Kelly Services, Inc. (KELYA) Q4 2011 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen, 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 Chief Executive Officer. Sir, you may begin.

Thank you. Good morning, everyone. We're glad you could join us for Kelly Services 2011 Q4 and year-end conference call. With me on the call today is Patricia Little, our CFO. Let me remind you that any comments made during this call including the Q&A, may include forward-looking statements about our expectations for future performance. Actual results could differ materially from those suggested by our comments, and we have no obligation to update the statements made on this call. Please refer to our SEC filings for a description of the risk factors that could influence the company's actual future performance. We begin today's report on upbeat note with the completion of a solid, successful fourth quarter. We can say without qualification the 2011 played out well for Kelly. This is especially gratifying given that the year took a course far different than its sanguine beginning. A devastating tsunami hit Japan early in the year impacting economic growth throughout the world. The budget stalemate in Washington threatened to halt economic growth over the summer, and the financial crisis in Europe has kept markets see-sawing. In short, a lot was thrown at us and in spite of these challenges, we did well. A number of factors converge during the second half of the year to create renewed optimism about the economy. Consumer confidence improved, increasing demand for business services. Manufacturing and construction, 2 particularly beleaguered industries, have begun to show signs of life. And most importantly, the year concluded with news that job growth has exceeded expectations. There's a long way to go before we recoup the job losses endured during such a lengthy and steep recession, but the recovery is at hand and slowly building momentum. 2011 should be viewed as an important step forward for Kelly. Our fourth quarter and full-year financial results showed nice improvement compared with the previous year. Our fourth quarter earnings were also enhanced by better-than-expected tax rate. Patricia will provide you with more detail on what contributed to that lower rate in her financial review. I'm pleased to report the revenue for the quarter was up more than 5% and for the year, revenue grew by 12% over 2010. We achieved an operating profit operating of $13 million for the quarter compared with the $17 million earned in the fourth quarter of 2010. While below the prior year, the fourth quarter of 2010 included a favorable $11 million benefit from a HIRE Act. For the year, we achieved an adjusted operating profit of $61 million compared to last year's operating profit of $47 million. Kelly's fourth quarter earnings from continuing operations were $0.64 per share, significantly higher than last year's adjusted earnings of $0.40 per share for the same period. Our full year adjusted earnings from continuing operations were $1.80 per share compared to 2011's adjusted earnings of $0.90 per share. Our gross profit rate also showed improvement, increasing to 16.3% during the quarter. We continue to benefit from strong operational leverage, a result of maintaining a tightened expense base. Some additional highlights of the quarter included, as expected, our OCG segment returned to profitability this quarter with earnings improving $4 million year-over-year and roughly $1 million on a sequential basis. This is very encouraging because we believe OCG, with its wide array of customized services, is critical for employers seeking greater flexibility and innovative solutions in today's rapidly changing marketplace. PT revenue and gross profit improved in all regions year-over-year. And growth rate surpassed Commercial growth rates. PT remains a critical focus. Our strategy targets PT and other high-yield, more profitable fee-based services where we can realize a sustainable positive impact on gross margins. However, as long as this recovery is slow moving and favors lower skilled disciplines, we recognize the pressure on margins will continue. We experienced a slow but steady pickup in our temp-to-perm business for much of the quarter. Although December's rate of growth slowed, we experienced quarterly year-over-year growth of 30%. Until overall employment improves and the economy adds jobs in a more meaningful way, growth in this and our other fee-based businesses will remain somewhat muted and can bounce around from month-to-month. Expenses increased compared to last quarter due primarily to incentive-based compensation. We