Kelly Services, Inc. (KELYA) Q1 2021 Earnings Report, Transcript and Summary

Good morning and welcome to Kelly Services First Quarter Earnings Conference Call. [Operator Instructions] Today’s call is being recorded at the request of Kelly Services. If anyone has any objections, you may disconnect at this time. I would now like to turn the meeting over to your host, Mr. Peter Quigley, President and CEO. Sir, you may begin.

Thank you, Tony. Hello, everyone and welcome to Kelly Services first quarter conference call. With me today is Olivier Thirot, our Chief Financial Officer, who will walk you through our Safe Harbor language which can be found in our presentation materials.

Thank you, Peter, and good morning everyone. Let me remind you that any comments made during this call, including the Q&A, may include forward-looking statements about our expectations for future performance. Actual results could differ materially from those suggested by our comments. And we have no obligation to update the statements made on this call. Please refer to our SEC filings for a description of the risk factors that could influence the company’s actual future performance. In addition, during the call, certain data will be discussed on a reported and on an adjusted basis. Discussion of items on an adjusted basis, are non-GAAP financial measures designed to give insight into certain trends in our operations. We have also provided the slide deck that we are using on today’s call as well as an expanded slide deck with more information on our performance on our website. Now back to you, Peter.

Thank you, Olivier. More than a year after the COVID-19 pandemic began we are entering a new and promising phase of the recovery. In the U.S., the temporary labor market has recovered, unemployment is down, and demand for staffing and other workforce solutions is building, across small, medium and large enterprises. While we haven’t left COVID completely behind us, we are entering what appears to be a solid, sustainable recovery that will likely gather momentum throughout 2021. At Kelly, we are well-positioned to capture growth in the recovery. Our actions in 2020 protected our balance sheet and capital. And in 2021, we are executing against our well-defined specialization strategy. We are investing in organic growth to help accelerate that strategy, bringing new high potential solutions to market. For example, the tutoring product that we launched in March will help close pandemic induced K-12 learning gaps and unlock new revenue streams in our Education segment. At the same time, we are pursuing inorganic growth at an unprecedented pace. As you may recall, in February 2020, shortly before the pandemic hit, we laid out plans to pursue a bolder approach to driving growth through targeted M&A. We are acting on these plans to accelerate our specialization strategy, including two acquisitions in the Education segment last year. Now, we are excited to have reached a new M&A milestone. Our purchase of Softworld in April 2021 is the largest acquisition in Kelly’s history. The deal significantly expands our market presence in the technology staffing and solutions space and helps to continue to shift Kelly’s portfolio toward fast-growing high-value specialties. Olivier will share what this means for future revenue and GP growth in a few minutes. But in the meantime, I know our Softworld colleagues are listening today, and I’d like to publicly welcome them to the Kelly family. We’re thrilled to have you on this journey with us. Before I hand it off to Olivier to provide details on Kelly’s first quarter performance, I will share a few highlights. All of our operating segments, Professional & Industrial, Science, Engineering, and Technology, Education, OCG and International were profitable in Q1 and excluding the 53rd week in the fourth quarter last year, all delivered sequential improvements in either revenue dollars or revenue growth rates, while three delivering improvements against both measures: OCG, Education and International. Specifically, our OCG segment continued to thrive and surpassed its pre-COVID revenue levels for the second quarter in a row, while delivering better year-over-year earnings. We were pleased to see our Education segment, which has been the segment most impacted by COVID-19 exceed our expectations in Q1, as we placed 30,000 substitute teachers in March, the best month since the pandemic began. The U.S. education system is still a long way from normal but schools are starting to reopen, we have added new wins to our portfolio and our sales pipeline is healthy and growing. Kelly International delivered better year-over-year earnings as our teams captured growth from sustained demand among life sciences customers and saw increased demand in manufacturing as facilities reopened. Our SET segment delivered sequential top line growth, notwithstanding a slight deceleration in growth rates during the quarter stemming from some headwinds among certain verticals in industries. We continue to meet strong demand in our Science specialty and captured significant fee growth. In our Professional & Industrial segment, our outcome-based businesses continue to perform well and our staffing business delivered strong fee growth. And while our Staffing business is trending up, and demand for our staffing solutions returned to pre-pandemic levels in the quarter, we did not convert enough of this new demand to top line revenue in line with our expectations. While some of this is attributable to a tighter than usual labor market, particularly in light industrial jobs, we have taken steps to enable P&I to capture more of this demand opportunity in the future. I will provide some additional insight regarding those steps later in the call. I will now turn it over to Olivier to share more details about our Q1 results.

