羅致恆富 (RHI) 2013 Q1 法說會逐字稿

Hello and welcome to the Robert Half International first-quarter 2013 conference call. Our hosts for today's call are Mr. Max Messmer, Chairman and CEO of Robert Half International, and Mr. Keith Waddell, Vice Chairman, President and Chief Financial Officer. Mr. Messmer, you may begin.

Thank you and good afternoon, everyone, and thank you for joining us today.

We begin today's call with our customary reminder that comments made on this call contain predictions, estimates and other forward-looking statements. They represent our current judgment of what the future holds and include words such as forecast, estimate, project, expect, believe, guidance, and similar expressions. While we believe those remarks to be reasonable, we do remind you that 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 statements made on today's call.

Now, let's discuss the first quarter. Global revenues for the first quarter of 2013 were $1.02 billion, a 4% increase year-over-year on a same-day constant currency basis. Income per share was $0.40, up 18% from the first quarter one year ago. Cash flow from operations during the first quarter was $25 million and capital expenditures were $8 million. In February, we raised the Company's cash dividend from $0.15 to $0.16 per share. The dividend was paid to shareholders on March 15 at a cost of $22 million. We also repurchased 800,000 RHI shares during the first quarter at a cost of $30 million. Approximately 10.6 million shares remain available for repurchase under our board approved stock repurchase plan.

We were pleased with the Company's overall performance in the first quarter. Demand for our professional services remains strongest in the United States, most notably in our permanent placement, information technology staffing and Protiviti operations. Despite softness in international markets, this is the 12th consecutive quarter in which net income and earnings per share have grown at least 15% or more on a year-over-year basis.

Now, I'll turn the call over to Keith for a closer look at our first-quarter results.

Thank you Max. As noted, first-quarter revenues for the Company were $1.02 billion, a reported increase of 1% over last year and a 4% increase on a same-day constant currency basis. On a same-day constant currency basis, global staffing revenues increased 2% year-over-year with the US growing 6% and international staffing revenues declining 9% on this basis. US staffing revenues were $677 million in the first quarter, while international staffing revenues were $230 million.

We have 346 staffing locations worldwide, including 101 locations in 19 countries outside the US. We calculated 62.2 billing days in the first quarter compared to 63.8 days in last year's first quarter, the effect of which was a 2.5% decrease in reported year-over-year staffing growth rates. The current second quarter has 63.5 billing days.

Currency exchange rates had no meaningful effect on reported first-quarter 2013 staffing revenue. A supplemental schedule accompanying our earnings release today shows year-over-year revenue growth rates for each of our staffing lines of business on a reported basis as well as on a same-day constant currency basis. The schedule further divides the data between US and non-US operations. This is a non-GAAP financial measure that provides additional information on certain revenue trends in our staffing operations. You will find the schedule in today's press release and in the investor center of our website.

First-quarter global revenues for Protiviti were $117 million, including $91 million in the United States and $26 million outside the US. Year-over-year growth rates were up 14% globally with US revenues up 17% and non-US revenues up 4%. Protiviti and its independently owned member firms serve clients through a network of 74 locations in 23 countries.

Now, turning to gross margin, first-quarter gross margin in our temporary and consulting staffing operations was 36.1% of applicable revenues. This was a 50 basis point increase over the first quarter of 2012. The improvement reflects continued strength in US pay/bill spreads and higher temp-to-hire conversion fees.

Permanent placement revenues were 9.2% of overall staffing revenues for the quarter, slightly higher than the 9.1% of revenues reported one year ago. Together with the higher temporary and consulting gross margins previously discussed, overall staffing gross margin expanded by 40 basis points versus a year ago.

Protiviti's first-quarter gross margin was $30 million, or 25.7% of Protiviti revenues, compared to $24 million or 23.1% of Protiviti revenues a year ago. This was an increase of $6 million or 26%.

Turning to selling, general, and administrative costs, in the first quarter our staffing SG&A costs were 32.5% of staffing revenues, up 10 basis points from the 32.4% reported a year ago. First-quarter SG&A costs for Protiviti were 22.5% of Protiviti revenues. This is a 290 basis-point improvement from the 25.4% reported last year.

