Kelly Services Inc (KELYB) 2011 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 on listen-only until the question-and-answer portion of the presentation. Today's call is 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. Please go ahead, sir.

Thank you, John, good morning, everyone. We're glad you could join us for Kelly Services' 2011 Q3 earnings report and conference call. With me today is Patricia Little, our CFO.

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 we have no obligation to update the statements made on this call. Please refer to our SEC filings for a description of the risk factors that could influence the Company's actual future performance.

Now for our third-quarter results. Kelly turned in another solid quarter, which was particularly gratifying in light of a modest slowdown during the summer months. We're managing well in an economy that lurches from 1 policy crisis to another, and while we note that many still question the sustainability of the economic recovery, we continue to progress.

Revenue growth for the quarter was nearly 10%, our gross profit rate improved slightly to 16.2% and a tightened expense base provided a strong operational leverage. Overall, Kelly's third-quarter results showed impressive improvement both year over year and sequentially.

For the quarter, Kelly's earnings from continuing operations were $0.52 per share, compared with last year's third quarter earnings of $0.26 per share. We achieved an operating profit of $22.1 million for the quarter, a significant increase over comparable earnings of $14.3 million earned for the third quarter of 2010.

I mentioned the summer pullback, precipitated by continuing jitters over US and European debt and the ongoing budget stalemate in Washington, to name just two factors contributing to the current economic malaise. It's understandable why some question the recovery sustainability. And while the concerns are real, we see no signs of a broad market retreat.

The economy continues to recover, albeit that a choppy pace. While our customers are cautious about adding jobs, they're certainly not exhibiting signs of ratcheting down current employment levels or talking contingency plans in anticipation of further slowing. Much of what Kelly is experiencing can be attributed to a normal seasonal fluctuation in demand for staffing services.

Looking at the big picture, general trends remain positive. Light industrial, while exhibiting a bit of a slowdown, is still performing well and remains ahead of pre-recession levels. Our OCG segment is also making solid progress with earnings improving $4 million year-over-year and roughly $600,000 on a sequential basis. We remain confident that OCG will return to profitability by the end of the year.

PT is also growing, although at a slower pace than we'd like. PT remains a critical strategic area and we continue to increase our focus on higher margin, professional and technical positions, where we see long-term opportunity for growth. PT revenue and GP improved in all regions year-over-year.

We're experiencing a slow but steady pickup in our temp-to-perm business, as well. However, until overall employment improves and the economy adds jobs at a quicker pace, growth in this and other fee-based businesses will remain somewhat muted.

Our strategic emphasis rightly targets growth of PT and other more profitable fee-based services where we can realize a sustainable positive impact on gross margins. But as long as the recovery favors lower skilled disciplines, pressure on margins will continue.

As expected, our expenses did increase modestly compared to last quarter, but only in tandem with business demand. We remain committed to maintaining a lower cost base and any deviation from that will be a pace with genuine revenue growth.

Last quarter we talked about the uncertainty hanging over our nation's economy. While many of the factors contributing to the uncertainty persist, we believe this recovery, as erratic as it is, will endure. In the US, employment is improving. Within the past 20 months, the private sector has added more than 2.6 million jobs. Job creation continues.

The stubbornly high unemployment masks a growing competition for skilled talent as evidenced by continued reduction in joblessness among college grads, now standing at a for more healthy 4.4%. Within the temporary staffing industry, more than 550,000 jobs have been added since September of 2009, when temp jobs were down by 25% for the year. Momentum has gradually built over this period and year-over-year we now see fairly stable growth of 8%.

The temporary help penetration rate for this past quarter also shows improvement. For the month of October, the rate edged up to 1.75%. Of course, there is still a significant way to go to reach the prior 2.03% peak rate, but the trend is positive.

With job creation hovering about 100,000 jobs per month since the start of 2010, many would characterize this as a job slight recovery. We believe the ongoing economic uncertainty will help to create a greater awareness of the benefits of temporary staffing and a secular shift in demand for temporary workers.

