Kelly Services - Q3 2024

Transcript

Operator (participant)

Good morning, and welcome to Kelly Services' third quarter earnings conference call. All parties will be on listen only until the question and answer session of the presentation. Today's call is being recorded at the request of Kelly Services. If anyone has any objections, you may disconnect at this time. The third quarter webcast presentation is also available on Kelly's website for this morning's call. I would now like to turn the meeting over to your host, Mr. Peter Quigley, President and CEO. Please go ahead.

Peter Quigley (President and CEO)

Thank you, Brad. Hello, everyone, and welcome to Kelly's third quarter conference call. Before we begin, I'll walk you through our Safe Harbor language. As a reminder, 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. Finally, a presentation with information about Kelly's financial results in the quarter is available on our website.

We have a lot to cover, so let's get started. First, I'm pleased to welcome Troy Anderson, Executive Vice President and CFO Designate, who formally joined Kelly last month and is with us on the call today. As announced in September, following an exhaustive search process, Troy was selected to succeed Kelly's current Executive Vice President and CFO, Olivier Thirot, following his planned retirement as an officer of the company. Troy and Olivier have been working side by side over the past several weeks to ensure a smooth transition of responsibilities. Upon completion of the transition, Troy will assume the role of Executive Vice President and CFO of Kelly, and Olivier will be a strategic advisor to the company. Troy brings to Kelly more than 30 years of experience, successfully executing business transformations, a track record of accelerating profitable growth, and a passion for developing and leading high-performing teams.

I'm confident he will build upon the significant contributions of Olivier, to whom I'm immensely grateful for his distinguished service to Kelly. Olivier's leadership has helped transform this company into a more efficient, profitable enterprise with a financial discipline to drive long-term value creation. I look forward to working with Troy to accelerate Kelly forward on our specialty journey and congratulate Olivier as he prepares to close one chapter and begin an exciting new one. Now, turning to Kelly's results in the third quarter, we continue to navigate uncertain market conditions that were broadly consistent with the prior quarter. Large enterprises maintained a cautious approach to managing their workforces, deferring hiring decisions, managing existing headcount through attrition, and in some cases, choosing not to backfill open roles. This continued to impact demand for both temporary and permanent staffing services.

Notwithstanding these persistent dynamics, we continue to focus on what we can control, capturing market share and shifting our business mix toward higher margin, more resilient solutions. Our actions contributed to Kelly's organic revenue stabilizing year over year for the second consecutive quarter and drove strategic progress in each of our businesses. In our education business, we achieved another quarter of double-digit revenue growth on strong fill rates and net new customer wins in our K-12 specialty. The ongoing growth of this specialty is reflected in Kelly's share of K-12 staffing market, which once again ranked number one on Staffing Industry Analysts' latest list of the largest education staffing firms in the U.S. We also remain focused on expanding our higher margin therapy specialty. Our near-term priorities in this specialty are scaling our capacity in additional markets and improving attraction and retention of therapy talent.

In our P&I business, the sequential revenue stabilization we achieved in the second quarter gave way to a sequential improvement in the third quarter as our omnichannel strategy within the staffing business continued to gain traction. This strategy, underpinned by our network of physical branch locations and the KellyNow mobile app, enabled our P&I business to meet clients and talent where they are and capture a greater share of the market as demand for industrial and commercial staffing remained under pressure. Also driving the continued improvement in P&I is the ongoing expansion of our outcome-based business into attractive end markets, including semiconductors and renewables. Our OCG business delivered solid year-over-year revenue growth, driven primarily by increased demand for our payroll process outsourcing solution. Revenue from our MSP and RPO solutions stabilized sequentially as more employers seek to drive efficiencies through total talent management.

Powered by our advanced Helix technology platform, which we continue to upgrade with the addition of AI-enabled market intelligence capabilities, OCG's higher margin MSP offering drove a steady pipeline of new business opportunities. In our SET business, demand decelerated during the summer months before improving in September as companies began to increase spending on technology projects. Its results for the quarter reflect this dynamic while continuing to outpace the market on a year-over-year basis. SET maintained its focus on expanding into the market for higher margin SOW-based services through the statement of work suite of solutions. This innovative offering continues to generate strong interest among clients seeking to optimize business processes without adding headcount amid ongoing macroeconomic uncertainty. The third quarter also marked the first full quarter since Kelly acquired the specialty talent solutions company Motion Recruitment Partners, whose results are currently reported as part of SET.

With integration planning well underway, I'm pleased with the collaborative approach our teams have taken to combining our highly complementary businesses. Together, we're creating a clear pathway to achieve revenue and cost synergies that will enable Kelly to realize the full value of this transformational deal. For more details on our results in the third quarter, I'll turn the call over to Olivier.

