Kelly Services, Inc. (NASDAQ:KELYA) Q3 2023 Earnings Call Transcript

Kelly Services, Inc. (NASDAQ:KELYA) Q3 2023 Earnings Call Transcript November 9, 2023

Kelly Services, Inc. beats earnings expectations. Reported EPS is $0.5, expectations were $0.25.

Operator: Good morning and welcome to Kelly Services Third Quarter Earnings Conference Call. All parties will be on 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.

Peter Quigley: Thank you, Kailey. 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 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 Thirot, our Chief Financial Officer, who will share more details about our expectations later in the call.

Turning to the third quarter, we continue 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 assumes no change to the market conditions we faced in the second quarter.

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Q&A Session

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 US. 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 US 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 towards 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 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 road map 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 road map 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.

Olivier Thirot: Thank you, Peter, and good morning everybody. For the third quarter of 2023, revenue totaled $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 constant 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 fill rates 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 sector has 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 Industrial segment declined 11% year-over-year in the quarter.

Revenue from our staffing product 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 continued 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 base. Performance varies depends on geography and product. For the quarter we had good constant currency revenue growth in Mexico and Portugal 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.