Kelly Services Inc (KELYA) 2008 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to Kelly Services second 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, John, and, again, good morning and welcome to Kelly Services 2008 second quarter conference call.

Let me start by introducing Patricia Little, our newly appointed Executive Vice President and Chief Financial Officer. Patricia brings more than 20 years of corporate finance treasury planning, and analysis to Kelly coming to us from Ford Motor Company where she served most recently as General Auditor.

We are very pleased to have her on the team and glad that she is joining us this morning.

To briefly review today's agenda, I will start with a few comments on the current economic climate before updating you on our earnings. Then we'll take a look at our second quarter operating results by segment, and following that, Patricia will provide additional financial commentary.

Finally I will make a few closing comments before opening the call to your questions. Mike Debs, Senior Vice President and acting CFO for the past few months, is also here today and he will participate as needed in our Q&A.

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 and please refer to our 2007 10-K for a description of the risk factors that could influence the Company's actual future performance.

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

The second quarter was a rough one. Analyst reports and media have well-documented the economic challenges faced by our industry on the global economy. Let me highlight the aspects most relevant to Kelly Services.

Overall demand for labor in the US -- already weak -- has worsened since we last reported to you. And demand for temporary staffing is declining at an even faster rate.

June brought the sixth straight month of overall job losses and an unemployment rate of 5.5%. Since January the US economy has lost 438,000 jobs. That compares to a creation of 2.1 million jobs in 2006 and another 1.1 million in 2007. And along with the job loss, temporary employment has posted 15 consecutive months of year-over-year declines with June's drop being the highest in the cycle. And although we had hoped for relative job stability, both in and outside of the US, we are now seeing employment weaken elsewhere in the world, particularly in western Europe.

When comparing 2008 job numbers to those seen in 2001, we have seen fewer job losses and the year-over-year percentage drop in temporary jobs is holding up better. The current unemployment situation seems to be more a reflection of employers' reluctance to add new employees rather than the result of aggressive layoffs.

While manufacturing, financial services and various other industries have experienced job loss, there continues to be opportunities in other sectors like education, government, energy and engineering. And although up just a slight bit, the unemployment rate for college graduates remains very low -- at 2.3%, in fact.

For the past several months, some business leaders and economists have suggested the US economic downturn would be mild and fairly short-lived, but despite initiatives to spur growth in the national economy, this slowdown has persisted and now intensified. It seems to us that we are actually in a recession with questions only open about the length and severity. We note that we now have significantly less visibility looking forward.

As a result of the deteriorating economic conditions, our earnings for the second quarter were lower than originally expected, $0.30 per share or $0.07 below the low end of our guidance. And that compares to the $0.48 we earned in the second quarter of 2007, excluding restructuring charges.

When we set our range at the conclusion of the first quarter, we did so with two key expectations. First, that the European economies would remain strong and, second, that the US economy, while not poised for a quick recovery, wouldn't worsen significantly. Unfortunately the negative inflection became a reality and our results fell below our forecast.

Given that economic uncertainty continues to cloud the outlook for our industry, we will not provide our customary earnings guidance for the next quarter. At such time as conditions stabilize, we will consider resuming this practice.

Now let's take a look at our segment results. We will begin with America's Commercial, which is 45% of our revenue. While nonfarm job losses during the second quarter were moderate, the BLS reported an increasing rate of job losses and temporary employment in the quarter. These job losses coupled with the sluggish growth in the US economy continued to adversely affect our business.

Reported revenue in America's commercial declined 6% in the second quarter when adjusted for the Easter holiday week, which fell on the second quarter last year and then the first this year, the adjusted revenue drop was over 7%. This decline was below our expectations and worse than the 6% adjusted revenue decrease we saw in the first quarter.

Our combined temp to perm and direct placement fees reported a 4% year-over-year decrease for the quarter, better performance than the 9% decline we saw in the first. Fees in America's Commercials for last five quarters have been running in the minus 7% to 9% range. During the quarter, we continued to seek much volatility on a monthly basis with April down 2%, May up 10% and June down 16%.

