Kelly Services Inc (KELYA) 2011 Q1 法說會逐字稿

Good morning, and welcome to Kelly Services first-quarter earnings conference call. All parties will be on listen-only until the question-and-answer portion of the presentation. Today's call is being recorded at the request of 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 to everyone, and welcome to Kelly Services 2011 Q1 earnings report and conference call. With me on today's 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, 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.

Now, let's discuss our first-quarter results. Last year's momentum has carried nicely into 2011. We are pleased to report steady growth and solid gains; as you may be aware, the first quarter is traditionally the weakest, being impacted by typical seasonal employment adjustments, and this one proved no different. However, our earnings this quarter were also impacted by 2 nonseasonal factors -- the first being expiration of the HIRE Act, which Patricia will cover; and, second, an out-of-line expense increase in our Americas region, which was unacceptable. Simply put, in the Americas, we geared up too aggressively. During the quarter we took action, have already seen expense improvement late in the quarter, and we've entered the second quarter with the Americas' expenses in line with revenue.

You may recall that a big part of the restructuring we undertook in 2009 and '10 addressed our Company's cost structure. We are very serious about holding a lid on spending and maintaining a lower expense base; and, be assured, we will continue to monitor and make appropriate adjustments when needed. Aside from the disproportionate increase in Americas' expenses, as the quarter played out, we saw encouraging improvement across nearly every segment of our business.

Revenue increased nicely and we held our gross profit margin; and, as a result, for the quarter, Kelly's adjusted earnings were $0.14 per share, compared with last year's adjusted first-quarter earnings of $0.05 per share. These results keep us on a positive course for the year. For the first quarter, we achieved an adjusted operating profit of $5.6 million, a nice improvement over the comparable earnings of $2.8 million earned in the first quarter of 2010.

We believe that the economic recovery has taken a firm hold, job figures show steady improvement, orders are up, and consumer confidence is moving in the right direction. Our paired-down structure and sharpened strategy, coupled with these trends, will supply added energy going forward. Specifically, in light industrial -- the harbinger of economic growth -- it is still on the upswing around the world. In our professional and technical sector, demand has continued to grow as well. As the economy improves and full confidence is restored, we anticipate PT demand to strengthen further, along with demand for fee-based services. Also, you will remember, that a key part of our strategy calls for a shift to fee-based and other higher income producing offerings, and I am pleased to report that we are seeing continued fee improvement and increased demand in our OCG segment.

Looking at broader economic indicators, in the US, April marked the twentieth consecutive month that the temp penetration rate increased or held steady. Now standing at 1.72%, it's at the highest level in over 2.5 years. More than 50,000 temporary jobs were added in the first quarter. Looking at the job market more broadly, the unemployment rate increased slightly to 9% in April; but, among college graduates, the job picture remains promising with unemployment hovering around 4.5%.

We have said this before, but it bears repeating -- this period of employment adjustments favors the staffing industry. Until full business confidence is restored, employers will disproportionately turn to temporary workers and the flexibility they provide; but, in fact, we believe that the entire labor model may be shifting towards more contractual employment as a means of adjusting the rapidly evolving economies. The gap between demand for high-tech/high-talent workers -- and the availability of those workers -- certainly suggests this will continue to be the case.

Now, I will zero in on each of our business segments and provide you with greater detail about our first-quarter performance beginning with Americas Commercial. Revenue in the Americas Commercial in the first quarter increased 19% year over year. On a sequential basis, revenue was up 1% for the quarter.

Within the Commercial segment, light industrial staffing and electronic assembly continued to experience strong year-over-year growth, growing 26% and 55%, respectively. Office clerical staffing continues to exhibit slower growth, increasing 3% year over year. Placement fees increased 40% year over year for the quarter, with increases in both conversion fees and direct placement fees; and, on a sequential basis, placement fees were up 33% for the first quarter, compared with the fourth.

