Q3 2022 Kelly Services Inc Earnings Call

November 10, 2022

Okay.

Ladies and gentlemen, thank you for standing by good morning, and welcome to Kelly Services third quarter earnings Conference call. All parties will be in a listen only mode until the question and answer portion of the presentation. Today's call is being recorded at the request of Kelly services. If one excuse me if any.

One has any objections you may disconnect at this time.

A fourth excuse me a third quarter webcast presentation is also available on the Kellys website for this mornings call I would now like to turn the meeting over to your host Mr. Peter Quigley President and CEO . Please go ahead.

Thank you Leah Hello, everyone and welcome to Kelly Services third 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. Thank you Peter and good morning, everyone. As a reminder, any comments made during this call.

Including the Q&A may include forward looking statements about our expectations for future performance.

<unk> results could differ materially from those suggested.

Our comments and we have no obligation to update the statements made on this call.

Please refer to our SEC filings for a description of the respect that could influence the company's actual future performance.

In addition, during the call certain data will be discussed on a reported and adjusted basis.

Discussion of items on an adjusted basis are non-GAAP financial measures designed to give insight into certain trends in our operations.

References to organic metrics in our discussion today excludes the results of rocket power and pediatrics therapeutic so she's a P. T S. Both of which we acquired earlier this year.

In addition, our organic metrics exclude the results of our Russian operations. Following the completion of the sale collection this quarter.

Finally to slide deck that we're using on today's call is available on our website and now back to you Peter Thanks, Olivier before I turn to Kelly's quarterly results I'd like to address two developments that were highlighted in today's press release.

First yesterday Kelly's board of directors authorized a one year $50 million repurchase of outstanding class a common shares.

This buyback program, which follows the $27 $2 million in shares we repurchased from personal earlier. This year reflects our continued confidence that investing and Kelly is a good use of capital and our commitment to a flexible and balanced capital allocation strategy that is focused on.

Maximizing the return on capital.

Second as noted in the press release, we incurred a goodwill impairment charge in the third quarter related to rocket power our acquisition in the ERP space.

Market power specializes in the high tech industry and many customers in that vertical have scaled back their full time hiring abruptly softening demand for rocket power services after two quarters of triple digit growth.

In light of these market dynamics, we are taking action to capture more of the expected value from this acquisition, including accelerating integration activities diversifying rocket power's portfolio and identifying additional synergies with Kelly to unlock new opportunities for growth.

Furthermore, we are optimistic optimistic that hiring reductions and layoffs in the high tech vertical may strengthen the pipeline of candidates in other industries, where demand for talent remains strong among them financial services insurance, and healthcare, where Kelly technology and software world are well.

<unk> established and positioned to capitalize.

The recent deceleration in the high tech industry demonstrates how sectors are responding differently to economic uncertainty.

Our software World acquisition continues to deliver solid performance and pediatric therapeutic services, our latest acquisition in the K 12 education specialty remains firmly on track and is delivering healthy year over year revenue and GP growth.

Given the uneven impact of inflation higher interest rates supply chain constraints and labor market disruption. It's likely we will continue to see this mix pattern of deceleration in some industries and resiliency and others.

What will not change is kelly's commitment to creating value and our third quarter results.

Of specialization strategy is indeed, driving structural improvements that are shifting our business mix toward higher value higher margin growth. We once again delivered GP rate improvements in each of our five segments continuing the positive trend we saw in Q1 and Q2.

As our specialty teams focused their energy and resources on higher margin products within their business units.

Our <unk> segment delivered solid revenue growth in telecom technology and outcome based solutions, along with solid fee growth and good leverage our education segment improved K 12 fill rates captured strong revenue growth from existing customers and new wins and produced another quarter of <unk>.

Led by Greenwood, Asher or higher education executive search specialty.

Our OCG segment delivered GP growth from its highest margin solutions as recent large MSP wins began going live and overall demand for our products remained solid.

Our P&I segment delivered revenue growth in outcome based specialties and kept staffing revenue on par with Q2 revenue trends and our international segment, excluding the impact of the sale of our Russian operations delivered good organic constant currency revenue and fee growth during the quarter.

The continued shift toward higher margin mix within each of our business units reflects kelly's active commitment to advancing our specialty growth strategy.

I'll remind you that we have made five significant transactions. So far this year to monetize noncore assets and reallocate capital in support of that strategy. In Q1, we completed the sale of most of our investment in the Pearsall Kelly APAC JV, we sold our investment in the common shares of <unk>.

<unk> holdings, and we repurchased class, a and class B common shares to and the cross shareholding arrangement with personal in March we acquired rocket power to drive additional growth in our growing <unk> business and in May we acquired Pts to add a new adjacent service to our education business.

<unk>.

These strategic transactions demonstrate our commitment to specialty growth and value creation within our businesses I'll turn it over to Olivier now for a closer look at the details of Kellys Q3 results. Thank you Peter <unk> quarter of 2022 revenue totaled $1 2 billion.

123% from the prior year on a reported basis, which includes 260 basis points of unfavorable currency impact so without the impact of FX headwinds revenues for the quarter were up.

0.3% in constant currency.

Included in that increase is a 130 basis point favorable impact from our acquisitions of rugged power in TTS as well as a 250 basis points unfavorable impact, resulting from the sale of our Russian operations, So our organic <unk>.

Currency revenue grows Fuller third quarter was up one 5%.

As we look at third quarter revenue by segment.

<unk> segment revenue was up 5%, we have continued to see a strong demand for our telecom specialty and growth in our outcome based solutions remain solid.

<unk> and engineering are flowing but I wont technology practice, including so flawed is key to growing also at also.

Lower base. In addition set permanent placement fee growth.

Also continued up 8% year over year, despite the more challenging economic environment.

In our education segment year over year growth continues to be strong up 57% on a reported basis.

The reported results include the May acquisition of Pts So revenue growth was 45% on an organic basis year over year.

It is on track and performing well with pro forma Q3 year over year revenue growth of 23 persons.

Revenue growth trends in our education business reflect robust demand from existing customers and new wins in 2022.

Steps taken earlier in the year to broaden the supply of talent have continued to pay off and we are continuing to see meaningful improvement in our CD rates.

Permanent placement fees, primarily higher education executive search with greening, the Asher were up 54% year over year.

Our OCG segment continued to deliver year over year revenue growth with revenues up 5% on a reported basis.

Organic constant currency revenue, excluding the impact of broker power was flat to the prior year in Q3 <unk>.

Declines in GPU as a result of some customer exits in the early 2020 to offset the continued growth in our high margin MSP and <unk> products.

I will provide more context on the situation with rocket Bauer later in my comments.

Revenue in our professional and industrial segment declined 10% year over year in the quarter.

Consistent with second quarter revenue from our staffing products declined 14% on lower our revenue volume.

Which has been partially offset by higher bill rates, resulting from the upward pressure on wages in the current talent market.

About 60% of the staffing revenue decline comes from the shift of a large staffing account, which we discussed as part of our outlook in our August call.

The segment's outcome based business continues to be impacted by contraction year over year demand from our call center specialty but growth in other outcome based efficiencies as it more than offset that headwind and thought that I would come based revenue was up about 3% for the quarter.

And finally, <unk> down 10% as our customers demand for direct hire services has been impacted by the increasing economic uncertainty, especially among our small and mid sized customers.

Revenue in our international segment declined 16% on the nominal currency basis and was down 5% on a constant currency basis.

Excluding the impact of the sale of our Russian operations organic constant currency revenue growth was 7%.

And finally permanent placement fees in the international segment grew by 10% year over year in constant currency.

