Q2 2021 Kelly Services Inc Earnings Call
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Good morning, and welcome to Kelly services second quarter earnings Conference call.
All parties will be in a listen only mode until the question and answers 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.
A second quarter webcast presentation is also available on Kelly's website for this morning's call.
I would now like to turn the meeting over to your host Mr. Peter Quigley President and CEO. Please go ahead.
Thank you Cynthia Hello, everyone and welcome to Kelly services second quarter Conference call.
With me today is Olivier T Rowe, our Chief Financial Officer, who will walk you through our safe Harbor language, which can be found in our presentation materials.
You Peter and good morning, everyone. Let me remind you that any comments made during this call, including the Q&A may include forward looking statements about our expectations for future performance.
Actual results could differ materially from those suggested by our comments and we have.
No obligation to update the statements made on this call. Please refer to our SEC filings for a description of the risk factors that could influence the company's actual future performance.
In addition, during the call certain data will be discussed discussed on a reported and on an adjusted basis discussion of items on an adjusted basis are non-GAAP financial measures designed to give insight into certain trends in our operations.
Currencies to organic growth in our discussion today excludes the results of our Q2 acquisition of Sofa World. We have also provided a slide deck that we aren't using on today's call as well as an expanded slide deck with Mueller formation.
Performance on our website now back to you Peter.
Thanks, Olivier as expected the economic recovery continued to gain momentum in the second quarter.
The temporary labor market is approaching pre covid levels. The unemployment crisis in the U S has eased with three months of strong job growth and demand for staffing and other workforce solutions continues to grow.
Kelly entered the recovery with our strategy firmly in place and we continue to execute against that strategy in the second quarter.
We are optimizing our operating model investing in organic growth and executing against our inorganic growth plans are.
Our purchase of soft World in April 2021 was our largest ever acquisition and the latest proof point in our Boulder approach to M&A and higher margin disciplines.
As Youll see in our results today soft world has already begun accelerating Kelly's revenue and GP results.
Illustrating the impact of targeted acquisition can have on the entire organization.
Before I hand, it off to Olivier to provide details on Kelly's quarterly performance I will share a few highlights.
All five of our operating segments professional and industrial Science Engineering, and technology Education, OCG and international had positive earnings from operations in the second quarter and all five segments delivered organic year over year revenue growth.
Four of our business units performed better than or in line with our expectations for the quarter education exceeded its pre pandemic performance for the first time in June.
OCG beat its pre Covid revenue for the third consecutive quarter International delivered positive sequential revenue gains and SEC continues to deliver topline growth.
With organically and with the acquisition of soft World Inorganically.
And our professional and industrial segment, we continue to see strong demand for talent in our staffing business. While also experiencing the constraints on talent supply and other challenges and fulfillment that we described last quarter.
Demand in this segment's outcome based business has slowed since the heights. It reached during the pandemic as customers needs have shifted with the economies reopening and supply chain shortages temporarily dampen some demand.
These businesses lagged our expectations for the quarter. So I will take a closer look at these dynamics later in the call along with the actions, we're taking to address them I will now turn it over to Olivier to share more details about Kelly's Q2 results. Thank you Peter.
<unk> mentioned, our Q2 results reflect the continuing stabilization in economic activity and resulting improved demand for our services coupled with a challenge to food to feed our customers demand for talent in the current market.
Before I get started reviewing the current value of the results.
To reflect on the comparable period of last year.
Q2 of 2020, we presented.
First impact of the Covid 19 pandemic on our business.
Revenues were favorably impacted by declines in demand as businesses are responding to the crisis on the K 12 education system in the U S moved to remote learning as a result, we responded to those declines in revenue by quickly on exiting temporary expense mitigation actions in the second quarter of 2020.
Including salary reductions and furloughs of full time employees as well as cuts to discretionary expenses as.
As we have discussed on past calls since Q2 of last year revenues have improved from crisis, driven lows and most temporary expense mitigation actions has been discontinued.
Now looking at the second quarter of 2021 revenue totaled $1.3 billion up 29% from the prior year are up 26% in constant currency in the quarter, our acquisition of <unk> added 310 basis points to our revenue growth rate.
All five segments I'll now reporting organic year over year revenue growth as we anniversaried the depth of the Covid 19 crisis in the prior year.
