Q1 2020 Earnings Call
[music].
Good morning, and welcome to Kelly Services first 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 at the request of Kelly services. If anyone has any objections you may disconnect at this time I would now.
Let's turn the meeting over to your host Mr., Peter Quigley, President and CEO, Sir you may begin.
Sure John.
Good morning, everyone and I hope everyone is staying safe.
Welcome to Kelly services first quarter conference call with me on the call is Olivier T. Rowe our CFO.
We have a lot of ground to cover so let me give a quick outline of what to expect.
I'm going to share some Q1 headlines and comment on Kelly's response to the cobot 19 pandemic.
Then Olivier will walk us through highlights of our quarterly performance.
Including the impact of code is 19, and the goodwill impairment, we announced in this mornings release, which was triggered by the stock markets responds to the crisis.
I'll then share some trends, we're seeing the precautionary actions, we've taken to create some further financial.
Flexibility and the proactive steps, we're taking to prepare Kelly for growth on the other side of this crisis.
Olivier will provide insight into our scenario planning.
In some perspectives for Q2.
And finally, I'll turn to what's next for Kelly, including updates on our specialization strategy and new operating model, which are designed to capture and accelerate growth.
So lets jump in.
We saw progress in the first part of the quarter as we saw signs of stabilization in our us staffing business and continued growth in our outcome based and consulting businesses.
We completed an acquisition in our education specialty we continue the accelerated rollout of our new front office technology.
We completed the sale and leaseback of our headquarters unlocking capital to invest in our specialty growth platforms.
We restructured parts of our operations as we continue to dedicate the company to effectively managing costs and aligning them with expected revenues.
We made significant progress on our new operating model, which we believe will yield improved revenue growth in our chosen specialties and we launched a fresh new Kelly logo to reflect the dynamic forward looking company we become.
We're encouraged by these foundational improvements in our business and the continuation of the growth oriented initiatives.
I discussed during last quarter's call, which will remain a key operational priority until we return to topline growth.
Of course, the coal that 19 pandemic turned the world upside down.
During our nearly 75 year history, we've never seen economics stock market and labor conditions, all change as suddenly and dramatically as they did starting in mid March impacting every aspect of operations and triggering.
The noncash goodwill impairment charge the charge does not change our views or confidence in our ability to navigate the cobot 19 crisis.
Or to capitalize on opportunities when the crisis ends.
Operationally, we responded quickly and decisively to the pandemic.
Our emergency management team was prepared for a possible pandemic and our team executed our plans as the crisis spread and led to global shutdowns.
While we continue to closely manage the financial impact as the talent company. Our first priority in this crisis has been and continues to be the health and safety of our people more than 90% of Kelly's full time staff are working from home.
Our recent restructuring efforts are accelerating our transition to a more agile tech enabled service delivery model and coupled with our recent infrastructure investments. This allowed us to transition quickly to remote work connecting our teams to talent clients and each other enabling kelly to respond.
On to rapidly changing needs, while supporting our people in accordance with national and local guidelines.
We've also taken steps to support the wellbeing of temporary employees and contractors, who have been impacted by the economics shutdown.
In addition to redeploying them whenever possible so they can keep working.
We are offering free online training and certification courses were expanding access to license counselors in Kelly's wellness program, we're partnering with online platforms to redeploy furloughed temporary workers.
We're waving registration fees for retraining programs, and we're launching a trending jobs website to help talent connect with any and all employment opportunities, whether there with kelly or not.
Our commitment to tout talent stand strong.
We have also been supporting our customers every step of the way holding virtual round tables with clients to identify their concerns sharing best practices for remote work answering questions about safety and well being of workers.
And delivering creative flexible talent solutions to help them navigate these unprecedented circumstances.
Before Olivier looks at Q1 financial highlights I want to emphasize how incredibly proud I am of Kelly's teams.
And how theyve risen so admirably to this moment in history, there flexibility creativity and unwavering commitment to the talent and customer customers. We serve is an inspiration to me professionally and personally and that buoys my enthusiasm about Kelly's transformation even in the phase.
Of current challenges.
I agree with you Peter.
Good morning, everyone before the Q1 highlights let me remind you that any comments made during this call, including the queuing. They may include forward looking statements about our expectations for future performance.
Actual results could differ materially from those adjacent bioequivalence and we have no obligation to update the statements made on these calls. Please we felt oil SEC filings floated description of the risk factors that could influenza companies actual future foments.
In addition, during the call Sefton that we'd be discussed on the 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 full months in the first quarter side deck, which is available on our website.
As Bill just laid out we started the quarter, we supposedly momentum and an economy that was continuing to grow and ended the quarter in a world that was much different I'll cover our quality, whereas our son provide some color on the impact as equivalent 19 crises on our first quarter over quarter right.
Results, including a related goodwill impairment charge during the quarter. We also completed a previously unknown slow searching plan a real estate collection as well as the acquisition of insight in K 12, education that outing, Boston to get east hydrology and impacted our financial with.
For the quarter.
I will cover those ingredients dated too.
Revenue for the quarter totaled 1.3 billion down 8.8% from the first quarter of the pipe you, including a 50 basis point unfavorable impact from foreign exchange as announced we acquired insight on generally the full teams 2020 and.
Added 110 basis point to our reported revenue growth. So on the constant currency inorganic basis, our revenue for the first quarter was down 9.4%.
We need to begin to see the impact of the Covenant 19 crisis in March demand declined as customers closed facilities to politics that workforces and in response to governmental Directv.
Our education business was particularly impacted as the most us kuljeet suites at close in response to the crises by the end of March the over really impact of the covered 90, new related to demand declines was approximately 270 basis points in the first quarter Lou.
Looking at each segment on the repo conveys the Americas staffing revenue trends pre pre crises wedding nine weeks Q4 trends, but the rate of decline was higher in March as a result of the impacts from covered 19.
The international Stashing revenue decline reflects a continuation of the challenging market conditions in Europe, and the beginning of the Cogent 19 impact in March and finally GTS at continued positive revenue gross the DTA segments souls, the smallest impact from 19 as many of the.
Segments customers are essential industries, we're able to facilitate remote work all continued to maintain rises unless they have their talent, including tenant provided by Katie.
