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Kelly Services, inc (NASDAQ:KELYA)
Q3 2021 Earnings Call
Nov 10, 2021, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning and welcome to Kelly Services Third Quarter Earnings Conference Call. All parties will be on listen-only until the question and answer portion of the presentation. Today's call is being recorded at the request of Kelly Services. If anyone has any objections, you may disconnect at this time. Our third 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.

Peter Quigley -- President and Chief Executive Officer

Thank you, John. Hello, everyone and welcome to Kelly Services third 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.

Olivier Thirot -- Executive Vice President and Chief Financial Officer

Thank you, Peter, and good morning everyone. Let me remind you that any comments made during this call, including the Q&A, may include forward-looking statements about our expectations for future performance. Actual results could differ materially from those suggested by our comments and we have no obligation to update the statements made on this call. Please refer to our SEC filings for a description of the risk factors that could influence the company's actual future performance.

In addition, during the call, certain data will be discussed on a reported and on an adjusted basis. Discussion of items on an adjusted basis are non-GAAP financial measures designed to give insight into certain trends in our operations. References to organic growth in our discussion today excludes the results of our Q2 acquisition of Softworld. We have also provided the slide deck that we are using on today's call on our website.

Now, back to you, Peter.

Peter Quigley -- President and Chief Executive Officer

Thanks Olivier. The economic recovery continued in Q3, although at a more moderate pace than anticipated at the start of the quarter, as evidenced by a strong U.S. jobs report in July followed by weaker results in August and September. Clearly, the delta variant and related concerns regarding health, child care, vaccine mandates and masking requirements had and continues to have an impact on the slope of the recovery. It appears that even with the more positive October jobs report, many potential workers are staying on the sidelines despite the reopening of schools and the expiration of enhanced unemployment benefits and the business disruption caused by supply chain shortages continues across multiple industries.

The good news is that we expect these challenges to be transitory. We're confident that as we continue to make progress toward a post-pandemic world, supply chain bottlenecks will ease, workers will reenter the workforce and the gap between demand and supply will narrow. At Kelly, we're managing the disruptions with short-term tactics without taking our eye off the longer-term goal. To lay the foundation for the future, we launched our new operating model last year in the midst of the pandemic and we entered the recovery with our specialty strategy firmly in place, aligning us with markets where there is strong demand for skilled talent and smart workforce strategies.

Now we're adjusting to the current environment internally, as well as helping customers adapt externally with both financial and non-financial actions. We continue to optimize our operating model, invest in organic growth and execute against our inorganic growth plans. As you'll see in today's discussion, the increased demand for our solutions further affirms that we have charted the right course. Before I hand it off to Olivier to provide details on Kelly's third quarter performance, I'll share a few highlights.

All five of our operating segments: professional and Industrial, science, engineering and technology, education, OCG and International delivered organic year-over-year revenue growth in the third quarter. Education continued to exceed its pre-pandemic performance as new customer wins and increased demand from existing customers drove top line growth. This growth has been constrained by weaker than expected talent supply, particularly in our core K-12 staffing business. Though many school districts resumed in-person instructional delivery in August and September, complications from the delta variant, as well as questions surrounding mask and COVID vaccine requirements have disrupted learning and made recruiting more challenging than normal.

Constraints on talent supply also continue to make it challenging to meet increased customer demand in our professional and Industrial staffing business. We are pleased that P&I staffing and our office professional and light industrial outcome based solutions delivered year-over-year top line growth, offsetting the softness in customer demand in our KellyConnect specialty, which we mentioned on our Q2 call and which continued in Q3. In our SET segment, we continue to deliver top line growth, both organically and with the acquisition of Softworld inorganically and in our International segment, we saw a year-over-year revenue growth as average volume increased in Europe with particularly strong performance in France, Russia and Portugal.

When we look at OCG's fourth consecutive quarter of beating pre-COVID revenue, we see a success story that aligns customer needs, workforce trends and digital advances. The Helix UX technology that I mentioned last quarter, an industry first solution that gives clients unprecedented access to full-time contingent and aggregated talent channels continues to attract new OCG customers and drive added value in our existing relationships. Along with our teams market insights and our recently released workforce agility report, Helix UX is enabling some of the world's largest companies to better understand and manage their global workforce during these uncertain times. Overall, we're pleased with this quarter's 15% revenue growth and 20% GP dollar growth; however, we have work to do to better leverage this growth, a dynamic that I'll discuss later in the call, including the actions we're taking to address it.

I'll now turn it over to Olivier to share more details about Kelly's Q3 results.

Olivier Thirot -- Executive Vice President and Chief Financial Officer

Thank you, Peter. As Peter mentioned, our Q3 results reflect the ongoing economic uncertainty, stemming from the continued impact of COVID-19 as well as supply chain disruptions impacting the business operations of our customers and constraints on the availability of talent in the current labor market. Overall, we are seeing improving demand for our services, but we continue to be challenged to fulfill our customers' demand for talent.

Before I review the current period results, it's helpful to reflect on the comparable period of last year. Q3 of 2020 represented the tail of the most severe impact of the COVID-19 pandemic on our topline results and the beginning of a steady, but slow recovery. We responded to those pandemic related declines in revenue with temporary expense mitigation actions, which continued until the beginning of the fourth quarter of 2020. As we have discussed on past calls, revenues have improved from crisis-driven lows and most temporary expense mitigation actions have been discontinued.

