U.S. Markets closed

Edited Transcript of RHI earnings conference call or presentation 23-Jul-19 9:00pm GMT

Q2 2019 Robert Half International Inc Earnings Call

MENLO PARK Jul 30, 2019 (Thomson StreetEvents) -- Edited Transcript of Robert Half International Inc earnings conference call or presentation Tuesday, July 23, 2019 at 9:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Max Messmer

Robert Half International Inc. - Chairman of the Board & CEO

* Keith Waddell

Robert Half International Inc. - Vice Chairman of the Board, President & CFO

================================================================================

Conference Call Participants

================================================================================

* Blake Johnson

Goldman Sachs Group Inc., Research Division - Research Analyst

* Dan Dolev

Nomura Securities Co. Ltd., Research Division - Executive Director of Business Services

* Gary Bisbee

BofA Merrill Lynch, Research Division - Analyst

* Jeff Silber

BMO Capital Markets Equity Research - MD & Senior Equity Analyst

* Kevin McVeigh

Crédit Suisse AG, Research Division - MD

* Mark Marcon

Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst

* Ryan Leonard

Barclays Bank PLC, Research Division - Research Analyst

* Seth Weber

RBC Capital Markets, LLC, Research Division - Analyst

* Tim McHugh

William Blair & Company L.L.C., Research Division - Partner & Global Services Analyst

* Tobey Sommer

SunTrust Robinson Humphrey, Inc., Research Division - MD

* Michael Cho

JP Morgan Chase & Co, Research Division - Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Hello and welcome to the Robert Half Second Quarter 2019 Conference Call. Our hosts for today's call are Mr. Max Messmer, Chairman and CEO of Robert Half; and Mr. Keith Waddell, Vice Chairman, President and Chief Financial Officer.

Mr. Messmer, you may begin.

--------------------------------------------------------------------------------

Max Messmer, Robert Half International Inc. - Chairman of the Board & CEO [2]

--------------------------------------------------------------------------------

Thank you, and hello, everyone, and thank you for joining today's call. As a reminder, the comments made on today's call contain predictions, estimates and other forward-looking statements. These statements represent our current judgment of what the future holds and include words such as forecast, estimate, project, expect, believe, guidance and similar expressions.

We consider these remarks to be reasonable. However, they are subject to risks and uncertainties that could cause actual results to differ materially from the forward-looking statements. Some of these risks and uncertainties are described in today's press release and in our SEC filings, including our 10-Ks, 10-Qs and today's 8-K. We assume no obligation to update the statements made on today's call.

For your convenience, our prepared remarks for today's call are available in the Investor Center of our website at roberthalf.com. From the home page, click on the Investor Center link at the bottom left of the page.

Now let's review Robert Half's financial results for the second quarter. Global revenues for the company were $1.516 billion, an increase of 4% from last year's second quarter on a reported basis and an increase of 6% on a same-day constant currency basis. Second quarter net income per share was $0.98 versus $0.89 in the same period 1 year ago. This is an increase of 10% year-over-year.

Cash flow from operations was $121 million in the second quarter, and capital expenditures were $16 million. In June, we distributed a $0.31 per share cash dividend to our shareholders of record for a total cash outlay of $36 million. We also repurchased approximately 1 million Robert Half shares during the quarter for $60 million. We have 4.9 million shares available for repurchase under our Board-approved stock repurchase plan.

We saw solid demand for our staffing and Protiviti services during the second quarter. Global talent shortages persist across our professional disciplines, particularly in the United States where unemployment remains near a 50-year low. This enhances the value of our services. During the second quarter, return on invested capital for the company was 42%.

I'll turn the call over to Keith for a more detailed discussion.

--------------------------------------------------------------------------------

Keith Waddell, Robert Half International Inc. - Vice Chairman of the Board, President & CFO [3]

--------------------------------------------------------------------------------

Thank you, Max.

As noted, global revenues in the second quarter were $1.516 billion. This is up 4% from the prior year's second quarter on a reported basis, and up 6% on a same-day constant currency basis from the year ago period.

Accompanying our earnings release today is a supplemental schedule showing year-over-year revenue growth rates on both a reported and as adjusted basis. These figures are further broken out by U.S. and non-U. S. operations. The term as adjusted reflects the removal of the impact of billing days, currency fluctuations and certain intercompany adjustments in our international operations. This is a non-GAAP financial measure designed to provide insight into certain revenue trends in our operations.

On an as adjusted basis, second quarter staffing revenues were up 4% year-over-year. U.S. staffing revenues were $965 million, up 4% on a same-day basis. Non-U. S. staffing revenues were $278 million, up 3% year-over-year on an as adjusted basis. We have 325 staffing locations worldwide, including 86 locations in 17 countries outside the United States.

