Kelly Services Inc (KELYA) 2009 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to Kelly Services second-quarter 2009 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. Good morning and welcome to Kelly Services second-quarter conference call. Before we begin, let me review today's agenda. I will start with a few comments on current economic conditions and talk about the effect they are having on the labor market. Then I will address Kelly's earnings for the quarter as well as our performance by individual business segment. Following that, Patricia Little, our CFO, will take you through our financials and detail the actions we have taken to reduce our expenses. Many of these cost-cutting initiatives are already yielding positive results. And we will conclude this morning with a short commentary on Kelly's position relative to this economic environment, our strategic efforts to position the Company for success beyond this prolonged global recession, and then we will open the call for your questions.

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 2008 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.

Frankly not much has changed since we last reported to you. Conditions remain pretty much the same for the general economy, the labor market, and for Kelly as well. Sales remain significantly behind prior year, albeit at a stable level. The effects of the negative year-over-year sales decline are being somewhat mitigated by our considerable expense reductions. Generally speaking, gross margins are fairly stable, but we are seeing further declines in our permanent placement and temp to perm fees. Overall, we seem to be in a period of stability. We are bumping along what seems to be a bottom to this recession.

As all of you know, job losses persist. Last year more than 3.1 million jobs were lost here in the US. In the first six months of 2009, an additional 3.4 million jobs were cut. June saw the 18th consecutive month of overall job loss in the US. One positive sign can be found in those statistics. Second-quarter job losses totaled about $1.3 million, a much smaller contraction than during the first three months of 2009. It appears that the speed and depth of this decline may be moderating, but the job market is at best anemic.

With that, it's not surprising that temporary staffing has been one of the hardest hit industries. Temporary job creation was down 27% compared to the same period last year. As a percentage of the total workforce, US temporary workers now represent only 1.32%, the lowest level since late 1993.

Similar conditions persist outside of the US. Throughout the world, employment markets are contracting as jobless rates increase. The bottom line, this environment has taken its toll on our financial performance. For the second quarter, Kelly reported a loss from operations of $19.5 million excluding impairment and restructuring charges. That compares to $15 million earned in the second quarter of 2008. Still it is certain that our results would have been worse had we not taken swift, significant steps to reduce expenses. And Patricia will supply more detail about our expense control initiatives during her remarks in addition to discussing our overall earnings performance.

But let's start by reviewing the operating results by business segment, beginning with America's Commercial, which represents 46% of revenue. Reported revenue in Americas Commercial fell 28% year-over-year in the second quarter, a slight deterioration from the 25% decline in the first quarter. Intra-quarter revenue was down 29% in April, 26% in May, and 29% in June. Sequentially revenue in the second quarter was 2% lower than in the first.

As we reported last quarter, our customers seemed to be maintaining a lower level of temporary usage. On a positive note, we are not seeing significant additional staff reductions across many of our customers. At the same time, we are not seeing the activity that usually proceeds precedes the decisions to add to their temporary usage. In other words, conditions are remaining relatively stable.

Our combined temp-to-perm and direct placement fees were down 71% year-over-year for the quarter, higher than the 60% year-over-year decrease in the first quarter. Combined fees fell 75% in April, 69% in May and 68% in June. Sequentially placement fees in the second quarter were down 19% compared to the first quarter. We expect that placement fee performance will lag that of our temporary activity.

As a result, Kelly's overall gross profit rate was negatively impacted for the current quarter. The gross profit rate in Commercial was 14.9% or 70 basis points lower than the same period last year. Sequentially this represents a 30 basis point decline from the first quarter of 2009 and this decline was primarily due to lower placement fees.

We remain highly focused on tight expense control in our America's Commercial segment and have reduced spending this quarter by about 17% compared to last year. Sequentially expenses in the second quarter are about 6% lower than our spending in the first quarter. We have made targeted staff reductions, lowered incentive compensation, placed limits on travel, and reduced other expenses not related to revenue generation. In addition during the quarter, we closed an additional five branches.

Negative expense leverage on the 28% revenue decline resulted in a year-over-year earnings decline of about 90%. However, let me point out that even in this difficult economy, Americas Commercial has remained profitable in both quarters this year. And I'm especially pleased that despite a sequential drop in revenue, earnings in the second quarter were higher than that of the first.

