Kelly Services Inc (KELYB) 2013 Q2 法說會逐字稿

Ladies and gentlemen, good morning and welcome to Kelly Services' second-quarter earnings conference call. All parties will be on listen-only until the question-and-answer portion of the presentation. Today's call is being recorded at the request of Kelly Services. If anyone has any objections, you may disconnect at this time. I would now like to turn the meeting over to your host, Mr. Carl Camden, President and CEO. Sir, you may begin.

Thank you, John and good morning, everyone. Welcome to Kelly Services' 2013 Q2 conference call and with me on the call 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 the call. Please refer to our SEC filings for a description of the risk factors that could influence the Company's actual future performance.

Turning now to Kelly's second-quarter results, I am pleased to report that our performance was in line with our expectations in this persistently sluggish economic environment. Revenue was flat year-over-year. Excluding restructuring and impairment charges, we held our expenses flat amidst making targeted investments in our long-term growth and we achieved an adjusted operating profit of $19 million.

Our gross profit rate for the quarter was 16.1%, down from the 16.3% reported in the second quarter of 2012. Kelly's adjusted second-quarter earnings from continuing operations were $0.33 per share compared to adjusted earnings of $0.34 per share for the same period last year.

Now let's take a closer look at our second-quarter performance and each of our business segments beginning with the Americas. We continue to experience soft revenue demand in the Americas as customers remain cautious about the economic environment. Combined staffing revenue for the region was down roughly 2% year-over-year for the second quarter, a slight improvement from the 3% year-over-year decline in the first quarter.

Americas Commercial revenue was down 3% year-over-year for the second quarter. This compares to the 5% decrease we reported in Q1. Light industrial was once again flat compared to the same period last year, while office clerical was down 8%. And we are continuing to see gains in Kelly Educational Staffing where new customer wins helped drive revenue growth of 15% year-over-year in the quarter.

Americas PT revenue was down 1% from the prior year compared to the flat growth we reported in the previous quarter. We continue to see some softness in the higher-end PT market stemming from many of our customers delaying new project implementations. Within PT, we saw revenue declines in our science, IT and finance businesses, somewhat offset by strong growth in engineering and healthcare. We also saw a softening in demand in fees. Combined temp-to-perm, direct placement and other fees saw a 4% revenue decline during the quarter, down from the 13% year-over-year increase we reported in the first quarter. Americas gross profit rate was once again 10 basis points higher than the same period last year.

Expenses in the Americas were up 5% year-over-year. This increase was expected as we continue to make planned investments in Professional and Technical and centralized operations staff to support our large customers and in our technology infrastructure. As we've stated last quarter, these targeted investments will continue throughout 2013 and though they may be a drag on the region's earnings in the short term, we fully expect these investments to deliver a positive long-term impact.

All told, Americas achieved earnings of $32 million for the second quarter. While this is a decrease from the previous year, our performance was solid and in line with our expectations given both our investment strategy and the lower volume that we are experiencing.

Let's now turn to our operations outside of the Americas beginning with EMEA. Revenue in EMEA was up 3% in the second quarter compared to last year on both a reported and constant currency basis, a nice improvement over the 4% year-over-year decline we saw in the first quarter. For the remainder of my EMEA discussion, all revenue results will be discussed in constant currency.

Economic and business conditions continue to be difficult across EMEA with the exception of Eastern Europe. For Kelly specifically, the revenue in Eastern Europe was up 16% year-over-year due primarily to the strong performance of Russia and Hungary. The performance of our operations in Switzerland and Portugal fueled growth of 2% in Western Europe year-over-year while the Nordics experienced a decline of 6%.

During the quarter, we also saw a decrease in our fees across this region. Fee revenue for the second quarter was down 15% year-over-year. The decrease can be seen across both our Commercial and PT segments. EMEA's GP rate for the quarter was 16.9% compared to 17.6% for the same period last year. The benefit of the CICE tax credit in France was worth about 50 basis points. You may recall the intent of the CICE is to improve business competitiveness by reducing the cost of labor.

Aside from this particular benefit, the overall GP decline in EMEA is attributable to continued margin erosion in the Commercial segment due to customer mix, as well as the decline in perm fees. Our corporate accounts have increased 9% and revenue over last year was a decrease in temp GP of 60 basis points. Similarly, revenue from our retail customers is improving slightly, but also at a lower temp GP rate.

