Kelly Services Inc (KELYB) 2015 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to Kelly Services fourth-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 CEO. Sir, you may begin.

Thank you, John, and good morning, everyone. Welcome to Kelly Services 2015 Q4 conference call. With me on today's call is Olivier Thirot, our CFO; and George Corona, our COO.

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 ongoing volatility in foreign currency exchange rates.

Also note that Kelly Services had a 53-week fiscal year in 2015, which is reflected in our results. As an additional resource to help you navigate our Q4 and full-year results, we once again published a slide deck on the Investor Relations page of our public website, summarizing our key financial performance indicators.

Before we turn to our Q4 and full-year results, it's worth recalling how we entered 2015. Coming off 2014, a year of aggressive investments and structural change, we knew that 2015 would be a critical test of Kelly's ability to deliver on our strategy. It was a year where focused execution was paramount. And I'm very pleased to report that Kelly's performance significantly improved on several fronts.

Revenue for the quarter was $1.5 billion, up 7.3% year-over-year. And for the full year, Kelly's revenue was $5.5 billion, up 4.7% compared to 2014. We achieved earnings from operations of $27 million for the quarter, tripling last year's Q4 operating profit of $9 million in nominal currency, excluding restructuring. And for the full year, operating earnings totaled $67 million, roughly doubling the $34 million in adjusted earnings we reported in 2014.

Kelly's fourth-quarter-earnings from continuing operations in nominal currency were $0.88 per share compared to earnings of $0.54 per share for the same period last year, again, excluding the 2014 restructuring charges. And for the full year, earnings were $1.39 per share compared to adjusted earnings of $0.81 per share for the same period last year.

All told, Kelly's fourth-quarter performance capped off a year of solid earnings growth, and we are very pleased with our strong operating leverage and strategic execution throughout 2015.

In constant currency, we dropped nearly 70% of our 2015 GP dollar growth to the bottom line, affirmation that we are operating as a more agile company committed to delivering sustained, profitable growth.

Now let's take a closer look at the performance in each of our business segments, starting with the Americans. As mentioned earlier, Kelly had a 53-week fiscal year in 2015. The extra week in the fourth quarter had the largest impact on our Americas segment.

As reported, Americas Q4 staffing revenue grew 4% compared to the same period last year. Excluding the 53rd week, Americas Q4 revenue was flat with last year, up from the 1% overall revenue decline we reported in Q3. And Americas commercial revenue was up 3% year-over-year for the quarter and down 1% year-over-year, excluding the 53rd week, again consistent with the 1% decrease in commercial revenue we reported last quarter.

Our year-over-year commercial growth rate continues to be impacted by the headwinds we have mentioned on previous earnings calls. We've exited several large accounts late in 2014, due to price discipline. We've begun to anniversary significant new Kelly Educational Staffing wins from 2014. And we have felt an impact in our natural resource accounts from the low price of oil. Americas PT revenue for the fourth quarter grew 8% year-over-year, and was up 2%, excluding them 53rd week, an improvement over the 1% growth we reported the last two quarters.

As stated on previous calls, we service our staffing clients through two different delivery models, and it's helpful to look at the results for each of these models separately. To provide clearer context around sequential performance, the remainder of Americas revenue comparisons will exclude the impact of the 53rd week.

In the accounts service through our local US branch network, commercial staffing revenue was up 3% year-over-year in the fourth quarter compared to the 5% increase we reported in Q3. And we continue to have strong, double-digit growth in KES, which achieved 15% year-over-year revenue growth for the second straight quarter. Excluding educational staffing, Q4 commercial revenue in our US branch network was flat compared to the 4% growth we reported in Q3, largely attributable to the shorter-than-usual Q4 seasonal ramp-up.

In our branch network PT business, revenue increased 19% in Q4, up from the 17% growth we reported in Q3. And this strong performance is a result of the investments we made in our PT branch network in 2014, which continued to yield a healthy pipeline. Looking at our large, centrally delivered customer model, in Q4 we began to partially anniversary the effects of exiting accounts last year due to pricing discipline. Commercial revenue decreased 10% year-over-year, an improvement over the 13% decline we reported last quarter.

