Kelly Services, Inc.

and some of the other positive information this morning. And maybe you could provide a little more color there. On these delayed contract decisions, when do those become not a delay but a lost opportunity type of thing? So I was wondering maybe a little more color on that education there.

Yeah, thanks, Joe. Happy to jump in. And first, I think it's important in the distress. Really, this pressure is not structural. The single largest driver of that decline is really dream-driven in Florida with some of the enrollment declines that we talked about, also some of the school choice attrition. The good news is it's behind us. And as we think about the selling cycle we talked about, the 100% renewal rate that we saw Many of those renewals were in the state of Florida, which is a big part of our business. But we also saw a whole bunch of other new wins come online. But as a reminder, those wins will come online as the new school year starts. And so, you know, we get a selling cycle that is ending about right now, and we're implementing new districts, and then those districts will need our outsourced services for now the 26-27 school year. We really feel good about our selling momentum, obviously the strength of not only our fill rates, the customer satisfaction, and the white space that's still out there for us to be able to grow outside of some of the key districts we're in. And we continue to also see big opportunities for us to sell therapy and the acute need that our school districts, parents need in terms of that care, clinical care in schools. That's a little bit more color on the education timing. Troy, is there anything else you want to add?

Yeah, Joe, I was just going to just one little point of clarification or expansion. So the contract delays we're talking about was last year's selling cycle. There was a lot of turmoil in the macro environment, the Department of Education, et cetera. And so those districts decided not to proceed with or various districts decided not to proceed with an outsourcing arrangement. And that we live with that through this whole school year, as Chris said, which now we have now seen our selling cycle and the improvement. The work has been done to your last part of your question about, you know, when do they become lost decisions? The work has been done for them to see the value proposition, as Chris said, you know, on the fill rates, on the client satisfaction, et cetera. So it's really just a matter of the process and working through them, many of which then we went ahead and closed this year.

Okay, great. Thanks for that. I appreciate that. And then you hired Joel, you know, over at SET, and just wondering, you know, what kind of the initial, you know, reaction there, what, you know, kind of, you know, steps has he been, are you seeing that he's taken to, can really start to drive growth over there in the SET unit.

Well, yes, and as a reminder, Joel's now in his second quarter and really excited about some of the momentum that's building. We referenced, right, but this is really a genuine inflection point in the quarter, and the improvement's been broad-based across SET. Every specialty area, all five segments, showed year-over-year improvement versus Q1, with telecom and life sciences really leading the way with delivering year-over-year growth. And the meaningful mix progress that we referenced now having about 40% of that business be solution-oriented, that's a huge part of Joel and the team's focus as we continue to move upstream. And then finally, I would say that in the technology space, we continue to see The benefit of a strong solutions pipeline, our consultant outbilling continues to be positive. And we know that there continues to be a lot of demand for solution-based business in the IT and services space. And then finally, within engineering, that segment is performing at a high level. We've got our average deal size is increasing sequentially, the pipeline velocity has been strong. And some of those trends, both on pipeline and velocity, coming out of June, were the strongest that we had seen all year in that business. So now that Joel and the team are now fully in the throes of their operating model, we know that SENT is positioned to continue to build on this momentum in the second half of the year.

Okay. And then just one more for me. Chris, you talked last quarter about taking a more, I'll say, active role over in ETM, reviewing leadership there. I just wanted to give us a little more color as to how those efforts have proceeded here over the past quarter.

Yes, well, I think you can see, based on the performance of the ETM business, that we continue to be pleased with the the steps we're making. We've got a really good leadership team in ETM who are really committed to client centricity, accountability, and execution. So I continue to stay very close to the business. And as we have any changes there, I'll certainly make sure everyone is updated. But based on the progress in the business, we really feel good about the momentum coming out of the quarter.

Okay, great. Thanks for that, guys. I'll get back in queue.

Thanks, Joe.

Thank you, Joe.

Thank you. Our next question comes from Karthik Mehta with North Coast Research. You may proceed.

Hey, good morning. Chris, just a big picture question. Where do you think we are in the recovery phase in the industry? I know maybe each segment might be a little bit different, but just your overall feel as you talk to clients and kind of see some of the job orders Where do you think we are in the cycle?

