Hello. And welcome to the Robert Half First Quarter 2021 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 our 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 the forward-looking statements. These risks and uncertainties are described in today’s press release, and 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.

Thank you, Keith, and hello, everyone. Let’s start with revenues. As Keith noted, global revenues were $1.398 billion in the first quarter. On an as-adjusted basis, first quarter staffing revenues were down 18% year-over-year. U.S. staffing revenues were $759 million, down 19% from the prior year. Non-U.S. staffing revenues were $242 million, down 15% year-over-year on an as-adjusted basis. We have 322 staffing locations worldwide, including 86 locations in 17 countries outside the United States. In the first quarter there were 62.3 billing days, compared to 63.1 billing days in the first quarter one year ago. The current second quarter has 63.4 billing days, equivalent to the second quarter one year ago. Currency exchange rate movements during the first quarter have the effect of increasing reported year-over-year staffing revenues by $17 million. This impacted our year-over-year reported staffing revenue growth rate by 1.4 percentage points. Now let’s take a closer look at results for Protiviti. Global revenues in the first quarter were $397 million, $316 million of that is from business within the United States and $81 million is from operations outside the United States. On an as-adjusted basis, global first quarter Protiviti revenues were up 35% versus the year-ago period with U.S. Protiviti revenues up 37%. Non-U.S. revenues were up 26% on an as-adjusted basis. Exchange rates have the effect of increasing year-over-year Protiviti revenues by $6 million and increasing its year-over-year reported growth rate by 2 percentage points. Protiviti and its independently owned member firms serve clients through a network of 86 locations in 28 countries. We remind you that changes to the company's deferred compensation obligations are classified as SG&A or, in the case of Protiviti, cost of services with completely offsetting changes in the related trust investment assets classified separately below SG&A. Previously they were both classified as SG&A. Our historical discussion of consolidated operating income has been replaced with the non-GAAP measures of combined segment income. This is calculated as consolidated income before income taxes adjusted for interest income and amortization of intangible assets. For your convenience, we have included a supplemental schedule to today’s earnings release on page seven, highlighting the impact of changes in the deferred compensation accounts to the summary of operations for the first quarter of 2021 and 2020. This is a non-GAAP disclosure, so we also show a reconciliation to GAAP.

Thank you, Mike. Our staffing results accelerated during the quarter indicating a faster early cycle pace of recovery than we have experienced in the past. This was very broad-based and seen across geographies, lines of business, client size and skill levels. As I mentioned earlier, small and medium-sized businesses led the way after being more negatively impacted during the peak of the pandemic. The NFIB recently reported that 42% of small businesses had job openings they could not fill, which was a record level. This bodes well for us. Our investments in advanced AI technologies have allowed us to adapt quickly to a new marketplace, where remote and hybrid work has become commonplace. Together with our people, these technologies enable us to find solutions to meet the critical talent and consulting needs of our clients across broader resource pools. Protiviti continues to thrive, with multiyear double-digit growth and a pipeline that is highly diversified across both solution offerings and client segments. Our blended solutions complementing Protiviti’s offerings with contract talent allows us to be extremely nimble and cost effective in response to client needs, and we expect this offering to be an increasing part of our business going forward. We are excited about our current momentum and our prospects for the balance of 2021 and beyond, buoyed by the strength of our brands, our people, our technology and our professional business model. We would also like to thank our employees for making possible two recognition awards we received just in the last few days. These are FORTUNE’s 100 Best Companies to Work for in 2021 and Forbes’ Best Employers for Diversity 2021. Now, Mike and I’d be happy to answer your questions. Please ask just one question and a single follow up as needed. If there is time, we will come back to you for additional questions.

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

Hi. It’s Andrew. Keith, I wanted to ask you if you felt the U.S. has entered a brand new economic expansion, which bodes for particularly strong years of revenue growth at Robert Half? Or is there something about the 2020 recession that was just different than past recessions and it really kind of lands us more where we were in 2019 in terms of the economy, which really only supported mid single-digit revenue growth on an ongoing basis for Robert Half?

