Max Messmer - Chairman and CEO Keith Waddell - Vice Chairman, President and CFO.

Kevin McVeigh - Deutsche Bank Andrew Steinerman - JP Morgan Mark Marcon - Robert W. Baird & Co Jeff Silber - BMO Capital Markets Ryan Leonard - Barclays Tim McHugh - William Blair Anjaneya Singh - Credit Suisse Kwan Kim - SunTrust Gary Bisbee - RBC Capital Markets Hamzah Mazari - Macquarie Capital.

Hello and welcome to the Robert Half Third Quarter 2017 Conference Call. Our hosts for today's call are Mr. Max Messmer, Chairman and CEO of Robert Half; and Mr. Keith Waddell, Vice Chairman, President and Chief Financial Officer. Mr. Messmer, you may begin..

Thank you and good afternoon everyone. We appreciate you joining us. Before we review our third quarter results, I'd like to remind you there are comments on today’s call that contain predictions, estimates and other forward-looking statements.

These statements due represent our current judgment of what the future holds and include words such as forecast, estimate, project, expect, believe, guidance and similar such expressions. We believe these remarks to be reasonable.

However, they are subject to risks and uncertainties that could cause actual results to differ materially from the forward-looking statements. Some of these risks and uncertainties are described in today's press release and in our SEC filings, including our 10-Ks, 10-Qs and today's 8-K.

We assume no obligation to update the statements made on today’s call. For your convenience, our prepared remarks also are available on our website, www.roberthalf.com. From the home page, click on Investor Center at the top of the page you will find the Quarterly Conference Calls link in the Investor Center.

Now, let’s review our third-quarter financial results. Revenues were $1.325 billion, essentially flat on a same-day, constant-currency basis compared to the third quarter one year ago, and down 1% on a reported basis. Income per share was $0.68. Both revenues and EPS were slightly below the midpoint of our third quarter guidance.

Cash flow from operations was $129 million, and capital expenditures were $7 million. In the third quarter, we returned $30 million to our shareholders through a $0.24 per share cash dividend. We also repurchased 800,000 Robert Half shares for $37 million during the quarter.

We have 3.4 million shares available for repurchase under our board-approved stock repurchase plan. Our third-quarter results were generally as expected and within the range of our previous guidance, led by our strong European operations.

Trends strengthened during the quarter, and we are very encouraged by the broad-based improvement in revenue growth rates that began in September and continued into October, particularly in the United States. During the third quarter, return on invested capital for the Company was 30 percent.

Now, I’ll turn the call over to Keith for a closer look at our results..

Thank you, Max. Global revenues in the third quarter were $1.325 billion, down 1% from last year’s third quarter on a reported basis, and roughly flat on a same-day, constant-currency basis. Third quarter revenues for our staffing business were up 0.3% year-over-year on a same-day, constant-currency basis. U.S.

staffing revenues were $854 million, down 2% on a same-day basis, while non-U.S. staffing revenues were $262 million, up 11% when adjusted for billing days and currency exchange rates. We have 324 staffing locations worldwide, including 83 locations in 17 countries outside the United States.

The third quarter had 63.1 billing days, compared to 64.1 days in the third quarter one year ago. This reduced reported year-over-year revenue growth rates by 1.5%. The current fourth quarter has 61.3 billing days, compared to 61.4 days in the fourth quarter of 2016.

Accompanying our earnings release is a supplemental schedule showing year-over-year revenue growth rates on both a reported and same-day, constant-currency basis. This data is further broken out by U.S. and non-U.S. operations. This is a non-GAAP financial measure that offers insight into certain revenue trends in our operations.

The effect of currency exchange rates increased our reported year-over-year staffing revenues by 9 million in the third quarter, which boosted year-over-year reported staffing growth rates by 0.8%.

For Protiviti, global third quarter revenues were $209 million, with $170 million coming from revenues within the United States and $39 million from revenues outside the United States. Protiviti revenues were down 3% year-over-year on a same-day, constant-currency basis. U.S.

Protiviti revenues in the third quarter were down 5% from the prior year on a same-day basis, and non-U.S. revenues were up 12% on a same-day, constant currency basis. Exchange rates had the effect of increasing year-over-year Protiviti revenues by $1 million in the third quarter and increasing the year-over-year reported growth rate by 0.3%.

