ManpowerGroup Inc.
Q3 2013 Earnings Call Transcript

Published: 21 Oct 2013

[Operator:]

Welcome, and thank you for joining the ManpowerGroup Third Quarter Earnings Conference Call. [Operator Instructions] Now I will turn the meeting over to Mr. Jeff Joerres, Chairman and CEO. Sir, you may begin.

[Jeffrey A. Joerres:]

Good morning, and welcome to the third quarter 2013 conference call. With me, as usual, is our Chief Financial Officer, Mike Van Handel. I'll kick the call off going through a few of the high-level results for the quarter, and then Mike will go through the details of the segments, as well as anything regarding the balance sheet and our forward-looking items for the fourth quarter. I will then talk a bit more about our progress in the simplification and recalibration efforts. Before moving into the call, I'd like to have Mike read the Safe Harbor language.

[Michael J. Van Handel:]

Good morning, everyone. This conference call includes forward-looking statements, 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. Additional information concerning factors that could cause actual results to materially differ from those in the forward-looking statements can be found in the company's annual report on Form 10-K and in the other Securities and Exchange Commission filings of the company, which information is incorporated herein by reference. Any forward-looking statement in today's call speaks only as of the date at which it is made, and we assume no obligation to update or revise any forward-looking statements. During our call today, we will reference certain non-GAAP financial measures, which we believe provide useful information for investors. We include a reconciliation of those measures, where appropriate, to GAAP on the Investor Relations section of our website at manpowergroup.com.

[Jeffrey A. Joerres:]

Thanks, Mike. We had a very good third quarter, as many of the initiatives we had started regarding simplification and recalibration came through higher than our expectations. Assisting the quarter was also an increasingly better revenues throughout the quarter across almost all geographies. Those 2 elements gave us an increase in operating earnings before restructuring of 44% over the last year and well over our anticipated results. We see this as extremely favorable, as this will allow us to enter the fourth quarter with even more optimism to finish the year strong. While the economies throughout the world have not improved dramatically, we were able to generate some operational leverage and improved productivity as a result of our simplification plan. Our revenue for the quarter was $5.2 billion, flat with last year. This is the first time in 6 quarters that we've been able to get to the point that we are flat over the prior quarter and prior year. Clearly, this is not the goal, but it is showing that we are trending in the right direction. As I stated, this less-than-expected revenue decline or slightly better revenue results is true across the board, with only Asia Pac Middle East coming in below the bottom end of our original guidance and Right Management coming in at the midpoint. Other than that, we were able to exceed all of our guidance in revenue, which clearly helped the third quarter results. Even with slightly better revenues, we continue to maintain our price discipline, and we are seeing the results of that come through in a leveling of gross profit, particularly on the staffing side. We still have a long way to go, as there are several of our large markets that continue to be under pressure, but the pressure is no greater than what had experienced in the past. Our gross margin came in at the low end of expectations, which is somewhat understandable as we look into the details. Our permanent recruitment business continues to be sluggish in Europe and Asia, which is constricting to some of the downward pressure in gross profit. Also, our Experis brand, on a European basis, is not growing or expanding the way we're anticipating, as the market remains tepid. Having said that, action has been taken, which is giving us a very strong showing, and what we're able to do and able to do with our expenses resulted in a very good operating profit for the quarter. Operating profit for the quarter was $162 million, up 36% as reported in constant currency and up 43% excluding restructuring, this yielding a 3.3% operating profit margin, up 100 basis points excluding restructuring. Truly a strong performance by the team. And as you will hear from Mike, our recalibration efforts continued to yield results, as well as our drive towards a healthier business mix. Now for additional information regarding the quarter and the segments, I'd like to turn it over to Mike.

