Kelly Services Inc (KELYB) 2009 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to Kelly Services third quarter earnings conference call. All parties will be in 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 Chief Executive Officer. Please go ahead.

Thank you. Good morning and welcome to Kelly Services third quarter conference call. Before we begin let me review today's agenda. I will start with a few comments on current economic and labor market conditions, then address Kelly's earnings for the quarter as well as our performance by individual business segment. Following that Patricia Little, our CFO, will take you through the financials and detail the actions we've taken to reduce expenses. We'll conclude this morning with a few comments on what we're doing to strengthen Kelly's competitive position during what has been a difficult period, then we'll open the call for questions.

Let me remind you that any 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, and please refer to our 2008 10-K for a description of the risk factors that could influence the Company's actual future performance.

While the global economy remains difficult for the staffing industry, the third quarter concluded with more positive underpinnings than when we reported our second quarter results. At that time we talked about seeing some early signs of stability, and I'm pleased to report this moderating trend continued for the third quarter. While there's been no big bounce, it's fair to say conditions and trends over the past few weeks are slowly and modestly improving. I think it's unambiguous that we're now in the early stages of our economic recovery, with staffing market beginning its upturn. As I read this quarter's earnings announcements and forecasts, it's clear that the pace and sustainability of this recovery remain uncertainty. As you know, it's fairly typical for noise, confusion, and conflicting data to accompany the initial period of any recovery, and that's been the case thus far. The fact of the matter is, the fundamentals of the global economy are showing improvement.

For the staffing industry job creation will bounce around a bit, good numbers in today's BLS report, even in a growing economy. Given the length and depth of this recession, employers are understandably wary about increasing their workforce too quickly. Unemployment will probably continue to nudge upward for awhile longer as companies adjust. What's more, employers are adding back hours for their existing employees and bringing back their own furloughed workers before they begin to hire, all of which means that demands for new jobs, including temporary staffing, could be moderated for awhile. Since December 2007, when the recession began, the US economy lost about 7.2 million jobs, or 5.2% of the workforce. But since mid-year, the rate of job loss has been steadily slowing. The third quarter, particularly in August and September, showed the fewest number of jobs lost this year, and again the October report showed an even lower rate of job loss. Professional and business services, a large sector representing 16.6 million employees, lost only 18,000 jobs in October.

The temporary staffing industry is also showing modest improvement. In this recent report this morning, we showed a 34,000 increase in the number of employees in the temporary services category. In fact, we've now had two months in a row where we're seeing an uptick in the temporary penetration rate. This month it was 1.37%.

There are other positive signs. Kelly has now experienced five consecutive months of increased demand in our light industrial staffing. And office clerical seems to have reached the bottom. As we move into the fourth quarter, LID continues to show some seasonal momentum, as does our educational staffing. While our sales remain significantly behind last year, we are seeing some improvement. The third quarter brought nearly a 2% sequential increase in revenue, and our perm placement and temp to perm conversion fees moderated compared to the second quarter's decline. Nevertheless, shifts in business and customer mix, combined with fee decreases, negatively impacted our profit margins for the current quarter on a year-over-year basis.

Given the current environment, it comes as no surprise that Kelly's financial performance was again adversely affected. For the third quarter we reported a loss from operations of $28 million. That compares to a $15 million operating loss in the third quarter of 2008. This economy has tested us like no other time in Kelly's history, but our losses have been lessened by our significant cost-cutting actions. Patricia will provide you with an update of those initiatives and talk more about the effect they've had.

But first, let me review the operating results by business segment beginning with America's Commercial which represents 45% of our revenue. Reported revenue in America's Commercial fell 25% year over year in the third quarter, a slight improvement from the 28% decline in the second quarter. The year-over-year decline improved each month during the quarter. Sequentially, revenue in the third quarter was about 1% lower than that in the second. This compares to a sequential drop of roughly 5% for the same period last year. On a positive note, our government business has been growing sequentially for several quarters now, and further, we reported last quarter that we had seen the start of sequential improvement in light industrial staffing. This upward trend accelerated in the third quarter and has continued through October. And in the last several weeks, our office staffing activity has stopped falling, and we are seeing the beginnings of a slight sequential build.

Our combined temp to perm and direct placement fees were down 61% year-over-year for the quarter, a slight improvement over the 71% year-over-year decrease in the second quarter. On a sequential basis, placement fees in the third quarter were up 26% compared to a very anemic second quarter. And about the same as in the first quarter. The sequential growth in our conversion fees exceeded that of direct hire fees. We're encouraged by the improvement. You'd expect that placement fee performance will be volatile over next several quarters and lag that of our temporary staffing activity.

Kelly's gross profit rate continues to be negatively impacted by the year-over-year drop in placement fees and the growth in light industrial staffing. For the current quarter the gross profit rate was 14.4%, or 90 basis points lower than the same period last year. Sequentially, this represents a 50 basis point drop from the second quarter of 2009. This decline was primarily due to business and customer mix. Particularly the growth in our light industrial business and the seasonal drop in our educational staffing, as well as higher Workers' Compensation costs resulting from fewer favorable adjustments to prior year claims in the third quarter.