Overall Q2 organic revenue is now 11% below pre covid 19 levels on a constant currency basis.
An improvement of 200 basis 220 basis points versus the trend we saw in Q1.
For the second quarter, our education segment reported the highest year over year growth rate.
As a comparability is impacted by significant school closures in the pile failures. We also measure revenue compared to the most recent pre pandemic valued or Q2 of 2019 edgy.
Education revenue was at 90% of pre pandemic revenue for the quarter ending June exceeded pre pandemic performance for the first time.
Both are good indicators that our education segment will perform well as crude has continued to move towards even greater in person learning in the fall.
Our education business is already working to ensure that we have an adequate supply as the competition for talent in this space would it be intense and of course because costs have continued to modify that on functional delivery in response to changing look at infection rates volatility and demand in the near term is still possible.
At the National continued to improve their revenue trends is both positive year over year and sequential revenue gains in the quarter.
Year over year revenue growth was driven by recoveries of hours volume in France in bulk together and continued solid performance in Mexico and Russia.
Our OCG segment continues to perform well as a result of new customer wins in all products and growth in our existing customer base primarily in <unk>.
OCG has continued to deliver year over year revenue growth and is now reporting sequential revenue growth as well with revenues up 28% over last year.
<unk> revenue as <unk> exceeded pre covid levels for the past three quarters and is now up 12% in Q2.
Due to the same period in 2019.
Revenue in our professional and industrial segment continues to reflect increasing demand for talent in the staffing product.
There has been limited by the current softness in talent supply and resulting talent mismatches as well as talent fulfillment challenges that Peter will cover later in.
And after performing well and delivering revenue growth throughout the Covid 19 crisis.
Our outcome based business in P&I expense, a slight decline in revenue in the quarter as demand was impacted at several large customers.
And finally, the <unk> segment, where the results from our acquisition of so far this reporting.
Revenue was up 21% on a reported basis.
And 8% on an organic basis.
Organic revenue trends continued to track with the customers serve in each specialty science, where we have many life science and clinical customers has been the strongest and engineering is a concentration in the oil and gas sector has been slower to recover.
Permanent placement fees were 146% up year over year and up 16% sequentially.
We continue to see significant increases in activity in P&I insight coupled with fees from our Q4.2020 acquisition of Greenwood Usher in the education segment fees.
<unk> in the International segment were also up over the pandemic impacted prior year, but were flat sequentially, reflecting a more cautious environment in Europe amid the uncertainty of further covid restrictions in the region overall balance sheet for the quarter now exceed pre covid level.
At plus 19% compared to the same period in 2019.
Overall gross profit was up 22, 1% or 19, 6% on a constant currency basis.
Our gross profit rate was 18, 4% compared to 19, 4% as of the second quarter of the prior year.
On a year over year basis, our GP rate was negatively impacted by unfavorable and favorable project mix as our lower margin staffing business recovers, coupled with approximately 100 basis points of temporary government with subsidies in the prior year.
Partially offsetting those declines was the impact of higher perm fees, and the accretion of softwood, which generates higher margin rates, 35% in the second quarter.
Within the segments.
We did expand some variability in GP rates caused by the factors I just mentioned said benefited from the software acquisitions.
And higher film sheath, the international GP rate improve on higher balance sheet and education was negatively impacted by the <unk>.
Year over year government, which the P&I.
P&I as the largest swing as the impact of unfavorable product mix between staffing and outcome base in the prior year government subsidies were only partially offset by higher balance sheets.
In addition, the P&I outcome based business GP rate was negatively impacted as talent attrition and declines in customer demand resulted in lower productivity in certain programs.
Our outcome based business with its opportunity for higher margins.
It also comes with higher inherent risk as we take on additional responsibilities for our customers' business processes.
When talent attrition increases our client demand and worker productivity decreases as they did in the second quarter <unk> revenue and GP are negatively impacted.
SG&A expenses were up 21, 9% year over year on a reported basis or 19, 8% in constant currency.
Expenses for the second quarter of 2021 include the intangible amortization and other operating expenses of soft world, which added 460 basis points to our year over year expense growth rate.
The increase in expenses reflect increases in performance based incentive compensation expenses as well as the impact of our comfort expense mitigation efforts in the prior year.
