Kelly Services Inc (KELYA) 2004 Q3 法說會逐字稿

Ladies and Gentlemen, thank you for standing by. Welcome to the Kelly Services third quarter financial results conference call. All participants are in a listen-only mode, and 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.

Thank you. 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 third quarter of 2004. All of you should have received copies of our financial statements. If you haven’t and if you would like to have the material, please call us at 248-244-5271, and we’ll gladly fax or email 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 our operating results and the general performance of the business segments. Then I’ll share my thoughts on current business conditions and the outlook for Kelly. But first I’d like to review the press release we issued earlier today.

Sales of $1 billion, 245 million for the third quarter set a new sales record, not only for the third quarter, but also for any quarter. It was another good quarter for earnings as well. Earnings were 21 cents per share, and that was at the top of our guidance of 16 to 21 cents, and a penny over the street consensus. This compares to the 4 cents per share earned in the third quarter last year.

And we’re looking for fourth quarter earnings to be in the range of 19 to 24 cents per share, and this in turn, would bring full-year earnings for 2004 to 57 to 62 cents per share, in comparison to the 14 cents per share we earned in the full year of 2003, but I’ll talk more about that in a few minutes. Now here is Bill Gerber, who will take you through our financial results. Bill?

Well thank you, Terry. 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 manage its information technology programs, and other factors discussed during this call and the Company’s filings with the SEC. Actual results may differ materially from any projections contained herein.

I’ll start by covering third quarter results. Revenue for the third quarter totaled $1.245 billion, an increase of 13.5 percent, compared to the $1.097 billion for the third quarter of last year. Now that’s a bit slower than the 15.6 percent increase for the second quarter. On a constant currency basis, which eliminates the impact of foreign exchange fluctuations, total Company revenue increased 10.7 percent, somewhat slower than the 13.4 percent increase in the second quarter. Details will be provided by segment later in the discussion.

Our gross profit rate in the third quarter was 16.3 percent, which increased 0.6 of a percent from the 15.7 percent rate in the prior year. Our gross profit rate was 16.2 percent in the second quarter, so there also was a 0.1 of a percent sequential increase. The year over year improvement in the gross profit rate is attributable to significantly lower workers’ compensation costs and improved fee-based income.

Selling, general and administrative expenses in the third quarter total $189.9 million, and increased 11.8 percent year-over-year. SG&A expenses increased only 0.3 of a percent sequentially as compared to the second quarter. Currency translation continued to impact our reported expenses, and on a constant currency basis, total expenses increased 8.8 percent compared to last year. SG&A expenses were 15.3 percent of sales, an 0.2 of a percent improvement compared to last year.

Earnings from operations in the third quarter were $12.5 million, compared to $2.7 million earned last year. The effective tax rate for the third quarter was 39.9 percent, which is the same as our year-to-date rate, but is a significant reduction compared to the 42.7 percent rate in the third quarter of last year. Last year was higher, because it included the impact of establishing valuation allowances for certain international tax loss carry-forwards.

Now, at the beginning of the fourth quarter, the Working Families Tax Relief Act was signed into law. The law provides for the retroactive extension of work opportunity credits, which will reduce our full-year tax rate to 38.5 percent. However, GAAP does not allow us to recognize this benefit until the fourth quarter. We expect our fourth quarter tax rate to decrease to approximately 36 percent, to reflect the full-year benefit of the work opportunity credits.

Our third quarter net income was $7.4 million, compared to the $1.5 million earned last year, and diluted earnings per share in the third quarter were 21 cents a share, compared to earnings of 4 cents a share last year.

Now I’ll cover our segment revenue results for the third quarter. As you know, we divide our operations into three segments -- number one, US commercial staffing; number two, PTSA, or Professional Technical and Staffing Alternatives units; and three, international.

Revenue in US commercial totaled $574 million, a 7.2 percent increase compared to last year. That is a slowing compared to the second quarter, when US commercial revenue increased 11.3 percent.

