Q3 2021 Kelly Services Inc Earnings Call

Okay.

Good morning, and welcome to Kelly Services' third 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, a third quarter webcast presentation.

And is also available on Kelly's website for this mornings call I would now like to turn the meeting over to your host Mr. Peter Quigley President and CEO. Please go ahead.

Thank you John Hello, everyone and welcome to Kelly services third quarter Conference call.

With me today is Olivier <unk>, our Chief Financial Officer, who will walk you through our safe Harbor language, which can be found in our presentation materials.

Peter and good morning, everyone. Let me remind you that any comments made during this call, including the Q&A may include forward looking statements about our expectations for future performance.

Actual results could differ materially from those suggested by our comments and we have no obligation to update the statements made on this call. Please refer to our SEC filings for a description of the risk factors that could influence the company's actual future performance.

During the call certain that I wanted to be discussed on a reported and on an adjusted basis discussion.

Items on an adjusted basis, our non-GAAP financial measures designed to give insight into certain trends in our operations.

References to organic growth in our discussion today excludes the results of our Q2 acquisition of Sofa World. We have also provided the slide deck that we're using on today's call on our website.

Now back to you Peter Thanks, Olivier the economic recovery continued in Q3, although at a more moderate pace than anticipated at the start of the quarter as evidenced by a strong U S. Jobs report in July followed by weaker results in August and September.

Clearly the Delta variant and related concerns regarding health childcare vaccine mandates and masking requirements had and continues to have an impact on the slope of the recovery.

It appears that even with the more positive October jobs report many potential workers are staying on the sidelines. Despite the reopening of schools and the exploration of enhanced unemployment benefits and the business disruption caused by supply chain shortages continues across multiple industries.

The good news is that we expect these challenges to be transitory, we're confident that as we continue to make progress towards the post pandemic world.

Supply chain bottlenecks will ease workers will reenter the workforce and the gap between demand and supply will narrow.

Kelly, we're managing the disruptions with short term tactics without taking our eye off the longer term goal to lay the foundation for the future. We launched our new operating model last year in the midst of the pandemic and we entered the recovery with our specialty strategy firmly in place aligning us with markets, where there is strong.

Demand for skilled talent and smart workforce strategies.

Now were adjusting to the current environment internally as well as helping customers adapt externally with both financial and non financial actions, we continue to optimize our operating model invest in organic growth and execute against our inorganic growth plans.

As youll see in todays discussion the increased demand for our solutions further affirms that we have charted the right course.

Before I hand, it off to Olivier to provide details on Kelly's third quarter performance I'll share a few highlights all five of our operating segments professional and industrial Science Engineering, and technology education, OCG and international.

Delivered organic year over year revenue growth in the third quarter education continued to exceed its pre pandemic performance as new customer wins and increased demand from existing existing customers drove top line growth.

This growth has been constrained by weaker than expected talent supply, particularly in our core K 12 staffing business, though many school districts resumed in person instructional delivery in August and September complications from the Delta variant as well as questions surrounding mask and Covid vaccine requirements have disrupted learner.

<unk> and made recruiting more challenging than normal.

Constraints on talent supply also continue to make it challenging to meet increased customer demand in our professional and industrial staffing business. We are pleased that P&I staffing and our office professional and light industrial outcome based solutions delivered year over year top line growth offsetting the softness in Custer.

Demand in our Kelly connect specialty, which we mentioned on our Q2 call and which continued in Q3.

In our set segment, we continued to deliver top line growth, both organically and with the acquisition of soft World Inorganically and in our international segment, we saw year over year revenue growth as hours volume increased in Europe, with particularly strong performance in France, Russia and Portugal.

When we look at Ocg's fourth consecutive quarter of beating pre Covid revenue, we see a success story that aligns customer needs workforce trends and digital advances the helix UX technology that I mentioned last quarter and industry first solution that gives clients unprecedented access to full time.

<unk> and aggregated talent channels continues to attract new OCG customers and drive added value in our existing relationships.

Along with our teams market insights and our recently released workforce agility report helix <unk> is enabling some of the world's largest companies to better understand and manage their global workforce. During these uncertain times.

Overall, we're pleased with this quarter's 15% revenue growth and 20% GP dollar growth. However, we have work to do to better leverage this growth dynamic that I'll discuss later in the call, including the actions, we're taking to address it I'll now turn it over to Olivier to share more details about Kelly's Q3 results. Thank you Peter.

