Kelly Services Inc (KELYA) 2010 Q2 法說會逐字稿

Good morning, and welcome to Kelly Services second quarter earnings conference call.

(Operator Instructions)

I would now like to turn the meeting over to your host, Mr. Carl Camden, President and CEO. Sir, you may begin.

Thank you, Patrick. Good morning you all, and welcome to the Kelly Services 2010 second quarter conference call. With me on the call is Patricia Little, our CFO.

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 10-K for a description of the risk factors that could influence the Company's actual future performance.

It is good to be with you all this morning. When we last reported to you, we noted that had global economy and labor markets were showing early signs of life. Today we say with greater confidence that a classical shaped recovery is underway. And what's more, we believe that this recovery is sustainable. While slower to gain steam, and not as robust as many would like, we are nonetheless steadily moving in the right direction. Further, trends in our business are strengthening and we remain encouraged by the improvements we are seeing.

From our perspective, the employment picture is improving, job figures are mixed, but it appears what we are seeing can best be characterized as a job-like recovery rather than the jobless recovery some had feared. While we are seeing rising economic confidence, our customers are becoming more optimistic and they're not talking about contingency plans for pullbacks and demands. Many of our customers are boosting hours worked, calling back furloughed employees and increasing their temp usage. Even so, we do know there is lingering skepticism and employers do remain hesitant about full-time hiring. However, while uncertainty inhibits permanent hiring, that reluctance does increase demand for temporary employment.

Let me go through the markets, starting with the US, our largest market. The July temp penetration rate edged slightly downward to 1.60 from 1.61 in June. However, we expect that rate will rise as companies seek flexibility and expanding the work force. July's temporary help payroll numbers were reported down slightly by 5,600 jobs. But more than 360,000 temporary jobs have been added in the last ten months. That figure represents 21% growth from the low point in September, 2009.

Year-over-year, temporary help posted a gain of 19.3% in July, compared to 19.1% in June. This was the sixth month it has shown significant growth. Temporary staffing figures measure up well against overall employment. The unemployment rate remains stable at 9.5% in July, as it was in June. We also note that the employment picture remains brighter for college graduates, where the unemployment rate was 4.5% in July. While the recent jobs numbers were a bit disappointing to some, the gradual improvements in the overall labor markets are having a positive impact on our business. Those positive indicators provided a healthy spring board for Kelly this quarter.

We have seen increased demand for temporary staffing across all of our regions. Light industrial staffing, in particular, is still on an upper trajectory, a trend that has continued well over a year. We are now back to 2007 pre-recession levels. Although clerical has not yet shown signs of accelerating, it remains stable. Professional and technical, on the other hand, exhibited improvement during the quarter in all three regions. And while we are seeing some improvement in fees, they do remain at lower levels as companies remain cautious about expanding their permanent work force too quickly. Overall, these business trends translated into a solid second quarter for Kelly, with notable improvements over our first quarter results.

Our second quarter revenue was up by 7% sequentially excluding restructuring. Expenses were up slightly on a sequential basis, but down compared to last year, and very much in line with our expectations. We continue to benefit from the restructuring actions we took last year. But as expected, improved performance has necessitated incremental increases in performance-based compensation during the quarter.

Our GP rate was essentially unchanged from the first quarter. In fact, it has held relatively stable for the past four consecutive quarters. Most notably, Kelly earned $0.11 per share in the quarter, a nice improvement over the first quarter, and a significant improvement over last year's second quarter loss. With that, let me turn to a review of our operating results by business segment, starting with America's commercial.

Revenue in America's commercial in the second quarter increased 27% year-over-year, an improvement from the 14% increase in first quarter. On the sequential basis, revenue was up 10% for the quarter. Within the commercial segment, light industrial staffing and electronic assembly are experiencing large sustained sequential and year-over-year growth. Office clerical remains stable, continuing to trend flat for the last four quarters. On a sequential basis, placement fees were up 3% for the second quarter compared with the first. Kelly's gross profit rate for current quarter was 14.3%, or 60 basis points lower than the same period last year. The rate was negatively impacted by the shift in business mix due to the cyclical growth and light industrial staffing, partially offset by the higher Act benefits.

