Kelly Services Inc (KELYA) 2006 Q1 法說會逐字稿

Good morning and welcome to Kelly Services First Quarter Earnings Conference Call. All parties will be on a listen-only until the Q&A portion of the presentation. Today’s call is being recorded at the request of Kelly Services. If anyone has any objection, you may disconnect at this time. I would now like to turn the meeting over to your host Mr. Carl Camden, President and CEO. Sir, you may begin.

Thank you, Mary.

Good morning everyone and welcome to Kelly Services First Quarter 2006 Conference Call. With me this morning to review our quarterly results is Bill Gerber, our CFO. Today we’ll depart a bit from our usual agenda. I’ll begin by giving you some general color on the quarter. Following that, Bill will provide the financial commentary on the first quarter, as well as our guidance for the second quarter and the balance of the year. And then I’ll cover in more detail performance highlights for our 3 business segments and provide you with our strategic outlook. After our comments, we’ll then open the call to your questions.

We’re going to try to limit our prepared remarks to about 20 minutes in order to accommodate any questions you may have. For those of the listening audience who did not receive a copy of this morning’s release, you can visit our web site at kellyservices.com or contact Jim Polehna, our director of Investor Relations at 248-244-4586.

Before we get started, I will again remind everyone that the comments made during this call, including the Q&A, may include forward-looking statements about our expectations for future performance. Actual results could differ materially from those suggested by our comments and please refer to our 2005 10K for a description of the risk factors that could influence the Company’s actual performance. So now that we’ve got that behind us let’s go on and discuss the first quarter.

I am very pleased to report that Kelly has gotten off to a great start in 2006 and our results are especially gratifying given that the first quarter is typically the lowest earnings quarter of the year due to seasonality. Our results exceeded the guidance we gave you all in January. Revenues for the quarter were $1.36 billion, an increase of 9%. Earnings per share were $0.24, more than double the $0.11 earned in the first quarter of 2005. We are proud of the earnings and revenue results achieved this quarter, with all 3 of our operating segments turning in strong results. We continue to transform solid sales increases into market share gains, strongly improve our operating efficiency, and produce great earnings growth. We are well-positioned for continued success, but more on that a bit later.

Now, let me have Bill take you through the financials for the quarter.

Thank you, Carl.

I’ll start by covering first quarter results. Revenue for the first quarter totaled $1.360 billion, an increase of 8.9% compared to last year. On a constant currency basis, total Company revenue increased 10.5%. We’re pleased with this result and note that it’s an acceleration compared to the fourth quarter, when constant currency revenue increased 8.3%.

During the first quarter, there were 2 holidays, New Years and Easter, where timing impacted the monthly results. Fortunately, the 2 about offset each other and there was no significant impact to the quarter as a whole. Our gross profit rate in the first quarter was 16.1%, which decreased 0.2 of a percent from the prior year. Sequentially, the 16.1% rate was unchanged from the fourth quarter.

SG&A in the first quarter totaled $205.9 million and increased 4% year-over-year. We’re pleased to note that we achieved our goal of holding expense growth to roughly half the rate of sales growth. On a constant currency basis, total expenses increased 6%. SG&A expenses were 15.1% of sales, a 0.7 of a percent improvement compared to last year.

Earnings from operations in the first quarter totaled $13.4 million, 121% increase compared to last year. Net interest income totaled $40,000 compared to $35,000 interest expense last year. The improvement is due primarily to higher U.S. interest rates earned in our cash balances.

The effective tax rate for the first quarter was 36.5%, which is higher than the 35% rate in the first quarter of last year. The first quarter benefited from utilization of international tax loss carry-forwards and Katrina employment credits. Unfortunately, Congress has not yet acted to extend work opportunity credits for 2006. We are confident the credits will be extended this year, but we can’t recognize the benefits until the bill is signed. In contrast, the first quarter of last year did include the work opportunity credits and reflected a favorable settlement of a U.K. income tax audit.

Our first quarter net income was $8.6 million, 117% increase compared to the $3.9 million earned last year. And diluted earnings per share in the first quarter totaled $0.24 per share, 118% increase compared to earnings of $0.11 per share last year. Note that the $0.24 includes stock option expense of $0.01 a share.

Well, now I’ll cover our segment revenue results for the first quarter, and as you know, we divide our operations into 3 segments – number one, U.S. Commercial Staffing; number two, PTSA, our Professional, Technical, and Staffing Alternatives unit; and number three, International.

