George Corona - President and CEO Olivier Thirot - CFO.

Louis Moser - Mayfax Investors.

Good morning ladies and gentlemen and welcome to the Kelly Services Third Quarter Earnings Conference Call. All parties will be on 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. George Corona, President and CEO. Sir, you may begin..

Thank you, John. Thank you and good morning. Welcome to Kelly Services 2017 third quarter conference call. With me on today's call is Olivier Thirot, our CFO. Let me remind you that any comments made during this call, including the Q&A 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 these 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.

Before we review Kelly's third quarter results, let me point out that our revenue growth was impacted by a weakening of the U.S. dollar against several European currencies in the quarter. I'll present our year-over-year comparisons in nominal currency with the exception of our international performance which will be represented in constant currency.

Now turning to Kelly's results, the third quarter was eventful for us on several fronts. We acquired Teachers On Call, a lean educational staffing company further strengthening our leadership positions in the K-12 market.

We announced our planned implementation of a digital talent platform which will transform our front office and I am pleased to report that even in the face of unprecedented weather events we once again delivered good top-line growth, healthy operating earnings and solid returns for our shareholders.

Kelly's third quarter revenue was $1.3 billion up 6.5% compared to last year. We achieved earnings from operations of $18.2 million compared to $18.8 million last year reflecting the addition of sales and recruiting resources and increase in performance based compensation and other factors that Olivier will walk you through in a few minutes.

And diluted earnings per share were $0.58 compared to the $2.06 per share last year reflecting the impact of our APAC JV transaction. Excluding that impact, EPS increased more than 30% year-over-year in the third quarter.

It was a solid quarter that continued to build on the momentum we saw in the first half of the year and we are pleased with our performance particularly our ability to deliver topline growth and make key investments in our future.

Now before we look more closely at how specific elements of our business performed in the third quarter, let me remind you that effective January 2, we realigned our business into three operative segments. The Americas Staffing segment includes our local branch delivered staffing business in the United States, Puerto Rico, Canada, Mexico, and.

The International Staffing segment includes the results of our EMEA staffing business and the Global Talent Solutions segment which we call GTS includes our global outsourcing and consulting business OCG and our Centralized Staffing Operations in the United States, Canada and Puerto Rico.

Now let's take a look at how these segments performed in the third quarter starting with America staffing. America staffing is comprised of commercial staffing, Kelly educational staffing, and professional and technical specialties. Americas staffing revenue increased 7% in the third quarter compared to the same period last year.

Commercial staffing revenue increased 8% over the prior year compared to the 6% year-over-year increase we reported in Q2 and the 1% increase in Q1.

We continued to see demand for light industrial accelerate in the third quarter building on the trend we saw in the first half of the year and our office clerical business returned to growth after several quarters of decline. Kelly educational staffing delivered revenue growth of 6% in the third quarter.

This growth rate was impacted by two primary factors, the addition of revenue for the months of September from the newly acquired Teachers On Call offset by the loss of revenue caused by the hurricanes experienced in the United States.

Revenue in our professional and technical specialties was slack in the third quarter compared to prior year down from the 3% increase in Q2. Total firm fees which remained volatile in the Americas were up 2% year-over-year.

The third quarter gross profit rate in America staffing was 17.8% down 50 basis points from a year ago due mainly to business mix.

Expenses for the quarter were up in Americas staffing by 6% year-over-year primarily the result of adding sales and resources in line with demand in commercial staffing and PT Specialties as well as performance based compensation. We expect leverage from these investments to start to improve in the fourth quarter.

Also the Americas Staffing segment achieved an operating profit of $13.3 million in the quarter, compared to $14.3 million last year. Let's now turn to our international staffing operations, I'll start with the Americas. Revenue in the international staffing increased 15% compared to prior year in nominal U.S.

dollars or 10% on a constant currency basis. This growth was driven by increased demand across Europe. For ease of reference the remainder of my comments on international staffing will be in constant currency. Fee based income for the quarter was up 8% year-over-year largely due to Eastern Europe.

The segment's reported GP rate for the third quarter was 14.3% compared to 14.7% in the same period a year earlier down due to customer mix. The 8% increase in GP dollars is mainly attributable to higher revenue driven by hours, volume in the [indiscernible] staffing business.

Expenses in international staffing were 2% higher than the prior year as we continued to add recruitments in our branch network, partially funded by redeployed headquarter expenses into targeted growth areas.

Netting everything out international staffing's operating profit in the third quarter were $7.2 million up 57% over the last year and we are pleased with the solid performance in this segment. Now let's turn to the results of our Global Talent Solutions reported segment.

