ManpowerGroup Inc.
Q4 2020 Earnings Call Transcript

Published: 2 Feb 2021

[Operator:]

Welcome to ManpowerGroup Fourth Quarter Earnings Results Conference Call. At this time, all participants are in a listen-only mode until the Q&A session of today's conference. This call will be recorded. If you have any objections, please disconnect at this time. And now, I will turn the call over to ManpowerGroup, Chairman and CEO, Jonas Prising. Sir, you may begin.

[Jonas Prising:]

Thanks for joining us today for the fourth quarter conference call for 2020. On the call with me today is our Chief Financial Officer, Jack McGinnis. For your convenience, we have included our prepared remarks within the Investor Relations section of our website at manpowergroup.com.

[Jack McGinnis:]

Good morning, everyone. This conference call includes forward-looking statements, including statements regarding the impact of the COVID-19 pandemic, which are subject to known and unknown risks and uncertainties. These statements are based on management's current expectations or beliefs. Actual results might differ materially from those projected in the forward-looking statements. We assume no obligation to update or revise any forward-looking statements. Slide 2 of our earnings release presentation includes additional forward-looking statement considerations and important information regarding previous SEC filings and reconciliation of non-GAAP measures.

[Jonas Prising:]

Thanks, Jack. During our earnings call in October, we talked about signs of recovery in the third quarter. Pleased to say we saw this trend of slow and steady recovery continuing into the fourth quarter. Despite experiencing a series of new COVID-19 related restrictions around the world, our results reflect a stronger market environment than we had anticipated, with revenue growth and new opportunities in select markets. We are now seeing clear signs of a K-shaped 2-speed recovery. The bifurcation is evident between industries able to adjust to the uncertain environment and others, like travel, hospitality and entertainment industries being significantly impacted by the lockdowns. This is also reflected in a labor market divide, where demand for workers has improved in some industries and in others remains stalled, with high unemployment rates. Organizations investing in digitization and automation are already emerging stronger and that is driving an acceleration in the polarization of the workforce between the skilled and the unskilled, creating a risk of continued post-pandemic skills-based polarization of labor markets in many countries. This is also captured in our recent Skills Revolution thought leadership series - Renew, Reskill and Redeploy - conducted across 26,000 employers in 40 plus countries. Those companies that plan to speed up their digitization plans as a result of the pandemic are maintaining or increasing their headcount, in contrast to others who have put their plans on hold.

[Jack McGinnis:]

Thanks, Jonas. Going back to the quarterly results on Slide 3, revenues in the fourth quarter came in above our constant currency guidance range. Our gross profit margin came in at the low-end of our guidance range. On a reported basis, our operating profit was $138 million. Excluding restructuring charges, our operating profit was $151 million, representing a decline of 21%, or a decline of 24% on a constant currency basis. This resulted in an operating profit margin of 3% before restructuring charges, which was above the high-end of our guidance. Breaking our revenue trend down into a bit more detail, after adjusting for the positive impact of currency of about 4%, our constant currency revenue declined about 6.5%, which rounds to 6% on a single-digit percentage basis. As acquisitions and billing days had no net effect, the organic days adjusted revenue decline was also about 6.5%. This represented an improvement from the third quarter revenue decline of 15% on a similar basis and 2 consecutive quarters of significant improvement from the second quarter of 2020. Turning to the EPS bridge on Slide 5, on a reported basis, earnings per share was $1.33, which included the restructuring charges of $12 million which, including related tax impacts, represented a negative $0.15. Excluding the restructuring charges, earnings per share was $1.48, which exceeded our guidance range. Included within this result was improved operational performance of $0.38, better-than-expected foreign currency exchange rates which added $0.03, a lower weighted average share count from share repurchases that added $0.02, offset by higher other expenses that had a negative impact of $0.05. Looking at our gross profit margin in detail, our gross margin came in at 15.8%. Underlying staffing margin contributed to a 40 basis point reduction. The anniversary of the incremental Fillon subsidies in France in October and the mix of higher seasonal yearend enterprise activity within the Manpower brand drove the overall additional year-over-year staffing margin decline from the third quarter result of down 20 basis points year-over-year.

