Kelly Services, Inc. Q1 2008 Earnings Call Transcript

Apr.22.08 | About: Kelly Services, (KELYA)

Kelly Services, Inc. (NASDAQ:KELYA)

Q1 2008 Earnings Call

April 22, 2008 9:00 am ET

Executives

Carl T. Camden – President, Chief Executive Officer & Director

Michael E. Debs – Interim Chief Financial Officer & Senior Vice President

Analysts

Ashwin Skirvaikar – Citigroup

Tobey Sommer – Sunrust Robinson Humphrey

Michel Morin – Merrill Lynch

David Feinberg – Goldman Sachs

Thomas C. Robillard – Banc of America Securities

Operator

Good morning ladies and gentlemen and welcome to Kelly Services first quarter earnings conference call. All parties will be on listen only mode 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 disconnect at this time. I would now like to turn the meeting over to your host Mr. Carl Camden, President and CEO. Please go ahead sir.

Carl T. Camden

Good morning and welcome to Kelly Services’ 2008 first quarter conference call. Mike Debs, our acting CEO is with me this morning to review our results. I’ll start with a few brief comments on the current economic climate before updating you on our earnings. Then, we’ll take a look at where we are on implementing our strategic plan and then we’ll go on through our first quarter operating results by segment. Following that Michael will provide additional financial commentary as well as guidance for the second quarter. Afterwards, I’ll update you on our 2008 outlook and then we’ll open the call for questions.

Before we start, 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. Please refer to our 2007 10K for a description of the risk factors that could influence the company’s actual future performance. In addition, we’ll 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 a comparison to our reported financial results.

As we all know the first quarter has been quite tumultuous. Everyday brought conflicting opinions as to whether the United States is entering a recession in the midst of an extending decline or may be exiting the shallow downturn. This economic uncertainty fueled by shaking credit markets, rising oil prices, stagnant employment, a growing deficit and assorted other problems is taking a toll on the early every industry including staffing. Add to that, for our business in particular Easter fell early resulted in fewer contributing work days. The employment picture has failed to show any signs of improvement during the quarter. The weaker than expected demand for staffing particularly in our America’s commercial segment where we have yet to see any inflection points upward or downward has only compounded the pressure. And, as you already know, the first quarter is typically our slowest yielding lower margins and less leverage of our fixed cost.

Yet, despite all these influencing factors, our earnings for the first quarter were $0.23 per share at the upper end of the $0.19 to $0.23 range we had forecast and a penny over consensus estimates. This compares to the $0.21 we earned in the first quarter of 2007 excluding restructuring charges. We attribute much of our performance to our successful strategy to become more geographically diverse, increase our fee based businesses, improve our margins, accelerate growth and professional and technical staffing, expand our outsourcing and consulting services and effectively control costs including better management of workers’ compensation.

During the first quarter we completed our organizational shift to newly defined geographic regions, the Americas, EMEA and APAC and today we begin the practice of reporting our financial results by commercial and professional and technical within each of those three regions. Our staffing alternatives businesses are now reorganized globally under our outsourcing and consulting group and will be reported accordingly. These seven segments better define our business focus and support our strategy to become a truly global company.

In the last few years our professional and technical business in both the EMEA and APAC regions has grown significantly becoming solid contributors to the profitability of the company. They are also areas in which we are making considerable strategic investments. As such, going forward we will examine, measure and report their performance individually. We believe that the expanded reporting will also enhance leadership accountability in each segment and provide greater transparency and richer detail to our shareholders. With that in mind let’s move on now to talk about our first quarter performance for each of our business segments.

I’ll begin with America’s commercial which is roughly 46% of our revenue. In the first quarter the Bureau of Labor Statistics showed increasing job losses in both non-farm and temporary employment. The job losses as well as the slowing US economy continues to affect our business. America’s commercial reported revenue decline over 6% in the first quarter. When adjusted for the Easter holiday week which fell in the first quarter this year compared to the second quarter last year the adjusted revenue decline was less than 6% and this is about the same decline experienced in each of the prior three quarters. By month during the quarter the revenue short fall was down 6% in January, 5% in February and down roughly 5% when adjusted for the Easter holiday in March. Our combined temp-to-perm and direct replacement fees reported a 9% year-over-year decrease for the quarter somewhat slower than the 7% decline that we saw in the second half of 2007. By month in the quarter January was down 7%, February was down 20% and March was down 1%. We expect growth in placement fees in aggregate in the second quarter to be about the same in the first.

