Kelly Services Inc (KELYB) 2005 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. As a reminder, this conference is being recorded at the request of Kelly Services.

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

Good morning. I'm Terry Adderley, Chairman and CEO of Kelly Services, and I should explain, recently recovered from a cold but occasionally with still a cough, so if it comes on, you will understand.

Well, I'm pleased to welcome you today as we report our financial and operating results for the fourth quarter and the full year of 2005. All of you should've received copies of our financial statements. If you haven't and would like to have this material, please call us at 248-244-5271 and we will gladly fax or e-mail it to you.

We will follow our usual agenda today, and let me start by highlighting a few items from the press release that was issued this morning. 2005 was a very good year for Kelly. Our fourth-quarter sales of $1.384 billion set a new sales record, not only for our fourth quarter but also for any quarter. Our full-year sales of $5.290 billion also established a new sales record, exceeding the previous one set in 2004 by over $300 million.

You may recall we use a fiscal calendar, which results in a fiscal leap year every five or six years. 2004 was a fiscal leap year for Kelly. The year had 53 weeks with the additional week in the fourth quarter. 2005 was a normal 52-week year with 13 weeks in each quarter. In 2004, the extra week added roughly 5% to our fourth-quarter sales and 1% to our annual sales. While we did not quantify the addition to earnings, it was at least as great as sales. Please keep this in mind when comparing our results for 2005 against 2004.

It was also a very good quarter and year for earnings. In the fourth quarter, we earned $0.37 per share, a 68% improvement over the $0.22 earned in the fourth quarter of '04. This was above our fourth-quarter guidance of $0.28 to $0.33. For the full year, earnings were $1.09 a share, an increase of 82% over the $0.60 we earned in 2004. The $1.09 was around the middle of the guidance we gave you a year ago and $0.05 over the Street consensus.

Those of you who have followed us regularly will remember that our first quarter's earnings have historically been disproportionately low, in fact the lowest for the year. We expect the first-quarter earnings to be in the range of $0.14 to $0.19 a share, and that compares to the $0.11 earned in 2005. For the full year, we're looking for earnings of $1.45 to $1.60 a share. I will talk more about the first quarter and the full year in a few minutes. But first, here's Bill Gerber, who will take you through our financial results in greater detail. Bill?

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 changes in market and economic conditions, laws and regulations, competition, currency fluctuations, 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 will start by covering fourth-quarter results. As Terry mentioned, our 2005 fourth quarter contained a normal 13 weeks, and our fiscal year included the normal 52 weeks. In 2004, which was a fiscal leap year, the fourth quarter included 14 weeks and the year, 53 weeks. Please note that both the as-reported 13 versus 14 week and adjusted 13 versus 13 week comparisons are included in the press release materials. We believe the comparable-week basis provides the better measure of revenue growth.

Revenue for the fourth quarter totaled 1.384 billion, an increase of 6.9% compared to the 13 week fourth quarter last year. On a reported 13 versus 14-week basis, total revenue increased 2.1%. On a 13-week constant-currency basis, total Company revenue increased 8.3%. We are pleased with this performance and note this is an acceleration compared to the third quarter, when constant-currency revenue increased 7.4%.

Our gross profit rate in the fourth quarter was 16.1%, which increased 0.3% from last year. There was higher gross profit rate in all three segments, primarily due to improved worker's compensation costs and growth in fee income.

Selling, General and Administrative expenses in the fourth quarter totaled 203.4 million and increased 0.3% year-over-year. On a constant-currency basis, total expenses increased 2%. SG&A expenses were 14.7% of sales, a 0.3% improvement compared to last year. Earnings from operations in the fourth quarter totaled 19.1 million, a 70.5% increase compared to last year.

Net interest expense totaled 10,000 compared to 145,000 last year. The improvement is due primarily to higher U.S. interest rates earned in our cash balances.

The effective tax rate for the fourth quarter was 30.3%, which is higher than the 28.2% rate in the fourth quarter of 2004. As mentioned in previous conference calls, the Working Families Tax Relief Act was signed into law during the fourth quarter of 2004 and provided for retroactive extension of work opportunity credits to the beginning of 2004. GAAP required us to recognize the full-year benefit in the fourth quarter of 2004. The fourth quarter of 2005 benefited from the favorable resolution of a state tax audit.