Turning to operating income, first-quarter operating income from our staffing divisions was $86 million, or 9.5% of staffing revenues. The Temporary and Consulting divisions reported $73 million in operating income for the quarter, or 8.9% of applicable revenues. First-quarter operating income from our Permanent Placement division was $13 million, or 15.1% of applicable revenues.

Protiviti's operating profit was $4 million in the first quarter or 3.2% of revenues compared to an operating loss of $2 million in the first quarter a year ago. This was Protiviti's best first-quarter operating performance in five years.

Accounts Receivable were $547 million at the end of the first quarter, with implied days sales outstanding or DSO of 48.7 days, compared to 46.9 days at the end of the first quarter of 2012.

Now let's turn to second-quarter guidance. We saw the following trends in the first quarter and so far in April. In the United States, year-over-year growth rates for our Temporary and Consulting divisions accelerated in January, decelerated in February, and remained constant in March. Also in the US, year-over-year growth rates for our Permanent Placement divisions accelerated in January, continued to accelerate in February, then slowed modestly in March. Outside the US, year-over-year staffing growth rates remained consistently negative throughout the quarter. For the first two weeks of April, revenues for our Temporary and Consulting operations were flat on a same-day constant currency basis compared to the same period last year with US Temporary and Consulting revenues up 4% and non-US Temporary and Consulting revenues down 11%. For the first three weeks of April, Permanent Placement revenues were also flat on a same-day constant currency basis compared to the same period last year with US Perm revenues up 1% and non-US Perm revenues down 3%. We would remind you, however, that it's difficult to evaluate these trends over such short periods of time. Taking this information into account, we offer the following second-quarter guidance -- revenues, $1.02 billion to $1.07 billion; income per share, $0.40 to $0.45. 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.

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

Thank you Keith. As previously noted, Robert Half Finance and Accounting, Robert Half Technology and Protiviti had particularly solid first quarters. We continue to see weaker staffing demand outside the United States, especially in Europe where the economic climate remains uneven.

Our US Permanent Placement revenues grew 18% year-over-year on a same-day constant currency basis, but this growth was offset by revenue declines outside the United States.

Protiviti, our business and risk consulting subsidiary, had a particularly strong quarter, especially in the United States where first-quarter revenues grew 17% year-over-year. In addition to internal audit and financial advisory services, strong consulting solutions for Protiviti included regulatory risk and compliance as well as information technology, application controls and security.

When we look at the overall business climate right now and some of the trends we are seeing, we do remain confident. Even as general unemployment remains relatively high in the United States by historical standards, there is continued demand for professional-level talent. Our focus on higher skilled interim and full-time positions is benefiting us, particularly as skill shortages continue to surface in many areas of technology and accounting. Businesses in many of our markets around the world continue to report a mismatch between the skills they're looking for and the qualifications jobseekers possess.

Our focus on small and midsize companies is serving us well right now. The latest ADP National Employment Report showed small and midsize companies continue to lead US private-sector job growth.

There is a continued need by companies for staffing flexibility. Since the end of the last recession, there's been a secular shift towards flexible staffing. Businesses learned the value of using temporary professionals as a way to keep labor costs variable, and to access skilled talent on-demand.

The percentage of temporary workers in the US labor force is nearing an all-time high and is expected to rise. Ongoing regulatory changes in the financial services industry and new healthcare legislation in the United States also may benefit our staffing divisions and Protiviti.

Our business is performing well even as economic growth has remained muted in the United States and uneven globally. As noted earlier on this call, year-over-year growth rates in net income and earnings per share have exceeded 15% for 12 straight quarters now.

At this time, Keith and I will be happy to answer questions. Please limit yourself to one question as usual and a single follow-up as needed. If time permits, we will certainly try to return to you later in the call if you have additional questions.

(Operator Instructions). Andrew Steinerman, JPMorgan.

Hi Max and Keith. I want to ask in the US about supply, both on the accounting staffing side and the IT staffing side. I think, Max, you phrased it as the economy remains muted. I wanted to know, do you fully expect your US business to re-accelerate with the US economy, or are there any supply constraints that would make that less of a total correlation?

