Kelly Services Inc (KELYA) 2007 Q4 法說會逐字稿

Good morning, ladies and gentlemen, 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. Mr. Camden, please go ahead.

Great. Thank you, John. Good morning and welcome to Kelly Services 2007 fourth-quarter and year-end conference call. With me this morning to review our results is Mike Debs, our Acting CFO.

Let me start with a brief earnings update, recap our strategic progress, make a few comments on the current U.S. economy, and then take you through our fourth-quarter operating results by segment. Following that, Mike will provide additional financial commentary on the quarter and guidance for the first quarter of 2008. Afterwards, noting the limited visibility on the current economic client, I will talk a little bit about our perspective on how 2008 is beginning to unfold, and then we'll open the call for questions.

Let me remind you that any comments made during this call, including the Q&A, may include forward-looking statements about our expectation for future performance. Actual results could differ materially from those suggested by our comments. And please refer to our 2006 10-K for a description of the risk factors that could influence the Company's actual future performance.

Now, in addition, we also make reference to non-GAAP performance measures. Please refer to the schedules attached to our press release for information on those performance measures and the comparison to our reported financial results.

The fourth quarter capped off a good year for Kelly. Considering 2007's challenges, we did quite well. We delivered adjusted fourth-quarter earnings from continuing operations of $0.54 per share, $0.03 above the upper end of our guidance and above consensus analyst estimates. For the year, adjusted earnings increased to $1.68 per share, and revenues increased to a record $5.7 billion. Our results take on significance given the weak temporary employment growth and economic uncertainty here in the U.S., Kelly's largest market. There is no question that the slowing U.S. economy dramatically influenced our 2007 performance. However, results would have been impacted to an even greater extent had we not made significant progress in repositioning Kelly for long-term growth.

You may recall that our strategic objectives this year were to invest in more recession-resistant higher gross margin business, to diversify geographically, to accelerate the globalization of our professional and technical staffing services and improve operating margins. And we made a lot of progress on all of these initiatives. Let me briefly recap.

We divested a non-core business, Kelly Home Care; in the Americas, we closed or consolidated roughly 60 underperforming branches; we restructured our UK operations, closing 22 branches there and consolidating three headquarters locations. We expanded our global presence by entering four promising new international markets through acquisitions. We added two other countries as well, the Ukraine and Finland, by expanding relationships with existing global customers. We purchased the remaining 51% of our joint venture Kelly's Temp Staff, extending our services in the Asia-Pacific market. And to meet the demand for technically skilled professional workers, we opened more than 50 new PTSA branches this year around the world.

Other steps helped us tighten expense controls, increase accountability and boost margins. Early in 2007, in a move providing additional transparency to our financial reporting and increasing segment leadership accountability, we began allocating headquarters' costs to the appropriate business segments. We consolidated several U.S. payroll centers to streamline costs and improve efficiencies. We're doing a better job of managing suit and workers' compensation costs in the United States. And as a result of those and other measures, we improved our operating margin by 20 basis points year over year.

And finally, we took steps to broaden our investor base and increase value to our shareholders. Given the tumultuous market conditions that have put significant pressure on staffing valuations, in August, we authorized a $50 million stock repurchase plan. And to date, we have purchased approximately 1.7 million Class A shares at a cost of roughly $35 million. And we increased our quarterly dividend by 8% during the third quarter, paying now a dividend for 45 consecutive years.

Now with that summary behind us, let's talk a bit about the year's economic environment, because there's no doubt it has hit the staffing industry especially hard and continues to be our most pressing challenge. We enter 2007 expecting strong growth from the Americas and a good year internationally. By the end of the first quarter, it was clear the year was going to play out far differently. Inside the Americas, Kelly's performance, while still better than the industry in general, was weaker than it could have been largely because of the underperformance in the first half of the year by our PTSA segment. Not only did we spend time adjusting to the U.S. economic climate, we also had to address issues specific to our PTSA segment.

Adding to that, we were also facing economic and industry challenges in the UK, our second largest market. Let me remind you that despite our quickened efforts to expand globally and to diversify our business mix, the Americas and the UK comprise roughly three quarters of our total business. In the face of these challenges, we responded quickly, selling noncore assets, restructuring the branch networks in the U.S. and UK and placing even greater emphasis on high-margin, fee-based services. So I'm very proud of our efforts this year.

You know, the last time we faced similar conditions in 2001, when U.S. revenue declined by 6%, Kelly's operating earnings dropped over 80%. This time, with the decline in U.S. revenue of over 4%, we ended the year with adjusted operating earnings actually growing nearly 15%. This confirms our efforts are paying off and that our strategic plan is serving us well.

