Kelly Services Inc (KELYA) 2010 Q4 法說會逐字稿

Good morning and welcome to Kelly Services fourth quarter earnings conference call. (Operator Instructions). Today's call is being recorded. 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, Greg. Good morning, everyone. Welcome to Kelly Services 2010, 4th quarter and year end conference call. With me on the call today 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 and we have no obligation to update. Please refer to our SEC filings for a description of the risk factors that could influence the Company's actual future performance.

Well, it's a good morning having just completed another solid quarter. In fact, 2010 turned out to be a very good year. Over the course of the last several months we've seen encouraging improvement across nearly every segment of our business. We've seen increased revenue, maintained our lower expense base and held our gross profit margin. As a result, Kelly's Q4 earnings were $0.39 per share, significantly ahead of consensus and last year's suggested earnings of $0.05 per share.

I'm also pleased to report that we achieved an operating profit of $17 million in the fourth quarter, a significant improvement compared to the $400,000 earned the fourth quarter of 2009. For the year, while we increased revenue by 15%, excluding restructuring and impairment charges, we achieved an operating profit of nearly $50 million versus the $63 million operating loss in the prior year. It is clear that the restructuring initiatives we took in 2009 to better position Kelly are working. Our decisions helped fuel much progress in 2010 and they should advance our performance as we enter 2011. And as importantly, current market trends appear to be working in our favor.

You'll remember that we used the recession to transform Kelly, reassessing our business strategy and aligning it with new global economic realities. Throughout every geographic region we streamlined our operations and reconfigured our footprint to match the evolving needs of our customers. In the process we cut deep, more than $200 million in SG&A expenses alone. And as the 2010 recovery unfolded, the restructuring paid off.

As typical in any recovery, light industrial picked up first, leading the way for other employment sectors. Office clerical staffing is now showing signs of improvement. Professional and technical is gaining momentum across all geographic regions and we're beginning to see early signs of improvement in our fee-based services. As you might expect, along with improvement in business has come a modest increase in our expenses. (inaudible) that increase is due to a resumption of performance-based compensation along with the addition of recruiters.

As we emerge from the recession, we will continue to hold the rein on expenses and preserve a more streamlined operating model. In addition, we continue to experience pressure on our gross margins. As demand for PT staffing and fee-based services gain full traction, our business mix will be more favorable and that pressure will lessen. I mentioned earlier that the economic trends are in our favor.

Let me just give you a few statistics. In December, the US temp penetration rate increased for the 15th consecutive month, now standing at 1.7% it's at the highest level in over 2.5 years. The temp staffing gain came in at almost 16,000 for December, and all-in-all, more than 300,000 temporary jobs were added during 2010. Since its low point in September of 2009, temporary staffing has grown nearly 30%. Looking at the job market more broadly, the unemployment rate dropped to 9.4% in December, from November's 9.8%. And while we all would like to see a more dramatic improvement, December's rate is the lowest seen in 19 months. And among college graduates, the job picture is even more promising with unemployment down to 4.8%.

There is growing consensus that a return to full employment could take several years. After losing almost 8 million jobs in our most recent recession, full employment is a distance away. Yet, US GDP is picking up, global markets are accelerating and employment growth will follow. Until hiring returns to pre-recession level and employers feel truly confident, this environment will disproportionately favor the staffing industry and the desire for more flexible labor models.

Now let me talk in greater detail about our Q4 performance and review our operating results by business segment beginning with our largest, America's Commercial. Revenue in Americas Commercial in the fourth quarter increased 16% year-over-year. As a reminder, 2009 included an extra week in the fourth quarter reducing our quarterly and annual comparisons by roughly 5% and 1% respectively. On a sequential basis, revenue was up 2% for the quarter. Within the commercial segment, light industrial staffing and electronic assembly continue to experience year-over-year growth. Office clerical staffing volume also trended up in the fourth quarter increasing 9% year-over-year, an improvement from the 7% growth in the third quarter. Placement fees increased nearly 70% year-over-year for the quarter, with increases in both conversion fees and direct fees. And on a sequential basis, placement fees were up 4% for the fourth quarter compared with the third.

Kelly's gross profit rate for the current quarter was 15.2%, or 90 basis points higher than the same period last year. Sequentially the GP rate was 60 basis points higher than the 3rd quarter. Year-over-year, the SUTA cost increases were more than offset by Hire Act credits and SUTA recovery. Spending in the America's Commercial segment increased by roughly 8% compared to last year excluding restructuring costs, sequentially spending was 6% higher than the third quarter due primarily to increased hiring. Commercial earnings were $25 million in the fourth quarter, compared to earnings of $12 million last year excluding restructuring. We're very pleased with the improvement in earnings we've achieved in the America's Commercial segment.

