Earnings Call: Q2 2021

Jul 20, 2021

Welcome to ManpowerGroup Second Quarter Earnings Results Conference Call. And now I will turn the call over to ManpowerGroup Chairman and CEO, Jonas Preising. Sir, you may begin. Welcome to the Q2 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 manpowergroup.com. I will start by going through some of the highlights of the quarter and Jack will go through the 2nd quarter results and guidance for the 3rd quarter. I will then share some concluding thoughts before we start our Q and A sessions. But before we proceed, Jack will now cover the Safe Harbor language. Good morning, everyone. This conference call includes forward looking statements, including statements regarding the impact of the COVID-nineteen 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 2 of our earnings release presentation further identifies forward looking statements made in this call and factors that may cause our actual results to differ materially and information regarding reconciliation of non GAAP measures. Thanks, Jack. Halfway through 2021, I am increasingly optimistic about the strength of the global recovery. As vaccine rollouts gain momentum and lockdown restrictions ease, We're seeing dramatic increases in hiring optimism. The pace of the recovery is strong with the hiring intent picking up much faster than after the previous economic downturn. And although the recent infection increases are concerning, we do not believe they will materially impact the positive recovery trajectory. I spent a considerable amount of time during the Q2 in Europe with our market leaders, teams and clients. This included time with our French team at VivaTech, One of the world's largest technology conferences in Paris, which I will talk about later as part of our innovation update. And together with other global leaders, I also spent time with President Macron and his government at the Choose France event. I believe that the future for France looks bright as the government continues on its path to make France more competitive and our business is very well It is clear from my discussions with clients that demand is coming back very strongly for our services across all of our brands. This is evidenced in temporary and permanent placement activity as well as demand for workforce solutions. Companies increasingly need our help in finding and reskilling talent to enable them to leverage the fast improving economic recovery and accelerate the digital transformation to emerge stronger post pandemic. Turning to our financial results. In the Q2, revenue was $5,300,000,000 up 31% year over year in constant currency. We grew revenues significantly in our key markets and this resulted in better than expected financial performance. Our operating profit for the quarter was $170,000,000 Operating profit was up significantly as we anniversaried the depth of the pandemic's financial impact. Operating profit margin was 3.2 percent and after excluding special charges in the prior year, operating profit margin increased 260 basis points. Earnings per diluted share was $2.02 As we welcome a stronger economic recovery than anticipated, We also see our clients experiencing supply constraints with much tighter labor markets in many countries and competition for talent heating up. Our most recent talent shortage survey of 42,000 employers in 43 countries found that 69% of employers globally, A 15 year high are reporting difficulties hiring skilled workers across many industries. Although vaccinations are more widespread, Workers are still dealing with issues created by the pandemic, such as healthcare and childcare concerns. Unemployment benefits and related programs are also having a lingering effect on worker supply. We This means hiring a skilled talent and supporting people to reskill and upskill for growth roles will be a driver of demand into the foreseeable future. It is a workers' market right now and as a result, we're also beginning to see employers respond to what workers want, Wage increases in places, more flexibility, skills development and a clear commitment to ESG, especially to take clarity around an organization's social and climate impact. I would now like to turn it over to Jack to take you through the financials and country performance details. Thanks, Jonas. Revenues in the 2nd quarter came in at the high end of our constant currency guidance range. Gross profit margin came in well above our guidance range. Operating profit was $170,000,000 representing a significant increase from the prior year period, which was heavily impacted by the pandemic. Operating profit margin was 3.2%, which was 80 basis points above the midpoint of our guidance. Breaking our revenue trend down into a bit more detail, after adjusting for the positive impact of currency of about 10%, Our constant currency revenue increased 31%. As the impact of net dispositions and slightly more billing days was very minor, The organic days adjusted revenue increase was also 31%. Comparing to pre pandemic revenues, Our 2nd quarter revenues were below 2019 levels by 4% on an organic days adjusted constant currency basis, representing a 1.5% improvement from the 1st quarter trend on the same basis. Turning to the EPS bridge on Slide 4. Earnings per share was $2.02 which significantly exceeded our guidance range. Walking from our guidance midpoint, Our results included improved operational performance of $0.55 slightly higher than expected foreign currency exchange rates, which had a positive 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 16.3%. Staffing margin contributed 60 basis point increase, which included 20 basis points related to direct cost accrual adjustments in France, representing a 40 basis points underlying improvement in staffing margin. Permanent recruitment contributed 50 basis points UP margin improvement as hiring activity was strong across our largest markets. Our Experis Man Services business in Europe contributed 10 basis point margin improvement. These increases were partially offset by other business mix factors, primarily involving a lower mix of right management career transition business. Next, let's review our gross profit by business line. During the quarter, the Manpower brand comprised 64% of gross profit, Our experienced professional business comprised 21% and talent solutions comprised 15%. During the quarter, our Manpower brand reported organic constant currency gross profit year over year growth of 51%. Our Manpower business experienced the biggest decline a year ago and as a result