KELYA

Good morning, and welcome to Kelly Services' second quarter 2026 earnings conference call. All parties will be on 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. Scott Thomas, Kelly's Head of Investor Relations. Please go ahead.

Good morning, and welcome to Kelly's second quarter conference call. With me today are Kelly's Chief Executive Officer, Chris Layden, and our Chief Financial Officer, Troy Anderson. Before we begin, I'll remind you that the comments made during today's call, including the Q&A session, may include forward-looking statements about our expectations for future performance. Actual results could differ materially from those suggested by our comments. We do not assume any 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, we'll discuss certain data 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. For more information regarding non-GAAP measures and other required disclosures, please refer to our earnings press release, presentation, and once filed, Form 10-Q, all of which can be accessed through our investor relations website at ir.kellyservices.com. I'll turn the call over to Chris.

Thank you, Scott, and good morning, everyone. It's great to be with all of you. In the second quarter, we measurably exceeded our guidance for both total company revenue and adjusted EBITDA margin. These results were driven primarily by positive momentum from our growth and efficiency initiatives. We continue to capitalize on organic growth drivers and constructive demand trends across the enterprise as well. Notably, Kelly's adjusted EBITDA margin returned to 3% in the quarter. This achievement demonstrates our ability to generate operating leverage in pursuit of growth as we continue to re-engineer our cost base while driving greater value for our customers as a strategic workforce partner. The value we deliver continued to be recognized in the quarter, as Everest Group named Kelly a leader in its 2026 PEAK Matrix for RPO and for staffing and solutions in engineering, IT, business and professional, and industrial.

In addition, Forbes once again ranked Kelly among America's best temporary staffing and professional recruiting companies. These accolades are a testament to 80 years of industry leadership and our unwavering focus on meeting the evolving needs of our customers and talent. At the segment level, we delivered sequential improvements in each of our businesses. ETM capitalized on broad-based demand for professional and industrial staffing among both new and existing customers. Talent Solutions benefited from the ramp-up of recent MSP wins. Continued growth in Talent Solutions reflects the differentiation of our technology-enabled and AI-powered offerings. Within SET, revenue grew on a sequential basis for the first time in two years. This represents an inflection point driven by improving trends across each specialty vertical and strong execution by our team following the completion of the leadership transition in the first quarter.

SET's outcome-based solutions also contributed to positive momentum, with revenue increasing over the prior year and contributing 40% of SET's total revenue in the quarter, up from about 1/3 a year ago. This reflects an intentional shift in our business mix as we increasingly leverage our specialized technical expertise across SET's specialty areas to deliver milestone and SLA-based solutions to our customers. In Education, the second quarter marked the conclusion of a strong sales cycle for our K12 staffing business. The cycle included a 100% renewal rate in the quarter, a significant milestone underpinned by industry-leading fill rates and customer satisfaction. We also delivered a year-over-year increase in net new customer wins, which will come online beginning in the third quarter with the start of the new school year.

These positive outcomes reflect the differentiated value we deliver and the depth of our relationships as the largest provider of education staffing solutions in the U.S. Across ETM and SET, our One Kelly Enterprise go-to-market approach continued to generate positive traction with our customers. The recent expansion of our relationship with a leading North American water technology company illustrates the potential of this model. What began as an engineering staffing engagement grew into a consultative workforce partnership through a unified effort across SET and ETM.

Our teams leveraged their combined insights into the company's contingent talent management strategy to identify additional capabilities which address their needs, positioning Kelly to capture the MSP. Through this win, we're well positioned to further expand this relationship as the customer moves forward with plans to double the size of their business by 2030. This is our One Kelly Enterprise go-to-market approach in action.

By supporting our customers as a unified team and bringing the full strength of our portfolio to bear, we're better able to anticipate their needs and position Kelly as a strategic partner in their success. As we scale our enhanced go-to-market approach, our technology modernization initiative is a key enabler. To that end, we delivered another milestone on our journey with a successful cutover onto a unified CRM platform. Powered by AI, this platform enables increased transparency and high conviction forecasting, while also driving cross-selling opportunities across the business. These capabilities are foundational to Kelly's integrated commercial operating framework. Championed by our growth office, this framework is strengthening account planning to capture greater market share and accelerate profitable growth. We also accelerated the integration of AI across the enterprise to drive efficiency and enhance the talent and customer experience.

Growing employee adoption of Grace Boost, our proprietary internal AI platform, is driving increased productivity at a small fraction of the utilization cost of third-party AI platforms. For talent and customers, we continue to scale our AI-enabled recruiting solution to create a more streamlined experience for both. Our solution can operate 24/7 and connect with applicants within minutes of receiving their application, increasing the throughput of highly qualified candidates. Feedback has been positive. Talent appreciate the responsiveness of the application and screening process, while customers value the reduction in cycle time. We're actively scaling new use cases, including for talent care, as we pursue opportunities to reduce turnover and increase redeployment to new assignments with our customers. As our technology modernization initiative creates a foundation for innovative AI-powered offerings, we're evolving our strategy to drive deeper alignment between these critical work streams.

That's why I'm pleased that we recently welcomed Alan Stukalsky as Kelly's Chief Product and Technology Officer. Alan brings significant technology and digital leadership experience to this newly created role. His background includes more than 20 years in staffing and a track record of aligning technology and product strategy to accelerate profitable growth. At Kelly, Alan will oversee product development, technology, and digital innovation efforts across the enterprise. I'm confident he'll be able to help us scale and optimize what's working today while building new capabilities that will define the future of work, from the products our teams will use to deploy our specialized technical solutions to autonomous AI agents. As we continue to solidify our management team in the second quarter, we further strengthened our board of directors as well. In May, we welcomed three new directors, Ryan McCrory, Michael Wartell, and George Woody Young.

Each of these directors brings extensive experience, which positions them to be strong contributors to the board as we drive progress on Kelly's strategic journey. I'm pleased with our achievements in the second quarter, which reflect disciplined execution on our growth and efficiency priorities. The meaningful progress we've delivered on our strategy has set us up on a positive trajectory entering the second half of 2026. I'll now turn the call over to Troy to talk through the quarter in more detail and our expectations for the balance of the year. Troy?

Thank you, Chris. Good morning, everyone. I'm pleased to report second quarter results that both exceeded our guidance and reflect clear sequential improvement across our business. We are increasingly confident with the momentum we've established and are adjusting our full year expectations favorably as a result. For the second quarter, revenue totaled $1.04 billion, a decline of 5.8% versus the prior year quarter, and measurably better than our guidance of down 7%-9%. The year-over-year revenue decline improved 500 basis points relative to the first quarter. Underlying revenue, which excludes the previously disclosed discrete impacts driven by reduced demands from the federal government and three large ETM customers, declined approximately 0.6%, an improvement of 270 basis points versus the first quarter, thus contributing more than half of the overall year-over-year improvement versus Q1. We expect to fully anniversary the year-over-year discrete impacts in the fourth quarter.

Demand across the federal government and the two large ETM customers who remain active has been relatively stable the past three quarters. At the segment level, ETM underlying revenue grew 3.1% year-over-year, which is an improvement of 350 basis points versus the first quarter decline. Staffing and outcome-based solutions, excluding contact center, returned to growth, with staffing growing approximately 3%, driven by strong demand across a variety of clients and industries. Talent Solutions grew for the second consecutive quarter. The growth of approximately 6% was driven by ramping new wins and increased overall demand across the RPO and MSP specialties, with both showing double-digit growth. SET underlying revenue declined 3% year-over-year, an improvement of 300 basis points versus the first quarter. Each specialty area showed year-over-year improvement versus Q1, while telecom delivered another quarter of year-over-year growth.