We remain highly focused on tight expense control in our America's Commercial segment and have reduced spending this quarter by about 19% compared to last year. Sequentially, expenses in the third quarter are about 1% lower than our spending in the second quarter, and during the quarter we incurred roughly $1.3 million of severance and $400,000 related to the closure of 16 additional branches. We continue to rationalize our branch network. Negative expense leverage on the 25% revenue decline resulted in a year-over-year loss of nearly $600,000. However, let me point out that in spite of this very difficult economy, and the slight sequential drop in revenue, America's Commercial has remained profitable in all three-quarters this year when you exclude employee and lease termination costs.

Now on to America's Professional and Technical representing about 18% of Company revenue. PT revenue dropped by 18% for the quarter, slightly better than the 21% downturn we experienced in the second quarter. Intra quarter, year-over-year revenue was down about the same each month. Sequentially, revenue in the third quarter was about 1% lower than that in the second, last year the sequential drop in the third quarter exceeded 4%.

Taking a closer look at our PT segment, for the third quarter we saw low single digit sequential growth in our science, IT, and engineering businesses. Our healthcare and finance businesses showed the largest sequential declines as our customers continue to retrench. Combined temp to perm and direct placement fees for professional and technical were down 57% year-over-year for the quarter. This is about same as the year-over-year decline we saw in the second quarter. Lower year-over-year fee performance is found across all of the PT businesses and sequentially placement fees were down about 3% compared to the second quarter. Direct hire fees held up better than conversion fees.

For the entire segment, our gross profit rate was 15.4%, down 120 basis points from the same quarter last year, and down 110 basis points in the second quarter. The year-over-year decline was attributable to lower placement fees and customer mix. The sequential drop was due to customer mix and weaker performance in our higher margin businesses. As you may recall from our second quarter comments, our law business completed several short-term projects in the second quarter, positively impacting that quarter's GP rate. For the quarter, expenses decreased by 15% year-over-year, and sequentially we were successful in reducing our spending by an additional 3% in the quarter. Our expenses are now at the lowest level in the last seven quarters and included in the third quarter expense is $200,000 of employee and lease termination costs. PT earnings were down 53% in the third quarter, about the same as the 54% decline we experienced in the second quarter, but we are pleased to post solid earnings on lower revenue.

I will now turn to our EMEA segment which comprises 25% of our revenue. After seeing significant revenue declines in EMEA commercial for much of the year revenue seems to have stabilized in the third quarter. On a sequential basis, reported revenue for the quarter increased 8%, and 3% on a constant currency basis. Reported revenue was down 36% in the third quarter, compared with the prior year, and on a constant currency basis revenue was down 30%. For the remainder of my EMEA discussion, all revenue results will be discussed in constant currency.

During the last 12 months, eastern Europe has been holding up better than western Europe. More recently in the third quarter we saw sequential revenue increases in some western European countries, particularly France, Switzerland, and Germany, and the UK was about flat sequentially. However, continued slowing in Russia this quarter negatively impacted eastern Europe. Turning to fees, revenue was down 60%. This was primarily driven by fee declines in the UK, Russia, and Switzerland. The quarterly G P rate was 14.9% compared to 17.8% last year and 16.2% for the second quarter. The year-over-year decrease was mainly driven by the reduction in placement fees and the French Social Security credit received in the third quarter of last year. In addition, we are seeing the effects of pricing pressure, primarily in Russia, as well as shifts in business mix across much of the region, which accounted for the sequential drop in GP from the second quarter.

Excluding the Portugal acquisition, expenses were down 34% year-over-year. Expenses were down 1% sequentially from the second quarter. This is a direct result of our continued focus on branch consolidation, workforce reductions, and ongoing productivity improvements. EMEA Commercial reported an operating loss of roughly $5.6 million for the quarter which includes $1.7 million of employee and lease termination costs, and this represents a sequential decline of roughly $300,000 compared to the last quarter.

EMEA Professional and Technical, which is about 4% of total Company revenue, improved this quarter, increased on a sequential basis by 10%. On a year-over-year basis revenue was down 11%. We are still seeing double-digit growth in Switzerland and Germany. Fees in this quarter were down compared to last year by 34%, or down 42% excluding the acquisition of Toner Graham. The gross profit rate in this segment was 27% for the quarter, compared to 29.3% last year. This decrease is due to lower perm fees. On a sequential basis the GP rate was up slightly from the 26.6% in Q2.

PT expenses declined by 20% compared to a year ago. Excluding acquisitions expenses were down nearly 26%. On a sequential basis expenses were down 2% in the third quarter compared to the second. EMEA's operating earnings were at a loss of $132,000 compared to a profit of $417,000 last year, but this represents a sequential improvement of almost $1.2 million compared to last quarter.

