Q2 2021 Robert Half International Inc Earnings Call
Hello, and welcome to the Robert half second quarter 2021 conference call. Our hosts for todays call are Mr. Keith White, our president and Chief Executive Officer of Robert half.
And Mr. Michael Buckley, Chief Financial Officer, Mr. <unk>, you may begin.
Hello, everyone. We appreciate your time today.
Before we get started I'd like to remind you that the comments made on today's call contain forward looking statements, including predictions and estimates about our future performance. These statements represent our current judgment on what the future holds however, they are subject to risks and uncertainties that could cause actual results to differ.
Materially from the forward looking statements. These risks and uncertainties are described in today's press release and on our most recent 10-K and 10-Q filed with the SEC.
We assume no obligation to update the statements made on today's call.
During this presentation.
We may mention some non-GAAP financial measures and reference these figures as as adjusted reconciliations and further explanations of these measures are included in a supplemental schedule to our earnings press release.
Our presentation of revenues and the related growth rates for Accountemps office team, Robert half technology, and Robert half management resources includes their inter segment revenues from services provided to Protiviti in connection with the company's blended staffing and consulting solutions. This is how we measure.
And manage these divisions internally the combined amount of divisional intersegment revenues with Protiviti is also separately disclosed the supplemental schedule. Just mentioned also include a revenue schedule showing this information for 2019 through 2021.
For your convenience our prepared remarks for today's call are available on the Investor Center of our website Robert half Dot com.
We achieved record levels of revenues and earnings in the second quarter due to a broad based global acceleration in demand for our staffing and business consulting services.
We're particularly pleased with the strength of our permanent placement and Protiviti operations, which grew year over year by 102% and 62% respectively. Protiviti reached its 15th consecutive quarter of revenue gains with very strong growth in each of its solution areas I'm extremely.
<unk> proud of our staffing and Protiviti and corporate services professionals, who are the key to our success.
Companywide revenues were 1.581 billion in the second quarter of 2021 up 43% from last year's second quarter on a reported basis and up 40% on an as adjusted basis net income per share on the second quarter was $1.33, increasing to <unk>.
27% compared to 41 cents in the second quarter a year ago cash.
Cash flow from operations during the quarter was $165 million in June we distributed <unk> 38 per share cash dividend to our shareholders of record for a total cash outlay of 42 million. We also acquired approximately 717000, Robert half shares during the quarter for $63 million, we have 8.
1.4 million shares available for repurchase under our board approved stock repurchase plan return on invested capital for the company was 49% in the second quarter now I will turn the call over to our CFO Mike Buckley.
Thank you Keith and Hello, everyone as Keith noted global revenues were $1.581 billion in the second quarter.
On an as adjusted basis second quarter staffing revenues were up 33% year over year U S. Staffing revenues were $855 million up 34% from the prior year non U S. Staffing revenues were 267 million up 31% on a year over year basis hazards.
Justin.
We have 322 staffing locations worldwide, including 86 locations in 17 countries outside the United States.
In the second quarter, there were 63, 4 billing days unchanged from the same quarter 1 year ago.
Third quarter had $64.4 billing days compared to $64.3 billing days in the third quarter 1 year ago.
Currency exchange rate movements during the second quarter had the effect of increasing reported year over year staffing revenues by $24 million.
This impacted our year over year reported staffing revenue growth rate by 2.9 percentage points.
Temporary and consulting fill rates for the quarter increased 3.7% compared to 1 year ago adjusted for changes in the mix of revenues by line of business currency and country.
This rate from Q1.2021 was 3.4%.
Now, let's take a closer look at results for Protiviti global revenues in the second quarter were $459 million.
$366 million of that is from business within the United States and $93 million is from operations outside the United States on an as adjusted basis Globals second quarter, Protiviti revenues were up 59% versus 1 versus a year ago period.
U S protiviti revenues with U S. Protiviti revenues up 63% non U S revenues were up 43% on an as adjusted basis.
Exchange rates had the effect of increasing year over year, protiviti revenues by $8 million and increasing its year over year reported growth rate by 2.8 percentage points.
Protiviti and its independently owned member firms serve clients through a network of 86 locations in 28 countries.
Moving on to SG&A presentation, we remind you that changes in the company's deferred compensation obligations are classified as SG&A or in the case of Protiviti cost of services.
With completely offsetting changes in the related trust investment assets classified separately below SG&A.
Previously they were both classified as SG&A, our historical discussion of consolidated operating income has been replaced with a non-GAAP measure of combined segment income.
This is calculated as consolidated income before income taxes adjusted for interest income and amortization of intangible assets.