Education declined 4.4%, which was a 40 basis point improvement versus the first quarter. The decline reflects the ongoing impacts of prior year delayed new contract decisions and overall reduced demand in key markets due to enrollment declines. With year-over-year growth in our new business signings, a strong renewal cycle, and accelerating growth in therapy, we expect to return to year-over-year growth in the second half of the year. Gross profit was $212 million, down 6% versus the prior year quarter, reflecting the lower revenue volume. The gross profit rate was 20.4%, essentially flat to the prior year and up 150 basis points sequentially from the first quarter, reflecting seasonality for employee-related costs and favorable business mix. All three business units saw notable improvement in their gross profit rates relative to the first quarter.

For year-over-year performance, ETM improved 50 basis points while SET and Education both reduced their year-over-year declines relative to Q1. Reported SG&A expenses were $195.9 million, down 5.5% versus the prior year quarter, and adjusted SG&A expenses were $192.7 million, down 4.1%, reflecting the continued focus with our structural and volume-related cost optimization efforts, along with investment in growth, technology and other areas. Core adjusted SG&A expenses, which exclude depreciation, amortization, and incentives, continued the sequential decline trend that has been in place since Q1 of 2025. In the quarter, adjusted SG&A expenses decreased across all three segments as we continue to drive durable and sustainable efficiencies in our operating model through technology enhancements and process efficiencies, including leveraging AI. This includes benefits from the prior year realignments within the ETM segment and the acquisition integration within SET.

For the year, we're projecting a net year-over-year decline in core SG&A expenses of approximately $25 million, or 4%, despite investments being made in technology, the growth office and other areas. The structural changes we are making will allow us to scale more efficiently as we grow, thus supporting our margin expansion expectations in the second half of the year and beyond. Our reported diluted earnings per share was $0.31 for the quarter. On an adjusted basis, we delivered earnings per share of $0.37 compared to $0.54 in the prior year. The year-over-year decline reflects lower profitability and a more normalized effective tax rate. For our adjusted results, in connection with our various efforts, we recognized $3.2 million of charges in the quarter, reflecting reduced integration, realignment and restructuring costs, as well as transaction costs relative to Q1.

We expect to continue incurring various charges throughout 2026 as we advance our technology modernization journey and expand upon our various optimization efforts. Adjusted EBITDA was $31.1 million with an adjusted EBITDA margin of 3%. This was well above our guidance of at least 2.5% and represents 150 basis points of sequential improvement from the first quarter. On a year-over-year basis, adjusted EBITDA margin declined 40 basis points, significantly narrowing the decline versus recent quarters, reflecting the improved revenue and gross profit rate declines and our continued SG&A discipline. For the segments, ETM and SET adjusted EBITDA margin improved approximately 200 and 100 basis points versus Q1, respectively, while Education was stable. Each segment was down year-over-year with ETM down only 10 basis points, a notable improvement relative to the past several quarters. Our balance sheet remains strong and continues to provide ample capital allocation flexibility.

Total available liquidity as of the end of the quarter was $303 million, comprised of $24 million in cash and $279 million available on our credit facilities. During the quarter, we generated $47.7 million of free cash flow and net reduced our debt by $52.4 million, resulting in total debt of $78.1 million at quarter end. Of note, during the quarter, we amended our accounts receivable securitization facility, primarily to extend the term by a year, along with other ancillary benefits that increase flexibility and reduce our cost of capital. We maintained our quarterly dividend of $0.075 per share during the quarter. We remain confident in Kelly's cash generation and are committed to a disciplined and opportunistic approach to capital allocation in pursuit of attractive returns for shareholders.

As we turn to the outlook for the remainder of 2026, our expectations have improved relative to the initial view we established in February and remain unchanged for adjusted EBITDA margin. Our expectations assume no material change in the macroeconomic environment in the coming quarters. For Q3, we expect to show measurable year-over-year improvement relative to Q2. Before I jump into specifics, I want to remind everyone that Q3 is the lowest revenue quarter and therefore a lower profit quarter for Kelly due to seasonality in our Education business as a result of schools being out of session the majority of the quarter. With our volume-based revenue model, this results in notable sequential revenue and adjusted EBITDA declines from Q2 to Q3, along with lower margin, and then a strong bounce back in the fourth quarter.

For the third quarter, we expect underlying revenue growth of 1%-2% and total revenue to be flat to a decline of 2% versus the prior year. For adjusted EBITDA margin, we expect year-over-year improvement of 40 to 50 basis points in the quarter, resulting in adjusted EBITDA margin in the low 2% range. For Q4, we expect to see further year-over-year improvement for both revenue growth and adjusted EBITDA margin, with total revenue growth in the mid to upper single digits and approximately 200 basis points of year-over-year adjusted EBITDA margin expansion, resulting in adjusted EBITDA margin of approximately 4%. This includes the impact of an extra fiscal week in the fourth quarter, which benefits revenue growth by approximately 4 points in the quarter, but negatively impacts adjusted EBITDA.

On a fiscal year basis, that should translate to a roughly low to mid-single digit total revenue decline and 10 to 20 basis points of year-over-year improvement in adjusted EBITDA margin. We are excited about the trajectory of our business going into the second half of the year. I'm thankful for all the Kelly team members and their commitment and resilience as we focus on delivering growth and enhanced profitability over the long term. I'll now turn the call back over to Chris for his closing remarks.

Thank you, Troy. The momentum we've generated strengthens our conviction in our strategy and reinforces our confidence in our expectation of further measurable improvement in our year-over-year performance in the second half of the year. As we move forward, we remain well-positioned to capitalize on organic growth drivers in each of our businesses. These include capturing additional K12 staffing and therapy market share in education, capitalizing on the shift towards higher margin statement of work and consulting engagements in SET, and growing demand for ETM's total talent management solutions among large enterprises. In addition to these growth drivers, we're seeing secular trends taking shape in markets where our breadth of offerings and depth of technical domain expertise are well suited to meet growing demand. Among these trends is industrial reshoring, which is driving significant expansion in U.S. manufacturing.

Domestic semiconductor manufacturing capacity is expected to triple over the next decade, driven by the CHIPS and Science Act. With the construction of new fabrication sites underway across the country, demand for highly-specialized talent needed to build and operate them is growing at a rapid pace, from electrical and process engineers to product developers to field and service technicians. Kelly is well established as a leading workforce solutions provider to the world's largest semiconductor fabricators, and we continued to win new semiconductor logos in the first half of the year. Our SET and ETM businesses offer the breadth of solutions and depth of technical domain expertise and industry-leading scale, uniquely situating Kelly to meet this moment. Industrial reshoring momentum extends beyond semiconductors to other areas as well.

The development of breakthrough drugs and treatments is driving companies throughout the life science value chain to accelerate their investments in U.S. manufacturing. This shift is increasing talent demand while introducing operational risk and uncertainty for companies investing in their supply chains to ramp up production and distribution. As one of the largest life sciences solutions providers in the U.S., our SET business offers a differentiated functional service provider capability that mitigates these challenges. By providing just-in-time access to specialized talent through our proprietary methodology to support critical development milestones, we're enabling life science companies to develop new drugs and maintain high performance and quality outcomes at an optimal cost. We're also seeing AI contribute to significant investments in data centers, which is driving demand for workers with technology, engineering, and telecom expertise.

This next phase of data center growth will favor organizations that can build, staff, and operate at scale in a sustainable way. Our SET business is among the top providers of staffing and solutions across these key domains. Our tailored approach aligns workforce strategy with site selection, build schedules, and long-term operational planning. We're actively deploying this approach with new customers, including a global hyperscaler, who engaged Kelly in the quarter to source critical to fill mechanical and electrical engineers and technicians as it commissions new data centers in EMEA and APAC. Our growth and efficiency initiatives are positioning Kelly to capitalize on these opportunities. Our One Kelly Enterprise go-to-market approach is bringing our full portfolio of solutions to the large multi-site manufacturers and infrastructure providers at the center of these trends. The unified CRM platform we implemented in the second quarter is a critical enabler of that work.

