Carl Camden - President and CEO Olivier Thirot - CFO George Corona - COO.

John Healy - Northcoast Research.

Good morning ladies and gentlemen, and welcome to Kelly Services Third Quarter Earnings Conference Call. All parties will be in a 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.

I would now like to turn the meeting over to your host, Mr. Carl Camden, President and CEO. Sir, you may begin..

Thank you, John. Good morning, everyone. Welcome to Kelly Services 2016 Q3 conference call. With me on the call today is Olivier Thirot, our CFO, and George Corona, our Chief Operating Officer.

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 begin to look at Kelley's third quarter results, let me point out that our year over year comparisons are represented in constant currency due to ongoing fluctuations in foreign currency exchange rates with the exception of our year over year earnings from operations and earnings per share comparisons which are represented in nominal currency.

And as an additional resource to help you navigate our quarterly results, we once again published a slide deck on the Investor Relations page of our public website summarizing our key financial performance indicators. Now let's turn to Kelly's third quarter results.

It's important to note that during the quarter we transferred our APAC staffing operations to TS Kelly Asia Pacific joint venture which is anticipated had an impact on Kelly's third quarter results. For the sake of clarity, I’ll walk through the results this morning with and without the impact of the JV.

Including the impact of the JV, Kelly’s reported revenue for the quarter was $1.2 billion, 7.1 decrease compared to last year. We achieved earnings from operations of 18.8 million in the third quarter, up 13% over the 16.6 million we delivered last year.

And our third quarter diluted earnings from continuing operations and nominal currency were $2.06 per share compared to earnings of $0.23 per share for the same period last year.

Excluding the impact of the - excluding the impact of the APAC JV, revenue was basically flat for the third quarter, earnings from operations grew by 29 % year over year and adjusted earnings per share were $0.44 compared to $0.19 last year. All told, we're satisfied with Kelly's performance in the third quarter.

Faced with an uncertain economic environment, we delivered strong leverage on top of flat revenue which yielded healthy growth and operating earnings and solid returns for our shareholders. Now let's take a closer look at the performance in each of our business segments starting with the Americas.

Americas third quarter staffing revenue decreased 1% year over year consistent with the 1% revenue decline last quarter. And Americas commercial third quarter revenue decreased 1% year over year consistent with the 1% decline we reported last quarter.

Americas PT revenue for the third quarter declined 1% year over year, slightly better than the 2% decrease we reported in the second quarter. As has been our practice on these are earning calls, we’ll separately review the results of the two service delivery models and our Americas staffing operations.

In accounts serviced through our local US branch network, commercial staffing revenue decreased 1% year over year in the third quarter compared to the 1% increase we reported last quarter.

Excluding Kelly educational staffing, KES, local commercial revenue decreased 5% year over year primarily due to continued declines in office services and slower growth in light industrial. However, we began to see some signs of improved demand in light industrial staffing late in the quarter.

KES reported revenue growth - year over year revenue growth of 36% for the third quarter compared to the 11% growth we reported last quarter, primarily due to a shift in the timing of summer breaks for many schools this year, which pushed more of our revenue growth into the third quarter.

Our actual results aligned with our expectations and year-to-date, KES revenue growth remained strong at more than 20% overall due to both program expansions and new customer wins. In our branch network PT business, revenue increased 3% year over year, an improvement from the 1% growth we reported last quarter.

The improvement was due to the continued momentum we started to see in late in the second quarter, along with new projects start ups in the third quarter. Looking now at our centrally delivered staffing model.

Commercial revenue decrease 3% year over year in the third quarter, an improvement from the 5% decline we reported last quarter and this was driven primarily by improved revenue in our light industry service line.

And our centralized PT business third quarter revenue was down 3% from a year ago, consistent with the 3% decline we reported last quarter.

Looking more closely at our core PT specialties in the Americas overall, year over year revenue in science and engineering continued to be lower in the third quarter due to softer demand and project completions, while our finance and IT specialties delivered revenue growth from increased demand and new projects start ups.