Now onto America's Professional and Technical, which represents about 19% of Company revenue. PT revenue dropped by 21% for the quarter, slightly weaker than the 17% downturn we experienced in the first quarter. Intra-quarter, year-over-year revenue was down 23% in April, 20% in May and about 19% in June. Sequentially revenue in the second quarter was roughly 1% lower than that in the first quarter.

Taking a closer look at our PT segment, we've seen year-over-year revenue declines in excess of 20% in our finance and engineering businesses. On the other hand, our IT science and healthcare businesses have fared better, showing smaller declines. The standout performer this quarter was our law business, which posted positive revenue growth on the strength of several short-term projects.

Combined temp-to-perm and direct placement fees for professional and technical were down 60% year-over-year for the quarter. This is somewhat higher than the 53% year-over-year decline we saw in the first quarter. PT direct placement fees was the largest contributor to this decline. Intra-quarter combined fee performance showed declines of 62% in April, 56% in May and 60% in June. Lower year-over-year fee performance is found across all of the PT businesses and sequentially placement fees were down 15% compared to the first quarter.

For the entire segment, our gross profit rate was 16.5%, down 90 basis points from the same quarter last year, yet an improvement of 60 basis points from the first quarter. The year-over-year decline was attributable to lower placement fees. The sequential improvement was due to stronger performance in our higher-margin businesses.

For the quarter, expenses decreased by 10% year-over-year and sequentially we were successful in reducing our spending by an additional 3% in the second quarter. PT earnings were down 54% in the second quarter, better than the 63% decline we experienced in the first quarter. In addition, we are pleased to post a solid sequential increase in second-quarter earnings on lower revenue.

I will now turn to our EMEA segment, which comprises 24% of our revenue. EMEA Commercial continued to slow in the second quarter, with reported revenue decreasing 40% compared with a 33% decrease in the first. On a constant currency basis, revenue was down 28%, and excluding the acquisition of Randstad Portugal, constant currency revenue was down 32%. For the remainder of my EMEA discussion, all revenue results will be discussed in constant currency.

By month during the quarter excluding the acquisition, April was down 34%, May 32%, and June 31%. Western Europe was down roughly 26% and the Nordics down by 22% in the quarter. In the UK, revenue was down 43% or roughly 30% if you exclude the effect of the restructuring. Eastern Europe on the other hand showed improvement, with revenue increasing 1% year-over-year, but down from the 7% increase in the first quarter.

Turning to fees, the slowing trend that began during the fourth quarter of 2008 continued to worsen in the second quarter. Reported fee revenue for the quarter was down 65% year-over-year or 58% on a constant currency basis. By month, April was down 54%, May 55% and June 66%. This was primarily driven by fee declines in the UK, Russia, and Switzerland.

The quarterly GP rate was 16.2% compared to 17.4% last year. This decrease was mainly driven by the reduction in placement fees. Excluding the Portugal acquisition, expenses were down 26% in constant currency for the quarter, more than twice the rate of decline achieved in the first. This is the direct result of our restructuring initiatives implemented in the second half of 2008 and diligent cost control efforts this year.

The restructuring of our UK operations is expected to be complete by the end of the third quarter, a bit longer than we initially anticipated. We are focused on developing our professional, technical and consulting businesses in the UK to promote future growth in this region.

EMEA Commercial reported a loss of nearly $3 million for the quarter excluding the cost of the UK restructuring. This improvement of almost $3.8 million versus the first quarter was the result of our ability to reduce our cost structure in Europe. EMEA Professional and Technical, which is about 3% of total Company revenue, also slowed during the quarter, decreasing 16% compared to a 10% decrease in the first. We are still seeing growth in Switzerland and Germany.

Fees in the quarter were down compared to last year by 41% or down 47% excluding the acquisition of Toner Graham. By month, April was down 53%, May 40% and June 47%. The gross profit rate in this segment was 26.6% for the quarter compared to 30.4% last year and this decrease is primarily due to lower fees and mix shift. On a constant currency basis, PT expenses declined by 5% compared to a year ago excluding acquisitions. Expenses were down nearly 15% an improvement over the 10% year-over-year decline in the first quarter. EMEA PT operating earnings were at a loss of roughly $1.3 million compared to a profit of almost $1.4 million last year.

