Kelly Services Inc (KELYB) 2002 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Kelly Services Fourth 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. Terrence Adderley of Kelly Services. Sir, you may begin.

Thank you. Well, good morning. I’m Terry Adderley, Chairman and CEO of Kelly Services. And I’d like to thank you for joining us this morning.

Our purpose today is to present our financial operating results for the fourth quarter and full year of 2002. Bill Gerber, our EVP and CFO will lead of 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 would like a copy, please call us at 248-244-5271, and we’ll gladly fax or email 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 thoughts on current business conditions and our preliminary guidance for the first quarter of 2003.

Now here’s Bill Gerber, who will take you through the financial results. Bill?

Well, thank you, Terry.

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. These factors include competition, changing market and economic conditions, currency fluctuations, changes in laws and regulations, including Federal, State, and International Tax Laws, the Company’s ability to effectively 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.

I’ll start by covering fourth quarter results. Sales for the fourth quarter totaled $1.124b, an increase of 8.4 percent, compared to the $1.037b reported for the fourth quarter of 2001. That’s an improvement from the 5.3 percent sales increase we reported for the third quarter and at the higher end of our expectations.

Our gross profit rate in the fourth quarter was 16.1 percent, which increased 0.1 percent from the 16.0 percent rate we recorded in the prior year. Our gross profit rate was 16.2 percent in the third quarter, so there was a 0.1 percent sequential decrease in gross profit rate. The gross profit rate of our U.S. Commercial segment showed an increase, compared to last year, while the gross profit rates in PTSA and International segments decreased.

SG&A expenses in the fourth quarter totaled $169.3m and increased 2.4 percent year-over-year. SG&A expenses decreased 1.3 percent sequentially, as compared to the third quarter. Well, the major components of the year-over-year increase were depreciation and currency impact in our International expenses. SG&A expenses at a percentage of sales were 15.1 percent an 0.8 percent improvement, compared to the 15.9 percent rate in the prior year.

Earnings from operations in the fourth quarter totaled $12m, a ten-fold increase, compared to the $1.2m earned in 2001. The fourth quarter of 2001 represented the low point of the year, in terms of earnings performance. Hence, year-over-year comparisons will show tremendous percentage improvement. On a sequential basis, earnings from operations increased 12.1 percent, compared to the $10.7m reported for the third quarter. Normally, you’d expect a minor seasonal decrease in the fourth quarter sales and earnings, as compared to the third quarter, so these results do reflect an underlying strengthening in the business.

EBITDA, earnings before interest, taxes, depreciation, and amortization, totaled $24.2m, an 83 percent increase compared to the $13.2m in the prior year.

Net interest income in the fourth quarter was $104,000, a $74,000 improvement compared to the prior year’s net interest income of $30,000.

Our effective tax rate in the fourth quarter was 39.5 percent, which is a 0.5 percent improvement, compared to 2001, and flat sequentially with the third quarter. For planning purposes, we expect to utilize the 39.5 percent rate in 2003.

Our fourth quarter net earnings were $7.3m, a tenfold increase compared to the $0.7m earned in 2001. And diluted earnings per share in the fourth quarter were $0.21 a share, also a tenfold increase from earnings of $0.02 a share in 2001. Compared to the third quarter, earnings increased by $0.03 per share sequentially from the $0.18 per share earned in that quarter.

Now I’ll cover our segment sales results. As you know, we divide our operations into three segments, U.S. Commercial Staffing, PTSA, our Professional, Technical, and Staffing Alternatives units, and International.

Sales in U.S. Commercial for the fourth quarter, totaled $547.5m, an 8.9 percent increase compared to the $502.6m reported in 2001. That’s an improvement compared to the third quarter when U.S. Commercial sales increased 6.7 percent. The sales increases by month on a year-over-year basis were October plus 9 percent, November plus 8 percent, and December plus 9 percent.

Well, the trend did flatten a bit in the fourth quarter, compared to the steady month-by-month increases we saw in the third quarter. Given that flattening in the fourth quarter, we currently expect that U.S. Commercial year-over-year sales growth will be comparable in the first quarter of 2003.