Sequentially, the GP rate remains stable compared to the last three quarters. America's commercial segment reduced spending this quarter by about 1% compared to last year, excluding restructuring costs. Sequentially, spending was about 4% higher than the first quarter, due to increased performance-based compensation. Commercial earnings were $18 million in the second quarter compared to $2 million last year. We are very pleased with the improvement in earnings we have achieved in America's commercial segment.

Now, on to America's professional and technical segment. PT revenue improved in the second quarter, increasing 13% compared to the 4% growth in the first quarter year-over-year. On a sequential basis, PT revenue was up 7% for the quarter. Taking a closer look at the PT segment, for the second quarter we saw a year-over-year and sequential growth across most business lines, with our IT business growing 24%, followed by our engineering business with an increase of 22% year-over-year.

Combined temp-to-perm or direct placement fees for professional and technical remained relatively flat during the quarter, a significant improvement over the 18% year-over-year decline we saw in the first quarter. Kelly Financial, IT, and Scientific all experienced year-over-year growth. And sequentially, total PTPs increased 2% compared to the first quarter. For the entire segment, our gross profit was 15.7%, down 80 basis points from the same period last year, but an increase of 40 basis points from the first quarter. And sequentially, the improvement was due to the higher Act benefits.

For the quarter, expenses decreased by 11% or nearly $3 million year-over-year. Sequentially, spending was about flat with the first quarter. PT earnings were $12 million, up $5 million compared to the prior year, due to revenue growth and success in controlling expenses.

I will now turn to our EMEA region, which is also seeing improvements in market conditions across the majority of countries. Although the reported revenue in EMEA commercial was down in the second quarter compared to last year by 1%, on a constant currency basis, revenue was up 2% or up nearly 5% excluding the impact of restructuring in 2009. Sequentially, second quarter--sequentially, second quarter increased by 9% versus the first quarter. For the remainder of my EMEA discussion, all revenue results will be discussed in constant currency.

The greatest improvement was once again seen in eastern Europe, increasing nearly 60% year-over-year and 11% compared to the first quarter primarily due to the performance in Russia. Western Europe was up 10% year-over-year and up 15% sequentially from the first quarter, which was primarily attributable to our operations in Portugal and Switzerland. Turning to fees, we're encouraged by the improvements we saw during the quarter. Revenue from fees for the quarter was up 36% year-over-year, and on a sequential basis fees grew by almost 13% compared with the first quarter.

The quarterly GP rate was 16.1%, stable compared to last year as well as the first quarter. Expenses were down by 16% excluding restructuring year-over-year and down 4% compared to the first quarter, despite increases in performance-based compensation-related costs. Our restructuring initiatives in EMEA are complete. However, during the quarter, we reassessed our systems strategy, cancelling an implementation and causing us to impair assets valued at $1.5 million.

EMEA commercial achieved profit of $1.4 million for the second quarter, that's an increase of $6.7 million compared to the same period last year, and a $3.7 million sequential improvement over Q1. Revenue in EMEA professional and technical increased by 9% during the second quarter year-over-year and sequentially revenue increased 6% compared to the first quarter. Double digit growth continues in France, Switzerland and Germany.

Fees in the quarter were up compared to last year by 5%. On a sequential basis, fees were up 11% compared with the first quarter. The gross profit rate was 27.1% for the quarter, an improvement compared to the 26.6% for same period last year. PT expenses declined by 13% compared to a year ago. EMEA PT reported a profit of $550,000 for the quarter, an improvement of nearly $2 million compared to last year and more than $600,000 sequential improvement to last quarter.

Our APAC region is also seeing improving signs of economic growth and labor market stabilization in both our commercial and professional and technical segments. Combined revenue for region grew by 27% year-over-year or 15% on a constant currency basis. That's an improvement from the 7% constant currency increase in the first quarter. Excluding the impact of exiting Japan, constant currency revenue was up 26%. Sequentially, revenue grew by 3% compared to the first quarter.

