Q3 2022 Robert Half International Inc Earnings Call

October 20, 2022

On your phone.

For today's call, Mr. Keith Waddell, President and Chief.

So of Robert half and Mr. Michael Buckley, Chief Financial Officer.

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 of what the future holds Howie.

Ever they are subject to the risks and uncertainties that could cause these actual results to differ materially from the forward looking statements. These risks and uncertainties are described in today's press release and in our.

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.

A 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 each of our contract functional specializations includes inter segment revenues from services provided to Protiviti in connection with the company's blended talent solutions and consulting operations.

This is how we measure and manage these businesses internally the combined amount of intersegment revenues with Protiviti is also separately disclosed the supplemental schedule. As just mentioned also include a revenue schedule showing this information for 2020 through 2022.

For your convenience our prepared remarks for today's call are available in the Investor Center of our website Robert half Dot com.

We're pleased to report third quarter year over year revenue growth of 7%, 10% adjusted for currency over and above the very strong 44% in the same quarter last year permanent placement led the way growing 17% or 20% adjusted for currency and Protiviti revenue.

<unk> reached new all time highs our results are a testament to the strength of our global teams as they demonstrate their agility and persistence, which makes our success possible.

Companywide revenues were 183 3 billion in the third quarter of 2022 up 7% from last year's third quarter on a reported basis and up 10% on an as adjusted basis net income per share in the third quarter was $1 53, the same as the third quarter a year ago.

Cash flow from operations during the quarter was 179 million in September we distributed a 43 cent per share cash dividend to our shareholders of record for a total cash outlay of $46 million.

Our per share dividend has grown 11, 4% annually since inception in 2000 and for the.

September 22 dividend was 13, 2% higher than in 2021.

We're also we also acquired approximately one 1 million Robert half shares during the quarter for $86 million.

We have $4 7 million shares available for repurchase under our board approved stock repurchase plan return on invested capital for the company was 45% in the third quarter now I'll turn the call over to our CFO Mike Buckley.

Thank you Keith and Hello, everyone as Keith noted global revenues were $1 833 billion in the third quarter on an as adjusted basis third quarter talent solutions revenues were up 12% year over year U S talent solutions revenue were 1.049 billion up.

13% from the prior year.

Non U S talent solutions revenues were $273 million up 10% year over year on an as adjusted basis.

We have 316 talent solutions locations worldwide, including 85 locations in 17 countries outside of the United States.

In the third quarter, there were $64 three billing days compared to $64 four billing days in the same quarter one year ago.

The current fourth quarter has $61 two billing days compared to 61, seven billing days one year ago.

For 2023 billing days by quarter will be 63, 363, $463, one and 61.1 for a total of 250 <unk> nine.

Currency exchange rates movements during the third quarter had the effect of decreasing reported year over year total revenues by $45 million.

$32 million per talent solutions and $13 million for Protiviti.

Negatively impacted our year over year overall revenue growth by two six percentage points.

Two seven percentage points for talent solutions, and two six percentage points for Protiviti.

Contract talent solutions Bill rates for the quarter increased 9% compared to one year ago adjusted for changes in mix of revenues by functional specialist specialization currency and country.

This rate for the second quarter was eight 2%.

Now, let's take a closer look at results for Protiviti grew.

Global revenues in the third quarter were $511 million.

$416 million of that is from business within the United States and $95 million is from operations outside of outside of the United States.

On an as adjusted basis Global third quarter, Protiviti revenues were up 5% versus the year ago period with U S. Protiviti revenues up 4%.

Non U S revenues were up 7% on an as adjusted basis.

Protiviti and its independently owned member firms serve clients through a network of 89 locations in 29 countries.

Companywide third quarter public sector revenues were 89 million of which $63 million were reported by Protiviti and the balance reported by talent solutions.

Currency exchange rates had the effect of decreasing year over year public sector revenues by approximately $5 million we.

We expect fourth quarter 2022 public sector revenues to be $80 million to $90 million, which will result in full quarter and full year revenues being down approximately 6% or 2% adjusted for currency.

Turning now to gross margin.

In contract talent solutions third quarter gross margin was 39, 4% of applicable revenues compared to 40% of applicable revenues in the third quarter one year ago.

Conversion revenues or contract to hire were four 1% of revenues in the quarter.

Our permanent placement revenues in the third quarter were 13, 8% of consolidated talent solutions revenues versus 12, 9% of consolidated talent solution revenues in the same quarter one year ago.

When combined with contract talent solutions gross margin overall talent solutions gross margin was 47, 8% compared to 47, 7% of applicable revenues in the third quarter one year ago.

For Protiviti gross margin was 35% of Protiviti revenues compared to 29, 5% of Protiviti revenues one year ago adjusted.

Adjusted for deferred compensation related classification impacts gross margin for Protiviti was 30% for the quarter just ended compared to 29, 4% one year ago.

Moving on to SG&A.

Enterprise SG&A costs were 29, 9% of global revenues in the third quarter compared to 28, 9% in the same quarter one year ago.

Adjusted for deferred compensation related classification impacts enterprise SG&A costs were 36% for the quarter just ended compared to 29% one year ago.

Talent solutions SG&A costs were 35, 3% of talent solutions revenues in the third quarter versus 35, 9% in the third quarter of 2021.

Adjusted for deferred compensation related classification impacts talent solutions, SG&A or 36, 3% for the quarter just ended compared to 36% one year ago.

