Good morning and welcome to Kelley Services' Second 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 Kelley Services. [Operator Instructions] A second quarter webcast presentation is also available on Kelley'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, Greg. Hello, everyone, and welcome to Kelly’s second quarter conference call. Before we begin, I’ll walk you through our Safe Harbor language. 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. Finally, a presentation with information about Kelly’s financial results in the quarter is available on our website. With that, I’ll begin with remarks on Kelly’s financial results. In the second quarter, we remained focused on what we can control as we continue to navigate uncertain market conditions. Large enterprises maintained a cautious approach to hiring, though demand began to stabilize with positive signs emerging, in particular among our Technology and Life Sciences customers. In our P&I business, revenues leveled off on a sequential basis. This trend reflects stabilizing demand and the benefits of our enhanced localized delivery model. The combined strength of our network of physical branch locations and the Kelly Now mobile app continue to generate positive momentum in the quarter with both clients and talent helping grow our pipeline of new industrial and commercial staffing business and drive a meaningful improvement to our fill rate and time to GP. At the enterprise level, our strategy to deliver the full suite of Kelly offerings to our largest customers also…

Thank you, Peter, and good morning, everybody. As a reminder, Kelly’s 2023 results include the European staffing business that was sold on January 2, 2024, and we are now including the results of Motion Recruitment Partners since the date of the acquisition, so just for the month of June 2024 this quarter. To provide greater visibility to trends in our operating results, I will also discuss year-over-year changes on a reported and also on an organic basis. References to organic information exclude the results of our European staffing business in 2023 and the impact of the acquisition of MRP in 2024. Revenue for the second quarter of 2024 totaled $1.06 billion, compared to $1.22 billion in 2023, down 13.1%, resulting primarily from the sale of our European staffing business, partially offset by the acquisition of MRP. On an organic basis, year-over-year revenue improved 0.6% in the quarter, reflecting strong growth in Education, a sequential stabilization of demand from Q1 to Q2 across much of our other businesses, despite of market uncertainty in several specialties. Reviewing results by segment, Education continued to grow revenue by double-digit, up 22% year-over-year in the quarter. This strong and sustained growth reflects net new customer wins, increased demand from existing customers and an improving fill rate. In the SET segment, revenue was up 10% on a reported basis, which includes the impact of the MRP acquisition. Revenue was down 3% on an organic basis and organic revenue trends were stable sequentially. Year-over-year organic revenue growth reflects lower staffing market demand with revenue down 4% in our staffing specialties and down 1% in our outcome-based business, permanent placement fees also declined by 20%. In our OCG segment, revenue improved 3%. The increase in revenues was driven by our PPO specialty, where demand growth has continued. Year-over-year…

Thanks for those insights, Olivier. In May, I shared with you that 2024 would mark an inflection point on our strategic journey. That the actions and results we deliver this year will propel Kelly into a new era of growth. Reflecting on the significant progress we achieved in the second quarter, I’m confident that we’re on track to realize those ambitions. Our transformational acquisition of Motion Recruitment Partners has strengthened the scale and capabilities of Kelly’s staffing, consulting and RPO solutions in attractive customer end markets, including technology, financial services and healthcare. The highly complementary nature of MRP and Kelly’s SET and OCG businesses, MRP’s attractive financial profile and its leadership team of recruiting industry veterans will contribute in a significant way to enhancing Kelly’s revenue growth potential and driving continued EBITDA margin expansion. The sale of Ayers Group further sharpened Kelly OCG’s focus on global RPO and MSP solutions while unlocking incremental capital to redeploy towards Kelly’s specialty strategy. And we achieved our initial expectation for EBITDA margin expansion, which we established one year ago, demonstrating the capacity of our growth and efficiency initiatives to significantly improve Kelly’s profitability over the long-term. Of course, it’s difficult to know the precise timeline of a recovery for our industry. And as Olivier noted, we expect the results in the second half of the year will continue to reflect uncertain market conditions. Notwithstanding these dynamics, I’m optimistic about the sequential stabilization we saw across our business and I’m confident that our achievements in the second quarter, together with the progress we’ve delivered since we embarked on our specialty growth journey, position Kelly to capitalize when sequential stabilization gives way to a sustained increase in demand. I’m immensely proud of the work of each and every member of Team Kelly, including our newest colleagues at MRP that has brought us to this point in our journey. Their urgency, agility and unwavering commitment to our clients and talent are the driving forces that continue to propel us to new heights. With our team moving forward together, united by our noble purpose, I’m confident that the opportunities before us are limitless. Greg, you can now open the call to questions.

