Q1 2021 Kelly Services Inc Earnings Call
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Good morning, and welcome to Kelly services first quarter 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. Peter Quigley, President and CEO, Sir you may begin.
Thank you Tony Hello, everyone and welcome to Kelly services first quarter Conference call.
With me today is Olivier T Rowe, our Chief Financial Officer, who will walk you through our safe Harbor language, which can be found in our presentation materials. Thank you Peter and good morning, everyone. Let me remind you that any comments made during this call, including the Q&A may include forward looking statements about our expectations.
<unk> folks to jump Assortments.
Actual results could differ materially from those suggested by our comments.
We have no obligation to update the statements made on this call. Please.
Please refer to our SEC filings for a description of the risk factors that could influence the companys actual future performance.
In addition, during the call certain debt that will be discussed on a reported and on an adjusted basis discussion of items on an adjusted basis our non-GAAP.
GAAP financial measures designed to give insight into certain trends in our operations. We have also provided a slide deck that we are using on today's call as well as an expense slide deck with more information on our performance. Although website now back to you Peter Thank you Olivier more.
A year after the COVID-19 pandemic began we're entering a new and promising phase of the recovery in the U S. The temporary labor labor market has recovered unemployment is down and demand for staffing and other workforce solutions is building.
Cross small medium and large enterprises, while we haven't left COVID-19 completely behind US we are entering what appears to be a solid sustainable recovery that will likely gathering momentum throughout 2021.
And Kelly, we are well positioned to capture growth in the recovery.
Our actions in 2020 protected our balance sheet and capital and in 2021, we are executing against our well defined specialization strategy.
We are investing in organic growth to help accelerate that strategy, bringing new high potential solutions to market. For example, the tutoring product that we launched in March will help close pandemic induced K 12 learning gaps.
And unlock new revenue streams in our education segment.
At the same time, we are pursuing inorganic growth at an unprecedented pace.
As you May recall in February 2020, shortly before the pandemic hit we laid out plans to pursue a bolder approach to driving growth through targeted M&A.
We're acting on these plans to accelerate our specialization strategy, including two acquisitions in the education segment last year.
Now we're excited to have reached a new M&A milestone our purchase of software World. In April 2021 is the largest acquisition and Kelly as history. The deal significantly expands our market presence in the technology staffing and solutions space and helps to continue to shift to kellys portfolio towards SaaS.
Growing high value specialties.
EBITDA will share what this means for future revenue in GB GP growth in a few minutes, but in the meantime, I know our soft world colleagues are listening today and I'd like to publicly welcome them to the Camden Kelly family. We're thrilled to have you on this journey with us.
Before I hand, it off to Olivier to provide details on Kelly's first quarter performance I will share a few highlights.
All of our operating segments professional and industrial Science Engineering, and technology Education, OCG and international were profitable in Q1, and excluding the 50 <unk> week in the fourth quarter last year.
All delivered sequential improvements in either revenue dollars or revenue growth rates, while three delivering improvements against both measures OCG education and international.
Specifically, our OCG segment continues to thrive and surpassed its pre COVID-19 revenue levels for the second quarter in a row, while delivering better year over year earnings.
We were pleased to see our education segment, which has been the segment most impacted by COVID-19 exceed our expectations in Q1, as we placed 30000 substitute teachers in March the best month since the pandemic began.
The U S education system is still a long way from normal but schools are starting to reopen we have added new wind store portfolio and our sales pipeline is healthy and growing.
Kelly International delivered better year over year earnings as our teams captured growth from sustained demand among life sciences customers and saw increased demand in manufacturing as facilities reopened.
Our set segment delivered sequential top line growth notwithstanding a slight deceleration in growth rates during the quarter stemming from some headwinds among certain verticals and industries.
We continue to meet strong demand in our science specialty and captured significant fee growth.
In our professional and in industrial segment, our outcome based businesses continued to perform well in our staffing business delivered strong fee growth.
And while our staffing business is trending up and demand for our staffing solutions returned to pre pandemic levels in the quarter. We did not convert enough of this new demand to top line revenue in line with our expectations.
While some of this is attributable to a tighter than usual labeled labor market, particularly in light industrial jobs, we have taken steps to enable P&I to capture more of this demand opportunity in the future.
I'll provide some additional insight regarding those steps later in the call.
Now I'll turn it over to Olivier to share more details about our Q1 results.
Peter as Peter mentioned, our Q1 results reflect the impact of our continuing stabilization in economic activity and demand from for our services as some COVID-19 related challenges remain.
We passed the one year mark of the pandemic this quarter.
The impact of lower demand shows the became visible in our financial results starting in mid March of 2020, as abundant increased bumps impacted economic activity around the globe.
For the first quarter of 2021 revenue totaled $1 2 billion down four 4% from the prior year or down five 5% in constant currency.
As we mentioned last quarter, we have continued to see gradual improvement in demand from the low point experienced in Q2 2020.
Our Q1 constant currency exit rate all year over year revenue trends for the months of March was down two 7% compounded to our December exit rate, excluding the 50 <unk> week of down eight 1%.
This is due in part to a prior year comparable debt reflects the early days of the pandemic in 2020 and reflects a continued trend of gradual improvements over the course of the quarter.
Three of our five segments are now reporting positive year over year constant currency revenue gains from the months of March OCG at plus 8% concur.