We continue to see stability in our gross profit rate. For nine consecutive quarters, our gross profit rate equaled or exceeded the prior year. The gross profit rate of 15.7% in the second quarter was the same as last year. We remained focused on maintaining good expense control in our Americas Commercial segment, reducing spending through the quarter by 2% compared to last year. However, negative expense leveraged on the 6% revenue decline resulted in year-over-year operating earnings for Americas Commercial being down about 21%.

Moving on to Americas Professional and Technical which is about 16% of Company revenue, reported revenue grew by 1%; and earnings were up over 2% on a year-over-year basis. While it is the third consecutive quarter of positive reported revenue growth in Americas PT, when you adjust for the Easter holiday effect, revenue growth in the second quarter was actually about flat with last year. That was also a decline from the 3% growth we had in the first quarter.

Especially given the slowing economy we are pleased with the performance of most of our PT businesses with the notable exception of our Law and Automotive units.

With regard to Professional, which represents about a quarter of Americas PT revenue, year-over-year revenue was down 3% after increasing 9% in the first quarter. Earnings were also down compared to the same period last year and this performance was primarily driven by the decline seen in our Law business, resulting from cutbacks in hiring and less outsourcing.

On the other hand, our Finance business reported nice revenue growth and earnings increases for the quarter.

Next is our Technical businesses, representing about 75% of PT revenue. Technical revenues were up nearly 3% in the quarter, somewhat helped by the Easter comparison. Further earnings increased at a faster rate than revenue. During the second quarter, both our Engineering and Science businesses continued to post strong revenue growth and solid earnings year-over-year. And while IT is improving it is still lower than last year.

Revenue in our Automotive unit was flat compared to last year but started to significantly drop midway through the quarter.

Our combined temp to perm and direct placement fees for Professional and Technical were flat with the same quarter last year, slower than the 6% increase we saw in the first quarter. For the entire segment, the gross profit rate improved to 17.7% for the quarter compared to 17.6% for the same period last year, a 10 basis point improvement over last year and additionally our gross profit increased at about the same rate as the increase in expenses during the quarter.

In a difficult economic environment, we are pleased with a greater than 2% increase in earnings for the second quarter in our PT business. The majority of the individual businesses are delivering solid performance in both revenue and earnings.

Let's now turn to our operations outside the Americas, beginning with EMEA which comprises 27% of our revenue. EMEA commercials reported revenue increased 10% in the second quarter. On a constant currency basis, revenue was down by 1% and, even worse, when you take into account the impact of the Easter holiday.

For the remainder of my EMEA discussion, all revenue and expense results will be discussed in constant currency.

By month during the quarter, year-over-year revenue softened. April was up 1%, flat in May and down 4% in June. General economic conditions worsened during the quarter in Europe and negatively impacted our business there, especially in the UK and to a lesser extent Western Europe. Revenue in the UK was down 7% in the quarter, reflecting very tough economic and market conditions and with the exception of France which exhibited 4% growth, the rest of Western Europe plus Scandinavia was down roughly 3%.

On the other hand, in Eastern Europe, we continue to see strong sales performances with revenue growth over 33%, largely driven by our strong performance in Russia. While reported fee revenue was up 6% year-over-year, we saw slowing late in the quarter. April was up 8%, May up 10%, but June was up only 1%.

The GP rate during the quarter decreased by 100 basis points to 17.4%. As you may recall, last year, we received a credit related to a temporary change in the payroll taxes in France. That was worth 180 basis points. The remaining improvement of 80 basis points that we experienced was primarily due to the higher fee income and mix of business. Expenses increased 4% primarily the result of additional investments in new EMEA branches during the quarter.

EMEA Commercial reported an operating profit of $1.3 million for the quarter. That is a decrease of about $4.6 million compared to the same period last year. However the prior year included a $3.8 million benefit related to the payroll tax refund thus leaving us down only $800,000 in a tough environment.