[Michael J. Van Handel:]

Thanks, Jeff. As Jeff discussed, our performance in the third quarter was much stronger than forecasted. Earnings per share was $1.18, up 49%, but before restructuring was $1.26, up 59%. This compares to the midpoint of our guidance range of $1.06. Of this $0.20 outperformance, $0.17 relates to operational performance. This operational outperformance was due to higher revenue than expected and lower SG&A expenses due to our cost recalibration efforts. Revenue in the quarter was flat with the prior year on a reported basis in U.S. dollars and in constant currency compared to a forecasted decline of 1% to 3%. On an average daily basis, revenue was down 2% in the quarter, an improvement from the 4% average daily decline we saw in the first and second quarters. Revenue in both Southern and Northern Europe was better than our guidance range, as we experienced some growth in a few markets and an improvement in the year-on-year contraction rate in other markets. Our SG&A expenses in the quarter were down 7% in constant currency, or down 8% excluding restructuring, reflecting strong execution on our simplification plan. Earnings per share were $0.02 above forecast due to gains on sales of investment securities, $0.01 better, as the impact of foreign currencies were neutral in the quarter compared to a forecast of an unfavorable $0.01. A slightly lower tax rate also added $0.01. Our weighted average shares negatively impacted earnings per share by $0.01, as the average shares outstanding were higher than forecast due to the increased dilution from equity plans as a result of a higher share price. This all resulted in earnings per share before restructuring charges of $1.26. Our restructuring charges in the quarter were $8.1 million, or $0.08 per share, which was within our forecasted range. Restructuring charges in the quarter relate to the simplification plan we put in place last fall. The $8.1 million of charges was incurred across all 5 of our reporting segments. The nature of these charges relates primarily to severance and lease costs. Later in the call, we'll review the performance of the operating segments, which will -- which includes these restructuring charges. Our gross profit margin for the quarter came in at 16.5%, down slightly from the prior year and previous quarter, which were at 16.6%. Looking at the components of our gross profit margin, temporary recruitment was stable overall, with Manpower's gross margin flat and Experis up 10 basis points. Within Manpower, the French gross margin improved primarily as a result of the CICE tax credits. On the Experis side, we saw good gross margin expansion in the U.S. as a result of focused price initiatives and in Sweden as a result improved bench utilization. We continue to see some price pressure in several of our markets as a result of soft demand for our services. We remain focused on price discipline and are selective on new market opportunities to ensure they meet our return-on-investment targets. Our permanent recruitment business was a drag on the overall gross margin by 10 basis points, as our permanent business contracted by 5% in constant currency during the quarter. While permanent recruitment remains sluggish in many of our markets, we are seeing strong interest from our clients in our high-value recruitment process outsourcing offering. During the quarter, we picked up several new clients, which positions us well for an economic recovery, when hiring should become more robust. Now let's turn to gross profit by business line. Our Manpower gross profit, which represents traditional staffing and recruitment services in the office and industrial verticals, comprise 2/3 of our gross profit in the quarter. Manpower's gross profit has been improving the last few quarters and was flat with the prior year this quarter. Our Experis business comprised 18% of gross profit in the quarter. Approximately 70% of Experis gross profit comes from IT services, 10% from engineering, 10% from accounting and finance and 10% from other professional services. Our Experis gross profit declined by 4% in constant currency in the quarter as a result of weakness in Europe and the Asia Pacific Middle East segment. In the Americas, which accounts for almost 50% of Experis gross profit, we saw gross profit growth of 5% in constant currency. Our ManpowerGroup Solutions business represented 9% of gross profit in the quarter and consists of Recruitment Process Outsourcing, MSP, Talent Based Outsourcing, Borderless Talent Solutions and Strategic Workforce Consulting. Our gross profit growth was flat in the quarter, as good growth in our MSP business was slightly offset by modest declines in the Talent Based Outsourcing. Our Right Management business comprised 6% of gross profit in the quarter and declined by 4% in constant currency, which I will discuss later in the call. Our SG&A expense in the quarter was $691 million, which includes $8 million of restructuring charges. As a result, our SG&A cost, before restructuring charges, was $683 million, a decline of 7.7% in constant currency. We saw a strong increase in productivity in the quarter as SG&A as a percentage of revenue improved to 13.2% from 14.3% the prior year. This was a result of tight cost controls and strong execution around our cost recalibration plan. On a year-to-date basis, our SG&A costs before restructuring are down $157 million in constant currency, or 6.9%, to $2.1 billion. This reflects a 60 basis point improvement in productivity, with SG&A as a percentage of revenue improving to 13.8% from 14.4% the prior year. These productivity gains are coming from all segments of the business. SG&A expenses are down between 3% and 10% in constant currency on a year-to-date business for all of the operating segments. As discussed last quarter, our cost recalibration plan is well ahead of initial target announced in the first quarter of this year. Our initial target was to reduce our SG&A cost run rate by $125 million this year based upon a recalibration of cost in 4 areas

