Good morning and welcome to Kelly Services Third Quarter Earnings Conference Call. All parties will be on listen-only until the question-and-answer session. Today's call is being recorded at the request of Kelly Services. If anyone has any objections, you may disconnect at this time. The third quarter webcast presentation is also available on 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, Brad. Hello, everyone, and welcome to Kelly's third 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. We have a lot to cover, so let's get started. First, I'm pleased to welcome Troy Anderson, Executive Vice President and CFO Designate, who formally joined Kelly last month and is with us on the call today. As announced in September, following an exhaustive search process, Troy was selected to succeed Kelly's current Executive Vice President and CFO, Olivier Thirot, following his planned retirement as an officer of the company. Troy and Olivier have been working side by side over the past several weeks to ensure a smooth transition of responsibilities. Upon completion of the transition, Troy will assume the role of Executive Vice President and CFO of Kelly, and Olivier will be a strategic adviser to the company. Troy brings to Kelly more than 30 years of experience, successfully executing business transformations, a track record of accelerating profitable growth and a passion for developing and leading high-performing teams. I'm confident he will…

Thank you, Peter, and good morning, everybody. As a reminder, Kelly 2023 results included the European staffing business that was sold on January 2, 2024, and our 2024 results include Motion Recruitment Partners since the May 31 acquisition date. To provide greater visibility into trends in our operating results, I will discuss year-over-year changes on a reported and also on an organic basis. References to organic information excludes the results of our European staffing business in 2023 and the impact of the acquisition of MRP in 2024. Revenue for the third quarter of 2024 totaled $1.04 billion compared to $1.12 billion in 2023, down 7.1%, 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 was essentially flat and down 0.2%. This is slightly lower than what we have built into our second half outlook. Reviewing results by segment, starting with Education. Q3 is low season for Education because of summer in much of our K-12 practices, but we continued to deliver sustained double-digit revenue growth, up 11% year-over-year in the quarter. This growth continues to reflect net new customer wins and an improving fill rate on existing business. In the SETT segment, revenue was up 37% on a reported basis, resulting from the acquisition of MRP, which is included in our results for a full quarter in Q3. Revenue was down 5% on an organic basis. Organic revenue trends were weaker over some months but improved in September as we exited the quarter. For the total quarter, organic year-over-year trends reflect lower staffing market demand with revenue down 5% in our staffing specialties as well as in our outcome-based solutions, driven primarily by lower demand in certain industry verticals like telecom. We continue to see the…

Thanks for those insights, Olivier. With uncertain market conditions likely to persist through the end of the year, our priorities are clear. We'll remain focused on what we can control, delivering near-term results while driving strategic progress on our specialty growth journey. We'll continue to execute our organic growth initiatives, including our omnichannel strategy in P&I and our large enterprise account strategy. These initiatives are enabling Kelly to capture a greater share of the market for staffing services and contributing to stabilizing revenue trends for the company. Within both P&I and SETT, we'll aggressively pursue further expansion of our higher-margin, more resilient outcome-based and SOW business into attractive end markets. And in Education, we'll continue to drive growth by maintaining strong fill rates on existing K-12 staffing business and capturing net new customer wins through a healthy sales pipeline. We'll move ahead with our aggressive pursuit of value creation through our inorganic investments. MRP remains our top priority with whom our SETT and OCG teams will continue to partner on a thoughtful approach to integration that harnesses the unique strengths of each business. I look forward to sharing more about our approach on our fourth quarter and full year earnings conference call in February. We'll also continue to develop a pipeline of high-quality acquisition targets that align with our inorganic growth strategy in SETT, Education, and more opportunistically, OCG. Finally, we'll remain laser-focused on improving our ability to convert a greater share of top line growth to bottom line growth. This includes sustaining the structural improvements to our cost base that have enabled us to achieve significant EBITDA margin expansion from our recent historical average and maintaining a disciplined approach to SG&A management that aligns our resources with demand trends. This formula has helped set Kelly apart from our competitors in this uniquely challenging environment while driving significant progress on our specialty journey, and it has positioned us to accelerate profitable growth when staffing demand rebounds. Of course, our greatest competitive advantage and the key to our success on this journey is our people. I'm grateful to each member of Team Kelly for their dedication to meeting the evolving needs of our clients and talent. Their relentless pursuit of innovation and commitment to excellence are among the reasons Everest Group's 2024 PEAK Matrix assessment recently recognized Kelly across several categories. Among them are MSP, an engineering contingent staffing solutions, in which Kelly was named a star performer; and industrial staffing, business and professional staffing, services procurement and contingent workforce management in which Kelly was recognized as a leader. This recognition underscores the strength of Kelly's offerings and why we are positioned to compete and win over the long term. With our team energized by the opportunity in front of us and united by our noble purpose, I'm confident that we'll deliver on our strategic priorities, continue to outperform the market and propel Kelly into new era of growth. Brad, you can now open the call to questions.

