Q3 2021 Kelly Services Inc Earnings Call

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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.

<unk> 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. 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 expectation.

Folks should ship their fault.

Actual results could differ materially from those suggested by our will commence and we have no obligation to update the statements made on this is cool.

Please refer to our SEC filings for a description of the risk factors that could influence the company's actual future performance. In addition, during the call certain that I wanted to be discussed on a reported and on an adjusted basis discussion of.

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

Durations references to organic growth in our discussion today excludes the results of our Q2 acquisition of social World. We have also provided a 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.

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.

<unk> 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.

Turning 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 topline growth offsetting the softness in customer <unk>.

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

In our <unk> 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 <unk>.

<unk> contingent 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 and 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 and 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 value of the results is hateful 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 have been 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 surrendered 20 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.

Pandemic valued 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 have seen 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. While <unk> 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 then three other 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.

The portion of manufacturing.

And our ability to fulfill customer demand has been limited by the current weakness in denim and supply as a result, we have experienced lower volume, but that the higher bill rates, reflecting our customers' understanding of the upward pressure on wages in the current talent market.

The net impact of that dynamic was 1% year over year, increasing <unk> revenue in the quarter.

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

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 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 forth easily bought <unk> 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 inset, coupled with fees from our Q4 2020 acquisitions of Greenwood Usher in the education segment she's in yen.

Nash in that 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 from 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 GE 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 prior year 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 remains below pre pandemic levels.

Expand gross new CDN litigation are in line with current revenue growth <unk>.

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.

Included in our reported Q3 results all the operating earnings of <unk>, $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 recognized a $75 5 million pre tax gain on the water vessel common stock compared to $16 8 million pretax gain in.

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 peso 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 accurate 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 $213 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 does the so called acquisition didn't required debt financing, we may begin to borrow on existing credit facilities to see both working capital, including the Q4 2021 repayment of 50%.

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're 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 had on increasing the available talent pool by tackling systemic barriers that prevent more people from connecting with <unk>.

<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 and methodologies in 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 <unk> at the beginning of the second quarter, and we have nine months or so forth 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 <unk> GP margin rate.

As we reflect on the third quarter results and look forward our views out 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 the 210 to 230 basis point impact from the so called acquisition.

Our expectation reflects 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.

<unk> then we are 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 Andrew <unk> filtration balanced supply and of course.

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 have taken.

The 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 groups. So all in we expect SG&A expense to be up 10% to 11% on an adjusted basis, increasing a 350 basis points impact.

From the <unk> 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% expense 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 operational efficiencies within our envelope heights functions that provides centralized support to our operating units and to align expenses with our current expectations for topline grew.

<unk>.

A restructuring charge of $3 five to $4 5 million will be reflected in our Q4 results.

These cost management actions are intended to deliver structurally expense saves.

Savings of at least $10 million on an annual 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 refine 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.

I like the crisis that preceded it 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 know 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 Josh.

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

You said 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.

You know us.

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 namely falling sunsets, 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 anchor.

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

As soon as 2022.

Thank you Anne.

Obviously, an impressive recovery rate you are showing in education in particular.

2019 was a record year I believe and.

Even as there remains uncertainty.

Round 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 of 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 and to date <unk>.

<unk> vaccination.

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

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 what 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 you know 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.

There's likely a response coming out of the pandemic people need talent. They are 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.

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.

The GDP projections that.

Suggests that were.

Not nearly at the end of the recovery.

Just when you look at Q3 and.

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

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

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

2019 in Q3.

Probably not sustainable for the 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 functional 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 massive investment in.

Goods and services in the U S. We are.

Our position to take advantage of that either directly in terms of customers that maybe.

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

Manufacturing.

<unk> 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.

<unk>.

I don't think Ive brought this up on a conference call in a couple of quarters here.

Running theme I have with several investors.

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

Especially as they're 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.

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

I just want 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 first solar.

Our 49%.

The APAC JV the basically the asset value is $445 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> is a publicly traded company.

<unk>.

Japan.

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

<unk>.

So as you think about tax and monetization.

I also would be base.

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.

Joint venture.

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

So that's a slightly different in.

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.

<unk>.

Sure.

The reason is not always clear.

They overlook.

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

Yes, Thanks, Josh Thank you Jonathan.

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 you have and obviously software. It seems like it was a winter this year, but maybe some color on the type of property 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 have.

Scouted out is is probably as healthy as as we've seen since.

We've become more acquisitive.

From 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 and our plant 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.

Well what standard we hold ourselves to in order to ensure that yes, 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 getting 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.

You know that we are using.

Internal rate of return.

Our rate is.

25%, plus which is pretty high.

Expecting usually are properties 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.

<unk> investment as soon as we have acquired appropriately and I think so far is a good example, we did acquire <unk> beginning of April.

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 that.

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 thought you wanted to do for a while and now we're on the other side of Covid hopefully in and now it makes sense.

<unk>.

You know maybe potentially the start of something longer term, where 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 save.

Savings that were.

Realizing.

And then talking about today.

As a result of further refining the five business unit model that we have and there are certain functions that were.

Previously supporting all.

Or.

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.

Rationalize some of the expense base that had historically been been held in a more centralized centralized way.

Yes, just to add on that.

Our expectation is really.

Could you just deliver $10 million of meaningful savings some of them are going to be kind of capped incorporate but to 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 a speed of RNA worth mentioning today. We are also looking at productivity metrics.

Yeah.

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.

<unk> 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.

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

Just of background.

Background screening education also just 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.

<unk> 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.

<unk>.