Now let me provide you with greater detail about our Q3 performance in each of our business segments beginning with the Americas. Revenue in Americas Commercial in the third quarter increased nearly 5% year- over-year. On a sequential basis, revenue was down 1% for the quarter.

Within the Commercial segment, electronic assembly continues to experience strong year-over-year growth at 17%. However growth in light industrial slowed to 6% year-over-year as we anniversary high growth in the prior year. Despite the slowdown, LID grew 4% sequentially. Office clerical also continued to slow a bit in the quarter, 1% below prior year and sequentially.

Combined temp-to-perm, direct placement and other fees increased 48% year over year and were up 12% sequentially compared with the second quarter. Commercial's gross profit rate for the current quarter was 14.2%, or 40 basis points lower than the same period last year. This decline was due mainly to the expiration of the HIRE Act, partially offset by favorable customer mix. On a sequential basis, the GP rate was 20 basis points higher than the second quarter.

Expenses for the quarter grew 4% year-over-year, and on a sequential basis, expenses were up 2% from the second quarter. Commercial earnings were $22 million for the quarter. While that's down 6% compared to last year, excluding the $5 million favorable impact of the HIRE Act in 2010. Q3 commercial earnings improved 21% year over year. Nice leverage on a nearly 5% revenue increase.

Americas Professional and Technical revenue in the third quarter increased 7% year-over-year. On a sequential basis, PT revenue was up 1%. For the quarter we saw the strongest growth in our technical business lines, our IT business grew 15%, engineering 10% and science 8% year-over-year. On a sequential basis, IT and science grew 1% while engineering grew 3%.

Combined temp-to-perm, direct placement and another fees for Professional and Technical increased 48% year-over-year. For the entire segment, our gross profit rate was 15.1%, down 80 basis points from the same period last year, again the decline is due primarily to the expiration of the HIRE Act, offset by favorable fees. Sequentially, the gross profit rate is up 50 basis points.

With continued investment in this segment, year-over-year expenses were higher in our PT area, increasing 11%. We've added recruiters and adjusted performance-based compensation in support of our PT expansion.

Sequentially, expenses were up just 1%, due mainly to higher recruitment and overhead costs. All in all, PT earnings were $12 million for the quarter, although 13% below prior year due to the margin impact in additional investments I've mentioned. Earnings were up 15% sequentially compared to the second quarter.

Now let's turn to our operations outside the Americas, beginning with EMEA. Reported revenue in EMEA Commercial was up in the third quarter compared to last year by 14%. On a constant currency basis revenue was up 3%. For the remainder of my EMEA discussion, all revenue results will be discussed in constant currency.

Looking at the regions, the most significant improvement was seen in Eastern Europe with an increase of 26% year-over-year. This was primarily driven by the performance in Russia, and our investment in Poland is also starting to produce good results with an increase of 70%. Western Europe was up 2% year over year, primarily attributable to our operations in Switzerland and Italy.

We continue to see a nice improvement in fees for the quarter. Fee revenue for Q3 was up 33% year over year. The quarterly GP rate for the quarter was 16.1%, down slightly from the 16.3% for the same period last year. The decrease is due to unfavorable mix, partially offset by the higher fee-based income.

At constant currency, expenses were flat year-over-year and sequentially, excluding restructuring. And although we're investing in countries across Europe with strong growth, like Switzerland, Germany, Norway and Russia, we are also seeing the savings impact from the restructuring done in 2010. Excluding restructuring, EMEA Commercial reported a profit of nearly $6 million for the quarter, an improvement of more than $1 million compared to the same period last year.

EMEA Professional and Technical also improved this quarter with revenue increasing 14% year-over-year. Solid improvements were seen in the UK, Germany and Switzerland. Fees in the third quarter were up compared to last year by 35%. The growth in fees was primarily attributable to our financial resources and scientific staffing units. Also worth mentioning was strong fee growth in both Germany and the UK year over year.

The gross profit rate in the segment improve substantially, at 27.3% for the quarter compared to the 26% for the same period last year. PT expenses increased by 8% compared to year ago on a constant currency basis. Continued investments are being made in Russia, Germany and the UK. EMEA PT reported a profit of nearly $1.6 million, a nice improvement both year over year and sequentially.

