Kelly Services, Inc.

Good morning and welcome to Kelly Services' fourth quarter and full year 2021 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 fourth quarter webcast presentation is also available on Kelly's website for this morning's call. I will now 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' fourth quarter conference call. With me today is Olivier Thiraud, 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 and 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. References to organic growth in our discussion today exclude the results of our Q2 2021 acquisition of softwares. We have also provided the slide deck that we are using on today's call on our website. Now, back to you, Peter.

Thanks, Olivier. Before we turn to Kelly's fourth quarter performance, I'd like to address this morning's announcement regarding a significant and bold step in our transformation as a specialty talent solutions provider. Today, we announced transactions that unlock more than $250 million after-tax dollars that we can strategically redeploy to accelerate our growth in high margin, high growth specialties. We're accomplishing this through an agreement with our valued partner, Persol, to unwind our cross ownership and reduce our ownership interest in our APAC joint venture, Persol Kelly. As we've noted in prior calls and in investor materials, Neither our shareholding in Persol nor ownership in the JV contribute any EBITDA to our financial results. Monetizing our investments in Persol and Persol Kelly provides us with an unprecedented amount of capital to invest in our specialty growth strategy. To give you a sense of the scope of these actions, between cash from the APAC transactions and our existing borrowing capacity, we now have more than a half billion dollars of available capital. These are the kind of resources we need to pursue high-margin, high-growth businesses that drive quantitative and qualitative improvement in our results. At the same time, while continuing to make long-term structural improvements in our existing businesses, improvements that are demonstrably contributing to our multi-year GP rate improvements. While we are unwinding our interest in Persol and Persol Kelly, we remain unequivocally committed to our OCG practice in APAC. Our OCG business in APAC has enjoyed exceptional, profitable growth in the last several years, and we will continue to relentlessly support our regional and global customers in the APAC region that require best-in-class, MSP, RPO, and other leading talent solutions. The Persol Kelly JV has enjoyed its own considerable success since its formation, and it will continue to partner with Kelly OCG as a premier staffing supplier across the region. And its parent company, Persol, will continue to be a valued partner to Kelly, and Persol's and Kelly's senior leaders, including myself, will continue to meet regularly as part of this enduring business relationship. Our transformative decisions to monetize non-core assets in APAC follow a year of solid progress in Kelly's overall growth journey. It's well known that 2021 had its share of headwinds, including supply chain disruptions and ongoing pressures on talent supply. Yet despite these challenges, we made our largest acquisition ever with the purchase of Softworld. We increased our GP rate through structural improvements in our businesses. Our P&I and education segments put the worst of the pandemic behind them. Our SET business drove double-digit growth in outcome-based business, science, and soft world with noticeable acceleration in technology and telecom. Our international segment continued its recovery by focusing on scaling local and regional specialties, and OCG delivered double-digit growth again and proved its ability to leverage. We're pleased that we made continued strategic progress in 2021. We ended the year better than we began it. And now, with tremendous capital at our disposal after the APAC transactions, we are well positioned to create shareholder value in the years ahead. I'll turn it over to Olivier now for more details on Kelly's Q4 results.

