Kelly Services, Inc.

Good morning and welcome to Kelly Services' third 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. A webcast presentation is also available on Kelly's website for this morning's call. I would now like to turn the meeting over to your host, Mr. Peter Quigley, President and CEO. Please go ahead.

Thank you, Keeley. Hello, everyone, and welcome to Kelly's third quarter conference call. Before we begin, I'll walk you through our Safe Harbor language, which can be found in our presentation materials. As a reminder, 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 these 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. Finally, the slide deck that we're using on today's call is available on our website. We have a lot to cover today, so let's get started. Before we turn to Kelly's third quarter results, I'd like to cover our recent announcement regarding another transformative and bold step in our specialty growth journey. On November 2nd, Kelly entered into a definitive agreement to sell our European staffing business to GI Group for €100 million, with €30 million of additional earn-out potential. Under the terms of the agreement, we'll transfer the European staffing business within Kelly's international operating segment to GI Group, while retaining our MSP, RPO, and FSP business with customers in the EMEA region. We expect the transaction to close in the first quarter of 2024, after which Kelly will maintain its global footprint and continue to provide MSP and RPO solutions to customers in the EMEA region through Kelly OCG and our fast-growing FSP solutions through Kelly Set. This transaction will unlock significant capital to pursue organic and inorganic investments in our chosen specialties. Furthermore, it sharpens our focus on our higher margin, higher growth MSP and RPO solutions globally and specialty outcome-based and staffing services in North America. Together, we expect these outcomes will accelerate our transformation efforts to significantly improve Kelly's net margin. I'm joined today by Olivier Giraud, our Chief Financial Officer, who will share more details about our expectations later in the call. Turning to the third quarter, we continued to make progress on the business transformation initiative we launched earlier this year. Following the implementation of strategic restructuring activities at the outset of the quarter, we remained laser-focused on sustaining these structural improvements across the enterprise. Our continued emphasis on organizational efficiency and effectiveness throughout the quarter resulted in a 9.1% decrease in SG&A on an adjusted basis. a substantial year-over-year improvement. With the efficiency phase of our transformation on track and delivering results, our expectation of an adjusted EBITDA margin around 3% exiting 2023 is within sight. As we shared in August, our expectation assumed no change to the market conditions we faced in the second quarter. In fact, macroeconomic headwinds in the third quarter proved to be more pronounced than anticipated. Amid a more challenging operating environment, we remain focused on what we can control, achieving significant improvements on an adjusted basis to EBITDA margin and earnings. As market conditions begin to improve, we're confident that the structural changes we've made across the enterprise will continue to deliver significant improvement to Kelly's bottom line. Notwithstanding persistent headwinds, we're keeping our sights trained on the horizon. As I shared with you in August, we've undertaken several strategic initiatives that are positioning Kelly to accelerate profitable growth over the long term. We've made progress since then, which I'm pleased to share with you today. At the enterprise level, we've developed a comprehensive strategy to deliver the full suite of Kelly offerings to our largest enterprise customers. This strategy is transforming the culture, capabilities, and technology across our segments to serve critical accounts more efficiently and effectively. We've begun to operationalize this approach within our large enterprise account teams, and I'm pleased by the way they have embraced the change. By successfully implementing this strategy, we'll accelerate our progress on increasing our share of wallet, improving our business mix, and optimizing expenses over a large subset of our business. In our professional and industrial segment, we're enhancing service delivery to industrial and commercial staffing customers and building our new business pipeline by enhancing our localized delivery model. At the heart of this model is a network of branch locations enabled by new technology through which our teams are meeting customers and talent closer to where they are. Our approach is designed to yield several benefits, accelerated responsiveness to customer and talent needs, deeper insights into local market dynamics, and greater collaboration, empowerment, and accountability among branch team members. In the third quarter, we completed a successful pilot of this delivery model in branches in select markets across the U.S. The