Kelly Services Inc (KELYB) 2002 Q1 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by.

Welcome to the Kelly Services first quarter financial results. All participants will be placed in a listen-only mode. As a reminder, this conference call is being recorded at the request of Kelly Services.

At this time, I would like to introduce Mr. Terence E. Adderley of Kelly Services. Sir, you may begin.

Good morning. I'm Terry Adderley, Chairman and CEO of Kelly Services.

Now I'd like to thank you for joining us this morning. Our purpose today is to present our financial and operating results for the first quarter of 2002

Bill Gerber, our Executive Vice President and CFO will lead off with our financial results.

All of you should have received copies of our P&L, balance sheet and cash flow statements. If you haven't received this material and you would like a copy, please call us at 248-244-5271, and we'll gladly fax or e-mail it to you.

Bill will be followed by Carl Camden, our President and COO, who will cover our operating results and the general performance of our business segments. Lastly, I will provide you with my perspective on current business conditions, and our guidance for the second quarter of 2002. <sync time = 00:00:24/>

Now, here is Bill Gerber, who will take you through the financial results -- Bill.

Thank you, Terry. <sync time = 00:00:31/> Well, first I'll read our Safe Harbor language. This conference call contains statements that are forward-looking in nature, and accordingly, are subject to risks and uncertainties. <sync time = 00:00:39/> These factors include competition, changing market and economic conditions, currency fluctuations, changes in laws and regulations, the company's ability to effectively implement and manage its information technology programs, and other factors discussed during this call, and in the company's filings with the Securities and Exchange Commission. Actual results may differ materially from any projections contained herein. <sync time = 00:01:04/>

I'll start by covering first quarter results. Sales for the first quarter totaled 1.0 billion, a decrease of eight percent, compared to the 1.087 billion reported for the first quarter of last year. That's a modest improvement from the 9.5 percent sales decrease we reported for the fourth quarter of 2001, and at the higher end of our expectations. <sync time = 00:01:28/> Our gross profit rate in the first quarter was 15.9 percent, which was down 0.8 percentage points from the 16.7 percent rate recorded in the first quarter of last year. However, our gross profit rate was 16.0 percent in the fourth quarter of 2001, so this result represents only a one/tenth of a percent decline in sequential performance. <sync time = 00:01:54/>

The gross profit rates of all three business segments showed decreases, as compared to last year, primarily due to an ongoing shift in mix of sales to our larger customers, combined with decreases in recruitment fee income. Selling, general, and administrative expenses, as a percentage of sales, were 15.8 percent, a one-tenth of a percentage point improvement compared to the 15.9 percent rate in the prior year. <sync time = 00:02:22/> SG&A expenses in the first quarter totaled 157.8 million, and decreased 8.9 percent year-over-year. In addition, SG&A expenses decreased four and-a-half percent sequentially as compared to the fourth quarter of 2001. <sync time = 00:02:39/>

We implemented a number of expense reduction initiatives during 2001 that increasingly began to show results as the year progressed, and began to have full impact during the first quarter. These initiatives included targeted staff reductions in both field operations and headquarters units. <sync time = 00:02:57/> Earnings from operations in the first quarter totaled 1.2 million, an 85.5 decrease versus last year, but about flat on a sequential basis compared to the fourth quarter of 2001.

EBITDA - earnings before interest, taxes, depreciation and amortization - totaled $11.2 million, a 40.3 percent decrease compared to the $18.7 million earned last year. Our EBITDA margin was 1.1 percent in the first quarter, down from the 1.7 percent rate in the prior year.

Net interest income in the first quarter was $141,000. That's a $316,000 improvement compared to last year's net interest expense of $175,000. The improvement is primarily attributable to significantly higher cash balances and lower short-term debt levels, offset by the impact of lower interest rates.

Our effective tax rate in the first quarter 40 percent, consistent with last year. For planning purposes, we expect to utilize the 40 percent effective rate over the balance of 2002, as well.

