Kelly Services Inc (KELYB) 2004 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Kelly Services fourth quarter financial results conference call. All participants are in a listen-only mode. And as a reminder, this conference is being recorded at the request of Kelly Services. At this time, I would like to introduce Mr. Terrence Adderley, CEO of Kelly Services. Sir, you may begin.

Good morning. I’m Terry Adderley, Chairman and CEO of Kelly Services. I’m pleased to welcome you today as we report our financial and operating results for the fourth quarter and full year of 2004. All of you should have received copies of our financial statements. If you haven’t and would like to have the material, please call us at 248-244-5271, and we’ll gladly fax or e-mail it to you.

Bill Gerber, our EVP and CFO, will lead off with a review of Kelly’s financial results. Following that, Carl Camden, our President and COO, will cover our operating results and the general performance of the business segments. And then I’ll share my observations on this past year and our outlook for Kelly as we begin the new year.

First, I’d like to highlight a few items from the press release that we released earlier today. Kelly had a very good year in 2004. Our fourth quarter sales of $1.356 billion set a new sales record not only for our fourth quarter but also for all quarters. And our full year sales of $4.984 billion also established a new sales record, exceeding the previous one set in 2003 by $659 million.

It was also a good quarter and year for earnings. In the fourth quarter, we earned 24 cents per share, a significant improvement over the 5 cents earned in the fourth quarter of 2003 and at the upper end of our guidance of 19 to 24 cents. For the full year, earnings were 62 cents a share and more than quadrupled the 14 cents we earned in all of 2003. This also put us at the upper end of the street estimates.

Most of you who follow us regularly probably also noticed that for the first time in four years we have given guidance for the full year. For the first quarter of 2005, we expect earnings to be in the range of 9 to 14 cents per share. And for the full year, we look for earnings of $1 to $1.20 a share. I’ll talk more about both the full year and the first quarter in a few minutes.

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

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 changes in market and economic conditions, laws and regulations, competition, currency fluctuations, 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 SEC. Actual results may differ materially from any projections contained herein.

I’ll start by covering fourth quarter results. Our fourth quarter contained 14 weeks and our fiscal year included 53 weeks. This fiscal leap year occurs every 5 or 6 years and is necessary to align the fiscal and calendar periods. Where applicable, I’ll also report the 13-week and 52-week sales comparisons.

Revenue for the 14-week fourth quarter totaled $1.356 billion, an increase of 16.4 percent compared to the $1.165 billion for the 13-week fourth quarter of last year. Revenue in the extra week totaled $62 million. On a 13-week basis, revenue increased 11.1 percent. On a 13-week constant currency basis, total Company revenue increased 8.5 percent. Details will be provided by segment later in the discussion.

Our gross profit rate in the fourth quarter was 15.8 percent, which decreased .2 of a percent from the 16 percent rate in the prior year. The year-over-year decrease is due to lower gross profit rates in the PTSA and International segments, partially offset by significantly better U.S. Commercial gross profit performance. SG&A expenses in the fourth quarter totaled $202.4 million and increased 10.7 percent year-over-year. On a constant currency basis, total expenses increased 7.9 percent. SG&A expenses were 14.9 percent of sales, an .8 of a percent improvement compared to last year.

Earnings from operations in the fourth quarter totaled $12.3 million (technical difficulty – no sound) .2 million last year. The effective tax rate for the fourth quarter was 29 (technical difficulty – no sound) percent, which is a significant reduction compared to the 41 percent rate in the fourth quarter of last year. As we noted in our October conference call, at the beginning of the fourth quarter, the Working Families Tax Relief Act was signed into law. The law provided for the extension of work opportunity credits retroactive to the beginning of 2004. However, GAAP requires us to recognize the entire full year benefit in the fourth quarter. We were very successful in hiring temporary employees who qualified for the credit and as a result we were able to reduce our full year tax rate to 36.1 percent.

Our fourth quarter net income was $8.6 million compared to the $1.8 million earned last year. Although we are not separately reporting the impact of the 14th week, clearly it added to earnings in the fourth quarter. Diluted earnings per share in the fourth quarter were 24 cents a share compared to earnings of 5 cents per share last year.