Now looking at the third quarter of 2021, revenue totaled $1.2 billion, up 15% from the prior year, including 60 basis points of favorable currency impact. Our Q2 acquisition of Softworld added greater then 20 basis points to our overall revenue growth rate. All five segments reported organic year-over-year revenue growth and our Q3 organic recovery rate in revenue is 91%, 200 basis points higher than we saw in Q2. We measure revenue recovery rate by comparing current period results to the corresponding pre-COVID 2019 period on a constant currency basis.

For the third quarter, our Education segment continues to report the highest year-over-year growth rate as the comparable 2020 period was impacted by significant school closures. We also measure revenue compared to 2019 and for the quarter, education revenue is now exceeding the comparable pre-pandemic period by 17%. This reflects new customer wins and growth in demand at existing customers. While revenue growth in this segment is strong, it has been constrained by a more challenging than anticipated talent market. Our education business continues to work to ensure that we secure the supply of talent needed to meet our customers' increasing demand. As schools restarted this fall, we are seeing commitment from school leaders to take the necessary steps to continue with in-person instructional delivery. However, schools may modify their functional 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 revenues up 29% over last year. The growth is a result of both new customer wins and growth in existing customer programs in all products. OCG revenue has exceeded pre-COVID levels for the past four quarters and is now up 19% in Q3 versus same period in 2019. Revenue in our professional and Industrial segment reflects continuing strong demand for talent in the staffing product across most industry verticals or the supply chain disruptions are now resulting in uncertainty across a broader portion of manufacturing and our ability to fulfill customer demand has been limited by the current weakness in supply.

As a result, we have experienced a lower average volume, but at the higher bill rates, reflecting our customers' understanding of the upward pressure on wages in the current talent market. The net impact of the dynamic was 1% year-over-year increase in staffing revenue in the quarter. And after performing well and delivering revenue growth earlier in the COVID-19 crisis, our outcome-based business expense of 4% year-over-year decline in revenue in the quarter as demand was impacted at several large customers.

At current levels of demand, constant currency revenue continued to exceed pre-pandemic period by 13% in the quarter. International continued to deliver positive year-over-year growth in the quarter, up 9% in constant currency. Year-over-year revenue growth was driven by the recovery of hours volume in most EMEA countries, which was partially offset by results in Mexico due to the impact of limitations placed on the staffing industry as a result of recently enacted legislation. And finally, the SET segment where the results from our acquisition of Softworld is reported, revenue was up 26% on a reported basis and 12% on an organic basis.

Organic revenue trends continue to track with the customers served. Demand continues to be solid from life science and clinical customers. There was a recovery in demand telecommunications, but demand from the oil and gas sector remains sluggish. Permanent placement fees were up 118% year-over-year and up 7% sequentially. We continue to see increases in activity in P&I and SET, coupled with fees from our Q4 2020 acquisitions of Greenwood/Asher in the education segment. 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.

Overall term fees for the quarter now exceeded pre-COVID levels at up 30% compared to the same period in 2019. Overall gross profit was up 19.8%. Our gross profit rate was 19.2% compared to 18.4% in the third quarter of the prior year. Our year-over-year GP rate improvement was driven by a combination of higher term fees, which contributed 90 basis points and from an additional 50 basis points as a result of the acquisition of Softworld, which generates higher margins.

These factors were partially offset by unfavorable product mix, as our lower margin staffing business recovers, coupled with higher employee-related costs. Within the segments, we did expand some variability in GP rates caused by the factors I just mentioned. SET benefited from the Softworld acquisition and the international GP rate improved on higher term fees and business mix. The P&I GP rate declined as the impact of unfavorable product mix between staffing and outcome-based and higher employee-related costs were only partially offset by higher term fees.

In addition, 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. SG&A expenses were up 13.7% year-over-year on a reported basis. Expenses in 2020 included a non-cash charge related to a customer dispute. Expenses for the third quarter of 2021 include the intangible amortization and other operating expenses of Softworld, which added 500 basis points to our year-over-year expense growth rate. On an adjusted basis, organic expenses grew by 14.3%. The increase in expenses reflects increase in performance based incentive compensation expenses, as well as the impact of our temporary expense mitigation efforts in the prior year.

Our 2021 results also include $2.4 million of expense in the Education segment related to contingent consideration due to the former owners of Greenwood and Asher as a result of operating performance that exceeded our expectations. Expenses in P&I and international, excluding the customer dispute charge in the prior year, have increased year-over-year, but remained below pre-pandemic levels. Expense growth in OCG and education are in line with current revenue growth. Expense levels in SET reflect that we have made investment in resources ahead of revenue growth. We do expect that we are positioned to capitalize on increasing demand for the specialty services in the near future.

Our reported earnings from operations for the third quarter were $9 million compared to a loss of $2.4 million in Q3 2020. Our 2020 results included a non-cash charge related to a customer dispute of $9.5 million included in our reported Q3 results are the operating earnings of Softworld of $1.7 million inclusive of intangible asset amortization.

