Kelly Services Inc (KELYB) 2007 Q3 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by and welcome to Kelly Services' third 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.

Thank you. Good morning and welcome, everybody, to Kelly Services' 2007 third quarter conference call. With me this morning to review our results is Bill Gerber, our CFO.

We will follow the usual agenda. We will begin by highlighting third quarter results and strategic accomplishments. I will make a few comments on the current U.S. economy. Following that, Bill will provide more financial commentary on the quarter and provide fourth quarter and full-year guidance. Afterwards, I will discuss performance by business segment and update you on our outlook for the balance of the year and then will open the call for questions.

Let me remind you that the comments made during this call including the Q&A may include forward-looking statements about our expectations for future performance. Actual results could differ materially from those suggested by our comments. Please refer to our 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 the comparison to our reported financial results.

There has obviously been a great deal of uncertainty surrounding the U.S. economy this year. Employment growth, in particular, has been anemic and our America's results this quarter do reflect that. But in spite of the weakness in our largest market, we delivered adjusted third quarter earnings from continuing operations of $0.45 per share, the same as our third quarter earnings last year and at the upper end of our guidance.

Before detailing our third quarter results, let's begin with a quick strategic update. We came out of the gate in 2007 with an ambitious agenda. We promised to invest in more high-growth, high-margin businesses, to diversify geographically, to accelerate the globalization of our Professional and Technical staffing services and to improve our operating margins. We have made good progress year-to-date. Yesterday we announced agreement to acquire access, a recruiting process outsourcing film firm with operations in Germany and Austria. This will position Kelly as a leader in one of the fastest-growing recruitment markets in the world.

In spite of a soft labor market in the U.S., demand for highly-skilled, credentialed temporary workers continues around the world and this quarter we added more than 20 PTSA branches to take full advantage of this trend, helping employers meet their need for engineers, IT professionals, scientific staff, and more. In addition to growing our PTSA and fee-based services and balancing our business mix, we're doing a good job of managing U.S. social costs and as a result of these efforts, our overall gross margin has improved by 80 basis points.

What's more, to demonstrate confidence in our strategic course, the opportunities that lie ahead, and our ability to grow, we took two important steps this quarter. First in August, Kelly's Board of Directors authorized the repurchase of up to $50 million of our company's outstanding Class A common shares over the next two years and during the third quarter we purchased 556,000 shares for $12.5 million. Second, we increased the quarterly dividend. It is 8% this quarter and I should add that Kelly has paid a dividend for 45 consecutive years, a record we're very proud of.

Now a few additional comments on the U.S. economy. With two-thirds of our business located in the states, this remains Kelly's biggest challenge. The U.S. labor market has indeed slowed since the beginning of the year, with declines in temporary employment hitting the U.S. staffing market particularly hard. We have seen year-over-year declines in temporary employment in 10 out of the last 11 months. Further, the U.S. penetration rate for temporary labor has been on a downward trend since peaking in December 2005.

While these trends have served to fuel recession fears, we still do not believe the U.S. is headed in that direction. However, visibility in our industry has definitely shortened from that of previous cycles. Customers are exhibiting different hiring patterns than before and for us, today's economic environment is less predictable. While we're not seeing any indicators that would signify a dramatic uplift in the economy, again, we're not seeing signs that things are getting substantially worse either.

I will discuss our individual business segments after Bill takes you through specific financials in greater detail.

Thank you, Carl. I will start by covering third quarter results. Revenue for the third quarter totaled $1.425 billion, an increase of 2% compared to last year. That is up a bit from the 1.6% growth reported in the second quarter. On a constant currency basis, total company revenue decreased 0.6% compared to last year.