It gives our teams the tools and visibility they need to identify the white space within our existing customer base and convert it into new business. As these new wins materialize, our structural efficiency enhancements will enable us to generate leverage across our operating model and convert a greater share of the incremental revenue to margin. We have more work to do, but I remain excited and energized about the opportunities ahead. Our strategy is delivering results. Our leadership is strong. With the demand trends beginning to improve, we're well positioned to capitalize and create value for our stakeholders. I'm grateful to our team for delivering on our commitments and to our shareholders, customers, and talent for placing their trust in Kelly. Operator, you can now open the call to questions.

Ladies and gentlemen, if you wish to ask a question, please press star one one on your telephone keypad. You may withdraw your question at any time by repeating the star one one command. If you're using your speakerphone, please pick up the handset before pressing the numbers. Once again, if you have a question, you may press star one one at this time. For our first question, we'll go to Joe Gomes with Noble Capital. You may proceed.

Good morning, Chris and Troy.

Hey, good morning, Joe.

Good morning, Joe.

Hey, I want to start off, maybe we could try to square the circle here, so to speak, on the education business. You talk about there's been a multi-quarter delay in contract decisions. You talk about the wins and some of the other positive information this morning, maybe you could provide a little more color there. On these delayed contract decisions, when do those become not a delay, but a lost opportunity type of thing? I was wondering, maybe a little more color on that education there.

Yeah. Thanks, Joe. No, happy to jump in. First, I think it's important, the distress, really this pressure is not structural. The single largest driver of that decline is really demand driven in Florida with some of the enrollment declines that we talked about. Also, some of the school choice attrition. The good news is it's behind us. As we think about the selling cycle we talked about, the 100% renewal rate that we saw, many of those renewals were in the state of Florida, which is a big part of our business. We also saw a whole bunch of other new wins come online. As a reminder, those wins will come online as the new school year starts.

We get a selling cycle that is ending about right now, and we're implementing new districts, and then those districts will need our outsourced services for now the 2026, 2027 school year. We really feel good about our selling momentum. Obviously, the strength of not only our fill rates, the customer satisfaction, and the white space that's still out there for us to be able to grow outside of some of the key districts we're in. We continue to also see big opportunities for us to sell therapy, and the acute need that our school districts, parents need in terms of that care, clinical care in school. That's a little bit more color on the education timing. Troy, is there anything else you want to add?

Yeah, Joe, just one little point of clarification or expansion. The contract delays we're talking about was last year's selling cycle. There was a lot of turmoil in the macro environment, the Department of Education, etc. Those districts decided not to proceed with, or various districts decided not to proceed with an outsourcing arrangement. We live with that through this whole school year, as Chris said, which now we have now seen our selling cycle in the improvement. The work has been done, to the last part of your question about when do they become loss decisions. The work has been done for them to see the value proposition, as Chris said, on the fill rates, on the client satisfaction, etc. It's really just a matter of the process and working through them, many of which then we went ahead and closed this year.

Okay, great. Thanks for that. I appreciate that. You hired Joel over at SET, and just wondering what kind of the initial reaction there, what kind of steps are you seeing that he's taken to really start to drive growth over there in the SET unit?

As a reminder, Joel's now in his second quarter and really excited about some of the momentum that's building. We referenced, but this is really a genuine inflection point in the quarter, and the improvement's been broad-based across SET. Every specialty area, all five segments showed year-over-year improvement versus Q1 with telecom and life sciences really leading the way with delivering year-over-year growth. The meaningful mix progress that we referenced now having about 40% of that business be solution oriented. That's a huge part of Joel and the team's focus as we continue to move upstream. Finally, I would say that in the technology space, we continue to see the benefit of a strong solutions pipeline.

Our consultant out billing continues to be positive. We know that there continues to be a lot of demand for solution-based business in the IT and services space. Finally, within engineering, that segment is performing at a high level. We've got our average deal size is increasing sequentially. The pipeline velocity has been strong, and some of those trends, both on pipeline and velocity, coming out of June, were the strongest that we had seen all year in that business. Now that Joel and the team are now fully in the throes of their operating model, we know that SET is positioned to continue to build on this momentum in the second half of the year.

Just one more from me. Chris, you talked last quarter about taking a more, I'll say, active role over in ETM, reviewing leadership there. I was just wondering if you could give us a little more color as to how those efforts have proceeded here over the past quarter.

I think you can see, based on the performance of the ETM business, that we continue to be pleased with the steps we're making. We've got a really good leadership team in ETM who are really committed to client centricity, accountability, and execution. I continue to stay very close to the business, and as we have any changes there, I'll certainly make sure everyone is updated. Based on the progress in the business, we really feel good about the momentum coming out of the quarter.

Okay, great. Thanks for that, guys. I'll get back in queue.

Thanks, Joe.

Thank you, Joe.

Thank you. Our next question comes from Kartik Mehta with Northcoast Research. You may proceed.

Hey, good morning. Chris, just a big picture question. Where do you think we are in the recovery phase in the industry? I know maybe each segment might be a little bit different, but just your overall feel as you talk to clients and kind of see some of the job orders, where do you think we are in the cycle?

Yeah. No, thanks, Kartik. We really believe we've moved beyond stabilization, and we're into the early stages of recovery. You're seeing now two consecutive quarters of improving underlying revenue trends, underlying ETM returning to growth, and SET delivering sequential growth for the first time in two years, which really reflects, I think, that structural progress that I just referenced. We're also seeing this in some of the operational indicators, right? Some of the key indicators, consultants out billing in SET is increasing. We're seeing spend under management in the ETM business expanding as well. I think really to the extent that that demand trend continues to improve, we're going to be well positioned to capitalize on as a result of the growth and efficiency initiatives that we're implementing and are delivering results in the quarter.

As you look at SET, I know in the past or maybe even now, one of the issues might be, hey, how is AI impacting that segment? Would you think AI right now is a headwind for the business, or are you seeing demand, and would you call it a tailwind right now for that particular business?

Well, I think it's a tailwind for us. In many ways, I think that's reflected in the sequential quarter-on-quarter improvement that you see from us in the quarter, and really underpinned by our focus and really breadth and depth of capability to support the data center industry. We're supporting companies across all facets of the data center ecosystem. This has a huge impact in SET, but also ETM, and requires our BPO capability as well. Increasingly, we're delivering solution-based work. That demand is an important growth driver.

It shows up in engineering, in telecom, our digital infrastructure business, in our IT business, and we believe that's going to continue to grow. We're also benefited by the strength, and really our leading engineering service capability. As you think about all of the critical infrastructure pillars that are required to support all the data center capital investment from power and cooling, commissioning, all the component supply chain, we really have unique domain expertise in this space that will allow us to continue to grow. We're excited about the momentum there.

Thank you very much. I really appreciate it.

Thanks, Kartik.

Thanks, Kartik.

Thank you. Our next question comes from Kevin Steinke with Barrington Research Associates. You may proceed.

Hey, great, thanks. As you talked about in your prepared comments, you noted that your expectations have improved since February, which is reflected in your improved revenue outlook for full year 2026. Can you just maybe walk through the areas where the expectations have improved most materially? I mean, is it mostly related to the macro environment or internal business momentum, or where would you assign the most weight to for the improved expectations?