Commercial's gross profit rate for the current quarter was 14.2%, or 10 basis points lower than the same period last year; and, as we expected, on a sequential basis, the GP rate was 100 basis points lower than the fourth quarter, due to the expiration of the HIRE Act. Overall, we are encouraged by the business growth seen in the Commercial segment for the quarter. As noted previously, spending in the Americas Commercial segment was out of line, compared to revenue growth, increasing 16% compared to last year and 3% on a sequential basis. During the quarter, we reduced a significant number of positions to a line expense with expected business growth. Americas Commercial earnings were $17 million in the first quarter, growing 27% over the prior year.

Now, on to the America's Professional and Technical segment. PT revenue in the first quarter increased 17% year over year. On a sequential basis, PT revenue was up 5%.

For the quarter, our IT business grew 28%, engineering 26%, and our science business grew at 20% year over year. We are also pleased that we experienced sequential growth across most business lines in the quarter. Combined temp-to-perm and direct placement fees for Professional and Technical increased 27% year over year and 23% sequentially. For the entire segment, our gross profit rate was 15%, down 30 basis points from the same period last year. This was due to business mix as we continue to see stronger growth in the lower margin PT skilled positions.

Sequentially, the GP rate is down 100 basis points, attributable to the HIRE Act expiration. As we experienced at Americas Commercial, expense growth in PT outpaced revenue growth. For the quarter, expenses increased by 20% year over year and 12% sequentially. The increase was due primarily to the hiring of recruiters, higher salaries, and performance-based compensation in support of our PT expansion efforts. All in all, PT earnings were $8.5 million for the quarter, about flat to the prior year.

As I noted earlier, the level of expense growth in the Americas during the quarter was unacceptable; but, we have taken the corrective action to bring expense growth back in line with current revenue trends, and for the second quarter, we expect to hold the Americas' expenses at or slightly below Q1 levels.

Now, let's turn to our operations outside the Americas, beginning with EMEA. Reported revenue in EMEA Commercial was up in the first quarter, compared to last year, by 13%. On a constant currency basis, revenue was up 10%. For the remainder of my EMEA 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 45% year over year. This was primarily driven by the performance in Russia. Western Europe was up 13% year over year, primarily attributable to our operations in Switzerland, Germany, and Portugal. We continue to see nice improvement in fees for the quarter. Fee revenue for Q1 was up 16% year over year.

The quarterly GP rate for the first quarter was 16.1%, slightly up from the 16% for the same period last year. Expenses were up 5.6% year over year in constant currency, excluding changes and estimates to restructuring, which Patricia will address in her financial review. We continue to add new consultants in targeted countries throughout EMEA in response to growth opportunities. Excluding restructuring, EMEA Commercial's first-quarter performance improved by over $1.5 million, compared to the same period last year.

EMEA Professional and Technical also improved this quarter, with revenue increasing 16% year over year. Fees in the first quarter are up, compared to last year, also by 16%. The gross profit rate in this segment decreased to 26.6% for the quarter, compared to 27.1% last year. PT expenses increased by 9%, compared to a year ago, on a constant currency basis. EMEA PT reported a profit of almost $300,000, an improvement over last year's loss.

In our APAC region, we continue to see strong revenue growth across both Commercial and Professional and Technical segments. Combined revenue for the region grew by 26% year over year, or 16% on a constant currency basis. That is consistent with the 15% constant currency increase in the fourth quarter. Australia, Singapore, and India all exhibited strong growth. Fees continued to improve in the region, and were up by nearly 60%, or 46% on a constant currency basis for the quarter.

Our GP rate for the region increased by 70 basis points, as a result of strong growth and fee income, offset somewhat by a decrease in the temp GP rate. Expenses for the quarter were up by 35%, or 24% on a constant currency basis. This reflected continued investment in that region, particularly in PT. As a result of the increased investments we've made, we had a small loss for the quarter, compared to a small gain in the prior year; and, although we plan to make additional investments across this region, we are on track to return to profitability in 2011.

Our final segment is our Outsourcing and Consulting Group, OCG. As our first-quarter results indicate, we are making considerable progress in OCG as customer demand strengthens. OCG revenue was up 23% in the first quarter, compared to last year, and we narrowed our loss for the quarter. In fact, all 3 of our regions within OCG had double-digit revenue growth for the quarter as compared to last year, as well as improved earnings performance. We are pleased with the progress we are seeing on all of our practice areas within this segment.