For your convenience we have included a supplemental schedule to today's earnings release on page 7 highlighting the impact of changes in the deferred compensation accounts to the summary of operations for the second quarter of 2021 and 2020.
This is a non-GAAP disclosure. So we also show a reconciliation to GAAP.
Turning now to gross margin in our temporary and consulting staffing operations second quarter gross margin was 39, 7% of applicable revenues compared to 37, 1% of applicable revenues in the second quarter 1 year ago.
Our permanent placement revenues in the second quarter were 12, 8% of consolidated staffing revenues versus 8.6% of consolidated staffing revenues in the same quarter 1 year ago.
When combined with temporary and consulting gross margin overall staffing gross margin increased 490 basis points compared compared to the year ago second quarter to 47, 4%.
For Protiviti gross margin was 29, 1% of Protiviti revenues compared to 23, 4% of Protiviti revenues 1 year ago.
That's it for the effect of deferred compensation expense related to changes in the underlying trust investment assets. As previously mentioned adjusted gross margin for Protiviti was 30% for the quarter just ended versus 25, 7% 1 year ago.
Transitioning to selling general and admin and administrative cost company.
Company SG&A costs were 39% of global revenues in the second quarter compared to 36, 7% in the same quarter, 1 year ago changes in deferred compensation obligations related to increases in underlying trust investments had the impact of increasing SG&A as a percentage of revenue.
By 1.5% in the current second quarter and increasing SG&A by 3.8% in the same quarter 1 year ago.
When adjusted for these changes companywide SG&A costs were 29, 4% for the quarter just ended compared to 32, 9% 1 year ago.
Staffing SG&A costs were 38, 4% of staffing revenues in the second quarter versus 44, 2% in the second quarter of 2020.
Included in staffing SG&A costs was deferred compensation expense related to increases in the underlying trust investment assets of 2.1% in the second quarter compared to an expense of 5.1% related to increases in the underlying trust investment assets in the same quarter, 1 year ago when adjust.
For these changes staffing SG&A costs were 36, 3% for the quarter just ended compared to 39, 1% 1 year ago.
Second quarter SG&A cost per Protiviti were 12, 5% of Protiviti revenues compared to 15, 1% of revenues in the year ago period.
Operating income for the quarter was $177 million. This includes $28 million of deferred compensation expense related to increases in the underlying trust investment assets.
<unk> segment income was therefore $205 million in the second quarter combined.
Combined segment margin was 12, 9%.
Second quarter segment income from our staffing divisions was $125 million with a segment margin of 11, 1%.
Segment income for Protiviti in the second quarter was $80 million with a segment margin of $17.4 per cent.
Our second quarter tax rate was 27% compared to 20% 1 year ago.
The comparative rate in 2020 was lower than normal due to adjustments made to the estimates of the pandemic impact on the 2020 tax free.
At the end of the second quarter accounts receivable were $908 million and implied day sales as day sales outstanding or DSO was 51.6 days.
Before we move to third quarter guidance, Let's review some of the monthly revenue trends, we saw in the second quarter and so far in July all adjusted for currency and billing days.
Our temporary and consulting staffing divisions exited the second quarter with June revenues up 34% versus the prior year compared to a 27% increase for the full quarter Rev.
Revenues for the first 2 weeks of July were up 35% compared to the same period 1 year ago.
Permanent placement revenues in June were up 83% versus June of 2020. This compares to a 97% increase for the full quarter.
For the first 3 weeks in July permanent placement revenues were up 83% compared to the same period in 2020.
We provide this information so that you had insight into some of the trends we saw during the second quarter and into July.
As you know these are very brief periods of time, we caution against reading too much into them.
With that in mind, we offer the following third quarter guidance.
Revenue 161 billion to $1.6 9 billion.
Income per share $1.35.
$2.1.45.
Yes.
The midpoint of our guidance implies new all time high revenue and EPS levels for the company.
Midpoint revenues of $1.65 billion or 37% higher than 2020 and.
5% higher than 2019 levels on an as adjusted basis.
Midpoint EPS of $1.40 is 110% higher than 2020, and 39% higher than 2019.
The major financial assumptions underlying the midpoint of these estimates are as follows.
Revenue growth on a year over year basis, staffing up 33% to 35% Protiviti up 46% to 48% overall up 36% to 38%.
Gross margin percentage temporary and consulting staffing.
39% to 40%.
Protiviti, 29% to 31%.
Overall, 41% to 43%.
SG&A as a percentage of revenues, excluding deferred compensation investment impacts staffing 35% to 36%.
Protiviti, 12% to 13%.
Overall, 29% to 30%.
Segment income for staffing tend to 11% protiviti, 17% to 18% overall, 12% to 13%.
