Kelly Services Inc (KELYA) 2003 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Kelly Services fourth-quarter financial results conference call. All participants will be placed in the 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 Mr. Terence Adderley, CEO.

Good morning. I'm Terry Adderley, Chairman and CEO of Kelly Services. I would like to welcome all of you this morning. Our purpose today is to present our financial operating results for the fourth quarter and full year of 2003. Bill Gerber, our Executive Vice President and CFO, will lead off with the financial results.

All of you should have received copies of our P&L balance sheet and cash flow statements. If you have not received this material and would like a copy, please call us at 248-244-5271. We will gladly fax or 3-mail it 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. Lastly, I will provide you with my thoughts on current business conditions and our preliminary guidance for the first quarter of 2004.

Now here is Bill Gerber who will take you through the 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 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 companies by with the Securities and Exchange Commission. Actual results may differ materially from these projections contained herein.

I will start by covering fourth quarter results. Revenue for the fourth quarter totaled 1.165 billion, an increase of 11.1 compared to the 1.048 billion for the fourth quarter of last year. That is a significant improvement compared to the 3.8 percent increase for the third quarter and at the higher range of our expectations.

Some of the reported increase was due to favorable currency impact on our international segment. On a constant currency basis, total Company revenue increased 7.2 percent, which was also a significant improvement compared to the 1.3 percent increase in the third-quarter.

Our gross profit rate in the fourth quarter was 16 percent, which decreased 1.3 percentage points from the 17.3 percent rate in the prior year. Our gross profit rate was 15.7 in the third quarter of 2003, so there was a three tons of one percent sequential increase in the gross profit rate.

The gross profit rate of the U.S. commercial and international business segments showed decreases compared to last year, while PTSA reported an increase.

The year-over-year decrease in gross profit rates in our US operations was largely due to higher workers compensation expense, combined with the impact of customer and service line mix.

The sequential increase in gross profit rate was driven largely by rate improvements in the PTSA business units.

Selling general and administrative expenses in the fourth quarter totaled 182.9 million and increased 8 percent year-over-year.

SG&A expenses increased 7.6 percent sequentially as compared to the third quarter of 2003.

Currency translation continued to impact our reported international expenses. On a constant currency basis, total Company expenses increased only 3.9 percent compared to last year.

SG&A expenses as a percentage of sales were 15.7 percent, a four-tenths of a percent improvement compared to last year.

Earnings from operations in the fourth quarter totaled 3.2 million, compared to the 12 million earned in 2002.

Our fourth quarter net income was 1.8 million, compared to the 7.3 million earned last year. And diluted earnings per share in the fourth quarter were 5 cents per share, which compares to earnings of 21 cents per share last year. Sequentially, diluted earnings per share increased one cent compared to the four cents earned in the third quarter.

Now I will cover our segment revenue results for the fourth quarter. 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.

Revenue in U.S. commercial totaled 569.2 million, a four percent increase compared to last year. That is a significant improvement compared the third quarter, when U.S. commercial revenue decreased 2.6 percent year-over-year.

The performance by month on a year-over-year basis was; October, plus 2 percent, November plus 5 percent, and December to 6 percent.

The year-over-year revenue growth trend accelerated throughout the fourth quarter. Staffing volumes showed strong sequential increases beginning in mid-August and continuing into November. In December, we were impacted by normal seasonal decreases, which were somewhat less significant in 2003 compared to prior years. We are currently seeing continued improvements in demand for U.S. commercial in early January.

Revenue in PTSA totaled 228.6 million, an increase of 4.1 percent compared to last year. In the third quarter, PTSA decreased four-tenths of a percent, so like U.S. commercial, the fourth quarter showed a significant turn. Carl will provide more detail on PTSA performance during his operations comments.

Moving on to the international segment, translated U.S. dollar revenue in international totaled 367.2 million, a 30.6 percent increase versus last year. On a same currency basis, our international revenue increased 16 percent, which reflected continued improvement from the 10.1 percent same currency growth reported in the third quarter. Same currency revenue growth was positive in all regions.

