Kelly Services, Inc. (KELYA) Q4 2007 Earnings Report, Transcript and Summary

Good morning ladies and gentlemen and welcome to Kelly Services fourth 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 objection you may now disconnect at this time. I would now like to turn the meeting over to your host, Mr. Carl Camden, President and CEO. Mr. Camden, please go ahead. Carl T. Camden – President and Chief Executive Officer: Great, thank you, John. Good morning and welcome to Kelly Services 2007 fourth quarter and year end conference call. With me this morning to review our results is Mike Debs, our acting CFO. Let me start with a brief earnings update, recap our strategic progress, make a few comments on the current US economy, and then take you through our fourth quarter operating results by segment. Following that Mike will provide additional financial commentary on the quarter and guidance for the first quarter of 2008. Afterwards noting the limited visibility on the current economic climate, I’ll talk a little bit about our perspective on how 2008 is beginning to unfold, and then we will open the call for questions. Let me remind you that any comments made during this call including the Q&A may include forward-looking statements about our expectation for future performance, actual results could differ materially from those suggested by our comments, and please refer to our 2006 10-K for a description of the risk factors that could influence the company’s actual future performance. Now in addition we also make reference to non-GAAP performance measures. Please refer to the schedules attached to our press release for information on those performance measures and the comparison to our reported financial results. The fourth quarter capped off a good year for Kelly. Considering 2007’s challenges we did quite well. We delivered fourth quarter adjusted earnings from continuing operations of $0.54 per share, $0.03 above the upper end of our guidance and above consensus analyst estimates. For the year adjusted earnings increased to $1.68 per share and revenues increased to a record $5.7 billion. Our results take on significance given that weak temporary employment growth and economic uncertainty here in the US, Kelly’s largest market. There is no question that the slowing US economy dramatically influenced our 2007 performance. However, results would have been impacted to an even greater extent had we not made significant progress in repositioning Kelly for long-term growth. You may recall that our strategic objectives this year were to invest in more recession resistant, higher growth margin business, to diversify geographically, to accelerate the globalization of our professional and technical staffing services, and improve operating margins. And we made a lot of progress on all of these initiatives. Let me briefly recap. We divested a non-core business, Kelly Home Care. In the Americas, we closed or consolidated roughly 60 underperforming branches. We restructured our UK operations, closing 22 branches there and consolidating three headquarters locations. We expanded our global presence by entering four promising new international markets through acquisitions. We added two other countries as well, the Ukraine and Finland, by expanding relationships with existing global customers. We purchased the remaining 51% of our joint venture, Kelly’s Tempstaff, extending our services in the Asia-Pacific market. And to meet the demand for technically skilled professional workers we opened more than 50 new PTSA branches this year around the world. Other stuff has helped us tighten expense controls, increase accountability, and boost margins. Early in 2007 in a move providing additional transparency to our financial reporting, and increasing segment leadership accountability, we began allocating headquarters cost to the appropriate business segments. We consolidated several US payroll centers to streamline cost and improve efficiency. We are doing a better job of managing [inaudible] and worker’s compensation cost in the United States. And as a result of those and other measures, we improved our operating margin by 20 basis points year-over-year. And finally we took steps to broaden our investor base and increase value to our shareholders given the tumultuous market conditions that have put significant pressure on staffing valuations. In August we authorized a $50 million stock repurchase plan. And to date we have purchased approximately 1.7 million Class A shares at a cost of roughly $35 million. And we increased our quarterly dividend by 8% during the third quarter, paying now a dividend for 45 consecutive years. Now with that summary behind us, let’s talk a bit about the year’s economic environment because there is no doubt that it has hit the staffing industry especially hard and continues to be our most pressing challenge. We entered 2007 expecting strong growth from the Americas and a good year internationally. By the end of the first quarter, it was clear that the year was going to play our far differently. Inside the Americas, Kelly’s performance, while still better than the industry in general, was weaker than it could have been largely because of the underperformance in the first half of the year by our PTSA segment. Not only did we spend time adjusting to the US economic climate, we also had to address issues specific to our PTSA segment. Adding to that we were also facing economic and industry challenges in the UK, our second largest market. Let me remind you that despite our quickened efforts to expand globally and to diversify our business mix, the Americas and the UK comprised roughly three-quarters of our total business. In the face of these challenges, we responded quickly selling non-core assets, restructuring the branch networks in the US and UK, and placing even greater emphasis on high margin fee based services. So I am very proud of our efforts this year. The last time that we faced similar conditions in 2001, when US revenue declined by 6%, Kelly’s operating earnings dropped over 80%. This time, with the decline in US revenue of over 4%, we ended the year with adjusted operating earnings actually growing nearly 15%. This confirms that our efforts are paying off, and that our strategic plan is serving us well. Now let’s go through each of the segments performance beginning with Americas Commercial, which is 47% of the revenue. The slowing US economy continued to negatively affect our sales in the fourth quarter. Americas Commercial revenues were down nearly 6%, consistent with the decline seen in both second and third quarters. And by month the revenue shortfall was just about the same, and then roughly 6% in each month of the quarter. Our combined temp-to-perm and direct placement fees in Commercial reported a 7% year-over-year decrease consistent with what we have seen in the second and third quarter. And there was a lot of volatility in placement fee performance with positive growth in November and decreases in October and December. On the other hand, we continue to post improvements in our gross profit rate. This is our seventh consecutive quarter of an increase in year-over-year gross profit rate. And this quarter was helped by our ability to carefully manage worker’s compensation claims. The gross profit rate during the quarter increased to 16.1% from 15.9% last year and a 40 basis point improvement over third quarter. Excluding the branch restructuring charge, we maintained good expense control, reducing spending by over 2% compared to last year. Americas Commercial fourth quarter expenses, as a percentage of gross profit, were the most favorable quarter during the year. Year-over-year operating earnings, excluding our branch consolidation in the Americas Commercial, were down about 11%, a significant improvement from the results of the third quarter. Before leaving Americas Commercial, let me update you quickly on our branch restructuring efforts. During the quarter we incurred an additional $1.4 million to consolidate 16 additional branches. In total we have closed 58 branches at a total cost of about $3 million. We are redirecting resources, and retaining a substantial portion of the revenue from the closed branches. At the same time we do anticipate annual cost savings of over $2 million, of which about $500,000 was realized in the fourth quarter. And this does complete our planned Americas