Now let's go through each of the segment's performance, beginning with Americas Commercial which is 47% of revenue. The slowing U.S. economy continued to negatively affect our sales in the fourth quarter. Americas Commercial revenue was down nearly 6%, consistent with the decline seen in both second and third quarters. And by month, the revenue shortfall was just about the same, down roughly 6% in each month of the quarter. Our combined temp to perm and direct placement fees in Commercial reported a 7% year-over-year decrease, consistent with what we've seen in the second and third quarter. Now there was a lot of volatility in placement fee performance with positive growth in November and decreases in October and December.

On the other hand, we continue to post improvements in our gross profit rate. This is our seventh consecutive quarter of an increase in year-over-year gross profit rate. And this quarter was helped by our ability to carefully manage workers' compensation claims. The gross profit rate during the quarter increased to 16.1% from 15.9% last year and a 40 basis point improvement over third quarter.

Excluding the branch restructuring charge, we maintained good expense control, reducing spending by over 2% compared to last year. Americas Commercial fourth-quarter expenses as a percentage of gross profit was the most favorable quarter during the year. Year-over-year operating earnings, excluding our branch consolidation in the Americas Commercial, were down about 11%, a significant improvement from the results of the third quarter.

Before leaving Americas Commercial, let me update you quickly on our branch restructuring efforts. During the quarter, we incurred an additional $1.4 million to consolidate 16 additional branches. In total, we've closed 58 branches at a total cost of about $3 million. We are redirecting resources and retaining a substantial portion of the revenue from the closed branches. At the same time, we do anticipate annual cost savings of over $2 million, of which about 500,000 was realized in the fourth quarter. And this does complete our planned Americas branch consolidation program.

Moving on to the Americas PTSA, which is about 20% of Kelly revenue, revenue grew by 6% with earnings up over 15% on a year-over-year basis. We are very pleased with the significant improvement in revenue growth in the second half of 2007. After reporting two consecutive quarters of declining revenue in the first part of the year, Americas PTSA turned positive in the third quarter then posted further revenue acceleration at nearly 6% in the fourth. By month, October was up 4% and both November and December grew nearly 7%. Our Staffing Alternatives businesses were the standout performers for the quarter, posting strong revenue growth and earnings increases. Then followed by our Professional businesses posting solid results as well. And while our Technical businesses are still underperforming our expectations, they are continuing to show improvement.

Taking a closer look, Staffing Alternatives, which makes up 20% of Americas PTSA, this group posted its second consecutive quarter of revenue growth in excess of 25%, a nice improvement from the 13% growth seen in the first half of the year. Earnings were also nicely positive for the second consecutive quarter, a significant recovery after being down 40% during the first half of 2007. Double-digit revenue and earnings increases were delivered by our three largest Staffing Alternatives businesses, Management Services, HRfirst and Vendor Management and we are very pleased to see the progress in each of these units.

Turning to Professional, which represents another 20% of Americas PTSA revenue, year-over-year revenue accelerated, growing almost 14% up from about the 9% rate in the third quarter. And further, Professional posted another quarter of solid earnings increases. During the quarter, our Healthcare business continued its outstanding performance with revenue increase in excess of 20% for the third consecutive quarter. Further, the finance and law businesses improved their year-over-year revenue growth from that of the third. CGR/seven, our creative staffing business, added about 50 basis points to the year-over-year PTSA revenue growth and yielded positive earnings contribution for the quarter.

Finally is our technical businesses, representing about 60% of PTSA revenue. Revenues in these businesses were down 4% in the quarter, and earnings were also down from last year. The revenue decline has been improving throughout the year. After declining about 10% in the first half of the year, the decline moderated to 6% in the third and improved to minus 4% in the fourth quarter.

For the entire segment, PTSA's gross profit rate improved to 19.1% in the quarter compared to 17.9% for the same period last year and a 40 basis point improvement over the third quarter. This improvement was fueled by strong fee growth including placement fee growth of over 30%, lower state unemployment costs, and the acquisition of CGR/seven.

Expense control in PTSA improved during the quarter as well, and with the PTSA gross profit rate growing faster than expenses, we are now beginning to see a nice return on our recent investments. We are very pleased with earnings increasing over 15% in third quarter in our PTSA business. The majority of the individual businesses have returned to delivering solid performance in both revenue and earnings.

Now let's turn to International operations. Overall, this was another very good quarter for International. Reported revenue increased over 20%. On a constant currency basis, revenue was up 9% and fees were up nearly 50%. Earnings improved by $7 million compared to the $500,000 earned in the fourth quarter last year. We are very satisfied with the solid sales and earnings growth in International and pleased with our international development strategy. Let's take a look at the two segments in detail.

