Good morning, and welcome to Kelly Services First 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.

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, and good morning. Welcome to Kelly Services 2019 First 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, 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.

And 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.

As we walk through our results this morning, let me point out that my year-over-year comparisons are represented in nominal currency, with the exception of our International segment, which is in constant currency.

Also, I'd like to remind you once again that the 2018 adoption of a required accounting standard related to equity investments has introduced volatility into the reported net earnings of many companies, including our own.

Our equity investment in Persol Holdings continues to introduce this volatility into our earnings report each quarter, either positively or negatively, depending on Persol's stock performance. We value our relationship with Persol and the business connections we have built together, and Persol continues to be an excellent investment for us.

In his remarks, Olivier will provide more detail regarding our Persol investment and its impact on our reporting this quarter. Now turning to Kelly's first quarter results. Revenue was $1.4 billion, up 0.9% compared to the first quarter of last year.

In his remarks, Olivier will discuss the impact of foreign exchange and acquisitions and divestitures on our Q1 results. Earnings from operations were $16.8 million in the first quarter compared with 2018 earnings of $12 million. These earnings include the results of our recent acquisitions and a $6.3 million restructuring charge related to our U.S.

business. Excluding these, adjusted earnings from operations were $20.8 million, an increase of 74% from a year ago. For a reconciliation of our adjusted results, please review this morning's press release. Diluted earnings per share for the quarter of 2019 totaled $0.56 per share compared to $0.74 in 2018.

On a like-for-like basis, adjusted earnings per share were $0.40 in 2019 compared to $0.32 last year. We are pleased with our solid execution in the first quarter. Now let's look at how Kelly's three operating segments performed in the first quarter, starting with Americas Staffing.

Americas Staffing revenue increased 4% in the first quarter compared to the same period last year. This growth rate was favorably impacted by the strategic acquisition of NextGen. Excluding NextGen, revenue was flat in the first quarter, consistent with fourth quarter results.

Commercial Staffing revenue was down 1% from the prior year, and Kelly Educational Staffing revenue was up 7% in the first quarter. Revenue in our Professional and Technical specialties grew 26% in the first quarter compared to last year, favorably impacted by the acquisition of NextGen.

Excluding NextGen, Professional and Technical revenue declined 2% for the quarter. On a combined basis, permanent placement fees increased 7% year-over-year. The first quarter gross profit rate in Americas Staffing was 18.7%, up 80 basis points from last year.

The gross profit rate for the quarter was positively impacted by the addition of NextGen and lower employee-related costs. Expenses for the quarter were up 10% in Americas Staffing.

The increase includes the addition of NextGen and a $6.3 million restructuring charge related to the repositioning of our service delivery model for growth, which we discussed last quarter. Excluding NextGen and the restructuring charge, expenses were down 2% compared to the prior year, reflecting effective cost management.

All told, the Americas Staffing segment achieved an operating profit of $16 million in the quarter compared to $16.1 million last year. Excluding the restructuring charge and NextGen, operating profit was $21.1 million, up 32% over the prior year. Now turning to our International Staffing operations outside of the Americas.

Revenue in International Staffing decreased 9% in nominal currency, down 1.5% on a constant currency basis as a strengthening U.S. dollar significantly impacted growth. Our results in constant currency were consistent with our results in Q4, and gains in the Eastern European region partially offset declines in Western Europe.

For ease of reference, the remainder of my comments on International Staffing will be on a constant currency basis. Fee-based income for the first quarter was down 7% year-over-year. The segment's reported GP rate for the quarter is 13.3%. This is 40 basis points below the same period a year earlier driven mainly by customer mix.

Expenses were 1% lower versus the prior year. In summary, International's reported operating profit was down $1.3 million compared to the same quarter last year, excluding the $400,000 negative exchange rate impact. Now turning to results of our Global Talent Solutions reporting segment. This segment includes GTA, one of our new strategic acquisitions.

Let's first look at how GTS performed as a whole in the first quarter. GTS revenue increased 3% year-over-year in Q1. Excluding the impact of our GTA acquisition, revenue growth was consistent with the fourth quarter of last year. Gross profit increased 9% year-over-year in Q1. Excluding the impact of the GTA acquisition, GP increased 6% year-over-year.