Yeah, no, thanks, Kartik. You know, we really believe we've moved beyond stabilization, and we're into the early stages of recovery. You're seeing now two consecutive quarters of improving underlying revenue trends, underlying ETM returning to growth, and SET delivering sequential growth for the first time in two years, which really reflects, I think, that structural progress that I just referenced. And we're also seeing this in some of the operational indicators, right? Some of the key indicators, consultants out billing inset is increasing. We're seeing spend under management in the ETM business expanding as well. And I think, you know, really to the extent that that demand trend continues to improve, we're going to be well positioned to capitalize on as a result of the growth and efficiency initiatives that we're implementing and are delivering results in the quarter.

Did you look at that? I know in the past, or maybe even now, one of the issues might be, hey, how is AI impacting that segment? Would you think AI right now is a headwind for the business, or are you seeing demand, and would you call it a tailwind right now for that particular business?

Well, I think it's a tailwind for us. In many ways, I think that's reflected in the sequential quarter-on-quarter improvement that you see from us. in the quarter, and really underpinned by our focus and really breadth and depth of capability to support the data center industry. We're supporting companies across all facets of the data center ecosystem, and this has a huge impact in SET, but also ETM, and requires our BPO capability as well, increasingly where we're delivering solution-based work. That demand is an important growth driver. It shows up in engineering and telecom, our digital infrastructure business, in our IT business, and we believe that's going to continue to grow. We're also benefited by, you know, the strength and really our leading engineering service capability. As you think about, you know, all of the, you know, critical infrastructure pillars that are required to support all the data center capital investment from, you Power and Cooling, Commissioning, all the component supply chain. We really have unique domain expertise in this space that will allow us to continue to grow. So we're excited about the momentum there.

Thank you very much. I really appreciate it.

Thanks, Karthik.

Thanks, Karthik. Thank you. Our next question comes from Kevin Steinke with Barrington Research Associates. You may proceed.

Great, thanks. So as you talked about in your prepared comments, you noted that your expectations have improved since February, which is reflected in your improved revenue outlook for full year 2026. Can you just maybe walk through the areas where the expectations have improved most materially, and is it mostly related to the macro environment or internal business momentum, or where would you assign the most weight to for the improved expectations?

Yeah, thanks, Kevin. I'll maybe give a little bit of color and then have Troy talk about some of the detail in the segments. We're really pleased with the execution in the quarter, and the beat was driven by meaningful operational progress, including some demand trends. We continue to see a normalized gross profit rate and it's really our continued SG&A discipline as well. These are not one-time items and you're seeing that in terms of the structural impact and our ability to unlock more margin. The path to the second half of the year though is pretty clear and I'll maybe point to three broad drivers for us. The first is the discrete impacts anniversary in the fourth quarter and so we see that runoff and the second, the organic growth that we've been talking about, those drivers are gaining traction across each segment across the business units, and even in education, where we expect the second half of the year to flip back to growth. And then finally, the structural efficiency improvements we're creating, and that will continue to drive operating leverage as revenue hits an inflection point. But I'll maybe toss it to Troy now to talk a little bit about it at the segment level.

Yeah, thanks. Good summary, Chris. Yeah, look, I think certainly ETM has been strong both in Q1 and Q2 through all the combination of factors Chris has referenced in several of the prior questions. So we feel good about the progress there. SET, I'd say, is probably more in line with expectations in education. Again, we're seeing the turn there into the back half of the year. A little more pressure than we thought coming into the year really on the volume side, but from the new business and the growth in therapy and the like are all as we were anticipating going into the back half of the year. As Chris said, on the cost structure side, we've been rigorous about that starting last year. We've continued to see some benefits from from some of the activity from last year with the realignment with INSET, with the integration work, I'm sorry, realignment with the ATM and the integration work with INSET. And we continue to look for further optimization opportunities, benefits from AI or technology modernization. So all of those things are coming together nicely and delivering some opportunity for upside in the back half of the year.

Okay, great. Within ETM, you talked about the broad-based demand for professional and industrial staffing that you're seeing, and you talked about the semiconductor angle and the reshoring. From that commentary, do you feel like there's some real legs to this in terms of continuing demand and combined with your ability to win new business, you know, what do you think the sustainability of this improved P&I demand, staffing demand is?

