Good morning and welcome to Kelly Services Second Quarter Earnings Conference Call. [Operator Instructions] I would now like to turn the meeting over to your host, Mr. Peter Quigley, President and CEO. Sir, you may begin.

Thank you, Brad. Hello, everyone, and welcome to Kelly Services Second Quarter Conference Call. With me on the call is Olivier Thirot, our Chief Financial Officer. I'll start the call by reviewing the impact of COVID-19 on Kelly's business in the second quarter. The actions we've taken to mitigate its impact on our financial position and steps we've taken to capture available upside. Olivier will walk us through the highlights of our quarterly performance that were announced today in this morning's earnings release. I'll then share what we're seeing in terms of customer demand and how Kelly is pursuing growth opportunities during this crisis. Olivier will provide some perspectives on Q3. And finally, I'll conclude with an update on what's next for Kelly, including our ongoing journey towards becoming a specialty talent solutions provider. I'm pleased to say that despite disruption caused by the pandemic, we continue making solid progress on our strategy about which I'll provide some additional details as we conclude today's discussion. Now let's turn to Q2. The impact of COVID-19 continued throughout the second quarter as closures and widespread uncertainty resulted in reduced customer demand and lower top line growth. We've discussed previously, how we've been closely monitoring the economic impact caused by two parameters of the pandemic. How deep will it be and how long will it last? As Q2 progressed, the severity of the resulting economic impact started coming into focus and we believe the worst is behind us. It's more challenging to call the duration of the downturn, although it appears that the recovery and economic and labor market improvements are underway, though they are likely to be uneven and more gradual than some thought a few months ago. Amid this unprecedented environment, Kelly continued to mitigate the downside and execute with speed…

Thank you, Peter and good morning everyone. Before the Q2 highlights, let me remind you that 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 the reported and on an adjusted basis, discussion of items on an adjusted basis, our non-GAAP financial measures designed to give insight into certain trends in our operations. We have also provided more information on our performance in the second quarter slide deck, which is available on our website. As Peter just mentioned, our Q2 results reflect the impact of the COVID-19 pandemic and the resulting disruption in economic activity and the availability of talent. The results also reflect the impact of our temporary expense mitigation actions and the positive impact of one-time of limited duration government stimulus and pandemic assistance in the US and in Europe. Revenue totaled $1 billion, down 29% from the second quarter of the prior year including a 100 basis point unfavorable impact from foreign exchange. The COVID-19 crisis and the resulting impact on both customer demand and talent supply impacted the full quarter. As we entered the quarter demand declined as customers closed facilities to protect their workforces and in response to government directives and consistent with the end of Q1, our education business was particularly impacted as most US school districts has closed in response to the crisis by the end of March. We did see some strengthening as the quarter progressed…

Thanks, Olivier. It's clear that COVID-19 has significantly muted demand, although some higher margin specialties by no coincidence areas where our specialty strategy is increasingly taking us have proven more resilient. We're encouraged that we exited the quarter better than we started it and we're now using our observations on the ground to give us insight into the months ahead which we expect to be variable by industry, geography, product line and available skill sets. Thanks to Kelly's operational agility I mentioned earlier and more resilient areas and skill sets that required ramping up in Q2, we stepped up and delivered high quality talent quickly, unemployment office agents, contact center agents, logistics professionals, remote learning educators, scientist supporting clinical trials and more. We also demonstrated the flexibility to provide talent and skill sets supporting the response to the pandemic. Kelly has placed thousands of temperature checkers at businesses and employers that are screening guests and workers for COVID-19. Similarly, contact tracing has been an in-demand skill set as public health agencies work to prevent community spread of the virus. The demand for these new jobs, certainly don't offset overall declines, but our ability to fill these new roles quickly is indicative of the more agile and creative company we are becoming. Overall, we are encouraged by this quarter's results and signs of strengthening demand from existing customers, new customer wins and solid new business pipelines, while we keep a close eye on the recoveries trajectory as some level of uncertainty remains as the pandemic continues. Olivier, will now provide his thoughts.

