Robert Half Q2 2022 Earnings Call Transcript

Quartr
Provided by Quartr
July 21, 2022

There are 12 speakers on the call.

Operator

Hello, and welcome to the Robert Half Second Quarter 2022 Conference Call. Today's conference call is being recorded. Our hosts for today's call are Mr. Keith Waddell, President and Chief Executive Officer of Robert Hass and Mr. Michael Buckley, Chief Financial Officer.

Operator

Mr. Waddell, you may

Speaker 1

begin. Hello, everyone. We appreciate your time today. Before we get started, I'd like to remind you that the comments made on today's call contain forward looking statements, including predictions and estimates about our future performance. These statements represent our current judgment of what the future holds.

Speaker 1

However, They are subject to risks and uncertainties that could cause actual results to differ materially from the forward looking statements. These risks and uncertainties are described in today's press release and in our most recent 10 ks 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 adjusted. Reconciliations And further explanations of these measures are included in our supplemental schedule to our earnings press release.

Speaker 1

We'd like to remind you that beginning in 2022, our financial disclosures for contract operations, Formally, temporary and consulting staffing are based on functional specialization rather than our previously branded divisions. The functional specializations are finance and accounting, administrative and customer support and technology. Finance and Accounting combines the former Accountants and Management Resources, Administrative and Customer Support was previously Office Team And technology was formerly Robert Half Technology. Protiviti and our permanent placement operations continue to be reported separately. Also, what we previously referred to as our staffing operations are now referred to as talent solutions.

Speaker 1

There is no change to our underlying business operations or organization. Our presentation of revenues and the related growth rates For each of our contract functional specializations includes intersegment revenues from services provided to Protiviti in connection with the company's blended talent solutions and consulting operations. This is how we measure And manage these businesses internally. The combined amount of intersegment revenues with Protiviti is also separately disclosed. The supplemental schedules just mentioned also include a revenue schedule showing us information for 2020 through 2022.

Speaker 1

For your convenience, our prepared remarks for today's call are available at the Investor Center of our website, roberthalf.com. We are pleased to once again report very strong results, Which continue to reflect a robust global labor market and demand environment. Talent Solutions led the way with permanent placement And contract talent solutions growing 39% 19% respectively on a year on year basis. Core Protiviti solutions also remain strong. I'd like to acknowledge the dedication And exemplary efforts of our entire global workforce, including talent solutions, Protiviti and corporate services professionals who make our success Possible.

Speaker 1

Company wide revenues were $1,863,000,000 in the Q2 of 2022, Up 18% from last year's Q2 on a reported basis and up 20% on an as adjusted basis. Net income per share in the 2nd quarter was $1.60 increasing 20% compared to $1.33 In the Q2 1 year ago, cash flow from operations during the quarter was $233,000,000 In June, We distributed a $0.43 per share cash dividend to our shareholders of record for a total cash outlay of 49,000,000 Our per share dividend has grown 11.6% annually since inception in 2004. The June 22 dividend was 13.2% higher than 2021. We also acquired approximately 900,000 Robert have shares during the quarter for $79,000,000 We have 5,800,000 shares available for repurchase under our Board approved stock repurchase plan. Return on invested capital for the company was 48% in the 2nd quarter.

Speaker 1

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

Speaker 2

Thank you, Keith, and hello, everyone. As Keith noted, global revenues were $1,863,000,000,000 in the 2nd quarter. On an as adjusted basis, 2nd quarter talent solutions revenues were up 24% year over year. U. S.

Speaker 2

Talent solutions revenue were 1 point $71,000,000,000 up 25 percent from the prior year. Non U. S. Talent Solutions revenues were 295,000,000 up 20% year over year on an as adjusted basis. We have 316 Talent Solutions locations worldwide, including 85 Locations in 17 Countries Outside of the United States.

Speaker 2

In the second quarter, There were 63.4 billing days, unchanged from the same quarter 1 year ago. The current at 64.3 billing days compared to 64.4 billing days 1 year ago. Currency exchange rate movements during the Q2 had the effect of decreasing reported year over year total revenues by $63,000,000 for Talent Solutions $11,000,000 for Protiviti. This negatively impacted Our year over year overall revenue growth by 2.3 percentage points, 2.3 percentage points for Talent Solutions and 2.4 percentage points for Protiviti. Contract Talent Solutions bill rates for the quarter Increased 8.2% compared to 1 year ago, adjusted for changes in the mix of revenues by functional specialization, Currency and country.