branch consolidation program. Moving on to the Americas PTSA, which is about 20% of Kelly revenue, revenue grew by 6% with earnings up over 15% on a year-over-year basis. We are very pleased with the significant improvement in revenue growth in the second half of 2007. After reporting two consecutive quarters of declining revenue in the first part of the year, Americas PTSA turned positive in the third quarter and posted further revenue acceleration and nearly 6% in the fourth. By month, October was up 4%, and both November and December grew nearly 7%. Our staffing alternatives businesses were the standout performers for the quarter posting strong revenue growth and earnings increases. And then followed by our professional businesses, posting solid results as well, and while our technical business are still underperforming our expectations, they are continuing to show improvement. Taking a closer look, staffing alternatives, which makes up 20% of Americas PTSA, just posted its second consecutive quarter of revenue growth in excess of 25%, a nice improvement from the 13% growth seen in the first half of the year. Earnings were also nicely positive for the second consecutive quarter, a significant recovery after being down 40% during the first half of 2007. Double-digit revenue and earnings increases were delivered by our three largest staffing alternatives businesses; Management Services, HR First and Vendor Management, and we are very pleased to see the progress in each of these units. Turning to professional, which represents another 20% of Americas PTSA revenues, year-over-year revenue accelerated growing almost 14% up from about the 9% rate in the third quarter. And further, professional posted another quarter of solid earnings increases. During the quarter our health care business continued its outstanding performance with revenue increase in excess of 20% for the third consecutive quarter. Further the finance and law businesses improved their year-over-year revenue growth from that of the third. CGR7, our creative staffing business, added about 50 basis points to the year-over-year PTSA revenue growth, and yielded positive earnings contribution for the quarter. Finally as our technical businesses represented about 60% of PTSA revenue, revenues in these businesses were down 4% in the quarter, and earnings were also down from last year. The revenue decline has been improving throughout the year. After declining about 10% in the first half of the year, the decline moderated to 6% in the third and improved to minus 4% in the fourth quarter. For the entire segment, PTSA’s gross profit rate improved to 19.1% in the quarter compared to 17.9% for the same period last year, and a 40 basis point improvement over the third quarter. This improvement was fueled by strong fee growth, including placement fee growth of over 30%, lower state unemployment cost, and the acquisition of CGR7. Expense control in PTSA improved during the quarter as well. And with the PTSA gross profit rate growing faster than expenses, we are now beginning to see a nice return on our recent investments. We are very pleased with earnings increasing over 15% in the third quarter in our PTSA business. The majority of the individual businesses have returned to delivering solid performance in both revenue and earnings. Now let’s turn to international operations. Overall this was another very good quarter for international. Reported revenue increased over 20%. On a cost in currency basis, revenue was up 9% and fees were up nearly 50%. Earnings improved by $7 million compared to the $500,000 earned in the fourth quarter last year. We are very satisfied with the solid sales and earnings growth in international, and pleased with our international development strategy. Let’s take a look at the two segments in detail. Overall international commercial revenue increased roughly 7% in cost in currency. Sales in the UK earlier were down 3%, which is a little weaker than our performance last quarter. However, Russia and Germany both experienced growth greater than 25%. Let me make a few additional comments on our UK operations. In the fourth quarter we implemented PeopleSoft, a new payroll and billing system. We expect to receive efficiencies resulting from this project in the second half of 2008. Additionally our restructuring efforts have already begun to pay off. Our fourth quarter cost savings from restructuring totaled more than $1 million, in line with our original estimates. However, as commercial margins continue to erode in the UK, much of our future success will be dependant upon continued progress in adding higher end, higher margin PTSA business to our mix. As I mentioned earlier, the UK is one of our largest markets, with annual revenue of approximately $470 million or 8% of total company sales. It is worth noting that our full year 2007 performance in the UK was better than originally expected. We cut our operating loss there by more than $3.5 million for the year, primarily due to reduced expense. Our Asia-Pacific region saw continued growth in its commercial business of over 25%, helped by our acquisitions of Tempstaff Kelly and P-Serv, as well as strong performances in Australia and Malaysia. For several quarters now we have seen good growth in fees in International Commercial. The fourth quarter was no exception, with fees growing over 20%. Particularly strong fee growth was seen in continental Europe, with growth of almost 65%. International’s gross profit rate was 18.2%, up 1.2% compared to the same quarter last year. This increase has been primarily driven by exceptional fee growth and increased margins in both Italy and France. Our final segment is International PTSA. Sales in International PTSA increased 34% in cost in currency. Europe PTSA’s sales increased 24%, from 14% of this growth attributable to organic expansion and another 10% coming from new branches. Our sales in the UK Ireland PTSA increased over 15% due to the strong growth of Kelly Financial Resources, and branch expansion in our IT, and outsourcing and consulting businesses. Our Asia-Pacific regions saw growth in its PTSA businesses of over 80%, primarily fueled by our operations in Malaysia, Japan, and Singapore. We have also seen exceptional growth in fees in International PTSA, with fees more than doubling. International PTSA’s gross profit rate was 32.1%, 650 basis points better than the same quarter last year. And this improvement is being driven by the growth in perm fees. In addition, during the quarter we opened five new International PTSA branches, and completed our acquisition of Access, an RPO with offices in Germany and Austria. It is clear that much of Kelly’s success in 2007 has resulted from the strong performance of our international operations and for this we are very pleased. And I will now turn the call over to Mike, who will cover our fourth quarter results for the entire company. Michael E. Debs – Interim Chief Financial Officer: Thank you, Carl. For the quarter total company revenue totaled $1.5 billion, an increase of 4% compared to last year. That’s up from the 2% growth reported in the third quarter. On a cost in currency basis, revenue decreased slightly by one-tenth of 1% compared to last year. That’s an improvement from the six-tenths of a point decrease in the third quarter. Our gross profit rate was 18%, an increase of 120 basis points compared to last year, primarily due to strong growth in fee based income and lower worker’s compensation costs. Selling, general and administrative expenses totaled $239 million, an increase of 10% year-over-year. This includes $1.4 million of restructuring costs related to our Americas operations. Excluding the restructuring cost, SG&A expenses increased by 9%. Most of the growth in SG&A expense has come from our international operations where we have continued to make strategic investments. The growth in SG&A expense was also impacted by currency rates. On a cost in currency basis, excluding restructuring cost, SG&A expense grew by 5%. Excluding the restructuring cost, SG&A expense decreased as a percentage of gross profit by more than 100 basis points in the fourth quarter and by 40 basis points for the year. Corporate expenses were $22.5 million, down 2% from last year. Earnings from operations totaled $26.5 million, an increase of 19%. Excluding the restructuring charges, earnings from operations increased