ManpowerGroup - Q3 2023

Transcript

Operator (participant)

Welcome to ManpowerGroup's Q3 Earnings Results Conference Call. You'll be put in listen-only mode until the question and answer time begins. This call is being recorded. If you care to drop off now, please do so. I would like to turn the call over to ManpowerGroup's Chairman and CEO, Mr. Jonas Prising. Sir, you may begin.

Jonas Prising (Chairman & CEO)

Welcome to the Q3 conference call for 2023. Our Chief Financial Officer, Jack McGinnis, is with me today. For your convenience, we have included our prepared remarks within the Investor Relations sections of our website at ManpowerGroup.com. I will start by going through some of the highlights of the quarter, then Jack will go through the Q3 results and guidance for the Q4 of 2023. I'll then share some concluding thoughts before we start our Q&A session. Jack will now cover the safe harbor language.

Jack McGinnis (CFO)

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.

Jonas Prising (Chairman & CEO)

Thanks, Jack. I'd like to open by sharing our sadness at the devastating terrorist attacks on Israel and the unfolding conflict. ManpowerGroup has operated in Israel for over 60 years. I've just spoken with our Israeli colleagues this morning to express our heartfelt support and thank them for working tirelessly to help those impacted and still run the day-to-day operations. Amid the suffering that is ongoing, I am in awe of their resilience and dedication to take care of each other, their families, our clients, and associates during these extremely challenging times. Turning to the broader environment, in recent weeks, I've spent time with our teams and clients in Europe and North America. The topic at the forefront of my discussions with clients and business leaders is the global economic outlook.

How things are looking now, how they may evolve, and how this is impacting labor markets and their hiring plans. Many echo a sentiment of manageable headwinds in the short term, yet confirm their limited visibility on how this will evolve is resulting in increasing cost reduction initiatives, hiring slowdowns, and project start postponements. This sentiment tracks with the trends and data we see as well. Last quarter, we shared that broader economic pressures were building, particularly in North America and Europe. Over the last two months, we have seen these pressures increase, with declining outputs in global manufacturing, slowing activity in services, and subdued hiring across some industries as companies pause new hiring and spending following a period of bullish hiring and investment post-pandemic.

Just last week, I joined many global CEOs across every sector for the Conference Board Business Council meeting in Denver, where most reported reduced optimism compared to three months ago, and the general consensus was that economic slowing will continue in the short term. Yet there are bright spots. Business environment in Latin America and Asia-Pac remain solid. Even in the regions most impacted by economic slowing, North America and Europe, consumer spending is holding, employment rates are strong, and workers continue to earn more and move up, and core inflation is easing, albeit slowly. In this uneven and uncertain environment, we saw organizations act the way they have done in past periods of increased uncertainty and economic headwinds, holding on to their existing permanent workforce and pulling back on staffing and permanent recruitment services in North America and Europe. Moving on to our financial results.

In the Q3, revenue was $4.7 billion, down 5% year-over-year in constant currency. Our reported EBITDA for the quarter was $78 million. Adjusting for restructuring, Argentina hyperinflationary foreign exchange charges, and a small loss on sale, EBITDA was $117 million, representing a 36% decrease in constant currency year-over-year. Reported EBITDA margin was 1.7%, and adjusted EBITDA margin was 2.5%. Earnings per diluted share was $0.60 on a reported basis and $1.38 on an adjusted basis. Adjusted earnings per share were down 39% year-over-year in constant currency. Although the timing of a recovery is always hard to predict, decades of experience tell us that we must adjust to the existing reality while being ready to pivot quickly when the situation improves.

Our industry is at the leading edge, and by this we mean it is often the first to feel the impact going into an economic downturn and the first to benefit from improving outlooks on the other side. Though today we are clearly in a slowing environment, labor markets overall are holding steady, and transformation agendas continue, though at a more moderate pace. Companies are reluctant to reduce their workforce or pause on initiatives to upskill and develop their people, and we see this evidenced in the demand for Experis Academy and Manpower MyPath offerings, which help people learn in-demand skills at scale and speed. In uncertain times, people and companies need trusted partners to show them a path to navigate the uncertainty....

Our value proposition to clients and candidates has never been more relevant, and our business model helps them absorb some of the pressures they are feeling today and prepare to accelerate out of the downturn once the economic recovery begins again. Employers value the insight and data-led guidance on developing and executing an agile workforce strategy. We remain confident that our clear plan to profitably grow the business by diversifying, digitizing, and innovating is how we help our clients and candidates prepare for the future and be competitive for the long term, while managing the headwinds today. With that, over to Jack to take you through the financials.

Jack McGinnis (CFO)

Thanks, Jonas. Revenues in the Q3 came in at the midpoint of our constant currency guidance range. Gross profit margin came in above our guidance range. As adjusted, EBITDA was $117 million, representing a 36% decrease in constant currency compared to the prior year period. As adjusted, EBITDA margin was 2.5% and came in at the midpoint of our guidance range, representing 120 basis points of decline year-over-year. During the quarter, year-over-year foreign currency movements had an impact on our results. Foreign currency translation drove about a 3% favorable impact to the U.S. dollar reported revenue trend compared to the constant currency decrease of 5%. Organic days adjusted revenue decreased 4% in the quarter. Turning to the EPS bridge.

Reported earnings per share was $0.60 and included $0.78 of charges related to restructuring, a non-cash foreign currency loss related to the translation of our hyperinflationary Argentina business, and a small loss on sale of our Philippines business. Argentina is required to be treated as a hyperinflationary economy, and the non-cash currency translation losses reflect the devaluation of the Argentine Peso during the quarter. This is a non-cash accounting charge, as our Argentina business operates in their local currency. Excluding these charges, adjusted EPS was $1.38.

Walking from our guidance midpoint, our results included a slightly better operational performance of $0.01, a lower weighted average share count due to repurchases in the quarter, which had a positive impact of $0.01, a lower effective tax rate, which had a positive impact of $0.02, a foreign currency impact that was $0.04 worse than our guidance, due to the weakening of the euro and the pound during the second half of the quarter, and interest and other expenses, which had a positive $0.01 impact. Next, let's review our revenue by business line. Year-over-year, on an organic constant currency basis, the Manpower brand reported a revenue decline of 3%. The Experis brand declined by 10%, and Talent Solutions brand declined by 14%. The Experis decline represented lower activity from both enterprise and convenience customer segments.