As Peter mentioned, our Q3 results reflect the ongoing economic uncertainty stemming from the continued impact of COVID-19, as well as supply chain disruptions impacting the business operations of our customers have constraints on the availability of talent and the current labor market.

Overall, we are seeing improving demand for our services, but we continue to be challenged to fulfill our customers' demand for tenants.

Before I review the current period results is helpful to reflect on the comparable period of last year.

Q3 of 2020 represented the tail of the most favorable impact of the COVID-19 pandemic on our topline results and the beginning of a steady but slow recovery.

We responded to those pandemic related declines in revenue with temporary expense mitigation actions, which continued until the beginning of the fourth quarter of 2020.

As we have discussed on past calls revenues have improved from crisis, driven lows and most temporary expense mitigation actions that are being discontinued.

Now looking at the third quarter of 2021 revenue totaled $1 2 billion up 15% from the prior year, including 60 basis points of favorable currency impact.

Our Q2 acquisition of <unk> added 320 basis points to our overall revenue growth rate.

All five segments reported organic year over year revenue growth in our Q3 organic recovery rate in revenue is 91% 200 basis points higher than we saw in Q2.

We measure revenue recovery rate by comparing current period results to the corresponding pre COVID-19 2019 valued on a constant currency basis.

For the third quarter, our education segment continues to report the highest year over year growth rate as a comparable 2020 period was impacted by significant school closures. We also measure revenue compared to 2019 and for the quarter education revenue is now exceeding the comparable.

<unk> by 17%.

This reflects new customer wins and growth in demand that existing customers while revenue growth. In this segment is strong it has been constrained by a more challenging than anticipated tenant market. Our education business continues to work to ensure that we secure the supply of talent needed to meet our customers increasing demand.

As cool. So we started this fall we are seeing commitment from school leaders to take the necessary steps to continue with in person in functional delivery. However schools may modify the intellectual delivery in response to changing local conditions and volatility in demand in the near term is killed.

Possibly.

Our OCG segment continues to perform well and delivered another quarter of steel over year revenue growth with revenues up 29% over last year.

The growth is a result of both new customer wins and growth in existing customer programs in old products with CD revenue has exceeded pre COVID-19 levels for the past four quarters and is now up 19% in Q3 <unk> same period in 2019.

Revenue in our professional and Im sure Youll segment reflects continuing strong demand for talent in the specialty product across most industry verticals or the supply chain disruptions are now.

Resulting in uncertainty across the border.

Broader portion of manufacturing.

Our ability to fulfill customer demand has been limited by the current weakness in talent supply as a result.

Experienced lower hours volume, but that the higher bill rates, reflecting our customers' understanding of the upward pressure on wages in the current talent market.

Net impact of that dynamic was 1% year over year increase in staffing revenue in the quarter.

And after are performing well and delivering revenue growth earlier in the COVID-19 crisis.

I would come base business expense of 4% year over year decline in revenue in the quarter as demand was impacted at several large customers at.

At current levels of demand constant currency revenue continued to exceed pre pandemic valued by 13% in the quarter.

At the National continued to deliver positive year over year growth in the quarter up 9% in constant currency.

Year over year revenue revenue growth was driven by the recovery of our volume in mouse EMEA countries, which was partially offset by results in Mexico due to the impact of limitations placed on the staffing industry as a result of recently enacted legislation.

And finally as a segment where the results from our acquisition of so far. These reported revenue was up 26% on a reported basis and 12% on an organic basis organic revenue trends continued to track with the customers served demand continues to be solid from life science and clinical customers.

There was a recovery in demand in telecommunications, but demand from the oil and gas sector remains sluggish.

Permanent placement fees were up 118% year over year and up 7% sequentially. We continue to see increases in activity in P&I and set coupled with fees from our Q4 2020 acquisitions of Greenwood Usher in the education segment she's in the answer.

National segment were also up over the pandemic impacted pio here, but were flat sequentially, reflecting the more cautious environments in Europe overall <unk> for the acquirer now exceeded pre COVID-19 levels at up 30% compared to the same period in 2019.

Overall gross profit was up 19, 8%.

Our growth gross profit rate was 19, 2% compared to 18, 4% in the third quarter of the prior year, our year over year GP rate improvement was driven by a combination of higher perm fees, which contributed 90 basis points and an additional 50 basis points.

As a result of the acquisition of Sofa World, which generates higher margins.

These factors were partially offset by unfavorable product mix as our lower margin staffing business recovers, coupled with higher employee related costs.