Well and then placement fees were down 23% year over year as fees declined in the Americas testing and at the National steps.
Overall gross profit was down 11 point suite percent, our gross profit rate to was 17.7%.
Down 60 basis points, when compared to the first quarter of the payoff.
The Red decline was primarily driven by higher employee related costs, which offset the slicks ride rate improvement in GTS from shifts in product mix.
As Jane as Ginny expenses were down 6.5% year over year.
Included in expense for the quarter ease of 8.7 million plus hectoring charge, excluding the restructuring charge expenses were down 7.7%. The declining expense reflects our ongoing cost management if faults in response to all pre crises topline trends in.
Addition, incentive based compensation expense for the quarter is also lower as we now expect full year results to be lower than the targeted swipes or payment levels, which were offset in early February.
As I mentioned the first quarter results include the 8.7 million less lecturing challenge in the quarter, we too close lecturing actions to align costs, we expected pre crises revenues to position the organization to adopt our new operating mode Lake during 2020 and finally.
To align to you as branch network facilities footprint with a more technology enabled salvage their delivery methodology.
These actions we the result in expense savings of approximately 20 million in 2020, and we believe that they position us well to respond to the most challenging environment, resulting from the equivalent 19 pandemic.
These actions also aligned with our growth strategy and will allow us to one does a recovery better yields following the crises with a more at Jive and focused organization.
We also completed the sale and leaseback of propulsion of the headquarters campus during the first quarter.
Transaction allows us to relocate catch that previews and investing in real estate to our growth cottage.
The net proceeds from the sale were 55.5 million and where youd inbound to repay outstanding borrowings related to the inside the acquisition and the low dose to end the quarter with no borrowings on that will use credit facilities.
The resulting gain on sale of the headquarters campus facilities was 62.1 the median.
And finally, we recorded a 148 million noncash goodwill impairment charge as the quarter unfolded. There was a significant decline in the global equity markets, including the stocks of many of the publicly trading staffing companies and now.
Our own common stock under us GAAP accounting rules the sees significant decline in our stock price together and entering goodwill impairment test and noted teammate fees a conclusion that as of the end of Q1, a goodwill impairment at all Q.
As speed term noted in his opening remarks, the child is noncash and doesn't change our views or confidence in our ability to navigate the code 19 crises all to capitalize on the subsequent economic recovery.
Including the items I just mentioned our reported loss from operations was 100 million and 11.8 in the first quarter.
Excluding the goodwill impairment and restructuring charges as well as the gain on sale earnings from operations were 12.5 million.
Q1, 2019 reported earnings of 16.8 million also contained a 6.3 million lecturing challenge. So on an adjusted basis Q1, 2020 owning from operations declined 46% versus last year.
Kelly's earnings before taxes also include the unrealized gains and losses on our equity investment in vessel holdings for the quarter, we recognize a 77.8 million pre tax loss on our personal common stock comp sale to a 17.2 million gain in.
Hi, all year.
He is noncash gains on lose these are recognized earnings from operations as a separate line item.
Income tax benefit for the first quarter was 60 to 76.2 million compared with our 2019 income tax expense of 6.4 million.
Q1, 2020 income tax benefit includes 23.8 million related to the non cash benefit on the loss of pursuit of stock and a 23 million then if feet on the noncash goodwill impairment charge.
And finally reported loss per share for the first quarter of 2020 was $3.91 per share compared to earnings of 56 cents Bill share in 2019.
In order to better understand the underlining trend you know earnings let me provide some addition, then I'm formation.
2020 earnings per share was unfavorably impacted by the goodwill impairment charge the loss until sort of common stock and those structuring charge, partially offset by the favorable impact of the gain on sale of the HQ buildings net of tax.
In 2019, EPS was positively impacted by again until sort of stock and negatively impacted Bios structuring charge.
Overall adjusting for these items Q1, EPS was 20 cents compared to 45 cents per share in Q1 2019.
Now moving to the balance sheet cash totaled 48 million compared to 31 million a year ago.
That was 2 million consistent with beyond 2019.
We ended the quarter with no borrowings on our U.S clean facilities as we navigate these values of economic uncertainty I will traditionally low level of that provides flexibility. We've continued to manage our cash and that closely that we may maintained a higher levels of cash then we have historically.
Including borrowings on our us credit facilities.
Accounts receivable was 1.2 billion and decreased 4% year over year, we'll evaluate DSO was 59 days an increase of one day over yearend 2019, and the same period last year.
To date, we have not experienced an increase in India. So as a result of the covered 19 crises.
In our cash flow for the quarter, we generated 5 million of free cash flow compared to 17 million of free cash flow into this embedded in 2019.
We did begin to benefit from some addition that free cash flow generation due to the current market conditions, you still legally we generate free cash flow. During his initial data yards of an economic downturn as we continued to collect our receivables wife payroll cost decline in line with demand.
However, this impact was offset in Q1 by the timing of certain cash payments.
As we move further into the economic cycle, we would expect these additional free cash flow generation to continue for the next several months assuming that customers continue to pay on time. We also anticipate taking advantage of the ability to defer certain us payroll tax payments inline with the care The act.
To provide additional liquidity.
Thank you back to your Peter Thanks, Olivier clearly the quarter Didnt unfold as anyone envisioned talent and customers are struggling to navigate a new normal without knowing the depth or duration of covered nineteens impact customers in vulnerable industries closed facilities and ended assignments.
As Olivier noted Kelly's education specialty is being hit, especially hard as schools across the us switch to remote learning or temporarily closed non essential manufacturing automotive and oil and gas also saw dramatic slowdowns.
Kelly's minimal exposure in U.S hospitality and retail industries limited the impact of those sectors sharp declines and we are seeing some increased demand in areas such as life Sciences contact centers, including our Kelly connect solution and areas associated with certain food distribution and supply.
Still it should come as no surprise that the short term opportunities do not offset the dramatic impact of cobot 19 on our business.
As we announced last month, we made a series of prudent decisions designed to reduce spending preserve key resources and bolster the strength and flexibility of Kelly's finances.
These actions include a temporary 10% pay cut for full time salaried employees in the us.