EMEA Professional and Technical, which is about 3% of total Company revenue, grew 6%. Particularly strong growth was seen in France, Italy and Germany. The gross profit rate in the segment improved to 30.4% from 29% for the same period last year and this improvement is from strong fee growth. Expenses increased by 4% in EMEA again reflecting our investments in this segment.

Overall, we were able to grow earnings more than threefold in the EMEA PT segment during the quarter.

Moving on to our APAC region, which currently comprises 7% to total Company sales, Commercial revenue in APAC grew 17% year-over-year. On a constant currency basis, revenue increased roughly 7%. The gross profit rate year-over-year remained about the same for the quarter.

Earnings from Commercial operations moderately declined during the second quarter on a year-over-year basis as a result of continued investment in the region. Professional and Technical revenue for the second quarter in APAC grew up nearly 60% year-over-year. On a constant currency basis, revenue increased by roughly 42%.

The gross profit rate declined to 30.3% in the quarter from the 33.2% achieved in the same period last year. On a year-over-year basis, earnings from operations for APAC improved slightly. Despite somewhat of a softening in this region during the quarter, we continue to believe our investments in this region will pay off in the long run. The demand for Commercial and Professional Technical talent will only increase as the Asian economies strengthen.

Our final segment is our Outsourcing and Consulting Group -- OCG -- representing 4% of total Company revenue. The development of OCG continues to evolve as we had expected. And we are very pleased with its performance this quarter. OCG revenue increased nearly 60% in the second 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 were up 32% compared to the same period last year. The Americas was the largest contributor to this earnings performance as we continued to realize the benefits of our investment. The strongest contributors were [HR Furst], Kelly Vendor Management and the [AIRS] Group, our career transitioning unit.

EMEA and APAC OCG are showing nice topline growth, but as expected, earnings were adversely impacted by investments in both regions to build out implementation and operations infrastructure required from new client wins.

In addition, during the quarter we entered the United Arab Emirates with an opening of a new Kelly vendor management office in the city of Dubai. OCG's gross profit rate was 31% compared to 27.4% for the second quarter last year. This improvement once again was the result of improved margins on our RPO unit coupled with revenue growth in our fee-based businesses such as vendor management.

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

Thank you, Carl. First, I would like to say how very happy I am to join the Kelly team.

Before I get into the details, you may recall that we recorded a restructuring charge in the UK of $2.4 million or $0.07 per share in the second quarter of 2007. All of the comparisons referenced this morning are for continuing operations excluding restructuring charge.

For the quarter, total Company revenue totaled $1.5 billion, an increase of 3% compared to last year. That is consistent with a growth rate reported in the first quarter. On a constant currency basis, revenue decreased by 1% compared to last year which is also consistent with the first quarter.

But as we mentioned, Easter fell in the first quarter this year and in the second quarter last year. This shift improved our reported revenue growth by about 1 percentage point in the second quarter.

Our gross profit rate was 17.7%, an increase of 20 basis points compared to last year. The increase is primarily due to improvements in growth in our higher margin OCG business, as well as increases in fee-based income in EMEA. These increases are partially offset by the nonrecurrence of the French payroll tax benefit which added 40 basis points to our 2007 gross profit rate.

Selling, general and administrative expenses totaled $242 million, an increase of 9% year-over-year. Most of the growth in SG&A expense came from our EMEA, APAC and OCG segments where we continue to make strategic investments. SG&A expense decreased by 2% in our Americas Commercial segment.

The growth in SG&A expense was also impacted by currency rates. On a constant currency basis, SG&A expenses grew by 4%. Earnings from operations totaled $15 million and were down compared to $24.7 million last year. Other income totaled $149,000 compared to $930,000 last year. The decrease is primarily due to increased debt and lower average cash balances.

The effective tax rate in the first quarter was 30.9% which is consistent with a 30.7% rate in the prior year. This rate was lower than we had expected because of higher work opportunity credits.