Thank you, Peter. So, you know, I will review our most recent results, but I will come back to our APAC transactions in more detail just after the 2022 outlook. Before I review the current period results, one important point related to the prior year. 2022 was a 53-week fiscal year for Kelly, and our Q4 2020 results include an extra week of operating activity. Where the impact is material to understand the underlying business trend, I will provide the impact of the additional week in 2020 in our year-over-year comparisons. Now looking at the fourth quarter of 2021, revenue total $1.3 billion, up 0.7% from the prior year, including 40 basis points of unfavorable currency impact. Excluding the impact of the extra week, revenues were up 6% on a constant currency basis, as the impact of the extra week unfavorably impacts the comparison by about 500 basis points. Included in that increase are 290 basis points of favorable impact from our acquisition of Softworld, as well as the 210 basis points unfavorable impact resulting from the changes in the Mexican staffing market legislation. We also monitor our revenue recovery rate, which compares current period results to the corresponding pre-COVID-19 period on a constant currency basis. Our Q4 organic revenue recovery rate is 91%, consistent with Q3. For the fourth quarter, our education segment continues to report the highest year-over-year growth rate of 44%, as the comparable 2020 period was impacted by significant school closures. For the quarter, education's recovery rate was 97%, which was lower than the Q3 rate. Although we have strong demand from the return to in-person learning, high levels of full-time teacher vacancies, and new customer wins, our growth has been constrained by a more challenging than anticipated talent market. Especially in school districts, which restrict vaccine mandates for instructors. Our education business continues to work to ensure that we secure the supply of talent needed to meet our customers' increasing demand, although it's likely this headwind will continue into early 2022. And as we have seen with the recent Omicron surge, schools may modify their instructional delivery in response to changing local conditions, and volatility in demand in the near term is still possible. Our OCG segment continues to perform well and delivered another quarter of year-over-year revenue growth, with revenue up 9% over last year and up 16%, excluding the extra week in 2020. OCG revenue has exceeded pre-COVID levels for the past five quarters and is now up 17% in Q4 versus same period in 2019. OCG delivered year-over-year growth in all products, with notable growth in RPO as demand for this product reflects our customers' adjustment to the impact of a challenging talent market. Revenue in our professional and industrial segment declined 12% in the quarter, or approximately 7% when accounting for the impact from the XY week in 2020. Our results in this segment continue to reflect the impact of supply chain disruptions and the Omicron variant, which have resulted in uncertainty across a broad portion of manufacturing and the challenges to fulfill customer demand in the current talent environment. As a result, we have experienced lower hours volume in our staffing product, which has been partially offset by higher bill rates as customers understand the upward pressure on wages in the current talent market. The net impact of this dynamic was an 11% year-over-year decrease in staffing revenue in the quarter. And after performing well and delivering revenue growth earlier in the COVID-19 crisis, our outcome-based business experienced an 18% year-over-year decline in revenue in the quarter as contraction in demand from our call center business more than offset growth in other specialties. Revenue declined 5.4% on a constant currency basis in our international segment. The year-over-year revenue growth trend was negatively impacted by the additional week in the comparable 2020 period, as well as by results in Mexico due to the impact of legislation enacted earlier this year, which placed restrictions on the staffing industry. Revenue growth in the EMEA region was positive up 4.2% in constant currency, and up 8.8% when excluding the extra week in the comparable 2020 period. And the region delivered a recovery rate of 99% in the fourth quarter. And finally, the set segment where the results from our acquisition of Softworld is reported, revenue was up 15.5% on a reported basis, 2.3% on an organic basis, and 8.1% on an organic basis when excluding the impact of the additional week in 2020. Organic revenue trends continue to track with the customer serve. Recovering demand in telecommunications continued, and demand for outcome-based solutions remained strong. Across all segments, we are well prepared for meeting clients' changing talent needs as permanent placement fees were up 95% year-over-year and up 7% sequentially. We continue to see significant increase in activity in P&I, SET, and education, which includes our recent acquisition of Greenwood Asher. Fees in the international segment were also up over the pandemic-impacted prior year, but were down sequentially, reflecting the more cautious environment in Europe. Overall, placement fees for the quarter now exceed pre-COVID levels at up 58% compared to the same period in 2019. Overall gross profit was up 9.8%. Our gross profit rate was 19.7% compared to 18.1% in the fourth quarter of the prior year. Our year-over-year GP rate improvement of 160 basis points was driven by a combination of higher perm fees, which contributed 80 base points, and from an additional 50 base points as a result of the acquisition of software, which generates higher margins. These factors were coupled with favorable business mix and lower employee-related costs. While these factors impacted our segments in varying degrees, every segment improved GP rate in the fourth quarter. SG&E expenses were up 7.5% year-over-year on a reported basis. Expenses in both years include approximately $4 million in restructuring charges. Expenses for the fourth quarter of 2021 include intangible amortization and other operating expenses of Softworld, which added 460 basis points to our year-over-year expense growth rate. The expense growth trend is also impacted by the additional week in the fourth quarter of 2020. On an adjusted basis, fourth quarter 2021 organic expenses grew by 6.6% year-over-year. The increase in expenses reflects higher performance-based incentive compensation expenses and continued investment in organic growth initiatives. As I mentioned, our Q4 2021 results include research and charges of 4.1 million primarily recorded as a corporate expense. This was within the range we had expected when we delivered our Q3 earnings report, and the savings will exceed our previous expectation of 10 million on an annual basis beginning in 2022. Our reported earnings for operations for the fourth quarter were 15.3 million compared to 9.5 million in Q4 2020. Included in each period is approximately 4 million of restructuring charges. So on an adjusted basis, Q4 2021 earnings from operations improved 40% year over year. Included in our reported Q4 results are the operating earnings of Softworld of 2.2 million, inclusive of intangible asset amortization. And also to quickly comment on our results for the full year. For the year 2021, earnings from operations, as reported, were $48.6 million, compared to a loss of $93.6 million in 2020. On a lack-for-lack basis, excluding restructuring charges in 2021 and a goodwill impairment charge, a charge related to a customer dispute, restructuring charges, and a gain on sale of assets in 2020, Adjusted earnings from operation in 2021 were 52.6 million compared to 44.3 million in 2020, an improvement of 19%. The improvement reflects the impact of a recovery in demand as the economy improved from crisis-driven lows and the challenge of fulfilling customer demand in the current talent market. Now turning back to Q4. Kelly's earnings before tax also include the unrealized gains and losses on our equity investment in personal holdings. For the quarter, we recognize a $50 million pre-tax gain on our personal common stock compared to a $14.8 million pre-tax gain in the prior year. These non-cash gains related to changes in the fair value of the investment are recognized below earnings for operations as a separate line item. Also reported below earnings from operations in the fourth quarter of 2021, we have realized a $19 million one-time gain related to cash proceeds received from a settlement of a claim on a representation and warranty insurance policy purchased by Kelly in connection with the acquisition of Softworld. Income tax expense for the fourth quarter was $16.1 million compared with our 2020 earnings. income tax expense of $2.5 million. Our effective tax rate for the quarter was 19%. And finally, reported earnings per share for the fourth quarter of 2021 was $1.80 per share compared to $0.59 per share in 2020. The increase in earnings per share resulted primarily from higher gains on per sole share and the gain on insurance settlement net of tax. Adjusting For the personal gains, the gain on insurance settlement and restructuring charges in both periods, Q4 2021 EPS was $0.65 compared to $0.41 per share in Q4 2020, up 59%. Now moving to the balance sheet at the end of the year. Cash totaled $112.7 million compared to $223 million a year ago. We had no debt consistent with debt at nearly zero at year-end 2020. The reduction in our cash balance reflects the $213 million cash paid, net of cash received, that was used to fund the acquisition of Softworld, partially offset by free cash flow generation. Accounts receivable was $1.4 billion, an increased 12% year-over-year, reflecting our year-over-year increase in revenue, as well as billings to MSP customers reported on a net basis. Global DSO was 60 to 81. Free cash flows in 2021 includes approximately 30 million of cash outflows used to repay federal payroll tax balances, which we deferred in 2020 under the CARES Act. In 2020, we generated 171 million of free cash flows, primarily due to the ability to defer certain payroll tax payments under the CARES Act, partially offset by the impact of higher day sales outstanding. And to clarify, in late December of 2021, there was a change in the regulations related to the repayment timing of the deferred payroll taxes, which allows companies to defer payments to January the 3rd, 2022, and January the 3rd, 2023. We paid approximately $30 million ahead of of the required January the 3rd, 2022 deadline, which is reflected in our 2021 cash flows. We have paid $29 million on January the 3rd, 2022, and expect to pay the remaining balance on January the 3rd, 2023. And now, back to you, Peter.

