Kelly Services Inc (KELYA) 2008 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to Kelly Services first-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 the 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. Please go ahead, sir.

Thank you, John. Good morning and welcome to Kelly Services 2008 first-quarter conference call. Mike Debs, our acting CFO, is with me this morning to review our results.

I will start with a few brief comments on the current economic climate before updating you on our earnings. Then we'll take a look at where we are on implementing our strategic plan and then go on through our first-quarter operating results by segment. Following that, Mike will provide the additional financial commentary as well as guidance for the second quarter. Afterwards, I'll update you on our 2008 outlook and then we'll open the call for questions.

Before we start, let me remind you that any comments made during this call including the Q&A may include forward-looking statements about our expectations for future performance. Actual results could differ materially from those suggested by our comments. Please refer to our 2017 10-K for a description of the risk factors that could influence the Company's actual future performance.

In addition, we will 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.

As we all know, the first quarter has been quite tumultuous. Every day brought conflicting opinions as to whether the United States was entering a recession in the midst of an extended decline or maybe exiting the shallow downturn. This economic uncertainty fueled by shaky credit markets, rising oil prices, stagnant employment, a growing deficit, and assorted other problems is taking a toll on nearly every industry including staffing. Add to that for our business in particular, Easter fell early resulting in fewer contributing work days.

The employment picture has failed to show any signs of improvement during the quarter. The weaker than expected demand for staffing particularly in our Americas Commercial segment where we have yet to see any inflection point, upward or downward, has only compounded the pressure. And as you already know, the first quarter is typically our slowest yielding lower margins and less leverage of are fixed cost.

And yet despite all of these influencing factors, are earnings for the first quarter were $0.23 per share at the upper end of the $0.19 to $0.23 range we had forecast and $0.01 over consensus estimates. This compares to the $0.21 we earned in the first quarter of 2007 excluding restructuring charges.

We attribute much of our performance to our successful strategy to become more geographically diverse, increase our fee-based businesses, improve our margins, accelerate growth in Professional and Technical staffing, expand our outsourcing and consulting services, and effectively control costs including better management of workers' compensation.

During the first quarter, we completed our organizational shift to newly defined geographic regions, the Americas, EMEA and APAC, and today we begin the practice of reporting our financial results by Commercial and Professional and Technical within each of those three regions. Our Staffing Alternatives businesses are now reorganized globally under our Outsourcing and Consulting Group and will be reported accordingly. These seven segments better define our business focus and support our strategy to become a truly global company.

In the last few years, our Professional and Technical business in both the EMEA and APAC regions has grown significantly becoming solid contributors to the profitability of the company. They are also areas in which we are making considerable strategic investments. As such going forward, we will examine, measure, and report their performance individually. We believe this expanded reporting will also enhance leadership accountability in each segment and provide greater transparency and richer detail to our shareholders.

With that in mind, let's move on now to talk about our first-quarter performance for each of our business segments. I will begin with Americas Commercial which is roughly 46% of our revenue. In the first quarter, the Bureau of Labor Statistics showed increasing job losses in both nonfarm and temporary employment. The job losses as well as the slowing U.S. economy continued to affect our business.

Americas Commercial reported revenue decline over 6% in the first quarter. When adjusted for the Easter holiday week which fell in the first quarter this year compared to the second quarter last year, the adjusted revenue decline was less than 6%. And this is about the same decline experienced in each of the prior three quarters.

By month during the quarter, the revenue shortfall was down 6% in January, 5% in February and down roughly 5% when adjusted for the Easter holiday in March.

Our combined temp to perm and direct placement fees reported a 9% year-over-year decrease for the quarter, somewhat slower than the 7% decline that we saw in the second half of 2007. By month in the quarter January was down 7%, February was down 20%, and March was down 1%. We expect growth in placement fees on aggregate and the second quarter to be about the same as in the first.

On the other hand, we continued to post improvements in our gross profit rate. This trend which we began in the second quarter of 2006 continued throughout 2007 and into the first quarter of 2008. In fact, this is our eighth consecutive quarter of an increasing year-over-year GP rate. This quarter was helped by careful management of workers' compensation claims as well as by lower unemployment cost. The GAAP rate during the quarter increased to 16.4% from 15.9% last year.