We continue to see structural improvement in our product mix this quarter with year-over-year volume increases in our BPO, KellyConnect and CWO practices, partially offset by decreases in our centrally delivered staffing. 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, centrally delivered staffing and recruitment process outsourcing solutions. Gross profit in the talent fulfillment business was down 2% year-over-year in Q1.

The decrease was a result of lower volume in our centrally delivered staffing practice partially offset by lower employee-related costs. Our outcome-based businesses comprised of our BPO, KellyConnect and advisory service solutions and, as mentioned previously, the results of the newly acquired GTA organization.

Gross profit in our outcome-based businesses increased 30% year-over-year, up 27% excluding the impact of our GTA acquisition. The like-for-like increase continues to be driven primarily by strong volume growth in both our BPO and KellyConnect products, coupled with lower employee-related costs.

Overall, the GTS segment's gross profit rate was 20% for the quarter, up 110 basis points year-over-year. This improved rate is primarily a result of structural improvement in our product mix and lower employee-related costs. Expenses in GTS were down 2% year-over-year. Excluding the impact of the GTA acquisition, expenses were down 4% year-over-year.

The lower expenses were a result of lower performance-based compensation and continued effective cost management. All told, GTS first quarter operating profit was $25.7 million compared to $16 million a year ago, a 61% increase. Now I'll turn the call over to Olivier, who will cover our quarterly results for the entire company..

Thank you, George. Revenue totaled $1.4 billion, up 0.9% compared to the first quarter last year. Our total company reported results were unfavorably impacted by 200 basis points due to foreign exchange. So on a constant currency basis, our revenue growth for the first quarter was 2.9%.

Our Q1 performance also includes the results of NextGen and GTA, which added 260 basis points to our total revenue growth rate. This was partially offset by the 60 basis point impact of the recent divestiture of our health care and legal specialty practices.

Overall, the Q1 constant currency organic revenue growth was up slightly as modest growth in our Americas Staffing and GTS segments was partially offset by declines in International Staffing. Staffing placement fees were down 4% in nominal currency and flat with a year ago in constant currency.

Continued positive momentum in Americas Staffing was offset by declines in fees in International Staffing. Overall, gross profit was up 5.6% or 7.4% on a constant currency basis. Our gross profit rate was 18.2%, up 80 basis points when compared to the first quarter of the last year.

Approximately 20 basis point of our GP rate improvement was due to the acquisition of NextGen and GTA, which are higher margin specialty businesses. On an organic basis, GP rate improved 60 basis points with 40 basis points coming from structural improvement in the GP rate and 20 basis points from adjustments for employee-related costs.

SG&A expenses were up 3.8% year-over-year or 5.4% excluding the impact of currency fluctuations. Included in SG&A in the first quarter of 2019, our restructuring expenses of $6.3 million related primarily to our U.S. branch-based staffing operations. In addition, 2019 expenses include $6.8 million of expenses from our NextGen and GTA acquisitions.

On an organic basis, excluding the restructuring costs and currency impact, expenses were down 40 basis points. The decrease in expense reflects good cost management across all of our operating segments. Earnings from operations were $16.8 million in the quarter compared with 2018 earnings of $12 million.

Adjusted earnings from operations, which excludes both the restructuring charge and the impact of our recent acquisitions, was $20.8 million for the first quarter of 2019, an increase of 74% over the same period in 2018. On an adjusted basis, these results reflect a conversion rate or return on gross profit of 8.6% compared to 5% for Q1 2018.

These results reflect solid execution for the quarter. We continue to execute on our focused specialty talent solutions strategy and on our commitment to delivering an improved conversion rate for the year.

As we have mentioned on prior calls, Kelly is required to reflect the unrealized gains and losses on changes in the market value of our equity investment in Persol Holdings as a component of our earnings. As a result, in the quarter, we recognized a $13.2 million pretax gain on our Persol common stock.