Now, turning back to the company as a whole, Kelly's earnings before tax also include the unrealized gains and losses on our equity investment in Persol Holdings. For the quarter, we recognized $35.5 million pre-tax gain on our Persol common stock compared to $16.8 million pre-tax gain in the prior year. These non-cash gains are recognized below earnings from operations as a separate line item. Income tax expense for the third quarter was $11.1 million compared with our 2020 income tax benefit of $1.2 million. Our effective tax rate for the quarter was 25.2%. Our effective tax rate was higher than the U.S. statutory rate as a result of the gains on our Persol stock, which is taxed at the higher Japanese tax rate.

And finally reported earnings per share for the third quarter of 2021 was $0.87 per share compared to $0.42 per share in 2020. The increase in earnings per share resulted primarily from higher gains on Persol shale and the impact of the 2020 charge related to a customer dispute net of tax. Adjusting for the Persol gains and the non-cash cost of the dispute charge, Q3 2020 EPS was $0.25 compared to $0.29 per share in Q3 of 2020.

Now moving briefly to the balance sheet. As of quarter end, cash totaled $44 million compared to $223 million at year-end 2020 and $248 million a year ago. We had no debt consistent with that at nearly 0 at year-end 2020 and a year ago. The reduction in our cash balance reflects the $213 million cash paid, net of cash received that we have used to fund the acquisition of Softworld at the beginning of the second quarter. Accounts receivable was $1.4 billion and increased 28% year-over-year, reflecting our year-over-year increase in revenue and also higher DSO. Global DSO was 63 days, an increase of two days over the same period in 2020 and a decline of 1 day from year-end 2020.

Year-to-date, we generated $24 million of free cash flow. Free cash flow last year reflected the rapid decline in working capital as revenues declined on lower customer demand in the early stages of the COVID-19 pandemic. As previously mentioned, we completed the Softworld acquisition in Q2 and we're able to fund the entire acquisition with existing cash balances. Our current cash balances are now in line with levels needed to manage daily liquidity and while the Softworld acquisition didn't require debt financing, we may begin to borrow on existing credit facilities to see both working capital including the Q4 2021 repayment of 50% of the deferred U.S. payroll tax balances as the revenue levels continue to recover or surpass pre-COVID levels.

And now back to you, Peter.

Peter Quigley -- President and Chief Executive Officer

Thanks for those details, Olivier. We're encouraged by the increased demand for our services as the recovery continues. We're also encouraged by healthy sales pipelines, new customer wins and expanded customer spend that we're capturing in all five segments. As I mentioned last quarter, we're committed to executing our specialty strategy and will add sales and recruiting resources as warranted to meet increased demand and support Kelly growth. We did just that in the third quarter in anticipation that the recovery would maintain a steady trajectory.

While some of the cost increase in the third quarter was due to good news, for example, the adjustment triggered by Greenwood/Asher's performance, which is exceeding our initial expectations, it's clear that we need to review our expense structure to ensure that as we go into 2022, we are able to deliver better leverage and drop more GP dollars to the bottom line. Last week, we initiated a series of cost management actions designed to increase operational efficiencies and realign our cost base with the current environment.

Olivier will provide more detail on the expected impact of these actions during his outlook. As Olivier mentioned, while demand in our P&I business exceeds pre-pandemic levels, we continue to work through fulfillment challenges in a labor market that is not following any previous recovery patterns. On a macro level, millions of jobs are going unfulfilled across industries. Even as schools have resumed in-person instruction delivery, fewer parents are returning to work. As I mentioned last quarter, proper matching of talent requires more than just adequate supply.

Businesses need workers with the right skills and they need those workers to be ready, able and willing to come work for them and then stay on the job. Not only is the recovery highlighting a structural skills mismatch that was present before COVID, it is also serving up a strong reminder that the labor market is made up of individual people, each with their own life circumstances, priorities and work preferences. While there's plenty of press coverage about how difficult it is to find workers, there aren't enough conversations around how difficult it is for many job seekers to access work.

Kelly's Equity at Work initiative is addressing this reality head-on, increasing the available talent pool by tackling systemic barriers that prevent more people from connecting with work. For example, in the U.S., millions of people who want to work, can't access employment due to outdated background screening practices. Our Kelly 33 program connects talented job seekers, who have non-violent, non-relevant criminal backgrounds with employers in need of their skills. Where educational barriers stand in the way, our Kelly Certification Institute offers apprenticeships, upskilling opportunities, training and certifications to talent whom we then match with clients.

We also continue to collaborate with customers to help close the talent gap. We work with them to set competitive wages and benefits, drop unnecessary job requirements and fix overly complicated onboarding processes. With our largest customers, we assess the talent landscape on a micro level, delivering custom Intelligence reports and developing recruitment methodologies and other frameworks that allow us to solve their specific talent challenges. Even as we tackle structural challenges in the labor market, we believe the current COVID related talent disruptions are temporary, even if supply chain shortages last longer than we expected six months ago. So, while our return to pre-pandemic growth across all segments will take longer than anticipated when the year began, we remain confident that Kelly will deliver top and bottom line growth from our specialization strategy as the recovery progresses.

I'll now welcome back Olivier to provide additional thoughts on 2021.