Overall gross profit was up five 1% on a reported basis.

Seven 6% in constant currency, our gross profit growth was a result of an improving gross profit rate, 26% for the quarter compared to 19, 2% in the third quarter of last year, a 140 basis point improvement the primary driver is.

Favorable organic business mix, which contributed more than 90 basis points lower employee related costs and higher Perm fees also contributed and finally, our 2022 acquisitions also positively impacted our total company GP rate by 20 basis points as.

<unk> PTH and rugged power generate higher margins than <unk> average.

And when we look across the business units gross profit rate improved in each segment, reflecting the continued shift in business mix towards higher margin products and specialties.

SG&A expenses were up five 1% year over year on a reported basis and seven 1% on a constant currency basis.

These expense growth rates are impacted by the intangible amortization expense and other operating expenses of rocket power and Pts as well as the favorable impact of the sale of our Russian operations on an organic constant currency basis expenses grew by 6% year over year. The majority of the income.

In SG&A reflects higher compensation related expenses for our full time tenant we have continued to add head count to support growth in selected specialties in line with revenue growth and provided commensurate market driven adjustments to base space.

These compensation adjustments reflect the impact of inflationary pressure and the continuing need to attract and retain talent even with increases in the cost of doing business and we have been taking steps to moderate the level of expense growth in Q3 as compared to earlier this year.

This reflects buds above the current level of economic uncertainty and its impact on our top line growth and positions us to react quickly to further market developments if conditions warrant moving forward.

Also reflected in our earnings while inflation in Q3 is an impairment charge of $30 7 million related to the goodwill of <unk> power.

Many customers in the high tech industry vertical in which rocket ball specializes have reuse their full time hiring reducing the demand for rockets power services.

And ongoing it couldnt be consistency as more broadly impacted the growth in demand for our recruitment process outsourcing the near term.

After experiencing triple digit pro forma growth in the first and second quarters rockets Power's third quarter revenue declined 11% from a yield the changes in market conditions triggered an interim impairment test, which resulted in the Q3 impairment charge the impairment charge is.

A noncash item and more information regarding the impairment charge will be available in our third quarter Form 10-Q.

Our reported loss from operations for the third quarter was $21 4 million.

Excluding the impairment charge adjusted earnings from operations were $9 5 million compound to the $8 9 million in Q3 of 2021 generally consistent on the nominal currencies the currency basis, but up 21% on a constant currency basis.

While our adjusted conversion rate.

Total company remain flat to 2021, we did see an improvement in conversion and improved conversion rate and set and continue to expect other business units to generate improving conversion rates as we move forward.

And just a reminder, that we monetize our investment in <unk> holdings and most of the vessel cavity APAC joint venture in the first quarter of 2022.

So there will be no further P&L impact from those investments, although the comparable valued higher.

<unk> will include gains and losses related to those investments until we anniversary the collections.

Income tax benefit for the third quarter was <unk> million compared with our 2021 income tax expense of $11 1 million, our effective tax rate for the quarter was 23, 4%.

And finally reported loss per share for the third quarter of 2022 was <unk> 43 per share compared to earnings of <unk>.

87 cents per share in 2021.

The decrease in earnings per share resulted primarily from the impact of the impairment charge related to rugged power and the 2021 gain on pearsall shale or net of tax.

Adjusting for those transactions Q3 'twenty to <unk>.

EPS was <unk> 25.

Consistent with an adjusted EPS of <unk> 25 in Q3 of 2021.

Now moving to the balance sheet as of the end of the third quarter as Peter mentioned, our balance sheet reflects the completion of five significant transaction. So far this year and demonstrates our commitment to monetize noncore assets and we're allocating capital to advance our specialty strategy.

In addition, we completed the sale of our Russian operations in July .

At the end of Q3 cash totaled $122 million compared to $44 million a year ago, we had essentially no debt consistent with the end of the third quarter of 2021 with our $300 million in available capacity on our credit facilities, we continue to have ample capital available to deploy.

All right.

As of the end of Q3 accounts receivable was $1 5 billion and increased six 7% year over year, reflecting our year over year increase.

In revenue as well as an increase in DSO.

DSO was 64 days, an increase of four days over year end 2021, and one day higher than the third quarter of 2021.

Global DSO increased primarily as a result of an increase in the mix of MSP and other customers with extended payment terms and to a lesser extent to the timing of some customer payments.

Accounts payable and accrued liabilities also increased as a result of an increase in MSP supplier payables, partially mitigating the impact of higher DSO on free cash flows.

Through the third quarter of 2022, we used $170 million of free cash flow, reflecting increasing investment in working capital.

Capital Free cash flows in 2022 also includes the use of approximately $50 million to pay income taxes, resulting from the sale of the <unk> solar holdings common stock as well as the use of approximately $29 million to repay federal payroll tax balances, which were deferred in 2020 under the <unk>.

<unk> Act and now back to you Peter Thanks for those details Olivier last quarter marked the two year anniversary of Kelly's optimized operating model and the formation of our five distinct business units.

As those businesses start to mature within the model they not only deliver strategic contributions to Kelly's overall performance. Each segment is also creating higher value within its own specialty.

In our set segment, we said we wanted to see meaningful returns on our investments both organic and inorganic the specialties, we've invested in including soft world and telecom are delivering those higher margin returns and in the third quarter set also delivered solid fee growth and good operating leverage.

In education, we committed to capture K 12 growth improve our fill rates and further expand our adjacencies. We've delivered on the promise of higher fill rates in Q3, we have begun implementing significant new wins as the school year ramps up and our Pts acquisition is contributing.

Solid revenue and GP growth to this segment.

OCG, we said we would invest this year in our fast growing <unk> business, our organic Rps business continued to deliver solid year over year growth in Q3, we've explained the market conditions that triggered the rocket power impairment charge, and we believe that with diversification and integration this acquisition.

<unk> will bring strategic long term value to our business.

In our P&I segment, we began to see some softening in staffing demand in the third quarter not unusual since this segment typically is the first impacted by a slowing economy notwithstanding year over year contraction in our call Center business, our outcome based P&I specialties delivered growth in the quarter.

Finally in our International segment, we said, we expected continued growth in regional and local specialties and Q3 delivered that growth with pockets of resilience specialties designed to thrive even in challenging macro conditions I'll now welcome back Olivier to share more about what we expect in the fourth quarter. Thank you Peter.

As we reflect on the third quarter results and look ahead, we expect that the growing economic uncertainty will begin to impact our P&I and international businesses, but that they will be a steady demand for our OCG and education services.

We expect that continued challenges related to talent supply inflation.

And the upward pressure on wages at all skill levels will continue although there are signs of a more gradual pace of wage Roes as we move forward and increasing interest rates may put some pressure on certain industries as consumers and businesses react to these higher rates.

Specific to give you the two unusual even that.

As impacted our Q3 results and we will continue to impact the remainder of the year Firstly the sale of our Russian operations, which we completed in July 2nd is a change of one of our large customers as they both strategy that we mentioned today and on earlier calls.

Large staffing customer decided to address their talent challenges and work with Kelly differently by changing its heavy user content label to one that instead, we will rely on hiring talent directly as full time employees.

Given that only one quarter remains in 2020 to my comments on our outlook reflect our expectations for the fourth quarter only will return to providing insights into expecting full year results in 2023.

I will start with highlighting the impact of the strengthening of the U S dollar against several currencies, including the Euro we have experienced and continue to expect a more significant negative impact from FX on our Q4 reported revenue growth rate.