[Jonas Prising:]

Thank you, Jack. We're well positioned to be able to provide the strategic and operational workforce expertise and flexibility our clients and candidates are looking for

[Operator:]

Thank you. We will now begin the question-and-answer session. Our first question came from the line of Andrew Steinerman of J.P. Morgan. Your line is now open.

[Andrew Steinerman:]

Good morning, Jonas and Jack. I wanted to focus on the Manpower U.S. brand that, obviously, you already said that revenues were down only 2% in the fourth quarter and headed to growth in the first quarter. This is kind of a huge-mongous improvement from a minus 21% in the third quarter. So I thought you just might take some time to help us understand how much of this is kind of market improvement versus Manpower's specific success, and if you could also make a comment on how January, this January 2021, started for the Manpower U.S. brand?

[Jonas Prising:]

Good morning, Andrew, and thank you. Yeah. No, we're very pleased with the progress we've seen in the U.S. Manpower business. And it's difficult to say at this point how much is us and how much is market. But I would say that we've seen a continued at or above market performance from the Manpower business all the way through a number of quarters now. And what we could observe is that clients are really looking for the flexibility that the Manpower offering provides them across a number of sectors. And we expect to continue to see good evolution here on the Manpower side going into the first quarter as well.

[Jack McGinnis:]

And I would add to that, Andrew, to your point about January trend. So what we saw for Manpower was good, steady improvement the entire quarter in the fourth quarter. So starting mid-single-digits days adjusted. And then December, we did have higher volumes of logistics activity, which really took December to a growth overall for the month. What we see for January is as some of that logistics activity is seasonal and falls off, still good underlying improvement into the month of January. Demand continues to be very strong and increasing, so we see that continuing, and as we said for the first quarter overall, we see that trend continuing for the next 3 months.

[Andrew Steinerman:]

Great. Thank you.

[Operator:]

Thank you. And the next question came from the line of Mark Marcon of Baird. Your line is now open.

[Mark Marcon:]

Good morning. Thanks for taking my question. I'm wondering if you could give an overall comment with regards to perm placement in terms of what you ended up seeing globally this quarter as a percentage of revenue. And what your prognostication is for improvement going forward? And then, I've got a follow-up.

[Jack McGinnis:]

Mark, sure, this is Jack. So perm, I guess the way I would look at perm is the progression over the last 3 quarters continues to improve. So if I look at perm gross profit dollars year-over-year, in the second quarter, at the depth of the pandemic, we were down 43%. That improved in Q3 to down 27% year-over-year. And here in Q4, we were down 18% year-over-year. So I'd say good steady improvement. In terms of, we measure it as a percentage of total gross profit dollars. And I'd say, you probably remember, we were running close to 16% pre-crisis, about 15.9% for full year 2019. As we end the fourth quarter here, we're at about 13.2% of our GP contribution is from perm. So the outlook for that is we continue to expect the same trends going forward, so that steady improvement in perm will continue into the first quarter. We're expecting that to continue to see a reduced rate of decline year-over-year. I would say as we look back to the fourth quarter, we saw some very strong perm trends emerging in Italy, which was great in the fourth quarter overall. So we are seeing some very - some nice trends of perm picking up. And I think in our prepared remarks, we also called out RPO in the U.S. was growth year-over-year, and so that's certainly contributing as well. So there's certainly some very good signs that perm is starting to return and we're seeing good steady improvement into the first quarter.

[Mark Marcon:]

Right. And this as a follow-up, to what extent is that, the perm part of the business driving the operating profit margin guidance? And, when would you expect that to potentially inflect?