experienced the biggest increase this period in the recovery. Compared to pre pandemic levels, this represented a decrease of 4% from the Q2 of 2019 on an organic constant currency basis. Gross profit in our Experis brand increased 23% year over year during the quarter on an organic constant currency basis. This represented a decrease of 1% from the Q2 of 2019 on an organic constant currency basis. Town Solutions includes our global market leading RPO, MSP and Right Management offerings. Organic gross profit increased 27 This represented an increase of 12% from the Q2 of 2019 on an organic constant currency basis. Our RPO business posted double digit GP growth during the quarter on significant growth in hiring activity. Our MSP business, which has performed well for several quarters, continued to experience double digit growth in gross profit in the quarter. Our Right Management business continues to see a runoff in outplacement activity as recovery strengthens and experienced a reduction in gross Profit of about 9% year over year. Our SG and A expense in the quarter was 690,000,000 and represented a 10% increase on a reported basis from the prior year. Excluding goodwill and other impairment charges in the prior year, SG and A was 17% higher on a constant currency basis. This compares to an increase in gross profit of 40 Operational costs increased by $96,000,000 and net dispositions represented a $1,000,000 reduction. Currency changes reflected an increase of $42,000,000 SG and A expenses as a percentage of revenue represented 13.1% in the Q2, representing ongoing improvement in our efficiency as revenue recovers. The Americas segment comprised 20% of Consolidated revenue. Revenue in the quarter was $1,000,000,000 an increase of 23% in constant currency. OUP was $56,000,000 Excluding impairment costs in the prior year, OUP increased 116% in constant currency And OUP margin increased 230 basis points to 5.4%. The U. S. Is the largest country in the Americas segment, comprising 60% of segment revenues. Revenue in the U. S. Was $629,000,000 representing a 22% increase compared to the prior year. Adjusting for franchise acquisition and days, this represented a 21% increase. Excluding impairment charges in the prior year, OUP for our U. S. Business increased 149 percent year over year to $38,000,000 in the quarter. OUP margin was 6%. Within the U. S, the Manpower brand comprised 35% of gross profit during the quarter. Revenue for the Manpower brand in the U. S. Increased 36% during the quarter. While the U. S. Manpower business continues to recover, we have noted softness in candidate supply during the Q2 and expect this to continue during the summer months. The Experis brand in the U. S. Comprised 32% of gross profit in the quarter. Within Experis in the U. S, IT skills comprise approximately 80% of revenues. Experis U. S. Revenues grew 5% during the quarter. We are encouraged by the current trends in our U. S. Experis business and anticipate continued improvement into the Q3. Talent Solutions in the U. S. Contributed 33% of gross profit and experienced revenue growth of 14% in the quarter. This was driven by RPO, which experienced dramatic revenue growth as hiring programs continue to strengthen. The U. S. 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 in right management in the U. S. In the Q3, we expect Ongoing underlying improvement in revenue growth for the U. S. In the range of 11% to 15% year over year. Comparing estimated 3rd quarter revenues to pre crisis levels in constant currency, this represented a 2% Decline compared to 2019 levels in the 3rd quarter using the midpoint of our guidance. Our Mexico operation experienced revenue growth of 6% in constant currency in the quarter. On April 23, The Mexican government passed labor legislation that will prohibit certain types of temporary staffing not considered specialized services beginning on July 23. As such, companies operating in Mexico will be prohibited from using temporary staffing for functions that are already deemed to be in house core competencies of their workforce. We have been working with our clients It absorbs this legislation and anticipate that we will have a reduction in revenues in our Mexico business beginning in the Q3 as clients navigate through the legislation and shift their workforce strategies accordingly. Although this will result in 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. We also believe there may be additional revenue opportunities over time as clients adjust their workforce strategies. Although it is difficult to forecast based on how Quickly, the legislation is being enacted. We are currently estimating a revenue decrease for the Mexican business in the 3rd quarter in the range of minus 28% to minus 32% in constant currency. Mexico represented 2.8% of our 2020 revenues. Revenue in Canada increased 22% in days adjusted constant currency during the quarter. Revenue in the other countries within Americas increased 40% in constant currency. This was driven by significant constant currency revenue growth in Argentina, Colombia, Peru and Chile. Southern Europe revenue comprised 46 percent of consolidated revenue in the quarter. Revenue in Southern Europe came in at $2,400,000,000 growing 51% in constant currency. This reflects ongoing improvement driven by France and Italy. OUP equaled $115,000,000 and OUP margin It was 4.8%. Brands revenue comprised 56% of the Southern Europe segment in the quarter and increased 67% in days adjusted constant currency. Compared to the same period in 2019, France revenues were down 12%. Although restrictions had an impact on the rate of revenue improvement during the quarter, the French business continued to perform well in a challenging environment, We expect ongoing improvement now that the majority of the restrictions have been lifted. OUP was $66,000,000 in the quarter and OUP margin was 4 0.9%. As previously referenced, direct cost accrual adjustments, representing approximately $10,000,000 benefited France's results. As we begin the Q3, we are estimating a year over year constant currency increase in revenues for France in the range of 12% to 16%. Comparing estimated 3rd quarter revenues to pre crisis levels in constant currency, This represents a 5% decline compared to 2019 levels in the Q3 using the midpoint of our guidance. Revenue in Italy equaled $469,000,000 in the quarter, reflecting an increase of 57% in days adjusted constant currency. Through the Q2, revenues in Italy continued to exceed 2019 levels. OUP equaled $32,000,000 and OUP