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Kelly Services Inc. (NASDAQ:KELYA)

Q2 2008 Earnings Call

July 22, 2008 9:00 AM ET

Executives

Carl Camden - President and CEO

Patricia Little - Executive VP and CFO

Mike Debs - Senior VP and Acting CFO

Analysts

Jim Janesky - Stifel Nicolaus

Tobey Sommer - Suntrust

T. C. Robillard - Banc of America Securities

Michel Morin - Merrill Lynch

David Feinberg - Goldman Sachs

Ashwin Shirvaikar - Citigroup

Operator

Good morning ladies and gentlemen, and welcome to Kelly Services’ Second Quarter Earnings 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, and if anyone has any objections you may disconnect at this time. I would now like to turn the meeting over to your host Mr. Carl Camden, President and CEO. Sir, you may begin.

Carl Camden

Thank you, John and again good morning and welcome to Kelly Services’ 2008 Second Quarter conference call. Let me start by introducing Patricia Little, our newly appointed Executive Vice President and Chief Financial Officer. Patricia brings more than 20 years of corporate finance, treasury, planning and analysis to Kelly. She is coming to us from Ford Motor Company, where she served most recently as General Auditor. We're very pleased to have her on the team and glad that she's joining us this morning.

We'll briefly review today's agenda: I'll start with a few comments on the current economic climate before updating you on our earnings. Then we'll take a look at our second quarter operating results by segment, and following that Patricia will provide additional financial commentary. Finally, I'll make a few closing comments before opening the call for questions. Mike Debs, Senior Vice President and Acting CFO for the past few months, is also here today and he'll participate as needed in our Q&A.

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 10-K 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 the performance measures and a comparison to our reported financial results.

The second quarter was a rough one. Analyst’s reports and media have well documented the economic challenges faced by our industry and the global economy, but let me highlight the aspects most relevant to Kelly Services. Overall demand for labor in the US, already weak, has worsened since we last reported to you; and demand for temporary staffing is declining at an even faster rate.

June brought the sixth straight month of overall job losses and an unemployment rate of 5.5%. Since January the US economy has lost 438,000 jobs, that compares to a creation of 2.1 million jobs in 2006, and another 1.1 million in 2007. Along with the job loss, temporary employment has posted 15 consecutive months of year-over-year declines with June's drop being the highest on the cycle.

Although, we had hoped for relative job stability both in and outside of the US, we’re now seeing employment has weakened elsewhere in the world, particularly in Western Europe. When comparing 2008 job numbers to those seen in 2001, we have seen fewer job losses and the year-over-year percentage drop in temporary jobs is holding up better.

The current unemployment situation seems to be more of a reflection of employers' reluctance to add new employees, rather than the result of aggressive layoffs.

Although manufacturing financial services and various other industries have experienced job losses, there continues to be opportunities in other sectors like education, government, energy and engineering.

Although up, just the slight bit, the unemployment rate for college graduates remains very low at 2.3% in fact. For the past several months, some business leaders and economists have suggested the US economic downturn will be mild and fairly short-lived,, but despite initiatives to spur growth in the National economy, this slowdown has persisted and now intensified. It seems to us that we are actually in a recession, with questions only open about the length and severity. We note that we now have significantly less visibility looking forward.

As a result of the deteriorating economic conditions, our earnings for the second quarter were lower than originally expected $0.30 per share or $0.07 below the low end of our guidance. That compares to the $0.48 we earned in the second quarter at 2007, excluding restructuring charges.

When we set our range at the conclusion of the first quarter, we did so with two key expectations. First, that the European economies would remain strong and second, that the US economy, while not poised for a quick recovery, wouldn't worsen significantly. Unfortunately, the negative inflection became a reality and our results doubled our forecast. Given that economic uncertainty continues to claw the outlook for our industry, we will not provide our customary earnings guidance for the next quarter. At such time as conditions stabilize, we'll consider resuming this practice.

