Kelly Services Inc (KELYA) 2004 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to 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 Mr. Terence Adderley, CEO of Kelly Services. Sir, you may begin.

I'm Terry Adderley, Chairman and CEO of Kelly Services. I am particularly pleased to welcome you today as we report our financial operating results for the second quarter 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 the material, please call us at 248-244-5271, and we will gladly fax or e-mail it to you.

This morning Bill Gerber, our Executive Vice President and CFO will lead off with a review of 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 the business segments. And I will share my thoughts on current business conditions and the outlook as we move forward. But first I would like to review the headline news we released earlier today.

Kelly's second-quarter sales of $1,224,000,000, set a new all-time record for any quarter. It was also a good quarter for earnings. Our earnings were 14 cents per share, that is a penny over the high end of our guidance, and this performances is all the more impressive when compared to the 4 cents per share earned in the second quarter last year. We believe the quarter and we believe the balance of this year will continue on course, and our third-quarter earnings should range from 16 cents to 21 cents per share as compared to the 4 cents per share we earned in the fourth quarter of 2003.

But I will talk more about that in a few minutes. 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 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 second-quarter results. Revenue for the second quarter totaled 1.224 billion, an increase of 15.6 percent compared to the 1.060 billion for the second quarter of last year. Now that's about the same as the 15.5 percent increase for the first quarter of 2004. However, less of the reported increase was due to favorable currency impact and more was due to real sales growth. On a constant currency basis which eliminates the impact of foreign exchange fluctuations total company revenue increased 13.4 percent, which showed continued improvement compared to the 11.1 percent increase in the first quarter.

Our gross profit rate in the second quarter was 16.2 percent, which decreased 1/10 of a percent from the 16.3 percent rate in the prior year. Our gross profit rate was 15.8 in the first quarter, so there was a 4/10 of 1 percent sequential increase in the gross profit rate. While the overall gross profit rate was still down slightly year-over-year in the second quarter, our current forecast is that the third quarter will show a year-over-year increase in the gross profit rate.

Selling, general and administrative expenses in the second quarter total 189.4 million and increased 11.5 percent year-over-year. SG&A expenses increased 4.4 percent sequentially as compared to the first quarter. Currency translation continued to impact our reported international expenses; on a constant currency basis total expenses increased 9 percent compared to last year. SG&A expenses were 15.5 percent of sales, a 5/10 of 1 percent improvement compared to last year. Earnings from operations in the second quarter totaled 8.7 million compared to 2.4 million earned last year.

Net interest expense totaled 283,000 compared to last year's net interest income of 4,000. Net interest expense was higher due to increase short-term debt levels and lower cash balances as a result of increased working capital requirements.

The effective tax rate in the second quarter was 39.9 percent; for planning purposes we expect the effective tax rate to remain at 39.9 percent for the balance of the year, which is a reduction from the 41 percent rate for the full year of 2003. Our second-quarter net income was 5 million compared to the 1.5 million earned last year and diluted earnings per share in the second quarter were 14 cents per share compared to earnings of 4 cents per share last year.

Now I will cover our segment revenue results for the second 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 581.5 million an 11.3 percent increase compared to last year. That continued improvement compared to the first quarter when U.S. commercial revenue increased 8.9 percent. The performance by month on a year-over-year basis adjusted for the shift to the Memorial Day holiday was April plus 12 percent, May plus 11 percent and June plus 11 percent. The year-over-year revenue growth trend appeared to flatten a bit as the quarter progressed.

However, this primarily reflects the strategic decision to exit certain customers who did not accept the statutory SUTA increases or had unfavorable workers compensation experience. As we indicated in our first-quarter call, we anticipated this outcome in our balance of year forecast. While these accounts did represent a fair amount of sales, their contribution to earnings was relatively small.

Turning to PTSA, revenue totaled 256.5 million, an increase of 14.7 percent compared to last year. In the first quarter PTSA increased 7.7 percent, so the rate of growth nearly doubled in the second quarter. PTSA revenue adjusted for the holiday shift showed accelerating growth throughout the quarter with April up 12 percent, May up 15 percent and June up 17 percent.

Moving on to the international segment, translated U.S. dollar revenue and international totaled 386.5 million, a 23.4 percent increase versus the prior year. On a constant currency basis our international revenue increased 15.9 percent, which reflected a bit of a slowing compared to the 17.8 percent constant currency growth reported in the first quarter. Constant currency revenue growth was positive in all regions, America is up 16 percent, Europe up 15 percent and Asia-Pacific up 25 percent.

