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Kelly Services Inc (NASDAQ:KELYA)
Q4 2019 Earnings Call
Feb 13, 2020, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Kelly Services Fourth Quarter 2019 Conference Call. [Operator Instructions] I would now like to turn the conference over to Mr. Peter Quigley. Please go ahead.

Peter Quigley -- President and Chief Executive Officer

Thank you, Cynthia, and good morning [Technical Issues] as well as some commentary from me as Kelly's new CEO regarding our current and future states. How we'll approach this is that I'm going to share some Q4 headlines, then Olivier will walk us through Kelly's quarterly and full year performance and provide some details on our balance sheet and cash flow. I'll then share some significant some of the significant actions we have taken in my first 120 days to address near-term priorities, primarily around growth. Olivier will follow up with our short-term financial outlook. And finally, I'll turn to what's next, including longer-term initiatives that position Kelly for its future, including bold plans to accelerate our organic and, importantly, our inorganic growth through M&A. These plans, some of which depart from how we've approached things in the past, chart an ambitious course to sustainable, profitable growth as a specialty talent solutions provider. I will also share some ideas about how we can create more clarity regarding our expectations for tracking the financial outcomes of that growth as these plans are under way.

Before we dive in, Olivier will take a moment to cover the safe harbor language.

Olivier Thirot -- Executive Vice President and Chief Financial Officer

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.

And finally, please note that year-over-year comparisons are represented in nominal currency, except our International Staffing segment, which is in constant currency. We have also provided more information on our performance in the fourth quarter slide deck, which is available on our website.

Peter Quigley -- President and Chief Executive Officer

Thanks, Olivier. So when I look at Q4 at a high level, we saw a continuation of many of the dynamics evident in Q3. We continued to effectively manage costs. And we saw better-than-expected improvements in our gross profit rate due to ongoing structural shifts in our product mix, particularly in our GTS segment. These positives were outweighed by declines in our staffing business, most notably in our U.S. commercial operations. Like Q3, these declines were the result of disruption from our Q1 restructuring, continued weakness in the U.S. manufacturing sector, historically tight labor markets and some planned exits from several high-volume, low-value accounts. And in our international operations, economic headwinds in Europe continued to constrain top line growth there. I look forward to sharing the recent steps we've taken to respond to the current situation, including how we're promoting growth while continuing to reap the benefits of our leaner, more agile operations. These recent actions lay the groundwork for a strategy that includes a more aggressive inorganic growth plan, increased focus on talent and greater urgency to building specialty growth platforms that will deliver results for clients, talent and shareholders. I'll share more details about these changes in a few minutes.

But first, Olivier is going to take a closer look at Kelly's overall performance for the fourth quarter and the full year.

Olivier Thirot -- Executive Vice President and Chief Financial Officer

Thanks, Peter. Just to provide a little bit more color, as a result of the dynamics that Peter just mentioned, our Q4 results didn't meet all of the expectations we laid out as part of the outlook in our last call. Our Q4 year-over-year revenue was down 5.4% versus the 4% to 5% decline in our outlook. Our GP rate exceeded our expectations, up 30 basis points compared to our expectation of a flat year-over-year GP rate, and expenses, while down 2%, were shy of our expected 4% to 5% year-over-year reduction. Now I will review our year-over-year performance in more detail. Revenue totaled $1.3 billion, down 5.4% from the fourth quarter of the prior year. Our total company reported results were unfavorably impacted by 20 basis points due to foreign exchange. Our Q4 performance includes the results of NextGen and GTA, which added 210 basis points to our constant currency revenue growth. So on a constant currency and organic basis, our revenue for the fourth quarter was down 7.3%. Overall, the Q4 constant currency organic revenue trend reflects declines in all three segments. Looking at each segment on a reported basis, the Americas Staffing revenue decline is primarily due to the light industrial and office clinical products or the commercial portion of the business, which was down 19% year-over-year.