Now let's take a look at our segment results: We'll begin with Americas Commercial which is 45% of our revenue. While non-farm job losses during the second quarter were moderate, the BOS reported an increasing rate of job losses and temporary employment in the quarter. These job losses, coupled with the sluggish growth in the US economy, continued to adversely affect our business. Reported revenue in Americas Commercial declined 6% in the second quarter, when adjusted for the Easter holiday week which fell in the second quarter last year and in the first of this year, the adjusted revenue drop was over 7%. This decline was below our expectations and worse than the 6% adjusted revenue decrease we saw in the first quarter.

Our combined temp-to-perm and direct replacement fees reported a 4% year-over-year decrease for the quarter, better performance than the 9% decline we saw in the first. Fees in Americas Commercials for the last five quarters have been running in the -7% to -9% range. During the quarter we continue to see much volatility on a monthly basis, with April down 2%, May up 10% and June down 16%.

We continue to see stability in our gross profit rate. For nine consecutive quarters our gross profit rate equaled or exceeded the prior year. The gross profit rate of 15.7% in the second quarter was the same as last year. We remained focused on maintaining good expense control on our Americas Commercials segment, reducing spending during the quarter by 2% compared to last year. However, negative expense leverage on the 6% revenue decline, resulted in year-over-year operating earnings for Americas Commercials, being down about 21%.

Moving on to Americas Professional and Technical, which is about 16% of company revenue. Reported revenue grew by 1% and earnings were up over 2% on a year-over-year basis. While it is the third consecutive quarter of positive reported revenue growth in Americas PT, when you adjust for the Easter holiday affect, revenue growth in the second quarter was actually about flat with last year that was also a decline from the 3% growth we had in the first quarter. Especially given the slowing economy, we’re pleased with the performance of most of our PT businesses with the notable exceptions of our law and automotive units.

With regards to professional, which represents about a quarter of Americas PT revenue, year-over-year revenue was down 3%, after increasing 9% in the first quarter, earnings were also down compared to the same period last year and this performance was primarily driven by the decline seen in our law business, resulting from cutbacks in hiring and less outsourcing. On the other hand, our finance business reported nice revenue growth and earnings increases for the quarter.

Next, are our technical businesses, representing about 75% of PT revenue. Technical revenue was up nearly 3% in the quarter, somewhat helped by the Easter comparison; further earnings increased at a faster rate than revenue.

During the second quarter, both our engineering and science businesses continued to post strong revenue growth and solid earnings year-over-year. While IT is improving, it is still lower than last year.

Revenue on our automotive unit was flat compared to last year, but started to significantly drop mid-way through the quarter. Our combined temp-to-perm and direct placement fees for professional and technical were flat with the same quarter last year, slower than the 6% increase we saw in the first quarter. For the entire segment, the gross profit rate improved to 17.7% for the quarter compared to 17.6% for the same period last year, a 10 basis points improvement over last year and additionally our gross profit increased at about the same rate as the increase in expenses during the quarter. In a difficult economic environment, we are pleased with a greater than 2% increase in earnings for the second quarter in our PT business. The majority of the individual businesses are delivering solid performance in both revenue and earnings.

Let’s now turn to our operations outside the Americas beginning with EMEA, which comprises 27% of our revenue. EMEA Commercial reported revenue increased 10% in the second quarter. On a constant currency basis, revenue was down by 1% and even worse when you take into account the impact of the Easter holiday. For the reminder of my EMEA discussion, all revenue and expense results will be discussed in constant currency.

By month end during the quarter, year-over-year revenue softened, April was up 1%, flat in May and down 4% in June. General economic conditions worsened during the quarter in Europe and negatively impacted our business there, especially in the UK and to a lesser extend Western Europe. Revenue in the UK was down 7% in the quarter, reflecting very tough economic and market conditions. With the exception of France which exhibited 4% growth, the rest of Western Europe and Scandinavia was down roughly 3%.