Adjusted expenses decreased by 5% year-over-year. This reduction is primarily due to staff reductions and commercial branch consolidations, bringing expenses more in line with the level of activity. Netting everything out, EMEA reported a profit of $4.4 million for the second quarter, an increase of $1.2 million compared to the same period last year, excluding restructuring. We are pleased with our ability to remain profitable in such a difficult market and we expect conditions across Europe to remain challenging for the staffing industry for the foreseeable future.

Next, we turn to APAC. As we reported on our last quarterly call, we are no longer consolidating our former subsidiaries in China, South Korea and Hong Kong. As such, year-over-year percentage changes are adjusted to exclude the impact of deconsolidating. Combined revenue for the APAC region increased by 4% in constant currency year-over-year. This was primarily driven by improved staffing volumes in Australia and Singapore. For the remainder of my APAC discussion, all revenue results will be discussed in constant currency.

Fees remained flat to prior year due to soft demand across the region. Our gross profit rate for the region was 16.6%, down 20 basis points compared to last year, but up 30 basis points compared to the prior quarter and this was primarily due to changes in business mix in Australia and New Zealand. Expenses were down 9% in constant currency for the quarter. This was primarily driven by a combined 17% reduction in headcount in Australia and New Zealand as we consolidated our operations there. We also realized a 23% reduction in all other headquarter expenses across the region during the quarter and we continue to keep a careful eye on expenses in the APAC region. We concluded the quarter by improving reported earnings in APAC by $2 million year-over-year.

Now we will turn to our results for OCG, an important segment that continues to be a driver of our growth. OCG revenue was up 20% in the second quarter compared to last year. Growth within OCG continues to be driven by two core elements of our talent supply chain management strategy, business process outsourcing and contingent workforce outsourcing. Revenue in our business process outsourcing practice had $40 million and was up 32% year-over-year. This was primarily due to an increase in our traditional BPO solutions within the Americas, as well as increased demand in our KellyConnect contact center solution.

Total OCG fee revenue was $16 million for the quarter and was up 25% year-over-year in our contingent workforce outsourcing practice. We are pleased that we continue to experienced double-digit growth in both our BPO and CWO practices year-over-year. Overall, OCG's gross profit rate was 23.3% compared to 25.9% a year ago. This decline was primarily due to the cost of services incurred to ramp up a large program ahead of the revenue stream, as well as business and customer mix.

Expenses without restructuring and impairment costs were up roughly $3 million, or 12% year-over-year. This increase is the result of servicing costs associated with the expansion of customer programs and new customer program implementations. But all in all, we are realizing significant operating leverage.

At the time of our first-quarter earnings call, we anticipated a small loss in OCG for the second quarter. That said, we are pleased that excluding restructuring and impairments costs, OCG was breakeven for the quarter compared to the same period a year ago. During the second quarter, we made the strategic decision to exit the executive search business in Germany. In connection with this decision, we recognized $1.7 million of asset impairment and $800,000 of restructuring costs. We continue to be pleased with the strategic progress we are making in this important segment and now I will turn the call over to Patricia who will cover our quarterly results for the entire Company.

Thank you, Carl. Revenue totaled $1.4 billion, flat compared to the second quarter last year and up 4% sequentially. Worldwide, our fees were down 2% year-over-year and up 4% sequentially. Our gross profit rate was 16.1%, down 20 basis points compared to the second quarter last year. On a sequential basis, our gross profit rate was down 40 basis points, primarily due to the OCG cost of services in advance of revenue.

During the second quarter, we recorded restructuring charges of $810,000 and impairment charges of $1.7 million as a result of our decision to exit our executive placement business in Germany. Excluding restructuring and impairment charges, expenses were flat year-over-year. As I noted last quarter, we recorded a $3 million charge in the first quarter due to an unclaimed property settlement. Absent this charge, expenses were down 2% sequentially and as a result of our continued efforts in controlling expenses, we were able to offset the investments we have been making in PT, centralization and technology.