With the FX headwinds and other challenges I mentioned, we expect Q4 revenue growth to be flat to up 1% year over year in nominal currency.

This includes about 230 basis points of unfavorable currency impact included in that the outlook is 150 basis points of inorganic revenue growth from rocket power in Pts and an unfavorable 150 basis points impact from the sale of our Russia business all in.

That reflects an expectation of $3 three to four points of year over year organic constant currency revenue growth.

While we are not expecting a full traditional seasonal lift in our P&I business.

Later, we will include a full quarter of revenue growth from our education segment as schools will be in session for the entire quarter and finally, our outlook assumes no material changes in macroeconomic conditions.

We expect our Q4 <unk> rate to be around 24%, a 70 basis point improvement from the 19, 7% we reported in Q4 of 2021.

This improvement in our <unk> rate is based on our expectation for continued structural improvement in products and specialty mix, partially offset by a deceleration in permanent placement fees.

Given our revenue and GP rate outlook, we expect that our GP dollars will grow by I.

We will grow by as much as 4% in the quarter on a nominal basis, our nitro and given the economic headwinds, we expect SG&A expense to be up two 5% to 3% on a reported basis, reflecting growing inflationary pressure in the current environment, partially offset by cost management default.

To ensure alignment with top line growth.

We remain committed to improving productivity across all of our business units and acting with urgency.

With respect to cost management in response to change in market conditions, as we execute our organic and inorganic strategies, we are utilizing adjusted EBITDA and adjusted EBITDA margin as additional measures of our progress in delivering pushed stable growth.

Based on our outlook, we expect Q4, adjusted EBITDA margin to improve to two 5% a 30 basis point improvement from the two 2% adjusted EBITDA margin delivered in Q4 of 2021, we also expect an adjusted Q4.

Income tax rate of approximately 50%. This is unusually high driven by the impact of nondeductible losses on life insurance policies used to fund certain retirement liability.

For a full year for the full year, we expect the effective tax rate to be in the low single digits.

And finally as Peter noted I was both our board of directors as approved a one year $50 million up in market share repurchase program. We expect that such open market repurchases will begin within a few weeks and now back to you Peter Thanks, Olivier the share buyback program doesn't change.

Inge Kelly's capital allocation strategy, it complements and demonstrates our commitment to using our capital to maximize returns we will continue to pursue organic and inorganic investments that accelerate specialty growth and deliver shareholder value there'll be a current economic climate may result in fewer high quality <unk>.

<unk> on the market, we are holding firm to our acquisition criteria balancing our desire for inorganic growth with our commitment to creating higher value higher margin mix in our specialty businesses.

Our third quarter performance confirms that we are indeed, making progress in shifting our business mix and delivering structural improvements that drive higher GP, while signals in the macro economy remain mix, we are capturing strong demand in our education and OCG segments, and we expect demand to hold steady in these more risk.

William specialties, we face the future with confidence in our well defined specialization strategy. We continue to benefit from our optimized operating model, which focuses our attention firmly on growth and we move forward as a more nimble proactive company that will adapt quickly to market changes guided by our seasoned.

Leadership team wholly committed to specialty growth and value creation.

You can now open the call to questions.

Ladies and gentlemen, if you would like to ask a question. Please press one then zero on your telephone keypad.

You will hear acknowledgment. That's your line has been placed in Q you may remove yourself from the queue at any time by repeating the one zero command. Once again, if you would like to ask a question. Please press one zero on your telephone keypad.

And our first question is from Joe Gomes with Noble capital. Please go ahead.

Sure.

Good morning, and thanks for taking the questions. Yes, good morning, Joe morning, Joe.

So I wanted to start out with talking about talent supply and maybe you get a little more detail.

What you guys are doing to try and attract the talent in this type of a market.

What do you see are the challenges there are you seeing any.

Loosening up of the talent supply across the end markets.

So Joe the Labor force participation rate.

<unk> continues to be stubbornly low relative to historic participation. So that's contributing to the ongoing tight labor market. Although the number of job openings has come down somewhat it's still twice twice.

Twice as many job openings are unemployed people so.

Thats a structural issue that continues to.

Challenge meeting our customers' demand.

We are using all appropriate measure.

Measures to try to attract more people, including.

Having retirees to come back into the workforce.

Creating new channels for our education practice, using social media to an extent that we.

Never used it before so we are pulling all the levers we can to try to create a value proposition for individuals to work with <unk> to further their career and career aspirations.

Okay. Thank you for that.

No.

Switch to the education segment.

Bit of a multipart question here, but.

And I noticed.

And through the the relief that segment did show an operating loss I'm, assuming that's mostly related to just time of the year, but was there anything else.

You would know that caused that operating loss in the education segment, and then to David discussed a little bit in the past about some additional wins that you were able to get in this space I'm just trying to think.

See where you stand today does that business still.

Attracting a lot of new wins in the kind of the pace of the wins in that segment.

Yes, Joe the operating losses.

Seasonal directly related to the fact that in the third quarter schools.

Only our only start starting to open.

So that's just a seasonality in terms of the wins, we continue to see.

Outstanding demand for our services.

We've had significant new wins during.

During the year that we're implementing.

For the New school year.

Ramping up now.

Going to enjoy a full quarter of that most of those wins.

In the fourth quarter and the pipeline for new wins, it looks very good where we believe we're taking market share based on our value proposition to our customers of being the best.

Company to deliver instructors into classrooms in an environment, where there are severe teacher shortages.

Clearly when you look at our <unk>.

Outlook for Q4, we anticipate very similar growth than what we had seen in Q1 Q2 into Q3 of 2022.

<unk> above the 40% 45% Mark.

Okay.

Thanks for that and then one last one if I may.

<unk> also saw this morning.

You answered intend agreement.

Sure.

I guess free up some.

Restricted or the ability to do some with restricted cash levels.

On the credit agreement, if you could just give us a little more detail what that is all about.

Yes.

Two things on that one is common to many companies you know that the LIBOR.

Restaurants interest.

<unk>.

Rate is no longer something that is in place. So basically these agreements, which I know is a long.

Disclosure of over 170 pages is basically on you know.

A new agreement moving from these label LIBOR, sorry, what we call so far.

The second point is basically a change in.

Some of our bond covenants to basically expand.

Some.

The possibility to basically fund.

The share repurchases that Peter and I will mention in two days. So it's basically an amendment to some of the basically a box governance to basically enable us to fund.

He is $50 million initiatives that again, we have mentioned today.

Okay, great. Thanks for that appreciate that I'll get back in queue. Thank you.

Thanks, Joe Thank you.

And our next question is from Kevin <unk> with Barrington Research. Please go ahead.

Good morning, Kevin Good morning, Good morning, Good morning, Peter and Olivier.

Wanted to start out by asking about rocket power and you mentioned.

Wanting to speed up the integration there and also.

Diversify its customer base just wondering.

What.

That integration would involve and then.

How.

I guess easier is to diversify the business.

Is it simply a matter of taking their existing offering and bring it to different industries or is there something specific about their offering.

Taylor to the tech industry.

I want to get in Walmart color on both of those things well.

Well as we mentioned Kevin rocket power was enjoying triple digit growth in Q1, and Q2 and had its hands full given.

<unk> falloff in demand and specifically in the high Tech vertical where rocket power had significant exposure.

We think pivoting its.

Really well run operations to other industries will be.

Successful and achievable and the exposure that Kelly has.

To blue chip and.

Enterprise sized customers across a variety of industries.

Was part of the original investment thesis anyway, its just that given the.

<unk>.

The downturn in the tech vertical and specifically we think this is the opportune time to.

