Feb 1, 2012
Executives
Jeffrey A. Joerres – Chairman, President and Chief Executive Officer Mike Van Handel – Executive Vice President and Chief Financial Officer
Analysts
Andrew Steinerman – JPMorgan Sara Gubins – Bank of America/Merrill Lynch Paul Ginocchio – Deutsche Bank Securities Jeffrey M. Silber – BMO Capital Markets James Samford – Citigroup Inc.
Kelly Flynn – Credit Suisse Thomas Allen – Morgan Stanley Kevin McVeigh – Macquarie Research Equities Mark Marcon – Robert W. Baird & Co., Inc.
Operator
Welcome and thank you for standing by. At this time, all participants are in a listen-only mode.
After the presentation, we will conduct a question-and-answer session. (Operator Instructions) I would now like to turn the meeting over to your host for today’s call, Mr.
Jeff Joerres. Sir, you may begin.
Jeffrey A. Joerres
Good morning, and welcome to the Fourth Quarter 2011 Conference Call. With me is our Chief Financial Officer, Mike Van Handel, I’ll go through the high level results for the fourth quarter and full year.
Mike will then spend some time going through the detail of the segments as well as the forward-looking items for the first quarter and any implications at all for the balance sheet and cash flow as well as the reorganization that we have done in the fourth quarter. Before we move into the call, Mike, could you read the Safe Harbor language?
Mike Van Handel
Good morning, everyone. This conference call includes forward-looking statements, which are subject to risks and uncertainties.
Actual results might differ materially from those projected in the forward-looking statements. Additional information concerning factors that could cause actual results to materially differ from those in the forward-looking statements can be found in the company's Annual Report (inaudible) and in the other Securities and Exchange Commission filings of the company, which information is incorporated herein by reference.
Jeffrey A. Joerres
Thanks, Mike. The fourth quarter by many measures was a strong quarter when you look at some of the wins in our [phase] that we had to deal with.
We continued at the same time to follow through with our execution and it resulted in a very strong quarter. We’re able to meet our expectations of profitability, while experiencing slightly worsening revenue trends throughout the quarter.
Our revenue was up 6% in constant currency and 5% in U.S. dollars to $5.5 billion in revenue.
We experienced the strongest revenue growth from our Asia-Pacific region as well as profitability increases. Our Asia-Pac region increased revenues in constant currency by 14% and more than doubled their OUP.
Our gross profit in the fourth quarter increased to $935 million and our operating profit came in at $150 million, while our net income increased 47% to $80 million before the reorganization charges. Earnings per share were $0.78 including a $0.20 charge for reorganization.
On a full year basis, we achieved record revenues of $22 billion and sales of $23 billion. Our operating earnings ended at $545 million before reorganization.
It was a hard fought increase of 52% and our earnings per share also before reorganization was $3.24, a 76% increase in constant currency. we continue to drive for efficiency with our SG&A as a percent of gross profit improving by more than 400 basis points.
We executed quite well in the fourth quarter. We were able to maximize the strategies that we put in place and continue the execution from our operational perspective.
Now for additional information regarding the segments and a bit more detail, I’ll turn it over to Mike.
Mike Van Handel
Okay. Thanks, Jeff.
I’ll follow my usual format with some comments on the quarter followed by a discussion of each of our segments and then a review of our balance sheet and cash flow. Lastly, I will comment on our outlook for the first quarter of 2012.
As Jeff noted, our earnings per share for the quarter came in at $0.78 per share, which includes a charge of $0.20 related to reorganization charges. Therefore, on a pro forma basis, earnings per share was $0.98, exceeding our guidance range of $0.85 to $0.95 per share.
$0.08 of performance relative to the mid point of our guidance related to operational earnings exceeding expectations by $0.05, our tax rate adding $0.05 and our lower share count adding $0.01. Currency impact was neutral whereas our forecast expected a positive impact of $0.03 per share.
Revenue in the quarter came in at $5.5 billion representing a 5% increase over the prior year. Revenue growth in constant currency was up 6% right in the middle of our guidance range of 5% to 7%.
Our fourth quarter revenue growth was aided by acquisitions completed in the second and third quarters and this added about 1.5% to our growth rate in the fourth quarter. Operating profit in the quarter was $130 million or $150 million before reorganization charges.
Operating profit before reorganization costs was up a strong 29% in the quarter with a margin of 2.7%, 50 basis points above the prior year. Our operating profit margin came in at the high end of our guidance range as a result of our gross profit margin also being on the high end of the range, while SG&A expenses are well controlled and came in about as expected.
Our gross profit margin came in at 17.1%, which was up 60 basis points sequentially, but down 30 basis points on a year-over-year basis. The primary reason for the decline in gross profit margin was a 30 basis points decline in temporary recruitment gross margin.
This decline is about as expected and relates to the higher unbelievable bench time in the few markets and a higher growth from large key accounts at lower gross margins. The gross margin was also negatively impacted 10 basis points in the quarter as a result of contraction in the higher margin outplacement business and 10 basis points related to the impact from an acquisition in China earlier in the year.
Permanent recruitment fees had a good performance in the quarter, up 11% in constant currency representing almost 12% of our total gross profit. this favorably impacted our consolidated gross profit margin by 10 basis points.
Our market leading RPO offering was a strong contributor with fees of 23% in constant currency. This is an area we continue to invest in as clients are recognizing the value of this ManpowerGroup Solutions offering.
Our selling and administrative expenses declined from $1.2 billion to $805 million in the quarter. After adjusting for reorganization charges in both years and impairment charges in 2010, while SG&A expenses down slightly in constant currency on 6% revenue growth.
This reflects strong productivity in the quarter as SG&A expenses has adjusted decline from 87.1% of gross profit to 83.9% of gross profit. As I flagged on last quarter’s conference call, we took a reorganization charge in the quarter of $20.5 million or $16.3 million after-tax resulting in a charge of $0.20 per share, with reorganization charge primarily relates to our disclosure and consolidation costs and severance costs in Northern Europe and Right Management.