There were 63.4 billing days in the second quarter versus 63.5 in the same quarter 1 year ago. The current quarter has 64.1 billing days compared to 63.3 days in the third quarter 1 year ago. Currency exchange rate movements during the quarter had the effect of decreasing reported year-over-year staffing revenues by $16 million. This reduced our year-over-year reported staffing revenue growth rate by 1.3 percentage points.

Global revenues for Protiviti were $273 million. $211 million of that is from business within the United States, and $62 million is from operations outside the United States. On an as adjusted basis, Protiviti revenues were up 14% versus the year ago period.

On a same-day basis, U.S. Protiviti revenues in the second quarter were up 15% from the prior year. Non-U. S. revenues were up 9% on an as adjusted basis. Exchange rates had the effect of decreasing year-over-year Protiviti revenues by $3 million and decreasing the year-over-year reported growth rate by 1.2 percentage points. Protiviti and its independently owned Member Firms serve clients through a network of 86 locations in 27 countries.

Now let's take a look at gross margin. In our temporary and consulting staffing operations, gross margin was 38.2% of applicable revenues compared to 37.5% of applicable revenues in the second quarter 1 year ago. Expanding bill/pay spreads and lower payroll tax rates were the largest contributors to the increase.

Permanent placement revenues were 11.3% of consolidated staffing revenues in the second quarter, compared to 11.0% during the same period 1 year ago. When combined with the temporary and consulting gross margin, overall staffing gross margin rose 70 basis points compared to the year ago period to 45.1%.

Protiviti gross margin was $76 million in the second quarter, or 27.9% of Protiviti revenues. 1 year ago, gross margin for Protiviti was $64 million or 27.3% of Protiviti revenues.

Staffing SG&A costs were 34.6% of staffing revenues in the second quarter compared to 33.7% in last year's second quarter. The higher mix of permanent placement revenues to this quarter versus 1 year ago added 20 basis points to the quarter's SG&A ratio. SG&A costs for Protiviti in the second quarter were 17.3% of Protiviti revenues versus 19.4% of revenues in the year ago period.

Second quarter operating income from our staffing divisions was $130 million. Operating margin was 10.5%. Our temporary and consulting staffing divisions reported $105 million in operating income and produced an operating margin of 9.5%. Operating income for our permanent placement division was $25 million in the second quarter and produced an operating margin of 18.0%. Second-quarter operating profit for Protiviti was $29 million, resulting in an operating margin of 10.6%.

At the end of the second quarter, accounts receivable were $842 million and implied days sales outstanding, DSO, was 49.8 days.

Before we move to third quarter guidance, let's review some of the monthly trends we saw in the second quarter of 2019 and thus far in July, all adjusted for currency and billing days. Our temporary and consulting staffing divisions exited the second quarter with June revenues up 5.3% versus the prior year, compared to a 3.7% increase for the full quarter. Revenues for the first 2 weeks of July were up 4.3% compared to the same period in July 1 year ago. Permanent placement revenues in June were up 7.6% versus June 1 year ago. This compares to a 6.2% increase for the full quarter. For the first 3 weeks in July, permanent placement revenues were down 4.6% compared to the same period last year. We provide this information so that you have insight into some of the trends we saw during the second quarter and into July. But as you know, these are very brief time periods. We caution against reading too much into them. With that in mind, we offer the following third quarter guidance: Revenues, $1.525 billion to $1.590 billion; Income per share, $0.98 to $1.04

The midpoint of our guidance implies year-over-year revenue growth of 5% on a same-day as adjusted basis, which includes Protiviti, and EPS growth of 6%. The projected tax rate for the third quarter is 28.5% compared to 24.1% a year ago. We limit our guidance to 1 quarter. All estimates we provide on the call are subject to the risks mentioned in today's press release and in our SEC filings.

Now I'll turn it over to Max.

--------------------------------------------------------------------------------

Max Messmer, Robert Half International Inc. - Chairman of the Board & CEO [4]

--------------------------------------------------------------------------------

Thank you, Keith.

We were pleased with our results in the second quarter, both in our U.S. and non-U. S. operations. Protiviti had a particularly strong quarter. The demand for skilled talent is something we don't see diminishing anytime soon. Skill shortages are most pronounced in the professional occupations in which we specialize. Likewise, demand remained strong for the consulting expertise of our Protiviti professionals as they work with companies on risk and compliance, data and analytics, performance improvement, and technology-related efforts. Increasingly, Protiviti is collaborating with Robert Half's staffing divisions to work on major client initiatives. Our blended staffing and Protiviti solutions allow us to meet a company's needs at every point in the staffing and consulting continuum. We believe this is a key differentiator for us.