Our fourth-quarter net income was 13.3 million, a 67.5% increase compared to the 8 million earned last year. Diluted earnings per share in the fourth quarter totaled $0.37 per share, a 68% increase compared to earnings of $0.22 per share last year.

Now, I will cover our segment revenue results for the fourth quarter, and I will be reporting the 13-week versus 13-week comparisons, but note that we've included both comparisons in our press release materials. As you know, we divide our operations into three segments -- number one, U.S. Commercial staffing; number two, PTSA, our professional, technical and staffing alternatives units; and number three, International.

Revenue in U.S. Commercial totaled 649.7 million, a 9.5% increase compared to last year on a 13-week basis. This represents continued acceleration compared to the 7.9% growth in the third quarter. Turning to PTSA, revenue for the fourth quarter totaled 290.2 million, an increase of 10% compared to last year on a 13-week basis. Moving onto the International segment, revenue for the fourth quarter totaled 444.1 million, a 1.5% increase versus prior year on a 13-week basis. On a 13-week constant currency basis, our International revenue increased 5.7%.

Turning now to our segment earnings results for the fourth quarter, U.S. Commercial earnings totaled 38 million, an increase of 6.1% compared to last year. The U.S. Commercial gross profit rate increased 0.4% from the prior year. U.S. Commercial expenses increased 8.3%, and expenses were 9.2% of sales, a 0.4% increase compared to last year.

PTSA earnings totaled 19 million, a 23.6% increase compared to last year. The PTSA gross profit rate increased 0.4 of a percentage point. PTSA expenses decreased 1.1% year-over-year, and expenses as a percent of sales were 10.8% compared to 11.5% last year.

International earned a profit of 5.2 million, a decrease of 4.7% compared to last year. The International gross profit rate increased 0.1%. International expenses increased 1.7% in U.S. dollar terms and increased 3.1% on a constant-currency basis. International expenses were 15.6% of sales compared to 15.5% last year.

Finally, moving onto corporate expenses for the fourth quarter totaled 43 million, a decrease of 2.3 million or 5.2% versus last year, primarily due to lower legal, healthcare and disability costs.

Well, now, I'd like to follow up on Terry's comment about the first-quarter earnings guidance of $0.14 to $0.19 per share. Analysts have historically had a difficult time calendarizing earnings in the first quarter. I'd like to remind you of a few factors that will impact our first-quarter earnings. First, our quarter is typically the lowest-volume quarter of the year, on average representing about 23% to 23.5% of the year's total revenue. Although expenses do vary somewhat with volume, a large portion is relatively fixed from quarter to quarter.

Kelly will implement FAS 123R, which requires the expensing of stock options, in the first quarter of 2006. The earnings guidance includes approximately $500,000 or $0.01 per share of stock option expense in the first quarter of 2006 and 1.5 million or $0.03 per share of stock option expense for the full year. We expect the effective tax rate in the first quarter will be 44%, considerably higher than the full-year 2006 estimated rate of 36%. The first-quarter tax rate is higher due to non-deductible losses incurred in certain international locations. Please keep these factors in mind as you build your 2006 earnings models for Kelly.

Next, I will cover a few highlights for the full year of 2005. Revenue for the 52-week year of 2005 totaled 5.290 billion, an increase of 7.5% versus the comparable 52-week year in 2004. On a 52-week versus 53-week comparison, total revenue increased 6.1%. On a 52-week constant-currency basis, revenue for the year increased 7%.

Our gross profit rate for 2005 was 16.2%, which increased 0.2% compared to 2004. This represents our first annual gross profit rate increase since 1995.

Selling, General and Administrative expenses as a percentage of sales were 15.2%, a 0.1 of a percentage point improvement compared to the prior year. This is our lowest expense percent of sales since 1998. SG&A expenses totaled 802.7 million and increased 5.1% year-over-year. On a constant-currency basis, total expenses increased 4.7% compared to 2004.

