Good morning and welcome to Kelly Services Third Quarter Earnings Conference Call. [Operator Instructions] I would now like to turn the meeting over to your host, Mr. Peter Quigley, President and CEO. Please go ahead..

Thank you, John. Hello, everyone, and welcome to Kelly Services Third Quarter Conference Call. With me today is Olivier Thirot, our Chief Financial Officer who will walk you through our Safe Harbor language..

Yes, thank you, Peter. And good morning, everyone. 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 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 reported and on an adjusted basis. Discussion of items on an adjusted basis, our non-GAAP financial measures designed to give insight into certain trends in our operations.

We have also provided more information on our performance in the third quarter slide deck, which is available on our website. During our discussion this morning, we’ll refer to that deck. So it may be helpful to have it available. Now, back to you, Peter..

Thank you, Olivier. To give you an idea of what we'll be covering today, I will start my perspectives on Kelly's current business environment, including the impact of COVID-19 in the third quarter. I'll then explain how our new operating model has resulted in a change in our operating segments.

And how this new way of organizing our business is designed to accelerate growth in our chosen specialties. Olivier will give you a brief overview of the new segments, and then walk us through the highlights of our quarterly performance that were announced in this morning's earnings release.

I'll then share some observations before Olivier provides perspectives on Q4. And finally, I'll conclude by highlighting Kelly's plans to connect even more people with work that enriches their lives. Now let's turn to Q3.

While COVID-19 continued to impact Kelly's business in the third quarter, lowering top line growth compared to Q3 last year, revenue trends in all of Kelly's operating segments showed sequential improvement, reinforcing our earlier assessment that the worst is behind us.

What we're currently seeing in our business is some gradual but uneven recovery, featuring stronger demand tempered by some on-going challenges in talent supply, particularly in lower wage jobs. Our larger customers have gained momentum and many have quickly adapted to challenges in the talent market with more attractive pay and benefits.

While many small and medium sized customers are taking longer to recover, and their demand remains sluggish by comparison. Amid this unique business environment, Kelly continue to execute on our pre-pandemic strategic plans moving forward to reinvent our operating model and redefine Kelly as a specialty talent provider.

We've strategically chosen to focus on specialties with the most robust demand, the most promising growth opportunities, and where we believe we excel in attracting and placing talent. Our chosen specialties also reflect our desire to shift our portfolio toward higher margin specialties.

As part of this important step forward in Kelly's evolution, today, we are reporting financial results by five operating segments based on our specialties; Science, Engineering and Technology, Education, Professional and Industrial previously known as Commercial, OCG and International.

While Kelly has played in these specialties for many years, our new operating segments represent an important part of our new operating model, one that combines for scale and focus all revenue generating resources of a particular specialty, regardless of whether they're staffing or outcome based.

For example, all products or solutions we'd think of as commercial, our office and clerical staffing, light industrial, calls center, and business process outsourcing solutions that include or even combine these skill sets are now part of our professional and industrial business unit, sharing the same leader, the same sales and marketing team and the same P&L.

This new way of organizing our business focuses our efforts where we are best able to win, removes artificial organizational barriers, and combines subscale businesses within our portfolio to give us greater advantages in the market.

We believe our new structure is the right move for today's Kelly and we expect our disciplined specialty focus to deliver growth coming out of the crisis, not just any growth, but profitable growth that delivers shareholder value. We've established growth targets for each specialty, and those targets will help guide future capital allocations.

We are encouraged by the increase in demand across each of our new operating segments, yet we don't expect all of our growth to come organically.

We are reviewing strategic targeted M&A opportunities in our specialties most prime for growth, such as technology and education, while at the same time continuing to optimize our portfolio, as demonstrated by the sale of our staffing operations in Brazil during Q3.

I'll now turn it over to Olivier to further explain each of our operating segments and to review their Q3 results..

Thank you Peter. On slide seven of the deck we issued today, we have an overview of the five segments that are the outcome of the new operating model and their respective pre pandemic 2019 financial information. So quickly as we can go into more details during the Q&A and starting with Science, Engineering and Technology.

It's more than $1 billion business operating primarily in the U.S. and Canada. As you would expect from the name, the specialty focus areas are Science, Engineering IT and with a well-placed acquisitions, acquisitions of GT and NextGen Telecommunications.