Our APAC region, which comprises 7% of total Company sales, continues to experience very challenging staffing market conditions characterized by high unemployment, weak labor markets, and low business confidence. Commercial revenue in APAC declined 27% year-over-year during the second quarter, about the same as the 26% decline in the first quarter. On a constant currency basis, revenue decreased about 16%. The gross profit rate declined by 270 basis points when compared to the same period a year ago. This decrease was largely due to the reduction in perm fees in Australia, New Zealand, and Singapore.

Losses from APAC Commercial operations were $1.2 million, compared to a profit of $500,000 in the second quarter of 2008. Professional and Technical staffing within APAC exhibited considerable slowing during the quarter. PT revenue declined 41% year-over-year after seeing a 27% decline in the first quarter. On a constant currency basis, revenue decreased by roughly 34%. Despite the revenue decline, the gross profit rate grew by 120 basis points year-over-year in the quarter to 31.5%. This improvement was due to shifts in both customer and business mix.

APAC PT reported a loss in the quarter of $400,000. On a combined basis, expenses for the region during the quarter were down 19% on a constant currency basis year-over-year. Given the continued slowing in the region, we remain focused on improving our operational efficiency and better aligning our expenses with current revenue and market trends.

Our final segment is our outsourcing and consulting group, representing 5% of total Company revenue. OCG revenue decreased by 12% in the second quarter compared to the same period last year. This was down from the 6% year-over-year revenue decrease we reported in the first quarter. While all three regions of OCG showed negative revenue growth year-over-year, Europe and Asia exhibited the largest declines of 49% and 39% respectively.

The America's revenue deteriorated slightly compared to a year ago, with a 5% drop in the second quarter. As you would expect, revenue declines were most pronounced in our recruiting process outsourcing practice in both the US and Europe and our executive placement business unit in Asia.

On the positive side, we continue to see solid revenue growth from The Ayers Group, our career transition and outplacement unit. Ayers reported second-quarter revenue growth of 36% compared to the same period last year. OCG's total gross profit rate was 29% for the quarter, compared to 32.3% for the same period last year. This reduction is attributable to shift in business mix. All three OCG regions showed lower earnings than a year ago and on a combined basis, OCG lost $3.2 million in the quarter. For the second quarter of 2009, expenses were down 1% from a year ago.

While we are disappointed with our short-term performance in OCG, we believe our investments in this segment will serve us well when employment growth reaccelerates.

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

Think you, Carl. Before I get into the operating results, I will address our impairment and UK restructuring charges. We took a non-cash pretax charge of $52.6 million or $1.41 per share for asset impairment and a $2.4 million pretax or $0.07 per share charge for UK restructuring costs in the second quarter.

Accounting rules require that we assess the fair value of our assets on a periodic basis. Considering that the economic recovery is coming later than expected, we performed this assessment in the second quarter and determined that goodwill in our America's Commercial, APAC Commercial, and EMEA PT segments as well as long-lived assets and intangibles related to operations in Japan were impaired and an accounting charge was appropriate.

As we previously announced, we have been restructuring our UK operations. We have incurred $9.3 million in charges through the second quarter and we expect to incur an additional $1.1 million in costs during the second half of 2009.

Now moving to our operating results, for the quarter, revenue totaled $1 billion, a decrease of 29% compared to last year. On a constant currency basis, revenue decreased by 24% compared to last year. This compares to a year-over-year decrease of 19% in the first quarter and on a sequential basis, second-quarter revenue was 1% lower than the first quarter.

Our gross profit rate was 16.7%, a decrease of 100 basis points compared to last year. The decrease was caused primarily by the significant decline in fees. Worldwide, our fees declined 52% year-over-year which compares to a 40% year-over-year decline in the first quarter.

On a year-over-year basis, excluding impairments in UK restructuring costs, selling, general, and administrative expenses are down 21% or $51 million. On a constant currency basis, this equates to a 16% reduction. Staying on a constant currency basis, expenses are down in both segments year-over-year. SG&A expense decreased by 14% in the Americas, 23% in EMEA, 19% in APAC, and 16% in our corporate headquarters, while OCG was up 4%. Compared to the first quarter, SG&A expense was down 5%. And although our revenue and GP declined from the first to the second quarter, the improvement in our expenses allowed us to reduce our loss from operations by $6 million.

