Kelly Services Inc (KELYB) 2005 Q2 法說會逐字稿

Ladies and gentleman, thank you for standing by. Welcome to the Kelly Services second 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 turn the conference over to your host, Mr. Terence Adderley, CEO of Kelly Services. Sir, you may begin.

Thank you. Good morning. I'm Terry Adderley, Chairman and CEO of Kelly Services. I'm pleased to welcome you today as we report our financial operating results for the second quarter of 2005. 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 email it to you.

Bill Gerber, our Executive Vice President and CFO, will lead off with a review of Kelly's financial results. Following that, Carl Camden, our President and COO, will cover the operating results and the general performance of our business segments. Then I'll share my observations on current business conditions and update you on our outlook for the balance of the year.

But first, I'd like to highlight a few items from the press release we issued earlier today. Sales for the second quarter grew by $87 million and set a new sales record for a second quarter of $1.312 billion. It was also a good quarter for earnings. In the second quarter, we earned $0.26 per share, nearly doubling the $0.14 earned in the second quarter of 2004. And we were well within our second quarter guidance of $0.24 to $0.29.

In the third quarter, we looked for earnings in the range of $0.30 to $0.35 per share, which compares to the $0.23 earned in the third quarter of 2004. And for the full year, with 6 months behind us, we are narrowing our earning guidance to a range of $1.00 to $1.15 a share. But I'll talk more about all that in a few minutes.

First, here's Bill Gerber, who will take you through our 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 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 second quarter results. Revenue for the second quarter totaled $1.312 billion, an increase of 7.1%, compared to last year. On a constant currency basis, total Company revenue increased 5.7%. Details will be provided by segment later in the discussion.

Our gross profit rate in the second quarter was 16.3%, which increased 1/10 of a percent from the 16.2% rate last year. The year-over-year increase is due to higher gross profit rates in the US Commercial and International segments, partially offset by a decrease in PTSA gross profit rate.

The second quarter gross profit rate was the same sequentially compared to the first quarter of 2005. Selling, general and administrative expenses in the second quarter totaled $200.5 million and increased 5.8% year-over-year. On a constant currency basis, total expenses increased 4.4%.

SG&A expenses were 15.3% of sales, a 2/10 of a percent improvement, compared to last year. Earnings from operations in the second quarter totaled $13.6 million, a 58% increase compared to the $8.6 million earned last year.

Interest expense totaled $152,000, compared to $283,000 last year. The improvement is due to higher average cash balances and higher US interest rates compared to last year.

The effective tax rate in the second quarter was 30.6%, which is a reduction compared to the 41.3% rate in the second quarter of last year. The lower effective tax rate is due to the passage of legislation in the fourth quarter of 2004, extending work opportunity credits for 2 years. Although the full year 2004 tax rate of 36% did reflect the credits, the second quarter 2004 rate of 41.3% did not, because the law was not passed until the fourth quarter. In addition, we successfully closed 2 state tax audits in the second quarter, which also helped reduce the effective rate.

For planning purposes, we expect that the third quarter tax rate will be approximately 38% and the full year tax rate should be approximately 37% for 2005.

Our second quarter net income was $9.3 million, a 91% increase compared to the $4.9 million earned last year. And diluted earnings per share in the second quarter totaled $0.26 per share, an 86% increase compared to earnings of $0.14 per share last year.

Well, now I'll cover our segment revenue results for the second quarter. As you know, we divide our operations into 3 segments -- number one, US Commercial Staffing; number two, PTSA, our Professional Technical and Staffing Alternatives units, and number three, International.

Revenue and US Commercial totaled $602.4 million, a 3.6% increase, compared to last year. US Commercial Growth on an as-reported basis was April, plus-4%, May, zero, and June, plus-6. However, all 3 months were impacted by holiday shifts. April was favorable due to Easter timing. May was unfavorable due to a shift in Memorial Day and June was a net favorable due to a combination of shifts in Memorial Day and the Friday preceding the 4th of July. Adjusting for the holidays, we estimate that the adjusted growth would have been April, plus-3%, May, plus-4% and June, plus-4%.

Turning to PTSA, revenue for the second quarter totaled $281 million, an increase of 9.5%, compared to last year. PTSA continued to show strong growth on a monthly basis. Adjusting for the holiday shifts, we estimate the growth would have been April, plus-10%, May, plus-9% and June, plus-9%.

Moving on to the International segment, revenue for the second quarter totaled $428.5 million, a 10.9% increase versus the prior year. On a constant currency basis, our International revenue increased 6.3%. Adjusting for the International holiday shifts, we estimate that US dollar growth by month would have been April, plus-9%, May, plus-11%, and June, plus-10%.

