Earnings Call Transcript - MAN Q3 2023

Operator, Operator

Welcome to ManpowerGroup's Third Quarter 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 now like to turn the call over to ManpowerGroup's Chairman and CEO, Mr. Jonas Prising. Sir, you may begin.

Jonas Prising, Chairman and CEO

Welcome to the third quarter 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 section 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 third quarter results and guidance for the fourth quarter of 2023. I will then share some concluding thoughts before we start our Q&A session. Jack will now cover the Safe Harbor language.

Jack McGinnis, Chief Financial Officer

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 2 of our earnings release presentation further identifies forward-looking statements made in this call and factors that may cause our actual results to differ materially and information regarding reconciliation of non-GAAP measures.

Jonas Prising, Chairman and 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 have 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 have spent time with our teams and clients in Europe and North America. The topic at the forefront of many 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, which 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 few 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. The business environment in Latin America and Asia Pac remains solid. And 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 third quarter, revenue was $4.7 billion, down 5% year-over-year in constant currency. Our reported EBITA for the quarter was $78 million. Adjusting for restructuring, Argentina hyperinflationary foreign exchange charges and a small loss on sale, EBITA was $117 million, representing a 36% decrease in constant currency year-over-year. Reported EBITA margin was 1.7%, and adjusted EBITA 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; 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, Chief Financial Officer

Thanks, Jonas. Revenues in the third quarter came in at the midpoint of our constant currency guidance range. Gross profit margin came in above our guidance range. As adjusted, EBITA was $117 million, representing a 36% decrease in constant currency compared to the prior-year period. As adjusted, EBITA 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 were $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 share 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 the 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 second quarter. 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 second quarter. 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 second quarter level. Other items resulted in a 20 basis point margin decrease. Moving onto the gross profit by business line. During the quarter, the 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 second quarter on this 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 fourth quarter. 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 third quarter, reflecting lowered 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 of restructuring costs. As adjusted, OUP was $44 million and OUP margin was 4.0%. 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 second quarter. 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% of gross profit and experienced a 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 third quarter. 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 second quarter. In the fourth quarter 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 third quarter. 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 $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 $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 fourth quarter for France to represent a modest further decline from the third quarter trend based on October activity to date. Revenue in Italy equaled $414 million in the quarter and was down 2% on a days-adjusted constant currency basis. OUP equaled $27 million and OUP margin was 6.5%. We expect a similar rate of constant currency revenue decline in the fourth quarter compared to the third quarter. 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 negative $3 million and OUP margin was negative 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 UK, the Netherlands, and Belgium. Our largest market in the 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 second quarter on this same basis. We expect a similar rate of constant currency revenue decline in the fourth quarter compared to the third quarter. In Germany, revenues increased 4% in days-adjusted constant currency in the quarter, representing three consecutive quarters of growth driven by our Manpower business, particularly due to strength in the automotive sector. The previously announced wind down of our Proservia managed services business in Germany is advancing with significant progress with the workers 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 first half of 2024, which we will carve out separately. We anticipate additional restructuring charges related to the wind down in the fourth quarter and will provide a further update when we announce our fourth quarter 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 fourth quarter, we are expecting a slightly lower rate of constant currency revenue growth compared to the third quarter 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 second quarter on this 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%. Our 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 fourth quarter. 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 third quarter, free cash flow represented $245 million compared to $254 million in the prior year. At the end of the third quarter, days sales outstanding were flat at 59 days. During the third quarter, capital expenditures represented $21 million. During the third quarter, we repurchased 636,000 shares of stock for $50 million. As of September 30, we have 293,000 shares remaining for repurchase under the share program approved in August of 2021 and an additional 5 million shares remaining for repurchase under the share program approved in August of 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 fourth quarter of 2023. Based on trends in the third quarter and October activity to date, our forecast is cautious and anticipates that the fourth quarter 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 fourth quarter to be in the range of $1.17 to $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 mid-point 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 mid-point. This represents an additional 1% decrease from the third quarter trend, ignoring rounding, on this same basis. We expect our EBITA margin during the fourth quarter to be down 110 basis points at the mid-point compared to the prior year. We estimate that the effective tax rate for the fourth quarter 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 $0.05 reduction in our fourth quarter EPS. When business in our lower rate geographies begins to improve, the tax rate will begin to return to the lower rate. 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 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 it 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 services business in Germany and we will disclose those and any additional restructuring charges separately when we report our fourth quarter 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 and CEO