Thank you, Peter. As we announced in mid-April, we withdrew our previously issued full year guidance. On our call in early May I described a scenario planning that we had undertaken in the early stages of the crisis and while we are now more than four months into it, the near and mid-term economic conditions continue to be highly uncertain. We have continued with our scenario planning updating for our most recent data points and confirming response plans that align with our priorities. These scenarios considering variety [ph] of demand scenarios, based on the duration of the economic contraction and the speed of the subsequent economic recovery. The possibility of repeated cycles of reopening of the economy and subsequent resurgence in infection rate, as well as a longer and slower recovery, are also included in our planning. In addition to the customer and talent feedback that Peter discussed, we are utilizing economic forecast as well as predictive and terminal activity base metrics to inform our scenario planning. We continue to review the resulting impact on earnings, cash flows and debt covenant metrics. We have updated our stress test of cash flows and debt covenants and at this point, we remain confident that we have adequate financial resources and liquidity to weather the crisis, to capture emerging growth opportunities and to take advantage of the recovery and subsequent periods of economic growth. Given where we are in the cycle, we have determined that we'll not be providing guidance but we'll provide some perspective on the third quarter. While current trends may not be predictive of future results, they are helpful to understand the current level of demand and customer buying behavior. As mentioned in my remarks on the second quarter results, revenue declines were not even across the segments and neither…

Thank you, Olivier. Q2 2020 was a tumultuous quarter, but it's times of crisis that reveal true character and Kelly employees have risen to the occasion. We remain confident in our ability to serve our talent and customers in this challenging environment and we are well positioned for growth as customer confidence, talent supply and the economy improve. Equally important, amid the painful moments of crisis stemming from systemic racism in our society, our identity is also unwavering. We know who we are and we are a company that stands up for equity inclusion, fair treatment and opportunity for all. I have shared in previous calls what's next for Kelly's business and that remains unchanged. We are aggressively pursuing our strategy towards specialization both organically and inorganically. I'm pleased that notwithstanding external headwinds we took a bold step forward on this path as we closed out Q2. As of July 1, Kelly is now organized as five distinct business units based on our chosen specialties, Kelly Science Engineering and Technology, Kelly Education, Kelly Professional and Industrial previously known as Commercial, Kelly OCG and Kelly International. We also completed on schedule our planned upgrade of our best-in-class front office platform and several state-of-the-art technology enhancements to further the productivity of our recruiters and other front-line employees. Today, we are more focused and better positioned to capture high margin business in the skill sets modern organizations need to grow and thrive. We've already seen this playing out during the pandemic, as certain specialties proved to be more resilient. We are actively working toward future growth and we see positive momentum in many parts of our business. As Kelly steadfastly pursues our transformation into a specialty talent company, we're doubling down on the talent essential to this strategy. We are affirming our commitment to talent On Assignment around the globe with our new five-point talent promise. It's a bold stand to always do the right thing for our talent in five areas safety, value, well-being, investment and opportunity. We've also turned up the volume on our voice in the marketplace during COVID-19 rather than retreating and waiting for things to improve. In Q2, we launched television spots in select markets for the first time in many years reintroducing Kelly to companies and highlighting our specialty skill sets, array of services and refresh brand. Our larger share of voice is indicative of our fresh and bolder Kelly that attracts attention as evidenced by Forbes ranking Kelly Number 3 on their Annual List of the Best Professional Recruitment Firms in the US. Q2 was a quarter unlike any we've seen during our nearly 75 years in business, and I'm very proud of how Kelly navigated through it all with our purpose of connecting people to work front and center. I'd like to thank our internal teams, our talent on assignment, our customers, our Board of Directors and shareholders for their support. Brad, you can now open the call to questions.

Thank you. [Operator Instructions] and we'll go first to the line of JE [ph] Gomes with Noble Capital. Please go ahead.

This is Joe Gomes. Good morning. I just want to make sure here I heard you properly. The government stimulus added roughly a 100 basis points to the gross profit in the quarter.

Yes, if you add US and Europe as I said, it's about 100 basis points and then to complement the 160 basis points, we have about 20 basis points from employee related costs that I did mention and about 40 basis points for, I would say our structural mix improvement.

Okay. On the back to school, I'm showing little of my Northeast bias here because school here generally doesn't start until September, but would July and August typically be a little lower demand months for you on the back of - on the school segment? Or as given where we are today, with some schools starting in August, that's not quite as true. I'm just trying to get an idea of some of the seasonality on the education segment there.

Yes. Joe, we see significant fall off towards the end of the school year in June and into the summer months, July. Again, because of the staggered openings of school districts across the US, we begin to see in a normal environment uptick starting in August and then with more fulsome in September. So, that's the normal cyclicality of the education business.

Okay. My guess is, it's a tough one to read right now because it doesn't seem to be any type of consensus out there in terms of what reopening of schools may or may not be. Just trying to get some more color from you guys on what you're seeing out there so far or what your expectations or hearing as to what might be the back to school environment.