Our gross profit rate in the third quarter was 17.3% and increased 80 basis points compared to last year primarily due to strong growth in fee-based income and lower workers compensation costs. Selling, general, and administrative expenses in the third quarter totaled $226.1 million and increased 8.8% year-over-year. Now, included in the third quarter SG&A expenses are $953,000 of UK and $1.5 million of Americas restructuring costs. Excluding these $2.5 million of restructuring costs, SG&A totaled $223.6 million, an increase of 7.6%. As reported, SG&A expenses were 15.9% of sales. Excluding the restructuring costs, SG&A expenses were 15.7% of sales compared to 14.9 last year.

Earnings from operations in the third quarter totaled $20.8 million. Excluding the restructuring charges, earnings from operations totaled $23.2 million, an increase of 1.1% compared to last year. Other income totaled $587,000 compared to $348,000 last year. The improvement is due primarily to higher interest rates and higher average cash balances.

The effective tax rate for continuing operations in the third quarter was 31.3%, which is higher than the 29.5% rate last year. The increase is primarily due to the favorable resolution of a federal tax audit last year, partially offset by the reinstatement of work opportunity credits this year.

Diluted earnings per share from continuing ops in the third quarter totaled $0.40 per share. Excluding the $0.05 per share of restructuring costs, our third quarter adjusted net earnings were $0.45 per share, unchanged from last year. That's puts us at the higher end of our original guidance of $0.41 to $0.46 per share.

Now I will cover our segment revenue results for the third quarter. Revenue in Americas Commercial totaled $682.5 million, a decrease of 5.7% compared to last year. That is consistent with our second quarter results, which also decreased exactly 5.7%. Turning to Americas PTSA, revenue for the third quarter totaled $277.9 million, an increase of 1.6% compared to last year. Note that is an improvement compared to second quarter, when revenue decreased 1.9%.

Moving on to International Commercial, revenue for the third quarter totaled $412.3 million, a 13.8% increase versus prior year. On a constant currency basis, International Commercial revenue increased 5.8%. International PTSA revenue for the third quarter totaled $52.6 million and grew 40.4%, reflecting both organic growth and the opening of new branches. On a constant currency basis, International PTSA revenue grew 30.3%.

Americas Commercial reported earnings of $19 million. Excluding the $1.5 million of restructuring costs, earnings totaled $20.5 million, a 20.5% decrease to last year. The Americas' gross profit rate increased to 15.7%, 30 basis points higher than the prior year, primarily due to improved workers compensation costs. Americas Commercial expenses, as reported, were $88.4 million, a 2.9% increase to last year. Excluding the restructuring costs, expenses increased 1.1% and were 12.7% of sales, compared to 11.9 last year.

Americas PTSA earnings totaled $14.5 million, a 3.1% decrease compared to the lie. The Americas PTSA gross profit rate of 18.7% increased 120 basis points primarily due to strong growth in fee-based income. Americas PTSA expenses increased 14% year-over-year. Expenses as a percent of sales were 13.5% compared to 12% last year. Expenses increased primarily due to increased staffing costs related to adding perm recruiters. We expect the rate of expense growth will moderate in the fourth quarter.

International Commercial reported a profit of $4.6 million. Excluding the $953,000 of UK restructuring costs, the profit was $5.6 million, a 73% increase compared to the $3.2 million last year. The French payroll tax credits totaled approximately $560,000, or $0.01 per share, in the third quarter. The International Commercial gross profit rate of 17.3% increased 20 basis points compared to last year primarily due to strong growth in fee-based income and the French payroll tax credits. International Commercial expenses increased 14%. Excluding the $953,000 of UK restructuring costs, expenses increased 12.4% and were 16% of sales, compared to 16.2% last year.

International PTSA earnings totaled $950,000, compared to $288,000 last year. The International PTSA gross profit rate of 30.5% increased 540 basis points year-over-year due to very strong growth in fee-based income. International PTSA expenses increased 65%, primarily reflecting new branch openings.

Finally, moving on to corporate expenses for the third quarter totaled $18.3 million, a 14.2% decrease compared to last year. Strong expense controls and reduced bonus accruals accounted for most of the decrease.