Well, Andrew, we would say that it feels very traditional early cycle and just to quantify that a little bit, we looked at the first three quarters post-trough for the recovery post-COVID, the recovery post-financial crisis, and the most recent recovery. And as an example, three quarters post-trough: first time, temp up 13%, perm up 18%. After the financial crisis, temp up 9%, perm up 34%, and this time temp up 18%, perm up 56%. Further, if you look at the peak-to-trough decline, those declines on the temp side are pretty consistent across those three cycles. Our people would tell you that the recovery feels very classic, that there is improving demand broadly across all the dimensions that I talked about, that as always, clients cut deep, they have gone lean. As transaction volumes improve, as projects restart, they need more help, they need to restore their workforce, many times upskill, and so for us, it feels very classical. Traditionally, we have a nice three-year to five-year runway once we get into recovery, which we believe we are well under way as we have spoken about.

Perfect. Thank you.

Your next question is from Mark Marcon with Robert W. Baird.

Good afternoon, Keith and Michael. First of all, congratulations on the stellar results. I’d like to talk about Protiviti. Specifically, wondering if you can give us a little bit more color on the stellar results that they ended up having, as you mentioned, 14 straight quarters, 35% growth. If we take a look at what you are forecasting here going into the second quarter, can you just dimensionalize how much of the uplift is because you are getting more opportunities, broadly speaking more adept, versus an improvement in terms of the win rate and really gaining share? And then can you also talk a little bit about what are some of the drivers, you did say it was broad-based, but I am wondering if you could give us some commentary with regards to the public sector work, the IT work, SPACs and obviously, we can see the results in terms of staffing in terms of what’s being eliminated for the intersegment revenue, so obviously that continues to go well. But just wondering if you can give some more color there?

Sure. As you said, we are very proud with the 35% growth rate and it splits pretty evenly between what I will call core—tech, risk and compliance, internal audit—which grew 18% year-on-year, totally exclusive of public sector and blended solutions. Blended solutions then grew 124%, adding 17 points to the growth rate. So you have got 18 points of the growth rate coming from core, you have got 17 points of the growth rate coming from blended solutions. By the way, those blended solutions then split about 50-50 between public sector and non-public sector. So that sizes the contribution to public sector. If you then look at their core solutions, in tech, which they have been very strategic about picking their shots as to practice areas, they have been very strategic about making the right hires at the right levels including very senior levels and so they are in cyber, they are in privacy, they are in digital transformation, data analytics. As I have talked before, tech consulting is now the largest core solution area for Protiviti. Risk and compliance remains very strong: anti-money laundering, consumer lending regulatory enforcement, regulator exam preparation—all very good. Internal audit, as you spoke about, is clearly benefiting from IPOs and SPACs. Further, they have clients reinstating their internal audit budgets that were cut last year during the pandemic, which also led to our conservatively aggressive guidance for Q2. The interesting thing about the public sector is that in blended solutions with staffing generally, it’s not just U.S. and we now have some sizable engagements outside of the U.S., which are contributing. So we are very pleased with that. As we have talked before those public sector engagements are around unemployment and housing assistance. A new and large opportunity we are seeing is in education. There’s a lot of funding going to K-12 and higher education institutions that will need help distributing and accounting for those funds. We have been pleased about the renewals that we have gotten where we already are and we are organizing or mobilizing as we speak to take advantage of this education opportunity. So it’s one of those times where virtually every core solution area, as well as the additional work we are getting in blended solutions—not only from public sector but from non-public sector as well—is contributing, such that we have the Q2 revenue guide for Protiviti for up 40%.

That’s great. Thank you for the color. Just to be 100% clear, it sounds like you are obviously getting all sorts of different opportunities. Can you comment a little bit just on the win rate relative to the Big Four, because I suspect you are continuing to win more, but just wanted to confirm that, number one? And number two, on the public sector, one of the things that we sometimes hear pushback on is the sense that those are just temporary, they are only going to be here for another few months to a year and then they are going to fade. What’s your sense?