[Jack McGinnis:]

Yeah. So I would say if you look at what's happening on GP margin, perm, that decline year-over-year has been a pretty steady drag in the margin. So we said in the fourth quarter, about 30 basis points in the walk, that's in line with what we've been experienced. I would expect, Mark, we will continue to have a drag until perm returns to growth again. And so, we'll continue to have a bit of a drag in the first quarter. I think if you look at the first quarter guide on GP margin, staffing is holding up very well. So staffing is basically we're projecting staffing margin to be flat year-over-year. I think, overall, it's down about 10 basis points in the guide. And that's largely because perm still will not be back to growth, but it will continue to be improving. So it will still be a drag. It'll be less so of a drag in the first quarter.

[Mark Marcon:]

And every recovery is going to be a little bit different. But assuming that we do have a recovery, kind of a post-pandemic environment in the second half, how quickly do you think perm could end up bouncing back?

[Jack McGinnis:]

Yeah, so I think once we get beyond the first quarter, we expect to see strong growth in perm beyond that, as we start to anniversary the huge declines in 2020. I'd say we would - as we talk about that percentage of total GP, I would expect that, Mark, to steadily increase over the course of 2021.

[Mark Marcon:]

Terrific. Thank you.

[Operator:]

Thank you. And the next question is from Jeff Silber of BMO Capital Market. Please go ahead with your question.

[Jeffrey Silber:]

Thanks so much. You gave a little bit of color on intra-quarter trends and January trends for the U.S. Can we get some similar color on some of your other major markets? Thanks.

[Jack McGinnis:]

Sure, Jeff. I guess, what I'd say maybe to back up and talk about the fourth quarter overall, and that trend that - that steady improvement trend. So we gave you the overall quarter in terms of the organic constant currency days adjusted decline of 6.5%. If you look at the monthly trend, October was down about 9%. That improved in November, to down about 7%. And then, December, with that higher logistics activity that we called out, improved to down about 3.5%, so good improvement. I'd say we see probably a more marked improvement in the month of December. But that was due to that yearend seasonal logistics work. So I think as we look forward to January and some of the trends we're seeing in some of our key markets, I'd say a continuation of some of the underlying progress we saw in the fourth quarter, I'd say probably with one exception. I think as we called out in our prepared remarks, France is experiencing some heightened restrictions. So businesses continuing, so that's good. But what we're seeing is not too different than what we saw in November, when France had some heightened restrictions. That did slow down their progress in terms of the continued rate of progress on the recovery. We're seeing that in the month of January. So instead of ongoing improvement in January, a trend more consistent with what we saw in the month of December. And as we see those, as we look forward and those restrictions are loosened, we'd expect to see a trend similar to what happened in the fourth quarter, when December had a bit of an improvement after the restrictions were lifted. So I'd say that's the trends in the key markets. We said that Italy is continuing to see very strong trends, so growth year-over-year in January. We talked about the U.S. seeing good improvement, particularly on the Manpower side. And I'd say the other market is the UK. So it was great to see the UK really come out of more of the sluggish returns we saw in the third quarter from a revenue perspective, so very good surge of revenue in the UK in the fourth quarter, which was great. We do expect - a lot of that was yearend logistics and some Brexit related work in the public sector. We do expect some of that to continue into the first quarter. So I'd say the UK is continuing to perform at a good level as well.

[Jeffrey Silber:]

All right, that's really helpful. And as my follow-up, Jonas, I guess this one's for you. In your prepared remarks you talked about your thought leadership piece that companies were planning on speeding up their digitization plans. And those companies are either maintaining or increasing their headcount. I'm really curious, can you give us some color in terms of where those headcounts either maintenance or increases are coming as it is in technology jobs? Is it overall, any color would be great?

[Jonas Prising:]

Sure, Jeff. The increase in employment, it actually cuts across many different skills categories, because it essentially indicates that their confidence in the future is high, and that they're looking to maintain or increase their levels. So it's actually broad based across a number of them, of course, there are going to be increases in the skill sets within IT, but also within logistics and just the general operations and sales. And that's an indication of their increased confidence in their business model, their ability to adapt to this - these accelerating changes and their belief that they will be able to take advantage of them.