Within the segments, we did expand some variability in GT rates caused by the factors I. Just mentioned said benefited from the so far the acquisition and the international GP rate improved on higher balance sheet and business mix, the P&I GP rate decline and the impact of unfavorable.

Mix between staffing and outcome base and higher employee related costs were only partially offset by higher balance sheet.

In addition, the P&I outcome based business <unk> rate was negatively impacted as talent attrition and declines in customer demand resulted in lower productivity in certain programs.

SG&A expenses were up 13, 7% year over year on a reported basis.

Expenses in 2020 included a noncash charge related to a customer dispute expenses for the third quarter of 2021 include the intangible amortization and other operating expenses of self world, which added 500 basis points to our year over year expense growth rate on that.

Adjusted basis organic expenses grew by 14, 3% the increase in expenses reflects increasing therefore, the performance based incentive compensation expenses as well as the impact of our temporary expense mitigation efforts in the pioneer our.

Our 2021 results also include $2 4 million of expense in the education segment related to contingent consideration due to the former owners of green with the National as a result of operating performance that exceeded our expectations.

Expenses in P&I, and <unk> and international excluding the customer dispute charge in the prior year have increased year over year, but remain below pre pandemic levels.

Expense growth in OCG and education are in line with current revenue growth expense.

Expense levels and said reflects that we have made investments in resources ahead of revenue growth. We do expect that we are positioned to capitalize on increasing demand for specialty services in the near future.

Our reported earnings from operations for the third quarter were $9 million compared to a loss of $2 4 million in Q3 2020.

Our 2020 wrestles included a noncash charge related to a customer dispute of $9 5 million includes.

Included in our reported Q3 results the operating earnings of $1 7 million inclusive of intangible asset amortization.

Now turning back to the company as a whole Kelly's earnings before tax also include the unrealized gains and losses on our equity investments in vessel holdings for the quarter, we recognize a $35 5 million pre tax gain on the water vessel common stock compared to $16 8 million pretax gain.

The prior year.

These noncash gains are recognized below earnings from operations as a separate line item.

Income tax expense for the third quarter was $11 1 million compared with our 2020 income tax benefit of $1 2 million, our effective tax rate for the quarter was $25.

2% I always think this tax rate was higher than the U S statutory rate as a result of the gains on our vessel stuck which is tax.

The higher Japanese tax rate.

And finally reported earnings per share for the third quarter of 2021 was <unk> 87 per share compared to 42 cents per share in 2020. The increase in earnings per share resulted primarily from higher gains on vessel shell and the impact of the 2020 charge related to a customer dispute.

Net of tax.

Adjusting for that vessel gains and the noncash <unk> charge Q3, 2020, EPS was <unk> 25.

<unk> 29 per share in Q3 of 2020.

Now moving briefly to the balance sheet.

As of quarter end cash totaled $44 million compared to 223 million at year end 2020, and $248 million a year.

We had no debt consistent with debt at nearly zero at year end 2020, and a year ago. The reduction in our cash balance reflects the $230 million cash paid net of cash received.

That we have used to fund the acquisition of <unk> at the beginning of the second quarter.

Accounts receivable was $1 4 billion and increased 28% year over year, reflecting our year over year increase in revenue and also higher <unk>.

Global DSO was 63 days, an increase of two days over the same period in 2020, and a decline of one day from.

Year end 2020.

Year to date, we generated $24 million of free cash flow free cash flow last year reflected the rapid decline in working capital as revenues declined on lower customer demand in the early stages of the COVID-19 pandemic.

As previously mentioned, we completed the <unk> acquisition in Q2, and we're able to fund the entire acquisition with existing cash balances. Our current cash balances are now in line with levels needed to manage daily liquidity.

And why is this a call acquisition didn't required debt financing we have been.

We may begin to borrow on existing credit facilities to see both working capital, including the Q4 2021 repayment of 50% of U S payroll tax balances as a revenue levels continued to recover osteopaths pre COVID-19 levels and now back to you Peter.

Thanks for those details Olivier we are encouraged by the increased demand for our services as the recovery continues. We're also encouraged by healthy sales pipelines, new customer wins and expanded customer spend that we're capturing in all five segments as I mentioned last quarter, we're committed to executing our specialty strategy and.

We will add sales and recruiting resources as warranted to meet increased demand and support Kelly growth.

We did just that in the third quarter in anticipation that the recovery would maintain a steady trajectory.