Revenue in U.S. Commercial totaled $618.8 million, a 9.4% increase compared to last year. This represents a consistent performance with the 9.5% reported in the fourth quarter of last year. Turning to PTSA, revenues for the first quarter totaled $298.5 million, an increase of 9.6% compared to last year. And moving on to International, revenue for the first quarter totaled $442.7 million, a 7.6% increase versus the prior year, and on an constant currency basis our International revenue increased 12.6%.

Before we begin our review of segment earnings results for the first quarter, I’d like to highlight a change in our segment reporting. Effective with the first quarter, we’ve implemented a charge-back system for our North American payroll billing and AR costs. We did this to more fully reflect all operating costs in segment results. We are now directly charging U.S. Commercial and PTSA, as well as Canada and Puerto Rico in the International segment for payroll billing and AR costs. These costs were previously included in corporate expense. Prior periods have all been reclassified for comparability and reclassified historical information by segment is available on our Investor Relations web site. And, of course, there was no impact to total Company results.

U.S. Commercial earnings totaled $29.5 million, an increase of 16.3% compared to last year. The U.S. Commercial gross profit rate decreased 0.1 of a percent from the prior year, primarily due to changes in customer mix. U.S. Commercial expenses increased 6.2% and expenses were 10.4% of sales, a 0.3 of a percent decrease compared to last year.

PTSA earnings totaled $19.3 million, a 32.4% increase compared to last year. The PTSA gross profit rate decreased 0.2 of a percentage point due to business unit mix. PTSA expenses decreased 2.3% year-over-year and expenses, as a percent of sales, were 10.8% compared to 12.1% last year.

International earned a profit of $3.3 million compared to essentially breakeven last year. The International gross profit rate decreased 0.5 of a percent, primarily due to growth in Pan European Corporate account business. International expenses increased 0.2 of a percent in U.S. dollar terms and increased 5.7% on a constant currency basis. International expenses were 16% of sales compared to 17.2% last year.

Finally, moving on to Corporate, expenses in the first quarter totaled $38.7 million, an increase of $4.8 million or 14.1% versus last year. IT costs were significantly higher due to the ongoing design and implementation of the PeopleSoft payroll and billing project. Incentive compensation program accruals also increased, reflecting the strong first quarter profit results. Corporate also included FAS 123R stock option expense of approximately $500,000.

Shifting to the Company’s first quarter balance sheet, I’ll make a few comments. Cash and short-term investments were $61 million at quarter-end, a decrease of $6 million compared to last year. AR totaled $820 million at quarter-end and increased $79 million compared to last year. For the first quarter, our global DSOs were 55 days, an increase of 1 day compared to last year.

Other assets include our investments in unconsolidated affiliates. You will recall that last year we made an $18 million investment in Tempstaff, a private Japanese staffing company. During the first quarter, Tempstaff went public on the Tokyo stock exchange. Accordingly, we have marked the investment to market and recorded an unrealized gain of $12 million. There was no P&L impact. The offsetting increase was to shareholders equity and deferred taxes.

Our short-term debt at quarter-end totaled $51 million, a $4 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 $11 million for the first quarter compared to $4.5 million last year. The improvement was primarily due to higher net earnings and better working capital management.

CapEx for the first quarter totaled $6 million, essentially flat compared to the $5.9 million spent last year. We now expect our 2006 CapEx to total between $40 to $44 million compared to $29 million last year. The increase is due to investment associated with the design and implementation of the PeopleSoft payroll and billing project.

As highlighted in the press release, our guidance for the second quarter is that diluted earnings per share will range from $0.34 to $0.39 compared to $0.26 per share last year. Incorporated into our second quarter guidance are the following assumptions. The shift of the Easter holiday into April will negatively impact our second quarter revenue growth rate by about 1%. Stock option expense will again be approximately $500,000, or about $0.01 per share. And we expect the effective tax rate will be approximately 32%, which assumes that legislation extending work opportunity credits for 2006 will be signed in the second quarter.

For the full year, we now expect earnings to range from $1.50 to $1.60 compared to $1.09 per share last year. Based on the strong first quarter, we’ve narrowed the range for the year by raising the lower end of guidance by $0.05. The full year will include approximately $1.5 million, or $0.03 per share, of stock option expense, and we expect that the full-year effective tax rate will be approximately 35%.

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

Thank you, Bill.