Confirming the trends we have seen in 2020.
International plus three 5% and education at plus two 7%.
For the quarter, our education segment continues to be impacted as U S quality suites to use a value tier of delivery models, including via dwell on the hybrid.
Which has an impact on the demand for our services. However revenue in our education segment for the first quarter did grow sequentially from Q4, 2020, which is encouraging.
Because schools have continued to modify their unstructured delivery in response to changing local infection rates volatility and demand in the near term is still possible.
International also experienced continued improvement in revenue trends and that positive sequential revenue gains in the quarter, excluding the impact of the fish detailed weak, Russia, and Mexico continued to show solid revenue growth, Switzerland, and Italy returned to positive revenue growth in the quarter and falls as seen.
Sequential improvement was a positive exit rate in March.
Revenue in our professional and interest for yield segment continues to reflect growth in our outcome based products, including our remote contact center business, our specialty business, while trending up is still limited by current talent supply shortages and some additional challenges that Peter will cover later.
And within the <unk> segment, our results have generally tracked with the customers served in niche specialty science, where we have many life science and clinical customers as being the strongest and engineering with a concentration in the oil and gas sector has been slower to recover.
And finally, our OCG segment has continued to perform well, thanks to new customer wins and growth in our existing customer base and CW.
<unk> and <unk>.
After reaching a key inflection point in Q4 2020, when revenue for the quarter exceeded the corresponding pre COVID-19 period.
<unk> sustain that level of performance in Q1 2021 with revenue up over both the comparable periods in 2020 and also in 2019.
Permanent placement fees were up 30% year over year from significant increases in activity in P&I inset, coupled with fees from our Q4 2020 acquisition of Greenwood as show in the education segment.
This was partially offset by a decline in fees in the international segment, reflecting a more uncertain environment in Europe.
Overall gross profit was down four 5% or five 7% on a constant currency basis.
Our gross profit rate was 17, 7% consistent with the first quarter of the pioneer.
On a year over year basis, our GP rate was positively impacted by higher term fees, which was offset by the negative impact of higher employee related benefit costs within the segment. We did experience some variability in gd rates caused by shifts in customer and product mix and in the case of P&I.
Caused by one time costs associated with expected future increases in customer demand in our contact center product.
SG&A expenses were down 8% year over year on a reported basis included in expenses for the first quarter of 2020, and $8 7 million plus structuring charge.
On a like for like basis expenses for the quarter were down 5% year over year in constant currency.
Overall expense reductions in all segments reflect continuous management of our cost base in line with revenue trends, while preserving the ability to respond as market conditions improved and continuing with organic investment in our selected specialties.
Our reported earnings from operations for the first quarter were $10 6 million compared to Q1 2020 reported loss of $111 8 million.
Our Q1 2020 earnings include a goodwill impairment charge of $147 7 million gain on the sale of the assets of $32 1 million and $8 $7 million restructuring charge.
As adjusted Q1 2020 earnings from operations were $12 5 million and a new lateral like basis.
In the 2021 first quarter declined 15%.
For the quarter, all operating segments as positive earnings from operations, and OCG and international delivered their adjusted earnings than a year ago.
Now turning back to the company as a whole Kelly earnings before tax also include the unrealized gains and losses on our equity investments in peso recordings.
For the quarter, we recognized a $30 million pre tax gain on our <unk> common stock compared to $77 8 million pre tax loss in the prior year.
These non cash gains and losses are recognized below earnings from operations as a separate line items.
Other income and expense also below also below earnings from operations other than usual year over year volume this quarter caused by higher transaction related expense from our software the acquisition and the one time non cash write the write down of HIV innovation from investment.
Income tax expense for the first quarter was $10 5 million compared with our 2020 income tax benefit of $36 2 million, our effective tax rate for the quarter was 28, 3% and our tax rate was higher than the U S statutory rate primarily due to the impact of non.
Cash gains on Perceval common stock and the related deferred taxes recorded at the higher Japanese statutory rate.
And finally reported earnings per share for the first quarter of 2021 was 64 cents per share compared to a loss of $3 91 per share in 2000 22021 earnings per share includes a gain on vessel share net of tax in 2020 earnings per share.
Was unfavorably impacted by the goodwill impairment charge the loss in total common stock and those structuring charges, partially offset by the gain on sale of assets.
Adjusting for these items Q1, 2021, EPS was 12 <unk>.
Compared to <unk> 20 per share in Q1, 2020, a decline of 40%.
Now moving to the balance sheet as Peter mentioned, we acquired <unk> on April 5th which falls in <unk> fiscal second quarter.
So the impact so far on acquisition is not reflected in our balance sheet as of the end of the first quarter.
As of quarter end cash totaled $279 million compared to $223 million at year end, 2020, and $48 million a year ago.
Debt remains slow 1 million at quarter end compared to nearly as you achieved in 2000 $22 million of U <unk>.
Again, we ended the quarter with no borrowings in our U S credit facilities, our higher cash balance reflects the benefit of deferral of payroll taxes in the U S. Under provisions of the cares Act and to a lesser extent the impact of reductions in working capital.
Given our current lower year over year revenue as the recovery from the impact of COVID-19 on our business continues.
Accounts receivable was $1 3 billion, an increase of three 5% year over year.
Global DSO was 60 days, an increase of one day over the same period in 2020, but the decline of full days from year end 2020.
