Kelly Services Inc (KELYA) 2005 Q3 法說會逐字稿

[Operator Instructions] And, as a reminder, this conference call is being recorded as a request of Kelly Services. At this time I'd like to introduce Mr. Terence Adderley, Chairman and 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 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 e-mail 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 of our business segments. Then I'll share my observations and current business conditions and update you on our outlook for the balance of the year.

But first, I'd like to highlight a few items from the press release we issued earlier today. Sales for the third quarter grew by $100 million to $1,345 billion setting a new sales record for the third quarter. It was also another good quarter for earnings. Earnings were $0.35 per share and that was at the top of our third quarter guidance of $0.30 to $0.35 and $0.02 over the Street consensus. This compares to the $0.23 per share earned in the third quarter last year.

Now, in the fourth quarter, we look for earnings to be in the range of $0.28 to $0.33 per share. This in turn would bring full year earnings for 2005 to $1.00 to $1.05 a share. And this compares to the $0.60 a share we earned in the full year of 2004. But I'll talk more about all that in a few minutes. First, here is Bill Gerber who will take you through our financial results. Bill.

Thank you, Terry. First, I'll read our Safe Harbor language. Now, this conference call contains statements that are forward-looking in nature and accordingly are subject to risks 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'll start by covering third quarter results. Revenue for the third quarter totaled $1.345 billion, an increase of 8% compared to last year. On a constant currency basis, total Company revenue increased 7.4%. Details will be provided by segment later in the discussion. Our gross profit rate in the third quarter was 16.2%, which decreased 1/10 of a percent from the 16.3% rate last year. There was higher gross profit rate in the U.S. Commercial Segment offset by decreases in PTSA and International gross profit rates. Sequentially, the third quarter gross profit rate decreased 1/10 of a percent compared to the second quarter of 2005.

Selling, general, and administrative expenses in the third quarter totaled $200.8 million and increased 5.7% year-over-year. On a constant currency basis, total expenses increased 5.2%. SG&A expenses were 14.9% of sales, a 4/10 of a percent improvement compared to last year. Earnings from operations in the third quarter totaled $17.3 million, a 41% increase compared to the $12.3 million earned last year.

Net interest income totaled $10,000 compared to $194,000 of interest expense last year. The improvement is due primarily to higher U.S. interest rates earned on our cash balances.

The effective tax rate for the third quarter was 26.9%, which is lower than the 33.3% rate in the third quarter of last year. The improved tax provision is primarily due to continued strength in work opportunity credits and favorable resolution of certain federal tax issues. For planning purposes, we expect that the fourth quarter tax rate will be approximately 38%. The full year tax rate should be approximately 32% for 2005 compared to 36% for 2004.

Our third quarter net income was $12.7 million, a 57% increase compared to the $8.1 million earned last year.

And diluted earnings per share in the third quarter totaled $0.35 per share, a 52% increase compared to earnings of $0.23 per share last year.

Now, I'll cover our segment revenue results for the third 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 $619.3 million, a 7.9% increase compared to last year. This represents significant acceleration compared to the 3.6% growth in the second quarter. U.S. Commercial growth on an as-reported basis was July plus 6%, August plus 7%, and September plus 11%. However, all 3 months were impacted by holiday shifts. July was impacted by the Fourth of July timing, and August and September were impacted by shifts in Labor Day and the Friday preceding Labor Day. Adjusting for the holidays, we estimate that the growth would have been July plus 5%, August plus 9%, and September plus 10%. Of course, we were also impacted by the hurricanes and Carl will have comments on the storm impact during his operations section.

Turning to PTSA, revenue for the third quarter totaled $284.9 million, an increase of 9.1% compared to last year. PTSA continued to show solid growth on a monthly basis. Adjusting for the holiday shifts, we estimate that growth would have been July plus 9%, August plus 9%, and September plus 8%.

