Kelly Services Inc (KELYA) 2005 Q1 法說會逐字稿

Welcome to the Kelly Services First Quarter Financial Results Conference Call. (OPERATOR INSTRUCTIONS) At this time, I would like to introduce Mr. Terence Adderley, Chief Executive Officer of Kelly Services. Sir, you may begin.

Thank you, good morning. I am Terry Adderley, Chairman and CEO of Kelly Services. I am pleased to welcome you today as we report our financial and operating results for the first quarter of 2005. All of you should have received copies of our financial statements. If you haven't, and would like to have the material, please call us at 248-244-5271 and we'll gladly fax or email it to you. Bill Gerber, our Executive Vice President and CFO will lead off with a review of Kelly's financial results. Following that, Carl Camden, our President and COO will cover the operating results and the general performance about our business segments. Then I will share my observations and current business conditions and update you on our outlook for the remainder of the year.

But, first, I would like to highlight a few items from the press release we issued earlier today. You will note that our results are preliminary and that's the first for Kelly. But, you probably also aware that we along with 100 of other companies are looking at our method of accounting for leases. Bill will cover this in greater detail. But, I just wanted to assure you that we do not expect any material changes to the preliminary financials we've already released today.

Sales for the first quarter of $1.249 billion grew by $90 million and set a new sales record for its first quarter. It was also a good quarter for earnings as well. In the first quarter, we earned $0.11 per share, a significant improvement over the $0.03 earned in the first quarter of 2004. And we were well within our first quarter guidance of $0.09 to $0.14.

In the second quarter, we are looking for earnings to be in the range of $0.24 to $0.29 per share, which compares to the $0.14 earned in the second quarter of 2004. And for the full year, we continue to look for earnings in the range of $1 to $1.20 a share. But, I will talk more about that in a few minutes. Now, here is Bill Gerber who will take you through our financial results. Bill?

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 risk and uncertainties. These factors include changes in market and economic conditions, laws and regulations, competition, currency fluctuations, 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 will start by covering first quarter results.

Revenue for the first quarter totaled 1.249 billion, an increase of 7.8% compared to the last year. On a constant currency basis, total Company revenue increased 6.5%. Details will be provided by segment later in the discussion. Our gross profit rate in the first quarter was 16.4%, which increased six-tenths of a percent from the 15.8% rate last year. The year-over-year increase is due to higher gross profit rates in the US commercial and international segments partially offset by a small decrease in PTSA gross profit performance. The first quarter gross profit rate also increased six-tenths of a percent sequentially compared to the fourth quarter of 2004. Selling, general, and administrative expenses in the first quarter totaled 198 million, an increase of 9.2% year-over-year.

On a constant currency basis, total expenses increased 7.7%. SG&A expenses were 15.8% of sales, two-tenths of a percent increase compared to the last year. Earnings from operations in the first quarter totaled 6.4 million, a 217% increase compared to the 2 million earned last year. Interest expense was 35,000 compared to 239,000 last year and the improvement is due to higher average cash balances and higher US interest rates compared to last year.

The effective tax rate in the first quarter was 35.2% which is a reduction compared to 40% rate in the first quarter of last year. The lower effective tax rate is primarily due to passage of legislation in the fourth quarter of 2004 extending work opportunity credits for 2 years. Although, the full year tax rate for 2004 of 36% did reflect the credits, the first quarter of 2004 rate of 40% did not because the law was not passed until the fourth quarter. In addition, we successfully resolved the UK income tax issue in the first quarter that also helped reduce the effective rate.

For planning purposes, the second quarter tax rate should be approximately 40% and the full year tax rate should be approximately 38% for 2005. We expect a bit more variability in the quarter-to-quarter tax rates going forward. Our first quarter net income was 4.1 million, a 286% increase, compared to the 1.1 million earned last year. Diluted earnings per share in the first quarter were $0.11 per share, a 267% increase, compared to earnings of $0.03 per share last year.