Olivier Thirot (EVP and CFO)

Thank you, Peter, and good morning, everybody. As a reminder, Kelly's 2023 results included the European staffing business that was sold on January the 2nd of 2024, and our 2024 results include Motion Recruitment Partners since the May 31st acquisition date. To provide greater visibility into trends in our operating results, I will discuss year-over-year changes on the reported and also on an organic basis. References to organic information exclude the results of our European staffing business in 2023 and the impact of the acquisition of MRP in 2024. Revenue for the third quarter of 2024 totaled $1.04 billion compared to $1.12 billion in 2023, down 7.1%, resulting primarily from the sale of our European staffing business, partially offset by the acquisition of MRP. On an organic basis, year-over-year revenue was essentially flat at down 0.2%, a slightly lower than what we have built into our second-half outlook.

Reviewing results by segment, starting with education. Q3 is low season for education because of summer break in much of our K-12 practices, but we continue to deliver sustained double-digit revenue growth, up 11% year-over-year in the quarter. This growth continues to reflect net new customer wins and an improving fill rate on existing business. In the SET segment, revenue was up 37% on a reported basis, resulting from the acquisition of MRP, which is included in our result for the full quarter in Q3. Revenue was down 5% on an organic basis. Organic revenue trends were weaker over some months but improved in September as we exited the quarter. For the total quarter, organic year-over-year trends reflect lower staffing market demand, with revenue down 5% in our staffing specialties as well as in our outcome-based solutions, driven primarily by lower demand in certain industry verticals like telecom.

We continue to see the outcome-based statement of work business as a growing portion of the market where we are focused and continue to innovate. Permanent placement fees declined solely 1% organically, but more than doubled when including the results of MRP, which has a strong direct hire business. In our OCG segment, revenue improved 6%. The increase in revenues continues to be driven by our PPO specialty. Year-over-year declines in RPO are due to slower hiring in certain market sectors, and MSP revenues declined in line with customers' contingent labor demand. Adding lower margin PPO revenue put some pressure on gross margin for the OCG segment as a whole again this quarter, but revenue in both MSP and RPO products were stable sequentially, and our higher margin MSP product is well positioned to benefit from positive momentum in the sales pipeline moving into 2025.

Revenue in our professional industrial segment declined 2% year-over-year in the quarter. P&I sequential revenue stabilization in Q2 turned to sequential revenue growth of 4% in Q3. Revenue from our staffing product declined 3% year-over-year, and revenue in our outcome-based specialties was flat year-over-year. Consistent with SET, we are seeing strong demand for innovative solutions to meet clients' talent needs across a variety of skill sets in P&I. As demand for the segment's contact center specialty has declined, P&I has successfully diversified its portfolio of outcome-based solutions. Overall, gross profit was down 3% as reported, or 6.4% on an organic basis. Our reported gross profit rate was 21.4% compared to 20.4% in the third quarter of 2023. Our GP rate reflects a 130 basis point improvement from the sale of our European staffing operations and an additional 110 basis points from the inclusion of MRP for the full quarter.

Excluding those impacts on an organic basis, the GP rate declined 140 basis points in Q3, consistent with the trends we have seen in Q2. Drivers of the trend include 120 basis points from business mix and 30 basis points from lower firm fees, partially offset by 10 basis points of favorable employee-related costs. The business mix impact continues to reflect growth in lower GP rate specialties. SG&A expenses were down 4.1% year-over-year on a reported basis. Expenses for the third quarter of 2024 include $6.1 million of costs related to integrating MRP as well as further aligning processes and technology across the company, and also $1.8 million of transition expenses related to the sale of our European staffing operations, and finally, $1.4 million of transaction costs associated with the acquisition of MRP. SG&A expenses in 2023 include $15.4 million of restructuring charges.

On an adjusted organic basis, expenses declined 4%. Like-for-like expenses were lower in Q3 2024, reflecting organic top-line trends and management's effort to align resource levels with volume, as well as the impact on variable performance-related incentive compensation expenses. On a consolidated basis, our reported earnings from operations in the third quarter were $2.6 million compared to $0.1 million in Q3 2023. On an adjusted basis, Q3 2024 earnings from operations were $11.7 million compared to $15.5 million a year ago. The acquisition of MRP added $2 million of earnings from operations in the third quarter of 2024. Adjusted EBITDA margin improved 20 basis points to 2.5%, reflecting 30 basis points of improvement from the sale of our European staffing operations, 30 basis points from the inclusion of MRP, partially offset by a 40 basis point decline in our organic EBITDA margin.

