Ladies and gentlemen, thank you for standing by. Good morning, and welcome to Kelly Services Third Quarter Earnings Conference Call. All parties will be on 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 anyone has any objections, you may disconnect at this time. A third quarter webcast presentation is also available on the Kelly's website for this morning's call. I would now like to turn the meeting over to your host, Mr. Peter Quigley, President and CEO. Please go ahead.

Thank you, Leah. Hello, everyone, and welcome to Kelly Services third quarter conference call. With me today is Olivier Thirot, 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 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 metrics in our discussion today excludes the results of RocketPower and Pediatric Therapeutic Services or 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 transaction this quarter. Finally, the slide deck that we are 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 to 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 Persol earlier this year, reflects our continued confidence that investing in 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 RocketPower, our acquisition in the RPO space. RocketPower specializes in the high-tech industry and many customers in that vertical have scaled back their full-time hiring, abruptly softening demand for RocketPower 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 RocketPower's portfolio and identifying additional synergies with Kelly to unlock new opportunities for growth. Furthermore, we are optimistic that hiring reductions and layoffs in the high-tech vertical may strengthen the pipeline of candidates in other industries where demand for IT talent remains strong. Among them, financial services, insurance and health care, where Kelly Technology and Softworld are well established and positioned to capitalize. The recent deceleration in the high-tech industry, demonstrates how sectors are responding differently to economic uncertainty. Our Softworld 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,…

Thank you, Peter. For the third quarter of 2022, revenue totaled $1.2 billion, down 2.3% 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 0.3% in constant currency. Included in that increase, is a 130 basis point favorable impact from our acquisitions of RocketPower and PTS, 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 1.5%. As we look at third quarter revenue by segment, in the SET 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. Science and engineering are slowing, but our technology practice, including software is still growing, 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 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. PTS 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 field rate. Permanent placement fees, primarily higher education executive search with Greenwood/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…

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 Softworld 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 full year ramps up, and our PTS acquisition is contributing solid revenue and GP growth to this segment. In OCG, we said we would invest this year in our fast-growing RPO business. Our organic RPO business continued to deliver solid year-over-year growth in Q3. We've explained the market conditions that triggered the RocketPower impairment charge, and we believe that with diversification and integration, this acquisition 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 resilient 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 there will be a steady demand for our SET, 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 growth 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 Kelly, there are two unusual events that have impacted our Q3 results and will continue to impact the remainder of the year. First is the sale of our Russian operations, which we completed in July. Second is the change of one of our large customers' labor strategy that we mentioned today and on earlier calls. A large staffing customer decided to address their talent challenges and work with scale differently by changing its heavy use of containment labor to one that instead will rely on hiring talent directly as full-time employees. Given that only one quarter remains in 2022, my comments on our outlook reflect our expectations for the fourth quarter only. We'll return to providing insight into expected full year results in 2023. I will start with highlighting the impact of the strengthening of the US 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…

Thanks, Olivier. The share buyback program doesn't change Kelly's capital allocation strategy. It complements it 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. Though, the current economic climate may result in fewer high-quality properties 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 on shifting our business mix and delivering structural improvements that drive higher GP. While signals in the macro economy remain mixed, we are capturing strong demand in our set education and OCG segments, and we expect demand to hold steady in these more resilient 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 a seasoned leadership team, wholly committed to specialty growth and value creation. Leah, you can now open the call to questions.

Thank you [Operator Instructions] And our first question is from Joe Gomes with NOBLE Capital. Please go ahead.

Good morning. Thanks for taking the questions.

Good morning, Joe.

Good morning, Joe.

So I wanted to kind of start out with talking about talent supply and maybe you get a little more detail as to 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 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 as many job openings as our unemployed people. So that's a structural issue that continues to challenge meeting our customers' demand. We're using all appropriate measures to try to attract more people, including having retirees come back into the workforce, creating new channels for our education practice, using social media to an extent that we've never used it before. So we're 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. To switch onto the Education segment, a little bit of a multipart question here, but I noticed flipping through the release 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 that you would note that caused that operating loss in the Education segment? And then two, you've 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 see where you stand today? Is 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 loss is...

Seasonal...

Seasonal. It's directly related to the fact that in the third quarter, schools are only starting to open -- so that's just the seasonality. In terms of the wins, we continue to see outstanding demand for our services. We've had significant new wins during the year that we are implementing for the new school year that's ramping up now. We're going to enjoy a full quarter of that -- most of those wins in the fourth quarter. And the pipeline for new wins looks very good. 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.