by 25%. With or without restructuring charges, we were able to increase earnings from operations in a quarter when our largest segment, Americas Commercial experienced a 6% decline in revenue. Other income totaled just over $1 million compared to $618,000 last year. The improvement is due primarily to higher interest rates and higher average cash balances. The effective tax rate for continuing operations in the fourth quarter was 33%, which is significantly higher than the 11% rate in the prior year. As you may recall in 2006, work opportunity credits were reinstated in the fourth quarter. As a result, we recognized the impact of an entire year’s worth of credit in the fourth quarter. Diluted earnings per share from continuing operations totaled $0.52 per share. Excluding $0.02 per share of restructuring cost, our adjusted net earnings were $0.54 per share. Although adjusted net earnings from operations were up 25%, the increase in the effective tax rate lead to a 4% decrease in earnings per share from continuing operations. This puts us $0.03 ahead of our guidance of $0.46 to $0.51 per share. Turning to the balance sheet, I will provide a few highlights. Cash remained strong totaling $93 million at year end. Accounts receivable totaled $888 million, an increase of $50 million compared to the prior year. For the quarter our global days sales outstanding were 55 days, an increase of one day. Debt totaled $98 million, a $29 million increase compared to 2006. Most of the increase relates to euro denominated borrowings we used to fund our acquisition of Access, which was completed in the fourth quarter. Also during the fourth quarter, we refinanced $49 million of short-term [yen] denominated borrowing with five year term debt. Finally a few comments on the company’s cash flows for the year. Net cash provided from operating activities was $73 million, compared to $116 million last year. The decrease was due to primarily growth of working capital. Capital expenditures totaled $46 million both in 2006 and 2007. Our investments associated with the design and implementation of the PeopleSoft payroll and billing project accounted for a significant portion of our capital expenditures in both years. We expect 2008 capital expenditures will total approximately $45 million. During the fourth quarter, we repurchased approximately 1.2 million Class A shares for $22 million, bringing the total for the year to 1.7 million shares at a cost of $35 million. $15 million remain available under the $50 million share repurchase program. We also used approximately $48 million to fund the five acquisitions that we completed during 2007. As highlighted in the press release, our guidance for the first quarter of 2008 is that diluted earnings per share will range from $0.19 to $0.23 per share. That compares to $0.14 per share from continuing operations in 2007. When we exclude the UK restructuring charges, we actually earned $0.21 per share in the first quarter of 2007. I want to remind you that the first quarter is typically our slower revenue quarter. As a result there is less leverage of our fixed cost base. We experience seasonally lower operating margins and our earnings are much more sensitive to changes in revenue growth patterns. Our guidance assumes that our revenue growth will be similar to the 4% growth we experienced in the fourth quarter of 2007. As a result of the stock buy-back, and additional borrowing to fund acquisitions, we expect that net other income will be very low in the first quarter compared to $673,000 last year. We also expect to have a lower average share count as a result of the stock buy-back. We exited the year with approximately 35.1 million shares outstanding. The first quarter effective tax rate will be approximately 45% compared to 53% in 2007. Again excluding the UK restructuring charge, the effective tax rate was 43% in 2007. The first quarter effective tax rate is typically high as a result of non-deductible losses outside of the US. We do not expect the full year effective tax rate to vary significantly from the 35.5% rate in 2007. At this point we have decided not to provide full year guidance. As you all know the US economy continues to have a significant impact on our operations. And as Carl noted earlier, changes in the US economic environment in ’07 have left us uncertain as to how the US temp job market will perform in 2008. I will now turn it back over to Carl, who will talk more about our expectations for 2008. Carl T. Camden – President and Chief Executive Officer: Thanks Mike. Predicting the economic future has challenged just about everybody this year, so I will weigh in anyway and give you a read on what we see unfolding over the next few months. We still believe that we are undergoing a lengthy mid-cycle slow down here in the US. But obviously in many ways, we do seem to be teetering on the edge of a genuine recession. Fears are mounting and economists have certainly gotten a lot more cautious in recent weeks. And we all have noted that the falloff from subprime lending, rising oil prices, and concern about inflation, all have been identified and could act as tipping points further delaying economic reacceleration. And we could surely see companies put the brakes on current hiring activity if these conditions or fears persist. For those of you who follow the staffing industry, the US market has certainly been perplexing and frustrating. To illustrate, in 2007 we saw a divergence in job creation in the US labor market. Non-farm payroll growth continued, creating over 1.3 million jobs during the quarter. However, during the same period temporary employment fell, and as a result the US temporary employment penetration rate dropped for much of the year. Then just at the same time that talk of recession began to increase, temporary employment actually began a slight upward tick in the past couple of months. Since the trough in September year-over-year percentage declines are lessening albeit very slightly, and we hope that this slow improving trend is going to continue. Demand is also very strong and accelerating for higher skilled temporary workers, and the professional and technical components of our industry are doing well. In this environment, employment opportunities for those with a college degree are exceptionally good. Hiring continues across the vast majority of disciplines including education, health care, finance, and law just to name a few. [Net] and it all out, we do recognize the real possibility of a recession. But we continue to believe that demand for temporary employees here in the States will gradually accelerate in late 2008 as GDP improves and larger companies resume adding to their payrolls. In turn we believe that Kelly will ultimately see US revenue and earnings growth pick up. Now around the world the economic picture for us is more robust, and that’s really what has been fueling Kelly’s growth. In Europe the market for temporary staffing does seem to be on more stable ground. Further deregulation, we believe will support new opportunities for temporary staffing. In Asia the expansion continues and the need for professional and technical workers is on-going and acceptance of temporary workers and the flexibility that they offer is growing. At this point our sights are remaining focused on investing and expanding in the right global markets. We do see our US dependency, and gaining greater scale globally. It remains on increasing our fee based and higher margin staffing services, and continuing our improvement in operating margins. Even if the US economy doesn’t improve this year, those actions will help move us forward. And let me note that once the US economy does gain traction, we should be positioned for outsized earnings growth. In summary, we believe that our strategic course will translate as it did in 2007 in long-term growth opportunities and lasting value for our shareholders. I hope that you will agree that we accomplished a lot in 2007 and you should count on us to keep up doing that as we enter 2008. This ends our formal comments. Mike and I will now be happy to answer your questions. To allow as many callers as possible to participate, we ask that you please limit yourself to one question, and a single follow-up as needed. If you have additional questions, we will try to return to you later in the call. John, the call can now be opened for questions.