Moving on to the International segment, revenue for the third quarter totaled $440.4 million, a 7.4% increase compared to the prior year. On a constant currency basis, our International revenue increased 5.7%. Adjusting for the International holiday shifts, we estimate that U.S. dollar growth by month would have been July plus 4%, August plus 8%, and September plus 11%.

Turning now to our segment earnings results for the third quarter. U.S. Commercial earnings totaled $34.8 million, an increase of 18.4% compared to last year. The U.S. Commercial gross profit rate increased 4/10 of a percent from prior year. A number of factors contributed to the increase - number one, improved pricing related to SUTA recovery, number two, workers' compensation costs decreased compared to last year, and number three, fee income increased 57% compared to last year. U.S. Commercial expenses increased 6.8% and expenses were 9.5% of sales, a 1/10 of a percent improvement compared to last year.

PTSA earnings totaled $17.6 million, a 7.1% increase compared to last year. The PTSA gross profit rate decreased 7/10 of a percentage point. The rate declined primarily due to changes in business unit mix and rates, partially offset by growth and fee income. PTSA expenses increased 3.5% year-over-year. Expenses as a percentage of sales were 11% compared to 11.6% last year. International earned a profit of $6.4 million, an increase of 3.1% compared to the $6.2 million earned in last year's third quarter. The International gross profit rate decreased 2/10 of a percent compared to last year, primarily due to temporary staffing gross profit rates decreases, partially offset by higher fee income. International expenses increased 6.5% in U.S. dollar terms and increased 5.2% on a constant currency basis. Included in the quarter was approximately $700,000 of severance costs related to repositioning key country management positions. International expenses were 15.8% of sales compared to 15.9% last year.

And finanally, moving on to Corporate, expenses for the third quarter totaled $41.4 million and increased $1.8 million or 4.4% versus last year, primarily due to increased compensation costs and IT project costs.

Before I move on to the balance sheet, note that you will find our full 9-month financial results included in the press release materials.

Shifting to the Company's third quarter balance sheet, I'll make a few comments. Cash and short-term investments were $60 million at quarter end, a decrease of $26 million compared to last year primarily due to growth in accounts receivable. Accounts receivable totaled $812 million at quarter end and increased $70 million compared to last year.

For the quarter, our global days sales outstanding were 55 days, an increase of 1 day compared to last year. Of the total $70 million increase in AR, approximately $15 million was due to the increase in DSO, while the balance, about $55 million, was due to sales growth.

Our short-term debt at quarter end totaled $48 million, a $5 million increase compared to last year and 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 provided by operating activities was $14.9 million for the 9-month period, compared to $18.2 million last year. As mentioned earlier, growth in accounts receivable accounted for substantially all of the decrease.

Capital expenditures for the first 9 months totaled $17.9 million compared to $17.7 spent last year. For planning purposes, we continue to expect our 2005 CapEx will total between $28 to $32 million.

And I'd now like to turn it over to Carl, who will highlight our operating results.

Thank you, Bill. Before I begin my operational update and get into a more detailed discussion on each of our business segments, I'd like to make a few general observations about our third quarter performance. Overall, it was a good quarter. Business activity and job creation continued to progress at a good pace for much of the quarter despite the impact of the recent hurricanes along the Gulf Coast of the U.S. And I'll talk more about this impact on our U.S. business in my segment detail.

You'll remember that we had identified three operational objectives as key to helping us return to our pre-recession earnings - to grow sales faster than the industry average, to hold controllable expenses to roughly half the rate of our sales growth, and increase earnings at a faster rate than sales. As Terry noted, our earnings were at the top of our third quarter guidance. Sales growth accelerated in our U.S. Commercial segment, while sales trends in our other two segments were generally consistent with the second quarter.

In addition, fee growth remained strong across all three of our segments. For much of this year we've told you that we were taking steps to bring expenses more in line with current sales growth. And although we've not yet reached our goal, we are making considerable progress. Each of our three business segments had sequential and year-over-year improvement and expenses as a percentage of revenue.

