Kelly Services Inc (KELYA) 2003 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Kelly Services first quarter financial results. All participants will be placed in 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. Carl Camden of Kelly Services you may begin.

Thank you. Good morning, I'm Carl Camden, President and Chief Operating Officer. Welcome to our conference call for the purpose of presenting our financial and operating results for the first quarter of 2003. Joining me this more thanking is Bill Gerber, Executive Vice President and Chief Financial Officer who will be covering our first quarter financial results. Terry Adderley, our Chairman and Chief Executive Officer, could not be with us today. I will then take you through our operating performance and provide guidance for the second quarter. All of you should have received copies of our P&L, balance sheet and cash flow statement. If you haven’t and would like a copy, please call us now at 248-244-5271 and we'll gladly fax or e-mail the material to you. I'll now turn the call over to Bill.

Thank you, Carl. First I’ll read our safe harbor 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, currency fluctuations, changes in laws and regulations including federal, state and international tax laws, the company's ability to effectively manage its information technology programs, and other factors discussed during this call, and in the Company’s filings with the Securities and Exchange Commission. Actual results may differ materially from any projection contained herein.

I'll start by covering first quarter results. Sales, for the first quarter, totaled 1.003 billion. That's an increase of 7.1 % compared to the 936.6 million for the fist quarter of 2002, as reclassified for the change in Kelly staff leasing revenue reporting that I'll cover later in the PTSA section.. Well, that sales growth is lower than the 8.2 % increase for the fourth quarter of 2002, but consistent with our revised expectations.

Our gross profit rate in the first quarter was 16.5 %, which decreased 5/10th of a percentage point from the 17 % rate recorded in the prior year. Our gross profit rate was 17.3 % in the fourth quarter of 2002, so there is was an 8/10th of a percentage point sequential decrease in gross profit rate. The gross profit rate of all three business segments showed decreases compared to last year.

Selling general and administrative expenses in the first quarter totaled 165.2 million, and increased 4.7 % year over year. SG&A expenses decreased 2.4 % sequentially, as compared to fourth quarter of 2002. The major components of the year over year increase where were currency impact on our international expenses and depreciation. SG&A expenses as a %age of sales, where 16.5%, a 3/10th of a percentage point improvement, compared to the 16.8 % rate in the prior year.

Earnings from operations in the first quarter totaled 390,000, compared to 1.2 million earned in 2002. Due to normal seasonal factors, staffing volume dropped sequentially, as compared to the fourth quarter, and then typically build into the second, third, and fourth quarters of the year. Therefore, the first quarter typically represents the low point of the year in terms of earnings performance.

Net interest income in the first quarter was 122,000, compared to the prior years net interest income of 141,000. Our effective tax rate in the fist quarter was 39.5%, which is a 5/10ths of a percent improvement compared to 2002, and consistent with the fourth quarter rate. For planning purposes, we expect to utilize the 39.5 % rate over the balance of 2003. Our first quarter net income was 310,000, compared to the 796,000 earned in 2002. And diluted earnings per share were 1 cent per share, which compares to earnings of 2 cents per share, last year.

Now, I would like to cover our segment sales results for the first quarter. I think, as you know, we divide our operations into three segments; number one, U.S. Commercial Staffing, number two, PTSA, our professional, technical, and staffing alternatives units, and, number three, International. Sales in U.S. Commercial totaled 504.3 million, a 4.9 % increase compared to the 480.7 million, reported in 2002. That’s a significant slowing compared with the fourth quarter when U.S. Commercial sales increased 8.9 %. The sales increases by month on a year over year basis were, January plus 6 %, February plus 3 %, ,and March, plus 5 %, however, the March results include the favorable impact of the Easter holiday falling in the second quarter of 2003. Without the favorable Easter impact, March results were only plus 3 %. The sales growth trend declined in the fist quarter compared to the relatively consistent month by month increases we saw in the fourth quarter. Basically, staffing volume was relatively flat month to month, but we were impacted by tougher year-over-year comparisons as the quarter progressed. In the first quarter, we benefited from the shift of the Easter holiday. In the second quarter, we will see the negative impact of the Easter shift. Basically, we remain cautious on the growth rates for U.S. Commercial in the second quarter. Sales and PTSA totaled 221.7 million, an increase of 6.1 %, compared to sales of 208.9 million in 2002. That's a slow down compared to the forth quarter PTSA sales growth of 11.3 %, with most of the business units showing reduced rates of growth. Carl will have more detailed comments on PTSA a bit later.

Included in the PTSA segment are the results of Kelly Staff Leasing, a professional employer organization or PEO. We adopt add new in evidence of reporting revenue. Effective with the first quarter of 2003, we adopted a new method of reporting revenue. Revenue is now reported under the net method, where the payroll costs of Kelly Staff Leasing work site employees, have been netted against revenue. Previously, these payroll costs were reported on the gross basis and were reported in both revenue and cost of services. The change in reporting resulted in an equal reduction of both KSL revenues and related cost of sales, with no impact on operating earnings, or earnings per share.