Thanks for those details, Olivier. As we enter 2022, we're encouraged by increased demand for our services reflected in our healthy sales pipelines and new customer wins across all five of our segments. While talent shortages may continue to challenge this growing demand, we expect talent shortages to subside over time, and we are encouraged by recent improvements in the labor force participation rate and the relaxation of COVID-induced restrictions that constrain the availability of talent. In the year ahead, we expect each of our specialty business units to deliver strategic contributions to our performance. Our P&I segment will focus on growing higher margin outcome-based specialties in 2022, and we will adopt new and updated technologies to create greater efficiencies in staffing, an approach that should lead to improving productivity and higher gross margin. We expect SET to deliver meaningful returns on our 2021 inorganic and organic investments and Softworld should continue to deliver double-digit growth in the segment. Education will continue to capture K-12 growth in 2022 and further expand its adjacencies, balancing investments in future growth with a need to effectively manage the segment's cost base. In OCG, we expect to see continued double-digit growth and strong leverage as the segment continues to deliver cutting-edge market insights, tech-enabled solutions, and workforce strategies that guide clients through the recovery. In addition to robust MSP growth, we intend to invest in our fast-growing RPO business. And in our international segment, we expect continued growth in regional and local specialties as our teams leverage Kelly's infrastructure to drive increased efficiency. The growth strategies in our five business segments, enabled by our focused operating model, together with our aggressive and smart use of capital, are designed to drive organic and inorganic growth for Kelly in 2022 and beyond, delivering results that we expect will create new shareholder value. To share more about what we expect from the year ahead, I'll now welcome back Olivier.

