Ladies and gentlemen, thank you for standing by, 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 objections, you may disconnect at this time.

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

Thank you, John, and good morning. Welcome to Kelly Services 2019 third quarter conference call. I'm Peter Quigley, Kelly's President and CEO. 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. 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. Before I turn to our quarterly results, I want to take a moment to say how honored and excited I am to be serving as Kelly's fifth and newest President and CEO.

Like my predecessor, George Corona, I have a profound respect for the people of Kelly and an unshakable belief in our mission of connecting people to work in ways that enrich their lives. This Company has a rich history and a bright future ahead.

As George mentioned on our Q2 earnings call, he'll be staying with Kelly as an advisor until he retires in the first half of next year. I look forward to working with George and the other members of the Board in the months ahead as we continue to ensure a smooth transition. Now let's turn to Kelly's third quarter results.

As we do so, please note that year-over-year comparisons are represented in nominal currency with the exception of our International Staffing segment, which is in constant currency. Looking at key measures of Kelly's Q3 performance, this was a challenging quarter. Revenue was $1.3 billion, down 5.6% compared to the third quarter of last year.

Our gross profit rate was up 20 basis points, and earnings from operations was down 22%. These results reflect several factors, both internal and external. From an internal standpoint, as mentioned on last quarter's call, Kelly undertook a significant and necessary restructuring of our US branch operations in Q1.

The changes we made are designed to accelerate growth in our focused specialties and create a better balance in our business mix, which is currently overweighted toward economically sensitive lower-margin light industrial business. At the same time, we exited several high-volume, low-value accounts.

While we remain confident in the restructure and believe it will deliver positive results, we see that it is taking longer than expected to work through some of the disruption it caused. We are seeing improved efficiency in our US branch operations, but we are not seeing the growth we anticipated particularly in existing accounts.

And as we drove these internal changes, external factors also hampered our progress in the third quarter. The slower-than-expected growth in the US market that we noted last quarter continued throughout Q3. In particular, ongoing softness in US manufacturing has a disproportionate impact on our Americas commercial business.

The seasonal ramp in our current customer base is slower than we've seen in previous cycles, and record low unemployment continues to constrain the talent supply. With that broader context in mind, let's look at how Kelly's three operating segments performed in the third quarter, starting with Americas Staffing.

Americas Staffing revenue decreased 8% in the third quarter compared to the same period last year. Commercial staffing revenue was down 14% from the prior year. Kelly Education revenue declined 1% in the third quarter, primarily due to absorbing a large account loss.

Revenue in our professional/technical specialties grew 20% in the third quarter compared to last year, favorably impacted by NextGen, a strategic first quarter acquisition. On a combined basis, permanent placement fees decreased 23% year-over-year, unfavorably impacted by several large projects in Q3 2018 that did not repeat.

The third quarter gross profit rate in Americas Staffing was 18.2%, down 70 basis points from last year due to higher employee-related costs and lower placement fees, partially offset by the favorable impact of NextGen on business mix.

Expenses for the quarter were down 1% in Americas Staffing mainly due to lower incentive-based compensation as well as lower salaries as a result of our Q1 restructuring. The decrease in expense was offset by the addition of NextGen and the costs associated with strategic projects.

All told, the Americas Staffing segment achieved an operating profit of $4.1 million for the quarter compared to $14.8 million last year. Now turning to our International Staffing operations outside of the Americas. Revenue in International Staffing for the third quarter decreased 9% year-over-year in nominal US dollars.

On a constant currency basis, revenue decreased 6% primarily due to a slowdown of the market in Western Europe, partially offset by increases in Eastern Europe. For ease of reference, the remainder of my comments on International Staffing will be on a constant currency basis. Fee-based income was down 8% year-over-year.

The reported GP rate for the quarter was 13.7%, 50 basis points higher than last year, driven mainly by a one-time expense in the third quarter of 2018, which increased cost of services. The underlying decline in our temp staffing GP rate is largely due to country mix.

Expenses were 2% higher than last year primarily due to several one-time expenses that will accelerate efficiencies. Excluding this effect, underlying expenses were 2% below last year due to continued effective cost management.

In summary, International Staffing's reporting operating profit was $3.5 million, $1.3 million lower than the same quarter last year. Now let's turn to the results of our Global Talent Solutions, GTS, reporting segment. This segment includes Global Technology Associates, GTA, one of our new strategic acquisitions.

