Kelly Services, Inc.

Good morning and welcome to Kelly Services' first quarter earnings conference call. All parties will be on listen only until the question and answer portion of the presentation. Today's call is being recorded at the request of Kelly Services. If anyone has any objections, you may disconnect at this time. I would now like to turn the meeting over to your host, Mr. Peter Quigley, President and CEO. Sir, you may begin.

Thank you, John. Good morning, everyone, and I hope everyone is staying safe. Welcome to Kelly Services' first quarter conference call. With me on the call is Olivier Thirot, our CFO. We have a lot of ground to cover, so let me give a quick outline of what to expect. I'm going to share some Q1 headlines and comment on Kelly's response to the COVID-19 pandemic. Then Olivier will walk us through highlights of our quarterly performance, including the impact of COVID-19 and the goodwill impairment we announced in this morning's release, which was triggered by the stock market's response to the crisis. I'll then share some trends we're seeing, the precautionary actions we've taken to create some financial flexibility and the proactive steps we're taking to prepare Kelly for growth on the other side of this crisis. Olivier will provide insight into our scenario planning and some perspectives for Q2. and finally I'll turn to what's next for Kelly including updates on our specialization strategy and new operating model which are designed to capture and accelerate growth. So let's jump in. We saw progress in the first part of the quarter as we saw signs of stabilization in our U.S. staffing business and continued growth in our outcome-based and consulting businesses. We completed an acquisition in our education specialty. We continued the accelerated rollout of our new front office technology. We completed the sale and leaseback of our headquarters, unlocking capital to invest in our specialty growth platforms. We restructured parts of our operations as we continue to dedicate the company to effectively managing costs and aligning them with expected revenues. We made significant progress on our new operating model, which we believe will yield improved revenue growth and our chosen specialties. And we launched a fresh new Kelly logo to reflect the dynamic, forward-looking company we've become. We're encouraged by these foundational improvements in our business and the continuation of the growth-oriented initiatives I discussed during last quarter's call, which will remain a key operational priority until we return to top-line growth. Of course, the COVID-19 pandemic turned the world upside down. During our nearly 75-year history, we've never seen economic stock market and labor conditions all change as suddenly and dramatically as they did starting in mid-March, impacting every aspect of operations and triggering the non-cash goodwill impairment charge. The charge does not change our views or confidence in our ability to navigate the COVID-19 crisis or to capitalize on opportunities when the crisis ends. Operationally, we responded quickly and decisively to the pandemic. Our emergency management team was prepared for a possible pandemic, and our team executed our plans as the crisis spread and led to global shutdowns. While we continue to closely manage the financial impact, as a talent company, our first priority in this crisis has been and continues to be the health and safety of our people. More than 90% of Kelly's full-time staff are working from home. Our recent restructuring efforts are accelerating our transition to a more agile, tech-enabled service delivery model. And coupled with our recent IT infrastructure investments, this allowed us to transition quickly to remote work, connecting our teams to talent, clients, and each other, enabling Kelly to respond to rapidly changing needs while supporting our people in accordance with national and local guidelines. We've also taken steps to support the well-being of temporary employees and contractors who have been impacted by the economic shutdown. In addition to redeploying them whenever possible so they can keep working, we are offering free online training and certification courses. We're expanding access to licensed counselors in Kelly's wellness program. We're partnering with online platforms to redeploy furloughed temporary workers. We're waiving registration fees for retraining programs, and we're launching a trending jobs website to help talent connect with any and all employment opportunities, whether they're with Kelly or not. Our commitment to talent stands strong. We have also been supporting our customers every step of the way, holding virtual roundtables with clients to identify their concerns. sharing best practices for remote work, answering questions about safety and well-being of workers, and delivering creative, flexible talent solutions to help them navigate these unprecedented circumstances. Before Olivier looks at Q1 financial highlights, I want to emphasize how incredibly proud I am of Kelly's teams and how they've risen so admirably to this moment in history. Their flexibility, creativity, and unwavering commitment to the talent and customers we serve is an inspiration to me professionally and personally, and it buoys my enthusiasm about Kelly's transformation even in the face of current challenges.

