Kelly Services Inc (KELYA) 2006 Q4 法說會逐字稿

During the conference call, management of the Company referred to a Form S-3 registration statement filed by the Company with the SEC on January 25, 2007. In accordance with the rules and regulations of the SEC, the discussion of that filing has been omitted from the recording and transcript of the conference call.

Good morning and welcome to Kelly Services' fourth quarter earnings conference call. All parties will be on listen-only until the question and answer portion of the presentation. Today's call is being recorded at the request of Kelly Services. If anyone has any objections, 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. Good morning and welcome to Kelly Services' 2006 fourth quarter and yearend conference call. With me this morning to review our results is Bill Gerber, our CFO.

I'll begin this morning by highlighting recent strategic initiatives and then provide comments on both the fourth quarter and full year. Following that, Bill will provide financial commentary on our 2007 guidance. Afterwards, I'll discuss performance in our three business segments and our 2007 outlook before opening the call for questions. For those of you who did not receive a copy of this morning's release, you can visit our website at kellyservices.com or call Jim Polehna, our director of Investor Relations at [248] 244-4586.

Let me remind you that the comments made during this call, including the Q and A, may include forward-looking statements about our expectations for future performance. Actual results could differ materially from those suggested by our comments. Please refer to our 2005 10K for a description of the risk factors that could influence the company's actual future performance.

As many of you are aware, during the past few months, we've reviewed, adjusted, and aggressively implemented our strategic plan. Let me give you a quick update. Second, in December we announced the sale of Kelly Staff Leasing as part of our efforts to selectively divest certain of our non-core businesses. And we will continue to look at other opportunities to redeploy assets in the future. As we divest non-core assets, we're increasing our investment and promising high-growth, high-demand businesses and geographies.

For example, we made an additional investment in temp staff. This strengthens our important strategic alliance with the second largest staffing firm in the Japanese market and enhances our ability to serve global customers. We're also actively pursuing acquisitions of specialty staffing companies. In doing so, we are furthering efforts to diversify across recession resistant service lines and industries as well as provide higher margin services. You may recall our acquisition of Ayres, an outplacement firm, in 2006 as one example of this strategy.

And finally, we have stabilized our UK operations and completed our operational analysis. And as a result of our reassessment of that market, we will take a restructuring charge in the first quarter of 2007, as we consolidate facilities and close unprofitable branches. We believe this will position us for profitable growth in the future.

You'll hear more about all of these actions during this morning's call and we'll continue to update you on our strategic progress during future earnings calls and investor conferences.

Now let's turn our attention to the fourth quarter results. Revenue increased 4.4% to $1.436 billion. Earnings per share were $0.67, up 81% from the $0.37 delivered in the fourth quarter of 2005. Excluding the gain on the sale of Kelly Staff Leasing during the quarter, earnings were $0.61, which well exceeded our $0.46 to $0.51 fourth quarter guidance range.

These results are especially gratifying, given that in the United States a market that represents two-thirds of our business, the overall economy experienced slowing GDP growth. Our U.S. business was affected by the slowing and in fact reported slightly negative, minus 0.6% year-over-year [technical difficulty] growth for the quarter. Nevertheless, Kelly's U.S. Commercial and PTSA segments reported respectable earnings increases on the strength of gross profit improvement.

And our international segment delivered another quarter of double digit revenue growth and solid earnings increases. Kelly's international segment is coming on strong, delivering consistent revenue and earnings growth in each of the four quarters of 2006. Now here is Bill to take you through our financials in greater detail.

Thank you, Carl. I'll start by covering fourth quarter results. Our revenue for the fourth quarter totaled 1.436 billion, an increase of 4.4% compared to last year. On a constant currency basis, total company revenue increased 2.3%. As we expected, this does reflect slowing from the 4.3% constant currency growth reported in the third quarter.

Our gross profit rate in the fourth quarter was 17.0% and increased 110 basis points compared to last year, primarily due to improved workers compensation costs and strong growth in fee-based income. Sequentially, the 17% rate increased 0.3% compared to the third quarter.

Selling, general, and administrative expenses in the fourth quarter totaled $221.6 million and increased 9.6% year-over-year. On a constant currency basis, total expenses increased 7.2%. SG&A expenses were 15.4% of sales, 0.7% increase compared to last year.

Earnings from continuing operations in the fourth quarter totaled $22.6 million, up 35.9% compared to last year. Other income totaled $618,000 compared to 10,000 of expense last year. The improvement is due primarily to higher U.S. interest rates and higher cash balances combined with dividends received on the temp staff investment.