Now let's focus on specific segment performance beginning with U.S. Commercial, which makes up about 46% of sales. We were very pleased with the 8% year-over-year sales growth in U.S. Commercial during the quarter. Bill's already provided detail on that growth, so I'll get to the question that many have asked us lately - what was the impact of the hurricanes on Kelly? By no means was it business as usual. Operationally it was tough. Hundreds of temporary employees and permanent staff had to be accounted for and over a dozen of our branches were shut down. However, we recovered well. Almost all branches have reopened and all permanent and temporary staff are safe. We're very proud of the significant efforts made by our corporate office and local teams that supported our recovery efforts.

The net financial impact during the quarter turned out to be far less than we'd originally expected because Kelly was a significant participant in the recovery efforts mounted by insurance firms, Federal and local government and customers. You may also recall that hurricanes hit Florida in the third quarter last year. The year-over-year net financial impact between the two has been close to a wash.

In spite of the storms, we saw encouraging revenue growth across all of our major service lines in commercial. After slowing over the last several quarters, growth in light industrial, staffing lid has resumed, returning to mid-single-digit growth. Office clerical staffing continued to show healthy signs of improvement, growing at about the same rate as [LIB] for the quarter. And the growth of both our temp to perm and direct placement fees remain solid. Growth was up over 50% year-over-year and this is the fifth consecutive quarter of strong double-digit fee growth in U.S. Commercial.

Additionally, year-over-year gross profit dollars increased 11% against sales growth of 8%. Commercial gross profit rate during the quarter increased to 15.1% compared to 14.7% for the same period last year. And this is the fifth consecutive quarter of improving year-over-year gross profit rate in U.S. Commercial. Our GP rate was favorably impacted as a result of our success in raising prices to cover SUTA cost increases, better workers' compensation management, and as we've noted, continued growth and fees.

For the quarter, expenses grew slightly less than the 8% sales growth. As a result, expenses, as a percentage of revenue, improved to 9.5 from 9.6% last year. We also saw sequential improvement compared to the first and second quarters. And summing it all up, operating earnings increased 18% in the quarter in U.S. Commercial.

Turning now to Professional, Technical, and Staffing Alternative Segment, which makes up 21% of sales. The third quarter for PTSA was good in terms of revenue growth. On a year-over-year basis, revenue was up over 9% and earnings grew at over 7%, and while we were disappointed with our third quarter earnings performance, it was a sequential improvement over quarter 2.

Similar to what we saw in our U.S. Commercial segment, the hurricanes had little net financial effect on PTSA. We experienced branch closings in 7 out of our 9 specialty staffings units, but this was also short term. All have reopened and growth has already resumed. Despite the storms, over half of the 14 business units that make up PTSA showed strong double-digit revenue growth as compared to 2004. And Professional and Technical Staffing, Kelly Engineering, and IT Resources were leading performers. These units had very strong double-digit sales growth for the quarter.

On the other hand our Automotive Services Group and the Law Registry experienced revenue declines during the quarter. And as we reported previously, the year-over-year decline in the Law Registry was attributable to the completion of major projects that were ongoing in 2004.

Turning to our Staffing Alternatives Group, Kelly HR First and Kelly Vendor Management were the leading performers with sales and earnings growth of over 30% for the quarter. Sales in our Staff Leasing business continued to decrease in the quarter as a result of our exiting customers with higher workers' compensation risk. However, this repositioning has resulted in solid year-over-year increase in earnings for KSL during the quarter up nearly 50%. We were also pleased with the continued strong growth and placement fee income in the majority of the PTSA staffing businesses. Fees improved over 20%.

In addition, expenses in PTSA were well managed. They increased only 3.5% for the quarter against revenue growth of 9%. We made very good progress in bringing PTSA expenses in line with our sales growth.