This segment is a combination of our previously reported OCG segment plus our centrally delivered staffing operations. The GTS reporting segment reflects the two primary ways that clients in this segment are buying from us; 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 third quarter. GTS revenue was up 2% year-over-year while gross profit grew 8% for the quarter.

Revenue was up year-over-year in our KellyConnect business process outsourcing and contingent workforce outsourcing practices offset by revenue declines in our centralized staffing and payroll practices. Now let's look at gross profit results in each of the two GTS businesses.

Our talent fulfillment business is made up of our contingent workforce outsourcing, payroll process outsourcing, recruitment process outsourcing and centrally delivered staffing practices. Gross profit in the talent fulfillment business was up 2% year-over-year and an improvement from the 1% decline we reported last quarter.

We continue to see nice double-digit GP increases in our CWO practice from new programs in Q3 as well as year-over-year GP growth in our RPO practice. These results were partially offset by year-over-year GP declines in our centrally delivered staffing and BPO practices.

The outcome based services business is comprised of our BPO, KellyConnect, Kelly legal managed services and advisory services practices. Gross profit for outcome based services increased 33% year-over-year driven primarily by continued momentum and strong results in both KellyConnect and BPO.

GP growth recently in KellyConnect or in the last three quarters confirms the return on investment we made in this practice during the second half of last year. We also saw double-digit year-over-year GP increases in BPO in the third quarter as we continue to withstand existing programs and main lead business in this practice.

Overall the GTS segment gross profit rate was 18.5% for the quarter up 110 basis points year-over-year largely due to favorable practice and customer mix along with lower Workers Comp and other employee benefit cost.

Expenses in GTS were up 3% year-over-year in the third quarter due to head count and salary costs related to the addition of new programs coupled with increased performance based incentive costs.

These increases were somewhat offset by cost reductions from the actions we took in the first quarter to optimize our centralized delivery staffing business in line with demand. Also GTS third quarter operating profit was $20.8 million up 30% over a year ago, another solid quarter for 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, up 6.5% compared to the third quarter last year. As George described, our revenue growth benefited from the weakening of the U.S. dollar against several other of the European currencies in the quarter. On a constant currency basis our total revenue increased 5.3% over the 6.5% in currency growth.

So currency as reported to you 120 basis points in [indiscernible]. Our acquisition of Teachers On Call added about 30 basis points to our total revenue growth rate.

Overall our Q3 employment [ph] performance reflects another quarter of improving trends [indiscernible] primary [indiscernible] growth in our locally digital staffing business in the Americas and internationally. Staffing placement fees, we are up nearly 7% year-over-year driven by good currency performance in international segment.

Excluding the impact of currency fees were up 4%. Overall gross profit was up $16 million year-over-year or at 7.3%. Our gross profit rate was 17.4% up 20 basis points when compared to the third quarter last year.

Our overall GP rate reflects ongoing structural improvement as we shift to higher margin solutions within our global talent solutions segment but to be offset by the impact of margin rate erosion in Americas and international staffing due to changes in businesses. SG&A expenses were up 8.3% year-over-year.

About half of that increase comes from our corporate expenses which reflect a return to normalized levels of performance based compensation expense after 2016 to unbelievable low level of performance based compensation and litigation related expenses.

Within our operations expense increases reached a good leverage on our third quarter GP growth even as we have made investments to catch the right market opportunities within our locally delivered staffing business in the U.S. and international markets.

We continually focus on the expense on four efforts and generating return for investment in our sales [indiscernible]. And in collaborations we are $18.2 million in the third quarter compared with 26 [indiscernible] of $18.8 million. These results reflect the conversion rates our internal gross profits of 7.9% compared to 8.7% for Q3 2016.

This relatively flat level of our business reflect our solid GP growth offset by internal expenses in the Americas staffing business [indiscernible] for future growth as well as higher performance based compensation expense.

As a reminder, our third quarter 2016 results including the $87.2 [ph] million pretax gain on closing of the APAC JV transaction in July 2016. Income tax benefit for the third quarter was $4.1 million.

Our Q3 2017 tax benefit includes the impact of releasing deferred tax valuation advance and our Q3 2016 tax expense includes the tax expense related to the gain on the APAC JV transaction. Adjusted for those items our effective tax rate was 5.7% this quarter compared to our third quarter of 2016 effective tax rate of 6.5%.

And finally, diluted earnings per share for the third quarter of 2017 totaled $0.68 [ph] per share compared to $2.06 in 2016. 2016 Q3 increasing $1.62 [ph] per share related to the after tax impact of the gain on the APAC JV transaction. Excluding the impact of the APAC JV transaction, EPS increased more than 30% year-over-year.