We also remain extremely focused on controlling costs in this particular segment given the current state of the U.S. economy and its overall impact on total company performance. And for the quarter, expenses were down compared to last year. Netting it all up, year-over-year operating earnings for Americas Commercial were down about 4% against the 6% revenue decline.

Moving onto Americas Professional and Technical which is about 17% of company revenue, revenue grew 2% with earnings up 4% on a year-over-year basis. We are very pleased with the improvement in revenue growth. After reporting declining revenue in the first three quarters of 2007, Americas PT turned positive in the fourth quarter and posted further growth to 2% in the first quarter of 2008. Adjusting for the Easter holiday, revenue growth was up about 3% and by month January was up 2%, February up 3% and March holiday adjusted also up 3%.

Taking a closer look, the Professional businesses which represents about 25% of Americas PT revenue continued the solid revenue growth seen in 2007 turning in 10% year-over-year revenue growth in the quarter. Further, Professional posted a slight improvement in earnings. During the quarter, our healthcare and finance businesses reported nice revenue growth and earnings increases but offsetting these successes was our law business which had both revenue and earnings decreases as several projects were completed.

And CGR/seven, our creative staffing business, which adds about 70 basis points to the year-over-year PT revenue growth also yielded positive earnings contribution for the quarter. As a note, the acquisition of the CGR/seven which closed in April 2007 will anniversary in the second quarter.

Our Technical businesses represent about 75% of Americas PT revenue. And while revenues in these businesses were flat in the quarter, earnings did increase. On a year-over-year revenue performance -- our year-over-year revenue performance which was negative during each quarter in 2007 has been steadily improving and we expect this trend to continue for the remainder of 2008.

During the first quarter, both our engineering and science businesses posted strong revenue and earnings growth, our IT business revenue performance continues to improve yet is still short of our expectations. For the entire Americas PT segment, the gross profit rate improved to 18.2% in the quarter compared to 17.7% for the same period last year, a 50 basis point improvement. This improvement was fueled by continued fee growth, lower state unemployment costs and the acquisition of CGR/seven.

Expenses continue to be managed well during the quarter, increasing at about the same rate as gross profit. We're pleased with the improvement we are seeing in Americas Professional and Technical businesses especially in light of the economic challenges.

Let's turn now to our operations outside of the Americas, beginning with EMEA which comprises roughly 23% of our revenue. EMEA Commercial reported revenue increased over 8% in the first quarter. On a constant currency basis and adjusted for the shift in the Easter holiday, revenue was essentially flat. By month during the quarter, revenue on a constant greasy basis and holiday adjusted was up 1% in January, up 2% in February, and up about 1% in March.

Revenue and the UK was down 13% in the quarter, however, we continue to see strong sales performance in Russia which was up almost 30%. The French market is also trending above last year with year-over-year revenue growth up about 6%.

Reported fee income was up 20% year-over-year or 10% in constant currency. By month in the quarter, January was up 14%, February up 16%, and March up only 1% as the timing of the Easter holiday caused many of our customers to delay employee start dates into April. The GAAP rate during the quarter increased to 17.3% from 16.5% last year primarily due to higher fee income.

Expenses increased 2.4% in constant currency, primarily the result of additional investments in the new Commercial EMEA branches we opened last year as well as costs associated with the opening of three new commercial branches in France, Russia and Hungary during the first quarter of 2008. EMEA Commercial reported an operating loss of $1.6 million for the quarter. This is an improvement of approximately $250,000 compared to the prior year excluding UK restructuring charges.

EMEA Professional and Technical which is about 3% of total company revenue grew roughly 21%. The gross profit rate in this segment improved to 29.8% from 25.7% for the same period last year. This improvement is from strong fee growth of 68%. We saw double-digit growth in fees in numerous countries within EMEA; additionally we saw the positive comparisons from our acquisitions of Talents in the Czech Republic and Poland in the second quarter last year.

Expenses increased 22% in EMEA primarily as the result of the Talents acquisition and 12 branch openings made during the second through fourth quarters last year. And in addition during the first quarter, we opened another financial resources branch in Hungary. Overall, we were able to grew earnings more than threefold in the EMEA Professional and Technical segment during the quarter.

