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

Hello, everyone. We appreciate your time today. Before we get started, I'd like to remind you that the comments made on today's call contain forward-looking statements, including predictions and estimates about future performance. These statements represent our current judgment of what the future holds; however, they are subject to risks and uncertainties that could cause actual results to differ materially from forward-looking statements. These risks and uncertainties are described in today's press release and in our most recent 10-K and 10-Q filed with the SEC. We assume no obligation to update the statements made on today's call. During this presentation, we may mention some non-GAAP financial measures and reference these figures as 'as adjusted.' Reconciliations and further explanations of these measures are included in a supplemental schedule to our earnings press release. In addition, we have modified our presentation of revenues and the related growth rates for account temps, office team, Robert Half Technology, and Robert Half management resources to include their intersegment revenues from services provided to Protiviti in connection with the company's blended staffing and consulting solutions. This is how we measure and manage these divisions internally, and from now on, it's how we'll report them externally. The combined amount of divisional intersegment revenues with Protiviti is also separately disclosed. For your convenience, our prepared remarks for today's call are available in the Investor Center of our website at roberthalf.com. We're very pleased that the third quarter and early October results reflect consistent weekly and monthly sequential gains across our divisions. Protiviti had another outstanding quarter, reporting its 12th consecutive quarter of year-on-year revenue gains leveraging a strong pipeline of diversified service offerings, including particularly robust growth with the blended solutions in our staffing operations. We're also pleased with the quarter-on-quarter growth in our staffing divisions led by our permanent replacement and office team divisions. 2020 continues to be an unprecedented year. I'm extremely proud of the resourcefulness and commitment exhibited by all of our employees as we maintain high levels of service to our clients and candidates. Company-wide revenues were $1.19 billion in the third quarter of 2020, down 23% from last year's third quarter on a reported basis and down 24% on an as adjusted basis. Income per share in the third quarter was $0.67 compared to $1.01 in the third quarter a year ago. Cash flow from operations during the quarter was $139 million, and capital expenditures were $7 million. In September, we distributed a $0.34 per share cash dividend to our shareholders of record for a total cash outlay of $38 million. We also acquired approximately 450,000 shares during the quarter for $24 million. We have 1 million shares available for repurchase under our board-approved stock repurchase plan. Return on invested capital for the company was 25.8% in the third quarter. Now I'll turn the call over to our CFO, Mike Buckley.