[Jeffrey A. Joerres:]

Thanks, Mike. The third quarter was a strong quarter, and we were able to execute in several of the areas that we had committed to. And as a result, you are seeing improved profitability. We are starting to see a slightly better pace for revenue, which is critical for us to enjoy the operational leverage that will drive additional earning power. The fact that we are beginning to see improved revenue trajectory across many of the geographies, particularly Europe, gives us all the more sense of urgency to continue our work in our 4 areas of simplification and cost recalibration to position ourselves for any enhanced revenue to drop more of that to the bottom line. Our business mix, however, still needs to be improved. We are seeing our permanent recruitment business fall off slightly in Europe, which is driving down a bit of our GP percent but also profitability. Also, we are not seeing the growth that we were expecting within Europe -- Experis, particularly Europe. While our revenue growth for Experis U.S. has not been up to market, we have been very price disciplined, and as a result, our gross profit percent for Experis U.S. has improved dramatically. We will continue to drive revenue across all geographies, so our business mix will continue to have a favorable impact on our overall profitability. Our cost recalibration associated with the simplification process within the organization is paying tremendous dividends, as Mike spoke about. We continue to reap more benefits than we had anticipated, as we are driving in all of the areas of the organization with a tremendous amount of engagement from our managers across the world. As a result of this engagement of our teams across the world, we are overturning new ideas for us to drive the efficiency and productivity on a permanent basis. Clearly, not all of our cost reductions are permanent. But by far, the vast majority of them are expected to be. This gives us additional confidence to continue in improvement of our operational leverage. As we spoke about on our last call, we remain cautious regarding the lack of clarity with economic challenges throughout the Eurozone. Europe is a major driver of the business, as it makes up a large percent of our overall revenue. However, there is a difference between last quarter's conference call and this call. One is, you can start to see a modest improvement in the numbers, and we continue to have more positive conversations with our clients based in Europe. We believe there is still a ways to go before we start to see a dramatic improvement in our revenue picture, but we are moving in the right direction. In the second quarter, Europe, which makes up 65% of our business, was down 6% in average daily sales in constant currency. The same was true for the first quarter. The third quarter, this 65% of our business was down 2%, a very nice improvement as we continue to drive good market growth were there is the potential. Clearly, however, there is more work to do. We continue to do well in Solutions. The revenue growth rate of 5% is disproportionally affected by our Talent Based Outsourcing. Our Talent Based Outsourcing, which makes up nearly 2/3 of our Solutions business, is where we price our business on an outcome basis rather than on a markup over pay. The majority of this business is in Experis and Manpower and is tangential to the core resourcing or staffing business. And as a result, we are seeing some of our clients tailing back some of their usage in this area to maintain flexibility and agility and to reflect the sluggish demand environment for their products or services. If we were to exclude the TBO business, our Solutions business would be up 17% in constant currency. A prime driver behind this growth is the RPO business, or Recruitment Process Outsourcing, and our MSP business. Both of them are continuing to do well. We continue to average and slightly increase our number of wins in the RPO space and the MSP space. Additionally, we are seeing a nice uptick in our Borderless Talent Solutions, which is maximizing our presence across the world but primarily sourcing several candidates from India that are then placed in various parts around the world, with the U.S. being one of the larger recipients. In addition to our Solutions business moving along nicely as I mentioned, we are seeing better revenue trends in our core business. A few countries to highlight in this are Italy, France and the U.S. While in the U.S., we are still slightly behind market, we are working through ensuring that we are taking the right business. A few of our U.S. regions are up over 25%. And therefore, you can see that where we are not pruning some business, we are getting some very good growth. In addition to Italy, France and the U.S., where we've seen better -- we've also seen better trends in Germany and the Netherlands. All of this is positive in our major markets for us. As Mike has addressed in his prepared remarks, the cost recalibration is going well. We continue to focus on all 4 areas of organization, programs, technology and delivery. Each of these areas have unearthed more opportunity for us, and we will continue to work in these areas. The 2 largest areas left is technology and delivery. In the area of technology, we continue to focus our efforts on being as efficient as we can in the back office and front office, while investing appropriately in tools for our field and additional tools for recruiting, sourcing and associate care. Our delivery systems, where we are driving multiple delivery channels on a strategic basis, is going well. We have piloted this in the United States in a few of the regions, and we are continuing to work out a few of the details before we roll it out in more of a full scale. Other countries, the U.K. and the Netherlands, are further ahead. And as the results are quite positive, we are yielding above-average returns for the business in those marketplaces. As we look forward to the fourth quarter, we are confident that our teams across the world will continue to drive effectively with the recalibration process and enhance our ability to drive revenue that would be available, given the marketplaces. We still have unsure marketplaces, and we stand on guard for any certain uncertainties that arrive. However, at this point, we do not see a bit of -- we do see a bit of clearer skies, though we have many uncertainties to work through. With that, I would like to open it up for questions.