Sales in PTSA totaled $295m, an increase of 11.1 percent compared to sales of $265.6m reported in 2001. That’s an improvement compared to the third quarter PTSA sales growth of 6.3 percent, with most of the individual business units showing improved performance. Carl will have more detailed comments on PTSA a bit later.

Translated U.S. dollar sales in International totaled $281.3m, a 4.6 percent increase versus the $268.9m in the prior year. On a same currency basis, our International revenue decreased 2 percent, which reflected improvement from the 4 percent decrease reported in the third quarter. Sales growth continued to improve in the Americas and Asia Pacific, the regions that were the first to experience the global slowdown in 2001. Sales in Continental Europe and the U.K. remained weak in the fourth quarter.

Turning now to our segment earnings results for the fourth quarter, U.S. Commercial earnings totaled $34.4m, an increase of 39.8 percent compared to earnings of $24.6m in 2001. The U.S. Commercial gross profit rate increased 0.7 percent from the prior year.

Three primary factors influenced the gross profit rate. First, the U.S. Commercial business reflected improvement in benefit costs relative to last year, including worker’s compensation expense. Second, fee-based income increased significantly year-over-year for the first time in 2002. And then, third, somewhat offsetting the above, customer mix and service line mix reduced the gross profit rate.

Although we’re pleased that U.S. Commercial staffing was able to increase it’s GP rate in both the third and fourth quarters of 2002, we know that most states adjust their unemployment tax rate effective January 1st of each year. Given relatively high and rising unemployment, we expect that many states will significantly increase their unemployment tax rates to replenish depleted trust funds. Although most of the tax increase will be recovered through price adjustments, U.S. Commercial staffing may experience a sequential decrease in gross profit rate in the first quarter of 2003. U.S. Commercial expenses were well managed and increased only $0.6m, or 1.3 percent compared to the prior year.

PTSA earnings totaled $13.6m, a 17.8 percent increase compared to earnings of $11.5m in 2001. The PTSA gross profit rate decreased one-tenth of a percent versus the prior year, due primarily to business unit mix and unfavorable worker’s comp expense at the Kelly Staff Leasing business unit. Offsetting this fee-based income increased significantly year-over-year and also improved on a sequential basis. PTSA expenses increased 7.2 percent year-over-year.

International earnings totaled $2.8m, compared to earnings of $1.6m last year, an increase of 76.7 percent. The International gross profit rate decreased 0.7 percent, primarily due to continued decreases in recruitment fee income, particularly in the U.K. Operating expenses decreased 1.4 percent versus last year in U.S. dollar terms and decreased 9 percent on a same currency basis.

Corporate expenses totaled $38.7m and increased $2.2m or 6.1 percent, versus the prior year. Compared to 2001, there was a million dollars of added depreciation. We expect this trend will continue over the next several quarters.

Next I’ll cover a few highlights for the full view of 2002. Sales for 2002 totaled $4.323b, an increase of 1.6 percent compared to the $4.257b reported in 2001.

Our gross profit rate for 2002 was 16.0 percent, which decreased 0.4 percent compared to the 16.4 percent rate recorded in the prior year. While the U.S. Commercial gross profit rate remained stable for the full year, the quarterly results decreased in the first half and increased in the second. The PTSA and International segments showed decreases, compared to the prior year, and were generally consistent quarter-to-quarter.

SG&A expenses as a percentage of sales were 15.3 percent, a 0.4 percent improvement compared to the 15.7 percent rate in the prior year. SG&A expenses totaled $662.3m and decreased 1.1 percent year-over-year.

Earnings from operations for the year totaled $30.4m, an 8.7 percent increase compared to the $28m reported in the prior year.

Net interest income for the year was $362,000, compared to the prior year’s net interest expense of $381,000. The improvement in net interest is primarily attributable to higher cash levels and lower short-term debt levels, both impacted by lower interest rates.

Our full year net earnings were $18.5m, an increase of 12.2 percent compared to the $16.5m earned in the prior year. Diluted earnings per share for the year were $0.52 per share, a 13 percent increase as compared to earnings of $0.46 a share in 2001.

