Q3 2019 Earnings Call
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 your portion of the presentation. Today's call is being recorded that's request Kelly services. If anyone has any objections you may disconnect at this time I would now.
Please 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, 29 teens third quarter conference call.
Hi, Peter Quigley, Kelly, Kelly's President and CEO with me on today's call is Olivier T. Rowe our CFO .
Let me remind you that any comments made during this call, including the Q and a.
They include forward looking statements about our expectations for future performance.
Actual results could differ materially from those suggested by our comments. The we have no obligation to update the statements made on this call. Please refer to our assay see 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, our 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 stats and newest president and CEO .
Like my predecessor, George Corona I have a profound respect for the people of Kelly and then unshakable belief in our mission.
Connecting people to work in ways that enrich their lives. This company has a rich history and a bright future ahead as.
As George mentioned on our Q2 earnings call it will be saying, what 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 Kellys third quarter results as we do so please note that year over year comparisons are represented in nominal currency with the exception number international staffing segment, which is in constant currency.
Looking at key measures of Kellys Q3 performance this wasn't challenging quarter.
Revenue was 1.3 billion down 5.6 per cent 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 U.S. branch operations into one the changes. We made are designed to accelerate growth in her focus 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.
Well, 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 at cost we are seeing improved efficiency in our U.S. branch operations, but we're 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 U.S. market that we noted last quarter continued throughout Q3.
In particular ongoing softness in U.S. 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 line, let's look at how Kelly's three operating segments performed in the third quarter, starting with America's staffing.
America 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 and technical specialties grew 20 per se.
And in the third quarter compared to last year [noise] Favourably impacted by next Gen 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 America staffing was 18 point, 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 nexgen on business mix.
<unk> 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 next Gen and the costs associated with the TJ 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 and international staffing for the third quarter decreased 9% year over year in nominal U.S. dollars on a constant currency basis revenue decreased 6%, primarily due to a slow down one of the market in Western Europe Europe , partially.
Partially offset by increases in eastern Europe .
Screens have referenced 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 is 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 G T. A one of our new strategic acquisitions, let's first look at how GTS performed as a hole 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 GE T.J.
In addition, we continue to see structural improvement in our product mix with year over year volume increases primarily in our business process outsourcing VPO and Kelly connect practices offset by decreases in our payroll process outsourcing PPL 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 CW L.P.P.O. centrally delivered staffing and recruitment process outsourcing Rpos 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 RPL centrally delivered staffing and P.O. practices, partially offset by lower employee related costs.
Our outcome based businesses is comprised of our BPL Kellyconnect and advisory services solutions and includes the results of the newly acquired G. T. A organization gross profit in our outcome based business increased 16% year over year. The increase continues to be driven by steady volume growth in both.
Barbie Pos kellyconnect products, along with the impact of the G T a acquisition.
Overall, the G.S. is PSEG segments gross profit rate was 19.8% for the quarter up 60 basis points year over year, primarily due to structural improvement in our products product mix and lower employee related costs expenses MGTS were down 3% year over year as a result of country.
Then you'd effective cost management.
All told.
GTS third quarter operating profit was 28.4 million compared to 24.1 million a year ago, and 18% increase [noise].
<unk>.
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 so called olasky.
I want to that accompany report. These results were unfavorably impacted by 80 basis points due to foreign exchange so constant currency basis, our so called <unk> revenue was down 4.8% year over year I.
I want to sweep, though <unk> includes the results of Nexgen G, which added 270 baseball into 'em current constant currency revenue growth rate.
This was partially offset by the 40 basis points impact other than recent divestiture of our do you go to specialty practices.
Overall, Newsweek Olson garanti organic revenue growth.
It was down 7.1, so sense.
Then equal revenue declines reflect the weakening economic environment in Europe , and we didn't the manufacturing say, starting the U.S. as well as continuing challenges, resulting from the Q1 lets look showing Oh, you as branch operations.
Stashing placement fees wound down 18% enough that currency and down 17%, that's a year ago in constant currency.
The feedback for months reflects declining fees in but I know, you've got stashing and international Stashing.
Overall gross profit was down 4.8% all 4.1% on a constant currency basis.
Our gross Brophy toys, 18, though summed up 20 basis points when competitors as well there last year.
Puts them at least 30 basis points of all Jeep Cherokee improvement.
As you do the acquisition, that's Nexgen, GTH, which are higher margin specialty businesses, although I know many basie GP rate declined 10 basis point as the continuous hugs run improvements in GTS GP rate was if say advice would you do a decline in America stuff.
As you an expense he is well known sweeper SUNS Sheila you all to wonderful, though Sunday, excluding the impact of currency fluctuations.