Turning now to our segment earnings results for the second quarter, US Commercial earnings totaled $32.8 million, an increase of 11%, compared to last year. The US Commercial gross profit rate increased 4/10 of a percent from the prior year. A number of factors contributed to the increase -- number one, improved pricing related to pseudo recovery; number two, workers' compensation costs decreased compared to last year and, number three, the income increased 43%, compared to last year. US Commercial expenses increased 4% and expenses were 9.6% of sales, the same as last year.

PTSA earnings totaled $17.1 million, a 5.7% increase, compared to last year. The PTSA gross profit rate decreased 8/10 of a percentage point, a rate decline primarily due to changes in business unit mix and rates, partially offset by growth and fee income. PTSA expenses increased 3.5% year-over-year. And expenses, as a percent of sales, were 11.3%, compared to 11.9% last year.

International earned a profit of $4.4 million, more than doubling the $2 million earned in last year's second quarter. The International gross profit rate increased 3/10 of a percent, primarily due to higher fee-based income. International expenses increased 9.5% in US dollar terms, but actually, increased only 5.2% on a constant currency basis. International expenses were 16.4% of sales, compared to 16.6% last year.

And, finally, moving on to Corporate expenses for the second quarter, totaled $40.7 million, and increased $1.6 million or 4.1% versus last year, primarily due to increased compensation costs.

Well, now before I move on to the balance sheet, note that you'll find our full 6 month financial results included in the press release materials.

Shifting to the Company's second quarter balance sheet, I'll make a few comments. Cash and short-term investments totaled $70 million at quarter end, an increase of $4 million compared to last year. Accounts receivable totaled $757 million at quarter end, an increase of $29 million compared to last year. And, for the quarter, our Global based sales outstanding were 53 days, which is an improvement of 1 day compared to both last year and 1 day sequentially compared to the first quarter.

Our short-term debt quarter end totaled $56 million, an $18 million increase compared to last year. You will recall in the first quarter, we borrowed $18 million under a Yen denominated credit agreement to fund our investment and temp staff, a private Japanese firm, which is the second largest staffing company in the Japanese market. And at quarter end, short-term debt was 8% of total capital.

And finally, a few comments on the Company's cash flows. Net cash provided by operating activities was $9.9 million in the 6 month period, compared to $6.6 million last year. Capital expenditures for the first 6 months totaled $12.7 million, compared to the $13.4 million spent last year. The small decrease is primarily due to the timing of IT project capital spending. For planning purposes, we continue to expect our 2005 capital expenditures to total between $28 to $32 million.

I'd now like to turn it over to Carl, who'll highlight our operating results.

Thank you, Bill. Before I begin my operational update and get into a more detailed discussion on each of our business segments, I'd like to make a few general observations about our second quarter. Overall, it was a good quarter, but like the first, the second quarter followed a more moderate pace then we had expected when the year began. Now, you'll remember that we had identified 3 operational objectives as key to helping us return to our pre-recession earnings by 2006 or '07 to grow sales faster then the industry average, to hold controllable expenses to roughly to half the rate of our sales growth and to increase earnings at a faster rate than sales. And as Terry said, our earnings were well within our second quarter guidance.

However, sales growth remained soft, especially in our US Commercial segment. Sales in our other 2 segments were more in line with our expectations. Fee growth remained strong and we saw further overall margin improvement. However, as a result of the sales growth moderating sooner than originally expected, we did not meet our expenses as a percentage of sales goal. On our first quarter conference call in April, we told you that we were taking steps to bring expenses more in line with current sales growth. And although we've not yet reached our goal, I am pleased to report that we are making considerable progress. The rate of expense growth declined in each of our 3 business segments. We had sequential and year-over-year improvements in our overall expenses as a percentage of revenue. And we expect further improvements over the balance of the year.

Let's now focus on specific segment performance beginning with US Commercial, which makes up about 46% of sales. Year-over-year sales in US Commercial increased almost 4% during the second quarter, slightly ahead of the 3% growth rate in the first. As we've commented for a couple of quarters now, growth in light industrial staffing, LID, has slowed over the last several quarters. We saw solid double-digit growth in the first half of 2004, but sales growth in LID decreased to mid-single digits in the second half of the year, slowed a bit further in the first quarter of 2005 and dropped 1% in the second quarter. This decline is primarily due to the automotive industry related slowdown, principally in the Midwest.

On the other hand, office clerical staffing continued to show healthy signs of improvement, outpacing LID for the third consecutive quarter. The recovery of both our temp-to-perm fees and direct placement fees in US Commercial remains solid. The double-digit rates of growth that began in 2004 continued into the second quarter. Growth was up over 40% year-over-year. And this is the third consecutive quarter of strong double-digit fee growth in US Commercial.