Well, Andrew, while there are some supply issues with certain positions in both accounting and IT, we are confident that a re-acceleration with the US economy we would participate in fully. We've had decades of experienced recruiting in all types of economies, and believe we would have access to the candidates that we need.

The short answer to your question is yes, we would expect to participate. The surprising thing really is how well the industry in general and we in particular have done, given the high unemployment rates that exist today. I think if the economy were to begin to grow a little faster than it has been, we would expect to do very well indeed.

Thank you very much.

Tim McHugh, William Blair & Co.

Thanks. I know you gave the numbers on the trends internationally, but can you just give us some color? Are there any particular markets that worsened, and are there any that are showing some signs of stability? It sounded on the last call or two that you were getting gradually more confident that there are some signs of stability, but it sounds a little less so now.

I think that's fair. Continental Europe generally was a little weaker than we expected. Germany that had grown very nicely, quarters prior, flattened out during the quarter. France and Belgium were a little more negative than we had expected. I think each of those economies, if you look at the macro, are in contraction as we speak. So I would say we are a little more bearish on Europe than we had been. That said, it's certainly not in free fall, and same-day sequential we were down 3% or so. And our guidance at the low end would contemplate we would take another step down in those orders of magnitude.

Okay. I guess are there many signs of stability, or any signs, or is it just broadly getting weaker?

And again, I'd say modestly weaker in Continental Europe. Australia I would say is flattish, so if anything, a little firmer than we talked about last quarter. On the Protiviti side, Japan is showing some signs of improvements, which is welcome after many quarters of the opposite. But overall, our non-US operations were modestly weaker than we had expected.

Okay. And if I look at the guidance for the next quarter just in that environment from a cost perspective, quickly try to run the numbers, it seems like you might step back up some of the spending on SG&A. If I'm wrong, just tell me so. But I guess broadly, what type of spending are you assuming in your guidance? Are you holding expenses still tightly or are you hiring out there in the field?

It's not one-size-fits-all, and so on the one hand, we are adding to staffing and permanent placement in the US, in technology in the US, at Protiviti both with full-time staff and with contractors. On the other hand, outside the US, we will continue to take our headcounts down pretty much with what we see the revenues doing. So, it's not a one-size-fits-all. We will add to staff, as I said, in the United States in the areas which are continuing to grow nicely, which we were pleased with during the quarter, but in other areas we will not.

All right, thanks.

Sara Gubins, Bank of America Merrill Lynch.

Thank you. So Protiviti's gross margin was down 90 basis points last year, but it was up pretty impressively in the first quarter. I'm wondering, is that underutilization given the strong revenue growth, or is there a bill rate increase in there as well?

Protiviti performed better on multiple fronts. On the one hand, their revenues were stronger led by, as we spoke earlier, the risk and compliance area, clearly with more enforcement actions, more consent decrees. There is work that results from that, particularly anti-money laundering and lending practices. They did well in the tech security and the tech applications controls areas. We had a little lift from the SharePoint acquisition that we did last quarter. Further, they manage their labor costs better, both by using more contractors from our staffing organization, which made their costs more variable. As well, they did some things to contain, better contain, their internal costs as well. So all of those things put together, Protiviti certainly did better than our guidance would have anticipated.

And is that sustainable into the second quarter?

Protiviti remains very optimistic about the second quarter. The pipeline is good. The types of projects that they were working on in the first quarter are continuing into the second. So, Protiviti is quite optimistic about its prospects for the remainder of 2013.

Okay, thank you. And then in the US, it looks like the temp staffing revenue grew a little bit more slowly than the BLS volume data for the US overall. I'm wondering if there was any negative pressure on pricing, or perhaps mix shift.

As to pricing, we can be more specific. Essentially, we're talking about up 1% year-over-year, up another 1% sequentially. And that's global, by the way. US is better, and those numbers were negatively impacted by the IZ.

I think the other thing we would point out is, in our accounting operations, particularly Accountemps and with Management Resources, there was a little bit of an impact from the foreclosure review projects that winded down to some extent during the quarter.