Now that the focus is on Specialities, we have brought together the brand based and [Indiscernible] delivery models with the outcome based products that deliver all these talent skill sets into a single business unit of segments.

This allows us to combine what had been subscale businesses in our old structure, and align our sales and recruiting efforts in the space to more effectively and efficiently compete for customers and talent. The GT rate reflects the higher margin specialty and outcome based services.

But we also have some very valuable lounge accounts in the segment albeit with lower margins. Next Education, increasing the results of our recent acquisition of Insight 2019 revenues were about $500 million all in the U.S. our largest specialty in K-12 instructional and support staff.

And we are building on our market leadership tools to provide talent in early childhood and higher education settings. In the future, we expect education will provide a broad range of talent to customers in these markets, including services directed towards special needs students.

[Indiscernible] in education reflects the delivery of services to both large metropolitan school districts as well as smaller districts across 41 states. Professional and Industrial with more than $2 billion of revenue in the U.S.

and Canada combines our branch base and software delivered staffing solutions in the office position of light industrial and call center specialties, together with our outcome based products that deliver talent in those same skill sets.

Kelly Connects our view to our contact center product is included in this segment, similar to science, engineering and technology bringing these delivery models together as a single business unit eliminates artificial organizational barriers and allows us to continue to increase our efficiency.

Our GP rate fold segment reflect the combination of staffing services to both lounge and SME customers as well as higher margin, outcome based services.

Outsourcing and consulting combines managed service provider MSP recruitment process outsourcing, RPO and barrel process outsourcing BPO businesses with our consulting practice and delivers services to customers on a global basis.

Revenues for the segment were just over $375 million in 2019, and the GP rate reflects that we have combined products with different GP rate profiles, including lower margin payroll processing, with higher margin fee based products. As a result, margins in the segments will vary quarter-to-quarter, depending on product mix.

And finally, at the National is more than $1 billion business predominantly in staffing, covering business in Europe, Mexico and also Brazil, before its sales in Q3 of 2020. Moving forward, the segment operates in 15 countries in Europe and in Mexico, and provides both white and blue collar tenants.

Most countries will continue to focus on delivering solutions to life science customers in their respective geography, as well as locally relevant specialty niches, such as watchmaking in Switzerland. The GP rates for the segment reflect the blend of large and SME businesses served.

Information about the financial performance of each of these operating segments was included in our prepared materials released earlier this morning. And now I'll move to a discussion of our Q3 results for the company as a whole.

As Peter mentioned, our Q3 results reflect the continuing impact of the COVID 19 pandemic, the beginning of some stabilization in economic activity, and the impact of the availability of talent.

The results also reflect the continuation of our temporary expense mitigation actions, and to a lesser extent than in Q2 limited duration government stimulus and pandemic assistance in the U.S. Revenue totaled $1 billion down 18% from the third quarter of the prior year. The impact of foreign exchange on our revenue growth rate was not significant.

As we mentioned last quarter, in Q2 we reached the full depth of the impact of the COVID-19 crisis on demand and have begun to see sequential growth in customer demand as we exited Q2. During Q3, we continue to see gradual improvement in demand, particularly in large accounts.

We experience the biggest gains early in the quarter, and the Q2 -- the Q3 exit rate, the Q2 exit rate sorry, year-over-year revenue trends for the month of September was consistent with our average for the quarter for the talent company.

Gains in demand have been uneven depending on special key and customer, the revenue trend in all segments has improved since the second quarter. Like in Q2, our education business continues to be particularly impacted as U.S.

school districts return to school in the fall using a variety of delivery models, including virtual and hybrid, which has an impact on the demand for our services. As we moved through the quarter, our Q3 revenue results were also impacted by tenant supply constraints in the U.S.

while enhanced unemployment benefits were reduced during the quarter COVID-19 related childcare needs and personal safety concerns are feeling backing the pool of available talent in some skill sets, especially in education and professional and industrial.

And finally, our OCD segment has continued to be the most resilient, with a 7% decline in revenue for the quarter. While certain customer industries such as NLG were negatively impacted, the demand from life sciences customers remain strong.

Permanent placement fees were down 40% year-over-year as the impact of economic uncertainty as depressed full time hiring in all segments. Overall gross profit was down 16.1%. Our gross profit rate was 18.4% up 40 basis points when compared to the third quarter of the prior year. The rate increase was driven by several factors.