Thanks, Jack. On our last call, I shared that we are 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 third quarter, 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 are 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 are 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 are 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 huManpower launches in many of our key markets this week, strengthening our positioning for candidates as an employer of choice with the data, expertise, and talented teams to guide them to achieve their potential as they progress in 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. The 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. And our Manpower brand has been recognized in the UK 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 is 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 would like to close by thanking our teams around the world for their engagement and contributions, which is how we are able to consistently deliver to our clients, our people, our partners, and our communities. I would now like to open the line for Q&A.

Operator, Operator

Thank you. Our first question comes from Mark Marcon with Baird. Your line is open.

Mark Marcon, Analyst

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, Chief Financial Officer

Sure, Mark. I'd be happy to start with that. As we assess the U.S. market at the end of the quarter, it was slightly better than the overall quarterly performance on a days-adjusted basis. Specifically, for the U.S., the total for the quarter was at minus 14 days-adjusted, with a slight improvement noted in September. Looking ahead to the fourth quarter, we anticipated stability or slight improvement, and that's what appears to be happening. It's also important to consider that there was a significant decline from the third to the fourth quarter in the previous year, which affects our outlook. In France, we concluded the quarter with a decline of about minus 3% on a days-adjusted basis in September, compared to a minus 2% overall for the quarter. The PRISM data showed a steeper decline in August, but there was a slight recovery in September. However, relating to our Q4 guidance, we noted some further softening in October, so we're estimating about minus 5% at the midpoint for France in the fourth quarter. For Italy, the end of the quarter reflected a trend similar to previous performance, landing at about minus 2% on a days-adjusted basis, consistent with the overall quarterly performance. Looking to the fourth quarter, we expect Italy to maintain a similar revenue trend on a days-adjusted basis. That summarizes the situation for our three largest markets, Mark.

Mark Marcon, Analyst

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

Jack McGinnis, Chief Financial Officer

Yeah. So, we did talk about the fact that we expected perm to continue to come off into the third quarter. That was the big development during the second quarter, 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, Analyst

Great. I have a philosophical question. I'm curious how much excess capacity you currently have, considering the ongoing restructuring in different countries. Additionally, how do you view the trends in the U.S., especially with the Atlanta Fed projecting a 5% GDP increase for the third quarter? It's interesting to consider the discussion around a soft landing while staffing seems to be in a recessionary state. I'd like to know your thoughts on this.

Jonas Prising, Chairman and CEO

Well, Mark, good morning, and thank you. Yeah, 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 third quarter, but let me tell you about our business and what we're seeing, and how we're thinking about this. 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 pipeline 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. And 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, Analyst

Great. Thank you very much.

Jonas Prising, Chairman and CEO

Thanks, Mark.

Operator, Operator

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

Jeff Silber, Analyst

Thanks so much. You mentioned the cost actions. I was wondering if we could just get a little bit more color on 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, Chief Financial Officer

Thank you, Jeff. I'm glad to address that question. As we've mentioned, we implemented significant cost measures in the third quarter, which we indicated during our second quarter results. This is a continuation of the previous discussion. In areas where our businesses are facing the most pressure, we have made some of the largest adjustments. To Jonas' point, we're approaching this carefully. We're focused on preserving sales and preparing for the opportunity to capture market share when trends start to improve. We're being very cautious on the sales front while adjusting our workforce based on current demand. The U.S. is one of the primary areas where we have made substantial changes; we noted a year-over-year decline of 7% in our headcount, with the U.S. seeing even larger decreases. Germany is another key market where we're rightsizing, and we will provide more details about Proservia in the fourth quarter. In Germany, this involves adjustments to our head office structure to align with the business moving forward, primarily focusing on our Manpower operations. We've also made significant reductions in the UK, particularly among enterprise clients. Other regions where we've implemented major changes include the Nordics, where we observed a considerable drop from Q2 to Q3, especially in Norway and Sweden. Those are the most notable markets. We are also making adjustments in France, but the larger decreases are primarily in the markets I've highlighted.

