Kelly Services Inc (KELYB) 2003 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Kelly Services third quarter financial results conference call. (OPERATOR INSTRUCTIONS) This conference is being recorded at the request of Kelly Services. At this time, I would like to introduce Mr. Terence Adderley of Kelly Services. Sir, you may begin.

Good morning. I'm Terry Adderley, Chairman and CEO of Kelly Services. And I would like to welcome all of you here this morning. Our purpose today is to present our financial operating results for the third quarter of 2003. 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. And if you haven't received this material and would like a copy, please call us at 248-244-5271, and we will 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 balance of the year.

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

Thank you, Terry. First I will 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 third quarter results. Sales for the third quarter totaled 1.097 billion, an increase of 3.8 percent compared to the 1.057 million for the third quarter of last year. That is about the same as the 4.4 percent sales increase for the second quarter of 2003, and at the lower range our expectations. Much of the sales increase was due to favorable currency impact on our International segment. On a constant currency basis, the total Company sales increase was 1.3 percent, which was also about the same as the 0.8 percent increase in the second quarter.

Our gross profit rate in the third quarter was 15.7 percent, which decreased 1.5 percentage points from the 17.2 percent rate in the prior year. Our gross profit rate was 16.3 percent in the second quarter of 2003, so there was a 0.6 of 1 percent decrease in the sequential gross profit rate. The gross profit rates of all three business segments showed decreases compared to last year.

It was the decrease in gross profit rate that drove the decline in earnings for the third quarter. The decrease in gross profit rate in our U.S. operations was largely due to a 6.4 million additional charge for workers compensation expense. Carl will review workers compensation costs in more detail.

Selling, general and administrative expenses in the third quarter were 169.9 million, and decreased 1 percent year-over-year. SG&A expenses were essentially unchanged sequentially as compared to the second quarter of 2003. Currency translation continued to impact our reported international expenses. On a constant currency basis, total expenses decreased 3.6 percent compared to last year. SG&A expenses, as a percentage of sales were 15.5 percent, a 0.7 of a percent improvement compared to last year.

Earnings from operations in the third quarter totaled 2.7 million compared to the 10.7 million earned in 2002. Our third quarter net income was 1.5 million compared to the 6.5 million earned last year. And diluted earnings per share in the third quarter were four cents per share, which compares to earnings of 18 cents per share last year. Sequentially, diluted earnings per share were the same as the 4 cents earned in the second quarter.

Well, now I will now cover our segment sales results for the third quarter, and as you know, we divide our operations into three segments, number one, U.S. Commercial Staffing, number two, PTSA, our Professional, Technical and Staffing Alternative unit, and number three, international.

Sales in U.S. Commercial totaled 535.3 million, a 2.6 percent decrease compared to the 549.9 million reported last year. That is a slowing compared to the second quarter when U.S. Commercial sales decreased 0.7 of a percent. The sales performance by month on a year-over-year basis was July, flat; August, minus 5; and September minus 3. The year-over-year sales growth trend fluctuated in the third quarter, worsening in August and improving in September.

Staffing volumes showed strong sequential increases beginning in mid-August and continuing into September, but we are impacted by tougher year-over-year comparisons because the seasonal ramp up began earlier in the quarter last year. We continue to see strong sequential improvements in demand for U.S. Commercial in early October, and note that we have achieved positive year-over-year growth in hours and sales.

Sales in PTSA totaled 221.2 million, a decrease of 0.4 of a percent compared to sales of 222 million last year. In the second quarter PTSA sales growth was 1.6 percent. The individual business units showed mixed rates of growth. Carl provide more detail on PTSA performance during his operations comments.

Moving onto the International segment, translated U.S. dollar sales in International totaled 340.7 million, a 19.4 percent increase versus the 285.4 million in the prior year. On a same currency basis, our international revenue increased 10.1 percent, which reflected strong improvement from the 3.3 percent same currency sales growth reported in the second quarter. The same currency sales growth was positive in all regions. The Americas increased 11 percent, Asia-Pacific increased troll percent, sales growth in the UK/Ireland accelerated significantly during the third quarter to plus 12 percent. And sales in Continental Europe continued to improve and turn positive for the first time this year with an increase of plus 8 percent.