Demand from enterprise technology clients continued to be weak. Within Talent Solutions, we saw a significant year-over-year revenue decline in RPO, as well as an expected sequential softening of activity from the Q2. Our MSP business saw revenue declines in the quarter as we reduced certain lower margin activity, while Right Management experienced significant year-over-year revenue growth on higher outplacement volumes in the quarter, with revenue levels fairly steady from the Q2. Looking at our gross profit margin in detail, our gross margin came in at 17.6%. Staffing margin contributed to a 10 basis point reduction due to mix shifts as pricing remained strong. Permanent recruitment, including Talent Solutions RPO, contributed a 70 basis point GP margin reduction as permanent hiring demand continued to soften.

Right Management career transition within Talent Solutions contributed 30 basis points of improvement, as outplacement activity reflected strong year-over-year growth, with gross profit steady from the Q2 level. Other items resulted in a 20 basis points margin decrease. Moving on to the gross profit by business line. During the quarter, Manpower brand comprised 59% of gross profit. Our Experis professional business comprised 25%, and Talent Solutions comprised 16%. During the quarter, our consolidated gross profit decreased 9% on an organic constant-currency basis year-over-year. Our Manpower brand reported an organic gross profit decrease of 5% in constant-currency year-over-year. Organic gross profit in our Experis brand decreased 14% in constant-currency year-over-year. Permanent recruitment and other services within Experis drove the higher rate of overall GP decrease for the brand.

Organic gross profit in Talent Solutions decreased 15% in constant currency year-over-year. This was mainly driven by declines in RPO, as permanent recruitment continued to weaken during the quarter. This was partially offset by Right Management on increased outplacement activity. MSP experienced a very slight decrease in gross profit in the quarter. Reported SG&A expense in the quarter was $752 million. Excluding restructuring costs, SG&A decreased 2.2% year-over-year on an organic constant currency basis, representing a sequential decrease from the flat level in the Q2 on the same basis. This reflects significant cost actions during the quarter, resulting in a quarterly headcount reduction of 4% sequentially, and a reduction of 7% year-over-year, which will result in further cost reductions into the Q4.

At the same time, we continue to invest in transformation programs included in corporate expense. These are strategic investments expected to drive medium and long-term productivity and efficiency enhancements across our technology and finance functions worldwide. The underlying SG&A decreases largely consisted of operational costs of $16 million, offset by currency changes of $19 million. Adjusted SG&A expenses as a percentage of revenue represented 15.3% in constant currency in the Q3, reflecting lower operational leverage on the revenue decline. Restructuring costs totaled $38 million. The Americas segment comprised 24% of consolidated revenue. Revenue in the quarter was $1.1 billion, representing a decrease of 7% compared to the prior year period on a constant currency basis. Reported OUP was $38 million and includes $6 million in restructuring costs. As adjusted, OUP was $44 million, and OUP margin was 4%.

The majority of the restructuring costs related to North America, with the balance recorded in Latin America. The U.S. is the largest country in the Americas segment, comprising 68% of segment revenues. Revenue in the U.S. was $753 million during the quarter, representing a 14% days adjusted decrease compared to the prior year. As adjusted to exclude restructuring costs, OUP for our U.S. business was $29 million in the quarter, representing a decrease of 52% from the prior year. As adjusted, OUP margin was 3.8%. Within the U.S., the Manpower brand comprised 25% of gross profit during the quarter. Revenue for the Manpower brand in the U.S. decreased 16% on a days adjusted basis during the quarter, representing an improvement from the 19% decrease in the Q2.

The Experis brand in the U.S. comprised 46% of gross profit in the quarter. Within Experis in the U.S., IT Skills comprised approximately 90% of revenues. On a days adjusted basis, Experis U.S. revenue decreased 15% as we anniversaried significant 2022 organic growth of 16%. As referenced earlier, the year-ago period reflected significant growth from enterprise clients who have had weak demand in the current year. Talent Solutions in the U.S. contributed 29% to gross profit and experienced revenue decline of 18% in the quarter. This was driven by a decrease in RPO revenues in the U.S. as permanent hiring programs continued at lower levels in the Q3. The U.S. MSP business saw revenue decline as we reduced some lower margin activity, while outplacement activity within our Right Management business drove strong revenue increases.

In the U.S., RPO, MSP, and Right Management all experienced relatively steady revenue levels from the Q2. In the Q4 of 2023, for our U.S. businesses overall, we expect a slightly improved rate of year-over-year decline in revenues as compared to the Q3. Southern Europe revenue comprised 45% of consolidated revenue in the quarter. Revenue in Southern Europe came in at $2.1 billion, representing a 3% decrease in organic constant currency. Reported OUP was $84 million and includes $4 million of restructuring costs. As adjusted, OUP was $88 million, and OUP margin was 4.2%. The majority of the restructuring charges related to reductions in the Southern Europe regional head office team.

France revenue comprised 57% of the Southern Europe segment, and revenue equaled EUR 1.2 billion in the quarter, down 2% on a days adjusted constant currency basis. After adjusting for modest restructuring charges, adjusted OUP for our France business was EUR 49 million in the quarter, representing a decrease of 20% in constant currency. Adjusted OUP margin was 4%. We are estimating the year-over-year constant currency revenue trend in the Q4 for France to represent a modest further decline from the Q3 trend based on October activity to date. Revenue in Italy equaled EUR 414 million in the quarter and was down 2% on a days adjusted constant currency basis. OUP equaled EUR 27 million and OUP margin was 6.5%. We expect a similar rate of constant currency revenue decline in the Q4 compared to the Q3.

Our Northern Europe segment comprised 19% of consolidated revenue in the quarter. Revenue of $914 million represented a 10% decline in constant currency. After excluding restructuring costs of $28 million, adjusted OUP was -$3 million, and OUP margin was -0.4%. The restructuring charges represented $15 million in Germany, largely related to head office rightsizing and related activities in view of the ongoing Proservia wind down. $7 million in the Nordics, mainly related to workforce optimization within the businesses, and modest additional charges in the U.K., the Netherlands and Belgium. Our largest market in Northern Europe segment is the U.K., which represented 35% of segment revenues in the quarter. During the quarter, U.K. revenues decreased 15% on a days adjusted constant currency basis.

