Hello everybody, good morning. Welcome to the 16th Annual Ideas Conference. My name is Erke Girgin , Assistant Account Manager with Three Part Advisors. Today we have Kelly Services Inc. listed on NASDAQ, ticker KELYA, and representing them today is Mr. Troy Anderson, Executive VP a nd CFO . Thank you.
Thank you. Good morning everybody. Thank you for joining us today, and thanks to the Three Part team for a quality event and their support as well. As you said, I'm Troy Anderson, CFO for Kelly Services. With me is Scott Thomas, our Head of IR. We will run you through a few slides here and give you some overview of the company and some of the things that we've been doing over the last number of years and some of our thoughts as we go forward, and then be happy to answer some questions. We will talk about some non-GAAP measures. I encourage everybody to read our disclosures, adjusted EBITDA, adjusted earnings, adjusted SG&A, a fairly standard approach there. Again, we may make some forward-looking statements in here. Nobody should be relying on those statements. We should review our published filings and disclosures around that. Okay, what is Kelly?
Kelly has been in business almost 80 years now. I think we're actually in our 79th year, and next year will be our 80th year. We did about $4.3 billion in revenue last year, adjusted EBITDA margin of 3.3%. You'll see that has increased substantially over the last several years. We operate in three segments. We will spend a few minutes talking about that. We staff hundreds of thousands of people a year across a wide variety of verticals, largely North American focused. We will spend a few minutes talking through that, but we're the number two temporary staffing firm in the country, and we have a number of other designations. I'll walk you through here in a few minutes, but long history, strong brand, very diversified portfolio, and has been on a significant transformation journey over the last several years that we'll walk you through. What's the value proposition?
The brand, as I just mentioned, we've reevaluated the operating model and made a number of changes there to really drive a focus on specialty, higher value offerings, more efficient go-to-market models, large enterprise focused, largely North American focused, although we do have a global footprint and with higher margin and higher growth potential across our portfolio. A significant amount of transformation around the business over the last several years. We have a commitment to delivering results and meeting our commitments out to the investment community, and we have a disciplined capital allocation approach. I've been fairly acquisitive over the last several years, completed our largest acquisition ever last summer, and acquired seven or eight different assets over the last five years, and going through a significant integration process right now, which will drive measurable synergies as we progress forward.
We do have a dividend that we pay $0.30 a share currently, and we have also done some share buybacks over the last several years. We'll touch on capital allocation here in a bit. How do we operate? We operate in these three segments: enterprise talent management, so that's just about half our portfolio, and within that, we generate a gross profit margin of about 20%. For us, just for clarity, our cost of sales is really the direct labor cost of the resources that we're staffing into a business. The sales and account teams and those types of things are all sitting down in our SG&A, so gross margin is just revenue less that direct cost to deliver the labor. Adjusted EBITDA margin about 2.6%. That is a global footprint largely in what we call the talent solutions area.
When you think about that ETM business and you look at the temp staffing versus talent solutions versus outcome-based, about half of the revenue is in the temp staffing space and about a quarter each in outcome-based and in talent solutions. That's across industrial, contact center, manufacturing, office, clerical, and light professional. The talent solution side is really the last three items, the managed service provider where we're managing the platform. A large enterprise has hundreds or even thousands of contingent workers that they're managing, that there's a platform associated with that, and we manage that platform on behalf of them. It's a standard offering in the industry. Recruitment process outsourcing or RPO, that could be an outsourcing of some or all of the talent acquisition function within a company, or it could be more project-based.
We're opening a new plant, and in this geography, we need to hire 500 people in the next six months of these skill sets, and they bring us in, and so it's surge-type capacity. PPO is Payroll Process Outsourcing, a bit more of a commodity-based offering where we already have a large payroll contingent, a number of workers, and we are able to payroll other contingent workers on behalf of companies. The science, engineering & technology arena is just as it says. We have five distinct verticals in there: engineering, telecom, life sciences, technology, and government. Higher margin business, and that's an area where we've invested pretty heavily from an acquisition perspective over the last several years, higher at the basal gross and the net margin basis.
