Kelly Services, Inc.

Good morning and welcome to Kelly Services' second quarter earnings conference call. All parties will be on a 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 objections, you may disconnect at this time. A second quarter 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, Greg. Hello, everyone, and welcome to Kelly's second quarter conference call. Before we begin, I'll walk you through our safe harbor language. 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 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. Finally, a presentation with information about Kelly's financial results in the quarter is available on our website. With that, I'll begin with remarks on Kelly's financial results. In the second quarter, we remained focused on what we can control as we continue to navigate uncertain market conditions. Large enterprises maintained a cautious approach to hiring, though demand began to stabilize with positive signs emerging, in particular among our technology and life sciences customers. In our P&I business, revenues leveled off on a sequential basis. This trend reflects stabilizing demand and the benefits of our enhanced localized delivery model. The combined strength of our network of physical branch locations and the KellyNow mobile app continue to generate positive momentum in the quarter with both clients and talent helping grow our pipeline of new industrial and commercial staffing business and drive a meaningful improvement to our fill rate and time to GP. At the enterprise level, our strategy to deliver the full suite of Kelly offerings to our largest customers also gained traction. Within the initial focus accounts where we have operationalized this approach, we've improved both the efficiency and effectiveness with which we serve our largest customers. This progress is beginning to drive gains in share of wallet with our large enterprise customers. Our growth initiatives are helping capture market share and build upon Kelly's position as one of the largest staffing firms in the U.S., According to staffing industry analysts' latest rankings, Kelly increased its position by the widest margin among the top 20 firms from 2022 to 2023. This is a testament to our team's resilience in deftly navigating through uncertain market conditions. Amid encouraging developments with growth, we remain laser-focused on improving our ability to convert a greater share of top-line growth to bottom-line growth. This month marks one year since we shared with you the anticipated impact of the transformation initiatives we undertook to drive structural efficiencies across Kelly and significantly improve the company's profitability. Our message at that time was clear. Kelly would achieve a normalized adjusted EBITDA margin in the range of 3.3% to 3.5% as soon as the first half of 2024. Notwithstanding the challenging market conditions, we delivered a steady cadence of net margin expansion driven by sustained reductions to SG&A. One year later, I'm pleased to share that we have achieved our initial expectations. In the first half of this year, Kelly attained an adjusted EBITDA margin of 3.4%, excluding the benefit of our acquisition of MRP. For more details on this and our results in the second quarter, I'll turn the call over to our Chief Financial Officer, Olivier Thurot.

Thank you, Peter, and good morning, everybody. As a reminder, Kelly's 2023 results include the European staffing business that was sold on January 2nd of 2024, and we are now including the results of motion recruitment partners since the date of the acquisition, so just for the month of June 2024 this quarter. To provide greater visibility into trends in our operating results, I will also discuss year-over-year changes on a reported and also on an organic basis. References to organic information exclude the results of our European staffing business in 2023 and the impact of the acquisition of MRP in 2024. Revenue for the second quarter of 2024 totaled 1.06 billion compared to 1.22 billion in 2023, down 13.1%, resulting primarily from the sale of our European staffing business, partially offset by the acquisition of MRP. On an organic basis, year-over-year revenue improved 0.6% in a quarter, reflecting strong growth in education, a sequential stabilization of demand from Q1 to Q2, across much of our other businesses, despite of market uncertainty in several specialties. Reviewing results by segment, education continued to grow revenue by double digits, up 22% year-over-year in the quarter. This strong and sustained growth reflects net new customer wins, increased demand from existing customers, and an improving fill rate. In the said segment, revenue was up 10%, on a reported basis, which includes the impact of the MRP acquisition. Revenue was down 3% on an organic basis, and organic revenue trends were stable sequentially. Year-over-year organic revenue growth reflects lower staffing market demand, with revenue down 4% in our staffing specialties and down 1% in our outcome-based business. Permanent placement fees also declined by 20%. In our OCG segment, revenue improved 3%. The increase in revenues was driven by our PPO specialty where demand growth has continued. Year-over-year declines in RPO are due to slower hiring in certain market sectors and MSP revenues declined in line with customers' contingent labor demands. But revenue in both