Ladies and gentlemen, thank you for standing by, and welcome to Kelly Services Fourth Quarter 2019 Conference Call. At this time all lines are in a listen-only mode. Later we will conduct the question-and-answer and instruction will be given to you at that time. [Operator Instructions] And as a reminder today's conference call is being recorded. I would now like to turn the conference over to Mr. Peter Quigley. Please go ahead.

Thank you, Cynthia, as well as some commentary from me as Kelly's new CEO regarding our current and future states. How we'll approach this is that I'm going to share some Q4 headlines. Then Olivier will walk us through Kelly's quarterly and full year performance and provide some details on our balance sheet and cash flow. I'll then share some significant -- some of the significant actions we've taken in my first 120 days to address near term priorities primarily around growth, Olivier will follow up with our short term financial outlook. And finally, I'll turn to what's next, including longer term initiatives that position Kelly for its future, including bold plans to accelerate our organic and importantly, our inorganic growth through M&A. These plans, some of which depart from how we've approached things in the past, short and ambitious course to sustainable and profitable growth as a specialty talent solutions provider. I will also share some ideas about how we can create more clarity regarding our expectations for tracking the financial outcomes of that growth as these plans are underway. Before we dive in, Olivier will take a moment to cover the Safe Harbor language.

Good morning, everyone. Let me remind you that any comments made during this call, including the Q&A may include forward looking statements about our expectations for future performance. Actual results could materially different 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 impact 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. And finally, please note that year over year comparisons are represented in nominal currency, except our international stretching segment, which is in constant currency. We have also provided more information on our performance in the fourth quarter slide deck, which is available on our website.

Thanks, Olivier. So, when I look at Q4 in a high level, we saw a continuation of many of the dynamics evident in Q3. We continue to effectively manage costs, and we saw better than expected improvements in our gross profit rate due to this ongoing structural shifts in our product mix, particularly in our GTS segment. These positives were outweighed by declines in our staffing business, most notably in our US commercial operation. Like Q3, these declines were the result of disruption from our Q1 restructuring, continued weakness in the US manufacturing sector, historically tight labor markets and some plant exits from several high volume low value accounts. And in our international operations, economic headwinds in Europe continue to constrain top line growth there. I look forward to sharing the recent steps we've taken to respond to the current situation, including how we're promoting growth while continuing to reap the benefits of our leaner more agile operations. These recent actions laid the groundwork for a strategy that includes a more aggressive and organic and inorganic growth plan, increased focus on talent and greater urgency to building specialty growth platforms that will deliver results for clients' talent and shareholders. I'll share more details about these changes in a few minutes. But first, Olivier is going to take a closer look at Kelly's overall performance for the fourth quarter and the full year.

Thanks Peter. Just to provide a little more color. As a result of the dynamics that Peter just mentioned, our Q4 results didn't meet all of the expectations we laid out as part of the outlook in our last call. Our Q4 year-over-year revenue was down 5.4% versus a 4% to 5% decline in our outlook. Our GP rate exceeded our expectations, up 30 basis points compared to expectations also flat year over year GP rate and expenses were down 2% were shy of our expected 4% to 5% year over year reduction. Now I will review our year over year performance in more detail. Revenue was at $1.3 billion, down 5.4% from the fourth quarter of the prior year. Our total company reported results were unfavorably impacted by 20 basis points due to foreign exchange. Our Q4 performance includes the results of NextGen and GTA which added 1210 basis points to our constant currency revenue growth. So on a constant currency and organic basis, our revenue for the fourth quarter was down 7.3%. Overall the Q4 constant currency organic growth new trends reflect decline in all three segments. Looking at each segment on a reported basis, the Americas Staffing revenue decline is primarily due to the light industrial and office political products or the commercial portion of the business, which was down 19% year-over-year. The decline was partially offset by the Kelly Education practice, which was up 5% in the fourth quarter and reflects a result revenue growth. The International Staffing revenue decline reflects a continuation of the challenging market conditions in Europe. And finally GTS return to revenue growth, up 2% year-over-year, but down slightly on an organic basis. The growth comes with structural improvement in our product mix with outcome based services like business process outsourcing and…