The higher mix of permanent placement revenues this quarter versus one year ago had the effect of adding 0.4 percentage points to the quarter's adjusted SG&A ratio.

Third quarter SG&A costs for Protiviti were 16% of Protiviti revenues compared to 12, 1% of revenues in the year ago period as operating expenditures returned to more normal levels.

Operating income for the quarter was $239 million adjusted for deferred compensation related classification impacts combined segment income was $224 million in the third quarter.

Combined segment margin was 12, 2% third quarter segment income from our talent solutions divisions was 152 million with a segment margin of 11, 5%.

Segment income for Protiviti in the third quarter was 72 million with a segment margin of 14%.

Yeah.

Our third quarter tax rate was 26% up from 25% in the same quarter one year ago.

At the end of the third quarter accounts receivable were one point.

101 billion and implied days sales outstanding or DSO was 54 days.

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

Contract talent solutions exited the third quarter with September revenues up 6% versus the prior year compared to an 11% increase for the full quarter.

Revenues for the first week of October were up 5% compared to the same period one year ago.

Permanent placement revenues in September were up 17% versus September of 2021.

This compares to a 20% increase for the full quarter.

For the first two weeks of October .

Permanent placement revenues were up 2% compared to the same period in 2021.

We provide this information so that you have insight into 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 that.

With that in mind, we offer the following fourth quarter guidance revenues, one 695 billion to 177 5 billion.

Income per share $1 31.

To $1 41.

Yeah.

Midpoint revenues of $1, 73, 5 billion or one 7% higher than the same period in 2021 on an as adjusted basis.

The major financial assumptions underlying the midpoint of these estimates are as follows.

Revenue growth year over year on an as adjusted basis.

<unk> solutions down 1% to up 4%.

Protiviti up 1% to up 4%.

Overall flat to up 4%.

Gross margin percentages contract talent, 38% to 40% productivity, 27% to 29% overall, 41% to 43%.

SG&A as a percent of revenues, excluding deferred compensation classification impacts.

Talent solutions, 36% to 38%.

<unk>, 14% to 16% overall, 30% to 32%.

Segment income for talent solutions, 10% to 12%.

Productivity, 13% to 15% and overall 11 to 13.

The tax rate, 26% to 27%.

And shares $107 million to $108 million.

Fourth quarter capital expenditures and capitalized cloud computing costs 15 million to $20 million.

We limit our guidance to one 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.

Global Labor markets remain tight and clients continue to higher, albeit at a more conservative pace dim.

Demand for talent remains high notwithstanding the increasingly uncertain economic outlook, although the sales cycle has lengthened.

And many clients are becoming more selective and requesting to see more candidates for their open positions.

They're adding more steps to their hiring processes, and prioritizing onside or local hybrid candidates, who take longer to hire.

At the same time talent shortages persist in the United States job openings and quit rates remain at elevated levels, although modestly off their highs.

The unemployment rate stands at three 5%, a 50 year low while the rate for those with a college degree more representative of our candidate base is half that at one 8%.

The National Federation of independent business, NFIB recently reported that 89% of small business owners hiring or trying to hire had few or no qualified applicants and 46% of all small small business owners had job openings they could not be filled.

Many candidates continue to prefer remote and hybrid working models a structural shift that is expected to remain.

Sourcing from this talent pool plays to our numerous numerous strengths, including our global brand Office network candidate database and advanced AI driven technologies. Many times clients very specialized needs are only available on a remote basis.

Protiviti demand remains very strong, particularly in the internal audit and regulatory risk and compliance practices.

Activity has successfully overcome the combined headwinds of much larger comparables, 55% growth in the same quarter a year ago.

The wind down of a very large financial services project.

A shift in public sector client demand over to talent solutions.

And still achieved record revenues for the quarter.

Activity's pipeline remains robust and is a little impacted by current economic conditions.

While short term talent solutions results may be impacted by a more uncertain macroeconomic environment.

We remain optimistic about our overall outlook we've.

We have successfully navigated many economic cycles, each time, achieving higher peaks.

Our recovery to new peaks from the recent COVID-19 downturn was the fastest in our history. We also benefit from activities resiliency, which stems from its diversified solution offerings that are much less tied to the economic cycle.

This is demonstrated by <unk> ability to grow through the last downturn.

We've also demonstrated our ability to be nimble with our cost structure aided by our AI driven technology advancements.

The advancements which continue.

As always our success is driven by the strength of our people our technology, our brand and our business model.

We remain steadfast in our focus on our purpose to connect people to meaningful work and provide clients with the talent and subject matter expertise they need to confidently compete and grow finally.

We're proud to have received several new accolades at this quarter, we were named by Fortune as one of the best workplaces for women and by Forbes as one of the world's best employers.

Robert half mobile App has been recognized for its excellence in innovation, receiving five awards in recent months, including a gold Stevie.

None of this recognition would be possible without the dedication and commitment of our employees across the globe.

Now, Mike and I'd be happy to answer your questions. Please ask just one question and a single follow up as needed. If there is time, we'll come back to you for additional questions.

Yeah.

Thank you.

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Again press Star one to ask a question.

First question comes from the line of maximize sign with Robert W. Baird and company.

Good afternoon, Keith and Mike.

A couple of questions. One is on talent solutions and one is on <unk>.

Protiviti with regards to talent solutions.

Can you talk a little bit about the admin and customer support business and specifically.

Some of the factors that may have impacted it.