We expect this charge will result in savings in excess of $30 million in 2012. Before we turn to the operating segments, I would like to review our gross profit by business line, in line with our overall business strategy, we continue to invest in our higher value service offerings, which now account for almost one-third of our total gross profit.
Within Experis, which accounts for almost 20% of total gross profit, we provide professional interim and permanent recruitment services primarily in the IT, finance and engineering verticals. Our Experis gross profit was up 6% in the quarter.
Our ManpowerGroup Solutions represents almost 10% of total gross profit and includes RPO, MSP, Talent Based Outsourcing, Borderless Talent Solutions and strategic workforce consulting. Our value-add solutions offerings continue to resonate extremely well with clients with gross profit growing 25% in the quarter.
Within Right Management, we offer outplacement solutions and talent management. This comprises about 5% of total gross profit.
I’ll discuss this later in the call, as it is a separate segment. Finally, our Manpower business, which includes temporary staffing and permanent recruitment services, is about two-thirds of our total gross profit.
Gross profit growth in this business moderated to 2% in the quarter with growth in the industrial skills and some contraction in the office skills. Now the growth of Manpower is currently impacted by economic factors.
we remain bullish on our long-term prospects, given the secular trends towards flexibility across the globe and the new opportunities presenting themselves in emerging markets, which are very low temporary staffing penetration levels. Now to review our operating segments; revenue in the Americas came in at about as expected at $1.2 billion for an increase of 5% in constant currency.
Operating unit profit in the Americas was $38 million, an increase of 35% or 37% in constant currency excluding reorganization charges in both years. The Operating Unit Profit margin before reorganization costs was 3.5%, an increase of 80 basis points over the prior year.
This higher OUP margin was a result of a higher gross margin and improved expense efficiency. Our U.S.
business, which represents about two-thirds of the Americas segment, had a decline in revenues of 1% to $766 million, but an increase in gross profit as we continue to trade our lower margin business for higher margin business. Our Manpower staffing business, which represents about 55% of U.S.
revenue, saw revenue contract 1% in the quarter as we continue to focus on price discipline and gross margin improvement. Our staffing gross margin was up in the quarter as we have more than fully offset state unemployment tax increases with price adjustments.
The gross margin also benefited from some higher act of credits related to 2010 that we were still able to claim this year. As we went to 2012, we have experienced further unemployment tax increases for many states as expected given the current unemployment levels.
We expect to fully pass on these tax increases to further price adjustments and we’ve already re-priced in excess of 80% of our business. Our (inaudible) business which represents 40% of U.S.
revenue was down 2% in the quarter. While we are seeing some slowing in growth of professional services, the decline was primarily the result of a few large projects winding down in the financial services area and one large client making the decision to bring the business in-house.
Permanent recruitment was strong during the quarter, up 50% over the prior year. This was driven by good growth across all three requirement offerings direct hire temporary to permanent conversions and RPO.
SG&A expenses excluding reorganization charges in both years were down more than 2% as the U.S. continues to drive productivity across their network.
Operating Unit Profit before reorganization charges was $28 million, up 38% for an increase of 100 basis points to 3.6%. Our Mexico operation had an extraordinary performance in the quarter with revenues up 18% in constant currency and OUP up 28% in constant currency.
The OUP margin expanded by 30 basis points due to strong expense leveraging. Revenue growth in Argentina was strong in the quarter, up 31% in constant currency, but this was driven by inflation as (inaudible) is slightly down year-on-year.
Revenue on Southern Europe came in at $2 billion right in line with the expected 6% constant currency growth. Revenue growth on an organic constant currency basis was about 5%.
Operating Unit Profit came in at $43 million, an increase of 14% in constant currency excluding the reorganization charges in the prior year. The OUP margin improved 10 basis points to 2.1%.
Gross margins in the quarter were up 20 basis points year-on-year, which reflects our growth in higher margin solutions and SMB business. Permanent recruitment fees, which represented about 9% of gross profit were flat year-on-year.
Recruitment fees excluding the impact of the decline in Pôle emploi contract increased 12% over the prior year. Within Southern Europe, France represents three fourth of the segment.
French revenues were up 6% in constant currency to $1.5 billion. OUP in France was $21 million, an increase of 7% in constant currency before the prior year reorganization charges.
Gross margin in France was up over the prior year probably due to the higher margin IT solutions business we acquired and due to our sales focus on higher margin SMB business. Our team did a good job managing the lower payroll tax subsidies this year by passing these costs on to the clients.
During the fourth quarter, we recovered over 90% of the lost subsidy. For those clients who did not except the price increase we’re doing a complete account profitability review and in some cases we will exit the business if it is no longer profitable.
SG&A expenses were up 5% in constant currency in France primarily as a result of the impact of acquisitions and acquisition related costs. Excluding these elements, expenses were up only 1%.
Revenue growth in Italy slowed quite dramatically in the fourth quarter coming in at 5% in constant currency, compared to 14% growth in the third quarter. (Inaudible) in the sovereign debt crisis and local economic challenges have resulted in lower demand for our services.
Despite these top line challenges, our team was able to produce OUP growth of 25%. Our OUP margin increased 100 basis points to 6.4% with some pressure on the gross margin was more than offset by SG&A productivity.
The Spanish market is also feeling the impact of the economic crisis with revenues down 5% year-on-year. Revenue in Northern Europe came in slightly below expectation at $1.5 billion an increase of 4% in constant currency.
OUP before the impact of $12 million of reorganization charges in the career were $64 million, an increase of 1% in constant currency. The OUP margin was down 10 basis points as the gross margin was down year-on-year as a result of an increase and [undurable] bench time in Germany and Holland and stronger growth in some of our lower margin key accounts in the UK.
Permanent recruitment fees grew only slightly in the quarter reflecting the slowing hiring trends across Europe. Permanent recruitment gross profit represents 13% of segment gross profit.
SG&A expenses were tightly controlled and came in below the prior year. Within Northern Europe, we saw a strong growth in our Nordics operation, which is up 8% in constant currency with an OUP increase of 28%.
