Robert Half Inc

SWB:RHJ

Earnings Call Transcript 2020-Q3

[Operator]

Hello, and welcome to the Robert Half Third Quarter 2020 Conference Call. Our hosts for today's call are Mr. Keith Waddell, President and Chief Executive Officer of Robert Half and Mr. Michael Buckley, Chief Financial Officer. Mr. Waddell, you may begin.

[Keith Waddell]

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 future performance. These statements represent our current judgment of what the future holds. However, they are subject to risks and uncertainties that could cause actual results to differ materially from forward-looking statements. These risks and uncertainties are described in today's press release and in 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. In addition, we have modified our presentation of revenues and the related growth rates for account temps, office team, Robert Half Technology and Robert Half management resources to include their intersegment 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 and from now on, it's how we'll report them externally. The combined amount of divisional intersegment revenues with Protiviti is also separately disclosed. For your convenience, our prepared remarks for today's call are available in the Investor Center of our website at roberthalf.com.

We're very pleased that third quarter and early October results reflect consistent weekly and monthly sequential gains across our divisions. Protiviti had another outstanding quarter reporting its 12th consecutive quarter of year-on-year revenue gains leveraging a strong pipeline of diversified service offerings including particularly robust growth with the blended solutions with our staffing operations.

We're also pleased with the quarter-on-quarter growth in our staffing divisions led by our permanent replacement and office team divisions. 2020 continues to be an unprecedented year. I'm extremely proud of the resourcefulness and commitment exhibited by all of our employees as we maintain high levels of service to our clients and candidates. Company-wide revenues were $1.19 billion in the third quarter of 2020 down 23% from last year's third quarter on a reported basis and down 24% on an as adjusted basis. And income per share in the third quarter was $0.67 compared to a $1.01 in the third quarter a year ago.

Cash flow from operations during the quarter was $139 million, and capital expenditures were $7 million. In September, we distributed a $0.34 per share cash dividend to our shareholders of record for a total cash outlay of $38 million. We also acquired approximately 450,000 shares during the quarter for $24 million. We have 1 million shares available for repurchase under our board-approved stock repurchase plan. Return on invested capital for the company was 25.8% in the third quarter.

Now I'll turn the call over to our CFO, Mike Buckley.

[Mike Buckley]

Thank you, Keith and hello, everyone. Let's start with revenues. As Keith noted global revenues were $1.190 billion in the third quarter. This is a decrease of 23% from the third quarter one year ago on a reported basis and a decrease of 24% on an as adjusted basis. Also on as adjusted basis, third quarter staffing revenues were down 31% year-over-year. US staffing revenues were $666 million down 32% from the prior year.

Non-US staffing revenues were $203 million down 29% year-over-year on an as adjusted basis. We have 326 staffing locations worldwide including 88 locations in 17 countries outside the United States. In the third quarter, there were 64.3 billing days compared to 64.1 billing days in the third quarter one year ago. The current fourth quarter has 61.7 billing days equivalent to the fourth quarter of one year ago. Currency exchange rate movements during the third quarter had the effective increasing reported year-over-year staffing revenues by $4 million. This increased our year-over-year staffing revenue growth rate by 0.3 percentage points.

Now let's take a closer look at the results for Protiviti. Global revenues in the third quarter were $321 million, $260 million off that is from business within the United States and $61 million is from operations outside the United States. On an as adjusted basis, global third quarter Protiviti revenues were up 6% versus the year ago period with US Protiviti revenues up 10%. Non-US revenues were down 8% on an as adjusted basis. Exchange rates had the effective increasing year-over-year Protiviti revenues by $2 million and increasing its year-over-year reported growth rate by 0.7 percentage points. Protiviti and its independently owned member firms served clients through a network of 86 locations in 28 countries.

During the quarter, we changed our presentation of SG&A expenses to exclude gains and losses on investments held to fund our obligations under employee deferred compensation plans. Under these plans, employees direct the investments of their account balances and the company makes cash deposits into an investment trust consistent with these directions. As realized and unrealized investments, gains and losses occur, the companies deferred compensation obligation to employees changes accordingly. However, the value of the related investment trust assets also changes by an equal and offsetting amount leading no net cost to the company.