Thank you. (Operator Instructions) And first go to the line of T. C. Robillard, with Banc of America. Please go ahead. Thomas C. Robillard – Banc of America Securities: Great, thank you, good morning guys. Carl T. Camden – President and Chief Executive Officer: Good morning. Thomas C. Robillard – Banc of America Securities: I just wanted to talk a little bit about the cost savings that you are going to expect from the Americas restructuring. Now that you guys have completed that can we expect that cost savings to be linear? I know you said, I believe, that it was $500,000 benefit that you got in the fourth quarter. Can we expect that tick to have a linear progression to kind of that annual $2 million level as we go through ’08? Or will it be a little front-end loaded, back-end loaded, just trying to get some granularity there? Carl T. Camden – President and Chief Executive Officer: It will be fairly linear. Nothing is ever perfect, T.C., but it will be pretty close. Thomas C. Robillard – Banc of America Securities: Okay and then just on following up on that, will ’08 have a full kind of $2 million in cost savings in the Americas Commercial? Carl T. Camden – President and Chief Executive Officer: Yes, that’s what we said and we expect it to be so. Thomas C. Robillard – Banc of America Securities: Okay, great, thanks guys, I’ll get back in the queue. Carl T. Camden – President and Chief Executive Officer: Good, no problem.

And next to the line of Toby Sommer, with SunTrust, please go ahead. Carl T. Camden – President and Chief Executive Officer: Hi, Toby. Toby Sommer – SunTrust Robinson Humphrey: Hi, Carl, I was wondering if you could give us some more commentary about the somewhat improvement, I guess, in the [euro rate] declines within the technical businesses. And to what extent your own internal actions are helping provide that improvement or is the market helping out. If you could just give us a little more color there. Carl T. Camden – President and Chief Executive Officer: The technical businesses, Toby, if you followed us, we started telling you on the first quarter that we were underperforming in the market and that we had gotten behind the curve on investment and recruiters and so on. And you have seen us now talking steadily about showing the improvement. I think that, I’m not certain that the overall marketplace for technical is improving as much as it is on the professional sides of the business. And I believe that what we are doing is primarily the case of us catching up to where the rest of the market is as opposed to generic improvement. Toby Sommer – SunTrust Robinson Humphrey: Okay, thank you. You mentioned that the UK business performed quite well for you. To what extent are you taking some share, is the market growing to an equal rate to the growth rate that you achieved in the quarter, or is Kelly perhaps exceeding the market there? Carl T. Camden – President and Chief Executive Officer: Yes, at minus 3% I doubt that we are exceeding the market in the UK Ireland side. I think what you see from the savings is a better handle on expenses. And if you notice while we have declined 3% in the UK Ireland overall we have improved 15% on the professional technical side. So what you are really seeing in Kelly’s case is a repositioning of the business mix away from some of the lower end parts of the commercial business and pretty successfully moving into the upper end parts of the professional and technical side. Toby Sommer – SunTrust Robinson Humphrey: I’m sorry. You’re right, Carl, I was referring to the professional and technical side in the UK where you did have good growth. Carl T. Camden – President and Chief Executive Officer: Yes, sorry. On the professional and technical side I don’t, we’re too small still to be having a major impact on share. In this case I view it as more a result of our opening new offices and with the renewed focus on it. Not particularly it’s signaling a strong level of growth in the UK market. Toby Sommer – SunTrust Robinson Humphrey: Thank you very much for the call.