While we are showing some improvement in the quarterly, year-over-year comparisons, we are mindful that this segment of our business continues to be the most affected by our pricing discipline, and at the impact of low oil prices on our large natural resources customers.

In our centralized PT business, Q4 revenue was down 2%, an improvement from the 4% decline we reported in Q3. And while this improvement is promising, as mentioned last quarter, large customers continue to shift their buying behavior towards purchasing more of their PT business through competitive sourcing models rather than through single-source arrangements, a trend that tends to put pressure on our centralized staffing growth while creating additional opportunities in our OCG business.

Looking more closely at our core PT specialties in the Americas, finance and science continued to be our best performers. Both of these specialties delivered nice year-over-year improvements and revenue growth compared to Q3. Science grew 6% compared to 3% last quarter, and finance was up 53% as compared to 37% last quarter.

In engineering and IT, Q4 revenue declined 4% and 2%, respectively, consistent with the declines each experienced in Q3. Perm fees in the Americas were up 8% in the fourth quarter compared to last year, a slight improvement from the 7% growth reported last quarter. And commercial fees were down 3% for the fourth quarter, while PT fees delivered a nice increase of 19% year-over-year.

Americas Q4 gross profit rate was 16.2%, up 140 basis points year-over-year. The improved rate is due to effective management of our temporary employee taxes and benefits, coupled with improved pricing in our US branch network and overall customer mix.

Americas expenses for the fourth quarter were up 4% year-over-year primarily due to higher incentive payments in the US branch network as profits increased. Including the 53rd week, the Americas delivered $36 million of operating profit in Q4, up 55% year-over-year. Full-year operating profit for the segment totaled $109 million, a 23% increase over last year.

We are very pleased with the strong quarterly and full-year results delivered by the Americas. We are confident that we are executing a solid strategy for continued growth in the region.

Let's now turn to our staffing operations outside the Americas, starting with EMEA. Revenue in EMEA was up 11% in the fourth quarter compared to last year, with our commercial business growing 11%, and our PT business up 12% year-over-year. Excluding the 53rd week, EMEA revenue was up 6%. We achieved solid revenue growth of 10% in Western Europe. And in Eastern Europe, revenue increased 24% year-over-year, driven by an improvement in our temporary staffing business in Russia. Revenue in other regions within EMEA was up 8%, primarily driven by our UK temporary staffing business.

Fee-based income for the quarter was up 7% year-over-year, driven by a growth of 16% in commercial fees, partially offset by improving, but still declining, PT fees, which were down 4% year-over-year. EMEA's GP rate for the fourth quarter was 15% compared to 15.7% for the same period last year. The overall GP decline is largely attributable to an unfavorable country mix. Expenses were down 8% in Q4, and we continue to see the benefits from effective cost control in the region.

Netting it all out, we're pleased with EMEA's Q4 operating profit of $7.2 million compared to $2.8 million last year. And for the full year, EMEA delivered earnings from operations of $14 million, up $1.1 million over last year, excluding 2014 restructuring charges, and including $4.1 million of unfavorable currency impact.

Turning to our staffing operations in APAC. Revenue for the region grew 10% year-over-year in the fourth quarter, primarily driven by commercial. Temporary staffing growth was especially strong in large accounts in Australia, Singapore, and India. Firm fees declined by 27% compared to the prior year, primarily due to companies deferring their hiring decisions. The GP rate declined to 13% compared to 14.8% in the prior year, primarily the result of declining perm fees and customer mix, partially offset by the benefit of wage credits in Singapore.

Total expenses were flat, down 1% to prior year, as a result of continued cost control efforts and productivity improvements. The APAC region ended the quarter with an operating profit of $1.6 million, down $400,000 compared to the same period last year. And for the full year, APAC delivered $9.1 million of operating profit, more than double last year's profit, and a record for the region.

Now we will turn from our staffing results to the performance of our outsourcing and consulting segment, OCG. OCG delivered strong year-over-year sales growth in the fourth quarter. Revenue was up 16% compared to last year, and gross profit also increased by 16%. The sales increase was largely driven by growth in our BPO, business process outsourcing, and CWO, contingent workforce outsourcing, practices.