Now, I'll cover our segment revenue results for the first quarter and as you know, we divide our operations into 3 segments: number 1, US Commercial Staffing; number 2, PTSA or Professional, Technical and Staffing Alternatives units and number 3, International. Revenue in US Commercial totaled 565.5 million, a 2.9% increase compared to last year. US Commercial growth on an as-reported basis was January plus 8%, February plus 1% and March minus 1%. However, both January and March were impacted by holiday shifts. January was favorable due to New Year and March was unfavorable due to Easter. Adjusting for both holidays, we estimate the adjusted growth would have been January plus 2%, February plus 1% and March 0%.

Turning to PTSA, revenue for the first quarter totaled 272.4 million, an increase of 14.1%, compared to last year. PTSA continue to show strong growth on a monthly basis. Adjusting for the holiday shift, the estimated growth would have been January plus 13%, February plus 13% and March plus 11%. Moving onto the International segment, revenue for the first quarter totaled 411.4 million, an 11% increase versus the prior year. On a constant currency basis, our International revenue increased 6.8%.

Turning now to segment earnings results for the first quarter, US Commercial earnings totaled 29.4 million, an increase of 20.9%, compared to last year. The US Commercial gross profit rate increased nine-tenths of a percent from the prior year. A number of factors contributed to that increase. Improved pricing related to recovery and the impact of exiting certain customers contributed positively.

Workers compensation cost also improved compared to last year and fee income increased significantly. US Commercial expenses increased 4.9%, expenses were 10% of sales compared to 9.8% last year. PTSA earnings totaled 15.5 million, a 10.2% increase, compared to last year. The PTSA gross profit rate decreased one-tenth of a percentage point. The rate declined slightly due to changes in business unit mix, partially offset by growth in fee income.

PTSA expenses increased 14.7% year over year, primarily reflecting volume growth and new branch openings. Expenses as a percent of sales were 11.8%, compared to 11.7% last year. International earned a profit of 537,000, a substantial improvement, compared to the loss of 905,000 in last year's first quarter. The International gross profit rate increased two-tenths of a percent, primarily due to the higher fee based income. International expenses increased 9.8% in US dollar terms, but actually increased only 5.6% on a constant currency basis. International expenses were 17.1% of sales compared to 17.2% last year.

And finally, moving on to corporate expenses for the first quarter totaled 39 million, an increase 3.6 million or 10.1% versus last year. A significant part of the growth was due to increased salary expense. As we mentioned last quarter, following the 2002 and 2003 salary freeze, merit increases were awarded in June of 2004, which impacts year-over-year comparisons until June this year. In addition, IT costs increased reflecting the startup work on the People Soft payroll and billing project. On the other hand, depreciation expense decreased and we recognized a small gain on sale of securities.

Shifting to the Company's first quarter balance sheet, I'll make a few comments. Cash in short-term investments totaled 70 million at quarter end, an increase of 14 million compared to last year. Accounts receivable totaled 741 million at quarter end, an increase of 36 million compared to last year. For the quarter, our global day sales outstanding were 54 days, which is an improvement of 1 day compared to last year. Our short-term debt at quarter end totaled 47 million, a 9 million increase compared to last year. In February, we borrowed 18 million under a Yen denominated credit agreement to fund our investment in Tempstaff, a private Japanese firm, which is the second largest staffing company in the Japanese market at quarter end, short-term debt was less than 7% of total capital.

And finally, a few comments on the Company's cash flows. Net cash generated from operates was a small positive in the first quarter compared to a use of 16.3 million last year. Improved DSO contributed most of the gain. Capital expenditures in the first quarter totaled 5.9 million compared to 4.4 million spent last year. The increase is primarily due to higher IT project capital spending. And for planning purposes, we continue to expect our 2005 CapEx to total between 30 to 34 million. And now, I'd like to move on to the topic of lease accounting. On February 7, 2005, the SEC issued a general letter on lease accounting.