Olivier Thirot -- Executive Vice President and Chief Financial Officer

Thank you, Peter. As mentioned, we completed the purchase of Softworld at the beginning of the second quarter and we have nine months of Softworld activity reflected in our 2021 results. The impact of Softworld is included in our outlook. As we saw in the second and third 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 margin rate. As we reflect on the third quarter results and look forward, our views are for 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 now expect revenue to be up 9.5% to 10.5% in nominal currency and including the 210 to 230 basis-point 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 that 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 a slower pace of recovery than we are expecting last quarter, primarily in our lower margin specialties as well as in education.

We expect that the timeline for each operating segment to reach pre-COVID revenue levels may -- will depend on geographies served, industry concentration, talent supply and of course product mix. OCG has already crossed that milestone and other segments will do so later in 2021 or beyond. We'll continue to launch targeted growth initiatives that are intended to further accelerate organic revenue growth. We do expect that the International segment's revenue growth rate will be negatively impacted by legislation recently enacted in Mexico.

We expect our GP rate to be approximately 18.5%, including the 30 basis points impact from the Softworld acquisition. Our GP rate expectations reflect faster growth in our fee-based business and on the more gradual pace of growth in our lower margin specialties. We have taken definitive steps in the past year that are driving meaningful cost savings and are partially offsetting the impact of the expiration of our temporary cost actions in place in 2020. As discussed in Q2, we are making selective investments in organic growth initiatives in SET, Education and also OCG to accelerate our specialty groups

So, all in, we expect SG&A expense to be up 10% to 11% on an adjusted basis, including a 350-basis points impact from the Softworld acquisition. Included in our expectation is 80 basis points of non-cash intangible asset amortization from Softworld. In addition to our expected 10% to 11% expense growth, I just mentioned, we have continued to review our expense structure to ensure it aligns with our top line growth expectations.

As Peter mentioned, last week, as a result of that review, we initiated a series of cost management actions designed to increase operational efficiencies within our enterprise functions that provide [Indecipherable] to our operating units and to align expenses with our current expectations for top line growth. Our restructuring charge of $3.5 million to $4.5 million will be reflected in our Q4 results. These cost management actions are intended to deliver structural expense savings of at least $10 million on an annual basis beginning in Q1 2022.

We'll also continue to assess if our business units are operating at the expected level of productivity as we refine our outlook on top line recovery. Included in that assessment is impact of the ongoing technology challenges that Peter discussed last quarter. And finally, we expect an effective income tax rate in the mid teens, which includes the impact of the work opportunity tax credit, which has been extended through 2025. As we execute on our acquisition strategy, we are utilizing EBITDA and EBITDA margin as additional measures of our progress in delivering profitable growth and have included these measures with our third quarter earnings materials.

We announced this morning that the Board of Directors has declared a dividend of $0.05 per share for the quarter that is payable on both Class A and B common shares. As we expected the recovery in demand continues, we'll continue to review our capital allocation strategy, including our dividend policy with our Board of Directors.

And now back to you, Peter.

Peter Quigley -- President and Chief Executive Officer

Thank you, Olivier. I'd like the crisis that preceded it. This recovery continues to challenge expectations and norms. The optimism with which we entered the second quarter has been tampered by subsequent realities, including the delta variant and supply chain issues that have slowed the recovery more than anticipated back then. Our optimism about Kelly's long-term strategic journey, however, stands firm. We are encouraged by demand in our staffing and outsourcing businesses that exceeds pre-COVID levels.

Sustained fee growth points toward our customers' investments and their future workforce and a market that is eager for the solutions we provide. At the same time, we are taking steps to bring our SG&A into line with our top line and GP growth and deliver better leverage. As we progressed through the recovery, we are figuring out what the appropriate cost base is for a post pandemic Kelly. Essentially, we're living in two worlds right now, the current state with all of its COVID related challenges and the future state where these limitations are lifted and markets are normalized.

We're not taking our eye off the outcome we expect on the other side of this pandemic. COVID has caused uncertainty about the pace of recovery, but we are undeterred in our pursuit of becoming a specialty talent provider to create value for our shareholders and employees. We're pursuing M&A opportunities in targeted high-value specialties as evidenced by our acquisition of Softworld, which is delivering top and bottom line growth for the enterprise. At the same time, we are investing in organic growth and we're encouraged by early revenue trends in our K-12 tutoring solution and our newer P&I professional services product.

The recovery may not be following a predictable path, but there's no question about where Kelly is heading. We're moving forward with a specialization strategy that is designed to meet market needs and to help customers and talent thrive. We celebrated Kelly's 75th anniversary in October and we're confident that even with all the company has accomplished over the decades, the very best is yet to come.

John, you can now open the call to questions.

Questions and Answers:

Operator

Certainly. [Operator Instructions] And first from the line of Josh Vogel with Sidoti and Company. Please go ahead.

Josh Vogel -- Sidoti and Company -- Analyst

Thanks. Good morning, Peter and Olivier.

Peter Quigley -- President and Chief Executive Officer

Good morning, Josh.

Olivier Thirot -- Executive Vice President and Chief Financial Officer

Good morning Josh.