Now, shifting to the Company's third-quarter balance sheet, I will add a few comments. Cash totaled $103 million at quarter end, an increase of $26 million compared to last year. Accounts receivable totaled $904 million and increased $26 million compared to last year. For the quarter, our global days sales outstanding were 58 days, an increase of one day compared to last year primarily due to the increase in international business mix. Our short-term debt totaled $75 million, a $17 million increase compared to last year. Most of the increase relates to yen-denominated borrowings we used to fund our investments in Japan.

Finally, a few comments on the Company's cash flows for the first nine months. Net cash provided by operating activities was $49.6 million compared to $59.1 million last year. The decrease was due primarily to growth of working capital. Capital expenditures totaled $33.6 million, compared to $26.1 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 to $48 million, compared to $45.5 million last year.

During the third quarter, we repurchased 556,000 Class A shares for $12.5 million and a total of $37.5 million remains available under the $50 million share repurchase program authorized by the Board in August.

Turning to guidance, as highlighted in the press release, our guidance for the fourth quarter of 2007 is that diluted earnings per share will range from $0.46 to $0.51, compared to $0.56 per share last year from continuing ops. Note that last year benefited from an unusually low 11.3% tax rate. Our guidance assumes that there will not be any significant improvement in Americas Commercial sales trends during the fourth quarter.

Not included in the guidance are the cost of the two restructuring programs. The UK restructuring program is now complete and will not impact the fourth quarter. The full-year cost of the UK restructuring was $6 million, or $0.16 per share. The restructuring of our Americas Commercial operations is now expected to close about 50 branches and cost a total of approximately $2.1 million pretax, or about $0.03 per share. We incurred $1.5 million of costs in the third quarter and expect to spend an additional $600,000, or approximately $0.01 per share, in the fourth quarter.

The fourth quarter effective tax rate will be approximately 36%, compared to 11.3% last year. The significant increase reflects the recording of the full-year 2006 work opportunity credits when the legislation was signed in the fourth quarter of last year. In addition, Mexico recently revised their income tax system, which will result in a one-time increase in the fourth quarter tax rate of about 2%. The go-forward impact of the Mexico change in 2008 and beyond is less than 1%.

For the full year, we expect earnings will range from $1.61 to $1.66, compared earnings of $1.56 per share for continuing operations last year. The full-year guidance also does not include the $0.16 per share of UK restructuring, the $0.03 per share of Americas restructuring 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, the favorable settlement of a federal tax audit last year, and the impact of Mexico in the fourth quarter of this year.

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 48% of our business. The slowing U.S. economy, as I have noted before, continues to negatively affect our sales. The BLS temporary help service employment growth remained negative for the third consecutive quarter with the quarterly trends worsening slightly. Our Americas Commercial revenue was down 5.7% in the third quarter, about the same percentage decrease as that seen in the second. By month, our revenue declined 5% in July and 6% in both August and September.

Our placement fees in Americas Commercial also felt the effects of the slowing economy. Our combined temp-to-perm and direct placement fees exhibited a 7% year-over-year decrease for the quarter, about the same rate of decline seen in the second. We have seen much volatility in placement fee performance for the quarter, with positive growth in July and decreases in August and September.

Looking to the fourth quarter, our reported fee performance will be skewed as we anniversary a large project in 2006, but if we exclude that project, year-over-year performance is expected to be about the same as the third quarter.

Principally on the strength of better management of workers compensation claims, the gross profit rate during the quarter increased to 15.7% from 15.4% last year, and this is our sixth consecutive quarter of increasing year-over-year GP. Summing it all up, year-over-year operating earnings in Americas Commercial were down 21% excluding branch restructuring.

Moving onto the Americas PTSA, which is about 20% of Kelly revenue, revenue was up 2% with earnings down 3% on a year-over-year basis. Our revenue performance is a significant improvement compared to the first half of the year. Revenue declined 6% in the first quarter, improved to minus 2% in the second quarter and turned positive in the third. By month, July was up 2%, August up 1% and September up 2%.