Overall, International Commercial revenue increased roughly 7% in constant currency. Sales in the UK/Ireland were down 3%, which is a little weaker than our performance last quarter. However, Russia Germany both experienced growth greater than 25%.

Let me make a few additional comments on our UK operations. In the fourth quarter, we implemented PeopleSoft, a new payroll and billing system. We expect to receive efficiencies resulting from this project in the second half of 2008. Additionally, our restructuring efforts have already begun to pay off. Our fourth-quarter cost savings from restructuring totaled more than $1 million, in line with our original estimates. However, as commercial margins continue to erode in the UK, much of our future success will be dependent upon continued progress in adding higher end, higher margin PTSA business to our mix. As I mentioned earlier, the UK is one of our largest markets with annual revenue of approximately $470 million or 8% of total Company sales.

It is worth noting that our full-year 2007 performance in the UK was better than originally expected. We cut our operating loss there by more than $3.5 million for the year, primarily due to reduced expense.

Our Asia-Pacific region saw continued growth in its commercial business of over 25%, helped by our acquisitions of Tempstaff Kelly, and P-Serve, as well as strong performances in Australia and Malaysia.

For several quarters now, we have seen good growth in fees in International Commercial. Fourth quarter was no exception with fees growing over 20%. Particularly strong fee growth was seen in continental Europe with growth of almost 65%.

International's gross profit rate was 18.2%, up 1.2% compared to the same quarter last year. This increase was being primarily driven by exceptional fee growth and increased margins in both Italy and France.

Our final segment is International PTSA. Sales in International PTSA increased 34% in constant currency. Europe PTSA sales increased 24%, with 14% of this growth attributable to organic expansion and another 10% coming from new branches. Our sales in the UK Ireland PTSA increased over 15% due to the strong growth of Kelly Financial Resources and branch expansion in our IT and outsourcing and consulting businesses.

Our Asia-Pacific region saw growth in its PTSA business of over 80%, primarily fueled by our operations in Malaysia, Japan, and Singapore. We have also seen exceptional growth in fees in International PTSA, with fees more than doubling. International PTSA's gross profit rate was 32.1%, 650 basis points better than the same quarter last year, and this improvement is being driven by the growth in perm fees.

In addition, during the quarter, we opened five new international PTSA branches and completed our acquisition of access and RPO with offices in Germany and Austria.

It is clear that much of Kelly's success in 2007 has resulted from the strong performance of our International operations, and for this, we are very pleased. Let me now turn the call over to Mike, who will cover our fourth-quarter results for the entire Company.

Thank you, Carl. For the quarter, total Company revenue totaled $1.5 billion, an increase of 4% compared to last year. That's up from the 2% growth reported in the third quarter. On a constant currency basis, revenue decreased slightly by 1/10 of 1% compared to last year. That's an improvement from the 0.6 of a point decrease in the third quarter. Our gross profit rate was 18%, an increase of 150 basis points compared to last year, primarily due to strong growth in fee-based income and lower Workers' Compensation costs.

Selling, general, and administrative expenses totaled $239 million, an increase of 10% year over year. This includes $1.4 million of restructuring costs related to our Americas operations. Excluding the restructuring costs, SG&A expenses increased by 9%. Most of the growth in SG&A expense has come from our International operations, where we continue to make strategic investments. The growth in SG&A expense was also impacted by currency rates. On a constant currency basis, excluding restructuring costs, SG&A expense grew by 5%. Excluding the restructuring costs, SG&A expense decreased as a percentage of gross profit by more than 100 basis points in the fourth quarter and by 40 basis points for the year. Corporate expenses were $22.5 million, down 2% from last year.

Earnings from operations totaled $26.5 million, an increase of 19%. Excluding the restructuring charges, earnings from operations increased by 25%. With or without restructuring charges, we were able to increase earnings from operations in a quarter when our largest segment, Americas Commercial, experienced a 6% decline in revenue.

Other income totaled just over $1 million compared to $618,000 last year. The improvement is due primarily to higher interest rates and higher average cash balances. The effective tax rate for continuing operations in the fourth quarter was 33%, which is significantly higher than the 11% rate in the prior year. As you may recall in 2006, Work Opportunity Credits were reinstated in the fourth quarter. As a result, we recognized the impact of an entire year's worth of credits in the fourth quarter.

Diluted earnings per share from continuing operations totaled $0.52 per share. Excluding the $0.02 per share of restructuring costs, our adjusted net earnings were $0.54 per share. Although adjusted net earnings from operations were up 25%, the increase in the effective tax rate led to a 4% decrease in earnings per share from continuing operations. This puts us $0.03 ahead of our guidance of $0.46 to $0.51 per share.