Our APAC region which comprises 7% of total Company sales is also seeing encouraging signs of economic growth and labor market stabilization. On a sequential basis commercial revenue in APAC increased 7% during the third quarter compared with the second, or 2% on constant currency basis. Year-over-year revenue was down 16% for the quarter, and on a constant currency basis revenue decreased 12%. The gross profit rate was 14.5% compared to 17.3% last year, a 280 basis point decline. The decline was largely due to the reduction in perm fees in Australia, New Zealand, Singapore and Malaysia. The GP rate was, however, down very slightly sequentially from Q2.

Losses from APAC Commercial operations were $1.2 million compared to a profit of $200,000 in the third quarter last year. Professional and Technical staffing also showed signs of stabilizing. Sequentially third quarter PT revenue grew by 17% over the second quarter. On a year-over-year basis PT revenue declined 30% for the quarter and on a constant currency basis revenue declined by 28%. Gross profit declined by 90 basis points year-over-year in the quarter to 30.3% and down 120 basis points from the second quarter. The year-over-year decline was primarily due to reduction in fees, while the sequential decline was mainly attributable to shifts both in both customer and business mix. APAC reported a loss in the quarter of $400,000. On a combined basis expenses for the APAC region during the quarter were down 20% year-over-year.

Our final segment is our outsourcing and consulting group representing 5% of total Company revenue. OCG revenue decreased by 5% in the third quarter compared to same period last year but on a sequential basis improved 5% from the second quarter. And I'm pleased that all three regions of OCG achieved quarterly sequential improvement. On a year over year basis Europe and Asia continue to exhibit the large declines of 23% and 19%, respectively. However, this was a significant improvement over the second quarter declines. The Americas OCG revenue declined by 3% in the third quarter on a year-over-year basis.

As we've seen for much of the year revenue declines were most pronounced in our recruiting process outsourcing practice in both the US and Europe and our executive placement business in Asia. I am encouraged that we're now starting to see pickup in RPO activity from existing customers along with new account wins. Our executive placement practice is also showing credible signs of improvement with third quarter increasing sequentially by 22% compared to the second quarter. On the other hand, the Ayers Group, our career transition and outplacement unit, reported year-over-year growth of 7%, down from the 36% growth we saw in the second quarter. OCG's total gross profit rate was 26.1% for the quarter compared to 32.8% for the same period last year. Sequentially this represents about a 290 basis point drop from the second quarter. The reduction is attributable to shift in business mix as revenue is growing faster and the lower margin BPO businesses compared to the higher margin units such as RPO and CWO. In addition, our margins within RPO have declined both year-over-year and sequentially due to customer mix.

For the third quarter 2009 expenses were down 5% year-over-year and on a sequential basis expenses were 2% lower than the previous quarter. We continue to look for ways to rationalize our cost structure without jeopardizing our ability to meet future customer demand. On a combined basis, OCG lost $3 .7 million in the quarter, slightly higher than the $3.2 million loss in the second quarter.

And now I will turn the call over to Patricia who will cover our quarterly results for the entire Company.

Thanks, Carl. I will start with our third quarter operating results. For the quarter, revenue totaled $1 billion, an increase of 2% compared with the second quarter but still down significantly compared to the prior year. During the quarter we saw sequential increases in EMEA, APAC and OCG while the Americas was still down slightly. Our gross profit rate was 15.8%, a decrease of 180 basis points compared to last year. The decrease was caused primarily by significant decline in fees as well as a reduction of our temporary margin. Worldwide, our fees declined 48% year-over-year which compares to a 52% year-over-year decline in the second quarter.

Our average temporary margin has been impacted by shifts in our business and customer mix as light industrial's proportion of our business increased compared to clerical, and as large corporate customers' proportion increased compared to retail. This is just what we would expect at this point in the economic cycle.

Moving on to selling, general, and administrative expenses, our expenses were down 26% or $66 million on a year-over-year basis. During the quarter, we revised our estimates of the ultimate costs of open litigation and as a result, increased our legal reserves by $4.3 million. In addition, we have continued our efforts to reduce our cost structure and as a result incurred an additional $4.4 million of lease and employee termination charges. These charges totaled $0.17 per share. I want to point out that last year's third quarter included a $22.5 million charge for litigation expense as well as $2.2 million of lease and employee termination charges. These charges in last year's third quarter totaled $0.46 per share. Excluding these items, we were successful in reducing our SG&A costs by 22% or $51 million on a year-over-year basis. Sequentially, expenses were down $4 million or 2%.

Also, excluding legal and lease and employee termination charges, expenses were down in every segment year-over-year. SG&A expense decreased by 19% in the Americas, 33% in EMEA, 20% in APAC, 5% in OCG, and 11% in our corporate headquarters.

Let me take you through detail of where we have reduced our costs using the same format from last quarter. First, the structural reductions we take as we continue to right-size our business by evaluating our operations around the world and reducing the number of permanent employees in branch locations, as appropriate. Over the past five quarters we have reduced the number of full-time employees by approximately 1,600 people, and we closed, sold, or consolidated about 130 branch locations. This is an additional 300 people and 30 branch locations compared to last quarter. We have made changes in virtually every operation around the world, with the more significant adjustments occurring in the US and Europe. These structural actions reduced our year-over-year SG&A costs by $31 million in the third quarter before the associated severance and lease termination expenses. We are not done in this area and will continue to reduce activities in locations that we believe will not impair our ability to compete as the global economy strengthens.

