ettain Group, LLC (MAN) Earnings Call Transcript & Summary

Welcome to ManpowerGroup's Special Investor Conference Call. [Operator Instructions] 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. You may now begin.

Welcome to the Special ManpowerGroup Conference Call regarding the acquisition of ettain Group. Thank you to everyone for joining us on such short notice. Our Chief Financial Officer, Jack McGinnis; and our President for North America, Becky Frankiewicz, are on the call with me today. For your convenience, we have included our prepared remarks within the Investor Relations section of our website at manpowergroup.com. Before we proceed, Jack will now cover the safe harbor language and a related topic.

Good morning, everyone. This conference call contains statements including, without limitation, statements regarding anticipated timing, completion and results of the proposed transaction, the expected tax treatment of the transaction and the intended sources of funds for the transaction that are forward-looking in nature. And accordingly, are subject to 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 presentation further identifies forward-looking statements made in this call and factors that may cause our actual results to differ materially from those described or contemplated in this call. This call is devoted solely to the announcement of the ettain Group acquisition, and we will not be providing a performance update on our ManpowerGroup operations during the third quarter.

We are very pleased to announce our acquisition of ettain Group, one of the largest privately held IT resourcing and services providers in North America. This acquisition will increase our depth of IT capabilities and expand our reach across more industry verticals. ettain is exclusively providing IT resourcing and services, and generate high margins based on this specialization. And as such, is a great fit for our Experis strategy. You've heard me discuss our DDI Strategy. So Diversification, Digitization and Innovation in previous investor calls. Today is an example of our diversification strategy and the acceleration of the evolution of our business mix with this acquisition. This acquisition directly aligns with our long-standing strategy to advance our business mix to include a higher proportion of IT resourcing and services. When combined, our Experis mix will represent 1/4 of our consolidated gross profit, and Experis and talent solutions combined will move to almost 40% of ManpowerGroup gross profit. You've also heard me talk about Experis' specialization in IT. In recent years, we have continued to prioritize IT and this acquisition will now bring our pro forma consolidated global Experis revenues estimated for 2021 to $4.5 billion, and will represent 25% of our gross profit mix with about 85% focused on IT. We continue to believe specialization in IT will enhance shareholder value as the global market for IT services is the single biggest skill specialization in our industry. And post-pandemic, we expect it to continue growing. We've seen demand rebound quickly during the pandemic, and we believe that the value of these services has increased from a client perspective and need. Our superior global footprint gives us a competitive advantage as we can deliver IT resourcing and services to our national and multinational clients in the various geographies where they conduct business. Next, in terms of segment profile, ettain has significant presence in financial services and health care IT. This is important as we view these segments as high-growth segments. This is also important as our Experis business in North America, although very strong in the technology and communications sectors, does not have as much depth in the health care and financial services sectors. You've heard us talk about our mix of clients as enterprise and convenience. ettain's business is primarily convenience clients, which typically results in more attractive margins and lower demand volatility when compared to large enterprise clients. This also makes ettain a great fit for us as we can leverage their platform for our convenience clients and there is minimal geographical or client overlap. Becky and her team have spent a great deal of time with the ettain management team, and I'll turn it over to her to provide some additional comments regarding the strength of this combination.

Thank you, Jonas. First, I would like to say to the ettain team that may be listening to the call this morning that I am delighted that you will be joining our Experis team. It has been a privilege to get to know ettain leadership, and we are excited to add them to our North American team. I have been extremely impressed by their management practices, client solutions and their ability to deliver higher-end IT services to the market. Our Experis business delivers into 5 main practice areas, and the addition of ettain will enhance our ability to deliver higher-end services to new and existing clients. I'm very excited about the opportunity to leverage the best of our and ettain's suite of workforce solutions following completion of this acquisition. The last point I would like to make is about culture. We know that this business is all about people, and it is critical that there is a good cultural fit among organizations to ensure success. I'm confident the cultures of our organizations align very well, and this will provide a great foundation for ongoing development for our employees and consultants as we take this business forward.

We summarized the profile of the combined global Experis business. You can see that this acquisition would move our North American Experis business from 27% of total global Experis today on a trailing 12-month basis to 39% on a pro forma basis estimated for 2021. This is important as the U.S. represents the biggest professional services market in the world. ettain will be integrated into the Experis brand. And with the additional capabilities they bring to the business, this will result in an ongoing strengthening of the Experis brand in the region. As Becky referenced, we look forward to welcoming the talented ettain leadership team to our North American Experis team. I'll turn it over to Jack to talk about the financial aspects of the acquisition.

We will fund this acquisition primarily with available cash on hand. As you've heard me say many times, our consistent capital allocation strategy prioritizes using available cash after the dividend to deploy towards strategic acquisitions when we identify attractive targets that meet our financial and operating criteria. We have built up a significant amount of cash during the pandemic, and we are pleased to be able to immediately put this cash to work with this acquisition. We will utilize our revolving credit facility for approximately $150 million of the purchase price, and our intent is to pay this down over the following 12 months. During this period, we expect to continue share repurchases to cover dilution, and we would recommence a more significant share repurchases plan after the revolver is paid down. Another very important aspect of this acquisition is the anticipated sizable tax savings. On a tax basis, this acquisition is primarily an asset purchase, which will result in a tax step-up in basis that is tax deductible in future years. Because of the significant step-up in tax basis, we expect an annual tax savings of about $9 million annually for 15 years. This represents a current net present value of $65 million. Reducing the purchase price by the value of this tax benefit, the underlying EBITDA multiple paid for ettain represents about 11.5x. Wrapping up the financial aspects of this acquisition. We expect it will be immediately accretive to earnings per share after excluding onetime deal costs and integration. We expect cost synergies of about $10 million annually, commencing at the conclusion of our integration activities at the end of 2022. We estimate transaction costs to be approximately $50 million and integration costs to approximate $20 million during the 12 months following the purchase. Subject to closing conditions and regulatory approvals, this transaction could close as early as late September 2021. We'll turn it back to Jonas.