Now I’ll cover our segment revenue results for the fourth quarter. And as you know, we divide our operations into 3 segments. Number one, U.S. Commercial Staffing; number two, PTSA, our Professional, Technical, and Staffing Alternatives units; and number three, International. For the 14-week fourth quarter, revenue in U.S. Commercial was $623 million, a 9.5 percent increase compared to last year. On a 13-week basis, sales increased 4.2 percent. U.S. Commercial showed solid growth on a comparable week basis with October up 4 percent, November up 2 percent, and December up 7 percent. December benefited from the Christmas and New Year’s holidays falling on weekends rather than weekdays, as in 2003.

Turning to PTSA, revenue for the 14-week quarter totaled $277.3 million, an increase of 21.3 percent compared to last year. On a 13-week basis, revenue increased 15.4 percent. PTSA revenue showed strong growth on a comparable week basis with October plus 15 percent, November, plus 13 percent, and December plus 19 percent. PTSA growth also accelerated in December, primarily due to the favorable holiday comparisons mentioned earlier.

Moving on to the International segment, revenue for the 14-week fourth quarter totaled $455.6 million, a 24.1 percent increase versus the prior year. On a 13-week basis, revenue increased 19.1 percent. And on a 13-week constant currency basis, our International revenue increased 10.8 percent.

Turning now to our segment earnings results for the fourth quarter, U.S. Commercial earnings totaled $36.3 million, an increase of 56.5 percent compared to last year. The U.S. Commercial gross profit rate increased .8 of a percent from the prior year. Workers Compensation costs improved significantly as compared to last year. We expect Workers Compensation costs to remain relatively stable in 2005.

U.S. Commercial expenses decreased 2 percent compared to the prior year. Demonstrating considerable operating leverage, expenses improved to 8.8 percent of sales compared to 9.9 percent last year. PTSA earnings totaled $16.1 million, an 8.9 percent increase compared to last year. The PTSA gross profit rate decreased 2.1 percentage points compared to the prior year. Carl will cover this in more detail later.

PTSA expenses increased 7.4 percent year-over-year, primarily reflecting volume growth and new branch openings. Expenses improved to 11.3 percent of sales compared to 12.7 percent last year. International earned a profit of $5.5 million, a substantial improvement compared to the $1.6 million earned in last year’s fourth quarter. The International gross profit rate decreased .4 of a percent, primarily due to lower temporary staffing gross profit rates, partially offset by higher fee-based income.

International expenses increased 15.2 percent versus last year in U.S. dollar terms, but actually increased only 6.9 percent on a constant currency basis. International expenses were 15.5 percent of sales compared to 16.7 percent last year.

Finally, moving on to corporate expenses for the fourth quarter totaled $45.6 million and increased $9.1 million, or 25.1 percent versus last year. The largest part of the increase was the accrual for the annual performance bonus and this significantly affects the year-over-year comparison because no management bonus was paid in 2003 due to low earnings. As we mentioned last quarter, following the ’02 and ’03 salary freezes, merit increases were awarded in June and also impacted fourth quarter expenses.

Next, I’ll cover a few highlights for the full year of 2004. Revenue for the 53-week year of 2004 totaled $4.984 billion, an increase of 15.2 percent compared to 2003. On a 52-week basis, total revenue increased 13.8 percent. And on a constant currency basis, revenue for the 52-week year increased 10.9 percent. Our gross profit rate for 2004 was 16 percent, which decreased .1 of a percent compared to the 16.1 percent rate reported in 2003.

SG&A expenses, as a percentage of sales, were 15.3 percent, a .6 of a percentage point improvement compared to the prior year. SG&A expenses totaled $763 million and decreased 10.9 percent year-over-year. On a constant currency basis, total expenses increased 7.7 percent. Earnings from operations for the year were $35.5 million compared to the $8.7 million reported in the prior year. The full year effective tax rate was 36.1 percent. I want to emphasize that this rate was not a one-time benefit. The work opportunity credits mentioned earlier were extended through the end of 2005. For planning purposes, we expect our effective tax rate to be approximately 37 percent in 2005. Our full year net earnings were $22.1 million compared to the $5.1 million earned in the prior year. Diluted earnings per share for the year were 62 cents per share compared to earnings of 14 cents per share in 2003.