margin was 6 0.8%. We estimate that Italy will continue to perform very well in the 3rd quarter with year over year constant currency revenue growth in the range of 20 to 24%. Revenue in Spain increased 12% in days adjusted constant currency from the prior year Revenue in Switzerland increased 33% in days adjusted constant currency. Our Northern Europe segment comprised 22 Percent of consolidated revenue in the quarter. Revenue increased 23% in constant currency to $1,200,000,000 driven by all major markets. OUP represented $18,000,000 and OUP margin was 1.5%. Our largest market in the Northern Europe segment is the UK, which represented 37% of segment revenues in the quarter. During the quarter, U. K. Revenues grew 30% and days adjusted constant currency, which included significant new business. The U. K. Continued to perform above 2019 levels in the Q2. We expect continued strong growth in the 34% to 38% constant currency range year over year in the 3rd quarter. In Germany, revenues increased 9% in days adjusted constant currency in the 2nd quarter. Although Germany continues to be a difficult market for our industry, we expect to see ongoing revenue improvement in Germany in the 3rd quarter. In the Nordics, revenues grew 17% in days adjusted constant currency. Revenue in the Netherlands increased 9% in days adjusted constant Belgium experienced days adjusted revenue growth of 24% in constant currency during the quarter. Revenue in other markets in Northern Europe grew 41% in constant currency in the quarter. This was driven by strong revenue growth in Poland, Russia and Ireland. The Asia Pacific Middle East segment comprises 12% of total company revenue. In the quarter, revenue grew 6% in currency to $620,000,000 OUP was $22,000,000 and OUP margin was 3.6%. Revenue in Japan grew 10% in days adjusted constant currency, which represents an improvement from the 6% growth rate in the Q1. Our Japan business continues to lead the market in revenue growth and we expect ongoing mid to high single digit revenue growth in the 3rd quarter. Revenues in Australia were down 11% in days adjusted constant currency. Revenue in other markets in Asia Pacific, Middle East grew 9% in constant currency. I'll now turn to cash flow and balance sheet. During the 1st 6 months of the year, free cash flow equaled 100 $71,000,000 compared to $577,000,000 in the prior year quarter, reflecting significant accounts receivable declines in the prior year period. At quarter end, days sales outstanding decreased year over year by almost 2 days to 56 days. Capital expenditures represented $12,000,000 during the quarter. During the Q2, we purchased 432,000 shares of stock for 50,000,000 Our year to date purchases stand at 1,500,000 shares of stock for 150,000,000 As of June 30, we have 1,900,000 shares remaining for repurchase under the 6,000,000 share program approved in August of 2019. Our balance sheet was strong at quarter end with cash of $1,460,000,000 and total debt of $1,090,000,000 resulting in a net cash position of $368,000,000 Our debt ratios at quarter end reflect total gross Debt to trailing 12 months adjusted EBITDA of 1.79 and total debt to total capitalization at 31%. Our debt and credit facilities did not change in the quarter. In addition, our revolving credit facility for $600,000,000 remained unused. Next, I'll review our outlook for the Q3 of 2021. Our guidance continues to assume additional lockdowns or business restrictions impacting our clients in any of our largest markets beyond those that exist today. On that basis, we are forecasting earnings per share for the Q3 to be in the range of $1.86 to 1 $0.94 which includes a favorable impact from foreign currency of $0.04 per share. Our constant currency revenue guidance growth range is between 12% 16%. The midpoint of our constant currency guidance is 14%. A minor decrease in billing days in the 3rd quarter and the slight impact of net dispositions impact the growth rate slightly, resulting in an outlook for organic days adjusted revenue growth of 15% at the midpoint. Adding the context of comparisons to pre crisis activity levels, this would represent a 3rd quarter organic constant currency decline in the range of 1% to 3% compared to 2019 revenues. We expect our operating profit margin during the Q3 to be up 50 basis points at the midpoint compared to the prior year. This reflects another quarter of continued strong sequential underlying improvement. We estimate the effective tax rate in the 3rd quarter will be 33%. Based on our improved earnings mix, we are now estimating the full year effective tax will approximate 33%, a 1% improvement from our previous estimate of 34% provided last quarter. As usual, our guidance does not incorporate restructuring charges or additional share repurchases, and we estimate our weighted average shares will be $55,200,000 I will now turn it back to Jonas. Thanks, Jack. We continue to invest in technology and are Great progress on our acceleration plans to diversify, digitize and innovate. Starting with diversification, We've been recognized again for award winning RPO business within our Talent Solutions brand, scoring highly for our strong tech ecosystem, Our consulting capabilities, data driven solutions and business intelligence. This is the 11th year we have been named a global leader in RPO in the Everest We've also just been named MSP leader for the 8th consecutive year by Everest, recognizing us at the top in market impact. They also recognized our global leadership and tech as well as our workforce strategies, data driven approach and I congratulate our Talent Solutions colleagues for our leadership In the RPO and MSP space, which is an important component of our diversification strategy to grow higher margin value business. Next, on digitization, we continue to rapidly execute our technology and web transformation. Our PowerSuite Tech Stack is helping us to grow our competitive advantage as we shift to cloud platforms, improving our customer experience while streamlining our candidate management. Our approach ensures we're always current, able to plug in with the best tech and the capability to scale, while turning our data into a key asset. We continue to move at speed. 