[Jeffrey Silber:]

Okay. That's really helpful. Thanks so much.

[Jonas Prising:]

Thanks, Jeff.

[Operator:]

Thank you. And the next question is from the line of Hamzah Mazari of Jefferies. Your line is now open.

[Hamzah Mazari:]

Hey, good morning. My first question is just stepping back just sort of a cycle question. Maybe if you could touch on, how this recovery is different than past cycles coming out of a downturn, I guess, you have a potential vaccine benefit we haven't seen yet. There's a lot of stimulus. Is sort of 2019 not the right prior peak to look at? I guess, if we look at your prior peak, $22 billion of revenue, all-time peak, 2019 was maybe $20.8 billion, I guess you were in the middle of last cycle, when COVID hit. So just any thoughts as you think about recovery, should we be looking at all-time prior peak revenue to judge sort of when you get back to a recovery revenue base, any sort of thoughts there would be great?

[Jonas Prising:]

Well, Hamzah, the year 2020 gets to contain all kinds of things, it gets to contain the deepest decline we've ever seen in the history of the company in almost 75 years, and also the fastest recovery, all of this happening in 1-year. And it sort of brought an economic expansion cycle to an end pretty abruptly in March, as we are all familiar with. But as we're looking at the recovery now, I think what our thesis has always been is in times of uncertainty and volatility, where human capital is going to make the difference for companies when they execute their business strategies, the services, the brands that we have respond extremely well to that demand. And that's what we've been positioning the company for all the way through the prior cycle and that's what we continue to position the company for. And as we mentioned in our prepared remarks, despite the pandemic, we continue to invest in digitization, we continue to prepare for the diversification and the markets where we saw good opportunities. And we also continue to drive innovation through our MyPath program, and analytics and insights across a number of our brands. So I think, we're very well positioned as we come into this new economic cycle, how it's going to look exactly is, of course, not something that we - is that we would know. But I would say that we're very confident that we're very well positioned, and we use the time of the pandemic to try and come out of this recessionary environment stronger than we were coming in. And by and large, I feel very good about the work that we've done during 2020 to achieve exactly that.

[Jack McGinnis:]

And Hamzah, I would just add to that to your question about what's different this time. So I think the one-item that's very different is just how margin is held up; staffing margin has held up fairly well. We have not seen a big change in pricing. And in some - actually, some markets, we've actually seen improvement in pricing. So I'd say that's a big difference. And you bring up a very good point about pre-crisis 2019. Remember for us, 2019 was the year where we - really we're still in a manufacturing slump in most of Europe. We were in revenue declined for the full year of 1% in constant currency. So I would actually go back prior to that really in the beginning in the middle of 2018 is when a lot of the manufacturing really started to decline in Europe. So I'd say more of the midpoint of 2018 is what I would consider more kind of the peak cycle and even 2017 we had good upper mid-single-digit revenue growth in constant currency. So I think it's a very good point, reflecting on the fact that 2019, even though, it was technically pre-crisis was still a year of decline for us on an overall basis based on what was happening in manufacturing. And that is our opportunity going forward as manufacturing comes back in the recovery.

[Hamzah Mazari:]

That's very helpful color. And just my follow-up question is just on the diversification strategy, higher solutions mix, higher professional services. I guess, you baked that into your long-term margin target of, I guess, close to 5%. Do you have to do a lot of acquisitions to get there? Or is this largely sort of organic growth, where you see that shift and mix over time?

[Jonas Prising:]

Our growth strategy hasn't changed. So we can do all of what we want to do organically. But as we've mentioned in the past, if we were to look at acquisitions, it would be within the Experis IT side of the business or in parts of the Talent Solutions business as well. So those would be the 2 areas where we could contemplate acquisitions, but we don't need to make an acquisition. We have strong organic growth plans. We prefer organic growth, because it provides a better return to our shareholders as we execute that, but it's possible that there could be opportunities that have to fill all of our filters of cultural fit, business fit and geographic mix, so that we could accelerate even faster. But we don't have to do that to get to the objectives of diversifying the business.

