Kelly Services Inc (KELYA) 2004 Q1 法說會逐字稿

Welcome to the Kelly Services first-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 now like to introduce Mr. Terence Adderley, CEO of Kelly Services.

Good morning. I'm Terry Adderley, Chairman and CEO of Kelly Services. I'm pleased to welcome you today as we report our financial and operating results for the first-quarter of 2004. All of you should have received copies of our P&L, balance sheet and cash flow statements. If you haven't and would like to have a copy please call us at 248-244-5271 and we'll gladly fax or e-mail the material to you.

To briefly review this morning's agenda, Bill Gerber, our Executive Vice President and CFO, will lead off with an update on Kelly's financial results for the quarter. Following that Carl Camden, our President and COO, will talk about operating results and the general performance of our business segments. Then I'll share my thoughts on current business conditions and offer preliminary guidance for the second-quarter of 2004. Now here's Bill Gerber who will take you through our financial results.

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 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 SEC. Actual results may differ materially from any projections contained herein.

I'll start by covering first-quarter results. Revenue for the first-quarter totaled 1.159 billion, an increase of 15.5 percent compared to the 1.003 billion for the first-quarter of last year. That's continued improvement compared to the 11.1 percent increase for the fourth-quarter of 2003. Some of the reported increase was due to favorable currency impact on our international segment. On a constant currency basis total company revenue increased 11.1 percent which also showed continued improvement compared to the 7.2 percent increase in the fourth-quarter.

Our gross profit rate in the first-quarter was 15.8 percent which decreased 7/10 of a percent from the 16.5 percent rate in the prior year. Our gross profit rate was 16 percent in the fourth-quarter of 2003 so there also was a 2/10 of 1 percent sequential decrease in the gross profit rate. While the overall gross profit rate is down year-over-year, we note that the rate of decrease slowed compared to the third and fourth-quarters of 2003. The year-over-year decrease in gross profit rate in our U.S. commercial segment was largely due to higher state unemployment taxes and workers’ compensation expense combined with the impact of customer mix.

Selling, general and administrative expenses in the first-quarter totaled 181.3 million and increased 9.8 percent year-over-year. SG&A expenses decreased 8/10 of a percent sequentially as compared to the fourth-quarter of 2003. Currency translation continued to impact reported international expenses. On a constant currency basis total expenses increased only 5.1 percent compared to last year. We're pleased to note that we achieved one of our objectives this quarter by holding constant currency expense growth, up 5 percent, at less than half the rate of constant currency sales growth, up 11 percent. SG&A expenses were 15.6 percent of sales, a 9/10 of a percent improvement compared to last year.

Earnings from operations in the first-quarter totaled 2 million compared to 390,000 earned last year. Net interest expense totaled 239,000 compared to last year's net interest income of 122,000. Net interest expense was higher due to increased short-term debt levels and lower cash balances as a result of increased working capital requirements. The effective tax rate for the quarter was 40.0 percent, a small increase from the 39.5 percent rate in last year's first-quarter. For planning purposes we expect the effective tax rate to remain at 40 percent for the balance of 2004 which is a reduction from the 41 percent rate for the full year of 2003. Our first-quarter net income was 1.1 million compared to the 310,000 earned last year. And diluted earnings per share in the first-quarter were 3 cents per share, a three fold increase compared to earnings of 1 cent per share last year.

Well now I'll cover our segment revenue results for the first-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.

Revenue in U.S. commercial totaled 549.4 million, an 8.9 percent increase compared to last year. That's continued improvement compared to the fourth-quarter when U.S. commercial revenue increased 4 percent. The performance by month on a year-over-year basis was -- January up 6 percent; February up 10 percent; and March up 12 percent. The year-over-year revenue growth trend accelerated throughout the first-quarter. Staffing volume also showed strong sequential increases beginning in January and continuing through March. This is a typical seasonal pattern for the first-quarter. And we are continuing to see improvements in demand for U.S. commercial through mid-April.