92% of the candidates actually passed the screening requirements that we established with Toyota literally hundreds of people found work there Toyota increase their talent.

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

And that's the kind of.

The story that we're seeing among other customers that are willing to revisit these many policies, whether it's education or background screening that has.

<unk> been in place for decades, and rarely revisited and or Kelly 33 program is particularly targeted at that.

The criminal conviction background, but.

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

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 have not seen in the past I would say it's market related but still so what we do.

In gaming education.

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 that's 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've seen 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.

These are 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 that's helpful. Thank you.

And 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.

You can see.

The secular drivers you have in place for growth margin expansion, we will we will.

Will kind of remain in place and.

Outweigh that.

Too early to comment.

Yes.

Of course.

We are not yet ready to give formal guidance.

Guidance for 2022, but you should look at.

<unk>, what we have done and what kind of dynamics, we've seen the paas 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 factual organic improvement that we've seen in the past continue to see about 25 30 basis points fueled organic basically improvement year over year, what you see now, especially on the fee.

C business.

The type of you know.

Push that it is providing to our margin.

90 basis points in Q3, 17, Q2 soda in Q1.

Mike easily these in the future because as we said I mean, the type of growth. We have now in the fee business is not going to continue at that pace, meaning like 30% versus 2019.

But we continue to see these kind of sexuality.

Improvement organically that we have seen for many years now.

And it could be.

As we have seen with <unk> and other acquisitions.

Inorganic, especially because Peter was mentioning again that the profile of the companies. We are looking at our high growth high value and high value is basically gross margin and net margin or EBITDA margin.

Alright. Thank you that's that's helpful.

Sure.

You had mentioned on the last call.

Maybe accelerating.

<unk>.

Further deployment of your.

Our front office system for recruiters, maybe an update on <unk>.

What's going on on that front.

How far along you are.

Yes, it continues to be a high priority for us Kevin is we.

Look to transition.

From our legacy Tech stack too.

Or more.

Versatile modern one and so that work continues.

And as I indicated last call there will be incremental improvements as we.

<unk>.

Disentangle from the legacy Tech stack and.

Enable some of the best in class tools that are available in the front office too.

In order to the benefit of our recruiters.

So that's work that we're continuing not only to focus on in terms of the time and energy of our it team, but financially to make sure that we're getting today.

Endpoint as quickly as possible.

Great.

Maybe one or two more here.

Any any.

Wait.

Maybe just qualitatively frame how much of an impact.

Supply chain disruptions are having on your business currently.

In terms of your ability of your customers to.

Just.

Operate the way they would like to.

Well we have.

Being the most pronounced impact in automotive.

That started first and we have considerable exposure to automotive I think.

It's relieved to some extent, although theres still chip shortages and other our other parts shortages the dynamic that we've seen I would say in the last.

Three or four months as the <unk>.

Disruption has.

Found its way into other industries and.

The challenge for Us is.

Staffing provider is it's it's uncertain, we have customers who.

Are forced to shut down operations because of a failure of a delivery or.

They can't they don't have enough parts.

So it's challenging just from a load balancing standpoint.

But as I mentioned in my remarks.

We believe this is temporary and that eventually.

The federal government now focused on.

724 opening of the ports.

Other.

Policy changes that we will over the course of time.

C evening out of the supply chain issues.

Alright, thanks for all the insight thanks for taking questions.

Thanks, Kevin Thank you Kevin.

Our next question is from the line of Joe Gomes with Noble capital. Please go ahead.

Good morning, Joe Good morning.

Morning.

So there's been a lot of talk here, obviously about Canada and availability in talent supply.

Maybe you could just talk a little bit about internally.

For Kelly itself I mean are you running at.

The optimum level the number of consultants that you have out there are you looking to add people how is it impacting.

The <unk> business.

The entire.

<unk>.

Availability of candidates out there.

Well, Joe as everybody scrambles for to find talent.

Competition for recruiters is also significant and companies that during the pandemic released their entire talent acquisition teams are now.

Also in the market for recruiters.

Some of there.

Recruiters that they let go during the pandemic are gone onto other things or decided to stay on the sidelines.

The positive is that.

We do have.

Considerable base of recruiters and that includes not only on our staffing business, but also our recruitment process outsourcing business. So we're seeing.

Significant demand in our recruitment process outsourcing business as well as.

In our across our staffing and outcome based segments, but clearly.

Recruiters, having enough recruiters keeping their recruiters.

Ensuring the recruiters are at productivity is an ongoing challenge in this sort of really.

Competitive environment for talent and the people that.

Whose job it is to find talent.

Okay. Thank you for that.

Last couple of quarters that you mentioned.

Some of the new clients and I was wondering you might be able even with a little more color on detail and especially on the education side, maybe some key wins or the size of wins, there and how is that.

Win rate so to speak.

Paired to what it has been historically.

We're seeing wins across both large and <unk>.

Small school districts and everything in between the demand.

For outsourced.

Support for finding instructors.

Probably we've never seen it as high.

The.

Amount of new wins that we've had in the last 12 18 months, probably the highest.

For Kelly education.

So.

There are.

They come in all all shapes.

And.

The geographies and the pipeline.

Continues to be very robust and our.

While.

We don't disclose what our win rate as were confident that were.

Winning more than our fair share.

Great. Thanks for taking my questions.

Okay, Joe Thank you Joe.

Ams quickly we have no further questions in queue.

Okay. John Thank you Joe. Thank you for your support as always we appreciate it.

You're very welcome ladies and gentlemen that does conclude your conference for today. Thank you for your participation you may now disconnect.