Second, as I have discussed in prior quarters, we have taken a number of compensation related initiatives. These non structural initiatives improved our year-over-year costs by $7 million in the third quarter. Year-over-year they have a slightly smaller impact than last quarter because we started to draw down variable compensation in the third quarter of 2008 as the economy contracted.

Third, we have reduced discretionary costs in areas such as travel and recruiting. These actions, which will tend to reverse as business picks up, are worth $8 million in the third quarter. And finally, foreign exchange accounted for $6 million of the cost change year-over-year.

To summarize, SG&A costs were down by $66 million in the third quarter of which $6 million was exchange. Structural reductions accounted for $31 million but were partially offset by higher severance and lease expenses of $3 million. Compensation initiatives totaled about $7 million, and other discretionary savings accounted for $8 million, partially offset by $1 million related to prior year's acquisitions. The remaining improvement is the year-over-year change in litigation expense of $18 million. In this environment, Kelly's success will be dependent on our ability to both grow with our customers while simultaneously reducing costs.

Moving back to the third quarter results, our loss from operations was $28 million, compared with a loss of $14.5 million in 2008. Excluding legal and employee and lease termination charges from both periods, we had an operating loss of $18.7 million in 2009 compared to operating income of $10.1 million in 2008. Income tax benefit in the third quarter was $14.8 million on a pretax loss of $29.6 million. The third quarter tax rate benefited from non taxable income from the cash surrender value of life insurance policies used to fund the Company's deferred compensation plan and from deductible foreign losses. Diluted loss per share from continuing operations totaled $0.43 per share compared to a diluted loss per share from continuing operations of $0.33 in 2008.

Turning to the balance sheet I will provide a few highlights. Cash totaled $91 million, down $27 million compared to the $118 million we held at year end. During the three-quarters we repaid $35 million of debt. At the end of the third quarter cash exceeded debt by $10 million, an improvement of $7 million compared to year end. Accounts receivable totaled $707 million and decreased approximately $108 million compared to year end. For the quarter, our global DSO was 52 days, up one day compared to the prior year. Debt of $81 million is down $34 million compared to year end, primarily due to the repayment I noted earlier. At the end of the third quarter, debt to total capital was a conservative 12%.

You may recall that we missed our debt covenants for the second quarter and received waivers on all of our outstanding debt agreements. During the third quarter we completed negotiations on a new revolver and entered into a three-year agreement that provides us with $90 million of committed funding capacity. The new facility is secured by our general assets in accounts receivable. The covenant structure has been altered to provide the Company with additional flexibility to restructure the business. We also amended our long-term loans to make the covenant structure and pricing match the revolver. Maturities remain the same. We are in the process of completing an additional $100 million securitization facility with one of our banks. The project is progressing well and we expect to complete it in the fourth quarter.

Turning to our cash flow, net cash provided by operating activities was $41 million compared to $86 million last year. Although we continue to benefit from reductions in working capital the deterioration in operating earnings has had a significant impact on our cash from operations. I'm encouraged by the signs of economic improvement that Carl noted. However, until the pace of the recovery is more clear we will continue to focus on adjusting our cost structure while preserving our ability to compete.

I will turn it back over to Carl for his concluding thoughts.

Thank you Patricia. As I mentioned earlier, we believe that we are in the early stages of the staffing recovery, and as typical in the early stage the shape of this recovery is uncertain. We will feel more confident once temp volume shows sustained sequential increases in a meaningful way, average work hours increase, and overtime hours increase. But on a longer term basis, for many employers, the length and severity of this recession has sparked a change in the way they will manage their workforce going forward. I'm inclined to believe that we utilize a greater proportion of temporary workers rather than returning to their old hiring practices.

In the meantime, as Patricia has noted, we've made a number of strategic moves to adjust our business size and structure to meet the changing market. We have realigned our headcount, reduced our workforce by roughly 16% and streamlined our operational organization. Our cost cutting initiatives have already yielded nearly $150 million savings year to date. And because many of these changes affect our infrastructure they're permanent in nature and should provide immediate leverage as the recovery gains steam. There's no doubt Kelly is a leaner, agile, more focused company today.

Going forward we will tend to draw on our considerable assets. We've done an excellent job of reducing costs but, as Patricia noted, we are seeking additional operational efficiencies across the entire organization. We've continued to maintain a strong balance sheet and secure new credit facilities even during this protracted recession. With little debt, a solid financial position, and available liquidity, Kelly has preserved flexibility and the power to generate growth. We have high customer satisfaction ratings. We've won several new customers in a very difficult and competitive environment. Although new customers are generally yielding lower volumes they will grow once business conditions improve. We've considerable progress in expanding into high margin professional and technical fields -- education, science, healthcare, and engineering, just to name a few. As labor conditions improve around the world, we expect to see an even greater demand for this specialized talent.