Our Manpower UK business continues to deliver a very strong performance with revenue growth of 12% in the quarter and OUP growth of 28% in constant currency. We saw the most significant easing of demand in the German and Dutch markets.
Constant currency revenue in Germany contracted by 6% or 2% on an average daily basis and then Netherlands contracted by 2%, but grew 3% on an average daily basis. Demand for IT services remained strong during the quarter with our Elan business up 10% in constant currency.
Growth in the UK market improved to 14%, whereas growth in mainland Europe softened from 14% last quarter to 4% in the fourth quarter. Our performance in the Asia-Pacific, Middle East segment exceeded expectations on revenue and OUP.
Revenue came in at $695 million an increase of 14% in constant currency or 5% on an organic basis. Operating Unit Profit was very strong more than doubling to $22 million with an OUP margin of 3.1%.
This margin expansion primarily reflects very good cost control with new revenue growth being addressed with the current expense base. After three quarters of flat revenue growth, the Japan operation was able to achieve 3% constant currency revenue growth in the fourth quarter.
Much of this growth came from our higher margin solutions business, which resulted in strong OUP growth in excess of 40% for the quarter. Revenue growth in Australia slowed in the quarter to 2%, but OUP growth was strong more than tripling that at the prior year.
Our business in China continues to do extremely well as we integrate the acquisitions made earlier in the year. On an organic basis, revenues were up almost 60%.
Revenue for Right Management came in as expected at $80 million, a decline of 9% in constant currency. The countercyclical outplacement business, which represents about 60% of Right’s revenue showed signs of stabilization, but still contracted 8% on a year-on-year basis.
While we are seeing softening in a number of economies, we’re not at the point were companies are making mass lay-offs, which is what drive the outplacement business. Our talent management business also declined about 8% in the quarter as we are seeing clients become more cautious and discretionary spending in talent management area.
OUP for Right, was about break-even for the quarter before the $6 million reorganization charge. This reorganization charge relates to streamlining our office and management structure to better inline with current revenue levels.
We anticipate further charges related to this reorganization plan later in 2012 as we continue to drive a more effective cost base. Now let’s turn to the cash flow and balance sheet.
Free cash flow defined as cash from operations, less capital expenditures was quite strong in the quarter coming in at $125 million. Free cash flow for the year was $4 million, which is down from the prior year due to one time income tax payments made earlier in the year and a slightly higher DSO.
Our DSO for the quarter was 57 days compared to 56 days in the prior year. This increase primarily relates to a shift in mix to key accounts with longer payment terms.
During the quarter, we repurchased 1.7 million shares of stock for $62 million bringing our total purchases for the year to 2.6 million shares for $105 million with an average purchase price just below $40 per share. Currently we have an additional 3.6 million shares authorized for repurchase.
Our balance sheet at quarter end was very strong and our credit facility provides us with good liquidity going forward. We ended the quarter with total debt of $700 million just slightly below the prior quarter due to currency changes.
Net debt was $120 million, an improvement of $20 million from the prior quarter. Our leverage statistics remain comfortable with total debt to total capitalization stable at 22%.
At year end, our $700 million of debt outstanding was primarily composed of two components. The €300 million note coming due in June of 2012, and €200 million note coming due in June of 2013.
We expect to refinance the note coming due this year in the public debt markets or through our new revolving credit agreement that was put in place in October. This agreement is an $800 million facility that currently has $798 million available for borrowing.
Finally I’d like to comment on our outlook for the first quarter of 2012. No doubt most of the markets we are in weakened through the fourth quarter, and we expect this softening trend to continue through the first quarter.
Assessing how weak the economies will get and how demand for our services will respond in these weaker economies is very difficult [to assess]. Nonetheless, I offer the following slides based up on what we see today and the trends we expect in the last two months of the quarter.
Overall we expect revenue to be flat to slightly up against the prior year in constant currency. Based up on where foreign currencies are today, this would suggest a revenue decline of approximately 2% on a reported basis.
I expect constant currency revenue growth to be flat to slightly up in the Americas and Northern Europe, and flat to slightly down in Southern Europe, all in constant currency. Our Asia-Pacific, Middle East business will still benefit from good growth in emerging markets and modest growth in Japan was helping in constant currency revenue growth, between 7% and 9%.
We expect Right Management revenue to decline between 7% and 9% in constant currency, similar to the fourth quarter. A gross profit margin should range between 16.6% and 16.8%.
We expect the operating profit margin to range from 1.4% to 1.6%, which is down about 20 basis points from the prior year. We expect our tax rate to be at 56%, which includes the French business tax.
Excluding the French business tax, our tax rate will be at 38%, right in line with the prior year. This will result in earnings per share in the range of $0.30 to $0.38 per share, with the negative currency impact of about $0.02.
We expect our weighted average share count to be 81 million shares, which reflects the share repurchases that were completed in the fourth quarter of 2011. With that I’d like to turn things back to Jeff.
Jeffrey A. Joerres
Thanks, Mike. The fourth quarter was a very solid quarter, we were able to achieve solid revenue growth and even better operating leverage.
In 2011, we clearly leveraged our capacity and footprint by adding an additional $3.1 billion in revenue, finishing the year just over $22 billion in revenue, and $23 billion in sales. As Mike talked about, our expense management as well as the efficiency and productivity that we worked on throughout 2010 and 2011 resulted in an increasing operating profit percent by 70 basis points.
Clearly, our geographical diversity and portfolio of offerings assisted our successful fourth quarter. Few highlights geographically.
Mike mentioned the U.S operation, the U.S. operation did an outstanding job with gross margin increasing by 100 basis points, even given the set back of state unemployment tax.
Additionally, we were able to improve our operating profit in the U.S. and the Americas region to 3.5%.
For the second quarter in a row and on an annual basis over 3%, even given the fact that we did not have strong revenue increases. Also our Japanese organization deserves a strong call out, given the difficulties in the Japanese market.
