Kelly Services (NASDAQ:KELYA) Q3 2020 Earnings Call

0:00 Good morning and welcome to Kelly Services' third quarter earnings conference call. All parties will be in listen only until the question and answer portion 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. I would now like to turn the meeting over to your host, Mr. Peter Quigley, President and CEO. Please go ahead.

0:24 Thank you, John. Hello, everyone, and welcome to Kelly Services' third quarter conference call. With me today is Olivier Thirot, our chief financial officer, who will walk you through our safe harbor language.

0:35 Yes, 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.

1:28 We have also provided more information on our performance in the third quarter slide deck, which is available on our website. During our discussion this morning, we'll refer to that deck so it may be helpful to have it available. Now back to you, Peter.

1:47 Thank you, Olivier. To give you an idea of what we'll be covering today, I will start my perspectives on Kelly's current business environment including the impact of COVID-19 in the third quarter. I'll then explain how our new operating model has resulted in a change in our operating segments and how this new way of organizing our business is designed to accelerate growth in our chosen specialties. Olivier will give you a brief overview of the new segments and then walk us through the highlights of our quarterly performance that were announced in this morning's earnings release. I'll then share some observations before Olivier provides perspectives on Q4. And finally, I'll conclude by highlighting Kelly's plans to connect even more people with work that enriches their lives.

2:38 Now let's turn to Q3. While COVID-19 continued to impact Kelly's business in the third quarter, lowering top line growth compared to Q3 last year, Revenue trends in all of Kelly's operating segments showed sequential improvement, reinforcing our earlier assessment that the worst is behind us. What we're currently seeing in our business is some gradual but uneven recovery, featuring stronger demand tempered by some ongoing challenges in talent supply, particularly in lower-wage jobs. and many have quickly adapted to challenges in the talent market with more attractive pay and benefits.

3:23 While many small and medium-sized customers are taking longer to recover and their demand remains sluggish by comparison. Amid this unique business environment, Kelly continued to execute on our pre-pandemic strategic plans. moving forward to reinvent our operating model and redefine Kelly as a specialty talent provider. We've strategically chosen to focus on specialties with the most robust demand, the most promising growth opportunities, and where we believe we excel in attracting and placing talent. Our chosen specialties also reflect our desire to shift our portfolio toward higher margin specialties. As part of this important step forward in Kelly's evolution, today we are reporting financial results by five operating segments based on our specialties.

4:17 Science, engineering, and technology, education, professional and industrial, previously known as commercial, OCG, and international. While Kelly has played in these specialties for many years, Our new operating segments represent an important part of our new operating model, one that combines for scale and focus all revenue-generating resources of a particular specialty regardless of whether they're staffing or outcome-based. For example, all products or solutions we'd think of as commercial, our office and clerical staffing, light industrial, call center, and business process outsourcing solutions that include or even combine these skill sets are now part of our professional and industrial business unit, sharing the same leader, the same sales and marketing team, and the same P&L.

5:13 This new way of organizing our business focuses our efforts where we are best able to win, removes artificial organizational barriers, and combines subscale businesses within our portfolio to give us greater advantages in the market. We believe our new structure is the right move for today's Kelly and we expect our disciplined specialty focus to deliver growth coming out of the crisis, not just any growth, but profitable growth that delivers shareholder value. We've established growth targets for each specialty and those targets will help guide future capital allocations. We are encouraged by the increase in demand across each of our new operating segments, yet we don't expect all of our growth to come organically.

6:02 We are reviewing strategic, targeted M&A opportunities in our specialties most primed for growth, such as technology and education, while at the same time continuing to optimize our portfolio as demonstrated by the sale of our staffing operations in Brazil during Q3. I'll now turn it over to Olivier to further explain each of our operating segments and to review their Q3 results. Thank you, Peter.

6:30 On slide 7 of the deck we issued today, we have an overview of the five segments that are the outcome of the new operating model and their respective pre-pandemic 2019 financial information. So, quickly, as we can go into more details during the Q&A, and starting with science, engineering and technology. It's a more than $1 billion business operating primarily in the U.S. and Canada. As you would expect from the name, the specialty focus areas are science, engineering, IT and with our well-placed acquisitions of GTA and NextGen telecommunications. Now that the focus is on specialties, We have brought together the brand-based and centralized staffing delivery models with the outcome-based products that deliver all these talent skill sets into a single business unit or segment. This allows us to combine what had been subscale businesses in our old structure and align our sales and recruiting efforts in the space to more effectively and efficiently compete for customers and talent.