We were positively impacted by lower employee related costs and improved product mix. This was partially offset by the negative impact of lower band placement fees and unfavorable customer mix as the recovery of demand from large customers with lower margin outpaced the recovery for small and medium sized customers.

The impact of government stimulus and pandemic relief related to our talent on assignment, and recorded in cost of services was not significant, and there was no impact on our Q3 GP rates. SG&A expenses were down 8.2% year-over-year.

Increase in expenses for the quarter was $9.5 million non-cash charge in our international segment to increase our allowance for doubtful accounts receivable. The charges related to a protracted contract dispute with the customer we stopped servicing in 2014.

There are no similar disputes with on-going customers, excluding the $9.5 million charge expenses for the quarter were down 12.7% year-over-year.

The decline in expenses reflect the temporary expense mitigation actions we took starting in April, including the compensation adjustments we have mentioned in the past, and to a lesser extent, the benefit of COVID-19 government subsidies related to our full time employees in the U.S., which we recognize in the quarter.

We have also seen the continuing benefits from the cost reduction actions we took in Q1 2020 prior to the pandemic. And finally, the year-over-year comparisons are impacted by the unusually low level of incentive compensation expense in Q3 of 2019.

Sequentially expense levels in Q3 have increased modestly over the course of the quarter as we brought back employees who had been temporarily furloughed in Q2. Our reported loss from operations for the quarter was $2.4 million compared to Q3 2019 reported earnings of $17.1 million.

Our Q3 2020 earnings includes the $9.5 million non-cash charge related to a customer dispute. So on the like-for-like basis, Q3 2020, earnings for operations were $7 million, a decline of 59% versus last year. The Professional and Industrial Science, Engineering and Technology and OCG segments delivered operating earnings for the quarter.

The International segment reported loss includes the $9.5 million charges related to the customer dispute I mentioned, but when adjusted for this item at the national earnings are nearly breakeven for the quarter.

And while four of our five segments expands the decline in year-over-year earnings, the OCG segment earnings increased significantly year-over-year, as a modest decline in GP was more than offset by strong cost management. Kelly's earnings before tax also include the unrealized gains and losses on our equity investment in personal holdings.

For the quarter, we recognized $16.8 million pretax gain on our personal common stock compared to $39.3 million pre-tax loss in the prior year. These non-cash gains and losses are recognized below earnings from operations as a separate line item.

Income tax benefit for the third quarter was $1.2 million compared with our 2019 income tax benefit of $12.8 million. Our effective tax rate for the quarter was a 9% benefit, as tax expense on Q1 valued earnings was more than offset by the benefits of the Work Opportunity Tax Credit.

And finally, reported earnings per share for the third quarter of 2020 was $0.42 per share, compared to a loss of $0.27 per share in 2019. In order to better understand the underlining trend in earnings, let me provide some additional information.

2020 earnings per share was favorably impacted by the gain on personal common stock, partially offset by the non-cash charge related to the customer dispute. In 2019, EPS was negatively impacted by your loss on personal stock. Adjusting for these Items, Q3 2020 EPS was $0.29, compared to $0.43 per share in Q3 2019, a decline of 33%.

Now, moving to the balance sheet. Cash totaled $248 million compared to $23 million a year ago. That was nearly zero, down from $2 million at year end 2019. We ended the quarter with no borrowings in our U.S. credit facilities.

Our cash balances reflect the impact of reductions in working capital, primary accounts receivable as revenues declined beginning late March and the benefit of the deferral of payroll taxes in the U.S. under provision of the CARES Act.

As we navigate the spate of economic uncertainty, we've continued to manage our cash and debt closely to ensure that we have the working capital available to capitalize on the economic recovery and to take advantage of future market growth opportunities.

Accounts Receivable was $1.1 billion and decreased 12% year-over-year Global DSO was 61 days, an increase of 3 days of year end 2019, and 2 days from the same period last year. While we have experienced an increase in DSO, it does not reflect the deterioration of the quality of our receivables.

The increase reflects two trends, we saw in Q2 as a result of the pandemic. First, customers are continuing efforts to manage their own cash flows, and are taking advantage of their full payment terms with us.

Second, there has been a shift in our customer mix as large accounts demand has recovered faster and has resulted in a greater proportion of business with large customers who generally enjoy longer payment terms.