On the other hand in Eastern Europe, we continue to see strong sales performances with revenue growth over 33%, largely driven by our strong performance in Russia. Our reported fee revenue was up 6% year-over-year, but we saw a slowing late in the quarter. April was up 8%, May up 10%, but June was up only 1%.

The GP rate during the quarter decreased by a 100 basis points to 17.4%. As you may recall, last year we received a credit related to a temporary change in the payroll taxes in France. That was worth 180 basis points. The remaining improvement of 80 basis points that we experienced, was primarily due to the higher fee income in mix of business.

Expenses increased 4%, primarily the result of additional investments in new EMEA branches during the quarter. EMEA Commercial reported an operating profit of $1.3 million for the quarter, that's a decrease of about $4.6 million compared to the same period last year; however, the prior year included a $3.8 million benefit related to the payroll tax refund, thus leaving us down only $800,000 in a tough environment.

EMEA Professional and Technical, which is about 3% of total company revenue, grew 6%. Particularly strong growth was seen in France, Italy and Germany. The gross profit rate in the segment improved to 30.4% from 29% for the same period last year, and this improvement is from strong fee growth. Expenses increased by 4% in EMEA, again reflecting our investments in this segment. Overall, we were able to grow earnings more than threefold in the EMEA PT segment during the quarter.

Moving on to our APAC region, which currently comprises 7% of the total company sales, commercial revenue in APAC grew 17% year-over-year. On a constant currency basis, revenue increased roughly 7%. The gross profit rate year-over-year remained about the same for the quarter. Earnings from commercial operations moderately declined during the second quarter on a year-over-year basis as a result of continued investment in the region.

Professional and technical revenue for the second quarter in APAC grew nearly 60% year-over-year on a constant currency basis, revenue increased by roughly 42%. The gross profit rate declined to 30.3% in the quarter, from the 33.2% achieved in the same period last year on a year-over-year basis.

Earnings from operations for APAC improved slightly. Despite somewhat of the softening in this region during the quarter, we continue to believe our investments in this region will pay-off in a long run. The demand for commercial and professional, technical talent will only increase as the Asian economy strengthen.

Our final segment is our outsourcing and consulting group OCG representing 4% the total company revenue. The development of OCG continues to evolve as we had expected, and we are very pleased with this performance this quarter.

OCG revenue increased nearly 60% in the second 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 were up 32%, compared to the same period last year.

The Americas was the largest contributor to this earnings performance. As we continue to realize the benefits of our investments, the strongest contributors were HR First, Kelly Vendor Management and The Ayers Group, our career transition unit.

EMEA and APAC, OCG are showing nice top line growth. But as expected, earnings were adversely impacted by investments in both regions, to build out implementation and operations infrastructure required from new clients wins. In addition, during the quarter, we entered the United Arab Emirates with an opening of a new Kelly Vendor Management office in the City of Dubai. OCG's gross profit rate was 31% compared to 27.4% for the second quarter last year. This improvement once again, was the result of improved margins in our RPO unit coupled with revenue growth in our fee-based businesses such as Vendor Management.

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

Patricia Little

Thank you, Carl. First, I’d like to say how very happy I am to join the Kelly team. Before I get into the details, you may recall that we recorded a restructuring charge in the UK of $2.4 million or $0.07 per share in the second quarter of 2007. All of the comparisons referenced this morning are for continuing operations excluding the restructuring charge.

For the quarter, total company revenue totaled $1.5 billion, an increase of 3% compared to last year. That’s consistent with the growth rate reported in the first quarter. On a constant currency basis, revenue decreased by 1% compared to last year, which is also consistent with the first quarter. But as we mentioned, Easter fell in the first quarter this year and in the second quarter last year. This shift improved our reported revenue growth by about one percentage point in the second quarter.

Our gross profit rate was 17.7%, an increase of 20 basis points compared to last year. The increase is primarily due to improvements in growth in our higher margin OCG business as well as increases in fee-based income in EMEA. These increases are partially offset by the non-recurrence of the French payroll tax benefit, which added 40 basis points to our 2007 gross profit rate.