Turning to PTSA, revenue totaled 238.7 million, an increase of 7.7 percent compared to last year. In the fourth-quarter PTSA increased 4.1 percent so, like U.S. commercial, the first-quarter showed continued improvement. 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 370.7 million, a 33.6 percent increase versus the prior year. On a same currency basis our international revenue increased 17.8 percent which reflected continued improvement compared to the 16 percent same currency growth reported in the fourth-quarter. Same currency revenue growth was positive in all regions -- America's up 15 percent; Europe up 18 percent; and Asia-Pacific up 21 percent.

Turning now to our segment earnings results for the first-quarter; U.S. commercial earnings totaled 24.3 million, an increase of 9/10 of a percent compared to last year. The U.S. commercial gross profit rate decreased 9/10 of a percent 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. New student tax increases were effective January 1, 2004. We have implemented additional pricing actions and have done well in recapturing these statutory increases. Third, customer mix also reduced the gross profit rate.

However, the U.S. commercial gross profit rate did improve 3/10 of a percent sequentially compared to the fourth-quarter. Workers’ compensation costs improved slightly on a sequential basis. U.S. commercial expenses increased 3.2 percent compared to the prior year. Expenses improved to 9.8 percent of sales compared to 10.4 percent last year. PTSA earnings totaled 14.2 million, a 5.8 percent increase compared to last year. The PTSA gross profit rate decreased 2/10 of a percent compared to the prior year. PTSA was impacted by higher workers’ compensation costs in the Kelly staff leasing unit. PTSA expenses increased 1.9 million or 7.4 percent year-over-year reflecting increased variable costs associated with the revenue growth in vendor management services and investment in the new Kelly Fed Secure business unit.

The international operating loss totaled 952,000 which is a substantial improvement compared to the 3.2 million loss in last year's first-quarter. The international gross profit rate decreased 9/10 of a percent primarily due to rate decreases in Europe as a result of the continued shift in mix to larger corporate customers. Recruitment fee incomes showed a modest increase as measured in constant currency. International expenses increased 20.9 percent versus last year in U.S. dollar terms, but actually increased only 6.3 percent on a same currency basis. International expenses were 17.3 percent of sales compared to 19.1 percent last year.

And lastly, moving on to corporate, expenses totaled 35.5 million and increased 1.6 million or 4.6 percent versus last year. Corporate expenses decreased 2.5 percent sequentially compared to the fourth-quarter. Corporate expenses as a percentage of sales improved 3/10 of a percent to 3.1 percent compared to 3.4 percent last year.

Now I'd like to shift to the Company's first-quarter balance sheet and add a few comments. Cash and short-term investments were 56 million at quarter end compared to 73 million last year. Increased working capital requirements were the primary driver of the lower cash balance. Accounts Receivable totaled 705 million at quarter end, an increase of 111 million compared to last year. For the first-quarter our global Days Sales Outstanding were 55 days which is an increase of one day versus last year. Our short-term debt at quarter end totaled 38 million, a $14 million increase compared to last year. The increase was driven by growth of sales and Accounts Receivable particularly in our international operations. At quarter end debt represented less than 6 percent of total capital.

And finally, a few comments on the Company's cash flows. Depreciation and amortization for the quarter totaled 11.3 million, a decrease of 582,000 or 4.9 percent compared to last year. For planning purposes we expect depreciation and amortization to total approximately 45 to 47 million for 2004. Capital expenditures for the quarter totaled 4.4 million, a planned decrease compared to the 8.4 million spent last year. For planning purposes we expect our 2004 capital expenditures to total between 30 to 34 million. In summary at quarter end our financial strength and flexibility remain excellent. I'd now like to turn it over to Carl who will highlight our operating results.

Thank you, Bill. I will briefly discuss first-quarter operational performance in each of our three business segments beginning with U.S. commercial which makes up 47 percent of sales. We continued to see strong, steady, sequential improvements in the number of assignments throughout the first-quarter. That trend began in the third quarter of last year and continues on to date. Year-over-year sales in this segment increased 9 percent in the quarter, a significant improvement over the fourth-quarter increase of 4 percent. Sales improved sequentially throughout the first-quarter and with an improving jobs market and a healthier economy we expect to see sales growth continue to trend upwards.