Year to Rico, and Canada regionally appropriate actions in EMEA, and APAC substantially reduced CEO compensation and reduced compensation of 10% or more for senior leaders temporary furlough and our redeployment of some full time employees.
Suspension of the company's matched to certain retirement accounts reduction of discretionary expenses in projects, including cutting capital spending by a third and suspension of the quarterly dividend starting in Q2 until conditions improve.
Kelly's Board is also expected to take formal action this week to reduce compensation of its directors.
We have taken these for cautionary actions as temporary defensive measures to further strengthen our balance sheet preserve key resources and protect our ability to quickly go on the offensive coming out of the crisis.
Olivier will provide a more detailed perspective on the short term impacts and how we're thinking about the next quarter.
As we announced in mid April we grew our previously issued full year guidance as Peter noted the impact of the equivalent 19 pandemic and the resulting near term economic conditions have introduced a level of uncertainty that we haven't experiencing the past given the level of uncertainty.
We like many companies I've been working through a variety of scenarios and building out responds plans that align with the priorities that Peter mentioned at the beginning of the core.
These scenarios taking into account a variety of demand scenarios based on both the severity and duration of the economic contraction and the speed of the subsequent economy to recovery.
In addition to economic forecasts, we are utilizing information from our customers as well as predictive until now activity based metrics to inform our scenario planning think taking into account these demands and values and the cost reduction actions that Peter mentioned, we have reviewed the resulting.
Impact on earnings cash flows and debt covenants metrics, we have stress tested our cash flows and debt covenants and at this point, we remain confident that we have adequate financial resources and liquidity to weather the crises to capture emerging growth opportunities and to take out.
On the edge of the recovery and subsequent failure modes of economic groups.
Given where we have in the cycle. We have detailed means that will not be providing guidance at this time, but will provide some perspective on the second quarter.
As mentioned in my remarks on the first quarter results revenue declines will not be even across the segments.
Decline so we'll be more pronounced in America, stashing, where I will education and light industrial business will be most heavily impacted.
And to National staffing declines will also be significant but moderated to a degree by existing label levels and the faults by governments in Europe to subsidize and protect employment.
The impact on Gtlds will be less severe as many customers in the segment operating the essential and histories Supersoft remote work all maintained workforces in an effort to resume production quickly when health and safety issues can be adequately addressed.
As we continue to work closely with our customers, we have not yet seen any material sign of mounting pressure due to the current environment.
And as Peter discussed we have taken some DEFINITY steps with respect to energy and expense levels. Both in advance of and in response to the crises. This includes the expense savings from our Q1 of US lecturing actions savings from the actions Peter Descried in response to the crew.
Hi, Ses and decreasing performance based incentive compensation expenses.
That sale.
While we have made significant contributions we will not be able to offset expected Q2 revenue declines as a result of the crises and that will tell me back over to Peter for his concluding soles.
Thank you Olivier there's no question that the covered 19 crisis presents unforeseen challenges for Kelly, our talent, our customers and our industry.
While the impact is temporary it is real and it cuts deep.
There's also no question that Kelly is the company fortified by the best employees in the industry to take on this crisis.
We are confident in our ability to support our talent and customers. During this time and emerge well positioned for growth.
I serve alongside a seasoned leadership team and a board of directors that has successfully manage through prior labor market disruptions and economic turmoil and we entered this crisis with a healthy balance sheet, a better expense profile, a well defined growth strategy and a clear plan of action.
We are moving forward with that plan as I laid out last quarter confident that it includes the ingredients to grow our business as a specialty talent solutions provider.
I discussed how the plan would intensify Kelly's focus and accelerate our growth by forming five distinct business units professional and industrial currently known as commercial education stem, which includes our science.
And engineering solutions.
Jay and the international.
We expect to change our reporting structure in the second half of 2020 to align with these five specialty businesses. We have identified presidents for each business and together we are identifying how we will combine our assets and resources into the five business units and stand up a new operating model with clear strategies and measure.
Able targets to inform each specialties M&A plans and allocation priorities.
We also undertook restructuring actions in Q1 to streamline resources create more efficient support systems and position Kelly for moving forward, our specialty growth strategy in a meaningful way.
These actions are indicative of the shift I mentioned earlier from defensive to offensive, we have proven that in areas, where we specialize in line with demand we deliver stronger performance coming out of this crisis, we will be well positioned to combine our own organic expertise with inorganic opportunities to.
Grow within our chosen specialties.
And our company structure and business strategies will be aligned with and able to accelerate that growth.
Our decision to move forward with our transformation speaks to the agility of today's Kelly and our confidence in our plans.
We are simultaneously, making difficult yet necessary decisions embracing a more acquisitive specialization strategy monitoring current levels of disruption and uncertainty preparing for post crisis growth and building accountability into every aspect of our business.
In the meantime, we are weathering the current storm together caring for and connecting with talent, who safety is our top priority guiding clients through uncharted territory, knowing that this crisis will end.
And as always standing ready to face what's next I'd like to thank Kelly's internal teams are external talent, our customers and our board of directors for their support I'm proud of the work, we're doing together and I look forward to Kelly's ongoing transformation in the months ahead.
Don you can now open the call to questions.
Certainly and ladies and gentlemen, if he would like to ask your question. Please press. One then zero on your telephone keypad you may withdraw your question at anytime by repeating the one zero command, if you're using a speakerphone. Please pick up the handset for pressing the numbers. Once again, if you have a question you may press.
One than zero at this time.
And then one or two line of a Josh Vogel with Sidoti. Please go ahead.
Thank you good morning, Peter and Olivia.
Both are doing well.
Thanks.
Yes, so a couple of questions here I guess the first.
You had the announcement in mid April that the board supported the drawdown from the credit facility in the Olivier sooner if you could talk about.
Would it be positioned today, how much is available to you on that credit facility and also with the deferral payroll taxes, how much do you think that could add weighted this year.
Yes, thank you dose.
Basically I mean, I'm going to start to confirmed that we have basically nuts.
Use of FFO facilities in the us at the end of Q1, I mean, we have local.
Use of local facilities for less than 2 million.
You might remember that we have renewed our facilities in December of last year.
Confirming a securitization program of hotter than 50 million and the revolver of 200 million. So I think was the right timing to basically secure.
Zeese two facilities.