Going forward changes to the company's deferred compensation obligations noted above will continue to be included in SG&A or in the case of Protiviti, direct cost. However, the offsetting changes in the investment trust assets will be presented separately below SG&A and outside of operating income. This does not change the reported level of pretax or after-tax income or cash flow previously provided. Going forward, we will replace the discussion of consolidated operating income with the non-GAAP measure of combined segment income. This will be calculated as consolidated income before income taxes adjusted for interest income and amortization of intangible assets.

Turning now to gross margin, in our temporary and consulting staffing operations, third quarter gross margin was 37.5% of applicable revenues compared to 37.9% of applicable revenues in the third quarter one year ago. The year-over-year decline in gross margin percentage is primarily due to lower conversion revenues. Our permanent placement revenues in the third quarter were 10% of consolidated staffing revenues versus 10.7% of consolidated staffing revenues in the same quarter one year ago. When combined with temporary and consultant gross margin overall staffing gross margin decreased 80 basis points compared to the year ago third period to 43.8%.

For Protiviti gross margin was $87 million in the third quarter or 27.1% of Protiviti revenues. This includes $3.4 million or 1.1% of Protiviti revenues of deferred compensation expense related to increases in the underlying trust investment accounts. One year ago gross margin for Protiviti was $88 million or 29.4% of Protiviti revenues including $200,000 of deferred compensation expense related to investment trust activities.

Company-wide SG&A cost were 32.8% of global revenues in the third quarter compared to 31.2% in the same quarter one year ago. Deferred compensation expenses related to increases in underlying trust investments had the impact of increasing SG&A as a percentage of revenue by 1.9% in the current third quarter and 0.1% in the same quarter one year ago.

Staffing SG&A cost were 40.2% of staffing revenues in the third quarter versus 34.8% in the third quarter of 2019. Included in staffing SG&A cost was deferred compensation expense related to increases in the underlying trust investment assets of 2.6% and 0.1% respectively. The increase in staffing SG&A as a percentage of revenues is primarily the result of continued negative leverage resulting from the decline in revenues. Third quarter SG&A cost for Protiviti were 13% of Protiviti revenues compared to 16.2% of revenues in the year ago period.

Operating income for the quarter was $77 million. This includes $26 million of deferred compensation expense related to increases in the underlying investment trust assets. Combined segment income was therefore $103 million in the third quarter. Combined segment margin was 8.6%, third quarter segment income from our staffing divisions was $54 million with a segment margin of 6.2%. Segment income for Protiviti in the third quarter was $49 million with a segment margin of 15.2%.

Our third quarter tax rate was 26% compared to 28% a year ago. The lower third quarter tax rate is primarily due to annual adjustments made to reconcile our tax accounts to prior year's tax returns as actually filed. Our nine-month year-over-year tax rate of 28% is in line with what we expect for the full year.

Moving onto accounts receivable, at the end of the third quarter accounts receivable were $690 million and implied day sales outstanding or DSO was 52.3 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. Our temporary and consultant staffing divisions exited the third quarter with September revenues down 29.3% versus the prior year compared to 30.7% decrease for the full quarter.

Revenues in the first two weeks of October were down 27% compared to the same period one year ago. Permanent placement revenues in September were down 30.1% versus September of 2019. This compares to a 35.7% decrease for the full quarter. For the first three weeks in October, permanent placement revenues were down 31% compared to the same period in 2019.

We provide this information so that you have insight into some of the trends we saw during the quarter and into October. But, as you know, these are very brief time periods we caution reading too much into them.

With that in mind, we offer the following fourth quarter guidance: Revenues of $1.155 billion to $1.255 billion; Income per share, $0.55 to $0.75. The midpoint of our guidance implies a year-over-year revenue decline of 22% on an as adjusted basis inclusive of Protiviti. The major financial assumptions underlying the midpoint of these assumptions are as follows: Revenue growth on a year-over-year basis staffing down 27% to 30%, Protiviti up 5% to 7%, overall down 21% to 23%. On a gross margin percentages temporary and consulting staffing 37% to 38%, Protiviti 27% to 29%, overall 39% to 40%.