outcome validated our assumptions. Our pilot markets delivered both top and bottom line improvements, along with a healthy pipeline of new business opportunities. Feedback from customers and talent was positive as well. Based on this success, we're moving swiftly to implement this strategy in additional U.S. markets, and early results continue to be encouraging. We're also aligning our capital allocation priorities to support our growth ambitions. In the third quarter, we completed our $50 million share repurchase program, which returned considerable value to our shareholders. While we're pleased with the outcome, we're confident that the best way to create value in the current environment is by reinvesting in our business. We continue to have ample capital available to deploy toward organic and inorganic growth initiatives with improved free cash flow driven by the efficiency phase of our transformation further strengthening our position. And as I mentioned previously, the sale of our European staffing business will add more than 100 million euro of liquidity when the transaction closes in the first quarter of 2024. As such, we're continuing our efforts to identify high-margin, high-growth inorganic opportunities. We remain focused on pursuing additional acquisitions in our SET and education segments, and more opportunistically, OCG. With a strong balance sheet, a disciplined approach to evaluating opportunities, and clear board-approved inorganic priority, Kelly is positioned to pursue deals notwithstanding the macroeconomic environment. We're also investing in technology, having developed a comprehensive roadmap to transform our business processes, tools, data, and the way technology is delivered to our people. Our vision is to leverage technology to both enable growth by improving efficiency and generate growth through innovative offerings that create value for customers and talent. With our roadmap focused on maximizing business impact at each step, We're committed to a disciplined approach to evolving our technology infrastructure, prioritizing opportunities through which there is greater potential for Kelly to differentiate itself in the market. I look forward to sharing more about our expectations for growth in 2024 on our fourth quarter earnings call in February. With that, I'll turn the call over to Olivier to provide details on our financial results for the third quarter.

Thank you, Peter, and good morning, everybody. For the third quarter of 2023, revenue total $1.1 billion, down 4.3% from the prior year, including 150 basis points of favorable currency impact. So revenues for the quarter were down 5.8% in concerned currency. As we look at third quarter revenue by segment, our education segment continues to report significant year-over-year growth, up 23%. due to our improved feed rate, strong demand from existing customers, and net new customer wins. Overall, continued double-digit revenue growth demonstrates that our education business, including our market-leading pre-K-12 and PTS therapy solutions, is a significant growth engine, even as broader staffing market trends remain challenging. In the set segment, revenue was down by 8%. During the third quarter, we saw a continuation of the deceleration of demand for our staffing specialties, as well as lower revenue trends in our outcome-based business. Permanent placement fees were also impacted by a continued deceleration in market demand and declined 39%. In our OCG segment, year-over-year revenue declined 4% on a reported and constant currency basis. Year-over-year declines in RPO continued as slower hiring in certain markets. Sectors have had a disproportionate impact. MSP revenue declined year-over-year in the quarter but was flat sequentially, and PPO year-over-year revenues improved. Revenue in our professional and entrepreneurial segments declined 11% year-over-year in the quarter. Revenue from our staffing products declined by 15%, reflecting the impact of economic headwinds which are more noticeable in this segment. The segment's outcome-based business revenue grew by 3% year-over-year, which is a moderation of the trend we have seen in the past few quarters. Excluding our contract center specialty, where demand for certain customers has decelerated, the segment's other outcome-based revenues have continued to grow at a double-digit pace. Placement fees in P&I declined 50%, and continue to be impacted by lower demand for full-time hiring. Revenue in our international segment increased 2% on a nominal currency basis and was down 6% on a constant currency basis. Performance varied depending on geography and product. For the quarter, we had good constant currency revenue growth in Mexico and Portugal, but that was more than offset by revenue declines in Switzerland, France, and Italy, as well as the impact of the sale of our Russian operations, which was completed in July of 2022. And the national placement fees were consistent with last year on the constant currency basis. Overall growth profit was down 5.1% on a reported basis of 6.3% in constant currency. Our growth profit rate