On the other hand, we continued to post improvements in our gross profit rate. This trend which we began in the second quarter of 2006 continued throughout 2007 and in to the first quarter of 2008. In fact, this is our eighth consecutive quarter of an increasing year-over-year GP rate. This quarter was helped by careful management of workers’ compensation claims as well as by lower unemployment costs. The GP rate during the quarter increased to 16.4% from 15.9% last year. We also remain extremely focused on controlling costs in this particular segment given the current state of the US economy and its overall impact on total company performance. And, for the quarter, expenses were down compared to last year. Netting that all up year-over-year operating earnings for America’s commercial were down about 4% against the 6% revenue decline.

Moving on to America’s professional and technical which is about 17% of company revenue, revenue grew 2% with earnings up 4% on a year-over-year basis. We are very pleased with the improvement in revenue growth. After reporting declining revenue in the first three quarters of 2007, America’s PT turned positive in the fourth quarter and posted further growth than 2% in the first quarter of 2008. Adjusting for the Easter holiday revenue growth was up about 3% and by month January was up 2%, February up 3 and March holiday adjusted also up 3%. Taking a closer look the professional businesses which represent about 25% of America’s PT revenue continued the solid revenue growth seen in 2007 turning in 10% year-over-year revenue growth in the quarter. Further, professional posted a slight improvement in earnings. During the quarter our healthcare and finance businesses reported nice revenue growth and earnings increases but offsetting these successes was our law business which had both revenue and earnings decreases as several projects were completed. And, CGR7 our creative staffing business which adds about 70 basis points to the year-over-year PT revenue growth also yielded positive earnings contribution for the quarter. As a note, the acquisition of CGR7 which closed in April, 2007 will anniversary in the second quarter.

Our technical businesses represented about 75% of America’s PT revenue and while revenues in these businesses were flat during the quarter, earnings did increase. Our year-over-year revenue performance which was negative during each quarter in 2007 has been steadily improving and we expect this trend to continue for the remainder of 2008. During the first quarter both our engineering and science businesses posted strong revenue and earnings growth. Our IT revenue performance continues to improve yet is still short of our expectations.

For the entire America’s PT segment the gross profit rate improved 18.2% in the quarter compared to 17.7% for the same period last year a 50 basis point improvement. This improvement was fueled by continued fee growth, lower state unemployment costs and the acquisition of CGR7. Expenses continued to be managed well during the quarter increasing at about the same rate as gross profit. We’re pleased with the improvement we’re seeing in America’s professional and technical businesses especially in light of the economic challenges.

Let’s turn now to our operations outside of the America’s beginning with EMEA which comprises roughly 23% of our revenue. EMEA commercial reported revenue increase over 8% in the first quarter. On a constant currency basis and adjusted for the shift in the Easter holiday, revenue was essentially flat. By month in the quarter revenue on a constant currency basis when holiday adjusted was up 1% in January, up 2% in February and up about 1% in March. Revenue in the UK was down 13% in the quarter however, we continue to see sales performance in Russia which was up almost 30%. The French market is also trending above last year with year-over-year revenue growth up about 6%. Reported fee income was up 20% year-over-year, 10% in constant currency. By month in the quarter January was up 14%, February up 16% and March up only 1% as the timing of the Easter holiday caused many of our customers to delay employee start dates in to April.

The GP rate during the quarter increased to 17.3% from 16.5% last year primarily due to higher fee income. Expenses increased 2.4% in constant currency primarily the result of additional investments and the new commercial EMEA branches we opened last year as well as costs associated with the opening of three new commercial branches in France, Russia and Hungary during the first quarter of 2008. EMEA commercial reported an operating loss of $1.6 million for the quarter. This was an improvement of approximately $250,000 compared to the prior year excluding UK restructuring charges.

EMEA professional and technical which is about 3% of total company revenue grew roughly 21%. The gross profit rate in this segment improved to 29.8% from 25.7% for the same period last year. This improvement is from strong fee growth of 68%. We saw double digit growth in fees in numerous countries within EMEA. Additionally, we saw the positive comparisons from our acquisitions of talents in the Czech Republic and Poland in the second quarter last year. Expenses increased 22% in EMEA primarily the result of the talents acquisition and 12 branch openings made during the second through fourth quarters last year and in addition during the first quarter we opened another financial resources branch in Hungary. Overall, we were able to grow earnings more than three fold in the EMEA professional and technical segment during the quarter.

