Carl T. Camden - President and CEO Patricia Little – EVP and CFO.

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Good morning, ladies and gentlemen, 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 objection he may disconnect at this time.

I would now like to turn the meeting over to your host, Mr. Carl Camden, President and CEO. Please go ahead..

Thank you, John. Good morning everyone. Welcome to Kelly Services’ 2014 Q3 conference call. And with me on the call today is Patricia Little, our CFO. Let me remind you that 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.

As we review Kelly’s performance today it is worth noting that we now have nine months of substantial investment and organizational change behind us. We’ve finished our reshaping our PT recruiting model and US operations in Q3 to build targeted pipelines of PT talent and added business development resources focused on local PT sales growth.

We have finished transitioning our targeted large accounts into a centralized service model and refocused our recruiting teams on building talent pipelines in line with our large accounts sales verticals. We have increased the efficiency and OCG service delivery and made significant progress in building up the elements of our talent supply chain.

On our last earnings call we indicated that our focus during the second half of the year would include evaluating and adjusting our new delivery models to take advantage of our more efficient operations. And we’ve recently taken actions to do precisely that.

Most notably we have streamlined our Americas staffing operations at both the local and large account levels, reduced management in our operations, further refined our OCG structure and reduced our headquarters staff.

Patricia will review these adjustments in greater detail this morning but at a glance we’ve taken significant expense out in both headquarters and in our operations and reduced our US branch network by roughly 50 branches.

In short 2014 has proven to be a year of aggressive investment and rapid change and we are pleased that we are seeing early signs that our investments are gaining traction. Turning now to our third quarter results; revenue was $1.4 billion, up 3.8% year-over-year.

Our gross profit rate for the quarter was 16.1%, down 30 basis points from the 16.4% delivered in the same period last year. Third quarter adjusted expenses were up 7% year-over-year. We continue to make progress and remained on track in implementing our strategic initiatives in both the Americas and OCG.

We delivered an operating profit, excluding restructuring of $11.1 million, down compared to adjusted earnings of $20.7 million for the third quarter last year but up from the $7.7 million earned in the second quarter.

Kelly’s third quarter earnings from continuing operations excluding restructuring were $0.10 per share compared to adjusted earnings of $0.51 per share for the same period last year. Overall Kelly’s third quarter performance was in line with our expectation. Softer revenue growth was more than offset by expense control.

We remain confident that our strategy is sound and that our investments will yield growth in 2015. Now let’s take a closer look at our performance of each of business beginning with Americas where the bulk of our actions were implemented.

Revenue demand in the Americas continued to improve during the third quarter with Combined Staffing revenue for the region up 3% year-over-year compared to the 1% increase we reported in the second quarter and the 4% decline we reported in Q1.

Americas’ commercial staffing revenue was up 4% year-over-year for the third quarter, double the growth rate we reported in Q2. Light industrial was up 1% from a year ago. This is also an improvement from the 2% year-over-year decline we reported last quarter.

Office clerical was down only 3% for the quarter, slightly lower than the 2% decline we reported for Q2. We continue to see significant growth from our new customer wins in Kelly Educational Staffing which reported revenue growth of 73% year-over-year in the quarter, up from the 60% growth in Q2.

Americas’ PT revenue was up 1% from the prior year, compared to the 3% decline we reported in the second quarter. We are beginning to see signs of traction from the investments we have made in our PT business, both in revenue and order demand.

Specifically in our local accounts our combined commercial and PT pipeline is healthy and the number of new orders is growing at double digits rates year over year especially across our PT specialties as a result of our investments in PT sales resources.

Similarly in our large accounts we’ve also seen PT order volumes increase as demand grows among this customer base. And while a few large customers have suspended projects in the fourth quarter reducing demand we expect the resumption of growth in early 2015.

Our Science and Engineering businesses continued to be the strongest performers during the quarter. Science revenue increased 3% year-over-year and Engineering revenue was up 4% year over year. We are also pleased with the performance of our Finance business during the quarter.

Revenue in Q3 was up slightly compared to the same period last year and up from the 12% decrease we reported in Q2. Our IT business reported a revenue decline of 7% year-over-year for the quarter, an improvement over the 12% year-over-year decline reported in Q2.