In summary, this acquisition has strong strategic, operational and financial benefits and accelerates our business mix diversification. We're excited about our continued progress and differentiating Experis as a global leader, specializing in IT resourcing and services. This acquisition increases our presence in North America and improves our geo mix for Experis, and we will benefit from high growth and higher-margin opportunities. I would now like to open the call for Q&A. Operator?

[Operator Instructions] Our first question comes from Manav Patnaik from Barclays.

The deal makes a lot of sense for financial [indiscernible]. To be honest, I was just wondering like if you have not done a lot of M&As and loan of this size. So has something changed in the strategy? Should we expect a little bit more aggression on your part? I'm just hoping for some color around that.

Manav. Yes, and thanks. We could hear you slightly faintly, but I think you asked whether anything has changed in our strategy. And I would say absolutely nothing has changed in our strategy. As Jack mentioned in our prepared remarks, we've been very clear around our allocation of capital and the areas where we would allocate capital. And we're very pleased to have been able to identify a terrific company like ettain that does a lot of things for us strategically, in the right market with the right mix of IT services and resourcing capabilities, with a minimal client segment overlap or geographic overlap, which we're also very excited about. So highly complimentary to our existing Experis North America business. It also significantly moves our share -- market share in the North American market up. And as Becky said, we feel really good about the culture of the company. And as you know from our past discussions and earnings call comments, this is a really important aspect. But I would say our strategy overall has not changed. We are very excited by our opportunities to grow the Experis business and all aspects of our business organically. But when we have the opportunity to allocate capital to a terrific company like ettain, we feel it's a great investment that we want to make as it moves us forward in so many areas.

Got it. And if I could just -- maybe you can refresh us on what a convenience client base is.

Sorry, Manav, could you repeat that question, please?

Yes. Just curious the difference between enterprise and convenience. Maybe if you can just remind us what the difference in those clients there is.

Sure. Right. Yes. So as you know, we describe enterprise as large corporations that are national, international multinational, multi-geo clients that we work with. And convenience clients are smaller clients, very important clients for us that is a very good segment, and you've seen us make some great progress on convenience clients, for instance, in Experis over the last 18 months, in particular, because they tend to come with higher margins and less volatility than larger enterprise clients, which are more volume-based. So it's our client segmentation between large, complex client engagements and convenience clients, which are smaller but very valuable to us. So that's our client segmentation vocabulary.

Our next question comes from Mark Marcon from Baird.

Congratulations. I was wondering if you could give us a few more details with regards to ettain. Specifically, what's their growth rate been over the last couple of years? Where are the bill rates? And how should we think about the integration strategy? Will you integrate them right away? Or will you take a little bit slower? How should we think about that?

That's a bunch of different questions. So I'll let -- I'll start by letting Jack go on the growth and the profile a little bit from a financial perspective of ettain, and then I'll ask Becky to comment a bit around our integration plans and how we intend to run the business in the North America region.

So Mark, on growth, I would say there are segments of the company that have a very nice growth history. If you look at components, we referenced the health care IT, which is a big part of the business. So pre-pandemic, nice growth in those segments and in the other segments as well. During the pandemic, as you would expect in the health care space, there was a reduction in demand. So 2020 is a unique year and probably not representative on a go-forward basis. But looking forward to 2021, to date, very nice growth in the health care IT space. So we feel very good about the growth opportunity here of the ettain Group and based on the history they've demonstrated in the different segments of the business. I think on the integration, maybe I'll start and Becky can talk a little bit about that. So as I mentioned, we gave detail about the integration cost that we expect I think we expect a big chunk of those costs are going to be allocated to IT and moving ettain into our IT infrastructure. And when we look at the remaining piece, there's going to be other back-office-related costs related to the integration. So that will be different steams as well. So I would say, when we look at this opportunity, as you can see from the margins, it's already a very efficient platform. So they're a leader in margin already from an EBITDA perspective. So this is not a big cost takeout play. This is really about making sure we set this up for growth appropriately. And that's what our integration efforts are going to be focused on. And I'll let Becky say a few words about that.

Yes, I'll just add that our clear focus is on a careful and successful integration, which really has 2 parts for us. As mentioned, we're a people business. And so making sure we welcome, take care of the people, both at the headquarter location as well as in the field is a priority for us. And second is focused on combining the convenience platform so we can accelerate our mutual growth. So that's our priority.

Will you maintain the ettain brand? Or will they just immediately come under Experis?

So Experis is our global brand for ManpowerGroup. So the business will fall under the Experis brand globally aligned with our strategy.

Our next question comes from Tobey Sommer from Truist Securities.