Focus rocket powers unique operating delivery model to other industries.

That.

The execution of those plans is already underway and we actually have.

The significant win that.

We'll be seeing implemented even before the end of the year as a result of the combination of rocket power and Kelly resources.

Yeah.

Okay, that's good to hear.

And when we think about that.

Gross margin for the year.

I guess the guidance for full year now has 24% correct versus 27% previously is that there is.

A function of.

Primary lower permanent placement fees or the assumption that there will be lower.

So, yes, I mean the <unk>.

What are the specific on the outlook today is at.

The practical matter, we have basically discuss about Q4 'twenty.

24, giving needs related to Q4.

Understood Okay.

Up 70 basis points not.

$202230 140, we have seen in Q1 Q2 Q3 of this year. The main difference is basically the <unk>.

And is that decelerating.

Good news is that we continue to see.

What we have seen for many years.

Five yield is a cycle and improvement on our business mix, our specialty mix that is going to continue to provide some traction in them of.

Basically improving or continue to improve our.

GP gross margin rate.

Okay.

Alright got it yes, yes, that's specific to the fourth quarter, that's 1.4% okay.

And just just thinking about.

SG&A you've mentioned that.

You kind of slowed down or looking years slowdown SG&A expense growth in the third quarter.

I'm just trying to.

Calibrate the prior SG&A expense growth outlook.

That you provided last quarter I think it was up 8% to 9% organically.

Has there been a change in the act.

Or is that still kind of weak.

You could expect.

Yes.

So Kevin if you if you look at full year.

<unk>.

Basically versus the outlook, we gave three months ago.

Downgraded our SG&A grows by about 200 basis points.

If you look at the trend over Q1 Q2 Q3.

I'm going to talk about the organic constant currency SG&A were up 12, 6% in Q1 $9 90 in Q2, 6% in Q3 and basically on a like for like basis. The 6% is going to go down further.

In Q4.

Based on the outlook for Q4, we did provide today two reasons on that one is of course as the topline is slowing down a little bit incentives are starting to react because thats. The way. It should work when performance is not necessarily at the level of the target and secondly.

<unk> that we have started in September and that is going to be more visible in Q4 East coast management, making sure that we deploy our resources.

According to a very fluid and uncertain environment as Peter was mentioning so it's very likely that we're going to continue to see this slowdown in expenses, but also more and more redeployment, depending on where basically we still have significant opportunities education.

These include the example, our PPO business overall is a very good example, technology, including so Ford still growing.

You have some areas, where we act on the continued to make sure we have.

Sufficient resources to continue to capture growth.

Okay great.

I guess you mentioned.

How is slowing economy might.

The result in fewer high quality M&A targets I guess.

Fairly self explanatory that targets <unk>.

Going to be selling the.

The market softer in their results might be softer but anymore.

Comment on just the M&A pipeline.

Alright.

What types of things you might be pursuing now.

We're continuing to focus on are the higher margin higher growth specialties. So that would be set and also we are very pleased with our acquisition of the pediatric therapeutic.

Services in the.

Therapeutic adjacency to education. So those would be two areas that we will continue to look for high quality assets to <unk>.

Add to our portfolio.

<unk> as well as the quality of.

Companies that are currently in the pipeline is.

Less attractive than it was say six months or a year ago.

We don't think that's permanent we think companies will come off the sidelines as the economy improves.

But we're.

We haven't changed our strategy, but we havent changed our.

Criteria that we're using to occur.

Acquire properties, it's a high bar, we have set to use our capital to acquire properties.

We'll continue to.

Look at.

Companies that come on the market through that lens.

Okay. Thank you for taking the questions.

Thanks, Kevin Thanksgiving.

Our next question is from Kartik Mehta with Northcoast Research. Please go ahead.

Hi, good morning.

Good morning. Thank you I was wondering if you could give maybe a little bit more detail on the type of companies that.

All youre seeing weakness from on the technology sector.

Because I know as you said, it's really mix of the type of demand, you're seeing and any type of granularity there would be great.

Yes, it's a very.

Important question, because when we talk about.

Either technology or high Tech, sometimes we conflate the.

The technology.

<unk> types with the technology sector.

Which is I think the all of the companies that are in the press announcing either lay officer.

Slowdowns in hiring including matter Lyft slack and on and on that's the sector Thats being most impacted there is still a very strong demand for high quality technology professionals.

And as I mentioned in the script so were seeing.

<unk>.

Solid demand in our software world. They continue to provide high quality technology talent to enterprise and small and medium sized businesses.

And we don't think there is any.

Pending slowdown in that demand because large institutions continuing to need.

App developers and network architects and cyber security experts, but at least for the near term the.

Hi Tech.

Industry Silicon Valley.

Austin, Texas other areas has been particularly hit by.

The uncertain macro as well as.

Potentially over hiring coming out of the pandemic.

And then as you look at M&A targets and considering the impairment charge on rocket power does that change maybe how you are looking at future M&A targets or does it change how you might be how you might underwrite them in the future.

Well, we're very pleased with the performance of our acquisitions.

In totality.

The rocket power.

We're off to a decline in the high tech vertical that they had significant exposure.

Two was.

The timing.

Well.

Cause us to reflect on it but it doesn't change the underlying strategy of looking to add to the <unk> Kelly legacy businesses with high quality high margin high growth prop.

Properties that we think will.

Create both primarily topline synergies for the company and.

Create.

Opportunities to attract new customers to Kelly.

If I may just add I was looking recently at reflecting a little bit.

Peter.

The performance of some recent acquisitions just to give you an idea first of all.

Pts as we said are growing 23% in revenue in Q3 redo the national interestingly over 80% growth.

Softwood.

Which is in the technology, plus 7% in revenue and Nextgen and GTA, which is now what we call our telecom specialty growing at about 34%. So you see that of course, we have some challenges with work at Bauer.

We have now a plan to capture the value we are expecting.

At the time of the acquisition, but reflecting on the recent acquisitions.

All of them are on tracking down both providing for us additional growth, but also additional value creation, because all of them got a margin profile. Our gross margin profile that is of course much higher than the average gross margin we have for the rest of the kidney.

And then just one last question you know based on what you just said Olivier and what you've said so far about the demand and business and supply and demand of labor as you look at your gross profit margins over the next.

12 months.

No.

You are there.

Headwinds that would make you go you can see them contracting or is there enough.

And that you should continue to see growth in gross profit margins.

So I think what we are going to continue to see probably the.

Traction in the boost that was coming from high growth in the fee business.

Is slowing down and we do not provide the boost we have seen.

In Q1, it was about 100 basis points Q2 70.

Q suites are already much lower it's about 10 basis points.

What we are going to continue to see with is what we have seen for the last five years basically a structural improvement of our GP margin coming from what we called mix, meaning specialty mix continuing to grow higher.

Gross margin businesses.

I would tell us the 140 basis points of improvement we had this quarter 90 basis points is coming from the structural improvement again that we have seen for the last five years, including in 2020 during the economic downturn. So Ics is traction continuing in the future.

Because that's something we have seen for a while it seems 2015 in fact, we've not one year, where basically our GP rate went in Berlin now we don't expect.

200, 2030 basis points that we have seen in Q1 or Q2, but meaningful improvement on the pure organic structural a specialty mix, yes definitely yes.

Thank you so much I appreciate it.

Thank you.

And next we go to mentor out Ram Gopal with Sidoti. Please go ahead.

Yes, good morning, and thanks for taking the questions. Good morning, good morning.

Yes. Thanks.

<unk>.

And as you look at your investments for next year, given the macro uncertainty is.