The performance by month on a year-over-year basis, adjusted for the Labor Day holiday shift, was July plus 9 percent, August plus 7 percent, and September plus 5 percent.

Turning to PTSA, revenue totaled $261 million, an increase of 18 percent compared to last year. In the second quarter, PTSA increased 14.7 percent, so the rate of growth accelerated in the third quarter. PTSA revenue, adjusted for the holiday shift, showed solid growth, with July up 19 percent, August up 19 percent, and September up 16 percent. PTSA faced tougher year-ago comparisons in September.

Moving on to the international segment, translated US dollar revenue and international totaled $409.9 million, a 20.3 percent increase versus the prior year. On a constant currency basis, our international revenue increased 11.5 percent, which reflected some slowing compared to the 15.9 percent constant currency growth reported in the second quarter. Constant currency revenue growth was positive in all regions -- the Americas plus 12 percent, Europe plus 10 percent, and Asia Pacific plus 17 percent.

Turning now to our segment earnings results for the third quarter, US commercial earnings totaled $29.7 million, an increase of 29.9 percent compared to last year. The US commercial gross profit rate increased 0.7 of a percent from the prior year. Several factors impacted the gross profit rate. First, workers’ compensation costs improved significantly compared to last year. Last year’s third quarter included an additional charge of $4.6 million, related to increased medical costs. We expect continued year-over-year improvement in workers’ compensation in the fourth quarter.

Second, state unemployment tax rates increased significantly in 2004, and as we pointed out last quarter, we’ve implemented additional pricing actions and have done well in recapturing most of these statutory increases.

Third, the decision to exit certain customers had a small, positive impact on the gross profit rate. The US commercial gross profit rate also improved 0.1 of a percentage point compared to the second quarter. Workers’ comp costs improved gross profit slightly on a sequential basis. US commercial expenses increased 4.5 percent compared to the prior year. Expenses improved to 9.5 percent of sales, compared to 9.8 percent last year.

PTSA earnings totaled $16.5 million, a 38 percent increase compared to last year. The PTSA gross profit rate increased 0.3 of a percent compared to the prior year. The PTSA gross profit rate benefited primarily from lower workers’ compensation expense and higher fee-based income. Last year’s third quarter included an additional workers’ comp. charge of $1.8 million, due to increased medical costs. PTSA expenses increased 11.6 percent year-over-year, primarily reflecting volume growth and new branch openings.

International earned a profit of $6.2 million, which is a substantial improvement compared to the $1.7 million earned in last year’s third quarter. The international gross profit rate increased 0.2 of a percent, primarily due to increased fee-based income. Recruitment fee income showed an increase of over 40 percent, as measured in constant currency. International expenses increased 14.7 percent versus last year in US dollar terms, but actually increased only 5.8 percent on a constant currency basis. International expenses were 15.9 percent of sales, compared to 16.7 percent last year.

Moving on to corporate, expenses totaled $39.9 million, and increased $6.2 million, or 18.3 percent versus last year. The largest part of the increase was the accrual for the annual performance bonus. This significantly affects the year-over-year comparison, because no management bonuses were paid in 2003, due to decline in earnings. Bonuses are an important part of our compensation plans, and are tied to set performance thresholds. Therefore, we view it as positive that the bonus accruals are up.

And as we mentioned last quarter, following the 2002 and 2003 salary freeze, merit increases were awarded in June and impacted the third quarter. In terms of year-to-date performance, you will find our full nine-month financial results included in the press release materials.

Before I move on to the balance sheet, I’d also like to note that 2004 is a fiscal leap year. What this means is that to properly align the fiscal periods with the year ending January 2nd, 2005, our fourth quarter will contain 14 weeks, and our year will include 53 weeks. This is a normal pattern and re-occurs every five to six years.

