Q2 2019 Earnings Call
Good morning, and welcome to Kelly Services second quarter earnings Conference call. All parties will be on listen only until the question and answer portion of the presentation. Today's call is being recorded at the request of Kelly services. If anyone has any objections you may disconnect at this time.
I would now like turn the meeting over to your host Mr., George Corona, President and CEO , Sir you may begin.
Thank you John and good morning, welcome to Kelly Services 2019 second quarter Conference call.
With me on today's call as Olivier T. Rowe our CFO .
Let me remind you that any comments made during this call, including the Q on 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 companys actual future performance.
In addition, during the call certain data will be discussed on a reported and on an adjusted basis discussion of items on an adjusted basis, our non-GAAP financial measures designed to give insight into certain trends in our operations.
Before I turn to our quarterly results.
I would like to recap the announcement Kelly made yesterday afternoon regarding my planned retirement, the board's appointment of my successor, and our transition plan.
Then I will underscore some of the additional levels of complexity, we experienced during the second quarter before I begin our second quarter earnings report.
Starting with the announcement, we made yesterday.
On September Thirtyth of this year I will step down from my role as President and CEO of Kelly.
It is important to me as well as to the board to ensure a smooth transition. So I will remain with the company in an advisory capacity and as a member of the board of directors until my retirement sometime in the first half of 2020.
Having spent most of my adult work life at Kelly, we'd be it in my CEO role or as COO for eight years or another positions for 15 years before that I believe it is now time to pass the torch to a new CEO , who will continue to move Kelly forward.
We have a strong seasoned leadership team in place and that an organization full of talented individuals who understand what's next for our industry and for our customers and I have complete confidence in the path that we're on and what lies ahead.
Recognizing my desire to retire early next year and guided by our succession plan. The board followed a comprehensive process to ensure we identified an extraordinary care.
Identified extraordinary candidates to service Kelly's next CEO .
Yesterday, Kelly's board unanimously endorsed executive Vice President Peter Quigley as our next President and CEO effective October Onest 2019.
He will also serve as a member of the board of directors and Peter is with us on today's call.
The board shares my confidence in our organization is in the hands of an extremely capable collaborative and growth minded leader for those of you haven't had the pleasure of meeting Peter Peter as a 17 year veteran of the company and during his time here. He is either managed or been responsible for managing a majority of operations and support functions across the organization.
He is also one of the principal architects of Kellys current business strategy.
Peter serves as a as Kelly's representative on the board of directors of personal holdings, a leading Japanese staffing and solutions company publicly traded on the Nikkei stock exchange. He also serves as a board member of personal Kelly the company's joint venture with per Sol that provide staffing and 12 geographies in APAC.
Other responsibilities and honors. He has had outside of Kelly include his role as second Vice chair of the board of directors of the American Staffing Association as well as appearing on essays 100, most influential people in staffing list.
I work with Peter everyday and I know the company is in good hands.
Moving onto our earnings report I want honored I want to start by underscore in some of the additional levels of complexity, we experienced during the second quarter.
These include our sale of unused property, our equity investment in personal holdings in to the volatility this introduces each quarter either positively or negatively.
Foreign exchange fluctuations and acquisitions and divestitures.
In his remarks Olivier will detail the impact of these items on our reported earnings.
Please note that my year over year comparisons are represented in nominal currency with the exception of our international staffing segment, which is in constant currency.
Turning to some of the highlights of Kellys second quarter results revenue was $1.4 billion down 1.4% compared to the second quarter of last year. Our gross profit rate was up 50 basis points earnings from operations were up 10%, excluding the gain on sale of assets free cash flow includes improved significantly year to date over the same period last year and diluted earnings per share showed a year over year improvement with that let's look at how Kelly's three operating segments performed in the second quarter, starting with Americas staffing.
America staffing revenue decreased 1% in the second quarter compared to the same period last year.
Commercial staffing revenue was down 7% from the prior year Kelly educational staffing delivered revenue growth of 7% in the second quarter and revenue in our professional and technical specialties grew 23% in the second quarter compared to last year Favourably impacted by Nexgen strategic first quarter acquisition.
