Kelly Services Inc (KELYA) 2003 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Kelly Services Second Quarter Financial Results Conference Call. All participants will be placed in a listen-only mode.

As a reminder, this conference is being recorded at the request of Kelly Services.

At this time, I would like to introduce your Chairman and CEO, Mr. Terence Adderley, of Kelly Services. Sir, you may begin.

Thank you. Well, good morning. I’m [Terry] Adderley, Chairman and CEO of Kelley Services, and I would like to welcome all of you this morning.

Our purpose today is to present our financial and operating results for the second quarter 2003. [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, Bbalance Ssheet, and Ccash Fflow Sstatements. If you haven’t received this material and would like to, please call us at 248/244-5271, and we will gladly fax or email a copy to you.

[Bill] will be followed by Carl Camden, our President and COO, who will cover our operating results, and the general performance of our business segments.

And lastly, I will provide you with my thoughts on current business conditions and our preliminary guidance for the third quarter of 2003.

Now here is [Bill] Gerber, who will take you through our financial results.

Thank you, Terry. First, I will 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 Ffederal, state and international tax laws, the company’s ability to effectively manage 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 projections contained herein.

I’ll start by covering second quarter results. Sales for the second quarter totaled $1.060b, an increase of 4.4%, compared to the $1.015b for the second quarter of last year. That’s lower than the 7.1% sales increase for the first quarter of 2003, and at the lower range of our expectations.

Most of the sales increase was due to favorable currency impact on our International segment. On a constant-currency basis, the total Ccompany’s sales increase was plus 1%.

Our gross profit rate in the second quarter was 16.3%, which decreased .5% from the 16.8% rate in the prior year.

Our gross profit rate was 16.5% in the first quarter of 2003, so there was a .2% decrease in the sequential gross profit rate. The gross profit rates of the U.S. Ccommercial and Iinternational business segments showed decreases compared to last year, while PTSA was flat.

It was the decrease in gross profit rate that drove the declined in earnings for the second quarter. I’ll discuss the gross profit rate in more detail as we cover the segment results.

Selling, general, and administrative expenses in the second quarter totaled $170m, and increased 3.8% yearyear-over-year over year. SG&A expenses increased 2.9% sequentially as compared to the first quarter of 2003. The most significant component of the year over year year-over-year increase was currency impact in our international expenses. On a constant-currency basis, total expenses were flat to last year. SG&A expenses as a percentage of sales were 16.0%, a .1% improvement compared to last year.

Earnings from operations in the second quarter totaled $2.4m, compared to $6.5m earned last year. Our effective tax rate in the second quarter was 39.5%, which is a .5% improvement compared to last year, and consistent with the first quarter rate. For planning purposes, we expect to utilize the 39.5% rate over the balance of 2003.

Our second quarter net income was $1.5m compared to the $3.9m earned last year. And diluted earnings per share in the second quarter were four cents per share, which compares to earnings of eleven cents per share last year. Sequentially, earnings per share increased from the one cent earned in the first quarter of 2003.

Now I’ll cover our segment sales results for the second quarter, and 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 $522.7m, a .7% decrease compared to the $526.6m repcorted last year. That’s a significant slowing compared to the first quarter, when U.S. Commercial sales increased 4.9%. The sales performance month- by- month on a year over year year-over-year basis was April, plus 1%, May minus 1%, and June minus 2%. Note that April results include the unfavorable impact of the Easter holiday falling in the second quarter of 2003. Adjusting for the unfavorable Easter impact, April results were +2%.

The sales growth trend declined in the second quarter, continuing the pattern we saw in the first quarter. Basically, staffing volume was relatively flat month to month, but we were impacted by tougher year over yearyear-over-year comparisons as the quarter progressed. We remain cautious on the outlook for U.S. Commercial in the third quarter, noting that we have not yet seen a fundamental improvement in demand.

Sales in PTSA totaled $223.6m, an increase of 1.6%, compared to sales of $220m last year. That’s a slowdown compared to the first quarter PTSA sales growth of plus 6.1%, with most of the individual business units showing reduced rates of growth.

Moving on to the International segment, translated U.S. dollar sales in the International totaled $313.3m, a 16.8% increase versus the $268.2m in the prior year. On a same-currency basis, our revenue increased 3%, which reflected improvement for the flat sales growth reported in the first quarter. Same-currency sales growth continues to be positive in the Americas and Asia Pacific. Sales in the UK turned positive during the second quarter, while sales in Continental Europe improved slightly, but remained negative.