Following the borrowings related to the acquisition of MRP, interest expense, net of interest income, which is reported as a component of other income and expense net, has increased $4.3 million year-over-year in Q3. Income tax benefit for the third quarter was $2.6 million compared to a benefit of $4.9 million in 2023. And finally, reported earnings per share for the third quarter was $0.02 per share, compared to $0.18 in 2023. Earnings per share in 2024 include integration cost, net of tax of $0.12, and $0.06 of transaction cost, net of tax. Earnings per share in 2023 included $0.32 of restructuring charges, net of tax. So, on an adjusted basis, Q3 2024 EPS was $0.21 compared to $0.50 per share in Q3 of 2023.

The change in earnings per share includes $0.09 of additional interest expenses following the acquisition of MRP in May 2024 and the impact of a one-time deferred income tax valuation allowance release of $0.14 in 2023. Now, reflecting on the balance sheet at the end of the quarter, total available liquidity was $159 million, comprised of $33 million in cash and $126 million of available capacity on our credit facilities. Borrowings totaled $228 million. Our debt-to-capital ratio is 15.6% at quarter-end as we leverage our strong balance sheet to acquire MRP, and our credit facilities give us the financial flexibility for additional organic and inorganic investment and to navigate an ongoing uncertain market environment. At quarter-end, accounts receivable totaled $1.2 billion, including the receivables of MRP. Global DSO was 64 days, up one day from the third quarter of 2023.

With continued growth in our education business, we experience a more pronounced seasonal DSO pattern in which DSO is the lowest in Q2 and the highest in Q3, making sequential comparisons less meaningful than in the past. Year-to-date, we have generated $3 million of free cash flow compared to $21 million in the comparable prior year period. Now, looking ahead to operating results for the fourth quarter, we believe that staffing market conditions will remain relatively consistent with what we have experienced in Q3 and expect continued stabilization in revenue in our P&I, SET, and OCG segments. With the start of the school year behind us, our education segment revenue will ramp sequentially from Q3 to Q4 and will continue to produce double-digit year-over-year revenue growth. And finally, the acquisition of MRP will deliver further improvement in both our growth and also value metrics.

For the fourth quarter, on an organic basis, we expect revenue to be up 1.5%-2.5% with no significant FX impact, resulting in a midpoint revenue expectation of $1.045 billion on an organic basis. In addition, we expect MRP to add an additional $120 million of revenue in the quarter. We expect our organic GP rate to be about 19.3% for Q4, reflecting the continuation of a change in our business mix, primarily because the education segment is expected to continue to deliver significant revenue growth. MRP, with its higher margin specialty profile, is expected to add an additional 110 basis points to our current gross margin rate in Q4. All in, our GP rate in Q4 is expected to be about 20.4%.

Reflecting on SG&A, we expect to sustain the efficiency improvements that we gained from our transformation-related actions over the past year and are actively managing resources in line with revenue trends in each segment. We expect that adjusted SG&A, excluding depreciation and amortization, will be 4.5%-5.5% lower than a year ago on an organic basis, and MRP will add about $30 million of expenses in the quarter. All in, we expect approximately $14 million of depreciation and amortization in the fourth quarter. We expect an adjusted EBITDA margin of 3.4%-3.5%, up about 90 basis points year-over-year, including a 30 basis point improvement from the acquisition of MRP. And finally, we expect our effective tax rate to be in the low teens. And now, back to you, Peter.

Peter Quigley (President and CEO)

Thanks for those insights, Olivier.

With uncertain market conditions likely to persist through the end of the year, our priorities are clear. We'll remain focused on what we can control, delivering near-term results while driving strategic progress on our specialty growth journey. We'll continue to execute our organic growth initiatives, including our omnichannel strategy in P&I and our large enterprise account strategy. These initiatives are enabling Kelly to capture a greater share of the market for staffing services and contributing to stabilizing revenue trends for the company. Within both P&I and SET, we'll aggressively pursue further expansion of our higher-margin, more resilient outcome-based and SOW business into attractive end markets. And in education, we'll continue to drive growth by maintaining strong fill rates on existing K-12 staffing business and capturing net new customer wins through a healthy sales pipeline. We'll move ahead with our aggressive pursuit of value creation through our inorganic investments.

MRP remains our top priority, with whom our SET and OCG teams will continue to partner on a thoughtful approach to integration that harnesses the unique strengths of each business. I look forward to sharing more about our approach on our fourth quarter and full-year earnings conference call in February. We'll also continue to develop a pipeline of high-quality acquisition targets that align with our inorganic growth strategy in SET, education, and more opportunistically OCG. Finally, we'll remain laser-focused on improving our ability to convert a greater share of top-line growth to bottom-line growth. This includes sustaining the structural improvements to our cost base that have enabled us to achieve significant EBITDA margin expansion from our recent historical average and maintaining a disciplined approach to SG&A management that aligns our resources with demand trends.