19 market deployments have been completed and another 16 are in flight. We look forward to providing you further update on this at year end. We're also making great progress in innovation. In June, We joined the biggest names in tech at the world famous Viva Technology Conference in Paris. As the conference's only HR partner since its launch 5 years ago, This is a great opportunity for us to showcase our newest innovation and work with more than 30 hour startups on how we're using AI, Machine learning and data driven predictive performance tools, together with our human expertise to upscale people at speed and scale and match people to jobs with better accuracy and speed than either humans or machines could do on their own. Building a better, brighter future of work has bold disruptive ideas and collaboration across business, government and education. This is how we will create sustainable skills, resilient communities and greater prosperity for all. I'd now like to open the call for Q and A. Operator? Thank you. We will now begin the question and answer session. The first question came from the line of Andrew Steinerman of JPMorgan. Your line is now open. Good morning, Eunice. It's Andrew. I wanted to ask you if you felt like we were at the beginning of a new economic expansion cycle. I definitely took note of your U. S. Comments where you've said demand for your labor feels stronger than expected in a typical Economic recovery. And then I heard the caveat that the supply, at least through the summer months, seemed more constrained Metatypical economic recovery. And so my question is for the U. S. And for Europe, do you feel like this is the beginning of an economic expansion where temporary health Really benefits for a couple of years, or do you feel like we're going to kind of get back to where we were in 2019? Good morning, Andrew. And yes, it's a great question. And our view would be 2 fold. First of all, there are some anomalies In terms of how we got into the economic recession and how we're getting out of that economic recession. So the speed of the downturn, the speed of the recovery, The supply shortages that we're seeing in the U. S. And frankly also in other countries for various reasons as we spoke about in our prepared remarks. But our feeling is that all of this leads to the beginning of a new economic cycle. And we are seeing stepping back from some of these anomalies really the signs of what that would look like. And to your point around the increased demand for strategic and operational flexibility, we truly believe that our penetration rates We'll continue to improve and we'll surpass prior peak levels from the previous cycle. But longer term adjusting to structural changes with skills changing as companies want to make sure they have The skill sets in the workforce to take advantage of technological progress, and other structural drivers, we feel We really feel that this is going to be a question of long term demand for our services and solutions over this new economic Right. And just make a comment about supply. Do you feel like supply will improve in the United States as we get into the fall? Well, from what we can see today, workers clearly still have health concerns, they have childcare concerns And we have a very significant stimulus package and unemployment benefits that for the most part, least in terms of the additional unemployment benefits will terminate around the 6th September for a lot of states. Some of them already have ended those additional benefits, and we feel that this has been a factor in the supply of the workforce back into the labor markets. And of course, we're also hopeful that vaccination rates will continue to improve. And those 2 in combination, we believe, will increase the supply of workers into the labor market So that we can see this normalized over the coming quarters. Well said. Thanks for your comments. Appreciate it. Thanks, Andrew. Thank you. And our next question is from the line of Jeff Silber of BMO Capital Markets. Your line is now open. Thank you so much. Along the lines of the supply constraints, is there anything You're doing on your own proactively to try to mitigate that that might have been different now than it had been in the past? We are really adjusting to the supply constraints that we see by offering Upskilling and reskilling opportunities for our existing associates and that's under the program called MyPath, where we have the ability to take our existing associates on assignment, Retain them by offering them progression in terms of the skills and the job opportunities that we have. And of course, All kinds of other measures that we can, whether it's referral bonuses, assignment completion bonuses, all of those in collaboration with our clients Clearly measures that we're taking to attract and retain the associates that we have on assignment. And I would say this is something that we're seeing not only in the U. S, but it's also to a lesser degree evident in Europe. But as I mentioned in my earlier remarks, We really see this as a temporary effect and an anomaly following the pandemic, and we expect it to normalize Over the coming quarters and really expect to see some changes when for the U. S, the additional unemployment benefits Are running out in September. So we would expect the situation to improve because we feel that there is ample supply, but it's being held back for various reasons and those reasons will dissipate over time. Okay, fair enough. In looking at your operating margin guidance for the 3rd quarter. It looks like the revenues compared to 3Q 2019 should be higher, Yet your operating margin guidance of 3% to 3.2% is lower than 3Q 2019's 3.6%. Is there something structurally going on now or are you just Yes, this is Jack. No, I'd be happy to take that. We did say at the end when we gave the Q3 guide, when you compare it to 2019, we're still below. So we were down, I think the range we provided was down minus 1% to minus 3%. So just to clarify that, that was So below 2019. So at the midpoint, that's about 2% below 2019 levels. And I think the If you think about our biggest businesses, France, we mentioned, was still below by 12% In the Q2, that's going to improve in the Q3, but they'll still be below by 5% from 2019 levels. So that's the biggest Business, we have 25% of our revenues and that's having an impact. The good news is the operating margin is Definitely improving on an underlying basis. As I look at the Q2, we did talk about the accrual adjustment we had in France that added about 20 basis points. If you take that out, our 3.2 is about 3.0. And if you look at the guidance into the 3rd quarter, that improves to the 3.1%. So we are seeing sequential underlying improvement. And the U. S, We mentioned it's still below 2019 and we think with the forecast for the Q3, we're going to continue to narrow that gap as well. So those are The top two businesses, the good news is we are making progress in narrowing that gap. And on an underlying basis, if you look back, 1st quarter, we were down from 2019 about 5.5%. 