Kelly Services Inc (KELYB) 2006 Q2 法說會逐字稿

Good morning and welcome to Kelly Services Second Quarter Earnings Conference Call. [Operator Instructions] I would now like to turn the meeting over to your host, Mr. Carl Camden, President and CEO. Sir, you may begin.

Thank you Ruth. Good morning and welcome to Kelly Services Second Quarter 2006 Conference Call. And with me this morning to review our quarterly results is Bill Gerber, our CFO.

I'll begin by giving you some general color on the quarter and following that Bill will provide the financial commentary on the second quarter, as well as our guidance for the third quarter and the balance of the year. Then I’ll cover in more detail the performance highlights for our three business segments and provide you with our strategic outlook.

After our comments we'll open the call to your questions. We think that our remarks will run approximately 20 minutes and that'll accommodate all the time that you need for the questions.

For those of you who did not receive a copy of this morning's release, you can visit our Web site at KellyServices.com or contact Jim Polehna, our Director of Investor Relations at 248-244-4586.

Before we get started let me remind you that the comments made during this call, including the Q&A, may include forward-looking statements about our expectations for future performance. Actual results could differ materially from those suggested by our comments. Please refer to our 2005 10-K for a description of the risk factors that could influence the Company’s actual future performance.

Now let's discuss the second quarter. I’m very pleased to report that Kelly has turned in another solid quarter. Revenues were $1.4 billion, an increase of 8%. Earnings per share were $0.35, up 35% from the $0.26 delivered in the second quarter of 2005.

Our second quarter results were within the $0.34 to $0.39 guidance range despite the fact that the Work Opportunity Credit legislation has not yet passed. Had it done so, our earnings would have been even stronger.

The unexpectedly higher tax rate in the second quarter cost us about $0.06 per share. That would have placed us above the upper end of our original earnings range. You should know that we have every confidence that this legislation will be passed before year-end.

Overall, we’re very pleased with the quarter. We’re moving forward and making gains. We transformed an 8% sales increase into improved operating efficiencies and very good earnings growth.

Now let’s get into the numbers. Bill will take you through our financials for the quarter.

Well, thank you Carl. I’ll start by covering second quarter results. Revenue for the second quarter totaled $1.416 billion, an increase of 8% compared to last year. Now, as we mentioned in our April conference call, the Easter holiday shift reduced our reported second quarter growth rate by nearly 1%. On a constant currency basis total company revenue increased 7.6%.

Our gross profit rate in the second quarter was 16.3%, which was flat compared to last year. Sequentially, the 16.3% rate increased two-tenths of a percent (0.2%) compared to the first quarter.

Selling, General and Administrative expenses in the second quarter totaled $208.9 million, an increased 4.2% year-over-year. And on a constant currency basis total expenses increased 4% or about the same rate.

SG&A expenses were 14.7% of sales, a six-tenths of a percent (0.6%) improvement compared to last year.

Earnings from operations in the second quarter totaled $21.3 million, a 56.7% increase compared to last year.

Other income totaled $465,000 compared to $152,000 of expense last year. The improvement is due primarily to higher U.S. interest rates, higher cash balances, and semi-annual dividends that we received on our temp staff investment.

Well the effective tax rate for the second quarter was 41.8%, which is significantly higher than the 30.6% rate in the second quarter of last year. Unfortunately, Congress did not finalize the retroactive extension of Work Opportunity Credits in the second quarter. We are confident that the credits will be extended this year but we can’t recognize the benefit until the Bill is signed.

In contrast, the second quarter of last year did include the Work Opportunity Credits and also benefited from the closing of two state tax audits.

We originally provided second quarter tax guidance of approximately 32%, which assumed retroactive extension of the Work Opportunity Credits. The higher tax rate impacted earnings by approximately $0.06 per share.

Our second quarter net income was $12.7 million, a 35.8% increase compared to the $9.3 million earned last year. And diluted earnings per share in the second quarter totaled $0.35 per share, a 34.6% increase compared to earnings of $0.26 per share last year. And note that the $0.35 includes stock option expense of about $0.01 a share.

Now I'll cover our segment revenue results for the second quarter and, as you know, we divide our operations into three segments. Number one, U.S. Commercial Staffing, number two, PTSA or Professional, Technical and Staffing Alternative units, and number three, International.