This reflects an additional decline from the 12% decrease in the Q2 on the same basis. We expect a similar rate of constant currency revenue decline in the Q4 compared to the Q3. In Germany, revenues increased 4% in days adjusted constant currency in the quarter, representing 3 consecutive quarters of growth driven by our Manpower business, particularly due to the strength in the automotive sector. The previously announced wind down of our Proservia managed service business in Germany is advancing with significant progress with the works councils and impacted clients during the quarter. We are tracking to conclude all wind down related actions by the end of the year, with some remaining transition activity concluding through the H1 of 2024, which we will carve out separately.

We anticipate additional restructuring charges related to the wind down in the Q4 and will provide a further update when we announce our Q4 earnings. Proservia business has been a significant drag on our Germany operations, and the completion of the wind down activity will improve profitability going forward. Overall, in the Q4, we are expecting a slightly lower rate of constant currency revenue growth compared to the Q3 trend. In the Netherlands, revenue decreased 5% on a days-adjusted constant currency basis, and this represented a slightly improved rate of decline from the Q2 on the same basis. The Asia Pacific Middle East segment comprises 12% of total company revenue. In the quarter, revenue was down 2% in constant currency to $565 million.

After excluding modest restructuring costs related to our Australia business, adjusted OUP was $25 million, and OUP margin was 4.4%. The largest market in the APME segment is Japan, which represented 49% of segment revenues in the quarter. Revenue in Japan grew 10% in days-adjusted constant currency. We remain very pleased with the consistent performance of our Japan business, and we expect continued strong revenue growth in the Q4. We also completed the sale of our Philippines business during the quarter, which transitions into a Manpower franchise going forward. I'll now turn to cash flow and balance sheet. In the Q3, free cash flow represented $245 million, compared to $254 million in the prior year. At the end of the Q3, days sales outstanding were flat at 59 days.

During the Q3, capital expenditures represented $21 million. During the Q3, we repurchased 636,000 shares of stock for $50 million. As of September 30th, we have 293,000 shares remaining for repurchase under the share program approved in August 2021, and an additional 5 million shares remaining for repurchase under the share program approved in August 2023. Our balance sheet ended the quarter with cash of $571 million and total debt of $962 million. Net debt equaled $391 million at quarter end. Our debt ratios at quarter end reflect total adjusted gross debt to trailing twelve months adjusted EBITDA of 1.41, and total debt to total capitalization at 29%. Our debt and credit facilities remained unchanged during the quarter.

Next, I'll review our outlook for the Q4 of 2023. Based on trends in the Q3 and October activity to date, our forecast is cautious and anticipates that the Q4 will continue to be challenging, with further declines in our Manpower businesses in Europe. Our forecast also anticipates a significant reduction in activity in our Israel business due to the current conflict. Our forecast also anticipates ongoing slowing of permanent recruitment activity and further offsets by cost actions being taken. We are forecasting underlying earnings per share for the Q4 to be in the range of $1.17-$1.27, which includes an unfavorable foreign currency impact of $0.01 per share. We have disclosed our foreign currency translation rate estimates at the bottom of the guidance slide.

Our constant currency revenue guidance range is between a decrease of 4% and 8%, and at the midpoint represents a 6% decrease. The impact of net dispositions and less working days contributes to an organic days adjusted constant currency revenue trend of about a 5.5% decrease at the midpoint. This represents an additional 1% decrease from the Q3 trend, ignoring rounding on the same basis. We expect our EBITDA margin during the Q4 to be down 110 basis points at the midpoint compared to the prior year. We estimate that the effective tax rate for the Q4 will be 32.5%, which reflects the mix effect of lower earnings from lower tax geographies in the current environment, with minimal expected offsetting tax items.

Compared to our previous estimate of a 30% tax rate before the worsening conditions, this update represents a 5% reduction in our Q4 EPS. When business in our lower rate geographies begin to improve, the tax rate will begin to return to the lower rates. As we consider other tax-related matters for 2024, I wanted to provide a brief update on the reduction of the French business tax, known as CVAE, based on recent developments. Previously, the French government had announced their intention to fully abolish the remaining component of the French business tax in 2024. The preliminary French budget was publicized in late September and instead announced that the remaining component of the French business tax would now be abolished on a pro-rata basis over the next four years.

As a result, the additional 1.5% improvement in our global effective tax rate from the abolishment of the CVAE will be spread over the next four years, with an anticipated reduction of about 35 basis points in 2024. We will continue to monitor any developments on the France budget, as is reviewed by the Parliament through year-end. As usual, our guidance does not incorporate restructuring charges or additional share repurchases, and we estimate our weighted average shares to be 49.9 million. As I mentioned, we do expect to have additional restructuring charges associated with the wind down of our Proservia managed service business in Germany, and we will disclose those and any additional restructuring charges separately when we report our Q4 earnings.

Our guidance also does not include the impact of the non-cash currency translation adjustment for our hyperinflationary Argentina business, and we will also report that separately. I will now turn it back to Jonas.

Jonas Prising (Chairman & CEO)

Thanks, Jack. On our last call, I shared that we're adapting to the current market environment and will not shy away from taking decisive actions that deliver on our strategy to simplify our operations and maximize return on our investments. In the Q3, we continued to execute against this plan. Our experienced leadership team is using a fine-point pen versus a broad brush to manage costs and invest for growth. And we're confident that our actions will preserve margin in the current environment, ready for the rebound when it occurs, and be more efficient in the long term. We have been executing a transformation agenda in support of our diversification, digitization, and innovation strategy for several years. We're now doubling down on centralized systems and global standardized processes to drive economic benefit across our finance and global technology functions.

By leveraging leading global platforms and driving their adoption, we will enable country teams to focus on strategic and operational decision making, so we can execute in the market at speed and increase market share. We're excited about the opportunity to leverage our global IT and finance infrastructure to automate non-value-added tasks, to drive recruiter productivity, and generate valuable client and candidate insights. Our diversification plan is how we accelerate growth of higher margin business across all our brands. For Manpower, this means building loyalty with skilled candidates, so we can deliver best-in-class talent in both permanent and temporary staffing in labor markets we believe will structurally be more constrained due to demographics and shifting skills needs. Our own research and data tell us that people want to work for companies they trust and believe in, and who will guide them to move up and earn more.