Our first quarter net earnings were $0.8 million, down 83.4 percent from the $4.8 million earned last year.

Diluted earnings per share in the first quarter were two cents per share, down 84.6 percent year-over-year from first quarter earnings of 13 cents per share in the prior year. However, they were flat sequentially with fourth quarter 2001 earnings, which were also two cents per share.

I would note that we achieved the higher end of our public guidance issued in January, which ranged from a loss of two cents per share to a profit of two cents per share for the first quarter.

We'll now cover our segment sales results for the first quarter.

As you know, we divide our operations into three segments. Number one, U.S. commercial staffing, number two, PTSA - our professional, technical and staffing alternatives units - and number three, international.

Sales in U.S. commercial totaled $480.7 million, a 12.3 percent decrease compared to the $548.1 million reported last year. The sales decreases by month on a year-over-year basis were: January, minus 17 percent; February, minus 10 percent; and March, minus nine percent.

The trend clearly improved month by month throughout the first quarter. If we continue to see similar improvement throughout the second quarter, we would expect to see positive year-over-year sales growth in the third quarter.

Sales in PTSA totaled $272.3 million. That's an increase of 1.7 percent compared to sales of $267.6 million reported last year. That's a slight improvement compared to fourth quarter PTSA sales performance of minus one percent, but individual business unit performance continues to vary. <sync time = 00:00:06/> In particular, Kelly Staff Leasing, our PEO, recorded net sales growth over 13 percent. Carl will have more detailed comments on PTSA business units a bit later.

Translated U.S. dollar sales in international totaled 247.1 million, a nine percent decrease versus the 271.5 million in the prior year. <sync time = 00:00:30/> On a same-currency basis, our international revenue decreased six percent, which reflected continued slowing from the three percent decreased reported in the fourth quarter. <sync time = 00:00:41/> We experienced significant slowing of demand, particularly throughout Continental Europe and the UK/Ireland.

Turning now to our segment earnings results for the first quarter, U.S. commercial earnings totaled 23.3 million, a decrease of 26.9 percent, compared to earnings of 31.9 million last year. <sync time = 00:01:03/> Expenses were well-managed, and decreased nine percent year-over-year. However, the 12 percent sales decrease, combined with the decrease in gross profit rate, produced the 27 percent earnings decline. <sync time = 00:01:17/> For reference, U.S. commercial earnings decreased 47 percent in the fourth quarter, so this does represent an improvement in the rate of decline. PTSA earnings totaled 11.4 million, a 7.4 percent decrease compared to earnings of 12.4 million in the prior year.

Gross profit rates decreased 0.9 percentage points, versus last year, due in part to changes in business unit mix. <sync time = 00:01:45/> For example, there was rapid growth at Kelly Staff Leasing, our PEO, which carries gross profit rates in the three to four percent range, which is typical for PEOs. At the same time, sales decreased in Kelly Home Care, which carries a higher gross profit rate than the segment average. <sync time = 00:02:06/> PTSA expenses were also well-managed and decreased three percent year-over-year. International results were a loss of 1.2 million, compared to earnings of 1.6 million last year. The significant sales decreases in Continental Europe and the UK/Ireland, combined with decreases in recruitment fee income, resulted in the operating loss. <sync time = 00:02:29/> On a year-over-year basis, expenses decreased eight percent.

Corporate expenses totaled 32.4 million, and decreased 14 percent versus last year. On a sequential basis, corporate expenses decreased 11.4 percent, as compared to the fourth quarter of 2001. <sync time = 00:02:49/> We will maintain continued tight control of corporate expense throughout this year. However, there will be sequential increases in depreciation and related IT expenses associated with the rollout of our technology programs over the next several quarters.

Well now I'd like to shift to the company's first quarter balance sheet and make a few comments.

Cash and short-term investments totaled $85 million at quarter end. That's an increase of $26 million from the $59 million cash balance last year.