Earnings from operations for the year totaled 56.2 million, a 65% increase compared to last year. The year's effective tax rate was 29.8%. This rate reflected both a full year of work-opportunity credits and favorable resolution of certain federal and state tax audits. As of today, the work-opportunity credits have not yet been extended for 2006, but we fully expect that they will be, with retroactive effect to the beginning of 2006. We expect our full-year effective tax rate to be approximately 36% in 2006.

Our full-year net earnings were 39.3 million, an increase of 85% compared to the 21.2 million earned in the prior year. Diluted earnings per share for the year were $1.09, an increase of 82% compared to earnings of $0.60 per share in 2004.

Shifting to the Company's fourth-quarter balance sheet, I will make a few comments. Cash and short-term investments were 64 million at year-end, a decrease of 22 million compared to last year, primarily due to growth in Accounts Receivable. Accounts Receivable totaled 804 million at year-end and increased 76 million compared to last year. For the fourth quarter, our global Days Sales Outstanding were 53 days, the same as last year. Our short-term debt at year-end totaled 57 million, a 22 million increase compared to last year, and the increase in debt primarily reflects the 18 million investment made in Tempstaff, the second largest firm in the Japanese staffing industry. At year-end, short-term debt was less than 8% of total capital.

Finally, a few comments on the Company's cash flows -- net cash provided by operating activities was 24.3 million for the full year, compared to 54.8 million last year. As mentioned earlier, growth in Accounts Receivable accounted for substantially all of the decrease. Capital expenditures for the full year totaled 28.5 million compared to the 36.8 million spent last year. We expect our 2006 capital expenditures to total between 43 to 47 million. The increase is due to costs associated with the implementation of the PeopleSoft payroll and billing project.

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

Thank you, Bill.

Overall, it was a very good quarter. Business activity and job creation progressed at a good pace; opportunity abounded and we successfully acted upon it.

You will remember that we had identified three operational objectives as key to helping us return to our pre-recession earnings -- growing sales faster than the industry average, holding controllable expenses to roughly half the rate of our sales growth, and increasing earnings at a faster rate than sales. As Terry noted, our earnings were above our fourth-quarter guidance. All three of our business segments saw solid sales growth and continued strong fee growth during the quarter.

When sales growth early in the year did not meet our expectations, we started taking steps to bring expenses back in line with sales growth. During the fourth quarter, we were successful in achieving our controllable expense growth target of roughly half the rate of our sales growth. Although we did fall short for the full year, I'm very pleased with the considerable progress we made throughout the year.

Let's now focus on specific segment performance, beginning with U.S. Commercial, which makes up 47% of sales. We were very pleased with the 4% year-over-year sales growth in U.S. Commercial during the quarter. On a comparable 13-week reporting period, sales rose nearly 10%. During each quarter of 2005, U.S. Commercial delivered improving year-over-year sales growth, starting with 3% in the first quarter, 4% in the second, followed by 8% growth in the third and 10% in the most recent quarter. Further, on a comparable basis, revenue growth occurred across all of our major service lines in Commercial. Office clerical staffing again showed a healthy year-over-year rate of growth in the fourth quarter, continuing the trend seen throughout 2005. Light industrial staffing, LID, growth continues in the low single digits. In the fourth quarter and during the majority of 2005, growth in office clerical staffing outpaced the growth seen in LID. The growth of both our temp-to-perm and direct placement fees remain solid. Growth was up over 25% year-over-year, and this is the sixth consecutive quarter of strong, double-digit fee growth in U.S. Commercial.

Year-over-year gross profit dollars increased 7% against sales growth of 4%. Commercial's gross profit rate during the quarter increased to 15%, compared to 14.6% during the same period last year. This is the sixth consecutive quarter of improving year-over-year gross profit rate in U.S. Commercial. Our GP rate was favorably impacted as a result of our success in raising prices to cover SUTA cost increases, better workers' compensation management and as we just noted, continued growth in fees.

For the quarter, expenses did grow faster than our 4% sales growth. Expenses as a percentage of revenue increased to 9.2% from 8.8. Contributing to those increases, though, were investments in new products and branches as well as in higher incentive payouts for 2005 performance. But note that even so, we did see continued sequential improvement and expense efficiency during each quarter of 2005.

