We are admonished to use the new name “ManpowerGroup,” which not only lacks a space but also fails to distract from the gender slant of the company’s name.
Q1 2011 results were chock full of important and distracting details, such as:
- New segment disclosure and limited historical restatement.
- Last Y/Y comparison lacking the COMSYS acquisition in the denominator.
- Significantly positive forex assistance in more than 50% of revenue.
- Continued need to pull a French business tax out of income tax expense and put it in direct labor cost where it belongs.
- Big short-term hit to cash flow from receivables, timing mismatch.
- Need to interpret results-vs.-expectations adjusted for currency and tax variance.
- Addition of post-forex revenue and earnings guidance for the first time.
Gross margin (as presented by management) came in 10 bp below the guidance range. Gross margin is crucial; gross profit is the true revenue for a staffing company. Almost all its cost of revenue is the pay earned by workers on assignment. Almost. More on that later.
Manpower’s profit margins look tiny because more than 80% of its “revenue” is passed through to the mostly-temporary labor force. Focus instead on that line above, operating income as a % of gross income. Also, dwell on gross cash flow (operating cash flow before working capital changes).
MAN’s operating income as a % of gross income was 10%, far above the guidance range despite the gross margin shortfall—related entirely to the counter-cyclical Right Management business, we’re told. Just have to trust them on that, for the obscurantism of MAN’s gross margin disclosure makes it impossible to know what’s going on. Anyway, Q1 apparently benefited from timely cost-cutting at Right, which has been swooning alongside the global recovery. Q2 guidance calls for continued operating leverage, with operating income 14-15% of true revenue (compared with 10% in Q2 2010).
Management didn’t exactly guide for the new segment disclosures unveiled with the 10-K, but one can back into them. MAN exceeded the top end of revenue growth guidance in the Americas, Southern Europe (inexplicably unites France, Italy and Spain), and Asia Pacific/Middle East.
Northern Europe (the Nordic countries, the Elan IT services business, UK Manpower, Germany, Benelux, and a large “other” probably in the East) only split the guidance range, and Right bottomed the low end. CEO Jeff Joerres expressed calm about Right, expecting that its growing HR process outsourcing business would carry the core outplacement business as employers turn to expansion.
With the addition of COMSYS last April, the United States is 67% of the Americas segment. COMSYS grew 18% Y/Y in Q1 2011, the rest of the US 14%. Manpower has Jefferson Wells, the long-sliding accounting practice, buried inside the US segment and restated back to 2009. But that’s a smidgen of revenue and doesn’t explain what’s going on in Manpower’s traditional US temp business.
Here is a clue: Look at Manpower’s sales at domestic franchisees, which run traditional-style temp help offices.
- Q1 2011 up 12% year over year
- Q4 2010 up 22%
- Q3 2010 up 39%
It’s really not as bad as it looks.
Here I present “adjusted sales,” Manpower’s US revenue + sales of franchisees + pre-acquisition COMSYS — franchise fees recognized as revenue. Given that MAN periodically acquires franchise offices and gains a comparison boost, this presentation is relevant to the company’s current state. And the two-year comp hit a post-recession high, despite the one-year comparison looking like a slowdown.
This chart of quarterly EBITA by segment shows why Manpower owns Right Management. During the vicious staffing downturn, Right provided a handsome earnings bridge. In the upturn, Right has lost money in only one quarter.
Read this chart to see what really matters at MAN. Many analysts spout about how France is soooo important, the United States relatively meaningless. Sorry, but reality is that Manpower makes more of its livelihood around the North and Baltic seas than in any other segment. For all its gross revenue, France isn’t that profitable.
Restoring “value added” is the chief problem at Manpower. Understand that operating cash flow for staffing companies is distorted by cyclical swings in receivables. The receivables are large, relative to profits, because of the mostly pass-through nature of billings. Ever since the late 1990s, clients have fixated on exactly what they’re paying for, when they give a markup to an employment agency.
Gross cash flow is the best measure of profitability. At MAN it’s a clean number—net income + D&A + stock comp pseudoexpense + bad debt accrual + deferred taxes. This is something akin to cash-taxed EBITDA minus interest.
After the 2001 recession, Manpower’s trailing-four-quarters gross cash flow margin (as a % of gross income, true revenue) bottomed at 10%. Profitability soared over the next four years. In fiscal 2007, MAN earned gross cash flow exceeding 18% of gross income. The management team that had replaced “market share before earnings” Mitchell Fromstein lifted MAN to a margin level similar to those of far more exclusive white collar staffing firms.
Then margins went kersplat. The trough—less than 6% in the 12 months ending March 2010. This doesn’t even recognize the mountainous goodwill writedowns and restructuring charges that came post-meltdown. Even after a full year of top-line recovery, MAN’s true profitability is well below its prior-cycle trough.
MAN’s gross cash flow margin in Q1 2011 was 8.6% compared with 5.8% in Q1 2010, 5.7% in Q1 2009, and previous-cycle-high 13.2% in Q1 2007.
Gross margin remains at a depressed level, especially when one strips out the influence of franchise fees (which pass all the way through to operating profit). For six of the past seven quarters, MAN has recorded a true gross margin of less than 17%.
Of paramount importance is the defense and enhancement of value added in staffing services. This urgency makes Manpower’s renewed emphasis on segment branding and service enhancement look very smart.
In this forum, I cannot render investment conclusions. As always, I invite inquiries.