We continue to monitor our customer payment patterns very closely and are confident that our collection teams have the resources necessary to respond to current conditions. In our cash flow for the quarter, we generated $34 million of free cash flow compared to use of $4 million of free cash flow in the same period in 2019.

As I mentioned, we have continued to benefit from the ability to defer certain payroll tax payments as part of COVID-19 related economic stimulus. And that is a primary reason for our increase in free cash flow for the quarter compared to a year ago.

Given that we have been operating at a reduced level of demand for the past two quarters, and demand and revenue have gradually improved from their Q2 lows, we would expect to begin to use some of our existing cash balances to meet working capital needs, if volumes continue to improve over the next several quarters. And now back to you, Peter..

Thanks, Olivier. Our strategic decision to shift our portfolio toward higher value specialties was made prior to the pandemic. And we are already seeing benefits. Higher margin specialties have been some of the most resilient parts of our business in the COVID-19 environment.

Kelly Science, Virtual Call Center and OCG Solutions have all performed well in this challenging climate. And while our education specialty has been dramatically impacted by COVID-19, we continue to believe it offers considerable growth potential.

In a post pandemic environment, we believe the demand for educators and instructors is going to increase and our acquisition of new school district customers during the pandemic plus a strong pipeline of new prospects support this assertion.

What's less clear in a post pandemic environment is a staffing demand we'll see from small and medium sized businesses we serve within Kelley professional and industrial without the resources of larger companies, which are showing good signs of recovery, small and medium enterprises have been disproportionately impacted by COVID-19 and are not yet showing the same signs of recovery.

Overall, we delivered acceptable Q3 results in a tough business environment. We're encouraged by our sequential improvements and strong pipelines in all of our operating segments and will continue to closely track the recovery trajectory as we enter the next phase of the pandemic. Olivier will now share his thoughts on what lies ahead..

Thank you, Peter. Consistent with the past two quarters, we are not providing guidance based on where we are in the cycle. Economic conditions continue to be highly uncertain.

However, we are comfortable that after reviewing fourth quarter economic data and completing our annual planning cycle, we'll be in a position to return to providing an outlook each quarter, beginning with our year-end 2020 earnings call in mid-February.

Since the early stages of the crisis, we have continued to evaluate the viability of demand scenarios based on the depths of the downturn. And now's the speed and stability of the economic recovery, including the possibility that they will be repeated cycles of reopening of the economy, and then a subsequent resurgence in infection rates.

We continue to review the resulting impact of the scenarios on earnings, cash flows, and debt covenants matrix. We continue to stress test our cash flows and debt covenants, and at this point, we remain confident that we have adequate financial resources and liquidity to weather the crisis.

We are also planning so that we are prepared to take actions that advance our [Indiscernible]. For example in the quarter, we completed the sale of our staffing operations in Brazil, and are evaluating opportunities to advance our inorganic strategy in the specialties where we choose to focus to accelerate our growth.

So while we are in providing guidance, I will share some perspective on the fourth quarter. Current trends may not be predictive of future results, but they are helpful to understand the current level of demand and customer buying behavior.

As mentioned in my remarks on the third quarter results, revenue declines were not even across the segments, and neither as been the pace of subsequent improvements in revenue trends. Education in particular will be challenging in Q4 as less than 25% of the district's we service our back to fully in person instruction.

While we are supporting our K-12 with remote and hybrid inflection, demand for our services will be higher when all schools are able to return to in person in selection.

Assuming the Q1 global response to COVID-19 and related economic impacts, doesn't change significantly we expect the recovery period to reach pre-crisis revenue levels will be longer than our view when we reported in Q2 to give a sense of the speed of recovery we are seeing for the month of June, our year-over-year constant currency revenue decline was 22.5% and our Q3 constant currency year-over-year year revenue decline was 18.2%.

Revenue trends were consistent for each month during Q3.

Other factors specific to Q4, we are starting to see some of the traditional seasonal lift in demand for our services in the distribution and logistics sectors, which are encouraging, and we anticipate that revenue in education will also exhibit the normal seasonal trend caused by the K-12 school calendar.

And as a reminder, 2022 is a 53rd week fiscal year for us. So Q4 will have 14 weeks of revenue. But the additional week is a holiday week. So we will gain about two working days in Q4. We continue to expect revenue trends to reflect year-over-year declines until we anniversary the economic impact of the crisis in March 2021.