Now as we look ahead to the rest of the year, for the fourth quarter we expect revenue to be up 8% to 9% this is about 200 basis points of the improvement coming from continued currency bias and about 120 basis points coming from our acquisition of Teachers On Call.

We anticipate that there will be some continuing impact of reduced demand in hurricane impacted [indiscernible] and believe may have some moderate downward pressure on our expected revenue growth. We expect to growth margin to be consistent with the last year and SG&A expense to be up 4.5% to 5.5%.

[Indiscernible] increase in SG&A is due to increased performance based incentive compensation expense as [indiscernible] discussions as would have the acquisition of Teachers On Call. This increase in performance based compensation we are on track to deliver good full year operating leverage.

Our 2017 annual income tax rate is expected to be in the mid single digit due to favorable funds in the [indiscernible] issue and usually will need our additional tax valuation allowance. Now moving to the balance sheet, cash totaled $22.2 million compared to $29.6 million at Q1 2016.

As far as the range [ph] this was $23.9 million compared to normal range at the end of 2016 and was $15.2 million from a year ago. This currency reflects that during the quarter we faced $37.2 million net of cash received relating to our acquisition of Teachers On Call.

Accounts receivable totaled $1.3 billion, and increased 12% compared to year end 2016. Global DSO was 58 days, up 2 days from the same quarter of last year and up 5 days since year end 2016.

DSO in the third quarter is higher due to seasonality including the impact of the seasonal increase in the educational staffing business in connection with staffing of the school year. The remainder of the increase is due primarily to customers [ph].

In our cash flow year-to-date we generated $18.2 million of free cash flow down from the $20.4 million of free cash flow generated last year.

The [indiscernible] in free cash flow reflects higher cash balance in 2017 and there was also some increased investment to begin our digital talent platform as would as the timing of spending on projects related technology and infrastructure as compared to the prior year.

For more information on our performance please review the third quarter slide deck and [indiscernible]. I will now turn it back over to George for his concluding thoughts..

Thank you, Olivier.

It has been a good year so far for Kelly and we're pleased with the progress we are making after building strong momentum in the first two quarters, our third quarter performance confirmed that we are continuing to drive topline growth, even as we invest in talent, technology, and solutions that will accelerate our progress in the future.

Our Americas staffing segment continues it forward momentum capturing strong revenue growth. Our local operating teams are more focused than ever. Our investments in targeted areas are yielding results and the acquisition of Teachers On Call further strengthens Kelly’s educational staffing leadership position in the K-12 [ph] market.

We expect continued return on these investments as we move forward.

Our international segment remains tightly focused on pursuing core specialties across Europe closely managing expenses as they actively capture new opportunities and our global talent solutions segment continues to deliver top and bottom line growth as we help companies navigate a more holistic approach to talent solutions.

It was clearly a successful quarter. Our performance demonstrated our continued ability to grow the top-line, operate with increased efficiency and deliver a solid return to our shareholders, all while continuing to invest in the future.

Our acquisition of Teachers On Call and our decision to implement a digital talent platform confirmed that we are not content to stop at short-term growth, and we are strategically positioning Kelly for the long-term as the world of work evolves.

Looking beyond our reporting segments, our APAC joint venture has reached its one-year anniversary and has slowly met our expectations in terms of expanding our market presence and strengthening the Kelly personal relationship. Finally, we are pleased with our financial performance.

Events in the third quarter also served as a reminder that Kelly has truly exceptional teams. I am very proud of how our colleagues came together to support one another through the natural disasters we encountered, all are staying true to the character of Kelly and meeting the needs of our customers and candidates.

Olivier and I will now be happy to answer your questions..

[Operator instructions] We will go to line of Louis Moser with Mayfax Investors. Please go ahead..

Congratulations on a great quarter.

I was wondering what is the sustainability of the first quarter going forward?.

You mean the revenue and growth that we saw in the third quarter?.

Yes, the growth revenue, earnings per share and so forth..

So, as we look forward not going any further than what we said for the fourth quarter we see continuing pace of growth going into the fourth quarter.

And certainly, the fact that we have demonstrated that we are investing in sales and recruiting resources in our Americas segment predominantly, but also in international demonstrates that we think that there is continuing demand as we look out into the future..

Okay, thanks very much..

And Mr. Corona we have no further questions in queue..

Okay, thank you John and I thank everyone for being on the call..

Ladies and gentlemen, this conference is available for replay. It starts today November 8, at 11:30 AM Eastern Time, will go until December 8 at midnight. You may access the replay at any time by dialing 1-800-475-6701 or 320-365-3844. The access code is 393787. Those numbers again 1-800-475-6701 or 320-365-3844 with the access code 393787.

That does conclude your conference for today. Thank you for your participation. You may now disconnect..