While some of the cost increase in the third quarter was due to good news for example, the adjustment triggered by Greenwood Azure as performance, which is exceeding our initial expectations. It's clear that we need to review our expense structure to ensure that as we go into 2022, we are able to deliver better leverage and drop more GP.

To the bottom line.

Last week, we initiated a series of cost management actions designed to increase operational efficiencies and realign our cost base with the current environment Olivier will provide more detail on the expected impact of these actions during his outlook.

As Olivier mentioned, while demand in our P&I business exceeds pre pandemic levels. We continue to work through fulfillment challenges in the labor market that is not following any previous recovery patterns on a macro level millions of jobs are going unfulfilled across industries, even as schools have resumed in person instructional.

Delivery fewer parents are returning to work.

As I mentioned last quarter proper matching of talent requires more than just adequate supply businesses need workers with the right skills and they need those workers to be ready able and willing to come work for them and then stay on the job not only is the recovery highlighting our structural skills mismatch that was present before COVID-19.

It is also serving up a strong reminder, that the labor market is made up of individual people each with their own life circumstances priorities and work preferences.

Theres plenty of press coverage about how difficult it is to find workers there arent enough conversations around how difficult. It is for many job seekers to access work Kelly's equity at work initiative is addressing this reality head on increasing the available talent pool by tackling systemic barriers that prevent more people from connecting with work.

<unk>.

For example in the U S millions of people, who want to work can't access employment due to outdated background screening practices or Kelly 33 program connects talented job seekers, who have nonviolent non relevant criminal backgrounds with employers in need of their skills, where educational barrier stand in the way.

Our Kelly certification Institute offers apprenticeships upscaling opportunities training and certifications to talent, whom we then matched with clients.

We also continue to collaborate with customers to help close the talent gap, we work with them to set competitive wages and benefits drop unnecessary job requirements and fix overly complicated onboarding processes with our largest customers. We assess the talent landscape on a micro level delivering custom intelligence reports and developing.

Recruitment methodologies and other frameworks that allow us to solve their specific talent challenges, even as we tackle structural challenges in the labor market. We believe the current COVID-19 related talent disruptions are temporary even if supply chain shortages last longer than we expected six months ago.

So while our return to pre pandemic growth across all segments will take longer than anticipated. When the year began we remain confident that Kelly will deliver top and bottom line growth from our specialization strategy as the recovery progresses I'll now welcome back Olivier to provide additional thoughts on 2021. Thank you Peter as mentioned.

We completed the purchase of so forth at the beginning of the second quarter and we have nine months of <unk> activity reflected in our 2021 results the impact of software orders included.

As we saw in the second and third quarter results. The software acquisition will accelerate our revenue growth in the high demand high margin technology specialty and will result in a structural improvement in our GP margin rate.

As we reflect on the third quarter results and look forward. Our views are for continuation of the current trend of steady increases in demand as well as the longer than expected continuation of the current level of talent mismatch putting pressure on fulfillment for.

For the full year, we now expect revenue to be up nine five to 10, 5% in nominal currency and including a 210 to 230 basis point impact from the so called acquisition.

Our expectation reflects that there are no material changes in business all governmental restrictions related to COVID-19 demand continues to improve and that the steps. We are taking to address the current mismatch will expand the supply of talent available to us as noted our current outlook reflect a slower pace of re.

Globally than we were expecting last quarter, primarily in our lower margin specialties as well as in education, we expect that the timeline for each operating segment to reach pre COVID-19 revenue levels may be will depend on geographies, so industry concentration talent supply and of course.

Mix OCG as already crossed that milestone and other segments will do so later in 2021, albeit we'll continue to launch targeted growth initiatives that are intended to further accelerate organic revenue growth. We do expect that the international segment's revenue growth rate will be negative.

Usually impacted by legislation recently enacted in Mexico.

We expect our GP rate to be approximately 18, 5% increasing facility basis points impact from the <unk> acquisition, our GP rate expectations reflect first the growth in our base business and then the more gradual pace of growth in our lower margin specialties. We.

We have taken definitive steps in the past year that are driving meaningful cost savings and is partially offsetting the impact of the expiring <unk> of our temporary cost actions in place in 2020.

As discussed in Q2, we are making selective investments inorganic growth initiatives insert education and also OCG to accelerate our specialty growth. So all in we expect SG&A expense to be up 10% to 11% on an adjusted basis, including a 350 basis points impact.