The largest increases during the quarter once again came from our light industrial practice. Demand in light industrial remains at a healthy level. This growth is fueled by both an increase in the number of assignments as well as an increase in the average work week. Although not yet exhibiting the same level of improvement as light industrial, office clerical staffing continues to see sequential improvement for the second consecutive quarter, up nearly 6 percent. We are very encouraged that demand for office clerical is strengthening.

We expect that this stronger, sustainable growth in temporary assignments will be followed by a stronger recovery in temp-to-perm fees. The first-quarter saw low double-digit improvement in these fees after being flat in 2003. We are encouraged by these results; we are now in the early stages of fee recovery, and we expect strong double-digit improvement throughout the year. Operating margins remained under pressure in U.S. commercial. We made progress during the quarter in recovering higher SUTA and workers’ compensation cost reflected in the modest sequential gross profit improvement. We dealt with SUTA and workers’ compensation cost through contract repricing and tighter claims management processes.

In addition during the quarter we ended some customer relationships that refused to accept the increases for unemployment taxes as well as customers with higher worker comp risk. As those customers go away it will somewhat lessen our year-over-year sales growth rate slightly in the second quarter. Expenses continue to be well managed in this segment. Expenses increased at less than half the rate of revenue growth and as a result we have seen the benefit of expense leverage tempered somewhat by weak year-over-year gross profit comparisons.

With the improvements we are seeing in U.S. commercial we have resumed our plans to fill out our domestic distribution system; more specifically we are looking at opening a number of new branches in various U.S. markets as well as adding new high-growth staffing concepts. Already during the first-quarter Kelly Educational Staffing has expanded into its 40th state. We now provide substitute teachers to over 1,700 school districts across the United States and the District of Columbia and we look forward to further educational expansion both domestically and abroad as the year progresses.

Now let me turn to PTSA which makes up 21 percent of sales and is comprised of our professional and technical services group and our non temporary staffing units, the staffing alternatives groups. 14 specialty businesses make up PTSA. Similar to what we saw in our commercial staffing business, sales growth in this segment accelerated in the first-quarter. Although the results of the 14 business units remain mixed, we are encouraged by the improvements in nearly all units.

Kelly Law Registry and Kelly Healthcare where the leading professional and technical staffing performers in the first-quarter. These units exhibited strong double-digit sales growth for the quarter in excess of 20 percent. Kelly Scientific and Kelly Engineering have turned around, both showing positive sales growth for the second consecutive quarter. However, Kelly Homecare and our automotive services group are still running behind last year. Kelly HRfirst, our outsourcing recruitment unit, and Kelly Vendor Management were the leading staffing alternatives performers. Both units had sales growth of over 20 percent for the first-quarter. Demand in these areas continues to grow strongly.

Placement fees are also improving for the majority of PTSA's staffing businesses. Overall placement fees were up 2 percent for the quarter. However, as the quarter progressed we saw sequential double-digit growth in fees. We expect that this improvement will continue to gain momentum as the job market strengthens. Of our three operating segments, PTSA had the largest increase in expenses in the quarter. However, as Bill noted, the increases were primarily attributable to additional investments in KVMS, our vendor management unit, and Kelly Fed Secure, our newest specialty staffing unit.

As with commercial, we are pleased with our quarterly performance in PTSA. We had both positive sales and earnings growth. We are also very encouraged by the strong improvement in professional assignments, especially during the first-quarter continuing into April. With the demand for specialty staffing accelerating we will resume adding to our PTSA offerings. Areas of strong interest included HR staffing, marketing staffing and outplacement. In addition, as we set priorities for PTSA development you can expect more fee-based businesses.

Our third segment is international which makes up 32 percent of our total sales. First-quarter sales growth was greatest in our international segment when compared to the previous year. In the first-quarter international sales grew over 33 percent year-over-year in U.S. dollars and were up nearly 18 percent when measured in constant currency. Sales growth has accelerated over the past five quarters. We attribute the strong improvements we are seeing in this segment to two factors, general economic recovery in most countries and Kelly's particular focus on sales and earnings growth.