Turning now to our segment earnings results for the third quarter, U.S. commercial earnings totaled 22.7 million, a decrease of 31.8 percent compared to earnings of 33.3 million last year. The U.S. commercial gross profit rate decreased 2.1 percentage points from the prior year. Several factors impacted the gross profit rate. First, workers compensation costs increased significantly compared to last year. Each quarter, we evaluate our outstanding claims and estimate the ultimate liability based on a number of factors, including the frequency and severity of the claims and expected trends in medical costs. Of the total 6.4 million additional charge for workers compensation, 4.6 million was charged to U.S. commercial. Second, the U.S. commercial business continues to be impacted by significantly higher state unemployment tax rates. Our pricing now reflects these higher SUTA tax rates for 2003. Additional SUTA tax increases are coming in January of 2004. We are now in the process of implementing additional pricing action to cover these increases, as well. And third, to a lesser extent, customer mix and service line mix also tended to reduce the gross profit rate. U.S. commercial expenses were well-managed, and decreased 5.1 percent compared to the prior year.

PTSA earnings totaled 11.5 million, a 13.7 percent decrease compared to earnings of 13.3 million last year. The PTSA gross profit rate decreased 0.7 percent compared to the prior year. PTSA was also impacted by Workers' Compensation expense during the quarter, primarily due to Kelly Staff Leasing. PTSA's share of the total 6.4 million additional charge for Workers' Compensation was 1.8 million. Excluding the additional charge, the PTSA gross profit rate would have been slightly higher than last year. PTSA expenses increased 0.1 million, or 0.3 percent year-over-year, reflecting investment in the rapidly growing Kelly Financial Resources and HR First units.

International earnings totaled 1.6 million, a 47.1 percent decrease compared to earnings of 3.1 million last year. Sequentially, the $1.6 million profit was a significant improvement compared to the second quarter, when International lost 1 million. The international gross profit rate decreased 1.4 percentage points, primarily due to gross profit rate decreases in the UK and continental Europe, along with same-currency decreases in recruitment fee income. Operating expenses increased 14 percent versus last year, in U.S. dollar terms, but actually increased only 4.8 percent on a same-currency basis. Corporate expenses totaled 33.1 million, and decreased 5.9 million, or 15 percent versus the prior year. The quarter benefited from the comparison with last year, which included a 1.5 million non-recurring loss in our investment in ITility, an Internet-based vendor management software provider that was sold to Peopleclick. Compared to 2002, net expenses related to our information technology programs were also significantly lower. Corporate expenses increased 1.3 percent sequentially, compared to the second quarter.

Well, normally, I'd cover the nine-month results at this point. However, except for the significant increases in third-quarter Workers' Compensation costs, underlying business trends remained relatively consistent in the year-to-date period, so I'll skip the detailed commentary. You'll find our full nine-month financial results included in the press release materials.

Well, now, I'd like to shift to the Company's third-quarter balance sheet, and make a few comments. Cash and short-term investments totaled 61 million at quarter end, compared to 85 million at the end of the third quarter last year. The decrease is largely attributable to the 26 million of cash used in the share repurchase transaction, as well as the increase in accounts receivable. Accounts receivable totaled 638 million at quarter end, an increase of 47 million compared to the 591 million balance last year. For the third quarter, our global days sales outstanding were 53 days, which is the same as our second-quarter performance, but an increase of two days compared to last year. Our short-term debt at quarter end totaled 33 million, a 5 million increase compared to the 28 million level the prior year. The increase was driven by growth of sales and accounts receivable in our international operations. At quarter end, debt represented approximately 5 percent of total capital.

And finally, I'll make a few additional comments on the Company's cash flows. Depreciation and amortization for the first nine months totaled 36.1 million, an increase of 2.8 million or 8.4 percent, compared to the 33.3 million for last year. For planning purposes, we expect depreciation and amortization to total approximately 47 to 49 million for 2003. Capital expenditures for the first nine months totaled 20.2 million, about the same as the 20 million spent for the same period last year. For planning purposes, we expect our 2003 capital expenditures to total between 28 to 30 million.

Well, in summary, at quarter end, the condition of our balance sheet and cash flow remains excellent. 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 the third quarter, in each of our three business segments, beginning with U.S. commercial, which makes up 49 percent of our sales. We are encouraged by recent trends in this segment. About midway through the quarter, we began to see strong, steady sequential improvements in the number of assignments in U.S. commercial. And, although we saw a similar trend emerge in the third quarter of 2002, the rate of growth is now greater than what we experienced last year. We are probably seeing early signs of improving job markets. Our partial recovery in 2002 in U.S. commercial was fueled primarily by our light industrial practice. In 2003, that improvement stopped, with two consecutive quarters of low growth in light industrial. However, demand did begin slightly increasing again in the third quarter. We have seen both an increase in the number of assignments, as well as an increase in the average work week. We are continuing to exceed our pre-recession performance levels in lit (ph).