[Hamzah Mazari:]

Great. Thank you so much.

[Jonas Prising:]

Thanks, Hamzah.

[Operator:]

Thank you. And the next question came from the line of Manav Patnaik of Barclays. Your line is now open.

[Manav Patnaik:]

Thank you. I apologize if I missed it. But Jack, could you just talk about why the margin guidance in the first quarter is, I guess, lower than what we had thought maybe there's some moving pieces that I'm missing there?

[Jack McGinnis:]

Yeah, Manav, I'd say the first quarter really there isn't - it's actually pretty straightforward. It's - the thing to remember about the first quarter, it's typically our lowest quarter for revenues and profitability overall. So we typically start at a bit of a lower base in Q1. So I think the key item is, we're seeing gross profit margin down only 10 basis points in the first quarter. So that's an improvement from the trend we've been experiencing. And included in that, as I was referring to earlier, still a bit of a drag on perm contribution, so perm will continue to improve, but still not back to growth in Q1, and that's having a slight impact on the margin overall. So I'd say staffing margin, if you look at year-over-year, we're expecting that to be pretty much in line with where we were in the year-ago period. I think in the year-ago period, our margin was up 10 basis points overall. So generally in line, it's just that the first quarter tends to be a bit depressed due to the lower revenue and profitability.

[Manav Patnaik:]

Got it. And Jonas, maybe in terms of just long-term changes that perhaps the pandemic has brought onto your industry, I mean, it sounds more like things have just gotten accelerated in terms of digitization and so forth. But have you seen any noticeable other changes that you guys might have to pivot to it?

[Jonas Prising:]

We're still in the midst of the pandemic, especially in Europe. But our view is that a lot of the change that's occurring is an acceleration to your point, Manav, of preexisting - or trends that existed before the pandemic. And that's really what we're seeing it now, an increase in digitization, an increase in the focus on the importance of skilled human capital, helping businesses execute on their strategies at speed. The evolution of new business models within businesses and how they go to market. So a lot of transformative work, a lot of change as it relates to technology, and both of those lead to a lot of change in the need for skills. And that's why we feel very good about our strategies, because we had projected that these structural trends we're going to be impacting - continue to impact both labor markets and organizations. And in fact, the pandemic is accelerating many of these underlying structural trends. And we don't really see the emergence of any new structural trends following the pandemic at this point. It may, of course, come later on. But all of this to say that we think whatever is - what is happening in labor markets and in organizations is really matching up very well with the strategies that we're pursuing globally.

[Manav Patnaik:]

All right. Thank you very much.

[Operator:]

Thank you. Our next question is from Kevin McVeigh of Credit Suisse. Please go ahead with your question.

[Kevin McVeigh:]

Great. Thanks so much. Hey, Jack, you spent a fair amount of time talking about digitization, and truly translated even more leverage on the SG&A line. Is there any way to think about - is there more leverage on SG&A? And does that manifests itself in higher margin? Or does the mix kind of get offset on the GP line? Just how should we think about that, because it seems like clearly, you're getting more leverage out of the dollars you're spending?

[Jack McGinnis:]

Yeah, Kevin, thank you. I guess, what I would say, you're breaking up a little there, but I think I caught most of your question. Basically, digitization is helping us with our efficiency on an overall basis and that clearly is a continuing trend. So we continue to leverage automation and digitization, and Jonas has talked a lot about our technology roadmap. And that will continue, I would say, the way we're looking at that is we are experiencing some increased spend on technology, I call that out in terms of our corporate expenses for the first quarter. But our goal is to offset that as much as possible with ongoing productivity. And we're seeing that we talked about the businesses throughout 17 countries, we've already implemented our new front office system. We are getting increased productivity, where we have implemented the technology, and we continue to have a very good rollout here in 2021 across 17 countries as well. So those - that progress will continue to increase our productivity going forward. And that helps us fund some of this increasing - increased investment. I would say, though, we will probably still have a little bit more of investment as we continue through the recovery and that should ease as we move forward. But on an overall basis, absolutely, the investment in technology is improving our efficiency on an overall basis and that's helping fund the increased costs.