Let’s take a closer look at our segment results, beginning with U.S. Commercial, which makes up 46% of sales. We are very pleased with the 9% year-over-year sales growth in U.S. Commercial, which is consistent with the last 2 quarters. Commercial’s revenue, adjusted for the holidays, was up 11% in January; 9% in February; and 10% in March. Office Clerical Staffing again showed a healthy year-over-year rate of growth in the first quarter, with signs of mild acceleration. And as we’ve seen for over a year now, growth in Office continues to outpace the growth rate of Light Industrial.

The growth in both our temp-to-perm and direct placement fees remain solid. Fee income was up over 23% year-over-year, the 7th consecutive quarter of double-digit fee increases in U.S. Commercial. The gross profit rate during the quarter was 15.1% compared to 15.2% during the same period last year, but ahead of the 15.0% we saw in the fourth quarter. For the quarter, expenses increased 6% at a slower rate than the 9% sales growth. We gained operating efficiencies, resulting in expenses, as a percentage of revenue, dropping to 10.4 from 10.7% last year and we expect continued improvement in this measure throughout the year. To sum it all up, year-over-year operating earnings increased 16% in the quarter in U.S. Commercial, a strong increase compared to the 6% growth seen in Q4 of ’05.

Moving now to PTSA, which makes up 22% of sales. First quarter for PTSA was very good in terms of revenue and earnings. On a year-over-year basis, revenue was up nearly 10% and earnings increased over 30%, consistent with PTSA’s 2005 fourth quarter performance. Their revenue growth, again adjusted for the holidays, was 12% in January and 8% in both February and March. Growth occurred across all of our major business units in this segment, in Professional and Technical Staffing, Kelly Scientific, Engineering, and IT were the leading performance, while our Automotive Services Group and Home Care continued to experience revenue declines.

As we expected, ASG continues to be negatively impacted by the turmoil in the automotive industry and we don’t expect this trend will reverse itself any time soon. But on the other hand, due to our recent restructuring efforts in Home Care, we’re now seeing improving contribution from that unit and we expect that trend to continue. And, finally, after anniversary and completion of large project work in the Law Registry, that unit had a revenue increase of over 5% for the quarter.

Turning to our Staffing Alternatives Group, Kelly HR First, Vendor Management, and Management Services were the leading performers, all with strong sales and earnings growth for the quarter.

Now, the rate of growth in PTSA placement fees continued to decelerate during the quarter. You may recall that after seeing nice double-digit growth for several consecutive quarters, fees did slow somewhat in the fourth quarter of ’05, settling into low single digits in the first quarter. With the tightening labor market in the Professional and Technical sector, we are now more aggressively expanding our pool of direct-hire recruiters in PTSA.

After seeing some improvement in gross profit rate during the fourth quarter, PTSA’s GP rate declined to 17.3% in the first. This was also down from the 17.5% in the first quarter of 2005. However, this GP decline was entirely due to business unit mix. Without changes in business unit mix, the GP would have actually increased during the quarter. Expenses remained, while under control, decreasing by over $700,000, or around 2%, compared to the same period last year. This is the second consecutive quarter of lower expenses in PTSA. But looking forward, we do expect expenses will begin to increase as we step up our efforts to open new branches and more aggressively hire additional recruiters.

Our third segment is International, which makes up about 32% of our sales. Reported sales increased over 7% for the first quarter. On a constant currency basis, International revenue was up 12.6%, considerably higher than the 5.7% revenue growth reported in the fourth quarter of ’05.

Earnings were $3.3 million for the quarter, significantly up over our Q1 earnings last year. We are very pleased with the sales and earnings growth we’re now seeing in International. Europe had an increase of over 16%, the strongest growth we’ve seen in this region since 1999. Sales were strong throughout Europe, except in U.K. Ireland, which experienced only moderate growth in the first quarter. The slight improvement in growth in the U.K. follows several preceding quarters of sales declines in that region. We are encouraged by the positive trends seen throughout much of Europe. In fact, if you were to exclude the U.K., sales growth in Europe would have been close to 24%.

You may recall, the U.K. is the second largest market in the industry, and for Kelly as well. This region has proven to be a challenge, not only for us but for the industry. Staffing [indiscernible], shrinking margins in this region, especially in the more traditional staffing areas. But as we’ve previously reported, we are taking steps to reposition our U.K. operations and return to profitability.