Moving on now to the Americas Professional and Technical segment. PT revenue in the fourth quarter increased 10% year-over-year. On a sequential basis, PT revenue is down 2% for the quarter, reflecting typical seasonality. Taking a closer look at the PT segment, for the fourth quarter we saw year-over-year growth across most business lines, our engineering business grew at 23%, I.T. increased 18%, and our science business grew at 13% year-over-year. Combined temp-to-perm and direct placement fees for Professional and Technical increased 4% both year-over-year and sequentially.

For the entire segment our gross profit rate was 16%, up 70 basis points from the same period last year. The year-over-year increase was attributable to Hire Act benefit, somewhat offset by higher payroll taxes. As we saw in our Commercial segment, the same year-over-year margin issues related to SUTA and the Hire Act affected our PT margins.

For the quarter, expenses decreased by 4% or $1 million year-over-year. Sequentially spending increased 4% from the third quarter due to increased compensation cost. PT earnings were $12.3 million, up $5 million excluding restructuring compared to the prior year due to revenue growth, increased margin, and success in controlling expenses.

Now let's turn to our operations outside the Americas beginning with EMEA. Although the reported revenue in EMEA commercial was down in the fourth quarter compared to last year by 4%, on a constant currency basis revenue was up 1% or more than 2% excluding the impact of closed operations. Sequentially fourth quarter decreased by 3% versus the third quarter, this is primarily due to seasonality and for the remainder of my immediate discussion, all revenue results will be discussed in constant currency. Looking at the regions, the most significant improvement was seen in Eastern Europe with an increase of 44% year-over-year and up 7% compared to the third quarter. This was primarily driven by the performance in Russia.

Western Europe was up 5% year-over-year and down almost 2% from the third quarter. Seasonality is again is a key factor when comparing to the third quarter. We continue to see nice improvement in fees for the quarter. Fee revenue for Q4 was up 15% year-over-year, sequentially fees are up 2% versus the third quarter. The quarterly GP rate for the 4th quarter was 16.2%, up from the 15.7% for the same period last year. The increase was due to improved temporary GP related to growth in our retail business as well as higher perm fees. At constant currency, excluding 4th quarter 2009 restructuring, expenses were up 3% year-over-year and up nearly 3% sequentially due to increases in performance-based compensation. EMEA Commercial reported a profit of nearly $3 million for the quarter, that's an improvement from the adjusted $2.2 million earned in the same period last year. EMEA Professional and Technical also improved this quarter, increasing by 10% year-over-year and up 7% sequentially. The improvement is mainly due to France, Switzerland, Italy and Russia.

Fees in the 4th quarter are up compared to last year by 10%. The gross profit rate in the segment increased to 25.4% for the quarter, compared to 24.7% last yearThis is exclusively driven by temp GP. PT expenses declined by over 8% compared to a year ago on a constant currency basis. EMEA PT reported a profit of almost $1.2 million, an improvement of over $2 million compared to the prior year

In our APAC region we continue to see strong revenue growth across both our Commercial, and Professional and Technical segments. Combined revenue for the region grew by 23% year-over-year or 15% on a constant currency basis, that's consistent with the 16% constant currency increase in the third quarter. Excluding the impact of exiting staffing operations in Japan, constant currency revenue was up 22%. Australia, Singapore, and India all exhibited strong growth. Sequentially, revenue was up 14% or roughly $14 million compared to the 3rd quarter.

Fees continued to improve in the region and were up 50%, 40% on a constant currency basis for quarter. The strongest fee growth was seen in Australia and Singapore where year-over-year fees grew by more than 60% on a constant currency basis. Fees for the entire region were essentially flat compared to the third quarter. Our GP rate for the region decreased by 70 basis points as a result of a decrease in the temp GP rate primarily due to mix. Expenses for the quarter were up 28% or 20% on a constant currency basis. This reflects continued investment in the APAC region particularly in PT and perm placement consultants. As an example during the fourth quarter, we opened new PT offices in Shanghai and Singapore. As a result of the increased investments we made, we loss $1.4 million for the quarter compared to essentially break even in the prior year. And although we plan to make additional investments across this region, we do expect APAC will return to profitably in 2011.

Our final segment is our Outsourcing and Consulting Group, OCG. OCG revenue was up 10% in the fourth quarter compared to last year, and up sequentially over 16% from the third quarter. All three of our regions within OCG had positive revenue growth for the quarter as compared to last year. As expected, we made progress during the quarter in OCG. The results in a number of our practice areas within this segment continue to improve with exception of our Kelly Connect practice which fell short of expectationsOnce again, we're pleased with our RPO results across all three regions. Globally, RPO revenue was up $4 million or 135% versus a year ago and up sequentially from Q3. This is the fifth consecutive quarter of sequential RPO revenue growth.