Globally, in our Recruitment Process Outsourcing practice, revenue was up nearly 90% versus a year ago, and RPO earnings for the quarter were up nearly $1 million, compared to that same period last year. Our CWO, Contingent Workforce Outsourcing, practice also had strong growth in the first quarter. The revenue was up 45% compared to a year ago. The return from our substantial investment in CWO is beginning to emerge, especially in the Americas and EMEA.

Our Business Process Outsourcing practice, BPO, continues to recover from client losses experienced in 2010. In fact, BPO had positive revenue growth of nearly 4% year over year. Our Executive Placement practice also reported significant year-over-year revenue growth during the quarter of 42%, and earnings from this practice area also significantly improved compared to last year.

Overall, OCG's gross profit rate is 240 basis points higher than a year ago. The improvement in GP rate is due to better volume mix. Expenses were up $2.8 million, or 15% year over year, in OCG; and, the increase in expenses is primarily the result of support costs associated with customer programs. On a combined basis, OCG had a loss of $2.4 million in the quarter. Again, this is a significant narrowing from the $4.5 million lost a year ago and the loss of $3.1 million in the fourth quarter. We continue to make progress and are on the path to achieving profitability in this segment in 2011.

Now, I will 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 19% compared to the first quarter last year. On a sequential basis, revenue was essentially flat compared to the fourth quarter. This represents underlying growth, since we typically experience a seasonal decline from the fourth quarter to the first quarter. Worldwide, our fees were up 34% year over year, an improvement compared to the 22% growth rate in the fourth quarter. On a sequential basis, our fees were also up 22%. The fee growth is beginning to help our GP rate, but fees are still 18% below the first quarter of 2008.

Our gross profit rate was 16%, an increase of 10 basis points compared to last year. On a sequential basis, our GP rate declined by 30 basis points, due to the expiration of the HIRE Act, partially offset by higher worldwide fee-based income.

Before I discuss expenses, let me explain the restructuring charge we took this quarter. During the last couple of years, we incurred significant restructuring charges, primarily related to employee and lease termination costs. During this quarter, we revised our estimate of UK lease termination costs and took an additional restructuring charge of $4 million. This charge is not related to any new activities, but is an adjustment of the estimated costs from prior years.

Excluding restructuring charges in both periods, expenses were up 17%. As Carl mentioned, the year-over-year increase is due to additional headcount, as well as incentive-based compensation and merit increases.

In the first quarter, our GAAP earnings from operations were $1.6 million, compared with a loss of $1.6 million in 2010. Excluding restructuring charges in both periods, earnings from operations were $5.6 million, compared to $2.8 million in 2010. Income tax expense in the first quarter of 2010 -- of 2011 was $100,000. Relatively low income levels, combined with employment-related tax credits, contributed to this low tax rate for the quarter. Diluted earnings per share for the first quarter of 2011 totaled $0.03 per share, compared to a loss of $0.06 in 2010. Excluding restructuring charges, we earned $0.14 per share in 2011, compared to $0.05 in 2010.

Before I turn to the balance sheet, I will make a few general comments about our expectations for the second quarter. We expect continued strong revenue growth in the mid-teens on a year-over-year basis. Sequentially, we expect that the gross margin will be relatively stable, although we may see some improvement if these continue to increase. Please keep in mind, though, that beginning in the second quarter, gross margin comparisons will get more difficult. Last year we received $2.6 million of HIRE Act payroll tax benefits in the second quarter and $21 million for the year. The HIRE Act payroll tax holiday expired at the end of 2010.

Expenses should continue to increase slightly on a sequential basis. As Carl noted earlier, on a sequential basis, we expect to hold expenses flat in our Americas region. However, we will see increases related to incentive-based compensation and investments in recruiters and IT infrastructure in the rest of the Company.

For the full year, we expect that our tax rate will be in the range of 15% to 20%, lower than our prior estimate of 30%. The decrease in the rate is primarily due to the retention credit portion of the HIRE Act. The HIRE Act's benefit has migrated, from being a payroll tax relief included in cost of services, to an income tax credit included in tax expense.