First-quarter sales growth was positive in all regions. In the Americas sales growth increased 15 percent in constant currency, up from the 11 percent seen in the third and fourth-quarters of 2003. This growth was primarily fueled by Canada and Mexico. We are pleased with our ability to leverage these increased sales and the solid earnings growth. We also remain encouraged by the year-over-year sales growth in Europe during the quarter. Overall this region had an increase of 18 percent in the first-quarter, a significant improvement compared to the 5 percent decline for the first-quarter of 2003. The majority of the countries in which we operate saw solid increases.

For example, in our UK/Ireland operations sales accelerated significantly during the quarter with sales up 33 percent, a 3 percent sequential improvement over the fourth-quarter. With the UK economy beginning to see signs of a turn around we remain optimistic that our performance there will strengthen further. Our fee-based recruiting businesses there are also improving significantly. During the quarter UK fees were up 27 percent in constant currency and we're very encouraged by both of these trends. In fact, fee-based income is beginning to show early signs of improving throughout Europe as a whole. As the economic conditions continue to improve and more customers hire full-time staff, we do expect recruiting fees to increase more dramatically.

The Asia-Pacific growth was fueled by our operations in Australia, New Zealand, Singapore and Malaysia. After seeing strong sales growth in the second half of 2003, sales growth further increased in the first-quarter of 2004 by 21 percent, a substantial improvement. In addition, we are encouraged by our performance in India where we opened three new branches during the quarter. We are very pleased with the turnaround in international. We've reduced our loss from 3.2 million to less than $1 million and we expect to turn profitable shortly. In our renewed efforts to expand our worldwide coverage we're making significant progress on growing specific PTSA business lines internationally; most notably Kelly Scientific, Financial, Engineering and Vendor Management. This concludes the operations comments, and now I'd like to turn it back to Terry.

Thank you Carl and thank you Bill.

There's no question we are in an economic recovery. Hundreds of thousands of jobs are now being created and temporary staffing is producing a significant number of those jobs. In fact, temporary employment has been growing on a year-over-year basis since April of 2003. Our 15 percent sales growth in the first-quarter is Kelly's strongest quarterly growth since 1997. And let me point out that the improvement has been seen across virtually every business line and geography. Additionally, our first-quarter earnings were good and put us on track to achieve strong earnings growth this year. We're off to a great start and we expect it to continue.

Assuming just moderate economic growth, second-quarter earnings should range from 8 to 13 cents per share as compared to the 4 cents per share we earned in the second quarter of 2003. The longer-term outlook is less clear; no one knows with certainty how the economy will perform in any upturn. The models being used by industry analysts vary a great deal. Some are using the 1990s recovery as the basis for their models; others are using different scenarios. And as I have cautioned before, just as no two recessions are alike, no two recoveries are the same either.

At Kelly we believe we are in a strong recovery, however the exact pattern is still unclear. So for planning purposes we're using moderate growth assumptions for the economy. Given these assumptions how quickly can Kelly reach or exceed our prerecession earnings? Well, with moderate growth we expect to return to our prerecession earnings in three to four years. With an exceptionally strong economic recovery it could be even sooner; or in the aftermath of another unexpected geopolitical event it could obviously be longer. Now three to four years may seem like a long time and if all we had to do was recover earnings to prerecession levels we probably could do so in a couple of years. But we do need to balance earnings growth with other objectives.

Some of those objectives include investing to further improve productivity, quality and customer service, expanding our geographic coverage, globalizing our successful PTSA businesses and adding new business lines and services. In other words, continuing to do those things that earned us a significant increase in market share and in the number of very large customers we serve.

We've set several ambitious goals for the Company and we're pursuing them with determination. We will continue to grow sales faster than the industry average. We will hold expenses to roughly half the rate of our sales growth, and in turn we will increase earnings at a rate much faster than sales. 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.

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