Good morning, and welcome to the Kelly Services' Fourth Quarter Full Year 2022 Earnings Conference Call. [Operator Instructions]. 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 this morning. I would now like to turn the meeting over to your host, Mr. Peter Quigley, President and CEO. Please go ahead.

Thank you, Keely. Hello, everyone, and welcome to Kelly's fourth quarter conference call. With me today is Olivier Thirot, our Chief Financial Officer, who will walk you through our safe harbor language, which can be found in our presentation materials.

Thank you, Peter, and good morning, everyone. 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 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. References to organic growth in our discussion today exclude the results of our 2022 acquisitions, RocketPower and PTS, as well as the impact of the sale of our Russian operations. We have also provided the slide deck that we are using on today's call on our website. And now back to you, Peter.

Thanks, Olivier. I'll start by sharing my perspective on the current economic and labor market dynamics to provide some context for Kelly's full year and fourth quarter results. The mixed pattern of deceleration we saw in the third quarter persisted through the balance of the year amid heightened economic uncertainty. In the high-tech sector, layoffs continued as more firms move to bring costs in line with slowing growth following a long period of expansion and aggressive hiring. Workforce reductions spread to the financial services sector amid market volatility and decreased consumer spending, driven by rising interest rates. Manufacturers also cut jobs as economic activity in this sector began to contract after 29 consecutive months of growth. In other sectors not broadly impacted by layoffs, a growing number of employers, scale back or slowed hiring in anticipation of greater headwinds in 2023. Notwithstanding these dynamics, the labor market remains tight. The economy continued to add jobs in the fourth quarter, albeit at a slightly slower pace to end the year. Services industries, health care and retail accounted for the bulk of the gains as employers in these sectors continue to recover from the pandemic. Unemployment remains at historically low levels. vacancies are steady, and the labor force participation rate is relatively unchanged despite elevated wage growth. The net result, job openings continue to be difficult to fill in those sectors. Even as economic headwinds emerged in the second half of the year, Kelly remained laser-focused on executing our specialty strategy, achieving solid growth in 2022. We increased revenue year-over-year, driven by top line gains in our SET, Education and OCG businesses and rapid growth in our outcome-based solutions. Every business unit expanded its gross profit margin, lifting Kelly's gross profit margin above 20% for the first time in more than 25…

Thank you, Peter. Before I dig deeper into our Q4 results, which as Peter mentioned, have been impacted by economic headwinds, some comments on our full year performance first. Full year revenue was up 1.1% on a reported basis and 3.2% on a constant currency basis. This reflects excellent revenue growth in our Education business unit as we captured additional growth opportunities and effectively managed talent supply challenges. SET, OCG and International, excluding Russia, also delivered solid constant currency revenue growth. Consistent with actions taken in alignment with our specialty strategy, GP rate improved 170 basis points on a year-over-year basis. The higher GP rate, combined with increasing revenue, resulted in a 12.1% increase in gross margin dollars in constant currency, and our GP rate improved in all BUs. Finally, excluding the impairment charges, we are able to convert the higher gross profit dollars to improve earnings. As Peter mentioned, adjusted earnings from operations were up 30%, and adjusted EBITDA margin was 2.1%, up 40 basis points from a year ago. Now looking at the fourth quarter of 2022 in more details. Revenue totaled $1.2 billion, down 1.3% from the prior year, including 200 basis points of unfavorable currency impact. Revenues were up 0.7% on a constant currency basis. Included in that increase are a 150 basis points favorable impact from our acquisitions of RocketPower and PTS, as well as a 270 basis points unfavorable impact resulting from the sale of our Russian operations. So our revenue was up 1.9% on a non -- organic constant currency basis. As we look at revenue in the first quarter by segments, in the SET segment revenue was up 1.7%. Demand has continued to be strong for our telecommunication specialty and many of our outcome-based solutions. Growth in other specialties was negatively impacted…