Thanks, Kevin. I'll maybe give a little bit of color and then have Troy talk about some of the detail in the segments. We're really pleased with the execution in the quarter. The beat was driven by meaningful operational progress, including some demand trends. We continue to see a normalized gross profit rate, and it's really our continued SG&A discipline as well. These are not one-time items, and you're seeing that in terms of the structural impact and our ability to unlock more margin. The path to the second half of the year, though, is pretty clear, I'll maybe point to three broad drivers for us. The first is the discrete impacts anniversary in the fourth quarter. We see that run off.

The second, the organic growth that we've been talking about, those drivers are gaining traction across each segment, across the business units, and even in Education, where we expect the second half of the year to flip back to growth. Finally, the structural efficiency improvements we're creating, and that will continue to drive operating leverage as revenue hits an inflection point. I'll maybe toss it to Troy now to talk a little bit about it at the segment level.

Yeah. Thanks. Good summary, Chris. Look, I think certainly ETM has been strong both in Q1 and Q2 through all the combination of factors Chris has referenced in several of the prior questions. We feel good about the progress there. SET, I'd say, is probably more in line with expectations in education. Again, we're seeing the turn there into the back half of the year. A little more pressure than we thought coming into the year really on the volume side. From the new business and the growth in therapy and the like are all as we were anticipating, going into the back half of the year. As Chris said, on the cost structure side, we've been rigorous about that starting last year.

We've continued to see some benefits from some of the activity from last year with the realignment within SET, with the integration work, realignment with ETM and the integration work within SET. We continue to look for further optimization opportunities, benefits from AI, our technology modernization. All of those things are coming together nicely and delivering us some opportunity for upside in the back half of the year.

Okay, great. Within ETM, you talked about the broad-based demand for professional and industrial staffing that you're seeing, and you talked about the semiconductor angle and the reshoring. From that commentary, it seems like do you feel like there's some real legs to this in terms of continuing demand and combined with your ability to win new business? What do you think the sustainability of this improved P&I staffing demand is?

Yeah. Well, I would say to start, customer sentiment in the quarter was increasingly positive, and a step forward from Q1, really across the business. Also some broader macro trends supporting some of the industrial output that we've now seen picking up some momentum, including with ISM's PMI data continuing to show some expansion. Within ETM, though, customers are leaning into broader talent management programs. I think that's important given the strength of our leading MSP and RPO offerings. They're now being used as a strategic workforce tool. This isn't just a temporary cost reduction measure that's being maybe used episodically, which continues to give us some real leverage with the large customers that we're working with.

Obviously, our ability through the growth office and all of the other work that we're doing in the strategic account management space, to go and capture more of that white space. We have leading offerings on the solutions and on the staffing side in P&I and also across SET that allow us to go and support large enterprise customers. The customers that I talk to, they want to be doing more with Kelly. That's really why we continue to believe that the One Kelly Enterprise strategy gives our customers the unlock they're looking for, and we're making sure that we're driving that every single day.

All right, great. Within SET, you refer to a couple of times that you see this as an inflection point. What do you think that means for the growth outlook going forward? Again, maybe in terms of the sustainability angle, assuming we continue to see an overall improving macro environment or at least stable with where we are now, how do you think that business can trend over the coming quarters based on the momentum and the inflection point you saw there?

Well, the improvement is really broad-based, and I think it's important to really underscore that every specialty area showed improvement from Q1. We referenced that Telecom and Life Sciences delivered year-over-year growth. It really is the breadth of what we're seeing from the demand side and the operational discipline that we have in terms of how we're converting that both to new solution assignments and projects and also new staffing revenue and GP. The technology business is the biggest segment within SET, and we continue to see positive momentum on the demand side and our selling focus continuing to move upstream and the opportunity for us to continue to differentiate with our solution capability. There is a tremendous amount of demand there that we've got to go and convert.

Finally, on the engineering side, that performance is really not only driven by sequential quarter-on-quarter improvement, but the velocity and size of the pipeline continuing to improve. As we referenced some of the opportunities both in industrial reshoring and in the broader data center capital investment, the engineering and digital infrastructure telecom offerings that we have really positions us uniquely in the market to be able to support those needs. Finally, the strong performance exiting the quarter in engineering we know is going to continue to drive growth. We feel good about the momentum.

Yeah. I would just add, Kevin, in the Q4 expectation that we've outlined, we expect growth across all three segments, so ETM, SET, and Education, excluding the 53rd week, which we noted in our materials and in the prepared remarks. Within SET, I would say it's across the specialties. We expect all the specialties to be reflecting year-over-year growth, except maybe government, could be close. Otherwise, to Chris's point, it's broad-based.

Okay, that's helpful. I also wanted to ask about Education, and you referenced the momentum in the therapy services there. How meaningful can that be at this point? I believe it's still a relatively small portion of the segment relative to the traditional substitute teacher K-12 staffing. What can it mean for, say, in a contract with a school district in terms of upsizing it or any other metrics that you'd point to in terms of its impact on the business?

Yeah. The therapy is one of the strongest growth opportunities we have. It's about 8% of the mix today and has a lot of opportunity to grow. We are encouraged by the selling cycle and support model there also follows the school calendar. We're gearing up for September. Really pleased with the progress we're making there. We have more therapy providers confirmed in September to start to support that work than any other time in our history. Operationally, the team is very focused on getting ready for the start of the school year. That really reflects not only the expansion of therapy in new school districts that we're working with today, but importantly, continuing to sell with our leading K12 offering.

With some of the new wins coming online, first-time districts, now we have both therapy and our K12 model embedded in that overall solution. From a margin standpoint, it gives us a real opportunity just given the mixed opportunity that it presents, which over time is the grossest part of the KE portfolio. We think it gives us real opportunity to continue to expand both EBITDA and gross profit margins across Kelly Education.

I would just add, the market opportunity is significant. It's a very, very fragmented market. Many areas are just small players, either single market or small regional players. As we, as Chris said, bring that more as a combined integrated offering to our clients, both existing and net new, as we're selling in the new selling cycles, we have significant opportunity there to penetrate much more deeply than we are today.

Great. Thank you. Thanks for taking the questions. I'll turn it back over.

Thank you. As a reminder, to ask a question, please press star one one on your telephone. Our next question comes from Marc Riddick with Sidoti. You may proceed.

Hey, good morning.

Good morning, Marc.

Marc, good morning.

I want you to touch a little bit on some of the sort of the progress that you're seeing with some of the leadership additions that you've made through the year. Then I know there was another one just, I guess, a month or so ago of adding to your leadership team as a Chief Product and Technology Officer. I was wondering, maybe sort of touch a little bit on some of the progress of those folks that you've added to your team, but also are there other areas that you'd like to add to strengthen the bench, if you will?

Thanks. We're pleased really with the recent leadership appointments that we've made and what it means to our broader management team. As you referenced, we welcomed Alan Stukalsky. He joined as Chief Product and Technology Officer. The role really reflects. It's a deliberate decision to integrate our technology modernization initiative with our product and AI strategy. As we scale AI deployment across the business, but also in this work as we support customers, we needed those work streams to be connected and aligned to not only our growth initiatives, but also some of the efficiency initiatives that we've talked about. Alan really brings the right experience for us, not only in this moment, but he is someone who's going to be able to help partner with us and our customers as we think about what's next for the future of work. That's what's so important.

When I'm out with customers and we think about our product roadmap, we have to continue to make sure that that data intelligence layer, the IP that sits in many of the products in our SET portfolio, that we continue to be able to scale the capability to unlock more value for customers. By bringing Alan in and really connecting AI product and IT together, we think it's really the right time to be able to do this and to bring more value. Then more broadly on your question, we continue to assess the talent and making sure we've got the right people and the right roles to execute our strategy. We're going to continue to do that. But we're really pleased with the additions we welcome this year and with our start to the year getting them integrated as part of the team.