Well, now I’d like to shift to the Company’s year-end balance sheet and make a few comments. Cash and short-term investments totaled $101m at year-end. That’s an increase of $17m from the $84m cash balance at the end of 2001. AR totaled $568m at year-end, an increase of $28m compared to the $540m the prior year. For the fourth quarter, our global DSO were 46 days, a one-day improvement compared to the prior year. Our short-term debt at year-end totaled only $25m, a decrease of $8m compared to the $33m level the prior year. At year-end, debt represented less than 4 percent of total capital.

Finally, I’ll make a few additional comments on the Company’s cash flows. CAPEX for the year totaled $33m, a planned decrease of 21 percent from the $43m spent in 2001. Of the total capital spending, over 75 percent related to Information Technology. Our CAPEX peaked in 1999 at $77m, decreased in 2000 to $54m, and decreased again in 2001 to $43m. The $33m of 2002 CAPEX reflects the intentional delay of several projects. The plan for 2003 is to return to a more normal capital spending level. For planning purposes, we expect our 2003 CAPEX to total between $40m to $45m.

Depreciation and amortization for the year totaled $45.4m, up 2 percent compared to the $44.4m in 2001. At the beginning of 2002, the Company implemented FAS-142 which requires that goodwill no longer be amortized against earnings, but instead tested periodically for impairment. As a result of FAS-142, amortization of goodwill of $2.7m was eliminated for the full year of 2002, which was offset by a $3.7m increase in depreciation expense. For planning purposes, we expect depreciation and amortization of intangibles other than goodwill to total approximately $47m to $49m for 2003.

In summary, the condition of our balance sheet and cash flow remains excellent. That concludes the financial results portion of the conference call. I’d now like to turn it over to Carl, who will highlight our operating results.

Thank you, Bill. I will briefly discuss operational performance in 2002 in each of our three business segments.

Let me begin with U.S. Commercial, which makes up 49 percent of our sales. After seeing a rapid slowdown in our U.S. Commercial sales throughout 2001, solid sales improvement in this segment throughout 2002. The segment was down year-over-year 12 percent in the first quarter, about flat in the second, up 7 percent in the third, and up 9 percent in the fourth. And although the fourth quarter saw a slower rate of improvement, we remained pleased with our performance. For the year, sales in U.S. Commercial were 0.5 percent greater than that of 2001.

The largest increases during the year came from Light Industrial and Electronic Assembly. Demand in these areas strengthened in the second, third, and fourth quarters. This growth results from both an increase in the number of assignments, as well as an increase in the average work week.

Office Clerical Staffing, on the other hand, the a largest component of U.S. Commercial, has not exhibited the same level of improvement. We began seeing modest improvements in Office during the second half of the year. However, with only slight sequential improvements in this area during the fourth quarter, we question whether the underlying economy will gain momentum in the near term or if, in fact, it is temporarily stalled. Terry will have more comments on this later.

Our fee-based recruiting business in U.S. Commercial remained under pressure throughout the year. Each of the first three quarters was down an average of 30 percent year-over-year, while the fourth quarter saw a 24 percent improvement. However, this strong year-over-year comparison results from especially weak fee income in the fourth quarter of 2001.

Gross margins in U.S. Commercial improved during the second half of the year. This improvement is due to a number of factors, including lower benefit costs. For the fourth quarter, the margin improvement translates to a 14 percent increase in gross profit dollars off of a 9 percent sales increase. We carefully managed our field expenses during 2002 and for the year U.S. Commercial’s expenses were down 2 percent compared to 2001. Most of the expense growth we did see resulted from field incentive plan pay-outs due to improved performance. Let me add that our expense as a percentage of revenue showed continued improvement year-over-year.

Before I leave U.S. Commercial, let me highlight enhancements we’ve made to our Office Services product. We have introduced several improvements in employee testing and training. Kelly’s new behavior skill analysis better matches the right employees with the right assignment. A multilingual skills test identifies those in high demand by companies serving the global marketplace. And newly created accounting, medical, and legal office skill evaluations allow us to further focus on these new niche areas of Office Services Staffing. We continue to explore opportunities that strengthen our ability to provide the very best employees to our customers.

Now let me turn to PTSA. PTSA makes up 26 percent of sales and is comprised of our Professional and Technical Services group and our non-temporary staffing units, the Staffing Alternatives group. As with our other business segments, our professional and technical staffing felt the effects of the recession. The economic impact on this segment remained less than what we experienced in our Commercial Staffing business.

