Kelly Services Inc (KELYA) Q2 2021 Earnings Call Transcript

Good morning, and welcome to Kelly Services’ Second Quarter Earnings Conference Call. All parties will be in a listen-only mode 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 second quarter webcast presentation is also available on Kelly’s website for this morning call. I would now like to turn the meeting over to your host, Mr. Peter Quigley, President and CEO. Please go ahead.

Thank you, Cynthia. Hello everyone, and welcome to Kelly Services’ second 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. We have no obligation to update the statements made on this call. Please refer to our SEC filings for a description of the risk factors that could influence the company's actual future performance. During the call, certain 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. References to organic growth in our discussion today exclude the results of our Q2 acquisition of Softworld. 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. As expected, the economic recovery continued to gain momentum in the second quarter. The temporary labor market is approaching pre-COVID levels. The unemployment crisis in the U.S. has eased with three months of strong job growth. Demand for staffing and other workforce solutions continues to grow. Kelly entered the recovery with our strategy firmly in place, and we continue to execute against that strategy in the second quarter. We are optimizing our operating model, investing in organic growth and executing against our inorganic growth plans. Our purchase of Softworld in April 2021 was our largest ever acquisition and the latest proof point in our bolder approach to M&A and higher margin disciplines. As you'll see in our results today, Softworld has already begun accelerating Kelly's revenue and GP results illustrating the impact of targeted acquisition can have on the entire organization. Before I hand it off to Olivier to provide details on Kelly's quarterly performance, I'll share a few highlights. All five of our operating segments: Professional and Industrial, Science, Engineering and Technology, Education OCG and International had positive earnings from operations in the second quarter, and all five segments delivered organic year-over-year revenue growth. Education exceeded its pre-pandemic performance for the first time in June. OCG beat its pre-COVID revenue for the third consecutive quarter, International delivered positive sequential revenue gains and SET continues to deliver top line growth both organically and with the acquisition of Softworld inorganically. In our Professional and Industrial segment, we continue to see strong demand for talent in our staffing business while also experiencing constraints on talent supply and other challenges in fulfillment that we described last quarter. Demand in the segment outcome-based business has slowed since the heights it reached during the pandemic as customers' needs have shifted with the economies reopening and supply chain shortages that have temporarily dampened some demand. These businesses lagged our expectations for the quarter. So I'll take a closer look at these dynamics later in the call, along with the actions we're taking to address them. I'll now turn it over to Olivier to share more details about Kelly's Q2 results.

