Kelly Services Inc (KELYA) 2002 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Kelly Services second quarter financial results. All participants will be placed in a listen-only mode. As a reminder this conference call is being recorded at the request of the Kelly Services. At this time I would like to introduce Mr. Terence Adderley of Kelly Services. Sir, you may begin.

Thank you. Good morning. I am Terry Adderley, Chairman and Chief Executive Officer of Kelly Services. I would like to thank you for joining us this morning. Our purpose today is to present our financial and operating results for the second quarter of 2002. Bill Gerber, our executive Vice President and CFO will leadoff with our financial results. All of you should have received copies of our P and L balance sheet and cash flow statements. If you haven't received this statement and would like a copy please call us at (248) 244-5271. And we will gladly fax or e-mail it to you.

Bill will be followed by Carl Camden, our President and COO. Lastly I will provide you with my thoughts on current business conditions and our preliminary guidance for the third quarter of 2002.

Now here is Bill Gerber who will take you through the financial results. Bill.

Thank you, Terry. First I will read our safe harbor language. This conference call contains information that are forward-looking and contain risks and uncertainties. Actual results may differ materially from any projections contained herein.

I will start by covering second quarter results. Sales for the second quarter were 1.077 billion an increase of 1% compared to the 1.066 billion for the second quarter of last year. That's a significant increase from the 8% decrease we reported in the first quarter of 2002, and at the higher end of our expectations.

Our gross profit rate in the second quarter was 15.8% which was down 9/10 of a percent from the 16.7 rate recorded in the second quarter of last year.

Our gross profit rate was 15.9% in the first quarter of this year, so this result represents only a 1/10 of a percent decline in sequential performance.

The gross profit segment rates showed decreases compared to last year, due to an on going shift of mix of sales to larger customers, and a shift of mix of sales to service lines, as well as a decrease in recruitment fee income.

Selling general and administrative expenses second quarter totaled 163.7, and decreased 2.2 percent year over year.

SG and A decreased sequentially, as compared to the first quarter of 2002. The components were depreciation, and currency impact on our international expenses.

SG and A expenses as a percentage of sales were 15.2%, a 0.5%age improvement compared to the 0 .17% in the prior year. Earnings from operations in the second quarter totaled 6.4 million, a 40.4 percent decrease from last year. On a sequential basis, earnings from operations increased over 5.2 million, compared to the 1.2 million in the first quarter of 2002. EBITDA earnings before taxes, depreciation and amortization totaled 16.7 million.

Net interest income in the second quarter was 82,000, 183,000 improvement compared to last year's net interest expense of 101,000. The improvement is primarily attributable to significantly higher cash balances and lower short-term debt levels offset by the lower interest rates. Our effective tax rate in the second quarter was 40.0%. We expect to utilize that rate during the balance of 2002 as well.

Second quarter net earnings were 3.9 million down 39.1% from 6.5 million earned last year. Diluted earnings per share in the second quarter were 11 cents per share, down 38.9%, year over year from second quarter earnings of 18 cents per share the prior year. However compared to first quarter of 2002, earnings increased by 9 cents per share from the 2 cents per share earned in that quarter. I would also note we achieved a higher end of our public guidance issued in April which ranged from 7 cents per share to 11 cents per share for the second quarter.

Now I will cover our segment sales results for the second quarter. As you know we divide our operations into three segments: number one, U.S. commercial staffing; two, PTSA, our professional, technical, and staffing alternative units; and three, international.

Sales in U.S. commercial totaled 526.6 million, 4/10% decrease compared to what was reported last year. That is a significant improvement in performance compared to the first quarter when they decreased 3.3%. Sales changes by month on year over year, April minus three, May flat, and June plus 1 percent. The trend improved month by month second quarter. We expect similar improvement during the third quarter, but note the rate of improvement has slowed relative to the first quarter.

Sales in PTSA totaled 282.2 million, increase of 3.9 million reported last year. That's an improvement compared to first quarter presidents is a sales, of plus 1.7%. But individual unit performance continues to vary. Carl will have more comments on that a bit later.

Translated U.S. dollar sales in international totaled 268.2 million a 9/10 percent increase versus 265.9 million in the prior year. On a same currency basis our international revenue decreased 2%, which reflected improvement from the 6 percent decrease reported in the first quarter. Demand began to improve in Canada, Mexico, and Asia Pacific, the regions that were the first to experience the global slow down in 2001.

Sales in continental Europe and the UK remain negative in the second quarter. Turning now to our segment earnings results for the second quarter, U.S. commercial earnings total 27.6 million, decrease of 6%, compared to earnings of 30.9 million last year. U.S. commercial gross profit rate decreased 7/10 of a percent from last year. Two types of changes in sales mix impacted the reported gross profit. First, the on going shift in mix of sales to larger, national account customers reduced the gross profit rate. Second, the sales recovery has been led by manufacturing and light industrial service lines which tend to have lower gross profit rates than office administrative staffing. In addition, fee based income decreased significantly as compared to last year.