Thanks, Olivier. I'd like to turn to our near term priorities and what we've accomplished since I became CEO. I'll start with our top operational priority growth. When we restructured our US operations last year, we had two primary goals; to drive efficiency and to drive growth. We are pleased with our progress with efficiency. In fact, we're ahead of plans. We have not yet delivered on our top line growth expectations and I've made returning to growth a top priority during my first 120 days, and we're instituting aggressive changes to get us there. We're reallocating sales and marketing resources to drive increased demand. And we're seeing positive momentum in our pipeline. We're centralizing support functions to allow our front lines to have greater focus on sales and recruiting, a move that should provide growth as well as expense savings. We are rolling out new front office technology that will improve our recruiters' effectiveness and make it easy for talent to work with us through a modern tech enabled process. This rollout will give our commercial and education teams, new front office technology for the first time in almost 20 years and resolves uncertainly at the front office implementation timing and delivery. We are using centralized recruiting to support certain large customers and we are already seeing improvement in fill rate. The centralized model has the added benefit of allowing other recruiters to focus on higher margin business. And we are accelerating our shift to a more responsive tech enabled delivery model that allows us to target resources to the fastest growing market and aligns with the preferences of the modern workforce and customers across the US. While returning to growth has been and will continue to be our top priority, we are acting with urgency to take care…

Thanks, Peter. Please note that the outlook for 2020 does include the impact of the recently announced acquisition of Insight. For the full year we expect our reported revenue growth to be 3% to 4% and we expect the impact of FX on revenue to be significant. We currently expect Insight to contribute approximately 100 basis points to our revenue growth rate. We do anticipate that our organic revenue growth will improve progressively during the year. But Q1 revenues are likely to reflect a year-over-year decline. Due to the growth challenges we still face in Americas Staffing. We expect that this pace of revenue growth will be supported by the initiatives that Peter laid out for the Americas. We expect the gross profit rate to be up slightly on the year-over-year basis. While we may continue to experience some volatility in the GP rate on a quarterly basis, as we have seen in the past, structural changes in business mix from our shift to higher margin specialty solutions are expected to positively impact our GP rate for the full year. We anticipate SG&A expenses to be up 2% to 3% on a reported basis. This includes increases in incentive compensation expenses, which will only be paid upon achievement of performance objectives, continued spending on technology and the impact of our recent acquisition. We also expect that the modernization and efficiency actions discussed today will provide cost savings. We have included an estimate of the cost savings outlook, while excluding the expected one-time cost of such actions. Will share the details of both the cost savings and the one-time cost during our next update. So, all in we will continue to make investments in several key areas of our business in 2020. And we expect to deliver year-over-year improvement in our conversion rate. Consistent with our prior discussions the outlook provided does not reflect any gains and losses on personal stock. Although, we do believe that future unrealized gains and losses resulting from changes in market price could be material. The outlook also excludes impact of our recently announced agreement to sell and lease back our corporate campus, including the expected gain on sale. The proceeds of the sale are expected to be approximately $51 million net of tax and transaction expenses and will unlock capital to invest in our specialty growth platforms. And finally, our 2020 annual income tax rate is expected to be in the low to mid-teens range. This does include the impact of the work opportunity tax credit, which was reinstated for 2020. I will now turn it back over to Peter for his concluding thoughts.

Thanks Olivier. It should be clear that we're acting with urgency to deliver progress in 2020. At the same time, we're looking further down the road to a day when the full potential of Kelly is realized. We have a lot to build on. We have one of the best brands in the industry. We have a solid balance sheet fortified over many years. We have an exceptional Blue Chip client base. We put to work thousands upon thousands of people looking for what's next in their work-life journey. And importantly we have the most dedicated and passionate employees anywhere. Our long term goal is to unlock the potential of these valuable assets, by deploying them differently, enabling them with technology differently and supporting them with an operating model differently than we have in the past. Over the course of 2020, I will have much more to share about how we will do this and the changes we will make, some of which, frankly are overdue. For today, there are three significant changes that I want to share with you. First, we intend to accelerate on our efforts to drive our top and bottomline performance through acquisition of inorganic growth platforms, making smart buys that align with Kelly's focus on specialization. Here's why I'm confident in this organic growth strategy and why it has the full support of Kelly's Board of Directors. We have the benefit of a rock solid balance sheet with ample financing capabilities under terms which reflect that strength and were just renewed in December year. We have a strong track record of improving our free cash flow generation. We have proven our ability to quickly and efficiently integrate new acquisitions that deliver meaningful growth for Kelly. And we have shown that we can finance these acquisitions…

Thank you. [Operator Instructions] And our first question will come from the line of Josh Vogel with Sidoti. Your line is open.