Protiviti and its independently-owned Member Firms serve clients through a network of 76 locations in 26 countries. Now, let’s turn to gross margin. Third quarter gross margin in our temporary and consulting staffing operations was 37.2% of applicable revenues. This is a 20 basis-point decline from the same period one year ago.

Third quarter revenues for our permanent placement operations were 10.0% of consolidated staffing revenues, which is up from last year’s 9.4%. Together with temporary and consulting gross margin, overall staffing gross margin increased 10 basis points versus one year ago, to 43.4%.

Gross margin for Protiviti in the third quarter was $62 million or 29.6% of Protiviti revenues. In the third quarter of 2016, Protiviti gross margin was $67 million or 30.9% of Protiviti revenues. Staffing SG&A costs were 33.8% of staffing revenues versus 32.7% in last year’s third quarter.

Third quarter SG&A costs for Protiviti were 17.9% of Protiviti revenues, the same as last year’s third quarter. Operating income from our staffing divisions was $108 million in the third quarter, down 9% from one year ago. Operating margin was 9.6%.

Our temporary and consulting staffing divisions reported $88 million in operating income, down 10% from last year, resulting in an operating margin of 8.7%. Third quarter operating income for our permanent placement division was $20 million, down 2% from the prior year, producing an operating margin of 17.9%.

Operating profit for Protiviti was $24 million in the third quarter, a decrease of 13% from 2016, producing an operating margin of 11.8%. Accounts receivable were $738 million at the end of the third quarter. Implied days sales outstanding or DSO were 50.7 days.

Before providing guidance for the fourth quarter, let’s review the monthly revenue trends we saw in the third quarter and so far in October, all adjusted for currency. Our temporary and consulting staffing divisions exited the third quarter with September revenues up 2.1% versus the prior year, compared to a 0.4% decline for the full quarter.

Revenue growth for the first two weeks of October was up 2.0% compared to that period in 2016. For permanent placement operations, September revenues were up 7.2% versus last year, compared to a 6.7% increase reported for the full quarter.

For the first three weeks in October, permanent placement revenues were up 21% compared to the same period last year. These are the trends we saw during the third quarter and so far in October. But, as you know, we hesitate to read too much into these numbers as they represent very brief periods of time.

With that said, we offer the following fourth quarter guidance. Revenues $1,287 million to $1,347 million, income per share $0.60 to $0.66, the midpoint of our fourth quarter guidance range implies year-over-year revenue growth of 4% on a reported basis, and 3% adjusted for days and currency.

EPS would be up 3% versus last year at the midpoint of our guidance range. 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 our SEC filings. Now, I’ll turn the call back over to Max..

Thank you, Keith. As noted earlier on the call, we are encouraged by the recent improving trends we are seeing globally, including in the United States. These trends and the related business climate are favorable for our staffing operations and Protiviti.

In the United States, economic activity increased across all 12 Federal Reserve districts, according to the latest FaceBook report. In the report, the Fed noted that labor markets are tight, and employers are having difficulty finding qualified talent.

In addition, the International Monetary Fund described a positive global economic outlook at their recent meetings in Washington, D.C., reporting broad-based optimism from most major world economies. The growth outlook for the United States is 2.2% for 2017, which is a significant improvement from last year’s 1.5% GDP growth.

We are hopeful this portends more business investments and stronger growth among U.S. companies. We believe these investments would benefit both our staffing operations and Protiviti. Revenue growth in Protiviti operations outside the United States, like our staffing business, was stronger than in U.S. Protiviti operations.

We’re very excited about our ongoing investments in technology innovation at Robert Half. We completed the global rollout of our CRM software this summer.

We also recently unveiled a new website that provides an exceptional user experience for our clients and job candidates, and better meets the preferences of our customers who want digital service options from the businesses they work with. Now, Keith and I would be happy to answer your questions.

We ask that you please limit yourself to one question and a single follow-up, as needed. If time permits, we’ll certainly try to return to you, if you have additional questions. Thank you..

[Operator Instructions] Your first question comes from the line of Kevin McVeigh from Deutsche Bank. Your line is open..

