Kelly Services, Inc.

discuss 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. We have a lot to cover, so let's get started. First, I'm pleased to welcome Troy Anderson, Executive Vice President and CFO Designate who formally joined Kelly last month and is with us on the call today. As announced in September, following an exhaustive search process, Troy was selected to succeed Kelly's current executive vice president and CFO, Olivier Thiroux, following his planned retirement as an officer of the company. Troy and Olivier have been working side by side over the past several weeks to ensure a smooth transition of responsibilities. Upon completion of the transition, Troy will assume the role of Executive Vice President and CFO of Kelly, and Olivier will be a strategic advisor to the company. Troy brings to Kelly more than 30 years of experience, successfully executing business transformations, a track record of accelerating profitable growth, and a passion for developing and leading high-performing teams. I'm confident he will build upon the significant contributions of Olivier to whom I'm immensely grateful for his distinguished service to Kelly. Olivier's leadership has helped transform this company into a more efficient, profitable enterprise with a financial discipline to drive long-term value creation. I look forward to working with Troy to accelerate Kelly forward on our specialty journey and congratulate Olivier as he prepares to close one chapter and begin an exciting new one. Now, turning to Kelly's results in the third quarter, we continue to navigate uncertain market conditions that were broadly consistent with the prior quarter. Large enterprises maintained a cautious approach to managing their workforces, deferring hiring decisions, managing existing headcount through attrition, and in some cases, choosing not to backfill open roles. This continued to impact demand for both temporary and permanent staffing services. Notwithstanding these persistent dynamics, we continue to focus on what we can control, capturing market share and shifting our business mix toward higher margin, more resilient solutions. Our actions contributed to Kelly's organic revenue stabilizing year over year for the second consecutive quarter and drove strategic progress in each of our businesses. In our education business, we achieved another quarter of double-digit revenue growth on strong fill rates and net new customer wins in our K-12 specialty. The ongoing growth of this specialty is reflected in Kelly's share of K-12 staffing market, which once again ranked number one on Staffing Industry Analyst's latest list of the largest education staffing firms in the US. We also remain focused on expanding our higher margin therapy specialty. Our near-term priorities in this specialty are scaling our capacity in additional markets and improving attraction and retention of therapy talent. In our P&I business, the sequential revenue stabilization we achieved in the second quarter gave way to a sequential improvement in the third quarter, as our omnichannel strategy within the staffing business continued to gain traction. This strategy, underpinned by our network of physical branch locations and the KellyNow mobile app, enabled our P&I business to meet clients and talent where they are and capture a greater share of the market as demand for industrial and commercial staffing remained under pressure. Also driving the continued improvement in P&I is the ongoing expansion of our outcome-based business into attractive end markets, including semiconductors and renewables. Our OCG business delivered solid year-over-year revenue growth driven primarily by increased demand for our payroll process outsourcing solution. Revenue from our MSP and RPO solutions stabilize sequentially as more employers seek to drive efficiencies through total talent management. Powered by our advanced Helix technology platform, which we continue to upgrade with the addition of AI-enabled market intelligence capabilities, OCG's higher margin MSP offering drove a steady pipeline of new business opportunities. In our SEP business, demand decelerated during the summer months before improving in September as companies began to increase spending on technology projects. Its results for the quarter reflect this dynamic while continuing to outpace the market on a year-over-year basis. SET maintained its focus on expanding into the market for higher margin SOW-based services through the Statement Works suite of solutions. This innovative offering continues to generate strong interest among clients seeking to optimize business processes without adding headcount amid ongoing macroeconomic uncertainty. The third quarter also marked the first full quarter since Kelly acquired specialty talent solutions company, Motion Recruitment Partners, whose results are currently reported as part of SET. With integration planning well underway, I'm pleased with the collaborative approach our teams have taken to combining our highly complementary businesses. Together, we're creating a clear pathway to achieve revenue and cost synergies that will enable Kelly to realize the full value of this transformational deal. For more details on our results in the third quarter, I'll turn the call over to Olivier.