Speaker 2

This rate for the Q1 of 2022 was 9.1%. Now let's take a closer look at the results for Protiviti. Global revenues in the 2nd quarter were $893,000,000 of that is from business within the United States and $101,000,000 is from operations outside of the United States. On an as adjusted basis, global 2nd quarter Protiviti revenues were up 11% versus the year ago period With U. S.

Speaker 2

Protiviti revenues up 8%, non U. S. Revenues were up 21% on an as adjusted basis. Protiviti and its independently owned member firms serve clients through a network of 88 locations in 29 countries. Companywide 2nd quarter public sector revenue was $94,000,000 of which $70,000,000 was reported by Protiviti and the balance reported by Talent Solutions.

Speaker 2

Currency exchange rates had the effect of decreasing year over year Public sector revenues by $4,000,000 We expect Q3 2022 public sector revenues to be $90,000,000 to $100,000,000 and we continue to expect full year 2022 public sector revenues to be flat to up 10% for the year. Turning now to gross margin. In Contract Talent Solutions, 2nd quarter gross margin was 39.9 Percent of applicable revenues compared to 39.7 percent of applicable revenues in the Q2 1 year ago. Conversion revenues or contract to hire were 4.1% of revenues in the quarter. Our permanent placement talent solution revenues in the 2nd quarter were 14.7% of consolidated talent solutions revenues Versus 12.8 percent of consolidated talent solutions revenues in the same quarter 1 year ago.

Speaker 2

When combined with Contract Talent Solutions gross margin, overall Talent Solutions gross margin was 48.7%, An increase of 1.3 percentage points compared to the year ago 2nd quarter. For Protiviti, gross margin was 30.4 percent of Protiviti revenues compared to 29.1% of Protiviti revenues 1 year ago. Adjusted for deferred compensation related classification impacts, gross margin for Protiviti was 28.1 percent for the quarter just ended compared to 30% 1 year ago. Gross margin in the current period was impacted by higher staff resource costs, including continued expansion of headcount in the quarter. Enterprise selling, general and administrative costs were 27.3 percent of global revenues in the 2nd quarter compared to 30.9% in the same quarter 1 year ago.

Speaker 2

Adjusted for deferred compensation related classification impacts, Enterprise SG and A costs were 30.3 percent for the quarter just ended compared to 29.4 percent 1 year ago. Talent Solutions SG and A costs were 32.2 percent of Talent Solutions revenues for the 2nd quarter versus 38.4% in the Q2 of 2021. Adjusted for deferred compensation related classification impacts, Talent Solutions SG and A costs were 36.2 percent for the quarter just ended compared to 36.3% 1 year ago. The higher mix of permanent placement revenues this quarter versus 1 year ago had the effect of adding 0.9 percentage points to the quarter's adjusted SG and A ratio. 2nd quarter SG and A costs for Protiviti were 14% of Protiviti revenues compared to 12.5 percent of revenues in the year ago period.

Speaker 2

Operating income for the quarter was 306,000,000 Adjusted for deferred compensation related classification impacts, combined segment income was $241,000,000 in the 2nd quarter. Combined segment margin was 12.9%. 2nd quarter segment income from our Talent Solutions divisions Was $171,000,000 with a segment margin of 12.5%. Segment income for Protiviti in the 2nd quarter was $70,000,000 with a segment margin of 14.1%. Our 2nd quarter tax rate was 27%, the same as 1 year ago.

Speaker 2

At the end of the Q2, accounts receivables was 1,092,000,000 and implied days sales outstanding or DSO was 52.6 days. Before we move to Q3 guidance, let's review some of the monthly trends we saw in the Q2 and so far in July, all adjusted for currency and billing days. Contract Talent Solutions exited the 2nd quarter with June revenues up 18% versus the prior year compared to a 21% increase for the full quarter. Revenues for the 1st week of July were up 16% compared to the same period 1 year ago. Permanent placement revenues in June were up 38% versus June of 2021.

Speaker 2

This compares to a 43% increase for the full quarter. For the 1st 2 weeks of July, permanent placement revenues were up for 3% compared to the same period in 2021. This period includes the historically variable impact of the 4th July holiday. We provide this information so that you have insight into some of the trends We saw during the Q2 and into July. But as you know, these are very brief periods of time.

Speaker 2

We caution against reading too much into them. With that in mind, we offer the following Q3 guidance. Revenues, dollars 1,870,000,000 to 1,950,000,000 Income per share, dollars 1.60 to 1.70 Midpoint revenues of $1,910,000,000 are 14% higher than the same period in 2021 on an as adjusted basis. Midpoint earnings per share of $1.65 is 8% higher than 2021, Notwithstanding a $0.05 negative impact for currency and a higher tax rate. Note that in the prior year, Q3 2021 revenues and EPS had very strong year over year growth rates of 43% and 129%, respectively.