remain committed to maintaining a lower cost of service, moving in tandem with business demand. Any deviation from that would be apace with revenue growth. In addition to our own performance benchmarks, positive trends within the U.S. labor market mend the staffing industry in particular support our confidence that this recovery will continue in 2012. The U.S. economy added jobs every month in 2011 and the pace quickened during the second half of the year. December's increase of 200,000 jobs was especially positive, driving the nation's unemployment rate down to 8.5%, the lowest in almost 3 years. And for the year, 1.6 million jobs were created, the best performance in 5 years. Since the start of the labor market recovery, the private sector has added more than 2.6 million jobs. High unemployment mask a growing competition for skilled talent as evidenced by the continued reduction in joblessness among college grads, now standing at a far more healthy 4.1%. Within the staffing industry, more than 550,000 jobs have been added since September 2009. Momentum has gradually built over this period. Year-over-year, we continue to see a fairly stable growth. The temporary health penetration rate has held steady at 1.75% for the past 4 months. Of course there's still a significant way to go to reach the prior 2.03% peak rate. Job creation is now hovering around 150,000 jobs per month, still characteristic of a jobs light recovery. We believe though that the ongoing economic uncertainty will help create a greater awareness of temporary staffing benefits and a secular shift in demand for temporary workers. Now let me provide you with greater detail about our fourth quarter performance in each of our business segments beginning with the Americas. Revenue in Americas Commercial in the fourth quarter increased nearly 5% year-over-year. On a sequential basis, revenue was up 2% for the quarter. Within the Commercial segment, Light Industrial grew 12% year-over-year and 1% sequentially. Office clerical, on the other hand, saw a slight decline of 1% year-over-year but did increase 5% sequentially from the third quarter. Combined, temp-to-perm direct placement and other fees increased 41% year-over-year, and were flat sequentially. Commercial's gross profit rate for the current quarter was 14.3%, or 90 basis points lower than the same period last year. This decline was due mainly to the expiration of the HIRE Act, partially offset by favorable customer mix. On a sequential basis, the GP rate was 10 basis points higher than the third quarter. Expenses for the quarter grew only 1% year-over-year. On a sequential basis, expenses were up 30% from the third quarter. Commercial earnings were $22.4 million for the quarter. While this is down 10% compared to last year, excluding the $8 million favorable impact of the HIRE Act in 2010, Q4 Commercial earnings improved 30% year-over-year, nice leverage on a nearly 5% revenue increase. Americas Professional & Technical revenue in the fourth quarter increased 6% year-over-year. On a sequential basis, PT revenue was down 3%. For the quarter, we saw the strongest growth in our Legal business, which grew 22% over the prior year and then our IT business with the growth of 18%. Combined temp-to-perm, direct placement and other fees for Professional & Technical increased 57% year-over-year and 12% sequentially compared to the third quarter. For the entire segment, our gross profit rate was 15.6%, down 40 basis points from the same period last year. The decline is due primarily to the expiration of the HIRE Act offset by favorable fees. Sequentially, the gross profit rate is up 50 basis points, due mainly to favorable business line mix and fees. Expenses for the quarter grew 7% year-over-year, due mainly to salaries and performance-based compensation in support of our PT expansion. Sequentially, expenses were up just 1%. All in all, PT earnings were $12 million for the quarter. Although 3% below prior year excluding the $2.6 million favorable impact of the HIRE Act, Q4 earnings improved 24%. Before I leave the Americas, I want to highlight that during the fourth quarter, we acquired Tradicao, a top national services provider in Brazil. This acquisition provides Kelly with a stronghold into one of the most robust and strategic markets in South America. We're pleased to welcome the Tradicao team to Kelly. Let's turn now to our operations outside of the Americas beginning with EMEA. Reported revenue in EMEA Commercial was up in the fourth quarter compared to last year by 4%. On a constant currency basis, revenue was up 3%. For the remainder of my EMEA discussion, all revenue results will