Let's first look at how GTS performed as a whole in the third quarter. GTS revenue decreased 1% year-over-year in Q3, while gross profit increased 2%. Both revenue and GP were positively impacted by the acquisition of GTA.

In addition, we continue to see structural improvement in our product mix with year-over-year volume increases, primarily in our Business Process Outsourcing, BPO; and KellyConnect practices, offset by decreases in our Payroll Process Outsourcing, PPO, and centrally delivered staffing products.

Now let's look at gross profit results in each of the two GTS businesses. Our talent fulfillment business is made up of our CWO, PPO, centrally delivered staffing, and Recruitment Process Outsourcing, RPO, solutions. The gross profit in our talent fulfillment business was down 5% year-over-year in Q3.

The decrease was primarily a result of the lower volume in our RPO, centrally delivered staffing and PPO practices, partially offset by lower employee-related costs. Our outcome-based business is comprised of our BPO, KellyConnect and advisory services solutions and includes the results of the newly acquired GTA organization.

Gross profit in our outcome-based businesses increased 16% year-over-year. The increase continues to be driven by steady volume growth in both our BPO and KellyConnect products, along with the impact of the GTA acquisition.

Overall, the GTS segment's gross profit rate was 19.8% for the quarter, up 60 basis points year-over-year primarily due to structural improvement in our product mix and lower employee-related costs. Expenses in GTS were down 3% year-over-year as a result of continued effective cost management.

All told, GTS' third quarter operating profit was $28.4 million compared to $24.1 million a year ago, an 18% increase. Now I'll turn the call over to Olivier, who will cover our quarterly results for the entire Company..

Thank you, Peter. Revenue totaled $1.3 billion, down 5.6% compared to the third quarter last year. Our total Company reported results were unfavorably impacted by 80 basis points due to foreign exchange. So on a constant currency basis, our third quarter revenue was down 4.8% year-over-year.

Our Q3 performance includes the results of NextGen and GTA, which added 270 basis points to our current constant currency revenue growth rate. This was partially offset by the 40 basis point impact of the recent divestiture of our legal specialty practice. Overall, the Q3 constant currency organic revenue growth was down 7.1%.

Organic revenue declines reflect a weakening economic environment in Europe and within the manufacturing sector in the US as well as continuing challenges resulting from the Q1 restructuring of our US branch operations. Staffing placement fees were down 18% in nominal currency and down 17% versus a year ago in constant currency.

The fee performance reflects declining fees in both Americas Staffing and International Staffing. Overall, gross profit was down 4.8% or 4.1% on a constant currency basis. Our gross profit rate was 18%, up 20 basis points when compared to the third quarter last year.

Approximately 30 basis points 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 declined 10 basis point as the continued structural improvement in GTA's GP rate was offset by the GP rate decline in Americas Staffing.

SG&A expenses were down 3% year-over-year or 2.4% excluding the impact of currency fluctuations. Included in SG&A in the third quarter of 2019 are $6.9 million of expenses from our NextGen and GTA acquisitions. So on an organic basis, excluding currency impact, expenses were down 5.5%.

Approximately two-thirds of that decrease reflects lower performance-based incentive compensation, and the rest comes from cost management efforts to align resources with revenue trends. Earnings from operations were $17.1 million in the third quarter compared with 2018 earnings of $21.9 million.

These results reflect the conversion rate or return on gross profit of 7.5% compared to 9.2% for Q3 2018. These results reflect an increasingly challenging environment and further highlight the need to continue to execute on our focused specialty talent solutions strategy.

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 $39.3 million pre-tax loss on our Persol common stock.

In 2018, we recognized a $15.8 million gain on the Persol common stock in Q3. These gains and losses are recognized below earnings from operations as a separate line item within other income and expense. Income tax benefit of the third quarter was $12.8 million compared to a $5.9 million tax expense in 2018.

The effective tax rate in 2019 was a benefit of 57.3% compared to a 16.1% expense in 2018. The change in the effective tax rate is primarily due to the tax impact of the gains and losses on the Persol common stock. And finally, diluted earnings per share for the third quarter of 2019 was a loss of $0.27 per share compared to earnings of $0.84 in 2018.