I am delighted that our new Manpower campaign, Human Power, launches in many of our key markets this week, strengthening our positioning for candidates as an employer of choice with the data, expertise, and talent, and teams to guide them to achieve their potential as they progress their career journey. Our message to workers is clear: Manpower values you, we are committed to your development, and we are by your side to build your skills and offer great career opportunities. This campaign is just one example of our role in preparing people for a future of work, and one that is also more green and more digital. Global green energy transition creates demand for millions of skilled workers to fill new roles in renewable energy, electrification, battery technology, hydrogen, and more.

We are committed to preparing people for these new opportunities, and recently announced our partnership with InnoEnergy and the European Battery Alliance to upskill as many as 800,000 workers for jobs in the green battery value chain by 2025. Our reputation as strategic partners to guide companies through transformation is recognized by industry analysts, too. Experis has been named a leader and star performer in Everest Group's PEAK Matrix assessment of U.S. contingent staffing services, scoring highly for its AI-enabled capabilities in IT staffing, project solutions, and managed services. Our Manpower brand has been recognized in the U.K. as a leader in contingent talent and strategic solutions, scoring highly for its strong emphasis on associate experience and investment in upskilling and reskilling services, including our MyPath program, Associate Academies, and candidate-facing mobile app.

Employers now understand that there's no path to growth without people, and the ability to hire, train, and develop human capital is critical to success on every time horizon. I'd like to close by thanking our teams around the world for their engagement and contributions, which is how we're able to consistently deliver to our clients, our people, our partners, and our communities. I'd now like to open the line for Q&A. Operator?

Operator (participant)

Thank you. If you'd like to ask a question, please press star one, one. If your question has been answered and you'd like to remove yourself from the queue, please press star one, one again. Our first question comes from Mark Marcon with Baird. Your line is open.

Mark Marcon (Senior Research Analyst, Managing Director)

Good morning, Jonas and Jack. Appreciate the opportunity to ask some questions. A couple of really quick number questions, and then one philosophical question. With regards to the exit rates in the U.S., France, and Italy, can you give us an update in terms of where the exit rates were for each of those three major markets as we exited the quarter?

Jack McGinnis (CFO)

Sure, Mark, I'd be happy to start with that. So as we look at the U.S., and we exited the quarter, I'd say it was slightly better than the full quarter rate on an overall basis, on a Days Adjusted basis. So, you know, when you look at the total for the quarter overall for the U.S. at the minus 14 Days Adjusted, I'd say slightly better in September, and as we guided to the Q4, we did expect stable to slightly better, and that's, that's kind of what we're seeing into the Q4. I think the other thing to remember is, there was a significant drop-off from the Q3 to the Q4 in the year-ago period, so that's part of the consideration.

If I move to France, I would say, we ended the quarter at about -3% in the month on a Days-Adjusted basis in the month of September, and you can see that comparing to the -2% for the quarter overall. I think, you know, the Prism data certainly came out during, you know, for the industry data, and I'd say that showed that August was a bit steeper in terms of the decrease, and that improved slightly into September. But I guess, more relevant to our guidance for Q4, we did indicate that we did see some additional softening into October, and that's why our guide at about -5% at the midpoint is showing some additional

decreases into the Q4 for France. And I'd say, Italy, came in at the end of the quarter, pretty similar to where they were trending. The quarter overall, on a days adjusted basis, was about -2. And I'd say they ended, the quarter at about that same minus 2 rate. And, as we look at the guide for the Q4 for Italy, we see a similar, a similar level of, Days-Adjusted revenue trend into, into the Q4. So that's a little color on the, on the large, on the three largest businesses, Mark.

Mark Marcon (Senior Research Analyst, Managing Director)

Great. Thanks, Jack. And then, Jack, you always wonder if I'm gonna ask this question, so I'll ask it this time. Perm, as a percentage of, of GP, how's that, how's that sitting right now?

Jack McGinnis (CFO)

Yeah. So, we did talk about the fact that we expected perm to continue to come off into the Q3. That was the big development during the Q2, where we saw perm step down quite a bit. And as we said, it came in as we expected, pretty much spot on with our expectations that it would step down further. That takes perm to about 16.5% of total GP, and not too far away of where we were, you'll remember, Mark, pre-pandemic, we were in that 16.2% range. So Perm, as a mix of GP, has normalized quite a bit.

Mark Marcon (Senior Research Analyst, Managing Director)

Great. And then a philosophical question. You know, wondering, Jonas, Jack, you know how, and obviously, it varies by country, and you're doing restructuring across the organization. But I'm wondering, at present levels, how much excess capacity do you have at this point? And then how do you think about, like, you know, the trends that we're seeing in the U.S. relative to, say, you know, the Atlanta Fed's GDP now, you know, projecting, like, a 5% GDP increase here in the Q3? Just, it's kind of interesting just in terms of thinking about, overall, a lot of discussion around the soft landing, and yet staffing has clearly been, you know, in a recessionary environment. And I'm just wondering how you think about that.

Jonas Prising (Chairman & CEO)

Well, Mark, good morning, and thank you. Yeah, I'm, I'm really happy I'm not an economist that has to sort of predict and explain how we could have a 5% GDP growth in the Q3. But let me tell you about our, our business and what we're seeing and how we're thinking about this. As, as you correctly point out, notwithstanding GDP growth numbers, both in Europe as well as in the U.S., which are still positive, our industry is operating under recessionary-like conditions. So we're negative here in the U.S., in Canada, across most of the European countries as well. So the way we think about managing the business at this time is, as we've mentioned in our prepared remarks, really using a fine-point pen as opposed to a broad brush.