Our Contingent Workforce Outsourcing CWO practice, making up nearly $7 million in revenue, also had strong growth in the fourth quarter. Fee revenue was up 22%, as compared to a year ago and up 18% sequentially from Q3. We're pleased that the returns from our investments in the CWO practice are beginning to emerge, and we expect to see this trend continue into 2011

Our BPO, Business Process Outsourcing practice, is beginning to recover from client losses earlier in the year. BPO revenue was flat in the fourth quarter year-over-year, but up nearly 5% sequentially from Q3 due to new customer wins. At Ayers, our out-placement group, revenue continues to be down significantly against last year given the slower pace of corporate restructuring activity. Kelly Connect revenue was down 30% from a year ago, this is due to completion of a large short-term project in 2009, coupled with a slower ramping revenues from newer customer programs.

Combining all of this, the OCG gross profit rate is 70 basis points higher than a year ago, expenses were up $2.8 millionyear-over-year in OCG excluding restructuring. Increase in expenses is primarily the result support costs associated with new customer programs in our Kelly Connect, CWO and RPO practices. On a combined basis, OCG had a loss of $3.1 million in the quarter, a significant narrowing from the $3.7 million we lost a year ago, and the loss of $4.2 million in thethird quarter. While it's taking longer than we had hoped, we continue to make progress in moving to break even and are on the path to achieving profitability in the segment. I'll now turn the call over to Patricia who will cover our quarterly results for the entire company.

Thank you, Carl. Revenue totaled $1.3 billion, an increase of 11% compared to the 4th quarter last year. This compares to the third quarter when revenue increased 22% compared to the prior year. As you may recall, 2009 included an extra week, which we estimate added about 5% to last year's fourth quarter revenue. I'd also like to point out that the year-over-year comparisons are becoming more difficult as we anniversary periods of growth. On a sequential basis, revenue increased 3% compared to the 3rd quarter.

Worldwide, our fees were up 22% and on a sequential basis, our fees were up 5% compared to the third quarter. Our gross profit rate was 16.3%, an increase of 50 basis points compared to last year. The increase was primarily caused by improvements of our temporary margin primarily within our Americas and EMEA regions. Improvements in the Americas have come from the Hire Act, while improvements in EMEA are coming from improved mix as we shift more of our business to higher-margin retail customers.

Moving on to SG&A expenses, for the fourth quarter our expenses were down 1% on a reported year-over-year basis. However, excluding fourth quarter 2009 restructuring costs, expenses were up 6% due to additional incentive-based compensation in merit increases. On a sequential basis, SG&A was up 3%, 5% excluding third quarter restructuring costs. Sequentially the increases due to currency, hiring of consults in the Americas and APAC incentive and discretionary compensation and business-related costs like technology and bad debt. In the fourth quarter, our GAAP earnings from operations were $16.9 million, compared with adjusted earnings of $400,000 in 2009.

Income tax expense in the fourth quarter was $1.6 million or approximately 10%. Year-to-date our rate is 20%, lower than the 35% that we had expected. The tax rate benefited from non-taxable income from the cash surrender value of life insurance policies used to fund the Company's deferred compensation plan, and from better than expected work opportunity tax credits and from retroactive extension of certain tax credits, such as empowerment zone credits. We estimate the lower tax rate added approximately $0.12 to our reported earnings per share.

Diluted earnings per share from continuing operations for the fourth quarter of 2010 totaled $0.39 per share compared to adjusted earnings of $0.05 in 2009.

Before I turn to the balance sheet, I'll make a few general comments about 2011. As I noted last quarter, although the economy is recovering slowly, we are seeing the impact of leverage in our business. Our priority is to maintain our lower break even point while growing our higher margin business In 2010, we added about $90 million in gross profit while reducing our SG&A for a full year improvement of about $100 million in operating earnings compared to the prior year. For the fourth quarter, we've gone from essentially break even to a 1.3% returnon sales on 11% revenue growth.

For the first quarter, I expect that revenue will continue to improve in the low teens on a year-over-year basis, but keep in mind that the first quarter is always our weakest quarter and that on a sequential basis we will see a decline in revenue. I expect that margin will be under pressure due to the lost of Hire Act benefits and higher net SUTA in the Americas. Our ability to offset this in the short run will depend on the recovery in permanent hiring. As Carl said, we see some improvement in this base, but the trajectory of business confidence is uncertain.. Expenses should continue to increase slightly on a sequential basis as we continue to add consultants in response to added volume, and in order to invest in our strategies of PT, in EMEA and APAC. I estimate our full year tax rate will be in the low 30% range with benefits or penalties for market returns on the life insurance policies continuing to add uncertainties.