The revenue guide looks really, really strong relative to EPS.

Can we just kind of explain some of that puts and takes in terms of kind of the delta between where the revenue came in the Q4 guide relative to where the EPS is?.

Sure. The probably the biggest reconciling item as you compared to last year's fourth quarter, in the last year's fourth quarter, we had very large true ups to workers compensation and to some extent, state unemployment cost such that, I believe the number was $4.5 million to $5 million of true ups to those accruals.

We never dial those into our guidance, frankly, we don’t expect those adjustments at that order of magnitude, but yet taking the fringed cost out if you will the gross margins are comparable, but that's a significant reconciling item as you look up year-over-year revenues versus year-over-year margins..

Got it. And then it seems like there has clearly been an inflection point in the U.S. in terms of the revenue.

Is that employers getting a little more sense of urgency that you’re starting to see more closer, health of your macro? Or how should we think about that, particularly the September into October trends?.

Right. So, clearly we're seeing clients starting more new projects. They’re spending more money. They have more sense of urgency. Their existing staff has a lean because they've held a line so far during this recovery. So, there’s some pent up demand that results from that.

You're also going into a quarter where seasonally Accountemps benefits from companies going into their budgeting season, they're preparing for year-end close, they're preparing for the year-on audit. Office team going into the open enrollment period, going into the seasonally strong retail cost center, customer support period.

So, you've got some more traditional seasonal pick up along with some catching up on deferred spending. All of which provide a better demand environment than we've seen in quite some time..

Your next question comes from Andrew Steinerman from JP Morgan. Your line is open..

Hi, Keith and Max.

I’d love to hear to speak a little bit more about Accountemps, did that inflect positive in the month of September? Do you expect Accountemps to grow in the fourth quarter?.

So, the good news, Andrew, is that it was a very broad-based inflection point. We saw year-over-year and sequential growth pick up nicely in September. The sequential we viewed as particularly significant on top of that, you've also got easier year-on-year comparisons. So, the combination provided a good story across the board including Accountemps..

And your view Accountemps favorably into the fourth quarter?.

No question..

Your next question comes from Mark Marcon from Robert W. Baird & Co. Your line is open..

Good afternoon, Max and Keith.

I was wondering if you could talk a little bit about the SG&A, particularly within comp staffing for this past quarter? And how should we think about it going forward particularly now that your CRM project has been rolled out?.

So, consistent with what we said in the last few quarters, a couple of things going on from a headcount and internal compensation standpoint, we've added to the heads, we've added to compensation costs, primarily outside the U.S. in support of their growth.

In the U.S., notwithstanding the fact that our revenue growth has been somewhat negative, we've held the line on headcounts and compensation cost. So when you put the two together, you get negative leverage.

Further, the IT initiatives that are currently ongoing, software as a service related expenditures get expense, not capitalized to the extent you're improving current processes that gets expense, not capitalized.

So versus prior periods when much of your IT spending got capitalized, we're actually now in an environment where much of that gets expensed.

And so while we're talking about capital expenditures, we're now projecting that for the year, our capital expenditures will only be in the $40 million to $50 million range and that compares to $82 million last year. And the CRM and cloud-based payroll, some of those big projects are now behind us and our CapEx is going down..

That's great. And then can you talk a little bit about, you said that the improvements on a sequential basis is broad-based.

Can you talk a little bit about RH Technology? And how are you thinking about that long-term? And where you're seeing the best improvement? And where the greatest opportunities are? How you're thinking about that long-term?.

And so, Robert Half Technology did see sequential growth during the September-October period. It was probably a bit behind the other lines of business, but it still did see sequential growth. New technology projects are being started by our middle market client base, things like upgrades to Office 365 would be an example.

So, we are encouraged that we saw sequential growth across the Board. And again as the compares get easier, that's even more helpful when you look year-over-year..

Great.

And then you're not building in any sued on workers comp, but typically you end up experiencing some in the fourth quarter, is that a correct assumption?.

It is certainly correct. We have not built any in. We think it's unrealistic to expect anything in the order of magnitude, which we saw last fourth quarter which was quite large unusually so. So for conservative and consistent with past practice, we have not built anything in for the fourth quarter..