Fees continued to improve in the region and were up 72%, or 59% on a constant currency basis. This is a significant improvement over the 30% constant currency increase in the first quarter. Our GP rate for the region increased by 80 basis points as improvements in fee-based income more than offset a lower temp GP rate. And the lower temp GP rate was primarily due to country mix fueled by the growth in India as well as our decision to exit the staffing business in Japan.

Expenses for the quarter were up 13%, but only up 2% on a constant currency basis. We earned $600,000 for the quarter, a nice improvement from the $1.6 million loss in the prior year. As a result of the improvements we are seeing in the APAC region, we are increasing our investments in selected markets across Asia to better leverage our operations there.

Our final segment is our outsourcing and consulting group, OCG. OCG revenue was up roughly 21% in the second quarter compared to last year, and up sequentially over 9% from the first quarter. All three of our regions within OCG had positive revenue growth for quarter as compared to last year. In general, our OCG results reflect the slower paced recovery we are seeing. Our PPO practice, which was up 50% year-over-year, accounted for much of the revenue growth in this segment.

We are also pleased with our RPO recruitment processing outsourcing results, especially in the Americas. We have now seen three consecutive quarters of sequential growth in RPO in the Americas. Americas RPO revenue growth in the second quarter was 30% compared to the first quarter, and 86% higher than last year. Our executive placement practice experienced over 35% year-over-year revenue growth in APAC for the second consecutive quarter.

At Ayers, our outplacement group, revenue continues to be down significantly against last year, given the slower pace of corporate restructuring activities. The OCG gross profit rate decreased by 760 basis points from a year ago. This decline was primarily due to growth in our lower margin PPO practice and the non-billable implementation cost associated with our KellyConnect practice. The decline was mitigated somewhat from our higher margin RPO and executive placement revenue this quarter.

Expenses were up by roughly $1 million year-over-year in OCG, but were basically flat with the first quarter on a sequential basis. The increase in our year-over-year expenses are primarily the result of implementation costs associated with new customer programs during the quarter. On a combined basis, OCG had a loss of $5.8 million in the quarter. This compares to the $3.2 million we lost a year ago and the $4.5 million in the first quarter. The growing losses are attributable to the Ayers group as well as the training costs, wages and other expenses associated with the new project implementations.

We are now nearing the end of implementation of two large accounts and we expect an improving profit picture as we move into the second half of the year. While we don't like the continued losses in OCG, we do remain confident that the investments we are making will enable us to leverage our infrastructure as customer volumes increase in tandem with economic and labor market growth.

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

Thank you, Carl.

Revenue totaled $1.2 billion, an increase of 18% compared to the second quarter last year, up 17% in constant currency. This is a significant improvement over the first quarter when constant currency revenue increased 4% compared to the prior year. During the quarter, we saw constant currency increases in all of our business segments. On a sequential basis, revenue increased 7% compared to the first quarter. Worldwide, our fees were up 19%. And on a sequential basis, the fees were up slightly compared to the first quarter.

Our gross profit rate was 15.8%, a decrease of 90 basis points compared to last year. The decrease was caused primarily by a reduction of our temporary margin primarily within our Americas and OCG businesses. As Carl described, within our Americas region, our average temporary margin continues to be impacted by shifts in our business. And within OCG, our GP rate was impacted by the continued growth in our the lower margin PPO practice as well as non-billable implementation costs in KellyConnect.

Moving on to selling, general and administrative expenses. For the second quarter, our expenses were down 7% or $12.7 million on a year-over-year basis. I do want to point out in the second quarter of 2009, we included restructuring charges of $4.7 million. Adjusted for the restructuring charges, expenses were down 4%. On a sequential basis, SG&A, excluding restructuring charges, was up 2% or $4 million compared to the first quarter. Most of the increase is related to incentive-based compensation that we have begun to reinstate. During the second quarter, we made a decision to discontinue an EMEA-based systems project ,and we took a $1.5 million impairment charge. This compares to $52.6 million goodwill impairment charge last year.