Great. Then I guess the last one for me is wondering if you talk a little bit about cash usage prioritization and sort of how you're thinking about that and whether there's potential for non-organic pursuits, and if so, sort of how you feel about the potential pipeline or maybe what's out there, level of attractiveness, valuation, things like that.

Great. Our approach, as we've talked about to capital allocation, remains balanced and opportunistic. We maintain the quarterly dividend in the quarter, obviously reflecting our confidence and ability to generate cash. In the near term, as Troy referenced in his prepared remarks, we prioritize debt paydown with the excess cash. The work we did in the credit facility also continues to give us some flexibility there. Let me just turn it over to Troy now to talk a little bit more about cash and maybe liquidity as we move to the second half of the year.

I mean, again, we generated $47 million, $48 million of free cash flow in the quarter. Year-to-date, we're at $21 million. That went to pay down on the debt. Again, our debt is more short-term in nature, so we're able to pay it down very expeditiously and also draw on it very expeditiously as needed. For the year, I would say, look, we'll use cash in the third quarter. That's seasonal. Again, we have the education business winding down in the second quarter for the summer and then ramping back up again. Also with the growth that we talked about and that we've set the expectation for, we are a working capital business, as you know, and therefore, that will consume cash as we accelerate our growth rates into the back half of the year.

Net-net, we should be a little bit more positive on cash flow for the full year relative to where we are now. As we look at the horizon, of course, we have a lot of work that we're doing internally. The leadership team, as we talked about, the technology modernization, the integration work, we continue to look at external opportunities, inorganic opportunities.

I think there's a lot of assets that are pent up, just given the softness in the market. Now that you're seeing the market turn, there may be some more assets coming on the market that could be attractive. Certainly, there's some areas that are hotter than others, as we sit here today, some of which we play in and some of which we don't. Look, as Chris said, we've got a very strong balance sheet. We have a lot of flexibility, we'll continue to be opportunistic as we go forward.

Great. Thank you very much.

Great. Thanks, Marc.

Thank you. I would now like to turn the call back over to Chris Layden for any closing remarks.

Great. Thank you all for joining. We'll see you next quarter.

Thank you all.

Thank you. This concludes the conference. Thank you for your participation. You may now disconnect.

Good morning, welcome to Kelly Services' first quarter earnings conference call. All parties will be in a listen only mode 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. Scott Thomas, Kelly's Head of Investor Relations. Please go ahead.

Good morning, and welcome to Kelly's first quarter conference call. With me today are Kelly's Chief Executive Officer, Chris Layden; and our Chief Financial Officer, Troy Anderson. Before we begin, I'll remind you that the comments made during today's call, including the Q&A session, may include forward-looking statements about our expectations for future performance. Actual results could differ materially from those suggested by our comments. We do not assume any 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, we'll discuss certain data 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.

For more information regarding non-GAAP measures and other required disclosures, please refer to our earnings press release, presentation, and once filed, Form 10-Q, all of which can be accessed through our investor relations website at ir.kellyservices.com. With that, I'll turn the call over to Chris.

Thank you, Scott. Good morning, everyone. I'll begin with highlights from the 1st quarter. The macroeconomic environment remained dynamic over the first three months of 2026. Against this familiar backdrop, employers continued to take a cautious approach to hiring, contributing to a mixed labor market. That said, conditions through the quarter were stable, consistent with our expectations. This stability was reflected in our results as we executed on our strategic priorities. Total company revenue exceeded our expectations, and adjusted EBITDA margin was in line with our expectations. In ETM, staffing and overall revenue trends improved sequentially from the 4th quarter, including growth in talent solutions across our technology-enabled and AI-powered MSP, RPO, and PPO offerings. In SET, we delivered another quarter of year-over-year growth in our telecom specialty, and life sciences and engineering performance improved sequentially.

In Education, we continue to experience pressure from delayed contract decisions and enrollment declines and, to a lesser extent, weather-related closings. Across all three segments, we continue to align resources with demand and maintain a disciplined approach to expense management as part of our ongoing focus on efficiency. Contributing to stabilizing trends in our results were new customer wins that were implemented and came online during the quarter. Among them is a significant MSP program with a leading global oil and gas company across its North American operations. Kelly was selected based on the differentiated value of our technology-enabled capabilities. This includes our Helix Analytics platform and AI-enabled rate intelligence, which provides the visibility, benchmarking, and cost optimization large enterprise customers require of a contingent talent management program. With the initial implementation of this new MSP program complete, we have clear line of sight to additional expansion opportunities.

This win underscores what our One Kelly go-to-market approach is capable of delivering, leveraging technology and our experience serving global customers to win in the market and grow. With momentum building across the enterprise, we remain focused on returning to organic growth and margin expansion. Paving the way toward this next horizon is our newly formed Growth Office. Since it was established in February, the Growth Office has been collaborating across the enterprise to lay the foundation for an integrated commercial operating framework. This framework will serve as the foundation of a unified One Kelly Enterprise strategy that brings the full breadth of our portfolio to Kelly's current customers and prospects. Central to this effort is the migration of all commercial teams onto a new unified CRM system.

A key component of our modernized tech stack, the CRM will provide enterprise-wide pipeline visibility, enable high conviction forecasting, and support cross-selling across business units. We expect the migration to be complete by mid-year as part of our ongoing technology modernization initiative. Reflecting more broadly on our technology modernization journey, we remain on track with our multi-phase approach. In the first quarter, our team was successful in ensuring a smooth transition following the cut-over of our acquisitions in SET from their legacy technology stack to the modernized platform Kelly acquired through our acquisition of MRP. Armed with the key learnings we gathered from the initial cut-over, we're well positioned to execute on subsequent phases and realize the benefits of deeper data and insights, AI and automation at scale, and enhanced productivity. As we executed on our strategic priorities through the quarter, we continue to evolve our leadership team.

In March, we welcomed Joel Leege as President of SET. Joel is a proven industry leader with broad-based sector experience, having spent nearly three decades in staffing, talent solutions, and managed services across technology, engineering, and life sciences. He brings extensive experience leading complex transformations and integrations, enabling exceptional service delivery for customers and driving above-market growth. This experience is uniquely suited to further enhance SET's competitive positioning and take the business to the next level. I'm pleased to have him as part of Kelly, and I look forward to Joel leading the SET business to new heights of growth and profitability. I'm also reevaluating the leadership structure within the ETM business. This business is core to our strategy, and with this in mind, I'm taking time to assess what we need longer term to ensure we deliver on our growth objectives.

In the interim, I will be closely involved in the management of ETM. I have great confidence in the team, who have consistently demonstrated their commitment to customer centricity, visibility, and accountability. These cultural pillars remain fundamental to how we'll achieve our ambitions and win in the market, both in ETM and across the enterprise. I was pleased to have the opportunity to see the strength of our culture on full display at our recent Impact 2026 leadership summit in March. This immersive experience brought together 200 of our leaders for two days of dialogue and collaboration focused on transforming Kelly into a more customer-centric, visible, and accountable enterprise.

Impact reflects our commitment to building on the strength of Kelly's culture from the leadership level down, positioning the company to execute more consistently as we target a return to revenue growth and margin expansion in the second half of the year. In a moment, I'll share more about our pathway toward a return to growth. First, I'll turn it over to Troy to provide more details on the results in the quarter. Troy?

Thank you, Chris. Good morning, everybody. I'm pleased to report that we started the year with solid execution and results on a number of fronts. For the first quarter of 2026, revenue totaled $1 billion, which was down 10.7% overall versus Q1 of last year and favorable to our guidance. Excluding the previously disclosed discrete impacts driven by reduced demand from the Federal government and three top ETM customers, revenue was down 3.3% on an underlying basis, which was improved 60 basis points versus last quarter. As a reminder and brief update regarding these impacts, Federal government demand largely stabilized in Q3 of last year with a slight sequential increase this quarter, mainly from the government shutdown and seasonal impacts in Q4.