A tax rate of 26% to 27%.
And shares outstanding at standing 100, or 111.5 million.
2021 capital expenditures and capitalized cloud computing costs.
$65 million to $75 million.
With $15 million to $20 million incurred during the third quarter.
We limit our guidance to 1 quarter.
All estimates we provide on this call are subject to the risks mentioned in today's press release and in our SEC filings now I'll turn the call back over to Keith.
Thank you Mike.
Our staffing results continued to reflect a faster pace of recovery than we've experienced in the past clients.
Clients have lean staff levels as they began to expand which is exacerbated by generally generally higher levels of attrition.
Also as they look remotely to fill their needs clients are elevating the experience requirements for other job openings, which further adds to the demand for our services.
The recovery is also a very broad based and spans across industries client size skill levels geographies and lines of business.
The National Federation of independent businesses are NFIB.
Recently reported that 56% of small businesses had fewer no qualified applicants for open positions and 46% had job openings that cannot be filled.
This speaks well to the ongoing demand environment.
Protiviti is multi year record of consecutive growth continues to benefit from our highly diversified suite of solution offerings and client base.
Blended solutions with staffing per per ticket is world class World class consulting talent with staffing <unk> deep operational resources to provide a cost effective solution to clients skills on scalability needs.
Protiviti has also benefited from project work in the public sector.
Resulting from various federal and state stimulus programs.
Approximately $100 million on revenue this quarter resulted from work related to these programs or approximately 7 cents of our earnings per share.
Growth in this public sector business contributed 32 points to Protiviti is year on year growth rate of 62%, while the core business accelerated to a growth rate of 30%.
Core growth was strong across internal audit technology consulting risk and compliance consulting and business process improvement with internal audit showing the most acceleration.
Public sector revenues represent 6% of total revenues and contributed 8 points to the company's overall, 40% growth rate.
A year ago, the world face an uncertain future with extraordinary challenges ahead.
On the way we've continued to invest in our tenured high performing work force. We also strengthened our investments in advanced AI technologies, enabling our professionals to help clients with critical talent and consulting needs and find solutions across broad resource pools. As a result, we closed the quarter.
With an employee base that is more engaged and productive than ever with all time high revenues and strong momentum leading into the second half.
Bolstered by the strength of our brands our people our technology on our professional business models. We're excited about the continued ability to find meaningful and exciting employment for the people we place.
And provide clients access to the specialized talent they need to grow and the deep subject matter expertise they need to confidently compete in a dynamic world.
Finally wed like to thank our employees for making possible. Another significant recognition received this quarter as Forbes named US Americas best professional recruiting for.
Now, Mike and I'd be happy to answer your questions. Please ask just 1 question on a single follow up as needed. If theres time, we'll come back to you for additional questions.
Yeah.
At this time.
To ask a question please press star 1.
To withdraw your question press the pound key.
Yeah.
Yes.
The first question.
Mark.
With Robert W. Baird.
Hey, good afternoon, Keith and Mike obviously.
I'm wondering if you could talk a little bit about protiviti specifically.
You mentioned $100 million in revenue that came from.
From a public sector.
Programs.
Sustainable do you think those those programs or how many kind of started up in the second quarter, what's the pipeline look like or how should investors think about.
That portion and then if we subtract out the $100 million.
From the from the inter segment revenues it looks like Youre also growing.
Our non public managed solutions business. So can you talk a little bit about guidance.
Traction youre seeing there.
Sure.
So again to size. This it was 100 million on revenues for the quarter.
Only 6% of our overall revenues it added 8 points to our growth rate and at 7 pennies a share.
It was again led by unemployment and housing assistance.
The good news is there's still a backlog of demand.
Many states have already extended us into Q3 and 4.
The tail is expected to last well into 2022.
Our forecast is flat for Q3 sequentially and for a modest decline in Q4.
So the pipeline for non transactional rfps increased 8 fold during the last 90 days projects such as performance improvement data analytics controls modernization. So we're cautiously optimistic that our win rate will be good but those.
Opportunities given the strength of our new relationships.
As you mentioned not only did we grow the public sector portion of inter segment, but we also grew the balance of inter segment, which is managed business solutions managed technology solutions between staffing and Protiviti. So that grew 40%.
9% year on year, as well that had nothing to do with public sector.
So bottom line is the transactional work we were doing has a longer tail than most expect and will will likely last well into 'twenty 'twenty..2 we're certainly ramping up a pipeline beyond that and stay tuned to see what our win rate is.
That's great and then.
On a really.
To that can you just talk a little bit about who you're winning from I mean, when you when you mentioned Matt.