Thanks for those insights, Olivier. It's difficult to know how the macroeconomic situation will unfold as we move forward in 2023. What is certain is that we will focus on what we can control and stay the course in our aggressive pursuit of profitable growth. In each of our chosen specialties, we'll continue to shift toward a business mix characterized not only by higher margins and value but greater resiliency amid market pressures. We'll drive inorganic growth using the ample capital available to us on our balance sheet to pursue additional high-quality acquisitions in Education, SET and OCG. And we'll continue to invest in technology and new products that will improve the talent and customer experience, enable organic growth and increase efficiency. I have great confidence in our team's ability to meet the moment and deliver on these priorities. This has been a defining characteristic of Kelly people since our founding more than 75 years ago and has contributed in no small way to the longevity of our company. With our team laser-focused on executing our specialty strategy and guided by our noble purpose, I look forward to building on the positive momentum we generated in 2022. Together, we'll create long-term value for all our stakeholders, helping our talent and customers thrive and rewarding our shareholders for their patience since we embarked on this transformation. We're grateful to all of them and to our Board of Directors for their unwavering support as we move forward on our journey to unleash the full potential of this great company. Keely, you can now open the call to questions.

[Operator Instructions]. We'll go to the line of Joe Gomes with Noble Capital.

So just kind of wanted to start off here. If we -- on the P&I business, if we look at that, it looked like revenues kind of accelerated on a negative end in the quarter. It was higher in the fourth quarter. The revenue declined in the other quarters of the year. Maybe you could just give us a little more color as to what is going on in the P&I segment.

Yes, Joe, I think it's a reflection of what's going on in the parts of the economy that we have exposure to. The P&I business has considerable exposure to manufacturing, like industrial distribution. And those businesses, in particular, were impacted by the headwinds that we saw, to some extent in Q3, but really accelerating in Q4. And that's the story behind the P&I. I also mentioned that we still have yet to anniversary the loss of the major customer we had that will anniversary in April of 2023.

On the flip side, I would say, and we did mention -- I did mention, our BPO business is still growing, despite of the fact that our call center business is still a little bit on a kind of challenging comparables. But overall, we grew this business by about 9% in Q4, which I think is an improvement versus what we have seen even in Q3 where it was about 3.5%. So that I wouldn't say that it's offsetting the staffing, but it is something we assumed to be resilient for the near future.

Okay. And switching over to Europe, you call out a number of different countries there, break that out in your tables. And I'm looking at it, obviously we know what happened in Russia with the sale. But all the other countries that you identify outside of Portugal were down on a revenue basis. Maybe you could talk a little bit as to what you're seeing in some of those countries that would show the sequential decline -- the quarterly decline in revenue.

Yes. I would say, of course, you need to put on the side 2 things, right? One is, of course, exchange rate, which is, of course, as we did mention, again, impacting our P&L in International. And of course, Russia until we anniversary basically the transaction that did happen early July of 2022. So if you put these 2 things on the side, we are still growing at about 5%. We are -- it's a little bit lower than what we have seen in Q3. Q3, we were shy of 7%. So we see a decline, but not, I would say, a pretty pronounced decline. We still see a lot of growth in Portugal, and you can see it on our 8-K, 30% plus. We have seen that in Q1, Q2, Q3 as well as Q4 of 2022. We have seen some slowdown in Switzerland, in France and in Italy because of market conditions, but I would say it is more challenging than before, but I wouldn't call it as a complete change in trend. We still have bright spots in Germany that is mentioned in other. And this is one of the main reasons why other is still up by 14%. In Germany, although the revenue is not big. It's a business where the margin or the gross margin is pretty interesting because of the business mix. And we continue to make huge progress over there. So we have also a couple of other countries where we continue to see very good traction. And of course, we don't disclose them because they are pretty small, especially on revenue. But some of them, like including Germany, are creating very interesting traction, probably more visible in GP and bottom line.