[Jonas Prising:]

And Kevin, the only thing I would add to that is, the productivity and the efficiency gains are going to be very welcome. And you've seen how we've leveraged the technology in terms of reducing our physical footprint very significantly over a number of years. But the great news with these technology investments is that they also provide with opportunities for growth. It's easier for us to move towards candidates and have interactions with candidates on an ongoing basis, increasing reassignment rates, and increasing referrals, which help us grow, fill orders faster. It also provides us with new offerings around analytics, where, for instance, in our Talent Solutions businesses, we can provide a lot more insight and advice to our clients. So they run their businesses more efficiently, which gives us more growth opportunities. So it's really on both sides, it runs our business better and more efficiently, which is what we're always aiming to do. But at the same time, it helps increase both existing growth opportunities within our brands as well as open up new opportunities for future growth in new offerings as well.

[Kevin McVeigh:]

Yeah, it makes a lot of sense. And then just real quick on the Mexican legislation, would you expect to the extent that goes through that you'd see an increase in perm placement? Or are there any just puts and takes as you think about the impact of that over the course of 2021?

[Jonas Prising:]

Well, if I step back a bit, Kevin, and give you just an idea of what the proposal is all about. So the President of Mexico has been concerned about certain employment practices in Mexico, and in terms of outsourcing, and he's introduced a very broad proposal to address those, frankly, legal practices and clearly, which is not related to our industry, specifically. But the issue is that the proposal is so broad. So as drafted, it could have a significant impact on restricting various outsourcing arrangements, including the staffing industry. And we believe that the legislation should be more targeted to address this issue. And we, along with our industry association and the broader business community has been providing feedback to this extent. And this should play out over the next couple of months and we're monitoring this closely. And I think by the next earnings call, we should be able to provide you some more detail on what specifically has been impacted. So right now, the impact could be pretty broad, although difficult to quantify. When we talk next, I believe we should know more the details and understand, what it would be impacted and how we would mitigate it, and how we would adjust our business in Mexico.

[Kevin McVeigh:]

Thank you.

[Operator:]

Thank you. The next question is from Tobey Sommer of Truist. Your line is now open.

[Tobey Sommer:]

Thank you. Could you elaborate on what's driving the growth in your solutions business, particularly RPO, and then maybe comment on the drivers at the customer level and what you're hearing from them in the prospects for that in this expansion? Thank you.

[Jonas Prising:]

Sure, Tobey, I'll be happy to. Over a number of years, we've seen that our Talent Solutions' offerings have really responded to the company need to focus on what they do best, and then work with strong global partners to help them navigate human capital related solutions. And we're really well placed in all of our global offerings within RPO or within MSP TAPFIN as well as Right Management to respond to those demands. And what's been very interesting to see, Tobey, is that during the pandemic, despite the headwinds that a lot of companies had. First of all, our MSP TAPFIN business as a whole grew during 2020 of this pandemic year. So the idea that we would be able to provide a solution that reduces the risk, reduces the cost, and has really come through very, very strongly for our clients. And we are very optimistic on our TAPFIN business. RPO was, of course, a business that was hit very hard right at the beginning when the uncertainty was at its highest, but we've seen a very quick return and recovery, and our win rate in the fourth quarter coming into the first and the second quarter is looking very strong. And I think that's an indication of companies thinking about what it is and how they want to deal with recruitment, and working with partners that can help them find great talent and integrate great talent at scale on a national, regional or a global basis, and then take it forward as part of their overall human capital strategy of how they want to attract and retain the best and the brightest talent to run their business. So I think both of our offerings there really respond to the strategic need for companies to run their business in different ways focus on what they're doing really well, and then work with world class partners, such as ManpowerGroup Talent Solutions. And let us handle that part, we expect that this trend carries on as we go through this economic cycle, because it's really seen a tremendous boost even during the pandemic, despite the very deep downturn in the second quarter.