Old increase.
Yes.
Where were those where would those opportunities have gone on previously.
How would you characterize the win rates like we are.
Who are you winning from and how big is that potential Tam do you think based on.
On that strength.
I'd say most of those competing with us for the non transactional work or other consulting firms, including the big 4 not other staffing firms for the transactional work clearly the other staffing firms are in some of the states as well.
So it's relatively new days for us with these public sector clients as I've said before we're very we feel very good about the referrals, we're getting from the relationships we've already.
When we've already established and therefore.
Only time will tell what our win rate will be but we're optimistic.
And our win rate clearly rises when we have existing relationships.
Terrific. Thank you.
Yeah.
Your next question is from Jonathan Silver.
With BMO capital markets.
Thanks, so much.
You mentioned the temporary consulting billing rates I was wondering if we could talk a little bit about wage rate and bill price spreads and are you doing anything different on the supply side to track or maybe theres constraints different from prior quarters from prior years.
So first of all the the wage rates are up a little less than the bill rates and I gave you a global rates. The U S rates are a little bit higher than the global rates.
When we talk about candidate supply is tightest at the staff are transactional level, but it's manageable we have successfully recruited and.
On the environments with much lower unemployment rates, while currently it's $5.9 overall in 3 and a half for college grads.
Just in 2019, it was 3 and a half overall on 1.9 for college Grads and frankly, if you adjusted the current rates for participation rates that would be even higher.
I'd say that remote candidates have meaningfully expanded the pool.
Our technology our footprint facilitate this.
Further we do expect some relief at the staff and transactional level as unemployment benefits decline in child care in schools reopen.
Hum.
We're passing through the wage inflation that we're having and we've actually expanded our margin some.
And clearly candidates want more remote options and frankly, we want a premium if you want them to work on site.
But net net we think the supply is manageable and we're not only at the staff and transactional level, but we are mid and higher skilled as well and it's not near as tight there as it is at the staff and transactional level.
Okay, that's really helpful.
Shifting gears a bit on talking about your internal hiring if I remember correctly last quarter. You said did you say you had enough capacity to last at least for the next couple of quarters given the strength that you saw last quarter are you ramping up your internal hiring.
And so were clearly ramping perm more quickly than temp or contract for obvious reasons and so we'll begin now to slowly add to our chip and contract internal staff and will get even more aggressive on the permanent.
So aside given how successful it's become.
Okay really helpful. Thanks, so much cash.
Your next question is from Andrew Steinman with J P. Morgan.
Hi, there I don't know if you're going to say this is the same type of question but.
I wanted to know if you feel like Robert half right now.
For multiple years of strong <unk>.
<unk> staffing growth you know usually there is multiple years.
I'm still on growth when you add a new economic cycle I definitely heard you say I feel like supply is manageable.
But my question really stems from you said, hey, we've really seen faster pick up demand here than typical so my question is when do you see this foster demand in typical or do you feel like it might not be as long.
As you typically see.
Okay. So, let's first talk about how much faster so far and so we measure 4 quarters past trough and we compare that against the OE to 9 in the 2000.2001 downturns and so this time 4 quarters past trough on the <unk>.
Her contract side were up 38% on the Perm side were up 96%.
And that compares <unk> 9 to per contract up 14 per about 33.
2000, 2000 war on Tempur contract 'twenty up 23, 4 quarters in and per them up 41. So clearly it's just a fact that so far we've recovered more quickly now.
Further if you look back to the same periods of time.
Or.
The OE OE 9 period 3 years, hence we had compound annual growth rates of <unk> 12 per cent a year for temp contract and 24% a year for Perm.
And 2000.2001 period was frankly double that.
So.
History would say and if anything it's repeating even better that historically history would say that once we start recovering we have a 3 to 5 year runway of outsized growth and there's there's nothing.
That would say otherwise as we sit here in fact I want to make a I want to make another structural point, which I think is relevant to when we're talking 3 to 5 years.
We think this widespread adoption of remote work is a structural win for us.
It's more difficult for clients to recruit remotely, particularly our smbs, which mostly have local footprints.
Clients want more experience when they're recruiting remotely.
Because they want to minimize the training requirements from their new hires.
We can deliver deeper skills lower price points, when we recruit outside local markets, particularly when we're recruiting for clients on large metro areas.
Our competitive position improves, particularly against our tougher local and regional firms, we have a national candidate database with local candidate relationships because of our footprint.
Our advanced day I matching algorithms provide real time short list not only of local candidates, but national candidates for every single job order, we get we give our internal staff a national selection as well as local on.
Al goes are trained with profiles of our most successful candidates across millions of actual engagements and further. Furthermore, these multi state candidates administrative requirements that come with remote work.