As reported in last week's Wall Street Journal, nearly 250 public companies have announced lease related restatements, adjustments, or reviews of their lease accounting. We are in process of completing a full review of our lease accounting practices. As a result, Kelly has revised its accounting to recognize step rent increases on a straight line basis over the lease term. For over 25 years, Kelly had consistently recognized rent expense as paid. Although, the lease accounting adjustments are not expected to be material to any period, Kelly will provide comparable information by restating its financials for '02, '03, '04.

Selling, general and administrative expense is expected to increase or decrease by immaterial amounts in each of the three years. In addition, on the balance sheet, Kelly will record allowances provided by landlords as deferred rent. Previously, these have been recorded as reductions of property and equipment. The balance sheet correction will increase property and equipment and deferred rent in equal amounts. We estimate this adjustment will be less than two-tenths of a percent of total assets.

The net cumulative effect of the estimated corrections to lease accounting for all years prior to 2002 and any other prior-period adjustments resulting from the restatement are expected to be recorded as an adjustment to the beginning of year 2002 retained earnings. The combined estimated after tax adjustment is expected to represent less than three tenths of a percent of stockholders' equity. The adjustments for lease accounting and any other adjustments resulting from the restatement are not expected to have a material effect on historically reported diluted earnings per share. The resulting adjustments are not expected to affect historical or future total cash flows. There was no material impact to our first quarter 2005 earnings as a result of the changes and there is not expected to be any material impact to our future results. I'd now like to turn over to Carl, who will highlight our operating results.

Thank you, Bill. Before I begin my operational update and get into a detailed discussion on each of our business segments, I'd like to make a few general observations about our first quarter's performance. Overall, we had a good quarter, but it followed a somewhat different course than we had planned. As Terry and Bill have noted, our earnings were within our first quarter guidance, so, we thought the sales growth would follow its 2004 trend for a few more quarters.

So, frankly, we were surprised when sales began to stop in late February and March, especially in our US Commercial segment. Sales in our other two segments were more in line with our expectations, but then fees picked up and we did much better on margin recovery than we had anticipated. Netting it all out, our expenses -- and they have been somewhat out of alignment due to the slower sales growth, better margin performance and fee growth generated a good earnings quarter. We are now taking steps to tighten our expense controls and bring them in line with our current sales growth.

With that said, let me turn to our first quarter performance of our largest business segment, US Commercial, which makes up about 45% of our sales. Year-over-year, sales in US Commercial increased 3% during the first quarter. Aligning for the New Year's and Easter holidays, comparable first quarter growth was close to the 1% less than the 4% growth we had on our fourth quarter results. As you recall, early in 2004, we exited selected accounts that did not accept statutory pseudo increases or that had unacceptable workers comp experience.

And in the first quarter this reduced commercials growth rate by points. The first quarter marked the anniversary of the loss of those accounts and the impact on year-over-year revenue growth for the remaining three quarters will be minimal. After considering both the holiday alignment and the customers exited, the year-over-year sales growth rate in US Commercial would have been approximately 5%. As we commented for a couple of quarters now growth in Light Industrial staffing has slowed over the last several quarters. After seeing a 20% growth rate in the first half of 2004, sales growth in decreased to mid-single digits in the fourth quarter with the year-over-year growth rate slowing a bit further in the first quarter of 2005.

On the other hand, office clerical staffing continued to show healthy signs of improvement growing 7% for the quarter and outpacing LID for the second consecutive quarter, and we are pleased that US Commercial is now ahead of their pre-recession sales. The recovery of both our temp-to-perm fees and direct placement fees in US commercial remains solid. The double-digit rates of growth that began in 2004 continued into the first quarter. Growth was nearly 60% consistent with the 60% year-over-year growth achieved in the fourth quarter of 2004.

And on another positive note, year-over-gross gross profit dollars increased 10%. Commercial's gross profit rate during the quarter increased to 15.2% compared to the 14.3% for the same period last year. This is the fifth consecutive quarter of improving gross profit rate in US Commercial.