Josh Vogel -- Sidoti and Company -- Analyst

I have a couple of questions here. The first one around these cost management actions. They said Olivier could bring I think $10 million plus in annual savings starting next year, but on the other side, you continued with organic investments in selected specialties. With that in mind, should we still feel comfortable that revenue should grow faster than SG&A next year?

Olivier Thirot -- Executive Vice President and Chief Financial Officer

Yes, I mean clearly, and as a complement to our outlook, I would say that we are going to see a meaningful leverage as soon as Q4 of this year. Specifically, in some areas where we have invested namely for in SET where we have taken advantage of the recovery to invest in targeted areas including Softworld, our Engineering business, as well as our technology business. So we believe that we are going to start to see a meaningful recovery of our incremental conversion rate in Q4 and we believe that it is going to be confirmed as soon as 2022.

Josh Vogel -- Sidoti and Company -- Analyst

Thank you. And, yes, obviously an impressive recovery rate you're showing in education in particular; 2019 was a record year, I believe, and even as there remains uncertainty around other variants or whatever, can we assume that education is positioned next year to surpass what you did in 2019 in terms of revenues?

Olivier Thirot -- Executive Vice President and Chief Financial Officer

Certainly, I mean, I did mention that when we did exit September of this year, we are starting to exceed basically 2019. I think that has been clearly confirmed, Josh, by looking at Q3 where we are now up 17% versus 2019. And we believe that despite of the headwinds we are mentioning today, including vaccination and COVID variant, we are well positioned to continue to grow and exceed -- continue to exceed 2019 beyond Q4 of the current year.

Peter Quigley -- President and Chief Executive Officer

And, Josh, while there certainly are headwinds in terms of the talent supply right now with school districts showing a greater willingness to increase wages with vaccination rates continuing to increase, albeit slowly and with the new emergency authorization for children in K-12, we think there's only upside in terms of the talent supply.

Olivier Thirot -- Executive Vice President and Chief Financial Officer

Yes, just maybe to add something, Josh, that we have not seen before -- in education now the wage inflation, we see for Q3 is about 7% to 8%. So, it seems to be like following what we have seen for several quarters in P&I, which I think is good news because the more we can get wage inflation, the more we can attract the talent we need for our education business.

Josh Vogel -- Sidoti and Company -- Analyst

Those are great insights, Thank you. Shifting gears, we're seeing the pickup in the fee-based work. Historically, coming out of recession you see that and this is likely response coming out of the pandemic, people need talent, they're willing to take them on full time. So is it fair to assume that this could and should slow down as we get into a more normal historical business environment. I guess, what I'm trying to get at, is if we do see a drop in perm next year and -- I'm sorry I keep focusing on next year and you'll probably give -- obviously give more comments when you report next quarter, but what kind of gross profit headwind do you think that could be in 2022?

Peter Quigley -- President and Chief Executive Officer

Well, I think, I'll let Olivier comment on the gross profit, but the amount of, I'll call it pent-up demand for a talent is significant and the number of our customers that are relying on permanent placement or attempt to hire to satisfy their now significant demand for talent, is likely to have a decent runway into 2022, especially if you consider the GDP projections that suggests that we're not nearly at the end of the recovery.

Olivier Thirot -- Executive Vice President and Chief Financial Officer

Yeah, Josh, when you look at Q3 and -- I'm going to refer rather Q2 2019, our fee business is growing by 30% versus 2019. It was about 17% in Q2, flat in Q1. Of course, I mean the 30% that we see versus 2019 in Q3 is probably not sustainable for the long run, but I think the dynamic we have seen I think should continue as Peter was mentioning probably at a lower pace of growth, but certainly not going backward in the near future, knowing the structural talent shortage that we have mentioned several times.

Josh Vogel -- Sidoti and Company -- Analyst

All right, great. Thank you. And it just seems like there is a valuation disconnect with some of your peers. I just want to think about the business, both at a company level, but also more macro. And now that we have more finite details, can you discuss opportunities you see or how you may benefit, particularly in P&I from the recently announced infrastructure bill? I know it'll be over a long-term period, but are you a potential beneficiary of that?

Peter Quigley -- President and Chief Executive Officer

Sure. I think any time there is a massive investment in goods and services in the U.S., we are positioned to take advantage of that either directly in terms of customers that may be in the business of delivering broadband towers for example, but also indirect early downstream benefits manufacturing logistics, areas that we're strong in and have exposure to that are likely to benefit our customers and therefore Kelly.

Josh Vogel -- Sidoti and Company -- Analyst

All right, great. And just one last one if I may? I don't think I brought this up on a conference call in a couple of quarters here and it's just a running theme I have with several investors around Persol and the Japanese assets. They really seem to go under-appreciated, especially as they're valued at around, let's call it the third of your market cap. Can you please walk me through this again and for everyone's listening benefit, how liquid is each asset? What capital gains repatriation tax consequences could come into place if you sell a piece of either -- would that potentially cannibalize the $30 million or so revenue coming from APAC? I just want to get a better sense of how the Street could better value these assets when ascertaining where the stock prices are today? Thank you.