Revenue in U.S. Commercial totaled $639.2 million, a 6.1% increase compared to last year. The Easter impact was about 0.5%, so this does reflect a slowing compared to the 9.4% growth reported in the first quarter.

Turning to PTSA, revenue for the second quarter totaled $293.1 million, an increase of 4.3% compared to last year. The Easter impact here was about six-tenths of a percent (0.6%), so this also reflects slowing from the first quarter growth of 9.6%.

Moving onto the International segment, revenue for the second quarter totaled $484.1 million, a 13% increase versus the prior year. This is an acceleration in U.S. dollar terms compared to the 7.6% growth reported for the first quarter. On a constant currency basis, our International revenue increased 11.8%.

Adjusted for the Easter holiday shift growth would have been about 13.5%, which is a slight acceleration compared to the first quarter growth of 12.6%.

U.S. Commercial earnings totaled $33.6 million, an increase of 16.2% compared to last year. The U.S. Commercial gross profit rate increased three-tenths of a percent (0.3%) from the prior year primarily due to improvement in workers' compensation costs and growth in fee-based income.

U.S. Commercial expenses increased 3.8% and expenses were 10% of sales, a two-tenths of a percent (0.2%) improvement compared to last year.

PTSA earnings totaled $18.6 million, a 14.1% increase compared to last year. The PTSA gross profit rate decreased one tenth of a percentage point (0.1%) primarily due to lower fee-based income.

PTSA expenses decreased eight-tenths of a percent (0.8%) year-over-year. Expenses as a percent of sales were 11%, an improvement of six-tenths of a percent (0.6%) compared to last year.

Most of the expense decrease relates to cost reduction efforts at the Kelly Homecare business. The remaining business units showed normal expense growth.

International earned a profit of $5.2 million, a 31.8% increase compared to last year. The International gross profit rate decreased five-tenths of a percent (0.5%) primarily due to growth of large corporate accounts in the European region.

International expenses increased 8.2% in U.S. dollar terms and increased 7.6% on a constant currency basis. International expenses were 15.8% of sales compared to 16.5% last year.

And finally, moving onto corporate expenses for the second quarter totaled $36 million, an increase of 1.4% versus last year. Corporate included FAS 123R stock option expense of approximately $422,000.

Well, shifting to the Company’s second quarter balance sheet I’ll add a few comments. Cash and short-term investments were $73 million at quarter end, an increase of $8 million compared to last year. Accounts receivable totaled $844 million at quarter end, and increased $87 million compared to last year.

For the second quarter, our global day sales outstanding were 54 days, an increase of one day compared to last year. And our short-term debt at quarter end was $55 million, about a $1 million decrease compared to last year. And at quarter end, short-term debt was approximately 7% of total capital.

And finally, a few comments on the Company’s cash flows. Net cash provided by operating activities was $40 million for the first six months compared to $9 million last year. The strong improvement was due to higher net earnings and better working capital management.

Capital expenditures for the first six months totaled $14. 6 million, compared to the $12.7 million spent last year. We expect our 2006 capital expenditures will total between $40 to $44 million compared to $29 million last year. The increase is due to ongoing investment associated with the design and implementation of the PeopleSoft payroll-billing project.

We also invested $4.5 million in our acquisition of The Ayres Group. The transaction does include additional contingent earn out payments of up to $2 million spread over the next three years based on achievement of targets.

Well, moving onto the guidance. As highlighted in the press release, our guidance for the third quarter is that diluted earnings per share will range from $0.43 to $0.48 compared to $0.35 per share last year. Incorporated into our third quarter guidance are the following assumptions. Stock option expense will be approximately $300,000 or a bit less than 1% per share. The effective tax rate will be approximately 26%, which assumes legislation retroactively extending Work Opportunity Credits to the beginning of 2006 will be signed during the third quarter. The 26% rate reflects three quarters of cumulative catch-up.

If the Work Opportunity Credits are not renewed during the third quarter, the effective tax rate would jump to about 39%.

For the full year we continue to expect earnings will range from $1.50 to $1.60, compared to the $1.09 per share of last year. The full year will include approximately $1.5 million or $0.03 per share of stock option expense.

And we continue to expect that the full year effective tax rate will be approximately 35%, again assuming retroactive extension of Work Opportunity Credits. Now, if the credits are not renewed for 2006 at all, which we think is very unlikely, the full year tax rate would be about 39%.