We note that the SEC is requiring all publicly traded PEOs, to implement similar changes in revenue reporting methods based on the SEC's interpretation of Emerging Issues Task Force Issue No. 99-19, Reporting Revenue Gross as a Principal versus Net as an Agent. Prior periods have been reclassified for comparability. We've provided the Kelly Staff Leasing sales adjustments for 2002, 2001, and 2000, as well as quarterly adjustments for 2002, in our press release.

Moving on to our International segment, translated U.S. dollar sales in international, totaled 277.4 million, a 12.3 % increase, versus the 247.1 million in the prior year. On a same currency basis, our International revenue was flat, which did reflect an improvement from the 2 %decrease we reported in the fourth quarter of 2002. Sales growth continued to be positive in the Americas and Asia Pacific while sales in continental Europe and the U.K. remained negative in the first quarter.

Turning now to our segment earnings results for the first quarter, U.S. Commercial earnings totaled 24 million, an increase of 3.2 % compared to earnings of 23.3 million in 2002. The U.S. Commercial gross profit rate decreased 5/10ths of a percent from the prior year. Several factors influenced the gross profit rate. First the U.S. Commercial business was impacted by significantly higher state unemployment tax rates that were not fully recovered from customers in the first quarter. Second, worker's compensation costs increased as compared to last year, and third, customer mix and service line mix also tended to reduce the gross profit rate.

As we noted in the January conference call, most states. Give relatively high and rising unemployment tax rate effective January 1 of each year. Given relatively high and rising unemployment, most states significantly increase their unemployment tax rates to replenish depleted trust funds. Although the majority of the tax increase will be recovered through price adjustments over the course of the full year, the lag in recover caused a decrease in gross profit rates in the first quarter of 2003.

U.S. Commercial expenses were well managed and increased only 0.9 million, or 1.7 % over the prior year. PTSA earnings totaled 13.3 million, a 16.6 % increase compared to earnings of 11.4 million in 2002.

The PTSA gross profit rate decreased 6/10th a percent versus the prior year, primarily due to the negative impact of state unemployment tax increases.[Audio Break]. PTSA expenses decreased 3.4 % year over year.

The International operating loss totaled 3.2 million, compared to a loss of 1.2 million last year. The International gross profit rate also decreased 6/10th of 1 %, primarily due to gross profit rate decreases in continental Europe and the U.K., along with same currency decreases in recruitment fee income.

Operating expenses increased 12.7% versus last year in U.S. dollar terms, but actually decreased 1 % on a same currency basis.

Corporate expenses totaled 33.8 million, and increased 1.5 million, or 4.6 % versus last year. Compared to 2002, there were increased IT costs and added depreciation. We expect this trend will continue over the next several quarters.

Well, now I’d like to shift to the Company's first quarter balance sheet and add a few comments. cash and short terms investments totaled 73 million at quarter end. That's a decrease of 12 million from the 85 million cash balance at the end of first quarter last year, principally due to cash requirements for working capital growth. Accounts receivable totaled 594 million at quarter end, an increase of 54 million from the 540 million in the prior year. For the first quarter, our day sales outstanding were 54 days, which is a increase of two days compared to the prior year. the increase was due to international performance which slowed in the U.K. and Americas regions.

Our short term debt at quarter end totaled 24 million, flat with the 24 million level in the prior year, and at quarter end, debt represented less than 4 % of total capital.

And finally, I'll make a few comments on the Company's statement of cash flows. Capital expenditures in the first quarter totaled 8.4 million, a planned increase from the 5.8 million spent in 2002. Of the total capital spending, over 70 % related to information technology. In 2002, full year capital spending totaled 33 million, reflecting the intentional delay of several projects.

The plan for 2003 is to return to a more normal capital spending level. For planning purpose, we expect our 2003 capital expenditures to total between 40 to 45 million.

Depreciation and amortization for the first quarter totaled 11.9 million, up 19 %compared to the 10 million for the first quarter 2002. The increase reflects the ongoing implementation of our major technology projects. For planning purposes, we expect depreciation, and amortization of intangibles other than goodwill to total approximately 47 to 49 million for 2003. In summary, at quarter end, the condition of our balance sheet and cash flow remains excellent. Well, that concludes the financial results portion of the conference call, I’d now like to turn it back over to Carl, who will highlight our operating results.

Thank you, Bill. I'm going to walk through some of the operational details of each of the three segments, then I'll share our thoughts on the economy, impact on our business, and conclude with earnings guidance for the second quarter.