The decline was partially offset by the Kelly Education Practice, which was up 5% in the fourth quarter and reflects a return to revenue growth. The international staffing revenue decline reflects a continuation of the challenging market conditions in Europe. And finally, GTS returned to revenue growth, up 2% year-over-year, but down slightly on an organic basis. The growth comes with structural improvement in our product mix with outcome-based services like business process outsourcing and KellyConnect, continuing strong growth. The GTS revenue growth rate was moderated by declines in payroll process outsourcing and centrally delivered staffing. Permanent placement fees were down 18% year-over-year from continued fee declines in Americas staffing and international staffing. Overall gross profit was down 3.7%. Our gross profit rate was 18.3%, up 30 basis points when compared to the fourth quarter of the prior year. Approximately 20 basis points of the GP rate improvement was driven by the acquisition of NextGen and GTA, which are higher margin specialty businesses. On an organic basis, the GP rate improved by 10 basis points as improved customer and product mix was offset by the impact of lower term fees. SG&A expenses were down 2.3% year-over-year or down 5% on an organic basis. The decline in expenses reflects our ongoing cost management efforts in response to our top line trends.

The largest reductions in expenses came from America Staffing, where expenses were lower primarily due to lower incentive-based compensation expense as well as lower salaries as a result of our Q1 restructuring actions and International Staffing, where expenses declined in line with revenue. In the fourth quarter results the fourth quarter results include a $15.8 million impairment charge related to our U.S. front office technology development project. During the quarter, we determined that we would not complete this project for which we have capitalized certain development costs. And we saw an opportunity to immediately move forward with enhancements to a technology platform that is already deployed in parts of our business. We'll complete the rollout of this technology to most of our frontline staff in the U.S. and Canada by mid-2020. This approach will accelerate our solution implementation and the recognition of the related business benefits, including productivity improvements and an improved experience for both our employees and the talent we connect to work. Earnings from operations were $13.1 million in the fourth quarter. Excluding the impairment charge, earnings from operations were $28.9 million compared with 2018 earnings of $33.1 million.

Excluding the impairment charge, the overall decline is 13% year-over-year in Q4. The largest driver of the decline is the Americas Staffing segment, where revenue declines led to lower year-over-year earnings from operations, despite of an improving GP rate and good expense management. International Staffing was able to deliver year-over-year earnings growth in the face of challenging market conditions and lower revenue. And finally, GTS delivered another quarter of year-over-year earnings growth. Our fourth quarter results, excluding the impairment charge, reflect a conversion rate or return on gross profit of 11.8%, down 120 basis points compared to Q4 2018. On a full year basis, earnings from operations, as reported, was $81.8 million compared to $87.4 million in 2018. Excluding the Q1 restructuring charge, the Q2 gain on sale of vacant land and the Q4 impairment charge, 2019 earnings from operation was $90.6 million compared to $87.4 million, up 4%. Our 2019 results reflect the headwinds of declining organic revenues, partially offset by the results of our NextGen and GT acquisitions. We continue to focus on improving our GP rate, both organically with structural product mix changes and inorganically through the acquisition of higher-margin specialty businesses and on executing solid expense control.

Putting it all together, earnings from operations and conversion rate, including the result of our recent acquisitions, continued to improve on a full year basis. Kelly's earning before tax also include the unrealized gains and losses on our equity investment in Persol Holdings. For the quarter, we recognized a $700,000 pre-tax gain on our Persol common stock compared to an $83.2 million loss in the prior year. For the full year, the gain is $35.8 million compared to a loss on Persol stock of $90.6 million $96.2 million in 2018. These noncash gains and losses are recognized below earnings from operations as a separate line item. Income tax benefit for the fourth quarter was $5.9 million compared with our 2018 income tax benefit of $23.8 million. Q4 2018 income tax benefit includes $25.4 million related to the noncash tax benefit on the loss on Persol stock. And finally, reported earnings per share for the fourth quarter of 2019 was $0.43 per share compared to a loss of $0.62 per share in 2018. In order to better understand the underlying trends in earnings, let me provide you some additional information. 2019 earnings per share was unfavorably impacted by the impairment charge, partially offset by the favorable impact of a gain on Persol common stock net of tax. In 2018, EPS was negatively impacted by a loss on Persol stock.