What we say to ease basically due to the.
Current environment.
We are aiming to give us a little bit more flexibility in to our liquidity and traditionally our level of cash to Mpsvs nancy's around 25 to 60 million we may.
Time to time increase as east level.
And that could include basically using some of our facilities.
And he's really to give us more flexibility in the short run due to the coolant environment as opposed to anything else.
Okay and.
I'm sorry confirm you said you have a $150 million on a credit facility and another 200 million and revolver, yes, we have a 160 million on those securitization.
And 200 million on the revolver facility.
Back to your question about the care as the cables Act Beatty keys of Maine.
Hi, Tim we use ease basically the.
Payroll tax deferral.
You might knows that basically is that fair or is going to push.
Our Q2 Q3 Q4.
Payroll tax payments from the Q on Q2 high fleet at the end of 2021 and deals a highlight at the end of 2022, roughly if Q1 to know the impact I would say it but it's going to depend on how those.
Q2, Q3, Q4 of the new look like something materially in the region between hundred 225 million.
All right that's helpful. Thank you and.
Just when we think about the carriers act, where there any other government programs that you applied for and when we also think about any formulas programs overseas. We have operations I. So we have looked at of course us and nodes. So outside the us and we have tried to clarify okay.
Opportunities if I may say on PNNT impact on one side cash flowing back to on the other side cash flow online. So in the US I would say for us the biggest.
Business it would be on what I've said, the deferral of payment of payroll tax.
We are looking at.
As we speak to what these calls the us retention credit.
That might be of what I would call the PNM opportunity.
We are waiting IRS guidance season that we got some of them late last week, but we have TV no reviewing plus size to see it may create opportunities for our own cost base, although caused phase of our customers, it's a little bit too early to say because.
Iras feedback.
That we got on Friday was slightly different than our initial expectation. So we're going to continue to follow up and seems to have we can confirm some opportunities outside of the U.S. PNNT impact it's about around 3 million, so not really material mainly NIM.
And he's going to be basically unemployment subsidies as I was mentioning in doing this script.
And is going to be Q2, mainly on the cash flow standpoint outside those you ace.
We we will benefit from so some postponement on payment of payroll tax, but he's not pretty material and he's going to be ready very short them, meaning a benefit in Q2 of payment in Q3 of the 200 here. So I would qualify them as nice to have not really impact fulfil the year we.
Whether it's because of the limited size of them and also because he has done beam opening between a Q2 in Q3. So these where we all know as we speak but of course, whether it's in the US a lot and say that as you as.
I'll use teams are scrutinizing, what is going on at through their level into us at stake level and of course in other countries outside the us.
Namely in the EMEA as we speak.
That's really helpful. Thank you.
Shifting gears, a little bit looking at.
Next Gen and GTH just curious.
How those two Baird I guess through the first one to two months of the cobot crisis relative to the.
Legacy business.
What I mean, you might I've heard that what we have seen so far in our global talent solutions Algea segment to ease as we have not seen any coded impact on metal getting back even in March.
And and knowing that type of business Nexsan and GTL in and you know that GTH easing GTS statement and Nexgen in America segment, I would say both of them.
I would say deed behave.
Alluded to beat.
Like what I was describing fall GTS, meaning apparently weathering the downturn pretty well.
Okay, Great and just one last one please.
So that you recently at the rollout of.
The human count cloud platform aggregator and seems like a nice step towards facilitating the process. It in Berlin mentoring more cost efficient solutions for clients I know, it's still little early but.
Yeah.
Could you give us any sort insight in the margin profile of this platform versus your more traditional staffing channels and thank you also talked to maybe some other rollouts that we should be looking forward to.
Particularly in the second half of the year hopefully when the prices dissipated.
Yes, Josh.
It is too early to tell I think I think the.
Aggregator as an excellent response to customer demand for.
Getting effects on how to navigate the human cloud and how to take advantage of the talent that is going to work in different ways.
The timing of the.
Launch.
Sort of coincided with a lot of the disruption from cobot 19. So while we think there is going to be a lot of and there has been expression of interest I would say, it's too early to tell about.
The margin impact the.
That's the thing about the Cove at 19 pandemic that has revealed itself to us here at Kelly is.
The speed with which we have stood up a number of very innovative solutions for our customers to help them.
For example, keep furloughed employees warm during the during the for low period and.
We have used to those opportunities as a way of streamlining our product development.
Processes, and we're very encouraged to that coming out of this.
There will be a number of.
New solutions that.
Will.
Potentially come to market.
At a more accelerated pace than.
Pre crisis.
Great. Thanks for taking my question is a great to hear from you guys stay safe out there you to Josh Thank you Jeff.
And next one line of Joe Gomes with Noble capital. Please go ahead.
Good morning.
Morning, Joe Joe Good morning to.
I was just wondering.
Made the insight acquisition.
I don't want on all if our timing could it have been a little [laughter] with what what's been happening here, but just if you could talk a little bit how that integration.
Has been ongoing and and.
And how that business is held up so far here given the circumstances today.
Thanks, Joe.
Well needless to say any of the solutions that are.
Deep in education are impacted by the.
Disruption in the temporary suspension or closings of of schools.
The.
That said there are a number of.
School districts that we've been partnering with too.
Maintain levels of.
Some employment working with school districts on return.
Two.
Returned to work programs.
There are opportunities that have.
Come up in the last.
Four to six weeks in early child care.
As you can imagine the demand for child care as people are.
[music].
Sheltering in place and working from home.
Essential workers, so we have.
Entered into a deal with one of the largest providers of early childhood.
We are also engaged.
With a learning.
Practice that we think has got some.
Some potential so while that.
The impact on insight is like the impact on Kelly education overall is significant.
We're very encouraged by the pace of the integration pre crisis.
Customers are continuing to let contracts even in the crisis.
We've had a number of nice wins recently and insight is.
A big part of the future. So we're still very encouraged by the.
By the acquisition notwithstanding the.
Unfortunate timing as you mentioned them.
Okay, great thanks for that for that insight and.
We will keep going along that same line one of the.
Pillars here that some of the new strategies that will being a little more aggressive on the acquisition side and presumably.
One would think some valuations have come down here again, given that the crisis.
