Kelly Services Inc (KELYB) 2007 Q2 法說會逐字稿

Ladies and gentlemen, good morning. 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. Good morning, and welcome to Kelly Services' 2007 second quarter conference call. With me this morning to review our results is Bill Gerber, our CFO. We'll follow the usual agenda this morning. I'll begin by highlighting strategic accomplishments before talking about Q2 results; and following that, Bill will provide a financial commentary and third quarter guidance. Afterwards, we'll discuss performance by business segment, update you on our outlook for the balance of the year, and then open the call for questions.

Let me remind you that the comments made during this call, 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 to our reported financial results.

This was another positive, productive quarter at Kelly, once in which we continued to make significant progress on our strategic plan to diversify geographically; invest in more recession-resistant, high-growth, high-margin business; accelerate globalization of our professional and technical staffing services; and improve operating margin.

Now, a couple of factors influenced our second quarter results, and you'll want to consider them as you assess our performance this quarter, as well as our outlook going forward.

First, you may remember that we announced the restructuring of our UK operations during our year-end conference call. During the first quarter of 2007, we incurred roughly $2.6 million in costs relating to the closure of eighteen branches and related severance in the UK. In the second quarter, we sustained $2.4 million in costs associated with the closure of four additional branches and the consolidation of our three UK headquarter locations. We expect to incur approximately $1.3 million in the third quarter in completion of this project.

Second, as many of you know, the French government recently modified the way in which it calculates payroll tax credits. Along with other staffing companies doing business in France, Kelly received a payroll tax benefit retroactive to January 2006. That benefit accounts for approximately $0.07 per share in our second quarter earnings.

Now, with that information as background, let's look at our strategic accomplishments this quarter. As promised, we're moving quickly to diversify our company geographically. During the quarter we expanded operations in China, Hong Kong and Singapore, with the acquisition of [P-Serve]. P-Serve is a successful, multi-service staffing company that provides permanent placement, business process outsourcing, call center management, and customized human resource services; a great match for Kelly. As a result of this acquisition, our global network now extends to 33 countries and territories. We anticipate P-Serve will generate full-year revenue of approximately $12 million in 2007, and contribute to our international earnings going forward.

Around the world, the growing demand for highly-skilled, credentialed temporary workers creates new opportunities for Kelly, and we're taking full advantage. This quarter we have added roughly 15 PTSA branches to meet the need for engineers, information technologists, scientific staff and more.

Now, while the majority of our improvement in operating margin this quarter is attributable to the French payroll tax credits, we continue to focus on the areas that will support future improvement. These areas include growing our PTSA offerings and fee-based businesses, achieving a healthy business mix, careful management of workers compensation and state unemployment costs, and controlling expenses.

Another important accomplishment in May, Kelly completed a successful secondary offering of 5.2 million shares of Kelly Class A Common Stock priced at $27.75 per share. Selling those shares, primarily from Trust controlled by our Chairman, Terence C. Adderley, was a very positive step for Kelly. It moved 15% of our market cap into the public float, attracted significant interest, and substantially broadened our shareholder base. In fact, more than 70% of those who invested were new to Kelly.

Now, of course, we can't discuss our second quarter performance without acknowledging our greatest challenge, the U.S. economy, where we do nearly two-thirds of our business. On the positive side, it certainly doesn't appear that we're heading for a recession. Fundamentals remain strong. New jobs are being created. The nation's unemployment rate remains low. Companies are growing and hiring, although much of the hiring recently has come from small and medium-size companies. We're also seeing sustained strength in more credentialed professional and technical staffing demands.

However, for more than a year now, we've been dealing with what has turned out to be the single longest mid-cycle pause ever seen in the U.S. staffing industry, the length of which is proving to be both frustrating and perplexing. After careful assessment of the trends and the particular slowness in demand for commercial staffing in the Americas, we've decided to restructure our branch network to support our long-term strategic goals. This realignment will include the closure and consolidation of approximately 40 branches in low-growth markets during the third and fourth quarters, resulting in a charge of approximately $2 million. The move is designed to redirect resources to markets and segments with greater revenue potential, reduce expenses, and protect our earnings.

I should add, while the U.S. economy is bumping along, our international markets continue to grow strongly, and PTSA, both in the Americas and international, is strengthening, and our initiatives to capture more of that business are working. Our expansion into higher-margin and fee-based businesses is yielding excellent results. In short, we're doing the right things.

To wrap up these introductory comments, even though our Americas business declined 4.6%, Kelly delivered second-quarter earnings from continuing operations, excluding the UK restructuring charge, of $0.48. That's 45% ahead of the $0.33 per share earned in the second quarter of last year.

I'll discuss operational performance by individual business segment after Bill takes you through our financials in greater detail. Bill?

Thank you, Carl. I'll start by covering second-quarter results.