Retention credits are available when HIRE Act employees maintain employment for a year and meet certain wage requirements, and we expect it will provide about 9 points of tax rate reductions for the year. The remaining tax rate benefit is due to our work opportunity credit realization, improving from our already high levels. This low tax rate is a direct result of good performance in our US field operations.

Turning to the balance sheet, I will make a few comments. Cash totaled $60 million, $21 million lower compared to the $81 million we held at year-end 2010. Accounts receivable totaled $876 million, and increased $65 million compared to year-end 2010. For the quarter, our global DSO was 52 days, compared to 51 days last year. Accounts payable and accrued payroll and related taxes totaled $478 million, and increased $53 million compared to year-end 2010.

During the first quarter, we took advantage of better conditions in the credit markets and our own improvement in financial performance; and, we renegotiated the terms of our revolver and securitization, increasing the combined capacity from $190 million to $300 million. Just prior to the closing of the new facilities, we repaid $63 million of term debt, which was due later this year. Including debt repayment, we increased capacity by about $50 million. The new facilities carry improved pricing and more flexible terms and conditions, so our debt structure is now free of term debt, with $300 million of capacity with terms of 3 and 5 years.

At the end of the first quarter, debt stood at $65 million, a reduction of $13 million compared with year end. Debt to total capital was 9%, down from the 11% at the end of 2010. And, in our cash flow, net cash used in operating activities was $5 million, an improvement compared to cash used of $19 million last year. The change primarily reflects reduced working capital requirements in 2011.

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

Thank you, Patricia.

When we last reported to you, we reviewed our planning and restructuring that was completed in 2010, and we referred to 2011 as a year of execution. After significantly streamlining our operations and geographic footprint, tightening expenses, refining our goals, and reshaping our business strategy last year, this is indeed a year for tactical execution. Our performance over the past few months, coupled with decisive corrective actions, give us every confidence that the strategy is playing out well.

To highlight, we are scoring high marks in client satisfaction, retaining our valued clients, and winning important new accounts as a direct result of exceptional customer service. Our commercial business is performing well. Light industrial remains above pre-recession levels and continues to set new records. We view this as the first substantive indicator that supports the temp penetration rate increasing beyond its prior peak.

We have seen significant growth and considerable performance improvement in our OCG segment. We are winning contracts and demonstrating OCG is important as a vehicle for accelerating Kelly's long-term growth and profitability. Growth in professional and technical staffing is accelerating, and, more importantly, we are beginning to move up the value chain to deliver higher end PT staffing.

We are starting to see some recovery in fees with both year-over-year and sequential improvement as we focus on expanding our higher margin fee-based services. And, as we emphasized this morning, expense control is top of mind. We reacted quickly to the out-of-line expense increase in the Americas during the first quarter, and we are back on track to maintain a lean operating structure going forward.

In that context, it's helpful to revisit our long-term goals. We are focused on improving profitability by focusing on higher-margin specialty staffing, expanding fee-based business, and leveraging our reputation for exceptional service into broader, more profitable customer relationships. We aim to achieve a 4% return on sales.

We are and will continue to act with a sense of urgency and discipline to execute our strategy. We are resolved to provide value-added staffing services suited to today's competitive real-time business conditions. We are delivering customer-focused workforce solutions across a broad continuum of offerings, spanning traditional staffing, professional and technical offerings, and outsourcing and consulting services.

Finally, executing our strategy all comes down to talent. Kelly will engage the best people to meet our clients' needs and fuel our profitability by attracting and retaining an exceptional team of employees, free agents, and suppliers.

To summarize, Kelly is well positioned. We're a strong, energized team with resolve. This is the time to leverage our experience and implement our strategies. As this quarter's performance confirms, we have made important strides and we will continue to make progress.

That concludes today's report. Patricia and I will now be happy to answer your questions. John, the call can now be opened.

Certainly. (Operator Instructions)

First, the line of Tobey Sommer with SunTrust. Please go ahead.

This is actually Frank in for Tobey. Congratulations on a nice quarter.

Wanted to ask a little bit about the United Kingdom. Any color you could give there? It looks like it was down a little bit at least year over year. Any signs of improvement or civilization in that market?

