KELLY SERVICES INC Q2 FY2024 earnings call

Management Statement and Operational Highlights

• Focused on controlling operations in uncertain market conditions; demand began to stabilize, especially in Technology and Life Sciences customers.
• P&I business revenues leveled off sequentially, with localized delivery model and Kelly Now app driving pipeline growth and fill rate improvement.
• Enterprise strategy to deliver full suite of Kelly offerings to large customers gained traction, improving share of wallet.
• Achieved initial EBITDA margin target of 3.4% in H1 2024, excluding MRP acquisition benefit.
• Acquired Motion Recruitment Partners (MRP), strengthening staffing, consulting, and RPO solutions in key markets; sold Ayers Group to sharpen focus on global RPO and MSP solutions.

Segment Performance

• Education: Revenue grew by double-digit, up 22% year-over-year in Q2. Driven by net new customer wins, increased demand from existing customers, and improving fill rate. Contributed significantly to overall growth.
• SET: Reported revenue up 10% (includes MRP acquisition). Organic revenue down 3%, with staffing specialties down 4%, outcome-based business down 1%, and permanent placement fees down 20%. Sequentially stable.
• OCG: Revenue improved 3%. Growth in PPO specialty, but RPO down due to slower hiring in certain sectors, MSP stable sequentially with positive momentum ahead.
• Professional & Industrial (P&I): Revenue down 9% year-over-year. Staffing product revenue down 9%, contact center outcome-based specialty and perm fees down, but other higher-margin outcome-based specialty revenue grew. Sequentially stable.

Guidance

• Revenue: Organic revenue expected to be up 2.5% to 3.5% in H2 2024, midpoint ~$2 billion. MRP expected to add $260M-$270M in H2 revenue.
• Gross Profit: Organic GP rate expected 20%-20.2% in H2, all-in GP rate 21%-21.2% due to MRP's higher margin profile.
• SG&A: Adjusted SG&A, excluding D&A, expected 3.5%-4.5% lower than prior year on organic basis; MRP to add ~$60M in expenses in H2.
• EBITDA: Adjusted organic EBITDA margin expected 3.2%-3.3%, up 30-40 basis points year-over-year; MRP to add ~30 basis points of net margin in H2. Education seasonality to impact EBITDA margin, with Q3 expected lower and Q4 improving.

Risks

• Uncertain market conditions impacting demand across sectors.
• Potential outlier suppliers trying to gain market share, though pricing discipline has been maintained.
• External market dynamics could delay return to normalized demand, affecting revenue and margin expectations.

Question and Answer

Q: Focus on MRP business trends, specifically H2 outlook compared to prior year?

A: MRP H1 2024 revenue ~$260M, H2 expected slight improvement. H1 prior year comparison down 8%, H2 expected flat to -1.5% vs prior year.

Q: Pricing trends across segments?

A: Stable in P&I; flat to up in SET; slight down in Education due to customer mix, but no pressure on spreads overall.

Q: Plans for next acquisitions?

A: Focus on integrating MRP now, but preparing pipeline for high-margin, high-growth businesses in Science, Engineering, Technology, Telecom, and Education sectors.

Q: Organic growth in H2 2024 drivers?

A: Education continuing double-digit growth, rest of business sequential improvement (1.5% sequential from Q1 to Q2 excluding Education), growth initiatives, and lower comparables in H2 2023.

Q: Adjusted SG&A trend in H2?

A: Adjusted organic SG&A expected 3.5%-4.5% lower year-over-year, similar trend to Q1, flat sequentially in H2.

Q: MRP integration and M&A pipeline?

A: Operating MRP under current model; comfortable with balance sheet leverage to deleverage and pursue acquisitions when attractive opportunities arise.

Q: Update on Kelly Arc?

A: High interest, dozen+ customers, hundreds of AI automation professionals, network effect expected as adoption grows.

Q: Technology investments and CapEx?

A: Recurring CapEx ~$20M-$25M on Technology; temporary increase for MRP technology integration after earn-out, likely moving CapEx up temporarily.