The decrease in CE Rand reflects the collection of receivables from several large customers. We are carrying higher balances at year end due to customer driven administrative issues.
In our cash flow for the quarter, we generated $8 million of free cash flow consistent with the same period in 2020.
As we noted in our form 8-K announcing the acquisition, we acquired <unk> for $215 million plus working capital adjustments and we were able to fund the entire acquisition with existing cash balances.
As a result, our cash balances are now back in line with levels needed to manage daily liquidity and.
And why does the third call acquisition didn't require debt financing, we may begin to borrow and existing credit facilities to ship, both working get their needs as revenue levels continued to recover offshore as pre COVID-19 levels and now back to you Peter Thanks for those details Olivier while it is <unk>.
Here that we are still living with the impact of the COVID-19 pandemic.
We're pleased to see continued economic momentum and we are encouraged by healthy sales pipeline and the new customer wins, we're capturing as the recovery progresses.
I'd like to provide a little more insight into the demand supply dynamics and P&I staffing that I mentioned earlier in the call as.
As noted demand from existing and new customers exceeds pre pandemic levels, while supply, particularly in lower wage jobs is challenging and while our staffing business is trending up we're taking steps to capture more growth than we delivered this quarter.
You'll recall that even during the pandemic, we successfully deployed our new front office mid year last year. During the first phase of deployment certain activities still require use of legacy Kelly systems.
The inefficient inefficiencies. This causes became more pronounced as we emerge from last year's significantly depressed demand to the current environment.
We are addressing this by accelerating the technology deployment timeline, introducing additional training of our frontline teams and exploring the use of complementary technology to alleviate some inefficiencies.
We've also begun reopening physical branches and targeted high demand markets to facilitate in person recruiting of local talent and we are focusing internal resources on filling vacant recruiter roles more quickly.
To capture a new revenue stream and P&I, we have started offering a new skilled professional solution that bridges the gap between temporary and full time employment and lets clients.
Bring in high value P&I workers on a project basis.
We expect the supply of P&I talent at all skill levels to improve as vaccines vaccination rates rise and schools resume in person instructional delivery, enabling more parents to return to work.
Overall, we're optimistic about these early stages of the recovery barring an unforeseen economic setback, we expect that demand in all operating segments will continue to accelerate particularly in the second half of the year.
It's worth noting that Kelly is maximizing the momentum of these market conditions with intelligence technologies deployed during the pandemic we.
We launched virtual job fairs last year in response to COVID-19, and have now incorporated them into our standard recruiting practices, bringing in hundreds of hires and hundreds of thousands of GT GP dollars.
To help put people on the job faster, we have improved our online talent experience and cut in half the time to complete the registration process. We are introducing a powerful new tech stack that enables kelly clients to request full time contingent and contract talent through a single source simpler.
Flying and speeding up the hiring process across their entire workforce.
And throughout our own operations Kelly has deployed numerous the bots that perform highly repetitive tasks and save hundreds of thousands of human work hours annually.
Technologies, such as these make it faster and easier for talent clients and our internal teams to connect and position Kelly to capture growth more quickly and efficiently as the recovery accelerates I'll now welcome back Olivier to provide additional thoughts on 2021.
Thank you Peter at the time of our year end earnings release in February will be returned to providing an outlook for the full year and we will continue to update our full year guidance as the year progresses.
We passed the one year anniversary of the COVID-19 pandemic in the quarter and remain confident that we have adequate financial resources and liquidity to emerge from this crisis and GAAP side on the recovery as we have discussed we completed the purchase of software I'll just after the end of the first quarter and we have nine months of <unk> activity reflected.
Our 2021 results.
We expect that the impact of <unk> acquisition will accelerate our revenue growth in the high demand high margin technology specialty and will result in a structural improvement in our <unk>.
So in discussing our outlook I'll first address our expectations from an inorganic perspective without the impact of the acquisition of Tso flow and will then address the impact of so flow separately.
As we reflect on our first quarter results and look at the remaining three quarters, our view as for continuation of the current trend of gradual and steady increases in demand with unimportant default most substantial recovery in the second half of 2021.
For the full year, we expect organic revenue to be up 10% to 12% compared to our initial 2021 guidance.
Seven to 11 year over year revenue growth rate.
This reflects our expectation that demand continues to improve and that steps. We are taking to address the current talent shortage I expect it to expand the supply of talent available to us we expect that the timeline for each operating segment to reach pre COVID-19 revenue levels will depend will depend on geographies.
So industry concentration in product mix with <unk> already in other segments, we will cross that milestone later in 2021 all in the first half of 2022, we'll continue to launch targeted growth initiatives that are intended to further accelerate organic revenue growth. In addition.
Can we expect so flow to add an additional 200 to 200 feet and 50 basis points to our revenue growth rate this year.
We expect our organic GT rate to be just under 18% down slightly versus our pre COVID-19 margins, while we pursue our specialty strategy intended to drive growth in higher margin specialties and expect continued year over year improvement in our balance sheet business. We also expect a recovery.
In lower margin specialties to keep our organic GP rate relatively flat in 2021.
The addition of <unk> is expected to improve to total company GP rate by a net Chanel 30 to 40 basis points. This year.
We have taken some definitive steps with respect to sustainable SG&A cost reductions in Q4, 2020, and authorizing meaningful cost savings.
