Kelly Services Inc (KELYB) 2012 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to Kelly Services' first-quarter earnings conference call. All parties will be on listen only until the question-and-answer portion of the presentation. Today's call is being recorded at the request of Kelly Services. (Operator Instructions). I would now like to turn the meeting over to your host, Mr. Carl Camden, President and CEO. Sir, you may begin.

Thank you. Good morning, everyone, and welcome to Kelly Services' 2012 first-quarter earnings report and conference call. With me on today's call 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, let's move on to our first-quarter results. First quarter is traditionally the weakest for the staffing industry, which feels the effects of seasonal and post-holiday employment adjustments. Although January showed promise, the first quarter of 2012 did sputter and concluded with tepid job growth. The industry is definitely experiencing a slower than anticipated recovery. Nonetheless, we have positive news to report. Kelly's first quarter was a good one.

As the first three months of the year played out, we leveraged our leaner cost structure, improved our gross profit margin, and stayed focused on executing our strategy. And our first-quarter results reflect that efforts. Revenue for the quarter was up 1%, at the low end of our internal projections. Kelly's earnings from continuing operations were $0.24 per share, compared with last year's adjusted first-quarter earnings of $0.14 per share. We achieved an operating profit of $14.7 million, a healthy improvement over the adjusted earnings of $5.6 million for the first quarter of 2011. Our gross profit rate increased to 16.5% during the quarter, compared to 15.8% for the same period last year.

Additionally, our quarterly performance was bolstered by steady progress we are making in our key strategic areas. Our higher-margin OCG segment remains on track and was profitable again this quarter, with earnings improving by $3 million year-over-year. Professional and Technical performed well, with improved revenue and gross profits in all regions, year-over-year. Our PT growth rates continue to outpace the growth rates seen in our commercial staffing businesses. We also saw a steady pickup in our perm fees, with year-over-year growth of 15%.

At the same time, we are holding cost in check. Our expenses were up slightly compared to the prior year by 1.6%, adjusted for last year's restructuring, but down sequentially compared to the last quarter. These progress points reflect our teams' strategic focus and a slowly improving economy. While we are cautious, we believe the US recovery has taken a firm hold. Undoubtedly, high fuel prices and worries over economic conditions across Europe dampened the confidence of business and consumers alike. March's employment gains were the fewest in the preceding five months. But even with that, the US labor market recorded its strongest first-quarter performance in six years. Improvement may come at a gradual pace, but the US economy has proven it's capable of producing a steady increase in jobs.

Several broad economic indicators support our tempered optimism. The unemployment rate dropped 8.1% in April, ticking downward from 8.2% in March, and reflected in the growth in our fees. In the US, the tent penetration rate now stands at 1.88%. After steady gains, temporary job growth has moderated slightly but remains at the highest level since August 2007. Among college graduates, the job picture remains bright, with unemployment in that segment hovering around 4%, reflected in our revenue growth and the ongoing investments we're making in PT. Small to medium-sized companies appear to be responsible for the lion's share of job growth at this point in the recovery. And this has kept our commercial growth flat year-over-year. We expect hiring among large companies, which form the core of Kelly's client base, to pick up as we move further into the economic recovery.

In contrast to the gradual improvement here in the US, Europe lost ground in the first quarter. After contracting during the fourth quarter, the euro-zone economies continued to struggle during the first quarter as weakness extends into the more resilient economies, such as Germany. Prolonged uncertainty as also contributing to a rise in employment levels through the region. As such, our outlook for Europe calls for recessionary conditions to persist, with only a modest recovery expected by the end of 2012. Nonetheless, we are encouraged by growth in PT and are making investments to take advantage of long-term business opportunities across that important region.

With that, I'll provide some quarterly highlights, beginning with the Americas. In the Americas, we felt the effects of the slow-moving recovery across both our Commercial and Professional and Technical segments. Combined revenue for the region grew by 3% year-over-year. On a sequential basis, revenue was flat for the quarter. Americas commercial revenue increased 2% year-over-year, due to the acquisition of Tradicao in Brazil. Without Tradicao, commercial revenue would have been relatively flat for the quarter.