Is it fair to assume both technology and work for us.

Are you going to be a lot more cautious just.

Just because you just don't have the visibility.

If you would like.

Well, we're going to continue to invest in the areas, where we think we can get a meaningful return so as Olivier mentioned the demand for our education services is significant and will continue to invest there we continue to see demand in our in our set in OCG practice.

But we're also very mindful as Olivier described in the Q4 outlook for SG&A.

That we're adapting to the current uncertainty and deceleration in certain parts of the economy and we will continue to.

Use that lever going forward.

In 2023 or.

More nimble more adaptable company our cost structure is more flexible than it has been.

We expect to.

See that continue in 2023.

Okay. Thanks, and then just.

Switching gears, a little in terms of Europe .

Some softness.

France, UK, Italy, not surprising given what.

We are hearing.

Europe , but.

What's your expectation in terms of.

Stabilization, there or should we expect that continued softness well into next year, given the macro environment.

Interestingly when we.

Exclude of course.

FX, which is creating a lot of noise and also Russia, which I think is.

Yes.

More like externally driven and you look at it.

In Q1 were growing at about 9% so very similar to the entire 2021 Q2, we're around 9% truthfully, we are at about 7%.

So and our fee business was still up 10% in Q3.

Including the fact that we have lost the benefit of Russia, Russia, historically, that's been a nice business.

For the moment honestly, we don't see specific signs of slowing down.

E <unk>.

It may come, but we believe that it is going to slow down a little bit, but what we have seen so far he's very very resilient business.

In Europe of course, we are scrutinizing, a little bit what is going on looking at ours on a weekly basis looking at our our fee business.

Getting ready if something is changing.

I believe is going to slow down a little bit but for the moment I would say it seems to be very very resilient.

Okay. Thanks, and then I guess finally.

Obviously.

I'm not known for most companies but.

As you look into 'twenty, three again and as you look at your portfolio.

Businesses.

Should we can despite the environment.

Should we still continue to expect year over year growth I know, you're not providing guidance, which is not a very high level.

Still expect the company to grow.

Next year despite the.

Macro headwinds.

Yes. It is.

Probably a difficult question knowing the environment, we have now, but when do you think about resiliency in.

We can we can speak about education.

Our set business in OCG business, we see that.

<unk>.

<unk> share of the business, we have now with the portfolio of specialties, we have in each of the segment for each of them. We believe we have a pretty resilient.

The model right.

Of course, when you're seeing about the P&I and to some extent in international business. We believe they are going to be likely more subject to.

The future economic environment, but we believe that at least for OCD set and education. We have businesses that are now strong enough resilient enough to probably weather.

Some challenges.

In the near future probably better than it was in the past and certainly better than other areas that are more exposed to I would say the cyclical.

<unk>.

Challenges, we may see a demo of economic environment in the near future.

Okay.

Okay. Yeah, that's very helpful. Thanks, again for taking the questions.

Yes. Thank you. Thank you.

Ladies and gentlemen for any follow up questions. Please press one then zero at this time.

Yeah.

And we have no other questions you may continue.

I think we're all set Leah. Thank you for your help today. Thanks, Julia you are very welcome ladies and gentlemen that does conclude your conference for today. Thank you for your participation and for using AT&T teleconference. You may now disconnect.

Yeah.

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We're sorry your conferences ending now please hang up.

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If one excuse me if anyone has any objections you may disconnect at this time.

Thank you Leah Hello, everyone and welcome to Kelly Services third quarter Conference call with me today is Olivier <unk>, Our Chief Financial Officer, who will walk you through our safe Harbor language, which can be found in our presentation materials. Thank you Peter and good morning, everyone. As a reminder, 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.

Please refer to our SEC filings for a description of the risk factors that could influence the company's actual future performance.

In addition, during the call certain data will be discussed on a reported and on an adjusted basis.

Discussion of items on an adjusted basis are non-GAAP financial measures designed to give insight into certain trends in our operations.

References to organic made tweaks in our discussion today excludes the results of rocket power and but yet weak therapeutic services, our Pts both of which we acquired earlier this year.

In addition, our organic metrics exclude the results of our Russian operations. Following the completion of the sale collection this quarter.

Finally, this is a slide deck that we're using on today's call is available on our website and now back to you Peter Thanks, Olivier before I turn to Kelly's quarterly results I'd like to address two developments that were highlighted in today's press release.

First yesterday Kelly's board of directors authorized a one year $50 million repurchase of outstanding class a common shares.

<unk> the return on capital.

Second as noted in the press release, we incurred a goodwill impairment charge in the third quarter related to rocket power our acquisition in the ERP space rocket power specializes in the high tech industry and many customers in that vertical have scaled back their full time hiring abruptly softening demand.

For rocket power services after two quarters of triple digit growth.

<unk> established and positioned to capitalize.

The recent deceleration in the high tech industry demonstrates how sectors are responding differently to economic uncertainty.

What will not change is kelly's commitment to creating value and our third quarter results.

Well the specialization strategy is indeed, driving structural improvements that are shifting our business mix toward higher value higher margin growth. We once again delivered GP rate improvements in each of our five segments continuing the positive trend we saw in Q1 and Q2.

As our specialty teams focus their energy and resources on higher margin products within their business units.

Led by Greenwood, Asher or higher education executive search specialty.

Our OCG segment delivered GP growth from its highest margin solutions as recent large MSP wins began going live in overall demand for <unk> products remain solid.

The continued shift toward higher margin mix within each of our business units reflects kelly's active commitment to advancing our specialty growth strategy.

I'll remind you that we have made five significant transactions. So far this year to monetize noncore assets and reallocate capital in support of that strategy. In Q1, we completed the sale of most of our investment in the personal Kelly APAC JV, we sold our investment in the common shares of <unk>.

First of all holdings, and we repurchased class, a and class B common shares to and the cross shareholding arrangement with personal in March we acquired rocket power to drive additional growth and our growing <unk> business and in May we acquired Pts to add a new adjacent service to our education business.

<unk>.

These strategic transactions demonstrate our commitment to specialty growth and value creation within our businesses I'll turn it over to Olivier now for a closer look at the details of Kellys Q3 results. Thank you Peter fourth quarter of 2022 revenue totaled $1 2 billion.

Two 3% from the prior year on a reported basis, which includes 260 basis points of unfavorable currency impact so without the impact of FX headwinds revenues for the quarter were up <unk>, 3% in constant currency.

Included in that increase is a 130 basis point favorable impact from our acquisitions of rocket power in TTS as well as a 250 basis points unfavorable impact.

Resulting from the sale of our Russian operations.

So our organic constant currency revenue growth for the third quarter was up one 5%.

As we look at third quarter revenue by segment.

<unk> segment revenue was up 5%, we have continued to see a strong demand for our telecom specialty and growth in our outcome based solutions remained solid.

Science and engineering are flowing, but I will technology practice, including so flawed.

We're growing also at although at a slower pace. In addition set permanent placement fee growth.

Also continued up 8% year over year, despite the more challenging economic environment.

In our education segment year over year growth.

<unk> to be strong up 57% on a reported basis.

The reported results include the May acquisition of Pts So revenue growth was 45% on an organic basis year over year.

<unk> is on track and performing well with pro forma Q3 year over year revenue growth of 23%.

Revenue growth trends in our education business reflect robust demand from existing customers and new wins in 2022.

Steps taken earlier in the year to broaden the supply of talent have continued to pay off and we are continuing to see meaningful improvement in our <unk> rate.

Permanent placement fees, primarily higher education executive search with greening, the Asher were up 54% year over year.