Both Professional and Staffing Alternatives posted positive revenue growth and earnings increases for the quarter. However, our technical business was adversely affected by poor performance of our IT unit. Excluding this one unit, the entire PTSA segment would've reported both positive revenue and earnings increases for the quarter.

Taking a closer look, our technical business makes up about two-thirds of PTSA revenue. Revenues in these businesses were down about 6% and earnings were also below last year. The revenue decline, however, has been improving somewhat throughout the year. After declining 12% in the first quarter and 7% in the second, technical revenues were down 6% in the third. Out of all of the individual technical businesses, our IT business stands out with earnings below last year and revenue declines of about 20% in each of the past three quarters.

We have commented on the underperformance of the temporary staffing side of our IT business for much of this year. We also expected the demands to improve later in the year. However, we now believe improvement in volume will not occur until 2008 and given this, we are repositioning our IT temporary staffing business.

Conversely, our placement fee growth in the IT unit continues solid performance, increasing over 38% in the third quarter. Our remaining technical businesses are performing much better. Revenue growth for these businesses has been improving this year, with the third quarter about flat to last year and in addition, we've seen earnings increase nicely for the quarter.

Turning to Professional, which represents about 20% of Americas PTSA revenue, year-over-year revenue grew more than 8% and earnings posted strong improvement. Most notable was the performance in our finance and healthcare businesses, with both posting revenue and earnings increases in the quarter. CGR/seven, our creative staffing business, added about 50 basis points to the year-over-year PTSA revenue growth and yielded positive earnings contribution for the quarter.

Finally, Staffing Alternatives, representing about 15% of PTSA. These businesses posted revenue growth of 28%, a significant improvement from the 13% growth seen in the first half of the year. Earnings were also nicely positive for the quarter, a significant recovery after being down about 40% during the first half of the year. Our Management Services and HRfirst businesses both delivered double-digit revenue and earnings increases in the quarter and we're very pleased to see the improvement in each of these units.

We are also especially pleased with the continuation of the growth in PTSA placement fees. Placement fees grew over 50% in the third quarter, slightly higher than the increase we saw in the first half of the year and we are expecting strong fee performance for the remainder of the year.

The PTSA gross profit rate improved to 18.7% in the third quarter, compared to 17.5% for the same period last year. The improvement was fueled by strong fee growth, lower state unemployment costs, and the acquisition of CGR/seven.

Expenses as a percentage of GP were up year-over-year primarily due to our strategic investments, including the acquisition of CGR/seven, the addition of recruiters, and the positioning of our IT business. These investments are already yielding positive growth in placement fees as well as contributing to higher revenue growth in several of our individual business units. Expenses as a percentage of GP in the third quarter are about the same as that seen in the first and second and we expect to see an improvement in the fourth quarter. And we also expect, as Bill noted, to see the expect growth rate to moderate in the fourth quarter.

We are disappointed that Americas PTSA reported lower earnings this quarter, but we are seeing success in the majority of our businesses and we expect to return to positive earnings growth in the fourth quarter.

Let me quickly update you on our branch restructuring efforts in the Americas. As you may recall, last quarter we announced plans to close approximately 40 Commercial branches by year-end. In the third quarter, we incurred a little over $1.5 million in costs related to the closure of 42 branches. In the fourth quarter, we will close a few additional branches at a cost of roughly $600,000. We plan to redirect resources and retain a substantial portion of the revenue from the closed branches, but at the same time, we do anticipate annual cost savings of around $2 million a year beginning in the fourth quarter.

Now let's return to our International operations. Overall, this was another very good quarter for International. Reported revenue increased over 16% and on a constant currency basis, revenue was up 8% and fees were up over 30%. Excluding the cost of our UK restructuring, earnings improved by $3 million, or 86%, over our third-quarter earnings last year. We're very satisfied with the solid sales and earnings growth in International and pleased with our International development strategy.