Thank you, Keith, and hello everyone. Let's start with revenues. As Keith noted, global revenues were $1.190 billion in the third quarter. This is a decrease of 23% from the third quarter one year ago on a reported basis and a decrease of 24% on an as adjusted basis. Also on an as adjusted basis, third quarter staffing revenues were down 31% year-over-year. US staffing revenues were $666 million, down 32% from the prior year. Non-US staffing revenues were $203 million, down 29% year-over-year on an as adjusted basis. We have 326 staffing locations worldwide, including 88 locations in 17 countries outside the United States. In the third quarter, there were 64.3 billing days compared to 64.1 billing days in the third quarter one year ago. The current fourth quarter has 61.7 billing days equivalent to the fourth quarter of one year ago. Currency exchange rate movements during the third quarter had the effect of increasing reported year-over-year staffing revenues by $4 million. This increased our year-over-year staffing revenue growth rate by 0.3 percentage points. Now, let's take a closer look at the results for Protiviti. Global revenues in the third quarter were $321 million, $260 million of that is from business within the United States and $61 million is from operations outside the United States. On an as adjusted basis, global third quarter Protiviti revenues were up 6% versus the year-ago period with US Protiviti revenues up 10%. Non-US revenues were down 8% on an as adjusted basis. Exchange rates had the effect of increasing year-over-year Protiviti revenues by $2 million and increasing its year-over-year reported growth rate by 0.7 percentage points. Protiviti and its independently owned member firms served clients through a network of 86 locations in 28 countries. During the quarter, we changed our presentation of SG&A expenses to exclude gains and losses on investments held to fund our obligations under employee deferred compensation plans. Under these plans, employees direct the investments of their account balances, and the company makes cash deposits into an investment trust consistent with these directions. As realized and unrealized investment gains and losses occur, the company's deferred compensation obligation to employees changes accordingly. However, the value of the related investment trust assets also changes by an equal and offsetting amount leading to no net cost to the company. Going forward, changes to the company's deferred compensation obligations noted above will continue to be included in SG&A or in the case of Protiviti, direct cost. However, the offsetting changes in the investment trust assets will be presented separately below SG&A and outside of operating income. This does not change the reported level of pretax or after-tax income or cash flow previously provided. Going forward, we will replace the discussion of consolidated operating income with the non-GAAP measure of combined segment income. This will be calculated as consolidated income before income taxes adjusted for interest income and amortization of intangible assets. Turning now to gross margin, in our temporary and consulting staffing operations, third quarter gross margin was 37.5% of applicable revenues compared to 37.9% of applicable revenues in the third quarter one year ago. The year-over-year decline in gross margin percentage is primarily due to lower conversion revenues. Our permanent placement revenues in the third quarter were 10% of consolidated staffing revenues versus 10.7% of consolidated staffing revenues in the same quarter one year ago. When combined with temporary and consultant gross margin, overall staffing gross margin decreased by 80 basis points compared to the year-ago third period to 43.8%. For Protiviti, gross margin was $87 million in the third quarter or 27.1% of Protiviti revenues. This includes $3.4 million or 1.1% of Protiviti revenues of deferred compensation expense related to increases in the underlying trust investment accounts. One year ago, gross margin for Protiviti was $88 million or 29.4% of Protiviti revenues, including $200,000 of deferred compensation expense related to investment trust activities. Company-wide SG&A costs were 32.8% of global revenues in the third quarter compared to 31.2% in the same quarter one year ago. Deferred compensation expenses related to increases in underlying trust investments had the impact of increasing SG&A as a percentage of revenue by 1.9% in the current third quarter and 0.1% in the same quarter one year ago. Staffing SG&A costs were 40.2% of staffing revenues in the third quarter versus 34.8% in the third quarter of 2019. Included in staffing SG&A costs was deferred compensation expense related to increases in the underlying trust investment assets of 2.6% and 0.1% respectively. The increase in staffing SG&A as a percentage of revenues is primarily the result of continued negative leverage resulting from the decline in revenues. Third quarter SG&A costs for Protiviti were 13% of Protiviti revenues compared to 16.2% of revenues in the year-ago period. Operating income for the quarter was $77 million. This includes $26 million of deferred compensation expense related to increases in the underlying investment trust assets. Combined segment income was therefore $103 million in the third quarter. Combined segment margin was 8.6%; third quarter segment income from our staffing divisions was $54 million with a segment margin of 6.2%. Segment income for Protiviti in the third quarter was $49 million with a segment margin of 15.2%. Our third quarter tax rate was 26% compared to 28% a year ago. The lower third quarter tax rate is primarily due to annual adjustments made to reconcile our tax accounts to prior year's tax returns as actually filed. Our nine-month year-over-year tax rate of 28% is in line with what we expect for the full year. Moving onto accounts receivable, at the end of the third quarter accounts receivable were $690 million and implied day sales outstanding or DSO was 52.3 days. Before we move to fourth quarter guidance, let's review some of the monthly revenue trends we saw in the third quarter and so far in October, all adjusted for currency and billing days. Our temporary and consultant staffing divisions exited the third quarter with September revenues down 29.3% versus the prior year compared to a 30.7% decrease for the full quarter. Revenues in the first two weeks of October were down 27% compared to the same period one year ago. Permanent placement revenues in September were down 30.1% versus September of 2019. This compares to a 35.7% decrease for the full quarter. For the first three weeks in October, permanent placement revenues were down 31% compared to the same period in 2019. We provide this information so that you have insight into some of the trends we saw during the quarter and into October. But, as you know, these are very brief time periods; we caution against reading too much into them. With that in mind, we offer the following fourth quarter guidance: Revenues of $1.155 billion to $1.255 billion; income per share, $0.55 to $0.75. The midpoint of our guidance implies a year-over-year revenue decline of 22% on an as adjusted basis inclusive of Protiviti. The major financial assumptions underlying the midpoint of these assumptions are as follows: revenue growth on a year-over-year basis staffing down 27% to 30%, Protiviti up 5% to 7%, overall down 21% to 23%. On gross margin percentages temporary and consulting staffing 37% to 38%, Protiviti 27% to 29%, overall 39% to 40%. SG&A as a percentage of revenues excluding deferred compensation investment impacts: staffing 36% to 38%, Protiviti 14% to 16%, overall 30% to 32%. Segment income, staffing 6% to 8%, Protiviti 12% to 15%, overall 8% to 10%. We expect our tax rate to be between 27% and 29%, and shares to be 133 million. We limit our guidance to one quarter. All estimates we provide on this call are subject to the risks mentioned in today's press release and in the SEC filings. Now I'll turn the call back over to Keith.