Including as yet and they into so quite a 29 team a 6.9 million that's expenses from our nexgen and Gi acquisitions.
So on an organic basis, excluding currency impact expenses, well known 5.5%.
Okay metric tussaud's of that decrease reflects lower oil that's almost based incentive compensation and the rest calling swung cost management a fault.
Resources with revenue trends.
Earnings from operations were 17.1 million in this quarter compared with 2018 earnings of 21.9 media.
He's resin suite verdict on Russian right are we done on gross profit of 7.5 per cent compared to 9.2% for Q3 28.
These results reflect an increasingly challenging on high month and further highlights the need to continue to execute on our focused specialty data solutions cottage.
As we haven't mentioned on prior calls could easily quiet to reflect the unrealized gains and losses on changes in the market the value of our equity investment in they'll sort of holdings as a component of our earnings.
As a result in the quarter, we recognized a 79.3 million pre tax loss on our fill sort of common stock.
In 2018, we recognize 18.8 million gain on the bell sort of common stock in Q Sweet these gains and losses I recognize beetle earnings Mamba Proliferations as a separate line item, we didn't other income and expense.
Income taxes. Many seats all this 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 fund sweep, though SUNS compared to a 16.1 expense.
In 2018, the change in the effective tax rate to is primarily due to the taxing back of the gains on the those he's on the pursuit of common stock.
And finally diluted earnings per share fell this quarter was 29 team well also 27 cents bill share compared to earnings of 84 cents in 28.
Included in 29, King MPS is approximately 70 cents related to our Lawson they'll sort of stopped and that those tax compared to 28 cents of gain in 2018.
In addition, our 2019 MPS includes a five cents benefit from our recent acquisitions. So on an adjusted like for like Macy's.
Yes for the quarter was 77 cents compared to 56 cents a year ago.
Now as we look ahead to the rest of the year.
After considering our results was this quarter, we expect our Q4 reported revenue growth to be down four to five point.
Well to 5%. This includes unexpected unsavory about the impact of FX on the revenue.
Okay mentally sodi they spots.
The impact of hours the recent acquisitions of Nexsan and GCA are included in our expectations.
We expect Q4 gross bookings rate to be on thought we'd love.
We expect fluctuated changes in business mix from our shift to higher margin solution.
Organically on as a result of our recent acquisitions to positively impact our GP rate. However continues margin erosion in America stashing.
Most of this improvement.
The result, our girls question, though not though not expectations are consistent with our revenue expectations.
We anticipate Q4 SDN expense to be downfall to 5%. This includes the engine that amortization expense related to the recently acquired intangible assets.
Consistent with our piled discussions the outlook provided does not reflect any gain some of those isn't though so to start although we do believe that should show unrealized gains on those easily resulting from changes in market price could be material.
And finally, we expect the fleet I think just accelerate to be in the mid teens. Excluding any addition that him back from del Sol gains all those these.
Moving fall as a result, a free sensor revenue trends, we are being more aggressive enough stuckey, taking actions to ensure that won't go onto so season cost structure is that I know on you know time expectations and position us.
For future growth in our focused specialties.
Now, let's move to the balance sheet cash 2020, swimming and competitive for 75 million at yearend 2018.
Accounts receivable that that 1.3 billion and I'm down 2.4% from year end 2018.
Yes. So was 59 days up one day from the same quarter last year and a four days from Q4 2018.
Ecuador, and with that of 18 million compared to 2 million I'd see around 28.
I will increase the level of that include the impact of borrowing related to our acquisitions of Nexgen and G.
Our Q3 balance sheet also reflects the adoption is annuities that counting spelled out if they keep at the beginning of 2019 why do we have reflected right, though views assets under these obligations on our balance sheet. The adoption didn't have a material impact on that well El Nino NOL do we expect intuitive going forward.
In our cash flow of all year to date free cash flow was 60 million compared to free cash flow of 15 million in December of last year.
This improvement in free cash flow as it allowed us to quickly repay borrowings used to fund our recent acquisitions and de leverage our balance sheet.
For more information on our performance. Please review the sudden quite a slide deck.
But on our website.
Now turning back over to be door for his concluding soaks. 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 U.S. branch operations in the first quarter, we were optimistic about how quickly we could reposition resources and rebalance our portfolio towards certain higher margin businesses and while we are achieving efficiency and acquiring new customers. We're not seeing the typical ramp up demand generation then.
Our customer base.