Well, on Big Four win rates, understand that the Big Four are frenemies. On one hand, we compete with them. On the other hand, when they are conflicted because of their external audit engagements, we are the first party they refer to, because we don’t compete with them on external audit like the other Big Four. So I’d say our win rate is consistent and rising, particularly in the blended solutions area where they simply don’t have the capabilities that we have. On the issue of sustainability with public sector, transitory is a word that our Federal Reserve Chairman likes to use. We have been very transparent that clearly there is a bulge dimension to the transaction volumes we are helping with. But we have also been clear that we believe we are building new relationships that we can leverage as they improve their processes, as they improve their controls, and as they modernize their technology. So we are certainly aware that there is a window of time where we are going to have a very intense relationship with these state and local governments and even local school districts, and we are working very hard to extend those. We have been very positively surprised or pleased with the extensions we are seeing, sometimes into the second quarter and third quarter with this work that we are already doing. So clearly there is a bulge element to what’s going on in public sector, but it’s not only bulge and we think there’s an opportunity. And the point I have tried to make is that, totally excluding it, Protiviti’s still growing 18%. That’s a big number.

Totally agreed. Thank you.

Your next question is from Jeff Silber with BMO Capital Markets.

Thanks so much. I wanted to shift the discussion over to the perm segment, which really had a really good quarter, much better than I think most people expected. Can we get a little color where you are seeing that trade either in the type of clients or the type of jobs they could place in?

The great news, Jeff, is that it’s across our clients. Perm placement is more SMB than the temporary side, almost by definition, if it’s perm it’s SMB. It’s by functional area, meaning it’s accounting and finance and it’s technology and it’s legal and it’s marketing and creative. It’s by skill level, so it’s for transactional-level people—accounts payable, accounts receivable, payroll, general ledger—as well as the higher senior accountants, accounting managers, controllers. So it’s very broad. It’s broad across geographies, not only within the United States but outside the United States as well. A good dynamic is candidates are getting more confident to make job changes, and being at home makes it easier for them to confidentially interview with our recruiters. So that’s good for perm. Very broad, very robust, we have huge momentum going into the quarter. We gave you our post-quarter numbers, which were triple-digit growth. So perm, as our people would say, is white-hot at the moment.

Okay. That’s great to hear. Can we shift over to the international piece of your business? Can you just give us a little bit of color by country and also do you have any exposure in Mexico? Thanks.

We do not have exposure to Mexico and we don’t do a lot of country-by-country discussion. I would call out that Germany and the U.K. had particularly good quarters. But frankly, there was a nice recovery across our geographies in Europe and in Asia.

Okay.

Your next question is from Manav Patnaik with Barclays.

The piece of the early cycle recovery has been faster than you have seen. But I guess I was just curious if you could compare it a bit to 2019 levels. I guess what I am trying to get an idea of is how much more is just left in terms of pure catching up to pre-pandemic before we start thinking about what the future growth looks like?

Good question. We are about just over 20% below 2019 for the temp side and about 15% below 2019 on the perm side. At our current pace, we fully expect to surpass 2019 sooner rather than later.

Okay. And the other question I had quickly was in terms of competition, are you seeing any changes in competitive behavior given this big catch-up going on and are dynamics different?

Is your question regarding our contract employees we put on engagements or our internal staff? On-assignment is a competitor in a very specific and relatively small part of our business, particularly since they focus on mid- and large-cap companies, while we focus a lot on SMBs as well. So there’s not a lot of apples-to-apples there. The competitive landscape as to pricing vis-à-vis our competitors generally hasn’t changed much at all.

Got it. Thank you.

Your next question is from Kevin McVeigh with Credit Suisse.

Great. Thanks so much and congratulations on the results. Keith, you talked about all-time high earnings, things like that. Do you think with the way the business is geared, you are positioned for structurally high margins or is it maybe some inability to hire or excess capacity among the staff? How are you thinking about the margin trajectory of the business relative to where your staffing levels are internally?