During the current quarter and what we should read into that.

Looking ahead.

Yeah.

Oh, sure admin and customers.

Service has been most impacted by the public sector wind down as it relates to the unemployment claims processing.

Also they didn't they didn't see quite the number of larger projects are related to open enrollment that they've seen in the past. So they have been disproportionately impacted relative to our other practice groups.

Yeah.

Got it.

With regards to not as much open enrollment was there an underlying reason for for.

For that.

Hard to know and it's also early days you tend to get more of that in the fourth quarter than in the third and Frac internally. We just opened our open enrollment period, and so I wouldnt over read that but those are some of their larger projects typically.

So the jury is out.

Fourth quarter.

Okay.

And then with regards to productivity.

You know I was wondering what I'm, assuming that the portion of the public sector work that fell off was also tied to that.

Claims I'm just wondering you know as we think ahead.

You know what how much how are you thinking about the public sector. You you gave the guidance for the fourth quarter, but I'm thinking about for next year, just broadly speaking and then if you can talk a little bit about you know the exposure that protiviti has to either M&A.

Or ipos, obviously in the you know what the cost of capital going up challenging environment.

How much of a headwind could that end up being on a go forward basis.

And so.

Let's talk generally and specifically.

First of all the impact to Protiviti as reported growth rate.

From the public sector run off and the large project wind down is about 13 percentage points for the quarter.

And as you look forward into how those two factors impacted our growth rates.

It will stay double digit in the fourth quarter 10 or 11%.

But then starting next year in the first half of the year that cuts in half to mid single digits in the second half of the year wouldn't exist at all and so for the full year 2023.

That drag essentially it's a very small single digit number and.

So.

The worst of that impact the most impactful part of those two wind downs is behind them and the fourth quarter coming will be it should be the last time. It has a double digit impact on their growth rates.

On public sector, specifically, let me just make some general comments.

Yep.

We're pleased with how the public sector has played out well.

We've essentially replaced the one off of this unemployment claims processing with other work all built on new client relationships.

Some of the new work is on the talent solutions side, some on the Protiviti side.

Solution, helping these clients deal with her talent shortages as well as elevated needs in education and housing.

<unk> has a very high win rate for new projects project management financial controls. Although the project size is somewhat smaller than expected that pipeline continues to build.

So when you step back from this and take a two year view. We've got we now have a new industry group with new relationships producing about $400 million in revenue that largely didn't exist for us three years ago.

We'd also say that sits about.

Since most of the work in public sector has been jointly performed by talent solutions at Protiviti.

Frankly, it's given our entire organization more confidence that we can win together.

And we're now approaching almost 600 million in revenue from joint engagements.

This very unique business model that we have and as our people would say we are one of one in this space. So our assessment of public sector. Two years in is that we've managed the run off of unemployment claims very nicely.

Now have a new industry group.

We further confirmed this go to market together strategy. So we feel good about public sector.

Then when you talk about IPO M&A, it's a small part not a large part of what Protiviti does opportunity has the largest backlog they've ever had adjusted for these two factors that I just spoke of their growth rates their core growth rates.

<unk> remain quite high so we feel great about protiviti.

That's terrific and then.

But one thing up on the large financial services projects that wound down is that completely done.

It's not completely done it's close but it's not the only thing we do for that client. It's it's a very very very large project. We did at that client we do other things for that client and we hope frankly to build from where we are but.

By and large we're down to a.

Relatively small amount of revenue on that project.

Great. Thank you.

Your next question comes from the line of Andrew Steinman with J P. Morgan.

Hi, Keith I wanted to ask you about the talent solutions fourth quarter guide for revenues to be down 1% to up.

<unk>, 4% and obviously I know when you when the copy labels count solutions, they're talking about both contract and Perm, but when I look at the trends that you talked about for early October in contract was up 5% Perm was up too I.

And I put those together it just it just seems like in the guide you've if you've built in some room for a deceleration from the October trends I was just wondering did you do that for the sake of conservatism.

We are not a large part of what Protiviti does protiviti has the largest backlog they've ever had.

Or just whatever dynamic helped you a frame the talent solutions, our fourth quarter revenue guide.

Adjusted for these two factors that I just spoke of their growth rates their core growth rates remain quite high so we feel great about protiviti.

Okay.

So it's clearly a we're simply being more conservative we've discounted the field forecast that we get each quarter more than what we would traditionally discount their forecast.

That's terrific and then.

Just a button one thing up on the on the large financial services projects that wound down is that completely done.

Clearly the economic environment is becoming more uncertain and given that uncertainty we thought it prudent to be more conservative, but you're very much correct.

Our fourth full quarter guide is.

Pretty significantly less than our start and there wouldn't typically be that big of a delta.

By and large we're down to a.

A relatively small amount of revenue on that project.

And then just if I could ask one more question about labor supply you know I definitely heard your prepared comments it seems like the labor supply for your addressable market hasn't meaningfully changed so that kind of demand.

Great. Thank you.

Your next question comes from the line of Andrew Steinman with J P. Morgan.

It's more measured but supply is still kind of persistently tight.

Hi, Keith I wanted to ask you about the talent solutions fourth quarter guide for revenues to be down 1% to up 4% and obviously I know when you when the company labels account solutions, they're talking about both contract and Perm, but when I look at the trends that you talked about for early October in Contra.

Tight do you feel like that.