Our intended to partially offset the impact of the expiring <unk> of our total <unk> cost actions in place in 2020, we expect that these savings will.
It will allow us to moderate expense growth as the revenues increase so all in we expect SG&A expenses to be up 4% to 5% on an organic basis.
Our recent acquisition is also expected to add about 200 basis points of operating expenses.
And also an additional 100 basis points of non cash intangible amortization this year.
As we execute on our acquisition strategy, we plan to utilize EBITDA and EBITDA margin as additional measures of our progress on the promise to deliver push stable growth.
We will begin reporting on and providing an outlook for these measures with our second quarter earnings release in August.
And finally, we expect our initiatives income tax rate in the mid teens, which includes the impact of the work opportunity tax credit, which has been extended through 2025.
At the expected recovering demand continues we will continue to review our capital allocation strategy, including our dividend policy with our board of directors back to you Peter Thank you Olivier more than a year. After the pandemic began we are looking ahead with optimism and growing confidence in the economic recovery and.
Our performance as reflected in our newly raised 2021 guidance.
We're seeing demand continue to strengthen among large customers and in small and medium enterprises and encouraging sign that the recovery is gaining traction at multiple levels layers.
Robust fee growth in the U S also points towards increased confidence about the future as businesses ramp up their full time hiring in anticipation of strong economic growth.
Kelly is well positioned to drive growth from our specialization strategy during this recovery.
<unk> pursuing targeted M&A opportunities and high value specialties as evidenced by our acquisition of soft world, which dramatically expands our presence in the fast growing technology staffing and solutions space.
At the same time, we are investing in organic growth on multiple fronts. For example, pursuing adjacencies such as tutoring in higher Ed in our education segment.
As the economic recovery strengthens underlying in equities in the labor market are likely to remain so they are too Kelly is taking action or equity at work initiative is helping to increase the available talent pool by tackling systemic barriers that prevent people from connecting with work where.
Inspired by customer support and enthusiasm around this initiative and we are already seeing some encouraging early results and talent attraction and retention rates.
<unk> is also taking a consultative role to help clients improve their employer brands and design new incentives to attract diverse talent in an increasingly competitive labor market.
The economic recovery is here and Kelly is ready for it we move forward in 2021 and confident in our specialization strategy, our ability to drive organic and inorganic growth and our commitment to helping customers and talent thrive in the brighter days that lie ahead.
Tony you can now open the call to questions.
Thank you, ladies and gentlemen, if you wish to ask a question. Please press one zero on your telephone keypad.
You may withdraw your question at any time by repeating the one narrow command.
If youre using a speakerphone, please pick up the handset before pressing the numbers.
Once again, if you have a question today.
You May press, one zero at this time.
Our first question comes from the line of John Healy with Northcoast Research. Please go ahead.
Thank you.
Olivia I was hoping you could just kind of run through some of that SG&A.
Outlook.
<unk>.
I was just trying to trying to square some of those numbers around and on the gross margin outlook.
Just under 18% does that include the benefit of software or software all of that or does that exclude it.
Thank you and good morning, John I'm going to start on the SG&A. So we said up 4% to 5%.
Just wanted to mention that of course, low reference point of 2000, Twenty's, a little bit difficult because of multiple you know.
One time events in 2020, so you'd need to sing about a base of 2020 base at about $795 million.
Which I think is a base that you could use.
To basically build up your modeling for 2021.
The second question about so flow and the GP note.
The GTE shy of 18% for the current debt.
Does exclude so flow and it's probably and I don't want to dose you want to do it now an opportunity to talk a little bit about the financial sponsor flow less so and I think Peter is going to give also a broader.
Business view of both so flow. So just wanted to briefly talk about so flow.
<unk>.
Explain a little bit what I call, we call the growth profile and the value profile of these comments. So if you think about the growth profile you look at the revenue trend of software World I will give you two simple numbers the revenue CAGR of soft world.
Between 2015, and 2020 with an average gross yield of 20% to 22%.
If you now look at 2020, which of course is always seen as a very specific year soft world was growing their revenue by 23%.
On the value profile of this company I'm going to help you to basically use our outlook to figure out.
Some key financials related to so called issue if you take the.
The.
Impact debt I was sharing with you about so flow.
Of course, it's on a nine months basis as opposed to a 12 month basis, but as you make the math get this information on the 12 months' basis to look at the kind of pro forma expected 2021 type of financials, you would end up basically looking at a revenue launch.
For social World fully abate between 100, 130 to 175 million low.
GP rate of 36% to 37% I repeat 36% to 37, it's a very very high GP rate that is commensurate with liquidity.
<unk> of the business, we have acquired and Peter probably will expand a little bit of that and you would end up with an EBITDA.
Again on a full year basis and up nine months after about 20 million. So an EBITDA margin at about 15, one 5%.
To conclude on that if you look at the acquisition price of $215 million.
And you look at multiples of EBITDA, while you can make the math very easily and you would end up with a range of EBITDA multiple between 10 to 11 times and with that Peter maybe you want to give a little bit of small business you bought so flow yes.
Thank you Olivia and good morning, John.
So the reason why.
We believe software lose such a attractive addition to the Kelly portfolio.
And the basis behind the numbers that <unk> shared with you as they sit in.
STREAMWAY high growth sweet spot in the technology space.