7:45 The GP rate reflects the higher margin specialty and outcome-based services, but we also have some very valuable large accounts in this segment, albeit with lower margins. Next, education. Including the results of our recent acquisition of Insight, 2019 revenues were about $500 million, all in the U.S., Our largest specialty in K-12 instructional and support staff. And we are building on our market leadership to also provide talent in early childhood and higher education settings. In the future, we expect education will provide a broad range of talent to customers in these markets, including services directed towards special needs students.

8:41 reflect the delivery of services to both large metropolitan school districts as well as smaller districts across 41 states. Professional and industrial, with more than $2 billion of revenue in the U.S. and Canada, combines our branch-based and centrally delivered staffing solutions in the office, professional, light industrial, and call center specialties together with our outcome-based products that deliver talent in those same skill sets. Kelly Connect, our virtual contract center product, is included in this segment. Similar to science, engineering, and technology, bringing these delivery models together as a single business unit eliminates artificial organizational barriers and allows us to continue to increase our efficiencies.

9:38 Our GP rate for the segment reflects the combination of staffing services to both large and SME customers as well as higher margin outcome-based services. Outsourcing and consulting combines managed service provider, MSP, recruitment process outsourcing, RPO, and payroll process outsourcing, PPO businesses, with our consulting practices and delivers services to customers on a global basis. Revenues for this segment were just over 375 million in 2019 and the GP rate reflects that we have combined products with different GP rate profiles including lower margin parallel processing with higher margin fee based products.

10:29 As a result, margins in the segment will vary quarter to quarter depending on product mix. And finally, International is more than $1 billion business, predominantly in staffing, covering business in Europe, Mexico, and also Brazil, before it sells in Q3 of 2020. Moving forward, the segment operates in 15 countries in Europe and in Mexico and provides both white and blue-collar talent. Most countries will continue to focus on delivering solutions to life sciences customers in their respective geography, as well as locally relevant specialty niches such as watchmaking in Switzerland.

11:14 The GP rate for the segment reflects the blend of large and SME businesses served. Information about the financial performance of each of these operating segments was included in our prepared materials released earlier this morning, and now I'll move to a discussion of our Q3 results for the company as a whole. As Peter mentioned, our Q3 results reflect the continuing impact of the COVID-19 pandemic, the beginning of some stabilization in economic activity, and the impact of the availability of talent. The results also reflect the continuation of our temporary expense mitigation actions and, to a lesser extent than EQ2, limited-duration government stimulus and pandemic assistance in the U.S.

12:09 Revenue totaled $1 billion, down 18% from the third quarter of the prior year. The impact of foreign exchange on our revenue growth rate was not significant. As we mentioned last quarter, in Q2 we reached the full depth of impact of the COVID-19 crisis on demand and had begun to see sequential growth in customer demand as we exited Q2. During Q3, we continued to see gradual improvement in demand, particularly in large accounts. We experienced the biggest gains early in the quarter and the Q3 exit rate The Q2 exit rates or year-over-year revenue trends for the month of September were consistent with our average for the quarter for the total company.

13:03 Gains in demand have been uneven depending on specialty and customer, but revenue trends in all segments have improved since the second quarter. Like in Q2, our education business continues to be particularly impacted as U.S. school districts returned to school in the fall using a variety of delivery models, including virtual and hybrid, which has an impact on the demand for our services. As we moved through the quarter, our Q3 revenue results were also impacted by talent supply constraints in the U.S. While enhanced unemployment benefits were reduced during the quarter, COVID-19-related child care needs and personal safety concerns are still impacting the pool of available talent in some skill sets, especially in education and professional and industrial.

14:02 And finally, our OCG segment has continued to be the most resilient with a 7% decline in revenue for the quarter. While certain customer industries such as energy were negatively impacted, the demand from life sciences customers remained strong. Permanent placement fees were down 40% year-over-year as the impact of economic uncertainty has depressed full-time hiring in all segments. Overall gross profit was down 16.1%. Our gross profit rate was 18.4%, up 40 basis points when compared to the third quarter of the prior year.

