Kelly Services Inc (KELYB) 2015 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to Kelly Services first-quarter earnings conference call. (Operator Instructions) 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, John. Good morning, everyone. Welcome to Kelly Services' 2015 Q1 conference call. With me on today's call is Olivier Thirot, our acting CFO. And George Corona, our COO, is also joining us this morning.

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.

As we walk through our quarterly results this morning, let me point out that our year-over-year comparisons are represented in constant currency due to the significant volatility in foreign currency exchange rates.

Now turning to Kelly's first-quarter results, I am very pleased to report that we delivered solid performance that exceeded our expectations on several fronts. Revenue for the quarter was $1.3 billion, up 4.4% year over year. Our gross profit rate for the first quarter was 16.7%, consistent with the rate we delivered in Q1 last year. All told, we achieved an operating profit of $12 million for the quarter, doubling our profit from a year ago.

Kelly's first-quarter earnings from operations in nominal currency were $0.10 per share, compared to earnings of $0.07 per share for the same period last year. Overall, we are pleased with Kelly's performance during the first quarter coming off of a year of aggressive investment. We grew revenue at 4 times the rate of our expenses while showing good price discipline and driving margins upward. That's a promising start to the year, and it confirms our confidence that 2015 will be a year of solid execution of our strategy.

Now let's take a closer look at the performance in each of our business segments beginning with the Americas.

Total staffing revenue, that's commercial and professional and technical, in the Americas grew 4.2% in the first quarter compared to the same period last year, and down from the 6.7% increase we reported in Q4. As expected, the slowing of our revenue growth was primarily seen in our centralized large accounts. Overall, commercial staffing grew more than 6% while PT declined by just over 1% for the quarter year-over-year. As we stated on last quarter's call, with operational changes we implemented in 2014, we now servicing our customers through two different delivery models that we implemented on two different timelines. As such, it useful to look at our results through that lens since our centralized accounts and branch network business are progressing at different rates.

In the account service throughout local, US branch network, we saw a 12% increase in commercial staffing with healthy gains in our core, light industrial, and office clerical business in continued new customer wins and Kelly Educational staffing which delivered impressive revenue growth of nearly 50% year-over-year. We also again to see increased traction in the PT business at our local branch network where we reported 4% year-over-year revenue growth for the quarter compared to the 5% decline we saw in Q4. We are pleased with the PT growth in our branch network and attraction that we are gaining from the specialty PT recruiting model we launched last year. Our PT pipeline appears healthy in the number of new orders continues to trend positively as a result of our investments in PT branch sale resources.

Turning now to the large accounts that we delivered through a centralized model, while commercial demand improved as the quarter progressed, we did experience a year-over-year decline of 5% in commercial staffing reflecting our decision to exit a couple of customer programs due to pricing discipline. At our centralized PT business, revenue was down 4% year-over-year and as we mentioned on last quarter's call, a few of our centralized accounts had projects coming to an end during Q4 and a negative impact carried over into the first quarter of 2015. However, we have seen a modest sequential increase in PT order volumes during the quarter and many other centralized accounts and we believe this increased demand will help offset the impact of project completions as the year progresses. Looking across the Americas at our core PT specialties, our engineering business was most significantly impacted by the completion and phasing of the centralized account projects I just mentioned. Engineering reported a 4% revenue decline for the quarter year-over-year. Our finance business on the other hand continued to show solid improvement reporting a revenue increase of 15% compared to a 3% increase in Q4.

Turning to the Americas overall fee performance, perm fees were up 3% in Q1, down from the 11% we reported last quarter. Our Q1 commercial fees were up 8% while PT revenues was down 2% -- the revenue was down 2% from a year ago. The reduction in PT feet growth was primarily attributable to our science and engineering businesses. We believe this long as temporary as our pipeline at the start of Q2 is healthy.

America's gross profit rate was 15.6%, up 10 basis points from the prior year due to improved price discipline and more favorable business Max. As anticipated, expenses for the first quarter were 5% higher year-over-year in the Americas as costs associated with last year's investments in PT sales and recruiting staff carried over into 2015 and these costs were partially reduced by the management simplification plan we implemented in October of last year.

America's achieved solid earnings of $23.2 million for the first quarter. We feel good about our quarterly results, we are pleased that our branch network delivery model is working well, and that our centralized delivery model is starting to gain traction as plan. We expect further improvement in our centralized accounts on the second half of the year, and sustained revenue growth from our branch network throughout 2015.