[Operator:]

[Operator Instructions]

[Jeffrey A. Joerres:]

I believe there's some people queued up. So can we put one on?

[Operator:]

Certainly. Our first question comes from Sara Gubins with Bank of America Merrill Lynch.

[Sara Gubins:]

You talked about cost reductions being largely permanent, although not entirely. If we start to think about growth on the top line next year, I'm wondering how we should think about the variability of SG&A, as some of it presumably would return.

[Michael J. Van Handel:]

Yes. As we look at our recalibration plan overall, as I mentioned in my prepared remarks, but I think it's probably worth summarizing, is we're looking overall to get $180 million out of the SG&A run rate this year as part of that program. Of that, $150 million will hit the P&L this year. And in total SG&A for the year, we expect over -- a reduction of over $200 million in constant currency so -- and so that additional $50 million plus is more variable in nature. So as revenue comes back, some of that, I would expect, will make its way into the expense base. Certainly, as we see growth in certain markets, we'll need to invest and put staff in place to support that growth as revenue comes in. But I think what's important is really leveraging that growth. What we're looking to do is try to be -- drive the productivity and efficiency, which comes down to part of what we're doing, part of our -- some of our delivery models and our channel strategy overall. And so as a result of that, we should get much higher incremental margin. So I guess that's a long way of saying yes, with growth, some expenses will come in. We don't expect those expenses to be proportional with the growth in SG&A and GP, as we think we will get some very good leverage coming from that growth and good incremental margins as a result of that.

[Jeffrey A. Joerres:]

But then what we're trying to do with that is -- as we have talked about, the largest area, kind of, that we have to still work on is delivery. So clearly, as we can get some of the new areas that we're doing with our multiple delivery channels out into the field, do it carefully, because that's where all of our revenue and profitability is made -- and the hope is we can we maybe get out ahead of that so that we can add less cost than we would normally because we're much more efficient because of how we're managing these channels.

[Sara Gubins:]

Okay. And then separately, any thoughts about share repurchase as dilution starts to hit the share count?

[Michael J. Van Handel:]

I think we've -- historically, we've done -- certainly been active on the share repurchase program. Last -- the last 2 years, we've bought back a little bit more than 8% of the overall outstanding. So we have been fairly active. We do have an authorization in place right now for 10 million shares, and we look at that subject to our overall capital structure and how we're positioned overall. Today, we don't have -- while the balance sheet is strong, we do like to -- we have some capacity for opportunities that might present themselves through the acquisition side, but we don't have -- we don't have a significant amount of excess cash on the balance sheet today. To the extent that, that accumulates, we certainly will consider repurchases, if that makes sense at some point down the road. But overall, we're looking to manage the overall leverage about where we are today. We do look to maintain an overall investment-grade rating from the rating agencies. We think that's a good place for the company to be from an overall perspective. And so -- so yes, so it is certainly something we'll consider going forward, but nothing in the immediate plans, given our overall balance sheet structure today.

[Operator:]

Our next question comes from Tim McHugh. He is with William Blair.

[Timothy McHugh:]

Just -- can you give us any more color on -- you talked about demand trends improved. And as you went through the quarter, was there a notable difference between the start of the quarter and, I guess, where you sit today? And just any color there?

