Kelly Services Inc (KELYA) 2013 Q1 法說會逐字稿

Good morning, ladies and gentlemen, 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, everyone. Welcome to Kelly Service' 2013 first quarter 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 the statements made on this call. Please refer to our SECfilings for a description of the risk factors that can influence the Company's actual performance.

Now let's turn to Kelly's first quarter results. I am pleased to report that we exceeded our expectations on a tough economic environment. Though revenue was down 3% year over year and constant currency, we held our expenses flat and made targeted investments in our long term growth and achieved an operating profit of $7.1 million. Our gross profit rate was 16.5%, flat with the first quarter of 2012.

Kelly's first quarter operated earnings from continuing operation were $0.34 per share, compared to last years earnings of $0.24 per share for the same period. I'll remind you that these earnings reflect a $0.26 per share impact resulting from the delayed reinstatement of the Work Opportunity Credit, which wasn't passed until January 2013.

Now let's take a closer Look at our first quarter performance in each of our business segments, beginning with the Americas.

We continue to experience softening revenue demand in the Americas that began in the third quarter of 2012, as customers remain cautious about the economic environment. Combined staffing revenue for the region was down 3% year-over-year. Americas' commercial revenue was down 5%, year over year for the first quarter. This compares to the 2% decrease we reported in Q4.

Light industrial was flat compared to the same period last year, while office clerical was down 10%. Kelly education staffing, on the other hand, had growth of 5% year-over-year as we continued to add new customers.

America's PTrevenue was basically flat year-over-year as compared to the 5% growth we reported in the previous quarter. We are now seeing a softening in the higher end PT market,as many of our customers are completing projects and then delaying new product implementation.

With MPT the strongest year over year growth came from healthcare and engineering. However, this growth was offset by year-over-year declines in science, IT and finance. On a more positive note, the Americas region combined temp to perm, direct placement and other fees grew 13% in Q1 year over year, are up 15% compared to the prior quarter.

Americas' gross profit rate for the quarter was 10 basis points higher than the same period last year. Expenses in the Americas were up 6% year-over-year. Nearly of half of this increase is attributable to a one time charge of $3 million relating to a state unclaimed property audit. The remainder of the increase is due to planned investments we are making in professional and technical staffing, and centralized operation staff to support our largest customers, and in our technology infrastructure.

These targeted investments will continue throughout 2013. And as we mentioned on our last earnings call, though they may be a drag on the regions earnings in the short term, we expect these investments to deliver positive long term impact as they enable us to execute our strategy with improved focus, speed and efficiency.

All told, Americas achieved earnings of $25 million for the first quarter. While this is a decrease from the previous year, our performance was solid and in line with our expectations, given both the invest moment strategy we have chose to follow and the lower volume we are experiencing.

Let's turn now to our operations outside the Americas, beginning with [EMEA]. Revenue in EMEA was down 4% in the first quarter compared to last year on both the reported and constant currency basis. For the remainder of my EMEA discussion all revenue results will be discussed in constant currency.

As expected, economic and business conditions remain challenging across Western Europe, and staffing markets are continuing to decline at down digit rates. For our operations in total we saw a commercial revenue decline by 6% year-over-year for the quarter. But I am happy to note that we saw growth of 3% in professional and technical staffing.

For Kelly specifically, Eastern Europe was up 6% year-over-year, due primarily to the performance of Russia and Hungary, while the in Nordics and Western Europe experienced declines of 9% and 6% respectively. The declines are primarily attributed to weak commercial temp sales.

During the quarter we also saw a decrease in our fees across the region. Fee revenue for the first quarter was down 11% year over year. The decrease can be seen across both our commercial and PT segments.

EMEA's GP rate was 17.1%, compared to 17.6% for the same period last year. Our GPperformance during the quarter was positively impacted by the new CICEtax credit in France. The intent of the CICE is to improve business competitiveness by reducing the cost of labor.

The benefit in the quarter was worth roughly 60 basis points. Aside from this benefit, the overall the GP decline in EMEA is attributable to continued margin erosion in the commercial segment due to customer mix as well as the decline in perm fees.

In constant currency, expenses decreased by 6% year-over-year. This reduction is primarily due to decreases in variable costs in the commercial segment, in line with the level of activity.