2nd quarter, as we mentioned, we were down about 4%, so we saw that ongoing improvement. And we're projecting another 2% improvement to minus 2% in the 3rd quarter versus 2019. So quarter by quarter, we continue to narrow that gap and you should expect that our operating profit margin We'll continue to improve with that same trend. Okay. I must have been looking at U. S. Dollars only. Thank you for the clarification. Appreciate it. Sure. Thank you. The next question is from the line of Hamzah Mazari of Jefferies. Your line is now open. Hi, thank you. This is Mario Cortellacci filling in for Hamzah. Could you just comment on how much of your margin target of the 4.5% to 5% It's based on further upside from leveraging gross margins. I guess, specifically, how much more room is there to Just wondering where you are in that journey? Sure. So I'd be happy to talk about that. So maybe first, I'll just say we are definitely still committed to the 4.5% to 5% EBITDA margin target more than ever. I think we're very encouraged by the progress we've been making in this recovery quarter over quarter in terms of operating profit margin. And what I'd say is how we're going to get there to your question is certainly GP margin is going to be part of the equation. I think what we saw this quarter was good GP margin development. Perm came back very, very strongly this quarter. You can see the impact That that had in our GP margins. And I would say the permanent hiring market is very, very strong in our largest markets right now. So we talked about Italy, we talked about the U. S, the UK is coming back and narrowing that gap to pre pandemic levels. So GP margin mix is going to be part of the equation. You mentioned solutions and Experis. That is definitely part of our roadmap to improve the contribution from those businesses. And this quarter was a great example of the opportunity there. So both Talent Solutions and Experis growing very, very strongly. And that trend, we expect that trend to continue into the Q3 as well. So improving From those businesses going forward will definitely help. And to your point on convenience, so we have the large enterprise, which Definitely from a mix shift was part of what we saw in 2020, became a bigger part. In the convenience market, Which is higher margin is coming back and we saw that start to happen in the U. S. The U. S. Had very, very good GP margin improvement during the quarter. And we expect convenience to continue to come back. And I think that's there's more to go in that regard and that's Going to help us be an additional tailwind in improving our staffing margin going forward as well. So I think all of those factors are going to be issues that are going to are going to be initiatives that are going to help us increase GP margin. And along the same time, we've talked to a great extent about the technology investments we're making. Those technology investments Our increasing our recruiter productivity, that's going to help our GP margin as well and that's going to help our overall SG and A efficiency. So that Along with our other cost transformation initiatives, which we've talked about in the past in terms of our back office initiatives and other items, All of those are going to be part of the mix to continue to improve our operating profit margin progressively going forward. Great. Thank you. And then just my follow-up is on the bill pay rates. Could you walk us through maybe what you're seeing right now On those bill pay rates across your portfolio, maybe you can talk us through how you're thinking about labor inflation and the impact on your business? And then maybe just As supply comes back into the market, how that labor inflation and maybe the timing of what you're expecting on that normalizing? Well, as a starting point, Mario, wage inflation is generally good for our business as We're able to increase our bill rates in line with at least that wage inflation. And we are seeing some good Pay bill gap expansion in a number of markets, notably the U. S. And Japan. And we are seeing, especially for a number of Manpower skill sets, some very strong wage inflation Right. Now, as I'm sure you've also seen, a lot of the efforts from employers to attract and retain their employees Also come not only with wage increases, but also one time bonuses, be they referral, retention And those kinds that are of a one time nature, so that wage inflation doesn't get out of hand. Because employers are very well versed on what it is that they can pay to be competitive in the market. And whilst we are seeing a spike a little bit in some of those wages, in some of the skill sets over time, We think that wage inflation will moderate and more accurately reflect then also of an improved supply into The labor market as the lingering effects of the pandemic and the stimulus initiatives Start to wear off and you get a little bit more of a normalized labor market dynamic. So we are seeing Slightly higher wage inflation in particular for some Manpower skills, but we feel that this will get adjusted over time to a more normalized level There as well. Great. Thank you. Thank you. And the next question is from the line of Mark Marcon of Baird. Your line is now open. Hey, good morning, Jonas and Jack. I've got a few different questions. 1, Jonas, you made some fairly positive comments with regards to France from a longer term perspective. Wondering if you can just discuss Some of the things that are giving you reason for optimism with regards to just France becoming more competitive in general. Thanks, Mark. Yes, no, I think we've been very positive on France for a while. If you recall the structural reforms that A positive effect, but the overriding ambition of France and the French administration is to make France more competitive in a global economy, and that means lowering tax rates, making sure their labor costs are in line with their closest competitors in Europe and globally, And directing investments into areas that they believe are fast growing parts of the economy. So having had the opportunity Spent some time with President Macron and his government along with other global leaders, a few weeks ago in France, It is a program that they also intend to promote going forward and that we believe is a very positive sign. We think they have further opportunities in a number of areas to address