But you always do experience a bit?.

We typically do experience although I'll say as we sit here today, we do not expect any significant reductions of our accruals pursuant to third party actuarial reviews, which we always get this time of year. We'd like to be positively surprised, but as we sit here this second we're not expecting that..

Is that different than past years at this time?.

Its fair that but frankly we don't know. We don’t know and the actuaries go away, they do their tail runs, what they expect the claims to be and they do their magic and they report back. And so, we're not about to say, we expect that we'll have credits when we've just given guidance that didn’t anticipate them..

Your next question comes from Jeff Silber from BMO Capital Markets. Your line is open..

Thanks so much.

Wanted to go back to your comments earlier about the improvement sequentially, I just curious, did the hurricanes that we experienced end of August, beginning of September, have any impact on your business? And is one reason you're seeing the sequential growth is that you know that's behind you?.

Well, so frankly, the hurricanes didn't have a material impact on us. We estimate it was somewhere in the $3 million to $5 million range, which on a $1 billion plus number isn't particularly significant.

We will say that Protiviti was more impacted by staffing because Texas is a larger part of Protiviti than is the case in staffing, but that order of magnitude impact didn’t really move the needle sequentially or year-over-year or impacted trends that we are talking about..

And then in terms of your guidance I'm just curious if you can just give us a little bit more color, what margin expectations are embedded in there as well as tax rate and share count? Thanks so much..

So from our guidance margin point of view as we just talked, our expectation is that versus the year ago when we got those credits we just discussed that the gross margin would be down in the 100 basis points range for the temp side. Protiviti actually we expect better gross margins this fourth quarter than a year ago. Protiviti non-U.S.

profitability has improved nicely. They expect a little better utilization in the U.S. as well. So, there is a 100 maybe 200 basis points of improvement with Protiviti at the gross margin line.

From an SG&A standpoint as you know the fourth quarter always a short quarter so looking its fewer days, looking sequentially, there is going to be some negative leverage from that, looking year-over-year you have got the higher -- you got the headcount discussion that I just went through such as year-over-year you have probably got all 60, 70 basis points of dilution higher SG&A as a percent of revenue for those reasons.

So that from an operating income standpoint, you are going to see both sequentially and year-over-year somewhere in the order of magnitude of 50 to 60 basis points lower operating margin percentages. Tax rate, we are currently estimating 37% for the fourth quarter.

Share count, down a few 100,000 shares depending on how aggressive we get with buybacks..

Your next question comes from the Manav Patnaik from Barclays. Your line is open..

This is Ryan filling in for Manav. So, obviously in the guide, you are entering the fourth quarter you get a little bit of benefit from the year-over-year comparables, but you talk about holding the line on the hiring front.

I mean is the sequential improvement that you are seeing enough for you to go out and start adding recruiters?.

Well, the thinking is, we've held in the U.S., we've held our recruiter numbers intact, not withstanding lower revenues. So, we can leverage those for a quarter or two. So, we do now plan given that capacity we do not plan to add to heads in the fourth quarter.

We hope and we're talking in 90 days that the results are such that we are confident that we can begin to do so, but we do have capacity that at least in the short-term were going to -- our intention is to use it..

And then I know we talk a lot about this in the last call.

You still surprised between the growth rates in perm and on the temp side, I mean, is that typical? Do you see those narrowing in the near future? Or is that something that you just need to have a play out?.

Well, what's typical is that they are highly correlated. There is more variation for perm, the peaks and valleys are highly correlated. What's the big difference this time, it seems companies have run leaner longer, and they're more willing to add to perm given they run leaner and longer.

So perm is a little stronger relative to temp than we would expect, that's a good thing for margins and how long that continues we don’t know. But clearly perm is stronger than temp and the quarter just ended projected to be for the quarter that we are in..

Go it. If I could just sneak one last one on the tax rate, I think you had said last quarter you expected 34.5% based off of some credits that were coming obviously came in a little bit lower there.

Is that just the timing of additional credits? Or is there anything structural behind that?.

Every year in the third quarter, you reconciled the prior year's tax return to your book accrual and in that reconciliation there are always things that fall out plus or minus. And so, we had some -- the result of that process was, we had some tax credits that haven't been reflected. There is nothing structural there..