We are maintaining our sales strength, driving for market share growth, seeing our pipelines increase in all of our brands, but seeing time to conclusion and value realization extend. We are managing to the slowing demand through our delivery capabilities, and that's what you see us adjusting in terms of how we're bringing costs down overall. Clearly, we're postponing projects that we don't think have a short-term return, so this is a pausing activity, not an elimination activity, and doubling down on transformation projects, like the one we spoke about in our prepared remarks, around centralizing finance and technology to drive greater productivity and efficiency for the organization as a whole, as well as recruiters with our global technology platforms. So that's how we're managing through it.

At this stage, clearly, there is still slack, and we plan it as such, so that we have time to bring in the people when we start to see the business stabilize, and we start to see the upturn coming on the other side, so that we have time to bring in new recruiters and meet the increased demand at that point in time.

Mark Marcon (Senior Research Analyst, Managing Director)

Great. Thank you very much.

Jonas Prising (Chairman & CEO)

Thanks, Mark.

Operator (participant)

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

Jeff Silber (Senior Analyst of Business & Industrial Services and Education)

Thanks so much. You mentioned the cost actions. I was wondering if we could just get a little bit more color where they were. And what do you need to see before saying, "That's enough cost actions," or, "We need to do more?

Jack McGinnis (CFO)

Thanks, Jeff. Yeah, I'm happy to talk to that question. So, you know, as we said, we did take significant cost actions in the Q3, and we teed that up when we released the Q2 results, that we would be leaning more heavily into that. And this is a bit of a continuation of the previous discussion we were just having. So as you look at where our businesses are seeing the most pressure, you should expect that that's where we've made some of the biggest adjustments, right? So, and to Jonas's point, we're doing that in a very careful way. We're preserving sales. We want to be well prepared on the sales activity and the opportunity to take market share when we start to see improving trends.

We're being extremely careful on the sales side, but we are, we are otherwise adjusting producers based on the existing demand. So where would that be? The U.S. is one of the biggest areas where we've made some pretty significant adjustments. We talked about being down year-over-year, 7% in our headcount. The U.S. is definitely well above that in terms of, decreases. I would say another key market, we talked about Germany, and some of the right sizing we're doing there. We'll have more to say about Proservia in the Q4, but as a result of that, we're making changes to our head office structure in Germany to adapt to, the business going forward, which will be largely a Manpower business.

We made some big adjustments in the U.K. as well, and you can see the more significant decreases in that market from the enterprise clients. Other markets where we've made some big adjustments, the Nordics. You saw in our trends, the Nordics came down quite a bit, from Q2 to Q3. So we've made some pretty significant reductions in Norway and Sweden as part of that. I'd say those are, those are the bigger ones. We continue to make adjustments in France as well, but I'd say in terms of the numbers that we're driving, the bigger decreases, those would be the markets that I would highlight.

Jeff Silber (Senior Analyst of Business & Industrial Services and Education)

Okay, that's really helpful. Maybe we can shift gears to the pricing environment, if we can talk about, you know, how both pay rates and bill rates are going, and are you seeing any pushback either from clients or maybe more competitive pressure?

Jonas Prising (Chairman & CEO)

Well, Jeff, the pricing environment remains competitive but rational, and I would say, based on the strength of the labor markets, broadly, the pricing environment remains solid. And you can see that in our staffing margins, you know, the decline that we saw of 10 basis points was really all driven by mix between various countries, not by pricing concessions. We remain very disciplined in our pricing, and, you know, the constraints on the labor markets means that the demand we have for the talent, you know, is seen as extremely valuable by our client companies. And we make sure that we are positioned in the right way, with the skill sets that we provide, so that we can maintain that pricing discipline. So overall, it is rational.

It is, of course, competitive, but it is still a solid and positive pricing environment for us.

Jeff Silber (Senior Analyst of Business & Industrial Services and Education)

Okay, thanks so much for the call.

Jonas Prising (Chairman & CEO)

Thanks, Jeff.

Operator (participant)

Thank you. Our next question comes from Josh Chan with UBS. Your line is open.

Josh Chan (Director, Equity Research Analyst)

Hi, good morning, Jonas and Jack. Thanks for taking my questions. I was wondering if you could comment on the U.S. trend. I guess, you know, your macro-oriented commentary seems, I guess, relatively subdued, but I guess the U.S. business saw a relatively improving trend in Q3, and you're forecasting another improvement into Q4. So I'm just wondering how you're thinking about the trajectory of that business and how you feel about, you know, the U.S. business from a trend perspective.

Jonas Prising (Chairman & CEO)

Yeah, thanks. It's a great question, and I'll start maybe, and then Jack can give a little bit more specificity. So stepping back from what we're seeing into the Q4, really, the change that we are observing is softening in Europe, primarily at the Manpower brand, primarily in France and some other countries, to a lesser degree, Italy. So that's the change as you look at the outlook. So from a geo perspective, as you've noted, you know, we see sequential stability in the Q3, heading into the Q4 for the U.S., and largely, that is true for all three brands. And if you step out and you look at this from a global perspective, Talent Solutions and Experis globally are sequentially stable going into the Q4, and the weakness comes in Manpower.

As I just mentioned, that weakness primarily relates to weakness in Europe. Maybe, Jack, you could give a little bit more specificity on some of the U.S. business trends.

Jack McGinnis (CFO)

Sure. Be happy to. So, Josh, I would say on the U.S. and the Manpower side, we did see slight improvement. So talking Days-Adjusted, I think let's remember the Days-Adjusted decrease for Manpower in Q2 was -19%, so quite a significant drop at that point, and that improved to -16% in the Q3. We expect that to see some slight improvement in that trend. So that being said, still a pretty difficult operating environment, right? And then on, on Experis, you know, very, very similar. So in Q2, Days Adjusted, we talked about being down -17%. That improved slightly to the -15%, Days Adjusted into Q3, and our outlook there is, you know, slight improvement into Q4.

And similar to what Jonas said, what that really means is when you consider, you know, the year ago period, we're seeing, you know, kind of stable levels of activity going into the Q4. So I would say still cautious. We are, you know, we are a bit cautious that the traditional ramp that you'd typically see in October and November may not materialize this year just based on, you know, continuation of the sluggish trends we've seen in the enterprise sector earlier in the year. But with that being said, as we anniversary the prior period, I think the rate will show some slight improvement on a year-over-year basis. And as Jonas said, I think on the Talent Solutions side, which is the biggest Talent Solutions, has the biggest impact globally in the U.S.