U.S. commercial expenses were well managed and decreased 1.4% compared to last year. PTSA earnings total 12.3 million, a 9.1% decrease, compared to earnings of 13.6 million in the prior year. The PTSA gross profit rate decreased 1.2 percentage points versus last year due to a combination of decreases within individual business units as well as changes in business unit mix. For example, Kelly staff leasing, PTO, had a decrease in profit rate due to decreases in benefit cost. At the same time, sales decreased in Kelly home care, which carries a higher gross profit rate than the segment average.

PTSA expenses were well managed and decreased 1.4% year over year. International earnings total 0.5 million compared to earnings of 2 million last year. However, this represents significant sequential improvement versus the first quarter when international lost 1.2 million. The international gross profit rate decreased 1 percentage point largely due to decreases in recruitment fee income.

Corporate expenses totaled 34 million and decreased 4.5% versus last year. We maintain tight control of corporate expenses during the second quarter. However, compared to the first quarter there was a sequential increase in depreciation and related IT expenses associated with the roll out of our technology programs and we expect it continue over the next several quarters.

Normally I would also cover the six months results at this point. However the underlying trends remain relatively consistent between the first and second quarters. So I will skip that.

Now I would like to shift to the company's second quarter balance sheet and make comments. Cash and short-term investments totaled 78 million at quarter end, increase of 9 million from the 69 million cash balance last year. Accounts receivable totaled 589 million at quarter end increase of 7 million compared to 582 million last year. For the second quarter, our global days sales outstanding remained at 50 days consistent with our performance last year.

Short-term debt quarter end totaled at 34 million. Short-term borrowings are foreign currency denominated. At quarter end debt represented less than 5% of total capital.

Throughout the downturn we have maintained our traditionally strong balance sheet. Our cash balance significantly exceeds our short-term debt. We believe our clean balance sheet remains a competitive advantage. Finally I will make some more comments about the company's cash flows. Capital expenditures totaled 14 million down from the 24 million spent last year. 75% relates to information technology investments. Our capital expenditures peaked in 1999 at 77 million, decreased in 2000 to 54 million, and decreased again in 2001 to 43 million. For planning purposes we expect our 2002 capital expenditures to total between 35 to 40 million, down 10 to 20% below last year.

Depreciation and amortization totaled 21.4 million. At the beginning of 2002, the company implemented FAS 142 that deals with goodwill and other intangible assets. As a result of FAS 142, amortization of 2.7 million will be eliminated for the full year of 2002. Approximately 1.3 million of amortization was eliminated in the first six months which was offset by a decrease in depreciation expense.

On July 1st, we announced we had repurchased 500,000 shares of class A common stock from the William Russell Kelly trust. The total value of the purchase was 13.1 million, and was executed at 2.7% discount to the June 28th closing market price. This repurchase which represents approximately 1.4% of the outstanding shares will be accretive to earnings per share. The repurchase transaction will be reflected in our third quarter results.

In summary, the condition of our balance sheet and cash flow remains excellent. That concludes the financial results portion of the conference call, I would like to turn it over to Carl who will highlight the operating results.

Thank you, Bill. I will briefly discuss operational performance during the second quarter 2002, in each of our three business segments, U.S. commercial, PTSA, and international. Let me begin with the us commercial segment which makes up 49% of our sales.

As we noted in our first quarter conference call in April, in spite of the improvements we were seeing, we foresaw year over year negative sales comparisons for at least the first two quarters for 2002. While this was a forecast we would have liked to have beat, year over year the commercial - was down - compared to the first quarter's 12% decline. As Bill indicated we saw a continued month by month improvement during the second quarter. Let me add, May was the first month since December of 2000 that we experienced positive year over year revenue growth in this segment. And this improvement continued through June.

As you may recall the slow down in our U.S. commercial sales was felt most strongly in our electronic assembly and light industrial practices in 2001. During 2002, demand in these areas has been improving. And the improvement gained momentum in the second quarter. The growth we are seeing in light industrial results from both an increase in the number of assignments, as well as an increase in the average workweek. It is important to point out however we are not seeing the same level improvement across all service lines. Our office clerical staffing, which represents the largest portion of our U.S. commercial sales to date has not yet rebounded.

Similarly our fee based recruiting businesses continue to be under pressure, declining somewhat in both the first and second quarters. We continue to carefully manage our field expenses in the segment. Field expenses for commercial were down 1.5% for the second quarter and in addition we saw improvement in our expenses as a percentage of revenue year over year as well as compared to the first quarter of 2002.

Now let me turn to PTSA. PTSA makes up 26% of sales and is comprised of our professional and technical services group and our non-temporary staffing units, the staffing alternatives group. PTSA sales increased 4% this quarter compared with a 2% increase in the first quarter. Results continue to be very mixed though among the 13 business units that comprise PTSA. For the second straight quarter Kelly healthcare, Kelly Financial and general contractor services continue to be leading performers, exhibiting sales growth of over 40% for the second quarter. And Kelly staff leasing maintained positive sales growth of 5% during the second quarter.