Our GP rate was favorably impacted as a result of our decision to exit accounts, further, better workers' compensation management, our success in raising prices to cover pseudo cost increases, and continued growth in fees, all had a positive effect. For the quarter, expenses grew at 5% compared to the 3% sales growth. Netting everything out, operating earnings increased 21% in the quarter in US Commercial.

Now let me turn to our Professional, Technical, and Staffing Alternatives segment, which makes up 22% of sales. The first quarter for PTSA was excellent in terms of revenue growth. On a year-over-over basis, revenue was up 14% and earnings grew 10%. Aligning for the holidays, comparable first quarter sales growth would have been approximately 12%, still good double-digit growth, with nearly every unit showing strong double-digit revenue growth as compared to 2004. In Professional and Technical Staffing, science, engineering, and finance were the leading performers. These units had very strong double-digit sales and earnings growth for the quarter, in excess of 25%. On the other hand, Kelly Home Care and our Automotive Services Group experienced revenue declines during the quarter.

Turning to our Staffing Alternatives group, Kelly HRfirst, our recruiting outsource business and Kelly Management Services were the leading performers. Sales in our Staff Leasing business decreased somewhat in the first quarter as a result of exiting customers with higher workers' compensation risk and experience. We were also very pleased to see acceleration in placement fee income in the majority of PTSA staffing businesses. These improved over 50%.

Contribution from PTSA continued to somewhat lag our expectations in the first quarter. PTSA's gross profit rate declined to 17.5%, and this was primarily due to our lower margins specialty businesses growing at a much faster rate during this quarter. Our higher margin PTSA businesses, however, did continue to grow with solid double-digit rates, and therefore we expect improvements in GP as the year progresses.

For the quarter, expenses in PTSA increased nearly 15% against revenue growth of 14%. We've recognized that if we make additional investments in our fastest growing PTSA businesses, expense growth may from time-to-time outpace sales growth, however, and total expenses are more in line, we are now going to slow down our PTSA branch expansion.

Our third segment is International, which makes up 33% of our total sales. Recorded sales increased approximately 11% for the first quarter. For the quarter, in constant currency, International sales increased 6.8%, and on a net sales basis, was not significantly impacted by holidays, and that calculation was easier than determining the real number of International holidays.

Earnings improved from a loss of $900,000 to a positive contribution of $500,000. During the quarter, we saw acceleration in year-over-year constant currency sales. International growth remained strong and continues to show nice sequential improvement. Sales growth was again positive in all regions. In the Americas, sales increased 10% in constant currency. Mexico and Porto Rico turned in especially good sales growth. We were encouraged by the year-over-year sales in Europe during the quarter; this region had an increase of 5%. Sales in Germany, Italy, and Russia grew faster than 15%. Sales in our UK-Ireland operations, however, was somewhat disappointing with a slight decline.

Consistent with last year, we saw double-digit growth in fees in the majority of countries. Total fees increased nearly 40% in constant currency, and they remain ahead of their pre-recession levels, we expect to see solid growth as the year progresses. The Asia-Pacific growth of nearly 10% was boosted by our operations in Singapore, Malaysia, and India. Our past investments in this region are yielding positive results. For example, sales growth in India better than tripled compared to last year, and Singapore grew by more than 30%.Additionally, international expenses for the quarter grew at 5.6%, and as regarding the other two segments we are looking to better align our expense growth with sales growth.

Holding to our strategy we continued to expand high growth PTSA business lines and win global and pan regional contract and we opened 3 new PTSA branches internationally in the first quarter. As a result of both fee growth and movement in the higher value services, our gross profit rate for international during the quarter increased to 17.2% compared to 17% for the same period last year.

As Bill mentioned, we made an investment in Tempstaff during the first quarter. We originally established a strategic alliance with Tempstaff in 2002 to broaden our reach into Japan and extend our capabilities in China. And we will continue to invest in international growth opportunities in 2005. I would conclude my operational update with a few comments on the combined performance of our 3 operating segments against each of our operational objectives. First, I had combined constant currency sales growth of 6.5% and although this is slower than we had hoped for it is better than we expect to see out of the industry. Second, our expenses for the first quarter increased much faster than our rate of sales growth.

