Kelly Services, Inc. (NASDAQ:KELYA) Q4 2023 Earnings Call Transcript
Kelly Services, Inc. (NASDAQ:KELYA) Q4 2023 Earnings Call Transcript February 15, 2024
Kelly Services, Inc. beats earnings expectations. Reported EPS is $0.93, expectations were $0.55. Kelly Services, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good morning, and welcome to Kelly Services Fourth Quarter Earnings Conference Call. All parties will be in a listen-only until the question and answer portion of the presentation. Today's call is being recorded at the request of Kelly Services. If anyone has any objections, you may disconnect at this time. A fourth 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.
Peter Quigley: Thank you, Kailey. Hello, everyone, and welcome to Kelly's fourth quarter conference call. Before we begin, I'll walk you through our safe harbor language, which can be found in our presentation materials. 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, the slide deck that we're using on today's call is available on our website. With that, let's get started. In a moment, I'll invite our Chief Financial Officer, Olivier Thirot, to share our results for the fourth quarter. I'll then share my reflections on what has been a transformative year defined by decisive action and rapid progress on our growth and efficiency objectives. Finally, we'll provide our preliminary expectations for 2024, before taking your questions. With that, I'll turn the call over to Olivier.
Olivier Thirot: Thank you, Peter, and good morning, everybody. Before I provide more details on our Q4 results, some brief comments on our full year performance first. Full year revenue was down 2.6% as reported or 3.2% on a constant currency basis. This reflects the challenging staffing market conditions we saw across a wide range of specialties and geographies. Amid those challenges, our education business demonstrated resilience and delivered another year of excellent revenue growth, up 32% in 2023, achieving over $840 million in revenue, almost doubling the level of revenue from the pre-COVID 2019 period. Overall, gross profit rate for 2023 was 19.9%. This is a 50 basis point decline from the prior year, driven primarily by lower permanent placement fees.
Our 2023 results also reflect the significant efforts made as part of our transformation initiatives to lower our cost base and position us to benefit from our improved efficiency moving forward. On an adjusted basis, we lowered our SG&A expenses by 5.4%. That allowed us to deliver adjusted earnings from operations of $69.1 million, consistent with 2022, in spite of difficult market conditions. And finally, our full year 2023 adjusted EBITDA margin rate improved by 20 basis points. Now looking at the fourth quarter of 2023 in more detail. Revenue totaled $1.2 billion, essentially flat with the prior year, including 120 basis points of favorable currency impact. So revenues were down 1.3% on a constant currency basis. As we now look at revenue in the fourth quarter by segment, as noted in my full year remarks, our education segment's revenue growth continues to be strong, up 27% year-over-year.
The continued double-digit growth reflects both strong field rate and demand from existing customers as well as net customer wins. Overall, the education business delivered more than $50 million of year-over-year revenue growth in the quarter. In the SET segment, revenue was down 5%. During the fourth quarter, we continued to see the impact of challenging market conditions with year-over-year revenue down 6% in our Staffing Specialties as well as lower revenue trends in our outcome-based business, which were flat year-over-year. Permanent placement fees in SET continued to be impacted by lower market demand and declined by 41%. In our OCD segment, revenue declined 3%. Year-over-year declines in RPO continued due to slower hiring in certain market sectors.
Year-over-year MSP revenues also declined while PPO year-over-year revenues improved. Revenue in our Professional and Industrial segment declined 11.5% year-over-year in the quarter. Revenue from our staffing product declined 15%, reflecting continuous challenging market conditions. The segment's outcome-based revenue was flat year-over-year in the quarter. Growth across most of our outcome-based specialties was offset by contraction in the year-over-year demand from our coal center specialty. And finally, revenue in our International segment improved 5% on a reported basis and was down 2% on a constant currency basis. Overall gross profit was down 4.7% as reported or 5.7% on a constant currency basis. Our gross profit rate was 19.3% compared to 20.3% in the fourth quarter of the prior year.
Lower term fees continued to unfavorably impact our GP rate by 60 basis points in Q4. And for the quarter, our GP rate was also impacted by unfavorable business mix by about 60 basis points. This reflects growth in specialties with lower GP rates including education and PPO and lower GP rates in SET, Education and International due to product, customers, and can mix, respectively, partially offsetting those impacts were 20 basis points of lower employee-related costs. SG&A expenses were down 2.2% year-over-year on a reported basis. Expenses for the fourth quarter of 2023 include $7.9 million of charges related to our ongoing transformation efforts as well as $6.9 million related to activities associated with the Q1 2024 sale of our European staffing operations.