So thank you, Mike. As is evidenced in the growth of our newly reported intersegment revenues, the partnership between Protiviti and our staffing operations continues to be an accelerating source of growth for our enterprise. We've also seen particular strength in our services to the public sector and financial service clients. In addition, we've experienced increased demand for services and solutions in the cloud technology, online security, data privacy, and digital transformation as enterprise client companies have continued to strategically invest in these areas. The significant reductions we made to our cost structure in the second quarter have also benefited the third quarter and will continue to benefit future quarters. Remote and hybrid working models will continue long after the pandemic ceases to require them. Access to talent is no longer limited to time zones or geographies. With our global network of talent and world-class technology tools, we can provide the right match for clients and candidates regardless of location. While uncertainty remains in the overall economic environment as the pandemic continues, there's much to be optimistic about as the fourth quarter progresses. The nature, timing, and amount of any additional fiscal stimulus should be known. Medical solutions to the COVID-19 virus move ever closer to reality, and the NFIB continues to report improving trends in the small business community. Our recent study shows that more than half of small businesses are trying to hire, but the vast majority are reporting few or no qualified applicants. We continue to believe and are positioning for future growth with the unique strengths of our brands, people, technology, and professional business model. Now Mike and I will be happy to answer your questions. Please ask just one question and a single follow-up as needed, and if there's time, we’ll come back to you.

Your first question comes from Andrew Steinerman from JPMorgan. Please go ahead.

Hi Keith, it's a big picture question about small businesses and surely, I follow NFIB just like you suggested and its favorable trends reported there. Kind of going through this recession I was worried about Robert Half's dependence on small and medium-sized businesses, and maybe it's about the types of small and medium-sized businesses that you serve and assuming not serving a lot of restaurants. My question is, do you agree with the trends that NFIB are suggesting that they really kind of made it through this recession favorably? Do you think it's really dependent on more stimulus for them? How are your small and medium-sized business customers feeling?

So we would definitely agree that the trends are improving. But as you stated, it’s also true that SMB clients are more nimble than mid and large-cap companies. They cut more and have added back more conservatively; that's very apparent in our own numbers. We've talked in the past that about 80% of our business is SMB, which we define as having 50 to 100 employees on average, and 20% is mid-cap, mostly mid. That has actually changed during the post-pandemic period such that the mid-cap number is almost 30%. Clearly, our mid-cap and larger clients have been more resilient than our SMB clients. But we're encouraged; if you look at our weekly trends beginning in early June, they've consistently improved and the fact we've seen accelerating monthly sequential growth during the quarter. We expect that to carry over into Q4 with one big caveat: it's been widely reported that most companies' employees have not taken their paid time off so far this year; that's true at Robert Half, and that's true at many of our client companies. We therefore think December will be more holiday impacted—as in holiday/ paid time off impacted. We'll have less planned capacity as our employees take that time off; our clients will have less planned capacity to close deals. So we're expecting a bigger than normal December impact. But that said, adjusted for that, we do feel good about the progression of our SMB clients, which is now 70% of the total, and history shows that once they get comfortable, which we would define as probably closer to the post-pandemic period, they will participate in an outsized way going forward, and yes, we do think the stimulus would be helpful, and hopefully that gets resolved pre or post-election.

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

That's correct.

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

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

At a high level, finance and accounting—particularly Accountemps—have staffed accounting positions that are very transactional or volume driven, and as our clients' volume levels and transaction levels are down, so is that business. That's no different than every downturn we've been through. As you know, I’ve been here over 30 years. Though we fully expect that as transaction volumes improve, Accountemps will participate nicely there. I'll also say that the transaction volume there is, generally speaking, those types of positions are less conducive to remote work than the project-driven positions, which also impacts Accountemps negatively relative to Protiviti and our management resources. Protiviti has been doing great as we've talked about it; it has multiple service offerings due to its diversification efforts. For the first time ever, technology consulting within Protiviti is the largest practice area, which I think is incredible. So they've done well in their technology consulting, they've done well with risk and compliance particularly in financial services. We've talked about anti-money laundering; we've talked about credit risk, enforcement actions that they're involved with in certain of their clients. And then, while internal audit at Protiviti is somewhat impacted, it’s not as impacted as transaction-driven Accountemps-type positions. So we're very optimistic about how Accountemps will participate when things get more back to normal from a COVID standpoint.

