Q3 2019 Earnings Call

Hello, and welcome to the Robert half third quarter 2019 conference calls our host for today's call are Mr., Max Mesmer, Chairman and CEO of Robert half and Mr., Keith what else Vice Chairman, President and Chief Financial Officer, Mr., Matt Smith, you may begin.

Thank you and Hello, everyone. We appreciate your joining us on todays call as a reminder of the comments made on our call contain predictions estimates and other forward looking statements. These statements represent our current judgment of what the future holes and include words, such as forecast estimate project expected to leave guidance and similar expressions.

We consider the remarks to be reasonable however, they are subject to risks and uncertainties that could cause actual results to differ materially from the forward looking statements. Some of these risks and uncertainties are described in today's press release and in a resi SEC filings, including or 10 taste and shoes in todays 8-K, we assume no obligation to update.

The statements made on todays call for your convenience our prepared remarks for today's call are available in the Investor Center of our web site at Robert half Dot Com from the home page click on the Investor Center link at the bottom left of the page.

Now, let's review Robert Half's third quarter financial results revenues for the company were 1.552 billion.

Up 6% from last year's third quarter on a reported basis and up 5% on a same day constant currency basis.

Third quarter net income per share was one dollar and once that versus 95 cents in the same period, one year ago. This is a 7% increase year over year.

Cash flow from operations was $191 million in third quarter and capital expenditures were $17 million.

In September we distributed a 31 cents per share cash dividend to our shareholders of record for a total cash outlay of $36 million. We also repurchased approximately one of the half million Robert half shares during the quarter for $80 million.

We have 3.4 million shares available for repurchases under our board approved stock repurchase plan.

Persistent tell what shortages resulted in continued strong demand for our staffing services in the third quarter, particularly in the United States Robert half management resources was the standout among our staffing lines of business and our Protiviti subsidiary also had a very strong quarter. We are pleased with the continued momentum or you're saying and are you.

Staffing and Protiviti operations.

Return on invested capital for the company was 42% in the third quarter.

I'll turn the call over to keep now for more detailed look at our third quarter results.

Thank you back space just noted global revenues in the third quarter were 1.552 billion. This is up 6% priors third quarter on a reported basis and up 5% on the same day constant currency basis from the year ago period.

Accompanying our earnings release today, as a supplemental schedule showing year over year revenue growth rates on both a reported and as adjusted basis. These figures are further broken out by U.S., a non U.S. operations. The term as adjusted reflects the removal of the impact of billing days currency fluctuations and.

Certain intercompany adjustments in our international operations. This is a non-GAAP financial measure designed to provide insight into certain revenue trends in our operations.

On an as adjusted basis third quarter staffing revenues were up 3%.

Year over year, U.S. staffing revenues were 973 million up 5% on an as adjusted basis non U.S. staffing revenues were 280 million down 0.3% year over year on an EPS adjusted basis, we have 325 staffing location.

Worldwide, including 86 locations and 17 countries outside the U.S.

There were 64.1 billing days in the third quarter versus 63.3 days in the same quarter one year ago.

The current fourth quarter has 61.7 billing days equivalent to the fourth quarter one year ago.

Currency exchange rate movements during the quarter had the effect of decreasing reported year over year staffing revenues by 11 million. This reduced our year over year reported staffing revenue growth rate by 0.9 percentage points.

Now, let's take a look at the results for Protiviti Global revenues in the third quarter were 299 million 235 million of that is from the United States and 64 million is from operations outside the United States.

On an as adjusted basis Protiviti global revenues were up 15% versus the year ago period.

On an as adjusted basis U.S. Protiviti revenues in the third quarter were up 16% from the prior year non U.S. revenues were up 9% own announce adjusted basis.

Change rates had the effective decreasing year over year, Protiviti revenues by 2 million and decreasing the year over year reported growth rate by 0.8 percentage points Protiviti and its independently owned member firms serve clients through a network of 86 locations in 27 countries.

Yeah.

Now, let's turn to gross margin.

Temporary and consulting staffing operations.

Third quarter gross margin was 37.9% of applicable revenues compared to 37.8% of applicable revenues in the third quarter one year ago.

Permanent placement business revenues were 10.7% or consolidated staffing revenues in the third quarter of 2019, which is flat compared to the last year's third quarter, when combined with temporary and consulting gross margin overall staffing gross margin rose 10 basis points compared.

To the year ago third quarter.

44.6%.