Additionally, year-over-year gross profit dollars increased over 6%, against sales growth of 4%. Commercial's gross profit rate during the quarter increased to 15%, compared to 14.6% for the same period last year. This is the fourth consecutive quarter of improving year-over-year gross profit rate in US Commercial.

Our GP rate was favorably impacted, as a result of our success in raising prices to cover pseudo cost increases, better workers' compensation management, and, as we just noted, continued growth and fees.

For the quarter, expenses grew at just about the same rate as the 4% sales growth. Expenses as a percentage of revenue were the same as last year, but we did see sequential improvement compared to the first quarter. Summing it all up, operating earnings increased 11% in the quarter for US Commercial.

Now, let me turn to our Professional Technical and Staffing Alternative segment, which makes up 21% of sales. The second quarter for PTSA was good in terms of revenue growth. Although the rate of growth declined somewhat compared with the first quarter, on a year-over-year basis, revenue was up over 9%. However, earnings grew only 6%. Over half of the 14 business units that make up PTSA continued to show strong double-digit revenue growth as compared to 2004. In Professional and Technical Staffing, Engineering and Kelly Scientific was the leading performers. These units had very strong double-digit sales and earnings growth for the quarter.

On the other hand, their Automotive Services Group and the Law Registry experienced revenue declines during the quarter. The year-over-year decline in the Law Registry was attributable to the completion of major projects that were ongoing in 2004.

Turning to our Staffing Alternatives group, Kelly HRFirst and Kelly HRConsulting were the leading performers with sales growth of over 30% for the quarter. Sales in our Staff Leasing business decreased in the second quarter, as a result of our exiting customers with higher workers' compensation risk.

We were also very pleased with the continued strong gross and placement fee income in the majority of the PTSA staffing businesses. Fees improved over 30%. In addition, expenses in PTSA were well managed. It increased only 3.5% for the quarter, against revenue growth of nearly 10%, a considerable improvement over PTSA's first quarter performance. We've made very good progress in bringing PTSA expenses back in line with our sales growth. And although we've slowed our PTSA branch expansion, we still opened 5 new PTSA branches during the quarter in the United States.

With strong revenue growth and great expense control in PTSA, you may wonder why earnings are lagging sales and fallen short of our expectations. As Bill already noted, PTSA's gross profit rate declined to 17.4%. And, as you would expect, given the trouble in the automotive industry, our Automotive Services unit has experienced significant margin decline. And similarly, Kelly Engineering Resources has seen declines in margin. And, as we've already noted, some special projects were concluded during the quarter in the Law Registry. These, in combination, account for the majority of the GP decline in PTSA. But we do expect to see sequential improvement in PTSA gross margin for the balance of the year.

Our third segment is International, which makes up 33% of our total sales. Reported sales increased approximately 11% for the second quarter, and in constant currency, International sales increased 6%. Earnings improved nicely as well, hitting $4.4 million for the quarter, more than doubling the $2 million earned in Q2 of 2004. International sales growth remained strong and was again positive in all regions. Europe had an increase of 7%. Sales in Germany, Switzerland, Scandinavia and Russia all grew faster than 15%. Sales in our UK-Ireland operations, however, were again somewhat disappointing with a slight decline. Consistent with last quarter, we saw double-digit growth in fees in the majority of our European countries. Total fees increased over 25% in constant currency and we expect continued solid growth as the year progresses.

The Asia-Pacific growth of over 10% was boosted by our operations in India, Malaysia and Singapore. Our past investments in this region are yielding positive results. For example, sales growth in India better than doubled compared to last year and Malaysia grew by more than 40%. In the Americas, sales increased 2% in constant currency. Although sales growth remained solid in Mexico and Puerto Rico, sales growth declined slightly in Canada during the quarter.

Additionally, International expenses for the quarter grew 5% on a constant currency basis. As a percentage of sales, they were 16.4% in the second quarter, an improvement from the 16.6% during the same period last year and a considerable improvement from the 17.1% in the first quarter of 2005. As a result of both fee growth and movement in the higher value services, our gross profit rate for International during the quarter increased to 17.4%, compared to 17.1% for the same period last year.

Earlier this month, we announced our entry into Japan through a joint venture with TempStaff and Sony Corporation. Kelly has a 9% ownership interest in this new company and Staff Kelly will be headquartered in Tokyo and will begin operations on September 1st, of this year. Staff Kelly will provide general temporary employment, recruitment, HR consulting and outsourcing, primarily for Sony. This partnership gives us an important presence in the world's fourth largest staffing market. It also strengthens our ability to meet the needs of our global customers. And we will continue to invest in International growth opportunities and are very excited about their outlook.