Netting it all out, EMEA's were basically flat compared to the same period last year. Given the difficult economic and business conditions, particularly in Western Europe, we are pleased with our performance during the quarter. We remain focused on efficiency and expense control, as we expect conditions to remain challenging for the staffing industry for the foreseeable future.

Next we turn to APAC. We are continuing to optimize our operations across APAC. You may recall we completed a North Asia joint venture with Temp Holdings during the fourth quarter of last year, and as a result we are no longer consolidating our former subsidiaries in China, South Korea, and Hong Kong. For a comparison purposes, year-over-year percentage changes do not include the impact of no longer consolidating these operations.

During the first quarter of 2013 we combined our business across Australia and New Zealand into a single management structure to streamline our operations there, and this resulted in a $200,000 restructuring charge. Combined revenue for the APAC region declined by 7% in constant currency year-over-year. This is largely due to exiting a low -- a number of low margin customers in India during the first half of 2012 and weaker economic conditions across Australia and New Zealand.

Fees declined by 17% year-over-year due to softening demand over the region. The exception was India, where fees grew by 30% over the quarter. Our gross profit rate for the region was 16.3%, down 60 basis points compared to last year, primarily the result of the decline in fees. The expenses remain well controlled and were down by 10% in constant currency for the quarter. We concluded the quarter by improving earnings slightly ahead of the same quarter last year.

Now we will turn to our results of OCG, an important segment that continues to be driver of growth. OCG revenue was 14% in the first quarter compared to last year. Growth within OCG continues to be driven by two core elements of our talent supply chain management strategy, business process outsourcing and contingent workforce sourcing.

Revenue in our business process outsourcing, BPOpractice, was up 30% year-over-year. This is primarily due to an increase in our traditional BPOsolutions within the Americas as well as increased demand in our KellyConnect or our contact center solution. Fee revenue was up 42% year over year in our contingent workforce, or CWO practice.

We are pleased that we continue to experience double digit work rates in both BPO and CWO year over year. Overall, OCG'sgross profit rate was 27.3%, compared to the 26.7% a year ago, with the improvement due to growth in higher margin practice areas.

Expenses were up roughly $3 million or 12% year-over-year. This increase is the result of servicing cost associated with the expansion of customer programs and new customer program implementation, but all and all we are realizing significant operating leverage.

For the quarter, OCGreporting earnings of $1.7 million, compared to earnings of $500,000 a year ago. Strong growth in our BPO and CWO units clearly helped to boost our first quarter earnings.

We are very pleased with the strategic progress we are making in this important segment. As we look to the second quarter, we are anticipating a small loss in OCG as we make planned investments during the quarter to support future growth in one of our strategic accounts.

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, a decrease of 3% compared to the first quarter last year. Worldwide our fees were flat year-over-year.

Our gross profit rate was 16.5%, flat compared to the first quarter last year. On a sequential basis our gross profit rate was up 30 basis points, due primarily to the improvement in fees. Expenses were flat year over year and on a sequential basis.

As Carl mentioned, we recently settled an unclaimed property audit with the state of Delaware, and as a result recorded a $3 million charge in the first quarter. Absent this charge, expenses were down both year over year and sequentially. As a result of our continued efforts in controlling expenses, we were able to offset the investments we have been making with further expense cuts. Restructuring did not have the expected $500,000 impact in the first quarter. We now expect that impact to be incurred later in the year.

In the first quarter earnings from operation were $7.1 million, compared to 2012 earnings of $14.7 million. Income tax for the first quarter was a benefit of $6.8 million, comparedexpense of $4.9 million in 2012. Included in the tax benefit is $9.7 million of 2012 Work Opportunity credit, which we recorded in the first quarter.

Diluted earnings per share from continuing operations for the first quarter of 2013 totaled $0.34 per share, compared to $0.24 in 2012. The increase is due to 2012 work opportunity credits.

Looking ahead to the second quarter of 2013, we expected revenue to be flat to down 2% on a year over year basis, up 2% to 4% sequentially since the first quarter is always our weakest quarter. We expect continued pressure on the gross profit rate, holding us flat on a year over year basis.

We expect SG&A to be flat sequentially and to increase around 5% year-over-year. As I discussed last quarter, we will continue to invest in our PTand OCG businesses as well as front office systems and expansion of our large customer service delivery model.