In our APAC region, revenue growth has slowed somewhat, although we continue to see strong growth in the Professional and Technical segment, which grew by 59% on a constant currency basis year over year. For the remainder of my APAC discussion, all revenue results will be discussed in constant currency.

Combined revenue for the region grew by 9% compared with the 13% increase in the second quarter. Fees continued to improve in the region were up 27% for the quarter, Australia, New Zealand and India, had solid growth of more than 30%.

Our GP rate for the region increased by 90 basis points, primarily due to strong growth in fee income. Expenses for the quarter were up 26% or 14% on a constant currency basis. This reflected continued investment in the region, particularly the addition of PT recruiters. We are pleased that the APAC region return to profitability this quarter with earnings of $600,000, a nice improvement.

The final segment is our Outsourcing and Consulting Group. We continue to be pleased with the sequential improvements in OCG's revenue and bottom line performance. OCG revenue was up 26% in the third quarter compared to last year, narrowing our losses for this segment in Q3 to roughly $200,000 compared to the $800,000 loss in the second quarter. This also saw an improvement in nearly $4 million from the $4.2 million loss we reported in Q3 of 2010.

Revenue growth and demand for services continues to be strong in many practice areas. For example, globally in our RPO practice, revenue was up more than 33% year- over-year. Revenue was up 52% year-over-year in our contingent workforce outsourcing practice.

Our payroll processing outsourcing practice also reported nice revenue growth of 22%. And our executive placement practice reported year-over-year revenue growth of 21% for the quarter. Overall, OCG's gross profit rate was 350 basis points higher than a year ago. On an absolute dollar basis, our GP was up 44% over last year. The improvement in GP rate continues to result from improved volume mix within higher margin practice areas.

Expenses were up to $2.8 million, or 14.5% year-over-year in OCG. This increase is primarily the result of servicing cost associated with the expansion of customer programs. Once again, we saw earnings improvement in most of our OCG practice areas in the quarter both sequentially and year-over-year. On a year-to-date basis, OCG revenue was up 24% and earnings have improved by over $11 million year-over-year.

We're pleased with the improvements and the progress we're making within OCG and remain on course to achieve profitability in this segment in the fourth quarter. Now I'll turn the call over to Patricia for our quarterly results for the entire Company.

Thank you, Carl. Revenue totaled $1.4 billion, an increase of 10% compared to the third quarter of last year, or 6% on a constant currency basis. On a sequential basis, revenue was essentially flat compared to the second quarter.

Worldwide, our fees were up 49% year-over-year, 40% of a constant currency basis, an improvement compared to the 35% constant currency growth rate in the second quarter. On a sequential basis, our fees were up 3%. Our gross profit rate was 16.2%, an increase of 10 basis points compared to last year.

The growth in fee-based income, 60 basis points, offset a 50-basis point decline in the temp GP rate, due to the expiration of the payroll tax holiday provision of the HIRE Act. We were pleased that we were able to essentially hold our GP rate in spite of losing half a point due to the HIRE Act.

During the third quarter, we made a small adjustment to our existing restructuring accruals, reducing expense and improving earnings by $600,000. Excluding restructuring, expenses were up 9% year over year, 5% on a constant currency basis. The increase is primarily due to additional headcount we added in prior periods.

On a sequential basis, excluding restructuring costs, expenses were up 2%, in large part due to the merit increases we granted in the third quarter. In the third quarter, our GAAP earnings from operations were $22 million, compared to 2010 earnings of $14 million, or $17 million if you exclude restructuring.

Income tax expense in the third quarter was $3.4 million, or 15%. The low rate is a direct result of significant employment-related tax credits, as we continue to benefit from work opportunity credits and retention credits related to the HIRE Act, which together totaled $8.6 million in the third quarter.

Diluted earnings per share from continuing operations for the third quarter of 2011 totaled $0.52 per share compared to $0.26 in 2010. Excluding restructuring, earnings per share from continuing operations were $0.51 this year compared to $0.31 last year.