So on an adjusted basis, constant currency basis, expenses declined by 9.5%, similar to Q3. The reduction reflects the positive impact of our transformation efforts, which are designed to reduce cost on a structural basis. Our reported earnings from operations in the fourth quarter was $7.3 million compared to $4.6 million in Q4 of 2022. As noted, our 2023 results includes $7.9 million of charges related to our transformation activities and $6.9 million of charges related to the sale of our European staffing operations. Our fourth quarter 2022 included the $10.3 million goodwill impairment charge. So on an adjusted basis, Q4 2023 earnings from operations were $22.1 million, a 59% improvement over the prior year, and adjusted EBITDA margin also improved 60 basis points to 2.6%.
Income taxes for the fourth quarter were a $6.5 million benefit compared with our 2022 income tax expense of $5.2 million. Income taxes in 2023 include the impact of nontaxable gains on the cash surrender value of company-owned life insurance and the benefit of work tax credit, which are recurring. In addition, we recognized deferred tax valuation allowance adjustments, the tax benefit from outside basis differences on held for sale assets and other tax impact from the legal entity restructuring of our European subsidiaries in anticipation of the Q1 2024 completion of the European staffing transaction. And finally, reported earnings per share for the fourth quarter of 2023 were $0.31 per share compared to a loss per share of $0.02 in 2022. Earnings per share in 2023 includes $0.46 of unfavorable tax adjustments, transaction costs and unrealized loss on a forward contract, all net of tax and all related to the sale of our European staffing operations and $0.16 related to restructuring charges net of tax.
Loss per share in 2022 included the impact of a goodwill impairment charge, net of tax, partially offset by a gain on sale of real property net of tax. So on an adjusted basis, Q4 2023 EPS was $0.93 compared to $0.18 per share in Q4 of 2022. This significant improvement is driven by year-over-year change in income taxes as well as business performance. Now moving to the balance sheet. As of end 2022, our European staffing operations are now classified as held for [indiscernible] and those assets and liabilities are now included on separate line items on our balance sheet. At year end, cash totaled $126 million, and we have no debt outstanding. Of course, this cash position does not include the more than $100 million of proceeds from the sale of our European staffing operations received early in 2024, or additional proceeds expected under the terms of the sales agreement in the third quarter of 2024.
So when combining our strong balance sheet with our existing borrowing capacity, we continue to have ample capital available to fund our organic and inorganic strategy and navigate an uncertain market environment. At year-end, accounts receivable as reported totaled $1.2 billion and represents accounts receivable generated from our North American staffing and outcome-based businesses as well as our global MSP and RPO practices. Receivables from our European staffing operations are now included in assets held for sale. Our global DSO, which includes all receivables, including those generated by our European staffing operations was 59 days. This is down two days over year-end 2022 and reflects continued efforts to manage our working capital investment in customer accounts receivable primarily in the U.S. For the year, we generated $61 million of free cash flow compared to using $88 million in free cash flows in 2022.
Given the onetime items in the 2022 period, including the final repayment of approximately $87 million of federal payroll tax balances, which we deferred in 2020 under the CARES Act, and also $48 million of income taxes due in Japan following the sales of our investment in Persol common stock. Comparisons from year-over-year are challenging. But on a like-for-like basis, free cash flow did improve from careful management of working capital. And now I'll turn it back over to Peter for additional comments.
Peter Quigley: Thanks for those insights, Olivier. When we began 2023, we did so with a clear vision for the company's future. Future defined by significantly improved profitability, sustainable growth and greater value creation for all our shareholders -- stakeholders. As the year progressed, macroeconomic uncertainty persisted, fueled by inflation, higher interest rates and geopolitical volatility. In general, employers continued to proceed cautiously with hiring both full-time and temporary workers while taking a measured approach to workforce reductions. . While some signs of cooling emerged, the labor market remained relatively resilient, and the supply of talent for open rolls continue to be constrained, diverging from the trend our industry has typically experienced during periods of uncertainty.
Notwithstanding these unique dynamics, we focused on what we can control and executed on our vision with urgency and agility. We set out to align our cost base with our strategic priorities, operating environment and performance, and we have swiftly implementing efficiency actions across the enterprise that have delivered and sustained a structural reduction to SG&A expenses. We said we would significantly improve our net margin to create greater financial flexibility to invest in Kelly's future, and we have, delivering 60 basis points of adjusted net margin expansion in the second half of the year. We committed to finding new avenues of growth, and we have, refreshing our go-to-market strategy with innovative offerings to meet the evolving needs of both customers and talent.
This includes a comprehensive approach to delivering the full suite of Kelly solutions to our large enterprise customers to capture a greater share of wallet. As of January, we are now executing on this strategy with an initial set of focus accounts that represent a meaningful portion of Kelly's revenue base. Of course, we remain committed to providing the highest quality of service to all our customers regardless of spend or size. In our P&I segment, our enhanced localized delivery model continues to generate positive momentum with both clients and talent benefiting further from our Kelly Now mobile app. The app is now live nationwide and actively serving up tailored job opportunities in commercial and light industrial to thousands of highly qualified candidates.