The demand for our technology.
Our specialist has accelerated application developers and software engineers data analysts the demand has never been greater.
And.
Software World results reflect that.
They have recruitment and staffing solutions that span some some high growth practice areas technology financial services Cyber Security Engineering Life Sciences government services data science.
And.
Importantly, they provide not only staffing but also.
Statement of work solutions that.
Net nicely.
Sure.
Solutions that Kelly provides and I guess the last one I would make John is surprisingly the the overlap among our customer set is actually relatively light, which we think provides a exciting opportunity for growth synergies going forward.
Great and just wanted to ask kind of one bigger picture question.
I think you guys are uniquely positioned to provide a perspective on assets in the education space.
How do you expect and kind of what its debt.
The tone that you are getting from <unk>.
School districts and municipalities about 2020 school year 2022.
In the fall here of 'twenty one.
Are you expecting net business.
Operate.
Kind of at pre pandemic levels.
Do you think the pandemic helps that business that didn't hurt that business kind of.
As we as we kind of I would think start.
Reopening 10 person education Marcel.
Yes. Thanks for the question Jon I'll comment provide some color and then let Olivier maybe share some.
Financial.
Perspective, we expect the.
Schools to be providing in person instruction in the fall we think the.
What we're seeing.
In the first half of this year what school districts are talking about the.
Both at the federal.
Geographic level local level.
The plans are in place to reopen fully in the fall so barring some unforeseen.
The challenge.
Scientific challenge our expectation is that schools are going to be fully reopened and net demand for.
Our services is going to be robust.
We have and we expect that not only from clients that we had.
Before the pandemic, who are who are working with we also saw.
Significant new wins in the last nine months and one of the most productive periods.
And Kelly education history, so it's going to be a combination of our existing clients reopening.
And new wins coming online.
Yes, just probably adding on in what we call until nearly our inflection point, which is the time, where our revenue.
Overall in the buy business units is going to cross.
Not necessarily that 2020 map, but the 2019, the pre COVID-19 type of revenue and we believe an indication based on what Peter what I would say that we believe we are going to exceed.
The second half of 2019 revenue.
Basically in the second half of 2021 cross the inflection point when you compare our trends in litigation non divestitures 2020 EBIT versus 2019.
Alright, Thank you guys.
Thank you. Our next question comes from Josh Vogel with Sidoti. Please go ahead.
Thank you and good morning, Peter and Olivier.
Good morning, Josh.
Jim.
I don't want to harp on software all too much but I was just curious.
Initial press release said they did in excess of about $100 from 2020 mentioned.
A CAGR rate.
Like 22, 23%.
But it seems like your guidance for the nine months extrapolate it out over the full year, you're looking at about 30% type growth is that just going up against a good comp or are you seeing pent up demand or is it a little bit of both.
No I'm going to start and Peter is going to complement on net.
Knowing that you know 2020 was a difficult year in terms of overall environment, including in the <unk> in the U S.
We are very confident that we can continue uneven so fast the type of double digit growth. We are seeing in revenue and on top of that we are as we did for Nextgen and GTA in 2019 immediately initiated some further investment to basically further accelerate beyond the <unk>.
Again, the growth of <unk> that is already in double digits.
Yes.
Josh.
I would add debt.
Regarding the pent up demand there is significant there was significant demand.
Before the pandemic and it is the only.
It accelerated.
As a result of.
The pandemic when you consider the companies having to stand up remote workforces and deal with the.
Heightened cyber security threats that exist.
And software World is in a excellent position to supply.
Supply the kind of high end talent debt really all organizations are going to need going forward for the foreseeable future. So.
Okay.
Soft world saw continuing.
Continuing growth during 2020, and we expect as the.
The worst part of the pandemic is behind us that it will only accelerate.
Yes.
Just when we are going to issue an 8-K.
Probably mid June.
All the pro forma so flow.
As well as the combination between the total NK and then you are going to have more access to.
Historical information.
<unk> basically.
When we talk about 100 million well in fact, we say around 100 million. So you will see that basically when you get the pro forma for.
2020, the revenue was slightly higher than the 100 million Mark you were referring to.
I Gotcha I appreciate those insights.
When we think about the M&A pipeline and appetite.
He is paying 10% to 11 times for a technology or an S&P type company.
Are you comfortable with going forward or your they're happy paying a little bit more software or just given the margin profile and the growth is in the business and just on a slight tangent.
What are the typical multiples <unk> been paying on the education and the education sector.
Yeah, I would say, we feel comfortable with the 10 to 11 neurons because of the strategic fit and the growth as.
As well as the value provided that Peter and I were describing today.
And I can say that we use a pretty high hurdle rates that we use internal rate of return.
As a critical.
Filter to make sure that you know.
We.
You know the right price.
Use.
Harder rate for internal rate of return of 25% and I've said several times I mean, that's a pretty high hurdle.
To make sure that we.
We've already always consider.
Basically the type of accuracy acquisition pricing, we put on the table on education I believe.
Talking about the type of Adjacencies and efficiencies. We are looking at is going to be probably yes.
Double digit from low double digit, but certainly crossing the 10% multiple yes, especially in.
Adjacencies, Josh not necessarily in the K 12 space, but.
And the higher margin for example in occupational speech.
The other therapy.
Adjacencies that are attractive.