North American focus, we've really narrowed our focus there, and about a 1/3 of that is in the outcome-based, so more project-based SOW, statement of work type business on the technology side. Things like telecom are almost entirely project-based type where we're staffing, we're providing telecom engineers to go do certain projects, whether it's cell tower, radio reconfigurations, maybe some fiber work, things like that. Engineering and life sciences could be life sciences as clinical trial support, certain things along those lines. A very diverse set of skill sets and, again, higher value skill sets in that business area. Education is an area where we're dominant in the marketplace. We're 46% market share, and what this is largely K-12 substitute teachers, so we're the largest provider of that.
Basically, that's outsourced by school districts to us, and it's a specialty that we bring both in terms of curating the talent inside of that school district area or that region, and then we're able to fill the open positions at a much higher rate and much more efficiently than the schools can themselves. We have a therapy offering within that as well, so we're staffing in-school therapists, which are required services that schools must provide. Think speech therapy, behavioral therapy, other types of support services, and there's a licensed therapist that we're providing into the school systems. We have some other ancillary services, executive search, etc. Lower on the gross margin level, this is a public service into the public government domain, so you know there's only so much you're going to charge for a substitute teacher.
They're usually mandated prices, and really we're just negotiating around our markup there. We get good leverage out of the, bless you, we get good leverage out of the SG&A in support of that business, and that's still a good net margin there. We think we have margin expansion opportunity across all three of these business areas. Our blended gross margin percentage is about 20.5%, and again, running about low 3s in the EBITDA. I'll just touch briefly on this, but I mentioned number two staffing firm in the U.S. We have accolades across our entire portfolio. We touch a number of different areas as I just outlined for you, but we're a leader and star performer in a number of the Everest PEAK Matrix categories.
In the talent solutions area, we're a top provider in office clerical, we're a top provider in industrial and manufacturing, we're a top five provider in life sciences and engineering. We're barely number 11, almost number 10 on the IT staffing, and again, a peak leader and star performer there in the SET space. In education, as I mentioned, we're just a dominant player there, and we staff millions of positions each year for the schools. We serve over 8,700 school districts. The interesting thing about that market is our market position that I was quoting is based on the outsourced business that's there, but we think we've only penetrated about a 1/3 of the overall market opportunity. That's an expanding market opportunity as far as more and more schools embracing the concept of outsourcing that function.
Most of our new wins in that space are actual new outsourcing deals, not competitive takeaways. The market is expanding and we're taking share along with that. Some of what we've done over the last five years, the company, Peter Quigley became the CEO in 2019. He's actually retiring, and we'll talk about that in a few minutes. Here just next week, we have a new CEO starting, and Peter really took the company to another level in terms of portfolio rationalization and margin expansion. You can see the portfolio dramatically changed between revenue and gross profit from 2020 to 2024. We divested over $1 billion in revenue and replaced that revenue with organic and inorganic revenue, sold off a number of underperforming assets where we were not at scale. Asia Pac, we had investments in a number of different companies. EMEA, I mentioned, we divested.
We sold some other smaller niche businesses that didn't fit in the portfolio. We sold some real estate as well and generated proceeds there. We generated over $700 million in proceeds and reinvested that in the business along with taking out some debt. I mentioned earlier our largest acquisition ever. We closed last summer Motion Recruitment Partners, about a $500 million IT staffing services provider. Through that, we've been in a declining market for the last several years. The staffing industry has been under a good bit of pressure the last few years, big boom post-COVID comeback, and then ever since then, the labor market's really been, from a contingent worker perspective, a bit challenged, particularly in areas like IT staffing, as you see some changes with things like AI and just changes in technology.
We've replaced all of that revenue, and with that, we expanded our gross margin by 200 basis points over that time horizon. We've remixed the portfolio significantly. When you take out that Amida divestiture, we've added several hundred, added a $1 billion of business over the years, both organically and inorganically. This is the EBITDA progression over the last several years. A historical average, if you take that far left bar and just run that back as far as your eye can see, that was about what Kelly ran, about 1.5%, 2% margin, EBITDA margin for a number of years. As I mentioned, Peter came in, realigned the operating model to what we outlined before. It was five segments with international, and what we created, the ETM segment was this year we consolidated two segments into the ETM segment to really focus on the large enterprise space.