Selling, General and Administrative expenses totaled $242 million, an increase of 9% year-over-year. Most of the growth in SG&A expense came from EMEA, APAC and OCG segments where we continue to make strategic investments. SG&A expense decreased by 2% in our Americas Commercial segment.

The growth in SG&A expense was also impacted by currency rates. On a constant currency basis, SG&A expense grew by 4%. Earnings from operations totaled $15 million and were down compared to $24.7% million last year. Other income totaled to $149,000 compared to $930,000 last year. This decrease is primarily due to increase debt and lower average cash balances. The effective tax rate in the first quarter was 30.9%, which is consistent with a 30.7% rate in the prior year. This rate was lower than we had expected because of higher work opportunity credits. Diluted earnings per share from continuing operations totaled $0.30 per share, compared to an adjusted $0.48 in 2007. I’ll remind you that the second quarter of 2007 include $0.07 related to the French payroll tax credit.

Turning to the balance sheet, I will provide a few highlights. Cash remained strong totaling $85 million; accounts receivable, totaled $953 million, an increase approximately $80 million compared to the prior year. Our receivables continued 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 accounts receivable. For the quarter, our global DSO was 51 days, unchanged from the prior year. Debt remained relatively unchanged at $96 million compared to $98 million at year-end.

Turning to our cash flow, net cash provided by operating activities was $41 million compared to $30 million last year. Improvement was primarily related to improved working capital driven by the timing of payroll tax payments.

As Carl discussed, as a result of the economic uncertainty that continues to impact our industry, we have decided to discontinue our quarterly guidance. So now I’ll turn it back to Carl for some concluding thoughts.

Carl Camden

Thank you, Patricia. When I talked to you all in April, I said that predicting the economic future was a bit like reading tea leaves. Unfortunately, the tea leaves didn’t foresee the downward inflection. The staffing industry is well as a cyclical business, trends in the demand for temporary staffing have tended the move in concert with economic growth. During this cycle, our U.S. commercial business has undergone a longer duration of decelerating growth compared to the last recession sessions in 2001. It has now lasted seven consecutive quarters. In 2001 and 2002 we experienced only six consecutive quarters of year-over-year declines.

On the other hand, the rate of decline was much greater in the last recession than we’ve seen over the duration of the current cycle. Again, there’s no doubt the economy has worsened in the past three months and that difficulties experienced in the US and the UK are now being felt elsewhere. It wouldn’t be surprising if conditions continue to be difficult throughout 2008 and perhaps longer. Many economists predict only sluggish economy growth for the remainder of the year, and many analysts have lowered their expectations for the entire staffing industry. At Kelly, until we witness sustained temporary job creation, our focus will be on minimizing risk for the short-term and taking steps to ensure long-term value for our shareholders. We’re prudent; we are pushing ahead with geographic expansion to generate additional revenue and earnings growth. For example, Kelly recently announced an agreement to purchase 13 branch offices and 15 onsite locations from Randstad Holding, a transaction that establishes Kelly’s presence in Portugal.

Now before we open our call to your questions, I’ll conclude by noting that I am personally disappointed in missing our earnings forecast for the quarter. The downward inflection we saw in the quarter was unexpected, but when I looked through it all despite the turbulent economic headwinds, we are making excellent progress.

During the quarter we improved geographic diversity with our expansion in the Portugal and Dubai. We successfully expanded our fee-based services and OCG increasing revenue by 60%. Our professional and technical business segments in all three regions increased our earnings and in this most difficult environment, our GP was up 20 basis points in the quarter. Given the global market and economic conditions, we are going to continue to look for opportunities to reduce our cost structure and improve our cash position. Specifically, we are looking at consolidating some commercial branches in Europe, making further reductions in corporate expenses and considering various initiatives to reduce field costs in Americas Commercial operations.