We expect our Q4 GP rate to be slightly lower than Q3. We expect to have a seasonal increase of education, revenue and lower margins, and certain employee related costs that are always subject to a degree of variability that we would expect could be even more pronounced during the pandemic.

We have continued to work closely with our customers and I've not yet seen any material sign of margin pressure due to the current environment. And as discussed, we have taken some definitive steps with respect to SG&A expense levels in response to the crisis. And we'll continue with strict cost controls.

However, we are handling the temporary compensation reductions and acted at the beginning of the crisis in the month of November, and ended all furloughs in October. Based on the anticipated speed of the recovery, we have continued to assess our service delivery infrastructure and cost base.

In mid-October, we made the difficult decision to start reducing our international staffing levels in line with expected volumes. We've continued to monitor conditions and take actions consistent with our scenario planning. Back to you now Peter..

Thank you, Olivier. Even though our aggressive plans for growth have coincided with a global pandemic, I'm encouraged that we are making significant progress in reinventing ourselves. Progress that will serve us, our customers and talent when the crisis ends. We have an aggressive path to pursue our specialization strategy.

And we have organized the Kelly of the future to grow and thrive. We're making strides in our digital transformation journey, building a technology foundation to sustain growth. We’re affirming our commitment to talent on assignment last quarter, introducing our five-point talent promise.

And we continue to monitor the market for acquisition targets to bolster our inorganic growth aspirations. This progress would not be possible without the talent and dedication of the Kelly team. And that passion we share for our purpose of connecting people to work in ways that enrich their lives. And we are now looking to extend this purpose.

From our vantage point operating squarely in the middle of the talent supply and demand equation, we continue to see that long standing systemic barriers in the U.S. make it hard or even impossible for some people to secure enriching work. As a talent company that's always considering what's next for talent.

We believe we can and should do more to champion those who aren't given a fair opportunity to secure meaningful work. Our new platform announced last month equity at work, sets a course to upend systemic barriers to employment and make the U.S. labor market more equitable and accessible for more people.

Kelly is uniquely capable of being a catalyst for positive change. And we believe that change will not only help Kelly place more people in great careers at great organizations, but also help their families, communities and the overall economy thrive.

In closing, I'd like to thank our internal teams, our talent on assignment, our customers, or board of directors and shareholders for their support. These are challenging times. But together, we are rising to the occasion and will emerge stronger than before. John, you can now open the call to questions..

[Operator Instructions] And one moment for our first question and we'll go to Josh Vogel with Sidoti. Please go ahead..

Thanks. Good morning, guys.

Hope you're doing well?.

Morning, Josh..

Good morning, Josh..

Hi. Peter earlier on in your commentary, you're talking about changes in supply issues in lower wage jobs and assuming that's because of stimulus and unemployment level, where people are getting paid in unemployment. Now I'm assuming that's in professional and industrial.

But I'm curious if you could just talk to order flow within that division relative to three months ago? Are you seeing stronger orders coming in, but you just don't have the supply? And do expect that that supply to improve once the stimulus -- now that the stimulus is over?.

Yes. Thanks, Josh. And hope you're doing well too. Yes. We're very encouraged by the order demand that we're seeing in professional and industrial, but also in other parts of our business.

I think it's not only the stimulus dollars, but it's also small and medium sized enterprises that are reluctant to really match the market wage rates, particularly when you have big box companies that are paying, you know, $15 an hour if a small and medium sized business isn't willing to match that.

It's a challenge to find talent, particularly in a environment where people have transportation needs, childcare needs, may be reluctant to go into a workplace because of concerns about the pandemic. So it's a combination, particularly at the lower end of the wage scale. We don't see the same dynamic in our professional skill sets..

Just maybe to add on that specific to the P&I segment. We have seen wage inflation basically on the segment moving up. We were at about four last year Q1 of this year,. 4% increase.

We are now more at 6% to 7%, meaning that, in some cases, we are successful at convincing some customers probably mainly large customers to really get more competitive in terms of wages, which of course, I mean, knowing the numbers that we're sharing with you is rather positive for us also..

Thank you for the insight, sir. And Olivier, you may have talked a little bit to this, but I was writing down notes. So I missed it. Looking at your science, engineering and tech, I'm not sure if you guys are going to call that set or whatnot. But down 14%, it's mostly U.S.

and Canada, I'm seeing some of your peers that are -- provide services to that end market; they were down more in the mid-single-digit. So I was just wondering if you can talk to the difference maybe in your business.