We are very pleased with our efforts to reduce expenses. Given the importance of cost control, it will continue to be a high priority as we move into the second half of the year and is worth spending some extra time on this quarter.

First, we continue to right size our business by evaluating our operations around the world and reducing the number of permanent employees and branches as appropriate. Including our UK restructuring actions, we have reduced the number of full-time employees by more than 1300 people in the last 12 months. During the same period, we closed, sold, or consolidated about 100 branches. While the UK has been the single biggest action, we have made changes in virtually every operation around the world with the more significant adjustments occurring in the US and Europe.

These structural actions reduced our year-over-year SG&A costs by $28 million in the second quarter before associated severance and lease termination expenses. We have targeted reductions in activities and locations that we believe will maximize our ability to compete as the economy turns around. When we do begin to experience a recovery, we will reconsider our capacity in each market and activity and make the necessary adjustments.

In order to achieve these structural savings, we incurred severance and lease termination expenses over the last 12 months. In the second quarter, these expenses were worth $2 million over and above the $2.4 million of UK restructuring costs that I referenced earlier.

Second, as I have discussed in prior quarters, we have taken a number of compensation-related initiatives such as suspending incentive compensation plans, discretionary stock grants, annual salary increases, and contributions to retirement plans. These nonstructural initiatives improved our year-over-year costs by $9 million in the second quarter. Part of our plan is to restore much of these costs as economic conditions improve.

Third, we have reduced discretionary costs in areas such as travel and recruiting. These actions, which will tend to reverse as business picks up, are worth $6 million in the second quarter. And finally, changes in exchange rates accounted for $13 million of the cost change year-over-year.

To summarize, SG&A costs were down $51 million in the second quarter, of which $13 million was exchange. Structure reductions accounted for $28 million, but were partially offset by severance and lease expenses of $2 million. Compensation initiatives totaled about $9 million and other discretionary savings accounted for $6 million, partially offset by $3 million related to prior year's acquisitions. Similar actions at OCG reduced our cost of services line by another $4 million.

We are not alone in our inability to predict the recovery, its timing, pace, or location. Under this environment, Kelly's success will be dependent on our ability to continuously adjust changing conditions by balancing cost reductions with future opportunities. We will continue to target actions which allow us to be flexible in responding to changing conditions both on the downside we are experiencing today and on the upside we expect to experience in the future.

Moving back to the second-quarter results, our loss from operations excluding impairment and UK restructuring costs was $19.5 million, compared with income of $15 million in 2008. On a GAAP basis, we had an operating loss of $74.5 million.

Income tax benefit in the second quarter with $9.5 million on a pretax loss of $75.5 million. For accounting purposes, most of the impairment and UK restructuring charges are not tax deductible.

Adjusted diluted loss per share from continuing operations totaled $0.41 per share compared to adjusted earnings from continuing operations of $0.30 in 2008.

Turning to the balance sheet, I will provide a few highlights. Cash remains strong, totaling $115 million, almost unchanged compared to the $118 million we held at year-end. We were pleased that in spite of the poor economic conditions, we were able to repay $36 million of debt and maintain our cash level. At the end of the second quarter, cash exceeded debt by $38 million, an improvement of $35 million compared to year-end.

Accounts receivable totaled $681 million and decreased approximately $135 million compared to year-end. For the quarter, our global DSO was 51 days, the same as the prior year. Debt of $78 million is down $38 million compared to year-end, primarily due to the repayments I noted earlier. At the end of the second quarter, debt to total capital was a conservative 12%.

We slightly missed our debt covenants for the second quarter. However, we were able to receive waivers on all of our outstanding debt agreements. Given the current economic conditions, we believe our current debt covenants restrict our ability to further restructure the business and we are in the process of renegotiating all of our outstanding agreements including our $150 million multicurrency revolving line of credit which expires next year. We expect to complete this process in the third quarter.

Turning to our cash flow, net cash provided by operating activities was strong at $70 million compared to $41 million last year. The improvement was primarily related to the reduction of accounts receivable by $135 million.

In these difficult times, we remain committed to aggressive cost actions, diligent management of our balance sheet, and the preservation of our ability to compete.

I will turn it back over to Carl now for his concluding thoughts.