Expenses in P&I, OCG internationally international and corporate remain below pre pandemic levels and expenses and set an education reflect investments in resources to capitalize on demand for services on in those specialties.
Our reported earnings from operations for the second quarter were $13.7 million compared to $11.1 million in Q2, a 24% increase included in our reported Q2 results of the operating earnings of <unk> of $2.3 million inclusive of intangible asset among.
<unk>.
For the second consecutive quarter, all operating segments and positive earnings from operations.
Now I will turn it back to the company as a whole Kelly's earning before tax also include the unrealized gains and losses on our equity investments and vessel holding.
For the quarter, we recognized a $6.3 million pre tax gain on our preferred stock compared to 20, $29.6 million tax gain.
Okay.
Noncash gains are recognized below earnings from operations as a separate line item.
Income tax benefit for the second quarter was $2.6 million compared with our 2020 income tax expense of 900000, our effective tax rate for the quarter was $813 five benefit.
Our effective tax rate was lower than the U S statutory rate and actually a benefit this quarter, primarily due to the impact of a nonrecurring UK tax rate change, resulting in greater deferred tax assets and the impact of the work opportunity credit in the U S.
And finally reported earnings per share for the second quarter of 2021 was <unk> 60 per share.
<unk> to $1.04 per share in 2020.
The decline in earnings per share resulted primarily from lower gains on Purcell shares net of tax.
Adjusting for the peso gains Q2, 2021, EPS was <unk> 49.
Compared to 51 cents per share in Q2.2020.
Now moving to the balance sheet, we acquired soft world on April of the fees and the impact of the software. The acquisition is reflected in our Q2 balance sheet.
As of quarter, right cash totaled $64 million compared to 223 million at June 2020, and to $116 million a year ago.
It was nearly zero consistent with year end 2020, and a year ago again, we ended the quarter with no borrowings in our U S credit facility.
<unk> in our cash balance reflects the 219 million cash paid net of cash received that was used to fund the acquisition of <unk> at the beginning of the quarter.
Accounts receivable was $1.4 billion and increased 26% year over year, reflecting our year over year increase in revenue.
Global DSO was 60 days.
A decrease of one day over the same period in 2020, and a decline of four days from year end 2020.
The decrease since yearend reflects the collection of receivables from several large customers were carrying higher balances.
Due to customer driven administrative issues.
Year to date, we generated $43 million of free cash flow free cash flow last year, reflecting the rapid decline in working capital as a revenue decline on lower customer demand in the early stage of the Covid 19 pandemic.
As I mentioned above we completed the software acquisition in Q2, and we're able to fund the entire acquisition.
<unk> cash balance.
Our cash balances are now back in line with levels needed to manage daily liquidity.
And whilst <unk> acquisition didn't required debt financing, we may begin to grow in existing credit facilities to support working capital needs as revenue levels continue to recover our surpass pre covid levels and now back to you Peter Thank.
Thanks for those details Olivier.
We're encouraged by the economic momentum and increased demand for our services as the recovery accelerates, our OCG and education segments are performing especially well and set an international are delivering solid year over year growth.
We're also encouraged by healthy sales pipeline and new customer wins, we're capturing in all five segments as businesses ramp up their full time and temporary hiring we have and will continue to add sales and recruiting resources as warranted to meet increased demand and support Kelly growth.
As Olivier mentioned demand in our P&I business exceeds pre pandemic levels and we continue to work through the fulfillment challenges, we discussed last quarter as well as taking additional actions in our outcome based business.
On a macro level the U S talent shortages are well document documented and publicized as the economy surges. Many jobs are going unfilled across industries. We do expect the supply of P&I talent to improve our schools resume in person instructional delivery in the fall and more pair.
<unk> returned to work.
Proper matching of talent requires more than just adequate supply businesses need workers with the right skills and up skilling and retraining, our not overnight fixes. The recovery is highlighting a structural skills mismatch that was present before covid began.
Beyond these broader trends as Olivier noted in the second quarter, we saw lower demand among large customers in our Kelly connect and BPL businesses, which impacted revenue and GP for the P&I segment. In addition, ongoing supply chain challenges, particularly microchips impacted several large outcome based customers.
In the quarter.
We believe the current easing of demand is temporary and we remain confident in outcome based business as part of our higher margin specialization strategy.