Activity gross margin was 88 million in the third quarter, 29.5% or Protiviti revenues, one year ago Protiviti gross margin was 71 million or 28.1% of Protiviti revenues.

Staffing SGN a cost for 30, 734.7% of staffing revenues in the third quarter compared to 34.1% in last year's third quarter.

Hey calls for positivity in the third quarter were 16.2% or Protiviti revenues versus 18.0% of revenues in the year ago period.

Third quarter operating income from our staffing divisions was 123 million.

Operating margin was 9.8%.

This amount are temporary and consulting staffing divisions reported 101 million and operating income.

In produced an operating margin of 9.1%, while our permanent placement Division reported operating income of 22 million and produced an operating margin of 16.2%.

Third quarter operating profit for Protiviti was 40 million, resulting in an operating margin of 13.

0.3% accounts receivable were 853 million at the end of the third quarter and applied days sales outstanding were 49.3 days.

Before we move to fourth quarter guidance, Let's review some of the monthly trends we saw in the third quarter of 2019, and thus far in October all adjusted for currency and billing days.

Our temporary and consulting staffing divisions exited the third quarter was September revenues up 2.8% versus the prior year compared to 3.4% for the full quarter revenues for the first two weeks of October were up 4% compared to the same period.

On October one year ago, when revenues were up 9%.

Permanent placement revenues in September for UBS hero, 0.5% compared to September of 2018.

This compares to 3.4% increase for the full quarter.

For the first three weeks in October permanent placement revenues were essentially flat compared to the same period last year when revenues were up 20%.

We provide this information so that you have insight as some of the trends we saw during the third quarter and into October but as you know these are very brief time periods, we caution against reading too much into them with that in mind, we offer the following fourth quarter guidance 1.500 billion.

To 1.565 billion.

[noise] income per share 94 cents to one dollar.

The midpoint of our guidance implies year over year revenue growth of 4% on a same day as adjusted basis, including Protiviti and EPS growth of 2%.

The projected tax rate is 28% compared to 27% a year ago.

Compared system sequentially to the third quarter just ended.

The midpoint of our guidance implies negative revenue and EPS growth of 1% and 4% respectively.

This differs from typical seasonal trends due to the loss of an extra billing day between the third and fourth quarters of 2019 in 2018.

In 2019.

We lose 2.4 days sequentially, whereas in 2018.

We lost only 1.6 days between quarters.

Limit our guidance to one quarter I'll estimates we provided on this call are subject to the risk mentioned todays press release and in our SEC filings now I'll turn it back over to Max Thank you Keith.

We're pleased with the company's third quarter results and encouraged by the continued momentum were seeing in our U.S. staffing and consulting operations. As we noted earlier Protiviti had a particularly strong quarter demand for Protiviti services was broad based across all of its consulting and internal audit solutions, including its managed solutions offerings provide a jointly.

With our staffing operations.

Our staffing operations are benefiting from the strong labor market, particularly in the United States.

In September the U.S. unemployment rate fell to 3.5%. The last time the rate was this low was in December 1969.

Staffing challenges are particularly acute for companies that are making technology investments the skills required for digital transformation projects are in short supply, which is fueling higher demand for specialized staffing services like ours.

We believe global labor shortages are going to have a durable impact on hiring demand. The vintage CEO confidence index showed a decline in overall confidence among Ceos small and midsize businesses in September .

Nearly 60% of these Ceos plan to higher in the year ahead or four point increase from the prior month.

While many of the various business confidence indices are off their historic highs they remain as strong absolute levels.

We're focused on technology investments within Robert half as we've talked about on this call the past.

Whether customers engage with us online or in person, we can provide a seamless experience supported by technology in the expertise of our local staffing experts.

That's a unique combination, which we believe is a key differentiator for Robert half.

We also see the blended solutions offered by our staffing and Protiviti operations as an important differentiator.

Protiviti is 2019 global finance trends survey.

Well that managed solutions models, where major projects are handled by a blend of full time staff.

Contract professionals and third party experts are gaining in popularity as an alternative to traditional outsourcing arrangements.

We believe we are uniquely qualified to provide these diverse staffing and consulting solutions all under one roof.

Now Keith and I'd be happy to answer questions. We ask that you. Please limit yourself as usual to one question on a single follow up is needed. If time permits will certainly try to return to you. If you have additional questions. Thank you.

[noise] at this time, if you would like to ask a question. Please press Star then the number one on your telephone keypad, our first question.

From our MOCON from Baird.

Your line is open. Please go ahead.