Those are going to command higher multiples, but as Olivier said, we have a very high internal rate of return hurdle rate and.
We're also measuring targets against other factors, including.
Our culture cultural set the ability to integrate which I think we've demonstrated a good track record with the acquisitions, we've made over the last three or four years.
As well as the ability to create.
Synergies.
To date, it's primarily been topline synergies but.
That's also an important factor.
Okay great.
Just wanted to give us a little bit understanding the current.
The demand and supply dynamic.
But when we think about the entire business and the pricing environment. What does it look at the lower and higher skill set or low categories versus pre pandemic and just general thoughts around price.
Pricing trends from here and your ability to maintain the spread.
Well I think it's.
It's very attractive at the higher end the professional.
In our <unk> business.
I think there is opportunity in our professional and industrial is the.
Talent shortages reveal themselves and companies are.
Dealing with the production consequences of not having enough.
Workers.
And so not only through.
Captures some of the.
Higher benefit cost debt, we have as a result of.
States having higher.
Payroll taxes, but also.
Because of the demand for talent and working with customers not only on competitive wages, but also potentially capturing more margin as a result of our ability to deliver the talent that they need to to run their businesses.
Alright, great. Thank you and yes.
Just two quick quick hit one.
I may be missing it in either in the slide presentation of the.
Earnings report, but what was in the other income or expense line that $3 for Milan.
Yes, you mean other income and expense Josh Yes, yes.
We have of course as usual some what we call a currency fluctuation, which is one explanation, but that is happening or less all the time. The two other items, we are basically acquisition cost and interest so flow.
And the second one is basically a write off of <unk>.
One.
The investments we add to our work in innovation from on a company called Kenzie Academy.
Onetime non cash item.
Uh huh.
One 4 million.
Alright, great and just lastly.
Do you have an early read on the April exit rate given that that was the first full month of the pandemic last year.
Yes.
Our exit rate for the months of March was minus two seven we have saved that we start to see.
OCG of course, confirming the growth we have seen even compared to 2019 education turning to positive as well in March as well as.
<unk>.
Our international sales volume.
What we see now in April while basically confirming the trends we see.
As seen of a gradual improvement.
And usually the way we look at it as you mentioned with the inflection point is basically also comparing our 2019 and we continue to see progress.
Vessels of pre COVID-19 type of revenue we had before.
Got you well thanks for taking my questions and for all the details and insights in the prepared remarks have a great day guys. Thanks.
Thanks, Josh Thank you Josh.
Thank you. Our next question comes from Kevin Steinke with Barrington Research. Please go ahead.
Hey, good morning.
Good morning, Kevin Good morning.
I wanted to.
Follow up on your organic growth outlook.
Uh huh.
The increase to 10% to 12% expected rate.
2021 versus the prior outlook of 7% to 11% just any more color you can provide on.
Yeah.
Giving you that confidence to increase the net organic unit growth.
Outlook.
Just one quarter into into the year.
Yes, I would say first.
It's a reflection of what's within each one.
Revenue wise.
<unk>.
What we have seen and we are mentioning is the March exit rate, what we see.
Sure.
And the beginning of May.
So.
That is basically taking into account all these type of from formation and you might have seen that we have narrowed down to these beats the lunch.
Which is also because we have much better visibility on what is going on.
Overall.
I would say if you want I mean that can expand beyond education that we havent discussed international net.
Anticipate slow, but continuous improvements you know that our.
Q1 revenue constant currency, excluding Brazil, because you might remember we have sold our Brazil operations in August of last year.
We are for the entire quarter up two 4%, but we stay cautious for international because of the uncertainties around the pandemic and related economic environment, we are going to continue to.
<unk> margin and cost and invest in selected markets in international, but we believe that we need to be a little bit cautious based on external debt.
Type of.
On environment OCG, we expect very positive momentum to continue thanks to healthy pipeline new wins and.
And we have said today, we are already exceeding our 2019, our level of revenue by six 4%.
In Q1.
Set.
We expect continued momentum in science outcome based and fee business. Our <unk> business was up 41% in Q1, which is a good sign of the momentum we have and we are with you also crossing the inflection point because our <unk> business was.
Also in Q1, 71% up versus Q1 of 2019, right, which is which is a good sign debt we are moving.
Pretty fast on that.
We believe that.
We are going to see some continuous improvements in technology and telecoms Ltd slow improvements in engineering due to oil and gas that is getting better but still challenging.
And overall, we should reach our inflection point insert.
Probably late Q3 early Q4 of the current year.
P&I, we expect continuous gross momentum in our outcome based business, we were still growing at.
That's about seven 6% in Q1 2021, so that's good and our staffing sheets because interestingly in like you said, our shoe business and P&I is up 60% in Q1 2020.
2021, sorry, and we expect some acceleration in our P&I staffing in the second half of the year.
Probably mainly driven by our central delivery model, but probably Peter can add to EBIT macula, specifically, maybe on P&I, yes, Kevin.
Well first I'll talk about all of the businesses I think the.
The encouraging signs regarding.
Existing customer renewals as well as.
The acquisition of new clients across the board is.
Adding to our confidence I think in.
Professional industrial we are.
Pleased to see that the demand has.
Has returned to pre pandemic levels and as noted.
We think it's going to accelerate throughout the year and some of the technology issues that I mentioned earlier as well as talent supply. We believe is going to improve particularly in the second half of the year end.