Speaker 2

The major financial assumptions underlying the midpoint of these assumptions are as follows: Revenue growth on a year over year basis, Talent Solutions up 16% to 19%, Protiviti up 6% to 9%, overall up 12% to 16%. Gross margin percentage, contract talent 38 to 40% Protiviti 28% to 30% overall 42% to 44%. SG and A as a percentage of revenue excluding deferred compensation classification impacts, Talent Solutions 36% to 37% Productivity 14% to 16%, overall 30% to 32%. Segment income, Talent Solutions, 11% to 13% Protiviti, 13% to 15% overall, 11% to 13% tax rate 26% to 27% shares 108,000,000 to 110,000,000 3rd quarter capital expenditures and capitalized cloud computing costs $25,000,000 to 30,000,000 We limit our guidance to 1 quarter. All estimates we provide on this call are subject to the risks mentioned in today's press release and in our SEC filings.

Speaker 2

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

Speaker 1

Thank you, Mike. Global labor markets remain strong. In the United States, job openings and quit rates remained elevated and only modestly below all time highs. The unemployment rate continues to hold near a record low, particularly those with a college degree where the rate is 2.1%. For small businesses, the National Federation of Independent Businesses or NFIB recently reported that 94% of those hiring or trying to hire had few or no qualified applicants for open positions and 50% of small business owners Had job openings, they could not be filled.

Speaker 1

Remote and hybrid working models are here to stay and provide us with a significant opportunity to capitalize on the structural shift in how companies source talent. This plays to our numerous strengths, including our global brand, office network, candidate database And advanced AI Driven Technologies. The demand environment remains strong on a broad basis spanning industries, Company size, skill level and geographies. We continue to see our talent solution results recovering at a faster pace Than we've experienced in the past, our permanent placement and contract talent solutions segments, including Blended Solutions with Protiviti have achieved Cumulative sequential growth of 180% 63%, respectively, during the 8 quarters since the pandemic trough. Similar numbers for the financial crisis and the dotcom recoveries were 78% 36% and 121% 47%, respectively.

Speaker 1

Protiviti reported double digit Year on year adjusted revenue growth notwithstanding the previously disclosed and expected wind down of a very large financial services regulatory remediation project and the anticipated moderation And stimulus related public sector revenues, internal audit and technology consulting solutions led the way, Protiviti's pipeline remains strong across each of its solution areas, particularly internal audit, As clients struggle to internally staff the rising demands of this function, we continue to be optimistic about our growth prospects for the remainder of 2022 propelled by the strength of our people, our technology, our brand and our business model. We remain steadfast in our focus on our purpose to connect people to meaningful work and provide clients with the talent And subject matter expertise they need to confidently compete and grow. Finally, we'd like to thank our people who are our greatest asset And what differentiates us in the marketplace for the significant company recognition received this quarter, We are proud to have recently ranked number 1 by Forbes on 3 prestigious list, America's Best Professional Recruiting Firm, America's Best Temporary Staffing Firm and America's Best Executive recruiting firm. This is the first time any company has placed 1st in all three categories.

Speaker 3

This is

Speaker 1

a credit to all of our employees and their incredible drive to deliver outstanding service to our clients and our candidates. Now Mike and I'd be happy to answer your questions. Please ask just one question and a single follow-up as needed. If there's time, we'll come back to you for additional

Operator

questions. And your first question comes from the line of Mark Marcon with Baird.

Speaker 4

Good afternoon, Keith and Mike, and congratulations on the recognitions That came from Forbes. I was wondering, can you talk a little bit more about what you're seeing in Protiviti? From the prepared remarks, it sounds like the overall public sector, including Solutions is going to be flat to up. I'm wondering, do you expect the public sector for Protiviti to be flat? And can you talk a little bit about more about the areas of strength that you're seeing within Protiviti?

Speaker 4

Since it looks like Protiviti was up 17.4 percent ex public sector. You mentioned internal audit. Wondering is that Primarily young companies or is that established Fortune 2000 telecoms?

Speaker 1

So Protiviti has a very strong pipeline across its solution areas. It's aggressively adding its staff in part to fund growth and in part to bring its mix of contractors Full time staff below 50%. It got above 50%. There was a view that, That was a little too much toward the contractor. So they're bringing that mix down by adding more Our full time staff, Technology Consulting IA, the hottest as we talked about as clients Struggle to hire their own people for internal audit.