SG&A as a percentage of revenues excluding deferred compensation investment impacts. Staffing 36% to 38%, Protiviti 14% to 16%, overall 30% to 32%. Segment income, staffing 6% to 8%, Protiviti 12% to 15%, overall 8% to 10%. We expect our tax rate to be between 27% and 29% and shares to be 133 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 the SEC filings.

Now, I'll turn the call back over to Keith.

[Keith Waddell]

So thank you, Mike. As is evidenced in the growth of our newly reported intersegment revenues. The partnership between Protiviti and our staffing operations continues to be an accelerating source of growth for our enterprise. We've also seen particular strength in our services to the public sector and financial service clients. In addition, we've experienced increased demand for services and solutions in the cloud technology, online security, data privacy and digital transformation as enterprise client companies have continued to strategically invest in these areas.

The significant reductions we made to our cost structure in the second quarter have also benefitted the third quarter and will continue to benefit future quarters. Remote and hybrid working models will continue long after the pandemic ceases to require them. Access to talent is no longer limited to time zones or geographies. With our global network of talent and world class technology tools, we can provide the right match for clients and candidates regardless of location. While uncertainty remains in the overall economic environment as the pandemic continues.

There's much to be optimistic about as the fourth quarter progresses the nature, timing and amount of any additional fiscal stimulus should be known. Medical solutions to the COVID-19 virus move ever closer to reality and the NFIB continues to report improving trends on the small business community. Our recent study show that more than half of small businesses are trying to hire, but the vast majority reporting few or no qualified applicants.

We continue to believe and our positioning for future growth with the unique strengths of our brands, people, technology and professional business model. Now Mike and I will be happy to answer your questions. Please ask just one question and a single follow-up as needed and if there's time. We'll come back to you.

[Operator]

[Operator Instructions] Your first question comes from the line of Andrew Steinerman from JPMorgan. Please go ahead.

[Andrew Steinerman, JPMorgan]

Hi Keith, it's a big picture question about small businesses and surely, I follow NFIB just like Keith, you suggested and its favorable trends reported there. Kind of going through this recession I was worried about Robert Half's dependence on small medium sized businesses and maybe it's about types of small medium sized business that you serve and assuming not serving a lot of restaurants.

My question is do you agree with the trends that NFIB are suggesting that they really kind of made it through this recession favorably. Do you think it's really dependent on more stimulus for them? How are your small and medium sized business customers feeling?

[Keith Waddell]

So we would definitely agree that the trends are improving. But as you started it's also true that SMB clients are more nimble than mid and large cap companies. They cut more and they've added back more conservatively that's very apparent in our own numbers. We've talked in the past that about 80% of our businesses SMB which we define by the way 50 to 100 employees on average and 20% is mid cap, mid to large, mostly mid that has actually changed during the post-pandemic period such that the mid cap number is almost 30%.

Clearly, our mid cap and larger clients have been more resilient than have been our SMB clients. But we're encouraged, if you look at our weekly trends beginning in early June. They've consistently improved in the fact we've seen accelerating monthly sequential growth during the quarter. We expect that to carry over into Q4 with one big caveat. It's been widely reported that most company's employees have not taken their paid time off so far this year, that's true at Robert Half, that's true at many of our client companies.

We therefore think December will be more holiday impacted, holiday/paid time off impacted. We'll have less planned capacity as our employees take that time off, our clients will have less planned capacity to close deals. So we're expecting a bigger than normal December impact. But that said adjusted for that, we do feel good about the progression of our SMB clients which is now 70% of the total and history shows that once they do get comfortable which we would define as probably closer to the post-pandemic period that will participate in an outsized way going forward and yes, we do think the stimulus would be helpful and hopefully that gets resolved pre or post-election.

[Andrew Steinerman, JPMorgan]

Perfect and just to make sure I got the point right. The December holiday effect that is already included in the midpoint of your fourth quarter guide, right?