[Operator Instructions] Your first question comes from the line of Kartik Mehta from Northcoast Research. Please go ahead.

Yeah. Good morning.

Good morning, Kartik.

Olivier, first of all, it’s been a pleasure working with you and I wish you the best. You have some big shoes to fill, so thank you for everything.

Thank you, Kartik. Thank you very much.

You’re welcome. I’m wondering if we could focus on the MRP business for a second. And just as you look at the fundamentals for that business, maybe so far in the second quarter, and you do look at your outlook in the second half, and you compare it to a year ago or maybe a quarter ago, what’s been the trend for that business?

Yeah. I will comment on a few numbers, and Peter can add more color on business trends and so on. You might have seen, Kartik, that we have issued the so-called 8-K/A, and of course, the outlook of today, and you are going to see further information in our 10-Q on what we call pro forma. If you use this information, you will see that H1 of 2024, the revenue was about $260 million, and if you take the mid-range of our guidance today, you are going to be at $265 million. So we expect, similar to what we have said for Kelly organic, basically a slight improvement, basically, in the second half of the year. When you look at how does it compare versus a year ago, H1 at $260 million is about minus 8% versus a prior year, which is consistent with the trends we have shared in June when we are talking specifically about MRP and we expect based on the change in comparables and a little bit of sequential improvement to turn H2 into flat to minus 1%, minus 1.5% versus a year ago.

And Kartik, longer term, I mean, we continue to be very bullish on MRP in particular, but also the space that they are in, both on the staffing and solution side, as well as on the RPO side. We have been very pleased with the partnership we have had with the MRP leadership to-date and the significant complementary nature of our businesses, the lack of significant customer overlap, complementary delivery models. So longer term, we are still very optimistic about the investment thesis in making the acquisition of MRP.

And then as you just look at the overall business, maybe in each of the segments, I am wondering what you are witnessing in terms of pricing. Have pricing trends or competition increased in any of the segments or are they kind of where they were last quarter?

Well, I think, on a -- in this kind of uncertain environment, market conditions, you are always going to find outlier suppliers that are going to try to buy share, but it is not across the board. It is not an industry dynamic that we are seeing. In fact, we have been relatively pleased with our ability to maintain pricing discipline during these market conditions.

Yeah. Just when you look at the so-called spread, in P&I it is completely stable. In SET, flat to up, slightly. In Education, a little bit down, but it is more the customer mix than real pricing conversation. So far, and it is not an isolated quarter, Q2 of this year, we have not seen any change or any pressure on spreads. We continue to see that we are capable of keeping our spread, thus keeping our overall margin.

And then just one last question, as you go down this transformation journey, and obviously, MRP will help, as you look for the next acquisition, is it not that you would like to integrate MRP, so you would wait or if an opportunity turned up, you are at a point where you could do another acquisition?

Well, I think, as we have said, MRP is going to continue to deliver its services and solutions through its operating companies and under its current brand. We will, of course, be working with the MRP leadership on where it makes sense integration. I think our focus right now is on that as a priority, but we are not going to stand on the sidelines in terms of developing a pipeline for future acquisitions. The cycle time is, as you know, Kartik, quite long. So we are preparing for the time when it would make sense for us to deploy additional capital in pursuit of high-margin, high-growth businesses, as I have said before, primarily in the Science, Engineering, Technology and Telecom space, or in our Education practice.

Perfect. Thank you so much. I appreciate it.

Thank you, Kartik.

Thank you, Kartik.

Your next question comes from the line of Kevin Steinke from Barrington Research. Please go ahead.

Good morning, Kevin.

Good morning.

Good morning. I want to start off by asking about generating some modest organic growth in the second quarter. It sounded like you were pleased with the progress of the organic growth initiatives that are part of the transformation effort. Would you attribute the return to organic growth as really being driven by those transformation-related organic growth initiatives?

Yeah. I think so, Kevin. It is hard to pin it down precisely, but relative to what we are seeing from our competitors, we believe we are taking share across our businesses and we spent a good portion of 2023 focused on efficiency. But, as I said at the beginning of the year, we were pivoting and turning our attention to growth. I think the progress we have made in our omnichannel strategy and Professional & Industrial is beginning to show results and our focus on taking share within our large enterprise customers is also showing traction. I think the combination of those two, plus obviously the continued growth in Education and a focus on high margin and areas that are a little bit more stable, and we are pleased with the organic growth in the quarter.