Jeff Silber, Analyst

Okay. That's really helpful. Maybe we can shift gears to the pricing environment. If we can talk about 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 and CEO

Well, just 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, 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 the constraints on the labor markets mean that the demand we have for the talent is seen as extremely valuable by our client companies, and we make sure that we are positioned in the right way with the skillsets 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, Analyst

Okay, thanks so much for the color.

Jonas Prising, Chairman and CEO

Thanks, Jeff.

Operator, Operator

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

Josh Chan, 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, 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 the U.S. business from a trend perspective.

Jonas Prising, Chairman and 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 fourth quarter, 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, we see sequential stability in the third quarter heading into the fourth quarter 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 fourth quarter, and the weakness comes in Manpower. And as I just mentioned, that weakness primarily relates to weakness in Europe. But maybe, Jack, you could give a little bit more specificity on some of the U.S. business trends.

Jack McGinnis, Chief Financial Officer

Sure, I'd be happy to. On the U.S. and Manpower side, we observed a slight improvement. The days-adjusted decrease for Manpower in Q2 was minus 19%, which improved to minus 16% in Q3. We anticipate some slight improvement in this trend. However, it remains a challenging operating environment. Similarly, in Experis, we noted a days-adjusted decline of minus 17% in Q2, which improved slightly to minus 15% in Q3, and we expect a bit of improvement for Q4. Compared to the same period last year, we see stable activity levels heading into the fourth quarter. We are cautious, though, as the traditional ramp seen in October and November may not happen this year due to the ongoing sluggish trends in the enterprise sector. Nevertheless, we think the year-over-year rate will show slight improvement as we compare with the prior period. Moreover, on the Talent Solutions side, which has the most significant impact globally in the U.S., we have seen stability in RPO, MSP, and Right Management from Q2 to Q3. While we expect some decline in perm placements, it will not be as significant as in previous quarters, indicating a level of stability at these lower levels as we move into Q4.

Josh Chan, Analyst

That's really good color. Thank you for that. And kind of piggybacking on your last comment, Jack, on the perm coming off, I guess, obviously, that's impacting your gross margin now, but it does sound like 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 peak impact or a maximum impact, if you will, going forward? How are you thinking about that?

Jack McGinnis, Chief Financial Officer

It's a valid question. It's difficult to determine if that 70 will be the peak. I can tell you that from Q3 to Q4, we're expecting GP margin to move from 17.6% to 17.4% at the midpoint, which is quite close. We're beginning to anniversary the decline in perm we experienced in the second half of last year. So, you should expect a lower impact on the year-over-year change as we start to see those lower levels in the past. We will have to monitor how this progresses, but it seems like we have normalized quite a bit recently, and we expect that to carry into the fourth quarter with GP margins remaining relatively stable sequentially.

Josh Chan, Analyst

Great. Thank you both for your time.

Operator, Operator

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

George Tong, Analyst

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 and CEO

Overall, George, I would say that demand remained fairly weak in both the U.S. and Europe. Specifically, the technology and communications sectors, particularly among telecommunications companies, have experienced the most significant declines. As mentioned in our earlier comments, we believe that conditions have stabilized to some extent, although at a low level, and they appear to be maintaining this status for now. This is our current observation. While we do see strength in other sectors, the declines in the tech and communications industries are driving significant reductions across all our brands, especially for Experis both globally and in the U.S.