And just talk to some pockets of strength there versus weakness that you saw on the quarter?.

Yes. I mean, the -- we see very positive signs of improvement in science. Clearly, we have seen some pickup over time from Q1, I would say, Q2 was pretty resilient. But we have seen those things moving up pretty quickly. Engineering is much more challenging. And one of the reason is oil and gas, where we still see some downside.

We start to see IT picking up. Telecommunication, which is basically NextGen and GTA were 2019 acquisitions is a little bit down not because of the markets, but more because of some customer dynamics. I mean, namely around T-Mobile and the merger around that.

But I would say we start to see very good sign in terms of science, and to some extent, IT or technology..

And Josh, I would just point out that our exposure or the volume of business we have in IT is smaller by comparison to a number of companies in the professional and technical space.

Hence, our inorganic strategy, as I mentioned earlier, in addition to education, also looking to bolster our portfolio, if the right opportunity came along for an acquisition..

Right. Sure. That makes sense.

The customer dispute in Mexico, is at an isolated event? Are you having any other negotiations with clients, whether there or elsewhere globally?.

No. As I said, it's really a one-time event. It's a non-cash item. It was a dispute that is older than five years. It is basically one of our customers in Mexico, to make it clear. We don't have any more relationship with this customer. So I would call it a very isolated case, that is pretty old.

But we have not seen though we have not any other similar exposures. so far..

We have a great track record with our customers, as you know, our accounts receivable are one of our strongest assets, and over many, many years. This is a one-off situation that resulted from a just a extenuating set of circumstances in the Mexican court system..

Yes. When you look at our balance sheet, and we mentioned in the balance sheet and also in some disclosures, the level of bad debt we have historically. This is really a very unusual type of event, not because we don't have bad debt, but its more of the magnitude, the unique magnitude of this event..

Sure. Just one more, and then I'll hop back into the queue. Just trying to get a handle on cash flow, especially thinking out into 2021.

And when we look at the balance sheet, the line item for accrued payroll and related taxes, that's all differ payroll taxes, and we should expect half of that to be paid at the end of 2021 and the other half at the end of 2022?.

Yes. I mean, when, when you see the balance sheet you're going to see there is a specific line item in the long term liabilities. Now it's about $76 million. That is basically mainly is a deferral of the U.S. payroll tax. It was a positive boost to our Q2 free cash flow for about $38 million.

And again, in Q3 for the same type of amounts, we expect, of course, similar amount of benefits in Q4. So the total is going to be probably around 110 million and 50% of it should be paid basically at the end of next year and the second half at the end of 2022..

Very well. Thanks, guys for taking my questions. I look forward to talking soon..

Yes. Thank you, Josh..

Next, we'll go to Kevin Steinke with Barrington Research. Please go ahead..

Hey, good morning..

Good morning, Kevin..

Good morning..

So you referenced strong new business pipelines, I believe.

Maybe could you just talk about what's contributing to the strength in the pipeline as you see it?.

Yes. I think, particularly among our large accounts, Kevin, we're seeing very strong demand. And that's both in our professional industrial and also in our Set [ph] businesses, Science, Engineering and Technology. And I think it's just a reflection that those businesses are figuring out how to operate in a pandemic environment.

And there's some pent up demand for the products and services that they that they offer. Our life sciences practice, for example, has been resilient throughout the pandemic, but we're seeing nice increases in order demand there. Distribution, logistics, particularly -- it's particularly apparent in among our large accounts..

I would add automotive where we see a lot of improvement, which is very helpful for us as well..

Okay, great. And so, those opportunities are actually moving forward in the pipeline in this environment.

It's not a situation where maybe things are in the pipeline, but they're little slow to convert or just trying to get a sense as to how quickly those opportunities are moving towards actual revenue generation?.

Yes. I think I'd actually say among the large customers, they're accelerating. I think among small and medium sized, as I said, it still remains a little bit slow. Our outsourcing consulting new winds have been very encouraging, as well as the pipeline. The decision making cycles in that space tend to be a little bit longer than pre pandemic.

But again, we're seeing deals being closed a number of significant ones last quarter, and the pipeline looks strong as well in the OCG space..

Okay, great. So, Olivier, you walked some of the factors -- through some of the factors behind the year-over-your gross margin improvement. I don't think you actually broke out kind of the basis point contribution, like product mix and employee costs.