Sequentially our Finance and IT businesses grew 4% and 2% respectively compared to the second quarter. Fee growth was a bright note in the quarter. Commercial fees were up 12% and PT fees up 13% from a year ago. On a sequential basis commercial fees were up 12% and PT fees were up 17% from Q2.

Americas’ gross profit rate was 14.9%, up 20 basis points from the previous year. Expenses were up 11% year-over-year in the Americas. As expected, the majority of this increase is due to last year’s salary increase and planned investments which included additional sales and recruiting resources.

The sequential improvements in our PT businesses show that our investments are now yielding positive results and these investments have positioned us to better capitalize on growth opportunities in the PT specialties and vertical markets we serve. Americas achieved earnings of nearly $21 million for the third quarter.

Let’s turn now to our staffing operations outside the Americas beginning with EMEA. Revenue in EMEA was up 4% in the third quarter compared to last year. On a constant currency basis revenue was also up by 4% with commercial up 3% and PT up 6% on a year-over-year basis.

And for the remainder of my EMEA discussion all revenue results will be discussed in constant currency. Performance in the third quarter continues to be positive versus last year.

But we are seeing deceleration of the growth compared to previous quarters, particularly in the second half of Q3 due to weaker market conditions across the region and particularly in fees. We achieved a solid growth of 8% in Western Europe year-over-year, well above market performance with Portugal up 38%, France up 12% and Italy up 7%.

In Eastern Europe we are down year-over-year by 2% driven by Russia where we are seeing the impact of sanctions. Fee-based income for the quarter was down 7% year-over-year with declines in both commercial and PT. EMEA’s GP rate for the third quarter was 15.9% compared to 16.6% for the same period last year.

The overall GP decline is primarily attributable to the decrease in [term] fees as well as an unfavorable country and customer mix. Excluding restructuring expenses remained stable year-over-year and decreased 5% from last quarter.

Netting it all out EMEA reported a profit of $4.5 million for the third quarter, about flat on a year-over-year basis excluding restructuring. We expect that market conditions in Europe will remain challenging for the Staffing industry for the foreseeable future given the weak economies across the region. Next we turn to APAC.

Revenue for the APAC region grew by 3% in constant currency year-over-year largely due to continued growth in temporary Staffing volumes in Singapore and India. Fees declined by 14% in constant currency compared to the prior year due to the weaker economic climate in Australia combined with regulatory impacts in Singapore.

Our gross profit rate for the region was 14.8%, down 190 basis points compared to the same period last year. This decline was due to lower temp margins in Australia, New Zealand and Singapore, resulting from customer mix, larger wage credits in Singapore in 2013 and the lower staffing fees I already mentioned.

During the third quarter we incurred restructuring charges of approximately $300,000 related to consolidating back office functions in Australia and New Zealand. Excluding restructuring our APAC region did a nice job of reducing expenses by 3% for the quarter. We concluded the quarter with a small profit, down slightly from last year.

Now we’ll turn from our geographic results to our results for OCG, an important driver of our global talent supply chain management strategy. As you may recall on our last earnings call we said that we anticipated our third quarter earnings in OCG to be lower than the prior year.

And for the quarter revenue grew by 11% year-over-year and gross profit increased 3%. The quarterly results were significantly impacted by our payroll process outsourcing business, PPO and by our business process outsourcing practice, BPO.

In our contingent workforce outsourcing practice, CWO revenue increased 10% for the quarter and gross profit increased 6% year-over-year. The slowing in CWO reflects a shift in customer mix in our PPO business. Excluding PPO our CWO revenue grew by 9.5% and gross profit grew by 11% for the quarter.

BPO revenue grew 10% for the quarter year-over-year while gross profit declined by 7%. This decline was anticipated as we made planned investments during the quarter in our call center outsourcing practice Tele-Connect ahead of expected revenue growth.

We continue to see strong growth in our recruitment process outsourcing practice, RPO, which saw revenue gains of 30% year-over-year for the quarter and a 16% sequential increase over Q2. Gross profit increased 35% year-over-year.