We also recognized a $23.7 million gain in Q1 2018. These gains are recognized below earnings from operations as a separate line item within other income and expense. Income tax expense for the first quarter was $6.4 million, consistent with our 2018 income tax expense. The effective tax rate in 2019 was 22.2% compared to 18.8% in 2018.

And finally, diluted earnings per share for the first quarter of 2019 totaled $0.56 per share compared to $0.74 in 2018. Included in 2019 EPS is approximately $0.23 related to our gain on Persol stock net of tax compared to $0.42 in 2018.

In addition, our 2019 EPS include the impact of a $0.12 restructuring charge and $0.04 benefit from our recent acquisitions. So on an adjusted basis, like-for-like EPS for the quarter was $0.40 compared to $0.32 a year ago, a 25% increase. Now as we look ahead to the rest of the year.

Our current full year outlook is generally in line with the discussion on our Q4 call in February. However, we now believe that the impact of foreign exchange and economic conditions in Europe will be a strong headwind – a stronger headwind on the revenue growth, and we have aligned our expense growth expectations with these changes.

For the full year, we expect our reported revenue growth to be 2.5% to 3.5%. This includes an expected unfavorable impact of FX on the revenue of approximately 100 basis points. The impact of our recent acquisition of NextGen and GTA are included in our expectations.

We continue to anticipate that our revenue growth will accelerate in the second half of the year as the changes we made in our Americas Staffing delivery models take effect. We expect the gross profit rate to be up 30 to 60 basis points on a year-over-year basis.

While we may continue to experience some volatility in the GP rate on a quarterly basis, structural changes in business mix from our shift to higher margin solutions, both organically and as a result of our recent acquisitions, are expected to positively impact our GP rate for the full year.

We anticipate SG&A expense to be up 3% to 4%, excluding restructuring charges. This includes the additional amortization expense related to the recently acquired intangible assets. Consistent with our prior discussions, the outlook provided does not reflect any gains and losses on Persol stock.

Also, we do believe that future unrealized gains and losses resulting from changes in market price could be material. And finally, we expect the effective tax rate to be in the mid-teens, excluding any impact from Persol gains and losses.

So all in, while we continue to make investments in several key areas of our business in 2019, we expect to deliver year-over-year improvement in our conversion rate. For the second quarter, we expect reported revenue to be up 1.5% to 2.5%, including unfavorable FX impact of 100 basis points.

We expect the gross profit rate to be up 40 to 60 basis points year-over-year. And finally, we expect SG&A expense to be up 2% to 3%. Now let's move to the balance sheet. Cash totaled $31 million compared to $35 million at year-end 2018. Accounts receivable totaled $1.3 billion and was flat with year-end 2018.

Global DSO was 58 days, up 1 day from the same quarter last year and up 3 days from Q4 2018 due primarily to seasonal fluctuations. At quarter-end, we had debt of $74 million compared to $2 million at year-end 2018. Our increased level of debt includes the impact of borrowing related to our acquisitions of NextGen and GTA.

Our Q1 balance sheet also reflects the adoption of the new lease accounting standard effective at the beginning of 2019. While we have reflected right-of-use assets and lease obligations on our balance sheet, the adoption did not have a material impact on our earnings nor do we expect it will going forward.

In our cash flow for the quarter, free cash flow was $17 million compared to negative free cash flow of $9 million last year. For more information on our performance, please review the first quarter slide deck available on our website. Now I'll turn it back over to George for his concluding thoughts..

Thank you, Olivier. Kelly continues to manage its business well and has delivered solid results for the first quarter. After three successive periods of low unemployment, tight labor markets and sustained demand for talent, we have once again taken the actions necessary to deliver on the bottom line while investing in our future.

If these business conditions represent a new normal, our team has successfully demonstrated its ability to adapt the business to the challenges and opportunities in this environment.

Here are some final thoughts on what we are seeing in the labor markets, an update on our latest strategic investments and more about the change activities currently underway at Kelly. The U.S. labor market remains tight. Given the healthy economic environment in the U.S., we expect the supply of labor to remain challenging in the foreseeable future.

As always, we are seeking new and creative ways to address supply gaps when and where they occur using our assets as effectively as possible. As we mentioned previously, we intend to stay focused on gross profit growth and on aggressively pursuing higher margin businesses in our specialty areas.

