Kelly Services Inc (KELYA) 2002 Q3 法說會逐字稿

Welcome to the Kelly Services third 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 Kelly Services. At this time I would like to introduce Mr. Terence Adderley from Kelly Services. Sir, you may begin.

Thank you. Good morning. I am Terence Adderley, Chairman and Chief Executive Officer of Kelly Services. I would like to thank you for joining us this morning. Our focus today is to present our financial and operating results for the third quarter of 2002. Bill Gerber, our Executive Vice President and CFO will lead off with our financial results. All of you should have received copies of our P&L, balance sheet and cash flow statements. If you haven't received this material and would like a copy, please call us at (248) 244 5271 and we will gladly fax or email it to you. Bill will be followed by Carl Camden, our President and Chief Operating Officer, who will cover our operating results and the general performance of our business segments. Lastly, I will provide you with my thoughts and current business conditions and our preliminary guidance for the balance of the year. Now here is Bill Gerber, who will take you through the financial results, Bill.

Thank you Terry. First I will read our cautionary language. This conference call contains statements that are forward-looking in nature and accordingly are subject to risks and uncertainties. These factors include competition, changing market and economic conditions, current fluctuations, changes in law and new regulations, and the company's ability to effectively implement and manage its information technology programmes and other factors discussed during this call and in the company's filings for the Securities and Exchange Commission. Actual results may differ materially from any projections contained herein.

I will start by covering third quarter results. The sales for the third quarter totalled $1.123mln, an increase of 5.3% compared to the $1.066mln reported for the third quarter of last year. That's a significant improvement from the 1% sales increase we reported for the second quarter of 2002 and consistent with our expectations. Our gross profit rate in the third quarter was 16.2% which [break in audio] 1/10 of a percentage point from the 16.1% rate recorded in the third quarter of last year. Our gross profit rate was 15.8% in the second quarter of this year at 4/10 of a percentage improvement in sequential performance. The gross profit rates of our US commercial and PTSA segments show increases compared to last year, while gross profit in the international segment decreased.

Selling, general and administrative expenses in the third quarter totalled $171.5mln an increased 4.6% year-over-year. SG&A expenses also increased 4.8% sequentially as compared to the second quarter of 2002. The major components of the year-over-year increase were depreciation, field bonus payouts and the currency impact of our international expenses. Carl and I will have more detailed comments on expenses as we cover the segment results.

SG&A expenses as a percentage of sales were 15.3%, a 1/10 of a 1% improvement compared to the 15.4% rate in the prior year. Earnings from operations in the third quarter totalled $10.7mln, a 38.3% increase from last year. And on a sequential basis earnings from operations increased over 65% compared to the $6.5mln reported for the second quarter of 2002.

EBITDA earnings before interest taxes, depreciation and amortization totalled $22.9mln, which was a 22.9% increase compared to the $18.7mln earned last year. Net interest income in the third quarter was $35,000, $170,000 improvement compared to last year's net interest expense of £135,000. The improvement is primarily attributable to lower short-term debt levels, so well offset by the impact of lower interest rates earned on our cash balances. Our effective tax rate in the third quarter was 39.5% which is a 5/10 of a percent improvement compared to both last year and sequentially. That brings our year-to-date effective tax rate to 39.7%, which for planning purposes we expect to utilize over the balance of this year.

Our third quarter net earnings were $6.5mln. That's an increase of 42.5% compared to the $4.6mln earned last year. And diluted earnings per share in the third quarter were 18¢ a share, a 381/2% year-over-year increase from third quarter earnings of 13¢ per share in the prior year. Compared to second quarter earnings, we increased by 7¢ a share from the 11¢ per share earned in the second quarter. I would also note that we beat third quarter street expectations by a penny a share.

Now I will cover our segment sales results for the third quarter. As you know we divide our operations into three segments. Number 1 - US commercial staffing. Number 2 - PTSA, our Professional, Technical and Staffing Alternatives Unit and Number 3 - international. Sales in the US commercial totalled $549.9mln, a 6.7% increase compared to the $515.3mln reported last year. That's a significant improvement in performance compared to the second quarter, where US commercial sales decreased 4/10 of a percent. Sales increases by month on a year-over-year basis were in July +3%, August +8% and September +11%. The trend clearly improved month-by-month throughout the third quarter, but we note that the rate of improvement slowed a bit in September. Given the slowing in September, we expect that year-over-year growth may flatten somewhat in the fourth quarter. Sales in PTSA totalled $287.4mln an increase of 6.3% compared to sales of $270.3mln reported last year. That's an improvement compared to the second quarter of PTSA sales growth, up +3.9%, the individual business unit performance continues to vary. Carl will have more detailed comments on the PTSA business units a bit later.