Would you be able to provide that as you have in the past?.

Yes. I mean, when you look at Q3, so our margin is about 18.4% to 40 basis points higher than 2019. And it's very helpful, because basically it is moving our GP dollar decline at minus 16% instead of minus 18% in revenue.

I would say when you look at the 40 basis points, the project mix, which is something we have seen structurally over time, out of the 40 basis point is around 20, which is something we have seen in the past. We have been always showing improvement year-over-year of about 20, 25 basis point.

Fee and customer mix are -- I would say fee is much more international where we have more exposure into fee business. Customer mix, yes, is slightly negative. I would say these factors are more or less offset with employee-related cost. And employee-related costs, I mean, payroll tax in the U.S.

This one I would say it's a quarter-over-quarter normal fluctuations we have. And I would say that the main factors you need to think about is our structural improvement of our product mix, about 20 something basis points.

And the other 20, I would say is the result of the sampling related costs positive offset -- partially offset by a little bit of pressure on the fees, especially in International, and the customer mix that we're mentioning whether it's on margin, but also, of course on DSO.

So I think what you need to think about is that we are still on track to continue to improve our value profile or GP margin by about 20, 25 basis points, due to this product mix, as we have done for the last five years. In fact, as a reminder, our GP margin in 2014 was 16.3.

And we have seen even during these challenging environments in 2020, our margin being even if you exclude one-time CARES Act and employee benefits fluctuation, I mean, continuing to show progress. And again, the main long term structural driver is a product mix I was referring to..

Okay. That's helpful. Thank you. So I just wanted to get a sense as to how you think SG&A might trend in the fourth quarter. You mentioned, ending temporary costs or temporary reductions to compensation, and also bringing back employees from furlough.

Have you also referenced doing some adjustments to internal staffing? So, I guess kind of against that SG&A adjusted for the customer dispute in 3Q, would you expect SG&A to kind of tick up sequentially? Or what -- how would you think about?.

Yes. I would -- yes, I think the way I see these is really -- we are keeping an eye on what we call recovery ratio, right? I mean, how much of the drop in GP dollar we basically offset by basically SG&A management, right? So in Q1, it was about 63%, Q2 80%, Q3 74%.

So that mean, that basically, if you look at Q3, we have managed to offset 74% of the drop in GD through SG&A management, right? And it's a very good way to basically protect our bottom line. And when I look at Q4, we see this recovery ratio, probably trending around, I would say, 50%.

Meaning that we expect basically to cover through cost management about 50% of a potential pressure on our GP dollar gross in Q4..

Okay. That's great. Very helpful.

So with your transition to the new segment structure, I know it's kind of early days, but any initial returns or early wins from this structure that you're seeing just within the organization or within the pipeline?.

Yes, very pleased. Kevin, already. I think the focus and the combination of the -- what I referred to as the earlier as the subscale businesses that were in different segments. We've seen some early customer wins.

I think the discipline and focus around the specialty that the combination of those resources has produced a -- I call it a reenergized organization. And I think we're frankly ahead of head of where I thought we'd be after just one quarter..

Yes. First of all, what we see and that's one of the very positive outcome of the new structure amongst those things is combining outcome based business with staffing, I think is creating a new dynamic. And if I look at for instance, P&I and I'm referring to Q3 numbers, so not an extremely positive environment.

Our outcome based business in P&I in Q3, the revenue is up by 16%. And we have seen some accelerations. First of all, it's a very resilient business. We have said that several times. But when I was looking at the numbers, we have seen some acceleration in Q3 of the dynamic.

And I believe that part of it is really combining outcome based together we start seeing, for instance in P&I that is creating I think broader integration, topline, synergies and opportunities that I think we start to see, for instance, with this example..

Okay. That's helpful color. I think you mentioned in your prepared comments that you establish growth targets for each segment.

I don't know, in the future you would be open to discussing those or what your plan would be, for maybe a longer term once we get past this crisis, perhaps talking about those targets?.

Yes. Kevin, I going back to pre COVID, I think, in my remarks in February, we talked about the aspiration to provide more transparency into growth targets for the company. The pandemic has disrupted that aspiration.

But we would like to continue to be transparent with our internal targets, because we think that helps inform how we're doing and how we're tracking, but it's a work in progress..