We saw slightly stronger revenue growth from our Americas PT, which grew 4% year-over-year, increasing 3% sequentially. Within PT, the strongest growth came from our IT and finance businesses growing 9% and 7% year-over-year, respectively. For the Americas region, combined temp-to-perm, direct placement, and other fees increased more than 24% year-over-year and were up 1% compared to the prior quarter. Americas gross profit rate for the quarter was 70 basis points higher than the same period last year. This increase was due to favorable adjustments to prior-year workers compensation costs on the Commercial segment, lower benefit cost in PT, and favorable customer mix and pricing in both Commercial and PT. On a sequential basis, the gross profit rate was 40 basis points higher than the fourth quarter, and I expect that about one-half of that 40 basis points will continue going forward. We remain committed to improving our margin and remain willing to walk away from business that we cannot service profitably.

Expenses were flat year-over-year and increased 3% compared to the fourth quarter. Excluding Tradicao, expenses were down slightly, year-over-year. We continue to carefully manage expenses throughout the region. All in all, we are very pleased with the Americas earnings of $35 million for the quarter. This represents an increase of 40% over prior-year and 3% over the fourth quarter, evidencing strong earnings leverage on 3% revenue growth.

Let's now turn to our operations outside the Americas, beginning with EMEA. Reported revenue in EMEA was down 7% in the first quarter compared to last year. On a constant currency basis, revenue was down 4%. For the remainder of my EMEA discussion, all revenue results will be discussed in constant currency. Difficult economic conditions are prevalent throughout EMEA, and staffing markets are seeing revenue declines in the range of 5% to 10%. Eastern Europe was down 8% year-over-year, while Western Europe fared better with a decline of just over 2%. The declines are attributable to a pullback in commercial temp sales.

PT, on the other hand, is still trending positive, with growth of 5% for the quarter. We continue to see nice improvement in fees for the quarter. Fee revenue for Q1 was up 8% year-over-year and up 5% sequentially. Growth was seen in both our Commercial and PT segments. The GP rate for the first quarter was 17.6%, down slightly from the 17.7% for the same period last year. The GP rate decline was exclusively due to temp GP deceleration across most countries.

We are seeing unfavorable customer mix between corporate and retail accounts within our EMEA Commercial segment. Temp GP and Professional and Technical remained stable for the quarter. At constant currency, expenses decreased by 1% year-over-year and nearly 4% sequentially, excluding restructuring. We are pleased with our ability to reduce our segment costs, more than offsetting targeted investments in PT. EMEA reported a profit of just over $300,000 for the first quarter. Given the headwinds in Europe, we expect results to continue to be below last year.

Turning now to APAC, combined revenue for the region, both Commercial and PT, declined 11% in constant currency. Commercial revenue was down 13%, due primarily to our decision to exit several large low-margin accounts in India and Australia. Excluding these accounts, revenue was up 3% for the quarter. We did see growth in PT, which grew by more than 10% year-over-year for the quarter. These across the region declined by 2% year-over-year. On a sequential basis, Professional and Technical fees rebounded nicely, with a 27% improvement over the prior quarter.

Our GP rate for the region increased by 150 basis points to 18.1%, compared to the same period last year. This improvement was primarily due to strengthening temporary margins in Australia and India as we exited unprofitable accounts. We are also seeing fee improvement in the average fee per placement resulting from our strategy to deliver higher-level placements. Expenses were flat for the quarter or up by 1% on a constant currency basis. We continue to focus our investment on greater China, where we have seen solid growth over the last four quarters. While we concluded the quarter with a loss of $1.4 million, we expect to see an improving profit picture in APAC.

Our final segment is our Outsourcing and Consulting Group, and we are very pleased with the progress made by the OCG team. OCG revenue was up 27% in the first quarter, compared to last year. This strong year-over-year growth is consistent with the 26% growth we reported in Q4 of 2011. Sequentially, revenue was down 8%. However, this decline is directly related to the seasonal nature of programs within our payroll processing outsourcing business. The fourth quarter is traditionally the strongest quarter in terms of both revenues and profits for PPO.

Revenue growth and demand for our OCG services remained strong in many of our practice areas. Fee revenue was up 50% year-over-year in our CWO practice. Revenue in our business process outsourcing was up 32% year-over-year, driven primarily by high demand in our contact center solution. Our PPO practice also reported nice revenue growth at 27% in Q1, as compared to a year ago. And globally, in our RPO practice, revenue was up 18%, versus a year ago, due to strong revenue growth in our EMEA programs. Overall, OCG's gross profit rate of 26.7% is 170 basis points higher than a year ago.