Early in the third quarter, the sequential improvements in office clerical assignments began to slow. Towards the end of the third quarter, however, growth strengthened and has continued throughout recent weeks. While customers still seem to be exercising some caution in their staffing decisions, they have turned more positive in their outlook. We believe this optimism will translate into stronger, more sustainable growth in temporary assignments, followed by growth in our placement fee business.

Turning to the bottom line, operating margins remained under increasing pressure in U.S. commercial. As I commented in our last two quarterly conference calls, our U.S. commercial gross profit percentage declined principally as a result of higher state unemployment taxes. Most recently, we are faced with significantly higher-than-expected increases and anticipated Workers' Compensation costs related to our open claims. What is driving this? Quite simply, medical costs are out of control. It is important to note that for Kelly, the frequency of claims is not increasing. We use a common measurement of the number of claims per thousand employees. However, the anticipated cost per claim is increasing, and while there are several factors contributing to this, the most significant is medical inflation. In the (technical difficulty) alone, medical costs have increased 35 percent. As you probably know, it can take many years for an individual's Workers' Compensation claim to be completely paid out. In the meantime, we have to project and then reserve for those anticipated future costs. We have significantly increased our reserves. We take great pride in our ability to manage Workers' Compensation, and we still think we manage cases very well. We work hard to maintain workplace safety and get people back to work as quickly as possible; but in this case, we simply underestimated the rate at which healthcare costs would escalate. Unfortunately, price adjustments will lag the increasing reserves, but let me emphasize this is a short-term issue. And we will continue to provide updates along the way.

Now, let me turn to PTSA. PTSA makes up 20 percent of sales, and is comprised of our professional and technical services group and our non-temporary staffing units, the staffing alternatives group. 13 specialty staffing businesses make up PTSA. For the third quarter, revenues in PTSA were flat year over year. Similar to what we saw in our commercial staffing business, this segment experienced weaker-than-expected sales trends as we began the third quarter. Midway through the quarter, however, we began to see sequential improvements in assignments across virtually all of the PTSA staffing businesses. For the quarter, Kelly financial and the Kelly Law Registry were the leading professional and technical staffing performers; both had double-digit growth. We saw ongoing weakness, however, in Kelly Scientific and Kelly Homecare, as their respective industries continue to struggle. We expect the resumption of growth in these professional businesses, in step with an improving economy and a healthy jobs market. Kelly HR First, our consulting, outsourcing and recruitment unit, was the leading staffing alternatives performer, with sales growth of over 25 percent. This is the fourth consecutive quarter of strong growth for HR First, and Kelly Vendor Management also had solid double-digit gains in the quarter. For the sixth consecutive quarter, our fee-based income has improved in PTSA. The fastest-growing contributor to growth continues to be Kelly HR First. Placement fees continue to lag. We anticipate that placement fees will rebound as business confidence strengthens. As with commercial, we are encouraged by the improvement we are seeing in this segment, especially over the past few weeks.

Before I leave PTSA and move on to international, I would like to make a few comments on our staff leasing business, KSL. As Bill noted, KSL's performance in the third quarter was significantly impacted by higher Workers' Compensation costs. Unlike commercial, KSL experienced increases in both the frequency of claims and the cost of claims in 2003, especially in the third quarter. The majority of our KSL customers are located in California, and as you are probably aware from the recent gubernatorial race, California has the largest Workers' Compensation increases in the country. We're addressing this matter, including reevaluating and repricing our KSL customers, particularly those in California. Our third segment is international, which makes up 31 percent of our total sales. For three quarters now, we have seen stronger sales growth in this segment. In the third quarter, international sales growth showed nearly 20 percent year-over-year improvement in U.S. dollars. When measured in costs and currency, sales were up 10 percent. We continue to see encouraging signs of improvement in our UK/Ireland operations. Despite the weak economic environment in the UK, our sales improved significantly. As Bill reported, sales in this region, on a constant currency basis, were up 12 percent year over year. This increase in sales revenue came from new staffing accounts -- one during the quarter -- as well as new business added since the beginning of the year. Our fee-based recruiting business, on the other hand, has not yet shown signs of recovery in the UK. The Asia/Pacific region and the Americas also showed solid double-digit year-over-year improvements in sales. The Asia/Pacific growth was fueled by our operations in Malaysia, Singapore and New Zealand, and we began to see slight year-over-year sales increases during the quarter in Australia. The Americas growth during the quarter was boosted primarily by Mexico.