The UK market, I think, overall has become fairly stable. We have repositioned ourselves inside that market. We've refocused more on Professional and Technical inside the UK. We stepped out of several large, but not profitable, commercial relationships, and we continue to be pleased with our performance in the UK market, but if you are looking for broader indicators, the UK market is growing, not as fast other parts of Europe, but growing and stable.

Okay, great.

And you mentioned going up the value chain in PT. Could you give us some examples of that or particular areas that you find particularly attractive or you're making steps to move into?

If you look at areas where we have been growing strongly, like science as an example, where we have been supplying large numbers of clinical trial researchers, as an example, we continue to move up to, providing the project leads for those clinical trials.

If you look at engineering, which has been another area of strength, again, while we have been providing large numbers of the engineers looking to, again, move up the ranks both of the technical quality of engineers as well as the project leadership, and a particular focus on -- in the IT space, on IT networking.

Okay, great. That's helpful.

Two quick cash related questions, 1, CapEx for the year, any expectations there?

Two, if you could comment on your thoughts in terms of use of cash going forward? Are you looking at acquisitions? Are you looking at buybacks, et cetera.

On CapEx, we had relatively low levels of CapEx this quarter. We know it will be going up, primarily related to some IT infrastructure that we are in the process of putting in. We basically held CapEx low for the last couple of years, so we had some catch-up to do to get us back to a reasonable level. I'd expect it to be between $20 million to $25 million for the year, so you can tell that it will be a little bit back loaded.

In terms of cash use, we are comfortable with our cash position. We are especially pleased with the debt restructuring, which gives us a nice amount of capacity, which I think will give us flexibility for any kind of movements that we want to make. Our Board continues to look at when it might be appropriate to restart the dividend, and I would say that buybacks would be, quite a bit lower down on the list compared to that.

Great. Thank you very much.

Thanks, Frank.

And next go to Ashwin Shirvaikar with Citi.

This is Phil Stiller on for Ashwin. I wanted to add my congratulations on the good revenue performance in the quarter. Carl, I was wondering if you could comment on the revenue trends within the quarter. Did you see acceleration in the growth rate throughout the quarter? Then, perhaps comment on what you have seen in April thus far.

I can't comment on what we are seeing in April so far. The month is still unfolding, but things were fairly stable, once you get past the holiday period. I would call it a steady growth across the -- in terms of what we would expect on the volume side. Year-over-year comparisons are always strange because we were just beginning to come out of the recession at that point, but it is behaving both seasonally like we would expect and performing at a fairly steady state.

The second quarter comment on the midteens growth, does that include benefits from currency?

No, that's a constant currency.

Okay. That's helpful. And then, the SG&A progression throughout the year, can we look at what it was in 2010 to get some base line as to what to expect this year?

Yes, I think so. It's hard to keep it completely flat, partly because you end up with some wage inflation benefits increase. We also have the incentive compensation which we constrained, highly constrained last year. And then, finally, we are investing in PT recruiters primarily around the world, in the Americas, APAC, and in EMEA. So, yes, I think a steady progression through the year, which is what you saw last year, is appropriate.

Lastly, Carl, you mentioned you are on track for profitability both in APAC and OCG. Did you mean full-year profitability this year or just by the end of the year?

By the end of the year.

Okay, great. Thank you very much.

(Operator Instructions)

We go to the line of Gary Bragar with NelsonHall. Please go ahead.

Hi, and my congratulations as well on the nice quarter. I just have a question, and apologies if I missed it, because I came on after you started. Within the OCG, could you please comment on the growth of RPO?

We did, and if you give me a second, I will flip back to the page and tell you what we said there. We talked about 90% growth in the RPO business, compared to a year ago, and we said that earnings for RPO were up nearly $1 million compared to the same period a year ago. That reflects just a general lift that you see in hiring around the world, compared to a year ago.

Great. Thanks very much.

No problem.

And we have a question from Dale Dutile with The Boston Company. Please go ahead.

Good morning. Just wondering if you could expand on your comments about the expense growth? What happened there and what's been done to address that?