But let me add this; While I am committed to a lower cost, we cannot cut our way out of this cycle. We must maintain an adequate infrastructure and continue to invest for the future. The simple fact remains that temporary staffing is a cyclical industry, and currently the largest parts of Kelly's revenue mix are in the most cyclical parts of the industry. This will end our formal comments, Patricia. Mike and I will now be happy to answer your questions.

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen, as to allow as many callers as possible to participate, we ask that you please limit yourself to one question in a single follow up as needed and then return to the queue. (Operator Instructions). We will first go to the line of Jim Janesky with Stifel Nicolaus. Please go ahead.

Carl Camden

Hi Jim.

Jim Janesky - Stifel Nicolaus

Yes, hi Carl. Thank you. Good morning. A question on your US based or Americas business; Some competitors have indicated that, while the US business was still on contracting, it had stabilized and in some cases expected it to stabilize as we moved into the third quarter.

Do you think that is either too optimistic of an outlook or is there something unique to your business mix possibly with the auto related business that has your business contracting more? I would just like to hear your point of view, if I could?

Carl Camden

Sure. For Kelly that would be an optimistic appraisal the one you are reciting by others. We don't see it that way. Our mix is different than other large staffing firms in the US. We are lighter, significantly lighter in the distribution and manufacturing, industrial side of the business.

We are heavier on the office clerical side of the business and so there are going to be quarter-to-quarter differences in what we see on the commercial segment versus the opposition. But I just note, there is nothing and that would be based on our last numbers that would argue that stability has been obtained, and there is nothing yet in the Kelly numbers that would argue stability has been obtained.

Hence our comment on visibility is significantly worse now than it's been.

Jim Janesky - Stifel Nicolaus

Okay and then as a follow up - first couple of weeks of July, how did that trend seem versus what you have experienced in June?

Carl Camden

I do not have enough data there to make a comment or we would have. We were in a holiday period at that point which is always distorting. What do you see?

Jim Janesky - Stifel Nicolaus

Okay, thank you.

Operator

And next in line with Tobey Sommer with Suntrust. Please go ahead.

Carl Camden

Hi Tobey.

Tobey Sommer - Suntrust

Hi good morning. I had a question for you about perm. I think you described the overall perm in the US. PT is kind of flattish. If you would look at monthly trends would you have seen kind of a progressive deterioration because some of the other monthly comparisons you gave whether it was EMEA or I think US commercial, it seems like June was a particularly bad month?

Carl Camden

Yes in terms of PT, it was one of those where there was no clear trend established, there was a lot of volatility in the month-by-month numbers, so we didn't give a trend there. There wasn't one to be seen.

Tobey Sommer - Suntrust

But on the perms specific side whether it’s...

Carl Camden

I'm talking specifically about the perm.

Tobey Sommer - Suntrust

Okay thank you.

Carl Camden

Yeah.

Tobey Sommer - Suntrust

And then I guess it’s a good thing that you were rationalizing some branches over the last several quarters. But if the slowdown in demand continues, to what extent can you continue to look at branches or are you comfortable now that you're at a level, and in terms of your footprint that you are going to stick to it?

Carl Camden

Well you're never comfortable, you always examine branches, as things unfold and what we’ve said when we did the last restructuring was that if the fundamentals changed in the American economy and you saw declines in profitability in the commercial sector, we would again take a look at branches. If we had a plan to do something about it we would have said so. You noted that we talked about some consolidation of branches inside Europe, we didn't talk about the America segment but we are always looking at the branches there.

Tobey Sommer - Suntrust

Okay and then, I'll sneak in one last question and get back in the queue. You generated significantly better cash flow from operations in the quarter versus a year ago. Could you just comment about how the changing economic conditions and lack of visibility may impact your thoughts on cash deployment and how you are going to use both the cash flow and the cash on your balance sheet. Thanks.