Moving on to our APAC region which currently comprises 7% of total company sales. Commercial revenue in APAC grew nearly 40%. On a constant currency basis revenue increased just over 23%. Earnings were essentially break even for the quarter compared to earnings of $676,000 in the first quarter of 2007. Professional and technical revenue for the first quarter in APAC was $8.5 million growing 85% year-over-year and on a constant currency basis revenue increased by roughly 63%. Earnings from operations for APAC PT were about flat to the prior year.

APAC while small remains one of our fastest growing segments. We are beginning to see very nice top line growth there in both our commercial and PT businesses and we will continue to invest heavily in this high growth segment. We believe our investments in this region will pay off in the long term. The Asian economies remain relatively strong and the demand for both commercial and professional technical talent continues to increase. This is particularly evident in countries such as India, China, Singapore and Australia. And, during the quarter we opened three new commercial branches and one new professional technical branch in New Zealand as well as one new commercial branch in China.

Our final segment is our outsourcing and consulting group representing 4% of total company revenue. OCG revenue increased over 45% in the first quarter compared to the same period last year. The America’s, EMEA and APAC all were solid contributors to this revenue growth. Year-over-year earnings more than tripled during the quarter. The America’s is the largest contributor to this earnings performance as we continue to realize the benefits of our investments. OCG America’s revenue was up 31%, earnings up 175%. Strongest contributors were HR First, Kelly Vendor Management and our management services unit, all had very strong revenue and earnings growth for the quarter. EMEA and APAC OCG while showing exceptional top line growth had their earnings negatively impacted by the accelerated investments in both regions to build out implementation and operations infrastructure in front of anticipated revenue from new client wins. This was expected and we do expect improved earnings in these two regions in the second half of the year.

For all of OCG the gross profit rate improved 31% in the quarter compared to the 25.3% for the same period last year. This was fueled by improved margins on our RPO unit coupled with revenue growth in our fee based business unit such as Vendor Management. We are very pleased with OCG’s performance this quarter and we expect further improvement as we make additional investments in this fast growing segment.

Now, I’ll turn the call over to Mike who will cover our quarterly results for the entire company.

Michael E. Debs

Good morning. Before I get in to the details, you may recall that we sold our Kelly Homecare unit in the first quarter of 2007. We also reported a restructuring charge in the UK of $2.6 million or $0.07 per share. All of the comparisons we’ve referenced this morning are from continuing operations excluding restructuring charge. For the quarter total company revenue totaled $1.4 billion an increase of 3% compared to last year. That’s down slightly from the 4% growth reported in the fourth quarter.

As Carl mentioned, Easter fell in the first quarter this year and in the second quarter in 2007 which impacted revenue growth by slightly less than 1%. On a constant currency basis revenue decreased by 1% compared to last year. That’s also down slightly from the fourth quarter when revenue was essentially flat on a constant currency basis.

Our gross profit rate was 18%, an increase of 100 basis points compared to last year primarily due to strong growth in fee based income and lower workers’ compensation costs. Selling, general and Administrative expenses totaled $237 million, an increase of 10% year-over-year. Most of the growth in SG&A expense has come from our EMEA, APAC and OCG segments where we continue to make strategic investments. SG&A expense decreased by 4% in our America’s commercial segment. The growth in SG&A expense was also impacted by currency rates. On a constant currency basis SG&A expenses grew by 5%.

Earnings from operations totaled $12.9 million and were down slightly compared to last year. We were pleased with our ability to hold earnings from operations essentially flat in a quarter when our largest segment, America’s commercial experienced a 6% decline in revenue. Other expenses totaled $51,000 compared to income of $673,000 last year. The decrease is due primarily to increased debt and lower average cash balances. The effective tax rate in the first quarter was 38% which is an improvement from the 42.8% rate in the prior year. The majority of the improvement was related to foreign tax credits recognized in the first quarter of 08. Diluted earnings per share from continuing operation totaled $0.23 per share compared to an adjusted $0.21 in 2007.