Perm fees in the Americas grew 1% year over year in the third quarter from the 5% decline we reported for the second quarter. Commercial fees were up 10% more than doubling the 4% growth we reported last quarter. And PT fees were down 7%, an improvement from the 11% decline we reported in the second quarter.

Americas third quarter gross profit rate was 16.2%, up 20 basis points from a year ago. The improved GP rate is due to effective management of our temporary employee payroll tax cost offset somewhat by increased workers' compensation costs compared to a year ago.

Americas total expenses for the quarter were down 1.2 % reflecting the impact of restructuring and adjustments to our cost base we implemented last quarter and will continue to monitor demand and make additional adjustments as needed to enable continued leverage in this critical business.

All told, the Americas delivered 24.1 million of operating profit in the third quarter, a 1% increase over last year. We’re pleased with the execution in our US branch network given the current economic environment and encouraged by more stable results on our centrally delivered model. Let's turn now to our staffing operations in the EMEA region.

Overall revenue in EMEA was flat compared to last year. Commercial revenue was up 1% and PT revenue declined by 3% as growth in Ireland and Portugal was offset by lower volumes in France, Switzerland, and the UK.

Fee-based income for the quarter was down 3% year over year primarily due to weaker demand in Western Europe amid ongoing economic uncertainty. EMEA’s gross profit rate for the third quarter decreased to 14.7% compared to 15.3% last year due to unfavorable country and customer mix.

The lower GP rate on flat revenue resulted in a 5% decline in gross profit dollars in the third quarter. Expenses were down 2% year over year due to effect of cost control of headquarters expense partially offset by targeted investments in our branch network.

Netting it all out, EMEA’s operating profit for the third quarter was 4.4 million compared to 5.3 million last year. Now we'll turn from our staffing results to the performance of our outsourcing and consulting segment, OCG. For the quarter, revenue grew by 4% over last year and gross profit increased by 9%.

These year over year comparisons reflect the impact of several large programs that were implemented in the third quarter of 2015 along with the delayed implementation of several 2016 wins into the first half of next year.

OCG’s gross profit increase was driven by growth in all three of our core businesses; business process outsourcing, BPO; contingent workforce outsourcing, CWO; and recruitment process outsourcing, RPO.

BPO gross profit increased by 13% and our traditional BPO solutions’ gross profit grew 35% year over year, while gross profit in our call center outsourcing practice KellyConnect declined 21% for the quarter due to bringing on additional resources in preparation for the seasonal ramp in one of our key accounts.

In CWO, gross profit increased 8% year over year reflecting 6% growth in our program management fees and 12% growth in our payroll process outsourcing business. In our RPO practice, gross profit increased by 18%, due to both revenue growth and a shift in customer mix as we expanded our client portfolio in this practice area.

Overall, OCG's gross profit rate was 25.2 % for the quarter, up 110 basis points over last year's rate, due to favorable customer mix.

Expenses in OCG were up 13% year over year due to increased headcount in support of program expansions as well as the hiring of additional global sales resources to support the strategic growth of our talent supply chain management solutions. All told, OCG's operating profit of 7.7 million for the third quarter is down 7% from last year.

Despite this disappointing short-term result, we know the decline is temporary and we look forward to improve performance as OCG programs are implemented in the first half of 2017. This segment represents a key element of our overall strategy and will continue making the necessary investments to support its future growth.

Now I'll turn the call over to Olivier, who will cover our quarterly results for the entire company..

Thank you, Carl. Revenue totaled 1.2 billion, down 7.6% compared to the third quarter last. Revenue was down 0.7% after excluding the APAC business from our 2015 results are nearly flat on a constant currency basis.

During the third quarter, we saw a continued moderation of the impact of foreign currency translation on our nominal revenue growth at about 60 basis points for the third quarter. Now consistent with Carl, the remainder of my year over year comments are represented in constant currency.