This formula has helped set Kelly apart from our competitors in this uniquely challenging environment while driving significant progress on our specialty journey, and it has positioned us to accelerate profitable growth when staffing demand rebounds. Of course, our greatest competitive advantage and the key to our success on this journey is our people. I'm grateful to each member of Team Kelly for their dedication to meeting the evolving needs of our clients and talent. Their relentless pursuit of innovation and commitment to excellence are among the reasons Everest Group's 2024 PEAK Matrix assessment recently recognized Kelly across several categories. Among them are MSP and engineering contingent staffing solutions in which Kelly was named a star performer, and industrial staffing, business and professional staffing, services procurement, and contingent workforce management in which Kelly was recognized as a leader.

This recognition underscores the strength of Kelly's offerings and why we are positioned to compete and win over the long term. With our team energized by the opportunity in front of us and united by our noble purpose, I'm confident that we'll deliver on our strategic priorities, continue to outperform the market, and propel Kelly into a new era of growth. Brad, you can now open the call to questions.

Operator (participant)

Of course. And ladies and gentlemen, if you wish to ask a question at this time, please press one, then zero on your telephone keypad. You may withdraw your question at any time by repeating the one, then zero command. If using a speakerphone, please pick up your handset before pressing the numbers. And once again, if you have a question at this time, please press one, and then zero.

Olivier Thirot (EVP and CFO)

Our first question today comes from the line of Joe Gomes with Noble Capital. Please go ahead.

Peter Quigley (President and CEO)

Good morning, Joe.

Olivier Thirot (EVP and CFO)

Good morning, Joe.

Joe Gomes (Senior Research Analyst)

Good morning. So real quick on the MRP integration cost. I know one of the things you've said in the past is you're planning on operating that kind of separately from the rest of Kelly. So how much more of these integration costs do you think we're going to see here in the next couple of quarters, if any?

Peter Quigley (President and CEO)

Hey, Joe. Thanks. So regarding the integration, as previously discussed, there is an earnout as part of the transaction. And so during the earnout period, which runs through the first quarter of 2025, we've agreed to maintain the operating companies and brand of MRP.

But we are in the midst of some significant planning for integration that will capture both top and bottom-line synergies when the earnout period is over. I'll let Olivier comment on the integration cost question.

Olivier Thirot (EVP and CFO)

Yeah, sure. I mean, as Peter was saying, I mean, up to the end of Q1 of next year, we are on the planning mode because of the earnout. But we have now a plan that we are going to trigger as soon as the earnout is behind us, so Q2 of next year. The majority of the costs we are going to incur in 2025 are related to the technology integration. It's going to be CapEx and OpEx. We are still evaluating this cost, but I would say it's going to be in line with the type of IT investment we are usually making every single year.

So overall, in terms of CapEx and OpEx, it should have a limited impact, I would say, overall in the course of 2025. It's going to be probably a little bit more visible in Q2, Q3 of next year as we are going to go significantly quick and big on this technology integration.

Joe Gomes (Senior Research Analyst)

Okay. Thanks for that. And then looking through the release, when you break everything out into segments, it looks like gross profit rate, with the exception of SET, fell in the other three segments. And I just wondered if you might be able to, year-over-year, talk a little bit about that.

Olivier Thirot (EVP and CFO)

Yeah. When you look at and probably the best way to look at it is organic, right? I mean, excluding MRP and excluding the transaction related to EMEA staffing.

So if you look at P&I, we're at 17.9, pretty much in line with a year ago and the trend we have seen so far. We continue to see a little bit of pressure coming from the challenges we have on the fee business. We see some fluctuation, ups and downs related to employee-related cost. But we start now to see a positive impact linked to the overall mix within our staffing business first because we start to see our branch-based business growing at a faster pace than our centralized staffing business. And our local business got higher gross margin rate.

And we see also the mix factor that we have seen for some quarters now, which is that overall, our outcome-based business in P&I, where we focus our attention on top of staffing, is providing better gross margin, so helping us also to overall maintain our gross margin rate despite the continuing pressure we have on the fee business. In education, yes, we continue to see some margin pressure. I would say Q3 is a little bit of a quarter for education. You need to look carefully because it's a low seasonal quarter, right? And sometimes the mix does not necessarily reflect the type of mix we see overall in the year. But yes, we continue to see some margin pressure in education. It is more than offset by basically the top-line growth we continue to see.