We actually did extraordinarily well with revenue increases in the fourth quarter of 3%, in constant currency. And profitability increase of over 40%, and for the year our profitability was up over 20%.
Much of this is attributed to our switch to solutions and our mix of business. Also our U.K operation assisted in the quarter, with U.K business up 12% and profit up 28% in the fourth quarter.
For the year our U.K business increased profitability more than 40%. Our Solutions business worldwide is gaining momentum.
We were able to continue to expand our managed service offering, both the MSP and vendor management, nearly $6 billion now annualized our under spent. And we have substantially increased our RPO offering, with 125 winds throughout the year.
Overall, a very good year for those two components of our Manpower Group solutions business, and overall a very good year for Manpower Group Solutions, which came in over $1 billion in revenue and up or more than 30% over 2010. 2011 was a very successful year for us in many more ways than just financially.
We set ourselves up to be an even stronger company in several areas, differentiation, which is about how we articulate the value that we bring to our clients and building our brand and capabilities to do more, while improving our gross margins, also diversification, which is broadening our portfolio of solutions and services to provide more value to our clients, while also improving our gross margins, and efficiency and productivity, which is a way of categorizing how we evaluate our systems and processes to increase our speed and cost effectiveness. In 2011, in all of these categories we had a better year.
We introduced the human age a major thought leadership platform that continues to resonate with clients, the press and internally. Additionally, we enhanced and consolidated our brands.
This has gone extremely well. We are confident that the underlying secular trends of our business are very strong, if not stronger than ever.
Secular trends in the Manpower business, the classic staffing business continue to ramp up in the mature markets and in the emerging markets. In the mature markets, clients no longer question their requirement fragility and flexibility.
The only question is, how much, when and where. The secular trends are even stronger within its peers.
Companies are beginning and knowing to become much more agile in their IT, engineering and finance functions. They are turning to more condensed projects, which in turn lend themselves to more interim resourcing.
Right management continues to struggle a bit with career transition business, as we are seeing companies with less people to out place and therefore we are seeing a market move just a bit sideways. We recently at the beginning of the first quarter, started to see just a bump up in how the conversations are taking place and how companies are starting to plan for some potential downsize.
However this is not translated yet into any increase in revenue in our career transition business. At the same time, we are clearly seeing secular trends of the need and want for talent management.
Even with the immediate see of it weakening right now, because of the economy. We are the largest coaching business in the industry and are in the top five in the consulting when it comes to the workforce strategy part of our business.
This clearly has allowed us to raise the level of conversation with our clients, and have the ability to offer high-impact, quick-time-to-value solutions, which is clearly needed in today’s world. Our solutions business is also experiencing solid secular trends.
Clients realize that in order for them to achieve their productivity and expense targets, they must do business differently. Our RPO, MSP and permanent recruitment businesses are great examples.
Each of these offerings is growing because clients want to focus more on their core while they recognize our strength in these areas. The secular trends in the emerging markets are also very real.
Our growth in China was over 400% in 2011, and in India, it was nearly 38%. So we are seeing the emerging markets continue to move fast in a very fast cadence, and our presence that we have there is working very well as we’ve invested over the last three to five years.
Most recently, we are seeing the payoff as it is increasing our profitability and our relevance in those markets. 2012 does hold potential challenges.
What Europe is going through does have a dampening effect on hiring. It is also creating hesitation by companies outside of Europe.
Clearly, we need to have a cautious outlook, primarily because of the European situation. But this does not mean we are cautious about our ability to capitalize on our success in creating a stronger organization in 2012.
With that, I would like to open it up for questions.
Operator
Thank you. We will now begin the formal question-and-answer session.
(Operator instructions) Andrew Steinerman of JPMorgan, you may ask your question.
Andrew Steinerman – JPMorgan
Good morning, gentlemen. I want to talk about your thoughtful strategy for purging business.
It sounded like it was primarily in the U.S., but I heard a touch of it perhaps maybe coming in France. I want to know if you felt like the purging process, which obviously has worked, is behind us or behind us soon, and I also wanted to get a sense if you have a [view] on how the U.S.
market started at the beginning of this year, is it anyway [fought] by purging?
Jeffrey A. Joerres
Okay thanks. Andrew yeah a couple of things on that, purging is always something we take very seriously, because we don’t want to do is to stop away from business and we’re not.
We have a long discussion with our client talking about kind of values, what we’re trying to do, why we’re trying to do it. And in the end, it may end up maybe because in the case of [Zeus], which really prompted a lot of those on discussions early on in 2011, which was – that we’re just not going to absorb or let us pass along Zeus.
So we had decided to give them a period of warning that we would be to move on. It has worked well, it is increasing our margin, but more importantly, it’s giving us time to work on other accounts.
so it is a strategy, it’s a strategy that we felt based on the market gains that we had made in the last two years in the US market that we were able to take that risk. So we evaluate even now.
my sense is it would be less aggressive in the U.S., but that still doesn’t mean we’re not going to do it, because we have to kind of hold up the value of what our offering is and there are certain clients who just are looking for something very different. So probably a little less in the U.S., but we would continue.
On the French side, what we’ve really been doing is spending the last 18 months working to the point where we would have the opportunity to be in a position to take some of those accounts that just are not the right accounts, the clients who are just not doing certain valuing. and what we’ve seen now is through a lot of hard work on our French operation, the deeper penetration into the small, medium sized business part, a bit more of a share of wallet from some other large clients that we picked up, because it might have been some quality problems on the competitor side.
it’s putting us in a position where we’re probably two, maybe three points ahead of the market in France and now we’re considering okay, what do we do, how do we do that, but it will be very careful. On the start of the U.S.
market, clearly there are two things if you look at, as we look into the current first quarter, first months and Mike talked a little bit about what we’re thinking with the U.S. Yeah, we have an anniversary of those – all of those accounts that we might have given to another competitor.
Additionally, we had a book of business and Experis that was heavy on the finance and banking side and there are few projects that ran off where they decided to bring in house.