Let's now turn to our staffing operations outside the Americas starting with the media. Revenue in EMEA was down 1% in the first quarter compared to last year with commercial down 2% and PT up 2% year-over-year. In nominal currency revenue was down 19% year-over-year. We achieved a solid growth of 4% in Western Europe while above market performance with Portugal up 43% in France up 9%. However, Switzerland was down 17% attributable to how our customers were dealing with the currency impact on their business and in Eastern Europe we're down year-over-year by 4% driven by Russia.

Fee-based income for the quarter was down 9% year-over-year with declines in both commercial and PT. We had solid double-digit the growth in France and the UK, but this growth was offset by declines in other countries, (((MY AUDIO STARTS HERE))) particularly Russia, where hiring decisions of our customers have been postponed or canceled.

EMEA's GP rate for the first quarter was 15.2%, compared to 16.3% for the same period last year, and the overall GP decline is primarily attributable to decreases in perm fees as well as unfavorable country mix. Expenses decreased 3% compared to last year. We are continuing to see the benefits from our cost control measures while we continue to selectively invest in PT across the region. Netting it all out, EMEA reported a loss of 170,000 for the first quarter. While the economic outlook in Europe appears to be slowly improving, we expect market conditions to remain challenging for the foreseeable future. We're confident that the adjustments we have made to our operating models over the past several years will continue to support our regional strategy. Now let's turn to AIPAC.

Revenue for the AIPAC region grew by 15% year over year. Temporary staffing revenue grew at double digits, mainly driven from large accounts in India, Australia, and Singapore. The growth rates reflect solid performance in both commercial and PT. Perm fees declined by 7% for the quarter compared to prior year, mainly driven by Australia. Our gross profit rate for the region was 16.5%, consistent with the prior year. AIPAC's gross profit results include the positive impact of higher than expected 2014 wage credit refunds in Singapore. The GP rate was tempered by customer mix and declines in perm fees. Our AIPAC region did a nice job of reducing expenses by 8% for the quarter, reflecting the positive impact of our restructuring in Australia and New Zealand last year. We concluded the quarter with an operating profit of $3.8 million, up roughly $3 million year over year.

Now we will turn from our staffing results to the results for our outsourcing and consulting segment of OCG. For the quarter, revenue grew by 13% year over year, and gross profit increased 10%. We had growth in all three of OCG's key talent supply chain management practices: business processing outsourcing -- our BPO business; contingent workforce outsourcing, CWO; and recruitment process outsourcing, RPO.

BPO revenue grew 15% for the quarter and gross profit increased by 12%. We experienced revenue growth of 48% in our stem business. In our contact center outsourcing business, KellyConnect, we had year-over-year revenue growth of 37% and gross profit increase of 16% as we continue to invest ahead of anticipated revenue in this business. In BPO's legal outsourcing business, year-over-year revenue declined 43% due to lower project volume from key customers.

In CWO, revenue increased 15% for the quarter and gross profit increased 22% year over year. These results then reflect an increase in both our payroll process outsourcing business and strong program management fees. The volume growth came from both existing and new customers.

In our RPO practice, revenue increased 4% for the quarter and gross profit declined 6% primarily due to lower volume across our natural resource customers. We expect this industry and our RPO practice to remain under pressure for the balance of the year.

Overall, GP dollars were up 10% in OCG, with a gross profit rate of 23.8% for the quarter. Expenses were up 7% year over year. As the year progresses, we expect expenses to increase at a higher rate as we continue to invest in this fast-growing business. We are pleased with OCG's operating profit of $2.8 million for the first quarter, up from last year's operating earnings of $1.2 million. The progress we're making in this segment is a key indicator of Kelly's success in meeting the growing demand for holistic workforce solutions, and we are pleased to continue making the necessary investments to support future revenue in GP growth in OCG.

Now I'll turn the call over to Olivier, who will cover our quarterly results for the entire Company.

Thank you, Tom. Revenue stood at $1.3 billion, up 4.4% in constant currency compared to the first quarter last year. (inaudible) down 0.8% is a difference caused mainly by the continued weak (inaudible). So the negative impact of foreign currency on our revenue growth trend was over 500 basis points from Q1.

Now (technical difficulty) for the remainder of my comment, year-over-year comparisons are represented in constant (inaudible). (inaudible) placement fees were down 4% year over year as we continue to experience decline in EMEA and AIPAC. That's more than (inaudible) 3% growth we saw in the Americas. Our gross profit rate was 15.7%, flat when compared to the first quarter last year. In constant currency, overall GP was up $8.5 million, so about 4%.