Turning to the balance sheet, I'll make a few comments. Cash totaled $81 million, $8 million lower compared to the $89 million we held at year end 2009. Accounts receivable totaled $811 million and increased $93 million compared to year end 2009. For the quarter, our global DSO was 49 days, compared to 51 days last year. Accounts payable and accrued payroll and related taxes totaled $429 million, and increased $34 million compared to year end 2009.

Debt of $79 million was a reduction of $58 million compared to 2009 year end. At the end of the fourth quarter, debt to total capital was down -- was 11%, down from nearly 20% at the end of 2009. During the year we improved from a $48 million net debt position to having $2 million of net cash. Continued improvement in results, tight working capital management, and the sale of shares contributed to this significant improvement. As you may be aware, we have $62 million of term debt maturing in the next 12 months. We currently have more than enough available capacity on our revolver and securitization to repay this debt. Due to the recovery in the capital markets and Kelly's improved performance, we are in the early stages of renegotiating both agreements. We expect our revised facilities to carry more favorable terms and conditions, reduced pricing, and increased capacity. That will more than offset the maturing term debt. We expect to close the facilities prior to the end of the first quarter of 2011.

Turning to our cash flow. Net cash from operating activities was $42 million, a significant improvement compared to cash used of $27 million last year. The change primarily reflects the improved earnings in 2010. During 2010, we repaid $60 million of debt compared to $22 million of borrowing in the prior year. At this point, we feel very comfortable with our cash, debt and capital structure. We were able to grow receivables by nearly $100 million while at the same time repaying $60 million of debt. I'm confident we have the necessary resources to fund our business as the economy continues its recovery. With the additional actions we are taking with regard to our funding sources in the first quarter, we expect that our liquidity position will continue to strengthen. I'll turn it back over to Carl for his concluding thoughts.

We've seen a lot of change in the course of 2010. Looking back, the year was a lot stronger than we had expected it to be, especially given the depth and duration of the recession. We've emerged in a far better position than we were a year ago. As we take stock of the structural changes we've put in place, we're confident Kelly is positioned to make the most of the labor market demands that lie ahead.

Our restructured expense base is holding, we're retaining accounts, earning high marks in customer satisfaction, and winning new, large accounts as well. We've gained significant OCG contracts that will support long-term growth and profitability. Our commercial business is performing nicely, with light industrial at historic levels and office clerical on the rebound. Demand for professional and technical is picking up and we're moving up the value chain to higher end PT staffing, and fees are beginning to show improvement.

Turning to the immediate future, we look for sales to increase in the next quarter in the range of 10% to 15% year-over-year. Our gross profit margin should remain stable. Until higher-end PT staffing demand strengthens and fees increase, our margins aren't expected to change materially. We remain committed to maintaining tight control over expenses. As Patricia explained, cost increases will be in tandem with improved business conditions. Longer term, we're committed to return to competitive profit levels this cycle. Our sights are achieving an ROS in the range of 4%. Our success along the way will be measured by our ability to expand our PT business with greater emphasis on growing higher end opportunities as well as growth in our fee-based businesses. The pace at which we reach our goal is dependent in part upon the level of economic growth and the demand for labor, but we are committed to acting with a sense of urgency.

While we expect the continued pace of this recovery to be measured, Kelly is postured to exceed historic performance levels. We have a great opportunity to leverage our experience and expertise to help our customers to implement workforce relationships designed for today's changing marketplace. We know employers need access to hard to find talent, seeking more staffing flexibility, and require real time workforce solutions.

2011 is a year of focusing on our goals and execution of the strategy when we continue to reaffirm what we've set out to do. First, we will improve profitability, emphasizing higher margins, specialty staffing, expanding fee-based business, and leveraging our reputation for excellent service into broader, more profitable customer relationships. Second, we will deliver customer-focused workforce solutions across a broad continuum of offerings, spanning traditional staffing, professional and technical offerings, and outsourcing and consulting services. And finally, we will engage the best talent by attracting and retaining an exceptional team of employees, free agents and suppliers.

In closing I want to take the opportunity to thank our employees for this effort during the past year. They've done an outstanding job focusing on customer service, guarding our expenses and working smart to deliver solid results. And now, Patricia and I will be happy to answer your questions. Greg, the call can now be opened.

Thank you. (Operator Instructions). Your first question comes from the line of John Healey. Please go ahead.

Hi, John.

