European countries. But overall, I would say, to give you a sense of what our conversations with clients are like, this still feels very much like a slowdown and not the beginning of the downturn, because by the same token of looking back at the past quarters with lower economic growth in the eurozone, you're looking at labor markets that are now at a 10 year low in terms of unemployment. So that's positive, that's why we think we will have opportunities in a number of our brands in countries across Europe. And also when you look at the projected outlook for growth for the year, it is significantly higher than what the current run rate is. So if that were to happen, there should be some good opportunities for a pickup. And the question is, of course, when that would happen. But our conversations with our clients still feel very much like a slowdown and not a downturn. Related to the question in the U.S., we still think of the U.S. as a good market for revenue improvement for us, and we believe that we'll see some revenue improvements. In the Manpower business, we were very pleased to see that Experis continued to improve also in the fourth quarter. So we think this is one of the markets where we'll have some good opportunities, and we're adding recruiters here in the U.S. because we think the market will be good here in the U.S.

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

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

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

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

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

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

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

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

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

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

So I would say in France, particularly one of the items we've seen in recent quarters, if you put the CICE decrease aside in 2018, we've actually seen good underlying improvement. So our objective is to try and offset the regulatory impacts, and we did that in 2018 in a very successful way, and we're continuing to see progress there for 2019. So I called out the change to the new subsidy, the headwind that, that will create of about 50 basis points. And we're optimistic that we're going to continue to be able to offset part of that pressure as well doing the same things we've been doing. So I'd say from that perspective, it continues to be a good labor market. And in view of the regulatory changes, we are actually having good progress on bill pay spreads on an overall basis. So that is an opportunity for us, and I'd say that it's not just unique to France, we've actually seen -- I called out the fact that we saw improvement in Italy in our staffing margin during the quarter as well. And we've been actually making progress in the U.S. as well. And I've talked about Experis. Experis saw an expansion in their gross profit margin during the quarter as well. So there definitely is opportunity for us when we look at pricing going forward, and we're starting to see that come through. And that's actually part of what's happening in terms of our outlook into the first quarter on GP margin as well.

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

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

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

Yes. Hamzah, I'd say yes, there definitely is. I'd really go back to our financial targets and when we talked about our EBITDA margin expansion goals, one of the key levers that we continue to pull are ongoing efficiencies, particularly in our back office processes. So you referenced the U.S. We did a lot in the U.S., and we are seeing that as an underlying improvement in our cost structure there that's helping fund the technology investments that we're making, and we're looking at that in a very similar way in our other large businesses around the world. We did some of that last year in Europe, and we expect we'll continue to be making advancements in our back office optimization in those key markets. And that will continue to be an opportunity for us. So in the current environment where we've seen some deleveraging due to the revenue pressure that we've seen, you can't see that coming out as strongly as it was before, but it is happening and it will continue to be an area that gives us some ability to continue to improve the bottom line and fund our technology investments.

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

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

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

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

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

Yes. No, I was in France last week. And -- so I was of course very interested in hearing what the impact was as it relates to the yellow vest. And the impact that has been noted is primarily in the retail sector, around the seasonal shopping as well as hospitality. I mean, those are the two sectors that have been hit quite hard at the end of the year. But at this point, the protests seem to be well contained. They're predictable, which means people work around them. They don't disrupt working life. And President Macron has instituted a number of initiatives that, at least for now, appears to have calmed the situation quite a lot. So I would say that this is now manageable from the French government's perspective, and they have instituted a number of different initiatives to try and placate the part of the population that feels that they've been left behind. We don't know whether any change would happen, but I would say, the initiatives that the government put in to reduce the pressure on budget did not include any change on the fee-on -- subsidies the way they've been projected to kick in on the 1st of October. And, of course, I'm sure that, that was part of the consideration when they looked at how to bridge a budget gap as they made some other changes. But at least for now what they have said is that no, this is going to happen and the date is the 1st of October. And that's as recent as last week with the meetings that I had with government ministers. So we feel pretty good about them sticking to that commitment because in the end, it is a commitment to make France more competitive by reducing the cost of labor and enabling companies to invest and grow their workforce in France. So I don't think that it's likely that it will change, at least at this point.

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

Mark, it's Jack. I'd say, on Germany, going back to what we talked about in the third quarter, we highlighted the disruption we saw from some of the systems in delivery model changes. But we did make progress in the fourth quarter, advancing initiatives around that. So these are all changes that are going to make our Germany business stronger going forward. But the reality is we're still working through some of that, and we saw some of that trend in the third quarter continue into the fourth quarter in terms of some of that disruption. At the same time in the fourth quarter, the market deteriorated. And that really goes to your point about the auto sector. We certainly have a -- we're very manufacturing focused in Germany, the auto sector is a big part of our business there. With that being said, we actually have seen stabilization if we look in 2019 in the first few weeks of January here, it stabilized. So as I said in my outlook, what we're holding right now for the first quarter guidance is what we're seeing as we exit the fourth quarter. So a trend similar to the fourth quarter, but it is encouraging that we, in January, have seen stabilization now, and I think it's going to be dependent on what happens in the market activity going forward.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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