KELYA
#Thank you, <UNK>.
Good morning, everyone.
Welcome to Kelly Services' 2016 first-quarter conference call.
With me on today's call is <UNK> <UNK>, our CFO; and <UNK> <UNK>, 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.
Before we look at Q1 results, let me note as we announced in our press release earlier this morning that Kelly's Board of Directors has declared a 50% cash dividend increase for our stockholders.
We are very pleased that our strong sustained operating results in 2015 have given us the ability to deliver this increase and to enhance shareholder value.
As we look at our first-quarter 2016 results, let me point out that the year-over-year comparisons are represented in constant currency due to ongoing volatility in foreign currency exchange rates, with the exception of our year-over-year earnings from operations comparisons, which are represented in nominal currency.
As additional resource to help you navigate our Q1 results, we have once again published a slide deck on the investor relations page of our public website summarizing our key financial performance indicators.
Now turning to Kelly's first-quarter results.
I'm pleased to report that Kelly delivered solid year-over-year growth on both the top and bottom lines.
Revenue for the quarter was $1.3 billion, up roughly 5% year over year.
We achieved earnings from operations of $15 million for the quarter, a 22% increase compared to the $12 million delivered in the first quarter last year.
Kelly's first-quarter earnings from continuing operations in nominal currency were $0.29 per share compared to earnings of $0.10 per share for the same period last year.
Without the favorable impact of work opportunity credits, we grew year-over-year earnings per share by more than 100% in the first quarter.
All told, we are pleased with Kelly's ability to deliver solid increases in revenue and earnings for the quarter.
Now let's take a closer look at the performance in each of our business segments, starting with the Americas.
Let me point out that all of today's comparisons to Americas' Q4 revenue will exclude the impact of the 53rd week of operations we had last quarter.
Americas staffing had a strong first quarter, with year-over-year revenue growth of 3% and earnings growth of 17% compared to the same period last year, leading to incremental leverage of 56%.
In Americas commercial, revenue was up 3% year over year for the quarter, an improvement from the 1% decrease we reported last quarter.
Americas PT revenue for the first quarter grew 2% year over year, consistent with the 2% growth we reported in the fourth quarter.
As has been our practice on our earnings call, we'll separately review the result of two service delivery models in our Americas staffing operations.
In the account service through our local US branch network, commercial staffing revenue was up 7% year over year in the first quarter compared to the 3% increase we reported last quarter.
Kelly Educational Staffing continues to report strong growth, with a 22% year-over-year revenue increase this quarter.
Excluding KES, Q1 commercial revenue in our US branch network increased 4% year over year as compared to flat revenue growth we reported last quarter.
In our branch network PT business, revenue increased 11% compared to the same period last year.
We are pleased with the continued double-digit growth in this segment.
Looking at our centrally delivered large customer model, commercial revenue decreased 3% year over year in the first quarter, a significant improvement from the 10% decline we reported last quarter.
This improvement was driven by an increased demand in a number of accounts outside of the natural resources vertical, coupled with the anniversary of our decision to exit several customer accounts due to pricing discipline.
In our centralized PT business, Q1 revenue was flat with last year, an improvement from the 2% decline we reported last quarter.
Looking more closely at our core PT specialties in the Americas, growth was once again led by our finance and segment specialties, both of which delivered nice year-over-year revenue improvements.
Perm fees in the Americas were up 24% in the first quarter compared to the same period last year, tripling the 8% growth we reported last quarter.
Commercial fees were up 4% for the first quarter, while PT perm fees delivered a healthy 43% increase year over year.
Americas Q1 gross profit dollars increased 6% year over year and our GP rate was 16.2%, up 60 basis points from a year ago.
The improved rate is due to effective management of our temporary employee payroll tax and benefits cost, coupled with the impact of the increased perm fee revenue.
These were somewhat offset by unfavorable customer mix and higher workers compensation costs compared to last year.
Americas expenses for the first quarter were up 4% year over year.
The region delivered a strong 56% leverage in the first quarter and we will continue to monitor and adjust cost as necessary.
All told, Americas delivered $27 million of operating profit this quarter and again, this is 17% growth compared to last year.
We are pleased with this segment's strong start in 2016.
Now let's turn to our staffing operations outside the Americas, starting with EMEA, where I'm pleased to report the EMEA region delivered a significant improvement in first-quarter operating profit.
Revenue in EMEA was up 4% in the first quarter compared to last year.
This compares to a 6% increase in revenue, excluding the 53rd week we reported last quarter.
For the quarter, commercial revenue was up 3%, with solid growth in the majority of markets, partially offset by year-over-year declines in Russia and Switzerland.