Access to talent on a full-time project and consulting basis is at a premium right now, and with our full spectrum of staffing and Protiviti solutions, we are a reliable source for this hard-to-find talent and expertise. As we have talked about many times on this call, small and midsized businesses make up the lion's share of our client base. While small business optimism is still at historically high levels, a few of the surveys we follow have reported slightly lower business confidence in recent months. This has had little impact in hiring activity, however. As of June, the NFIB Small Business Optimism Index reported 19 months of consecutive employment growth among small companies. In the June survey, finding qualified workers remain the single most important business problem for these firms.

Looking at the U.S. workforce as a whole, the June employment outlook was positive, with job growth exceeding analysts' estimates. The labor participation rate also rose slightly, which is a positive sign that workers feel confident in their job prospects. For these and other reasons, we are optimistic about our growth opportunities. We will continue to invest in technologies that enable us to deliver a world-class digital experience that complements the personalized service we have perfected over 70 years in the staffing and recruitment industry.

Earlier this month, we introduced a new mobile app that allows candidates to search for full-time and temporary jobs, apply instantly and track the status of their applications. The app also recommends on a real-time basis new jobs that match a candidate's preferences.

Now Keith and I would be happy to respond to your questions. We ask that you please limit yourself to one question and a single follow-up, as needed. As time permits, we'll certainly try to return to you if you have additional questions. Thank you.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) Our first question comes from the line of Mark Marcon from R.W. Baird.

--------------------------------------------------------------------------------

Mark Marcon, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [2]

--------------------------------------------------------------------------------

I was wondering if you could give us a little bit of additional color with regards to the acceleration that you ended up seeing in June and potentially continuing into July. I know we're not trying to make too much out of month-to-month trends, but just wondering if you could give a little bit of color in terms of which specific segments within staffing you ended up seeing it in relative to. Also from a geographic perspective, what are you seeing in the U.S. relative to Europe, which seems to be slowing. And then how would you comment with regards to how much of the benefit is basically coming from the collaboration that you're seeing between staffing and the Protiviti division, which continues to perform extremely well?

--------------------------------------------------------------------------------

Keith Waddell, Robert Half International Inc. - Vice Chairman of the Board, President & CFO [3]

--------------------------------------------------------------------------------

So on the acceleration, we did see improvement in U.S. temp across our lines of business every month during the quarter. May was better than April. June was better than May. In the U.S., our July start is actually a little better than June, so the U.S. trends across our lines of businesses progressively got better year-on-year each month. International results were different. We are seeing macros slowing -- in Europe and in the U.K., and they offset those trends somewhat. Our guidance assumes that the growth for the quarter will be close to, essentially on a year-over-year basis globally, what it was in Q2, which is some firming in the U.S. according to the trends we just talked about, offset by some additional softening in Europe, U.K.

As to the collaboration, it continues to go very well. As we've talked about before, those results get reported in Protiviti, not in staffing. So the staffing trends I just talked about do not consider the additional benefits from what we call managed business services, managed technology services, which were significant, and we're the fastest-growing segment in Protiviti.

--------------------------------------------------------------------------------

Mark Marcon, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [4]

--------------------------------------------------------------------------------

That's terrific. And can you talk just a little bit about just on the staffing EBITDA margin and the staffing SG&A? Is that partially just due to mix as it relates to just the mix between the U.S. and Europe in terms of the SG&A going up a little bit, and just the deleveraging that you may have seen over there?

--------------------------------------------------------------------------------

Keith Waddell, Robert Half International Inc. - Vice Chairman of the Board, President & CFO [5]

--------------------------------------------------------------------------------

So frankly, the SG&A deleveraging, to use your word, is more about our continued investment in tech initiatives we've talked about on prior calls that we continue, and we continue pretty much unabated, from what we had in the last few quarters. We've talked about AI, machine learning, matching engine, micro-targeting and marketing, prioritizing leads for our staff. We talked earlier on the call about how we released a new mobile app a couple of weeks ago that's principally candidate-focused. So the tech spending continues kind of irrespective of revenues. It's spending we're happy to make. We believe we're already getting payback, particularly in the candidate area. We're excited about the additional initiatives we have on the runway, and that's the principal reason why SG&A is up as a percent of revenue. And going to guidance, we expect that to continue in the guidance as well.

--------------------------------------------------------------------------------

Operator [6]

--------------------------------------------------------------------------------

Our next question comes from Andrew Steinerman from JPMorgan.