Revenue for the second quarter totaled $1.416 billion, an increase of 1.6% compared to last year. That's up a bit from the 1.1% growth reported in the first quarter. On a constant currency basis, total company revenue decreased 0.5% compared to last year.

Our gross profit rate in the second quarter was 17.5% and increased 150 basis points compared to last year, primarily due to strong growth in fee-based income and lower payroll taxes. During the second quarter the French government changed the method of calculating payroll tax credits retroactive to the beginning of 2006, and on a go-forward basis. Kelly recognized a total credit of $3.8 million, of which $2.6 million related to 2006, about $600,000 to the first quarter, and another $600,000 to the second quarter of 2007. The favorable impact on the overall gross profit rate was about 30 basis points. Selling, general and administrative expenses in the second quarter totaled $225.3 million and increased 10.8% year-over-year. Included in the second quarter SG&A expenses are $2.4 million of UK restructuring costs. Excluding these costs, SG&A expenses totaled $222.9 million, an increase of 9.6%.

As reported, SG&A expenses were 15.9% of sales. Excluding the UK restructuring costs, SG&A expenses were 15.7% of sales compared to 14.6% last year. As we move to more fee-based businesses, another important measure is expenses as a percent of GP. Excluding the UK restructuring costs, expenses were 90% of GP compared to 91.1% of GP last year.

Earnings from operations in the second quarter totaled $22.3 million. If you exclude the UK restructuring charge, earnings from operations totaled $24.7 million, a 23.8% increase to last year. Other income totaled $930,000 compared to $465,000 last year. The improvement is due primarily to higher interest rates and increased dividend income.

The effective tax rate for continuing operations in the second quarter was 34%, which is significantly lower than the 42% rate last year. The decrease is primarily due to work opportunity credits included in the current quarter as compared to last year, when the credits had not yet been renewed.

Diluted earnings per share from continuing operations in the second quarter were $0.41 per share compared to earnings of $0.33 per share last year, a 24% increase. If you exclude the $0.07 per share of UK restructuring costs, our second quarter adjusted net earnings would have been $0.48 per share, a 45% increase. This compares to our original guidance of $0.35 to $0.40 per share. Even if you exclude the impact of all of the French payroll tax credits, which accounted for $0.07 per share, you would adjust back to $0.41 per share, which is still above the high end of the range.

Now I will cover our segment revenue results for the second quarter. Revenue in Americas commercial totaled $697 million, a decrease of 5.7% compared to last year.

Turning to Americas PTSA, revenue for the second quarter totaled $271.6 million, a decrease of 1.9% compared to last year. Note that this is a significant improvement compared to the first quarter, when PTSA revenue decreased 6.2%.

Moving on to international commercial, revenue for the second quarter totaled $397.7 million, a 16% increase compared to the prior year. And on a constant currency basis, international commercial revenue increased 8.8%.

International PTSA revenue for the second quarter totaled $49.4 million and increased 42.9%, reflecting both organic growth and the opening of new branches. On a constant currency basis, international PTSA revenue grew 33.8%.

Turning now to earnings for the second quarter, Americas commercial earnings totaled $23 million, down 12.9% to last year. The Americas commercial gross profit rate increased to 15.7%, 60 basis points higher than the prior year, primarily due to improved payroll tax rates and lower workers compensation costs. Americas commercial expenses increased 1.2%. Expenses were 12.4% of sales compared to 11.6% last year.

Americas PTSA earnings totaled $13.6 million, a 1.3% increase compared to last year. The Americas PTSA gross profit rate of 18.4% increased 210 basis points, primarily due to strong growth in fee-based income, lower payroll taxes, and the impact of the higher margin CGR/seven creative staffing business. Americas PTSA expenses increased 14.6% year-over-year. Expenses as a percent of sales were 13.4% compared to 11.5% last year. Expenses increased primarily due to increased staffing costs related to adding permanent recruiters, combined with the impact of the CGR/seven business.

International commercial reported a profit of $4.3 million. Excluding the $2.4 million of UK restructuring costs, the adjusted profit would have been $6.7 million compared to the $560,000 loss last year. The French payroll tax credits accounted for $3.8 million of the adjusted $6.7 million operating earnings. The international commercial gross profit rate of 18.3% increased 140 basis points compared to last year, primarily due to the French payroll tax credits and strong growth in fee-based income. Excluding the credits, the gross profit rate would have increased about 40 basis points. The French payroll tax credits are expected to continue on a go-forward basis, increasing the third and fourth quarter international commercial gross profit rate by about 10 basis points each quarter. International commercial expenses increased 17.2%. Excluding the $2.4 million of UK restructuring costs, expenses increased 13% and were 16.6% of sales compared to 17% last year.