Moving onto our APAC region which currently comprises 7% of total company sales. Commercial revenue in APAC grew nearly 40%. On a constant currency basis, revenue increased just over 23%. Earnings were essentially breakeven for the quarter compared to earnings of $676,000 in the first quarter of 2007.

Professional and Technical revenue for the first quarter in APAC was $8.5 million growing 85% over the year-over-year and on a constant currency basis, revenue increased by roughly 63%. Earnings from operations for APAC PT were about flat with the prior year. APAC while small remains one of our fastest-growing segments. We are beginning to see very nice top-line growth there on both our Commercial and PT businesses and we will continue to invest heavily in this high-growth segment. We believe our investments in this region will pay off in the long term. The Asian economies remained relatively strong and the demand for both Commercial and Professional Technical talent continues to increase.

This is particularly evident in countries such as India, China, Singapore and Australia and during the quarter, we opened three new Commercial branches and one new Professional Technical branch in New Zealand as well as a new Commercial branch in China.

Our final segment is our Outsourcing and Consulting Group representing 4% of total Company revenue. OCG revenue increased over 45% in the first quarter compared to the same period last year. The Americas, EMEA and APAC all were solid contributors to this revenue growth. Year-over-year earnings more than triple during the quarter. The Americas was the largest contributor to this earnings performance as we continued to realize the benefits of our investments. OCG Americas revenue was up 31%, earnings up 175%. The strongest contributors were HRfirst, Kelly Vendor Management and our management services unit all had very strong revenue and earnings growth for the quarter.

EMEA and APAC OCG while showing exceptional top-line growth had their earnings negatively impacted by the accelerated investments in both regions to build out implementation and operations infrastructure in front of anticipated revenue from new client wins. This was expected and we do expect improved earnings in these two regions in the second half of the year.

For all of OCG, the gross profit rate improved to 31% in the quarter compared to 25.3% for the same period last year. This was fueled by improved margins in our RPO unit coupled with revenue growth in our fee-based business units such as vendor management. We are very pleased with OCG's performance this quarter and we expect further improvement as we make additional investments in this fast-growing segment.

Now I'll turn the call over to Mike who will cover our quarterly results for the entire Company.

Thank you, Carl, and that morning. Before I get into the details, you may recall that we sold our Kelly Home Care unit in the first quarter of 2007. We also recorded a restructuring charge in the UK of $2.6 million or $0.07 per share. All of the comparisons referenced this morning are from continuing operations excluding the restructuring charge.

For the quarter, total Company revenue totaled $1.4 billion, an increase of 3% compared to last year. That is down slightly from the 4% growth reported in the fourth quarter. As Carl mentioned, Easter fell in the first quarter this year and in the second quarter in 2007 which impacted revenue growth by slightly less than 1%. On a constant currency basis, revenue decreased by 1% compared to last year. That is also down slightly from the fourth quarter when revenue was essentially flat on a constant currency basis.

Our gross profit rate was 18%, an increase of 100 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 $237 million, an increase of 10% year-over-year. Most of the growth in SG&A expense has come from our EMEA, APAC and OCG segments where we continue to make strategic investments. SG&A expense decreased by 4% in our Americas Commercial segment. The growth in SG&A expense was also impacted by currency rates. On a constant current basis, SG&A expense grew by 5%.

Earnings from operations totaled $12.9 million and were down slightly compared to last year. We were pleased with our ability to hold earnings from operations essentially flat in the quarter when our largest segment, Americas Commercial, experienced a 6% decline in revenue. Other expenses totaled $51,000 compared to income of $673,000 last year. The decrease is due primarily to increased debt and lower average cash balances.

The effective tax rate in the first quarter was 38% which is an improvement from the 42.8% rate in the prior year. The majority of the improvement was related to foreign tax credits recognized in the first quarter of '08. Diluted earnings per share from continuing operations totaled $0.23 per share compared to an adjusted $0.21 in 2007.