labor markets, making them even more competitive, As well as further investments in infrastructure and specific sectors and all of this taken together gives us a great deal of optimism as it Relates to France's role and the opportunities that we will have as ManpowerGroup in France to see our business continue to grow. Great. And then can you talk a little bit about what you're seeing in the U. K. On a monthly or weekly basis? Obviously, they're further along in terms Of the new wave with regards to Delta and the impact there in Yes, Mark, this is Jack. I'd be happy to talk to that. So I would say the UK has actually been Performing very, very well, despite the issues with the Delta variant that we've seen Start to increase more recently. And if I look at that trend, I think the year over year monthly trends Aren't overly helpful because of the prior year was really the depth of the pandemic. But what I would say, when you compare to 20 The UK has actually been above 2019 levels, in both the Q1 and the second quarter, And we expect that to continue. And the UK has actually won some significant new business as well, which is great. So I would say it hasn't really been a big factor in our business in the UK. And the outlook continues To look very strong in terms of demand from our customers in the UK. I did mention perm and the UK made some good progress in Term recruitment in the 2nd quarter as well, still not quite back to pre pandemic, but definitely narrowing the gap quite significantly. So I'd On an overall basis, the UK business has actually been performing very well despite the recent increases in the Delta variant. Great. And then last question is just with regards to gross margins, I mean really nice improvement Here in the Q2, it's been a few years since we've achieved this level. And I know we had the 20 basis point improvement From the accruals in France in terms of the reversal. But when I take a look at the performance and then I take a look at the mid Point of the guidance for the Q3, is that conservatism or is it perhaps mix in terms of maybe places like France Becoming a little bit bigger of a part of the mix or how should we think about the guidance for gross margins for the Q3 relative to the Q2? Yes. No, good question, Mark. What I would say, it's generally in line with what we're seeing on an underlying basis Currently, so to your point, 16.3 percent in Q2, take out the accrual adjustment that we called out for 20 basis So on an underlying basis, 16.1%, we're guiding to 16.0% next quarter. That 10 basis points It's largely a bit of a mix. Remember in the Q3, we do have the holiday impact in some of our European countries that put a little pressure Sure, on our bench as a result of that. So we it's not uncommon to see a little bit of pressure From the Q2 to the Q3 in those markets. But on an overall basis, I'd say, generally in line and still we expect Good underlying positive momentum on staffing margin going into the next quarter. Great. Thank you. Thank you. And the next question is from the line of Kevin McVeigh of Credit Suisse. Your line is now open. Great, thanks. Hey, I guess in regard to kind of where we are in the cycle, I guess Jack or Jonas, obviously you've done a much better Job with margins this cycle. Is there any way to think about how we should think about just longer term the impact on margins as we transition through the next Up cycle, I mean, you were able to hold on to a lot more of the margin in this downturn as opposed to prior cycles. So how should we think about that As we're working our way through this upturn. Thanks, Kevin. So I'd say this is a bit related The previous discussion I think we've had in terms of our margin target and to your point and a bit related to our views on the cycle In terms of the economic recovery and the opportunity going forward. So I would say, we're very pleased By the margin progression that we've seen over the last few quarters, I think if you think about the opportunity to continue that, I think Perm, very, very strong this quarter. We actually are back to 2019 levels in perm organically, Which is great to see. So very strong. The perm contribution to margin is significant and That is going to be an opportunity for us as we go forward. And we've been investing in that. We've been investing in perm consultants in some of our key markets and we're starting to see Really good results as a result of that investment. So as we look forward, I would say our GP margin initiatives combined with the technology agenda that we've been implementing and as Jonas mentioned, we're making Very, very good progress on the technology agenda. We've been implementing at speed, on plan, and those are all Proceeding very, very well. So when we get to the end of this year, we'll really be down to just a handful of markets that don't that will be implementing the new on office system and we'll be very, very well positioned to continue to see the improvement from that recruiter efficiency going forward. So I would say, We're very optimistic about the opportunity to march to that EBITDA margin target and one step at a time. Once we get to that, we'll talk more about what's next. But I think, as Jonas said earlier, we look at this economic Recovery as having some real legs and some real momentum, particularly in the manufacturing sector that we've talked a lot about that Really impacted our business quite significantly in the second half of twenty eighteen and twenty nineteen. And we think that that's going to have a good run going forward as well. I think all of those factors give us the confidence that we have a very, very good opportunity to improve our operating profit margin Over the medium term here. That helps. And then Jack, any thought as to kind of length of assignments, just given the tightness of supplier people Keeping candidates on assignment a little bit longer, just anything you call out in terms of client conversations around tone Just as we're thinking about near term trends. I'd say, Kevin, that the clients and us Very focused on keeping our associates on assignment, but as you can imagine, it's a very tight labor market. So the competition for talent is high. So we probably see more churn than we would normally do. But on the other hand, we've been able to Manage it well and this is our business and we know how to recruit and attract and retain people. So I think it is It depends, of course, on where you are in the world. But overall, it is a tight supply market from a Workforce perspective, but we are managing