George Corona - President, Chief Executive Officer Olivier Thirot - Senior Vice President, Chief Financial Officer.

John Healy - Northcoast Research.

Ladies and gentlemen, thank you for standing by. Welcome to the Kelly Services First Quarter Earnings conference call. All parties will be in a listen-only mode 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. George Corona, President and CEO. Sir, you may begin..

talent fulfillment and outcome-based services. I’ll discuss each business’ results separately, but first let’s take a look at how GTS performed as a whole in the first quarter. Q1 GTS revenue was basically flat year-over-year but gross profit grew more than 6%.

Revenue was up in our CWO, BPO and Kelly Connect practices, offset by revenue declines in our centralized staffing and payroll practices. Now let’s discuss gross profit results in each of these GTS businesses.

The talent fulfillment business is made up of our contingent workforce outsourcing - CWO, payroll processing - PPO, recruitment process outsourcing - RPO, and our centrally delivered staffing practices. Gross profit in the talent fulfillment business grew 2% year-over-year.

The growth was fueled by an increase in our CWO GP from new programs offset by slight GP declines in the PPO and RPO practices as well as flat GP in centrally delivered staffing. The outcome-based services business is comprised of our business process outsourcing - BPO, Kelly Connect, Kelly Legal managed services, and our advisory services practices.

Gross profit for the outcome-based services business increased 24% year-over-year driven primarily by growth in Kelly Connect and BPO. If you recall in the second half of 2016, we made intentional investments to expand programs in our Kelly Connect practice in order to drive increased revenue and GP in 2017.

The solid Kelly Connect year-over-year GP growth in the first quarter confirmed the return on those investments. We also saw strong double-digit year-over-year GP growth in our BPO practices due to continued program expansions and new program wins.

Overall, the GTS segment gross profit rate was 18.6% for the quarter, up 120 basis points year-over-year due largely to favorable practice and customer mix, coupled with a decrease in workers’ compensation and other employee-related costs in our centralized staffing and PPO practices. Expenses in GTS were up 5% year-over-year in the quarter.

This includes a $2 million restructuring charge related to optimizing our service delivery models. Excluding that restructuring charge, expenses were up 2% due to increased headcount in support of growth.

We have implemented new programs, expanded existing programs, and hired additional global sales resources to support further growth in the GTS segment. All told, GTS’ first quarter operating profit was $15.3 million, up 12% year-over-year.

Excluding the restructuring charges, our operating profit was $17.3 million, a solid 26% increase from a year ago. We are very pleased with the performance of this segment. Now I’ll turn the call over to Olivier, who will cover our quarterly results for the entire company..

Thank you, George. Revenue totaled $1.3 billion, down 4.4% compared to the first quarter last year. As George described, our 2016 Q1 results included our APAC staffing results, which we had deconsolidated during the third quarter of 2016. Excluding the APAC staffing results in 2016, revenue increased by 2.6%.

Our Q1 performance reflects a solid improvement after three quarters of flat revenue growth and is driven by improving trends in our staffing business in the Americas and international. Staffing placement fees were down 19% year-over-year.

Excluding the APAC staffing results from 2016, perm fees were down 3% as fee growth in international was offset by a decline in Americas staffing and global talent solutions. Overall gross profit was down $1 million. Excluding the APAC staffing results in 2016, GP was up $15 million or 7% year-over-year.

Our gross profit rate was 18%, up 70 basis points when compared to the first quarter last year. Our overall GP rate reflects an improving GP rate in all three segments. Our GP rate in Americas staffing benefited from lower workers’ compensation expenses, and in international from one-time employment tax savings.

We continue to experience structural GP rate improvement in our GTS segment. SG&A expenses were down 1.3% year-over-year. Excluding the impact of the APAC staffing business in 2016, SG&A expenses were up 4.3%.

Included in SG&A expenses for the quarter are $2.4 million of restructuring costs related primarily to optimizing our GTS service delivery models, which we expect to deliver cost savings in 2017. Excluding the restructuring costs and APAC staffing business, expenses were up 3.2%.

Approximately half of that increase is related to the timing of performance-based incentive expenses that are a component of corporate expenses. In our operations, expense increases were in line with GP growth and leverage expectations.

We continue to manage expenses in line with GP growth for the full year and remain committed to strong expense control effort and generating returns on investments in our service delivery infrastructure. Earnings from operations were $15.4 million in the first quarter compared with 2016 earnings of $14.7 million.

If we exclude the restructuring charges from 2017 and the APAC staffing results from 2016, adjusted earnings from operations was $18.8 million compared to $10.2 million, and grew by $8.6 million or more than 80% versus last year.

On an adjusted basis, these results reflect a conversion rate or return on gross profit of 8.1% compared to 4.7% for Q1 2016, a healthy improvement year-over-year. Income tax expense for the first quarter was $2.7 million, consistent with our 2016 income tax expense.

Finally, diluted earnings per share for the first quarter of 2017 totaled $0.31 per share compared to $0.21 in 2016. Included in 2017 EPS is approximately $0.40 related to our 2017 restructuring charges.

Now as we look ahead for the rest of the year, we continue to confirm our full year outlook as discussed on the Q4 call in February, and as a reminder, the outlook provided on today’s call does not reflect the impacts of the APAC staffing business in 2016. For the full year, our expectations are in line with our last earnings call.

We expect revenue growth to be up 3 to 4%, we expect the gross profit rate to be up on a year-over-year basis, and finally we expect SG&A expense to be up 3 to 4%. The SG&A expense increase is in line with our expectations to deliver operating leverage offset in part by expense to support growth areas of the business.