Yeah. And clearly, when you look at our outlook for Q4, we anticipate very similar growth than what we have seen in Q1, Q2 and Q3 of 2022, meaning, above the 40%, 45% mark.

Okay. Thanks for that. And then, one last one if I may, I also saw this morning that you entered into an agreement, I guess, free up some restricted or the ability to do some with restricted cash levels on the credit agreement. Maybe you could just give us a little more details what that is all about?

Yeah. I mean two things on that. One is, common to many companies. You know that, the LIBOR, reference interest rate is no longer something that is in place. So basically, this agreement, which I know is a long disclosure of over 170 pages is basically on a new agreement moving from this labor -- LIBOR, sorry, to what we call so far. And the second point is, basically, a change in some of our bank covenants to basically expand some possibility to basically fund the share repurchase that Peter and I were mentioning today. So it's basically an amendment to some of the basically bank governance to basically enable us to fund these 50 million initiatives that, again, we have mentioned today.

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

Thanks Joe.

Thank you.

And our next question is from Kevin Steinke with Barrington Research. Please go ahead.

Good morning, Kevin.

Good morning.

Good morning. Good morning, Peter and Olivier. I wanted to just start out by asking about RocketPower 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, easy is it to diversify the business? Is it simply a matter of taking their existing offering and bring it to different industries, or if there's something specific about their offering that's tailored to the Tech Industry? Just want to get a little more color on both of those things?

Well, as we mentioned, Kevin, RocketPower was enjoying triple-digit growth in Q1 and Q2 and had its hands full, given the abrupt falloff in demand in -- specifically in the high-tech vertical, where RocketPower 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 enterprise-size customers across a variety of industries was part of the original investment thesis anyway. It's just that given the downturn in the tech vertical. And specifically, we think this is the opportune time to focus RocketPower's unique operating delivery model to other industries and that the execution of those plans is already underway, and we actually have a significant win that we'll be seeing implemented even before the end of the year as a result of the combination of RocketPower and Kelly Resources.

Okay. That's good to hear. And when we think about gross margin for the year, I guess, the guidance for the full year now is 20.4%, correct versus 20.7% previously. Is that just a function of primarily lower permanent placement fees, or the assumption that they'll be lower…?

So yeah, I mean the -- what is specific on the outlook today is that as a practical matter, we have basically discussed about Q4. So the 20.4%, Kevin, is related to Q4.

Understood. Okay.

It is still up 70 basis points, not the 220, 230 and 140 we have seen in Q1, Q2, Q3 of this year. The main difference is basically the fee business that is decelerating. The good news is that we continue to see what we have seen for many years, over five years is a structural improvement on our business mix or specialty mix that is going to continue to provide some traction in terms of basically improving or continue to improve our GP, gross margin rate.

Okay. I got it. Yeah, that's specific to the fourth quarter, that 20.4%. Okay. And just thinking about SG&A, you've mentioned that you slowed down or looking at your slowdown in 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 that, or is that still, kind of, what we should expect…?

So Kevin, if you look at full year, basically versus the outlook we gave three months ago, we have downgraded our SG&A growth by about 200 basis points. If you look at the trend over Q1, Q2, Q3, and here, I'm going to talk about organic constant currency. Our SG&A were up 12.6% in Q1, 9.9% in Q2, 6% in Q3. And basically, on a like-for-like basis, this 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 top line 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 second thing that we have started in September, and that is going to be more visible in Q4 is cost management, right? 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 are 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 is a good example. Our BPO business overall is a very good example. Technology, including software, still growing. There are some areas where we are going to continue to make sure we have sufficient resources to continue to capture growth.

Okay. Great. I guess, yes, you mentioned just how a slowing economy might result in fewer high-quality M&A targets. I guess it's fairly self-explanatory that targets wouldn't want to be selling when the market is softer and their results might be softer. But any more just comment on just the M&A pipeline and what types of things you might be pursuing now?

Well, we're continuing to focus on 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'll continue to look for high-quality assets to add to our portfolio. The quantity 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 haven't changed our criteria that we're using to acquire properties. It's a high bar we've set to use our capital to acquire properties, and we'll continue to look at companies that come on the market through that lens.

Okay. Thank you for taking the questions.

Thanks, Kevin.

Thanks, Kevin.

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

Hi. Good morning.