Adjusting for these items, and including the results of the recent acquisition, Q4 EPS was $0.71 compared to $0.87 per share in Q4 2018. And for the full year, reported diluted earnings per share were $2.84 compared to $0.58 for 2018. Full year earnings per share for 2019 were impacted by the gain on sale of assets and the impairment as well as restructuring charges. Gains and losses on Persol common stock impacted both years. Adjusting for these items and including the results of the 2019 acquisitions, diluted earnings per share were $2.38 in 2019 compared to $2.27 in 2018, a 5% increase. Now moving to the balance sheet. Cash totaled $26 million compared to $35 million a year ago. Debt was $2 million consistent with year-end 2018. Accounts receivable was $1.3 billion and decreased 1% year-over-year. Global DSO was 58 days, an increase of three days over year-end 2018. The increase in DSO reflects both increasing pressure from our global customers and the timing of customer payments at year-end. In our cash flow for the full year, we generated $82 million of free cash flow compared to $36 million of free cash flow in 2018.

With our improved level of free cash flow generation, we paid down the debt used to fund the $86 million acquisitions of NextGen and GTA. This achievement gives us added confidence as we accelerate the inorganic component of our specialty talent strategy, including the early 2020 acquisition of Insight, which we announced last month. Insight is a provider of K-12 Education Staffing in complementary markets to our existing education business in the U.S., and cash paid at closing was $38 million. The purchase will start to be reflected in our Q1 2020 financial results.

Peter Quigley -- President and Chief Executive Officer

Thanks, Olivier. I'd like to turn to our near-term priorities and what we've accomplished since I became CEO. I'll start with our top operational priority growth. When we restructured our U.S. operations last year, we had two primary goals: to drive efficiency and to drive growth. We are pleased with our progress with efficiency. In fact, we're ahead of plans. We have not yet delivered on our top line growth expectations. And I've made returning to growth a top priority during my first 120 days, and we're instituting aggressive changes to get us there. We're reallocating sales and marketing resources to drive increased demand, and we're seeing positive momentum in our pipeline. We're centralizing support functions to allow our front lines to have greater focus on sales and recruiting, a move that should provide growth as well as expense savings. We are rolling out new front office technology that will improve our recruiters effectiveness and make it easier for talent to work with us through a modern tech-enabled process.

This rollout will give our commercial and education teams new front office technology for the first time in almost 20 years and resolves uncertainty about front office implementation, timing and delivery. We are using centralized recruiting to support certain large customers, and we're already seeing improvements in fill rates. The centralized model has the added benefit of allowing other recruiters to focus on higher-margin business. And we are accelerating our shift to a more responsive tech-enabled delivery model that allows us to target resources to the fastest-growing markets and aligns with the preferences of the modern workforce and customers across the U.S. While returning to growth has been and will continue to be our top priority, we are acting with urgency to take care of business elsewhere in the company. In December, we announced plans to sell our HQ campus and lease back our main building, bringing employees together in two locations. This arrangement enables our progressive work from anywhere HQ program and reinforces Kelly's intense focus on growth by freeing up capital for investments that accelerate our specialty strategy.

As Olivier mentioned, we made one of those investments early this year. Our purchase of Insight, a fast-growing provider of education solutions, advances our specialty strategy and further strengthens Kelly Education's leading position in the U.S. market. It's an exciting addition to our high-performing education growth platform, and we're thrilled to have Insight's operational founders join the Kelly Education team. I also announced the appointment of Kelly's first-ever Chief Growth Officer to place even greater emphasis on our growth mandate. Among other responsibilities, this role will ensure that we're allocating the right people, process and technology resources to achieve our growth goals within it and across our specialties, accelerate our inorganic growth plans, ramp up our use of innovation and market research to identify new growth platforms, and ensure Kelly's pricing and channel development strategies align with our goals for growth. And finally, we have made excellent progress in establishing an operating model that optimizes Kelly's structure, capabilities, governance, accountability and ways of working. These steps taken over the last four months are addressing the need to stabilize our U.S. operations, accelerate growth, effectively manage costs and drive further specialization.

With these actions behind us, let's have Olivier walk us through our outlook for the year ahead.

Olivier Thirot -- Executive Vice President and Chief Financial Officer

Thanks, Peter. Please note that the outlook for 2020 does include the impact of the recently announced acquisition of Insight. For the full year, we expect our reported revenue growth to be 3% to 4%, and we don't expect the impact of FX on revenue to be significant. We currently expect Insight to contribute approximately 100 basis points to our revenue growth rate. We do anticipate that our organic revenue growth will improve progressively during the year, but Q1 revenues are likely to reflect a year-over-year decline due to the growth challenges we still face in Americas Staffing. We expect that this pace of revenue growth will be supported by the initiatives that Peter laid out for the Americas. We expect the gross profit rate to be up slightly on a year-over-year basis. While we may continue to experience some volatility in the GP rate on a quarterly basis, as we have seen in the past, structural changes in business mix from our shift to higher-margin specialty solutions are expected to positively impact our GP rate for the full year.