Okay. And pardon me, you mentioned on the last call talking about the tech layoffs, about how that might provide a better pipeline of candidates for some of the other verticals. Maybe you could talk -- are you seeing that? And what else are you needing to do? I know this is kind of an ongoing and unfolding situation to attract workers to fill positions that are open.

Yes. The demand for the talent that are involved in a lot of the publicized layoffs in the tech sector are skills and capabilities that are in demand outside of the high-tech sector. The lag time between moving those people to other industries is measured by geography, by pressures that in all industries customers are making hiring decisions slower, taking a little bit more time. But clearly, the demand for those skill sets is evident, and we're seeing it. It's just that the macroeconomic conditions doesn't translate immediately into moving people from -- up from Friday to Monday to a new position. It takes a little bit longer. And we expect to see the benefits of that increase in technology, talent and skill sets throughout 2023.

Okay. And one more, if I may, on RocketPower. Again, your last call when you were talking about it, the firm, you mentioned about identifying synergies with the rest of Kelly, accelerating the integration, diversifying the portfolio. Maybe could you provide a little more detail on where you see yourself progressing on those goals for RocketPower?

Yes. We're very encouraged by where we are on those 2 issues. But also, Joe, part of the investment thesis for RocketPower was being able to take advantage of their Latin American delivery model. And we're encouraged by the ability not only to continue to use that for RocketPower customers, but also to take advantage of that for either legacy Kelly RPO customers and also use it as part of our sales efforts for new RPO customers. And we are seeing signs that, that part of the investment thesis is paying off, with customers we're talking to in terms of where they're looking to see a lower cost delivery and we're able to provide that through that Latin American delivery model that was part of RocketPower.

We'll go next to the line of Kevin Steinke of Barrington Research.

I wanted to first ask about the Science, Engineering & Technology segment. You noted some continued good demand in the telecom area, although that you mentioned also that the other areas within the segment are being impacted by the economy. So can you maybe just expand on the areas being impacted by the economy, and maybe how material the slowdown has been there?

Yes. Thanks, Kevin. So as Olivier mentioned, just to call out the BPO or outcome-based business and SET continues to see nice growth. And I think it speaks to the strategy that we have of moving business to that delivery model. So that's where I would start. Telecom is enjoying very significant growth, both in terms of traditional staff as well as statement of work business. And we see that continuing as companies work to deploy next-generation networks. The areas that are a little more challenged are probably Science and Engineering. Because in Science, there are a lot of companies that are catching their breath after coming out of COVID and trying to reestablish what their going-forward strategy is. So we've seen some slowdown in hiring, taking -- customers taking longer. And Engineering has continued to see some headwinds from a macroeconomic standpoint. Technology is reflective of, I think, the high-tech sector overall. But we don't see that as a permanent. It's probably a temporary lull in terms of demand. Companies still need app developers and network architects and cybersecurity experts and data analysts. And we see when they -- economic conditions become more certain, we expect that to come back quite quickly.

Okay. That's helpful color. You were talking earlier about how some of the layoffs in the high-tech sector. You could use some of those people and their skills to fill demand in other areas. I guess, just more broadly, has some of the softening in the labor market improved your ability to fill orders more generally across the company? I know you referenced, there's still a good number of job openings and the labor market is still fairly tight. So just kind of wondering if that's maybe enabled you to fill some other orders better than maybe we're sitting open due to greater labor market tightness.

Yes. Well, the demand has slowed in certain sectors. I would point out that our fill rates have improved in Education, which is likely a sign of people coming off the sidelines, could be retirees that are concerned about inflation. But we've seen across the regions improvement in fill rates, which is very encouraging because the demand continues to be very strong in Education. In SET, our fill rates have pretty much maintained. Demand has slackened a little bit. But we continue to find talent and put them to work at our customers. And our fill rates have improved in P&I, although the demand has softened considerably, as I mentioned to -- in response to Joe's question.