Well, I’d now like to turn it back over to Carl who’ll highlight our operating results

Thank you Bill. Let’s take a closer look at our segment results and I’ll start with U.S. Commercial, which now makes up 45% of sales. Very pleased with the 6% year-over-year sales growth in U.S. Commercial in the second quarter. Although slower than the 9% growth rate we had in the first, the 6% growth was inline with both our expectations and a more modest GDP growth rate. We expect U.S. GDP to grow at a modest 2.5 to 3% rate for the remainder of the year.

Now, Commercial’s revenue, adjusted for the Easter holiday, was up 9% in April, 7% in May and 4% in June. Clearly there’s been a slowing in U.S. Commercial demand.

Office clerical staffing, which represents over 50% of Commercial's revenue, did show a healthy year-over-year rate of growth in the quarter and as we’ve seen for six consecutive quarters now growth in office continues to match or outpace the rate of our light industrial staffing.

Now the growth of both our temp to perm and direct placement fees in U.S. Commercial remains solid. Fee income was up over 35% year-over-year and this is Commercial’s eighth consecutive quarter of double digit fee increases.

The gross profit rate during the quarter in U.S. Commercial increased to 15.3% from 15.0% during the same period last year, principally on the growth and fee income and better management of worker’s compensation. This is also a sequential improvement from the 15.1% GP rate we had in the first quarter.

Expenses increased 4% at a slower rate than the 6% sales growth. We gained operating efficiencies resulting in expenses as a percentage of revenue dropping to 10% from 10.2% last year. This is also an improvement from the 10.4% seen in the first quarter.

Now recently we’ve won two large contracts -- Nike and the Orange County Florida Public Schools, the twelfth largest school district in the U.S. These accounts have large U.S. Commercial components, and as we gear up to service these accounts we do expect U.S. Commercial expenses to increase ahead of realizable revenue.

As a result, our year-over-year expense growth in this segment will be somewhat higher in the third quarter. But we do expect these new accounts to earn a positive return by the fourth quarter.

Summing it all up, year-over-year operating earnings increased 16% in the quarter in U.S. Commercial continuing the strong double-digit earnings increase we saw in the first quarter.

Now, let’s move onto PTSA which makes up 21% of sales. The second quarter for PTSA was disappointing and fell short of our expectations in terms of revenue and earnings. On a year-over-year basis revenue was up over 4% and earnings increased 14%. This performance is significantly below what we saw in the first quarter.

PTSA's revenue, again adjusted for holidays, was up 7% in April, 4% in May, and 3% in June. Given where we are in this cycle, and a growing demand in professional staffing and the breadth of services that Kelly provides, we expect this segment to exhibit better performance going forward and we’re taking steps to do just that.

Let’s look at PTSA in more detail dividing it into its three subsegments. First is the Professional Group, which is comprised of five business units -- Financial Resources, the Law Registry, Homecare, Healthcare and Fed Secure. Year-over-year revenue growth for this group was nearly flat during the quarter while earnings were up nicely. The Law Registry was the leading performer in this group with strong double-digit sales and earnings growth. Homecare experienced a revenue decline during the quarter negatively impacting both the Professional group as well as the entire PTSA segment. This is attributable to branch closures that took place when we began restructuring this unit in the fourth quarter of 2005. But as expected, the earnings contribution from Homecare is beginning to improve nicely and we expect growth in revenues will resume once this final phase of the turnaround is completed later this year.

Second is the Technical Staffing Group which is comprised of four business units -- automotive services, engineering, IT and scientific. Revenues for this group were up 3% while earnings were down considerably. Engineering was the leading performer in this group with solid sales and earnings growth. And, as expected, the Automotive Services Group continued to experience sales and earnings declines during the quarter contributing significantly to this group's lower revenue growth and reduction in earnings.

Finally is the Staffing Alternatives Group, which is made up of five business units -- Management Services, HR First, Vendor Management Services, Staff Leasing and the newly acquired Ayres Group. By acquiring Ayres during the quarter we expanded our services to include career transition services and organizational effectiveness consulting. Staffing Alternatives have double-digit growth in both revenues and earnings for the quarter. And HR First was the leading performer in this group with very strong sales and earnings growth.

Year-over-year revenue growth in staff leasing on the other hand declined during the quarter.