[Michael J. Van Handel:]

Yes, sure, Tim. If I look overall as the quarter progressed, actually, just looking at year-on-year trends, August was actually quite an improvement on a consolidated basis relative to where we saw July, and then September looked a lot like August. So it wasn't a continuous trajectory. And typically, in these type of scenarios, when business is recovering somewhat, you just don't see a solid line. Sometimes, you get a little bit of a sawtooth on the way up. And so I think we're seeing a little bit of that, and I'm talking about average daily as well. I should be clear on that because we did have an extra day in September. So just look at average daily constant currency. We saw improvements, August. September looked pretty much like August. And when you look at country-by-country, you'll see, in some cases, September was better -- was an improvement relative to August. And in other countries, September was, on an average daily basis, slightly worse than what we saw in August. So we're seeing a little bit of choppiness, but certainly, overall, the overall trend continues to at least move -- be moving in the right direction, and we're closing that gap with the prior year.

[Timothy McHugh:]

Okay. And then on Experis, you talked about how, in some of the markets, the growth's not hitting what you'd like. And I believe you said you've taken some actions and made some changes. Can you -- I think you touched on a few of them. But, I guess, just elaborate a little bit more on what you'd like to do to change that going forward.

[Jeffrey A. Joerres:]

Each of the major geographies have a little different kind of characteristic to them. So we're not just applying one solution to it. I would say, if you were to try to categorize it in a bigger area, what we've done is to increase our focus on the IT part of Experis. We know that's the largest part of the market and the market that we are most successfully in currently. About 70% of our total Experis business is coming out of the IT area. So we're really working with our operations to make sure we focus on that. A little aside, the finance and accounting side in the U.S. had a very good quarter, so we are seeing some growth in there, but it's still not as large. Secondly, what we're doing is, is to making sure that, while we are increasing, in a lot of our geographies, our gross margin, and as a result, getting very good bottom line, we're taking a real hard look at the kind of price inelasticity side and say, "Okay, if we were to do a few things differently on the gross margin line, would we be able to bring on x additional business versus not?" And we're doing that on a market-by-market analysis, and we'll be making a decision on how much we want to be able to take on that might be a little off our targets but, we believe, would still yield a very good gross margin but improve our revenue picture in a much more dramatic way.

[Michael J. Van Handel:]

While I have you, Tim, as well, I was made aware that I may -- I did misspeak in our -- my prepared remarks. I said Experis comprised 40% of Northern Europe. It actually comprises 20% of Northern Europe. So get that correction made as well, please.

[Timothy McHugh:]

Okay, and then one last one. Mike, just the impact of the extra day in Q3, just in terms of the revenue growth, how much did that add at the end of the day?

[Michael J. Van Handel:]

Yes, so that would have added about 2%. 1.6%, I think, technically. So call it about 2%.

[Operator:]

Our next question comes from Andrew Steinerman with JPMC.

[Andrew C. Steinerman:]

Mike, it's a question about France. On an average day basis, the minus 4%, what would that translate to? And my sense is that Manpower's gaining share in France. Is that your assessment as well?

[Michael J. Van Handel:]

Yes, when you look at on an average daily basis in the quarter for France was down 5% overall, so right around 5%. I think we're probably picking up just a little bit of market share. Certain geographies are a little bit stronger than others, and so I think we probably are picking up just a little bit of share overall. But when you look at France, we've seen a fairly steady improvement across the quarter and into the early stages of the fourth quarter and fairly gradual but continuous closing the gap relative to the prior year. So as we look forward to the fourth quarter, we see that trend continue.

[Andrew C. Steinerman:]

And what's implied in the Southern Europe guidance for France in the fourth quarter?

[Michael J. Van Handel:]

In the fourth quarter, specific to France, we'd be looking for down 2% to down 4% year-on-year on an average daily basis. And days are the same in the fourth quarter. So effectively, that's the same.

[Operator:]

Our next question comes from Tobey Sommer with SunTrust.

[Tobey Sommer:]

I wanted to ask you a question about the SG&A expenses that would -- needed to be to accompany revenue growth going forward. Is there a greater sensitivity to the SG&A kind of accompanying revenue growth depending on in which segment you experience the revenue growth? And if so, which one is more closely tied?