Okay. Thank you.

Mark Marcon, R. W. Baird.

Good afternoon. I would like to dig into Accountemps if we could. Can you give us a sense for the geographic split there in terms of what percentage would be international versus domestic?

Generally speaking, our temp business is about 75/25, so typically Management Resources is a little more non-US than the average, and tech is a little less non-US than the average. But generally speaking, it's 75/25. So that would be in the ballpark for Accountemps.

Can you talk about the areas that were softer and the areas that held up as it relates to Accountemps, and what you're seeing there?

Accountemps was stronger in the accounting operations area, which are the staff accounting roles. And it was a little softer in the mid-level positions within Accountemps. As I just mentioned, a little bit of the growth -- it's not a huge number, but a little bit of the growth was impacted by the foreclosure look-back projects that scaled back during the quarter.

Was that a material amount, or was that just a little bump? I guess exclusive of that --

It's definitely not material overall, but when you're talking about impact on growth rates, it doesn't take huge numbers to impact growth rates.

Sure. I guess the question is if we were to strip that out, as we look at your US growth rates in Accountemps, does that seem to hold steady or was that showing -- or is that more consistent with the pattern of decline that we see in the overall --?

Again, Accountemps is such a big piece of the overall, you can't divorce it from the overall pattern. And while foreclosure had a little bit of an impact on the growth rates, the overall pattern is still intact. The fact is our clients do remain cautious. While job order flow is steady, our clients are cautious. As we said last quarter, business is not great but it's not bad.

Got it. And with regards to the commentary from US clients, any more chatter with regards to the Affordable Care Act or the impact that that could end up having eventually?

Clearly, we've gotten even more inquiries from clients who seem to be more in a fact-finding and an analysis mode than in a take action mode. As we stated last quarter and we'll reiterate, we do plan to comply not only with the letter but the spirit of the law ourselves. That said, we will help our clients implement legitimate workforce strategies, ACA-related or not. We still think it's too early to estimate what actual new demand will be, but there's clearly ever-growing amounts of activity, particularly inquiries from clients. Since last quarter, we have again confirmed with third-party administrators and underwriters that we are going to be able to offer coverage probably on a self-insured basis. Many of our smaller competitors will probably struggle to offer coverage, either fully or self-insured. So we actually believe we can get some advantage just by being able to offer to our candidate base that some of our small competitors cannot.

Great, thank you.

Paul Ginocchio, Deutsche Bank.

Thanks. Just as we look at the first couple weeks of April, you talked about 4% growth in the US in Temp and Consulting. Just wondered about Accountemps relative to that, if there's any major divergence. And then was the slowdown in Management Resources related to the mortgage foreclosure that you talked about, or was there something else that drove that deceleration in the first quarter? Thanks.

Again, with Accountemps being such a big piece of the total as to the post-quarter result, it is the biggest piece of that post-quarter result, so it's representative.

As to Management Resources, it's the most non-US centric temp division we have. And in fact, the non-US mix in Management Resources is very similar to non-US perm, meaning it's around 40% of the total. And so to the extent non-US was more impacted than the US, you see that more in MR than the other divisions.

Thank you.

Gary Bisbee, Barclays Capital.

Good afternoon. I wanted to dig in a little more to the Protiviti margins. I guess this is obviously a great performance relative to the last few years, and it's always been the seasonally weakest quarter. What factors would lead this year to not play out on a seasonal basis with margins getting better from this as a starting point on a similar pattern to what they've done in the past? Is it just all about revenue growth, or are there other factors that maybe wouldn't allow it to increase as much as one might think it could?

Generally speaking, the seasonal pattern should play out. The only thing I would caution is that we are starting from a higher starting point in the first quarter than usual, so the incremental improvement might not be what it's been in the past. But that said, generally speaking, the seasonal pattern should continue. The first quarter is Protiviti's weakest quarter, and we are delighted to come out of the first quarter with Protiviti having made money, unlike the last five years.