Thank you, Peter. As we reflect on the 2021 results and look ahead, we expect a continuation of the current trend of steady increases in demand, as well as continuation of the current level of talent mismatch, putting some pressure on fulfillment. We also believe that recent trends in inflation and the upward pressure on wages at all skill levels will continue into 2022. For the full year, we expect revenue to be up 4.5% to 5.5% in nominal currency. Our expectations reflect that there are no material changes in business or governmental restrictions related to COVID-19, demand continues to improve, and that the steps we are taking to address the current talent mismatch will expand the supply of talent available to us. Even with those efforts, education will continue to be challenged in early 2022 As talent supply remains constrained, an international revenue growth rate will be negatively impacted by the Mexico legislation change until we anniversary the impact in the second half of the year. In addition, we expect that changes in the workforce strategies of a few large customers could potentially create some headwinds in P&I and SET. And finally, we expect that our targeted growth initiatives will begin to provide measurable acceleration of organic revenue growth. We expect our GP rate to be about 19.4%. Our continued structural improvements in GP rate expectations reflect continued growth in our seed-based business, continued shift in mix to higher margin specialties, and a more gradual pace of growth in our lower margin specialties. We continue to take steps to drive meaningful cost savings and provide additional leverage. Our restructuring initiative in Q4 2021 is a continuation of those efforts. In addition, we'll continue to focus on productivity improvements in each business unit as we move into 2022. As discussed in the past, we'll continue to make targeted investments in organic growth initiatives to accelerate our top-line growth and to deliver against our digital roadmap and technology strategy. So all in, we expect SG&E expense to be up 4.5 to 5.5% on an adjusted basis. As we execute on our organic and inorganic strategy, we are utilizing adjusted EBITDA and adjusted EBITDA margin as additional measures of our progress in delivering profitable growth. Based on our outlook for 2021, We expect adjusted organic EBITDA margin to improve 50 to 70 basis points from the 1.7% adjusted EBITDA margin delivered in 2021. And finally, we expect an effective income tax rate in the high teens, which includes the impact of the work opportunity tax credit, which has been extended through 2025. As we have discussed, our board's approval of the transactions to monetize investment in the Asia-Pacific region will have a significant impact on our balance sheet and cash flows in Q1 of 2022 and beyond. By acting now, we lock in substantial market appreciation on the personal common shares and selling most of our stake in the personal KDJV allows us to realize the significant value that we have created with the formation of the GenVenture and has continued to build with the JV expansion in the region. And as Peter noted, we'll continue to focus on growing our profitable OCG business in APAC. We expect that the sale of most of our investment in the Persol Collegiate Venture, representing a 46.5% interest in the JV, will generate cash proceeds of $114 million net of taxes payable. Based on recent market prices, the sale of our investment in the common share of personal holdings is expected to generate approximately $169 million in cash, net of expected transaction costs, and income taxes due. And to complete the unwinding of our cross-shareholding arrangement, we'll pay $27 million to repurchase the Class A and Class B common shares owned by personal holdings. All in, These transactions, which we expect to complete this month, are expected to generate approximately $255 million of cash on a net basis. With no debts and nearly $300 million of available borrowing capacity, we'll have more than $500 million of available capital, which combined with our proven ability to generate free cash flow, positions us to accelerate our strategic transformation and build additional shareholder value moving forward. And now back to you, Peter.

Thank you, Olivier. With the worst of the pandemic behind us and a sustainable recovery ahead, we're heralding 2022 as a year of transformative progress. As companies and talent lean into new growth opportunities, they're turning to Kelly for what's next. Sustained fee growth points toward our customers' investments in their future workforces and increased demand in our staffing and outsourcing businesses reflects a market eager for the specialty solutions we provide. The recovery may not have followed the path we predicted two years ago, but we continue to make real progress on the path we do control, Kelly's specialty growth strategy. We announced this strategy two years ago and have continued to make good on its promises. We said we would increase Kelly's focus and we have since launched an operating model with five clearly defined specialties led by experienced and committed business unit leaders laser-focused on driving growth within their specialty. We said we would more aggressively pursue inorganic growth, and we have since made two acquisitions in our education specialty and the company's largest ever acquisition with a purchase of Softworld in our high-margin set specialty. We said we would drive organic growth, and we have since launched innovative new products such as K-12 tutoring, skilled professional solutions, and Helix UX while continuing to provide exceptional support of our customers and talent during an unprecedented global crisis. We said we would take steps to unlock capital, and we have since sold and leased back our headquarters properties and sold our Brazil staffing operations. And with today's announcement regarding Persol and the Persol Kelly JV, Kelly proves it's gearing up for even more meaningful change in 2022 and beyond, unlocking significant capital to invest in our chosen specialties, drive growth where we know we can win, and create additional value for our shareholders. We believe this will be an extraordinary year for all the right reasons, a year where the world emerges from the pandemic's grip and Kelly enters a bold new era of growth. It's an exciting journey that we're honored to share with all of our stakeholders. We're thankful to our employees for their agility and commitment to fulfilling our noble purpose every day, to our talent for entrusting us with the next steps in their careers, to our clients and suppliers for their partnership and collaboration, to our board of directors for their support of our aggressive growth strategy and to our shareholders for their confidence that Kelly's best days lie ahead. John, you can now open the call to questions.