Turning to the balance sheet, I’ll provided a few highlights. Cash remains strong totaling $88 million. Accounts receivable totaled $931 million, an increase of approximately $100 million compared to the prior year. Our receivables continue to increase faster than sales due to the significant growth in our Vendor Management business. Under US GAAP Vendor Management Service billings are not included in revenue but are included in our accounts receivables. For the quarter our global days sales outstanding were 52 days, a small increase of one day compared to the first quarter of 2007. Debt totaled $103 million up slightly compared to $98 million at year end. All of the increase is due to exchange rates.

Finally, a few comments on the company’s cash flows for the quarter. Net cash provided by operating activities was $19.3 million compared to $14 million last year. Capital expenditures totaled $6.4 million compared to $8.5 million in 2007. We expect 08 capital expenditures will total approximately $45 million. During the first quarter we repurchased approximately 400,000 Class A shares for $8 million. We have repurchased 2.1 million shares at a cost of $43 million

since the repurchase program was announced in the third quarter of 2007.

Turning to our guidance, as highlighted in the press release, our guidance for the second quarter of 08 is that diluted earnings per share will range from $0.37 to $0.41 per share. That compares to reported earnings of $0.41 per share from continuing operations in 2007. Let me point out that the second quarter of 07 included a UK restructuring charge of $0.07 per share and a benefit of $0.07 per share from French payroll tax credit. Our guidance assumes revenue growth of 5 to 6% year-over-year. Excluding the effect of the Easter shift we expect America’s commercial to continue with its current negative growth rate of approximately 6%. We expect that on an overall basis the remainder of our business segments will experience a modest increase in the growth rate. The second quarter effective tax rate will be approximately 37%. We do not expect the full year effective tax rate to vary significantly from the 35.5% rate in 2007.

I’ll now turn it back over to Carl who will talk more about our expectations for 2008.

Carl T. Camden

That’s wrap by talking about our outlook for the remainder of 2008. When we last talked to you all in January we acknowledged then that predicting the economic future was akin to reading tea leaves and it still is. There is no historic precedent for what is happening and that is what makes this time so perplexing. GDP growth was about flat in the fourth quarter. US employment in the first quarter is down and temporary employment penetration is still dropping. But, on the other hand when you look at college graduates and other college decree professionals there was a very low 2.1% unemployment rate. In January, I said the US appeared to be teetering on the edge of recession, many economists now believe we’re in one but at some point the semantics of that argument become meaningless. You can call it what you want but the important question today is now whether we’re in a recession but rather do we anticipate a sharp downturn in the near term? Or, do we see any signs of an upturn on the horizon. Interestingly, the answer to both questions is no.

Over the past 15 months or so we have learned that we cannot predict the duration or severity of this current economic downturn and we can’t control the economy but we can control our own actions. What we can say for certain is that opportunities are still out there and how we go after them will determine our future success. We anticipate a shortage of professional and technical workers in North America, Western Europe and Japan for at least the next decade. Kelly’s focus will be on helping companies meet that need through expanded professional and technical staffing and throughout outsourcing and consulting services. We also continue to build new customer relationships in more recession resistant sectors within the US such as government services and education. These sectors are and will continue to support growth across all staffing disciplines.

In other geographies around the world, in South America and Eastern Europe for example we see a growing demand for not only professional and technical workers but also for commercial employees. We are probably witnessing a change point in the world’s labor markets, one in which skills shortages will be common throughout the industrialized nations. New talent needs will emerge, professional decreed and technical workers will drive economies and global labor markets will become even more interconnected.

Today Kelly Services is a transformed company different in almost every way from the company that navigated past downturns. Our operations are different, our structure is different and we’ve sharpened our strategic focus. We’re strong and agile and positioned for the industry shift we believe are coming. While we can’t say with any certainty what the remainder of 2008 will bring, we can say this, recessions or whatever we’re calling this period of time do end and what’s important is to be in the right place when they do and I’m confident that Kelly is prepared.

This will end our formal comments and 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 and if you have additional questions we’ll certainly try to return to you later in the call. The call can now be opened for questions.

Question-and-Answer Session

Operator

(Operator Instructions) We’ll first go to the line of Ashwin Shirvaikar with Citigroup. Please go ahead.

Ashwin Skirvaikar – Citigroup

The question I have is can you talk to at least for the next quarter forward expectations by unit in the new classification? [Inaudible] is fine, just because the classification is new.

Carl T. Camden

What Mike said was is that we expected the US to perform, US commercial, America’s commercial to perform at roughly the same pace as it has been now for about four quarters in a row. Sitting between -5 to -6%, kind of controlling for the Easter shift in there and we expect mild improvement over the rest of the business unit.