Summing it all up, year-over-year operating earnings increased 6% in the quarter in U.S. Commercial, as well as showing a strong sequential increase compared to the third quarter of 2005.

Let me turn now to our Professional, Technical and Staffing Alternative segment, which makes up 21% of sales. The fourth quarter for PTSA was good in terms of revenue growth. On a year-over-year basis, revenue was up nearly 5% and earnings grew nearly 24%, considerably faster than the rate of sales growth. On a comparable 13-week reporting period, revenue increased 10%, up sequentially over the third quarter growth of 9%. During the quarter, about half of the 14 business units that make up PTSA showed strong double-digit revenue growth. In professional and technical staffing, Kelly Engineering and IT were the leading performers.

On the other hand, our Automotive Services group, Homecare and the Law Registry experienced revenue declines during the quarter. As you might expect, ASG was impacted by the recent cuts in the automotive industry during the quarter and we don't expect this trend to reverse itself in 2006. Also, as we reported previously, the year-over-year decline in the Law Registry is attributable to the completion of major projects that were ongoing in 2004.

Turning to our Staffing Alternatives Group, Kelly HR First and Kelly Vendor Management were the leading performers with strong sales and earnings growth for the quarter. Sales in our Staff Leasing business did decrease in the quarter but as we previously reported, the year-over-year decline in our Staff Leasing business was the result of our exiting customers with higher workers' compensation risk. However, this repositioning has resulted in solid, year-over-year increases in earnings for KSL during the quarter up over 50%.

Placement fee growth in the majority of PTSA staffing businesses slowed somewhat for the quarter. After seeing over 25% growth for several consecutive quarters, fees improved 14% in the fourth. Expenses continue to be well-managed in PTSA, actually decreasing during the quarter. We are very pleased with the good progress we've made in bringing PTSA expenses back in line with our rate of sales growth. We are also encouraged by the sequential improvement in PTSA's gross profit rate during the fourth quarter, due to lower workers' compensation costs and growth in fee income.

Our third segment is International, which makes up 32% of total sales. Reported sales decreased over 2% for the fourth quarter, but on a comparable 13-week reporting period, U.S. dollar revenue was up nearly 2% and on a comparable 13-week constant-currency basis, International revenue was up 5.7%, about the same rate of growth as we reported in the third quarter.

Earnings were $5.2 million for the quarter compared to $5.5 million last year.

Now, before I move into my review of the regional performance in International for the quarter, I should remind you that all of my comparisons are in constant-currency and all reflect the comparable 13-week period in 2004.

Overall, International growth remains good. Europe had an increase of over 7%. Sales were strong throughout Europe, except in the UK/Ireland, which again declined. As we reported on our third-quarter conference call, we are taking steps to reposition our UK business.

The Asia-Pacific growth of 12% was boosted by our operations in India and Malaysia. Our investments in this region continue to yield positive results. Sales growth in India better than doubled compared to last year, and growth was exceptionally strong throughout South Asia. In the Americas, sales decreased 2% and although sales growth was positive in Canada, it was flat in Mexico and declined in Puerto Rico. Consistent with last quarter, we saw a double-digit growth in fees for the division of 13%, while our UK operations had a decline in fees of 13%. We saw particularly strong fee growth in Europe and South Asia. Additionally, International expenses for the quarter grew only 3% on a constant-currency basis, roughly half the rate of sales growth for the quarter. International gross profits rate increased to 16.8% compared to 16.7. This increase was primarily attributable to stronger fee-based income during the quarter.

Holding to our strategy, we are continuing to expand our PTSA business lines in high-growth, international markets. In addition, on January 3 of this year, we announced our entry into Turkey, one of the world's largest emerging markets. Kelly now operates in 30 countries and territories. We will continue to invest in international growth opportunities and are very excited about their outlook.