Thank you, Peter. As Peter mentioned, our Q1 results reflect the impact of a continuing stabilization in economic activity and demand for our services, as some COVID-19 related challenges remain. We passed the one-year mark of the pandemic this quarter. The impact of lower demand first became visible in our financial results starting in mid-March of 2020 as the pandemic response impacted economic activity around the globe. For the first quarter of 2021, revenue totaled $1.2 billion, down 4.4% from the prior year, or down 5.5% in constant currency. As we mentioned last quarter, we have continued to see gradual improvement in demand from the low point experienced in Q2 2020. Our Q1 constant currency exit rate or year-over-year revenue trends for the month of March was down 2.7% compared to our December exit rate, excluding the 53rd week of down 8.1%. This is due in part to prior year comparable that reflects the early days of the pandemic in 2020, and reflects account to new trend of gradual improvements over the course of the quarter. Three of our five segments are now reporting positive year-over-year constant currency revenue gains for the month of March. OCG is at plus 8%, confirming the trends we have seen in 2020. International is plus 3.5%, and education at plus 2.7%. For the quarter, our Education segment continues to be impacted as U.S. school districts to use a variety of delivery models, including virtual and hybrid, which has an impact on the demand for our services. However, revenue in our Education segment for the first quarter did grow sequentially from Q4 2020, which is encouraging. Because schools have continued to modify their instructional delivery in response to changing local infection rates, volatility in demand in the near term is still possible. International also experienced continued improvement in revenue trends and had positive sequential revenue gains in the quarter, excluding the impact of the 53rd week. Russia and Mexico continued to show solid revenue growth, Switzerland and Italy returned to positive revenue growth in the quarter and France has seen a sequential improvement with a positive exit rate in March. Revenue in our Professional & Industrial segment continues to reflect growth in our outcome-based products, including our remote contact center business. Our staffing business while trending up is still limited by two internal supply shortages and some additional challenges that Peter will cover later. And within the SET segment, our results have generally tracked with the customers served in each specialty. Science, where we have many life science and clinical customers, has been the strongest. And Engineering, with a concentration in the oil and gas sector, has been slower to recover. And finally, our OCG segment has continued to perform well, thanks to new customers’ wins and growth in our existing customer base in CW, RPO and PPO. After reaching a key inflection point in Q4 2020, when revenue for the quarter exceeded the corresponding pre-COVID period, OCG sustained that level of performance in Q1 2021 with revenue up over both the comparable period in 2020 and also in 2019. Permanent placement fees were up 30% year-over-year from significant increase in activity in P&I and SET, coupled with fees from our Q4 2020 acquisition of Greenwood/Asher in the Education segment. This was partially offset by a decline in fees in the International segment, reflecting a more uncertain environment in Europe. Overall, gross profit was down 4.5% of 5.7% on a constant currency basis. Our gross profit rate was 17.7%, consistent with the first quarter of the prior year. On a year-over-year basis, our GP rate was positively impacted by higher term fees, which was offset by the negative impact of higher employee related benefit costs. Within the segment, we did experience some variability in GP rates caused by shift in customer and product mix, and in the case of P&I caused by one-time costs associated with expected future increases in customer demand in our contact center product. SG&A expenses were down 8% year-over-year on a reported basis. Included in expenses for the first quarter of 2020 was an $8.7 million restructuring charge. On a like-for-like basis, expenses for the quarter were down 5% year-over-year in constant currency. Overall, expense reductions in all segments reflect continues management of our cost base, in line with revenue trends, while preserving the ability to respond as market conditions improved, and continuing with organic investment in our selected specialties. Our reported earnings from operations for the first quarter were $10.6 million compared to Q1 2020 reported loss of $111.8 million. Our Q1 2020 earnings include a goodwill impairment charge of $147.7 million gain on sale of assets of $32.1 million and $8.7 million of restructuring charge. As adjusted, Q1 2020 earnings from operations were $12.5 million and on a like-for-like basis, earnings in the 2021 first quarter declined 15%. For the quarter, all operating segments had positive earnings from operations and OCG and International delivered well adjusted earnings than a year ago. Now, turning back to the company as a whole, Kelly’s earnings before tax also include the unrealized gains and losses on our equity investment in Persol Holdings. For the quarter, we recognized a $30 million pre-tax gain on our Persol common stock compared to $77.8 million pre-tax loss in the prior year. These non-cash gains and losses are recognized below earnings from operations, as a separate line item. Other income and expense also below earnings from operations had an unusual year-over-year volumes this quarter caused by higher transaction related expense from our Softworld acquisition and a one-time non-cash write-down of Kelly innovation from investment. Income tax expense for the first quarter was $10.5 million compared with our 2020 income tax benefit of $36.2 million. Our effective tax rate for the quarter was 28.3%. And our tax rate was higher than the U.S. statutory rate, primarily due to the impact of non-cash gains on Persol common stock, and the related deferred taxes recorded at the higher Japanese statutory rate. And finally, reported earnings per share for the first quarter of 2021 was $0.64 per share compared to a loss of $3.91 per share in 2020. 2021 earnings per share, includes the gain on Persol share, net of tax, and 2020 earnings per share was unfavorably impacted by the goodwill impairment charge, the loss on Persol common stock and all restructuring charges, partially offset by the gain on sale of assets. Adjusting for these items, Q1 2021 EPS was $0.12 compared to $0.20 per share in Q1 2020, a decline of 40%. Now, moving to the balance sheet, as Peter mentioned, we acquired Softworld on April 5th, which falls in Kelly’s fiscal second quarter. So the impact of Softworld acquisition is not reflecting in our balance sheet as of the end of the first quarter. As of quarter end, cash totaled $259 million compared to $223 million at year end 2020 and $48 million a year-ago. Debt remains low, $1 million at quarter end compared to nearly $0 million at year end 2020 and $2 million a year ago. Again, we ended the quarter with no borrowings in our U.S. credit facilities. However, higher cash balance reflects the benefit of the deferral of payroll taxes in the U.S. under provisions of the CARES Act and, to a lesser extent, the impact of reductions in working capital given our current lower year-over-year revenue as the recovery from the impact of COVID-19 on our business continues. Accounts receivable was $1.3 billion, an increase of 3.5% year-over-year. Global DSO was 60 days, an increase of one-day over the same period in 2020, but a decline of four days from year end 2020. The decrease since the year end reflects the collection of receivables from several large customers. We are carrying higher balances at year-end due to customer-driven administrative issues. In our cash flow for the quarter, we generated $8 million of free cash flow, consistent with the same period in 2020. As we noted in our Form 8-K announcing the acquisition, we acquired Softworld for $215 million plus working capital adjustments and we were able to fund the entire acquisition with existing cash balances. As a result, our cash balances are now back in line with levels needed to manage daily liquidity. And while the Softworld acquisition did not require debt financing, we may begin to borrow on existing credit facilities to support working capital needs, as revenue levels continue to recover or surpass pre-COVID levels. And now back to you, Peter.