We saw stability in our RPO, MSP and Right Management in the U.S. from Q2 to Q3. I talked about a bit of the normalization of perm. We do expect perm to continue to come off a bit, but it won't come off at the same degree that it came off more significantly in the previous quarters. So we see a kind of stability in that at those lower levels into the Q4.

Josh Chan (Director, Equity Research Analyst)

That's, that's really good color. Thank you for that. And kind of piggying, piggybacking on your last comment, Jack, on, on the perm coming off, I, I guess, you know, obviously, that's impacting your gross margin now, but it does sound like that there, you know, that there could be some sequential stability. So I guess, how are you thinking about perm going forward? And then specifically, does that 70 basis points of gross margin headwind become kind of a, a peak impact or a maximum impact, if you will, going forward? How are you thinking about that?

Jack McGinnis (CFO)

Yeah, you know, I, I'd say, you know, it's a fair question. It, it really is hard to say whether that 70 is gonna be kind of the, the peak. I will tell you sequentially, Q3 to Q4, we're, we're looking at, you know, GP margin going from 17.6%-17.4% at the midpoint, so fairly close. You know, we are starting to anniversary, you know, some of the drop in perm that we saw in the H2 of last year. So I'd say, you know, it will be, you should expect that it, it will likely be a lower impact on the year-over-year change as we start to anniversary those lower levels, and we'll just have to see how that continues.

But I would say, it does feel like we've normalized quite a bit recently, and we're anticipating, you know, that into the Q4 guide, with GP margins still holding up fairly good, sequentially.

Josh Chan (Director, Equity Research Analyst)

Great. Thank you both for your time.

Operator (participant)

Thank you.

Our next question comes from George Tong with Goldman Sachs. Your line is open.

George Tong (Senior Research Analyst of Equity Research)

Hi. Thanks. Good morning. You noted demand from enterprise technology clients continued to be subdued in the quarter. Can you elaborate on where you're seeing the weakness in tech and how tech staffing trends performed over the course of the quarter and in October to date?

Jonas Prising (Chairman & CEO)

Overall, George, I'd say that the demand, you know, continued to be quite weak, both in the U.S. and in Europe. You know, I think in terms of industry verticals that are big, especially for Experis, globally and also here in the U.S., you know, it was the tech and the communications industries, that they were the telcos. They are the ones that have seen the biggest drops. I would say, as you heard from our prior remarks here, we think things have stabilized sequentially, but at a low level, and, you know, they seem to be holding steady, at least for now, and so that's what we're seeing.

We have strength, you know, in other verticals, but they are the ones that are driving the significant declines, for all of our brands, but in particular for Experis at a global and at a U.S. level.

Jack McGinnis (CFO)

George, I guess I would just add, I know, I know you like to to know about a little color on some of the other verticals and some of the others on the call as well. So maybe this is a good time to maybe talk a little bit about that. So to Jonas's point, enterprise tech has been some of the more significant, the sector probably with the most significant pressure during the year on an overall basis. I would say other areas on the weaker side, you know, we've talked about logistics being soft, you know, most of the year. That continues. I'd say on the manufacturing side, outside of auto and food, manufacturing continues to be very sluggish. You can see that. We talked about that in terms of manufacturing PMIs in our prepared remarks.

And then I'd say construction, which is really more relevant to our European business, and Norway and France has been weaker as well. And I would say more recently, we've seen banking. So banking was strong, was relatively flattish, and I'm talking more of the U.S. market now in the H1 of the year. And we're starting to see banks pull back a bit more now as we end the Q3. So we see banks kind of reacting to the current environment currently. I'd say on the flip side, auto continues to be strong. You certainly see that in our Germany numbers. That is an area of strength that continues in France and Sweden as well.

I mentioned food, and I would say the public sector has generally been more resilient on an overall basis, although that has softened a little bit in the U.K. in the Q3. So a little more color in terms of what we're seeing in terms of the industry verticals on an overall basis.

George Tong (Senior Research Analyst of Equity Research)

That's very helpful. Thank you. And then, to follow up, every cycle, as you know, has its own unique characteristics, in terms of the way down and the way up. How do you expect the current macro slowdown and subsequent recovery to compare with prior cycles in terms of depth and also in terms of duration?

Jonas Prising (Chairman & CEO)

Well, George, I think if I knew the depth, then it'd be easy, but we don't, so we manage through the uncertainty like everybody else. But I would say largely, this, the way this economic slowdown is playing out in our industry is roughly what we have seen in prior economic cycles, with the difference being some delays and some sequencing. You know, we talked about, you know, the step-down of perm, you know, in the Q2 coming into the Q3, where that is normally something we would see a little bit earlier. We would see, you know, maybe, commercial staffing start to decline a little bit earlier, and that, you know, IT staffing and professional staffing would hold on a little bit longer due to the length of the projects and the higher skill sets, and that's been a little bit reversed.

But a lot of these, you know, differences in timings, we think, can be largely explained by pandemic and post-pandemic anomalies, frankly, that are, as we go through this economic cycle, you know, seem to be coming back towards trend. So overall, we would expect this to play out in a recovery in the same way that we've seen in the past. You know, companies will get some confidence into the future, but not enough to really start their permanent hiring in a significant way. You know, that means we'll see commercial staffing start to pick up, IT projects and others for Experis pick up.

You know, RPO and perm start to pick up because a lot of the talent acquisition activities have been changed in the client companies, and then, you know, we would see it start like that. The one thing, George, that I think we will have to get used to, which in our terms is a positive effect in terms of demand, is more structurally constrained labor markets overall in many skill sets, and not just the highest skill sets, but also broadly due to the changing demographics and aging population.

You know, we think access to human capital is going to become more difficult, which means customers and companies will rely more on us and all of our brands to attract and retain the talent, both on a contingent as well as on a permanent, on a permanent basis. And, you know, we look at our staffing margins that we have today across the board and how well they're holding up, and that is, you know, different from what we've seen in other cycles. And we would hope that based on the structural trends that we're seeing demographically and the demand for new skill sets driven by technological changes at all skill levels, frankly, but that will give us further support for some good margin evolution, staffing margin and total margin as a whole.