In the second quarter, our GAAP earnings from operations were $8.5 million compared with a loss of $74.5 million in 2009. Excluding impairment and restructuring charges, we had an operating profit of $10 million in 2010 compared to an operating loss of $17.2 million in 2009, a $27 million improvement. Although the economy is recovering slowly, we are beginning to see the impact of leverage in our business. Our lower break-even point will help us to further leverage future sales growth and improve our profitability as the economy continues to recover.

Other expenses up $1.1 million compared to the prior year, due to higher interest expense. Income tax expense in the second quarter was $2.5 million or approximately 40%. Our year-to-date rate is 49%; however, we expect that the full year rate will be closer 35%. Diluted earnings per share from continuing operations for the second quarter of 2010 totaled $0.11 per share compared to a loss of $1.89 in 2009. Again, excluding impairment and restructuring charges from both periods, we earned $0.14 in 2010 compared to a loss of $0.37 in 2009.

Before I turn to the balance sheet, let me look forward to the remainder of 2010. First, although the economy should continue to improve, until we see significant improvement in our PT business and fees from permanent hiring come back, I don't expect the GP rate to improve significantly from its current level. In fact, if we continue to grow significantly in the light industrial space, I expect continued pressure on our GP rate. With regard to expenses, at this point I expect we will continue to see sequential increases in our SG&A as we have some hiring, particularly in PT and OCG, and as our earnings generate increasing field and management variable compensation.

Turning to the balance sheet, I will make a few comments. Cash totaled $65 million, down $24 million compared to the $89 million we held at the 2009 year-end. Accounts receivable totaled $752 million, and increased $34 million compared to year-end 2009. For the quarter, the global DSO was 50 days compared to 51 days last year. Accounts payable and accrued payroll and related taxes totaled $373 million, and decreased $18 million compared to year-end 2009. Debt of $118 million is down $19 million compared to the 2009 year-end. At the end of the second quarter, debt-to-total capital was 17%.

Turning to our cash flow, net cash from operating activities was a use of $20 million compared to cash provided of $47 million last year. The change primarily reflects increased working capital needs in 2010 as our business continues to pick up, somewhat offset by the better operating performance. During the first six months, we repaid $19 million of debt compared to $36 million in the prior year. In addition, we sold $1.6 million Class A shares to temp holdings for $24 million. The transaction was made using treasury stock. I would like to point out that we feel very comfortable with our cash, debt, and capital structure and we are confident that we have the necessary resources to fund our business as the economy recovers.

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

Thank you, Patricia.

We are pleased with our solid second quarter results. Given the current macroeconomic environment we have been dealing with for the past several months, it is fair to ask--where do we think we are headed?

We've said this many times, but it does bear repeating. Job creation lags most other positive indicators following a recession. This has been such a deep, protracted downturn that we have been through, climbing back out is going to take some time. We do fully expect that this recovery will continue and eventually companies will become less cautious with respect to permanent hiring. And when that happens, the pace of economic growth should pick up.

But regardless of the pace, let me remind you that Kelly is in a far better position to quickly adapt to whatever happens inside the economy than it was just two or three years ago. In terms of our expectations, in the next quarter, we expect continued modest sequential increases in revenue. As Patricia noted, we believe our gross margins will remain relative stable for the time being, and as business conditions improve, we expect compensation-related expense along with limited business investment to increase modestly.

We are keeping a careful eye on our expenses and we remain committed to operating with a lower cost service model. In short, we are a stronger, leaner and more adaptive company now. The strategies we've laid out provide direction and purpose to our actions, and we will guide Kelly to greater profitability in the years ahead. We are committed to maintaining our strength in our commercial staffing markets, accelerating the growth of higher margin services such as our professional and technical disciplines and our outsourcing and consulting services.

We will increase our focus on customer acquisition and build consultative relationships and alliances that can create success for them and drive profit for Kelly. We are spending more time forging strong relationships and promise in geographies without making significant financial investments. You may recall early in the second quarter we announced the strategic alliance with Temp Holdings, a leading integrated human resource services company in Japan.