Shifting to the company’s third quarter balance sheet, I’ll make a few comments. Cash and short-term investments totaled $88 million at quarter end, an increase of $27 million compared to last year. Accounts receivable totaled $742 million at quarter end, an increase of $104 million compared to last year. For the third quarter, our global day’s sales outstanding were 54 days, which is an increase of one day versus last year, but consistent with the second quarter.

Our short-term debt at quarter end totaled $43 million, a $10 million increase compared to last year, and this was driven by growth of sales and accounts receivable in our international operations. At quarter end, short-term debt represented approximately 6 percent of total capital.

And finally, I’ll make a few comments on the Company’s cash flows. Cash from operating activities totaled $32.5 million, 178 percent increase compared to the $11.7 million generated last year. Capital expenditures for the nine-month period totaled $16.7 million, a planned decrease compared to the $20.2 million spent last year. For planning purposes, we expect our 2004 CapEx to total between $25 to $27 million.

In summary, at quarter end, our financial strength and flexibility remain excellent. And now I’d like to turn it over to Carl, who will highlight our operating results.

Thank you, Bill. I will briefly discuss third quarter operational performance in each of our three business segments, beginning with US commercial, which makes up 46 percent of sales. Sales in US commercial remain solid through the third quarter. Year-over-year sales in this segment increased 7 percent in the quarter, down from the 11 percent year-over-year growth seen in the second quarter. This slowing was strongest in light industrial and the least in office clerical staffing.

Several factors contributed to the slower growth in US commercial. During the quarter, we finished exiting selected accounts, who did not accept statutory SUTA increases, or that had bad workers’ comp experience. This alone reduced commercial’s quarterly growth rate by 4 percentage points.

Next, the US economy went through a soft patch during the third quarter, and of our three segments, commercial seemed to have had the most short-term effects. In recent weeks however, the economy has regained traction, and our trends are strengthening.

Finally, our quarterly growth was also tempered briefly by the series of hurricanes in the Southeastern US, a major market for Kelly. Despite this, the recovery of our temp to perm fees was terrific. For the third consecutive quarter, we saw double-digit rates of growth. Operating earnings in US commercial increased nearly 30 percent from the quarter on the strength of sales increases, expense discipline, and gross profit management. By the way, this was our fourth consecutive quarter of sequential gross profit rate improvement in US commercial.

This quarter’s gross profit reflects the actions we’ve taken to better manage workers’ compensation, and as a result, our workers’ comp costs are less than last year, and we expect this performance to continue in the fourth quarter as well. However, as are normal in a recovery cycle, there will be yet again, another round of SUTA increases for 2005. Several States have already announced general increased rates for next year, but you should know that these increases are more modest than 2004’s and our preparations are well in hand.

You will recall, one of our goals is to hold our controllable expenses at roughly half the rate of our sales growth in all three segments, but as I said last quarter, we expect our expense growth to be slightly higher for the next couple of quarters, and this is because we granted the first general salary increases since 2001, and have higher bonus payments due to improved performance this year.

Overall, expenses continue to be well managed and for commercial, expenses increased 4.5 percent from the quarter against the 7 percent rate of growth in revenue, but if we strip out the compensation items, expenses in this segment grew less than 1 percent.

Now let me turn to the PTSA segment 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 group. PTSA had an exceptional quarter in terms of both top and bottom line growth. On a year-over-year basis, revenue was up 18 percent and our range(ph) grew 38 percent. Sales continue to trend upward at accelerating rates, in spite of the softness in the US economy.

Nearly every unit showed strong, double-digit improvements. In professional and technical staffing, the Kelly Law Registry and engineering were the leading performers. These units exhibited very strong, double-digit sales and earnings growth for the quarter, in excess of 25 percent. And although improving, Kelly Home Care and our automotive services group continue to run behind last year.

Turning to the staffing alternatives group, Kelly HR First, our outsource recruitment unit, and Kelly Vendor management continue to be the leading performers. Both units had sales and earnings growth of over 25 percent for the third quarter. We are also pleased that the recovery and placement fee income and the majority of the PTSA staffing businesses is accelerating.