Overall, OCG’s gross profit rate was 23.9% in the third quarter compared to 25.7% a year ago and the year-over-year decline was primarily due to the previously discussed declines in PPO and BPO.

Expenses were up 15% year-over-year, the result of investments and new client implementations, servicing costs associated with expansion of existing customer programs and several planned strategic projects such as talent supply chain analytics. OCG had an operating profit of $3.7 million for the third quarter, in line with our expectations.

As we look out to the fourth quarter we expect OCG revenue growth in the low-teens and gross profit growth in the mid-teens which reflects constraints driven by our PPO customer mix as previously discussed. However long-term we continue to expect OCG to deliver gross profit growth around 20%.

The progress we are making in this segment is a key element of our overall strategy and we are pleased to continue making the necessary investments to support the future revenue and GP growth in OCG. Now I will turn the call over to Patricia who will cover our quarterly results for the entire company. .

Thank you, Carl. Revenue totaled $1.4 billion, up 4% compared to third quarter last year. Staffing placement fees were down 2% year-over-year as we continued to experience declines in EMEA and APAC that more than offset the 13% growth we saw in the Americas.

Our gross profit rate was 16.1%, down 30 basis points compared to the third quarter last year and overall GP was up $5 million, about 2%. During the quarter we recorded $4 million in restructuring, including $3.7 million of corporate restructuring and $300,000 related to the consolidation of back office functions in Australia and New Zealand.

We began 2014 with a firm commitment to growth and a clear plan for accelerating Kelly's strategic priorities through significant investments in our PT specialties, our OCG practices and our centralized approach to servicing large customers.

We've executed these investments on schedule and our restructuring effort now brings additional efficiency to our operating models across the organization. In the America segment we're streamlining our local U.S. field operations through the consolidation or closure of approximately 50 branches.

We're simplifying our centralized large account delivery structure and we're flattening our U.S. management structure. In OCG we're continuing to align resources more efficiently against areas that deliver rapid growth in return on investments and we're optimizing our headquarters operations.

This management simplification plan is expected to reduce our global workforce by approximately 100 permanent positions and related to this plan we reported restructuring charges of $3.7 million, consisting entirely of severance cost in the third quarter of 2014.

We'll have subsequent restructuring charges in the fourth quarter which are estimated to range between $5.3 million to $6.3 million and were including additional severance as well as lease termination cost of about $2 million.

We estimate restructuring charges to total between $9 million and $10 million and they will be recorded entirely in corporate selling general and administrative expenses. We expect to complete this plan during the fourth quarter of 2014 and the majority of these costs will result in future cash expenditures starting in the fourth quarter of 2014.

We've also restricted hiring and we will be able to reduce our headcount further by choosing not to fill in additional 70 vacant permanent positions and we've identified further non personnel savings for 2015. The total result of the management simplification plan is to reduce our future expense growth by $35 million of SG&A.

This will allow the growth we've invested against to drop more efficiently to the bottom line. Excluding restructuring charges expenses were up 7% year-over-year.

The increase is due to a number of factors including higher cost due to salary increases as well as additional headcount related to investments in PT recruiters, OCG and centralized operations. Excluding restructuring cost, earning from operations were $11.1 million compared with 2013 adjusted earnings of $20.7 million.

Income tax for the third quarter was $3.5 million compared to $100,000 in 2013. The increase reflects the cessation of U.S. work opportunity credits in 2014. Excluding restructuring charges diluted earnings per share for the third quarter of 2014 totaled $0.10 per share compared to $0.51 in 2013.

Looking ahead for the full year we now expect revenue to be up 3% to 4%, lower than the 4% to 6% we were expecting last quarter. We expect the GP rate to be relatively flat and we expect SG&A to be up 5% to 6%, also down compared to the 6% to 8% we were expecting last quarter.

Income taxes are expected to provide a small benefit for 2014 assuming work opportunity credits are renewed. Work opportunity credits expired at the end of 2013, which puts us in the same situation we were in two years ago. At this point we don't know if or when they will be renewed.