Are you guys seeing more opportunities, it's something you're we continue to look at our kind of hit the pause and on that you'll just looking to to conserve capital.
Well, we haven't hit the pause button.
Joe we are continuing to.
You know pipeline opportunities that we think are going to create value for where the company and our shareholders. The pandemic.
As you can understand.
Throw some of the activity into a elongated state.
And some people are.
Taking deals off the table for now or saying, let's get through the next quarter, but we believe it's going to be temporary and we are hopeful as you mentioned that some of the multiples.
That were.
We were seeing precrisis come down to more.
Achievable levels.
We've indicated in the past that we're going to embark on a more aggressive acquisition strategy, but we've also been pretty clear, we're not going to.
Overpay for for properties.
And that they will be aligned with our.
Strategy of mixing up into higher margin products and solutions.
Yes at some stage, we are going to move our balance sheet from a very defensive mode, where we are now.
And when we see that.
Equally he is starting to be clear on we have more understanding of above the near future. We can switch very quickly our balance sheet from a defensive mode to a more offensive mode like Peter was mentioning.
A few minutes ago.
Okay, and what one quick last winter and energy say I believe that you had identified.
The managers for the this specialty segments.
Or that all internal candidates did you go outside some of those are you going to make an announcement of who each of these people are here in the near future.
So my question, yes, Thanks, Joe I had indicated in in February that we would have announced them by the end of the quarter, which but for the pandemic, we would have but they're all in place.
They're not all internal were very.
Very glad to have attracted.
Some really good talent from the outside.
We announced the addition of Hugo Milan.
John to run our stem business, which as you know is.
A business, we're very keen on and very excited about so Hugo has been a great addition to the team and when we get closer.
Probably to the ended the quarter, we will announce all of those positions.
But thanks for the question, Joe and Hope your hope you're well.
Yes.
Yes, the positions are going to be effective when we move to our new segments. So now we are positioning.
And we have say then again today that you're going to be Nucor sofas us again that for 2020.
And ladies and gentlemen, just a quick reminder, if you do have a question. Please press one than zero at this time.
And we do a follow up from Josh Vogel. Please go ahead.
Thank you.
Peter you had in your prepared remarks, I think you said about 90% of your staff is working from when can you confirm that yes that would be our full time workforce.
Josh.
Okay, Great and then.
So you are taking steps to better align the cost structure with to withstand the crisis and we know in recent years, you've been making these ITD infrastructure investments that have positioned you well from a tech enabled standpoint I'm. Just curious are there any other investments.
That needs to be made.
On the infrastructure front to help use maintain this work from home.
Platform.
Well I think the probably not so much the work from home platform, Josh that those investments that we've made over the past few years with our.
Progressive Kelly anywhere program.
And also moving to a more tech enabled.
Delivery model in our branch network has really served us well in this not only in going remote but also.
[music].
Stress testing that model as a way of.
Being able to toggle resources.
In a more agile way there will never be enhancements to the to the technology that we will need to.
Invest it's not going to be at the magnitude of our new front office for example, but.
The way in which.
The talent wants to be.
Dealt with the way our customers want to be dealt with will require us to be continuously exploring and looking for the best in class technology, whether its matching technology or video interviewing technology or.
Of the sort like those kinds of examples we will be regularly.
Working and evaluating and then investing in and I think our new front office technology provides us a excellent platform to do that quickly.
And with a keen eye on the expense.
Okay, great and.
It's really nice to see you taking the steps to help the temp employees redeploying where possible offering some of the free services.
We've known for quite some time that there has been a big supply demand imbalance on the labor front end and the crisis kind of reset that and I was just curious if these steps that you are taking to help furloughed employees are on the temp side.
Is this only for the existing candidates in your system or is this actually are you offerings to anyone and is it may be kind of.
Giving you a competitive advantage in bringing more candidate onto your platform.
Well, we're we're.
To answer would be both Josh as an example, we have stood up our trending jobs website, which is.
Really designed to it was in response to a request we got from a large hotel.
Chain because they were.
Releasing thousands of.
Their employees and they were looking for away to help them find find work of course, if we have opportunities, we'll put them to work with Kelly, but we felt there was in the.
The right thing to do to create this.
Website that it will allow individuals who are out of work to look look for.
Spikes in demand, whether it's with Kelly or not will that create some kind of allegiance or loyalty to the to Kelly.
Hard to tell at this point.
We're very.
Invested in.
Creating a better talent experience for.
Workers that want to work with Kelly and that do engage with us.
And we think that Thats an area that we have invested in in the last couple of years and we intend to make it a focus.
In the future because we think that there is a differentiation that can be achieved by engaging with talent in a different way and so we're we're excited about some other things we've got underway.
And how we treat employees and how we interact with temporary and contractors. During this pandemic hopefully will pay dividends because they'll see Kelly as a different kind of company.
Great. Thank you again for taking my questions. Yeah. Thanks, Josh Thank you.
Ams quick we have no further questions in queue.
Okay John.
Thank you very much thank everyone and.
I hope everybody stays well thank you very much.
Ladies and gentlemen that does conclude your conference for today. Thank you for your participation you may now disconnect.
We're sorry your conference is ending now please hang up.
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Good morning, and welcome to Kelly Services first quarter earnings Conference call all parties will be out listen only until the question and answer a portion of the presentation. Today's call is being recorded at the request of Kelly services.
Anyone has any objections you may disconnect at this time I would now like turn the meeting over to your host Mr., Peter Quigley, President and CEO, Sir you may begin.
Thank you John.
Good morning, everyone and I hope everyone is staying safe.
Welcome to Kelly services first quarter conference call with me on the call is Olivier T. Rowe our CFO.
We have a lot of ground to cover so let me give a quick outline of what to expect.
I'm going to share so Q1 headlines and comment on Kelly's response to the covert 19 pandemic.
Then Olivier will walk us through highlights of our quarterly performance.
Including the impact of code at 19, and the goodwill impairment, we announced in this mornings release.
Which was triggered by the stock markets response to the crisis.
I'll then share some trends, we're seeing the precautionary actions, we've taken to create some from.
Financial flexibility and the proactive steps, we're taking to prepare Kelly for growth on the other side of this crisis.