Improvement in GP continues to result from improved volume mix within higher-margin practice areas. Expenses were up roughly $3 million or 17% year-over-year in OCG. Increases in expenses continue to be the result of servicing costs associated with the expansion of customer programs, as well as costs associated with new customer programs being implemented. But all in all, we are realizing very nice operational leverage. For the quarter, OCG reported earnings of more than $500,000, compared to a loss of nearly $2.4 million a year ago.

As a final note, our Q1 performance in OCG was especially gratifying, given that the first quarter is traditionally our weakest quarter. This year, we experienced better than expected volume in our BPO and EMEA RPO business units, which helped drive a stronger than expected first quarter. However, we expect Q2 performance to follow more normal seasonal patterns, and we expect Q2 to be impacted by costs associated with the implementation of customer programs that are scheduled to come online in Q3. That said, 2012 should be a profitable year for OCG. Now I'll turn the call over to Patricia, who will cover our quarterly results for the entire Company.

Thank you, Carl. Revenue totaled $1.4 billion, an increase of 1% compared to the first quarter of last year. On a sequential basis, revenue was down 3% compared to the fourth quarter. Our acquisition of Tradicao in Brazil late last year added about 1% to our first-quarter revenue, leaving organic revenue flat year-over-year. Seasonally, the first quarter is always our weakest, and the sequential decline was expected.

Overall, first-quarter revenue came in at the low range of our expectation, due to weakness in Europe. Worldwide, our fees were up 15% year-over-year, 16% on a constant currency basis. On a sequential basis, our fees were up 8%. Our gross profit rate was 16.5%, up 70 basis points compared to the first quarter last year. The improvement was due to continued growth in fee-based income, as well as improvements in our temp GP rate. The overall improvement in our temp GP rate was due to lower benefit and workers compensation costs, some of which won't repeat next quarter.

Expenses were up 2% year-over-year, excluding the restructuring costs that we took in the first quarter of 2011. Again, without Tradicao, expenses would have been flat compared to the first quarter last year. And on a sequential basis, expenses were down 1%. As I have mentioned before, we continue to focus on controlling expenses. We believe this is even more important in the current slow to flat growth period that we are experiencing. But we are still protecting investments in key areas, such as OCG and PT.

In the first quarter, our earnings from operations were $14.7 million, compared to adjusted 2011 earnings of $5.6 million. That is good leverage on a small increase in revenue. The income tax rate in the first quarter was 35%. The tax rate came in somewhat better than expected, primarily due to favorable adjustments related to Work Opportunity Credits from last year. Diluted earnings per share from continuing operations for the first quarter of 2012 totaled $0.24 per share, compared to an adjusted $0.14 in 2011.

Looking ahead to the second quarter of 2012, we expect revenue growth to be flat to up slightly on a year-over-year basis, up in the low single digits sequentially. We expect gross profit margin to continue to be up year-over-year, although most likely not quite as much as we saw in Q1, due to the favorable adjustments Carl and I noted. We plan to stay the course on expense control in 2012 and deliver growth with only modest increases in SG&A. On a year-over-year basis, expenses will increase in the mid-single digits, and on a sequential basis, we expect expenses will only increase slightly.

As I've mentioned before, our income tax rate will be much higher than in 2011. This is primarily due to the expiration of the Work Opportunity and Hire Act Retention Credits, which provided $28 million of combined benefit in 2011. We do not anticipate the Hire Act Retention Credit to be reinstated, but the Work Opportunity Credit has expired and been reinstated several times, even retroactively. Given the current political environment, it is uncertain if or when the Work Opportunity Credit will be reinstated. We estimate our annual tax rate to be 25% to 30%, if WOC credits are reinstated, and 35% to 40% of they are not. The accounting model for taxes means that we will not book any 2012 Work Opportunity Credits until legislation is enacted. And in fact, our second-quarter rate will be higher than the first quarter, due to Work Opportunity Credit adjustments we recorded in the first quarter.

I also want to point out how the change -- the change in how we present and account for our operating segments. As we've continued to refine our operating structure and combined the management of Commercial and PT in each of our regions, we have been required to allocate a significant amount of expense between Commercial and PT. Beginning in 2012, we have eliminated the expense allocation, which we do not perceive adds much value. While we continue to report through the gross profit line for the seven operating and reporting segments, our expense reporting has been reduced to the four regions -- Americas, EMEA, APAC, and OCG, plus corporate.