Diluted earnings per share from continuing operations totaled $0.30 per share compared to an adjusted $0.48 in 2007. I will remind you that the second quarter of 2007 include $0.07 related to the French payroll tax credits.

Turning to the balance sheet, I will provide a few highlights. Cash remains strong, totaling $85 million. Accounts receivable totaled $953 million, an increase of approximately $80 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 US GAAP, Vendor Management service billings are not included in revenue, but are included in accounts receivable.

For the quarter, our global DSO was 51 days unchanged from the prior year. Debt remained relatively unchanged at $96 million, compared to $98 million at year-end.

Turning to our cash flow, net cash provided by operating activities was $41 million compared to $30 million last year. The improvement was primarily related to improved working capital driven by the timing of payroll tax payments.

As Carl discussed, as a result of the economic uncertainty that continues to impact our industry, we have decided to discontinue our quarterly guidance. So now I'll turn it back to Carl for some concluding thoughts.

Thank you, Patricia. When I talked to you all in April, I said that predicting the economic future was a bit like reading tea leaves. Unfortunately the tea leaves didn't foresee the downward inflection.

The staffing industry is well-known as a cyclical business. Trends in the demand for temporary staffing have tended to move in concert with economic growth.

During this cycle, our US Commercial business has undergone a longer duration of decelerating growth compared to the last recession in 2001. It has now lasted seven consecutive quarters. In 2001 and '02 we experienced only six consecutive quarters of year-over-year declines.

On the other hand the rate of decline was much greater in the last recession than we have seen over the duration of the current cycle. Again, there is no doubt the economy has worsened in the past three months and that difficulties experienced in the US and the UK are now being felt elsewhere.

It wouldn't be surprising if conditions continued to the difficult throughout 2008 and perhaps longer. Many economists predict only sluggish economic growth for the remainder of the year and many analysts have lowered their expectations for the entire staffing industry.

At Kelly, until we witness the same temporary job creation, our focus will be on minimizing risk for the short-term and taking steps to ensure long-term value for our shareholders. We are prudent, we are pushing ahead with geographic expansion to generate additional revenue and earnings growth.

For example, Kelly recently announced an agreement to purchase 13 branch offices and 15 on-site locations from Randstad Holdings, a transaction that establishes Kelly's presence in Portugal.

Now before we open our call to your questions, I will conclude by noting that I am personally disappointed in missing our earnings forecast for the quarter. The downward inflection we saw in the quarter was unexpected, but when I looked through it all, despite the turbulent economic headwinds, we are making excellent progress.

During the quarter we improved geographic diversity with our expansion into Portugal and Dubai. We successfully expanded our fee-based services in OCG, increasing revenue by 60%. Our Professional and Technical Business segments in all three regions increased their earnings. And in this most difficult environment our GP was up 20 basis points in the quarter.

Given the global market and economic conditions, we are going to continue to look for opportunities to reduce our cost structure and improve our cash position. Specifically, we are looking at consolidating some commercial branches in Europe, making further reductions in corporate expenses, and considering various initiatives to reduce field costs in our Americas Commercial operations.

Let me add this. While I am committed to a lower cost, we cannot cut our way out of this cycle. We must maintain an adequate infrastructure and continue to invest for the future. The simple fact remains that temporary staffing is a cyclical industry and currently the largest parts of Kelly's revenue mix are in the must cyclical parts of the industry.

This will end our formal comments. Patricia, Mike, and I will now be happy to answer your questions. John, the call can now be opened.

(Operator Instructions) Jim Janesky with Stifel Nicolaus.

A question on your US-based or Americas business. Some competitors have indicated that while the US business was still contracting, it had stabilized and in some cases expected it to stabilize as we moved into the third quarter. Do you think that that is either too optimistic of an outlook? Or is there something unique to your business mix possibly with the auto-related business that has had your business contracting more? I would just like to hear your point of view if I could.

Sure. For Kelly that would be an optimistic appraisal, the one you were citing by others. We don't see it that way. Our mix is different than other large staffing firms in the US. We are lighter. Significantly lighter in the distribution and manufacturing, industrial side of the business. We are heavier in the office clerical side of the business.