was 20.4% compared to 20.6% in the third quarter of last year. a decrease of 20 basis points. The primary driver was 40 basis points of unfavorable impact from lower perm fees and 20 basis points of higher employee-related costs. These impacts were partially offset by 40 basis points of continued improvement in structural business mix. SG&A expenses were down 1.2% year-over-year on the reported base. Expenses for the third quarter of 2023 include 15.4 million of charges related to our ongoing transformation efforts. So on an adjusted constant currency basis, expenses declined by 9.1% or 21 million in the quarter. The reduction reflects the positive impacts of our transformation efforts which are designed to reduce costs on a structural basis, as well as lower performance-based incentive compensation. For the third quarter, on a reported basis, we produced break-even earnings from operations. This compares to a loss of $21.4 million in the third quarter of 2022. As noted, our 2023 Q3 results include the $15.4 million of charges related to our transformation activities. So adjusted earnings for operations in Q3 of 2023 were 15.5 million. Our 2022 Q3 loss includes a 30.7 million goodwill impairment charge, resulting in adjusted earnings for operation in Q3 of 2022 of 9.5 billion. So on the like-for-like basis, Q3 2023 earnings for operations increased by 60%. Adjusted EBITDA margin for the quarter also improved at 2.3% compared to 1.6% a year ago, a 70 basis point improvement. Income tax benefit for the third quarter was $4.9 million, consistent with our 2022 income tax benefit of $5 million. And finally, reported earnings per share for the third quarter of 2023 was 18 cents per share, compared to a loss per share of 43 cents in 2022. Adjusted EPS for the third quarter of 2023, excluding the transformation-related charges net of tax, was 50 cents. And after adjusting for the 2022 goodwill impairment charge net of tax, Q3 2022 EPS was 25 cents. So on a lag-for-lag basis, EPS in Q3 of 2023 doubled from the prior year. Now moving to the balance sheet as of the end of Q3. At the end of Q3, cash total $117 million compared to $154 million at the end of 2022. And we ended the third quarter of 2023 with no debt, consistent with substantially no debt. At the end of 2022, with our $300 million in available capacity on our credit facilities and our cash balances, as well as the outcome of our EMEA transaction, we continue to have ample capital available to deploy in the near future. As of the end of Q3, accounts receivable was $1.4 billion and decreased 9% year-over-year, reflecting a year-over-year decrease in revenue as well as a decrease in DSO. Global DSO was 63 days, up to days from year end 2022, due primarily to the impact of seasonality in our education business. DSO is one day lower than the same period in 2022. For the third quarter of 2023, we generated $7 million of free cash flow, and year-to-date free cash flow now totals $21 million. For the quarter, we have continued to maintain lower accounts receivable balances in line with our revenue trends, and the ESO improvement. A portion of those receivables are related to our MSP programs and are funded with supplier payables. So the lower net position has a limited impact on free cash flow generation. In the quarter, we completed the 50 million shares repurchase program that we announced in November of last year, buying approximately 3 million shares during the program. Now I will move on to our expectation for the rest of 2023. We assume a continuation of the current market conditions, which, as Peter noted, are more challenging than we had anticipated a quarter ago. We now expect fourth quarter nominal revenue to be down 50 to 150 basis points year-over-year. We expect our Q4 GP rate will be down 50 basis points year-over-year to about 19.8%, as continued softness in demand for full-time hiring compresses permanent placement fees. The lower Q4 GP rate also reflects a normal sequential trend due to the seasonality of our education business and continuation of the structural business mix improvement that is expected to keep our full-year GP rate above 20%. We expect fourth quarter adjusted SG&A to be about 9% lower than the same period last year, consistent with Q3, and better than our expectations that we shared a quarter ago. We reacted to the more challenging top-line trends and accelerated our transformation efficiency actions. As a result, we expect adjusted EBDA margin in the fourth quarter to be between 2.8% to 3%, reflecting the more challenging market conditions. For additional perspective, with the benefit of full year of expected transformation-related saving, the impact of the sale of our European staffing business, and our current top-line expectations, we would expect to reach a normalized adjusted EBDA margin in the range of 3.3% to 3.5% as discussed three months ago. That is more than 100 basis points of improvement from our historical levels of adjusted EBDA margin, all since we began the transformation journey earlier this year. And now I'll turn it back over to Peter for additional comments.