[Keith Waddell]

That's correct.

[Operator]

Our next question comes from the line of Mark Marcon from Robert W. Baird and Company. Please go ahead.

[Mark Marcon, Robert W. Baird and Company]

I was wondering if you could talk a little bit about the differences that you're seeing with regards to the needs for finance and accounting professionals between what you're seeing on the account temp side versus Protiviti. We've had some discussions with some investors who are concerned that maybe accounting isn't going to come back as strongly, obviously on the Protiviti side you're clearly doing very, very well there. But I'm wondering if you could compare and contrast and how we should think about it, as we start coming out of this downturn when we eventually do have a vaccine.

[Keith Waddell]

And so at a high level, finance and accounting particularly accountemps level has staffed accounting positions that are very transactional or volume driven and as our clients volume levels and transaction levels are down, so is that business. That's no different than every downturn we've been through and as you know I've been here over 30 years. Though we fully expect as transaction volumes to improve, accountemps will participate nicely there.

I'll also say that what transaction volume there is, generally speaking those type of positions are less conducive to remote work than the project driven positions which also impacts accountemps negatively relative to Protiviti and or management resources. Protiviti has been doing great as we've talked about it has multiple service offerings due to its diversification efforts. For the first time ever, technology consulting within Protiviti is the largest practice area which I think is incredible. So they've done well in their technology consulting, they've done well with risk and compliance particularly in financial services.

We've talked about anti-money laundering; we've talked about credit risk, enforcement actions that they're involved with certain of their clients. And then while internal audit at Protiviti is somewhat impacted, it's not as impacted as a transaction driven accountemps type positions. So we're very optimistic about how accountemps will participate when things get more back to normal from a COVID standpoint.

[Mark Marcon, Robert W. Baird and Company]

That's terrific and can you talk a little bit about your stance with regards to how much excess capacity you have currently and how you're thinking about potential additions or subtractions with regards to internal personnel or some chatter going on with regards to what your internal hiring profile is like when someone and if you could clarify that?

[Keith Waddell]

Sure and so first of all, I'd say, if you compared the first quarter so let's call that pre-pandemic with the third quarter. Our revenues are down 21% and our income is down 21% and so quite frankly I think it's pretty incredible that given the type of impacts COVID had, that we effectively got through that with no net negative leverage principally because we aggressively cut our cost. We are cautiously optimistic that when we get that 20% revenue back that we'll do better and we'll actually leverage in a positive way.

Our current workforce is more tenured because our less tenured workforce is piece of the workforce that we had to part ways with. We're very focused on the productivity levels of our internal staff. We have better data to measure that. We have very consistent buy-in internally across the organization. Frankly, our people internally make more money as we let their productivities rise versus adding more people such that you got spreading your revenues over more people, they're more profitable, if you spread it over fewer, so we have very good internal alignment that we're going to let our productivity levels drive up, which will be good for their individual profitability and will be good for our corporate profitability. But we're optimistic we're going to do better on the next 20% up than we did on the 20% down having said that again, we're super pleased that 20% down at the top line met no more than 20% down at the bottom line.

[Mark Marcon, Robert W. Baird and Company]

That was impressive, thank you.

[Operator]

Thank you. Our next question comes from the line of Jeff Silber from BMO Capital Markets. Please go ahead.

[Jeff Silber, BMO Capital Markets]

Just a follow-up on that answer to Mark's last question. Are you starting to ramp up internal hiring on a net basis and if not, what do you need to see to start doing that?

[Keith Waddell]

Well because we're talking staffing now because we think we have a lot of unused capacity with the more tenured staff that we currently have, we don't think we need to do much hiring in the short-term. We've got a replaced turnover and by in large we've done that, largely with furloughs but that's pretty much all behind us now. So if you're looking at our job postings online there's some indication as to our level of confidence in the future. I would say don't because we're happy with the staffing levels we have and we're happy that there is inherent upside in their productivity levels particularly tenured adjusted, which is the best it's ever been.