Your next question is from the line of Michel Morin with Merrill Lynch, please go ahead.

Yes, good morning. Carl T. Camden – President and Chief Executive Officer: Good morning.

Two quick ones, first, gross margins apparently were impressive. I think it’s the highest gross margin rate since 1999. I was wondering if you could give us a bit more color. I think that you mentioned perm fees and worker’s comp. Specifically as we think about 2008, what kind of expectations would you have there specifically on those two items? And then secondly, in terms of the country results, I noted a bit of a deceleration in Mexico. And also if I look at the year-on-year numbers in Norway, just wondering what kind of dynamics that you are seeing in those two markets. Thank you. Carl T. Camden – President and Chief Executive Officer: Starting with the gross profit side, I’m hoping that if you see a pick up in the US in general that we would begin at some point begin to see an improvement in both the temp-to-perm and direct hire side on the Americas Commercial. Don’t expect any particular deceleration in perm placement fees in Americas PTSA. That’s doing fine. And there was nothing that would indicate any deceleration on the perm placement activities outside of the international segments. In terms of worker’s compensation, we’re not seeing any particular decrease in experience. Claims aren’t increasing. Things that you would typically look for by the way seeing that a recession is coming aren’t happening. In terms of the worker’s compensation type of activity, you are not seeing an acceleration in claims per thousand [FTE’s], that’s not taking place. A chunk of our worker’s compensation improvement was from better mix, better experience. A chunk of it was from lower cost estimates for past claims. For sure we think that the current experiences will continue and improve. And how past claims play out is always more uncertain but we are not expecting any dramatic decline in that area. In terms of Mexico, we have seen a spreading of the slowing of activity, the declining of the US economy affecting the Americas in general, the 6% decline that we have seen in cost in currency in Mexico, actually about the same level of decline that we have seen in the commercial business inside the United States. And I have to tell you to be honest that I don’t have any particular answer for what’s taking place in Norway. Although on a cost in currency basis the sales were still up in Norway 16.5%, and for the year it was 26%. Why the deceleration, I’m not particularly certain.

Okay, and then, Carl, just going back on the gross margin part of the question, what about state unemployment insurance? Have you received kind of the new rates for this year? I’m assuming that you have already at this point. Are you seeing a tick up in the rates there? Michael E. Debs – Interim Chief Financial Officer: We haven’t received all of the rates yet, but what we are seeing is that we would expect unemployment insurance to continue to come down in ’08.

Really? Michael E. Debs – Interim Chief Financial Officer: Like we have seen in ’07, not significantly but we continue to expect to see some improvement. Carl T. Camden – President and Chief Executive Officer: We are not experiencing high unemployment rates in the country as a whole in spite of all of the talks of recession, and Kelly in particular has not been experiencing high activity there either.

Okay, great, that’s very helpful. Thank you. Carl T. Camden – President and Chief Executive Officer: Very good.

Your have next on the line Ashwin Shirvaikar with Citi. Please go ahead. Carl T. Camden – President and Chief Executive Officer: Hi, Ashwin. Ashwin Shirvaikar – Citigroup Smith Barney: Hi, how are you? Good morning, nice quarter. Carl T. Camden – President and Chief Executive Officer: Thank you. Ashwin Shirvaikar – Citigroup Smith Barney: My question is on drivers, your EPS drivers backwards seems to imply, at least for the first quarter you have a modest step back in operating margins. Could you just sort of go through the push and takes there in some detail if you don’t mind? Carl T. Camden – President and Chief Executive Officer: We haven’t commented on operating margins in the first quarter. We would expect for the year to have improved operating margins. First quarter, as Mike was talking about is just always a very strange quarter given low volumes, impacts on tax rates, and so on. So not getting into the push and takes on operating margin in Q1 for us, you face a lot of uncertainties still inside the United States. We are not particularly forecasting any improvement, and with a weak US market, we think that we will still deliver good earnings with an improvements coming out of international, is how we see the first quarter playing out. Ashwin Shirvaikar – Citigroup Smith Barney: And for corporate expenses in the quarter seem to be up. What part of that was one-time because of the restructuring, or was this just a higher expense case? Carl T. Camden – President and Chief Executive Officer: Corporate expenses were down 2% for the quarter so I am not certain what you’re, in a year-over-year basis? Ashwin Shirvaikar – Citigroup Smith Barney: Let me revisit that number, I may have something wrong then. One last question if I can sneak it in, the tax rate I find we have some questions about the first quarter, was it [less] of here? Could you clarify what you said, I missed that? Michael E. Debs – Interim Chief Financial Officer: We expect the tax rate in the first quarter to be higher than what it will be for the full year. That is usually the case for us. Where we do have losses outside of the US that we can’t deduct, those usually occur more in the first quarter than later in the year, which drives our first quarter tax rate up. We expect it to be similar to the first quarter of the prior year though. Ashwin Shirvaikar – Citigroup Smith Barney: Got it. Michael E. Debs – Interim Chief Financial Officer: Okay, thank you.