Thanks for those details, Olivier. While it’s clear that we are still living with the impact of the COVID-19 pandemic, we are pleased to see continued economic momentum and we’re encouraged by healthy sales pipelines and the new customer wins we’re capturing as the recovery progresses. I would like to provide a little more insight into the demand/supply dynamics and P&I staffing, that I mentioned earlier in the call. As noted, demand from existing and new customers exceeds pre-pandemic levels, while supply particularly in lower wage jobs is challenging. And while our staffing business is trending up, we are taking steps to capture more growth than we delivered this quarter. You will recall that even during the pandemic, we successfully deployed our new front office mid-year last year. During the first phase of deployment, certain activities still require use of legacy Kelly systems. The inefficiencies this causes became more pronounced as we emerged from last year’s significantly depressed demand to the current environment. We are addressing this by accelerating the technology deployment timeline, introducing additional training of our front-line teams, and exploring the use of complementary technology to alleviate some inefficiencies. We have also began reopening physical branches in targeted high demand markets to facilitate in-person recruiting of local talent, and we are focusing internal resources on filling vacant recruiter roles more quickly. To capture a new revenue stream in P&I, we have started offering a new skilled professional solution that bridges the gap between temporary and full-time employment, and let’s clients bring in high value P&I workers on a project basis. We expect the supply of P&I talent at all skill levels to improve as vaccination rates rise and schools resume in-person instructional delivery, enabling more parents to return to work. Overall, we are optimistic about these early stages of the recovery. Following an unforeseen economic setback, we expect the demand in all operating segments will continue to accelerate, particularly in the second half of the year. It’s worth noting that Kelly is maximizing the momentum of these market conditions with intelligent technologies deployed during the pandemic. We launched virtual job fairs last year in response to COVID-19, and have now incorporated them into our standard recruiting practices, bringing in hundreds of hires and hundreds of thousands of GP dollars. To help put people on the job faster, we have improved our online talent experience and cut in half the time to complete the e-registration process. We are introducing a powerful new tech stack that enables Kelly clients to request full time, contingent and contract talent through a single source, simplifying and speeding up the hiring process across their entire workforce. And throughout our own operations, Kelly has deployed numerous parts that perform highly repetitive tasks and save hundreds of thousands of human work hours annually. Technologies such as these make it faster and easier for talent, clients, and our internal teams to connect and position Kelly to capture growth more quickly and efficiently as the recovery accelerates. I will now welcome back Olivier to provide additional thoughts on 2021.