And we are continuing to invest in our outsourcing and consulting group. Increasingly we expect to use OCG as a means of strengthening global relationships, delivering workforce solutions and helping our customers manage their talent. Very recently we entered into new customer partnerships, specifically to manage global contingent work forces. These new accounts total an additional $1.4 billion of annual spend under management. A very nice validation of our investment in OCG and growing emphasis on fee-based services.

Yes, our third quarter financial performance is not acceptable. But we continue to believe that the outlook for Kelly is positive and that the long-term prospects are excellent. I'm confident again that we're at the front end of the upturn. The economy is poised to grow, optimism is spreading, employment has stabilized, and temporary staffing demand is beginning to increase. As that happens, Kelly will rebound to profitability.

This concludes our formal comments this morning. Patricia and I will now be happy to answer your questions.

(Operator Instructions) First go to the line of TC Robillard with Signal Hill Group.

Good morning.

How do you always manage to always be the first caller?

It's not like that on all calls, I just figured you guys might like me more than everybody else.

Absolutely. What can I do for you, TC?

I just want to make sure I'm understanding correctly, the fact that revenues were up sequentially but gross margins were down, even though perm was flat quarter to quarter, is that purely mix related, or was there any type of incremental pricing pressure you guys might have seen?

If there was significant incremental pricing pressure, we would have talked about it. We did specifically talk about it, as an example, in the case of Russia. In general, TC, if I can be really simplistic, because there were different stories by segment but in general as the recovery begins it is the lower GP type of products that recover first. And as an example, light industrial, which we talked a lot about in the US, has been rebounding nicely and steadily. But as you have a rebound there and you don't have a rebound in some of the higher priced PT or even office side, it just changes your mix.

Okay. And then I know this is going to be challenging, because no two recessions, no two recoveries are alike, but how should we be thinking about the proportion of light industrial as we're going through this? What I'm trying to get a sense for is how much more deterioration do we see in that gross profit line even though it looks like revenue should probably start to grow slightly sequentially?

It's a fine question, and it just depends on the model. I have to tell you, we don't know. We very specifically said that we saw stabilization and the slight beginnings of upturns in office clerical. But obviously if you are talking now just specifically about an Americas commercial GP, until the growth rate in office staffing is at least as high as the growth rate in light industrial, it will be tough to not see some deterioration in GP lines until the placement fees and conversion fees bounce back. That's just a mathematical outcome of the progression of what type of jobs bounce back first. But I don't have the crystal ball to tell you how fast one recovers versus the other. But right now, LIB is bouncing back steadily and we're just beginning to see the stabilization and slight improvements in office clerical.

Understood. I know there's definitely a lot of moving parts for you guys, particularly given the global nature of the business. Specifically in Americas Commercial, which is one of the larger segments, how much of a head start has LIB had on office clerical? I thought you said, was it about five months or so? Did I hear that correctly in your prepared remarks?

Yes, that's correct, TC.

Okay. And then just lastly, and I will hop back in the queue. Patricia, should we be looking at the $189 million, $190 million, ex the legal fee, as a good base case for SG&A as we're going forward, and then obviously growing that on a variable basis with however we're going to model revenues? Is that a decent enough base, or do we think that there's going to be some incremental cost cuts that will flow through into the fourth quarter?

It's a good start point. We do plan to continue to reduce our costs during the fourth quarter. We have plans and actions underway, as I mentioned in my remarks, to keep looking at streamlining, so we would hope to do even better next year.

Okay. Fair to say, though, that the large scale reductions are probably behind you guys, it's more just slight incrementals?

If you think about the way I've characterized our cost reductions in terms of structural, that's where we're continuing to work on and expect to see improvement. If you look at comp related, we can't go lower than where we are today, sadly. Or maybe happily, depending on your point of view. The discretionary cost cuts, again, I really don't see us going lower than where we are today, we've cut it to the point that there's not much more to get. And then as you said, ex the legal and those sorts of one-time things. So if you think about that, no, we can't make the kinds of reductions that we made this year just because we don't have the same tools left to us. It's the structural we'll continue to focus on, and frankly that's the right place because that leads to the longest term value creation for the enterprise.

We go to Tobey Sommer with SunTrust Robinson Humphrey

We go to Tobey Sommer with subpoena trust Robinson Humphrey.

Your line is open, possibly take yourself off mute. And we will move on. We will go to Ty Govatos with CL King.

These are more housekeeping questions. Where were the legal costs? All in the SG&A?

Yes.

Okay. You identified $4.4 million of termination and lease costs. Also SG&A or all over the place?

In SG&A.

That makes it simple. What would you use if I wanted to break those out as a tax rate? I guess could I back into it.

I've never done it that it way , frankly, to look at those costs with their own part tax rates. Clearly some countries we have valuation allowances in, and those tend to be the ones where we're restructuring the quickest, so it's a bit of a mixed bag.

Fair enough. How about shares outstanding on a diluted basis for the quarter?

I'm looking. 34.9.

You have exhausted all my questions. Let me try one more. I'm not sure if you will answer. Historically, the margins on the clerical have been about 1. times light industrial. Does that still hold, or has that radically changed in this market?