[Jeff Silber, BMO Capital Markets]

All right, that's helpful. I appreciate that. And the second question might be for Mike. Regarding the change in the SG&A presentation I'm just curious why now, is it because of the volatility that you might have seen in these trust assets? If you can give us some color on that, I'll appreciate it. Thanks.

[Keith Waddell]

And so let me talk at 50,000 feet and then Mike can be more practical. So first of all, I understand we've had these plans for over 10 years, understand we've got over 2,300 participants. As we said earlier as Mike said earlier doesn't impact earnings, doesn't impact cash flow. We've disclosed these numbers in our footnotes. We've got no net costs, there's no net economic cost from doing this. And the simple answer for why now, it's because the SEC believes it's more appropriate that we take one side of the equation out of SG&A and make it, its own line item. But simply putting those two-line items together, you have the same SG&A that you typically had or it used to have.

I mean one oversimplified way of thinking about this, is that we have to mark-to-market every quarter our obligation to employees under these plans and we also have to mark-to-market the underlying assets and the mark-to-market adjustments for both of those is exactly the same thing and opposite amounts and opposite directions. The same amount. So economically it's zero and we've had this forever 10 plus years and the short answer again, the SEC has asked us going forward to take what we had put in our footnotes and instead, put it on the face of the income statement.

[Jeff Silber, BMO Capital Markets]

I'm sorry, go ahead.

[Mike Buckley]

It has been disclosed in the footnotes and so it's really just a geography movement.

[Jeff Silber, BMO Capital Markets]

Got it and so the presentation that we see in this quarter's press release is the same presentation we're going to be seeing going forward, is that correct or is there something different?

[Keith Waddell]

It's just what you're seeing and we'll do our best to help you not have to change your model because if you'll look on the face of the income statement that's attached to the press release. There's two rows right next to each other and if you put those two together. You'll have exactly the same SG&A you would have gotten historically. We can't tell you to do that. But we could suggest if you did that, that the combination of two rows would be exactly the same as the SG&A you've had traditionally in your model.

[Jeff Silber, BMO Capital Markets]

Okay, I appreciate the suggestion. Thanks so much.

[Operator]

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

[Manav Patnaik, Barclays]

Keith, my first question was just you talked about the work from home virtual goal your talent can go beyond I guess where the geographically located. I agree that high level and I would think that's the flexibility with the larger firms probably benefits from that. But I was just curious with your SMB clients are you seeing that, like is the smaller 50 to 100 person shop willing to hire someone across the country?

[Keith Waddell]

Well and so there's suddenly there's two different questions here. One is, remote versus on site and the remote could be in the same geography. It's not just in the office and then there's remote as in a different geography altogether. And I'd say, clearly SMB has shown that they're willing to have not on premise but largely in the same local geography. Whereas bigger businesses not only are minimal to that, they're also minimal to particularly for project work going outside the local market. But we've been very pleased that depending on line of business that you're talking sometimes 70%, 80% of the people we have on assignment are not working in the client's premises. They're working remotely either in the same geography or in a distant geography.

[Manav Patnaik, Barclays]

Got it and maybe just on Protiviti. Can you give us a flavor of kind of where the engagements of the strongest like you know which areas are you seeing the growth and maybe which areas either idle or declining right now?

[Keith Waddell]

Well the area, where they're the strongest and frankly the area that we are probably really proud is the joint success Protiviti and staffing are having in the public sector. We've got joint pursuit teams selling the work, by in large the resources get provided by staffing. But Protiviti manages them. If you think about it process management, process optimization is right in Protiviti's wheelhouse, in fact it's the wheelhouse of their wheelhouse. If you look at states they're overwhelmed with volumes and unemployment claims, eligibility for unemployment payments, processing, they're dealing with housing assistance claims. Their calling volumes are off the charts and additionally you've got school districts that can't keep up with the technical support requirements of all the virtual learning models.

So the public sector has made a meaningful difference to both staffing and Protiviti, this quarter. You'll notice in the schedules attached to the press release for the first time ever, we've actually shown you how much revenue is billed by staffing to Protiviti. We've shown you the growth rates and we're pleased to report that for this quarter, staffing revenues from Protiviti grew by 28% year-on-year and public sector activities were a big piece of that. That said, that's not the total picture.