From the Sofa acquisition included in our expectation is 80 basis points of noncash intangible asset amortization from soft world.

In addition to our expected 10 to 11 person expand growth I. Just mentioned, we have continued to review our expense structure to ensure it aligns with our top line growth expectations as Peter mentioned last week as a result of that review we initiated a series of cost management actions designed to increase the opera.

<unk> efficiencies within our enterprise functions that provide centralized support to our operating units and to align expenses with our current expectations for topline growth.

Fracturing charge of three five to $4 5 million will be reflected in our Q4 results.

Cost management actions are intended to deliver structural expense savings.

Savings of at least $10 million on an annualized basis, beginning in Q1 2022.

We will also continue to assess if our business units I hope they are operating at the expected level of productivity.

As we refined our outlook on top line recovery.

Included in that the assessment is impact of the ongoing technology challenges that Peter discussed last quarter.

And finally, we expect an effective income tax rate in the mid teens, which includes the impact of the work opportunity tax credit, which has been extended through 2025.

As we execute on our acquisition strategy, we are utilizing EBITDA and EBITDA margin as additional measures of our progress in delivering push stable growth and have included these measures with our third quarter earnings materials.

We announced this morning that the board of directors has declared a dividend of <unk> <unk> per share for the quarter that is payable envelope, both class a and b common shares as the expected new recovering demand continues we'll continue to review our capital allocation strategy, including our dividend policy with our board of directors and now back to.

Peter Thank you Olivier.

Like the crisis that preceded this recovery continues to challenge expectations and norms, the optimism with which we entered the second quarter has been tempered by subsequent realities, including the Delta variant and supply chain issues that have slowed the recovery more than anticipated back then.

Our optimism about Kellys long term strategic journey, however stands firm.

We are encouraged by demand in our staffing and outsourcing businesses that exceeds pre COVID-19 levels sustained fee growth points toward our customers' investments in their future workforce and a market that is eager for the solutions. We provide at the same time, we are taking steps to bring our SG&A into line with our top line and GP growth.

And deliver better leverage as we progress through the recovery, we are figuring out what the appropriate cost base is for a post pandemic Kelly <unk>.

Essentially we're living in two worlds right now the current state with all of its COVID-19 related challenges in the future state where these limitations are lifted and markets are normalized we're not taking our eye off the outcome. We expect on the other side of this pandemic COVID-19 has caused uncertainty about the pace of recovery, but we are undeterred in our pursuit of becoming.

<unk>, a specialty talent provider to create value for our shareholders and employees.

We're pursuing M&A or opportunities in targeted high value specialties as evidenced by our acquisition of soft world, which is delivering top and bottom line growth for the enterprise at the same time, we are investing in organic growth and we are encouraged by early revenue trends in our K 12 tutoring.

Solution and our newer P&I professional services product.

The recovery may not be following a predictable path, but there is no question about where Kelly is heading we're moving forward with our specialization strategy that is designed to meet market needs and to help customers and talent thrive.

We celebrated Kelly 75th anniversary in October and we're confident that even with all the company has accomplished over the decades, the very best is yet to come.

John you can now open the call to questions.

Certainly ladies and gentlemen, if you wish to ask a question. Please press. One then zero on your telephone keypad you may withdraw your question at any time by repeating the ones you don't command and we ask if you're using a speakerphone. Please pick up the handset before pressing the numbers.

Once again, if you have a question. Please press one then zero.

First one line of Josh Vogel with Sidoti <unk> Company. Please go ahead.

Thanks, Good morning, Peter and Olivier Good morning, Josh.

I have a couple of questions here on the first one around these cost management actions.

Olivier could bring I think $10 million plus in annual savings starting next year, but on the other side you continued with organic investments in selected specialties with that in mind should we still feel comfortable that revenue should grow faster than SG&A next year.

Yes, I mean clearly and.

As a complement to our outlook I would say that we are going to see a meaningful leverage as soon as Q4 of this year.

Specifically in some areas, where we have invested.

Emily falling sunset, where we have taken advantage of the recovery to invest in targeted areas, including self world.

Our engineering business as well as our.

Technology business. So we believe that we are going to start to see a meaningful recovery.

Of our <unk>.

Incremental conversion rate in Q4, and we believe that is going to be confirmed.

As soon as 2022.

Thank you Anne.

Yeah, obviously, an impressive recovery rate youre showing in education in particular.

<unk> 19 was a record year I believe and <unk>.

Even as there remains uncertainty.