Of course. [Operator Instructions] And our first question today comes from the line of Joe Gomes with NOBLE Capital. Please go ahead.

Good morning. So real quick on the MRP integration cost. I know one of the things you've said in the past is you're planning on operating that kind of separately from the rest of Kelly. So how much more of these integration costs do you think we're going to see here in the next couple of quarters, if any?

Hey, Joe, thanks. It's -- so regarding the integration, we -- as previously discussed, there is an earn-out as part of the transaction. And so during the earn-out period, which runs through the first quarter of 2025, we've agreed to maintain the operating companies and brand of MRP. But we are in the midst of some significant planning for integration that will capture both top and bottom line synergies when the earn-out period is over. I'll let Olivier comment on the integration cost.

Yeah. Sure. I mean -- as Peter was saying, I mean, up to the end of Q1 of next year, we are on the planning mode because of the earn-out. But we have now a plan that we are going to trigger as soon as the earn-out is behind us, so Q2 of next year. The majority of the cost we are going to incur in 2025 are related to the technology integration. It's going to be CapEx and OpEx. We are still evaluating this cost, but I would say it's going to be in line with the type of IT investment we are usually making every single year. So overall, in term of CapEx and OpEx, it should have a limited impact, I would say, overall in the course of 2025. It's going to be probably a little bit more visible in Q2, Q3 of next year as we are going to go significantly quick and big on this technology integration.

Okay. Thanks for that. And then looking through the release, when you break everything out in the segments, it looks like gross profit rate, with the exception of SETT, fell in the other three segments. And I just wondered if you might be able to, year-over-year, talk a little bit about that.

Yeah. When you look at -- and probably the best way to look at it is organic, right, I mean excluding MRP and excluding the transaction related to EMEA staffing. So if you look at P&I, we're at 17.9%, pretty much in line with a year ago and the trend we have seen so far. We continue to see a little bit of pressure coming from the challenges we have on the fee business. We see some fluctuation, ups and downs, related to employee-related costs. But we start now to see a positive impact linked to the overall mix within our staffing business first because we start to see our branch-based business growing at a faster pace than our centralized staffing business. And our local business got higher gross margin rate. And we see also the mix factor that we have seen for some quarters now, which is that overall, our outcome-based business in P&I, where we focus our attention on top of staffing, is providing better gross margin, so helping us also to overall maintain our gross margin rate despite of the continuing pressure we have on the fee business. In Education, yes, we continue to see some margin pressure. I would say, Q3 is a little bit of a quarter for Education. You need to look carefully because it's a low seasonal quarter, right? And sometimes the mix does not necessarily reflect the type of mix we see overall in the year. But yes, we continue to see some margin pressure in Education. It is more than offset by basically the top line growth we continue to see. But I would not necessarily make a definitive judgment on Q3 GP rate for Education, again, because of the low seasonality. OCG, we are down, and the clear explanation is product mix. Our PPO business is growing significantly. The rest of the business, RPO and MSP, hopefully now is stabilizing. And we expect some growth in MSP in the near future because of the kind of healthy pipeline we have. But of course, knowing that the payrolling business got a much lower GP rate, that's the main reason why now we are at about 30% versus a history of 36% in OCG. In SETT, when you look at it overall and you put on the side MRP, despite of the high pressure we still have on fees, we are doing a good job maintaining our overall GP rate, basically, again, similar to P&I by working on the mix, especially on outcome-based statement of work versus staffing on the other side.