The Asia-Pacific growth of 19% was boosted by our operations in Australia and in Malaysia. Sales growth in India better than doubled compared to last year and growth was exceptionally strong through South Asia. In the Americas, sales decreased to 1%. Although sales growth was positive in Canada and Mexico, it significantly declined in Puerto Rico. This decline was attributable to a weaker economy, compounded by manufacturing jobs leaving the island. We expect Puerto Rico sales growth to decline for the balance of the year; however, we’ve adjusted our cost structure there to be more in line with that region’s revenue.

Consistent with the last couple of quarters, we saw double-digit growth in fees for the division of 16%, with particularly strong fee growth in Europe and South Asia. Additionally, International expenses for the quarter grew only 6% on a constant currency basis, less than half the rate of sales.

International’s GP rate decreased to 16.7% compared to the 16.8% for the fourth quarter of ’05, and down from the 17.2% for the first quarter of 2005. In addition to the normal competitive pressures in Western Europe, the decrease was attributable to our success in winning several Pan European contracts. In addition, entering Turkey during the quarter, we remain focused on expanding our PTSA business lines in high-growth international markets. During the quarter, we opened 16 new international branches, 10 of which were PTSA offices. We will continue to invest in International growth opportunities and are excited about their outlook. We are currently focusing on prioritizing International initiatives and streamlining our processes to quicken new country and branch launches.

To wrap up my operating review, let me make a few comments on the combined performance of the segment. They had combined constant currency sales growth of over 10%, an improvement from the 8% in the fourth quarter of ’05.

Second, collectively, expense growth of 4% for the quarter was less than half of our 9% reported sales growth. In addition, we achieved a significant decrease in the ratio of expenses as a percent of sales all the way down from 15.8 to 15.1%. We’re, obviously, very pleased with our expense control in the first quarter. We do expect expenses to increase at a slightly higher rate for the rest of the year, as we continue to execute our strategy. And this will be particularly evident in PTSA. However, we do look for our ratio of expenses, as a percentage of sales, to continue to improve throughout ’06.

Third, our first quarter 2006 net earnings more than doubled compared to the same period last year and increased considerably faster than the sales growth. I hope you’ll agree that the first quarter results we’ve shared with you today support our optimism and give us reason to be excited about the future.

In a moment, I’ll give you a very quick overview of where our business stands right now and where I think it’s headed, and most importantly, you can expect from Kelly, and then we’ll open the call to your questions.

First, let me take a moment to address a subject that I received a lot of questions on. Many of your have asked quite explicitly what changes you might see at Kelly, given the recent change in leadership. It’s been less than 2 month since I was named CEO and during that time we have had a very full agenda. But today let me assure you that for the time being we intend to follow the strategic plan we laid out a couple of years ago. The plan remains solid and it’s playing out very, very well. Our first quarter earnings certainly underscore that fact.

So though the style of execution may be somewhat different, the fundamentals here at Kelly aren’t expected to change dramatically for the near term. Our priority has been, and remains, returning the Company to pre-recession earnings level by the end of ’07 and increasing the value of Kelly stock price following what’s been a long period of stagnation. We will accomplish this by balancing our efforts with strategic expansion activities. Now, once we achieve our earnings target, we see the door opening to new possibilities and we’ll be in a strong position to explore more aggressively all of our opportunities. The good news, as you’ve seen, is that we’re making significant progress on our plan to return to our pre-recession earnings per share of $2.43. In the last 2 years, we have achieved record sales and gained market share, considerably decreased our expenses, as a percentage of sales, improved our operating margins, and significantly grown EPS. Our ability to deliver is reinforced by a tried and tested focus on secure and in building long lasting relationships with large companies and customers that dominate their markets. It’s a focus that will guide us in reaching our short-term targets, achieve our operating efficiencies, roll out new services, enter new markets, grow our business, and take advantage of future trends and staffing.

That’s going to end our formal comments. Bill and I will now be happy to answer your questions. To allow as many callers as possible to participate, we ask that you please limit yourself to one question and a single follow-up, as needed. If you’ve got additional questions, we’ll certainly try to return to you later in the call.

Mary, the call can now be open for questions.

[Operator instructions.] Michael Fox, J.P. Morgan

Congratulations on the strong quarter. I was just wondering if you have given any thought to maybe bringing the Company to one share class now that you’ve been CEO for a month or two, if you can talk about that at all?