Let's look at the segments in detail. Overall, International Commercial revenue increased roughly 6% in constant currency. We remain encouraged by positive trends seen throughout continental Europe. Sales in the UK, Ireland were flat, which is consistent with our performance last quarter. Russia, Germany and Denmark all experienced growth greater than 20%.

A few quick comments on our UK operations. While our restructuring efforts are relatively new, we're pleased with the outcomes so far. We've completed the project on time and within budget, closing 22 branches and consolidating three headquarters locations. We expect to realize an annual cost savings in the range of five to $6 million beginning in the fourth quarter, a relatively short-term 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. The UK is one of our largest markets, with annual revenue of approximately $475 million, or 8% of total company sales.

Our Asia-Pacific region saw continued growth in its Commercial business of over 20%, helped by our acquisitions of Tempstaff Kelly and P-Serv. For quite a few quarters now, we have seen good growth in fees in International Commercial, with fees growing nearly 9%. Particularly strong fee growth was seen in continental Europe, with growth over 50% led by the performance of Russia, Norway, Italy, Switzerland and Germany.

International Commercial's gross profit rate was 17.3%, up 0.2% compared to the same quarter last year. This increase is being driven primarily by European fee growth and the final quarter of French social security credits, both somewhat offset by the erosion in our UK Commercial margins.

The final segment is International PTSA. Sales in International PTSA increased more than 31% in constant currency. Sales in European PTSA increased 21%, with UK/Ireland increasing over 16%. We are taking advantage of the Professional higher-margin business opportunities in international and, as mentioned earlier, yesterday we announced that we signed an agreement to acquire access, an RPO with a presence in Germany and Austria.

Our Asia-Pacific region saw growth in its PTSA business of 82% primarily fueled by our operations in New Zealand and Singapore. If you exclude our recent acquisitions, growth still would have been over 50%. We've also seen exceptional growth in fees in International PTSA, with fees almost doubling. Countries with exceptional performance included Singapore, Russia, Norway and New Zealand.

International's gross profit rate was 30.5%, 540 basis points better than the same quarter last year. This improvement is being driven primarily by the exceptional growth in perm fees.

It is clear that much of Kelly's success this year has been driven by the performance of our International operations and for this we're pleased. I wish we had an equally clear vision of how the global economic cycle is going to play out over the next year. While there is weakness in general staffing in the U.S., currently the professional and technical part of the industry is doing relatively well. The unemployment rate has remained historically low. Moderate wage inflation is continuing. Employment opportunities for those with college degree are excellent, as evidenced by the very low 2% unemployment rate for this group.

Hiring continues across the vast majority of disciplines, including education services, health care, finance, law just to name a few. Globally, the economic picture remains positive. In Europe, the market seems to be on solid ground and in Asia, the expansion continues. There is an ongoing need for professional and technical workers around the world.

We continue to believe that the demand for temporary employees here in the states will accelerate as GDP improves and larger companies resume adding to their payrolls. And in turn, Kelly should ultimately see U.S. revenue and earnings growth pick up.

Right now, our sights remain focused on investing and expanding in all the right markets. You should look for us to continue to reduce our U.S. dependency, gain greater scale internationally, accelerate PTSA staffing around the world, add more fee-based businesses to our mix, acquire new complementary businesses to our portfolio, continue to carefully manage our expenses and improve our operating margins, thereby positioning Kelly for long-term growth. These actions will translate into lasting value for our shareholders.

I hope you'll agree that we are accomplishing a great deal this year. Count on us to keep up the momentum as we closeout 2007 and enter 2008.

This will end our formal comments, but before an open the cause your questions I would like to recognize Bill Gerber for his contributions to Kelly. As many of you know, in August, Bill announced his plans to retire as CFO of Kelly Services at year-end, the position he's held for nearly 10 years. All of us are grateful for his service and commitment and I am sure you'll join us in wishing him well.