[Michael J. Van Handel:]

Yes, sure, Tobey. I don't think, when we look at opportunities to leverage SG&A with top line growth, I think we're sitting pretty well in all markets, meaning that I would expect, with some revenue growth, we'll have some fairly good operating leverage in all markets. And it's difficult for me to put one above the other. I think we've got a little bit of capacity in many of the markets that we're in. And I think, as we look forward and we look at what we're doing from a delivery strategy and a channel strategy, we expect we're going to be driving efficiencies in many of the markets. So I think -- I don't think I would to point to one more than the other. Certainly, what I think is maybe going to be more important is exactly where that growth happens within a market. So if you get into certain geographies within country, may have excess capacity within an office, whereas other offices might be completely full and -- in terms of our productivity. So if the growth comes in markets that are already booming, clearly, we're not going to get quite the leverage that we would get if the growth came in a market that happened to be down and still on a recovery standpoint. So I think that's probably going to be the more important fact overall in terms of where the growth may come and how that leverage might play out, but I do think each of our segments has good upside from an operating leverage standpoint.

[Tobey Sommer:]

And then just if you could comment on the momentum you're seeing in the MSP and RPO markets, to what extent that is new work coming to market versus displacing competition.

[Jeffrey A. Joerres:]

In the RPO space, it still is more new work, though we have kind of made full circle on a couple of the large contracts that we have, and we've done a good job in securing those second time around. But I would say this is a -- particularly more so in South America and in Asia, where we're seeing good growth, a lot of this is new opportunity. These are secular changes that really allow us to expand what we're doing without having to get into taking it from somebody else, if you will. On a run-rate basis, we are ahead of what we were the last 2 quarters in the number of wins in the RPO space. When it comes to MSP, there is still some aggregation going on within the U.S., so some of that is taking business from smaller MSP providers or aggregating them all into one across the world or expanding a successful MSP program into other geographies is what we're seeing. And in some other geographies, it makes it more difficult because of some laws, as well as maybe skewed market shares within there, where we may have, in a couple of countries, 30%, 40%, 50% market share and MSP doesn't seem to make as much sense, but those are opening up to us as well. So both of those have some -- have strong pipelines, and we're comfortable with those pipelines as we're getting some momentum in the area. I would also comment that the actual hiring occurring within the RPO businesses that we are winning or have won in the past is still on the slow side. So there's still a lot of opportunity. If we can get some demand in the marketplace, you're going to see those RPO contracts flow through a lot more hiring and, as a result, generate a lot more profitability.

[Operator:]

Our next question comes from Mark Marcon with RW Baird.

[Mark S. Marcon:]

I have a couple of questions. One, with regards to France, how much of the CICE are you able to keep? What's your sense in terms of the market as we think about the rest of this year and going into next year?

[Michael J. Van Handel:]

I think, in terms of the CICE, just to what was said overall, that's a tax credit that we're receiving as part of the overall French stimulus program, and it amounts to 4% of employee wages. And so it's all employees, not just temporary employees, but all employees. And that increases to 6% next year. And now the intent of that subsidy is to go to the employers and also to be reinvested in training and employment programs, which we, in fact, are doing. So from our perspective, this is a credit that does stay with the employer, and our view is -- has been from the start that it should stay with us and not be passed on in bill rates. And of course, we've been monitoring the market to see exactly how the market itself and our competitors play with that as well. From our perspective, as we look forward, we'll continue to monitor it. I think it's logical that some of it will move into the marketplace. We may be already seeing some of that move into the SMB part of the margin itself. So -- but I think it's one of those, Mark, where we're still just seeing how that plays out. As we move into next year, the credit goes up a little bit more, and we'll see how -- what happens and how that takes place going forward. So I think it's not fully played out yet, but I think for the most part, the market does not seem to be giving the credit or passing the credit back on down. I think they're looking at it as a credit that should stay with the employer, and as funds that will be invested in -- at least partially invested in new worker programs.

[Mark S. Marcon:]

Do you feel like, generally speaking, the market's retaining about 2/3 of it?

[Michael J. Van Handel:]

Yes, I'm not prepared to put a number on that because I'm not sure -- particularly on the SMB business, it's really hard to decipher how much of that is actually making it into the marketplace and how that is moving through. So it's pretty difficult to actually say exactly what the percentage is in terms of what is making its way there.