Our 2013 annual income tax rate will be around 10%, including the retroactive Work Opportunity credit. Our tax rate is highly depend on the mix of our business, especially the amount of US, LID business, which drives the Work Opportunity credits, the geographic mix of business, earnings or losses from our deferred compensation plans and tax planning.

Turning to the balance sheet, I'll make a few comments. Cash totaled $62 million, down from $76 million at year end 2012. Accounts receivable totaled $1 billion, decreased $14 million compared to year end 2012.

For the quarter our global DSOwas 54 days, flat with last year. Accounts payable and accrued payroll and related taxes totaled $562 million, up slightly compared to year end 2012.

At the end of the first quarter debt stood at $50 million, down $14 million from year end 2012. Debt to total capital was 6%, down from 8% at year end. In our cash flow we generated $6 million of net cash from operating activities, compared to $13 million last year. The change primarily reflects higher additional working capitol requirements in 2013.

With the weak revenue situation, it is still a strong operational performance this quarter. And I'll turn it back over to Carl for his concluding thoughts.

Thank you. As our first quarter results demonstrate, Kelly's strategy continues to deliver progress in three key strategic areas. First, our OCGsegment continues to deliver strong revenue, GP and earnings results, as we leverage higher margin fee base business and strengthen our talent supply chain capabilities.

Secondly, our professional and technical staffing solutions are driving a more profitable business mix, as we meet increase market demand for higher skilled, higher margin talent. And finally, we continue to keep a close eye on expenses, making strategic targeted investments that support our long term growth while delivering an operating profit in the face of lower revenue.

This progress confirms that Kelly's strategy is designed with the modern labor market in mind and is positioning us to take advantage of secular trends that favor higher end work force solutions and highly skilled professional technical talent. Still, while we are pleased with Kelly's first quarter results, we are realistic about the erosive impact of the sluggish recovery in which we are operating.

Reaching our 4% on return on sales goal will require stronger, more sustained economic growth than we are likely to see in the near term. The slow and uneven growth trends we saw in 2012 remain with us, as the US economy grew less than expected in the first quarter of 2013.

And as a side bar, the US employment is below 8% and declining, one of the primary drivers has been a shrinking labor force rather than a growing demand for labor. So even though modest job growth is occurring, we are not seeing the corresponding uplift in our industry that we have typically seen in previous recoveries. And while some indicators point toward improving temporary staffing levels, the economy has yet to shake the forces that are constraining hiring and applying pressure on staffing revenues, direct hire fees and margins.

Commercial staffing in particular has felt the drag of weak GDPgrowth. Customers remain cautious about expanding their work force, and Kelly and many of our competitors continue to see declines in revenue.

Looking ahead, we expect the current pace of growth will continue, as the US labor market remains fragile and predictable, with no clear signs of momentum. Add to that, there is on-going uncertainty about the effects of sequestration and rising anxiety about the pending Affordable Care Act, which is one of the most significant issues facing our industry today. With the clock ticking on ACAimplementation, companies are now struggling in earnest to understand the full scope of the impact, and several pieces have yet to be addressed by regulators. General consensus though is that compliance will be extremely complex.

For our part, Kelly continues to work closely with staffing industry groups, explore cost modeling scenarios in pursuit of more accurate financial impact, work with vendors to develop ACAcompliant plans, and refine training and tools to equip our account teams to discuss potential impact with customers. Our preliminary estimates put the ACAcost at approximately 1% of US cost of sales.

However, these costs will be passed on to our clients, consistent with our competitors and with other government mandated burdens such as [SUTA]. We will continue to provide ACA updates on future conference calls.

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

(Operator Instructions). We'll first go to Tobey Sommer with SunTrust.

Thank you.

Hi, Tobey.

Good morning. First I was wondering if you could segregate the work opportunity impact in the quarter related to last year, and then the impact related to the first quarter specifically?

Sure, Tobey. The impact related to 2012 is $9.7 million or $0.26 per share. The way we do the fully year is we spread it over the quarters. We'll find out what that number is for you in a minute.

Okay. And, Carl, I think I caught in the beginning of your prepared remarks when you were discussing the US, the softening of the high end within professional? If indeed I heard that accurately, could you describe that a little bit more, please?