Large customers continue to drive the.
A recovery and we expect that to continue as well in the second half of the year.
Okay.
Okay. That's helpful.
Some nice color at the segment level. So appreciate that.
Yes.
Circling back on soft World, maybe can you just talk a little bit more about.
How that deal came together and obviously there.
A lot of attractive characteristics about soft rule.
For you, but from their perspective, what made it attractive.
Correct it for them too.
Combined with a larger organization with Kelly.
Well I think the growth opportunities that were very evident from.
To start when we began our discussions.
As I noted earlier all customers need.
Technology support and when you.
Consider the breadth of customers that Kelly.
And the fact as noted earlier that there was not a lot of overlap in our the customers that we support so I think the opportunity to grow.
<unk>.
In life Sciences application development and data management embedded systems development functional it services in the Kelly.
<unk> customer base as well as bringing to bear Kellys solutions to the software old customer base was very attractive and I think as Olivier mentioned, the willingness of Kelly to provide some organic investment too.
Further accelerate what is already a very.
Historically promising business was attractive too.
Software because they see that as an exciting opportunity to participate in.
That investment in growth.
Makes sense.
In terms of the organic investments in software or are we talking about.
No more recruiters head count.
Other.
Type of investments you might be making there.
Yes, it's primarily.
People Kevin.
Sales and sales and recruiters and we think that the.
The track record of soft world and delivering year over year impressive growth.
Once the investment of our capital there.
Great.
So with the software acquisition.
You've talked about for a while wanting to get more scale.
And the staffing.
Do you think this acquisition gives us the necessary scale in that area or do you see opportunities to continue to add.
Our it staffing and solutions.
Well it certainly improved significantly our scale in technology. It is one of the fastest growing and largest <unk>.
Staffing markets and when you couple that with Kelly solutions in.
Outcome base as well as soft worlds solutions based business.
We think there is considerable opportunity and.
If there are attractive opportunities that would complement the combination of software Eldon Kelly's IP.
<unk> and <unk>.
We were able we were able to acquire them at a high hurdle rate that Olivier mentioned earlier, we would certainly consider it.
Great.
You talked about some of the.
External factors that you think will increase talent supply as we move forward I think you've also talked about.
Internal initiatives to.
Attract more talent maybe any.
Data on that in some of the things Youre doing to.
Attract talent.
Thinking specifically about P&I, but.
If you want to touch on any of the other segments as well that'd be that'd be great.
Well I think there are both external and internal.
Factors that are contributing to the talent supply in especially in the lower wage P&I space.
The external factors I think are fairly well known with.
Not only the.
Concerns about the pandemic, but also the number of workers that are on the sidelines due to.
Either caregiving or schooling responsibilities.
Created by by pandemic there is.
It's hard to quantify the depressive effect of the stimulus packages and whether or not that is contributing to.
People staying on the sidelines I know, that's a sort of a politically charged issue but.
Theres, probably some <unk>.
The impact that that's having the internal issues. We think we've identified as I mentioned, we deployed successfully our new front office.
<unk>.
The way that technology gets deployed requires us to continue to rely on legacy Kelly systems for a period of time and I.
The pandemic demand last year that depressed the pandemic demand may have masked some of those inefficiencies and as demand came back significantly in late Q4 and early early in Q1.
Those inefficiencies reveal themselves.
We're taking action to to address them.
<unk>.
Double down on our efforts to win.
Recruit more recruiters.
Because of the demand and we're also spending time with the existing recruiter base.
To ensure that the adoption of the new front office technology is optimized.
Okay, well thanks for all the insights that's all I heard from now thanks.
Thanks, Kevin Thank you Kevin.
Thank you if there are any additional questions. Please press one then zero at this time.
Our next question comes from Joe Gomes with noble capital.
Good morning, Joe.
Yes.
Taking my question.
Kind of wanted to circle back.
On the education segment here you mentioned in the.
The answering one of the other questions that you had significant new wins over the last nine months, one of the Bath and Kelly history.
I was wondering if you would care to kind of quantify what.
That statement means part a and part B on the education segment.
<unk> seen a lot of reports at least.
Teachers retiring.
Partly due to the pandemic and the conditions.
How does that either positively or negatively.
Impact Kelly's education segment.
Yes, good morning, Joe I'm going to let Olivier.
Refresh.
Sure.
The financial numbers that I went through earlier, but.
We think the.
<unk>.
Well you are correct in the debt there are a <unk>.
A large number of <unk>.
Instructors that are leaving the education work force and.
At the same time, we believe that there is going to be an increased demand for instructors at all levels.
And.
As well as the support services that schools will need.
Need in a post.
Post pandemic environment, when you think about.
Cleaning services, how often school scope, our classrooms will have to be cleaned when do you think about the.
Spacing of students in classrooms.
The number of instructors that are going to be needed not only to.
To refresh the number of features that are retired but also to deal with just the increased demand and instructors. We think Kelly is very well positioned.
We have a we're the leading provider of substitute teachers, we have.
Extremely well recognized brand in this space.
And.
We believe that school districts more school districts will see the value of outsourcing their talent acquisition.
Needs to a company like Kelly, we think that is part of the reason why we saw such.
Significant new wins in the past nine months and.
They are across the board, meaning that it's not.
Small school districts.
All school districts medium large and small school districts that are seeing the value of.