But I would not necessarily make a definitive judgment on Q3 GP rate for education, again, because of the low seasonality. OCG, we are down, and the clear explanation is product mix. Our PPO business is growing significantly. The rest of the business, RPO and MSP, hopefully now is stabilizing, and we expect some growth in MSP in the near future because of the kind of healthy pipeline we have. But of course, knowing that the payrolling business got a much lower GP rate, that's the main reason why now we are at about 30% versus a history of 36% in OCG.

In SET, when you look at it overall and you put on the side MRP, despite the high pressure we still have on fees, we are doing a good job of maintaining our overall GP rate, basically, again, similar to P&I by working on the mix, especially on outcome-based statement of work versus staffing on the other side.

Joe Gomes (Senior Research Analyst)

Thanks for that, Olivier. Much appreciated. And last one, again, I think you said you mentioned that the Adjusted EBITDA margin was 2.5% in the quarter, was up 20 basis points year-over-year. But I think last quarter, you said you were looking for about a 3% Adjusted EBITDA margin. And wondering if you could just walk us through that.

Olivier Thirot (EVP and CFO)

Yeah. I think what I'm going to go back maybe to Q1, Q2 briefly to give you a little bit of the full picture.

So you might remember in Q1, we're at 3.2. We're up 120 basis points. The majority of it, 80 basis points out of the 120, was pure organic. Q2, we were at 3.8 in total versus 2.1 a year ago, so an improvement of 170 basis points. Organically, again, the biggest contributor, 120 basis points. In Q3, we're at 2.5. We're expecting something closer to 3%. 2.3 in Q3 of last year. So basically, the improvement is about 20 basis points. But if you exclude and you go for organic only, we are at minus 40 basis points. So I would say overall, what is first of all, I mean, of course, we know that education has an impact in Q3 because the education growth is still healthy at double digits.

But of course, the absolute dollar contribution to revenue growth is much smaller than in Q4 or in the first half of the year. And we have seen, of course, some pressure, as Peter and I were mentioning, on our SET business. The first two months of Q3 were pretty low in terms of revenue, and that was a surprise for us. We have seen our peers and also market conditions being a little bit more challenging in Q3 than they were at the beginning of the year. The positive side is that when you look at exit rate, meaning revenue of the month of September, basically in SET, we are at -3.6% versus a -5% organic for the quarter. So we have seen some improvement in September.

We need to wait a little bit to see how the trends are going to look like in the next coming weeks to see if we are turning more closer to our exit rate of 3.6%. But overall, if I look at the exit rate of Kelly in September, which I think is good to understand a little bit the current dynamic and think about what does it mean for Q4, our exit rate in September, excluding on an organic basis, was 3.1%, with P&I being at almost 1% growth, which is very good news. Education at about 12.5% and OCG 7.1%. That is giving us confirmation that some of the dynamics we have seen could continue in Q4.

But again, we need to wait a little bit to see how SET is going to trend in the next coming weeks to have a final assessment on the potential dynamic in Q4 for SET and beyond Q4.

Joe Gomes (Senior Research Analyst)

Great. Thanks for that, Olivier. Much appreciated. I'll get back in queue.

Olivier Thirot (EVP and CFO)

Thanks, Joe.

Peter Quigley (President and CEO)

Thank you.

Operator (participant)

And our next question comes from the line of Kartik Mehta with North Coast Research. Please go ahead.

Kartik Mehta (Executive Managing Director)

Hey, good morning, Peter. Good morning, Olivier. Olivier, I think last quarter I said goodbye to you a little bit early, so I want to correct that and wish you the best going forward.

Olivier Thirot (EVP and CFO)

Thank you.

Kartik Mehta (Executive Managing Director)

Peter, as you look at the MRP business and kind of look at the performance of that business, how would you characterize it based on kind of expectations when you acquired the business to now?

I know it hasn't been a long time, but just kind of your early thoughts on how this business is performing and what you might see that maybe has been better than your early expectations on the business?

Peter Quigley (President and CEO)

Yeah. The business has certainly met my expectations. The business is in sectors of the industry that are affected by the current market conditions, and MRP is not immune from that, and its results are similar to what we see in our SET business, so in terms of performance, I think it's managing the current industry headwinds very well. I think they're positioned for when demand rebounds. We really like the complementary nature of their business, they're really significant options for how they deliver solutions, and we think that long-term, MRP is at least meeting our expectations, if not exceeding our expectations.

That includes both the MRP staffing solutions as well as the Sevenstep business, which will complement our existing RPO and MSP practices.