Carl Camden

Although know Tobey, again, that a chunk of the cash flow improvement was due to the timing of payroll taxes here in the United States, so that’s was on, just a particular note. We’ve always said that we would use our cash and we look at our cash for both in continued dividend payments, looking at it for branch openings as well as acquisitions. Those kind of primary areas haven’t particularly changed, we always have more caution as we approach the downturn and look to maintain healthier cash balances so that we can cope with the uncertainty. That hasn’t changed at Kelly either, and we’re in a period of economic uncertainty and we will even more closely monitor our cash.

Tobey Sommer - Suntrust

Thank you very much.

Operator

And your next question from T. C. Robillard with Banc of America Securities. Please go ahead.

Carl Camden

Hi Tom!

T. C. Robillard - Banc of America Securities

Thank you. Good morning Carl, I’m just struggling here. You guys always give us great details segment-by-segment, but what I’m still trying to get my arms around here is the revenue side actually did not look that bad for you guys in the quarter. (at least that would have kind of where expectation where in), If I look at that grossly related to what we saw in the first quarter was fairly similar but the margin deterioration was pretty significant. I’m just trying to get my arms around why you were able to see a slight operating margin or a slight deterioration,I guess, I should say in the first quarter, but you saw significant deterioration in the second quarter. Is there something specific that we were missing. I mean I know that things fell off late in the quarter particularly in Europe, but I’m just trying to reconcile that the de-leverage there would seem to be lot more severe than what the revenue base would indicate?

Carl Camden

Yes, I think a couple of things worth noting again. If you listen to us talking about the deterioration first in the Americas Commercial side, we’ve talked about that in the last 15-16 months. As you begin to anniversary year-over-year comparisons, we had an expectation that, while you would necessarily see growth that anniversarying of the decline that we have seen in the prior year would be reflected in the numbers. It was until we continued the same rate of deterioration and at some point you do cross leveraging points and so you had a 6% revenue decline translating into a 21% profit decline in Americas.

Over on the EMEA Commercial side which you were referencing, there was a sharpness of the decline which you’ve reference kind of paling off in the US in the last part of the quarter. Again we’ll look at a further rationalization of the EMEA Commercial branch network with these types of results.

T. C. Robillard - Banc of America Securities

Okay and then the follow up to that would be, you made some comments that you did see a growth in SG&A and EMEA and APAC as you are investing in branches. Can you tell us exactly where we are seeing some of these. I know you highlighted the Portugal acquisition that will come on and the Dubai office but are there any other areas where you are investing, where you are seeing growth opportunities?

Carl Camden

No, there was no particular country that was over weighted with branches that would just fill in the holes and the distribution network over the specific customers who had a need.

T. C. Robillard - Banc of America Securities

Is that something where you are thinking to pull back the reigns as you are looking at the deterioration of some of your larger markets or is this just a function of the short-term pain for the long term gain?

Carl Camden

Oh, the answer is always in between those two alternatives right -you never cut back to zero and you don’t go full pace ahead of this point. We will until we see some sustained growth and temporary employment, more closely monitor than even before, how much we invest, where we invest, but there's going to be some branch openings even as you shut down other branches if probable, and if you recall in Europe when we shut down a portion of the UK network, we also opened a significant number of professional and technical branches while closing some commercial branches.

Again, missing in all of the confusion of the numbers is the fact that I hit at the end, but want to continue to hit, is that all three of the PT segments and all parts of the world managed to improve earnings. You don't want to stop feeding where you are growing earnings. So rather than look at it geographically, as you were, I would say that is a segment where you might see more investment.

T. C. Robillard - Banc of America Securities

Okay, thanks for the insights Carl. Appreciate it.

Carl Camden

No problem.

Operator

And next in the line of Michel Morin with Merrill Lynch. Please go ahead.

Carl Camden

Hi, Michel.

Michel Morin - Merrill Lynch

Hi. Good morning.

Carl Camden

Good morning.

Michel Morin - Merrill Lynch

I just wanted to clarify, Carl, the numbers you gave us for Americas Commercial on the monthly trends, where those just for perm? Or was that the temp numbers? April down 2, May down 10, and June down 16?