Strongest part of Protiviti at the moment is technology consulting, its cyber, its cloud, its transformation. But also risk and compliance - money laundering, the retail, operational risk all those are strong as well. So Protiviti, very well, very good. The internal audit has been a little impacted more discretion in client budgets. There's some fee pressure there. It's down 8% or 10% while everything up is up, even more than that to get to where you see it overall.

And as I said last quarter remember Protiviti's fees are actually up more than the revenues because they've got less reimbursable expenses because they're not traveling and if you looked at fee level versus a revenue level. You can add another 4 percentage points to that. So Protiviti doing very well and Protiviti together with staffing doing very well, as well as we actually show you that both in numbers and in growth rate percentages in the schedules that we attached to the press release.

[Manav Patnaik, Barclays]

Got it, thanks Keith.

[Operator]

Thank you. Our next question comes from the line of Hamzah Mazari from Jefferies. Please go ahead.

[Mario Cortellucci, Jefferies]

This is Mario Cortellucci filling in for Hamzah. Could you just give us a quick update on what the bill pay spread was in the quarter? And maybe you can even give us a sense how that trended throughout the quarter into the first few weeks of October?

[Keith Waddell]

Well so adjusted for mix to get apples-and-apples, their rates were up 3% and that's versus 5% a quarter ago and 6% to quarter before that, so not surprisingly given the overall environment. There's some pressure on our bill rates, but we're still increasing them and as you know, this all starts with the pay rates. We have to attract the right talent to a given clients assignment.

[Mario Cortellucci, Jefferies]

Great, thanks and then on, I guess historically perm has improved faster than temp. I guess you're starting to see that now already. But I'm just curious to know, I mean because of how extreme and unique the situation is, do you see anything different about this cycle that it could cause maybe the temps portion of that rebound to lag a little more. I know that we've had an obviously an early V-shaped recovery since June I feel like the economy has to kind of a slower pace of improvement. So I didn't know given the dynamic you're seeing with SMBs' and your midcap customers and then also this, like I said this V-shaped followed by slower pace could maybe drag out the temp portion of the rebound longer than it normally would in a regular recession.

[Keith Waddell]

And the short answer would be, we don't think though its true perm has recovered well off the draw, not unusual, many of our clients cut too deep and as they need staff, they come to us, they're upgrading staff including out of market remote resources that they haven't done before. But also remember they're coming off a lower trough that is the case for temp, all of which is normal. So I would say based on everything we've seen so far, the relationship of temp versus perm, there's very little surprises us. Office team actually rebounded nicely off their trough because they're actually participating disproportionately and as public sector work, that I talked about earlier and call centers are a big part of the demand from the states, from the reasons that I talked about.

[Mario Cortellucci, Jefferies]

Great, thank you so much.

[Operator]

Thank you. Your next question comes from the line of Kevin McVeigh from Crédit Suisse. Please go ahead.

[Kevin McVeigh, Crédit Suisse]

And Keith, as you talked about furloughs a little bit, but any sense on how that dynamic is been playing out in this recovery whether it's internal Robert Half or just as your clients are maneuvering through furlough process as opposed to perm because it seems like the perm is coming a little bit stronger than what you would have expected given how aggressive firms for with furloughs this cycle.

[Keith Waddell]

A, I think furloughs have largely played their way out in a major way given we're several months from when those people were furloughed. And I'd also say, if you look to peak to trough perm fell a little less than it would traditionally. So there's no evidence that furloughs impacted that and further from the trough, perm is coming back nicely as you observed. And so as we talk about extensively on the last call. I don't think furloughs are having any meaningful negative effect on the demand for our services.

[Kevin McVeigh, Crédit Suisse]

Got it and then just to follow-up on the wage. Keith is any of that, is it just the environment we're in or is any of that maybe just sourcing the candidates from a wider spread geographically than you would historically see. I guess said in another way, because you're going maybe more cost-efficient regions. Is that pressing the wage rate at all?