As we do this, we will continue to evaluate, remediate or exit unprofitable customers from our portfolio. In addition, identifying high margin strategic acquisitions is a part of the strategy and we announced two such acquisitions at the beginning of this quarter.

Integrations for our two new acquisitions, NextGen and GTA, are moving forward and progressing well. Both companies are profitable, delivering significantly higher margins in our traditional lines of business and contributing to our bottom line.

I'll share more news about these two acquisitions next quarter, but I am pleased to say we are learning from one another and we believe each company is benefiting as a result. Finally, we continue to evaluate all aspects of our business operations to improve them.

Prominent change activities currently underway include updating our brand, marketing and talent acquisition strategies as well as the ongoing investments we're making in our North American digital talent platform. Another critical project includes the restructuring activities we initiated in our U.S. branch operations.

These activities are designed to accelerate growth by allowing us to more precisely and flexibly adjust and redeploy resources across our organization as required by supply and demand conditions.

This improved agility should allow us to more quickly and efficiently meet the demands of both customers and talent and begin producing later this year improvements in recruiter and sales productivity and healthier customer and product mix. I look forward to reporting back to you on the results of all these efforts next quarter.

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

[Operator Instructions] And first from the line of Josh Vogel with Sidoti. Please go ahead..

Good morning and thank you guys. Sorry, I sound a little nasally, my allergies are getting the best of me today. So my first question, I know you went into detail on this, George and Olivier, but looking at GTS, you did a tremendous job on the margin front. I know there was product mix and lower employee-related costs.

I'm just curious if there was any onetime items there that may have fueled some upside or is just a run rate we can expect to see going forward?.

Yes. Let me reply on that. When we think about 80 basis points, we like to split it into three categories. There is a 20 basis point structural improvement coming from our acquisitions. We believe this acceleration is a structural improvement. To give you an idea, the margin of this business is about 25% overall, so higher than the average.

The second one is about 40 basis points. That is our structural improvement in our current product mix. This one has been structural. We have seen progress year-over-year since 2014, and we expect that to continue with, of course, some fluctuations.

And the last one, which is about 20 basis points, is more what I would call short-term ups and downs that we have mentioned several times, including this outlook. And it is made of – on what we call adjustment on our employee-related costs.

So this one, I would say is more quarter-related and can go up and down depending on the quarter and some dynamics around healthcare, payroll tax and other matters such as workers’ comp..

Great. That's very helpful. Thank you.

And looking at property and equipment on the balance sheet, I was just curious, I'm assuming, obviously, that's from the two acquisitions but what exactly did you acquire in those deals with regard to P&E?.

I mean, if you are referring to our two recent acquisitions, I mean, the net book value that we have acquired, not surprised, is very limited and most of it is working capital, and to a very, I would say, limited extent, some fixed assets.

The movement you see in fixed assets for the quarter versus a year ago or versus year-end is linked to the lease new standard that I was referring to in my script. Basically, we are now to recognize the right-of-use assets.

And I would say for the quarter, it's shy of $70 million of adjustment that is purely linked to this lease accounting adjustment..

Okay, yes. That’s helpful. That makes sense. Thank you. And I know that with the spike in the short-term borrowings related to the acquisitions, I was just curious was any of – was that all going to NextGen and GTA.

Were there any seasonal increases for working cap purposes?.

I would say the large majority, although we don't split into bits and pieces, I mean, the large majority of our securitization use now does relate to the two recent acquisitions. That were about $85 million, $86 million. So we have already managed through our free cash flow to start to deleverage a little bit in the quarter..

Okay. And George, in your final thoughts, you were just talking about acquisition landscape, looking for high margin strategic deals.

I'm just curious if you could talk to, without giving away any competitive information, just – are there any specific white spaces that you're targeting, markets you certainly want to get a foothold in?.

Well, I mean, what we've said in the past is we're looking at North American specialty and that's where we're looking to invest. And we're looking to invest in places that we have strength, and so we're looking at the education market, engineering, science as those types of areas that we're looking at.

But we'll also look at the future of more kinds of things.