Last month, we finalized similar partnerships with firms doing business in Vietnam and South Africa. Both are strong companies located in parts of the world where Kelly has had no prior presence, but where we see ample opportunity. These new relationships are structured in a manner that will allow us to serve customers quickly and efficiency without creating a costly network of offices. Our strategies embrace all of the time-honored aspects of Kelly, and affirm that our best path to profitability is to deliver more than temporary staffing services. We see ourselves as the premier provider of comprehensive workforce solutions. That concludes our formal comments this morning. Patricia and I will now be happy to answer your questions. Patrick, the call can now be open.

(Operator Instructions)

Our first question today is from Ashwin Shirvaikar from Citi. Please go ahead.

Hi Ashwin.

Hi, Carl. Hi, Patricia. My first question is with regards to the GP date in America's commercial. And obviously, as you both mentioned, it is stable. But I was sort of expecting it to be improving by now. Could you comment on what is going on beneath the surface there? Some of the moving parts, as to why the GP date should not be improving?

I will start, Ashwin, and Patricia will add, if she wishes. As long as we are continuing to see the exceptionally strong growth that we are seeing in light industrial far outpacing the other components in our commercial business, you are not going to see GP improvement.

So, until you begin to hear us talking about growth in either temp-to-perm conversions or some of the placement business that's inside of commercial or you hear us talk about solid sequential growth in office, and preferably, until you hear us talking about both simultaneously, you will not get an increase in the GP rate in America's commercial. In fact, as long as the light industrial growth in the country is continuing to outpace everything else in the commercial segment, we will still be under pressure in the GP in that segment.

Okay. And you started off with fairly positive comments, and that sort of reflects what we have heard from others in the industry, but do you have confidence that the weaker recent economic data does not kind of point to a double dip recession or prolonged period of weakness? Is that sort of based on your conversations with your clients that maybe you are ready to use significantly higher level of temp, or what is it based on?

Ashwin, for us, again, we are not--at least, I'm not an economist--but for us, prior to the recession's kicking in, you generally have a sharp increase in the amount of conversations you are having with customers about contingency plans to reduce the amount of their flexible work force in front of possible decreases in demand for their services or products. Those conversations aren't taking place. And, in general, preceding a recession you would see a flat line in the demand for temporary staffing.

While the BLS number showed a flat line, the comments you have heard from others in our industry and from us contradict the BLS numbers. I don't understand that yet, but hope to, but again, within the world that we operate, we are not seeing any of the indicators that usually start throwing up, you know, red flags for us about the probability of a sharp decline in demand for temporary staff. But I also--what I thought was pretty clear--is that I am not either claiming that I am seeing the indicators that is signal a dramatically sharp increase in demand for temporary staff. We used the word modest in our expectations for sequential growth in the third quarter and I think that's what we will see. We will see nice, modest single digit increases in demand for, for our services.

Okay. One more question, if I may, in regards to Europe. Are you happy with the portfolio for the countries that you kind of have now, or is there more strategic work that needs to be done in Europe?

There's always more strategic work that needs to be done everywhere, but to the heart of your question, we specifically said our restructuring activities are finished in Europe. You had the last little piece as we were assessing what IT assets we needed which led to a small write-down of an IT program. We have countries that are all in position--either currently profitable or in a position to become profitable. We have a good book of business and a good array of customers. So no, we are not expecting any further significant restructuring. As always, Ashwin, there's a branch to be closed here and a branch to be open there, but that's just normal in the course of doing business.

Okay. One question for Patricia. The share count--should we expect that to increase because of the Japanese investment?

You saw in the second quarter, in fact, that the share count went up, and that is because of selling the shares out of treasury for the Japanese. So we ended the quarter-- our average was $36 million, up from $34.8 million last year, and that all relates to that change.

That's not a [prorated] amount that's fully reflective?

That's half the amount because it happened half-way through quarter.

Got it. Thank you.

Thank you.

Our next call--or question, comes from T.C. Robillard with Signal Hill Capital.

Good morning, Carl.