--------------------------------------------------------------------------------

Michael Cho, JP Morgan Chase & Co, Research Division - Analyst [7]

--------------------------------------------------------------------------------

This is Michael Cho for Andrew. I just had a question on -- Keith, on the comment you made about acceleration in the U.S. staffing business across all lines in every month of the quarter. What do you think is driving that acceleration, at least in the quarter and into July?

--------------------------------------------------------------------------------

Keith Waddell, Robert Half International Inc. - Vice Chairman of the Board, President & CFO [8]

--------------------------------------------------------------------------------

I would say that generally speaking, our clients think you've got a friendlier Fed today than they did 6 months ago, that trade tensions, while still around, don't seem to be as intense as they were 6 months ago. But if you look at the sentiment measures, we referenced NFIB, you can look at PMI Services, the sentiment measures have stayed high. And my personal belief is it's primarily about a more friendly Fed.

--------------------------------------------------------------------------------

Michael Cho, JP Morgan Chase & Co, Research Division - Analyst [9]

--------------------------------------------------------------------------------

Got it. Understood. And then just a quick follow-up. What was the bill rate growth in the quarter?

--------------------------------------------------------------------------------

Keith Waddell, Robert Half International Inc. - Vice Chairman of the Board, President & CFO [10]

--------------------------------------------------------------------------------

So the bill rate growth was 5.4% year-on-year. That's down slightly from 5.7% last quarter. But it's not unusual to see fluctuations in that neighborhood.

--------------------------------------------------------------------------------

Operator [11]

--------------------------------------------------------------------------------

Our next question comes from Dan Dolev from Nomura.

--------------------------------------------------------------------------------

Dan Dolev, Nomura Securities Co. Ltd., Research Division - Executive Director of Business Services [12]

--------------------------------------------------------------------------------

Following up on the bill rates versus billable hours, I guess, 5.4% would imply about 1.6% negative billable hours, if my math is right, getting to 3.7% same-day constant currency. That's probably the weakest it's been since the third quarter of 2017. What needs to happen to get that number to trend back into positive territory? And kind of what are you implicitly modeling in your head for the third quarter for that -- for those 2 components?

--------------------------------------------------------------------------------

Keith Waddell, Robert Half International Inc. - Vice Chairman of the Board, President & CFO [13]

--------------------------------------------------------------------------------

Our third quarter modeling is very similar to second quarter actual. So that was an easy one to answer. As to what needs to happen to turn it around, I'd say the U.S. macro sentiment needs to continue to at least get no worse and improve would be nice. And then to the extent we get better and better with attracting and retaining candidates that we place on assignment and/or provide for permanent placement, the more pressure we'll take off of the sales cycle, which will help hours. As we've talked about on prior calls, it's not unusual in this part of a cycle for hours to be pressured because a.) it's harder to recruit candidates; b.) more candidates leave mid-assignment and you have to replace them, all of which is additional work for our staff. All of which ultimately will lead to pressure on hours. As we've also said on calls, because of the pressure on hours, we also feel like we need to get paid when we have the eligible candidates, which is why you see the bill rates increasing in the 5% range and have over a few quarters now.

--------------------------------------------------------------------------------

Dan Dolev, Nomura Securities Co. Ltd., Research Division - Executive Director of Business Services [14]

--------------------------------------------------------------------------------

Got it. And just to clarify, when you said the third quarter guidance, you're basically implying about 3.7% staffing or temp organic growth was in the -- was this roughly a similar component, is that what you were saying?

--------------------------------------------------------------------------------

Keith Waddell, Robert Half International Inc. - Vice Chairman of the Board, President & CFO [15]

--------------------------------------------------------------------------------

Staffing overall is roughly expected to grow at the same rate by which it did in the second quarter. We leave ourselves some wiggle room between perm and temp. But staffing overall, the guidance is Q3 growth looks the same as Q2 growth, which notably isn't any slowing versus the growth that we just showed in part because of the trend line, the improving trend line we talked about.

--------------------------------------------------------------------------------

Operator [16]

--------------------------------------------------------------------------------

Our next question comes from Jeff Silber from BMO Capital Markets.

--------------------------------------------------------------------------------

Jeff Silber, BMO Capital Markets Equity Research - MD & Senior Equity Analyst [17]

--------------------------------------------------------------------------------

I wanted to shift gears and talk about Protiviti a little bit. You had some nice margin expansion both in the gross margin line and operating margin line. If you could talk about what drove that and if you could also give us a little bit more color of what's embedded in your 3Q guidance for Protiviti, both revenues and margins.