[Jeffrey A. Joerres:]

On the large account side, we have had quite good successes in retaining it through some conversations we've had with them. At the same time, we would expect, as Mike noted, it goes up when we move into 2014. That may be another point of conversation at that point with the larger clients saying, "Oh, now that it's moved up, can we have this discussion?" even though the intent hasn't changed, which is it's supposed to stay with the employer, but that may be another opportunity for some negotiation. So on the larger account side, it seems to be going pretty well. On the SMB side, it's harder because also, we are dealing with many, many more competitors on the SMB side.

[Mark S. Marcon:]

Great. And then can you talk a little bit about -- I was a little unclear with regards to the cost savings. Just trying to decipher whether there's -- relative to the $180 million in annualized cost savings that were originally targeted, it sounded like, potentially, you're saying that the cost savings are going to be greater on an annualized basis, but I wasn't completely sure about that.

[Michael J. Van Handel:]

Sure, let me clarify it. And the original amount was $125 million, so we...

[Mark S. Marcon:]

Right. And then last quarter, we went to $180 million.

[Michael J. Van Handel:]

Last quarter went to $180 million. So yes, so if you look at that $180 million, that is what we see as part of our recalibration program. So of that $180 million, $150 million will go through the earnings statement next year, and the other $30 million will come through -- we'll have $180 million by the time we exit the year on a run-rate basis, but the incremental $30 million impact will show up next year. The other point I was...

[Mark S. Marcon:]

You mean in '15?

[Michael J. Van Handel:]

In '14, 2014. So again, 100 -- sum's $180 million. $150 million impacts 2013 earnings statement. The incremental $30 million will impact '14 to get you the full $180 million out related to the simplification program. What I was -- the other point I was trying to make is, as you look at our SG&A overall, clearly, the reduction for this year will be more than $150 million. It will be in excess of $200 million, and that additional reduction has to be with other -- has to do with just other cost reduction measures that we've been taking, and there are some more variable expenses in there that may come back in as revenue ticks up. So that was the distinction I was trying to make there.

[Mark S. Marcon:]

Got it, great. And then -- and just in terms of thinking about the target that you had set back in February in terms of the 4% EBITDA margin, that basically implied a 10% incremental margin. Do you still think that's reasonable over the next $3 billion in revenue, roughly speaking?

[Michael J. Van Handel:]

Yes, I think so. I think that is, as we look at those incremental margins, I mean, effectively, we think we can deliver on that. So as you look at how that roadmap was developed, there's 70 basis points related to that. I still think that's sensible. And, of course, the SG&A reduction we had listed at 60 basis points helped. It's turning out to be 90 basis points, so we're ahead of the game there. I would say, on the GP side, we're looking for a 30 basis points improvement from GP mix overall with the underlying staffing margin to be stable. I would say, as we're further into it, I would say the underlying staffing margin may see a little bit more pressure than what we had anticipated. So if there's a little bit of risk in that, I would say there's a little bit of risk on the GP margin expansion of 30 basis points. We'll exceed the SG&A side of it, and I still feel good about the last piece, which is the 70 basis points on the incremental revenue.

[Mark S. Marcon:]

And you would think you'd get some GP improvement if, in fact, the overall environment improves, just not the 30?

[Michael J. Van Handel:]

Yes, I think -- I still think, from a mix standpoint, I still very much feel we'll get the mix benefit that we had spoken about. It's just that we may see a little bit of deterioration on the underlying core staffing margin, which may take that 30 down a little bit. But I still think, on a net basis, we'll see some benefit coming on the GP margin.

[Operator:]

Our next question comes from Paul Ginocchio with Deutsche Bank.

[Paul Ginocchio:]

Mike, just on the commentary around the first quarter. It does look like consensus is about a 5% Q-on-Q decrease in revenues, a 40 basis point decline in gross margin, a 100 basis point decline in operating margin. I'm just trying to understand your commentary in relation to that. Is that not enough, or what were your 1Q comments trying to imply?