Hi. Good morning, Carl. A couple of questions I was hoping you could elaborate on a little bit. As you look to 2011 and you talk about the changes you've made to the business, I was hoping you could talk a little bit about the OCG business, maybe some of the pipeline that you feel is present there, and your thoughts on how some of the progress you've made over the last year or two from just signing up new accounts how that might play out as the year goes on, the conversations you're having with customers.

Actually, let me see if I can parse your question into parts here, John. First off, happily, the -- while we're still implementing some of the large accounts that were announced last year, there were press releases as you know on both BP and Rio Tinto, they're both moving forward in terms of both implementation, but also happily in terms of the revenue being generated from those, and so that's working. The implementation on the accounts that we won last year is proceeding pretty much on schedule with the normal hiccups as you move into global accounts. Pipeline is healthy, but as you would expect for these mega accounts you're talking about, there's only so many of them out there in the world, so healthy is a relatively small number.

I would say that if I look at 2010 and the lessons learned, it takes longer to implement than perhaps we were hopeful. I would say we're getting better at figuring out how to shorten that implementation curve, but these are new style contracts for the industry and implementation costs were higher and lengthier than we thought, which is why you saw some of the levels of losses inside OCG. The cost plus model that we've been working to implement during the implementation phase is a happier place to be and one that so far is working well. I can't remember the rest of your questions, John.

I think I got the gist of it there. I was hoping that, Patricia, you could talk a little bit more about your thoughts on the impact of Hire Act no longer being a benefit, and what your thinking regarding SUTA, if you did a good job of recovering most of it this year. How we should think about those two elements playing out maybe for the first quarter, I know Carl said stable gross margins, but was hoping you could give us a little bit more color on how you expect gross margins to move throughout the year.

Yes, John, we're really pleased with our results in Hire Act. We did a good job we think in collecting the money that we were owed, but of course then it goes away. So we knew that all year long. We didn't really anticipate that the Hire Act would be reenacted, and our operating teams have been very, very focused on making up the difference. It will be hard to do because during the same period SUTA was an issue for 2010, but offset by the Hire Act and of course it will continue to increase in 2011, we think probably another probably 40, 45 basis points.

So what we need to do, and working very actively at doing, is moving our business up with retail customers over some of our lower margin commercial, making sure that we're appropriately costed against the lower margin big accounts, and moving up the value chain especially with our PT business. I think it will take as I said in my comments, it will really take a difference in permanent fees before you -- that's the shortest term impact and we're cautiously optimistic about fees, but it's not completely clear, we don't have the ability to perfectly predict when that will come back.

So would you... oh go ahead.

No, go ahead.

Went you say you expect gross margins for the full year basis to probably be higher in 2011 than 2010 or do you think that we're in a situation where all the good things happen in the business really just kind of take over for some of the head winds you have from a burden standpoint?

Closer to flat, but with the upside potential depending on how fees come in.

Okay, thank you so much.

Thank you, John.

Your next question comes from the line of Tobey Sommer from SunTrust. Please go ahead.

Hi, Tobey.

Thank you. I have a question for you about your cost-cutting over the last couple of years. I think exiting 2009, if I remember correctly, maybe was $100 million, $110 million of structural expenses that you thought -- you trimmed out of the business that wouldn't have to recur with revenue growth. I was wondering just after completing 2010 whether that is still a fair assessment or if that number has either gone up or down since that time.

It's Patricia. Yes, we think that's still a fair assessment. We're tracking that internally very closely and we're comfortable. What you've seen come back are things we talked all the way through 2009 and 2010. We've had increases year-over-year related to incentives, comp. We've had -- and things like merit increases, salary increases for our employees, they're really important for us to remain competitive. Some hiring related to revenue-facing positions as volumes have increased, and those are really the big things coming back. We also said at the time that we would kind of see the discretionary costs like travel, all of that sort of stuff come back, but slowly. And I think the team has done a good job of keeping the reins on that. Frankly, it's come in even -- it's returned even more slowly than I had hoped. So I'm comfortable that we've maintained our discipline with the structural cost cuts we took out.

Great. Asking a question just to get a sense for what a 4% operating margin could mean in terms of EPS. Is each percentage point a margin, if I'm doing my math right, something like $0.90 or $1, is that about right?

Well it depends on how much -- what your revenue base is and so how much of the leverage you're getting from the revenue base versus not. So we didn't really want to put out an EPS number out there. Suffice it to say, we think that 4% is -- or approaching 4% is a competitive level and we need to get there in this economic cycle at the peak.

Sure okay. Is there just to put a fine point on it, any -- no wide variation as far as tax rate or other income or share account that you would anticipate this cycle?

No.