Around other variants or whatever can we assume that education is positioned next year to surpass what you did in 2019.

In terms of revenue.

Certainly I mean I did mention that when we did exit September.

This year, we are starting to exceed basically 2019, I think there has been clearly confirmed Josh by looking at Q3, where we are now up 17% versus 2019, and we believe that despite of the headwinds we have mentioned in to date, including a vaccination.

And the equivalent volumes, we are well positioned to continue to grow and exceed continued to exceed 2019.

In Q4 of the current year and Josh while there are certainly are headwinds in terms of the talent supply right now.

With school districts, showing a greater willingness to increase wages.

With vaccination rates, continuing to increase, albeit slowly and with the new emergency authorization for.

Children in K 12, we think theres only upside in terms of the talent supply just maybe to add some seeing Josh that we have not seen before.

In education now the wage inflation, we see for Q3 is about 7% to 8%. So it seems to be like following which we have seen for several quarters in P&I, which I think is good news because the more we can get you know wage inflation the more we can attract the talent.

We need for our education business.

Those are those are great insights. Thank you.

Shifting gears.

We're seeing a pickup in the fee based work.

Historically coming out of recession, you see that.

And this is likely a response coming out of the pandemic people need talent, they're willing to take them on full time. So is it fair to assume that this could and should slow down as we get into a more normal historical business environment I guess, what I'm trying to get at is if we do see a drop in Perm next year.

And I'm, sorry, I keep focusing on next year and you'll probably give obviously give more comments when you report next quarter, but.

What kind of gross profit headwind do you think that could be in 2022.

Well I think I'll, let let me comment on the gross profit.

<unk>.

The amount of I'll call. It pent up demand for talent is significant and the.

A number of <unk>.

Our customers that are.

Relying on permanent placement or attempt to hire.

To satisfy their now and significant demand for talent.

It is likely to have.

A decent runway.

Into 2000 through 2022, especially if you consider the <unk>.

GDP projections that.

Suggest that were not not.

Not nearly at the end of the recovery.

Just when you look at Q3 and.

I'm going to refill directly to 2019, our shoe business is growing by 30%.

2019, it was about 17% in Q2 flat in Q1.

Of course, I mean, the facility both of them that we see this year.

2019 in Q3.

Clearly not sustainable.

Long run, but I think the.

Dynamic we have seen I think should continue as Peter was mentioning probably at the lower pace of growth.

But certainly not going backwards in the near future knowing the structural talent shortage that we have mentioned several times.

Alright, great. Thank you.

It just seems like there is a valuation disconnect with some of your peers and I just want to think about the business both at a company level, but also.

More macro and now that we have more finite details can you discuss opportunities you see or how you may benefit, particularly in P&I from the recently announced infrastructure Bill I know it will be over a long term period, but are you a potential beneficiary of that.

Sure I think anytime there is a master that investment in.

The goods and services in the U S. We are positioned to take advantage of that either directly in terms of customers that maybe in.

In the business of delivering broadband towers for example, but also indirect early downstream benefits.

Manufacturing.

Logistics areas that were strong in and have exposure to.

That.

Are likely to.

Benefit.

Our customers and therefore Kelly.

Alright, Great and then just one last one if I may.

I don't think Ive brought this up on a conference call on a couple of quarters here and you know, it's a running theme I have with several investors.

Around personal in the Japanese assets, they really seem to go underappreciated.

Especially as they are valued at around lets call. It a third of your market cap I can can you. Please walk me through this again and for everyone's listening benefit how liquid is each asset.

What capital gains a repatriation tax consequences could come into place if you sell a piece of either.

Would that potentially cannibalize, a $30 million or so revenue coming from APAC.

Im just trying to get a better sense of how the streak of better value of these assets when ascertaining, where the stock prices today. Thank you.

Thank you Josh So if you look at our balance sheet at the end of Q3.

And you combine the value of <unk>.

Our 49%.

The APAC JV equally the asset value is $345 million, which of course are looking at our market cap is really.

A big portion of it.

One third.

In terms of liquidity of course.

<unk>.

<unk> trading company.

In.

Japan.

So there is of course opportunity is needed and we have said that several times.

Monetize.

The pearsall.

So as you think about <unk> monetization.

Also would be.

Basically, 71%, which is the Japanese tax rate on the capital gain which of course is a very substantial because the return on this investment has been phenomenal over time and for the joint venture the tax cuts tax tax cash rate story would be in the region of 5% to 6%.