Ashwin Skirvaikar – Citigroup

Okay. The lower workers’ comp, are we in the process of bottoming that out? Given past historical trends that typically starts increasing in a downturn, doesn’t it?

Michael E. Debs

I think we’ve probably come pretty close to bottoming out. I’m not sure that I expect it to increase significantly but we continue to see very good news as we adjust our prior year’s claims and I don’t expect that to continue at that rate.

Carl T. Camden

What’s uncertain at the moment is there’s been a lot of structural changes to workers’ compensation particularly in states like California where there were significant reform efforts. Those seem to be holding even in the midst of increased unemployment and what the states are not reporting are significant increases in claim activity, duration or severity of claims like you’ve seen in past employment downturns. Again, we’ll see how it all unfolds as the year happens but there have been important legislative changes in a lot of states in this country.

Operator

Our next question is from Tobey Sommer with Suntrust Robinson. Please go ahead.

Tobey Sommer – Sunrust Robinson Humphrey

I had a question, I think when you were talking about the EMEA region and you gave your monthly breakdown of fee growth, the fee growth for March you said was just $0.01 because of people pushing back start dates. Does that imply that in April you did see those start dates occur and perm fee trends within the EMEA region remain more similar to January/February levels?

Carl T. Camden

If we had seen a significant downturn we would not have said that start dates had been shifted out. What we’ve seen in April reflects the start dates having been shifted out.

Tobey Sommer – Sunrust Robinson Humphrey

I’ll ask one follow up kind of on the first couple of questions that were asked, regarding the kind of slight improvement in growth rates that maybe you’re looking at outside of US commercial in 2Q, is that only a function of the shift in the Easter holiday? Or, is there some sort of more fundamental improvement in demand that you might see?

Carl T. Camden

You have a fair number of branch openings that we have continued to highlight through the quarters and as those branches mature you would expect to see revenue growth in those areas. So, we’re not talking about a fundamental pickup in the GDP of world economies or demand for labor but Kelly itself has been investing well in branch openings and that’s reflected in our numbers.

Michael E. Debs

I would slightly better than the Easter shift.

Operator

We’ll go to the line of Michel Morin of Merrill Lynch. Please go ahead.

Michel Morin – Merrill Lynch

I was just focusing a little bit on the UK where we had seen some pretty decent results I guess in the last quarter now, a bit of a surprise to see its fallen off. Is there room to do yet more restructuring, more cost cutting there? Or, what specifically might have happened this quarter?

Carl T. Camden

We, like everyone else are evaluating our large accounts, their profitability and choosing whether to retain or not retain. In addition, you do see some revenue falling off from the branches that we’ve closed as that anniversaries on out. What growth we’re seeing in the UK, for us is coming out of the professional and technical side, it’s not coming out of the commercial side. We always take a look at all operations to see whether the branch network is over built and we’ll continue to do so.

Michel Morin – Merrill Lynch

Great. Then just focusing on the EMEA commercial segment for a second, I think in constant currency terms the growth was 8.2, I was wondering how that compares to 07? And, I don’t know if you’re going to be providing us with some historical growth rates?

Carl T. Camden

The historical information is out on the web now.

Michel Morin – Merrill Lynch

It is? Okay.

Carl T. Camden

And available, in fact, for 07 and 06 by quarter so you’ll have eight months to work backwards from Michele.

Operator

Your next question is from David Feinberg with Goldman Sachs. Please go ahead.

David Feinberg – Goldman Sachs

Questions regarding your US perm business, you gave us some numbers around the commercial side, can you give us a similar sense in terms of the Americas professional and technical? What occurred in perm on a monthly basis? And also by verticals what’s going on within each? Are certain verticals outperforming others?

Carl T. Camden

If I had it here in front of me I would give it to you. I don’t have it here in front of me, let me find out how we get that for you.

David Feinberg – Goldman Sachs

Okay. Then, I’ll take advantage and I’ll ask a follow up question, as it relates to your comments in Europe about a push out in start dates from March in to April was there a similar dynamic in the America’s? Or, are you just seeing overall general weakness as it relates to perm?

Carl T. Camden

Yes, some but not as intense.

David Feinberg – Goldman Sachs

Some push outs but, not as intense?

Carl T. Camden

Right.