Good morning.

Good morning, Patricia.

Good morning.

Just a couple quick questions. First, on your OCG business, can you give a little better sense as to, I believe the, along the lines of modest improvement in terms of the margin. Are we talking 20 to 30 basis points modest or can it be a little more than that? And also, along that line, can you give us a sense as to the timing of completion for the couple of implementations you spoke about and are there any large implementations on the horizon that we should be thinking about as we monitor the profitability there?

I will do some commentary and see where it goes. Margins in OCG will be wildly variable. It is a relatively small business on the revenue line. The growth of our payroll processing business was shocking even to us in terms of just the sheer amount of the year-over-year business that has come in and as you know, payroll processing is one of the lower margin services that you can do. So there's margin stability inside the service lines generally, but the mix effects inside OCG are stronger than they're going be in larger business units.

So, I have no particular comment as to how the ultimate mix out will be in margin on that. It just depends on how the businesses flow. In terms of the implementations, the ones that have been--the two that we have focused on that have been driving up much cost, revenue is turning on now from those. And again, in my text I was saying you should interpret that to be we think we have hit bottom in terms of the losses and you should begin to see improvements now over the next few quarters. Do we have other very large implementations in line now? Do I hope I have three or four of those to deal with over the next year? Sure. But not yet.

I agree. That's kind of a near-term pain for a long-term gain.

I do think that as we have gone through this and for our industry, these type of large, really large, supply chain contracts or mega KellyConnect projects are new and there's a learning curve there. And I will tell you that they take longer to implement than we knew and therefore it takes longer for the revenue streams to turn on, you know, and over the course of time, we are look at different ways of pricing, different ways to structure fees, to deal with that. It is tough to absorb losses for 8 to 12 months while you turn on a massive global program. We are looking at ways to do better in the future.

Have you guys thought about any type of partnerships in terms of being able to mitigate some of those losses or maybe help the ramp time of implementation, or the strategy, a much better return for your to do yourself?

We have a variety of partnerships, most of these programs require the adoption of a technology platform for the flow of orders, we have various technology partners, some of the RPO space. We announced we had IBM as a partner. We don't lack for partners. What we have to do is shift fee models around so that implementation fees are not built into an overall margin, so that you're recovering your implementation cost over the length of the contract. We need to deal with recovering the implementation costs up front. With experience, we will speed. We and others will learn to speed to implementation more quickly.

Okay.

Again, these are new services being asked for on a -- where you have revenue streams projected, not revenue streams but you're dealing with supply chains measured in the hundreds of millions if not billion plus, and it is a level of complexity that hasn't been experienced by our industry before. Our learning curve is proceeding quickly. We will get better at that.

Agreed, and thank for the commentary. Just one last one on OCG. The revenue that's now starting to on the two large implementations, is that on track in terms of the ramp? Is that meeting your expectations? I understand the implementation took a little longer but as far as now that revenue is turning on, is that revenue ramp to your liking?

The fact that there's revenue is always to my liking. The ramp, I have to say, T.C., you have to give us a little more time to see how those play out. When the first chunks of geography, as an example, turn on in the supply chain or the first chunks of business units, the question then is how fast you get to the next chunk of geography or business unit. So being the eternal optimist, we are doing great. Ask me next quarter.

Fair enough. I appreciate it. I will jump back in the queue. Thank, Carl.

Okay. Our next call is from Tobey Sommer with SunTrust.

Hi, Tobey.

Hi. This is actually Frank in for Tobey.

Hi, Frank.

I wanted to ask about the gross profit in the Americas PT segment. Is that mainly due to mix shift? Or is there any pricing pressure there? You had nice growth in IT and engineering. Any color there would be helpful.

It is a little more on the fees, that we mentioned on the call. So that's a piece of it. And you know, it is still relatively stable, I would say overall. So, you know, there are mix shifts among but it is not, it is not driving really large changes.