be discussed in constant currency. Looking at the regions, the most significant improvement was seen in Eastern Europe with an increase of 12% year-over-year. This was primarily driven by the performance in Russia. Western Europe was up 2% year-over-year primarily attributable to our operations in Switzerland. We continue to see nice improvement in fees for the quarter. Fee revenue for Q4 was up 26% year-over-year. The quarterly GP rate for the fourth quarter was 16.2%, flat compared to the same period last year. At constant currency, expenses were up roughly 3% year-over-year and up 1% sequentially, primarily due to the reorganization of our Benelux operations. EMEA Commercial reported a profit of nearly $3 million for the quarter, up 11% compared to the same period last year. EMEA Professional & Technical also improved this quarter with revenue increasing 8% year-over-year. Solid improvements were seen in the UK, France, Germany and Switzerland. Fees in the fourth quarter were up compared to last year by 11%. The growth in fees was primarily attributable to our scientific staffing unit. The gross profit rate in the segment remained at 25.4% for the quarter, unchanged from the same period last year. PT expenses increased by 12% compared to a year ago on a constant currency basis. Continued investments are being made in Russia and Germany. EMEA PT reported a profit of nearly $1 million for the quarter. As we look at our overall EMEA operations, we are exercising caution due to the elevated economic uncertainty. In our APAC region, combined revenue, both Commercial and PT, decreased by 4% compared with the 9% increase in the third quarter. Commercial revenue declined by 8% as we exited some large lower margin accounts in India and Australia. In contrast, our Professional & Technical segment continue to exhibit strong growth growing 40% on a constant currency basis. For the remainder of my APAC discussion, all revenue results will be discussed in constant currency. Fees continue to improve in the region and were up 4% for the quarter. China and New Zealand had solid growth of more than 20%. Our GP rate for the region increased by 130 basis points primarily due to the improvements in temporary margins in Australia and India. Expenses for the quarter were down 2% on a constant currency basis. The APAC region reported a small loss for the quarter. Our final segment is our Outsourcing and Consulting Group, OCG. As mentioned earlier, we're pleased that OCG reported a profit in the fourth quarter with earnings for quarter of more than $800,000. OCG revenue was up 26% in the fourth quarter compared to last year. The strong growth is consistent with 26% year-over-year growth we reported in the third quarter. Sequentially, revenue was up nearly 17% from Q3. This is primarily due to the seasonality of a number of our PPO programs, which typically have stronger Q4 revenue performance. The $800,000 earnings for the quarter compares to a loss of $3.2 million a year ago. Again, consistent with our third quarter results, this is a significant improvement of nearly $4 million over a year ago. Revenue growth and demand for our OCG services continues to be strong. For example, globally in our RPO practice, revenue was up more than 17%. Revenue was up 46% in our contingent workforce outsourcing practice, and our payroll processing practice also reported nice revenue growth of 24% in Q4 compared to last year. Overall, OCG's gross profit rate was 330 basis points higher than a year ago. On an absolute dollar basis, GP was up 43% over last year as compared to the 44% growth we reported in Q3. The improvement in GP rate continues to result from improved volume mix within the higher-margin practice areas. Expenses were up nearly $4 million or $17 million year-over-year in OCG. Expense growth continues to show good leverage when compared to our growth in revenue and gross profit. This increase was primarily the result of servicing cost associated with the expansion of customer programs. On a year-to-date basis, OCG revenue was up 25% and earnings have improved by over $15 million. This is a significant turnaround. We are pleased with the improvements and progress we're making within OCG and believe we are well-positioned for OCG to continue that progress this year. I do note, however, that we do expect to see a pullback in revenue and earnings in Q1 due to normal seasonal declines. The first quarter is typically our weakest quarter, but we do believe the subsequent quarters and full-year 2012 will be profitable for OCG. Now I'll turn the call over to Patricia, who will cover our quarterly results for the entire company.