Thank you, Peter. As Peter mentioned, our Q2 results reflect the continuing stabilization in economic activity and resulting improved demand for our services coupled with a challenge to fulfill our customers' demand for talent in the current market. Before I get started reviewing the current financial results, it's important to reflect on the comparable period of last year. Q2 of 2020 presented the deepest impact of the COVID-19 pandemic on our business. Revenues were severely impacted by declines in demand, as businesses were responding to the crisis and the K-12 education system in the U.S. moved to remote learning. As a result, we responded to those steep declines in revenue by quickly enacting temporary expense mitigation actions in the second quarter of 2020, including salary reductions and furloughs for full-time employees as well as cuts to discretionary expenses. As we have discussed on past calls since Q2 of last year, revenues have improved from crisis to even lows, and most temporary expense mitigation actions have been discontinued. Now looking at the second quarter of 2021, revenue totaled $1.3 billion at 29% from the prior year or up 26% in constant currency. In the quarter, our acquisition of Softworld added 310 basis points to our revenue growth rate. All five segments are now reporting organic year-over-year revenue growth as we have the depth of the COVID-19 crisis in the prior year. Overall, Q2 organic revenue is now 11% below pre-COVID-19 levels on a constant currency basis, an improvement of 220 basis points versus the trend we saw in Q1. For the second quarter, our education segment reported the highest year-over-year growth rate as the comparable is impacted by significant school closures in the prior period. We also measure revenue compared to the most recent pre-pandemic period, or Q2 of 2019. Education revenue was at 90% of pre-pandemic revenue for the quarter and in June exceeded its pre-pandemic performance for the first time. Both are good indicators that our education segment will perform well as schools continue to move towards even greater in-person learning in the fall. Our education business is already working to ensure that we will have an adequate talent supply as the competition for talent in this space will be intense. Of course, because schools have continued to modify their functional delivery in response to changing local infection rates, volatility in demand in the near term is still possible. International continued to improve their revenue trends both positive year-over-year and sequential revenue gains in the quarter. Year-over-year revenue growth was driven by recoveries of hours volume in France and Portugal, and continued solid performance in Mexico and Russia. Our OCG segment continues to perform well as a result of new customer wins in all products and growth in our existing customer base primarily in PPO and RPO. OCG has continued to deliver year-over-year revenue growth and is now reporting second consecutive revenue growth, with revenues up 28% over last year. OCG revenue has exceeded pre-COVID levels for the past three quarters and is now up 12% in Q2 versus the same period in 2019. Revenue in our professional and industrial segment continues to reflect increasing demand for talent in the staffing product that has been limited by the current softness in talent supply and resulting talent mismatches, as well as talent fulfillment challenges that Peter will cover later. After performing well and delivering revenue growth throughout the COVID-19 crisis, our outcome-based business in P&I experienced a slight decline in revenue in the quarter, as demand was impacted at several large customers. Finally, the SET segment, where the results from our acquisition of Softworld are being reported, saw revenue increase 21% on a reported basis and 8% on an organic basis. Organic revenue trends continue to track with the customers served in each specialty. Science, where we have many labs, science, and clinical customers have been the strongest, and engineering, which has a concentration in the oil and gas sector, has been slower to recover. Permanent placement fees were up 146% year-over-year and up 16% sequentially. We continue to see significant increases in activity in P&I and SET coupled with fees from our Q4 2020 acquisition of Greenwood/Asher in the education segments. Fees in the International segment were also up over the pandemic impacted prior year but were flat sequentially, reflecting the more cautious environment in Europe amid the uncertainty of further COVID restrictions in the region. Overall, gross profit was up 22.1% or 19.6% on a constant currency basis. Our gross profit rate was 18.4% compared to 19.4% in the second quarter of the prior year. On a year-over-year basis, our GP rate was negatively impacted by unfavorable product mix. As our lower margin staffing business recovers, coupled with approximately 100 basis points of temporary government subsidies in the prior year. P&I has had the largest swing due to the impact of unfavorable product mix between staffing and outcome-based, and the prior year government subsidies were only partially offset by higher term fees. Additionally, the P&I outcome-based business GP rate was negatively impacted as talent attrition and declines in customer demand resulted in lower productivity in certain programs. Our outcome-based business, with its opportunities for higher margins, also comes with higher inherent risk. When talent attrition increases, our client demand and worker productivity decrease, which we experienced in the second quarter. Kelly's revenue and GP are negatively impacted. SG&A expenses were about 21.9% year-over-year on a reported basis or 19.8% in constant currency. Expenses for the second quarter of 2021 include the intangible amortization and other operating expenses of Softworld, which added 460 basis points to our year-over-year expense growth rates. The increase in expenses was linked to a rise in performance-based incentive compensation expenses, as well as the impact of our temporary expense mitigation efforts in the prior year. Expenses in P&I, OCG international, and corporate remain below pre-pandemic levels, while expenses in SET and education reflect investments in resources to get ready for the rise in demand for services in those specialties. Our reported earnings from operations for the second quarter were $13.7 million compared to $11.1 million in Q2, reflecting a 24% increase in our reported Q2 results of the operating earnings of Softworld of $2.3 million, inclusive of intangible assets amortization. For the second consecutive quarter, all operating segments have positive earnings from operations. Now turning back to the company as a whole, Kelly’s earnings before tax also include the unrealized gains and losses on our equity investments in Persol holdings. For the quarter, we recognized a $6.3 million pre-tax gain on our Persol common stock, compared to a $29.6 million tax gain in the prior year. These non-cash gains are recognized below earnings from operations as a separate line item. The income tax benefit for the second quarter was $2.6 million compared with our 2020 income tax expense of $900,000. Our effective tax rate for the quarter was a 13.5% benefit. Our effective tax rate was lower than the U.S. statutory rate, primarily due to the impact of a non-recurring U.K. tax rate change, resulting in greater deferred tax assets and the impact of the work opportunity credit in the U.S. Finally, reported earnings per share for the second quarter of 2021 was $0.60 per share, compared to $1.04 per share in 2020. The decline in earnings per share resulted primarily from lower gains on Persol shares net of tax. Adjusting for the Persol gains, Q2, 2021 EPS was $0.49 compared to $0.51 per share in Q2, 2020. Now moving to the balance sheets, we acquired Softworld on April 5th, and the impact of the Softworld acquisition is reflected in our Q2 balance sheet. As of quarter end, cash totaled $64 million compared to $223 million at year-end 2020 and $216 million a year ago. That was nearly zero consistent with year-end 2020 and a year ago. Again, we ended the quarter with no borrowings in our U.S. credit facility. The reduction in our cash balance reflects the $219 million cash paid, net of cash received, that was used to fund the acquisition of Softworld at the beginning of the quarter. Accounts receivable was $1.4 million and increased 26% year-over-year, reflecting our year-over-year increase in revenue. Global DSO was 60 days, a decrease of 1 day over the same period in 2020 and the decline of 4 days from year-end 2020. The decrease since year-end reflects the collection of receivables from several large customers carrying higher balances at year-end due to customer-driven administrative issues. Year-to-date, we generated $43 million of free cash flow. Free cash flow last year reflected the rapid decline in working capital as revenues declined on lower customer demand in the early stage of the COVID-19 pandemic. As I mentioned above, we completed the Softworld acquisition in Q2 and were able to fund the entire acquisition with existing cash balances. Our cash balances are now back in line with levels needed to manage daily liquidity. While the Softworld acquisition didn't 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. We're encouraged by the economic momentum and increased demand for our services as the recovery accelerates. Our OCG and education segments are performing especially well, and SET and International are delivering solid year-over-year growth. We're also encouraged by healthy sales pipelines and new customer wins we're capturing in all five segments as businesses ramp up their full-time and temporary hiring. We have and will continue to add sales and recruiting resources as warranted to meet increased demand and support Kelly's growth. As Olivier mentioned, demand in our P&I business exceeds pre-pandemic levels, and we continue to work through the fulfillment challenges we discussed last quarter, as well as taking additional actions in our outcome-based business. On a macro level, the U.S. talent shortages are well documented and publicized. As the economy surges, many jobs are going unfilled across industries. We do expect the supply of P&I talent to improve as schools resume in-person instructional delivery in the fall, and more parents returned to work. However, proper matching of talent requires more than just adequate supply. Businesses need workers with the right skills, and upskilling and retraining are not overnight fixes. The recovery is highlighting a structural skills mismatch that was present before COVID began. Beyond these broader trends, as Olivier noted, in the second quarter, we saw lower demand among large customers in our Kelly Connect and BPO businesses, which impacted revenue and GP for the P&I segment. Additionally, ongoing supply chain challenges, particularly microchips, impacted several large outcome-based customers in the quarter. We believe the current easing of demand is temporary, and we remain confident in outcome-based business as part of our higher margin specialization strategy. We are taking numerous actions to accelerate revenue growth moving forward in P&I. As I mentioned last quarter, we are intensifying efforts to add recruiters in our staffing business, streamlining processes to boost their productivity, and investing in technology to support their work. We have reopened critical branches in high-demand areas where in-person recruiting can increase speed to revenue. In the second quarter, we invested additional sales resources to support increased demand for outcome-based solutions. We implemented price increases where the market and client dynamics warrant additional margin, and we are exiting client relationships where profitability doesn't meet our expectations. We continue to collaborate with clients to set competitive wages and benefits, drop unnecessary job requirements, and invest in re-skilling and up-skilling. Each of these actions is designed to deliver talent to meet the current demand. Though our return to pre-COVID growth across the P&I segment will take longer than anticipated, we remain optimistic about the recovery in Kelly's ability to accelerate growth. I'll now welcome back Olivier to provide additional thoughts on 2021.