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. 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, JPMorgan.

Thanks. Congratulations to Bill on retirement and definitely good luck.

Thank you.

Could you talk about the confidence that you guys have that despite the slowdown in temp demand, that we will avoid recession and the confidence that demand for temp will increase?

I can talk about it. We are at a -- I have seen all of you all's writings and you have seen a variety of writings. We are at a very unusual time. There has not been this level of decoupling of temporary growth and penetration with GDP rate in as far as we can track back in the history of the BLS statistics. Our customers' forward views are no more pessimistic, no more optimistic. They're kind of equally balanced, kind of running forward.

We have seen continued strong demand in the professional and technical space. Basically, all of our units except IT performing very well on a year-over-year basis. So in the professional and technical space, it is clear there is still a continuing uptick in demand. In the Commercial space, it now seems to be running, to steal a line from others, we're basically flattish, running stable, just below last year at about somewhere between, for us, between a five to 6% rate with no signs of a downturn coming.

What we have typically seen, if there is such a thing is typical, but what you have typically seen in front of a recession is customers shortening their forward demand, canceling orders for temporary staffing. Those types of activities are not taking place. Overtime hours are stable. The light industrial distribution business has not collapsed like it did in front of the last recession. So I think that we tried to carefully say is we seen no signs of a downturn, but nor do we see any signs in the short run of a dramatic uplift in demand.

Okay, great. Can you give perm as a percent of either gross profit or total revenue for the total company and for U.S.?

We will have that precise number in our 10-Q filing. Again, I would say less than 3% of total revenue is a good aggregate number and will have the specifics in the Q.

Okay, great. Thanks a lot.

Tobey Sommer, SunTrust Robinson.

I was wondering just along the same lines of the previous question if you could maybe comment on specific end market kind of visibility that you have and I had three areas in mind. On the consumer products side, what product launch schedules looked like as far as your visibility over the next six or nine months. Then I was curious about the visibility you have into call center demand and then maybe light manufacturing as well.

Let me parse those out, Tobey, if I can. Call center demand in the U.S., people have been reporting, and we wouldn't show any different results, a small diminution in call center demand throughout the U.S. And I do not see anything that suggests a sharp downturn or sharp upturn in call center demand. Right now it is behaving normally seasonally, which means employers are beginning to staff up as they should for the holiday season with training and so on to have a greater support system in place for holiday sales.

In terms of product launches in general, as we talked about last quarter and I would continue to say without specifically talking about product launches, but in general, customers are not as intensely engaged in large projects as they were, and that has been a particular driver, as we have talked about it in our IT business being down on a year-over-year basis. In light manufacturing, we are -- we do not have particularly good visibility into that. Our light industrial business is more in the distribution side and less in the manufacturing side.

Right, thank you. Then just one little bit of color on the UK operations. If you were to adjust for the branch closures, etc., is it your sense that the market in UK and Ireland is growing? If so, kind of what would be the delta between Kelly's performance and what you would assess the market to be doing?

I cannot tell yet on the UK, because if you piece together all the different parts of our presentation, we were up 16% in PTSA in the UK. We were flat overall, which means then, obviously, we were negative in the Commercial space. But there was so much Kelly repositioning going on in our own operation I would not draw conclusions about what is taking place in the UK. After we finish up with the earnings season, we will all have a good picture as to what is taking place in the market. But in general, I think that the Commercial business in the UK for the industry is still somewhat negative on a year-over-year basis.

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

T. C. Robillard, Banc of America Securities.

Just real quick on the U.S. business, if we take the assumption that the U.S. economy just continues to kind of muddle along as is, and I think you guys have kind of a stable revenue pattern there with your restructuring benefit, how should we think about the operating margin then as we go forward in terms of what you guys will be able to add for cost savings?