Turning now to our segment earnings results for the fourth quarter, U.S. commercial earnings totaled 23.1 million, a decrease of 33 percent compared to last year. The U.S. commercial gross profit rate decreased 2 percentage points from the prior year. Several factors impacted the gross profit rate.

First, workers compensation costs increased significantly as compared to last year, principally due to medical cost inflation.

Second, U.S. commercial continues to be impacted by significantly higher state unemployment tax rates. We were successful in recovering most of the increase in the fourth quarter through pricing action. However, additional pseudo (ph) tax increases were effective January 1, 2004. We have been implementing additional pricing changes to recover these increases as well.

Third, customer mix and service line mix also reduced the gross profit rate. U.S. commercial expenses increased 7.2 percent compared to the prior year. Included in the quarter was 1.1 million of bad debt expense associated with the bankruptcy of Solutia, a significant corporate account.

PTSA earnings totaled 14.9 million, an 8.6 percent increase compared to last year. The PTSA gross profit rate increased five-tenths of a percent compared to the prior year. PTSA benefited from higher fee-based income in the Staffing Alternatives units.

PTSA expenses increased 1.7 million or six percent year-over-year, reflecting increased variable costs associated with the revenue growth in the Vendor Management Services and HRfirst units. And PTSA was also impacted by the Solutia bankruptcy, absorbing a $318,000 charge.

International earnings totaled 1.6 million, a 41.5 percent decrease compared to last year. The international gross profit rate decreased 1.9 percentage points, primarily due to gross profit rate decreases in the UK, Continental Europe, and Asia-Pacific; primarily the result of continued shift in mix to larger corporate customers.

Recruitment fee income showed a small increase as measured in constant currency.

Operating expenses increased 21 percent versus last year in U.S. dollar terms, but actually increased only 7.3 percent on a same currency basis.

Corporate expenses totaled 36.3 million and decreased 2.5 million or 6.3 percent versus the prior year. Compared to last year, expenses related to our information technology programs and management bonus were significantly lower.

Corporate expenses increased 9.8 percent sequentially compared to the third-quarter; principally due to higher marketing expenses and costs associated with the implementation of Kelly staff net, the company's new branch automation system.

Next I will cover a few highlights on the full year of 2003. Revenue for 2003 totaled 4.325 billion, an increase of 6.6 percent compared to the 4.057 billion reported in 2002. On a constant currency basis, total revenue increased 3.3 percent for the year.

Our gross profit rate for 2003 was 16.1 percent, which decreased one percentage point compared to the 17.1 percent rate last year. The decrease in full year gross profit was due to the combination of increases in workers compensation costs; higher state unemployment taxes, customer and service line mix, and generally lower fee-based income.

Selling, general and administrative expenses as a percentage of sales were 15.9 percent, a four-tenths of a percentage point improvement compared to the 16.3 percent rate in the prior year.

SG&A expenses totaled 687.9 million and increased 3.9 percent year-over-year. However on a same currency basis, the total company increase in expenses was only one-tenth of one percent compared to last year.

Earnings from operations for the year totaled 8.7 million, compared to the 30 million reported in the prior year. Our full year net earnings were 5.1 million compared to the 18.6 million earned in the prior year. Diluted earnings per share for the year were 14 cents per share, compared to earnings of 52 cents per share in 2002.

Now I would like to shift to the Company's year-end balance sheet and make a few comments. Cash and investments totaled 77 million at year end, compared to 101 million at the end of 2002. Increased working capital requirements and the third-quarter share repurchase transaction were the primary drivers of the lower cash balance.

Accounts Receivable totaled 658 million at year end, an increase of 90 million compared to last year. For the fourth quarter, our global Day Sales Outstanding were 51 days, which is an improvement of two days versus the third-quarter performance, but an increase of two days compared to last year.

Our short-term debt at year-end totaled 39 million, a $14 million increase compared to the prior year. This increase was driven by growth of sales in Accounts Receivable in our international operations. At quarter end debt represented only six percent of total capital.