Thank you, Carl. Revenue totaled $1.4 billion, an increase of 5% compared to the fourth quarter last year. On a sequential basis, revenue was essentially flat compared to the third quarter. Worldwide, our fees were up 29% year-over-year, also 29% on a constant currency basis. On a sequential basis, our fees were down 8%. Our gross profit rate was 16.3%, the same as the fourth quarter last year. The growth in fee-based income, 40 basis points, as well as improvements in our customer mix, offset an 80 basis points decline in the temp GP rate due to the migration of the HIRE Act benefits to the income tax line. We are pleased that we're able to essentially hold our GP rate in spite of losing almost a full point due to the HIRE Act. Expenses were up 8% year-over-year. The increase is primarily due to higher compensation costs. During the fourth quarter, we saw the impact of higher incentive-based compensation as well as the impact of retirement benefits and merit increases we reinstated earlier in the year. A large portion of our full year incentive-based compensation cost was recorded in the fourth quarter due to our improved EPS performance. On a sequential basis, expenses were up 4% higher than we had anticipated due to the higher incentive-based compensation. Excluding the increase in incentive-based compensation, expenses would've decreased slightly on a sequential basis. In the fourth quarter, our GAAP earnings from operations were $13 million, compared to 2010 earnings of $17 million. The fourth quarter of 2010 included an $11 million benefit from the HIRE Act. Excluding the effect of the payroll tax holiday, we achieved nice leverage on a year-over-year basis. The movement of the HIRE Act benefit has made comparisons difficult all year. Excluding the HIRE Act impact, we improved our year-over-year fourth quarter gross margin by 80 basis points, and grew gross profits by 10%, twice the rate of sales. We did this while holding expense growth to 8%, including the compensation items we've reinstated that I discussed earlier. Overall, we're proud of the progress we're making. Income taxes in the fourth quarter provided a benefit of $11 million. The benefit was partially from our best-in-class work opportunity in the HIRE Act retention credit program. These programs provide tax credits for employing workers in certain disadvantaged groups, such as disabled, or unemployed veterans, recipients of government assistance and the long-term unemployed. We employed 30,000 workers from these targeted groups in 2011 and generated fourth quarter credits of $7.9 million. Also in the fourth quarter, we determined that for tax reporting purposes, we were eligible for a workless [ph] stock deduction related to the Netherlands, which resulted in an $8.4 million benefit. Diluted earnings per share from continuing operations for the fourth quarter of 2011 totaled $0.64 per share compared to $0.39 in 2010. Looking ahead to the first quarter of 2012. We expect continued revenue growth in the low-single digits on a year-over-year basis, down slightly sequentially. Keep in mind that seasonally, the first quarter is our weakest quarter. Sequentially, we expect the gross margin will be stable, although we may see some improvement if fees continue to increase. We plan to stay the course on expense control in 2012, and deliver growth with only modest increases in SG&A, those necessary to retain our workforce and to make targeted investments, primarily in OCG and PT. On a year-over-year basis, expenses will increase slightly. However on a sequential basis, we expect expenses will decrease slightly as we will not have the higher incentive comp levels we experienced in the fourth quarter. We expect our income tax rate to be much higher in 2012. This is primarily due to the expiration of the work opportunity in HIRE Act retention credits, which provided $28 million of combined benefit in 2011. We do not anticipate the HIRE Act retention credit to be reinstated, but the work opportunity credit has expired and been reinstated several times, even retroactively. Given the current political environment, it is uncertain if or when the work opportunity credit will be reinstated. We estimate our annual tax rate to be 30% the 35% if work opportunity credits are reinstated, and 40% to 45% if they aren't. The accounting model for taxes means that we will not book any 2012 work opportunity credits until legislation is enacted. And in fact, our first quarter rate will be high due to seasonal items. Overall, the weaker euro will put pressure on our reported EMEA earnings. I also want to alert you to a change we will be making in how we present and account for our operating segments. As we have continued to refine our operating structure and combine the management of Commercial and PT in each of our regions, we have been required to allocate a significant amount of expense between Commercial and PT. Beginning in 2012, we are eliminating the expense allocation, which we do not perceive adds much value. While we will continue to report through the gross profit line for the 7 operating and reporting segments, our expense reporting will be reduced to the 4 regions, Americas, EMEA, APAC and OCG and Corporate. We have included a pro forma example of the new reporting structure as the last page in the press release. Turning to the balance sheet, I'll make a few comments. Our balance sheet includes Tradicao, the Brazil acquisition we completed late in the year. Tradicao's results will not be reflected in the income statement until 2012. Cash totaled $81 million, generally unchanged from year-end 2010. Accounts receivable totaled $945 million and increased $134 million compared with year-end 2010. For the quarter, our global DSO was 52 days, up from 49 days last year. The increase is due primarily to expansion of terms for CWO and all other customers. Accounts payable and accrued payroll and related taxes totaled $509 million and increased $84 million compared to year-end 2010. At the end of the fourth quarter, debt stood at $96 million compared with $79 million at year-end last year due to the increase in DSO and the inclusion of Tradicao. Debt to total capital is 12%, up slightly from 11% last year. In our cash flow, we generated $19 million of net cash from operating activities, compared to $42 million last year. The change primarily reflects higher working capital requirements, partially offset by improved operating results in 2011. I'll turn it back over to Carl for his concluding thoughts.