Kartik Mehta (Executive Managing Director)

Then, Olivier, you talked a little about the SET business and talked about maybe some monthly trends and how September was better than the previous two months and the quarter. I'm wondering if you just look at the overall business and the rest of the businesses, if you saw a similar trend or were things fairly even throughout the three months of the quarter.

Olivier Thirot (EVP and CFO)

No, overall, I mean, if you look at total SET, again, better exit rate than the average of the quarter. If you think, is it linked to a specific area in the SET business? No, I would say it's overall the same type of trends we have seen.

Two challenging months at the beginning of Q3 and then better months in September. But none of that was linked to a specific area in SET. And we have seen very similar trends in Motion Recruitment as well. Although, interestingly, to follow up on what Peter was saying, we see some pressure on the top line for MRP. But the GP rate, interestingly, despite the pressure we have on the fee business, is still meeting our expectation at 29%, which I think is excellent knowing the pressure we see in the market now on the permanent fees amongst other things. And our EBITDA margin trend for MRP is now in the region of 5.6%-5.7%, a little bit lower than the 6% we're expecting. But it's mainly driven by the top-line pressure we continue to see in Q3 and potentially in Q4.

Kartik Mehta (Executive Managing Director)

And just a final last question, Olivier, as you look at 2025, if revenues were to stay kind of stable and the trends you were seeing stay similar in 2025, is the business at a point where you I know you've taken a cost that you can improve margins or the margins can kind of stay stable?

Olivier Thirot (EVP and CFO)

No, I think when and I know the September exit rate might not be something you can extrapolate. But even if you look at the outlook we have now for Q4, organic plus MRP, I think we are turning now the overall top line on a positive momentum, which is good. And I think we are going to see that being confirmed in Q4. There is still this question about SET where, again, we need to wait a little bit to see how the coming weeks are going to look like.

But I'm confident that things are going to get probably back on track. So as soon as we start to grow organically and, of course, with the addition of MRP, I think our margin expansion, our net margin expansion should continue. You have seen that for Q4, we are providing an outlook of 3.4-3.5. That's going to be something that I think is achievable, and that's going to position us well, I think, to enter into 2025. So even though we may not have high growth in the near short-term future, I think we have now proven capabilities to really leverage through our transformation or better leverage even a small top-line growth, which I hope is going to be not small.

But I think now we are well equipped to leverage with, I would say, still a challenging environment, which I think should lead us to continue our progress in terms of net margin expansion beyond the year 2024.

Kartik Mehta (Executive Managing Director)

Perfect. Thank you very much. I really appreciate it.

Peter Quigley (President and CEO)

Thank you. Thank you.

Operator (participant)

And our next question comes from the line of Kevin Steinke with Barrington Research. Please go ahead.

Peter Quigley (President and CEO)

Morning, Kevin.

Olivier Thirot (EVP and CFO)

Morning, Kevin.

Kevin Steinke (Managing Director and Senior Research Analyst)

Hey, good morning, Peter and Olivier. So you talked there about the softness in SET in the first couple of months of the third quarter with some improvement in September. Sounds like that I think you mentioned a bit of a surprise, that softness. So could you just dig a little bit more into the market dynamics you're seeing in that segment and what kind of led to the trends you saw throughout the third quarter?

Peter Quigley (President and CEO)

Well, Kevin, as Olivier mentioned, we were surprised by the deceleration in July and August. It was steeper than expected. But we were also encouraged by the rebound in September. As Olivier mentioned, the exit rate showed considerable improvement over the first couple of months of the quarter. We're keeping a close eye on it. The industry is, I would say, stabilizing, but not necessarily or noticeably improving. And that's, I think, reflective of a continued sense of caution among large enterprise customers with respect to large technology deployments and the like, big CapEx projects. When that will ease and companies will return to normal spending habits in the technology and other science and engineering practices, of course, remains to be seen. But we're well positioned when that happens, both in terms of the Kelly SET business as well as our MRP acquisition.

Kevin Steinke (Managing Director and Senior Research Analyst)

Okay. That makes sense.

And so when we look at kind of this flattish organic growth in the third quarter and combine that with your outlook for the fourth quarter in terms of organic growth, I think it's a bit below what you were looking for previously. So is it fair to say that's primarily attributable to SET in terms of that bit of a change in expectations?

Olivier Thirot (EVP and CFO)

I would say SET is where we still have a question mark. But again, our outlook, organic revenue is based on some level of cautiousness for SET because we need to wait to see a little bit how things are moving. On the flip side, P&I is really showing significant improvements.

I mean, when you think about a sequential improvement of 4% from Q2 to Q3 total revenue, or the fact that year over year, we are starting the year at minus 11 Q1 versus Q1 of 2023, then moving to -8, now -2, and knowing that now we have an exit rate in September, total revenue P&I turning positive. And also because we start to see the market improving a little bit, that is probably a positive versus what we thought three months ago.