Thanks for that. Much appreciated. And last one, again, I think you said -- you mentioned that the adjusted EBITDA margin was 2.5% in the quarter, was up 20 basis points year-over-year. But I think last quarter, you said you were looking for about a 3% adjusted EBITDA margin. And wondering if you could just walk us through that.

Yeah. I think what if -- I'm going to go back maybe to Q1, Q2 briefly to give you a little bit the full picture. So you might remember in Q1, we're at 3.2%, we're up 120 basis points. The majority of it, 80 basis points out of the 120, was pure organic. Q2, we were at 3.8% in total versus 2.1% a year ago, so an improvement of 170 basis points. Organically, again, the biggest contributor, 120 basis points. In Q3, we are at 2.5%. We are expecting something closer to 3%, 2.3% in Q3 of last year. So basically, the improvement is about 20 basis points. But if you exclude and you go for organic only, we are minus 40 basis points. So I would say, overall, what is -- first of all, I mean, of course, we know that Education has an impact in Q3 because the Education growth is still healthy at double digit. But of course, the absolute dollar contribution to revenue growth is much smaller than in Q4 or in the first half of the year. And we have seen, of course, some pressure, as Peter and I were mentioning, on our SETT business. The first two months of Q3 were pretty low in terms of revenue, and that was a surprise for us. We have seen our peers and also market conditions being a little bit more challenging in Q3 than they were at the beginning of the year. The positive side is that when you look at exit rate, meaning revenue of the month of September, basically in SETT, we're at minus 3.6% versus a minus 5% organic for the quarter. So we have seen some improvements September. We need to wait a little bit to see how the trends are going to look like in the next coming weeks to see if we are turning more closer to our exit rate of 3.6%. But overall, if I look at the exit rate of Kelly in September, which I think is good to understand a little bit the current dynamic and think about what does it mean for Q4, our exit rate in September, excluding on an organic basis, was 3.1%, with P&I being at almost 1% growth, which is very good news. Education at about 12.5% and OCG, 7.1%. That is giving us comfort that some of the dynamics we have seen could continue in Q4. But again, we need to wait a little bit to see how SETT is going to trend in the next coming weeks to have a final assessment on the potential dynamic in Q4 for SETT and beyond Q4.

Great. Thanks, much appreciate. I’ll get back in queue.

Thank you.

And our next question comes from the line of Kartik Mehta with Northcoast Research. Please go ahead.

Hey, good morning, Peter. Good morning, Olivier, Olivier, I think last quarter, I said goodbye to you a little bit early. So I want to correct that and wish you the best going forward.

Thank you.

Peter, as you look at the MRP business and kind of look at the performance of that business, how would you characterize it based on kind of expectations when you acquired the business? And now I know it hasn't been a long time, but just kind of your early thoughts on how this business is performing and what you might see that maybe has been better than your early expectations on the business?

Yeah. The business has certainly met my expectations. The business is in sectors of the industry that are affected by the current market conditions, and MRP is not immune from that. And its results are similar to what we see in our SETT business. So in terms of performance, they're, I think, managing the current industry headwinds very well. I think they're positioned for when demand rebounds. We really like the complementary nature of their business, their really significant options for how they deliver solutions. And we think that long term, MRP is -- at least is meeting our expectations, if not exceeding our expectations. And that includes both the MRP staffing solutions as well as the Sevenstep business, which will complement our existing RPO and MSP practices.