In context we talked about a decline in a start up of new projects andimplementations of new projects in professional and technical. That has been bringing with it a [concument] decline in demand for upper end PT professionals. For the longest time the declines that we were seeing were in the lower ends of the PT marketplace. That has now spread, as new projects are not being started and companies themselves are cutting back on spending, while they wait to see where the economy is going, in the demand for some of the higher end, professionals particularly in the science and IT areas.

Okay.

And, Tobey, the first quarter Work Opportunity credit related to 2013 is $1.4 million.

Which in EPS -- is that pretax or after?

That's a tax number, so it is an after tax.

It's an after tax number. Okay. In the OCG segments the small loss that you expect in the second quarter, what kind of invests? Are they related to new client signings, or anything else you can give us color there on?

There's always new client signings requiring investments, and we are ramping up a particular customer that has a higher demand for various types of workers who come online prior to the revenue coming online for them, and you will see that in the second quarter.

Okay. The education business in the US showed some growth. What sort of factors do you think may be -- may enable that growth to continue in the face of kind of uncertain demand across the overall business?

School districts have always been looking for their better ability to manage their need for substitute workers, primarily teachers but others also. We have a management team that has been effective at pushing the solution, now selling the solution in the school districts who don't so a history of using us or others for that type of service. So it is not from any particular increase in demand in existing clients. It is primarily being driven, Tobey, by the team's success in expanding the acceptance of concept throughout other parts of the country.

Thanks. And my last question, Carl, relates to kind of the broader caution on the trajectory of growth in BLS statistics. How do you reconcile the growth in temporary labor according to BLSstatistics with what your sales in other companies are reporting in actual dollars and cents?

I have spent a lot of time on that issue and in a variety of roles that I play. Once before we had a significant divergence, and I don't think you were following us then, but thatturned out to be a divergence in the sampling models being used by BLS and reality. That's not the case this time.

We like other companies are showing 20% growth in things like healthcare. So if you are -- and healthcare is a large component of the US economy but a small component of Kelly, Manpower and other companies' sales mix. And so one of the strongest growing segments with strong demand for temporary employment is underrepresented in the large companies.

Secondly, construction has been doing well and is also chewing up temporary workers. But as you probably would guess, there's not a Kelly construction staffing services, and we don't have carpenters and others blazing through the ranks. Companies that our construction are heavy are again showing strong double digit growth, butagain the major staffing firms would be underrepresented in that. I suspect that those trends -- while I can see those numbers, I suspect the trend would also be apparent in company that were hospitality industry heavy and agricultural heavy, but I don't have that same visibility.

So it appears we are going through a period of time, Tobey. I am guessing the BLS numbers are correct, andI am real certain that the numbers being reported by the major staffing firms are correct. So assuming there's not a sampling error, and I don't think there is this time, it's because the growth is for a moment occurring primarily in the economy in sectors that are way underrepresented in the major staffing firms.

Thank you very much.

Our next question is from John Healy with Northcoast Research. Please go ahead.

Good morning. Carl, I want to ask about the OCG business. You guyscontinue to do fantastic there, and I know you kind of cautioned some things in terms of how large customers are maybe planning their business going forward. Curious to get your thoughts on the business process outsourcing part. Are you getting a little nervous there? Would you expect the cadence or the trajectory of the business to maybe kind of plateau a bit? Curious to get any thoughts on those items.

If it was mature, the answer would be yes. It would begin to rise and fall with general level of business activity. But on the supply chain parts of the BPO, which is where we are focused, sinceit is a concept that is still underadopted yet in the marketplace, and it is kind of in the fast adoption, fast growing side, I think that declined in demand in any one particular account are being offset by the acquisition of new accounts in a big way.

Okay. Along those lines, I know that everyone continues to focus on the healthcare reform angle as it relates to your business, but do you think maybe we are looking at it wrong in thinking about it a driver to penetration rates of temp demand? Or is this likely -- do you feel that parts of your business, maybe on the consulting and more the services side, is that where you think you will see the demand created? Curious to get your thoughts if you are starting developing more comfort regarding what this will do for different parts of demand for your business?

I have never been happy with the rhetoric about it driving penetration rate as companies seek to avoided [an employment] model. I am much more comfortable with the fact that there is a long term correlation between growth in the industry and complexity of employment. And ACAadds complexity to employment, and companies outsource complexity.