Included in 2019 EPS is approximately $0.70 related to our loss on Persol stock, net of tax, compared to $0.28 of gain in 2018. In addition, our 2019 EPS includes a $0.05 benefit from our recent acquisitions. So on an adjusted like-for-like basis, EPS for the quarter was $0.37 compared to $0.56 a year ago. Now as we look ahead to the rest of the year.

After considering our results with the third quarter, we expect our Q4 reported revenue growth to be down 4% to 5%. This includes an expected unfavorable impact of FX on revenue of approximately 30 basis points. The impact of our recent acquisitions of NextGen and GTA are included in our expectations.

We expect the Q4 gross profit rate to be on par with last year. We expect structural changes in business mix from our shift to higher margin solutions, both organically and as a result of our recent acquisitions, to positively impact our GP rate. However, continuous margin erosion in Americas Staffing will offset most of this improvement.

As a result, our gross profit dollar expectations are consistent with our revenue expectations. We anticipate Q4 SG&A expense to be down 4% to 5%. 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, although we do believe that future unrealized gains and losses resulting from changes in market price could be material.

And finally, we expect the full year effective tax rate to be in the mid-teens excluding any additional impact from Persol gains or losses.

Moving forward, as a result of recent revenue trends, we are being more aggressive and have started taking actions to ensure that our current resources and cost structure is aligned with our near-term expectations and position us for future growth in our focused specialties. Now let's move to the balance sheet.

Cash totaled $23 million compared to $35 million at year-end 2018. Accounts receivable totaled $1.3 billion and are down 2.4% from year-end 2018. Global DSO was 59 days, up one day from the same quarter last year and up four days from Q4 2018. At quarter end, we had debt of $18 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 Q3 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, our year-to-date free cash flow was $60 million compared to free cash flow of $15 million in the same period last year.

This improvement in free cash flow has allowed us to quickly repay borrowings used to fund our recent acquisitions and deleverage our balance sheet. For more information on our performance, please review the third quarter slide deck available on our website. I'll now turn it back over to Peter for his concluding thoughts..

Thank you, Olivier. As I noted at the beginning of this call, the third quarter was challenging, and I'd like to share some additional insights on our performance and what lies ahead.

When we undertook a transformation of our US branch operations in the first quarter, we were optimistic about how quickly we could reposition resources and rebalance our portfolio toward certain higher-margin businesses.

And while we are achieving efficiency in acquiring new customers, we are not seeing the typical ramp of demand generation in our customer base.

In light of recent revenue trends, we have already begun taking further action to bring our Americas cost structure in line with our top line, and we will continue to do so while retaining our ability to capture demand in our focused specialties in the US market.

We have proven that in areas where we specialize, in line with demand, we performed well. Moving forward, we need to accelerate these growth areas to create a healthier balance in our business mix, one that aligns what's next for customer needs, talent preferences and key market trends.

Those trends include a soft US manufacturing sector, a weak economic environment in Europe and a constrained supply of talent worldwide. Against that challenging backdrop, Kelly accomplished several things this quarter.

Despite pressure on the top line growth, we delivered improvements in our GP rate as we continue to focus on higher margin and outcome-based services. We executed on our inorganic specialty strategy with our GTA and NextGen acquisitions, once again outperforming expectations and delivering strong revenue and GP growth.

And we effectively contained costs. Despite these efforts, our Q3 results fell short. While the fundamentals of our strategy are sound, we need to drive better top and bottom line results than we saw this quarter and improve the value we deliver to shareholders.

As I transition into the CEO role, over the course of the next quarter, I'll complete my assessment of the organization, its operations and its structures. And I'll be ready to share specific insights and expected outcomes with you on our next earnings call.

In the meantime, Kelly remains committed to balancing the value-versus-volume equation in our portfolio, effectively managing expenses to align with revenue growth and advancing our specialty talent solutions strategy as we connect people to work in ways that enrich their lives.

We look forward to reporting back to you on the results of our efforts next quarter. Olivier and I will now be happy to answer your questions. John, the call can now be open for questions..

Thank you. [Operator Instructions] We'll first go to the line of Josh Vogel with Sidoti & Company. Please go ahead..