International PTSA earnings totaled $544,000 compared to a loss of $78,000 last year. The International PTSA gross profit rate of 31.3% increased 650 basis points year-over-year, primarily due to extremely strong growth in fee-based income. The French payroll tax credits had no significant impact on the International PTSA gross profit rate. International PTSA expenses increased 72%, primarily reflecting new branch openings.

And, finally, moving on to corporate, expenses for the second quarter totaled $19.2 million, essentially flat compared to last year.

Shifting to the Company's second quarter balance sheet, I will add a few comments. Cash totaled $112 million at quarter end, an increase of $40 million compared to last year. Accounts receivable totaled $869 million and increased $25 million compared to last year. And for the quarter, our global days sales outstanding were 56 days. The one day increase compared to last year is primarily the result of a mix change due to growth in the international segments. Our short-term debt totaled $77 million, a $22 million increase compared to last year. Most of the increase related to yen-denominated borrowings we used to fund our investments in Japan.

And, finally, a few comments on the Company's cash flows for the first six months. Net cash provided by operating activities was $30 million for the six-month period compared to $40 million last year. The decrease was primarily due to growth of accounts receivable. Capital expenditures totaled $21 million compared to the $14.6 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 $46 million to $48 million compared to $45.5 million last year.

During the first six months, we made several acquisitions that totaled $25 million. In the second quarter we acquired P-Serve with operations in China, Hong Kong and Singapore for $8 million.

As highlighted in the press release, our guidance for the third quarter of 2007 is that diluted earnings per share will range from $0.41 to $0.46 compared to $0.45 per share last year from continuing operations.

Incorporated into our third quarter guidance are the following assumptions. Americas sales trends will improve a bit, yet remain negative in the third quarter. We now don't expect that Americas sales will turn positive until late in the fourth quarter. Not included in the guidance are the two restructuring programs. There will be additional UK restructuring costs totaling approximately $1.3 million pre-tax, or $0.04 per share. These costs relate primarily to completing the UK headquarters consolidation. The full-year cost of the UK restructuring is estimated at $6.3 million, or $0.17 per share. As Carl previously mentioned, the restructuring of our Americas commercial operations will close about 40 branches and incur approximately $2 million pre-tax of restructuring costs, or about $0.03 per share. These costs are expected to be charged in the third and fourth quarters of 2007.

The third quarter effective tax rate, excluding the restructuring programs, will be approximately 32% compared to 29.5% last year. The increase reflects the benefit of successfully closing a federal tax audit last year.

For the full year, we expect earnings will range from $1.60 to $1.70 compared to earnings of $1.56 per share for continuing operations in 2006. The full-year guidance also does not include the $0.17 per share of UK restructuring costs, the $0.03 per share of Americas restructuring costs, or the $0.17 gain on the sale of Kelly Home Care. We expect the full-year effective tax rate, excluding the restructuring programs, will be about 34%. The tax rate is expected to be higher than the 28.6% rate last year due to a smaller impact from work opportunity credits, particularly Katrina relief credits.

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

Thank you, Bill. Now let's take a closer look at our segment results, starting with Americas commercial, which is about 49% of our revenue. The slowing U.S. economy continued to negatively affect our sales. The BLS temporary help service employment growth remained negative for the second consecutive quarter; and as you would expect, our Americas commercial revenue was down 5.7% in the second quarter compared to a negative 4.3% in the first. By month, our revenue declined 5% in April, 5.6% in May, and 6.5% in June.

Our placement fees also felt the effects of the slowing economy. After 11 consecutive quarters of solid fee increases, our combined temp-to-perm and direct placement fees exhibited negative 6% year-over-year growth for the quarter. Both April and May decreased year-over-year, but June rebounded and showed positive growth. We expect fee growth in Americas commercial to remain about flat for the balance of the year. Principally on the strength of lower state unemployment costs and better management of worker compensation claims, the gross profit rate during the quarter increased to 15.7% from 15.1% last year. Summing it all up, year-over-year operating earnings in Americas commercial were down 13%.

Moving on to Americas PTSA, which is 19% of Kelly revenue, the slowing economy also continued to negatively impact PTSA's revenue growth in the second quarter. On a year-over-year basis, revenue was down 1.9%, but earnings were up just over 1%. This performance is a significant improvement in both revenue and earnings compared to that of the first quarter. After seeing revenue decline 6.2% in the first quarter, we saw a somewhat improving trend in the second quarter, down 3% in April, flat in May, and down 2% in June.

Looking in more detail, Businesses and Professional and Staffing Alternatives posted positive revenue growth with our technical staffing business still reporting revenue decreases, but at a rate much less than in the first quarter. In professional, which represents about 20% of Americas PTSA revenue, year-over-year revenue grew 8% and earnings posted a strong improvement. Most notable was the performance in our law and healthcare businesses, with both posting revenue and earnings increases this quarter. CGR/seven is now included in the professional results for the quarter, and this business added about 50 basis points to the year-over-year PTSA revenue growth rate, and also had positive earnings contribution for the quarter.