The effective tax rate for continuing operations for the fourth quarter was 11.7%, which is significantly lower than the 29.1% rate last year. Congress did finally pass the extension of work opportunity credits retroactive to the beginning of 2006. As a result, the fourth quarter tax rate includes the full year's worth of credits. These credits total approximately $6 million and reduce the fourth quarter tax rate by approximately 25%.

Our fourth quarter net earnings from continuing operations, was $20.5 million, a 74% increase compared to the $11.8 million earned last year.

Discontinued operations, net of tax, results from the sale of Kelly Staff Leasing effective December 31st, 2006.

Well, now there are two components to the $3.9 million of net income. First, the normal quarterly operating earnings of KSL, which totaled $2.6 million or $1.7 million after tax.

Second component is the gain on sale of KSL of $3.7 million or $2.3 million after tax. Diluted earnings per share in the fourth quarter were $0.67 per share, an 81.1% increase compared to earnings of $0.37 per share last year.

Excluding the one-time after-tax gain on sale of $2.3 million or about $0.06 per share, our fourth quarter adjusted net earnings were $0.61 per share compared to our guidance of $0.46 to $0.51 per share.

Now I will cover our segment revenue results for the fourth quarter. As you know, we divide our operations into three segments -- number one, U.S. Commercial staffing; number two, PTSA, our professional, technical and staffing alternatives unit; and number three, International.

Revenue in U.S. Commercial totaled $641.2 million, a decrease of 1.3% compared to last year. As Carl mentioned in the October conference call, we did see a slowing of growth in the U.S. market. That trend resulted in U.S. Commercial sales growth slowing from plus 6% in the second quarter to plus 1% in the third quarter and now minus 1.3% in the fourth quarter.

Turning to PTSA, revenue for the fourth quarter totaled $284.1 million, an increase of 1.1% compared to last year. Here revenue growth was about the same as the plus 1.6% in the third quarter. Note that the total company revenue and the PTSA segment revenue exclude Kelly Staff Leasing in both this year and last year.

Moving on to the International segment, revenue for the fourth quarter totaled $510.7 million, a 15% increase versus the prior year. On a constant currency basis our international revenue increased 8.4%, a bit slower than the third quarter growth of 10.8%.

U.S. Commercial earnings totaled $36.6 million, an increase of 8.5% compared to last year. The U.S. Commercial gross profit rate increased to 16%, one full percentage point higher than prior year, primarily due to reduced workers compensation costs, improved payroll tax rates and growth in fee-based income. U.S. Commercial expenses increased 3.5% and expenses were 10.3% of sales compared to 9.8% last year.

PTSA earnings totaled $18.8 million, an 18.7% compared to prior year. The PTSA gross profit rate of 18.5% increased 190 basis points, primarily due to strong growth in fee-based income, the impact of the higher margin Ayres outplacement business and changes in business mix.

PTSA expenses increased 9.5% year-over-year. Expenses as a percent of sales were 11.9% compared to 11% last year. Expenses increased due to the impact of the Ayers outplacement business and increased staffing costs related to adding permanent recruiters.

International earned a profit of $7.8 million, a 67% increase compared to last year. The International gross profit rate of 17.4% increased 60 basis points compared to last year, primarily due to strong growth in fee-based income. International expenses increased 16.1% in U.S. dollar terms and increased 9.1% on a constant currency basis. International expenses were 15.9% of sales compared to 15.7% last year.

And finally, moving on to corporate expenses for the fourth quarter it totaled $40.5 million, an increase of 7.9% versus last year. Corporate included FAS 123[R] stock option expense of about $230,000.

Next, I'll cover a few highlights for the full year of 2006. Revenue for the full year totaled $5.606 billion, an increase of 6.7% versus 2005. Our gross profit rate for the full year was 16.5%, which increased 30 basis points compared to 2005. This represents our second consecutive annual gross profit rate increase.

Selling, general and administrative expenses as a percentage of sales were 15.1%, a one-tenth of a percentage point improvement compared to the prior year. This is our lowest expense percent of sales since 1997.

SG&A expenses totaled $846.2 million and increased 6.1% year-over-year. On a constant currency basis total expenses increased 5.6% compared to last year. Earnings from continuing operations for the year totaled $79 million, a 54% increase compared to the prior year. The year's effective tax rate from continuing operations was 28.7%, which was about the same as the 29% rate in 2005. This reflected a full year of work opportunity credits in both periods.

