Kelly Services Inc (KELYB) 2007 Q1 法說會逐字稿

Ladies and gentlemen, good morning and welcome to the Kelly Services first quarter earnings conference call. All parties will be on listen-only until the question-and-answer portion of the presentation. Today's call is being recorded at the request of Kelly Services. If anyone has any objections, you may disconnect at this time. I would now like to turn the meeting over to your host, Mr. Carl Camden, President and CEO. Sir, you may begin.

Thank you, John, and good morning you all and welcome to Kelly Services' 2007 first-quarter conference call. With me this morning to review our results is Bill Gerber, our CFO. I will begin by highlighting some strategic actions that we have taken before commenting on the first quarter results, and following that, Bill will provide more financial commentary and our second-quarter guidance. Afterwards, I'll discuss performance by business segment and update you on our 2007 outlook before opening the call for questions.

Let me remind you that the comments made during this, including the q-and-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 2006 10-K for a description of the risk factors that could influence the Company's actual future performance.

In addition, we also make reference to non-GAAP performance measures. Please refer to the schedules attached to our press release for information on the performance measures and a comparison of our reported financial results.

This was a very busy, productive quarter at Kelly Services. We accomplished a great deal towards our goal of increasing shareholder value and positioning Kelly for long-term growth while adjusting to an unexpectedly long pause in U.S. growth. As a result of several initiatives we have undertaken, this earnings report differs considerably from those in the past. Let me highlight some key factors you will want to consider as you assess our performance for the quarter and our prospects going forward.

First, we have divested some noncore assets. With the sale of Kelly Home Care at quarter end, we now have two discontinued operations. We are not planning to divest additional businesses in the foreseeable future. Second, in our year-end conference call, we announced the restructuring of our UK operations and an anticipated charge of roughly $6 million to $7 million. To date, we have incurred approximately $2.6 million in cost resulting from these actions and we now expect the total cost to be roughly $6 million.

During the first quarter, we also began the practice of allocating additional headquarters cost to their appropriate business segment. This shift provides more transparency in our financial reporting and holds segment leadership more accountable for overall business performance.

In addition, we have grown our International PTSA business to a size that it should now be reported separately, and we are now managing our business around four distinct segments -- the Americas Commercial, Americas PTSA, International Commercial and International PTSA. During the quarter, we also accrued approximately $1.6 million related to two long-standing legal matters. These unforecasted legal costs did affect first quarter earnings, reducing them by about $0.03 per share.

As promised, we're proceeding quickly to diversify our company geographically, move into more recession-resistant service lines and add more fee-based higher-margin business, and during the quarter, we made excellent progress. We acquired Talents Technology, a perm placement and executive search firm with estimated full-year 2007 revenue of $2.4 million. Located in the Czech Republic and Poland, this expands our global footprint to 32 countries and territories. In support of our strategically phased expansion into the Asia-Pacific markets, we acquired the remaining 51% in our Tempstaff-Kelly joint venture. The estimated full-year 2007 revenue for this unit is $40 million.

And finally, we acquired CGR/seven, a creative services staffing and placement firm in New York with estimated full-year revenue of $8 million in 2007. In addition to carrying higher margins, this acquisition is a nice addition to our professional services portfolio. Although these acquisitions did not have any significant impact in the first quarter, they will enhance earnings going forward.

As we go through the financial specifics of the quarter, you should also pay particular attention to margins and fees where our strategies are continuing to yield strong improvement. And of course, we cannot talk about our performance today without addressing our most significant challenge, the U.S. economy. We're now in one of the longest mid-cycle pauses that Kelly has ever experienced, nearly 10 months in fact, and with nearly two-thirds of our business in this market, our U.S. sales declined nearly 5%. In spite of that, we managed to slightly increase earnings from operations, excluding of course the UK restructuring. We do believe that U.S. economic growth will reaccelerate mid-year, however if negative U.S. trends persist, we will take steps to preserve earnings while balancing opportunities in other markets and you will hear more about all of these actions during this morning's call. Now let's turn our attention to first quarter results.

Revenues increased 1.1% to $1.35 billion, earnings per share were $0.32 compared to $0.24 delivered in the first quarter of 2006. Excluding the gain on the sale of Kelly Home Care and the UK restructuring cost, adjusted earnings were $0.23 per share, which is $0.02 below our $0.25 to $0.30 first quarter guidance range. Our results do certainly reflect the economic sluggishness in the U.S., but our international markets continue to show strength and our strategies for diversification are positioning us to take full advantage. I'll discuss operational performance by individual business segment after Bill takes you through our financials in greater detail. Bill?

Thank you, Carl. I will start by covering first quarter results.