Yes.

Just to be clear that.

The 345.

Approximately.

200, plus of that is the pearsall.

<unk> venture.

Is not liquid its a joint venture between two two companies.

So that's a slightly different.

In response to the liquidity question, but.

The bottom line is we agree with you that we don't necessarily think we.

The value of that asset is recognized and.

In our in our share price and that's why in our investor deck.

We have and will continue to update.

To try to steer investors and potential investors to that anomaly.

That.

For.

Reasons not always clear.

They overlook.

Well great I do appreciate all of those insights and thank you for taking all my questions.

Yeah. Thanks, Josh Thank you Josh.

Next we'll go to the line of John Healy with Northcoast Research. Please go ahead.

Thank you Don.

Good morning, guys.

A couple of minutes just talking about the acquisition pipeline that you guys do have and obviously software on it seems like it was a winter this year, but maybe some color on the type of properties that you guys are maybe evaluating and maybe the pace at which we could see that playing out next year.

Yes, John Thanks for the question.

The pipeline is healthy and the number of.

Properties that have either come to market or that we've.

Scouted out.

Is is probably as healthy as as we've seen since.

We've become more acquisitive and it's become a bigger part of our strategy. The properties that we're looking for or what we referred to as a platform like a soft world.

By platform, we mean, a company that has exceptional growth prospects high.

High quality management excellent.

Technology and processes that we can build on.

And not only expecting them to contribute.

Revenue and earnings as they were before we acquired them, but at an accelerated.

Pace.

So using software World as an example, we saw software is one of those platforms and.

Supported their growth through investment in additional recruiting and sales resources as early as the first month that they were part of our company. So those are the kinds of properties I think there will be a.

A bias towards properties in our fastest growing specialties, so that would be science engineering technology Telecom.

Our OCG practice.

And education.

And just maybe I'll ask Olivier to comment in this market, while there is a lot of activity.

We're very mindful of valuations and ensuring that we don't overpay for these.

Companies that we're looking at and I'll ask Olivier to comment on.

What standard we hold ourselves to in order to ensure that I mean, the first point as you know that we have no leverage on our balance sheet and humble.

Capability to fund quickly sum.

I would say inorganic beds.

Second point is.

Of course, there is a lot of activity on the market. We are very proactive, but we are keeping in mind you know some.

Financial principles that we are using.

Know that we are using.

And then that rate of return.

Our rate is 25% plus which is pretty high.

Expecting usually a property that basically would be earning accretive as soon as a quarter of the acquisition and usually we are also.

Using or looking at platforms, where we can add organic.

Type of investment as soon as we have acquired these appropriately and I think so far is a good example, we did acquire <unk> quote beginning of April a couple of months later, we had already in place.

Significant organic investments program play to basically accelerate the topline growth as we said was still double digit around 2021%.

Great Super helpful.

Wanted to ask a little bit on the cost savings.

Hoping you could maybe go a little deeper maybe just operationally kind of what's changing.

Is it a move to more centralized recruitment are centralized in our back office.

Largely domestic oriented I'm, just trying to understand.

I'm, just trying to understand that a little bit more conceptually kind of what's changing on the cost side of things and Additionally, as this is this something that you felt you wanted to do for a while and now we're on the other side of Covid hopefully in and now it makes sense.

Or.

<unk>, maybe potentially the startup something longer term or maybe this could be phase one.

Multiple phase approach to looking at the cost a little bit more.

Sharply.

John I'll, let Olivia comment on.

Some of the perspective from a financial but from an operating standpoint when we.

Launched our new operating model last July.

We.

Expected that there would be.

Additional.

Ways to optimize that model and the cost.

Savings that were.

Realizing.

And then talking about today are as a result of <unk>.

Further refining the five business unit model that we have and there are certain functions that were.

Previously supporting all.

Sure.

A portion of the business units that now makes sense to push into the business units.

Because it puts the activity closer to the.

Customer closer to the revenue and GP generation, and we think that allows us to.

<unk> rationalized some of the expense base that had historically been held in a more centralized centralized way.

Yes, just to add on that.

Our expectation is really.

At least deliver $10 million of meaningful savings some of them are going to be kind of kept incorporate but a lot of it is going to be basically getting our business you need some more efficient and exit rates.

Leverage now you're seeing about the long run all the mid to long run as PD, one and <unk> worth mentioning today. We are also looking at productivity metrics.

The business unit <unk>.