Translated US dollar sales and international totalled $285.4mln, a 1.7% increase versus the $280.7mln in the prior year. On the same currency basis, our international revenue decreased 4%, which reflected a slowing from the 2% decrease reported in the second quarter. Demand continued to improve with the Americas and Asia Pacific, the regions that were first to experience the mobile slowdown in 2001. Sales in Continental Europe remained weak, while the UK slowed further in the third quarter.

Turning now to our segment earnings results for the third quarter. US commercial earnings totalled $33.3mln, an increase of 22% compared to earnings of $27.3mln last year. The US commercial gross profit rate increased 4/10 of a percent from last year. Three primary factors influenced the gross profit rate. First, we experienced positive rate impact in the Office Clerical and Marketing service lines. Second, the US commercial business reflected improvement in benefit costs relative to last year, including worker's compensation expense. And third, somewhat offsetting the above, recruitment fee income decreased as compared to last year. US commercial expenses increased $1.5mln or 2.8% compared to last year, primarily due to increased field bonus payouts and approximately $600,000 of bad debt expense associated with corporate bankruptcies.

PTSA earnings totalled $13.1mln, a 30.7% increase compared to earnings of $10mln in the prior year. The PTSA gross profit rate [break in audio] 5/10th of a percent versus last year, due primarily to great increases within individual business units and improvement in benefit costs. Fee-based income was flat year-over-year and improved on a sequential basis. PTSA expenditures were well managed and grew only 2.3% year-over-year.

International earnings totalled $3.1mln compared to earnings of $4.3mln last year. However, this represents a significant sequential improvement versus the second quarter where international earnings were about $0.5mln. The international gross profit rate decreased by a tenth of a percent, primarily due to continued decreases in recruitment fee income. Operating expenses increased 10% versus last year in US dollar terms, but actually decreased 6% on the same currency basis. Corporate expenses totalled $38.9mln and increased $5mln, up 14.7% versus last year. Compared to last year, there was $2mln in added depreciation and approximately $2mln in added IT costs associated with the company's continuing evaluation of its technology programmes. We expect that this trend will continue over the next several quarters.

The company also had a $1.4mln non-recurring loss on its investment in [Itility], which is an internet based, vendor management software provider that was acquired by Peopleclick during the third quarter. The full $1.4mln is included in our third quarter of SG&A expenses.

Well, normally I would cover the nine-month results at this point, however underlying trends excelled from the third quarter improvement in gross profit rate, remain relatively consistent in the year-to-date period, so I will skip the detailed commentary. You will find our full nine-month financial results included in the press release materials.

Now I would like to shift to the company's third quarter balance sheet and make a few comments. Cash and short-term investments totalled $85mln at quarter end; that's an increase of $4mln from the $81mln cash balance last year. Accounts receivable totalled $591mln at quarter end, an increase of $6mln compared to the $585mln last year. For the third quarter, our global day sales outstanding were 48 days, which is a 2 day improvement, compared to our performance last year. Our short-term net at quarter end totalled $28mln, a decrease of $19mln compared to the $47mln level last year. All of our short-term borrowings are foreign currency-denominated and provide a partial balance sheet hedge against foreign exchange fluctuations. At quarter end, debt represented less than 5% of total capital.

Finally, I will make a few additional comments on the company's cash flows. Capital expenditures in the first nine months totalled $20mln, down 36% from the $31mln spent last year. Up in total over 75% related to information technology investments. Our capital expenditures peaked in 1999 at $77mln, decreased in 2000 to $54mln and decreased again in 2001 to $43mln. For planning purposes we expect our 2002 capital expenditures to total between $30mln to $35mln or about 20% to 30% below last year. Depreciation and amortisation for the first nine months totalled $33.3mln up 3% compared to $32.4mln for the same period last year. At the beginning of this year the company implemented FAS 142, which requires that goodwill no longer be amortised against earnings, but instead tested periodically for impairment. As a result of FAS 142, amortisation of goodwill up $2.7mln will be eliminated for the full year of 2002. Approximately $2mln of amortisation was eliminated in the first nine months, which was offset by a $2.9mln increase in depreciation expense. For planning purposes we expect depreciation and amortisation of intangibles other than goodwill to total approximately $44mln to $46mln for 2002 reflecting on-going inflation of our major IT projects. On July 1st we announced that we had re-purchased 500,000 shares of Class A common stock from the William Russell Kelly Trust. The total value of the re-purchase was $13.1mln and was executed at a 2.7% discount to the June 28th market price. This re-purchase which represents approximately 1.4% of the outstanding shares will be agreed at earnings per share. The re-purchase transaction was reflected in our third quarter results.

In summary the condition of our balance sheet and cash flow remain (gap). That concludes the financial results portion of the conference call. I would now like turn it over to Carl, who will highlight (gap).