Revenue for the first quarter totaled $1.35 billion, an increase of 1.1% compared to last year. On a constant currency basis, total company revenue decreased 1.1%, and this reflects slowing from the 2.3% constant currency growth reported in the fourth quarter, primarily in the U.S. market.

Our gross profit rate in the first quarter was 17% and increased 100 basis points compared to last year primarily due to improved workers compensation costs and strong growth in fee-based income. Sequentially, the 17% rate increased 20 basis points compared to the fourth quarter. Selling, general and administrative expenses in the first quarter totaled to $218.7 million and increased 9.2% year-over-year. Included in the first quarter SG&A expenses are $2.6 million of UK restructuring costs, and excluding these costs, SG&A expenses were $216.1 million, up 7.9%.

As reported, SG&A expenses were 16.2% of sales. Excluding the restructuring costs, SG&A expenses were 16% of sales compared to 15% last year. Earnings from operations in the first quarter totaled $10.5 million. Excluding the UK restructuring charge, earnings from operations totaled $13.1 million, a 2.6% increase to last year. Other income totaled $673,000 compared to only $40,000 last year. The improvement is due primarily to higher U.S. interest rates and higher cash balances.

The effective tax rate for continuing operations in the first quarter was 52.9%, which is significantly higher than the 36.3% rate last year. The increase is primarily due to the UK restructuring charges where the tax deduction is not recognized currently because of valuation allowances recorded against existing UK tax loss carryforwards.

Earnings from continuing operations were $5.3 million, and excluding the impact of the UK restructuring, earnings from continuing operations were $7.9 million, a 3.4% decrease to last year. Discontinued operations net of tax results from the sale of Kelly Home -- Care -- effective March 31, 2007. There are two primary components to the $6.7 million of net income. First, the normal quarterly operating earnings of Kelly Home Care which totaled $674,000, or about $400,000 after-tax. The second component is the gain on sale of Kelly Home Care of $10.2 million, or $6.2 million after-tax.

Diluted earnings per share in the first quarter were $0.32 per share compared to $0.24 per share last year, and as Carl mentioned if you exclude the UK restructuring costs of $0.07 per share and the gain on sale of Kelly Home Care of $0.17 per share, our first quarter adjusted net earnings were $0.23 per share.

Now I will cover our segment revenue results for the first quarter, and effective with the first quarter, we've realigned our operations into four reporting segments -- Americas Commercial, Americas PTSA, International Commercial and International PTSA. The Americas includes all U.S. operations as well as Canada, Mexico and Puerto Rico which previously were reported as part of International. Revenue in Americas Commercial was $684.1 million, a decrease of 4.3% to last year.

Turning to Americas PTSA, revenue for the first quarter was $263.4 million, a decrease of 6.2% compared to last year. And note that total Company revenue and the Americas PTSA segment revenue exclude Kelly Home Care revenue in both this year and last year.

Moving on to International Commercial, revenue for the first quarter was $359 million, a 16.3% increase versus last year, and on a constant currency basis International Commercial revenue increased 7.3%. International PTSA revenue for the first quarter totaled $44.4 million and increased 40%, reflecting both organic growth and the opening of new branches. And on a constant currency basis, International PTSA revenue grew 29%.

Before we begin our review of segment earnings results for the first quarter, I'd like to highlight the additional change to our segment reporting. Effective with the first quarter, we've allocated corporate expenses that directly support the operating units to the segment results. Prior periods have been reclassified for comparability and our investor relations web site has been updated to reflect reclassified historical results by segment. There was no impact on total Company results.

Americas Commercial earnings totaled $21.1 million, essentially flat compared to last year. The U.S. Commercial gross profit rate increased to 15.9%, 100 basis points higher than prior year primarily due to reduced workers compensation costs and improved payroll tax rates. Americas Commercial expenses increased 2.3% and expenses were 12.8% of sales compared to 12% last year. Americas PTSA earnings totaled $13.6 million, a 6.5% decrease compared to last year. The Americas PTSA gross profit rate of 18.5% increased 200 basis points primarily due to growth in fee-based income and the impact of the higher margin Ayers outplacement business.

Americas PTSA expenses increased 10.6% year-over-year. Expenses as a percent of sales were 13.3% compared to 11.3% last year. Expenses increased primarily due to the impact of the Ayers outplacement business and increased staffing costs related to adding permanent recruiters.

International Commercial reported a loss of $4.5 million. Excluding the UK restructuring costs, the loss was only $1.9 million, a 21% improvement compared to the $2.3 million loss last year. The International Commercial gross profit rate of 16.6% decreased 20 basis points compared to last year, primarily due to rate decreases in the UK's temporary staffing area. International Commercial expenses increased 17.8%. Excluding the $2.6 million UK restructuring costs, expenses increased 13% and were 17.1% of sales compared to 17.6% last year.