Yes, it's a great question, Joe. And given the given the environment, on top of mind for a lot of people, I'll use our Top 15 school districts as a proxy for what we're seeing among our other customers. And among those 15, it's pretty evenly split for those that have made a decision, which is the majority, about half are going remote-only to open schools and then the other half are doing a hybrid of a mix between online and on-site. And there is still a handful that have not yet declared which direction they're going to go. But I think that's representative of what we're seeing among school districts as they deal with the pandemic.

And how does that play out then for your staffing business there, if you're going remote? And you're able to just do everything out of your own house; does that lessen the opportunities available for you guys?

Well, that will remain to be seen, but we've been using the time between the onset of the pandemic and today to prepare our teachers and work with the school districts to make sure that whether it's remote or on-site, we're satisfying the demand for teachers, which will continue even during the pandemic. You may have seen in the press reports of accelerated teacher retirements, obviously there are teachers that are concerned about their own safety. So we think there is going to be school district demand for our services during the Q3 and Q4. We're in uncharted territory, as I know, you know, so it's hard to forecast and predict it precisely. But I would comment that school districts are continuing to award contracts and Kelly had a very positive track record recently in terms of our wins when you compare it even to 2019 when we weren't in the pandemic situation.

Okay. Now, let me ask one more, then I'll get back in queue. So, you ended the quarter with $216 million of cash, and no debt. Do you [indiscernible] continuing to build cash for the rest of this year? Any plans for that sizeable cash that's on the balance sheet or any clarity there would be appreciated.

So, you're right to say we have about $216 million of cash plus about shy of $300 million of debt capacity. You know that in our industry during the first phase of an economic downturn, you start to accumulate cash and this is what you see on the free cash flow, which is $170 million Q2 year-to-date versus about $65 million last year. It's a normal pattern we see in each economic downturn. But of course, depending on how the recovery is going to look like, some of this cash is going to be used to fund our recovery because our working capital needs are going to quickly go up, especially in some areas where there are expectations for a near term recovery. On top of that, of course, having no leverage and available debt capacities is confirming that we have a very strong balance sheet and we continue to have a strong balance sheet. And of course, this is going to give us on top of funding the recovery some ammunitions to basically switch our balance sheet from a defensive to an offensive mode, whether it's with organic or of course, inorganic initiatives.

Okay, thanks. I'll jump back in queue.

All right. Thanks, Joe.

And next, we can go to the line of Kevin Steinke with Barrington Research. Please go ahead.

Hey, I wanted to start out by asking about, you mentioned some of your higher margin specialty businesses being more resilient you called out Life Sciences and Kelly Connects specifically. Should we be thinking of any others that have been performing a little bit better than average in this environment?

Any of the customers in the essential services, so Life Science being obviously one. But there are a number of others that is stayed opened during the pandemic. Particularly, our outcome-based services, business process outsourcing held up very well during the quarter and we do provide that in Life Sciences, but we also provide that in other essential services as well, Kevin.

Yes, you will see that our outcome-based business, if you look at revenue was up by about 10%, so similar to Q1. Our GP in this area was up by about 18%, due to customer mix. So, you see that the traction we have there basically is very similar to what we have seen in Q1 of this year, or I would say even in the past.

Okay, that's helpful. In this environment are you able to kind of see any signs of continued benefits from the US branch restructuring that you completed last year in terms of maybe the pipeline or potential future growth or is that just kind of - most things have been put on hold with the pipeline there?

Kevin, I know there's been a couple of benefits from that reorganization and the restructure. One, it provided additional financial flexibility, those steps were pre-pandemic, but they had helped with our ability to manage the financial position of the company during the pandemic. I mentioned in my prepared remarks how the organization, which has reduced its reliance on brick and mortar was well prepared to respond to customer demand by going remote I think as quickly, if not more quickly than some of our competitors and we're very encouraged by the pipeline. As I mentioned, not only we're seeing strengthening among existing customers, but also new wins, some of which I think are from other competitors that haven't potentially demonstrated the agility that Kelly has during the pandemic to respond to the challenges of remote recruiting. So we think that those moves that we took, again, without the knowledge of the pandemic, are proof points that we are becoming a more technology enabled and agile organization.

Okay, great. And you mentioned that you saw some strengthening in June primarily in Americas staffing. What are the areas within Americas staffing where you may be saw the most strengthening?

I'm going to start with two numbers for you to understand a little bit our exit rate in Americas staffing commercial versus the average for the quarter. And then I think Peter is going to go a little bit deeper on what we see on the marketplace. So our commercial within the Americas staffing was down roughly by minus 38% for the quarter and our exit rate was about minus 33%. Peter?