And historically, you've commented that, in the right environment, you thought this business could get to double-digit; I think you even said potentially low-teens-type margins at some point. Is that something that, if revenue continues on the trajectory of this quarter, could happen fairly soon, or would likely take a couple of years to get to those type levels? Thank you.

As Protiviti US revenues expand, so would their margins. And US only margins have certainly been in the high single digits even in the recent past. Our non-US operations did improve this quarter as well modestly, but they are still a modest drag overall. And so to get to the double-digit overall margins, not only do we have to see some continued improvement in the US, which we expect, but we've also got to continue to make progress outside the US. I guess I don't want to overhype how quickly they will get to double-digit operating margins. And so my general reaction would be to be conservative.

Okay, thank you.

Tobey Sommer, SunTrust Robinson Humphrey.

Thank you. I was wondering if you could comment on any changes in the assignment length within the tech business, just get a sense for how people are planning their CapEx. And then wondering if you could comment about whether you're evaluating using a healthcare exchange as part of your self-insured offering relative to the Affordable Care Act.

Okay. Assignment length in tech as it relates to CapEx. I would say this. We clearly made strides this quarter in tech at the higher end, the web developers, the application developers, which we focused on and invested in, in the past few quarters. Those do have longer duration; those do have higher bill rates; those do carry higher margins. So, we were particularly pleased at the mix of our tech business this quarter. It's also one of the first times in years where we've had sequential growth in tech in the first quarter. We were delighted by that, and it's largely due to the progress we made on the tech development side.

As to whether we plan to use exchanges for our self-insurance offering, the answer would be not initially. Clearly, the choices that will be made available to those that go to the public exchanges will be, to some degree, a blueprint for the choices you'd like to offer internally through private exchanges. But early on, the thought is we will have a bronze type plan that complies with ACA. We might have a plan that has lower benefits than bronze that's totally voluntary on the part of our temporary employees. That is still to be decided.

Thank you very much.

Paul Condra, BMO Capital Markets.

I have one question about your international markets. I wondered if you could talk about the competitive landscape there, how you think about that as the markets are shrinking, how you think about maintaining your share there.

I'm not sure our market share has changed much. We've talked about, in the UK, how we have intentionally walked away from some business that's just been crazily priced as that market has contracted. But other than that, I'm not sure there's any competitive landscape change in the other countries, Germany, France, Belgium, that would be noteworthy.

What about when you think about acquisitions? Is that something that makes more sense internationally than domestically?

We're always looking for situations that culturally are a fit. But those that culturally are a fit are typically the hardest to find. And whether they get easier to find in this kind of environment, typically the ones that are most available during these kind of times are the ones you least want. That said, again, if it's a good cultural fit, similar to what we believe and with the early returns bear out, like the two little deals we did in Protiviti in the last six months. We very much looked at cultural fit, and they met the bar and we did the deals.

Okay, thanks.

Kevin McVeigh, Macquarie Research.

Thank you. Keith, it looks like an incremental step-up on the guide from Q1 to Q2 revenues about $10 million at the midpoint, but EPS is about $0.02. What's driving that? Is that bumping up against some of the taxes, pricing? Any color on that?

Well, we still have gross margin expansion year-over-year Quarter 2 versus a year ago. The tax rate we think will stay in between 37% and 38% as we projected it would be for the quarter just ended, which we continue to believe would be the range for the quarter we are now in. No big change there.

The first quarter was a short quarter, as we've talked about, so you didn't leverage your SG&A percentage basis quite what you typically would. The second quarter is a little longer, 1.3 days or so. And therefore, you'll leverage your SG&A just a little more because it's more of a typical length. There are no major screaming changes or differences.

If you look at the absolute level of our SG&A spending, frankly it's been flat the last three quarters. So we've been pretty vigilant at looking at our SG&A costs and would continue to do so in this environment. With the exception of the areas that I talked about earlier, if it's growing, we're going to invest in it and we are going to feed it. And that's our plan.

Got it. And then just as you think about Management Resources as a feeder for Protiviti, can you help us directionally? What percentage of Protiviti is non-bench related now as opposed to where it's been in the past, and how much MR just directionally is sourced to Protiviti?