Turning to the balance sheet, I'll provide a few highlights, cash remained strong totaling $88 million; accounts receivable totaled $931 million, and increased approximately $100 million compared to the prior year. Our receivables continued to increase faster than sales due to the significant growth in our vendor management business. Under U.S. GAAP, vendor management service billings are included -- are not included in revenue but are included in our accounts receivable.

For the quarter, our global days sales outstanding were 52 days, a small increase of one day compared to the first quarter of 2007. That totaled $103 million, up slightly compared to $98 million at year end; all of the increase is due to exchange rates.

Finally a few comments on the Company's cash flows for the quarter. Net cash provided by operating activities was $19.3 million compared to $14 million last year. Capital expenditures totaled $6.4 million compared to $8.5 million in 2007. We expect '08 capital expenditures will total approximately $45 million. And during the first quarter, we repurchased approximately 400,000 Class A shares for $8 million. We have repurchased 2.1 million shares at a cost of $43 million since the repurchase program was announced in the third quarter of 2007.

Turning to our guidance, as highlighted in the press release, our guidance for the second quarter of '08 is that diluted earnings per share will range from $0.37 to $0.41 per share. That compares to reported earnings of $0.41 per share from continuing operations in 2007. Let me point out that the second quarter of '07 included a UK restructuring charge of $0.07 per share and a benefit of $0.07 per share from French payroll tax credits.

Our guidance assumes revenue growth of 5% -- 5% to 6% year-over-year. Excluding the effect of the Easter shift, we expect Americas Commercial to continue at its current negative growth rate of approximately 6%. We expect that on an overall basis, the remainder of our business segments will experience a modest increase in the growth rate. The second quarter effective tax rate will be approximately 37%. We do not expect the full year effective tax rate to vary significantly from the 35.5% rate in 2007.

I will now turn it back over to Carl who will talk more about our expectations for 2008.

Thank you, Mike. Let's wrap by talking about our outlook for the remainder of 2008. When we last talked to you all in January, we acknowledged then that predicting the economic future was akin to reading tea leaves and it still is. There is no historic precedent for what is happening and that is what makes this time so perplexing. GDP growth was about flat in the fourth quarter, U.S. employment in the first quarter is down and temporary employment penetration is still dropping.

But on the other hand, when you look at college graduates and other degreed professionals, there is a very low 2.1% unemployment rate. In January, I said U.S. appeared to be teetering on the edge of recession. Many economists now believe we are in one. But you know at some point the semantics of that argument become meaningless. You can call it what you want but the important question today is not whether we're in a recession but rather do we anticipate a sharp downturn in the near-term or do we see any signs of an upturn on the horizon. And interestingly, the answer to both questions is no.

Over the past fifteen months or so, we've learned that we cannot predict the duration or severity of this current economic downturn and we can't control the economy but we can control our own actions. And what we can say for certain is that opportunities are still out there and how we go after them will determine our future success.

We anticipate a shortage of professional and technical workers in North America, Western Europe and Japan for at least the next decade. Kelly's focus will be on helping companies meet that need through expanded professional and technical staffing and through outsourcing and consulting services. We also continue to build new customer relationships in more recession resistant sectors within the U.S. such as government services and education. These sectors are and will continue to support growth across all staffing disciplines.

In other geographies around the world, South America and Eastern Europe for example, we see a growing demand for not only professional and technical workers but also for commercial employees. We are probably witnessing the change point in the world's labor markets one in which skill shortages will be common throughout the industrialized nations, new talent needs will emerge, professional degreed and technical workers will drive economies and global labor markets will become even more interconnected.

Today Kelly Services is a transformed Company different in almost every way from the Company that navigated past downturns. Our operations are different, our structure is different and we've sharpened our strategic focus. We are strong and agile and positioned for the industry shifts we believe are coming.

While we can't say with any certainty what the remainder of 2008 will bring, we can say this, recessions or whatever we are calling this period of time do end and what is important is to be in the right place when they do and I'm confident that Kelly is prepared.

This will end our formal comments. Mike and I will now be happy to answer your questions. To allow as many callers as possible to participate, we ask that you please limit yourself to one question and a single follow-up as needed and if you have additional questions, we will certainly try to return to you later in the call.

John, the call can now be open for questions.