14:47 The rate increase was driven by several factors. were positively impacted by lower employee-related costs and improved product mix. This was partially offset by the negative impact of lower term placement fees and unfavorable customer mix as the recovery of demand from large customers with lower margin outpaced the recovery for small and medium-sized customers. The impact of government stimulus and pandemic relief related to our talent on assignment and recorded in cost of services was not significant and there was no impact on our Q3 GP rate. SGN expenses were down 8.2% year-over-year.

15:36 Included in expenses for the quarter was a $9.5 million non-cash charge in our international segment to increase our allowance for doubtful accounts receivable. The charge is related to a protracted contract dispute with a customer we stopped servicing in 2014. There are no similar disputes with ongoing customers. Excluding the 9.5 million charge, expenses for the quarter were down 12.7% year over year. The decline in expenses reflects the temporary expense mitigation actions we took starting in April including the compensation adjustments we have mentioned in the past and to a lesser extent the benefit of COVID-19 government subsidies related to our full-time employees in the US which we recognize in the quarter.

16:34 We have also seen the continuing benefits from the cost reduction actions we took in Q1 2020 prior to the pandemic. And finally, The year-over-year comparisons are impacted by the unusually low level of incentive compensation expense in Q3 of 2019. Sequentially, expense levels in Q3 have increased modestly over the course of the quarter as we brought back employees who had been temporarily furloughed in Q2. Our reported loss from operations for the quarter was $2.4 million compared to Q3 2019 reported earnings of $17.1 million.

17:19 Our Q3 2020 earnings include the $9.5 million non-cash charge related to a customer dispute. So, on a like-for-like basis, Q3 2020 earnings from operations were $7 million, a decline of 59%. versus last year. The professional and industrial science, engineering, and technology and OCG segments delivered operating earnings for the quarter. The international segment reported loss includes a $9.5 million charge related to the customer dispute I mentioned, but when adjusted for this item, international earnings are nearly break-even for the quarter. and while four of our five segments experienced a decline in year-over-year earnings, the OCG segment earnings increased significantly year-over-year as a modest decline in GP was more than offset by strong cost management.

18:25 Kelly's earnings before tax also include the unrealized gains and losses on our equity investment in personal holdings. For the quarter, We recognize a 16.8 million pre-tax gain on our personal common stock compared to a 39.3 million pre-tax loss in the prior year. These non-cash gains and losses are recognized below earnings from operations as a separate line item. Income tax benefit for the third quarter was 1.2 million compared with our 2019 income tax benefit of 12.8 million. Our effective tax rate for the quarter was a 9% benefit as tax expense on current period earnings was more than offset by the benefit of the work opportunity tax credit.

19:20 And finally, reported earnings per share for the third quarter of 2020 was 42 cents per share compared to a loss of 27 cents per share in 2019. In order to better understand the underlying trend in earnings, let me provide some additional information. 2020 earnings per share was favorably impacted by the gain on personal common stock, partially offset by the non-cash charge related to the customer dispute. In 2019, EPS was negatively impacted by a loss on personal stock. Adjusting for these items, Q3 2020 EPS was 29 cents. compared to $0.43 per share in Q3 2019, a decline of 33%.

20:12 Now, moving to the balance sheet. Cash totaled $248 million compared to $23 million a year ago. Debt was nearly zero, down from $2 million at Iran 2019. We ended the quarter with no borrowings in our U.S. credit facilities. Our cash balances increased reflect the impact of reductions in working capital, primary accounts receivable as revenues decline beginning late March and the benefit of the deferral of payroll taxes in the U.S. under provision of the CARES Act. As we navigate this period of economic uncertainty, we'll continue to manage our cash and debt closely to ensure that we have the working capital available to capitalize on the economic recovery and to take advantage of future market growth opportunities.

21:04 Accounts receivable was 1.1 billion and decreased 12% year-over-year. Global DSO was 61 days, an increase of 3 days over year-end 2019 and 2 days from the same period last year. While we have experienced an increase in DSO, it does not reflect a deterioration of the quality of our receivables. The increase reflects two trends we foresaw in Q2 as a result of the pandemic. First, customers are continuing efforts to manage their own cash flows and are taking advantage of their full payment terms with us. Second, there has been a shift in our customer mix as large accounts demand has recovered faster and has resulted in a greater proportion of business with large customers who generally enjoy longer payment terms.