Turning to the balance sheet, I'll make a few comments. Cash totaled $88 million, up from $81 million at the year -- at year-end 2011. Accounts receivable totaled $978 million and increased $33 million compared to year-end 2011. For the quarter, our global DSO was 54 days, up from 52 days last year. The increase is due primarily to expansion of terms for CWO and other customers. Accounts payable and accrued payroll and related taxes totaled $550 million and increased $41 million compared to year-end 2011.

At the end of the first quarter, debt stood at $95 million, about the same as year-end 2011. Debt to total capital was 12%, down slightly from year-end 2011. In our cash flow, we generated $13 million of net cash from operating activities, compared to a use of $5 million last year. The change primarily reflects improved operating results, as well as lower working capital requirements in 2012. I will turn it back over to Carl for his concluding thoughts.

Thank you, Patricia. It's clear that 2012 will present its share of challenges. To be certain, the US economy is recovering but at a stubbornly slow pace. Weakening European economies have shaken confidence here in the US. Business consumers and investors remain cautious. And large companies still are not spending and adding jobs as quickly as would've been expected. Those are realities that can constrain our business. But they are balanced by the positive longer-term trends that favor Kelly. Among them, shortages in a number of high-skilled disciplines and an aging workforce that will create opportunities, an ongoing secular shift toward flexible workforce models, and a growing demand for types of customized talent management solutions we provide through OCG. And so, we see the glass as more than half full.

Despite the economic headwinds and low revenue growth, we demonstrated our commitment to improved operational leverage, achieving solid first-quarter results. We remain optimistic about 2012, but the second quarter will be tougher than originally expected, given global economics. As we conclude this morning's report, let me affirm what we set out to do. We are committed to delivering competitive returns and increased value for our shareholders. Specifically, our sights remain on achieving a return on sales of 4% this cycle. To do that, we are focusing on growing PT, fee-based, and other higher-margin offerings and maintaining our lower cost of service delivery. And we are making progress.

But if we are going to achieve our goal, we need to see stronger economic growth and greater demand for labor. Regardless, we know that the strategy is sound, and we will continue to act with urgency as we execute our plan. We will leverage our reputation for excellent service to capture new business, broaden customer relationships, and generate profit. We will respond to customers' needs for flexible, innovative solutions for managing their workforce, from traditional staffing to professional and technical specialties to outsourcing and consulting programs. And finally, we will leverage our exceptional Kelly team to connect the world's top companies with talented, passionate free agents and suppliers, equipping our clients with a flexible workforce that helps them execute their business goals in 2012 and beyond.

That concludes today's report. Patricia and I will now be happy to answer your questions. John, the call can now be opened.

Certainly. (Operator Instructions). First to the line of James Samford with Citigroup. Please go ahead.

Hi, James.

Good morning. How are you doing?

Doing well.

Just wanted to get a sense for -- things seem to be deteriorating here in Europe, certainly, at least, on the rhetoric level. I'm just wondering what you are hearing or what you've been seeing in the quarter so far, particularly in Western European side?

I am not seeing any signs of a miraculous recovery in Europe. That's what we are hoping for. I think the rhetoric is hard. Speaking not necessarily of the hours we're seeing but talking of the customer sets in general, I see customers in all of the European areas being very cautious about starting anything new, very cautious about investing inside the European markets. I think there is insufficient certainty. And until there is some understanding of how the euro crisis, the debt situation is going to play out, I'm not expecting there to be any resolution of the certainty crisis in Europe. We are not counting on a return to strong growth in Europe this year.

I guess, one of the segments, in Switzerland, you are still seeing some pretty nice growth there. And I think from the data, it looks like even Switzerland temp data has gone negative. Is there a share gain going on there, do you think? Or is something particular in Switzerland that's going on?

For a growing market, and the overall data shows that it's losing, then you would argue that there is a share shift. I have not seen any objective report to that effect. But that would be the only way the two numbers could be reconciled.

Fair enough. Switching to the US really quickly, just any comment on trends you are seeing there between your larger clients versus smaller client mix?