Our OCG segment continued to deliver year over year revenue growth with revenues up 5% on a reported basis.

Organic constant currency revenue, excluding the impact of broker power was flat to the prior year over year in Q3.

Declines in GPU as a result of some customer exits in the early 2020 to offset the continued growth in our high margin MSP and <unk> products.

I will provide more context on the situation with rocket Bauer later in my comments.

Revenue in our professional and Andrew cereal segment declined 10% year over year in the quarter.

Consistent with second quarter revenue from our staffing products declined 14% on lower our revenue volume.

Which has been partially offset by higher bill rates, resulting from the upward pressure on wages in the current tenant market.

About 60% of the staffing revenue decline comes from the shift of a large staffing account, which we discussed as part of our outlook in our August call.

The segment's outcome based business continues to be impacted by contraction year over year demand from our call center specialty but growth in other outcome based specialties as it more than offset that headwind and thought that I would come based revenue was up about 3% for the quarter.

And finally, <unk> down 10% as our customers demand for direct hire services has been impacted by the increasing economic uncertainty, especially among our small and mid sized customers.

Revenue in our international segment declined 16% on the nominal currency basis and was down 5% on a constant currency basis.

Excluding the impact of the sale of our Russian operations organic constant currency revenue growth was 7%.

And finally, the permanent placement fees in the international segment grew by 10% year over year in constant currency.

Overall gross profit was up five 1% on a reported basis.

Seven 6% in constant currency, our gross profit growth was the result of an improving gross profit rate, 26% for the quarter compared to 19, 2% in the third quarter of last year, a 140 basis point improvement the primary driver is.

Both Pts and rocket power generate higher margins than <unk> average.

And when we look across the business units gross profit rate improved in each segment, reflecting the continued shift in business mix towards higher margin products and specialty.

SG&A expenses were up five 1% year over year on a reported basis and $7 one person on a constant currency basis.

The real pressure and the continuing need to attract and retain talent even with increases in the cost of doing business. We have been taking steps to moderate the level of expense growth in Q3 as compared to earlier. This year. This reflects above the current level of economic uncertainty and its impact on our top line.

Growth and positions us to react quickly to further market developments if conditions warrant moving forward.

Also reflected in our earnings while inflation in Q3 is an impairment charge of $30 7 million related to the goodwill of <unk> power.

Many customers in the high tech industry vertical in which rocket ball specializes have reuse their full time hiring reducing the demand for rockets power services.

And ongoing it couldnt be consistently as more broadly impacted the growth in demand for our recruitment process outsourcing neostem after experiencing triple digit pro forma growth in the first and second quarters rockets Power's third quarter revenue declined 11% from a yield.

The changes in market conditions triggered an interim impairment test, which resulted in the Q3 impairment charge. The impairment charge is a noncash item and more information regarding the impairment charge will be available in our third quarter Form 10-Q.

Our reported loss from operations for the third quarter was 21 4 million.

While our adjusted conversion rate.

Total company remained flat to 2021, we did see an improvement in collection and improved conversion rates and set and continue to expect other business units to generate improving conversion rates as we move forward.

And just a reminder, that we monetize our investment in <unk> holdings and most of the vessel cavity APAC joint venture in the first quarter of 2022.

So there will be no further P&L impact from those investments over the comparable period.

<unk> will include gains and losses related to those investments until we anniversary the transactions.

Income tax benefit for the third quarter was <unk> million compared with our 2021 income tax expense of $11 1 million, our effective tax rate for the quarter was 23, 4%.

And finally reported loss per share for the third quarter of 2022 was <unk> 43 per share compared to earnings of.

87 cents per share in 2021.

The decrease in earnings per share resulted primarily from the impact of the impairment charge related to rugged power and the 2021 gain on vessel sales or net of tax.

Adjusting for those transactions Q3 'twenty to <unk>.

EPS was <unk> 25.

Consistent with an adjusted EPS of <unk> 25 in Q3 of 2021.

Now moving to the balance sheet as of the end of the third quarter as Peter mentioned, our balance sheet reflects the completion of five significant transaction. So far this year and demonstrates our commitment to monetize non core assets and we're allocating capital to advance our specialty strategy.

In addition, we completed the sale of our Russian operations in July .

At the end of Q3 cash totaled $122 million compared to $44 million a year ago, we had essentially no debt consistent with the end of the third quarter of 2021, with our 300 million in available capacity on our credit facilities, we continue to have ample capital available to deploy.

All right.

As of the end of Q3 accounts receivable was $1 5 billion and increased six 7% year over year, reflecting our year over year increase.

In revenue as well as an increase in yes.

DSO was 64 days, an increase of four days over year end 2021, and one day higher than the third quarter of 2021.

DSO increased primarily as a result of an increase in the mix of MSP and other customers with extended payment terms and to a lesser extent to the timing of some customer payments at.

Accounts payable and accrued liabilities also increased as a result of an increase in MSP supplier payables, partially mitigating the impact of high yield year on free cash flows.

Through the third quarter of 2022, we used $170 million of free cash flow, reflecting increasing investment in working cap.

Capital Free cash flows in 2022 also includes the use of approximately $50 million to pay income taxes, resulting from the sale of the peso to holdings common stock as well as the use of approximately $29 million to repay federal payroll tax balances, which were deferred in 2020 and those.

<unk> Act and now back to you Peter Thanks for those details Olivier.

Last quarter marked the two year anniversary of Kellys optimized operating model and the formation of our five distinct business units.

As those businesses start to mature within the model they not only deliver strategic contributions to Kelly's overall performance. Each segment is also creating higher value within its own specialty.

In our <unk> segment, we said, we wanted to see meaningful returns on our investments both organic and inorganic the specialties, we've invested in including soft world and telecom are delivering those higher margin returns and in the third quarter set also delivered solid fee growth and good operating leverage.

In education, we committed to capture K 12 growth improve our fill rates and further expand our adjacencies. We delivered on the promise of higher fill rates in Q3, we've begun implementing significant new wins as the school year ramps up and our Pts acquisition is contributing.

Solid revenue and GP growth to this segment.

<unk> will bring strategic long term value to our business.

As we reflect on the third quarter results and look ahead we.

We expect that the growing economic uncertainty will begin to impact our P&I and international businesses, but that they will be a steady demand for our OCG and education services.

We expect that continued challenges related to talent supply inflation.

Specific to give you the two unusual even that.

As impacted our Q3 results and will continue to impact the remainder of the year Firstly the sale of our Russian operations, which we completed in July 2nd is a change of one of our large customers as they both strategy that we mentioned today and on the earlier calls a large staffing customer decided.

To address their talent challenges and work with Kelly differently by attending a heavy user of container playbook to one that instead, we will rely on the hiring talent directly as full time employees.

Given that only one quarter remains in 2020 to my comments on our outlook reflect our expectations for the fourth quarter, only we will return to providing insights into expecting full year results in 2023.

With the FX headwinds and other challenges I mentioned, we expect Q4 revenue growth to be flat to up 1% year over year in nominal currency.

This includes about 230 basis point of unfavorable currency impact, including that the outlook is 150 basis points of inorganic revenue growth from rocket power in Pts and then unfavorable to 250 basis points impact from the sale of our Russia business all in.

That reflects an expectation of 3.3 to four points of year over year organic constant currency revenue growth.

While we are not expecting a full traditional seasonal lift in our P&I business.

Weather will include a full quarter of revenue growth from our education segment as schools will be inflation for the entire quarter and finally, our outlook assumes no material changes in macroeconomic conditions.