--------------------------------------------------------------------------------

Keith Waddell, Robert Half International Inc. - Vice Chairman of the Board, President & CFO [18]

--------------------------------------------------------------------------------

So Protiviti had a very strong quarter. The good news is it was very broad-based. Every one of their major segments had double-digit year-over-year revenue growth. Internal audit was strong; IT audit was the strongest part within that; tech consulting was strong; cloud, cyber, digital, FSI regulatory was strong; and then the strongest of all, managed business services, managed technology services, where the pipeline continues to be strong. We have various types of projects where staffing and Protiviti work together. Examples include remediating material weaknesses, resolving processing backlogs, back-office modernization, standing up shared service centers, user experience, user interface improvements. Again, our model where we have scalable staff from the staffing side, deep subject-matter expertise for Protiviti continues to go very well. But as I just said, it's in addition to their traditional segments also already doing well.

We did see margin expansion on SG&A. You got better leveraging of cost at the gross margin line. They had slightly better pricing, slightly better utilization. We're very happy their margin, operating margin for the quarter was double digit. Year-to-date, they're at 9%, which is just below double digit. Still better than 7.6% a year ago. Our expectation is that they'll have double-digit margins the last 2 quarters of the year and will end the year with double-digit margins, which we talked about being our goal for some time. So very strong revenue performance, U.S. and non-U. S., although non-U. S. had very high comps from a year ago. They also saw some slowing in Europe, U.K. But still all things considered, Protiviti non-U. S. wasn't bad. Protiviti U.S. was outstanding.

--------------------------------------------------------------------------------

Jeff Silber, BMO Capital Markets Equity Research - MD & Senior Equity Analyst [19]

--------------------------------------------------------------------------------

Okay. That's helpful. And just a couple of quick numbers questions. What share count is embedded in your 3Q EPS guidance? And I know you're not giving 4Q guidance, but at least from a tax rate perspective, should we use that 28.5% for the fourth quarter as well?

--------------------------------------------------------------------------------

Keith Waddell, Robert Half International Inc. - Vice Chairman of the Board, President & CFO [20]

--------------------------------------------------------------------------------

So we're using 116,500 for share count. Tax rate should normalize in the fourth quarter, 27% to 27.5%. We've pointed out in this call our Q3 guidance is 28.5%, which is 4 points higher than a year ago. A year ago, we had some nonrecurring credits for foreign taxes when we reconciled our return to our tax accounts. We don't expect those credits to repeat, although Q3 is always a noisy quarter for tax rate, given that it's the quarter you reconcile your tax return to your accounts.

--------------------------------------------------------------------------------

Operator [21]

--------------------------------------------------------------------------------

Our next question comes from Kevin McVeigh from Credit Suisse.

--------------------------------------------------------------------------------

Kevin McVeigh, Crédit Suisse AG, Research Division - MD [22]

--------------------------------------------------------------------------------

Keith and Max, any sense of how conversion fees came in, in the quarter? And then just what's been the tenor of clients? Have they become kind of less picky or just pushing out the hiring decision at all? Just any thoughts at the margin, particularly on the perm side.

--------------------------------------------------------------------------------

Keith Waddell, Robert Half International Inc. - Vice Chairman of the Board, President & CFO [23]

--------------------------------------------------------------------------------

So conversions were 3.5% of revenue on the temp side, which is consistent with last quarter. As to the tone of business in perm, particularly from a client point of view, clients are just as picky as they were, which slows us down. We're further slowed down by candidates who are getting counteroffers from their existing employers when they go tell them they're going to leave. They further get multiple outside offers when it's known that they're looking. So many time we go through an entire process with the candidate. And in the 12th hour, they decide to stay with their existing company or they take another offer and we have to start over, or we have to go to plan B to the extent we've got a plan B in the works.

But the point is clients are still demanding. They're still picky. They're still selective. Candidates are still tight. They're in demand. They have many opportunities, which makes them more selective and more picky, so you got both sides counterintuitively being more selective.

--------------------------------------------------------------------------------

Kevin McVeigh, Crédit Suisse AG, Research Division - MD [24]

--------------------------------------------------------------------------------

Got it. And then just the step-up in the tax rate, was that just mix? Or any particular reason for that?

--------------------------------------------------------------------------------

Keith Waddell, Robert Half International Inc. - Vice Chairman of the Board, President & CFO [25]

--------------------------------------------------------------------------------

The tax rate, there are certain costs that are nondeductible under the new Tax Act. We had more of those this year than last, and we had the absence of credits we got a year ago as I just talked about. But a normal rate should be more in the 27%, 27.5%, and that's what we hope to see in the fourth quarter.

--------------------------------------------------------------------------------

Operator [26]

--------------------------------------------------------------------------------

Our next question comes from Gary Bisbee from Bank of America Merrill Lynch.