Our next question is from the line of Ty Govatos with C. L. King. Please go ahead. Carl T. Camden – President and Chief Executive Officer: Hi, Ty. Ty Govatos – C. L. King & Associates, Inc.: How are you? Carl T. Camden – President and Chief Executive Officer: Good, great, yourself? Ty Govatos – C. L. King & Associates, Inc.: Okay. Could you kind of give us a [timeline] on what the light industrial market has been doing in the US? Is it still, I know in the second and third quarters was kind of stable. Is it still stable sequentially? Carl T. Camden – President and Chief Executive Officer: I do not have those numbers in front of me. There has been no significant variation that I’m aware of, and I think that I would have been, in the light industrial segment inside in the United States. Ty Govatos – C. L. King & Associates, Inc.: Could you elaborate on the 6% decline, in what areas most of those come from, clerical or otherwise? Carl T. Camden – President and Chief Executive Officer: Yes, don’t have those numbers here with me and I would say that except for government and education type of businesses, which we have been moving more into as recession resistant. We see it pretty much across the board in the commercial area. And it has always been a little more concentrated in light industrial than it has been elsewhere, but no particular changes in the [timeline] there. Ty Govatos – C. L. King & Associates, Inc.: Okay, the branches that you closed, there was an effort to consolidate revenues. Have you been successful with that keeping a lot of the revenues of the branches that were closed? Carl T. Camden – President and Chief Executive Officer: Yes. Ty Govatos – C. L. King & Associates, Inc.: Thanks an awful lot, I appreciate it, very nice quarter. Carl T. Camden – President and Chief Executive Officer: Thank you, Ty.

And a follow-up from T. C. Robillard, please go ahead. Thomas C. Robillard – Banc of America Securities: Great, thanks. Carl can you give us a sense, I know that you touched on it a little bit, but just wanted to kind of build on some of the key European markets. And I’m sure that you guys have been reading the same papers that we have all been reading with respect to mounting fears about a major slow down in Europe, even risk of a recession increasing there. I know that some of these markets aren’t that big for you relative to kind of Kelly’s revenues, but just if you could like France, Germany, and maybe some other. You guys definitely cover the UK well, but any other kind of continental Europe economies that you could shed some light on would be helpful. Carl T. Camden – President and Chief Executive Officer: Sure, in terms of France, we always tell people on the calls that our presence in France is smaller than everybody else’s but also dramatically different. We have almost no presence in heavy manufacturing, tourism, a lot of the areas that comprise the big bulk of the business in France. So we should never be used as an indicator of what is taking place in France. We are in the upper end of the business in France, heavy in professional technical, heavy in upper end clerical, etc. And for us, France has been a, was a good market. In the fourth quarter it was up 6.7% in cost in currency, better than our year-to-date performance with some acceleration. And we also said in the conference call that margins were increasing. Having said that you are much better off relying on Manpower [inaudible] to get a handle on what the broader French economy is doing. In terms of Russia, we are one of the largest performers, one of the largest staffing firms in Russia and business has been solid all year, 23% for the quarter, 23% for the year. So, no particular deceleration that we are seeing at all in Russia, a very strong market with hiring and economic activity very, very strong. And again in Germany, we tend to be concentrated more again on the upper end of the business than in some of the broader industrial sides of it. And so our plus 40-some percent in cost in currency is indicative of Kelly’s efforts in the professional technical and upper end business and again not particularly indicative of the economy. Having said that, we are not projecting any slow down, any significant slow down, in professional and technical, and upper end commercial business in Europe. Thomas C. Robillard – Banc of America Securities: That was great. Just a little bit more on France, are you seeing a secular or structural shift in that economy as well as the more professional and technical, or is that just a function of maybe you guys gaining share, just wondering if there are broader themes going on there as well. Carl T. Camden – President and Chief Executive Officer: I think throughout Western Europe the acceptance of professional technical temporary employment as a legitimate form of employment, and a legitimate use of that type of talent is becoming broader. So I think that you are continuing to see a multi-year shift now of professional technical becoming a larger component of the staffing market inside Western Europe. Having said that, the type of growth rates that we are seeing are much more indicative of Kelly’s particular focus I would believe rather than that secular movement. Thomas C. Robillard – Banc of America Securities: Okay. And then, Mike, just real quick, you made a comment about working capital needs increased throughout ’07. Could you just shed some light on what drove that and how we should be thinking about the working cap needs as we go through ’08? Michael E. Debs – Interim Chief Financial Officer: That was primarily just a focus of our growth in accounts receivable. I don’t expect ’08 to be a whole lot different from that. We will continue to grow receivables assuming that our business goes. If we get into a recession, that won’t be an issue. Thomas C. Robillard – Banc of America Securities: I understand. Is there… Carl T. Camden – President and Chief Executive Officer: I’d rather have the issue. Thomas C. Robillard – Banc of America Securities: Yes, absolutely. Is the growth in receivables more a growth or some increase in the mix as receivables on international markets tend to be closer to 90 days, rather than kind of the 30-60 in the US? Or is there something else going on there? Michael E. Debs – Interim Chief Financial Officer: No, the entire increase, the one day increase is all a result of the mix as we grow our international business faster than our domestic business. Thomas C. Robillard – Banc of America Securities: Okay, great, thanks guys. Carl T. Camden – President and Chief Executive Officer: Thank you.