Another way to look at it is about our own wage inflation. We see as [indiscernible] SET is still elevated at around 8% to 9%, which is what we have seen for a long time now. It is moving down a little bit in P&I, which might be a sign that the supply of talent side is easing a little bit. Our wage inflation for P&I in Q4 was about 2.5% versus something like 7% in Q3. Education is slightly down, but still very elevated at about 9% versus 14%, or 13% to 14% before.

Okay. Yes. That's good. Helpful color. So just maybe just drilling down a little bit more into Education and -- does the business pipeline there continue to be strong? And specifically, what are you seeing with demand and your ability to leverage the Pediatric Therapeutic Services acquisition.

Yes, very encouraged by the early signs of synergy between our traditional pre-K to 12 education business and PTS both ways, frankly. So PTS introducing our traditional K-12 business to school districts they support and our K-12 school districts being introduced to PTS. So we think there's significant synergistic opportunity there. We're seeing growth in the traditional business, both in terms of existing customers as well as our existing school districts, as well as the pipeline continues to be very strong and school district struggle with frankly, a chronic teacher shortage. And as they focus on their full-time hiring and curriculum, more and more school districts are likely to be outsourcing the management of their substitute teacher population. And we're going to be the beneficiary of that because we win more than our fair share when we're competing for business. We've had an excellent retention rate among our existing customers and excellent win ratio when we compete for business. I would also add that the higher ed portion of the education system is very dynamic, which leads to a lot of turnover. Which means our Greenwood/Asher executive search practice is seeing very significant volume of searches for universities and community colleges and even some superintendents in our K-12 space. So we're very encouraged by that because it's a very -- not a huge business, but a very, very profitable business.

Great. I just also wanted to ask about the outlook for the first half of 2023. As you noted, you expect revenue will continue to be constrained by economic uncertainty. And also acknowledging that, as you mentioned, it's difficult to ascertain exactly how the macroeconomic situation will evolve. But as it currently stands, would you expect economic headwinds to pick up in the first half, or kind of stay as is? Kind of what's the pipeline look like? And your expectation for how severe or how much of a change you could see in terms of economic headwinds in the first half?

Yes. Probably what I'm going to do is to reflect a little bit on what we have seen so far, especially in terms of revenue, early in 2023 as we speak. So back to what Peter was talking about Education, we continue to trend very well in all practices, including PTS. This is a confirmation of what we have seen again for the whole of 2022. We continue to make progress in improving our fill rates. And we expect, I mean, solid growth and a continuation of the solid growth. Just for you to know that -- of course, we are going to deal with higher comparables because we are already growing at 40% to 50% in 2022, but a very solid start of the year. When I look at OCG, not seen any significant changes in trends so far versus what we have seen Q4 2022. I believe at some stage, we would expect some pressure on RPO because of the market, although we have not seen that yet. For SET, P&I and International, what I would say is staffing continued to slow down, especially in P&I. Fees, very, very volatile. We have 1 good week, 1 more challenging week. Difficult to know how it's going to trend in the future, I would say, high volatility. Outcome-based, so far, what we have seen is a confirmation of resilience, whether it's in P&I or in SET.

We'll go next to the line of Kartik Mehta of Northcoast Research.

This is Jack Boyle, speaking on behalf of Kartik Mehta. Just a couple of questions to get us started here. So you just spoke a little bit about what we can expect early I appreciate that. So can you speak a little bit more about maybe the competitive environment, what you're seeing? I understand demand has come down. But what kind of competitive environment are you guys seeing now? And is there a certain point that you guys are competing on, whether it be price or capability?

I think the competitive landscape hasn't changed significantly in terms of the vendors and suppliers that we compete against. We've been very disciplined about maintaining our pricing and our margin. And to some extent, in some cases, trading off and not chasing revenue for purposes of top line. I think we haven't seen a lot of, I would say, wholesale margin pressure coming from our principal competitors. And regional companies will, at times, chase business. But as I said, we're being disciplined about it. We're focusing on finding higher-margin jobs and job categories that we know we can fill and compete and win. We're pleased with the number of customer acquisitions that we've had in the past couple of quarters. Those take a while to show up because you have to transition from other companies. But I would say on the whole, there's not a significant change in the competitive landscape.