If you exclude the HIRE Act, what we basically said, you would have been relatively flat quarter-to-quarter. So the improved, this sequential improvement in GP rate was due to the HIRE Act. It seems to be relatively flat, and again what you are missing, what we didn't particularly talk about in the text, what you are missing in terms of the year-over-year comparisons on the GP rate will be the fees.

Right.

Until you see placement fee, until you hear us talk about placement fees kicking in or temp-to-perm conversions, you shouldn't expect to see us return back to the historic level of GP that we had in PT. We will remain stable until the fees turn back on.

Okay. Great. One numbers question, can you talk about the tax effects on the after tax impact of the charges? Was that a regular effective rate?

In the second quarter, you mean?

Yes.

Yes, it was a little higher than usual because of some discrete items that we would almost always have in the second quarter related to some stock comp and things like that. So, it's nothing out of the usual, and we would expect the rate to hone back in to 35%, you know, around there somewhere for the full year.

Okay, great. And you talked about temp holding and your partnerships, relationships in Vietnam and South Africa. Can you talk a little bit about how those are proceeding versus your expectations and kind of what are you looking to do more of that going forward? And what you've seen or learned there.

I will talk somewhat, we will be in a better position to talk after the partnerships have had another quarter or two to mature. But have we already seen increased access to customers and revenues from the temp holdings for both sides of the partnership? Yes. So, it is proceeding down the path that we thought it would. Vietnam and South Africa are relatively new, and I will be in a better position--so I can qualitatively say I'm happy with them--but I will be in a better position to talk in terms of facts as the next quarters unfold.

But underlying that, you know, I would say that around the world, there is too much capacity inside the staffing industry, there are too many branches and for a while we contributed to that continued growth in capacity. As we went through this recession, and as some of the purchasing models shifted within our customer base, we no longer felt the necessity to always have our own owned and operated set of branches. We had great partners in some of these countries who had superb branch networks and great commitments to customer service, much more cost efficient for us. And ultimately better for the industry to not add to the excess capacity and these partnerships are providing good access to each other's customers and providing a way to extend services on a much more cost efficient manner.

Great. Thank you very much.

Thank you.

(Operator Instructions)

Our next call is from John Healy from Northcoast Research.

Good morning, John.

How are you?

Good.

A question on the EMEA side of the business, I thought you briefly quantified it, but I wanted to get your thoughts on it maybe a little more detail. But due to the restructuring efforts that you have put in place, put forth in that business, how much revenue do you think you guys have walked away from by exiting some markets and you know, de-emphasising some premier offerings over there?

It's about 2% or 3%. So, just to put it into perspective, for EMEA Commercial on a constant currency basis, our revenue was up 2% and then, if you adjusted for the fact for the markets we exited or restructured, it was up about 5%.

Okay. Perfect. And then, when you think about just some of the activity in the OCG business, can you kind of describe the conversations you are having with the customers there? Maybe how the pipeline looks for big customer signings or maybe their thought process on how they're viewing the services you provide longer term, if there's building momentum in that business and what you are hearing there?

There's no lack of interest. So, kind of learning experience. This is not only implementation cycle's long, but sales cycles are long. But far longer than all of the other alphabet soup of services. It is, kind of as you move up from you know a temporary staffing workforce solution, and as you move your way up to the most complex global supply chain management you just keep adding time to the sales cycle. I will say some of these have run two years to complete.

Now, as they become more common, you know, in global companies, the sales cycle will probably decline as will the implementation cycle. But there's not a lack of a pipeline. But I do respect the length of the time it takes to bring one of these to conclusion.

Got you. And then, Carl any thoughts--I am just going to--it sounded like you were positive on how business conditions moved through month of July but any thoughts in terms of how the US EMEA business performed in July, maybe on the year-over-year basis compared to the June time frame?

If it had sharply changed from the path we were on, we would have said so. We would not have said we expected modest sequential growth. We would not have said the comments we were making. But beyond that, no.

Okay. Thank you.

Yes.

Okay. Thank you. Our next call comes from Jeff Meuler with Baird.

Good morning. It's Jeff Meuler with Baird in for Mark Marcon.Thanks for taking the call.