PTSA placement fees continued to decelerate. You may recall that after seeing double-digit growth for several consecutive quarters, fees began slowing during the fourth quarter of 2005 and hit the low single digits in the first quarter. This trend continued with placement fees declining just under 1% during the most recent quarter.

As we stated on our first quarter conference call, we did not act quickly enough in response to the tightening professional and technical labor market. But we are now more aggressively expanding our pool of direct hire recruiters and over the balance of the year will continue to invest in our PTSA recruiter base, including the addition of both direct hire recruiters and temporary staffing recruiters. These efforts should improve both our fee income and our sales growth rates in our PTSA staffing businesses.

The PTSA gross profit rate of 17.3% remained the same as we saw in the first quarter and down slightly from the 17.4% in the second quarter of 2005.

Expenses decreased about 1% in PTSA compared to the same period last year.

Investment in new branch openings, coupled with the addition of recruiters, was offset by savings realized from the Kelly Homecare Services restructure.

In the second quarter, in addition to investing in existing branches, we opened nine new U.S. PTSA offices. Going forward we'll remain disciplined but we do expect expenses to grow as we continue to expand our field operations, particularly in the recruiting area.

Our third segment is International, which makes up about 34% of our total sales. Reported sales increased over 13% for the quarter. On a constant currency basis International revenue was up 11.8%. Adjusted for the holiday, revenue growth and constant currency was up 13.5% -- a bit stronger than the 12.6% reported in the first quarter.

Earnings were $5.2 million for the quarter, up 32% over our Q2 earnings last year. Very pleased with the solid sales and earnings growth we've seen this year in International.

Sales in Europe increased nearly 13% in constant currency. Sales remain strong throughout Europe expect in the U.K. Ireland, which experienced a slight reduction in sales for the second quarter as compared to last year. We're encouraged by the positive trends seen throughout continental Europe. Excluding the U.K., sales growth in Europe would have been closer to 23%.

The 21% growth in our Asia Pacific region was once again fueled by our operations in Australia, India, Malaysia. Sales growth in India more than tripled compared to last year. Growth there is benefiting from branch openings and significant new accounts. We now have 16 branches in India. Growth was exceptionally strong throughout the rest of South Asia also.

In the America's sales for the quarter grew 4% in constant currency -- a nice rebound from the 1% decline seen in the first quarter. Sales growth was once again positive in Canada and Mexico and significantly declined in Puerto Rico.

You may recall that on our first quarter conference call we said we expected Puerto Rico sales growth to decline for the balance of the year. Their economy remains under significant pressure due to loss of manufacturing jobs, as well as uncertainties surrounding government spending and budget constraints.

Consistent with the last few quarters we saw double digit growth of fees in International as fees grew 17%. Particularly strong fee growth was seen in continental Europe and South Asia at 40% and 65% respectively.

International's gross profit rate decreased to 16.9% compared to 17.4% for the second quarter last year. However, this represents a sequential improvement compared to the 16.7% in the first quarter. The primary driver for our year-over-year decline in GP continues to be our success in winning large volume Pan European contracts. Let me note, however, that our second quarter GP improved over the first primarily due to growth in perm fees.

International expenses for the quarter grew 7.6% on a constant currency basis. Very pleased with this performance and are continuing to align expenses with staffing volume.

During the quarter we opened six new international branches, three of which were PTSA offices.

Looking ahead, we recognize, along with other companies, the slowing of economic growth here in the U.S. But we don't believe the economy is headed towards a prolonged downturn or a recession. Rather, we feel that we're experiencing a temporary pause or lull in U.S. economic growth caused by many factors, including geopolitical upheaval in the Middle East, the price of oil, and inflation worries. And as we've said before, it's not uncommon to see this happen from time to time.

At this point we continue to see underlying strength in the U.S. economy. Our customers' employment outlook remains positive and the overall trends in our business suggest a resumption of growth may be the more probable outcome.

Growth in the global economy is strong and is expected to be in the 4 to 5% range well into the next year. If this holds true, look for Kelly to step up our efforts to build a stronger international presence through geographic expansion and the globalization of our PTSA businesses. We continue to see great potential in Eastern Europe, Japan, and India.

Overall, we are continuing to produce strong sales increases, good expense management, improved operating margins, and significant earnings growth. Our ability to deliver is reinforced by Kelly's focus on securing and building long lasting relationships with large customers, such as the newest accounts, Nike and the Orange County Florida Public Schools.