Turning now to our segment earnings results for the second quarter, U.S. commercial earnings totaled 29.6 million, an increase of 27.7 percent compared to last year. The U.S. commercial gross profit rate decreased 2.10th of a percent from the prior year. Several factors impacted the gross profit rate. First, state unemployment tax rates increased significantly. As we pointed out last quarter we have implemented additional pricing actions and have done well in recapturing most of these statutory increases.

Second, workers compensation cost stabilized as compared to last year. And third, the decision to exit certain customers had a small, positive impact on the gross profit rate. The U.S. commercial gross profit rate improved 4/10th of a percent compared to the first quarter; workers compensation costs and the exiting of selected accounts improved gross profit slightly on a sequential basis.

The U.S. commercial expenses increased only 2.9 percent compared to the prior year and expenses improved to 9.5 percent of sales compared to 10.3 percent last year. PTSA earnings totaled 16.4 million, a 27.7 percent increase compared to last year. The PTSA gross profit rate increased 3/10th of a percent compared to the prior year. The PTSA gross profit rate benefited primarily from higher fee-based income. PTSA expenses increased 11.4 percent year-over-year, reflecting increased costs associated with bad debt expense at the home care business, volume growth in the Law Registry and better management services units and investment in the new FedSecure business.

International earned a profit of 1.9 million, which is a substantial improvement compared to the 1 million loss in last year's second-quarter. The international gross profit rate decreased 5/10 of a percent primarily due to gross profit rate decreases in Europe as a result of the continued shift in mix to larger corporate customers. Recruitment fee income showed an increase of over 20 percent as measured in constant currency.

International expenses increased 14.3 percent versus last year in U.S. dollar terms, but actually increased only 7.1 percent on a constant currency basis. International expenses were 16.6 percent of sales compared to 17.9 percent last year. And lastly, moving on to corporate expenses totaled 13. -- excuse me, 39.3 million, and increased 6.7 million or 20.6 percent versus last year. The largest part of the increase was the accrual for the annual performance bonus. This significantly effects the year-over-year comparisons because no management bonuses were paid in 2003 due to the decline in earnings. Bonuses are obviously an important part of our compensation plan and are tied to set performance thresholds. Therefore we view it as positive that bonus accruals are up.

Similarly following the 2003 salary freeze, merit increases were awarded in the second quarter. In addition, there were higher costs associated with deployment of Kelly StaffNet, our branch automation system. We're nearing the completion of our deployment and expect to finish in the third quarter. Before I move on to the balance sheet note that you will find our full six-month financial results included in the press release materials.

Shifting to the Company's second-quarter balance sheet I will add a few comments. Cash and short-term investments were 65 million at quarter end compared to 77 million last year. Increased working capital requirements were the primary driver of the lower cash balance. Accounts Receivable totaled 728 million at quarter end, an increase of 110 million compared to last year. For the second quarter our global days sales outstanding were 54 days, which is an increase of one day versus last year but actually an improvement of one day compared to the first quarter.

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 and, short-term debt represented less than 6 percent of total capital.

And finally I will make a few comments on the Company's cash flows. Depreciation and amortization for the six-month period totaled 22.4 million, a decrease of 1.6 million or 6.7 percent compared to last year. For planning purposes we expect depreciation and amortization to total approximately 44 to 46 million for 2004. Capital expenditures in the first six months totaled 12.8 million, a planned decrease compared to the 15.1 million spent last year. And for planning purposes we expect our 2004 capital expenditures to total between 27 to 29 million. In summary at quarter end our financial strength and flexibility remain excellent. And I would now like to turn it over to Carl who will highlight our operating results.

Thank you, Bill. I will briefly discuss second-quarter operational performance in each of our three business segments, beginning with U.S. commercial, which makes up 47 percent of sales. As the U.S. economy and labor market continued to strengthen during the second quarter, so did the demand for commercial staffing. Year-over-year sales in this segment increased 11 percent in the quarter, a respectable improvement over the first quarter's increase of 9 percent. Since the beginning of this year we have seen five consecutive months of double-digit sales growth.