Our full year net earnings from continuing operations were $57.4 million, an increase of 58% compared to the $36.3 million earned in 2005. Discontinued operations net of tax totaled $6.1 million and reflected $3.9 million of net earnings from operations combined with the $2.3 million net gain on sale of Kelly Staff Leasing.

Diluted earnings per share for the year were $1.75 per share. Excluding the $0.06 per share gain on sale of KSL adjusted earnings per share were $1.69, an increase of 55% compared to earnings of $1.09 per share in 2005.

Now I would like to shift to the company's year-end balance sheet and make a few comments. Cash totaled $118 million at year-end, an increase of $55 million compared to last year. Accounts receivable totaled $838 million at year-end and increased $34 million compared to last year.

For the full year our global days sales outstanding were 54 days, an improvement of two days compared to last year. Our short term debt at quarter end totaled $69 million, a $12 million increase compared to last year. And at quarter end short term debt was about 8% of total capital.

Finally I will make a few comments on the company's cash flows. Net cash provided by operating activities was $116.3 million for the year compared to $20.8 million last year. The strong improvement was due to higher net earnings and lower growth of accounts receivable. Capital expenditures for the year totaled $45.5 million compared to $28.5 million spent last year. The increase is primarily due to investment associated with the design and implementation of the PeopleSoft payroll and billing project.

We initially expected our 2007 capex will total between $43 to $45 million. During the year, we invested $20.7 million in unconsolidated affiliates. This represents our purchase of an additional 1.6% interest in Temp Staff for $15.6 million, bringing our total investment to 4.9%.

Also included is $5.1 million related to our acquisition of an additional 40% interest in the Temp Staff-Kelly joint venture bringing our total ownership there to 49%.

Now I would like to cover our guidance. As highlighted in the press release, our guidance for the first quarter of 2007 is that diluted earnings per share will range from $0.25 to $0.30 compared to $0.23 per share last year from continuing operations.

Incorporated into our first quarter guidance are the following assumptions. The effective tax rate will be approximately 41% compared to 36.3% last year. The increase reflects the positive impact of work opportunity credits being extended for 2007, offset by the fact that last year benefited from a one time utilization of tax loss carry forwards in Germany. Now what is not included in the above guidance are costs related to a planned UK restructuring of approximately $6 to $7 million pretax or about $0.16 to $0.19 per share.

The cash impact is approximately $5 to $6 million. These non-recurring costs relate primarily to branch closings, headquarters consolidation and related severance costs. We expect to close approximately 22 branches, bringing the total UK branch count down to 83. This restructuring is an important element of our plan to return the UK to profitability.

For the full year, we expect that earnings will range from $1.90 to $2.05 compared to earnings of $1.58 per share for continuing operations in 2006. The full year guidance also does not include the $0.16 to $0.19 per share of UK restructuring costs. We expect the full year effective tax rate will be approximately 35%, reflecting non-extension of work opportunity credits for 2007. The tax rate is expected to be higher than the 28.7% rate in 2006, due to a smaller impact from work opportunity credits and particularly Katrina credits. 2006 also benefited from a favorable resolution of a federal tax audit.

I'd now like to turn it back over to Carl who'll highlight our operating results.

Thank you, Bill.

Now, let's take a closer look at our segment results for the quarter beginning with U.S. Commercial, which makes up 45% of revenue.

We began the year strong with revenue growth of nearly 8% in the first half of 2006, but as you've heard, it slowed to a negative minus 1.3% by the fourth quarter.

Following a similar pattern, the BLS temporary help services employment increased over 4% in the first half of 2006, but slowed to a slightly negative minus 0.2% in the fourth quarter. And this is the first negative year-over-year change in BLS numbers for temporary staffing reported since June of 2003.

However, overall job growth remains solid resulting in strong fee growth for us, and leading us to believe that we're in the midst of an economic pause rather than the beginnings of another recession.

Such a pause is not uncommon. We saw a similar occurrence in 1995 when the temporary health penetration rate was relatively flat for 12 months, only to be followed by several subsequent years of increases.

The growth of both our attempt to perm and direct placement fees remain solid. The income was up 40% year-over-year, compared to the 33% growth seen in the third quarter.

And although fourth quarter fee growth was helped in part by a one-time project, even without that project, fee growth was very strong. This is Commercial's tenth consecutive quarter of double-digit fee increases.

The gross profit rate in U.S. Commercial during the quarter increased to 16% from 15% during the same period last year. This is also a sequential improvement from the 15.6% rate we had in the third quarter.