When we talk about profitability, those discussions have to start with gross margins. Traditionally in a downturn, peak to trough we are down 300 basis points; this time we were only down 100. We are now back to pre-pandemic levels; pay bill spreads have recovered. We have lower fringe rates because our higher pay rate divisions make up more of our mix, meaning more of the payroll isn’t subject to payroll tax. We have also got this tranche of full-time contractors we have talked about that have higher margins and that’s growing as well. Temp-to-hire conversions are currently 3.1%. They were 3.5% in 2018 and 2019 and have been as high as 4% to 5% historically, so there is upside there. We would caution in the short term, like for Q2 and Q3, we are projecting some sequential reduction in temp gross margin up to 40 basis points, because we have to pay our temporary or contract staff for time off to get their vaccine and time off to recover from that, if needed. But that’s hopefully transitory. On the SG&A front, given we are still below even 2019 levels, we still think we have capacity with existing staff, which on average is more tenured than it’s been in the past. That said, particularly on perm because of its very rapid growth rates, we will begin slowly adding to internal staff there as well.

Super helpful. And Keith, it sounds like from sourcing candidates that you are — there is no issue there. Is that right or how is it from a candidate perspective?

Candidate supply is more nuanced than meets the eye. On one hand, candidates are resistant to onsite opportunities because they are concerned about COVID, they don’t like commute times, they don’t have child care, they have school uncertainty for their children, and they have unemployment benefits. They also have out-of-market opportunities as well as local opportunities. Many times if they don’t live in a big city, they live outside of a big city but now can get big-city pay without moving. So it’s a very nuanced situation. The good news is, it allows us to add more value because it’s more complicated for clients themselves to source candidates, particularly out of their local markets. The combination of our experienced recruiters and the technology we’ve developed gives us an opportunity to add value in a new and increased way because of all these candidate nuances. Clients are understanding that it’s a more complicated world. Relative to clients doing it themselves and relative to our traditional competitors, particularly local regional firms, they simply don’t have the capabilities or recruiter relationships, especially out of market. If anything, our competitive positioning is better than ever.

Yes. Thanks so much.

Your next question is from Gary Bisbee with BofA Securities.

Hey. Good afternoon. So the first one on the blended staffing, tremendous success you continue to have. Does that have any discernible impact on gross margins in the temp staffing business either up or down or is it generally relatively representative of what they are when you are staffing those people out to an external client?

First of all, the staffing temp gross margins we report are not impacted at all by that, because it’s been pushed over to Protiviti. If you are asking how the gross margins on the business with clients that’s serviced by both compares to our normal gross margins, I’d say they are at or maybe a little above, which is fantastic given that the client base skews much larger and typically staffing by itself going to those larger clients would have some margin pressure that’s been avoided by going to market together with Protiviti.

But so is it safe to then say, temp gross margin 10 points roughly above Protiviti, so the revenue growth there is helping Protiviti margins, because of that delta or is that the way you price it?

The blended solutions reported in Protiviti are accretive to Protiviti’s margins in large part because there’s no pitch time or utilization reduction, since these people are 100% utilized. They are only paid when they are working by and large. So that utilization differential makes them accretive for Protiviti’s gross margin, because a large portion of Protiviti’s workforce is full-time and utilization management has a huge impact on their margin structure.

Yeah. Got it. And then even you gave a sense of public sector versus non-public sector. Even if we back out portion of public sector, it really feels like the blended solutions have gained tremendous momentum in the last year, but even the last several quarters. Why has the momentum picked up, is it just you are selling it more aggressively or the clients are responding and just trying to think about the durability of the drivers of that momentum? Thanks.

We are selling it more aggressively. We are consciously adding to developers that focus on selling just that service. We are adding subject-matter expertise on the Protiviti side to manage those projects and with the success we have had, success leads to more success. It’s now gone international, which is really great. It’s not just a U.S. thing. We have got some wonderful wins outside of the U.S. So globally people on the staffing side and the Protiviti side see that it works and they also see that nobody else has it.