Let’s start with U.S. Commercial, which makes up 50 % of sales. After seeing solid sales growth in this segment throughout much of 2002, the rate of improvement began to flat in the last quarter of the year. That sales growth trend continued to weaken in the First quarter of this year. For the quarter, U.S. Commercial was up year over year 5 %. That's less than the 9 % growth rate we saw in the fourth quarter, and as Bill noted during the quarter, the month to month revenue trend was sequentially flat. Now, in 2002, we saw more typical sales increasing month to month, and as a result, this year over year rate of growth would trend downward as the quarter unfolded.

Demand in commercial staffing continues to be led by our light industrial and electronic assembly practices. However, during the quarter, growth and assignments in these service lines began slowing somewhat.

Office clerical staffing, the largest component of U.S. Commercial, was flat early in the quarter. However, over the past few weeks, we have begun to see sequential improvement in the number of assignments. Though we are encouraged by this trend, it is still too early to determine whether this will accelerate, stall or even retreat, but if the upward trend continues, it might signify the beginning signs of a sustainable recovery in the economy.

The slowing of growth in our U.S. Commercial segment is being driven by our customers being very cautious in their staffing decisions. Their caution stems from their uncertainty about the U.S. economy and the concern about the effects of the war with Iraq. It has chilled both the use of temporary employees and the addition of permanent staff. This caution is also reflected in the first quarter’s job losses for the U.S. economy.

With the resulting slow down in permanent hiring, our fee-based recruiting business remains sequentially flat with the fourth quarter of 2002. This slowing economy has also affected employment taxes. Our U.S. Commercial gross profit percentage declined as Bill noted, as a result of higher states’ unemployment taxes, as well as our higher growth rates in our lower margin service lines; light industrial and electronic assembly .

We have adjusted bill rates, and we expect to recover the higher state unemployment the taxes over the remainder of the year. We are carefully managing expenses at the branch level, including aligning headcount with volume changes, and year over year, the expense growth was only 2 %, and this growth resulted from technology and equipment related to Kelly Staff Net, our new front office system.

But our expense as a percent of revenue continued to show improvement year over year,10.4 %compared to 10.7 at this point last year.

Now let me turn to PTSA, Professional and Technical, and Staffing Alternatives makes up 22 %of sales, and is comprised our professional and technical services groups, and our non-temporary staffing units, the Staffing Alternatives Group. Our professional and technical staffing also felt the effects of the stalled U.S. economy, however, the impact on this segment continues to be less than what we experienced in our commercial staffing business. Year over year PTSA revenue collectively grew by just over 6 % for the quarter, and 1 % sequentially. However, this is significantly below the 11 % year over year growth we saw in the fourth quarter. And although we saw a general slowing trend, it was not uniform across all of PTSA's business units. Kelly Financial, Kelly IT and Kelly Health Care, were the leading professional and technical staffing performers, all exhibited solid double-digit sales growth for the quarter. Kelly HR First, our HR outsourcing solution for activities including recruiting and employment functions was the leading Staffing Alternatives performer, with sales growth over 25 %. This is the second consecutive quarter of strong growth for HR First.

Now, for nearly two years, Kelly Home Care has experienced double-digit sales decline and during the the first quarter it declined another 13 %. Kelly Home Care’s customers are primarily private pay elderly clients. These customers have been hit especially hard by this recession, lower stock market returns [and] low interest rates have significantly reduced discretionary income, forcing many customers to drastically cut the amount of home care services. For example, some have replaced 24/7 care with eight hour care Monday through Friday. in other cases , unemployed family members have supplemented home care services. But when the overall economy improves, we expect the general demand for private pay home care will improve as well.

In addition for the fourth consecutive quarter, PTSA did see sequential improvement in fee based income. And this growth was due largely to improvements in outsourcing and project fees associated with Kelly HR First. And as Bill noted, expenses are being well managed across the PTSA segment, down just over 3 % during the quarter, we are continuing to aggressively manage expenses in this segment. Now, before I leave PTSA and move on to International, let me update you a little bit more on the Staff Leasing business.

As Bill just covered, beginning in 2003, we have adopted the Net method in reporting revenue for our leasing Business. Now, as you may recall from our fourth quarter conference call, iin light of the challenges facing the PEO industry, we significantly changed our Staff Leasing customer portfolio to better position the Business for the long term. We’ve reduced our portfolio by over 300 low margin customer representing more than $100 million in billings. At that time, we expected our first half leasing sales to decline during the first quarter in the range of 2 to 3%, but with a stronger customer base, we expected a small positive impact to earnings. I am pleased to report that KSL sales were, in fact, positive for the first quarter, and margins grew at a significantly higher rate than sales, which led to a nice growth in earnings. Let me add that this margin growth was not an artifact of the reclassification of our leasing revenues. Our performance was the direct result of our efforts to build a stronger customer portfolio.