Good afternoon American keep.

But the quarter was it was really good, particularly as it relates to both Protiviti is well there.

Management resources. So wondering if you could talk a little bit about the growth that you're seeing in.

And your blended solutions your managed solutions.

Combination.

And where is that in terms of its development.

What's sort of which for potential do you see out of that one question and then a follow up has to do with the guidance Im just wondering you know keep sometimes you provide detail with regards to what you're explicitly expecting.

Segment, both in terms of.

Trends as well.

From a margin perspective, thank you.

So our blended solutions did quite well yet again.

Mack said earlier Protiviti is growth was broad based across all of it solutions areas.

Blended solutions, we can manage business solutions managed technology solutions did particularly well.

Clients certainly appreciate deep subject matter expertise, they get from productivity and scalable variable resources, they get from staffing they get that all under one roof.

Whether they are building something new whether they are fixing a problem whether they are cleaning up a backlog all three or perfect use cases for that blended solution.

As far as a development we think it's early days.

Potential we think is tremendous.

It's clearly for three or four quarters in a row than one of our fastest growing operations and we believe.

There's a lot of upside from where we are.

On guidance.

Maybe we'll just go down the personnel a bit.

For revenues with staffing or basically seeing a year over year growth rates, staying essentially flat with a third quarter. The U.S. stays strong Europe continues to slow, but the comps do get.

For four points easier.

We're particularly pleased with how we're doing in the U.S.

The macro and trade policy uncertainty that's in the news every day seems mostly limited to manufacturing and supply chain and we don't have a lot of exposure to that so we're holding up very well and our judgment in the U.S.

Because it's the fourth quarter, there's always calendar anxiety. This year, maybe more so than most because the holidays fall on Wednesday that concern is that more people decide to take.

The full week off those both candidates and clients, which could have more impact than it typically does but again revenues staffing.

Year over year year over year growth rates essentially flat with Q3.

Revenues for Tivity.

They will slow modestly.

In part because the comps are the toughest yet they were up 19% a year ago.

In the international zone. They have a couple of large projects that ended that will take down a little time to replace.

Further with productivity because they've been so busy this year their staff have deferred a lot of their time off that time off is scheduled a heavier in December that is typically the case.

Partly because of the wins the date that I talked about and partly because they just have more differ time off that effectively shortens the quarter, even more for protiviti. So some modest slowing.

In the year over year growth rates for positivity.

Gross margin flat to up 20 basis points Protiviti gross margin down 30 to 50 basis points because of the.

Time off.

And holiday impacts that I, just talked about effectively they utilize their staff.

Yes, because of that downtime.

SGN, a staffing up 50 to 70 basis points year on year, primarily due to negative leverage from the international's own Protiviti SGN, a down 50 to 70 basis points year on year operating leverage to higher revenues.

That means operating income for staffing down 40 to 60 basis points year on year, Protiviti up 10 to 30 basis points year on year.

Tax rate, 27.5% to 28% more nondeductible cost pursuant to the last tax tax law change shares about 115 million.

That's great. So it sounds like you're actually seeing good trends, you're just basically when we take a look at the guidance.

For the fourth quarter, you're basically accounting for that.

Wondering society.

To a certain extent and also on the Protiviti side, we've got some.

From vacation than we have to give our folks that's been deferred that correct summary, I mean, it doesn't sound like you're seeing any sort of change from a macro perspective.

We are relative to Q3.

Not at all particularly in the U.S.

As I said earlier, where we we think we take the trends pretty much intact into Q4 were particularly happy about our start for this quarter.

The early part of September coming back from the holidays was a little soft, but we picked up.

The second part of September which continued to October that we're happy about Protiviti is pipeline.

It's very strong order their market leaders on the call.

Yesterday actually described it as all switches are in the own position. So I thought that was a perfect way to describe kind of the tone of business for Protiviti.

Particularly in the U.S.

That's great to hear thank you.

Your next question is from Andrew Steinerman from JP Morgan. Your line is open. Please go ahead.

Hi, Keith I Hope you get a allow me six cyclical questioning here and definitely heard you already about the calendar anxiety, but my question is looking past just fourth quarter guide a 44% revenue growth you know is it to everything sort of in place for higher growth here are the tight labor.

Hi, good conducive real GDP still high small business confidence, even though it's off higher levels and so like as we think maybe even past for fourth quarter. You know shouldn't we have a backdrop that could give us kind of let's say higher than 4% growth as we move further out.