Thank you Bill. I will briefly discuss operational performance during the third quarter 2002 in each of our three business segments, US commercial, PTSA and internationals. Let me begin with the US commercial segment, which makes up 49% of our sales. As we noted in our second quarter conference call, we were seeing solid improvements in our US commercial segment throughout the first half of the year. The segment was down year-over-year at 12% in the first quarter, and down 4/10th of a percent in the second. And although we cautioned on a slower rate of improvement as Bill mentioned, this positive year-over-year trend continued throughout the third quarter. We saw a 7% rate of growth this quarter was steady, although not dramatic, month-by-month improvement. Let me add that the largest increases continue to come from Light Industrial and Electronic Assembly. Demand in these areas has been very strong in the second and third quarters. This growth results from both an increase in the number of assignments, as well as increase in the average work week. For the first time since the third quarter of 2000, we are beginning to see a slight sequential increase in our Office Clerical staffing, which represents the largest portion of our US commercial sales. These improvements appear to be across several markets within the segment and although we are encouraged by this improvement, I must point out that it is still not close to the robustness of past recoveries. We still believe it is too early to determine if this improvement will be sustained. Our pre-based recruiting business on the other hand continues to be under pressure. During the quarter we were down nearly 30% year-over-year and as you may recall we were down almost 40% in the first quarter and also down 30% in the second. As Bill mentioned, gross margins in the US commercial improved during the quarter to just over 16%. This improvement is due to a number of factors including growth in GP and Office Clerical and Marketing service lines and for the quarter, the margin improvement translates to almost a 9% increase in gross profit dollars off of a 7% sales increase.

We continue to carefully manage our field expenses. For the quarter, expenses grew at less than 3% year-over-year and most of the expense growth in US commercial resulted from field incentive plan payouts and increased bad debt expense. Let me add that our expense as a percentage of revenue continues to improve year-over-year and we are pleased with our ability to control field expenses. Before I leave you with commercial, I will provide a quick update on Kelly Educational Staffing. During the quarter we expanded our US coverage to 35 states, additionally Educational Staffing has now been introduced to both the UK and Canada.

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 6% this quarter, compared with a 4% increase in the second and a 2% increase in the first. Results continue to vary considerably among the 13 business units that comprise PTSA. Kelly Healthcare, Kelly IT and Kelly Financial were the leading professional and technical staffing performers, all exhibiting sales growth of over 25% for the third quarter. Kelly Management Services continues to be the leading staffing alternatives performer with sales growth also in excess of 25%. And Kelly Staff Leasing maintained positive sales growth of nearly 2% during the quarter, somewhat slower than the second quarter's 5% growth. However, the PEO industry is facing significant challenges because of the rising costs associated with benefits and workers' costs. Therefore sales and earnings in the PEO industry will be under significant pressure for the foreseeable future.

We have in previous quarters talked about declines in two of our largest PTSA units, Kelly Homecare and Kelly Automotive Services and although moderating somewhat during the third quarter, Kelly Homecare continued to experience decline in revenue. However, our Automotive Services Group turned positive during the quarter with a 10% year-over-year improvement.. In fact 7 out of our 13 business units that make up PTSA showed double digit year-over-year revenue growth for the quarter. In addition, PTSA did see some sequential improvements in placement fee-based income. During the quarter we were down nearly 6% year-over-year, this represents a slight improvement from the second quarter. And let me add that within our staffing alternatives group, other fee-based income was up in excess of 20% year-over-year for both Kelly Vendor Management and Kelly HR First. As we did throughout all of last year, 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 for existing PTSA businesses. Expenses are being well managed across the PTSA segment and we continue to see year-over-year improvement. Expenses were up only slightly during the third quarter and this increase was primarily attributable to increases in liability insurance costs, as well as increases in bad debt expense. In spite of these costs, we saw improvement in PTSA's expense as a per cent of revenue year-over-year. We are encouraged by the improvements we are seeing in this segment, however at this time we still remain cautious given the variability of performance across the 13 PTSA service lines.

Our third segment is international which makes up 25% of our total sales. Real sales growth in our international business decreased 4% in the third quarter. This compares to a sales decline of 6% in the first quarter of 2002, followed by a 2% decline on the second. The Americas and Asia Pacific regions which were the first within our international segment to feel the negative impact of the global economic slowdown continue to show signs of improvement. The Asia Pacific growth was fuelled by our operations in Malaysia, Singapore and New Zealand, while the Americas' growth has been across all three countries Mexico, Canada and Puerto Rico. The slowdown however remains most severe in Continental Europe and in the UK, Ireland, particularly in the permanent placement and p-based businesses. Therefore in spite of the improvements we are seeing in the Americas and Asia Pacific, our international business remains under pressure and we continue to focus on reducing expenses at the country level. On a constant currency basis, expenses decreased by almost 6% for the quarter or in excess of $3mln versus last year. In addition, we opened new Kelly Scientific Resources Offices in Glasgow, Scotland and Milan, Italy. Now let me add that Kelly continues to lead the world in scientific staffing, we now have scientific offices in 11 countries.