That large customer focus will help us reach our earnings targets, achieve operating efficiencies, rollout new services, enter new markets, and take advantage of staffing trends.

In short, our plan is working, we're making good progress, and we believe the future holds great promise.

This will end our formal comments. Bill and I will now be happy to answer your questions. To allow as many callers as possible to participate we'll ask that you please limit yourself to one question and a single follow-up as needed. If you've got additional questions, we'll certainly try to return to you later in the call. Ruth, the call can now be opened for questions.

[Operator Instructions] Michael Fox with J.P. Morgan.

Hi, good morning. Given the deceleration in the U.S. Commercial and the PTSA, can you talk about what gives you guys confidence that it's going to reaccelerate? And can you talk about the trends so far in the third quarter?

Can't talk about the trends so much in the third quarter but on the reacceleration, as I was saying before, our customers are not engaging in the type of activities that we saw in 2000 as the recession was beginning to shape up. They're not cutting back, they are what we call forward orders, they're not talking about reductions and the use of temporary employment in the future. They're continuing to make forward plans for new types of employment involving new projects, et cetera. So I’m not seeing any hesitancy or pullback in our customer base Michael.

Okay. And then what about the availability of workers?

The availability of workers is remaining generally fine. It's slowly tightening especially in the more credentialed, the more educated parts of the workforce. And I expect that we'll see a slow continuing tightening but, again, it's not like it was in 1999 where we and some of the other staffing firms were talking about a impossible to recruit job market. But the unemployment rate then was sitting at 3.9, 3.8 and we're not close to that yet today.

Thanks a lot. Congratulations.

Toby Sommer with SunTrust Robinson.

I wanted to see if you could comment on two specific areas that you cited as being strong in the PTSA, namely the Law Registry and Engineering. Is it your sense that you're taking share there or the markets are doing well or perhaps a combination of both?

I think in terms of engineering if you exclude the automotive segment, which for us is in a different business unit which we talked about, I think the engineering market is doing very well in the U.S. I think in particular civil engineers, chemical engineers and so on are still highly demanded in the Gulf States in terms of the rebuilding efforts post-Katrina, Rita. While we've long since stopped talking about that there's still a lot of demand for those types of professionals down in the southeast of the U.S., enough so that we've seen movement of workers out of other geographies down there.

In terms of the Law Registry, that business is highly dependent upon the amount of lawsuits taking place in the United States. I view that as a constant growing industry and so I think that while your particular sales can rise and fall in a quarter depending on what projects you're working, I think if you smoothed out the quarters you would see the Law Registry as a growing industry and data is not complete enough to say whether share is being taken or not in that segment.

I was wondering whether you could comment on what perm trends look like and what you're hearing from customers. You did say that they're not cutting forward orders. Could you comment on perhaps the conversion rates and that kind of thing and any other color you could give us there?

Don't have conversion rates to provide you but if you go back through the text of our comments, in our Commercial business as we talked about fees were up very nicely, very strongly, both in temp to perm conversions, which is slowly and steadily growing, as well as direct hire.

In the PTSA environment here in the U.S.-- and again I’m assuming your questions, Toby, are still all U.S. here. In terms of the U.S. environment, in professional and technical there's still a strong demand. That's where the recruiting is toughest, that's where the-- lots of the companies you've heard talking about the need to add recruiters and we're among that group.

Thank you very much, I'll get back in the queue.

Michel Morin with Merrill Lynch.

I was wondering if you could provide us with some intraquarter trends in the International segment. And then secondly, I can understand the reluctance to talk specifically about what's going on in early July, I don't know if there's any color you can give or in particular are things getting any worse versus June in July, that would be helpful. Thank you.

It's always fun to see how many different ways the same question could be asked. If things were getting worse, if we saw that things were particularly deteriorating you would have seen that color affecting our forward guidance and comments to that effect. So can't, again, give you any specific numbers as to how July is unfolding but be assured if we saw things going to hell in a hand basket there would have been conversation like that in our forward view.

And I'm sorry, what was your first question? You know what, we didn't provide in our text the month-to-month breakout in International and I have to tell you I don't have those numbers at fingertips here.

I don't have them at fingertips either but there was no deterioration in growth pattern as we saw in the United States. There would be currency fluctuations from month to month but the underlyings were much more stable.