International PTSA earnings totaled $248,000 and increased 38% compared to last year. The International PTSA gross profit rate of 27.7% increased 250 basis points year-over-year primarily due to strong growth in fee-based income. International PTSA expenses increased 55%, primarily reflecting new branch openings.

And finally moving on to corporate, unallocated expenses for the first quarter totaled $19.9 million, a decrease of 3.9% versus last year. Included in corporate expenses were two significant accruals for legal settlements totaling $1.6 million. The prior year included legal settlements of about $800,000. The decrease in corporate expenses was due to tight expense controls, reflecting the soft U.S. market conditions.

Shifting to the Company's first quarter balance sheet, I will make a few comments. Cash totaled $120 million at quarter end, an increase of $61 million compared to last year. Accounts receivable totaled $828 million and increased $8 million compared to last year. And for the quarter, our global days sales outstanding were 56 days, the same as last year. Our short-term debt totaled $76 million, up $25 million from last year, with most of the increase related to yen-denominated borrowings we used to fund our investments in Japan. At quarter end, short-term debt was about 9% of total capital.

And finally, a few comments on the Company's cash flows. Net cash provided by operating activities was $14 million for the quarter compared to $11 million last year. The improvement was due to higher net earnings and lower growth of accounts receivable. Capital expenditures totaled $8.5 million compared to $6 million spent last year. The increase is primarily due to investment associated with the design and implementation of the PeopleSoft payroll and billing project. We expect our 2007 CapEx will total between $43 million to $45 million compared to $45.8 million last year.

During the quarter, we had several significant investing activities. We sold the Kelly Home Care business for proceeds of $12.5 million. We made three acquisitions that totaled a net $17 million. We acquired Talents Technology for an initial purchase price of $3 million, we acquired CGR/seven for an initial cash purchase price of $12 million and we acquired the remaining 51% of the Tempstaff Kelly JV for a net cash price of $2 million.

As highlighted in the press release, our guidance for the second quarter of 2007 is that diluted earnings per share will range from $0.35 to $0.40 compared to $0.33 per share last year from continuing operations. Incorporated into our second quarter guidance are the following assumptions. Americas sales trends will improve, yet remain negative in the second quarter, turning positive in the third quarter. We believe this is reasonable based on our view that the U.S. economy will avoid a recession over the balance of 2007. What is not included in the above guidance are the planned additional UK restructuring costs of approximately $3 million pretax, or about $0.08 per share. These costs relate primarily to closing three additional branches and the UK headquarters consolidation. Another $600,000, or about $0.01 per share, may impact the third quarter.

The total cost of the UK restructuring is now estimated at about $6 million, or $0.16 per share. The second quarter effective tax rate, excluding the UK restructuring, will be about 36% compared to 42% last year. The reduction reflects the positive impact of work opportunity credits being included in 2007 while not yet reflected in the second quarter of 2006.

For the full year, we expect earnings will range from $1.65 to $1.80 compared to earnings of $1.56 per share for continuing operations in 2006. The 2006 continuing operations results exclude both KSL and Kelly Home Care. The full-year guidance also does not include the estimated $0.16 per share of UK restructuring costs, or the $0.17 gain on the sale of Kelly Home Care. We expect the full-year effective tax rate, excluding the UK restructuring, will be at about 35%. The tax rate is expected to be higher than the 28.6% rate last year due to a smaller impact from work opportunity credits, and particularly Katrina credits. 2006 also benefited from favorable resolution of a federal tax audit.

I will now turn it back over to Carl, who will highlight our operating results.

Thank you, Bill, and let's take a closer look now at our segment results, starting with U.S. Commercial. The slowing U.S. economy continues to negatively affect our sales. The BLS temporarily help service employment has been flat to slightly negative now for six months, and as a result, total Americas Commercial revenue fell minus 4% in the first quarter versus a negative 1% in the fourth. By month, revenue was down about 4% in January and February and a little less than 5% in March.

In terms of fees, after 10 consecutive quarters of double-digit fee increases, the combined growth of our temp to perm and direct placement fees settled into solid single-digit increase of 6% and we expect that level of growth for the remainder of the year. Principally on the strength of better management of workers compensation claims and improving state unemployment rates, the gross profit rate during the quarter increased to 15.9% from 14.9% last year. Summing it all up, year-over-year operating earnings in Americas Commercial were about the same as last year, even though revenue fell 4%.

Moving on to Americas PTSA, the slowing economy also negatively impacted PTSA's revenue growth in the first quarter. On a year-over-year basis, revenue was down 6% with earnings decreasing 6.5%. By month, revenue was down 7% in January, 5% in February and 7% in March.