Staffing placement fees were down 19% year-over-year or down 3% after excluding the APAC staffing business from our 2015 results. While we saw flat fee growth in the Americas, there was a decline in the fees in EMEA as a result of ongoing economic uncertainty. In constant currency, overall gross profit was down 12 million or 5%.

After excluding the APAC staffing business from our 2015 results, gross profit was up 1 million. Our gross profit rate was 7.2 % - 17.2%, up 30 base points when compared to the third quarter last year. Our GP rate reflects an improving business mix and continued improvement in the GP rate for our OCG business.

The overall pace of GP rate improvement has slowed as we have begun to anniversary the work started last year to improve our US staffing GP rate. SG&A expense were down 6.9 % year over year. After excluding the results of the APAC staffing business from our 2015 results, SG&A expenses were down 1.4%.

Expenses were down in all of our staffing businesses, but up in our global OCG business reflecting continued investment in that business unit. Included in our third quarter corporate expenses, our saving of 7.5 million related to the reduction of our performance-based compensation expense.

Earnings from operations were 18.8 million in the third quarter compared with 2015 earnings of 16.6 million. Excluding the APAC staffing business, 2015 earnings were 14.5 million. So on the like-for-like basis, earnings from operations are up almost 30%. Our performance reflects good operating leverage on flat revenue growth.

On an as-reported basis, our third quarter results reflect a conversion rate or return on gross profit of 8.7 % compared to 7.3 % for the third quarter of 2015, a solid improvement year over year. As a result of the closing of the APAC JV transaction in the third quarter, we have recorded a pre-tax gain of 87.2 million.

This gain represents the difference between the book value of the asset compared to the JV compared to the fair value of 49% ownership in TS Kelly Asia Pacific plus cash receipt. Our third quarter financial statements do not reflect any equity method investment earnings from the APAC JV.

As we will be reporting our 49 % share of those earnings on a three months lag. Income tax expense for the third quarter was 24.7 million compared to an income tax expense of 7.5 million reported in 2015. Excluding the tax expense related to the gain in the APAC JV transaction.

This calculation is more fully described in our press release issued this morning. Now, looking ahead to the rest of the year, we finalized the expansion of our joint venture in APAC as of the beginning of the third quarter.

As a result, our APAC starting operations are not included in Kelly’s consolidated financial results, beginning in the third quarter. We look out for Kelly’s 49% interest in TS Kelly Asia Pacific as an equity method investment and the related income from this investment will be reported on the income statement, below earnings from operations.

Consistent with last quarter, our expectations reflect the completion of the JV collection and the growth rates reflect no impact operations in either year. In light of an uncertain economic environment in the U.S. and the impact of the 53rd week in 2015, we anticipate revenue for the fourth quarter to be down 2% to 3% in constant currency.

Excluding the impact of the 53rd week, revenue would be relatively flat to last year. We expect the gross profit rate to be consistent on a year-over-year basis. Finally, given cost reductions initiated at the end of the second quarter and lower performance based compensation expenses, we anticipate SG&A expense to be down 3% to 4%.

This is a continuation of the year-over-year reduction in SG&A expense from Q3 and reflects our ongoing cost containment efforts, including corporate expense. Also, we faced headwinds from increasing compliance and litigation costs, our underlying corporate expenses have remained stable.

So for the fourth quarter, we expect to deliver slightly higher year-over-year earnings from operations on lower revenue and continue to improve our conversion rate. In addition, we'll begin to report the earnings from our equity method investment in the JV in the fourth quarter. Also, we don't expect the amount to be material.

Our 2016 annual income tax rate is expected to be in the mid-teens, including the impact of the work opportunity credit. This excludes the impact of the gain, resulting from the expansion of the TS Kelly Asia Pacific JV.

And it’s the right time to note, as we look forward, the completion of the JV collection and the results of our annual strategic review will also likely result in a change in how we allocate resources and analyze performance. This may result in a change to our segment reporting as we move into 2017. Now, moving to the balance sheet.