We anticipate SG&A expenses to be up 2% to 3% on a reported basis. This includes increases in incentive compensation expenses, which will only be paid upon achievement of performance objectives, continued spending on technology and the impact of our recent acquisition. We also expect that the modernization and efficiency actions discussed today will provide cost savings. We have included an estimate of the cost savings in the outlook, while excluding the expected onetime cost of such actions. We'll share the details of both the cost savings and the onetime costs during our next update. So all in, we'll continue to make investments in several key areas of our business in 2020, and we expect to deliver year-over-year improvement in our conversion rate. Consistent with our prior discussions, the outlook provided does not reflect any gains and losses on Persol stock, although we do believe that future unrealized gains and losses resulting from changes in market price could be material.

The outlook also excludes the impact of our recently announced agreement to sell and lease back our corporate campus, including the expected gain on sale. The proceeds of the sale are expected to be approximately $51 million net of tax and transaction expenses and will unlock capital to invest in our specialty growth platforms. And finally, our 2020 annual income tax rate is expected to be in the low- to mid-teens range. This does include the impact of the work opportunity tax credit, which was reinstated for 2020.

I'll now turn it back over to Peter for his concluding thoughts.

Peter Quigley -- President and Chief Executive Officer

Thanks, Olivier. It should be clear that we're acting with urgency to deliver progress in 2020. At the same time, we're looking further down the road to a day when the full potential of Kelly is realized. We have a lot to build on. We have one of the best brands in the industry. We have a solid balance sheet fortified over many years. We have an exceptional blue-chip client base. We put to work thousands upon thousands of people looking for what's next in their work-life journey. And importantly, we have the most dedicated and passionate employees anywhere. Our long-term goal is to unlock the potential of these valuable assets by deploying them differently, enabling them with technology differently and supporting them with an operating model differently than we have in the past. Over the course of 2020, I will have much more to share about how we will do this and the changes we will make, some of which, frankly, are overdue. For today, there are three significant changes that I want to share with you. First, we intend to accelerate our efforts to drive our top and bottom line performance through acquisition of inorganic growth platforms, making smart buys that align with Kelly's focus on specialization.

Here's why I'm confident in this organic growth strategy and why it has the full support of Kelly's Board of Directors. We have the benefit of a rock-solid balance sheet with ample financing capabilities under terms which reflect that strength and were just renewed in December last year. We have a strong track record of improving our free cash flow generation. We have proven our ability to quickly and efficiently integrate new acquisitions that deliver meaningful growth for Kelly. And we have shown that we can finance these acquisitions and deleverage quickly. In fact, we have no debt remaining for many of our acquisitions. Our future capital allocation will be focused entirely on growth, both organic and inorganic, in our chosen specialties. The second change stems from the fact that our growth plans are ambitious, and I don't believe achieving this kind of growth will happen within Kelly's current structure, which is too complex to enable our specialty talent strategy. Today, I'm announcing an important change to design to intensify Kelly's focus and accelerate our growth. We have proven that in areas where we specialize in line with demand, we perform well. And we have made clear that our growth is tied to our success as a specialty talent solutions provider.

Moving forward, we will combine our assets and resources in five business units, each defined by clear strategies and measurable targets that will inform our M&A strategy and guide how we allocate our resources. The new structure will include these five specialties: commercial, which we are renaming Professional and Industrial; Education; STEM, which includes our science, IT and engineering solutions; OCG; and International. Each specialty will be led by a business unit President reporting to me, who will be laser-focused on driving growth within their specialty. The five leaders will work with our new Chief Growth Officer, who will identify growth opportunities across the business units, help maximize efficient support systems and drive profitable collaboration. Together, this leadership team will move our specialty growth strategy forward in a meaningful and measurable way, taking responsibility for both organic and inorganic opportunities while meeting customers' needs for talent and connecting talent with great opportunities, all at a more accelerated pace. We expect this new way of working will allow us to allocate our corporate functions to be just as focused on growth as our operations are.