Thank you, Peter. At the time of our year end earnings release in February, we have returned to providing an outlook for the full year. And we continue to update our full year guidance as the year progresses. We passed the 1-year anniversary of the COVID pandemic in the quarter and remain confident that we have adequate financial resources and liquidity to emerge from this crisis and capitalize on the recovery. As we have discussed, we completed the purchase of Softworld just after the end of the first quarter, and we have nine months of Softworld’s activity reflected in our 2021 results. We expect that the impact of the Softworld acquisition will accelerate our revenue growth, in the high demand, high margin technology specialty and will result in a structural improvement in our GP rate. So in discussing our outlook, I will first address our expectations from an inorganic basis perspective without the impact of the acquisition of Softworld, and will then address the impact of Softworld separately. As we reflect on the first quarter results and look at the remaining three quarters, our view is for continuation of the current trend of gradual and steady increase in demand with an opportunity for the most substantial recovery in the second half of 2021. For the full year, we expect organic revenue to be up 10% to 12% compared to our initial 2021 guidance of 7% to 11% year-over-year revenue growth rate. This reflects our expectation that demand continues to improve, but steps we are taking to address the current talent shortage, I expected to expand the supply of talent available to us. We expect that the timeline for each operating segment to reach pre-COVID revenue levels will depend on geographies we serve, industry concentration and product mix. OCG has done so already, and other segments will cross that milestone later in 2021 or in the first half of 2022. We will continue to launch targeted growth initiatives that are intended to further accelerate organic revenue growth. In addition, we expect Softworld to add an additional 200 to 250 basis points to our revenue growth rate this year. We expect our organic GP rate to be just under 18%, down slightly versus our pre-COVID margins. While we pursue our specialty strategy intended to drive growth in higher margin specialty, and expect continued year-over-year improvement in our commercial business, we also expect the recovery in lower margin specialties to keep our organic GP rate relatively flat in 2021. The addition of Softworld is expected to improve total company GP rate by an additional 30 basis points to 40 basis points this year. We have taken some definitive steps as respect to sustainable SG&A cost reductions in Q4 of 2020, and authorizing meaningful cost savings and are intended to partially offset the impact of the expiration of our temporary cost actions in place in 2020. We expect that these savings will allow us to moderate expense growth as the revenues increase. So, all in, we expect SG&A expenses to be up 4% to 5% on an organic basis. Our recent acquisition is also expected to add about 200 basis points of operating expenses and also an additional 100 basis points of non-cash intangible amortization this year. As we execute on our acquisition strategy, we plan to utilize EBITDA and EBITDA margin as additional measures of our progress on the promise to deliver profitable growth. We will begin reporting on and providing an outlook for these measures with our second quarter earnings release in August. And finally, we expect an effective income tax rate in the mid-teens, which include the impact of the work opportunity tax credit, which has been extended through 2025. As the expected recovery in demand continues, we’ll continue to review our capital allocation strategy, including our dividend policy with our Board of Directors. Back to you, Peter now.

Thank you, Olivier. More than a year after the pandemic began we are looking ahead with optimism and growing confidence in the economic recovery and our performance, as reflected in our newly raised 2021 guidance. We are seeing demand continue to strengthen among large customers and in small and medium enterprises, an encouraging sign that the recovery is gaining traction at multiple layers. Robust fee growth in the U.S. also points toward increased confidence about the future as businesses ramp up their full time hiring in anticipation of strong economic growth. Kelly is well positioned to drive growth from our specialization strategy during this recovery. We are aggressively pursuing targeted M&A opportunities in high-value specialties as evidenced by our acquisition of Softworld, which dramatically expands our presence in the fast growing technology, staffing and solutions space. At the same time, we are investing in organic growth on multiple fronts. For example, pursuing adjacencies such as tutoring and higher ed in our Education segment. As the economic recovery strengthens, underlying in equities in the labor market are likely to remain. So there too Kelly is taking action. Our equity-at-work initiative is helping to increase the available talent pool by tackling systemic barriers that prevent people from connecting with work. We’re inspired by customer support and enthusiasm around this initiative, and we are already seeing some encouraging early results in talent attraction and retention rates. Kelly is also taking a consultative role to help clients improve their employer brands and design new incentives to attract diverse talent in an increasingly competitive labor market. The economic recovery is here and Kelly is ready for it. We move forward in 2021 confident in our specialization strategy, our ability to drive organic and inorganic growth and our commitment to helping customers and talent thrive in the brighter days that lie ahead. Tony, you can now open the call to questions.

Thank you. [Operator Instructions] Our first question comes from the line of John Healy with Northcoast Research. Please go ahead.

Thank you. Olivier, I was hoping you could just kind of run through some of that SG&A outlook again. I was just trying to square some of those numbers around. And on the gross margin outlook, does the – just under 18%, does that include the benefit of Softworld or does that exclude it?

Thank you and good morning, John. I’m going to start on the SG&A. So we set up 4% to 5%. I just wanted to mention that, of course, the reference point of 2020 is a little bit difficult because of multiple one-time events in 2020. So you need to see about a base of – 2020 base at about $795 million, which I think is a base that you could use to basically buildup your modeling for 2021. The second question about Softworld and the GP, no, the GP shy of 18% for the current year does exclude Softworld. And it’s probably – and I don’t know, Peter, if you want to do it now, an opportunity to talk a little bit about the financials about Softworld. And I think Peter is going to give also broader business view about Softworld. So just wanted to briefly talk about Softworld to really explain a little bit, what we call, the growth profile and the value profile of this company. So if you think about the growth profile, you look at the revenue trend of Softworld, I will give you two simple numbers, the revenue CAGR of Softworld between 2015 and 2020 was an average growth per-year of 22%. If you now look at 2020, which of course, is always seen as a very specific year, Softworld was growing their revenue by 23%. On the value profile of this company, I’m going to help you to basically use our outlook to figure out some key financials related to Softworld. If you take the impact that I was sharing with you about Softworld, of course, it’s on a nine months basis as opposed to a 12 month basis. But if you make the math, get this information on the 12-month basis to look at the kind of pro forma expected 2021 type of financials, you would end up basically looking at a revenue range for Softworld full year base between $130 million to $135 million. A GP rate of 36% to 37%, I repeat, 36% to 37%, it’s a very, very high GP rate that is commensurate with the quality of the business we have acquired and Peter probably will expand a little bit of that. And you would end up with an EBITDA – again, on a full year basis, not 9 months of about $20 million; so an EBITDA margin at about 15%. And to conclude on that, if you look at the acquisition price of $215 million, and you look at multiple of EBITDA, well, you can make the math very easily and we would end up in a range of EBITDA multiple between 10x to 11x. And with that, Peter, maybe you want to give a little bit of more business view about Softworld?