Certainly. And ladies and gentlemen, if you wish to ask a question, please press 1, then 0 on your telephone keypad. You may withdraw your question at any time by repeating the 1-0 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, we press 1, then 0 at this time. First we'll line up John Healy with North Coast Research. Please go ahead.

Thank you and congrats on the close of the year and the milestone of getting closer to monetizing these unique assets you have. Just wanted to spend a minute on that transaction. I know you've talked about the $255 million of incremental cash or capital to fund the transformation. I just wanted to make sure that is net of also reducing the share count by call it a million and a half shares. And that would be incremental capital relative to the 113 million or so that you had on your balance sheet at year end. Additionally, you know, you can talk about the transformation, but given where the stock price is, are you contemplating, you know, potentially maybe returning some of that capital in terms of share shrinkage as we look at 2022?

Good morning, John. It's Olivier. So I'm going to start and Peter is going to follow up. If you think about the approximately $255 million, it is net of tax, sorry, number one, and number two, net of the $27 million of buyback that I was explaining during the call. So it's really basically the addition of the 46.5% of the JV, which is about $114 million net of tax, an estimation of $169 million net proceeds coming from the block trade that we are initiating now to sell our personal shares. And then deducted from those two numbers is the $27 million buyback that I was referring to. Peter, do you want to add something?

Good morning, John, and thank you for the comments. So with discussions with our board of directors, obviously we spend a lot of time talking about capital allocation. We are, as part of this transaction, buying back $27.2 million of stock that won't affect the liquidity of the shares due to the fact that it was owned by Persol. But as I said two years ago on this call, we believe, I believe that the best use of our capital is to add to our organic growth strategy with inorganic growth through finding high-quality, attractive targets like Softworld that we don't overpay for, but that add substantially to our margin profile and to our growth profile. And that's what we intend to do, subject to ongoing discussions with our board around capital allocation.

And we are going to continue, as we shared, to be, you know... extremely mindful on, of course, the strategic fit, but also making sure that we pay the right price. You know that we are using, amongst other things, one KPI, which is internal rate of return. The bar we have set, as you know, at 25% is pretty high to ensure that, of course, there is a very nice and good strategic fit, but also we are mindful about paying the right price. And I think, John, we have a unique opportunity between this $250 million plus of cash combined with, you know, possible balance sheet leverage up to, I would say, 2.2 times APDA, so about another $250 million to put something like half a billion on the table to really accelerate our inorganic strategy.

Great. And just wanted to ask just... About the solutions business and what you're seeing there, I mean, clearly there's some traction and some success happening there. Any sort of categories or areas within kind of that elevated HR services you provide that are, you know, doing exceptionally well right now, or you feel like that, you know, as we emerge post-pandemic, that there's maybe a more structural case to the growth potential?

I think it's more broad-based, John. I think that companies coming out of the pandemic recognize the benefit of flexibility and also the outsourcing of non-core operations, and that's what we're seeing in terms of the demand. We're also seeing customers adopt our skilled professional solution, which we launched last year in our professional and industrial segment, which basically allows them to the opportunity to address the talent shortage in a less conventional way by using an outcome-based business model. And we're seeing excellent uptake of that solution. And we have, as I mentioned in my remarks, we have expectations for that business to continue to see growth in 2022. Great.

Thank you so much.

Thanks, John. Thanks, John.

Our next question is from Joe Gomes with Noble Capital. Please go ahead.

Good morning, and let me add my congratulations also for the transaction and the end of the year.

Thanks, Joe. Good morning.

Just, you know, you have a goal of growing revenue at 9.5 to 10.5 for the full year. You came in a little bit short of that. Is that kind of a reflection on, you know, the, the, the research in COVID, you know, going in late into the fourth quarter, or was there something else behind that? And, you know, you did a much better job in, in restraining SG&A expenses versus what you were, were, believing should be up on your guidance. I'm just wondering what was behind that all. So did that all have to do with the restructuring benefits that we saw?

Yeah, Joe, I'll let Olivia comment on the SG&A. I think the, you know, the top line was particularly constrained as a result of Omicron in the fourth quarter, you know, even starting in late third quarter, but in particular in the fourth quarter in both our P&I and our education segment. And the absences and other implications for the availability of talent, as well as vaccine mandates and ongoing supply chain disruptions created some headwinds in the fourth quarter that we think in 2022 are the worst is going to be behind us. So that's what I would attribute in terms of the top line. Olivier, comment on the SG&A.