Using Kelly to help them support there.
Need for instructors and we think there will be additional revenue streams created as a result of the pandemic as I mentioned in custodial and other support services, but also in tutoring, we think that is a.
Going to be a growth area. The federal government is throwing its weight behind.
Tutoring with federal funding for.
Between year.
Tutoring as well as during the year tutoring and school districts are looking for help too.
Support them in that regard so.
We feel bullish about the education space, which is why we have been making additional investments in it Olivier do you want to comment on that Joe just to.
Summarize what I've said before that we see there is a very positive momentum in education, and we haven't closed the inflection point, meaning revenue exceeding.
28, 2019, <unk>, so pre COVID-19.
Second NAV for this year.
Which were chasing is a sign that we feel that we are well positioned to capture further growth in education and actually in Q1 is a proof of that and we are rapidly recovering.
So I assume we are still very positive and optimistic about.
Education.
Starting with the months to come.
Okay. Thank you for that and then.
Looking at the Euro.
Elyse today and on a segment level.
On the P&I.
You are showing the revenue from services were debt was down five 3%.
Gross profit in that segment was down 10, 7%.
Year over year.
Which with a much larger drop on the gross profit side than any other than any of the other segment that saw declining revenues and I'm just wondering what.
Be behind the bigger than that.
Gross profit drop on the revenue drop in the P&I segment.
Yes.
I will briefly.
Talk about that so when you look at P&I.
Basically the staffing piece the.
The margin is basically very much stable versus a year ago.
And we start to see of course, some positive dynamics in our staffing business and P&I, thanks to the CBS assets.
Again is growing over 60% in Q1, and we believe that a good month dispute momentum is going to patients. So thats of course.
Helping us to get our margin pretty much aligned with where it was a year ago.
On the outcome based business.
Specifically on the call Center business basically as we did mentioned briefly during our prepared remarks, we've got our call Center business.
He is one specific customer.
A lot of specific additional training.
Is that off or there is a non billable training that is pushing our margin.
And Thats basically almost the majority of the reason why <unk> margin is down by 100 basis points 100 basis points versus last year and this basically at Chanel unusual training.
Usually happening not to this extent, but our good sign that basically it's because.
We need to get people trained for ramp up in demand in the next coming months.
So the revenue isn't going to come we is this kind of.
<unk>.
Preliminary non billable training investment.
But again.
I think the next few months are going to show.
Basically run booking activity in this area, which of course is <unk>.
The daily build faster it.
Okay. Thanks for that and just to circle back to fall from World for for one one second here kind of on a different approach you mentioned that you are utilizing your existing cash balances you did utilize.
<unk> four.
The cost of the acquisition.
Yes.
Mitch.
Towards the end of this year, you still do have to repay the roughly $60 million of tax deferrals.
Under the cares Act so.
Do you think youll be generating enough cash over the course of the year to pay that or would that point in time, maybe have to dip into some of their credit facilities.
Yes.
Absolutely yes.
Despite the slow fall collection.
Total in cash.
And you have seen debt our cash position at the end of Q1 was almost $140 million right. So now what is happening is basically.
We have to continue to fund our working capital because as the business is.
He is moving up our work can get debt is going to continue to progress as we moving up right.
The second point price you are right to say that half of the.
Payroll tax deferral, which was about.
$117 million.
We need to be before the end of this year and the other half.
At the end of next year. So it may be if you combine that with our growing working get debt requirements that we are going to have a little bit of leverage.
During the unit, especially at <unk> health.
The cash vector was mentioning but it is going to be still a very low level of <unk> you know the liquidity and the debt capacity that we have seen.
Completely intact.
Okay. Thanks, Thanks for that I appreciate it and one last one from me I know, it's relatively minor and everything.
Kenzie Academy right off.
When you guys made the announcement of that investment in November of <unk>.
A lot of fanfare there.
Training in it.
Tech space.
It was one of the one of the goals.
Maybe you could just Peter kind of give us what happened there.
Yeah. Thanks, Joe.
So the kenzie of Ketamine business model was we thought.
<unk>.
Excellent complement to.
Bringing more.
Talent into the workforce the.
The model changed a number of times in the course of our relationship and.
That's as startups, often do to try to figure out exactly the sweet spot I think kenzie.
Was.
Potentially had some traction but the pandemic really took its toll.
On.
On the.
The ability to track.
The.
New cohorts, new new classes.
<unk>.
They just.
Recognize that the.
The amount of investment.
Stabilize and.
Sure.
Regain that traction was.
<unk>.
More than they anticipated and more than their investors anticipated in.
They struck a deal with a.
Education and University and.
That's that's that's going to be the future, it's going to be housed within a university that can spread the risk over a lot more.
Platforms, then Kenzie Academy cut on it zone.
Yes, I would just say we.
When we make investments of that debt.
<unk> type we recognize that there is potentially.
We won't make those investments unless we are excited about the value proposition and hence the fanfare, but we also recognize that there are going to be.
Risks in terms of the unique or novel business models that.
Entrepreneurs spring to before.
Right right I understand that thanks.
Thanks for the update and again, thanks for taking my questions. Yes, good to talk to you Joe. Thank you Joe.
Thank you there are no remaining questions in the queue. Please continue.
Autonomy. If there are no further questions I think we can probably in the call.
Great. Thank you.
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