Olivier Thirot -- Executive Vice President and Chief Financial Officer

Yes. Thank you, Josh. So if you look at our balance sheet at the end of Q3 and you combine the value of Persol with our 49% of the APAC JV, basically the asset value is $345 million, which of course looking at our market cap is really a big portion of it above one-third. In term of liquidity, of course, Persol is a publicly traded company in Japan. So there is of course opportunity is needed and we have said that several times to monetize Persol. So if you think about tax monetization, Persol would be basically 31%, which is a Japanese tax rate on the capital gain, which of course is very substantial because the return on this investment has been phenomenal over time and for the joint venture, the tax cuts -- tax cash rate, sorry, would be in the region of 5% to 6%.

Peter Quigley -- President and Chief Executive Officer

Yes, that -- just to be clear the $345 million, approximately $200 plus of that is the Persol, the joint venture -- is not liquidated to joint venture between two companies. So, that's a slightly different in response to the liquidity question, but the bottom line is we agree with you that we don't necessarily think we -- the value of that asset is recognized and -- in our share price and that's why in our investor deck, we have and will continue to update to try to steer investors and potential investors to that anomaly that they -- for reasons not always clear, they overlook.

Josh Vogel -- Sidoti and Company -- Analyst

Well, great. I do appreciate all those insights. And thank you for taking all my questions.

Peter Quigley -- President and Chief Executive Officer

Yes. Thanks Josh.

Olivier Thirot -- Executive Vice President and Chief Financial Officer

Thank you, Josh.

Operator

Next, we'll go to the line of John Healy with Northcoast Research. Please go ahead.

John Healy -- Northcoast Research -- Analyst

Thank you.

Peter Quigley -- President and Chief Executive Officer

Good morning, John.

John Healy -- Northcoast Research -- Analyst

Good morning, guys. I was hoping we could spend a couple minutes just talking about the acquisition pipeline that you guys do have and obviously Softworld seems like it was a winner this year, but maybe some color on the type of properties that you guys are maybe evaluating and maybe the pace at which we could see that playing out next year?

Peter Quigley -- President and Chief Executive Officer

Yes, John, thanks for the question. The pipeline is healthy. The number of properties that have either come to market or that we've scouted out, is probably as healthy as we've seen since we've become more acquisitive and it's become a bigger part of our strategy. The properties that we're looking for are, what we refer to as a platform, like a Softworld and by platform we mean a company that has exceptional growth prospects, high-quality management, excellent technology and processes that we can build on, not only expecting them to contribute revenue and earnings, as they were before we acquired them, but at an accelerated pace.

So using Softworld as an example, we saw Softworld as one of those platforms and supported their growth through investment in additional recruiting and sales resources, as early as the first month that they were part of our company. So, those are the kinds of properties. I think there will be a bias toward properties in our fastest growing specialties. So, that would be science, engineering, technology, telecom, our OCG practice and education. And just, and maybe I'll ask Olivier to comment, in this market, while there is a lot of activity, we're very mindful of valuations and ensuring that we don't overpay for these companies that we're looking at. And I'll ask Olivier to comment on what standard we hold ourselves to -- in order to ensure that.

Olivier Thirot -- Executive Vice President and Chief Financial Officer

I mean the first point is that we have no leverage on our balance sheet and ample capabilities to fund quickly some, I would say, inorganic bids. Second point is, of course, there is a lot of activity on the market. We are very proactive, but we are keeping in mind some financial principles that we are using. You know that we are using internal rate of return.

Our rate is 25% plus, which is pretty high. We are expecting usually properties that basically would be earning accretive as soon as a quarter of the acquisition and usually we are also using or looking at platforms where we can add organic type of investment as soon as we have acquired this property and I think so for you the good example, we did acquire Softworld beginning of April. A couple of months later, we had already in place significant organic investments program in play to basically accelerate the topline growth that as we said was and is still double-digit around 20%, 21%.

John Healy -- Northcoast Research -- Analyst

Great. That's super helpful. And just wanted to ask a little bit on the cost savings. I was hoping Olivier could maybe go a little deeper or maybe just operationally, kind of, what's changing? Is it a move to more centralized recruitment or centralized kind of back office? Is it largely domestic oriented? I'm just trying to understand little bit more conceptually kind of what's changing on the cost side of things? And additionally, is this something that you felt you wanted to do for a while and now we're on the other side of COVID hopefully and now it makes sense? Or is this maybe potentially the start of something longer term or maybe this could be Phase 1 of a multiple phase approach to looking at the cost a little bit more sharply?

Peter Quigley -- President and Chief Executive Officer

John, I'll let Olivier comment on some of the perspective from a financial. But from an operating standpoint, when we launched our new operating model last July, we expected that there would be additional ways to optimize that model and the cost savings that we're realizing and I'm talking about today or as a result of further refining the five business unit model that we have. And there are certain functions that were previously supporting all or a portion of the business unit that now makes sense to push into the business units because it puts the activity closer to the customer, closer to the revenue and GP generation and we think that allows us to rationalize some of the expense base that had historically been held in a more centralized way.

Olivier Thirot -- Executive Vice President and Chief Financial Officer

Yes, just to add on that, our expectation is really to at least deliver $10 million of meaningful savings. Some of them are going to be kind of kept in corporate, but a lot of it is going to be basically getting our business units more efficient and accelerate leverage. Now, if you think about the long-run or the mid to long run, as Peter and I were mentioning today, we are also looking at productivity metrics with the business unit to really continue to streamline and improve our efficiency over time. This is an ongoing process that we are looking at, including technologies that we have discussed for the last couple of quarters.