Turning to the balance sheet, I'll provide a few highlights. Cash remains strong, totaling $93 million at year-end. Accounts Receivable totaled $888 million and increased $50 million compared to the prior year. For the quarter, our global days sales outstanding were 55 days, an increase of one day. Debt totaled $98 million, a $29 million increase compared to 2006. Most of the increase relates to euro-denominated borrowings we used to fund our acquisition of AXCESS, which was completed in the fourth quarter. Also, during the fourth quarter, we refinanced $49 million of short-term [yuan]-denominated borrowings with five-year term debt.

Finally, a few comment on the Company's cash flows for the year. Net cash provided from operating activities was $73 million compared to $116 million last year. The decrease was due primarily to growth of working capital. Capital expenditures totaled $46 million in both 2006 and 2007. Our investment associated with the design and implementation of the PeopleSoft payroll and billing project accounted for a significant portion of our capital expenditures in both years. We expect 2008 capital expenditures will total approximately $45 million.

During the fourth quarter, we've repurchased approximately 1.2 million Class A shares for $22 million, bringing the total for the year to 1.7 million shares at a cost of $35 million. $15 million remain available under the $50 million share repurchase program. We also used approximately $48 million to fund the five acquisitions we completed during 2007.

As highlighted in press release, our guidance for the first quarter of 2008 is that diluted earnings per share will range from $0.19 to $0.23 per share. That compares to $0.14 per share from continuing operations in 2007. When we exclude the UK restructuring charges, we actually earned $0.21 per share in the first quarter of 2007. I want to remind you that the first quarter is typically our slower revenue quarter. As a result, there is less leverage of our fixed cost base. We experienced seasonally lower operating margins and our earnings are much more sensitive to changes in revenue growth patterns. Our guidance assumes that a revenue growth will be similar to the 4% growth we experienced in the fourth quarter of 2007. As a result of the stock buyback and additional borrowings to fund acquisitions, we expect that net other income will be very low in the first quarter compared to $673,000 last year. We also expect to have a lower average share count as a result of the stock buyback. We exited the year with approximately 35.1 million shares outstanding.

The first-quarter effective tax rate will be approximately 45% compared to 53% in 2007. Again, excluding the UK restructuring charge, the effective tax rate was 43% in 2007. The first-quarter effective tax rate is typically high as a result of nondeductible losses outside of the U.S. We do not expect the full-year effective tax rate to vary significantly from the 35.5% rate in 2007.

At this point, we have decided not to provide full-year guidance. As you all know, the U.S. economy continues to have a significant impact on our operations and as Carl noted earlier, changes in the U.S. economic environment in '07 have left us uncertain as to how the U.S. temp job market will perform in 2008. I'll now turn it back over to Carl, who will talk more about our expectations for 2008.

Thanks, Mike. Predicting the economic future has challenged just about everybody this year, so I will weigh in anyway and give you a read on what we see unfolding over the next few months. We still believe we are undergoing a lengthy mid-cycle slowdown here in the U.S., but obviously, in many ways we do seem to be teetering on the edge of a genuine recession. Fears are mounting and economists have certainly gotten a lot more cautious in recent weeks. And we all have noted the fallout from sub-prime lending, rising oil prices and concern about inflation. All of them have been identified and could act as tipping points, further delaying economic reacceleration. And we could surely see companies put the brakes on current hiring activity if these conditions or fears persist.

For those of you who follow the staffing industry, the U.S. market has certainly been perplexing and frustrating. To illustrate, in 2007, we saw a divergence in job creation in the U.S. labor markets. Non-farm payroll growth continued, creating over 1.3 million jobs during the quarter. However, during the same period, temporary employment fell, and as a result, the U.S. temporary employment penetration rate dropped for much of the year. Then, just at the same time that talk of recession began to increase, temporary employment actually began a slight upward tick in the past couple of months. Since the trough in September, year-over-year percentage declines are lessening, albeit very slightly and we hope that this slow, improving trend is going to continue.

Demand is also very strong and accelerating for higher skilled temporary workers, and the professional and technical components of our industry are doing well. In this environment, employment opportunities for those with a college degree are exceptionally good. Hiring continues across the vast majority of disciplines, including education, healthcare, finance and law, just to name a few.

Netting it all out, we do recognize the real possibility of a recession, but we continue to believe that demand for temporary employees here in the states will gradually accelerate in late 2008 as GDP improves and larger companies resume adding to their payrolls. In turn, we believe Kelly will ultimately see U.S. revenue and earnings growth pickup.

Now, around the world, the economic picture for us is more robust and that's really what's been fueling Kelly's growth. In Europe, the market for temporary staffing does seem to be on more stable ground. Further deregulation, we believe, will support new opportunities for temporary staffing. In Asia, the expansion continues. Then the need for professional and technical workers is ongoing, and acceptance of temporary workers and the flexibility they offer is growing.