Second, and also improving, are our technical businesses, which make up about two-thirds of PTSA's revenue. Technical revenues were down about 7%, but earnings were positive for the quarter. The revenue decline was less than the 12% decline in the first quarter, and we expect continued improvement throughout the balance of the year. You may recall that in my first quarter conference call remarks, I said that several of our large IT customers significantly reduced their temporary usage in the first quarter, but we expected a recovery in the second half of the year. While our IT business continued to be negative, we did see some improvement in the revenue growth rate for the quarter.

Finally, is staffing alternatives, representing about 13% of PTSA. These businesses posted revenue growth of 8%. However, earnings for the quarter were 40% less than last year. This decline was primarily driven by disappointing performance in our [H.R. First] and Ayers outplacement units. In H.R. First we're anniversarying a very profitable project from the second quarter of last year; and with Ayers, second quarter revenue fell short of our expectations. Both businesses are great opportunities for higher future growth, and we also expect to see earnings improvement in the second half of 2007.

Now you may also recall that in our first quarter conference call we commented on poor performance in our Kelly Management Services unit. The actions we've taken to better align our costs in this unit resulted in improved second quarter revenue and earnings for KMS.

Overall, we are especially pleased with the continuation of growth in PTSA's placement fees. As you know, we've been investing heavily in expanding our base of recruiters. Placement fees grew 48% in the second quarter, an improvement from the 45% increase in the first. With our addition of recruiters now basically complete, we're expecting strong fee performance for the remainder of the year. The PTSA gross profit rate improved to 18.4% in the second quarter compared to 16.3% for the same period last year. The improvement was fueled by strong fee growth, lower state unemployment costs, and the acquisition of CGR/seven. I'm very pleased that the Americas PTSA returned to positive earnings growth after the disappointing decline in the first quarter. We expect our ongoing strategic actions will continue to support future growth and increase profitability.

Now let's turn to our international operations. Overall, this was another very good quarter for international. Reported revenue increased over 18%. On a constant currency basis, revenue was up 11%, with fees growing up 39%. Excluding the cost of our UK restructuring, earnings improved by $7.9 million over Q2 earnings last year, with the payroll tax credits in France contributing about half of this increase. We are extremely satisfied with the solid sales and earnings growth in international and pleased with our international development strategy.

Now let's look at the segments in detail. Overall, international commercial revenue increased almost 9% in constant currency. We remain encouraged by positive trends seen throughout continental Europe. Sales in UK-Ireland were flat, but that's an improvement over the negative performance of the past couple of quarters. Russia, Germany, Scandinavia and Spain all experienced growth greater than 25%.

Let me make a few additional comments on our UK operations. While our restructuring efforts are still relatively new, we're pleased with the progress to date. We've remained on track, within budget, with our branch closures and headquarters consolidation. We expect to realize an annual cost savings in the range of $5 million to $6 million beginning in 2008, a relatively short payback. However, as commercial margins continue to erode in this market, much of our future success will be dependent upon continued progress in adding higher-end PTSA business to our mix.

Our Asia-Pacific region saw continued growth in its commercial business of over 20%, helped by our recent acquisitions of TempStaff Kelly and P-Serve. For quite a few quarters now, we've seen good growth in fees in international commercial with fees growing almost 13%. Particularly strong fee growth was seen in continental Europe with growth of about 50%, led by the performance of Russia, France, Italy and Germany.

International commercial's gross profit rate was 18.3%, up 1.4% compared to the same quarter last year. This increase is being driven primarily by the French payroll tax credits, and somewhat offset by the erosion in our UK commercial margins.

Finally, on to our final segment, international PTSA. Sales in international PTSA increased by 34% in constant currency. Sales in Europe increased 30%, with UK-Ireland PTSA sales increasing over 16%. Our strategic decision to place a greater focus on professional higher-margin businesses in international is yielding positive results. Our Asia-Pacific region saw growth in its PTSA business of 50%, primarily fueled by our operations in New Zealand and Singapore. Even if you exclude our recent acquisitions, growth would have still been about 40%. We have also seen exceptional growth in fees in international PTSA with fees more than doubling. Countries with exceptional performance included Singapore, Russia, France and Scandinavia.

International PTSA's gross profit rate was 31.3%, a 650 basis points improvement over the same quarter last year. This improvement is being primarily driven by exceptional growth in perm fees.

So, what does the remainder of 2007 hold for Kelly? We see an ongoing need for professional and technical workers around the world, expanding opportunities in our international markets, and underlying strength in the U.S. We continue to believe the demand for temporary employees here in the states will accelerate as the GDP improves and larger companies begin adding to their payrolls; and, in turn, Kelly should begin to see revenue and earnings growth pick-up.