MSP and RPO products were stable sequentially and with our MSP product positioned to benefit from positive momentum going forward. Revenue in our professional and industrial segment declined 9% year-over-year in the quarter, but also stabilized sequentially, including in the P&I staffing specialty. Revenue from our staffing product declined 9%. The segment's contact center outcome-based specialty revenue also declined year-over-year, as did PERM fees in this segment. Partially offsetting these declines, other higher margin outcome-based specialty revenue continued to grow. Overall gross profit was 11.2% as reported, or 4.3% on an organic basis. Our gross profit rate was 20.2% compared to 19.8% in the second quarter of the prior year. Our GP rate reflects a 100 basis point improvement from the sale of our European staffing operations and an additional 40 basis points from the inclusion of the June results of MRP. On an organic basis, the GP rate declined 100 basis points in Q2, 110 basis points due to unfavorable business mix, and 20 basis points due to lower perm fees, partially offset by 30 basis points of favorable employee-related costs. The business mix impact reflects continued growth in specialties with lower GP rates, including education and PPO. SGN expenses were down 17% year over year on a reported basis. Expenses for the second quarter of 2024 include 4.3 million of restructuring charges related to our ongoing transformation efforts, as well as 1.6 million of expenses primarily related to the sale of our European staffing operations, including transaction and also transition expenses. SG&A expenses in 2023 include 5.6 million of restructuring charges. So expenses declined by 18% on an adjusted basis or 10% on an adjusted organic basis. So like for like, expenses were lower in Q2 of 2024 due to the positive impacts of our structural transformation efforts as well as lower performance incentive conversation expenses, reflecting current top-line trends. As a reminder, beginning in the first quarter of 2024, we are reporting the operating results of our reportable segments utilizing revised business unit profit measures. We also are allocating a greater share of the costs we have previously reported as corporate costs to our business unit. In addition, we are no longer including deposition and amortization in our business unit profit measure. We believe this provides greater visibility into the financial performance of each business unit and how they contribute to Kelly's overall performance. On a consolidated basis, our reported earnings from operations in the second quarter were 12.2 million compared to 6.2 million in Q2 of 2023. On an adjusted basis, Q2 2024 earnings from operations were 28.1 million, nearly doubled from a year ago. The 15.9 million increase from reported earnings includes a loss on the sale of our European staffing operations, charges related to transformation actions and the sale of our European staffing operations, an impairment charge related to excess lease property, and a gain on the sale of assets related to the IRS group. The acquisition of MRP added 1.5 million of earnings for operations in the second quarter of 2024. Adjusted earnings in the second quarter of 2023 were 14.2 million. The 8 million increase from reported earnings included transformation-related charges and an asset impairment charge. The European staffing operations produced 1 million of earnings for operations on an adjusted basis in the second quarter of of 2023. Adjusted EBDM margin also improved 180 basis points to 3.8%, reflecting 40 basis points of improvement from the sale of our European staffing operations, 10 basis points from the inclusion of the month of June result of MRP, and 130 basis points of improvement from our ongoing transformation efforts. Income tax expense for the second quarter was 1.1 million compared to a benefit of 1.9 million in 2023. Our effective income tax rate was 19.4% in Q2 2024. And finally, reported earnings per share for the second quarter was 12 cents per share compared to 20 cents in 2023. Earnings per share in 2024 include a loss related to the sale of our European staffing operations and again on the sale of the highest group transaction, as well as transaction costs related to the acquisition of MRP, restructuring charges related to our transformation, and an asset impairment charge. Earnings per share in 2023 included restructuring and an asset impairment charge. So on an adjusted basis, Q2 2020 for EPS was 71 cents compared to 36 cents per share in Q2 of 2023. nearly doubling year over year. Now reflecting on the balance sheet. Following the acquisition of MRP at quarter end cash total 38 million and we had 210 million of debt outstanding. Our debt to capital ratio is 14.1% as of quarter end as we leverage our balance sheet to acquire MRP. And as we disclosed at the time of the acquisition, we have amended our credit facilities to maintain the financial flexibility for additional organic and inorganic investment, and to navigate an ongoing uncertain market environment. At quarter end, accounts receivable total 1.2 billion, including the receivables of MRP. Global DSO was 57 days, down two days from year end 2023, and down four days from the second quarter of 2023. In the quarter, we generated 55 million of free cash flow compared to 32 million in the comparable prior year period. Looking