[Tobey Sommer:]

Thank you. My follow-up, could you refresh us on your balance sheet management strategy and your leverage goal and maybe the most likely path for you to get there?

[Jack McGinnis:]

Yeah, Tobey, I'd say, from a balance sheet perspective, you saw the details in the release slides very, very comfortable. So we have a net - continue to have a net cash position. You did see what we did in the fourth quarter from a capital allocation perspective. So with the balance sheet as strong as it was and with the outlook continuing to improve, we definitely allocated more capital to share repurchases in the fourth quarter. So, I guess, what I would say from a leverage perspective, our ratios are very comfortable at the moment. We will continue to see improvement as profitability continues to improve, as we look at trailing 12 months EBITDA. So, I'd say the outlook is it continues to be improving on an overall basis. So we feel very well positioned from that perspective. And it was also great from capital allocation to increase the dividend again in the fourth quarter. So I'd say the outlook is very stable, improving trends and we look for that to continue.

[Operator:]

Thank you. And the next question is from the line of Gary Bisbee of Bank of America. Your line is now open.

[Gary Bisbee:]

Hey, guys, good morning. So when I look back at past recessions, there's frequently a couple of years of elevated revenue growth as the business bounces back and benefits from stronger economic growth coming out of these types of things. When I think about today, obviously, you've got easy comps and seeing improvement sequentially on a month-to-month basis, pretty strong in the last 6 months; on the other hand, when we look at GDP forecasts, pretty anemic recovery that's being forecast for Europe, at least relative to the U.S. How should we think about sort of the need for economic growth versus just the cadence of the business normalizing in a more normal environment post a recession or post the pandemic? Does this feel like your setup for a good period of recovery, like you've seen in the past? Or could a weak economic recovery have some impact on that? And obviously, I'm asking beyond Q1, just thinking out over the next couple of years.

[Jonas Prising:]

So we feel really good about the overall outlook and how we're positioned in terms of this recovery. Then when you look at the economic recovery, although there is great uncertainty on - when it really starts to kick in, a lot of the world that - Asia, North America, parts of Latin America should see some really good improved growth. This morning, you might have seen the GDP in the fourth quarter for Europe. So Europe is clearly lagging behind in that growth. But having said that, just as when we came out of the last great recession, we could see some very good growth, even though GDP growth was lower. And the driver of that growth, we believe came from the need for companies both to transform their workforce, and the degree of uncertainty that they were facing, so unwilling to take on permanent headcount to some degree and preferring the flexibility of our workforce solutions across all of our skill-sets. And we think that that's going to play out just as much, if not more going forward as well. And just as we had said in the last economic cycle, that we thought the penetration rate, so the market share of our overall offerings as an industry would surpass the prior peak, that would still be our belief, also coming into this new cycle that we would see greater use of flexible workforce solutions, greater use of permanent workforce solutions, as well as of course the offerings of talent solutions that we have, which should be able to help us have a good run base, even if the GDP recovery is a little bit slower in Europe.

[Gary Bisbee:]

Great, thanks. And one follow-up on just the tax rate commentary, Jack. You said that based on the French tax situation, you would expect the tax rate to be down 4%, but not this year, because profits are down. I understand that dynamic. But of those 2 things you called out, I assume those are temporary, right? So should we see that things as a tax rate may fall in 2022? Or could the payroll tax and the corporate tax changes in France sort of go back to the pre-pandemic levels beyond this year? Do you have any insight or color on how that could play out? Thank you.