We expect our Q4 <unk> rate to be around 24%, a 70 basis point improvement from the 19, 7% we reported in Q4 of 2021.

Improvement in our <unk> rate is based on our expectation for continued structural improvement in products and specialty mix, partially offset by a deceleration in permanent placement fees.

Given our revenue and GP rate outlook, we expect that our GP dollars will grow by.

To ensure alignment with topline growth.

We remain committed to improving productivity across all of our business units and acting with urgency.

Income tax rate of approximately 50%. This is unusually high driven by the impact of non deductible losses on life insurance policies used to fund certain retirement liability.

For a full year for the full year, we expect the effective tax rate to be in the low single digits.

And finally as Peter noted our board our board of directors as approved a one year $50 million up in market share repurchase program. We expect that such open market repurchases will begin within a few weeks and now back to you Peter Thanks, Olivier the share buyback program doesn't change.

Leadership team wholly committed to specialty growth and value creation.

Leah you can now open the call to questions.

Ladies and gentlemen, if you would like to ask a question. Please press one then zero on your telephone keypad.

You will hear acknowledgment that your line has been placed in Q you may remove yourself from the queue at any time by repeating the one zero command. Once again, if you would like to ask a question. Please press one zero on your telephone keypad.

And our first question is from Joe Gomes with Noble capital. Please go ahead.

Sure.

Good morning, and thanks for taking the questions. Yes, good morning, Joe Good morning, Joe.

So I wanted to start out with talking about talent supply and maybe you get a little more detail.

What you guys are doing to try and attract the talent in this type of a market.

What do you see are the challenges there are you seeing any.

Loosening up of the towers supply across the end markets.

So Joe the Labor force participation rate.

Twice as many job openings are unemployed people so.

That's a structural issue that continues to.

<unk> meeting our customers' demand.

We are using all appropriate.

Is your is to try to attract more people, including.

Having retirees to come back into the workforce.

Creating new channels for our education practice, using social media to an extent that we have.

Never used it before so we are pulling all the levers we can to try to create a value proposition for individuals to work with Kelly to further their career and career aspirations.

Okay. Thank you for that.

Switch to the.

The education segment.

A little bit of a multipart question here, but I noticed flipping.

Flipping through the release that that segment did show an operating loss I'm, assuming that's mostly related to just time of the year, but was there anything else.

Where do you stand today does that business still.

Attracting a lot of new wins in the kind of the pace of the <unk>.

Wins in that segment.

Yes, Joe the operating losses.

Seasonal it's directly related to the fact that in the third quarter schools.

Only our only start starting to open.

So that's just a seasonality in terms of the wins, we continue to see.

Outstanding demand for our services.

We've had significant new wins during.

During the year that we're implementing.

For the New school year.

Ramping up now.

Going to enjoy a full quarter of that most of those wins.

In the fourth quarter and the pipeline for new wins, it looks very good where we believe we're taking market share based on our value proposition to our customers of being the best.

Our company to deliver instructors into classrooms in an environment, where there are severe teacher shortages.

Clearly when you look out.

Outlook for Q4, we anticipate very similar growth than what we had seen in Q1 Q2 in Q3 of 2022.

<unk> above the 40% 45% Mark.

Okay.

Thanks for that and then one last one if I may.

<unk> also saw this morning.

You answered anything under agreement.

Uh huh.

I guess free up some restricted or the ability to do some with restricted cash levels.

Under the credit agreement, if you could just give us a little more detail what that is all about.

Yes, I mean do things on that one is common to many companies you know that the LIBOR.

Restaurants interest.

<unk>.

Rate is no longer something that is in place. So basically these agreements, which I know is a long day.

Disclosure of over 170 pages is basically on you know.

A new agreement moving from this label LIBOR, sorry, what we call so far.

The second point is basically a change in.

Some of our bond covenants to basically expand.

Some.

The possibility to basically fund.

The share repurchases that Peter mentioned in two days. So it's basically an amendment to some of the basically a bond governance to basically enable us to fund.

He is $50 million initiatives that again, we have mentioned today.

Okay, great. Thanks for that appreciate that I'll get back in queue. Thank you.

Thanks, Joe Thank you.

And our next question is from Kevin <unk> with Barrington Research. Please go ahead.

Good morning, Kevin Good morning, Good morning, Good morning, Peter and Olivia.

Wanted to start out by asking about rocket power and you mentioned.

Wanting to speed up the integration there and also.

Diversify its customer base just wondering.

What.

That integration would involve and then.

Yes.

I guess easy is it to diversify the business.

Is it simply a matter of taking their existing offering and bring it to different industries or is there something specific about their offering.

Taylor to the tech industry.

I want to get in Walmart color on both of those things.

Well as we mentioned Kevin rocket power was enjoying triple digit growth in Q1, and Q2 and had its hands full given.

Dropped falloff in demand and specifically in the high Tech vertical where rocket power had.

Significant exposure.

We think pivoting its.

Really well run operations to other industries will be.

Successful and achievable and the exposure that Kelly has.

Two blue chip <unk>.

Enterprise sized customers across a variety of industries.

Was part of the original investment thesis anyway, its just that given the.

<unk>.

The downturn in the tech vertical and specifically we think this is the opportune time to.

Focus rocket powers unique operating delivery model to other industries.

That.

The execution of those plans is already underway and we actually have.

The significant win that.

We'll be seeing it.

Implemented even before the end of the year as a result of the combination of rocket power and Kelly resources.

Okay.

Okay, that's good to hear.

And when we think about that.

Gross margin for the year.

I guess the guidance for full year now has 24% correct versus 27% previously is that there is.

A function of.

Primary lower permanent placement fees or the assumption that there'll be lower.

So yes, I mean, the what is specific on the outlook today is at.

As a practical matter, we have basically discuss about Q4 'twenty.

24, giving needs related to Q4.

Understood Okay.

Up 70 basis points not.

The 202230 and $1 40, we have seen in Q1 Q2 Q3 of this year. The main difference is basically the <unk> is that decelerating.

The good news is that we continue to see.

What we have seen for many years.

Over five yield is a cyclical improvement on our business mix, our specialty mix that is going to continue to provide some traction in them of basically improving or continue to improve our.

GP gross margin rate.

Okay.

Yes, yes, that's specific to the fourth quarter.

4% Okay.

And just just thinking about.

SG&A you've mentioned that.

You kind of slowed down or looking years slowdown SG&A expense growth in the third quarter end.

I'm just trying to.

Calibrate the prior SG&A expense growth outlook.

That you provided last quarter I think it was up 8% to 9% organically.

Has there been a change in the act.

Or is that still kind of what we should expect.

So yes.

Yes.

So Kevin if you if you look at full year.

Basically versus the outlook, we gave three months ago, we have downgraded our SG&A grows by about 200 basis points.

If you look at the trend over Q1 Q2 Q3.

I'm going to talk about the organic constant currency.

G&A were up 12, 6% in Q1 $9 90 in Q2, 6% in Q3 and basically on a like for like basis. The 6% is going to go down further.

In Q4.

Based on the outlook for Q4, we did provide today two reasons on that one is of course as the topline is slowing down a little bit.

Incentives are starting to react because that's the way it should work when performance is not necessarily at the level of the target and cig and seeing that we have started in September and that is going to be more visible in Q4 is cost management, making sure.

That we deploy our resources according to a very fluid and uncertain environment as Peter was mentioning so it's very likely that we're going to continue to see this slowdown in expenses, but also more and more redeployment, depending on where base.

<unk>, we still have significant opportunities education is a good example, our PPO business overall is a very good example, technology, including so called still growing yes.

We have some areas, where we are going to continue to make sure we have.