Andrew Steinerman – JPMorgan
It sounds good Jeff, thanks.
Jeffrey A. Joerres
Yes.
Operator
Sara Gubins of Merrill Lynch. You may ask your question.
Sara Gubins – Bank of America/Merrill Lynch
Hi, thank you good morning. In the sense, it looks like you held up better than the market overall in the fourth quarter.
And I’m wondering if you could give us some more details about what you’re seeing there and how that’s trending in the early part of this year?
Jeffrey A. Joerres
I think we did and some of it had to do with what I had spoken to Andrew about is that when you try to make a different kind of sales structure, discipline, our operations down at the branch level in France have improved greatly over the last year in achieving their key performance indicators. we focused on verticals and client segmentation.
So we’ve done all of those things.
Sara Gubins – Bank of America/Merrill Lynch
Okay. And so far this year?
Jeffrey A. Joerres
And now what we’ve seen is that as we roll into this year, you’ve got to be really very much standing on guard, I mean there are some challenges in Europe, which might be an understatement or just so obvious, but the fact is that France is in the middle of that. there is an election in May.
There are some things that have come out. so what we’re seeing is actually not much worsening, but clearly, we wouldn’t see the first quarter having any kind of inflection point on the way up.
there could be some very devastating news that comes out three weeks or a month from now that none of us would be aware of, but I would say that right now, we’re feeling fairly stable in France it would be mighty, Mike, anything to add to that?
Mike Van Handel
Yeah. Just maybe a little bit more specific color, I think stable is the word as we look at the last four weeks in terms of where our monthly volume numbers have been running.
From a revenue perspective through January, I would estimate we’re running down on prior year, low-to-mid single digits. so clearly although weaker than what we saw in December, but clearly it’s not falling off from also quite either at all.
and so right now as the last couple of weeks have looked pretty similar.
Sara Gubins – Bank of America/Merrill Lynch
Okay, great. And then also focused on Europe, could you talk about what you’re seeing in small business trends versus large?
Jeffrey A. Joerres
But what we have to focus on small business, which Italy is there’s a lot by nature of the marketplace and we have improved our small business presence and there, it doesn’t seem to be as much of effect on the small business community in France. Switching over to Italy that small, medium sized business is seeing some effect, there’s no doubt about it.
Italy is going to lots of changes right now in the banking system and austerity programs and lines of credit as well as just consumer demand. So we have seen the difference between the third quarter and the fourth quarter, it was probably the sharpest that we saw across Europe in the downturn, which happened in Italy.
we still see a little bit more coming down in Italy, because of that small, medium sized businesses affected. The real question is, is that can this get stabilize both from a confidence perspective and also from a technical perspective?
I think you’d start to see that come back, but it will be far too early to say when that would happen.
Sara Gubins – Bank of America/Merrill Lynch
Okay, great. and then just last question any more detail on margin expectations in the first quarter by segment.
Thank you.
Jeffrey A. Joerres
Yeah. We tend not to go into detail by individual segments.
And overall, we’re looking for about 20 basis points down at the operating margin level. and as you look across the board, I would expect probably each of the operating segments to be just a little bit less than the prior year.
Asia-Pac might be pretty much in line with prior year, would be my sense for things. And what you’re seeing there is effectively little top line growth.
Gross margin should be pretty stable across most countries or most segments and then from an expense standpoint, we’ll have just a slight expense growth probably overall less than 1% in constant currency and that’s really just reflecting some of the statutory salary increases and that type of things. So, expenses are tightly controlled and so just a very slight delevering in the first quarter given where we’re expecting top line right now.
Sara Gubins – Bank of America/Merrill Lynch
Thank you.
Jeffrey A. Joerres
You bet.
Operator
Paul Ginocchio, Deutsche Bank. You may ask your question.
Paul Ginocchio – Deutsche Bank Securities
Thanks. Just a question on the operating leverage, it’s pretty significant where revenue is down.
Could we just talk a little bit where you’re getting that and then just maybe where the office closures were located? Thank you.
Jeffrey A. Joerres
Thanks, Paul. I think from an overall operating leverage standpoint, I mean, clearly that’s something that we’ve been focused on all year long and incremental margins in the fourth quarter were quite strong as we really focused on driving as much top line as we possibly could, while just holding back the costs.
I guess, when you actually look at it from a market standpoint, we’re getting really good leverage and really got good operating leverage, I would say across virtually all segments, and Asia-Pac really kicked in as well this last quarter. I think when you look at it, it’s a lot of focus on the fundamental just driving productivity in those offices looking at all of our processes end-to-end, and how do we accelerate the in-take process with our candidates, how do we get them assessed in all the assignment much more quickly.
So it’s really driving every process along the way. So, there is not one thing I would point out.
I would say it’s just a continuation of our overall productivity and the efficiency, strategic driver that we have been driving on and that’s starting to show up in the results and really has through out the year. The first quarter is a little bit more sensitive of course, just given the lower volume quarter.
so, if revenues are a little bit stronger, we’ll feel a little bit leverage coming through and of course, it works on the opposite side as well.
Jeffrey A. Joerres
On the office closure perspective, we really aren’t moving out of any markets at all primarily in Europe, what we have found and we’ve been testing this now for about two years and the test results are coming back quite positive, is in some of the major cities we are doing consolidation. So we’ve done it in Amsterdam, we are looking at doing it in Berlin, we’ve done it in London.
We’re instead of kind of having the Starbucks strategy, if you will; we’re moving more to a consolidated strategy given that people are clearly more mobile, meaning they will go outside their smaller area within a major city. it gives us the chance to have more scale in that office.
it cuts down on our real estate and actually it creates a much better dynamic in the office. At the same time, we have opened offices.
We’ve opened offices in China, some of them in fact, the majority of them organic and we’ve continued to look at opening offices and have opened offices in Brazil and a few other locations within South America. So net-net, it’s about even if you will, but there is no market that we’re exiting from any of the geographies that we operate in.