And finally, I will make a few comments on the Company's cash flows. Depreciation and amortization for the year totaled 47.8 million, an increase of 2.4 million or five percent compared to last year. For planning purposes we expect depreciation and amortization to total approximately 46 to 48 million for 2004.

Capital expenditures for the year totaled 30.2 million, a 9.5 percent decrease compared to last year. For planning purposes we expect our 2004 capital expenditures to total between 30 to 34 million.

In summary at year end we believe the condition of our balance sheet and cash flow remains excellent. I would now like to turn it over to Carl, who will highlight our operating results.

Thank you, Bill. I will briefly discuss operational performance in 2003 in each of our three business segments, beginning with U.S. Commercial, which makes up 49 percent of sales. This segment began to see strong, steady, sequential improvements in the number of assignments during the third quarter. This continued throughout the fourth and into January, and we are very encouraged by this trend.

Year-over-year sales in this segment rebounded from being down almost 3 percent in the third-quarter to plus 4 percent by the fourth. We are clearly seeing encouraging signs of improving job markets and a healthier economy.

The largest increases during the year came from our Light Industrial practice. After two consecutive quarters of low growth in Light Industrial, demand accelerated in the second half of the year. This growth resulted from both an increase in the number of assignments, as well as an increase in the average workweek. In fact, during the fourth quarter with a double-digit growth in our LIT assignments.

Although office clerical staffing has not yet exhibited the same level of improvement, we began to see encouraging sequential improvement towards the end of the third-quarter. This growth strengthened throughout the fourth. This indicates customers are becoming more optimistic in their outlook. We expect that this stronger, more sustainable growth in temporary assignments will be followed by a recovery in our Temp to Firm fees. The slight improvements we saw in fees in the fourth quarter were perhaps indicative of the early stages of a fee recovery.

Operating margins remained under pressure in U.S. Commercial throughout the year. The declines in our gross profit were principally the result of higher state unemployment taxes and significantly higher-than-expected increases in workers compensation costs.

As I reported in our third-quarter conference call, we view this is as a relatively short-term issue. Let me quickly update you on how we're dealing with these increases.

First, we are repricing most contracts. Second, we are ending some of our customer relationships. Third, we have implemented a stronger claims management process. As a result, we are making significant progress.

Let me remind you that the results are not always immediate. In many cases we are bound by terms of existing contracts, which can require anywhere from 30 to 120 day advance notice of price increases. And in fact some accounts do not true up until year-end.

Before I leave U.S. commercial, I would like to highlight our continued strong performance in Kelly Educational Staffing, KES, for 2003. For the third consecutive year KES had double-digit sales growth. During the year we added five additional states to our U.S. footprint. We now serve 39 states and the District of Columbia, representing 1400 school districts.

In the UK, we also saw strong growth work KES. We added KES branches in 2003 and in addition we were awarded the Department for Education and Skills Quality Mark. This award has been given only to a very few select educational (technical difficulty) providers. We continue to actively pursue both domestic and international opportunities in Educational Staffing.

Now let me turn to PTSA. PTSA makes up 20 percent of sales and is comprised of our Professional and Technical Services Group and our non-temporary staffing units. Fourteen specialty staffing businesses now make up PTSA. Our newest PTSA business, Kelly FedSecure was launched in October 2003. FedSecure places professionals with security and top security clearances.

Similar to what we saw in our commercial staffing area, PTSA saw accelerated sales growth in the fourth quarter. Sales were up 4 percent year-over-year after being flat in the third. The results of PTSA's 14 business units remain mixed.

Kelly Financial and Law were the leading Professional and Technical Staffing performers in the fourth quarter, as well as during the year. Both units exhibited strong double-digit sales growth for the quarter as well as for the year. We saw ongoing weakness in Kelly Scientific, Homecare, and Engineering. However, during the fourth quarter, we did begin to see improvements in Scientific and Engineering staffing.