Shifting to the Company’s fourth quarter balance sheet, I’ll make a few comments. Cash and short-term investments totaled $89 million at year-end. That’s an increase of $12 million compared to last year. AR were $727 million at year-end, an increase of $69 million compared to last year. And for the year, our global DSOs were 54 days, which is an improvement of 1 day compared to last year. Our short-term debt at quarter-end totaled $34 million, a $5 million decrease compared to last year. And at quarter-end, short-term debt was 5 percent of total capital.

Finally, a few comments on the Company’s cash flows. Cash from operating activities totaled $59.4 million, a 94 percent increase compared to the $30.6 million generated last year. CapEx for the full year totaled $35.6 million compared to the $30.2 million spent last year. Included in the total was $7.4 million for software licenses related to the multi-year implementation of PeopleSoft payroll billing and financial systems. For planning purposes, we expect our 2005 CapEx to total between $32 to $36 million.

In summary, at quarter-end, our financial strength and flexibility remain excellent. And now I’d like to turn it over to Carl, who will highlight our operating results.

Thank you, Bill. I’ll begin my operational update with a review of the 3 performance goals we set for the Company in early 2004 as keys to returning to our pre-recession earnings levels to grow sales faster than the industry average, to hold controllable expenses at roughly half the rate of our sales growth, and to increase earnings at a rate considerably faster than sales. I am very pleased to report that 2004 was a great year. We finished the year strong and we achieved our performance goals.

Let me highlight our fourth quarter and full year performance in each of our business segments beginning with U.S. Commercial, which makes up 47 percent of sales. Sales in U.S. Commercial remain solid during the fourth quarter. Year-over-year, sales in this segment increased nearly 10 percent. On a comparable week basis, revenue was up 4 percent for the quarter, down slightly from the 7 percent year-over-year growth seen in the third. Early in 2004, we exited selected accounts and did not accept statutory SUTA increases or that had unacceptable Workers Comp experience. In the fourth quarter, this reduced Commercial’s growth rate by 5 percentage points. In the first quarter of 2005, there will be a similar impact on U.S. Commercial sales, but the effect for the remaining 3 quarters will be minimal as we anniversary the loss of these accounts.

For the third consecutive quarter, growth near 10 percent in office clerical staffing and for the first time in almost 3 years year-over-year growth in office clerical outpaced light industrial staffing. On an even more positive note, the recovery of both our temp-to-perm fees and direct placement fees remain strong. We saw improving double-digit rates of growth in 2004 and the trend is strengthening, starting at approximately 10 percent growth in the first quarter and ending at 60 percent year-over-year growth in the fourth. Commercial’s gross profit rate during the quarter also improved to 14.7 percent compared to 13.9 for the same period last year. Improvements in Workers Comp experience and the growth in fees contributed to the improving gross profit rate in the quarter. Further, our gross profit rate was favorably impacted as a result of our decision to exit certain accounts in early ’04.

As we stated in our third quarter conference call, we are prepared for another round of SUTA increases for 2005. These increases should be significantly less than those in ’04 and we expect the rate adjustment process to be fairly routine. Expenses were well managed in Commercial. For the quarter, expenses actually decreased 2 percent against the nearly 10 percent rate of growth in revenue. And for the year, expenses increased only 2 percent on 9 percent revenue growth. On the strength of sales increases, gross profit management and expense discipline, operating earnings increased 56 percent in the quarter and 28 percent for the full year in U.S. Commercial.

Now let me turn to the PTSA segment, which makes up 21 percent of sales and is comprised of our Professional and Technical Services Group and our non-temporary staffing units, The Staffing Alternatives Group. The fourth quarter for PTSA was excellent in terms of revenue growth. On a year-over-year basis, revenue was up 21 percent and earnings grew 9 percent. Sales continued to trend upwards at accelerating rates. Nearly every unit showed strong double-digit improvements. In Professional and Technical Staffing, Science & Engineering were the leading performers. These units had very strong double-digit sales and earnings growth for the quarter in excess of 25 percent. Most PTSA staffing units are now ahead of pre-recession sales. On the other hand, Kelly Home Care and our Automotive Services Group continue to run behind 2003 sales.