On a combined basis permanent placement fees decreased 8% over year over year over year.
The second quarter gross profit rate in America staffing was 18.2% up 20 basis points from last year due to the favorable impact of Nexgen on business mix and partially offset by higher employee related costs <unk> expenses for the quarter were up 3% in Americas staffing, mainly due to the addition of nexgen and the costs associated with strategic projects expenses were partially offset by lower salaries. As a result of our Q1 restructuring actions in the quarter was also impacted by lower incentive based compensation.
All told the Americas staffing segment achieved an operating profit of $15 million in the quarter compared to $17.8 million last year.
In my concluding remarks, I'll share some additional insights about recent activities in this operating segment and what we expect to see in the future.
Now turning to our international staffing operations outside of the Americas.
Revenue in international staffing decreased 7% compared to the prior year and nominal us dollars.
And on a constant currency basis revenue decreased 2%, primarily in western Europe , partially offset by increases in eastern Europe .
For ease of reference the remainder of my comments on international staffing will be on a constant currency basis.
Fee based income for the second quarter was down 10% year over year and the segments reported GP rate for the quarter is 13.5%. This is 40 basis points below the same period, a year earlier, driven mainly by unfavorable customer mix and lower fee based income.
Expenses were 2% higher versus the prior year.
In summary international staffing reported operating profit was $3.5 million compared with $6.4 million in the same quarter last year.
Now, let's turn to the results of our global talent solutions reporting segment. This segment includes global technology Associates GCA, one of our new strategic acquisitions, Let's first look at how GTS performed as a whole in the second quarter.
GTS revenue increased 1% year over year in Q2.
Gross profit increased 8% year over year, both revenue and GP were positively impacted by the acquisition of Gtld.
In addition, we continue to see structural improvement in our product mix with year over year volume increases in our business process outsourcing Kelly connect and contingent workforce outsourcing practices being offset by decreases in our centrally delivered staffing.
Now, let's look at the gross profit results in each of the two GTS businesses.
Our talent fulfillment business is made up of our CW payroll process outsourcing PEO centrally delivered staffing and recruitment process outsourcing or RPL solutions.
Gross profit in the talent fulfillment business was down 2% year over year in Q2, consistent with Q1.
The decrease was primarily a result of lower volume in our centrally delivered staffing practices, partially offset by volume increases in our CW in PPL practices as well as lower employee related costs.
Our outcome based business is comprised of our VPO Kelly connect and advisory services solutions and include the results of the newly acquired GPA organization.
Gross profit in our outcome based businesses increased 30% year over year.
The increase continues to be driven by strong volume in both our BPL and Kelly connect products, along with the impact of the acquisition of GPA.
Consistent with our talent fulfillment practice, we also saw a reduction in employee related cost in our outcome based businesses compared to a year ago.
Overall, the GTS segment gross profit rate was 19.7% for the quarter up 120 basis points year over year and this improved rate is primarily result of structural improvements in our product mix and lower employee related costs.
Expenses in GTS were down 1% year over year. The lower expenses were result of the continued effective cost management within the organization.
All told GTS second quarter operating profit was $25.4 million compared to $17.7 million a year ago, a 43% increase.
And now I'll turn the call over to alleviate who will cover our quarterly results for the entire company.
Thank you Joe Gibbs revenue totaled 1.4 billion down 1.4% compared to the second quarter last year.
I will take that a company reported results were unfavorably impacted by 120 basis points due to foreign exchange. So on a constant currency basis, our second quarter revenue was down 0.2% year over year.
Our Q2 performance include the older though results of Nexsan and.
We added 290 basis points to our constant currency revenue growth rate.
This was partially offset by the 60 basis point impact of the recent divestiture of our legal or specialty product.
Overall, the two to constant currency organic revenue growth was down 2.5%.
Organic revenue declines reflect the weakening economic environment in Europe , and China, Ngs, resulting from the Q1 the host lecturing profile you as bonds operations.
Staffing placement fees were down 9.7% in nominal currency and down 7.5% versus a year ago in constant currency.
The feedback fall months reflect continued decline in international processing fees.