Speaker 1

There's also increasing demands. If you think about all the modernization, And all the innovation projects that companies of all sizes have, there's an internal audit element to bringing The results of those projects online that stimulates demand. And again, that's all sizes of Protiviti clients. And technology consulting, you've got data analytics, enterprise applications that are also strong. If you combine the impact of public sector plus the wind down of the large regulatory project, Their growth rate was impacted by about 12 points.

Speaker 1

And so you can take what's reported at 12 To get the impact of those 2 projects that have wound down, the good news is the regulatory project, The people have been redeployed, but just to replace that means flat growth not increasing growth on that element of their The point being apart from those two very specific areas, Protiviti's core is growing very strong, Double digit. They're very bullish about their prospects. They're competing very effectively With the big four, their margins are recovering, up 200 basis points this quarter to 14%. I understand it's not the 17% that you had last year, but last year had no travel, had no training, had very little recruiting, had no practice development. We're very happy with a 14% to 15% margin range, which is where they are.

Speaker 1

So again, apart from The two areas that we've talked about before and again today, Protiviti is growing quite nicely. Frankly, their biggest issue is not demand. Their Biggest issue is attracting people which they're working on aggressively and are being successful doing so. They won many awards of their own type. I think just this week they won a Best Place for Millennials to Work award by the Great Places to Work organization.

Speaker 1

So they're doing quite well. So we're pleased with Protiviti. We're pleased with the true results. We're pleased with its pipeline. They're working through these two issues.

Speaker 1

And I'd say 2 on public sector since you asked the question, That's pretty much tracking as expected. Housing assistance, education, IT services, project management, those engagements are leading the way. In public sector as we've talked about, as we've expected. So Protiviti is down by more than we're down overall Because talent solutions public sector is growing, the public sector pipeline is 2x what it was a year ago. So we're very pleased with that.

Speaker 1

But bottom line on public sector, it pretty much tracked as expected. There were some FX impact. If you add that back, we're right in the range that we talked about. So pleased with public sector. It's a whole new Line of business for us, if you will, both Talend Solutions and Protiviti, but tracking as expected.

Speaker 4

That's great. And Robert Half did an amazing job of navigating through COVID with an 8.3% EBITDA margin for 2020. Nobody knows if we're going to have a soft landing, a mild recession or perhaps something worse. How would what's The philosophy, how would you guide investors to think about how you would navigate through the cycle if we end up having a mild recession in In terms of expense controls and positioning Robert Half for the snapback and the rebound when the inevitable Up cycle comes.

Speaker 1

Well, I think you correctly point to and you don't have to look very, very far As to how we perform in a downturn by just looking at how we did during pandemic. And just The playbook we ran is no different than the playbook we always run on the talent solutions side. We look at the productivity of our internal staff and the underperformers we become less patient with Than we typically would be in typical times and normal times. And so there are some rightsizing of The staff on the Talent Solutions side, the nice thing on the Protiviti side, Protiviti did not go down. Protiviti did not have negative revenue growth during the pandemic.

Speaker 1

Said differently, Protiviti continued to grow Through the pandemic, it showed to be more resilient than is the case in staffing and we would expect that again. So I think the other good thing about looking back pandemic and forward, as we talked about in the call, the 8 quarters since the trough, We've grown the fastest we've ever grown post a recession trough. And so if a mild recession does come, You don't have to look far to see how well we came out of it, both from a revenue standpoint and a profitability standpoint.

Speaker 4

Terrific. Thank you.

Operator

Your next question comes from the line of Heather

Speaker 5

Can you talk a little bit about the permanent placement part of your business and kind of just the strength you're seeing and How long do you think this can last and your comfort in, I guess, that number higher as a percent of revenue, just how you're thinking about that business?

Speaker 1

Our placement is actually one of the strongest part of talent solutions. As we've talked earlier, It grew 39% year on year on tough compares. Virtually to a person when you talk to our people, They're probably the most bullish about permanent placement. Given the state of the labor market, which remains strong, Given the talent shortages that exist, many companies even today prefer to hire full time And that's for the benefit of perm placement. So to show our confidence in perm placement, It's an area where we're hiring the most aggressively internally because frankly the productivity level of our current Staff is so high.

Speaker 1

I mean the only way we're going to grow permanent placement is to have some more internal resources. So we feel good about permanent placement. We just talked to all of our people. They feel good about permanent placement. So we're bullish on permanent placement.

Speaker 5

Thank you. And given all the concerns about a potential downturn, How are you thinking about managing your costs in this, I guess, in this strong environment today, but given the risk

Speaker 1

Yes. I talked a little bit with Mark about how we deal with our staff costs. I think we've got a long track record across Many downturns of rightsizing our staff relative to expected revenue trends and we would do same. But we're not going to do is make it self fulfilling and cut in advance of that. There is so much noise about there about whether there's going to be a recession, how deep there's going to be a recession, when the recession might occur.