--------------------------------------------------------------------------------

Gary Bisbee, BofA Merrill Lynch, Research Division - Analyst [27]

--------------------------------------------------------------------------------

I just wanted to ask, given the success you're having going to market with Protiviti and using some of the staffing business, I realize in the grand scheme of the company, that's still fairly small numbers. But is that have any -- sort of exacerbating any ability to find candidates for temp engagements and then, thus having an impact on the growth? Or presumably, you'd prioritize those for your own Protiviti engagement, or is that not of the scale that that's an issue at all?

--------------------------------------------------------------------------------

Keith Waddell, Robert Half International Inc. - Vice Chairman of the Board, President & CFO [28]

--------------------------------------------------------------------------------

We like to think that we provide each of our clients the very best candidate available, and we don't cherry-pick for the benefit of Protiviti. But clearly, Protiviti is staffing's largest client, so they impact the candidate pool. But frankly, it's a high-class problem to have, and we'd like to have more of it. So, I would say that the success with Protiviti is to the detriment of success with third-party clients, but there's no question that the candidate pool is tight. Particularly the tech initiatives we have in place, I believe, is having a meaningful impact on our ability to recruit candidates and to deliver them to clients, whether that client is Protiviti or whether that client is a third-party client.

Frankly, our people on the staffing side internally, they get paid the same either way. So they're ambivalent. They're agnostic. They're neutral on whether the client is Protiviti or whether the client is a third party.

--------------------------------------------------------------------------------

Gary Bisbee, BofA Merrill Lynch, Research Division - Analyst [29]

--------------------------------------------------------------------------------

Okay. And then the follow-up, you've mentioned a couple of times the concept that the technology investments are helping with candidates. How do you measure that? And how do you get that out to the candidates? Are you having to do an advertising campaign or marketing campaign, or you just introduce it to people who are currently working with you?

--------------------------------------------------------------------------------

Keith Waddell, Robert Half International Inc. - Vice Chairman of the Board, President & CFO [30]

--------------------------------------------------------------------------------

We do a lot of things. But as an example, the new mobile app we released 2 weeks ago, every time we get a new order, we will match that against our candidate inventory. And you will in real-time get pushed to you that opportunity if you're on our mobile app. If you're not on our mobile app, we'll communicate with you by e-mail or however you told us you want to be communicated with. But the point is: For the first time in the history of Robert Half, when we get a new order, we immediately match it to our inventory, and then we reach out to everybody that matches that order and ask them to apply for that position. That's much more proactive than we were 5 years ago, much less 10 years ago. It's just one example.

--------------------------------------------------------------------------------

Operator [31]

--------------------------------------------------------------------------------

Our next question comes from Tim McHugh from William Blair.

--------------------------------------------------------------------------------

Tim McHugh, William Blair & Company L.L.C., Research Division - Partner & Global Services Analyst [32]

--------------------------------------------------------------------------------

Just maybe 1 question but 2 parts, I guess, internationally, is the softening broad-based? Is there anything specific to certain countries? And then secondly, the trends in June, was that broad-based? In the U.S., was that broad-based as well, or any of the practice lines more pronounced than the other ones in terms of improving trends?

--------------------------------------------------------------------------------

Keith Waddell, Robert Half International Inc. - Vice Chairman of the Board, President & CFO [33]

--------------------------------------------------------------------------------

In the international zone, the softening was principally Europe and U.K. Although we will say, while Germany slowed a lot, it slowed a lot on a high base, and it still had a solid single-digit growth number year-on-year, which given the environment, we thought was pretty good. But generally speaking, it was Belgium -- the slowing in Belgium, Germany, France, the U.K. As to June trends, while there are some differences by line of business, it was broad. It was broad. It was broad throughout the quarter, and it was broad by line of business. It wasn't isolated in any one line of business.

--------------------------------------------------------------------------------

Operator [34]

--------------------------------------------------------------------------------

Our next question comes from Manav Patnaik from Barclays.

--------------------------------------------------------------------------------

Ryan Leonard, Barclays Bank PLC, Research Division - Research Analyst [35]

--------------------------------------------------------------------------------

This is Ryan on for Manav. I'm just curious on the perm declines in July. Is there anything specific to call out there, the 4th of July timing or anything like that?

--------------------------------------------------------------------------------

Keith Waddell, Robert Half International Inc. - Vice Chairman of the Board, President & CFO [36]

--------------------------------------------------------------------------------

Perm is always a.) more volatile; b.) the post-quarter is less predictive of the full quarter. I think the most volatile period of time we have over the course of the entire year is around the 4th of July holiday. And so we've studied the post-quarter start relative to the full month. With hindsight. We looked at the post-quarter start with respect to the full quarter with hindsight. And the least predictive period all year long is the July 4 post-quarter period. So would we like for it to have been stronger? Absolutely. But while I wouldn't say grain of salt, we certainly aren't particularly concerned about it. And we continue to be very bullish on perm, in fact, continue to add heads disproportionately in perm, which also somewhat impacts our SG&A.