At this point, our sights are remaining focused on investing and expanding in the right global markets, reducing our U.S. dependency, and gaining greater scale globally. It remains on increasing our fee-based and higher margin staffing services and continuing our improvement in operating margins. Even if the U.S. economy doesn't improve this year, those actions will help move us forward and let me note that once the U.S. economy does gain traction, we should be positioned for outsized earnings growth.

In summary, we believe that our strategic course will translate, as it did in 2007, in long-term growth opportunities and lasting value for our shareholders. I hope you will agree we accomplished a lot in 2007 and you should count on us to keep up the momentum as we enter 2008. This ends our formal comments.

Mike and I will now be happy to answer your questions. To allow us 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 have additional questions, we will try to return to you later in the call. John, the call can now be open for questions.

(OPERATOR INSTRUCTIONS). T.C. Robillard, Banc of America.

I just wanted to talk a little bit about the cost savings that you are going to expect from the Americas restructuring. Now that it looks like you guys have completed that, can we expect that cost savings to be linear? I know you said I believe it was about 500,000 kind of that you got in the fourth quarter. Can we expect that to have a linear progression to kind of that annual $2 million level as we go through '08? Or will it be a little front-end loaded, back-end loaded? Just trying to get some granularity there.

It will be fairly linear. Nothing is ever perfect. But it will be pretty close.

Okay, and then just following up on that, will you -- will '08 have a full kind of $2 million in cost savings in the Americas Commercial?

Yes, that's what we said and we expect it to be so.

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

Tobey Sommer, SunTrust.

I was wondering if you could give us some more commentary about the somewhat improvement I guess you've seen in the year-over-year declines within the technical business. And to what extent your own internal actions are helping provide that improvement or is the market helping you out? If you could give us a little more color there.

In the Technical businesses, Tobey, if you followed us, we started telling you all in the first quarter that we were underperforming the market and that we had gotten behind the curve on investment and recruiters and so on. And you have seen us now talking steadily about showing the improvement. I think that I'm not certain that the overall marketplace for Technical is improving as much as it is on the Professional sides of the business. And I believe that what we are doing is primarily the case of us catching up to where the rest of the market is as opposed to generic improvement.

Okay, thank you. And then, you mentioned that the UK business performed quite well for you. To what extent -- are you taking some share? Is the market growing at an equal rate to the growth rate that you achieved in the quarter? Or is Kelly perhaps exceeding the market there?

Yes, at minus 3%, I doubt we are exceeding the market in the UK/Ireland side. I think what you see from the savings is a better handle on expenses. And if you noted that while we declined 3% in the UK/Ireland, overall, we improved 15% on the Professional, Technical side. So what you're really seeing in Kelly's case is a repositioning of the business mix away from some of the lower-end parts of the commercial business and pretty successfully moving into the upper end parts of the Professional and Technical side.

I'm sorry. You're right, Carl. I was referring to the Professional and Technical side within the UK, where you did have good growth.

Sorry. On the Professional and Technical side, I don't -- we are too small still to be having a major impact on share. In this case, I view it as more a result of our opening new offices and with a renewed focus on it, not particularly it signaling a strong level of growth in the UK market.

Thank you very much for the color.

Michel Morin, Merrill Lynch.

Good morning. Two quick ones. First, gross margins were fairly impressive; I think it's the highest gross margin rate since 1999. So I was wondering if you can give us a bit more color. I think you mentioned perm fees and workers' comp. Specifically as we think about 2008, what kind of expectations would you have there, specifically on those two items?

And then secondly, in terms of the country results, I noted a bit of a deceleration in Mexico. And also, if I look at the year-on-year numbers in Norway, just wondering what kind of dynamics you're seeing in those two markets. Thank you.

Starting with the gross profit side, I'm hoping that if you see a pickup in the U.S. in general, that we would begin at some point to see an improvement in both the temp to perm and direct hire side on the Americas Commercial. Don't expect any particular deceleration in perm placement fees in Americas PTSA. That's doing fine. And there was nothing that would indicate any deceleration on the perm placement activities outside of the -- you know, in the International segments.

In terms of workers' compensation, we're not seeing any particular decrease in experience. Claims aren't increasing. Things that you would typically look for, by the way, signaling that a recession is coming, aren't happening. In terms of the workers' compensation type of activity, you are not seeing an acceleration in claims per thousand FTEs and so on. That's not taking place. A chunk of our workers' compensation improvement was from better mix, better experience. A chunk of it was from lower cost estimates for past claims. For sure, we think the current experiences will continue and improve, and how past claims play out is always more uncertain, but we're not expecting any dramatic decline in that area.