[Michael J. Van Handel:]

Well, Paul, I wasn't trying to guide any more specific than that. I think, just as we look at that, the first quarter always is a little bit tricky just from a leverage and a deleverage standpoint. So I wasn't trying to comment as to how I felt about what was out there, either favorably or unfavorably. But just give -- as people I know start to refine next year, look at it more carefully, just thought I'd give a few thoughts on that in terms of what they look at for the year. I think from a revenue perspective, given the trend that we're seeing -- so third quarter, down 2% in constant currency, and the fourth quarter down flat in constant currency, given what we're seeing today, I think it would be unusual to see a 5% down in constant currency. I think that's what you said.

[Paul Ginocchio:]

Q-on-Q?

[Michael J. Van Handel:]

Oh, that was Q-on-Q. Okay, I got you. So -- but I think you could just take the year-on-year trends and kind of look at that and do some reasonable extrapolation. The number of days in the first quarter overall seems to be about the same this year compared to prior year. We've got a couple of markets that have an extra day, a few markets that are about the same. So we might pick up a portion of a day when you look at revenue going into the first quarter. Easter this year fell right at the very end of the first quarter. Next year, it's in April. So Easter will have less of an impact. So I think I would take that, and those would be the comments I would have on the first quarter.

[Paul Ginocchio:]

That's perfect. And Jeff, if I could sneak one more in, just -- did the U.S. government shutdown have any impact at all?

[Jeffrey A. Joerres:]

Not that we've been able to tell. And when we look at our weekly numbers, it really hasn't -- we don't have -- we have some in the Federal government, and particularly Washington and a few other processing centers. So we'll -- I'm sure there'll be a little bit of nick, but not noticeable.

[Operator:]

And our final question comes from Kevin McVeigh with Macquarie.

[Kevin D. McVeigh:]

Jeff or Mike, and I know this may be hard to quantify, but as you think about the discipline on the revenue line, how much have you kind of walked away from in terms of where the revenue would have been but for you just didn't think the margin was where it were should have been from a profitability perspective? And is there any kind of region that's been kind of -- you've been more aggressive in terms of price discipline than others?

[Jeffrey A. Joerres:]

So we always try to put some numbers on that, and we've got to be careful because we want to make sure that when we hear we lost because of price, it really was price and not just poor marketing and sales on our part, because that does happen. But where we can really have discrete, large opportunities, where we've either had it, the business, which is a lot of that, and just said, at re-upping time or renegotiation time, we in fact did, if you will, pleasantly walk away, nicely walk away, professionally walk away from that business. That probably falls into about the 2% kind of a range, and a few large clients because of completion is about another 2% in there. That's how we've kind of look at it in the U.S. side. When you look at the regions that are outperforming some of the others, because there isn't an even spread, what we would find is that a lot of times, they're outperforming because of the same thing, which is that the few large accounts that we've been able to pick up. But also, why a region is down is maybe because of, in many cases, because of that 1 account or 2 accounts. So when we look at it across the board, we feel pretty good about it. We want to make sure that we're not becoming overly disciplined, meaning -- it goes back to the conversation we had regarding Experis as well, which is where is that price inelasticity or elasticity, and how do we get into that zone? And we're trying to do a lot of work on that, and we're going to continue to do the work on that. We do not see this as a long-term trend that we think is what we want to do. So don't be confused that we're thinking 3 years of this is what we want. We're looking for some bottoming out. We're trying to make sure that we also work on our efficiency and productivity so that, in some cases, we'd be able to eke out a little bit more operating profit off of a lower price. So there's a lot of work being done in this, and the teams know, particularly in the U.S., is let's make sure we sell aggressively, keep the price discipline and really look at the contribution on a per-account basis by maybe delivering some less services, which is difficult for us because we like to keep our services at a high level. But those are the kinds of discussions that are happening throughout the company right now.

[Kevin D. McVeigh:]

Got it. And then in terms of the CICE in '14 going from 4% to 6%, does it go to 4% to 6% automatically? Is there some type of step function, or is it just kind of 1/1/14, that credit goes to up to 6% and then holds there?

[Michael J. Van Handel:]

Yes, that's set by law that it goes up automatically to 6%.

[Jeffrey A. Joerres:]

All right. Thank you, everyone.

[Operator:]

Thank you for your participation. You may disconnect at this time.