And we go to the line of Kevin McVeigh, with Credit Suisse. Please go ahead. Kevin McVeigh – Credit Suisse First Boston: Hey, Carl and Mike. Carl T. Camden – President and Chief Executive Officer: Hey. Kevin McVeigh – Credit Suisse First Boston: I know that the French is very small for you, but you did mention that the margins were up. I wonder what was driving that. Carl T. Camden – President and Chief Executive Officer: For us, its mix shift and increased perm fees. Kevin McVeigh – Credit Suisse First Boston: Okay, and then just in terms of I know that you are not going to give full year guidance, was there anything in particular that drove that decision more than macro certainly in the US versus Europe overall, or just what drove that decision? Carl T. Camden – President and Chief Executive Officer: We had primarily driven by just the decrease in visibility, but also an awareness that the majority of companies now have shifted in terms of IR communication to quarterly guidance, and not providing annual guidance. But whether that’s a good practice or not, or in particular a good practice now to given non-predictability in markets looking forward. Kevin McVeigh – Credit Suisse First Boston: Okay, and thank you very much. Carl T. Camden – President and Chief Executive Officer: Okay.

And you have a follow-up from Toby Sommer, please go ahead. Toby Sommer – SunTrust Robinson Humphrey: Thanks, Carl. This is to dovetail on that last question, in terms of visibility in the past you have talked about the visibility of the consumer products and your product launches, the communication that you get from your clients, call center shifts and the willingness of them to plan for classes in training further out in the future. Has that visibility in those two categories contracted? Carl T. Camden – President and Chief Executive Officer: What we found happening over last year is I looked at this because we told you repeatedly that customers weren’t particularly shying away from their plans to use temporary staffing. What would happen though is that a large lay-off of one particular restructuring at eight particular clients was enough to offset the small but anticipated growth in several tens of clients. So that we basically hovered in the commercial space in that minus 6% space for several quarters there. The customer’s forward view is still one of needing more help. It’s still one of scheduling classes out about the same periods of time that they always have, it’s still talking about projects. We just note that the disruptive effect of the sporadic, large restructuring in reductions in staff that take place in some of the large companies. Toby Sommer – SunTrust Robinson Humphrey: Okay, thanks. And then shifting gears to the state unemployment taxes and worker’s comp, sort of the social costs, in which states do you think that you have already got the information for 2008 rates? Has there been increases? And in which states have there decreases? Carl T. Camden – President and Chief Executive Officer: We don’t have that information here. I can just tell you that the trend is been for more decreases than increases, which is what Mike said. Toby Sommer – SunTrust Robinson Humphrey: Right, I guess that I was just curious where the real estate has been most problematic and where the unemployment rates have risen most. I just wondering whether you are starting to see worker’s comp rates start to go up perhaps in Florida, California, just areas where the real estate boom was most pronounced. Carl T. Camden – President and Chief Executive Officer: I was talking about pseudo-cost. In terms of workers compensation cost, in general things are, its all related to rather than preset rates, worker’s compensation is more a function of specific claim experience. And that is not accelerating in any particular state. It continues to be low and seems to be decreasing still. Toby Sommer – SunTrust Robinson Humphrey: Okay, and then I think that I picked up on the last question about first quarter operating margin, you opted to pass everybody on additional color, but did I hear you correctly? Did you say operating margins you expect to be up for the year? Carl T. Camden – President and Chief Executive Officer: We always look to improve operating margins on a year-over-year basis. Toby Sommer – SunTrust Robinson Humphrey: Okay, and lastly… Carl T. Camden – President and Chief Executive Officer: Just this year operating margins grew 20 basis points for the year. Toby Sommer – SunTrust Robinson Humphrey: Absolutely. Stepping back from the big picture standpoint, anything that you hold out higher hopes for perhaps for any healthcare portability or larger reforms that could really boost the staffing industry here in the US over the next couple years, understand that since we are in an election year, any sort of changes that we should be looking for out in the future that may benefit Kelly? Carl T. Camden – President and Chief Executive Officer: One, I think that you are correct. That the single thing that would catch the country’s use of temporary staffing up to what we have seen in some of the other Western European countries would be fixing healthcare. That’s probably the most important item on my political agenda, and I know that Kelly was one of the co-founders of a coalition with the service employees union, the communication workers, as well as Intel, Wal-Mart and others to address the issue. We do not see any quick action taking place in the United States. By quick I mean it’s something to have an impact in 2009 and the election year will freeze things this year. We do believe that there is a high possibility of action being taken inside late 2009, and potentially having an impact in 2010. Toby Sommer – SunTrust Robinson Humphrey: Thank you very much. Carl T. Camden – President and Chief Executive Officer: Yes, you’re welcome.