We were also encouraged by recent sales trends in continental Europe. We saw increased year-over-year sales growth in the third quarter, in the majority of countries. France and Switzerland, in particular, showed renewed sales growth after months of slowing. However, we continue to see deterioration in Germany. While our temporary staffing business is recovering in continental Europe, as with the UK, our fee-based income continues to lag.

For comparison purposes, I would like to highlight our total U.S. performance for the third quarter. This combines both U.S. commercial and PTSA sales results. Kelly's total U.S. sales for the third quarter were 757 million, down 2 percent from the 772 million reported for the same period last year. However, on a sequential basis, sales grew almost 2 percent. Recent labor statistics, including the revised BLS temporary staffing data, job creation numbers and claims for unemployment benefits were encouraging, and suggest an improving jobs market. In addition, in recent weeks, we have seen similar trends in our business. As such, we're hopeful that the labor market may be finally showing meaningful signs of strengthening.

That concludes the operational comments, and now I'll turn the call back to Terry.

Thank you, Carl. Thank you, Bill. Over the past three years, I have shared my thoughts on the economy and its impact on the staffing industry. Early on, some viewed me as being overly conservative, a real Mr. Doom and Gloom. It started in early 2001, when we gave a very pessimistic forecast, and quite a bit earlier than other staffing companies. Based on our experience, we began preparing for a mild recession. Unfortunately, we weren't pessimistic enough. Just as we were early in calling a recession, we were more cautious than others in not calling for a recovery in 2002. Although our business was improving, we questioned whether the recovery could be sustained, and we were concerned about the fragile state of the U.S. economy. As it turned out, the economy did stall as we entered 2003, and our business once again felt the effects.

Well, at this point in time, we believe the current recovery is real and is sustainable. This belief is based on the coming together of three factors -- the strengthening of both the U.S. economy and the international economies and real growth in our business. Remember, our industry has been a good concurrent indicator of economic growth. Since we last reported to you in July, there have been encouraging signs that the economic recovery in the United States is building momentum. GDP growth is growing at accelerating rates. The manufacturing sector is stabilizing. Businesses are becoming more optimistic, and the labor market is beginning to improve. Economic and employment conditions outside the United States have also been improving. It appears that Europe has finally joined the Americas and Asia in the economic recovery.

For Kelly in particular, after nearly three quarters of low growth, the demand for temporary staffing in the United States began to significantly improve in the third quarter. We have seen strong sequential improvement in the number of assignments and in total hours over the past nine weeks. Outside the United States, our staffing numbers have improved in the majority of the countries in which we operate. As momentum builds, we believe this growth will translate into continued sales growth for Kelly. As a result of these changes, in both our U.S. and international operations, we have shifted our view from being cautiously optimistic to moderately optimistic. It is possible that the snap-back in demand for temporary staffing may be less robust than in previous cycles. However, if the upturn is longer, it would be a good trade-off.

While we think the recovery is for real, there are no guarantees that the declines we experienced this year, as the economy stalled, are completely behind us. We continue to believe that the U.S. and global recoveries are still fragile, and labor markets remain weak. I guess you'd have to expect at least one cautionary note from me. Although we believe the economic cycle has finally turned, there are still significant issues which were also fairly common coming out of past recessions. While issues like these are not unusual, the specifics always seem to have some element of surprise. In the first quarter, we began addressing unusually large SUTA increases with price adjustments. As Carl indicated, these are largely accomplished. Currently, Workers' Compensation costs, which Carl also covered in some detail, are having strong short-term effects in our business. Although we expect this to be a short-term issue, I should note that Workers' Compensation may affect earnings for the next quarter or two.

Despite our optimism, the outlook for the remainder of the year remains uncertain. Until we see a longer period of sustained improvement, we will remain a bit cautious. At this time, our best thinking is that fourth-quarter earnings should be in the range of 0 to 4 cents per share. This would bring full-year earnings to the range of 9 to 13 cents per share. And this assumes that the economy and labor markets continue to improve. We believe Kelly remains well-positioned for the long term. Since the recession began in 2001, we have managed our operations without sacrificing long-term growth for short-term earnings. We have preserved our customer relationships, we have closely managed expenses, we have maintained our branch network, and we have preserved our strong balance sheet and capital structure. This strategy has led to much success over the past 57 years, and we believe it will continue to do so as the recovery gains momentum.

Now, this concludes our formal comments. We'd be pleased to answer any questions you may have, subject to the constraints of Regulation FD. But please call is at 248-244-5271, and we will get back to you as promptly as we can. Once again, thank you for joining us this morning.

We'd like to think everyone for joining today's conference call, and please have a wonderful day.