I guess a follow up on the last question, and trying to understand this contradiction between the BLS data and what we are seeing in your numbers, as well as all of the other temp staffing providers. In the US in July if you think about the normal seasonal trends from June to July, was it pretty in line with the normal seasonality? Are you still seeing above typical seasonal growth or any sort of deterioration in the trends that would be at all supportive of the BLS data?

I'm not certain I understand what "normal" is going to emerge to be post-all of this. It's behaving strong. It is exceeding the normal type of sequential growth. I've said "sequential" so many times I can't say it right here.

All this is proceeding less. So in aggregate you probably get a performance that has pretty close to the seasonality. But the components aren't behaving in a seasonal fashion. I don't understand, as I said the BLS numbers, because I have gone through all of our competitors calls, too, and none of are us talking about a slow down. We are all talking about continued growth. I am not certain what has taken place, and I have spent a lot of time with the numbers. So if you figure it out, give me a call. But it is a point of data that doesn't fit all the rest of the data stream.

It was a bit of a head scratcher for us, too, so we appreciate your perspective. Thanks, Carl.

Thanks, Jeff.

Your next call is again from T.C. Robillard from Signal Hill Capital.

Hello again.

Thank you.

I just wanted to--just two quick questions. Patricia, how should we think about the sequential up ticks here, the modest sequential up ticks in the SG&A line, just trying to balance--how should we thinking about how variable incentive comp--Should we model that up of variable revenues? And then also, I think you had mentioned the need to, to increase some head count in some areas. I am just trying to get a sense as to how to think about that modest increase.

Just to put it into perspective, think about the second quarter to the first quarter, was about $4 million. And in terms of the compensation increases that we have been tracking and talking to you about, that was the vast bulk of it. It was in excess of $3 million of the $4 million. The amount above and beyond that was some hiring primarily in APAC where we added recruiters. We've been very happy, Carl talked about the fee growth we've seen in APAC, that's because we have been hiring recruiters and we want to make sure that we do that.

Looking forward, you'll see similar kinds of increases in comp each quarter. We will put--if results continue with the sequential increases in revenue, you will see us put even more in terms of -- into the comp buckets because it will be back-loaded to the year with our back-loaded better results. So, if that is helpful.

And also, by the way, we will continue to modestly add some head count-related primarily to recruiters focused on PT and focused on permanent hiring recruiters. And I think those are good investments for us. We really want to make sure we don't miss good fee business that's out there as it starts to come back.

Understood. Is it a fair assumption that the increases, the year-on-year increases in SG&A will trail year-on-year increases in revenue?

Yes.

Okay.

That's a fair comment. Also, I realize I didn't answer your specific question which is the comp that we are talking about is related to bottom-line earnings.

Okay.

We have comp programs around the world that relate to more of a contribution or a GP, but when we've been talking about the sequential increases in compensation, the stuff we took out last year, that relates to the bottom line earnings.

Okay. Perfect.

Then Carl, some thoughts on guidance and dividends we are in the cycle reflecting your increased confidence in the recovery, the business is obviously been stable as for as gross margin, you are certainly seeing improving profitability. I want to get a sense as to how you're thinking, as to how the Board is thinking about the returns of the dividend, and also, you're thoughts. Obviously, you have given a lot more granularity on the outlook side than you have in quarters past. But I am wondering when you may get back to what we are expecting for top-line given a range of numbers in the earnings range?

Both guidance and dividend policy, as you quickly noted,are Board-level conversations. Both of those I would expect to have as we close the year with some stability behind it. And we will report out personally. At the top of the last cycle I wasn't particularly happy with the whole guidance practice. You saw lots of companies abandoning given guidance and we will assess where the industry and where we are on that, for sure, as the year completes.

We are still utilizing cash in terms of supporting our growth in revenue in terms of working capital. So, it is not a simple decision just to--poof, say, here's earnings, here's a dividend. And we will talk about that substantially with the Board the remainder of this year.

Okay. Thank you. Appreciate the comments.

(Operator Instructions).

We have no further questions in queue.

Thank you, Patrick. Thank you all.

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