Speaker 1

There are so many conflicting signals. The one thing we are not going to do is cut in advance of that. And we've told our people it is business as usual. We will continue to feed the hot hands, which include perm placement, which include management resources, which include our full time engagement professionals. We're going to continue to feed those hot hands as long as they're hot.

Speaker 1

We will manage everything else on a productivity basis, Which is the way we've always managed the business and we're very confident and comfortable about that.

Speaker 5

Thank you very much.

Operator

Your next question comes from the line of Andrew Steinerman with JPMorgan.

Speaker 6

Hi, it's Andrew. Two questions. You were very clear about that FX was a larger than expected revenue Headwind in the second quarter. Could you just give the EPS impact on the second quarter from FX? And then my second question Has to do here's a kind of an interesting question.

Speaker 6

What happens if we don't go into a recession and we have more of a soft landing here and there's more time on the cycle. I wanted to ask you about your views on contract gross margins. Contract gross margins We're 39.9 in the quarter about the same as last quarter, but in the guide contract gross margins Are guided to be 38 to 40. And so you're actually guiding contract gross margins down sequentially. My question is like do you worry that if we have More years on this expansion that contract gross margins have already peaked.

Speaker 1

Okay. First one, easy. EPS impact Q2 of foreign exchange is $0.02 and for Q3, it's 2.5p for FX and 2.5 for tax rate. On the What if there's not a recession and that's precisely why we say we're acting business as usual and feeding the hot hands We're not going to miss out on any business that we do have. As to contract gross margins, Frankly, we're bullish on contract gross margins.

Speaker 1

There's the mix element As we move more to higher skills, they cover they have higher gross margins. As we move more to full time engagement professionals, They have higher gross margins as the labor market remains tight, that's good for conversions, That's higher gross margins and that further as perm stays strong, The mix of perm versus contract skews further perm, which also helps overall gross margins. So were we a little bit conservative in the guidance overall? Yes. Gross margin specifically?

Speaker 1

Yes. But I can assure you if there's not a recession, we're nothing but bullish on our contract gross margins.

Operator

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

Speaker 6

Great. Thanks so much and congratulations again on the Forbes recognition. Hey Keith, circling back to Protiviti, on the government side, Is there any way to think about the funding of the projects that occurred in Protiviti? How much of that was kind of federal versus state. And is there any kind of sequencing you'd call out as to some of that running off as opposed to maybe Getting renewed.

Speaker 6

Is there any way to think about that within the context of Protiviti?

Speaker 1

Well, first of all, it's more state and local than federal. It's not all state and local, but it's more state and local and federal. So the housing assistance and the education Is Moore state and local. As to the runoff, we've been very transparent about what our numbers were by quarter between Talend Solutions and Protiviti for all of 2021. We've now broken that out for 2022.

Speaker 1

We've said That for full year 2022 notwithstanding some of the stimulus related has run off, we expect to be flat to up. And so we've said about as many ways as we know how that sure some of the STEMIOS related work Is declining. We are backfilling that particularly on an enterprise basis with all the other project work that I talked about such that when you put all the pieces together On a company wide basis, we think we'll be flat to up slightly, notwithstanding the runoff that you described.

Speaker 6

Got it. And then the remixing of kind of full time versus supplemental staff on Protiviti, What's the optimal mix there? And I guess what drove decision? Was it kind of service delivery or just the remixing, I guess, of staff?

Speaker 1

So it went north of 50% of the hours worked to contract the last Had you asked me 5 years ago what the highest contractor percentage That we could ever even dream about at Protiviti, I wouldn't have said higher than 30%. And so the fact that they've taken it Beyond 50 is pretty incredible. But there's a practical level, there's a career The impact to the people that work at Protiviti,

Speaker 7

fifty-fifty

Speaker 1

And below feels reasonable to me. It's not there's nothing magic about it. It's subjective. It's the nature of work, right? There's one mix for certain types of special projects.

Speaker 1

There's another mix for Recurring annual internal audit engagement, it's not one mix across all their projects, but fifty-fifty is unbelievably good and unbelievably strong and it just shows How the resources of the entire enterprise can be brought to bear for the benefit of Protiviti and its clients and have catalyzed its growth in a major way. But let's Pause and let's kind of look at fifty-fifty, which is certainly closer to traditional at least of the last couple 3 years and then reassess. But it's an incredible success story overall, The way Protiviti and Talent Solutions have come together for the benefit, 1st for the whole enterprise, but particularly for Protiviti's clients.