Thank you. Good morning, Peter and Olivier. How are you guys?

Good morning, Josh. We're good. How are you?

I'm great. Thank you. I got a couple questions. I guess the first one, just about one of your initiatives here. I'm assuming that you already have the president of each specialty in place or is this something you're going to be looking to add?

We'll be announcing the presidents, Josh. So yes. But we'll be announcing them in probably in the next -- by the end of the quarter.

Okay, great. And then with the announcement I think last week of Tim Dupree as your CGO. Do you feel that you have your executive team round it out?

Yes. I would say that the -- with the BU presidents and the current leadership team including Tim we have a complement of leaders that are ready to deliver on our strategy. That's not to say that we won't add talent where it's necessary, but I think we're ready to deliver on this plan as I've laid it out.

Okay, great. With your outlook for 2020 and all these initiatives and strategies in place, I was pretty surprised, but certainly encouraged by your full year revenue growth guidance, understanding Q1 will be down year-over-year and there's the 100 basis point contribution from insight. But what gives you the confidence that you could put up mid-single digit gains later this year? And could you maybe it's more for Olivier kind of give us just like a sense of, I know, there'll be progressive improvements throughout the year, but if you just give any more insight or details and how you see revenue trajectory playing out this year.

Yeah. I mean, as we did mention, we believe that Q1 is going to be still challenging on organic basis because of what is going on in our US operations commercial. But I think we have a solid plan in place and we start to see some progress naming one of them the pipeline. And we feel that we are going to start to see some traction that would enable us to show still a little bit of a challenging Q1, but some improvement in our overall organic growth trajectory with of course an improvement or further improvement as we move to the remainder of the year. I think the other thing is, our recent acquisition NextGen and GTA. When you look at what we did achieve in 2019, it’s a growth platform that we grow at about 22% top line, providing a very interesting value profile at 27% margin and very good bottom line. These two acquisitions were already accretive as soon as Q1 of 2019 and generating $0.22 of EPS for the full year. We see and continue to see good traction in our education business. You have seen that we did mention the return to growth from minus 1 in Q3 to plus 5 in Q4. And we see further traction as we enter into 2020. We see good traction also in our outcome based business as we have seen in 2019. So there's a lot of, I would say dynamics that are in play that gives us confidence that especially if we continue to make progress on our US operation commercial staffing, we should progressively improve our organic capability during the year. And again, we plan to have about 100 basis points of extra boost on our organic growth coming from Insight, which is an excellent geography complement to our existing K12 substitute teacher business in the US.

That’s really helpful. Thank you. And I'm sorry, did you say that NextGen and GTA grew 22% last year versus their 2018 numbers?

That is correct. And you will see that in details when you have access to the 10-K, because we have pro forma analysis that is showing basically the progress and through our earnings release, 8-K, where we show some analysis about that as well.

Okay, wonderful, wonderful. Focusing on your inorganic strategy, can you just talk a little bit about the pipeline of opportunities you are seeing today, knowing that you can't discuss any future potential deals, but just curious what the pipeline looks like and maybe from specialty perspective?

Yeah. Couple comments, Josh. I think because we have as compared to past periods, been more acquisitive in the last few years, relatively speaking, we have been included on a number of transactions that we may not have been in prior period. So we are encouraged by the fact that we are being seen as a company that is playing in the M&A space more aggressively. And I think with today's -- my laying out our plan for the future, we would expect that to continue. We are developing not only a reactive pipeline strategy, but also a proactive pipeline strategy where we're identifying growth platforms that exist within Kelly or we think would be implements to growth platforms in Kelly. And using a variety of resources to try to generate additional targets for acquisition. And I would say that that is a work in process, but it's clearly more robust than it has been in the past.