So there are going to be quarter to quarter differences in what we see in the Commercial segment versus the opposition. But I just note that there is nothing in the BLS numbers that would argue that stability has been obtained. And there is nothing yet in the Kelly numbers that would argue stability has been obtained. Hence, our comments that visibility is significantly worse now than it's been.

Okay and then as a follow-up, first couple of weeks of July, how did that trend versus what you experienced in June?

Not enough data there to make a comment, or we would have. We are in a holiday period at that point, which is always distorting what you see.

Tobey Sommer with SunTrust.

Good morning. I had a question for you about perm. I think you described the overall perm in the US PT as kind of flattish. If you were to look at monthly trends, would you have seen a progressive deterioration because some of the other monthly comparisons you gave was EMEA or I think US Commercial? It seemed like June was a particularly bad month.

Yes, in terms of PT it was one of those where there was no clear trend establish. There was a lot of volatility in the month-by-month numbers. So we didn't give a trend there. There wasn't one to be seen.

But on the perm-specific side, whether it's -- .

I'm talking specifically about the perm.

Okay. Thank you. And then I guess it's a good thing that you were rationalizing some branches over the last several quarters. But if the slowdown in demand continues, to what extent can you continue to look at branches? Or are you comfortable now that you are at a level and in terms of your footprint that you are going to stick to it?

Well, you're never comfortable. You always examine branches as things unfold and what we said when we did the last restructuring was that if the fundamentals changed in the American economy and you saw declines in profitability in the Commercial sector, we would again take a look at branches.

If we had a plan to do something about it, we would have said so. You noted that we talked about some consolidation of branches inside Europe. We didn't talk about the Americas segment, but we are always looking at the branches there.

Okay and then I will sneak in one last question and I will get back in the queue. You generated significantly better cash flow from operations in the quarter versus a year ago. Could you just comment about how the changing economic conditions and sort of a lack of visibility may impact your thoughts on cash deployment and how you are going to use both the cash flow and the cash on your balance sheet? Thanks.

I will note again that a chunk of the cash flow improvement was due to a timing of payroll taxes here in the United States. So that's -- it was a -- just a particular note there.

We have always said that we would use our cash and we would look at our cash for both continued dividend payments, looking at it for branch openings as well as acquisitions. Those kind of primary areas haven't particularly changed. You always have more caution as you approach a downturn and look to maintain healthier cash balances so that you can cope with the uncertainty.

That hasn't changed at Kelly either and we're in a period of economic uncertainty and we even more closely monitor our cash.

T.C. Robillard with Banc of America Securities.

I am just struggling here. I think you guys always give us great detail segment by segment, but what I'm still trying to get my arms around here is the revenue side actually did not look that bad for you guys in the quarter at least relative to where expectations were. If I look at that growth rate relative to what we saw in the first quarter, it was fairly similar, but the margin deterioration was pretty significant.

I am just trying to get my arms around lying you were able to see a slight operating margin or slight deterioration I guess I should say in the first quarter, but you saw significant deterioration in the second quarter? Is there something specific that we are missing there? I mean I know that things kind of fell off late in the quarter, particularly in Europe, but I am just trying to reconcile. The deleverage there seemed to be a lot more severe than what the revenue base would indicate.

Yes. I think a couple of things worth noting, again, if you listen to us talking about the deterioration first on the Americas Commercial side, we talked about that last 15, 16 months and as you begin to anniversary year-over-year comparisons, we had an expectation that while you wouldn't necessarily see growth that anniversarying of the decline that we had saying in the prior year would be reflected in the numbers. And it wasn't. We continued the same rate of deterioration.

And at some point you do cross. You do cross leveraging points and so you had a 6% revenue decline translating into a 21% profit decline in Americas.

Over on the EMEA Commercial side, which you were referencing, there was a sharpness of the decline which you reference kind of tailing off in the last part of the quarter. Again we will look at a further rationalization of the EMEA Commercial branch network with these type of results.