Speaker 6

Makes sense. Thank you.

Operator

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

Speaker 8

Hi, thanks. Good afternoon. You expect full year 2022 public sector revenues to be flat Up 10% for the year. Can you discuss how much public sector Protiviti revenues will go up by or How it will perform for the year and what will drive potential growth in public sector productivity spend?

Speaker 1

Well, George, Frankly, the split between Talent Solutions and Protiviti as to how it's reported It's somewhat arbitrary. Many times the very same people on one project Because of how the contracting took place, it gets reported on Protiviti. The very same people on the next project Might be reported in Talent Solutions. So we think it's better to think about from a company wide for enterprise basis. But there's no question, as we've talked about, the things that are growing Fastest at the moment in public sector, tend more toward talent solutions than Protiviti, be it housing assistance, be it education.

Speaker 1

That said, Protiviti is very active with RFPs. Protiviti has a very good success rate with the RFPs they have where they have the contract. But even during the heyday of public sector, 90% of the hours worked were worked by contractors. And so whether those contractors get reported as talent solutions revenue or Protiviti revenue is often as arbitrary as who had the contract with the client and the contract with the client many times Related to the GSA schedules that only Protiviti had. So there's some arbitrariness between Talent Solutions versus Protiviti on public sector, which is why I think it's fairer to look at it overall.

Speaker 1

And we've said overall, It will be flat to up 10%.

Speaker 8

Got it. And this is a higher level I guess stepping back. As you think about the overall macro environment, what are some areas where you're seeing Potential weakness, if you had to rank order, you pointed out areas of strength. What are the areas where you see potential cracks in the order?

Speaker 1

Hello. I'm not sure I would call it cracks in the armor. I would start by saying While labor markets and demand environment is very strong, it's not quite as strong as it was last quarter. I'd say clients are taking a little longer to make offers. Often they want to see one more candidate Or they want to interview their finalist one more time or they want to insist on the person work on-site, particularly if it's at the operations level.

Speaker 1

That said, they also understand if they drag their feet too long, they're going to lose the candidate. So I would say, if anything, if we're going to talk On the negative side, clients are taking a little longer to make their offers. That said, Candidates are still in demand. Candidates are still short. I talked about the multiple offers.

Speaker 1

I talked about the counter offers. It's still a Canada driven market, but clients are taking a little longer with an underscore on the word little to make their offers.

Speaker 8

Got it. Very helpful. Thank you.

Operator

Your next question comes from the line of Kartik Mehta with Northcoast Research.

Speaker 7

Hi, good afternoon. I know you've talked about talent procurement that it's still difficult. I'm just wondering, Compared to maybe 3 months, 6 months ago, if it's gotten any easier, if you're seeing more if you're able to see more candidates, If it just loosened up at all.

Speaker 1

There's been no significant easing of Candidate shortage. And in fact, if anything, with higher gas prices, candidates Won't remote work and don't want to have to commute into a client even more so. And so there's Sometimes there is conflict between what the client wants, which would be at the operational level For the person to be on-site 2 or 3 days versus what the candidate wants. And if anything, the candidates won't remote even more than they wanted 90 days ago. And if anything, clients want a couple of days on-site more than they did 90 days ago.

Speaker 1

So our people have to bridge that gap between the parties to make deals happen.

Speaker 7

And just as a follow-up, any change in wage inflation? It seems like based on your comments, probably not Since we've still got vocal to get talent, but curious if you've seen any change in growth rate on wage inflation?

Speaker 1

No. It tracks closely with bill rate changes and we talked about this quarter it was 8% -ish and last quarter it was 9 I think the quarter before that it was 8 ish percent. So it's been 8% or 9% on the bill rate side And you can take a couple of points off of that to get what the pay rate is.

Speaker 7

Thank you very much. I really appreciate it.

Operator

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

Speaker 3

Thank you. Keith, I was just wondering like what are some of the leading indicators that you would look for in terms When it won't be business as usual, like is Protiviti on the consulting side something that will give you that lead? I know you showed some deceleration that's only the 1st weeks of July. So just curious what you track or what you need to see to change some of the business patterns?

Speaker 1

Well, I'd first say from the 1st few weeks of July are very holiday impacted. So we read virtually nothing into that one way or the other. Leading indicators, if you look back over prior downturns, when you first look at perm placement versus contract, They're mostly coincident, maybe perm leads a little bit versus contract, But there's certainly no external data we can look to and whether it be BLS, SIA, ASA, any other of the economic, ISI, You name it. There's no magic external data. We found that helpful In its predictiveness or as a leading indicator, we get weekly data On the contract side, we get daily data on the perm placement side.