For the three top ETM customers, one stabilized at the current reduced demand levels beginning in Q3, one fully ran off in Q3, and the largest one remains one of our top customers and has stabilized across Q4 and Q1. At the segment level, underlying ETM declined 0.4% versus the prior year quarter, which is measurably improved versus last quarter and exceeded our expectations. Each Talent Solutions specialty grew versus the prior year quarter. In Staffing, we saw a net underlying decline of just 1.2% in the quarter and year-over-year growth across February and March. Overall underlying ETM revenue has been relatively stable across the last five quarters. Education decreased 4.8% year-over-year in the quarter, reflecting the prior year delayed new contract decisions, elevated weather-related school closures, and overall reduced demand in key markets due to enrollment declines.

We expect Education to deliver a sequential year-over-year improvement throughout the remainder of 2026 and a return to growth in the second half of the year as a result of new business wins, successfully defending several key renewals, and continued penetration of our therapy offering into new and existing clients. SET's underlying revenue declined 6% in the quarter, led primarily by near-term demand pressure within the Technology specialty. Consistent with ETM and Education, we are confident we will see sequential year-over-year improvement each quarter in 2026, with Science, Engineering, and Technology contributing most strongly in Q2. Reported gross profit was $196.4 million, down 17% versus the prior year quarter, reflecting the lower revenue volume along with employee-related costs and business mix changes.

The gross profit rate was 18.9%, a decrease of 140 basis points compared to the prior year quarter. Approximately 50 basis points of the decline is timing related, which we expect to normalize over the course of the year. Our overall gross profit rate improved 10 basis points relative to Q4, and the year-over-year decline improved similarly. Versus Q4, both ETM and SET saw improvement in their gross profit rates and year-over-year declines, while Education saw rate pressure in light of the revenue decline, cost timing, and mix. We expect to see gross profit rate improvement overall and in each BU in Q2 and over the remainder of the year. We continue to make significant progress improving our SG&A expense profile with reported SG&A expenses of $199.3 million, a decrease of 11.7%.

On an adjusted basis, SG&A expenses decreased 10.3% year-over-year, reflecting the continued momentum with our structural and volume-related cost optimization efforts. Over the last three quarters, the year-over-year decline has averaged over 10%. Core adjusted SG&A expenses, which exclude depreciation and amortization and incentives, have declined sequentially each quarter since Q1 of 2025. In the quarter, adjusted SG&A expenses decreased across all the segments as we continue to drive durable and sustainable efficiencies in our operating model through technology enhancements and process efficiencies, including leveraging AI. We also continue seeing benefits from realignments within the ETM segment and integration of MRP and other acquisitions within SET, all of which are progressing well. For the year, we're projecting a net year-over-year decline of approximately $25 million in core SG&A expenses, despite investments being made in technology, the Growth Office and other areas.

The structural and durable changes we are making will allow us to scale more efficiently as we pivot to growth, thus supporting our expected return to margin expansion in the second half of the year and beyond. Our reported loss per share was $0.17 for the quarter. On an adjusted basis, we delivered earnings per share of $0.03 compared to $0.39 in the prior year. For our adjusted results, in connection with our various efforts, we recognized $9.2 million of charges in the quarter. Integration, technology modernization, organizational realignment and restructuring drove $5.2 million of the charges. The balance is related to costs associated with our controlling shareholder change, executive transitions, and initial steps we have taken in our real estate rationalization efforts.

We expect to continue incurring various charges throughout 2026 as we progress on our technology modernization journey, reduce our fixed cost structure, including real estate costs, and expand upon our various optimization efforts. Adjusted EBITDA was $15.8 million, with an adjusted EBITDA margin of 1.5%, which was down 150 basis points versus the prior year quarter and in line with our expectations. The year-over-year decline improved 20 basis points relative to Q4. The revenue and gross profit declines drove the decrease versus the prior year, with the significant SG&A reductions partially offsetting them. At a segment level, similar to the gross profit rate, both ETM and SET improved their margins in year-over-year performance versus Q4, while education saw pressure in light of the revenue and gross profit declines.

We expect each BU to show sequential improvement in their adjusted SG&A margins in Q2 and on a year-over-year basis as we progress through the year. Moving to the balance sheet and cash flow, we utilized $25.4 million of cash from operations this quarter due to the timing of working capital requirements. Total available liquidity as of the end of the quarter was $252 million, comprising $26 million in cash and $226 million available on our credit facilities, providing us with ample capital allocation flexibility. Total borrowings of $130.5 million increased versus the prior year-end, reflecting the working capital needs during the quarter. Our debt-to-EBITDA leverage remained near one at the end of the fiscal quarter. During Q1, we maintained our quarterly dividend of $0.075 per share.

We remain confident in Kelly's strategy and cash flow generation capabilities and are committed to opportunistically deploying capital in pursuit of attractive returns for shareholders. As we turn to the outlook for the remainder of 2026, our expectations are unchanged relative to the initial view we established in February. Our expectations assume no material change in the macroeconomic or industry dynamics in the coming quarters. For Q2, we expect to show year-over-year improvement relative to Q1, with an overall revenue decline of 7%-9%, which includes at least 100 basis points of improvement in the underlying decline. For adjusted EBITDA margin, we expect at least 2.5%, representing at least 100 basis points improvement relative to Q1 and a significant reduction in the year-over-year decline relative to the past two quarters.

As we progress through the balance of the year, assuming no new material impacts, we expect to see relative improvement in our year-over-year performance each successive quarter for both revenue and adjusted EBITDA margin. That should translate to modest revenue growth in the second half of the year and a roughly mid-single-digit decline on a full year basis. For adjusted EBITDA margin, we expect to see measurable year-over-year margin expansion in the second half of the year and a modest increase on a full year basis. We are excited about the momentum we are building and the opportunities that lie ahead in 2026. I'm grateful to all the Kelly team members for their unwavering commitment and resilience as we position the company for growth and enhanced profitability over the long term. I'll now turn the call back to Chris for his closing remarks.

Thank you, Troy. As we look ahead, we remain firmly committed to executing on the priorities we outlined in February. Rooted in the strategic pillars I shared shortly after joining Kelly, these priorities will continue to guide our actions and progress on the pathway toward an inflection point in our results. Growth remains our top priority. The Growth Office is taking shape and beginning to enhance how we go to market as One Kelly Enterprise. With the leadership transition and SET complete and organic growth drivers gaining traction in each of our business, we have a clear path to improve top-line performance as we move through the year. The strength of our pipeline and the steady stream of new wins coming online reinforce our confidence that our go-to-market approach is working and our ability to convert opportunities is accelerating.

On efficiency, we'll continue to align resources with demand while re-engineering our cost base to drive structural efficiencies and enhance profitability. Our technology modernization initiative remains on track. Our enterprise AI strategy continues to unlock productivity across the business. On culture, the energy and alignment our team demonstrated at our recent Impact Leadership Summit reinforce what I've known since I joined Kelly. Our people are deeply committed to the success of our company, our clients, and the talent we place. We'll continue to build on the momentum with an emphasis on customer centricity, visibility, and accountability across everything that we do. We remain on track to deliver our commitments and achieve revenue growth and margin expansion in the second half of the year. There's much work ahead. I'm confident in our plan, our team, and our ability to execute.

I look forward to capitalizing on the positive momentum we're building together and unlocking Kelly's full potential for the benefit of all of our stakeholders. Operator, you can now open the call to questions.