Looking at more detail, Businesses and Professional and Staffing Alternatives posted positive revenue growth with the technical staffing businesses continuing to report negative revenue growth. First in Professional, which represents about 20% of Americas PTSA revenue, year-over-year revenue grew 3% and earnings posted double-digit improvement. Most notable was the performance in our law and health care businesses with both posting double-digit earnings increases in the quarter.

second is Technical, which makes up over two-thirds of our PTSA revenue. There revenues were down about 12% while earnings were down somewhat less. In the first quarter, all of the businesses in technical were negatively affected by the slowing economy and reported lower revenue. IT business was the one most severely affected. Several of our large IT customers significantly reduced their temporary usage in the first quarter, but we do expect a recovery in the second half of the year.

Finally at Staffing Alternatives, representing about 14% of PTSA, these businesses posted revenue growth of nearly 17%. However, earnings for the quarter were less than last year. This decline was primarily driven by poor performance in our Kelly Management Services unit. One of this unit's outsourcing projects incurred significantly higher than expected workers compensation costs for the quarter and we are taking actions to bring this cost in line.

Overall, we are especially pleased to see acceleration in PTSA placement fees. As you know, since mid-2006, we've been investing heavily in our base of recruiters and we're seeing a nice return. Placement fees grew over 45% in the first quarter, up from plus 14% in the fourth and 2% in the third quarter of 2006. With our addition of recruiters nearly complete, we're expecting strong fee performance for the remainder of the year. The PTSA gross profit rate improved to 18.5% in the first quarter compared to 16.5% for the same period last year and the improvement is aided by our acquisition of our Ayres outplacement business and the placement fee growth. While we're disappointed with the decline in earnings in the first quarter in our Americas PTSA segment, we do believe that actions are being taken that will provide future growth and profitability.

Let's turn now to our International operations. Overall, this was another very good quarter for International. Reported revenue increased nearly 20%. On a constant currency basis, revenue was up nearly 10% and fees were up 27%. Excluding the cost of our UK restructuring, earnings improved over 26% over our Q1 earnings last year. We're extremely satisfied with the solid sales and earnings growth in International and pleased with our International development strategy.

Now let's take a look at the segments in detail. Overall, International Commercial revenue increased over 7% in constant currency. We remain encouraged by positive trends seen throughout continental Europe. Consistent with the past few quarters, sales in the UK-Ireland decreased about 4%, but Russia, Germany, Scandinavia and Switzerland all experienced growth greater than 25%.

Our Asia-Pacific region saw continued growth in its Commercial business of nearly 10% with Malaysia leading the way with growth of over 35%. For quite a few quarters now, we've seen good growth in fees in International Commercial with fees growing over 11%. Particularly strong fee growth was seen in continental Europe with growth of plus 70%, led by the performance of Russia, France, Switzerland and Scandinavia.

International Commercial's gross profit rate was 16.6%, down slightly compared to the same quarter last year, and this decrease is being driven primarily by the erosion in our UK commercial margins.

Finally, the final segment, International PTSA. Sales on international PTSA increased by nearly 27% in constant currency, Europe increased nearly 30% with sales in UK-Ireland increasing almost 20%. Our strategic decision to place a greater focus on the professional higher-margin businesses in International is yielding positive results. Our Asia-Pacific region saw growth in its PTSA business of over 40%, which was primarily fueled by our operations in New Zealand and Singapore. As with our other three segments, we have also seen exceptional growth in fees in international PTSA with fees growing over 70%. Countries with exceptional performance included Singapore, Russia and the UK.

International PTSA's gross profit rate was 27.7%, 250 basis points better than the same quarter last year. This improvement is being driven primarily by growth in perm fees. International PTSA expenses for the quarter grew 45% on a constant currency basis. Our International expense continued to trend upward during the quarter as we continued to invest heavily in this area. We opened 20 new International branches during the quarter with more than half being PTSA branches.

And for a strong start in 2006, the U.S. economy cooled off and that pause in growth has continued into 2007. While many macroeconomic factors have contributed to this slow-down, we believe that fundamental economic drivers continue to be encouraging. We're optimistic that demand for temporary workers will accelerate sometime in the middle of the year and we faced our forecasting guidance for the balance of 2007 on that expectation.

Let me explain why. First, although cautious, our customers' employment outlook remains positive. Second, the overall labor market remains healthy, the unemployment rate is at a six-year low, and while temporary employment has declined as a percentage of overall job creation this past year, our perm placement and temp to perm fees have remained strong and the demand for high skilled professional temporary employees is very good as well.

Now employment growth this year has so far been fueled by small and medium-sized company hiring. We do expect employment growth to reaccelerate in large companies later this year, a segment we do particularly well in.

Third, macroeconomic and staff and industry data from Europe and Asia remains solid and forecasts are encouraging for the balance of 2007.