Jack McGinnis, Chief Financial Officer

George, I want to provide some insight into various sectors and share updates from others on the call. To address Jonas' point, enterprise technology has faced notable pressure this year across the board. Additionally, we've seen ongoing softness in logistics, which has persisted throughout the year. In manufacturing, aside from the auto and food industries, activity remains sluggish, as evidenced by the manufacturing PMIs we discussed earlier. Construction, particularly in our European operations in Norway and France, has also weakened. Recently, we've noted a pullback in banking, which had been stable in the U.S. during the first half of the year but is now reacting more cautiously as we approach the end of the third quarter. On a positive note, the auto sector remains robust, evident in our performance in Germany, and this strength is also visible in France and Sweden. While the food industry holds steady, the public sector has generally shown resilience, although we've seen some softening in the UK during the third quarter. This provides a clearer picture of what we're observing across different industry verticals overall.

George Tong, Analyst

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 and CEO

I believe it's challenging to predict the depth of the current situation, so we navigate through the uncertainty like everyone else. However, the current economic slowdown in our industry resembles what we've experienced in previous cycles, albeit with some delays and sequencing differences. We previously discussed the decline in permanent placements from the second to the third quarter, which typically occurs earlier. Normally, commercial staffing would see a decline sooner, while IT and professional staffing would remain stable longer due to project durations and required skill levels. This trend has reversed somewhat. We believe many of these timing differences can be attributed to pandemic-related anomalies, and as we progress through this economic cycle, they seem to be reverting to the norm. Overall, we anticipate a recovery similar to past experiences. Companies will gain some confidence about the future but may hesitate to start significant permanent hiring. Consequently, we expect commercial staffing to gradually rise, IT projects for Experis to pick up, and also an increase in recruitment process outsourcing and permanent placements, as client companies have adjusted their talent acquisition strategies. One aspect we may need to adapt to is the structural constraints in labor markets across various skill sets, not just in high-demand categories. Additionally, due to changing demographics and an aging population, accessing human capital is expected to become more challenging, which will lead customers and companies to rely more on us and our brands to attract and retain talent for both contingent and permanent roles. Looking at our current staffing margins, they are holding up well, which is a departure from previous cycles. We remain optimistic that the ongoing structural demographic trends and the increasing demand for new skill sets driven by technological advancements will support a positive margin evolution in both staffing and overall margin performance.

George Tong, Analyst

Very helpful. Thank you.

Jonas Prising, Chairman and CEO

Thanks, George.

Operator, Operator

Thank you. Our next question comes from Kartik Mehta with Northcoast Research. Your line is open.

Kartik Mehta, Analyst

You are on mute, Kartik.

Jack McGinnis, Chief Financial Officer

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

Operator, Operator

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

Princy Thomas, 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 impact from these mix changes?

Jack McGinnis, Chief Financial Officer

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 the other country that we've talked a lot about in the past has been the UK, 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 UK, 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 third quarter on both of those. Thanks.

Princy Thomas, Analyst

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

Jonas Prising, Chairman and CEO

Thank you for your question. As I noted in my prepared remarks earlier today, I've been in touch with our colleagues in Israel. The Israeli business has been a market leader for over 60 years, employing more than 10,000 individuals in the region and generating around $400 million in revenue. Given the current wartime situation, many of our employees are being called to serve, and unfortunately, there have been missing family members, with some impacted fatally. It's a challenging time for our operations in Israel. We are doing everything we can to provide support as ManpowerGroup, and I am truly impressed by the resilience of our team as they navigate this uncertain and difficult environment while continuing to assist our thousands of associates and client companies. I feel sadness regarding the terrorist attacks and the subsequent challenges in the region, and while estimating the medium-term impact for Israel will be difficult, the short-term operational effects are significant.

Princy Thomas, Analyst

Appreciate the color. Thank you.

Operator, Operator

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

Jasper Bibb, Analyst

Hey, good morning. This is Jasper Bibb on for Tobey. 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 and CEO

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 nothing strategic and not really in reaction to 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 manage the demand decline through other ways, centralizing delivery in low-cost areas and things like that so that we have more flexibility. And that's really the evolution that we've had between the last-mile delivery capability that we have in our countries, also augmenting that 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 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, Analyst

Thanks for that. And then just had a quick one on preliminary expectations for the tax rate in '24. I guess, the fourth quarter is going to 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 '24, or would that be too high?

