Kelly Services, Inc.

Good morning and welcome to Kelly Services' second quarter earnings conference call. All parties will be on a 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, Brad.

Hello, everyone, and welcome to Kelly Services' second quarter conference call. With me on the call is Olivier Thirot, our Chief Financial Officer. I'll start the call by reviewing the impact of COVID-19 on Kelly's business in the second quarter, the actions we've taken to mitigate its impact on our financial position, and steps we've taken to capture available upside. Olivier will walk us through the highlights of our quarterly performance that were announced today in this morning's earnings release. I'll then share what we're seeing in terms of customer demand and how Kelly is pursuing growth opportunities during this crisis. Olivier will provide some perspectives on Q3. And finally, I'll conclude with an update on what's next for Kelly, including our ongoing journey toward becoming a specialty talent solutions provider. I'm pleased to say that despite disruption caused by the pandemic, we continue making solid progress on our strategy about which I'll provide some additional details as we conclude today's discussion. Now let's turn to Q2. The impact of COVID-19 continued throughout the second quarter as closures and widespread uncertainty resulted in reduced customer demand and lower top line growth. We've discussed previously how we've been closely monitoring the economic impact caused by two parameters of the pandemic. How deep will it be and how long will it last? As Q2 progressed, the severity of the resulting economic impact started coming into focus, and we believe the worst is behind us. It's more challenging to call the duration of the downturn, although it appears that the recovery and economic and labor market improvements are underway, though they are likely to be uneven and more gradual than some thought a few months ago. Amid this unprecedented environment, Kelly continued to mitigate the downside and execute with speed and discipline. The precautionary actions we took to protect our balance sheet that I shared on last quarter's earnings call proved to be judicious. These temporary defensive measures included pay reductions for full-time salaried Kelly employees in several regions, more significant pay reductions for me and our senior leadership team, reduced compensation for our board of directors, reduced hours in some regions, suspension of the company match for most retirement accounts, redeployments for some employees and temporary furloughs for others, suspension of the quarterly dividend, and significantly reduced capital spending. I did not take these moves lightly, and I'd like to acknowledge everyone in the Kelly community, our employees, board, and shareholders for their shared sacrifices. These sacrifices mattered in this quarter's results, and they give us flexibility to weather the ongoing crisis and go on the offensive when opportunities present themselves in the months ahead. So decisive expense management served us well in Q2, and so did speed, agility, and execution of our operational plans. Over the past several years, we have intentionally reduced our reliance on brick and mortar branch offices, established remote recruiting networks and moved to a progressive work from anywhere model at our headquarters. When the pandemic hit, these earlier decisions aimed at being a more technology enabled agile organization meant we had robust IT systems and remote work protocols already in place. We quickly transitioned to a fully remote regular workforce for reasons of employee safety and we were ready and able to seamlessly serve our talent and customers. This speed and agility have enabled us to creatively capture new opportunities on several fronts, even in the face of overall declines in demand and a challenging supply environment. I'll share more about that in a few minutes, but first I'll turn it over to Olivier to cover the specifics of our Q2 financial results.