BPO revenue grew 20% for the quarter, and gross profit increased by 16%. The year-over-year growth is primarily due to our STEM business within BPO, with revenue growth of 45%. In KellyConnect, our contact center BPO business, revenue increased 36% year-over-year. And in our legal BPO business, revenue declined 25% in Q4.

Turning to our CWO practice, revenue increased 17% for the quarter, and gross profit was up 33% year-over-year. These results reflect growth in our program management fees as well as strong growth in our payroll process outsourcing business, in addition to improved customer mix. And the volume growth came from both existing and new customers.

In our RPO practice, revenue declined 21% year-over-year for the quarter, and gross profit declined 35%. As we stated in previous quarters, the decline is primarily due to lower volume across our natural resources customers, which continued into the fourth quarter.

Overall, OCG's gross profit rate was 25.6% for the quarter, on par with the prior year. Expenses in OCG were up 6% year-over-year on 16% gross profit growth, again showing excellent expense leverage for the quarter. OCG's operating profit of $14 million for the fourth quarter is up 47%, or $4.3 million from last year's operating profit. We continue to be pleased with the progress we're making into this important segment, which delivered a full-year operating profit of $28.5 million, a 76% increase compared to last year.

Now I will turn the call over to Olivier, who will cover our quarterly and full-year results for the entire Company.

Thank you, Carl. Revenue totaled $1.5 billion, up 7.3% in constant currency, compared to the fourth quarter last year. In nominal currency, we continue to be impacted by weak global currencies by more than 400 basis points in Q4, even as we anniversary the strengthening of the US dollar, which occurred in late 2014, and has continued throughout 2015.

Now, consistent with Carl, the remainder of my year-over-year comments are represented in constant currency. And as Carl also mentioned, our 2015 fiscal year result include 53 weeks. The additional week of revenue in Q4 represents about half of our Q4 year-over-year revenue growth rate.

Staffing placement fees were down 3.6% year-over-year, as [of the] growth we saw in the Americas and the now positive fee trend generated in EMEA in Q4 are offset by declines in APAC.

In constant currency, overall gross profit was up $27.1 million, nearly 12%. Our gross profit rate was 17.1%, up 80 basis points when compared to the fourth quarter last year. Our GP rate reflects effective management of temporary employee payroll tax and benefit expenses, combined with continued improvement in pricing in our branch-based business, and improved customer mix in the US.

SG&A expenses were up 3.3% year-over-year, excluding the impact of prior-year restructuring charges, which reflect another quarter of continued expense leverage in all business units. Our Q4 results reflect higher expenses in our US branch-based and OCG business, as a result of revenue growth, as well as higher corporate litigation related expenses. Corporate litigation expenses accounted for half of our year-over-year growth in SG&A expense. Partially offsetting these increases were continued cost management efforts in EMEA. And as a reminder, included in Q4 2014 results were $6.2 million of restructuring costs.

Earnings from operations were $26.5 million in the fourth quarter compared with 2014 earnings, excluding restructuring charges of $8.8 million. These results reflect continued operating leverage, with more than 70% of our GP growth dropping to the bottom line on a constant currency basis, excluding the 2014 restructuring.

On the full-year basis, earnings from operations were $66.7 million, an increase of $32.8 million from $33.9 million in 2014, again excluding the impact of restructuring charges. Our full-year earnings were impacted by $6.6 million due to foreign currency volatility. The substantial improvement in earnings came from both good top-line volume and value growth, coupled with consistent cost discipline.

As we measure progress against our goals to deliver both growth and improved operating leverage, we believe that conversion rate, or earnings from operation as a percentage of gross profit, is an increasingly important metric. While we continue to view return on sales as a valuable measure of performance, we believe that the measure that focuses on the return on gross profit dollars provides additional insight as we expand our higher-margin businesses.