Thank you, Patricia. As we reflect on 2011, it's time to take stock of how far we've come and what we've accomplished. By most measures, it was a successful year for the industry and for Kelly. Despite the challenges we've faced, we've moved forward and demonstrated our resolve and capability to succeed. We're keenly focused on building a stronger company, a tightened expense base and ongoing cost control measures make us more competitive. Innovative product offerings through OCG provide more choices in customized solutions for customers' talent needs. We're earning high marks in customer satisfaction and winning new large accounts. And the investments we've made in our OCG segment are yielding a positive return, a segment that we believe is very aligned with labor market trends. Our Commercial business, our largest segment, is performing well. Demand for Professional & Technical workers is picking up, and fee-based services, while fluctuating a bit, are trending upward as well. We enter 2012 with cautious optimism. Thus far, positive economic trends are continuing and that will lead to greater demand for our services. There's a strongly growing demand for customize workforce solutions available through our OCG segment, and we believe these solutions will be even more widely accepted as the economy improves. Demographic shifts, most notably in aging workforce and shortages on high-skilled labor areas favor a more flexible staffing model. Again, as these factors play out, let me affirm what Patricia has noted, we look for sustainable growth with sales increasing during the current quarter in the low-single digits. We expect our gross margins to remain stable, and we will remain committed to maintaining firm control over expenses. Before we conclude this morning, let me reaffirm what we've committed to do over the longer-term. We are focused on achieving competitive returns and increased value for our shareholders, specifically our sights are set on achieving an ROS of 4% and key to that goal is our success in growing PT, fee-based and other higher-margin offerings and maintaining our cost of service delivery. The pace at which we reach this goal is dependent in part on the overall economic growth and demand for labor, but we are intent on acting with a sense of urgency. By pursuing a strategy that enables us to leverage our reputation for exceptional service and a broader, more profitable customer relationship. And we're delivering customer-focused solutions across a broad continuum of offers that span traditional staffing, professional and technical offerings and outsourcing and consulting services. And finally, we will engage the best talent by attracting and retaining an exceptional team of employees, free agents and suppliers. In closing, I want of knowledge our talented team of employees and thank them for their efforts during the past year. They did a terrific job of maintaining a strong customer focus, guarding expenses and working smart to deliver solid results. That concludes today's report. Patricia and I will now be happy to answer your questions. John, the call can now be opened.