--------------------------------------------------------------------------------

Ryan Leonard, Barclays Bank PLC, Research Division - Research Analyst [37]

--------------------------------------------------------------------------------

Got it. And then on the mobile app, I guess if you're looking out the next couple of years, what are some milestones that we should think of either in terms of your number of roles placed or candidates on the app itself as we track the progress of this kind of new initiative?

--------------------------------------------------------------------------------

Keith Waddell, Robert Half International Inc. - Vice Chairman of the Board, President & CFO [38]

--------------------------------------------------------------------------------

Well, I think the idea is we want to communicate with candidates on their terms, not just ours. So if they prefer to come to our website, fine, they can do that. If they prefer we e-mail them, fine, we can do that. If instead they like to be pushed, if they can set up their own agents and pull jobs to themselves, we can push jobs to them based on what they match to. The point is we want to be everywhere they are. So I'm not sure the metrics of any one channel over any other channel are critical. But the point is there's no question, we live in a more mobile-centric world than we ever have. And we've just, in a major way, upgraded the user-friendliness and the functionality of what we provide on our website.

And by the way, if you report your time to us on that website or on the new mobile app, you get paid within 24 hours. And not a lot of companies can say that.

--------------------------------------------------------------------------------

Operator [39]

--------------------------------------------------------------------------------

Our next question comes from Tobey Sommer from SunTrust.

--------------------------------------------------------------------------------

Tobey Sommer, SunTrust Robinson Humphrey, Inc., Research Division - MD [40]

--------------------------------------------------------------------------------

I was wondering if you could comment about bill/pay spreads and expectations for pricing and bill rates in the context of the slightly improved demand you're seeing in historical trends?

--------------------------------------------------------------------------------

Keith Waddell, Robert Half International Inc. - Vice Chairman of the Board, President & CFO [41]

--------------------------------------------------------------------------------

We would say if you look at the 2004-2009 period, while unemployment wasn't quite as low then as it is now, it was low, and we consistently got around 5% bill rate increases that, in virtually every case, slightly exceeded our pay rate increases such that we expanded our gross margins. So we've been in that 5% range now for a few quarters. It would be our expectation that we stay in that range -- we not go significantly higher nor significantly lower. It seems based on history to kind of be the sweet spot giving what wage inflation is as we see it.

--------------------------------------------------------------------------------

Tobey Sommer, SunTrust Robinson Humphrey, Inc., Research Division - MD [42]

--------------------------------------------------------------------------------

And could you frame that for us in terms of gross margin? What kind of expansion did you have in that 5-year period in the last expansion? If you don't mind also incorporating in, kind of refreshing us on whatever social costs there still may be that could be alleviated from the gross margin this cycle.

--------------------------------------------------------------------------------

Keith Waddell, Robert Half International Inc. - Vice Chairman of the Board, President & CFO [43]

--------------------------------------------------------------------------------

So the social cost, I presume you're referring to -- the most significant we have is state unemployment. And with unemployment rates at 50-year lows, one of the positives of that are each state has fewer claims. We have fewer claims charged to our account in each state, and in turn, the rate we're charged against current payroll declines. So I think it was 10 or 15 basis points of the improvement this quarter year-on-year relates to an improvement or a lowering of the state unemployment tax rate. And as unemployment rates continue to come down, our expectation would be we'll continue to see benefits from that.

As to the gross margin expansion, I guess I don't have 5 years of history in front of me. We have to constantly weigh against our spreads versus the market versus our competitors that are largely local and regional. I don't think anybody would dispute that we have industry-leading margins. And we're aware of that, and therefore, we certainly don't want to price ourselves out of the market. So while we believe we can modestly expand our gross margins from here, objective 1 is to pass through wage inflation, which we're doing; and objective 2 is to modestly expand gross margins, understanding we are already the highest-margin supplier in most local markets relative to local competition.

--------------------------------------------------------------------------------

Operator [44]

--------------------------------------------------------------------------------

Our next question comes from Seth Weber from RBC Capital Markets.

--------------------------------------------------------------------------------

Seth Weber, RBC Capital Markets, LLC, Research Division - Analyst [45]

--------------------------------------------------------------------------------

I wanted to go back to the Europe commentary and the kind of relative strength in Germany. Can you just remind us what's unique to your position there that's enabling you to put up positive growth numbers in a pretty soft market?