That you might be looking at an outlook, where you know kind of the talent shortage is become a little less persistent than you might be able to source talent more easily.

I think that's a fair assessment and that talent.

<unk> was up five in Perm was up too I put those together it just it just seems like in the guide.

Acquisition is still tight I would say, it's not quite as tight.

As it has been.

<unk> built in some room for a deceleration from the October trends I was just wondering did you do that for the sake of conservatism.

Having said that and relative to the conversation. We're also seeing some reluctance of candidates from changing jobs, which is yet another indication that the.

Or just whatever dynamic helps you frame the talent solutions fourth quarter revenue guide.

The candidate side softening a bit.

Okay.

That's fine thank you.

So it's clearly a we're simply being more conservative we've discounted the field forecast that we get each quarter more than what we would traditionally discount their forecast.

Yeah.

Okay.

Your next question comes from the line of Tobey Sommer with Suntrust.

Yes.

Hey, good afternoon. This is Jasper Bibb on for Tobey. My first question was just on Protiviti on the last call you mentioned.

Clearly the economic environment is becoming more uncertain and given that uncertainty we thought it prudent to be more conservative, but you're very much correct and that our fourth.

Working to accelerate hiring as the mix is getting a bit too heavy on contract resources could.

Could you just update us on those hiring efforts and we're in a full time versus contract makes sense today.

Full quarter guide is.

I'd say theyre still very aggressively adding to head count to compete well in the marketplace. They continue to win all kind of okay culture related awards.

Pretty significantly less than our start and there wouldn't typically be that big of a delta.

And then just if I can ask one more question about labor supply you know I definitely heard your prepared comments it seems like the labor supply for your addressable market hasn't meaningfully changed so that kind of demand is more measured but supply is still kind of persistently tight.

Which simply reinforces that and helps them with their recruiting.

As to the mix of.

The mix is more tied to the nature of work so certain types of projects public sector being a good example, 90% of that work was from contractors only 10% opportunity fulltime employees, whereas other engagements and the typical in turn.

Tight do you feel like that you might be looking at an outlook, where you know kind of the talent shortages become a little less persistent than you might be able to source talent more easily.

A lot of engagement that mix might be more <unk>.

15, 20, 25% of the total so it's very much is driven by the nature of the work and.

I think that's a fair assessment and that talent.

Acquisition is still tight I would say, it's not quite as tight.

Okay.

Protiviti for every one of its solution offerings.

As it has been.

Having said that and relative to the conversation.

<unk>, having access to the just in time resources.

We're also seeing some reluctance of candidates from changing jobs, which is yet another indication.

They have access to by reason of being together with talent solutions.

That.

Candidates side softening a bit.

And then looking at the temp gross margin guidance, the midpoint would imply gross margins down from the third quarter.

That's fine thank you.

Your next question comes from the line of Tobey Sommer with Suntrust.

Are you seeing any kind of incremental pressure on contract bill pay spreads or would you say, you're taking kind of a similarly conservative approach as it sounds like was the case on your revenue guidance.

Hey, good afternoon. This is jasper bibb on for Tobey.

First question was just on Protiviti on the last call you mentioned.

We're certainly not expecting any compression on spreads spreads are still good they are strong.

Working to accelerate hiring is it makes it is getting a bit too heavy on contract resources.

We project they'll stay strong the fringes have creeped up a bit we've had some more medical claims than we anticipated in the third quarter and that impacts our full year estimates. So it's principally due to higher fringe rate.

Could you just update us on those hiring efforts and we're in a full time versus contract makes sense today.

I'd say theres still very aggressively adding to head count.

Well in the marketplace. They continue to win all kind of culture related awards.

Than it is anything else conversions are also hanging in there nicely. So it's more about fringes.

Which simply reinforces that and helps them with their recruiting.

As to the mix.

Which is.

Related to probably things that correct themselves I E. These large medical claims which are unusual and certainly not expected to repeat into 2023.

I appreciate the detail there thanks for taking the questions.

Yeah.

Your next question comes from the line of Kevin Mcveigh with Credit Suisse.

A lot of engagement that mix might be more <unk>.

15, 20, 25% of the total so it's very much is driven by the nature of the work and.

Great. Thanks, so much hey, Keith just one point of clarification.

The guidance looks pretty similar.

Yeah.

What is for Q4, but the EPS about 15 cents.

Protiviti for every one of its solution offerings.

Is that all tax it looks like the Texas, a little bit harder because it looks like the revenue range and kind of margins are similar so is the delta there mostly tax.

<unk>, having access to the just in time resources.

They have access to them by reason of being together with talent solutions.

Well, you've got you've got six pennies of tax and exchange currency.

And then looking at the temp gross margin guidance, the midpoint would imply gross margins down from the third quarter.

That make it different other than that the margins are a little lighter as we talked about the.

Gross margin on talent that we just talked about impacts that the protiviti margins a year on year are still.

We're certainly not expecting any compression on spreads spreads are still good they are strong.

It's still less than they were a year ago, because normalizes or cost and the fourth quarter is always a short quarter.

We project they'll stay strong the <unk>.

<unk> fringes have creeped up a bit we've had some more medical claims than we anticipated in the third quarter and that impacts our full year estimates. So it's principally due to higher fringe rate.

Cause of billing days, and so you get a little bit of negative leverage because the fourth quarter is always a short quarter because of the holidays.

Than it is anything else conversions are also hanging in there nicely. So it's more about fringes.

Got it and then.