Excluding the restructuring and impairment charges, earnings from operations were $18.9 million compared to 2012 adjusted earnings of $21.6 million. Income tax expense for the second quarter was $4.8 million compared to an expense of $8.3 million in 2012. Our tax rate was 32% for the quarter, 28% excluding restructuring and impairment charges, which were not tax-deductible. That compares to a rate of 39% last year when Work Opportunity Credits were not available for most new hires.

Diluted earnings per share from continuing operations, excluding restructuring and impairment charges, for the second quarter of 2013 totaled $0.33 per share compared to $0.34 in 2012. Looking ahead to the third quarter of 2013, we expect revenue to be flat to up 2% on a year-over-year basis, flat sequentially. We expect continued pressure on the gross profit rate holding us flat on a sequential basis down 70 basis points year-over-year. We expect SG&A to be up 1% to 3% both year-over-year and sequentially. We will continue to invest in our PT and OCG businesses, as well as front-office systems and expansion of our large customer service delivery model.

Our 2013 annual income tax rate will be around 10%, including the retroactive Work Opportunity Credits we recorded in the first quarter. Our tax rate is highly dependent on the mix of our business, especially the amount of US LID business, which drives Work Opportunity Credits, the geographic mix of business, earnings or losses from our deferred compensation plans and tax planning.

Turning to the balance sheet, I will make a few comments. Cash totaled $70 million, down from $76 million at year-end 2012. Accounts receivable totaled $1 billion and increased $25 million compared to year-end 2012. For the quarter, our global DSO was 54 days, up one day compared to last year. Accounts payable and accrued payroll and related taxes totaled $567 million, up slightly compared to year-end 2012.

At the end of the second quarter, debt stood at $83 million, up $19 million from year-end. Debt to total capital was 10%, up from 8% at year-end. In our cash flow, we used $14 million of net cash for operating activities compared to generating $6 million last year. The change primarily reflects higher additional working capital requirements. Even with the weak revenue situation, we had a strong operational performance this quarter and I will turn it back over to Carl for his concluding thoughts.

Thank you, Patricia. Our second-quarter results demonstrate Kelly's ongoing progress in three strategic areas that we believe are key to our long-term success. Our OCG segment continues to deliver strong revenue and fee results and the investment we are making to support key OCG clients will serve to further strengthen our talent supply chain capabilities for years to come, including developing scalable repeatable delivery methods that drive efficiency across all solutions.

We continue to pursue higher-margin professional and technical staffing solutions to meet the growing demand in the higher skilled talent space. And we believe our success in OCG will create a better awareness of Kelly's PT capabilities. And finally, we continue to keep a close eye on expenses making strategic targeted investments that support our long-term growth while delivering an operating profit in the face of flat revenue.

This progress confirms that Kelly's strategy is responding to secular trends in the labor force, trends that require holistic higher-end workforce solutions for larger companies and highly skilled professional technical talent for firms of all sizes. We are also especially pleased with the progress we have seen in our EMEA region this quarter as they continue successfully to execute despite the recessionary conditions there.

Still, while we are pleased with Kelly's second-quarter results, we know that they reflect an economy that is far short of full recovery. The slow and uneven growth trends we saw in 2012 remain with us and although we have experienced modest job growth thus far in 2013, the improvement in temporary employment in the US as reported by the BLS has primarily been driven by hiring in the construction, retail and hospitality sectors, areas which we are not generally engaged in. As such, staffing revenues remain constrained and there is still significant pressure on margins and direct hire fees.

Looking ahead, we expect the current trends in the US labor market will continue and true signs of momentum will remain elusive. The one-year reprieve in the Affordable Care Act employer's mandate is unlikely to lessen the anxiety of US companies. Compliance will still be extremely complex and uncertainty over the impact of 2014's individual mandate will continue to dampen hiring.

For our part, Kelly is moving ahead with our work towards ACA compliance. We are conferring with staffing industry groups, working with vendors to develop ACA compliant plans, updating our internal IT systems and developing financial models, communication plans and support strategies to ensure that we are prepared. This concludes today's report. Patricia and I will now be happy to answer your questions. John, the call can now be opened.

(Operator Instructions). Tobey Sommer, SunTrust.

Hi, Tobey.

Hi, good morning. Carl, I had a question for you about the OCG segment and I guess sort of the contingent workforce outsourcing element. What kind of -- how do you think about the opportunity for that business and the growth there to help drive growth in the staffing businesses?