John Healy -- Northcoast Research -- Analyst

Great. Thank you, guys.

Peter Quigley -- President and Chief Executive Officer

Thanks, John.

Olivier Thirot -- Executive Vice President and Chief Financial Officer

Thanks.

Operator

Our next question is from Kevin Steinke with Barrington Research. Please go ahead.

Peter Quigley -- President and Chief Executive Officer

Good morning, Kevin.

Olivier Thirot -- Executive Vice President and Chief Financial Officer

Good morning.

Kevin Steinke -- Barrington Research -- Analyst

Good morning. Hey, I wanted to ask about, you mentioned that your outlook assumes that the initiatives you're taking to increase talent supply will gain traction. So can you talk about what successes you've seen on that front and how willing are customers to work with you on some of the things you mentioned, for example, you mentioned outdated background screening, educational requirements, just trying to get a sense of the traction you're seeing on and even being able to improve talent supply with your initiatives and your customers' willingness to work with you on those initiatives?

Peter Quigley -- President and Chief Executive Officer

Yes. Good morning, Kevin. I'll give you an example, but I would add to that list of background screening, education also just the baseline and willingness to consider increasing wages is also, obviously, an important important factor. But in the case of the background screening, we recently shared a case study that we had with Toyota in a huge manufacturing facility. We've been working with Toyota to open up the top of their talent funnel by allowing candidates with non-violent, non-relatable criminal convictions to be considered for work at Toyota and 92% of the candidates actually passed the screening requirements that we established with Toyota.

Literally hundreds of people found work there. Toyota increased their talent pool by 20%, the increase of diversity by almost 10% and they lowered their turnover by 70%. And that's the kind of story that we're seeing among other customers that are willing to revisit these many policies, whether it's education or background screening that have been in place for decades and rarely revisited. And our Kelly 33 program is particularly targeted at the criminal conviction background. But we have other programs that we're undertaking with customers, who are frankly starved for talent and are willing to relook at their approach.

Kevin Steinke -- Barrington Research -- Analyst

Great, that's really interesting and helpful. And you mentioned wages and other -- wages is another factor there. I would assume or is it true that in the current environment, your customers are seeing the need to mark up wages to attract the talent or kind of what's the dynamic you're seeing there as you work with your customers?

Peter Quigley -- President and Chief Executive Officer

Yes, we're seeing pretty much across the board willingness to at least engage in a discussion about raising wages because companies that are not willing, are just suffering because in this environment talent has a choice and it's not only the attraction of talent, but retention of talent as well. We're seeing evidence of some increases in the attraction of talent, but retention continues to be a real challenge and I'll let Olivier comment on the wage increases that we're seeing and it's pretty much across the board including finally after years of stagnated wages in our education practice.

Olivier Thirot -- Executive Vice President and Chief Financial Officer

Yes, as I said, Kevin, the education is a little bit new and now we see really some meaningful increase in wages, I mentioned 7% to 8%, that's really something we have not seen in the past. I would say it's market related, but also what we do in Kelly Education to have meaningful conversations with our customers in education and explain to them the new market conditions and what they need to do to attract those talents. So, it's not only something that is externally driven that's also an outcome of numerous discussions we have in education and I would say something very similar for P&I, current inflation, we see a wage inflation within P&I is now 8% to 9% which is pretty high, higher than inflation, higher than what we have seen in the past. It's also a combination of, of course, market pressure, but also numerous discussions that Kelly P&I have with their customers to educate them on this new environment and what they need to do and among other things, how they can be financially competitive from this market where there is a big end balance between supply and demand.

Kevin Steinke -- Barrington Research -- Analyst

Right. Okay, that's helpful. Thank you. And just circling back, there was discussion earlier about and I know you're not giving guidance at this point for 2022, but just as we think about gross margin moving into next year, you obviously have the positive drivers of permanent placement and growth in your higher margin specialties. But we could also hope potentially or hopefully see through your recovery in International and P&I kind of your lower margin specialty. So, just -- how are you thinking about that all balancing out? If you can think the secular drivers you have in place for growth margin expansion will kind of remain in place and outweigh that or is it too early to comment?

Olivier Thirot -- Executive Vice President and Chief Financial Officer

Yes, I mean, of course, we are not yet ready to give formal outlook or guidance for 2022, but if you look at structurally what we have done and what kind of dynamics we have seen in the past, just as a reminder, our GP margin in 2014 was 16.3%, we are now at 19.2%. If you look at these trends, of course, we are about 50% of it that is coming from inorganic initiatives and I think Softworld is a good example for the current year. But we have also, what I call more structural organic improvement that we have seen in the past, continue to see about 25, 30 basis point pure organic basically improvement year-over-year.

What you see now, especially on the fee business and the type of push that it is providing to our margins, 90 basis points in Q3, 70 in Q2, 30 in Q1, it might easily beat in the future, because as we said, I mean the type of growth we have now in the fee business, is not going to continue at that pace, meaning like 30% versus 2019. But we continue to see these kinds of structural improvement organically that we have seen for many years now and it could be accelerated as we have seen with Softworld and other acquisitions, with inorganic, especially because Peter was mentioning again that the profile of the companies we are looking at our high growth, high value. And a high value is basically gross margin and net margin or EBITDA margin.