Mike Van Handel
As you look at the reorganization charge, Paul, the 20 million, it’s pretty much broken up. About half of that is severance costs, about half of that is office costs, which the office cost would relate to least commitments as well as fixed asset write-offs leasehold improvements in those offices.
Jeffrey A. Joerres
Well, and that, to bring to that reorganization, it falls as Mike said, in the two areas, Right Management and Experis, let me describe both of those. In the case of right management, we’re able to in it by keeping the integrity of that brand, which is really important to us, and the independence of that brand, we have been able to co-domicile in some places where it really worked well and markets a lot of that’s taking place in Asia.
But also in the case of Experis where we wanted to bring it into one brand, an operating model that would really different ourselves in the market, there are some side benefits to that. We don’t have an Elan office, a Manpower professional office and (inaudible) office, we now have an Experis office and we've been able to put that together.
In the U.S., we are able to take our Jacksonville’s office and turn that into the Experis finance. So there’s cost savings probably what about half of those in the reorganizations sit in that area on the Experis side, we didn’t do Experis for that intent, but we have the side benefit of being able to get some good consolidation of real estate people on management.
Paul Ginocchio – Deutsche Bank Securities
If I could just speak, was there a headcount number related to that severance in second doesn’t sound like you’ve taken any capacity out to that or your ability to grow. it sounds like it’s just at the edges?
Jeffrey A. Joerres
There was some headcount in there, particularly at the leadership level, where we have done some management restructuring particularly along those lines, I just spoke about in Experis as well as in right management, but it probably as a lot of it is on the back-office and system side as well.
Mike Van Handel
Yeah. It would be in the neighborhood of 1% of our overall global headcount.
Paul Ginocchio – Deutsche Bank Securities
Thank you.
Operator
Jeff Silber, BMO Capital Markets, you may ask your question.
Jeffrey M. Silber – BMO Capital Markets
Thanks so much. I was wondering, if you could talk a little bit about the pricing environments in some of your major markets across the world?
Jeffrey A. Joerres
So pricing for the most part is all things relative, is pretty stable. that doesn’t mean that we don’t price everyday, and as you’ve heard in some cases walk away from some business.
But what we are seeing is any further ratcheting down. There are a few markets that might be a little bit more competitive than others, but none of them real major markets.
So I would say pricing has become a bit more sophisticated and as a result, we’re seeing less ridiculous, now we would see in France, and that case in Italy where there is a local competitor who – in a couple of those cases with the DSO of 75 days, I don’t know how you’re going to return an adjusted profit based on that. So that still happens, but that was happening before.
Our major account set, they’re really looking for us to make the switch from what we’re doing now, while not a bad in total. But what we’re doing now two more solutions and that’s why you saw our solutions business going up, they’re saying we’ve already got you as far as we can on the so-called gross margin.
What we’d like you to do now is perform at a different level and that’s why our solutions business is growing so quickly.
Jeffrey M. Silber – BMO Capital Markets
Great. It is a follow up; I wanted to focus a little bit on the UK, at the beginning of last quarter that the components of the Agency Worker Directive came on full force.
Did you see any impact from those new [ags] on your business?
Jeffrey A. Joerres
So you’re right. The Agency Worker Directive in the UK started in October and was to be implemented throughout the year.
We’ve had lots of discussions in scenario plannings. we have not seen a much effect at all, coming into the end of this year.
we still have the first part maybe the first half of the first quarter where we could see some effects. no doubt there are some clients that have made different decisions, because of that parity pay, but it is a very small amount.
So at this point, we do not see it affecting our UK numbers, as we move into 2012.
Mike Van Handel
I think what we are finding there, Jeff, clients are really evaluating flexibility and the flexibility is the priority now. and so it really hasn’t had a big impact.
As Jeff said, press a little bit along the edge of few clients, but not a dramatic impact.
Jeffrey M. Silber – BMO Capital Markets
All right. That’s great to hear.
Thanks so much.
Operator
James Samford of Citigroup, you may ask your question.
James Samford – Citigroup Inc.
Great thank you. Just wanted to touch on the U.S.
again and just the purging issue again. how should we think about maybe an organic growth rate relative to sort of clients who have exited and that’s potentially when should we lapse some of the larger efforts that you’ve made in terms of streamlining your client base?
Jeffrey A. Joerres
Well, it depends on how the clients that we purge some of them at seasonality. so it’s not just a straight anniversaring of, when we left them in June or they left us, but come the next June that is, it perfectly lines up across those quarters.
I would say that when you look at it, if you would have looked at 2% some number like that it might be at, but it’s – and our view would be as we look into the future, now we’re going to continue to do it probably not at the scale we did in 2011. but I just think it’s a good business practice once we find out that there are just some clients as we have a discussion with them that they’re looking for something different that what we’d be offering.
So I would expect it to continue, but just not at the same level. So as we look at 2012, our focus – wasn’t 2011, but even more intense our focus will be to really bring some of the solutions we have out, some of the ways that we have implemented salesforce.com, our sales process.
So we’re optimistic, we’re going to get back on the trail, after we’ve readjusted our business that get back on the trail of getting up on top of the market.
James Samford – Citigroup Inc.
And if I just quick follow-up, I think you mentioned that is there a pushing into more middle market in the U.S. as well and I think you lost a large client this quarter.
How should that pan out this year and should that help diversify your way from some large losses.
Jeffrey A. Joerres
I think so well we may have lost a large client, we win many more large clients in that. So I would say 2012 will be an equal struggle to make that balance work, because if we can pick up a $100 million, $200 million, $300 million we’ve got a couple of bids on the table right now, that are in the final stages and are for a couple of hundred million dollars.
So we are still going to have a very solid and growing book of what we’ll call key or large account business. But we are going to work our tail off to balance it in through our metro market strategy and our SMB strategy.
James Samford – Citigroup Inc.
Perfect, thanks.
Operator
Kelly Flynn of Credit Suisse, you may ask your question.
Kelly Flynn – Credit Suisse
Thanks, guys. My questions are builds on Sarah’s earlier question about what you are seeing in Q1 so far.