Okay. And then Carl, I wanted to ask one last question, and I'll get back into the queue. In your assessment of customers and their HR internal capabilities, are they bringing in ramping those capabilities back at a slower pace this cycle compared to your previous experience? And, if so, do you think that kind of impaired capability may persist?

Though I think they would disagree with impaired. I think during the course of this recession, at least in the larger companies, that they've stopped and are evaluating what is the role of HR in the company. I see it taking on a more strategic roll, and a lot more of the transactional activities that they were involved in being outsourced. So practices like RPO and CWO and so on, we're reflecting a strategic shift that they should be setting strategy rather than necessarily conducting thousands of transactions. And I do see hiring inside HR departments of customers proceeding at a very slow pace.

Thank you very much.

Yes.

Your next question comes from the line of T.C. Robillard from Signal Hill. Please go ahead.

Hi, T C.

Good morning, Carl. Good morning, Patricia. Patricia, I just wanted to make sure I'm interpreting some of the comments around guidance correctly or just kind of the outlook correctly. In terms of gross margin as we're moving into the first quarter, would you expect year-on-year pressure or were you talking in terms of pressure more kind of sequential?

It's not a huge difference. I mean, if look at it, either way those headwinds get to us. They get to us a little bit more because the Hire Act was disproportionate in the fourth quarter, right? Just the way map on it was ramped up over the course of the year, we got more of it there. But if you equalize for that, I think that it's -- the pressure is -- I was talking about specifically more a fourth quarter forward than I was a year-over-year.

Gotcha. Gotcha. Okay, that's helpful. And then as we look in terms of your comment about SG&A picking up quarter-to-quarter. I'm assuming that was in absolute dollars or were you talking a percent of revenue?

Absolute dollars.

Absolute. Okay, thank you. And then if we look at just on SG&A leverages as we run through the year, is there -- obviously, as revenues improve you're going to need to ramp up hiring and incentive [comp] it's going to pick back up, but can you give us a sense of how we should be thinking about the incremental margin structure as we progress through the year?

I think that we need to be really focused and we are really focused on wringing out every piece of capacity that we have. The issue tends to be that where your growth is isn't always where your capacity is and we saw that a little bit this year , where our growth hit us was especially in our smaller markets as the lid business came back and those are small branches with -- in small markets. You don't have a lot of excess capacity to -- that's easy to use immediately. But what we have done in order to keep efficient is we're moving more of our accounts to a centralized structure where we think, for example that, we can benefit from our added capacity. It's easier to manage capacity when we've congregated the recruiters and support people for an account centrally. So that would be the kind of example where I see us really maximizing our productivity and continuingto put the pressure on that. So we will be hiring with volume, but we're going to try to keep it to an absolute minimum.

Okay. In terms of just, maybe in terms of just an absolute margin, could we see kind of high single digits, low double digits in terms of an incremental operating margin as we run through this year, or do you expect some of the hiring and comp stuff to ramp a little quicker through the year?

Say that again, I'm sorry.

So I'm just trying to get a sense as to your incremental margins as we go through the year. So the incremental profit off of the incremental revenue. And then looking at it on year-on-year basis, can you run that incremental [up] margin at an 8% to 10% or 10% to 12% range as we go through the year, or is this going to be a function where because incentive [comps] are going up, because hiring is going to start to kick in, do you expect that incremental margin to actually start to pare back? It seems that if given your 4% target, it seems you should be able to run at a high single digit, low double digit incremental margin for several more quarters, but I'm just trying to get a sense, I'm just trying to balance that as we look through the year.

I understand, thanks for clarifying that. Yes, I've always been reluctant to put numbers out there's but yes, we have to make that number as high as we possibly can. The reason I'm always cautious about giving it is because it depends a lot on how we get it. It's really different if we get it in OCG versus in fees, and a little bit in PT (unintelligible) versus APAC. It's not -- I wish it were quite as simple as sort of doing a generic corporate margin and that's -- incremental margin, and that's how I've always been reluctant to put a number out there, but we have to lever up as high as we can possibly make it.

Okay, thank you. And Carl, just a quick question on the progress in OCG and thinking about it from an operating profit standpoint or improvement on the loss. Been good improvement over the last couple of quarters of roughly about $1 million a quarter, a little more. Can we expect to see that similar type of sequential improvement or is there some seasonality that hits into the March quarter? I'm just trying to figure out where that break even point gets. Can you get there in late 2011 or is that something that's going to shift into 2012?

First off, I think it's going to improve every quarter. Your question as to the amount of the improvement, and is there seasonality, there's so many different businesses in there. There is some seasonality and that there just tends to be lot of year -- some more year end projects than front end projects, but I'm looking for OCG to be -- to exit the year at a profitable point and so that's going to require substantial improvement quarter-by-quarter and we expect to see that.