Accounts receivable totaled $540 million at quarter end, down significantly from $600 million last year, reflecting lower sales, but also improved DSO. For the first quarter our global days sales outstanding were 49 days, which is a one day improvement versus our performance last year.

Our short-term debt at quarter end totaled $24 million, compared to $49 million last year. All of our short-term borrowings are foreign currency denominated, and provide a partial balance sheet hedge against foreign exchange fluctuations. At quarter end, debt represented less than four percent of total capital.

Throughout the staffing downturn, we've maintained our traditionally strong balance sheet. We've increased our cash balance, both as compared to fourth quarter and last year. In addition, our cash balance significantly exceeds our short-term debt. We believe our clean balance sheet remains a competitive advantage.

Finally, I will make a few additional comments on the company's cash flows.

Capital expenditures for the first quarter totaled $6 million, down 58 percent from the $14 million spent last year. Of the total, over 75 percent related to information technology investments. Our capital expenditures peaked in 1999, $77 million, decreased in 2000 to $54 million, and decreased again in 2001, to $43 million.

For planning purposes, we expect our 2002 capital expenditures to total between $35 to $40 million, or down about 10 to 20 percent below last year.

Depreciation and amortization for the first quarter totaled $10 million, a decrease of five percent from the $10.5 million for the same period of 2001. At the beginning of 2002, the company implemented FAS 142, which deals with goodwill and other intangible assets. This standard requires that goodwill no longer be amortized against earnings, but instead tested periodically for impairment.

Last year, depreciation and amortization totaled $44.4 million. As a result of FAS 142, amortization of goodwill of $2.7 million will be eliminated for the full year 2002. Approximately $0.7 million of amortization was eliminated in the first quarter, which caused the overall year-over-year decrease in depreciation and amortization.

For planning purposes, we expect depreciation and amortization of intangibles other than goodwill to total approximately 43 to 47 million for 2002, reflecting ongoing implementation of our major IT projects. <sync time = 00:00:14/>

Dividends paid in the first quarter totaled 3.6 million, a 60 percent decrease compared to last year. The company implemented a significant change in dividend policy during the fourth quarter of 2001. <sync time = 00:00:27/> The quarterly dividend was reduced 60 percent to a new rate of 10 cents per share per quarter, or 40 cents per share annually. The cash saved from this reduction will total over 21 million per year. <sync time = 00:00:40/>

In summary, the condition of our balance sheet and free cash flow remains excellent. Well, that concludes the financial results portion of the conference call, and I'd now like to turn it over to Carl, who will highlight our operating results. <sync time = 00:00:55/>

Thank you, Bill. I will briefly discuss operational performance during the first quarter 2002 in each of our three business segments, U.S. Commercial, PTSA, and International. <sync time = 00:01:08/> Let me begin with our U.S. Commercial segment, which makes up 48 percent of sales. As we highlighted in our fourth quarter conference call in January, we saw progressive sales declines in this segment throughout most of 2001. <sync time = 00:01:23/>

However, we did see early signs of a bottom late in the fourth quarter on a month-to-month basis. And although we were not prepared then to officially declare a bottom in U.S. Commercial, we were cautiously optimistic that the trend would continue. <sync time = 00:01:37/> And at that time, we indicated that we expected significantly negative year-over-year comparisons for at least the first two quarters of 2002, in spite of the improvements we were seeing.

Our first quarter 2002 results seemed to confirm this thinking. <sync time = 00:01:54/> Year-over-year, the commercial segment was down 12 percent in the first quarter 2002, compared with the fourth quarter's 17 percent decline. And as Bill has already indicated, we saw continued month-by-month improvement during the first quarter. <sync time = 00:02:09/> As you may recall, the slowdown was felt most strongly in our electronic assembly practice in 2001.