Okay. Yes. Fair enough. Makes sense. I'll turn it over for now. Thanks for taking the questions..

Yes. Thanks, Kevin. Appreciate it..

Thank you, Kevin..

Next, we'll go to Joe Gomes with The Noble Capital. Please go ahead..

Good. Morning, Joe..

So just real quick, if you could provide a little more color in terms of the thought process behind and sizing you mentioned, you sold in the third quarter, your Brazilian staffing operations?.

Yes. So I'll let Olivier give you the numbers, Joe. But, you know, we made the investment in Brazil more than probably 10 years ago with aspirations to have that be sort of a beachhead for a Latin America expansion. In the intervening decade, we've obviously changed course.

And while we continue to provide our outsourcing consulting solutions in Brazil to our global customers, the staffing operation just didn't line up with where we're headed. And so, we decided to exit the business..

Yes. Just to give you an idea of sizing and so on, and you are going to see that in our earnings release. And also, of course, our 10-Q. I mean, when you get the size of the collection, and you're going to see the cash impact, the cash proceeds net was about $1.2 million, and you're going to see that on our cash flow statement.

So small, right? And the P&L impact, I mean, is close to zero, meaning, overall, the election was at book value. To give you an idea of the size of the business, the revenue of last year was about $74 million. So pretty small overall. And the year to date 2020, and you're going to see that on -- again on the 10-Q and also the earnings release.

Yesterday 2020, about $70 million. So a rather small business. I think is clearly another step on our focus strategy. You might remember that over time, we have basically a diversity and scale legal. And that's another step on our focus strategy.

But pretty small impact overall, right?.

Thank you for that. Switching gears on to the education business and understanding some of the challenges there. You did mention you acquired some new clients in the quarters. Wonder, if you give a little more color detail there. In also, given the uncertainty in that business.

Have you seen any increase in difficulty in retaining talent here? Just the teachers saying, hey, I've got to do something. And if it's not -- if the schools aren't going to go back to a normalized model anytime soon, I just have to find something different.

Is that becoming more and more challenge for you in that business?.

Yes. So Joe, thanks for the question on sort of reverse order, or maybe in the order you ask them. The new customer acquisition is very promising given the environment. But even in compared to pre pandemic environments our new customer winds are up substantially.

And I think it reflects the fact, the comment I made earlier that when we get to the other side of the pandemic, the demand for instructors and teachers is going to be -- is going to increase.

And part of that is the number of teachers that are leaving the profession, and retirees, which was already the case pre pandemic, but probably will be accelerated as a result of the pandemic.

And with respect to the pandemic environment, particularly among I would say, people in upper demographic in terms of age, many teachers are reluctant to go back into a classroom.

So that has impacted our ability to some extent with our historic fill rates have been a little bit lower due to the fact that substitute teacher population tends to be older than other disciplines, because a lot of them are retirees or had had some role in education.

We have, I think, done a nice job in a short amount of time pivoting to recruiting a different demographic, in what we call our momentum seekers, which are individuals who may see teaching as a new career opportunity coming out of the pandemic.

And so, we've stood up a number of different programs to try to recruit from that demographic into our supply base.

But I think the combination of the teacher shortage is coupled with what we're seeing from school districts wanting our help to prepare for the post pandemic environment where we're encouraged even though the you know, the top line is taken quite a hit during the crisis..

Thank you for that color. And one last one for me. Obviously, you've seen the headlines about new lockdowns in Europe.

Just trying to get a little bit of more detail here on how you guys -- how it's been impacting your business? How big of a monkey wrench is it throwing at you at this point?.

Well, as you know, Joe, our exposure to Europe is significantly lower than some of our some of our competitors. And -- but we are seeing, not necessarily an immediate impact of the lockdowns, but customers are clearly dealing with it.

And it is -- there are some early indications that companies will deal with it differently than they did in March, but they're still going to have to grapple with transportation issues, childcare issues and the like. So it's I think, too early to tell.

But particularly in countries like France and the UK where they're basically reinstituted almost total lockdowns. There's likely to be a sort of an impact, although it's hard to hard to quantify..

Okay. Thank you for taking the questions. Really appreciate it..

Yes. Thanks, Joe. Good to hear from you..

Thank you, Joe..

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

Okay, John. Appreciate your help. Thank you everyone. Stay well..

Thank you, John. Stay well, yes..

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