Coupled with declining feeding America staffing after several quarters of Citigroup.
Overall gross profit was up 1.5%.
Oh, 2.6% on a constant currency basis.
Our gross profit rate was 17.8%.
Up 50 basis points, when compared to the second quarter last year.
Approximately 30 basis points of our GP line improvement was due to the acquisition of Nexgen and DTA, which are higher margins they should keep business.
On an organic basis GP rate improved 20 basis points, we 30 basis points coming from Textron improvement in the GP rate.
Partially offset by 10 basis points from lower Dave staffing placements.
As Gn expenses went up to the low 0.6% year over year or 1.6% increase excluding the impact of currency fluctuations.
Including as DNA in the second quarter of 2019, our 6.9 million of expenses from our Nexsan and GTS acquisitions.
In Q2, we also add a $600000 benefit as the current expected costs for our Q1 that was lecturing actions on less than we had originally expected.
So on an organic basis, excluding currency impact expenses were down 1.2%.
The decrease in expense that reflects good cost management, particularly in our GTS segment.
Earnings from operations were $64.8 million in the second quarter compared with 2018 earnings of 20.4 million.
Included in earnings from operations from the second quarter of 2019 is a gain on sale of assets of 12.3 million, representing primarily a pre tax gain on the sale of unused land Neil our company at quarters, we headed the unused land to a low for potential future expansion, but how and where our employees work at changed.
In an increasingly need that in one place.
We no longer on T. beta need too expensive fecal footprint of our cooperate compass.
Excluding the sale of assets. These are the two reflect a conversion rate all retail non gross proceeds of 9.2% compared to 8.5%.
For Q2 2018.
These results reflect solid execution of the quarter.
In an increasingly challenging environment in spite of these challenges will continue to execute on our focused specialty talent solutions strategy and on our commitment to delivering an improved conversion rate for the year.
As we have mentioned on prior calls Kelly's required to reflect the unrealized gains and losses on changes in the market value of our equity investment in pursuit of holdings as a component of our earnings as a result in the quarter. We recognize is 61.2 million pretax gain.
On our pursuit of common stock.
In 2018, we recognize a 62.5 million loss on the vessel come unstuck in Q2.
These gains and losses are recognized below earnings from operations as a separate line item, we the other income and expense.
Income tax expense for the second quarter was $12.7 million compared to a 15.6 million tax benefit in 2018.
The effective tax rate in 2019 was 17.2% compared to 49.6% benefit in 2018 the change in the effective tax rate is primarily due to the tax impact of the gains and losses on the both sort of common stock.
Also included in Q2 2019 income tax expense is a net benefit of 9.7 million related to changes in deferred tax valuation allowances.
And finally.
Diluted earnings per share for the second quarter of 2019 to that too, though an hour and 12 cents per share compared to a loss of 40 cents in 2018.
Including 29 King airs is approximately 100 107 cents related to our gain on post some stock net of tax compared to a 94 cents loss in 2018.
In addition, our 2019 EPS include the impact of 23 cents.
Related to the gain on sale of assets mansion play to usually an eight cents benefit from our recent acquisitions.
So on an adjusted basis like for like EPS for the quarter was 72 cents compared to 54 cents a year ago.
Now as we look ahead to the rest of the year.
After considering our results through the second quarter, we expect our full year reported revenue growth to be flat to up 1%.
This includes an expected expected unfavorable impact of FX on the revenue of approximately 100 than than basis points.
The impact of our recent acquisitions of Nexsan and DTA on including our expectations. We continue to Unsi base that our revenue growth will progressively accelerate to doing this again that for the year as attendees, we made in our Americas staffing delivery models take effect.
We expect the full year gross profit rate to be 50 to 60 basis points on yield of a yield basis.
Why do we may continue to experience some volatility in the GP rate on a quarterly basis.
Such wild changes in business mix from our shift to higher margin solutions, both organically and as a result of our recent acquisitions.
Our expected to positively impact our GP rate for the full year.
As a result, we expect our gross profit dollar increase to be in the 3% to 4.5% ranch in nominal currency.