We'll be transitioning into the new structure over the next few quarters as well as rolling out refreshed logos that signal Kelly's specialty focus. Finally, the third change is a commitment to bringing new transparency to our goals for growth. I'm pleased to share what we're calling a growth map that outlines the goals we're aiming to hit for three specific financial areas. Here's what we'll be tracking. Revenue growth, including parameters for both organic and inorganic growth as we execute our more acquisitive plans. Gross profit margin, which we see as the appropriate measure of progress on our journey toward higher-value specialization. And EBITDA margin, an update to our previous conversion rate measure as we fix our sites on more inorganic growth platforms. We will be sharing more details about our growth map next week after we present at the Noble Capital Investor Conference. You'll be able to view a webcast of our presentation and access all supporting materials on our investor website. And starting later this year, we will begin reporting on these metrics and our goals to help gauge our progress. We will be refreshing these goals regularly so that you have line of sight to the next period on a rolling basis. We hope you'll see this added transparency as a valuable and positive change from our past practices.

I'm excited about what's next for Kelly. The last 120 days set a new stage and pace for growth. Our new operating model is designed to accelerate specialty growth and profitability by playing to our strengths and focusing on specialties that align with market needs. The acquisitions we've made in the last three years are just the start of an ambitious program to use inorganic growth to drive our financial performance. We're addressing key structural issues and modernizing our operations to adapt our infrastructure and take care take advantage of the latest technology. We understand talent and are becoming more agile to meet them and our customers where they are. And we're doing it all while creating a more fulfilling experience for the customers and talent we have the privilege to connect. Putting Kelly on to a higher growth trajectory isn't going to happen overnight. But I believe we are already laying the foundation and moving ahead with a renewed sense of urgency and purpose to realize the full potential of our great company. We look forward to reporting the results of our efforts each quarter as Kelly's transformation unfolds.

In the meantime, Olivier and I will be happy to answer your questions. Cynthia, the call can now be open for questions.

Questions and Answers:

Operator

Thank you. [Operator Instructions] And our first question will come from the line of Josh Vogel with Sidoti. Your line is open.

Josh Vogel -- Sidoti -- Analyst

Thank you. Good morning, Peter and Olivier. How are you guys?

Olivier Thirot -- Executive Vice President and Chief Financial Officer

Good morning, Josh. We're good. How are you?

Josh Vogel -- Sidoti -- Analyst

I'm great. Thank you. I've got a couple of questions. I guess, the first one just about one of your initiatives here. I'm assuming that you already have the President of each specialty in place? Or is this something you're going to be looking to add?

Peter Quigley -- President and Chief Executive Officer

We'll be announcing the Presidents, Josh. So yes, but we'll be announcing them in probably in the next by the end of the quarter.

Josh Vogel -- Sidoti -- Analyst

Okay. Great. And then with the announcement, I think it was last week of Tim Dupree as your CGO. Do you feel that you have your executive team rounded out?

Peter Quigley -- President and Chief Executive Officer

Yes. I would say that the with the BU presidents and the current leadership team, including Tim, we have a complement of leaders that are ready to deliver on our strategy. That's not to say that we won't add talent where it's necessary. But I think we're ready to deliver on this plan as I've laid it out.

Josh Vogel -- Sidoti -- Analyst

Okay. Great. What's your outlook for 2020 and all these initiatives and strategies in place? I was pretty surprised, but certainly encouraged by your full year revenue growth guidance, understanding Q1 will be down year-over-year, and there's the 100 basis point contribution from Insight. But what gives you the confidence that you could put up mid-single-digit gains later this year? And could you maybe maybe this is more for Olivier, kind of give us just like a sense of I know there will be progressive improvements throughout the year. But if you could just give any more insight or details on how you see revenue trajectory playing out this year?

Olivier Thirot -- Executive Vice President and Chief Financial Officer

I mean the as we did mention, we believe that Q1 is going to be still challenging on an organic basis because of what is going on in our U.S. operations, commercial. But I think we have a solid plan in place, and we start to see some progress, naming one of them, the pipeline, and we feel that we are going to start to see some traction that would enable us to show still a little bit of a challenging Q1, but some improvement in our overall organic growth trajectory with, of course, an improvement or further improvement as we move to the remainder of the year. I think the other thing is our recent acquisition, NextGen and GTA. When you look at what we did achieve in 2019, it's a growth platform that grew at about 22% top line, providing a very interesting value profile at 27% margin and very good bottom line. These two acquisitions were already accretive as soon as Q1 of 2019 and generating $0.22 of EPS for the full year. We see and continued to see good traction in our education business.