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 you're seeing weakness from on the technology sector. Because I know, as you said, it's really mix as to 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 all of the companies that are in the press announcing either layoffs or slowdowns in hiring, including meta, Lyft, Slack and on and on. That's the sector that's being most impacted. There is still very strong demand for high-quality technology professionals. And as I mentioned in the script, so we're seeing solid demand in our soft world, they continue to provide high-quality technology talent to enterprise in small and medium-sized businesses. And we don't think there's any pending slowdown in that demand because large institutions continuing to need app developers and network architects and cybersecurity experts. But at least for the near-term, the high-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 RocketPower, does that change maybe how you're 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 RocketPower, the abrupt decline in the high-tech vertical that they had significant exposure to the timing will cause us to reflect on it, but it doesn't change the underlying strategy of looking to add to the Kelly legacy businesses with high quality, high margin, high-growth properties that we think will create both primarily topline synergies for the company and create opportunities to attract new customers to Kelly.

Yes. If I may just add, I was looking recently at reflecting a little bit with Peter on the performance of some recent acquisitions. Just to give you an idea, first of all, PTS, as we said, growing 23% in revenue in Q3. We do International interestingly over 80% growth, Software, which is in the technology plus 7% in revenue and NexGen 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 RocketPower, but 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 track in terms of providing for us additional growth, but also additional value creation because all of them got a margin profile or gross margin profile that is, of course, much higher than the average gross margin we have for the rest of Kelly.

And then just one last question. Based on what you just said, Olivier, and what you've said so far about the demand in business and supply and demand of labor, as you look at your gross profit margins over the next 12 months. Do you -- are there headwinds that would make you -- you could see them contracting, or is there enough demand that you should continue to see growth in gross profit margins?

So, I think what we are going to continue to see is probably the traction and the boost that was coming from high growth in the fee business is slowing down and will not provide the boost we have seen this year, right? In Q1, it was about 100 basis points, Q2, 70. Q3 is already much lower, it's about 10 basis points. What we are going to continue to see is what we have seen for the last five years is basically a structural improvement of our GP margin coming from what we call 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 structural 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 -- well, since 2015, I'm sorry, with not one year where basically our GP rate went down. Now we don't expect 200, 230 basis points that we have seen in Q1 or Q2, but meaningful improvement on a pure organic structural specialty mix yes, definitely, yes.

Thank you so much. I appreciate it.

Thank you.

Thank you.

And next, we go to Mitra Ramgopal with Sidoti. Please go ahead.

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

Good morning, Mitra.

Good morning.

Yes. Thanks. First, as you look at your investments for next year, given a macro uncertainty, is it fair to assume both technology and workforce, you're going to be a lot more cautious just because you just don't have the visibility that 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 education services is significant, and we'll continue to invest there. We continue to see demand in our set and OCG practices. 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, and we expect to see that continue in 2023.

Yes. Thanks. And then just switching gears a little in terms of Europe. We saw some softness in areas France, UK, Italy, not surprising given what we're hearing from Europe. But what's your expectation in terms of maybe stabilization there, or should we expect continued softness well into next year given the macro environment?

Yeah. Interestingly, when we exclude, of course, FX, which is creating a lot of noise and also Russia, which I think is more like externally driven. And you look at -- 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 and Russia historically has been a nice fee business. For the moment, honestly, we don't see a specific signs of slowing down. It may come, but we believe that it's going to slow down a little bit, but what we have seen so far is a very, very resilient business in Europe. Of course, we are scrutinizing a little bit what is going on, looking at hours on a weekly basis, looking at our fee business, getting ready if something is changing, I believe it's 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, it is, obviously, not known for most companies. But as you look into 2023 again and as you look at your portfolio of businesses, should we -- despite the environment, should we still continue to expect year-over-year growth? I know, you're not providing guidance, but just on a very high level, you still expect the company to grow next year despite the macro headwinds.

Yes, it's probably a difficult question, knowing the environment we have now. But when you think about resiliency and we can speak about education, our Ed business and OCG business, we feel that with the structure, the business we have now, the portfolio of specialties we have in each of these segments. For each of them, we believe we have a pretty resilient model, right? Of course, when you think about our P&I and to some extent, international business, we believe there are going to be likely more subject to the future economic environment. But we believe that, at least, for OCG set and education, we have businesses that are now strong enough, resilient enough to probably whether some challenges in the near future, probably better than it was in the past. And certainly, better than other area that are more exposed to, I would say, the cyclical challenges we may see in terms of economic environment in the near future.

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

Yes. Thank you.

Thank you.

[Operator Instructions] And we have no other questions. You may continue.

I think we're all set, Lea. Thank you for your help today.

Thank you, Lea.

You're 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.