Thank you, Peter. As mentioned, we completed the purchase of Softworld at the beginning of the second quarter. We will have nine months of Softworld’s activity reflected in our 2021 results. The impact of Softworld is now included in our outlook. As we saw in the second quarter results, 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. As we reflect on the second quarter results and look forward, our views are for the continuation of the current trend of steady increases in demand as well as a longer than expected continuation of the current level of talent mismatch, putting pressure on fulfillment. For the full year, we expect revenue to be up 11% to 12% in nominal currency, including a 210 basis points to 230 basis points impact from the Softworld acquisition. Our expectation reflects that there are no material changes in business or governmental restrictions related to COVID-19. Demand continues to improve and the steps we are taking to address the current talent mismatch will expand the supply of talent available to us. As noted, our current outlook reflects the slower pace of recovery than we were expecting last quarter, primarily in our lower margin specialties. We expect that the timeline for each operating segment to reach pre-COVID revenue levels will depend on geographies we serve and industry concentration, talent supply, and project mix. OCG has already crossed that milestone, and other segments will do so later in 2021 or in 2022. We will continue to launch targeted growth initiatives that are intended to further accelerate organic revenue growth. We do expect that the international segment's revenue growth rate will be negatively impacted by legislation recently enacted in Mexico, which prohibits temporary staffing not considered specialized services. Although we see opportunities to improve our margin profile by delivering higher margin fees and specialty services, we expect our GP rate to be approximately 18.5%, including a 30 basis point impact from the Softworld acquisition. Our GP rate expectations have improved on both faster growth in our fee-based business and the more gradual pace of growth in our lower margin specialties. We have taken definitive steps and expect to realize sustainable SG&A cost reductions in the past year that are driving meaningful cost savings, partially offsetting the impact of the expiration of our temporary cost actions in place in 2020. The savings will moderate expense growth as revenues increase. We have also started to make selected investments in organic growth initiatives in certain education segments to accelerate our specialty growth. So all in, we expect SG&A expense to be up 9% to 10% on an adjusted basis, including a 250 basis points impact from the Softworld acquisition. Included in our expectations is 80 basis points of non-cash intangible asset amortization from Softworld. As we execute on our acquisition strategy, we have started to utilize EBITDA and EBITDA margin as additional measures of our progress in delivering push double-growth. We have included these measures with our second quarter earnings materials. Finally, we expect an effective income tax rate in the low teens, which includes the impacts of the work opportunity tax credit, which has been extended through 2025. We announced this morning that our Board of Directors has declared the first dividend since the beginning of the COVID-19 crisis. The dividend of $0.05 per share for the quarter is payable on both Class A and Class B common shares. As we expected, the recovery in demand continues and we will continue to review our capital allocation strategy, including our dividend policy with our Board of Directors. Now back to you, Peter.