I apologize, I hopped on a couple of minutes late, so I'm sorry if I ask something that you already covered. But I guess, first, I'll start with just some comments you actually ended with, Peter, just talking about the Americas cost structure and bringing it in line with current demand.

And we know in the recent year or two, you spent a good amount of time and investment in building out the branch network, streamlining operations and back-office functions.

So I just want to get a sense, how easy is it for you to scale down the business or up based on the macro environment and overall demand trends?.

Thanks for the question, Josh. When we restructured the US operations, the branch network in the first quarter of this year, one of the objectives of that, in addition to reducing management layers, was to create greater agility for us to respond to supply and demand that we were seeing in markets.

So it was designed to scale up and down in a more agile way and even within the US. It's a significant undertaking involving a lot of parts of the organization. And as I indicated in my comments, while we're seeing the efficiency that we expected from the restructuring, the agility in terms of generating growth is just taking longer than we expected..

We have now, Josh, a much more flexible model.

And when I look at productivity per FTE in our commercial business, despite of top line pressure, we do pretty good, much better than we would have done a couple of years ago because as Peter was explaining, we have a much more agile and flexible delivery model that help us to scale up and down more quickly than we were capable of doing a few years ago..

Understood. Thank you.

And just when I think about actually scaling down, is that only about personnel reductions? Or is that potentially a closure of a branch? Or how does that look?.

Well, Josh, when there's a need to look at the down scaling resources, we look at all of the resources that are available to delivering services to our customers. And so that would include both headcount, and there may be appropriate closure of branches where the demand isn't justified.

But we're also very focused on looking at different ways of delivering to markets. We've been, I think, maybe a little too beholden to focusing on brick-and-mortar as the only way to cover certain geographies.

And part of our new agility is to try to cover markets not necessarily with brick-and-mortar, but through other more innovative delivery methods..

That's helpful. Thank you. Understanding this historically tight labor pool in the US, I was wondering if you could maybe talk to your efforts about what you're doing with regard to -- or with candidate acquisition.

What's being done to attract and drive more candidates your way?.

So we're -- one of our strategic initiatives for the last couple of years, Josh, has been what we call the talent experience. We recognize that we are, and appropriately so, deeply focused on our customers. But we also recognize that we need to turn our attention equally to our talent and make sure that their experience with Kelly is differentiated.

So we have been using both qualitative and quantitative research to help us develop what we think will be some innovative ways of engaging talent. We, of course, are relying on many other means; social media, marketing campaigns, referral programs, technology, to try to interact with talent the way they want to be interacted with these days.

But as you mentioned, it's a difficult environment. And we continue to look for ways that allow talent to see Kelly as a preferred destination for their career aspirations..

To add on that and further development technologies, you might recall that we are now investing in our new front office for the US markets, and we are likely going to go live next year.

And combine that with digital application and other technologies, we feel it could also enhance the way we can attract talents and also, of course, our productivity per FTE..

Great. Thank you. And just one more, and I just feel compelled to ask.

But in light of the labor environment in the US, a weak economic landscape across Europe and sluggish manufacturing demand, I know it's early, but if you can give any sort of direction or sense of what 2020 could have in store when we look across the Americas, GTS and International, that would be appreciated..

Yes. I think I'm going to kind of start with what we see now and probably comment a little bit on what could it mean for next year. You have seen in our guidance that we forecast now our revenue to be down by about 4% to 5%, including 30 basis point of exchange rate. So it's going to be similar to what we are seeing in Q3.

And the fact that this trend looks likely for Q4 is that overall, our exit rate at the end of Q3 is similar to our entire Q3 trend. So we feel that if you think about that kind of trend, we feel that whether it's in Q4 or next year, we are going to continue to see challenges in Europe in terms of top line growth.

Also, we see that Eastern Europe is continuing to do well. You will see in some of our report that countries like Russia are still growing at a fast pace. But it is more challenging in Western Europe although we have some bright spots like Italy. But of course, we anticipate a still challenging environment in Europe.

That's one of the reason we continue to invest in additional tools, new structure technologies and so on to continue to increase our efficiency. When you look at our GTS segment, we still see some good growth in our outcome-based as we have seen for some -- several quarters.

So the outcome-based business, I think, is going to continue to have good traction unless something is changing dramatically. We feel that on the staffing side in the US, whether it's GTS staffing or our US operations, the commercial environment is going to be still difficult.