The goal is obviously to continue to increase operating margins. We will see how the -- we have to see how the year plays out. What you should be looking for if nothing changes is stability in the Commercial operations, some improvement in the expense base, which you correctly noted, and what you have seen is an upturn in the Americas PTSA business, which should contribute positively both to operating margin and total profits in the Americas.

Having said that, I also carefully noted that visibility is short right now as to what is taking place. That is the game plan, which is what I think you were asking.

Yes and I guess if we look at -- I think the Americas blended was roughly about 4% in terms of an operating profit if you back out the restructuring charges. As you look at kind of cost savings going forward, is that more likely a more normalized kind of 5% type of margin? Again, I know the revenue side is always a wild-card, but if we just assume that there is -- it hits your plan, like you said, there some stability in Commercial, some uptick in PTSA?

I would just add that the cost savings of a couple million dollars are relatively small on a fairly significant expense base. Your logic is correct. I just think the effect would be relatively small.

Okay, great. Thank you so much.

Michel Morin, Merrill Lynch.

First of all, thanks very much for the additional disclosure in terms of the individual countries. That is very helpful. My first question is actually related to that. I was wondering if you could talk to us a little bit about what is going on in Italy. I was surprised to see that you were down there in constant currency terms.

Correct.

Yes, Italy, we have been looking at our kind of our overall position in the marketplace and what business do we want to be in. The reason you're surprised is there's been strong growth in Italy for most of our competitors. We're in the process of redefining customer base there and that would account for the negative number that you are referencing.

All right. And then in the UK, it sounds from your prepared remarks that obviously it still remains very challenging environment. Is it fair to say that post your restructuring efforts, you're still not making any money there?

We basically have stated in the past that we lose a material amount of money in the UK. We stated that we will make improvements in that loss position beginning in 2008.

Okay, great. Last thing is regarding your perm business in the U.S., you had very strong results in PTSA. How did that trend during the quarter, specifically within U.S. PTSA? Because other competitors have noted that maybe July was relatively weak. Is that something you have seen as well?

We did not release the specific growth rates by month, but I can tell you there was no discernible trend either positive or negative.

We would have talked about it if there had been acceleration or deceleration. There was not.

Great, thanks very much.

Mark Marcon, R. W. Baird.

Bill, I wanted to wish you all the best in your next stage.

Thank you very much. I appreciate that.

He's not certain about his decision to live part of the year in California, given the events of the last few days here.

I will bring a fire extinguisher.

I guess it won't be during the summers -- (multiple speakers). A couple of questions. With regards to U.S. Commercial gross margins, you had an improvement. How much of that was due to workers comp improvements as opposed to an improvement in terms of pay bill ratios?

There is no question that a large part of it was in fact due to improved workers comp. That was the point or making. We increased 30 basis points. That was the largest single factor in driving the 30 basis points.

Did you see an improvement in pay bill?

Yes --

But again, the pay bill concern for us is a -- we're on a fixed market bases with the overwhelming majority of contracts. They're long-term contracts, so movement is slow there.

Okay, then with regards to -- you have noted that we have had this decoupling in terms of U.S. GDP growth relative to the growth in Commercial Staffing in the U.S. I am just wondering from a longer-term perspective, let's forget the last couple of quarters, but as you look out, do you think there is just a secular change that is occurring with regard to just the overall level of employment in terms of manufacturing as well as administrative positions that you would typically fill in these Commercial positions and therefore, that it is not really realistic to expect us to see the types of growth rates that we have historically with the Commercial business?

We had long discussions on that topic at both recent Fed meetings and Department of Labor meetings with no particular agreement, in case you're interested as to what is going on. I will give you dominant hypotheses.

I would like to know what you think.

I think there has been a -- I think classes of employment of moved permanently out of the United States and I think that in the process of companies trying to be cost competitive in light manufacturing, in particular, I think that there were a group of jobs that spiked up in the use of temporary labor as an attempt to maintain them here and then ultimately, the wage difference and so on finished moving them outside the of U.S.