I think you'd mentioned in prepared remarks that you saw.

So some of the shift in Protiviti was to talent solutions.

Which is.

Related to probably things that correct themselves I E. These large medical claims which are unusual and certainly not expected to repeat into 2023.

What drove that shift was just kind of the scope of work that was more.

Kind of tuned to what town solution does as opposed to Protiviti.

It's where.

Whereas a year ago, the need of a given.

I appreciate the detail there thanks for taking the questions.

Local government related to processing unemployment claims now its more they are understaffed and they need additional staff, which is right in the wheelhouse of talent solutions again, but for that relationship.

Yeah.

Your next question comes from the line of Kevin Mcveigh with Credit Suisse.

Great. Thanks, so much.

Just one point of clarification.

The guidance looks pretty similar to what.

Talent solutions wouldn't be at the table.

As for Q4, but the EPS about 15 cents.

So therefore, we've nicely leverage of what we started as unemployment claims processing and transition that into something much more broad that benefits talent solutions.

Is that all tax it looks like the taxi is a little bit higher just wondering because it looks like the revenue range and kind of margins are similar so is the delta there mostly tax.

Well, you've got you've got six pennies of tax and exchange currency.

Enterprise wide and we're very pleased that we're essentially going to be flat with a year ago down 2% adjusted for currency. So we feel good about this whole.

That make it different other than that the margins are a little lighter as we talked about the.

Transformation of being very unemployment claims processing centric to be much broader.

Gross margin on talent that we just talked about impacts that the protiviti margins a year on year are still.

Yeah.

Understood. Thank you very much.

It's still less than they were a year ago, because that normalizes or cost.

Okay.

Your next question comes from the line of George Tong with Goldman Sachs.

And the fourth quarter is always a short quarter.

Cause of billing days, and so you get a little bit of negative leverage because the fourth quarter is always.

Hi, Thanks, good afternoon.

As you look across talent solutions and Protiviti in the third quarter, what factors most surprised you to the upside and downside relative to your internal expectations.

A short quarter because of the holidays.

Got it and then.

You'd mentioned in prepared remarks that you saw some of the shift in Protiviti was to talent solutions.

I'd say to the upside.

What drove that shift was just kind of the scope of work that was more.

Europe was not as impacted as the headlines would it.

In the tune of what town solution dose as opposed to Protiviti.

We would have expected.

It's where whereas a year ago the need of a given.

Both in the UK and in Germany, so that record for that matter and so I'd say that was a positive surprise.

Local government related to processing unemployment claims now it's more theyre understaffed and they need additional staff, which is right in the wheelhouse of talent solutions again, but for that relationship.

On the downside.

Our small business clients.

Got a little more conservative in their hiring than we expected.

<unk>.

Talent solutions wouldn't be at the table.

Kevin the barrage of negative news asked to inflation as to interest rates as the economic forecast that all impacts confidence psychology sentiment rose.

So therefore, we've nicely leverage of what we started as unemployment claims processing and transition that into something much more broad that benefits talent solutions.

Remember that our SMB clients are more nimble managing their cost than larger companies are.

Enterprise wide and we're very pleased that we're essentially going to be flat with a year ago down 2% adjusted for currency. So we feel good about this whole.

So given that <unk>.

More nimbleness.

They adjusted more quickly than bigger companies have and they adjusted their hiring pace a little more than what we expected.

Transformation of being very unemployment claims processing center to be much broader.

Okay.

<unk>.

Understood. Thank you very much.

I'd say as soon as I say that I would also remind everyone that.

Okay.

Just like Theyre more nimble on the downside there are also more nimble on the upside.

Your next question comes from the line of George Tong with Goldman Sachs.

Hi, Thanks, good afternoon.

And we demonstrated that most recently during COVID-19.

As you look across talent solutions and Protiviti in the third quarter, what factors most surprised you to the upside and downside relative to your internal expectations.

Recovery was the fastest in our history.

And that further say that clients adult quickly forget about a tight labor market.

And as soon as things start to get better.

Let's say to the upside.

They start to add staff and they do so quickly.

Europe was not as impacted as the headlines would it.

Which we just saw.

Our peak to peak growth, we've experienced and achieved in every cycle, we'd been a part of in the last 35 years.

We would have expected.

Both in the UK and in Germany, so that record for that matter and so I'd say that was a positive surprise.

So we feel good about where we're positioned we love our SMB client base, but they are more nimble, but it's a balanced more nimble.

On the downside.

Our small business clients.

Let's keep that in mind.

Got a little more conservative in their hiring than we expected.

Okay.

Got it that's helpful.

<unk>.

Can you discuss how your internal hiring intentions for recruiters and sales have evolved.

Given the barrage of negative news asked to inflation as the interest rates as the economic forecast that all impacts confidence psychology sentiment.

And what factors are influencing your outlook for internal hiring.

[noise], that's I'd say were gone.

Remember that our SMB clients are more nimble managing their cost than larger companies are.

Manage our head count on a very targeted basis, both on the upside and the downside. This is the same way we've managed head count forever.

And so given that.

More nimbleness.

Our adjusted more quickly than bigger companies have and they adjusted their hiring pace a little more than what we expected.

We'll continue to hire where we're growing and we will adjust appropriately where it will not.

Also consistent with the past, we will not make major reductions in heads ahead of near term market conditions, which would make our results even more negative in self fulfilling there's too much uncertainty about the timing and the extent of any downturn to make that.