With all the actions that have occurred over the last several years, including the portfolio remix, along with a big focus on SG&A management, you could see that big step up between 2023 and 2024 where there was a $150 million SG&A reduction program. More than doubling the margin to over 3%, and we're hovering right around there this year. We have said we expect to expand margin in the back half of the year and on a four-year basis, modestly. 100 basis points last year, some modest expansion this year, and then we'll talk a little bit about some of the work that we're doing that we believe that there's continued margin expansion opportunity, both within the segments as well as overall. Of course, with growth, we get better leverage and scale that will support us as well. I touched on capital allocation earlier.
You could see, as I mentioned, we have deployed a substantial amount of capital over the last several years, largely toward acquisitions. That was proceeds that we generated through sales, as well as we took out about $240 million in debt for the MRP acquisition. That was as of the end of June 30, that was down to $74 million. We do expect that to go up a bit, the debt between now and the end of the year. We've already made a pretty big dent in that. We basically have been applying all or the majority of our excess cash flow to debt repayment in the near term. We did do some share repurchase in 2022 and 2023, $50 million, and we did another $10 million at the end of 2024. We still have $40 million remaining on an authorization.
As I mentioned, we do have a dividend that we've had at $0.30 a share for the last two years or so. We're CapEx, we're asset light, so we're not building delivery centers. We're largely staffing on client sites or remote work. We do have a branch network across the geographies. We do have some physical presence in a number of countries to support our multinational customers. Generally speaking, we're asset light, so our CapEx is not significant, $15 million, $20 million in a given year, and largely IT assets and software development and then some of the branch furniture, fixtures, equipment, that type of things. That's the lay of the land on our capital allocation. What we're focused on as we go forward now, the SET business and the ETM business, those realignments are really active this year.
We announced the consolidation of two segments into the ETM segment at the beginning of this year. There's been a lot of work done already to realign our go-to-market model and to drive a more optimized organizational structure in support of that. We have within SET the shift to the five verticals I mentioned: information technology, life sciences, engineering, telecom, and government. That's really been occurring this year as well. We had acquired a number of different assets, IT assets, for example. We had three different acquisitions there, including the MRP acquisition, but we weren't running them as one business. They were still being run under their brand and as independent businesses. We're now focused on integrating all those businesses, both from a go-to-market perspective as well as an operations and technology perspective. We're well underway on consolidating the MRP business.
They had implemented an end-to-end modernized tech stack that we're actually leveraging for our integration efforts now. We're integrating the SET business all onto that technology stack, and we're building out our plans to leverage that technology stack for all of Kelly over the next several years. We see a huge opportunity to drive continued efficiency and scale in our technology infrastructure around that. We're going to continue focused on education. Again, we're a leader there. We have great momentum. We've been growing double digits. That was a few hundred million dollar business in 2020, and it's a $1 billion run rate business now, largely through organic growth. There is a huge opportunity there that we're going to continue going after and taking more than our fair share. We're going to continue looking for other optimization opportunities across the business.
If you look at the margin expansion that we've had over the last several years, it's been fantastic, but we think we have some continued opportunity to drive that forward and maybe not at quite the same clip that you saw the last few years, but continue making steady progress there. Last, I mentioned our CEO change. We announced with our earnings release on August 7th that Chris Layden will be the new CEO for Kelly . He's the sixth CEO in Kelly's history, and he's the first sort of outsider, if you will. Peter had been with the company for 20 years and has been with the company almost over 20 years in total, the last, again, five and a half or so as CEO. Chris joins us.
He spent over almost two decades at Manpower, and then the last few years he spent at one of the fastest growing, if not the fastest growing staffing firm in the U.S., Prolink , where they've almost doubled revenue in the last two years. He's really led them through a hypergrowth phase. He spent his whole career in the staffing industry. He started as an intern recruiting, so he's been through recruiting and operations and sales and go-to-market and outsourcing, and he has tremendous transformation experience as well. Brings a lot of energy and passion and knowledge of the industry and of the business. He's competed against Kelly , so he respects the brand, knows about Kelly, knows things that he's done in his career to try and emulate Kelly. He's really excited to be joining. We're excited to have him. He starts next week, and Peter will remain as an advisor. Peter is also on our board. The board is annually voted, and he'll remain on at least until he finishes his current term. I think that's it. Happy to answer any questions. Yes.