Operator

We have a question from the line of TC Robillard with Banc of America Securities. Please go head.

Thomas C. Robillard – Banc of America Securities

Just a quick question on the America’s commercial, the operating margin, you continue to see some great cost controls there. When do we start to anniversary some of the restructuring there? Or, is there something else going on? Because, you were able to show a 10 basis point roughly year-on-year increase in your margin there despite the decline on the revenue side. When do we get to a deleverage point I guess is what I’m trying to look at? Or, is this a consistent kind of cutting of costs as the year unfolds and you guys are mapping out your revenues?

Michael E. Debs

The two biggest changes in our GP rate year-over-year were favorable workers’ comp and unemployment taxes in America’s commercial. Unemployment taxes will continue through this year and in terms of 09 it’s hard to say what’s going to happen but I suspect we’ve probably bottomed out in unemployment taxes. Workers’ comp I think we’ll continue to see, as we said earlier, good performance on our current year but I don’t expect to continue to see favorable adjustments to prior years like we’ve seen through the first quarter of this year.

Carl T. Camden

On the expense basis itself and we anniversary the restructuring charges in Q3 and 4 so you’ll still see some year-over-year improvements from that. And, we continue to look at - as you see the revenue declines we’re always are looking at the cost behind those and are continuing to see what we can do to bring those costs down. You can’t show year-over-year revenue declines in a segment, and we’ve now seen this for almost 15 or 16 months, if it continues on at some point we’ll hit a deleveraging point but we’re battling hard to stave that off.

Thomas C. Robillard – Banc of America Securities

Okay. Then, just to follow up on what’s been talked about on our last couple of questions in terms of the push out of start dates in Europe, have you seen some of that pick up in the first few weeks of April? Or, was this more of just kind of a broader based push out not necessarily a one month push out?

Carl T. Camden

No. What we’ve said is that we’ve seen the push out and you’ve seen some corresponding pick up in those start dates. It was not a slowdown or push out of activity, it was the same level of recruiting activity just start dates were moved beyond Easter which we well understand and, you don’t recognize any revenue until people have started on the job.

Thomas C. Robillard – Banc of America Securities

So is it far to assume that you’ve seen a pretty healthy pickup in terms of that growth rate if we were comparing April to March?

Carl T. Camden

I won’t comment on the Q2 performance, must simply noting that we wouldn’t have said that there was a delay in start dates if we didn’t see the corresponding starting in the second quarter.

Operator

(Operator Instructions) We do have a follow up from Ashwin Skirvaikar. Please go ahead.

Ashwin Skirvaikar – Citigroup

The question I have is on OCG which was a significant profit contributor much more so than on the revenue side and I know you did have some comments on it but could you go through what exactly happened in the quarter and do you expect that continue especially as some of these businesses are recession resistant? In the next few quarters do you expect the higher degree of profit contribution to stay the same?

Carl T. Camden

Without speaking of any specific quarter, as OCG continues to grow and gain scale, yes we expect to see nice profit growth from the segment. We’ve been putting lots of investments in to it, there’s very significant revenue growth as you were commenting from new account wins. There’s always heavy implementation costs on a lot of those new wins and then the profit comes following that. As we talked about on EMEA and in APAC we’ve been investing heavily in front of the revenue stream that will come and we expect OCG over the next quarters to be a nice contributor to profit growth in the company.

Ashwin Skirvaikar – Citigroup

Okay. I guess you would have mentioned it if there was an impact but in your VMS business, any impact?

Carl T. Camden

There was no important impact.

Michael E. Debs

It all impacted the fourth quarter last year.

Carl T. Camden

What impact there was already happened in Q4.

Ashwin Skirvaikar – Citigroup

And in spite of that the VMS market itself do you see that sort of returning to normal?

Carl T. Camden

The VMS market never slowed down even during the times debacle, that was just a hiccup in revenue from that business divested into a variety of VMS suppliers and managers. That is a fast growing business for us and for the industry.

Operator

We have a follow up from Tobey Sommer. Please go ahead.

Tobey Sommer – Sunrust Robinson Humphrey

Carl, I wanted to ask you just stepping back and thinking longer term with the decline in value of the dollar and potential long term valuation in this range, do you think that there’s an opportunity over time for the lid and other manufacturing industries and perhaps staffing demand to rebound if indeed kind of production within the US and kind of North America is more competitive on a global basis?