I'd say as soon as I say that I would also remind everyone that.

Just like Theyre more nimble on the downside there are also more nimble on the upside.

And we demonstrated that most recently during COVID-19.

Kind of call.

But we look at current conditions, we look at the environment, we look at forecast, but we largely.

Recovery was the fastest in our history.

And I would further say that clients adult quickly forget about a tight labor market.

And as soon as things start to get better.

Our attempt to balance our cost structure against our revenues.

They start to add staff and they do so quickly.

We've been more nimble with our cost structure.

Which we just saw.

Our peak to peak growth, we've experienced and achieved in every cycle. We've been a part of in the last 35 years.

In the last three to five years than we have in our history. If you look during 2020.

Our margins bought I think we're for the year. They were at over 8%. We did not have that much of negative leverage in SG&A, meaning we managed our head count well. So I would argue just as our clients are very nimble in managing their businesses we've.

So we feel good about where we're positioned we love our SMB client base, but they are more nimble, but it's a balanced more nimble.

Let's keep that in mind.

Okay.

Got it that's helpful.

Also made ourselves very nimble as we manage our cost and our head counts in our business.

Can you discuss how your internal hiring intentions for recruiters and sales have evolved and what factors are influencing your outlook for internal hiring.

<unk> targeted we have data down to the individual we know how everybody performs relative to the standard. That's also adjusted based on their tenure, so we very objectively manage our head count.

I'd say, we're going to.

Vantage, our head count on a very targeted basis, both on the upside and the downside. This is the same way we've managed head count forever.

Great. Thank you.

[noise]. Our next question comes from the line.

We will continue to hire where we're growing and we will adjust appropriately where it will not.

With Bofa Global research.

Hi, Thanks for taking the question.

And investing the hearing kick into your businesses and in light of what you're hearing from your customers right now.

I know I know you talked about ability to manage costs Im curious how youre thinking about your investment spend.

And to your businesses and and thoughts around cost controls as well, especially into next year. Thanks.

That kind of call.

What we look at current conditions, we look at the environment, we look at forecast, but we largely.

And so I just talked about head count, which is our largest cost we will be nimble, we will adjust based on what's happening in the top line, we will not get way ahead of it as I just talked about.

Our attempt to balance our cost structure against our revenues.

We've been more nimble with our cost structure.

In the last three to five years and we have in our history. If you look during 2020, our margins, but I think we're for the year. They were at over 8%. We did not have that much of negative leverage in SG&A, meaning we managed our head count well so I would argue just.

Our other major investment has indeed been innovation.

A couple of comments there.

And so we just had our first full quarter.

We added a new additional component to our AI.

And it leverages the learnings of our recruiters with respect to a given Canada did we vet them how far did we placed them how did they perform.

As our clients are very nimble in managing their businesses.

We've.

By definition this is very proprietary to us.

Also made ourselves very nimble as we manage our cost in our head counts in our business.

So using this updated model we had many branches rely almost exclusively on technology to identify candidates.

<unk> targeted we have data down to the individual we know how everybody performs relative to the standard. That's also adjusted based on their tenure, so we very objectively manage our head count.

It's the most successful pilot we've ever had.

Our metrics across <unk>.

Many.

Great. Thank you.

Spreadsheets that we have improved meaningfully.

[noise]. Our next question comes from the line.

Adoption rates for our AI are increasing rapidly in part because of the testimonials that have come from this.

With Bofa Global research.

Hi for taking the question.

Question.

Okay.

Essentially we've totally transformed candidate discovery candidate identification it creates more capacity for our workforce. So more specifically to your question.

And investing the hearing kick into your businesses and in light of what you're hearing from your customers right now.

I know I know you talked about ability to manage cost Im curious how youre thinking about your investment spend.

We will continue to invest in AI and innovation, because it's paying off in a very meaningful way, we will continue to enhance client and candidate digital experiences as they interact with US we will continue to make our candidate driven matching.

And to your businesses and thoughts.

Round cost control as well, especially into next year. Thanks.

Yeah.

And so I just talked about head count, which is our largest cost we will be nimble, we will adjust based on whats happening in the top line, we will not get way ahead of it as I just talked about.

AI better.

And as I've also said before we're focused as well on client facing AI, helping our internal staff better identify which clients, which prospects are most likely to react positively.

Our other major investment has indeed been innovation.

Comments there.

So we just had our first full quarter, where we added a new additional component to our AI.

And it leverages the learnings of our recruiters.

Two there.

Outreach.

So head count we talked about and it's the same way we manage the head count forever, we're more nimble than ever.

In addition, this is very proprietary to us.

Innovation will continue to invest in because we're getting a real payback from.

So using this updated model we had many branches rely almost exclusively on technology to identify candidates.

As recently as this quarter, especially this quarter.

[noise] you very much.

Yeah.

It's the most successful pilot we've ever had.

Your next question comes from the line of Manav Patnaik with Barclays. Please go ahead.

Metrics across.

Many.

Yes.

Spreadsheets that we have improved meaningfully.

Hi, how are you. This is roni Kennedy on for Manav. Thank you for taking my question I just confirm.

Adoption rates for our AI are increasing rapidly in part because of the testimonials that have come from this.

You spoke of some of the leading indicators you are seeing within SMB and the nimbleness and there I was wondering if you could elaborate on that and what other leading indicators you would see in addition to the selectivity in say the conservatism and hiring and what your visibility would be.