I think that we've seen a steady decline in administrative personnel, for sure. For the last ten years, administrative assistants and secretaries have always been on the top five list of declining professions at the Department of Labor. I think that continues and will continue for a while. With specialty clerical support positions like call centers and others, for a while moving up, but it is now stable.

So I think when you look at the unemployment rate in the non-college-educated workforce in particular, it is heading back towards double digits and I think that that group is going to find increasing difficulty finding employment in the United States and I think that will serve as a drag on the lower end of the Commercial business. What is taking place is a dramatic increase in the penetration rate in the Professional and Technical categories, but that is not enough to offset what has been a decline in the lower end of the Commercial space.

On the lower end of the Commercial space, would you expect that the growth rates, even if we have a rebound in terms of GDP growth, it will remain fairly tepid and so, therefore, when we think about things from a longer-term perspective, say five years and out, we should really think about investments and growth coming, at least in the Americas, on the PTSA side?

Most analysts, including myself, have said that in the longer term employment growth in the country in general and for staffing firms in particular is going to come from college-educated credentialed positions, which in our world is the PTSA.

Okay, great. Thank you.

Andrew Steinerman, Bear Stearns.

Could you just walk us through the difference between the reported $0.40 for the quarter and the guidance $0.46 to $0.51 for the fourth quarter? How much of that is a normal seasonal pickup? How much of that his share buyback? How much of that pickup is from some of the early benefits of your restructuring?

Let me try and parse that. The reported $0.40 included $0.05 of restructuring, so if you will, add that back, you're starting at $0.45. As we move into the fourth quarter, first I'll tell you what it is not. There is a small impact due to repurchase of stock. We have not yet made any decisions about additional repurchases, but based upon the 556,000 shares repurchased so far, there will be a small positive effect in the fourth quarter, but less than $0.01 a share. Really the seasonal lift, we're not expecting a lot of seasonal lift particularly in Commercial. There will certainly be some, but I think you'll see that our comments were fairly guarded in terms of expecting improvements in Commercial, and that is both year-over-year as well as sequential. So --

And benefits from your restructuring efforts, does that impact the fourth quarter?

Yes, it does. We are expecting expense improvements in the UK because the restructuring is now complete. And we are also expecting some expense improvements in U.S. because we have completed 42 out of about 50 of the branch closings. We are also expecting continued strong growth in International and particularly International PTSA. I think mathematically those will get you there.

Right and what you just said is enough to move the needle in terms of pennies or no -- in the quarter, Bill?

The combination of all of those are significant enough to get us to the $0.46 to $0.51 that we are providing.

Thank you. I appreciate it.

(OPERATOR INSTRUCTIONS) Tobey Sommer.

I was wondering if you could tell us what your thoughts are regarding capital deployment at this stage. You did purchase a decent amount of your own shares in the third quarter, just stated that you're not sure about what the timing may be near-term regarding that. And you also had an acquisition announced, so among the different areas that you can deploy your cash, what are your current thoughts in this environment?

Acquisitions continue to be a viable option, as you have seen. We maintained a very good pace this year. We have a two-year authorization on the stock buyback, with the stock trading at near book value. That is obviously a very attractive option for us. We are in a very strong cash position, so we have continued to invest in branch openings, as you've seen with us talking about opening 20 PTSA branches over the quarter. I see all three of those options as good possibilities as we move into the fourth quarter.

In roughly equal size in terms of cash deployment?

Good try, but, we will see how both the quarter unfolds and the opportunities in front of us.

I was just taking advantage of my follow-up, Carl.

No, it was good. I appreciate it.

Mr. Camden, no further questions in queue.

Thank you, John, for moderating. Thank you all for attending the conference and look forward to chatting with you all over the next few months. Goodbye.

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