Yeah, so and back to Q4, I would also mention again the impact of the 53rd week. So you need to think about, I mean, exiting 2021 at a revenue growth of about 6%, as I did mention, which is really putting apart this one-time event every four years or so that we have to deal with an additional week. So think about more like 6%, including, of course, soft world. But without soft world, we are, I would say, at about 3.5%. So we know that we need some acceleration. But I would say otherwise, I think it was a pretty OK run rate revenue-wise at the far end of 2021. On the SG&A, yes, you are right. I mean, when you look at, you know, we like to use incremental conversion rate, which is basically saying, well, if we deliver $100 more of GP, how much we push to the bottom line. That has been challenging, I would say, up to Q3 of last year. We have started to show meaningful leverage in Q4. Our so-called ICR, incremental conversion rate, was about 24%, 25%. We think we can do better, especially again in 2022, One of the reasons is basically improvement in, I would say, our cost management, which is a little bit challenging in the recovery phase. The second thing is more on 2022, where we expect to benefit from this Q4 2021 action. The outcome would be savings starting in 2022 in excess of $10 million, and that combined with really focusing on productivity improvements and efficiency in each business unit should continue to provide meaningful improvement in what we call leverage or incremental conversion rate as we move into 2022. Okay.

Thank you for that. And you talk about the challenges in talent acquisition and And I'm just thinking, you know, if you look at, you know, the markets that you're in and the specialty skill set, do you find yourself having a stronger candidate pool relative to your peers in any of these markets?

Well, I think in education, yeah, in education, notwithstanding the challenges of we believe we're best in class in terms of attracting talent in the education space, in the lower classes, You know, lower wage, it is a challenge, and we believe that as healthcare concerns abate with the, you know, putting Omicron behind us, schools gaining additional stabilization so parents can come back to work, wages continue to increase, and they begin to look more attractive to people that may have stayed on the sidelines. We think there is opportunity to increase the talent pool and fill the demand that, as we've indicated for the last few quarters, continues to experience strong growth across all of our five segments.

Okay. I'll throw in one more, if I may, since we're looking at the monetization investments here. How does that acquisition pipeline look today? What are we talking in terms of seeing in valuations? Is it more attractive or has it gotten less attractive over the past six or nine months?

The pipeline remains, I would say, robust. Joe, there was in 2021 probably a spike in properties on the market due to issues around potential tax changes. But the market is solid for identifying attractive properties. As Olivier mentioned earlier, we're not going to overpay. We will walk away from deals if the valuations are beyond what we think is reasonable. But the areas that we're particularly interested in or would be in our science engineering technology and telecom, as reflected in our acquisition of Softworld. In the education space, particularly in adjacencies to our K-12 practice, and also opportunities in our OCG. Our OCG business has demonstrated an ability to leverage, and we think if there are properties that we can use to enhance our MSP or RPO practices, Again, assuming the valuation is appropriate, we would be interested in that area as well.

I would just add, knowing the capital we have available now, if you combine balance sheet leverage and cash, we have half a billion of capital available. So as Peter was mentioning during his prepared remarks, we have an opportunity to go bigger, bolder. So we are looking at properties at the level of software, if not more, because we have the capital now to really go bigger, bolder, and accelerate our transformation, especially around inorganic.

Great. I really look forward to seeing how that all unfolds. I appreciate you guys taking the questions. Thank you.

Thanks, Joe. Thank you, Joe.

Next, we'll go to the line of Kevin Steinke with Barrington Research. Please go ahead.

Good morning. Good morning, Kevin. Good morning. Good morning. I just wanted to ask a little bit more about the top-line growth outlook for 2022. Should we think of Mexico having a meaningful impact on that outlook for 2022? And also, is there any, you know, impact from currency that you're building into that growth guidance?

Yeah, I mean, I would comment, of course, usually we give our guidance, especially on revenue in nominal currency. When you look at Q4, the unfavorable impact was about 40 base points, so I would not see that as a major item in 2022 unless things are changing. Back to your point about Mexico, if you think about Q4 of 2021, where we have started to see for the first time the full impact of this new legislation, it did impact us by about 210 base points on our top line, as mentioned. So it's going to be something that is going to impact us in the quarters to come until we anniversary this change, which did occur in September of 2021. Having said that, when you look at beyond impact on revenue, it is a positive on our margin. It is positive. partly why we have seen some GP rate improvement, especially in Q4 in our international business. So the impact on the gross profit dollar is much less than what we see in the revenue because, of course, it's an opportunity for Kelly, and this is what we do now, to change basically the value proposition we offer to our customers in Mexico and move to higher margin type of solutions, which is what we start to see, and our GP rate over there is moving up. The last thing is that, of course, knowing the reduction in revenue in Mexico, which is about 70% down in Q4, we have also adjusted our cost base to really reflect on the new business model we see now emerging. So I would say significant impact on the revenue, much less of an impact on GP dollar, and I would call it limited impact on the bottom line overall. But yes, on the revenue, I mean, we are going to continue to see that until we anniversary this change in September.