Year-over-year sales growth has stabilized at the current level as we finish exiting accounts who have not accepted statutory SUTA increases or that had bad workers comp experience. Year-over-year growth comparisons in commercial are still led by our light industrial practice which was up over 20 percent. This rate of growth is slightly higher than our first-quarter performance. We continue to see modest sequential increases in the number of lid (ph) assignments as well.

As we saw in the first quarter as the recovery gained momentum, commercials' performance was boosted by office clerical staffing. For the third consecutive quarter we saw sequential improvements in office staffing. As expected, we are also now seeing stronger recovery in temp-to-perm fees; for the second consecutive quarter we saw modest double-digit rates of improvement. This trend validates that we are in the early stages of the recovery. We are pleased with this performance but expect to see even stronger improvement as the year progresses.

Operating results in the U.S. commercial increased 28 percent in the second quarter on the strength of sales growth, as well as continued expense discipline. The gross profit range improved sequentially from the first quarter and further the year-over-year gap in the GP rate narrowed considerably. Expenses continued to be well-managed in this segment. Expenses increased less than 3 percent in the quarter. A substantially lower rate than the 11 percent growth rate in revenue. And although we will continue to carefully manage our spending, expenses will increase slightly as we reinstate previously suspended compensation increases and incentive payouts tied to higher profit performance.

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 and staffing alternatives group. Sales growth in this segment continued to trend upward at accelerating rates, nearly every unit of the 14 businesses that make up PTSA showed improvements. And professional and technical staffing at Kelly Law Registry and Kelly Healthcare were the leading performers. These units exhibited very strong double-digit sales growth for the quarter in excess of 25 percent. And after turning around in the first quarter, Kelly Scientific and Kelly Engineering, two of our largest specialty staffing businesses continued their solid performance. And as conditions improve further, we expect even stronger growth in these businesses.

Slower to respond to the improving economy, Kelly Home Care and their Automotive Services group continue to run behind last year. Kelly HRfirst, our outsourcing and recruitment unit and Kelly Vendor Management were the leading staffing alternatives performers. And both units had sales growth of over 25 percent for the second quarter. Demand in these areas continues to grow steadily.

We are also very pleased about the resurgence in placement fee income in the majority of the PTSA staffing businesses. For the second consecutive quarter placement fees showed strong growth, up nearly 30 percent for the quarter. This is considerable improvement over the 2 percent increase we saw in the first quarter. As expected, as the quarter progressed and the job market strengthened, we saw strong month-to-month fee acceleration as well.

Of our three operating segments, PTSA had the largest increase in expenses during the quarter. Aside from the increase in bad debt expense on our home care unit as Bill reported, the remainder of the staffing businesses held expense growth to about half the rate of sales growth. We are pleased with our solid quarterly performance in PTSA, earnings in this segment grew at double the rate of sales growth in the quarter. We are also very encouraged by the continuing strong improvement in PTSA assignments. Having added more assignments during the second quarter alone than we added in all four quarters of 2003 combined.

Our third segment is international which makes up 32 percent of our total sales. For the second consecutive quarter year-over-year sales growth was strongest in our international segment. Second-quarter sales growth was positive in all regions, in the Americas sales growth increased 16 percent in constant currency, slightly ahead of the 15 percent growth seen in the first quarter. This growth was primarily fueled by Canada and Mexico, both countries turned in good double-digit sales growth and very strong earnings growth for the quarter. 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 a 15 percent increase in the second quarter. The majority of countries in which we operate saw solid increases. For example in our UK Ireland operations, sales continued to be strong with growth of over 20 percent in the second quarter. And we note that the UK economy continues to recover. We are already seeing encouraging signs and permanent hiring; during the quarter UK recruiting fees were up nearly 50 percent in constant currency.

As we are seeing in our U.S. operations, fee-based income is showing early signs of improving throughout Europe. Within the majority of countries we are seeing double-digit growth in fees, and we look forward to even stronger improvements in our recruiting fees as economic conditions get better.

The Asia-Pacific growth was once again fueled by our operations in Australia, New Zealand, Singapore and Malaysia. Sales growth in this region was 25 percent during the second quarter. In fact, for nearly a year now we have seen strong sales growth in this region. Additionally during the quarter we doubled the size of our operations in India and you can expect further expansion in this growing area as the year progresses.

We are very pleased with our performance in international. You may recall that we narrowed our first-quarter loss to just under $1 million from the 3.2 million loss in the first quarter of 2003. And in the second quarter we returned to profitability with earnings over $1.9 million. This represents a $2.9 million improvement over last year's loss, and we expect this trend to continue for the balance of the year.