A couple of questions. Government, the recent trend of DOJ and all the layoffs in government, does that help or hurt you? I mean, do they find that the contracted workers that you have with the U.S. government, are they easier to lay off, or is it the opposite that they lay off permanent people and then they just hire your people to replace them? Is it this way?
Yeah. Short- term, it's a hurt. I think it was pretty widely publicized back in the February, March, April timeframe. They went after government contractors pretty hard. Governments have 5%- 6% of our business, and about 1/2 of that was one particular agency in the health and human services space, which was cut pretty significantly. That's about a two-point headwind for us right now on year-over-year growth. We have other agencies as well where we're both prime and sub for various players. Some of those other prime players were hit pretty hard as well. We've seen that stabilize. We saw some pretty quick actions there because it was easy to turn off, to kind of your point there. They just started sending people home. That has stabilized exiting Q2. We think we've got line of sight there.
We're looking for other opportunities around in the agencies we work in and in other agencies. We've brought all of our government, again, we had three different teams in the government space. We've now brought them all together under one leader so we can be more effective leveraging our assets and capabilities to drive more business there.
You mentioned very quickly AI. From your perspective, just trying to separate the hype from the reality, how much is AI in your various verticals really reducing the demand for manpower as of now in the next year?
Yeah. The areas where we think we've seen it the most really is in the IT space. Of that SET business, roughly 1/2 of it is focused in IT. Now we're, again, doing statement of work, project-based work. We're staffing higher level positions there. It's not sort of lower end programmers and help desk, things that are, there's a heavy push to automate. Many companies have said, we'll never hire another programmer again. There's a lot of that's happened there. A lot of that's frankly already manifested itself. Companies may not have figured out exactly how to do the work, but they've stopped hiring those positions while they're figuring it out. We've already seen that manifest itself pretty heavily. A lot of our other positions are people-based work. You think about the education business. We've seen what virtual education on an exclusive basis was not highly regarded.
Technology and support of people is really the focus on education. That business is really stable and protected in that regard. Light industrial, again, those are workers that need to go in and drive things and move stuff and perform tasks. Same thing with Telecom and Engineering and Life Sciences. Really don't see a huge impact. I mean, it's going to continue evolving. Our own use of AI, I mean, we're trying to do the same thing. The recruiting process is ripe with opportunities to ingest automation and intelligence into the process, whether it's scanning resumes, it's scheduling interviews, it's doing screenings, job descriptions, the whole nine yards, along with data and analytics. We're collecting tons of data from our clients through our platforms, and we're able to provide sophisticated workforce analytics to them, leveraging AI. That's really how we're seeing the landscape. Yeah.
How would you fare in a minor recession if... I'm curious if...
Staffing has been in a recession. There is one metric in particular that the industry looks at, and it's called the Temp Penetration Rate, and that's the ratio of full-time workers to temporary workers. That has been at recessionary lows for the last two years. The staffing industry overall revenues declined double digits in 2023, mid-single digits last year, and are still on a mid to slightly on the other upper side of mid, and this year we're still on a declining trend. Kelly has bucked that trend. We were half a point of organic growth last year in a heavily declining market. Up until we have a few different customer dynamics that we talked about on our earnings call, where we've had three large customers take pretty significant actions on their workforce, which is putting some pressure on us, and then the government that we talked about earlier.
When you exclude those items, we were a point and a half of growth, very discrete items. Staffing in general has been under pressure, heavily on the technology side, but broadly speaking, has been under pressure. What we see, and we have a very diverse portfolio across all different industries, again, heavily North American focused. We definitely saw some enthusiasm coming into the year, then we saw some retrenching around Liberation Day and those types of things. What we're seeing now is more people feeling like they have an understanding of the landscape, and those that are obviously more tariff sensitive, that they're figuring out what their plans are now to address that. Other companies that maybe are not, but they're just trying to figure out what the lay of the land is, where they should invest or not invest. We're seeing people moving forward, or at least talking about moving forward versus 60, 90, 120 days ago, it was, we're not doing anything right now. Let's just pause and come back to us in a few months.