We are now seeing steady improvement in that area, and in addition, the early signs of improvement in our light industrial staffing that began during the fourth quarter of 2001, continued to trend upward during the first quarter. <sync time = 00:02:30/> Calls Interstaffing maintained solid performance during the quarter, and Kelly Educational Staffing exhibited double-digit growth for the same period.

We are not, however, seeing the same level of improvement across all service lines. For example, office clerical staffing, which held up relatively well for the first half of 2001, came under significant pressure in the second half of the year. <sync time = 00:02:56/> And to date, while seeming to have bottomed, this are has not yet shown signs of recovery.

Similarly, our fee-based recruiting businesses continue to be under pressure, declining somewhat in the first quarter. We continue to carefully manage our expenses in this segment.

Field expenses for U.S. commercial were down nine percent year-over-year for the first quarter. This represents the fifth consecutive quarter of lower expenses.

Let me now turn to PTSA. PTSA makes up 27 percent of sales, and is comprised of our professional and technical services group and our non-temporary staffing units, the staffing alternatives group.

While the negative impact of the recession on this segment was less than what we've seen in commercial staffing, it has been nonetheless significant. The weighted growth was less than two percent for 2001, much lower than the 12 percent growth rate achieved for 2000.

We were somewhat encouraged, however, that after seeing PTSA sales decline by one percent in the fourth quarter of 2001, that sales improved almost two percent this quarter. Results continued to be very mixed, though, among the 13 business units that comprise PTSA.

Kelly health care, Kelly financial and general contractor services continue to be the leading performers into 2002, exhibiting sales growth of 40 percent or better for the first quarter.

And as Bill commented, Kelly staff leasing maintained positive sales growth of 13 percent during the first quarter. This is a five percent improvement in growth rate versus fourth quarter 2001.

Three large PTSA units - the automotive services group, IT resources, and Kelly home care - continued to experience revenue declines during the quarter. However, the double-digit revenue declines experienced in the fourth quarter of 2001, moderated somewhat during the first quarter. And incidentally, these declines are consistent with what we are seeing in the industry.

As with U.S. commercial, we are encouraged by the improvement we are seeing in PTSA. However, we still remain cautious. We have continued to suspend the launch of new PTSA businesses, but we have opened a few branches in existing businesses in response to customer needs or local market opportunities.

Let me add that the expense reductions made across our PTSA segment during the past year are beginning to have an impact, and we are now seeing year-over-year improvement. Expenses were down three percent during the first quarter year-over-year.

Our third segment is international, which makes up 25 percent of our total sales. The rate of global slowing in demand continued in our international business.

Real sales growth decreased six percent in the first quarter of 2002. This compares to a sales decline of three percent in the fourth quarter.

As reported in our fourth quarter conference call, the decline was strongest in Continental Europe. The sharp slowing we saw in the third and fourth quarters of 2001 continued through the first quarter, 2002. <sync time = 00:00:15/> And we began to experience significant slowing in the UK/Ireland as we entered 2002.

For example, staffing demand in the UK/Ireland declined in the first quarter. <sync time = 00:00:28/> In addition, recruitment fee income was down over 30 percent. As a result, despite significant expense reductions, our UK/Ireland operation operated at a modest loss during the quarter. <sync time = 00:00:38/> As demand slows in our international business, we continue to focus on reducing expenses at the country level.

Finally, for comparison purposes, I would like to highlight our total U.S. performance for the first quarter. <sync time = 00:00:54/> This combines both U.S. commercial and PTSA sales results. As you are probably aware, our competitors report total U.S. sales, and Kelly's total U.S. sales for the first quarter totaled $753 million, representing a decline of approximately eight percent from the previous year. <sync time = 00:01:15/> This compares to an average quarterly decline of 19 percent for those large staffing firms who have already reported first quarter results.