Our next question is from the line of [Andrew Phelps] with UBS. Please go ahead. [Andrew Phelps] – UBS: Yes, thank you. I have two questions. First, on Germany, I know that you did an acquisition there earlier in the quarter. I was just wondering if that had a fourth quarter impact and if you can qualify that? And then secondly, if you can distinguish between the trend that you see in temp and them perhaps perm conversions to your large markets in the US and UK. Thanks. Carl T. Camden – President and Chief Executive Officer: You do the Germany and I’ll… Michael E. Debs – Interim Chief Financial Officer: The Germany, I believe that we completed that acquisition late in November. So it had maybe one month, but remember December is an unusual month with all of the holidays. So not much impact on the quarter. Carl T. Camden – President and Chief Executive Officer: Both on the fee based business so it wouldn’t have a whole lot of impact on the top line results there. In terms of temp to perm conversions inside first the US, we’ve said that they were down inside US commercial. They are still down and they have been down about roughly the same rate for several quarters here, neither accelerating or nor decelerating. Inside the professional space, that tends to be more of a placement. Professional technical tends to more of a placement market than it is a temp to perm market. And there we see very nice fees, but that is primarily from perm placement rather from conversion. And inside the UK, I’m not aware of any particular acceleration or deceleration in that trend. [Andrew Phelps] – UBS: Okay, thanks.

(Operator Instructions) And we do have a follow-up from Michel Morin, please go ahead.

Yes, thanks. Carl, I think that you updated us on PeopleSoft in the UK, I was wondering if you can update us kind of on the roll-out globally? Carl T. Camden – President and Chief Executive Officer: We are about half way through putting out the modules that we had planned. We are running slightly behind schedule. That will probably slightly increase or increase the cost as we have a few more months. We are sorting all of that out still and we will put that in to our 10-K.

Okay and can you remind us of the cost savings that you were anticipating to get from this? Carl T. Camden – President and Chief Executive Officer: We haven’t put that out there yet and don’t know when we will do that. But for the moment, whether you achieve cost savings or not, having an up to date payroll system and so on is critical. Our country is like we said in the UK, we expect to see efficiencies. In other markets, it will just be a case of replacing outdated systems with a current system.

Okay, and then in terms of the actual spending on this year, what are those numbers? Michael E. Debs – Interim Chief Financial Officer: We’ll update that on the 10-K. I don’t have that right in front of me right now.

Okay. And then separately, there have been new line items on the balance sheet in terms of long-term debt you mentioned a refinancing in Japan. Is this just kind of an opportunity you had or is there a thinking that you do want to go in forward on this business with more long-term capital, and perhaps continue with buy-backs and show more willingness to take on financial leverage? Carl T. Camden – President and Chief Executive Officer: We have indicated in past conference calls that we were not debt adverse, that we were willing to employ more leverage on the balance sheet. You have begun to see some activities there, we will do it only where it makes sense. But also the opportunity in Japan was a particularly good opportunity for us and we took advantage of that.

Okay, and then just finally M&A, I think there were five deals that you had done last year with the pipeline looking for ’08, is your appetite still there considering the macro environments? Carl T. Camden – President and Chief Executive Officer: I won’t comment on the appetite, but I expect that ’08 will have a fair amount of activity in it as did ’07.

Great, thanks very much.

We do have a follow-up from Kevin McVeigh, please go ahead. Kevin McVeigh – Credit Suisse First Boston: Carl, could you just clarify what the organic growth in the fourth quarter was and in terms of the first quarter is that 4% is that organic or does that include any benefit from the acquisitions? Carl T. Camden – President and Chief Executive Officer: There is a continuing stream of benefit from acquisitions that’s in there. No, we have not separated out what would be the equivalent of the same branch or same store sales year-over-year. So I don’t have that forecasting type of number at my fingertips. Michael E. Debs – Interim Chief Financial Officer: We have looked as to whether the acquisitions have had a significant impact on our growth rate and it did not. Kevin McVeigh – Credit Suisse First Boston: Okay, thank you very much. Carl T. Camden – President and Chief Executive Officer: Thanks.

And we have a follow-up from Ashwin Shirvaikar, please go ahead. Ashwin Shirvaikar – Citigroup Smith Barney: Hi, Carl, I just wanted to go back to the buy-back question, as to understand what is your appetite for continued buy-backs, especially given the sort of the buy-back thing for Kelly because of its ownership structure? You had five million shares out there and you bought back 1.7 million. Carl T. Camden – President and Chief Executive Officer: And we still have authority to exercise on the, we still have authority yet to run out on the buy back program. I expect that we will use that if market conditions don’t change. I think that given the stock price below book value we will be active participants. Whether we will go back to the board for more authority, we will post that will depend upon both where the stock price is, its valuation, as well as our view on the macro economy at that time. Ashwin Shirvaikar – Citigroup Smith Barney: But this is all going to be open market for you. Carl T. Camden – President and Chief Executive Officer: Correct. Ashwin Shirvaikar – Citigroup Smith Barney: Okay. Thank you. Carl T. Camden – President and Chief Executive Officer: Yes.

Mr. Camden there are no further questions in queue. Carl T. Camden – President and Chief Executive Officer: Thank you all and we look forward to talking with you next quarter.

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