Finally for comparison purposes, I would like to highlight our total US performance for the third quarter. This combines both the US commercial and PTSA sales results. As you are probably aware most of our competitors report total US sales also combining commercial and professional and technical sales. Kelly's total US sales for the third quarter totalled $837mln representing an increase of approximately 7% from the previous year. Kelly maintains its position as the second largest staffing company in the US market in terms of sales and I am always pleased to add that we remain the number one staffing company in terms of quality.

To sum up, both US commercial and PTSA showed significant increases in earnings for the quarter, both year-over-year and sequentially. However our international segment showed decline in earnings for the quarter, but a significant sequential improvement compared to the second quarter. If the recovery continues to move forward we remain optimistic that the improvements we are seeing in our business will begin to accelerate. Our optimism is most tempered by the fact that we have not yet seen signs of a robust recovery. This concludes the operations comments and now I would like to turn it back to Terry.

Well thank you Carl and thank you Bill. In many ways we had a good three quarters and we saw a continued pattern of overall sales improvement that began early in the year. US sales continued to improve month by month in a still fragile economy. Our international sales in local currency, declined somewhat during the quarter, which reflected the ongoing economic weakness in the UK and Europe. And although we are encouraged by our third quarter performance and believe we are in the recovery stage, we feel it is too early to know if the economic recovery is sustainable. The fact remains that sales growth in our industry is still very much dependent upon growth in the economy. I should also point out that Kelly's relatively strong sales growth is not necessarily reflective on the general growth of the economy, since we have enjoyed significant gains in market shares in the United States. In early 2001, I began talking about the fact that our industry is very difficult to forecast during a recession and it is hard to use a particular recession as a model since no two recessions or recoveries have been the same. Nevertheless, there have been some patterns that do seem to repeat themselves. First, staffing companies are among the first to feel the negative effects of an economic downturn, but fortunately they are also among the first to feel the positive effects of an upturn and generally rebound quickly and strongly during recoveries. Another pattern from past recessions has been that Light Industrial staffing has typically been the first to decline, followed by Office Clerical staffing. Also in the recovery stage, Light Industrial has been the first to rebound followed by Office Clerical. In other words, in the past, our business has been a good concurrent indicator of the economy. The question now is whether or not the recovery is sustainable. We have seen strong sales growth in our Light Industrial area and while we are beginning to see growth in the office area, the increases are still relatively weak. Stronger growth in office staffing would have validated a full fledge recovery. Now aside from the fact that we are not seeing the growth in Office staffing typical of a recovery, we are also concerned about the continued fragility of the economy. And our primary concern about that fragility is that it wouldn't take all that much to stall or de-rail the current recovery. Whereas the same adverse conditions might have had little or no effect during a strong upturn. Behaviour of consumers, businesses, investors and markets are skittish and while there have been some encouraging signs such as strong GDP growth, the negatives still warrant attention.

Corporate earnings remain under pressure, capital spending remains at depressed levels, consumer confidence is hedging downward which is putting consumers' spending at risk. The end of the recession in New York is not clear and there is still the possibility of another significant event, economic, political or military that could tip the economy back into a recession. The near term outlook is not clear. The recovery is still at risk of stalling and in our judgement it is still too early to make predictions with any certainty. One of the more frequently asked questions we get is what shape this economic cycle is taking, and frankly our crystal ball isn't any better than anyone else's. Nevertheless it does not appear to be taking on the traditional v or u-shape or even necessarily a w-shape, but it may turn out to be an extended u which includes a longer period of limited or no growth. We obviously won't know what shape the full recovery will finally take until the recession is over, but it is an interesting question and a bit more than just academic.

Let me conclude by trying to pull these remarks together. I believe the greater probability at this point is that we are in the early stages of a recovery. We will feel more certain of the recovery when Office Clerical staffing demand begins to accelerate. If our GDP growth remains positive without strong increases in demand for Office Clerical staffing, then perhaps this recovery is truly different than past recessions. We will remain watchful for signs of a second downturn, but in any case we do remain optimistic, we feel it is not yet time to give a long-term forecast. Therefore, we will continue to practise we began in the first quarter, providing quarter-by-quarter guidance and using a range rather than a single number. At this time, our best thinking that fourth quarter earnings should be in the range of 17¢ to 21¢ per share. This would bring full year earnings to the range of 48¢ to 52¢ per share and this assumes that the economy will continue to edge upwards. Now this concludes our formal comments. We will be pleased to answer any questions you may have subject to the constraints of regulation (..). Please call us at (248) 244 5271 and we will back to you as promptly as we can. Once again thank you for joining us this morning.