Expenses increased nearly 4%, a faster rate than commercial sales growth. However, the increases in expenses were principally associated with salaries and fuel bonuses.

Summing it all up, year-over-year operating earnings increased nearly 9% in the quarter in Commercial, in spite of negative revenue growth.

Moving on now to PTSA, which makes up 20% of company revenue, my comments will cover our continuing operations excluding the results of our divested staff leasing business.

The slowing economy negatively impacted PTSA's revenue growth in the fourth quarter. On a year-over-year basis, revenue was up 1% with earnings increasing 19%. PTSA's revenue was flat in October, up nearly 2% in November, and up 1% in December.

As we look in more detail, businesses and professional and staffing alternatives posted strong revenue and earnings growth, but the technical staffing businesses were more negatively impacted by the slowing economy.

First in professional, it represents over 20% of PTSA's revenue, year-over-year revenue grew 6% and earnings posted a solid double-digit improvement. Most notable is the increase in our law business in the fourth quarter, both revenue and earnings showed strong double-digit year-over-year increases.

Another leading performer was Kelly healthcare, this business exhibited double-digit revenue growth with solid growth and earnings and as we expand in the new healthcare segments, we expect this growth to continue.

Second is technical, which makes up over 60% of PTSA's revenues. Revenues were down nearly 9% in this group, and earnings were down as well.

In the fourth quarter, all of the businesses in technical reported lower revenue than in the same period last year. Our automotive business remained soft, but there we were able to increase the GP rate and deliver an increase in earnings for the quarter, but our outlook for automotive staffing is for it to stay soft for most of 2007.

Finally, the staffing alternatives which represents about 20% of PTSA. These businesses posted revenue growth in excess of 50% along with strong earnings increases for the quarter.

Early in 2006, we reported that growth in PTSA placed on fees was unacceptably low. We are pleased that this trend reversed itself in the third quarter and that fee growth has continued to gain momentum in the fourth as we continue to add recruiters.

Placement fees grew 14% in the fourth quarter, up from the 2% growth in third. The PTSA gross profit rate improved to 18.5% in the fourth quarter, compared to 16.6% for the same period last year, and improvements in GP rates were seen across in many of the businesses.

Expenses increased 9.5% in PTSA compared to the same period last year. The year-over-year increase has been driven in large part by expenses from our nearly acquired outplacement business, as well as our continued investment in recruiters, and we're very pleased with the healthy 19% earnings increase in the fourth quarter.

Our third segment is International, which makes up about 35% of our total revenue. This was another very good quarter for International, reported revenue increased 15% for the quarter and on a constant currency basis, International revenue was up over 8%.

Earnings were $7.8 million for the quarter, up 67% compared to our Q4 earnings last year. We are extremely satisfied with the solid sales and earnings growth in International and are pleased with our International development strategy.

Sales in Europe increased over 11% in constant currency, and we remain encouraged by the positive trend seen throughout continental Europe.

Consistent with the past few quarters, sales in the UK, Ireland decreased about 1%, excluding the UK sales growth in Europe would've been closer to 19%.

As was communicated previously, the UK is probably the toughest staffing market in the world and we have underperformed there. To become more competitive, we will streamline our infrastructure and lower costs beginning in the first quarter of this year, and as Bill noted our efforts will include selected branch closings in the UK, relocation and consolidation of certain branches and staff reductions.

We believe this restructuring will better position Kelly in what's still a very important market. The 10% growth in our Asia-Pacific region was once again fueled by our operations in India and Malaysia.

Sales growth in India again increased fivefold compared to last year and Malaysia grew by more than 30%. India's growth is a result of branch openings and significant new account wins and although we did experience slight decreases in Australia and New Zealand, growth was exceptionally strong throughout the rest of South Asia.

In the Americas, sales for the quarter were slightly positive; Mexico had very nice growth of nearly 30%, and as expected Puerto Rico sales growth continued to decline. Canada's revenue decreased slightly in Q4 directionally following U.S. trends.

Consistent with the last few quarters, we saw exceptional growth in fees in International, with fees growing almost 40%. Particularly strong fee growth was seen in continental Europe and Asia-Pacific, around 70% and 40% respectively.

International's gross profit rate was 17.4%, which was 0.2% better than the third quarter and0 .6% better than the fourth quarter of 2005, and this improvement is being driven primarily by growth in perm fees.

International expenses for the quarter grew 9% on a constant currency basis; this expense rate increase is higher than in past quarters due to our investments in new branches.