Jack McGinnis, Chief Financial Officer

It's a fair question. It's a bit challenging to provide a definitive answer for the full year of '24 since it will largely depend on the earnings mix from different countries. However, you are correct that the CVAE will likely lead to some improvement, potentially reducing the rate by about 35 basis points. We have guided to a 32.5% rate in the fourth quarter, and at this point, it seems reasonable to estimate that the rate could be around 32%. I will provide an update at year-end to clarify whether this estimate will change. For now, using a slightly reduced fourth quarter rate seems appropriate. Thank you.

Jasper Bibb, Analyst

Fair enough. Thanks for taking the questions, guys.

Jonas Prising, Chairman and CEO

Thank you.

Operator, Operator

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

Stephanie Moore, Analyst

Good morning, and thank you. I wanted to discuss something specific, particularly regarding the Q&A. Aside from France, you’re predicting a bit of stability in the fourth quarter, especially in the U.S. and somewhat in the UK. Considering there’s been a slowdown for nearly a year, are any of your clients indicating that they believe the worst is over? Or are they expressing concerns about the possibility of further declines? Is there a chance for trends to improve from this point forward? I'm trying to understand our year-over-year comparison, seasonality—which it seems you aren't really observing from third quarter to fourth quarter—and the broader macro trends. Any insight from your clients on when we might expect to see changes, whether in the fourth quarter, the first quarter, or beyond? Thank you.

Jonas Prising, Chairman and CEO

The declines we've observed, Stephanie, and in our discussions with clients indicate that they are uncertain about the duration of this situation. They are holding on to their workforces but are adjusting to fluctuations and slowing demand in our industry. From our prepared remarks, the sentiment we gather from clients is that they find the current environment manageable, and they appreciate our support in navigating it. While they acknowledge slowing demand and are adapting with our assistance, they have plans for transformation, involving energy transition activities in manufacturing and technology projects. However, they will likely slow down or pause these initiatives based on the current sentiment. Clients are generally optimistic but uncertain about when they might need to significantly increase their talent acquisition. For now, they seem to be in a wait-and-see mode, seeking further clarity on the situation.

Stephanie Moore, Analyst

No, actually, that's super helpful, and I really appreciate the information. Maybe just as a second point, can you talk a little bit about the situation you're seeing in Asia Pacific? In the Middle East, or at least Asia Pacific, you mentioned it continues to be relatively resilient. So, if you could just provide a bit more detail, that would be helpful. Thanks for all the information.

Jonas Prising, Chairman and CEO

Both Asia Pacific and Latin America are showing strong trends. In Asia Pacific, Japan has been a particularly strong performer, marking our 35th consecutive quarter of growth there. Several other countries within these regions are also doing well, demonstrating the strength of our geographic diversification. The benefits of both brand and geographic diversification are evident in challenging times like these, as we see consistent business progress. Both regions continue to experience positive effects from growing demographics, which are still playing a critical role in the global supply chain. Overall, it's encouraging to observe this ongoing progress.

Operator, Operator

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

Unidentified Analyst, Analyst

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, Chief Financial Officer

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 and 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 and many more. Through the second half of 2024, I believe we'll have over 50% of our revenues on the new cloud-enabled back office. And 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 mentioned that we are taking SG&A down significantly, but one area where we're continuing to invest is in this transformation. You can see that in our corporate expenses, and you'll see that in a more significant way into the fourth quarter as well. So that is where we're making some very significant progress. We're very excited about that. And I think, Jonas, do you want to comment on that as well?

Jonas Prising, Chairman and 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 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 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.

Unidentified Analyst, Analyst

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

Jonas Prising, Chairman and CEO

Thank you, Stephanie, and thanks, everyone. I think that brings us to the end of our earnings call for the third quarter. 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, Operator

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