to mitigate those impacts reasonably well, I would say. Super. Thank you. Thank you. And the next question is from the line of Tobey Sommer of Truist Securities. Your line is now open. Hey, good morning. This is Jasper Bibb on for Toby. I wanted to follow-up on margin guidance and where the company is in the process of bringing Back SG and A, like should we be looking for more SG and A in the 4th quarter or is 3Q guidance pretty close to what the cost base can look like there going forward? Jasper, this is Jack. So I would say what you've seen us During the pandemic, we took costs down very sharply to manage our recovery ratio, And we did that very well. And now in the recovery, we've been investing in that growth. And so when I look back at the Q1, our FTEs We're still down year over year about 3%. On average, in the second quarter, when we compare the second quarter The Q1 were up about 3% in FTEs. And I would expect as demand continues to improve and we continue to You should expect that we will be continuing to invest in that. I think the key will be that we're managing that very carefully. So during the pandemic, we talked a lot about the recovery ratio. Now it's all about GP flow through. So that incremental GP Year over year, we're seeing a good amount of that fall down to the bottom line. And so we will continue To invest, but we'll do that carefully to ensure that we continue to get good GP flow through going forward. So you should expect That we will continue to take costs up with that increase in GP dollars coming through, but we'll do that carefully to ensure there's still good flow through down to operating profit Thanks. And then with respect to talent solutions and what's driving your new client wins there, beyond like a Rebound, do you think more clients are looking to adopt solutions like RPO or MSP as they rethink their cost structures, talent management programs, etcetera, Post COVID. Talking to our clients, Jasper, they are clearly indicating that, yes, right now, they have a significant need, But this sudden onset of the pandemic also reminded them of the need to have flexibility both ramping down and ramping up. So we really see this as another impetus for market penetration in terms of human capital outsourcing solutions such as our RPO offerings and our MSP offerings under the Talend Solutions brand. So We've been very encouraged by the progress and based on those offerings and Talent Solutions as a whole is now above 2019 levels because of the strong resurgence of RPO and the continued very strong progress of our MSP offerings. So we think that this is certainly benefiting from the cyclical rebound, but in terms of the new Client wins we had and that we talked about in prior quarters that were of scale during the pandemic and our current pipeline, we Very good about the progress that we've made and the outlook for talent solutions going forward as well. Thank you. And the next question is from the line of Gary Bisbee of Bank of America Securities. Your line is now open. Hey, guys. Good morning. So the first question, it's interesting that Italy and I think you just said the U. K. Are ahead of 2019, a few markets, it looks like in other Americas clearly ahead, but yet a lot of markets are well behind. Is that just market factors or in sort of what are the key Variables determining how quickly the business has come back versus 2019 and what are the Gating factors, if any, to some of those trending more like the ones that are already ahead? The starting point is probably the depth and the degree to which they were hit during the pandemic. So as Jack noted earlier, France It's making its way back to 2019 levels, but also their hit and how deep they went is, From our industry perspective, the steepest decline of all countries globally. So the starting point What are the strengths of various sectors compared to others? And what was the severity of the lockdowns and how much was business impacted and how quickly were Those lockdowns released. And then finally, what is the confidence and the speed around the vaccination rates? And those are the things that combined Make certain markets recover a little bit quicker, but I would say the most important aspect of this is how deep did the market drop initially And then how quickly are they able to make their way back? That would sort of be on average the reason why you see some disparity. But Having said all of that, as we noted in our prepared remarks, the recovery is broad based across markets and industries, manufacturing and services. So, it is that is a common factor across all of the markets where we operate and the speed of the recovery against 2019 depends a bit on those factors I mentioned. Okay, great. And then there's been a lot of press Reports around workers shifting from some industries to others, for example, maybe people not wanting to go back into hospitality jobs, But having moved to other industries where there's been more hiring during the pandemic, are you seeing that in countries out Side of the U. S. Where I think it's been discussed a lot. And what are the implications, if any, for your business from sort of shifts in the type of work that workers 1st of all, I'd say that the labor market dynamics in the U. S. Are probably a little bit unique. It is a Highly dynamic, very open labor market where we have a significant level of churn even in a normal Year and certainly post pandemic or within still the ending parts hopefully of the pandemic, it's still labor market that's with some anomalies related to that pandemic. So the fact that people are moving between industries, although It may be at somewhat of an accelerated pace right now, really as a hallmark of the U. S. Labor market as a whole. And to a much To lesser degree, this is a phenomenon that we see in other markets. Overall, I think our task What we are very good at is finding skilled workers for specific industries and meeting the needs of Those workers as matching those with the demand from the employers. And we have as one of our hallmarks to Try and understand what skill sets are applicable not only to one specific industry, but to multiple industries So that we can provide opportunities to workers. So at this point, what is impacting our ability Or rather what is impacting us in the U. S, as we mentioned in our prepared remarks, has to do with supply, not the over the coming quarters. But this movement between industries is frankly quite logical. That workers will do everything they can to try and find gainful employment in another