We are taking numerous actions to accelerate revenue growth moving forward and P&I.
As I mentioned last quarter, we are intensifying efforts to add recruiters in our staffing business streamlining processes to boost their productivity and investing in technology to support their work and we have reopened critical branches in high demand areas, where in person recruiting can increase speed to revenue.
In the second quarter, we invested in additional sales resources to support increased demand for outcome based solutions, we implemented price increases were in the market and client dynamics warrant additional margin and we are exiting client relationships where profitability doesn't meet our expectations. We also continue to collaborate.
With clients to set competitive wages and benefits drop unnecessary job requirements and invest in Reskilling and upskilling.
Each of these actions is designed to deliver talent to meet the current demand, though were returned to pre covid growth across the P&I segment will take longer than anticipated, we remain optimistic about the recovery in kelly's ability to accelerate growth.
Now welcome back Olivier to provide additional thoughts on 2021. Thank you Peter as mentioned, we completed the purchase of <unk> at the beginning of the second quarter and we will have nine months of so forth activity reflected in our 2021 results.
Impact of software that is now included in our outlook.
As we saw in the second quarter results.
Paul acquisition will accelerate our revenue growth in the high demand high margin technology specialty.
This results in a structural improvement in our GP rate as.
As we reflect on our second quarter results and look forward views are for continuation of the current trend of steady increases in demand as well as a longer than expected continuation of the current level of standards mismatch putting pressure on fulfillment.
For the full year, we expect revenue to be up 11% to 12% in nominal currency and including a 210 to 230 basis point impact from the software acquisition.
Our expectation reflects that there are no material changes in business of governmental restrictions related to Covid 19 demand continues to improve and that the steps. We are taking to address the current tenants mismatch will expand the supply of talent available to us as noted our current outlook reflects.
So slower pace of recovery than we were expecting last quarter, primarily in our lower margin specialties.
We expect that the timeline for each operating segment to reach pre covid revenue levels will depend on geographies served industry concentration talent supply and product mix OCG has already crossed that milestone and other segments will do so later in 2021 or in 2022, we'll continue to learn.
<unk> targeted growth initiatives that are intended to further accelerate organic revenue growth. We do expect that the international segment's revenue growth rate will be negatively impacted by legislation recently enacted in Mexico, which prohibits temporary staffing not consider specialized services.
So we see opportunities to improve our margin profile by delivering higher margins and specialty services.
We expect our GP rate to be approximately 18, 5%.
Including a 30 basis point impact from the so called acquisition.
Our GP rate expectations have improved on both faster growth in our fee based business and then the more gradual pace of growth in our lower margin specialties.
We have taken definitive steps with respect to sustainable SG&A cost reductions in the past year that are driving meaningful cost savings and a partially offsetting the impact of the expiring <unk> of our temporary cost actions in place in 2020.
The savings will allow us to moderate expense growth as revenues increase.
So started to make selected investments in organic growth initiatives and certain education to accelerate our specialty growth. So all in we expect SG&A expense to be up 9% to 10% on an adjusted basis, including 350 basis points impact from the software.
All acquisition.
Included in our expectations is the 80 basis points of non cash intangible asset amortization from so fault.
As we executed on our acquisition strategy, we have started to utilize EBITDA and EBITDA margin as additional measures of our progress in delivering push stable growth and we have included these measures with our second quarter's earnings materials.
And finally, we expect an effective income tax rate in the low teens, which includes the impacts of the work opportunity tax credit.
Which has been extended through 2025.
We announced this morning that our board of Directors has declared the first dividend since the beginning of Covid 19 crisis.
This dividend of five <unk> per share for the quarter is payable on both class a and class B common shares as the expected recovery in demand continues we'll continue to review our capital allocation strategy, including our dividend policy with our board of directors and now back to you Peter.
Olivier as we anniversary the low points of the pandemic, we're gaining new clarity on the recovery trajectory.
We are encouraged by increasing demand in our outsourcing and staffing businesses. Our education business is already accelerating and so long as K 12 schools are able to conduct in person instruction. It is poised to resume pre covid growth rates later this year.
Strong sustained fee growth in our staffing businesses points toward our customers growing confidence in the future as companies continue to ramp up full time hiring.