And then, Olivier, you talked a little about the SETT business and talked about maybe some monthly trends at how September was better than the previous two months in the quarter. And I'm wondering if you just look at the overall business and the rest of the businesses, if you saw a similar trend or were things fairly even throughout the three months of the quarter?

No. Overall, I mean, if you look at total SETT, again, better exit rate than the average of the quarter. If you think, is it linked to a specific area in the sales business? No, I would say it's overall the same type of trends. We have seen two challenging months at the beginning of Q3 and then a better month in September, but none of that was linked to a specific area in SETT. And we have seen very similar trends in Motion Recruitment as well. Although interestingly, to follow up on what Peter was saying, we see some pressure on the top line for MRP. But the GP rate, interestingly, despite of the pressure we have on the fee business, is still meeting our expectation at 29%, which I think is excellent knowing the pressure we see in the market now on the perm fees, amongst other things. And our EBITDA margin trend for MRP is now in the region of 5.6%, 5.7%, a little bit lower than the 6% we are expecting, but it's mainly driven by the top line pressure we continue to see in Q3 and potentially in Q4.

And just a final last question. Olivier, as you look at 2025, if revenues were to stay kind of stable and the trends you were seeing stay similar in 2025, is the business at a point where you -- I know you've taken out costs, that you can improve margins or the margins can kind of stay stable?

No, I think when -- and I know the September exit rate might not be something you can extrapolate. But even if you look at the outlook we have now for Q4, organic plus MRP, I think we are turning now the overall top line on a positive momentum, which is good. And I think we are going to see that being confirmed in Q4. There is still this question about SETT where, again, we need to wait a little bit to see how the coming weeks are going to look like, but I'm confident that things are going to get probably back on track. So as soon as we start to grow organically, and of course, with the addition of MRP, I think our margin expansion -- our net margin expansion should continue. You have seen that for Q4, we are providing an outlook of 3.4% to 3.5%. That's going to be something that I think is achievable, and that's going to position us well, I think, to enter into 2025. So even though we may not have high growth in the near short-term future, I think we have now proven capabilities to really leverage through our transformation or better leverage even a small top line growth, which I hope is going to be not small. But I think now we are well equipped to leverage with, I would say, still a challenging environment, which I think should lead us to continue our progress in terms of net margin expansion beyond the year 2024.

Okay, thanks very much. Really appreciated.

And our next question comes from the line of Kevin Steinke with Barrington Research. Please go ahead.

Good morning, Peter, Olivier. So you talked there about the softness in SETT in the first couple of months of the third quarter with some improvement in September. It sounds like that -- I think you mentioned a bit of a surprise, that softness. So could you just dig a little bit more into the market dynamics you're seeing in that segment? And what kind of led to the trends you saw throughout the third quarter?

Well, Kevin, as Olivier mentioned, we were surprised by the deceleration in July and August. It was steeper than expected, but we were also encouraged by the rebound in September. As Olivier mentioned, the exit rate showed considerable improvement over the first couple of months of the quarter. We're keeping a close eye on it. The industry is, I would say, stabilizing but not necessarily or noticeably improving. And that's, I think, reflective of continued sense of caution among large enterprise customers with respect to large technology deployments and the like, big CapEx projects. When that will ease and companies will return to normal spending habits in the technology and other science and engineering practices, of course, remains to be seen. But we're well positioned when that happens, both in terms of our -- the Kelly SETT business as well as our MRP acquisition.

Okay. That makes sense. And so when we look at kind of this flattish organic growth in the third quarter and combine that with your outlook for the fourth quarter in terms of organic growth, I think it's a bit below what you're looking for previously. So is it fair to say that's primarily attributable to SETT in terms of that a bit of a change in expectations?

I would say SETT is where we still have a question mark. But again, our outlook -- organic revenue is based on some level of cautiousness for that because we need to wait to see a little bit how things are moving. On the flip side, P&I is really showing significant improvement. I mean, when you think about a sequential improvement of 4% from Q3 to Q4 -- Q2 to Q3 total revenue or the fact that year-over-year, we are starting the year at minus 11% Q1 versus Q1 of '23, then moving to minus 8%, now minus 2% and knowing that now we have an exit rate in September, total revenue P&I turning positive. And also because we start to see the market improving a little bit, that is probably a positive versus what we thought three months ago.