Thank you, Olivier. As we anniversary the low points of the pandemic, we're gaining new clarity on the recovery's trajectory. We are encouraged by increasing demand in our outsourcing and staffing businesses. Our education business is already accelerating, and so long as K-12 schools are able to conduct in-person instruction, it is poised to resume pre-COVID growth rates later this year. Strong sustained fee growth in our staffing businesses points toward our customers' growing confidence in the future as companies continue to ramp up full-time hiring. As Olivier noted, our Board of Directors approved a dividend for the quarter, reflecting the progress we're making with our specialization and M&A strategies, our confidence in the sustainability of the recovery, and our appreciation of shareholders' patience throughout the crisis. Moving forward, as noted, we expect continued increases in demand will be coupled with continued challenges in talent supply. Our equity at work initiative is helping to address some of these pressures by increasing the available talent pool and tackling systemic barriers that prevent people from connecting with work. As we help clients improve their employer brands and attract talent in a competitive labor market, we’re leveraging the strength of our own brand. Kelly is one of the most recognized brands in the industry, and in 2021 is the most recognized brand in key specialties such as light industrial, MSP, Science, Engineering, Telecom, K-12, and higher education. The Kelly brand continues to evolve as we drive growth from our specialization strategy. We're pursuing M&A opportunities in targeted high-value specialties, as evidenced by our acquisition of Softworld, which is already delivering top and bottom line growth for the enterprise, as well as bringing new synergies to Kelly's existing businesses. At the same time, we are investing in organic growth. For example, we're encouraged by the level of customer interest in our K-12 tutoring solution and the new P&I professional services product that I mentioned last quarter. Kelly is moving forward in the economic recovery with a commitment to our specialization strategy and with confidence in our ability to help customers and talent thrive. Even brighter days lie ahead, and we are ready for them. Cynthia, you can now open the call for questions.

Thank you. Our first question will come from Kevin Steinke with Barrington Research. Your line is open.

Good morning.

Good morning, Kevin.

Good morning, Kevin.

I wanted to first ask about, you mentioned talent attrition and professional and industrial outcome-based. Can you just expand more on what's going on there and how you're addressing that? I guess you're referring specifically to Kelly Connect and BPO with regard to the attrition?