So you've seen over the years -- John, you have seen the growth of benefits administration, payroll administration, as companies outsource complex parts of the employment process. And I think that in the longer run -- not in any short burst, but in a longer run, the more complexity you add to employment relationships, the better it is for employment services companies like Kelly.

It's just the amount of reporting and so on, that if you are a company that has 40 to 60 employees, is huge. And your infrastructure to deal with that reporting is less developed than it is in larger companies. I think on the professional and technical call side, access to healthcare has always been the number one psychological and reality impediment to people choosing to be various forms of free agent labor, and I think that in spite of some of its flawed, ACA makes coverage more available, especially for higher pays workers.

And I think you will see, again, a shift because of the easier availability of access to healthcare. to greater use of that model by the talent, choosing to do it. Not because companies are trying to avoid cost, but because talent has lost one of the barriers to choosing to work in a way that they want to work.

Do I believe that there will be companies that will pitch schemes to avoided ACA obligations? Absolutely. I've seen them in the mail already. Do I believe that the government is committed to stopping the abuse and fraud around us on ACA? Yes,I've seen those activities already. I think it will play out just like SUTA dumping did, whichis it will lead to small bursts of activity with delayed but ultimately effective government response.

Great, and then just a final question. Patricia, I think you mentioned 10% tax rate for the year. Are we right in thinking that maybe in 2Q we see something in the low 20s? Is that kind of a decent proxy to think about for 2Q?

Hang on. I think it will be -- yes, somewhere in that range. Low to mid 20s.

Perfect. Thank you so much.

(Operator Instructions). And we do have a follow up from Tobey Sommer. Please go ahead.

Thanks. Carl and Patricia, where do you think your taking share, and where do you think you are losing share? Thanks.

Fine question. There's not -- letme work my way through segments. There's not yet great objective data that I trust in the OCG space.

Let me start there. It is a messy category that companies put in different lumps. There's not a great industry -- not great industry ratings, and even SIA is dealing with self-report surveys and so on.

So if you are asking me to guess, in the OCG we are doing better than our opponents, but it is messy. That's messy numbers. The cleaner numbers are on the staffing side, because most companies report staffing in the same way, and against the publicly traded companies we're either doing as well as they are in all the commercial space -- in North America, or -- but in the PT space, we are probably doing slightly better.

In Europe we are probably doing -- in Western Europe, it's a mess. Everybody is in decline. And I can't tell you how that is going. On the PT side we are gaining share I would say. And in Asia -- I forgot Russia, Patricia was whispering to me here. Russia we are doing great and gaining share.

And, Carl, given your comments about the demand picture kind of being uncertain and probably not showing a lot of improvement forthe foreseeable future, do you have significant levers you can pull on the cost structure in my methods of service delivery? Or are we really talking about changes around the margin and changes to variable costs?

A lot, [indeed], changing around the margin. We have been talking about for several quarter a change to a service delivery model with centralized staffing. We've also have been pretty clear that every time you move an account in you get a burst of expense that then work itself off as you both back fill behind it and what used to be in some of the branches as well [that] offset that expense base.

So who aren't continuing to move more of our business into centralized service centers, but that doesn't lead to any short term improvements on the expense side. If anything, it puts a little more pressure on it, but then it works its way off.

We always look around the margins for ways, and I think you have heard us talk about in several of the operating units a reduction in expenses as we reduce variable costs associating. And we have tried over our restructuring efforts to get as much of our cost variable. You can only bring in so much of it into the variable category, but it's -- so I would say continued improvement in centralized processing and focus on the variable cost.

And the other thing I would add to that is we -- as we sit here today, we may do small normal course restructurings, but I don't see us doing anything larger than that. We are pretty comfortable with our footprint and our resource.

Frankly, our conversations revolve around those continuous improvements in our cost structure, but also around where we want to invest for growth. So that's the offset that you see on the bottom line. So far we have done a very good job of offsetting that investment for growth with incremental cost reductions. So that -- I would [view] that model as going forward.

Okay. Thank you very much.

Thank you.

And, Mr. Camden, no additional questions in queue.

Very good, and thank you, John. Thank you all for listening.

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