21:58 We continue to monitor customer payment patterns very closely and are confident that our collection teams have the resources necessary to respond to current conditions. In our cash flow for the quarter, we generated $34 million of free cash flow compared to a use of $4 million of free cash flow in the same period in 2019. As I mentioned, we have continued to benefit from the ability to defer certain payroll tax payments as part of COVID-19 related economic stimulus and that is a primary reason for our increase in free cash flow for the quarter compared to a year ago. Given that we have been operating at a reduced level of demand for the past two quarters and demand and revenue have gradually improved from their Q2 lows, we would expect to begin to use some of our existing cash balances to meet working capital needs if volumes and many more.

23:22 virtual call center, and OCG Solutions have all performed well in this challenging climate. And while our education specialty has been dramatically impacted by COVID-19, we continue to believe it offers considerable growth potential. In a post-pandemic environment, we believe the demand for educators and instructors is going to increase. and our acquisition of new school district customers during the pandemic plus a strong pipeline of new prospects support this assertion. What's less clear in a post-pandemic environment is the staffing demand we'll see from small and medium-sized businesses we serve within Kelly Professional and Industrial. Without the resources of larger companies which are showing good signs of recovery, small and medium enterprises have been disproportionately impacted by COVID-19 and and are not yet showing the same signs of recovery.

24:19 Overall, we delivered acceptable Q3 results in a tough business environment. We're encouraged by our sequential improvements and strong pipelines in all of our operating segments and will continue to closely track the recovery's trajectory as we enter the next phase of the pandemic. Olivier will now share his thoughts on what lies ahead.

24:40 Thank you, Peter. Consistent with the past two quarters, we are not providing guidance based on where we are in the cycle. Economic conditions continue to be highly uncertain. However, we are comfortable that after reviewing fourth quarter economic data and completing our annual planning cycle, we'll be in a position to return to providing an outlook each quarter, beginning with our year-end 2020 earnings call in mid-February. Since the early stages of the crisis, we have continued to evaluate a variety of demand scenarios based on the depths of the downturn and now the speed and stability of the economic recovery, including the possibility that there will be repeated cycles of reopening of the economy and then a subsequent resurgence in infection rates. We continue to review the resulting impact of these scenarios on earnings, cash flows, and Debt Covenants Metrics.

25:40 We continue to stress our cash flows and debt covenants and at this point we remain confident that we have adequate financial resources and liquidity to weather the crisis. We are also planning so that we are prepared to take actions that advance our strategy. For example, in a quarter we completed a sale of our staffing operations in Brazil and are evaluating opportunities to advance Our inorganic strategy in the specialties where we choose to focus to accelerate our growth. So while we aren't providing guidance, I will share some perspective on the fourth quarter. Current trends may not be predictive of future results, but they are helpful to understand the current level of demand and customer buying behavior.

26:28 As mentioned in my remarks on the third quarter results, revenue declines were not even across the segments and neither has been the pace of subsequent improvements in revenue trends. Education in particular will be challenging in Q4 as less than 25% of the districts we service are back to full in-person instruction. While we are supporting our K-12 customers with remote and hybrid instruction, demand for our services will be higher when all schools are able to return to in-person instruction. Assuming the current global response to COVID-19 and related economic impacts doesn't change significantly, we expect the recovery period to reach pre-crisis revenue levels will be longer than our view when we reported in Q2.

27:23 To give a sense of the speed of recovery we are seeing, for the month of June, our year-over-year constant currency revenue decline was 22.5%. and our Q3 constant currency year-over-year revenue decline was 18.2%. Revenue trends were consistent for each month during Q3. Other factors specific to Q4, we are starting to see some of the traditional seasonal lift in demand for our services in the distribution and logistics sectors, which is encouraging. And we anticipate that revenue in education will also exhibit the normal seasonal trend caused by the K-12 school calendar.