Consistent with our strategy of fueling profitable growth internationally, we opened 15 new international branches during the quarter, 9 of which were PTSA offices. In addition, during the quarter, as we've already stated, we increased our ownership interest in Temp Staff-Kelly to 49%, and look for us to continue to pursue additional growth opportunities in key Asia-Pacific markets.

We continue to believe that we're experiencing a pause in economic growth here in the U.S., one caused by many macroeconomic factors. But what's important is that we continue to see underlying strength in the U.S. economy. Though cautious, our customers' employment outlook remains positive, and the more recent trends in our business suggest the typicalseasonal sequential growth should continue.

Temporary job creation has been somewhat sluggish in recent months, including dropping in to negative growth rate in the fourth quarter. But we continue to believe this is a short term occurrence. Overall job creation remains positive, and economic expectations point to moderate but sustainable GDP growth in 2007.

When the year began, we did not expect to see a slow down in the U.S. The strength of economic growth and trends in our core commercial staffing segment during the first quarter certainly supported that view. Moreover, we set our annual guidance anticipating much stronger U.S. sales growth. But as it turned out, much of our revenue growth in 2006 has principally come from international operations. A resumption of growth in the U.S. where nearly two-thirds of our business still resides, would obviously further boost sales and earnings. But all in all, we had a very good year.

Kelly concluded 2006 with record sales of $5.6 billion and earnings exceeded our initial guidance provided in January of last year. Our renewed efforts to implement our strategy are yielding results. Not only are we continuing to increase sales and deliver significant earnings growth, we're improving gross profit, controlling expenses, and investing in both geographic and specialty business opportunities, and the future looks encouraging too.

Despite a pause in the U.S. growth, the global economy remains strong. If this strength endures, we will continue to build a stronger international presence through geographic expansion and globalization of our PTSA businesses. In other words, we're continuing our focus on building shareholder value.

And this will end our formal comments. Bill and I will now be happy to answer your questions relating to Kelly's fourth quarter and 2006 performance. To allow as many callers as possible to participate, we ask that you please limit yourself to one question and a single follow up if needed. If you have additional questions, we'll certainly try to return to you later in the call.

John, we can now open the call up for questions.

[OPERATOR INSTRUCTIONS]. First from the line of Mike Fox with J.P. Morgan, please go ahead.

Good morning guys. I just had a quick question about the pause -- the economic pause that you guys are talking about. Given the discussions you have with your clients, do you have any comments you'd like to make on the timing of a reacceleration in the market, more particularly for you guys in the U.S.? Thanks.

If I had more precision, I would probably be an economist for you all, instead of doing this job. Now, its -- it's a tough call right now and we are -- it's more likely obviously, as you drift in to the middle of the year than it is here at the beginning, but beyond that no particular precision to our notion as to when an upturn in temporary staffing demand would occur in the U.S.

Okay, and then, I guess a quick follow up on that. Are you seeing any particular strength within temporary, I mean, I know you said technical was pretty soft and the U.S. Commercial was soft, and it seems like perm was pretty strong. On the temp side, are you seeing any particular strength?

As we said, strong demands, strong strength in the professional side, healthcare, legal, all of the -- and in fact, I'm not certain that there is any particularly weak zone inside all of the professional staffing segments here in the U.S.

Okay, great thanks a lot.

Thanks a lot, Mike.

Our next question is from the line of Toby Sommer with SunTrust Robinson Humphrey, please go ahead.

Hi, Toby.

Hi, Mike sits in for Toby this morning. Quick follow up on the U.S. growth. You said that you can't really force the -- forecast an acceleration with any precision, but do -- in your sense, are we starting to stabilize a little bit and kind of bottom out or is that something that you just can't tell yet either?

Now, the BLS numbers would argue for the country as a whole at stabilizing. We'll have a better feel tomorrow as we get another release of -- not tomorrow, next week, as we get another release of jobs numbers and so on and we'll get a good feel for what's happening in the entire country.

And then a question on the firm. Can you give us a sense of how aggressively you're adding perm recruiters and how long you perceive doing that, and may be touch on what areas are really strong in the perm recruiting area?

Well, in the commercial side, there hasn't been a particularly aggressive addition. There's been -- you know, we started that program a few years ago as we talked about it, and it's been doing fine and slowly adding, responding to the local market conditions.

In the professional and technical space, as we admitted in Q1, we just -- we were late in coming to the game. We aggressively added in the first and second quarter that slowing down as we begin to achieve sufficiency in several markets, and that's pretty much across -- the need for perm recruiters was fairly much across all of the PTSA businesses -- the PT businesses.