You have seen that we did mention a return to growth from minus 1% in Q3 to plus 5% in Q4, and we see further traction as we enter into 2019 2020. We see a good traction also in our outcome-based business, as we have seen in 2019. So there are a lot of, I would say, dynamics that are in play that give us confidence that, especially if we continue to make progress on our U.S. operation, commercial staffing, we should progressively improve our organic capabilities during the year. And again, we plan to have about 100 basis points of extra boost on our organic growth coming from Insight, which is an excellent geographic complement to our existing K-12 Substitute Teacher business in the U.S.

Josh Vogel -- Sidoti -- Analyst

That's really helpful. Thank you. And I'm sorry, did you say that NextGen and GTA grew 22% last year versus their 2018 numbers?

Olivier Thirot -- Executive Vice President and Chief Financial Officer

That is correct. And you will see that in details when you have access to the 10-K because we have a pro forma analysis that is showing, basically, the progress and through our earnings release 8-K where we showed some analysis about that as well.

Josh Vogel -- Sidoti -- Analyst

Okay. Wonderful. Focusing on your inorganic strategy, can you just talk a little bit about the pipeline of opportunities you're seeing today, knowing that you can't discuss any future potential deals, but just curious what the pipeline looks like and maybe from a specialty perspective.

Peter Quigley -- President and Chief Executive Officer

Yes, a couple of comments, Josh. I think because we have, as compared to past periods, been more acquisitive in the last few years, relatively speaking. We have been included on a number of transactions that we may not have been in prior periods. So we're encouraged by the fact that we're being seen as a company that is playing in the M&A space more aggressively. And I think with today's, my laying out our plan for the future, we would expect that to continue. We are developing not only a reactive pipeline strategy, but also a proactive pipeline strategy, where we're identifying growth platforms that exist within Kelly, where we think would be complements the growth platforms in Kelly and using a variety of resources to try to generate additional targets for acquisition. And I would say that, that is a work in process, but it's clearly more robust than it has been in the past.

Josh Vogel -- Sidoti -- Analyst

Okay. Great. And just one last one, and I'll hop back in the queue. It's a nice way to unlock capital through the corporate headquarters sale and lease back. I guess it's a quick two parter. How much can you remind me how much you have available on your current facility? And then just also, you still have these attractive assets on the books related to Persol. And I personally feel that The Street doesn't seem to give enough attention to that. I'm just curious, is there any plan to potentially monetize or liquidate a portion of those investments and put that capital to work elsewhere?

Olivier Thirot -- Executive Vice President and Chief Financial Officer

I'm going to start, and Peter is going to complement, especially when it comes to commenting on our JV, APAC assets as well as our shares with Persol. So we have renewed our financing capabilities in December of last year. So the overall capacity is $350 million. $150 million through a securitization program and the rest with a traditional revolver. We feel, as Peter mentioned, that we have ample capacity basically to execute and accelerate on our inorganic initiatives. We did mention today that basically, our balance sheet at the end of 2019 is completely or almost deleverage, our debt is $2 million. So we feel comfortable now with our significant improvement in free cash flow generation that we can use this $350 million capacity, while making sure that we can deleverage with our free cash flow, which is, of course, very important, especially for a cyclical industry like our industry.

Peter Quigley -- President and Chief Executive Officer

Yes, Josh. And with respect to other assets of the company, we're regularly evaluating how best to combine resources and how to consider resources to create value. And there isn't any asset or resource that's off the table in that regard. But we have no nothing to announce with respect to any specific asset other than the ones we've mentioned today. So it's a regular part of our review of how we're allocating resources and how we're using our capital to drive growth.

Josh Vogel -- Sidoti -- Analyst

Well, thank you guys for taking my questions. Looking forward to see and watching 2020 play out.

Peter Quigley -- President and Chief Executive Officer

Yeah. Thanks, Josh. Really appreciate it.

Olivier Thirot -- Executive Vice President and Chief Financial Officer

Thank you, Josh.

Operator

Thank you. Next, we'll go to the line of Joe Gomes with NOBLE Capital. Your line is open.