Carl Camden

Those numbers were perm numbers.

Michel Morin - Merrill Lynch

Would you happen to have the temp numbers?

Carl Camden

We didn't give the temp numbers, I don’t recall giving those. Again, non-holiday adjusted -6, -6, -7.

Michel Morin - Merrill Lynch

Okay, alright. Then specific to the gross profit, gross margin numbers, specific to the Americas Commercial - Could you elaborate a little bit on what the puts and takes are to the gross margin? Specifically, are you in terms of bill pay rates spreads, workers comp, how are those things evolving?

Carl Camden

There were no significant changes compared to the second quarter of last year.

Michel Morin - Merrill Lynch

Okay. Great. Then if I am not mistaken, I think that, on the PeopleSoft implementation, you had put a few things on hold there. Could you give us a little bit of an update of where you stand there?

Patricia Little

Yes. I’ll first reference you to our queue because I have a nice complete explanation of what specific deployments we are pushing off until 2010. That plan remains the same to push us off until 2010 and we’re still looking at the total cost of implementation.

Michel Morin - Merrill Lynch

Okay. Great. Will look out for the queue and then just finally, Carl I think on the earlier question regarding July. You said it was a little bit too early and the holiday has distorted the data. But in Europe, I don't think there is too much by way of holiday and your EMEA Commercial was down more significantly in June and if you continue to see that specific to the EMEA Commercial segment in July?

Carl Camden

I am prepared to comment on any of July's numbers. I’m really against the whole notation of no guidance by the way. But in any case, two weeks of data is just insufficient at this point for us to call a trend in anywhere that we are seeing. If there had been something significantly noteworthy, we would have talked about it.

Michel Morin - Merrill Lynch

Alright. I thought I’d try. Thanks.

Carl Camden

You tried. Thanks Michel.

Operator

In your line David Feinberg with Goldman Sachs. Please go ahead.

David Feinberg - Goldman Sachs

Hi. Good morning.

Carl Camden

Hi David

David Feinberg - Goldman Sachs

Hi, how are you? To Patricia and although, a question hopefully a housekeeping question for Patricia. CapEx in the quarter and CapEx budget for the year, as well as I didn't see any share repurchases. I just wanted to confirm that and see if anything had changed there.

Patricia Little

We didn't make share repurchases in the quarter. We remain with about $7 million available. We don't have any active plans right now and CapEx was inline with what we expected and will continue to be.

David Feinberg - Goldman Sachs

Yes! I think that was like $45 million last year?

Mike Debs

Yes, we spent $45 million last year. We spent a little bit less year-to-date than we did last year because of the KCP project so far this year.

David Feinberg - Goldman Sachs

I’m sure, and then given all the negative news, maybe try to take a glass half full approach this. So sometimes in a downturn there is an opportunity to take share, not some as you highlighted Carl, that you can’t cut your way out of this downturn but maybe there are more opportunities like the Randstad acquisition in Portugal. What are you seeing on the M&A front in terms of trying to gain share and/or diversify your business? Are the businesses just for sale and there are opportunities or is that just not the case where folks are not willing to sell given what’s happened with the marketplace?

Carl Camden

That’s slightly too early in the cycle for the distressed sales that hit. But if you see the downturn continuing in another quarter or two, I wouldn’t be surprised to see more distressed sales emerge, but not yet. While it’s been a long downturn, it’s been a shallower downturn without the sharp inflexion down that crushed lot of firms the last time. So we haven’t seen the abundance of the business closings or distressed sales in this cycle that we’ve seen in the past.

David Feinberg - Goldman Sachs

Now, please remind me, I wasn’t following the stock during the last downturn. Was Kelly a net acquirer during '01 and would you expect to be one, if you saw those types of sales now?

Carl Camden

We were a not a net acquirer in '01 and we always look at all opportunities in front of us.

David Feinberg - Goldman Sachs

Thank you very much.