Olivier will provide insight into our scenario planning.
Some perspectives for Q2, and finally I'll turn to what's next for Kelly, including updates on our specialization strategy and new operating model, which are designed to capture and accelerate growth.
So lets jump in.
We saw progress in the first part of the quarter.
We saw signs of stabilization in our U.S. staffing business and continued growth and our outcome based and consulting businesses.
We completed an acquisition in our education specialty.
We continue the accelerated rollout of our new front office technology.
We completed the sale and leaseback of our headquarters unlocking capital to invest in our specialty growth platforms.
We restructured parts of our operations as we continue to dedicate the company to effectively managing costs and aligning them with expected revenues.
We made significant progress on our new operating model, which we believe will yield improved revenue growth.
Our chosen specialties, and we launched a fresh new Kelly logo to reflect the dynamic forward looking company we become.
We're encouraged by these foundational improvements in our business and the continuation of the growth oriented initiatives I discussed during last quarter's call, which will remain a key operational priority until we return to top line growth.
Of course, the called at 19 pandemic turned the world upside down.
During our nearly 75 year history, we've never seen economic stock market and labor conditions, all change as suddenly and dramatically as they did starting in March impacting every aspect of operations and triggering.
The non cash goodwill impairment charge, the charge does not change our views or confidence in our ability to navigate the cobot 19 crisis.
Or to capitalize on opportunities when the crisis and.
Operationally, we responded quickly and decisively to the pandemic.
Our emergency management team was prepared for a possible pandemic and our team executed our plans as the crisis spread and led to global shutdowns.
While we continue to closely manage the financial impact as a child and company. Our first priority in this crisis has been and continues to be the health and safety of our people more than 90% of Kelly's full time staff are working from home.
Our recent restructuring efforts are accelerating our transition to a more agile tech enabled service delivery model and coupled with our recent infrastructure investments. This allowed us to transition quickly to remote work connecting our teams to talon clients and each other enabling kelly to respond.
On to rapidly changing needs, while supporting our people in accordance with national and local guidelines.
We've also taken steps to support the wellbeing of temporary employees and contractors, who have been impacted by the economic shutdown.
In addition to redeploying them whenever possible so they can keep working.
We are offering free online training and certification courses were expanding access to license counselors in Kelly's wellness program, we're partnering with online platforms to redeploy furlough temporary workers.
We're waving registration fees for retraining programs, and we are launching a trending jobs website to help talent connect with any and all employment opportunities, whether they are with Kelly or not.
Commitment to tout talent stand strong.
We have also been supporting our customers every step of the way holding virtual around tables with clients to identify their concerns sharing best practices for remote work answering questions about safety and well being of workers.
And delivering creative flexible talent solutions to help them navigate unprecedented circumstances.
Before Olivier looks at Q1 financial highlights I want to emphasize how incredibly proud I am of Kelly's teams.
And how they have risen so admirably to this moment in history, there flexibility creativity and unwavering commitment to the talent and customer customers. We serve is an inspiration to me professionally and personally and buoys my enthusiasm about Kelly's transformation even in the phase.
Current challenges.
I agree with you Peter.
Good morning, everyone before the Q1 highlights let me remind you that any comments made during this call, including the queuing. They may include forward looking statements about our expectations for future performance.
Actual results could differ materially from those that Jason bioequivalence, and we have no obligation to update the statements made on these core. Please we felt to our SEC filings for a description of the risk factors that could be friends. The companys actual should jump that foments.
In addition, during the call something that I would it be discussed on the reported and on an adjusted basis.
Discussion of items on an adjusted basis.
GAAP financial measures designed to get inside too soon so often trends in our operations.
We have also provided more information on though up that full months in the first quarter slide deck, which is available on our website.
As we go just laid out we started the quarter. We suppose it you momentum and then economies that was continuing to grow and ended the quarter in a world that was much different I'll cover our quarterly, whereas our son provide some color on the impact as it goes 19 crises on our first quarter.
Results, including a related goodwill impairment charge during the quarter. We also completed a previously unknown will fluctuate Glenn.
Early stage collection as well as the acquisition of insight in K 12 education that are important to getting is tied to GE uninfected, our financial results for the quarter I.
I will cover those ingredients dated too.
Revenue for the quarter totaled 1.3 billion down 8.8% from the fourth quarter of the pipe you, including 50 basis point unfavorable impact from foreign exchange as announced we acquired insight on generally the Fortys 2020 and.
Did 110 basis point to our reported revenue growth so on a constant currency and organic basis, our revenue for the first quarter was down 9.4%.
What is beginning to see the impact of the 19 crisis in March.
Demand declined as customers close facilities to politics that workforces and in response to governmental directories, our education business was particularly impacted as most us credit Suisse.
Close in response to the crises by the end of March the overall impact of the 19 engaging demand declines was approximately 270 basis points in the first quarter.
Looking at each segment on the reported basis, the Americas staffing revenue trends pre pre crises well in line with Q4 trends, but the rate of decline was highly much.
Of the impacts from 19.
The international Stashing revenue decline reflects a continuation of the challenging market conditions in Europe, and the beginning of the 19 impact in March and finally, GTS continued push Steve revenue gross DDS segment. So is the smallest impact from 19 as many of the.
Segments customers are in they some showed I am just release why bother to facilitate remote work all continued to maintain rises unless they have their talent, including done and providing banking.
Well and then placement fees were down 23% year over year as fees declined in America stepping on a national stuff.
Overall gross profit was down 11.3% our gross profit rate was 17.7%.
Down 50 basis points, when compared to the first quarter of the payoff.
The decline was primarily driven by higher employee related costs, which offset the slicks run rate improvement in GTS from shifts in project mix.
As Janet as Ginny expenses were down 6.5% year over year.
Included in expense for the quarter is 8.7 million plus hectoring charge, excluding the restructuring charge expenses were down 7.7%.
<unk> expense reflects our ongoing cost management efforts in response to all pre crises topline trends.
In addition incentive based compensation expense for the quarter is also lower as we now expect full year results to be lower than the targeted twice or payment levels, which were offset in February.
As I mentioned the first quarter results include the 8.7 meters of us lecturing charge.