SG&A expenses were up 1% year over year, which does include the impact of cost savings generated by our management simplification plan. Earnings from operations were $12 million in the first quarter, compared with 2014 reported earnings of $6 million. These results reflect strong operating leverage as almost 3/4 of our GP growth dropped to the bottom line. Income tax expenses for the first quarter was $5.9 million compared to $2.1 million reported in 2014. The increase is driven by higher earnings default taxes as well as an increase in non-tax deductible losses in some countries. Diluted earnings per share for the first quarter of 2015 totaled $0.10 per share, compared with $0.07 reported in 2014.

Looking at have for the rest of the year, we expect constant currency revenue to be up 5% to 6%, slightly lower than our previous guidance and reflecting the current growth trend in our large centralized accounts. We expect the gross profit rate to be up year over year, reflecting our continued pricing discipline and (inaudible). We can also confirm that, at this time, our current pricing with customers will be sufficient to cover our ongoing costs and prior investments related to the Affordable Care Act.

Turning to SG&A, let's take a closer look at how our investments in management simplification plan bring back our expanded growth rate during the year. Based on our current projections of 5% to 6% revenue growth, we expect SG&A expense to be up about 3.5%. That's a $31 million increase in SG&A net of the $35 million of cost savings coming from our management simplification plan. Our projected SG&A expense includes $39 million of valuable expense that's dependent on our revenue growth assumptions, $10 million related to the authorization of our investments to (inaudible), and $70 million related to merit increase and other cause. Our 2015 annual income tax rate is expected to be in the low 14% range, excluding work opportunity credit.

As you may be aware, work opportunity credit expired at the end of 2014, and there has not been any update of this topic since our first-quarter earnings call. At this point, we don't know if or when they will be renewed. If work opportunity credit are reinstated, our annual tax rate is expected to be in the 20 percentage points lower. Note that in the quarter of reinstatement the tax rate could be in the low single digits or even negative.

For the second quarter, we expect constant currency revenue to be up 4% to 5% on a year-over-year basis. This is on par with Q1 growth. We expect our gross profit rate to be up on a year-over-year basis and nearly flat on a sequential basis. And we expect expenses to be up about 3%, so about 50% of our GP growth on a year-over-year basis.

Although the current global currency volatility did not have a significant impact on our Q1 earnings from operations, we do anticipate that it would have a more significant impact in future periods. Because such impacts are inherently difficult to predict, we can't provide any further guidance on such effects at this time.

Now turning to the balance sheet, cash totaled $49 million, compared with $83 million at year-end 2014. Accounts receivable totaled $1.1 billion and decreased 2% compared to year-end 2014. (inaudible) DSO was 57 days, consistent with last year but up three days after the fourth quarter. The sequential increase is largely the result of seasonal fluctuations. Accounts payable and accrued payroll and related taxes totaled $637 million, down $35 million compared to year-end 2014.

At the end of the first quarter, debt stood at $81 million, down $11 million from year-end 2014. Debt to total capital was 8.8%, down from the 9.9% (inaudible) at year-end 2014.

In our cash flow, we used $50 million of net cash flow for operating activity compared to using $91 million from operating activity last year. The change was primarily due to lower growth in trade accounts receivable.

I turn it back over to Carl for his concluding comments.

Thank you, Olivier. When we closed out 2014, we said Kelly had emerged a more efficient, better-aligned organization, ready to deliver solid earnings growth in 2015. And our first-quarter results are clearly on track with those expectations and confirm that Kelly's strategy aligns with market needs.

Account service through our US branch network are showing good, sustained growth in Kelly's commercial core and solid sequential improvements in our PT specialties. Our expanded sales force is growing our PT customer pipelines, while our new PT recruiting centers focus on growing our talent pipelines. Our local markets are off to a strong start in 2015, and we expect that trend to continue throughout the balance of the year.

We are also pleased with the trends we are seeing in our EMEA and AIPAC segments, which deliver cost control and PT revenue growth that align with our strategy in those regions.

Our centralized large accounts, on the other hand, are more exposed to the impact of currency fluctuations and global economic challenges. And as noted before, the sheer size of these top accounts makes this portfolio more susceptible to client-specific fluctuations. This volatility, combined with our intent to maintain price discipline, may lead to ongoing revenue variations from quarter to quarter. But we are pleased to see signs of increased PT order volume in our centralized accounts as these companies search for the skilled talent to move their businesses forward.