Yes, without precision I would say I do not remember a trend of either acceleration or deceleration in International.

Okay and then finally, I think in your most recent investor presentations you've provided a-- you've updated your view on where you would expect to come out for 2007. I know that looks-- that seems perhaps a bit far in time right now, but is there any change to how things look for 2007 given some of the margin dynamics in International and given also the slightly weaker than expected PTSA results at the top line?

We've not changed any of our public commentary on 2007 and we will look to updating that model later in the year.

Okay, thank you.

Thank you Michel.

Leone Young with Citigroup.

Good morning. Can I take from your comments then as you gave your guidance for the third quarter and then as you also talked about really not seeing significant deterioration from the end of the quarter, is your GDP assumption of 2.5 to 3% consistent with then maintaining that June U.S. Commercial growth rate of 4% give or take?

Two separate facts slightly connected. I mean obviously our growth is dependent upon GDP growth, but our growth rate is also dependent upon the acquisition of new accounts, retention of current accounts. So the two are moderately correlated but not completely dependent upon each other. So it's taken into account-- that assumption is taken account in then the forward view but it's not the only factor.

But an assumption of being able to maintain U.S. Commercial and then, as you said, hopefully with some of the actions you're taking you see room for professional services to bounce back a little bit, seems to be the--

We always work towards improvement and obviously, as we've stated now for two quarters, we see room for PTSA to bounce back a bit.

Before you go onto the next question, I just would like to go back to Michel Morin's question. He specifically asked about the International tracking by month. We do have the numbers available. Pretty much as we said, it would be April up 13, May up 14, and June also up 14. So there was very steady performance in International and that was on a constant currency basis, rounded.

If I could just ask my follow-up, in the other income then would we expect that special dividend every other quarter then?

Yes.

Thank you.

David Feinberg with Goldman Sachs.

I apologize if I missed this in the prepared remarks, but you just gave the International month by month growth, can you give us an indication of how quickly you saw a deceleration in the U.S. over the three months? In other words, 'cause you talked about going forward customer reluctancy about what's occurring in the Middle East and that was one of the issues and that's only developed recently. So trying to get an idea of how quickly demand fell off within the U.S. business?

We did give that in our prepared remarks. Commercial's month-to-month adjusted for holidays was up 9% in April, 7% in May, and 4% in June.

Thanks. And then turning to the PTSA, the perm business, talked about the new recruiters that you brought online in the last six months, how long do you expect until they're going to start contributing positively and whether it's in terms of operating income or as a percent of revenue?

Yes, typically in the industry it takes new recruiters, depending on the segment, anywhere from three to six months to become effective. Some do that much quicker, some take longer. But that's a range that you would look at.

And you completed your hiring at the end of 1Q or through 2Q.

No, we're continuing to hire.

And then in terms of the Pan European clients that have been pressuring gross margins, is that a trend that we should ever expect to reverse or is it the case that because they are Pan European in nature they are going to impact gross margin and the hope is that you see pull through on operating margin?

Well I hope it doesn't reverse itself. We've proven to be very effective at winning the Pan European accounts and plan to continue to do so. And then the operating earnings that you've seen in International are nicely going up and Europe is a big contributor to that.

Europe has been behind North America in the adoption of consolidated buying by the large accounts. It's rapidly catching up to the U.S. There's now lots of competition for the Pan European accounts. We're doing very well on that competition and I don't expect-- I would be disappointed if I saw the trend reverse itself in Europe.

So it is reasonable to expect continued gross margin declines on a year-over-year and quarter-over-quarter basis in International?

Sure, from any one particular quarter that would be-- that may or may not happen but I don't expect International margins to be dramatically rising any time soon.

All right, thanks. I'll get back in the queue.

Pete Carrillo with Citigroup.

Just a quick one actually on the dividend question. What's the actual amount of the dividend?

In terms of round numbers it's about $250,000 on a semi-annual basis, so 250 in June and 250 in December. That's dependent upon temp staff's forward continuing to pay a dividend but that's what we expect.

So the one you just had this quarter was just 250, so the rest of interest income ended up being about 250 it sounds like?

Yes, we have higher cash balances and U.S. interest rates are up substantially and virtually all of our cash position is U.S. dollar denominated so we're benefiting nicely from higher interest rates.

Okay. And just for the last thing [inaudible] in the fire question. So at International for the rest of the year you don't-- you expect fluctuations not necessarily up significantly, is that right?