Our 2017 annual income tax rate is expected to be in the mid-20% range, including the impact of the work opportunity credit. For the second quarter, we expect revenue to be up 2.5 to 3.5%. We expect the gross profit rate to be up year-over-year but slightly down sequentially.

Finally, we expect SG&A expense to be up 2.5 to 3.5%, which will keep us on track to deliver good full-year operating leverage. Now moving to the balance sheet, cash totaled $46 million compared to $30 million at year end 2016. Accounts receivable totaled $1.2 billion and increased 2% compared to year-end 2016.

Global DSO was 55 days, flat with the same quarter last year but up two days from Q4 2016 as a result of seasonal fluctuations. At quarter end, we continued to have no outstanding debt, consistent with year-end 2016 but also down $39 million from a year ago.

In our cash flow year to date, we generated $22 million of free cash flow compared to generating $19 million of free cash flow last year. For more information on our performance, please review the first quarter slide deck available on our website. I’ll now turn it back over to George for his concluding thoughts..

Thank you, Olivier. While Kelly’s reporting segments have changed in 2017, our commitment to growth and profitability have not. In fact, we are focused on accelerating profitability in the year ahead and our first quarter results demonstrate that we’re already delivering on that commitment. Kelly returned to top line growth.

Each of our segments delivered double-digit year-over-year improvements in operating profit, and we continue to improve our conversion rate. Our Americas staffing segment demonstrated targeted focus and strong execution in our local markets, holding expenses flat, increasing GP, and delivering 24% growth in operating profit.

Our international segment drove higher revenue across Europe and improved fee-based income more than doubling total operating profit. Our global talent solutions segment improved GP, continued making strategic investments for additional growth, and delivered 26% higher operating profit over last year, excluding restructuring.

With these short-term results confirming our commitment to profitability, we also continue to make progress against our long-term strategy.

Our Americas staffing segment demonstrates the strength and flexibility of Kelly’s local operating teams and Kelly education staffing continues to excel as a market leader, posting double-digit growth year after year.

Our operating structure in Americas staffing is now designed to accelerate growth, and we will continue to refine our sales and recruiting processes to ensure we are connecting customers and talent as efficiently as possible.

Our international staffing segment is tightly focused on pursuing core specialties across Europe and capturing the growth opportunities available to us.

We expect continued growth in our GTS segment as companies continue to adopt a more holistic approach to talent fulfillment and continue to outsource their non-core functions through outcome-based solutions.

As a whole, we’re very pleased with Kelly’s first quarter performance and our ability to deliver top line growth, solid operating earnings, and strategic progress.

We will continue to keep a watchful eye on the state of the global economy and labor markets, yet we are moving forward with confidence knowing we are prepared to respond to market trends and committed to maintaining our relentless pursuit of profitable growth. Olivier and I will now be happy to answer your questions..

[Operator instructions] Your first question comes from the line of John Healy with Northcoast Research. Please go ahead..

Hi John. .

Mr. Healy, your line is open..

Thank you, guys. George, wanted to congratulate you on the new position; and Carl, if you’re listening, I wanted to wish you well. Wanted to ask a little bit about the gross profit rate expectations for the year.

I know in the guidance, you talked about them being up year-over-year, and pretty impressive performance in 1Q, I think up about 70 basis points, 80 basis points or so.

Is it reasonable to expect that type of year-over-year improvement throughout the remainder of the year, or should it moderate?.

Well I mean, when you look at the 70 basis point improvement for Q1, I would say roughly half of it is what I’d call structural improvement, which is driven by basically our mix. The second half is more what George was alluding to, mentioning the French tax as well as our workers’ comp, which are good news.

We’ll take them, but they are more one-time, I would say, good news. So that’s why I was mentioning that on the quarter over quarter, I would say we expect Q2 to be slightly below Q1, because again half of the 70 basis points are one-time events.

But when you look at structurally, we continue to improve, and when you think about where we were in 2014, our GP rate was about 16.3, and where we are now, I think we have done structural progress over time, sometimes with one-time events that can derail a little bit the trend, but I will say still positive versus last year..

Great. Wanted to ask on the revenue trajectory throughout the first quarter, was there any sort of nuances that you would call out? If you looked at kind of the U.S.

business as well as southern Europe, was there any sort of rate differential? Did you end the quarter at a different level than maybe you started the quarter on and what you reported?.

Well, what I would say is that we saw improvement in the first quarter over the trends that we saw in the third and fourth quarter of last year, both in Americas staffing and in international. From a progression perspective, we continue to see improvement at a slow pace..

Yes, slow pace. I mean, Europe is probably the area where we have seen progress over time. If you look at Q3, Q4 of last year and Q1 of this year, 8% revenue growth is good. Now, you need to be mindful of the economic environment. The good news is that this 8% was all over our countries.

The U.S., I would say we have seen and continue to see slow improvement quarter after quarter, starting Q3 last year to Q4 and then to Q4, but it’s at a slow pace..

Great, and then just final question, I know on the previous--last quarter’s call, you mentioned that you didn’t expect a material contribution from the JV relationship to income this year.

Is there any change on that, and any updated thoughts there?.

No, we continue to see that as an area where we’re going to invest to grow and it’s more of a growth engine for us, so we don’t expect to see in 2017 any material change to what we said..

Okay, great. Thank you, guys..

Thanks John..

Thank you..

If there are any additional questions, please press star then one. At this time, there are no further questions..

Okay, thank you, Greg. .

Thank you..

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