We anticipate full year as DNA expense to be up 1.5% to 2.5% excluding autos lecturing charges.
This includes the action that amortization expense related to the recently acquired intangible assets, we continue to align our cost base to slow growth expectations.
Consistent with our pilot discussions the outgrew provided does not reflect any gains and losses on post oak, Although we do believe that future unrealized gains and losses, resulting from changes in market price could be material.
And finally, we expect the full year effective tax rate to be in the mid teens, excluding any additional net impact from both solid gains or losses.
So all in while we continue to make investments in several key areas of our business in 2019, we expect to deliver yield the yield improvement in our conversion rate.
For the third quarter, we expect reported revenue to be negative to 0.5% to up 0.5%, including unfavorable FX impact of about 80 basis points.
We expect the gross profit rate to be 40 to 50 basis point year over year, resulting in a 2% to 3% year over year improvement in nothing that GP dollar.
And finally, we expect in the expense to be up two to sweep persons.
Now, let's move to the balance sheet cash totaled $77 million compared to $35 million at yearend 2018.
Accounts receivable totaled 1.3 billion and now in the are down 1.5% from year end 2018.
Good idea. So was 57 days up two days from the same quarter last year and up two days from Q4 2018.
At quarter end, we had debt of $19 million compared to 2 million at year end 2018.
I will increase the level of debt includes the impact of borrowing related to our acquisition of Nexsan and GT.
Our Q2 balance sheet also reflect the adoption of the new lease that comes in Selmo effective at the beginning of 2019.
While we have reflected the right of use assets and lease obligations on our balance sheet.
The adoption not that momentum of an impact on our earnings no. All do we expect it will going forward.
In our cash flow year to date free cash flow was 65 million.
Compared to free cash flow of 23 million in the same valued lofty.
This improvement in free cash flow as it allows us to quickly repay borrowings used to fund our recent acquisitions and de leverage our balance sheet quickly.
We also generated 14 million cash during the quarter from the sale of the asset sale.
For more information on our performance. Please review the second quarter slide deck available on our website.
I'll now turn the back over to John for his concluding thoughts.
Thank you Olivier I'd like to share some additional insights about the quarter, let's start in the Americas as you may recall last quarter, we announced a restructuring initiative for our US branch operations. This initiative is designed to accelerate growth by allowing us to more precisely and flexibly adjust their redeploy resources across our organization as required by supply and demand conditions. Ultimately this improved agility will enable us to more quickly and efficiently meet the needs of both customers and talent as well as to capture growth opportunities in the market.
We're confident in the structural changes we have made and expect that later this year. We will begin producing improvements are recruiter and sales productivity and a healthy customer and product mix.
The second quarter brought slower than expected growth in the U.S. and softening demand in Europe .
While macroeconomic economic conditions in Europe have deteriorated the us labor market continues to be holding up despite signs of slowing in both economic and employment growth.
Against that backdrop, we acute we accomplished several things this quarter.
We delivered improvements in gross profit performance as we continue to focus on higher growth outcome based services, we executed on our inorganic specialty strategy with RG Ta Nexgen acquisition is outperforming expectations and making a strong impact on the business.
In Q2, they alone delivered a lot of $11 million in GP, and 4 million and earnings while providing us with a platform for additional organic growth and investment.
We effectively managed costs in line with our GP, while continuing to invest strategically in our business.
And free cash flow improved significantly now at $65 million compared to $23 million in the same period last year.
Our forward focuses on optimizing the value versus volume equation and effectively managing costs, while advancing our specialty talent solutions strategy.
As always we will continue to monitor the competitive landscape for additional strategic investments to further accelerate the growth of our business. We look forward to reporting back to you on these rigs on these results.
And these efforts next quarter Olivier Peter and I will now be happy to answer your questions.
And ladies and gentlemen, if you would like to ask a question. Please press star one on your Touchtone phone you will hear a tone, indicating when placed in the queue. If your question gets answering you wish to remove yourself from the queue. Please press the pound key once again star one and we have a question.
And now personal line of Josh Vogel with Sidoti. Please go ahead.