And finally, despite the absence of growth in our largest market and all of the changes we have undertaken this quarter to better our operations, we delivered respectable earnings. We're proud of that accomplishment, it speaks to our strength and affirms we're on the right strategic course.

As we move forward, we'll continue to be mindful of short-term performance goals, but we're not losing sight of our long-term strategies. We will continue to aggressively expand our geographic presence outside the U.S., invest in more recession-resistant high-growth, high-margin business and accelerate the globalization of our professional and technical staffing services.

In summary, we accomplished a lot in the first quarter. In addition to implementing some operational changes, we completed divestiture of our noncore businesses, made strategic investments in both geographic and specialty business opportunities, improved our gross profit and increased global sales. It all adds up to building value for our shareholders.

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

(OPERATOR INSTRUCTIONS). Mike Fox, J.P. Morgan.

Quick question on -- you mentioned a lot about kind of a mid-cycle slowdown in the U.S. economy. What gives you confidence that it's a mid-cycle slowdown? And then, you also mentioned that you're not expecting a recession. Could you talk about that, and then also, the tone of your customers with regard to near-term and intermediate or longer-term hiring needs and what their view of the economic environment is? Thanks a lot.

You managed to get five questions in that one, so let me see if I can parse them out here. First off, customers are talking about projects coming online in the middle of the year. They are talking to us already about staffing they will need to support those projects. Customers are not talking about increasing layoffs, they're not talking about shutting down facilities. So customers' tones remain positive, not exuberant, but positive about need for more labor resources as the year unfolds.

Second question as to what are the types of indicators that we look to heading into the recession. Several things, none of which are happening at the moment. Customers are not counseling out or shortening their forward view, they're still talking to and making commitments to us several months in advance. We don't see a reduction in overtime usage, we don't see a collapse in the [lid] business, and their demand for permanent employees remains very strong, very high. So none of the things that typically begin breaking down prior to that are doing so. The Fed Reserve in its various statements and the meetings of its various regional banks are not talking about a recession being likely. In fact, they have shifted outlook to saying the threat of inflation is greater than the threat of a recession in their last statements. So supporting our customers' micro view, kind of the macro numbers for Kelly all rolled in seem to be positive and encouraging of a pickup in the midyear.

And a just follow-up to that. Do you think the fact that your customers, they are still seeing some pretty solid demand, but they're not exuberant, do you think that that bodes well for the longevity of the expansion?

I think that as I talk to our customers they have learned lessons about avoiding a boom-bust that we experienced in the 1999-2000 period where there was wild scrambles at times to bring people onboard, then they had to have wild scrambles to undo that talent acquisition. I think the lesson people learned from that was to be more measured in their response, to take their time at adding resources, to take the time at undoing resources. And our customers, again, I cannot repeat too often -- the customers are confident, they're looking forward to increases and demand for their products. But it is not a wild increase in demands and most of the forward views on GDP that you're more familiar with than I am are showing things sitting around the 2% range, the 2.5% for the year.

Okay, great. Thanks a lot.

Toby Sommer, Suntrust Robinson Humphrey.

Thank you. I was wondering if you could comment on your forward-looking kind of branch openings look like. You opened up quite a few in the quarter, you're again mostly focused I guess on the International PTSA. Just wondering if you could comment on that. Thanks.

As we've talked about before, we don't have targets for the numbers of branch openings. They are partially driven by the opportunities with specific customers, opportunities in specific markets. The majority branch openings are obviously going to be in our high-growth areas right now, which are Europe and A-PAC, but no doubt in the U.S., we will continue to open some branches in response to specific customer needs and [on-sites] as well as close some branches that no longer work for us. We don't have a particular branch opening target, Toby, as you know. I don't expect the pace to slow down or pick up for the next quarter.

Could you refresh our memory on the path to profitability typically for a new branch or what you aspire to? And then I was hoping you could comment on -- I think I heard you say in your prepared remarks, comment on rate decreases in the UK, and if you could give us any additional color if I did in fact hear you correctly?

I aspire to branches being profitable on day one, but my aspiration and outcome sometimes differ here. Inside the PTSA operations and in Europe, the time for branch profitability has now shortened to less than a year. It's our goal across the U.S. and the rest of our operations, and in general both commercial and PTSA operations are beginning to hit that target. Faster obviously where you have a settled established customer fueling you and a little slower when you're moving into a new market. What specifically we said in the UK was that temporary GP had come down which was affecting the overall GP. I can tell you, it's not because we are lowering rates in the UK, it's simply a mix of customers as to which ones are growing and which ones are declining. Typically, we have not been experiencing GP rate declines there. We would've mentioned that in prior conference calls. It just happened to be a mix issue this quarter.

Thank you, I will get back in queue.