--------------------------------------------------------------------------------

Keith Waddell, Robert Half International Inc. - Vice Chairman of the Board, President & CFO [46]

--------------------------------------------------------------------------------

I'd start with we have a really good, experienced team in Germany. We've made significant headcount investments consistently for many years, much less many quarters in a row. Our project-based businesses, Management Resources and Robert Half Technology, generally speaking in Europe, are more resilient than is Accountemps, OfficeTeam that are more transactional. They seem to be more macro impacted than does Management Resources or Robert Half Technology. So I think it's a combination of consistent past investment, the quality and experience of our team, and the positioning of our revenue mix toward the higher-level project-oriented lines of businesses.

--------------------------------------------------------------------------------

Seth Weber, RBC Capital Markets, LLC, Research Division - Analyst [47]

--------------------------------------------------------------------------------

Okay. That's helpful. And then just -- I'm sorry if I missed it, but did you give a third quarter -- a 3Q staffing operating margin guidance target or -- I know you gave Protiviti double digits, but anything that we should...

--------------------------------------------------------------------------------

Keith Waddell, Robert Half International Inc. - Vice Chairman of the Board, President & CFO [48]

--------------------------------------------------------------------------------

So with our guidance, let's just do a brief little tour down the P&L. Staffing gross margins, up 30 to 50 basis points. Higher spreads, lower SUI taxes as we just talked about. Protiviti gross margins, up 75 to 100 basis points. Higher rates and utilization. SG&A staffing, up 60 to 80 basis points. More tech investments, more perm heads. Protiviti SG&A, down 50 to 80 basis points. Leveraged from their outsized growth. Operating income, staffing down 20 to 40 basis points as the SG&A is more than the increase in gross margin. Protiviti, up 100 to 200 basis points. You've got the double benefit of higher gross margin and less SG&A. However, the bad news is when you get down to the tax rate, it's up 4 points over last year and takes away some of the benefit we just described.

--------------------------------------------------------------------------------

Operator [49]

--------------------------------------------------------------------------------

Our next question comes from George Tong from Goldman Sachs.

--------------------------------------------------------------------------------

Blake Johnson, Goldman Sachs Group Inc., Research Division - Research Analyst [50]

--------------------------------------------------------------------------------

This is Blake on for George. Given that bill rates expanded 5.4% this quarter, how much of the 70 basis points of gross margin expansion in temp staffing was driven by increasing bill/pay spreads versus the change in payroll tax rates?

--------------------------------------------------------------------------------

Keith Waddell, Robert Half International Inc. - Vice Chairman of the Board, President & CFO [51]

--------------------------------------------------------------------------------

Okay. So as we talked about a second ago, our state unemployment rates came down, and they added somewhere between 10 and 15 basis points to the increase in spreads, and the balance is principally the difference between pay rates and bill rates.

--------------------------------------------------------------------------------

Blake Johnson, Goldman Sachs Group Inc., Research Division - Research Analyst [52]

--------------------------------------------------------------------------------

Got it. And then regarding hiring, are you continuing to grow headcount? Or have you pared back your hiring this quarter?

--------------------------------------------------------------------------------

Keith Waddell, Robert Half International Inc. - Vice Chairman of the Board, President & CFO [53]

--------------------------------------------------------------------------------

Our objective with hiring is to stay as consistent as we can with our expectations on top line growth. We've gotten a little ahead in perm. We're still bullish on perm. We're still hiring in perm. So we'll still stay a little bit ahead. You'll see the perm margins, operating margins rather, then being 20% or 18%, but we'll take 18% all day long. Generally speaking, we continue to hire commensurate with, consistent with what we expect top line growth to be.

--------------------------------------------------------------------------------

Operator [54]

--------------------------------------------------------------------------------

Our next question comes from Jeff Silber from BMO Capital Markets.

--------------------------------------------------------------------------------

Jeff Silber, BMO Capital Markets Equity Research - MD & Senior Equity Analyst [55]

--------------------------------------------------------------------------------

Just a quick follow-up, Keith. The margin guidance that you gave, was that compared to the prior quarter, the one that just ended, or the prior year?

--------------------------------------------------------------------------------

Keith Waddell, Robert Half International Inc. - Vice Chairman of the Board, President & CFO [56]

--------------------------------------------------------------------------------

Prior year. 3Q of '18.

--------------------------------------------------------------------------------

Max Messmer, Robert Half International Inc. - Chairman of the Board & CEO [57]

--------------------------------------------------------------------------------

That was our last question. We'd like to thank everyone for joining us today on the call.

--------------------------------------------------------------------------------

Operator [58]

--------------------------------------------------------------------------------

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 www.roberthalf.com. You can also dial the conference call replay. Dial-in details and the conference ID are contained in the company's press release issued earlier today.