You mean with the long month or two that I’ve had?

Yeah.

Yeah, that’s a question, Michael, that you’ve asked and it’s one that the board considers from time to time. We will consider it again, but I will tell you that for the moment our answer is the same as it’s been, that we’re not looking at changing the share structure. But, again, I can also assure you the board will continue to review that.

Okay. And then just a quick follow-up. You said that the fundamentals would stay the same but the style of execution might differ a little bit. Can you just elaborate a little bit on how the style of execution might be a little different?

Over-engaged here in an interactive Q&A, I think we look to be as transparent as possible, open to the marketplace, and quick to market in our responses to changing market conditions.

[Pete Carello], Citigroup

First, just a question, sort of U.S. Commercial Staffing had its worst operating margin figure I think in 8 quarters or so. I’m not sure if I missed it on the call, but is there something to explain what happened there, given --

Pete, did you catch the part about our implementation of a payroll billing and AR charge-back?

Okay. That’s what did it?

Yes. If you’re comparing the quarter against history that hasn’t been reclassified, the press release numbers by segment have been reclassified and we have put all of -- as much history as possible on our Investor Relations web site.

I guess if you change your models and adjust Corporate as well to offset the --

Yes. Yes, absolutely.

Okay.

Corporate expense would be lower by an offsetting amount.

Okay. A quick follow-up question, I guess, is that on the International area, obviously the margins came in for I guess -- obviously, the margins came in a bit higher than we had at least, about double what we were expecting, which is good. Should we see that type of a trend throughout the rest of the year? Is it suggestive of performance and operating margins for International?

We expect strong performance by International for the remainder of the year. I mean, the 24% revenue growth that you saw in Western Europe is beginning to give us some of that critical mass that we need to produce good solid earnings. I think that you should expect good results from International over the remainder of the year.

Is that International -- you just -- International growth are you talking about, that 12.6 constant currency? That sort of came out of no -- I mean, it’s sort of – it’s out of the line of the trend for the last 4 quarters though. Is there any kind one-time or acquisition or anything else in there to make that number jump so hard?

We bought Adecco last week. No. No, there are no particular one-time events there.

No [voices overlap] acquisition.

Again, if you pay attention to -- if I can point out some of the detail in there, I mean, the U.K. shifted from a negative on the revenue growth to be in a moderate positive. That helps. We talked about Pan European contracts coming in, which significantly fueled Western European growth. But at the same time, we also talked about some significant declines in Puerto Rico. So nothing other than what I view as a continuation of Kelly’s core strategy.

Okay.

I mean, as you all have been asking for it too in International.

Toby Sommer; SunTrust Robinson

This is actually Mike in for Toby. A question regarding the PTSA group. I was just wondering if you could discuss what areas in the professional staffing industry you’re seeing strength in and maybe you could discuss the pricing environment.

As we talked about, a lot of what I view as the core technical areas, IT and Engineering, and in particular strong in Science. And then over on the fee-based businesses, almost all of those are doing particularly well. Outsourcing is experiencing very strong growth. Vendor Management continues to become a very important model in the staff and industry. HR First, as we’ve talked about, which again is the outsourcing of recruiting, doing particularly well. Finance Staffing continues, I think, to have good high demand for it around the U.S.

I’m not seeing any particular change in pricing pressures. Again, if we had -- if our proportions by business unit had stayed exactly the same, in fact, we would have had a GP increase for the quarter. The small decline that we had in GP was just completely due to some units growing faster than others. We’re not seeing particularly any change up or down in the pricing pressures inside the PTSA segment.

And then one last question. Can you give us any sense kind of on what kind of percentage of headcount increase maybe that you’re looking for in the recruiters for the direct feed business?

You’re talking again about PTSA?

Correct.

Yeah, I don’t have a headcount target. I’m looking for modest increases. As you know, it takes a while when you bring on recruiters for them to fully get up to speed. I think you know we’re very measured at how we deal with expenses here and I think you should be looking for a very modest increase in the expense rate of PTSA.

Michel Morin, Merrill Lynch

First of all, thanks very much for taking our questions this morning. It’s very appreciated. The results look very solid overall. I was a bit surprised to see the guidance range not -- or the top end of the range not moving and I just wanted to get a bit more color as to why that is. Thank you.