We access through our mobile App, which is the number 1 rated in the industry for 8 out of 5 and we just processed our 1 millionth time record through that App and quite frankly, our competitors don't have any of that.
And then to add further if you look at our SaaS based internal infrastructure.
It allows our staff to work remotely that improves their job satisfaction their productivity per income potential and allows us to balance our workloads across a much broader geographic area. So I would argue.
That not only do we have the traditional opportunity as business conditions improve.
There is this the structural shift to hybrid slash remote gives us a lot of advantages, we havent havent traditionally had.
Thank you.
Great I appreciate at the time.
Yes.
Your next question comes from the line of Manav Patnaik with Barclays.
Thank you Keith maybe just some comments around that.
Margin and.
With this I guess faster than expected, we should we expect more leverage on <unk>, just any any thoughts there would be appreciated.
Well as we look forward and margins I'd say first let's let's talk gross margins.
On the 1 hand, we're at all time highs and by the way our.
Contract to hire conversions this quarter were $3.4 per cent of revenue so that was up.
But.
As we look forward, we think there is a upside with those conversions that have been as high as 4% and that's all that's all operating margin as well as gross margin.
But there's also this mix shift to higher skill levels.
And mix is our friend, we get higher gross margins as we move up the skill curve day.
They've been a big part of our margin expansion. If you look back 10 years and.
And our appetite to continue to move up that scale curve. If anything is greater which is a great thing for future gross margins further on the SG&A side.
We have a new opportunities to leverage.
As I just talked about as our people can fill jobs remotely they are.
I'll get more productive we can leverage our technology spend which has been significant we can leverage our field infrastructure, which is now is only now returning back to 2019 levels. So we're bullish as we move forward in time, we can.
On further expand our operating margins for the reasons I just mentioned.
<unk>.
And maybe specific to activity.
How should we think of that given this.
Massive growth.
On the government solutions and as that comes down by just the moving pieces there.
Well because an ever growing portion of Protiviti is this blended activity with staffing.
We frankly think it's best to look at our enterprise margins, rather than staffing alone or Protiviti alone.
And all the comments I just made apply to the enterprise.
Okay alright, thank you.
Your next question comes from the line of Hamzah <unk> with Jefferies.
Yes.
Hey, this is actually on Ryan gunning filling in for Hamzah.
I'll touch on a little bit, but could you comment a little more on where you are on your technology journey.
Use of AI to match candidates in your digital footprint range in general and what's behind you, what's yet to come.
Okay.
Well we've had significant.
Accomplishments.
On the last few years, a we've got a SaaS base Salesforce Dot Com front office infrastructure.
Infrastructure B we've adopted.
Work day, not only for financials, but per for payroll and HR, but financials as well.
See as we've talked about.
Before we've spent significantly.
To create what we think is competitive advantage.
By having our matching engine trained based on the profiles of our most successful candidates based on actual work performance across millions of jobs.
We're further enhancing that by also trying to predict using data using activity signals likelihood to engage because.
Predicting fit is important but predicting fit and likelihood to engage is more than doubling importantly.
So we will continue to invest there or mobile app highly rated very successful talked about that I would say at 50000 feet. We've long talked about this continuum of traditionally as traditional staffing on the 1 side.
Talent platforms self service driven on the other with the latter giving clients access to our technology given access to our candidate database, which is second to non for professional level people.
We're still about building out that other side of that continuum, we have made significant progress.
We hope in the next few quarters.
Have at least a minimum viable product ready to go to market there, but our vision is that clients not we should choose how much they want to interact digitally versus how much they want to interact traditionally and quite frankly, our belief is that.
While many might first come to us thinking they want to do it digitally self service. It will ultimately become lead gen. As they find that they need more help closing candidates.
And therefore.
Benefiting the traditional side simply by having the talent marketplace.
Self service solutions that would be principally digital.
It would start as all digital.
We feel great about the technology initiatives the technology spending.
The impact that they've had I can I can assure you we've made tens of thousands of placements on a remote basis using this technology that we simply couldn't have done 5 years ago. So we know it works we know it's effective and we strongly believe in.
We can make it even better.
Great. Thank you and then kind of switching over to the competitive landscape.
Can you just talk about whether you see someone like Linkedin being competitive threat at some point in the future whether you see it more complementary to the business.
Yeah.
Say, whether its point in weathers indeed.
Whether it's other job boards.
We've often described them as fit as frenemies on the 1 hand, we use them all as part of our sourcing strategy, Although I'll tell you today.
We sourced more candidates directly to our own website.
Then all other digital sources combined.