The closing of the APAC JV collection took place at the beginning of the third quarter. The assets and liabilities that were contributed to the JV are no longer included in our consolidated balance sheet data. Our balance sheet now reflects an equity method investment in the APAC JV, TS Kelly Asia Pacific.

Cash totaled 28 million, compared to 42 million at year end 2015. During the quarter, we received 37 million in cash proceeds from the APAC JV transaction and de-consolidated 18 million of cash held in the APAC staffing business. The cash proceeds were used to pay down short-term debt.

In our cash flow, year-to-date, we generated 18 million of free cash flow compared to using 14 million of free cash flow last year. The change was mainly due to lower growth in trade accounts receivable due in part to improved GSO as well as improving net earnings.

Global DSO was 56 days, one day better than the same quarter last year and two days higher than the fourth quarter of 2015, primarily due to seasonality. At quarter end, that stood at 9 million, down 47 million from year end 2015 and down 68 million from a year ago.

We are pleased with our continued progress in generating sustainable free cash flow as well as the cash proceeds from the APAC JV transaction. As a result, we are reviewing our capital allocation strategy going forward. For more information on our performance, please review the third quarter slide deck, which is available on our website.

I’m turning back now over to Carl for his concluding remarks..

Thank you, Olivier. Kelly entered the year with a firm commitment to become an even more competitive and profitable company and today's quarterly report confirms that we are continuing to deliver on that commitment. Sifting through the complexity of our third quarter results, I think there's three key takeaways.

First Kelly's US staffing operations are continuing to deliver solid execution, despite sluggish demand and economic uncertainty. We've aligned our cost structure to market realities and we're going to continue to adapt as conditions change.

Second, although Kelly's reported quarterly revenue was down, our overall gross profit rate increased 30 basis points and we reduced expenses. And the third key takeaway, this leverage enabled us to once again deliver strong growth in operating earnings, our third quarter reported earnings were 13% higher than last year.

With these short term results conforming our commitment to profitability, we're also making significant progress against our long-term strategy for growth.

Our joint venture in Asia is now complete, establishing a dominant presence in the APAC region and paving the way for continued growth in our wholly owned OCG segment in the outsourcing and consulting space. Kelly’s gains from the JV are also yielding new opportunities for strategic investment.

As we refine our capital allocation plans, we're evaluating near-term organic investments in technology that will support our global strategy and longer-term, inorganic investments to accelerate the strategic growth areas of our business.

In our staffing business, our US branch network continues to focus on capturing growth and our PT specialties KES and core commercial business, refining our sales and recruiting processes as we connect US customers with the talent they need to move their companies forward.

Our centrally delivered staffing in the Americas faces headwinds as the economy slows and large customers transition to a competitive sourced model, yet, we’re responding by adjusting our account structure, we're seeing our performance stabilize as we align our resources with demand.

Our OCG segment continues to deliver solid performance, as more clients adopt a talent supply chain management approach and after a temporary dip in growth rates in the third quarter, we expect to see a return to double digit GP growth, as this year's new customer wins and expansions are implemented next year.

We remain confident in this segment’s strategic direction and in the investments we're making to increase top and bottom line growth in OCG. As a whole, we're satisfied with Kelly's third quarter performance and our ability to deliver strong leverage, solid operating earnings and strategic progress on a low growth environment.

We’re of course keeping a careful eye on the state of the economy and the labor market in the US and yet, we're moving forward with confidence knowing we're prepared to respond to market trends and ready to maintain our relentless pursuit of profitable growth.

Olivier and I will now be happy to answer your questions along with George Corona, our Chief Operating Officer. John, the call can now be opened..

[Operator Instructions] And we’ll go to the line of John Healy with Northcoast Research. Please go ahead. .

I wanted to ask a little bit about the relationship between the OCG business and the business in the Americas. I know you kind of talked to some client wins on the OCG side, re-accelerating the growth engine of the business for next year.