Peter Quigley (President and CEO)

And Kevin, while the, as you mentioned, the relatively flat revenue is slightly below what we expected because of SET in the first couple of months, it's very clear that we continue to take market share across all of our business segments. And that includes SET as well as P&I, OCG, and of course, education.

So it's been in SET. It's been six quarters now where we've been taking share.

Kevin Steinke (Managing Director and Senior Research Analyst)

Okay. That's great. I guess, Olivier, you're there and discussing P&I that kind of was leading into my next question in terms of that really nice sequential revenue growth you saw in P&I. I think you mentioned maybe the market getting a little bit better, but I'm just wondering if you could dig into any other factors driving that sequential improvement. I know you have some organic initiatives in place. I think you mentioned moving into a couple of new market areas like semiconductor and renewables. So maybe if you could give me any more color on that revenue rebound you saw sequentially.

Peter Quigley (President and CEO)

Yeah. I think the performance and I'll let Olivier comment on that as well, Kevin.

But the improvement in P&I is really sort of resulting from what we call our omnichannel strategy, which is centralized delivery to large enterprise customers, a renewed focus on local markets that are high growth where we see demand for light industrial and commercial solutions. And our KellyNow mobile app, which we're very pleased with the results and the number of our employees who are using it, signing up for it, we're seeing improved reassignment rates, improved cycle times, and improved fill rates as a result. So it's a combination of that strategy really beginning to pay off for a number of quarters. And we have expectations that that type of improvement will continue going forward and will continue to take share.

Olivier Thirot (EVP and CFO)

Yeah. I mean, just to add probably on P&I outcome base, in total, revenue is flat versus a year ago, but it is hiding a little bit different dynamics, meaning our call center business that is now about one-third in revenue of this outcome base in P&I is really in a difficult situation. I mean, our revenue is under pressure, while it's now two-thirds of the outcome base business in P&I, which is, I mean, a good example of that is what Peter was discussing several times, which is the semiconductor business. This one is high growth. I mean, as we speak, it is up double digits, and that's a nice diversification for us away from the call center business, and again, historically, the call center business was two-thirds of this outcome base.

Now it's only one-third because we grow very, very fast on the outcome-based, especially around specialties or combining our specialty in delivering outcome-based in P&I together with some industry verticals.

Kevin Steinke (Managing Director and Senior Research Analyst)

Okay. Sounds great. So you alluded a couple of times there or mentioned a couple of times about taking market share in SET and P&I, and you actually had a comment in your earnings release about the stable year-over-year organic revenue actually outpacing the market. So maybe just speak to that, what the factors are that you think are enabling you to take market share and the competitive dynamics, and if you feel like you can continue that trend of taking share and outperforming the market going forward.

Peter Quigley (President and CEO)

Yeah, Kevin, we do think it's possible. And I think I would point to a couple of dynamics. Education, we're just clearly the leader.

And we have a value proposition for school districts that really no one else can match. And so that's why, as Olivier mentioned, we continue to expect to see double-digit growth, at least for the near term. Who knows how long that can be sustained given the more difficult comps. But education, we're just the leader there. In both P&I and SET, I think we're taking share because of the solutions that we're bringing to the market. I mentioned the omnichannel strategy in P&I staffing. Olivier mentioned the focus on outcome-based in P&I, but that's also gaining traction within SET. And our Statement of Work suite of solutions, we think, is a competitive differentiator in the science, engineering, telecom, and technology space. And we think that we're going to continue to develop that.

In OCG, we're taking share because of our technology-driven solution, particularly our Helix solution is a competitive differentiator. Customers recognize that. That's why, particularly in our MSP practice, we are winning more than our fair share of large MSP business. We have a very healthy pipeline, but we've also won and have an implementation, a number of very large programs that will begin to deliver GP in 2025, more so in the back half of 2025. But again, it's the result of a set of solutions that we think create and set Kelly apart.

Kevin Steinke (Managing Director and Senior Research Analyst)

Great. Yeah. That's helpful insight. Appreciate that. Just lastly, Olivier, when we think about the adjusted SG&A expenses for the third quarter, they were $210 million up sequentially from $185.6 million. Is that just really driven by the inclusion of MRP, I assume?

Olivier Thirot (EVP and CFO)

Yeah. I mean, yeah. I mean, clearly, when you look at the impact of MRP and what we provided in the outlook is, I would say, something you can use for Q3 as well. I mean, MRP is adding about $30 million of expense, excluding depreciation and amortization every quarter, right? This is what we have seen in Q3. This is what we are going to see in Q4. After that, things are going to change because we are going to have, of course, synergies whenever we start the integration that Peter was discussing a few minutes ago, starting in Q2 of next year.