Well, there was more growth and, as we talked about, there was more employment being created in the smaller customer set. But the dynamics aren't such that it would have caused any appreciable shift in our overall balance yet. What I tend to look for is my signs that doom and gloom is coming is our customers talking about contingency plans for what happens if they need 10% less in staff. That is not really taking place. On the other hand, there's not a whole lot of conversations taking place about how we would ramp-up rapidly and give them 10% more. It's kind of a stable set of expectations. That's why we talk about very low single-digit type of growth for a bit here in the US.

Certainly. Thank you.

Our next question is from Tobey Sommer with SunTrust. Please go ahead.

Hi, Tobey.

Hi. This is actually Frank in for Tobey. How are you?

Hi, Tobey's substitute.

I wanted to ask about the expense control and SG&A. You talked about continued improvement there throughout 2012. You have done a good job so far. Can you give us any color on -- additionally where that's coming from?

Yes. We are basically keeping the same tight rein on what I'll call sort of staff and discretionary costs. In addition to that, we really are focused on making sure our field is as efficient as they can be. Where it's appropriate, we are centralizing functions, which also give us some efficiency. I will also say that, to a certain extent, we're -- the only negative in the whole picture is that we do have a fair amount of turnover in the US, as well as in Asia. So, sometimes we wish we had a little bit more expense to have a few more recruiters to deck against our business. But that said, that is not a big worry. It's just one of the pieces that we need to keep managing.

Okay. Great. That's helpful. Can you talk a little bit about pricing in APAC Commercial? What are the trends you're seeing there?

What you are seeing inside our own data is not a reflection, per se, of pricing. It was a reflection of restructuring our portfolio of business and removing the lower price points. Clearly, there are parts of the business that have been more than commoditized. They have been brought down to gross profit rates that are razor-thin, and we are not going to play in those areas. At the upper end, we seem to be capable of moving up the skill sets, both in Professional and Technical temp staffing, as well as in the placement fees. The question as to the more macro pricing environment, I am not really set to answer.

Okay. Great. And then, in EMEA, France is a particularly large exposure there. We've had some political results lately. Any thoughts about either regulatory changes or shifts that could occur in that region?

It's hard to imagine more regulation on the temporary staffing industry than already exists in France. It's a very regulated market, and it is a -- it has been a long and core part of the French approach to the labor markets. I suspect over time, we might see various legislative initiatives that might impact the market in France. But I'm not expecting any -- it's not high on the legislative agenda. I'm not expecting any significant policy change within the next 18 months.

Okay. Great. And finally, looking at cash flow and balance sheet, can you talk a little bit about your view of acquisitions, what you see out there versus your balancing of repurchases and perhaps dividends?

There is never an end to the possible uses of cash. We still have a tad more debt than I would like. And so, that's obviously an area I keep focus on. There are, as we've now come out of the post-recession environment, there are people now beginning to place more staffing properties on the market. And we, like everyone else, would take a look of those. If we found one particularly interesting and useful to our strategy, we would probably participate. But it is not an explicit strategy to go purchase just for the sake of purchasing.

Great. Thank you very much.

(Operator Instructions). We'll go to Ty Govatos with CL King. Please go ahead.

Hi, Ty.

How are you?

Doing well.

Sorry about making you go back over what you said, but I missed some of the guidance points. Patricia, could you go through them again?

Sure. We talked about revenue growth being flat, maybe up slightly on a year-over-year basis. It will grow a little bit, sequentially. We said that we would expect the gross margin -- the gross profit margin to be up year-over-year in the second-quarter but not quite as much as you saw in the first. We would only have mid-single digits year-over-year expense growth. And then, I talked about taxes, which I revised the numbers that I gave last quarter, where, if we do have Work Opportunity Credits, we would be in the range of 25% to 30%. If we don't, we would be in the range of 35% to 40%. Is that helpful?

To the tax rate, you said second Q would be higher than the first Q?

Yes, I did. Thank you. We had Work Opportunity Credit adjustments in the first quarter, which is typical. As you know, those things take years to move their way through the state system. And so, we were -- we made some adjustments.

So, we are talking a higher rate probably for the year then?

Yes. This was the low side.

Okay. Thank you very much. I appreciate it.

Thank you.

I should say that was the low side assuming no Work Opportunity Credits. Obviously, if we got Work Opportunity Credits, our fourth-quarter rate would be very low.

I understand.

Mr. Camden, no additional questions in queue.

Great. Thank you all, and I look forward to talking with you over the next quarter. Bye.

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