In terms of Mexico, we have seen a spreading of the slowing of activity, the decline of the U.S. economy affecting the Americas in general. The 6% decline that we've seen in constant currency in Mexico, that giving about the same level of decline that we've seen in the commercial business inside the United States.

And I have to tell you, to be honest, I don't have any particular answer for what's taking place in Norway, although on a constant currency basis, the sales were still up in Norway, 16.5%; and for the year, people are handing me pages here for the year, it's 26%. Why the deceleration, I'm not particularly certain.

Okay. And then sorry, just going back on the gross margin part of the question, what about state unemployment insurance? Have you received kind of the new rates for this year? I'm assuming you have already at this point. Are you seeing a tick-up in the rates there?

No.

We haven't received all of the rates yet, but what we're seeing is we would expect unemployment insurance to continue to come down in '08.

Really?

From what we've seen in 2007. Not significantly, but we expect to continue to see some improvement.

We're not experiencing high unemployment rates in the country as a whole in spite of all the talks of recession. And Kelly in particular has not been experiencing high activity there either.

Okay, great. That's very helpful. Thank you.

Ashwin Shirvaikar, Citi.

Nice quarter. My question, however, is on guidance. Your EPS guidance, if I work backwards, seems to imply that at least for the first quarter, you have a modest step back in operating margins. Could you sort of go through the puts and takes there in some detail, if you don't mind?

We haven't commented on operating margins in the first quarter. We would expect for the year to have improved operating margins. First quarter, as Mike was talking about, is just always a very strange quarter given low volumes, impacts on tax rates and so on. So not getting into the puts and takes on operating margin in Q1 for us. We face a lot of uncertainty still inside the United States. We're not particularly forecasting any improvement, and with a weak U.S. market, we think we will still deliver good earnings with improvements coming out of International, is how we see the first quarter playing now.

Got it. And for corporate expenses in the quarter, seemed to be up. What part of that was sort of one-time because of some of the restructuring versus just a higher expense base?

Corporate expenses were down 2% for the quarter, so I'm not certain what your -- on a year-over-year basis.

Let me revisit that number. I may have something wrong then. One last question if I can sneak it in. The tax rate, if you don't mind clarifying, you had some questions about the first quarter versus the last of the year. Could you clarify what you said? I missed that.

We expect the tax rate in the first quarter to be higher than what it will be for the full year. That's usually the case for us. But we do have losses outside the U.S. that we can't deduct. Those usually occur more in the first quarter than later in the year, which drives our first quarter tax rate up. We expect it to be similar to the first quarter of the prior year, though.

Got it. Okay, thank you.

Ty Govatos, C.L. King.

Could you kind of give us a trend line on what the light industrial market has been doing in the U.S.? Is it still -- I know in the second and third quarters it was kind of stable. Is it still stable sequentially?

I do not have those numbers in front of me. There's been no significant variation that I'm aware of, and I think I would have been, in the light industrial segment inside the United States.

Could you elaborate on the 6% decline? In what areas most of it has come from? Clerical or otherwise?

Again, don't have those numbers here with me, and would see it except for government and education type of businesses, which we have been moving more into as recession resistant, would see it pretty much across the board in the commercial area. And it's always been a little more concentrated in light industrial than it has been elsewhere, but no particular changes in trend lines there.

Okay. The branches that you closed, there was an effort to consolidate revenues. Have you been successful with that, keeping a lot of the revenues of the branches that were closed?

Yes.

Than an awful lot. I appreciate it. Very nice quarter.

T.C. Robillard.

Carl, can you give us a sense, just -- I know you touched on it a little bit, but just wanted to drill down into some of the key European markets. And I'm sure you guys have been reading the same papers we've all been reading with respect to mounting fears about a major slowdown in Europe, even risk of a recession increasing there.

I know some of these markets aren't that big for you relative to kind of Kelly's revenues. But just if you could, maybe, like France, Germany, and maybe some other -- you guys definitely covered the UK well, but any other kind of Continental Europe economies that you could shed some light on, it would be helpful.

Sure. In terms of France, we always tell people on the calls that our presence in France is one, smaller than everybody else's, but also dramatically different. We have almost no presence in heavy manufacturing, tourism, a lot of the areas that comprise the big bulk of the business in France. So we should never be used as an indicator of what's taking place in France. We are in the upper end of the business in France. Heavy in Professional, Technical, heavy in upper end clerical, et cetera. And for us, France has been a -- was a good market. In the fourth quarter, it was up 6.7% in constant currency, better than our year-to-date performance with some acceleration. And we also said in the conference call that margins were increasing. Having said that, you're much better off relying on Manpower or Adecco to get a handle on what the broader French economy is doing.