As Bill mentioned, the significant portion of the increase was attributable to higher compensation resulting from 2004 merit increases and 2005 bonus accruals. But as I said before, we were surprised with sales growth began to moderate so early in the year and as a result we are now rebalancing our strategic investments to better align our expense growth with sales growth. And third, our first quarter 2005 earnings grew considerably faster than the rate of sales growth. And let me add, we've made good progress on margin improvement and we believe there is some continued upside for further improvement. This concludes the operations comments, and now I would like to turn it back to Terry.

You may recall during our fourth quarter conference call in January, we told you that for the first time in four years, we felt confident enough about the economic outlook to offer guidance for the full year. But right now, you might wonder whether we have turned more cautious given the escalation in oil prices, concerns about inflation, and the flattening in the general economy. And the answer is yes, but we continue to feel that this is a normal phase of the economic cycle and the economy is not heading into another recession.

Living in the Detroit area, we are very aware of the problems the auto manufacturers and their suppliers are having and to continue with the Detroit perspective, in our view, the US economy has lifted its foot from the accelerator, but it is not on the brakes. Economic upturns do not proceed in a straight line and this is clearly not a smooth ride at this point. But how does this effect temporary staffing?

In the early stages of an economic recovery, companies rely on temporary help until they feel the recovery is sustainable and their own business is secure. Now with business confidence improving, permanent hiring is accelerating, and we are seeing that in our own business. The number of conversions of our temporary employees to permanent is growing. While the increase in permanent hiring is producing good increases in our fee income, it is slowing the growth of our temporary staffing sales. And this is normal, and the BOS statistics support this.

Of the two-third million new jobs created last year in the US, approximately 10% were accounted for by Temporary Staffing companies. Now during the first quarter of this year, it is estimated that 500,000 new jobs were created in United States. The Temporary Staffing accounted for only 5% of those jobs; the slowing of demand is not unusual. Temporary Staffing typically produces larger percentage gains at the beginning of a recovery, before settling back to more normal rates of growth as the recovery matures. And frankly, given the strong results in the fourth quarter of 2004 and the first half of Q1, we assumed we would see several more quarters of stronger temporary job growth, and we were not alone. Many economists and analysts held some reviews. But the growth rate in the economy began moderating before we expected it to.

As Carl noted, we are making necessary adjustments to compensate. We do believe the general economy is settling down to a period of solid healthy sustainable growth. As you heard this morning, our sales grew in all three of our business segments during the first quarter. Sales in our traditional office clerical staffing are improving nicely for demand remains strong in professional and technical as well as our International segment. Fee income in both temp to permanent direct placement continues to increase rapidly and we believe this is a good indication that business confidence is still building and permanent hiring will continue to grow.

With stable economic conditions as well as the trends in our business, we are continuing to pursue our strategic growth plan by filling out our branch network, introducing new US commercial product offerings, expanding our fast growing professional and technical businesses to other countries and expanding geographically. Our strategic growth plan underlies the earnings guidance we provided on our January conference call. You will recall for the year, we gave earnings guidance of $1 to $1.20 a share.

Our projections assumed good solid sustained economic growth. We believe the economy will deliver and in turn we continue to believe we will deliver this forecast for the year. The $0.11 per share we earned in the first quarter is in line with those guidance numbers. At the beginning of this call, I gave guidance for the second quarter of $0.24 to $0.29 per share. This will roughly double the $0.14 we earned in the second quarter of 2004. Our first quarter results combined with our second quarter guidance would keep us on track to achieve our guidance of $1 to $20 for this year and also to reach our previous session earnings of $2.43 by either in the year 2006 or 2007.

Our operational objectives for this year have not changed. To grow sales faster than the industry average, to hold controllable expenses at roughly half the rate our sales increase and to increase earnings at a rate considerably faster than our sales. And this concludes our formal comments this morning, and we will 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.

Ladies and gentlemen thank you for attending today's conference and have a great day.