PT revenue grew 7% year over year, primarily due to strong growth in Western Europe, partially offset by declines in the Nordics, where we are more exposed to the oil and gas industry.
Fee-based income for the quarter was up 5% year over year, with PT up 10% and commercial up 2%.
Americas GP rate for the first quarter was 14.9% compared to 15.2% for the same period last year.
The GP decline is primarily due to unfavorable customer and business mix, primarily in the UK.
Total expenses were down 5% as we continue to see the benefits from effective cost control and headquarters expense.
Netting it all out, we are pleased with EMEA's operating profit of $2 million compared to a loss of $200,000 last year.
We'll now turn to the first-quarter results for our APAC segment, where I'm pleased to report a 19% year-over-year increase in operating profit for the region.
Revenue for APAC grew 4% year over year in the first quarter, driven by commercial.
Temporary staffing growth continued to hold strong, and large accounts in Singapore, India, and Indonesia.
Perm fees declined by 8% compared to the prior year, an improvement over the 27% decline in Q4, primarily driven by stronger fee performance in Australia.
The GP rate of 16.9% was up 80 basis points ---+ was up 40 basis points over the same period last year, primarily the result of wage credits in Singapore, partially offset by declining perm fees and customer mix.
Total expenses were down 1% compared to the prior year as a result of continued cost control and productivity improvement.
The APAC region ended the quarter with an operating profit of $4.4 million, up $600,000 compared to the same period last year.
As you know, last month, we announced that Kelly Services and Temp Holdings are expanding our current joint venture to cover all of Asia and the Pacific.
The new joint venture, TS Kelly Asia Pacific, is expected to be the largest workforce solutions company in the Asia-Pacific region.
By expanding its scope from four geographies to 12, the new JV is positioned to be the leading player in the region's growing workforce solutions market.
Our core OCG entities in the APAC region are not included in this transaction.
Recruitment process outsourcing ---+ RPO ---+ and contingent workforce outsourcing ---+ CWO ---+ will not move to the JV and will continue to operate under the solo ownership of Kelly.
We will continue to invest in OCG's capabilities in APAC as we strengthen our role as the talent supply chain provider to multinational companies in the region.
<UNK> will provide further details about this transaction in his upcoming financial review and I'll provide additional color in my closing comments.
Now we'll turn from our staffing results to the performance of our outsourcing and consulting segment, OCG.
OCG delivered an operating profit of $5.4 million for the first quarter, a 90% increase over the same period last year.
For the quarter, revenue grew by 13% compared to last year, and gross profit increased by 20%.
The sales increase was driven mainly by growth in business process outsourcing ---+ BPO ---+ and contingent workforce outsourcing ---+ CWO.
BPO revenue grew 14% for the quarter and gross profit increased by 18% due mainly to strong results in our STEM business.
At CWO, revenue increased 13% for the quarter and gross profit increased 15% year over year.
And these results reflect growth in our program management fees as well as growth in our payroll process outsourcing business.
In addition to improved customer mix, the volume growth came from both existing and new customers.
Turning to our RPO practice, after several quarters of revenue decline, RPO revenue increased 2% year over year in the first quarter and gross profit increased by 31%.
The gross profit increase was primarily due to a shift in business mix.
Overall, OCG's gross profit rate was 25.1% for the quarter due to favorable customer and practice area mix, an increase over last year's rate of 23.8%.
Expenses in OCG were up 14% year over year on a 20% gross profit dollar increase, the increase in expenses due mainly to performance-based compensation, and servicing costs associated with the expansion of existing customer programs.
All told, OCG's operating profit of $5.4 million for the first quarter was up 90% from last year's operating profit.
We are pleased with the progress we're making in this important segment.
And now I'll turn the call over to <UNK>, who will cover our quarterly results for the entire Company.
Thank you, <UNK>.
Revenue totaled $1.3 billion, up 4.6% in constant currency compared to the first quarter last year.
And even as we anniversary the strengthening of the US dollar, which began in late 2014, our nominal currency revenue continues to be impacted by global currencies.
Although the affect's impact has moderated, it still had a 240-basis-points impact on our year-over-year reported revenue growth rate in Q1.
Now, consistent with <UNK>, the remainder of my year-over-year comments are represented in constant currency.
Staffing placement fees were up 7% year over year as the solid fee growth we saw in the Americas and a continued positive fee trend in EMEA in Q1 are partially offset by declines in APAC.
In constant currency, overall gross profit was up $17 million, nearly 8%.
Our gross profit rate was 17.3%, up 60 basis points when compared to the first quarter last year.
Our OCG rate reflects an improving GP rate in our US staffing business as a result of effective management of temporary employee payroll tax and benefit expenses, and to a lesser extent, improvement in perm fees coupled with an improving GP rate in our OCG business.