Thank you good morning, guys first off George Congrats on your retirement wish you the best of luck and Peter Congrats to you as well.
Thank you.
I guess.
My first question.
Looking at organic revenue was down 3% in the first half of the year ex Nexgen and GTV and then looking at your guidance and commentary I just want to confirm that you expect the organic revenue performance to show improvement.
In the second half of the year versus the first half of the year excluding any.
FX.
Yes, I mean, when when you look at.
All getting grows so excluding.
Acquisition.
And divestiture.
For Q2, we are at minus 2.5.
When you look at the outlook for Q3, and then the full the full year, we are comfortable to see some acceleration, namely.
Now, we'll use some branch based business.
As an outcome of the lecturing initiative, we have taken in Q1.
Okay great.
I actually we saw some nice sequential and year over year uptake in the UK, which surprised me I was just wondering if you could talk to the driver there and what the dialogue is say with clients around the ongoing of Brexit talk.
Yes, I mean, when you look at total revenue in the UK for the quarter.
We will have by about 16.3% in constant currency to an acceleration versus Q1 Q1 was at about close to 5%.
So we see despite the very challenging environment.
I think very good dynamics in our business that may be JOLED, you may add some single Peter Yes, I guess, what I would say is that we have.
I spent a lot of time and effort in improving our UK operations and.
It's been a long road, but it's beginning to pay off now and our business. While it will have some of in packs from Brexit, we're not highly dependent on on those things. So we don't think it will have a material impact on Peter if you want to add to that Josh. The only thing I'd add is that the Brexit George said not a direct impact on our business, but it is creating some uncertainty among businesses in terms of making decisions.
But I think Thats, just something we're going to have to live with.
And one of the outcome is basically what I didn't mention around tax. The fact that we have basically we'll need some valuation than the ones in the UK and basically the undervalued underlying reason is basically we have turned the business owning wise positive for the last three years Committee.
Which is one of the outcome of the text on bond, but the real root cause of that is of course, a business improvement and our capabilities to.
On the business into a positive earnings were very proud of the team over there.
Okay great.
The technology and personnel investments you've been making in recent quarters.
Dating back to last year, just wondering how much left is there and when we should expect this even more leverage from those initiatives.
Yes, so, let's let's talk about the the technology investment no. We as as we said before it's going to take us.
That's a pretty significant investment that we're making in technology and it will.
Go into next year.
So as we get into 2020, we still will have activities in rolling that technology prep platform out into the U.S. So you. When you start to think about the benefits that will come specifically from that in the leverage that will come from that it's going to be very late next year and neuro and early into.
I'm I get my years matched up not 2021.
When that really is fully deployed.
And is off and running.
With with the expected leverage is going to come from it.
From off the talent initiatives that is a much longer term.
Project for us that is to turn ourselves much more into a talent focused business now we have some pilots that we're running right now.
That we expect will begin to have an improvements and making it easier for us to attract and deploy talent, but that will be an ongoing initiative for the next couple of years as we turn ourselves to being much more of a specialty talent provider.
Okay, great. Thank you.
So seeing the.
The sale of the parcel of land.
I know that was kind of a one off but I guess when.
We look to your platform today are there and you take into account the recent acquisitions and other businesses you have either sold or got out of in recent quarters. I'm. Just wondering if there are any other noncore assets that you are targeting to potentially move away from.
Yes so.
We always will evaluate all of our assets and how do they fit into our portfolio.
As we move forward.
As we continue down this path of being a much more highly specialized.
Player, we don't have anything, particularly to report right now.
But as we move forward, we will continue to look at every opportunity to deploy assets that aren't producing or don't fit into the strategy. So that we can invest more into the strategy.
Okay, and just lastly, I figured I'd ask.
Otherwise it'd be brought up later on the call, but do you have any updates on the B shares.
No.
We don't.
All right. Thank you guys.
Thank you. Thank you.
Ladies and gentlemen, just a quick reminder, if you do have a question. Please press star one next and then a joke moments with noble capital. Please go ahead.
Let me add my congratulations and good morning.
Thank you wanting thank you.
So how to.
Going along on some of these.
Separate markets.
No just to call out a couple here like.