28:11 And as a reminder, 2022 is the 53rd week fiscal year for us, so Q4 will have 14 weeks of revenue, but the additional week is a holiday week, so we will gain about two working days in Q4. We continue to expect revenue trends to reflect year-over-year declines until we anniversary the economic impact of the crisis in March 2021. We expect our Q4 GP rate to be slightly lower than Q3. We expect to have the seasonal increase of education revenue at lower margins and certain employee-related costs that are always subject to a degree of variability that we would expect could be even more pronounced during the pandemic.

28:57 We have continued to work closely with our customers and have not yet seen any material sign of margin pressure due to the current environment. And as discussed, we have taken some definitive steps with respect to SG&A expense levels in response to the crisis and will continue with strict cost controls. However, we are ending the temporary compensation reductions enacted at the beginning of the crisis in the months of November and ended all furloughs in October. Based on the anticipated speed of the recovery, we have continued to assess our service delivery infrastructure and cost base. In mid-October, we made the difficult decision to start reducing our internal staffing levels in line with expected volumes. We'll continue to monitor conditions and take actions consistent with our scenario planning.

29:54 Back to you now, Peter.

29:56 Thank you, Olivier. We're making strides in our digital transformation journey, building a technology foundation to sustain growth. We're affirming our commitment to talent on assignment last quarter, introducing our five-point talent promise. And we continue to monitor the market for acquisition targets to bolster our inorganic growth aspirations. This progress would not be possible without the talent and dedication of the Kelly team. and the passion we share for our purpose of connecting people to work in ways that enrich their lives. And we are now looking to extend this purpose. From our vantage point operating squarely in the middle of the talent supply and demand equation, we continue to see that longstanding systemic barriers in the US make it hard or even impossible for some people to secure enriching work.

31:13 As a talent company that's always considering what's next for talent, We believe we can and should do more to champion those who aren't given a fair opportunity to secure meaningful work. Our new platform announced last month, Equity at Work, sets a course to upend systemic barriers to employment and make the U.S. labor market more equitable and accessible for more people. Kelly is uniquely capable of being a catalyst for positive change. and we believe that change will not only help Kelly place more people in great careers at great organizations, but also help their families, communities and the overall economy thrive. In closing, I'd like to thank our internal teams, our talent on assignment, our customers, our board of directors and shareholders for their support.

32:03 These are challenging times, but together we are rising to the occasion and will emerge stronger than before. John, you can now open the call to questions. Certainly. And ladies and gentlemen, if you wish to ask a question, please press 1, then 0 on your telephone keypad. You may withdraw your question at any time by repeating the 1-0 command. If you're using a speakerphone, please pick up the handset before pressing the numbers. Once again, if you have a question, you may press 1, then 0 at this time. and one moment for our first question. And we'll go to Josh Vogel with Sedoti. Please go ahead.

32:42 Thanks. Good morning, guys. Hope you're doing well. Good morning, Josh. Good morning, Josh. Hi. Peter, earlier on in your commentary, you were talking about seeing some supply issues in lower wage jobs. I'm assuming that's because of stimulus and unemployment level, where people are getting paid in unemployment. Now, I'm assuming that's in professional and industrial, but I'm curious if you could just talk to order flow within that division relative to three months ago. Are you seeing stronger orders coming in, but you just don't have the supply, and do you expect that supply to improve once, you know, now that the stimulus is over?

33:26 Yeah, thanks, Josh, and I hope you're doing well, too. Yeah, we're very encouraged by the order of demand that we're seeing in professional and industrial, but also in other parts of our business. I think it's not only the stimulus dollars, but it's also small and medium-sized enterprises that are reluctant to really match the market wage rates, particularly when you have big box companies companies that are paying $15 an hour if a small and medium-sized business isn't willing to match that. It's a challenge to find talent, particularly in an environment where people have transportation needs, child care needs, may be reluctant to go into a workplace because of concerns about the pandemic.

34:23 So it's a combination, particularly at the lower end of the wage scale. We don't see the same dynamic in our professional skill sets.

34:35 Just maybe to add on that, especially to the P&I segment, we have seen wage inflation basically on this segment moving up. We were at about four last year, Q1 of this year, four percent increase. We are now more at 6% to 7%, meaning that in some cases we are successful at convincing some customers, probably mainly large customers, to really get more competitive in terms of wages, which of course, I mean, knowing the numbers I was sharing with you is rather positive for us also. Thank you for the insights, Aaron.