Thank you, Olivier and good morning, John. So, the reason why we believe Softworld is such an attractive addition to the Kelly portfolio and the basis behind the numbers that Olivier just shared with you is they sit in a extremely high growth sweet spot in the technology space. The demand for a technology specialist has accelerated. Application developer, software engineers, data analysts, demand has never been greater and Softworld’s results reflect that. They have recruitment in staffing solutions that span some high growth practice areas: technology, financial services, cybersecurity, engineering, life sciences, government services, data science. And importantly, they provide not only staffing, but also statement of work solutions that complement nicely the solutions that Kelly provides. And I guess the last one I would make, John, is surprisingly the overlap among our customer set is actually relatively light, which we think provides a exciting opportunity for growth synergies going forward.

Great. And just wanted to ask kind of one bigger picture question and I think you guys are uniquely positioned to provide a perspective on this. In the Education space, how do you expect and kind of what is the tone that you are getting from school districts and municipalities about 2020 – I guess school year 2022 in the fall here of 2021? Are you expecting that business to operate kind of at pre-pandemic levels? And do you think the pandemic helps that business, did it hurt that business, kind of as we kind of – I would think start reopening to in-person education more so?

Yes, thanks for the question, John. I will comment to provide some color and then let Olivier maybe share some financial perspective. We expect the schools to be providing in-person instruction in the fall. We think the – what we are seeing in the first half of this year, what school districts are talking about both at the federal, the geographic level, local level, the plans are in place to reopen fully in the fall. So barring some unforeseen scientific challenge, our expectation is that schools are going to be fully reopened and that demand for our services is going to be robust. We have – and we expect that not only from clients that we had before the pandemic who we are working with, but we also saw significant new wins in the last 9 months and one of the most productive periods in Kelly Education history. So, it’s going to be a combination of our existing clients reopening and new wins coming online. Olivier, you want to…

Yes. Just probably adding on what we could, until maybe our inflection point, which is a time where our revenue overall and by business units is going to cross, not necessarily the 2020 map, but the 2019, the pre-COVID type of revenue. And we believe in education base on what Peter has said that we believe we are going to exceed the second half of 2019 revenue, basically in the second half of 2021. We will cross this inflection point when you compare our trend in Education not versus 2020 but versus 2019.

Great. Thank you, guys.

Thank you. Our next question comes from Josh Vogel with Sidoti. Please go ahead.

Thank you. Good morning, Peter and Olivier.

Good morning, Josh.

Good morning, Josh.

I don’t want to harp on Softworld too much, but I was just curious, the initial press release said they did in excess of about $100 million in 2020. You mentioned a CAGR rate like 22%, 23%, but it seems like your guidance for the 9 months extrapolated out over the full year, you are looking at about 30% type growth. Is that just going up against good comp, are you seeing pent-up demand or is it a little bit of both?

No, I’m going to start and Peter is going to complement on that. I mean, knowing that 2020 was a difficult year in terms of overall environment, including in IT in the U.S., we are very confident that we can continue and even surpass the type of double-digit growth we are seeing in revenue. And on top of that, we are, as we did for NextGen and GTA in 2019, immediately it’s initiated some further investment to basically further accelerate the organic growth of Softworld that is already in double-digit.

Good morning, Josh. I would add that regarding the pent-up demand, there is significant – there were significant demand before the pandemic, and it is only accelerated as a result of the pandemic when you consider the companies having to stand up remote work forces and deal with the heightened cyber security threats that exist. And Softworld is in a excellent position to supply the kind of high-end talent that really all organizations are going to need going forward for the foreseeable future. So Softworld saw continuing growth during 2020, and we expect as the worst part of the pandemic is behind us, that it will only accelerate.

Yes. And Josh, when we are going to issue an 8-K probably in mid-June with all the pro forma of Softworld as well as the combination between the Softworld and Kelly. And then you are going to have more access to historical information, for instance, basically, when we talk about $100 million. Well, in fact, we say around $100 million. So you will see that basically when you get the pro forma for 2020, the revenue was slightly higher than the $100 million mark we were referring to.

I got it. I appreciate those insights. And when we think about the M&A pipeline and appetite is paying 10x to 11x for a technology or a SET type company, are you comfortable with that going forward or you are happy paying a little bit more Softworld, just given the market profile and the growth is in the business? And just on a slight tangent, what are the typical multiples you have been paying on the education in the Education sector? Thanks.