Kevin Steinke -- Barrington Research -- Analyst

All right, thank you. That's helpful. You had mentioned on the last call, maybe accelerating the further deployment of your front office system for recruiters, just maybe an update on what's going on that front and just how far along you are on this initiative?

Peter Quigley -- President and Chief Executive Officer

Yes, it continues to be a high priority for us, Kevin, as we look to transition from our legacy tech stack to a more versatile and modern one and -- so that work continues and as I indicated last call, there will be incremental improvements as we disentangle from the legacy tech stack and enable some of the best-in-class tools that are available in the front office to -- in order of the benefit of our recruiters. So, that's work that we're continuing, not only to focus on in terms of the time and energy of our IT team, but financially to make sure that we're getting to the endpoint as quickly as possible.

Kevin Steinke -- Barrington Research -- Analyst

Great. Maybe one or two more here, but any way to maybe just qualitatively frame how much of an impact supply chain disruptions are having on your business currently in terms of your ability of your customers to just operate the way they would like to?

Peter Quigley -- President and Chief Executive Officer

Well, we have seen the most pronounced impact in automotive that started first and we have considerable exposure to automotive. I think it's relieved to some extent, although there's still chip shortages and other part shortages. The dynamic that we've seen, I would say, in the last three or four months is the disruption has found its way into other industries and the challenge for us as a staffing provider is it's uncertain. We have customers who are forced to shut down operations because of a failure of a delivery or they can't -- they don't have enough parts. So it's challenging just from a load balancing standpoint, but as I mentioned in my remarks, we believe this is temporary and that eventually with the federal government now focused on 7 by 24 opening of the ports and other policy changes that we will over the course of time see a evening out of the supply chain issues.

Kevin Steinke -- Barrington Research -- Analyst

All right, thanks for all the insight. Thanks for taking the questions.

Peter Quigley -- President and Chief Executive Officer

Thanks, Kevin.

Olivier Thirot -- Executive Vice President and Chief Financial Officer

Thank you, Kevin.

Operator

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

Peter Quigley -- President and Chief Executive Officer

Good morning, Joe.

Olivier Thirot -- Executive Vice President and Chief Financial Officer

Good morning.

Joe Gomes -- Noble Capital -- Analyst

Good morning. So, there's been a lot of talk here obviously about candidate availability and talent supply. Maybe you could just touch a little bit about internally for Kelly itself. I mean, are you running at the optimum level, the number of consultants that you have out there, are you looking to add people, how is it impacting the Kelly business, the entire availability of candidates out there?

Peter Quigley -- President and Chief Executive Officer

Well, Joe, as everybody scrambles for -- to find talent, the competition for recruiters is also significant and companies that during the pandemic released their entire talent acquisition teams are now also in the market for recruiters as some of their recruiters that they let go during the pandemic or have gone on to other things or decided to stay on the sidelines. The positive is that we do have a considerable base of recruiters and that includes not only in our staffing business, but also our recruitment process outsourcing business. So, we're seeing significant demand in our recruitment process outsourcing business as well as in our -- across our staffing and outcome-based segments. But clearly recruiters -- having enough recruiters, keeping the recruiters, ensuring them that recruiters are at productivity is an ongoing challenge in this sort of really competitive environment for talent and the people that -- whose job it is to find talent.

Joe Gomes -- Noble Capital -- Analyst

Okay, thank you for that. And last couple of quarters, you mentioned that some of the new clients and I was wondering, you might be able to give us little more color or detail, especially on the education side, maybe some key wins or the size of wins there? I mean, how is that win rate, so to speak, compared to what has been historically?

Peter Quigley -- President and Chief Executive Officer

We are seeing wins across both large and small school districts and everything in between. The demand for outsourced support for finding instructors, probably, we've never seen it as high. The amount of new wins that we've had in the last 12, 18 months, probably the highest for Kelly Education. So, there are -- they come in all shapes and geographies and the pipeline continues to be very robust and our -- while we don't disclose what our win rate is, we're confident that we are winning more than our fair share.

Joe Gomes -- Noble Capital -- Analyst

Great, thanks for taking my questions.

Peter Quigley -- President and Chief Executive Officer

Okay. Joe.

Olivier Thirot -- Executive Vice President and Chief Financial Officer

Thank you, Joe.

Operator

And Mr. Quigley, we have no further questions in queue.

Peter Quigley -- President and Chief Executive Officer

Okay, John.

Olivier Thirot -- Executive Vice President and Chief Financial Officer

Thank you, John.

Peter Quigley -- President and Chief Executive Officer

Thank you for your support. As always, we appreciate it.

Operator

[Operator Closing Remarks]

Duration: 64 minutes

Call participants:

Peter Quigley -- President and Chief Executive Officer

Olivier Thirot -- Executive Vice President and Chief Financial Officer

Josh Vogel -- Sidoti and Company -- Analyst

John Healy -- Northcoast Research -- Analyst

Kevin Steinke -- Barrington Research -- Analyst

Joe Gomes -- Noble Capital -- Analyst

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