35:18 Olivier, you may have talked a little bit to this, but I was writing down notes, so I missed it. Looking at your science, engineering, and tech, I'm not sure if you guys are going to call that set or whatnot, but down 14%. It's mostly U.S. and Canada. I'm seeing some of your peers that provide services to that end market. They were down more in the mid-single digits. I was just wondering if you can talk to the difference maybe in your business and just talk to some pockets of strength there versus weakness that you saw in the quarter.

36:00 We see very positive signs of improvement in science. Clearly, we have seen some pickup over time from Q1. I would say Q2 was pretty resilient, but we have seen now things moving up pretty quickly. Engineering is much more challenging, and one of the reasons is oil and gas, where we still see some downside. We start to see IT picking up. Telecommunication, which is basically NextGen and GTA, our 2019 acquisitions, is a little bit down, not because of the market, but more because of some customer dynamics, namely around T-Mobile and the merger around that. But I would say we start to see very good signs in terms of science and, to some extent, IT or technology technology.

36:57 And Josh, I would just point out that our exposure or the volume of business we have in IT is smaller by comparison to a number of companies in the professional and technical space. Hence, our inorganic strategy, as I mentioned earlier, in addition to education, also looking to bolster our portfolio if the right opportunity came along for an acquisition.

37:28 Right, sure, that makes sense. The customer dispute in Mexico, is that an isolated event? Are you having any other negotiations with clients, whether there or elsewhere globally?

37:43 No, as I said, it's really a one-time event. It's a non-cash item. It was a dispute that is older than five years. It is basically one of our customers in Mexico. to make it clear. We don't have any more relationship with this customer so I would call it a very isolated case that is pretty old but we have not seen or we have not any other similar exposure so far.

38:18 We have a great track record with our customers as you know our accounts receivable are one of our Strongest Assets, and over many, many years, this is a one-off situation that resulted from just an extenuating set of circumstances and the Mexican court system.

38:42 Yeah, when you look at our balance sheet, and we mentioned in the balance sheet and also in some disclosures the level of bad debt we have historically, this is really a very unusual type of event, not because we don't have bad debt, but it's more the magnitude, the unique magnitude of this event.

39:04 Sure, sure. Just one more, and then I'll hop back into the queue, but just trying to get a handle on cash flow, especially thinking into 2021, and when we look at the balance sheet, the line item for accrued payroll and related taxes, that That's all deferred payroll taxes, and we should expect half of that to be paid at the end of 21 and the other half at the end

39:28 of 22? Yeah, I mean, when you see the balance sheet, you're going to see there is a specific line item in long-term liabilities. Now it's about $76 million. That is basically mainly the deferral of the U.S. payroll tax. It was a positive boost to our Q2 free cash flow for about 38 million, and again in Q3 for the same type of amount. We expect, of course, a similar amount of benefits in Q4, so the total is going to be probably around 110 million, and 50% of it should be...

40:17 paid basically at the end of next year and the second half at the end of 2022. Great.

40:25 Well, thanks, guys, for taking my questions. I look forward to talking soon. Thank you, Josh. Next, we'll go to Kevin Steinke with Barrington Research. Please go ahead.

40:38 Hey, good morning.

40:39 Morning, Kevin. Good morning.

40:42 So you referenced strong new business pipelines, I believe. Maybe could you just talk about what's contributing to the strength in the pipeline as you see it?

40:56 Yeah, I think particularly among our large accounts, Kevin, we're seeing very strong demand, and that's both in Our professional industrial and also in our set business of science, engineering, and technology. And I think it's just a reflection that those businesses are figuring out how to operate in a pandemic environment. And there is some pent-up demand for the products and services that they offer. Our life sciences practice, for example, has been resilient throughout the pandemic, but we're seeing nice increases in order demand there. Distribution, Logistics, but it's particularly apparent among our large accounts.

41:45 I would add Automotive where we see a lot of improvement, which is very helpful for us as well.

41:56 Okay, great. And so those opportunities are actually... Moving forward in the pipeline in this environment, it's not a situation where maybe things are in the pipeline but they're a little slow to convert or just trying to get a sense as to how quickly those opportunities are moving towards actual revenue generation.