ahead to operating results for the second half of the year, our results will be impacted by several factors. First, we believe that staffing market conditions will remain relatively consistent with what we have experienced in the first half of the year, and modest sequential revenue improvement in our P&I set and OCG segments will continue in the second half of 2024. Our education segment revenue will be impacted by the summer school holiday period in Q3, but will continue to produce double-digit revenues. And finally, the acquisition of MRP will deliver further improvements in both our growth and also value metrics. For the second half of 2024, on an organic basis, we expect revenue to be up 2.5% to 3.5%, with no significant FX impact. resulting in a midpoint revenue expectation of about 2 billion. In addition, we expect MRP to add an additional 260 to 270 million of revenue in the second half of the year. We expect our organic GP rate to be between 20 to 20.2% in the second half. On the lag-for-lag basis, this is a 90 basis point decline at the midpoint of our range, affecting the change in our business mix. primarily because our education business is expected to continue to deliver significant revenue growth. MRP, with its higher margin specialty profile, is expected to add an additional 100 basis points to our gross margin rate in the second half of the year. So, our all-in GP rate in the second half of 2024 is expected to be between 21% to 21.2%. Reflecting on SG&A, we expect to sustain the efficiency improvements that we gained from our transformation-related actions over the past year. The impact on year-over-year trends will moderate as we anniversary the execution of most of those actions. We expect that adjusted SG&A, excluding DNA, will be 3.5% to 4.5% lower than a year ago on an organic basis. And MRP will add about 60 million of expenses in the second half. All in, we expect approximately 28 million of deposition and amortization in H2 of 2024. We expect an adjusted organic ABDA margin of 3.2 to 3.3%, up 30 to 40 basis points year over year. And we believe that MRP will add an additional 30 basis points of net margin in the second half of 2024. And back to my earlier points regarding education seasonality, we expect that our adjusted ABDA margin will be closer to 3% or 2.6% organic in the third quarter during the school summer holiday period, and then improve as in Q4 as education's working days increase. And finally, we expect our effective tax rate to be in the low teens. And now back to you, Peter.

Thanks for those insights, Olivier. In May, I shared with you that 2024 would mark an inflection point on our strategic journey, that the actions and results we deliver this year will propel Kelly into a new era of growth. Reflecting on the significant progress we achieved in the second quarter, I'm confident that we're on track to realize those ambitions. Our transformational acquisition of motion recruitment partners has strengthened the scale and capabilities of Kelly's staffing, consulting, and RPO solutions in attractive customer and markets, including technology, financial services, and healthcare. The highly complementary nature of MRP and Kelly's SET and OCG businesses, MRP's attractive financial profile, and its leadership team of recruiting industry veterans will contribute in a significant way to enhancing Kelly's revenue growth potential and driving continued EBITDA margin expansion. The sale of Ayers Group further sharpened Kelly OCG's focus on global RPO and MSP solutions while unlocking incremental capital to redeploy towards Kelly's specialty strategy. And we achieved our initial expectation for EBITDA margin expansion, which we established one year ago, demonstrating the capacity of our growth and efficiency initiatives to significantly improve Kelly's profitability over the long term. Of course, it's difficult to know the precise timeline of a recovery for our industry. And as Olivier noted, we expect the results in the second half of the year will continue to reflect uncertain market conditions. Notwithstanding these dynamics, I'm optimistic about the sequential stabilization we saw across our business. And I'm confident that our achievements in the second quarter Together with the progress we've delivered since we embarked on our specialty growth journey, position Kelly to capitalize when sequential stabilization gives way to a sustained increase in demand. I'm immensely proud of the work of each and every member of Team Kelly, including our newest colleagues at MRP, that has brought us to this point in our journey. Their urgency, agility, and unwavering commitment to our clients and talent are the driving forces that continue to propel us to new heights. With our team moving forward together, united by our noble purpose, I'm confident that the opportunities before us are limitless. Greg, you can now open the call to questions. OK. Ladies and gentlemen, if you'd like to ask a question, please press 1 then 0 on your telephone keypad. You may withdraw your question at any time by repeating the 1, 0 command. If you're using a speakerphone, please pick up the handset before pressing the numbers. Once again, if you have a question, please press 1 then 0 at this time. And one moment, please, for your first question. Your first question comes from the line of Kartik Mehta from North Coast Research. Please go ahead.