Growth remained positive in PTSA each quarter of 2002. Overall sales improved 6 percent for the year, compared with a growth rate of 2 percent in 2001. However, the result of PTSA’s 13 business units were mixed. Kelly Healthcare and Kelly Financial were the leading professional and technical staffing performers, both exhibiting sales growth of over 25 percent for the year.

Additionally, Kelly IT Resources, which was under significant pressure during the first half of the year, began to show solid double-digit growth during the second half.

Kelly HR First, our outsourcing solution for HR activities including recruiting and employment functions, was the leading Staffing Alternatives performer with sales growth of nearly 25 percent for the year.

We have in previous quarters talked about declines in two of our largest PTSA units, Kelly Home Care and Kelly Automotive Services. And although moderating somewhat during the third and fourth quarters, Kelly Home Care continued to experience a decline in revenue. However, as I mentioned in our third quarter conference call, our Automotive Services group turned positive, with year-over-year sales growth in the third and fourth quarters.

In addition, for the third consecutive quarter, PTSA did see sequential improvements in fee-based income. During the fourth quarter, fee income doubled year-over-year. This growth was due largely to improvements in outsourcing fees associated with Kelly HR First and Kelly Vendor Management Solutions.

Expenses are being well managed across the PTSA segment. Expenses were up only slightly during the year, in fact, only 1 percent. This increase was primarily attributable to increases in liability insurance costs and, like U.S. Commercial, higher field incentive plan pay-outs. In spite of these costs, we saw improvements in PTSA’s expense as a percentage of revenue year-over-year.

Before I leave PTSA and move on to our International segment, I’d like to make a few comments on Kelly Staff Leasing and the huge obstacles facing the PEO industry. Kelly Staff Leasing maintained positive sales growth throughout the year, with an over 10 percent increase for the fourth quarter. However, as I mentioned in our third quarter conference call, the PEO industry is facing an unprecedented crisis because of rising costs associated with benefits and worker’s comp. This crisis was only aggravated during the fourth quarter, as the shakeout within the industry intensified.

Despite the fact that Kelly’s performance in this area has remained strong, we have taken the opportunity to significantly change our Staff Leasing customer portfolio to better position this business for the long-term. As a result, we expect our Staff Leasing sales to decline in the first quarter of 2003 in the range of 2 to 3 percent. On the other hand, with a stronger customer base, we expect there will be a small positive impact to earnings.

Our third segment is International, which makes up 25 percent of our total sales. Sales growth in this segment were in a negative for all of 2002 as compared to the previous year, but no clear quarterly trend emerged. Real sales declined 6 percent in the first quarter, 2 percent in the second, 4 percent in the third, and back to 2 percent in the fourth.

The Americas and Asia Pacific regions continued to show signs of improvement. The Asia Pacific growth was fueled by our operations in Malaysia, Singapore, and New Zealand, while the Americas growth has been in Mexico and Canada. The slowdown remains most severe in Continental Europe and in he U.K. Ireland. And although our fee-based recruiting businesses have been hit the hardest, overall economic conditions continue to negatively affect our temporary staffing operations in these regions.

Unfortunately, we remain uncertain about near-term economic outlook in Europe. Therefore, we continue to focus on reducing expenses at the country level. On a constant currency basis, expenses decreased by almost 9 percent for the fourth quarter, or nearly $5m versus last year. For the full year, expenses were down 6 percent, or in excess of $13m.

Finally for comparison purposes I would like to highlight our total U.S. performance for the fourth quarter and full year. This combines both U.S. Commercial and PTSA sales results.

Kelly’s total U.S. sales for the fourth quarter were $842m, an increase of approximately 10 percent from the previous year. For the full year, U.S. sales totaled $3.2b representing a 1 percent increase. As we begin 2003, Kelly maintains its position as the second-largest staffing company in the U.S. market in terms of sales, with significant market share gain. And we remain the number one staffing company in terms of quality. We are proud of these accomplishments, especially given the tough economic environment over the last two years.

To sum up, all three of our segments, U.S. Commercial, PTSA, and International, showed significant increases in earnings during the second half of the year, both year-over-year and sequentially.

This concludes the operations comments, and now I’d like to turn it back to Terry.

Thank you, Bill.