[Keith Waddell]

I would say generally speaking, we started this disruption period with tighter [ph] unemployment than ever and so you started from a very strong place and further because it's event driven. I think by in large clients see the end of the tunnel more clearly than they typically would and the fact that it happened more quickly than in prior downturns where there is like water torture over 18 months, this happened over a few. I think all of those are relevant to this business about what happens to pay rates or what happens to bill rates. But the pay rates are not up as much as they were, but they're still up. Bill rates are not up as much as they were, but they're still up. While it might be impacted a little bit by the remote work phenomenon, by in large I don't think that's the driver.

[Kevin McVeigh, Crédit Suisse]

Very helpful, thank you.

[Operator]

Thank you. Your next question comes from the line of Gary Bisbee from Bank of America. Please go ahead.

[Gary Bisbee, Bank of America]

I just wanted to ask within the temp staffing business, when we look at the sub segments. The technology and management resources obviously the growth rate deteriorating from last quarter. is that just sort of the lag typically we see with professional maybe longer engagements took a while to roll off and - or is there anything else you would point to and is it fair to say that those two businesses have also seen the trend of week-to-week revenue improvement that you discussed earlier?

[Keith Waddell]

And so as you observed, the facts are, the assignment links are longer in management resources in tech and so they had in flight [ph] assignments that they rode longer than our other divisions that hit [ph] meaning they were impacted later, happy to report that once they got to that period, they have begun to improve week-to-week although it was a bit later than early June. They have had several weeks of consistent growth as well. The other thing that I talked about earlier was that because they're focused more on project work than transactional work. Project work is more remote friendly than transactional work. So that if you look cumulatively at kind of peak to trough during pandemic of our accountemps office team and you compare that to management resources tech. There is less impact to management's resources tech than there is to the former because of the project work and it seems to be more resilient than the transactional work partly because it's more remote friendly.

[Gary Bisbee, Bank of America]

Okay, that makes sense. And then, within the cost reductions that you've delivered particularly at the SG&A level, interesting to me that Protiviti which is doing holding up better and continuing to grow, it seems pretty similar. In fact it looks like more larger percentage than a temp reduction in SG&A. Was there anything in particular to the quarter and I guess how should we think about that trending? I know you commented on next quarter a bit, but trending over the next quarter or so anything you would point out there. Thank you.

[Keith Waddell]

Well, first of all remember that, Protiviti's principal payroll cost are in direct cost not in SG&A. but for those cost that are in SG&A. I think they've certainly been because there's less travel overall and including non-billable travel, that's a factor. They've reduced their marketing cost just because of the impacts primarily to their internal audit practice during the year. Having said that, if you noticed for the fourth quarter, we're calling for their SG&A cost to increase and that's driven by the same reasons they're going to turn the marketing spicket [ph] back on and they've got some training cost attached to all the people that they've added. But Protiviti's profitability for calendar 2020 will be the largest that's been in many, many years which in an off itself is also incredible. So they're growing the fastest and they're the most profitable of any of our lines of business which is a really good place to be.

[Gary Bisbee, Bank of America]

Yes for sure, thanks.

[Operator]

Thank you. Your next question comes from the line of Tobey Sommer from Truist Securities. Please go ahead.

[Jasper Bibb, Truist Securities]

This is Jasper Bibb filling in for Tobey. I was hoping you could speak to what you've been hearing from customers kind of regarding reshoring or onshoring of outsourced labor and what that might mean for your business? Thanks.

[Keith Waddell]

We hear a little bit of it. Primarily on the Protiviti side. I wouldn't say it's a major theme or trend. But clearly some companies aren't happy to have a heavily reliance on their supply chain offshore and they're bringing some of that back and so again we have a few engagements but it's not moving the needle.

[Jasper Bibb, Truist Securities]

Thanks and then as volumes kind of coming back here. I was hoping you could speak to what you're hearing from clients kind of the split between flexible in perm labor needs and whether that dynamic might vary from what you've seen in kind of the early stages of the power cycles?