So as you start to begin to look at the way that the – what we would call our commercial marketplace just changing in terms of light industrial and those kinds of things, there's going to be a lot more opportunity to go after things like automation and maintenance and repair and those kinds of activity.

So we would look there as well to diversify our business..

Okay.

And then just lastly on the flip side of that with the legal managed services and the health care businesses, are – can we expect to see some divisions that you'll be looking to get out of?.

There's nothing on the horizon for that. As we looked at our – again as – Josh, when you take a look at our business, those were two very small businesses that had high capital needs if we were really going to go after the market.

And we just determined that the use of our capital was better in places where we had leadership positions, and so we divested of those..

Okay, great. Thank you for taking my questions..

Thank you..

Next, we go to John Healy with Northcoast Research. Please go ahead..

Thank you. I wanted to ask just a little bit about the NextGen business. There's clearly excitement surrounding that entity. But curious to know how that business might have performed on a pro forma basis compared to what they did a year ago when they were on their own.

And what's kind of embedded in the expectations for this year in terms of how that business grows versus kind of the – the kind of legacy Kelly business at least in the Americas?.

Yes. Overall, you are going to see that when looking at the pro forma and other information, the impact on the quarter was about $36 million in revenue, $9 million in GP, so GP rate of about 25%, and the impact on our EPS was about $0.04. We see both of them growing at a fast pace, I mean, over 20%.

You might recall that we have mentioned that we have added more organic investment on top to accelerate their growth on both sides, I mean, NextGen and GTA. So basically, we see that now moving very quickly with an acceleration of our top line growth related to these two recent acquisitions..

Yes, John, one of the main things that attracted us to these businesses was the fact that they were in a fast-growing part of the market with 5G that has – seems to have a long-time horizon here. And one of the things that we could bring to them was an ability to invest to grow even faster than they were able to do on their own.

So we definitely see these as growth platforms for the company..

Great. And I just wanted to ask around the topic of NextGen.

Maybe I'm misinterpreting the adjustments to the earnings this quarter, but are you guys backing out the $0.04 of earnings contribution from NextGen in your $0.40 number? So assuming – so on a continuing ops basis, you did own that business for 94% of the quarter, the adjusted earnings would've been closer to $0.44, correct?.

That’s correct..

That's completely correct. Yes. In the analysis, we start with $0.56, we eliminate $0.23 of gain on Persol net of tax, add back $0.12 on restructuring, the $6 million plus that we are referring to, and deduct $0.12 of acquisitions, which lead to the 27% increase.

But knowing that 100% of the NextGen and GTA activity was reflected in Q1, the $0.04 is truly something that potentially would be added to the $0.40, yes..

Okay. Just wanted to make sure I was interpreting that correct. And then just on the restructuring efforts in the first quarter, I think, what $6 million or so.

Any color on – it sounds like those were in the Americas, but any color on what's happening with the service model? Is it just continuation of trends in the past – efforts in the past and would you expect those to continue throughout the remainder of the year?.

Yes. So we've always looked at our business in the Americas and it really is – that $6.3 million was focused heavily on the commercial branch network. And what it was designed to do, John, was to kind of break our – the boundaries that we had around geography based on management.

So what we're attempting to do there is to flatten the organization and allow the capacity that exists in that business to be able to use where the demand occurs.

So as an example, if we have high demand in Northern California, but we have more capacity in Southern, we can use that much more rapidly now because of the way that we're now organizing the business. And it allows us to also invest in more frontline resources to be able to meet the needs of the market where the market is.

So – and I think as we said, we expect as we get through this initial process that we begin in the second half of the year to really benefit by seeing that begin to play out..

Great, thank you, guys..

Thank you..

[Operator Instructions] And allowing a few moments, Mr. Corona, no further questions in queue..

Okay. Well, then we'll go ahead and end call and thank everyone..

Great. Ladies and gentlemen, this conference is available for replay. It starts today at 11:30 a.m. Eastern and will last until June 6 at midnight. You may access the replay at any time by dialing (800) 475-6701 or (320) 365-3844. The access code is 414734. Those numbers again (800) 475-6701 or (320) 365-3844. The access code is 414734.

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