Okay. And then I guess the follow-on to that would be you made some comments that you are a -- you did see a growth in SG&A and EMEA and APAC (technical difficulties) branches. Can you tell us exactly where we are seeing some of that?

I know you highlighted the Portugal acquisition that will come on in the Dubai office, but are there any other areas where you are investing where you're seeing growth opportunities?

Yes. There was no particular country that was overweighted with branches of just filling in holes in the distribution network or with specific customers who had a need.

And is that something where you are thinking to pull back the reins as you are looking at the deterioration in some of your larger markets? Or is this just a function of the short-term pain for the long-term gain?

The answer is always in between those two alternatives, right? You never cut back (inaudible) 0 and you don't go full [pace] ahead at this point. We will until we see some sustained growth in temporary employment more closely monitor than we, you know, than even before how much we invest, where we invest.

But there's going to be some branch openings even as you shut down other branches is probable. And if you recall, in Europe when we shut down a portion of the UK network, we also opened a significant number of Professional and Technical branches while closing some Commercial branches.

And again, missing in all of the confusion of the numbers is the fact that I hit at the end, but when I continued to hit is that all three of the PT segments and all parts of the world were managed to improve earnings. You don't want to stop feeding your -- where you are growing earnings.

So rather than look at it geographically as you were, I would say that is a segment where you might see more investment.

Okay. Thanks for the insights, Carl. Appreciate it.

Michel Morin with Merrill Lynch.

Good morning. I just wanted to clarify Carl the numbers you gave us for Americas Commercial on the monthly trends, were those just for perm? Or was that the temp numbers April down 2, May down 10 and June down 16?

Those numbers were our perm numbers. And (multiple speakers). Go ahead.

Would you happen to have the temp numbers?

We gave -- we didn't give the temp numbers and I don't have a problem giving those. Again, nonholiday adjusted minus 6, minus 6, minus 7.

All right. And then specific to the gross profit, gross margin numbers specific to the Americas Commercial, could you elaborate a little bit on what is driving, what the puts and takes are to the gross margin specifically? Are you in terms of bill pay rate spreads, workers comp, how are those things evolving?

There were no significant changes compared to the second quarter of last year.

Okay. Great. Then if I'm not mistaken I think that you had, on the PeopleSoft implementation, you had put a few things on hold there. Could you give us a little bit of an update of where you stand there?

Yes. First I will reference you to our Q because that has a nice complete explanation of what specific deployments we are pushing off until 2010. That plan remains the same to push those off until 2010. We are still looking at the total cost of implementation.

Okay. We will look out for the Q. Then just finally, Carl, I think on the earlier question regarding July, you said it was a little bit too early and the holidays kind of distorted the data. But in Europe I don't there was too much by way of holiday and your EMEA Commercial was down significantly in June.

Have you continued to see that specific to the EMEA Commercial segment in July?

I'm prepared to comment on any of July's numbers. Kind of go against the whole notion of no guidance by the way, but in any case, two weeks of data is just insufficient at this point for us to call a trend in anywhere that we are seeing. If there had been something significantly noteworthy, we would have talked about it.

All right. I thought I would try. Thanks.

Good try.

David Feinberg with Goldman Sachs.

Get Patricia involved with a question, hopefully a housekeeping question for Patricia. CapEx in the quarter and CapEx budget for the year, as well as I didn't see any share repurchases, I just wanted to confirm that see if anything had changed there?

We do not. We didn't make share repurchases in the quarter. We remain with about $7 million available. We don't have any active plans right now and CapEx was in line with what we expected it will continue to be.

I think that was like $45 million last year?

Yes, we spent $45 million last year. We spent a little bit less year-to-date than we did last year because of the KCP project so far this year. And then given all the negative news maybe try to take a glass half full approach to this. Sometimes in a downturn there is an opportunity to take share, not so as you highlighted, Carl, that you can't cut your way out of this downturn, but maybe there are more opportunities like the grandstand acquisition in Portugal.