And can you just quickly touch on what areas or what specialties you're seeing greatest demand for, as far as permanent placements?

We've not provided a breakout in our -- in the professional technical areas as to where the demand is highest, and I'm not prepared to do that here.

Thanks, thank you very much.

Thanks Mike.

Our next question's from the line of Pete Carrillo, Citigroup, please go ahead.

Hi, guys.

Hi, Pete.

Couple questions for you. The commercial staffing profitability category is an up and emerging category. Do we sort of -- I mean, last several quarters have been year-over-year increase of anywhere from, I guess 20 to 50 basis points. Is that kind of -- should that sort of continue in to this next coming quarter, a kind of year-over-year increase.

A lot a things depend on what happens with the growth rate. I have to tell you, to stand flat to slightly negative it's hard to get any continued operating leverage on the Commercial side. When you begin -- as we've talked about often in conference calls as well as investor conferences, to get improvements in operating efficiency, you got to have growth rates sitting above 4%, and on a continued basis you might be able to achieve it in any one quarter, but in general, you got to have stronger growth rates than we're having now in U.S. Commercial.

Well, I mean, in this current quarter, the fourth quarter we just had, you had -- you were negative, minus 1.3% year-over-year, but you were up about 50 basis points, right?

And again, Peter, are you talking about gross margins or --

Operating margins.

You're talking about operating margins, got you.

Yeah.

Again, you can have a success in any one particular quarter and again we had a very strong gross profit increase, but in our general -- in our investor conferences we've talked about looking for 10 basis points of improvement over the course of a year, we just happened to have had a very strong performance here in '06.

Okay, so then I guess -- moving to the -- what I'm trying to get at I guess is, your guidance is surprising -- I guess, it surprises me how weak it was versus where we're at, where the [fee] consensus is, I guess, that's going to be sort of a function of where -- kind of the operating margin comes in the Commercial stock, that's the biggest area, it's like if they model through the whole thing, that's the one area that seems like if -- you have to have these sort of under 5 in order to get even to $0.30 -- down to $0.30.

Our operating guidance for the -- our guidance for the year is, encompasses where the street is quite nicely.

Yeah.

For the particular quarter, there has been -- we have this issue now for the last three years where the calendarization of some of the folks who follow us is just wrong. They overestimate how much earnings will pop in to the first quarter and underestimate what comes in the remainder of the year. And it's kind of spectacularly replayed itself again in the first quarter numbers this year.

Yeah, Pete, I'd like to add to that. If you look at 2006, in our first quarter, we reported $0.24 a share; we ultimately earned $1.69 through the year on adjusted basis. If you look at first quarter as a percent of the year, it works out around 14%. Many of the analysts were much, much higher as a first quarter percent of year. They have the year in the rough range correct, but the first quarter is just too high. And again, as Carl said it's a consistent -- we deal with this every single year.

Okay, and then one other quick thing. In terms of -- is PTSA, was the fall off related to this -- the sequential fall off related to the selling of the operations in terms of operating margin?

Again in PTSA you had a negative sales growth and it is hard to sustain. Operating, you can't sustain the same operating numbers that you have when you have sales declining. And again in PTSA, you have [anniversarying] significant sales increases from the Ayers acquisition. Until we get through the anniversarying of the acquisition of Ayers and the addition of perm recruiters, the ratios there are going to be off.

Okay, all right, got you. And International, I guess, you're not -- you shouldn't -- you are not going to --

More than one follow up question, but we'll go ahead and take that Pete.

All right, I can go back in line, it's usually few -- just a few of us on the call, right, and you answer questions. But the International operating margin, we are not looking to fall back to where we were a year ago right, so we are continuing on for the last few quarters.

We've been doing fine in International, we continue to expect it to improve quite well. So, no, we're not expecting any fall back there, short of a global recession.

Great.

Okay, thanks Pete.

Our next question is from the line of Michel Morin with Merrill Lynch. Please go ahead.

Good morning guys.

Good morning, Michel.

If I am not mistaken, typically when you provide your outlook you also talk about revenue. You didn't do that this time. Can you give us a sense of what's embedded in your EPS outlook?

You are mistaken; we've never given the revenue guidance precisely as we look out over the future --

We've sometimes given some color commentary on the U.S. market, because of the relative uncertainty we deliberately decided not to provide revenue guidance.

For the U.S. part, correct.

Okay. And then can we go over kind of how the quarter trended, you know, month to month? I think you've talked about that also sometimes on the calls?