With an eye trained on the future, we continue to drive growth and value in the near term as well. We remain focused on capturing demand in more resilient markets, including higher margin, higher growth outcome-based business as well as in education, which as Olivier mentioned, continues to be a high-performing growth engine within our portfolio. We unlocked additional value-creating opportunities, entering an agreement to sell our European staffing business and unlocking more than $100 million in capital to redeploy in pursuit of organic and inorganic growth. And we successfully completed a $50 million share repurchase program in the third quarter, returning value directly to Kelly shareholders. Taken together, these accomplishments form a strong foundation upon which we will continue to build.
We entered 2024 a more efficient, profitable and focused enterprise, and with further streamlined operating model now comprising four business units with market-leading positions in North America staffing and global MSP and RPO solutions, we'll continue to realize more of the benefits from these changes throughout the year. For more details on our expectations for 2024. I'll turn the call back over to Olivier.
Olivier Thirot: Thank you, Peter. As Peter mentioned, the staffing market and underlying economic trends have not moved in the same patents we have seen in other economic cycles, and that has made it more difficult to know how quickly the staffing market will improve as we move into 2024. As a result, we'll share our outlook for the first half of 2024 only, a period where we believe that staffing market conditions will remain relatively consistent with what we have experienced over the past several quarters. But before I dive into 2024, I will give you some color on the impact of the sale of our European staffing operations on our historical results. And for clarity, we have retained our Mexico operations, which were included in our International reportable segment through 2023.
Revenue for Mexico has been reported in the revenue tables of our earnings releases. So you can get more information, including quarterly revenue impact from our historical filings. For the full year of 2023, our European staffing operations generated approximately $810 million of revenue, $120 million in gross profit and add $119 million in SG&A expenses. So reported revenue should be approximately 17% lower as we move into 2024 on a like-for-like basis, GP rate should improve by 100 basis points, and our EBITDA margin should improve by 40 basis points as a result of the sale. The remainder of my comments on our outlook for 2024 will exclude the European staffing operations from the 2023 base. For the first half of 2024, on a like-for-like basis, we expect nominal revenue to be flat to up 0.5% with no significant FX impact, resulting in a midpoint revenue expectation of $2.09 billion.
Our outlook reflects an expectation that Q1 revenue trends will be consistent with Q4 of 2023 and then the transformation-related growth initiatives that Peter has mentioned start to gain traction as we move into Q2. We expect our GP rate to be 20.5% to 20.7% on a like-for-like basis. This is a 30 basis point decline in the midpoint of our range, reflecting the change in our business mix, primarily because of our Education business is expected to continue to deliver significant revenue growth. Also, we expect to see a continued improvement in efficiency as the impact of our transformation-related actions continue. On a like-for-like basis, we expect adjusted SG&A expenses to be down 5% to 6% for the first half of 2024. At the midpoint of our outlook, that's an expected run rate of about $190 million per quarter for the first half of the year.
Overall, we expect adjusted EBITDA margin in the range of 3.3% to 3.5%. In addition to the 60 basis point improvement we made in our cost structure in the second half and the 40 basis point favorable impact from the sale of our European staffing operations, we expect an additional 30 basis points to 50 basis points of net margin improvement in the first half of 2024. And we believe that when the staffing market recovers, we'll be well positioned to take further advantage of our improved efficiency. Finally, as we move into 2024, beginning with our first quarter results, we report the operating results of our segments, utilizing revised segment earnings from operations and EBITDA margin measures. We will allocate a greater share of the costs we have previously reported as corporate costs to our business units.
This aligns with feedback from investors and others that they would value greater transparency on the financial results each business unit generates and how they contribute to Kelly's overall performance. And now back to you, Peter.
Peter Quigley: Thanks, Olivier. With the decisive action and rapid progress our team delivered in 2023, we have laid the groundwork for 2024 to be an inflection point in Kelly's 77-year history. Our efficiency measures are delivering sustained results. Our growth initiatives are now in the implementation phase, and we ended the year with an adjusted EBITDA margin of 3%, a step change from our historical net margin average of around 2%. As Olivier shared, the stage is set for the company to achieve our previously disclosed expectation for net margin of 3.3% to 3.5%. With these structural improvements in place, I'm confident that Kelly is well positioned to capture increased customer demand when the macroeconomic environment improves and convert a greater share of top line gains to bottom line growth.
I'm very proud of the way our team has kept their sights set on dual horizons, definitely steering Kelly through a challenging external environment and delivering results in the near term, all while embracing the change that's necessary to position the company for the future. Finally, I'm grateful to our customers, talented shareholders who have been with us on this journey, placing their trust in Kelly to deliver on our commitments and create value over the long term. While there is work to be done, I'm confident that 2024 is a start of a new era of growth for Kelly, a year in which we'll begin to reap the full benefits of the work we've done to transform this company and reward all our stakeholders. Kailey, you can now open the call to questions.
Operator: [Operator Instructions] Our first question will come from the line of Joe Gomes with Noble Capital.
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