Turning now to our segment earning results for the second quarter, U.S. Commercial earnings totaled $23.1m, a decrease of 16.4%, compared to earnings of $27.6m last year. The U.S. Commercial gross profit rate decreased .7% 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. Most, but not all of the increase, was recovered from customers in the second quarter. Our pricing efforts will continue into the third quarter.

Second, Workers’ Compensation costs increased significantly as compared to last year.

Third, shifts in customer mix and service-line mix also reduced the gross profit rate.

U.S. Commercial expenses were well managed, and if fact were flat compared to the prior year.

PTSA earnings totaled $12.8m, a 2.8% increase compared to earnings of $12.4m last year. The PTSA gross profit rate was the same as the prior year. Like U.S. Commercial, PTSA was also impacted by higher state unemployment tax rates during the quarter. Pricing action recovered most, but not all of the SUTA increase.

Higher fee-based income offset the impact of the business unit mix. PTSA expenses increased to $0.5m, or 1.8% year over yearyear-over-year, reflecting investment in the rapidly growing Kelly Financial Resources and HR First units.

The International operating loss totaled $1m, compared to a profit of $0.4m last year. Sequentially, the loss was a significant improvement compared to the first quarter, when International lost $3.2m. The International gross profit rate decreased .8%, primarily due to gross profit rate decreases in the UK and Asia Pacific, along with same-currency decreases in recoup and feerecruitment fee income.

Operating expenses increased 15% versus last year in U.S. dollar terms, but actually increased less than 1% on a same-currency basis.

Corporate expenses totaled $32.4, a decrease of $1.6m, or 4.7% versus the prior year. Compared to 2002, there were lower legal and net information technology costs. Corporate expenses decreased 4.2% sequentially, compared to the first quarter.

Well, normally I’d cover the six-months results at this point. However, the underlying trends remained relatively consistent in the year-to-date period, so I’ll skip the detailed commentary. You’ll find our full six-month financial results included in the press release materials.

Now, I’d like to shift to the Ccompany’s second quarter balance sheet and make a few comments. Cash and short-term investments totaled $77m at quarter end. That’s about the same as the $78m cash balance at the end of the second quarter last year. Accounts receivable totaled $618m at quarter end. That’s up $29m compared to last year.

For the second quarter, our global-based days sales outstanding were 53 days, consistent with the prior year. Our short-term debt at quarter end totaled $24m, a $6m decrease compared to the $30m level the prior year. At quarter end, debt represented less than 4% of total capital.

And finally, I’ll make a few additional comments on the Ccompany’s cash flows. Capital expenditures for the first six months totaled $15m. That’s up 6.4% from the $14m spent for the same period last year. For planning purposes, we expect our 2003 capital expenditures to total between $35m to $40m. Depreciation and amortization for the first six months totaled $24m. That’s up $3m, or 14% compared to last year. For planning purposes, we expect depreciation and amortization to total approximately $47m to $49m for 2003.

In summary, at quarter end the condition of our balance sheet and cash flow remains excellent.

I’d now like to turn it over to Carl, who will highlight our operating results.

Thank you, [Bill.]

I will briefly discuss the operational performance in the second quarter in each of our three business segments.

Let me begin with U.S. Commercial, which makes up 49% of sales. The weakening year over yearyear-over-year sales trend of the first quarter continued through the second quarter. The recovery to date in this segment has been fueled primarily by our light industrial and electronic assembly practices. However, the year over yearyear-over-year rate of growth in these service lines has been slowing since the beginning of the year. And although we saw sequential improvement in the number of office clerical staffing assignments as the quarter progressed, the trend failed to gather momentum and fell short of our expectations. This reflects the ongoing caution of our customers and their staffing decisions. Companies remain hesitant to pursue expansion plans.

Our fee-based recruiting business in the U.S. Commercial segment increased 8% sequentially against the first quarter, and 11% year over yearyear-over-year. And although we are encouraged by this improvement, we have not yet seen the aggressive hiring that is characteristic of a strongly improving economy.

Operating margins, as [Bill] noted, are under increasing pressure. As I commented in our First Quarter Conference Call, our U.S. Commercial gross profit percentage declined as a result of higher state unemployment taxes, which we call SUTA, as well as a shift in business mix. And although we had successfully recovered the majority of SUTA costs by the end of the second quarter, our lower margin businesses, Light and Electronic Assembly, continued to grow more rapidly than our higher margin businesses, Office Clerical. And by the way, some of the additional recovery of SUTA costs as a reflection oin our pricing, will spill over into the third quarter.