In light of recent revenue trends, we have already begun taking further action to bring our Americas cost structure inline with our topline and we will continue to do so or retaining our ability to capture demand in our focus specialties in the U.S. 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 softer U.S. manufacturing sector, a weak economic environment in Europe , and a constrain supply of talent worldwide against that challenging backdrop Kelly accomplished several things this quarter. Despite pressure on the topline growth we delivered improvements in our GP rate as we continue to focus on higher margin.
Outcome based services, we executed on our inorganic specialty strategy with RG Ta Nexgen acquisitions, once again outperforming expectations and delivering strong revenue and GDP growth and we effectively contain costs. Despite these efforts our Q3 results fell short.
Well 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 delivered to shareholders as I transition into the CEO role over the course of the next quarter. All 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 act.
Efforts next quarter Olivier and I will now be happy to answer your questions. John the call can now be off open for questions.
And ladies and gentlemen, if he would like to ask your question. Please press star one on your Touchtone phone.
Here its own indicating been placed in the queue. If your question gets Antonia Western move yourself from the Q. Please press the pound key again star one final question.
Personal line of and Josh Vogel with Sidoti and company. Please go ahead.
Hey, good morning, a theater and Olivia Thanks, taking my question running this morning, Josh I apologize I hopped on a couple of minutes late so I'm I'm, sorry, if I ask something that you already covered but I guess first I'll start with a just some comments you actually ended with Peter I'm just talking about the America is a cost structure.
And bringing in line with current demand and we know in in a in the recent year to you that you spent a good amount of time in 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 <unk> or off and based on the macro environment and overall demand trends.
Thanks for the question Josh.
When we restructured the U.S. 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're seeing in end markets.
So it was designed to scale up and down in a more agile way and even within the U.S.
It's it's a.
Significant undertaking involving a lot of parts of the organization and as I indicated in my comments.
We're seeing the efficiency that we expected from the restructuring of the the agility in terms of generating growth is just taking longer than we expected.
We have now just a much much more flexible model and when I look at public TV deeper risky.
In our commercial reason as despite those top line pressure, we doing pretty good a much better than we would have down a couple of years ago, because as Peter was explaining we have a much more jyllands flexible delivery model that help us to scale up and down more quickly than we were capable of doing a few years.
Okay.
Understood. Thank you and just when I speak about.
Actually scaling down is that only involve personnel reductions or is that potentially a closure of a branch or you know how does how does that look.
Well.
Josh when there is a a need to look at the down.
Down scaling resources, we look at all of the resources that are available to delivering services to our to our customers and so that would include both head count and there may be.
Appropriate closure of branches, where the demand is 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.
You've understanding a this historically tight labor pool in the U.S. I was wondering if you could maybe talk to your efforts about what you're doing with regard to or with a candidate acquisition.
What's being done to attract and drive more candidates your way.
So where you.
One of our strategic initiatives for the last couple of years, Josh is been a what we call that 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.
Jim 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.
Well, what we think will be some.
Innovative ways of engaging talent, we of course are relying on many other means a 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.
You know we continue to look for ways that allow talent to see Kelly as a preferred destination for their career aspirations.
Two other than that and further develop and technologies you might tweak or that we all know investing in our new phone dose he's a fall as the U.S. markets.
And we are likely going to go live next year and combine that we did that application and other technologies, we feel it could also enhance or the way we can attract tenants I notice so of course that well productivity related.
Great. Thank you and just one more and.
And I just feel compelled to ask about you know in light of the labor environment in the U.S.
A weak economic landscape across Europe , and sluggish manufacturing demand I know, it's early but if you could give any sort of direction or sense of what 2020 could have in store when we look across the Americas GTS in international that that would be appreciated.
Yeah, I think I'm going to kind of starts with what we see now and probably come until you didn't get done what could it means for next year or you have seen in our guidance that we forecast now our revenue to be down by about four to five including sodium base point, though.
Exchange rate.
So if you're going to be similar to what we have seen in Q3 and.
The fact that.
These trend looks.
I could equal Q4 is that the overall I will exit rate at the end of Q3 c me now to our until you actually was going to trend. So.
We see that if you if you're seeing about that kind of trends, we see that whether it's in Q4 next year. We are going to continue to see challenges in Europe , a in demo still flying gross ozu, we see that.
Eastern Europe is continuing to do well Oh, you will see a in some of our report that countries like Russia.
Our steel growing at a fast space.
But even more challenging in western Europe , although we have some bright spots like you've already but of course, we anticipate a still challenging on environment in Europe . That's one of the reason we continue to.
Invest in additional tools AWS.
Used truck show technologies, and so on to continue to increase our efficiency.
When you look at all or a GTS segments. We do you see some good gross you know I would come basis as we have seen for some several quarters. So the outcome based business I think he's going to continue to a good traction.