Yes, I would say we feel comfortable with the 10x to 11x range because of the strategic fit and the growth, as well as a value profile that Peter and I were describing today. I can say that, I mean, we use a pretty high hurdle rate. You know that we use internal rate of return as a critical filter to make sure that we put the right price. We use hurdle rate for internal rate of return of 25%. And I’ve said several times, I mean that’s a pretty high hurdle rate to make sure that we already always consider basically the type of acquisition pricing we put on the table. On Education, I believe talking about the type of adjacencies and efficiencies we are looking at, is going to be probably yes, double-digit, probably low double-digit, but certainly crossing the 10% multiple.

Yes, especially in the adjacencies, Josh, not necessarily in the K-12 space, but in the higher margin, for example, in occupational speech, some of the other therapy adjacencies that are attractive with those are going to command higher multiples. But as Olivier said, we have a very high internal rate of return hurdle rate, and we’re also measuring targets against other factors including our cultural set, the ability to integrate, which I think we’ve demonstrated a good track record with the acquisitions we’ve made over the last three or four years, as well as the ability to create synergies. To-date, it’s primarily been top line synergies, but that’s also an important factor.

Okay, great. Just wanted to switch gears a little bit understanding the current demand and supply dynamic, when we think about the entire business and the pricing environment, what does it look at the lower and high end goal set for both categories versus pre-pandemic, and any general thoughts around pricing trends from here and your ability to maintain the spread?

Well, I think it’s very attractive at the higher end, the professional in our SET business. But I think there is opportunity in our Professional & Industrial, as the talent shortages reveal themselves, and companies are dealing with the production consequences of not having enough of workers. And so, not only to capture some of the higher benefit costs that we have as a result of states having higher payroll taxes, but also because of the demand for talent, and working with customers, not only on competitive wages, but also potentially capturing more margin as a result of our ability to deliver the talent that they need to run their businesses.

Alright, great. Thank you. Yes, just two quick hit ones. I maybe missing it in the either in the slide presentation of the earnings report, but what was in the other income expense line, that $3.4 million?

Yes, you mean other income and expense, Josh?

Yes.

Yes. I mean, we have of course as usual some, what we call, currency fluctuation, which is one explanation, but that is happening more or less all the time. The two other items were basically acquisition cost linked to Softworld. And the second one is, basically a write-off of one investment we had through our Kelly innovation from on a company called Kenzie Academy. That’s a one-time non-cash item of $1.4 million.

Alright, great. And just lastly, do you have an early read on the April exit rate given that was the first full month of the pandemic last year?

Yes. We – Our exit rate for the month of March was minus 2.7%. We have said that we start to see OCG, of course, confirming the growth we have seen even compared to 2019, Education turning to positive as well in March, as well as our International segment. What we see now in April, well basically is concerning the trends we have seen as a gradual improvement. And usually, is a way we look at it, as you mentioned, with the inflection point is basically also comparing ourselves with 2019. And we continue to see progress versus the pre-COVID type of revenue we had before.

Got it. Well, thanks for taking my questions and for all the details and insights in the prepared remarks. Have a great day, guys.

Thanks, Josh.

Thank you, Josh.

Thank you. Our next question comes from Kevin Steinke with Barrington Research. Please go ahead.

Hey, good morning.

Good morning, Kevin.

Good morning.

I wanted to follow-up on your organic growth outlook and the increase to a 10% to 12% expected rate in 2021 versus prior outlook of 7% to 11%. Just any more color you can provide on what’s giving you that confidence to increase the organic growth outlook just one quarter into the year?

Yes, I would say, first, it’s a reflection of what we have seen in Q1 revenue-wise. It’s also what we have seen and we have mentioning as the March exit rate, what we see in April and the beginning of May. So that’s basically taking into account all these type of information. And you might have seen that we have narrowed down a little bit the range, which is also because we have much better visibility on what is going on overall. I would say, if you want – I mean, I can expand beyond Education that we have discussed. Internationally, we anticipate slow but continuous improvements. That our Q1 revenue, constant currency, excluding Brazil, because you might remember we have sold our Brazil operation in August of last year. We are, for the entire quarter, up 2.4% but we stay cautious for International, because of the uncertainties around the pandemic-related economic environment. We are going to continue to monitor margin and cost and invest in selected markets in International, but we believe that we need to be a little bit cautious based on the external type of environment. OCG, we expect very positive momentum to continue, thanks to healthy pipeline, new wins. And we have said today, we are already exceeding our 2019 level of revenue by 6.4% in Q1. SETs, we expect continued momentum in science, outcome-based and fee business. Our fee business was up 41% in Q1, which is a good sign of the momentum we have. And we are already also crossing the inflection point because our OCG business was up also in Q1, 31% up versus Q1 of 2019, right, which is a good sign that we are moving pretty fast on that. We believe that we are going to see some continuous improvements in Technology & Telecoms; a little bit slow improvements in Engineering due to oil and gas, that is getting better, but still little bit challenging. And overall, we should reach our inflection point in SET probably late Q3, early Q4 of the current year. P&I, we expect continued growth momentum in our outcome-based business. We were still growing at about 7.6% in Q1 2021, so that’s good. And our staffing fees, because interestingly, like you said, our fee business in P&I is up 60% in Q1 2020 – 2021, sorry, and we expect some acceleration in our P&I staffing in the second half of the year, probably mainly driven by standard delivery model. But probably Peter can add a little bit more color, specifically maybe on P&I.