Okay, thanks. And so that was helpful, too, related to the strategy in Mexico. It sounds like it still makes sense to be in that market for you and just you know, move up market to some higher margin solutions. Is that correct? Yes. Okay. And, you know, also thinking about the 2022 outlook, you mentioned, I think, Olivier factoring in some potential customer changes to their workforce strategies within P&I and SETS. I don't know if you could expand on that at all.

Yeah, Kevin, I'll let Olivia comment as well, but essentially in this challenging talent market, companies are modifying their historical use of contingent laborers, for example, and not across the board, but there are customers that, for example, are moving earlier to permanent placement of employees as opposed to using contingent labor because they're concerned about being able to attract and retain talent given their own turnover. Some companies are moving towards converting our employees at a much higher rate than historical practices would be. And those are the kinds of changes due to the existing macro environment that could have an impact on, in particular, you know, top-line revenue if companies are taking that approach. So those are the kinds of changes in business models that we're seeing in some instances. We don't think it's a permanent change. We think it's just a reflection of the existing constraints talent market. And when things get more relaxed, we expect that companies will probably revert back to a more normal practice in terms of use of contingent labor.

Okay, yeah, that's helpful. And with that more aggressive stance by some customers on permanent hiring, I guess, how much does that factor into your gross margin outlook? You called out continued growth and permanent placement, helping out gross margin, and maybe just kind of what are you expecting or how are you thinking about permanent placement growth in 2022? Yeah.

Basically, when you think about the outlook, we project a GDP rate of 19.4%, which is which is about 70 base points up versus 2021. Just for you to know, 21 versus 2020, we are up about 40 base points. But you might remember that in 2020, our GP rate was favorably impacted by about 20 base points coming from wage subsidies. So on the kind of flag for like basis, I would say the 40 base points would be more like 60 base points. Something very similar that we see for 2022. Of course, we don't expect the fees to continue to grow at the type of level we have seen now. You know, I was sharing today that in Q4 our fee business is up 95% versus 2020, in Q4 of 2021, and more than 50% up versus 2019. We know that with the talent shortage, we are going to continue to get good traction in the fee business, but we believe that this dynamic is going to continue, but certainly at a lower pace than what we have seen in 2021. So yes, we plan and we expect some fee business to continue to trend well, but not with the impact we have seen in 2021, certainly.

Okay, that's helpful. Just a couple more here for me. You know, I think you also mentioned in your prepared comments about assuming continued impact of talent supply on the revenue growth outlook for 2022. Is there any way to frame that up in terms of the amount of impact you'd expect on growth? And is that something, it sounded like, you know, you're kind of assuming that that would persist throughout the year.

Well, Kevin, I don't know if persist throughout the year. I mean, we're not, we're not, you know, projecting that it's going to end immediately. As I mentioned earlier, we believe that the worst is behind us. We believe that as healthcare concerns with Omicron are in the rear view mirror with schools being stabilized and open again on a more regular basis with wages increasing. We think the labor force participation rate is likely to continue to progress in the right direction, and that's good news for us because the demand we have, you know, the issue is being able to fill all of the demand, and the more people that are coming back to work, the better. So I don't necessarily foresee that it's going to persist through the year. I think we're going to continue to see gradual improvement throughout the year.

Yeah, probably. And we did mention it today, it's going to be a little bit challenging, especially for education. At the early start of 2022. I think overall, the good news is wage inflation and into for We have seen wage inflation at about 11% in P&I as well as in education. That's very helpful for us to be able to attract talent. It's one of the outcomes of the discussions we have with some customers to help them to realize the new market environment, especially in terms of supply. And interestingly, in P&I, we have seen also wage inflation shy of 8% in Q4. So all that is good for us because inflation is good for us, but also because it's good because it's really helpful to attract talents.

Right. Okay, that makes sense. And just lastly, the 4.5% to 5.5% growth in SG&A you're expecting, what's the base that we should throw that off of the 2021 base? Is it the adjusted number excluding restructuring charges?

Yeah, I would say that's exactly what we are referring to. Usually, it's really excluding or structuring. So if you get there, that would be probably the best base to apply the range we have of four and a half to five and a half.

Great. Thank you. Congratulations on your APAC monetization and looking forward to continued improvement in 2022.

Thanks, Kevin. Thank you, Kevin.

Next, we'll go to Josh Vogel with Sedoti. Please go ahead.

Hey, good morning, Peter and Olivier. And yes, congratulations. Certainly exciting news there with monetizing those APAC investments and Thanks for the helpful slide at the end of the deck, just covering that in more detail. So you covered a lot of the questions I had, and maybe I just want to build off some of the other questions that we just heard. But maybe going a little bit deeper into Q4, when I'm looking at the gross profit bridge, obviously a big tailwind from Perm. I was just curious, how much Was that above forecast when you issued the guidance coming out of Q3? You know, basically just like how much was baked into that guidance number?