Kevin Steinke (Managing Director and Senior Research Analyst)

Okay. Yeah. Thanks for that. That's helpful, and on what I believe is now your last earnings call, Olivier, I will add my best wishes.

Olivier Thirot (EVP and CFO)

Thank you. I appreciate it very much. Thank you. Thank you very much.

Operator (participant)

And with that, our next question comes from the line of Marc Riddick with Sidoti. Please go ahead.

Peter Quigley (President and CEO)

Good morning, Marc.

Olivier Thirot (EVP and CFO)

Good morning.

Operator (participant)

Oh, one moment. His line seems to have dropped out of the queue. One second here. I'll get him back.

Marc Riddick (Senior Equity Analyst)

Hello?

Operator (participant)

And please go ahead with your question, sir.

Marc Riddick (Senior Equity Analyst)

Hi. Can you hear me?

Peter Quigley (President and CEO)

Yeah.

Olivier Thirot (EVP and CFO)

Yeah.

Peter Quigley (President and CEO)

We can, Marc. Good morning.

Marc Riddick (Senior Equity Analyst)

There we go. Okay. Good morning. Just want to echo my sentiments as well, Olivier. Thank you for everything. It's certainly been a pleasure working with you. I was sort of curious as to you guys covered quite a bit already.

I was sort of curious as to whether or not you could talk a little bit about the integration and maybe some of the potential that you see as far as investment opportunities or technology spend or some of the things that maybe some initial thoughts as to sort of how that integration might play out with the market?

Peter Quigley (President and CEO)

Well, I think our focus, Marc, right now is to create a plan that takes advantage of the really unique capabilities of both Kelly and MRP. And that includes how we go to market. It includes bringing the best practices of each enterprise to the other and its customers and talent. That work is well underway. As I said, we're not going to do anything during the earnout period, but beginning Q2 of next year, we will begin to implement those integrations.

MRP brings to the equation some really exciting technology opportunities for Kelly. And so we're going to be very focused on how we scale the technology to include not only our SET business, but also potentially, and at some point, the Kelly enterprise. We think that's a very exciting opportunity to create value beyond the sort of four walls of MRP. And so again, we're eager to get started, but respecting the earnout period. But we're doing a lot of the preparatory work to make sure we're ready to go.

Olivier Thirot (EVP and CFO)

Yeah. I think Peter was saying we are planning. We have a plan now on business integration, technology integration, and of course, back office integration because we need to be ready as soon as the earnout is behind us. And I think we are ready.

I mean, we have some targets to achieve in terms of top-line synergies that we have shared, I think, in June or July when we're talking about this Motion acquisition. So we feel comfortable that we are going to be able to execute those initiatives as soon as Q2 of next year.

Marc Riddick (Senior Equity Analyst)

And this might be a little early, but I'm sort of curious as to whether or not you've had the opportunity to gain customer feedback, client feedback as to the combined operations and maybe what you may be hearing there if it's not too early for that.

Peter Quigley (President and CEO)

Marc, it's been universally positive. I think people recognize that combining two outstanding organizations like ours creates a lot of potential. I think Kelly's customers are very excited about the really high-quality talent that Motion is known for being able to recruit and place.

The Seven Step brand is well recognized as a leader in the RPO space. So our customers are excited about the best practices that Seven Step will bring to the KellyOCG RPO practice. The Motion Telco practice is a leader and has a very complementary customer set to Kelly's telecom practice. And TG Federal is an excellent government business that, again, is highly complementary to Kelly's formidable government business. So the customers recognize that and see opportunities for new solutions, new technology, and again, an opportunity to bring the very best talent to their workforces.

Marc Riddick (Senior Equity Analyst)

It's very encouraging. Thank you very much.

Peter Quigley (President and CEO)

Okay, Marc. Thank you.

Olivier Thirot (EVP and CFO)

Thank you, Marc.

Operator (participant)

And once again, if there are any additional questions at this time, please press one, followed by the zero on your touch-tone phone. Once again, if there are any questions, please press one, then zero at this time.

It does appear at this time there are no further questions from the phone lines.

Peter Quigley (President and CEO)

Okay, Brad. Well, let me add, again, my final thanks to Olivier for his tremendous contributions to Kelly and wish him all the best.

Olivier Thirot (EVP and CFO)

Merci and au revoir.

Peter Quigley (President and CEO)

Thank you, Olivier. Brad, I think we're all set.

Operator (participant)

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