Your next question comes from Tim McHugh from William Blair. Your line is open..

I want to ask I guess about the U.S. growth rate maybe in September and guess October.

Are you -- has that turned positive or and just trying to separate that some what I assume is still pretty good growth in Europe?.

So, Tim, our guidance would assume we get real close to turning positive year-over-year in the U.S. We don’t quite get there but we get really close. But clearly the improvement, the sequential improvement we talked about, is very much inclusive of the U.S..

Okay. And gross margin in the quarter I guess and even I guess a little bit what you are guiding for fourth quarter.

What’s the cause of the year-over-year compression? Any separates on the credit?.

Right, they are unusual. We had 20 basis points of year-on-year compression and gross margin for the quarter. It's principally non-U.S. holiday pay impacts. So Germany, Belgium particularly as you know Europe, August is a big holiday month.

And we had more holiday pay in those countries than in the past than expectations, and therefore that had an impact to our overall gross margins..

Okay, if we just looked at the U.S.

would it be stable, is that fair? Or what do you discrete with it?.

Fair..

Okay, thank you..

Your next question comes from Anjaneya Singh from Credit Suisse. Your line is open..

First off, I was hoping you could discuss the factors driving the decline in U.S. Protiviti this quarter. Is there something on contract timing that's causing to depth? Was it the Hurricane impact you sort of alluded to earlier? Just hoping you can discuss your visibility and what you are seeing in U.S.

Protiviti looking ahead?.

Right, so for your U.S. Protiviti third quarter, as we talk about before, their Hurricane impacts were larger. It was probably $1 million to $1.5 million in that range.

Further, they did some they had work performed towards the end of the quarter where our contracts weren’t actually signed till after the quarter, so they weren’t able to recognize that revenue, that's a good thing for the fourth quarter because that rose into that.

Further, there are always puts and takes principally with our FSI regulatory and their technology consulting practices between when contracts in and when new contracts or projects -- when project stands versus when new projects replace. And some of the replacements were a little slower than they expected.

But the good news is as I said earlier, particularly, when you look sequentially, our guidance assumes that Protiviti has a much better fourth quarter than it did a year ago.

And in fact, the profitability, the operating margin will actually be better than a year ago such that for the full year, they're going to come very close to 10% or double-digit which is what we've said all along. So, we're quite happy that they got behind that earlier in the year and they're catching up. And in part because better U.S.

profitability, but even to a larger degree better non-U.S. profitability. The fourth quarter for Protiviti should be better..

Okay. That's helpful. And as a follow-up, if you could talk about the strengths and management resources, the strong uptick there in 3Q, I realized, it’s got more exposure to Europe in temp. So, is it just the stronger international performance? Hoping, you can just pass the strength there a little bit..

Right. So, if you look at the lines of business, you see management resources and office team being the strongest performers and both of that was principally because of non-U.S. performance. In the U.S., their relative performance wasn't that different. Non-U.S., management and resources and office team were quite strong..

[Operator Instructions] Your next question comes from Tobey Sommer from SunTrust. Your line is open..

Hi, this is Kwan Kim on for Tobey. Thank you for taking my questions. First, in your past experience, I have major accounting development similar to the ASC 606 Revenue Recognition standards for 2018 and major tax reform impacted the customer buy upside from your segments. And how would you compare that to your expectations today? Thank you..

So, change is good. Change is always a good. Revenue Recognition or 606 for the technical people, as we've talked about for the last year or so has been very isolated to a small number of companies. And therefore, the overall impact hasn't been that material.

On the other hand, lease accounting, which becomes effective at the beginning of 2019 is much more broadly impactful, every public company has to deal with a new lease accounting standard.

So, we are seeing many more projects, initially diagnostic in nature, and we're much more hopeful about the impact on lease accounting than we were with the impact of 606/Revenue Recognition to use baseball analogies whereas we've said in the past Revenue Rec was a bunt single.

We actually think we’re going to get some solid doubles at lease accounting. Cash reform, again, any change is a good. It's been a long time since we've had major tax reform. We would expect an uptick there, but I can't say that we could quantify that given that you don't even know the nature of what it's going to look like..