Where we saw some declines quarter.
On a year over year, and Puerto Rico, France, Portugal, I was wondering if you might be able to provide a little bit more color on what is going on in those markets and.
Where do you think they'll be going here in the near term.
Yes, I mean, if I stopped we spoke to Rico, I mean, I would qualify it as basically a tough comparables because in the past where.
Print TBD.
Post hurricane.
You know.
I would say.
Improvement in the island, so I would say, it's more the comparable to adopt challenging because of a big Unfortunately, but one time event that was pushing our business last year as opposed to say there is a challenging I would say more sexual trends I don't see that no.
As as a problem I think it's again more on the Comparables.
Full fall fall together.
If you look at the trends we are keen to.
I would say.
Prohibiting books again, we don't see the growth we have seen in the past and we have been growing fallout of heels over there I think in both together I would say between the most challenging economic environment, especially because both together. These sometime use as as a platform for manufacturing name of you for a gentleman died both manufacturing, including automotive. So it is depressing the beat the market.
But we feel as to that you know we have critical mass we have here as a team the size of our business. We are going to continue to make progress, but it's more challenging than what we have seen the BASF.
In France would be a similar story in that the economic environment, there is a little bit more challenging than than it's been in the past.
Okay.
And then.
You guys have talked in the past about your.
New and creative ways to address.
Apply gap.
Just wonder if you might add a little more color or detail, there's exactly what what you're doing.
Okay, Yes. So first of all we did a we did a pretty substantial reorganization of our US branch business last quarter, a big part of that was designed to address.
Some of the challenges that we had within our structure to dealing with supply and demand fluctuations in the United States May give you a little bit more color on that we used to have artificial boundaries around.
Divisions have delivered into the us that didnt necessarily make it easy to say that if there was an increase in demand in California.
That we could take.
Productive capacity that might be in in the Midwest thats, not being used and apply it to there.
There were there were both technological barriers in the past and there were organizational barriers most of the technological barriers have been removed to give us the ability to do that last quarter, we took.
Took steps to remove the organizational boundaries to make it more seamless that we could apply recruiting.
Talent, so where the demand fluctuations are going and that should make it much easier for us to not only.
Fill more orders.
But also.
To make it.
Much more efficient when we do that so we don't have to hire places where we have.
Capacity, where we don't have capacity and hang on to people, where we have we have capacity so that big change happened last quarter, and it's going to take a little bit of time as we move through all the management changes for that for that the finally take hold.
The second Big Big thing that we're doing to address those.
Issues that we think particularly in the specialty areas are going to theres going to be a long term structural shortage of talent.
And that an order.
The companies that are going to prosper in the future are going to be the ones that have a deeper connection to talent.
And.
Become a a place and a source for people as they are looking for jobs, we have to get them to a point where were differentiated in the marketplace from competition because of the way that we we interact with them. The technology that we apply the care that we take with their careers and that takes a whole new level of.
What I would call employee care that we have to.
Apply to become that differentiated source in the marketplace. We have a program called talent acts going on within the company right now which is.
Designed explicitly too.
Both understand what the talents is doing and then make changes in our service delivery process and our outreach to the communities.
To make sure that we begin that differentiation process.
The organizational changes are more short term and we expect to the second half of this year.
That they will begin to pay.
Dividends and we're confident of that the changes in our system and processes more of an ongoing.
Change within the company.
But it really revolves around the fact that we are getting back to the core of being a talent company.
Okay, great. Thank you.
And Ms. Corona, we have no further questions in queue I will turn it back to you for any closing comments.
If there's no further questions I just want to thank everybody for being on the call and since this is my last call. Thank you to you all it is.
It's been an honor of a lifetime. Thank you.
Ladies and gentlemen, this conference is available for replay. It starts today at 11 30 am Eastern will last until September 7th at Midnight you May access the replay at anytime by dialing 804, 756, 701 or 320 365384 for the access code is four and one before 735.
Those numbers again, one 804, 756, 701 or 320 Threesix volumes 384 for the access code 414735 that does conclude your conference for today. Thank you for your participation you may now disconnect.
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