Good morning, and welcome to Kelly Services' First Quarter Earnings Conference Call. All parties will be on listen-only until the question-and-answer portion of the presentation. Today's call is being recorded at the request of Kelly Services. If anyone has any objections, you may disconnect at this time. A first quarter webcast presentation is also available on Kelly's website for this morning's call. I would now like to turn the meeting over to your host, Mr. Peter Quigley, President and CEO. Please go ahead, sir.

Thank you, Steve. Hello, everyone, and welcome to Kelly Service's first quarter conference call. With me today is Olivier Thirot, our Chief Financial Officer, who will walk you through our safe harbor language, which can be found in our presentation materials.

Thank you, Peter, and good morning, everyone. As a reminder, any comments made during this call, including the Q&A, may include forward-looking statements about our expectations for future performance. Actual results could differ materially from those suggested by our comments, and we have no obligation to update the statements made on this call. Please refer to our SEC filings for a description of the risk factors that could influence the company's actual future performance. In addition, during the call, certain data will be discussed on a reported and on an adjusted basis. Discussion of items on an adjusted basis are non-GAAP financial measures designed to give insight into certain trends in our operations. References to organic growth in our discussion today exclude the results of our Q2 2021 acquisition of Softworld. While we did complete our acquisition of RocketPower in the first quarter, which Peter will talk more about shortly, we'll be consolidating their operating results on a one-month lag. So while our balance sheet and cash flows include the initial impact of the acquisition, we'll start seeing the positive P&L impact of RocketPower in Q2. Finally, the slide deck that we are using on today's call is available on our website. And now back to you, Peter.

Thanks, Olivier. It's been an exceptionally productive start to the year, and Kelly's first quarter performance provided substantial evidence that our strategy is paying off. We achieved significant year-over-year improvement in revenue. We grew GP in every one of our five segments. Our GP rate reached its highest level in more than 25 years and we more than doubled our earnings from operations, all of which point to broad-based structural improvements in our business. We also restored our dividend to its pre-pandemic level of $0.075 per share, a sign of our Board's confidence in Kelly's performance and strategic progress. Our education SET and OCG segment each delivered double-digit constant currency year-over-year top line growth. While the impact of Mexico's legislation led to an overall decline in International, we saw solid revenue growth in our European operations. And notwithstanding a modest decline in revenue, P&I substantially grew its GP and saw a significant growth in fees. In fact, fees were higher across all segments as companies continue to ramp up their hiring of full-time talent. As we approach just the second anniversary of our new operating model, we are pleased with Kelly's first quarter financial results. And early in 2022, we're excited about the progress we're making in executing our strategy. We entered the year committed to advancing our bolder, more acquisitive specialty growth strategy. In February, we announced noncore investments in APAC that provided approximately $235 million of capital and said then that we would redeploy that capital toward higher-margin growth. We haven't wasted any time. As of last week, we have completed 2 acquisitions this year. In March, we acquired RocketPower, a Silicon Valley start-up that diversifies and strengthens Kelly's fast-growing RPO business by targeting clients in the high-tech market. And last week, we acquired Pediatric Therapeutic Services, or…

Thank you, Peter. For the first quarter of 2022, revenue totaled $1.3 billion, up 7.5% from the prior year, including 150 basis points of unfavorable currency impact. So revenues for the quarter were up 9% in constant currency. Included in that increase are a 310 basis points favorable impact from our acquisition of Softworld, as well as a 230 basis points unfavorable impact resulting from the Q3 2021 changes in the Mexican staffing market legislation. While the current situation in Ukraine has contributed to additional economic uncertainty in Europe, we did not experience any significant impact on our Q1 revenues. As we look at first quarter revenue by segment, our Education segment continues to report significant year-over-year growth, up 55% as the comparable 2021 period was still impacted by COVID-related disruptions. We have continued to experience strong demand and new customer wins, even as we work through a challenging talent market. Our Education business has been successful in broadening the supply of talent, and we have started to see meaningful improvement in our fill rate. Our OCG segment continued to deliver year-over-year revenue growth, with revenue up 10% over last year in the first quarter. OCG delivered strong growth in RPO, reflecting custom demand for this product as well as solid growth in the MSP product, partially offset by declines in PPO as a result of some customer exits. Revenue in our Professional & Industrial segment declined 5% year-over-year in the quarter. Overall, our results in this segment continue to reflect the impact of supply chain disruptions and the challenges to fulfill customer demand in the current talent environment. In our outcome-based business, we have continued to experience a reduction in revenue, down 9.9% year-over-year from a contraction in demand from our call center specialty, which more than offset growth…