Thank you, Peter, and good morning, everybody. As a reminder, Kelly's 2023 results included the European staffing business that was sold on January the 2nd of 2024, and our 2024 results include motion recruitment partners since the May 31st acquisition date. to provide greater visibility into trends in our operating results, I will 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 third quarter of 2024 totaled 1.04 billion compared to 1.12 billion in 2023 down 7.1%, resulting primarily from the sale of our European staffing business, partially offset by the acquisition of MRP. On an organic basis, the revenue was essentially flat, at down 0.2%, slightly lower than what we have built into our second half outlook. Reviewing results by segment, starting with education, Q3 is low season for education because of summer break in much of our K-12 practices, but we continue to deliver sustained double-digit revenue growth, up 11% year-over-year in the quarter. This growth continues to reflect net new customer wins and an improving fill rate on existing business. In the said segment, revenue was up 37% on a reported basis, resulting from the acquisition of MRP, which is included in our results for a full quarter in Q3. Revenue was down 5% on an organic basis. Organic revenue trends were weaker over some months but improved in September as we exited the quarter. For the total quarter, organic year-over-year trends reflect lower staffing market demand with revenue down 5% in our staffing specialties as well as in our outcome-based solutions driven primarily by lower demand in certain industry verticals, like telecom. We continue to see the outcome-based Statement of Work business as a growing portion of the market where we are focused and continue to innovate. Permanent placement fees declined 31% organically, but more than doubled when including the results of MRP, which has a strong direct higher business. In our OCG segment, revenue improved 6%. The increase in revenues continues to be driven by our PPO specialty. 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 demand. Adding lower margin PPO revenue put some pressure on growth margin for the OCG segment as a whole again this quarter, but revenue in both MSP and RPO products were stable sequentially, and our higher margin MSP product is well positioned to benefit from positive momentum in the sales pipeline moving into 2025. Revenue in our professional industrial segment declined 2% year-over-year in the quarter. P&I sequential revenue stabilization in Q2 turned to sequential revenue growth of 4% in Q3. Revenue from our staffing product declined 3% year-over-year. and revenue in our outcome-based specialties was flat year over year. Consistent with that, we are seeing strong demand for innovative solutions to meet clients' talent needs across a variety of skill sets in P&I. As demand for the segment's contact center specialty has declined, P&I has successfully diversified its portfolio of outcome-based solutions. Overall, gross profit was down 3% as reported or 6.4% on an organic basis. Our reported gross profit rate was 21.4% compared to 20.4% in the third quarter of 2023. Our GP rate reflects a 130 basis point improvement from the sale of our European staffing operations and an additional 110 basis points from the inclusion of MRP for a full quarter. Excluding those impacts on an organic basis, the GDP rate declined 140 basis points in Q3, consistent with the trends we have seen in Q2. Drivers of the trend include 120 basis points from business mix and 30 basis points from lower-perm fees, partially offset by 10 basis points of favorable employee-related costs. the business impact continues to reflect growth in lower GP rates specialties. SG&A expenses were done 4.1% of a year on a reported basis. Expenses for the third quarter of 2024 include 6.1 million of costs related to integrating MRP as well as further aligning processes and technology across the company and also 1.8 million of transition expenses related to the sale of our European staffing operations. And finally, 1.4 million of transaction costs associated with acquisition of MRP. SG&E expenses in 2023 include 15.4 million of restructuring charges. So on an adjusted organic basis, expense declined 4%. So like-for-like expenses were lower in Q3 2024, reflecting organic top-line trends and management's effort to align resource levels with volume, as well as the impact on variable performance-related incentive compensation expenses. On a consolidated basis, our reported earnings from operations in the third quarter were 2.6 million, compared to 0.1 million in Q3 2023. On an adjusted basis, Q3 2024 earnings from operations were 11.7 million, compared to 15.5 million a year ago. The acquisition of MRP added 2 million of earnings for operations in the third quarter of 2024. Adjusted ABDM margin improved 20 basis points to 2.5%, reflecting 30 basis points of improvement from the sale of our European staffing operations 30 basis points from the inclusion of MRP, partially offset by a 40 basis point decline in our organic ABD MRG. Following the borrowings related to the acquisition of MRP, interest expense net of interest income, which is reported as a component of other income and expense net, has increased 4.3 million year-over-year in Q3. Income tax benefit for the third quarter was 2.6 million compared to a benefit of 4.9 million in 2023. And finally, reported earnings per share for the third quarter was 2 cents per share compared to 18 cents in 2023. Earnings per share in 2024 include integration costs, net of tax of 12 cents, and 6 cents of transaction costs, net of tax. Earnings per share in 2023 included $0.32 of restructuring charges net of tax. So on an adjusted basis, Q3 2024 EPS was $0.21 compared to $0.50 per share in Q3 of 2023. The change in earnings per share includes $0.09 of additional interest expenses, following the acquisition of MRP in May 2024, and the impact of a one-time deferred income tax valuation allowance release of $0.14 in 2023. Now reflecting on the balance sheet, at the end of the quarter, total