(OPERATOR INSTRUCTIONS) Ashwin Shirvaikar, Citigroup.

The question I have is can you talk to at least for the next quarter forward expectations by units in the new classification? (multiple speakers) is fine, just because the classification is new.

What Mike said was that we expected the U.S. to perform U.S. Commercial, Americas Commercial to perform at roughly the same pace that it has been now for about four quarters in a row, sitting between minus 5%, minus 6%. Kind of controlling for the Easter shift in there. And we expect mild improvement over the rest of the business units.

Okay, the lower workers' comp, I mean is this -- are we in the process of bottoming that out given past historical trends? That typically starts increasing in a downturn, doesn't it?

I don't know that I would -- I think we probably come pretty close to bottoming out. I'm not sure I expect it to increase significantly but we continue to seek very good news as we adjust our prior year's claims and I don't expect that to continue at that rate.

What is uncertain at the moment is there has been a lot of structural changes to workers' compensation, particularly in states like California where there was significant reform efforts. Those seem to be holding even in the midst of increased unemployment and what the states are not reporting are significant increases in claim activity, duration or severity of claims, like you've seen in past employment downturns.

Again, we'll see how it all unfolds as the year happens but there have been important legislative changes in a lot of states in this country.

Toby Sommer, SunTrust Robinson.

Thank you. I had a question I think when you were talking about the EMEA region and you gave your monthly breakdown of fee growth, the fee growth for March you said was just 1% because of people pushing back start dates. Does that imply that in April you did see those start dates occur and that perm I guess fee trends within the EMEA region remain more similar to January, February levels?

If we had seen a significant downturn, we would not have said that. But start dates have been shifted out. What we've seen in April reflects the start dates being shifted out.

And I'll ask one follow-up kind of on the first couple of questions that were asked. Regarding the kind of I guess slight improvement in growth rates that maybe you are looking at outside of U.S. Commercial in 2Q, is that only a function of the shift in the Easter holiday or is there some more fundamental improvement in demand that you might see?

You have a fair number of branch openings that we have continued to highlight through the quarters and as those branches mature, you would expect to see revenue growth in those areas. So we are not talking about a fundamental pick up in the GDP of world economies or demand for labor. But Kelly itself has been investing well in branch openings and that is reflected in our numbers.

Slightly better than the Easter shift.

Yes.

Okay, fair enough. Thank you very much. I'll get in the queue and follow-up. Thanks.

Michel Morin, Merrill Lynch.

Good morning. I was just focusing a little bit on the UK where we had seen some pretty decent results I guess in the last quarter and now a bit of a surprise to see it has fallen off. Is there room to do yet more restructuring, more cost cutting there or what specifically might have happened this quarter?

We like everyone else are evaluating our large accounts, their profitability and choosing whether to retain or not retain in addition. You do see some revenue falling off from the branches that we've closed as that anniversaries on out. But growth we're seeing in the UK for us is coming out of the Professional and Technical side. It's not coming out of the Commercial side and we'll take -- we always take a look at all operations to see whether the branch network is over built and we'll continue to do so.

Okay, great. Just focusing on the EMEA Commercial segment for a second, I think in constant currency terms, growth was 8.2. I was wondering how that compares to '07? I don't know if you are going to be providing us with some historical growth rates.

That historical information is out on the Web now.

It is, okay.

And available, and back for '07 and '06.

By quarter.

By quarter. So you will have eight months to work backwards from, Michel.

Okay, great. Thanks very much.

David Feinberg with Goldman Sachs.

Good morning. Questions regarding your U.S. perm business. You gave us some numbers around the commercial side. Can you give us a similar sense in terms of the Americas Professional Technical, what occurred in perm on a monthly basis? And also by verticals what is going on with a niche or certain verticals outperforming others?

Give me a second here to see what -- if I had it here in front of me, I would give it to you. I don't have it here in front of me, so let me find out how we get that for you.

Okay. Then in terms of -- then I will take the advantage and I'll ask a follow-up question. As it relates to your comments in Europe about a pushout and start dates from March into April, was there a similar dynamic in the Americas or are you just seeing overt general weakness as it relates to perm?

Yes, some, but not as intense.