Okay, great. And just one last one and I'll hop back in the queue. Is a nice way to unlock capital through the headquarters sales and leaseback? I guess it's a quick two parter. How much -- can you remind me how much you have available on your current facility? And then just also you still have these attractive assets on the books related to parcel. And I personally feel that the Street doesn't seem to give enough attention to that. I'm just curious, is there any plans to potentially monetize or liquidate a portion of those investments and put that capital to work elsewhere?

Yeah. I'm going to start and Peter is going to compliment especially when it comes to commenting on our JV APac assets as well as our shares with [indiscernible]. So we have renewed our financing capabilities in December of last year. So the overall capacity is $250 million, $150 million through a securitization program and the rest with additional revolver. We feel as Peter mentioned that we have ample capacities basically to execute and accelerate on our inorganic initiatives. We did mention today that basically our balance sheet at the end of 2019 is completely almost deleveraged our debt is $2 million. So, we feel comfortable now with our significant improvement in free cash generation that we can use these $150 million capacity whilst making sure that we can deleverage with our free cash flow, which is of course very important especially for a cyclical industry like our industry.

Yeah Josh. And with respect to other assets of the company. We are regularly evaluating how best to combine resources and how to consider resources to create value. And there isn't any asset or resource that's off the table in that regard. But we have no -- nothing to announce with respect to any specific asset other than the ones we've mentioned today. So, it's a regular part of our review of how we're allocating resources and how we're using our capital to drive growth.

Well, thank you guys for taking my questions. Looking forward to see and watching 2020 play out.

Yeah. Thanks, Josh.

Thank you. Next we'll go to line of Joe Gomes with Noble Capital. Your line is open.

Good morning. And thanks for taking the question.

Joe, good morning.

I just wanted to circle back about the outlook for 2020. And I understand with some of the NextGen and the education returning to growth. But a lot of this and you look at relatively large decline in the U.S. staffing business in the fourth quarter and some of the issues you outlined today and in previous calls. What gives you confidence that U.S. commercial business is going to stabilize in the near term?

Yeah, thanks, Joe. So, what gives us confidence is that the initiatives that I've instituted since becoming CEO are in large measure beginning to show results. And I think, as Olivier mentioned, we believe that the U.S. commercial is stabilized. We clearly have work to do on returning to growth but the initiatives that we've instituted including reallocating resources to drive demand acting on our shared services and centralized delivery models to a loud radar, focus on higher margin business. We like what we say. Again, we are not comfortable with the results or pleased with the results because we have to get back to growth. But when we look at the pipeline and some other things, we see signs of the initiatives we take and are beginning to take hold.

Okay. Thanks for that. And if you can provide a little more color or detail on the technology development project and why you guys put the staff and put the charge there? I mean a little more insight on that would be appreciated.

Yeah. About two years and a half ago we start an initiative on the front end middle office for how our US business to replace directly and all inhouse ERP that was 20 plus years old. We have realized that as recently as Q4 that there were some uncertainties on when we can get this new front end middle office being delivered. And we saw an opportunity basically to move with something else that we are familiar with. Because we are using the system we are now implementing or expanding. We have used it all the time. So we saw that with the uncertainty around the timing of the delivery combined with risk of coupling front end middle office, we have an opportunity to really accelerate the delivery of this new platform. As we speak, we have already implemented this new system for shy of 200 people. So that was basically the tradeoff. I mean, getting the paying off I would say the asset impairment of $15.8 million in exchange with we can get something now as we speak. And implement quickly enhance the system to get similar benefits than what we are expecting with our initiatives. And we expect as soon as the second half of 2020 get additional productivity and other metrics being enhanced and improved through this system. So the tradeoff was really the paying off this asset impairment versus making sure we get the benefit of this new system as quickly as possible, which is what we see now. I mean, again, we have implemented already the system to shy of 200 people by mid of 2020. We are going to be fully in place. And we are going to start to see basically, what benefits we’re expecting post implementation, as opposed to significant uncertainty with the first option on when we are going to be able to deliver on this project.

And, Joe, I would just add relative to your question about confidence for the back half of the year in terms of growth that, we're introducing new technology as I mentioned for the first time in almost 20 years. And we believe that our US commercial teams will be a significant beneficiary of this modern latest technology in their recruiting.