There's some things that I mentioned, the we feel that on the stashing Sanya U.S., whether its GTS stashing, though our U.S. operations.
Commercial environment is gonna be difficult, a we believe that overtime.
As discussed by Peter we see that we are going to start to gain traction, but he's going to be more in the second half of next year as opposed to NIS three very early next year.
So we feel confident on that the topline he's going to rebound at some stage or doing a next year. We see good about the our recent acquisition GTN Nexgen, we've seen that they are going to continue to boost or to boost our top line.
But the environment overall in the U.S., whether its manufacturing all the labor market conditions I'm going to still remain challenging in the foreseeable future.
Thank you for all that insight I'm not off now thank you.
Thanks, Josh.
Ladies and gentlemen, just a quick reminder, if you do have a question. Please press star one and done that's going to Joe Gomes with normal capital. Please go ahead.
Joe Your line is open if he on mute maybe.
I'm sorry, good morning, Marni job money.
Just wanted to touch base first on the education segment was down slightly said you lost a contracting.
I was wondering if you could talk little bit why you lost that contract well that segment acts that loss up.
What what kind of is the.
Our men in the education segment these days.
Well thanks, Thanks for the question Joe.
I mean, they the.
Competitive environment in the education space a is.
Hey, you know is significant their their contracts are left their public the pricing becomes public so there's always some.
Competitive.
Information that leads to a potential competitors coming in we have a very strong track record of.
Providing school districts, where the value that that they see it differentiates Kelly from others.
But you know from time to time, we are going to rotate out of a customer and that happened and so it happened there was a.
A large school districts. So the impact was a little more significant than 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.
Education business, but again we.
See education is a pivotal growth pet platform for the company.
Yeah, I would add on that that of course, when when you've got the gross a topline growth in education Q1, Q2, well at about seven FFO Sun. So.
Q3, either you'd be like an exception to that trend we have seen nothing this year, but for for several quarters.
My Kids TD growing ads, let's see me now phase and we have seen the Fas basically between 7% to 9%, we don't see any change in trend over there.
We have a very good pipeline a into how much of a new customers and you mean.
Of course, losing a big customer is challenging but the.
I would say structural trends, we see a the pipeline we have the dynamic we have a in our expansion and all Guinea gross I think is not changing we are now basically launching and even looking at a and only childhood project.
In the marketplace, where we expect a basically two got sure.
Hi gross.
And get to also some momentum or probably stocking next year. It's a very good then moving market. We are weighted position through our teacher on coal a acquisition two years ago to basically beat up on what we have now and continue to develop these uh huh.
Gross market Oh each item.
Okay. Thank you for that.
And I just wanted to circle back a little bit here on the the challenging environment.
Because you guys mentioned the challenging environment last quarter also you know the Soffe Western Europe , and you know some of the weakness here in the U.S. I'm trying to get an idea a maybe a little more color.
What changed quarter from court sequentially that you went from basically flat revenues to down this quarter. So you know relatively significantly.
In in the environment that you know you emitting are described is challenging last quarter.
You just did you can provide some more detail now would be appreciated.
Sure Joe I'll start and I'll ask Olivier maybe to provide some some color on the numbers, but you know the.
Our business is a cyclical one at where we ordinarily would see.
A significant ramp of business in Q3 into Q4.
And the.
The softening in the manufacturing portion of the economy in particular in which we as I indicated in my comments, we are over weighted.
Began to slow down in.
You know according to the P. I am I 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 the demand that.
We see another cycles.
And it's not been limited to.
A single portion of the manufacturing a industry it it's across geographies and across industries. So it wouldn't just indicate that the.
You know the softness that started in Q2.
Likely accelerate it into Q3 and given our seasonality had a.
Disproportionate impact on our results for the quarter.
Yes, I would I would complement that by saying that manufacturing Giza a post the border.
Activity for us.
But it's material so knowing that the demand I would say slowing down then turning to linger ditto for recessionary moaned, although it's not realization.
As we are exposed to the business on the material standpoint in denim of weight.
That is putting pressure on us.
Okay.
Thanks for the insight. Thank you thanks, Joe.
And with no further questions in queue Missy quickly I'll turn it back to you if you have any closing comments.
No John Thank you again, thank you for a long.
The setting up the call and I think we're good at rain. Thank you very much.
Thank you ladies and gentlemen, this conference is available for replay. It starts today at 11 30 am Eastern will last until December six at Midnight you may access the replay in anytime by dialing one 804, 756 701 or three 2036 times 384 for the access code is.
For and one for 736.
Those numbers again, one 804, 756, 701 or 320 365384 for the access code for one for 736 that does conclude your conference for today. Thank you for your participation you may now disconnect.
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