For 2015, our conversion rate was 7.2% compared to 3.7% in 2014, excluding again restructuring charges. Income tax benefit for the fourth quarter was $8.4 million compared to an income tax benefit of $15.5 million reported in 2014. In both years, the tax benefit is a result of the retroactive reinstatement of the work opportunity credit in late December. For 2015, Kelly captured $18 million of work opportunity credit tax benefit, which is consistent with 2014. The overall lower year-over-year quarterly tax benefit is driven by higher earnings before taxes in 2015.

We were pleased that the work opportunity credit was reinstated at the end of 2015, and for a period of five years, which provides additional certainty and will reduce volatility in our income tax rate, going forward.

Diluted earnings per share for the fourth quarter of 2015 totaled $0.88 per share compared to $0.54, excluding restructuring charges in 2014. Our total year diluted earnings per share was $1.39 compared to $0.81 in the prior year, excluding restructuring charges, an increase of more than 70%.

Looking ahead to 2016: for the full year, we expect revenue growth to be up 3.5% to 4.5%. We expect the gross profit rate to be up slightly on the year-over-year basis. And finally, we expect SG&A expense to be up 2% to 3%, in line with our expectation to deliver operating leverage, offset in part by expenses to [shape up] growth areas of the business.

Our 2016 annual income tax rate is expected to be in the low 20% range, including the impact of the work opportunity credit. For the first quarter, we expect constant currency revenue to be up 4.5% to 5.5%. We expect the gross profit rate to be up year-over-year.

Turning to SG&A, we expect SG&A expense to be up about 4% to 5% year-over-year, reflecting that expenses will be slightly down on a sequential basis from Q4.

Putting it all together, while we do expect some additional operating leverage in Q1, we expect that it would be more modest than recent quarters, given Q1's lower seasonal volume.

Now, moving to the balance sheet. Cash totaled $42 million compared to $83 million at year-end 2014. Accounts receivable totaled $1.1 billion, and increased 1.4% compared to year-end 2014. Global DSO was 54 days, consistent with the same quarter last year, but down 3 days from Q3 2015. Accounts payable and accrued payroll and related taxes totaled $674 million, flat compared to year-end 2014. At year end, debt stood at $56 million, down $36 million from year-end 2014. Debt to total capital was 5.8%, down from 9.9% at year-end 2014.

In our cash flow, year-to-date we generated $24 million of net cash for operating activities compared to using $70 million for operating activities last year. The change was due mainly to lower growth in trade accounts receivables due in part to improved DSO, as well as improving net earnings. And for the year, we generated $6.6 million of free cash flow compared to negative free cash flow of $91.7 million a year ago. For more information on our performance, please review the fourth-quarter slide deck, available on our website.

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

Thank you, Olivier. There's no question that 2015 was an important year of strategic execution for Kelly Services. We entered the year with our new operating models firmly in place. And I'm pleased that we gained traction throughout the year, as we delivered against our investments and accelerated bottom-line growth. We're extremely proud of the Kelly team and the results they achieved, and their commitment to driving the Company's strategy forward.

We are operating as a more efficient organization, deeply focused on profitability. Our investments in higher-margin PT and OCG are yielding results. And we're delivering on a strategic plan that not only aligns with critical market trends, but positions Kelly as a leader in workforce solutions markets worldwide.

Accounts serviced through our US branch networks are delivering strong, sustained growth on our PT specialties, and we're very pleased with our results in this segment. Our expanded salesforce is pursuing and winning new business, while our PT recruiting centers are efficiently connecting US clients with specialized talent.

Our centrally delivered account portfolio is starting to show signs of improves performance in the face of client-specific fluctuations. And we are responding to changes in large companies' buying behavior by adjusting our centralized recruiting structure. As existing large customers transition their PT business to a competitive source model, we are capturing new opportunities for Kelly's talent supply chain management strategy, and are earning fees in our CWO business by managing these competitive source models.

In our international segments, we're pleased with the results from both our APAC and EMEA regions. APAC delivered record-breaking earnings for 2015. And in EMEA, our operations delivered strong revenue growth combined with effective cost discipline that yielded solid improvements in operating earnings.