Okay. Good. And it is related to that question, when we think about your forecast for organic revenue growth of 2.5% to 3.5% in the second half of 2024, you talked about assuming kind of a similar demand environment in the second half relative to what you have been seeing recently, but also you mentioned some stabilization and demand, some improvement in Technology and Life Sciences. I am just trying to unpack how you get to that higher rate of organic growth in the second half if it is driven by the organic growth initiatives or assuming some sort of continued improvement or stabilization in just the overall demand environment to get to that growth and also the sequential improvements you mentioned you expect in P&I, SET and OCG?

Yeah. I mean, I am going to start and then Peter will add some color on the business side and so on. If you think about it, first of all, we did confirm today that we see Education continuing to grow at double-digit rate. Of course, Q3 is low seasonality, but we see the dynamic we have seen for a long, long time continuing, so that is one point. Second point is, when you put on the side Education sequentially from Q1 to Q2, excluding Education, the rest of the business sequentially went up by about 1.5%. We expect similar modest improvements sequentially over the second half of the year. That is basically based on what we have seen sequentially from Q1 to Q2. Some areas it is more stabilization like, for instance, P&I staffing. Others it is really sequential growth and I am thinking about OCG and to some extent SET. We start to see some positive dynamics, as Peter was saying, in our legacy IT business and also Science that are moving up. And on top of that, of course, the growth initiatives that Peter was mentioning, that are part of this sequential improvement of 1.5% I was mentioning from Q1 to Q2 when you exclude Education. And there is also the base impact, right? I mean, the 2.5% to 3.5% is also basically reflecting on the fact that our comparables are basically lower in H2 of 2023 than they were in the first half of this year.

And Kevin, as I mentioned in my prepared remarks, we don’t know when there will be a return to a more normalized demand, but we are much better positioned to take advantage of that. And we are prepared to take advantage of it when it happens than we were a couple of years ago just because of all the steps we have taken to structurally improve the cost base and to be able to leverage when demand returns in a meaningful way. But we are not waiting for that, which is why I focused on the growth initiatives that I mentioned. We turned to in earnest at the beginning of the year and we will continue to lean into those growth initiatives, notwithstanding the external market conditions.

Okay, great. I also want to ask about the trend in adjusted SG&A expenses. You mentioned you expect them to be down organically 3.5% to 4.5% year-over-year. Just trying to think about, on a sequential basis as we move into the second half of the year, how those will trend organically. If we should think about those kind of being flattish sequentially, excluding MRP or if they come down a little bit more.

I would really continue to look at organic, meaning excluding our European staffing business and MRP. I think we gave today some specific around MRP expectation for SG&A, excluding D&A by the way, for the second half of the year. So if you think about a Q2 trend, if you go really on the adjusted organic, we are at about minus 10% like-for-like in Q2 versus a year ago. In Q1 we are at minus 11%, so very similar trend in the second quarter than in the first quarter. When we move to our guidance that you are mentioning for the second half, of course, the comparables are becoming more challenging, right? Because a good portion of our efficiency initiative was already visible in the second half of the year. So this is why we go for this adjusted guidance. But if you think about it more sequentially, you will see that it’s basically flat sequentially from first half to second half or if you look at Q2 to Q3 and Q4. Yes, that’s our expectation and this is where we are trending now.

Okay. Thank you, Olivier. That was very helpful. And I also wanted to add my congratulations and best wishes for your upcoming retirement. Certainly --

Thank you.

It was a pleasure working with you over the years.

I’m going to be still around for a while now, right?

Okay.

So you’re going to hear from me for the next two quarters with pleasure.

Oh, right. Okay. Well, I look forward to talking to you then.

Thank you.

Your next question comes from the line of Joe Gomes from Noble Capital Markets. Please go ahead.

Good morning, Joe.

Yeah. Josh filling in for Joe.

Good morning, Joe.

Oh, hey, Josh.

So now we’re kind of a couple of months just into the completion of MRP. Can you describe to me how the integration of it is actually kind of coming along and some key takeaways so far into it? Has the company really picked up any new business ones from it so far?