Meanwhile, the European market is growing nicely, and in Asia things are really booming. Look for us to continue to reduce our U.S. dependency and gain greater scale internationally, accelerate PTSA staffing around the world, add more fee-based businesses to our mix, acquire new complimentary businesses in our portfolio, carefully manage our expenses, improve operating margins, and position Kelly for long-term growth. These actions will translate into lasting value for our shareholders.

Right now we're investing and expanding in all the right places. We've accomplished a great deal this year, and we're keeping up the momentum as we head into the second half of 2007.

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 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 open for questions.

Thank you. (OPERATOR INSTRUCTIONS) First on the line I have Mike Fox with J.P. Morgan. Please go ahead.

Hi, Mike.

Hi. Good morning. I just have one quick question. When you talk about the guidance, you talk about the U.S. market kind of reaccelerating as you get closer to the end of the year. Can you talk about where the confidence in that comes from, and what you're hearing from your clients maybe looking out to the fourth quarter or maybe early next year? Thanks.

Thank you, Michael. Part of the confidence that we're not entering into a recession is that our U.S. customer base is still talking about needs for future labor. They're still talking about projects coming on line. I would say that they are slower to bring them on line than they have been in the past, part of the reason for the fact that we've had to push out by a quarter as to when we start expecting to see the acceleration start. Customer demand is still running at roughly the same level, and nobody is talking about pulling back or reducing demand for temporary labor.

And I would just add that we're also anniversarying softer and softer comparisons as we move through third, and particularly into fourth quarter. So, that will mathematically help us a bit as well.

Okay. Great. Thanks a lot.

Thanks, Mike.

The next question is from Toby Sommer with Suntrust. Please go ahead.

Hi, Toby.

Hi. Good morning. I have a question for you about the Americas commercial. You described some margin pressures there. I was wondering, from a strategic standpoint, you're addressing some of the branch issues to increase profitability. What other items could you have in your bag of tricks to help address and maybe offset some of that margin pressure; anything from a customer focus standpoint that perhaps is a discretionary decision that you could make to, kind of, fight the market there? Thanks.

By "margin," Toby, I'm assume you're talking about operating margin not gross margin.

I'd leave that open-ended to let you address both. Thank you.

Gross margin, the pressures in the marketplace are--have subsided a lot as we've talked over several conference calls. The challenge for us that we--is continuing to improve operating margin; difficult to do in a declining sales environment. We had expenses increase 1.2%. That's about as low as you can have expenses go, given wage inflation and so on. The next best way to then deal with expenses is to look at your less-profitable/unprofitable branches and look to consolidation and closure, which is what we announced today. In terms of looking at accounts, we always look at accounts that are profitable or unprofitable, look at pricing increases for those that are drifting towards unprofitability; but that is actions that we've taken for as long as you've known us, and we would continue to take. Right now the marketplace is fairly quiet, given the downward pressure on the levels of temporary staffing at most companies, and it has been nice to see the industry not responding to that with dramatic cuts in gross margin.

As a follow-up, I was wondering if you--as a proportion of the customer mix, is there more growth in small and medium-size customers? I know, generally speaking, your focus has been on top customers globally to be able to leverage the growth and the opportunity that you can offer clients abroad, as well as domestically. I was curious if that may be an opportunity on the gross margin side? Thanks.

Yeah. We've never not looked at good local business. We do fine with that. It has always been an important part of, especially, our Americas commercial stance. As you would expect, our local business has been growing while the large-account business has been declining in the last couple of quarters. With employment being negative overall for small and medium-size companies, especially large companies from the BLS numbers, you would expect the growth currently to be coming from smaller companies, and it is. We're participating in that growth.

Thank you.

Thank you.

The next question is from Pete Carrillo with Citigroup. Please go ahead.

Hi, Pete.

Hi. How's it going?

It's going well.

A couple of questions for you. I think Manpower said in their call last week that they thought that, I guess, one change that has affected things in recent months is the fact that if you look at the BLS data where the (inaudible) are being added, one of the categories is sort of a healthcare area, which isn't a traditionally strong area for some of the--some of you guys. Do you agree with that a little bit, or can you address that issue at all? I guess the implications are that even if things get a little bit better in December and January, it's maybe a little bit of a temporary--or something--structural change to the temp job market right now. Maybe this is going too far, but if it's going to (inaudible).

Obviously, the health component of the U.S. economy is one of the fastest growing components, now representing 16% of GDP, and employment growth is reflecting its growth in its percentage of GDP. Companies with healthcare staffing units and healthcare staffing practices are experiencing growth. We just reported a nice growth on our healthcare side. So, I think that that--it would be an accurate observation. I don't believe that job growth, as you look out over the next few months and quarters, is going to be dominated by healthcare. It will be one of the leading contributors, but I see other opportunities there too.

Okay. A couple of quick ones also. The French tax credit, that came--that was in--that's being included in SG&A?