Without disclosing percentages, we are delighted at the percentage of Protiviti's workforce sourced through contractors primarily through our Robert Half staffing operations. It is light years higher than it once was, so not only do they have a more variable cost structure for that reason, they've also done some creative things with their full-time staff that makes their costs more flexible quarter-to-quarter. So we've made major strides, culturally as well as financially, in integrating from a Protiviti point of view our staffing contractors.

Got it. Just to be clear, that's across Accountemps and MR, right?

It's across even more divisions than that. Clearly, Accountemps and MR are the largest, but let's not forget Robert Half Technology.

Understood. Thank you.

Randy Reece, Avondale Partners.

Good day gentlemen. I was just trying to get a feel for how you manage in an environment like this where, for a protracted period of time, it's been pretty sideways. That has to affect individuals' abilities to hit their bonus targets and their motivation. And over time, do you shift how you manage people to your goals when things are just tracking along sideways?

We can both comment, but I'll make an observation. As you may recall, if you looked at our top roughly 200 field managers, we've calculated that they average over 17 years seniority. They've been through a lot of wars with us over the years and we are used to different economic circumstances in which we have to operate.

Many of the questions about Protiviti and its good results Keith handled perfectly. All I would add is Joe Tarantino and the other leaders at Protiviti are doing an outstanding job. So, we have really good people. They understand the situation with the economies, but I think we expect to take advantage.

You have to remember, in tough economies, your smaller competitors always get hurt. Frankly, they are the first to go. The comments about Europe, it is not a lot different in Europe, but a lot of the smaller firms struggle much more than the bigger ones. There may be acquisition opportunities that more likely are going to be opportunities to seize market share. If we get just a little bit of help from the economies in Europe as well as the US, I would expect us to be in a perfect position to take advantage of that.

So the short answer is you manage carefully with a lot of attention to SG&A, but we are blessed to have a very seasoned team that understands what is necessary.

The only thing I would add is that remember they work in the labor markets every day. They understand the labor markets better than anybody on this call. And so to the extent the markets are going sideways, they understand that. And their expectations are impacted accordingly.

That make sense. Thank you very much.

We have one last question. Gary Bisbee.

Just wanted to ask about the temp-to-perm conversions. I think you said they were up year-over-year again and that's sort of curious given some deceleration in the business and certainly deceleration in a lot of the overall economic data. What do you attribute that to, and how important has that been to the gross margin expansion over the last few quarters? Thank you.

Year-over-year, it is up a little. Sequentially, it's about the same. I'll just make a general comment about perm versus temp and conversions as a derivative of perm. So perm benefits from a lot of turnover-driven demand, more so than temp would. Although if there is a part of temp that does benefit from turnover derived demand, it would be in conversions. So, generally speaking, perm is growing more quickly today than is temp. And if you look at the sources of that growth, on the perm side, it traces back more to more backfilling where there was turnover, be it forced turnover or voluntary turnover, versus where our clients are investing in more heads.

Okay, thank you.

Andrew Steinerman.

Keith, while we are all together, could you just tell us what variables go into the difference between the low end of guidance, let's call it the revenue guidance, and the high end of revenue guidance? And where would April trends track to within that guidance?

Okay. So the low end of our guidance would assume some additional deceleration beyond what the early April trends are. So if you take your early April trends and you get more conservative, that gives you your low end. The high end assumes some acceleration from where we started the quarter. We essentially bracketed, if you will, where we started, looking at the trend lines by line of business, by geography. But we did build in conservatism relative to how we started the quarter. Understand that, for the non-US operations, the comps do start getting easier because it was second quarter a year ago where they started decelerating with their own revenues which now become the comps.

All right. And do comps get easier here for the US as well?

They do get modestly easier, but the comps get easier for non-US than they do for US.

I think you said expect SG&A dollars to be rather steady, but with a little more revenue, the percentage goes down in the second quarter guided versus the first quarter just actual. Right?

Correct. And again, just having a normal length quarter gives you a little more leverage on the SG&A side.

Perfect. Thank you.

Apparently that was our last question. Keith that I would like to thank everyone again for joining us on today's call.

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