Some pushouts but not as intense?

Right.

Great, thank you.

T.C. Robillard with Banc of America Securities.

Thank you, good morning, guys. Just a quick question on the Americas Commercial, the operating margin. You continue to see some great cost controls there. When do we start to anniversary some of the restructuring there, or is there something else going on? Because you were able to show a ten-basis point roughly year-on-year increase in your margin there, despite the decline on the revenue side.

When do we get to a deleverage point, I guess, is what I'm trying to look at? Or is this a consistent kind of culling of costs as the year unfolds and you guys are mapping that to revenues?

So first off, when do we anniversary?

The two biggest changes in our GP rate year-over-year were favorable workers' comp and unemployment taxes in Americas Commercial. Unemployment taxes will continue through this year. In terms of '09, it's hard to say what is going to happen, but I suspect we've probably bottomed out in unemployment taxes. Workers' comp, I think we will continue to see as we said earlier good performance on our current year, but I don't expect to continue to see favorable adjustments in the prior years like we've seen through the first quarter of this year.

On the expense base itself, then we anniversary the restructuring charges in Q4 --.

Three and four.

Three and four, so you will still see some year-over-year improvements from that. And we continue to look at, as you see the revenue declines, we always are looking at the cost behind those and are continuing to see what we can do to bring those costs down. You can't show year-over-year revenue declines in a segment. We've now seen this for almost 15, 16 months. If it continues on, at some point we will hit a deleveraging point, but we are battling hard to stave that off.

Okay. And then just to follow up on -- it's been talked about the last couple of questions in terms of the pushout of start dates in Europe. Have you seen some of that pick up in the first few weeks of April? Or was this more of just kind of a broader-based pushout, not necessarily a one-month pushout?

No, what we've said is that we've seen enough -- we've seen the pushout and you see then some corresponding pickup in those start dates. It was not a slowdown or a pushout of activity. It was the same level of recruiting activity. Just start dates were moved beyond Easter, which we'll understand, and you don't recognize any revenue until people have started on the job.

So is it fair to assume that you've seen a pretty healthy tickup in terms of that growth rate if we were comparing April to March?

Won't comment on the Q2 performance; just simply noting we wouldn't have said that there was a delay of start dates if we didn't see the corresponding starting in the second quarter.

Fair enough. I had to try, Carl. All right, guys, thanks so much.

(OPERATOR INSTRUCTIONS) Ashwin Shirvaikar.

The question I have is on OCG, which was a significant profit contributor, much more so than on the revenue side. And I know you did have some comments on it, but could you go through what exactly happened in the quarter and do you expect that to continue, especially as some of these businesses are I guess recession resistant the next few quarters? Do you expect the higher degree of profit contribution to sustain?

Without speaking of any specific quarter, as OCG continues to grow and gain scale, yes, we expect to see nice profit growth from the segment. We've been putting lots of investments into it. There is very significant revenue growth, as you were commenting from new account wins. There is always heavy implementation costs on a lot of those new wins, and then the profit comes following that. As we talked about in EMEA and in APAC, we've been investing heavily in front the revenue stream that will come. And we expect OCG over the next quarters to be a nice contributor to profit growth in the Company.

Okay. I guess you would have mentioned it if there was an impact, but in your VMS business any impact from [Chimes]?

There was no important impact.

All impacted in the fourth quarter last year.

Yes, what impact there was already happened in Q4.

Okay, in spite of that VMS market itself, do you see that sort of return to normal?

The VMS market never slowed down even during the Chimes debacle. That was just a hiccup and revenue from that business divested into a variety of different VMS suppliers and managers. It is a fast-growing business for us and for the industry.

Okay, thanks.

We have a follow-up from Toby Sommer.

Carl, I wanted to ask you just stepping back and thinking longer-term with the decline in value of the dollar, potential long-term valuation in this range; do you think there is an opportunity over time for the lid and other manufacturing industries and perhaps staffing demand to rebound if indeed kind of production within the U.S. and North America is more competitive on a global basis?