Yes. Kevin, during the quarter when non-essential services were shut down, that was a significant impact on for example, in automotive. Those businesses are now either online or close to being fully back online. So those are the areas where we're likely to see improvement in US commercial because with exposure to light industrial and non-essential services and small and medium-sized enterprises as well were most likely shut down during the shelter in place rules and they're beginning to come back online. And we're seeing demand there as we move into Q3.

Okay, good. And how should we think about expense management as we move through the rest of the year here? Are the initiatives that you put in place in Q2 is going to continue as is, moving forward or should we expect costs coming back, it is revenue rebound? Just how would you frame that?

As I mentioned, we are looking at several scenarios, including for Q3, and we have always-- the flexibility to adjust our cost base, especially with the numerous initiatives we have taken that Peter has shared with you. On average, I like to use what is called recovery ratio that I think everybody should be familiar with. Our recovery ratio in Q2 was about 79%, so pretty good I would say. And we expect this recovery ratio to be at least at 50% if not more in Q3, and probably around similar numbers in Q4.

Okay, thanks. And then just lastly for me, you mentioned continuing to aggressively pursue your specialty strategy in this environment. What does the M&A pipeline look now, you know, have opportunities slowed, are you seeing more opportunities or just give us a flavor for those inorganic pursuits as they stand now?

Yes, Kevin, we saw a dramatic drop off in late March, April, May. But we have seen especially in the last few weeks, probably starting in late June, early July, a significant uptick in activity. Pipeline is not at pre-COVID levels by any means. Again, we've seen a nice uptick. And we haven't hit the pause on our own proactive efforts to continue inquiring, speaking to, evaluating properties that we think provide an opportunity for Kelly to advance our specialty strategy. So we're leaning into it and I think, when industry adjusts to the fact that you can actually do things remotely, we've had a couple of management meetings online and frankly, while I wouldn't have said that's how I would prefer to do management meetings pre-COVID, I think they were pretty well and I think we can advance deals during the pandemic, because of people getting used to the fact that this is the new normal.

And we are looking more and more at what we call passive candidates, meaning proactively looking at potential opportunities coupled with more what we call active on market candidates, as well.

Okay, great. That's all I had for now. Thank you.

Thanks, Kevin.

[Operator Instructions] We can go back to the line of Joe Gomes. Please go ahead.

One quick follow up here, if I may, you guys had talked about some of the responses you had implemented for the COVID including your free online training and certification program. Just wondering how was the uptake on that and has that helped you at all in either retaining or maybe expanding your candidate pool?

I think the uptake has been about what we expected, Joe. But I would point to a couple of other things of how we've connected with our talent during the summer. Our education business spent a lot of time working with our teachers to prepare them for working in any kind of scenario. We had really positive reaction to that training as well as ongoing meetings to maintain contact to assure our teachers that we're focused on their training but also their safety. So I think our outreach during this pandemic across all of our business has been well received by our talent and I think it represents our focus on concentrating on talent. As I mentioned during my prepared remarks that we're committed to having a long-term relationship with talent for helping them determine what's next in their journey and that's I think going to create some differentiation among Kelly versus some of our competitors. So we're excited about that and the response to our efforts in the pandemic I think are just emblematic of a larger effort underway at Kelly.

Great, thanks.

And next, we can go to the line of Josh Vogel with Sidoti & Company. Please go ahead.

Hey, good morning guys. Thanks for taking my questions. I apologize. I have been bouncing back and forth between a couple of calls. So if any of this is repetitive, I'm sorry but I thought I caught - Olivier, you said that education was down 79% in Q2, is that the correct number?

Yes, that's correct 78%, 79%.

Okay. And I know you were giving a little bit of commentary around Q3 and I just wanted to kind of get a feel. Did you say that the consolidated June exit rates are good idea of what to think about Q3 or is there incremental improvement that you expect especially if schools reopened?

I would start with a few numbers and then I think Peter is going to complement. So our exit rate overall was minus 22.5% in constant currency. The main improvement from the average of 28% in constant currency for the full quarter was really coming from improvement we have seen especially in June in our Americas staffing commercial business where the average decline for the quarter was about 38% and we ended up the quarter at minus 33%. What we see in July is similar to what we have seen in June progressive but slow improvement on our top line versus a year ago.