[Jack McGinnis:]

Yeah, so Gary, there's 2 parts of that. So we have the French business tax, which is the bigger part. So that's about 3.5% of the minus 4%. And, that's a fair question, to be determined. We're hoping that's permanent. We know President Macron has been very focused on the French business tax is uncompetitive for France, so although technically, there's only a one-year budget going forward. We're hoping that that reduction continues into future years. So to be determined, but as of right now I think a lot of the press on that is hopeful that that reduction will continue into future years, but we'll keep you posted on that. The second part of it is just overall corporate tax reform in France on their corporate rate. And that is permanent. So that steps down again this year to 27.5% from 31% last year. And it steps down again in 2022, down to 25%. So we'll see additional improvement next year as that occurs. So that's the landscape currently and we'll keep you posted on the French business tax going forward as well.

[Gary Bisbee:]

Thank you.

[Jonas Prising:]

Oh, great. Thanks, Gary. And, Eunice, this would be the last question coming up.

[Operator:]

Thank you. It came from the line of George Tong of Goldman Sachs. Your line is now open.

[George Tong:]

Hi, thanks. Good morning. Gross margins contracted 70 bps year-over-year in the quarter. You mentioned negative impact of about 40 bps from temp staffing and 30 bps from perm placement. Can you talk a little bit about which areas contributed to the negative surprise on gross margins in 4Q and how those areas might evolve heading into 1Q?

[Jack McGinnis:]

Sure, George. I'd say, just quickly, we came in within our guidance. So we did come in within the range. It was just slightly below the midpoint at the lower end. So I'd say on an overall, pretty much in line with expectations, except that we did call out that we did have more logistics, Manpower business, seasonal yearend work. That was a bit of a mix issue that took the margin down slightly. I'd say that's probably the main item that took us down slightly below the midpoint of that GP margin. I think on an overall basis, as I mentioned earlier, staffing - pricing is holding up very, very well. If you look at staffing margin in the fourth quarter versus the third quarter, it was a little bit more of a decrease of 40 basis points, but largely due to that enterprise mix of logistics that I mentioned that contributed little bit more. The other 10 basis points was really the anniversary of some subsidies. In France, we had the Fillon subsidies that came in, in October of 2019. So as we lap those that was about 10 basis points of the pressure as well. But overall, I'd say we feel pretty good. And that really feeds into our guide for the first quarter, where on an underlying basis we see staffing pretty close to flat year-over-year, overall GP margin still down about 10 basis points, largely because perms still recovering.

[George Tong:]

Got it. That makes sense. And then, as a follow-up, you talked about January trends in France softening as COVID concerns there have increased and the government imposed some restrictions. Can you elaborate just broadly on the labor market conditions in France and how long perhaps you expect the lockdowns will be in place for?

[Jonas Prising:]

It's difficult to project how long the lockdowns will be in place for in France, or for that matter, across Europe. I think our caution as we look into the first quarter, it really is related to the evolution in Europe. And that's to do with the impact of the virus appears to be still very strong. And the governments across Europe, including France have put in lockdown measures to prevent the spread. And the second component is the slow speed of the vaccine rollout. So as soon as we start to see an improvement in the health situation across Europe and in France, as well as the speed of vaccinations pick up, then we think we'll see some good evolution also in France and in Europe. I had the opportunity to be in France just a couple of weeks ago. And so I was there to review the business and see for myself what the lockdown measures were doing. And it's clear that both government is interested in not impacting the economy too much, the public knows how to behave and try to reduce the spread of the virus. And finally, the companies are much better at navigating the effect of the infection risks within their production facilities as well as within their office environment. And, of course, most of the office environment is done remotely at this point to reduce the risk of infections. So overall, George, I think we feel good about where this is going eventually. The outlook is a little bit more cautious based on the near-term prospects in particular in Europe.

[George Tong:]

Very helpful, thank you.

[Jonas Prising:]

Thank you, George. And with that we come to the end of our fourth quarter 2020 earnings call. We look forward to speaking with you in our next quarterly earnings call. Thanks so much. Have a good rest of the week.

[Operator:]

Thank you. And this does conclude today's conference call. Thank you all for participating. You may now disconnect.