Okay. And if you could just provide a little color on what you guys see in the European market in 2020? What's going on there, where do you see some positives, where do you see some challenges?

Well, it's a tough call because there are so many desperate economic issues in the region, there continues to be uncertainty regarding Brexit, or as a result of the Brexit outcome, there are challenges in economic headwinds throughout the region. Although, and I'll ask Olivier to comment as well, but I think there are some at least signs that the deterioration has not -- or is not accelerating. And there are pockets of growth and pockets of development that, we expect to benefit from. But we're not such a huge player in the region that we're going to be a bellwether of what's going on there. But we do expect the sort of current state to be what we should expect for 2020.

Yeah, I would just add on that, that our lifescience specialties still doing well, where we are specialized on this area. Eastern Europe, specifically Russia, we are still seeing some traction like we have seen in 2019. We are going to continue to run the business in a meaningful way, manage our resources, making sure that we continue to stabilize our margin as we did along 2019. But we don't expect top line, very -- being very dynamic. I think it's going to be kind of similar to what we have seen in 2019. But with no sign of further downside I would say. And whenever there are pocket of opportunities, and we see a lot of them, sometimes in many countries, in some very specific specialties. We are usually good at capturing them very quickly and get some benefits. But the overall environment is I would say not very favorable, but now going down further.

Okay. Great. Thank you very much.

Thank you, Joe.

Thank you. Next we will go to line of John Healy with Northcoast Research. Your line is open.

Hi, thank you. In responding a little bit more thoughts just about the future M&A strategy and how it is maybe deployed. Is there a way you can kind of help us conceptualize maybe the amount of capital that you look forward to kind of earmark for potential M&A? And additionally, will it be mostly domestic oriented as you try to get more target on within certain verticals? Or do you think international M&A will also be an element of the toolkit?

Yeah, thanks, John. So, without giving specifics, I would say that if you consider the 150 plus million that we've spent in the past three years that when I talk about an acceleration and a more ambitious M&A plan, it's probably reasonable to think about, it as a multiple of that. And, as we go forward, we'll do our best to try to frame it for you in more specific terms. But I think right now, that's probably how I would think about the quantification of it. And in terms of the areas that we're focused on, I would think that we will clearly be overweighted in North America versus our international operations. It's not to say that we would preclude if there was something opportunistic, but we see huge opportunity in North America. It's a largest staffing market in the world. We see significant opportunities in outcome based. Our outcome organic platforms are growing nicely. So complementing those areas here, we think is probably where our capital is best allocated.

Great. And trying to get a little bit more detail. 2020 seems like it's a year of a lot of unknowns in terms of where the industry is headed, especially with the election later this fall. Does that make you kind of pause your M&A pursuit this year and make 2020 kind of a due-diligence year and 2021 maybe a year of action because maybe you're able to get prices that are very different? Or do you think that you'll be active in terms of closing transactions in 2020?

Well, John, we're -- it's a great question. We're very aware of where we are in the cycle. And so we're going to be diligent about making smart acquisitions, if we're going to make acquisitions. But we think that there are opportunities to pick your targets, even in this year. Recognizing as I said, that we're not going to overpay for properties or get into markets that we're not comfortable are long-term growth platforms.

Just one on that next week. Peter mentioned that we are going to be even participating to a noble capital event and we are going to share more details about our acceleration in terms of capital allocation strategy.

Great. And then just one final question for me. On the balance sheet it looks like that there's a property held for sale is $21 million. Is that related to the headquarters or is there something else that, it's kind of in that transaction?

You are correct. That's basically the headquarters that we have mentioned. It is 20 -- roughly $21 million. I did mention that the net proceed, net of tax and transaction costs is going to be around $61 million. So basically, we are going to recognize in Q1, because we are going to secure the deal in Q1 a $30 million basically capital gain. And the meaning the $51 million net of tax and transaction costs will happen before the end of Q1.

Okay. Thank you again.

Thank you.

Thank you.

Thank you. [Operator Instructions] I'm showing no further questions in queue. Pleas continue.

Okay, Cynthia. Thank you very much.

Thank you very much.

Thank you. And ladies and gentlemen that does conclude your conference call for today. Thank you for your participation and for using AT&T Executive Teleconference Service. You may now disconnect.