Thanks for those details, Olivier. We're encouraged by our momentum leaving the first quarter and the increased demand, healthy sales pipelines and new customer wins we're seeing. We expect each of our specialty business units to deliver strategic contributions to this year's performance. In P&I, the well-publicized dynamics of the current labor environment require Kelly and our clients to adjust the ways in which we connect with high-quality talent, and we are responding with speed and agility. As Olivier mentioned, we are changing how we work with one of our large P&I staffing clients shifting to a direct hire model to better meet their needs. We are also making P&I's local teams more agile. In January, we made adjustments to the P&I organization to align with our local markets, enabling us to deliver service through the channel that works best for local talent and clients whether that be through technology, our branch network or an on-site arrangement. Notwithstanding ongoing talent shortages and supply chain disruptions, we expect P&I's new local alignment, coupled with the deployment of technology investments we've described on previous calls, will drive improved productivity throughout the second half of the year. In our SET segment, we said we wanted to see meaningful returns on our inorganic and organic investments. Our double-digit growth with and without Softworld in the first quarter, delivered on that expectation, and we expect meaningful contributions from SET for the remainder of 2022 and beyond. In Education, we committed to capture K-12 growth this year, improve our fill rates and further expand our adjacencies. And we achieved that growth in Q1 and started Q2 with our acquisition of PTS which creates yet another high-margin, high-demand specialty within the Education segment that can quickly drive synergies across our market-leading client portfolio. We also expect to see improving fill rates in our K-12 staffing business throughout 2022. In OCG, we said we would invest in our fast-growing RPO business, and that's precisely what we did in the first quarter with the acquisition of RocketPower, an innovative RPO leader in the high-margin, high-tech specialty. In addition, many of the sizable MSP wins from 2021 will begin to produce GP throughout 2022. And in our International segment, we said we expected continued growth in regional and local specialties. Our EMEA operations delivered solid top line growth in the first quarter. Notwithstanding Mexico and our transition from Russia, we expect our International segment to continue delivering nice revenue growth for the remainder of the year. These growth strategies in our 5 business segments, together with our aggressive and focused use of capital, are designed to drive value for Kelly's stakeholders in 2022 and beyond. 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 first quarter results and look ahead, we expect a continuation of many of the macro trends we are currently seeing. There is a steady increase in demand for talent, coupled with the continuation of talent supply mismatch that puts pressure on our ability to fulfill that demand. We expect that recent trends in inflation and the upward pressure on wages at all skill levels will continue into the second half of 2022. And that expected increases in interest rates may put pressure on certain industries as consumers and business adapt. Specific to Kelly are 2 unusual events that impact our outlook. First is our intention to transition our operations in the Russian market. This will reduce 2022 revenues in our International segment and for total Kelly by about 200 basis points. Second is a change on -- in one of our large customers label strategy mentioned earlier. Essentially, one of our large staffing customers decided to address today's talent challenges and work with Kelly differently by changing its heavy use of contingent labor to one that instead will rely on hiring direct -- talent directly as full-time employees. While P&I has secured a number of large on-site transitions from competitors during the quarter, there will not be enough in Q2 to fully offset the top line impact of this change in this one customer's business. Even with those headwinds, we continue to expect revenue to be up organically 4.5% to 5.5% on a full year basis in nominal currency. Of course, excluding the impact of our acquisition of RocketPower and PTS. Stated another way, we are increasing our outlook for our non-Russian business by approximately 200 basis points. And finally, we expect an additional 150 basis points of inorganic revenue growth from…