Our OCG segment continues to perform well, expanding current relationships and bringing new clients into Kelly's portfolios. And though we expect RPO will continue to face headwinds, our BPO and CWO specialties are delivering strong results, as more clients adopt our talent supply chain management approach. And we expect to see continued, double-digit revenue growth in OCG.

As a whole, we're pleased with Kelly's Q4 and full-year performance and our proven ability to deliver strong GP improvement and sustained earnings growth.

Moving forward, we've set our sights on becoming an even more competitive, consultative, and profitable company. We have, and are, reshaping our business to make that vision a reality. And with our new operating models in place, we are now working to rebalance our resources to align with our goals for growth, intentionally redeploying our workforce into client-facing roles that drive increased revenue and GP for the Company.

Kelly is poised for continued progress and growth. And with a proven strategy to guide us, and a year of solid execution behind us, we move forward with renewed confidence. We are focused on delivering growth now, capturing the opportunities in the expanding workforce solutions market, and delivering with the excellence and integrity that have been Kelly's trademark for the past 70 years.

I'd like to personally thank Kelly's teams once again for a successful 2015.

And Olivier and I will now be happy to answer your questions, along with George Corona, our COO.

John, the call can now be opened.

(Operator Instructions). John Healy, Northcoast Research.

Congratulations on a strong close of the year. And just wanted to ask a cadence question. When I look at the gross margin improvement in 2015, it seemed very weighted towards the back half of the year. I want to say gross profit was up 80 bps or so -- 70, 80 bps, on a year-over-year basis.

Is it reasonable to think that that type of year-over-year improvement can take place in 1Q and 2Q of 2016? Without committing to a firm number. But just given the mix in the business and the growth that you are getting in PT, should we see that type of GP improvement, at least in the first half of the year?

Yes, there are several drivers. We talk about -- several time about price discipline, and that's something we will continue to exercise in the future. I would say the second point is the [source around] shift to higher margin in PC and OCG that should continue to improve our margin over time. And we have also, and we will continue to focus on our temporary employee tax and benefit expenses, to continue to improve our cost of service.

Now, there might be short-term fluctuation quarter-over-quarter to seasonal nature of some of our business or customer mix. So there are going to be, still, on the short-term basis, some fluctuation, ups and downs.

Okay, great. No, that's helpful. And, Carl, I just wanted to take a step back and get your thoughts on the activity within your customer base. Maybe if you just think about the US and maybe the rest of the world, how are you seeing your big customers behave? What kind of conversations are you having with them? And are you seeing any sort of change in the behavior, on a sequential basis?

I'll start and then I'll let George weigh in. I'm going to set aside the natural resources sector, which is experiencing -- as you know, probably, from all the work that you do -- great tumult right now. And there are announcements of significant layoffs inside the natural resource sector, and plans for how they deal with the dramatic drop in oil price, and how they deal with their expense base.

But if I remove that sector from consideration, I'm not seeing any -- from the customers I talk with -- any significant change in how they are approaching operating this year, compared to last year.

George talks to a different group, and --.

Well, the only thing I would add to that, John, is that as we continue to work with these customers, more and more they are continuing to talk to us about taking on expanded roles in workforce solutions. So, we see no slowdown in their appetite to take what we have been doing for them, and ask us to do more. And as you see from the growth rates of our OCG, we are capturing that momentum. And so, we see no slowdown in that, at all.

Got you. Got you, great. And then just one modeling question. I know you guys gave the thoughts on the full year. I believe those numbers were in constant currency. I just wanted to make sure. And is there a way you could maybe help us make sure we've got the -- if rates stay the same, what the FX impact is, maybe as we move throughout the year?

Well, it's in constant currency. That's the way we have done it, and that's the way we have done it again today. As for currency expectation, it's very hard for us to know what it's going to be next. What we are seeing is that we are still impacted in Q4 for about 400 basis points. We were impacted by about 600 basis points at the beginning of the year throughout Q3. We cannot say what is going to be next. That's why we think that constant currency is probably the best indication we can give so far.

Okay. Great. Thank you.

(Operator Instructions). And Mr. Camden, allowing a few moments, no further questions coming in.

Well, thank you, and I appreciate you all attending the call. And thank you, John.

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