For the third consecutive quarter, placement fees were strong, up nearly 50 percent for the quarter, and this is a considerable improvement over the 30 percent year-over-year growth we saw in the second quarter. Of our three operating segments, PTSA had the largest increase in expenses during the quarter. Expenses increased 12 percent against the 18 percent rate of growth in revenue, obviously greater than our 50 percent target.

However, as we told you previously, we would authorize investments in high-demand areas, and we have expanded our high-growth businesses such as fed secure(ph), engineering, the law registry and finance by adding 12 new PTSA branches during the quarter. Further, we believe that PTSA will continue to grow at a faster rate than our commercial growth. PTSA still hasn’t reached the penetration rate seen in commercial staffing. There is a tremendous opportunity, and we are taking advantage of this opportunity by investing in our high-growth businesses as well as by pursuing new services.

Our third segment is international, which makes up 33 percent of our total sales. Year-over-year sales and earnings continue to be strong in this segment. For the third quarter, international sales increased 12 percent in constant currency, and earnings improved nearly threefold. We saw a slowing in year-over-year constant currency sales throughout this segment during the quarter, but this was primarily due to the anniversary and a very strong sales growth that occurred in the third quarter of 2003.

Our international growth remains strong and continues to show nice, sequential improvement; and this quarter’s sales growth was positive in all regions. In the Americas, sales increased 12 percent in constant currency. Canada and Puerto Rico turned in good double-digit sales growth and very strong earnings. However, Mexico saw a temporary slowing in the quarter as manufacturing activity briefly declined, but the staffing demands in Mexico should return to more normalized levels in the fourth quarter.

We also remain encouraged by the year-over-year sales in Europe during the quarter. This region had an increase of 10 percent and the majority of countries in which we operate saw solid increases. For example, in our UK-Ireland operations, sales continue to be strong with growth of nearly 20 percent in the quarter, while Russia saw a growth of over 25 percent.

As we have seen in our US operations, fee-based income continues to improve throughout Europe. For the third consecutive quarter, we are seeing double-digit growth in fees within the majority of countries, and we expect even stronger improvements in our recruiting fees as we look ahead to 2005.

The Asia Pacific growth was fueled by our operations in Australia, New Zealand, Singapore, Malaysia and now India. Sales growth in this region was 17 percent during the third quarter, and during the quarter, we made additional investments in our growing operations in India, and we anticipate further expansion as the year progresses.

We are very pleased with our performance in international. After returning a profitability in the second quarter, third quarter saw continuing strengthening of the bottom line, with quarterly earnings of over $6 million, almost four times international’s 2003 third quarter’s earning. Further, as we saw in our other two segments, expenses continue to be well-managed in international. International expenses grew at 6 percent at constant currency for the quarter, about half the rate of sales growth.

Holding to our strategy, we are fueling our international growth by expanding high-growth PTSA business lines internationally, and by winning global and Pan-regional accounts. We expect solid growth to continue through the fourth quarter and into 2005 in international.

Before I turn the call back over to Terry for his final comments, let me give you a quick update on our SUTA dumping efforts. You may recall that at the time of our second quarter conference call, the House of Representatives just passed HR 3463, known as the SUTA Dumping Prevention Act. I’m pleased to report that the bill was passed by the Senate on July 22nd and signed into law on August 9th. By Washington standards, the speed with which Congress took up the issue, reached agreement and took action was remarkable.

After two years of Kelly efforts, this unethical practice will finally come to an end and employers will no longer be able to disguise their true unemployment experience for the purpose of manipulating their tax rates, or evading taxes altogether. Every state must now pass conforming legislation, including closing the loopholes and establishing meaningful civil and criminal penalties, no later than the end of 2005.

And I’m happy to share the speed with which additional action is being taken. Just four days following the President’s signature, the US Department of Labor issued guidance to the States on what action is required. The DOL in States have been holding regional meetings to share our best practices, ranging from detection to how to enforce under existing statutes.