Thank you, Olivier. We entered 2022 with energy and optimism, and signaled that 2022 would be a year of bold progress for Kelly. Kelly is leaning into market opportunities with a well-defined and well-capitalized specialization strategy ready to use the resources at our disposal to accelerate our progress and increase value to our shareholders. We made a commitment to bold inorganic growth, and we started 2022 by providing unprecedented capital to enable that growth. The effectiveness with which we started putting our capital to work signals a newly confident Kelly, one that has chosen our specialties wisely, pursues high-margin growth where we know we can win and acts decisively to drive value for shareholders. We're thrilled to welcome RocketPower and PTS to the Kelly team, and we look forward to our shared success. At the same time, we're delivering on our promise to accelerate high-quality organic growth, driving significant improvement in GP while simultaneously investing in the talent and technology needed to bring innovative Kelly products to market with speed and impact. As we continue to execute against our specialty strategy in 2022, Kelly will create value for all of our stakeholders, talent, clients, suppliers and shareholders alike. Steve, you can now open the call to questions.

[Operator Instructions] Our first question will come from the line of Kevin Steinke of Barrington Research.

Hey. Good morning. Congratulations on the solid start to the year.

Thank you, Kevin. Good morning.

Good morning. I wanted to start off by asking about RocketPower. Seems like a really nice acquisition, but can you just give us a sense as to what they bring to Kelly that is additive to what you were doing before in recruitment process outsourcing?

Yes. Thanks, Kevin. We're really excited about the RocketPower acquisition. It's another high-quality, high-margin, high-growth property that we think will add considerably to our existing Kelly RPO practice, which is also experiencing significant growth and demand. RocketPower participates in high-tech industry that Kelly has not participated significantly in. So it broadens the customer base. There was literally no overlap in our customers between Kelly and RocketPower and they have a delivery model that includes leveraging resources in Latin America that we think can be deployed in our legacy Kelly RPO practice to the advantage of our customers and also produce some meaningful financial returns.

Maybe, Kevin, I can add a few numbers. If you want to tell you a little bit more about what we call pro forma full year expectations. So you know that revenue of RocketPower in 2021 was about $28 million. If you think about our expectations and again, full year, not basically the pro rata temporaries that we are going to recognize based on the acquisition date. We expect a revenue in the region of close to $60 million for the year. So if you compare that with $28 million in 2021, I would say, very high growth, and we have already seen that in 2021 versus 2020. GP rate in the region of 44%, so gross margin, very, very high and EBITDA margin in the region of 20%. So really a high-growth, high-value engine, as Peter, I think, was describing during his prepared remarks.

Great. That's very helpful. And can you give us just a sense as to how quickly you can capitalize on revenue synergies, both from RocketPower as well as your latest acquisition Pediatric Therapeutic Services in the education space.

Yes, it's a priority, Kevin, that top line synergies is one of the parts of the investment thesis for both at the RocketPower and PTS. And we think that there's opportunity, as I said, in the case of RocketPower to leverage their exposure in the high-tech market, which we don't have a lot of exposure to, to bring their delivery with our other customers. In the case of PTS, it's an adjacency that we've been looking for a high-quality property to add to the K-12 portfolio. We believe we found it in PTS. We have school districts that are in need of the therapies that PTS provides, and it's just a natural complement to our leading K-12 core business to be able to support our school districts with the therapies that PTS provides, and we believe it's a platform that we can scale.

Great. I just want to ask you about the Education segment, really strong results, at least relative to my expectations, and we have been talking last quarter about labor shortages in that market. And you noted a meaningful improvement in fill rates and that your efforts to attract talent are gaining traction. So can you just talk a little bit about the Education segment, the momentum there and your ability to attract more talent.