I will conclude my operational update with a few comments on the combined performance of our operating segments for the year. First, they had combined constant-currency sales growth of 7% on a 52-week basis. While not as robust as the growth we saw in 2004, we continue to grow sales faster than the industry and gain market share. Second, even though expense growth was more than half the rate of our sales growth, we did reduce the ratio of expense as a percent of sales. We accomplished this while expanding our global branch network. Third, our 2005 net earnings increased 85%, considerably faster than the rate of sales growth. Let me add that, even given the tough pricing environment, we made good progress on margin improvement in our largest segment, U.S. Commercial, during the year and we believe there is some continued upside in 2006 as well. Notice also that, during this most recent quarter, all three of our business segments had GP improvement.

This concludes the operations comments. Now, I'd like to turn it back to Terry.

Thank you, Carl and Bill.

Looking back on 2005, it reminds me of driving on the freeway during a road-construction project. I don't think it's an exaggeration to say that the economy, the staffing industry and Kelly Services traveled through 2005 on a bumpy road at varying speeds. Given the political, economic and weather disruptions and the high-profile bankruptcies, it's a wonder the economy didn't come to a halt altogether.

In retrospect, despite these roadblocks, 2005 turned out to be a good year for the economy, the staffing industry and Kelly Services. The economy in the U.S. settled down and grew at a respectable rate. Unemployment improved to 4.9%. Corporate earnings grew on average at double-digit rates. Capital spending increased in the rest of the world; economic growth slowed during the year but still expanded at over 3%, and job growth continued around the world. The positive trends I've just mentioned, combined with a lot of hard work and dedication by our employees, translated into solid performance in 2005. For the first time, Kelly's sales exceeded $5 billion. We improved our gross profit rate. We grew net earnings by 85%. We gained market share; we had strong growth in our temp-to-perm and permanent placement fees; we controlled expenses, and we continued to invest for the longer term. We believe 2006 will also be a very good year for Kelly Services.

In earlier conference calls, I've discussed the typical post-recession pattern of recovery. In the first phase coming out of the recession, our industry typically experiences well above-average sales growth, reflecting the fact that our customers' work is building up but they are not yet confident the recovery is sustainable. This is what happened in 2004. In the second phase, our customers feel the recovery is for real and they resume hiring full-time employees. While our sales don't decline in absolute terms, the rate of our sales growth generally tapers off from the rates seen in the first phase, and this is what we saw in the beginning of 2005. The third phase comes after our customers have rebalanced their workforce. At this point, they begin to use a greater proportion of temporary help in order to gain staff flexibility to better cope with whatever the economic cycle might bring. We believe this third phase developed around the middle of 2005. The BLS numbers would seem to support this. In the U.S., roughly 2 million jobs were created in both 2004 and 2005, but the number of those jobs accounted for by temporary staffing dropped from nearly 180,000 in 2004 to 155,000 in 2005.

Now, phase three can be relatively short or it can last for years. Although no one really ever knows for certain how the economy will behave, given the underlying economic conditions and the positive trends in our own business, we believe we are in a period of solid, sustainable economic expansion and that expansion should provide for continued job creation. With confidence in the economy, we continue to pursue our strategic growth plan of expanding Kelly's presence around the world.

Along with many of you, we have been somewhat surprised and disappointed at the industry's low growth rate following the recession. But as we've said before, no two recessions or recoveries have been the same. It would be a mistake to interpret the current growth rate as predictive of future growth. We continue to believe this industry will show well above-average growth for years to come.

Given the shape of this current cycle and the trends in our business, we believe that returning to our pre-recession earnings of $2.43 per share in 2007 is doable. Carl already talked about how we did against our 2005 objectives. Our objectives for this year are basically the same as last year -- grow sales faster than the industry average, hold controllable expenses to roughly half the rate of our sales increase, and increase earnings at a rate considerably faster than our sales.

At the beginning of this call, I gave guidance for the first quarter of $0.14 to $0.19 per share. As Bill mentioned and as I remind you, the first quarter is a difficult one to calendarize, but we are comfortable with the range of $0.14 to $0.19. I also gave guidance for the full year of $1.45 to $1.60 per share, which keeps us on track to return to our pre-recession earnings of $2.43 in 2007.

Now, that concludes our formal comments this morning. We'd be pleased to answer any questions you may have subject to the constraints of Regulation FD. Please call us at 248-244-5271 and we will 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.