If they are not renewed, our tax rate is expected to be in the upper 40s. For the fourth quarter we expect revenue to be up 4% to 5% on a year-over-year basis and up 1% to 2% sequentially.

We expect our gross profit rate to be slightly down on a year-over-year basis and slightly up on a sequentially basis and we expect expenses to be up 2.5% to 3.5% on a year-over-year basis as we see the first impact of our management simplification plan. Turning to the balance sheet, I'll make a few comments.

Cash totaled $52 million compared to $126 million at year-end 2013. A portion of the decrease approximately $20 million was due to payments we received very late in our fiscal 2013, most of which were paid to suppliers in the first few days of fiscal 2014. Accounts receivable totaled $1.2 billion, an increase of $135 million compared to year end 2013.

For the quarter our global DSO was 58 days up two days compared the last year. The increase is largely due to the timing of our month-end cutoff as well as extended terms and invoicing complexities for certain large customers. Accounts payable and accrued payroll and related taxes totaled $658 million, up $20 million compared to year-end 2013.

At the end of third quarter debt stood at $89 million, up [$60] million from year-end 2013. Debt to total capital was 10%, up from 3% at year-end 2013. In our cash flow we used $109 million of net cash for operating activities compared to $22 million generated for operating activities last year.

The change was due in large part to the increase in accounts receivable; and again about $20 million was related to the payments which crossed over last year-end. I’ll turn it back over to Carl for his concluding thoughts..

Thank you, Patricia. 2014 has proven to be a year of rapid change at Kelly as we have focused on growth and implemented targeted investments, particularly in our PT specialties our OCG practices and our centralized approach of serving large customers. As Patricia noted, these investments have been aggressive, targeted and swiftly implemented.

And we are pleased with our team’s commitment to their success. Our new local recruiting model positions us for growth in higher margin specialties. Our investments in the centralized large account model have enhanced productivity with a clear focus on growing professional and technical staffing with our largest clients.

And we continue to see increased demand for OCGs integrated talent supply chain approach across our clients’ global enterprises. With the bulk of our 2014 investments behind us our focus has shifted to evaluating our new delivery models ensuring we are operating at peak efficiency and making adjustments accordingly.

I mentioned that we have recently taken actions to achieve greater efficiency and our most recent steps fall under five categories which I will cover in more detail now. First, we re-examined our branch delivery network in the U.S.

With our large accounts centralization efforts complete and our PT recruiting structure fully implemented we reexamined our local delivery network and refocused our local growth efforts where they are most likely to yield the highest results.

As Patricia noted we are consolidating or closing approximately 50 branches by the end of the year, a continuation of this ongoing commitment to efficiency and productivity in our local delivery channels. Second, we simplified our management structure in U.S. operations.

Taking into account the 50 branches we’re closing we will have closed or consolidated roughly a 150 branches in the U.S. since our larger account centralization efforts began several years ago. We have now reduced the number of management positions in the organization to align our structure with our current operating network.

Third, we streamlined our large account delivery structure with all of our targeted large accounted moved into a centralized delivery model we have stabilized our operations and have turned to driving efficiency and productivity.

We now have the right centralized functions and teams in place to execute our large account strategy as efficiently as possible. Fourth, we are continuing to align OCG resources more efficiently against our talent supply chain management strategy.

Throughout 2014 we have making organization changes that ensure efforts are focused on those areas that deliver rapid growth and the greatest return on investment. And more recently this quarter we made a small number of changes to our global OCG structure. And finally, we have streamlined our headquarters operations.

As our delivery models have changed so must the corporate based organizations that support them. In October, we eliminated 55 full time positions from various corporate headquarter departments primarily in manager roles.

These changes though difficult were necessary to ensure that we’re executing our strategy as efficiently as possible and creating a streamlined more nimble company that is better aligned to its new delivery models.

As Patricia noted, when all of these actions are taken in totality we are removing approximately $35 million in expense out of our 2015 cost base. Overall, we are pleased with our third quarter performance, proud of our team’s commitment.

We expect our targeted investments and efficiency measures to deliver growth in both revenue and gross profit in 2015, particularly in OCG and in our PG staffing business and given the sustained economic progress in the U.S. and positive projections from recent job reports we feel confident that the U.S.

economy is on solid footing and that we will be able to capitalized on these improved market conditions as our investments play out. Patricia and I will now be happy to answer your questions. John, the call can now be opened..