Joe Gomes -- NOBLE Capital -- Analyst

Good morning, and thanks for taking the questions. Hi, Joe.

Olivier Thirot -- Executive Vice President and Chief Financial Officer

Good morning.

Joe Gomes -- NOBLE Capital -- Analyst

I just wanted to circle back about the outlook for 2020. And I understand what some of the NextGen and the education returning to growth. But a lot of this if you look at relatively large decline in the U.S. Staffing business in the fourth quarter and some of the issues you outlined today and in previous calls, what gives you confidence that the U.S. commercial business is going to stabilize in the near term?

Peter Quigley -- President and Chief Executive Officer

Yes. Thanks, Joe. So what gives us confidence is that the initiatives that I've instituted since becoming CEO are, a large measure, beginning to show results. And I think as Olivier mentioned, we believe that the U.S. commercial is stabilized. We clearly have work to do on returning to growth, but the initiatives that we've instituted, including reallocating resources to drive demand, acting on our shared services and centralized delivery models to allow greater focus on higher-margin business. We like what we see. We again, we're not comfortable with the results or pleased with the results because we have to get back to growth. But when we look at the pipeline and some other things, we see signs that the initiatives we've taken are beginning to take hold.

Joe Gomes -- NOBLE Capital -- Analyst

Okay, thanks for that. And just if you could provide a little more color or detail on the technology development project and why you guys put the stop and took the charge there? I mean, a little more insight into that would be appreciated.

Olivier Thirot -- Executive Vice President and Chief Financial Officer

Yes. We about two and half years ago, we did start an initiative on the front and middle office for our U.S. business to replace, basically, an old in-house developed ERP that was 20-plus years old. We have realized that as recently as Q4 that there were some uncertainties on when we can get this new front and middle office being delivered. And we saw an opportunity, basically, to move with something else that we are much familiar with because we are using the system. We are now implementing or expanding. We have used it over time. So we saw that with the uncertainty around the timing of the delivery, combined with the risk of coupling front and middle office, we had an opportunity to really accelerate the delivery of this new platform. As we speak, we have already implemented this new system for shy of 300 people.

So that was, basically, the trade-off. I mean getting the pain of, I would say, the asset impairment of $15.8 million in exchange with we can get something now as we speak and implement quickly, enhance the system to get similar benefits than what we are expecting with our initiative. And we expect, as soon as the second half of 2020, to get additional productivity and other metrics being enhanced and improved through this system. So the trade-off was really the pain of this asset impairment versus making sure we get the benefit of this new system as quickly as possible, which is what we see now. I mean, again, we have implemented already the system to shy of 300 people. By mid of 2020, we are going to be fully in place. And we are going to start to see, basically, what benefits we are expecting post-implementation as opposed to significant uncertainty with the first option on when we are going to be able to deliver on this project.

Peter Quigley -- President and Chief Executive Officer

And Joe, I would just add, relative to your question about confidence for the back half of the year in terms of growth that we're introducing new technology, as I mentioned, for the first time in almost 20 years, and we believe that our U.S. commercial teams will be a significant beneficiary of this modern, latest technology in their recruiting.

Joe Gomes -- NOBLE Capital -- Analyst

Okay. And then if you could just provide a little color on what you guys see in the European market in 2020? What's going on there? Where do you see some positives? Where do you see some challenges?

Peter Quigley -- President and Chief Executive Officer

Well, it's a tough call because there are so many disparate economic issues in the region. There continues to be uncertainty regarding Brexit or as a result of the Brexit outcome. There are challenges, economic headwinds throughout the region. Although and I'll ask Olivier to comment as well. But I think there are some, at least signs that the deterioration has not accelerated or is not accelerating. And there are pockets of growth and pockets of development that we expect to benefit from, but we're not such a huge player in the region that we're going to be a bellwether of what's going on there. But we do expect the sort of current state to be what we should expect for 2020.

Olivier Thirot -- Executive Vice President and Chief Financial Officer

I would just add on that, that our life science specialty is still doing well, where we are specialized on this area. Eastern Europe, specifically Russia, we are still seeing some traction like we have seen in 2019. We are going to continue to run the business in a meaningful way, manage our resources, making sure that we continue to stabilize our margin as we did along 2019, but we don't expect top line very being very dynamic. I think it's going to be kind of similar to what we have seen in 2019, but with no sign of further downside, I would say. And whenever there are pockets of opportunities, and we see a lot of them sometime in many countries in some very specific specialties, we are usually good at capturing them very quickly and get some benefits. But the overall environment is, I would say, not very favorable, but not going down further.