You have a mixed set of customer expectations. We have some CWO practices where there is an expectation that we will do no staffing and we have other CWO customers, there is an expectation we will take all that we can acquire and do. So it is not an even answer. In general, owning the customer strategic relationship will generally provide you better opportunities to acquire staffing revenue over the future. But I see the size of those opportunities being overstated by some and misunderstood by many.

It is more the relationship, the strategic relationship you have with a customer that is important than it is the fact that you have the particular CWO contract. I think in the long run it is a significant advantage for the firms that have control of the customer's talent supply chain strategy.

And within OCG, how much sort of -- maybe think of it as customer spend are you shepherding at this point?

I am looking around the table to see if that is a number that we have -- let's say close to $5 billion.

And then asking just one last question on that, and I will kind of get back into queue soon. The customer that you were kind of ramping for in the quarter that suppressed profitability, would we probably see better operating margins within OCG headed into 3Q?

If not, I would be unhappy.

Yes, we will still have a little piece of it in the third quarter, but overall it will be -- it won't be the big impact it was in the second.

Okay, my last question and I will get back into queue. Are you involved in executive search in other markets now that you have exited Germany?

We have executive search in several markets and particularly in the APAC region.

Okay, thank you very much.

Ty Govatos, TG Research.

Hi. A couple of questions. I was surprised that the SG&A was down so much sequentially. And Patricia, I tried fast, but my fingers didn't move fast enough. Could you go through some of the guidance numbers again?

Yes, I will. We basically said that it would be up 1% to 3% for the third quarter, whether you do the math year-over-year or sequentially. That is inclusive of the investments that we continue to make in our -- in the areas we are investing in -- PT, OCG, large customers, centralization and technology.

Okay. And gross profits?

What we said about gross profit is that they will be pretty flat sequentially.

You are referring to margins, right?

I'm sorry, say that again?

Referring to margins?

Yes, gross profit margins.

And you think the SG&A will be up 1% to 3% sequentially --

Yes.

-- from the second Q?

Yes. Whether you do second Q to third quarter or third quarter to last year --

Got you.

-- it's somewhere in that range.

And why the dip? Because if I remember right, you were looking for flat sequentially Q1 to Q2 and it was down pretty sharply?

Well, we really focused in the second quarter on expense control. We will continue to do that. As I look ahead though, some of the things that we were doing in APAC in particular and EMEA I don't see necessarily having -- being able to continue at that pace for the amount of change.

Understand. It was still a nice drop. Good work. Thank you. That's all.

(Operator Instructions). Tobey Sommer.

Thank you. Could you walk us through now what your expectations may be? I know it is a little bit early, but for Work Opportunity Credits for next year. Is there certain legislation that you are already monitoring or do we need to sit tight and wait for something to develop in the legislature?

My long experience with the US government, the Work Opportunity Credit is always held until the end because it is a negotiating chip that people are able to put on the table to offset something else by saying look how good we are being for business or look how good we are being for employment. And the only expectation I have is that nothing will be done until the last minute because that has been my experience now for --

Way too long.

-- for like a long time.

Well, plus with all the discussion about corporate tax reform, I think that that will just lead to even more uncertainty and then therefore lack of action. So I wouldn't be surprised if it was another cliffhanger beyond --.

You are as good as we are. What do you expect?

Well, I was hoping for a revelation here.

Well, you are not getting it. (multiple speakers)

(multiple speakers). It's not happening.

Okay. Excluding that, if for example we don't get to a situation where we start out 2014 and it is not in place, Patricia, what would be a ballpark tax rate in the absence of Work Opportunity Tax Credits?

In the absence of having them at all?

Yes, for example, if we started the year and we were just talking about the year without that in place, what would a tax rate look like?

Upper 30%s.

Upper 30%s? Okay. And then on DSOs up a day, is that just a customer mix or a particular timing issue or is there -- could you give us a little bit of color as to what drove that and if you see -- if you expect it to revert?

Yes, it's an interesting thing. I am not sure it will revert because the biggest change that we are seeing is that our large customers are paying slower, although still within their terms. So what we see them doing is they used to be paying a little bit in advance of their terms and now they are really carefully maximizing that. I am also surprised by the number of customers, large customers that we have that really play the end of their quarter and seemed to slow down especially in that period of time. So what is going to sit on their balance sheet as cash is not going to sit on our balance sheet as cash.