available liquidity was $159 million, comprised of $33 million in cash and $126 million of available capacity on our credit facilities. Borrowings totaled $228 million. Our debt-to-capital ratio is 15.6% at Quatern as we leverage our strong balance sheet to acquire MRP. And our credit facilities give us the financial flexibility for additional organic and inorganic investment and to navigate an ongoing uncertain market environment. At Quatern, accounts receivable total 1.2 billion, including the receivables of MRP. Global DSO was 64 days, up one day from the third quarter of 2023. With continued growth in our education business, we experienced a more pronounced seasonal DSO pattern in which DSO is the lowest in Q2 and the highest in Q3, making sequential comparisons less meaningful than in the past. Year-to-date, we have generated 3 million free cash flow compared to 21 million in the comparable period prior year period. Now, looking ahead to operating results for the fourth quarter, we believe that staffing market conditions will remain relatively consistent with what we have experienced in Q3 and expect continued stabilization in revenue in our P&I set and OCG segments. With the start of the school year behind us, our education segment revenue will ramp sequentially from Q3 to Q4 and will continue to produce double-digit year-over-year revenue growth. And finally, the acquisition of MRP will deliver further improvement, both our growth and also value metrics. For the first quarter, on an organic basis, we expect revenue to be up 1.5% to 2.5%, with no significant FX impact, resulting in a midpoint revenue expectation of $1.045 billion on an organic basis. In addition, we expect MRP to add an additional 120 million of revenue in the quarter. We expect our organic GP rate to be about 19.3 for Q4, reflecting the continuation of a change in our business mix, primarily because the education segment is expected to continue to deliver significant revenue growth. MRP, with its higher margin specialty profile, is expected to add an additional 110 basis points to our current growth margin rate in Q4. So all in, our GDP rate in Q4 is expected to be about 20.4%. Reflecting on SG&A, we expect to sustain the efficiency improvements that we gained from our transformation-related actions over the past year, and are actively managing resources in line with revenue trends in each segment. We expect that adjusted SG&A, excluding and amortization will be 4.5% to 5.5% lower than a year ago on an organic basis. And MRP will add about 30 million of expenses in the quarter. All in, we expect approximately 14 million of depreciation and amortization in the fourth quarter. We expect an adjusted EBDA margin of 3.4% to 3.5% up about 90 basis points year over year including a 30 basis point improvement from the acquisition of MRP. 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. With uncertain market conditions likely to persist through the end of the year, our priorities are clear. We'll remain focused on what we can control, delivering near-term results while driving strategic progress on our specialty growth journey. We'll continue to execute our organic growth initiatives, including our omnichannel strategy in P&I and our large enterprise account strategy. These initiatives are enabling Kelly to capture a greater share of the market per staffing services and contributing to stabilizing revenue trends for the company. Within both P&I and SET, we'll aggressively pursue further expansion of our higher margin, more resilient, outcome-based, and SOW business into attractive end markets. And in education, we'll continue to drive growth by maintaining strong fill rates on existing K-12 staffing business and capturing net new customer wins through a healthy sales pipeline. We'll move ahead with our aggressive pursuit of value creation through our inorganic investments. MRP remains our top priority. with whom our SET and OCG teams will continue to partner on a thoughtful approach to integration that harnesses the unique strengths of each business. I look forward to sharing more about our approach on our fourth quarter and full-year earnings conference call in February. We'll also continue to develop a pipeline of high-quality acquisition targets that align with our inorganic growth strategy in SET, education, and more opportunistically, OCG. Finally, we'll remain laser-focused on improving our ability to convert a greater share of top-line growth to bottom-line growth. This includes sustaining the structural improvements to our cost base that have enabled us to achieve significant EBITDA margin expansion from our recent historical average and maintaining a disciplined approach to SG&A management that aligns our resources with demand trends. This formula has helped set Kelly apart from our competitors in this uniquely challenging environment while driving significant progress on our specialty journey. And it has positioned us to accelerate profitable growth when staffing demand rebounds. Of course, our greatest competitive advantage and the key to our success on this journey is our people. I'm grateful to each member of Team Kelly for their dedication to meeting the evolving needs of our clients and talent. Their relentless pursuit of innovation and commitment to excellence are among the reasons Everest Group's 2024 peak matrix assessment recently recognized Kelly across several categories. Among them are MSP and engineering contingent staffing solutions in which Kelly was named a star performer, and industrial staffing, business and professional staffing, services procurement, and contingent workforce management in which Kelly was recognized as a leader. This recognition underscores the strength of Kelly's offerings and why we are positioned to compete and win over the long term. With our team energized by the opportunity in front of us and united by our noble purpose, I'm confident that we'll deliver on our strategic priorities, continue to outperform the market, and propel Kelly into a new era of growth. Brad, you can now open the call to questions.