Yes, so thanks for the question, Kevin. Again, good morning. As Olivier mentioned in our outcome-based businesses inside P&I, we take on the responsibility of hiring the employees and delivering the outcome. So when there is increased attrition among the employees that we employ to deliver the services, it has a negative impact on productivity and therefore on our GDP. That's just something characteristic of the outcome-based business. We have plans in place to mitigate those risks. We think it's temporary but it is one of the inherent risks we have when we're in such a competitive talent environment.

Understood. You talked about supply potentially improving schools reopen specifically within professional and industrial? But you also mentioned the ongoing skills mismatch, and what role does Kelly play in upskilling or retraining? How do you work with your clients to address those skills gaps?

Yes, we are regularly working with our customers to identify what skills they need to deliver the services to their business. When you have people coming off the sidelines, that may be coming from different industries, for example, hospitality and leisure, we need to spend some time rescaling and upskilling those individuals to fit, for example, a manufacturing environment. So working with customers to establish short-term training programs to accelerate the way individuals gain skills to fill roles for those particular customers is something that we do, and customers see the benefit of it because they get a more capable source of talent more quickly.

And can you touch a little bit more on the SG&A outlook and the organic investments and maybe just expand on those organic investments specifically within science, engineering, and technology and education specialty?

Yes, Kevin, it's Olivier. I'm going to first give you a little bit of a view on Q2 because I think it's also very useful to understand our full year expectations related to SG&A. If you look at Q2 on a constant currency basis, our SG&A are up 19.8%. Out of that, you've got 460 basis points that are linked to Softworld. Basically, if you include Softworld, we are at about 15% on an organic basis. Then, we've got about out of this 15%, about 800 basis points coming from incentives, which are variable costs. Last year, they were pretty low based on what we have mentioned and what you know. So it's about 800 basis points which is completely variable depending on the performance. Then we have about 300 basis points linked to the investment in SET and education that we are mentioning. And then we have what we call the 'old stuff,' meaning I did mention that, of course, last year, we had salary cuts and furloughs. That's an additional 400 basis points that we have reduced as you know by going through some restructuring actions in Q4 of last year, but there is still, of course, the impact of that, especially in Q2, but also in Q3 versus last year. If you think about the full year, we give basically an outlook of 9% to 10%. It's what I call on an adjusted basis. It is excluding from our 2020 base our restructuring costs which were about $15 million between Q1 and Q4 and also a customer dispute that we had which was about $9 million cost. So that's the first thing about the base. So if you think about this 9% to 10%, you've got about 350 basis points from Softworld with about 80 basis points of amortization, and then you should think about the rest. Think about what I was sharing about Q2, you've also got this base impact, I was referring to, you get the same type of impact coming from organic investments we have now in our high growth specialty businesses, certainly education, as well as the normal impact linked to incentives coming from improvements in performance.

That's helpful. It's just I guess, again, with regard to the investments, those are incremental. Can you just talk about a little more about those investments and the growth opportunities you see that are leading you to increase that pace of investment?

Yes, one of them, and we didn't mention it last quarter, was, Kevin, that anytime we have an acquisition, we immediately boost the top line rules by adding some of organic initiatives. We have done that in the past; we have started to do it for Softworld as well, as soon as April, meaning the time when we went through the acquisition, that's going to be of course an investment. We’ve seen that knowing the trajectory, we have on top line growth with Softworld with double-digit growth around 20%, we are mentioning three months ago. We want to further accelerate this momentum; the right timing, the market is good, we have good dynamics. The other two investments we have on the way are smaller, of course, is in engineering and also in our existing Kelly technologies. Again, it's really because in this recovery phase, putting some investment and keeping the momentum is very appropriate. Unique education, as you know, we have several organic initiatives. One of them we did mention several times around tutoring, where we need to invest to really develop some areas like tutoring where we know and Peter might develop a little bit on that. Tutoring, especially with what we know now with the COVID gap year, and what we see now is a booming market that we are investing in to capture future goals.

Yes, Kevin, we recently released a report that we conducted with a partner organization called the Tutoring Solution. It's very clear that school districts and parents are very concerned about the COVID gap year and the recovery of students. We think the combination of that demand coupled with funding from the federal government as well as state and local governments, presents promising prospects for helping school districts develop Tutoring Solutions that help their students recover from the gap year caused by the pandemic in 2021 and 2020.