On September 20th, the Department of Labor began piloting detection software in seven States with rollout to the remaining States planned for January of 2005, and on September 28th, Governor Schwarzenegger signed into law California’s anti SUTA Dumping legislation with many more states poised to follow suit. Enforcement is also gearing up. Many employers including staffing companies have already paid fines and assessments as a result of state investigation and those investigations continue.

We are impressed with the speed that this legislative action has taken. We continue to work with the States to assist them with this implementation. This concludes the operations comments, and now I’d like to turn it back to Terry.

Thank you, Carl and Bill. First, I’ll start with our view of current business conditions, because economy is such an important factor in setting our own expectations for the fourth quarter and for next year. There seems to be a lingering cloud of uncertainty over the strength and duration of this recovery. Comparisons to the last recovery are still causing some to underestimate the real strength of this one.

For some time now, I’ve been saying that while this may not be a rip-roaring recovery, it is a strong and solid one, and it’s a good one for our business. If we look beyond the headlines, we see underlying trends that validate a good, solid recovery. GDP growth in the United States for the second quarter was recently revised upward from 2.8 percent to 3.3 percent. And the blue chip forecast is predicting GDP growth in the third quarter of 4 percent.

The jobs market in the United States is expanding nicely. So far this year, an average of 170 thousand jobs have been added each month, and at that rate, we should see over 2 million jobs created by year-end.

GDP globally is projected to grow 5 percent this year, which is the best performance in years. Our company’s sales results continue to exhibit a good, concurrent relationship with the economy. The good news is that the demand for staffing services is increasing in all three of our business segments, and our temp to perm. placement fees are coming back strongly. The business confidence index suggests that the economy will continue growing over the next couple of years. Capital spending plans are on the rise as well.

Incidentally, and good gut check is that our customers are generally optimistic and pleased with the trends in their businesses. So why the uneasiness? Well, I think there are a number of reasons, including the storms that have hit the Southeastern United States, rising oil prices, the media frenzy surrounding the upcoming Presidential election, and a relatively recent phenomenon, sound byte economics, where critically important issues are being reduced to overly simplified, 15-second sound bytes.

Sound bytes that don’t accurately reflect the true complexity of the issues being discussed or the economic trends themselves. Sound bytes which focus too much on just-released numbers for everything from job creation to GDP growth. The first-released numbers are often inaccurate to the point of being downright misleading. And this practice isn’t limited to TV and radio, it also includes print media. Yet, the just-released numbers are immediate news and the basis of all kinds of predictions and commentary.

When finally issued, the revised numbers, which are usually more accurate and meaningful, are often not reported or are no longer headline news. While cutting through all the sound bytes, we continue to believe that we are in the midst of a healthy recovery that could have a fairly long life.

At the beginning of this call, I said that our guidance for the fourth quarter is 19 to 24 cents a share, and these numbers include a lower tax rate and the 53rd week. This would bring our full-year earnings for 2004, to 57 to 62 cents per share, a considerable improvement over the 14 cents we earned in 2003.

Now the current street estimates for our fourth quarter range from 23 to 30 cents per share, with a consensus of 25 cents. And the current consensus for the year is 63 cents per share. The numbers are getting close enough that I guess I don’t need to preach to you again about how all recoveries are not the same.

But seriously, we have, over the past several months, in various conference calls and analyst meetings, presented two recovery scenarios that would get our earnings back to the pre-recession record of $2.43 by the year 2006 or 2007. We continue to believe that our actual results will likely fall somewhere in between those two recovery scenarios.

However, with either scenario, we will continue to focus on three key performance goals -- 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. Now, the economy and business trends are with us, and with three solid quarters behind us, 2004 is turning out to be a very good year.

We’re well-positioned for strong performance in 2005, and we remain on track to return to our pre-recession earnings level by 2006 or 2007.

Well, 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, but please call us at 248-244-5271, and we’ll get back to you as promptly as we can. And once again, thank you for joining us today.

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