The difficult part as you are facing a rising demand is how many recruiters do you need in the space and with what pace do you expect the increase in demand to flow and I would say that we got out in front of where the demand actually ended up. And a lot of those recruiter positions -- we were out ahead of market demand in some of the markets and we stepped them back down as we saw where the demand flow was going to be.

So, that was mostly in North America Commercial, I'm assuming, or PT as well.

It was heavily in North America Commercial and somewhat in PT.

Is there some metric we could look at going forward, incremental SG&A per incremental dollar revenues? How should we think about -- or how do you think about planning the business internally from expense leverage perspective?

I tend to look at it more in terms of the gross profit dollars than I do the revenue dollars, and the question is, how much of the incremental gross profit do you convert, which is leverage? That would be the metrics that we would tend to focus on.

How would I look at that metric changing that, f you are successful in reigning in the expense growth somewhat?

Haven't released it, but again, I'll just -- a little more color. It depends partly where the gross profit growth comes. As you have been following what we have been doing in the APAC region, we are investing at about even with the pace that we've been growing gross profit, because that job market there is just growing dramatically and we are adding recruiters at a fairly good clip.

As the GP grows inside the Americas region, I expect a very high-level of leverage. As an example, you heard both Patricia and I say, we expect the expenses to be relatively flat in the Americas, which means all of the incremental GP, roughly, for that quarter begins the fall down.

It gets complicated as you look more than a quarter out, because it depends what business lines and what capacity is left inside those business lines in terms of where the growth comes, but for us the focus is how much of the gross profit -- incremental gross profit can we convert and drop and that is where the management team is focused.

Okay. Thank you very much. That's helpful.

And we have a question from Josh Vogel with Sidoti. Please go ahead.

Good morning. Thank you.

Can you please talk about or quantify what the drag was from pseudo-taxes in Q1?

A fine question that I actually don't have those numbers sitting here with me.

Okay. I can follow-up off to the call. On the last call, you expected pseudo to be about a 40 to 45 basis point drag. I'm just curious of those expectations were in tact?

Yes, I think that's pretty close. We would say that -- we might be doing actually a little bit better than that because our recovery has been higher than we thought it would be when we gave those numbers, so I think that we are going to talk about a little bit more closer to 20 to 30 instead.

Okay.

Just a question on France. We saw modest 5% growth there year over year. Just saw a couple competitors put up a little bit stronger growth. I was just curious if you may be in different markets or could you possibly be losing some share there?

The blunt answer is that both were in different niches, but specifically we are underperforming in France. Yes, we have lost share, and we are looking to address that issue.

Okay. Just lastly and I will jump back in the queue, are you planning any additional restructurings or adjustments to prior restructurings?

No.

Okay. All right. Great. Thank you very much.

(Operator Instructions)

And, we have a follow-up from Ashwin Shirvaikar. Please go ahead.

This is Phil Stiller again. I just wanted to ask about the tax rate. It seems like most of those benefits will occur just in 2011, so as we look further out, should we expect a return to the low 30s?

Yes, I think so. It will also be affected as our earnings continue to improve because the effect of the tax credits becomes less and less as you have more earnings, so I think that would be a better projection. The work opportunity credit benefit that we get, though, is a long-lasting benefit that we continue to expect that we'll get. It is worth a lot to us and our branch operations to really a best in class job of collecting on it. They have used that same discipline to tackle the HIRE Act, which is why you have seen such outsized benefit for us on the HIRE Act.

Okay. And then just lastly, in Japan, have you guys seen any impact from the earthquake on your joint venture there?

Our operations are small -- that we have left in Japan are small. With our temp holding partners, they will be talking about this in their earnings releases and so on, so I won't jump to conclusions. Obviously, supply chains are disrupted in Japan. That is all over the media, somewhat offset by a tremendous amount of recovery work that is taking place, and the temporary staffing firms are heavily involved in Japan in the recovery efforts.

Okay. Thank you.

We do see a little bit of impact, say, in our Toyota business here in the US. Some of this -- it's clear the automotive sector is impacted by the supply chain, so we see a little bit of that, but not worth calling out.

Okay. Thank you.

Mr. Camden, no further questions in queue.

Very good. Thank you, all.

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