Certainly. (Operator Instructions) We will go to the line of Toby Sommer with SunTrust. Please go ahead..

Hi, this is actually Frank in for Toby.

Wanted to ask about some of the cost actions, I guess the $35 million expected impact through 2015, is that pretty evenly throughout the quarters or do we expect -- how would you describe the ramp of that cost saving?.

That’s our full year number and we expected to take -- it will be in effect beginning the beginning of the year. So it’s evenly throughout, it’s not ramping up through the course of 2015..

Okay, great.

And then the decision not to fill the 70 positions that you mentioned are they in a particular region or geography?.

The geography of all these actions is almost exclusively in the U.S. with just a few positions outside of it. So yeah, they are all in the U.S. and we did what anyone would do sensibly approaching this action which is we made sure that weren’t hiring into positions that we knew we didn’t need and that allowed us to keep our severance costs low.

So I would think that this is -- I would just put this in the category good management as we approach this action..

Okay, and as you look forward are there any other areas where you think there can be additional savings going forward in particular or is this kind of the initiative at this point?.

No, I think as you can tell by the amount that we’re reducing our cost we took a very thorough look at all of our cost both in our service delivery model as well as our headquarters. We had some, as I mentioned non-personnel cost that are part of that $35 million where we looked at IT projects and IT service delivery things like that.

I think this is a very strong effort.

I don’t anticipate us making further changes but what we do have with our large delivery model and our OCG talent supply chain is the ability to react well to fluctuations in our customers’ demand and I am very pleased about the progress we are making on that which gives us a lot of flexibility and I will say importantly on the upside as well as the downside..

Okay great, that’s helpful. In your prepared remarks you spoke a little bit about EMEA and especially in the Eastern Europe, the impact of Russia.

Can you quantify the impact of Russia or describe the environment as you see there going forward?.

You have increased uncertainty right now in Russia in terms of company’s investment into Eastern Europe generically, but Russia specifically as people wait to see how the sanctions are going to play out. But you don’t have the same sense of impending crisis that we had a few months ago.

So I think the impact you are seeing now is probably the impact that would be ongoing..

Yes and just you asked the question about quantification, you can always look in our press release and we lay out our revenue by country and in Russia we were down $13 million in U.S. currency..

Okay, great.

And then as we look at Asia going forward can you talk about the major kind of drivers and swing factors in terms of the revenue trajectory there?.

Asia is one of our smallest segments. So it’s going to be the most volatile segment in terms of specific customer demands or specific local market conditions with countries like Singapore and Malaysia and Australia having significant impact as to how the overall region performs.

So I would not be using us as a surrogate for what’s taking place inside the APAC region. It’s a breakeven to mildly profitable region for us. It supports some of our supply chain business as we have gone forward and I would think of it in that regard..

Okay, great. And last one from me, it’s a nice performance in Americas especially on PT, you called out science and engineering.

How is the hiring front and the ability to find candidates? Is that changing or is that relatively stable what’s going on with the ability to source particularly in Americas PT?.

Yes, so it’s a better climate because there has been a low period of jobs growth in this country. So there is a better matching between talent availability and talent demand as you hit specialties.

There is always going to be specific shortfalls and the more specialized you get the more difficult it finds to hit a match, but on a generic basis on all-in basis you have got a good array of talent available and you talk about very specific niches now you end up with shortages always..

And really if look at the strategy that we’ve employed, especially in our local markets it’s really designed around allowing us to tap those specialties. What we have done is really put the recruiters in with a dedicated team of like community in terms of their recruitment specialties.

We freed them from geographic constraints and that’s allowing us to really go after those targeted specialties with a much better approach and that’s one of the reasons I believe we are seeing growth..

Thank you for your questions and say hello to Toby for us..

Thank you so much..

(Operator Instructions). And Mr. Camden there are no further questions coming in..

Very good, thank you John and look forward to talking to you all again on the fourth quarter call..

Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation. You may now disconnect..