Carl T. Camden

I always remind everybody my Ph.D. is not in economics or in labors but, there’s a fundamental shift taking place in manufacturing employment in the country so while the country is maintaining a good level of manufactured goods output we’re steadily declining and we’re projected to steadily decline for another decade the number of people directly employed and indirectly employed in manufacturing. That’s not going to change whether the dollar strengthens or weakens, that’s kind of a systemic trend in the country. We’ve shifted the type of manufacturing we do. So, to the extent the lid part of the industries business is tied to manufacturing it will face the same time of slow steady declines that you’ve also seen for a couple of decades in the office clerical side of the business as there’s been a shift away from a large number of secretaries and administrative assistants and more productivity and use of software, it’s going to take place and is taking place in the lid part of the business today. I think that its decline can be speed up or slowed down by what happens to exports which is what gets reflected by the changing strength of the US dollar but on a long period of time manufacturing related employment in this country has been declining for a decade and is going to continuing to decline for another decade.

Operator

We have a follow up from Michel Morin. Please go ahead.

Michel Morin – Merrill Lynch

Carl, I was wondering was there any discernable trends between office clerical and light industrial in the US?

Carl T. Camden

No, they were performing at about the same.

Michel Morin – Merrill Lynch

Okay. Then, can you remind us what’s been the issue in the IT segment?

Carl T. Camden

As we talked about three quarters ago when we highlighted the underperformance there, we had large projects that finished up, we didn’t have as many large projects in the pipeline and the non-project related part of the IT temporary staffing had been somewhat neglected while everybody was focusing on the project side. So we rebalanced what the IT offices were doing, we’ve now had two to three quarters of nice improvement in that business but we’re still underperforming segments of the industry there.

Michel Morin – Merrill Lynch

But, at some point you’ll be anniversarying that, what in the second half?

Carl T. Camden

Yes.

Michel Morin – Merrill Lynch

Okay. And on the legal side you noted a little bit of weakness there in this quarter, is that also kind of projects rolling off?

Carl T. Camden

Yeah. For us on the legal staffing side we have a very healthy core permanent staffing and placement business but there’s big revenue swings inside of the legal staffing business based on the large projects, document reviews and so on that are underway. If you all could generate a few more lawsuits which the investment industry seems to be capable of doing, we might then see a pick up here in that business shortly.

Michel Morin – Merrill Lynch

We’ve done our part here at Merrill Lynch. Final question for me is PeopleSoft, how’s the implementation going with the status of that right now?

Carl T. Camden

We will update on the PeopleSoft implementation within the next quarter. We don’t have an update for you right now.

Operator

We have a follow up from Tobey Sommer. Please go head.

Tobey Sommer – Sunrust Robinson Humphrey

I wanted to ask you a question about OCG, the gross margins were very high and showed a lot of expansion. Overtime, where should we think that those margins can go and which particular segment, if there is one within that, or which particular businesses would be the driver of that expansion?

Carl T. Camden

I don’t have yet a long term picture of where the GP rate ends up in OCG. It’s still a relatively small business. You have individual business units that are experiencing 50 to 100% growth rates some of which have 70 to 80% type GP margins. You have other businesses also growing quickly that have much lower GP rates. That business needs to settle out and mature before I get to a point of understanding where its long rate GP is. It will be higher obviously than staffing and it will produce and is already producing very nice operating margins and will continue to do so as it matures. Too early yet though to see where that’s going to settle down to.

Tobey Sommer – Sunrust Robinson Humphrey

In terms of a direction though should we be looking for expansion there from current levels?

Carl T. Camden

I really can’t tell you because I think it depends which unit grows faster within there. If one of the lower margin units happens to have a spectacular half of the year it could bring down the overall GP rate and I would still cheer them on.

Tobey Sommer – Sunrust Robinson Humphrey

I guess maybe could you tell us which business units within that segment are the lower margin segments?

Carl T. Camden

Not yet. We haven’t done so and I would like to prepare comments on that if we’re going to do so. But, I take that in as information we might look at doing on one of the future conferences. If I could quickly while there is a little pause here with the questions, I don’t have the month-by-month breakdown but there was placement fee growth of about 5 to 6% in the professional technical business, nice solid single digit growth in the America’s that somebody was asking for.

Operator

Mr. Camden no further questions in queue.

Carl T. Camden

Great. Thank you all. We look forward to seeing you out and about.

Operator

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