George Tong (Senior Research Analyst of Equity Research)

Very helpful. Thank you.

Jonas Prising (Chairman & CEO)

Thanks, George.

Operator (participant)

Thank you. Our next question comes from Kartik Mehta with North Coast Research. Your line is open. Kartik Mehta, your line is open.

Jonas Prising (Chairman & CEO)

You're on mute, Kartik.

Jack McGinnis (CFO)

Maybe, maybe we'll come back to Kartik. He might be having difficulty.

Operator (participant)

Our next question comes from Manav Patnaik with Barclays. Your line is open.

Princy Thomas (Equity Research Analyst)

Hi, Jack. Hi, Jonas. This is Princy Thomas on for Manav. Last quarter, you mentioned some mix-related changes around rebalancing your client mix, specifically in India and Australia, and that you were seeing good profitability levels in those markets. Can you give us an update and expand on your progress there, and how this impacts your exposures and revenue margin impacts from these mix changes?

Jack McGinnis (CFO)

Sure, Princy. I think the main takeaway is there wasn't really a lot of dramatic changes in Q3. I think you're right, that's been an ongoing adjustment we've been making in certain key markets. India certainly is a very important market for us, but it's a tough margin market. So as a result of that, we want to make sure we're taking on the right business that's accretive to the organization overall, and we're making really good progress in that regard. So the business has been doing a really nice job repositioning the business this year, and we feel good about that, and I'd say that continued on in Q3 as expected.

I'd say, you know, the other country that we've talked a lot about in the past has been the U.K. and another tough margin market on an overall basis. We have a lot of tremendous experience operating in that market, and we've done a really nice job repositioning the margin profile of that business as well. So despite the very difficult conditions, and you saw the trends for the U.K., so definitely on the higher side of pressure that we've seen, they're actually operating quite well in that environment and doing a really nice job preserving operating unit profit margin. So I'd say those are two examples that we probably have talked a little bit more about, and I'd say continued on good progress into the Q3 on both of those. Thanks.

Princy Thomas (Equity Research Analyst)

Got it. Thank you. As my follow-up, you mentioned in your prepared remarks that you expect significant reduction of activity in your Israel business. Can you quantify your Israel exposure for us?

Jonas Prising (Chairman & CEO)

Yes, thanks for that question. As I mentioned in my prepared remarks just this morning, I've spoken to our Israeli colleagues. The Israel business is a business that is the market leader, and we've been in Israel for over 60 years. We have more than 10,000 employees and associates in Israel, and it's roughly a $400 million operation. As you can imagine, in this wartime in Israel, many of our employees are being called up to serve. Unfortunately, we have had family members missing, has also impacted fatally. So it is a tough time for our operation in Israel.

We are providing them all the support we can, of course, as ManpowerGroup, and I am in awe at their resilience and their ability to manage a very uncertain and volatile and difficult environment, both professionally and personally, and still support our thousands and thousands of associates as well as client companies in, in Israel. So I am, I am very impressed, and I'm sad by the terrorist attacks and all the resulting difficulties in the region, but it is going to be tough to estimate the impact medium-term for Israel, but from what we can tell, at least in the short-term, this is having a significant operational impact to us in Israel.

Princy Thomas (Equity Research Analyst)

Appreciate the color. Thank you.

Operator (participant)

Thank you. Our next question comes from Toby Sommer with Truist Securities. Your line is open.

Jasper Bibb (VP, Equity Research)

Hey, good morning. This is Jasper Bibb on for Toby. Just wanted to follow up on the restructuring actions and what that might mean for your branch network. Like, I know, total branches have come down quite a bit over the past decade, but curious how you see the future of the branch footprint with the recent portfolio changes.

Jonas Prising (Chairman & CEO)

You know, we've been very cautious. As you pointed out, we've really leveraged our digital platforms to bring down our physical branch footprint very significantly over the last decade, which, of course, helps us because it becomes less fixed cost, more variable. But at this point, I think, at least for now, we are going to remain relatively stable in our branch network. We had some slight adjustments sequentially here, but, you know, nothing, nothing strategic and not really in reaction to, you know, the slowdowns that we're seeing. So we largely intend to keep our physical footprint exactly where it is today in all of our brands, and, you know, manage the demand decline, you know, through other ways, centralizing delivery and low-cost areas and things like that, so that we have more flexibility.

That's really the evolution that we've had, you know, between the last mile delivery capability that we had in our countries, you know, also augmenting that, the centralized delivery capabilities in all geos, be that from Latin America, in India and in the U.S., and in Europe, making sure that we have excess delivery capabilities centrally, so that we can flex those first and be able to adjust to the demand, in a very dynamic way, which, of course, also helps us, you know, as we ramp up for a coming rebound when that occurs. So that is sort of how we're thinking about our physical footprint right now.

Jasper Bibb (VP, Equity Research)

Thanks for that. Then just had a quick one on preliminary expectations for the tax rate in 2024. I guess the Q4 is gonna be a bit higher at 32.5, but you also mentioned some CVAE benefit next year. So on a blended basis, would that imply about 32% for 2024, or would that be too high?

Jack McGinnis (CFO)

Yeah, no, Jasper, I think, you know, it's a fair question. You know, it's a little hard to say at this time for the full year of 2024, because it's gonna be heavily driven by the mix of earnings from the countries. But what I would say is, you're absolutely right, the CVAE will be an improvement, and all things being considered equal, will be an improvement and a reduction in the rate, somewhere, as we said, to the tune of about 35 basis points. We got it to the 32.5 in the Q4. You know, for now, if you wanted to apply that to that 32.5 and say it's gonna be somewhere in the neighborhood of 32%, as of right now, I think that's a reasonable estimate.

I'll certainly give an update on that at year-end. I'll give our updated view on whether that should change for estimate purposes. But I think for now, using the Q4 rate reduced somewhat is reasonable. Thanks.

Jasper Bibb (VP, Equity Research)

Fair enough. Thanks for taking the questions, guys.

Jonas Prising (Chairman & CEO)

Thank you.

Operator (participant)

Thank you. Our next question comes from Stephanie Moore with Jefferies. Your line is open.