Thank you, Peter, and good morning, everyone. Before the Q2 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 and we have no obligation to update the statements made on this call. Please refer to our SEC filings for a description of the risk factors that could influence the company's actual future performance. 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 second quarter slide deck, which is available on our website. As Peter just mentioned, our Q2 results reflect the impact of the COVID-19 pandemic and the resulting disruption in economic activity and the availability of talent. The results also reflect the impact of our temporary expense mitigation actions and the positive impact of one-time or limited-duration government stimulus and pandemic assistance in the U.S. and in Europe. Revenue total $1 billion, down 29% from the second quarter of the prior year, including a 100 basis point unfavorable impact from foreign exchange. The COVID-19 crisis and the resulting impact on both customer demand and talent supply impacted the full quarter. As we entered the quarter, demand declined as customers closed facilities to protect their workforces and in response to government directives. And consistent with the end of Q1, our education business was particularly impacted as most U.S. school districts as closed in response to the crisis by the end of March. We did see some strengthening as the quarter progressed, and our June revenue exit rate, a decline of 23.1% or 22.5% in constant currency, reflects lower year-over-year declines than we experienced in April and May. These improvements came primarily from America's staffing, As we move through the quarter, our Q2 revenue results were also impacted by talent supply constraints in the U.S. as COVID-19 related safety concerns and the impact of enhanced unemployment benefits reduce the pool of available talent in some skill sets, especially in our commercial business. Looking at each segment on a reported basis, the Americas staffing revenue declines were the most pronounced, down 45%, given the impact of lower demand in education and a larger reliance on the manufacturing sector and skill sets within this segment. The international staffing revenue decline of 31% reflects a continuation of the COVID-19 impact which began in the first quarter. And finally, our GTS segment, were the most resilient, with an 8% decline in revenue for the quarter. While certain customer industries, such as automotive and energy, were negatively impacted, the demand from life sciences customers and for our outcome-based services, including KellyConnect, our remote call center specialty, remained strong. Permanent placement fees were down 52% year-over-year as fees declined in America's staffing and international staffing as the impact of economic uncertainty has depressed full-time hiring. Overall gross profit was down 22.5%. Our gross profit rate was 19.4%, up 160 basis points when compared to the second quarter of the prior year. The rate increase was primarily driven by three factors. The impact of government stimulus and pandemic relief of about 100 basis points, lower employee-related costs, and also the impact of improved product mix. This was partially offset by the impact of lower term placement fees. While the government stimulus and pandemic relief has been helpful to temporarily ease the economic impact of the crisis, and allowed us to retain critical talent, these benefits generally end early in the third quarter. SG&A expenses were down 19.6% year over year. The decline in expenses reflects the temporary expense mitigation actions we took starting in April, including the compensation adjustments Peter discussed and also Lower performance-based incentive compensation expenses. In addition, we have seen benefits from the cost-reduction actions we took in Q1 2020 prior to the pandemic. And while we have been quick to react to the crisis, we have been deliberate in our actions to avoid jeopardizing our ability to partner with our customers now and to capture growth during the recovery period. Our reported earnings from operations for the second quarter was $11.1 million compared to Q2 2019 reported earnings of $34.8 million. Our Q2 2019 earnings included a $12.3 million gain on sale of assets and an adjustment to our Q1 2019 restructuring charge. So, after adjusting for those items on a like-for-like basis, due to 2020 earnings from operations declined by 50% 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 29.6 million pre-tax gain on our personal common stock compared to a 61.2 million pre-tax gain in the prior year. These non-cash gains are recognized below earnings from operations as a separate line item. Income tax expense for the second quarter was $900,000 compared to our 2019 income tax expense of $12.7 million. Our effective tax rate for the quarter was 2% as tax expense on current period earnings was mostly offset by a one-time benefit from the recognition of some deferred tax assets. And finally, reported earnings per share for the second quarter of 2020 was $1.04 per share compared to earnings of $2.12 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 favorably impacted by the gain on personal common stock. In 2019, EPS was positively impacted by a gain on personal stock, a gain on sale of assets, and an adjustment to restructuring charges. Adjusting for these items due to 2020 EPS was 51 cents compared to 81 cents per share in Q2 2019, A decline of 37%. Now moving to the balance sheet. Cash totaled $216 million compared to $37 million a year ago. Debt was nearly zero, down from $2 million at year-end 2019. We ended the quarter with no borrowings on our U.S. credit facilities. Our cash balances reflect the impact of reductions in working capital Thank you very much. and decreased 15% year-over-year. Global DSO was 61 days, an increase of 3 days over year-end 2019 and 4 days from the same period last year. While we have experienced an increase in DSO, it does not reflect a deterioration of the quality of our receivables. The increase does reflect two main trends we are seeing as a result of the pandemic. Certain customers are making efforts to manage their own cash flows and are taking advantage of their full payment terms with us. Second, there has been a shift in our business mix as a result of the crisis, which has resulted in a greater proportion of business with large customers who generally enjoy longer payment terms. In addition, we have historically had a seasonal reduction in DSO at the end of Q2 as the school year ends in June. But given the decline in education revenue with COVID-19 related school closing at the end of the first quarter, the seasonal impact happened earlier in the second quarter in 2020. We'll continue to monitor customer payment patterns closely and have ensured that our collection teams have the resources necessary to respond to current conditions. In our cash flow for the quarter, we generated 170 million of free cash flow compared to 65 million of free cash flow in the same period in 2019. As I mentioned, we benefited from free cash flow generation due to the current market conditions. We generate free cash flow during the initial periods of an economic downturn as we continue to collect our receivables while payroll costs decline in line with demand. We also took advantage of the ability to defer certain tax payments as part of COVID-19-related economic stimulus. In addition, we monetized certain tax receivables as part of an existing asset monetization strategy. and now back to you, Peter.