Thank you, Patricia. Without question, this recession has been the longest and most dramatic in recent memory. That said, signs of a building recovery are accumulating. The majority of economists predict a gradual if somewhat bumpy end to the recession later this year or early in 2010.

We look beyond those economic predictions for other signs of recovery more relevant to our industry, closely monitoring workweek metrics, movements in [lid] versus office staffing, trends in placement and conversion fees, and signs that seasonal staffing patterns will return.

At Kelly, the [hint] to stabilization that surfaced late in the first quarter has in fact continued, although we still have not witnessed tangible and corroborating signs that temporary staffing usage is recovering. Regardless of the shape of the recovery, employment will lag for some time. Companies are justifiably skittish and many will need to call back furloughed employees and return to more normalize hours of operation before they add significant numbers of additional workers.

That said, it may sound counterintuitive to say that we remain hopeful and we do for a very good reason. Kelly has taken the right strategic steps to stem losses and to get ready to move swiftly and deliberately when this economy turns. We continue to win new customers in a very difficult environment. Many of these contracts are currently yielding lower staffing volumes but are structured for higher usage once business conditions improve.

We've made great progress expanding into higher-margin businesses, education, science, healthcare and engineering, to name a few. As labor conditions improve around the world, we expect to see an even greater demand for specialized talent. Our ongoing focus on professional and technical staffing solutions, and outsourcing and consulting should serve us well.

We are a more geographically diverse Company than at any other time in our 63-year history. Reducing our dependency on a single economy means we are better able to seize opportunities presented by shifting workforce needs whenever and wherever they occur. At the same time, we are constantly evaluating our operations in every region in order to capitalize on growth prospects and to limit our exposure when necessary.

As Patricia detailed, we have done an exceptional job of reducing our costs to better align expenses with changing business volume. Year-over-year, those initiatives have resulted in year-over-year savings of more than $85 million and we continue to actively seek out operational efficiencies across the entire organization that will yield further cost savings.

Finally but perhaps most importantly, we have followed our tradition of maintaining a strong balance sheet even during the protracted slowdown. With minimal debt and a solid financial position, Kelly has preserved flexibility, scalability, and agility necessary for growth.

We have said this before, but it bears repeating. Kelly will always be a cyclical company operating in a cyclical industry. We are in business to provide our customers with the tools and talent they need to compete in the current marketplace. We absorbed the impact during down cycles and we enable growth during an upturn. I am confident that this economy will turn around and bring job creation with it. When that happens, Kelly will emerge as a more capable vibrant Company.

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

(Operator Instructions) Toby Sommer, SunTrust.

Thank you, I just had a question for you. Maybe you could help me out in thinking about what kind of revenue level the Company can approach kind of a breakeven at because we've had some restructuring charges for a while I was just wanting to get your thoughts about kind of how to think about that?

Not an easy to do exercise for you, Toby. As you know, it depends where the revenue is and what type of revenue it is. There's revenue that brings more profit with it and there's revenue that brings less so that's not a question prepared to answer or even if we were prepared to answer a simple question.

Okay, kind of moving on, in terms of your balance sheet, you were able to pay down a bunch of debt and now have cash balance. Do you -- how does this level of liquidity -- and if you could remind us what your total liquidity is -- compare to the previous cycle? I am just trying to get a sense for how you are positioned to fund growth as it eventually resumes. Thanks.

Toby, it's Patricia. Just to remind you, we have about $150 million on our multicurrency line and then we have another $75 million, well $77 million of term debt. So that is broadly speaking our capacity, ignoring things like lines of credit that add to that. I can't tell you offhand what it needed during the last cycle, but we have done a fair amount of modeling with different growth rates to make sure that we are comfortable that any sort of reasonable growth pattern would be comfortably well within that capacity.

We did not need to borrow significantly in prior recoveries, so I'm very comfortable with the $150 million line of credit that we have.

Okay, and then as you look into the third and fourth quarters, are there any nuances to look for if you could refresh my memory in terms of billable days? Any significant variances in the third and fourth quarter?

Yes, the one thing I will point out is that this is one of the years that we get the extra week in the fourth quarter. So normally have a 52-week cycle and this is the year we catch up and have a 53rd week. Now that is not -- that is a holiday kind of period, so it doesn't necessarily bring with it a full week's worth, but it's worth about 1%.