Stephanie Moore (SVP of Equity Research)

Hi, good morning. Thank you. I wanted to touch on a little bit, you know, I'm just trying to kind of parse through everything that was said on, in the Q&A in particular. You know, I think apart from France, you know, you are calling for a bit of stability in the Q4, particularly in the U.S., called U.K. a little bit. You know, given you've been, I guess, seeing the slowdown for almost a year, I guess 4Q to 4Q, are you hearing from any of your clients that think maybe the worst is behind us? Or are they kind of talking about the potential that there could be another step down, or, you know, could you start to see trends, you know, improve from here?

I'm just trying to triangulate, you know, what now are year-over-year comp, you know, seasonality, which I guess, you know, it sounds like you're not really seeing 3Q to 4Q, and then just the underlying macro trends. So any help about help you're hearing from clients in terms of kind of when we should start to see, you know, any, any change, you know, maybe 4Q, Q1, anything like that? Thanks.

Jonas Prising (Chairman & CEO)

You know, the level of declines that we've seen, Stephanie, and in our conversations with clients, you know, really goes to answer it in the way that they don't know. And they don't know how long this will take, and they are uncertain, and that's why I think, you know, they're maintaining their own workforces, but they're really flexing this fluctuation and slowing demand through our industry. So just along the prepared remarks that we mentioned on our—the sentiment that we hear when we speak with our clients, you know, they still say: Look, this is still manageable. Thank you for helping us navigate through this environment. You know, we see some slowing demand, which we're adjusting to, and primarily with your help. But as to the outlook, you know, we have great plans.

We need to drive transformation forward. We have a lot of energy transition-related activities in manufacturing and other industries. We have transformation projects related to technology. All of those things are still things we need to do, but right now we're going to slow them down or pause them, and that is really the sentiment that we get from our clients right now. Which is not unusual when you think about where we are and everything that you read about. So it is still, for them, a manageable environment, and you can tell by seeing what they're doing with their own workforce. They're holding on to their own workforce, by and large, and they're flexing up and down with our workforce.

You can see the sequential stability that we talked about, both from the U.S. and in some areas also in Europe, as a positive sign. Just as Jack said, you know, some of that is, of course, you know, maybe missing the seasonal uptick that we're getting. But on the whole, they remain optimistic but uncertain on when they would need to accelerate their acquisition of talent to a larger degree. And, you know, for now, they're a little bit in a waiting pattern to get some further clarity. That's how I'd describe this, if that is of any help.

Stephanie Moore (SVP of Equity Research)

No, actually, that's super helpful, and I really appreciate the color. Maybe just as a, not a follow-up, my second. Can you talk a little bit about the color you're seeing in Asia Pacific and the Middle East? Or at least Asia Pacific, you called out, continues to be, you know, relatively resilient. So if you could just provide a bit more there, that'd be helpful. Thanks for all the color.

Jonas Prising (Chairman & CEO)

Yep. Yeah, Steph, both of the regions, Asia Pac and Latin America, are seeing, you know, very good trends. And especially in Asia Pac, we've talked about Japan being a very strong operation. This will be our 35th consecutive quarter of growth. We're performing very well in Japan, and many of the other countries in the regions are also performing well. So, you know, they are still holding up, and it really speaks to the strength of our geographic diversification. So not only a brand diversification, but also a geo-diversification in times like this, can be very helpful because we see that business continuing to move forward. And, you know, they are clearly benefiting still from, you know, the overall impact of growing demographics, still being very instrumental in the global supply chain.

You know, that for now, at least, that is what we're seeing, and that's what we're hearing from those two regions. So it's very... it's good for us to see that progression.

Operator (participant)

Thank you. Our next question comes from Andrew Steinerman with JP Morgan. Your line is open.

Stephanie Yee (VP, Equity Research)

Hi, good morning. This is Stephanie stepping in for Andrew. I heard your comment on how you're centralizing the finance and technology systems. Can you give us an update on where you stand in rolling out your front-office PowerSuite system?

Jack McGinnis (CFO)

Sure, sure, Stephanie. I'd say, as Jonas said, on the front office, in terms of PowerSuite, we're in very, very good shape. That's been a multiyear journey, where we're towards the end of that, with 75% of our businesses being on the new front office through the end of this year. So we're very pleased about that. Doing a lot of work as we speak to your point on the back office, which is global technology and finance platforms, and making very good progress. So we have a cloud-enabled industry-leading back office platform. We're live in five countries. We're in flight in many more. Through the H2 of 2024, I believe we'll have over 50% of our revenues on the new cloud-enabled back office.

That's quite significant for us because what we're also doing at the same time is now we have the infrastructure to do more and more standardization and centralization, and we're progressing that as we speak in Europe, and that's a lot of significant work that we're undertaking. And that's what I referred to when I, I mentioned that we are taking SG&A down significantly, but one area where we're continuing to invest is in this transformation. And you can see that in our corporate expenses, and you'll see that in a more significant way into the Q4 as well. So that is where we're making some very significant progress. We're very excited about that, and I think, Jonas, you wanted to comment on that as well.

Jonas Prising (Chairman & CEO)

Yeah. I think, Stephanie, for us, this is a huge strategic move, and we think it's a big differentiator for us to have common global front- and back-office technology platforms. And as you can imagine, the first phase, of course, is all about, you know, driving commonality and process alignment and generating productivity. But the add-ons that we can already see some progress on, but think yield great opportunities into the future, is applying AI to the data and the insights that we can generate, and then replicate very quickly across all of our operations and all of our functions as well. So it is a very heavy and labor-intensive and resource-intensive journey that we have been on now for the better part of three and a half years.

But we think this has the promise of really generating a lot of value for our clients, our candidates, and for the company looking into the future.

Stephanie Yee (VP, Equity Research)

Okay, I really appreciate the color. Thank you. I'll just leave it at that.

Jonas Prising (Chairman & CEO)

Thank you, Stephanie.

Jack McGinnis (CFO)

Thank you.

Jonas Prising (Chairman & CEO)

And thanks, everyone. I think that brings us to the end of our earnings call for the Q3. Thanks, everyone, for listening in and for your questions. We look forward to speaking with all of you again in our fourth and full-year earnings call in January. Thanks so much.

Operator (participant)

Thank you for your participation. This concludes the program. You may now disconnect. Everyone, have a great day.