Thank you. Ladies and gentlemen, if you wish to ask a question, please press star one one on your telephone keypad. You may withdraw your question at any time by repeating the star one one command. If you're using a speakerphone, please pick up your handset before pressing the numbers. Once again, if you have a question, you may press star one one at this time. Our first question is going to come from the line of Marc Riddick with Sidoti. Your line is open. Please go ahead.

Hey, good morning.

Morning, Marc.

Morning, Marc.

I wanted to start with some of the cost improvements that you've been working on and maybe you could talk a little bit about the I believe it was $25 million in core SG&A reductions expected. Maybe you could sort of touch a little bit about some of those efforts and maybe the timing we might expect there.

Thanks, Marc. I'm really pleased with the progress that you're seeing as we really look at driving expense reductions across the enterprise. This is one of the priorities that I outlined right as I joined Kelly, our focus on reengineering our cost base, matching resources with demand. You're seeing us come through and really delivering on that commitment in the first quarter through that disciplined execution. You know, we saw that in the 1.5% margin, EBITDA margin as well, which was in line with our expectations. It improved 20 basis points year-over-year in comparison to our Q4 trajectory.

As you've heard us talk about and Troy reemphasize, we're gonna continue to see that sequential, incremental improvement on the EBITDA margin side, as we go throughout the rest of the year. Maybe ask Troy if you wanna comment any further on the specific $25 million impact for the rest of the year.

Yeah, sure. Thanks for the question, Marc. You know, we began taking actions as Chris noted, throughout last year and really accelerated in the latter part of the year, in response to some of the elevated, you know, revenue pressure, but also just with the integration efforts that really with the acquisitions, the cut over to the new technology platform where we consolidated all the acquisitions in December.

It's really the manifestation of, you know, some of the realignments that we did last year and then the integration efforts, as we progress into this year, and just continue looking at, both, you know, durable structural, changes as well as, volume-related changes so that as we pivot to growth, we can scale much more efficiently and really drive that EBITDA margin expansion.

Great. I guess maybe picking up on that part of the commentary there, can you talk a little bit about the I guess the timing and milestones that you're looking for for the remainder of the year on the technology activity as well as I guess maybe timing at ERP that we might see going forward? Thanks.

Yeah. We have another phase expected in the beginning of the fourth quarter of this year, where we'll migrate the platform now to a broader enterprise platform. Right now, again, we have the acquisitions, MRP and the prior SET acquisitions all consolidated on the platform. That was designed really for those smaller entities. We've made some foundational changes in the platform that we'll migrate all those onto that now we'll call it the enterprise platform. We're migrating our enterprise human capital management. All of our FTEs will now be on the platform. We have some other smaller changes, migrating some customers on a prototype sample basis just to go through some of the Kelly to platform migrations.

We're gonna continue working on some of our solutions billing capabilities. That's some of the more complex, right non-staffing related capabilities. Work that we're gonna be doing to bring the majority of the SET business onto the platform early in 2027.

Marc, just maybe one thing to add, you know, on our CRM, the most important near term milestone in the second quarter, which is on track, is the deployment of our HubSpot CRM. It's the consolidation of our CRMs across the business units. We're gonna migrate all of our commercial sellers onto the CRM by mid-year. Now having the Growth Office and Pat's leadership to be able to go and drive that, it gives us the enterprise-wide pipeline visibility and allows us to go and do some of the go-to-market and growth objectives we've been outlining since we started.

That's very helpful. Thank you. Last one for me is just maybe touch a little bit on the demand drivers that you're seeing from customers, particularly the technology demands. Yeah, maybe you could talk a little bit about sort of how, you know, that sort of paced through the quarter and maybe just what you're seeing overall as far as, you know, whether the data center impacts AI, impacts things like that, what you're seeing now versus maybe the beginning of the year and sort of how that's been progressing. Thank you.

Yeah, sure. I mean, first, you know, some of the near term pressures you're seeing do reflect some difficulty in our year-over-year comps, particularly within SET as we look at 2025. Which is why, as we've talked about across the business, we continue to make sure we've got resources aligned with demand. Now under Joel's leadership, we'll be very focused on getting back to market growth. Now that being said, we're actually seeing some encouraging signals, including a net positive consultant count improvement in March. As we exited the quarter, we also are seeing that April is tracking quite similarly. Some positive momentum there.

We also saw some sequential improvement in some of the businesses that we've mentioned in our prepared remarks. We're really pleased with the progress we're making in the telecom space that is being driven by outsized demand in the data center space that where we have differentiated capability. We are gonna continue to see that demand play out in the market where we have customers across the supply chain who need total talent management solution and a technical solution to support the investment that's happening in the United States and around the world.

Marc, this is Troy. I would just add, across the business, we saw improvement as we progressed through the quarter. Again, in education, we had some weather-related impact that was largely concentrated in January. That was, you know, maybe half the decline in the quarter specific to that. Then in ETM, you know, I commented in the prepared remarks about pivoting to growth in the underlying staffing business as we exited the quarter. You know, we feel good about the trends heading into Q2, which is reflected in the expectation there, where we'll see in our call for 7%-9% overall and at least 100 basis points improvement in the underlying decline.

Excellent. Thank you very much.

Thank you.

Thank you. One moment for our next question. Our next question will come from the line of Kartik Mehta with Northcoast Research. Your line is open. Please go ahead.

Thank you. Hey, good morning, Chris. Maybe, you know, taking a bigger picture look at Kelly today versus prior downturns, could you just discuss maybe how you think structurally the company is different today than it was before, maybe in terms of customer mix, customer relationships, and obviously in terms of how the company has changed in terms of business mix as you've gone more into SET and higher margin businesses?

Yeah, sure, Kartik, good to have you with us. You know, I guess as I step back and think a little bit about, you know, what differentiates Kelly in the market and maybe how that's evolved, all of the steps we took over the last few years to get scale and to get capability in higher specialized areas were all the right steps to take. We have the scale and the breadth of capability to go and compete now in all of the end segments that we're in. We didn't have that a few years ago in areas like technology, as an example, and now we do. We also have a much more robust RPO offering through some of the inorganic activity with our acquisition of Sevenstep.

We have a leading total talent management solution with the combination of the strength of our MSP offering and RPO offering, together. As I think though about what needs to differentiate Kelly going forward, it really is, it has to be our focus on our customer and making sure that we're bringing all of that capability to our customer. We're doing that, you know, in large part through better execution. The operating framework that we outlined right away, focusing on not only our go-to-market, but also the way that we show up more holistically as an enterprise, Kelly Enterprise, to all of our customers. The establishment in the first quarter of the Growth Office was the next step on that journey.

Driving the operating framework within account management, within how we sell, and within how we deliver across these large customers is really important. That is an area of focus that we're gonna continue to come back. We're seeing the roots of that already playing out with some large customer wins, and that focus is gonna continue to be what will differentiate Kelly for many years, many years to come.

Thanks, Chris. Maybe Troy, just on that point, you know, you've done a good job with taking costs out. The company seems more efficient. I'm wondering, you know, how you think about the incremental earnings power when we get back to kinda growth in this industry.

It's a good question. You know, that cost reduction from the earlier question, and I noted this in the prepared remarks, was net even of some investments that we're making in the Growth Office and some other areas. You know, you'll see some of that cost declines moderate as we go through the year and pivot to growth, but we'll be able to scale more efficiently. We're expecting, you know, to achieve our expectations for the year. Margins would be back above 3% in the back half of the year, which is where we were in the last half of 2024 and the first half of 2025.

Of course, as we continue to grow more, we would expect to expand further from there, and, you know, in a very efficient and effective way.

Perfect. Thank you very much. Appreciate it.

Thanks, Kartik.