Our performance established Kelly as the second-largest staffing company in the U.S. in terms of sales. <sync time = 00:01:30/> And of course, I would be remiss if I didn't remind you that we do remain the number one staffing company in terms of quality. We are continuing to expand our customer base, and significantly grow marketshare, which we believe positions us well to take advantage of the recovery as it unfolds. <sync time = 00:01:46/>

To sum up, all three operating segments showed declines in earnings, but as I reported, we are beginning to see early signs of improvement within both the U.S. commercial and PTSA. As the global recession deepens in Europe, we expect the performance of our international segment to remain under pressure. <sync time = 00:02:03/> And that concludes the operation comments, and I'd like to turn it back to Terry.

Well, thank you, Carl, and thank you, Bill. As our first quarter results reflected, we're beginning to see signs of improvement in our U.S. operations. <sync time = 00:02:19/> However, it is not yet apparent that the staffing recession is at a bottom in international. Our international operations came under increased pressure during the quarter, and we expect this pressure to continue for at least the next quarter or two. <sync time = 00:02:36/>

As we look forward, we remain concerned about the fragile state of the U.S. economic recovery. Corporate earnings remain mixed, a number of industries continue to struggle, PE ratios are in an upper end of acceptable levels, many companies are still under tight cost constraints, capital expenditures by corporations have been slow to recover. Corporate bankruptcies and layoffs continue. Questionable accounting practices have had a negative effect on investor and public confidence.

Consumer spending has remained strong, but could quickly change as debt levels rise or uncertainty increases. And as Mideast tensions continue, a strained economic recovery - a sustained economic recovery - could be delayed.

The list goes on and on. Each week seems to bring a new wave of problems or problem companies. Clearly the recovery is fragile, and it's too early to make predictions with any certainty at this time.

In our year-end 2001 conference call, we were uncertain if the bottom had been reached in our U.S. sales. We announced that we expected first quarter 2002 earnings to be in the range of a loss of two cents per share, to a profit of two cents per share. And as Bill reported, with our U.S. sales beginning to recover, earnings for the quarter were at the top of this range at two cents per share.

We were pleased with this performance, however, we remain cautious in extending guidance beyond the second quarter. As we move through this quarter, we should have a better idea of what shape the recovery will take, and what we might expect for the balance of the year.

At this time, however, we expect second quarter earnings to be in the range of seven to 11 cents per share.

Now, based on the fact that our first quarter results were at the upper end of our guidance, and our second quarter guidance projects a significant improvement over first quarter results, many of you may feel tempted to raise your estimates for the balance of the year.

You may be even more tempted to raise your estimates if you look at how we did compared to the Street consensus. We beat the Street in the first quarter by four cents a share, and our guidance for the second quarter is six to ten cents per share higher in current Street estimates.

However, whichever way you look at the numbers, if you just go with a simple mathematical extrapolation, you will end up with estimates that are higher than the global economy will support.

Let me remind you, we don't know what shape the global economy recovery will take in the second half of the year, or even if there will be a recovery.

Then the fact still remains that sales growth in our industry is very much dependent upon the strength of the economy.

I have managed through a number of recessions since 1960. And just as I was glad to get the others behind, me, I look forward to getting this past recession, as well.

<sync time = 00:00:05/> Although we remain cautious in our short term outlook, I would like to leave you with some longer term views. Our expense controls will remain tight. <sync time = 00:00:19/> We will continue to focus on gaining marketshare in both the United States and internationally. And as Carl indicated, Kelly is now the second-largest staffing company in the United States in terms of U.S. sales. <sync time = 00:00:32/> And that's pretty good, when you consider that our objective has always been to be the best, and not necessarily the largest.

Finally, we remain committed to returning Kelly to pre-recession profit levels. <sync time = 00:00:49/> But you should recognize that the slope of the curve of the global economic recovery will determine whether we can accomplish this in two, three, or four years.

Now, this concludes our formal comments. We would be pleased to answer any question you may have, subject to the constraints of Regulation FD. <sync time = 00:01:11/> Please call us at 248-244-5271, and we'll get back to you as promptly as we can. Once again, thank you very much for joining us this morning. <sync time = 00:01:22/>