I always remind everybody my Ph.D. is not in economics or in labor. There is a fundamental shift taking place in manufacturing employment in the country. So while the country is maintaining a good level of manufactured goods output, we are steadily declining and we're projected to steadily decline for another decade the number of people directly employed and indirectly employed in manufacturing. That is just -- that is not going to change whether the dollar strengthens or weakens. That's kind of a systemic trend in the country.

We've shifted the type of manufacturing we do. So to the extent the lid part of the industries business is tied to manufacturing, it will face the same type of slow, steady declines that you've also seen in the --you've seen for a couple of decades in the office clerical side of the business as there's been a shift away from large numbers of secretaries and administrative assistants than more productivity and use of software.

It's going to take place and is taking place in the lid part of the business today. I think that its decline can be sped up or slowed down by what happens to exports, which is what gets reflected by the changing strength of the U.S. dollar. But on the long period of time, manufacturing-related employment in this country has been declining for a decade. It's going to continue to decline for another decade.

Thank you.

Michel Morin.

Carl, I was wondering were there any discernible trends between office clerical and light industrial in the U.S.?

They were performing about the same.

Okay. Can you remind us what has been the issue in the IT segment?

As we talked about for the -- about three quarters ago when we highlighted the underperformance there, we had large projects that finished up. We didn't have as many large projects in the pipeline, and the non-project related part of temporary -- nonproject part of the IT temporary staffing had been somewhat neglected while everybody was focused in on the project side.

So we rebalanced what the IT offices were doing. We've now had two to three quarters of nice improvement in that business, but we are still underperforming segments of the industry there.

But at some point you'll be anniversarying that, what, in the second half?

Yes.

Okay. On the legal side, you noted a little bit of weakness there this quarter. Is that also kind of projects rolling off?

Yes, for us on the legal staffing side, we have a very healthy core permanent staffing and placement business, but there is big revenue swings inside the legal staffing business based on the large projects, document reviews and so on that are underway.

If you all could generate a few more lawsuits which the investment industry seems to be capable of doing here, we might then see a pickup in that business here shortly.

We've done our part here at Merrill. And final question from me is PeopleSoft, how is the implementation going? What's the status of that right now?

We will update on the PeopleSoft implementation within the next quarter; don't have an implementation -- don't have an update for you right now.

Okay. All right, thanks.

We have a follow-up from Toby Sommer.

Thank you. I wanted to ask you a question about OCG. The gross margins were very high and showed a lot of expansion. Over time, where should we think that those margins can go and which particular segment, if there is one within that, which particular businesses would be the driver of that expansion? Thanks.

I don't have yet a long-term picture of where the GP rate ends up in OCG. It's still a relatively small business. You have individual business units that are experiencing 50% to 100% growth rates, some of which have 70%, 80% type of GP margins. You have other businesses also growing quickly that have much lower GP rates. That business need to settle out and mature before I get to a point of view of understanding where its long range GP is. It will be higher, obviously, than staffing, and it will produce and is already producing very nice operating margins and will continue to do so as it matures. Too early yet, though, to see where that is going to settle down to.

In terms of direction, though, should we be looking for expansion there from current levels?

I really can't tell you because it depends which unit grows faster and within there. And if one of the lower margin units happens to have a spectacular half of the year, it could bring down the overall GP rate and I would still cheer them on.

Sure. I guess maybe could you tell us which of the business units within that segment are the lower margin segments?

Not yet, but we might in the -- we haven't done so and I'd like to prepare comments on that if we are going to do so. But I take that in as information that we might look at doing at one of the future conferences.

Okay, thank you very much.

If I could quickly while there is a little pause here on the questions. I don't have the month-by-month breakdown, but there was placement fee growth of about 5% to 6% in the Professional Technical businesses; nice solid, single-digit growth in the Americas that you were asking for, or somebody was asking for.

Mr. Camden, no further questions in queue.

Great. Thank you all. Look forward to seeing you out and about.

Ladies and gentlemen, this conference is available for replay. It starts today at 11:30 AM Eastern time, will last for one month until May 22nd at midnight. You may access the replay at any time by dialing 800-475-6701 or 320-365-3844. The access code is 917255. (OPERATOR INSTRUCTIONS)

That does concludes your conference for today. Thank you for your participation. You may now disconnect.