And Kevin, while the -- as you mentioned, the flat -- relatively flat revenue is slightly below what we expected because of SETT in the first couple of months. It's very clear that we continue to take market share across all of our business segments. And that includes SETT as well as P&I OCG, and of course, Education. So it's been -- in SETT, it's been 6 quarters now where we've been taking share.

Okay. That's great. I guess, Olivier, there discussing P&I that kind of was leading into my next question in terms of a really nice sequential revenue growth you saw in P&I. I think you mentioned maybe the market getting a little bit better, but I'm just wondering if you could dig into any other factors driving that sequential improvement. I know you have some organic initiatives in place. I think you mentioned moving into a couple of new market areas like semiconductor and renewables. So maybe if you could give any more color on that revenue rebound you saw sequentially.

Yeah. I think the performance -- and I'll let Olivier comment on that as well, Kevin. But the improvement in P&I is really sort of resulting from our, what we call our omnichannel strategy, which is centralized delivery to large enterprise customers, a renewed focus on local markets that are high growth, where we see demand for light industrial and commercial solutions. And our Kelly Now mobile app, which we're very pleased with the results and the number of our employees who are using it, signing up for it. We're seeing improved reassignment rates, improved cycle times and improved fill rates as a result. So it's a combination of that strategy really beginning to pay off for a number of quarters. And we have expectations that, that type of improvement will continue going forward, and we'll continue to take share.

Yeah. I mean just to add, probably on P&I outcome-based, in total, revenue is flat versus a year ago. But it is like hiding a little bit front dynamics, meaning our call center business that is now about one third in revenue of this outcome-based in P&I is really in a difficult situation. I mean our revenue is under pressure. Whilst now two thirds of the outcome-based business in P&I, which is -- I mean a good example of that is what Peter was discussing several times, which is the semiconductor business. This one is high growth. I mean, as we speak, it is up double digit. And that's a nice diversification for us away from the call center business. And again, historically, the call center business was two thirds of this outcome-based. Now it's only one third because we grew very, very fast on the outcome-based, especially around specialties or combining our specialty in delivering outcome-based in P&I together with some industry verticals.

Okay. Sounds great. So you've alluded a couple of times there or mentioned a couple of times about taking market share in SETT and P&I. And you actually had a comment in your earnings release about the stable year-over-year organic revenue actually outpacing the market. So maybe just speak to that, what the factors are that you think are enabling you to take market share and the competitive dynamics and if you feel like you can continue that trend of taking share and outperforming the market going forward?

Yeah. Kevin, we do think it's possible. And I think I would point to a couple of dynamics. Education, we're just clearly the leader. And we have a value proposition for school districts that really no one else can match. And so that's why, as Olivier mentioned, we continue to expect to see double-digit growth, at least for the near term. Who knows how long that can be sustained given the more difficult comps. But Education, we're just the leader there. In both P&I and SETT, I think it's -- we're taking share because of the solutions that we're bringing to the market. I mentioned the omnichannel strategy in P&I staffing. Olivier mentioned the focus on outcome-based in P&I, but it's also gaining traction within SETT. And our statement works suite of solutions, we think, is a competitive differentiator in the science, engineering, telecom and technology space. And we think that we're going to continue to develop that. And in OCG, we're taking share because of our technology-driven solution, particularly our Helix solution is a competitive differentiator. Customers recognize that and that's why, particularly in our MSP practice, we are winning more than our fair share of large MSP business. We have a very healthy pipeline, but we've also won and have an implementation a number of very large programs that will begin to deliver GP in '25, more so in the back half of '25. But we are -- again, it's a the result of a set of solutions that we think create and set Kelly apart.