Is there anything that we can kind of think to that might be able to kind of bring the core Americas business along with it? Are there any client wins along that side that might go on with it or are we kind of in a situation where the Americas business is going to kind of be moving around at a glacial pace and the growth really just comes from OCG next year?.

Well, George and I will both give you an answer here. So right now, as we look at the industry growth of our major competitors, it's a flat to negative growth environment right now in the Americas for core temporary staffing. You see a lot of other forms of flexible labor increasing in particular independent contractors and so on.

And that’s something more capturable obviously in the OCG segment. I don't see a situation in the near term where you would see a rapid acceleration or ability to capture significant market growth inside the temporary staffing markets. It's more likely to happen as it has been happening for us in OCG. It's my perspective.

George is closer to the detail of the day in and day out battle and let him hit some..

John, when we look at it, certainly every time we went to something in OCG, it ultimately will end up supporting us in staffing somewhere. But when you think about the sheer size of our US business, it's just not going to be enough to change the economic fact, because they’re out there.

We're pretty pleased when we take a look at how we performed relative to the market that we're picking up market share. And as the market improves, we’ll do fine. But I think as Carl said, I don't see anything that would put the winds coming from OCG that are going to dramatically change the trajectory of the US staffing business..

Okay. Fair enough.

And along those same lines, with the OCG business, when you look at the customer wins in this year again there, are those customers that are just becoming active for the first time with programs or do you think these are competitive wins? And then additionally, when you look at the OCG, the uptake amongst your customer base outside of the US, is it drastically different than what you're seeing in the US today?.

So let me take those pieces. When we look at it, we're getting wins from existing clients and we're getting wins from new clients. So it’s kind of across the board. And when we're looking at some of the wins that we have, we're starting to expand current programs in OCG, so in other words, we had them as generation one or generation two programs.

And now, they're starting to grow with those by bringing on different kinds of things that they're doing like statement of work, like independent contractor kinds of things. So we're expanding what we're doing, but we're also bringing out a lot of first time customers, where we’re winning them competitively in the marketplace.

So that piece of it is going well. When you look at development of the different regions of the world, certainly, the US has better out front in terms of -- the US companies have been out front, in terms of stopping these new work styles, and are starting to slowly move across the globe.

Europe is behind the US, but ahead of Asia in the adoption of these programs, but ultimately, we believe that it will all come to center, as these companies operate more globally..

And we already have significant accounts from companies that are headquartered in Europe or companies headquartered in Asia along with the North American headquartered companies.

So the adoption is -- the adoption outside of the North American companies is proceeding -- North American base is proceeding, but a little slower than it was inside the US..

They’re just not ready yet. They haven’t..

Got you.

And I was just hoping on, maybe Olivier, you could just kind of go over again kind of the cash flow impact of the JV and how much I guess maybe cash you still have in the business, I don’t know if you look at it that way in terms of receivables and working capital side of, I’m just trying to understand kind of the timing of some of the cash flows here?.

Yeah. There are a lot of moving parts. Let me explain from the cash impact. I mean, we did receive about 36 million of cash out of the transaction, but we de-consolidated about 18 million. So the net impact is about 18 point something million.

The impact on our receivables, payables, and so on that is not very significant, if you look at from that, yes, so I mean, there is no real impact, because that wasn’t really small. I mean, if you look at receivable, that was a very small portion of our overall, I would say, receivables, if you look at over $1 billion.

So that has not really significant impact. I would say the major impact is really the cash proceeds that we have used to lower then our debt and you might see that now our leverage ratio is less than 1%.

So that's of course combining with free cash and opening for some discussions about investments in the future, as mentioned by Carl for that question..

Thank you very much. .

[Operator Instructions] And, Mr. Camden, no further questions coming in..

It’s because we were so brilliantly clear. Thanks, John. Appreciate your moderating. Thank you all for listening. We’ll talk to you all again. Bye..

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