Essentially we've totally transformed candidate discovery candidate identification it creates more capacity for our workforce. So more specifically to your question.

And seeing those indicators into a potential downturn.

We will continue to invest in AI and innovation, because it's paying off in a very meaningful way, we will continue to enhance client and candidates digital experiences as they interact with US we will continue to make our candidate driven matching.

Well as to visibility the nature of our business is we don't have a lot of visibility and clients use contract staff.

In part to have more flexibility with their cost structure and.

So we've never had visibility to any great extent, and we still don't have visibility.

AI better.

We look at our weekly trends.

And as I've also said before we're focused as well on client facing AI, helping our internal staff better identify which clients, which prospects are most likely to react positively.

We look at our Tam.

Anecdotal interactions with clients and.

It's a subjective judgmental assessment.

Of where we think the business is headed but as I said, because we can be so nimble with our cost structure, we don't have to get way ahead of it.

Two there.

Outreach.

So head count we talked about and it's the same way we manage the head count forever, we're more nimble than ever.

Can keep pace with it and we'll be just fine.

Yes.

[noise]. Okay. Thank you and then May I ask what was the driver of the sequential decline in the administrative and customer support business line I think on the call. You had mentioned a lengthening sales cycle, but was there anything with regards to that skill set in particular.

Innovation will continue to invest in because we were getting a real payback from.

As recently as this quarter, especially this quarter.

Thanks very much.

Okay.

Does it slow.

Your next question comes from the line of Manav Patnaik with Barclays. Please go ahead.

Well admin customer service.

We said earlier.

Yes.

It's been disproportionately impacted by public sector wind down.

Hi, how are you. This is roni Kennedy on for Manav. Thank you for taking my question May I just confirm.

Unemployment claims and it also hasn't had as many larger projects as in years past many of which related to open the open enrollment, but open enrollment season is still very much open so.

You spoke of some of the leading indicators you are seeing within SMB and the nimbleness. There I was wondering if you could elaborate on that and what other leading indicators you would see in addition to the selectivity in say the conservatism and hiring and what your visibility would be.

That book has been completely written yet.

And seeing those indicators into a potential downturn.

Okay.

Yes.

Okay. Thank you.

Well as to visibility the nature of our business is we don't have a lot of visibility and clients use contract staff.

Yes.

Your next question comes from the line of.

Jeff Silber with BMO capital markets.

Oh.

In part to have more flexibility with their cost structure. So.

Thanks, So much just wanted to Oh and one more question.

So we've never had visibility to any great extent, and we still don't have visibility.

If we just focus on the technology contracts solutions segment.

We look at our weekly trends.

Your line of business excuse me I know that growth slowed from two Q3, Q I know the comps on a year over year basis were tough versus <unk> last year, but was there anything else specific going on I'm, just wondering what youre seeing within that segment. Thanks.

Look at our.

Anecdotal interactions with clients.

<unk>.

It's a subjective judgmental assessment.

Where we think the business is headed.

Well because the client base is SMB.

As I said, because we can be so nimble with our cost structure, we don't have to get way ahead of it.

Across all our talent solutions.

Can keep pace with it and we'll be just fine.

Practice groups, the trans arent that different and as you pointed out.

Yes.

The change in the growth rate is entirely explained by the change in the year ago comps and Thats just as true for technology as it is finance and accounting so the differential between the two isn't any different and the client base is also largely F N b.

Okay. Thank you.

And May I ask what was the driver of this sequential decline in the administrative and customer support business line I think on the call. You had mentioned a lengthening sales cycle, but was there anything with regards to that skill set in particular.

'cause it slow.

Well Edwin.

Customer service as we said earlier.

Are you seeing any projects.

It's been disproportionately impacted by public sector wind down.

<unk> potentially ending earlier is there any slowdown just specific to what's going on in the end market.

Unemployment claims.

And it also hasn't had as many larger projects as in years past many of which related to open the open enrollment, but open enrollment season is still very much open so.

But I'd say the only distinction that's been noted is that.

The gap between what candidates.

E remote and what clients want many times onsite.

That book has been completely written yet.

It seems to be the most acute in technology.

Okay.

Yes.

Okay. Thank you.

And got worse not better during the quarter.

Yes.

Your next question comes from the line of Jeff Silber with BMO capital markets.

It's hard to quantify how much of the how.

How much impact that had but it is certainly a discussion point, but to me the bigger point, it's still SMB clients change in growth rate.

Thanks, So much just wanted to flip in one more question.

If we just focus on the technology contracts solutions segment.

Explained entirely by change in comps.

On a business excuse me I know that growth slowed from <unk> to <unk> I know the comps on a year over year basis were tough versus <unk> last year, but was there anything else specific going on I'm, just wondering what youre seeing within that segment. Thanks.

Okay fair enough. Thanks, so much for the color.

Yes.

Your next question comes from the line of Mark Marcon with Robert W. Baird.

Well because the client base is SMB.

Okay.

Thanks for taking a couple of follow up questions.

Across all our talent solutions.

What are the build rate assumptions for Q4, and how are you. How are you thinking about you know bill rate inflation on a go forward basis and wage rate inflation.

Practice groups.

Trans arent that different and as you pointed out the change in the growth rate is entirely explained by the change in the year ago comps and Thats just as true for technology as it is finance and accounting so the differential between the two isn't any different and.