Sufficient resources to continue to capture growth.

Okay great.

I guess you mentioned, just how is slowing economy might.

Result in fewer high quality M&A targets I guess.

Fairly self explanatory that targets would be selling when.

The market is softer in their results might be softer but anymore.

Comment on just the.

The M&A pipeline.

Alright.

Types of things you might be pursuing now.

We're continuing to focus on are the higher margin higher growth specialties. So that would be set and also we are very pleased with our acquisition of the pediatric therapeutic.

Services in the.

<unk> therapeutic adjacency to education. So those would be two areas that we will continue to look for high quality <unk>.

Assets to.

Add to our portfolio.

Quantity as well as the quality of.

The companies that are currently in the pipeline is less.

Less attractive than it was say six months or a year ago.

Think that's permanent we think companies will come off the sidelines as the economy improves.

But we're.

We haven't changed our strategy, but we havent changed our.

The criteria that we're using to.

Acquire properties, it's a high bar, we have set to use our capital to acquire properties and we.

We will continue to.

Look at.

Companies that come on the market through that lens.

Okay. Thank you for taking the questions.

Thanks, Kevin Thanksgiving.

Our next question is from Kartik Mehta with Northcoast Research. Please go ahead.

Hi, good morning.

Good morning, good morning.

I was wondering if you could give maybe a little bit more detail on the type of companies that.

All youre seeing weakness from on the technology sector.

Because I know as you said, it's really mix of the type of demand, you're seeing and any type of granularity there would be great.

Yes, it's a very.

Important question, because when we talk about.

Either technology or high Tech, sometimes we conflate the.

Technology.

Job types with the technology sector.

Which is I think that all of the companies that are in the press announcing either lay officer.

Slowdowns in hiring and including meta Lyft slack and on and on that's the sector Thats being most impacted there is still a very strong demand for high quality technology professionals.

And as I mentioned in the script so were seeing.

<unk>.

Solid demand in our software world. They continue to provide high quality technology talent to enterprise and small and medium sized businesses and we don't think there is.

Any pending slowdown in that demand because large institutions continuing to need.

App developers and network architects and cyber security experts, but at least for the near term.

Hi Tech.

Industry Silicon Valley.

Austin, Texas other areas.

Been particularly hit by.

The uncertain macro as well as.

Potentially over hiring coming out of the pandemic.

Well, we're very pleased with the performance of.

Our acquisitions as you know.

In totality.

That rocket power.

The abrupt decline in the high tech vertical that they had significant exposure.

<unk>.

Yeah.

The timing.

Well.

Cause us to reflect on it but it doesn't change the underlying strategy of looking to add to the <unk> Kelly legacy businesses with high quality high margin high growth proper.

Properties that we think will.

Create both primarily topline synergies for the company and <unk>.

Create.

Opportunities to attract new customers to Kelly.

If I may just add I was looking recently at reflecting a little bit.

Peter.

The performance of some recent acquisitions just to give you an idea first of all.

Pts as we said are growing 23% in revenue in Q3 redo the national renters in the over 80% growth.

Softwood.

At the time of the acquisition, but reflecting on our recent acquisitions.

12 months.

No.

You are there.

<unk> that would make you go you can see them contracting or is there enough.

Man that you should continue to see growth in gross profit margins.

So I think what we are going to continue to see probably the traction and the boost that was coming from high growth in the fee business.

Is slowing down and we do not provide the boost we have seen.

In Q1, it was about 100 basis points Q2 70.

Q suites will be much lower it's about 10 basis points.

What we are going to continue to see with is what we have seen for the last five years is basically a structural improvement of our GP margin coming from what we called mix, meaning specialty mix continuing to grow higher.

Gross margin businesses.

Out of the 140 basis points of improvement we had this quarter 90 basis points is coming from the fluctuate improvement again that we have seen for the last five years, including in 2020 during the economic downturn. So I see this traction continuing in the future.

Because that's something we have seen for a while it seems 2015 in fact, we've not one year, where basically <unk> <unk> now we don't expect.

200, 2030 basis point that we have seen in Q1 or Q2, but meaningful improvement on the pure organic cottrill, especially techniques, yes definitely yes.

Thank you so much I appreciate it.

Thank you.

Yeah.

And next we go to mentor out Ram Gopal with Sidoti. Please go ahead.

Yes, good morning, and thanks for taking the questions.

Good morning.

Yes. Thanks.

Yeah.

And as you look at your investments for next year, given the macro uncertainty is.

Is it fair to assume both technology and work for us.

Are you going to be a lot more cautious just.

Just because you just don't have the visibility.

If you would like.

But we're also very mindful as Olivier described in the Q4 outlook for SG&A.

That we're adapting to the current uncertainty and deceleration in certain parts of the economy and we'll continue to.

Use that lever going forward.

In 2023, we're a more nimble more adaptable company our cost structure is more flexible than it has been.

We expect to.

See that continue in 2023.

Okay. Thanks, and then just.

Switching gears, a little in terms of Europe .

Awesome softness.

France, UK, Italy, not surprising given what.

We are hearing from Europe , but.

What's your expectation in terms of.

Maybe stable.

The stabilization the arrow.

We expect that continued softness well into next year, given the macro environment.

Interestingly when we.

Exclusive of course.

FX, which is creating a lot of noise and also Russia, which I think is.

Yes.

More like externally driven and you look at it.

In Q1, we are growing at about 9% so very similar to the entire 2021 Q2, we're around 9% Q3, we are at about 7%.

So and our fee business was still up 10% in Q3.

Including the fact that we have lost the benefit of Russia, Russia, historically, that's been a nice.

Business.

For the moment honestly, we don't see specific signs of slowing down.

Yeah.

It may come back.

We believe that he is going to slow down a little bit, but what we have seen so far east.

Very very resilient.

In Europe of course, we are scrutinizing, a little bit what is going on looking at ours on a weekly basis looking at our our fee business.

Getting ready if something is changing.

I believe is going to slow down a little bit but for the moment I would say it seems to be very very resilient.

Okay. Thanks, and then I guess finally.

Obviously.

I'm not known for most companies.

As you look into 'twenty three again as you look at your portfolio.

Yes.

It should be.

Despite the environment.

Should we still continue to expect year over year growth and I know youre, not providing guidance, but just not a very high level you guys still expect the company to grow.

Next year despite the.

Macro headwinds.

Yes. It is.

Difficult question, knowing the environment, we have now, but when do you think about resiliency in.

We can we can speak about education, our set business in OCG business, we feel that we have.

<unk>.

<unk> share of the business, we have now with the portfolio of specialties, we have in each of the segments for each of them. We believe we have a pretty resilient.

The model right.

Of course, when you're seeing about the P&I and to some extent that international business. We believe they are going to be likely more subject to.

The future economic environment, but we believe that at least for OCD set and education. We have businesses that are now strong enough resilient enough to probably weather.

Some challenges.

Future, probably better than it was in the past and certainly better than other areas that are more exposed to I would say the cyclical.

Ah.

Challenges, we may see a demo of economic environment in the near future.

Yeah.

Okay. Yeah, that's very helpful. Thanks, again for taking the questions.

Yeah. Thank you. Thank you.

Ladies and gentlemen for any follow up questions. Please press one zero at this time.

Okay.

And we have no other questions you may continue.

I think we're all set Leah. Thank you for your help today. Thank you Andrea you are very welcome ladies and gentlemen that does conclude your conference for today. Thank you for your participation and for using AT&T teleconference. You may now disconnect.

Q3 2022 Kelly Services Inc Earnings Call

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