Yes, Kevin. Well, first I’ll talk about all the businesses. I think the encouraging signs regarding existing customer renewals as well as the acquisition of new clients across the board, is adding to our confidence. I think in Professional & Industrial, we are pleased to see that the demand has returned to pre-pandemic levels. And as noted, we think it’s going to accelerate throughout the year, and some of the technology issues that I mentioned earlier, as well as talent supply, we believe is going to improve, particularly in the second half of the year. And large customers continue to drive the recovery and we expect that to continue as well in the second half of the year.

Okay, that’s helpful. It’s a nice color at the segment level, so appreciate that. Just circling back on Softworld, maybe can you just talk a little bit more about how that deal came together? And obviously, there are a lot of attractive characteristics about Softworld for you. But from their perspective, what made it attractive for them to combine with a larger organization like Kelly?

Well, I think the growth opportunities that were very evident from the start when we began our discussions. As I noted earlier, all customers need technology support and when you consider the breadth of customers that Kelly has, and the fact – as noted earlier – that there was not a lot of overlap in our – the customers that we support. So I think the opportunity to grow in life sciences, application development and data management, embedded systems development, functional IT services in the Kelly customer base as well as bringing to bear Kelly’s solutions to the Softworld customer base was very attractive. And I think as Olivier mentioned, the willingness of Kelly to provide some organic investment to further accelerate what is already a very historically promising business was attractive to Softworld because they see that as an exciting opportunity to participate in that investment and growth.

Makes sense. In terms of the organic investments in Softworld, are we talking about more recruiters headcount, any other types of investments you might be making there?

Yes. It’s primarily people, Kevin, sales and recruiters, and we think that the track record of Softworld in delivering year-over-year impressive growth warrants, the investment of our capital there.

Great. So with the Softworld acquisition, you’ve talked about for a while wanting to get more scale in the IT staffing space. Do you think this acquisition gives you the necessary scale in that area or do you see opportunities to continue to add in IT staffing and solutions?

Well, it certainly improved significantly our scale in technology. It is one of the fastest growing and largest staffing markets. And when you couple that with Kelly’s solutions in outcome-based as well as Softworld’s solutions-based business, we think there is considerable opportunity. And if there are attractive opportunities that would complement the combination of Softworld and Kelly’s IT platforms and they were able to – we’re able to acquire them at the high hurdle rate that Olivier mentioned earlier, we would certainly consider it.

Great. You talked about some of the external factors that you think will increase talent supply as we move forward. I think you’ve also talked about internal initiatives to attract more talents. Maybe any update on that and some of the things you’re doing to attract a talent? I was thinking specifically about P&I but if you want to touch on the other segments as well, that would be great?

Well, I think there are both external and internal factors that are contributing to the talent supply in – especially in the lower wage P&I space. The external factors I think are fairly well known with not only the concerns about the pandemic, but also the number of workers that are on the sidelines due to either care-giving or schooling responsibilities created by the pandemic. There is – it’s hard to quantify the depressive effect of the stimulus packages and whether or not that’s contributing to people staying on the sidelines. I know that’s a sort of a politically charged issue. But there is probably some impact that’s happening. The internal issues, we think, we’ve identified as I mentioned, we deployed successfully our new front office. The way that technology gets deployed requires us to continue to rely on legacy Kelly systems for a period of time, and I think the pandemic demand last year – the depressed the pandemic demand, may have masked some of those inefficiencies. And as demand came back significantly in late Q4 and early in – well, in Q1, those inefficiencies to revealed themselves and we’re taking action to address them. We’ve doubled down on our efforts doing – recruit more recruiters because of the demand. And we’re also spending time with the existing recruiter base to ensure that the adoption of the new front office technology is optimized.

Okay. Well, thanks for all the insights. That’s all I had for now. Thanks.

Thanks, Kevin.

Thank you, Kevin.

Thank you. [Operator Instructions] Our next question comes from Joe Gomes with NOBLE Capital.

Good morning, Joe.

Thanks for taking my question. So I kind of wanted to circle back on the Education segment here. You mentioned in answering one of the other questions that you’ve had significant new wins over the last 9 months, one of the best in Kelly’s history. I was wondering if you would care to kind of quantify what that statement means – part A. And part B on the Education segment. You’ve seen a lot of reports at least of teachers retiring partly due to the pandemic and the conditions. How does that either positively or negatively impact Kelly’s Education segment?