Okay, last question I will get back in the queue. Carl, in terms of seasonal work as we look forward towards the Christmas holidays, etc., what are you hearing from customers that may be involved in distribution kind of early reads on what retailers are expecting from the consumer? Thanks.

Toby, just as we have stopped looking or being able to predict further out, our customers are in no better shape. Their conversations with us has been assessing our capability to respond well if there is a bump in demand, but no particular commitment on their parts that there's going to be that bump in demand. Too early.

Okay, thank you.

Ashwin Shirvaikar, Citi.

This is [Phil Stiller] for Ashwin. Just asking about pricing, I was wondering if you could comment on whether pricing pressure increased sequentially and then add some color by geography or vertical?

On a really broad basis when we looked at the GP line going down, as Patricia said and then I said in the detailed comments by segment, almost all of our GP rate decline -- essentially the overwhelming portion of it was due to movement in fees. So is there pricing pressure? There always is in a downturn. By the way there always seems to be in an upturn to. As the pricing pressure picked up noticeably not across the board, of course, it picks up for certain accounts or in certain geographies, but nothing that would be particularly worth noting at the moment.

In general, GP price stability is hanging in there around the world. Pricing discipline is remaining fairly good around the world. You know, if anything, you might be seeing a little more pressure in terms of price points from the smaller customers as opposed to the larger customers which was more typical in the last two recessions.

Okay, thanks. And then just following up on the SG&A you guys talked about some of the cost measures that you guys are doing. SG&A was down about $10 million sequentially this quarter. Can we expect something similar for the third quarter?

I'd love to get that much, but I think it will be a little bit better but it won't be that much. We announced in the -- we took in the mid-first quarter compensation-related actions that then we only got part of that in the first quarter and a full amount of that in the second quarter. Those are obviously not going to give us a sequential lift from the second quarter to the third quarter. So as we -- as the curve flattens out for the significant actions that we took intra-quarter in the first half of the year, I don't expect to see that much come in. But we are working it every day, so we will keep responding to the economic conditions and cut deeper as we need to.

You mentioned that the compensation costs may come back at some point. Is there a certain point where you expect that to come back either by time or do you have to hit profitability before that comes back?

We would have to be comfortable that we are in an economic situation that allowed us to put those back in. We will also not put them back in all at once. We foresee layering them back in with some of our field-directed compensation actions coming in advance of management-related compensation actions. So they will come in over time as we gain confidence in an economic environment that allows them to be sustainable.

Thanks, guys.

Ty Govatos, C.L. King.

How are you, Karl?

Doing well.

In this environment you ask? The aspirin is close at least. Can you give us any kind of a feel for if the revenues were to stabilize, big question mark at around current levels, whether you can cut operating the losses in half throughout the second half?

I wouldn't want to put out a forward number yet again. There is no steady state. In other words, revenues could stay at this level with declines in some regions, increases in others, and we would respond based on how that was mixing out. Clearly, if you listen both to economists and listen to our own data, APAC is nowhere near the stable point that North America has been. So revenue will mix out differently with different growth rates and would have different expense impacts. Until you hit real stability on a real global basis, only then could you begin to look a what type of reductions are there. But I will echo what Patricia said. Will there be further reductions? Yes, they will be appropriate to the revenue mix and the economic conditions.

Is it fair when I look at your operations that I'm really just eyeballing them at this stage of the game? You have had more success probably because of the lag times involved with improving the Americas operations than most of the foreign operations.

Yes, Ty, as you know because you have covered all of this, the European staffing operations as an example were late coming to the recession party and seeing the declines in employment. Now they have caught up very rapidly, but there's been less quarters to adjust, although I'm very, very pleased with how the EMEA team has responded very rapidly in terms of the cost side.

But to your point, they've had less quarters to look at the market, to look at where the marketplace is and to bring their expenses in alignment to it. And in Asia as we talked about, even later to those same types of declines and are responding in real time now to the shifting market conditions.

Okay, thanks an awful lot. It was very helpful.

(Operator Instructions) Toby Sommer.

Thank you, I was wondering if you could comment, Carl, on the potential impact of healthcare reform on the space broadly -- just to kind of get an update on your perspective. I know we don't have a specific bill we are talking about yet, but kind of the general trend and maybe what your preferred outcome may be. Thanks.