Kelly HRfirst, our outsourcing and recruitment units, and Kelly Vendor Management were the leading staffing alternative performers. Both units had sales growth of over 25 percent for the fourth quarter and solid double-digit sales growth for the year.

Let me make a few quick comments on HRfirst this morning. This business has shown substantial revenue growth during the last two years. Companies are becoming more focused on improving their hiring processes and are turning to Kelly for the solution.

HRfirst improves recruiting effectiveness while significantly reducing expense. Demand in this area continues to strongly grow. Both HRfirst and Kelly Vendor Management account for the greater than 25 percent increase in the other fee-based income for PTSA.

Placement fees on the other hand continued to lag in the majority of PTSA staffing businesses and were down over 10 percent for the year. However strong fee performance in the Kelly Law Registry Unit did result in an overall fourth quarter increase in placement fees for PTSA.

We expect that as business confidence strengthens further, placement fees will continue to improve. As with Commercial, we are pleased with this segment's performance. The unit finished the year with positive sales and earnings growth. We are also very encouraged by the improvements in professional assignments, especially during the fourth quarter and continuing on in January.

Our third segment is International, which makes up 31 percent are total sales. By far 2003 sales growth was greatest in our international segment when compared to the previous year; and the fourth quarter international sales grew over 30 percent year-over-year in U.S. dollars and were up 16 percent when measured in constant currency.

Overall for the year this segment was up 20 percent in U.S. dollars and over 7 percent in constant currency, with sales growth accelerating quarter by quarter throughout the year.

The strong improvements we're seeing have been caused by both the general economic recovery in many countries and Kelly's particular focus on sales growth.

Fourth-quarter sales growth was again positive in all regions. In our UK Ireland operations, sales accelerated significantly during the second half of the year with sales up 30 percent in the fourth quarter. The UK economy is beginning to see signs of a turnaround. The increase in sales revenue we are seeing is coming primarily from new accounts added throughout the year. And in addition our fee-based recruiting business is showing encouraging signs of improvement during the fourth quarter with growth of over 20 percent.

During the fourth quarter, sales growth in the Americas increased 11 percent, consistent with the third. However unlike the third quarter, where growth was primarily fueled by Mexico, the fourth saw stronger sales growth in Canada and Puerto Rico.

The Asia-Pacific growth was fueled by our operations in Australia, New Zealand, Singapore and Malaysia. After seeing strong sales growth in the third-quarter, sales growth increased in the fourth by 21 percent.

We also saw encouraging year-over-year sales growth in Continental Europe during the second half of the year. You may remember from our last conference call, sales in continental Europe turned positive in the third-quarter for the first time in 2003. This trend continues. Overall the region had an increase of nearly 10 percent in the fourth quarter. The majority of countries in which we operate saw solid increases, however we did continue to the deterioration in Germany.

While our temporary staffing business is recovering in continental Europe, our fee-based income continues to lag. In this region our recruiting business has been hit hardest, but as economic conditions continue to improve, we do expect fee-based income to ultimately begin to recover.

We are also making significant progress on growing specific PTSA business lines internationally. Most notably, Kelly Scientific, Financial, Engineering, and Vendor Management.

Let me quickly highlight Kelly Vendor Management. We have been providing Web enabled Vendor Management solutions in Europe as well as the U.S. since 1998. We have successfully adapted our technology to meet the specific needs of customers and the individual legislative requirements of individual countries.

Our success in VMS in Europe and the U.S. has enabled us now to secure additional client relationships in Latin America, Asia, and Australia during 2003. We are now the only staffing company providing Vendor Management solutions across five continents; and we're the only company with the VMS tool that is multilingual and localized for 10 of the world largest staffing markets.

We look forward to continued growth in this area. This concludes the operations comments and I would like to turn it back to Terry.

Thank you, Carl, and thank you, Bill. 2003 was a transitional year for the economy and the staffing industry. The first half of the year was marked by sporadic economic improvements and a weak labor market. It was not until late in the year that economic conditions globally began to improve and signaled a sustainable job creating recovery. Concurrent with this, the demand for temporary staffing also began to show real strength.