I'll make a few general comments about the fourth quarter. We expect continued revenue growth in the mid-single digits on a year-over-year basis. Sequentially, we expect that the gross margin will be relatively stable, although we may see some improvement if these continue to increase.

Keep in mind gross margin comparisons to the prior year will be more difficult because last year, we received $11 million of HIRE Act payroll tax benefits in the fourth quarter, $21 million for the full year. The HIRE Act payroll tax holiday expired at the end of 2010. And while we continue to get HIRE Act benefits, they've migrated to the tax line.

Expenses will increase slightly on a sequential basis. For the full year, we continue to expect that our tax rate will be around 10%. The low rate is due to our work opportunity credit and HIRE Act retention credit. These credits are a direct result of very good performance in our US field operations.

The HIRE Act retention credit is only available in 2011. I'll point out that the work opportunity credit also expires at the end of the year. Like many business credits, the work opportunity credit has expired and been reinstated several times and we expect this credit to be extended. Nonetheless, given the current political environment, there is more uncertainty than normal.

Turning to the balance sheet, I'll make a few comments. Cash totaled $74 million, down slightly compared to $80 million at year end 2010. Accounts receivable totaled $940 million and increased $129 million compared to year end. For the quarter, our global DSO was 52 days, unchanged from last year. Accounts payable and accrued payroll and related taxes totaled $511 million and increased $86 million compared to year end 2010.

At the end of the third quarter debt stood at $79 million, unchanged compared with 2010. Debt to total capital was 11%, again unchanged from year end. In our cash flow, we generated $6 million of net cash from operating activities an improvement compared to essentially breakeven last year. The change primarily reflects improved operating results in 2011, somewhat offset by working capital requirements due to our growth this year. I'll turn it back over to Carl for his concluding thoughts.

Thank you, Patricia. As we look forward we're optimistic. In the past 2 years, Kelly has made significant progress sharpening our strategy and executing a plan for continuing revenue growth and profitability. We focused on increasing exposure and growing our higher end PT disciplines, and PT is now growing faster than our Commercial business in all 3 regions year over year.

We've completed the successful build out of OCG and are growing that business quickly with emphasis on RPO and CWO practice areas. We're well positioned for long-term expansion of our gross profit rates, and we've established a strong culture around expense management, tightening expenses and remaining keenly focused on cost containment. That discipline will produce operating leverage going forward. And at the same time, we're turning in solid revenue and earnings growth.

We are committed to delivering competitive returns, but achieving this goal will depend on demand for labor, a business mix that favors higher end skills and a growth of our fee-based business services. When is that going to happen? Well here's what we see in the near future.

We believe the recovery is authentic, but that deceleration we experienced during this past quarter may continue on and off until companies become less cautious about permanent hiring. Our customers remain optimistic about job creation. And while they're not signaling dramatic hiring plans in the near term, they're not talking about scaling back either.

As Patricia noted, our overall gross margins will likely hold steady. We're not expecting to see any material change until PT staffing strengthens and our fee-based business improves. In the meantime, we'll leverage our expertise to help customers adapt to the new market realities, adopt long-term workforce solutions and gain greater access to needed talent.

We're encouraged by what we hear from our customers. They want even more flexibility and greater options in staffing their business and they're concerned about the impending talent shortage. These concerns signal significant growth opportunity ahead, especially for OCG. That in turn reinforces our belief that the investments we've made in OCG, along with our emphasis on increasing our PT business mix, are well timed. Taken together, PT and OCG have the potential to expand our profit margins and increase revenue beyond historic levels.

And finally we're maintaining vigilant expense control. We will invest when and where we see opportunity, but we will preserve our lower cost of service model. That concludes today's report. Patricia and I will now be happy to answer your questions. And John the call can now be opened.

(Operator Instructions) James Samford with Citigroup.

Hi, James.

Good morning, thanks for taking my question. I was just-- your outlook last quarter called for sort of low to mid-teens revenue growth. I was just wondering, were there any surprises this quarter as far as any slowdowns that you could point to versus your expectations?