Turning to our Staffing Alternatives Group, Kelly HR First, our recruiting and outsource business, and Kelly Vendor Management were the leading performers. We’re also very pleased with the acceleration and placement fee income in the majority of the PTSA staffing businesses throughout the year. Contribution from PTSA lagged our expectations because the gross profit rate declined to 17.7 percent. This was primarily due to higher Workers Comp expense from prior year’s claims in our Staff Leasing business. There was also a sizeable decrease in gross profit in our Kelly Home Care unit. We believe both issues were short-term and our GP rate will normalize in 2005. For the year, expenses in PTSA increased 9 percent against revenue growth of 15 percent. We expanded our Engineering and Science businesses during the quarter by adding several new branches. In total, over 30 new PTSA branches were added in all of 2004. We believe that PTSA will continue its rapid growth for quite some time.

Our third segment is International, which makes up 32 percent of our total sales. Reported sales increased 24 percent for the fourth quarter. For the 13-week quarter in constant currency, International sales increased 11 percent and earnings tripled. During the quarter, we saw acceleration in year-over-year constant currency sales. International growth remains strong and continues to show nice sequential improvements. Sales growth was again positive in all regions. In the Americas, sales increased 14 percent in constant currency. Canada and Puerto Rico turned in good double-digit sales growth.

We were encouraged by the year-over-year sales growth in Europe during the quarter. The region had an increase of 9 percent. Particularly encouraging is that there was solid growth in nearly every country. For example, sales in Germany and Switzerland grew faster than 20 percent. Sales in our U.K. Ireland operations also continued to strengthen with growth nearing 10 percent in the fourth quarter. Throughout the year, we saw double-digit growth in fees in the majority of countries. Year-over-year, fees in Europe grew nearly 20 percent for the quarter. Fees now exceed their pre (technical difficulty – no sound) and we expect to see further improvements in 2005.

The Asia-Pacific growth (technical difficulty – no sound) percent was boosted by our operations in Australia, New Zealand, Singapore, Malaysia, and now India. Our past investments in this region are yielding positive results. For example, sales growth in India better than doubled compared to last year and Singapore grew by more than 25 percent.

We are very pleased with our performance in International. We returned to profitability in the second quarter. The third saw continued strengthening and in the fourth earnings tripled to over $5 million. For the year, our International earnings totaled nearly $13 million, which is quite an improvement over last year’s loss of nearly $1 million. Additionally, expenses continue to be well managed in International. For the year, expenses grew at 6.5 percent compared to revenue growth of nearly 16 percent.

Holding to our strategy, we continue to expand high growth PTSA business lines and win global and Pan regional contracts during the quarter. In fact, we opened 3 new PTSA branches internationally in the fourth quarter, bringing our total for the year to 16. And finally, we expanded our international presence with our entering into Hungary, our 27th country. We will continue to invest in international growth opportunities in 2005 and are very excited about the outlook.

Looking at (technical difficulty – no sound) not only did we (technical difficulty – no sound) grow sales faster than the industry, we continued to gain market share in the U.S. and abroad. Second, excluding the headquarters, we held our expenses to just under half the rate of our sales growth and we accomplished this while expanding our global branch network. Third, our 2004 earnings quadrupled over 2003 considerably faster than the 15 percent rate of sales growth.

And let me add, we continue to make good progress on margin improvement in our largest segment, U.S. Commercial, and we believe there is a significant upside of margin improvement in 2005. We expect higher margin products, such as Office and Specialty Staffing, to grow faster than our lower margin business. We expect further growth in our placement fee business to happen and to further accelerate. And we expect SUTA costs to stabilize and perhaps even begin to decrease. While we’re expecting greater margin impressions in International, as we continue to win the greater proportion of European and Pan European contracts, some of this will be offset by higher placement fees as well as more international PTSA expansion.

That concludes the operation segment, and now I would like to turn it back to Terry.