You're talking about the GP rate again?

International operating margin.

That I didn't make any comment about the operating margin, I was reacting to a question on the gross profit rate. I expect the operating margins of the Company to steadily improve. That's our goal. Will there be any one particular quarter we're-- it doesn't particularly work that way, sure, but over a long rage period of time we're looking to improve the operating margin.

I guess the question is revenue growth has been pretty good in International for a while now, what's the catalyst what you need to see International margin? Obviously it's not going to get to where U.S. is to sort of approach it, moving up more towards that direction, is there something that can happen or that will happen over the coming years so it would cause that to happen or is there some reason that--?

As we've talked about before, operating margins inside the International segment have been improving, they're continuing to improve, they're delivering outsized profit growth compared to sales growth and we expect that to continue. Until you get mass in International and the geographies approximating the mass that you have in the U.S. or that other competitors have sitting inside in Europe in particular, you can't expect operating efficiencies to be the same and we don't. As we continue to grow our operating efficiency will continue to improve.

And again, just further comment on that. If you look at our six months results in International we've more than doubled profitability year-over-year. Obviously that had a substantial impact on the margins. I would expect growth in the International profit to continue to be among the fastest of the three segments and the relative progress upward in terms of operating margins to be the fastest in International -- starting from a low base.

Thanks.

Jeremy Davis with Credit Suisse.

More questions on perm. People have already touched on it, but sounds like you're still fairly optimistic with the hiring outlook going forward. Just wondering if you wound up moderating or from a timing issue pushing off anything during the quarter, or plan to, in the upcoming quarters just as we've seen things slow a little bit at least temporarily?

Always cautious on approving new expense initiatives and again, if you look at our SG&A expense as a percent of sales, nice improvement being made-- steadily made each quarter. I was taught well here to be very, very cautious on the expense growth and not to let it get ahead of the sales growth.

Okay, but you did make the comment that you expect that to be a drag a little bit in 3Q and then improve in 4Q.

Again, the expense drag that we talked about in Q3 was with the addition of two new accounts with heavy implementation. They're both heavy implementation accounts that we expect-- that you should expect to see in Q3 a pop in expense particularly in the Commercial segment but that we expect by Q4 the accounts to be profit positive.

Okay, and then have you disclosed basically what or how many recruiters that you've been hiring over the past six months and off of what kind of base?

No.

Okay. And then lastly, when do you expect the PeopleSoft rollout to be complete?

We gave a fairly good timetable at our last investor conference and that should be available on the Web still.

Yes, it is a slide in the Morgan Stanley Investor Conference presentation. I think it's the last slide in the financial presentation. We start the rollout in basically first quarter of 2007 and substantially complete by the end of 2008.

Okay, I just wanted to make sure that had not changed. Thank you.

Ty Govatos with C.L. King.

Can you give us, without giving away the kitchen sink, some kind of idea the magnitude in Orange County contracts?

No, but if you go look at the newspapers down in Orlando there's been wild guesses done by the newspapers and some of it's of public record. Both of the accounts that I mentioned-- as you know Ty we normally don't mention customer names, both of those have been publicly released by the customers, have been covered by newspapers, and size and information we can't confirm or not confirm but you can-- it would be available in public documents.

Will do some Googling. Refresh my memory on the U.K. decline in revenues. Is that in part due to the elimination of some accounts?

Yes.

Can you elaborate how much of it?

No, because there's a-- in the case that we've talked about there's always been elimination of some unprofitable accounts, we've been winning accounts in the U.K., the mix of business has been changing. I think we, along with most of the other larger staffing companies, are relooking our business model in the U.K. and I don't think that very many of us are looking at the U.K. as a strong revenue growth market for a while.

Okay, thanks an awful lot, appreciate the time.

[Operator instructions] Mark Marcon with RW Baird.

Couple of quick questions. Just wondering if you could give us a little bit more color with regards on the Professional side, on the Technical side, F&A and IT. What sort of trends are you seeing there and on the F&A side, are you seeing any sort of impact from the SarbOx roll off? I know that you weren't heavily involved in the SarbOx but--

Yes, there's good news and there's bad news. On the-- we didn't get the benefit as Jefferson Wells and others did with the tremendous boost in SarbOx revenues from those who were doing audit work. On the other hand, without having had a whole lot of SarbOx work inside our financial resources group there wasn't a lot of runoff from it either.