SG&A expenses were up 6.7% year over year.
Approximately half of the increase was related to one-time costs and unfavorable phasing of expenses for benefit programs that are a component of corporate expenses.
In our operating units, expense increase were in line with GP growth and leverage expectations.
Excluding the unfavorable impact of corporate benefit expenses, the level of expense growth is consistent with our Q1 guidance.
Q1 operating leverage is historically lower than other quarters, given the lower seasonal volume.
We'll continue to remain vigilant about expense control, and we'll manage expenses in line with GP growth for the full year.
Earnings from operation were $14.7 million in the first quarter compared with 2015 earnings of $12.1 million.
These results reflect a conversion rate or return on gross profit of 6.3% compared to 5.5% for Q1 2015, a healthy improvement year over year.
Income tax expense for the first quarter was $2.7 million compared to an income tax expense of $5.9 million reported in 2015.
The overall lower year-over-year quarterly tax expense is primarily driven by the work opportunity credit and improving results outside the US.
The work opportunity credit was reinstated at the end of 2015.
As a result, quarterly 2015 income tax expense did not reflect the impact of the work opportunity credit until the fourth quarter of last year.
Our first-quarter earnings per share reflected a $0.07 improvement related to reinstatement of the work opportunity credit.
And finally, diluted earnings per share for the first quarter of 2016 totaled $0.29 per share compared to $0.10 in 2015, up nearly 200%.
Now, as we look ahead to the rest of the year, as <UNK> mentioned, we announced that we are expanding our joint venture in APAC.
As a result, our APAC staffing operations will not be included in Kelly's consolidated financial results after the closing of the transaction.
In addition, a small portion of our APAC OCG business that was closely aligned with the staffing-based permanent placement business will also be transferred to the JV.
After the transaction is closed, Kelly 49% interest in TS Kelly Asia Pacific will be accounted for as an equity method investment and the related income from this investment will be reported on the income statement below earnings from operations.
Once the transaction is closed, our guidance will be updated to reflect the JV formation.
The guidance provided on today's call does not reflect the JV expansion.
For the second quarter, we expect constant currency revenue to be up 3% to 4%.
We expect the gross profit rate to be up 70 basis points to 90 basis points year over year.
And finally, we expect SG&A expense to be up 4% to 5%, which will keep us on track to deliver good full-year operating leverage.
For the full year, our expectations are in line with our last earnings call.
We expect revenue growth to be up 3.5% to 4.5%.
We expect the gross profit rate to be up 30 basis points to 50 basis points on a year-over-year basis.
And finally, we expect our SG&A expense to be up 3% to 4%.
The SG&A expense increase is in line with our expectation to deliver operating leverage, offset in part by expense to support 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.
And one other item of note as we look forward: the completion of the JV transaction will also likely result in a change in how we allocate resources and analyze performance, and may result in change to our segment reporting at that time.
Now, moving to the balance sheet, cash totaled $46 million compared to $42 million at year-end 2015.
Accounts receivable totaled $1.2 billion and increased 2.6% compared to year-end 2015.
Global DSO was 55 days, two days better than the same quarter last year, but up one day from Q4 2015 as a result of seasonal fluctuations.
Accounts payable and accrued payroll and related taxes totaled $715 million, up 6% compared to year-end 2015.
At quarter end, debt stood at $39 million, down $16 million from year-end 2015 and down $41 million from a year ago.
Debt total capital was 4.1%, down from 5.8% at year-end 2015.
In our cash flow, year to date, we generated $19 million of free cash flow compared to using $19 million of free cash flow last year.
The change was due mainly to lower growth in trade accounts receivable due in part to improved DSO as well as improving net earnings.
For more information on our performance, please review the first-quarter slide deck available on our website.
I'll now turn it back over to <UNK> for his concluding thoughts.
Thank you, <UNK>.
When we closed out 2015, we said that Kelly had set its sights on becoming an even more competitive, consultative, and profitable company.
I think today's quarterly report demonstrates that we are actively reshaping our business to make that vision a reality.
Our investments in higher-margin PT and OCG are yielding results, and we are delivering on a strategic plan that aligns with market trends and positions Kelly as a leader in the global workforce solutions market.
Accounts serviced through our US branch network ushered in the new year with strong sustained growth in our PT specialties as our PT sales and recruiting teams continued to excel in our new operating model, efficiently connecting our US customers with specialized talent.
And after a year of tough challenging headwinds, our centrally delivered account portfolio was building on signs of improved performance we saw at the end of 2015 and we'll continue to adjust our centralized account structure to respond to trends in this segment.