I will just say there hasn't been a radical changing of margins, unlike the last recession, I have not seen any restructuring of margins inside the industry. It's been actually fairly steady. I've been surprised at that.

Ty, if I can go back, if you were trying to work out the cents per share for the legal and termination costs, we did mention that that was worth $0.17.

I'll just use that one. I can back into the rest of the numbers. Patricia, thank you very much, I appreciate it.

We'll try going back to Tobey Sommer.

Thank you very much. I had a question about other leading indicators that I don't think you mentioned in your prepared remarks. If you did I apologize. How should we think about the hours worked? We got out of the BLS, it's unchanged. Wondering if you are seeing anything in your book of business and in all the data you get to see that may differ somewhat with what the BLS churned out today. Thanks.

Generally you would see, speaking generally, you would expect to see staffing firms, hours per work week would increase more quickly than it would for the permanent employment base. I didn't talk about in here our hours per work week, but I will tell you we're not seeing any deterioration. It's at a nice point, one that would be indicative of and typical of the type of growth we're beginning to see sequentially and that the BLS numbers are showing for the industry.

In terms of the outplacement business, I was wondering if you could describe how it performed sequentially, and if you would expect that to be a decline there or a stable period as opposed to growth. If that generally is incident with a reacceleration sequentially in temp, or if you would expect there to be some sort of lag where the outplacement business would slow down, then a quarter or two later you would see more substantial momentum building on the temp side.

If you want the most honest answer, we have not had a long period of experience with outplacement. We didn't have outplacement services in the last down part of the cycle, in the last recession. I'm highly interested myself to watch and learn. That's not an answer -- an area where I think we would view ourselves yet as credible experts as to exactly how that's going to play out. But in general terms, we know that outplacement is counter cyclical. We know there's always an ongoing bases of activity. But I think they're hit the peak of demand. As you see less and less job displacement in countries you will see decreasing demand for some of the services. Beyond that you will do better to ask some of my colleagues at other firms who have a little bit longer experience in the category.

Specifically in terms of the sequential performance, you quoted a year-over-year rate of growth. Was it sequentially down or did the year-over-year growth rate just decelerate?

I don't have that information here and we didn't talk about it in the script. So I'll to have to look and see. We'll find out.

Is that something we could follow up with afterwards?

Yes, absolutely. I was looking around the table to see which way the heads nodded. The answer is yes.

Then I had a specific question, wondering if you could comment on what business is like in the UK, which had been a market that was hit really hard. You guys over the last couple years have taken a lot of action there, and I was just curious as a market that's been so severely impacted, what the behavior has been like in customers. Thanks.

The UK was not a market that we identified as showing sequential increases, like we talked about in Switzerland and France, as examples. It was a market that we described as approaching stability. But we've done -- again, I'm cautious on using Kelly as a read on the UK market. We've done significant repositioning in the marketplace. We've streamlined our organization and really have started focusing on more specific niches there. So I would again say we're not as good of a read on the UK market. We were happy with stabilization, happy to see decreases in the losses experienced there, and we look forward to it being an improving market, but again, that's another case where you'd be better to pick up a read on that market from someone else.

And then my final question relates to a comment that you made in your prepared remarks about perhaps employers' behavior changing as a result of the severity of this downturn and thinking about how they rely on and utilize temporary staffing as a part of their labor mix. Do you have a thought about how that change in behavior could impact different parts of the business, such as the professional side? Is that where you expect to see more of a change, or is there equal opportunity for heightened reliance across commercial, light industrial and professional? Thanks.

No, I think, Tobey, just given the structure of, and again, as I look at the structure of the workforce in much of the industrialized world, insufficient demand, insufficient production of college degreed individuals, insufficient demand in professional and technical trained folks, that trend was there prior to the recession. It is going to come back dramatically post recession. Opportunities are always going to be greater in the industrialized world for the next decade or two in the professional and technical space, just given demography. In terms of greater reliance on office clerical, light industrial, and then in parts that we don't do business in, heavy manufacturing, and so on, I think there will be good opportunities emerging, increasing opportunities, but not at the pace that you will see in professional and technical.

I said that was my last question. I'll ask one more. There was recently some significant M&A in the space, and I was curious about your broad perspective on consolidation over the next year or two, not even specifically addressing Kelly, but will you expect that activity to pick up in a meaningful fashion now that you're seeing some stability and sequential improvement in your own business?

I've now been in the industry 16 years, and we always expect consolidation, and some years we get it, and some years we don't. Over a long period of time, there will be increasing consolidation in the industry there. There has been and will continue to be. What's been interesting, as you know, is that the category keeps expanding almost as fast as the consolidating activity comes. The rise of OCG services, as an example, the whole contingent workforce outsourcing, that's become a very large part of what we do and others do is a whole brand-new addition to the category. So I think consolidating activity will continue. It usually has a pickup in pace in the early stages as recovery of certain firms find themselves in trouble generating working capital. But I think that the category will grow almost as fast as the consolidating activity. So there will be lots of opportunity.