[Operator Instructions] And we have James Samford with Citigroup.

Looks like things are going fairly well this quarter in Europe, particularly in Switzerland and Russia and Norway. Just wondering could you comment on what's working well there, and any trends that you're seeing as this quarter has progressed in terms of potential slowdowns from all the macro things that are going on over there?

When we were reporting Q3 and then Q2, the uncertainty in the U.S. over how the budget and debt deficit debate were going to be resolved, we talked about how that made companies hunker down and much more tentative in their planning. And you see some of that in Europe now as they're going through that same uncertainty about how are they going to sort through some of the mess that they're dealing with. And I think you see what tentativeness in the planning. You see cautious growth, I think to echo the words of some of our compatriots in the industry, and we see the same thing in Western Europe. The further east you go, so you will hear us talking about Switzerland and Russia, the more robust the economic recovery, and the less tied to the euro in many regards they are in Switzerland and Russia, as you noted, have been strong areas of growth for us and particularly Russia has been for several quarters now, source of double-digit growth. It's a solid market that has a fair amount of resource base and its overall economy and demand for right minerals and resources is very high.

And then maybe just a little bit of detail on the Brazilian acquisition, particularly any thoughts on what an organic growth rates might be in Q1 or will it impact that low-single digit guidance number that you gave?

I don't think it will impact the low single-digit number, and the Brazilian economy is performing very well. Until we've had a longer period of time of managing with our new colleagues in Brazil, we'd hesitate to give any market specific guidance yet. But ask us next quarter.

Okay. I guess if I can get one last one in. Just from a seasonality perspective, should we expect a compensation -- sort of a Q4 event just generally, going forward as well, Patricia?

No, I mean you can see that given the tax benefit that we had, that was more impactful than just the normal -- this would be a not-too-normal seasonal pattern for us. I think if you go back to 2010, you can see a more normal pattern and the incentive comp booking follows that.

Our next question's from Tobey Sommer with SunTrust.

I was just wondering if you could describe a little bit more the -- what the stock deduction from the Netherlands and I think Carl, you mentioned Benelux reorganization?

Yes. We did some realignment of our business in Netherlands. We closed some -- a couple of branches. We outsourced some of our back office and we're starting to share management within the Benelux area. That was a part of the requirement -- or not requirements, but the documentation and understanding that we needed from -- for the IRS requirements to make a workless [ph] stock deduction. So that allowed us to essentially deduct our value of our stock in the Netherlands. It's a pretty standard tax event. We've done it before, this one was just larger. It also had a sort of outside impact because those events happened in the fourth quarter. If they would have happened in the first quarter, we would have taken $8 million and spread it across the full year. It would have been a couple of million dollars a quarter and it wouldn't have been so impactful. So it was magnified a little bit by the fact of when we did it.

In the Legal business in the Americas PT, Carl, you mentioned that was up strongly, kind of called that out. Are you involved in staffing for E-discovery type work and if so, was that a driver of the growth there?

Our Legal business has 2 parts. You have the ongoing, normal types of staffing supplement that you do for law firms and for law departments in corporations, but you will hear us from quarter to quarter talking about big bursts of growth or big declines in legal staffing and much of that comes with large actions around large civil lawsuits, large amount of litigation. A portion of that is always E-discovery. That's been a part of what we been doing for a while, but I would attribute it particularly to that. The rise and fall of our legal business in exceptional levels tends to do with the success we have in supporting various litigation efforts.

And then a question about OCG and I'll get back into queue. How does your visibility for revenue growth headed into 2012 look? And maybe if you could break apart between your expectations for existing customers versus whatever kind of new clients you signed up and your visibility in ramping that business?

Yes, visibility is improving. As you know, when we started into some of the larger -- the larger account implementations, we struggled with understanding how quickly you could implement and how quickly you could get fee revenue online. We have a better understanding of that and internally our forecasting ability has improved as we gain more experience with some of those accounts. I -- in this economy that we've endured for the last 3 years, I never trust anybody's long-range projections in any form of demand, Tobey. So I think we have pretty good visibility 2 to 3 months out. I think we understand what customers say they're going to do over the next year. And then to the last part of your question in terms of new customers, as I stated in our comments, this is an area of strong demand for the services. We have a good pipeline of proposals and pitches, and that's where many of the senior officers are spending much of our time right now in participating in those activities.