The results here that you’re seeing out of the staffing industry in the first quarter are reflecting a leveraging in terms of operating efficiency off of higher-than-expected sales growth. We did particularly well, as we’ve said, in our revenue growth. If we saw strong acceleration and basic economic demand for labor that turned into the revenue growth that I think it will, I think there is upside to that number. But that’s a -- I think what you see there is a range that reflects our best view currently of the economy and yet we significantly raised the bottom of our overall range because we think there is less risk of a movement down in basic demand than there might have been. All of us were a bit cautious, as we were coming out of fourth quarter a little uncertain as to what we were going to be seeing.

Okay. And if I may, with a quick follow-up, you mentioned market share gains and I think you’ve also mentioned Pan European contracts. I was just wondering are those 2 things related? Are the market share gains predominantly in Europe or is this a broader development that you’re seeing?

No, I’ll have to wait and see when all of the results are out. We won’t know about Adecco’s numbers until deep into May, so I’ll need to see how some of the rest of the opponents do. Up to this point, most of our market share gains have occurred in North America. This is one of the -- this is now the first quarter where especially in Europe we’re seeing what we think will be significant market out-performance in terms of year-over-year sales. We’ve always been doing particularly well in Asia. But I think Europe -- this is the first time that we would attribute market share gains to the Pan European contracts.

And those contracts, they are coming in at lower gross margin. Can we still remain confident that they are profitable for the operating level? You have longer terms on these contracts or what are some of the things that would make us feel comfortable about that?

One, if you know our style, it would be hard for us to believe that I would sign any significant contract that wasn’t profitable. Obviously, a key consideration of what we’re looking at. And, again, if you look at the contribution increase in International, it was a very significant increase this year on a year-over-year basis. So I expect again, as I said before, International to be a significant contributor now to contribution growth.

[David Steinberg], Goldman Sachs

Two questions. First, following up on some of the questions earlier in terms of permanent business within PTSA, I wanted to know if you felt that your hiring of recruiters of now reflects either missed opportunities in 4Q or 1Q or if you are hiring in anticipation of an acceleration in the market. In other words, have you missed an opportunity to this point just by not having the right headcount or is it the market is about to take off and you’re hiring in anticipation of it?

A little bit of yes to both. I think that we missed an opportunity. With a strong focus on expense control on what had been a very strong double-digit growth rates on year-over-year basis in PTSA, I thought we had adequate numbers of recruiters in some of the units and in retrospect probably should have started slowly ramping up the recruiters in the fourth quarter of last year. I think there is still more upside available. The tightening of the labor market that we’re seeing in the professional and technical category indicates good opportunities on the placement side as well as the more traditional temp-to-perm. So I think we missed a little bit of the opportunity in the last 2 quarters but will be a time to take advantage here of the cycle.

Great. And that’s actually -- my follow-up question relates to the operating expense control that you guys have demonstrated. You talked a little bit on this call in terms of where you’re making investment, whether it be the PeopleSoft implementation, the addition of recruiters and offices in ’06. Can you talk a little bit about what plans you’ll have in place to continue to maintain your operating expense growth rate at approximately half the growth rate -- excuse me, half of your revenue growth rate?

Yeah. You can control your expenses. I mean, your ratios are controlled by how quickly you add expenses and we’ve announced that we are doing the PeopleSoft program implementation, which you’ve identified, as well as continuing to open offices and branches. As long as, and we talked about last year, if your revenue growth falls below a certain level, sitting in the 6 to 8% range, it’s real tough to grow your expenses at half the rate of sales. When you move up into the double-digits on a real -- on a constant currency basis, you can do that, and we did.

I think as long as you see revenue growth rates at about the same pace that we have here we will control our expenses growth. And we’ve got a long record of doing so. Even in the years -- even in the quarters in which we didn’t hit, as we said we wouldn’t every single quarter, that particular expense growth rate target, we still have a long series of succession of quarters of reducing expense as a percent of sales. And actually I’m getting more and more focused on that, on bringing down the SG&A expense ratio that I am about exactly hitting that half of sales target every quarter.

One quick follow-up. So based on your earlier comments about guidance and your comments here on double-digit, is it safe to assume that your internal planning, you’re looking for double-digit constant currency revenue growth rates for the remainder of the year?

We are not counting on it to hit our targets. Do I think that that is possible? Yes, given that we just did it in the first quarter. But I’m not building a plan that is absolutely dependent upon that.