And that's a major movement from what I would've said 5 years ago.
Oh sure we use linked to ensure we use indeed share we use some of the other boards.
We believe.
The brand.
Combined with an AI driven outreach program, where we invite candidates to apply for all our open positioning drive a lot of traffic straight to us the numbers speak for themselves as I just described.
So linkedin isn't new linked in doesn't have new game.
Game changing tools, they're 1 of many sources for us, but as I said and we're very proud.
Traffic coming directly to us has never been greater and is growing.
Okay.
Got it thanks.
Your next question is from Kevin Mcveigh with credit Suisse.
Great. Thank you.
Congratulations on the results.
Thank you to Mike Love with beats. The last 2 quarters has been significantly upsized reality, keeping cash recoveries things like that.
What's been driving the incremental upside relative to the expectations you've been setting at the beginning.
Quarter, because again from an EPS perspective sizable beats, but if you think about that where are the puts and takes then against the initial guidance you've been setting, particularly against the last 2 quarters.
Well I would say the <unk>.
Strength of the recovery has been much greater than expected and much greater than traditionally.
Because not only do we get the lift we've traditionally gotten as our clients who are lean get more transaction volume start new projects and need our help.
Incremental to that is this higher level of attrition or churn.
Yeah.
Net increases demand and further this appetite slash need for remote workers.
Makes them less inclined to do it themselves and more incline.
To use a third party and why not America's best professional recruiting firm.
And so.
<unk> got that traditional tranche of lift you get early cycle.
That's been added to by the higher attrition.
On the the appetite for remote candidates.
So it's been a wonderful thing.
And we think sustainable.
Quick follow on 1.
200 million of government Protiviti.
Net.
On the understanding.
I'd say, it's 95% in Protiviti, but remember now.
All of that is not inter segment. The inter segment is the contractor participation on those engagements. There is also pretty professionals.
Participating on those engagements and there is revenue there. So when we gave you 100, we've been totally transparent it's everything.
Got it.
And then just different from how much is in the Q3 guidance.
Q3 guide government is flat.
Thank you.
Sequentially flat.
Your next question is from Tobey Sommer with Truest Securities.
Thanks.
Could you dig into the factors driving perm.
Is <unk>.
With such high growth in such a high percentage of sales.
Versus temp and.
And maybe specifically.
The extent to which your clients looking nationally to recruit is a contributor.
Well as I just said.
As clients transaction volumes pick up because they're starting at a leading point given what they've gone through as their transaction volumes pick up they need people as they start new projects or restart projects that day mopboard they need new people.
They also are having to deal with higher attrition.
They need new people.
Many times they have to look outside the current market or want to look outside to current market E. Either a for a better price point. So if you're on a big city and you recruit outside of Big City. There is usually a cost arbitrage benefit to the client or if you are looking for a really deep skills you can't find locally.
Look outside for that.
You are more inclined to use a third party for remote hiring.
You are for.
Local market so all of those things.
Stacked on top of each other.
Which provide for a wonderful environment for Perm.
And by the way tip on contract benefit as well because many times.
During the time it takes to get a full time person on board, it's a perfect opportunity for temp in contract to sell he will give you a person on.
Until you make that full time hire and in fact, we will give you a person you may fall in love with and want to hire them full time.
So there's a nice little network effect.
And then it's the strongest combination we've ever seen and as I said earlier.
We believe this.
Long term shift to hybrid slash remote structurally positions us better than we've ever been positioned vis vis clients doing it themselves or going to our local competitors that don't have any of the capabilities or limited capabilities without talking.
About earlier.
Alright, thank you.
With respect to bill rates and what.
This phenomenon means for them over the course of the cycle.
How do you net out this.
Potential labor arbitrage, which food.
Be a decline in bill rate and on comp when you were talking about perm or contract.
In the natural.
The sort of normal wage inflation and the news that we're seeing with commodities in general inflation fears on how do you net that out when you look at the business over the medium term.
Yes.
Well, we've got a multi decade multi decade history of passing on whatever the wage inflation is for whatever the reason is.
And.
This business about labor arbitrage driving.
The.
Desire to go out of market I don't think our margins get squeezed because if anything that that arbitrage spread itself.
It gives us an opportunity to participate in that.
So I would argue there is a new opportunity, there's an incremental opportunity for us to expand our margins as we take a bit of that arbitrage margin.
So I understand that but actually on the.
The bill rate growth.
Bill rate growth.
To the extent it.
It's.
Muted somewhat by the.
The lower aggregate Bill rate I think you more than make that up by expanding the margin on the arbitrage.
So I certainly don't see it as a negative.
Okay. So.
A bigger margin driver and.