All right. And just one more. In terms of a little more color around some of the SG&A savings strategy you discussed. The pause in hiring, is that across all of your businesses? And how long do you foresee that lasting?

Well, we -- it's across all businesses subject to -- if we have a customer-facing revenue GP generating position, we're filling those roles. But we're doing it after a review to make sure that it's necessary. But all of the -- the other, I would call them, noncustomer-facing, non-revenue GP generating roles are -- we've put a hiring freeze on. And we'll continue that until we see some signs of certainty in the macroeconomic conditions and don't see any deterioration in demand in our businesses. The one exception, Jack, might be Education, where the demand is so significant that we've got to add people because the opportunity is so significant. And we're not going to miss the great work that the Education team has done to acquire new school districts and generate additional revenue and GP through improving our fill rates.

We'll go next to the line of Mitra Ramgopal with Sidoti.

Just following up a little on the last question on the SG&A, in terms of how comfortable do you feel you'll be able to keep SG&A as well as you would like, especially in light of the revenue uncertainty? And how far along are you in terms of the investments in technology initiatives? And should we continue to see elevated investments?

So on the SG&A question, we've done a lot of work starting in the third quarter of last year to identify certain metrics that we're following very closely that will trigger additional cost moves, if necessary. And I think we're better prepared to respond to macroeconomic conditions than we have been before. So I'm very comfortable that we're -- have the levers that you need to pull identified and available to us should that be necessary. The technology is a very critical area of investment for us. We're investing not only in the ways to improve the productivity of our frontline teams, but we're also investing in the talent experience. We recently launched a new myKelly portal, which provides the talent that we deal with every day with a better user experience. And we think that's going to create some opportunities to maintain relationships with the great people that we put to work every day, and use that as a differentiator in terms of selling to our customers. So the technology investments, we will continue judiciously. But we need to make investments for the long term. And that will be and continue to be a priority in terms of our organic investments.

Okay. That's great. And then on the inorganic side, I know it's something you always keep an eye on given the balance sheet you have, you can certainly be aggressive there. But in light of the economic uncertainty you spoke to, if maybe you can give us some color in terms of how you're thinking about inorganic opportunities, if you feel confident you'll be able to get something done maybe this year and the pipeline and valuations you're seeing?

Well, candidly, Mitra, the quality and the quantity of properties in the market right now is less than it was a year ago. And that's, I think, just a reflection of not only the macroeconomic conditions, but also the interest rate environment. And that's likely to continue for the first quarter and probably into the first half. My expectation is that when the interest rate environment becomes a little bit clearer in terms of the ceiling, and companies have line of sight to more certainty in the economy, we're going to see a lot of companies that were on the sidelines being part of conversations. And we're not waiting for that. We're actively -- proactively pursuing and identifying high-quality, high-margin, high-growth assets that we would like to add to the portfolio. But it's a fairly constrained environment right now. But we will be ready. And as I said, we're not sitting on our heels during this period of time. We're continuing to proactively look for those kinds of properties.

And with our level of liquidity, which is now over $450 million, I mean, we can really go fast and aggressive, especially in the second half of the year, not necessarily waiting for a much better economic environment. Because, again, I mean with our balance sheet, we can do it at an early stage of any potential recovery versus the current environment.

We have a follow-up from the line of Kevin Steinke with Barrington Research.

Just a really quick follow-up in terms of what we should expect for an effective tax rate as we move into 2023.

Yes, that's a difficult question. I would say I'm still on the mid-teens plus, that would be where I would position it. Although you might have seen that there is a lot of volatility because of several items. I think today, when I was talking about tax, it was a good example of that. But high mid-teens would be probably the way I would position it for the moment.

[Operator Instructions]. There are no further questions in queue.

Okay. Keely, I think we can wrap it up then. Thank you very much for your help.

Thank you.

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