Yeah, I would say we were expecting a nice improvement year over year, but a little bit below than what we have seen. Software you have seen is, of course, part of it, 50 base points. This one was fully anticipated. Basically, software did push our margin by about 50 base points since acquisition, so Q2, Q3, Q4. I would say permanent placement, 80 base points. We are usually cautious on that because we have some visibility on permanent placement, but especially at the end of each year, when you start to be close to year-end, Some companies are, you know, sometimes putting a little bit of temporary stop on their recruitment. So usually it's a little bit difficult to forecast, you know, Q4, especially the far end of Q4. We have seen traction better than anticipated, especially at the far end of the year, which I think is good news in terms, you know, how, you know, we can bridge perm placement from, far end of 2021 to 2022. The rest I would say we have always a little bit of movement in what is called employee related costs. It was a little bit more favorable than anticipated in Q4 but you know these are kind of things where usually you can have like quarterly fluctuations But overall, we know, you know, on a more like couple of quarters, usually we anticipate well. Sometimes it's a little bit more difficult to look at just one specific quarter for employee-related costs. So overall, slightly better than anticipated, but I would say not massively different than what we're anticipating.

That's helpful, and certainly a tailwind from the employee-related cost side of it. But you do mention that it was higher – in set, and I was just curious, so that's just kind of like a one-off there?

It's difficult to know because, you know, we have several items, you know, including health care and payroll tax, workers' comp. I would say, yeah, probably some of it is more temporary than anything else, but there are a lot of things at play, so Yeah, I would say the majority of it is probably temporary, although we shall see.

Okay. And you had some comments about wage inflation at P&I and education. So I think you said it was 8% at P&I, 11% in education. Does that mean your bill rates were up by those metrics or were they even better?

I would say when you look at our spread in education and P&I, basically it's the same, meaning we have done a good job on pushing this 11% plus wage inflation to our bill rate. Interestingly, when you look at SET, in SET we have done better, meaning our spread did improve in Q4. meaning our bid rate went up at a faster pace than the roughly 8% wage inflation I was mentioning. And that's basically a good outcome because, as you know, organically said, we are really trying to get our bid rate moving up. And that's a very strong sign that you can see in Q4 where our spread is already moving up in a very interesting way, which is basically further boosting the 8% wage inflation we have seen in Q4 we set.

All right, great. And I know there's a lot of questions already on the revenue guidance outlook you gave, and understanding Mexico will be a little bit of a headwind. But just looking at the other moving parts, what... how much of soft world, because there's an extra quarter of soft world, how much does that add? And then also, what are your expectations about wage inflation and bill rate improvement that's built into that full year outlook?

Yeah, so on soft world, you have seen that basically, if you look at Q4, Southworld did provide about a boost of about 290 base points of growth. So we are going to see that again in Q1 2022 until the anniversary of the acquisition of Southworld on April the 5th. So I would say if you think about the impact, I mean, roughly speaking, very high level, you can take 290 base points divided by four. because it's going to be, you know, sorry, divided by, no, it should be, sorry, I'm making the math as we speak, 290 base points for Q1, but it's going to be only Q1 in 2022, of course. Sorry for the mixed up. For inflation, we usually are more careful than what we see, meaning we, to be clear, we have not forecasted the type of wage inflation I was sharing with you today, like 11% in education, 11% in P&I, we believe that it's going to slow down because of the current environment, the improvement of the supply and demand balance, and also because we believe inflation, also now at 7.5% in January, is going to ease. So usually we are pretty cautious. So I would say we are far below the 11% we are mentioning today. And that may be a surprise, a positive surprise on revenue, especially at the beginning of 2022. But again, usually, Josh, we are cautious on not betting too much on, you know, very, very high type of double-digit wage inflation.

No, understood. Thank you. And just last one, kind of more housekeeping and for the benefit of those of us building out the models here. With the Class A and B repurchase, what share count, what diluted share count should we be using on the income statement? And what does that do to the equity section on the balance sheet?

Yeah, I mean, so it's basically roughly 1.6 million shares I mean, to be precise, I think it's mainly A shares, and the B share is something like 1,470 something, so negligible. So the majority is 1.6 million Israeli A shares. It's about 4% of our outstanding shares. So it's going to have an impact on EPS, but I wouldn't call it major impact when you look at EPS in the future.

Okay, great. Well, thank you again, and congrats on the APAC-related news. Thanks, Josh. Appreciate it.

Thank you, Josh.

And, Mr. Quiggle, we have no further questions in queue at this time.

Okay, John. Thank you very much. Appreciate your support, and I think we can end the call. Thank you, John. Thank you all.

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