42:21 I think I'd actually say among the large customers they're accelerating. I think among small and medium sizes, as I said, it still remains a little bit slow to are outsourcing consulting. New wins have been very, very encouraging, as well as the pipeline. The decision-making cycles in that space tend to be a little bit longer than pre-pandemic. But again, we're seeing deals being closed, a number of significant ones last quarter, and the pipeline looks strong as well in the OCG space.

42:58 Okay, great. So, Olivier, you walked through some of the factors behind the year-over-year gross margin improvement. I don't think you actually broke out kind of the basis point contribution, like product mix and employee costs. Would you be able to provide that as you have in the past?

43:25 Yeah, I mean, when you look at Q3, so our margin is about 18.4%, so 40 base points higher than 2019. And it's very helpful because basically it is moving our GP dollar decline at minus 16% instead of minus 18 in revenue. I would say when you look at the 40 base points, the product mix, which is something we have seen structurally over time. Out of the 40 basis points, it's around 20, which is something we have seen in the past. We have been always showing improvement year over year of about 20, 25 basis points.

44:14 Fees and customer mix are, I would say fees is much more in international where we have more exposure into fee business. Customer mix, yeah, is slightly negative. I would say these factors are more or less offset with employee-related costs. And employee-related costs, I mean payroll tax in the U.S. This one, I would say, it's a quarter of a quarter normal fluctuations we have. And I would say the main factors you need to think about is our structural improvement of our product mix, about 20-something basis points. And the other 20, I would say, is the result of this employee-related cost positive, partially offset by a little bit of pressure on the fees, especially in international, and the customer mix that we are mentioning, whether it's on margin but also of course on DSO. So I think what you need to think about is that we are still on track to continue to improve our value profile or GP margin by about 2025 basis point due to this product mix as we have done for the last five years in fact.

45:39 As a reminder our GP margin in 2014 was 16.3 and we have seen even during this challenging environment in 2020 Our margin being, you know, even if you exclude, you know, one-time CARES Act and employee benefit fluctuation, I mean, continuing to show progress. And again, the main long-term structural driver is the product mix I was referring to.

46:07 Okay, that's helpful. Thank you. So I just wanted to get a sense as to, you know, how you think SG&A might trend, you In the fourth quarter, you mentioned ending temporary reductions to compensation and also bringing back employees from furlough. You also referenced doing some adjustments to internal staffing. So I guess kind of against that SG&A adjusted for the customer dispute in 3Q, would you expect SG&A to kind of tick up sequentially, or how would you think about that?

46:52 Yeah, I think the way I see it is really we are keeping an eye on what we call a recovery ratio, right? I mean, how much of the drop in GP dollar we basically offset. by basically SG&A management, right? So in Q1, it was about 63%, Q2, 80%, Q3, 74%. So that means that basically if you look at Q3, we have managed to offset 74% of the drop in GP through SG&A management, right? And it's a very good way to basically protect our bottom line.

47:38 And when I look at Q4, we see this recovery ratio probably trending around, I would say, 50%, meaning that we expect basically to cover, through cost management, about 50% of a potential pressure on our GP dollar growth in Q4.

48:08 Okay, that's great. Very helpful. So with your transition to the new segment structure, I know it's kind of early days, but any initial returns or early wins from that structure that you're seeing just within the organization or within the pipeline?

48:29 Yeah, very pleased, Kevin, already. I think the focus and the combination of the what I referred to earlier as the subscale businesses that were in different segments. We've seen some early customer wins. I think the discipline and focus around the specialty that the combination of those resources has produced a, I'll call it a re-energized organization and I think we're frankly ahead of where I thought we'd be after just one quarter.

49:10 Yeah, for instance what we see and that's one of the very positive outcome of the new structure amongst those things is combining outcome-based business with staffing I think is creating a new dynamic and if I look at for instance P&I and I'm referring to Q3 numbers so not an extremely positive environment Our outcome-based business in P&I in Q3, the revenue is up by 16%. And we have seen some acceleration. First of all, it's a very resilient business. We have said that several times. But when I was looking at the numbers, we have seen some acceleration in Q3 of the dynamic. And I believe that part of it is really combining outcome-based together with staffing, for instance, in P&I, that is creating, I think, broader integration, top-line synergies and opportunities that I think we start to see, for instance, with this example.