No. That is included in gross profit.

Okay. For the--well, I guess it's international commercial & PTSA?

As I said in the call, it's all dedicated to the international commercial side. Because it's oriented towards low-wage workers, virtually none of it ended up in the international PTSA side.

Okay. Did you give the--okay, right. So, we can just back out the entire amount, whatever--or part of it. I guess for the 2Q (inaudible) portion, and the 1Q portion as well; right?

Correct. Again, just to kind of reiterate, it's $3.8 million in total, of which $2.6 million relates to 2006, and about $600,000 each in first quarter and second quarter. You can reasonably expect about that amount in third and fourth quarter.

$600,000 and $600,000. And I guess, just going forward, it's that similar amount; right?

Correct.

Correct.

Okay. The final question is, depreciation--can you actually give the depreciation figure? I don't see it in your stuff.

Actually, in our Cash Flow Statement, depreciation and amortization was $20.9 million.

Yeah. Can you separate it out; because I think in past quarters, for some reason, I seem to have it separated out.

At this moment, I would refer you to our 10-Q, which we'll be filing in a week or ten days. So, it will be in there.

Okay. Thanks.

Thank you.

The next question is from T.C. Robillard with Banc of America Securities. Please go ahead.

Thank you. Just on the guidance, specifically going forward, does your--your full-year guidance, does that include or exclude the French tax credits for third quarter and fourth quarter?

It absolutely includes them.

Okay. And does it include it for the second quarter, just the quarterly amount?

Correct. It includes the full amount of the French payroll tax credits.

I'm sorry. So, it includes the retro amount for 2006?

Yes, it does.

Okay. Actually, that's all I have for questions. Thanks.

Great. Thanks, T.C.

We'll go to [Mark Marcond] with Robert W. Baird. Please go ahead.

Good morning.

Good morning, Mark.

I was just wondering, in terms of the UK, are you seeing any pressure in terms of your PTSA business over there in terms of margins?

Not yet, but I also would acknowledge that most--that a good number of our branches are new. They're still in the expansion phase. You heard us just tell you that we had 16% growth in the PTSA business in the UK-Ireland. So, I wouldn't use us as a good indicator yet as to what's taking place in the PTSA marketplace there.

Would you expect margin pressure over the longer term, or do you think that things--conditions are eventually going to get better over there?

I expect margin pressure everywhere, in every line of business, in every country over a period of time. But right now in the world, including UK-Ireland, the margin pressure is less in the PTSA side than it is in the commercial side.

And then with regards to your comments about the pick-up as we start getting out towards the fourth quarter, aside from the projections for GDP and easier comps, are your clients giving you any indication that that's kind of the way that they're looking at the world as well?

As I said before, our customers are talking about beginning projects deep in the third quarter into the fourth quarter. There is never a guarantee that that happens or doesn't happen, but customers are optimistic about forward demand for staffing.

Terrific. Thank you.

Next in line is Ty Govatos with CL King. Please go ahead.

How are you?

I'm doing fine, Ty. Yourself?

Okay. Could you tell us about the trends in the light industrial business during the second quarter? Did it start to stabilize at all?

Yeah. It has been fairly stable. No particular uplift or down tick in light industrial.

Clerical still--

Still roughly the same too. I would say clerical and LID were basically flat for the quarter.

Okay. Thanks an awful lot.

No problem.

And we'll go to Michel Morin with Merrill Lynch. Please go ahead.

Good morning, guys. Can you explain to me, the 40 branches that are being closed in the U.S., what percent of the base is that? Secondly, how should we think about these closures? Are these branches that were losing money, or were they simply opportunities to consolidate with nearby branches? What was the thought process behind that decision?

About 5% of the brick-and-mortar network in the U.S. Most of the branch closings are consolidations, and some are in markets where we have historically lot money and didn't see an opportunity to turn those around.

Okay. You said in your prepared remarks that the scenario is that we are not headed towards a recession. What if we were? Would that 40 branch count--what would that number be? Is there still a second layer that you could be looking at if things were to get worse?

I wouldn't offer speculation along that regard. It depends, as Terry has often said and I'll continue to repeat, no two recessions are the same. We would have to look at how they've--what it's looking like and where's hitting to decide how we would respond.

Okay. All right. That's fair. Then, on the UK--I think you might have mentioned this, but I missed it in your prepared remarks--did you say that there was some margin erosion in the UK, even after having done the restructuring?

We talked about gross margin erosion and the--that continues for the industry--

Okay.

--in the commercial space in the UK, and that has been--that's widely written about. One of the reason is, that while we're defending our core of commercial business in the UK, we continue to move quickly into professional and technical business there.

Okay. As a result of the restructuring though, your overall profitability there presumably is up and consistent with your expectations?

Consistent with our expectations and continuing to improve, yes.

Great. Okay. Thanks very much.