And our OCG segment continues to perform well, bringing new clients into Kelly's portfolio and expanding current relationships. And though we expect RPO to have a challenging year, our BPO and CWO specialties are delivering solid results and continue to play a key role in our talent supply chain management approach. As many of the world's largest companies become more intentional and strategic about their global workforce, we are helping them design and deliver more holistic solutions for acquiring and managing their talent. We will continue our investments to capture ongoing growth opportunities in the outsourcing and consulting market, and we expect OCG revenue and gross profit growth in the 15% to 20% range in 2015.

As a whole, we are pleased with Kelly's performance and our ability to double our earnings in Q1. We believe that recent US jobs reports still signal a stable labor market, and that demand for skilled workers will increase in 2015 and that we will capture those opportunities for PT growth while delivering leverage in our core staffing business throughout the year.

As we continue our investments and drive top-line growth in OCG, we will continue to broaden and deepen Kelly's role as the trusted talent advisor to many of the world's top companies, positioning us for success in 2015 and beyond.

Olivier and I will now be happy to answer your questions, along with George Corona, our Chief Operating Officer. John, the call can now be opened for questions.

(Operator Instructions) John Healy, Northcoast Research.

Hi, Carl. Congrats on the nice work on the operating line. I wanted to ask a question about how you see the year. I appreciate the comments on the constant currency revenue and expense growth. But as I look at the year, typically first quarter is probably the low watermark for operating profit for the year. And I know you got a lot going on with volatility in the customers. But is it reasonable to think that the operating profit that we see for this quarter hopefully will be the low watermark for the year? Can we reasonably think that profits on a quarter-to-quarter basis should move higher from here, assuming the revenue lines don't get shocked by any economic factors?

I think when you look at the Q2 guidance, I think you get a flavor of (technical difficulty) now. We expect the revenue of the top line to continue to grow at the same pace than in Q1. And getting an operating leverage of about (technical difficulty) good outcome for probable outcome in line with what we're seeing in Q1.

I'm not seeing anything, John, that is changing the basic in-year cyclicality of the industry. Because you're right; Q1 is always the weakest quarter. It grows through Q2, Q3, and then the debate is always what type of decline you get in Q4. It's been a [typic] pattern at the moment; haven't seen anything coming off of it. But I think Olivier's comments -- we are seeing growth that in some past recoveries would still have been viewed as tepid, but the leverage now we are producing off of that growth is very strong.

Got you. Okay, that makes sense. I wanted to ask about the investments in the OCG business. It seems like you will be spending some money there. Is that anticipation of business that you've already been rewarded, or is that just an optimism that those offerings are just going to continue to see further demand increases?

This is George.

John, it's both. So there's a part that I necessarily in the growth wouldn't call investments. It's just the ability to be able to deliver the volume as our current clients and as we bring on new clients, we have to bring on some cost to deliver that GP. But the big part of what I do call investments is our belief in thought processes in the industry that these products are continuing to catch on. That our large customers are coming to us and asking for more and more service, so we have to be able to deliver product innovation as we move forward. And then the last piece is brand-new customers come with implementation costs.

So it's all of those three things. It's delivering the volume, it's implementing new wins, and then it's delivering product innovation that is being required by our clients as we move forward. And that's why we continue to say that we see 15% to 20% forward growth here is because of the adoption that's coming in the industry for these new waves of work.

Got you. That make sense. And just two quick housekeeping questions. I might've missed it, but did you guys give any color on why the tax rate in 1Q was just a bit higher than you would have expected? And then additionally if you said what the forecast was for currency headwind into queue or the remainder of the year.

I think on the currency -- of course, they start to know what is next because (inaudible) every day. On the tax side, twofold. One is we expect potentially restatements of work opportunity credit, but it's going to be more in Q4 -- a little bit like in 2014, where you get (inaudible) one quarter.

So basically, as we see now, Q1, Q2, Q3, we are going to be around 40% income tax -- effective tax rate. If work opportunity credit is reinstated in Q4, then of course the rate is going to drop in order to get around 20% for the full year.

Why the rate in Q1 is higher than even our expectation -- there two things. One is related to Russia, where we have been kind of push to book evaluation (inaudible) because of the economic environment and impact on our P&L. And the second one (technical difficulty) more seasonality for foreign business, where usually we have more loss-making countries in Q1 for which we have valuation (inaudible) we don't benefit from (inaudible). But that's very seasonal, and it's not going to be expected to continue over the year.

Got you. Thank you guys so much.

Tobey Sommer, SunTrust Robinson Humphrey.

Wanted to ask your question about what was the US local growth. And is there a goal in either dollar terms or percentage of sales that you give us so that we can get a sense for how you progress in coming quarters?