Joe Gomes -- NOBLE Capital -- Analyst

Okay, great. Thank you very much.

Peter Quigley -- President and Chief Executive Officer

Thank you, Joe

Olivier Thirot -- Executive Vice President and Chief Financial Officer

Thank you.

Operator

Thank you. Next, we will go to the line of John Healy with Northcoast Research. Your line is open.

John Healy -- Northcoast Research -- Analyst

Thank you. Peter, just want to get a little bit more thoughts just about the future M&A strategy and how it may be deployed. Is there a way you could kind of help us conceptualize maybe the amount of capital that you and the board have kind of earmarked for potential M&A? And additionally, will it be mostly domestic-oriented as you try to get more targeted within certain verticals? Or do you think international M&A will also be an element to the toolkit?

Peter Quigley -- President and Chief Executive Officer

Yes. Thanks, John. So without giving specifics, I would say that if you consider the $150-plus million that we've spent in the past three years that when I talk about a acceleration and a more ambitious M&A plan, it's probably reasonable to think about it as a multiple of that. And as we go forward, we'll do our best to try to frame it for you in more specific terms. But I think right now, that's probably how I would think about the quantification of it. And in terms of the areas that we're focused on, I would think that we will clearly be overweighted in North America versus our international operations. It's not to say that we would preclude if there was something opportunistic, but we see huge, huge opportunity in North America. It's the largest staffing market in the world. We see significant opportunities and outcome based. Our outcome-based organic platforms are growing nicely. So complementing those areas here, we think, is probably where our capital is best allocated.

John Healy -- Northcoast Research -- Analyst

Great. And trying to get a little bit more detail. 2020 seems like it's a year of a lot of unknowns in terms of where the industry is headed, especially with the election later this fall. Does that make you kind of pause your M&A pursuits for this year and make 2020 kind of a due diligence here and 2021 maybe a year of action because maybe you're able to get prices that are very different? Or do you think that you'll be active in terms of closing transactions in 2020?

Peter Quigley -- President and Chief Executive Officer

Well, John, we're it's a great question. We're very aware of where we are in the cycle. And so we're going to be diligent about making smart acquisitions if we're going to make acquisitions, but we think that there are opportunities to pick your targets even in this year, recognizing, as I said, that we're not going to overpay for properties or get into markets that were not comfortable or long-term growth platforms.

Olivier Thirot -- Executive Vice President and Chief Financial Officer

Just to add on that next week, Peter mentioned that we are going to be even participating to a Noble Capital event, and we are going to share more details about our acceleration in terms of capital-allocation strategy.

John Healy -- Northcoast Research -- Analyst

Great. And then just one final question for me. On the balance sheet, it looks like there's a property held for sale of $21 million. Is that related to the headquarters? Or is there something else that is kind of in that transaction?

Olivier Thirot -- Executive Vice President and Chief Financial Officer

That's you are correct. That's basically the headquarters that we have mentioned. It's 20 roughly $21 million. I did mention that the net proceeds, net of tax and transaction costs is going to be around $51 million. So basically, we are going to recognize in Q1 because we are going to secure the deal in Q1, a $30 million, basically, capital gain and the proceeds, meaning the $51 million net of tax and transaction costs will happen before the end of Q1.

John Healy -- Northcoast Research -- Analyst

Thank you, guys.

Olivier Thirot -- Executive Vice President and Chief Financial Officer

Thank you.

Peter Quigley -- President and Chief Executive Officer

Thank you.

Operator

Thank you. [Operator Instructions] I'm showing no further questions in queue. Please continue.

Peter Quigley -- President and Chief Executive Officer

Okay, Cynthia. Thank you very much.

Olivier Thirot -- Executive Vice President and Chief Financial Officer

Thank you very much.

Operator

[Operator Closing Remarks]

Duration: 54 minutes

Call participants:

Peter Quigley -- President and Chief Executive Officer

Olivier Thirot -- Executive Vice President and Chief Financial Officer

Josh Vogel -- Sidoti -- Analyst

Joe Gomes -- NOBLE Capital -- Analyst

John Healy -- Northcoast Research -- Analyst

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