Do you have an expectation for incremental profitability in the OCG segment, and could you share that with us?

Yes and then no. I have an expectation. I'd like it to be better informed by the speed of implementation of projects, how quickly can we get to it and how much infrastructure have we -- that we've been building to support the new accounts then is transferable to other accounts. That's a -- that will be a better question to ask us in 2 to 3 quarters from now. I think things -- we'd have a better handle on that.

And next we go to John Healy with Northcoast Research.

I wanted to ask about gross margins as we maybe move throughout 2012. I know there were a number of items that kind of masked some of the progress you made this year. But are you of the view that gross margins can make some, what do they say, modest improvements on an annual basis in 2012? I know you mentioned they will be similar in the next quarter, but I was just hoping to get some sort of maybe thoughts on where the trajectory of those might be working over the next year or so?

You have moving parts. If you listen to the -- if you look at some of the detail we provided, we still had strong growth in Light Industrial in Q4. So you can still have some of your lower margin activities, the lower skill sets still seem to be in high demand than in economy and that can -- you can have GP improvement within business segments. But business line mix could offset that. On the other hand, we've been seeing exceptional growth on the placement fees, direct hire fees and that's more, as Patricia was saying in some of the segments, more than offset some of the downward pressure. As I was saying to Tobey, I have confidence in the next few week's outlook, and after that it's more uncertain how fast will job creation be. If you're asking me do I think there's a possibility that fee growth will be sufficient to provide some upward movement in gross profit, Patricia said that in her comments, that's what I believe also. That's a possibility at this point.

Okay. Great. And I wanted to ask you, I feel like so much of the recovery so far in the staffing world has been driven by, to some degree, the larger customers. And anecdotally, can you provide some color on maybe what you're hearing from the small- and medium-sized businesses out there, maybe specifically in the U.S.? Does it sound like they're feeling better about hiring? Or does it sounds like you're feeling better about their business? Anything you can provide there will be helpful.

I'll give you opinions and then you can take them as just that. On the larger -- on the large customer side, we've been talking about that they have -- they have been committed to an increase in secular shift to various forms of free agent labor. And they're in the process during this recovery of changing their overall mix. That's tougher for smaller customers to do. As I engage in speaking events and talk to smaller business, they are more susceptible to the political uncertainty and the political rhetoric and are much more hunkered down in terms of committing to the future growth and are doing it at the absolute last possible moment in terms of hiring activities. Not by the way that larger companies are wildly spending either, but small business in particular has been distressed by the political rhetoric and by the uncertainty over economic growth. And no, I don't see yet a genuine shift in small enterprise, saying, "Okay everything is going to be cool, let's start investing a little bit ahead of the growth."

And then just last question. As you think about capital deployment, I know this year was kind of milestone of getting back on the horse in terms of paying a been dividend. I was curious to know how you think about that dividend, maybe when you might begin to evaluate a bit further and if that's something that you think about increasing on a gradual basis or on a regular basis? I'm just curious your thoughts there.

There's no commitment to increasing either gradually on a long-term basis, but of course that's something we look at every year as part of our planning -- of our planning process. This economy has been slow. And like many staffing firms, we went deep -- deep into demand on our capital during the downside and there's still some things we'd like to put in better working order as we're generating more operating profit. And that would tend to be my higher priority at the moment. Patricia, I don't know what your...

Yes, I agree.

Our next question is from Gary Bragar with Nelson Hall.

My question is, you noted that in the fourth quarter, RPO revenue was up 17%, kind of a two-part question. Do you have the full year RPO growth results? And also, where do you see the growth coming from? Is it new clients added in 2011 plus addition of more increased hiring from existing clients?