That's helpful. You did mention in your prepared comments that demand in professional and industrial is actually exceeding pre-COVID level. So, I guess, it's encouraging to see the demand is there and coming back but it's more a matter of having the available supply and being able to fulfill that demand. So I guess that's going to be a real focus is to make sure you can meet that surging demand. I mean, is that your top priority right now in P&I?

Yes, absolutely, Kevin. Both on the staffing side, all of the steps that I mentioned are designed to increase our ability to capture more of that demand. In the outcome-based business, it's around generating additional customers for that solution, as we said, we think the easing of demand is temporal, and we expect that business to recover and will be perfectly prepared for it when it does.

Just one last question from me. Have you heard anything in your discussions with your clients or any indicators that the Delta variant is having any impact on demand or slowing the outlook at all for the second half of the year?

Kevin, we've seen some customers have reintroduced mask mandates, for example, for the first time in a couple of months. We haven't seen any widespread shutdown of facilities due to the Delta variant. We have seen some shutdowns due to the microchips shortage, which has caused some companies in the automotive sector, for example, to suspend operations for a period, maybe a week, 10 days while they find access to microchips. But we haven't seen any widespread disruption in economic activity as a result of the Delta variant yet.

Very helpful insight. Thanks for taking the questions.

Thank you. Our next question comes from the line of Josh Vogel with Sidoti. And your line is open.

Good morning, Josh.

Hope you guys are doing well.

Yes, Josh, thank you.

Thank you. I have a couple of questions. First one's a little bit higher level and just thinking about the environment today in your client base. Some thought maybe or meaningful changes, mix and interpret the client size or the number of orders they're putting in for an even going a little bit further. Perhaps larger clients who predominantly did things in-house are now starting to open up to the outsourcing model, especially given the supply constrained environment. Just some general thoughts around that, please.

Yes, I think the first dynamic I would point to Josh, and again, good morning, is our perm business in both SET and P&I is exceeding pre-pandemic levels, which suggests that at least some customers, in order to address their demand and the talent supply issue, are resorting to full-time hiring. At the same time, we are seeing customers, especially large customers, talk to us more about both increasing their contingent labor as well as moving more products or more of their processes to an outcome in our BPO practice. Notwithstanding some hiccups related to the chip shortages in our business in the second quarter, we are seeing some healthy demand in a P&I solution that we introduced and I discussed last quarter, which is essentially an outcome-based solution that allows customers to take advantage of talent and use them for longer periods than they might have otherwise using a temporary employee. So there are some shifts going on, I think as a result of companies taking experience away from the pandemic environment.

Yes, those are great insights. Thank you. So obviously, a big theme is the supply constrained environment and expectations or assumptions that, even outside of potential mismatches, we should see an increase in the labor pool. For instance, kids going back to school frees up parents, you have unemployment benefits that are going to be curtailed government stimulus. What do you think the lag time could be between, especially once the stimulus and unemployment benefits are curtailed, to actually a meaningful increase in the labor pool and vessel order fulfillment? I'm just curious, is it something that could and should happen immediately or is it something that could take several months before people really start to reenter? I was just wondering your thoughts there?

Well, it's still early, Josh. It’s something we talk about and look at all the time. It's still early to judge the impact that the states who eliminated or suspended the enhanced unemployment benefits and what impact that had on the labor pool. It doesn't appear that it has resulted in a wave of new talent. So at least as far as the enhanced unemployment benefits are concerned, again, it's early, but judging from the states that have eliminated the enhanced benefits would suggest that there isn't going to be an immediate impact. We believe that the schools reopening with in-class instruction might have a bigger impact. We say that because we did see, anecdotally and from our own experience, that when schools reopened during the pandemic in 2020 and 2021, we did see additional talent looking for work. So that's encouraging. Potentially, the increase in the number of vaccinated individuals could be a third factor that will provide some assurance to individuals that the workplace they're coming back to is safe.

I got it. Thank you. And in thinking about the investments you're making on the technology side, to streamline processes to support your recruiters, can you talk about any investments? Are you investing in any client-facing technology that focuses on enabling candidates, whether attracting them to you, onboarding where they can see accept and be deployed on assignments? I'm just curious about what's going on in the client-facing end of it?