Yes. We're really encouraged by what we saw in Q1 and leave in Q1 by the improvement in fill rates that we talked about last quarter. We're -- in some of the regions that Kelly Education participates in, we're at or even exceeding pre-pandemic levels in terms of fill rates. There are some geographies that are still behind, but all of them are showing levels of improvement as more individuals come off the sidelines, the health care concerns are lessened and schools are open and no longer requiring vaccines and masking. So we're encouraged. We're also encouraged by the pipeline of new wins, a number of large school districts we've added to the portfolio even this year. And as we look to the '22, '23 school year, we're encouraged by the combination of improved fill rates and increased demand.

And I would add on that, that we -- in terms of attraction, we see wage inflation continuing. If you look at Q1 in our Education, wage inflation was about 14%, 1-4, which, of course, the same impact on the bill rate. So that's good for Kelly, but that's good also to attract talents.

And as Olivier said, pay rates are high, and we're seeing an inflow of talent from the health care sector as the COVID-induced stress individuals are migrating to the education space, which adds to the labor pool for school districts, which is very positive for Kelly Education.

All right. Yes, that's an interesting dynamic that you called out there. Okay, great. So you talked about the shift to a direct hire model with your large P&I customer, it sounds like that's happening in other places across the market. I mean, when you talk to your customers, do you think this reflects a fairly permanent shift in their approach to hiring or attracting talent? Or do you think they might eventually revert back to the old model? Just what's your sense on just that market trend and the sustainability of it?

Yes. I don't think -- I wouldn't call it a trend, Kevin. I think there are a few isolated instances where customers have decided to deal with the talent shortage by moving from a contingent worker strategy to permanent hiring strategy. But at the same time, the demand for contingent workers support is at an all-time high according to the American Staffing Association numbers in terms of the penetration rate. And customers are, due to the COVID situation, they have come to realize the benefits to their business models of the flexibility that contingent labor provides. So it'd be hard to predict whether these 1 or 2 customers are going to revert back to using contingent workers, but we don't see it as a trend that's going to have a long-term impact on our business.

Okay. Good. That's helpful. Just a couple more here. You noted the higher SG&A expenses related to higher compensation to attract and retain your own workforce. Do you feel like that you're in a good position now with those compensation increases to attract and retain the talent you need to fulfill all the customer demand you're seeing?

Well, it's a competitive labor market, as you know, Kevin, and we're addressing some of that through increased compensation, which is important to recognize our employees' contributions to the success of our business. But it's not the only answer. We need to provide a compelling value proposition to our employees and provide a workforce -- I mean, a workplace that is flexible, that is inclusive and welcoming and we have efforts underway to ensure that, that's the case at Kelly. But it's a competitive environment. And we're doing everything we can to ensure that we have the talent and the capabilities we need to deliver on our strategy.

Okay. Just lastly, as we think about the gross margin as we move throughout the year, should that -- should we think about that being pretty consistent from quarter-to-quarter, you're 19 9 in the first quarter and 20 for the full year. So is that relatively consistent or anything we should think about in just second quarter, the quarters beyond?

No, I would say we are confident on the 20-plus percent for the year, including our 2 recent acquisitions. I think we have, I would say, a solid set of dynamics that we see, the fee business that is still up 68%. The mix that has been useful for years, spread improvement, especially in SET where we start to see now our bill rate moving at a higher pace than our pay rate. So we see all those dynamics continuing as we have seen for quite a while now. And I was just recently looking at our gross margin total Kelly in 2018, we're at 17.6, right? So -- and we have been able to improve our gross margin every single year since 2015, including in 2020 where basically the market conditions were extremely challenging. So I would say it's a long-term structural improvement that we expect to continue to see this year, but also beyond this year.

Great. Thank you for taking the questions.

Thanks Kevin.

[Operator Instructions] Our next question will come from the line of Joe Gomes of NOBLE Capital.

Good morning. Thanks for taking the questions. So the first one is I think you noted a little bit here on the -- in your remarks, if you look at the P&I business and the International business, both had lower revenues but increased GP dollars and rates, I believe, for both. I just wonder if you could give us a little more color as to what is going on there that's allowing you to increase the GP rate even the face of some lower revenues in those 2 segments?