I think Bill gave that in his presentation but --

It's in the written remarks; I certainly don't mind repeating it.

I am sorry, I might have missed it, I have to jump off.

Commercial, it was flat in October, down 3% in November, down 2% in December.

Okay, all right, sorry about that. And then, I was happy to hear -- and maybe I missed this also, but in the UK did you talk about the expected cost savings from the restructuring?

We absolutely did not. We believe that it will have a significant positive impact. We recognize we are only getting a partial year benefit in 2007 because the actions will be taken mostly during the first quarter, perhaps even the later part of it. We will get a full year's benefit in 2008 and we expect to see material significant improvement in the UK.

And is it possible to quantify in dollars or in some other way what kind -- how we should think about that, because the UK, if I am not mistaken, is the most important country in your International segment? So it would be pretty helpful. I guess we can probably figure something out, but if you can give us a range of what you would expect to achieve on an ongoing basis, in a way, that would be very helpful.

We haven't done that and we'll look and see what we communicate here going forward.

Yeah, I think our plan would be to update the analyst community quarterly as we go forward both on the actual cost of the restructuring because that's a fairly broad range, and the savings that we expect to resolve as we achieve them.

Okay, great, thanks, I'll get back in the queue.

Great, thanks.

Next from the line of [T. C. Roublehead] with Bank of America Securities. Please go ahead.

Great, thank you, good morning guys.

Good morning.

Good morning.

Just two quick questions. One, can you quantify how much of the International revenues came from your increased share ownership -- you know, the Sony purchase of Temp Staff-Kelly?

The answer there would be zero.

And again to -- again, just refresh your memory on the accounting, we own 4.9% of Temp Staff-Kelly. We own 49%, it is not consolidated, we are not picking up any of the revenue, we're picking up 49% of the earnings and I'll just say that it was an immaterial amount.

Okay, perfect. And then, Carl, can you give us -- just refresh us in terms of kind of your history with the industry and your knowledge here? I understand your commentary around a pause economically as you put that stable payroll data, even though the temp data has gotten a little soft recently. But if you go back in to the last mid-cycle slowdown, the temp data never went negative in terms of kind of year-on-year changes. Can you kind of -- can you explain that or provide some commentary around that? I mean, I know we're looking a little bit apples and oranges here as the industry certainly matured a bunch over the last 10 years, but I am just trying to reconcile the stable payroll data with the downturn on the temp side.

First part of your question, I still think of myself as the new guy in the industry compared to our chairman. But I've been in the industry now, to my amazement almost 13 years long, relatively long presence. I was not here during -- particularly conscious of macro sales trends in the prior calls. As we've gone back and looked at, it may or may not have gone negative, I can't tell you about it, but I don't view a minus 0.2% as -- you know, I just view all that as noise.

I've never seen -- I don't have a whole lot of confidence in the month-to-month accuracy of the BLS numbers. I have a lot more confidence in the post corrected numbers long after it. So, I don't view the absolute range of a negative number that we've had here as particularly different and I concur with all of your comments, the industry is dramatically different.

You know, in 1994-1995 commercial staffing was 60% of the business, today it is 25% of the -- 25 to 40% depending what you're including in there, the business in the U.S., so a very different industry today.

Okay, great. Thanks for the color, I appreciate it.

Thanks.

Our next question is from the line of Leone Young with Citigroup. Please go ahead.

Hi Leone.

Hi, thank you, good morning. I understand without revenue growth that it's hard to continue to get operating leverage, but you obviously have very good operating performance in Commercial in the fourth quarter. Should that at least be sustainable or is there anything you can think of in there that was, say, unusual or unsustainable?

If it was unsustainable we wouldn't be able to -- if much of it wasn't sustainable we wouldn't be able to give you guidance for next year. That shows very strong year-over-year growth in earnings, so --

Right, that's where it's really driven from then, great.

Next we go to the line of Chris Hussey with Goldman Sachs. Please go ahead.

Hi, it's actually David Feinberg for Chris.

Hey David, how are you?

Good, yourself?

Doing quite well, thank you.

Good, two questions. In terms of the weakness in the PTSA segment, I heard you call out -- the auto business in the U.S., two questions there. One, was there any other areas of particular weakness, and due to the, you know, the overall state of the auto industry, is there any restructuring that you may or may not need in the coming year, oops.

I hope that was your phone.

It was, it was --

Good. The -- what we said in the -- what I said in the comments on the fourth quarter was that all of our technical businesses, were negative in revenue, that was IT and -- includes IT and engineering. So that sector seems to be having difficulty here in the U.S.