Great. Yeah, that's helpful insight. I appreciate that. And just lastly, Olivier, when we think about the adjusted SG&A expenses, for the third quarter, they were $210 million, up sequentially from $185.6 million. Is that just really driven by the inclusion of MRP, I assume?

Yeah. I mean, clearly, when you look at the impact of MRP and what we provided in the outlook is, I would say, something you can use for Q3 as well. I mean MRP is adding about $30 million of expense, excluding depreciation and amortization every quarter, right? This is what we have seen in Q3. This is what we are going to see in Q4. After that, things are going to change because we are going to have, of course, synergies whenever we start the integration that Peter was discussing a few minutes ago, starting in Q2 of next year.

Okay. Yeah. Thanks for that. That's helpful. And on what I believe is now your last earnings call, Olivier, I will add my best wishes.

Thank you. I appreciate very much. Thank you. Thank you very much.

And with that, our next question comes from the line of Marc Riddick with Sidoti. Please go ahead. [Operator Instructions]

Good morning, Marc.

One moment. It seems to dropped out of the queue. One second, I’ll get him back. Please go ahead with your question, sir.

Hi, can you hear me.

Yeah.

Yeah, we can, Marc. Good morning.

Good morning. Just want to echo my sentiments as well, Olivier. Thank you for everything and certainly been a pleasure working with you.

Thank you, Marc.

I was sort of curious as to -- you guys covered quite a bit already. I was sort of curious as to whether or not you could talk a little bit about the integration and maybe some of the potential that you see as far as investment opportunities or technology spend or some of the things that -- maybe some initial thoughts as to sort of how that innovation might play out with the MRP?

Well, I think our focus, Marc, right now is to create a plan that takes advantage of the really unique capabilities of both Kelly and MRP. And that includes how we go to market, it includes bringing the best practices of each enterprise to the other and its customers and talent. That work is well underway. As I said, we're not going to do anything during the earn-out period. But beginning Q2 of next year, we will begin to implement those integrations. MRP brings to the equation some really exciting technology opportunities for Kelly. And so we're going to be very focused on how we scale the technology to include not only the -- our SETT business but also potentially and at some point the Kelly enterprise. We think that's a very exciting opportunity to create value beyond the sort of four walls of MRP. And so we're -- again, we're eager to get started but respecting the earn-out period. And -- but we're doing a lot of the preparatory work to make sure we're ready to go.

Yeah. The -- I think as Peter was saying, we are planning -- we have a plan now on business integration, technology integration, and of course, back-office integration because we need to be ready as soon as the earn-out is behind us. And I think we are ready. I mean we have some targets to achieve in term of top line synergies, synergies that we have shared, I think, in June or July when we're talking about this Motion acquisition. So we feel comfortable that we are going to be able to execute those initiatives as soon as Q2 of next year.

And is it -- this might be a little early, but I was a little curious as to whether or not you've had the opportunity to gain customer feedback, client feedback as to the combined operations and maybe what you may be hearing there, if it's not too early for that?

Marc, it's been universally positive. I think people recognize that combining two outstanding organizations like ours creates a lot of potential. I think Kelly's customers are very excited about the really high-quality talent that Motion is known for being able to recruit in place. The Sevenstep brand is well recognized as a leader in the RPO space. So our customers are excited about the best practices that Sevenstep will bring to the Kelly OCG RPO practice. The Motion telco practice is a leader and has a very complementary customer set to Kelly's telecom practice. And TG Federal is an excellent government business that, again, is highly complementary to Kelly's formidable government business. So the customers recognize that and see opportunities for new solutions, new technology, and again, an opportunity to bring the very best talent to their workforces.

Very encouraging. Thank you very much.

Okay, Marc. Thank you.

[Operator Instructions] And it does appear at this time, there are no further questions from the phone lines.

Okay, Brad. Well, let me add my -- again, my final thanks to Olivier for his tremendous contributions to Kelly, and wish him all the best. Thank you, Olivier. Brad, I think we're all set.

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