To be perfectly blunt, last year was a lousy for the staffing industry. The recession has been unusual in the length of the downturns, the lack of definition in the recovery, and the absence of a strong rebound in demand for staffing. The effects of the recession on Kelly were also very apparent. When compared to our pre-recession sales and earnings records, 2002 was not a good year for us either. We’re still a ways from the pre-recession records we set in the year 2000. While we had good sales and earnings growth on a percentage basis in 2002, that growth was achieved against a very low earnings base in 2001.

We also had good sales results on a relative basis and gained considerable market share, especially in the United States. But given the severity of the recession, I’m proud of what we were able to accomplish during this past year. Both sales and earnings in 2002 exceeded 2001, and we believe that only a handful of staffing companies will be able to report having increased both.

We were able to leverage modest sales growth into solid earnings because we managed expenses well. It’s allowed us to both grow earnings and still be able to create new foundations for future growth. We expanded current business lines, enhances products, and deployed new productivity and enhancements. We were also able to preserve our branch network and the complete range of our products. Unlike many of our competitors, we did not accomplish this by stripping out staff or programs.

No, it wasn’t a great year in terms of our historic records, but nevertheless I’m very proud of the results we’ve produced given the recession. And I feel we are well-positioned for future growth.

Now it falls to me to set expectations for 2003, and I doubt that you all will accept a “heck if I know” answer, even though there would be an awful lot of truth to that. The economic cycle does seem to have hit bottom and appears to be edging upward. Nevertheless, in many ways for Kelly, the beginning of 2003 is a lot like the beginning of 2002. There is still no consensus among economists on their forecast for the year. We are still waiting for a robust economic upturn. We have not seen a strong increase in the demand for office clerical staffing, which would validate an unambiguous recovery based on our past experience.

We are still facing an uncertain global economy, with concerns over the European recession and our own recovery. And the world is still uncertain of the scope and nature of potential geopolitical upheavals. There are no lack of predictions for 2003, but three broad scenarios would cover most of them. They are a strong recovery, a slow hedging upward recovery, or a double-dip recession. I personally think the greater probability is for a continued edging upward.

If the financial analysts think it’s hard to prepare an earnings forecast in these times, let me assure you it’s tougher preparing an operating budget. And for sure the penalties for failure are greater. So what are we doing? In many ways, we’re approaching 2003 much like we did 2002. Expense control is tight. We’re keeping our powder dry. We have the cash on hand to weather another dip or to take advantage of a robust recovery. We’re well aware that our business responds quickly and strongly to changes in the overall economy. And we’re meeting our customers needs for new offices or service extensions.

However, unlike last year, there is no hockey stick built into our budget. We’re operating under the edging upwards scenario, in other words, a slow incline for the whole year. We are currently on a run rate that produces moderate sales growth, similar to that of the fourth quarter. We expect to leverage that sales growth with expense management to produce good earnings growth that will exceed our sales growth rate.

How strong will our earnings growth be? Well, one thing for sure, visibility has not improved that much since last year. Therefore, we’ll continue giving guidance one quarter at a time. Our best thinking is that first quarter earnings should be in the range of $0.04 to $0.08 per share. Now this compares to earnings of $0.02 per share in the first quarter of 2002. While we expect solid improvement in 2003, we will not see increases of the magnitude reported for the fourth quarter of 2002 or in our first quarter estimate for 2003. Please recall that these quarters are being compared to quarters where earnings were extraordinarily depressed. Also as 2003 progresses, year-over-year comparisons will become more difficult, because we’ll be comparing against improving results in 2002.

Nevertheless, short of a second economic dip, we do expect to deliver a year of solid earnings gains in 2003. We’re certainly not satisfied with our current level of sales and earnings, and we are committed to returning to and exceeding our historic levels. How quickly that will happen will depend partially on the economy. If we assume continued slow growth in the economy, then it could take as long as two or three years to get back to pre-recession earnings levels. On the other hand, if the economy does better, we’ll do better. But for now, we’d like to keep your expectations reasonable.

Now this concludes our formal comments. We’d be pleased to answer any questions you may have subject to the constraints of Regulation FP. Please call us at 248-244-5271, and we’ll get back to you as promptly as we can.

Once again, thank you for joining us this morning.