I will start, and then George will pick it up. In the script, we said we had -- in the local US branch network, we had a 12% increase in commercial staffing and that we had a 4% year-over-year revenue growth and PT staffing in the local business. And then --

I guess what we've said moving forward is just that we continue to see improvements especially in PT. The commercial growth at 12% is very strong, but how long that will be able to sustain, it's hard to say. But expect it to continue to grow at strong rates in commercial throughout the year. But we expect to see PT increasing as the growth rates (technical difficulty) throughout the year as the new model continues to take hold. And we've been very pleased with what we've seen in the first quarter as that model has taken hold. And as we look at how PT proceeded within the quarter, it was up 2 in January, it was up 4 in February, and it was up 5 in March. And so you see the progression as it's moving forward.

Will those growth rates flip-flop towards end of the year based on your outsized investments in PT?

I'm not sure I understand your question.

Will the growth rates in PT rise to potentially exceed commercial growth rate?

I don't think they will rise to exceed commercial, but they will get closer.

Okay. What sort of growth have you had in sales-generating headcount to support your growth aspirations in PT and then local?

So we have been -- as we said last year, we added over 60 reps in business development for the local PT area. And right now, as we add it, it will just be small, incremental amounts at this point.

Can you give some context so we can interpret what 60 reps means as a function of the base or percentage terms?

In percentage terms, I would have to go back and look to give you an exact number. But it was a substantial increase in the number of reps that we have.

I was curious in your RPO business, what was -- I missed the growth rate as you mentioned it specifically. I'm curious if existing customers that maybe you had for a while are hitting their projections for hiring. In other words, are they getting the numbers they talked about with you a year or two ago? Are they falling a little short or exceeding, kind of in general?

I think, in general, they are hitting, but we have some particular impacts in oil and gas where they are not hitting. Actually, they have started to reverse their hiring because of what's going on in the oil market. That's had a bit of an impact on us. And then as we were growing RPO last year, a lot of the clients that we had in there, they are hitting their targets, but they are not growing now. So year over year is just not as big an impact. We are satisfied that we have a solid pipeline in RPO. But, as you know, those things take time to close and then time to implement. We see the future of RPO to be fine, but we're going to have some pressure on the business throughout this year.

Then just two kind of broad questions. One, Carl, I was hoping you could talk to the old long-term operating margin target with these investments underway. Are you in a position to be able to talk about a long-term operating margin target again? And then lastly -- I'll get back into queue -- while OCG is growing nicely, I just wonder if in any of the lines of business, you feel like you are subscale versus other large, global players. And that may be requiring some investment in dampening the flow through to profit. Thanks.

Yes, so let me start -- try to parse your -- the questions. In terms of an operating target, not yet, because I'm not certain what the proportion of business mix in terms of gross profit dollars and so on is going to ultimately end up being between OCG and staffing and obviously seeing how the mix plays out between PT and commercial.

But I get the usefulness of having that number out there. We are just in a state of flux right now as we're watching OCG growing at a rate 5 times faster than staffing. And then you can see were that works while it needs -- as George said, with that high of a growth rate, how much leverage do you get out of the expense side, how much more do you have to put in in terms of new programs and new program management?

We've said in terms of -- I'm not so certain that it's a scale issue, but we have said in terms of our customer mix that we expect RPO to be under pressure kind of the lowest growth. But understand a good 4% for the quarter, so it wasn't as if it was a negative growth rate. But we are -- one of our very important verticals is a natural resource vertical, and, in particular, that one has been the most disrupted by changes in the price of oil and changes in macroeconomics.

Yes. And so I guess when we look at scale issues, RPO would be the one that I would say that in the competitive space we need to get bigger and more invested in that product. Like I said, our pipeline is strong, so we are very confident on the future of it.

The rest of our businesses, we are on par with our competitors. It's really hard when you get into the BPO space because we do very -- a lot of things within BPO, and there's all kinds of competitors out there, some bigger, some smaller. But we possess enough scale in the things that we're doing to be able to deliver solid operating profit out of them.

Okay. One last question if I could sneak it in. Could you size relatively the oil and gas industry for you either in RPO or OCG as a whole, whichever way you prefer?

Yes, no.

No, I was asking if you could.

No, not at this time.

Okay.

(Operator Instructions) Mr. Camden, no additional questions coming in.

Very good. Thank you all for joining us on the call. And thank you, John, for hosting the call and talk to you all later.

Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation. (technical difficulty) now disconnect.