And if I could just interject, I really want to emphasize the importance of the shift in the Easter holiday. I was surprised myself when we did the analysis, but it really will take one percentage point off our reported growth rate in second quarter. So if you see a decline in our second quarter growth rate, don’t be surprised.

Ty Govatos, C.L. King

Congratulations on that quarter. Could you elaborate a little bit more on the PeopleSoft and what the impact might be now and in upcoming quarters, when that program will be finished?

The PeopleSoft implementation stretches over a period of about 3 years, 2 or 3 years. And I think you’ll see some impact begin to take place as early as next year in terms of isolated functions and countries. What we’re primarily looking for, and then I’ll have Bill give you a little more specifics here, but what we’re primarily looking for is an ability to handle the payroll function much more efficiently than we can do today. And we view ourselves as market leaders in doing that. The billing AR, a lot of the back office functions, as accounts are becoming more and more complex, as we’re looking for more consistency across borders and so on, PeopleSoft gives us a good solution to that.

Just adding a little bit of color, we’re really in the design and build phase this year. I would expect sort of comparable impact in the balance of the year as to what we experienced in first quarter, i.e. it will be a significant driver of growth in headquarters expenses. We then move into the implementation and rollout phase in 2007. There will be various costs associated with that. We think over time it will really allow Kelly to grow volumes substantially without linear increases in back office costs. And we think that’s the real power of this system. And we’re not building in, at least imminently, any material cost reductions that will be achieved in 2 quarters as a result, but we think that over time it will have a very powerful effect in our ability to control expense growth in the future.

Pete Carello, Citigroup

Just a quick follow-up. You guys valued last quarter for a 44% tax rate and obviously you were far below that. What happened and why didn’t the expenses happen as expected [indiscernible]?

Good question. As I mentioned on the call, there were really 2 factors that helped the first quarter tax rate, relative to our expectations. The first of those was utilization of international tax loss carry-forwards, which is kind of a fancy phrase for saying that in Germany, Germany did extraordinarily well during the quarter; frankly, better than we forecast. We were able to utilize their tax loss carry-forwards for more than we expected to be able to.

And the second factor was a very interesting one. There are special tax credits available for employing victims of the Katrina disaster. And I want to emphasize these are not one-time credits. In fact, they go until August of 2007. We really didn’t know how successful we were going to be in capturing those, and, frankly, we did a very good job at it. So they’re really a subset of work opportunity credits. And even though the general work opportunity credits have not been restored for 2006 go-forward, there was a special subset essentially called Katrina credits that we were able to capitalize on and at the time we gave our guidance we just didn’t know how successful we were going to be in capturing those.

Okay. But then it’s 3 quarters in a row of having, I guess, a higher tax rate expected and then coming in and being a -- I will ask you if there is a surprise in the second quarter, you are going to go down to 32? Is it a high probability the events are going to happen in the second quarter that will get you the 32% tax rate or what are the chances that it could actually be higher than that?

Well, again, I emphasized on the call that the assumption that drives that is that work opportunity credits will be extended by Congress and signed by the president in the second quarter. As we all know, that legislation has held up along with dividends and capital gain extensions. Our best legislative intelligence says that will happen in second quarter. However, to be honest with you, I thought it was going to happen in first quarter and it didn’t. So we are hopeful. There has been some version of either work opportunity credits or targeted jobs tax credits for something like the last 20 years. It would be unprecedented if Congress let these credits lapse. No one believes that will happen. I think it’s just a question of exactly when they will be signed.

If it doesn’t happen in 2Q, what tax rate would you expect then, 35.5, 35, somewhere in that range?

I would expect it to be a couple, 3 percentages points higher.

[Bill Weeds], Delta Management

Thanks for opening the call to questions. I think it’s a big help. Just on cash flows, you mentioned CapEx stepping up this year to about $44 million. What’s your expectation for depreciation and amortization?

We haven’t previously given one of those, but I would expect it to be in the $44 to $45 million range this year. That would be D&A. And incidentally, I did say CapEx of $40 to $44 million, so a range.

Okay. And given the current growth rate of the business, do you view working capital as a user of cash, source of cash, or net neutral?

If we continue to grow in the 8, 9, 10% range, working capital will, unfortunately, be a user of cash. Our DSO was up 1 day. We’re not pleased about that. We’re working strenuously to get it back down. Each day sale is worth about $14 million. So if we’re successful in getting it back to 54 days, you can do the math, it’s worth quite a bit to us.