Right. Okay. That sounds great. Thank you.

Your next question is from Tobey Sommer with Truist Securities.

Thank you. Given the sort of odd nature of the decline and robust rebound to-date, how do you think about bill rates and sort of compensation inflation in this cycle?

Wage inflation is usually our friend and as the candidate side tightens, which it already is and is expected to further, not only do we traditionally pass through the higher pay rate, but it also gives us an opportunity to widen our spread a bit. You can look back 25 years and you can see wage inflation has been our friend. I think any reasonable person would project that there’s going to be some wage inflation as things improve.

Thanks. On the social costs that typically dampen gross margins exiting recession and then provide a nice tailwind for subsequent years of recovery, how is this cycle perhaps different?

An interesting issue is state unemployment. This time around, to get the federal subsidies, the states had to agree not to charge the claims to individual company accounts but instead to keep them in a general pool. I could make the case that we are not going to benefit from that, because the general pool increase could be argued to be less than what the increases would be had all the claims been charged to our account. It’s been the case across the staffing industry that during downturns previously working temporary employees file a lot of unemployment claims that stay with us for three to five years as the states average that into their rates. I am cautiously optimistic that because the elevated claims that we read about every day, by and large haven’t been charged to our individual accounts, the one-pool concept will benefit us more than it will hurt us, but only time will tell.

Thank you.

Your next question is from Hamzah Mazari with Jefferies.

Over the past few calls there’s been questions about your capacity and you mentioned it a little bit earlier on in the call about having capacity remaining in the business. At current capacity levels and given the trends in the business that you are seeing right now, how long do you think you can go without having to hire internally? It sounds like you are doing a little bit in perm or expect to, but in the overall business, when should we expect that to ramp or at what point in the cycle would you want to ramp hiring?

On the temp side, we think we have a couple of quarters we will be fine with existing staff. There is a productivity benefit to internal remote work because we no longer have to staff every single office for peak demand. One office can be assisted by a neighboring or distant office remotely when they have peak demands. So we should be more efficient going forward than in the past because we can share internal resources across larger areas. It’s not just a matter that because we are recovering we need X number of staff; our average tenure is longer than normal, which also impacts our need to hire. Long story short, we are beginning to hire internally. We are probably a couple of quarters from starting in temp, but even there it will be at a slower pace than it might otherwise have been because of the benefits of remote work and technology tools that have paid off for the last three or four quarters.

Great. Thank you. I just have one more and I will turn it over. Just on M&A, I know you have done some smaller deals within Protiviti. Is there anything specific to Protiviti that you guys are looking at currently? Are there any chunkier deals or should we expect any smaller deals throughout the remainder of 2021?

Protiviti is always looking for solution areas and practice groups that fit culturally and strategically. They did the Identity Management deal last quarter. Stay tuned; it’s part of the ordinary course of business that they are looking for practice areas and smaller consulting firms that have the same kind of cultural Big Four background that they have.

Great. Thank you very much.

Your next question is from George Tong with Goldman Sachs.

Hi. Thanks. Good afternoon. You mentioned that public sector work lifted Protiviti growth by 17% in the quarter. How much did it benefit temp staffing growth by?

Virtually zero and it’s a very important point. The public sector work, while it starts in the lines of business on staffing, it gets eliminated. That intersegment elimination line eliminates all of that work. So the growth rates for temp staffing are not impacted by the public sector work; it’s ex-public sector. The public sector is over on the Protiviti side. As I mentioned, it’s about half of Protiviti’s growth rate, but half of 35% is still a really big number.

Got it. Very helpful. And then if you look at performance in the temp staffing business in the U.S. and compare that to Europe, how would you compare the various trajectories of the recovery?

Amazingly consistent. If you look at temp and perm and we disclose U.S. versus non-U.S., they are amazingly consistent.

Got it. Very helpful. Thank you.

Okay. I think that’s our last question. Thanks everyone for joining.

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 replay. Dial-in details and the conference ID are contained in the company’s press release issued earlier today.