In terms of Russia, we're one of the largest performers, you know, one of the largest staffing firms in Russia; and business has been solid all year, 23% for the quarter, 23% for the year, so no particular deceleration that we are seeing at all in Russia; very strong market with hiring and economic activity very, very strong.

And again, in Germany, we tend to be concentrated again more in the upper end of the business than in some of the broader industrial sides of it. And so our plus 40-something-percent in constant currency is indicative of Kelly's efforts in the Professional, Technical and upper end business, and not particularly indicative of the economy. Having said that, we are not projecting a slowdown, any significant slowdown in Professional and Technical and upper end commercial business in Europe.

That was great. Just, maybe a little bit more on France. Are you seeing a secular or a structural shift in that economy as well to more Professional and Technical or is that just a function maybe of you guys gaining share? Just wondering if there are broader themes going on there as well.

I think throughout Western Europe, the acceptance of Professional, Technical temporary employment as a legitimate form of employment and a legitimate use of that type of talent is becoming broader. So I think that you are continuing to see what's been a multi-year shift now of Professional and Technical becoming a larger component of the staffing market inside Western Europe. Having said that, the type of growth rates that we are seeing are much more indicative of Kelly's particular focus, I would believe, rather than that secular movement.

Okay. And then Mike, just real quick, you made a comment about working capital needs increased throughout '07. Can you just shed some light on what drove that and how we should be thinking about the working cap needs as we go through '08?

That was primarily just the focus of our growth in accounts receivable. I don't expect '08 to be a whole lot different from that. We will continue to grow receivables, assuming that our business goes. If we do hit a recession, that won't be an issue.

Understood. Is there a --

I'd rather have the issue.

Absolutely. Is the growth in receivables more a growth or some increase in the mix as receivables on international markets tend to be closer to 90 days rather than kind of a 30 typically 60 in the U.S.? Or is there something else going on there?

No, the entire increase, the one day increase is all a result of a mix as we grow our International business faster than our domestic business.

Okay, great. Thanks, guys.

Kevin McVeigh, Credit Suisse.

Carl, I know France is very small for you, but you did mention the margins were up. I wonder what was driving that.

For us, it's mix shift and increased perm fees.

Okay. And then just in terms of -- I know you are not giving full-year guidance. Was there anything in particular that drove that decision, more the macro uncertainty in the U.S. versus Europe overall or just what drove that decision?

We had -- primarily driven by just the decrease in visibility, but also an awareness that the majority of companies now have shifted in terms of IR communication to quarterly guidance and not providing annual guidance. But whether that's a good practice or not, it's in particular a good practice now given non-predictability of markets looking forward.

Okay. Thank you very much.

Tobey Sommer.

Just to dovetail on that last question. In terms of visibility, in the past you've talked about the visibility in the consumer products and their product launches, the communication you get from your clients, call center shift and the willingness of them to plan for classes and training further out in the future; has that visibility in those two categories contracted?

No. What we found happening over last year, as I looked at this because we told you repeatedly the customers weren't particularly shying away from their plans to use temporary staffing. What would happen, though, is that a large layoff at one particular or restructuring at a particular client was enough to offset the small but anticipated growth in several tens of clients. So that we basically hovered in the commercial space, as you know, and that minus 6% space for several quarters there. The customers' forward view is still one of needing more help; is still one of scheduling classes out about the same periods of time they always have; still talking about projects. We just note that the disruptive effect of the sporadic, large restructuring and reductions of staff that take place in some of the large companies.

Okay, thanks. And then shifting gears to the student unemployment taxes and Workers' Comp, sort of the social costs, in which states that you've already got the information for, for 2008 rates have there been increases? And in which states have there been decreases?

We don't have that information here. I can just tell you the trend has been for more decreases than increases, which is what Mike said.

Right. I guess I was just curious whether the real estate has been most problematic and where the unemployment rates have risen the most. I'm just wondering whether you're starting to see Workers' Comp rates go up, perhaps in Florida or California, just areas where the real estate boom was most pronounced.

I was talking about [pseudo] costs. In terms of Workers' Compensation costs, in general, things are -- it's all related to -- rather than preset rates, Workers' Compensation is more a function of specific claim experience. And that is not accelerating in any particular state. It continues to be low and seems to be decreasing still.

Okay. And then I think I picked up when you were asked a question about the first quarter operating margin, you opted to pass on providing additional color. Did I hear you correctly? Did you say operating margins you expect to be up for the year?

No, we always look to improve operating margins on a year-over-year basis.

Okay. And then lastly (multiple speakers) --

(multiple speakers) -- the way as we just this year operating margins improved 20 basis points for the year.

Absolutely. And then stepping back from the big picture standpoint, anything that you hold out higher hopes perhaps for any sort of health care portability or larger reforms that could really boost the staffing industry in the U.S. over the next couple of years?