Well, as we explained, Josh, for the foreseeable future, we’re going to continue to operate the businesses as they’ve been operating under their current delivery models and brands. That doesn’t mean we’re not spending a lot of time with the Motion Recruitment Partners’ leadership team working on ideas and plans for integration when it makes sense. We have been encouraged by the collaboration between the teams on both the staffing and solution side of the Motion Recruitment Partners business, as well as within the Sevenstep business. And there have been opportunities that we’ve taken advantage of that the combined forces of Kelly and MRP has proven to be an advantage. It’s still early, but we’re encouraged by what we think is the market and customer reaction to the combination and partnership. And more to come on that as we further refine what the ideal or optimized operating model will be going forward.

Okay. That’s helpful. Thank you. And you kind of touched on the M&A side a little bit, but you guys talked about in the previous quarter how there’s kind of more discussion happening. Is that really still true now? Is there kind of more properties in the market that you’re seeing or is it still roughly about the same?

I’d say it’s roughly about the same, Josh. There is -- it’s still not what it was two years or three years ago. I think companies are still a little bit cautious about coming off the sidelines, so the flow is not what it was at its height. But as you know, in our business in particular, not everything comes to market, and so we continue to explore high-quality, high-growth, high-margin businesses and develop relationships that we think could potentially at some point in the future result in an acquisition similar to how we accomplished MRP.

Okay. Yeah. Thank you for the color. And then last one from me, it’s been probably a couple quarters you guys commented on the Kelly Arc. Can you guys kind of provide us with an update on that and kind of what’s been the interest been like in that program?

Well, the interest is high. The fact is that it’s a platform solution that has both the talent and customer side in an area of great demand in terms of AI and automation talent. As with any platform-driven solution, adoption on both the talent side and the customer side takes time. But we have a dozen-plus customers on the platform and hundreds of AI automation professionals that are also partaking in the solution. And it’s one of those solutions, again, a platform solution. As individuals and customers begin to join and register, it has a network effect as people hear about it and learn about it and refer other people to the platform. So we’re still optimistic about the solution and the value it brings for both talent and customers and we’ll continue to invest our time and technology into it.

Your next question comes from the line of Marc Riddick from Sidoti. Please go ahead.

Morning, Marc.

Good morning.

Good morning. Good morning. And Olivier, I’m glad you’re with us today. So we certainly appreciate that.

Thank you.

I wanted to touch a little bit on sort of maybe piggybacking on the acquisition pipeline and opportunities that you see there. I was wondering if you thought maybe shifting a little bit sort of comfort levels with that and leverage and sort of how that plays into the thought process of the future acquisition pipeline?

Yeah. I mean, if you remember at the time of the MRP acquisition, our debt level was $263 million to be very precise. We are already now at $210 million. If you use what I like to use amongst many other metrics, multiple of EBITDA and I’m using the last 12 months EBITDA, that is the calculation we use in our bond governance. We are now at about 1.7 debt-to-EBITDA. So we are making progress. You have seen that our free cash flow for the quarter was over $50 million. So I feel comfortable that over time, not this year, but I think we are going to continue to basically deleverage as much as we can and as quickly as possible. It’s going to take, of course, more than the next 12 months, but I feel that we are on the right track. When you see our working capital, glad to confirm that our DSO now is at 57 days, which is, I would say, a big progress versus where we are before and we are in a business where the best way to manage your capital is basically to manage your DSO. So I feel comfortable that what we see in terms of metrics, balance sheet leverage, we are comfortable that we can continue to deleverage and comfortable to basically go for an acquisition whenever we are ready to do it and whenever we have attractive properties.

Okay. Great. And then I guess one quick little follow-up. Is there sort of a general ballpark range we are looking at for any potential technology investments, maybe CapEx for this year? Are there any sort of investments that you see coming, whether it was in conjunction with MRP, but just maybe enterprise-wide would be great?

I mean, of course, you can assess our CapEx at least on the cash flow by looking at our cash flow statement. Most of our CapEx over time have been on Technology and it will continue to be the case. You need to think about something in the region of $20 million, $25 million on a recurring basis. Of course, that does not take into account technology integration of MRP that, as Peter was mentioning, is going to happen as soon as we have the earn-out behind us. So after Q1 of next year, we are planning for it now, and it will possibly move the $20 million to $25 million up for a temporary period. But that’s something that knowing our free cash flow generation, I feel comfortable that we can absorb higher capital expenses and the $20 million, $25 million at least for a limited period of time, which may happen through this integration of technology for MRP.

Great. Thank you very much.

Thank you.

Thank you, Marc.

[Operator Instructions] And at this time, there are no further questions.

Okay, Greg, I think we can end the call. Thank you very much.

Thank you, Greg.

Thank you. 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.