industry where their skill sets are applicable and that's what you're seeing happening now. I don't think this is going to impair the ability for the hospitality industry over the long term to attract workers. Certainly, they will adjust their hiring practices and offer better pay and conditions as they need to compete in the market for talent. But once they've done that, they will Start to normalize that flow as the remaining and lingering effects of the pandemic start to decrease. I would just add, Gary, we did include our industry vertical update as an appendix to our earnings slides. And as we show, we don't have Significant exposure to the hospitality industry. So if that trend does persist that you mentioned, that could be an opportunity from A worker supply side into some of the sectors that we are strong in. Thank you. That's helpful. Thank you. And the next question is from the line of Manav Patnaik of Barclays. Please go ahead with your question. Thank you. I just had one quick question for you guys and that is, obviously, you said your guidance doesn't assume any future lock But it sounds like maybe the delta variant will cause some of that. So I was just curious, compared Since we've been through this for a year and a half or so, how are you guys preparing for potential lockdown and maybe What are your clients saying? Just trying to gauge what the impact could be. I presume it would be less than what we saw last year, but just The lockdowns. But what we saw in the second quarter and frankly, for a large part of the Pandemic excluding the initial lockdowns, governments really focused on reducing social interactions to the greatest degree possible by allowing work to continue to the greatest degree possible. So we think that there will be exactly the same objective going forward. And I think the latest lockdowns that you're seeing, for instance, occurring in France Are making a clear distinction between those that are vaccinated in terms of how the lockdowns affect them, Which is not very much, if at all, and those that are unvaccinated, which are the ones that unfortunately are the most impacted by the surge In delta variance. And that is certainly true in Europe. And as far as other countries and other parts of the world With the lower vaccination rates, Latin America is making its way through this pandemic and managing to keep their economic growth Going and improving. And the Asia Pac is now seeing some resurgence. And of course, their strategy has been to isolate Close their countries. But for the most part, when we look at Japan, it's had maybe 3 or 4 State of emergencies, they have focused on maintaining their ability to go to work and reduce the social interaction. In summary, we would expect that governments would apply exactly the same principle of reducing social interactions in the areas where Infections occur and focus on incentivizing increased vaccination rates. And that is why at this point, We don't expect any material impact of lockdowns. Clearly, as we mentioned, that can change. But if Governments navigate this as they have in the past during more difficult times with no vaccination available. We expect this to be managed In exactly the same way and therefore at this point not expecting material impact. All right. Thank you. Thank you. And our final question came from the line of George Tong of Goldman Sachs, your line is now open. Hi, thanks. Good morning. I just wanted to follow-up on that last question on the impact Lockdowns, again, your guidance assumes no material additional lockdowns or business restrictions beyond those that exist today. Can you describe which of your markets are seeing the most restrictions currently? Obviously, things are in flux right now. You talked about the UK and France and in parts of Asia. And I guess, even though your guidance assumes no material impact from the Delta variant, how would you frame the downside risks In terms of potential impact? George, as I mentioned in my previous response, Clearly, first of all, this can change. But if the past is a guide to what we can Think of what governments would do, they will want to continue to keep the economic growth engine going And minimize the impact of any restrictions to the greatest degree possible, certainly to economic growth and To their populations as well. So what's different compared to the prior lockdowns, and of course, all of the progress that you've seen over the quarters here over the last four quarters really has been under quite Severe lockdowns that have progressively been eased, but really majorly only been eased over the last Quarter or so and frankly in the last part of the second quarter in many countries, we've shown an ability to adapt to those Restrictions and still be able to serve our customers and meet the increased demand for flexibility and strategic and So it's very hard to predict, of course, What this resurgence would do, but we think the stance of governments will be very similar, if not even more focused on trying to keep The engine going, trying to motivate their people to get vaccinated. And that in combination is why we are, at this point, Believing that there won't be a major impact, but as I mentioned, this can change, but based on what we are seeing today, That appears to be the case. Got it. And then lastly, can you discuss the competitive environment and if you've seen any changes in market shares Your key geographies as economies begin to recover? We're really seeing Traditional dynamic in terms of a recovery, albeit maybe somewhat different in terms of the speed of Certain of our services and solutions, as Jack mentioned, are permanent placement activity is actually above 2019, and normally Permanent placement and permanent recruitment is a bit of a lagging offering in a traditional recovery, but in this case, it's actually been Synced with and in some cases even ahead of the temporary staffing recovery. So we think the dynamics overall Are very similar to traditional recovery, maybe on somewhat faster speed. And in terms of the market, it remains very competitive, But also rational and is not really there's really nothing I'd call out that is different From what we've talked about in prior quarters. Thank you. And that brings us to the end of our Q2 earnings call. We look forward to speaking with you again on our 3rd Quarter earnings call and very importantly for today, go Bucks. Thanks everyone. Have a great rest of the week. Thank you. And that concludes today's conference. Thank you all for participating. You may now disconnect.