Yeah. Kind of continuing on that format, specific to the technology aspect of the business, are you seeing any tangible signs or maybe intangible signs even of that turn? You just answered.
We've seen a declining decline in our SET business. I actually called this out in my prepared remarks in the earnings release. We were at about a 5% decline, and this is the SET business overall. Again, not 1/2 of that technology, but you've got engineering and life sciences, etc., excluding government, down about 5% in Q4, down about 4% in Q1, and down about 3% in Q2. We're seeing a continued positive trajectory there. Our business overall, excluding these four large, three large customers in government, was up about a point and a half in Q2 and maybe two to three points in Q1. I think the industry overall, I think we're bottoming out. The question is, where does it go from here?
Does it just stay there, or do we see some upward trajectory as everybody settles out more in terms of just what some of the policies will be and how they might affect them? We get the sense for how some of the other countries are reacting and how that might affect imports and exports and those types of things. Do we get some of this reinvestment boom? Although, a lot of that reinvestment boom will drive a huge amount of automation. It's not necessarily going to bring the same number of humans into the workforce. Of course, you have the immigration dynamics as well. There's still a lot, I think, to sort out exactly how things play out. Definitely, we've seen this stability, and the question is now where does it go from here?
Not what you find going on it, but that decelerating rate of decline, is that a function of year-over-year capacity getting easier, or is it truly the industry starting to show some deceleration? Do you see any forward indicators that are starting to move up?
Yeah. The industry has been stabilizing. I think we're benefiting from that. I'd like to think we're differentiating ourselves a little bit, and maybe we're taking some opportunities that are helping as well. I think it's a combination of factors. Like I said, when I was asked about our guide for Q3, I said maybe the same type of performance for SET, if not a little bit improved. Similarly, ETM probably a little bit more challenged than they were in Q2, and then Education showing a little bit stronger growth rate in the third quarter than they showed in the second quarter. We're seeing some positives. Where we're seeing the pressure is really in that light industrial large enterprise staffing, and that's where you have the industries that are having supply chain issues or tariff issues or having to react to some of the government policy shifts. Yeah.
Yeah. Inversely to the recessionary worries, how would the business be impacted? What sort of catalyst for growth would a potential interest rate cut?
Yeah. Hard to tell. It would have to, what would drive us would be change in company behavior. I don't know that the biggest constraint, certainly cost of capital, lower cost of capital influences investment, right? There's no debate about that. How much investment, as we see here today, is not happening because of interest rates versus not happening or constrained because of some of the other factors that are still being sorted out from either, again, policy perspective or otherwise. I don't know, maybe not an immediate lift, but I think getting on a company's knowing that there's more of a trajectory of interest rate cut and actually seeing some of those cuts could unlock some activity. Anyone else? Yes.
The education sector doesn't work with the temporary substitute teachers. Do they get exactly what they work, or do you take any sort of risk depending on the number of hours that they're needed or others?
Yeah. We're essentially a cost-plus model, right? The day rate for a substitute teacher or hourly rate is set by the jurisdiction. It could be set at the state level or could be local to the school district or school. We're collecting a markup for our services against that rate. We're not taking any risk on the business. I mean, the risk for us is just we have to manage that whole platform, and we have the teams of people. As far as the individual workers themselves, we're not taking any risk. We're not managing a utilization rate or anything like that.
Some of the contracts are like years, right? Some of the contracts are very short- term. What's the average?
Yeah. We typically are operating under one-year contracts that renew. You're talking about education or more broadly? Yeah. Generally speaking, I'd say we operate under one-year contracts. Sometimes we'll sign a multi-year contract that'll have sort of set pricing and markup rates. That's probably more the exception than the rule. Even the education contracts tend to be annually renewable. The statement of work outcome-based type contracts can be all different lengths depending upon the type of work being done. It is going to be pretty variable, but I would just say average probably a year.
That's basically your business, and that's a year.
Yeah. In many cases, there's really no penalty for cancellation. I mean, they're not fixed commitments. They're just MSAs that define our relationship. If they decide they need 100 less people, which is what happened with some of these large customer arrangements, 100 less people are working within the next few weeks. Anyone else? Great. We timed that perfectly. We had 20 seconds left. Thank you.