The next question is from [Randall Reese] with Waddell & Reed. Please go ahead.

Good morning. I think that--I apologize for focusing on the weak part of your business because you are doing good things around the world. It sounds like you're doing the right things in the U.S. I'm trying to get a better understanding of what's going on in the U.S. market, because I think that weak spot there is important to determining the future value of your stock. I'm trying to understand whether you can identify the sources of persistent weakness by the type of customer, by the price level, by the size of the engagement, something like that? If there is some segment of the market that has just gone away versus the past cycle, or if you can explain it otherwise? I guess I'm trying to get a better picture of how things in different business segments can be so different from one another.

I think I used the word "perplexing" in there, so I will try to clear up the little bit that I can. Some of it is still uncertain. Clearly, both from the BLS numbers and in our experience, demand is down within large--within the largest customers. Those aren't customers who have gone away. Those aren't customers who have ended whole categories of demand. They're just down. To the best that we're able to sort out a portion of that "down," it's from larger projects not having--we talked about this last quarter also in the IT world--larger projects being delayed, larger projects being pushed out later into the year, and especially those that seem to be capital sensitive. We've seen some delays in our customers from that. Beyond that, it's hard to get much more specific. I don't see a lot of difference by customer segment, whether you're talking about pharmaceutical, or automotive beyond kind of a general depression on automotive employment here in the U.S. from the U.S. companies. But very little that's industry specific. Very little that's temporary category specific. Once you get beyond the notion that large companies have less demand right now, not just for temporary labor but for employment of all types according to the BLS stats, it gets to be less knowable as to what's taking place.

In terms of the changes in your--in the closures of offices, are there geographies that those are specific to, and why were certain markets persistently unsuccessful do you think? Were they more competitive markets or--?

In terms of--a very small number of markets actually exited. Most of it, again, as we talked about, was consolidation of branches. There are markets in the U.S. that have been losing employment and losing population, and that accounted for a good number of those; and historically, if you looked back at a longer period of time, been good markets, but had become less good markets for employment.

Okay. Very good.

That's good; not being particularly articulate there. But you get the idea.

How do you accumulate the information about customers' hiring expectations so that you can draw up a top-down expectation that the market is going to improve later in the year?

When you do about two-thirds of your business with 100 customers, you can actually talk to them just about every quarter.

Very good. Thank you, very much.

(OPERATOR INSTRUCTIONS). We do have a follow-up from Toby Sommer. Please go ahead.

Welcome back, Toby.

Thank you. I just had a question about your uses of cash, seeing if there's any change, because over the last year or so you've divested a couple of non-core businesses and tacked on some interesting but small acquisitions. I was wondering if you think there's going to be any change over time, or the next couple of quarters you think you'll probably do a little bit more of the same?

We've consistently said that we would use our cash for growing the business. We've talked about using the cash for dividends, shareholder pay-out, and that we would be open if the conditions were right to look at share buy-backs. All of those options are still available to us. We've been aggressive in the use of cash, but happily we're generating lots of cash. So, hope that both of those activities continue into the future.

In terms of geography, is anything looking particularly interesting in terms of an area to deploy that cash and maybe increase your presence?

We've continued to say that East Europe is a market--East and Central Europe markets that we need to be more heavily in. We're not done in Asia. There's still several markets where we're either underrepresented or not represented. As many of you analysts ever so kindly point out, we don't yet have a presence in South America, which will have to be addressed in the future.

Okay. Thanks, Carl.

And we'll go to Pete Carrillo. Please go ahead.

Just a quick one. Bill, can you give me an EBITDA figure for the quarter then?

Actually, I don't have that in front of me. But I'll tell you what; I will call you later with it. It certain is derivable from our financials, I just don't have it in front of me.

Sure. Great. Thanks.

We'll go to the line of Mark Marcond. Please go ahead.

I just had a couple of quick follow-ups. First, in terms of North American, are there any geographic differences in terms of the commercial business in terms of areas of strength or softness, or is it fairly uniform?

No, it's not uniform. I mean, GDP performance in the country isn't uniform, and you see staffing correlate pretty closely to that. The manufacturing, especially the automotive manufacturing belt through southern Indiana, parts of Illinois, central-southern Ohio and central-southern Michigan, are in particular taking a very heavy beating. You look at unemployment rates of 6% to 8% in a lot of those areas. You would see staffing demand correspondingly way down. East Coast, West Coast continue to be strong performers for the U.S. economy, and strong performers for staffing.

In terms of--you mentioned that the pricing is holding up. Why do you think that is? I mean, normally when demand starts falling off, we start seeing an increase in terms of price competition. It sounds to me like most of the players have become--

Rational?

--rational with regard to their pricing, but I wanted to get your perspective.