I'll conclude my operational update with a few comments on the combined performance of our 3 operating segments against each of our objectives.

First, a combined constant currency sales growth of 5.7%; second, we made good progress during the quarter to bring our expenses back in line with our sales growth. Expenses, as a percentage of revenue, improved to 15.3%, from 15.5% last year and decreased from 15.8% in the first quarter in 2005. Third, our second quarter 2005 earnings grew considerably faster than the rate of sales growth. And, let me add, we continue to make good progress on margin improvement. We believe there is still some continued upside. This concludes the operations comments and now I'd like to turn it back to Terry.

Thank you, Carl and Bill. On our first quarter conference call in April, I said that although we had turned more cautious, we did not feel the US economy was heading into another recession. In our view, not much has changed since then. US economy continues to grow at a good pace, with expected growth of around 3.5% this year. The global economy is slowly strengthening. Overall job growth in the United States remains solid. Over 500,000 new jobs were created in the second quarter, which was about the same as in the first quarter. A greater proportion of those jobs were permanent positions and, as a result, we saw strong growth in our temp-to-perm conversions and in permanent placements. In addition, all 3 of our business segments are growing.

Looking back at previous economic cycles, we know that up-cycles do not necessarily proceed in a straight line. As we have noted before, in the beginning of an economic recovery, growth in temporary staffing generally accelerates very quickly, as it did in 2004, and, typically, reaches double-digit growth rates and this makes sense. Early on, businesses need more personnel, but are hesitant to add permanent staff until they are reasonably certain that the recovery is sustainable. As business confidence builds, companies resume adding permanent staff to rebalance their work force. In turn, this causes the growth rate in temporary staffing to slow. It would not be unusual to see a modest slowdown to solid single-digit growth rates, as we did in the first half of 2005.

Now, fortunately for the staffing industry, this slowdown in cushioned by increases in permanent hiring, which generates strong fee growth from temp-to-perm conversions and direct placements. Now this period can be short or may last for quite some time. After workforce rebalancing has been achieved, normally, the demand for temporary help begins to reaccelerate. As businesses expand and special projects arise, companies minimize adding permanent help in order to avoid becoming overstaffed. And, at that point in the business cycle, typically, there is a nice increase in demand for temporary staffing.

When you step back, the pattern of this cycle is not surprising. But what was surprising was that along with many analysts, we anticipated a few more quarters of strong temporary job growth, but this time, the demand for temporary jobs began moderating sooner then we expected. However, as we have said before, no 2 recessions or recoveries have been exactly alike and we continue to hold a positive outlook. Therefore, we are continuing to pursue our strategic growth plan by filling out our branch network, introducing new US commercial product offerings, developing our professional and technical businesses in other countries and expanding Kelly's presence around the world.

As Carl mentioned, we recently announced our entry into Japan. Our expansion into Japan is an important step in our global strategy and we are particularly pleased with our partners, the Sony Corporation and TempStaff, the second largest temporary staffing company in Japan. Kelly now operates in 29 countries and territories.

Our strategic growth plan and our confidence in the global economy underlies our earnings forecast. You will recall that for the year, we originally gave earnings guidance of $1.00 to $1.20 per share. Our projections assumed a few more quarters of strong growth before we entered the current phase for modest demand for temporary staffing. And, as I said earlier, given the current slowing of demand, we have narrowed that range to $1.00 to $1.15 per share.

At the beginning of this call, I gave guidance for the third quarter of $0.30 to $0.35 per share and this compares to the $0.23 we earned in the third quarter of 2004. Our 2005 results for the first 6 months, combined with our third quarter guidance, keeps us on track to achieve our current guidance of $1.00 to $1.15 for this year. This, incidentally, compares to the $0.60 a share we earned for the year 2004.

Now, when comparing our forecast against last year's results, please keep in mind that we use a fiscal calendar which results in a fiscal leap year every 5 to 6 years. This adds 1 additional week to our year and to our fourth quarter.

2004 was a fiscal leap year for Kelly. 2005 is a normal 52 week year with 13 weeks in each quarter. This extra week in 2004 added roughly 1% to last year's annual sales and about 5% to fourth quarter sales. While we did not quantify the addition to earnings, it was at least as great as sales.

In summary, given our current outlook, we still expect to return to our pre-recession earnings of $2.43 by 2006 and a half, or 2007.

That concludes our formal comments this morning. We would be pleased to answer any questions you may have, subject to the constraints of the regulation FD, and 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.

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