I don't -- so first off, in terms of -- do we have the full-year number? I see people flipping through books quickly here to see if we have it. I don't know if we do or not. And then secondly, in terms of whether it's from new customers or old customers, it tends to be more from the older customers. We are seeing some signs of pickup of growth reflecting what I talked about in my part of the discussion earlier, about a slowly accelerating job growth market and, again, tending to be in the lower levels of corporations and that tends to be a level of high activity for RPOs.

Our full-year growth was about a little over 40%.

And we go to Ty Govatos with CL King.

Just a little clarification, my pencil couldn't move fast enough. SG&A in the first quarter would be down sequentially but up year-to-year?

Yes, exactly.

And when you say gross margin is stable, is that on a year-to-year or sequential basis?

Sequential.

[Operator Instructions] We do have a follow-up from Tobey Sommer.

I think I missed it. Did you, for the first quarter, give a comment on revenue growth?

Yes. Up low-single digits year-over-year.

Year-over-year. Okay. And then does that incorporate a -- what kind of euro kind of performance -- is that a snapshot of kind of like where it's trading over the last week or so?

Yes. That's consistent with that. I mean on a year-over-year basis, that will be a little bit of a downside, but that downside is included in the low single-digits expectation.

Okay. And then Carl, kind of a broader question to you, generating operating leverage has been a goal and there's been evidence of that in the company's performance since the recession. What kind of minimum revenue growth do you need to continue to generate operating leverage?

We're going to be able to do so even off of low-single digit growth. The question that I really fret with is which -- how can we pick up the pace that -- moving much more rapidly to a 4% return on sales? And you know and I know, low-single digit growth is it going to help us get there quickly. I need growth much more like what you're seeing us talk about in some of our PT and fee businesses where you hear us talking about 30%, 40% growth in some of the fees and 10% or high-single digits on the PT side. The question all comes down to, Tobey, on the speed of that improvement is when do we think the, for us, the U.S. economy in particular, gets back to producing 200,000 to 300,000 jobs on a steady month-by-month basis. And if we knew that, we could predict the next election.

And then in terms of the revenue growth, the low-single digits, I guess if you're going to get operating leverage on that, there's a -- an assumption of a positive mix shift towards more -- better growth on the fee elements of your revenue?

Yes. We've been reporting positive mix shift in terms of fees versus staffing and in terms of elements inside the staffing, not quite as much because of sometimes the rapid growth of Light Industrial. So it's going to require tight control on expenses and a continued shift into higher-margined -- higher-margined, more profitable business lines.

Last question for me. Could you comment on what you think is the durability of the growth we've seen in manufacturing and Light Industrial employment in the U.S. and comment as to how Kelly participates in what seems to be a resilient auto industry?

Yes. So lots of little subparts in there. So first off, the U.S. has become, I will admit somewhat to my surprise, more competitive as a place to locate manufacturing for a whole variety of reasons, some of which now -- some of which focus around the ability of manufacturing companies to deploy labor in a more flexible manner. And obviously, we've been participating in that and we've been a recipient. That's one of the reasons you've seen in our Light Industrial business lines growing as much. And as long as manufacturing companies feel like they have the flexibility to rapidly increase or decrease labor costs in response to demand, I think you'll continue to see the U.S. become a better manufacturing site. And secondly, we're not paying attention to the fact that even though the total number of manufacturing jobs are in decline, the value of manufactured goods are increasing. The U.S. is doing a very good job at producing more manufacturing output with fewer people, and that's been partly what's been behind the demand for Professional & Technical labor inside our business line. So I think that's fairly sustainable. And when you start getting into the effect of currency rates and all those types of things, that's way beyond my ability to speak. But I think fundamentally, the U.S. is in the process of being an important player to manufacturing revival. But it's going to be a jobs-light revival in manufacturing.

And Mr. Camden, no additional questions.

Thank you, John. And look forward to talking to you all next quarter.

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