In 2003, our sales increased to $4,325,000,000. This is a new sales record for the company and was some $75 million above the previous record set in the year 2000. While sales recovered nicely, earnings declined to about 10 percent of their pre-recession levels. This was anticipated in our quarterly guidance last year. And as I previously stated, we are committed to exceeding our historic levels and expect to do so over the next three to four years.

Clearly recessions are not good for our industry and I know we at Kelly welcome this recovery. As an aside, it is always amazing to me how many people still believe staffing companies do well during a recession.

Well, starting with this conference call, I will briefly touch on what has been happening or has happened historically coming out of a recession. During the early stages of a recovery, companies are uncertain if the pickup in their business will continue. Rather than hiring full-time employees, they will add temporary staff. And typically during this early period of the recovery our sales grow at an accelerated rate.

When companies become confident that the recovery is for real, they will begin adding to their permanent workforce. At that point, our sales do continue to increase but at a more normal rates. It is also at this time that we do expect to see temp-to-perm and placement fees begin to accelerate.

Another thing to expect coming out of a recession is significant increases in workers compensation costs and state unemployment taxes. The increase in 2003 and what we are experiencing in 2004 has been particularly large.

An increase in bankruptcies is also to be expected. These increases, however, should all be viewed only really as having a short-term effect on our earnings.

This industry has always been difficult to forecast. The duration and strength of the economic recoveries will vary, which in turn will affect our growth rates. Also during the last decade we have seen many fundamental changes in the business, which may also affect growth rates. For example, temporaries are a larger part of the workforce today.

Over the last decade, temporary employees in the U.S. as a percentage of the workforce grew from 1.3 percent to 2.3 percent. Since the recession began, that percentage has declined back to 1.8, but it is expected to rebound quickly.

There has also been widespread acceptance and growth in the professional and technical staffing areas. While recruiting fees have become more important as more companies use temp-to-perm as a preferred hiring model. And in the case of Kelly, our mix of businesses and geographic spread is so much different than it was ten years ago.

So the pattern of recovery for our industry is yet to be determined and comparisons to the past may be of limited use. In any event, it will be interesting to watch and overall should be a very positive experience.

As you may recall, we finally got our strategic growth plan fully underway just months before the recession began. By the year 2000, all of our segments were turning in real double-digit sales growth and good earnings. And as you may also recall at the start of the recession, we slowed the implementation of that strategic plan. Where possible, we delayed entering new countries, starting new businesses, and opening new offices.

We obviously also sacrificed short-term earnings in order to protect gains we had already made. Now that we are in the recovery, we are resuming where we left off. With some retuning, we are reintegrating our strategic plan. We will accelerate filling out our domestic and international branch network by adding to our 2400 offices, all of which are company-owned and operated.

And in our U.S. commercial segment, we will further develop our core business and add new high-value products such as a the call center staffing programs. We will expand our current PTSA businesses and continue to add business lines to this segment.

Some potential examples include HR staffing, marketing staffing, and outplacement. We will continue to expand our global footprint. We added 20 countries in the 1990s and we'll add another dozen or so before the end of this decade. And we will continue to stress quality and the most efficient systems and processes in our industry.

We will combine faster than market sales growth and limited expense growth into solid earnings growth. We do feel we can do both; increase earnings, and aggressively pursue our strategic plan.

Now, as we prepare for 2004, the greatest unknown is the pace of the recovery. In our judgment, the greatest probability is that this will be a gradual recovery. Recognizing that the first quarter or our first quarter has the lowest revenue and will bear significant increases in employment tax costs. Our best thinking is that the first-quarter earnings should be in the range of a loss of a penny to a profit of four cents per share.

We do expect to deliver a year of continued sales growth and solid earnings gains. 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 as promptly as we can. Once again, thank you for joining us this morning.

Thank you for attending today's conference. Have a great day.