Well.

We would agree with all the observations that you just made we would also note that if you look at our compares for the next few quarters, they get easier not harder. That's also better. So we're bullish and were particularly bullish in the U.S., we have seen some slowing outside the U.S.

Europe , the UK for reasons that are.

Well chronicled, but it's certainly not abruptly declining but the trend line does show at declining.

Maybe not to the extent it did and the and the third quarter, but declining nonetheless.

Okay. Thank you.

Your next question comes from Jeff Silber BMO capital. Your line is open. Please go ahead.

Thank you so much.

In your prepared remarks, you alluded the fact that Robert half management resources is really the stand out amongst staffing was that because of the work that you're dealing with protiviti words or something else going on a net unit.

So it does not because of that work, we're doing with Protiviti, which is actually classified as Protiviti. This is their work other than that I'd say a few observations one.

Their clients have leaner middle management, which means anytime they have a project or anything out of the ordinary.

They're more in need for specialized skills, particularly higher level, which is where management resources.

Focuses.

Further the candidate supply for Robert half management resources is very different than for Accountemps. As an example management resources has access to a lot of people that have chosen.

To be contractors or consultants as a career and that essentially is not the case at all with Accountemps further the management resources candidates will travel and clients will pay for that travel.

Which further helps from a supply point of view so a very different candidate supply story for management resources. Then is the case for accountemps.

Okay. That's helpful. I appreciate that and I know, you're not giving guidance beyond the current quarter, but we've got a model out beyond that.

From a tax rate perspective is there anything we should know about in 2020 in the same thing in terms of capital expenditures for next year. Thanks.

I'd say that tax rate's going to be generally between 27 and 28%.

It move somewhat between quarters, you can't smooth to the extent you used to could.

On the Capex they were.

They were somewhat elevated.

This year and we would expect they would continue to be elevated next year as well.

Okay, great. Thank you so much.

Your next question comes from Kevin Mcveigh from Credit Suisse.

Your line is open. Please go ahead.

Great.

Hey.

Keith could you give us a sense of and I don't think you mentioned if he did that.

Just with the bill pay spreads where in the quarter and then just along those lines.

How you're hiring plans are shaping up.

So for bill rate increases this quarter, they were up 4.8% year on year.

That's a little less than it was last quarter.

And that's after dilution from non U.S. operations, the U.S. rate is higher.

If you look back and Oh forward, Oh, eight or nine period, it's not unusual to see swings as much as a full percentage point in our bill rate increases so 4.8 versus 5.4 last quarter, we don't read any particular significance into.

Hiring rate, we did continue to higher particularly late in the third quarter, which follows in.

To the fourth quarter, so that we can support our U.S. growth rate, we've clearly moderated our hiring outside of the U.S. given the macro conditions there.

Thank you.

Your next question comes from Tobey Sommer from Suntrust.

Your line is open. Please go ahead.

Hi, Thanks. This is jasper a bit on for Toby today, just based on the NFL NBA data. It seems funding available town has been the biggest issue for clients recently, but with small business confidence pulling back a bit has caution in hiring elongated the time it takes three to find hires as well.

Oh, so the short answer is.

There is an along engagement, but it isn't because of macro uncertainty it's more about yeah. So intense.

The competition for candidates.

One of the biggest issues, we have particularly on the Perm side, we spend all this time getting a Canada all the way to the point, where the client makes the offer the candidate goes back to their existing employer the existing employer counters at that and they don't leave their existing employer, we've we've done all.

The work, we would otherwise due to mix placement yet it doesn't happen so the.

Stress point is not that there's a lack of demand or a lack of job orders.

The stress pulling is the candidate tightness.

Great. Thank you said earlier, we're not particularly exposed to manufacturing or manufacturing supply chain and our end markets have held up.

We see reasonably well in the United States.

Right, Okay that makes sense. Thank you.

Your next question is from Gary Bisbee from Bank of America Merrill Lynch. Your line is open. Please go ahead.

Thanks, Yeah anymore color you can provide on the international performance, obviously slowing there, but again, it's quite tough comps, but relative to the data in major markets in Europe in other places your growth.

Can you just look quite strong so I guess, how does that trending how you're thinking about that and was there any defined change and pattern during the quarter. Thank you.

So as we talked about on the last call and is in fact played out.

We did see slowing Germany's our biggest market it slow, but it still has a positive year over year growth rate.

Australia was strong Canada still stayed strong, but if you look at Belgium would you look at to UK.