Speaker 1

And so there's nothing like our own data That help us out. And as I said, we just talked to our key people this week. And while they said it's not quite as strong as it was last quarter, it's still very strong and they feel very good. Frankly, the numbers they submitted for the coming quarter are stronger than what we Published because we were just a little more conservative, but our people feel good.

Speaker 3

Okay. And given that it sounds pretty good obviously and the stock is pulled back, I mean, I guess I'm just curious, any changes in your Your capital allocation philosophy?

Speaker 1

Our capital allocation policy Forever has been, 1st, do what's necessary for the business, which is principally around Technology Innovation Spending, which we're doing. Then we look to continue the dividend, grow the dividend. We talked on the call earlier about we've grown to dividend double digit since inception. And with the balance, we dollar cost average. The balance of our free cash flow, we dollar cost average stock buybacks.

Speaker 1

And so Sometimes it sucks up, sometimes it's down, sometimes you feel like it's undervalued, sometimes you feel like it's overvalued. What we do is We're there. We're consistent. We dollar cost average and over time it works its way out. And we Continue to do that as we speak.

Speaker 1

You can look at our free cash flow. You can look at our financing on our cash flow statement and we're pretty much spending All our free cash flow between tech, internal innovation, dividends and repurchases.

Speaker 3

Got it. Thank you so much, Heath.

Operator

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

Speaker 9

Thank you. Given your long tenure in the industry, Is there an example in any geography of what some people are now calling a jobful recession? Should we hit the Soft lending and have the firm labor market maintain that characteristic?

Speaker 1

As I sit here, nothing comes to mind. I think the head scratcher for many Given how strong the labor markets are, if in fact we're beginning a recession, How impactful is that strong start to how the labor markets will perform? And is there enough slack in all those job openings that actual jobs won't be that impacted or instead Will actual jobs or actual unemployment be impacted? All we can say is what I've already said, As we speak and as we look forward to the coming quarter, our people are very positive. The markets are very strong.

Speaker 1

There's a lot of demand from our clients, not quite as much as the prior quarter, but it's very strong. We can do very well in an environment like the one we're in.

Speaker 9

Excellent. And my follow-up is, You talked about a previous question asked about external data that you may look at. In your prepared remarks, you cite some NFIB IB data is favorable and there are some hiring components that do demonstrate yet that, yet the overall survey fell to a 13 year low. How do you square the overall sentiment declining so precipitously and then cite the labor components?

Speaker 1

Yes. And so I think you're talking about the optimism index. And one of the reasons why their optimism fell is because they're having a hard time finding people. And so that's how you square the 2 pieces. They're somewhat pessimistic because they're Having trouble finding the people they need to grow their business.

Speaker 1

The other piece of that is inflation.

Speaker 9

Thank you very much.

Operator

Your next question comes from the line of Jeff Silber with BMO Capital Markets.

Speaker 10

Thanks so much. I apologize I joined late, so this question was asked. Just please ignore me. I'm just curious in terms of your own internal hiring, recruiters, account managers, etcetera, How that's been tracking so far this year and what plans you have for the rest of the year?

Speaker 1

And so we've Aggressively added to the areas that are growing the fastest and for us that starts with permanent placement, Management Resources and full time engagement professionals. All three of those areas are still strong as we sit here And we have plans to continue to add the staff in those areas because the productivity of those people currently in those areas is high. And the only way we can take advantage of those hot markets is to continue to add to staff. For our other practice groups, We manage on a productivity basis and only as productivity dictates do we add the staff there, But we haven't changed our policy. And as I said, I don't know whether you're on the call.

Speaker 1

The last thing we're going to do is make a downturn self fulfilling By not feeding the hot hands that I just described.

Speaker 10

Okay. That's really helpful. And then I know there was an FX impact on revenues in the rest of the business in the quarter, but specifically focusing on revenues. If I take that out, you still came in at the low end of guidance or maybe at the midpoint of guidance. Are there any specific segments that either outperformed or underperformed during the quarter?

Speaker 1

I'd say the one that struggled the most was our Administrative and customer service and that's the one most closely tied to public sector. So other than that, there was no big story. And most of the revenue differential was currency related.

Speaker 10

Appreciate you pointing that out. Thanks so much.

Speaker 8

Yes.

Operator

Your next question comes from the line of David Silber with C. L. King and Associates.

Speaker 11

Yes. Hi. Thank you. I have a basically kind of a very naive sounding question about your perm business. So I think of that business as Striking a balance between the demand for full time candidates and the supply.