That’s terrific. Can you talk a little bit about your stance with regard to how much excess capacity you have currently and how you're thinking about potential additions or subtractions with regards to internal personnel or some chatter going on with regards to what your internal hiring profile is like?

Sure, and so first of all, I’d say, if you compared the first quarter—let's call that pre-pandemic—with the third quarter, our revenues are down 21% and our income is down 21%, and so quite frankly, I think it’s pretty incredible that, given the type of impacts COVID had, we effectively got through that with no net negative leverage, principally because we aggressively cut our costs. We are cautiously optimistic that when we get that 20% revenue back that we'll do better, and we'll actually leverage it in a positive way. Our current workforce is more tenured because our less tenured workforce is a piece of the workforce that we had to part ways with. We're very focused on the productivity levels of our internal staff. We have better data to measure that. We have very consistent buy-in internally across the organization. Frankly, our people internally make more money as we let their productivity levels rise versus adding more people so that you have to spread your revenues over more people; they're more profitable if you spread it over fewer, so we have very good internal alignment that we're going to let our productivity levels drive up, which will be good for their individual profitability and will be good for our corporate profitability. But we're optimistic we're going to do better on the next 20% up than we did on the 20% down; having said that, again, we're super pleased that 20% down at the top line met no more than 20% down at the bottom line.

That was impressive, thank you.

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

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

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

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

Let me talk at 50,000 feet and then Mike can be more practical. So first of all, I understand we've had these plans for over 10 years, and we’ve got over 2,300 participants. As we said earlier, as Mike said earlier, it doesn't impact earnings, doesn't impact cash flow. We've disclosed these numbers in our footnotes. We've got no net costs; there's no net economic cost from doing this. And the simple answer for why now, it's because the SEC believes it’s more appropriate that we take one side of the equation out of SG&A and make it its own line item. But simply putting those two line items together, you have the same SG&A that you typically had or used to have. One oversimplified way of thinking about this is that we have to mark to market every quarter our obligation to employees under these plans, and we also have to mark to market the underlying assets; the mark to market adjustments for both of those are exactly the same thing and opposite amounts in opposite directions—meaning the same amount. So economically, it’s zero, and we've had this for over ten years, and the short answer again is that the SEC has asked us going forward to take what we had put in our footnotes and instead put it on the face of the income statement.

I'm sorry, go ahead.

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

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

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

Okay, I appreciate the suggestion. Thanks so much.

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

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

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

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

The area where they're the strongest and frankly the area that we are probably really proud of is the joint success Protiviti and staffing are having in the public sector. We've got joint pursuit teams selling the work, largely the resources get provided by staffing, but Protiviti manages them. If you think about it, process management, process optimization is right in Protiviti's wheelhouse; in fact, it’s the wheelhouse of their wheelhouse. If you look at states, they’re overwhelmed with volumes and unemployment claims, eligibility for unemployment payments, processing; they’re dealing with housing assistance claims. Their calling volumes are off the charts, and additionally, you’ve got school districts that can't keep up with the technical support requirements of all the virtual learning models. So the public sector has made a meaningful difference to both staffing and Protiviti this quarter. You'll notice in the schedules attached to the press release for the first time ever, we've actually shown you how much revenue is billed by staffing to Protiviti. We've shown you the growth rates, and we're pleased to report that for this quarter, staffing revenues from Protiviti grew by 28% year-on-year and public sector activities were a big piece of that. That said, that’s not the total picture. The strongest part of Protiviti at the moment is technology consulting, its cyber, its cloud, its transformation. But also risk and compliance—money laundering, the retail, operational risk—all those are strong as well. So Protiviti, doing very well, and Protiviti together with staffing is doing very well, as well as we actually show you that both in numbers and in growth rate percentages in the schedules that we attached to the press release.

Got it, thanks, Keith.

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

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

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

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

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

Great, thank you so much.

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

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

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

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

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

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

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

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

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

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

Yes, for sure, thanks.

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

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

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

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

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

I appreciate it. Thanks for taking the questions, Keith.

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

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

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

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

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

Got it, very helpful. Thank you.

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

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

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

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

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

Great, thank you.

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

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