KELLY SERVICES INC Q1 FY2025 earnings call

Management Statement and Operational Highlights:

• Kelly's operating model demonstrated resilience with each business making strategic contributions, despite changes in demand for US federal government business.
• Education business remained strong with fill rate improvement and higher bill rates, though winter weather impacted school days.
• Higher margin outcome-based solutions in semiconductor and renewable sectors showed robustness.
• Implemented cost optimization actions to enhance profitability, with incremental EBITDA margin expansion expected.
• Integrated OCG and P&I into ETM, streamlining the go-to-market approach and increasing share of wallet.
• Accelerated MRP integration, initiating modernization of front and back office systems leveraging MRP's tech stack.
• Launched integrated permanent hiring solutions combining RPO and Seventh Step, creating a leading talent solutions offering.

Segment Performance:

• Education: Up 6.6% year-over-year in Q1 2025 (6.3% on an organic basis). Growth from fill rate improvement and higher bill rates in existing business, partially offset by fewer school days in January due to winter weather.
• SET (Science Engineering and Technology): Reported revenue up 39% due to MRP acquisition. SET organic revenue down 7% total, but down 4% excluding 3% decline related to lower federal contract demand.
• ETM (Enterprise Talent Management): Reported revenue up 1.9%, flat on an organic basis. Staffing services declined due to large customer actions and federal contractors, but outcome-based revenues increased by 1.8%.

Guidance:

• Second quarter outlook: Total revenue growth expected to be 6%-7%, with an organic revenue decline of 1%-2% or roughly flat excluding federal contractor demand and slower economic growth impacts.
• Adjusted EBITDA margin expected to decline 20-30 basis points year-over-year in Q2, but anticipates margin expansion in Q3 and Q4, and for the full year.
• Expect to capture additional market share in 2025 and capitalize on high-growth specialties for organic revenue growth.

Risks:

• Dynamic macroeconomic environment may temper staffing market demand in the near term.
• Potential further downsizing of Fed business, with ongoing impact on revenue.
• Integration charges, including IT-related and severance costs, affecting margins, with similar charges expected in the coming quarters.

Question and Answer: Q: Joe Gomes asked about ongoing integration charges and the Fed business.

A: Troy Anderson explained integration charges include IT-related and severance costs, driven by ETM consolidation and legacy acquisitions, and Fed business impact was around 0.8% in Q1 with ongoing effects in Q2.

Q: Will Bruneman inquired about MRP margin benefits and trends.

A: Troy Anderson stated MRP integration offers margin improvement opportunities, with go-to-market and operating efficiencies expected as integration progresses.

Q: Kevin Steinke asked about Q2 outlook and client tailoring.

A: Peter Quigley discussed Q2 outlook considering macroeconomic conditions and client tailoring's role in gaining share through tailored, higher margin solutions for large enterprise customers.