On the other hand, two large PTSA units, the automotive services group, and Kelly home care continued to experience revenue declines during the quarter. However, these revenue declines continued to moderate somewhat in the second quarter. As with commercial we are encouraged by the improvement we are seeing in this segment. However, at this time, we still remain cautious given the variability of performance across the business lines.

As we did in 2001, we are continuing to suspend the launch of new PTSA businesses but are selectively opening branches in response to customer needs and local market opportunities.

Let me add the expense reductions made across the PTSA segment during the past year are beginning to have an impact and we are now seeing year over year improvement. Expenses were down nearly 1.5% during the second quarter year over year and as we experienced in the commercial segment we saw improvement in the PTSA expense compared to year over year compared to second quarter 2002.

The third segment is international. Real sales growth in the international business decreased 2% in the second quarter of 2002. This compares so a sales decline of 6% in the first quarter of 2002 and 3% decline in the fourth quarter of 2001.

As we reported in our first quarter conference call, the decline was most severe in continental Europe and in the UK Ireland. The slowing we saw in the second half of 2001, continued through the first and second quarters of 2002. Canada, Mexico, and Asia Pacific, the first regions within the international regions, are now beginning to show improvements. The international business remains under pressure and we continue to focus on reducing expenses. Overall for the quarter on a translated U.S. dollar basis, international - were down 2%. Finally for comparison purposes I would like to highlight our total U.S. performance for the second quarter. This combines U.S. commercial and PTSA sales results. Most of our competitors also report total U.S. sales combining commercial and technical U.S. sales. Our sales totaled 809 million, representing increase of approximately 1% from the previous year. Although we can cannot officially confirm the numbers, this compares to projected quarterly decline of 10 to 15% for the large staffing firms. Kelly maintains its position as the second largest staffing position in terms of sales. And I am pleased to say we remain the number one in terms of quality. We believe we have strengthened our ability to take advantage of the recovery as it unfolds. We continue to sharpen our focus on customers and prepare Kelly to meet their growing staffing needs.

To sum up all three operating segments showed declines in earnings. But they are moderating and we are beginning to see gradual signs of improvement in all. As the recovery moves forward. We remain optimistic the improvements we are seeing in our business will continue to accelerate. Our optimism is tempered by the fact that the recovery has not spread to the services sector of the general economy and office staffing in particular. This concludes the operations comments and now I would like to turn it back to Terry.

Thank you, Carl and Bill. Our views on the economic recovery and its impact on our business have not significantly changed since our last conference call. The second quarter continued the pattern of sales improvement that began early in the year. As Bill reported, U.S. sales continue to improve month by month. And our international sales in local currency showed a slight improvement in the quarter. However, as Carl indicated, the improvements remain very mixed our various business lines and markets.

I have previously pointed out that no two recessions were ever exactly alike. Nor were any recoveries the same. Our two prime concerns about this recovery has been the fragility of the recovery and the lack of strong sales growth for staffing services.

First, the real concern about the fragility is that it wouldn't take all that much to stall or derail a weak recovery. Whereas the same adverse conditions might have little or no effect at all on a strong recovery. Economic signals are still very mixed. While there have been some positive signs, such as the strong TDP growth, the weight of the negative seems to outweigh the positives. Investor and public trust is waning and as financial statements certified by professional accountants, and blessed by corporate management are found to be inaccurate.

Corporate earnings are under pressure in most industries. Equity values expressed in terms of traditional price earnings ratios are still high. The second concern is about the rate of sales growth in our industry and our company. In past recoveries, we have been in a concurrent economic indicator and an early one at that. It is possible that things have changed. Our industry may not be as early economic predictor as it was. However, if things have not changed and if this is a full-fledged recovery, then we should be experiencing much stronger sales growth than we currently are.

Capital spending by business is still weak with no clear signs of strength emerging. Consumer spending which has been given credit for holding up the economy is showing signs of weakening. And the probability of an overreaction to a very bad situation could very well result in onerous regulations which may well have an adverse effect on corporate governs and public confidence in business.

We obviously won't know until the recession is over. But it does raise an interesting question for us. In spite of all of this we do remain cautiously optimistic. However, when we have basic concerns about the sustainability of the current economic recovery in the near term. At best our crystal balls have been foggy. As to what we might expect for the balance of the year.

Therefore we will continue the practice we began in the first quarter of providing quarter by quarter guidance in using a range rather than a single point.

At this time our best thinking is that third quarter earnings should be in the range of 15 to 20 cents per share. This assumes that the economy will continue to edge upward. Let me leave you with one final comment. When the economy stabilizes and full-fledged recovery begins, we expect Kelly will be an early participant. As we move through the recovery we look forward to returning to our historic strong growth rates.

This concludes our formal comments. We would be pleased to answer any questions you may have subject to the constraints of regulation FD. Please call us at (248) 244-5271. And we will get back to you promptly as we can. Once again, thank you for joining us this morning.

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