Quarter, we too close lecturing actions to align costs with expected pre crises revenues to position the organization to adopt our new operating model Lake during 2020, and finally to align to you as branch network facilities footprint with a more technology and they both so is there.
David really methodology. These actions will result in expense savings of approximately 20 million in 2020, and we believe that they position us well to respond to the most challenging environment, resulting from the equivalent 19 pandemic.
These actions also I'd argue with our growth strategy and will allow us to one does the recovery benefits following the crises with a more agile and focused organization.
We also completed the sale and leaseback of proportion of the quarter's kemper's during the first quarter.
Transaction allows us to relocate catch that previews and investing in real estate to our growth strategy.
The net proceeds from the sale were 55.5 million and whether youd inbound to repay outstanding borrowings related to the inside the acquisition and the low dose to end the quarter with no borrowings on that will you guys credit facilities.
The resulting gain on sale of the headquarters campus facilities was 62.1 median.
And finally, we recorded a 148 to median non cash goodwill impairment charge.
Quarter unfolded, there was a significant decline in the global equity markets, including the stocks of many of the publicly trading staffing companies and our own common stock.
Under us GAAP accounting rules, the CV significant decline in our stock price together and entering goodwill impairment test I noticed you made fees a conclusion that as of the end of Q1, a goodwill impairment at Oak Q.
Peter noted in his opening remarks, the child is noncash and doesn't change our views or confidence in our ability to navigate the code 19 crises all to capitalize on the subsequent economic recovery.
Including the items I just mentioned our reported loss from operations was 100 million and 11.8 in the first quarter.
Excluding the goodwill impairment and restructuring charges as well as the gain on sale.
Earnings from operations were 12.5 million.
Q1, 2019 reported earnings of 16.8 million also contain a 6.3 million less lecturing challenge. So on an adjusted basis Q1, 2020 owning some operations declined 46% that's just.
Cadiz earnings before tax also include the unrealized gains and losses on our equity investment in vessel holdings for the quarter, we recognize a seven 7.8 million pre tax loss on our pursuit of common stock comp they out to a certain point 2 million gain.
In the pie all year.
This noncash gains analyses are recognized earnings from operations as a separate line item.
Income tax benefit for the first quarter was so it's 76.2 million compared with our 2019 income tax expense of 6.4 million.
Q1, 2020 income tax benefit includes 23.8 million related to the noncash many feet on the loss of but also to stock and the 23 million Vinny feet on the noncash goodwill impairment shops.
And finally, we voted loss built show for the first quarter of 2020 was three the rollout and 91 cents bushehr compared to earnings of 56 cents Bill share in 2019.
You know the to better understand the underlying trend you know earnings let me provide some addition, then I'm formation.
2020 earnings per share was unfavorably impacted by the goodwill impairment charge the loss until sort of common stock on those switching charge, partially offset by the favorably by the impact of the gain on sale of the HQ buildings net of tax.
In 2019, EPS was positively impacted by again until sort of stuck and negatively impacted bio structuring charge.
Overall, we're adjusting for these items Q1, EPS was 20 cents compared to 45 cents per share in Q1 2019.
Now moving to the balance sheet cash stood at 48 million compared to 31 million the year.
That was 2 million consistent with the on 29.
We ended the quarter with no borrowings on our use credit facilities as we navigate these values of economic uncertainty I will tell you shouldn't really low level of that provides flexibility. We continued to manage our cash and that closely but we may maintained a higher levels of cash then we have historically.
Including borrowings on that will use credit facilities.
Accounts receivable was 1.2 billion and decreased 4% year over year. Nobody is still was 59 days an increase of one day over yearend 2019, and the same valued last year.
To date, we have not experienced an increase in India as soon as a result of the government 19 crises.
In our cash flow for the quarter, we generated 5 million of free cash flow compared to 17 million the free cash flow into the simpatico during 2019.
We did beginning to build it feeds from somebody shown that free cash flow generation due to the current market conditions, you still Cody we generate free cash flow. During his initial data yields of an economic downturn as we continued to collect our receivables wife payroll cost decline in line with demand.
However, the impact was upset in Q1 by the timing of certain cash payments.
As we move further into the economic cycle, we would expect solution that free cash flow generation to continue for the next save a lot of moans, assuming that customers continued to pay on time. We also anticipate taking advantage of the ability to defer certain us payroll tax payments in line with of care was the AG.
To provide additional liquidity.
Thank you back to you Peter Thanks, Olivier clearly the quarter didn't unfold as anyone envisioned talent and customers are struggling to navigate a new normal without knowing the depth or duration of covered nineteens impact.
Customers in vulnerable industries closed facilities and ended assignments.
As Olivier noted Kelly's education specialty is being hit, especially hard as schools across the U.S. switch to remote learning or temporarily closed non essential manufacturing automotive and oil and gas also saw dramatic slowdowns.
Kelly's minimal exposure in U.S. hospitality and retail industries limited the impact of those sectors sharp declines and we are seeing some increased demand in areas such as life Sciences contact centers.
Including our Kelly connect solution and areas associated with certain food distribution and supply.
Still it should come as no surprise that the short term opportunities do not offset the dramatic impact of covered 19 on our business.
As we announced last month, we made a series of prudent decisions designed to reduce spending preserve key resources and bolster the strength and flexibility of Kelly's finances.
These actions include a temporary 10% pay cut for full time salaried employees in the us.
Right, ERICO, and Canada regionally appropriate actions in EMEA, and APAC substantially reduced CEO compensation and reduced compensation of 10% or more for senior leaders temporary furlough and our redeployment of some full time employees.
Suspension of the company's matched to certain retirement accounts reduction of discretionary expenses and projects, including cutting capital spending by a third and suspension of the quarterly dividend starting in Q2 until conditions improve.
Kelly's Board is also expected to take formal action. This week the reduced compensation of its directors.
We have taken these precautionary actions as temporary defensive measures to further strengthen our balance sheet preserve key resources and protect our ability to quickly go on the offensive coming out of the crisis.
Olivier will provide detailed perspective on the short term impacts and how we're thinking about the next quarter.
As we announced in mid April we grew our previously issued full year guidance as Bill noted the impact of the equivalent 19 pandemic and the resulting near term economic conditions I've introduce a level of uncertainty that we haven't experiencing the past given the level of uncertainty.