With solid revenue growth and great expense control in PTSA, we wondered why to lag sales and fall short of our expectation. As Bill already noted, PTSA's gross profit rate declined to 17.2% compared to 17.9% for the same period last year. A number of factors contributed to the downward pressure on PTSA's GP. Our lower margin specialty businesses grew at a much faster rate during this quarter as compared to our higher margin businesses. And as previously noted, three of our higher margin businesses experienced revenue declines - the Automotive Services Group, the Law Registry and Staff Leasing. This, in combination, accounted for the majority of the GP decline in PTSA. We do expect to see sequential improvement in PTSA's gross margin in the fourth quarter and into 2006.

Our third segment is International, which makes up 33% of our total sales. Reported sales increased over 7% for the third quarter and in constant currency, International sales increased 6%. Earnings improved to $6.4 million for the quarter, slightly ahead of last year. But earnings were negatively impacted in the third quarter due to exceptional severance costs. International sales growth remained strong and was again positive in all regions. Europe had an increase of 4%. Sales in Germany, France, Scandinavia, and Russia all experienced double-digit growth. Sales in our U.K. Ireland operations, however, were again disappointing with a decline of 11%. We are taking steps to reposition our U.K. operations to return this important unit to profitability. We'll update you with progress along the way.

The Asia Pacific growth of 15% was boosted by our operations in India, Malaysia, and Singapore. Our investments in this region continue to yield positive results. For example, sales growth in India better than doubled compared to last year and Malaysia grew by more than 50%. In the Americas, sales increased 4% in constant currency. Although sales growth remained solid in Mexico and Canada, it declined in Puerto Rico during the quarter. Consistent with last quarter, we saw solid double-digit growth in fees in the majority of our countries. Total fees increased nearly 20% in constant currency and we expect continued solid growth and fees.

Additionally, International expenses for the quarter grew 5% on a constant currency basis. As a percentage of sales, they were 15.8% in the third quarter, an improvement from the 15.9% during the same period last year and a considerable improvement from the 16.4% in the second quarter of 2005.

International's gross profit rate for the quarter declined slightly to 17.2% compared to 17.4% for the same period last year. And as Bill mentioned, this decline was attributable to decreases in GP rates in temporary staffing offset by higher fee-based income. Holding to our strategy, we continue to expand our PTSA business lines in high growth international markets. We opened five new PTSA branches internationally in the third quarter, including our first scientific branches in Japan and Singapore. Kelly now operates over 100 scientific staffing branches around the world. We will continue to invest international growth opportunities and are excited about our outlook.

Let me conclude my operational update with a few quick comments on the combined performance of our three operating segments. First, they had combined constant currency sales growth of nearly 8%. Second, we made good progress during the quarter to bring our expenses back in line with our sales growth. Expenses as a percentage of revenue improved to 14.9% from 15.3% last year and decreased sequentially from the 15.3% in the second quarter of 2005. And third, our third quarter 2005 earnings grew considerably faster than the rate of sales growth. And let me add that even given the tough pricing environment, we continue to make good progress on margin improvement in U.S. Commercial, and we believe there are some continued upsides.

That concludes the operations comments and now I'd like to turn it back to Terry.

Well, thank you, Carl and Bill. There's been considerable discussion in the media concerning the economic impact of the hurricanes in the Gulf Coast, as well as the Delphi Bankruptcy. Carl talked about the impact with the hurricanes on our business. Fortunately, the job loss from the hurricanes in the short term was less than predicted and the job creation from the recovery efforts has been more immediate than first expected. While it's too early to comment on the impact of Wilma, it is interesting to note that over the longer term, the Department of Labor estimates a net positive impact on job creation as a result of hurricane recovery and rebuilding efforts.