Yeah, well, you know, I would say to start customer sentiment in the quarter was increasingly positive and a step forward from Q1 really across the business, but also some broader macro trends supporting some of the industrial output that we've now seen picking up some momentum, including with ISMs, PMI data continuing to show some expansion. Within ETM, though, customers are leaning into broader talent management programs, and I think that's important given the strength of our leading MSP and RPO offerings. They're now being used as a strategic workforce tool. This isn't just a A temporary cost reduction measure that's being maybe used episodically, which continues to give us some real leverage with the large customers that we're working with. And then obviously our ability through the Growth Office and all of the other work that we're doing in the strategic account management space to go and capture more of that white space. We have leading offerings on the solutions and on the staffing side. in P&I and also across SET that allow us to go and support large enterprise customers. And the customers that I talk to, they want to be doing more with Kelly. And that's really why we continue to believe that the one Kelly enterprise strategy gives our customers the unlock they're looking for. And we're making sure that we're driving that every single day.

All right, great. Within SET, you refer to a couple of times that you see this as an inflection point. So what do you think that means for the growth outlook going forward? And again, maybe, you know, in terms of the sustainability angle, you know, assuming we continue to see an overall improving macro environment or at least stable with where we are now. I mean, how do you think that business can trend over the coming quarters based on the momentum and the inflection point you saw there?

Well, the improvement is really broad-based, and I think it's important to really underscore that every specialty area showed improvement from Q1. and you know we reference the telecom and life sciences delivered year-over-year growth but it really is you know the breadth of what we're seeing from the demand side and the operational discipline that we have in terms of how we're converting that both to new solution assignments and projects and also new staffing revenue and GP. You know the technology business is the biggest segment within within SET, and we continue to see positive momentum on the demand side and our selling focus continuing to move upstream and the opportunity for us to continue to differentiate with our solution capability. There is a tremendous amount of demand there that we've got to go and convert. And then finally, on the engineering side, that performance is really not only driven by and so forth. And, you know, sequential quarter-on-quarter improvement, but the velocity and size of the pipeline continuing to improve. And as we reference some of the opportunities both in industrial reshoring and in the broader data center capital investment, you know, the engineering and digital infrastructure telecom offerings that we have really positions us uniquely in the market to be able to support those needs. you know finally the strong performance exiting the quarter in engineering we know is going to continue to drive growth so we feel good about the momentum.

Yeah and I would just add Kevin in the Q4 expectation that we've outlined we expect growth across all three segments so ETM set and education excluding the 53rd week which we noted in our materials and in the prepared remarks. And within SET, I would say it's across the specialties. We expect all the specialties to be reflecting year-over-year growth, except maybe government, you know, could be close. But otherwise, to Chris's point, it's broad-based.

Okay. That's helpful. I also wanted to ask about education and You referenced the momentum and the therapy services there. How meaningful can that be at this point? I believe it's still a relatively small portion of the segment relative to the traditional substitute teacher K-12 staffing. What can it mean for, say, in a contract with a school district in terms of upsizing it or any other metrics that you'd point to in terms of its impact on the business?

Yeah, the therapy is one of the strongest growth opportunities we have. It's about 8% of the mix today and has a lot of opportunity to grow. We are encouraged by the selling cycle and support model there also follows the school calendar, and so we're gearing up for September. Really pleased with the progress we're making there. We have more therapy providers confirmed in September to start to support that work than any other time in our history. Operationally, the team is very focused on getting ready for the start of the school year. And that really reflects not only the expansion of therapy in new districts, new school districts that we're working with today, but importantly, continuing to sell with our leading K-12 offering. And so with some of the new wins coming online, first-time districts, now we have both therapy and are all embedded in that overall solution. Now, from a margin standpoint, it gives us real opportunity just given the mixed opportunity that it presents, which over time is the grossest part of the KE portfolio. We think it gives us real opportunity to continue to expand both EBITDA and gross profit margins across across Kelly Education.

Yeah, I would just add the market opportunity is significant. It's a very, very fragmented market. Many areas are just small players, either single market or small regional players. And so as we, as Chris said, bring that more as a combined integrated offering to our clients, both existing and net new as we're selling in the new selling cycles, we have significant opportunity there to penetrate much more deeply than we are today.