I agree with you, Peter. Good morning, everyone. Before the Q&A highlights, 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. 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. In addition, during the call, certain data will be discussed on a reported and on an adjusted basis. Discussion of items on an adjusted basis are non-GAAP financial measures designed to give insight into certain trends in our operations. We have also provided more information on our performance in the first quarter slide deck which is available on our website. As Peter just laid out, we started the quarter with positive momentum and an economy that was continuing to grow and ended the quarter in a world that was much different. I'll cover our quarterly results and provide some color on the impact of the COVID-19 crisis on our first quarter results, including a related goodwill impairment charge. During the quarter, we also completed a previously announced restructuring plan a real estate transaction as well as the acquisition of insight in K-12 education that are important to Kelly's strategy and impacted our financial results for the quarter. I will cover those in greater detail too. Revenue for the quarter totaled $1.3 billion down 8.8% from the first quarter of the prior year including a 50 basis point and favorable impact from foreign exchange. As announced, we acquired Insight on January 14, 2020 and added 110 basis points to our reported revenue growth. So, on a constant currency and organic basis, our revenue for the first quarter was down 9.4%. We did begin to see the impact of the COVID-19 crisis in March. Demand declined as customers closed facilities to protect their workforces and in response to governmental directives. Our education business was particularly impacted as most U.S. school districts had closed in response to the crisis by the end of March. The overall impact of the COVID-19 related demand declines was approximately 270 basis points in the first quarter. Looking at each segment on a reported basis, the America staffing revenue trends pre-crisis were in line with Q4 trends, but the rate of decline was higher in March as a result of the impacts from COVID-19. The international staffing revenue decline reflects a continuation of the challenging market conditions in Europe and the beginning of the COVID-19 impact in March. And finally, GTS had continued positive revenue growth. The GTS segment saw the smallest impact from COVID-19, as many of the segment's customers are in essential industries, were able to facilitate remote work, or continue to maintain rather than lay off their talent, including talent provided by Kelly. Permanent placement fees were down 23% year-over-year as fees declined in America staffing and international staffing. Overall gross profit was down 11.3%. Our gross profit rate was 17.7%, down 50 basis points when compared to the first quarter of the prior year. The rate decline was primarily driven by higher employee-related costs, which offset the structural rate improvement in GTS from shifts in product mix. SG&A expenses were down 6.5% year over year. Included in expense for the quarter is a $8.7 million restructuring charge. Excluding the restructuring charge, expenses were down 7.7%. The decline in expense reflects our ongoing cost management efforts in response to our pre-crisis top-line trends. In addition, incentive-based compensation expense for the quarter is also lower as we now expect full-year results to be lower than the targeted threshold payment levels which were set in early February. As I mentioned, the first quarter results include a $8.7 million restructuring charge. In the quarter, we took restructuring actions to align costs with expected pre-crisis revenues, to position the organization to adopt our new operating model later in 2020, and finally to align the U.S. branch network facilities footprint with a more technology-enabled service delivery methodology. These actions will result in expanded savings of approximately $20 million in 2020. and we believe that they position us well to respond to the more challenging environment resulting from the COVID-19 pandemic. These actions also align with our growth strategy and will allow us to enter the recovery period following the crisis with a more agile and focused organization. We also completed the sale and lease back of a portion of the headquarters campus during the first quarter. The transaction allows us to relocate capital previously invested in real estate to our growth strategy. The net proceeds from the sale were $55.5 million and were used in part to repay outstanding borrowings related to the in-site acquisition and allowed us to end the quarter with no borrowings on our U.S. credit facilities. The resulting gain on sale of the headquarters campus facilities was 32.1 million. And finally, we recorded a 148 million non-cash goodwill impairment charge. As the quarter unfolded, there was a significant decline in the global equity markets, including the stocks of many of the publicly trading staffing companies and our own common stock. Under US GAAP accounting rules, the significant decline in our stock price triggered an interim goodwill impairment test and ultimately the conclusion that as of the end of Q1, a goodwill impairment had occurred. As Peter noted in his opening remarks, the charge is non-cash and does not change our views or confidence in our ability to navigate the COVID-19 crisis or to capitalize on the subsequent economic recovery. Including the items I just mentioned, our reported loss from operations was $100,011.8 million in the first quarter. Excluding the goodwill impairment and restructuring charges, as well as the gain on sale, earnings from operations were $12.5 million. Q1 2019 reported earnings of $16.8 million also contained a $6.3 million restructuring charge. So on an adjusted basis, Q1 2020 earnings from operations declined 46% versus last year. Kelly's earnings before tax also include the unrealized gains and losses on our equity investment in personal holdings. For the quarter, We recognize a 77.8 million pre-tax loss on our personal common stock compared to a 13.2 million gain in the prior year. These non-cash gains and losses are recognized below earnings from operations as a separate line item. income tax benefit for the first quarter was $36.2 million compared with our 2019 income tax expense of $6.4 million. Q1 2020 income tax benefit includes $23.8 million related to the non-cash benefit on the loss of personal stock and a $23 million benefit on the non-cash goodwill impairment charge. And finally, Reported loss per share for the first quarter of 2020 was $3.91 per share compared to earnings of $0.56 per share in 2019. In order to better understand the underlying trend in earnings, let me provide some additional information. 2020 earnings per share was unfavorably impacted by the goodwill impairment charge, the loss on personal common stock, and the restructuring charge, partially offset by the favorable impact of the gain on sale of the HQ buildings net of tax. In 2019, EPS was positively impacted by gain on personal stock and negatively impacted by our structuring charge. Overall, adjusting for these items, Q1 EPS was 20 cents compared to 45 cents per share in Q1 2019. Now moving to the balance sheet. Cash total 48 million compared to 31 million a year ago. Debt was 2 million consistent with year 2019. We ended the quarter with no borrowings on our U.S. credit facilities. As we navigate this period of economic uncertainty, our traditionally low level of debt provides flexibility. We continue to manage our cash and debt closely but we may maintain higher levels of cash than we have historically, including borrowings on our U.S. credit facilities. Accounts receivable was 1.2 billion and decreased 4% year-over-year. Global DSO was 59 days, an increase of one day over year-end 2019 and the same period last year. To date, we have not experienced an increase in DSO as a result of the COVID-19 crisis. In our cash flow for the quarter, we generated 5 million of free cash flow compared to 17 million of free cash flow in the same period in 2019. We did begin to benefit from some additional free cash flow generation due to the current market conditions. Historically, we generate free cash flow during the initial periods of an economic downturn as we continue to collect our receivables while payroll costs declined in line with demand. However, this impact was offset in Q1 by the timing of certain cash payments. As we move further into the economic cycle, we would expect this additional free cash flow generation to continue for the next several months, assuming that customers continue to pay on time. We also anticipate taking advantage of the ability to defer certain US payroll tax payments in line with the CARES Act to provide additional liquidity.