50:16 Okay. That's a helpful color. I think you mentioned in your prepared comments that you established growth targets for each segment. I don't know if in the future you'd be open to discussing those or what your plan would be for maybe longer term once we get past this crisis, perhaps talking about those targets.

50:45 Yeah, Kevin, going back to pre-COVID, I think in my remarks in February, we talked about the and many more. Thank you.

51:25 Okay, yeah, fair enough. Makes sense. I'll turn it over for now. Thanks for taking the questions.

51:30 Yeah, thanks, Kevin. Appreciate it. Thank you, Kevin. Next, we'll go to Joe Gomes with Noble Capital. Please go ahead.

51:39 Good morning. Morning, Joe. So, just real quick, if you could provide a little more color in terms of the thought process behind and sizing. You mentioned you sold in the third quarter, your Brazilian staffing operations?

51:59 Yeah, so I'll let Olivia give you the numbers, Joe, but we made the investment in Brazil more than probably 10 years ago with aspirations to have that be sort of a beachhead for a Latin America expansion. In the intervening decade, we've obviously changed course, and the and so on. And you are going to see that in...

52:46 Our earnings release and also, of course, our 10Q. I mean, when you get the size of the transaction and you are going to see the cash impact, the cash proceed net was about 1.2 million and you are going to see that on our cash flow statement. So, small, right? And the P&L impact, I mean, is close to zero, meaning overall the transaction was at book value. Thank you very much. Another step on our focus strategy, you might remember that over time we have basically divested healthcare, legal, and that's another step on our focus strategy.

53:57 But pretty small impact overall, right?

54:01 Thank you for that. Switching gears onto the education business and understanding some of the challenges there, You did mention you had acquired some new clients in the quarters. I was wondering if you could give a little more color or detail there. And also, given the uncertainty in that business, have you seen any increase in difficulty in retaining talent here? Just that, you know, teachers saying, hey, I've got to do something and If the schools aren't going to go back to a normalized model anytime soon, I just have to find something different, is that becoming more and more of a challenge for you in that business?

54:53 Yeah. So, Joe, thanks for the question. I'm sort of reverse order, or maybe in the order you asked them. The new customer acquisition is very promising, given the environment. But even compared to pre-pandemic environments, Our new customer wins are up substantially. And I think it reflects the fact, the comment I made earlier, that when we get to the other side of the pandemic, the demand for instructors and teachers is going to increase. And part of that is the number of teachers that are leaving the profession and retirees, which was already the case pre-pandemic, but probably will be accelerated as a result of the pandemic.

55:42 And with respect to the pandemic environment, particularly among, I would say, people in the upper demographic in terms of age, many teachers are reluctant to go back into a classroom. So that has impacted our ability to some extent to with our historic fill rates have been a little bit lower due to the fact that that substitute teacher population tends to be older than other disciplines because a lot of them are retirees or had some role in education. We have, I think, done a nice job in a short amount of time pivoting to recruiting a different demographic in what we call our momentum seekers, which are individuals who may see teaching as a new career opportunity coming out of the pandemic. And so we've stood up a number of different programs to try to recruit from that demographic into our supply base.

56:57 But I think the The combination of the teacher shortages coupled with what we're seeing from school districts wanting our help to prepare for the post-pandemic environment, we're encouraged, even though the top line has taken quite a hit during the crisis.

57:19 Thank you for that, Colin. One last one for me. Obviously, you've seen the headlines about new lockdowns in Europe. Just trying to get a little bit of more detail here on how it's been impacting your business. How big of a monkey wrench is it throwing at you at this point?

57:47 Well, as you know, Joe, our exposure to Europe is significantly lower than some of our competitors. But we are seeing... Thank you very much. and particularly in countries like France and the U.K.

58:34 where they're basically reinstituted almost total lockdowns, there's likely to be sort of an impact, although it's hard to quantify.

58:51 Okay, thank you for taking the questions. Really appreciate it.

58:54 Yeah, thanks, Joe. Good to hear from you. Thank you, Joe. Ladies and gentlemen, just a quick reminder, if you do have a question, please press 1, then 0. And allow me a few moments. Mr. Quigley, no further questions coming in.

59:13 Okay, John. Appreciate your help. Thank you, everyone. Thank you, John. Stay well. Stay well. Thank you. Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation. You may now disconnect.