Unfortunately, in an already difficult pricing environment, we are now facing higher than expected increases in Workers’ Compensation charges, as medical costs associated with claims rise rapidly. We are stepping- up our efforts to contain these costs, and we will continue to provide updates.

Now let me turn to PTSA. PTSA makes up 21% of sales and is comprised of our Professional and Technical Services Group, and our non-temporary staffing units, the Staffing Alternatives Group. Collectively, our professional and technical staffing continued to show revenue growth. For the second quarter, revenues were up almost 2% year over yearyear-over-year. As with our Commercial Staffing business, this segment experienced weaker than expected sales trends during the second quarter due to the stalled U.S. economy.

But Aas we’ve seen in the previous quarters, the slowing was not uniform across all of PTSA’s 13 business units. For the quarter, Kelly Financial was the leading professional and technical staffing performer. Sales growth exceeded 25%. On the other hand, staffing demands softened somewhat in Kelly Scientific, as the pharmaceutical industry in particular reduced its temporary workforce due to general economic factors. And Kelly Home Care continued to decline in the quarter, reflecting the ongoing weakness in the Home Care industry. We expect a resumption of growth in these professional businesses, in step with an improving economy.

Kelly HR First, our outsourcing solution for recruiting unemployment functions was the leading Staffing Alternatives performer, also with sales growth of over 25%. This is the third consecutive quarter of strong growth for HR First, but let me add that nearly all of the businesses that comprise the Staffing Alternatives Group had solid double-digit gains during the quarter.

For the fifth consecutive quarter, our fee-based income has improved in PTSA. The fastest growing contributor to this growth has been Kelly HR First, and but unfortunately, we have not yet seen this rate of growth in the placement fees associated with our specialty staffing units.

Similar to U.S. Commercial, the majority of costs associated with the SUTA increases have been recovered in this segment. In addition, during the quarter our lower margin businesses grew at a faster rate than our higher margin businesses. But increases in fee income offset the impact of the change in business mix in PTSA.

Expenses are being well managed in this segment. They increased just 2% for the second quarter year over yearyear-over-year, and as [Bill] noted, this increase is attributable to our expansion efforts in Kelly HR First and Kelly Financial. As we selectively pursue opportunities in our growth businesses, we continue to exercise operational discipline in this segment.

Before I leave PTSA and move on to International, I’d like to make a few comments about our Staff Leasing business, KSL. The PEO industry has been facing considerable challenges. This prompted us at the end of 2002 to build a stronger customer portfolio, to better position this business for the long term. We eliminated over 300 low-margin customers representing more than $100m in billings.

In addition, in the first quarter of 2003, we along with the rest of the PEO industry, adopted the net method of reporting Staff Leasing revenue. Under the new method, payroll costs of our Leasing worksite employees have been netted against revenues, with no impact on operating earnings. On the new basis, Kelly Staff Leasing sales in the second quarter grew at over 10%, resulting in strong earnings growth. This is the second consecutive quarter of strong performance in our Leasing business. And let me add, it would have been an equally strong quarter regardless of the reporting method we used.

Our third segment is International, which makes up 30% of our total sales. In the second quarter, sales growth in this segment showed a 17% year over yearyear-over-year improvement in U.S. dollars. But when measured in constant currency, sales were up only 3%. In our First Quarter Conference Call, we reported that we were beginning to see encouraging signs of improvement in our UK/Ireland operations. And I am pleased to say that despite the weakening environment in the UK, our operations continued to improve in the second quarter. Sales in this region on a constant-currency basis were up almost 4% year over yearyear-over-year. This increase in sales revenue came from new staffing accounts won in the first half of the year. Our fee-based recruiting business, on the other hand, has not yet shown signs of recovery.

For the most part, the Americas and Asia Pacific regions continued to show solid year over yearyear-over-year improvements in sales. However, the rate of growth softened slightly in the second quarter. The Asia Pacific growth was fueled by our operations in Malaysia, Singapore, and New Zealand. The Americas growth continues to be in Mexico and Puerto Rico, somewhat offset by weaker sales performance in Canada. In Continental Europe, sales are improving slightly. In the quarter, we saw year over yearyear-over-year sales growth in the majority of countries. France and Switzerland, on the other hand, are still slowing, and we continue to see deterioration in Germany and the Netherlands.