[Keith Waddell]

Well which is always the case and in prior cycles, most of our very nimble SMB clients get really lean during the downturn and at the first hint of optimism and more transaction volume they need help and frankly if you look for the last couple of downturns and recoveries thereafter temp and perm have recovered pretty much together because perm has a deeper trough it typically has higher growth rates coming out of that trough. But by in large just economic incentives to keep your cost variable are just as true at the beginning of a recovery as they are any other time. On the other hand to the extent they overcut or got extra lean and want to take advantage of one of the best labor markets they're going to see because it's early into recovery, many of chose to tap into that market and upgrade their talent. So frankly, we don't see anything different in impact of downturn, early stages of recovery that differ than in the past other than it was condensed into a much smaller timeframe.

[Jasper Bibb, Truist Securities]

I appreciate it. Thanks for taking the questions Keith.

[Operator]

Thank you. Your next question comes from the line of George Tong from Goldman Sachs. Please go ahead.

[George Tong, Goldman Sachs]

Temp staffing gross margin contracted 40 bps year-over-year due to lower conversion revenues for the most part. Can you talk about how you expect the recent slowdown in temp wage growth that impact temp bill pay spreads?

[Keith Waddell]

Well first of all I'm glad you mentioned temp gross margins because frankly it's one of the things we're most proud of and how we managed during the pandemic period typically peak to trough during a downturn. We'd be down 300 basis points in our temp gross margins and as we stand here now, we're significantly less than that meaning we've done significantly better. As to slowing temp wage growth, that's not going to have much impact on our spread because we're going to take to the extent there are lower temp wages in an absolute way. We're going to take that amount and apply the same margin to it that we would otherwise. So compression with wage growth doesn't mean compression in margin.

[George Tong, Goldman Sachs]

Got it, that's helpful. And then I wanted to dive into your assumptions around your 4Q guide. Can you elaborate on what you're assuming with COVID infection rates and lockdowns in your outlook?

[Keith Waddell]

Well the assumption is that, just like it's been the case in the last few months. They're going to be ebbs and flows, they're going to be hotspots, there's going to be partial lockdowns, partial restrictions it's just all part of the calculus and that's a reason why we only have modest sequential growth in the midpoint of our guide. It doesn't assume a major country complete shutdown and does assume that there will be continue to be ebbs and flows.

[George Tong, Goldman Sachs]

Got it, very helpful. Thank you.

[Operator]

Thank you. Your next question comes from the line of Mark Marcon from Baird. Please go ahead.

[Mark Marcon, Robert W. Baird and Company]

Just have one quick follow-up. Keith and Mike, you talked about the public sector and I was wondering if you could talk about to what extent that has plateaued or if you're seeing continued growth and how long you think those projects are going to go on for? It's certainly seems like if given how far behind the public sector is, that it would continue for a while. But I'd love to hear your perspective.

[Keith Waddell]

Well some of the current demand is bulge demand because of unemployment rates because of need for housing assistance. There's no question that there is bulge component to it but we believe we're building relationships for the first time ever that are going to have lags as we go forward and as I said earlier Protiviti loves to show up when process optimization is the objective and for many of these state and local governments their processes could use some optimization and we believe that lives past this bulge period. But the bulge period certainly is nice to have as we bridge ourselves to the other side of COVID.

[Mark Marcon, Robert W. Baird and Company]

Would you use initial unemployment claims as kind of a proxy for that bulge period and does tracking that or how are you thinking about a longer bulge [ph] period will last?

[Keith Waddell]

If our penetration rates among the states, we're only dealing with a handful of states and so if we were dealing with every single state and this surge related primarily to their surge, I would say yes. But the fact that we're continuing to go to new states and referencing the states where we already are, that itself is a source of growth such that we're growing share if you will, in addition to just the surge on unemployment and housing assistance claims.

[Mark Marcon, Robert W. Baird and Company]

Great, thank you.

[Keith Waddell]

Okay, that was our last question. Thank you very much for joining us.

[Operator]

This concludes today's teleconference. If you missed any part of the call, it will be achieved in audio format in the investor center of Robert Half's website at www.roberthalf.com. You can also dial the conference call replay. Dialing details and the conference ID are contained in the company's press release issued earlier today.