Michael Morin, Merrill Lynch.

Sorry I'm going to make you repeat something I'm sure you said, but I missed it. What were the monthly trends just in the commercial segment U.S. or Americas?

Minus 4, and slightly less than minus 5.

And were there any major differences between -- within that segment between what you would call light industrial and office?

Light industrial is more positive than office is right now.

And from a month to month, were there any major differences in trends at all?

I don't have that and we haven't been giving that out anyway, but I have tell you, I don't' even have it, so don't know.

Okay. In terms of the PeopleSoft implementation, you mentioned that. That is as far as you can tell going on, is on track and is going smoothly?

It is on track and going smoothly.

Okay, I will get back in queue. Thanks.

David Feinberg, Goldman Sachs.

With regard to your U.S. Professional business, or Americas Professional business, you had the technical portion down 12% year-over-year. On last quarter's call, you highlighted auto as particularly weak in what you believe might be dragging down that business. This time, it seems like a little bit of change of tone. You're talking about all businesses impacted by the slower economy. Can you parse out what you think auto has specifically on the technical weakness versus the overall economy as a whole?

I cannot parse that out. Automotive is not a -- we said that all of the businesses were negative. If automotive had been in the most negative, it would have been the one that we had talked about. This quarter, IT was the one that was causing the greatest drag, and that was primarily due to the end of some projects at our customers, not a fast pick-up of projects, and so we ended up with, as you heard, a very significant decline in demand in the IT area. That's not typical of the IT industry in general. I don't see that as an indicator for what has taken place in IT. That was specific our customers and some of their projects.

Was there any particular vertical that you were employed in for those IT projects, or just throughout all?

No, it was throughout all.

T.C. Robillard, Banc of America Securities.

Can you help me with reconciling, just using your vast experience here. As we have gone through the past recovery, a lot of people referred to this as a jobless recovery, and Carl, your remarks in an earlier question about companies learning a lesson from the last boom-bust. How come we are not seeing bigger trends on the temp side that you would expect to see through a jobless recovery if we are in fact in just a bit of a slowdown with some reacceleration coming through? It would appear just intuitively that the temp numbers would not have materially declined even with a slight slowdown in economic growth and the fact that companies really hadn't overhired anybody. So I'm just trying to reconcile some of that and hoping you guys can maybe shed some color on it.

I can shed some conjecture on it, we'll see if it's colorful or not.

That would be great.

Calling this recovery a jobless recovery I think is a significant misnomer. I think the BLS numbers undercount -- and the Wall Street Journal talked about that yesterday -- the BLS numbers undercount the real job creation and I think that's a critical clue to what's taking place here. And so, you keep having month after month significant upward revisions in jobs. What is different about the end of 2006 and so far through 2007 is where the jobs are being created. Over the course of a cycle, you go through periods where large companies are creating jobs and smaller ones are very hesitant. That is what happened in the early years. We're right now in a period of time where the small companies are creating jobs and the larger companies are in fact fairly stable. If you look at job creation this year inside of the U.S., all of the job creation is coming from companies with under 500 employees and that group uses temporary employees as a percentage of their work force less than do large companies.

So my conjecture is that the decline in the penetration rate that is taking place, the small declines that have taken place are more because the part of the employment sector that the temporary employees do best in, larger companies, isn't growing so far this year.

Great, that is very helpful. Then can you just talk a little bit more about the actions you said you were taking to address the PTSA segment in the Americas?

Several things are taking place. Last year, we talked about that we were a little behind where we should have been in adding recruiters, so we sped through adding recruiters and you're now seeing very significant growth and we're now I think pretty well balanced as to where we need to be and relatively well balanced as to where we need to be in the mix of recruiters and the mix of temporary super -- temporary staff supervisors. I think that we have customer mix issues to address. In some of the businesses segments, you can be overly dependent upon a certain number of customers. We were in the IT segment. We're working on diversifying the mix of customers that we have there. And then you can always be, there is never -- you never stop paying attention to the profitability of your individual branches. There's always a little sharper you can be and we'll do so inside the Americas PTSA.

Great, thanks for the insights.

(OPERATOR INSTRUCTIONS). [Nick Nattell], [Janna] Partners.

I guess just a question on your performance in the quarter and the guidance. The $0.23 that you sort of are reporting excluding the sale of Home Care and the UK restructuring, that itself has within it the 52.9% tax rate, or it has within it a lower tax rate?

Effectively, it would have a lower tax rate. The continuing operations tax rate without the UK restructuring would be something more like 42%. It was really, really, really skewed because of the nondeductibility of the UK restructuring costs.

Okay, that's helpful. And then your new sort of guidance of I guess $1.65 to $1.80 you said had a 35% tax rate.