<unk> continued to streamline and improve our efficiency over time. This is an ongoing process that we are looking at including technologies that we have discussed for the last couple of quarters.

Great. Thank you guys.

Thanks, John.

Our next question is from Kevin Steinke with Barrington Research. Please go ahead.

Good morning, Kevin Good morning morning.

I wanted to ask about.

You mentioned that your outlook assumes.

The initiatives, you're taking to increase talent supply.

Gain traction so can you talk about what successes you've seen on that front and how willing are customers to work with you on some of the things you mentioned for example, you mentioned outdated background screening educational requirements.

Just trying to get a sense of.

The traction youre seeing in email being able to improve talent supply with your initiatives in your customers' willingness to work with you on those.

Initiatives.

Yes.

Yes, good morning, Kevin I'll give you I'll give you an example that I would add to that.

List of.

Background screening education also.

The baseline willingness to consider increasing wages. There is also obviously an important important factor, but in the case of the background screening.

We recently.

Shared a case study that we had with Toyota.

Huge manufacturing facility.

We've been working with Toyota to open up the top of their talent funnel by.

Allowing.

Candidates with nonviolent non unrelated bowl criminal convictions to be considered for for work at Toyota and.

92% of the candidates actually passed.

The screening requirements that we established with Toyota.

Literally hundreds of people found work there.

<unk> to increase their talent.

Pool by 20% the increase of diversity by almost 10% and they lowered their turnover by 70%.

That's the kind of.

<unk>.

The story that we're seeing among other customers that are willing to revisit.

Many policies, whether it's education or background screening that has.

<unk> been in place for decades.

Rarely revisited and or Kelly 33 program is particularly targeted at at at the criminal conviction background, but.

We have other programs that we're undertaking with customers who are frankly.

Frankly starved for talent and are willing to re look at their approach.

Great that's really interesting and helpful.

And you mentioned wages and other ways.

Wages is another factor there.

Would assume or.

Is it true that in the current environment Youre customers are.

Seeing the need to markup wages to.

To attract the talent or kind of what's the dynamic you're seeing there.

As you work with your customers yes.

We're seeing pretty much across the board willingness to at least engage in a discussion about raising wages because companies that are.

Are not willing.

Just suffering because in this environment talent has a choice and it's not only the attraction of talent, but retention of talent as well.

We are seeing.

Evidence of <unk>.

Some increases and the attraction of talent, but retention continues to be a real challenge and I'll, let olivier comment on the.

<unk>.

The wage increases that we're seeing and it's pretty much across the board, including finally after years of stagnated wages in our education practice.

Yes.

Kevin.

Is it new and now we see really.

Some some meaningful increase in wages I mentioned, 7% to 8% that's really something we haven't seen in the past.

I would say it's market related but still so what we do.

In gaming education to have.

Meaningful conversation with our customers in education and explain to them the <unk>.

New market conditions, and what they need to do to attract those tenants. So he's not only something that is externally driven.

Also an outcome of numerous discussions we have in education, and I would say something very similar for P&I Cowen inflation, we see wage inflation, we see the P&I is now 8% to 9%, which is pretty high higher than inflation higher than what we have seen in the past. It's also a combination of of course market.

Pressure, but also numerous discussions that kt P&I half.

VSAT customers to educate them on this new environment, and whether you need to do and.

And amongst other things how they can be financially competitive in this market, where there is a big and balance between supply and demand.

Right. Okay. That's helpful. Thank you.

Just circling back there was discussion earlier about.

I know youre, not giving guidance at this point, but for 2022, but just as we think about gross margin moving into next year.

We have the <unk>.

Positive drivers of.

Permanent placement and <unk>.

Growth in your higher margin specialties, but we can also.

Potentially or hopefully see three year recovery in international and P&I.

Kind of your lower margin specialties.

How are you thinking about that all balancing out.

Yes.

The secular drivers you have in place for growth margin expansion will will kind of remain in place and.

Outweigh that.

Too early to comment.

I mean of course.

We are not yet ready to give formal guidance for 2022, but if you look at.

Structurally what we have done and what kind of dynamics, we have seen in the past just as a reminder, our GP margin in 2014.

Was $16 three.

We are now at $19 two.

If you look at the trend of course, we have.

About 50% of it that is coming from inorganic initiatives and I think so.

He is a good example, footlet current here, but we are also what I call more functional organic improvement that we have seen in the past continue to see about 25 30 basis point pure organic basically improvement year over year, what you see now, especially on the fee.