Well, the International segment was -- the headwind there is Mexico primarily. In EMEA, we saw increase in revenue 9%. So good growth there. In both cases, though, Joe, the focus of our staffing business is to improve the quality of the business that we're acquiring. And that allows us to -- as I said during the last earnings call, to focus on higher-margin business in both of those segments. In addition, in the case of P&I, higher-margin outcome-based solutions that we're offering to our customers in the new operating model where we're able to offer outcome-based business process -- business process outsourcing and our SPS solution, we're able to offer those to all of our P&I customers and those solutions command higher margin and they're growing at a good clip. So that contributes to the improved GP performance in P&I.

Okay. Thanks for that insight. Great movement here, an improvement on GP rate is, Olivier, you mentioned over the years -- hopefully, this year, we'll be at a 20% rate. I mean how much more upside do you think there is in that? And is it just continuing to get more like the Softworld type of acquisitions? Or is there other things that you can be leveraged, you can be pulling on to continue to grow that GP rate?

Well, Joe, our strategy is both organic and inorganic. And we believe in both cases, we can improve our GP rate. And I think that's what you're seeing. It's a combination of the addition of high-quality, high-growth properties like Softworld, like PTS, like RocketPower, but also improving the solutions that we provide in our legacy Kelly businesses that command higher margins. Our outcome-based solutions command a higher margin, and we believe that there is upside in really all of our business segments to improve our GP rate. If you take education as an example, it's been relatively stable in Kelly Education, but the addition of PTS, which commands much higher margins, we think can have a meaningful impact on the GP rate in Kelly Education as well as Kelly overall.

Yes. So far, when you look back a little bit, when you look...

Right. Go ahead.

When you look back from, let's say, 2018, our average GP rate improvement, Joe, was about 40 to 50 basis points with about 2/3 that is basically purely organic. And we still have a lot of opportunities even organically, as Peter was describing.

And you talked a little bit on your full-time talent in some of the things that you're doing there. In your presentation, you talked about addressing the talent supply to meet customer demand. Just wondering outside obviously, increased pay. What other types of things are you being able to offer to help try and attract more talent for you so that you can meet your customers' supply-demand?

Well, as mentioned, Joe, it's about the value proposition. Today's workers want a flexible environment where they can adjust their work requirements around their other aspects of their life. We have a program that we started before the pandemic, 5 years ago, called Kelly Anywhere, which provides a level of flexibility that we think is very attractive to today's workers. So combined with that as well as improving our wellness and benefits plans, creating affinity groups, so individuals of all demographics feel welcome in the workplace. That's a potent combination to attract people as well as telling the story of our noble purpose of connecting people to work in ways that enrich their lives. Today's workers want to feel a sense of purpose, and we believe that Kelly offers that combination that they can be excited about coming to work every day in support of the great companies that we work with and the great talent that we work with.

Okay. And one last for me, if I may. I know you repurchased the shares held by Persol, you just raised the dividend. But given where -- what's happening in the market today where the stock has been trading here recently, would be -- going back and buying some more shares be of interest you or the Board in this environment? Or would you rather prefer to kind of hold on to that dry powder for potential acquisitions?

Well, we're reviewing all of the options with respect to capital allocation, Joe. We do that regularly with the Board, whether it's dividends or the possibility of share repurchase. We do believe that the best use of the majority of our capital is going to be to acquire high-quality properties like we've demonstrated with Softworld and RocketPower and PTS. But nothing is off the table, and we're regularly considering how to create value for our shareholders.

There are no further questions in queue at this time. Please continue, Mr. Quigley.

Steve, if there are no further questions, I think we can call it a day.

Ladies and gentlemen, we would like to thank you for your participation in today's teleconference call, which will be available for replay from today at 11:30 a.m. until June 12 midnight of that day. You may access our replay by dialing (866) 207-1041 and entering the access code of 6759661. And if you're dialing from an international location, please use the dial-in number of (402) 970-0847 and the same access code of 6759661. Once again, we'd like to thank you for your participation in today's teleconference call, and thank you for using our service. Have a wonderful day. You may now disconnect.