Yes. Good morning, Joe. I’m going to let Olivier refresh the financial numbers that he went through earlier. But we think the – well, you’re correct in the – that there are a large number of instructors that are leaving the education work force. And at the same time, we believe that there is going to be an increased demand for instructors at all levels. And as well as the support services that schools will need in a post-pandemic environment, when you think about cleaning services, how often school or classrooms will have to be cleaned; when you think about the spacing of students in classrooms, the number of instructors that are going to be needed not only to refresh the number of teachers that have retired, but also to deal with just the increased demand in instructors. We think Kelly is very well positioned. We have a – we are the leading provider of substitute teachers. We have the extremely well recognized brand in this space, and we believe that school districts – more school districts will see the value of outsourcing their talent acquisition needs to a company like Kelly. We think that is part of the reason why we saw such significant new wins in the past 9 months. And they are across the board, meaning that is not small school districts. It’s all school districts, medium, large and small school districts that are seeing the value of using Kelly to help them support their need for instructors. And we think there will be additional revenue streams created as a result of the pandemic, as I mentioned in custodial and other support services, but also in tutoring. We think that is a going to be a growth area. The federal government is throwing its way behind tutoring with federal funding for – between year tutoring, as well as during the year tutoring. And school districts are looking for help to support them in that regard. So we feel bullish about the Education space, which is why we have been making additional investments. And Olivier, do want to comment on that?

I mean, just to summarize what I’ve said before. I mean, we think there is a very positive momentum in Education, and we haven’t crossed the inflection points, meaning revenue exceeding 2019 of pre-COVID second half of this year, which I think is a sign that we feel that we are well positioned to capture growth in Education. And I think Q1 is the proof of that. I mean, we are rapidly recovering. So I assume we are still very positive and optimistic about Education, starting with the months to come.

Okay. Thank you for that. And then looking at the – your release today on the segment level, on the P&I segment, that you showing the revenue from services was down 5.3%. The gross profit in that segment was down 10.7% year-over-year, which was a much larger drop on the gross profit side than in any of the other segment that saw declining revenues. Just wondering what might be behind the bigger than gross profit drop on the revenue drop in the P&I segment?

Yes. I mean, I will briefly talk about that. So when you look at P&I, basically the staffing piece, the margin is basically very much stable versus a year ago. And we start to see, of course, some positive dynamics in our staffing business in P&I, thanks to the fee business. That’s again is going over 60% in Q1, and we believe that a good momentum is going to continue. So that’s, of course, helping us to get our margin pretty much aligned with where it was a year ago. On the outcome-based business, and specifically on the call center business, basically as we – I did mention briefly during our prepared remarks, we’ve got in our call center business is one specific customer, lot of specific additional training that has – there is a non-billable training that is pushing our margin little bit down. And that’s basically almost the majority of the reason why P&I margin is down by 100 basis points versus last year. And these basically actionable unusual training are usually happening, not to this extent. But are good sign that basically it’s because we need to get these people trying for ramp-up in demand in the next coming months for the revenue is going to come. We have this kind of preliminary non-billable training investment. But again, I think the next few months are going to show basically ramp-up in activity in this area, which of course is billable path of it.

Okay, thanks for that. And just to circle back to Softworld for one second here kind of a different approach, you mentioned that you are utilizing your existing cash balances, or you did utilize to pay for the cost of the acquisition?

Yes, I mean we…

Towards the end of this year you still do have to repay the roughly $60 million of tax deferrals under the CARES Act. So do you think you’ll be generating enough cash over the course of year to pay that or at that point in time maybe you have to dip into some of their credit facilities?

Yes. First of all, yes, we did pay the Softworld transaction entirely in cash. And as you have seen that our cash position at the end of Q1 was almost $140 million, right? So now what is happening is basically, we have to continue to fund our working capital, right? Because as the business is moving up, our working capital is going to continue to progressively moving up, right. The second point is you’re right to say that half of the payroll tax deferral, which was about $117 million we need to pay half before the end of this year and the other half at the end of next year. So maybe if you combine that with our growing working capital requirements, that we are going to have a little bit of leverage during the year, especially at Q1 with this half of the CARES Act I was mentioning. But it’s going to be still a very low leverage versus the liquidity and the debt capacity that we are still completely intact.

Okay. Thanks for that. I appreciate it. One last one for me, I know it’s relatively minor and everything, the Kenzie Academy write-off, when you guys made the announcement of that investment in November of ‘18, was a lot of fanfare there. Training in the tech space was one of the goals. If you could just, Peter, kind of give us what happened there?

Yes. Thanks, Joe. So Kenzie Academy business model was we thought a excellent complement to bringing more IT talent into the workforce. The model changed a number of times in the course of our relationship. And that’s as start-ups often do to try to figure out exactly the sweet spot. I think Kenzie was – potentially had some traction but the pandemic really took its toll on the ability to attract new cohorts, new classes. And they just recognize that the amount of investment to sort of stabilize and regain that traction was more than they anticipated and more than their investors anticipated, and they struck a deal with a education university and that’s going to be the future. It’s going to be housed within a university that can spread the risk over a lot more platforms than Kenzie Academy could on its own. Yes. I’d just say when we make investments of that type, we recognize that there is potentially – we won’t make those investments unless we are excited about the value proposition and hence the fanfare, but we also recognize that there are going to be risks in terms of the unique or novel business models that entrepreneurs bring to the fore.

Right, right. I understand that. Thanks for the update. And again, thanks for taking my questions.

Yes. Good to talk to you, Joe.

Thank you, Joe.

Thank you. There are no remaining questions in the queue. Please continue.

Well, Tony, if there are no further questions, I think we can probably end the call. Thank you.

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