Okay, great. Thanks so much.

Your next question comes from the line of Ashwin Shiravaikar from Citigroup. Please go ahead.

Hi, Ashwin.

Hi, this is actually Phil Stiller on for Ashwin.

An imposter.

I just wanted to follow up on the 4% operating margin target. As you think about it, where you are currently around 1%, how much of that improvement are you expecting to come from gross margin gains for SG&A leverage?

I expect both to contribute. I'm not -- as we slowly build the model for public consumption one of the key issues you've heard us saying again and again is we don't know what the pace of the PT recovery and firm job placement fees, those are two big pieces. They will account for a good chunk of that improvement in ROS, but hard for me to understand yet or to predict well yet what that impact is going to be in 2011.

I'm just thinking, I know that 4% is not a 2011 target, but do you need 200 basis points of gross margin expansion to hit that 18 -- or 4% target?

You can get there on different ways, but we do need both. We need gross margin expansion fairly significantly, which again will come from higher end PT and, as well as more PT volume and placement fees, and it has to come from expense leverage. We expect to deliver expense leverage throughout the entire up part of the cycle.

Okay. And then just going back to the Hire Act. Patricia, can you quantify what the benefit was for the fourth quarter and full year?

For the full year it was a little bit over $20 million.

Okay, great. Thank you.

Your next question comes from the line of George Van Weiss from Classic Fund Management. Please go ahead.

George.

Hi. Two questions if I may. First of all, can you give us some commentary on what's going on in Europe? I would have expected more of an improvement there it in terms of profitability and there really hasn't been much. And I'm just wondering if you've really done enough to restructure that business. And then in a similar vein, in Asia you haven't really shown that you can run those businesses very profitability yet you're already expanding there. What's the rationale behind that?

Starting with Asia, particularly where we're expanding and mentioning Singapore, Australia, we have demonstrated nice ability to produce profit and again, we very explicitly view those as growth markets of the future, and are putting recruiters in front of what obviously have been very high levels of growth in those markets. In Europe, we had historically very large levels of losses in Europe. We've returned now to moderate profitability, we're very happy with that improvement. So while we've yet to demonstrate high levels of profitability, I concur, we've demonstrated an ability to move from significant losses to profit, and on that point, we are quite happy with the performance in those markets.

And yet, quarter-over-quarter, there hasn't really been any growth, while some of the markets you are in have grown quite a lot, and I would have just expected at least something to be happening on the gross margin at that point or on the gross profit.

Well, we do have seasonality in fourth quarter. We talked about that, Carl talked --

I meant year-over-year, not quarter-over-quarter, my apologies.

Again, a fair amount of restructuring that we took place to take us out of markets last year. Again, I think year-over-year without restructuring, showing acceptable levels of improvement. And again, I'm more interested in the quality of what it is that we're selling than I am in terms of high volumes of low margin business. So I think you will see significant improvement this year in Europe. They significantly improved last year and I think you'll see it again, a very nice improvement in European earnings this year.

Great, look forward to it.

If not, I'm certain I'll hear from you, George.

Your next question comes from the line of Dan Mazur from Harvest Capital. Please go ahead.

Good morning, guys.

Good morning.

Just wanted to see if at some point you would be in a position to maybe provide a bridge on your 4% margin goal. I know that other companies have just put out a business mix or what gross profit per segment or an SG&A would look like. Obviously, even on your 2011 revenue estimate I think 4% margin equates to like $3.50 to $4 of earnings power. I know you're not going to get there next year, but there's obviously with where the stock is, there's some scepticism as to whether you'll be able to get to it. I think if you could lay out some bridge it may help people on just kind of modeling long-term and getting comfortable that this is something that's achievable.

I think the important thing to remember is there's a lot of different bridges. As Carl said, it's going to take a piece of all of the elements, leverage on the volume, keeping track of the expense, growth margin improvement. What's really important for us is to realize that regardless of the individual weights of those elements of the bridge, we need to get to 4% If it's not in one, it needs to be somewhere else, and that's why I really don't want to put a bridge out there because the point is we need to get there and if one piece doesn't work, then we'll have to push harder on the other pieces.

We've crafted alternative scenarios as to how you get there, that's part of the strategic planning process, and those scenarios are as dependant upon general economic conditions and shape of the recovery as anything else. I think I want to underline what Patricia said, we have multiple paths to get there. They just respond in different ways to what economic reality is.

Okay, now I -- That makes sense. Now with the cash -- I think you said you had net cash on the balance sheet. Any thought on just -- do you revisit a dividend, is there a buy-back in place? How are you thinking about capital management?