If could I come back before we move on, in terms of errors, revenue was down sequentially, which is again what you would expect as you see declines in the pace of job losses.

Next question is from Ashwin Shirvaikar of Citi.

This is actually Phil Stewart in for Ashwin. Wondering if you could quantify some of the benefits from the $4.4 million employee and lease termination actions in the quarter. I won't give you a number, but in general we expect the payback to that to be less than a year.

And then will there be further restructuring charges in the fourth quarter as well?

Yes.

Okay. Moving on to the gross margin a bit, state unemployment tax rates are expected to rise next year. I know there's still uncertainty in this topic, but I was wondering if you could maybe help frame what percent SUDA costs are as a percent of revenue today and perhaps talk about how the impact hit you guys in the prior cycle.

I think that I would like to wait a quarter before I begin talking more definitively about SUDA. We know rates are increasing. We know that we've already begun working with customers. Some have already agreed for those projected rate increases to move into their new pricing. We need to, I think, in another quarter we will be able to give a much more definitive response as to how we see that unfolding. It's murky now because many of the states don't even know what the rates are going to be. We just know generic they are going up and there's still a lot of uncertainty about exactly what types of support aspects of government programs are going to provide the states in terms of some of the unemployment costs. So it's a very good question, Phil. If I can defer that for one quarter, we'll come back more definitively then.

Is there some sort of historical context that you could provide? Were you able to pass on the full SUDA impact in the prior recession?

If you go back and you look at those calls, we had a set of contracts that were not set up to enable us to pass along costs. We talked about for us it was a long and unpleasant battle through there. We also talked about building a set of contracts at that time that would allow us to pass through SUDA costs. We've done so and regardless of whether there's perfection in that process or not, we expect to do much better in this cycle dealing with SUDA costs than we were in the last one.

Lastly, you mentioned that working capital constraints will begin to pickup in the industry. Do you guys feel that the negative working capital impacts of growth could constrain you, given the balance sheet at this point?

No, I don't. When I look at our overall liquidity and availability of credit, and the way the borrowing base grows with receivables, I'm not particularly concerned about that.

Okay, thank you very much.

And we'll go to Mark Marcon with RW Baird.

Good morning. Wondering if you could talk a little bit more about some of the trends that you are seeing on the light industrial side. Specifically where the areas of greatest strength are, both from a geographically and end market perspective, and then also what are you seeing from the competition on the light industrial side? Specifically, are you starting to see some of the smaller players fade away, or are they becoming more desperate from a pricing perspective? How would you characterize that?

Okay, let me parse through your questions. First off, geographically, northeast, southeast showing more signs of the pickup in use of light industrial than, for example, the great Midwest here. So let's start there. In terms of types, we're not into heavy manufacturing here. Our light industrial truly is light. We tend to see it more in distribution, and a little bit inside the manufacturing base, but for us it's more of a distribution, where we would see the play at light industrial. Much of our competition, much of our business base is with national companies, national accounts. After that after that when you get down to local, it is a completely different story, city by city. So I don't have any generic comment yet to make in terms of what we're seeing from regional or local players. Again, relatively good price stability inside the Americas zone. Doesn't mean there isn't an occasional account where there's not some tough competition, but reasonable behavior, reasonable competition inside the North American LIB area.

How would you characterize the competition Europe in LIB?

We do not have enough LIB presence in Europe for me to comment there. Most of our presence in Europe is in office clerical placement and professional technical.

Just going back to the SUDA question, it sounds like what you're saying is, not only have the contracts been changed relative to the last cycle, but you're already having the discussions, and it sounds like your clients are understanding of the need to make changes.

Speaking in broad, overarching generalities that would be more true. Of course, there are clients who are less understanding and those who have been through this before. The SUDA rate experience in the last recession was very unsettling for the industry and for the clients. I think at that time we were facing the belief that there would never be another recession, that the economy was going to continue to roll upwards, and that we were going to have low unemployment rates forever. That last recession trained a new generation of procurement and HR people to understand how social costs in the US flowed through a recession. That group well understands, or their customers with people in charge who have not been through this before, sure. But conferences in the industry are dealing with this. Customer conferences in the industry are talking about this. This it is a different environment than it was at the end of the last cycle.

Great. Can you talk a little bit about -- and this was touched on earlier, but if could you further expand -- you obviously have a core group of really large clients. What are the discussions like with them in terms of using a greater percentage of flexible staff, given the uncertainties in the macro environment or the anticipation that there is going to continue to be volatility?

I would frame that in terms of a discussion of many of our larger customers are also now moving into the CWO space, and are managing all forms of their flexible labor as a strategic resource for the company. So not speaking specifically about temporary employees, but when I look at the mix of 1099 employees, or independent contractors of various forms around the world, temporary employees, consultants and so on, I would say there's a very high awareness of companies as to how many they use, a strong desire to manage it well, and a general belief among the larger global companies that that proportion of their talent mix is going to increase versus that which comes from a permanent staff. As much because of changing attitudes and among the workforce, changing demographics inside the industrialized world in combination with what you were talking about, a desire to preserve even more flexibility.