Operator

And we have a question from the line of Ashwin Shirvaikar with Citigroup. Please go ahead.

Carl Camden

Hi Ashwin.

Ashwin Shirvaikar - Citigroup

Hi Carl. How are you?

Carl Camden

Doing well.

Ashwin Shirvaikar - Citigroup

Good, thanks and welcome Patricia.

Patricia Little

Thank you.

Ashwin Shirvaikar - Citigroup

As I look at sort of the topic of negative operating leverage, it seems quite drastic quarter-over-quarter. It’s not as bad as the last cycle. I’m trying to think about what’s different this time. Is it just the pace, pricing, are there other factors?

Carl Camden

Good question. And obviously we are not experiencing anywhere near the operating earnings declines that we did in the last cycle, so several things are different first for the industry, what's different is more rational behavior, within the industry and then secondly significant changes permanently and workers compensation cost, at a state level and again very healthy, still very healthy reserves on the unemployment’s upon the many states. While the unemployment rate has moved up to 5.5%, that still is significantly lower unemployment rate than it was on the last downturn, not causing as much hits on the funds.

Within, Kelly again we have broader geographic diversity, broader business line diversity in this cycle, as we been working there with the last decade, than we did on the last one. As noted before you still, you have positive results coming out of professional, technical on OCG, even as this downturn is unfolding. An addition at Kelly, in this cycle we have already as an earlier question noted, began rationalizing the branch network. We've responded early in the cycle too, and that's been a significant contributor here.

Ashwin Shirvaikar - Citigroup

Okay. So, the follow-up question becomes, what steps can you take further to continue to take cost out given you already had some restructuring and should we expect a specific charge?

Carl Camden

I don't know the answer to the last question. There is nothing at the moment that would say that you should. While that we noted in my final comments, in the prepared section was that we are looking at reduction and corporate expenses, we are looking at some consolidation inside Europe and as always looking at overall branch expense inside the America zone. As we've talked about other regions in the Q&A section, we've talked about reigning in a bit in some sectors, some of the investment that we’ve been doing.

Ashwin Shirvaikar - Citigroup

Okay, thank you.

Carl Camden

Thank you Ashwin.

Operator

(Operator Instructions). Now we do have a follow up from Tobey Sommer. Please go ahead.

Tobey Sommer - Suntrust

Thank you. Carl, I was wondering if you could comment about IT. I think you said you are doing a little bit better internally but I was wondering if you are in a position to access how the market is doing in addition to accessing Kelly’s specific performance within that market?

Carl Camden

I am not yet, but I will be soon after all the earnings announcements are out. When we talked about our IT segment is smaller than other segments, that we are not representative of what’s taking place nationally and if you recall two to three quarters ago, we said that we had gotten behind in the addition of some IT recruiters that we needed to add. It was a Kelly specific problem that we had fixed and I’ve seen improving results, but in this particular case I wouldn’t view us as an indictor for what you or you may not be seeing in the IT segment in general.

Tobey Sommer - Suntrust

Okay then are there specific verticals with some strength and perhaps anything you may expect to be more resilient for non cyclical reasons over the next couple of quarters?

Carl Camden

Yes, again in prior years I have talked about part of the strategic plan mixing out in the US was to have a better investment in less cyclical parts, not certainly, and is never truly immune but less cyclical part of the economy. The US government is an important segment for us, and so far I haven’t seen there be a less report showing US government hiring down. Education has been an important segment for us and while not free of all cyclicality has been doing very well in total BOS numbers. In particular, the petrochem industry and its engineering components especially, have all been in high demand in the overall economy and have done very well for Kelly.

Tobey Sommer - Suntrust

Thank you very much.

Operator

And Mr. Camden, there are no further questions in queue.

Carl Camden

Great. Thank you, John. Thank you all for participating, look forward to follow on conversation from certain. Good bye.

Operator

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

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Source: Kelly Services, Inc. Second Quarter 2008 Earnings Call Transcript
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