While we are encouraged by the pockets of growth we are seeing in Continental Europe, it does not reflect an overall strong regional economic growth. There are no signs that fee-based income is beginning to recover, and we remain uncertain about the near-term economic outlook in Europe and its effect on staffing. Therefore, we continue to intensify our efforts to gain efficiencies and reduce expenses at the country level. On a constant-currency basis, expenses increased less than 1% for the second quarter, and they’re nearly flat year to date.

For comparison purposes, I would like to highlight our total U.S. performance now for the second quarter. This combines both the U.S. Commercial and PTSA sales results. Kelly’s total U.S. sales for the second quarter were $746m, basically the same as reported for the same period last year. The biggest threat to better growth in our U.S. businesses for the near term is the tenuous improvement in the general U.S. economy, as well as the weak labor market. We continue to look for signs that the economy is improving and the labor market is strengthening. Like many of you, aside from the general economic growth indicators, we look at the BLS Temporary Staffing data. In addition, we focus on job creation numbers and claims for unemployment benefits.

Let me discuss those. If we look at the BLS data, the level of improvement as reported for the last two months would seemingly suggest the temporary staffing market is dramatically strengthening. We believe, however, the BLS statistics to becould be exaggerated as a result of the new categorizations and sampling methodologies they are employing.

It’s interesting to note that the sudden uptake in temporary staffing numbers coincided with the change in sampling methodology used by the BLS. We have not yet seen similar trends in the staffing industry’s numbers to validate that in fact the industry is seeing significant growth. And the growth as reported is inconsistent with the overall job creation numbers, as well as the increasing number of unemployment claims. As such, until we see unambiguous signs that the general economy and labor markets are improving, we will remain cautious in interpreting these numbers.

This concludes the operations comments, and I’ll turn the call back over the [Terry.]

Thank you, Carl, and thank you, [Bill.]

Each quarter, I provide my perspective on current business conditions, and the outlook for the staffing industry. In many ways, not much has changed since we last reported to you in April. Strong sustained economic growth has not yet materialized.

On our First Quarter Conference Call, we cautioned the demand for temporary staffing was again slowing after several months of improvement, and that second quarter year over yearyear-over-year revenue comparisons would be difficult. In spite of optimistic forecasts by many, we were uncertain that the turning point in the economic cycle had been reached. Economic signals remained mixed, and the fragility of the economy continued to concern us. It is now clear that the U.S. economic recovery stalled in the second quarter.

Looking forward into the third quarter, while there are some encouraging signs, such as projected growth in GDP, there remains a general lack of strength in the recovery. As Carl noted, the economy continues to lose jobs. Since January, over 350,000 jobs have been lost, and about 20% of those lost jobs had been filled by temporary employees. The unemployment rate is still at its highest level in more than nine years. Corporate layoffs continue, and capital spending remains weak.

The outlook for the remainder of the year is not clear, and in our judgment, even short-term predictions cannot be made with any certainty. But since our industry has historically been a good concurrent indicator of the economy, we often get asked, “When will the recovery begin?” The current economic cycle has not followed a traditional “V” or “U” pattern, and as we pointed out in early 2002, the shape appeared to be what we called an “extended U” although the extension has been a lot longer than we originally anticipated. Nevertheless, when the recovery does start, we do expect a snapback in demand for temporary staffing.

During one of the toughest recessions for our industry, we have been pleased with our ability to significantly grow market share and remain profitable. We are committed to returning to and exceeding our historic sales and earnings levels. Now, how quickly that will happen will depend on how quickly the economy recovers. Given this uncertainty, even providing guidance one quarter out is becoming more challenging.

At this time, our best thinking is that third quarter earnings should be in the range of four to eight cents per share. The current consensus for earnings per share is fourteen cents per share for the third quarter and forty-one cents per share for the year. We believe both estimates are too high.

Most economists and analysts have built their third and fourth quarter forecasts around a strong economic recovery in the second half this year. We certainly share their hope, but not necessarily their optimism. We continue to see a sputtering global economic recovery, with particular concerns for Continental Europe and the United Kingdom. Nevertheless, until we see sustained improvements in the U.S. economy, we will remain cautious in our outlook.

We do believe Kelly remains well positioned, and we will continue to manage our operations through the balance of 2003 much as we have since the recession began in 2001. We will not sacrifice long-term growth for short-term earnings. We will preserve our customer relationships. We will closely manage expenses. We will maintain our branch network. And we will preserve our strong balance sheet and capital structure.

This strategy has led to much success over the past two years, and continues to do so this year.

Now, this concludes our formal comments. We’d 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’ll get back to you as promptly as we can.

Once again, thank you for joining us this morning.