We have specific bills. The trouble is we have several specific bills. There's an upside and downside. This is obviously a US market issue, so a big concern to us. When you ask people what's the number one reason that they don't engage in more of the temporary employment independent contractor type of work, the number one reason is access to healthcare. So on the supply side of labor, providing more access and providing more access to this nontraditional workforce, very critical. So if you imagine we come back into times of labor shortage -- and we will, although it doesn't seem like it now but we will -- having access to more supply would be very beneficial to the industry.

There are ways of providing access that would do harm to the industry and ways that would do less harm. ASA is being very active in lobbying for bills that would have participation thresholds that would be sensitive to numbers of hours worked, the duration, length of assignments and so on. There needs to be a rational approach to this. I find much of the congressional staffers who work on this as well as members of the administration to be understanding of the issue, not necessarily certain which way to do it. So you see bills out there that propose a variable fee structure. Those tend to be somewhat friendly to the staffing industry. You see those that have very high percentages on payroll taxes. Those tend to be unfriendly to employment in general and to the staffing industry.

There will be much work before we hit a final bill. The other thing I would remind all the analysts who look at this is that no bill at the moment is projecting any particular burst of increase in coverage until 2013. So I mean, there's a lot of storm and fury now but we are years away from a particular impact and the industry has time to shape this into something that's very good for the country as well as something that's very good for the staffing industry.

Thank you and as a follow-up, are there any other pieces of legislation or macro things that you are looking at outside of the recessionary labor data that could impact business over the medium and long term? Thanks.

The industry is paying a tremendous amount of attention to the Employee Free Choice Act, Card Check, pick whichever set of terminology you want to. In our particular mix of business even in the worst possible scenarios, it would have only a very modest impact. And in any case the way legislation is shaping up and compromises being talked about, I think it emerges as language that would be acceptable to the temporary staffing industry.

But it is always a bill worth watching, understanding, and paying attention to. The steady rises in minimum wage that I think will be called for over time, people worry about the impact that that has on the lowest wage workers. Our experience has been that it has very minimal impact again on Kelly. It generally provides a basement that moves up the salary basis, but again a very small percentage. A very small percentage of Kelly temporaries in fact make minimum wage. Almost all of our temporary employees are already above that.

You have to watch state-specific legislation gets to be more interesting on everything from healthcare to how they deal with wage and law issues in particular states. We always watch California. There's no lack of imagination that is capable there. And then what you will see coming out of states -- when you have the overwhelming majority of states looking at budget deficits, they will pay attention to ways to increase revenue, obviously. Gross sales receipts are things that the industry has continuously fought in terms of their applicability to us with great success over the years.

California again specifically has legislation under consideration that would have to be dealt with to make it applicable, a better way to tech temporary staffing. But the industry has a track record of dealing with that well in other states and we are already active in California.

Thanks, my last question relates to your view of the early indicators of a potential increase in demand. Of all the different kind of data that we're able to look at in the from the BLS, I was wondering what your perspective may be on the hours worked data series and if that is one to really keep a sharp focus on?

Yes, we pay most -- we are paying most attention to in terms of those very techy indicators, everybody's paying attention to the hours per work week. You don't begin soaking up the furloughed workers and hours of operation and so on until you see it -- you can't believe it's taking place substantially until you begin to see an increase in hours per work week. We pay attention to that on our own data. We pay attention to it in the BLS data.

Over a longish period of time, I think we are seeing improvements and we will continue to see improvements in that data set. It gets variable from month to month depending what's taking place inside a variety of factories, specifically the automotive industry and the parts, associated parts industry has an ability to tweak that number up and down. You have to get behind that the see what's taking place. But fundamentally, there's been the slow, steady increase in hours per work week.

Structurally, you ultimately have to pay attention to -- it's one of the first questions was on -- what's taking place in the distribution, what's taking place in warehouses and so on. We always pay attention to the lid versus office type of comparisons. While we are not overly represented in pure manufacturing itself in terms of the actual manufacturing production, we are well represented in the distribution chain.

So we would again look for those signs of movement in the distribution-related lid work. But as I answered earlier, too early to tell what is going to take place and -- in the forthcoming holiday season.

Thank you very much, very helpful.

Mr. Camden, no further questions in queue.

Thank you, John, and thank you all for participating.

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