We're seeing Josh sequential growth week-over-week and now that businesses are reopening, it's not concentrated in any particular area. We're seeing good growth in e-commerce, logistics, retail. I mentioned the automotive and our finance business has actually been pretty resilient through the pandemic. So we're seeing growth and we like the pipeline. We are seeing customers continue to let contracts and we are pleased with our win ratio versus prior periods and so we think we have momentum recognizing as I mentioned in my prepared remarks, we're keeping an eye on the trajectory because these are uncertain times for sure.

That's helpful. Thank you. It's nice to see the transition to the five specialties. I think it will be good for investors to see the pillars of the business. Is it possible when we think about those five specialties that you could kind of give us the exit rate of those businesses coming out of June or what you're seeing in July?

Well, as we speak, we are going to of course report with our new segments at the end of Q3. We have shared with you some sizing revenue-wise for each of them and what I call margin of value profile. I would say if you think about them, what we call science, engineering and technology knowing the type of business, the specialization is likely to be what we call now resilient, especially when you look at our GTS business. Education is based on what we have discussed today. Professional and industrial, I mean what we are going to see is what we are describing around manufacturing as well as I would say clerical and professional. But we cannot really give you more insight because we need of course now to get ready for the current quarter restate, of course, the best and we are going to be able to share much more around that during the Q3 earnings call.

Josh, the only thing I would add is outside of education and international is still a bit uneven. The comments about the slow and steady growth and the pipeline work with existing customers as well as new wins, I think applies to the other three business units.

That's great. Thank you. A question around education. If schools stay closed through at least the end of this year and there is this pivot we're seeing to extended online learning, do you have a presence there?

We have an increasing growing presence there. We don't actually own a technology that we will deploy, but we work with school districts and our teachers would be trained on the - we have eLearning training that we've conducted throughout the summer with our teachers and they're prepared to use the technology that school districts use and it should be seamless given the amount of attention that's been given to it during the four or five months of the pandemic.

Okay, great. And shifting gears a little bit. I know you've made investments in technology and I know it may be tough to gauge in this environment, but are you seeing any notable or quantifiable productivity improvements stemming from those investments?

Well, I think we are glad that now we have implemented or fully implemented this new front office and the digital tools that are around it. Although on the digital side, it's more of the beginning than the end because we are going to continue to fine tune, invest in new tools around digital technologies. I would say yes. It's challenging in this environment to really starting some measures also, we have started. I think we are going to need a little bit of time probably the second half of this year to really start to see trends in term of productivity, efficiency, speed that we were expecting of course, as an outcome of this project, plus of course talent experience, how we connect with customers and so on. But we are going to need a little bit of time, especially in this disrupted environment to make an assessment. But I believe again second half of this current year is a good target to really get and share some assessment on what are the outcome of this initiative.

Anecdotally, Josh, I would say the new technology has been very well received and our frontline very excited about the advantages that it provides to them in terms of matching candidates, communicating with candidates, allowing candidates to know where they are in the queue if you will. So, we'll have more data later in the year, but anecdotally, we're confident that we're going to see improvements in the front line.

All right, great. I think there was an earlier question around the acquisition pipeline or appetite there, but obviously maintaining a strong cash balance in the balance sheet is very impressive in this environment. Again if you addressed this I apologize, but what do you need to see from a macro level where you feel comfortable either getting active or aggressive on the acquisition front and what are your thoughts around reinstating a dividend at some point? Thank you.

It's more than one question but let's see. The key point is, of course, we need to be mindful that some of the cash we are generating now is basically because at an early stage of a downturn in our industry you generate more cash. The fact that our free cash flow year-to-date Q2 is $170 million versus $65 million a year ago. Of course, we are going to need some of this cash when the recovery is going to progressively come but as a matter of fact, on top of having $216 million of cash, we have no debt so our available debt capacity is to be very clear on the exact $297 million. So I would say at any point in time when we see some opportunities for inorganic, we are not going to wait forever. If we find something in the next coming months that is fitting with our strategy at the right price tag. I think we are going to go for it, and as Peter explained previously, we are still very active on the marketplace and looking at properties, whether they are actively on the market or basically what we call passive candidates. On the dividend side, as we speak, we are still in a very uncertain environment. That's something of course we assess and discuss regularly. I would say for us the step number one is going to be to get more clarity on what is going on and how things are evolving. So I would say we are not yet ready to give you a precise timetable on when we are going to reestablish dividends, but it's of course something we have in mind and that is part of our capital allocation whether it's now or in the near future.

I appreciate the clarity. Thank you, guys, for taking my questions and it's always good talking to you.

Currently, no further questions in queue. [Operator Instructions] No questions currently.

Okay, Brad. I guess we can end the call. Thank you very much.

Thank you, Brad.

Thank you everyone.

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