Maybe different kind of revenue okay. Thank you so much free health Yep.
Yes.
Your next question comes from Gary Bisbee with Bank of America.
Hi, good afternoon.
Interesting continued progress of this public sector work.
I guess you've.
You've talked about the opportunity in pipelines and obviously, it's just been terrific in the last few quarters as you think about that as a segment of work you've not done a lot in the past are there any downsides to the public sector as a customer whether that.
Its ability funding cycles anything particular about the work or the profitability.
I understand some of that.
Either directly or indirectly pandemic related and some of that.
At some point, but other than that is there anything you'd call out about serving that sector relative to that.
The corporate World, which has been your primary customer base.
Well I'd say first of all from margins, we get normal margins on the public sector work, they're not really higher or theyre, not really lower we get normal margins. So that's a good thing clearly.
The contract administration is different.
And.
A bit more bureaucratic than we get for non public sector work, but.
We benefit from Protiviti, having all of these GSA schedules, which <unk> had for a very long time, which were principally used for federal work for Protiviti as government services group.
We've been able to leverage those with state and local groups. So that certainly helps.
Net.
As a client we find.
That particularly at the state level.
Because they don't really compete with each other.
Dave there's a lot of friendly relationships on a lot of friendly referrals from 1 state to another state.
And so.
We've found that kind of land and expand where you start with.
The controller upstate a and you do a good job. They refer you to the controller for state B and so forth and so if anything because they're not directly competitive.
As compared to kind of commercial clients, if you will where they or their equivalents would compete with them. They wouldn't refer you 2 of them, it's actually better from that standpoint on the public side, but it's new ground for us we've been very open about that but.
But we're optimistic our clients generally speaking in the public sector are very happy with us have referred already to us as I said earlier, our pipeline grew eightfold in 90 days and 90 days it grew eightfold.
So now now the onus is on us.
To deliver on some of that.
And that dovetails nicely into my follow up which is just.
Given how fast revenues gone and how strong your mark.
<unk> had been at.
Seem likely to me that youre going to need to step up SG&A investment meaningfully.
To sell and serve all of this all of this business you know I look at Tampa at all time high gross margin.
Perm business the operating margin.
In a historical context at a level that rarely has persisted for long, obviously protiviti margins are off the charts.
As we think.
Over the next couple of years.
Demand stays strong do you think these profitability levels are sustainable or.
Has your ability to invest not been as quick as the revenue has come back such that it would be more likely to put a lot more.
Money to work in and margins might be impacted as you did that.
Again as I said earlier I think the best view is to take on enterprise margin view, and we think we have enterprise margin upside potential.
After funding the SG&A that you described.
Also remember as I said earlier with technology, we've learned the last 15 months that we can fill jobs internally from non local markets, which allows our entire workforce to be more efficient because we can balance those.
Work loads over a much larger group of people.
And effectively that's a permanent increase in the productivity level of our people and therefore, a permanent reduction in SG&A certainly as a percentage of revenue.
So.
Focus on the enterprise, we believe that the operating margins. We just had this quarter, which I think we are at 12, 9%.
Enterprise.
We don't think those are peak.
We think we have upside we think we have gross margin upside as the mix continues to gravitate.
Because that's where we're focused up to scale curve. We think there is gross margin upside.
And again from an enterprise point of view, we think we can leverage the SG&A base from where we are.
Great that's helpful color.
Thanks.
Your next question is from David Silver with <unk>.
Yes.
Yes, hi, thanks very much.
So I had a couple of questions I think the first 1.
Keith I was wondering if you could maybe comment on your strategies for your own staff retention.
In other words, you know my my recollection is that.
Sometimes the best producers and in industries, such as yours.
Maybe take the opportunity during very robust periods or when their marketing.
Marketability as the strongest to either I don't know hanging up their own shingle or they're susceptible to poaching from some of your competitors.
And I ask this I guess when I think back about a year ago I think Keith you purposely kind of adopted a very lean staffing strategy at the onset of the pandemic and we're comfortable running.
With lower staff levels. So as we reopen here I mean, how do you think about.
The need to kind of retain your best producers to kind of hit hit your internal targets. Thank you.
So pertaining our best producers is everything.
And the tenure of our best producers is second to none in the industry by leaps and bounds.
<unk>.
What we've learned in the last 15 months is they place a huge premium on flexibility the ability to work from home and.
So we've extended their individual choice to the end of the year and we've already announced it'll be hybrid thereafter hybrid to be defined with as much flexibility for them as we can do.
So we're committed to this new model for their benefit there.
It helps their job satisfaction it helps there.
Their income levels.