Thank you. One moment for our next question. Our next question comes from the line of Kevin Steinke with Barrington Research Associates. Your line is open. Please go ahead.

Great. Thank you, and good morning.

Good morning.

Hey, Kevin.

Wanted to just follow up on the discussion about the core SG&A expenses to make sure I'm understanding correctly. I guess, with core SG&A, I believe that you're equating that with the adjusted SG&A. You know, if it's down $25 million year-over-year in 2026, if I'm doing my math correctly, it appears that the adjusted SG&A expense on a quarterly basis will kind of flatten out for the rest of the year at about that $192 million level that you saw in the first quarter. Am I thinking about that correctly?

Yeah. That's, right, that's total, yeah, so $192 million. Yeah, roughly flatten out. The reason why I went to this core, which is not something that, you know, we've talked about really previously, was just we had a lot of movement with incentives last year, you know, with the challenging environment we were operating in. Of course, there was reduction to performance incentives throughout the year. Of course, this year, we're expecting to perform measurably better and we would expect a return to some of those incentives.

If you strip that out and really just focus on that underlying, you know, wages and facilities and some of those things that are more stable and some of those things that we're focused on from the durable and structural reduction perspective, that should flatten out as we progress through the year, and we get the year-over-year benefit of the actions taken both last year and this year. Again, that's net of investments that we'll be making as we pivot to growth.

Okay. All right. How material is the change in incentive comp that you're expecting in 2026 versus 2025?

It's probably, you know, a $20 million to $25 million swing on in total SG&A between the years, something in that ballpark. Again, it'll be subject to ultimate performance and of course, each business unit has different incentives tied to their specific performance, so you can get some variability in that just based on how individual business units perform.

Right. Okay, that makes sense. Just following up on that then, I think you commented that you expect gross margin improvement throughout the year, I believe. What would be driving that? It sounds like a lot of the adjusted EBITDA margin improvement that you're expecting would kinda hinge on the improved gross margins. Is that correct?

Yeah, that's generally correct. I mean, again, we'll continue driving. I mean, with the as we pivot to growth, we'll get some lift there, on a relatively, again, flat-ish expense base on a run rate basis. Then, with the gross margin improvement. A little bit of timing, I commented on that, just how some of the expenses, we're seeing how they'll play out this year versus how they played out last year, particularly in employee related expenses, which we saw some pressure on exiting last year. Then, we were again up 10 basis points quarter-over-quarter on gross margin despite some of that timing pressure.

Then, as we benefit from mix, again, as we grow, pivot to growth in some of the areas that we're expecting growth or the higher margin areas, that will benefit us as we get into the back half of the year. We are also, by the way, again, back to an earlier comment about just growth and where we're seeing opportunities. We are seeing a little bit of movement on perm fees. I mean, it's still, you know, 1% of revenue, but we did see a little bit of benefit from that and particularly in SET in the first quarter. And of course, that helps gross margins and ultimately EBITDA as well.

Okay. Yeah, that's helpful. Just a couple more. You called out lower student enrollment in the Education segment. Just, you know, wondering how meaningful that is or how broad-based that is as you look across your various school district clients?

Yeah, thanks. Well, we, you know, first, I mean, we remain really confident in this education business. It has really significant differentiation. We're number one in the market, and we continue to see really historic fill rates across the U.S., where we're serving 9,000 schools. You know, some of the impact, the convergence of factors that really came together are temporary in nature. We don't see these as structural. As we mentioned in the prepared remarks, there were some weather-related closures. We also saw some budget constraints stemming from enrollment declines. Where that had the biggest impact for us was in Florida.

We serve some of the largest school districts in the United States and largest school districts in Florida. That concentration was a one-time hit. That demand has now stabilized. Where we're focused is the 70% of the market that is still not benefiting from an outsourced K-12 substitute teacher management relationship with Kelly. We are selling around the country. We're very, as we hinted at, we feel very good about some of the large renewals that have been open this year. We're gonna continue to sell more districts around the United States.

We're also gonna continue to focus on bringing in more therapy, more therapy services across that K-12 footprint, not only in Florida, but around the United States. We feel really good about where that business, what the opportunity is in the Education business and where that business is gonna be as we go throughout the rest of the year.

Okay. That's helpful commentary. Just lastly, I wanna ask about the organic growth drivers. You mentioned organic growth drivers gaining traction, if you could provide a little more color on that. Then related to that, you mentioned the strength of the pipeline, can you maybe talk about how broad-based that strength is across your various businesses?

Yeah, sure. You know, first, you know, the Growth Office has been moving quickly and it's a foundational quarter for us, as we begin to put in this integrated commercial operating framework. There is some work we've been doing aligning incentives. Obviously, the commercial teams, some of the account management teams, putting more rigor around our pipeline management, and account planning, is all in motion.

We will move, as I mentioned earlier, all of our commercial teams to this new CRM platform. That will give us the visibility that we need to continue to drive the business forward and make sure we've got resources in the right places, not only to go close deals, but also to go and make sure that we're delivering and providing excellent service. The strength in the pipeline continues. You know, we continue to see a lot of demand for customers looking for total talent management solutions. The robustness of our MSP pipeline is very strong right now. You saw that in the big oil and gas win we had in the quarter. Interestingly, you know, that was not a price-based win.

This was a differentiation around our tech stack, our reach, and the differentiation of our core offering. We continue to see more and more large global customers coming to Kelly for those total talent management solutions. We hinted earlier, our Telecom and Engineering pipelines continue to be very strong in SET. We're gonna likely continue to see that. We have an opportunity to continue to drive more pipe in our Technology business. Our K-12 staffing pipeline continues to be very strong for net new school districts. We've seen a nice jump in the amount of therapy opportunities that we're seeing tied to some of our larger school districts.

At a high level, that's how I'd characterize some of the momentum that we're seeing. Pat and the Growth Office are gonna continue to drive as we go through the remainder of the year.

Okay. That's good to hear. Thank you for the comments.

Thanks, Kevin.

Thanks, Kevin.

Thank you. As a reminder, if you would like to ask a question, please press star one one on your telephone. Our next question is going to come from the line of Joe Gomes with Noble Capital Markets. Your line is open. Please go ahead.

Hi, this is George Proost. I'm filling in for Joe Gomes this morning. How are you guys doing?

Doing good. Hi, George.

First question I have for you. What have the Hunt Companies brought to the table so far?

Yeah. Great. Well, you know, as you would've seen a few weeks ago, in our filing, later today, we'll be in our annual meeting. The board has nominated 11 individuals for election to the board. Three new members will be joining. You know, really excited about the extensive experience that the board brings, some of our new board members are bringing to really help with our strategic execution, our long-term value creation. I'm personally really excited to work with the new board. As the Hunts have shared, they continue to express their support of our management team, the strategic direction that we've outlined. There's been no change, right? To our business strategy, our client relationships, our operational approach.

You know, we're all focused on driving shareholder value. We're excited to bring in this new slate of directors later today.

All right. Great. The early days of your new Chief Growth Officer, Pat McCall, how have they been?

You know, really well, and, you know, we talked a little bit about this in terms of, you know, setting some of the foundation for the commercial operating framework. There's a lot of opportunity for Kelly to show up as one global enterprise, One Kelly Enterprise to all of our large customers. So we're putting in the foundation right now, stronger account planning, more rigorous pipeline management, all of the things that will contribute to our growth. We're really excited about what this will mean to our future.

All righty. That's all I have. Thank you.

All right. Thanks, George.

Thanks, George.

Thank you. I'm showing no further questions, and I would like to hand the conference back over to Chris Layden for closing remarks.

Great. Thank you all. We'll see you next quarter.

This concludes today's teleconference. Thank you for participating, and you may now disconnect. Everyone, have a great day.