Okay. So given the improved earnings, you ought to be still generating a decent amount of free cash flow and you’ve already got a good amount of cash on the balance sheet. Do you have any thoughts on usage of cash you generate going forward, as the business model improves?

Yeah, the standard options are available to us and we continue to look at them. There are investments we need to make potentially in the business, possible acquisitions, and we always look at possible increases in dividends and share repurchases. Those are all things that we look at over the course of the year as good use of our free cash and we’ll continue to do so this year. Thank you.

Michel Morin, Merrill Lynch

I just wanted to follow up to the very first question about the share classes. Is it really as simple as a simple matter for the board to decide or are there some fiduciary duties that the trustees have that would preclude even moving forward on that kind of an idea to merge the 2 classes of stock? Thank you.

I don’t want to give a quick or simple answer to that, so I’m going to have to defer answering that question for the moment. You have now moved into some very specific legal questions there that I don’t want to move into on this call.

Okay. In that case, if I can ask another quick one. Are there any plans to change the amount of cash as return to shareholders, either via cash dividends or buybacks?

Yeah, as I just said a bit ago, we’ve got an ongoing review for how we use our cash, including both again possible dividend increase, share repurchases, but also investments in the business and acquisitions. We’ll review all of those. Those are all currently under discussion.

Bill Weeds, Delta Management

Just to clarify your earnings, your goal that you laid out for ’07, getting back to pre-recession peak levels, is that a goal for the year all in or is it your goal to exit the year at those levels of profitability?

Very specifically, the $2.43 goal would be full-year 2007 earnings. We have been very deliberate in spelling out the assumptions that drive making that possible and it’s about 8% revenue growth. It would require about a 0.1 of a percent increase in the gross profit rate and, again, about holding expenses at half the rate of sales growth. And if we can accomplish those 3 objectives, we will, in fact, -- we can, in fact, deliver the 243 next year.

Pete Carello, Citigroup

Carl, could I just ask you a bigger picture question sort of regarding Kelly’s strategy. You mentioned you are not planning on any kind of sort of changes in the near term from your plan 2 years ago. We’ve heard just, even at the staffing conference in Beverly Hills like a month ago and other sources, that there are lots of opportunities in the smaller clients. I know you short of shifted towards the bigger clients you say. But there is any chance you would use some of your sales force resources and try to go back and pick up some smaller company business or are you really sort of married to sticking with this big client strategy or what’s your related thoughts on that?

There is a difference between where your strategic focus is and what you’re open to. We do about, as we’ve told you, all about two-thirds of our business with 100 customers. With that said, we’ve got well over 100,000 customers. We do business with lots and lots and lots of small companies. And one of the things that I look at and talk to and review with all of my operating segments is what is the rate of sales growth of local sales versus the international sales. And if you look at some of the new products that we’ve offered out of the Commercial segment, things like Kelly Educational Staffing, the Substitute Teaching Program, and Kelly Higher Education, those are clearly designed to attract a big segment in the local market. So I’m already directing, and we have been historically at Kelly, a modest amount of investment and sales activity continuing to grow local sales and we’re doing -- and I think we’re doing relatively well. You haven’t heard us discuss, especially in terms of U.S. operations, a dramatic increase in concentration in business because we’ve been growing both fairly well.

If I can just ask one follow-up to this sort of [indiscernible]. Another big picture question, but so not much related to that, you guys often -- you talk every quarter or so, every month, about the employment report and what you’re seeing out there. And anything, given the interest rate environment and the fuel expenses and things like that, are you hearing anything at all from some of your clients sort of what their view is these days in hiring intentions in general? Are they getting increasingly nervous? Are they getting sort of -- is it stable enough? What’s the thoughts you’re hearing out there from business leaders, executives, whatever?

And more resilient than I would have thought. I mean, there’s been a -- there is a lot of uncertainty embedded inside the marketplace over both oil prices, interest rates, and so on, but our customers are acting, and again, I’m talking in particular about the larger customers, Pete, but our customers are acting with a fair degree of confidence and certainty in their own actions. They are not pulling down the window that they’re looking at in terms of their hiring activities. They are not discussing plans for a precipitous falloff in demand or a decrease in need for staff. That’s not happening. And I’m still seeing a lot of confidence in the business leaders of those Top 100 customers.

[Operator instructions.] Gentlemen, there are no further questions. Thank you.

Thank you all. Thank you, Mary, and I look forward to talking to you all next quarter.

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