That is, again, excluding the UK restructuring.

Yes, and when you gave it initially in January, the guidance was I think $1.90 to $2.05, was your initial range. What was the $1.90 to $2.05? Was that also predicated on about a 35% tax rate?

I don't have that in front of me. I will say yes, in that range. It might have been 36, and I will check my notes, and if it's different, I can give you a call back.

And can you talk a little bit about -- so sort of at the midpoint numbers are kind of moving down about $0.25 you know for the year and the first quarter it looks like was a $0.23 versus you're looking for the $0.25 to $0.30, so there was about maybe $0.05 there. But across the balance of the year, you're seeing another sort of $0.20 weakness. Can you help sort of broadly lay out the biggest drivers of that or you know if you could apportion that out somehow or sort of give some more clarity behind that?

I don't know that I can apportion it, but I will put some clarity into it. We entered the year at about minus 1%. We didn't expect the fairly quick drop down to the minus 5% that we have experienced, others have experienced and the -- inside the U.S. marketplace. Our forecast was predicated on hanging at about that level to improving fairly quickly throughout the remainder of the year. We obviously ended the quarter at minus 5, we're going into the second quarter at a much lower rate than we anticipated going, and the gap between what we're entering the quarter and where we thought we were going to be is larger than the gap that we entered the first quarter, so there's more of a disproportionate impact coming from this delay and the acceleration of U.S. sales. International, both of its segments are doing pretty much what we expected them to do, they're continuing on what they're doing, so it's primarily the Americas marketplace, heavily influenced by the U.S. gets almost all of the apportionment of the blame. It's the difference between our expectations for where the second quarter was going to be versus where we're now entering the second quarter that accounts for that disproportionate size of impact that you were referencing, Nick.

And the final question on that guidance or the numbers. The legal cost that you mentioned, I think you had said that that was about $0.03 a share in the first quarter. Can you talk about what that was and to what extent that is continuing through the year?

I can't talk about what they were, but they where unforecasted as they hit and I'm not predicting -- we're not currently forecasting (MULTIPLE SPEAKERS)

There is no expectation of additional costs related to those, no material additional costs related to those particular cases.

Toby Sommer.

Within the technical areas that you described as being kind of weak, you cited IT, and I was curious -- is that a function of particular customers, do you think, or do you think, again, it might be indicative of the market?

I don't think it's indicative of the market, I think the IT segment it doing pretty well, and I think in our case, it is 100% indicative of projects ending at a few specific customers and a slow uptake of new projects.

So given I guess that commentary that you think the market's pretty good, that could Wright itself then just as we work our way through the year?

We expect it to Wright itself as we work our away through the year, and obviously we will play, as I said earlier, a little more attention to diversification inside that particular customer mix inside that business segment.

Sure. And then, I was wondering, with the cash balances still kind of building, I was wondering if you could give us an update on how you would characterize the M&A market and whether you were seeing kind of more or less opportunities and whether they are more interesting or less interesting than perhaps several quarters they go? Thanks.

We are very active in the M&A market. I think as you saw in the first quarter, we continued to look in a lot of different markets and spaces, particularly internationally in terms of additional geographic diversification. We continued to be interested in additional specialties within the U.S. market. I would characterize the market as active. I don't think prices, other than Germany, are out of line, and I think you will see Kelly continue to make strategic acquisitions over the balance of the year.

Pete Carrillo, Citigroup.

When you gave your earnings, your EPS guidance for the second quarter of $0.35 to $0.40, I think you followed it with some sort of -- what your assumptions were. Could you just repeat that? I didn't quite get that all down.

Sure, I would almost be happy to repeat it verbatim here. We said that we expect Americas sales trends will improve, yet remain negative in the second quarter, turning positive in the third quarter. And then we just reiterated that we think this is reasonable based upon a view that the U.S. economy is going to avoid a recession over the balance of this year.

Okay. In terms of trying to figure out on my job where you're going to come out in the range, what would it take to hit $0.40? I'm assuming the $0.35 is sort of what you just said. I guess hitting $0.40 must mean things aren't quite as negative or almost flat for the quarter, or is that accurate or --?

For us, we still have two-thirds of our business inside the U.S., over 70% inside the Americas. It's real clear, we can continue to have spectacular performances in the 30% and it will improve, but we're obviously going to perform much better as the U.S. economy in particular picks up and the demand for temporary staffing picks up, and that is the one single event that's going to propel earnings towards higher numbers.

Mike Fox.

Thanks, I just wanted a quick follow-up. Can you give us the fee-based income or the perm income as a percent of total revenue?

It's around 2% in the quarter. It was up nicely from a year ago, but it remains 2% to 2.2% of total revenue.

Okay, and then what was that last year, do you think, just under 2?