Okay. And then, Carl, the investments you are making in the branch structure to facilitate more regional and local sales, how do you feel about that at this stage and when would be a kind of more reasonable timeframe to be able to judge the outcome of those investments more fully? Thanks.

I think, Tobey, what we are really more focused on is the consolidation of our service delivery, especially for the large accounts and to a centralized hub. So you hear us talking about centralization and we and others in the industry are slowly shifting away from -- to quickly shifting away from a branch-based model of a lot of that service into a centralized model. What you have though are branches left behind with more capacity than they had before as that business has moved -- as the large account business has moved out and that, of course, takes some time to refill up that capacity with local business. So it is not so much an investment in branch in a brick-and-mortar structure to drive more local business as it is a refocusing of the branches on the local business structure. And that takes a while to play out. A year or so tends to be our experience.

So would that be a year from now or a year -- a lesser time because you began the initiative a while back?

Yes, you began the initiative a while back, so it is less than a year for some branches, but it is still new to other branches. So the clock has just started ticking and some work still to be done on centralizing and pulling some of that business out of the branch network.

Okay. My last question has to do with Europe and some of the margin pressures there. Would some of the other global players in the midst of branch consolidations and kind of reducing their cost structures very significantly, do you see an opportunity for any stability in margins at this point or are we probably still in a compression phase in Europe for the foreseeable future?

You are talking gross margins or operating margins?

Gross margins.

For us, I am not certain that we are seeing a steady downward trend in the margins of any particular contract. What we have been talking about is a shift in mix as the larger accounts have become a bigger proportion of our mix. So it is not that contract A used to be a 22% and then it got renewed at 20%. That is not really what is taking place. It is that the larger corporate or global accounts for us are becoming a larger proportion of our business.

And then in particular, driving some of the GP rate down would be the commentary we had about a significant reduction in the placement-oriented type of fees in terms of the conversion of workers or the direct hire of workers in Europe. Again, Western Europe, still although maybe stabilizing, still in a recessionary environment and you don't see a lot of perm hiring in that environment. So I would say the greatest downward pressure for us has been on the fee side and then secondarily on the mix. But not much towards a revision downward of pricing contracts.

Thank you very much. That's helpful.

Josh Vogel, Sidoti & Company.

Thank you, good morning, everyone. First question, I know you have exited some markets or not including some revenue from certain countries and APAC, but it looks like the year-over-year and sequential trends seem a lot weaker on the PT front versus commercial and I was wondering if you could just talk to the overall demand trends, the nature of the commercial work there and why that business seems to be outperforming relative to PT?

Again, I am not certain that it is so much an outperforming and again, like you said, we are washing out the effects of what we are consolidating in countries that we have exited. And I would not use Kelly at all as an indicator for what is taking place in big chunks of Asia on the PT or Commercial side given our presence. We see -- again, for us, we are much more responsive to changes in demand from a handful of customers rising or falling than we are to general trends in the region. So I am pretty hesitant to give you commentary as to what I think are the macro up or down pressures on PT and Commercial.

Okay.

And the fact that we are deconsolidating the joint venture does have a lot of impact because that was primarily PT-based.

Oh, okay, okay.

So when you look at the PT numbers in the release, those are not adjusted for that deconsolidation.

Okay. That makes sense. Now with EMEA, I know France is one of your largest markets there. I know you saw better results in Q2 and based on Q2 and what you are seeing for Q3, do you think that is the beginning of a sturdy recovery there?

No. I see nothing in wearing any of the hats that I wear arguing that Europe is now on the edge of a recovery. I would argue the downward slope in the recession, I can make a case that things have stabilized at a lower point for both the industry and for the GDP -- and for what passes for GDP growth there. But I for sure would not want to be saying the recovery is coming profit. I am not certain yet what the timing of that is going to be.

Okay, that's fair. And lastly, with OCG, I know it was breakeven on an adjusted basis and there is some residual ramp costs and ongoing investments there. But should we expect the unit to be profitable in Q3 or breakeven again or running around breakeven?

No, I have a strong expectation it will be profitable in Q3.

Okay. That is all I have. Thank you very much.

And Mr. Camden, no additional questions in queue.

Great. Thank you all.

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