Holding to our strategy, we continue to fuel our international growth by growing specific PTSA business lines internationally, most notably Kelly Scientific, Financial, Engineering and Vendor Management. We expect very nice growth through the remainder of the year in international, but at a somewhat slower pace as we anniversary exceptionally strong sales growth we had in the last two quarters of 2003.

And before I turn the call back over to Terry for his final comments, let me update you on SUTA dumping. This is a very important issue facing the unemployment compensation system today, and for nearly two years Kelly has been actively leading the charge to bring this issue to the attention to policymakers. You may recall that SUTA dumping occurs when employers take steps to disguise their true unemployment experience for the purpose of manipulating their unemployment insurance tax rates or evading unemployment insurance taxes altogether. Several staffing companies have engaged in this practice.

Unfortunately ethical employers have been left to cover a greater portion of the increased cost. I am pleased to report that we have taken a giant step toward elimination of this unethical practice. Last week the House of Representatives passed HR 3463, commonly known as the SUTA Dumping Prevention Act. If passed by the Senate as we expect very shortly, this Bill would require each State to enact conforming legislation which would prevent corporations from engaging in this deceptive act. In the meantime companies engaging in SUTA dumping have been put on notice that this practice is now receiving the increased attention of policymakers. In fact, many staffing companies have already paid fines, and additional assessments as a result of state investigations. We believe the combination of State and Federal action will soon end this unethical practice.

This concludes the operations comments, and now I would like to turn it back to Terry.

Thank you, Carl. And thank you, Bill. Since the beginning of the year we've been talking about returning to and then exceeding our pre-recession earnings. On these quarterly calls and at various investor conferences we've laid out two likely scenarios that would get us there over three to four years. The three-year scenario assumed faster sales growth with limited gross margin recovery, while the four-year scenario used slower sales growth but higher margin recovery. For planning purposes, we have assumed that the current economic recovery will continue growing at a moderate pace with sustainable job growth.

We've also set three key performance goals for the company; to grow sales faster than the industry average, to hold our controllable expenses at roughly half the rate of our sales growth and to increase earnings at a rate considerably faster than sales. We expect that our actual results will likely fall somewhere in between these two scenarios and obviously we would like to shorten the time period. While two quarters do not make a trend, we are off to a great start. Our results have been solid across all three business segments with good sales and earnings growth. We have every reason to believe this will continue, and we will exceed our pre-recession earnings by 2006 or 2007.

At the beginning of this call I said that our guidance for the third quarter is 16 to 21 cents per share. Now this compares to the current street estimates that range from 16 to 28 cents per share. As we gaze into our crystal ball early in the third quarter, we think that the high end of the street estimates are too high. Some expect stronger GDP growth than we do while others are using a more aggressive leverage factor for temporary staffing than we see. Now this is one of those cases where we would be delighted to be wrong.

Although the economy is recovering nicely, it is not as robust as some past recoveries have been. Across many industries, including staffing, expectations are now being adjusted downward to reflect a more modest economic recovery over the next few quarters. But nevertheless, this is still a good, solid recovery. GDP is growing nicely. Job creation is strong, and earnings are improving. We also think on the positive side that this may result in a longer, more sustainable recovery.

Given this outlook, as you begin to look more closely at the balance of the year, let me share with you a few of our key assumptions. First, let me begin with sales. Sales are growing very nicely and are pretty much in line with analyst estimates, and we expect this to continue. As Carl and Bill mentioned earlier, we have ended certain customer relationships. The effect in the second quarter was to trim nearly 3 full percentage points off our year-over-year sales growth in U.S. commercial. Or about 1.5 percentage points off the Company's consolidated sales growth. Nevertheless, our sales for the balance of the year will continue to show solid growth.

Second, we expect temporary staffing margins to stabilize or even to improve modestly. At the same time, we expect that growth in fee-based income to accelerate this year. Finally, we expect to hold the increase in our controllable expenses to roughly half the rate of growth in our sales. In any one particular quarter, though, one segment's expense may be higher just as we saw recently with PTSA during the second quarter. The trick, however, is to maintain a balance between improving earnings and growing the business.

This is an exciting time for Kelly. Sales and earnings are good. 2004 should be a great year, and we are well positioned for a strong performance in 2005 and beyond. That concludes our formal comments this morning. 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 very much for joining us today.

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