What are you seeing on the M&A front in terms of trying to gain share and or diversify your businesses there. Are there businesses for sale? Are there opportunities? Or is that just not the case? Are folks not willing to sell given what has happened in the marketplace?

Slightly too early in the cycle for the distress sales to hit, but if you see the downturn continuing another quarter or two, I wouldn't be surprised to see more distress sales emerge. But not yet. Kind of given the -- while it's been a long downturn, it's been a shallower downturn without the sharp inflection down that crushed a lot of firms the last time.

So I haven't seen the abundance of business closings or distress sales in the cycle that we've seen in the past.

Now, please remind me, I wasn't following this stock during the last downturn. Was Kelly [Net] acquired during '01 and would you expect to be (inaudible) if you saw those types of sales now?

We were not a net acquirer in '01 and we always look at all opportunities in front of us.

Thank you very much.

Ashwin Vas Shirvaikar with Citigroup.

As I look at sort of the topic of negative operating leverage, while it seems quite drastic quarter-over-quarter, it's not as bad as the last cycle. And trying to think about what's different this time, is it just the pace, pricing, or are there other factors?

Good question and, obviously, we are not experiencing anywhere near the operating earnings decline that we did in the last cycle. Several things are different.

First, for the industry, what's different is a more rational behavior within the industry. And, secondly, significant changes permanently in workers' compensation costs you know that the state level and again very healthy -- it's still very healthy reserves in the unemployment funds in many states.

While the unemployment rate has moved up to 5.5%, that's still a significantly lower unemployment rate that it was in the last downturn. Not causing as much hits on the [fund].

Within Kelly again we have broader geographic diversity. Broader business line diversity in the cycle as we have been working at that over the last decade than we did in the last one. As noted before you still -- you have positive results coming out of Professional, Technical, and OCG, even as this downturn is unfolding.

In addition, at Kelly in this cycle, we have already has an earlier questioner noted begun rationalizing the branch network. We responded early in the cycle to doing that and that's been a significant contributor here.

Okay. So the final question that comes, what steps can you take further to continue to take costs out, given you already had some restructuring? And should we expect (inaudible) charge?

I don't know the answer to the last question. There's nothing at the moment that would say that you should. But as we noted in my final comments in the prepared section was (inaudible) looking at a reduction in corporate expenses.

We are looking at some consolidation inside Europe and, as always, looking at overall branch expense inside the Americas. And as we talked about other regions in the Q&A section, we've talked about bringing in a bit in some sectors, some of the investment we've been doing.

Okay. Thank you.

(Operator Instructions). Toby Sommer.

Carl, I was wondering if you could comment about IT? I think you said you were doing a little bit better internally. But I was wondering if you're in a position to assess how the market is doing in addition to assessing Kelly's specific performance within that market?

I don't yet but I will soon after all the earnings announcements are out. I think what we talked about, again our IT segment is smaller than other segments that we have not representative of what is taking place nationally. If you recall two to three quarters ago, we said that we had gotten behind in the addition of some IT recruiters that we needed to add.

It was a Kelly-specific problem that we had fixed and (inaudible) improving results, but in this particular case I wouldn't view us as an indicator of what you may or may not be seeing in the IT segment in general.

Okay. Then are there specific articles with some strength and perhaps are there any that you may expect to be more resilient for noncyclical reasons over the next couple of quarters?

Yes. We -- again in prior years -- talked about part of the strategic plan mixing out in the US was to have a better investment in less cyclical parts.

Not certain anything is ever truly immune, but less cyclical parts of the economy, the US government is an important segment for us. So far I haven't seen the BLS report showing US government hiring down. Education has been an important segment for us and while not free of all cyclicalities has been doing very well in total BLS numbers.

And in particular the Petrochem industry and its engineering components especially have all been in high demand in the overall economy and have done very well for Kelly.

Thank you very much.

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

All right. Thank you, John. Thank you all for participating. Look forward to follow on conversations (inaudible). Goodbye.

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