Are you seeing market to be worse trends in January versus Q4 or does your guidance just kind of imply that the Q4 trends continue in Q1. I think you answered it for France, but I just want to you to specifically address the U.S.
and Italy.
Jeffrey A. Joerres
Sure, yeah.
Kelly Flynn – Credit Suisse
Thanks.
Jeffrey A. Joerres
Good question Kelly, I think overall it does depend little bit by market I think when you look to the U.S. Market and a few other markets in Asia, what you see is some stability going into the first quarter.
And yeah there is enough noise in the first couple of weeks starting of the year that you don’t know how much weight to put on. But I’ll say overall the U.S.
in January looks as good as December is not a little bit improved on December overall from the couple of weeks we’ve seen so far. When you look to Italy, our fourth quarter was up 4% in revenue terms, it now is – we’re seeing contraction in that market.
So that market clearly has become a little bit weaker and contraction would be in the mid single digit level or something like that right now. So again, not falling apart by any means, but certainly just some easing in overall demand, and that’s what we’re seeing there.
Northern Europe would be a little bit mixed by market place, but I would say in general, things have started the year okay and in some markets maybe about like December other markets maybe just a touch softer, but overall, I would say okay. In terms of the overall guidance for the first quarter anticipates that we probably will see a little bit further softening in February and March, but not dramatic for their softening in February and March.
So, that’s how we’re looking at it right now.
Kelly Flynn – Credit Suisse
Okay, great, and then, if I could just ask related high level question of Jeff. I know you’re not an economist, but the investors obviously seem a little more optimistic about macro in general and Europe specifically.
But it seems like somewhat you said in press release about your guidance, they are rest of the downside. Just building on those two comments, I mean, what if any are the meaningful positive signs on the cyclical front in Europe are you just not seeing any?
Jeffrey A. Joerres
No. So, I’m glad you brought it up, because as Mike knows as I rewrote that was about 25 times in the press release.
But I having come back from Davos, I came back with a just slightly different mindset and that is that there is a real commitment that this difficult problem whether it would be some forms of physical union or austerity or the balance between austerity and growth, are actually being achieved and that the banks, which were also represented there have the time over the last year. I mean, if you think about it over the last year at this time when Greece really announced that they were in a lot of trouble.
So, while this has been long and drawn out and we would all like answers and fast action, it’s not going to happen and it shouldn’t happen, because it’s a very complicated process. So, while there could have been this race for an answer, which is what was being driven in the October and November timeframe that was scaring a lot of people, because it would have been pretty tough or draconian or not agreed to.
Where we are right now is that yes, this is going to be difficult, yes there is a slowdown in Europe, but my sense right now is that there is a lot less panic, optimism would be too strong of a word, but more of a satisfaction of we will make it through this without a major drop. Now, having said that, I couldn’t say that in the press release, so what I said in the press release is, things look pretty good, all things considered, but there is this wildcard.
and if this wildcard ends up coming apart for reasons that I have no idea, but I could imagine then of course, the game changes and that was really what I was trying to get across in the press release is that, that’s the wildcard and I think it’s logical to consider the wildcard, but given the backdrop, it’s actually less likely than it might have been 30 or 45 days ago.
Kelly Flynn – Credit Suisse
Okay. That’s a great answer.
Thanks a lot.
Jeffrey A. Joerres
All right.
Operator
Thomas Allen of Morgan Stanley. you may ask your question.
Thomas Allen – Morgan Stanley
Hi guys. Can you talk about your capital allocation strategy a little bit?
I mean you bought back more stock this quarter than anytime since 2008. Should we view this as any change in your use of cash?
And then related, how you think about the emerging market opportunity? You made a number of acquisitions that were big enough to call out early last year and they appear to be doing very well.
But are you happy with your footprint now or could that grow? Thanks.
Jeffrey A. Joerres
Sure, Thomas. So I think clearly, we are always tuned into our overall capital structure and probably one of the primary things that we’re looking to do is maintain an overall investment grade rating, just because that gives us more access to debt markets overall.
And so – whatever we do, it’s in the context of that and as we look at the world we’re on the acquisition front, we’re always looking at opportunities to either accelerate our professional and solution strategy or expand within some of the emerging markets. I mean there is the two things that we’re always looking at and so there’s always possibilities and those are always on the Board.
Dividends of course is part of one way to get cash back to shareholders, but then share buyback is the other way. And as we looked at things in the fourth quarter and where things stood from an overall cash standpoint, we did have a cash we felt that it would be thoughtful to get it back to shareholders overall.
But clearly, we do it in the context of the overall share price, but we don’t think we’re too smart that we’re going to be able to pick the share price, pick the bottom et cetera. But certainly in the level that they are at today, we certainly felt that this was a good time to return some cash back to shareholders.
So, I don’t think it’s been a dramatic change if you go back prior to 2008, you would have seen over a four-year period. We returned about $1 billion of cash to shareholders.
So this has always been part of the strategy. I don’t think there’s anything new here, clearly in 2008, 2009 the depths of the recession.
We were certainly more focused on liquidity than just given the fact that capital markets weren’t very reliable. So we backed off in any type of share repurchase strategy than, but certainly we see the world in a different way today.
Jeffrey A. Joerres
And I would just add, yes we are happy with the acquisitions we’ve made. And we’re a year behind whether it would be WDC in India, what we’ve done in the three in China, they’ve integrated nicely.
They’ve offered great management. They’re working with our branding strategy.
So we are happy. Having said that, and we know that because you have a few good acquisitions, doesn’t mean you should start getting more aggressive because that’s when they start piling up bad one.
So we are as disciplined as we’ve been in the past. We don’t need any acquisitions.
So that gives us the advantage to really do some picking and choosing. We are growing very fast organically in those emerging markets primarily China and India is where you would see that or if you look at Hong Kong and few of those are really emerging if they’ve been quite mature.
Both of those growing nicely, both of those have opportunities for us to take what we’ve done, which has always been our strategy. If you go all the way back to Elan where there were $300 million revenue company and there were $1.2 billion last year.