We believe that over time, as discussed by Peter, we feel that we are going to start to gain traction, but it's going to be more in the second half of next year as opposed to necessarily very early next year.

Although we feel confident that the top line is going to rebound at some stage during next year, we feel good about our recent acquisitions, GTA and NextGen. We think that they are going to continue to boost our top line.

But the environment overall in the US, whether it's manufacturing or the labor market conditions, are going to still remain challenging in the foreseeable future..

[Operator Instructions] And next, we're going to Joe Gomes with Noble Capital. Please go ahead. Joe, your line is open. If you are on mute, maybe..

I'm sorry. Good morning..

Good morning, Joe..

Good morning..

Just wanted to touch base first on the education segment. It was down slightly. You said you'd lost a contract. And I was wondering if you could talk a little bit about why you lost that contract.

Was that segment ex that loss up? What kind of -- is the environment in the education segment these days?.

Well, thanks for the question, Joe. I mean the competitive environment in the education space is significant. Their contracts are let -- they're public. The pricing becomes public, so there's always some competitive information that leads to potential competitors coming in.

We have a very strong track record of providing school districts with a value that they see differentiates Kelly from others. But from time to time, we are going to rotate out of a customer, and that happened. It so happened, it was a large school district. So the impact was a little more significant than usual.

But we're very confident in the value proposition that we provide to our customers in the education space. And I'll turn -- I'll ask Olivier to comment on the financial for the education business. But again, we see education as a pivotal growth platform for the Company..

Yes. I would add on that, that of course, when you look at the growth, top line growth in education in Q1, Q2, we're at about 7%. So Q3 is a little bit like an exception to the trend we have seen not only this year but for several quarters. The market is still growing at a similar pace than we have seen in the past, basically between 7% to 9%.

We don't see any change in trend over there. We have a very good pipeline in terms of new customers, new win. Of course, losing a big customer is challenging, but the -- I would say structural trends we see, the pipeline we have, the dynamic we have in our expansion and organic growth, I think, is not changing.

We are now basically launching and developing an early childhood product on the marketplace where we expect basically to capture high growth and get also some momentum probably starting next year. It's a very good and booming market.

We are well positioned through our Teachers On Call acquisition two years ago to basically build up on what we have now and continue to develop this high-growth market in early childhood..

Okay. Thank you for that. And I just wanted to circle back a little bit here on the challenging environment. Because you guys mentioned the challenging environment last quarter also, the soft Western Europe and some of the weakness here in the US.

So I'm trying to get an idea, maybe a little more color, what changed quarter-from-quarter sequentially that you went from basically flat revenues to down this quarter relatively significantly in the environment that you described as challenging last quarter. And just -- if you could provide some more detail, that would be appreciated..

Sure, Joe. I'll start, and I'll ask Olivier maybe to provide some color on the numbers. But the -- our business is a cyclical one where we ordinarily would see a significant ramp of business in Q3 into Q4.

And the softening in the manufacturing portion of the economy, in particular, in which we are -- as I indicated in my comments, we are overweighted, began to slow down in -- according to the PMI, in the April time frame, and it continued to decline.

And the impact on what would ordinarily be our seasonal ramp, we just haven't seen the demand that we see in other cycles. And it's not been limited to a single portion of the manufacturing industry. It's across geographies and across industries.

So it would just indicate that the softness that started in Q2 likely accelerated into Q3 and, given our seasonality, had a disproportionate impact on our results for the quarter..

Yes. I would complement that by saying that manufacturing is a profitable activity for us, but it's material.

So knowing that the demand, I would say, is slowing down and turning into a little bit of a recessionary mode, although it's not recession, as we are exposed to this business on a material standpoint in terms of weight, that is putting pressure on us..

And with no further questions in queue, Mr. Quigley, I'll turn it back to you if you have any closing comments..

No, John. Thank you. Again, thank you for the -- setting up the call, and I think we're good..

Thank you very much..

Great. Thank you. Ladies and gentlemen, this conference is available for replay. It starts today at 11:30 a.m. Eastern and lasts until December 6 at midnight. You may access the replay at any time by dialing 1-800-475-6701 or 320-365-3844. The access code is 414736. Those numbers again, 1-800-475-6701 or 320-365-3844. The access code is 414736.

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