We did see slowing trends, which are expected to continue.

The macro slowing b to b it.

Treat uncertainty slowing will be at Brexit all of those are at play.

But.

We are barely negative year on year, and we would expect to get a little more negative year on year.

In the fourth quarter, but all about as I said earlier. It is helpful that our comps get four points easier in the fourth quarter versus the third.

Great. Thanks, and then and then the follow up just on the Perm business. When I look back over time in years, where there was more uncertainty that business, sometimes has cooled more aggressively into year end. Its companies just defer hires to the next year relative to.

Stronger either business sentiment or macro conditions I guess, how how are you thinking about the perm business both in the U.S. and overall as we trend through October November December .

Well because the overall environment is one where there are plenty of theres plenty of demand plenty of orders and the issue as candidates.

We don't have the traditional concern that the demand pauses or slows in the fourth quarter.

That said December as a month for the Perm business, there's always uncertainty attached to it and.

We're not discounting that we've talked a little bit about that earlier, but it's more about getting candidates identified agreed to and they actually make the job change and they make the job change to our client they don't stay put they don't tell.

Mike yet another offer that theyve gotten somewhere else so for us it's about.

Candidate control.

More so than it is job orders.

That's helpful. Thanks.

Again feel would like to ask a question. Please press Star then the number one on your telephone keypad.

Your next question comes from Manav Patnaik <unk> from Barclays. Your line is open. Please go ahead.

Yeah. This is a ride on from all of you know I'm. Just curious is interesting your comments about not really feeling any of the uncertainty in the US. If you look back over the past couple of years I mean, there's been some positives related to elections or tax reform I guess from your conversations what's different you know.

Even just from a pure headline standpoint of of people you know maybe thinking about holding back on hiring just because of all the different things. We you know we've seen going on that's obviously impacting Europe .

Well I.

I was.

I would reference a study that was published.

An economic study that was published based on Bureau of economic analysis.

In late October and the headline as job growth slowdown seems likely to be contain there as well as evidence of spillovers from manufacturing into other industries other than supply chain. So I think the point is because we're not that exposed to manufacturing and because the.

Slowdown seems focused on manufacturing the other pauses as you described a more broader than just manufacturing and that's how I would distinguish the too.

Fair enough and then you know lot of technology investments and we've talked about on the call here can you maybe talking about uptick in the use of the app throughout the quarter and how you can think about that going into next year.

But we're very pleased with how the App has launched the.

The engagement, we've gotten from those that come it's principally candidate focused.

We continue to add additional functionality improved the user experience personalize that user experience on both our App and online.

We're also continuing to expand the use cases, where we leverage our data using AI and now that's on the App as well as online we use it and how we market how we sell how we recruit how we match in fill jobs where.

We're pleased with where we are with our digital strategy with the implementation of what we've done a large part of that initial investment was in digital marketing, which is personalized micro targeted as to who gets it when they get at what the message is we talked on the last call about.

We're in Fyeighteen candidates that match to all our new job orders for doing that at scale, we've never done that before so we feel good about our digital strategy and we've got more to come.

Great. Thank you.

Your next question comes from George Tong from Goldman Sachs. Your line is open. Please go ahead.

Hi, Thanks, good afternoon.

You indicated that temp staffing exited the third quarter with September revenue up 2.8% year over year compared to 3.4% for the full quarter can you discuss what factors contributed to the slowdown.

Well as I said earlier early September was a little soft coming out of the holidays.

A lot we picked up later September and in October because we also put in the script there that our October growth rate year on year was 4%.

So we did better latter part of September and in October and it's actually an acceleration not a deceleration.

Got it that's helpful.

So you're maintaining your hiring rate in the fourth quarter relative to the third quarter in the U.S.

Based on what you said earlier moderating a little bit in the in the you can you help unpack that specifically.

How quickly you are scaling up your recruiters in the U.S. and what degree of moderation in hiring you're seeing and you.

Well, we try to roughly.

Kuwait, our hiring rate to our topline growth rate.

So do you is flat to down slightly so.

That's what our hiring plan looks like in the EU. The U.S. is growing 4% to 5% and that's what the hiring plan looks like.

Got it thank you.

That was our last question, we'd like to thank everyone again for joining us today.

Okay.

Today's teleconference. If you missed any part of the call there will be archived audio format in the Investor Center of Robert Half's website at Www Dot Robert half Dotcom you can also dial the conference call replay dial in details and the conference I'd are contained in the company's press release issued earlier today.