So our strategy is still intact on that. And as Mike said, if there are some good ones out there, we’ll look at it.
But we don’t get overly eager on any of these, because we know that when you do them, then you do a lot of them your stomach gets upset pretty quickly.
Thomas Allen – Morgan Stanley
Okay, that’s great. Thank you.
Jeffrey A. Joerres
All right last question.
Operator
Kevin McVeigh of Macquarie. You may ask your questions.
Kevin McVeigh – Macquarie Research Equities
Great, thanks. Hey, Mike or Jeff, do you have a sense of what percentage of your business in Europe on the manufacturing side is tied to exports?
Jeffrey A. Joerres
Well, here would be an answer and Mike probably can calculate it, I’m just kidding. But here is where I would go.
If you look at our business in Europe, it is running with the exception of Sweden and probably in Netherlands. It’s running somewhere in the neighborhood of 60% light industrial manufacturing.
So you could almost do a proxy for what is happening in Europe. If you took a European industrial output and said what percent of those are actually on export, we would be in line with that, because we’re big enough almost to represent the market.
That’s the best answer I would have struggled a bit with that one ever, but that’s about the best answer.
Kevin McVeigh – Macquarie Research Equities
Great, thanks. And then just not to press, do you have any sense Jeff, the GDP your assumptions you are using as you build your kind of business model for 2012?
Jeffrey A. Joerres
We do look at that and I’ve said this a few times before, each country has a little bit different correlation between GDP. But I would also say that given the way the world is shaping up for a knock in some cases.
GDP may be less relevant from a correlation perspective than it was in the past, because if you get stimulus coming from government that has improved increasing GDP, but we don’t participate in that kind of business is GDP that has no flow-through to us. So yes, there are some correlations.
In France, if we can get to that 1%, 1.2%, 1.3%, we tend to be in growth mode in the low single-digits. You get below that, we tend to go down.
I’d like to think that’s still true, but its election here, you don’t know what’s going to really happen from a [quasi] stimulus perspective.
Kevin McVeigh – Macquarie Research Equities
Super, thank you.
Jeffrey A. Joerres
And then, one more question. We’ll take one more question.
Operator
Mark Marcon of Robert W. Baird.
You may ask your questions.
Mark Marcon – Robert W. Baird & Co., Inc.
Good morning and congratulations on the good SG&A leverage. I was wondering if you could talk a little bit about two things.
First, Northern Europe, specifically Germany, what are you seeing there? I mean, we’re actually getting reports, the EPO has been moving up over the last three months.
It sounds like some competitors are still seeing strong results. How are you managing that over there and what are you seeing with the bench and managing that dynamic?
And then secondly, in Asia-Pac, a real nice surprise over the course of this year in terms of the improvement in the margins, are those sustainable, is there anything unusual that’s occurring? How should we think about the margin outlook longer-terms over there?
Jeffrey A. Joerres
Okay, good. Thanks Mark.
On the Germany one, Germany’s economy is growing and we are participating in that, but we are being even more selective. So when we look at Germany, our strategy has been for the last 18 months and if you had to go back into our conference call, you’d be able to look at it.
We really wanted to make sure that we had our house in order. We were selecting the right kind of accounts.
We were doing the right kind of profitability and not reducing our gross margin or our profitability. In 2011, our profitability in Germany doubled.
So we really worked on, if you will, ourselves, not excluding ourselves in the market, but very much on ourselves. When we look at 2012, you’re going to see us much more aggressive in the marketplace that doesn’t mean pushing price down, but really much more aggressive in the marketplace.
So we know, we get tracking of it. Also I would say that there is two less days in December, so your average daily sales would come up with something different than minus six.
So that kind of lessens that impact, if you will. We look very closely at it, and we’re meeting with them next week.
This is an important topic for us, but we really wanted to get very, very solid profitability, high single-digit sort of stuff and we felt that once we get on that kind of plane we can move in a much better way. On the Asia-Pacific side, what you are seeing is the investments now paying off.
What you are seeing is where we had losses or very little ability to use scale to offset fixed cost, those are now turning around. So in some cases, we would have lower gross margins factor of the market, but we are still leveraging.
So what you are really starting to see is upturning the corner from opening offices, investing in country managers, investing in head of marketing’s, and now that we’ve got that met, you start to be accelerating it. So, I don’t think those trends really go sideways on us at this point, because we still have some more leveraging to do over the next two to three years.
We’ve said in the past, I think it was about a year ago, may be on this call it might have been on the one before was that, we felt very optimistic about our position in Asia, our management team in Asia, and our offerings in Asia. Almost more than half off that could be a little off more than half of our RPO engagements of the 125 additionals that we secured in 2011 were in Asia.
So we’ve got very solutions business. We produced 30% more profit in Japan based on our Solutions business.
So we’ve got a run rate here, my sense is that there will be a hiccup sometime in China, don’t know when that would come, but even that may not be as a big one effect. So, we’re looking at it being, Mike, what did it come at OUP percent?
Mike Van Handel
It was 3.1…
Jeffrey A. Joerres
So 3.1, I believe.
Mike Van Handel
Yeah, right.
Jeffrey A. Joerres
So 3.1, we’re – the team there is saying, hey, we may be Asia, but there is no reason why we shouldn’t be at the same levels of others and that’s the trajectory that we’re on.
Mark Marcon – Robert W. Baird & Co., Inc.
That’s fantastic. So I could throw one more in, the $30 million in savings that are expected from the restructuring, how quickly do you think you will actually be able to realize those?
Jeffrey A. Joerres
Yeah, that’s going to start to come in pretty quickly, Mark. I would expect probably see $6 million to $7 million of that in the first quarter.
So that’s a lot of those actions have been taken and we’re moving on and then have been working on that over the last quarter.
Mark Marcon – Robert W. Baird & Co., Inc.
Fantastic. Thank you.
Jeffrey A. Joerres
All right. Thank you.
Operator
This concludes today’s conference call. Thank you for your participation.