One last question. You've historically been quite close to the healthcare debate. You've discussed it a number of times. Can you talk about, based on your current understanding and recognizing that you probably haven't reviewed the whole 2,000-page document, which is going to continue to change, but how are you thinking about - you're closer to it than a lot of us -- how are you thinking that the changes, the potential changes that could come in healthcare are going to end up impacting the industry?

For the industry, there's two critical impact points. First off, we know that one of the growth inhibiting factors for the industry has been access to healthcare for our employees. On the other side, we also know that as you look at potential employer mandates, employee mandates, payroll tax base, on and on, an area that right now is particularly fuzzy in this debate, we know that for staffing firms in particular we have to pay attention to eligibility requirements. When do those get triggered. As an example, the industry is working very hard at making certain that the triggers for that type of an employer or employee mandate don't take place until there's been a long period of engagement with the company. Large numbers of temporary employees work two weeks, four weeks, and then move out of that engagement. You can't be having employer-employee mandates being triggered with that low of a level of work. So it's now down to being very careful to making certain that this portion of the workforce is well represented in the debate. We're working very hard on that, as is the industry. We need to make certain there's access to those who work in this work style, and we need to make certain that it's not done in a way that unintentionally makes it very difficult for staffing firms to operate.

With regards to the hours and the trigger points, do you feel like you are going to be fairly successful or the industry is going to be fairly successful in getting a proper level of representation and some common sense injected?

Common sense is not typically a phrase I hear used in the same sentence with government.

Absolutely true, coming from somebody who lived for eight years outside of DC.

We are well represented in the debate. We are well represented in the technical formation of the bill. I have learned never to predict an outcome.

Got it, thank you.

Next we go to John Healy with North Coast Research.

Patricia, you mentioned, I thought you said 30 offices were closed and about 300 people let go during the quarter. How should we think about the pace of headcount reduction and the pace of office closures as you're starting to see more stability, at least building in some of your geographies? As we go into the fourth quarter and the early part of next year, should we continue to see similar type reductions, or maybe should we see some moderation there?

We're still working through that for the fourth quarter, but what we'd really like to do is get the bulk of the actions that we want to take behind us in the fourth quarter, so we can really be ready to launch what we think will be a stronger 2010 with a leaner cost base. So the pace -- I think we will continue to see the fourth quarter, and I think it's after that, that you'll see the pace really drop off, hopefully, as the economy helps us out a little bit.

Okay, great. And then speaking about office locations, have you guys looked at the opportunity with the shake-out in the commercial real-estate markets to begin to try to renegotiate leases, or try to work on some things for office expenses, or is that not an opportunity that really presents itself to you guys?

We never stop looking at that area. There are places we're able to take advantage of it and places where the leases that we're currently in make it difficult to do so.

Should we think about that as an opportunity for you guys more next year on the SG&A line, or is it something that isn't that material?

It's just not going to have that quick an impact, because if you think that most of the leases are about five years, so about 20% of them turn over, our leases in Europe actually tend to be much longer than that, so it's not something that you are going to see a big SG&A impact on. Over the long haul, obviously lower real estate costs will permeate through our SG&A line, but frankly probably offset by other things that will swamp them. So I wouldn't look for big savings for that in 2010, for example.

Great, thank you.

And we have a follow-up from Ty Govatos.

Couldn't resist. The other one is, you identified $3.2 million of the $4 plus million severance. Can you break down where the other items were? You gave us what the severance were for Americas Commercial, PT, EMEA, but not the remaining divisions. Or would you rather have me call back for that?

I'm just looking to see if I've got the right numbers here in front of me. The bulk of it was in EMEA. The remainder was pretty much EMEA, with a little bit -- with less than $1 million in corporate.

Okay. So it would be EMEA PT gets everything else except for the $1 million in corporate, and the other three that you broke down? That's fine, that will get me enough.

Very small.

That brings me to the other question, kind of theoretical. When I go back and I look at your gross profits, I don't see any seasonal factors in there between the fourth quarter and the third quarter. It's a mix thing going back 10 years. I would assume, therefore, that going forward on a sequential basis, the primary driver of gross margins would be mix.

Yes. Inside the US, we have a distorting of a traditional seasonal. We are seeing some seasonality in GP because our educational staffing business continues to grow. It's growing, as an example, through this recession. But on a general basis, you're very correct. Outside of placement fees, it's all going to be mix that will drive GP changes.

Okay, thank you again.

And we have a follow-up from TC Robillard.

Just real quick on working cap usage in the quarter seemed to be a pretty sizable number relative to where you guys usually are when you have a working cap usage. Was it timing related with anything there or anything that needs to be called out?

We did have some of the litigation impact hit us in the third quarter, but overall, I would say you can just se it mostly because of the sequential pickup.

Okay, perfect, thank you.

And, Mr. Camden no, further questions in queue.

Thank you, and thank you all for joining the call, and look forward to the invariable follow-up calls. Talk to you later.

Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation. You may now disconnect.