Thank you, Carl and Bill. First, a few observations about this past year. 2004 was a very good year for the economy, for the staffing industry, and for Kelly Services. Economic conditions strengthened both here and abroad. The U.S. economy posted steady gains. Over 2 million new jobs were created and more than 10 percent of those jobs were accounted for by temporary staffing. The unemployment rate improved to 5.4 percent and GDD growth accelerated as the year progressed. The global economy posted impressive gains, growing at the fastest rate since 1976. Overall, employment also grew around the world while temporary employment in Europe was growing faster than employment in general.

For Kelly, sales improved nicely in all 3 of our business segments and across virtually all of our service offerings. During 2004, fee income increased sharply, both in temp-to-perm and direct placement, an important confirmation that business confidence was building and permanent hiring increasing. The underlying economic conditions as well as the trends in our own business also validated this recovery as a solid one.

With the recession behind us, we re-engaged our strategic growth plan in 2004. We resumed filling out our branch network, U.S. Commercial continued to expand its product offerings, PTSA expanded our professional and technical businesses into more countries, and International also resumed geographic expansion, opening in Hungary our 27th country.

2004 was a very good year for Kelly. We returned to double-digit sales growth, set a new sales record, gained market share in the U.S. and worldwide, controlled expenses, improved operating efficiencies, quadrupled earnings, and we continue to invest for the longer term.

While it is very early in the year for a prediction, we think 2005 will also be a very good year for the Company. The economies, both here and abroad, are expected to produce solid growth with significant job creation. In turn, we expect to see a healthy increase in our sales and earnings.

You may recall that early last year we set a goal of reaching our pre-recession earnings records of $2.43 a share by the year 2006 or 2007. To demonstrate the reasonableness of this goal we modeled 2 potential scenarios. The 2006 scenario was based on faster growth with limited margin recovery, while the 2007 scenario was built on somewhat slower growth but with higher margins. Using these assumptions, we laid out possible projections of annual earnings for each scenario. Beginning with 2004, earnings were projected at 57 cents per share under the 2007 scenario and at 62 cents a share for the 2006 scenario. Using the same models, the earnings projections for this year, 2005, are $1 a share under the ’07 scenario and $1.40 a share in the ’06 scenario. While our earnings last year of 62 cents a share tracked the 2006 scenario, I will remind you again that we might end up somewhere in between the two and we will call that the 2006 1/2 scenario.

You may also recall that we have not provided full year guidance since 2001 because the economic cycle was uncertain and visibility virtually nonexistent. Today, the economy looks solid and we believe there is enough visibility to again provide guidance for the year. We also believe this will give our investors a better idea of what we think our earnings will be in 2005.

For this year, we are currently budgeting earnings between $1 to $1.20 per share. And this assumes a good solid but not robust economy. This budget also gives us needed operating flexibility to quickly respond should the economy unexpectedly dip or accelerate. With guidance of $1 to $1.20 for the year, we have given you what we feel is a realistic forecast at this very early point in the year. And while our current guidance of $1 to $1.20 is closer to the 2007 scenario, I do not want to suggest that we have dismissed or given up on the 2006 scenario - far from it. In fact, our current guidance nearly doubles last year’s earnings of 62 cents and would keep us in the running for either 2006 or at worst 2006 1/2. It simply makes 2006 a little tougher. And, as Carl has already pointed out, we believe there is good upside potential for improved earnings and stronger sales.

At the beginning of this call, I said that our guidance for the first quarter is 9 to 14 cents per share. This would be 3 to 4 times the 3 cents we earned in the first quarter of 2004 and would be a very good start for the year. In terms of our 2 scenarios, 9 to 14 cents puts us at about the 2006 1/2 level. Now this is somewhat lower than the current street estimates, but I remind you that owing to seasonality the first quarter is the lowest of the year and we also believe the number of analysts are assuming a much stronger economy than we are.

2005 should be another good year for Kelly. Again, our objectives for this year have not changed – grow sales faster than the industry average, hold controllable expenses at roughly half the rate of our sales increase, and increase earnings that at a rate considerably faster than our sales. We accomplished this in 2004 and we believe Kelly is well-positioned and well-balanced to do it again in 2005.

This concludes our formal comments this morning. We would be pleased to answer any questions you may have subject to the constraints of Regulation FB. 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.

Thank you for attending today’s conference and have a great day.