Great. Thank you. Thanks for taking the questions. I'll turn it back over.

Thank you. And as a reminder, to ask a question, please press star 1-1 on your telephone. Our next question comes from Mark Riddick with Sidoti. You may proceed.

Good morning.

Good morning, Mark. Good morning.

I wanted to touch a little bit on some of the progress that you're seeing with some of the leadership additions that you've made through the year. And then I know there was another one just, I guess, a month or so ago of adding to your leadership team as a chief product and technology officer. I was wondering, maybe sort of touch a little bit on some of the progress of those folks that you've added to your team, but also, you know, are there other areas that you'd like to add to strengthen the bench, if you will?

Yeah, no, thanks. We're pleased, really, with the recent leadership appointments that we've made and, you know, what it means to our broader management team. As you referenced, we welcomed Alan Stokolsky. He joined as Chief Product and Technology Officer. And the role really reflects, it's a deliberate decision to integrate our technology modernization initiative with our product and AI strategy. You know, as we scale AI deployment across the business, but also in this work as we support customers, We needed those work streams to be connected and aligned to not only our growth initiatives, but also some of the efficiency initiatives that we've talked about. Alan really brings the right experience for us, not only in this moment, but he is someone who's going to be able to help partner with us and our customers as we think about what's next for the future of work. And that's what's so important. When I'm out with customers, and we think about our product roadmap, we have to continue to make sure that that data intelligence layer, the IP that sits in many of the products in our set portfolio, that we continue to be able to scale the capability to unlock more value for customers and by bringing Allen in and really connecting AI product and IT together, we think it's really the right time to be able to do this and to bring more value. More broadly on your question, we continue to assess the talent and making sure we've got the right people and the right roles to execute our strategy. We're going to continue to do that, but we're really pleased with the additions we welcomed this year and with our start to the year getting them integrated as part of the team.

Great. And then I guess the last one for me, I guess, is wondering if you could talk a little bit about cash usage prioritization and sort of how you're thinking about that and whether there's potential for non-organic pursuits. And if so, sort of how you feel about the potential pipeline or maybe what's out there, level of attractiveness, valuation, things like that.

Yeah, great. Well, our approach, as we've talked about, to capital allocation remains balanced and opportunistic. We maintain the quarterly dividend in the quarter, obviously reflecting our confidence and ability to generate cash. In the near term, as Troy referenced in his prepared remarks, we prioritize debt pay down with the excess cash, and the work we did in the credit facility also continues to give us some flexibility there. But let me just turn it over to Troy now to talk a little bit more about cash and maybe liquidity as we move to the second half of the year.

Yeah, I mean, again, we generated $47 million, $48 million of free cash on the quarter. So year-to-date, we're at $21 million. So that went to pay down on the debt. Again, our debt is more short-term in nature, so we're able to pay it down very expeditiously and also draw on it very expeditiously as needed. to your question about... And for the year, I would say, look, we'll use cash in the third quarter. That's seasonal. Again, we have the education business winding down in the second quarter for the summer and then ramping back up again. Also, with the growth that we talked about and that we've set the expectation for, we are a working capital business, as you know, and therefore, that will consume cash as we accelerate our growth rates into the back half of the year. But net-net, we should... We should be a little bit more positive on cash flow for the full year relative to where we are now. And as we look at the horizon, of course, we have a lot of work that we're doing internally. The leadership team, as we talked about, the technology modernization, the integration work. But we continue to look at external opportunities and organic opportunities. The market is, you know, I think there's a lot of assets that are pent up. just given the softness in the market. And so now that you're seeing the market turn, there may be some more assets coming on the market that could be attractive. And certainly there are some areas that are hotter than others, as we sit here today, some of which we play in and some of which we don't. So as Chris said, we've got a very strong balance sheet. We have a lot of flexibility, and we'll continue to be opportunistic as we go forward. Great.

Thank you very much.

Great. Thanks, Mark.

Thank you. I would now like to turn the call back over to Chris Layden for any closing remarks. Great. Thank you all for joining. We'll see you next quarter. Thank you all. Thank you. This concludes the conference. Thank you for your participation. You may now disconnect.