There's been leadership change at some of the companies, which I believe had--put a lot of the downward pressure on. I believe that competition is still very tough, don't get me wrong; but it's more today on service factors, more today on experience with the various types of accounts and meeting their needs, a little less on--a little less on having the absolute lowest price.

And then with regards to PTSA in the U.S., in the areas where you are seeing success, are you seeing any sort of pressures from the perspective of increased wages for your own people?

Our accounts are mark-up accounts, so that as wages go up, a standard percentage mark-up is applied to the wages, whether they go up or down. By the way, they've done both over the last few years. But that doesn't put particular pressure on Kelly.

I meant more from the perspective of your recruiters and your account managers.

No. I mean, it's always competitive for those recruiters in the professional technical space. We've spent a lot of time both recruiting and then retaining those that we've recruited, but I don't see any particular wave of turn-over taking place in the industry--any higher wave of turn-over taking place in the industry.

And a long term question. As we look out to your international business, five years from now--I think going beyond that may be hard to say--but if we look out five years from now, where would you hope international would be as a percentage of your business?

I haven't found five years out to be a particularly easy prophecy window either.

Whatever you feel comfortable with, or however you want to articulate it.

I tend to be more comfortable with aspirational goals. I mean, if you look at the staffing industry, the United States is now about 40% and declining of the staffing industry overall. We would like to have--we would like to have our international presence represent the shape of the industry, so we'd like to see us in the 50% to 60% range within a relatively short period of time. But I'm not going to be particularly bound by that as a numeric goal that has to be hit within a specific number of years. That drives you to doing stupid decisions in a marketplace that may not be supportive of that type of drive. You've seen the actions we've taken in the past few quarters. We're increasing our presence globally right now very quickly, and it's--and we're improving our profitability very rapidly.

Great. Thank you.

Thank you.

We'll go to the line of Michel Morin. Please go ahead.

I noticed also that on the corporate expense line, it seems like you did a very good job there of controlling expenses. Was there a specific effort underway there that would continue into the second half?

Just drove down the money we were spending on investor relations. That helped. No. Kelly has always traditionally been very aggressive at trying to keep costs down. We've often been an industry leader. And an expense as a percent of sales, while you drive into the fee business, those numbers get a little stranger. But we will--we've always looked at the headquarter side as an expense that needs to be controlled, and usually we manage to do so; and every now and then it slips up, and then we have to get back into and see what we have to look at.

Yeah. I would just add that for the first half of the year, our corporate expenses are actually down about 2% to last year. That is very aggressive expense control. I would expect flattish corporate expenses over the next six-month period. Some quarter may be up a little, another quarter may be down a little, but nothing dramatic in either direction.

Okay. That's really helpful. Thank you. On the international side, would it be possible to talk about the month-to-month trends that you saw during the quarter as well?

I don't have that data here.

I would tell you, without having the exact data in front of me, it was relatively stable each of the three months. Furthermore, our international performance between first quarter and second quarter was nearly flat; you know, flat at some very, very high numbers.

If there had been a significant inflexion, we would have told you either way.

Okay. That's helpful also. Thank you. Finally, for the Americas commercial, given the slow down that you saw, kind of, during the quarter, is it possible to talk about what you've seen in early June--in early July?

No. When you have holidays in the mix, I never trust early data in there. You had the July 4th holiday sitting smack in the middle of the week. It takes a little while to see what numbers you're seeing and what type of trend they represent. So, I'm not prepared at this moment to talk about what we're seeing in July.

Okay. And then just, finally, you mentioned that Ayers is not performing as well as you had anticipated. Does that temper your enthusiasm for that line of business as a potential extension?

No. As you well know, from following other outplacement companies, demand rises and falls. In the New York area there was--good news for some people--a lot less lay-offs announced, a lot less activity for them to follow up on. That's just a normal up-and-down cyclicality. I think outplacement is an important part--will be an important part of the Kelly mix as we go forward.

Michel Morin. All right. Okay. Great. Thanks very much. Thank you.

And we'll go to Ty Govatos. Please go ahead.

Question on the minimum wage. Do you anticipate any problems passing those related costs through?

No.

Either at that rung, or whatever effect it has at the rungs above it?

Again, Kelly is a--Kelly is a mark-up account, which means that as wages rise, the mark-up is applied to--mark-up percentage is applied to the new wage base. Since I've been at Kelly, I've seen the minimum wage rise twice, and Terry more times before that. The company has very good procedures in place to implement to pass that on through. But it's not a question of passing the cost on to the customer as wages go up and mark-up is applied. On the other hand, given Kelly's mix of assignments, those who are--those who hit the minimum wage have historically usually for us been 2%, 3% or less of our employment base. It's not a significant event here.

Okay. But even the tiers above that that might be affected, it's still a mark-up type thing?

That is correct.

Okay. Thanks an awful lot.

Thank you.

Mr. Camden, I have no further questions in queue.

Thank you. I look forward to talking to you all later.

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