Got it. And there have been recent news in recent months about potential slowdown in global advertisement buying specially from the consumer goods sector.

So to what extent is Robert Half creative group exposed to similar industry trend?.

Well, clearly the creative group is impacted by ad buying trends and that's always been the case that always will be the case, such as the extent that comes to fruition. It will have an impact..

Your next question comes from Gary Bisbee from RBC Capital Markets. Your line is open..

I wondered if you guys -- there was an article in the journal earlier this week about companies increasing using software instead of people in the treasury department.

Is that something that you're hearing about from clients? Is that potentially a drag on the demand for your services and some of the seasonal work you provide? Or is that not anything really impacting business or could in the near term?.

Right now, we read the story you saw. I guess I'd first say overall that to the extent that happens that middle market companies will be impacted by later than will big companies, most of that relates to where you got large number of people in departments all doing recurring routine kind of tasks that get automated.

They talk about robotics in that way. I guess we would also observe because we're old and we've been around a while. We can actually remember when accounting went from manual spreadsheets and then came VisiCalc and then came Lotus 123 and then came Excel. And during those periods, there was major concern that that would reduce demand.

And what it did was changed the demand, and in fact if anything it got better. We can also remember when accounting software packages first came on the scene and again the nature of the people we place has changed to some degree, but in total it's actually expanded.

It would be counter intuitive to most people that even as we sit here today, payroll processors are one of the tougher candidate fill request that we get. And most companies have an automated payroll system or a third-party payroll provider, but you still need people to process within those systems.

So, query the net benefit that will accrue to bigger companies, but my point you'll get a preview of that with bigger companies before it will impact our companies..

Okay, that's helpful. And then just -- when we go back and look at U.S. GDP versus the performance of your U.S. business that when GDP has been above 2.5%, it's been a pretty clear signal that you've historically been able to grow quite nicely.

I guess we're starting to get back to that or at least it looks it was the recent data and certainly the forecast at or above that 2%.

What are the factors that would keep your business, if that were to persist for several more quarters from accelerating more rapidly in line with that historical trend? Is there anything you feel like is very different today? Or that would change that historical dynamic we can see by looking at your results? Thanks..

Well, I'd say to the extent what we've seen 2.5 for the last five or six years that’s come one quarter at a time, and then gone away, one quarter at a time. It hasn’t been sustained. And therefore nobody believed, it was sustainable starting with our clients. Such of the extent, we can string together some consistent 2.5% or better.

Then that changes everything and we are very optimistic and encouraged that we would participate in that very nicely. And it already appears again based on the month of September, based on the two weeks thereafter.

So, we've had six good weeks which is half a quarter where we've had sustained acceleration in our growth rates, starting sequentially, and then with the [Audio Gap] of easier year-on-year compares..

Looks like, we have one more question. It's from the line of Hamzah Mazari from Macquarie Capital. Your line is open..

I was wondering if you could just comment on bill rate spreads. And any thoughts you have on wage inflation versus your expectations. I know you said last quarter it was sort of running lower versus what you guys cart at this time in the cycle. I don’t know if that’s still consistent..

So our bill rates for the quarter were up 2.5%, which is virtually the same number that it was in the third quarter. So, clients are still very reluctant to pay up notwithstanding the fact that the candidate market continues to get somewhat tighter.

There seems to be a bit of disconnect between what clients are willing to pay and the state of the Canada supply demand market. So, we would expect that wage inflation would pick up a little, but here again through this quarter you haven’t seen much of that..

Thank you, and just a follow-up.

In the IT staffing business that you guys have, are you seeing any differentiation in terms of tech support versus tech development just in terms of client demand? Anything different where one is weaker than the other? Or it's pretty consistent?.

I'd say our trends aren't dramatically different one to the other. We traditionally will principally support. In the last several years, we have added development. But I wouldn’t say that the trends are materially different with our middle market companies, one versus the other..

That was our last question. Keith and I would like to thank everyone again for joining us today. We appreciate it..

This concludes today’s teleconference. If you have missed any part of the call, it will be archived in audio format in the Investor Center of Robert Half’s website at www.roberthald.com. You can also dial the conference call replay. Dial-in details and the conference ID are contained in the Company’s press release issued earlier today..