Well, Josh, we're very excited about a technology that we've introduced last quarter called Helix. It's currently deployed in our OCG segment with our MSP clients, but the reaction from customers in that space has been extremely positive. What Helix does is it allows organizations and hiring managers to take out a lot of the guesswork about what kind of talent they need. It essentially streamlines for the hiring manager all of the processes that they otherwise would have to go through to try to answer that question. It does it in a relatively user-friendly way, and it's something that customers have been asking for. We were first to market in delivering this solution, and the response from our customers has been very positive. We’re regularly looking for opportunities to introduce technology into our solutions. This includes our OCG, this Helix product, but it also includes our other businesses where we work with customers to identify what their pain points are and bring technology to eliminate those pain points.

Great, thank you. I just have a couple of quick hitters in relation to the outlook for the balance of the year. The first one, just thoughts on direct hire or perm over the balance of the year. The strong results we saw in Q1 and certainly Q2, was that more pent-up demand? Do you think that can continue? And then certainly once comps get a little bit tougher in the first half of next year, just what you're thinking there?

Yes, this is one of the reasons why we have increased our GP rate expectation for the year to 18.5%. Of course, as we mentioned, one of the boosts is coming from Softworld, bringing 30 basis points for three quarters only. But we believe we see momentum continuing, at least for the next months, and that's one of the key reasons, among several others, why we are comfortable increasing our GP rates expectation. We think that in an environment where there are some issues, especially structural issues on the supply side, that's probably with higher comparability, the percentages are going to decline a little bit. But in the mid-term horizon, I think there are going to be good traction, whether it's in P&I or SET. You've also seen through our recent acquisition in education some good actions.

And then, taking one of the prior questions a little bit further, outside of discussions or what you may be seeing within the client, is looking at revenue. You bake any conservative assumptions into this outlook that reflect the potential for the Delta variant or other earnings potential leading to lockdowns or just broader disruption than we're seeing at this point in time?

Yes, we always base our views on multiple assumptions and so on. But our view on the second half of the year was to get a cautious view on Q3 because of what is going on with the COVID variant and getting through a combination of business improvement, seasonality, and also a better containment of these variants, something we probably bear in Q4. We've been still quite cautious when building our outlook, especially again for Q3.

And just lastly, you get a lot of good information. Olivier, around kind of reconciling SG&A. I had in my notes that I think it was last quarter, you basically gave us a base number of $795 million just hit the last year. Is that the number you use still?

Yes, I mean, let me double check here. I think it should be in the same region. One second, sorry. Just need to go to the right page. No, I think I would confirm the same numbers. Yes, I have like $790 million, so pretty close. Yes, currency fluctuations and so on, but ballpark, that's where you should be. I mean, basically I've eliminated restructuring and this one-time event with one customer just to give a view that is more what I would call adjusted or like-for-like, but the base is good, yes.

Well, thank you for taking my questions. I look forward to chatting soon.

Thank you. Our next question comes from the line of Joe Gomes with NOBLE Capital. And your line is open.

Good morning, Joe.

Good morning. Thanks for taking my question. I want to start off on Softworld. And just you know how that integration is going. Peter, you mentioned some synergies. I was wondering if you might be able to just expand a little bit more on what you're seeing on synergies and maybe an opportunity for expansion with the Softworld acquisition?

Yes, Joe, thanks and good morning. The integration is on track and meeting all of our expectations. We are very excited about the quality of the talent at Softworld as well as the talent that they engage on behalf of our customers. The synergies, it's early, frankly, but the opportunities we think are promising because of the fact that the overlap of customers between Softworld and Kelly surprisingly was not that significant. It was one of the things that attracted us to this acquisition because we know that the kinds of services that Softworld provides to its customers are in demand at every organization: high technology development, cybersecurity, network support are all needs that organizations in the U.S. have. So the synergies are to increase the profile of Softworld in the Kelly customer base, one. Softworld has demonstrated the ability to expand its platform into new disciplines based on customer demand. We think there could be some adjacencies and specialties inside not only technology but also in our science businesses that would allow for new solutions in our customer base.