I would guess it was about 2. Again, fast growth in PTSA, fast growth in International. But again, to actually increase its percent of the total, it has to really get up there. I would guess it was around 2% and probably 2.2% this year. We will put the actual numbers in our 10-Q filing.

Michael Morin.

I just wanted to drill down a bit further into these new segments, particularly within the Commercial segment. Can you -- has the mix changed at all between clerical and light industrial if you look at Americas and International, and can you refresh us on what that mix is roughly?

The mix has not changed dramatically over the years. It gets out of balance at various points in the cycle, but in general for Kelly, inside the Americas it runs 50% to 60% office clerical, about a third light industrial, electronic assembly, and then the remaining sixth or so, a much of miscellaneous.

And then the International Commercial, was that --?

International tends to look very much like the U.S., a little higher proportion of [lid] because the European business has a higher proportion of lid in it.

Okay. And then within PTSA, same thing -- what are the two or three most important verticals? Has that changed at all and how do Americas and International compare there?

In International, there's four primary verticals that drive PTSA, it's finance, engineering, IT and science. Inside the Americas, those four are also very critical with large other practices, but those would still be four of the larger ones.

Okay. And then how significant are Canada, Mexico and Puerto Rico?

You can probably do the math.

Yes, but in terms of each of them.

Canada is by far and away the largest of the three. Mexico and Puerto Rico are much smaller relative to Canada. And again, you could put one of your junior analysts, just simply do subtractions from the change in revenue in our reclassified financials, you'll be able to drive out what Canada, Mexico, Puerto Rico total.

Yes, okay. And so in terms of the growth rates that you quoted, would those be the same in constant currency terms?

Actually, we did in our press release do the constant currency for all four segments, and again, I can tell you that, yes, they're slightly different, but it's within a tenth or two-tenths in Americas between dollars and constant currency.

Okay, great. And then, just last one. When you look at Americas Commercial in particular, what has the bill rate trend looked like in the quarter? And if you compared that with recent trends, that would be helpful as well. Thank you.

It's increasing. It has been increasing for awhile here as the job market has tightened and as our skill mix has continued to shift more into the higher skill side. We tend to reflect and sometimes do occasion a little better with the wage inflation rate that the BLS reports and the BLS has been reporting 3%, sometimes 4%, but 3% roughly here, and rising higher with the more education or skills.

That number will be in our 10-Q as well.

And the 3% that you are quoting is BLS type data?

Yes, we'll put our own number into the Q.

Nick Nattell.

On the expenses as a percentage of revenue, I think that the SG&A or OpEx was about 16%, excluding the restructuring costs versus 15% a year ago. Can you -- I think you may have covered this, but can you go over again what are the sources? Is it as a function or as a percentage of revenue, is the increase more a function of the fact that revs are down more than you expected? Because this is kind of a big jump. And can you talk about where you think you see this settling out for the year and sort of what you can do to control that line item, or how much control or lack of control you have therein?

First off, we had nice performance in terms of the International segments, and as we have said historically, you cannot get to operating efficiency leverage if you have negative sales. And again, you have 70% of the business that was negative in sales, and that is the overwhelming factor that accounts for the change in the operating efficiency. Where we will get to for the year will depend on where that reacceleration point occurs and how quickly we get the North American sales improving.

So to the extent the North American sales were flat to down something in the range of sort of a 16% number for an overall entity, assuming that International stays where it is, is kind of where we can imagine you might come out -- does that sound reasonable?

I don't know yet. Give us another quarter to see how things are sorting themselves out. I understand what you're asking, there's just a lot of ifs in there and it's hard to sort them out yet.

I would just add that Americas Commercial expenses were up only 2.3%. Again, it is very, very difficult given the fixed nature of a lot of the expenses, i.e. rent on branches, depreciation, telecom costs -- it is really, really, really hard for those expenses ever to be down -- to be negative. It would take a major restructuring of closing branches and massive change to actually bring them down. So I think you can expect very modest growth in those expenses just simply because they are largely fixed and a little bit of growth due to wage inflation. That is really about it.

Toby Sommer.

Thanks. I was wondering if you could comment on what your own internal hiring is like. You commented about how you built up some of your recruiter base and had some good fee growth as a result, but what are your plans currently given where the market is?

We have historically always been tight on adding to our own staff and plan to continue to do so. When you have operating margins like we have in this industry, you watch every aspect of your expenses and we are as tight on that as we reported our large customers to be.

So that's to say that you're not really adding recruiters on an aggregate basis at this point?

We talked about in the PTSA segment that we had reached a position of relative proportion that we wanted to there.

But if you were talking about just general headquarters staffing, we would be extraordinarily tight.

Mr. Camden, there are no further questions in queue.

Thank you, and we'll talk to you all again.

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