Our third segment is International, which makes up 28 %of our total sales. For the first quarter, sales growth in this segment showed a 12 % year over year improvement in U.S. dollars but when measured in constant currency, sales were flat.

The Americas and Asia Pacific regions continued to show solid improvements in sales. The Asia Pacific growth was fueled by our operations in Malaysia, Singapore and New Zealand, while the Americas growth was primarily in Mexico and Puerto Rico. These improvements resulted in very strong earnings growth year over year for both regions. But the slow down remains severe in continental Europe and the U.K. Ireland.

While other staffing companies have reported mixed results in continental Europe, for Kelly, overall economic continues continue to negatively affect our staffing operation there. Let me explain. Our mix of business in Europe is much difference than that of our European competitors. We do not participate in heavy manufacturing and construction staffing, our concentration is instead in office and professional staffing. In comparison virtually all European staffing companies do provide service in support of manufacturing and construction, it’s a huge part of the European temporary staffing market that we choose not to participate in.. Therefore our performance in Europe is not typical of the industry either on the up or the down side.

We are, however, beginning to see encouraging signs of improvement in our U.K. Ireland operations. We saw slight improvements in our fee based recruiting business, and we added several major contracts during the quarter. In spite of these improvements, we remain uncertain about near term economic outlook in Europe and it's effect on staffing. Therefore, we continue to focus on reducing expenses at the [country] level. On a constant currency basis, expenses decreased by 1% for the first quarter or $500,000 versus last year.

For comparison purposes I would like to highlight our total U.S. performance for the fist quarter that combines both U.S. commercial and PTSA sales results. Kelly's total U.S. sales for the first quarter were 726 million, an increase of 5 % from the 690 million reported for the same period last year.

We are continuing to see modest gains in U.S. market share in spite of the first quarter economic slowing. On our January conference call, we reported strong growth in our business, but we also indicated that we were beginning to see a flattening or slowing in sales growth during the fourth quarter. In fact, we cautioned that the economic recovery might have stalled. However we were hopeful that the recovery would continue to slowly edge upward. Unfortunately, as the quarter unfolded and the events leading to the war with Iraq intensified, virtually all businesses felt the effect of further economic slowing. Demand for labor and temporary staffing in particular, started slowing on a year over year basis. The slow down has been reflected in the job loss data released during the first quarter. Nearly 400,000 jobs have been lost in the last two months alone, creating a reduction in demand for labor of all types, including temporary staffing. In spite of the slump, Kelly is still experiencing some year over year growth, but at a slower rate than it was the fourth quarter.

In addition to the job loss data, this year’s economic data to date, has been disappointing as well. Many recent economic indicators have reflected further slowing, a trend that started even before the war with Iraq. The war has served as a chilling factor in the launch and development of new products and services by companies around the world. Without new projects and strong job growth the demand for both products and services will remain stagnant.

In addition to these macroeconomic concerns, during the first quarter the staffing and Kelly we’re also faced with higher than expected state employment tax increases that went into effect January 1.And as Bill noted, that although we expect to recover the majority of these costs from our customers through bill rate adjustments, the prices increases do not begin until late in the first quarter. On top of that, the U.S. experienced major snow storms on the east coast this forced businesses in critical staffing markets to unexpectantly close offices and temporarily suspend operations. The significance of these events prompted us in March to revise our earnings estimate downward for the fist quarter. At that time, we stated that we expected earning to range between a loss of 3 cents per share to a profit of 1 cent per share. The losses were at the upper rage of that, at one sent 1 cent per share. And as Bill reported, earnings for the first quarter where at the upper end of that range at 1 cent per share, basically flat [to] the earnings of 2 cents per share for the first quarter of 2002.

At this time, our preliminary guidance for the second quarter of 2002 is for earnings to range from 3 cents to 7 cents per share. If there's one word that characterizes Kelly's outlook, that world would be cautious. Predicting the turning point of this economic cycle remains impossible, especially given the heightened ambiguity surrounding the economy and the geopolitical events of the past few weeks. For Kelly, our crystal ball has managed to get even foggier. As the war is ending, fundamental economic issues remain that will likely prevent an immediate economic turnaround in the U.S. Topping our list is the need for strong month over month job growth. This is critical to a recovery for the economy and for the staffing industry. Second, our office clerical staffing must continue to show signs of sustained growth. We are encouraged by the growth in our office clerical staffing over the past few weeks, but it is still to early to determine whether this trend will continue. Until these trends become clearer, we will manage our operations through 2003 much like we did in 2002. We are proud of our performance since the beginning of the recession. We note that we have enough staying power to weather a second dip or to take advantage of the recovery. This concludes our conference call. We’d be pleased to attempt 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 as promptly as we can. Once again, thank you for joining us on our conference call this morning.