Just to give you some views on the financials. We are completely on track with what we're expecting. The revenue is around $30 million, margin 35%, which was our expectation EBITDA for the quarter, $4.5 million, so 15%, roughly. It has been only accretive, which is what we're expecting despite starting to invest, and just maybe as a point of reference, due to the date of the acquisition, we had 11 weeks of activities instead of 13 weeks. That's also something you may consider. Top line growth is still double-digit, as we said. So completely in line with our expectations delivering, I would say, the growth and value dynamics we were expecting. So all that is on track.

Thanks, Olivier, I appreciate that. And then on the cash, obviously we used a substantial portion of that for the Softworld acquisition, the remaining cash balance. Could you remind us how much of that is due to go back to the federal government for FICA taxes? Is that remaining level? Are you comfortable with that as demand continues to increase across the business?

Yes, we ended up the quarter with $64 million of cash. Usually we need about $25 million to run this business, so we have a little bit of excess cash, not as big as it was pre-Softworld acquisition. At the end of December, we are going to need to pay half of the deferred payroll tax, which was about $170 million, so roughly $58 million. You know that as of now, we have variable funding capacities between our securitization and revolver of shy of $300 million, precisely $297 million. Knowing that we have no leverage now, we have ample capacity to basically do two things: fund our growth and continuing growth in working capital as we continue to improve our top line. Also potentially continue the momentum we have started here again with Softworld if there is something that would fit with our strategic priority this year again with Softworld.

And then one last question for me, it's kind of some pretty high-level here. Peter, and just trying to get some commentary. I was just looking earlier this morning on Thomson, and looking at the 12-month stock returns based again on Thomson information. If you look on what Thomson is saying, Kelly, over the past 12 months, it's up 24%. Almost every other one of the main competitors in that group are up 50% to 100%. I look at that and say, well, Kelly's had a very good rebound off pandemic lows. There can't be any questions from anybody on the capital structure, we're obviously reinitiating the dividend. When you talk with investors, what are some of their concerns that they bring to you? Is it the dual class structure, the fact that every quarter you have the personal impact and reported numbers that if you're not willing to go below the surface, you can't really see what the adjusted numbers are? Is it something else? And what are people saying to you that would at least in your mind kind of say, 'Well, this is why Kelly is only up again, according to Thomson, 24%, in their peer group is up 50% to 100% in stock performance over the past 12 months?'

I mean, it's always difficult to know, I mean, my feeling this is more about sentiment than anything else. Peter, please add to it. One of them is, and I think we have mentioned that several times, we have these APAC assets, basically one-third of our price value that are not generating any EBITDA. The value of those assets, I think, is probably underestimated by the market. The second item, I think, is probably the fact that although we are moving and transforming ourselves to be a specialty value company, we still have a good proportion of our business, I would say, lower margin specialties, where probably there is a concern, probably temporary concern on the supply side, as we did mention again today. Peter, do you have any other things you would add?

So Joe, I wouldn’t want to pretend to get into the minds of all of our investors or potential investors. Some of the issues that you mentioned do come up in conversations. I think the new structure that we've created, the reaction from investors has been positive in terms of being simpler to understand our business and what we're trying to accomplish. But I think that the transformation and the focus on higher margin specialty is a work in process, and I think probably there's perhaps some, I don't want to say trepidation, but waiting to see if we can deliver on that. I think Softworld was a huge step forward. But as Olivier said, and as you mentioned, the shareholding in both the JV and in Persol does create some confusion in the marketplace. And as well, it represents assets that are not contributing to our earnings in a meaningful way. So we think we still have work to do. But I don't have any precise answer other than to say that we have historically traded at a discount to that competitive SET. I don't know exactly what the competitive set is in the Thomson information that you're looking at, but we typically have traded at a discount, and to some extent, could be from the dual class structure, but also from the reasons that Olivier mentioned about our dependence on the lower margin staffing business.

Thank you, Peter and Olivier. I think you guys have been doing an excellent job, and just trying to see if there's something that I'm missing as to that, but it seems like we're all pretty much on the same page here. Hopefully, in the near term, investors start to see the good job that you guys are doing and where you're moving to and then it becomes reflected in the share price.

Thanks, Joe. Good to talk to you today.

Thank you.

Thank you. One moment, please. It looks like we have no further questions in queue. Please continue.

We're good here, Cynthia. We have no further questions; we can wrap up the call.

Thank you. Ladies and gentlemen, that does conclude your conference call for today. Thank you for your participation and for using AT&T Executive Teleconference Service. You may now disconnect.