Speaker 11

And for Years now, I think, the JOLTS data, the unfilled positions data indicate there's a shortfall on the candidate supply side. When I look at your first half revenues, dollars 387,000,000 or so from perm, it's up 29% over the first half of 2021 and up 23% over the back half of twenty twenty one. And I'm just kind of wondering on a very naive basis, I mean To drive that growth, you need more candidates. Where are the candidates in your opinion, where are you finding them to make these incremental placements. Thank you.

Speaker 1

And so on the permanent placement side, by and large, We recruit people that already have a full time job to change jobs and take a new job. And so we've got the entire universe of people currently employed that we recruit from on the permanent placement side.

Speaker 11

Okay. And I'd like to maybe my second question would be to build on that answer. And I guess some people use the moniker, the great resignation, but I would just say churn or job hopping. How does Robert Half strike that balance between The clients who want a candidate who's going to stick around for a long time and justify the fees they're paying And the candidates desire to take advantage of a hot job market and go for either higher pay or a more amenable You know, remote in person balance. In other words, is there a slight Conflict or how do you manage that trade off between serving the candidate in a certain way serving the employer?

Speaker 11

Thank you.

Speaker 7

I think

Speaker 1

most of the great reshuffle is not candidate makes a change And then shortly after makes another change, it's more that first change for career and or compensation purposes, They make the change. And so while there's some of the former, that's the exception rather than the rule. And so, I mean, we guarantee that if they do leave, We replaced them on a reduced basis. But other than that, I don't think we've seen a major business problem of The candidates we place the first time in large numbers then leave in a relatively short period of time For yet a better opportunity. So I guess that it's possible, but I'm just saying On the ground, that's certainly not the norm.

Speaker 11

Okay. We're not there yet. Okay. No, I appreciate that context. Thanks very

Speaker 3

much.

Operator

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

Speaker 4

Keith, I had a couple of quick follow-up questions. Number 1, there weren't any questions with regards to international on the call. Wondering, can you talk a little bit about what you're seeing on a country by country basis? Any sort of we can see the overall trends, But just wondering, are you seeing any sort of distinct patterns emerging between the countries, particularly in Europe?

Speaker 1

Well, I'd say we're strong in the UK. We're particularly strong in Germany. And the really nice thing about Germany is that Germany Talent Solutions and Protiviti are going to market very well. And in fact, it may be our most successful country where Protiviti and Talent Solutions go to market together and both are benefiting accordingly. And their outlook, notwithstanding all the talk about energy, Russia, etcetera, The German outlook is still quite good because of those Managed Business Solution opportunities they jointly have.

Speaker 4

Great. And any areas that are pulling back or that seem a little bit weaker?

Speaker 1

I think Belgium was a little softer this quarter than normal, but is expected to be better in the coming quarter, but there's no real major outlier in a negative way, Belgium included.

Speaker 4

Great. And then the pipeline for Protiviti, how much visibility do you have into the pipeline for projects that would start in Q4? Reason why I'm asking is because the comps become significantly easier when we get to Q4. You obviously had really strong comps For Protiviti in Q2 and Q3. So just wondering if maybe we even have an inflection point in Q4?

Speaker 1

Well, I haven't looked at their pipeline based on when it starts. My guess is they actually have it. I just don't have it on the top of my head, but their pipeline is strong. They're people constrained. They're not demand constrained.

Speaker 1

And internal audit is by leaps and bounds their hottest area as I talked about. Their clients Can't staff their own internal audit departments. They need help. Their clients as they have their modernization and innovation projects, Those projects usually require internal audit before they go live. There's more of that.

Speaker 1

So good old internal audit, Which is Protiviti's long term core business is its strongest and it's a wonderful thing.

Speaker 4

And Q4 is a strong quarter for that?

Speaker 1

That's correct. You have seasonally Q3, you have a step up where a lot of the Sarbanes Oxley work gets done. You mostly hold that because that work continues into Q4. So those seasonal patterns and the guidance we've given Assumes a seasonal step up in Protiviti in large part because of Sarbanes Oxleyinternal audit.

Speaker 4

Great. Thank you.

Speaker 1

Okay. I believe that is our last question. We Appreciate everybody joining. Thank you very much.

Operator

This concludes today's teleconference. If you missed any part of the It will be archived in audio format in the Investors Center of Robert Half's website at roberthalf.com. You can also dial the conference call replay. Dial in details and the confirmation code are contained in the in this press release issued earlier today. Thank you.

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Earnings Conference Call
Robert Half Q2 2022
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