We like many companies I've been working through a variety of scenarios and building out responds plans that align with the priorities that Peter mentioned at the beginning of the core.
These scenarios take into account a virus tier of the men scenarios based on both the severity and duration of the economic contraction and the speed of the subsequent economy to recovery.
In addition to economic forecasts, we are utilizing information from our customers as well as predictive until now activity based make tweaks to inform our scenario planning think taking into account these demands and values and the cost reduction actions that detail mentioned, we have reviewed the resulting.
Backed on earnings cash flows and debt covenants metrics, we have stress tested our cash flows and debt covenants and at this point, we remain confident that we have adequate financial resources and liquidity to weather the crises to capture emerging growth opportunities and to take advantage.
Each of the recovery and subsequent better yields of economic groups.
Given where we having the cycle we have detailed means that will not be providing guidance at this time, but will provide some perspective on the second quarter.
As mentioned in my remarks on the first quarter results revenue declines will not be even across the segments.
Scientists will be more pronounced in Americas, stashing, well education and light industrial business, we'd be must have it impacted.
That's a national Natus Stephan declines will also be significant but more the rate due to a degree by existing label rose and they faults by governments in Europe to subsidize and protect employment.
The impact on Gtlds will be less severe as many customers energy segment operating the essential as histories Sioux Falls, we mutwo all maintained workforces in an effort to resume production quickly when Henson safety issues can be adequately addressed.
As we continue to work closely with our customers, we have not yet seen any material sign of mounting pressure due to the current environment.
And as Bill discussed we have taken some additional steps with respect to SGN expense levels. Both in advance of any response to the crises. This includes the expense savings from our Q1 of US lecturing actions savings from the actions Bill described in response to the.
Crises and decreasing thats almost based incentive compensation expenses.
That sales.
Why do we have made significant cost reductions, we will not be able to offset expected Q2 revenue declines as a result of the crises.
What's holding back over to Peter for at least concluding thoughts.
Thank you Olivier there's no question that the covet 19 crisis presents unforeseen challenges for Kelly, our talent, our customers and our industry.
While the impact is temporary it is real and it cuts deep.
There's also no question that Kelly is the company fortified by the best employees in the industry to take on this crisis.
We are confident in our ability to support our talent and customers. During this time and emerge well positioned for growth.
I serve alongside a seasoned leadership team and a board of directors that has successfully manage through prior labor market disruptions and economic turmoil and we entered this crisis with a healthy balance sheet, a better expense profile, a well defined growth strategy and a clear plan of action.
We are moving forward with that plan as I laid out last quarter confident that it includes the ingredients to grow our business as a specialty talent solutions provider.
I discussed how the plan would intensify Kelly's focus and accelerate our growth by forming five distinct business units professional and industrial currently known as commercial education stem, which includes our science IP and engineering solutions, Oh, CJ and international.
We expect to change our reporting structure in the second half of 2020 to align with these five specialty businesses. We have identified presidents for each business and together we are identifying how we will combine our assets and resources into the five business units and stand up a new operating model with clear strategies and May.
Measurable targets to inform each specialties M&A plans and allocation priorities.
We also undertook restructuring actions in Q1 to streamline resources create more efficient support systems and position Kelly for moving forward, our specialty growth strategy in a meaningful way.
These actions are indicative of the shift I mentioned earlier from defensive to offensive, we have proven that in areas, where we specialize in line with demand we deliver stronger performance coming out of this crisis, we will be well positioned to combine our own organic expertise with inorganic opportunities to grow.
Within our chosen specialties.
And our company structure and business strategies will be aligned with and able to accelerate that growth.
Our decision to move forward with our transformation speaks to the agility of today's Kelly and our confidence in our plans.
We are simultaneously, making difficult yet necessary decisions embracing a more acquisitive specialization strategy monitoring current levels of disruption and uncertainty preparing for post crisis growth and building accountability into every aspect of our business.
In the meantime, we are weathering the current storm together caring for and connecting with talent, who safety is our top priority, citing clients through uncharted territory, knowing that this crisis will end.
And as always standing ready to face what's next I'd like to thank Kelly's internal teams are external talent, our customers and our board of directors for their support I'm proud of the work, we're doing together and I look forward to Kelly's ongoing transformation in the months ahead.
Don you can now open the call two questions.
Certainly and ladies and gentlemen, if you would like to ask a question. Please press. One then zero on your telephone keypad you may withdraw your question at any time by repeating the one zero command if you're using a speakerphone. Please pick up the handset for pressing the numbers. Once again, if you have a question you make press one.
And then zero at this time.
And that will go to line of a Josh Vogel with Sidoti. Please go ahead.
Thank you good morning, Peter in a review both.
And well.
Josh Thanks.
So a couple of questions here I guess first.
You had the announcement in mid April that supports supported the drawdown from the credit facility in Olivier sooner if you could talk about.
Liquidity position today, how much is available to you on that credit facility and also.
With the deferral and we'll taxes, how much do you think that could add weighted this year.
Yes. Thank you does well basically I mean, I'm going to stop to confirm that we have basically nothing.
Use of FFO facilities in the us at the end of Q1.
We have local use of look at it facilities for less than 2 million.
You might remember that we have renewed that well facilities in December of last year.
Confirming the securitization program of how to then 50 million on the revolver of 200 million. So I think it was the right timing to basically secure.
These two facilities.
What we say to ease basically due to the current environment.
We are aiming to give us a bit more flexibility to our liquidity.
And traditionally our level of cash to fund these businesses around 25 to sell team Union we may.
Turning to time.
Increase.
Level.
And that could include basically using some of our facilities.
So really to give us more flexibility in the short run due to the current environment as opposed to intense.
Okay and.
I'm sorry, some confirm you said you have a $150 million on the credit facility and another 200 million and revolver. Yeah, we have 160 million on those securitization.
And 200 million on the revolver facility.
Back to your question about the care the cables Act basically the main item we use is basically the.
Payroll tax deferral.
You might know is that basically is that fair or is going to push.
For Q2 Q3 Q4.
Payroll tax payments from the Q on Q2 high fleet at the end of 2021 and deals a highlight at the end of 2022 roughly.