I would describe those units as steadily-- nice steady units and they were not mentioned in our commentary as either problem units but nor were they mentioned as the superstars of the quarter.

So no change really in trends relative to prior quarters?

No.

That's great. And then with regards to HR First, sounds like you're continuing to experience a lot of success there. Can you give us a little bit more color? And then lastly, in terms of the Staffing Alternatives, PEO, what are you seeing there? It sounds like that might be decelerating.

HR First is our recruiting outsource unit. I think it's been-- if I went back over the last three years scripts I think it's probably been mentioned at least 11 out of the 12 quarters as a strong performing unit. HRO, to use you all's jargon, is a fast growing area and then the RPO segment, the recruiting outsourcing side of it, is particularly strong growth. We, along with other recruiting outsourcing units, are seeing very strong growth in this. I don't see it as particularly decelerating and that's a business service that's doing well, increasingly globally for us and for others. It's a very important part of Staffing Alternatives.

Leasing, on the other hand, for us has-- there's been periods where it's stayed relatively flat, there's been periods where it's been in a little bit of a sales decline. Right now it's in a sales decline.

Is there any particular reason? Is that something that's specific to you or are you seeing--? 'Cause it sounds like most people have been seeing some fairly decent growth there so I'm trying to figure out--

Yes, we're not large enough in the leasing area for us to be viewed as a bellwether at all for what's taking place in leasing. For us it'll be on a quarter-to-quarter basis what happens with particular sales efforts and particular customers.

Thank you.

Toby Sommer with SunTrust Robinson.

Just on the International side, I wanted to see if you could comment on sort of generally what you're seeing as the opportunity in Europe, if there's any increasing flexibility in the workforce that you think may benefit you there and present some opportunities. And then just additional color, if you could, on Japan, perhaps the tenure of Japan's employment market given the fact that the economy seems to be starting to grow.

Taking the semi easy question first. In terms of Japan, the employment market there is slowly tightening. The workforce acceptability of temporary staffing continues to improve and in particular in the Professional and Technical side of the business a lot greater acceptance of that within both the Japanese employee and employer communities.

You know, the upper limit on growth inside Japan is ultimately going to be workforce availability and the government is hoping that workforce availability can be increased by a greater use of temporary staffing. So you've seen greater flexibility in Japan as the government's trying to make that employment form more usable and more doable in Japan.

Europe, everybody-- it's hard to talk about Europe because it's very much a community of countries with different things. But in general, we still see a continued slow, awkward movement towards liberalization of rules. We always describe it as two steps forward, one back, two or three sideways, and then you continue to move on. So it's slow but steady moves towards liberalization.

Eastern Europe is rapidly and avidly adopting the temporary staffing concept and without as many of the restrictions as you see in Western Europe.

Professional and Technical, as we've said before, is one of the faster growing parts of the European market and slow growth, steady growth, in the lower wage sides in Europe.

One follow-up if I could. Any early lessons that you think you're learning in Japan because that market is tilted into a workforce, absolute number of workers that is starting to decline that you'd be able to apply either to the U.S. or to European markets?

I think it's a great pollination of ideas for us that run all around the world. The focus on the older worker, for us here being one of only 13 companies recognized by the AARP as a preferred employer. A lot of the knowledge we've taken there working well in Japan. Japan's adoption of Professional and Technical staffing coming later in the cycle, there's been good lessons learned from them to us and the rest of the world and from the rest of the world there.

So, it's a good solid market and the lessons of the business that we're currently in are working well there and it's a good place to learn new tactics in advance of what will be workforce shortages also in parts of Europe here as you note shortly.

Thank you very much.

Michael Fox of JP Morgan.

Can you tell us what perm fees are as a percent of total revenue?

We are asked that question every quarter.

The answer is that on a global basis less than 3% of total revenues are perm fees. It is highest in International, next highest in PTSA, and lowest in U.S. Commercial.

Okay, thanks a lot.

At this time there are no additional questions. Please continue.

Great. Thank you Ruth, we appreciate it. Thank you all for your questions and for spending an hour with us. Look forward to talking with you all over the course of the next quarter. Good-bye.

[Operator Instructions] This does conclude our conference for today. Thank you for your participation and for using AT&T Executive Service. You may now disconnect.