I'm just thinking since we are in an election year, any sort of changes that we should be looking for out in the future that may benefit Kelly?

One, I think you're correct that the single thing that would catch the country's use of temporary staffing up to what we see in some of the other Western European countries would be fixing health care. That's probably the most important item on my political agenda. And you may or may not know, Kelly was one of the co-founders of a coalition with the Service Employees Union, the Communication Workers, as well as Intel, Wal-Mart and others to address the issue.

We do not see any quick action taking place in the United States. By quick, I mean something that would have an impact in 2009. And the election year will freeze things this year. We do believe that there is a high possibility of action being taken inside late 2009 and potentially have an impact in 2010.

Andrew Fones, UBS.

I have two questions. First, on Germany, I note that you did an acquisition there early in the quarter. I was just wondering if that had a full quarter impact? And if you can quantify that?

And then secondly, if you can distinguish between the trends you are seeing in temp and then perhaps perm and conversions for your two largest markets, the U.S. and the UK? Thanks.

You do the Germany and I'll do the --.

In terms of Germany, I believe we completed that acquisition late in November. So it had maybe one month. But remember, December is an unusual month with all of the holidays. So not much impact on the quarter.

Plus it is a fee-based business, so it wouldn't have a whole lot of impact on the top line results there.

In terms of temp to perm conversions inside first the U.S., we've said that they were down inside U.S. commercial. They're still down and they've been down about roughly the same rate for several quarters here, neither accelerating nor decelerating.

Inside the professional space that tends to be more of a placement -- professional and technical tends to be more of a placement market than it is a temp to perm market. And there we've seen very nice fees. But that's primarily from perm placement rather than from conversions.

And inside the UK, I'm not aware of any particular acceleration or deceleration in that trend.

(OPERATOR INSTRUCTIONS) Michel Morin.

Carl, I think you updated us on PeopleSoft in the UK. I was wondering if you can update us kind of on the rollout globally?

Yes, we are about halfway through putting out the modules that we had planned. We are running slightly behind schedule. That will probably slightly increase or increase the cost as we have a few more months. We are sorting all of that out still and we will put that into our 10-K.

Okay. And can you remind us of the cost savings that you are anticipating to get from this?

We haven't put that out there yet and don't know when we will do that. But for the moment, whether you achieve cost savings or not, having an up-to-date payroll system and so on is critical. There are countries -- like we said, in the UK we expect to see efficiencies. In other markets it will just be a case of replacing an outdated system with a current system.

Okay. And in terms of the actual spending on this, this year, what are those numbers?

We'll update that in the 10-K. I don't have that in front of me right now.

Okay. And then separately, there's a new line item on the balance sheet in terms of long-term debt, you mentioned the refinancing in Japan. Is this just kind of an opportunity you had? Or is there a thinking that you do want to, going forward, fund this business with more long-term capital? And perhaps continue with buybacks and show more willingness to take on financial leverage?

We've indicated in past conference calls that we were not debt adverse, that we were willing to employ more leverage on the balance sheet. You've begun to see some activities there. We will do it only where it makes sense. But also the opportunity in Japan was a particularly good opportunity for us and took advantage of that.

Okay. And then just finally, M&A, I think there were five deals done last year. What is the pipeline looking for '08? Is your appetite still there considering the macroenvironment?

I won't comment on the appetite, but I expect that '08 will have a fair amount of activity in it, as did '07.

Kevin McVeigh.

Carl, could you just clarify what the organic growth in the fourth quarter was? And in terms of the first quarter, is that 4%, is that organic? Or does that include any benefit from the acquisitions?

There is a continuing stream of benefit from acquisitions that's in there. No, we have not separated out what would be the equivalent of the same branch or same-store sales year-over-year, so don't have that forecasting type of number at my fingertips.

We have looked at whether or not the acquisitions have had a significant impact on our growth rate, and it did not.

Ashwin Shirvaikar.

Hi, Carl. I just wanted to go back to the buyback question. [I still] understand -- what's your appetite for a continued buyback, especially given it's sort of a little vexing for Kelly because of its ownership structure. You already -- you had 5 million shares out then you bought back 1.7 million.

We still have authority to exercise on the -- we still have authority yet to run out on the buyback program. I expect that we will use that if market conditions don't change. I think that given the stock price below book value we will be active participants.

Whether we will go back to the Board for more authority, will, post that, will depend upon both where the stock price is, its valuation as well as our view on the macroeconomy at that time.

Okay. But this is all going to be open market purchase?

Correct.

And Mr. Camden, there are no further questions in queue.

Thank you all. And look forward to talking with you next quarter.

Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation. You may now disconnect.