There's a-- we experienced and were able to track kind of a almost instantaneous reaction to intensity of debates around, in the US it was around the debt ceiling and the deficit reduction plans. What would normally have in the summer months have been a time of typical seasonal growth for us became pretty close to flattish during much of what would have been a growth period. And once the debt resolution was resolved, we saw a resumption of a typical seasonal pattern. But that protracted debate in particular seemed to cost us a good chunk off of our growth expectation.

Yes, no I hear you. It looks at corporate expenses came down a little bit versus our expectations. Were you scaling back some of your investments at that time and now you've sort of reengaged that in terms of-- as you see the market improve a little bit I guess it sounds like at the beginning of this quarter?

We haven't really changed a lot about our investment outlook. I mean we are, like Carl said, we're a little bit more careful in the third and fourth quarter. I would say particularly in Europe where obviously the debate there is also having an impact on our business and where the cost of employee turnover are high, we're being careful. But we don't view that the economy is a reason to stop investing, because as Carl said, we have actually a lot of faith in the economy. Changes in our corporate expenses, I mean you're talking small amounts of money that shift around, it's not anything signaling a change in our approach to investment.

If I can just sneak one last one in. Tax rates for 2012, how should we think about that, and depending on what happens with the tax credit I guess with or without?

Yes, I don't have numbers to give you with and without. But the tax credit as you can see, is a big, big impact. If the tax credit is renewed, which as I said is our expectation, it by the way could be renewed in different formats, obviously this whole discussion about a veterans credit would be part of the work opportunity tax credit. They shifted the composition of that credit pretty much every year I think. But broadly speaking, we should, if the tax credit is extended, you should see higher tax rates for us going forward, both because we won't have the HIRE Act retention credit and because our expected higher earnings will drive through bottom line tax rate increases. If the HIRE Act is -- I'm sorry not the HIRE Act, if the work opportunity credit is not extended, you'll see substantially higher tax rates comparable to any sort of regular corporate level tax rate.

One of the things I'll point out that could happen and has happened in the past, is that the work opportunity tax credit, if it is not enacted on a timely basis, we would not book those credits. What's happened in the past is by the end of the year, they've ended up passing a retroactive work opportunity credit and then we take all the credit-- the backlog of credit in the quarter that the law has passed. So I do foresee a fair amount of volatility in our tax rate in next year.

Great, thank you.

(Operator Instructions) Tobey Sommer with SunTrust.

Hi, Tobey, thanks for joining us.

Hi, this is actually Frank in for Tobey. Nice quarter. I wanted to ask, nice performance in Outsourcing and Consulting Group, are you getting signs that that's sustainable in terms of going forward? Any early signs as we move into 4Q or demand indicators that you're seeing?

I wouldn't have reiterated our expectation that it'll return to profitability in Q4, if I wasn't seeing sustained demand. I-- what we tried to make clear on the comments, but I'll make explicitly clear here is I see a secular shift in the demand for those types of services and the changes to how companies are looking at how they deal with talent markets in general. And our OCG unit is at the edge of where that shift is taking place. And I think you'll see strong steady demand for OCG services over the next few years.

Okay, great. And in EMEA Professional and Technical's gross margins picked up nicely and is that due mainly to a mix shift or pricing or can you talk a little bit about that?

It's more due to fees. There's the-- our Professional and Technical business lines in Europe mix out heavier on the fees side of the business then they do in the United States. And so you can see more volatility in gross margin rates there as permit hiring goes up and down and reflected in the fee lines for the PT business there.

Okay. And if I can drill down into Americas a little bit. I guess, can you talk a little bit about Canada and trends you're seeing there?

I could, but I don't have the numbers here in front of me and don't have -- it's not deviated in any significant way or we would have reported it out as an issue here.

Yes, so I'm just-- so we were up nicely in the quarter. You know what, we do a good job in the western part of the country where I think the continuing strength in commodities is important, and it tends to track with the US because of that.

All right great. I'll jump back in the queue.

(Operator Instructions) And Mr. Camden, no further questions.

Thank you, John, thank you to all who listened in, appreciate it and we'll talk to you next quarter.

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