As existing large customers transition their PT business to a competitive source model, it creates new opportunities in Kelly's talent supply chain management strategy.
And we are responding to this market shift by aggressively pursuing growth in our CWO, RPO, and BPO businesses.
In our international segments, we are pleased with the EMEA region's continued ability to deliver effective cost control while driving solid revenue growth, yielding strong improvements in operating earnings.
And in APAC, our expanded joint venture is a step forward in the evolution of Kelly's strategy for the region.
Not only will we be forming the largest workforce solutions company in Asia-Pacific, the JV provides us with accelerated growth opportunities and enhanced competitive positioning across the dynamic region.
As we mentioned when we first announced the JV, as a sign of our commitment to ongoing growth, we are also forming a joint cooperation committee consisting of executives from both Kelly Services and Temp Holdings to collaborate on future initiatives.
Again, I will note that OCG's CWO and RPO practices are not included in the JV.
OCG is already recognized as a leader in the outsourcing and consulting space in APAC and we will accelerate our investments in OCG's capability in the region as we strengthen our role as a talent supply chain provider to multinational companies.
But of course, OCG's growth is not limited to APAC.
Around the world, our OCG segment continues to deliver solid performance as more clients adopt our talent supply chain management approach.
In our RPO practice, we were pleased to see signs of improved revenue and profitability in the quarter.
Our BPO and CWO specialties are continuing to deliver solid results as existing accounts expand and new customers enter the portfolio.
And we expect to see continued double digit GP growth in OCG.
As a whole, we are pleased with Kelly's first-quarter performance and our sustained revenue and earnings growth.
Our new operating models are firmly in place and we are continually rebalancing our resources to align with our goals, intentionally designing a workforce that is fully equipped to drive increased revenue and GP for the Company.
With a strategy for growth guiding us and a proven ability to execute that strategy, we are moving forward.
Our sights are set on capturing the opportunities in the dynamic workforce solutions market and delivering with the excellence and integrity for which Kelly has always been known.
<UNK> and I will now be happy to answer your questions, along with <UNK> <UNK>, our COO.
<UNK>, the call can now be opened.
So what I would tell you is with some rare exceptions that come from specific industries, like oil and gas, when I look at our large customers, I think ---+ I view what our discussions with them and where they are going is what I would call stable.
They are not looking into ---+ they don't have large projects that they are telling us looking forward: get ready, we are adding 4,000 people.
And they don't have the opposite, which is: get ready, we are going to get rid of 1,000 people.
It's been a pretty steady environment.
And with those large customers, they would also tell you that their cadence in moving towards solutions continues.
And so we continue to see high activity around bid and proposal activity for things like our MSP services in OCG, RPO, and the like.
So they continue to move their business more towards the solution and spend.
On the smaller customer base, they are pretty healthy right now.
They continue ---+ we continue to see growth opportunities and good demand.
The issue that's going to come in there is in the employment side of the market, we are starting to see that it's getting ---+ recruiting is getting tighter, particularly when you get into the more credentialed areas, we see that it's getting harder to fill those orders and more expensive to try to find the people.
But even in some of the more entry-level blue-collar kinds of things, it's getting harder now to fill those orders as well.
, which you would expect as the unemployment rate has been coming down.
So you've got that ---+ we are at that time in the marketplace where it's starting to get harder to find people.
But the demand is I would call steady.
As the ---+ if you're asking about what we ---+ often the traditional red flags going, we are not there yet, if that's what you're asking, <UNK>.
What I would say is that's what we've been doing over the last year is really changing.
So there's a couple things going on inside those large centers, okay.
One is the volatility is always going to be there, and with our oil and gas customers, there's just volatility in the demand.
So we are not losing market share, but things are going on in that perspective.
As I said earlier, we continue to see this cadence from master vendor to vendor-neutral solutions.
That gets at the core of what you're talking about, which is we have to get better at delivering on the vendor-neutral space because more of the ---+ especially more of the PT business in that area is going to not come through master vendor contracts, but that move is going to continue.
That behooves us to get much more efficient in the way that we manage and there was going to be always in those large customers, there's margin pressure.
And so what I would tell you is we are continuing to shift our model there as we move forward.
But the volatility will not go away.
And that volatility can go both ways.
If we get $70 barrel of oil price, you'll see that volatility move in a very different way.
You mean for the remaining of the year.
Yes, I mean, it should be.
I mean, difficult always to know what is next, but I think now we are at about 200 basis points, 250 basis points impact.
The main driver now is probably more like Latin America a little bit year on year, but more now APAC.
So yes, I would say something around 200 basis points, 250 basis points should be what we could expect for the remaining of the year.
Great.
Thank you, <UNK>.
Thank you all on the call.