You broke up I think you said one of the bill rate assumptions and I would say, they're not they're not materially change from what we're currently seeing.

Client base is also largely F N b.

But I'll say this as well that.

We haven't.

Are you seeing any project potentially ending earlier is there any slowdown just specific to what's going on in the end market.

Gotten much.

Additional gross margin from the higher bill rates. They are essentially been a pass through of higher pay rates and to the extent.

Okay.

But I'd say the only distinction that's been noted is that.

Wage inflation subside somewhat.

The gap between what candidates for E remote.

While it might hurt top line, a bit and that Youll pass through less it shouldn't have much impact on margin.

And what clients want.

Many times on site.

Or are you seeing any signs of wage inflation.

Seems to be the most acute in technology.

Becoming more subdued.

<unk> gotten worse not better during the quarter.

Well, we're certainly seeing signs of clients.

Looking back more.

It's hard to quantify how much of the.

On having to pay more and it's also a factor and while that why the pace of their hiring is less than what it was they were having to pay more.

How much impact that had but it's certainly a discussion point, but to me the bigger point, it's still SMB clients change in growth rate.

But my problem.

It's not a margin it's not a margin impact.

Explained entirely by change in comps.

Okay fair enough. Thanks, so much for oncology.

Got it and then.

Yes.

You've been through so many cycles.

Yeah.

You probably ended up seeing this week.

Your next question comes from the line of Mark Marcon with Robert W. Baird.

You know there was a survey published by the Wall Street Journal Economist Youre basically expecting a shallow recession in the first half of 'twenty three if it occurs how do you think for investors who aren't as familiar with you in your history, how do you think arbitrage.

Yeah.

Thanks for taking a couple of follow up questions.

What are the build rate assumptions for Q4, and how are you how are you thinking about bill.

Bill rate inflation on a go forward basis and wage rate inflation.

Differently during this downturn relative to prior downturns and then what are you most excited about for the next up cycle.

You broke up I think you said one of the bill rate assumptions.

Okay.

And I would say theyre not theyre not materially change from what we're currently seeing but I'll say this as well that.

Well, so I think the first point I'd make is youre right, we have been around a while 35 years for me.

Happy to report in every cycle, we've grow peak to peak.

We haven't.

<unk> much.

Interestingly in the dotcom cycle, we <unk> peak peak to peak in the 7% a year range and the Covid cycle.

Additional gross margin from the higher bill rates stay around essentially been a pass through of higher pay rates and to the extent.

Cycle, we are CAGR, 7% again, a peak to peak financial crisis was about half of that but that lasted longer. It was more directed closer to our wheelhouse, but 0.1 is b groh peak to peak.

Wage inflation subside somewhat.

While it might hurt top line, a bit and that Youll pass through less it shouldn't have much impact on margin.

Are you seeing any signs of wage inflation.

0.2 is we've got the most nimble cost structure, we've ever had and we just prove that.

Becoming more subdued.

Well, we're certainly seeing signs of clients pushing back more on.

Less than two years ago.

On having to pay more and it's also a factor and while that why the pace of their hiring is less than what it was they are having to pay more.

Three we now have forgive me.

It's much less tied to the economic cycle. It is a diversified suite of solution offerings.

Its current pipeline is the best they've ever had.

But Martin.

So not a margin it's not a margin impact.

<unk> revenue not only did not decline they actually grew 12% 2020 versus 2019.

Got it and then.

<unk> been through so many cycles.

Protiviti is now a third of our consolidated revenue and earnings said differently Protiviti is half the size of talent solutions.

You probably ended up seeing this week.

You know there was a survey published by the Wall Street Journal of economists, who were basically expecting a shallow recession in the first half of 'twenty three if it occurs how do you think for investors who aren't as familiar with you in your history, how do you think arbitrage.

And it has significant more resiliency than.

<unk> talent talent solution passed just by the nature of its business.

So there's a huge difference between this cycle and cycles past and that we now have something half as large as talent solutions that's quite resilient.

Differently during this downturn relative to prior downturns and then what are you most excited about for the next up cycle.

Okay.

Well, so I think the first point I'd make is you are right we have been around a while 35 years for me.

That's great. Thank you.

Report in every cycle, we've grow peak to peak.

Interestingly in the dotcom cycle, we <unk> peak peak to peak in the 7% a year range.

Okay I think that was our last question. So we appreciate everybody's time and thank you very much.

The COVID-19.

Cycle CAGR, 7% again a P.

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's website at Robert half Dot Com you can also log in to the conference call replay details are contained in the company's press release issued earlier today.

To peak financial crisis was about half of that but that lasted longer it was more directed closer to our wheelhouse, but one is b groh peak to peak.

0.2 is we've got the most nimble cost structure, we've ever had and we just prove that.

Two years ago.

Three we now have for activity.

It's much less tied to the economic cycle. It has a diversified suite of solution offerings.

Its current pipeline is the best they've ever had.

Protiviti is revenue not only did not decline they actually grew 12% 2020 versus 2019.

Protiviti is now a third of our consolidated revenue and earnings said differently Protiviti is half the size of talent solutions.

And it has significant more resiliency than talent talent solutions has just by the nature of its business. So.

So there's a huge difference between this cycle and cycles past and that we now have something half as large as talent solutions that is quite resilient.

That's great. Thank you.

Okay I think that was our last question. So we appreciate everybody's time and thank you very much.

Yeah.

Q3 2022 Robert Half International Inc Earnings Call

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