Our automotive business is very tight, particular offices to particular facilities and customers, you're not looking at generic offices sitting out there. So no, at the moment we're not anticipating any restructuring in the automotive segment.

Okay, and then I know this might be a little premature, but we're about three weeks into the quarter, any trends that are starting to appear that you -- you're either surprised by or not surprised by?

I am unprepared to talk about the first quarter at this moment. It's -- with the holidays and so on, you have to get much deeper in the February before you have a good sense for how things are really breaking, but I do admire the consistent attempts to pull that information.

I'll -- can't harm me for trying, all right thanks.

Not at all.

We'll go to the line of Jeremy Davis with Credit Suisse, please go ahead.

Hi Davis.

Good morning guys. Just looking for any additional color you can offer on the recent changes you've made to your portfolio of businesses, you've got ridden of the staff leasing business, which was a lower margin business and you made a comment early on in your comments about potentially looking at other higher end professional staffing opportunities and then you highlighted your recent Ayers acquisition. Just wondering what areas within professional staffing might be appealing to you.

We have been stating in the conferences that we've participated in for two or three years that we are -- we've always been interested both in HR professionals as a staffing area of interest and that we've been interested in marketing or creative professionals as an area of interest, and we've stated that for a good bit of time, and we're still interested in those areas.

Okay, nothing new on that front then?

Nothing new on that front.

Okay, thank you guys.

And we have a follow-up from Michel Morin, please go ahead.

Hi Michel.

Hi there, thanks. I think that you mentioned in your prepared remarks that Europe, ex-UK was up 19%.

Correct.

I was hoping you might be able to give us a bit of color there in terms of where you're seeing the strength in particular, if there was any specific things that catch your -- that should catch our attention there?

You know, our professional technical businesses continue to grow very well inside Europe. The growth across geography -- again our presence in Europe is not as strong as manpower or as that goes in a lot of the countries. So, I wouldn't view areas of strength or weakness as particularly indicative of what's going on in those countries. We had strong performance generally across all of continental Europe.

Okay, thank you.

Thanks Michel.

And we have follow-up from Pete Carrillo, please go ahead.

I just [inaudible] the other income category. We have it marked as interest incomes, so did it change in the past few quarters or anything else in there?

Yes, again, we renamed the line to be other income, because we started including dividends from Temp Staff in the line. The bulk of it is interest income, but in the fourth quarter, the Temp Staff dividends were about 250,000.

Okay, and real quickly, Carl, the question there about the temp growth year-over-year, to take your point about this not being as bad now as it was mid-double-digit, mid-teens basically from latter half '01 to first half of '02, so it's quite different than negative [technical difficulty].

I'm sorry, I missed that Pete.

The temp growth, the negative temp growth that was referenced earlier.

Right.

Was negative mid teens in the late '01 early '02 period year-over-year. So it's quite different than today, which is just down less than 1% year-over-year.

Yes, absolutely.

The BLS numbers.

Yeah, very much, I concur with that perspective. It's not -- in none of the -- we're not seeing the precursors to a recession in the numbers which we've said, it doesn't mean that any -- as Terry always reminds us, no two are alike, but at the moment, we're not seeing those precursors.

And just as a quick reminder ladies and gentlemen, [OPERATOR INSTRUCTIONS]. And from the line of Bill Weeds with Delta Management, please, go ahead.

I just want to understand the opportunity in the International section -- segment a little bit better. As we work through the next few years and you address the issues in the UK and gain scale in Europe, what is -- what are the operating metrics that you're trying to drive that business toward?

We haven't stated an end goal and I'm not certain that we know exactly where the end goal will be in terms of operating margin. We have significant improvements still in front of us. We've said that we've made significant improvement in the last year and a half, and we're very proud of it. I think there's a lot of runway yet to come. But I -- we're not -- I'm not certain that a -- that an end of the -- an end of all of the goals here, what the operating margin is going to ultimately get up to. All I know is it'll be a lot better still than we currently are.

Okay, thanks.

Thanks, Bill.

And Mr. Camden, no further questions in queue.

Thank you all.

Ladies and gentlemen, this conference is available for replay, it starts today at 2:15 p.m. eastern and will last until February 25th at midnight. You may access the replay at any time by dialing 1800-475-6701 or 320-365-3844, the access code 855-538. Those numbers again, 1800-475-6701 or 320-365-3844, the access code 855-538, that does conclude your conference for today, thank you for your participation, you may now disconnect.