As Olivier noted our board of directors approved a dividend for the quarter, reflecting the progress were making with our specialization and M&A strategies, our confidence in the sustainability of the recovery and our appreciation of shareholders patients throughout the crisis.
Moving forward as noted we expect the continued increases in demand will be coupled with continued challenges in talent supply our equity at work initiative is helping to address some of these pressures increasingly available talent pool by tackling systemic barriers that prevent people from connecting with work.
As we help clients improve their employer brands and attract talent in a competitive labor market. We are leveraging the strength of our own brand Kelly as one of the most recognized brands in the industry and in 2021 is the most recognized brand in key specialties, such as light industrial MSP Science Engineering Telecom.
K 12, and higher education, the Kelly brand continues to evolve as we drive growth from our specialization strategy, we're pursuing M&A opportunities in targeted high value specialties as evidenced by our acquisition of soft world, which is already delivering top and bottom line growth for the enterprise as well as bringing new synergy.
He has to Kelly's existing businesses.
At the same time, we are investing in organic growth. For example, we are encouraged by the level of customer interest in our K 12, tutoring solution and the new P&I professional services product that I mentioned last quarter.
<unk> is moving forward in the economic recovery with a commitment to our specialization strategy and with confidence in our ability to help customers and talent thrive even brighter days lie ahead, and we are ready for them. Cynthia you can now open the call to questions.
Thank you and ladies and gentlemen, if you wish to ask a question. Please press one and then zero on your Touchtone phone.
We are here tone, indicating that you had been placed in Q U may also remove yourself from the queue by pressing the same one zero command.
Once again, it's one zero for any questions or comments.
And our first question will come from the line of Kevin with.
With Barrington Research your line is open.
Good morning.
Hey, Kevin Good morning, Kevin.
I wanted to.
First ask about.
You mentioned.
Talent attrition.
Sure.
Professional and industrial outcome based and.
Can you just expand more on what's going on there and how you're addressing that I guess you are.
Referring specifically to Kelly connect and BPL.
Sure.
With regard to the attrition.
Yes, so thanks for the question, Kevin and good morning.
As Olivier mentioned in our outcome based businesses inside P&I.
We take on the responsibility of hiring the employees in delivering the outcome and so when there is increased attrition.
Among the employees.
We employ to deliver the services.
It has a negative impact on productivity and therefore on our.
R&R GDP and Thats just.
Something that's characteristic of the outcome based business.
And we we have plans in place to mitigate those risks we think it's temporary.
But it is one of the inherent risks we have when we're in such a competitive talent environment.
Okay.
Third.
And.
You talked about supply potentially.
Proving.
Schools reopen specifically within professional industrial.
But you also mentioned the ongoing skills mismatch in.
What role does Kelly play in.
Upscaling or retraining and how do you work with your clients.
The address those skills gaps.
Well, we are regularly working with our.
Customers to identify what skills they need.
To deliver the services that they are.
Yes.
Their business and so.
When you have people coming off the sidelines that may be coming from different industries for example, hospitality and leisure.
We need to spend.
Some time re skilling and up scaling those individuals to fit for example in manufacturing environment. So.
Working with customers to establish.
Short term training programs to accelerate the.
The way individuals gain skills to fill roles for those particular customers is something that that we do and customers see the benefit of it because they get.
A more capable source of talent.
More quickly.
Okay great.
Can you touch a little bit more on.
The SG&A outlook and the organic investments and maybe just expand on that.
Those organic investments specifically within.
Science Engineering, and technology and education specialty.
Yes.
Kevin.
I'm going to first give you a little bit of a view on Q2, because I think it's also proved very useful to understand.
Our.
Full year expectations related to SG&A. So if you look at Q2.
On a constant currency basis our.
<unk>.
At 19, 8% out of that you've got 460 basis points that is going to.
<unk>. So basically if you exclude self world. We're at about 15% one five on an inorganic basis, then we've got about out of the 15% about 800 basis points coming from incentive.
Incentive out valuable cost.
And of course last yielding was pretty low based on what we have mentioned and what you know so it's about 8% Android based upon but completely variable depending on the performance. Then we have about 300 then.
<unk> hundred basis points.
The investments and set an indication that we are mentioning.
And then we have what we call a Beijing back meaning I did mention that of course last year, we had salary cuts furloughs and so on Thats, an additional 400 basis points.