Several things. First off, we've said repeatedly that our CapEx has been -- is at too low of a point to be sustainable. We held back on expenditures that are necessary and you should expect as we've said in the last couple of conference calls, to see CapEx spending just beginning to trend up over the next couple of years. We said that we will look at reinstating the dividend, so I view those two as critical uses of cash, depending on where very rapid growth comes there will be investments needed in the business.

We talked as an example, about how we were adding recruiters with some pace into parts of Asia and trying to get in front of the pick up and demand on PT. In addition to what you may be asking, there are partnerships, there are strategic alliances, there are acquisitions that we will look at as this recovery unfolds. You know, the shift in our -- the shift in the way the world has approached staffing has enabled us to rely much more on strategic alliances and partnerships, so you'll probably see more emphasis from us on investments in those activities and less so on acquisitions as we go forward, but improving our capacity to deliver services around the world has to continue. You'll just see more use of partnership and strategic alliance vehicles than you did in the past.

Okay, that makes sense. And thenis that dividend, is that something that the board is discussing now, or what's the time frame for when do you think that could be reinstated?

We haven't set a time frame, nor have -- nor will I comment on what the board is discussing or not discussing. Executive management is discussing the dividend and where it fits into our use of cash, and where it fits into our investor policies running forward.

Okay, thanks.

Thank you.

(Operator Instructions). Next we'll go back to the line of Tobey Sommer from SunTrust. Please go ahead.

Thank you. Just wanted to ask a question about office openings and closures. I think during the downturn you were able to shut some operations in certain countries that maybe weren't profitable, and I just wanted to get your prospective on your ability to service customer needs in those countries through alternative means, if you're comfortable that so far the alternative means have been sufficient? Thank you.

Tobey, I'm comfortable in general with our -- with the amount of places that we're doing business as branches will shrink and grow for us as a measure of winning accounts which require on-site branches, the pushing of new services into existing places we do business, so I really think what you're asking about is not so much the number of branches we have, but will we need to increase our commitment to brick and mortar expenditures as we expand the business and I think there will be very little of that.

In general, while there will be some additional brick and mortar expenses as you look at, I can imagine as you look at some of the countries we operate in, in Asia in particular, but in general customers have gotten very comfortable and our temporary employees have gotten very comfortable with working with us in online activities, with working with us via call centers, and branches have a wider geographic zone of coverage now than they did a decade ago. Where you might see some -- a chance that you would see more investment, although it would be a relatively small amount in terms of brick and mortar, would be in our CWO practice as you have a need to establish very small branches but branches that coordinate activities and in new countries. But I don't think you'll see a significant number of new brick and mortar staffing branches.

And as far as the markets we exited entirely, we have no regrets about any of them.

Thank you. Last question from me is could you comment on some of the payroll taxes and other things that hit the gross margin, and just get your perspective for how things are proceeding in terms of being able to recoup the elements of those that you can from your clients? Thanks.

The big one by far is SUTA. We've been very happy with our recovery rate on SUTA. It's been good for 2010 and we're already pleased with our progress for what we anticipate in 2011. We never get all of it back; we're certainly doing a better job than we have in the past.

Thank you very much.

Thank you.

Your next question comes from the line of Tom Walsh from Detroit Free PressPlease go ahead.

Hey Tom, haven't heard from you in a while.

Hi, Carl. Could you just elaborate a little bit on what you see is the outlook for net job growth short of private sector versus public sector? You see it sort of steady where it's been the last few months or accelerating? And then if you see in the US any geographic mix to that?

I'm very interested in the job numbers coming out here very shortly. I think that we'll see, when you use the word accelerating that often implies big jumps. I think we'll see modest acceleration, but I do think that you're going see a net loss of public sector employment especially at the city and state level of 5,000 to 10,000 a month for the next year.

That is a -- that will take away a month of private sector growth, so it's going to be a more depressed overall number and I think you're very correct to try to look at it as private employment versus public employment because I think we're going to see public employment coming down fairly significantly over the next few months. Companies are just operating with a much greater focus on productivity and are achieving that just as we are, they are and I think it will take a faster GDP growth rate before you begin to see the 150,000 replacement rate number. I think we're going to be a little short of it for a while.

And geographic mix in the US, pretty similar across the country?

There's always differences, but for those of us here in parts of the Midwest, while the growth rates now are beginning to homogenize more around the country, because we had a year in which those of us in the upper Midwest here were continuing to decline while other parts were growing, the hole we're in is much deeper and the impact on our governments is more intense, so we're experiencing growth rates now pretty similar across the country, but the Midwest in particular is in a hole that is deeper than other parts of the country.

Okay, thanks.

Thanks, Tom.

At this time, there are no further questions.

Thank you, Greg. Thank you all.

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