They appreciate these technology investments that we're making it brings more clients. It brings more candidates it brings national candidates as well as local candidates.
I can't think of a time, where our individual.
Recruiters benefit more by being part of our organization than now given the technology investments that we've made.
They're making more money because we are leaner we have hockey sticks.
Shaped incentive plans, where they get a larger and larger share of the incremental gross margin they produce.
As they grow their own book of business. So it's a combination of all those things, but I can assure you.
Controlling where they work given they've proven how productive they can be at home.
Is is hugely important in all of the surveys we do with our employee base, which we do often.
Okay, Great and then last 1 other question more philosophically and it would be.
About your permanent staffing business, so 2 parts, but the first part just the clarification, but.
Is the quarterly revenue this quarter and the $30 million plus EBIT are those both all time quarterly records for your company that and then just to kind of put that in context, you know when I took a labor economics in college I mean, we were.
We're told that the.
The decision to hire people permanently.
Something that happens as the economic cycle.
Cycle, let's say matures as opposed to being at an early stage and you know to.
To me second quarter of 2021 were far from.
On a mature stage of the current economic reopening recovery.
Rebound what have you. So you know from your perspective, I mean, how would you characterize the current.
Very healthy appetite from your customers for permanent hiring as opposed to something.
More temporary or project based and then can you maybe project forward, maybe thinking about where perm revenues or perm demand might reach during this current cycle matures. Thank you.
Well I'd say first of all our early cycle per.
<unk> always outperforms.
Per contract and in fact, the last 2 cycles.
CAGR pretty much double what tempur contracted for 3 and 5 years and so what we're seeing from that standpoint is somewhat akin to what we've seen before.
I would say there is so much press every single day about how tight candidate market, which frankly relates more to the transactional and staff level than across the board, but psychologically it impacts virtually every client and to the extent the belief is labor is really tight.
You want to.
You want to buy it rather than to lease it for per lack of a better way to say it.
Uh huh.
And there is all the more incentive for them to hire full time and to remember from a permanent placement standpoint churn is your friend.
And there's a lot of churn as we speak.
Some of which has picked up attrition because there wasn't much in 'twenty 'twenty.
And as the Sun has come out and candidates are more confident theyre, making more changes that shows up in to the national Jones numbers.
Yeah.
That's great.
That's fine we're right at the top of the hour I appreciate the insight. Thank you.
Okay.
Your next question is from George Tong with Goldman Sachs.
Hi, Thanks, good afternoon.
Looking across Accountemps office team RH technology and are each management resources. Your revenue performance in <unk> 2021 versus <unk> 2019 vary quite a bit among the segments can you, perhaps discuss what's driving that variation, namely the decline in accountemps and the growth.
Management resources office team of technology versus to Q2 thousand 19.
Well so first of all let me say that overall on the Tempur contract side were 2% below.
Q2, 2019 on the permanent placement side were 2% above so essentially where we've returned to 2019 levels overall now.
Now.
Our higher skilled divisions, Robert half management resources, Robert half technology are more project driven they declined less.
There are also more remote work friendly which is a reason they declined less so because of they declined less they've recovered not quite as quickly as the more transactional.
Patients Accountemps and office team.
Office team has been the largest beneficiary of the public sector work.
Which is why it's outperformed accountemps at that leaves in accountemps with with it staffing and transactional level work.
That's more on premise less remote more impacted but also recovering more quickly.
But I think the bottom line is.
Overall, we're back to 2019 levels and we're growing from there and we're growing quickly.
Got it that's helpful.
Historically your gross margins have been approximately 41, 5% on a full year basis based on temp wage trends today in bill pay spreads when do you believe you'll return to historical gross margins.
Well so the gross margins if we're talking consolidated staffing gross margins which include.
Tip contract and Perm were actually higher than that.
So we're not below historical gross margins. So let's look first of all at Kimpton contract only we were at 39, 7% this quarter, that's the highest ever.
Permanent placement margins are pretty much in line with what they've always been.
The mix of Perm to the total is higher than it's ever been so when you put the 2 together we have the highest.
Staffing consolidated gross margins in our history and as I. Just said, we think we have upside from here, primarily as we continue up the skill curve and higher skills are our friend from a margin standpoint.
So today, we have our highest gross margins ever.
And we think we have upside as we continue to move up the skill mix.
Thank you.
Okay. So that was our last question. We appreciate everyone joining the call. Thank you.
This concludes today's teleconference. If you missed any part of the call. It will be archived in audio format in the Investor Center of Robert half website.
Www Dot Robert half Dot Com you can also dial.
Conference call replay.
Details on that.
<unk>.
Contained in the company's press release issued earlier today.
Okay.
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