Some of you may also be wondering about our financial exposure to the automotive industry in general and Delphi specifically. After all, we're in the metropolitan Detroit area and Delphi is literally right down the street. With Delphi, our exposure is relatively small and has been reserved fully. As to the automotive industry, both manufacturers and suppliers, our risk is also relatively limited. While that industry once accounted for a very substantial portion of our business, today the entire automotive sector makes up less than 4% of our total revenues. And while the domestic automobile industry is experiencing very difficult times, we believe it will continue to be an important sector of the economy. It's also important to remember that there are a number of financially healthy companies in the automotive sector and I'm pleased to report that Kelly continues to do business with these companies around the world.

Looking at business conditions worldwide, the fundamentals remain in place for continued solid economic growth and strong job creation. Some of these trends are the global economy is strengthening, GDP in the United States is growing at a respectable 3.5%, overall job growth in the United States to date has been nearly 1.6 million and over 7% of those jobs were in temporary staffing. In turn, we saw strong growth in our temp to perm conversions and in permanent placements. This has resulted in an impressive gain in all three of our business segments.

On our last conference call, I laid out a post-recession scenario that I'd like to briefly recall for you. In the first phase coming out of a recession, our industry typically experiences well above average sales growth, reflecting the fact that our customers' work is building up, but they're not yet confident that the recovery is sustainable. And this is typical of what happened in 2004.

In the second phase, our customers feel the recovery is for real and they resume hiring full time employees. While our sales don't decline in absolute terms, normally the rate of our sales rate declines significantly from the rate we experienced in the first phase and that is what we saw in the beginning of this year.

The third phase comes after our customers rebalance their work force. At this point, they become more inclined to use a combination of temp and perm and move toward the use of a greater proportion of temporary help. This allows them to better position themselves staff-wise for the next business down turn or recession with all of the incumbent issues over-staffing brings. This is the period we thought was developing when we talked to you last quarter and our third quarter results seem to reflect this shift. This third phase can be relatively short or it can last for several years. At this point, no one knows, but we feel pretty confident that it's sustainable for the foreseeable future.

For these reasons, we're continuing to pursue our strategic growth plan of expanding Kelly's presence around the world by adding new countries, filling out our branch network, introducing new commercial products offerings in the United States, and developing our professional and technical businesses in other countries.

Now our strategic growth plan and our confidence in the global economy underlies our earnings forecast. At the beginning of this call, I gave guidance for the fourth quarter of $0.28 to $0.33 per share. This would bring our full year earnings for 2005 to $1.00 to $1.05 per share, which would be a solid improvement over the $0.60 a share we earned for the full year of 2004. You may recall we use a fiscal calendar, which results in a fiscal leap year every 5 or 6 years. 2004 was a fiscal leap year for Kelly. The year had 53 weeks, with the additional week in the fourth quarter. 2005 is a normal 52-week year with 13 weeks in each quarter. In 2004, the extra week added week roughly 5% to our fourth quarter sales and 1% to our annual sales. While we did not quantify the addition to earnings, it was at least as great as sales. Please keep this in mind when comparing our guidance and ultimately, our results against last year's performance.

In 2004, we laid out two likely scenarios that would return us to our pre-recession earnings in 2006 or 2007. And incidentally, that was about half the time it took us to rebound from the last recession in the early 1990s. The 2006 scenario was based on a rapid recovery in the economy, similar to the recovery in the early '90s. The 2007 scenario was based on more modest sales growth with somewhat higher margins. Now we have out-performed our industry in every quarter during this recovery. Nevertheless, our growth has only averaged 11% over the past 2 years, far less than 15 to 25% sales growth often seen in earlier cycles.

Now given the shape of the current cycle, neither the 2006 nor the 2006.5 model is likely. However, given the current sales trends, the 2007 scenario seems highly probable. We will keep you updated on this on our year-end call in January. Now, there's no question we are in a good solid recovery. And although the economy may not be as robust as the last cycle, we expect to finish the year with good momentum and well positioned for 2006.

That concludes our formal comments this morning. We'd be pleased to answer any questions you might have subject to the constraints of regulation FD, and 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.

Thank you for attending today's conference and have a great day. You may now disconnect.